MEGACABLE HOLDINGS, S.A.B. DE C.V. AND SUBSIDIARIES Consolidated Financial...

01 Report of Independent Auditors Audited Consolidated Financial Statements:

02 Consolidated Balance Sheets03 Consolidated Statements of Income04 Consolidated Statements of Changes in Shareholders’ Equity 06 Consolidated Statements of Cash Flows07 Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009with Report of Independent Auditors

MEGACABLE HOLDINGS, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Financial Statements

Financial Statements 2010 • 01

To the Shareholders ofMegacable Holdings, S.A.B. de C.V. and Subsidiaries.

We have audited the accompanying consolidated balance sheets of Megacable Holdings, S.A.B de C.V. and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in conformity with Mexican Financial Reporting Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Megacable Holdings, S.A.B. de C.V. and Subsidiaries at December 31, 2010 and 2009, and their consolidated results of operations, changes in shareholders’ equity, and cash flows for the years then ended, in conformity with Mexican Financial Reporting Standards.

Our audit opinion and the accompanying financial statements and footnotes have been translated from the original Spanish version to English for convenience purposes only.

Mancera, S.C. A Member Practice of Ernst & Young Global

José María Tabares

Guadalajara, Jalisco April 27, 2011

❍ ❍ ❍ Report of Independent Auditors

02 • Financial Statements 2010


❍ ❍ ❍ Consolidated Balance Sheets(Amounts in thousands of Mexican pesos)

December 31 2010 2009

Assets Current assets: Cash and cash equivalents (Note 2) Ps. 1,685,652 Ps. 2,576,189 Accounts receivable, net (Note 3) 278,423 254,678 Recoverable taxes (Note 4) 357,753 462,554 Inventories (Note 5) 166,879 143,581 Prepaid expenses 75,955 28,579 Financial instruments (Note 14) – 13,216Total current assets 2,564,662 3,478,797 Property, systems and equipment, net (Note 8) 7,759,422 6,007,917 Goodwill, net (Note 1I) 4,277,036 4,277,036 Related parties (Note 6) 384,530 – Equity investment in associate (Note 7) 108,525 58,970 Other assets, net (Note 9) 512,751 407,640Total non-current assets 13,042,264 10,751,563Total assets Ps. 15,606,926 Ps. 14,230,360

Liabilities and shareholders’ equity Current liabilities: Short-term notes payable (Note 10) Ps. 34,432 Ps. 6,320 Bank loans (Note 11) – 3,021,244 Suppliers 501,863 207,735 Related parties (Note 6) 17,736 11,536 Sundry creditors, accrued liabilities and provisions (Note 12) 593,434 398,504Total current liabilities 1,147,465 3,645,339 Long-term liabilities: Long term notes payable (Note 10) 28,669 – Bank loans (Note 11) 2,100,000 – Employee benefits (Note 13) 102,963 76,863 Deferred taxes on profits (Note 18) 629,929 703,985Total long-term liabilities 2,861,561 780,848Total liabilities 4,009,026 4,426,187 Contingencies and commitments (Note 19) – –

Shareholders’ equity (Note 17): Capital stock 920,130 919,965 Share premium 2,126,348 2,126,348 Retained earnings 8,326,987 6,628,840 Total shareholders’ equity Majority interest 11,373,465 9,675,153 Minority interest 224,435 129,020Total shareholders’ equity 11,597,900 9,804,173Total liabilities and shareholders’ equity Ps. 15,606,926 Ps. 14,230,360

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



❍ ❍ ❍ Consolidated Statements of Income (Amounts in thousands of Mexican pesos)

Year ended December 31 2010 2009 Service revenues (Note 1d and 21) Ps. 7,509,295 Ps. 6,894,682Cost of services 2,498,836 2,307,483Gross profit 5,010,459 4,587,199 General and operating expenses 2,824,217 2,380,289 Operating income 2,186,242 2,206,910 Other income, net 45,485 12,766 Comprehensive financing (cost) income: Interest income 130,457 133,263Interest expense (154,529) (168,607)Exchange (loss) gain, net (13,425) 136,554 (37,497) 101,210 Equity interest in net (loss) income of associate (Note 7) (5,078) 34,491 Income before taxes on profits 2,189,152 2,355,377 Taxes on profits (Note 18) 477,498 348,570Consolidated net income 1,711,654 2,006,807

Net income attributable to:Non-controlling interest (14,330) (20,037)Equity holders of the parent Ps. 1,697,324 Ps. 1,986,770

Earnings per share:Basic earnings per ordinary share (pesos - Note 17) $ 0.99 $ 1.15



❍ ❍ ❍ Consolidated Statements of Changes in Shareholders’ EquityFor the years ended December 31, 2010 and 2009 (Amounts in thousands of Mexican pesos)

Share Retained Minority Total shareholders’ Capital stock premium earnings Total interest equity

Consolidated balance at December 31, 2008 Ps. 914,800 Ps. 2,099,829 Ps. 4,574,541 Ps. 7,589,170 Ps. 93,755 Ps. 7,682,925Capital contributions 15,228 15,228Net resale of shares (Note 17) 5,165 26,519 67,529 99,213 99,213Comprehensive income 1,986,770 1,986,770 20,037 2,006,807

Consolidated balance at December 31, 2009 919,965 2,126,348 6,628,840 9,675,153 129,020 9,804,173Increase in minority interest 81,085 81,085Net resale of shares (Note 17) 165 823 988 988Comprehensive income 1,697,324 1,697,324 14,330 1,711,654

Consolidated balance at December 31, 2010 Ps. 920,130 Ps. 2,126,348 Ps. 8,326,987 Ps. 11,373,465 Ps. 224,435 Ps. 11,597,900



Year ended December 31 2010 2009

Operating activities Income before taxes on profits Ps. 2,189,152 Ps. 2,355,377 Net period cost of employee benefits 32,280 16,483 Allowance for doubtful accounts 40,000 –Items related to investing activities: Depreciation 703,330 581,497 Customer portfolio amortization 162,821 125,134 Loss on the sale of property and machinery – 5,328 Interest income (130,457) (133,263) Equity interest in net loss (income) of subsidiary 5,078 (34,491) Other items not requiring the use of cash 26,038 24,900Items related to financing activities: Exchange differences (33,048) (87,612) Interest paid 154,529 168,607 3,149,723 3,021,960Accounts receivable (63,745) (122,976)Prepaid expenses (47,376 –Recoverable taxes 104,801 (308,536)Related parties 6,200 (72,584)Inventories (23,298) 118,659Financial instruments 13,216 –Suppliers 294,128 (367,844)Sundry creditors and others (157,302) (73,541)Net cash flow provided by operating activities 3,270,167 2,195,138 Investing activities Acquisition of Grupo Omnicable (Nota 20) (549,716) –Acquisition of Grupo Lipsio’s shares (Nota 20) (118,237) Related parties (384,530) –Interest income 130,457 133,263Acquisition of property, systems and equipment (2,196,197) (1,445,229)Proceeds from the sale of property, systems and equipment – 8,772Equity investment (54,633) (17,208)Investments in intangible assets and others (2,892) (46,505)Net cash flow used in investing activities (3,175,748) (1,366,907)Cash surplus to be applied to financing activities 94,419 828,231

Financing activities Loans received 2,100,000 –Loans paid (2,988,196) –Notes payable 56,781 (54,712)Interest expense (154,529) (168,607)Purchase and sale of Company’s own shares 988 99,213Capital contributions – 15,228Net cash flow used in financing activities (984,956) (108,878)Net (decrease) increase in cash and cash equivalents (890,537) 719,353 Cash and cash equivalents at beginning of year 2,576,189 1,856,836

Cash and cash equivalents at end of year Ps. 1,685,652 Ps. 2,576,189



❍ ❍ ❍ Consolidated Statements of Cash Flows (Amounts in thousands of Mexican pesos)


1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Megacable Holdings, S.A.B. de C.V. and Subsidiaries (the Company) is composed of a group of companies engaged in installing, operating, maintaining and selling cable television, internet and telephone services.

