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UNITED PAN-EUROPE COMMUNICATIONS N.V.
(DEBTOR-IN-POSSESSION)

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


FORM 10-Q

(Mark One)  

ý

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

For the quarter ended June 30, 2003

or

o

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

For the transition period from                             to                              

Commission file number: 000-25365


United Pan-Europe Communications N.V.
(Exact name of Registrant as specified in its charter)

The Netherlands
(State or other jurisdiction of
incorporation or organization)
  98-0191997
(I.R.S. Employer
Identification No.)

Boeing Avenue 53,
Schiphol Rijk, The Netherlands

(Address of principal executive offices)

 

1119 PE
(Zip code)

(31) 20-778-9840
(Registrant's telephone number, including area code)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        The number of shares outstanding of the Registrant's common stock as of August 14, 2003 was:

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





PART I–FINANCIAL INFORMATION

 
 
  Page
Number

Item 1–Financial Statements    
  Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002   3
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2003 and 2002   5
  Unaudited Condensed Consolidated Statements of Shareholders' Equity (Deficit) for the Six Months Ended June 30, 2003   6
  Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002   7
  Notes to Unaudited Condensed Consolidated Financial Statements   8

Item 2–Management's Discussion and Analysis of Financial Condition and Results of

 

 
  Operations   30

Item 3–Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4–Controls and Procedures

 

47


PART II–OTHER INFORMATION

 
 
  Page
Number

Item 1–Legal Proceedings   48

Item 2–Changes in Securities and Use of Proceeds

 

48

Item 3–Defaults Upon Senior Securities

 

48

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

 

48

Item 5–Other Information

 

48

Item 6–Exhibits and Reports on Form 8-K

 

50

2


UNITED PAN-EUROPE COMMUNICATIONS N.V.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in thousands of Euros, except par value and number of shares)
(Unaudited)

 
  June 30,
2003

  December 31,
2002

ASSETS        
Current assets        
  Cash and cash equivalents   178,499   255,062
  Restricted cash   35,471   18,352
  Subscriber receivables, net of allowance for doubtful accounts of 35,875 and 52,232, respectively   69,601   95,526
  Costs to be reimbursed by affiliated companies   2,955   4,054
  Other receivables   30,298   40,588
  Deferred financing costs, net   46,746   59,375
  Prepaid expenses and other current assets   67,147   79,345
   
 
    Total current assets   430,717   552,302
Marketable debt and equity securities, at fair value   31,704   12,760
Investments in and advances to affiliated companies   44,825   114,680
Property, plant and equipment, net   2,884,090   3,175,363
Goodwill, net   988,208   994,670
Other intangible assets, net   70,384   77,607
Other assets   2,407   3,635
   
 
    Total assets   4,452,335   4,931,017
   
 

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

3


 
  June 30,
2003

  December 31,
2002

 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)          
Current liabilities          
Not subject to compromise:          
  Accounts payable, including related party payables of 4,821 and 5,189, respectively   158,367   166,679  
  Accrued liabilities   248,971   281,211  
  Subscriber prepayments and deposits   137,703   121,749  
  Derivative liabilities   4,089   10,133  
  Short-term debt   5,243   58,363  
  Current portion of long-term debt   3,357,791   3,212,302  
   
 
 
    Total current liabilities not subject to compromise   3,912,164   3,850,437  
   
 
 
Subject to compromise:          
  Accounts payable   36,889   36,889  
  Accrued liablities   329,013   351,500  
  Current portion of long-term debt, including related party debt of 2,180,560 and 2,358,380, respectively   4,672,594   5,043,346  
   
 
 
    Total current liabilities subject to compromise   5,038,496   5,431,735  
   
 
 
Long-term liabilities          
Not subject to compromise:          
  Long term debt   60,209   427,444  
  Deferred gain on sale of assets   150,321   150,321  
  Other long-term liabilities   85,605   83,999  
   
 
 
    Total long-term liabilities not subject to compromise   296,135   661,764  
   
 
 
Guarantees, commitments and contingencies (Note 8)          
Minority interests in subsidiaries   1,504   1,660  
   
 
 
Convertible preferred stock subject to compromise:          
  Convertible preferred stock   1,664,689   1,664,689  
   
 
 
Shareholders' equity (deficit)          
  Priority stock, EUR 0.02 par value, 300 shares authorized, issued and outstanding      
  Ordinary stock, EUR 0.02 par value, 1,000,000,000 shares authorized, 443,417,525 shares issued and outstanding   8,868   443,418  
  Additional paid-in capital   3,192,883   2,740,586  
  Deferred compensation   (9,061 ) (16,888 )
  Accumulated deficit   (9,932,152 ) (10,053,630 )
  Accumulated other comprehensive income   278,809   207,246  
   
 
 
    Total shareholders' equity (deficit)   (6,460,653 ) (6,679,268 )
   
 
 
    Total liabilities and shareholders' equity (deficit)   4,452,335   4,931,017  
   
 
 

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

4



UNITED PAN-EUROPE COMMUNICATIONS N.V.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Stated in thousands of Euros, except share and per share data)
(Unaudited)

 
  Three Months
Ended June 30,

  Six Months
Ended June 30,

 
 
  2003
  2002
  2003
  2002
 
Statements of Operations                  
Revenue   359,385   358,917   718,485   705,229  
Operating expense(1)   (155,189 ) (192,701 ) (313,612 ) (380,732 )
Selling, general and administrative expense   (96,788 ) (105,815 ) (194,870 ) (216,072 )
Depreciation and amortization   (170,651 ) (172,268 ) (337,267 ) (344,900 )
Impairment and restructuring charges   963   (21,105 ) 963   (25,048 )
   
 
 
 
 
  Operating income (loss)   (62,280 ) (132,972 ) (126,301 ) (261,523 )
Interest income   1,152   10,727   4,721   16,712  
Interest expense   (78,035 ) (160,278 ) (160,412 ) (332,067 )
Interest expense—related party     (64,658 )   (123,074 )
Foreign currency exchange gain   201,250   577,315   334,605   521,258  
Gain on extinguishment of debt     347,207   69,364   471,718  
Gain on sale of investment in affiliate to related party   25,518     25,518    
Other income (expense), net   (11,394 ) 10,274   (14,272 ) (176,666 )
   
 
 
 
 
  Income (loss) before income taxes and other items   76,211   587,615   133,223   116,358  
Reorganization expense   (4,852 )   (12,493 )  
Income tax expense, net   (703 ) (2,851 ) (1,191 ) (1,607 )
Minority interests in subsidiaries, net   (10 ) 126   (75 ) (64 )
Share in results of affiliates, net   4,509   (18,389 ) 2,014   (39,692 )
   
 
 
 
 
  Income (loss) before cumulative effect of change in accounting principle   75,155   566,501   121,478   74,995  
Cumulative effect of change in accounting principle         (1,498,871 )
   
 
 
 
 
  Net income (loss)   75,155   566,501   121,478   (1,423,876 )
   
 
 
 
 
Earnings per share (Note 9):                  
  Basic income (loss) per ordinary share before cumulative effect of change in accounting principle   0.17   1.20   0.27   0.01  
  Cumulative effect of change in accounting principle         (3.38 )
   
 
 
 
 
    Basic net income (loss)   0.17   1.20   0.27   (3.37 )
   
 
 
 
 
  Diluted income (loss) per ordinary share before cumulative effect of change in accounting principle   0.12   0.53   0.04   0.14  
  Cumulative effect of change in accounting principle         (1.94 )
   
 
 
 
 
    Diluted net income (loss)   0.12   0.53   0.04   (1.80 )
   
 
 
 
 
Statements of Comprehensive Income                  
  Net income (loss)   75,155   566,501   121,478   (1,423,876 )
Other comprehensive income (loss), net of tax:                  
  Foreign currency translation adjustments   24,457   56,410   44,234   12,415  
  Change in fair value of derivative assets   3,731   5,210   10,133   13,212  
  Change in unrealized gain in available-for-sale securities   14,336   (19,037 ) 17,196   (16,029 )
   
 
 
 
 
    Comprehensive income (loss)   117,679   609,084   193,041   (1,414,278 )
   
 
 
 
 

(1)
Excluding depreciation and amortization, and impairment and restructuring charges shown seperately below.

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

5



UNITED PAN-EUROPE COMMUNICATIONS N.V.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

(Stated in thousands of Euros, except number of shares)
(Unaudited)

 
  Priority Stock
  Ordinary Stock
   
   
   
   
   
 
 
  Additional
Paid-In
Capital

  Deferred
Compensation

  Accumulated
Deficit

  Accumulated Other
Comprehensive
Income

   
 
 
  Shares
  Amount
  Shares
  Amount
  Total
 
December 31, 2002   300     443,417,525   443,418   2,740,586   (16,888 ) (10,053,630 ) 207,246   (6,679,268 )
Decrease in nominal value         (434,550 ) 434,550          
Amortization of deferred compensation             7,827       7,827  
Capital contribution from subsidiary of parent           17,747         17,747  
Net income               121,478     121,478  
Unrealized gain on available-for-sale securities                 17,196   17,196  
Change in fair value of derivative assets                 10,133   10,133  
Change in foreign currency translation adjustments                 44,234   44,234  
   
 
 
 
 
 
 
 
 
 
June 30, 2003   300     443,417,525   8,868   3,192,883   (9,061 ) (9,932,152 ) 278,809   (6,460,653 )
   
 
 
 
 
 
 
 
 
 
 
  June 30,
2003

  December 31,
2002

 
 
  (In thousands of Euros)

 
Foreign currency translation adjustments   275,861   231,627  
Fair value of derivative assets     (10,133 )
Unrealized gain on available-for-sale securities   2,948   (14,248 )
   
 
 
  Total accumulated other comprehensive income   278,809   207,246  
   
 
 

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

6



UNITED PAN-EUROPE COMMUNICATIONS N.V.

(DEBTOR-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in thousands of Euros)
(Unaudited)

 
  Six Months
Ended June 30,

 
 
  2003
  2002
 
Cash flows from operating activities:          
Net income (loss)   121,478   (1,423,876 )
Adjustments to reconcile net income (loss) to net cash flows from operating activities:          
  Depreciation and amortization   337,267   344,900  
  Impairment and restructuring charges   (963 ) 25,048  
  Stock-based compensation   9,655   13,883  
  Accretion of interest   25,176   181,044  
  Amortization of deferred financing costs   12,588   15,576  
  Foreign exchange gains   (324,041 ) (522,168 )
  Gain on extinghuisment of debt   (69,364 ) (471,718 )
  Gain sale of investment in affiliate   (25,518 )  
  Loss on derivative assets   10,221   186,675  
  Minority interests in subsidiaries   75   64  
  Share in results of affiliated companies   (2,014 ) 39,692  
  Cumulative effect of change in accounting principle     1,498,871  
  Loss on sale of assets     12,092  
  Other   2,654   16,762  
  Decrease in restricted cash     30,314  
  Change in receivables   50,338   36,091  
  Change in other current liabilities   (10,278 ) (182,215 )
  Change in deferred taxes and other long-term liabilities   1,606   (47,346 )
   
 
 
Net cash flows from operating activities   138,880   (246,311 )
   
 
 
Cash flows from investing activities:          
Capital expenditures   (103,085 ) (172,762 )
Proceeds received from the sale of assets   100,663    
Restricted cash deposited, net   (17,119 ) (12,038 )
Purchase of derivatives   (9,090 )  
Derivative loan settlement   (50,975 )  
Dividends received   3,745   8,031  
Acquisitions, net of cash acquired   (671 ) (24,060 )
   
 
 
Net cash flows from investing activities   (76,532 ) (200,829 )
   
 
 
Cash flows from financing activities:          
Proceeds from long-term and short-term borrowings     10,665  
Repayments of long-term and short-term borrowings   (128,348 ) (44,574 )
   
 
 
Net cash flows from financing activities   (128,348 ) (33,909 )
   
 
 
Effect of exchange rates on cash   (10,563 ) 8,823  
   
 
 
Net decrease in cash and cash equivalents   (76,563 ) (472,226 )
Cash and cash equivalents at beginning of period   255,062   855,001  
   
 
 
Cash and cash equivalents at end of period   178,499   382,775  
   
 
 
Supplemental cash flow disclosures:          
  Cash paid for reorganization expenses   (12,511 ) (11,195 )
   
 
 
  Cash paid for interest   (106,888 ) (123,063 )
   
 
 
  Cash received for interest   3,432   12,444  
   
 
 

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

7



UNITED PAN-EUROPE COMMUNICATIONS N.V.

(DEBTOR-IN-POSSESSION)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     Organization and Nature of Operations

        United Pan-Europe Communications N.V. ("UPC" or the "Company"), a 53.1% owned subsidiary of UnitedGlobalCom, Inc. ("United"), was formed for the purpose of acquiring and developing multi-channel television and telecommunications systems in Europe. UPC operates broadband communications networks in 11 European countries through its three primary divisions, UPC Distribution, UPC Media and Priority Telecom. UPC Distribution provides video, telephone and internet services for residential customers, (Triple Play) and is comprised of local operating systems. UPC Media provides broadband internet and interactive digital products and services, transactional television services such as pay per view movies, digital broadcast and post-production services, and thematic channels for distribution on UPC's network, third party networks and satellite direct-to-home ("DTH") platforms. Priority Telecom focuses on providing network solutions to the business customer. In 2003, as part of the ongoing realignment of the business, UPC formed an Investments Division, which manages UPC's non-consolidated investment assets. UPC continues to focus on rationalizing its investment portfolio to maximize value.

