As filed with the Securities and Exchange Commission on June 30, 2004
The following exhibit has been omitted pursuant to Rule 12b-25:
Exhibit 4.10, Amendment, dated as of June 29, 2004, to the loan agreement
between Grupo Radio Centro, S.A. de C.V. and Scotiabank Inverlat, S.A.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the fiscal year ended December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number: 1-12090
----------
Grupo Radio Centro, S.A. de C.V.
(Exact name of registrant as specified in its charter)
Radio Center Group
(Translation of registrant's name into English)
United Mexican States
(Jurisdiction of incorporation or organization)
----------
Constituyentes 1154 (7(degree) Piso)
Col. Lomas Altas
C.P. 11950, Mexico, D.F., Mexico
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered
Series A Shares, without par value New York Stock Exchange*
("Series A Shares")
Ordinary Participation Certificates New York Stock Exchange*
("CPOs"), each CPO representing one
Series A Share
American Depositary Shares ("ADSs"), New York Stock Exchange
each representing nine CPOs
*Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Securities registered or to be registered pursuant
to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report: 162,667,561 Series A Shares
Indicate by check mark whether the Registrant (1) has filed all reports
required to be file 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.
|X| Yes |_| No
Indicate by check mark which financial statement item the
Registrant has elected to follow:
|_| Item 17 |X| Item 18
================================================================================
TABLE OF CONTENTS
Page
PART I.........................................................................2
Item 1. Identity of Directors, Senior Management,
Advisers, and Auditors..........................................2
Item 2. Offer Statistics and Expected Timetable...........................2
Item 3. Key Information...................................................2
Item 4. Information on the Company.......................................11
Item 5. Operating and Financial Review and Prospects.....................27
Item 6. Directors, Senior Management and Employees.......................36
Item 7. Major Shareholders and Related Party Transactions................44
Item 8. Financial Information............................................46
Item 9. The Offer and Listing............................................47
Item 10. Additional Information...........................................49
Item 11. Quantitative and Qualitative Disclosure
About Market Risk..............................................62
Item 12. Description of Securities other than
Equity Securities..............................................62
PART II.......................................................................63
Item 13. Defaults, Dividend Arrearages And Delinquencies..................63
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds....................................63
Item 15. Controls and Procedures..........................................63
Item 16A. Audit Committee Financial Expert.................................63
Item 16B. Code of Ethics...................................................63
Item 16C. Principal Accountant Fees and Services...........................64
PART III......................................................................64
Item 17. Financial Statements.............................................64
Item 18. Financial Statements.............................................64
Item 19. Exhibits.........................................................64
INTRODUCTION
Grupo Radio Centro is a corporation organized under the laws of the United
Mexican States. As used in this Annual Report and except as the context
otherwise requires, the terms "Grupo Radio Centro" and "the Company" refer to
Grupo Radio Centro, S.A. de C.V. and its consolidated subsidiaries.
PRESENTATION OF FINANCIAL INFORMATION
In this Annual Report references to "pesos" or "Ps." are to the lawful
currency of the United Mexican States ("Mexico"). References herein to "U.S.
dollars" or "$" are to United States dollars.
The Company publishes its financial statements in pesos. Pursuant to
generally accepted accounting principles in Mexico ("Mexican GAAP"), financial
data for all periods in the financial statements included in Item 18 (the
"Consolidated Financial Statements") and, unless otherwise indicated, throughout
this Annual Report, have been restated in constant pesos (having the same
purchasing power for each period indicated taking into account inflation) as of
December 31, 2003.
This Annual Report contains translations of certain peso amounts into U.S.
dollars at specified rates solely for the convenience of the reader. These
translations should not be construed as representations that the peso amounts
actually represent such U.S. dollar amounts or could be converted into U.S.
dollars at the rate indicated. Unless otherwise indicated, such U.S. dollar
amounts have been translated from pesos at an exchange rate of Ps. 11.24 to
$1.00, the noon buying rate for pesos at December 31, 2003 as published by the
Federal Reserve Bank of New York. The peso/U.S. dollar exchange rate is volatile
and, accordingly, the translation to U.S. dollars at the December 31, 2003
exchange rate may not accurately represent the financial condition of the
Company in U.S. dollar terms as of a subsequent date. On June 23, 2004, the noon
buying rate for pesos was Ps. 11.345 to $1.00. See Item 3, "Key
Information--Exchange Rate Information," for information regarding exchange
rates since January 1, 1999.
The term "billion" as used in this Annual Report means one thousand
million.
FORWARD-LOOKING STATEMENTS
This Annual Report contains words, such as "believe," "expect" and
"anticipate" and similar expressions that identify forward-looking statements
that reflect the Company's views about future events and financial performance.
Actual results could differ materially from those projected in such
forward-looking statements as a result of various factors that may be beyond the
Company's control, including, but not limited to, effects on the Company from
competition with its broadcasting and other operations, material changes in the
performance or popularity of key radio stations or broadcast programs,
significant developments in the Mexican economic or political situation or
changes in the Company's regulatory environment. Accordingly, readers are
cautioned not to place undue reliance on these forward-looking statements. In
any event, these statements speak only as of their dates, and the Company
undertakes no obligation to update or revise any of them, whether as a result of
new information, future events or otherwise.
PART I
Item 1. Identity of Directors, Senior Management, Advisers and Auditors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial information
of the Company and its subsidiaries for each of the periods indicated. This
information, to the extent applicable, should be read in conjunction with, and
is qualified in its entirety by reference to, the Consolidated Financial
Statements, including the notes thereto, included elsewhere in this Annual
Report. Grupo Radio Centro's financial statements are prepared in accordance
with Mexican GAAP, which differ in certain respects from generally accepted
accounting principles in the United States ("U.S. GAAP"). Note 25 to the
Consolidated Financial Statements provides a description of the principal
differences between Mexican GAAP and U.S. GAAP as they relate to Grupo Radio
Centro and a reconciliation to U.S. GAAP of operating income, net income and
shareholders' equity.
Grupo Radio Centro's financial statements were prepared giving effect to
Bulletin B-10 and Bulletin B-12 issued by the Mexican Institute of Public
Accountants. Generally, Bulletin B-10 is designed to provide for the recognition
of certain effects of inflation by requiring Grupo Radio Centro to restate
non-monetary assets and liabilities using the Mexican Consumer Price Index (the
"INPC"), to restate the components of shareholders' equity using the INPC, to
restate its fixed assets using the INPC and to record gains or losses in
purchasing power from holding monetary assets or liabilities. Bulletin B-12
requires that the statement of changes in financial position reconcile changes
from the restated historical balance sheet for the prior year to the current
balance sheet. Pursuant to Mexican GAAP, the selected consolidated financial
information set forth below, and all data in the related Consolidated Financial
Statements, have been restated in constant pesos at December 31, 2003. The
effect of the inflation accounting principles described above has not been
reversed in the reconciliation to U.S. GAAP. See Note 25 to the Consolidated
Financial Statements.
In 1999, Grupo Radio Centro elected early to adopt the provisions of
Bulletin D-4, issued by the Mexican Institute of Public Accountants and
officially effective beginning January 1, 2000. In accordance with Bulletin D-4,
the Company's financial statements recognize the income tax effects of the
differences in bases of assets and liabilities between financial accounting and
accounting for tax reporting purposes. In prior years through December 31, 1998,
Grupo Radio Centro recognized the effects of deferred taxes for certain timing
differences expected to reverse over a definite period of time. However, the
Company's adoption of Bulletin D-4 gave rise to additional deferred taxes
resulting in a net deferred tax expense of Ps. 64.1 million recognized in the
statement of income for the year ended December 31, 1999. The cumulative effect
of adopting Bulletin D-4 for years prior to December 31, 1998 resulted in the
recognition of additional deferred tax liabilities of Ps. 90.6 million in 1999.
This cumulative effect is presented as a separate component in shareholders'
equity.
2
Year Ended December 31,
------------------------------------------------------------------------------------------
2003(1) 2003 2002 2001 2000 1999
--------- ------------ ------------- -------------- -------------- --------------
(in thousands, except per-ADS data)
Operating Data:
Mexican GAAP:
Broadcasting Revenue................. $ 73,406 Ps. 825,084 Ps. 738,376 Ps. 779,957 Ps. 1,040,630 Ps. 899,988
Broadcasting Expenses, Excluding
Depreciation and Amortization..... 43,904 493,593 479,624 504,304 464,238 451,839
--------- ------------- ------------- -------------- -------------- --------------
Broadcasting Income................. 29,502 331,491 258,752 275,653 576,392 448,149
Depreciation and Amortization........ 10,089 113,405 112,327 122,196 117,110 101,384
Corporate, General and
Administrative Expenses........... 5,354 60,183 46,911 52,399 75,702 58,497
--------- ------------- ------------- -------------- -------------- --------------
Operating Income(2) (3)............. 14,059 157,903 99,514 101,058 383,580 288,268
Comprehensive Financing Expense...... 2,925 32,898 53,210 12,597 33,185 23,587
Other (Expense), Net................ (5,870) (65,982) (52,487) (75,993) (63,724) (11,300)
Extraordinary Item(3)................ 30,322 340,705 0 0 0 0
Net (Loss) Income(4)................. (21,865) (245,795) 2,271 18,470 255,868 122,491
Minority Interest.................... 1 6 14 17 224 1
Net (Loss) Income per ADS(4) (5)..... (1.21) (13.60) 0.12 1.01 13.50 5.73
Common Shares Outstanding(5)......... 162,722 162,722 163,235 163,918 170,512 192,236
U.S. GAAP:
Broadcasting Revenue................. $ 73,406 Ps. 825,084 Ps. 738,376 Ps. 779,957 Ps. 1,040,630 Ps. 899,988
Operating (Loss) Income(2) (3)....... (28,591) (321,346) 120,896 179,302 460,317 347,096
Net (Loss) Income(2) (4)............. (28,361) (318,777) 76,214 96,907 332,619 233,162
Net (Loss) Income per ADS(2)(4)(5)... (1.53) (17.64) 4.23 5.31 17.55 10.91
Dividends per ADS(6)................. 0.28 3.15 0.00 6.92 2.50 0.00
Common Shares Outstanding(5)......... 162,722 162,722 163,235 163,918 170,512 192,236
Balance Sheet Data:
Mexican GAAP:
Working Capital...................... $(11,271) Ps. (126,701) Ps. (315) Ps. (49,897) Ps. 161,573 Ps. 164,168
Property and Equipment, Net.......... 41,805 469,892 495,940 527,168 539,139 595,333
Excess Cost over Fair Value of
Assets of Subsidiaries............ 67,802 762,088 841,603 917,502 885,076 945,095
Total Assets(2)...................... 138,197 1,553,336 1,788,752 1,930,353 1,974,214 2,042,162
Long Term Debt Excluding Current
Portion........................... 15,112 169,855 164,789 234,463 307,536 0
Total Debt........................... 20,149 226,473 354,942 414,288 384,421 71,371
Shareholders' Equity(2).............. 79,869 897,720 1,200,486 1,204,010 1,316,215(7) 1,725,087(8)
U.S. GAAP:
Total Assets(2)...................... $ 138,002 Ps. 1,551,148 Ps. 1,841,561 Ps. 1,986,087 Ps. 2,026,884 Ps. 2,078,736
Shareholders' Equity(2).............. 78,029 877,058 1,252,806 1,259,257 1,368,406 1,758,195
----------
(1) Peso amounts have been translated into U.S. dollars solely for the
convenience of the reader at the rate of Ps. 11.24 per U.S. dollar, the
noon buying rate for pesos on December 31, 2003, as published by the
Federal Reserve Bank of New York. See "--Exchange Rate Information."
(2) Pursuant to Statement of Financial Accounting Standard No. 142 (SFAS 142)
under U.S. GAAP, amortization of goodwill ceased as of January 1, 2002. For
purposes of presentation and comparison, SFAS 142 was applied to the
financial data for the years ended 2001, 2000 and 1999. The operating loss
under U.S. GAAP for the year ended December 31, 2003 includes a goodwill
impairment loss of Ps. 152.5 million determined under SFAS 142. See Note 25
to the Consolidated Financial Statements.
(3) Extraordinary item reflects a provision of Ps. 340.7 million for the
contingent liability related to the Infored arbitration proceeding. Unlike
treatment under Mexican GAAP, for purposes of U.S. GAAP, such provision is
charged against operating income. See Notes 10 and 25 to the Consolidated
Financial Statements.
(4) In accordance with Mexican GAAP, net income does not give effect to
minority interest. In contrast, net income under U.S. GAAP does give effect
to minority interest. See Note 25 to the Consolidated Financial Statements.
(5) Amounts shown are the weighted average number of Series A Shares
outstanding, which was used for purposes of computing net income per ADS
under both Mexican and U.S. GAAP.
(6) The Company's dividend payment in any particular year relates to the
immediately preceding fiscal year. The Company did not pay any dividends in
2002 with respect to 2001.
(7) In December 2000, the Company reduced its capital by Ps. 343.0 million
(nominal amount) through a payment to its shareholders of that amount. See
Item 5, "Operating and Financial Review and Prospects--Liquidity and
Capital Resources."
(8) In 1999, the Company elected to adopt early the provisions of Bulletin D-4
issued by the Mexican Institute of Public Accountants, which became
effective on January 1, 2000. The cumulative effect of adopting Bulletin
D-4 for years prior to December 31, 1998 was the recognition in 1999 of Ps.
90.6 million in additional deferred tax liabilities. See Note 20 to the
Consolidated Financial Statements.
3
EXCHANGE RATE INFORMATION
Mexico has a free market for foreign exchange, and the Mexican government
allows the peso to float freely against the U.S. dollar. For much of 1998, the
foreign exchange markets were volatile as a result of financial crises in Asia
and Russia and financial turmoil in certain Latin American countries, including
Brazil and Venezuela. The peso declined during this period, but was relatively
stable from 1999 until 2001. In 2002 the peso declined significantly and
continued to decline through 2003. In 2004 to date, the peso has depreciated
slightly. There can be no assurance that the government will maintain its
current policies with regard to the peso or that the peso will not further
depreciate or appreciate significantly in the future.
The following table sets forth, for the periods indicated, the high, low,
average and period-end exchange rate for the purchase of U.S. dollars, expressed
in pesos per U.S. dollar.
Period Exchange Rate(1)
------ -----------------------------------------
Year Ended December 31, High Low Average(2) Period End
----- ----- ---------- ----------
1999................................ 10.60 9.24 9.56 9.48
2000................................ 10.09 9.18 9.47 9.62
2001................................ 9.97 8.95 9.33 9.16
2002................................ 10.43 9.00 9.75 10.43
2003................................ 11.41 10.11 10.85 11.24
Month Ended 2003:
December............................ 11.41 11.17
Month Ended 2004:
January............................. 11.10 10.81
February............................ 11.25 10.91
March............................... 11.23 10.92
April............................... 11.43 11.16
May................................. 11.63 11.38
----------
(1) Source: Noon buying rate for pesos reported by the Federal Reserve Bank of
New York.
(2) Average of month-end rates.
Fluctuations in the exchange rate between the peso and the U.S. dollar
will affect the U.S. dollar equivalent of the peso price of Series A Shares on
the Bolsa Mexicana de Valores, S.A. de C.V. (the "Mexican Stock Exchange") and
the price of ADSs on the New York Stock Exchange ("NYSE"). The Company pays cash
dividends in pesos, and exchange rate fluctuations will affect the U.S. dollar
amounts received by holders of ADSs upon conversion by Citibank N.A., as
depositary for the ADSs (the "Depositary"), of cash dividends on the Series A
Shares underlying the CPOs represented by the ADSs.
On June 23, 2004, the noon buying rate was Ps. 11.345 to $1.00.
4
RISK FACTORS
Risks Relating to Our Operations
If the Company fails to prevail in its challenge in the Mexican courts to
the damage award granted in the arbitration proceedings with Infored and
Mr. Gutierrez Vivo, our financial condition would be materially and
adversely affected
In 2002, an arbitration proceeding was initiated against the Company by
Infored, S.A. de C.V. ("Infored"), the producer of the news program Monitor, and
Jose Gutierrez Vivo, the principal anchor of Monitor, seeking rescission of
contract and damages. On March 1, 2004, an arbitration panel of the
International Chamber of Commerce (the "ICC") notified the Company of the ICC
panel's decision to rescind the contract and to award Infored and Mr. Gutierrez
Vivo together a total of $21.1 million, which represents the amount the Company
would be required to pay after taking into account the amounts prepaid by the
Company under the contract. The Company plans to challenge the validity of this
decision in the Mexican courts. Pending the Company's challenge of the
arbitration award, the Company will seek a stay of the enforcement of the damage
award. If the Mexican courts refuse to grant the Company a stay of enforcement,
it is likely that the Company will not have sufficient financial resources to
pay the award unless it is able to obtain additional financing. The Company is
currently engaged in talks with lenders in an effort to obtain standby financing
that could be drawn upon in the event the Company is obligated to make a payment
in connection with the damage award. In addition, should the Company fail in its
challenge, it expects to pursue various potential sources of funds to cover its
obligations with respect to such award, including medium-term or long-term
financing up to $21.1 million. No assurance can be given that such funds will be
obtained. Failure by the Company to win a stay of enforcement and, ultimately,
to prevail in its challenge to the damage award would materially and adversely
affect its financial condition.
If the Company does not comply with the financial covenants in our loan
agreement, the lender under that agreement could accelerate the maturity
of the loan
We have indebtedness with an outstanding principal amount of Ps. 198.1
million at June 23, 2004 under a loan agreement with Scotiabank Inverlat, S.A.
This loan agreement contains covenants requiring us to maintain certain
quarterly and year-end financial ratios. If we breach any of these covenants,
the amount then outstanding under the loan agreement could be accelerated by the
lender. In the past, including for the year ending December 31, 2003 and for the
first quarter of 2004, we have obtained from the lender waivers of our failure
to comply with these covenants. There can be no assurance that we will be able
to comply with these covenants in the future or that, if we fail to comply, we
will be able to obtain waivers of such failures.
Increased competition or a decline in popularity of any of our radio
formats could reduce our audience share and result in a loss of revenue
Radio broadcasting in Mexico is highly competitive, and programming
popularity, an important factor in advertising sales, is readily susceptible to
change. In the last five years, our average Mexico City audience share decreased
from 34.3% in 1999 to 32.0% in 2003. See Item 4, "Information on the
Company--Business Overview--Competition." There can be no assurance that
increased competition within, or a decline in the popularity of, a given format
segment will not decrease our aggregate audience share in the future. In
addition, we face strong competition from both television and various print
media for advertising revenues. If we are unable to respond to an increase in
competition or a decline in the popularity of any of our radio formats, our
revenue and profitability could suffer material adverse consequences.
5
If we lose one or more of our key customers, we could lose a significant
amount of our revenue
Our two largest individual customers in 2003 and 2002 were Comercial
Mexicana, S.A. de C.V. ("Comercial Mexicana") and Gigante, S.A. de C.V.
("Gigante"). In 2003, Comercial Mexicana and Gigante accounted for 3.6% and
3.5%, respectively, of our total broadcasting revenue. In 2002, Comercial
Mexicana and Gigante accounted for 5.5% and 5.3%, respectively, of our total
broadcasting revenue. Gigante was our largest individual customer in 2001 and
accounted for 7.7% of our total broadcasting revenue in that year. In 2003, the
companies comprising Grupo Carso accounted for 5.2% of total broadcasting
revenue, while in 2002 and 2001, the companies comprising Grupo Gigante, S.A. de
C.V. ("Grupo Gigante") accounted for 7.3% and 9.3%, respectively, of our total
broadcasting revenue. We cannot assure you that Comercial Mexicana and Gigante
or the companies comprising Grupo Carso or Grupo Gigante will continue to
purchase advertising from us at current levels. The loss of our relationship
with any one of our principal customers could have a material adverse effect on
our results of operations. See Item 4, "Information on the Company--Business
Overview--Broadcasting Operations--Sale of Air Time and Marketing."
A decrease in advertising expenditures by political campaigns could
substantially reduce our revenue
Our business is significantly affected by the advertising expenditures of
political parties during election campaigns in Mexico. While our revenue has
increased significantly during congressional elections, including 2003, which
occur every three years, our revenue has increased even more significantly
during presidential elections, which occur every six years (coinciding with
congressional elections), including 2000. In 2001, 2002 and 2003, advertising by
political parties accounted for 0.1%, 6.1% and 21.1% of total broadcasting
revenue, respectively. A decrease in advertising expenditures by political
campaigns during an election year could have a material adverse impact on our
results of operations. See Item 4, "Information on the Company--Business
Overview--Broadcasting Operations--Sale of Air Time and Marketing," and Item 5,
"Operating and Financial Review and Prospects--Seasonality of Sales."
The seasonal nature of our business affects our revenue
Our business is seasonal. Our revenue from advertising sales, which we
recognize when the advertising is aired, is generally highest in the fourth
quarter because of the high level of advertising during the holiday season.
Accordingly, our results of operations depend disproportionately on revenue
recognized in the fourth quarter, and a low level of fourth quarter advertising
revenue could have a material adverse effect on our results of operations for
the year. See Item 4, "Information on the Company--Business
Overview--Broadcasting Operations--Sale of Air Time and Marketing" and Item 5,
"Operating and Financial Review and Prospects--Seasonality of Sales."
Termination of the operating agreement for XHFO-FM could reduce our
revenue
We manage and operate, but do not own, one of Mexico City's most popular
radio stations, XHFO-FM. That station is an important source of revenue. The
agreement pursuant to which we operate XHFO-FM is scheduled to terminate on
January 2, 2005. There can be no assurance that we will be able to extend this
agreement or what the terms of any such extension might be. See Item 4,
"Information on the Company--Business Overview--Broadcasting Operations--Radio
Stations."
6
The Mexican Federal Competition Commission may prohibit us from making any
further investments in radio operations in Mexico
We, like all Mexican radio licensees, are subject to regulation by several
Mexican governmental agencies. As a result of such regulation, radio licenses
are subject to review and possible revocation, and licensees are prohibited from
transferring or assigning their radio broadcasting licenses without prior
governmental approval of both the transfer and its terms. As a result of the
increase in our share of the Mexico City radio market following completion of
the acquisition of Radiodifusion RED in 1996, we are required by the Mexican
Comision Federal de Competencia (the "Federal Competition Commission") to seek
its prior approval in connection with any future investments in radio operations
in Mexico, including, without limitation, purchases and leases of radio
stations, interests in other radio concerns or transmission sites, irrespective
of the size of such investments or their related audience share. To the best of
our knowledge, other Mexican radio broadcasting companies are not generally
subject to this requirement. No assurance can be given that we will be permitted
by the Federal Competition Commission to make any particular investment should
we desire to do so. See Item 4, "Information on the Company--Regulatory
Framework--Regulation of Radio Broadcasting by Mexico--Other."
If the Mexican government does not renew our broadcasting licenses, our
business could be harmed
To broadcast commercial radio in Mexico, a broadcaster must have a license
from the Secretaria de Comunicaciones y Transportes (the Secretary of
Communication and Transportation or "SCT"). Because the SCT generally grants
renewals to licensees that have substantially complied with applicable law, we
expect our renewal applications that are currently pending to be granted.
However, if we are unable to renew these licenses, our business could be
significantly harmed.
Our investments in non-radio businesses may not be successful due to our
limited experience outside the radio broadcasting industry
In addition to our ownership and operation of radio stations and the radio
network, Organizacion Impulsora de Radio, we may invest from time to time in
other media or communications businesses. Our experience in these businesses may
be limited, and there can be no assurance that any such business venture would
succeed.
Risks Relating to Our Principal Shareholders and Capital Structure
Holders of ADSs are not entitled to attend shareholders meetings and have
no voting rights
Holders of the CPOs, and therefore holders of the ADSs, have no voting
rights with respect to the underlying Series A Shares. Pursuant to the trust
agreement under which the CPOs are issued, the trustee for the CPOs will vote
the Series A Shares held in the trust in the same manner as the majority of the
Series A Shares that are not held in the trust and that are voted at the
relevant shareholders meeting. Holders of the CPOs are not entitled to attend or
to address our shareholders meetings. See Item 7, "Major Shareholders and
Related Party Transactions--Major Shareholders" and Item 10, "Additional
Information--Bylaws--Voting Rights" and "Additional
Information--Bylaws--Limitations Affecting Non-Mexican Holders--Voting Rights."
7
Certain members of the Aguirre family effectively control our management
and the decisions of the shareholders, and their interests may differ from
those of other shareholders
Certain members of the Aguirre family have the power to elect a majority
of our directors and control our management because they own a substantial
majority of the outstanding Series A Shares not held in the form of CPOs. These
Aguirre family members have established two Mexican trusts, which they control,
that together hold 84,020,646 Series A Shares, or 51.6% of all outstanding
Series A Shares. See Item 7, "Major Shareholders and Related Party
Transactions--Major Shareholders" and Item 10, "Additional
Information--Bylaws--Voting Rights" and "Additional
Information--Bylaws--Limitations Affecting Non-Mexican Holders--Voting Rights."
Our bylaws include provisions that could delay or prevent a takeover and
thus deprive you of a premium over the market price of the ADSs or
otherwise adversely affect the market price of the ADSs
The bylaws include certain provisions that could delay, defer or prevent a
third party from acquiring us, despite the possible benefit to our shareholders.
These provisions include restrictions on the acquisition, without the approval
of the Board of Directors, of shares or other securities of the Company
representing 30% or more of our capital stock and restrictions on agreements and
other arrangements, without the approval of the Board of Directors, for the
exercise of voting rights in respect of shares representing 30% or more of the
Company's capital stock. These provisions may deprive you of a premium over the
market price of the ADSs or otherwise adversely affect the market price of the
ADSs. See Item 10, "Additional Information--Bylaws--Other
Provisions--Anti-Takeover Provisions."
Future sales of Series A Shares by the controlling shareholders may affect
future market prices of the Series A Shares, CPOs and ADSs
Actions by members of the Aguirre family, directly or through the two
Mexican trusts through which they hold their Series A Shares, with respect to
the disposition of their Series A Shares, may adversely affect the trading price
of the Series A Shares or the CPOs on the Mexican Stock Exchange and the price
of the ADSs on the NYSE. There are no contractual restrictions on the rights of
members of the Aguirre family to sell ADSs, CPOs or Series A Shares.
You may not be able to participate in any future preemptive rights
offering and, as a result, your equity interest in us may be diluted
Under Mexican law, if we issue new shares for cash as a part of a capital
increase, we must generally grant our shareholders the right to purchase a
sufficient number of shares to maintain their existing ownership percentage.
Rights to purchase shares in these circumstances are known as preemptive rights.
We may not legally be permitted to allow holders of ADSs in the United States to
exercise any preemptive rights in any future capital increases unless (i) we
file a registration statement with the U.S. Securities and Exchange Commission
(the "SEC") with respect to that future issuance of shares or (ii) the offering
qualifies for an exemption from the registration requirements of the U.S.
Securities Act of 1933 (the "Securities Act"). At the time of any future capital
increase, we will evaluate the costs and potential liabilities associated with
filing a registration statement with the SEC, the benefits of preemptive rights
to holders of ADSs in the United States and any other factors that we consider
important in determining whether to file a registration statement.
There can be no assurance that we will file a registration statement with
the SEC to allow holders of ADSs in the United States to participate in a
preemptive rights offering. In addition, under current Mexican law, sales by the
Depositary of preemptive rights and distribution of the proceeds from such
8
sales to the ADS holders is not possible. As a result, the equity interest of
ADS holders in us would be diluted proportionately. See Item 10, "Additional
Information--Bylaws--Preemptive Rights."
Risks Relating to Mexico
Economic developments in Mexico may adversely affect our business
Our financial condition and results of operations are generally affected
by the strength of the Mexican economy, as the demand for advertising, revenue
from which is the principal source of our earnings, generally declines during
periods of economic difficulty.
In 2002 and 2003, Mexico's gross domestic product, or GDP, grew by 0.9%
and 1.3%, respectively, and inflation rose to 5.7% and decreased to 3.98%,
respectively. In 2004, according to preliminary estimates of the Mexican
government, GDP is expected to grow by 3.1% and inflation is expected to be
4.08%. If the Mexican economy contracts or if inflation and interest rates
increase significantly, our business, financial condition and results of
operations could suffer material adverse consequences.
Economic conditions in Mexico are heavily influenced by the condition of
the U.S. economy due to various factors, including commercial trade pursuant to
the North American Free Trade Agreement (NAFTA), U.S. investment in Mexico and
emigration from Mexico to the United States. Events and conditions affecting the
U.S. economy may adversely affect our business, results of operations, prospects
and financial condition.
In addition, in recent years, economic crises in Asia, Russia, Brazil and
other emerging markets have adversely affected the Mexican economy and could do
so again.
High levels of inflation and high interest rates in Mexico could adversely
affect our financial condition and results of operations
Mexico has experienced high levels of inflation and high domestic interest
rates. The annual rate of inflation, as measured by changes in the National
Consumer Price Index, was 3.98% for 2003. Inflation for the first quarter of
2004 was 1.57%. If inflation in Mexico does not remain within the government's
projections, we might not be able to raise our broadcast advertising rates to
keep pace with inflation. More generally, the adverse effects of high inflation
on the Mexican economy might result in lower demand for broadcast advertising.
Interest rates on 28-day Mexican treasury bills, or Cetes, averaged 6.23%
during 2003. On June 23, 2004, the 28-day Cetes rate was 6.58%. High interest
rates in Mexico could adversely affect our financing costs.
Political events in Mexico could affect Mexican economic policy and our
operations
Mexican political events may significantly affect our operations and the
performance of Mexican securities, including our securities. In the Mexican
national elections held in July 2000, Vicente Fox of the opposition Partido
Accion Nacional (National Action Party or PAN) won the presidency. His victory
ended more than 70 years of presidential rule by the Partido Revolucionario
Institucional (the Institutional Revolutionary Party or PRI). Neither the PRI
nor the PAN currently has a majority in the Congress or Senate. The lack of a
majority party in the legislature and the lack of alignment between the
legislature and the President has resulted in deadlock and prevented the timely
implementation of
9
economic reforms. Continued delays could have a material adverse effect on the
Mexican economy and on our business.
