Back to GetFilings.com




Use these links to rapidly review the document
UNITEDGLOBALCOM, INC. TABLE OF CONTENTS



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

FORM 10-Q

ý Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

FOR THE QUARTER ENDED JUNE 30, 2002

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 No. 000-496-58

UnitedGlobalCom, Inc.
(Exact name of Registrant as specified in its charter)

State of Delaware
(State or other jurisdiction of
incorporation or organization)
  84-1602895
(I.R.S. Employer
Identification No.)


4643 South Ulster Street, #1300
Denver, Colorado
(Address of principal executive offices)

 

80237
(Zip code)

Registrant's telephone number, including area code: (303) 770-4001

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

The number of shares outstanding of the Registrant's common stock as of August 7, 2002 was:

Class A common stock – 102,920,968 shares
Class B common stock –    8,870,332 shares
Class C common stock – 303,123,542 shares





UNITEDGLOBALCOM, INC.
TABLE OF CONTENTS

 
   
    PART I – FINANCIAL INFORMATION

Item 1.

 

Financial Statements

 

 

Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 (Unaudited)

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2002 and 2001 (Unaudited)

 

 

Condensed Consolidated Statement of Stockholders' Deficit for the Six Months Ended June 30, 2002 (Unaudited)

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (Unaudited)

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

 

PART II – OTHER INFORMATION

Item 3.

 

Defaults Upon Senior Securities

Item 6.

 

Exhibits and Reports on Form 8-K

1


UnitedGlobalCom, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par value and number of shares)
(Unaudited)

 
  June 30,
2002

  December 31,
2001

 
Assets              
Current assets              
  Cash and cash equivalents   $ 501,366   $ 920,140  
  Restricted cash     50,130     86,625  
  Short-term liquid investments     114,135     78,946  
  Subscriber receivables, net of allowance for doubtful accounts of $70,407 and $51,405, respectively     150,393     152,025  
  Notes receivable, related parties     8,190     310,904  
  Other receivables, including related party receivables of $32,439 and $32,145, respectively     91,779     107,704  
  Deferred financing costs, net of accumulated amortization of $39,826 and $39,178, respectively     103,081     132,564  
  Business transferred under contractual arrangement     –       78,672  
  Other current assets, net     93,303     75,671  
   
 
 
    Total current assets     1,112,377     1,943,251  
Investments in affiliates, accounted for under the equity method, net     179,383     231,625  
Property, plant and equipment, net of accumulated depreciation of $1,521,825 and $1,174,197, respectively     3,843,064     3,692,485  
Goodwill and other intangible assets, net of accumulated amortization of $608,292 and $552,370, respectively     3,104,589     2,843,922  
Deferred financing costs, net of accumulated amortization of $155 and $7,688, respectively     1,368     18,371  
Derivative assets     –       131,320  
Business transferred under contractual arrangement     –       143,124  
Other assets, net     13,474     34,542  
   
 
 
    Total assets   $ 8,254,255   $ 9,038,640  
   
 
 
Liabilities and Stockholders' Deficit              
Current liabilities              
  Accounts payable, including related party payables of $2,827 and $1,347, respectively   $ 189,560   $ 350,813  
  Accrued liabilities     578,823     697,827  
  Subscriber prepayments and deposits     132,381     88,975  
  Derivative liabilities     71,830     –    
  Short-term debt     239,785     77,614  
  Notes payable, related party     102,728     –    
  Current portion of senior notes and other long-term debt, related party     –       2,314,992  
  Current portion of senior notes and other long-term debt     5,873,121     6,074,502  
  Business transferred under contractual arrangement     –       607,350  
  Other current liabilities     8,201     11,052  
   
 
 
    Total current liabilities     7,196,429     10,223,125  
Senior discount notes and senior notes     389,437     1,565,856  
Other long-term debt     73,659     78,037  
Business transferred under contractual arrangement     656,959     228,012  
Deferred taxes     221,644     80,300  
Other long-term liabilities     118,530     148,135  
   
 
 
    Total liabilities     8,656,658     12,323,465  
   
 
 
Commitments and contingencies              
Minority interests in subsidiaries     1,403,013     1,240,665  
   
 
 
Series B convertible preferred stock, stated at liquidation value, nil and 113,983 shares issued and outstanding, respectively     –       29,990  
   
 
 
Stockholders' deficit              
Preferred stock, $0.01 par value, 10,000,000 shares authorized, nil shares issued and outstanding     –       –    
Series C convertible preferred stock, nil and 425,000 shares issued and outstanding, respectively     –       425,000  
Series D convertible preferred stock, nil and 287,500 shares issued and outstanding, respectively     –       287,500  
Class A common stock, $0.01 par value, 1,000,000,000 shares authorized, 110,325,208 and 98,042,205 shares issued and outstanding, respectively     1,103     981  
Class B common stock, $0.01 par value, 1,000,000,000 shares authorized, 8,870,332 and 19,027,130 shares issued and outstanding, respectively     89     190  
Class C common stock, $0.01 par value, 400,000,000 shares authorized, 303,123,542 and nil shares issued and outstanding, respectively     3,031     –    
Additional paid-in capital     3,704,461     1,537,944  
Deferred compensation     (54,318 )   (74,185 )
Treasury stock, at cost, 7,404,240 and 5,604,948 shares of Class A common stock, respectively     (34,162 )   (29,984 )
Accumulated deficit     (4,759,163 )   (6,437,290 )
Other cumulative comprehensive income (loss)     (666,457 )   (265,636 )
   
 
 
    Total stockholders' deficit     (1,805,416 )   (4,555,480 )
   
 
 
    Total liabilities and stockholders' deficit   $ 8,254,255   $ 9,038,640  
   
 
 

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

2


UnitedGlobalCom, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except per share amounts and number of shares)
(Unaudited)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
Revenue   $ 379,732   $ 399,250   $ 728,772   $ 793,995  
Operating expenses (exclusive of items shown separately below)     (196,133 )   (280,373 )   (381,049 )   (581,320 )
Selling, general and administrative expenses     (121,875 )   (172,554 )   (240,004 )   (340,664 )
Depreciation and amortization     (172,453 )   (277,132 )   (337,637 )   (548,246 )
Impairment and restructuring charges     (19,437 )   (262,032 )   (22,895 )   (262,032 )
   
 
 
 
 
      Operating loss     (130,166 )   (592,841 )   (252,813 )   (938,267 )
Interest income, including related party income of $683, $9,201, $3,148 and $14,868, respectively     12,696     25,795     22,617     57,022  
Interest expense, including related party expense of $1,976, $4,427, $20,749 and $4,427, respectively     (154,361 )   (280,570 )   (338,495 )   (547,047 )
Proceeds from litigation settlement     –       190,211     –       190,211  
Provision for loss on investments     (7,785 )   –       (14,490 )   –    
Foreign currency exchange gain (loss), derivative losses and other expenses, net     545,781     (177,500 )   335,879     (305,040 )
   
 
 
 
 
      Income (loss) before other items     266,165     (834,905 )   (247,302 )   (1,543,121 )
Income tax (expense) benefit, net     (36,874 )   1,743     (48,592 )   971  
Minority interests in subsidiaries     (18,425 )   44,008     (42,412 )   105,353  
Share in results of affiliates, net     (6,786 )   (22,299 )   (77,748 )   (70,489 )
   
 
 
 
 
      Income (loss) from continuing operations before extraordinary gain and cumulative effect of change in accounting principle     204,080     (811,453 )   (416,054 )   (1,507,286 )
Extraordinary gain on early retirement of debt, net of income tax     365,490     –       2,098,199     –    
Cumulative effect of change in accounting principle     –       –       –       32,574  
   
 
 
 
 
      Net income (loss)   $ 569,570   $ (811,453 ) $ 1,682,145   $ (1,474,712 )
   
 
 
 
 
Basic net income (loss) attributable to common stockholders   $ 569,570   $ (824,386 ) $ 1,677,971   $ (1,500,571 )
   
 
 
 
 
Diluted net income (loss) attributable to common stockholders   $ 569,570   $ (824,386 ) $ 1,682,145   $ (1,500,571 )
   
 
 
 
 
Net income (loss) per common share:                          
  Basic net income (loss) before extraordinary gain and cumulative effect of change in accounting principle   $ 0.49   $ (8.38 ) $ (1.14 ) $ (15.60 )
  Extraordinary gain on early retirement of debt     0.88     –       5.71     –    
  Cumulative effect of change in accounting principle     –       –       –       0.33  
   
 
 
 
 
      Basic net income (loss)   $ 1.37   $ (8.38 ) $ 4.57   $ (15.27 )
   
 
 
 
 
Diluted net income (loss) before extraordinary gain and cumulative effect of change in accounting principle   $ 0.49   $ (8.38 ) $ (1.12 ) $ (15.60 )
Extraordinary gain on early retirement of debt     0.88     –       5.65     –    
Cumulative effect of change in accounting principle     –       –       –       0.33  
   
 
 
 
 
      Diluted net income (loss)   $ 1.37   $ (8.38 ) $ 4.53   $ (15.27 )
   
 
 
 
 
Weighted-average number of common shares outstanding:                          
      Basic     416,187,877     98,328,251     367,339,371     98,275,362  
   
 
 
 
 
      Diluted     416,909,206     98,328,251     371,493,711     98,275,362  
   
 
 
 
 
Other comprehensive income (loss), net of tax:                          
Net income (loss)   $ 569,570   $ (811,453 ) $ 1,682,145   $ (1,474,712 )
Foreign currency translation adjustments     (454,297 )   46,833     (411,768 )   3,080  
Change in fair value of derivative securities     2,959     (5,193 )   10,514     (5,193 )
Change in unrealized gain on available-for-sale securities     452     1,112     509     37,538  
Cumulative effect on other comprehensive income of change in accounting principle     –       –       –       523  
Amortization of cumulative effect of change in accounting principle     1     (119 )   (76 )   (119 )
   
 
 
 
 
      Other comprehensive income (loss)   $ 118,685   $ (768,820 ) $ 1,281,324   $ (1,438,883 )
   
 
 
 
 

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

3


UnitedGlobalCom, Inc.
Condensed Consolidated Statement of Stockholders' Deficit
(In thousands, except number of shares)
(Unaudited)

 
  Series C
Preferred Stock

  Series D
Preferred Stock

  Class A
Common Stock

  Class B
Common Stock

  Class C
Common Stock

   
   
   
   
   
   
   
 
 
   
   
  Treasury Stock
   
  Other
Cumulative
Comprehensive
Income (Loss)

   
 
 
  Additional
Paid-In
Capital

  Deferred
Compensation

  Accumulated
Deficit

   
 
 
  Shares
  Amount
  Shares
  Amount
  Shares
  Amount
  Shares
  Amount
  Shares
  Amount
  Shares
  Amount
  Total
 
Balances, December 31, 2001   425,000   $ 425,000   287,500   $ 287,500   98,042,205   $ 981   19,027,130   $ 190   –     $ –     $ 1,537,944   $ (74,185 ) 5,604,948   $ (29,984 ) $ (6,437,290 ) $ (265,636 ) $ (4,555,480 )
Accrual of dividends on Series B, C and D convertible preferred stock   –       –     –       –     –       –     –       –     –       –       (156 )   –     –       –       (4,018 )   –       (4,174 )
Merger/reorganization transaction   (425,000 )   (425,000 ) (287,500 )   (287,500 ) 11,628,674     116   (10,156,798 )   (101 ) 21,835,384     218     770,438     –     (35,708 )   923     –       –       59,094  
Issuance of Class C common stock for financial assets   –       –     –       –     –       –     –       –     281,288,158     2,813     1,396,479     –     –       –       –       –       1,399,292  
Issuance of Class A common stock in exchange for remaining interest in UGC Holdings   –       –     –       –     600,000     6   –       –     –       –       (6 )   –     –       –       –       –       –    
Issuance of Class A common stock in connection with 401(k) plan   –       –     –       –     54,329     –     –       –     –       –       203     –     –       –       –       –       203  
Equity transactions of subsidiaries   –       –     –       –     –       –     –       –     –       –       97     (97 ) –       –       –       –       –    
Interest on loans to related parties   –       –     –       –     –       –     –       –     –       –       (538 )   –     –       –       –       –       (538 )
Amortization of deferred compensation   –       –     –       –     –       –     –       –     –       –       –       19,964   –       –       –       –       19,964  
Purchase of treasury shares   –       –     –       –     –       –     –       –     –       –       –       –     1,835,000     (5,101 )   –       –       (5,101 )
Net income   –       –     –       –     –       –     –       –     –       –       –       –     –       –       1,682,145     –       1,682,145  
Foreign currency translation adjustments   –       –     –       –     –       –     –       –     –       –       –       –     –       –       –       (411,768 )   (411,768 )
Change in fair value of derivative assets   –       –     –       –     –       –     –       –     –       –       –       –     –       –       –       10,514     10,514  
Change in unrealized gain on available-for-sale securites   –       –     –       –     –       –     –       –     –       –       –       –     –       –       –       509     509  
Amortization of cumulative effect of change in accounting principle   –       –     –       –     –       –     –       –     –       –       –       –     –       –       –       (76 )   (76 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, June 30, 2002   –     $ –     –     $ –     110,325,208   $ 1,103   8,870,332   $ 89   303,123,542   $ 3,031   $ 3,704,461   $ (54,318 ) 7,404,240   $ (34,162 ) $ (4,759,163 ) $ (666,457 ) $ (1,805,416 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

4


UnitedGlobalCom, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
  Six Months Ended June 30,
 
 
  2002
  2001
 
Cash Flows from Operating Activities              
Net income (loss)   $ 1,682,145   $ (1,474,712 )
Adjustments to reconcile net income (loss) to net cash flows from operating activities:              
  Depreciation and amortization     337,637     548,246  
  Impairment and restructuring charges     22,895     262,032  
  Stock-based compensation     17,357     (2,868 )
  Accretion of interest on senior notes and amortization of deferred financing costs     137,839     247,534  
  Unrealized foreign exchange (gains) losses, net     (492,295 )   183,234  
  Provision for loss on investments     14,490     –    
  Loss on derivative securities     155,918     118,235  
  Minority interests in subsidiaries     42,412     (105,353 )
  Share in results of affiliates, net     77,748     70,489  
  Extraordinary gain on early retirement of debt, net of income tax     (2,098,199 )   –    
  Cumulative effect of change in accounting principle     –       (32,574 )
  Decrease (increase) in receivables, net     23,582     (28,037 )
  Decrease (increase) in other assets     13,827     (22,730 )
  Decrease in accounts payable, accrued liabilities and other     (181,751 )   (154,245 )
   
 
 
    Net cash flows from operating activities     (246,395 )   (390,749 )
   
 
 

Cash Flows from Investing Activities

 

 

 

 

 

 

 
Purchase of short-term liquid investments     (1,355,457 )   (563,925 )
Proceeds from sale of short-term liquid investments     1,320,086     684,282  
Restricted cash released (deposited), net     38,485     (91,653 )
Investments in affiliates and other investments     (1,839 )   (44,210 )
Dividends received from affiliates     7,042     –    
New acquisitions, net of cash acquired     (21,098 )   (24,195 )
Capital expenditures     (189,555 )   (416,188 )
Increase in notes receivable from affiliates     (602 )   (273,964 )
Other     2,965     8,533  
   
 
 
    Net cash flows from investing activities     (199,973 )   (721,320 )
   
 
 

Cash Flows from Financing Activities

 

 

 

 

 

 

 
Issuance of common stock     200,006     469  
Issuance of common stock in connection with Company's and subsidiary's stock option plans     –       2,979  
Proceeds from short-term and long-term borrowings     9,793     1,163,241  
Proceeds from notes payable to shareholder     102,728     –    
Retirement of existing senior notes     (231,630 )   –    
Deferred financing costs     (18,293 )   (8,591 )
Repayments of short-term and long-term borrowings     (66,394 )   (699,249 )
   
 
 
    Net cash flows from financing activities     (3,790 )   458,849  
   
 
 
Effect of Exchange Rates on Cash     31,384     (103,697 )
   
 
 
Decrease in Cash and Cash Equivalents     (418,774 )   (756,917 )
Cash and Cash Equivalents, Beginning of Period     920,140     1,876,828  
   
 
 
Cash and Cash Equivalents, End of Period   $ 501,366   $ 1,119,911  
   
 
 

Supplemental Cash Flow Disclosures

 

 

 

 

 

 

 
  Cash paid for interest   $ 120,095   $ 235,776  
   
 
 
  Cash received for interest   $ 13,955   $ 48,217  
   
 
 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

 
  Issuance of common stock for financial assets   $ 1,206,441   $ –    
   
 
 

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

5



UnitedGlobalCom,Inc.
Notes to Condensed Consolidated Financial Statements
As of June 30, 2002
(Unaudited)

1.    Organization and Nature of Operations

        UnitedGlobalCom, Inc. (together with its majority-owned subsidiaries, the "Company" or "United") provides video, telephone and Internet access services, which the Company refers to as "Triple Play", or "Triple Play Distribution", in numerous countries worldwide. The following chart presents a summary of the Company's ownership structure as of June 30, 2002.

GRAPHIC

6


2.    Merger Transaction

The Company was formed in February 2001 as part of a series of planned transactions with UGC Holdings and Liberty Media Corporation (together with its subsidiaries and affiliates "Liberty"), intended to restructure and recapitalize United's business. On January 30, 2002, United completed a transaction with Liberty and UGC Holdings, pursuant to which the following occurred.

Immediately prior to the merger transaction on January 30, 2002:

As a result of the merger transaction:

7


Immediately following the merger transaction:

In December 2001, IDT United, Inc. ("IDT United") commenced a cash tender offer for, and related consent solicitation with respect to, the entire $1.375 billion face amount of senior discount notes of UGC Holdings (the "UGC Holdings 1998 Notes"). As of the expiration of the tender offer on February 1, 2002, holders of the notes had validly tendered and not withdrawn notes representing approximately $1.350 billion aggregate principal amount at maturity. At the time of the tender offer, Liberty had an equity and debt interest in IDT United.

Prior to the merger on January 30, 2002, United acquired from Liberty $751.2 million aggregate principal amount at maturity of the UGC Holdings 1998 Notes (which had previously been distributed to Liberty by IDT United in redemption of a portion of Liberty's equity interest and in prepayment of a portion of IDT United's debt to Liberty), as well as all of Liberty's remaining interest in IDT United. The purchase price for the UGC Holdings 1998 Notes and Liberty's interest in IDT United was:

On January 30, 2002, Liberty loaned United approximately $17.3 million, of which approximately $2.3 million was used to purchase shares of preferred stock and promissory notes issued by IDT United. Following January 30, 2002, Liberty loaned United an additional approximately $85.4 million. United used the proceeds of these loans to purchase additional shares of redeemable preferred stock and convertible promissory notes issued by IDT United. These notes to Liberty accrue interest at 8.0% annually, compounded and payable quarterly, and each note matures on its first anniversary. The Company consolidates IDT United as a "special purpose entity", due to insufficient third party residual equity at risk.

On May 14, 2002, the Principal Founders transferred all of the shares of UGC Holdings common stock held by them to United in exchange for an aggregate of 600,000 shares of United Class A common stock pursuant to an exchange agreement dated May 14, 2002, among such individuals and United. This exchange agreement superseded the exchange agreement entered into at the time of the merger transaction. As a result of this exchange, UGC Holdings is now a wholly-owned subsidiary of United, and United is entitled to elect the entire board of directors of UGC Holdings. This transaction was the final step in the recapitalization of the Company.

