Back to GetFilings.com

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

FORM 10-Q

Commission file number: 005-55939

UGC EUROPE, INC.
(Exact name of Registrant as specified in its charter)

        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 o    No ý

        Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý    No o

        The number of shares outstanding of the Registrant's common stock as of November 1, 2003 was:

49,985,521 shares of common stock, par value USD 0.01 per share.

PART I—FINANCIAL INFORMATION

PART II—OTHER INFORMATION

1

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

UGC EUROPE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

2

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

3

UGC EUROPE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

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

⁽¹⁾

Excluding depreciation and amortization, and impairment and restructuring charges shown separately below.

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

4

UGC EUROPE, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

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

(Unaudited)

⁽¹⁾

Additional shares may be issued based upon potential resolution of general unsecured claims resulting from the UPC Chapter 11 Case.

⁽²⁾

As part of the Chapter 11 Case, holders of UPC shares contributed to UGCE any and all UPC Ordinary Shares A, UPC Preference Shares A and UPC Priority Shares in exchange for UGCE Common Shares. Shareholders receive 0.0018 UGCE Share in exchange for 1 UPC Ordinary Share A. All share and per share amounts in the accompanying consolidated financial statements and notes thereto have been retroactively restated to reflect the exchange of the UPC shares and UPC Priority Shares into UGCE shares and the UGCE shares issued upon incorporation of UGCE.

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

5

UGC EUROPE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Stated in thousands of Euros)
(Unaudited)

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

6

UGC EUROPE, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     Organization and Nature of Operations

        UGC Europe, Inc. ("UGC Europe" or the "Company"), is one of the leading broadband communications and entertainment companies in Europe. Through its broadband networks, UGC Europe provides television, internet access, telephone and programming services. UGC Europe's operations are currently organized into two principal divisions—UPC Broadband and chello Media. UPC Broadband delivers video, internet access and telephone services to residential customers, and chello Media provides broadband internet and interactive digital products and services. The chello Media division also includes Priority Telecom, which operates a competitive local exchange carrier business providing telephone and data network solutions to the business market, and the group's investment holdings. UGC Europe is a successor issuer and parent company to United Pan-Europe Communications N.V., or "UPC." In September 2003, UPC completed the restructuring of its balance sheet in United States and Dutch proceedings described below in Note 2 and, as a result, UnitedGlobalCom, Inc. ("United") and certain other creditors of UPC and holders of UPC's ordinary shares became stockholders of UGC Europe. UGC Europe's common stock is listed on the Nasdaq National Market under the symbol "UGCE."

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

2.     Reorganization under Bankruptcy Code

        On December 3, 2002, UPC 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 UPC 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 provided for the transfer of shares of the Company's common stock for various claims against, and equity interests in UPC. In conjunction with the commencement of the Chapter 11 Case, on December 3, 2002, UPC commenced a moratorium of payments in The Netherlands under Dutch bankruptcy law and filed a proposed plan of compulsory composition (the "Akkoord") with the Amsterdam Court (Rechtbank) under the Dutch Bankruptcy Code. The restructuring contemplated by the Plan and the Akkoord was completed on September 3, 2003.

        As previously reported, the Plan was confirmed by the U.S. Bankruptcy Court on February 21, 2003, the ratification of the Akkoord which occurred on March 14, 2003, was appealed to the Dutch Supreme Court and the Dutch Implementation Offer was extended to August 30, 2003. On August 26, 2003, the Dutch Supreme Court rejected the appeal of the ratification of the Akkoord and ruled in favour of UPC. UPC completed all the required actions and satisfied all of the conditions to its Plan and the effective date of its emergence from Chapter 11 Reorganization, Dutch Moratorium and Akkoord proceeding was September 3, 2003. Also on September 3, 2003, the Dutch Implementing Offer became unconditional.

        On September 24, 2003, a shareholders' resolution was adopted at a general meeting of shareholders and a meeting of holders of Ordinary Shares A of UPC to cancel all such Ordinary Shares A. It is anticipated that such resolution will be implemented at the end of November 2003.