Depreciation of the peso relative to the U.S. dollar could adversely
affect our financial condition and results of operations
The value of the peso has been subject to significant fluctuations with
respect to the U.S. dollar in the past and may be subject to significant
fluctuations in the future. In 2003, the peso depreciated against the U.S.
dollar by year-end by 7.77% and the average value of the peso against the U.S.
dollar during 2003 was 11.28% lower than in 2002. In 2002, the peso depreciated
against the U.S. dollar at year-end by approximately 12.8%, and the average
value of the peso against the U.S. dollar during 2002 was 4.2% lower than in
2001. In 2001, the peso appreciated against the U.S. dollar by 4.8% at year-end,
and the average value of the peso against the U.S. dollar during 2001 was 1.7%
higher than in 2000. No assurance can be given that the peso will not depreciate
in value relative to the U.S. dollar in the future.
Fluctuations in the exchange rate between the peso and the U.S. dollar
will affect the U.S. dollar value of an investment in our equity securities and
of dividend and other distribution payments on those securities. See "--Exchange
Rate Information."
On March 1, 2004, as a result of the Infored Arbitration Proceeding, the
Company was ordered to pay $21.1 million in damages. The Company plans to
challenge the validity of this decision in the Mexican courts. Pending this
challenge, the Company will seek a stay of the enforcement of the damage award.
There can be no assurance that we will prevail on any of these challenges. Any
award that we are ultimately obligated to pay as a result of the Infored
Arbitration Proceeding would be payable in U.S. dollars.
A small portion of our operating costs is also payable in U.S. dollars.
Although at December 31, 2003 and at May 31, 2004, we had no U.S.
dollar-denominated indebtedness, we may in the future incur non-peso-denominated
indebtedness. Declines in the value of the peso relative to other currencies
increase our obligations payable in U.S. dollars, increase our operating costs,
increase our interest costs in pesos relative to any U.S. dollar-denominated
indebtedness, result in foreign exchange losses and could adversely affect our
ability to meet our U.S. dollar-denominated obligations. Additionally, since
substantially all our revenue is denominated in pesos, increased costs resulting
from a decline in the value of the peso relative to the U.S. dollar will not be
offset by any exchange-related increase in revenue. See Item 11, "Quantitative
and Qualitative Disclosure About Market Risk."
Severe devaluation or depreciation of the peso may also result in
disruption of the international foreign exchange markets and may limit our
ability to transfer or to convert pesos into U.S. dollars and other currencies
for the purpose of making timely payments of our obligations or our operating
costs payable in U.S. dollars.
Developments in other emerging market countries may affect prices of the
ADSs
The market value of securities of Mexican companies is, to varying
degrees, affected by economic and market conditions in other emerging market
countries. Although economic conditions in such countries may differ
significantly from economic conditions in Mexico, investors' reactions to
developments in any of these other countries may have an adverse effect on the
market value of securities of Mexican issuers. In late October 1997, prices of
both Mexican debt securities and Mexican equity securities dropped
substantially, precipitated by a sharp drop in value of Asian markets.
Similarly, in the second half of 1998, prices of Mexican securities were
adversely affected by the economic crises in
10
Russia and Brazil. There can be no assurance that the market value of our
securities would not be adversely affected by events elsewhere, especially in
emerging market countries.
Item 4. Information on the Company
THE COMPANY
Organization
Grupo Radio Centro is a corporation (sociedad anonima de capital variable)
organized under the laws of Mexico. Grupo Radio Centro is a holding company that
operates through its subsidiaries.
Grupo Radio Centro's principal executive offices are located at
Constituyentes 1154 (7(degree) Piso), Col. Lomas Altas, C.P. 11950, Mexico,
D.F., Mexico. The telephone number of Grupo Radio Centro at this location is
(525) 55-728-4800.
History
Grupo Radio Centro is a family-controlled radio broadcasting company with
roots in Mexican radio broadcasting dating back over 50 years. Francisco Aguirre
J., the founder of Grupo Radio Centro, initiated his radio broadcasting
activities in 1946. In 1952, he founded Organizacion Radio Centro ("ORC"), the
sole owner and operator of two radio stations, Radio Centro and Radio Exitos. In
1965, the Company formed Organizacion Impulsora de Radio ("OIR"), to provide
national sales representation to affiliated radio stations outside Mexico City.
It was incorporated as Tecnica de Desarrollo Publicitario, S.A. de C.V. on June
8, 1971, and renamed Grupo Radio Centro, S.A. de C.V. on July 14, 1992. The
bylaws of the Company provide for its existence until 2070. In 1973, Grupo Radio
Centro expanded its broadcasting activities by establishing three new FM radio
stations, thus consolidating its position as the market leader in Mexico City
radio broadcasting. In 1983, Grupo Radio Centro began broadcasting outside
Mexico and in 1986 created Cadena Radio Centro ("CRC") to provide programming
and network sales representation to affiliated radio stations serving primarily
the rapidly growing Spanish-speaking population of the United States. The
Company sold CRC in August 1994. In 1989, the Aguirre family began a
comprehensive process of corporate reorganization designed to consolidate Grupo
Radio Centro's radio operations under the common ownership of the Company and
the family's non-radio-related operations under the common ownership of another
company controlled by the Aguirre family outside Grupo Radio Centro. The purpose
of the reorganization was to permit Grupo Radio Centro to focus on radio-related
operations and to acquire the balance of shares of its radio broadcasting
subsidiaries that were owned directly or indirectly by members of the Aguirre
family outside Grupo Radio Centro. As a result of the reorganization, the
Company acquired substantially all of the shares of its radio broadcasting
subsidiaries with the last transfer of shares occurring in March 1993. In the
third quarter of 1993, the Company completed an initial public offering of its
ADSs and CPOs, listing such securities on the NYSE and the Mexican Stock
Exchange, respectively. The Company completed a subsequent public offering of
ADSs and CPOs during the third quarter of 1996. On June 30, 2003, all CPOs held
by holders that qualified as Mexican investors, as defined in the Company's
bylaws (see Item 10, "Additional Information--Bylaws--Limitations Affecting
Non-Mexican Holders"), were exchanged for Series A Shares held in the CPO Trust
(see Item 9, "The Offer and Listing"). In connection with the Amended CPO Trust,
the Series A Shares commenced trading on the Mexican Stock Exchange under the
symbol "RCENTRO.A" on June 30, 2003. The Series A Share listing is deemed to
include the CPOs, such that the Series A Share trading line will reflect trading
of both Series A Shares and CPOs.
11
Capital Expenditures and Divestitures
Capital Expenditures
Capital expenditures in 2003, 2002, and 2001 were Ps. 18.7 million, Ps.
33.4 million and Ps. 152.5 million respectively. In 2003, capital expenditures
were financed from working capital. In 2002, capital expenditures were financed
from working capital. In 2001, capital expenditures were financed from working
capital and short-term bank loans.
The Company's principal capital expenditures in 2001 were made in
connection with its purchase of the Mexico City radio station XEN-AM on December
31, 2001. The total purchase price was approximately $6.0 million, including
approximately $1.0 million in monthly payments under an operating agreement
effective up to the consummation of the purchase, $3.4 million in deposits and
cash delivered upon consummation of the purchase and $1.6 million in payments to
a third party, primarily in connection with the termination of a marketing
services contract between the third party and the previous owners of XEN-AM.
Approximately $4.8 million of the total purchase price was paid in 2001 and the
remaining balance of $1.2 million was paid during 2002. See "--Business
Overview--Business Strategy--Maintenance of Leading Market Position," Item 10,
"Additional Information--Material Contracts" and Note 23 to the Consolidated
Financial Statements.
Additionally, in February 2001 the Company purchased To2, a company owning
an Internet portal, for a total purchase price of $2.15 million, including the
assumption of certain liabilities totaling $1.25 million. In March 2001, the
Company purchased Palco Deportivo, a company providing sports-related content
for various media, for a total purchase price of $4.7 million, including the
assumption of certain liabilities totaling $0.7 million. These acquisitions were
financed with short-term bank loans. See Item 5, "Operating and Financial Review
and Prospects--Liquidity and Capital Resources" and Note 24 to the Consolidated
Financial Statements.
The balance of the Company's capital expenditures in the 2001-2003 period
were primarily for broadcasting equipment.
Capital Divestitures
The Company's capital divestitures from 2001 to 2003 amounted to Ps. 19.5
million in 2003, reflecting primarily the sale of used company automobiles, Ps.
25.0 million in 2002, reflecting primarily the sale of real estate and Ps. 3.7
million in 2001, reflecting primarily the sale of obsolete equipment (see Notes
1 and 11 to the Consolidated Financial Statements).
BUSINESS OVERVIEW
Grupo Radio Centro is a leading radio-broadcasting company in Mexico and
for each of the last 32 years has been the leading radio broadcaster, in terms
of audience share, in Mexico City, the most populous city in North America.
Grupo Radio Centro's principal activities are the production and broadcasting of
musical programs, news, interviews and special event programs. The Company's
revenue is derived primarily from the sale of commercial air time to advertising
agencies and businesses. The Company's Mexico City average audience share for
the year ended December 31, 2003 was 32.0%, almost twice that of the next most
popular radio-broadcasting company in Mexico City for the same period. See
"--Broadcasting Operations" and "--Competition."
Grupo Radio Centro currently owns eight AM and five FM radio stations, and
manages and operates an additional FM station. Of the 14 radio stations it owns
or operates, Grupo Radio Centro
12
operates five AM and six FM stations in Mexico City. The remaining three AM
radio stations, including one in Mexico City, are currently managed and operated
by third parties pursuant to operating agreements.
The Company manages the 11 radio stations it operates in Mexico City as a
portfolio, combining in-depth market research and programming innovation with
continuous investment in state-of-the-art technology and human resources to
produce high-quality, popular programs that target substantially all of the
demographic segments of the Mexico City radio audience sought by advertisers.
For the year ended December 31, 2003, Grupo Radio Centro's radio stations ranked
as four of the top ten FM radio stations out of a total of 29 FM stations and
three of the top ten AM stations out of a total of 34 AM stations. The Company's
station portfolio includes one or more of the leading stations, in terms of
audience share, in most of the major station format categories (such as
Juvenil--Youth Oriented and News/Talk Show) in Mexico City. See "--Business
Strategy."
In addition to its radio-broadcasting activities, the Company, under the
trade name Organizacion Impulsora de Radio, acts as the national sales
representative for, and provides programming to, a network of affiliates in
Mexico. At December 31, 2003, the Company had 111 affiliates in 73 cities
throughout Mexico.
Business Strategy
The Company's strategy is to optimize cash flow from operations through
maintaining its leading market position, offering advertisers top-ranked
stations in almost every major station format, and continuing its focus on
operating efficiency and cost control.
Maintenance of Leading Market Position
The Company is focused on maintaining its current position as the leading
radio broadcaster in Mexico City, offering advertisers top-ranked stations in
almost all of the major station formats, including Spanish
Language--Contemporary Music, Spanish Language--Classics, English
Language--Music, English Language--Contemporary Music, English Language--Classic
Rock, Juvenil--Youth Oriented, Grupera--Diverse Musical Genres and News/Talk
Show. By maintaining a strong presence in the major station formats, management
believes that the Company will maximize its share of total radio advertising
expenditures. Management bases such belief on the following rationale: (i) a
broadcaster's revenue is correlated with its ability to maximize the number of
listeners within an advertiser's given demographic parameters and (ii) the
Company's stations currently cover almost all of the demographic segments of the
radio audience sought by advertisers. In addition, by managing its stations as a
portfolio and offering a broad range of advertising packages, the Company
believes that it differentiates itself from its smaller competitors, who cannot
offer as comprehensive coverage of the Mexican radio audience. The Company is
able to offer advertisers exposure to listening audiences targeted to correspond
with the demographic profiles they seek, and is able to provide advertisers with
their choice of either focused or broad audience exposure across a comprehensive
range of income classes and age segments.
In order to maximize the audience share of its portfolio of stations, the
Company recognizes the need to be responsive to the requirements of its
listeners and advertisers, tailoring its stations to the changing circumstances
of the market. The Company seeks to manage its station portfolio by (i)
balancing the mix of its station formats to correspond to the needs of the
overall market and (ii) being proactive in the management of each individual
station format and adjusting to the evolution of its particular market segment.
13
OIR Network Strategy
As a complement to its radio-broadcasting activities, Grupo Radio Centro
operates, and continues its efforts to expand, its OIR radio network. The
Company simultaneously transmits its news program La Red from 5:45 a.m. to 10:00
a.m. to the 32 largest commercial markets in Mexico outside the Mexico City
metropolitan area. While increasing programming and service revenue, the
operation of OIR also facilitates the Company's overall marketing efforts,
offering advertisers access to radio stations on a nationwide basis. See
"--Business Overview--OIR Network."
14
Broadcasting Operations
Radio Stations
Except as noted, the following table sets forth certain information
about the Mexico City radio stations operated by Grupo Radio Centro as of
December 31, 2003:
INRA(1) INRA(1) INRA(1) Arbitron(2)
2003 Total 2003 Total 2003 2003 Total
Power Market Audience Band Market
Station Frequency (Watts) Station Format Rank(3) Share(4) Rank(5) Rank(3)
------- --------- ------- -------------- ------- -------- ------- -------
XEQR-FM......... 107.3 mhz 100,000 Grupera--Diverse Musical Genres 1 9.33% 1 1
XEJP-FM......... 93.7 mhz 100,000 Spanish Language--Contemporary 4 4.19% 4 2
Music
XERC-FM......... 97.7 mhz 100,000 Juvenil--Youth Oriented 3 5.35% 3 4
XHFO-FM(6)...... 92.1 mhz 150,000 English Language--Classic Rock 15 2.74% 14 7
XHFAJ-FM........ 91.3 mhz 100,000 English Language--Contemporary 9 3.59% 9 10
Music
XHRED-FM........ 88.1 mhz 100,000 News / English Language--Music 26 1.16% 19 24
XERED-AM........ 1110 khz 50,000 News / Talk Show 19 2.13% 2 18
XERC-AM(7)...... 790 khz 50,000 News 44 0.28% 19 45
XEQR-AM......... 1030 khz 50,000 Spanish Language--Talk Show / 25 1.25% 7 17
Contemporary Music
XECMQ-AM(7)..... 1150 khz 20,000 Spanish Language Classics 21 1.73% 4 13
XEN-AM(8)....... 690 khz 50,000 News / Talk Show 46 0.24% 22 29
Arbitron(2) Arbitron(2)
2003 Total 2003 Target
Audience Band Demographic
Station Share(4) Rank(5) Segments
------- -------- ------- --------
XEQR-FM......... 13.90% 1 13-44 years
XEJP-FM......... 6.70% 2 18-44 years
XERC-FM......... 6.10% 4 8-34 years
XHFO-FM(6)...... 4.10% 7 18-44 years
XHFAJ-FM........ 2.90% 10 13-24 years
XHRED-FM........ 1.60% 16 25+ years
XERED-AM........ 1.70% 6 25+ years
XERC-AM(7)...... 0.30% 23 25+ years
XEQR-AM......... 1.70% 5 25+ years
XECMQ-AM(7)..... 2.20% 2 35+ years
XEN-AM(8)....... 0.40% 13 25+ years
----------
(1) Source: International Research Associates Mexicana, S.A. de C.V. ("INRA").
(2) Source: Arbitron Inc.
(3) Total market rank is determined based on each station's annual average
share of the total radio audience.
(4) Total audience share represents each station's annual average share of the
total radio audience.
(5) Band rank is determined based on each station's annual average share of
the radio audience within its broadcasting frequency band (i.e., either AM
or FM).
(6) XHFO-FM is operated by Grupo Radio Centro pursuant to an operating
agreement that will terminate on January 2, 2005.
(7) In October 22, 2001 the Company switched the programming of the stations
XERC-AM and XECMQ-AM.
(8) On March 1, 2001, the Company began operating XEN-AM. On December 31,
2001, the Company acquired XEN-AM. The Company's ownership of this station
was approved by the SCT on April 8, 2003.
15
XHFO-FM is operated by Grupo Radio Centro pursuant to an operating
agreement that will terminate on January 2, 2005. For the year ended December
31, 2003, XHFO-FM accounted for approximately 8.8 % of Grupo Radio Centro's
broadcasting revenue. There can be no assurance that the Company will be able to
extend this agreement beyond January 2, 2005 or what the terms of any such
extension might be.
Programming
The Company currently produces all of the programming for the stations it
owns or operates. Prior to March 3, 2004, however, the Monitor news program,
which was Mexico City's most popular radio news program in 2003, and Red Vial, a
Mexico City traffic report were produced by Infored (see "--Production of
Programming by Infored"). The news program that replaced Monitor and the traffic
report that replaced Red Vial are produced by the Company itself. In addition,
the Company provides programming to its network of affiliates.
Programming produced by the Company includes playing recorded music,
coverage of live music events (such as concerts), special musical programs and
news and talk show programs. For example, through its Noticentro news division,
the Company produces daily news programs consisting of three-minute updates and
ten-minute summaries of local, national and international news that are
broadcast through Formato 21, the Company's 24-hour, all-news station, and a
majority of its other stations in Mexico City.
Grupo Radio Centro's programming strategy is to tailor the format of each
of its stations to attract targeted demographic segments of the radio audience
sought by advertisers. To ensure that its programming remains responsive to
shifting demographic trends and audience tastes, Grupo Radio Centro uses its
internal research division (which conducts daily door-to-door interviews
throughout Mexico City) as well as commercially available data to assess the
listening habits and tastes of the Mexico City population. In 2003, Grupo Radio
Centro conducted approximately 658,000 interviews. Grupo Radio Centro believes
that no competitor has developed an internal research capability as extensive as
its own.
Production and Transmission of Programming
Grupo Radio Centro has 18 production studios in which musical material,
advertisements and promotional spots are recorded on digital audio tape ("DAT").
During the first half of 2004, the Digital Recording System was updated for
advertisements and music. In addition, Grupo Radio Centro maintains 13 on-air
studios, each of which is linked to Grupo Radio Centro's new automated
programming computer network via optical fiber. In most cases, Grupo Radio
Centro has maintained a consistent design for both production and on-air studios
to provide a familiar work environment for employees and to reduce the risk of
error. Grupo Radio Centro's primary studio operations are substantially all
digital and utilize state-of-the-art computer networks for the recording,
scheduling and playing of all news, music, promotional and advertising material.
Currently, the Company has a single network with a velocity measured in
Gigabytes installed in both on-air studios and production studios, totaling 30
workstations.
The new Digital Recording System records the audio of music, news and
promotional and advertising material on hard disks from a storage system thereby
transferring the audio directly to each workstation and then to an audio
console. This programming feed is then processed and sent to one of several
transmitter sites via VHF digital or analog studio transmitter links or via
digital linear high-speed E1 links. Each signal is periodically monitored for
quality.
16
During 2004, the Company plans to replace six analog mixer consoles with
digital mixer consoles. The replacements will occur at radio stations XECMQ-AM,
XERC-AM (two consoles) and at one studio and two transmitter cabins used by OIR.
The Company will also install a new news module (including new hardware and
software) named "News Room" to modernize the operations of the news division of
the Company and facilitate the rapid distribution of news information to all of
the Company's radio stations.
Each station has a main transmitter and two back-up transmitters. All AM
transmitters incorporate solid-state design. Each transmitter site has a diesel
generator with automatic transfer that allows rapid switchover to back-up power
in the event of power outages. In addition, the main FM transmitter facility is
equipped with an uninterruptible power supply to prevent the loss of air time
during a cutover to back-up power. Grupo Radio Centro uses sophisticated
multiplexing networks for transmission, which allows five of its AM stations to
operate at two sites, each site using one antenna. Similarly, five FM stations
are multiplexed into a common eight-bay panel antenna situated on Cerro del
Chiquihuite, which Grupo Radio Centro believes is ideally located at 540 meters
above the average terrain level in Mexico City. A sixth FM station operated by
the Company transmits from the World Trade Center in Mexico City.
Currently all AM and FM radio broadcast signals in Mexico are analog.
There are various efforts underway around the world to develop, test and
implement digital audio broadcasting ("DAB"). If implemented, DAB would largely
eliminate fading, static and other interference that adversely affects the
listening experience. Various DAB proposals have focused upon either the United
States "in-band" broadcasting model (using existing allocations of AM or FM
spectrum) or the European "out-of-band" broadcasting model. The Camara Nacional
de la Industria de Radio y Television (the Mexican Trade Association for
Broadcasters or "CIRT"), of which the Company is a member, is in the process of
analyzing such proposals, particularly the European model. The Company is an
active participant in CIRT's efforts to obtain favorable regulation of DAB when,
and if, such technology is implemented in Mexico. CIRT has created a task force
with the Secretaria de Comunicaciones y Transportes (the Secretary of
Communication and Transportation or "SCT") in order to introduce DAB in Mexico
in the future.
In March 2000, the SCT issued an order reserving a certain band of radio
frequency (the "L" band) for research and development of digital audio
broadcasting. In October 2000, the SCT issued an order amending all existing AM
and FM band radio licenses to allow licensees to engage in DAB using
technologies to be approved in the future by the SCT. There can be no assurance,
however, as to whether or when DAB will be introduced.
In October, 2003, the Company was granted by the SCT permission to install
in its Cerro del Chiquihuite plant, a digital radio system named DAB Eureka 147
which simultaneously transmits the programming of the radio stations Radio
Red-FM, Stereo Joya, Alfa Radio, Stereo 97.7 and La Z. The Company also
installed a digital transmitter system through which the Company broadcasts the
programming of the radio station Alfa Radio. The results of such tests will be
provided to the SCT. In addition, the Company plans to continue testing
"IBOC-AM", an in-band on-channel AM system for transmitting digital information
over existing stations.
In 2003, Grupo Radio Centro completed a project to increase the power of
several radio stations--XERED-AM, XECMQ-AM and XEN-AM, from 50 to 100 kilowatts,
20 to 50 kilowatts and 50 to 100 kilowatts, respectively. The objective of this
effort is to improve the stations' presence, coverage and quality of reception
in Mexico City's metropolitan area. Definitive authorization from the SCT was
granted in April 2004.
17
Production of Programming by Infored
Through a series of transactions effected in 1995 and early 1996, the
Company acquired five radio stations owned by RED as well as the exclusive radio
broadcasting rights to Monitor, the most popular news and talk radio program in
Mexico. Contemporaneously with the acquisition of RED, the Company assumed a
programming services agreement between RED and Infored pursuant to which Infored
provided news programming and production services, including the production of
Monitor, to the Company. Broadcasting revenue from XERED-AM and XHRED-FM
attributable to Monitor represented a significant portion of Grupo Radio
Centro's total broadcasting revenue. Approximately 23.0% and 22.9% and 27.8% of
the Company's broadcasting revenue for 2001, 2002 and 2003, respectively, was
attributable to Monitor.
On December 23, 1998, the Company entered into a programming services
agreement (the "Infored Agreement") with Infored and Mr. Gutierrez Vivo, the
principal anchor of Monitor, to provide the Company with original news programs
and special-event productions for radio until 2015. The Infored Agreement
provided that Mr. Gutierrez Vivo would continue as Monitor's host until at least
the end of 2003.
Under the Infored Agreement, the Company agreed to make a one-time payment
to Infored totaling approximately $15.4 million, of which $4.0 million and Ps.
4.0 million (nominal amount) was paid at signing and the balance of $11.0
million was paid over the course of 1999. In addition, Grupo Radio Centro paid
Infored monthly production fees based on the revenues derived from Monitor and
the amount of budgeted expenses, which generally reflected increases due to
Mexico's inflation rate, to cover Infored's radio programming operations. The
Company also agreed to transfer to Infored two AM radio stations, XEFAJ-AM and
XEJP-AM. These transfers were completed in April 2000.
In May 2002, however, Mr. Gutierrez Vivo and Infored intiated an
arbitration proceeding pursuant to which they sought rescission of the Infored
Agreement and damages. On March 1, 2004, the International Chamber of Commerce
(the "ICC") notified the Company that, by majority vote of two of the three
arbitrators, the ICC panel held that the Company was in breach of its contract
with Infored and Mr. Gutierrez Vivo. As a result, the contract was rescinded and
Infored and Mr. Gutierrez Vivo together were awarded a total of $21.1 million in
damages, which represents the amount the Company would be required to pay after
taking into account prepayments made by the Company. The Company plans to
challenge the validity of this decision in the Mexican courts. Pending this
challenge, the Company will seek a stay of the enforcement of the damage award.
There can be no assurance that we will prevail on any of these challenges.
In March 2004, the Company replaced its Infored-produced programming,
including Monitor, with similar programming that the Company itself produces.
Investment in Technology
Grupo Radio Centro consistently has invested in state-of-the-art
equipment, the development and deployment of new operating systems and the
training of its engineering and operating personnel. Grupo Radio Centro believes
these investments enable it to produce high quality programming with few
scheduling or on-air errors and to broadcast a superior signal to listeners'
radios. In addition, Grupo Radio Centro's computer system allows it to maintain
a certifiable log of advertising and to generate real-time affidavits certifying
that advertisements have been aired when and as requested, thereby reducing its
clients' monitoring costs and enhancing client goodwill. Grupo Radio Centro
believes that its state-of-the-art equipment and engineering staff give it a
competitive edge in Mexico City radio broadcasting.
18
Sale of Air Time and Marketing
Commercial air time for Grupo Radio Centro's radio stations is sold both
to advertising agencies and directly to businesses. The top ten customers in
each of 2003, 2002 and 2001 accounted for approximately 33.4%, 31.4% and 37.7%,
respectively, of total broadcasting revenue of the Company. Our two largest
individual customers in 2003 and 2002 were Comercial Mexicana and Gigante. In
2003, Comercial Mexicana and Gigante accounted for 3.6% and 3.5%, respectively,
of our total broadcasting revenue. In 2002, Comercial Mexicana and Gigante
accounted for 5.5% and 5.3%, respectively, of our total broadcasting revenue.
Gigante was our largest individual customer in 2001 and accounted for 7.7% of
our total broadcasting revenue in that year. In 2003, the companies comprising
Grupo Carso accounted for 5.2% of total broadcasting revenue, while in 2002 and
2001, the companies comprising Grupo Gigante, S.A. de C.V. accounted for 7.3%
and 9.3%, respectively, of our total broadcasting revenue.
In addition to the Company's corporate clients, Instituto Federal
Electoral, a public organization responsible for organizing presidential and
congressional elections, accounted for 8.1% of our total broadcasting revenue in
2003. The two largest Mexican political parties, the PRI and the PAN, together
accounted for 8.5% of the Company's total broadcasting revenue in 2003,
reflecting the significant campaign advertising expenditures associated with the
triennial congressional elections that year. By contrast, in 2002, the two
political parties accounted for 1.3% of broadcasting revenue, while in 2001,
they contributed virtually no revenue.
Sales of commercial air time vary throughout the year and are generally
highest in the fourth quarter of the year and lowest in the first quarter of the
year. See Item 5, "Operating and Financial Review and Prospects--Seasonality of
Sales."
At December 31, 2003, the Company had a sales force of 33 individuals, of
which 19 marketed primarily to advertising agencies and major customer accounts
and 14 marketed to small and mid-sized accounts.
Grupo Radio Centro establishes its advertising rates by considering the
cost per thousand listeners as a reference to ensure that its rates are
competitive. The Company offers package discounts to its clients who purchase
air time on multiple stations, offering the largest discounts to clients who
purchase air time on all of its stations. Higher rates apply to clients who
purchase commercial air time for "special events," such as live concerts and
special news features.
In addition, the Company sells commercial air time in advance under a plan
pursuant to which advertisers who deposit cash with Grupo Radio Centro in an
amount equal to their advertising commitment for an agreed period are guaranteed
the rate in effect at the time of the purchase for the agreed period, and are
granted bonus advertising time in addition to the time purchased. The Company
invests cash deposited pursuant to advance sales, and includes interest
generated on such investments in broadcasting revenue. In 2003, revenue
recognized under advance-sale arrangements, including related interest income,
accounted for approximately 43.8% of total broadcasting revenue, as compared to
41.4% for 2002 and 53.3% for 2001. See Note 15 to the Consolidated Financial
Statements.
The effect of such advance sales is to substitute the increased interest
income earned on the advance sale payments for a portion of the operating income
foregone because of the reduced effective rate on the advertising time subject
to the advance-sale arrangements. The Company believes that such advance sales
are advantageous to Grupo Radio Centro because the interest income generated by
the proceeds of such advance sales offsets in part the effective reduction in
advertising rates associated with such sales, and because the bonus advertising
time granted to purchasers is "dead time" (i.e., time that would not otherwise
be sold). The Company also believes that its advance-sales plan attracts
advertisers
19
who would not otherwise purchase advertising time because of the benefits of
guaranteed rates and bonus time. However, any decrease in the inflation rate for
2004 may reduce the attractiveness of these plans for such advertisers.
OIR Network
Grupo Radio Centro, under the trade name OIR, provides national sales
representation, programming and broadcast-related services to a network of
affiliates. At December 31, 2003, Grupo Radio Centro had 111 affiliates located
in 73 cities throughout Mexico. During the last three years, broadcasting
revenue from OIR-related activities was 2.5% to 1.5% of total broadcasting
revenue. In 2003, approximately 2.5% of the Company's revenue was attributable
to its work through OIR, and no single affiliate represented more than 7.4% of
total OIR-related revenue.
At December 31, 2003, 17 of the Company's OIR-related affiliates were
owned or controlled by shareholders of the Company. Except as disclosed
elsewhere (see Item 7, "Major Shareholders and Related Party
Transactions--Related Party Transactions" and Note 6 to the Consolidated
Financial Statements), all commercial relations between such shareholder-owned
or shareholder-controlled stations and Grupo Radio Centro are on an arm's-length
basis.
Outside Mexico City, virtually all national radio advertising (i.e.,
advertising aimed at a national audience) is sold through networks of affiliated
radio stations. Pursuant to its standard affiliate agreement, terminable at will
by either party on 60 days notice, OIR agrees to purchase commercial air time
from affiliated stations, compensating such stations for their air time with a
percentage of the revenue obtained on the resale of commercial air time to
national advertisers. The affiliates agree to broadcast certain programs at
specified times with advertising spots of specified duration. Compensation paid
to affiliates varies depending on the size of the affiliate's market.
OIR transmits special event programs, including national advertising,
directly to certain affiliates via satellite. As of December 31, 2003, 55
affiliates were able to receive such programs via satellite from Mexico City and
the remaining affiliates received recorded programming on conventional or DAT
cassettes.
Internet and Other Media
On February 16, 2001, the Company acquired To2, an Internet portal
company. The Company used this acquisition to evaluate the possibilities of
leveraging the Internet as a complementary medium to radio for distribution of
the Company's content. In October 2002, the Company decided to cease operations
of this Internet subsidiary because of its limited profitability and to control
costs.