United accounted for the merger transaction on January 30, 2002 as a reorganization of entities under common ownership at historical cost, similar to a pooling of interest. Under reorganization accounting, the

8



Company has consolidated the financial position and results of operations of UGC Holdings as if the merger transaction had been consummated at the inception of UGC Holdings. The purchase of the UGC Holdings 1998 Notes directly from Liberty and the purchase of Liberty's interest in IDT United were recorded at fair value. The issuance of United's new shares of Class C common stock to Liberty for cash, United UPC Bonds and the Belmarken Notes was recorded at the fair value of United's common stock at closing. The estimated fair value of these financial assets (with the exception of the Belmarken Notes) was significantly less than the accreted value of such debt securities as reflected in UGC Holdings' historical financial statements. Accordingly, for consolidated financial reporting purposes, United recognized an extraordinary gain of approximately $1.647 billion from the effective retirement of such debt outstanding at that time equal to the excess of the then accreted value of such debt over United's cost, net of income tax, as follows:

 
  Fair Value
at Acquisition

  Book Value
  Gain/(Loss)
 
 
  (In thousands)

 
UGC Holdings 1998 Notes   $ 540,149   $ 1,210,974   $ 670,825  
United UPC Bonds     312,831     1,451,519     1,138,688  
Belmarken Notes     891,671     891,671     –    
Write-off of deferred financing costs     –       (52,224 )   (52,224 )
Deferred income tax     –       (110,583 )   (110,583 )
   
 
 
 
  Total extraordinary gain on early retirement of debt   $ 1,744,651   $ 3,391,357   $ 1,646,706  
   
 
 
 

3.    Risks, Uncertainties and Liquidity

United

The report of United's previous independent public accountant, Arthur Andersen LLP, on United's consolidated financial statements as of and for the year ended December 31, 2001, includes a paragraph that states, in part, "...the Company has suffered recurring losses from operations, is currently in default under certain of its significant bank credit facilities, senior notes and senior discount note agreements, which has resulted in a significant net working capital deficiency that raises substantial doubt about its ability to continue as a going concern". As of June 30, 2002, the Company believes its corporate level working capital is sufficient to fund its corporate level commitments over the next year.

UPC

UPC has incurred substantial operating losses and negative cash flows from operations, which have been driven by continuing development efforts, including the introduction of new services such as digital video, voice and Internet. In addition, substantial capital expenditures have been required to deploy these services and to acquire businesses. Management expects UPC to incur operating losses at least through 2005, primarily as a result of the continued introduction of these new services, which are in the early stages of deployment, as well as continued depreciation and amortization expense. As of June 30, 2002, there was substantial uncertainty whether UPC's sources of capital, working capital and projected operating cash flow were sufficient to fund its expenditures and service its indebtedness over the next year. In addition, as a result of the events of default described below, UPC's senior notes, senior discount notes, Belmarken Notes and the senior secured credit facility among UPC Distribution Holdings, B.V. ("UPC Distribution")

9



as borrower and TD Bank Europe Limited and Toronto Dominion (Texas), Inc., as facility agents, and a group of banks and financial institutions (the "UPC Distribution Bank Facility"), have been classified as current liabilities. UPC's ability to continue as a going concern is dependent on (i) its ability to restructure its senior notes and senior discount notes, the Belmarken Notes and its convertible preferred stock and (ii) its ability to generate enough cash flow to enable it to recover its assets and satisfy its liabilities in the normal course of business. The report of UPC's previous independent public accountants, Arthur Andersen, on UPC's consolidated financial statements for the year ended December 31, 2001, includes a paragraph that states that UPC has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about UPC's ability to continue as a going concern. During 2001, UPC reviewed its current and long-range plan for all segments of its business and engaged a strategic consultant to assist it in the process. UPC worked extensively with this consultant to revise its strategic and operating plans, no longer focusing on an aggressive digital roll out, but on increasing sales of products and services that have better gross margins and profitability. The revised business plan focuses on average revenue per subscriber and margin improvement, increased penetration of new service products within existing upgraded homes, efficient deployment of capital and products with positive net present values.

Given UPC's funding requirements and possible lack of access to debt and equity capital in the near term, UPC determined that it would not make interest payments on its senior notes as they fell due. On February 1, 2002, UPC failed to make required interest payments in the aggregate amount of $100.6 million on its outstanding 10.875% Senior Notes due 2009, 11.25% Senior Notes due 2010 and 11.5% Senior Notes due 2010. The indentures related to its senior notes and senior discount notes provide that failing to make interest payments constitutes an event of default under the notes if UPC is in default of the payment of interest on any of the notes for a period of time in excess of 30 days. Since UPC failed to make these interest payments upon expiration of this 30-day grace period on March 3, 2002, events of default occurred under those indentures. The occurrence of these events of default resulted in cross events of default under the indentures related to the remaining series of senior notes and senior discount notes. The occurrence of the various events of default gave the trustees under the related indentures, or the requisite number of holders of such notes, the right to accelerate the maturity of all of UPC's senior notes and senior discount notes and to foreclose on the collateral securing the loans. In addition, on May 1, 2002 and August 1, 2002, UPC failed to make required interest payments in the aggregate amount of $35.3 million and $122.0 million, respectively, on its outstanding 10.875% Senior Notes due 2007, 11.25% Senior Notes due 2009, 10.875% Senior Notes due 2009, 11.25% Senior Notes due 2010 and 11.5% Senior Notes due 2010. As of August 14, 2002, neither the trustees for those notes nor the requisite number of holders of those notes have accelerated the payment of principal and interest under those notes.

UPC's failure to make the February 1, 2002, May 1, 2002 and August 1, 2002 interest payments on certain of its outstanding senior notes gave rise to cross events of default under the following credit and loan facilities:

On July 30, 2002, UPC transferred 22.3% of the outstanding shares of UPC Germany to the minority interest holders in UPC Germany (see Note 21). The EWT Facility was refinanced by the new majority shareholder and the cross default ceased to exist. The UPC Distribution Bank Facility is secured by share

10



pledges on UPC Distribution which is the holding company of most companies within the UPC Distribution group, and over certain operating companies within this group. The Belmarken Notes are secured by pledges over the stock of Belmarken, UPC's wholly-owned subsidiary, UPC Holding B.V. and UPC Internet Holding B.V., which owns chello broadband. The occurrence of the cross events of default under such facilities gave the creditors under those facilities the right to accelerate the maturity of the loans and to foreclose upon the collateral securing the loans.

On March 4, 2002, UPC received the first waivers from the lenders under the UPC Distribution Bank Facility, the EWT Facility and the Belmarken Notes for the cross events of default under such facilities that existed or may exist as a result of UPC's failure to make the interest payments due on February 1, 2002 within the applicable cure periods, or any resulting cross defaults. On July 29, 2002, the bank lenders and United extended the duration of the waivers until September 12, 2002. The other terms of the waivers remain unchanged from those announced on March 4, 2002.

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

In addition, each of these waivers contains certain other conditions and undertakings and will terminate if there is a default by UPC of the terms of that waiver. The waiver under the UPC Distribution Bank Facility subjects UPC to a €100.0 million drawdown limitation under that facility, subject to certain conditions, during the period in which the waiver is in place. As of August 14, 2002, UPC had not made the interest payments on its senior notes. None of the events described above have had a material adverse effect on the operations of UPC or UPC's relationships with customers, suppliers and employees.

On July 24, 2002, United and an ad-hoc noteholders committee representing UPC's noteholders announced an agreement in principle with respect to the recapitalization of UPC. As part of the recapitalization, United and other holders of UPC's notes will exchange approximately $5.4 billion accreted value of UPC's debt into equity of a new holding company of UPC ("New UPC"). Key terms of the agreement are as follows:

11


This agreement is subject to documentation among United, UPC and the ad-hoc committee of noteholders and certain other approvals and conditions. United expects this transaction will close in the first quarter of 2003, though there is no certainty that all of the conditions necessary for the transaction to close will be satisfied. If completed, the restructuring will result in substantial dilution of UPC's existing shareholders, a loss of some or all of the value of UPC's outstanding securities, including UPC's ordinary shares, preference shares, senior notes and senior discount notes.

If the parties are unable to conclude documentation for the debt restructuring agreement in principle or if UPC is otherwise unable to successfully complete an agreed upon restructuring plan for its debt, UPC may seek relief under a debt moratorium leading to a suspension of payments, or a bankruptcy proceeding under applicable laws. If UPC seeks relief under either of these proceedings, or any other laws that may be available to UPC, holders of UPC's outstanding securities, including UPC's ordinary shares, preference shares, senior notes and senior discount notes, as well as the Belmarken Notes, may lose some or all of the value of their investment in UPC's securities. Such proceedings could result in material changes in the nature of UPC's business, material adverse changes to UPC's financial condition and results of operations or UPC's liquidation.

In 2002 and thereafter, UPC anticipates that sources of capital will include working capital and operating cash flows, proceeds from the disposal of non-core investments and further internal reorganization and alignment of businesses, draws under the UPC Distribution Bank Facility and vendor financing. UPC does not anticipate access to the capital markets as a source of funding unless it is able to restructure its existing indebtedness, although UPC might access such markets if possible. If UPC is able to complete its planned debt restructuring satisfactorily and is able to implement a rationalization of its non-core investments and improve its operating performance, UPC believes its existing cash balance, working capital, operating cash flow and capacity under the UPC Distribution Bank Facility will be sufficient to fund operations for the foreseeable future. However, should the planned debt restructuring, further internal reorganization and alignment of businesses and the investment rationalization program be unsuccessful, or should operating results fall behind UPC's current business plan, there is uncertainty whether UPC will have sufficient funds to meet its expenditure or debt commitments and as such not be able to continue as a going concern.

VTR

The report of VTR's previous independent public accountants, Arthur Andersen, on VTR's consolidated financial statements for the year ended December 31, 2001, includes a paragraph that states that VTR has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about VTR's ability to continue as a going concern. On May 29, 2002, VTR and VTR's senior lenders entered into an amendment to VTR's existing $176.0 million senior secured credit facility (the "VTR Bank Facility"), extending the maturity date of the loans under the facility until April 29, 2003. The amendment

12



also establishes new financial covenant levels consistent with VTR's current projections. In connection with the amendment, UGC Holdings funded $26.0 million in capital contributions to VTR, the proceeds of which were used to prepay the senior loans down to $150.0 million. UGC Holdings also funded another $23.0 million to VTR and committed to fund an additional $10.0 million during 2002 for VTR's general working capital. United Latin America, Inc., a wholly-owned subsidiary of the Company and 100% indirect owner of VTR, is required to fund amounts to VTR in the future if VTR fails to maintain its senior leverage ratio. Pursuant to the amendment, VTR will be required to either (a) consummate a Chilean bank and/or bond financing of not less than $50.0 million or (b) make further loan prepayments of $12.0 million and, under certain circumstances, pay a higher interest rate on the remaining loans. In 2002 and thereafter, VTR anticipates sources of capital will include increasing cash flows from operations. During the next year, VTR may obtain capital from the Chilean market and/or United, although there can be no assurance in this regard. VTR believes its existing cash balance, working capital and operating cash flow will be sufficient to fund operations for the foreseeable future. However, if VTR's sources of capital are less than anticipated, VTR fails to refinance the VTR Bank Facility, or should operating results fall behind its current business plan, there is uncertainty whether VTR will have sufficient funds to service the VTR Bank Facility when due April 29, 2003.

4.    Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

See Note 2 for a discussion related to the application of reorganization accounting in connection with the merger and related transactions.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and all subsidiaries where it exercises a controlling financial interest through the ownership of a direct and indirect majority voting interest. UAP was deconsolidated effective November 15, 2001 in

13



connection with the sale of 49.99% of the Company's interest in UAP (see Note 8). All significant intercompany accounts and transactions have been eliminated in consolidation.

New Accounting Principles

In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). Under SFAS 145, most gains and losses from extinguishments of debt will not be classified as extraordinary items unless they meet much more narrow criteria in Accounting Principles Board Opinion No. 30 Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30"). SFAS 145 may be early adopted, but is otherwise effective for fiscal years beginning after May 15, 2002, and must be adopted with retroactive effect. The Company has not yet adopted such standard and will adopt such standard in fiscal 2003 in accordance with the effective date and transition guidance provided for in SFAS 145. The Company is currently evaluating the potential impact, if any, the adoption of SFAS 145 will have on its financial position and results of operations.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activity ("SFAS 146"). SFAS 146 requires the liability for a cost associated with an exit activity, including restructuring, or disposal activity to be recognized and measured initially at its fair value in the period in which the liability is incurred. Additionally, SFAS 146 requires subsequent adjustment to the recorded liability for changes in estimated cash flows. SFAS 146 may be early adopted, but is otherwise effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the potential impact, if any, the adoption of SFAS 146 will have on its financial position and results of operations.

14



5. Investments in Affiliates

 
  June 30, 2002
 
  Contributions
  Cumulative
Dividends
Received

  Cumulative
Share in Results
of Affiliates

  Cumulative
Translation
Adjustments

  Cumulative
Impairments

  Total
 
  (In thousands)

PrimaCom   $ 341,017   $ –     $ (75,678 ) $ (32,716 ) $ (232,623 ) $ –  
SBS     264,675     –       (77,322 )   (10,465 )   (102,037 )   74,851
Tevel     120,877     (6,180 )   (113,577 )   (1,120 )   –       –  
TKP     26,812     –       (26,922 )   110     –       –  
Melita     18,751     –       (1,060 )   (3,057 )   –       14,634
Iberian Programming     11,947     (9,602 )   14,176     5,324     –       21,845
Xtra Music     12,106     –       (7,551 )   (1,204 )   –       3,351
Other UPC     49,947     (695 )   (36,667 )   3,935     –       16,520
Telecable     71,819     (20,862 )   (6,874 )   (11,230 )   –       32,853
MGM Networks LA     16,853     –       (16,853 )   –       –       –  
Jundiai     7,438     (1,572 )   1,079     (3,283 )   –       3,662
Pilipino Cable Corporation     19,026     –       (4,771 )   (2,588 )   –       11,667
Hunan International TV     6,394     –       (2,525 )   16     (3,885 )   –  
   
 
 
 
 
 
  Total   $ 967,662   $ (38,911 ) $ (354,545 ) $ (56,278 ) $ (338,545 ) $ 179,383
   
 
 
 
 
 
 
    
December 31, 2001

 
  Contributions
  Cumulative
Dividends
Received

  Cumulative
Share in Results
of Affiliates

  Cumulative
Translation
Adjustments

  Cumulative
Impairments

  Total
 
  (In thousands)

PrimaCom   $ 341,017   $ –     $ (67,834 ) $ (32,747 ) $ (232,623 ) $ 7,813
SBS     264,675     –       (74,217 )   1,368     (102,037 )   89,789
Tevel     120,877     (6,180 )   (113,577 )   (1,120 )   –       –  
TKP     26,812     –       (3,015 )   15     –       23,812
Melita     14,224     –       (1,426 )   (3,493 )   –       9,305
Iberian Programming     11,947     (2,560 )   10,130     3,103     –       22,620
Xtra Music     14,546     –       (7,156 )   (1,055 )   –       6,335
Other UPC     43,875     (695 )   (31,890 )   2,105     –       13,395
Telecable     71,819     (20,862 )   (5,891 )   (6,672 )   –       38,394
MGM Networks LA     15,080     –       (15,080 )   –       –       –  
Jundiai     7,438     (1,572 )   1,004     (2,444 )   –       4,426
Pilipino Cable Corporation     18,680     –       (4,342 )   (2,588 )   –       11,750
Hunan International TV     6,394     –       (2,424 )   16     –       3,986
   
 
 
 
 
 
  Total   $ 957,384   $ (31,869 ) $ (315,718 ) $ (43,512 ) $ (334,660 ) $ 231,625
   
 
 
 
 
 

15


6. Property, Plant and Equipment

 
  June 30,
2002

  December 31,
2001

 
 
  (In thousands)

 
Cable distribution networks   $ 3,798,049   $ 3,417,040  
Subscriber premises equipment and converters     932,110     825,320  
Direct-to-home ("DTH") and other distribution facilities     82,175     105,575  
Information technology systems, office equipment, furniture and fixtures     286,499     261,747  
Buildings and leasehold improvements     177,161     164,475  
Other     88,895     92,525  
   
 
 
      5,364,889     4,866,682  
  Accumulated depreciation     (1,521,825 )   (1,174,197 )
   
 
 
    Net property, plant and equipment   $ 3,843,064   $ 3,692,485  
   
 
 

7. Goodwill and Other Intangible Assets

 
  June 30,
2002

  December 31,
2001

 
 
  (In thousands)

 
Goodwill:              
  UPC   $ 3,381,487   $ 3,083,979  
  VTR     174,021     182,860  
  TV Show Brasil     5,270     6,487  
Other Intangible Assets:              
  UPC     151,955     122,767  
  Other     148     199  
   
 
 
      3,712,881     3,396,292  
    Accumulated amortization goodwill     (574,892 )   (515,887 )
    Accumulated amortization other intangible assets     (33,400 )   (36,483 )
   
 
 
      Net goodwill and other intangible assets   $ 3,104,589   $ 2,843,922  
   
 
 

Statement of Financial Accounting Standards No. 142

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

16



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

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
Net income (loss) as reported   $ 569,570   $ (811,453 ) $ 1,682,145   $ (1,474,712 )
Add back:                          
  Goodwill amortization                          
    UPC and subsidiaries     –       71,684     –       161,126  
    VTR     –       2,946     –       6,059  
    Austar United and subsidiaries     –       3,749     –       7,570  
    Other     –       468     –       950  
  Amortization of excess basis on equity investments                          
    UPC affiliates     –       8,676     –       17,892  
    Austar United affiliates     –       801     –       1,624  
    Other     –       507     –       1,014  
   
 
 
 
 
Adjusted net income (loss)   $ 569,570   $ (722,622 ) $ 1,682,145   $ (1,278,477 )
   
 
 
 
 

Basic net income (loss) per common share as reported

 

$

1.37

 

$

(8.38

)

$

4.57

 

$

(15.27

)
Add back:                          
  Goodwill amortization                          
    UPC and subsidiaries     –       0.73     –       1.64  
    VTR     –       0.03     –       0.06  
    Austar United and subsidiaries     –       0.04     –       0.08  
    Other     –       –       –       0.01  
  Amortization of excess basis on equity investments                          
    UPC affiliates     –       0.09     –       0.18  
    Austar United affiliates     –       0.01     –       0.02  
    Other     –       0.01     –       0.01  
   
 
 
 
 
Adjusted basic net income (loss) per common share   $ 1.37   $ (7.47 ) $ 4.57   $ (13.27 )
   
 
 
 
 

Diluted net income (loss) per common share as reported

 

$

1.37

 

$

(8.38

)

$

4.53

 

$

(15.27

)
Add back:                          
  Goodwill amortization                          
    UPC and subsidiaries     –       0.73     –       1.64  
    VTR     –       0.03     –       0.06  
    Austar United and subsidiaries     –       0.04     –       0.08  
    Other     –       –       –       0.01  
  Amortization of excess basis on equity investments                          
    UPC affiliates     –       0.09     –       0.18  
    Austar United affiliates     –       0.01     –       0.02  
    Other     –       0.01     –       0.01  
   
 
 
 
 
Adjusted diluted net income (loss) per common share   $ 1.37   $ (7.47 ) $ 4.53   $ (13.27 )
   
 
 
 
 

17


SFAS 142 requires a two-step process to determine whether goodwill is impaired. Under step one, the fair value of each of the Company's reporting units is compared with their respective carrying amounts, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss. As of June 30, 2002, the first step of the goodwill impairment test under SFAS 142 was completed, and the carrying value of certain reporting units exceeded the fair value, including the Netherlands, Sweden, Hungary, Czech Republic, France, Slovak Republic, Poland, Priority Telecom and TV Show Brasil. The Company is currently performing the second step of the test under SFAS 142 to quantify how much of the total goodwill will be impaired. It is possible that a substantial cumulative effect adjustment may be required as a result of this process. The determination of the potential impairment adjustment will be completed by the end of 2002. As of June 30, 2002, net goodwill of approximately $3.0 billion is included in the accompanying condensed consolidated balance sheet.