These services are rendered through concessions granted by the Mexican Ministry of Communications and Transportation in the regions described in Note 21.

On April 27, 2011, the accompanying consolidated financial statements and these notes were authorized by the Company’s chief finance officer, Luis Antonio Zetter Zermeño, for their issuance and subsequent approval by the audit committee and the Board of Directors and shareholders.

Summary of Significant Accounting Policies

a) Basis of preparation The accompanying financial statements have been prepared on an historical-cost basis, except for those non-monetary items

acquired or recorded in the financial statements before December 31, 2007, as such items reflect the accumulated effects of inflation from their initial recognition date through December 31, 2007. The figures shown in the accompanying financial statements and these notes are in thousands of Mexican pesos (Ps.), except where otherwise indicated.

The annual rate of inflation for 2010 and 2009, as determined based on the Mexican National Consumer Price Index (NCPI) published by Banco de Mexico, was 4.40% and 3.57%, respectively, while the cumulative inflation rate for the three years prior to 2010 is 14.5%. Under Mexican FRS B-10, this cumulative inflation rate represents the necessary condition for considering Mexico as having a non-inflationary economic environment.

b) Compliance with Mexican Financial Reporting Standards The accompanying financial statements were prepared in conformity with Mexican Financial Reporting Standards (Mexican FRS).

c) Equity Investment in subsidiaries and affiliated company i) Investments in subsidiaries A description of the entities (all are S.A. de C.V., except for Megacable Holdings, S.A.B.de C.V.) included in these consolidated financial

statements is as follows:

Equity interest Company 2010 2009 Description of the business

Megacable Holdings Holds and receives resources for placement on the stock market

Mega Cable 99.99% 99.99% Holds and leases infrastructure to subsidiaries

Primary subsidiaries:

Megacable Comunicaciones (1) – 99.99% Handles system operations in Sinaloa, Sonora, the western, central and gulf regions, Chiapas, Comarca, State of Mexico, León and Los Cabos, among others


❍ ❍ ❍ Notes to Consolidated Financial StatementsDecember 31, 2010 and 2009(In thousands of Mexican pesos, unless otherwise indicated)


Company 2010 2009 Description of the business

Telefonía por Cable (1) 99.99% 99.99% Handles system operations in Sinaloa, Sonora, the western, central and gulf regions, Chiapas, Comarca, State of Mexico, León and Los Cabos, among others (1)

Tele Cable Centro de Occidente 51.00% 51.00% Handles system operations in Morelia and Pátzcuaro, MichoacanGiga Cable 99.67% 99.67% Owns the concessions granted for Veracruz, Puebla,

Chiapas, Hidalgo, Campeche, Tabasco and Oaxaca. Handles system operations in Colima and Baja California Sur

Acotel, S.A. de C.V. and Subsidiaries 99.99% 99.99% Owns the concessions granted for the State of Mexico, León and Los Cabos

Sistemas Generales de 99.99% 99.99% Holds the concessions granted for Tlalnepantla Telecomunicaciones

MCM Holding and Subsidiaries 99.99% 99.99% Provides local telephone services in Mexico City, Guadalajara and Monterrey

Myc Red 51.00% 51.00% Handles cable and system operations in Sahuayo and Jiquilpan, Michoacán

TV Cable del Golfo 99.99% 99.99% Provides technical personnel

Servicios Técnicos de Visión por Cable 99.99% 99.99% Provides technical personnel

Mega Ventas 99.99% 99.99% Provides sales personnel

Servicios de Administración y Operación 99.00% 99.00% Provides administrative personnel

Tele Asesores 99.00% 99.00% Provides administrative personnel

Entretenimiento Satelital 95.00% 95.00% Operates Video Rola channel

Grupo Lipsio 96.42% – Lease of equipment and infrastructure for telephony services

Corporativo de Comunicación y Redes 51.00% – Lease of equipment and infrastructure for cable, internet de GDL and telephone services

Servicio y Equipo en Telefonía, Internet 51.00% – Holder of the rights of subscribers of the systems in Morelia y Televisión and Patzcuaro, Michoacan.

(1) During the year ended December 31, 2009, this company had no operations and in 2010, it was merged with Megacable Comunicaciones, S.A. de C.V., the disappearing company, and took over the business of Megacable Comunicaciones, S.A. de C.V. that the related party had carried out through December 31, 2009.

The subsidiaries are consolidated from the time the Company acquires control over the subsidiary and ceases when it no longer exercises control over the subsidiary.

The financial statements of the subsidiaries have been prepared for the same accounting period and following the same accounting policies as those of the Company.

All significant intercompany balances, investments, and transactions have been eliminated in the consolidated financial statements.

Minority interest represents the equity interest of non-controlling shareholders in the results of operations and net assets of the subsidiaries. Minority interest is presented separately in consolidated shareholders’ equity.

NOTAS A LOS ESTADOS FINANCIEROS CONSOLIDADOS


ii) Investment in affiliates Beginning January 1, 2009, the Company adopted Mexican FRS C-7, Equity Investments in Affiliates and Other Long-Term Equity

Investments. Investments in affiliates are considered to be those equity investments which grant the Company significant influence over the investee.

The equity investment in affiliates is first valued at cost of acquisition, and later using the equity method, which basically consists of recognizing the proportional share in the net income or loss and the shareholders’ equity of the investees.

The financial statements of the associate have been prepared for the same accounting period and following the same accounting policies as those used for the preparation of the accompanying financial statements.

d) Recognition of revenues Cable, internet, digital telephone and advertising service revenues are recognized when services are rendered. Cable and internet

services consist of installation fees, monthly service charges, pay per view, and other related services.

Telephone service revenues consist of the monthly rent for such service, which includes measured usage charges based on the number of telephone calls made. Local telephone calls exceeding basic usage are recognized at the time they are made, while long-distance calls are recognized monthly based on their duration.

Interconnection revenues from other carriers are recognized together with the long-distance or excess telephone calls from other operators that enter the Company’s telephone network.

Sales revenues are recognized at the time the significant risks and benefits of ownership of the equipment have been transferred to the customer, which occurs when shipped equipment is received and accepted by the customer.