        All monetary amounts included in these notes are stated in Euros, unless indicated otherwise.

2.     Reorganization Under Bankruptcy Code

        UPC has experienced net losses since formation. On December 3, 2002, the Company filed a petition for relief under Chapter 11 (the "Chapter 11 Case") of the United States Bankruptcy Code (the "U.S. Bankruptcy Code"), on the same date, the Company filed a pre-negotiated plan of reorganization, as modified (the "Plan"), with the United States Bankruptcy Court for the Southern District of New York. In general, the Plan provides for the transfer of shares of common stock ("New UPC common stock") of a newly formed company that will become the holding company of UPC ("New UPC") for various claims against, and equity interests in, the Company. In order to achieve fully the restructuring, including the distributions contemplated by the Plan, it was also necessary to effect the restructuring under the laws of a non-U.S. jurisdiction, i.e. Dutch law. Accordingly, in conjunction with the commencement of the Chapter 11 Case, on December 3, 2002, the Company commenced a moratorium of payments in The Netherlands under Dutch bankruptcy law. On December 3, 2002, the Company filed a proposed plan of compulsory composition (the "Akkoord") with the Amsterdam Court (Rechtbank) (the "District Court") under the Dutch Faillissementswet (the "Dutch Bankruptcy Code").

        Unlike the U.S. Bankruptcy Code, the Dutch Bankruptcy Code does not provide for the Akkoord to reorganize or cancel any of the equity interests, ownership interests or shares in the Company. Therefore, in order to facilitate implementation of the Plan with respect to certain of the UPC Ordinary Shares A in accordance with Dutch law, New UPC commenced an offer with respect to certain non U.S. holders of UPC Ordinary Shares A to deliver shares of New UPC common stock to such holders of UPC Ordinary Shares A in consideration for the delivery by such holders of their UPC Ordinary Shares A to New UPC (the "Dutch Implementing Offer").

        As of June 30, 2003, as a result of the Chapter 11 Case and other matters, UPC's outstanding long term debt has been classified as current liabilities and there is substantial uncertainty whether UPC's sources of capital, working capital and projected operating cash flow will 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's ability to continue as a going concern is dependent on (i) the successful completion of the restructuring and (ii) UPC's ability to generate the cash flows required to enable it to recover the carrying value of the Company's assets and satisfy the Company's liabilities, in the normal course of business, at the amounts

8



stated in the consolidated financial statements. Due to the uncertainty of UPC's ability to continue as a going concern, the Report of Independent Accountant in the audited financial statements for the year ended December 31, 2002, includes a modification in this respect. Following the successful completion of the planned restructuring, UPC believes that the Company will have sufficient sources of capital, working capital and operating cash flows to enable the Company to continue as a going concern.

Summary of Status of the Restructuring

        As of the date of the Company's filing of its Quarterly Report on Form 10-Q for the period ended June 30, 2003, the restructuring of the Company has not been completed, but is in the final stages. The Plan has been confirmed by the U.S. Bankruptcy Court. In addition, the Akkoord has been ratified by the District Court. On March 21, 2003, Intercomm Holdings, L.L.C. ("ICH") filed an appeal against the ratification of the Akkoord by the District Court.On April 15, 2003, the Dutch Court of Appeals confirmed the judgment by the District Court. On April 23, 2003, a further appeal was filed with the Dutch Supreme Court, but the Company believes it is without merit and intends to oppose it vigorously. Both UPC and ICH have concluded the exchange of briefs in the Supreme Court proceedings. On July 11, 2003, the Dutch Attorney General delivered advice to the Supreme Court, which advice concluded that all of the grounds for the appeal are without merit and that, therefore, the appeal should be dismissed. The Supreme Court is independent of the Dutch Attorney General however, and there can be no assurance that the Supreme Court will act consistently with the advice of the Dutch Attorney General. Judgment is expected in August 2003. The Dutch Implementing Offer, which was scheduled to expire on April 24, 2003, has been extended to August 30, 2003. The Dutch Implementing Offer will become unconditional on the date the Plan becomes effective and the settlement of the Dutch Implementing Offer will occur no later than five Euronext business days after the Dutch Implementing Offer becomes unconditional. Certain amendments to UPC's Articles of Association were adopted during an Extraordinary General Meeting of its shareholders. One of the amendments was effective immediately, two amendments will become effective upon the effective date of the Plan and the remaining amendments will become effective upon the later to occur of the effective date of the Plan and the date of the delisting of the Company's Ordinary Shares A from Euronext Amsterdam. The Plan and the Akkoord are expected to become effective and the Company's restructuring complete soon after the appeal against the Akkoord is resolved. From and after the Effective Date of the Plan, the Company expects to operate its businesses and properties as a reorganized entity pursuant to the terms of the Plan. The Company's shareholders will be asked to adopt a further amendment to UPC's Articles of Association, allowing holders of UPC's Ordinary Shares C to convert their Ordinary Shares C into Ordinary Shares A on a one-for-one basis. The purpose of the proposed amendment is to facilitate the delisting of the Ordinary Shares A from the Euronext Amsterdam Stock Exchange ("Euronext"), so that the Company will not have any shares listed on a stock exchange or market. It is expected that an Extraordinary General Meeting of the Shareholders of UPC will be held on August 28, 2003 to vote upon the amendment.

        UPC believes subscriber growth has been impacted in some countries by the Company's financial restructuring; however, the Company believes the restructuring has not had a material adverse effect on its subsidiaries or its relationships with suppliers and employees.

        Upon completion of the restructuring, the Company will have substantially delevered its balance sheet, reducing its total long- and short term debt from 8.9 billion at December 3, 2002, the date it

9



commenced the Chapter 11 case, to approximately 3.4 billion, of which approximately 3.0 billion relates to the principal amount outstanding under its bank credit facility. At the completion of the Company's restructuring, the bank facility will constitute the Company's only outstanding long-term debt.

Polish Restructuring

        On June 19, 2003 the Company's subsidiary UPC Polska Inc. ("UPC Polska"), signed a binding agreement with creditors, holding approximately 86% of the UPC Polska's total debt, in support of a judicially supervised restructuring of the balance sheet of UPC Polska. These creditors include (i) an ad-hoc committee of bondholders, which together with a creditor subsequently joining the agreement, hold approximately 75% of UPC Polska bonds, and (ii) UPC Telecom B.V. ("UPC Telecom") and Belmarken Holding B.V. ("Belmarken"), which are wholly-owned subsidiaries of UPC and together hold approximately 17% of UPC Polska's outstanding bonds and approximately $481.0 million (420.4 million) principal amount constituting substantially all of the other indebtedness of UPC Polska, as of June 30, 2003.

        If implemented under its current terms, the agreed restructuring will significantly reduce UPC Polska's indebtedness, substantially delevering UPC Polska's balance sheet. The restructuring agreement consists primarily of the following key terms:

        Upon completion of the UPC Polska restructuring, the New Senior Notes would constitute the only long term debt of UPC Polska of approximately $60 million (52.4 million).

        In addition, the restructuring agreement contains an agreement by the parties (other than UPC Polska) to forbear on exercising rights and remedies relating to defaults on UPC Polska bonds and/or any other security of UPC Polska held by the parties while the restructuring agreement remains in effect.

        In order to effect the restructuring, UPC Polska filed, with the approval of its affiliated creditors and with the approval of nearly 75% of the non-affiliated holders of the Polska Notes, a voluntary petition for

10



relief under Chapter 11 of the United States Bankruptcy Code on July 7, 2003, and filed a pre-negotiated plan of reorganization on July 8, 2003, with the United States Bankruptcy Court for the Southern District of New York. UPC Polska remains in possession of its assets and properties and continues to operate its businesses and manage its properties as a debtor-in-possession pursuant to the U.S. Bankruptcy Code and under the supervision of the U.S. Bankruptcy Court. The Chapter 11 proceeding of UPC Polska does not involve any of the operating subsidiaries of UPC Polska that hold substantially all of the assets and employee, supplier and customer contracts relating to its business. The restructuring contemplated by the agreement is subject to various closing conditions, and should be completed by the end of 2003. Upon completion of the proposed recapitalization of UPC Polska, the New Senior Notes will be the only long-term debt of UPC Polska.

3.     Basis of Presentation

Basis of Presentation

        As discussed in Note 2, the Company filed a petition for relief under Chapter 11 of the U.S Bankruptcy Code and the Company filed a plan of reorganization with the U.S. Bankruptcy Court. In order to fully achieve the planned restructuring, it was also necessary to effect the restructuring under the laws of certain non-U.S. jurisdictions, including Dutch law. Accordingly, in conjunction with the commencement of the Chapter 11 Case, on December 3, 2002, the Company commenced a moratorium of payments and an Akkoord in The Netherlands under Dutch bankruptcy law. The U.S. petition and Dutch actions affect only the Company's itself and does not include any of the Company's subsidiaries. UPC is operating its business as a debtor-in-possession.

        The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting priciples, generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles, generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets, and liquidation of liabilities and commitments in the normal cause of business. As a result of the Company's recurring losses from operations and net capital deficiency, and the Chapter 11 Case and related circumstances, realization of assets and liquidation of liabilities are subject to significant uncertainty. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern depends on, among other things, its ability to successfully complete the financial restructuring and maintain business and financial operations consistent with those expected in the Plan (see Note 2).

        While operating as a debtor-in-possession, the Company may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, the Plan could materially change the amounts and classifications reported in the consolidated financial statements.

11



        In connection with the Chapter 11 Case, the Company is required to prepare its consolidated financial statements as of June 30, 2003, in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"). In accordance with SOP 90-7, all of the Company's pre-petition liabilities that are subject to compromise under the proposed Plan are segregated in the Company's consolidated balance sheet as liabilities and convertible preferred stock subject to compromise. These liabilities and the convertible preferred stock are recorded at the amounts expected to be allowed as claims in the Chapter 11 Case rather than at the estimated amounts for which those allowed claims may be settled as a result of the approval of the Plan. The amounts for Chapter 11 related reorganization expenses included in the consolidated debtor-in-possession statement of operations consist of professional fees of 12.5 million for the six months period ended June 30, 2003.

        Liabilities and convertible preferred stock included in the consolidated debtor-in-possession balance sheet as of June 30, 2003, which are subject to compromise under the terms of the Plan, are summarized as follows (in thousands of Euros):

 
  June 30,
2003

  December 31,
2002

 
  (In thousands of Euros)

Movieco (Cinenova)   11,667   11,667
Philips   25,222   25,222
   
 
  Total accounts payable   36,889   36,889
   
 
Accrued interest   329,013   351,500
   
 
July 1999 notes   1,404,014   1,513,558
October 1999 notes   964,934   1,027,625
January 2000 notes   1,484,559   1,607,706
The Exchangeable Loan   819,087   894,457
   
 
  Total senior notes, senior discount notes and other debt (see Note 7)   4,672,594   5,043,346
   
 
Convertible preferred stock   1,664,689   1,664,689
   
 
Total liabilities subject to compromise   6,703,185   7,096,424
   
 

        In accordance with SOP 90-7 interest expense is reported only to the extent that it will be paid during the bankruptcy proceedings or that it is an allowed claim. The interest expense allowed as claim is nil million both for the three and six months ended June 30, 2003, respectively. The contractual interest expense is 117.8 million and 239.9 million for the three and six months ended June 30, 2003, respectively.

        Certain prior period amounts have been reclassified to conform with current period presentation. The Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 required the Company to reclassify gains and losses associated with the extinguishment of debt from extraordinary classification to other income (expense) in the accompanying condensed consolidated statements of operations.

12


New Accounting Principles

        In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The provisions of SFAS 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. We are currently evaluating the impact of adopting this statement.

        In May 2003, the FASB issued SFAS No. 150, Accounting For Certain Financial Instruments With Characteristics Of Both Liabilities And Equity ("SFAS 150"). SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. We are currently evaluating the impact of adopting this statement.

Stock-Based Compensation

        The Company accounts for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). The Company has provided pro forma disclosures of net loss as if the fair value based method of accounting for these plans, as prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), had been applied. SFAS 123 is amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure and Amendment of FASB Statement No. 123 ("SFAS 148"). The intrinsic value method results in compensation expense for the difference between the grant price and the fair market value at each new measurement date. In addition, the Company, has stock-based compensation plans which are equivalent to stock appreciation rights. Accordingly, variable plan accounting is used in which compensation expense and deferred compensation is recorded based on the difference between the grant price and the market value of the underlying shares at each financial statement date. For our plans, which follow fixed plan accounting, compensation expense and deferred compensation is recorded based on the difference between the grant price and the market value of the underlying shares at grant date. The Company has adopted the disclosure requirements of SFAS 123.

