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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

COMMISSION FILE NUMBER 000-22877

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

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

         Indicate by check (X) whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No (    )

        The number of shares outstanding of UPC Polska, Inc.'s common stock as of March 31, 2003, was:

Common Stock 1,000

UPC POLSKA, INC.
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED MARCH 31, 2003

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PART I    FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

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

ASSETS

See accompanying notes to unaudited consolidated financial statements.

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

LIABILITIES AND STOCKHOLDER'S DEFICIT

See accompanying notes to unaudited consolidated financial statements.

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

See accompanying notes to unaudited consolidated financial statements.

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

See accompanying notes to unaudited consolidated financial statements.

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

See accompanying notes to unaudited consolidated financial statements.

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UPC POLSKA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)

1.     GENERAL

        UPC Polska, Inc. (previously @Entertainment, Inc.) is a Delaware corporation which was established in May 1997. UPC Polska, Inc. succeeded Poland Communications, Inc. ("PCI") as the group holding company to facilitate an initial public offering of stock in the United States and internationally (the "IPO"). PCI was founded in 1990 by David T. Chase, a Polish-born investor. On August 6, 1999, United Pan-Europe Communications N.V. ("UPC") acquired all of the outstanding shares of UPC Polska, Inc. Until December 2, 2002, UPC Polska, Inc. was wholly owned by UPC. On December 2, 2002, UPC transferred all issued shares in the capital of UPC Polska, Inc. to its wholly owned subsidiary, UPC Telecom B.V. ("UPC Telecom"). UPC also assigned to UPC Telecom all rights and obligations arising from loan agreements between UPC Polska Inc. and UPC. References to "UPC" mean United Pan-Europe Communications N.V. References to "UPC Telecom" mean UPC Telecom B.V. References to the "Company" mean UPC Polska, Inc. and its consolidated subsidiaries.

2.     MERGER OF D-DTH BUSINESS

        On August 10, 2001, the Company, UPC and Group Canal+ S.A. ("Canal+"), the television and film division of Vivendi Universal, announced the signing of a Shareholder Agreement and Contribution and Subscription Agreement ("Definitive Agreements") to merge their respective Polish digital satellite direct-to-home ("D-DTH") platforms, as well as the Canal+ Polska premium channel, to form a common Polish D-DTH platform (the "Canal+ merger"). The transaction contemplated by such agreements was consummated on December 7, 2001. As part of the transaction, the Company, through its affiliate Polska Telewizja Cyfrowa Wizja TV Sp. z o.o. ("PTC"), contributed Wizja TV Sp. z o.o. and UPC Broadcast Centre Ltd., the Company's Polish and United Kingdom D-DTH businesses, respectively, to Telewizyjna Korporacja Partycypacyjna S.A. ("TKP"), the Polish subsidiary of Canal+. The Company received 150.0 million Euros (approximately $133.4 million as of December 7, 2001) in cash and PTC received a 25% ownership interest in TKP upon receipt of court approval and other legal matters in connection with the issuance of new TKP shares.

        In connection with the requirements of the Definitive Agreements, the Company was required to fund 30.0 million Euros ($26.8 million as of December 31, 2001) to TKP. On February 1, 2002, the Company and Canal+ completed all Polish legal formalities in connection with the transaction. On the same day, the Company funded TKP with 30.0 million Euros (approximately $26.0 million as of February 1, 2002) in the form of a shareholder loan ("JV loan") and registered its 25% investment in TKP with the Commercial Court in Poland. The Company included the value of the JV loan in its valuation of the fair value of its 25% investment in TKP. The Company valued its 25% ownership interest at fair market value as of the acquisition date (December 7, 2001) at 30.0 million Euros (approximately $26.8 million as of December 31, 2001). The Company accounts for this investment using the equity method. As a result of the recognition of the Company's share in TKP's losses the book value of this investment was zero as of March 31, 2003.