For the recognition of service revenues, the Company observes the rules imposed by International Accounting Standard 18 (IAS 18), issued by the International Accounting Standards Board (IASB) and applied on supplementary basis.

e) Use of estimates The preparation of financial statements in conformity with Mexican Financial Reporting Standards requires the use of estimates and

assumptions in certain areas. Actual results could differ from these estimates.

f) Cash and cash equivalents Cash and cash equivalents principally consist of bank deposits and highly liquid investments with maturities of no more than 90 days.

These investments are stated at cost plus accrued interest, which is similar to their market value.

g) Financial instruments Financial instruments acquired for hedging purposes The Company mitigates certain financial risks, such as interest rate and foreign currency risks, through a controlled risk management

program that includes the use of derivative financial instruments. The Company enters into interest rate swaps and foreign currency options to mitigate its exposure to interest rate and exchange rate fluctuations, respectively.

All derivatives are recognized in the balance sheet at their fair values, which are obtained from the financial institutions with which the Company has entered into the related agreements. Transaction costs and cash flows received or delivered to adjust the derivatives to their fair value at the inception of the hedge (excluding premiums on options) are recognized as part of the fair value of such financial instruments.

Changes in the fair value of derivatives that do not qualify as hedges are immediately recognized in results of operations, as part of financing cost.

h) Allowance for doubtful accounts The Company’s policy is to provide for doubtful accounts on the balance of accounts receivable, while also taking account the

Company’s past experience and balances with specific collection problems.

The risk of uncollectability of related party receivables is evaluated annually based on an examination of each related party’s financial situation and the market in which the related parties operate.



i) Inventories Inventories are recognized at historical acquisition cost and are valued using the average-cost method. The carrying value of

inventories is not in excess of their net realizable value.

j) Property, systems and equipment Property, systems and equipment are initially recorded at acquisition cost. All equipment acquired before December 31, 2007 was

restated for inflation as required by Bulletin B-10, Effects of inflation.

Depreciation of property, systems and equipment is determined using the straight-line method, based on the estimated useful lives of the related assets (see Note 8).

The carrying value of property, systems and equipment is reviewed whenever there are indicators of impairment in the value of such assets. Whenever an asset’s recovery value, which is the greater of the asset’s selling price and its value in use (the present value of future cash flows), is less than the asset’s net carrying amount, the difference is recognized as an impairment loss.

At December 31, 2010 and 2009, there were no indicators of impairment in the Company’s fixed assets.

k) Leases Property and equipment lease agreements are recognized as capital leases if (i) the ownership of the leased asset is transferred to

the lessee upon termination of the lease; (ii) the agreement includes an option to purchase the asset at a reduced price; (iii) the term of the lease is substantially the same as the remaining useful life of the leased asset; or (iv) the present value of minimum lease payments is substantially the same as the market value of the leased asset, net of any future benefit or scrap value. The Company has no capital leases.

l) Goodwill Goodwill represents the difference between the acquisition cost and the fair value of the net assets acquired at the purchase date.

Goodwill is considered to have an indefinite life and is therefore not amortized; however, it is subject to an impairment evaluation annually, or on a more frequent basis when there are indicators of impairment, and it is adjusted for any impairment loss that may be determined. Impairment testing is conducted for the total goodwill of each reporting unit. Goodwill was amortized through December 31, 2003 and, as of 2004, it is subject to impairment testing.

For the years ended December 31, 2010 and 2009, the Company recognized no loss from impairment in the value of goodwill.

An analysis of goodwill at December 31, 2010 and 2009 is as follows: Goodwill Ps. 4,961,329 Amortization (684,293)

Ps. 4,277,036

m) Intangible assets Intangible assets are amortized on historical values using the straight-line method based on the estimated useful lives of the related

assets.

The carrying value of the Company’s intangible assets with defined useful lives is reviewed whenever there are indicators of impairment in the value of such assets. Whenever an asset’s recovery value, which is the greater of the asset’s selling price and its value in use (the present value of future cash flows), is less than the asset’s net carrying amount, the difference is recognized as an impairment loss.

For the years ended December 31, 2010 and 2009, the Company recorded no loss from impairment in the value of intangible assets shown in the balance sheet.

n) Accrued liabilities, provisions, contingent assets and liabilities and commitments Accrued liabilities are recognized whenever (i) the Company has current obligations (legal or assumed) resulting from a past event,

(ii) when it is probable the obligation will give rise to a future cash disbursement for its settlement and (iii) the amount of the obligation can be reasonably estimated. Otherwise liabilities are disclosed in the financial statements qualitatively.



The effects of long-term engagements with third parties, such as operating leases and agreements with content providers, are recognized in the Company’s financial statements. Considering the terms and conditions of the agreements and based on the revenues earned or expenses incurred. The Company’s significant commitments are disclosed in their notes. The Company does not recognize contingent income, revenues or assets.

o) Provision for seniority premiums, termination payments and other benefits Seniority premiums are paid to workers as required by Mexican labor law. Under Mexican labor law, the Company is liable to make

certain payments to workers who terminate employment or are dismissed in certain circumstances.

The Company recognizes the cost for seniority premiums and termination benefits on an annual basis based on independent actuarial computations applying the projected unit-credit method, using financial assumptions net of inflation. The latest actuarial computation was prepared in December 2010.

Beginning January 1, 2008, as a result of the adoption of Mexican FRS D-3, the Company’s transition liability for labor obligations is being amortized over a term of five years.

The Company recognizes a provision for the costs of paid absences, such as vacation time, based on the accrual method.

p) Employee profit sharing Current-year and deferred employee profit sharing is presented as an ordinary expense in the statement of income rather than as

part of taxes on profits.

Deferred employee profit sharing is determined using the asset and liability method. Under this method, deferred profit sharing is computed by applying the 10% rate to all temporary differences between the values of assets and liabilities for financial and employee profit sharing reporting purposes.

The Company periodically evaluates the possibility of recovering deferred employee profit sharing assets and, if necessary, creates a valuation allowance for those assets that do not have a high probability of being realized.

At December 31, 2010 and 2009, deferred employee profit sharing is Ps. 11,111 and Ps. 9,261, respectively, and is included in the other assets account.

q) Exchange differences Transactions in foreign currency are recorded at the prevailing exchange rate on the day of the related transactions. Foreign currency

denominated assets and liabilities are valued at the prevailing exchange rate at the latest balance sheet date.

Exchange differences from the transaction date to the time foreign currency denominated assets and liabilities are settled, as well as those arising from the translation of foreign currency denominated balances at the balance sheet date, are charged or credited to results of operations.

r) Comprehensive income Comprehensive income consists of the net income for the year plus, if applicable, those items that are reflected directly in

shareholders’ equity and that do not constitute capital contributions, reductions or distributions.

s) Taxes on profits Current year taxes on profits are shown as a short-term liability, net of prepayments made during the year.

Deferred taxes on profits are recognized using the asset and liability method established in Mexican accounting FRS D-4, Taxes on Profits. Under this method, deferred taxes on profits are recognized on all temporary differences between financial reporting and tax values of assets and liabilities, applying the enacted income tax rate or flat-rate business tax rate, as the case may be, effective as of the balance sheet date or the enacted rate at the balance sheet date that will be in effect when the deferred tax assets and liabilities are expected to be recovered or settled.