8. Business Transferred Under Contractual Arrangement

Prior to November 15, 2001, Asia/Pacific owned approximately 99.99% of UAP's outstanding common stock. On November 15, 2001, Asia/Pacific entered into a series of transactions, pursuant to which it transferred an approximate 49.99% interest in UAP to an independent third party for nominal consideration. As a result of these transactions, Asia/Pacific now holds 50.00% of UAP's outstanding common stock. For accounting purposes, these transactions resulted in the deconsolidation of UAP from November 15, 2001 forward and presenting the assets and liabilities of UAP as of December 31, 2001 in a manner consistent with the guidance set forth in Staff Accounting Bulletin No. 30 Accounting for Divestiture of a Subsidiary or Other Business Operation ("SAB 30"). No gain was recorded in the consolidated statement of operations upon the deconsolidation of UAP (equal to the amount of the Companys' negative investment in UAP at the transaction date) or upon the filing of the bankruptcy petitions on March 29, 2002, as the Company does not believe such transaction qualifies as a divestiture for accounting purposes. A gain may be recognized upon the ultimate liquidation of the Company's indirect 50.0% interest in UAP. As a result of the bankruptcy petitions on March 29, 2002, the Company changed its presentation of the net negative investment in UAP to a one-line-item presentation consistent with the guidance in APB 18, and discontinued recording its share of losses from UAP. For the six months ended June 30, 2002, the Company recorded equity in losses of approximately $38.9 million related to its investment in UAP.

9. Current Portion of Senior Notes and Other Long-Term Debt, Related Party

 
  June 30,
2002

  December 31,
2001

 
  (In thousands)

Belmarken Notes (see Note 2)   $ –     $ 887,315
United UPC Bonds (see Note 2)     –       1,427,677
   
 
  Total   $ –     $ 2,314,992
   
 

18


10. Senior Discount Notes and Senior Notes

 
  June 30,
2002

  December 31,
2001

 
 
  (In thousands)

 
UGC Holdings 1998 Notes (see Note 2)   $ 23,073   $ 1,222,533  
UPC July 1999 Senior Notes (1):              
  UPC 10.875% dollar Senior Notes due 2009     520,481     558,842  
  UPC 10.875% euro Senior Notes due 2009     141,489     205,675  
  UPC 12.5% dollar Senior Discount Notes due 2009     388,125     365,310  
UPC October 1999 Senior Notes (1):              
  UPC 10.875% dollar Senior Notes due 2007     113,766     143,864  
  UPC 10.875% euro Senior Notes due 2007     37,402     61,386  
  UPC 11.25% dollar Senior Notes due 2009     113,567     125,967  
  UPC 11.25% euro Senior Notes due 2009     37,732     61,547  
  UPC 13.375% dollar Senior Discount Notes due 2009     241,144     227,424  
  UPC 13.375% euro Senior Discount Notes due 2009     86,497     77,044  
UPC January 2000 Senior Notes (1):              
  UPC 11.25% dollar Senior Notes due 2010     356,454     387,697  
  UPC 11.25% euro Senior Notes due 2010     81,544     121,234  
  UPC 11.5% dollar Senior Notes due 2010     145,028     215,067  
  UPC 13.75% dollar Senior Discount Notes due 2010     461,278     442,129  
UPC Polska Senior Discount Notes     366,364     343,323  
   
 
 
      3,113,944     4,559,042  
    Less current portion     (2,724,507 )   (2,993,186 )
   
 
 
    Senior discount notes and senior notes   $ 389,437   $ 1,565,856  
   
 
 

(1)
As discussed in Note 3, UPC is in default under its senior notes and senior discount notes. Accordingly, these borrowings have been classified as current.

11. Other Long-Term Debt

 
  June 30,
2002

  December 31,
2001

 
 
  (In thousands)

 
UPC Distribution Bank Facility (1)   $ 3,089,594   $ 2,827,629  
UPC DIC Loan     53,458     48,049  
Other UPC     77,081     104,591  
VTR Bank Facility (2)         176,000  
Other     2,140     3,084  
   
 
 
      3,222,273     3,159,353  
  Less current portion     (3,148,614 )   (3,081,316 )
   
 
 
  Other long-term debt   $ 73,659   $ 78,037  
   
 
 

(1)
As discussed in Note 3, UPC is in default under certain of its credit and loan facilities. Accordingly, the UPC Distribution Bank Facility has been classified as current. As of June 30, 2002, UPC has not drawn under the €100.0 million capacity of this facility.

(2)
As discussed in Note 3, the VTR Bank Facility was amended, establishing a new maturity date. Accordingly, this facility has been classified as short-term debt.

19


12. Derivative Instruments

In connection with certain borrowings, UPC has entered into both cross-currency swaps and interest rate derivative contracts, providing economic hedges to both currency and interest rate exposure. The following table details the fair value of the derivative instruments outstanding by related borrowings:

Borrowing
  June 30,
2002

  December 31,
2001

 
 
  (In thousands)

 
UPC July 1999 Senior Notes cross currency/interest rate derivative contract   $ –     $ 90,925  
UPC October 1999 Senior Notes cross currency/interest rate derivative contract     –       49,622  
UPC January 2000 Senior Notes cross currency/interest rate derivative contract     –       32,837  
UPC Distribution Bank Facility cross currency/interest rate derivative contract     (71,830 )   (42,064 )
   
 
 
  Total derivative (liabilities) assets, net   $ (71,830 ) $ 131,320  
   
 
 

Of the above derivative instruments, only the contract on the UPC Distribution Bank Facility qualifies as an accounting cash flow hedge. Accordingly, changes in fair value of this instrument are recorded through other comprehensive income in the consolidated statement of stockholders' deficit. The remaining instruments are marked to market each period with the corresponding fair value gain or loss recorded as a part of foreign currency exchange gain (loss), derivative losses and other income (expense) in the accompanying consolidated statements of operations. The fair values consider all rights and obligations of the respective instruments, including certain set-off provisions. For the three months ended June 30, 2002 and 2001, UPC recorded a gain (loss) of $(2.9) million and $(49.8) million, respectively, and for the six months ended June 30, 2002 and 2001, UPC recorded a gain (loss) of $(165.1) million and $22.8 million, respectively, in connection with the mark-to-market valuations.

In June 2002, UPC recognized an extraordinary gain of approximately $342.3 million from the delivery by certain banks of approximately $399.2 million in aggregate principal amount of UPC's senior notes and senior discount notes as settlement of the interest rate/cross currency derivative contracts on the UPC July 1999 Senior Notes, the UPC October 1999 Senior Notes and the UPC January 2000 Senior Notes.

13.  Minority Interests in Subsidiaries

 
  June 30,
2002

  December 31,
2001

 
  (In thousands)

UPC (1)   $ 1,241,961   $ 1,104,732
Subsidiaries of UPC     146,606     135,933
IDT United     14,446     –  
   
 
  Total   $ 1,403,013   $ 1,240,665
   
 

(1)
Represents UPC convertible preference shares not held by the Company, including $265.6 million held by Liberty. The minority interests' share in results in the consolidated statements of operations for the three and six months ended June 30, 2002 and 2001 includes $3.5 million, $8.1 million, $4.3 million and $9.8 million, respectively, of accrual of dividends on UPC convertible preference shares held by Liberty. The minority interests' basis in the common equity of UPC was reduced to nil in January 2001.

20


14.  Commitments and Contingencies

UPC has terminated for cause an agreement for the supply of various types of equipment in an aggregate amount of $34.2 million. UPC intends to source such equipment from alternative suppliers.

On July 4, 2001, InterComm Holdings LLC, InterComm France CVOHA ("ICF I"), InterComm France II CVOHA ("ICF II"), and Reflex Participations ("Reflex," collectively with ICF I and ICF II, the "ICF Party") served a demand for arbitration on UPC, UGC Holdings, and its subsidiaries, Belmarken Holding B.V. and UPC France Holding B.V. The claimants allege breaches of obligations allegedly owed by UPC in connection with the ICF Party's position as a minority shareholder in Médiaréseaux S.A. The claimants seek relief in the nature of immediate acceleration of an alleged right to require UPC or an affiliate to purchase all or any of the remaining shares in Médiareséaux S.A. from the ICF Party and/or compensatory damages, but in either case no less than €163.0 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 and intend to vigorously defend against claimants' allegations. UPC is vigorously defending the arbitration proceedings and has filed appropriate counter claims.

The Company is not a party to any material legal proceedings. From time to time, the Company and/or its subsidiaries may become involved in litigation relating to claims arising out of its operations in the normal course of business.

15. Stockholders' Deficit

Common Stock

The Company's Class A common stock, Class B common stock and Class C common stock have identical economic rights. They do, however, differ in the following respects:

21


Holders of the Company's Class A, Class B and Class C common stock vote as one class on all matters to be voted on by the Company's stockholders, except for the election of directors or as specified by the Delaware General Corporation Law. Shares of the Company's Class C common stock vote separately to elect four of the Company's 12 person Board of Directors until such time as the shares of Class C common stock become convertible in full into shares of Class B common stock. Holders of Class A and Class B common stock, voting together, elect the other eight Directors. After all shares of Class C common stock become convertible in full into shares of Class B common stock, all 12 of the Company's 12-person Board of Directors will be elected by the holders of shares of Class A common stock, Class B common stock and Class C common stock voting together. Shares of Class C common stock will become convertible in full into shares of Class B common stock upon the occurrence of certain events relating to the indentures of UGC Holdings and certain of its subsidiaries.

Holders of the Company's Class A, Class B and Class C common stock are entitled to receive any dividends that are declared by the Company's board of directors out of funds legally available for that purpose. In the event of the Company's liquidation, dissolution or winding up, holders of the Company's Class A, Class B and Class C common stock will be entitled to share in all assets available for distribution to holders of common stock. Holders of the Company's Class A, Class B and Class C common stock have no preemptive right under the Company's certificate of incorporation. Holders of shares of Class C common stock have purchase rights to prevent the dilution of the voting power of the Class C common stock by 10.0% or more of its voting power immediately prior to a dilutive issuance or issuances of Class B common stock. The Company's certificate of incorporation provides that if there is any dividend, subdivision, combination or reclassification of any class of common stock, a proportionate dividend, subdivision, combination or reclassification of one other class of common stock will be made at the same time.

Certain Other Rights of Holders of Class C Common Stock

Under the terms of the Company's certificate of incorporation, the Company must have the approval of the majority of directors elected by the holders of Class C common stock, before the Company can:

22


If any issuance of additional Class B common stock dilutes the voting power of the outstanding Class C common stock by 10.0% or more (on an as-converted basis), the holders of the Class C common stock will have the right to maintain their voting power by purchasing additional shares of Class C common stock at the same per share price as the Class B common stock per share issue price or by exchanging shares of Class A common stock for shares of Class C common stock on a one-for-one basis. At the option of the holder, each share of Class C common stock can be converted into one share of Class A common stock at any time or, upon the occurrence of certain events related to UGC Holdings' outstanding indebtedness, into one share of Class B common stock. If no conversion event has occurred by June 25, 2010, each share of Class C common stock may be converted into 1.645 shares of Class A common stock or, in some cases, 1.645 shares of Class B common stock, which could result in the issuance of a substantial number of additional shares. The terms of the Class C common stock are set out in the Company's restated certificate of incorporation.

Preferred Stock

The Company is authorized to issue 10.0 million shares of preferred stock. The Company's board of directors is authorized, without any further action by the stockholders, to determine the following for any unissued series of preferred stock:

23


In addition, the preferred stock could have other rights, including economic rights senior to common stock, so that the issuance of the preferred stock could adversely affect the market value of common stock. The issuance of preferred stock may also have the effect of delaying, deferring or preventing a change in control of the Company without any action by the stockholders. The Company has no current plans to issue any preferred shares.

Other Cumulative Comprehensive Income (Loss)

 
  June 30,
2002

  December 31,
2001

 
 
  (In thousands)

 
Foreign currency translation adjustments   $ (666,178 ) $ (254,410 )
Fair value of derivative assets     (13,545 )   (24,059 )
Unrealized gain (loss) on available-for-sale securities     13,071     12,562  
Cumulative effect of change in accounting principle     195     271  
   
 
 
  Total other cumulative comprehensive income (loss)   $ (666,457 ) $ (265,636 )
   
 
 

16. Basic and Diluted Net Income (Loss) Attributable to Common Stockholders

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
Basic:                          
  Net income (loss)   $ 569,570   $ (811,453 ) $ 1,682,145   $ (1,474,712 )
  Accrual of dividends on Series B convertible preferred stock     –       (464 )   (156 )   (921 )
  Accrual of dividends on Series C convertible preferred stock     –       (7,437 )   (2,397 )   (14,875 )
  Accrual of dividends on Series D convertible preferred stock     –       (5,032 )   (1,621 )   (10,063 )
   
 
 
 
 
    Basic net income (loss) attributable to common stockholders     569,570     (824,386 )   1,677,971     (1,500,571 )
   
 
 
 
 
Diluted:                          
  Accrual of dividends on Series B convertible preferred stock     –       –     (1)   156     –     (1)
  Accrual of dividends on Series C convertible preferred stock     –       –     (1)   2,397     –     (1)
  Accrual of dividends on Series D convertible preferred stock     –       –     (1)   1,621     –     (1)
   
 
 
 
 
    Diluted net income (loss) attributable to common stockholders   $ 569,570   $ (824,386 ) $ 1,682,145   $ (1,500,571 )
   
 
 
 
 

(1)
Excluded from the calculation of diluted net loss attributable to common stockholders because the effect is anti-dilutive.

24


17. Segment Information

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

25


Revenue

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (In thousands)

Europe:                        
  Triple Play Distribution                        
    The Netherlands   $ 103,075   $ 88,242   $ 197,322   $ 173,276
    Austria     47,284     37,318     88,983     76,507
    Belgium     6,041     5,376     11,749     11,003
    Czech Republic     8,140     7,407     15,347     15,320
    Norway     18,554     14,140     34,950     28,727
    Hungary     26,392     20,032     50,915     39,144
    France     23,035     21,230     45,430     40,319
    Poland     18,480     20,207     37,714     39,170
    Sweden     12,938     9,859     24,642     19,860
    Germany     11,221     10,214     21,993     21,600
    Other     9,440     6,786     17,142     13,447
   
 
 
 
      Total Triple Play Distribution     284,600     240,811     546,187     478,373
  DTH     6,647     21,073     12,971     41,083
  Content     –       974     –       1,369
  Other     10,136     (249 )   18,940     2,638
   
 
 
 
      Total Distribution     301,383     262,609     578,098     523,463
  Priority Telecom     25,679     46,003     48,441     89,514
  UPC Media     3,493     2,585     7,584     4,655
  Corporate and other     –       1,051     108     1,885
   
 
 
 
      Total Europe     330,555     312,248     634,231     619,517
   
 
 
 
Latin America:                        
  Triple Play Distribution                        
    Chile     46,954     41,997     89,647     82,689
    Brazil     970     999     1,978     2,117
    Other     923     458     1,703     1,016
   
 
 
 
      Total Triple Play Distribution     48,847     43,454     93,328     85,822
  Other     5     30     13     56
   
 
 
 
      Total Latin America     48,852     43,484     93,341     85,878
   
 
 
 
Asia/Pacific:                        
  Triple Play Distribution                        
    Australia     –       40,813     –       83,198
   
 
 
 
      Total Triple Play Distribution     –       40,813     –       83,198
  Content     –       2,636     –       5,226
  Other     (275 )   69     –       176
   
 
 
 
      Total Asia/Pacific     (275 )   43,518     –       88,600
   
 
 
 
Corporate and other     600     –       1,200     –  
   
 
 
 
      Total consolidated revenue   $ 379,732   $ 399,250   $ 728,772   $ 793,995
   
 
 
 

26


Adjusted EBITDA

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
Europe:                          
  Triple Play Distribution                          
    The Netherlands   $ 28,484   $ 6,800   $ 53,625   $ 15,482  
    Austria     18,674     10,369     32,905     21,289  
    Belgium     2,239     792     4,206     1,786  
    Czech Republic     2,152     2,911     5,570     5,083  
    Norway     4,178     1,739     7,913     3,568  
    Hungary     11,863     7,479     22,420     14,682  
    France     (3,286 )   (3,878 )   (5,226 )   (9,815 )
    Poland     4,525     1,525     7,711     187  
    Sweden     4,988     2,363     8,755     3,333  
    Germany     5,276     6,810     11,006     12,377  
    Other     3,304     1,972     5,902     4,296  
   
 
 
 
 
      Total Triple Play Distribution     82,397     38,882     154,787     72,268  
  DTH     230     (1,860 )   690     (6,951 )
  Content     –       (9,112 )   –       (20,332 )
  Other     5,402     4,097     9,625     4,525  
   
 
 
 
 
      Total Distribution     88,029     32,007     165,102     49,510  
  Priority Telecom     (1,441 )   (22,821 )   (5,542 )   (42,323 )
  UPC Media     (235 )   (28,946 )   (5,125 )   (61,715 )
  Corporate and other     (23,300 )   (26,850 )   (42,412 )   (47,207 )
   
 
 
 
 
      Total Europe     63,053     (46,610 )   112,023     (101,735 )
   
 
 
 
 
Latin America:                          
  Triple Play Distribution                          
    Chile     11,969     6,500     19,956     12,164  
    Brazil     (89 )   (77 )   (219 )   (223 )
    Other     (328 )   (348 )   (795 )   (483 )
   
 
 
 
 
      Total Triple Play Distribution     11,552     6,075     18,942     11,458  
  Other     (798 )   (2,518 )   (1,548 )   (3,552 )
   
 
 
 
 
      Total Latin America     10,754     3,557     17,394     7,906  
   
 
 
 
 
Asia/Pacific:                          
  Triple Play Distribution                          
    Australia     –       (10,401 )   –       (19,977 )
    Other     –       –       –       –    
   
 
 
 
 
      Total Triple Play Distribution     –       (10,401 )   –       (19,977 )
  Content     –       (2,438 )   –       (3,974 )
  Other     (320 )   (346 )   (170 )   (787 )
   
 
 
 
 
      Total Asia/Pacific     (320 )   (13,185 )   (170 )   (24,738 )
   
 
 
 
 
Corporate and other     (3,115 )   (3,529 )   (4,171 )   (12,290 )
   
 
 
 
 
      Total consolidated Adjusted EBITDA   $ 70,372   $ (59,767 ) $ 125,076   $ (130,857 )
   
 
 
 
 

27


Consolidated Adjusted EBITDA reconciles to the condensed consolidated statement of operations as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
Operating loss   $ (130,166 ) $ (592,841 ) $ (252,813 ) $ (938,267 )
Depreciation and amortization     172,453     277,132     337,637     548,246  
Stock-based compensation (1)     8,648     (6,090 )   17,357     (2,868 )
Impairment and restructuring charges     19,437     262,032     22,895     262,032  
   
 
 
 
 
  Consolidated Adjusted EBITDA   $ 70,372   $ (59,767 ) $ 125,076   $ (130,857 )
   
 
 
 
 

(1)
Stock-based compensation for the three months ended June 30, 2002 and 2001 and the six months ended June 30, 2002 and 2001 includes charges associated with fixed, or non-cash, stock option plans totaling $9.9 million, $7.6 million, $18.6 million and $17.8 million, respectively, and includes charges (credits) associated with phantom, or cash-based, stock option plans totaling $(1.3) million, $(13.7) million, $(1.2) million and $(20.7) million, respectively.