        Upon consummation of the restructuring, UPC recognized a gain on the effective retirement of its senior notes, senior discount notes and its Exchangeable Loan. The issuance of common stock by UGC Europe to third-party holders of the remaining UPC senior notes and senior discount notes was recorded at fair value on September 3, 2003. This fair value was significantly less than the accreted value of such debt securities as reflected in the Company's historical consolidated financial statements. Accordingly, the Company recognized a gain of 1.9 billion on the extinguishment of debt outstanding equal to the excess of

7

the then accreted value of such debt over the fair value of UGC Europe common stock. In addition, UPC recognized a gain of 9.3 million with the cancellation of certain payables.

        With the successful completion of its restructuring, UGC Europe believes that its existing cash balances, working capital, cash flow from operations and draw downs available under the UPC Distribution Bank Facility will be sufficient to fund operations for the next year. However, should the operating results fall short of management's expectations, revisions to UGC Europe's bank facility or additional debt or equity may be necessary. Such debt or equity may not be able to be obtained in a timely manner or on acceptable terms.

3.     Basis of Presentation

Basis of Presentation

        The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles, 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.

        The Company prepared its consolidated financial statements in accordance with AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under Bankruptcy Code ("SOP 90-7"). This in connection with UPC's bankruptcy proceeding through September 3, 2003 and UPC Polska's continued bankruptcy (for UPC Polska, see Note 3. "Polish Restructuring"). In accordance with SOP 90-7, all of the Company's pre-petition liabilities that are subject to compromise under a plan of reorganization are segregated in the condensed consolidated balance sheet as liabilities subject to compromise. These liabilities are recorded at the amounts expected to be allowed as claims in the bankruptcy proceedings rather than at the estimated amounts for which those allowed claims might be settled as a result of the approval of the plan of reorganization. The estimates for allowable amounts are based on accounting records, discussions with creditors and amounts as documented in the plan of reorganization.

        The Company recorded reorganization gains for UPC and UPC Polska of 5.6 million and 18.1 million, respectively, for the three and nine months period ended September 30, 2003. The reorganization expense

8

for UPC for the three and nine months period ended September 30, 2003 is as follows (for UPC Polska see Note 3. "Polish Restructuring"):

        Liabilities and convertible preferred stock included in the consolidated debtor-in-possession balance sheet as of December 31, 2002, which were subject to compromise under the terms of the Plan, are summarized as follows (in thousands of Euros):

Comparative figures

        Certain prior period amounts have been reclassified to conform to the 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.

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company's wholly-owned subsidiaries and all subsidiaries where the Company exercises a controlling financial interest through the ownership of a direct or indirect majority voting interest.

9

        For those investments in companies in which the Company's voting interest is 20.0% to 50.0%, the Company's investments are held through a combination of voting common stock, preferred stock, debentures or convertible debt and/or the Company exerts significant influence through board representation and management authority, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's proportionate share of net earnings or losses of the affiliate, limited to the extent of the Company's investment in and advances to the affiliate, including any debt guarantees or other contractual funding commitments.

Polish Restructuring

        A Delaware subsidiary of the Company, UPC Polska, Inc. ("UPC Polska") has over time incurred substantial debt, significant operating losses and negative cash flow which were driven by the large capital investment required for the construction and acquisition of cable networks, acquisition of programming rights and the costs associated with commencing DTH and programming operations. After commencing an internal reorganization in 2001 and discussions with its creditors throughout 2002, UPC Polska, directly and through its advisors, started discussions with UPC, UPC Telecom B.V. (a subsidiary of UPC), Belmarken (collectively, the "UPC Entities") and a group of holders of UPC Polska's outstanding senior discount notes due 2008 and 2009 (the "UPC Polska Notes). These discussions culminated in the execution, on June 19, 2003, of a restructuring agreement (the "Restructuring Agreement"), which was extended to an additional creditor on July 2, 2003. The Restructuring Agreement provides for a restructuring substantially on the same terms contained in the plan of reorganization.