        On February 12, 2003, the Company and Canal+ agreed to certain changes to their agreements governing TKP, including a change to TKP's capitalization and the manner in which proceeds from any sale of TKP would be distributed among its shareholders, to retain the original economic structure of

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the shareholders' investments, following the capitalization. The Company and Canal+ agreed that upon a sale of their investment in TKP the sales proceeds will be distributed in the following proportion:

•

if the proceeds are less than or equal to 270.0 million Euros, PTC will receive an amount corresponding to 30/270 of the proceeds (11.1%)



•

if the proceeds are higher than 270.0 million Euros, the excess over 270.0 million Euros will be distributed between PTC and Canal+ and its affiliate on a pro rata basis corresponding to their shareholding. Thus, PTC will receive 11.1% of the proceeds up to 270.0 million Euros and 25% of the excess of the proceeds over 270.0 million Euros.

        On February 27, 2003, the JV loan was paid to the Company in the principal amount of 30.0 million Euros ($32.3 million as of February 27, 2003) and subsequently contributed by the Company to TKP's paid-in capital, following the shareholders' resolution to increase in share capital of TKP. The Company acquired 60,000 registered series C shares at the issue price of 500 Euros each. Canal+ and PolCom Invest S.A., an affiliate of Canal+, contributed together 90.0 million Euros into paid-in capital on the same date. After the contribution, PTC continued to hold 25% of TKP's shares. As the loan granted to TKP of 30.0 million Euros was included in the fair market value of the investment in TKP as of December 7, 2001, the above transactions (repayment of the loan to the Company by TKP and further capital contribution of 30.0 million Euros) have no influence on the valuation of the investment in TKP.

        Pursuant to the indentures governing the Company's 14¹/2% Senior Discount Notes due 2008, Series C Discount Notes due 2008 and 14¹/2% Senior Discount Notes due 2009 (together, the "UPC Polska Notes"), the Company was required to use the net cash proceeds from the Canal+ merger within 12 months of the transaction date, December 7, 2001, for certain limited purposes. These include:

•

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



•

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



•

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

        Additionally, the Company's agreements related to the notes payable to UPC and its affiliates contain limitations on the use of cash proceeds from the sale of assets. However, the Company has received a waiver from UPC and its affiliates to specifically exempt the net cash proceeds from these transactions from the limitations contained in the loan agreements with UPC and its affiliates.

        Out of total unrestricted cash of $105.6 million as at December 31, 2002 and $96.7 million as at March 31, 2003, approximately $10.2 million and $8.6 million, respectively, represents cash which is limited in use to the above purposes. Restricted cash of $16.4 million includes $15.8 million held on escrow account with the Indenture trustee for discharge of PCI Notes (see note 3 for details). The remaining part of restricted cash is a deposit held as collateral for guarantee for the rent of the Company's office space.

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3.     GOING CONCERN AND LIQUIDITY RISKS

        These unaudited consolidated financial statements have been prepared on a going concern basis. Due to the large capital investment required for the construction or acquisition of the cable networks, acquisition of programming rights and the administrative costs associated with commencing operations, the Company has incurred substantial operating losses since inception.

        During 2001, the Company reviewed its long term plan for all segments of its operations and identified businesses which were profitable on an operating profit basis and businesses which required extensive additional financing to become profitable. The Company also assessed its ability to obtain additional financing on terms acceptable to it. These reviews resulted in a determination that, as of that point, the Company's only profitable business on an operating profit basis was cable television and it could not provide further financing to its D-DTH and programming businesses. As a result, the Company changed its business strategy towards its operating segments. The Company decided to dispose of its D-DTH and programming businesses and revised its business strategy for cable television from aggressive growth to a focus on achievement of positive cash flow. The Company had positive Adjusted EBITDA and positive cash flow from operations in 2002. Adjusted EBITDA is not a generally accepted accounting principle ("GAAP") measure. The most directly comparable financial measure to Adjusted EBITDA that is calculated and presented in accordance with GAAP is income (loss) before income taxes. Adjusted EBITDA represents net operating earnings before depreciation and amortization. Adjusted EBITDA is one of the primary measures used by the Company's chief 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 decision makers, that Adjusted EBITDA provides investors with the means to evaluate the financial results of the Company compared to other companies within the same industry and 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. Investors should not view Adjusted EBITDA 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 flows.