The Company recognizes the benefits of the taxes losses of its acquired companies in the year that the losses are carried forward. Accordingly, the deferred tax asset from tax losses includes a valuation allowance for tax losses in excess of the price paid for the



new company. In evaluating the possible recovery of deferred tax assets, the Company considers that some or all of these assets may not ever be recovered. The actual realization of deferred tax assets depends on the Company’s generating taxable income in the periods in which the temporary differences become deductible. In carrying out this assessment, the Company takes into account the expected reversal of its deferred liabilities, its projected taxable profits and its strategic planning.

The Company periodically evaluates the possibility of recovering deferred tax assets and, if necessary, creates for a valuation allowance for those assets that do not have a high probability of being realized.

t) Statement of income presentation Costs and expenses shown in the Company’s statement of income are presented based on their function, since such classification

allows for an accurate evaluation of both gross profit and operating margins.

Although Mexican FRS B-3 does not require the presentation of operating income, this caption is shown in the statement of income, since operating income is an important indicator used for evaluating the Company’s operating results.

u) Earnings per share Earnings per share are determined by dividing net income of the year by the weighted-average number of shares outstanding during

the year.

v Segments Segment information is presented based on information used by the Company in its decision-making processes for those geographical

areas in which the Company operates.

w) New accounting pronouncements

The most important new accounting pronouncements that became effective in 2010 are as follows: Mexican FRS C-1 was issued by the Mexican Financial Reporting Standards Research and Development Board (Consejo Mexicano

para la Investigación y Desarrollo de Normas de Información Financiera, A.C. or “CINIF”) in November 2009 and is effective for fiscal years beginning on or after January 1, 2010. The application of the new accounting requirements is not expected to have a material impact on the Company’s financial statements.

Following is a discussion of the new accounting pronouncements that will become effective on January 1, 2011: In 2009, the CINIF issued two new Mexican Financial Reporting Standards, which will become effective for fiscal years beginning on

or after January 1, 2011: Mexican FRS B-5, Financial Information by Segment; and Mexican FRS B-9, Interim Financial Information.

In 2010, the CINIF issued Mexican FRS C-4, Inventories; Mexican FRS C-5, Prepaid Expenses; Mexican FRS C-6, Property, Plant and Equipment; and Mexican FRS C-18, Obligations related to Retirement of Property, Plant and Equipment. All of these new standards will be effective for fiscal years beginning on or after January 1, 2011, except for the changes related to the segregation of property, plant and equipment into separate components for those assets with different useful lives. These new standards will become effective as of January 1, 2012.

International Financial Reporting Standards (IFRS) On November 11, 2008, the Mexican National Banking and Securities Commission (CNBV) issued a press release announcing plans to

require companies listed on the Mexican Stock Exchange to adopt the IFRS issued by the International Accounting Standards Board (IASB). The CNBV and the CINIF will work together to develop the process for adoption of IFRS by public companies and the CNBV will be in charge of implementing the regulatory changes needed for IFRS transition. Under the new regulations, issuers in Mexico will be required to adopt IFRS financial reporting as of 2012.

As of 2012, the CNBV will require issuers of securities registered with the National Registry of Securities to release financial information prepared under IFRS. In accordance with this requirement, the Company adopted IFRS accounting beginning January 1, 2011. Based on an analysis conducted by the Company’s aimed at identifying the accounting effects from the adoption of IFRS on the consolidated financial statements, the captions that will be most affected by IFRS transition are property, systems and equipment, intangible assets, service concessions, labor obligations, shareholders’ equity and deferred taxes. At the date of the audit report on these financial statements, the Company is quantifying the possible effect of these changes on its 2011 financial statements.



2. CASH AND CASH EQUIVALENTS

An analysis of cash and cash equivalents at December 31, 2010 and 2009 is as follows:

2010 2009

Cash and banks Ps. 333,213 Ps. 286,750 Investments 1,352,439 2,289,439

Total Ps. 1,685,652 Ps. 2,576,189

3. ACCOUNTS RECEIVABLE, NET

An analysis of accounts receivable at December 31, 2010 and 2009 is as follows:

2010 2009

Trade receivables Ps. 286,972 Ps. 231,798 Sundry debtors 31,451 22,880 318,423 254,678 Allowance for doubtful accounts (40,000) – Total Ps. 278,423 Ps. 254,678

4. RECOVERABLE TAXES

An analysis of recoverable taxes at December 31 is as follows:

2010 2009

Income tax Ps. 165,106 Ps. 273,850 Value added tax 138,527 150,307 Flat-rate business tax (FRBT) 54,120 17,787 Tax on cash deposits – 20,610

Total Ps. 357,753 Ps. 462,554

5. INVENTORIES

An analysis of inventories at December 31 is as follows: 2010 2009

Operating equipment Ps. 79,469 Ps. 42,329 Advances to suppliers - 10,339 Inventories in transit 87,410 90,913

Ps. 166,879 Ps. 143,581



6. RELATED PARTIES

a) An analysis of balances due from/to related parties at December 31, 2010 and 2009 is as follows:

2010 2009

Due from (long term): Grupo de Telecomunicaciones de Alta Capacidad, S.A.P.I. de C.V. (GTAC) Ps. 384,530 Ps. –

Due to: Productora y Comercializadora de Televisión, S.A. de C.V. Ps. 17,736 Ps. 11,536

The long-term account receivable at December 31, 2010 refers to a simple loan granted to the affiliate GTAC on June 15, 2010 through a line of credit of up to Ps. 688,217, of which the affiliate has drawn down Ps. 384,530. This loan matures on December 31, 2021 and bears interest at the 28-day Mexican Weighted Interbank Rate (TIIE), plus two percentage points. GTAC participated in and won the bid called by the Ministry of Communications and Transportation to operate dark fiber owned by the Mexican Federal Electricity Commission.

There were no charges to results of operations for uncollectibility of accounts due from related parties and no guarantees related to these accounts were granted.

At December 31, 2010 and 2009, the balance due to related parties corresponds to services for the purchase of television channels and content for cable system broadcast that are rendered under an associated agreement.

b) During the years ended December 31, 2010 and 2009, the Company had the following transactions with related parties:

2010 2009

Income: Interests: Grupo de Telecomunicaciones de Alta Capacidad S.A.P.I. de C.V. Ps. 12,447 Ps. –

Disbursements: Content: Productora y Comercializadora de Televisión, S.A. de C.V. 507,247 514,678 Rent collected: Corpmazón, S.A. de C.V. 1,036 988 Fincas Urbanas de Cajeme S.A. de C.V. 900 863 Purchase of assets: Autos y tractores de Culiacán S.A. de C.V. 5,659 2,625 Others 50 280 Loans granted: Grupo de Telecomunicaciones de Alta Capacidad, S.A.P.I. de C.V. 384,530 –

c) Employee benefits granted to the Company’s key management and directors for the years ended December 31, 2010 and 2009 totaled Ps. 23,200 and Ps. 16,910, respectively.