        In the Restructuring Agreement, the parties agreed to implement the proposed restructuring through a plan of reorganization under Chapter 11. UPC Telecom B.V. and Belmarken and the participating noteholders also agreed, subject to the terms and conditions of the Restructuring Agreement, to vote their claims in favor of the plan of reorganization. As of the date of this filing, the participating noteholders (excluding UPC Telecom and Belmarken) represented approximately 75% (in value) of all outstanding UPC Polska Notes held by third parties that are not affiliates of UPC Polska (approximately 17% of all outstanding UPC Polska Notes are held by UPC Telecom).

        On October 27, 2003, UPC Polska filed an amended disclosure statement and amended plan of reorganization with the U.S. Bankruptcy Court. A hearing was held in the U.S. Bankruptcy Court on October 29, 2003, pursuant to which the Bankruptcy Court approved the amended disclosure statement. A hearing for confirmation of the amended plan of reorganization is scheduled for December 3, 2003. The Company presently expects that the amended plan of reorganization will become effective and the restructuring will be completed by the end of 2003.

        The Polska Creditors Committee has informed UPC Polska that it does not intend to support the amended plan of reorganization or the proposed restructuring as currently proposed. The Company believes that the bondholders owning 75% (in value) of the UPC Polska Notes held by unaffiliated third parties, including four of the seven members of the Polska Creditors Committee, are obligated by the Restructuring Agreement to vote their claims in favour of the amended plan of reorganization.

        The restructuring contemplated by the Restructuring Agreement is subject to various closing conditions. It is currently anticipated that the Company will continue to own 100% of UPC Polska after the consummation of the restructuring.

10

        The consolidated financial statements include the accounts of UPC Polska, which on July 7, 2003, filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. Although the U.S. bankruptcy laws convey jurisdiction to the bankruptcy court, the Company believes during the bankruptcy proceedings that it will have the ability to substantively control UPC Polska for the following primary reasons:

•

As the sole equity holder of UPC Polska, the Company's wholly-owned subsidiary, UPC Telecom, had majority voting control before UPC Polska commenced voluntary bankruptcy proceedings, and the Company expects that its wholly-owned subsidiaries will have majority voting control of UPC Polska on its emergence from bankruptcy;



•

The Company's wholly-owned subsidiaries were able to negotiate the prearranged form of the voluntary bankruptcy filing, by obtaining the agreement of the other key stakeholders (unaffiliated third-party bondholders) that the Company's wholly-owned subsidiaries would continue to be UPC Polska's controlling equity holder upon UPC Polska's emergence from bankruptcy;



•

Based on an evaluation of pre-arranged debtor-in-possession bankruptcies filed in the U.S., and of the material terms of the Restructuring Agreement reached with the requisite majority of UPC Polska's unaffiliated third party bondholders, the Company believes that the U.S. Bankruptcy Court will confirm UPC Polska's plan of reorganization which is based on the Restructuring Agreement;



•

The Company believes the rights exercised by the U.S. Bankruptcy Court are protective in nature and, therefore, do not affect its wholly-owned subsidiaries' continued substantive control over UPC Polska; and



•

The Company believes that consolidating UPC Polska provides the best and most transparent financial reporting to users of the Company's financial statements.

        Accordingly, the accounts of UPC Polska have been consolidated for all periods presented in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.

        In connection with its Chapter 11 case UPC Polska is required to prepare its consolidated financial statements as of September 30, 2003 in accordance with SOP 90-7. In accordance with SOP 90-7, all of UPC Polska's pre-petition liabilities that are subject to compromise under UPC Polska's proposed plan of reorganization are segregated in the Company's consolidated balance sheet as liabilities subject to compromise. These liabilities are recorded at the amounts expected to be allowed as claims in the UPC Polska's Chapter 11 case rather than at the estimated amounts for which those allowed claims may be

11

settled as a result of the approval of the UPC Polska plan of reorganization. The following table presents condensed consolidated financial information for UPC Polska in accordance with SOP 90-7.

⁽¹⁾

Eliminated in consolidation.

12

        The amounts for UPC Polska's Chapter 11 related reorganization expenses included in the consolidated statement of operations consist of the following for the three and nine month's period ended September 30, 2003:

        The write down of the UPC Polska Notes reflects an adjustment to the carrying value of the UPC Polska Notes required to state them at the amounts expected to be allowed as claims in the Chapter 11 case. Professional fees represent amounts accrued and incurred for professional services subsequent to UPC Polska's Chapter 11 filing. By September 30, 2003.