        In the first quarter of 2003, the Company achieved a decrease in negative cash flow from operations by $0.3 million as compared to the three month period ended March 31, 2002. The negative cash flow from operations is mainly due to an increase in restricted cash of $16.4 million during the first quarter of 2003 (see note 2 for details on restricted cash).

        As of March 31, 2003, the Company had negative working capital of $397.4 million and a stockholder's deficit of $740.5 million. The Company experienced an operating loss of $2.5 million for the three months ended March 31, 2003 as compared to an operating loss of $4.4 million for the three months ended March 31, 2002. It also has significant commitments under operating leases and programming rights, as well as payment obligations related to its short and long term debt.

        As of March 31, 2003, the Company had approximately $6.0 million in outstanding notes payable (the "RCI Note") to Reece Communications, Inc. ("RCI"), a former minority stockholder of the

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Company's subsidiary, Poland Cablevision (Netherlands) B.V. ("PCBV"), recognized as a current liability. The RCI Note bears interest of 7% per annum and matures in August 2003. UPC is the guarantor of the note. Since an event of default has occurred under UPC's indentures, which was not cured or waived within the applicable grace period, a cross-default has occurred under the RCI Note. As a result, RCI has the right to receive interest at the default rate of 12% per annum and to accelerate the repayment of the RCI Note. On January 15, 2003, RCI filed a complaint in the Superior Court in New Castle County, Delaware against the Company regarding its default on the RCI Note. The demand was made for immediate payment in full of the unpaid $6.0 million principal amount of the RCI Note together with all accrued and unpaid interest at the default rate. The litigation was formally served on January 29, 2003. On February 25, 2003, a default judgment was entered against the Company in the amount of $6,110,465.60 (representing the outstanding principal and accrued interest from January 1, 2003 through February 25, 2003) plus an unidentified amount for "all other costs of this action". The Company has not paid any amounts demanded by RCI, or filed responsive pleadings in the litigation.

        On November 1, 2003, the Company will also be required to fulfill its repayment obligation of approximately $14.5 million in principal amount under the 9⁷/8% Senior Notes due 2003 ("PCI Notes") of the Company's subsidiary, PCI. At March 31, 2003, the PCI Notes were classified as a short-term liability. In February 2003, PCI elected to satisfy and Discharge the PCI Notes in accordance with the Indenture governing PCI Notes ("the PCI Indenture"). On March 19, 2003, the Company deposited with the PCI Indenture trustee $15.8 million, an amount to be held in trust and sufficient to pay and discharge the entire indebtedness of the PCI Notes plus accrued interest at maturity (November 1, 2003). Accordingly, on the Company's consolidated balance sheet as of March 31, 2003, this amount is reflected as Restricted Cash. As a result of the Discharge of the PCI Notes, PCI has been released from its covenants contained in the PCI Indenture.

        Over the long term, the Company must meet substantive repayment obligations on its indebtedness, including approximately $469.6 million due to UPC Telecom and Belmarken Holding B.V. ("Belmarken") plus related interest and $459.9 million under the UPC Polska Notes. Cash payments under the UPC Polska Notes will aggregate to approximately $50.8 million per annum in 2004 and approximately $69.2 million per annum in 2005 and thereafter. At March 31, 2003, the unpaid accrued and capitalized interest owing to UPC Telecom and its affiliate aggregated to $129.0 million. In prior years, UPC and its affiliates have permitted the Company to defer payment of interest due. UPC Telecom and its affiliate have agreed to permit such deferral until the earlier of (A) April 1, 2004 or (B) the occurrence of any other event of default under any of the Company's loans from UPC Telecom or Belmarken, or any acceleration of debts in excess of $15.0 million under any agreement evidencing debt of the Company. The Company, however, has no assurances that UPC Telecom and its affiliate will permit such deferral going forward.