7. EQUITY INVESTMENT IN ASSOCIATES

The Company’s equity investment consists of its equity interest in the following entities:

Equity interest Company 2010 2009 Description of the business

Productora y Comercializadora 26.23% 26.23% Sale of television content and signals for the cable TV de Televisión, S.A. de C.V industry. Grupo de Telecomunicaciones 33.33% – Concessionaire of the rights to operate dark fiber owned by de Alta Capacidad S.A.P.I. de C.V. (1) the Mexican Federal Electricity Commission.

(1) During the year ended December 31, 2010, the Company invested in this entity to participate in the bid called by the Ministry of Communications and Transportation to operate dark fiber owned by the Mexican Federal Electricity Commission.

An analysis of the equity interest in the shareholders’ equity of associates is as follows:

2010 2009

Productora y Comercializadora de Televisión, S.A. de C.V. Ps. 62,108 Ps. 58,970 Grupo de Telecomunicaciones de Alta Capacidad, S.A.P.I. de C.V. 46,417 – Ps. 108,525 Ps. 58,970

An analysis of the Company’s equity interest in the net income or loss of associates for the years ended December 31, 2010 and 2009 is as follows:

Productora y Comercializadora de Televisión, S.A. de C.V. Ps. 3,171 Ps. 34,491 Grupo de Telecomunicaciones de Alta Capacidad S.A.P.I. de C.V. (8,249) – Ps. (5,078) Ps. 34,491

8. PROPERTY, SYSTEMS AND EQUIPMENT

a) An analysis of property, systems and equipment at December 31, 2010 and 2009 is as follows:

2010 2009 Accumulated Accumulated Average Investment depreciation Investment depreciation useful life

Land Ps. 40,430 Ps. 40,430 – – Buildings 72,490 Ps. 5,271 33,478 Ps. 3,660 40 years Cable television signal distribution network and equipment 10,273,408 3,991,148 8,645,384 3,454,424 15 years Computer equipment and office furniture and equipment 587,326 335,583 524,893 282,596 8, 10 and 18 years Automotive equipment 287,944 92,828 237,784 77,470 13 years Leasehold improvements 138,352 96,887 116,486 78,952 10 years Communications equipment 23,487 6,777 13,223 5,826 5 years Other 88,202 28,975 77,205 24,518 Sundry 11,511,639 Ps. 4,557,469 9,688,883 Ps. 3,927,446

Inventories in transit 349,274 – Construction in progress 455,978 246,480 Ps. 7,410,148 Ps. 6,007,917



b) Depreciation expense for the years ended December 31, 2010 and 2009 was Ps. 703,330 and Ps. 581,497, respectively.

c) Assets in progress are composed primarily of machinery and equipment used in the construction of the cable television signal network and distribution equipment. These assets will be used in different projects during 2011.

9. OTHER ASSETS

An analysis of this caption at December 31 is as follows:

2010 2009

Customer portfolio, net (1) Ps. 460,491 Ps. 332,234 Guarantee deposits 24,483 22,951 Sundry 27,777 52,455

Total Ps. 512,751 Ps. 407,640

(1) An analysis of the customer portfolio is as follows:

Customer portfolio: At December 31, 2009 Ps. 475,980 Additions 18,241 At December 31, 2009 494,221 Additions in 2010 related to business acquisitions (Note 20) 291,078 At December 31, 2010 Ps. 785,299 Customer portfolio amortization: At December 31, 2009 Ps. 36,853 Amortizations 125,134 At December 31, 2009 161,987 Amortizations 162,821 At December 31, 2010 Ps. 324,808 Net book value: At December 31, 2010 Ps. 460,491 At December 31, 2009 Ps. 332,234

For the years ended December 31, 2010 and 2009, amortization expense was Ps. 162,821 and Ps. 125,134, respectively. Amortization is computed using the straight-line method based on the estimated useful lives of the related assets, which is four years. The Company began to amortize the customer portfolio acquired in September 2008 as of that same month, and it began to amortize the customer portfolio obtained in June 2010 as of July 2010.



10. NOTES PAYABLE An analysis of the Company’s notes payable at December 31, 2010 and 2009 is as follows:

2010 2009

Promissory notes of USD 2,006,703 and USD 2,593,328 signed on November 30, 2010 with Cisco Systems, Inc. and Scientific Atlanta (suppliers), respectively, for the purchase of network equipment. These notes mature in November 2011 (USD 2,284,562)

and August 2012 (USD 2,315,463) and bear annual interest at the rate of 5.435%. Ps. 56,956 Ps. – Other 6,145 6,320 Total notes payable Ps. 63,101 Ps. 6,320 Less (current liabilities) (34,432) (6,320) Long-term notes payable Ps. 28,669 Ps. –

11. BANK LOANS An analysis of bank loans at December 31, 2010 and 2009 is as follows:

2010 2009

Loan obtained on August 18, 2010 in the amount of Ps. 2,100,000. Such loan matures on August 20, 2013 and bears interests at the Mexican Weighted Interbank Rate

(TIIE), plus a 0.90%. (1) Ps. 2,100,000 Ps. – Loan obtained on May 27, 2008 in the amount of USD 120,000,000. Such loan

matures on August 23, 2019 and bears annual interest at the London Inter Bank Offered Rate (LIBOR) plus 0.65%, as adjusted based on the performance of the

Company’s consolidated leverage ratio (2) – 1,565,244

Loan obtained on May 27, 2008 in the amount of Ps. 1,456,000, maturing on August 23, 2010 and bearing annual interest at the TIIE rate, plus 0.65%, as adjusted

based on the performance of the Company’s consolidated leverage ratio. (2) – 1,456,000 2,100,000 3,021,244

Current portion of long-term bank loans – (3,021,244)

Bank loans with maturities of more than one year Ps. 2,100,000 Ps. –

(1) On August 18, 2010, the Company entered into a loan agreement with three financial institutions, Banco Nacional de México, a member of Grupo Financiero Banamex, which acted as the loan’s administrative agent; BBVA Bancomer S.A., Institución de Banca Múltiple; and Banco Santander (México), S.A., Institución de Banca Múltiple. The total amount of financing granted was Ps. 2,100,000.

(2) On August 23, 2010, the Company repaid in full the syndicated loan it obtained on May 27, 2008 from eight financial institutions: BBVA Bancomer, S.A. de C.V., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, which acted as the loan’s administrative agent, and BBVA Securities Inc. and JP Morgan Chase Bank, N.A., which acted as the co-syndicate agent and co-documentation agent, respectively.

The weighted average cost of debt at December 31, 2010 and 2009 (including interest, commissions and the reimbursement of withheld taxes) was 6%.



The loan agreements establish certain financial and operating commitments. Such commitments restrict the Company’s ability to merge into or consolidate with third parties; to sell, transfer or lease certain assets; to make certain investments; to maintain a pre-determined level of debt; to make certain dividend payments or capital distributions of the Company or its subsidiaries; to authorize the purchase, redemption or acquisition of capital stock of any of the subsidiaries; to enter into hedge contracts, unless they help the Company to mitigate risks or acquire benefits; and to make changes in its financial information. Under such commitments, the Company and subsidiaries are also required to comply with certain financial ratios, including a consolidated leverage rate no greater than 3 to 1 and a consolidated interest coverage of no less than 3.5 to 1.