        Based upon Black-Scholes single option pricing model, the total aggregate fair value of options granted in the three and six-month period ended June 30, 2003 was nil. The amount of the total aggregate fair values is being amortized using the straight-line method over the vesting period of the options. Cumulative compensation expense recognized in pro forma net income, with respect to options that are forfeited prior to vesting, is adjusted as a reduction of pro forma compensation expense in the period of forfeiture. Stock-based compensation, net of the effect of forfeitures and net of actual compensation expense recorded in the statement of operations, was 13.2 million and 24.4 million, for the three-month period ended June 30, 2003 and June 30, 2002, respectively. Stock-based compensation, net of the effect of forfeitures and net of actual compensation expense recorded in the statement of operations, was

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30.5 million and 44.8 million, for the six-month period ended June 30, 2003 and June 30, 2002, respectively. This stock-based compensation had the following pro forma effect on net income (in thousands):

 
  Three Months Ended June 30,
  Six Months
Ended June 30,

 
 
  2003
  2002
  2003
  2002
 
 
  (In thousands of Euros, except per share amounts)

 
Basic net income (loss) attributable to common shareholders, as reported   75,155   533,489   121,478   (1,492,693 )
Add: Stock-based compensation expense included in reported net income (loss), net of related tax effects   3,934   6,495   7,827   13,285  
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects   (13,199 ) (24,387 ) (30,524 ) (44,815 )
   
 
 
 
 
Pro forma net income (loss)   65,890   515,597   98,782   (1,524,223 )
   
 
 
 
 
Earnings per share:                  
  Basic earnings per share—as reported   0.17   1.20   0.27   (3.37 )
   
 
 
 
 
  Basic earnings per share—pro forma   0.15   1.16   0.22   (3.44 )
   
 
 
 
 
  Diluted earnings per share—as reported   0.12   0.53   0.04   (1.80 )
   
 
 
 
 
  Diluted earnings per share—pro forma   0.10   0.52   0.02   (1.84 )
   
 
 
 
 

4.     Dispositions

SBS

        On April 9, 2003, UPC sold six million shares of SBS to UnitedGlobalCom Europe B.V., a subsidiary of UnitedGlobalCom, Inc. ("United"), for 100 million. UPC transferred the proceeds from the sale of the SBS shares to UPC Holding B.V., which, in turn, transferred these funds to UPC Distribution Holding B.V., as part of a 125 million funding contemplated by a waiver agreement relating to the UPC Distribution Bank Facility. UPC accounted for the transaction as a sale, and a gain of 25.5 million is recorded on the income statement for the difference between UPC's book value and the readily available fair value of SBS on April 9, 2003, the date the transaction closed. The additional amount above the readily available SBS trading value on that date and the amount paid by UnitedGlobalCom Europe B.V. was 17.7 million, this is recorded as a capital contribution.

14


5.     Property, Plant and Equipment

 
  June 30,
2003

  December 31,
2002

 
 
  (In thousands of Euros)

 
Cable distribution networks   3,460,435   3,461,209  
Subscriber premises equipment and converters   913,710   890,589  
DTH, MMDS and distribution facilities   87,046   87,666  
IT systems, office equipment and fixtures   291,198   295,300  
Buildings and leasehold improvements   136,353   144,606  
Other   58,418   58,711  
   
 
 
    4,947,160   4,938,081  
  Accumulated depreciation   (2,063,070 ) (1,762,718 )
   
 
 
  Property, plant and equipment, net   2,884,090   3,175,363  
   
 
 

6.     Goodwill and Other Intangible Assets

        The following table presents the movement of net goodwill during 2003:

 
  December 31,
2002

  Acquisitions
  Cumulative
Translation
Adjustment
& Other

  June 30,
2003

 
   
  (In thousands of Euros)

   
Distribution:                
  The Netherlands   610,704       610,704
  Austria   133,963       133,963
  Belgium   12,358       12,358
  Norway   8,607     (1,016 ) 7,591
  Hungary   70,517   201   (4,514 ) 66,204
  Sweden   136,275     377   136,652
  Other   22,246     (1,510 ) 20,736
   
 
 
 
Total   994,670   201   (6,663 ) 988,208
   
 
 
 

        The following table presents other intangible assets, as of June 30, 2003 and December 31, 2002:

 
  June 30, 2003
  December 31, 2002
 
  Gross
Intangible
Assets

  Accumulated
Amortization

  Net
Intangible
Assets

  Gross
Intangible
Assets

  Accumulated
Amortization

  Net
Intangible
Assets

 
  (In thousands of Euros)

License fees   113,515   (44,609 ) 68,906   119,158   (42,675 ) 76,483
Other   7,190   (5,712 ) 1,478   3,969   (2,845 ) 1,124
   
 
 
 
 
 
  Total intangible assets   120,705   (50,321 ) 70,384   123,127   (45,520 ) 77,607
   
 
 
 
 
 

15


        The aggregate amortization expense on goodwill and other intangibles for the three months ended June 30, 2003 and 2002 was 2.6 million and 0.3 million, respectively. The aggregate amortization expense of other intangibles for the six months ended June 30, 2003 and 2002 was 6.4 million and 5.2 million, respectively. The Company's future estimated amortization expenses are as follows:

Six Months Ended December 31, 2003   5,453
Twelve Months Ended December 31, 2004   7,684
Twelve Months Ended December 31, 2005   7,460
Twelve Months Ended December 31, 2006   7,359
Twelve Months Ended December 31, 2007   7,358
Thereafter   35,070
   
  Total   70,384
   

7.     Long-Term Debt

 
  June 30,
2003

  December 31,
2002

 
 
  (In thousands of Euros)

 
July 1999 Notes   1,404,014   1,513,558  
October 1999 Notes   964,934   1,027,625  
January 2000 Notes   1,484,559   1,607,706  
UPC Distribution Bank Facility   2,984,042   3,140,139  
Exchangeable Loan   819,087   894,457  
UPC Polska Notes   353,295   359,951  
DIC Loan     54,438  
Other   80,663   85,218  
   
 
 
    8,090,594   8,683,092  
  Less current portion   (8,030,385 ) (8,255,648 )
   
 
 
  Total   60,209   427,444  
   
 
 

        Since March 3, 2002, the Company has been in default under its senior notes and senior discount notes and has received short-term waivers with respect to the UPC Distribution Bank Facility and the Exchangeable Loan. Accordingly, these borrowings have been reclassified to the current portion of long-term debt.

        All non-Euro denominated borrowings are recorded each period using the period end spot rate with the result being recorded as foreign exchange gain or loss.

UPC Polska Notes

        As a result of UPC Polska's filing of a petition for relief under Chapter 11 of the U.S. Bankruptcy Code and expiration of waivers from subsidiaries of UPC, all of UPC Polska's long-term debt, has been classified as short-term.

16


8.     Guarantees, Commitments and Contingencies

        The Company has entered into agreements that contain features, which meet the definition of a guarantee under FIN 45. FIN 45 defines a guarantee to be a contract that contingently requires the Company to make payments (either in cash, financial instruments, other assets, common shares of the Company or through provision of services) to a third party based upon changes in an underlying economic characteristic (such as interest rates or market value) that is related to an asset, a liability or an equity security of the other party. The Company has the following major types of guarantees that are subject to the disclosure requirements of FIN 45:

Business sale agreements

        In connection with agreements for the sale of portions of the Company's business, including certain discontinued operations, the Company typically retained certain liabilities of a business, which relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Company generally indemnifies the purchaser of its business in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification guarantees typically extend for a number of years.

        The Company is unable to estimate the maximum potential liability for these types of indemnification guarantees as the business sale agreements sometimes do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and the likelihood of which cannot be determined at this time.

        Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.

Lease agreements

        The Company's Digital Media Center ("DMC") sub-leases transponder capacity to a third party. Under this sublease agreement, the Company guaranteed performance criteria. These issued performance guarantees are fully matched with the guarantees received under the lease agreements between UPC and the third party.

Indemnification of lenders and agents under credit facilities

        Under its credit facilities, the Company has agreed to indemnify its lenders under such facilities against costs or losses resulting from changes in laws and regulation, which would increase the lenders' costs, and for legal action brought against the lenders. These indemnifications generally extend for the term of the credit facilities and do not provide for any limit on the maximum potential liability.

        Historically, the Company has not made any significant indemnification payments under such agreements and no material amounts have been accrued in the accompanying financial statements with respect to these indemnification guarantees, as the Company does not believe such amounts are probable of occurrence.

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Other indemnification agreements

        The DMC has third party contracts for the play out of channels from the DMC, which require the DMC to perform according to industry standard practice, with penalties attached should performance drop below the agreed criteria. Additionally, UPC Media's interactive service group also entered into third party contracts for the delivery of interactive content with certain performance criteria guarantees.

        The Company has certain franchise obligations under which the Company must meet performance requirements to construct networks under certain circumstances. Non-performance of these obligations could result in penalties being levied against the Company. The Company continues to meet its obligations so as not to incur such penalties.

        In the ordinary course of business, the Company provides customers with certain performance guarantees, should a service outage occur in excess of a certain period in time, UPC will compensate those customers for the outage.

        Historically, the Company has not made any significant payments under any of these indemnifications or guarantees. In certain cases, due to the nature of the agreement, the Company has not been able to estimate its maximum potential loss, the maximum potential loss has not been specified.

        The following is a description of certain legal proceedings to which UPC or one of UPC's subsidiaries is a party. In addition, from time to time, UPC may become involved in litigation relating to claims arising out of our operations in the normal course of the Company's business. In the opinion of the Company's management, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on the business, results of operations, financial condition or liquidity of UPC and its subsidiaries. UPC's (but not its subsidiaries') liability under legal proceedings are subject to compromise pursuant to the Chapter 11 Case and the Akkoord. As these legal proceedings are resolved, to the extent that UPC has any liability and such liability is owed by the Company, and to the extent the Plan and Akkoord become effective, UPC will distribute shares of New UPC Common Stock as provided under the Plan and the Akkoord in satisfaction of such claim.

        On July 4, 2001, InterComm Holdings L.L.C., InterComm France CVOHA ("ICF I"), InterComm France II CVOHA ("ICF II"), and Reflex Participations ("Reflex"), collectively with ICF I and ICF II, the "ICF Party") served a demand for arbitration on UPC, UGC Holdings, Inc. ("UGC Holdings") and its subsidiaries, Belmarken and UPC France Holding B.V. The claimants allege breaches of obligations allegedly owed by UPC in connection with the ICF Party's position as a minority shareholder in Médiaréseaux S.A. The claimants seek relief in the nature of immediate acceleration of an alleged right to require UPC or an affiliate to purchase all or any of the remaining shares in Médiareséaux S.A. from the ICF Party and/or compensatory damages, but in either case for a maximum of 192 million, plus reasonable fees and costs. The ICF Party has not specified from which entity it is seeking such relief, however, UGC Holdings is not a party to any agreement with the claimants and has been dismissed from the proceedings. UPC and its affiliates, as respondents, deny these claims. UPC is vigorously defending the arbitration proceedings and has filed appropriate counter claims. The ICF Party withdrew its claims on January 31, 2003; this arbitration is however still pending as a result of the decision of UPC and its affiliates to maintain their counterclaims. The final hearing on respondents' counterclaims occurred on June 25, 2003.

18


UPC and its affiliates were invited to provide the arbitral tribunal and the ICF party with additional supporting evidences before August 15, 2003. On February 14, 2003, the ICF Party served a new demand for arbitration on UPC, Belmarken and UPC France Holdings B.V. in which the ICF Party filed again claims similar to those withdrawn on January 31, 2003. UPC and its affiliates have answered such new demand for arbitration on April 29, 2003 and will, again deny vigorously the merit of these claims. The Terms of Reference are currently in the process of being drawn up by the arbitrators.

        On March 21, 2003, ICH, a creditor in the Dutch moratorium proceeding appealed the District Court's ratification of the Akkoord. On April 15, 2003, the Dutch Court of Appeals confirmed the judgment by the District Court of March 13, 2003 that ratified the Akkoord. On April 23, 2003, ICH appealed the ratification of the Akkoord to the Dutch Supreme Court. UPC takes the view that the appeal before the Supreme Court is without merit. Both UPC and ICH have concluded the exchange of briefs in the Supreme Court proceedings and on July 11, 2003, the Dutch Attorney General delivered advice to the Supreme Court, which advice concluded that all of the grounds for the appeal are without merit and that, therefore, the appeal should be dismissed. The Supreme Court is independent of the Dutch Attorney General, however, and there can be no assurance that the Supreme Court will act consistently with the advice of the Dutch Attorney General. Judgment is expected in August 2003.

        A subsidiary of UPC, UPC Polska, Inc. ("UPC Polska") 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 DTH carriage agreement ("DTH Agreement") for the HBO premium movie channel. With respect to the Cable Agreement, on April 25, 2002, UPC Polska 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 UPC Polska. Specifically, UPC Polska 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 relevant territory.

        In its answer in the arbitration, HBO asserted counterclaims against UPC Polska, alleging that UPC Polska was liable for minimum guarantees under the Cable Agreement and the DTH Agreement, and also that UPC Polska was liable for an increase in minimum guarantees under the DTH Agreement, based on the fact that UPC Polska merged its DTH business with Canal+ in December 2001. UPC Polska 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 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 DTH Agreement.