Triple Play Distribution Revenue

 
  Three Months Ended June 30, 2002
 
  Video
  Voice
  Internet
  Total
 
  (In thousands)

Europe:                        
  The Netherlands   $ 60,847   $ 14,099   $ 28,129   $ 103,075
  Austria     20,756     11,005     15,523     47,284
  Belgium     3,669     –       2,372     6,041
  Czech Republic     7,006     185     949     8,140
  Norway     13,027     2,339     3,188     18,554
  Hungary     18,107     6,265     2,020     26,392
  France     14,762     6,415     1,858     23,035
  Poland     17,515     –       965     18,480
  Sweden     8,840     –       4,098     12,938
  Germany     11,122     12     87     11,221
  Other     7,968     –       1,472     9,440
   
 
 
 
    Total Europe     183,619     40,320     60,661     284,600
   
 
 
 
Latin America:                        
  Chile     28,552     15,652     2,750     46,954
  Brazil     970     –       –       970
  Other     833     –       90     923
   
 
 
 
    Total Latin America     30,355     15,652     2,840     48,847
   
 
 
 
    Total consolidated Triple Play Distribution revenue   $ 213,974   $ 55,972   $ 63,501   $ 333,447
   
 
 
 

28


 
  Six Months Ended June 30, 2002
 
  Video
  Voice
  Internet
  Total
 
  (In thousands)

Europe:                        
  The Netherlands   $ 118,553   $ 25,536   $ 53,233   $ 197,322
  Austria     39,805     20,033     29,145     88,983
  Belgium     7,143     –       4,606     11,749
  Czech Republic     13,377     369     1,601     15,347
  Norway     24,666     4,250     6,034     34,950
  Hungary     35,168     12,110     3,637     50,915
  France     28,957     12,405     4,068     45,430
  Poland     35,872     –       1,842     37,714
  Sweden     16,950     –       7,692     24,642
  Germany     21,842     23     128     21,993
  Other     15,825     –       1,317     17,142
   
 
 
 
    Total Europe     358,158     74,726     113,303     546,187
   
 
 
 
Latin America:                        
Chile     55,013     29,945     4,689     89,647
Brazil     1,978     –       –       1,978
Other     1,540     –       163     1,703
   
 
 
 
    Total Latin America     58,531     29,945     4,852     93,328
   
 
 
 
    Total consolidated Triple Play Distribution revenue   $ 416,689   $ 104,671   $ 118,155   $ 639,515
   
 
 
 

29


Triple Play Distribution Revenue

 
  Three Months Ended June 30, 2001
 
  Video
  Voice
  Internet
  Total
 
  (In thousands)

Europe:                        
  The Netherlands   $ 55,272   $ 15,602   $ 17,368   $ 88,242
  Austria     18,370     8,345     10,603     37,318
  Belgium     3,352     –       2,024     5,376
  Czech Republic     6,959     183     265     7,407
  Norway     10,813     1,405     1,922     14,140
  Hungary     13,486     5,863     683     20,032
  France     13,989     5,464     1,777     21,230
  Poland     19,880     –       327     20,207
  Sweden     7,575     –       2,284     9,859
  Germany     10,196     9     9     10,214
  Other     6,786     –       –       6,786
   
 
 
 
    Total Europe     166,678     36,871     37,262     240,811
   
 
 
 
Latin America:                        
  Chile     27,543     13,060     1,394     41,997
  Brazil     999     –       –       999
  Other     458     –       –       458
   
 
 
 
    Total Latin America     29,000     13,060     1,394     43,454
   
 
 
 
Asia/Pacific:                        
  Australia     37,469     751     2,593     40,813
  Other     –       –       –       –  
   
 
 
 
    Total Asia/Pacific     37,469     751     2,593     40,813
   
 
 
 
    Total consolidated Triple Play Distribution revenue   $ 233,147   $ 50,682   $ 41,249   $ 325,078
   
 
 
 

30


 
  Six Months Ended June 30, 2001
 
  Video
  Voice
  Internet
  Total
 
  (In thousands)

Europe:                        
  The Netherlands   $ 113,318   $ 28,671   $ 31,287   $ 173,276
  Austria     37,578     18,129     20,800     76,507
  Belgium     6,949     –       4,054     11,003
  Czech Republic     14,477     381     462     15,320
  Norway     22,194     2,929     3,604     28,727
  Hungary     26,813     11,209     1,122     39,144
  France     27,703     9,504     3,112     40,319
  Poland     38,638     –       532     39,170
  Sweden     15,351     –       4,509     19,860
  Germany     21,558     19     23     21,600
  Other     13,447     –       –       13,447
   
 
 
 
    Total Europe     338,026     70,842     69,505     478,373
   
 
 
 
Latin America:                        
  Chile     55,598     24,773     2,318     82,689
  Brazil     2,117     –       –       2,117
  Other     1,016     –       –       1,016
   
 
 
 
    Total Latin America     58,731     24,773     2,318     85,822
   
 
 
 
Asia/Pacific:                        
  Australia     75,948     1,624     5,626     83,198
  Other     –       –       –       –  
   
 
 
 
    Total Asia/Pacific     75,948     1,624     5,626     83,198
   
 
 
 
    Total consolidated Triple Play Distribution revenue   $ 472,705   $ 97,239   $ 77,449   $ 647,393
   
 
 
 

31


Revenue by Geographical Area

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (In thousands)

Europe:                        
  The Netherlands   $ 133,939   $ 106,293   $ 254,527   $ 213,248
  Austria     50,146     41,438     95,241     83,449
  Belgium     6,041     5,449     11,750     11,623
  Czech Republic     11,148     10,014     21,005     19,953
  Norway     22,721     17,156     42,834     34,005
  Hungary     30,034     23,492     58,036     45,723
  France     23,153     22,559     45,746     42,656
  Poland     19,918     37,530     40,357     73,088
  Sweden     13,158     10,164     25,119     20,291
  Germany     11,897     13,004     22,850     26,241
  Other     8,400     25,149     16,766     49,240
   
 
 
 
    Total Europe     330,555     312,248     634,231     619,517
   
 
 
 
Latin America:                        
  Chile     46,954     41,997     89,647     82,689
  Brazil     970     999     1,978     2,117
  Other     928     488     1,716     1,072
   
 
 
 
    Total Latin America     48,852     43,484     93,341     85,878
   
 
 
 
Asia/Pacific:                        
  Australia     –       43,518     –       88,600
  Other     (275 )   –       –        
   
 
 
 
    Total Asia/Pacific     (275 )   43,518     –       88,600
   
 
 
 
Corporate and other     600     –       1,200     –  
   
 
 
 
    Total consolidated revenue   $ 379,732   $ 399,250     728,772     793,995
   
 
 
 

32


Total Assets

 
  June 30,
2002

  December 31,
2001

 
  (In thousands)

Europe:            
  The Netherlands   $ 3,828,442   $ 4,151,306
  Poland     619,435     689,208
  Germany     168,185     144,517
  France     810,193     765,964
  Austria     444,695     410,534
  Sweden     416,494     372,368
  Hungary     383,245     351,825
  Norway     309,153     302,006
  Czech Republic     254,036     221,149
  Belgium     46,617     43,158
  Other     111,287     94,935
   
 
    Total Europe     7,391,782     7,546,970
   
 
Latin America:            
  Chile     538,658     544,937
  Brazil     16,394     20,055
  Other     47,859     92,317
   
 
    Total Latin America     602,911     657,309
   
 
Asia/Pacific:            
  Australia     –       221,796
  New Zealand     –       –  
  Other     20,331     27,703
   
 
    Total Asia/Pacific     20,331     249,499
   
 
Corporate and other     239,231     584,862
   
 
    Total consolidated assets   $ 8,254,255   $ 9,038,640
   
 

33


18.  Impairment and Restructuring Charges

 
  Employee
Severance and
Termination
Costs

  Office
Closures

  Programming
and Lease
Contract
Termination
Costs

  Asset Disposal
Losses and
Other Costs

  Total Impairment
and Restructuring
Charges

 
 
  (In thousands)

 
Impairment and restructuring liability as of December 31, 2001   $ 33,565   $ 9,956   $ 91,207   $ 14,504   $ 149,232  
Impairment and restructuring charges during 2002     3,458     –       –       19,437     22,895  
Cash paid during 2002     (19,616 )   (2,387 )   (19,958 )   (14,846 )   (56,807 )
Non-cash release of restructuring liability     (827 )   (125 )   (21,021 )   –       (21,973 )
Cumulative translation adjustment     3,984     1,051     9,635     2,949     17,619  
   
 
 
 
 
 
Impairment and restructuring liability as of June 30, 2002   $ 20,564   $ 8,495   $ 59,863   $ 22,044   $ 110,966  
   
 
 
 
 
 
Short-term portion of impairment and restructuring liability   $ 20,564   $ 1,714   $ 6,671   $ 20,560   $ 49,509  
Long-term portion of impairment and restructuring liability (1)         6,781     53,192     1,484     61,457  
   
 
 
 
 
 
  Total   $ 20,564   $ 8,495   $ 59,863   $ 22,044   $ 110,966  
   
 
 
 
 
 

(1)
The long-term portion of impairment and restructuring liability relates to costs that as a result of the terms of the original agreements will not be paid within one year.

UPC implemented a restructuring plan during the second half of 2001 to both lower operating expenses and strengthen its competitive and financial position. This included eliminating certain employee positions, reducing office space and related overhead expenses, recognizing losses related to excess capacity under certain contracts and canceling certain programming contracts. UPC also incurred certain restructuring charges during the three and six months ended June 30, 2002 related to employee severance and termination costs. These costs included salaries, benefits, outplacement and other costs related to employee terminations. The total workforce reduction was effected through a combination of involuntary terminations and a reorganization of operations to permanently eliminate open positions resulting from normal employee attrition. Salaries and benefits earned during the transition period have not been included in the restructuring charge. In addition to the reduction of employee positions, UPC's restructuring plan included reductions in office space and related overhead expenses. Office closure and consolidation costs are the estimated costs to close specifically identified facilities, costs associated with obtaining subleases, lease termination costs and other related costs.

34



The following table summarizes the number of employees scheduled for termination in connection with UPC's restructuring (by division and by function):

 
   
   
  Number of Employees
Scheduled for Termination as of

 
   
   
  June 30,
2002

  December 31,
2001

Division:                
  UPC Distribution   243   873
  Priority Telecom   4   23
  UPC Media   13   86
  Corporate   2   4
           
 
    Total   262   986
           
 

Function:

 

 

 

 

 

 

 

 
  Programming   –     1
  Network Operations   155   498
  Customer Operations   29   112
  Customer Care   50   92
  Billing and Collection   –     4
  Customer Acquisition and Marketing   7   164
  Administration   21   115
           
 
    Total   262   986
           
 

19.  Extraordinary Gain on Early Retirement of Debt

        As part of United's recapitalization, United purchased certain debt securities of its subsidiaries at fair value, including the UPC Bonds, Belmarken Notes and UGC Holdings 1998 Notes (directly from Liberty and indirectly through the purchase of Liberty's interest in IDT United). The estimated fair value of these financial assets (with the exception of the Belmarken Notes) was significantly less than the accreted value of those debt securities as reflected in UGC Holdings' historical financial statements. For consolidated financial reporting purposes United recognized an extraordinary gain of approximately $1.647 billion (net of deferred income tax) from the effective retirement of such debt outstanding at that time equal to the excess of the then accreted value of such debt over its cost (see Note 2).

In January 2002, UPC recognized a gain of approximately $109.2 million from the restructuring and cancellation of capital lease obligations associated with excess capacity of certain Priority Telecom vendor contracts.

In June 2002, UPC recognized a gain of approximately $342.3 million from the delivery by certain banks of approximately $399.2 million in aggregate principal amount of UPC's senior notes and senior discount notes as settlement of certain interest rate/cross currency derivative contracts between the banks and UPC (see Note 12).

35



20.  Related Party Transactions

Notes Receivable, Related Parties

 
  June 30,
2002

  December 31,
2001

 
  (In thousands)

Liberty   $ –     $ 302,708
Telecable     8,190     7,952
Other     –       244
   
 
  Total   $ 8,190   $ 310,904
   
 

The Company executed certain promissory notes with Liberty, which were assumed by United on January 30, 2002 in connection with the merger transaction.

Related Party Receivables

Related party receivables (totaling approximately $32.4 million as of June 30, 2002) include expenses paid on behalf of affiliates as well as loans by UPC to certain employees for the exercise of the employees' stock options, taxes on options exercised, or both. These UPC loans totaling $3.7 million were fully reserved for as of December 31, 2001, and were subsequently waived as of May 28, 2002.

Other Notes Receivable

Notes receivable from officers and directors, totaling approximately $18.1 million are generally payable on demand and in any event no later than November 22, 2002, accrue interest at 90-day London Interbank Offer Rate ("LIBOR") plus 2.5% or 3.5%, as determined in accordance with the terms of each note, and are secured by certain stock options and shares owned by such individuals. Such amounts have been recorded as a reduction to stockholders' equity, as such transactions are accounted for as variable option awards based on the substance of such transactions.

Merger Transaction Loans

When UGC Holdings issued shares of its Series E preferred stock in connection with the merger transaction, the Principal Founders delivered full-recourse promissory notes to UGC Holdings in the aggregate amount of $3.0 million in partial payment of their subscriptions for the Series E preferred stock. The loans evidenced by these promissory notes bear interest at 6.5% per annum and are due and payable on demand on or after January 30, 2003, or on January 30, 2007 if no demand has been made by then. Such amounts have been reflected as a reduction of stockholders' equity, as such transactions are accounted for as variable option awards based on the substance of such transactions.

21.  Subsequent Events

Transfer of German shares

Until July 30, 2002 UPC had effective ownership of 51.0% of EWT/TSS Group through its 51.0% owned subsidiary, UPC Germany. Pursuant to the agreement by which UPC acquired EWT/TSS Group, UPC was required to fulfill a contribution obligation no later than March 2003, by contribution of certain assets

36



amounting to approximately €358.8 ($354.5) million. If UPC failed to make such contribution by such date or in certain circumstances such as a material default by UPC under its financing agreements, the 49.0% shareholders of UPC Germany could call for approximately 22.0% of the ownership interest in exchange for the Euro equivalent of 1 Deutsche Mark. On March 5, 2002, UPC received notice of the holders' notice of exercise. On July 30, 2002, UPC completed the transfer of 22.3% of UPC Germany to the 49.0% shareholders in return for the cancellation of the contribution obligation. UPC now owns 28.7% of UPC Germany, with the former 49.0% shareholders owning the remaining 71.3%. UPC Germany will be governed by a newly agreed shareholders' agreement and will be deconsolidated by UPC effective August 1, 2002.

Tara Bankruptcy Filing

Our indirect subsidiary Tara, a broadcast channel that supplies Irish programming to the United Kingdom, filed for protection from its creditors under Irish law on March 1, 2002. The Court appointed an "Interim Examiner" and, after unsuccessfully negotiating with its creditors, the Interim Examiner recommended and the Court elected to place Tara into liquidation. The date expected for the liquidation to be finalized by the Irish Court is second quarter 2003.

37



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

Forward Looking Statements

The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. These forward-looking statements may include and be identified by, among other things, statements concerning our and our subsidiaries' and affiliates' plans, objectives and future economic prospects, expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These forward-looking statements involve known and unknown risks, uncertainties and other factors which 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. These factors include, among other things, changes in television viewing preferences and habits by our subscribers and potential subscribers, their acceptance of new technology, programming alternatives and new video services we may offer. They also include the timing, cost and effectiveness of technological developments, competitive factors, 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 our planned acquisitions, our ability to successfully close proposed transactions, risks inherent in investment and operations in foreign countries, changes in government regulation and changes in the nature of key strategic relationships with joint ventures. Certain of our subsidiaries and affiliates are in breach of covenants with respect to their indebtedness, have filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code and/or are planning to restructure their capital structure. The outcome of the breaches of covenants, the Chapter 11 bankruptcy proceedings and the planned restructuring is uncertain and subject to many factors outside of our control, including whether creditors accept such proposed restructuring. These forward-looking statements apply only as of the time of this report, and we have no obligation or plans to provide updates or revisions to these forward-looking statements or any other changes in events, conditions or circumstances on which these statements are based.

Merger Transaction/Reorganization

On May 14, 2002, Messrs. Gene W. Schneider, Mark L. Schneider, Albert M. Carollo, Sr. and Curtis W. Rochelle, or the "Principal Founders", transferred all of the shares of UGC Holdings common stock held by them to us in exchange for an aggregate of 600,000 shares of our Class A common stock pursuant to an exchange agreement dated May 14, 2002, among such individuals and us. This exchange agreement superseded the exchange agreement entered into at the time of the merger transaction. As a result of this exchange, UGC Holdings is now our wholly-owned subsidiary, and we are entitled to elect the entire board of directors of UGC Holdings. This transaction was the final step in the recapitalization of UGC Holdings. We accounted for the merger transaction on January 30, 2002 as a reorganization of entities under common ownership at historical cost, similar to a pooling of interest. Under reorganization accounting, we have consolidated the financial position and results of operations of UGC Holdings as if the merger transaction had been consummated at the inception of UGC Holdings.

Principles of Consolidation

For the six months ended June 30, 2002 and 2001, we consolidated the results of operations from UPC, our systems in Australia (2001), Chile, Peru, Brazil (Fortaleza) and Uruguay. Systems that are not consolidated include our interests in certain systems in UPC, Brazil (Jundiai), Mexico, Australia (2002), New Zealand, the Philippines and China and our interests in companies that provide video content to the Spanish,

38



Australian and Latin American markets. We account for these unconsolidated systems using the equity method of accounting.

Risks, Uncertainties and Liquidity

The report of our previous independent public accountant, Arthur Andersen LLP, on our consolidated financial statements as of and for the year ended December 31, 2001, includes a paragraph that states, in part, "...the Company has suffered recurring losses from operations, is currently in default under certain of its significant bank credit facilities, senior notes and senior discount note agreements, which has resulted in a significant net working capital deficiency that raises substantial doubt about its ability to continue as a going concern." As of June 30, 2002, we believe our corporate level working capital is sufficient to fund our corporate level commitments over the next year. For further discussion see "Liquidity and Capital Resources" included elsewhere herein.

Material Trends, Events and Uncertainties

The broadband communications industry is subject to rapid and significant changes in technology and the effect of technological changes on our businesses cannot be predicted. Our core offerings may become outdated due to technological breakthroughs rendering our products out of date. In addition, our business plan contemplates the introduction of services using new technologies. Our investments in these new services may prove premature and we may not realize anticipated returns on these new products. The cost of implementation for emerging and future technologies could be significant, and our ability to fund such implementation may depend on our ability to obtain additional financing. We cannot be certain that we would be successful in obtaining any additional financing required.

Our principal business activities are regulated and supervised by various governmental bodies. Changes in laws, regulations or governmental policy or the interpretations of those laws or regulations affecting our activities and those of our competitors, such as licensing requirements, changes in price regulation and deregulation of interconnection arrangements, could have a material adverse effect on us. We are also subject to regulatory initiatives of the European Commission. Changes in European Union ("EU") Directives may reduce our range of programming and increase the costs of purchasing television programming or require us to provide access to our cable network infrastructure to other service providers, which could have a material adverse effect on us.

The provision of Internet services has, to date, not been materially restricted by regulation. The legal and regulatory framework applicable to the Internet is uncertain and may change. For example, existing pressure to liberalize high-speed Internet access in The Netherlands may become stronger in the future. New and existing laws may cover issues like: value-added sales or other taxes; user privacy; pricing controls; characteristics and quality of products and services; consumer protection; cross-border commerce; libel and defamation; electronic signatures; transmission security; copyright, trademark and patent infringement; and other claims based on the nature and content of Internet materials. Any new laws and regulations or the uncertainty associated with their enactment could increase our costs and hinder the development of our business and limit the growth of our revenues.

A significant component of our strategy to increase our average revenue per unit is to successfully market broadband products to our existing residential client base. Broadband usage by residential customers is in its infancy. Notwithstanding, we believe that our triple play offering of telephony, broadband access to the Internet and digital television will prove attractive to our existing customer base and allow us to increase our average revenue per user. Notwithstanding, we face significant competition in these markets, through digital satellite and digital terrestrial television and through alternative Internet access media, such as digital subscriber lines offered by incumbent broadband communications operators. Some of our competitors have substantially greater financial and technical resources than we do. If we are unable to

39



charge prices for broadband services that are anticipated in our business plan in response to competition or if our competition delivers a better product to our customers, our average revenue per unit and our results of operations will be adversely affected.

Continued weak global economic conditions could adversely impact our revenues and growth rate. During the past year, the information technology market weakened, first in the United States, then in Europe and Asia. Continued softness in these markets, particularly in the broadband communications and consumer sectors, and customers' uncertainty about the extent of the global economic downturn could result in lower demand for our products and services. We have observed effects of the global economic downturn in many areas of our business. The economic downturn has led, in part, to restructuring actions and contributed to write-downs to reflect the impairment of certain investments in our investment portfolio.