Under the contract’s not-to-do covenants, cash dividends may be paid to the Company Holdings as follows: a) for a total amount not exceeding a percentage of the consolidated net income of Company and the guarantor, which is reduced by capital distributions or dividends made or paid by the entities, or any other payments made against their capital stock; b) for additional amounts at any time equal to the cash received from the issuance and sale of shares of the Company (but not of its subsidiaries) or from capital contributions received by the Company (but not by its subsidiaries).

At December 31, 2010 and 2009, the Company has fulfilled the above-mentioned covenants.

12. SUNDRY CREDITORS, ACCRUED LIABILITIES AND PROVISIONS

An analysis of this caption for the years ended December 31, 2010 and 2009 is as follows:

2010 2009

Income tax provision for flat-rate business tax credit (1) Ps. 160,250 Ps. 160,250 Provision for income taxes (2) 135,840 – Employee profit sharing 7,917 9,467 Vacation provision 32,068 19,283 Total of provisions 336,075 189,000 Sundry creditors 194,416 167,026 Taxes payable 62,943 42,478 Total Ps. 593,434 Ps. 398,504

(1) During the year ended December 31, 2009, the Company determined a flat-rate business tax credit of Ps. 246,000 for which it recorded a provision.

(2) This provision is for possible differences of opinion on part of the tax authorities regarding several transactions.



13. PROVISION FOR SENIORITY PREMIUMS AND TERMINATION BENEFITS

The Company provides for the seniority premiums and termination benefits of all of its employees.

An analysis of the net period cost and the plan assets for the years ended December 31, 2010 and 2009 related to the retirement plan (seniority premiums) and termination benefits is as follows:

a) Net period cost

2010 Termination benefits Retirement Total

Analysis of net period cost for 2010: Service cost Ps. 3,369 Ps. 13,287 Ps. 16,656 Financing cost 2,172 3,471 5,643 Unamortized items 1,365 145 1,510 Actuarial loss 6,189 2,282 8,471 Net period cost for 2010 Ps. 13,095 Ps. 19,185 Ps. 32,280


Analysis of net period cost for 2009: Service cost Ps. 3,103 Ps. 11,869 Ps. 14,972 Financing cost 2,706 4,050 6,756 Unamortized items 1,519 133 1,652 Actuarial gain (loss) 164 (7,061) (6,897) Net period cost for 2009 Ps. 7,492 Ps. 8,991 Ps. 16,483

b) An analysis of the changes in the defined benefit obligation is as follows:

Termination benefits Retirement Total

Defined benefit obligation: Present value of defined benefit obligation at January 1, 2009 Ps. 30,400 Ps. 40,105 Ps. 70,505 Service cost 3,103 11,869 14,972 Financing cost 2,706 4,060 6,766 Actuarial loss (gain) (1) 164 (7,061) (6,897) Benefits paid (2,593) (1,070) (3,663) Present value of defined benefit obligation at December 31, 2009 Ps. 33,780 Ps. 47,903 Ps. 81,683 Service cost 3,369 13,287 16,656 Financing cost 2,172 3,471 5,643 Actuarial loss (1) 6,189 2,282 8,471 Benefits paid (4,633) (1,547) (6,180)

Present value of defined benefit obligation at December 31, 2010 Ps. 40,877 Ps. 65,396 Ps. 106,273

(1) Includes amortization of unamortized items.

In 2010 and 2009, past services costs are being amortized over a period of five years.



c) An analysis of the net current liability is as follows:


Acquired employee benefits Ps. 26,945 Ps. 46,688 Ps. 73,633 Not acquired employee benefits 13,932 18,708 32,640 Defined employee benefits 40,877 65,396 106,273 Unamortized items (3,244) (66) (3,310) Net current liability Ps. 37,633 Ps. 65,330 Ps. 102,963


Acquired employee benefits Ps. 16,599 Ps. 41,894 Ps. 58,493 Not acquired employee benefits 11,704 11,486 23,190 Defined employee benefits 28,303 53,380 81,683 Unamortized items (4,609) (211) (4,820) Net current liability Ps. 23,694 Ps. 53,169 Ps. 76,863

The rates used in the actuarial study were as follows:

2010 2009

Discount rate 6.20% 6.60% Salary increase rate 4.10% 4.50% Legal minimum wage increase rate 3.70% 4.00%

14. FINANCIAL INSTRUMENTS

a) At December 31, 2010 The Company had the following derivative positions to hedge its U.S. dollar denominated liabilities with equipment suppliers:

- Foreign currency forward contract of USD 1,000,000, which was entered into on October 29, 2010 and matures on April 29, 2011. The forward exchange rate closed at $ 12.5403 pesos. (1)





2010 Notional Marked to Derivative Type amount market

Forward (1) Foreign currency Ps. 12,540 Ps. 76 Forward (2) Foreign currency 12,463 – Forward (3) Foreign currency 24,911 (18)

At December 31, 2010, the Company’s derivative financial instruments were classified as held for trading.

b) As of December 31, 2009

Instruments qualifying as foreign currency hedges are as follows:

Foreign currency hedges Ps. 13,216

As of December 31, 2009, instruments qualifying as cash flow hedges are as follows:

2009 Notional Marked to Derivative Type amount market

Interest-rate swaps IRS Ps. 250,000 Ps. 1,572 Interest-rate swaps IRS 500,000 945

The terms of the swaps mentioned above are as follows:

Trade Effective Termination Fixed Variable Derivative date date date interest rate interest rate

Interest-rate swaps March 11, 2009 March 12, 2009 March 12, 2010 7.47% 28-day Mexican weighted interbank rate (TIIE) Interest-rate swaps January 23, 2009 January 26, 2009 January 26, 2010 7.3% 28-day Mexican weighted interbank rate (TIIE)

c) At December 31, 2010 and 2009, the loss on these instruments was Ps. 38,910 and Ps. 32,232, respectively. Those changes were recognized as part of Interest expense.

15. LEASES

Operating lease

The Company has entered into several operating leases for the buildings where some of its offices and warehouses are located. The contracts are for periods ranging from one to five years, and the minimum annual lease payments are adjusted based on the NCPI.



An analysis of minimum annual compulsory rent for the next five years is as follows:

2011 Ps. 56,570 2012 49,005 2013 36,185 2014 23,795 2015 15,502

Total Ps. 181,057

Rent charged to results of operations under operating leases for property rentals was Ps. 109,396 in 2010 and Ps. 103,104 in 2009.

The Company has operating leases for utility poles and pipelines for cables, and related network equipment. Rent charged to results of operations under these leases was Ps. 41,825 and Ps. 38,054 in 2010 and 2009, respectively.