On March 14, 2001, the Company acquired Palco Deportivo, a company
providing sports-related content for radio, television, various print media and
its own Internet portal. In addition to using this acquisition to explore the
use of other media, the Company broadcasts Palco Deportivo radio programming
daily on XEQR-AM and broadcasts Palco Deportivo radio spots and advertisements
on other Company stations. See "--The Company--Capital Expenditures and
Divestitures--Capital Expenditures," Item 5, "Operating and Financial Review and
Prospects--Liquidity and Capital Resources" and Note 24 to the Consolidated
Financial Statements.
Competition
Radio broadcasting in Mexico is highly competitive, and programming
popularity, an important factor in advertising sales, is readily susceptible to
change. As of December 31, 2003, there were 56
20
commercial radio stations in Mexico City (30 AM and 26 FM stations) and seven
not-for-profit, public-service stations (consisting of four AM and three FM).
These constitute all of the currently available radio broadcast channels within
Mexico City's AM and FM frequency spectrum.
Set out below is a table showing the number of stations in Mexico City
operated by Grupo Radio Centro and each of its six main competitors at June 23,
2004, and a chart depicting the audience share of each, including the audience
share of the stations owned by RED until 1994 and by the Company thereafter.
Operation of Mexico City Stations by Grupo Radio Centro
and its Principal Competitors(1)
AM Stations FM Stations Total
----------- ----------- -----
Grupo Radio Centro (GRC) .................... 5 6 11
Grupo ACIR (ACIR)(2) ........................ 3 4 7
Nucleo Radio Mil (NRM) ...................... 3 3 6
Radiopolis (TVR)(3) ......................... 3 3 6
Organizacion Radio Formula (ORF) ............ 3 2 5
Grupo Imagen(4) ............................. 0 2 2
Multivision Radio (MVS)(5) .................. 0 2 2
---- ---- ----
Total .................................... 17 22 39
----------
(1) Source: Grupo Radio Centro.
(2) In September 2000, Grupo Televisa S.A. de C.V. offered to acquire a 50.05%
interest in Grupo ACIR. As of May 2001, the Federal Competition Commission
had rejected the proposed acquisition and a subsequent appeal of that
rejection by Grupo Televisa. Grupo Televisa has appealed the rejection in
the Mexican courts, which have not decided the matter.
(3) A subsidiary of Grupo Televisa.
(4) Formerly part of MVS.
(5) Formerly known as Frecuencia Modulada Mexicana.
21
Mexico City Radio Audience Share (1970-2003)(1)
GRAPH
(1) Source: INRA.
(2) In 1995, the Company began operating the three stations owned by Radio
Programas de Mexico. Accordingly, the Company's audience share includes
the audience share of these three stations beginning in 1995. In 1996, the
Company acquired these stations.
(3) In 1994, NRM no longer owned XECO-AM and XEUR-AM, and in 1995, NRM
purchased XHMM-FM.
(4) In 1995, the three stations owned by Grupo Artsa were acquired by Grupo
Acir.
(5) Includes average audience share of stations owned by Grupo Imagen until
Grupo Imagen's separation from MVS in December 1999.
Since 1995, the Company's average Mexico City audience share has declined
from 37.1% to 32.0% in 2003. This decline is mainly attributable to increased
competition from other radio stations that have adopted formats similar to the
Company's most successful formats, including Juvenil--Youth Oriented,
Grupera--Diverse Musical Genres and News/Talk Show.
Although the Company believes that its balanced portfolio of station
formats following the RED acquisition reduces the impact of a decline in
audience share of any one format segment or station (for example, the Company's
most popular station, which was the top-ranked station in Mexico City for the
year ended December 31, 2003, represented only 9.2% of the total radio
audience), there can be no assurance that competition within, or a decline in
the popularity of, a given format segment will not decrease the Company's
aggregate audience share in the future. In addition, the Company faces strong
competition from both television and various print media for advertising
revenue.
OIR Network Competition
As with radio broadcasting, the Mexican radio-network market is highly
competitive. As of December 31, 2003, there were 27 radio networks serving 743
AM radio stations and 403 FM radio
22
stations outside Mexico City. The Company believes that the popularity of its
programming, its long-standing experience in the Mexican radio broadcasting
market and the quality of its broadcast-related services enable the Company's
affiliates that are serviced by OIR to compete effectively.
Significant Subsidiaries
The following table sets forth the Company's significant subsidiaries at
December 31, 2003:
Percentage of
Jurisdiction Ownership and
Name of the Company of Establishment Voting Interest Description
----------------------------------------------------------- ---------------- --------------- ------------------
XEQR, S.A. de C.V Mexico 99.9% Radio Station
XERC, S.A. de C.V Mexico 99.9% Radio Station
XEEST, S.A. de C.V Mexico 99.9% Radio Station
XEQR-FM, S.A. de C.V Mexico 99.9% Radio Station
XERC-FM, S.A. de C.V Mexico 99.9% Radio Station
XEJP-FM, S.A. de C.V Mexico 99.9% Radio Station
XEDKR-AM, S.A. de C.V Mexico 99.2% Radio Station
Radio Red, S.A. de C.V Mexico 99.9% Radio Station
Radio Red-FM, S.A. de C.V Mexico 99.9% Radio Station
Radio Sistema Mexicano, S.A Mexico 99.9% Radio Station
Estacion Alfa, S.A. de C.V Mexico 99.9% Radio Station
Emisora 1150, S.A. de C.V Mexico 99.9% Radio Station
Grupo Radio Centro, S.A. de C.V Mexico 99.9% Marketing Company
Radio Centro Publicidad, S.A. de C.V Mexico 99.9% Marketing Company
GRC Publicidad, S.A. de C.V Mexico 99.9% Marketing Company
GRC Medios, S.A. de C.V Mexico 99.9% Marketing Company
Promotora Tecnica de Servicios Profesionales, S.A. de C.V Mexico 99.9% Service Company
Publicidad y Promociones Internacionales, S.A. de C.V Mexico 99.9% Service Company
23
Percentage of
Jurisdiction Ownership and
Name of the Company of Establishment Voting Interest Description
----------------------------------------------------------- ---------------- --------------- ------------------
Promo Red, S.A. de C.V Mexico 99.9% Service Company
Universal de Muebles e Inmuebles, S.A. de C.V Mexico 99.8% Real Estate Company
Inmobiliaria Radio Centro, S.A. de C.V Mexico 99.9% Real Estate Company
Desarrollos Empresariales, S.A. de C.V Mexico 99.9% Sub-holding Company
Radiodifusion Red, S.A. de C.V Mexico 99.9% Sub-holding Company
Enlaces Troncales, S.A. de C.V Mexico 99.9% Sub-holding Company
Property and Equipment
All of Grupo Radio Centro's tangible assets are located in Mexico. At
December 31, 2003, the net book value of all property and equipment was
approximately Ps. 469.9 million ($41.8 million).
Grupo Radio Centro's principal executive offices and studios are located
in Mexico City and are owned by Grupo Radio Centro. In 1992 Grupo Radio Centro
purchased the Constituyentes building, a modern, 102,000 square foot building of
which, at December 31, 2003, the Company occupied approximately 81,000 square
feet with the remainder available for leasing to third parties. In March 1994,
Grupo Radio Centro moved its principal offices and broadcasting operations
(excluding transmitter antennae and related equipment) into the Constituyentes
building. Grupo Radio Centro also owns the transmitter sites and antenna sites
used by most of its Mexico City radio stations, including related back-up
facilities. In addition, Grupo Radio Centro currently leases
satellite-transmission facilities in Mexico City from the Mexican government. As
a result of a 1993 change in applicable Mexican law, Grupo Radio Centro
purchased and received authorization from Telecomunicaciones de Mexico, a
state-owned entity, to operate its own up-link equipment. This up-link equipment
has been operational since the end of 1994. Grupo Radio Centro continues to own
the building in which its administrative offices and studios were located
immediately prior to its move into the Constituyentes building. Grupo Radio
Centro also owns the land in Mexico City on which the transmission facilities of
XERED-AM are located.
Grupo Radio Centro believes that its facilities are adequate for its
present needs and are suitable for their intended purpose.
24
REGULATORY FRAMEWORK
The business of Grupo Radio Centro is subject to regulation and oversight
by the SCT. The SCT is part of the executive branch of the Mexican federal
government. Regulation and oversight are governed by the Ley Federal de Radio y
Television (the "Federal Radio and Television Law"), the Ley Federal de
Telecomunicaciones (the "Federal Telecommunications Law"), the regulations
issued pursuant to these laws and the licenses granted by the SCT.
Regulation of Radio Broadcasting by Mexico
Licenses. Under the Federal Radio and Television Law, owners and operators
of radio stations in Mexico must obtain a license from the Mexican government
through the SCT to broadcast over a specified channel. Applications are
submitted to the SCT and, after a formal review process of all competing
applications and an objection period by third parties, a license is granted to
an applicant with a specific term of up to 30 years. The SCT may terminate or
revoke the license at any time upon the occurrence of, among others, the
following events: failure to construct broadcasting facilities within a
specified time period; changes in the location of the broadcasting facilities or
changes in the frequency assigned without prior governmental authorization;
failure to broadcast for more than 60 days without reasonable justification; and
any violation of any of the other terms of the license. Under Mexican law, in
the event of revocation of the license for certain specified reasons, Grupo
Radio Centro would forfeit its transmission and antenna facilities with respect
to the license. In the event of early termination of the license for other
causes, the Mexican government would have a right of first refusal to purchase
all these assets at a price fixed by an independent appraiser. In addition, in
the event that the SCT terminates or revokes a license, the licensee may not
obtain a new license for five years and, in some cases, may be forbidden from
obtaining a new license. Under current law governing the regulation of the
licensing and use of the respective AM and FM frequency spectrums, no additional
licenses may be granted for the Mexico City market.
The licensee has rights to renew the license for periods of up to 30 years
(with most terms for renewal currently being up to 12 years) under a
non-competitive renewal process. Renewals are generally granted to licensees
that have substantially complied with the applicable law. The licenses for nine
of Grupo Radio Centro's radio stations are set to expire in 2004. The licenses
for XEDKR-AM (in Guadalajara) and XESTN-AM (in Monterrey) expired in October
2003 and November 2003, respectively. The Company submitted an application to
the SCT for the renewal of the licenses that expired in 2003 as well as an
application for the renewal of the licenses that are set to expire in 2004;
approval of the renewals is still pending. In addition, the license for XHRED-FM
is set to expire in 2007, and the license for XEJP-FM is set to expire in 2012.
The licenses contain restrictions on the transfer of shares of the
licensee, including the following: the transfer must be to a qualifying Mexican
person; the transfer cannot result in a concentration of radio broadcasting
holdings that may be contrary to the public interest; and the transfer cannot
result in a gain to the seller. All such transfers are subject to prior notice
to the SCT. In addition, any transfer of the license itself is subject to the
prior approval of the SCT. A license may only be assigned if it has been in
effect for more than three years and the licensee has complied with all of its
obligations under the license.
Supervision of Operations. The SCT conducts regular inspections of the
operations of the radio stations, and the companies or persons to which licenses
have been granted must file annual technical, statistical, financial and legal
reports with the SCT.
25
Under Mexican law, radio programming is not subject to judicial or
administrative censorship, except that programming is subject to various
regulations, including prohibitions on foul language and programming that is
contrary to the general principles of right conduct, national security or public
order.
Radio programming is required to promote Mexico's cultural, social and
ideological identity, and each licensee is required to make available each day
up to 30 minutes of cultural or educational programming, or programming
regarding family counseling or other social matters. The programming to be used
to fulfill this requirement is provided to the broadcaster by the Mexican
government.
Each licensee is required, during political campaigns, to provide a
limited amount of broadcast time free of charge to all registered political
parties.
Networks. There are no Mexican regulations governing the ownership and
operation of a radio broadcasting network, such as OIR's network, separate from
the regulations applicable to operating a radio station.
Restrictions on Advertising. Mexican law regulates the type and contents
of advertising that may be broadcast on radio. In addition, licensees are
prohibited from broadcasting advertisements that are misleading. The
advertisements of certain products and services are subject to restrictions or
require government approval prior to their broadcast. Moreover, the Mexican
government must approve any advertisement of lotteries or raffles, or any
advertisement that promotes bonuses to consumers for purchasing products or
services.
Mexican law also regulates the amount of advertising that may be broadcast
in any day. Under Mexican regulations, no more than 40% of broadcast time may be
used for advertisements, divided proportionately among broadcasting hours.
Generally, radio stations can have up to 12 two-minute breaks for advertisements
per hour. Grupo Radio Centro, from time to time, has obtained waivers from the
Mexican government with respect to these regulations.
The Company sets its minimum advertising rates and registers such rates
with the SCT. No advertising may be sold at rates lower than those so
registered. There are no restrictions on maximum rates that may be charged.
Broadcast Tax. Since 1969, all radio stations in Mexico have been subject
to a tax payable by granting the Mexican government the right to use a portion
of broadcast time. Historically, the Mexican government was entitled to use up
to 12.5% of all daily radio broadcast time. Beginning on October 10, 2002, radio
stations must satisfy this tax by providing the Mexican government 35 minutes of
broadcasting time between the hours of 6:00 a.m. and midnight, in spots lasting
between 20 to 30 seconds. The use of this time is not cumulative and any time
not used by the Mexican government in any day is forfeited. The time must be
distributed on a proportional and equitable basis throughout the relevant
programming period. The programming of public service announcements provided by
the Mexican government is prohibited from competing with the licensee's
programming and, if it is made to promote the consumption of products or
services, must be limited to general promotions of Mexico's goods and services.
Other. In June 1993, the Ley Federal de Competencia Economica (Federal
Economic Competition Law), a law to promote fair competition and to prevent
monopolistic practices, became effective, and regulations thereunder were
published in March 1998. As a result of the increase in Grupo Radio Centro's
share of the Mexico City radio market following completion of the RED
acquisition, the Company is required by the Federal Competition Commission to
seek its prior approval in connection with any future acquisitions of radio
stations in Mexico, including, without limitation, purchases or leases
26
of radio stations, interests in other radio concerns or transmission sites,
irrespective of the size of such investments or their related audience share, a
requirement to which, to the best knowledge of the Company, other Mexican
broadcasting companies are not subject generally. Although the Company received
Federal Competition Commission approval of its acquisition of XEN-AM in July
2001 (see Note 23 to the Consolidated Financial Statements) because the Company
sold two of its AM stations in 2000 (see "--Business Overview--Broadcasting
Operations--Production of Programming by Infored"), no assurance can be given
that the Company will be permitted by the Federal Competition Commission to make
any additional investments should it desire to do so.
The Federal Telecommunications Law became effective in Mexico on June 8,
1995. Although this law does not affect the transmission of radio signals of the
type transmitted by the Company's radio stations, it does cover the transmission
of radio signals at certain frequencies at which the Company may wish to
transmit in the future. Among other requirements, this new law provides that
licenses for the transmission of radio signals at certain frequencies be granted
pursuant to a competitive bidding procedure.
There is a general prohibition on the ownership of radio broadcasting
companies by non-Mexicans and Mexican corporations that allow foreign ownership
of their voting securities. The adoption of the North American Free Trade
Agreement has not changed these Mexican regulations.
Intellectual Property
Mexico. Grupo Radio Centro (directly or through its subsidiaries) has
registered or filed for registration with the Instituto Mexicano de la
Propriedad Industrial (the Mexican Institute of Industrial Property) of the
Secretaria de Economia (the "Ministry of Economy") the following service marks
(and their corresponding design, where indicated): "Radio Red," "Joya," "El
Fonografo del Recuerdo," "Variedades," "Stereo Joya," "NotiCentro" (and design),
"Sensacion" (and design), "Universal" (and design), "Stereo 97.7," "Alegria,"
"Centro," "Formato 21," "Hoy," "OIR," "Palco Deportivo" and "To2." In addition,
Grupo Radio Centro (directly or through its subsidiaries) has registered or
filed for registration the following commercial slogans: "CRC Radiodifusion
Internacional," "Grupo Radio Centro Radiodifusion de Mexico al Mundo," "ORC
Radiodifusion Valle de Mexico," "OIR Radiodifusion Nacional," "Radio Centro, la
Estacion de la Gran Familia Mexicana" and "SER Servicios Especializados de
Radiodifusion." Grupo Radio Centro also obtained the following service marks in
connection with the acquisition of RED: "Radio Programas de Mexico," "RPM,"
"ALFA 91.3," "BANG," "UNIRED," "SERVIRED" and "AUTORED."
United States. Grupo Radio Centro has registered on the principal register
of the United States Patent and Trademark Office (the "USPTO") the following
service marks: "Radio Exitos," "Radio Centro," "En Concierto," "Reinas de la
Popularidad," "Frente a Frente . . . Fuera Mascaras," "Radio Sensacion," "Radio
Variedades" and "Cadena Radio Centro CRC." Grupo Radio Centro has also
registered on the principal register of the USPTO a sound mark consisting of a
series of musical notes and the words "Radio Variedades."
Item 5. Operating and Financial Review and Prospects
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Annual Report. Grupo Radio Centro's Consolidated Financial Statements have
been prepared in accordance with Mexican GAAP, which differ in certain respects
from U.S. GAAP. Note 25 to the Consolidated Financial Statements provides a
description of the principal differences between Mexican GAAP and U.S. GAAP, as
they relate to Grupo
27
Radio Centro, and a reconciliation to U.S. GAAP of operating income, net income
and shareholders' equity.
Among other things, Mexican GAAP requires that financial statements
recognize certain effects of inflation. In accordance with these requirements,
the Company has restated non-monetary assets and liabilities using the INPC,
restated the components of shareholders' equity using the INPC, recorded gains
or losses in purchasing power from holding monetary assets or liabilities and
restated financial data for all periods in the Consolidated Financial
Statements, and throughout this Annual Report, in constant pesos as of December
31, 2003. See Item 3, "Key Information--Selected Financial Data."
General
Grupo Radio Centro's operating performance is dependent on a number of
factors, including its ability to produce popular radio programs that attract
the demographic segments of the radio audience sought by advertisers, its share
of the total radio audience, the relative advertising cost efficiency of radio
compared to other media, competition, the strength of its radio signals and the
quality of its sound, the rate of growth of the local and national economies and
government regulation and policies. Grupo Radio Centro's revenue is generated
mainly from the sale of commercial air time. The primary operating expenses
involved in owning and operating radio stations are employee salaries,
programming expenses, promotion and advertising expenses and depreciation and
amortization.
Seasonality of Sales
Grupo Radio Centro's revenue varies throughout the year. Sales of
commercial air time, Grupo Radio Centro's primary source of revenue, are
generally highest in the fourth quarter of the year and lowest in the first
quarter of the year. However, Grupo Radio Centro historically has had sufficient
cash flow from operations to meet its operating needs in all four calendar
quarters. In 2003, there was a departure from this general pattern in that the
revenue from the sale of commercial air time was highest in the second quarter,
instead of fourth quarter, of the year because of increased advertising
expenditures related to congressional political campaigns, and lowest in the
third quarter of the year.
Advertising expenditures by political campaigns represent an important
part of the Company's total broadcasting revenue. While the Company's revenue
increases significantly during congressional elections, which occur every three
years, including 2003, an even more significant increase in revenue results from
presidential elections, which occur every six years (coinciding with
congressional elections), including 2000. In 1997, advertising by political
parties in connection with congressional elections and the Mexico City
gubernatorial election represented 9.0% of the Company's total broadcasting
revenue. In 1998 and 1999, advertising by political parties decreased to 1.1%
and 6.5%, respectively, of total broadcasting revenue. In 2000, in connection
with the presidential and congressional elections, political advertising
increased to 20.9% of the Company's total broadcasting revenue. Advertising by
political parties decreased to 0.1% of total broadcasting revenue in 2001 and
increased to 6.1% of total broadcasting revenue in 2002, mainly due to the
elections in the State of Mexico, which occurred in the first quarter of 2003.
In 2003, in connection with congressional elections that took in July 2003,
advertising by political parties increased to 21.1%. See Item 4, "Information on
the Company--Business Overview--Broadcasting Operations--Sale of Air Time and
Marketing."
28
The following table sets forth the Company's broadcasting revenue and
broadcasting income (excluding depreciation and amortization) on a quarterly
basis, in each case as a percentage of its respective total, for 2003, 2002 and
2001.
Broadcasting Income,
Excluding Depreciation and
Broadcasting Revenue Amortization
---------------------- --------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
First Quarter ........... 22.8% 16.6% 20.1% 23.2% (0.3%) 15.4%
Second Quarter .......... 31.0 24.8 23.2 37.6 19.7 23.2
Third Quarter ........... 21.3 20.9 25.1 14.5 10.3 21.5
Fourth Quarter .......... 24.9 37.7 31.6 24.7 70.3 39.9
----- ----- ----- ----- ----- -----
Total ................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Economic Conditions in Mexico
Grupo Radio Centro's financial condition and results of operations are
generally affected by the strength of the Mexican economy, as demand for
advertising, revenue from which is the principal source of the Company's
earnings, generally declines during periods of economic difficulty. The annual
rate of inflation in Mexico, as measured by changes in the National Consumer
Price Index, was 3.98% for 2003. Inflation for the first quarter of 2004 was
1.57%. The adverse effects of high inflation on the Mexican economy might result
in lower demand for broadcast advertising.
Cost-Control Measures
An important element of the Company's operating strategy is cost control.
In 2001, personnel expenses decreased 2.0% from the previous year as a result of
decreased sales commissions paid to sales personnel in connection with decreased
sales. In 2002, personnel expenses decreased 6.7% mainly as a result of
decreased sales commissions paid to sales personnel in connection with decreased
sales. The Company also ceased the operations of its Internet portal company,
To2. In 2003, personnel expenses decreased 1.9% mainly as a result of a
reduction in personnel. The changes in personnel in 2003 and 2001 resulted in
severance payments of Ps. 3.9 and Ps. 4.7 million, respectively, which are
included in other expenses (net). See Note 22 to the Consolidated Financial
Statements.
Production of Programming
In March 2004, as a result of the outcome of the arbitration proceeding
with Infored and Mr. Gutierrez Vivo, the Company replaced its Infored-produced
programming, including Monitor, with similar programming that the Company itself
produces. The Company currently produces all of the programming for the stations
it owns or operates (see "--Business Overview--Broadcasting
Operations--Production of Programming by Infored").
Loss Contingency
As a result of the damages awarded in the arbitration proceeding with
Infored and Mr. Gutierrez Vivo, we have recorded a provision for this contingent
liability in the amount of $21.1 million. The Company plans to challenge the
validity of the arbitration award in the Mexican courts. There can be no
assurance that we will prevail in this challenge. (see "--Business
Overview--Broadcasting Operations--Production of Programming by Infored").
29
2003 vs. 2002 Results of Operations
For the year ended December 31, 2003, broadcasting revenue was Ps. 825.1
million, representing a 11.7% increase compared to Ps. 738.4 million reported
for the same period of 2002. This increase was mainly attributable to higher
advertising expenditures from political parties in connection with the
congressional elections that took place in July 2003.
The Company's broadcasting expenses (excluding depreciation, amortization
and corporate, general and administrative expenses) for the year ended December
31, 2003, were Ps. 493.6 million, a 2.9% increase compared to Ps. 479.6 million
reported for the same period of 2002, principally as a result of fees paid in
connection with new programming for one of the Company's radio stations.
Broadcasting income (broadcasting revenue minus broadcasting expenses,
excluding depreciation, amortization and corporate, general and administrative
expenses) for the year ended December 31, 2003 was Ps. 331.5 million, an
increase of 28.1% compared to broadcasting income of Ps. 258.8 million reported
for the same period of 2002. This increase was mainly attributable to higher
broadcasting revenue.
Depreciation and amortization expenses for the year ended December 31,
2003 were Ps. 113.4 million, representing an increase of 1.0% compared to Ps.
112.3 million reported for the same period of 2002.
The Company's corporate, general and administrative expenses during 2003
were Ps. 60.2 million, an increase of 28.3% compared to Ps. 46.9 million
reported for the same period of 2002. This increase was mainly due to higher
executive compensation and higher revenue-based fees paid to Infored in
connection with the production of the radio news program Monitor during 2003.
As a result of the foregoing, the Company's operating income for the year
ended December 31, 2003 was Ps. 157.9 million, an increase of 58.7% compared to
operating income of Ps. 99.5 million reported for the same period of 2002.
The Company's comprehensive financing cost decreased from Ps. 53.2 million
during 2002 to Ps. 32.9 million reported for 2003. This favorable change of
38.2% is mainly attributable to a decrease in the foreign exchange loss, net,
from Ps. 43.7 million for 2002 to Ps. 6.5 million for 2003, resulting from the
Company's conversion of its U.S. dollar-denominated bank loans to Mexican
peso-denominated bank loans during the fourth quarter of 2002. The improvement
in foreign exchange loss, net, was partially offset by a loss on monetary
position of Ps. 0.31 million in 2003 compared to a gain on monetary position of
Ps. 9.03 million in 2002, as well as an increase in interest expense resulting
from higher interest rates in 2003.
Other expenses, net, were Ps. 66.0 million in 2003, representing an
increase of 25.7% compared to Ps. 52.5 million reported for 2002. This increase
is mainly due to the sale of certain non-broadcasting assets at a gain during
2002 compared to the sale of certain non-broadcasting assets at a loss during
2003, combined with an increase in expenses related to the arbitration
proceeding with Infored.
For the year ended December 31, 2003, the Company reported income before
extraordinary items and provisions for income tax and employee profit sharing of
Ps. 59.0 million compared to a loss before extraordinary items and provisions
for income tax and employee profit sharing of Ps. 6.2 million reported for 2002.
As a result of the provision for the contingent liability under Mexican
GAAP resulting from the damages award granted in the arbitration proceeding with
Infored and Mr. Gutierrez Vivo, the Company
30
reported an extraordinary item charge in the amount of Ps. 340.7 million for
2003, resulting in a loss before provisions for income tax and employee profit
sharing of Ps. 281.7 million for 2003 compared to a loss before provisions for
income tax and employee profit sharing of Ps. 6.2 million reported for 2002.
The Company recorded an income tax and employee profit sharing credit of
Ps. 35.9 million for 2003 compared to Ps. 8.5 million for 2002.
As a result of the foregoing factors, the Company recorded a net loss for
2003 of Ps. 245.8 million compared to a net gain of Ps. 2.3 million reported for
2002.
2002 vs. 2001 Results of Operations
For the year ended December 31, 2002, broadcasting revenue was Ps. 738.4
million, a 5.3% decrease as compared with Ps. 780.0 million reported for 2001.
This decrease is mainly due to the slowdown of the Mexican economy in 2002
compared with 2001, which was partially offset by advertising revenues generated
from political parties during the fourth quarter of 2002.
The Company's broadcasting expenses (excluding depreciation and
amortization and corporate, general and administrative expenses) for the year
ended December 31, 2002 were Ps. 479.6 million, a 4.9% decrease as compared with
Ps. 504.3 million reported for 2001. This decrease is primarily attributable to
the cancellation of non-productive programs and better control of operating and
advertising expenses of the Company in the fourth quarter of 2002.
Broadcasting income for the year ended December 31, 2002 was Ps. 258.8
million, a 6.1% decrease as compared with Ps. 275.7 million reported for 2001.
This decrease is primarily due to the decrease in broadcasting revenue, which
was partially offset by the reduction in broadcasting expenses during 2002.
Depreciation and amortization for the year ended December 31, 2002
decreased 8.0% to Ps. 112.3 million, from Ps. 122.2 million reported for 2001.
This decrease is primarily attributable to the write-off of goodwill in
connection with some of the Company's subsidiaries in the fourth quarter of
2002. See Notes 13, 23 and 24 to the Consolidated Financial Statements.
Corporate, general and administrative expenses for the year ended December
31, 2002 were Ps. 46.9 million, a decrease of 10.5% as compared with Ps. 52.4
million reported for 2001. This decrease was mainly due to lower executive
compensation.
Operating income for 2002 was Ps. 99.5 million, representing a decrease of
1.5% compared with Ps. 101.1 million reported for 2001. This decrease is
primarily attributable to the decrease in depreciation and amortization during
2002.
Comprehensive financing cost increased from Ps. 12.6 million during 2001
to Ps. 53.2 million reported for 2002. This increase is primarily attributable
to a foreign exchange loss of Ps. 43.7 million for 2002, as compared with a
foreign exchange gain of Ps. 17.9 million for 2001, as a result of the weakening
of the peso against the U.S. dollar in the fourth quarter of 2002. This
unfavorable change was partially offset by a decline in interest expense from
Ps. 36.8 million in 2001 to Ps. 20.8 million in 2002, primarily resulting from a
decrease in bank debt during 2002.
Other expenses, net, were Ps. 52.5 million in 2002, compared with Ps. 76.0
million reported for 2001. This 30.9% decrease is mainly attributable to the
closing of operations of To2, one of our
31
subsidiaries engaged in Internet activities, which resulted in expense savings
compared to expenses incurred for that subsidiary for the fourth quarter of
2001.
As a result, loss before provisions for income tax and employees profit
sharing for the year ended December 31, 2002 was Ps. 6.2 million compared with
an income before provisions for income tax and employee profit sharing of Ps.
12.5 million for 2001. The Company reported a credit for income tax and
employees profit sharing of Ps. 8.5 million for 2002, compared to a credit of
Ps. 6.0 million for 2001 that primarily resulted from the use of tax loss
carryforwards in 2001. See Note 20 to the Consolidated Financial Statements.
As a result of the foregoing factors, net income for 2002 decreased 87.7%
to Ps. 2.3 million, compared with Ps. 18.5 million reported for 2001.
Liquidity and Capital Resources
The Company's primary source of liquidity is cash flow from operations.
The Company's operating activities provided Ps. 221.8 million in 2003, Ps. 40.2
million in 2002 and Ps. 155.1 million in 2001. Cash flow from operations
historically has been sufficient to cover the Company's working capital needs.
However, at December 31, 2001, the working capital deficit was Ps. 49.9 million,
due primarily to the Company's acquisitions of XEN-AM, Palco Deportivo and To2,
which were financed mainly through short-term loans (see Notes 23 and 24 to the
Consolidated Financial Statements). At December 31, 2002, the working capital
deficit was Ps. 0.3 million. At December 31, 2003, the working capital deficit
was Ps. 126.7 million, due primarily to the recorded provision for the
contingent liability in connection with the arbitration proceeding with Infored
and Mr. Gutierrez Vivo.