        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 on liabilities subject to compromise allowed as a claim for the three and the nine months ended September 30, 2003 is 1.4 and 49.6 million, respectively. The contractual interest expense on liabilities subject to compromise is 25.0 million and 73.2 million for the three and the nine months ended September 30, 2003, respectively.

        As of September 30, 2003, UPC Polska had not made interest payments on any outstanding indebtedness subject to compromise since the filing for relief under Chapter 11.

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 SFAS 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").

13

        The stock-based compensation had the following pro forma effect on net income (in thousands):

        Stock-based compensation is recorded as a result of applying fixed-plan accounting and variable-plan accounting to UPC's stock option plans. Under fixed plan accounting, deferred compensation is recorded for the difference between fair value of options granted and the option price of such options at the date of grant. This deferred compensation is then recognized in the statement of operations ratably over the vesting period of the option. Under variable-plan accounting, compensation expense is recognized at each financial statement date for vested options based on the amount, if greater, of the estimated fair value of the underlying common stock over the grant price, until the options are exercised or expire. As a result of UPC's emergence from Chapter 11 on September 3, 2003, all stock-based compensation plans within UPC were cancelled.

14

4.     Goodwill

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

5.     Long-Term Debt

        Bank lenders under the UPC Distribution Holding B.V. bank facility had extended until September 30, 2003, waivers of the defaults arising as a result of UPC's decision not to make interest payments under its outstanding UPC Notes. During this time the UPC Distribution Bank Facility was classified as current portion of long-term debt. Following completion of the restructuring the UPC Distribution Bank Facility waivers are no longer necessary and the UPC Distribution Bank Facility remains in place, and is classified as long-term debt. The Company may from time to time consider various changes to the UPC Distribution Bank Facility. The PCI Notes were redeemed on November 3, 2003.

        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.

15

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 liabilities subject to compromise. For a detailed discussion on the Poland Chapter 11 case, see Note 3, "Polish Restructuring".

6.     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:

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'

16

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.

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.

Indemnity agreement between Philips Media B.V., UPC and UGC

        In connection with the acquisition of the 50% of UPC ordinary shares held by Philips Electronics N.V. ("Philips") on December 1, 1997, UPC agreed to indemnify Philips for any damages incurred by Philips in relation to a guarantee provided by them to the City of Vienna, Austria ("Vienna Obligations"), but was not able to give such indemnification due to certain covenants in the then outstanding bonds. Following the successful tender for its bonds UGC was able to enter into an indemnity agreement with Philips with respect to the Vienna Obligations. On August 27, 2003, UPC acknowledged to UGC that UPC would be primarily liable for the payment of any amounts owing pursuant to the Vienna Obligations and that UPC would indemnify and hold UGC harmless for the payment of any amounts owing under such indemnity agreement.

        Historically, the Company has not made any significant indemnification payments to either Philips or UGC 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.

17

Litigation

        The following is a description of certain legal proceedings to which UGC Europe or one of UGC Europe's subsidiaries is a party. In addition, from time to time, UGC Europe may become involved in litigation relating to claims arising out of its operations in the normal course of the Company's business. In the opinion of the Company's management, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on the business, results of operations, financial condition or liquidity of UGC Europe and its subsidiaries. UPC's (but not its subsidiaries') liability under legal proceedings were 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 UPC, UPC will distribute shares of UGC Europe's Common Stock as provided under the Plan and the Akkoord in satisfaction of such claim.

        UPC Polska is involved in a dispute with HBO Communications (UK) Ltd., Polska Programming B.V. and HBO Poland Partners (collectively "HBO") concerning its cable carriage agreement ("Cable Agreement") and its D-DTH carriage agreement ("D-DTH Agreement") for the HBO premium movie channel. With respect to the Cable Agreement, on April 25, 2002, 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 also that UPC Polska was liable for an increase in minimum guarantees under the D-DTH Agreement, based on the fact that UPC Polska merged its D-DTH business with an affiliate of 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) denying that it owes any sums for an increase in minimum guarantees under the D-DTH Agreement, because it has not purchased an equity interest in HBO, a condition on which UPC Polska contends the increase in minimum guarantees is predicated under the D-DTH Agreement.