16. FOREIGN CURRENCY BALANCES

a) The financial statements at December 31, 2010 and 2009 include the following U.S. dollar denominated assets and liabilities:

Thousands of U.S. dollars 2010 2009

Current assets: Cash USD 21,531 USD 12,656 Trade receivables 1,797 2,331 Other assets 2,301 321 Total assets 25,629 15,308 Current liabilities: Suppliers (34,316) (11,186) Other liabilities (5,289) (857) Bank loans – (120,000) Total liabilities (39,605) (132,043)

Net monetary liability position USD (13,976) USD (116,735)

At December 31, 2010 and 2009, the exchange rates used to translate the above amounts to Mexican pesos were $12.3817 pesos and $13.0437 pesos per U.S. dollar, respectively. At April 27, 2011, the date of the audit report on these financial statements, the exchange rate is $11.5824 pesos per U.S. dollar.



17. SHAREHOLDERS’ EQUITY

a) At December 31, 2010 and 2009, an analysis of the Company’s paid-in capital and the number of shares representing it is as follows:

No. of series “A” shares Fixed capital Variable capital Fixed capital

Capital stock at December 31, 2008 94,733 1,711,180,140 Ps. 914,800

Net repurchase of shares (ii) 9,681,600 5,165 Capital stock at December 31, 2009 94,733 1,720,861,740 919,965

Net repurchase of shares (ii) – 309,200 165

Capital stock at December 31, 2010 94,733 1,721,170,940 Ps. 920,130

i. During the year ended December 31, 2010, the Company purchased 199,600 ordinary share certificates, which equal 399,200 common registered series “A” shares.

During the year ended December 31, 2010, the Company purchased 45,000 ordinary share certificates, which equal 90,000 common registered series “A” shares.

ii. During the year ended December 31, 2009, the Company purchased 5,065,800 ordinary share certificates, which equal 10,131,600 common registered series “A” shares.

For the year ended December 31, 2009, the Company purchased 225,000 CPOs, which are equal to 450,000 common registered series “A” shares.

During the years ended December 31, 2010 and 2009, the Company purchased 154,600 and 4,840,800 ordinary share certificates, which equal 309,200 and 9,681,600 common registered series “A” shares. These operations represent 0.01% and 0.56% of capital stock, respectively.

At December 31, 2010 and 2009, the market value of the Company’s shares was $ 31.95 pesos and $ 27.60 pesos, respectively.

b) At a regular shareholders’ meeting held on April 26, 2010, the shareholders agreed to reserve a maximum amount of Ps. 209,000 to repurchase the Company’s own shares.

c) In conformity with the Mexican Corporations Act, the Company is required to appropriate at least 5% of the net income of each year to increase the legal reserve. This practice must be continued until the legal reserve reaches 20% of the value capital stock. At December 31, 2010 and 2009, the Company has not made any appropriation to the legal reserve.

d) Dividends paid and capital reductions that exceed the Net taxed profits account (CUFIN) and Restated contributed capital account (CUCA) balances are subject to payment of income tax, in conformity with Articles 11 and 89 of the Mexican Income Tax Law, at the legal income tax rate in force at the dividend is paid.

At December 31, 2009, the total balance of the Company’s tax accounts is as follows:

2010 2009

CUFIN Ps. 2,091,039 Ps. 1,688,645 CUCA Ps. 3,492,881 3,346,121



e) Earnings per share

Earnings per share are obtained by dividing net income for the year by the average weighted number of shares issued and outstanding during the period. An analysis is as follows:

2010 2009

Net Income Ps. 1,697,324 Ps. 1,986,770 Weighted number of shares issued and outstanding 1,721,120,977 1,720,861,740 Basic earnings per share (pesos) Ps. 0.98 Ps. 1.15

18. INCOME TAX AND FLAT-RATE BUSINESS TAX

Income tax

a) On December 7, 2009, the 2010 Tax Reform was published. This tax reform changes, amends and repeals several tax provisions and is effective as of January 1, 2010.

The 2010 Tax Reform includes changes in the income tax rate to be applied in future years, as follows: i) from 2010 to 2012 the rate will be 30% ii) for 2013 the rate will be 29% iii) for 2014 and succeeding years the rate will be 28%

Flat-rate business tax

b) On October 1, 2007 the Flat-Rate Business Tax (FRBT) Law was published. This Law became effective as of January 1, 2008 and abolished the Asset Tax Law.

Current-year FRBT is computed by applying the 17% rate to income determined on the basis of cash flows, net of authorized credits.

FRBT credits result mainly from the negative FRBT base to be amortized, salary and social security contribution credits, and credits arising from the deduction of certain assets, such as inventories and fixed assets, during the transition period as of the date on which the FRBT became effective.

FRBT is payable only to the extent it exceeds income tax for the same period. To determine FRBT payable, income tax paid in a given period is first subtracted from the FRBT of the same period.

When the FRBT base is negative because deductions exceed taxable income, there is no FRBT payable. The amount of the negative base multiplied by the FRBT rate results in a FRBT credit, which may be applied against income tax for the same year or, if applicable, against FRBT payable in the next ten years.

Based on projections of its taxable income, the Company estimates that it will be subject to the payment of income tax in the following years.



Total taxes on profits shown in statement of income

c) An analysis of taxes on profits charged to results of operations for the years ended December 31, 2010 and 2009 is as follows:

2010 2009

Current year taxes on profits Ps. 355,981 Ps. 117,245 Deferred taxes on profits 121,517 171,325

Total income tax Ps. 477,498 Ps. 348,570

Deferred taxes on profits

d) An analysis of deferred taxes shown in the balance sheet at December 31, 2010 and 2009 is as follows:

2010 2009

Deferred tax assets: Intangible assets Ps. 211,000 Ps. 267,197 Provisions 60,471 79,457 Available tax loss carryforward 693,558 4,542 965,029 351,196 Less: Valuation allowance (496,030) – 468,999 351,196

Deferred tax liabilities: Property, systems and equipment and others (1,073,571) (971,687) Other (25,357) (83,494) (1,098,928) (1,055,181)

Net deferred tax liability Ps. (629,929) Ps. (703,985)

A reconciliation of the statutory corporate income tax rate to the effective income tax rate recognized by the Company for financial reporting purposes is as follows:

2010 2009

Statutory rate 30% 28%

Permanent differences: Benefit from tax loss carryforwards (13%) – Annual inflation adjustment, non- deductible expenses, effect of change in income tax rate (2009), and others (5%) 4% Intangible assets – (11%) FRBT credit – (6%)

Effective tax rate 22% 15%



At December 31, 2010, some of the consolidated companies had tax loss carryforwards, as described below:

Year of tax loss Restated tax loss Year of expiration

2006 2,305,949 2016 2009 5,914 2019

Ps. 2,311,863

19. CONTINGENCIES AND COMMITMENTS

Concessionsa) In conformity with the terms and conditions of the concession arrangements, the subsidiaries that have been granted concessions

by the Mexican Ministry of Communications and Transportations to provide services must comply with certain obligations.

In case of non-performance of such obligations, the Company could be subject to fines. In addition, the Company’s concessions are subject to cancellation by the Federal authorities for a number causes, such as service interruptions, non-performance of the obligations or conditions established in the respective concession arrangements, transfer or assignment of the rights, and non- payment of the agreed on fees to the Federal government.