Despite the regulatory and economic factors discussed above, we believe that there is and will continue to be significant growth in the demand for Internet access, voice and video services in the residential and business marketplace. The increase in computing power, number of computers accessing the Internet, and connection speeds of computers are driving tremendous increases in communications uses for the Internet and data services. Prices for mobile and long distance voice services have decreased, resulting in increased demand for these services. In addition, cost savings and network efficiencies are driving demand for more robust voice and data network equipment. However, the business marketplace for communications products is highly competitive. The number and size of customers, the geographic scope and product platform preferences of our target customer base dictates the competition we face. The market for wireless mobile and data communications services and product sales is highly competitive on a national and international basis. The level of competition intensifies, while the number of qualified competitors diminishes as the level of technological and design expertise rises and product distribution rights narrow.

Our cable communications systems compete with a number of different sources which provide news, information and entertainment programming to consumers, including local television broadcast stations that provide off-air programming which can be received using a roof-top antenna and television set, program distributors that transmit satellite signals containing video programming, data and other information to receiving dishes of varying sizes located on the subscriber's premises, other operators who build and operate communications systems in the same communities that we serve, interactive online computer services, and home video products. In order to compete effectively, we strive to provide, at a reasonable price to subscribers, new products and services, superior technical performance, superior customer service, and a greater variety of video programming.

DTH service can be received throughout many of our service areas through the installation of a small roof top or side-mounted antenna. DTH systems use video compression technology to increase channel capacity and digital technology to improve the quality and quantity of the signals transmitted to their subscribers. Our digital cable service is competitive with the programming, channel capacity and the digital quality of signals delivered to subscribers by DTH systems.

DTH providers are also developing ways to bring advanced communications services to their customers. They are currently offering satellite-delivered high-speed Internet access services with a telephone return path and are beginning to provide true two-way interactivity. We believe that our Internet access service is superior to the service currently offered by DTH providers because our service does not rely on a telephone line. In order for DTH providers to offer true two-way high-speed Internet access services, additional equipment is required and their service is typically offered at higher prices for equivalent services.

40



Critical Accounting Policies

Recoverability of Intangible Assets

We adopted SFAS 142 effective January 1, 2002. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are tested for impairment on an annual basis and whenever indicators of impairment arise. In addition, goodwill on equity method investments is no longer amortized, but tested for impairment in accordance with APB 18. The goodwill impairment test, which is based on fair value, is performed on a reporting unit level. All recognized intangible assets that are deemed not to have an indefinite life are amortized over their estimated useful lives. SFAS 142 requires a two-step process to determine whether goodwill is impaired. Under step one, the fair value of each of our reporting units is compared with their respective carrying amounts, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss. As of June 30, 2002, the first step of the goodwill impairment test under SFAS 142 was completed, and the carrying value of certain reporting units exceeded the fair value. We are currently performing the second step of the test under SFAS 142 to quantify how much of the total goodwill will be impaired. It is possible that a substantial cumulative effect adjustment may be required as a result of this process. The determination of the potential impairment adjustment will be completed by the end of 2002. As of June 30, 2002, net goodwill of approximately $3.0 billion is included in the accompanying consolidated balance sheet.

41


Summary Operating Data

Grand Total Triple Play Revenue Generating Units ("RGUs")

 
  June 30, 2002
Grand Total Aggregate RGUs   13,019,600
   
Grand Total Consolidated RGUs (1)   9,250,100
   
Grand Total Proportionate RGUs (2)   5,968,800
   

Operating System Data – Video

 
  June 30, 2002
 
  United
Ownership

  System
Ownership

  Homes in
Service
Area

  Homes
Passed by
Network

  Two-way
Homes
Passed(3)

  Analog
Cable
Subscribers

  Digital
Cable
Subscribers

  Digital
DTH
Subscribers

  Total
Subscribers

UPC:                                    
  The Netherlands   53.1%   100.0%   2,695,600   2,563,200   2,285,000   2,335,500   61,300   –     2,396,800
  Germany (4)   13.3-27.1%   25.0-51.0%   2,765,800   2,667,700   471,500   1,882,600   12,100   –     1,894,700
  Poland   13.3-53.1%   25.0-100.0%   1,865,200   1,865,200   184,600   998,000   –     585,500   1,583,500
  Hungary   52.5-53.1%   98.9-100.0%   1,001,100   952,800   481,800   668,500   –     60,800   729,300
  Austria   50.4%   95.0%   1,081,400   923,300   920,100   497,200   13,100   –     510,300
  Israel (5)   24.7%   46.6%   670,300   667,400   425,000   403,000   180,200   –     583,200
  Czech Republic   53.0-53.1%   99.9-100.0%   912,900   681,400   238,300   305,600   –     43,200   348,800
  France   48.9%   92.0%   2,656,600   1,335,700   640,600   455,700   9,600   –     465,300
  Norway   53.1%   100.0%   529,000   479,900   169,500   333,900   31,200   –     365,100
  Slovak Republic   53.1%   100.0%   517,800   377,900   17,300   299,000   –     9,600   308,600
  Romania   27.1-53.1%   51.0-100.0%   659,600   458,400   –     322,200   –     –     322,200
  Sweden   53.1%   100.0%   770,000   421,600   253,500   269,100   10,400   –     279,500
  Belgium   53.1%   100.0%   530,000   152,600   152,600   127,600   –     –     127,600
  Malta   26.6%   50.0%   186,100   186,100   82,100   92,800   –     –     92,800
           
 
 
 
 
 
 
    Total           16,841,400   13,733,200   6,321,900   8,990,700   317,900   699,100   10,007,700
           
 
 
 
 
 
 
Latin America:                                    
  Chile   100.0%   100.0%   2,350,000   1,690,500   922,100   448,000   –     8,500   456,500
  Mexico   90.3%   90.3%   395,300   290,500   118,800   78,800   –     –     78,800
  Brazil (Jundiai)   49.0%   49.0%   70,200   67,900   –     15,800   –     –     15,800
  Brazil (TV Show Brasil)   100.0%   100.0%   463,000   390,000   –     8,600   8,500   –     17,100
  Peru   100.0%   100.0%   140,000   65,700   22,100   11,600   –     –     11,600
           
 
 
 
 
 
 
    Total           3,418,500   2,504,600   1,063,000   562,800   8,500   8,500   579,800
           
 
 
 
 
 
 
Asia/Pacific:                                    
  Australia   55.8%   100.0%   2,085,000   2,083,100   –     41,600   –     375,600   417,200
  Philippines   19.6%   49.0%   600,000   585,900   29,500   165,300   –     –     165,300
  New Zealand   23.2%   41.6%   179,100   152,900   152,900   31,400   –     –     31,400
           
 
 
 
 
 
 
    Total           2,864,100   2,821,900   182,400   238,300   –     375,600   613,900
           
 
 
 
 
 
 
Aggregate Video   23,124,000   19,059,700   7,567,300   9,791,800   326,400   1,083,200   11,201,400
           
 
 
 
 
 
 
Consolidated Video (1)   16,955,400   13,060,900   6,309,100   7,662,200   134,100   122,100   7,918,400
           
 
 
 
 
 
 
Proportionate Video (2)   12,217,800   9,752,700   4,070,700   4,536,700   120,700   356,100   5,013,500
           
 
 
 
 
 
 

(1)
Summation of the operating system data for those systems that we consolidate in our financial statements due to majority ownership and control.
(2)
Summation of the operating system data multiplied by our ownership percentage.
(3)
Two-way homes passed represents the number of homes passed 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)
Includes 326,000 subscribers in The Netherlands. PrimaCom statistics are as of March 31, 2002.
(5)
Israel statistics are as of March 31, 2002.

42


Operating System Data – Voice

 
  June 30, 2002
 
   
   
   
  Subscribers
  Lines
 
  United
Ownership

  System
Ownership

  Homes
Serviceable

 
  Residential
  Business
  Residential
  Business
UPC:                            
  The Netherlands   53.1%   100.0%   1,539,100   175,900   –     214,900   –  
  Austria   50.4%   95.0%   899,700   143,800   –     145,000   –  
  Hungary   52.5-53.1%   98.9-100.0%   84,900   65,400   –     71,500   –  
  France   48.9%   92.0%   640,600   56,400   –     58,200   –  
  Norway   53.1%   100.0%   127,200   20,000   –     22,100   –  
  Czech Republic   53.0-53.1%   99.9-100.0%   17,700   3,200   –     3,200   –  
  Germany   27.1%   51.0%   1,300   100   –     100   –  
  Priority Telecom (3)   42.0%   79.1%   7,900   7,900   –     7,900   –  
           
 
 
 
 
    Total           3,318,400   472,700   –     522,900   –  
           
 
 
 
 
VTR:                            
  Chile   100.0%   100.0%   922,100   206,400   2,500   231,100   4,200
           
 
 
 
 
Austar United:                            
  New Zealand (4)   23.2%   41.6%   152,900   172,200   43,600   55,300   67,800
  Australia   55.8%   100.0%   –     19,000   –     19,000   –  
           
 
 
 
 
    Total           152,900   191,200   43,600   74,300   67,800
           
 
 
 
 
Aggregate Voice   4,393,400   870,300   46,100   828,300   72,000
           
 
 
 
 
Consolidated Voice (1)   4,240,500   679,100   2,500   754,000   4,200
           
 
 
 
 
Proportionate Voice (2)   2,667,400   500,800   12,600   524,800   19,900
           
 
 
 
 

(1)
Summation of the operating system data for those systems that we consolidate in our financial statements due to majority ownership and control.
(2)
Summation of the operating system data multiplied by our ownership percentage.
(3)
Priority Telecom statistics are as of March 31, 2002.
(4)
Subscribers include the provision for long distance services.

43


Operating System Data – Internet

 
  June 30, 2002
 
  United
Ownership

  System
Ownership

  Homes
Serviceable

  Subscribers
UPC:                
  The Netherlands   53.1 % 100.0 % 2,285,000   274,300
  Austria   50.4 % 95.0 % 920,100   157,800
  Sweden   53.1 % 100.0 % 253,500   52,600
  Germany   13.3-27.1 % 25.0-51.0 % 471,500   41,000
  Norway   53.1 % 100.0 % 169,500   26,300
  Belgium   53.1 % 100.0 % 152,600   22,300
  France   48.9 % 92.0 % 640,600   19,700
  Hungary   52.5-53.1 % 98.9-100.0 % 384,800   19,200
  Czech Republic   53.0-53.1 % 99.9-100.0 % 238,300   10,000
  Poland   53.1 % 100.0 % 184,600   10,700
  Malta   26.6 % 50.0 % 82,100   8,500
  chello broadband subscribers outside of UPC's network   53.1 % 100.0 % 10,600   10,600
           
 
      Total           5,793,200   653,000
           
 
Latin America:                
  Chile   100.0 % 100.0 % 901,300   43,000
  Mexico   90.3 % 90.3 % 118,800   3,200
  Uruguay   100.0 % 100.0 % 5,200   400
  Peru   100.0 % 100.0 % 22,100   1,300
           
 
      Total           1,047,400   47,900
           
 
Austar United:                
  Australia   55.8 % 100.0 % –     74,400
  New Zealand   23.2 % 41.6 % 152,900   126,500
           
 
      Total           152,900   200,900
           
 
Aggregate Internet   6,993,500   901,800
           
 
Consolidated Internet (1)   6,189,800   650,100
           
 
Proportionate Internet (2)   3,889,000   441,900
           
 

(1)
Summation of the operating system data for those systems that we consolidate in our financial statements due to majority ownership and control.
(2)
Summation of the operating system data multiplied by our ownership percentage.

44


Operating System Data – Content

 
  June 30, 2002
 
  United
Ownership

  System
Ownership

  Subscribers
UPC:            
  UPCtv   53.1 % 100.0 % 11,468,000
  Spain/Portugal   26.6 % 50.0 % 9,326,000
  MTV Joint Venture   26.6 % 50.0 % 3,116,000
           
      Total           23,910,000
           
MGM Networks LA:            
  Latin America   50.0 % 50.0 % 14,927,500
           
Austar United:            
  Australia   27.9 % 50.0 % 7,041,600
           
Aggregate Content   45,879,100
           
Consolidated Content (1)   11,468,000
           
Proportionate Content (2)   18,821,300
           

(1)
Summation of the operating system data for those systems that we consolidate in our financial statements due to majority ownership and control.
(2)
Summation of the operating system data multiplied by our ownership percentage.

45


Grand Total Triple Play RGUs

 
  June 30, 2001
Grand Total Aggregate RGUs   12,013,900
   
Grand Total Consolidated RGUs (1)   9,753,000
   
Grand Total Proportionate RGUs (2)   5,870,200
   

Operating System Data – Video

 
  June 30, 2001
 
  United
Ownership

  System Ownership
  Homes in Service Area
  Homes Passed by Network
  Two-way Homes Passed (3)
  Analog Cable
Subscribers

  Digital Cable
Subscribers

  Digital DTH
Subscribers

  Total Subscribers
UPC:                                    
  The Netherlands   53.3 % 100.0 % 2,628,300   2,512,200   2,086,200   2,328,400   33,500   –     2,361,900
  Germany (4)   13.3-27.2 % 25.0-51.0 % 2,636,500   2,636,500   422,000   1,893,800   6,000   –     1,899,800
  Poland   53.3 % 100.0 % 1,950,000   1,851,800   181,000   1,022,800   –     385,800   1,408,600
  Hungary   52.7-53.3 % 98.9-100.0 % 1,001,100   900,400   315,500   643,800   –     45,600   689,400
  Austria   50.6 % 95.0 % 1,081,400   922,700   919,400   493,000   –     –     493,000
  Israel   24.8 % 46.6 % 660,000   652,100   405,000   434,300   –     –     434,300
  Czech Republic   53.3 % 100.0 % 913,000   786,400   179,300   362,400   –     41,300   403,700
  France   49.0 % 92.0 % 2,653,200   1,267,900   485,400   417,600   8,600   –     426,200
  Norway   53.3 % 100.0 % 529,000   475,400   150,200   331,500   –     –     331,500
  Slovak Republic   50.6-53.3 % 95.0-100.0 % 517,800   371,700   17,300   312,800   –     13,600   326,400
  Romania   27.2-37.3 % 51.0-70.0 % 648,500   450,700   –     288,800   –     –     288,800
  Sweden   53.3 % 100.0 % 770,000   421,600   241,700   258,600   –     –     258,600
  Belgium   53.3 % 100.0 % 530,000   152,100   152,100   123,600   –     –     123,600
  Malta   26.7 % 50.0 % 184,500   181,000   35,000   86,200   –     –     86,200
           
 
 
 
 
 
 
      Total           16,703,300   13,582,500   5,590,100   8,997,600   48,100   486,300   9,532,000
           
 
 
 
 
 
 
Latin America:                                    
  Chile   100.0 % 100.0 % 2,350,000   1,625,300   794,600   429,300   –     9,100   438,400
  Mexico   90.3 % 90.3 % 395,300   264,900   66,500   74,300   –     –     74,300
  Brazil (Jundiai)   49.0 % 49.0 % 70,200   67,900   –     17,300   –     –     17,300
  Brazil (TV Show Brasil)   100.0 % 100.0 % 463,000   306,000   –     15,900   –     –     15,900
  Peru   100.0 % 100.0 % 140,000   64,300   –     7,900   –     –     7,900
           
 
 
 
 
 
 
      Total           3,418,500   2,328,400   861,100   544,700   –     9,100   553,800
           
 
 
 
 
 
 
Asia/Pacific:                                    
  Australia   81.3 % 100.0 % 2,085,000   2,083,100   –     57,800   –     374,400   432,200
  Philippines   19.6 % 49.0 % 600,000   517,500   29,500   184,400   –     –     184,400
  New Zealand   40.7 % 50.0 % 146,900   115,000   115,000   24,800   –     –     24,800
           
 
 
 
 
 
 
      Total           2,831,900   2,715,600   144,500   267,000   –     374,400   641,400
           
 
 
 
 
 
 
Aggregate Video   22,953,700   18,626,500   6,595,700   9,809,300   48,100   869,800   10,727,200
           
 
 
 
 
 
 
Consolidated Video (1)   18,972,500   14,903,800   5,526,700   7,683,100   42,100   869,800   8,595,000
           
 
 
 
 
 
 
Proportionate Video (2)   12,674,400   10,005,500   3,548,700   4,515,900   22,900   572,600   5,111,400
           
 
 
 
 
 
 

(1)
Summation of the operating system data for those systems that we consolidate in our financial statements due to majority ownership and control.
(2)
Summation of the operating system data multiplied by our ownership percentage.
(3)
Two-way homes passed represents the number of homes passed 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)
Includes 296,500 subscribers in The Netherlands.

46


Operating System Data – Voice

 
  June 30, 2001
 
   
   
   
  Subscribers
  Lines
 
  United
Ownership

  System
Ownership

  Homes
Serviceable

 
  Residential
  Business
  Residential
  Business
UPC:                            
  The Netherlands   53.3 % 100.0 % 1,410,300   154,200   –     192,500   –  
  Austria   50.6 % 95.0 % 899,000   122,600   –     123,700   –  
  Hungary   52.7-53.3 % 98.9-100.0 % 84,900   68,100   –     73,400   –  
  France   49.0 % 92.0 % 485,400   55,000   –     57,500   –  
  Norway   53.3 % 100.0 % 117,600   17,500   –     19,000   –  
  Czech Republic   53.3 % 100.0 % 17,700   3,500   –     3,500   –  
  Germany   27.2 % 51.0 % 1,300   100   –     100   –  
  Priority Telecom   53.3 % 100.0 % 6,700   6,700   –     6,700   –  
           
 
 
 
 
      Total           3,022,900   427,700   –     476,400   –  
           
 
 
 
 
VTR:                            
  Chile   100.0 % 100.0 % 794,600   155,700   1,500   173,000   3,100
           
 
 
 
 
Austar United:                            
  New Zealand   40.7 % 50.0 % 115,000   37,900   1,700   44,300   5,500
  Australia   81.3 % 100.0 % –     8,600   –     8,600   –  
           
 
 
 
 
      Total           115,000   46,500   1,700   52,900   5,500
           
 
 
 
 
Aggregate Voice   3,932,500   629,900   3,200   702,300   8,600
           
 
 
 
 
Consolidated Voice (1)   3,817,500   592,000   1,500   658,000   3,100
           
 
 
 
 
Proportionate Voice (2)   2,407,600   400,500   2,200   446,100   5,300
           
 
 
 
 

(1)
Summation of the operating system data for those systems that we consolidate in our financial statements due to majority ownership and control.
(2)
Summation of the operating system data multiplied by our ownership percentage.

47


Operating System Data – Internet

 
  June 30, 2001
 
  United
Ownership

  System
Ownership

  Homes
Serviceable

  Subscribers
UPC:                
  The Netherlands   53.3%   100.0%   2,080,900   208,500
  Austria   50.6%   95.0%   919,400   122,300
  Sweden   53.3%   100.0%   241,700   40,400
  Germany   13.3-27.2%   25.0-51.0%   422,000   24,400
  Norway   53.3%   100.0%   150,200   20,500
  Belgium   53.3%   100.0%   152,100   18,800
  France   49.0%   92.0%   485,400   18,500
  Hungary   52.7-53.3%   98.9-100.0%   241,400   7,800
  Czech Republic   53.3%   100.0%   114,700   3,300
  Poland   53.3%   100.0%   181,000   4,600
  Malta   26.7%   50.0%   35,000   4,900
  chello broadband subscribers outside of UPC's network   53.3%   100.0%   23,500   23,500
           
 
      Total           5,047,300   497,500
           
 
Latin America:                
  Chile   100.0%   100.0%   568,100   16,800
  Mexico   90.3%   90.3%   66,500   700
           
 
      Total           634,600   17,500
           
 
Austar United:                
  Australia   81.3%   100.0%   –     79,400
  New Zealand   40.7%   50.0%   115,000   59,200
           
 
      Total           115,000   138,600
           
 
Aggregate Internet   5,796,900   653,600
           
 
Consolidated Internet (1)   5,162,400   564,500
           
 
Proportionate Internet (2)   3,142,300   356,100
           
 

(1)
Summation of the operating system data for those systems that we consolidate in our financial statements due to majority ownership and control.
(2)
Summation of the operating system data multiplied by our ownership percentage.