        UPC Polska intends to vigorously prosecute its claims and defend against HBO's counterclaims. The case is currently in arbitration. UPC Polska has prepared the terms of reference, which include a mapping out discovery needs, a 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. The oral argument occurred on May 29, 2003. The summary judgment motion was denied, and the discovery phase has begun. Submissions (such as witness statements, pretrial briefs and joint exhibits) were due in October 2003. On July 8, 2003, the U.S. Bankruptcy Court handling UPC Polska's bankruptcy case granted relief from the automatic stay imposed under section 362 of the Bankruptcy Code to allow the HBO Arbitration to continue in the ordinary course, up to and including entry of an adverse judgment. UPC Polska need not seek any stay relief to enforce any favorable judgment. However, HBO may not enforce any judgment in its favor against UPC Polska and any such judgment against UPC Polska remains subject to the automatic stay, although HBO could enforce any such judgment

18

against UPC Polska's subsidiaries which are party to the arbitration, but which are not party to or protected by UPC Polska's Chapter 11 proceeding.

        The evidentiary hearings occurred on November 4 and 5, 2003 and witnesses of both parties were heard. The verdict of the Arbitration Panel is expected to be announced by the end of the first quarter of 2004 at the earliest. At this stage UPC Polska is unable to predict the outcome of the arbitration process.

        On October 22, 2002, Philips Digital Networks B.V. ("Philips") commenced legal proceedings against UPC, UPC Nederland B.V. and UPC Distribution (together the "UPC Defendants") alleging failure to perform by the UPC Defendants under a Set Top Computer Supply Agreement between the parties dated November 19, 2001, as amended (the "STC Agreement"). The action was commenced by Philips following a termination of the STC Agreement by the UPC Defendants as a consequence of Philips' failure to deliver STCs conforming to the material technical specifications required by the terms of the STC Agreement. Philips' principal allegation is that the UPC Defendants have failed to take delivery of 47,100 Set Top Computers ("STCs") with a value claimed of 21.2 million. Additionally, Philips is claiming dissolution of the STC Agreement and a release from an obligation to manufacture and deliver a further 29,850 STCs and related damages of 7.0 million. Lastly, Philips is claiming additional costs, including interest on late payments of approximately 1.0 million. The UPC Defendants deny all claims brought by Philips, and vigorously defended themselves against these claims in their defense submitted on January 28, 2003.

        Philips' statement of reply to the defense, which was submitted on May 7, 2003, contained an incident action on the basis of Article 843a Dutch Code on Civil Procedure ("DCCP") and a change of the original claim. The 843a DCCP claim relates to certain documents Philips wished the UPC Defendants to produce in order to prove that at the time of entering into the STC Agreement, the UPC Defendants did not intend to perform under the STC Agreement. The change of the claim related to the addition of another ground for the claim; a tort (deception/fraud) allegedly committed by each of the UPC Defendants.

        Judgment on the incident action was rendered on October 9, 2003 and dismissed the action completely and unreservedly. The UPC Defendants have now until December 10, 2003 to submit its Statement of Rejoinder (being its reply to Philips' statement of reply to the defense) but may apply for a six week extension to such submission date.

        On December 3, 2002, Europe Movieco Partners Limited ("Movieco") filed a request for arbitration (the "Request") against the Company with the International Court of Arbitration of the International Chamber of Commerce. The Request contains claims, which are based on a cable affiliation agreement entered into between the parties on December 21, 1999 (the "CAA"). The arbitral proceedings were suspended from December 17, 2002 to March 18, 2003. They have subsequently been reactivated and directions have been given by the Arbitral Tribunal. In the proceedings, Movieco claims (i) unpaid licence fees due under the CAA, plus interest, (ii) an order for specific performance of the CAA or, in the alternative, damages for breach of that agreement, to be assessed and (iii) legal and arbitration costs plus interest. Of the unpaid licence fees approximately USD 11 million had been accrued prior to the Company's commencing insolvency proceedings in the Netherlands on December 3, 2002 (the "Pre-Petition Claim"). Movieco made a claim in the Akkoord for the Pre-Petition Claim and, should Movieco succeed in the arbitration, shares of the appropriate value have been set aside. The Company's position is that the CAA is null and void because it breaches Article 81 of the EC Treaty and Section 6 of

19

the Dutch Competition Act. The Company also relies on the Order of the Southern District of New York dated January 7, 2003 in which the New York Court ordered that the rejection of the CAA was approved effective as of March 1, 2003 and that the Company shall have no further liability under the CAA. The Company has filed a counterclaim seeking the return of the amounts it has overpaid to Movieco under the CAA. Movieco does not accept its treatment as a contingent creditor and as part of its attempts to obtain distribution of the shares it has filed an action in the Dutch Court on October 28, 2003 challenging the Akkoord. The Company's position is that such action is without merit and it will be defending such action accordingly.

        In 2000, one of UPC'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. UPC had always regarded its cable networks as movable property and not subject to such transfer tax. UPC appealed the tax assessment, but on June 6, 2003, the Dutch Supreme Court ruled against UPC. Therefore, UPC's Dutch systems may be assessed for taxes on similar transactions. Currently, UPC cannot predict the extent to which the taxes could be assessed retroactively or the amount of tax that UPC's systems may be assessed for, although it may be substantial, being 6% of the value attributable to some of UPC's systems at the date of transfer. Because UPC owns 100% of UPC Nederland, any tax liabilities assessed against UPC's Dutch systems will be consolidated with UPC'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 limit the Company's exposure for past or future years.

        On October 8, 2003, an action was filed in the Court of Chancery of the State of Delaware in New Castle County, in which the plaintiff named as defendants the Company, United and certain directors of the Company and United. The complaint purports to assert claims on behalf of all public shareholders of the Company. On October 21, 2003, the plaintiff filed an amended complaint in the Delaware Court of Chancery. The complaint alleges that the Company and the defendant directors have breached their fiduciary duties to the public shareholders of the Company in connection with an offer by United to exchange shares of its common stock for the outstanding Common Stock of the Company. Among the remedies demanded, the complaint seeks to enjoin the exchange offer and obtain declaratory relief, unspecified damages and rescission. On November 12, United and the plaintiff, through respective counsel, entered into a memorandum of understanding approving the terms of the revised offer and the disclosure concerning the revised offer and agreeing to settle the litigation, subject to entering into final settlement documents, consummation of the exchange offer and court approval of the settlement.

20

7.     Earnings per share

8.     Income Taxes

UPC Restructuring

        On September 3, 2003, UPC discharged a substantial amount of debt in connection with its restructuring. Pursuant to the restructuring UPC has become a subsidiary of UGC Europe Inc. The final discharge of the debt outstanding at the level of UPC took place after it had become such a subsidiary. As a result, also the U.S. income tax aspects of the discharge of debt at the level of UPC need to be

21

considered. The U.S. Internal Revenue Code provides that when a debtor discharges its debt at a discount, the debtor generally realizes "cancellation of debt" income (and earnings and profits in the case of a corporation). The Internal Revenue Code also provides that this cancellation of debt income can be excluded from taxable income and, subject to certain limitations, earnings and profits under certain circumstances, including when the cancellation of debt income occurs in a transaction consummated pursuant to the bankruptcy code. When a debtor excludes cancellation of debt income from taxable income under the bankruptcy code exclusion, the debtor must reduce its basis in certain tax attributes, including but not limited to, net operating losses, capital losses and tax basis in assets, by the amount of excluded income. The debtor may also exclude such cancellation of debt income from its earnings and profits, but only to the extent such cancellation of debt income is applied to reduce the debtor's basis in its assets. If the excluded income exceeds the reduction in basis of the debtor's assets, the debtor's current year earnings and profits are increased by the amount of such excess. An increase in current or future earnings and profits could impact UGC Europe's U.S. federal income tax liabilities as UGC Europe could be required to recognize all or a portion of UPC's current or future earnings and profits as a deemed dividend under certain specific provisions of the U.S. Internal Revenue Code.