        UPC Polska intends to vigorously prosecute its claims and defend against HBO's counterclaims. As of the date of filing this Quarterly Report on Form 10-Q, the case remains in arbitration. The parties have prepared the terms of reference, which includes mapping out discovery needs, timing/briefing schedule for future motions, and hearing dates. On April 15, 2003, the arbitration panel confirmed a schedule for UPC Polska's request to have the matter decided on summary judgment in which oral argument occurred on

19



May 29, 2003. On May 29, 2003 the tribunal assembled in New York for oral argument on the motion. The Tribunal did not award the motion and ruled that there is necessity of hearing further evidence and therefore there will be an evidentiary hearing scheduled. The case is proceeding with discovery ensuing over the course of the summer and submissions (such as witness statements, pretrial briefs and joint exhibits) due in October 2003. The evidentiary hearings are scheduled to occur in November 2003. UPC Polska is unable to predict the outcome of the arbitration process.

        In 2000, one of the Company's Dutch systems was assessed for a transfer tax on immovable property in the amount of 0.8 million for the purchase of a cable network. The Company has always regarded its cable networks as movable property and not subject to such transfer tax. The Company has appealed this tax assessment, but on June 6, 2003 the Dutch Supreme Court ruled against the Company. Therefore, the Company's Dutch systems may be assessed for taxes on similar transactions. Currently the Company cannot predict the extent to which the taxes could be assessed retroactively or the amount of tax that the Company's systems may be assessed for, although it may be substantial, being 6% of the value attributable to some of the Company's systems at the date of transfer. Because UPC owns 100% of UPC Nederland, any tax liabilities assessed against the Company's Dutch systems will be consolidated with the Company's results. The Company believes that most cable television companies and other utilities in The Netherlands could become subject to similar tax liabilities. Various interested parties therefore are currently lobbying the Dutch Government to obtain clarification on how the Government intends to deal with the consequences of the Supreme Court's ruling. There can be no assurance that such lobbying will be limiting any exposure for past or future years.

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9.     Earnings per share

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2003
  2002
  2003
  2002
 
 
  (In thousands)

 
Numerator (Basic):                  
Income (loss) before cumulative effect of change in accounting principle   75,155   566,501   121,478   74,995  
  Accretion of Dividend on Series 1 Convertible Preferred Stock     (31,487 )   (65,767 )
  Accretion of Discount of Series 1 Convertible Preferred Stock     (1,525 )   (3,050 )
   
 
 
 
 
Basic income (loss) attributable to common stockholders before cumulative effect of change in accounting principle   75,155   533,489   121,478   6,178  
Cumulative effect of change in accounting principle         (1,498,871 )
   
 
 
 
 
Basic net income (loss) attributable to common stockholders   75,155   533,489   121,478   (1,492,693 )
   
 
 
 
 
Denominator (Basic):                  
Basic weighted-average number of common shares outstanding   443,417,525   443,417,525   443,417,525   443,417,525  
   
 
 
 
 
Numerator (Diluted):                  
Income (loss) before cumulative effect of change in accounting principle   75,155   566,501   121,478   74,995  
  Reversal of gain on DIC Loan conversion       (69,364 )  
  Reversal of interest accretion on DIC Loan     1,768   688   3,536  
  Accretion of exchangeable loan     14,557     29,880  
   
 
 
 
 
Diluted income (loss) attributable to common stockholders before cumulative effect of change in accounting principle   75,155   582,826   52,802   108,411  
Cumulative effect of change in accounting principle         (1,498,871 )
   
 
 
 
 
Diluted net income (loss) attributable to common stockholders   75,155   582,826   52,802   (1,390,460 )
   
 
 
 
 
Denominator (Diluted):                  
Basic weighted-average number of common shares outstanding   443,417,525   443,417,525   443,417,525   443,417,525  
  DIC Loan     475,554,629   634,681,465   154,249,557  
  Exchangeable Loan   136,797,557   131,467,986   136,797,557   129,534,938  
  Series 1 Convertible Preferred Stock   48,314,874   44,731,969   48,314,874   43,692,788  
   
 
 
 
 
Diluted weighted-average number of common shares outstanding   628,529,956   1,095,172,109   1,263,211,421   770,894,808  
   
 
 
 
 

21


10.   Segments and Geographic Information

        The Company is managed internally as three primary businesses, UPC Distribution, UPC Media and Priority Telecom (with the UPC Media division managing the chello broadband and programming businesses). UPC Distribution focuses on providing cable television (including digital), DTH, internet and telephone services to residential customers and is comprised of the local operating systems. UPC Media includes chello broadband, the internet access provider, and UPCtv, which provides video content and programming as well as UPC's digital products. UPC Media provides broadband internet and interactive digital products and services, transactional television services such as pay per view movies, digital broadcast and post production services, and thematic channels for distribution on the Company's network, third party networks and DTH platforms. UPC has also formed an Investment Division, which manages UPC's non-consolidated investment assets. Priority Telecom is focused on providing telephone and internet services to business customers. The Company evaluates performance and allocates resources based on the results of these divisions. Adjusted EBITDA is the primary measure used by our chief operating decision makers to evaluate segment-operating performance and to decide how to allocate resources to segments. EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. As the Company uses the term, Adjusted EBITDA represents net income before cumulative effects of accounting changes, share in results of affiliates, minority interests in subsidiaries, income taxes, reorganization expense, other income and expense, gain on issuance of common equity securities by subsidiaries, provision for loss on investments, gain (loss) on sale of investments in affiliates and other assets, foreign currency exchange gain (loss), interest income and expense, impairment and restructuring charges, depreciation, amortization and stock-based compensation. The Company believes Adjusted EBITDA is meaningful because it provides investors a means to evaluate the operating performance of its segments and its company on an ongoing basis using criteria that is used by its internal decision makers. The Company reconciles the total of the reportable segments' Adjusted EBITDA to its consolidated net income as presented in the accompanying condensed consolidated statements of operations, because the Company believes consolidated net income is the most directly, comparable financial measure to total

22



segment operating performance. Investors should view Adjusted EBITDA as a supplement to, and not a substitute for, other GAAP measures of income as a measure of operating performance.

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2003
  2002
  2003
  2002
 
 
  (In thousands of Euros)

 
Revenue                  
Triple Play:                  
  The Netherlands   125,729   121,670   253,111   237,533  
  Austria   57,120   52,895   112,834   102,969  
  Belgium   6,904   6,559   13,827   13,069  
  Czech Republic   13,935   11,628   27,440   22,571  
  Norway   20,814   20,346   42,600   39,319  
  Hungary   36,392   32,611   73,226   64,544  
  France   24,702   25,011   49,469   50,550  
  Poland   18,803   20,066   37,823   42,000  
  Sweden   16,730   14,048   32,680   27,484  
  Other   10,119   8,948   20,232   18,251  
   
 
 
 
 
Total Triple Play Distribution   331,248   313,782   663,242   618,290  
   
 
 
 
 
Germany     11,977     24,468  
Other   6,583   11,212   13,054   21,046  
   
 
 
 
 
  Total Distribution   337,831   336,971   676,296   663,804  
   
 
 
 
 
Priority Telecom   27,658   30,876   54,262   62,992  
UPC Media   21,581   17,860   42,252   36,375  
UPC Investments   122     245   123  
Intercompany Eliminations   (27,807 ) (26,790 ) (54,570 ) (58,065 )
   
 
 
 
 
  Total   359,385   358,917   718,485   705,229  
   
 
 
 
 

23


        A summary of the segment information by geographic area is as follows:

 
  Triple Play Revenues for the
Three Months Ended June 30, 2003

 
  Cable
Television

  DTH
  Telephone
  Internet/
Data

  Total
 
  (In thousands of Euros)

Triple Play:                    
  The Netherlands   68,685     18,727   38,317   125,729
  Austria   22,979     13,446   20,695   57,120
  Belgium   4,115       2,789   6,904
  Czech Republic   7,946   3,735   163   2,091   13,935
  Norway   13,935     3,015   3,864   20,814
  Hungary   21,120   4,947   6,355   3,970   36,392
  France   16,254     6,059   2,389   24,702
  Poland   17,263       1,540   18,803
  Sweden   10,389       6,341   16,730
  Other   9,622   483     14   10,119
   
 
 
 
 
  Total Triple Play Distribution   192,308   9,165   47,765   82,010   331,248
   
 
 
 
 
 
  Triple Play Revenues for the
Three Months Ended June 30, 2002

 
  Cable
Television

  DTH
  Telephone
  Internet/
Data

  Total
 
  (In thousands of Euros)

Triple Play:                    
  The Netherlands   66,068     22,910   32,692   121,670
  Austria   22,537     13,503   16,855   52,895
  Belgium   3,984       2,575   6,559
  Czech Republic   7,607   2,790   201   1,030   11,628
  Norway   14,145     2,740   3,461   20,346
  Hungary   19,661   3,954   6,803   2,193   32,611
  France   16,029     6,965   2,017   25,011
  Poland   19,018       1,048   20,066
  Sweden   9,598       4,450   14,048
  Other   8,652   473     (177 ) 8,948
   
 
 
 
 
  Total Triple Play Distribution   187,299   7,217   53,122   66,144   313,782
   
 
 
 
 

24


 
  Triple Play Revenues for the
Six Months Ended June 30, 2003

 
  Cable
Television

  DTH
  Telephone
  Internet/
Data

  Total
 
  (In thousands of Euros)

Triple Play:                    
  The Netherlands   139,007     37,806   76,298   253,111
  Austria   45,790     27,267   39,777   112,834
  Belgium   8,337       5,490   13,827
  Czech Republic   15,698   7,468   336   3,938   27,440
  Norway   28,648     6,045   7,907   42,600
  Hungary   42,713   9,936   12,816   7,761   73,226
  France   32,639     12,278   4,552   49,469
  Poland   34,965       2,858   37,823
  Sweden   20,412       12,268   32,680
  Other   19,255   963     14   20,232
   
 
 
 
 
  Total Triple Play Distribution   387,464   18,367   96,548   160,863   663,242
   
 
 
 
 
 
  Triple Play Revenues for the
Six Months Ended June 30, 2002

 
  Cable
Television

  DTH
  Telephone
  Internet/
Data

  Total
 
  (In thousands of Euros)

Triple Play:                    
  The Netherlands   131,876     43,887   61,770   237,533
  Austria   44,261     26,319   32,389   102,969
  Belgium   7,946       5,123   13,069
  Czech Republic   14,872   5,515   411   1,773   22,571
  Norway   27,418     5,194   6,707   39,319
  Hungary   39,117   7,921   13,469   4,037   64,544
  France   32,217     13,796   4,537   50,550
  Poland   39,952       2,048   42,000
  Sweden   18,935       8,549   27,484
  Other   17,612   993     (354 ) 18,251
   
 
 
 
 
  Total Triple Play Distribution   374,206   14,429   103,076   126,579   618,290
   
 
 
 
 

25


 
  Three Months
Ended June 30,

  Six Months
Ended June 30,

 
Adjusted EBITDA

 
  2003
  2002
  2003
  2002
 
 
  (In thousands of Euros)

 
Triple Play:                  
  The Netherlands   51,053   27,087   99,241   55,190  
  Austria   21,968   18,515   42,847   32,509  
  Belgium   2,570   2,100   5,223   3,908  
  Czech Republic   5,332   2,068   10,440   5,569  
  Norway   5,101   3,670   10,783   6,784  
  Hungary   13,740   11,688   28,735   23,157  
  France   1,691   (4,272 ) 2,761   (7,406 )
  Poland   7,213   4,537   12,086   7,737  
  Sweden   6,806   4,597   13,400   7,758  
  Other   4,289   2,956   8,561   5,813  
   
 
 
 
 
  Total Triple Play Distribution   119,763   72,946   234,077   141,019  
   
 
 
 
 
Germany     6,691     12,212  
Corporate   (12,532 ) (16,085 ) (30,393 ) (30,339 )
Other   4,622   4,853   9,761   10,680  
   
 
 
 
 
  Total Distribution   111,853   68,405   213,445   133,572  
   
 
 
 
 
Priority Telecom   3,130   (1,473 ) 5,731   (6,149 )
UPC Media   5,559   (112 ) 8,024   (5,687 )
UPC Investments   (516 ) 674   (686 ) 572  
   
 
 
 
 
  Total   120,026   67,494   226,514   122,308  
   
 
 
 
 

26


        Following is a reconciliation of Adjusted EBITDA to UPC's net income (loss) for the three and six months ended June 30, 2003 and 2002.

 
  Three Months
Ended June 30,

  Six Months
Ended June 30,

 
 
  2003
  2002
  2003
  2002
 
 
  (In thousands of Euros)

 
Adjusted EBITDA   120,026   67,494   226,514   122,308  
Depreciation and amortization   (170,651 ) (172,268 ) (337,267 ) (344,900 )
Impairment and restructuring charges   963   (21,105 ) 963   (25,048 )
Stock-based compensation   (5,762 ) (7,093 ) (9,655 ) (13,883 )
Loss on disposal of Poland DTH business   (6,856 )   (6,856 )  
   
 
 
 
 
  Operating income (loss)   (62,280 ) (132,972 ) (126,301 ) (261,523 )
Interest income   1,152   10,727   4,721   16,712  
Interest expense   (78,035 ) (224,936 ) (160,412 ) (455,141 )
Foreign currency exchange gain   201,250   577,315   334,605   521,258  
Gain on extinguishment of debt     347,207   69,364   471,718  
Gain on sale of investment in affiliate to related party   25,518     25,518    
Other income (expense), net   (11,394 ) 10,274   (14,272 ) (176,666 )
   
 
 
 
 
  Income (loss) before income taxes and other items   76,211   587,615   133,223   116,358  
Reorganization expenses   (4,852 )   (12,493 )  
Income tax expense, net   (703 ) (2,851 ) (1,191 ) (1,607 )
Minority interests in subsidiaries, net   (10 ) 126   (75 ) (64 )
Share in results of affiliates, net   4,509   (18,389 ) 2,014   (39,692 )
   
 
 
 
 
  Income (loss) before cumulative effect of chance in accounting principle   75,155   566,501   121,478   74,995  
Cumulative effect of change in accounting principle         (1,498,871 )
   
 
 
 
 
  Net income (loss)   75,155   566,501   121,478   (1,423,876 )
   
 
 
 
 

27


 
  Total Assets
 
  June 30,
2003

  December 31,
2002

 
  (In thousands of Euros)

Corporate and UPC Investments   302,550   542,113
UPC Media   71,600   69,253
Priority Telecom   223,619   249,412
Distribution:        
  The Netherlands   1,755,129   1,798,320
  Austria   416,939   430,027
  Belgium   40,467   42,422
  Czech Republic   117,557   121,881
  Norway   200,406   238,397
  Hungary   286,759   327,667
  France   545,592   580,956
  Poland   213,151   233,969
  Sweden   219,261   226,807
  Other   59,305   69,793
   
 
Total   4,452,335   4,931,017
   
 

11.   Impairment and Restructuring Charges

        During 2001, in reviewing the current and long-range plan, the Company implemented a Company-wide restructuring plan to both lower operating expenses and strengthen its competitive and financial position. Management began implementation of the plan during the second half of 2001 by eliminating certain employee positions, reducing office space and related overhead expenses, recognizing losses related to excess capacity under certain contracts and cancellation of certain programming contracts.

28



        The following table summarizes these costs by type and related segment of the business as per June 30, 2003.

 
  Employee
Severance &
Termination
Costs

  Office
Closures

  Programming
and Lease
Contracts
Termination Costs

  Asset
Disposal
Losses and
Other Costs

  Total
Impairment and
Restructuring
Charges

 
 
  (In thousands of Euros)

 
Impairment and restructuring liability, December 31, 2002   18,545   13,550   35,184   4,195   71,474  
   
 
 
 
 
 
Total impairment and restructuring charges (releases) for the six months ended June 30, 2003   (963 )       (963 )
Cash paid during six months ended June 30, 2003   (7,195 ) (3,398 ) (2,061 ) (1,045 ) (13,699 )
Non-cash release of restructuring liability       (435 )   (435 )
Cumulative translation adjustment & other   (143 ) (520 ) (2,130 ) (9 ) (2,802 )
   
 
 
 
 
 
Impairment and restructuring liability, June 30, 2003   10,244   9,632   30,558   3,141   53,575  
   
 
 
 
 
 
Short-term portion impairment and restructuring liability   4,678   4,508   887   3,090   13,163  
Long-term portion impairment and restructuring liability   5,566   5,124   29,671   51   40,412  
   
 
 
 
 
 
Impairment and restructuring liability, June 30, 2003   10,244   9,632   30,558   3,141   53,575  
   
 
 
 
 
 

12.   Related Party Transactions

        In 2002, a subsidiary of UPC entered into a contract with Spinhalf Ltd. for the provision of network services. This company is owned by a family member of UPC's Chief Executive Officer. The value of the contracted services to date is approximately 7 million.

13.   Subsequent Events

        Certain subsequent events are described in Note 2 "Reorganization Under Bankruptcy Code" in the consolidated financial statements.

29




Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        We caution you that the following discussion contains, in addition to historical information, certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's beliefs, as well as on assumptions made by and information currently available to management. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from what we say or imply with such forward-looking statements. All statements other than statements of historical fact included herein may constitute forward-looking statements. In addition, when we use the words "may", "will", "expects", "intends", "estimates", "anticipates", "believes", "plans", "seeks" or "continues" or the negative thereof or similar expressions herein, we intend to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, including, but not limited to, national and international economic and market conditions, competitive activities or other business conditions, and customer reception of our existing and future services. These forward-looking statements may include, among other things, statements concerning our plans, objectives and future economic prospects, potential restructuring of our subsidiaries' capital structure, expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Investors should be aware that the video, telephone and Internet access services industries are changing rapidly, and, therefore, the forward-looking statements and statements of expectations, plans and intent herein are subject to a greater degree of risk than similar statements regarding certain companies involved in other industries.

        Although we believe that our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, we cannot assure you that our actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied from such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, among other things, whether we and/or some of our subsidiaries will continue as going concerns, changes in television viewing preferences and habits by our subscribers and potential subscribers and their acceptance of new technology, programming alternatives and new video services that we may offer. They also include our subscribers' acceptance of our newer digital video, telephone and internet access services, our ability to manage and grow our newer digital video, telephone and internet access services, our ability to secure adequate capital to fund other system growth and development and planned acquisitions, our ability to successfully close proposed transactions and restructurings, risks inherent in investment and operations in foreign countries, changes in government regulation and changes in the nature of key strategic relationships with joint venture partners. We and certain of our subsidiaries are in breach of covenants with respect to our and their indebtedness, have filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code and foreign moratorium laws and/or are planning to restructure our and their capital structure. The outcome of the breaches of covenants, the Chapter 11 bankruptcy proceedings and restructurings is uncertain and subject to many factors outside of our control, including whether creditors accept such proposed restructurings. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by our discussion of these factors. Other than as may be required by applicable law, we undertake no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. We caution you, however, that this list of risk factors and other cautionary language contained herein may not be exhaustive.

        The following discussion and analysis of financial condition and results of operations covers the three and six month periods ended June 30, 2003, and 2002, respectively, and should be read together with our consolidated financial statements and related notes included elsewhere herein. These consolidated financial statements provide additional information regarding our financial activities and condition.

30



        All monetary amounts in Management's Discussion and Analysis are stated in Euros, unless indicated otherwise. All capitalized terms used and not otherwise defined in Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations have the meanings given to them in Notes to the Consolidated Financial Statements contained in Part I—Financial Statements of this Quarterly Report on Form 10-Q.

Risks, Uncertainties and Liquidity

        For a detailed discussion on certain of our risks, uncertainties and liquidity, see Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Description of Business

        The Company is managed internally as three primary businesses, UPC Distribution, UPC Media and Priority Telecom (with the UPC Media division managing the chello broadband and programming businesses). UPC Distribution focuses on providing cable television (including digital), DTH, internet and telephone services to residential customers and is comprised of the local operating systems. UPC Media includes chello broadband, the internet access provider, and UPCtv, which provides video content and programming as well as UPC's digital products. UPC Media provides broadband internet and interactive digital products and services, transactional television services such as pay per view movies, digital broadcast and post production services, and thematic channels for distribution on our network, third party networks and DTH platforms. We have also formed an Investment Division, which manages UPC's non-consolidated investment assets. Priority Telecom is focused on providing telephone and internet services to business customers. We evaluate performance and allocate resources based on the results of these divisions.

31



Results of Operations

Revenue

        The following tables provide revenue detail for our operating segments for the three and six months ended June 30, 2003 and 2002.

 
  Revenue
 
 
  Three Months Ended June 30,
  2003 over 2002
 
 
  2003
  2002
  Change
  % Change
 
 
  (In thousands of Euros)

   
 
Triple Play Distribution   331,248   313,782   17,466   5.6 %
Germany(1)     11,977   (11,977 ) –100.0 %
Other   6,583   11,212   (4,629 ) –41.3 %
   
 
 
 
 
  Total Distribution   337,831   336,971   860   0.3 %
Priority Telecom   27,658   30,876   (3,218 ) –10.4 %
UPC Media   21,581   17,860   3,721   20.8 %
UPC Investment   122     122   n.a  
Intercompany Eliminations(2)   (27,807 ) (26,790 ) (1,017 ) 3.8 %
   
 
 
 
 
  Total   359,385   358,917   468   0.1 %
   
 
 
 
 
 
  Revenue
 
 
  Six Months Ended June 30,
  2003 over 2002
 
 
  2003
  2002
  Change
  % Change
 
 
  (In thousands of Euros)

   
 
Triple Play Distribution   663,242   618,290   44,952   7.3 %
Germany(1)     24,468   (24,468 ) –100.0 %
Other   13,054   21,046   (7,992 ) –38.0 %
   
 
 
 
 
  Total Distribution   676,296   663,804   12,492   1.9 %
Priority Telecom   54,262   62,992   (8,730 ) –13.9 %
UPC Media   42,252   36,375   5,877   16.2 %
UPC Investment   245   123   122   99.2 %
Intercompany Eliminations(2)   (54,570 ) (58,065 ) 3,495   –6.0 %
   
 
 
 
 
  Total   718,485   705,229   13,256   1.9 %
   
 
 
 
 

(1)
As of August 1, 2002 Germany (EWT/TSS) is a non-consolidated company

(2)
Intercompany eliminations are the eliminations of intercompany revenues with UPC Media and network revenues

        UPC Distribution.    The movement in revenue from UPC Distribution for the three and six months ended June 30, 2003 is attributable to:

32


        Priority Telecom.    The movement in revenue from Priority Telecom for the three and six months ended June 30, 2003 is attributable to:


        UPC Media.    The movement in revenue from UPC Media for the three and six months ended June 30, 2003 is mainly attributable to an increase of 130,400 (22.0%) in the number of internet subscribers to 723,300 from 592,900 as per June 30, 2003 and 2002, respectively.

Operating Expenses

        Operating expenses include direct costs and costs relating to network operations, customer operations, customer care, billing and collecting, broadcasting, programming, content and franchise fees.

33



The following table shows the operating expenses for three and six months ended June 30, 2003 and 2002, respectively.

 
  Operating Expenses
 
 
  Three Months Ended June 30,
  2003 over 2002
 
 
  2003
  2002
  Change
  % Change
 
 
  (In thousands of Euros)

   
 
Distribution excluding Germany   155,338   173,612   (18,274 ) –10.5 %
Germany(1)     5,881   (5,881 ) –100.0 %
   
 
 
 
 
  Total Distribution   155,338   179,493   (24,155 ) –13.5 %
Priority Telecom   17,986   25,347   (7,361 ) –29.0 %
UPC Media   7,357   10,791   (3,434 ) –31.8 %
UPC Investments         0.0 %
Intercompany Eliminations   (25,492 ) (22,930 ) (2,562 ) 11.2 %
   
 
 
 
 
  Total   155,189   192,701   (37,512 ) –19.5 %
   
 
 
 
 
 
  Operating Expenses
 
 
  Six Months Ended June 30,
  2003 over 2002
 
 
  2003
  2002
  Change
  % Change
 
 
  (In thousands of Euros)

   
 
Distribution excluding Germany   316,665   346,887   (30,222 ) –8.7 %
Germany(1)     11,121   (11,121 ) –100.0 %
   
 
 
 
 
  Total Distribution   316,665   358,008   (41,343 ) –11.5 %
Priority Telecom   33,044   49,842   (16,798 ) –33.7 %
UPC Media   14,263   23,175   (8,912 ) –38.5 %
UPC Investments         0.0 %
Intercompany Eliminations   (50,360 ) (50,293 ) (67 ) 0.1 %
   
 
 
 
 
  Total   313,612   380,732   (67,120 ) –17.6 %
   
 
 
 
 

(1)
As of August 1, 2002 Germany (EWT/TSS) is a non-consolidated company.

        The movement in operating expenses for the three and six months ended June 30, 2003 is attributable to:

34


Selling, General & Administrative Expenses

        Selling, general and administrative expenses ("SG&A expenses") include costs relating to human resources, IT, general services, management, finance, legal, and marketing. SG&A expenses also include stock-based compensation charges.

 
  Selling, General & Administrative expenses
 
 
  Three Months Ended June 30,
  2003 over 2002
 
 
  2003
  2002
  Change
  % Change
 
 
  (In thousands of Euros)

   
 
Distribution excluding Germany   70,560   86,376   (15,816 ) –18.3 %
Germany(1)     1,669   (1,669 ) –100.0 %
   
 
 
 
 
  Total Distribution   70,560   88,045   (17,485 ) –19.9 %
Priority Telecom   6,541   7,002   (461 ) 6.6 %
UPC Media   8,666   7,181   1,485   20.7 %
UPC Investments   393   354   39   11.1 %
Stock-based compensation   5,762   7,093   (1,331 ) –18.8 %
Loss on disposal of Poland DTH business   6,856     6,856   n.a.  
Intercompany Eliminations   (1,990 ) (3,860 ) 1,870   48.4 %
   
 
 
 
 
  Total   96,788   105,815   (9,027 ) –8.5 %
   
 
 
 
 
 
  Selling, General & Administrative expenses
 
 
  Six Months Ended June 30,
  2003 over 2002
 
 
  2003
  2002
  Change
  % Change
 
 
  (In thousands of Euros)

   
 
Distribution excluding Germany   146,254   167,798   (21,544 ) –12.8 %
Germany(1)     3,399   (3,399 ) –100.0 %
   
 
 
 
 
  Total Distribution   146,254   171,197   (24,943 ) –14.6 %
Priority Telecom   15,487   19,299   (3,812 ) –19.8 %
UPC Media   19,966   18,886   1,080   5.7 %
UPC Investments   686   579   107   18.5 %
Stock-based compensation   9,655   13,883   (4,228 ) –30.5 %
Loss on disposal of Poland DTH business   6,856     6,856   n.a.  
Intercompany Eliminations   (4,034 ) (7,772 ) 3,738   48.1 %
   
 
 
 
 
  Total   194,870   216,072   (21,202 ) –9.8 %
   
 
 
 
 

(1)
As of August 1, 2002 Germany (EWT/TSS) is a non-consolidated company.

        The movement in selling, general and administrative expenses for the three and six months ended June 30, 2003 is attributable to:

35


Adjusted EBITDA

        Adjusted EBITDA increased for the three months and six months ended June 30, 2003 primarily due to increased revenues, improved gross margin and continued cost control across all our operating segments. The following tables provide Adjusted EBITDA detail for our operating segments.

 
  Adjusted EBITDA
 
 
  Three Months Ended June 30,
  2003 over 2002
 
 
  2003
  2002
  Change
  % Change
 
 
  (In thousands of Euros, unaudited)

   
 
Triple Play Distribution   119,763   72,946   46,817   64.2 %
Germany(1)     6,691   (6,691 ) –100.0 %
Corporate   (12,532 ) (16,085 ) 3,553   22.1 %
Other   4,622   4,853   (231 ) –4.8 %
   
 
 
 
 
  Total Distribution   111,853   68,405   43,448   63.5 %
   
 
 
 
 
Priority Telecom   3,130   (1,473 ) 4,603   312.5 %
UPC Media   5,559   (112 ) 5,671   5,063.4 %
UPC Investments   (516 ) 674   (1,190 ) –176.6 %
   
 
 
 
 
  Total   120,026   67,494   52,532   77.8 %
   
 
 
 
 
 
  Adjusted EBITDA
 
 
  Six Months Ended June 30,
  2003 over 2002
 
 
  2003
  2002
  Change
  % Change
 
 
  (In thousands of Euros, unaudited)

   
 
Triple Play Distribution   234,077   141,019   93,058   66.0 %
Germany(1)     12,212   (12,212 ) –100.0 %
Corporate   (30,393 ) (30,339 ) (54 ) –0.2 %
Other   9,761   10,680   (919 ) –8.6 %
   
 
 
 
 
  Total Distribution   213,445   133,572   79,873   59.8 %
   
 
 
 
 
Priority Telecom   5,731   (6,149 ) 11,880   193.2 %
UPC Media   8,024   (5,687 ) 13,711   241.1 %
UPC Investments   (686 ) 572   (1,258 ) –219.9 %
   
 
 
 
 
  Total   226,514   122,308   104,206   85.2 %
   
 
 
 
 

(1)
As of August 1, 2002 Germany (EWT/TSS) is a non-consolidated company.

36


        UPC Distribution.    The movement in Adjusted EBITDA from UPC Distribution for the three and six months ended June 30, 2003 is attributable to:

        Priority Telecom.    The movement in Adjusted EBITDA from Priority Telecom for the three and six months ended June 30, 2003 is attributable to:


        UPC Media.    The movement in Adjusted EBITDA from UPC Media for the three and six months ended June 30, 2003 is mainly attributable to:

        Please refer to our segment information in the accompanying footnotes to the unaudited condensed financial statements for a definition of Adjusted EBITDA and a reconciliation of total segment Adjusted EBITDA to consolidated net income.

Depreciation and Amortization

        Depreciation and amortization expense decreased 1.6 million (–0.9%) to 170.7 million from 172.3 million for the three months ended June 30, 2003 and 2002, respectively. Depreciation and amortization expense decreased 7.6 million (–2.2%) to 337.3 million from 344.9 million for the six months ended June 30, 2003 and 2002, respectively. The decreases are mainly attributable to the deconsolidation of UPC Germany effective August 1, 2002.

Interest Income

        Interest income decreased 9.6 million (–89.3%) to 1.2 million from 10.7 million for the three months ended June 30, 2003 and 2002, respectively. Interest income decreased 12.0 million (–71.8%) to 4.7 million from 16.7 million for the six months ended June 30, 2003 and 2002, respectively. The decreases are mainly attributable to the decrease in cash balances.

Interest Expense

        Interest expense (including related party) decreased 146.9 million (–65.3%) to 78.0 million from 224.9 million for the three months ended June 30, 2003 and 2002, respectively. Interest expense (including related party) decreased 294.7 million (–64.8%) to 160.4 million from 455.1 million for the six months ended June 30, 2003 and 2002, respectively. The decreases are mainly attributable to the cessation of accreting interest in accordance with SOP 90-7 (as defined below) on our senior discount notes on

37



December 3, 2002 when we filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. In addition, the decrease in interest expense is attributable to an increase of the euro against the U.S. dollar.

 
  For the Three Months Ended June 30,
  For the Six Months Ended June 30,
 
 
  2003
  2002
  2003
  2002
 
 
  (In thousands of Euros, unaudited)

 
Cash Current Pay:                  
  Bank   (56,199 ) (66,167 ) (122,648 ) (128,782 )
  Senior Notes     (55,484 )   (127,731 )
   
 
 
 
 
    (56,199 ) (121,651 ) (122,648 ) (256,513 )
   
 
 
 
 
Non-Cash Accretion:                  
  Discount Notes   (12,483 ) (78,077 ) (25,176 ) (153,172 )
  Exchangeable Loan     (14,557 )   (29,880 )
  Deferred Financing   (9,353 ) (10,650 ) (12,588 ) (15,576 )
   
 
 
 
 
    (21,836 ) (103,284 ) (37,764 ) (198,628 )
   
 
 
 
 
Total Interest Expense   (78,035 ) (224,935 ) (160,412 ) (455,141 )
   
 
 
 
 

        The recapitalization process is expected to be completed during 2003. If there is completion of the recapitalization, our senior notes, senior discount notes and other claims would be exchanged for equity in New UPC. See Note 3 of the Company's Unaudited condensed consolidated financial statements captured in this Quarterly Report on Form 10-Q

Foreign Currency Exchange Gain

        Foreign currency exchange gain decreased 376.1 million (–65.1%) to 201.3 million from 577.3 million, for the three months ended June 30, 2003 and 2002, respectively. Foreign currency exchange gain decreased 186.7 million (–35.8%) to 334.6 million from 521.3 million for the six months ended June 30, 2003 and 2002, respectively. These gains during both 2003 and 2002 are primarily a result of a significant foreign exchange gain on our dollar denominated senior notes and our Exchangeable Loan as the euro strengthened against the U.S. dollar. Consequently, the decrease is mainly attributable to the difference in revaluation of the euro against the U.S. dollar during these periods.

Gain on Extinguishment of Debt

        The gain on extinguishment of debt for the six months ended June 30, 2003 relates to the gain on the Tevel transaction, recognized during the three months ended March 31, 2003. The gain on extinguishment of debt for the six months ended June 30, 2002 relates to the gain on the unwinding of certain cross currency swap agreements for 347.2 million, recognized during the three months ended June 30, 2002, and the gain on the restructuring and cancellation of costs associated with certain vendor contracts of Priority Telecom for 124.5 million, recognized during the three months ended March 31, 2002.

Gain on Sale of Investments to Related Party

        On April 9, 2003 we sold our investment in SBS to UnitedGlobalCom Europe B.V. for 100 million. As a result of the sale, we recognized a gain on sale of investments to related party of 25.5 million.

Other Income and Expense

        Other income and expense decreased 21.7 million to an expense of 11.4 million from an income of 10.3 million for the three months ended June 30, 2003 and 2002, respectively. Other income and expense decreased 162.4 million (–91.9%) to an expense of 14.3 million from an expense of 176.7 million for the six

38



months ended June 30, 2003 and 2002, respectively. Other income and expense primarily relates to the mark-to-market valuations of our cross currency and interest rate derivative contracts from period to period. Consequently, the movement is mainly attributable to the number of derivatives held by us, and the change in the underlying exchange rate and interest variables.

Reorganization Expenses, Net

        In connection with the Chapter 11 Case, we are required to prepare our consolidated financial statements in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"), issued by the American Institute of Certified Public Accountants. The reorganization expenses for the three and six months ended June 30, 2003 included professional fees of 4.9 million and 12.5 million, respectively.

Share in Results of Affiliated Companies, Net

        Share in result of affiliated companies increased 22.9 million to a gain of 4.5 million from a loss of 18.4 million for the three months ended June 30, 2003 and 2002, respectively. Share in result of affiliated companies increased 41.7 million to a gain of 2.0 million from a loss of 39.7 million for the six months ended June 30, 2003 and 2002, respectively. This increase is mainly attributable to:

Cumulative Effect of Change in Accounting Principle

        Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which establishes that goodwill and intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis and whenever indicators of impairment arise. The adoption of SFAS 142 on January 1, 2002, resulted in a cumulative decrease of income of 1,498.9 million and a cumulative decrease of net goodwill of 1,498.9 million during the six months period ended June 30, 2002. The amount of net loss as shown for the six month period ended June 30, 2002 has been restated to include the effect of adoption of SFAS 142 of January 1, 2002. The following table represents the cumulative effect of change in accounting principle by reporting unit:

 
  For the Six Months
Ended June 30, 2002

 
 
  (In thousands of Euros)

 
  The Netherlands   (491,737 )
  Czech Republic   (98,463 )
  Norway   (43,572 )
  Hungary   (56,071 )
  France   (178,692 )
  Poland   (409,906 )
  Sweden   (189,447 )
  Other   (30,983 )
   
 
Total   (1,498,871 )
   
 

39



Liquidity and Capital Resources

        Historically, we have financed our operations and acquisitions primarily from:

        In general, we have been primarily dependent on the capital markets in the past to fund acquisitions, developing systems and products and corporate overhead, using the cash contributed by United Europe, Inc. upon formation and debt and equity raised at the holding company levels for such purposes. However, going forward we may not be able to access the capital markets as a source of capital. Our current plans do not anticipate such access, although we might access such markets if we were able and the terms of such financing were acceptable to us.

        In addition, we have financed our systems from our UPC Distribution Bank Facility and with operating cash flow. Well-established systems generally have stable positive cable cash flows that are used to partially offset funding necessary for new product offerings, including telephone and internet/data. Developing systems are at various stages of construction and development and generally depend on us for some of the funding for their operating needs.

        In the remainder of 2003 and thereafter, we anticipate that the sources of capital possibly available to us will include working capital and operating cash flows, proceeds from the disposal of non-core investments, further internal reorganization and alignment of businesses, draw downs under the UPC Distribution Bank Facility and vendor financing. We do not anticipate access to the capital markets as a source of funding unless we are able to restructure our existing indebtedness. If we are able to complete our planned recapitalization satisfactorily and are able to implement a rationalization of our non-core investments and continue to improve our operating performance, we believe that our existing cash balances, our working capital and operating cash flow and draw downs available under the UPC Distribution Bank Facility will be sufficient to fund operations as a going concern. Should our planned debt restructuring, or the investment rationalization program be unsuccessful, or should our planned recapitalization be unsuccessful and our operating results fall behind our current business plan, there will be uncertainty whether we have sufficient funds to meet our planned capital expenditures and/or existing debt commitments and it will be doubtful whether we will be able to continue as a going concern.

        As a result of our failure to pay interest when due on certain of our senior notes, the maturity of those notes, our senior discount notes, the Exchangeable Loan and the UPC Distribution Facility may be accelerated at any time, subject, in the case of the Exchangeable Loan, and the UPC Distribution Facility to conditional waivers granted by the holders of such indebtedness. Consequently, all such indebtedness has been classified as current portion of long-term debt.

Restrictions under our July 1999, October 1999 and January 2000 Indentures

        Our activities are restricted by the covenants of our indentures dated July 30, October 29, 1999 and January 20, 2000, under which our senior notes and senior discount notes were issued. Among other things, our indentures place certain limitations on our ability, and the ability of our subsidiaries, to borrow money,

40



pay dividends or repurchase stock, make investments, create certain liens, engage in certain transactions with affiliates, and sell certain assets or merge with or into other companies.

Sources of Capital

        We had approximately 178.5 million of cash and cash equivalents on hand as of June 30, 2003. Our ability to access our borrowing capacity at the holding company and subsidiary level was restricted or eliminated as a result of the payment defaults under our senior notes in the first twelve months of 2002 and the first quarter of 2003. To date, our principal sources of capital have been debt and equity capital raised at our holding company level and debt securities and bank debt issued or borrowed by subsidiaries. As of the date of the filing, we have no restrictions to make additional drawings under the UPC Distribution Bank Facility.