48


Operating System Data – Content

 
  June 30, 2001
 
  United
Ownership

  System
Ownership

  Subscribers
UPC:            
  UPCtv   53.3%   100.0%   9,264,000
  Spain/Portugal   26.7%   50.0%   7,459,000
  Ireland   42.6%   80.0%   5,499,000
  MTV JV   26.7%   50.0%   3,104,000
  Poland   53.3%   100.0%   1,064,000
  Hungary   53.3%   100.0%   10,000
  Czech Republic   53.3%   100.0%   13,000
  Slovak Republic   53.3%   100.0%   2,000
           
      Total           26,415,000
           
MGM Networks LA:            
  Latin America   50.0%   50.0%   13,587,800
           
Austar United:            
  Australia   40.7%   50.0%   6,972,800
           

Aggregate Content

 

46,975,600
           
Consolidated Content (1)   15,852,000
           
Proportionate Content (2)   20,306,200
           

(1)
Summation of the operating system data for those systems that we consolidate in our financial statements due to majority ownership and control.
(2)
Summation of the operating system data multiplied by our ownership percentage.

49


Results of Operations

Revenue

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (In thousands)

UPC   $ 330,555   $ 312,248   $ 634,231   $ 619,517
VTR     46,954     41,997     89,647     82,689
Austar United (1)     –       43,518     –       88,600
Other Latin America     1,898     1,487     3,694     3,189
Other     325     –       1,200     –  
   
 
 
 
  Consolidated revenue   $ 379,732   $ 399,250   $ 728,772   $ 793,995
   
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

Revenue decreased $19.5 million, or 4.9%, for the three months ended June 30, 2002 compared to the three months ended June 30, 2001, and decreased $65.2 million, or 8.2%, for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, primarily due to the deconsolidation of Austar United, offset by increases in RGUs and average monthly revenue per subscriber at UPC and VTR, the details of which are as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2002
  2001
  2002
  2001
 
  (In thousands)

UPC revenue:                        
  Triple Play Distribution   $ 284,600   $ 240,811   $ 546,187   $ 478,373
  DTH     6,647     21,073     12,971     41,083
  Content     –       974     –       1,369
  Other     10,136     (249 )   18,940     2,638
   
 
 
 
    Total Distribution     301,383     262,609     578,098     523,463
   
 
 
 
  Priority Telecom     25,679     46,003     48,441     89,514
  UPC Media     3,493     2,585     7,584     4,655
  Other     –       1,051     108     1,885
   
 
 
 
    Consolidated UPC revenue   $ 330,555   $ 312,248   $ 634,231   $ 619,517
   
 
 
 
    Consolidated UPC revenue in euros   358,917   357,493   705,229   690,941
   
 
 
 
VTR revenue:                        
  Triple Play Distribution   $ 46,954   $ 41,997   $ 89,647   $ 82,689
   
 
 
 
    Consolidated VTR revenue   $ 46,954   $ 41,997   $ 89,647   $ 82,689
   
 
 
 
    Consolidated VTR revenue in Chilean pesos     CP30,967,044     CP25,470,051     CP59,556,759     CP48,830,864
   
 
 
 
Austar United revenue (1):                        
  Triple Play Distribution   $ –     $ 40,813   $ –     $ 83,198
  Content     –       2,636     –       5,226
  Other     –       69     –       176
   
 
 
 
    Consolidated Austar United revenue   $ –     $ 43,518   $ –     $ 88,600
   
 
 
 
    Consolidated Austar United revenue in A$   A$ –     A$ 84,806   A$ –     A$ 170,134
   
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

50


Revenue for UPC in U.S. dollars increased $18.4 million, or 5.9%, from $312.2 million for the three months ended June 30, 2001 to $330.6 million for the three months ended June 30, 2002. Revenue for UPC in U.S. dollars increased $14.7 million, or 2.4%, from $619.5 million for the six months ended June 30, 2001 to $634.2 million for the six months ended June 30, 2002. On a functional currency basis, UPC's revenue increased €1.4 million, or 0.4%, from €357.5 million for the three months ended June 30, 2001 to €358.9 million for the three months ended June 30, 2002 and increased €14.3 million, or 2.1%, from €690.9 million for the six months ended June 30, 2001 to €705.2 million for the six months ended June 30, 2002, primarily due to an increase in Triple Play Distribution revenue of €33.3 million and €73.8 million for the three and six months ended June 30, 2002, respectively, offset by decreases in revenue from DTH and Priority Telecom. Consolidated Triple Play Distribution RGU's increased from an average of approximately 8,053,200 for the six months ended June 30, 2001, to an average of approximately 8,437,000 for the six months ended June 30, 2002. In addition, the average monthly revenue per Triple Play subscriber (excluding Germany and including DTH) increased from €12.16 for the three months ended June 30, 2001 to €13.29 for the three months ended June 30, 2002. Video revenue accounted for €8.5 million and €21.6 million of the Triple Play Distribution revenue increase for the three and six months ended June 30, 2002, respectively, representing an increase of 4.5% and 5.7%, respectively, in video revenue compared to the prior periods, primarily due to an increase in the number of consolidated video subscribers from an average of approximately 7,262,400 subscribers for the six months ended June 30, 2001, to an average of approximately 7,414,100 subscribers for the six months ended June 30, 2002. Voice revenue accounted for €1.6 million and €3.9 million of the Triple Play Distribution revenue increase for the three and six months ended June 30, 2002, respectively, representing an increase of 3.7% and 5.0%, respectively, in voice revenue compared to the prior periods, primarily due to telephone subscriber growth (consolidated average of approximately 461,400 subscribers for the six months ended June 30, 2002, compared to a consolidated average of approximately 391,700 subscribers for the six months ended June 30, 2001). Internet revenue accounted for €23.2 million and €48.3 million of the Triple Play Distribution revenue increase for the three and six months ended June 30, 2002, respectively, representing an increase of 54.4% and 62.1%, respectively, in Internet revenue compared to the prior periods, primarily due to Internet subscriber growth (consolidated average of approximately 561,500 subscribers for the six months ended June 30, 2002, compared to a consolidated average of approximately 399,100 subscribers for the six months ended June 30, 2001). DTH revenue decreased €16.9 million and €31.4 million, respectively, from the same periods in the prior year due to the deconsolidation of UPC's DTH operations in Poland upon the merger with Canal+ Group effective December 7, 2001. Revenue from Priority Telecom decreased €24.8 million and €46.0 million for the three and six months ended June 30, 2002, respectively, compared to the same period in the prior year due to the closure of its international wholesale business and, to a lesser extent, the closure of operations in non-core countries. UPC no longer has any content revenue due to the closure of the sports channels in the central European region.

Revenue for VTR in U.S. dollars increased $5.0 million, or 11.9%, from $42.0 million for the three months ended June 30, 2001 to $47.0 million for the three months ended June 30, 2002. Revenue for VTR in U.S. dollars increased $6.9 million, or 8.3%, from $82.7 million for the six months ended June 30, 2001 to $89.6 million for the six months ended June 30, 2002. On a functional currency basis, VTR's revenue increased CP5.5 billion, or 21.6%, from CP25.5 billion for the three months ended June 30, 2001 to CP31.0 billion for the three months ended June 30, 2002. On a functional currency basis, VTR's revenue increased CP10.8 billion, or 22.1%, from CP48.8 billion for the six months ended June 30, 2001 to CP59.6 billion for the six months ended June 30, 2002. Voice revenue accounted for CP2.4 billion and CP5.2 billion of this increase for the three and six months ended June 30, 2002, respectively, representing an increase of 30.3% and 35.7%, respectively, in telephone revenue compared to the prior periods, primarily due to telephone subscriber growth (average of approximately 196,200 subscribers for the six months ended June 30, 2002, compared to an average of approximately 138,900 subscribers for the six months ended June 30, 2001), offset by lower average monthly revenue per telephone subscriber from CP15,985 ($26.35) and CP15,742 ($26.67) for the three and six months ended June 30, 2001, respectively,

51



to CP15,020 ($22.78) and CP15,006 ($22.59) for the three and six months ended June 30, 2002, respectively, due to reduction of outgoing traffic because of a general contraction in the market. Video revenue accounted for CP2.1 billion and CP3.8 billion of the total revenue increase for the three and six months ended June 30, 2002, respectively, representing an increase of 12.7% and 11.4%, respectively, in video revenue compared to the prior periods primarily due to an increase in the number of video subscribers from an average of approximately 430,000 subscribers for the six months ended June 30, 2001, to an average of approximately 450,300 subscribers for the six months ended June 30, 2002, as well as an increase in the average monthly revenue per video subscriber from CP12,869 ($21.23) and CP12,751 ($21.62) for the three and six months ended June 30, 2001, respectively, to CP13,912 ($21.10) and CP13,579 ($20.44) for the three and six months ended June 30, 2002, respectively. Internet revenue accounted for CP1.0 billion and CP1.7 billion of the total revenue increase for the three and six months ended June 30, 2002, respectively, representing an increase of 114.7% and 126.2%, respectively, in Internet revenue compared to the prior periods, primarily due to Internet subscriber growth (average of approximately 32,700 subscribers for the six months ended June 30, 2002, compared to an average of approximately 12,300 subscribers for the six months ended June 30, 2001).

Operating Expenses

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC   $ (175,624 ) $ (218,121 ) $ (340,506 ) $ (452,195 )
VTR     (18,984 )   (18,709 )   (37,437 )   (36,701 )
Austar United (1)     –       (42,148 )   –       (89,654 )
Other     (1,525 )   (1,395 )   (3,106 )   (2,770 )
   
 
 
 
 
  Total Operating Expenses   $ (196,133 ) $ (280,373 ) $ (381,049 ) $ (581,320 )
   
 
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

Operating expenses decreased $84.2 million for the three months ended June 30, 2002 compared to the three months ended June 30, 2001 and decreased $200.3 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, primarily due to cost cutting, cost control, the deconsolidation of Austar United, the closure of our international wholesale voice and data business in Europe, the deconsolidation of Poland DTH and the closure of the sports channels in the central European region.

52



Selling, General and Administrative Expenses

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC   $ (102,355 ) $ (132,591 ) $ (200,690 ) $ (261,888 )
VTR     (15,221 )   (17,213 )   (31,770 )   (35,929 )
Austar United (1)     –       (15,550 )   –       (26,674 )
Other     (4,299 )   (7,200 )   (7,544 )   (16,173 )
   
 
 
 
 
  Total Selling, General and Administrative Expenses   $ (121,875 ) $ (172,554 ) $ (240,004 ) $ (340,664 )
   
 
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

Selling, general and administrative expenses decreased $50.7 million for the three months ended June 30, 2002 compared to the three months ended June 30, 2001 and decreased $100.7 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, primarily due to departmental cost controls offset by an increase in stock-based compensation expense of $14.7 million and $20.2 million for the three and six months ended June 30, 2002, respectively.

Adjusted EBITDA

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC   $ 62,154   $ (47,487 ) $ 110,230   $ (102,771 )
VTR     11,219     5,750     18,456     10,664  
Austar United (1)     –       (13,660 )   –       (25,742 )
Corporate and other     (3,115 )   (3,529 )   (4,171 )   (12,290 )
Eliminations and other     114     (841 )   561     (718 )
   
 
 
 
 
  Consolidated Adjusted EBITDA   $ 70,372   $ (59,767 ) $ 125,076   $ (130,857 )
   
 
 
 
 

53


Consolidated Adjusted EBITDA reconciles to the condensed consolidated statement of operations as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
Operating loss   $ (130,166 ) $ (592,841 ) $ (252,813 ) $ (938,267 )
Depreciation and amortization     172,453     277,132     337,637     548,246  
Stock-based compensation (2)     8,648     (6,090 )   17,357     (2,868 )
Impairment and restructuring charges     19,437     262,032     22,895     262,032  
   
 
 
 
 
  Consolidated Adjusted EBITDA   $ 70,372   $ (59,767 ) $ 125,076   $ (130,857 )
   
 
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.
(2)
Stock-based compensation for the three months ended June 30, 2002 and 2001 and the six months ended June 30, 2002 and 2001 includes charges associated with fixed, or non-cash, stock option plans totaling $9.9 million, $7.6 million, $18.6 million and $17.8 million, respectively, and includes charges (credits) associated with phantom, or cash-based, stock option plans totaling $(1.3) million, $(13.7) million, $(1.2) million and $(20.7) million, respectively.

54


Adjusted EBITDA increased $130.1 million for the three months ended June 30, 2002 compared to the three months ended June 30, 2001, and increased $255.9 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, the details of which are as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC Adjusted EBITDA:                          
  Triple Play Distribution   $ 82,397   $ 38,882   $ 154,787   $ 72,268  
  DTH     230     (1,860 )   690     (6,951 )
  Content     –       (9,112 )   –       (20,332 )
  Other     5,402     4,097     9,625     4,525  
   
 
 
 
 
    Total Distribution     88,029     32,007     165,102     49,510  
  Priority Telecom     (1,441 )   (22,821 )   (5,542 )   (42,323 )
  UPC Media     (235 )   (28,946 )   (5,125 )   (61,715 )
  Corporate and other     (24,199 )   (27,727 )   (44,205 )   (48,243 )
   
 
 
 
 
    Consolidated UPC Adjusted EBITDA   $ 62,154   $ (47,487 ) $ 110,230   $ (102,771 )
   
 
 
 
 
    Consolidated UPC Adjusted EBITDA in euros   67,494   (54,368 ) 122,308   (115,176 )
   
 
 
 
 
VTR Adjusted EBITDA:                          
  Triple Play Distribution   $ 11,969   $ 6,500   $ 19,956   $ 12,164  
  Management fees and other     (750 )   (750 )   (1,500 )   (1,500 )
   
 
 
 
 
    Consolidated VTR Adjusted EBITDA   $ 11,219   $ 5,750   $ 18,456   $ 10,664  
   
 
 
 
 
    Consolidated VTR Adjusted EBITDA in Chilean pesos   CP 7,399,329   CP 3,488,869   CP 12,252,826   CP 6,307,467  
   
 
 
 
 
Austar United Adjusted EBITDA (1):                          
  Triple Play Distribution   $ –     $ (10,401 ) $ –     $ (19,977 )
  Content     –       (2,438 )   –       (3,974 )
  Management fees and other     –       (821 )   –       (1,791 )
   
 
 
 
 
    Consolidated Austar United Adjusted EBITDA   $ –     $ (13,660 ) $ –     $ (25,742 )
   
 
 
 
 
    Consolidated Austar United Adjusted EBITDA in A$   A$ –     A$ (26,622 ) A$ –     A$ (49,489 )
   
 
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

55


Adjusted EBITDA for UPC in U.S. dollars increased $109.7 million, from negative $47.5 million for the three months ended June 30, 2001 to positive $62.2 million for the three months ended June 30, 2002. Adjusted EBITDA for UPC in U.S. dollars increased $213.0 million, from negative $102.8 million for the six months ended June 30, 2001 to positive $110.2 million for the six months ended June 30, 2002. On a functional currency basis, UPC's Adjusted EBITDA increased €121.9 million from negative €54.4 million for the three months ended June 30, 2001 to positive €67.5 million for the three months ended June 30, 2002 and increased €237.5 million from negative €115.2 million for the six months ended June 30, 2001 to positive €122.3 million for the six months ended June 30, 2002. UPC Distribution accounted for €58.8 million and €127.7 million of this increase for the three and six months ended June 30, 2002, respectively, primarily due to cost cutting and cost control, improvements in processes and systems and organizational rationalization, improved gross margins brought about by continued negotiations with major vendors, successfully driving higher service penetration in existing customers and continuing to achieve increased average revenue per unit. UPC Media's Adjusted EBITDA increased €33.5 million and €63.5 million for the three and six months ended June 30, 2002 compared to the three and six months ended June 30, 2001, respectively, primarily due to continued focus on profitable revenue growth and cost reduction with the media division and the transfer of operating expenses associated with the provision of broadband Internet access services to UPC Distribution in December 2001. Compared to the prior periods, Priority Telecom's Adjusted EBITDA increased €24.8 million and €41.3 million, respectively, due to cost savings as a result of the closure of its international wholesale business.

Adjusted EBITDA for VTR's Triple Play Distribution in U.S. dollars increased $5.5 million, or 84.6%, from $6.5 million for the three months ended June 30, 2001 to $12.0 million for the three months ended June 30, 2002. Adjusted EBITDA for VTR's Triple Play Distribution in U.S. dollars increased $7.8 million, or 63.9%, from $12.2 million for the six months ended June 30, 2001 to $20.0 million for the six months ended June 30, 2002. On a functional currency basis, VTR's Adjusted EBITDA increased CP3.9 billion, or 111.4%, from CP3.5 billion for the three months ended June 30, 2001 to CP7.4 billion for the three months ended June 30, 2002 and increased CP6.0 billion, or 95.2%, from CP6.3 billion for the six months ended June 30, 2001 to CP12.3 billion for the six months ended June 30, 2002. The increase in VTR's video Adjusted EBITDA accounted for CP1.3 billion and CP2.1 billion of this increase for the three and six months ended June 30, 2002, respectively, VTR's voice Adjusted EBITDA accounted for CP2.0 billion and CP2.5 billion of this increase for the three and six months ended June 30, 2002, respectively, and VTR's Internet Adjusted EBITDA accounted for CP0.6 billion and CP1.4 billion of this increase for the three and six months ended June 30, 2002, respectively. The positive results in VTR's Adjusted EBITDA are primarily due to lower churn, improved promotion of bundled services, lower costs for network energy and equipment maintenance, and improving margins as a result of the increased subscriber base and a reduction in bandwidth costs.

56


Stock-Based Compensation

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC   $ (10,478 ) $ 8,135   $ (18,995 ) $ 7,158  
VTR     930     (626 )   784     (1,798 )
Austar United (1)     –       (1,128 )   –       (3,194 )
Other     900     (291 )   854     702  
   
 
 
 
 
  Total stock-based compensation, net   $ (8,648 ) $ 6,090   $ (17,357 ) $ 2,868  
   
 
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

Stock-based compensation increased $14.7 million for the three months ended June 30, 2002 compared to the three months ended June 30, 2001, and increased $20.2 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, due to fluctuations in the value of the common stock of our subsidiaries. Stock-based compensation is recorded as a result of applying variable-plan accounting to certain of our subsidiaries' stock-based compensation plans and vesting of certain of our subsidiaries' fixed stock-based compensation plans. The variable plans include the UPC phantom stock option plan, the chello phantom stock option plan, the ULA phantom stock option plan and the VTR phantom stock option plan. Under variable-plan accounting, increases in the fair market value of these vested options result in compensation charges to the statement of operations, while decreases in the fair market value to these vested options will cause a reversal of previous charges taken. The fixed plans include the UPC stock option plan and the Austar United stock option plan.

Depreciation and Amortization

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC   $ (158,655 ) $ (227,410 ) $ (310,034 ) $ (453,341 )
VTR     (12,798 )   (14,044 )   (25,599 )   (27,467 )
Austar United (1)     –       (29,075 )   –       (59,421 )
Other     (1,000 )   (6,603 )   (2,004 )   (8,017 )
   
 
 
 
 
  Total depreciation and amortization   $ (172,453 ) $ (277,132 ) $ (337,637 ) $ (548,246 )
   
 
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

UPC's depreciation and amortization expense in U.S. dollars decreased $68.8 million and $143.3 million for the three and six months ended June 30, 2002, respectively, compared to the prior periods. On a functional currency basis, UPC's depreciation and amortization expense decreased €88.1 million from €260.4 million for the three months ended June 30, 2001 to €172.3 million for the three months ended June 30, 2002. UPC's depreciation and amortization expense decreased €160.6 million from €505.5 million for the six months ended June 30, 2001 to €344.9 million for the six months ended June 30, 2002. The decrease resulted primarily from the non-amortization of goodwill effective January 1, 2002, in accordance with SFAS 142.

57


Interest Expense

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC   $ (146,854 ) $ (215,829 ) $ (314,083 ) $ (416,915 )
VTR     (4,567 )   (5,747 )   (8,598 )   (11,274 )
Austar United (1)     –       (4,108 )   –       (10,701 )
Other     (2,940 )   (54,886 )   (15,814 )   (108,157 )
   
 
 
 
 
  Total interest expense   $ (154,361 ) $ (280,570 ) $ (338,495 ) $ (547,047 )
   
 
 
 
 

Interest expense decreased $126.2 million and $208.6 million for the three and six months ended June 30, 2002 compared to the three and six months ended June 30, 2001, the details of which are as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
Cash Pay:                          
  UPC senior notes   $ (23,471 ) $ (63,689 ) $ (72,504 ) $ (130,174 )
  UPC bank facilities     (62,788 )   (72,994 )   (117,693 )   (141,661 )
  VTR bank facility     (2,998 )   (3,941 )   (5,788 )   (7,774 )
  Austar United bank facility (1)     –       (3,549 )   –       (9,567 )
  Other     (1,944 )   (9,692 )   (4,671 )   (10,337 )
   
 
 
 
 
      (91,201 )   (153,865 )   (200,656 )   (299,513 )
   
 
 
 
 
Non Cash:                          
  UPC senior discount notes accretion     (52,030 )   (59,690 )   (106,482 )   (117,809 )
  UGC Holdings senior discount notes accretion     (918 )   (36,872 )   (11,837 )   (72,738 )
  Amortization of deferred financing costs     (10,212 )   (17,448 )   (15,000 )   (28,061 )
  Belmarken Notes     –       (4,524 )   (4,520 )   (4,524 )
  UAP senior discount notes accretion (1)     –       (8,171 )   –       (24,402 )
   
 
 
 
 
      (63,160 )   (126,705 )   (137,839 )   (247,534 )
   
 
 
 
 
    Total interest expense   $ (154,361 ) $ (280,570 ) $ (338,495 ) $ (547,047 )
   
 
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

58


Foreign Currency Exchange Gain (Loss), Derivative Losses and Other Expenses

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC   $ 545,111   $ (99,561 ) $ 334,583   $ (184,434 )
VTR     (28,346 )   (30,702 )   (27,630 )   (49,261 )
Austar United (1)     –       738     –       945  
Other     29,016     (47,975 )   28,926     (72,290 )
   
 
 
 
 
  Total   $ 545,781   $ (177,500 ) $ 335,879   $ (305,040 )
   
 
 
 
 

(1)
As a result of the sale of 49.99% of our interest in UAP, we deconsolidated the results of operations of Austar United effective November 15, 2001.

Foreign currency exchange gain (loss), derivative losses and other expenses decreased $723.3 million and $640.9 million for the three and six months ended June 30, 2002, respectively, compared to the prior periods. These gains resulted primarily from UPC's dollar-denominated debt as the euro strengthened approximately 11.7% against the dollar during the three months ended June 30, 2002.

Minority Interests in Subsidiaries

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
Accrual of dividends on UPC convertible preference shares   $ (16,419 ) $ (20,286 ) $ (37,800 ) $ (46,028 )
UPC     –       –       –       54,050  
Other     (2,006 )   64,294     (4,612 )   97,331  
   
 
 
 
 
  Total minority interests in subsidiaries   $ (18,425 ) $ 44,008   $ (42,412 ) $ 105,353  
   
 
 
 
 

The minority interests' share of losses decreased $62.4 million and $147.8 million for the three and six months ended June 30, 2002, respectively, compared to the prior periods, primarily due to the reduction of the minority interests' basis in the common equity of UPC to nil in January 2001, as well as the deconsolidation of UAP effective November 15, 2001. We cannot allocate a portion of UPC's net losses to the minority shareholders once the minority shareholders' common equity basis has been exhausted. We will consolidate 100% of the net losses of UPC until such time as the preference shareholders convert their holdings into common equity or until additional equity is contributed by third-party investors.

59


Share in Results of Affiliates

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC's affiliates   $ (16,936 ) $ (13,935 ) $ (35,616 ) $ (56,412 )
Austar United's affiliates     –       (8,007 )   –       (13,639 )
UAP and other     10,150     (357 )   (42,132 )   (438 )
   
 
 
 
 
  Total share in results of affiliates   $ (6,786 ) $ (22,299 ) $ (77,748 ) $ (70,489 )
   
 
 
 
 

Losses from recording our share in results of affiliates decreased $15.5 million for the three months ended June 30, 2002 compared to the same period in the prior year and increased $7.3 million for the six months ended June 30, 2002 compared to the same period in the prior year, primarily due to the sale of 49.99% of our interest in UAP effective November 15, 2001, which resulted in the pickup of UAP's losses under the equity method of accounting.

Extraordinary Gain on Early Retirement of Debt

As part of our recapitalization, we purchased certain debt securities of our subsidiaries at fair value, including the UPC Bonds, Belmarken Notes and UGC Holdings 1998 Notes (directly from Liberty and indirectly through the purchase of Liberty's interest in IDT United). The estimated fair value of these financial assets (with the exception of the Belmarken Notes) was significantly less than the accreted value of those debt securities as reflected in our historical financial statements. For consolidated financial reporting purposes we recognized an extraordinary gain of approximately $1.647 billion (net of income tax) from the effective retirement of such debt outstanding at that time equal to the excess of the then accreted value of such debt over our cost.

In January 2002, UPC recognized a gain of approximately $109.2 million from the restructuring and cancellation of capital lease obligations associated with excess capacity of certain Priority Telecom vendor contracts.

In June 2002, UPC recognized a gain of approximately $342.3 million from the delivery by certain banks of approximately $399.2 million in aggregate principal amount of UPC's senior notes and senior discount notes as settlement of certain interest rate/cross currency derivative contracts between the banks and UPC.

60


Liquidity and Capital Resources

Sources and Uses

We have financed our acquisitions and funding of our video, voice and Internet businesses in the three main regions of the world in which we operate primarily through public and private debt and equity as well as cash received from the sale of non-strategic assets by certain subsidiaries. These resources have also been used to refinance certain debt instruments and facilities as well as to cover corporate overhead. Our subsidiaries have supplemented contributions from us with the sale of debt and equity, bank financing and operating cash flow. The following table outlines the sources and uses of cash, cash equivalents, restricted cash and short-term liquid investments (for purposes of this table only, "cash") for United and UGC Holdings from inception to date:

 
  Inception to
December 31, 2001

  Six Months
Ended
June 30, 2002

  Total
 
 
  (In millions)

 
United and UGC Holdings Corporate
                   
Financing Sources:                    
  Debt   $ 1,347.0   $ 102.7   $ 1,449.7  
  Equity     1,717.7     200.0     1,917.7  
  Asset sales, dividends and note payments     376.6     –       376.6  
  Interest income and other     237.4     24.2     261.6  
   
 
 
 
      Total sources     3,678.7     326.9     4,005.6  
   
 
 
 
Application of Funds:                    
  Investment in:                    
    UPC     (717.8 )   –       (717.8 )
    Asia/Pacific     (422.2 )   (0.4 )   (422.6 )
    Latin America     (961.9 )   (70.8 )   (1,032.7 )
    Other     (89.8 )   (2.2 )   (92.0 )
   
 
 
 
      Total     (2,191.7 )   (73.4 )   (2,265.1 )
  Loan to Liberty     (287.6 )   287.6     –    
  Repayment of bonds     (793.4 )   (530.1 )   (1,323.5 )
  Offering and merger costs     (118.6 )   (13.9 )   (132.5 )
  Litigation settlement     195.4     –       195.4  
  Purchase of treasury shares     –       (5.1 )   (5.1 )
  Corporate and other     (222.1 )   (24.5 )   (246.6 )
   
 
 
 
      Total uses     (3,418.0 )   (359.4 )   (3,777.4 )
   
 
 
 

Period change in cash

 

 

260.7

 

 

(32.5

)

 

228.2

 
Cash, beginning of period     –       260.7     –    
   
 
 
 
Cash, end of period   $ 260.7   $ 228.2     228.2  
 
 
 
 
 
United's Subsidiaries
                   
Cash, end of period:                    
  UPC     396.1  
  VTR     34.3  
  Other     7.0  
 
   
   
 
 
      Total United's subsidiaries     437.4  
 
   
   
 
 
Total consolidated cash, cash equivalents, restricted cash and short-term liquid investments as of June 30, 2002   $ 665.6  
 
   
   
 
 

61


United and UGC Holdings Corporate.    We had working capital of $101.5 million as of June 30, 2002, net of restricted cash of $32.3 million, and net of the note payable to Liberty of $102.7 million, which is due January 30, 2003. Liberty has agreed in principle to extend for one year the maturity of that portion of its loan to us that equals the amount we pay to purchase New UPC common stock, if any, as part of UPC's restructuring. We have committed to purchase up to €100.0 ($98.8) million of New UPC common stock as part of UPC's restructuring, subject to reduction if UPC sells any assets or raises any non-dilutive capital prior to the closing of the restructuring. The third-party bondholders will have the option to participate pro rata in this equity issuance. General sources of cash in the next year may include the raising of additional private or public debt and/or equity and/or proceeds from the disposition of non-strategic assets. Uses of cash in the next year may include funding of approximately $50.0 million to meet the existing growth plans of our systems in Latin America and approximately $20.0 million for general corporate purposes. To the extent we pursue new acquisitions or development opportunities, we will need to raise additional capital or seek strategic partners.

On June 14, 2002, the Board of Directors of United approved a stock repurchase plan pursuant to which we may buy up to four million shares of our Class A common stock, from time to time, in the open market or in privately negotiated transactions. Any particular purchase will depend on our evaluation of prevailing market conditions at the time of the purchase. Following the aforementioned Board authorization, we purchased 1,835,000 shares of our Class A common stock on June 14, 2002, in a private block trade at an all-in purchase price of $2.78 per share. The closing price of our Class A common stock on June 14, 2002 was $3.03 per share.

UPC.    UPC has incurred substantial operating losses and negative cash flows from operations, which have been driven by continuing development efforts, including the introduction of new services such as digital video, voice and Internet. In addition, substantial capital expenditures have been required to deploy these services and to acquire businesses. We expect UPC to incur operating losses at least through 2005, primarily as a result of the continued introduction of these new services, which are in the early stages of deployment, as well as continued depreciation and amortization expense. As of June 30, 2002, there was substantial uncertainty whether UPC's sources of capital, working capital and projected operating cash flow were sufficient to fund its expenditures and service its indebtedness over the next year. In addition, as a result of the events of default described below, UPC's senior notes, senior discount notes, Belmarken Notes and the UPC Distribution Bank Facility have been classified as current liabilities. UPC's ability to continue as a going concern is dependent on (i) its ability to restructure its senior notes and senior discount notes, the Belmarken Notes and its convertible preferred stock and (ii) its ability to generate enough cash flow to enable it to recover its assets and satisfy its liabilities in the normal course of business. The report of UPC's previous independent public accountants, Arthur Andersen, on UPC's consolidated financial statements for the year ended December 31, 2001, includes a paragraph that states that UPC has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about UPC's ability to continue as a going concern. During 2001, UPC reviewed its current and long-range plan for all segments of its business and engaged a strategic consultant to assist it in the process. UPC worked extensively with this consultant to revise its strategic and operating plans, no longer focusing on an aggressive digital roll out, but on increasing sales of products and services that have better gross margins and profitability. The revised business plan focuses on average revenue per subscriber and margin improvement, increased penetration of new service products within existing upgraded homes, efficient deployment of capital and products with positive net present values.

Given UPC's funding requirements and possible lack of access to debt and equity capital in the near term, UPC determined that it would not make interest payments on its senior notes as they fell due. On February 1, 2002, UPC failed to make required interest payments in the aggregate amount of $100.6 million on its outstanding 10.875% Senior Notes due 2009, 11.25% Senior Notes due 2010 and 11.5% Senior Notes due 2010. The indentures related to its senior notes and senior discount notes provide that failing to make interest payments constitutes an event of default under the notes if UPC is in default of the payment of interest on any of the notes for a period of time in excess of 30 days. Since UPC failed to

62



make these interest payments upon expiration of this 30-day grace period on March 3, 2002, events of default occurred under those indentures. The occurrence of these events of default resulted in cross events of default under the indentures related to the remaining series of senior notes and senior discount notes. The occurrence of the various events of default gave the trustees under the related indentures, or the requisite number of holders of such notes, the right to accelerate the maturity of all of UPC's senior notes and senior discount notes and to foreclose on the collateral securing the loans. In addition, on May 1, 2002 and August 1, 2002, UPC failed to make required interest payments in the aggregate amount of $35.3 million and $122.0 million, respectively, on its outstanding 10.875% Senior Notes due 2007, 11.25% Senior Notes due 2009, 10.875% Senior Notes due 2009, 11.25% Senior Notes due 2010 and 11.5% Senior Notes due 2010. As of August 14, 2002, neither the trustees for those notes nor the requisite number of holders of those notes have accelerated the payment of principal and interest under those notes.

UPC's failure to make the February 1, 2002, May 1, 2002 and August 1, 2002 interest payments on certain of its outstanding senior notes gave rise to cross events of default under the following credit and loan facilities:

On July 30, 2002, UPC transferred 22.3% of the outstanding shares of UPC Germany to the minority interest holders in UPC Germany. Due to the share transfer, such holders became the majority shareholders of UPC Germany. The EWT Facility was refinanced by the new majority shareholder and the cross default ceased to exist. The UPC Distribution Bank Facility is secured by share pledges on UPC Distribution which is the holding company of most companies within the UPC Distribution group, and over certain operating companies within this group. The Belmarken Notes are secured by pledges over the stock of Belmarken, UPC's wholly-owned subsidiary, UPC Holding B.V. and UPC Internet Holding B.V., which owns chello broadband. The occurrence of the cross events of default under such facilities gave the creditors under those facilities the right to accelerate the maturity of the loans and to foreclose upon the collateral securing the loans.

On March 4, 2002, UPC received the first waivers from the lenders under the UPC Distribution Bank Facility, the EWT Facility and the Belmarken Notes for the cross events of default under such facilities that existed or may exist as a result of UPC's failure to make the interest payments due on February 1, 2002 within the applicable cure periods, or any resulting cross defaults. On July 29, 2002, we and the bank lenders extended the duration of the waivers until September 12, 2002. The other terms of the waivers remain unchanged from those announced on March 4, 2002.

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

In addition, each of these waivers contains certain other conditions and undertakings and will terminate if there is a default by UPC of the terms of that waiver. The waiver under the UPC Distribution Bank Facility subjects UPC to a €100.0 million drawdown limitation under that facility, subject to certain conditions,

63



during the period in which the waiver is in place. As of August 14, 2002, UPC had not made the interest payments on its senior notes. None of the events described above have had a material adverse effect on the operations of UPC or UPC's relationships with customers, suppliers and employees.

On July 24, 2002, we and an ad-hoc noteholders committee representing UPC's noteholders announced an agreement in principle with respect to the recapitalization of UPC. As part of the recapitalization, United and other holders of UPC's notes will exchange approximately $5.4 billion accreted value of UPC's debt into equity of New UPC. Key terms of the agreement are as follows:

This agreement is subject to documentation among us, UPC and the ad-hoc committee of noteholders and certain other approvals and conditions. We expect this transaction will close in the first quarter of 2003, though there is no certainty that all of the conditions necessary for the transaction to close will be satisfied. If completed, the restructuring will result in substantial dilution of UPC's existing shareholders, a loss of some or all of the value of UPC's outstanding securities, including UPC's ordinary shares, preference shares, senior notes and senior discount notes.

If the parties are unable to conclude documentation for the debt restructuring agreement in principle or if UPC is otherwise unable to successfully complete an agreed upon restructuring plan for its debt, UPC may seek relief under a debt moratorium leading to a suspension of payments, or a bankruptcy proceeding under applicable laws. If UPC seeks relief under either of these proceedings, or any other laws that may be available to UPC, holders of UPC's outstanding securities, including UPC's ordinary shares, preference shares, senior notes and senior discount notes, as well as the Belmarken Notes, may lose some or all of the value of their investment in UPC's securities. Such proceedings could result in material changes in the nature of UPC's business, material adverse changes to UPC's financial condition and results of operations or UPC's liquidation.

In 2002 and thereafter, UPC anticipates that sources of capital will include working capital and operating cash flows, proceeds from the disposal of non-core investments and further internal reorganization and alignment of businesses, draws under the UPC Distribution Bank Facility and vendor financing. UPC does not anticipate access to the capital markets as a source of funding unless it is able to restructure its existing indebtedness, although UPC might access such markets if possible. If UPC is able to complete its planned debt restructuring satisfactorily and is able to implement a rationalization of its non-core investments and improve its operating performance, UPC believes its existing cash balance, working capital, operating cash flow and capacity under the UPC Distribution Bank Facility will be sufficient to fund operations for the foreseeable future. However, should the planned debt restructuring, further internal reorganization and alignment of businesses and the investment rationalization program be unsuccessful, or should operating results fall behind UPC's current business plan, there is uncertainty whether UPC will have sufficient funds to meet its expenditure or debt commitments and as such not be able to continue as a going concern.

UPC's ordinary shares are traded in the form of American Depositary Receipts ("ADRs") on the Nasdaq National Market ("Nasdaq") under the symbol "UPCOY". Nasdaq has traditionally maintained certain

64



rules regarding bid prices for continued listing on the market. UPC's ADR's were delisted from Nasdaq at the end of May 2002, as UPC did not meet the minimum bid price requirement. UPC's shares have commenced trading on the Over the Counter Bulletin Board ("OTC BB") in the United States. UPC does not expect the delisting to affect the normal course of business for UPC's operating companies. UPC will be eligible to relist on Nasdaq if it completes its restructuring and complies with Nasdaq rules. UPC's shares continue to trade on the Euronext Amsterdam Exchange under the symbol UPC.

VTR.    The report of VTR's previous independent public accountants, Arthur Andersen, on VTR's consolidated financial statements for the year ended December 31, 2001, includes a paragraph that states that VTR has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about VTR's ability to continue as a going concern. On May 29, 2002, VTR and VTR's senior lenders entered into an amendment to VTR's existing $176.0 million senior secured credit facility, extending the maturity date of the loans under the facility until April 29, 2003. The amendment also establishes new financial covenant levels consistent with VTR's current projections. In connection with the amendment, UGC Holdings funded $26.0 million in capital contributions to VTR, the proceeds of which were used to prepay the senior loans down to $150.0 million. UGC Holdings also funded another $23.0 million to VTR and committed to fund an additional $10.0 million during 2002 for VTR's general working capital. United Latin America, Inc., a wholly-owned subsidiary of ours and 100% indirect owner of VTR, is required to fund amounts to VTR in the future if VTR fails to maintain its senior leverage ratio. Pursuant to the amendment, VTR will be required to either (a) consummate a Chilean bank and/or bond financing of not less than $50.0 million or (b) make further loan prepayments of $12.0 million and, under certain circumstances, pay a higher interest rate on the remaining loans. In 2002 and thereafter, VTR anticipates sources of capital will include increasing cash flows from operations. During the next year, VTR may obtain capital from the Chilean market and/or United, although there can be no assurance in this regard. VTR believes its existing cash balance, working capital and operating cash flow will be sufficient to fund operations for the foreseeable future. However, if VTR's sources of capital are less than anticipated, VTR fails to refinance the VTR Bank Facility, or should operating results fall behind its current business plan, there is uncertainty whether VTR will have sufficient funds to service the VTR Bank Facility when due April 29, 2003.

Statements of Cash Flows

We had cash and cash equivalents of $501.4 million as of June 30, 2002, a decrease of $418.7 million from $920.1 million as of December 31, 2001. Cash and cash equivalents of $1,119.9 million as of June 30, 2001 represented a decrease of $756.9 million from $1,876.8 million as of December 31, 2000.

 
  Six Months Ended
June 30,

 
 
  2002
  2001
 
 
  (In thousands)

 
Cash flows from operating activities   $ (246,395 ) $ (390,749 )
Cash flows from investing activities     (431,603 )   (721,320 )
Cash flows from financing activities     227,840     458,849  
Effect of exchange rates on cash     31,384     (103,697 )
   
 
 
Net increase in cash and cash equivalents     (418,774 )   (756,917 )
Cash and cash equivalents at beginning of period     920,140     1,876,828  
   
 
 
Cash and cash equivalents at end of period   $ 501,366   $ 1,119,911  
   
 
 

Six Months Ended June 30, 2002.    Principal sources of cash during the six months ended June 30, 2002 included $200.0 million from the issuance of our common stock, $102.7 million of loan proceeds from a note payable to Liberty, $38.5 million of restricted cash released, $31.4 million positive exchange rate

65



effect on cash, $7.0 million of dividends received from affiliates, $9.8 million of proceeds from short-term and long-term borrowings and $3.0 million from other investing and financing activities.

Principal uses of cash during the six months ended June 30, 2002 included $231.6 million for the purchase of Liberty's interest in IDT United, $189.6 million of capital expenditures, $66.4 million for the repayment of debt, $35.4 million of net purchases of short-term liquid investments, $21.1 million for the acquisition of UPC's remaining 30.0% interest in AST Romania, $18.3 million for deferred financing costs, $246.4 million for operating activities and $2.3 million for other investing and financing activities.

Six Months Ended June 30, 2001.    The principle source of cash during the six months ended June 30, 2001 was proceeds from UPC's Exchangeable Loan of $856.8 million. Additional sources of cash included $306.4 million of borrowings on the UPC Bank Facility, $120.4 million of net proceeds from the sale of short-term liquid investments, $3.0 million from the exercise of stock options and $9.0 million from affiliate dividends and other investing and financing sources.

Principal uses of cash during the six months ended June 30, 2001 included $699.2 million for the repayment of debt, $416.2 million of capital expenditures, $274.0 million in loans to Liberty and other affiliates and $103.7 million negative exchange rate effect on cash. Additional uses of cash included $91.7 million cash put on deposit as collateral for our forward foreign exchange contracts and for the VTR Bank Facility, $44.2 million for investments in affiliates, $24.2 million for new acquisitions, $8.6 million for deferred financing costs and $390.7 million for operating activities.

New Accounting Principles

In April 2002, the FASB issued SFAS 145. Under this new standard, most gains and losses from extinguishments of debt will not be classified as extraordinary items unless they meet much more narrow criteria in APB 30. SFAS 145 may be early adopted, but is otherwise effective for fiscal years beginning after May 15, 2002 and must be adopted with retroactive effect. We have not yet adopted such standard and we will adopt such standard in fiscal 2003 in accordance with the effective date and transaction guidance provided for in SFAS 145. We are currently evaluating the potential impact, if any, the adoption of SFAS 145 will have on our financial position and results of operations.

In June 2002, the FASB issued SFAS 146, which requires the liability for a cost associated with an exit activity, including restructuring, or disposal activity to be recognized and measured initially at its fair value in the period in which the liability is incurred. Additionally, SFAS 146 requires subsequent adjustment to the recorded liability for changes in estimated cash flows. SFAS 146 may be early adopted, but is otherwise effective for exit or disposal activities initiated after December 31, 2002. We are currently evaluating the potential impact, if any, the adoption of SFAS 146 will have on our financial position and results of operations.

66




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Investment Portfolio

We do not use derivative financial instruments in our non-trading investment portfolio. We place our cash and cash equivalent investments in highly liquid instruments that meet high credit quality standards with original maturities at the date of purchase of less than three months. We generally place our short-term investments in liquid instruments that meet high credit quality standards with original maturities at the date of purchase of between three and twelve months. We also limit the amount of credit exposure to any one issue, issuer or type of instrument. These investments are subject to interest rate risk and will fall in value if market interest rates increase. We do not expect, however, any material loss with respect to our investment portfolio.

Equity Prices

We are exposed to equity price fluctuations related to our investment in equity securities. Changes in the price of the stock are reflected as unrealized gains (losses) in our statement of shareholders' deficit until such time as the stock is sold, at which time the unrealized gain (loss) is reflected in the statement of operations. Investments in publicly traded securities at June 30, 2002 included the following:

 
  Number
of Shares

  Fair Value
June 30, 2002

 
   
  (In thousands)

PrimaCom   4,948,039   $ 2,934
SBS   6,000,000   $ 111,660

We are also exposed to equity price fluctuations related to UPC's debt that is convertible into UPC ordinary shares, such as the UPC DIC Loan and the Belmarken Notes.

Impact of Foreign Currency Rate Changes

The functional currency of our major systems UPC, Austar United and VTR is the euro, Australian dollar and Chilean peso, respectively. We are exposed to foreign exchange rate fluctuations related to our operating subsidiaries; monetary assets and liabilities and the financial results of foreign subsidiaries when their respective financial statements are translated into U.S. dollars during consolidation. Foreign currency rate changes also affect our share in results of our unconsolidated affiliates. Our exposure to foreign exchange rate fluctuations also arises from items such as notes, payable, the cost of equipment, management fees, programming costs and certain other charges that are denominated in U.S. dollars but recorded in the functional currency of the foreign subsidiary. The relationship between these foreign currencies and the U.S. dollar, which is our reporting currency, is shown below, per one U.S. dollar:

 
  Spot Rate
  Three Month Average Rate
  Six Month Average Rate
 
 
  Euro
  Australian
Dollar

  Chilean
Peso

  Euro
  Australian
Dollar

  Chilean
Peso

  Euro
  Australian
Dollar

  Chilean
Peso

 
December 31, 2001   1.1189   1.9591   654.7900   –     –     –     –     –     –    
June 30, 2002   1.0120   1.7745   688.0500   1.0858   1.8114   659.5188   1.1096   1.8978   664.3470  
June 30, 2001   1.1801   1.9594   631.7500   1.1449   1.9488   606.4774   1.1207   1.9204   590.5391  
% Strengthening/(Devaluation) 2001 to 2002   14.2%   9.4%   (8.9% ) 5.2%   7.1%   (8.7% ) 1.0%   1.18%   (12.5% )

67


The table below presents the impact of foreign currency fluctuations on our revenue and Adjusted EBIDA

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2002
  2001
  2002
  2001
 
 
  (In thousands)

 
UPC:                          
  Revenue   $ 330,555   $ 312,248   $ 634,231   $ 619,517  
   
 
 
 
 
  Adjusted EBITDA   $ 62,154   $ (47,487 ) $ 110,230   $ (102,771 )
   
 
 
 
 
 
Revenue based on prior year exchange rates

 

$

313,492

 

$

333,700

 

$

629,275

 

$

666,160

 
   
 
 
 
 
  Adjusted EBITDA based on prior year exchange rates   $ 58,953   $ (50,749 ) $ 109,135   $ (111,045 )
   
 
 
 
 
 
Revenue impact

 

$

17,063

 

$

(21,452

)

$

4,956

 

$

(46,643

)
   
 
 
 
 
  Adjusted EBITDA impact   $ 3,201   $ 3,262   $ 1,095   $ 8,274  
   
 
 
 
 

VTR:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Revenue   $ 46,954   $ 41,997   $ 89,647   $ 82,689  
   
 
 
 
 
  Adjusted EBITDA   $ 11,219   $ 5,750   $ 18,456   $ 10,664  
   
 
 
 
 
 
Revenue based on prior year exchange rates

 

$

51,061

 

$

48,918

 

$

100,852

 

$

94,524

 
   
 
 
 
 
  Adjusted EBITDA based on prior year exchange rates   $ 12,201   $ 6,701   $ 20,749   $ 12,210  
   
 
 
 
 
 
Revenue impact

 

$

(4,107

)

$

(6,921

)

$

(11,205

)

$

(11,835

)
   
 
 
 
 
  Adjusted EBITDA impact   $ (982 ) $ (951 ) $ (2,293 ) $ (1,546 )
   
 
 
 
 

The table below represents the foreign currency translation adjustments arising from translating our foreign subsidiaries' assets and liabilities into U.S. dollars for the two quarters ended June 30, 2002 and 2001.

 
  For the Three Months Ended
 
  March 31,
  June 30,
 
  2002
  2001
  2002
  2001
 
  (In thousands)

Foreign currency translation adjustments   $ 42,529   $ (43,753 ) $ (454,297 ) $ 46,833
   
 
 
 

68


Certain of our operating companies have notes payable which are denominated in a currency other than their own functional currency as follows:

 
  June 30, 2002
   
   
 
 
  December 31, 2001
 
 
   
  Related Party (3)
 
 
  Third Party
  Third Party
  Related Party
 
 
  (In thousands)

 
U.S. Dollar Denominated Facilities:                          
  UPC 10.875% dollar Senior Notes due 2009 (1)     520,481     241,180     558,842     241,190   (4)
  UPC 12.5% dollar Senior Discount Notes due 2009 (1)     388,125     182,647     365,310     171,911   (4)
  UPC 10.875% dollar Senior Notes due 2007 (1)     113,766     56,142     143,864     56,144   (4)
  UPC 11.25% dollar Senior Notes due 2009 (1)     113,567     124,626     125,967     124,586   (4)
  UPC 13.375% dollar Senior Discount Notes due 2009 (1)     241,144     110,734     227,424     103,798   (4)
  UPC 11.25% dollar Senior Notes due 2010 (1)     356,454     208,778     387,697     208,709   (4)
  UPC 11.5% dollar Senior Notes due 2010 (1)     145,028     83,180     215,067     83,153   (4)
  UPC 13.75% dollar Senior Discount Notes due 2010 (1)     461,278     237,061     442,129     221,822   (4)
  UPC Polska Senior Discount Notes (1)     366,364     –       343,323     –    
  Belmarken Notes (1)     –       914,092     –       887,315   (4)
  VTR Bank Facility (2)     150,000     –       176,000     –    
  Intercompany Loan to
VTR (2)
    –       364,971     –       347,971   (3)
   
 
 
 
 
    $ 2,856,207   $ 2,523,411   $ 2,985,623   $ 2,446,599  
   
 
 
 
 

(1)
Functional currency of UPC is Euros
(2)
Functional currency of VTR is Chilean Pesos.
(3)
Held by United and eliminated in consolidation.
(4)
Held by Liberty.

Derivative Instruments

We use derivative instruments from time to time to manage interest rate risk on our floating-rate debt facilities and reduce our exposure to foreign currency exchange rate risk. In connection with certain borrowings, UPC has entered into both cross-currency and interest rate derivative contracts, providing economic hedges to both currency and interest rate exposure. The following table details the fair value of these derivative instruments outstanding by their related borrowings:

Borrowing
  June 30,
2002

  December 31,
2001

 
 
  (In thousands)

 
UPC July 1999 Senior Notes cross currency/interest rate derivative contract   $ –     $ 90,925  
UPC October 1999 Senior Notes cross currency/interest rate derivative contract     –       49,622  
UPC January 2000 Senior Notes cross currency/interest rate derivative contract     –       32,837  
UPC Distribution Bank Facility cross currency/interest rate derivative contract     (71,830 )   (42,064 )
   
 
 
  Total derivative (liabilities) assets, net   $ (71,830 ) $ 131,320  
   
 
 

Of the above derivative instruments, only the contract on the UPC Distribution Bank Facility qualifies as an accounting cash flow hedge. Accordingly, changes in fair value of this instrument are recorded through

69



other comprehensive income in the consolidated statement of stockholders' deficit. The remaining instruments are marked to market each period with the corresponding fair value gain or loss recorded as a part of foreign currency exchange gain (loss), derivative losses and other income (expense) in the consolidated statement of operations. The fair values consider all rights and obligations of the respective instruments, including certain set-off provisions. For the three months ended June 30, 2002 and 2001, UPC recorded a gain (loss) of $(2.9) million and $(49.8) million, respectively, and for the six months ended June 30, 2002 and 2001, UPC recorded a gain (loss) of $(165.1) million and $22.8 million, respectively, in connection with the mark-to-market valuations.

In June 2002, UPC recognized an extraordinary gain of approximately $342.3 million from the delivery by certain banks of approximately $399.2 million in aggregate principal amount of UPC's senior notes and senior discount notes as settlement of the interest rate/cross currency derivative contracts on the UPC July 1999 Senior Notes, the UPC October 1999 Senior Notes and the UPC January 2000 Senior Notes.

Inflation and Foreign Investment Risk

Certain of our operating companies operate in countries where the rate of inflation is extremely high relative to that in the United States. While our affiliated companies attempt to increase their subscription rates to offset increases in operating costs, there is no assurance that they will be able to do so. Therefore, operating costs may rise faster than associated revenue, resulting in a material negative impact on reported earnings. We are also impacted by inflationary increases in salaries, wages, benefits and other administrative costs, the effects of which to date have not been material.

Our foreign operating companies are all directly affected by their respective countries' government, economic, fiscal and monetary policies and other political factors. We believe that our operating companies' financial conditions and results of operations have not been materially adversely affected by these factors.

70


Interest Rate Sensitivity

The table below provides information about our primary debt obligations. The variable rate financial instruments are sensitive to changes in interest rates. The information is presented in U.S. dollar 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, 2002. Contractual maturities may differ from the information shown in the table below.

 
  June 30, 2002
  Expected payment as of December 31,
 
  Book Value
  Fair Value
  2002
  2003
  2004
  2005
  2006
  Thereafter
  Total
 
  (In thousands, except interest rates)

Fixed rate UGC Holdings 1998 Notes (dollar)   $ 23,073   $ 9,851   (1) $ –     $ –     $ –     $ –     $ –     $ 23,073   $ 23,073
  Average interest rate     10.75 %   26.34 %                                        
Variable rate UPC Senior Notes due 2009 (dollar)     520,481     99,016   (2)   520,481     –       –       –       –       –       520,481
  Average interest rate     10.875 %   86.43 %                                        
Fixed rate UPC Senior Notes due 2009 (euro)     141,489     21,053   (2)   141,489     –       –       –       –       –       141,489
  Average interest rate     10.875 %   92.65 %                                        
Fixed rate UPC Senior Discount Notes due 2009 (dollar)     388,125     66,150   (2)   388,125     –       –       –       –       –       388,125
  Average interest rate     12.50 %   59.99 %                                        
Variable rate UPC Senior Notes due 2007 (dollar)     113,766     22,088   (2)   113,766     –       –       –       –       –       113,766
  Average interest rate     10.875 %   92.87 %                                        
Fixed rate UPC Senior Notes due 2007 (euro)     37,402     6,835   (2)   37,402     –       –       –       –       –       37,402
  Average interest rate     10.875 %   98.80 %                                        
Variable rate UPC Senior Notes due 2009 (dollar)     113,567     30,965   (2)   113,567     –       –       –       –       –       113,567
  Average interest rate     11.25 %   87.83 %                                        
Fixed rate UPC Senior Notes due 2009 (euro)     37,732     6,892   (2)   37,732     –       –       –       –       –       37,732
  Average interest rate     11.25 %   57.68 %                                        
Fixed rate UPC Senior Discount Notes due 2009 (dollar)     241,144     43,020   (2)   241,144     –       –       –       –       –       241,144
  Average interest rate     13.375 %   57.86 %                                        
Fixed rate UPC Senior Discount Notes due 2009 (euro)     86,497     13,211   (2)   86,497     –       –       –       –       –       86,497
  Average interest rate     13.375 %   53.36 %                                        
Fixed rate UPC Senior Notes due 2010 (dollar)     356,454     73,480   (2)   356,454     –       –       –       –       –       356,454
  Average interest rate     11.25 %   88.00 %                                        
Fixed rate UPC Senior Notes due 2010 (euro)     81,544     14,396   (2)   81,544     –       –       –       –       –       81,544
  Average interest rate     11.25 %   94.54 %                                        
Fixed rate UPC Senior Notes due 2010 (dollar)     145,028     29,667   (2)   145,029     –       –       –       –       –       145,028
  Average interest rate     11.50 %   89.71 %                                        
Fixed rate UPC Senior Discount Notes due 2010 (dollar)     461,278     90,000   (2)   461,278     –       –       –       –       –       461,278
  Average interest rate     13.75 %   55.25 %                                        

71


 
  June 30, 2002
  Expected payment as of December 31,
 
  Book Value
  Fair Value
  2002
  2003
  2004
  2005
  2006
  Thereafter
  Total
 
  (In thousands, except interest rates)

Fixed rate UPC DIC Loan (dollar)     53,458     –     (3)   53,458     –       –       –       –       –       53,458
  Average interest rate     10.00 %   0.00 %                                        
Fixed rate UPC Polska Senior Discount Notes     366,364     93,822   (2)   –       14,509     –       –       –       351,855     366,364
  Average interest rate     7.00-14.5 %   25.11-55.03 %                                        
Variable rate UPC Bank Facility     3,089,594     3,089,594   (4)   3,089,594     –       –       –       –       –       3,089,594
  Average interest rate     7.62 %   7.62 %                                        
Notes payable to Liberty     102,728     102,728   (4)   –       102,728     –       –       –       –       102,728
  Average interest rate     8.00 %   8.00 %                                        
Capital lease obligations     49,304     49,304     5,879     5,159     4,834     4,820     4,842     23,770     49,304
  Average interest rate     Various     Various                                          
Other debt     29,917     29,917   (4)   5,200     24,717     –       –       –       –       29,917
  Average interest rate     Various     Various                                          
   
 
 
 
 
 
 
 
 
    Total debt   $ 6,438,945   $ 3,891,989     5,878,639     147,113     4,834     4,820     4,842     398,698     6,438,945
   
 
 
 
 
 
 
 
 
Operating leases     53,195     41,320     40,480     39,633     49,177     172,939     396,744
Other commitments     61,175     42,870     –       –       –       –       104,045
               
 
 
 
 
 
 
    Total commitments     114,370     84,190     40,480     39,633     49,177     172,939     500,789
               
 
 
 
 
 
 
    Total debt and commitments   $ 5,993,009   $ 231,303   $ 45,314   $ 44,453   $ 54,019   $ 571,637   $ 6,939,734
               
 
 
 
 
 
 

(1)  Fair value ($0.40 of face) is based upon the recent price paid to repurchase 98.2% of these bonds in the tender offer that expired February 1, 2002.

(2)  Fair value is based on quoted market prices in an active market.

(3)  Fair value approximates nil, due to under water convertibility feature.

(4)  Fair value approximates book value in the absence of quoted market prices.

72



PART II – OTHER INFORMATION

Item 3. Defaults Upon Senior Securities

Please refer to Note 3 to the Company's condensed consolidated financial statements, which is incorporated herein by reference.


Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit
Number

  Description
10.1   Amendment No. 7 dated as of April 29, 2002, among VTR GlobalCom S.A., a Chilean corporation, the subsidiaries of VTR listed on the signature pages, Toronto Dominion Bank (Texas), Inc., as agent for the lenders party to the Credit Agreement and each of the lenders party to the Credit Agreement dated as of April 29, 1999, among UIH Chile Holding S.A., the subsidiary guarantors named therein, Toronto Dominion (Texas), Inc., TD Securities (USA), Inc. and Citibank, N.A.

10.2

 

Cash Collateral Agreement, dated as of April 29, 2002, by and among United Latin America, Inc., a Colorado corporation, Toronto Dominion Bank (Texas), Inc., as agent for the lenders party to the Credit Agreement and The Toronto-Dominion Bank, as securities intermediary.

10.3

 

Letter Dated April 29, 2002 from UGC Holdings, Inc. to Toronto Dominion Bank (Texas), Inc., as agent for the lenders party to the Credit Agreement, and such lenders.


(b)    Reports on Form 8-K filed during the quarter

 
Date of Filing
  Date of Event
  Item Reported
  June 25, 2002   June 21, 2002   Item 5 – Announcement of a loan agreement between Liberty Media Corporation and Gene W. Schneider, the Chairman and Chief Executive Officer of UnitedGlobalCom, Inc.

73



SIGNATURE

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

        UNITEDGLOBALCOM, INC.

Date:

 

August 14, 2002


 

By:

 

/s/  
FREDERICK G. WESTERMAN III      
Frederick G. Westerman III
Chief Financial Officer


CERTIFICATION

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


Date:

 

August 14, 2002


 

/s/  
GENE W. SCHNEIDER      
Gene W. Schneider
Chairman and Chief Executive Officer

Date:

 

August 14, 2002


 

/s/  
FREDERICK G. WESTERMAN III      
Frederick G. Westerman III
Chief Financial Officer

74