        The UPC Polska Notes are currently classified as long term debt on the basis of waivers that the Company has obtained regarding certain covenant violations on loans it owes to UPC Telecom and Belmarken. These waivers extend until April 1, 2004, but are subject to early termination upon the occurrence of certain conditions outside the Company's control, including termination of waivers on certain cross defaults on the Company's loans. If such cross defaults or other conditions were to occur and would not be cured, the waivers on UPC Polska's loans from UPC Telecom and Belmarken could terminate, which in turn could allow the UPC Polska Notes to be accelerated.

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        The Company, since its acquisition by UPC, has relied completely on funding from its shareholder UPC and UPC's affiliates. The Company believes it will not be able to obtain significant funding from UPC in the foreseeable future. UPC has reviewed its funding requirements and possible lack of access to debt and equity capital in the near term and has modified its business and funding strategies. As a result of its financial circumstances and strategies, in 2002 UPC failed to make payments on outstanding debt securities, which caused defaults on such securities and other securities issued by UPC and/or on an Exchangeable Loan made to Belmarken. On December 3, 2002, UPC filed a petition for the relief under Chapter 11 of the United States Bankruptcy Code and a petition to commence a moratorium on payment and for a plan of compulsory composition (Akkoord) under Dutch Bankruptcy law. Subsequently, plans of reorganization were filed with respect to the Chapter 11 case and Akkoord and were approved on February 20, 2003 and March 13, 2003, respectively. The Company understands that UPC expects the restructuring contemplated by the Chapter 11 and Akkoord plans to be completed promptly after applicable appeal periods and procedures have been completed. However, the Chapter 11 and Akkoord proceedings are not yet final. An appeal is pending with the Dutch Supreme Court in respect of Akkoord and consummation of the restructuring contemplated by the Chapter 11 and Akkoord plans is subject to various conditions. Accordingly, the Company cannot make any assurance that these conditions will be satisfied or that the restructuring will be consummated.

        UPC has announced that it has received waivers to its principal bank facility and the Exchangeable Loan made to Belmarken. The extended waivers are subject to certain conditions and expire on the earlier of (A) September 30, 2003 and September 3, 2003, respectively or (B) the occurrence of certain events, none of which, to the knowledge of the Company, has occurred as of the date of the filing of this Quarterly Report on Form 10-Q.

        The Company's loan agreements with UPC Telecom and Belmarken contain various covenants, including a provision which provides UPC Telecom with the ability to declare the loans immediately due and payable if, in their opinion, a material adverse change has occurred in the business, operations, prospects or condition (financial or otherwise) of the Company or any of its subsidiaries or, if in the opinion of UPC Telecom and Belmarken, any event or circumstance has occurred that could have a material adverse effect on the Company's ability to fulfill its obligations under the loan agreement in question.

        The Company's loan agreements with UPC Telecom and Belmarken contain various covenants and events of default which, among other things, permit UPC Telecom and Belmarken to accelerate the loans if a continuing default exists under the Exchangeable Loan, a default exists under indebtedness of the Company or its subsidiaries which would permit or cause such indebtedness to be accelerated or if, in the opinion of UPC Telecom or Belmarken, certain material adverse events or conditions relative to the Company have occurred. Accordingly, the Company's loans payable to UPC Telecom and Belmarken are classified as short-term liabilities. Although the RCI Note is in default at the date of the filing of this Quarterly Report on Form 10-Q, this has not resulted in cross default under the Company's loans from UPC Telecom and Belmarken because UPC Telecom and Belmarken have waived any potential cross default until the earlier of (A) April 1, 2004 or (B) any other event of default under the Company's loans from UPC Telecom and Belmarken. The Company cannot be certain that it will continue to receive such waivers in the future.