Consolidated Capital Expenditures

        Since 1995, we have been upgrading our existing cable television system infrastructure and constructing our new-build infrastructure with two-way high capacity technology to support digital video, telephone and internet/data services. Capital expenditures for the upgrade and new-build construction can be reduced at our discretion, although such reductions require lead-time in order to complete work-in-progress and can result in higher total costs of construction. At the end of 2001, we completed a strategic review of the business, which resulted in a reduced capital expenditure program for 2002 and 2003, as we focused on increasing penetration of new services in our existing upgraded footprint and efficient deployment of capital on a limited basis, aimed at causing product deployment to result in positive net present values.

        In addition to the network infrastructure and related equipment and capital resources described above, development of our newer businesses, chello broadband, Priority Telecom, our digital distribution platform and DTH, including expansion into Central Europe, requires capital expenditures for construction and development of our pan-European distribution and programming facilities, including our origination facility, network operating center, and related support systems and equipment.

        For the year 2003, we plan a slight increase on capital expenditures. Customer premise equipment ("CPE") costs decreased in 2002 and are expected to decrease further based on current prices, which are negotiated centrally, and continue to decrease as market rates for such equipment continue to fall. In addition, tighter field controls have been implemented leading to higher rates of CPE retrieval.

        We expect that network and upgrade capital expenditure will also see a reduction as we are limiting additional network investment primarily to that needed to cover maintenance and costs necessary to support expansion of services. We expect our existing network to largely cope with the anticipated increase in traffic. In addition, we plan to limit new build expenditures primarily to these areas where essential franchise commitments require investment and to limit additional upgrade investment until such a time that existing upgraded areas are fully serviced, although in certain areas of Eastern Europe, we are upgrading our network to launch internet services.

41




Statements of Cash Flows

        As of June 30, 2003 we had cash and cash equivalents of 178.5 million, a decrease of 76.6 million from 255.1 million as of December 31, 2002. As of June 30, 2002 we had cash and cash equivalents of 382.8 million, a decrease of 472.2 million from 855.0 million as December 31, 2001.

 
  For the Six Months
Ended June 30,

 
 
  2003
  2002
 
 
  (In thousands of Euros)

 
Cash flows from operating activities   138,880   (246,311 )
Cash flows from investing activities   (76,532 ) (200,829 )
Cash flows from financing activities   (128,348 ) (33,909 )
Effect of exchange rates on cash   (10,563 ) 8,823  
   
 
 
Net decrease in cash and cash equivalents   (76,563 ) (472,226 )
Cash and cash equivalents at beginning of period   255,062   855,001  
   
 
 
Cash and cash equivalents at end of period   178,499   382,775  
   
 
 

For the six months ended June 30, 2003

        Principal sources of cash during the six month period ended June 30, 2003 included 138.9 million from operating activities, 100.7 million of proceeds from the sale of assets, and 3.7 million of dividends received.

        Principal uses of cash during the six month period ended June 30, 2003 included 128.3 million for repayment of long- and short-term debt facilities, 103.1 million of capital expenditures, 51 million for the settlement of a derivative loan, 17.1 million for restricted cash deposited, and 9.1 million for the purchase of derivatives.

For the six months ended June 30, 2002

        Principal sources of cash during the six-month period ended June 30, 2002 included 8.0 million of dividends received and proceeds of 10.7 million from long- and short-term debt facilities.

        Principal uses of cash during the six month period ended June 30, 2002 included 246.3 million for operating activities, 172.8 million for capital expenditures, 24.1 million for acquisitions, 44.6 million for the repayment of long- and short-term debt facilities and 12.0 million for restricted cash deposited.


Item 3.    Quantitative and Qualitative Disclosure About Market Risk

Investment Portfolio

        As of June 30, 2003, we had cash and cash equivalents of approximately 178.5 million. We have invested this cash in highly liquid instruments, which meet high credit quality standards with original maturities at the date of purchase of less than three months. These investments are subject to interest rate risk and foreign exchange fluctuations (with respect to amounts invested in currencies outside the European Monetary Union). Additionally we hold certain investments in marketable debt and equity securities which are subject to stock price fluctuations. To date we have not experienced any material losses with respect to our investment portfolio.

Credit Risk

        We monitor the financial risk of our trade counter parties. Subject to a materiality test, new vendors go through a credit check before a contract is awarded. Periodical financial analyses are made of a group of

42



vendors that provide material proprietary services or products. As of June 30, 2003, we believe our portfolio of these vendors as a whole meets our internal criteria for acceptability.

Inflation and Foreign Currency Exchange Rate Losses

        To date, we have not been impacted materially by inflation.

        The value of our monetary assets and liabilities is affected by fluctuations in foreign currency exchange rates as accounts payable for certain equipment purchases and certain operating expenses, such as DTH and programming expenses, are denominated in currencies other than the functional currency of the entity making such payments. We and some of our operating companies have notes payable and notes receivable that are denominated in, and loans payable that are linked to, a currency other than their own functional currency, exposing us to foreign currency exchange risks on these monetary assets and liabilities. Historically, we have not hedged our exposure to foreign currency exchange rate operating risks. Accordingly, we may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations.

        The functional currency for our operations generally is the applicable local currency for each operating company. We have consolidated operations in countries outside of the European Monetary Union including Norway, Sweden, Poland, Hungary, Romania, Slovak Republic and Czech Republic. Assets and liabilities of foreign subsidiaries are translated at the exchange rates in effect at period-end, and the statements of operations are translated at the average exchange rates during the period. Exchange rate fluctuations on translating foreign currency financial statements into Euros result in unrealized gains or losses referred to as translation adjustments. Cumulative translation adjustments are recorded as a separate component of shareholders' equity. Transactions denominated in currencies other than the local currencies are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income as unrealized, based on period-end translations, or realized upon settlement of the transactions.

        Cash flows from our operations in foreign countries are translated based on their functional currencies. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not agree to changes in the corresponding balances on the consolidated balance sheets. The effects of exchange rate changes on cash balances held in foreign currencies are reported as a separate line below cash flows from financing activities.

Impact of Foreign Currency Rate Changes

        We are exposed to foreign exchange rate fluctuations related to our monetary assets and liabilities, including those of our operating subsidiaries, which are denominated in currencies outside of the European Monetary Union, notably the EUR/USD risk arising from our U.S. dollar denominated liabilities. Our exposure to foreign exchange rate fluctuations also arises from intercompany charges.

        The table below provides information about UPC's and its consolidated subsidiaries' foreign currency risk for cash, which is denominated in foreign currencies outside of the European Monetary Union as of June 30, 2003. The information is presented in Euro equivalents, as the Euro is our reporting currency.

 
  Amount Outstanding
as of June 30, 2003

 
  Book Value
  Fair Value
 
  (In thousands of Euros)

Cash and Cash Equivalents        
USD Cash   90,209   90,209

        We are risk averse towards foreign currency risk and therefore actively seek to manage our foreign currency risk by entering into hedge instruments where appropriate and available to us in the financial

43



markets. We use cross currency swaps, currency deposits and forward contracts to hedge the exposure. We actively monitor the various financial instruments available to us and expect to shift the use of instruments to less credit capacity intensive instruments in the near future, driven by the current credit risk appetite in the financial markets. We have consistently managed our foreign currency risk through the use of these instruments.

        For descriptions of our senior notes, senior discount notes and the Exchangeable Loan we refer to Note 8 of our audited consolidated financial statements for the year ended December 31, 2002, as included in our Annual Report on Form 10-K for such year. The interest rates of the notes are included in the interest rate sensitivity tables to which we refer.

        The table below provides information about our foreign currency exchange risk for debt, which is denominated in foreign currencies outside of the European Monetary Union as of June 30, 2003, including cash flows, based on the expected repayment date and related weighted-average interest rates for debt. The instruments' actual cash flows are denominated in foreign currency. The information is presented in Euro equivalents, which is our reporting currency and is based on classification of indebtedness in our consolidated financial statements for the six months ended June 30, 2003. Contractual maturities of the indebtedness differ from the information shown in the tables.

 
  Amount Outstanding
as of
June 30, 2003

  Expected Repayment
as of June 30, 2003

 
  Book
Value

  Fair
Value

  2003
  2004
  2005
  2006
  2007
  2008 and
thereafter

 
  (In thousands of Euros)

Dollar Denominated Facilities                                
UPC Senior Notes due 2009(1)   665,771   143,141   665,771          
UPC Senior Notes due 2007(1)   148,517   30,632   148,517          
UPC Senior Notes due 2009(1)   208,284   43,740   208,284          
UPC Senior Notes due 2010(1)   199,556   42,905   199,556          
UPC Senior Discount Notes due 2009(1)   525,186   96,370   525,186          
UPC Senior Discount Notes due 2009(1)   324,783   59,810   324,783          
UPC Senior Discount Notes due 2010(1)   644,992   118,230   644,992          
UPC Senior Notes due 2010(1)   494,263   106,267   494,263          
PCI Notes   12,682   12,682   12,682          
UPC Polska 1998 Senior Discount Notes   173,018   62,783   173,018          
UPC Polska 1999 Senior Discount Notes   161,288   59,763   161,288          
UPC Polska 1999 Series C Senior Discount Notes   18,989   9,598   18,989          
Exchangeable Loan(1)   819,087   819,087   819,087          

(1)
These senior notes, senior discount notes and the Exchangeable Loan are subject to compromise as of June 30, 2003. We refer to Note 2 "Reorganization Under Bankruptcy Code" to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Interest Rate Sensitivity

        We actively manage our exposure to interest rates and use various financial instruments like interest rate swaps, interest rate caps and fixed and floating rate credit instruments, when available to us and appropriate. We aim at fixing a minimum 50% of the interest rates on our bank debt to average tenors with a minimum tenor of one year. We actively monitor the various financial instruments available to us and expect to shift the use of instruments to less credit capacity intensive instruments in the near future, driven by the current credit risk appetite in the financial markets. We have consistently managed, where possible, our interest rate exposure through the use of these instruments.

        For descriptions of our senior notes, senior discount notes and the Exchangeable Loan we refer to Note 8 of our audited consolidated financial statements for the year ended December 31, 2002, as included in our Annual Report on Form 10-K for such year.

        The table below provides information about our financial instruments that are sensitive to changes in interest rates as of June 30, 2003, including cash flows based on the expected repayment dates and the related weighted-average interest rates. The information is presented in Euro equivalents, which is our

44



reporting currency and is based on classification of indebtedness in our consolidated financial statements for the six months ended June 30, 2003. Contractual maturities of the indebtedness differ from the information shown in the table.

 
  Amount Outstanding
as of June 30, 2003

  Expected Repayment as of June 30,
 
  Book
Value

  Fair
Value

  2003
  2004
  2005
  2006
  2007
  2008 and
thereafter

 
  (In thousands of Euros)

Fixed and Variable Rate Facilities                                
Fixed rate UPC Senior Notes due 2009(1)   665,771   143,141   665,771          
  Average interest rate   10.875 % 164.900 %                      
Fixed rate UPC Senior Notes due 2007(1)   69,166   12,969   69,166          
  Average interest rate   10.875 % 139.990 %                      
Fixed rate UPC Senior Notes due 2009(1)   69,774   13,083   69,774          
  Average interest rate   11.250 % 134.800 %                      
Fixed rate UPC Senior Notes due 2009(1)   213,057   40,481   213,057          
  Average interest rate   10.875 % 164.900 %                      
Fixed rate UPC Senior Discount Notes due 2009(1)   525,186   96,370   525,186          
  Average interest rate   12.500 % 93.710 %                      
Fixed rate UPC Senior Discount Notes due 2009(1)   144,410   17,097   144,410          
  Average interest rate   13.375 % 88.600 %                      
Fixed rate UPC Senior Discount Notes due 2009(1)   324,783   59,810   324,783          
  Average interest rate   13.375 % 88.600 %                      
Fixed rate UPC Senior Notes due 2007(1)   148,517   30,632   148,517          
  Average interest rate   10.875 % 139.990 %                      
Fixed rate UPC Senior Notes due 2009(1)   208,284   43,740   208,284          
  Average interest rate   11.250 % 134.800 %                      
Fixed rate UPC Senior Discount Notes due 2010(1)   644,992   118,230   644,992          
  Average interest rate   13.750 % 83.010 %                      
Fixed rate UPC Senior Notes due 2010(1)   199,556   42,905   199,556          
  Average interest rate   11.500 % 172.590 %                      
Fixed rate UPC Senior Notes due 2010(1)   494,263   106,267   494,263          
  Average interest rate   11.250 % 169.690 %                      
Fixed rate UPC Senior Notes due 2010(1)   145,748   27,692   145,748          
  Average interest rate   11.250 % 169.690 %                      
Fixed rate PCI Notes   12,682   12,682   12,682          
  Average interest rate   9.875 % 9.875 %                      
Fixed rate UPC Polska 1998 Senior Discount Notes   173,018   62,783   173,018          
  Average interest rate   14.500 % 87.538 %                      
Fixed rate UPC Polska 1999 Senior Discount Notes   161,288   59,763   161,288          
  Average interest rate   14.500 % 87.538 %                      
Fixed rate UPC Polska 1999 Series C Senior Discount Notes   18,989   9,598   18,989          
  Average interest rate   7.000 % 42.260 %                      
Fixed rate Exchangeable Loan(1)   819,087   819,087   819,087          
  Average interest rate   6.000 % 6.000 %                      
Variable rate UPC Distribution Bank Facility   2,984,042   2,984,042   2,984,042          
  EURIBOR/USDLIBOR + 0.75%–4%                                
  Average interest rate   8.060 % 8.060 %                      
Capital lease obligations   51,776   51,776   2,328   2,648   2,720   2,953   3,214   37,913
  Average interest rate   Various   Various                        
Other debt   16,205   16,205   5,444   6,253   957   682   623   2,246
  Average interest rate   Various   Various                        
   