As a result of the damages awarded in this arbitration proceeding, we have
recorded a provision for this contingent liability in the amount of $21.1
million. The Company plans to challenge the validity of this award in the
Mexican courts. Should the Company fail in its challenge, it expects to pursue
various potential sources of funds to cover its obligations with respect to such
award, including medium-term or long-term financing up to $21.1 million. No
assurance can be given that such funds will be obtained.
The Company expects to be able to meet its additional working capital
needs in 2004 with cash flow from its operations.
Grupo Radio Centro invests its cash balances generally in short-term peso
instruments, including overnight and time deposits, repurchase agreements,
certificates of deposit and commercial paper of certain Mexican issuers.
Indebtedness
Scotiabank Inverlat Loan Agreement. On October 30, 2000, the Company
obtained a five-year, $35 million loan from Banco Inverlat, S.A. (now Scotiabank
Inverlat, S.A.), with interest payable quarterly, at an annual rate equal to the
90-day London Interbank Offered Rate (LIBOR) plus 3.25%, and principal payable
bi-annually. As amended by a letter agreement, dated April 17, 2001, the loan
agreement provided for an annual interest rate of LIBOR plus 3.00% (beginning
May 1, 2001) and the payment of principal beginning October 31, 2001. The
Company used the proceeds of the loan to fund a capital reduction in the amount
of Ps. 372.3 million (Ps. 343 million, nominal amount), resulting in a payment
of that amount to shareholders.
32
The Scotiabank Inverlat loan agreement contains covenants requiring the
Company to maintain certain financial ratios and to comply with other financial
conditions that, among other things, limit the Company's ability to incur
additional indebtedness, pay dividends, pledge its assets and enter into
transactions with affiliates. If we breach any of these covenants, the amount
then outstanding under the loan agreement could be accelerated by the lender. As
of December 31, 2001, the Company was not in compliance with the covenants
requiring that the Company maintain a certain ratio of total liabilities to
EBITDA (earnings before interest, taxes, depreciation and amortization) and a
certain level of tangible capital, each as defined in the loan agreement. The
Company obtained a waiver from Scotiabank Inverlat of its non-compliance with
the tangible capital financial covenant through December 31, 2001 and the total
liabilities to EBITDA financial covenant through March 31, 2002. Scotiabank
Inverlat additionally agreed to amend the total liabilities to EBITDA financial
covenant in the loan agreement to increase the ratio permitted through December
31, 2002. As a condition to the granting of the waiver and the amendment, the
Company agreed to convert the denomination of $13.6 million of the amount
outstanding under the loan agreement from U.S. dollars into Mexican pesos, to
pay interest equal to the Mexican Interbank Equilibrium Interest Rate (Tasa de
Interes Interbancaria de Equilibrio or TIIE) plus 2.00% on the converted portion
of the loan and not to pay any dividends for so long as the Company is not in
compliance with any of the financial covenants in the loan agreement as amended.
See Note 14 to the Consolidated Financial Statements.
Under a subsequent amendment to the Scotiabank Inverlat loan agreement on
December 10, 2002, the Company agreed to convert the remaining $23.3 million of
the outstanding balance under the loan agreement from U.S. dollars into Mexican
pesos, to pay interest equal to TIIE plus a variable rate ranging from 2.0% to
3.25%, depending on the ratio of the Company's total liabilities to EBITDA, and
not to pay any dividends for so long as the Company is not in compliance with
financial covenants in the loan agreement during three consecutive quarters
starting with the fourth quarter of 2002.
On December 3, 2003, the Company and Scotiabank Inverlat signed an
amendment to the Scotiabank Inverlat loan agreement to increase the principal
amount outstanding of the loan by Ps. 50 million, to extend the loan's maturity
to October 31, 2007 and to fix the annual interest rate of the consolidated loan
at 10.3%, subject to the Company's compliance with a certain ratio of total
liabilities to EBITDA, as defined in the amendment to the loan agreement.
Failure to comply with such ratio will result in incremental quarterly
adjustments to the annual interest rate up to a maximum interest rate of 11.55%.
Due to noncompliance in the first quarter of 2004 (described below), the loan is
currently subject to an annual interest rate of 11.05%. The proceeds of the
additional loan described above were used to pay in full the outstanding
principal of a short-term loan with BBVA Bancomer, S.A.
As a result of the provision recorded for the contingent liability in
connection with the damages award granted in the arbitration proceeding with
Infored, (i) at December 31, 2003 and at the end of the first quarter of 2004,
the Company was not in compliance with the covenant under the Scotiabank
Inverlat loan agreement requiring it to maintain a certain ratio of total
liabilities to shareholders' equity, as defined in the loan agreement and (ii)
at the end of the first quarter of 2004, the Company was not in compliance with
the covenant requiring the Company to maintain a certain ratio of total
liabilities to EBITDA, as defined in the loan agreement. On June 15, 2004, the
Company obtained from Scotiabank Inverlat a waiver of its failure to comply with
these covenants for these periods. On June 29, 2004, Scotiabank Inverlat agreed
to amend the total liabilities to shareholders' equity financial covenant and
the total liabilities to EBITDA financial covenant in the loan agreement to
increase the corresponding ratios permitted through December 31, 2004.
At December 31, 2003, the Company's total indebtedness was Ps. 226.5
million, all of which was related to the Scotiabank Inverlat loan described
above. The Company's short-term indebtedness was Ps. 56.6 million relating to
the current portion of the Scotiabank Inverlat loan, while the Company's
long-
33
term indebtedness was Ps. 169.9 million relating to the non-current portion of
the Scotiabank Inverlat loan. The Company's total indebtedness is Ps. 198.1
million at June 23, 2004, all of which is related to the Scotiabank Inverlat
loan described above.
Short-term Indebtedness. Between 2001 and 2003, the Company's short-term
indebtedness was related to the current portion of the Scotiabank Inverlat loan
and to several short-term promissory notes issued by the Company. The first
promissory note, dated July 24, 2002, represented indebtedness owing to BBVA
Bancomer, S.A. in the principal amount of $5.0 million, bore interest at an
annual interest rate equal to LIBOR plus 1.35% and matured on January 17, 2003.
The second promissory note, dated August 2, 2002, represented indebtedness owing
to BBVA Bancomer, S.A. in the principal amount of $1.5 million, bore interest at
an annual rate of LIBOR plus 1.2% and matured on January 17, 2003. On January
17, 2003, both promissory notes owing to BBVA Bancomer, S.A. were combined and
their maturities extended. The combined promissory note, dated January 17, 2003,
represented indebtedness owing to BBVA Bancomer, S.A. in the principal amount of
$6.5 at an annual interest rate of 2.5% and matured on May 19, 2003. On May 19,
2003, the Company paid the $6.5 million to BBVA Bancomer, S.A. and agreed to a
new short-term loan in the amount of Ps. 50.0 million (nominal amount), which
bore interest at an annual rate of 6.9% and was scheduled to mature on July 17,
2003. BBVA Bancomer, S.A. subsequently agreed to extend the maturity of the loan
to January 26, 2004. The principal and interest were paid off on December 4,
2003.
The third promissory note, dated November 12, 2002, represented
indebtedness owing to Banco Nacional de Mexico, S.A. in the principal amount of
$3.5 million, bore interest at an annual rate of 3.2% and matured on January 10,
2003. On January 10, 2003, the promissory note was extended until March 11, 2003
and the annual interest rate lowered to 2.78%. The principal and interest were
paid off at maturity on March 11, 2003. See Note 14 to the Consolidated
Financial Statements. The proceeds of the promissory notes described above were
used to finance the Company's acquisitions of XEN-AM, Palco Deportivo and To2.
See Item 4, "Information on the Company--The Company--Capital Expenditures and
Divestitures--Capital Expenditures" and Notes 23 and 24 to the Consolidated
Financial Statements.
The Company has not entered into any arrangements for the purpose of
hedging interest rate or currency risk.
During 2003, the Company's principal use of funds, other than for
operating purposes and capital expenditures, was the payment of indebtedness
totaling Ps. 61.8 million and the payment of dividends totaling Ps. 56.4 million
(Ps. 55.0 million, nominal amount). In 2003, the Company repurchased on the open
market 57,000 shares of the Company at an aggregate cost of Ps. 370,000 (Ps.
360,000 nominal amount). During 2002, the Company's principal use of funds,
other than for operating purposes and capital expenditures, was for the payment
of indebtedness totaling Ps. 79.0 million. In 2002, the Company repurchased from
the public market 1,230,400 shares at an aggregate cost of Ps. 5.0 million (Ps.
4.6 million, nominal amount), representing approximately 0.7% of outstanding
capital stock. During 2001, the Company's principal use of funds, other than for
operating purposes and capital expenditures (see Item 4, "Information on the
Company--The Company--Capital Expenditures and Divestitures--Capital
Expenditures"), was the payment of dividends totaling Ps. 130.7 million (Ps.
115.0 million, nominal amount). Grupo Radio Centro may from time to time
repurchase its outstanding equity securities if market conditions and other
relevant considerations make such repurchases appropriate.
34
Contractual Obligations. In the table below we set forth certain
contractual obligations as of December 31, 2003, consisting of debt, and the
period in which the contractual obligations come due. The table below does not
include pension liabilities, deferred taxes or current accounts payable.
Payments Due by Period
(in thousands)
(as of December 31, 2003)
--------------------------------------------------------------------------
Total 2004 2005-2006 2007-2008 2009 and beyond
----------- ---------- ----------- ---------- ---------------
Contractual Obligations
Long-Term Debt Obligations .................... Ps. 226,473 Ps. 56,618 Ps. 113,237 Ps. 56,618 0
----------- ---------- ----------- ---------- ---------------
Total ....................................... Ps. 226,473 Ps. 56,618 Ps. 113,237 Ps. 56,618 0
U.S. GAAP Reconciliation
Net (loss) income under U.S. GAAP for 2003, 2002 and 2001 was Ps. (318.8
million), Ps. 76.2 million and Ps. 97.0 million, respectively. The difference
between net income under U.S. GAAP and Mexican GAAP was primarily attributable
in 2003, 2002 and 2001, to the amortization of goodwill with respect companies
purchased from related parties. Under current Mexican GAAP, goodwill is
amortized using a straight-line method based on an asset's estimated useful
life. In July 2001, the Financial Accounting Statements Board issued Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible
Assets." As a result of SFAS 142, amortization of goodwill under U.S. GAAP
ceased as of January 1, 2002, and U.S. GAAP requires testing goodwill for
impairment at least once a year. The Company was required to adopt this standard
for the year ending December 31, 2002 on its consolidated financial statements
under U.S. GAAP. In accordance with the requirements of SFAS 142, the Company
performed an analysis for impairment of its goodwill as of December 31, 2002 and
December 31, 2003. For the year ending December 31, 2002, no impairment
adjustment was necessary. For the year ending December 31, 2003, a goodwill
impairment adjustment under U.S. GAAP was necessary in the amount of Ps. 152.5
million ($13.6 million) relating to the rescission of the Infored Agreement and
the associated decline in anticipated advertising revenues.
Operating (loss) income under U.S. GAAP for the years ended December 31,
2003, 2002 and 2001 was Ps. (321.3) million, Ps. 120.9 million and Ps. 102.4,
respectively. The principal difference between operating (loss) income under
Mexican GAAP and U.S. GAAP is that certain expenses, net of the Company that are
classified as non-operating charges under Mexican GAAP are charged against
operations under U.S. GAAP. For the year ended December 31, 2003, the Company's
extraordinary item relating to the provision for the contingent arbitration
losses is classified as a non-operating charge to earnings under Mexican GAAP,
whereas for U.S. GAAP reporting purposes this represents an operating charge
against the Company's earnings.
Shareholders' equity under U.S. GAAP at December 31, 2003, December 31,
2002 and December 31, 2001 was approximately Ps. 0.9 billion, Ps. 1.3 billion
and Ps. 1.3 billion, respectively. In 2003, 2002 and 2001, the difference
between shareholders' equity under U.S. GAAP and Mexican GAAP was mainly due to
the treatment of amortization of goodwill with respect to companies purchased
from related parties and the prohibition against amortization of goodwill under
U.S. GAAP as of January 1, 2002.
For a further discussion of the differences between Mexican GAAP and U.S.
GAAP as they relate to Grupo Radio Centro, see Note 25 to the Consolidated
Financial Statements. Pursuant to Mexican GAAP, Grupo Radio Centro's financial
statements recognize certain effects of inflation in accordance with Bulletin
B-10 and Bulletin B-12; these effects have not been reversed in the
reconciliation to U.S. GAAP. Due to the Company's adoption of Bulletin D-4 in
1999, the Company's financial statements for
35
2003, 2002 and 2001 include an expanded recognition of deferred taxes under
Mexican GAAP that more closely parallels U.S. GAAP. Accordingly, there were no
differences related to deferred taxes that had to be reconciled between Mexican
and U.S. GAAP for purposes of the Consolidated Financial Statements (see Note 25
to the Consolidated Financial Statements).
Item 6. Directors, Senior Management and Employees
Directors
Management of the business of the Company is vested in the Board of
Directors. At the shareholders meeting held on April 25, 2003, the Company
amended its bylaws. See Item 10, "Additional Information--Bylaws." The bylaws,
as amended, provide that the Board of Directors shall consist of a minimum of
seven and a maximum of twenty directors and an equal number of their respective
alternate directors. Each director and alternate director is elected by the
Company's shareholders by simple majority vote at the annual ordinary general
meeting for a term of one year. Alternate directors are authorized to serve on
the Board of Directors in place of directors who are unable to attend meetings
or otherwise participate in the activities of the Board of Directors. Directors
and alternate directors may be Mexican or foreign, but both the majority of
directors and the majority of alternate directors must be Mexican.
Of the total number of directors, and their respective alternate
directors, at least 25% must be independent directors. Independent directors may
not be individuals related to the Company, such as, among others, employees or
officers of the Company, shareholders with directive power over officers of the
Company, important clients, suppliers, debtors or creditors of the Company, or
their respective shareholders, directors or employees. Alternate directors only
serve in place of their respective regular directors and, in the case of
alternate directors of independent directors, must also meet the requirements
for independent directors.
The Board of Directors currently consists of twelve members. Alejandro
Sepulveda de la Fuente is the Secretary to the Board of Directors. The current
members of the Board of Directors were elected at the annual shareholders
meeting on April 16, 2004. Their names, positions, ages and information on their
principal business activities outside Grupo Radio Centro are listed below. In
addition to the "other directorships" listed below, the Aguirre members of the
Board of Directors, except for Ana Maria Aguirre and Rafael Aguirre, sit on the
boards of directors of various radio stations in Mexico.
Francisco Aguirre G. Age: 62
(Chairman) Years as director: 4
Principal occupation: Private Investor
Other directorships: Chairman of the board of Grupo Radio Mexico,
S.A. de C.V.
Maria Esther Aguirre G. Age: 64
(Vice President) Years as director: 4
Principal occupation: Private Investor
Maria Adriana Aguirre G. Age: 57
(Vice President) Years as director: 4
Principal occupation: Private Investor
36
Ana Maria Aguirre G. Age: 59
Years as director: 33
Principal occupation: Private Investor
Other directorships: Director of Avon Cosmeticos, S.A. de C.V.
Carlos Aguirre G. Age: 49
Years as director: 4
Principal occupation: General Director of Grupo Radio Centro
Rafael Aguirre G. Age: 46
Years as director: 11
Principal occupation: Private Investor
Other directorships: Chairman of the Board of the Quintana Roo
branch of Bancrecer, S.A.; Director of the
Quintana Roo branch of HSBC Mexico, S.A.
(formerly Banco Internacional, S.A.);
Director of the Yucatan Peninsula branch
of Banco Nacional de Mexico, S.A.
Jose Manuel Aguirre G. Age: 41
Years as director: 4
Principal occupation: Private Investor
Pedro Beltran N. Age: 60
Years as director: 2
Principal occupation: Finance and Administrative Director and Chief
Financial Officer of Grupo Radio Centro
Sergio Nino M. Age: 63
Years as director: 2
Principal occupation: Financial Advisor
Jose Raymundo Leal M. Age: 58
Years as director: 2
Principal occupation: Financial Advisor
Thomas Harold Raymond Moffet Age: 62
Years as director: 4
Principal occupation: President of Amsterdam Pacific Securities,
LLC (a financial advisory firm)
Luis de la Fuente Baca Age: 58
Years as director: 4
Principal occupation: Financial Advisor
37
Ms. Maria Esther G. de Aguirre is the Honorary Chairperson for life of the
Board of Directors of the Company and also is the mother of Francisco Aguirre
G., Maria Adriana Aguirre G., Maria Esther Aguirre G., Ana Maria Aguirre G.,
Carlos Aguirre G., Rafael Aguirre G. and Jose Manuel Aguirre G.
The bylaws require that any of the following transactions be previously
approved by the Board of Directors: (i) transactions entered into between the
Company and/or its subsidiaries and any related party of the Company and/or its
subsidiaries outside the ordinary course of business; (ii) the purchase or sale
of 10% or more of the Company's and/or its subsidiaries' assets; (iii) the
granting of a guarantee resulting in a potential liability exceeding 30% of the
Company's and/or its subsidiaries' assets; and (iv) any transaction, other than
the transactions described above, involving an amount in excess of one percent
of the Company's and/or its subsidiaries' assets.
The bylaws provide that the Board of Directors shall meet at least once
every three months and that either the Chairman of the Board of Directors, the
Secretary, at least 25% of the members of the Board of Directors or any
statutory auditor of the Company shall be entitled to call for a meeting of the
Board.
The bylaws provide that holders of Series A Shares representing 10% of the
capital stock of the Company shall be entitled to appoint one regular member of
the Board of Directors and such member's alternate.
The bylaws also provide that the Board of Directors shall present to the
shareholders at the annual shareholders meeting the reports of the Audit
Committee and that the Board of Directors shall be entitled to appoint and
remove the external auditor, taking into consideration the recommendation of the
Audit Committee.
Executive Committee
The Company's bylaws provide that at an ordinary general meeting, the
shareholders may elect, by simple majority vote, an Executive Committee of five
to seven members from among the Company's directors or alternate directors
elected or designated at such shareholders meeting. The bylaws of the Company
provide that the Executive Committee, with certain exceptions, is vested with
all powers of the Board of Directors. Alternate Executive Committee members are
authorized to serve on the Executive Committee in place of members who are
unable to attend meetings or otherwise participate in the activities of the
Executive Committee.
The current members of the Executive Committee are Francisco Aguirre G.
(chairman), Jose Manuel Aguirre G. (vice president), Ana Maria Aguirre G., Maria
Esther Aguirre G., Maria Adriana Aguirre G., Carlos Aguirre G. and Rafael
Aguirre G.
Audit Committee
The Audit Committee consists of three regular members of the Board of
Directors appointed to the Audit Committee by the shareholders at the annual
shareholders meeting. The chairman of the Audit Committee and a majority of its
members must be independent directors, as independent is defined under Mexican
securities market law.
The Audit Committee makes non-binding recommendations to the Board of
Directors with respect to certain transactions, including any transactions
entered into by the Company and/or its
38
subsidiaries with related parties, any purchase or sale of more than 10% of the
Company's and/or its subsidiaries' assets, any guarantee for an amount exceeding
30% of the Company's and/or its subsidiaries' assets and transactions involving
more than 1% of the Company's and/or its subsidiaries' assets. The Audit
Committee may make recommendations to the Board of Directors for the hiring or
removal of the external auditor and the approval of any additional non-audit
services to be rendered by the external auditors, and to propose the hiring of
independent advisors as it may deem necessary in order to make recommendations.
The Audit Committee must prepare an annual report on its activities for
presentation to the shareholders at the annual shareholders meeting and to the
Board of Directors. All resolutions of the Audit Committee must be approved by
at least a majority of its independent members. The Company's statutory auditor
must attend all meetings of the Audit Committee but is not entitled to vote at
such meetings. There can be no assurance that recommendations of the Audit
Committee will ensure that any arrangements with related parties are on an
arm's-length basis.
Currently, the Audit Committee consists of three members: Sergio Nino M.,
Thomas Harold Raymond Moffet and Luis de la Fuente Baca, as committee chairman.
As required by our bylaws and Mexican law, the chairman and two of the three
members, Mr. Moffet and Mr. de la Fuente Baca, are independent members, as
independent is defined under Mexican securities market law.
Statutory Auditors
The Company's bylaws provide for one or more statutory auditors to be
elected at the ordinary general meeting of shareholders and, if determined at
such meeting, their respective alternates. Additionally, the bylaws provide that
holders of shares, with or without voting rights, representing 10% of the
capital stock of the Company shall be entitled to appoint one statutory auditor,
and such statutory auditor may not be removed until all other statutory auditors
are removed. Under Mexican law, the duties of statutory auditors include, among
other things, the examination of the operations, books, records and any other
documents of a company and the presentation of a report of such examination at
the annual ordinary general meeting of shareholders. The statutory auditors are
required to attend all meetings of the Board of Directors, Executive Committee,
Audit Committee and shareholders of the Company.
The Company currently has one statutory auditor, Alejandro Martinez C.,
and one alternate statutory auditor, Patricio Montiel F.
Executive Officers
The executive officers of Grupo Radio Centro are as follows:
Carlos Aguirre G. Years as officer: 25
General Director Years of service: 30
Pedro Beltran N. Years as officer: 18
Finance and Administrative Director Years of service: 18
and Chief Financial Officer
Arturo Yanez F. Years as officer: 20
Administrative Sub-Director Years of service: 20
Sergio Gonzalez L. Years as officer: 20
Operations Director Years of service: 20
Luis Cepero A. Years as officer: 21
Audio Engineering Director Years of service: 43
39
Eduardo Stevens A. Years as officer: 14
Transmission Engineering Director Years of service: 24
Gonzalo Yanez V. Years as officer: 4
Marketing Director Years of service: 7
Rodolfo Nava C. Years as officer: 4
Audit and Information Manager Years of service: 18
Alvaro Fajardo de la Mora Years as officer: 19
General Counsel Years of service: 19
Luis Miguel Carrasco N. Years as officer: 6
Commercial Director Years of service: 11
Compensation
For the year ended December 31, 2003, the aggregate compensation for the
executive officers of the Company paid or accrued in that year for services in
all capacities was Ps. 22.0 million, of which approximately Ps. 3.9 million was
paid in the form of bonus awards. These bonus awards were determined based on
various factors, including quarterly financial results and station ratings and
rankings.
The total of payments to Executive Committee members for attendance at
Executive Committee meetings during 2003 was Ps. 17 million. The total of
payments to directors for attendance at Board of Director meetings during 2003
was Ps. 283,140.
Employees
At December 31, 2003, Grupo Radio Centro employed a total of 394 full-time
employees, fewer than half of whom are members of the Sindicato de Trabajadores
de la Industria de Radio y Television, Similares y Conexos de la Republica
Mexicana (the Radio and Telecommunications Workers Union or the "Union"). At
each of December 31, 2002 and December 31, 2001, the Company employed a total of
394 and 406 full-time employees, respectively. Grupo Radio Centro also employs a
varying number of temporary employees. During 2003, the Company employed an
average of 99 temporary employees.
Negotiations with Union employees are conducted at the industry level
pursuant to a national contract (the "Contrato Ley") that is administered by the
Union and that provides for general employment terms applicable to all Union
employees, although particular enterprises within the radio broadcasting
industry may negotiate separate contractual arrangements with the Union in the
event exceptions from the Contrato Ley are desired. All of Grupo Radio Centro's
current contractual relations with Union employees are pursuant to the stated
terms of the Contrato Ley. The current Contrato Ley will expire on January 31,
2006; however, salary increases are implemented annually. On February 1, 2004,
the Company and the Union agreed to a 4.5% increase in salaries. Relations
between Grupo Radio Centro, its workers and the Union have historically been
good; there have been no material disputes between any of the radio broadcasting
subsidiaries of Grupo Radio Centro and any of their employees since the founding
of Grupo Radio Centro.
40
Share Ownership
As of June 23, 2004, the Aguirre members of the Board of Directors had
beneficial ownership, through the two Mexican trusts through which they hold
their Series A Shares, of 84,020,646 Series A Shares of the Company,
representing 51.6% of the outstanding Series A Shares. See Item 7, "Major
Shareholders and Related Party Transactions--Major Shareholders."
None of the Company's other directors or officers is the beneficial owner
of more than 1% of the Company's outstanding capital stock.
Significant Differences between New York Stock Exchange Corporate Governance
Standards and our Corporate Governance Practices
Pursuant to Section 303A.11 of the Listed Company Manual of the New York
Stock Exchange (NYSE), we are required to provide a summary of the significant
ways in which our corporate governance practices differ from those required for
U.S. companies under the NYSE listing standards. We are a Mexican corporation
with shares listed on the Mexican Stock Exchange (Bolsa Mexicana de Valores S.A.
de C.V.). Our corporate governance practices are governed by our bylaws, the
Mexican Securities Market Law (Ley del Mercado de Valores) and the regulations
issued by the Mexican Banking and Securities Commission (Comision Nacional
Bancaria y de Valores). We also generally comply on a voluntary basis with the
Mexican Code of Best Corporate Practices (Codigo de Mejores Practicas
Corporativas) as indicated below, which was created in January 2001 by a group
of Mexican business leaders and was endorsed by the Mexican Banking and
Securities Commission. On an annual basis, we file a report with the Mexican
Banking and Securities Commission and the Mexican Stock Exchange regarding our
compliance with the Mexican Code of Best Corporate Practices.
The table below discloses the significant differences between our
corporate governance practices and the NYSE standards.
NYSE Standards Our Corporate Governance Practices
-------------- ----------------------------------
Director Independence. Majority of board of directors Pursuant to the Mexican Securities Market Law and
must be independent. "Controlled companies," which would our bylaws, our shareholders are required to appoint
include our company if it were a U.S. issuer, are exempt a board of directors of between seven and 20
from this requirement. A controlled company is one in members, of whom at least 25% must be independent.
which more than 50% of the voting power is held by an Our board of directors is not required to make a
individual, group or another company, rather than the determination as to the independence of our
public.ss.303A.01 directors.
A director is not independent if such director is: Under Article 14 Bis of the Mexican Securities
Market Law and our bylaws, a director is not
independent if such director is:
(i) a person who the board determines has a (i) an employee or officer of the company
material direct or indirect relationship with the (one-year cooling off period);
company, its parent or a consolidated subsidiary;
41
NYSE Standards Our Corporate Governance Practices
-------------- ----------------------------------
(ii) an employee, or an immediate family member of (ii) a shareholder that, without being an
an executive officer, of the company, its parent or a employee or officer of the company, has influence
consolidated subsidiary, other than employment as or authority over the company's officers;
interim chairman or CEO;
(iii) a person who receives, or whose immediate (iii) a consultant, or partner or employee of a
family member receives, more than $100,000 per year consultant, to the company or its affiliates,
in direct compensation from the company, its parent where the income from the company represents 10%
or a consolidated subsidiary, other than director and or more of the overall income of such consultant;
committee fees or deferred compensation for prior
services only (and other than compensation for
service as interim chairman or CEO or received by an
immediate family member for service as a
non-executive employee);
(iv) a person who is affiliated with or employed, or (iv) an important client, supplier, debtor or creditor (or
whose immediate family member is affiliated with or a partner, director or employee thereof). A client and
employed in a professional capacity, by a present or supplier is considered important where its sales to or
former internal or external auditor of the company, purchases from the company represent more than 10% of the
its parent or a consolidated subsidiary; client's or supplier's total sales or purchases. A debtor
or creditor is considered important whenever the relevant
financing represents more than 15% of the company's assets
or of the debtor's or creditor's assets;
(v) an executive officer, or an immediate family (v) an employee of a fund, association or civil
member of an executive officer, of another company company that receives contributions from the
whose compensation committee's membership includes an company that represent more than 15% of the total
executive officer of the listed company, its parent contributions received;
or a consolidated subsidiary; or
(vi) an executive officer or employee of a company, (vi) a CEO or other high ranking officer of
or an immediate family member of an executive officer another company in which the issuer's CEO or other
of a company, that makes payments to, or receives high ranking officer is a member of the board of
payments from, the listed company, its parent or a directors; or
consolidated subsidiary for property or services in
an amount which, in any single fiscal year, exceeds
the greater of $1 million or 2% of such other
company's consolidated gross revenues (charities are
not included, but any such payments must be disclosed
in the company's proxy (or, if no proxy is prepared,
its Form 10-K / annual report)).
42
NYSE Standards Our Corporate Governance Practices
-------------- ----------------------------------
"Immediate family member" includes a person's spouse, (vii) a "family member" related to any of the persons
parents, children, siblings, mothers and fathers-in-law, mentioned above in (i) through (vi). "Family member"
sons and daughters-in-law and anyone (other than domestic includes a person's spouse, concubine or other relative of
employees) who shares the person's home. Individuals who up to three degrees of consanguinity or affinity, in the
are no longer immediate family members due to legal case of (i) and (ii) above, and a spouse, concubine or
separation, divorce or death (or incapacity) are excluded. other relative of up to one degree of consanguinity or
ss.303A.02(b) affinity in the case of (iii) through (vi) above.
Executive Sessions. Non-management directors must meet There is no similar requirement under our bylaws or
regularly in executive sessions without management. applicable Mexican law.
Independent directors should meet alone in an executive
session at least once a year.ss.303A.03
Audit committee. Audit committee satisfying the We will be required to comply with Rule 10A-3 under the
independence and other requirements of Rule 10A-3 under Securities Exchange Act of 1934 by July 31, 2005. The
the Securities Exchange Act of 1934 and the more stringent members of our audit committee are not required to satisfy
requirements under the NYSE standards is required. the NYSE independence and other audit committee standards
ss.ss.303A.06, 303A.07 that are not prescribed by Rule 10A-3.
Our audit committee complies with the requirements
of the Mexican Securities Market Law and has the
following attributes:
We have a three-member audit committee, composed of
regular members of the board of directors and
appointed by the shareholders at the ordinary
general shareholders meeting.
Under our bylaws, the chairman of our audit
committee and the majority of its members must be
independent directors. Two of the three members of
our audit committee are independent as such term is
defined under the Mexican Securities Market
Law.
Our audit committee operates pursuant to the Mexican
Securities Market Law, the regulations issued by the
National Securities and Banking Commission and our
bylaws.
Pursuant to our bylaws and Mexican law, our audit
committee submits an annual report regarding its
activities to our board of directors, which in turn
presents the report to our shareholders at the
ordinary general shareholders meeting.