        In the event UPC or its affiliates cease to allow deferral of interest payments or accelerate payment owed to them by the Company under their loans, the Company would have limited funds or available borrowings to repay these loans. If the Company were to default on its loan payments to UPC

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or its affiliates, the acceleration clauses in the indentures governing the UPC Polska Notes may be triggered requiring those notes to be paid off as well, and the Company would likely not have sufficient funds or available borrowings to repay those notes. Additionally, under the UPC Polska Notes there are various Events of Default, including the acceleration of the payment of other debt of the Company in excess of $15.0 million. In the event the UPC Polska Notes were accelerated as a result of such a cross acceleration or another event of default, the Company would have limited funds or available borrowings to repay these notes. In any such circumstances the Company's available cash on hand would be insufficient to satisfy all of its obligations, and the Company cannot be certain that it would be able to obtain the borrowings needed to repay such amounts at all, or on terms that will be favorable to the Company.

        Although the Company had anticipated being able to rely on UPC to meet its payment obligations, given UPC's liquidity concerns and uncertainty whether or not UPC's restructuring will be completed, the Company is not certain that it will receive the necessary (or any) financing from UPC. In order to continue its operations, the Company believes it will have to restructure its outstanding indebtedness to UPC Telecom and Belmarken and the holders of the UPC Polska Notes. If the Company is unable to successfully restructure its debt or rely on UPC for financial support, it will have to meet its payment obligations with cash on hand, funds obtained from public or private debt and bank financing or any combination thereof, subject to the restrictions contained in the indentures governing the outstanding senior indebtedness of the Company and, if applicable, UPC and its parent, UnitedGlobalCom, Inc.

        In the fourth fiscal quarter of 2002, the Company became aware that certain of its main creditors, including UPC and its affiliates, and certain holders of the UPC Polska Notes, were engaged in discussions about the restructuring of the Company's indebtedness. In the first quarter of 2003, the Company met with representatives of UPC (which through subsidiaries holds debt obligations of the Company) and certain holders of the UPC Polska Notes (other than UPC and its affiliates) to discuss a process for, and terms of, a restructuring of those obligations and notes. UPC and its advisors and the noteholders and their advisors have had substantive discussions with the Company about the terms of a possible debt restructuring. As of the date of the filing of this Quarterly Report on Form 10-Q, the Company has not entered into a definitive agreement with either UPC, its affiliates or the noteholders' regarding the terms of a debt restructuring.

        The Company has approximately $96.7 million of unrestricted cash as of March 31, 2003. However, as a result of the limitations imposed on it by the indentures governing the UPC Polska Notes and the notes payable to UPC Telecom and its affiliate, approximately $8.6 million as of March 31, 2003 of this cash, which represents the remaining net cash proceeds of the Canal+ merger, is limited in use (as described in note 2 above). As a result of these limitations and the potential inability of UPC to provide necessary funding, if required, the Company has limited sources of funding available to it outside of its operating cash flows.

        The Company has experienced net losses since its formation. There is a substantial uncertainty whether UPC Polska's sources of capital, working capital and projected operating cash flow would be sufficient to fund the Company's expenditures and service the Company's indebtedness over the next years. Accordingly, there is substantial doubt regarding the Company's ability to continue as a going concern. UPC Polska's ability to continue as a going concern is dependent on (i) the Company's ability to restructure the UPC Polska Notes and its loans payable to UPC Telecom and its affiliate and (ii) the Company's ability to generate the cash flows required to enable it to maintain the Company's assets and satisfy the Company's liabilities, in the normal course of business, at the amounts stated in the

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consolidated financial statements. The report of the Company's independent accountant, KPMG Polska Sp. z o.o., on the Company's consolidated financial statements for the year ended December 31, 2002, includes a paragraph that states that the Company has suffered recurring losses from operations and had a negative working capital and a net capital deficiency that raises substantial doubt about the Company's ability to continue as a going concern.

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

4.     BASIS OF PRESENTATION

BASIS OF PRESENTATION

        The information furnished by the Company has been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to these rules and regulations. The Company maintains its books of accounts in Poland, the Netherlands and in the United States of America in accordance with local accounting standards in the respective countries. These financial statements include all adjustments to the Company's statutory books to present these statements in accordance with U.S. GAAP. The consolidated financial statements include the financial statements of UPC Polska, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated balance sheets, statements of operations, statements of comprehensive loss and statements of cash flows are unaudited, but in the opinion of management, reflect all adjustments which are necessary for a fair statement of the Company's consolidated results of operations and cash flows for the interim period and the Company's financial position as of March 31, 2003. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 filed with the SEC (the "2002 Annual Report"). The interim financial results are not necessarily indicative of the results of the full year.