Any of the above cases are also cause for cancellation of the concession by the federal authorities, which would not toned no pay any indemnity to the Company. Should the Ministry of Communications and Transportation cancel any of the concessions, the Company would not be authorized to operate within the region covered under the concession agreement, or to obtain new concessions to operate in the same region or at any other locations, within the following five years.

The cancellation of any of the Company’s concessions would adversely affect its business, financial position and results of operations.

Tax In the event of a review of the Company’s taxes, the tax authorities could observe certain discrepancies in the criteria applied by the

Company with respect to its tax treatment and computations. During the years ended December 31, 2010 and 2009, the Company’s taxes were not reviewed by the tax authorities.

Legala) On October 26, 2009, the Company filed a nullity lawsuit against the payment of Ps. 11,384 ordered by the city government of Boca

del Río, Veracruz related to the rights of usage of utility poles used in the installation of the Company’s network.

b) On January 14, 2010, the Federal Antitrust Commission issued a resolution establishing a fine against the Company of Ps. 1,450 for alleged monopolistic practices by one of the Company’s affiliates. The Company has filed a motion for appeal against such resolution.

The Company and its legal advisors do not expect the final outcomes of these cased to have a material impact on the Company’s financial position or results of operations.



20. ACQUISITIONS

a) On June 14, 2010, the Company acquired the assets and customer portfolio of Grupo Omnicable in the state of Sonora for the incorporation of such cable system into the Company’s own network. The total cost of this acquisition was Ps. 549,716.

An analysis of the values assigned to the assets was as follows:

Fixed Assets Ps. 258,638 Intangible assets for customer portfolio 291,078

Total Ps. 549,716

At the date of the audit report on these financial statements, the Company has yet to conclude the identification and measurement of the fair values of the assets acquired, in conformity with Mexican FRS B-7, Business Acquisitions. The Company has one year as of the acquisition date to conclude the recognition of the acquisition.

During the year ended December 31, 2010, the Company acquired 96.42% shares of Grupo Lipsio, S.A. de C.V. to transform it into a company dedicated to leasing equipment and infrastructure for the provision of telephony services. The cost of this acquisition was Ps. 118,237.

21. SEGMENT INFORMATION

The Company’s financial and operating information is broken down by geographical area. A summary of segment information by business unit and geographical area is as follows:

I) Financial information by segment

For the year ended December 31, 2010:

Digital Consolidated Cable Internet telephone Other total

Service revenues Ps. 4,659,739 Ps. 1,282,661 Ps. 1,025,008 Ps. 541,887 Ps. 7,509,295

Operating income Ps. 624,598 Ps. 935,504 Ps. 653,900 Ps. (27,760) Ps. 2,186,242

For the year ended December 31, 2009:

Digital Consolidated Cable Internet telephone Other total

Service revenues Ps. 4,450,893 Ps. 1,127,952 Ps. 842,628 Ps. 473,209 Ps. 6,894,682 Operating income Ps. 936,917 Ps. 789,460 Ps. 521,410 Ps. (40,877) Ps. 2,206,910



Other information by segment:

2010 Digital Consolidated Cable Internet telephone Other total

Property, systems and equipment by segment Ps. 6,002,493 Ps. 833,294 Ps. 678,350 Ps. 245,285 Ps. 7,759,422

Acquisition of property, systems and equipment 2,180,635 186,157 45,287 42,989 2,455,068

Depreciation and amortization 560,914 53,294 31,119 58,003 703,330

2009 Digital Consolidated Cable Internet telephone Other total

Property, systems and equipment by segment Ps. 4,385,439 Ps. 701,414 Ps. 766,665 Ps. 154,399 Ps. 6,007,917

Acquisition of property, systems and equipment 1,108,962 172,026 139,611 24,630 1,445,229

Depreciation and amortization 431,539 38,920 33,510 77,528 581,497

Service revenues:

2010 2009

Cable segment: Basic video Ps. 4,164,775 Ps. 3,728,380 Premier video 325,175 217,238 Lifeline video 45,623 285,233 Mini-basic video 53,394 81,733 Advertising sales 44,125 84,939 Other services 26,647 53,370

Total cable segment Ps. 4,659,739 Ps. 4,450,893

2010 2009

Internet segment: Residential Ps. 1,111,235 Ps. 978,528 Commercial 171,426 149,424

Total internet segment Ps. 1,282,661 Ps. 1,127,952



2010 2009

Digital telephone segment: Residential Ps. 959,530 Ps. 786,262 Commercial 65,478 56,366 Total digital telephone segment Ps. 1,025,008 Ps. 842,628 Other segments Ps. 541,887 Ps. 473,209 Consolidated total Ps. 7,509,295 Ps. 6,894,682

II) Additional geographical analysis

a. An analysis of net revenues by geographical location is as follows:

Total service revenues 2010 2009

Jalisco Ps. 1,364,143 Ps. 1,281,824 Sinaloa 836,685 790,189 Puebla 688,465 652,859 Sonora 763,619 638,742 Veracruz 616,096 605,502 Durango and Coahuila 478,852 465,506 Michoacán 487,554 447,391 Estado de México 484,360 439,095 México DF 394,292 335,734 Guanajuato 352,192 284,014 Nayarit 207,767 199,919 Chiapas 196,797 189,475 Querétaro 179,038 141,855 BC Sur 124,711 114,899 Oaxaca 85,824 88,352 Colima 74,050 59,694 Chihuahua 32,917 35,046 Zacatecas 45,369 35,575 Morelos 33,821 29,674 Guerrero 31,344 25,636 Hidalgo 11,683 11,961 Abroad 8,702 9,797 Tabasco 4,672 5,057 San Luis Potosí 4,265 4,278 Campeche 2,077 2,608

Consolidated total Ps. 7,509,295 Ps. 6,894,682



b) An analysis of property, systems and equipment by geographical location is as follows:

Acquisition of property, Total assets systems and equipment 2010 2009 2010 2009

Sinaloa Ps. 701,121 Ps. 576,536 Ps. 163,550 Ps. 135,420 Sonora 793,462 386,467 435,646 104,509 Nayarit 146,468 134,986 27,084 23,740 Jalisco 2,075,764 1,507,014 884,814 116,114 Michoacán 236,537 221,225 52,849 239,410 Querétaro 316,961 264,656 48,335 83,769 Zacatecas 81,441 70,433 17,042 12,417 Veracruz 556,081 458,182 134,247 134,237 Chihuahua 53,736 48,298 9,040 5,727 Puebla 630,734 511,180 169,274 147,150 Durango and Coahuila 449,055 392,415 89,283 89,556 Chiapas 166,120 151,230 24,717 23,448 México DF 679,567 612,221 141,314 88,673 Guanajuato 238,241 193,765 73,216 63,743 Guerrero 44,522 41,967 4,310 11,692 Oaxaca 149,461 136,527 17,260 17,001 Morelos 52,682 46,371 7,478 10,879 Colima 219,105 109,564 115,777 68,255 Baja California 152,022 128,706 37,853 63,984 Others 16,342 16,174 1,319 5,505

Consolidated total Ps. 7,410,148 Ps. 6,007,917 Ps. 2,455,068 Ps. 1,445,229



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