43
NYSE Standards Our Corporate Governance Practices
-------------- ----------------------------------
Nominating/corporate governance committee. We are not required to have a nominating/corporate
Nominating/corporate governance committee of independent governance committee, and it is not expressly recommended
directors is required. The committee must have a charter by the Mexican Code of Best Corporate Practices.
specifying the purpose, duties and evaluation procedures
of the committee. "Controlled companies," which would
include our company if it were a U.S. issuer, are exempt
from these requirements. ss.303A.04
Compensation committee. Compensation committee of We are not required to have a compensation committee. Our
independent directors is required, which must approve bylaws require that our directors' compensation be
executive officer compensation. The committee must have a determined by the shareholders at the ordinary general
charter specifying the purpose, duties and evaluation shareholders meeting.
procedures of the committee. "Controlled companies," which
would include our company if it were a U.S. issuer, are
exempt from this requirement. ss.303A.05
Equity compensation plans. Equity compensation plans Shareholder approval is not required under Mexican
require shareholder approval, subject to limited law or our bylaws for the adoption and amendment of
exemptions.ss.303A.08 an equity compensation plan. Currently, we do not
have an equity compensation plan.
Code of Ethics. Corporate governance guidelines and a We have adopted a code of ethics applicable to our
code of business conduct and ethics is required, with chief executive officer, chief financial officer and
disclosure of any waiver for directors or executive principal accounting officer or persons performing
officers. ss.303A.10 similar functions. We are required by Item 16B of
Form 20-F to disclose any waivers granted to such
persons. A copy of our code of ethics is available
on our website at www.radiocentro.com.mx.
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
The Company was incorporated as Tecnica de Desarrollo Publicitario, S.A.
de C.V. on June 8, 1971, with its principal shareholders being members of the
Aguirre family. The Company has undergone several changes in nominal ownership,
but ultimate control has always resided with the Aguirre family.
On June 3, 1998, all of the Series A Shares and CPOs owned by the Aguirre
family, which were held in a trust established by the Aguirre family in 1992
(the "Old Controlling Trust"), were divided into two trusts (the Old Controlling
Trust and the "New Controlling Trust" and, together, the "Controlling Trusts").
Prior to the division, 50% of the Series A Shares and CPOs of the Company held
by the Old Controlling Trust was held for the benefit of Maria Esther G. de
Aguirre, with the remainder divided equally among her children. Simultaneously
with the division, Maria Esther G. de Aguirre acquired a
44
50% interest in each of the Controlling Trusts and transferred those interests
to her children in equal parts, but reserved her rights to vote and receive
dividends in respect of the Series A Shares and CPOs previously held for her
benefit (the "reserved rights").
On May 25, 1999, four members of the Aguirre family made a gift of their
interest in the Company's Series A Shares and CPOs held by the Controlling
Trusts to Maria Esther G. de Aguirre. On the same date, the Aguirre family
amended the terms of the Controlling Trusts to transfer, on such date, the
reserved rights held by Maria Esther G. de Aguirre to her children in equal
parts and to transfer, upon the occurrence of certain events, the trust
interests gifted to her by her four children to her seven other children--Maria
Esther Aguirre G., Francisco Aguirre G., Maria Adriana Aguirre G., Ana Maria
Aguirre G., Carlos Aguirre G., Rafael Aguirre G. and Jose Manuel Aguirre G.
On April 5, 2000, Maria Esther G. de Aguirre made a gift of her
approximate 36% interest in the Controlling Trusts to her seven children holding
interests in such trusts. Following this gift and an amendment of the terms of
the Controlling Trusts to remove Maria Esther G. de Aguirre as grantor and
beneficiary, those seven children owned, in equal parts, 100% of the interests
in the Controlling Trusts. Under the terms of the Controlling Trusts, the Series
A Shares held by each trust are ordinarily voted as directed by a majority of
the beneficiaries of the trust.
The following table sets forth certain information regarding the ownership
of Series A Shares by holders of more than 5% of the outstanding Series A Shares
as of June 23, 2004. All CPOs previously held by the Controlling Trusts were
converted to Series A Shares in 2003.
Series A Percentage of
Name of Person or Group Shares Owned Series A Shares(1)
----------------------- ------------ ------------------
Old Controlling Trust.............. 11,669,527 7.2%
New Controlling Trust.............. 72,351,119 44.4%
----------
(1) Percentages are based on 162,667,561 Series A Shares issued and
outstanding as of June 23, 2004.
The voting rights of the holders of Series A Shares not held in the form
of CPOs or ADSs are identical.
The bylaws of the Company prohibit the ownership of Series A Shares by
persons who do not qualify as Mexican investors. See Item 10, "Additional
Information--Bylaws--Limitations Affecting Non-Mexican Holders." At June 23,
2004, to the best knowledge of the Company, approximately 34% of the outstanding
Series A Shares were represented by ADSs. It is not practical for the Company to
determine the number of U.S. holders of CPOs or ADSs.
Related Party Transactions
Family Control of OIR Network Affiliates
In addition to their participation in the Company, members of the Aguirre
family owned or controlled 17 of the 111 affiliates in the network serviced by
OIR at December 31, 2003. Affiliated stations owned or controlled by members of
the Aguirre family accounted for approximately 18.9%, 25.6% and 24.4% of OIR
revenue (or 0.5%, 0.3% and 0.3% of Grupo Radio Centro's total broadcasting
revenue) for the fiscal years ended December 31, 2003, 2002 and 2001,
respectively. Grupo Radio Centro has provided administrative and other services
to such family-owned stations in the OIR network and under certain circumstances
has provided commercial air time to related parties, on terms that are
45
more favorable than those provided to unrelated parties. The Company does not
believe that such transactions have been material.
Service Contract
On January 5, 2000, Grupo Radio Centro entered into a contract with an
entity owned by Francisco Aguirre Gomez, chairman of the Board of Directors of
the Company, for an indefinite term pursuant to which this entity is compensated
for consulting services and the sale of air time provided to the Company by Mr.
Aguirre. The Company incurred expenses under this contract totaling Ps. 10.0
million, Ps. 7.9 million and Ps. 7.8 million in 2003, 2002 and 2001,
respectively. See Note 6 to the Consolidated Financial Statements.
Sale of Goods and Services
The Company makes available to employees, including key management
personnel, and directors and directors' family members goods and services
obtained by the Company in barter transactions. These goods and services are
offered to executive officers and directors at discounts that are comparable to
the discounts offered to the Company's employees. In 2003, the Company received
a total of Ps. 3.2 million from executive officers and directors and their
families in connection with these transactions. See Note 6 to the Consolidated
Financial Statements.
Attention to Aguirre Family Matters
Carlos Aguirre G., the General Director, and to a lesser extent, Pedro
Beltran, the Chief Financial Officer, Arturo Yanez, the Administrative
Sub-Director, and Alvaro Fajardo, the General Counsel, have spent a portion of
their time on Aguirre family matters for which Grupo Radio Centro has not been
separately compensated.
For further information regarding transactions between Grupo Radio Centro
and related parties, see Note 6 to the Consolidated Financial Statements.
Item 8. Financial Information
Consolidated Financial Statements
See Item 18, "Financial Statements" and pages F-1 through F-44.
Other Financial Information
Legal and Arbitration Proceedings
As required by a decree of a Mexican civil judge in connection with a
litigation proceeding brought in 2002 by the Company to clarify the amounts owed
in a contract dispute with Infored regarding the compensation of certain
sportscasters for programming produced by Infored, the Company paid Ps. 13.1
million to Infored in June 2004. The amounts were paid from provisions that had
been created in 2002 by the Company for such purpose. This matter was unrelated
to the March 2004 arbitration decision regarding the Monitor news program.
As of June 23, 2004, other than proceedings related to the arbitration
with Infored described under Item 4, "Business Overview--Broadcasting
Operations--Production of Programming by Infored," neither the Company nor any
of its subsidiaries is engaged in any material litigation or arbitration, and no
46
material litigation or claim is known to the Company to be pending or threatened
against the Company or any of its subsidiaries.
Dividend Policy
The table below sets forth each of the dividends paid by the Company
during the period 1999-2003, together with per-Series A Share (in nominal pesos
and U.S. dollars) and per-ADS amounts translated into U.S. dollars at the
exchange rate in effect on each of the respective payment dates.
Aggregate
Fiscal Year with Amount of Dividend Per Dividend Per Dividend Per
Respect to which Dividend Paid Series A Share Series A Share ADS
Date Dividend Paid Dividend Paid(1) (Nominal Pesos) (Nominal Pesos)(2) (U.S. dollars)(2) (U.S. dollars)(2)(3)
------------------ ---------------- --------------- ------------------ ----------------- --------------------
March 3, 2000................... 1999 42,700,000 0.24 0.02 0.23
March 9, 2001................... 2000 115,000,000 0.70 0.07 0.65
August 22, 2003................. 2002 55,000,000 0.34 0.03 0.28
----------
(1) The Company paid no dividends with respect to 2001.
(2) Per Series A Share and ADS amounts calculated based on weighted average
number of shares outstanding during the year in which the dividend was
paid.
(3) Nominal peso amounts have been translated to U.S. dollar amounts at the
noon buying rate for pesos on the date of payment of the dividend, as
published by the Federal Reserve Bank of New York.
The amount of future dividends will depend upon Grupo Radio Centro's
operating results, financial condition and capital requirements and upon general
business conditions. The declaration, amount and payment of dividends are
determined by a majority vote of the holders of the Series A Shares, generally
upon the recommendation of the Company's Board of Directors. At the annual
shareholders meeting of April 16, 2004, no dividend was declared with respect to
2003. Depending on the Company's financial position and compliance with the
covenants in its loan agreement with Scotiabank Inverlat, the Company may
declare dividends in the future. See Item 10, "Additional
Information--Bylaws--Dividends."
Item 9. The Offer and Listing
Since July 1, 1993, the CPOs and the ADSs have been listed on the Mexican
Stock Exchange and the NYSE, respectively. The ADSs have been issued by the
Depositary. Each ADS represents nine CPOs. Each CPO represents a financial
interest in one Series A Share.
The CPOs were originally issued by Nacional Financiera, S.N.C.,
Institucion de Banca de Desarrollo, Direccion Fiduciaria ("Nafin") as trustee
for the trust (the "CPO Trust") created by the trust agreement, dated May 24,
1993, as amended, among the Old Controlling Trust and the Company, as grantors,
and Nafin as CPO trustee. At a general meeting of the Company's shareholders on
April 25, 2003 and a general meeting of the CPO holders on May 19, 2003, the
shareholders and CPO holders approved several amendments to the CPO Trust. On
June 27, 2003, the parties to the CPO Trust agreement entered into an amended
and restated CPO Trust agreement (the "Amended CPO Trust Agreement"), reflecting
those amendments, including the following:
o Nafin was replaced as the CPO trustee by GE Capital Bank, S.A.,
Institucion de Banca Multiple, GE Capital Grupo Financiero, Division
Fiduciaria, as successor trustee for the CPO Trust (the "CPO
Trustee").
47
o The term of the CPO Trust was extended 20 years until June 29, 2023
(which term may be further extended).
o On June 30, 2003, all CPOs held by holders that qualified as Mexican
investors, as defined in the Company's bylaws (see Item 10,
"Additional Information--Bylaws--Limitations Affecting Non-Mexican
Holders"), were exchanged for Series A Shares held in the CPO Trust.
As of June 30, 2003, qualifying Mexican investors held Series A
Shares and no longer held CPOs. Non-Mexican holders of CPOs as of
June 30, 2003 continued to hold CPOs and, as holders of CPOs, are
not entitled to withdraw the Series A Shares held in the CPO Trust.
In connection with the Amended CPO Trust, the Series A Shares commenced
trading on the Mexican Stock Exchange under the symbol "RCENTRO.A" on June 30,
2003. The Series A Share listing is deemed to include the CPOs, such that the
Series A Share trading line will reflect trading of both Series A Shares and
CPOs.
Holders of CPOs are able to sell their CPOs (i) to a non-Mexican investor,
in which event the non-Mexican investor would receive such CPOs, or (ii) to a
Mexican investor, in which event the Mexican investor would receive the Series A
Shares underlying such CPOs, directly or by keeping them deposited at an account
at Indeval, maintained by such investor or by an authorized institution. Indeval
or Institucion para el Deposito de Valores, S.A. de C.V. is a privately-owned
securities depositary that acts as a clearinghouse for Mexican Stock Exchange
transactions.
The 2003 amendments to the CPO Trust did not affect the rights or
interests of holders of ADSs.
Price History
The following table sets forth, for the periods indicated, the reported
high and low sale prices for the Series A Shares and the CPOs on the Mexican
Stock Exchange (on a nominal basis) and the reported high and low sale prices
for the ADSs on the NYSE.
Mexican New York
Stock Exchange Stock Exchange
----------------------- -------------------
Amounts per Series A
Share and per CPO Amounts per ADS
(in nominal pesos) (in U.S. dollars)
----------------------- -------------------
High Low High Low
---- --- ---- ---
1999........................... 10.00 4.20 9.00 3.75
2000........................... 15.00 6.90 14.50 5.75
2001........................... 9.00 5.30 8.25 5.20
2002
First Quarter............ 6.30 5.05 6.24 5.10
Second Quarter .......... 5.95 2.61 6.00 2.61
Third Quarter............ 3.55 3.30 3.63 2.65
Fourth Quarter........... 3.49 2.25 2.64 1.76
2003
First Quarter............ 3.00 2.40 2.52 1.61
Second Quarter .......... 6.65 3.00 5.75 2.40
Third Quarter............ 8.41 5.95 7.45 4.95
Fourth Quarter........... 8.50 7.16 7.00 5.86
48
Mexican New York
Stock Exchange Stock Exchange
----------------------- -------------------
Amounts per Series A
Share and per CPO Amounts per ADS
(in nominal pesos) (in U.S. dollars)
----------------------- -------------------
High Low High Low
---- --- ---- ---
2004
First Quarter ........... 8.45 5.70 7.14 4.63
Most Recent Six Months
December 2003............ 8.50 8.40 6.98 6.75
January 2004............. 8.45 8.40 7.14 6.49
February 2004............ 8.45 8.45 6.96 6.70
March 2004............... 8.45 5.70 6.50 4.63
April 2004............... 6.30 5.40 4.83 4.20
May 2004................. 7.40 5.30 5.88 4.05
Trading on the Mexican Stock Exchange
The Mexican Stock Exchange, located in Mexico City, is the only stock
exchange in Mexico. Founded in 1907, it is organized as a corporation whose
shares are held by brokerage firms that are exclusively authorized to trade on
the Exchange. Trading on the Mexican Stock Exchange takes place through the
Sentra, an automated system; the Exchange's opening and closing times are fixed
so that the Exchange's trading day coincides with the trading day of the NYSE.
The Mexican Stock Exchange operates a system of automatic suspension of trading
in shares of a particular issuer as a means of controlling excessive price
volatility, but under current regulations this system does not apply to
securities, such as the CPOs, that are directly or indirectly (for example,
through ADSs) quoted on a stock exchange (including, for these purposes, the
NYSE) outside Mexico.
Settlement is effected two business days after a share transaction on the
Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is not
permitted without the approval of the Comision Nacional Bancaria y de Valores
(National Banking and Securities Commission, the "CNBV"). Most securities traded
on the Mexican Stock Exchange, including those of Grupo Radio Centro, are on
deposit with Indeval.
Item 10. Additional Information
BYLAWS
Set forth below is certain information concerning the Company's capital
stock and a brief summary of certain significant provisions of the Company's
bylaws and Mexican law. This description does not purport to be complete and is
qualified by reference to the bylaws of the Company, which have been filed as an
exhibit to this Annual Report, and Mexican law. For a description of the
Company's bylaws relating to the Board of Directors, Executive Committee and
statutory auditors, see Item 6, "Directors, Senior Management and Employees."
At the annual shareholders meeting held on April 25, 2003, the Company
amended its bylaws. The amendments were intended, among other things, to comply
with the general provisions applicable to issuers and other participants in the
securities market, published by the CNBV on March 19, 2003.
49
Organization, Register and Purpose
The Company was incorporated on June 8, 1971, as a Mexican limited
liability stock company (sociedad anonima de capital variable) in accordance
with Chapter V of the Ley General de Sociedades Mercantiles (the "Mexican
Companies Law"). It was registered in the Public Registry of Commerce of Mexico
City on August 28, 1992 under number 20694.
The capital stock of the Company consists of Series A Shares. In addition
to Series A Shares, the bylaws permit the issuance, upon the approval of the
CNBV, of special series of shares with limited or no voting rights.
Additionally, the bylaws permit the Company to issue and sell debt securities
(certificados bursatiles).
Voting Rights
Each Series A Share entitles the holder thereof to one vote at any meeting
of the shareholders of the Company. Holders of CPOs are not entitled to exercise
the voting rights corresponding to the Series A Shares held in the CPO Trust.
Such voting rights are exercisable only by the CPO Trustee, which is required to
vote all such Series A Shares in the same manner as the holders of a majority of
the Series A Shares that are not held in the CPO Trust and that are voted at a
shareholders meeting. See "--Limitations Affecting Non-Mexican Holders--Voting
Rights."
Shareholders Meetings
General shareholders meetings may be ordinary meetings or extraordinary
meetings. Extraordinary general meetings are those called to consider certain
matters specified in Article 182 of the Mexican Companies Law and the Company's
bylaws, including, principally, amendments of the bylaws, liquidation, and
merger and transformation from one form of company to another. In addition, the
Company's bylaws require an extraordinary general meeting to consider the
removal of the Company's capital stock from listing on the Mexican Stock
Exchange or any foreign stock exchange. General meetings called to consider all
other matters are ordinary meetings, which are held at least once each year.
An ordinary general meeting of the holders of Series A Shares must be held
at least once each year to consider the approval of the financial statements of
the Company and certain of its subsidiaries for the preceding fiscal year, to
elect directors for holders of Series A Shares (all of whom are elected annually
for terms of one year), statutory auditors and members of the Executive
Committee, to determine the allocation of the profits or losses of the preceding
year and to consider approval of the report on the Company's repurchase and sale
of shares and the report on the actions of the Audit Committee.
The quorum for an ordinary general meeting of the Series A Shares in first
call is 50% of such shares, and action may be taken by a majority of the Series
A Shares present. If a quorum is not available, a second meeting may be called
at which action may be taken by a majority of the Series A Shares present,
regardless of the number of such shares. The quorum for an extraordinary general
meeting is 75% of the Series A Shares. If a quorum is not available, a second
meeting may be called, provided that at least 50% of the Series A Shares
entitled to vote are present. Actions at an extraordinary general meeting may be
taken by a 50% vote of all outstanding Series A Shares on first and successive
calls.
Shareholders meetings may be called by the Board of Directors, the
statutory auditors or a court. The Board of Directors or the statutory auditors
may be required to call a meeting of the shareholders by the holders of 33% of
the Series A Shares. Additionally, holders of shares, with full or limited
voting rights, representing 10% of the capital stock of the Company may require
the Board of Directors or the
50
statutory auditors to call shareholders meetings and, in the event that such
holders do not have sufficient information on the matters to be voted on,
request postponements of shareholders meetings. Notice of meetings must be
published in the Diario Oficial de la Federacion or a newspaper of general
circulation in Mexico City at least 15 days prior to the meeting. In order to
attend a meeting, shareholders must deposit their Series A Shares with the
Company's Secretary at its office in Mexico City or any appointed registrar, or
submit certificates evidencing a deposit with Indeval. If entitled to attend the
meeting, a shareholder may be represented by proxy. The directors and statutory
auditors of the Company may not act as proxies. Holders of the Company's shares,
with full or limited voting rights, representing 20% of the capital stock of the
Company have the right to seek judicial remedies to block any actions taken by
the shareholders with respect to which such holders have the right to vote.
Holders of CPOs and ADSs representing CPOs are not entitled to call shareholders
meetings or seek judicial remedies to block actions taken by the shareholders.
Dividends
At the annual ordinary general meeting of holders of Series A Shares, the
Board of Directors submits the financial statements of the Company for the
previous fiscal year, together with a report thereon by the Board, to the
holders of Series A Shares for approval. The holders of Series A Shares, once
they have approved the financial statements, determine the allocation of the
Company's net profits for the preceding year. They are required by law to
allocate at least 5% of such net profits to a legal reserve, which is not
thereafter available for distribution except as a stock dividend, until the
amount of the legal reserve equals 20% of the Company's historical capital stock
(before effect of restatement). See Note 19 to the Consolidated Financial
Statements. Thereafter, the shareholders may determine and allocate a certain
percentage of net profits to any special reserve, including a reserve for
open-market purchases of the Company's Series A Shares. The remainder of net
profits is available for distribution. All Series A Shares outstanding and fully
paid at the time a dividend or other distribution is declared are entitled to
share equally in such dividend or other distribution. Series A Shares that are
only partially paid participate in dividends or other distributions in the same
proportion that such Series A Shares have been paid at the time of the dividends
or other distributions.
Liquidation
Upon liquidation of the Company, one or more liquidators may be appointed
to wind up its affairs. All fully paid and outstanding Series A Shares will be
entitled to participate equally in any distribution upon liquidation. Series A
Shares that are only partially paid participate in such distribution upon
liquidation in the proportion that they have been paid at the time of
liquidation.
Preemptive Rights
Except as described below, in the event of a capital increase, a holder of
existing Series A Shares has a preferential right to subscribe for a sufficient
number of Series A Shares to maintain the holder's existing proportionate
holdings of Series A Shares. Shareholders will not have preemptive rights to
subscribe for Series A Shares issued (i) in connection with mergers, (ii) on the
conversion of convertible debentures or (iii) for placement in a public
offering, if an extraordinary general shareholders meeting called for such
purpose approved such issuance and waived preemptive rights in connection
therewith in accordance with the procedures specified in the Company's bylaws.
Preemptive rights must be exercised within 15 days following the publication of
notice of the capital increase in the Diario Oficial de la Federacion. Under
Mexican law, preemptive rights cannot be waived in advance and cannot be
represented by an instrument that is negotiable separately from the
corresponding share. Holders of CPOs or ADSs that are U.S. persons or located in
the United States will be unable to participate in the exercise
51
of such preemptive rights absent registration of the preemptive rights offering
under the Securities Act, which the Company is not obligated to do.
Variable Capital
Under the Company's bylaws and Mexican law, the Company's capital stock
must consist of fixed capital and may have, in addition, variable capital.
Shares of the Company's fixed capital stock are called Class I shares and shares
of the Company's variable capital stock are called Class II shares. The fixed
portion of the Company's capital stock may only be increased or decreased by
resolution of an extraordinary general meeting of shareholders, whereas the
variable portion of the Company's capital stock may be increased or decreased by
resolution of an ordinary or extraordinary general meeting of shareholders.
Increases and decreases in the variable portion of the capital stock must be
recorded in the Company's book of capital variations.
Currently, the Company's outstanding capital stock consists only of fixed
capital. In the event the Company should have any outstanding variable capital,
its outstanding shares will not be specifically assigned to the fixed or
variable portion.
Limitations Affecting Non-Mexican Holders
Share Ownership
Ownership by non-Mexican investors of shares of Mexican enterprises is
regulated by the 1993 Ley de Inversion Extranjera (the "Foreign Investment
Law"), as amended, and the 1998 Reglamento de la Ley de Inversion Extranjera y
del Registro Nacional de Inversiones Extranjeras (the "Foreign Investment
Regulations") thereunder. The Ministry of Economy and the Comision Nacional de
Inversiones Extranjeras (the "Foreign Investment Commission") are responsible
for the administration of the Foreign Investment Law and the Foreign Investment
Regulations.
The Foreign Investment Law reserves certain economic activities
exclusively for the state and reserves certain other activities (such as radio
broadcasting) exclusively for Mexican individuals or Mexican corporations the
bylaws of which contain a prohibition on ownership by non-Mexicans of the
corporation's voting securities. However, the Foreign Investment Law allows
foreign investors to own non-voting securities, such as the CPOs, of companies
subject to foreign investment restrictions.
In addition to the limitations established by the Foreign Investment Law,
the Federal Radio and Television Law and the licenses granted by the SCT provide
restrictions on ownership by non-Mexicans of shares of Mexican enterprises
holding licenses for radio, such as those held by Grupo Radio Centro.
In order to comply with these restrictions, the Company's bylaws limit
ownership of Series A Shares to qualifying Mexican investors. The Company,
however, has received approval from the Foreign Investments Commission to have
up to 73.5% of its capital stock represented by CPOs issued by the CPO Trust.
The CPOs do not have any restrictions on non-Mexican ownership, except that
foreign governments or their agencies may not own them. The foregoing
restriction does not prevent foreign state-owned enterprises organized as
separate entities with their own assets to own CPOs. Pursuant to the Amended CPO
Trust Agreement, the CPOs may be owned only by holders that do not qualify as
Mexican investors as defined in the Company's bylaws. A holder that acquires
CPOs in violation of the restrictions on Mexican ownership will have none of the
rights of a CPO holder with respect to those CPOs.
52
The Series A Shares may be owned only by holders that qualify as Mexican
investors as defined in the Company's bylaws. A holder that acquires Series A
Shares in violation of the restrictions on non-Mexican ownership will have none
of the rights of a shareholder with respect to those Series A Shares.
The Foreign Investment Law and Foreign Investment Regulations also require
that the Company register any foreign owner of its shares, or the depositary
with respect to ADSs or global depositary shares representing its shares or
ordinary participation certificates representing such shares, with the Registro
Nacional de Inversiones Extranjeras (National Registry of Foreign Investment). A
foreign owner of Series A Shares that has not been registered is not entitled to
vote such Series A Shares or to receive dividends with respect to such Series A
Shares. The Direccion General de Inversion Extranjera (General Directorate of
Foreign Investment) has informed Grupo Radio Centro that it is not required to
register any foreign owner of CPOs.
Voting Rights
Each Series A Share entitles the holder thereof to one vote at any meeting
of the shareholders of the Company. Holders of CPOs (and holders of ADSs
representing CPOs) are not entitled to exercise voting rights with respect to
the Series A Shares underlying such CPOs. Pursuant to the terms of the Amended
CPO Trust Agreement, the CPO Trustee votes the Series A Shares held in the CPO
Trust in the same manner as holders of a majority of the Series A Shares not
held in the CPO Trust and voted at the relevant shareholders meeting. The
Controlling Trusts hold a substantial majority of the Series A Shares not held
in the form of CPOs. As a result, the Controlling Trusts and, indirectly,
members of the Aguirre family have the power to elect a majority of the
directors of, and control, the Company. Additionally, holders of CPOs or ADSs
are not entitled to attend or to address the Company's shareholders meetings.
Rights of Appraisal
Whenever the shareholders approve a change of corporate purpose, change of
nationality or restructuring from one type of corporate form to another, any
shareholder who has voted against such change or restructuring has the right to
withdraw from the Company and receive the amount calculated as specified in
Mexican law attributable to its shares, provided such shareholder exercises its
right to withdraw during the 15-day period following the meeting at which such
change was approved. Because the CPO Trustee is required to vote the Shares held
in the CPO Trust in the same manner as the holders of a majority of the Series A
Shares that are not held in the CPO Trust and that are voted at the shareholders
meeting, under no circumstances will the Series A Shares underlying the CPOs be
voted against any such change and therefore appraisal rights will not be
available to holders of CPOs or ADSs.
Termination of the CPO Trust
The Amended CPO Trust Agreement and the CPOs issued under the public deed
evidencing the issuance of CPOs pursuant to the Amended CPO Trust Agreement
(which deed is registered with the Public Registry of Commerce of the Federal
District of Mexico) are scheduled to expire 20 years after the date of execution
of the Amended CPO Trust Agreement. The CPO Trust may be extended by the CPO
Trustee upon receipt six months prior to termination of written notice from the
CPO Technical Committee (as defined below). If no such notice is received, the
CPO Trustee will commence the procedure for the termination of the Amended CPO
Trust Agreement. At the time of such termination, the CPO Trustee will proceed
to sell the Series A Shares held in the CPO Trust and distribute the proceeds of
such sale to the holders of the CPOs on a pro rata basis in accordance with the
number of CPOs owned by each holder. Notwithstanding the foregoing, the Amended
CPO Trust Agreement cannot be terminated if any dividends or other distributions
previously received by the CPO Trustee remain unpaid to the CPO holders.
53
Upon the expiration of the Amended CPO Trust Agreement, subject to
obtaining the applicable authorizations from the Mexican government, the CPO
Trustee and any CPO holder may execute a new trust agreement with the same terms
as the Amended CPO Trust Agreement. There can be no assurance that a new trust
agreement will be executed.
Administration of the CPO Trust
Pursuant to the terms of the Amended CPO Trust Agreement, the CPO Trust
will continue to be administered by the CPO Trustee under the direction of a
technical committee. The technical committee of the CPO Trust (the "CPO
Technical Committee") consists of four members and their respective alternates.
Each of the following appoints one member: the Mexican National Foreign
Investment Commission, the Mexican Stock Exchange, the Mexican Association of
Securities Brokerage Firms, and the common representative of the CPO holders
(HSBC, S.A., Institucion de Banca Multiple, Grupo Financiero HSBC). Actions
taken by the CPO Technical Committee are required to be approved by a majority
of the members present at any meeting of such committee at which at least the
majority of the members are present.
Other Provisions
Redemption
The Series A Shares are subject to redemption in connection with either
(i) a reduction of share capital or (ii) a redemption with retained earnings,
which, in either case, must be approved by the Company's shareholders at an
extraordinary shareholders meeting. The Series A Shares subject to any such
redemption would be selected by the Company by lot or, in the case of redemption
with retained earnings, by purchasing Series A Shares by means of a tender offer
conducted on the Mexican Stock Exchange, in accordance with the Mexican
Companies Law.
Purchase by the Company of its Shares
The Company generally may not repurchase its shares, subject to certain
exceptions. First, the Company may repurchase shares for cancellation with
distributable earnings pursuant to a decision of an extraordinary general
meeting of shareholders. Second, pursuant to judicial adjudication, the Company
may acquire the shares of a shareholder in satisfaction of a debt owed by such
shareholder to the Company. The Company must sell any shares acquired pursuant
to judicial adjudication within three months; otherwise, the Company's capital
stock will be reduced and such shares will be cancelled. Third, in accordance
with its bylaws, the Company is permitted to repurchase its own shares on the
Mexican Stock Exchange under certain circumstances with funds from a special
reserve created for such purpose. Shares repurchased by the Company may be held
by the Company only for a stated period of time. If, at the expiration of such
period, the shares have not been sold to investors, the capital stock must be
reduced proportionally. The maximum amount that may be authorized by the
shareholders to be spent by the Company for the repurchase of shares (see
"--Bylaws--Shareholders Meetings" above) may not exceed the sum of net income
for the prior year plus retained earnings.
Purchase of Shares by Subsidiaries of the Company
Subsidiaries or other entities controlled by the Company may not purchase,
directly or indirectly, shares of the Company, or shares of companies that are
majority shareholders of the Company or of subsidiaries of the Company.
54
Withdrawal Rights
In the event the Company should have any outstanding variable capital, the
outstanding variable portion of the Company's capital stock may be fully or
partially withdrawn by the shareholders. The minimum fixed portion of the
Company's capital stock (the "Minimum Capital") specified in the Company's
corporate charter cannot be withdrawn. A shareholder who wishes to effect a
total or partial withdrawal of its Series A Shares must notify the Company in an
authenticated written notice to that effect. If notice of withdrawal is received
prior to the last quarter of the fiscal year, the withdrawal becomes effective
at the end of the fiscal year in which the notice is given. Otherwise, the
withdrawal becomes effective at the end of the following fiscal year.
Reimbursement of withdrawn Series A Shares is made at the lower of (i) 95%
of the average Series A Share price quoted on the Mexican Stock Exchange, taking
into account the trading volume during the 30 days prior to the date on which
the withdrawal becomes effective for a period up to six months; and (ii) the
book value per share as calculated from the Company's financial statements (as
approved at the annual ordinary general meeting of shareholders) for the fiscal
year immediately preceding that in which withdrawal becomes effective. In the
event that the period in which the shares were traded is less than 30 days, the
actual number of days in which the shares were traded will be taken into
account. If the shares are not traded during such period, the book value of the
shares will be used. Any such amount to be paid by the Company becomes due on
the day following the annual ordinary general meeting of shareholders referred
to in clause (ii) above.
Because the Minimum Capital cannot be withdrawn, requests for withdrawals
are satisfied only to the extent of the available variable capital and in the
order in which they are received; requests which are received simultaneously are
fulfilled pro rata to the extent of the available variable capital. Currently,
all Series A Shares of the Company constitute Minimum Capital.
Conflict of Interest
A shareholder that votes on a business transaction in which its interest
conflicts with that of the Company may be liable for damages, but only if the
transaction would not have been approved without its vote.
Actions against Directors
Actions for civil liabilities against directors may be initiated by
resolution passed at a general ordinary shareholders meeting. In the event the
shareholders decide to bring such action, the directors against whom such action
is to be brought immediately cease to be directors. Shareholders representing
not less than 33% of the outstanding Series A Shares may directly bring such
action against directors, provided that (i) such shareholders did not vote in
favor of abstaining from such action at a relevant shareholders meeting and (ii)
the claim covers all damages allegedly suffered by the Company and not only by
such shareholders. Shareholders representing 15% of capital stock of the Company
have the right to directly bring actions for civil liabilities against
directors, statutory auditors and members of the Audit Committee in their
capacity as such. Any recovery of damages with respect to actions for civil
liabilities against directors will be for the benefit of the Company and not for
the shareholders bringing such actions.
Obligations of Majority Shareholders
In compliance with CNBV regulations, the Company's bylaws include a
provision whereby the shareholders holding the majority of the voting shares or
having the power to control decisions in the
55
general shareholders meeting or appoint the majority of the Board of Directors
(the "Controlling Shareholders") will be required to make a public offer to
purchase all outstanding shares in case the Company requests cancellation of the
registration of its securities with the Registro Nacional de Valores (National
Registry of Securities and or "RNV") or such registry is cancelled by the CNBV.
If the Controlling Shareholders make such a purchase offer but do not acquire
100% of the shares of the Company's capital stock, then, prior to cancellation
of the registration of its securities from the RNVI, the Company shall place in
trust for a minimum of six months an amount of funds necessary to acquire the
remaining shares at the purchase offer price.
According to the bylaws of the Company, the price of the offer must be at
least the higher of (i) the average trading price during the previous 30 days on
which the shares may have been quoted for a period up to six months prior to the
effective date of the offer, or (ii) the book value of the shares in accordance
with the most recent quarterly report submitted to the CNBV and to the Mexican
Stock Exchange.
The trade value in the Mexican Stock Exchange shall be the average price
for the volume of operations that have been carried out during the last 30 days
in which the shares of the issuer have been traded, prior to the date of the
offer during a period that cannot exceed six months. In the event that the
period in which the shares were traded is less than 30 days, the actual number
of days in which the shares were traded will be taken into account. If the
shares are not traded within such period of time, the book value of the shares
will be used.
The Board of Directors of the Company must provide its opinion regarding
the price of the public offer within the five business days prior to the
commencement of the offer, taking into account the interests of the minority
shareholders and the opinion of the Audit Committee. In case that the Board has
a conflict of interest, it shall present an opinion issued by an independent
expert appointed by the Audit Committee.
In the event that the Controlling Shareholders obtain the consent of the
shareholders representing 95% of the capital stock of the Company by means of
resolution adopted at a shareholders meeting, and the price offered for the
shares is less than 300,000 investment units (as defined under Mexican law), it
will not be necessary that the Controlling Shareholders carry out a public offer
in the understanding that in order to the request of cancellation, the Company
shall place in trust for a minimum of six months an amount of funds necessary to
acquire the remaining shares at the same price of the offer.
Finally, the bylaws provide that the Controlling Shareholders may request
authorization from the CNBV to use a different basis for the determination of
the price provided that the Board of Directors presents a recommendation to
establish a different price, after taking into account the opinion of the Audit
Committee, together with the report of an independent expert confirming that the
price is consistent with article 16 of the Securities Market Law.
Duration
The Company's existence under the bylaws continues until 2070.
Anti-Takeover Provisions
The bylaws contain certain provisions intended to delay or prevent a
takeover of the Company by any person or persons. The bylaws require the
approval of two-thirds of the members of the Board of Directors for (i) the
acquisition by any person or related persons, through one or more consecutive
transactions of any nature, of shares or other securities with full voting
rights representing 30% or more of
56
the capital stock of the Company and (ii) the entering into by any person or
persons of any agreement or arrangement for the exercise of voting rights in
respect of 30% or more of the capital stock of the Company.
Any acquisition of shares or other securities of the Company which has not
been approved by the Board of Directors as required will not be recorded in the
stock registry book of the Company, will not be acknowledged by the Company and
will not entitle the acquiring person to vote or exercise any other rights in
respect of the acquired shares or securities. Similarly, any person entering
into any voting agreement or arrangement which has not been approved by the
Board of Directors as required will not be entitled to exercise the relevant
voting rights whether in the general shareholders meeting or the Board of
Directors meetings. In the event of either an acquisition of shares or
securities of the Company or the entering into of a voting agreement or
arrangement without the required approval of the Board of Directors, the Board
of Directors will have the right to take certain actions including requiring the
acquirer of shares to sell such shares through a public offering, requiring such
acquirer to acquire all or part of the remaining shares of the Company, the
rescission of the acquisition of shares and the termination of such voting
agreement or arrangement.
To the extent that the Board of Directors has the right to approve any
acquisition of shares or other securities or any agreement for the exercise of
voting rights, the Board of Directors shall decide to approve such transaction
based on the following factors: (i) the nationality, moral and financial status
and other characteristics of the contemplated acquirer, (ii) the potential
advantages and disadvantages of the contemplated acquirer's participation in the
Company and (iii) the contemplated acquirer's experience in the radio
broadcasting industry.
The Chairman and the Secretary of the Board of Directors must be notified,
within five days, of any acquisition of shares or other securities or the
entering into of any voting agreements or arrangements involving 5% or more of
the capital stock of the Company.
MATERIAL CONTRACTS
The Company entered into a $35 million loan agreement with Banco Inverlat,
S.A. (now Scotiabank Inverlat, S.A.) on October 30, 2000 and amended the
agreement on April 17, 2001. On December 10, 2002, the Company amended the loan
agreement and converted 100% of the indebtedness from U.S. dollars to Mexican
pesos. On December 3, 2003, the Company amended the loan agreement to increase
the principal amount outstanding of the underlying loan by Ps. 50 million, to
extend the loan's maturity to October 31, 2007 and to fix the annual interest
rate of the consolidated loan at 10.3%, which is contingent upon the Company's
compliance with a certain ratio of total liabilities to EBITDA as defined in the
amendment to the loan agreement. Failure to comply with such ratio will result
in incremental adjustments quarterly to the annual interest rate as set forth in
the amendment up to a maximum interest rate of 11.55%. The consolidated loan has
an aggregate principal amount of Ps. 198.1 million at June 23, 2004. Due to
noncompliance with a financial covenant in the first quarter of 2004, the loan
is currently subject to an annual interest rate of 11.05%. See Item 5,
"Operating and Financial Review and Prospects--Liquidity and Capital Resources".
On June 29, 2001, the Company entered into an agreement to extend the term
of the Operating Agreement, dated as of December 14, 1998, between the Company
and Comercializadora Siete, S.A. de C.V., under which the Company operates the
radio station XHFO-FM. The agreement is scheduled to terminate on January 2,
2005. See Note 8 to the Consolidated Financial Statements.
Other than the foregoing, the only material contracts entered into by the
Company in the two-year period prior to this filing have been entered into in
the ordinary course of business.
57
EXCHANGE CONTROLS
Mexico has had a free market for foreign exchange since 1991, and the
government has allowed the peso to float freely against the U.S. dollar since
December 1994. There can be no assurance that the government will maintain its
current foreign exchange policies. See Item 3, "Key Information--Exchange Rate
Information."
TAXATION
The following summary contains a description of the principal U.S. federal
income and Mexican federal tax consequences of the purchase, ownership and
disposition of CPOs or ADSs by a holder that is a citizen or resident of the
United States or a U.S. domestic corporation or that otherwise will be subject
to U.S. federal income tax on a net income basis in respect of the CPOs or ADSs
(a "U.S. holder"), but it does not purport to be a comprehensive description of
all of the tax considerations that may be relevant to an investment in CPOs or
ADSs. In particular, this summary deals only with U.S. holders that will hold
CPOs or ADSs as capital assets and does not address the tax treatment of U.S.
holders that are subject to special tax rules or that own or are treated as
owning 10% or more of the voting shares (including CPOs) of the Company. This
summary also includes a limited description of certain U.S. tax consequences
with respect to non-U.S. holders.
The summary is based upon tax laws of the United States and Mexico as in
effect on the date of this Annual Report, which are subject to change. Holders
of CPOs or ADSs should consult their own tax advisers as to the U.S., Mexican or
other tax consequences of the purchase, ownership and disposition of CPOs or
ADSs, including, in particular, the effect of any foreign, state or local tax
law.
In general, for U.S. federal tax purposes, and for purposes of the
Convention for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion and the Protocols thereto (the "Tax Treaty") between the United States
and Mexico, entered into force on January 1, 1994, holders of CPOs or ADSs will
be treated as the beneficial owners of the Series A Shares represented by those
CPOs or ADSs.
Taxation of Dividends
Mexican Tax Considerations
During 2004, there will be no Mexican income or withholding tax levied on
holders of the CPOs or ADSs who are non-residents of Mexico for tax purposes (as
described below) on dividends paid, either in cash or in any other form, by the
Company.
For purposes of Mexican taxation, an individual is considered to be a
resident of Mexico if he or she has established a home in Mexico. However, if
such individual has a home in a foreign country as well, he or she will be
considered a resident of Mexico if his or her center of vital interests is
located in Mexico. A Mexican citizen is presumed to be a resident of Mexico for
tax purposes unless such person can demonstrate otherwise. A legal entity is
considered to be a resident of Mexico if it has been incorporated under the laws
of Mexico or if its principal administrative office is located in Mexico.
U.S. Tax Considerations
The gross amount of any dividends paid with respect to the Series A Shares
represented by CPOs or ADSs, to the extent paid out of the Company's current or
accumulated earnings and profits, as determined for U.S. tax purposes, generally
will be includible in the gross income of a U.S. holder as
58
ordinary income on the day on which the dividends are received by the CPO
Trustee and will not be eligible for the dividends received deduction allowed to
corporations under the Internal Revenue Code of 1986, as amended. Dividends,
which will be paid in pesos, will be includible in the income of a U.S. holder
in a U.S. dollar amount calculated in general by reference to the exchange rate
in effect on the day they are received by the CPO Trustee. U.S. holders should
consult their own tax advisors regarding the treatment of foreign currency gain
or loss, if any, on any pesos received that are converted into U.S. dollars on a
date subsequent to the date of receipt by the CPO Trustee. Subject to certain
exceptions for short-term and hedged positions, the U.S. dollar amount of
dividends received by an individual prior to January 1, 2009 with respect to the
ADSs will be subject to taxation at a maximum rate of 15% if the dividends are
"qualified dividends." Dividends paid on the ADSs will be treated as qualified
dividends if (i) the ADSs are readily tradable on an established securities
market in the United States and (ii) the Company was not, in the year prior to
the year in which the dividend was paid, and is not, in the year in which the
dividend is paid, a passive foreign investment company ("PFIC"), foreign
personal holding company ("FPHC") or foreign investment company ("FIC"). The
ADSs are listed on the New York Stock Exchange, and will qualify as readily
tradable on an established securities market in the United States so long as
they are so listed. Based on the Company's audited financial statements and
relevant market and shareholder data, the Company believes that it was not
treated as a PFIC, FPHC or FIC for U.S. federal income tax purposes with respect
to its 2003 taxable year. In addition, based on the Company's audited financial
statements and its current expectations regarding the value and nature of its
assets, the sources and nature of its income, and relevant market and
shareholder data, the Company does not anticipate becoming a PFIC, FPHC or FIC
for its 2004 taxable year. Based on existing guidance, it is not entirely clear
whether dividends received with respect to the CPOs will be treated as qualified
dividends, because it is not clear that the CPOs are readily tradable on a U.S.
exchange. In addition, the U.S. Treasury has announced its intention to
promulgate rules pursuant to which holders of ADSs or common stock and
intermediaries though whom such securities are held will be permitted to rely on
certifications from issuers to establish that dividends are treated as qualified
dividends. Because such procedures have not yet been issued, it is not clear
whether the Company will be able to comply with them. Holders of ADSs or CPOs
should consult their own tax advisers regarding the availability of the reduced
dividend tax rate in the light of their own particular circumstances.
A holder of CPOs or ADSs that is, with respect to the United States, a
foreign corporation or nonresident alien individual (a "non-U.S. holder")
generally will not be subject to U.S. federal income or withholding tax on
dividends received on CPOs or ADSs, unless such income is effectively connected
with the conduct by the non-U.S. holder of a trade or business in the United
States.
Taxation of Capital Gains
Mexican Tax Considerations
Gains on the sale or other disposition of ADSs by holders who are
non-residents of Mexico for tax purposes will generally not be subject to
Mexican income or withholding tax. Deposits of CPOs in exchange for ADSs and
withdrawals of CPOs in exchange for ADSs will not give rise to any Mexican tax
or transfer duties.
Income generated on the sale of CPOs during 2004 by individuals or legal
entities who are non-residents of Mexico for tax purposes through the Mexican
Stock Exchange or any other stock exchange or securities market in Mexico that
is recognized by the Mexican Ministry of Finance, are generally exempt from
Mexican taxes. However, sales effected through a public offering must comply
with certain restrictions in order to benefit from this exemption.
59
Notwithstanding the Mexican taxes on capital gains described above,
capital gains realized on the disposition of CPOs by a U.S. holder who is
eligible for tax benefits under the Tax Treaty generally will not be subject to
Mexican tax, unless such gains are attributable to a permanent establishment or
fixed base of such U.S. holder in Mexico or if the U.S. holder owned, directly
or indirectly, 25% or more of the issuer's capital stock within the 12-month
period preceding such sale or other disposition.
Exemption under the Tax Treaty requires that the U.S. holder appoints a
legal representative in Mexico for income tax purposes prior to the sale and
provides such a representative with a U.S. tax residence certificate issued by
the U.S. Internal Revenue Service. Additionally, the U.S. holder must file a
notice with the Mexican tax authorities within 30 days after the appointment has
been made.
Gains on sales or other dispositions of CPOs made in circumstances other
than those described above, generally would be subject to Mexican tax,
regardless of the nationality or residence of the transferor.
U.S. Tax Considerations
Gain or loss realized by a U.S. holder on the sale or other disposition of
CPOs or ADSs will be subject to U.S. federal income taxation as capital gain or
loss in an amount equal to the difference between the amount realized on the
disposition and such U.S. holder's tax basis in the ADSs or the CPOs. Gain, if
any, realized by a U.S. holder on the sale or other disposition of CPOs or ADSs
generally will be treated as U.S. source income for U.S. foreign tax credit
purposes. Consequently, if a Mexican withholding tax is imposed on the sale or
disposition of CPOs or ADSs, a U.S. holder that does not receive significant
foreign source income from other sources may not be able to derive effective
U.S. foreign tax credit benefits in respect of these Mexican taxes. U.S. holders
should consult their own tax advisors regarding the application of the foreign
tax credit rules to their investment in, and disposition of, CPOs or ADSs.
Gain or loss realized by a U.S. holder on such sale, redemption or other
disposition generally will be long-term capital gain or loss if, at the time of
disposition, the CPOs or ADSs have been held for more than one year. The net
amount of long-term capital gain recognized by an individual holder is taxed at
a reduced rate.
Deposits and withdrawals of CPOs by U.S. holders in exchange for ADSs will
not result in the realization of gain or loss for U.S. federal income tax
purposes. Such an exchanging U.S. holder will have a tax basis in the securities
received equal to the basis such holder had in the exchanged securities. A U.S.
holder's holding period for securities received in such an exchange will include
the holding period such U.S. holder had in the securities prior to such
exchange.
A non-U.S. holder of CPOs or ADSs will not be subject to U.S. federal
income or withholding tax on gain realized on the sale of CPOs or ADSs, unless
(i) such gain is effectively connected with the conduct by the non-U.S. holder
of a trade or business in the United States or (ii) in the case of gain realized
by an individual non-U.S. holder, the non-U.S. holder is present in the United
States for 183 days or more in the taxable year of the sale and certain other
conditions are met.
Other Mexican Taxes
There are no inheritance, gift, succession or value added taxes applicable
to the ownership, transfer, exchange or disposition of CPOs or ADSs by holders
that are non-residents of Mexico for tax purposes. There are no Mexican stamp,
issue, registration or similar taxes or duties payable by holders of CPOs or
ADSs.
60
Unless it can be proved that the services were not utilized in Mexico,
commissions paid in brokerage transactions for the sale of CPOs on the Mexican
Stock Exchange are subject to a value added tax rate of 15%.
U.S. Backup Withholding Tax and Information Reporting Requirements
In general, information reporting requirements will apply to payments by a
paying agent within the United States to a non-corporate (or other non-exempt)
U.S. holder of dividends in respect of the CPOs or ADSs or the proceeds received
on the sale or other disposition of the CPOs or ADSs, and a backup withholding
tax may apply to such amounts if the U.S. holder fails to provide an accurate
taxpayer identification number to the paying agent. Amounts withheld as backup
withholding tax will be creditable against the U.S. holder's U.S. federal income
tax liability, provided that the required information is furnished to the U.S.
Internal Revenue Service.
DOCUMENTS ON DISPLAY
Grupo Radio Centro is subject to the information requirements of the
Securities Exchange Act of 1934, as amended. In accordance with these
requirements, Grupo Radio Centro files reports, including annual reports on Form
20-F, and other information with the SEC. These materials, including this Annual
Report, and the exhibits thereto, may be inspected and copied at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20459.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. Any materials filed by Grupo Radio Centro may
also be read and copied at the SEC's regional office at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. As a foreign private
issuer, Grupo Radio Centro has been required to make filings with the SEC by
electronic means since November 2002. Any filings the Company makes
electronically will be available to the public over the Internet at the SEC's
web site at http://www.sec.gov. and Grupo Radio Centro's website at
www.radiocentro.com.mx. (This URL is intended to be an inactive textual
reference only. It is not intended to be an active hyperlink to our web site.
The information on our web site, which might be accessible through a hyperlink
resulting from this URL, is not and shall not be deemed to be, incorporated into
this Annual Report.)
61
Item 11. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in currency exchange
rates.
Foreign Currency Exchange Risk
The Company's principal foreign currency exchange risk involves changes in
the value of the peso relative to the U.S. dollar. Provided below is a summary
of the Company's net foreign currency exposure. For the year ended December 31,
2003, the U.S. dollar-denominated assets represented bank deposits. The U.S.
dollar-denominated contingent liabilities in 2003 represented a potential
obligation in connection with the arbitration proceeding with Infored described
under Item 4, "Business Overview--Broadcasting Operations--Production of
Programming by Infored." See Notes 4, 10 and 14 to the Consolidated Financial
Statements.
At December 31, 2003
(in thousands)
--------------------
U.S. dollar-denominated assets............................ $ 601
U.S. dollar-denominated contingent liabilities............ (21,016)
---------
Net liability position including
contingent liabilities............................... $ (20,415)
Decreases in the value of the peso relative to the U.S. dollar will
increase the cost in pesos of the Company's foreign currency-denominated costs
and expenses and of any obligation the Company might with respect to any foreign
currency-denominated liabilities. A depreciation of the peso relative to the
U.S. dollar also will result in foreign exchange losses, as the peso value of
the Company's foreign currency-denominated contingent liability would increase.
The Company generally does not hedge or enter into derivative transactions with
respect to its foreign currency exposure.
Although the Company had no foreign-currency denominated indebtedness at
December 31, 2003, the Company's total foreign currency-denominated contingent
liabilities at such date amounted to $21.1 million in connection with the
Infored Arbitration Award. See Item 4, "Information on the Company--Business
Overview--Broadcasting Operations--Production of Programming by Infored." and
Note 10 to the Consolidated Financial Statements. Additionally, a small portion
of the Company's operating expenses are payable in U.S. dollars.
A hypothetical and unfavorable 10% change in the currency exchange rate
would result in total additional operating expenses of approximately Ps. 2.9
million in 2003. A hypothetical and unfavorable 10% change in the currency
exchange rate on December 31, 2003 would have resulted in an estimated foreign
exchange loss of approximately Ps. 22.9 million for 2003, reflecting the
increased value in pesos of the Company's net foreign currency-denominated
liability position including contingent liabilities.
Item 12. Description of Securities other than Equity Securities
Not applicable.
62
PART II
Item 13. Defaults, Dividend Arrearages And Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds
Material Modifications to Security Holders' Rights
None.
Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
We carried out an evaluation under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2003. There are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon our evaluation, our chief
executive officer and chief financial officer concluded that the disclosure
controls and procedures as of December 31, 2003 were effective to provide
reasonable assurance that information required to be disclosed in the reports we
file and submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported as and when required. There has
been no change in our internal control over financial reporting during 2003 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Luis de la Fuente Baca
qualifies as an "audit committee financial expert" within the meaning of this
Item 16A.
Item 16B. Code of Ethics
We have adopted a code of ethics, as defined in Item 16B of Form 20-F
under the Securities Exchange Act of 1934, as amended. Our code of ethics
applies to our chief executive officer, chief financial officer and principal
accounting officer or persons performing similar functions. Our code of ethics
is available on our website at www.radiocentro.com.mx. If we amend the
provisions of our code of ethics that apply to our chief executive officer,
chief financial officer, principal accounting officer or persons performing
similar functions, or if we grant any waiver of such provisions, we will
disclose such amendment or waiver on our website at the same address.
63
Item 16C. Principal Accountant Fees and Services
Audit Fees
The following table sets forth the fees billed to us by our independent
auditors, BDO Hernandez, Marron y Cia., SC, for the fiscal years ended December
31, 2002 and 2003:
Year ended December 31,
-----------------------
2002 2003
--------- ---------
(in thousands)
Audit fees................................. Ps. 1,765 Ps. 1,660
Audit-related fees......................... 0 0
Tax fees................................... 0 0
Other fees................................. 0 0
--------- ---------
Total fees.............................. Ps. 1,765 Ps. 1,660
Audit fees in the above table are the aggregate fees billed in connection
with the audit of our annual financial statements and the review of our interim
financial statements and statutory and regulatory audits.
Audit Committee Approval Policies and Procedures
Our audit committee has not established pre-approval policies and
procedures for the engagement of our independent auditors for services. Our
audit committee expressly approves on a case-by-case basis any engagement of our
independent auditors for audit and non-audit services provided to our
subsidiaries or to us.
PART III
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
See pages F-1 through F-44, incorporated by reference herein.
Item 19. Exhibits
Documents filed as exhibits to this annual report:
(a) List of Financial Statements
Consolidated Financial Statements of Grupo Radio Centro, S.A. de C.V. for the
Years Ended December 31, 2003, 2002 and 2001
Report of independent auditors.......................................... F-1
Consolidated balance sheets as of December 31, 2003 and 2002............ F-3
64
Consolidated statements of income for the years ended
December 31, 2003, 2002 and 2001..................................... F-4
Consolidated statements of changes in stockholders'
equity for the years ended December 31, 2003, 2002 and 2001......... F-5
Consolidated statements of changes in financial position
for the years ended December 31, 2003, 2002 and 2001................ F-6
Notes to the consolidated financial statements as of and
for the years ended December 31, 2003, 2002 and 2001................ F-7
All other supplemental schedules relating to the Company are omitted
because they are not required or because the required information, where
material, is contained in the Consolidated Financial Statements or Notes
thereto.
(b) List of Exhibits
Charter (Escritura Constitutiva), together with
an English translation(a).............................................. 1.1
Amended and Restated Bylaws of Grupo Radio
Centro, S.A. de C.V., dated April 25, 2003,
filed as an English translation(h)..................................... 1.2
Amended and Restated Controlling Trust Agreement,
No. F/23020-1, dated April 24, 1992, with amendments
dated September 2, 1992, May 18, 1993 and
September 14, 1993, between certain members of
the Aguirre family and Bancomer, S.A., as trustee,
together with an English translation (b)............................... 3.1
Amended and Restated CPO Trust Agreement, dated
as of June 27, 2003, between GE Capital
Bank S.A., Institucion de Banca Multiple, GE
Capital Grupo Financiero, as CPO Trustee, and
Grupo Radio Centro, S.A. de C.V., filed
as an English translation(h)........................................... 3.2
Trust Agreement, dated June 3, 1998, among
certain principal shareholders of Grupo Radio
Centro, S.A. de C.V., together with an
English translation(c)................................................. 3.3
Deposit Agreement, dated June 30, 1993, among
Grupo Radio Centro, S.A. de C.V., Citibank
N.A. and holders from time to time of
American Depositary Receipts issued thereunder,
including the form of American Depositary
Receipt(d)............................................................. 4.1
Amended and Restated Public Deed, dated as of
June 27, 2003 (the "Amended and Restated CPO
Deed"), filed as an English translation(h)............................. 4.2
Modifying Agreement, dated December 14, 1998,
between Grupo Radio Centro, S.A. de C.V. and
Comercializadora Siete, S.A. de C.V., modifying
Service Agreement, dated October 2, 1995 with
respect to XHFO-FM, together with an English
translation(e)......................................................... 4.3
Programming Services Agreement, dated December 23,
1998, among Grupo Radio Centro, S.A. de C.V.,
Infored and Jose Gutierrez Vivo, together
with an English translation(e)......................................... 4.4
Loan Agreement, dated October 30, 2000, between
Grupo Radio Centro, S.A. de C.V. and Banco
Inverlat, S.A., (the "Loan Agreement"), together
with an English translation(f)......................................... 4.5
Letter Agreement, dated April 17, 2001, between
Grupo Radio Centro, S.A. de C.V. and Scotiabank
Inverlat, S.A. (formerly Banco Inverlat, S.A.),
amending Loan Agreement, together with an
English translation(f)................................................. 4.6
65
Waiver and Amendment Letter, dated June 19, 2002,
executed by Scotiabank Inverlat and Grupo Radio
Centro, S.A. de C.V. in connection with the
Loan Agreement(g)...................................................... 4.7
Amendment, dated December 10, 2002, to the Loan
Agreement, filed as an English translation(h).......................... 4.8
Amendment, dated December 3, 2003, to the Loan
Agreement, filed as an English translation............................. 4.9
Amendment, dated as of June 29, 2004, to the
Loan Agreement, to be filed as an English
translation pursuant to Rule 12b-25.................................... 4.10
Modifying Agreement, dated June 29, 2001, between
Grupo Radio Centro, S.A. de C.V. and
Comercializadora Siete, S.A. de C.V., modifying
Service Agreement, dated October 2, 1995, with
respect to XHFO-FM, together with an English
translation(g)......................................................... 4.11
List of Subsidiaries of the Company(h).................................... 8.1
Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.............................................. 12.1
Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.............................................. 12.2
Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.............................................. 13.1
----------
(a) Incorporated by reference to the Company's Registration Statement on Form
F-1 (Reg. No. 333-63878) filed on June 4, 1993.
(b) Incorporated by reference to the Company's Annual Report on Form 20-F
(Commission File No. 001-12090) filed on December 31, 1993.
(c) Incorporated by reference to the Company's Annual Report on Form 20-F
(Commission File No. 001-12090) filed on June 30, 1998.
(d) Incorporated by reference to the Company's Registration Statement on Form
F-6 (Reg. No. 333-8224) filed on January 16, 1998.
(e) Incorporated by reference to the Company's Annual Report on Form 20-F
(Commission File No. 001-12090) filed on June 30, 1999.
(f) Incorporated by reference to the Company's Annual Report on Form 20-F
(Commission File No. 001-12090) filed on May 9, 2001.
(g) Incorporated by reference to the Company's Annual Report on Form 20-F
(Commission File No. 001-12090) filed on June 24, 2002.
(h) Incorporated by reference to the Company's Annual Report on Form 20-F
(Commission File No. 001-12090) filed on June 30, 2003.
66
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: June 30, 2004
GRUPO RADIO CENTRO, S.A. de C.V.
By: /s/ Pedro Beltran Nasr
----------------------------
Pedro Beltran Nasr
Chief Financial Officer
67
GRUPO RADIO CENTRO, S.A. DE C.V.,
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
TOGETHER WITH
AUDITORS' REPORT
GRUPO RADIO CENTRO, S.A. DE C.V.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of independent auditors F-1 to F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Income
for the years ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2003, 2002, and 2001 F-5
Consolidated Statements of Changes in Financial Position
for the years ended December 31, 2003, 2002, and 2001 F-6
Notes to the Consolidated Financial Statements F-7 to F-44
Report of Independent Auditors
To the Board of Directors and Shareholders of
Grupo Radio Centro, S.A. de C.V.
We have audited the accompanying consolidated balance sheets of Grupo Radio
Centro, S.A. de C.V. and subsidiaries (as defined in Note 1 to the consolidated
financial statements) as of December 31, 2003 and 2002, and the related
consolidated statements of (loss) income, changes in shareholders' equity and
changes in financial position for each of the years in the three year period
ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and 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. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grupo Radio Centro,
S.A. de C.V. and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations, the changes in their shareholders' equity and the changes
in their financial position for each of the years in the three year period ended
December 31, 2003, in conformity with accounting principles generally accepted
in Mexico.
F-1
Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the results from
operations for each of the years in the three year period ended December 31,
2003, and the shareholders' equity and changes in financial position as of
December 31, 2003 and 2002, to the extent summarized in Note 27 to the
accompanying consolidated financial statements.
These consolidated financial statements have been translated into English solely
for the convenience of readers of this language.
Hernandez, Marron y Cia., S.C.
Salvador Dacal Alonso, CPA
Partner
Mexico City
March 17, 2004,
except for the matter described in the last
paragraph of Note 14, sub-paragraph a)
which dates are June 15, 2004 and June 29, 2004
F-2
GRUPO RADIO CENTRO, S.A. DE C.V.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002
(Unless otherwise specified, all amounts bearing the symbol "Ps" are expressed
in thousands of constant Mexican pesos with purchasing power as of
December 31, 2003. Amounts bearing the symbol "US$" are
expressed in thousands of US dollars.)
2003 2003 2002
----------- ------------ ------------
ASSETS
------
CURRENT:
Cash and temporary investments (Note 5) US $6,111 Ps 68,676 Ps 40,878
Accounts receivable:
Broadcasting, net of allowance for
doubtful
accounts of Ps7,411 and Ps1,663 19,238 216,232 223,789
Other receivables (Note 7) 351 3,946 6,183
Income taxes recoverable -- -- 18,120
----------- ------------ ------------
19,589 220,178 248,092
----------- ------------ ------------
Guarantee deposits (Note 8) 615 6,915 7,190
Others prepaid expenses 843 9,480 7,387
Prepaid expenses (Note 10) -- -- 9,454
----------- ------------ ------------
Total current assets 27,158 305,249 313,001
----------- ------------ ------------
Prepaid expenses (Note 10) -- -- 108,729
Property and equipment, net
(Notes 11) 41,805 469,892 495,940
Deferred charges, net (Note 12) 1,102 12,391 18,424
Excess cost over net book value of net
assets of
subsidiaries, net (Note 13) 67,802 762,088 841,603
Guarantee deposits (Note 8) 51 576 7,789
Other assets 279 3,140 3,266
----------- ------------ ------------
US $138,197 Ps 1,553,336 Ps 1,788,752
=========== ============ ============
2003 2003 2002
----------- ------------ ------------
LIABILITIES
-----------
CURRENT:
Notes payable (Note 14) US $5,037 Ps 56,618 Ps 190,153
Advances from customers
(Note 15) 5,307 59,657 42,446
Suppliers and other
accounts
payable (Note 16) 4,759 53,491 66,868
Taxes payable (Note 17) 2,318 26,051 13,849
Contingent liability (Note 10) 21,008 236,133 --
----------- ------------ ------------
Total current 38,429 431,950 313,316
liabilities
LONG-TERM:
Notes payable (Note 14) 15,112 169,855 164,789
Reserve for labor
obligations
(Note 18) 2,352 26,445 26,168
Deferred taxes (Note 20) 2,435 27,366 83,993
----------- ------------ ------------
Total liabilities 58,328 655,616 588,266
----------- ------------ ------------
SHAREHOLDERS' EQUITY
--------------------
(Note 19):
Capital stock 95,360 1,071,841 1,072,142
Retained (deficit) earnings (11,223) (126,147) 176,087
Reserve for repurchase of shares 3,377 37,952 38,021
Surplus on restatement of capital 385 4,332 4,332
Cumulative effect on prior years
of initial recognition
of deferred
income taxes (Note 20) (8,060) (90,597) (90,597)
Effect from labor liability (15) (168) --
----------- ------------ ------------
Majority shareholders' equity 79,824 897,213 1,199,985
Minority interest 45 507 501
----------- ------------ ------------
Total shareholders' equity 79,869 897,720 1,200,486
----------- ------------ ------------
US $138,197 Ps 1,553,336 Ps 1,788,752
=========== ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
GRUPO RADIO CENTRO, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Unless otherwise specified, all amounts bearing the symbol "Ps" are
expressed in thousands of constant Mexican pesos with purchasing power
as of December 31, 2003. Amounts bearing the symbol "US$" are expressed
in thousands of US dollars.)
2003 2003 2002 2001
------------ ------------ ------------ -----------
(Note 2)
BROADCASTING REVENUES US$ 73,406 Ps 825,084 Ps 738,376 Ps 779,957
Broadcasting expenses, excluding
depreciation and amortization 43,904 493,593 479,624 504,304
------------ ------------ ------------ -----------
Broadcasting income 29,502 331,491 258,752 275,653
Depreciation and amortization 10,089 113,405 112,327 122,196
General and administrative corporate expenses
(Note 21) 5,354 60,183 46,911 52,399
------------ ------------ ------------ -----------
Operating income 14,059 157,903 99,514 101,058
------------ ------------ ------------ -----------
COMPREHENSIVE COST OF FINANCING
Interest expense 2,409 27,098 20,828 36,761
Interest income (87) (973) (2,318) (2,944)
Loss (gain) on foreign currency exchange,
net (Note 4) 575 6,463 43,734 (17,874)
Loss (gain) on net monetary position 28 310 (9,034) (3,346)
------------ ------------ ------------ -----------
2,925 32,898 53,210 12,597
------------ ------------ ------------ -----------
Other expenses, net (Note 22) 5,870 65,982 52,487 75,993
------------ ------------ ------------ -----------
Income (loss) before extraordinary item
and provisions 5,264 59,023 (6,183) 12,468
Extraordinary item (Note 10) 30,322 340,705 -- --
------------ ------------ ------------ -----------
(Loss) income before provisions (25,058) (281,682) (6,183) 12,468
Benefit for income taxes and
employee profit sharing (Note 20) (3,193) (35,887) (8,454) (6,002)
------------ ------------ ------------ -----------
Net (loss) income US$ (21,865) Ps (245,795) Ps 2,271 Ps 18,470
============ ============ ============ ===========
NET (LOSS) INCOME APPLICABLE TO:
Majority interest US$ (21,866) Ps (245,801) Ps 2,257 Ps 18,453
Minority interest 1 6 14 17
------------ ------------ ------------ -----------
US$ (21,865) Ps (245,795) Ps 2,271 Ps 18,470
============ ============ ============ ===========
NET (LOSS) INCOME PER SHARE US$ (0.134) Ps (1.511) Ps 0.013 Ps 0.112
============ ============ ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
GRUPO RADIO CENTRO, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Unless otherwise specified, all amounts bearing the symbol "Ps" are
expressed in thousands of constant Mexican pesos with purchasing power
as of December 31, 2003. Amounts bearing the symbol "US$" are expressed
in thousands of US dollars.)
Surplus
Reserve for Effect from (deficit) on
Capital Retained repurchase labor restatement
stock earnings of shares liabilities of capital
------------ ----------- ----------- ------------ ------------
Balances as of December 31,
2000 (Note 19) Ps 1,078,998 Ps 308,733 Ps 13,447 Ps -- Ps 4,252
Increase to the reserve for the
repurchase of shares -- (22,706) 22,706 -- --
Repurchase of shares (1,338) -- (169) -- --
Net income for the year -- 18,470 -- -- --
Dividends paid -- (130,650) -- -- --
Sales of shares 1,338 132
Cumulative effect of recognition
of deferred income taxes -- -- -- -- --
Minority interest -- (17) -- -- --
------------ ----------- ----------- ----------- -----------
Balances as of December 31,
2001 (Note 19) 1,078,998 173,830 36,116 -- 4,252
Repurchase of shares (6,856) - 1,905 -- --
Net income for the year -- 2,271 -- -- --
Cumulative effect of recognition
of deferred income taxes -- -- -- -- 80
Minority interest -- (14) -- -- --
------------ ----------- ----------- ----------- -----------
Balances as of December 31,
2002 (Note 19) 1,072,142 176,087 38,021 -- 4,332
Repurchase of shares (301) - (69) -- --
Net loss for the year -- (245,795) -- -- --
Effect of additional liability
from labor liabilities -- -- -- (168) --
Dividends paid -- (56,433) -- -- --
Minority interest -- (6) -- -- --
------------ ----------- ----------- ----------- -----------
Balances as of December 31,
2003 (Note 19) Ps 1,071,841 Ps (126,147) Ps 37,952 Ps (168) Ps 4,332
============ =========== =========== =========== ===========
Cumulative
effect on
prior years of
initial
recognition
Minority of deferred Comprehensive
interest income taxes Total income (loss)
----------- -------------- ------------ -------------
Balances as of December 31,
2000 (Note 19) Ps 470 Ps (89,614) Ps 1,316,286 Ps 32,879
===========
Increase to the reserve for the
repurchase of shares -- -- -- --
Repurchase of shares -- -- (1,507) --
Net income for the year -- -- 18,470 18,470
Dividends paid -- -- (130,650) --
Sales of shares 1,470
Cumulative effect of recognition
of deferred income taxes -- (59) (59) (59)
Minority interest 17 -- -- --
----------- ----------- ------------ -----------
Balances as of December 31,
2001 (Note 19) 487 (89,673) 1,204,010 Ps 18,411
===========
Repurchase of shares -- -- (4,951) --
Net income for the year -- -- 2,271 2,271
Cumulative effect of recognition
of deferred income taxes -- (924) (844) (844)
Minority interest 14 -- -- --
----------- ----------- ------------ -----------
Balances as of December 31,
2002 (Note 19) 501 (90,597) 1,200,486 Ps 1,427
===========
Repurchase of shares -- -- (370) --
Net loss for the year -- -- (245,795) (245,795)
Effect of additional liability
from labor liabilities -- -- (168) (168)
Dividends paid -- -- (56,433) --
Minority interest 6 -- -- --
----------- ----------- ------------ -----------
Balances as of December 31,
2003 (Note 19) Ps 507 Ps (90,597) Ps 897,720 Ps (245,963)
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
GRUPO RADIO CENTRO, S.A. DE C.V.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Unless otherwise specified, all amounts bearing the symbol "Ps" are
expressed in thousands of constant Mexican pesos with purchasing power
as of December 31, 2003. Amounts bearing the symbol "US$" are expressed
in thousands of US dollars.)
2003 2003 2002 2001
------------ ------------ ------------ -----------
(Note 2)
OPERATING ACTIVITIES:
---------------------
Net (loss) income for the year US$ (21,865) Ps (245,795) Ps 2,271 Ps 18,470
Increases (decreases) to income not
affecting resources:
Depreciation and amortization 3,015 33,890 38,370 43,738
Amortization of goodwill 7,074 79,515 73,957 78,458
Deferred income taxes (5,037) (56,627) (14,139) (9,864)
Advance payments 10,514 118,183 16,726 10,430
Reduction in book value of buildings held for sale
(Note 12) 125 1,407 1,754 1,428
------------ ------------ ------------ -----------
(6,174) (69,427) 118,939 142,660
Net change in accounts receivable,
accounts payable and other 25,908 291,222 (78,726) 12,398
------------ ------------ ------------ -----------
Resources provided by operating activities 19,734 221,795 40,213 155,058
------------ ------------ ------------ -----------
FINANCING ACTIVITIES:
---------------------
Repurchase of shares (33) (370) (4,951) (37)
Repayments (proceeds) in bank loans (11,430) (128,469) (59,310) 29,851
Dividends paid (5,020) (56,433) -- (130,558)
------------ ------------ ------------ -----------
Resources used in financing activities (16,483) (185,272) (64,261) (100,744)
------------ ------------ ------------ -----------
INVESTING ACTIVITIES:
---------------------
Excluding the recognition of the effects of inflation:
Equipment (776) (8,725) (24,985) (24,043)
Buildings held for sale -- -- 16,674 --
Guarantee deposits -- -- -- (22,800)
Purchase of equity securities -- -- -- (108,992)
Effects of inflation -- -- -- (8,498)
------------ ------------ ------------ -----------
Resources used in investing activities (776) (8,725) (8,311) (164,333)
------------ ------------ ------------ -----------
Increase (decrease) in cash and temporary
investments 2,475 27,798 (32,359) (110,019)
Cash and temporary investments
at beginning of year 3,636 40,878 73,237 183,256
------------ ------------ ------------ -----------
Cash and temporary investments
at end of year US$ 6,111 Ps 68,676 Ps 40,878 Ps 73,237
============ ============ ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
(Unless otherwise specified, all amounts bearing the symbol "Ps" are expressed
in thousands of constant Mexican pesos with purchasing power as of December 31,
2003. Amounts bearing the symbol "US$" are expressed in thousands
of US dollars.)
NOTE 1 Line of business and composition of the companies
Grupo Radio Centro, S.A. de C.V. ("Grupo Radio Centro" or "the Company")
is a Mexican radio broadcasting enterprise incorporated on June 8, 1971. Its
principal line of business is the production and radio broadcasting of musical
programs, news, interviews and special events. Its revenues are derived
primarily from the sale of commercial airtime to advertising agencies and
businesses. The Company also operates a radio network in Mexico.
The following companies, which comprise or formerly comprised Grupo Radio
Centro, operate in various sectors of the radio broadcasting industry. Grupo
Radio Centro owns approximately 99.9% of most of its subsidiaries.
Companies Notes 2003 2002 2001
-------------------------------------------------------------------- --------- -------- --------- ----------
Radio stations:
XEQR, S.A. de C.V. X X X
XERC, S.A. de C.V. X X X
XEEST, S.A. de C.V. a X X X
XEQR-FM, S.A. de C.V. X X X
XERC-FM, S.A. de C.V. X X X
XEJP-FM, S.A. de C.V. X X X
XEDKR-AM, S.A. de C.V. X X X
XESTN-AM b X X X
Radio Red, S.A. de C.V. X X X
Radio Red-FM, S.A. de C.V. X X X
Estacion Alfa, S.A. de C.V. X X X
Emisora 1150, S.A. de C.V. (formerly XECMQ) X X X
Radio Sistema Mexicano, S.A. c X X X
Marketing companies:
Grupo Radio Centro, S.A. de C.V. X X X
Radio Centro Publicidad, S.A. de C.V. X X X
GRC Publicidad, S.A. de C.V. X X X
GRC Medios, S.A. de C.V. d X X X
Service companies:
Promotora Tecnica de Servicios Profesionales,
S.A. de C.V. X X X
Publicidad y Promociones Internacionales,
S.A. de C.V. X X X
F-7
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Companies Notes 2003 2002 2001
-------------------------------------------------------------------- --------- -------- --------- ----------
Promo Red, S.A. de C.V. X X X
Real estate companies:
Universal de Muebles e Inmuebles, S.A. de C.V. e X X X
Inmobiliaria Radio Centro, S.A. de C.V. e X X X
Sub-holding companies:
Desarrollos Empresariales, S.A. de C.V. X X X
Radiodifusion Red, S.A. de C.V. X X X
Enlaces Troncales, S.A. de C.V. f X X X
Non-operating companies:
Musica, Musica, Musica, S.A. de C.V. X X X
Promotora de Exitos, S.A. de C.V. X X X
Producciones Artisticas Internacionales, S.A. de C.V. g X X X
Internet companies:
To2 Mexico, S.A. de C.V. h X X X
----------------------------------------------------------------------------------------------------------------
Notes:
a Radio station managed and operated by Comercializadora Siete de Mexico,
S.A. de C.V.
b Radio station acquired by Radio Red, S.A. de C.V. on September 6, 2000 to
operate in Monterrey, Nuevo Leon.
c Subsidiary as of December 31, 2001 (see Note 23).
d Subsidiary as of April 2, 2001 (see Note 24).
e On July 8, 2000, Grupo Radio Centro established Trust N(degree)151548,
with Banco Internacional, S.A., as trustee, to act as the real estate
administrator for Universal de Muebles e Inmuebles, S.A. de C.V. and
Inmobiliaria Radio Centro, S.A. de C.V. On September 30, 2002 the Trust
was terminated and consequently the real estate is administered by the
above-mentioned real estate companies.
f Includes Palco Deportivo.Com, S.A. de C.V. and related companies, all of
which were merged into this subsidiary on October 1, 2001 (see Note 24).
g The subsidiary was incorporated as a result of the merger between Grupo
Radio Centro (the merging company) and Centraltena (the merged company)
effective October 13, 1999.
h Subsidiary as of February 16, 2001 (see Note 24).
F-8
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
The Company's radio-station operations include the production and
broadcasting of musical programs, news, interviews, special events and
advertising in Mexico City's metropolitan area. They are based on limited-term
concessions, subject to renewal, granted by Mexico's Ministry of Communications
and Transportation ("SCT"). One of the station concessions granted to the
Company expired in October 2003 and one in November 2003. Renewed applications
for both these concessions have been filed as described below. Nine will be up
for renewal in July 2004, one in December 2007 and one in December 2012.
In November 2002, renewal applications for the two concessions that
expired in 2003 and in May 2003 renewal applications for the nine concessions
that are set to expire in 2004 were submitted to the Ministry of Communication
and Transportation (Secretaria de Comunicaciones y Transportes). Renewal of
these concessions is still pending.
The Company's marketing companies are or were responsible for the
programming and sale of commercial airtime for broadcast by the Company's radio
stations in Mexico City's metropolitan area and, beginning in 1995, in the rest
of Mexico.
The Company's service companies provide commercial, technical and
administrative personnel to the companies comprising Grupo Radio Centro.
The Company's real estate companies described in Note 1e, own the land and
buildings where the transmission facilities of the Company's radio stations and
its commercial companies are located, including the building where the head
offices and studios of Grupo Radio Centro and its subsidiaries are located.
The Company's non-operating companies were incorporated for the purpose of
developing new investment projects and are not currently active.
The Internet companies were acquired to explore the Company's
opportunities for distributing its content through the Internet. On October 1,
2002 the Internet companies To2 Mexico and Palco Deportivo ceased operations.
In October 2001, the Company restructured itself to decrease the number of
holding companies and simplify management. This restructuring resulted in
mergers and acquisitions among subsidiaries of the Company as follows:
* Desarrollos Empresariales, S.A. de C.V. acquired from Grupo Radio Centro, S.A.
de C.V. 99.99% of the shares of Radiodifusion Red, S.A. de C.V. and is the
surviving entity following mergers with each of the following subsidiaries:
o Mensajes Digitales, S.A. de C.V.
o Industrias Telecentro, S.A. de C.V.
* Enlaces Troncales, S.A. de C.V. acquired 99.99% of the shares of Promo Red,
S.A. de C.V. from Radiodifusion Red, S.A. de C.V. and is the surviving entity
following mergers with each of the following subsidiaries (see Note 13):
F-9
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
o Palco Deportivo.Com, S.A. de C.V.
o Palco Shop, S.A. de C.V.
o Palco Deportivo Multimedia, S.A. de C.V.
o Palco Deportivo Mexico, S.A. de C.V.
* Promo Red, S.A. de C.V. is the surviving entity following a merger with
Servicios Corporativos Palco, S.A. de C.V. (see Note 13).
* Radio Centro Publicidad, S.A. de C.V. is the surviving entity following
mergers with the following subsidiaries:
o Publicidad Mega, S.A. de C.V.
o Organizacion Impulsora de Radio, S.A. de C.V.
o Compania de Servicios Publicitarios, S.A. de C.V.
* GRC Medios, S.A. de C.V. is the surviving entity following a merger with
Expertopolis, S.A. de C.V. (acquired by Grupo Radio Centro, S.A. de C.V. for Ps
50 in June 2001).
NOTE 2 Basis of consolidation and presentation
The accompanying consolidated financial statements include the accounts of
Grupo Radio Centro and its subsidiaries, listed in Note 1, as of December 31,
2003 and 2002, and for the years ended December 31, 2003, 2002 and 2001. All
intercompany balances and transactions have been eliminated in consolidation.
Convenience statements:
The 2003 US dollar amounts (denoted by the symbol "US$") shown in the
financial statements have been included solely for the convenience of the reader
and were translated at the rate of Ps 11.24/US$1.00, the noon buying rate of
Mexican pesos on December 31, 2003, as published by the Federal Reserve Bank of
New York. Such translation should not be construed as a representation that the
Mexican peso amounts have been or could be converted into US dollars at this or
any other rate.
Certain amounts reported to the consolidated financial statements as of
December 31, 2002 and 2001 have been reclassified to conform to the 2003
presentation.
NOTE 3 Summary of significant accounting policies
The most significant accounting policies followed by Grupo Radio Centro in
the preparation of its consolidated financial statements, are summarized below:
a. Recognition of the effects of inflation:
- The consolidated financial statements have been prepared in
accordance with the guidelines set out in Bulletin B-10,
"Recognition of the Effects of Inflation on Financial Information,"
and its amendments, issued by the Mexican Institute of
F-10
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Public Accountants. Therefore, the consolidated financial statements
for the years ended December 31, 2003, 2002 and 2001, are expressed
in constant Mexican pesos with purchasing power as of December 31,
2003, as determined by applying factors derived from the National
Consumer Price Index ("NCPI") published by the Banco de Mexico.
2003 2002 2001
------ ------ ------
Restatement factor using Mexican Inflation 1.0397 1.057 1.044
- Capital stock, retained earnings (deficit), reserve for repurchase
of shares and cumulative effect on prior years of recognition of
deferred income tax include their restatement effects, determined by
applying factors derived from the NCPI from the date of their
contribution or generation. These restatements reflect the reserves
required to maintain shareholders' equity accounts at constant
levels.
- Surplus on restatement of capital represents the accumulated gain
from holding non-monetary assets. This gain represents the
difference between the value of non-monetary assets, recorded at
acquisition cost as compared to the value of the assets as restated
using factors derived from the NCPI.
- (Gain) loss on net monetary position represents the effects of
inflation, as measured by the NCPI, on the net monetary assets and
liabilities held during the year.
- Comprehensive cost of financing consists of interest income and
expense, foreign-exchange gains or losses, and the gain or loss on
net monetary position.
b. Temporary investments:
Stated at cost, plus interest earned, which does not exceed market
value.
c. Property and equipment:
The Company recognizes the effects of inflation through adjustments
in general price levels by applying factors derived from the NCPI.
Related depreciation is calculated based on estimated useful lives
of assets, as determined by independent appraisers, both for
acquisition costs and restatement increases.
During 2003, 2002 and 2001, impairment losses relating to buildings
held for sale and amounting to Ps 1,407, Ps 1,754 and Ps 1,428,
respectively, were recognized in other expenses in the accompanying
statements of (loss) income (see Note 22).
F-11
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
d. Excess cost over net book value of net assets of subsidiaries:
Goodwill can be amortized over a period no greater than 20 years
from the date of acquisition. Amortization is calculated on the
straight-line method.
e. Income Tax ("IT"), Business Assets Tax ("BAT"), Employees Statutory
Profit-Sharing ("ESPS") and Deferred Income Taxes:
IT, BAT and ESPS expense are recognized in the period incurred, and
the effects of deferred IT and ESPS are recognized, in accordance
with Bulletin D-4, Accounting treatment of income tax, business
assets tax and employees profit sharing ("Bulletin D-4"), effective
January 1, 2000. Bulletin D-4 requires deferred IT to be determined
by applying the enacted statutory income tax rate to the total
temporary differences between the book value and tax value of assets
and liabilities, considering when available, and subject to a
recoverability analysis, tax loss carryforwards as well as other
recoverable taxes and tax credits. Bulletin D-4 also requires a
determination of the effect of deferred ESPS for those temporary
differences, which are of non-recurring nature, arising from the
reconciliation of the net income of the period and the taxable
income of the period for ESPS.
Income taxes are computed based on the consolidated return basis and
employee profit sharing is computed on a separate return basis for
each entity in the consolidated group. The effect of a statutory tax
rate change is recognized in the income statement of the period in
which the change occurs and is officially declared (see Note 20).
f. Advances from customers:
Recognized as income when the corresponding airtime is transmitted.
g. Employee benefits:
The costs related to benefits to which employees are entitled as a
result of seniority premiums and pension plans in the case of union
personnel, or by law or by Company grant, are recognized in the
results of operations on the basis of the present value of the
benefits determined under actuarial estimates, as services are
rendered. The amortization of unrecognized prior service cost,
changes in assumptions and adjustments based on experience that have
not been recognized, is based on the employee's estimated active
service life. Other benefits, to which employees may be entitled,
principally severance benefits and vacations, are recognized as an
expense in the year in which they are paid.
On January 1, 2000, the Company established a pension plan for union
personnel. The Company has recorded a reserve for the estimated
accrued seniority premium and pension benefits, the amount of which
was determined also through actuarial estimates (see Note 18).
F-12
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Other indemnities or compensation based on length of service, to
which, under the terms of Mexico's current Federal Labor Law,
employees may be entitled in the event of dismissal or death are
charged to income in the year in which they become payable.
h. Earnings per share:
Net income per share is computed on the basis of the weighted
average number of shares outstanding for the years ended December
31, 2003, 2002 and 2001.
i. Transactions in foreign currencies:
Recorded at the buying rate published by the Banco de Mexico
(Central Bank) in 2003 and 2002, which rate is comparable to the
Federal Reserve Bank of New York on the dates they are entered into
and/or settled. For 2001, the rate used was at the noon buying rate
of the Federal Reserve Bank of New York. Monetary assets and
liabilities in foreign currencies are stated in Mexican pesos at the
year-end closing rates of exchange. The exchange differences are
applied to the year's results from operations.
j. Recognition of broadcasting income:
Recognized when the corresponding airtime is broadcast.
k. Barter transactions:
The Company exchanges advertising time for products and services.
Broadcasting revenue and the related airtime cost in connection with
the barter of advertising time are recognized when the advertising
is aired, and the cost of the goods and services received in such a
barter transaction are recognized when the goods and services are
used. The Company estimates that the value of these operations does
not exceed market value.
l. Use of estimates:
The preparation of financial statements requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported periods. Actual
results could differ from those estimates.
m. Concentration of credit risk
Broadcasting Revenue:
The Company's principal source of revenue is generated from
radio broadcasting of advertising and promotions for its customers.
Although the
F-13
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Company has several large customer accounts, none comprised more
than 10% of the Company's total broadcasting revenue in 2003, 2002
and 2001.
n. Repurchase of shares:
In accordance with Mexico's current Stock Market Law, the Company
has created a capital reserve from retained earnings, called
"Reserve for repurchase of shares", to be used if the Company
repurchases its shares. Shares repurchased by the Company are
treated as treasury shares. Should these shares not be offered anew
to the investing public within one year, the Law requires that the
treasury shares be canceled, thus resulting in a reduction of common
stock.
o. Comprehensive Income:
The Company follows the practice of recognizing "Comprehensive
Income" per the guidelines of Bulletin B-4, issued by the Mexican
Institute of Public Accountants, which sets out disclosure and
presentation rules concerning comprehensive income and its
components.
The total comprehensive income presented in the statement of changes
in shareholders' equity, results from the performance of the Company
for the period ended December 31, 2003 and is included on the
balance sheet as part of shareholders' equity, pursuant to generally
accepted accounting principles in Mexico as net income (loss), plus
deferred income tax and any additional liability for retirement
payments.
p. New pronouncements:
In December 2001, the Mexican Institute of Public Accountants issued
Bulletin C-9, "Liabilities, Accruals, Contingent Assets and
Liabilities and Commitments." This Bulletin was effective January 1,
2003 and supersedes former Bulletin C-9, "Liabilities" and Bulletin
C-12, "Contingencies and Commitments." Bulletin C-9 establishes
additional guidance clarifying the accounting for liabilities,
accruals and contingent assets and liabilities, and establishes new
standards for the use of present value techniques to measure
liabilities, and the accounting for the early settlement of
liabilities and convertible debt. Additionally, Bulletin C-9
establishes new rules for disclosing commitments arising from
current business operations. The adoption of this Bulletin did not
have a material effect on the Company's financial statements.
The Mexican Institute of Public Accountants published Bulletin C-15,
"Impairment in the Value of Long-Lived Assets and Their Disposal,"
which became effective as of January 1, 2004. The application of
Bulletin C-15 is mandatory for fiscal years beginning on or after
January 1, 2004, but early adoption is encouraged. Bulletin C-15
establishes, among other things, new principles for the calculation
and recognition of impairment losses for long-lived assets and
including any subsequent reversals of such impairment losses. It
also provides examples of indicators of possible
F-14
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
impairment in the carrying amount of tangible and intangible
long-lived assets in use, including goodwill. The calculation of
such losses requires the determination of recoverable value, which
is now defined as the greater of the net selling price of a
cash-generating unit and its usable value, which is the present
value of discounted future net cash flows, using an appropriate
discount rate.
The financial statements were not affected from the adoption of this
Bulletin or from the corresponding study performed.
The Company has engaged an independent business valuation firm and
an appraisal firm to assess impairment of its long-lived assets,
principally its goodwill, as of December 31, 2003 for U.S. GAAP
purposes. Based on the results of these independent firms'
valuations, the Company recognized an impairment loss of Ps 152,491
for U.S. GAAP purposes (See note 25.)
NOTE 4 Position in foreign currencies
The consolidated balance sheets as of December 31, 2003 and 2002, include
the following assets and liabilities in US dollars, valued at the closing
year-end foreign exchange rates of Ps 11.2360 / US$ 1.00 and Ps 10.3125/US$1.00,
respectively:
2003 2002
----------- -----------
Cash and marketable securities US$ 601 US$ 1,187
Liabilities (including contingent
liabilities) (21,016) (10,000)
----------- -----------
Net liabilities (including contingent
liabilities) US$ (20,415) US$ (8,813)
=========== ===========
At March 17, 2004, the date of these financial statements, the
foreign-exchange rate was Ps 11.10/US$ 1.00.s of December 31, 2003 and 2002, the
net book value of the Company's property and equipment denominated in foreign
currencies was as follows:
2003 2002
----------- -----------
Transmission equipment US$ 1,776 US$ 1,929
Studio equipment 1,171 1,575
Helicopters 391 500
Other 402 355
----------- -----------
Net assets in US dollars US$ 3,740 US$ 4,359
=========== ===========
F-15
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
NOTE 5 Cash and temporary investments
2003 2002
----------- -----------
Cash Ps 1,411 Ps 227
Short-term investments, mainly at
fixed interest rates 67,265 40,651
----------- -----------
Ps 68,676 Ps 40,878
=========== ===========
Temporary investments as of December 31, 2003 and 2002 consisted primarily
of deposits at fixed interest rates, with maturities of less than 90 days. Grupo
Radio Centro invests its temporary excess cash in such deposits.