        The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates which include, but are not limited to: allowance for doubtful accounts, impairment charges of long-lived assets, valuation of investments in affiliates and revenue recognition.

        The financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets, and liquidation of liabilities and commitments in the normal course of business.

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        Certain amounts have been reclassified in the corresponding period's unaudited consolidated financial statements to conform to the unaudited consolidated financial statement presentation for the three months ended March 31, 2003.

PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of UPC Polska, Inc. and all of its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

NEW ACCOUNTING PRINCIPLES

        In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and reported as a liability. This statement is effective for fiscal years beginning after June 15, 2002. The Company has adopted SFAS 143 and determined, based on its analysis, that although it may have asset retirement obligations relating to certain lease contracts, it cannot make a reasonable estimate of the fair value of the liability due to the contingent nature of the obligation and the uncertainty about the timing of the settlement, if any. To date the Company has not made any cash payments with respect to the settlement of any potential asset retirement obligation.

        In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145, which updates, clarifies and simplifies existing accounting pronouncements, addresses the reporting of debt extinguishments and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of SFAS 145 are generally effective for the Company's 2003 fiscal year, or in the case of specific provisions, for transactions occurring after May 15, 2002 or financial statements issued on or after May 15, 2002. For certain provisions, including the rescission of Statement 4, early application is encouraged. In the first quarter of 2003, the Company adopted SFAS 145 which did not have an impact on its financial position or results of operations.

        In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in the EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The scope of SFAS 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS 146 will be effective for financial statements issued for fiscal years beginning after December 31, 2002. As the Company currently has no plans to exit or dispose of any of its activities, the adoption of SFAS 146 did not have a material impact on its results of operations and financial position.

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        In November 2002, the Financial Accounting Standard Board issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an Interpretation of FASB Statements No. 5, 57, and 107 and a Rescission of FASB Interpretation No. 34. ("FIN 45"). FIN 45 clarifies and expands on existing disclosure requirements for guarantees, including loan guarantees. It also would require that, at the inception of a guarantee, the Company must recognize a liability for the fair value of its obligation under that guarantee. The initial fair value recognition and measurement provisions will be applied on a prospective basis to certain guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of periods ending after December 15, 2002. The Company adopted the disclosure requirements of FIN 45 at December 31, 2002 and evaluated the impact of the adoption of the remainder of FIN 45 and determined, based on its analysis, that it will not have a material impact on its financial position and results of operations.

        In December 2002, the Financial Accounting Standards Board issued Statement No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment to Statement No. 123" ("SFAS 148"). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), by requiring prominent disclosures in both annual and interim financial statements, about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The Company adopted the provisions of SFAS 123, as amended by SFAS 148, at December 31, 2002 and determined, based on its analysis, that it will not have a material impact on its financial position and results of operations.

        In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for variable interest entities created or acquired after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities created or acquired prior to February 1, 2003. The Company believes that the adoption of FIN 46 will not have a material impact on its financial position and results of operations.

        On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, ("FAS 149"), which amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to address (1) decisions reached by the Derivatives Implementation Group, (2) developments in other Board projects that address financial instruments, and (3) implementation issues related to the definition of a derivative. FAS 149 has multiple effective date provisions depending on the nature of the amendment to Statement 133, and the Company is currently considering its potential effect on the financial statements.