 
 
 
 
 
 
 
  Total debt   8,090,594   4,768,353   8,030,385   8,901   3,677   3,635   3,837   40,159
   
 
 
 
 
 
 
 
Short term debt           5,243          
Operating leases           48,134   36,148   24,854   18,969   14,432   32,075
Purchase commitments           47,748   12,044   692   2,156   65   2
Other long term obligations           79,495   43,232   39,550   32,400   14,394   53,652
           
 
 
 
 
 
  Total commitments and short term debt           180,620   91,424   65,096   53,545   28,891   85,729
           
 
 
 
 
 
  Total debt and commitments           8,211,005   100,325   68,773   57,180   32,728   125,888
           
 
 
 
 
 

(1)
These senior notes and senior discount notes and the Exchangeable Loan are subject to compromise. We refer to Note 2 "Reorganization Under Bankruptcy Code" of the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Equity Prices

        As of June 30, 2003, we are exposed to equity price fluctuations related to our investments in equity securities. We evaluate our investments in publicly traded securities accounted for under the equity method for impairment in accordance with Accounting Principles Board Opinion No. 18, The Equity

45



Method of Accounting for Investment in Common Stock ("APB 18") and Securities and Exchange Commission Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equitable Securities. Under APB 18, a loss in value of an investment accounted for under the equity method, which is other than a temporary decline, should be recognized as a realized loss, establishing a new carrying value for the investment. Factors we consider in making this evaluation include: the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer, including cash flows of the investee and any specific events which may influence the operations of the issuer and the intent and ability of us to retain our investments for a period of time sufficient to allow for any anticipated recovery in market value. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment.

 
  Number of Shares
  Fair Value
June 30, 2003

 
  (In thousands of Euros, except share amounts)

United   5,569,240   24,827
PrimaCom AG   4,948,039   2,573
Sorrento   1,561,081   3,616

        As of June 30, 2003, we are also exposed to equity price fluctuations related to our debt that is convertible into our ordinary shares. The table below provides information about our convertible debt, including expected cash flows and related weighted-average interest rates. The information is presented in Euro equivalents, which is our reporting currency and is based on classification of indebtedness in our consolidated financial statements for the six months ended June 30, 2003. Contractual maturities of the indebtedness differ from the information shown in the table.

 
  Amount Outstanding
as of June 30, 2003

   
   
 
  Expected Repayment
as of June 30,

Convertible Debt

  Book Value
   
  Fair Value
  2003
  2004
 
  (In thousands of Euros)

Exchangeable Loan(1)   819,087   819,087   819,087  
  6.0% per annum                

(1)
The Exchangeable Loan is subject to compromise. We refer to Note 2 "Reorganization Under Bankruptcy Code" of the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Cross-Currency and Interest Rate Swaps

        We entered into an interest rate swap in respect of 1,725 million of the UPC Distribution Bank Facility to fix the EURIBOR portion of the interest calculation at 4.5475% for the period ending April 15, 2003. This swap qualifies as an accounting cash flow hedge as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Accordingly, the changes in fair value of this instrument are recorded through other comprehensive income in the consolidated statement of shareholders' equity. As per April 15, 2003, the interest rate swap expired and ceased to exist. In the first quarter of 2003, we have bought protection on the interest rate exposure on the Euro denominated bank indebtedness for 2003 and 2004. As a result, EURIBOR (without the applicable margin) is capped at 3% for an amount totaling 2.7 billion. The changes in fair value of these caps are recorded through other income in the consolidated statement of operations. In June 2003, we entered into a cross currency swap and interest rate swap pursuant to which a USD 347.5 million obligation under the UPC Distribution Bank Facility was swapped at an average rate of 1.113 euros per U.S. dollar until July 2005.

46



        The consolidated balance sheet reflects these instruments as derivative assets or liabilities as appropriate.


Item 4.    Controls and Procedures

(a)
Evaluation of disclosure controls and procedures.
(b)
Changes in internal controls.

47



PART II–OTHER INFORMATION

Item 1–Legal Proceedings

        For information regarding developments in certain legal proceedings to which the Company or any of its subsidiaries is a party, see Notes 2, 8 and 14 to our condensed consolidated financial statements included elsewhere herein.


Item 2–Changes in Securities and Use of Proceeds

        None.


Item 3–Defaults Upon Senior Securities

        For information regarding the defaults on our senior securities, see Note 2 to our condensed consolidated financial statements included elsewhere herein.


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

        For information regarding submission of matters to a vote of security holders, see Note 2 to our condensed consolidated financial statements included elsewhere herein.


Item 5–Other Information

Summary Operating Data

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

48


 
  June 30, 2003
 
   
   
   
   
   
  Video
  Telephony
  Internet
 
  UPC Paid in
Ownership

  Homes in
Service
Area(1)

  Homes
Passed(2)

  Two Way
Homes
Passed(3)

  Basic
Penetration

  Analog
Subscribers(4)

  Digital
Subscribers(5)

  Direct to
Home
(DTH)
Subscribers(6)

  Homes
Serviceable(7)

  Residential
Subscribers(8)

  Lines
Residential(9)

  Homes
Serviceable(10)

  Residential
Subscribers(11)

  3rd Party
ISP
Subscribers(12)

  Total
RGUs(13)

Norway   100.0 % 529,000   483,800   199,400   70.0 % 338,500   32,500     136,300   23,400   25,800   199,400   33,400     427,800
Sweden   100.0 % 770,000   421,600   265,800   65.6 % 276,700   19,900           265,800   66,100     362,700
Belgium   100.0 % 530,000   153,700   153,700   85.0 % 130,700             153,700   25,300     156,000
France   92.0 % 2,656,600   1,363,300   673,200   34.1 % 465,500   7,100     673,200   56,800   58,300   673,200   23,100     552,500
The Netherlands   100.0 % 2,652,100   2,589,600   2,336,400   89.0 % 2,304,200   47,500     1,597,300   160,600   188,100   2,336,400   310,900     2,823,200
Austria   95.0 % 1,081,400   923,300   920,100   54.1 % 499,400   22,200     899,700   150,500   152,000   920,100   191,800     863,900
       
 
 
     
 
 
 
 
 
 
 
 
 
  Total Western Europe       8,219,100   5,935,300   4,548,600       4,015,000   129,200     3,306,500   391,300   424,200   4,548,600   650,600     5,186,100
       
 
 
     
 
 
 
 
 
 
 
 
 
Poland   100.0 % 1,870,700   1,870,700   262,000   52.8 % 987,500             262,000   19,100     1,006,600
Hungary   99.8–100.0 % 1,001,100   966,500   521,500   71.8 % 694,200     85,100   84,900   64,900   71,500   461,300   33,000   500   877,700
Czech Republic   99.9–100.0 % 913,000   681,400   240,200   43.5 % 296,600     58,900   17,700   3,000   3,000   240,200   19,900     378,400
Romania   100 % 659,600   458,400     72.1 % 330,300                   330,300
Slovak Republic   95.0–100 % 517,800   382,700   21,100   74.4 % 284,900     10,200         15,600   200     295,300
       
 
 
     
 
 
 
 
 
 
 
 
 
  Total Eastern Europe       4,962,200   4,359,700   1,044,800       2,593,500     154,200   102,600   67,900   74,500   979,100   72,200   500   2,888,300
       
 
 
     
 
 
 
 
 
 
 
 
 
  Total       13,181,300   10,295,000   5,593,400       6,608,500   129,200   154,200   3,409,100   459,200   498,700   5,527,700   722,800   500   8,074,400
       
 
 
     
 
 
 
 
 
 
 
 
 

Summary Operating Tables Notes

(1)
"Homes in Service Area" represents the number of homes in a certain franchise area that can potentially be served.

(2)
"Homes Passed" represents the number of homes that can be connected to our distribution system without further extending the cable network distribution plant.

(3)
"Two-Way Homes Passed" represents the number of homes passed by our network where customers can request and receive the installation of a two-way addressable set-top box, cable modem and/or voice port which, in most cases, allows for the provision of video, voice and data (broadband) services.

(4)
"Analogue Subscriber", is a home or commercial unit that receives our video cable service.

(5)
"Digital Subscriber" is a home or commercial unit with one or more digital converter boxes that receives our digital service. A Digital Subscriber is also counted as a Basic Subscriber.

(6)
"DTH Subscriber" is a home or commercial unit with one or more television sets, that receives our video programming broadcast directly to the home via geosynchronous satellites.

(7)
"Telephony Homes Serviceable" represents the number of homes that can be connected to our cable distribution system, or our copper (twisted pair) network in certain areas, where customers can request and receive voice services.

(8)
"Residential Telephony Subscriber" is a home with one or more voice ports connected to our broadband network, or our copper (twisted pair) network in certain areas, where a customer has requested and is receiving voice services.

(9)
"Telephony Lines" are the number of lines provided to our Telephony Subscribers.

(10)
"Internet Homes Serviceable" represents the number of homes that can be connected to our cable distribution system where customers can request and receive high-speed Internet access services.

(11)
"Residential Internet Subscriber" is a home or commercial unit connected to our broadband network, where a customer has requested and is receiving chello broadband high-speed Internet access services.

(12)
Broadband Internet subscribers who are not served by chello broadband.

(13)
"Total Subscribers", or "Total RGUs" is the sum of Analogue, Digital, DTH, Telephony and Broadband Internet Subscribers.

49



Item 6.    Exhibits and Reports on Form 8-K

 
   
(a)   Exhibits

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbaines-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbaines-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbaines-Oxley Act of 2002.

32.2

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbaines-Oxley Act of 2002.

(b)

 

Reports on Form 8-K filed during the Quarter

99.2

 

Current report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934, dated June 19, 2003

99.3

 

Current report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934, dated July 7, 2003

99.4

 

Current report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934, dated July 28, 2003
Date of Report

  Date of Event
  Item Reported

April 24, 2003   April 24, 2003   Item 3 & 7–Announcement that on April 24, 2004, following the confirmation of the Akkoord (plan of composition) by the Dutch Court of Appeals, InterComm Holdings L.L.C., has appealed the ratification of the Akkoord to the Dutch Supreme Court (Hoge Raad).

May 14, 2003

 

May 14, 2003

 

Item 7 & 9–Announcement that on May 14, 2003 UPC filed a press release announcing its operating and financial results for the first quarter ending March 31, 2003.

June 20, 2003

 

June 20, 2003

 

Item 5 & 7–Announcement that on June 20, 2003, UPC Polska, Inc, a subsidiary of UPC, issued a press release announcing that, in connection with the proposed restructuring of its indebtedness, it has entered into a Restructuring Agreement, dated as of June 19, 2003, with UPC Telecom B.V., Belmarken Holding B.V., and certain holders of UPC Polska's Senior Discount Notes.

July 28, 2003

 

July 28, 2003

 

Item 5 & 7–Disclosure of proposed disclosure statement filed with the United States Bankruptcy Court for the Southern District of New York on July 28, 2003, by UPC Polska, Inc., a subsidiary of UPC, with respect to the voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code and the pre-negotiated plan of reorganization filed by UPC Polska, Inc.

50



SIGNATURES

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

    UNITED PAN-EUROPE COMMUNICATIONS N.V.
a Dutch Public limited liability company

 

 

By:

/s/  
CHARLES H.R. BRACKEN      
Charles H.R. Bracken
Board of Management Member and
Chief Financial Officer

Date: August 14, 2003

 

 

By:

/s/  
RUTH PIRIE      
Ruth Pirie
Principal Accounting Officer
Date: August 14, 2003



QuickLinks

PART I–FINANCIAL INFORMATION
PART II–OTHER INFORMATION
UNITED PAN-EUROPE COMMUNICATIONS N.V. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Stated in thousands of Euros, except share and per share data) (Unaudited)
UNITED PAN-EUROPE COMMUNICATIONS N.V. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (Stated in thousands of Euros, except number of shares) (Unaudited)
UNITED PAN-EUROPE COMMUNICATIONS N.V. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Stated in thousands of Euros) (Unaudited)
UNITED PAN-EUROPE COMMUNICATIONS N.V. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Results of Operations
Liquidity and Capital Resources
Consolidated Capital Expenditures
Statements of Cash Flows
PART II–OTHER INFORMATION
SIGNATURES