        UPC currently expects that it will be able to exclude any realized cancellation of debt income associated with its restructuring from its earnings and profits as determined for U.S. tax purposes under the bankruptcy code exclusion to the extent that the Company is able to reduce its adjusted tax basis in its assets. Any material amount of earnings and profits recognized by the exchange of UGC Europe equity for UPC obligations as part of the reorganization plan may cause UGC Europe to have a material income inclusion with respect to UPC's investment in U.S. property, including its investment in its subsidiary, UPC Polska. The Company anticipates that after taking into account the exclusion, the exchange should not generate a material amount of earnings and profits for the Company. UPC expects that it will be required to reduce the tax basis of its assets by a material amount as a result of the exclusion, which could have the effect of increasing UPC's earnings and profits as determined for U.S. tax purposes in subsequent years, when such assets are disposed of in a taxable disposition. Any increase in earnings and profits could impact UGC Europe's U.S. federal income tax liabilities by increasing required income inclusions under the U.S. Subpart F rules or investment in U.S. property rules.

        The Company also believes that as a result, in part, of certain internal restructuring efforts that the Company and/or UPC Polska intend to undertake following the reorganization, UPC will not have any remaining material tax basis in any investment in U.S. property, as determined for U.S. federal income tax purposes. If UGC Europe is required to recognize income as a result of the exchange, the resulting U.S. tax liability could be substantial.

        In connection with the Company's restructuring, the Company exchanged its equity for both U.S. dollar and Euro denominated UPC bonds. The Company then exchanged these bonds for UPC equity. UGC Europe realized both exchange gains and losses on the exchange of Euro denominated bonds for UPC equity. Such gains and losses are measured based on the purchase price paid and spot rate in effect when the bondholder who exchanged their bonds for UGC Europe equity acquired such bonds.

        Under Dutch tax law, the discharge of UPC's indebtedness in connection with its restructuring would generally constitute taxable income to UPC in the period of discharge. UPC has reached an agreement with the Dutch tax authorities whereby UPC is able to utilize net operating loss carry forwards to offset Dutch income taxes arising from the discharge of debt in 2003. UPC, together with its "fiscal unity"

22

companies, expects that for the year ended December 31, 2003, it will have sufficient current year and carry forward losses to fully offset the income to be recognized on the discharge of the debt.

9.     Segments and Geographic Information

        The Company's operations are currently organized into two principal divisions—UPC Broadband and chello Media. UPC Broadband delivers video, internet access and telephone services to residential customers and manages its business by country, and chello Media provides broadband internet and interactive digital products and services. The chello Media division also includes Priority Telecom, which operates a competitive local exchange carrier business providing telephone and data network solutions to the business market, and the group's investment holdings. The Company evaluates performance and allocates resources based on the results of these segments. Adjusted EBITDA is the primary measure used by the Company's 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 further removes the effects of cumulative effects of accounting changes, share in results of affiliates, minority interests in subsidiaries, reorganization expense, other income and expense, gain on extinguishment of debt, provision for loss on investments, gain (loss) on sale of investments in affiliates and other assets, proceeds from litigation settlement, foreign currency exchange gain (loss), impairment and restructuring charges, 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's internal decision makers believe Adjusted EBITDA is a meaningful measure and is superior to other available GAAP measures because it represents a transparent view of its recurring operating performance and allows management to readily view operating trends, perform analytical comparisons and benchmarking between segments in the 11 different countries in which the Company operates and identify strategies to improve operating performance. For example, the Company's internal decision makers believe that the inclusion of impairment and restructuring charges within Adjusted EBITDA distorts their ability to efficiently assess and view the core operating trends in its segments. In addition, the Company's internal decision makers believe its measure of Adjusted EBITDA is important because analysts and other investors use it to compare the Company's performance to other companies in its industry. The Company reconciles the total of the reportable segments' Adjusted EBITDA to its consolidated net income as presented in the accompanying consolidated statements of operations, because the Company believes consolidated net income is the most directly comparable financial measure to total 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. As discussed above, Adjusted EBITDA

23

excludes, among other items, frequently occurring impairment, restructuring and other charges that would be included in GAAP measures of operating performance.

24

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