        At the January 23, 2003 meeting, the Emerging Issues Task Force (EITF) reached consensuses on EITF 02-18 Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition. Issues 1 and 2 of EITF 02-18 which considered whether, (i) an investor should recognize any previously suspended losses when accounting for a subsequent investment in an investee

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that does not result in the ownership interest increasing from one of significant influence to one of control, and (ii), if the additional investment represents the funding of prior losses, whether all previously suspended losses should be recognized or whether only the previously suspended losses equal to the portion of the investment determined to be funding prior losses should be recognized. The EITF concluded that if the additional investment, represents, in substance, the funding of prior losses, the investor should recognize previously suspended losses only up to the amount of the additional investment determined to represent the funding of prior losses. At its February 5, 2003 meeting, the FASB ratified the consensuses reached by the Task Force in this Issue. The Company has discontinued recording losses on its equity method investment in TKP. If the Company makes additional investments in TKP, the Company would be required to recognize additional losses to the extent these additional investments are considered funding of unrecognized prior losses of TKP.

5.     INTANGIBLE ASSETS

        On January 1, 2002 the Company adopted SFAS 142, "Goodwill and Other Intangible Assets". Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are tested for impairment on an annual basis and whenever indicators of impairment arise. The goodwill impairment test, which is based on fair value, is performed at the reporting unit level. All recognized intangible assets that are deemed not to have an indefinite life are amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS 144.

        In adopting SFAS 142, the Company worked with an external party to assist in the determination and comparison of the fair value of the Company's reporting unit with its respective carrying amount, including goodwill. The fair value of the Company's reporting units was estimated using the expected present value of future cash flows as well as a market multiple approach, under which a risk adjusted market multiple obtained by comparison with various publicly traded companies in the cable industry, was applied to the Company's revenue stream.

        As a result of the Company's impairment test completed in the fourth quarter of 2002, the Company recorded a goodwill impairment charge of $371.0 million, net of income taxes of zero as a cumulative effect of accounting change. As a result of the adoption of SFAS 142, the net book value of goodwill as at March 31, 2003 and December 31, 2002 is zero.

        The Company's amortized intangible assets consist of software licenses in the net amount of $1.4 million as of March 31, 2003. As of March 31, 2003 the gross carrying value and accumulated depreciation amounted to $4.0 million and $2.6 million respectively.

6.     RELATED PARTY TRANSACTIONS

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

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CALL CENTER REVENUE

        During 2002, the Company provided certain call center services to TKP in connection with Canal+ merger transaction. The total revenue from these services amounted to $918,000 for the three months ended March 31, 2002. These call center services were terminated in the second quarter of 2002.

OTHER REVENUE

        Commencing April 2002, the Company has provided certain IT services relating to a subscribers management system to other Central European affiliates of UPC. The total revenue from these services amounted to $117,000 for the three months ended March 31, 2003.

        Commencing March 2003, the Company has provided certain marketing services related to internet market research to an affiliate of UPC. The total revenue from these services amounted to $39,000 for the three months ended March 31, 2003.

DIRECT OPERATING EXPENSES CHARGED BY AFFILIATES

        Certain of the Company's affiliates have provided programming to the Company. The Company incurred programming fees from these affiliates of $614,000 for the three months ended March 31, 2003 as compared to $849,000 for the three months ended March 31, 2002.

        The Company was also provided with Canal+ Multiplex programming by TKP. The total cost related to this service amounted to $198,000 for the three months ended March 31, 2003 as compared to $29,000 for the three months ended March 31, 2002.

        The Company has incurred direct costs related to internet services from its affiliates amounting to $523,000 for the three months ended March 31, 2003 as compared to $326,000 for the three months ended March 31, 2002.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

        UPC and its affiliates provide the Company with services such as legal services, negotiation of contracts with programmers, financial reporting assistance, investor relations, corporate communications, information technology, equipment procurement and facilities. UPC allocates to the Company a proportionate share of such costs for these services based on the Company's revenues. Taking into account the relative size of its operating companies and their estimated use of UPC resources, the allocation may be adjusted in the future. During the three months ended March 31, 2003, UPC charged the Company $663,000 as compared to $1,345,000 for the three months ended March 31, 2002 for those services. The above charges are shown as a component of selling, general and administration expenses in the consolidated statements of operations.

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NOTES PAYABLE TO UPC AND ITS AFFILATES

        The Company was indebted to UPC and its affiliates in the following amounts: