Report on ONO Midco, SAU and its subsidiaries as of December 31 ...

aggregate price of these services purchased on an individual basis from us in order to increase revenues from each of our
customers. Our residential fiber bundled services comprise a combination of our fiber television packages of up to 125 channels,
VoD, broadband internet services up to 100 Mbps for residential customers and 200 Mbps for SMEs and telephony services,
offering our customers the convenience of having a single provider for their wireline communication, entertainment and
information needs. We have gradually increased our residential fiber RGUs, reaching 4.1 million as of December 31, 2011,
compared to 4.0 million as of December 31, 2009, due to the fact that an increasing percentage of our total residential fiber
customers received triple-play services (39.9% as of December 31, 2011, compared to 35.6% as of December 31, 2009). Most of
our remaining customers receive at least double-play services because we no longer promote any of our services on a stand-alone
basis. The gradual increase in residential fiber RGUs and the relatively small decline in the number of our residential fiber
customers have resulted in an increase in the ratio of RGUs per residential fiber customer from 2.17x as of December 31, 2009 to
2.22x as of December 31, 2010 and 2.25x as of December 31, 2011.
Capital Expenditure
In light of the financial crisis which made funding the expansion of our network difficult to finance, we elected in the
second half of 2008 to cease network expansion activity. As a result, our capital expenditure has been significantly reduced and
we are now focused on upgrading our existing network, customer installations and the quality of our products and services.
Examples of our investment in improving the quality of our products and services include our introduction of broadband speeds of
up to 100 Mbps, the next generation TV services and the outsourcing and uptrading of our voice platform (Huawei). Our capital
expenditure amounted to €220 million, €244 and €292 million in 2009, 2010 and 2011, respectively. See “—Liquidity and Capital
Resources—Capital Expenditures”.
Reduction in Operational Expenditure
As part of our transformation strategy we have also taken steps to reduce our operational expenditure, including
undertaking an internal reorganization, reducing our headcount, renegotiating certain of our contracts to improve their terms, using
more cost efficient sales channels, such as the internet (and thereby reducing our reliance on direct sales efforts) and reducing our
advertising and marketing expenses, in part by adopting more carefully targeted marketing campaigns. For quarter ended
December 31, 2011, 31% of our sales were made through the internet, compared to 17% for the same period in 2009. As part of
our business reorganization, we have consolidated our regional operations, reducing the number of our regional areas of operation
from ten to four.
We also began to reduce our headcount in 2008 and reduced our total headcount from an average of 4,594 in 2008 to
3,549 in 2009, 3,283 in 2010 and to 3,025 in 2011. We continue to monitor overall headcount to ensure adequate staffing levels.
Regulatory Costs
The Spanish Parliament has adopted tax legislation requiring telecommunications operators, including Cableuropa, to
help fund Spain’s publicly-owned broadcasting company, RTVE. Law 8/2009, of August 28, for the financing of the Spanish
Radio and Television Corporation, imposed a 1.5% tax derived from our television and other audiovisual communications
revenues from September 1, 2009 and a 0.9% tax on our telecommunications revenue from January 1, 2010 (the “RTVE
Financing Law”). These taxes are assessed on a yearly basis and resulted in additional operating expenses of €10.5 million and
€13.4 million in 2010 and 2011, respectively. See “—Business—Other Legal and Regulatory Matters”.
Furthermore, since May 2010, we have become legally required, in certain circumstances, to invest 5% of a significant
portion of the revenues we derive from the provision of our television and audiovisual services into the production of new Spanish
or European television and other audiovisual content. We expect this obligation will result in a cash expenditure of €5 million to
€8 million per year which will be accounted for as a capital expenditure. We expect that we will earn revenues from such
investments in future years.
On August 20, 2011, the Spanish official Gazzette (Boletín Oficial del Estado) published Royal Decree Law 9/2011
(the “RD-Law 9/2011”) concerning measures to improve the quality and cohesion of the national health system, contributions to
fiscal consolidation, and provisions to increase the maximum amount of state guarantees for 2011. Article 9 of said RD-Law
9/2011 provides certain changes in the Spanish Corporate Income Tax Law in relation to tax loss carry forward rules which are
relevant for the tax position of the ONO Group. For tax periods beginning in 2011, 2012 and 2013, companies with turnover for
the preceding 12-month period of at least €60 million may use tax losses generated in prior periods to offset a maximum of 50%
of their taxable income (before application of the carry forward). In addition, effective for tax periods beginning as of January 1,
2012, Article 25.1 of the Corporate Income Tax Law (as amended) extends the tax losses carry forward period from 15 to 18
years.
We have tax credits of €953 million as of December 31, 2011. In this regard, RD-Law 9/2011 establishes important
restriction on our ability to use our tax credits to offset our tax profits for fiscal years 2011 to 2013. If we are profitable in fiscal
years 2011 to 2013, we will be able to use tax credits to offset up to 50% against the positive taxable base. In order to reduce the
impact of the abovementioned measure related to the offset of tax losses, RD-Law 9/2011 establishes that pending losses as at the
beginning of 2012 fiscal year and losses generated thereafter may be offset for a period of 18 years, instead of 15 years. We are in
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