NOTE 6 Related parties
In the normal course of business, the Company may sell broadcast time or
programming services to various other companies that are related through common
ownership. These sales are recorded at rates not materially different from those
charged to non-related entities for these types of services.
The Company may also purchase assets or services from these related
parties. Grupo Radio Centro believes that the costs of such assets or services
do not exceed the prices that could be obtained from non-related entities.
The Company also provides certain services to affiliated companies on
terms that are more favorable than those available to non-related companies. The
Company does not believe that any such service arrangements with related parties
are material.
The Company also engages in various leasing or lending activities with
such related parties. The Company believes that the terms of such leasing or
lending arrangements do not significantly differ from the terms which could be
obtained from or charged to non-related companies.
During the years ended December 31, 2003, 2002 and 2001, the Company
conducted the following transactions with related parties:
2003 2002 2001
----------- ---------- ---------
Income:
-------
Sale of airtime and services
rendered Ps 176 Ps 193 Ps 795
Building rent 276 275 299
Sale of transportation equipment 427 185 --
Sale of computer equipment 14 3 160
Other 169 196 304
Recovery of expenses -- 317 --
F-16
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------- ---------- ---------
Expenses:
---------
Purchase of airtime and services
received Ps (1,914) Ps (2,194) Ps (1,442)
Fees paid (1) (10,016) (7,881) (7,857)
(1) On January 5, 2000 the Company entered into a contract with an entity
owned by Francisco Aguirre Gomez, the president and a shareholder of the
Company. This entity provides promotional services to the Company. The Company
incurred expenses for such services under this contract totaling Ps 10,016
(historical amount), Ps 7,881 (Ps 7,580 historical amount) and Ps 7,858 (Ps
7,150 historical amount) in 2003, 2002 and 2001, respectively.
During the years ended 2003, 2002 and 2001, the shareholders made personal
use of goods and services that the Company acquired from barter operations for
which they paid Ps 3,664, Ps 2,897 and Ps 2,476, respectively.
NOTE 7 Other receivables
At December 31, 2003 and 2002, the balances in other receivables consisted
of the following:
2003 2002
-------------- --------------
Officers and employees Ps 2,855 Ps 3,461
Other (1) 1,091 2,722
-------------- --------------
Ps 3,946 Ps 6,183
============== ==============
(1) At December 31, 2003 and 2002, the amounts include Ps 157 and Ps
1,792, respectively, for receivables from shareholders.
NOTE 8 Service agreements
In order to manage the operations of XHFO-FM, S.A. de C.V. (the
"Station"), Desarrollos Empresariales, S.A. de C.V. ("Desa"), a wholly-owned
subsidiary of the Company entered on October 2, 1995 into a Service Agreement
(the "Agreement") with the Station and with Comercializadora Siete de Mexico,
S.A. de C.V. ("Comercializadora"). Under the terms of the Agreement, Desa was
granted the right to sell the airtime of the Station in exchange for providing
operating and administrative services to Comercializadora and the Station.
On December 14, 1998, the Company entered into a Modifying Agreement (the
"First Modifying Agreement") renewing and modifying the Agreement with
Comercializadora and the Station. On December 30, 1998, a 24 month rights-ceding
contract was signed in which the Company replaced Desa, in order to continue the
operation of the Station by the Company beginning January 3, 1999. On December
15, 2000, the parties renewed the First Modifying Agreement for a term of one
year.
F-17
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
On June 29, 2001, the parties entered into a second Modifying Agreement
renewing and modifying the First Modifying Agreement, effective January 3, 2002
for a term of thirty-six-months. Under this agreement, the Company is entitled
to a monthly fee equal to Ps 166 plus US$ 207 from the total revenues generated
by the Station for providing operating and administrative services. On July 17,
2001, the Company made a deposit of US$ 2,250 to guarantee its compliance with
this agreement, which deposit is to be refunded in monthly installments over the
thirty-six month term.
NOTE 9 Acquisition of Radiodifusion Red
Through a series of transactions effected in May 1995 and January 1996,
the Company acquired from Corporacion Medcom, S.A. de C.V. all of the
outstanding capital stock of Radiodifusion Red. The purchase price consisted of
US$ 23 million (Ps 146,308 historical amount) paid in May 1995 and a fixed
payment of Ps 241,610 (historical amount) with a contingent payment of Ps 80,500
(historical amount) paid in January 1996. The contingent payment was subject to
the attainment by the radio stations owned by Radiodifusion Red of certain
audience-share targets for each of the following five years.
For the years ended December 31, 1998, 1997 and 1996, the audience-share
targets were reached. Therefore, the Company was not entitled to any refund of
the contingent payment for those years. In December 1998, in connection with the
Company's entering into a programming-services agreement with Infored, S.A. de
C.V., ("Infored") and Jose Gutierrez Vivo ("Mr. Gutierrez") (see Note 10), the
Company surrendered its rights to any refund of the remaining contingent
payments for 2000 and 1999. The aggregate amount of Ps 80,500 corresponding to
the contingent payments was capitalized as part of the purchase price and
included in goodwill.
On September 30, 2001, the Company sold its shares of Radiodifusion Red to
Desarrollos Empresariales, a subsidiary of the Company. This sale resulted in a
loss for tax purposes of Ps 175,626 (Ps 159,805 historical amount) (see Note
20).
NOTE 10 Infored production contract
On December 23, 1998, in order to continue collaborating in the production
of radio shows and to establish two new joint ventures, the Company signed a new
contract (the "Production Contract" or the "Infored Agreement") with Infored,
the producer at that time of the Monitor news and talk-show, and Mr.Gutierrez,
Monitor's host at that time, to provide the Company with exclusive production
services for news and special-event radio shows until June 30, 2015. The Company
committed to air these programs on XERED-AM and XHRED-FM and affiliated radio
stations.
The Production Contract, in addition to requiring the Company to continue
paying Infored for the cost of producing its shows, required the Company to pay
Infored an aggregate of approximately US$ 15,400. Of this amount, US$ 4,400 and
Ps 4,593 (Ps 4,003 historical amount) was paid upon signing the Production
Contract, US$ 4,000 was paid on January 31, 1999, and US$ 7,000 was paid in
eleven equal monthly payments starting February 28, 1999. The aggregate amount
of these advance payments is being amortized monthly in equal amounts through
June 2015. In addition, the Company paid Infored monthly production fees based
on the revenues
F-18
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
derived from Monitor and the amount of budgeted expenses, which generally
reflected increases due to Mexico's inflation rate, to cover Infored's radio
programming operations.
Prepayments made under the Production Contract as of December 31, 2003 and
2002, were as follows:
2003 2002
-------------- --------------
Short-term Ps -- Ps 9,454
Long-term -- 108,729
-------------- --------------
Ps -- Ps 118,183
============== ==============
The Company also transferred to Mr. Gutierrez two AM radio stations,
XEFAJ-AM, S.A. de C.V. and Emisora 1320, S.A. de C.V., at book value. The
Company continues rendering maintenance services, leasing transmission
engineering, and leasing broadcasting building for these stations under separate
agreements.
On May 7, 2002, Mr. Gutierrez and Infored notified the Company that they
were initiating an arbitration proceeding pursuant to which they sought the
rescission of the Production Contract entered into on December 23, 1998 (see
Note 9), and damages.
On March 1, 2004 the International Chamber of Commerce ("ICC") notified
the Company that a final decision had been made in the arbitration proceeding
initiated in 2002 by Infored and Mr. Gutierrez against Grupo Radio Centro. Based
on a majority vote of two of the three arbitrators, the ICC panel held that the
Company had breached the agreement with Infored and Mr. Gutierrez. As a result,
the agreement has been rescinded and Infored and Mr. Gutierrez together have
been awarded Ps 236,133 (US$21,016) in damages which represents the amount the
Company would be required to pay after taking into account the amounts prepaid
by the Company under the contract. Although the Company intends to contest this
ruling, a contingent liability has been recorded at December 31, 2003 and the
prepayment, which at December 31, 2003 was Ps 104,572, was written off. The
total amount of both awards stood at Ps 340,705, which is presented in the
consolidated statement of loss for the year ended December 31, 2003 as an
extraordinary item.
The Company will appeal the validity of the decision before the Mexican
courts. Pending this challenge, the Company will seek a stay of the enforcement
of the damage award.
In addition, news programming produced by Infored and hosted by Mr.
Gutierrez has been discontinued. The Company now produces its news programming
on its own. The Company believes that any resulting reduction in advertising
revenue will be offset by a reduction in programming costs.
NOTE 11 Property and equipment
As of December 31, 2003 and 2002, the balances in property and equipment
consisted of the following:
F-19
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Depreciation
per annum 2003 2002
------------- --------------- ------------------
Buildings 2.22% Ps 292,855 Ps 291,487
Transmission equipment 11.87% 113,828 109,698
Studio equipment 15.94% 114,323 113,925
Office furniture and equipment 16.48% 41,455 41,317
Computer equipment 32.22% 58,563 56,394
Transportation equipment 28.30% 32,795 33,310
Helicopters 18.18% 30,791 30,791
Leasehold improvements 5.00% 11,099 11,085
--------------- ------------------
695,709 688,007
Less -- Accumulated depreciation (380,868) (352,113)
--------------- -----------------
314,841 335,894
Land 127,249 127,249
Buildings held for sale, net 27,592 29,361
Equipment in transit 210 3,436
--------------- -----------------
Ps 469,892 Ps 495,940
=============== =================
During 2003 and 2002, Inmobiliaria Radio Centro, S.A. de C.V. (see Note
1e) rented to Maxcom part of the building in which the main executive offices
and studios of the Company are located. Rental income for 2003, 2002 and 2001
amounted to Ps 220, Ps 218 and Ps 214, respectively.
During the years ended December 31, 2003, 2002 and 2001, the Company
reviewed the realizable values of those buildings held for sale, and determined
that a reduction was required in their book values of Ps 1,407, Ps 1,754 and Ps
1,428, respectively. These amounts have been recognized in other expenses in the
accompanying statements of income (see Note 22).
On September 10, 2002, the Company sold some of its obsolete fixed assets
for US$2,163, resulting in a gain on sale of Ps 9,039.
NOTE 12 Deferred charges
As of December 31, 2003 and 2002, deferred charges consisted of the
following:
F-20
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
2003 2002
------------- -------------
Systems development projects Ps 5,597 Ps 5,597
Installation expenses 8,876 8,872
Licenses and patents 1,024 1,699
------------- -------------
15,497 16,168
Less -- Accumulated amortization (10,127) (9,496)
------------- -------------
5,370 6,672
Labor liabilities (see Note 18):
Intangible assets 7,021 11,752
------------- -------------
Ps 12,391 Ps 18,424
============= =============
NOTE 13 Excess cost over net book value of net assets of subsidiaries
The Company purchased 33% and 67% of the outstanding shares of
Radiodifusion Red on May 12, 1995 and January 9, 1996, respectively. On
September 30, 2001, Grupo Radio Centro sold these shares to Desarrollos
Empresariales, one of its subsidiaries. As a result of these purchases and
sales, the Company recorded excess cost over book value of net assets (or
goodwill) amounting to Ps 424,750 (Ps 146,308 historical amount) and Ps 743,863
(Ps 313,101), respectively (see Note 9).
On October 18, 1996, the Company acquired from related parties 100% of the
outstanding shares of Compania de Servicios Publicitarios, S.A. de C.V.
(formerly Fuerza Vital). The purchase price was in excess of the book value of
net assets and resulted in goodwill recorded by the Company of Ps 24,431 (Ps
12,099 historical amount), which has been amortized.
On February 16, 2001, the Company acquired To2 Mexico, S.A. de C.V. and
recorded goodwill in the amount of Ps 17,184 (see Notes 1 and 24), which was
amortized over two years from the date of acquisition.
On December 31, 2001, the Company acquired Radio Sistema Mexicano, S.A. de
C.V. and recorded goodwill in the amount of Ps 52,654 (see Notes 1 and 23),
which is being amortized over 20 years from the date of acquisition.
On March 14, 2001, the Company acquired Palco Deportivo.Com, S.A. de C.V.,
Palco Shop, S.A. de C.V., Palco Deportivo Multimedia, S.A. de C.V., and Palco
Deportivo Mexico, S.A. de C.V. On October 1, 2001, these companies were merged
with Enlaces Troncales, S.A. de C.V. On March 14, 2001, the Company acquired
Servicios Corporativos Palco, S.A. de C.V., which was merged with Promo Red,
S.A. de C.V. on October 1, 2001 (see Notes 1 and 24). As a result of these
acquisitions the Company recorded goodwill in an aggregate amount of Ps 43,951
(Ps 38,715 historical amount), which is being amortized over 20 years from the
date of acquisition.
F-21
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
At December 31, 2003 and 2002, the Company had total goodwill of Ps
762,088 and Ps 841,603, respectively, which, except as otherwise noted above, is
being amortized over 20 years from the date of acquisition of the relevant
subsidiary.
NOTE 14 Notes payable
At December 31, 2003 and 2002, notes payable consisted of the following:
2003 2002
------------ --------------
Short-term:
Scotiabank Inverlat, S.A. (a) Ps 56,618 Ps 82,928
BBVA Bancomer, S.A. (b) -- 69,696
Banco Nacional de Mexico, S.A. (c) -- 37,529
------------ --------------
56,618 190,153
Long-term:
Scotiabank Inverlat, S.A. (a) 169,855 164,789
------------ --------------
Ps 226,473 Ps 354,942
============ ==============
----------
Notes:
(a) Represents payment obligations under a loan agreement and related
promissory note initially in the amount of US$ 35,000 dated October 31,
2000.
The loan agreement contains covenants requiring the Company to maintain
certain financial ratios and to comply with other financial conditions
that, among other things, limit the Company's ability to incur additional
indebtedness, pay dividends, pledge its assets and enter into transactions
with affiliates except those required in the normal course of its
operations. Scotiabank Inverlat agreed to amend the financial covenant
requiring that Company maintain a certain ratio of total liabilities to
EBITDA (operating income before deducting depreciation and amortization)
to increase the ratio permitted through March 31, 2003. As a condition to
the granting of the waiver and the amendment, the Company agreed to
convert US$ 13,600 of the amount outstanding under the loan agreement from
U.S. dollars into Mexican pesos, to pay interest equal to the Mexican
Interbank Equilibrium Interest Rate (Tasa de Interes Interbancaria de
Equilibrio or TIIE) plus 2.00% on the converted portion of the loan and to
not pay any dividends for so long as the Company is not in compliance with
any of the financial covenants in the loan agreement as amended.
On December 10, 2002 the loan agreement was amended to convert the
denomination of the remaining US$23,300 of the outstanding balance from
U.S. dollars to Mexican pesos at a variable interest rate of TIIE + 2.00%
to 3.25%, depending on certain financial ratios. Principal payments are
due semi-annually beginning April 30, 2003 and interest payments are due
quarterly.
F-22
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
On July 17, 2003, the loan agreement was further amended to extend the
term of payment from October 31, 2005 to October 31, 2007.
On December 3, 2003, a new amendment to the loan agreement was signed,
establishing an increase of Ps 50,000 (historical amount) in the principal
amount of the loan, an interest rate which is fixed between 10.30% and
11.55% depending on the financial indicator of total liabilities to
EBITDA, the payment of principal every six months from April 30, 2004
maturing on October 31, 2007 and the payment of interest quarterly.
As of the date of this report, as a result of recognizing a provision for
the contingent liability due to the International Chamber of Commerce's
award of damages in the arbitration proceeding brought by Infored and Mr.
Gutierrez, the Company was not in compliance with the financial covenant
to maintain a certain ratio of total liabilities to EBITDA and total
liabilities to total shareholders' equity. The Company has informed the
bank of this situation and requested a waiver of its non-compliance of
certain of these financial ratios (see Note 10). On June 15, 2004, the
Company obtained a waiver from Scotiabank Inverlat solely and exclusively
for non-compliance with the financial covenant to maintain a certain ratio
of total liabilities to total shareholders' equity reflected in the
audited financial statements for 2003 and the internal financial
statements as of March 2004 as well as the maximum total liabilities to
EBITDA for the internal financial statements as of March 2004. On June 29,
2004, the Company reached an agreement with Scotiabank Inverlat in which
the bank temporarily amends solely and exclusively the financial ratios
with which the Company has been in noncompliance. This agreement will be
in force until December 31, 2004.
(b) Represents payment obligations under two promissory notes. The first
promissory note, dated July 30, 2001, is in the amount of US$ 5,000 at an
annual interest rate equal to LIBOR + 0.97745% (4.95% as at December 31,
2001) and principal and interest payable January 25, 2002. On January 25,
2002, the maturity of the first promissory note was extended to July 24,
2002 and the annual interest rate was decreased to annual interest rate to
LIBOR + 1.06364% (3.14% as at January 25, 2002). On July 24, 2002, the
first promissory note was extended to January 17, 2003 and the annual
interest rate was modified to LIBOR + 1.35% (3.403% as of December 31,
2002). The second promissory note, dated April 5, 2002, was in the amount
of US$ 700 with an annual interest rate of LIBOR + 0.63135% and principal
and interest payable on August 2, 2002. On August 2, 2002, the promissory
note was increased to US$ 1,500 at an annual interest rate of LIBOR +
1.1985% (3.50421% as of December 31, 2002). Principal and interest on the
second promissory note were payable on January 17, 2003. On January 17,
2003, both promissory notes were combined and their maturities extended.
This combined promissory note, in the amount of US$6,500 with an annual
interest rate of 2.5%, was paid on May 19, 2003. On this date, the Company
contracted a new short-term loan in the amount of Ps 50.0 million, bearing
interest at an annual rate of 6.90%, scheduled to mature on July 17, 2003.
On July 17, 2003, the promissory note was renewed at an interest rate of
6.44% maturing on September 12, 2003. On that September date, the
promissory note was renewed at an interest rate of 5.95% maturing on
October 31. On October 31, the promissory note was renewed at an interest
rate of 6.15% maturing on November 28, 2003. On that date the promissory
note was renewed at an interest rate of 7.0% maturing on January 26, 2004.
The promissory note was paid in full on December 3, 2003.
F-23
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
(c) Represents a payment obligation under a promissory note dated March 19,
2002, in the amount of US$ 3,500 with an annual interest rate of 3.58% and
principal and interest initially payable on September 13, 2002. On
September 13, 2002, the maturity date of the promissory note was extended
and its annual interest rate decreased to 3.21% with principal and
interest payable on November 12, 2002. On November 12, 2002, the maturity
date of the promissory note was extended to January 10, 2003 and the
annual interest rate lowered to 3.20%. On January 10, 2003, the maturity
date of the promissory note was extended and its annual interest rate was
lowered to 2.78%. The principal and interest were paid at maturity on
March 11, 2003.
NOTE 15 Advances from customers
Advances from customers amounted to Ps 59,657 and Ps 42,446 as of December
31, 2003 and 2002, respectively, representing deposits from customers for future
advertising. These advances are recognized as income when the corresponding air
time is broadcast. For tax purposes, income is recognized when the advances are
received.
NOTE 16 Suppliers and other accounts payable
At December 31, 2003 and 2002, suppliers and other accounts payable
consisted of the following:
2003 2002
------------- ---------------
Media and service suppliers Ps 42,926 Ps 55,163
Salaries and fees payable 6,506 5,356
Interest 1,815 2,912
Employee profit sharing 540 1,027
Other 1,704 2,410
------------- ---------------
Ps 53,491 Ps 66,868
============= ===============
F-24
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
NOTE 17 Income taxes and other taxes payable
At December 31, 2003 and 2002, income tax and other taxes payable were
comprised of the following:
2003 2002
------------- ---------------
Taxes on wages and salaries Ps 5,043 Ps 5,890
Value-added tax 19,433 7,959
Income tax 1,575 --
------------- ---------------
Ps 26,051 Ps 13,848
============= ===============
NOTE 18 Seniority premiums
The Company maintains a reserve to cover seniority premiums and pension
plan liabilities. This reserve was determined through actuarial studies using
the projected unitary cost method, in accordance with Bulletin D-3, issued by
the Mexican Institute of Public Accountants.
F-25
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
The actuarial calculations as of December 31, 2003 and 2002, are
summarized below:
2003 2002
-------------------------------------------- -------------
Seniority
Seniority Pension Premium and
premium Plan Total pension plan
------------ ---------- ------------- -------------
Changes in projected-benefit liabilities
Projected-benefit liabilities at the
beginning of the year Ps 26,877 Ps 1,087 Ps 27,964 Ps 22,344
Service cost 1,690 68 1,758 1,755
Interest cost 895 42 937 936
Actuarial gain (2,187) 198 (1,989) 3,125
Benefits paid (409) (20) (429) (195)
------------ ---------- ------------- --------------
Projected-benefit liabilities at the end
of the year Ps 26,866 Ps 1,375 Ps 28,241 Ps 27,965
============ ========== ============= =============
Assets of the plan Ps 0 Ps 0 Ps 0 Ps 0
============ ========== ============= =============
Funded status Ps (26,866) Ps (1,375) Ps (28,241) Ps (27,965)
Unrecognized net actuarial loss (177) 407 230 2,714
Unrecognized prior service costs 8,740 58 8,798 10,863
------------ ---------- ------------- -------------
Net accrued benefit obligation Ps (18,303) Ps (910) Ps (19,213) Ps (14,388)
============ ========== ============= =============
Accrued benefit obligation Ps 25,189 Ps 1,256 Ps 26,445 Ps 26,140
============ ========== ============= =============
Additional liability (seniority premiums) Ps 6,886 Ps 346 Ps 7,232 Ps 11,752
============ ========== ============= =============
Intangible assets (see Note 12) Ps 6,834 Ps 187 Ps 7,021 Ps 11,752
============ ========== ============= =============
Total labor liabilities Ps 25,189 Ps 1,256 Ps 26,445 Ps 26,168
============ ========== ============= =============
Weighted-average assumptions at December 31,
2003 2002
------------------------ --------------
Seniority Pension Seniority
Premium Plan Premium
--------- ------- --------------
Discount rate (real rates) 4.00% 4.00% 4.00%
Increase in compensation rates (real rates) 1.00% 1.00% 1.00%
Amortization period of the transition liability (years) 3.09 17.03 5.08 and 14.99
F-26
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Components of net cost of benefits for the year
2003 2002
--------------------------------------------- ------------
Seniority Pension Seniority
premium Plan Total Premium
--------------- ----------- ------------ ------------
Service cost Ps 1,690 Ps 68 Ps 1,758 Ps 1,758
Interest cost 895 42 937 937
Amortization of prior service cost 2,585 17 2,602 2,603
-------------- ----------- ------------ ------------
Net cost for the year Ps 5,170 Ps 127 Ps 5,297 Ps 5,298
============== =========== ============ ============
NOTE 19 Shareholders' equity
The shareholders of the Company approved the following changes in the
Company's capital structure during 2003 and 2002:
During 2003:
a) Payment of dividends totaling Ps 56,433 (Ps 55,000 historical
amount).
b) Repurchase from the public market of 57,000 shares, representing
0.03% of outstanding shares and totaling Ps 370 (Ps 360 historical
amount).
During 2002:
a) Repurchase from the public market of 1,230,400 shares, representing
0.7% of outstanding shares and totaling Ps 4,951 (Ps 4,576
historical amount).
After the aforementioned changes, as of December 31, 2003, the capital
stock of the Company was comprised of 247,414,768 authorized common shares,
representing the minimum fixed capital with no withdrawal rights, of which
162,667,561 shares were outstanding and fully paid for and 84,747,207 shares
were treasury shares. Shares of stock may be owned only by Mexican investors.
Capital stock is represented by shares with no par value, and valued as follows:
Amount Shares
-----------------
Total authorized capital stock 247,414,768
Treasury shares (84,747,207)
-----------------
Total outstanding capital stock 162,667,561
=================
Fixed capital stock, subscribed to and paid for Ps 840,823
Increase from restatement to express in constant
Mexican pesos with purchasing power as of
December 31, 2003 231,018
-----------------
Ps 1,071,841
=================
F-27
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
The changes in the number of outstanding shares as of ended December 31, 2003
and 2003, were as follows:
2003 2002
----------------- ----------------
Shares outstanding at the beginning of the year 162,724,561 163,954,961
================= ================
Shares outstanding at the end of the year 162,667,561 162,724,561
================= ================
Capital stock at the end of the year, expressed in
constant Mexican pesos with purchasing power as
of December 31, 2003 Ps 1,071,841 Ps 1,072,142
================= ================
Net income for the year is subject to a legal requirement that 5% thereof
be transferred to a legal reserve each year until the reserve equals 20% of the
capital stock. The legal reserve included as part of retained earnings as of
December 31, 2003 and 2002, was Ps 23,172 and Ps 23,061, respectively.
If earnings for which no corporate tax has been paid are distributed, the
Company must pay corporate tax on such earnings upon the distribution of the
dividends (see discussion of CUFIN and CUFINRE in Note 20). In accordance with
the new Mexican Income Tax Law, the statutory income tax rate was 35% for 2002
and 34% for 2003. However this rate will change to 33% for 2004 and 32% for 2005
and subsequent years.
NOTE 20 Income taxes
Taxable income differs from accounting income due both to permanent
differences, principally among which are the treatment of non-deductible
expenses (primarily for goodwill) and the reflection in the income statement of
the effects of inflation, and to timing differences affecting accounting and
taxable income in different periods.
A reconciliation of the statutory rate to the effective income tax rate
for the years ending December 31, 2003 and 2002 is as follows:
2003 2002
-------- ---------
Statutory tax rate (34.0%) 35.0%
Recognition of the effects of inflation 1% 50.2%
Nondeductible expenses (primarily goodwill) 37.5% 392.4%
Utilization of tax loss carryforwards (17.0%) (615.6%)
-------- --------
Effective income tax (benefit) rate (12.6%) (138.0%)
======== =========
F-28
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Provisions for income tax and employee profit sharing for the years ending
December 31, 2003 and 2002 were as follows:
2003 2002
------------ ------------
Current income tax payable Ps 64,920 Ps 32,215
Tax on assets 3,500 2,245
Amortization of tax loss carryforwards (48,120) (29,538)
Deferred income tax benefit (55,773) (13,464)
----------- -----------
Total income tax (benefit) (35,473) (8,542)
----------- -----------
Current employee profit sharing 440 762
Deferred employee profit sharing (854) (674)
----------- -----------
Total employee profit sharing (414) 88
----------- -----------
Total Ps (35,887) Ps (8,454)
=========== ===========
Beginning in 1999, determination of the consolidated income tax for the
Mexican companies took into account a maximum of 60% of the taxable income or
loss of each of the subsidiaries. In addition, commencing in 1999, the taxable
income of those subsidiaries that have tax loss carryforwards generated before
1999 have been included in proportion to the Company's equity ownership of such
subsidiaries at the end of the period. The controlling entity which in any
fiscal year prior to January 1, 1999 had individual tax losses generated during
consolidation for tax purposes and pending deduction and deducted them in any
fiscal year to determine its consolidated taxable profit or tax loss shall
determine their consolidated taxable income in fiscal years concluded as of 2002
by adding 100% of its taxable profits until said tax losses at the company-held
level are exhausted.
The current income tax liability corresponds to the tax on 40% of the
taxable income of the subsidiaries that is not subject to consolidation for
income tax purposes and excluded from any operating loss carryforward benefits
available at the consolidated level.
Beginning in 2002, a new income tax law became effective in Mexico,
establishing that the income tax rate will be decreased from 35% by 1% each
year, beginning in 2003 until it reaches 32% in 2005.
Grupo Radio Centro elected early to adopt the provisions of Bulletin D-4,
issued by the Mexican Institute of Public Accountants, which requires
recognizing the income tax effects of the differences in bases of assets and
liabilities between financial accounting and accounting for tax reporting
purposes.
In prior years through December 31, 1998, Grupo Radio Centro had
recognized the effects of deferred taxes for certain timing differences expected
to reverse over a definite period of time. The Company's early adoption of
Bulletin D-4 gave rise to additional deferred taxes resulting in a net deferred
tax expense of Ps 3,190 recognized in the statement of income for the year ended
F-29
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
December 31, 1999. The cumulative effect of adopting Bulletin D-4 for years
prior to December 31, 1998 resulted in additional deferred tax liabilities of Ps
89,614 to be recognized. The cumulative effects of deferred income tax from
companies acquired during 2002 and 2001 was (Ps 59) and (Ps 924), respectively.
This cumulative effect as of December 31, 2003 stands at (Ps 90,597) and is
presented as a separate component in shareholders' equity.
The balance of deferred taxes as of December 31, 2003 and 2002, consists
of the following components:
2003 2002
----------- -----------
Prepaid expenses for Infored services Ps -- Ps (41,881)
Property and equipment (76,898) (78,767)
Advances from customers 19,687 14,431
Labor liabilities 12,716 11,416
Tax loss carryforwards 16,742 8,568
Other 387 2,240
----------- -----------
Net deferred tax liability Ps (27,366) Ps (83,993)
=========== ===========
Income taxes and employee profit sharing are calculated using the
liability method which requires recognizing deferred tax assets and liabilities
based on differences in bases of assets and liabilities between financial
accounting and accounting for tax reporting purposes. The current tax rate is
used to determine the deferred tax assets and liabilities.
In accordance with Mexico's Income Tax Law, tax loss carryforwards are
subject to restatement for inflation and may be used to offset taxable income
over the ten years following their generation. As of December 31, 2003, the
Company's restated cumulative tax loss carryforwards were as follows:
Fiscal year
incurred Amount Expiration year
----------- ------------------- ---------------
1994 Ps 2,716 2004
1995 5,801 2005
1996 1,724 2006
1997 5 2007
1998 2,040 2008
1999 269 2009
2000 567 2010
2001 455 2011
2002 7,090 2012
2003 933 2013
----------------
Ps 21,6000
================
The Company is authorized to consolidate for tax purposes its subsidiary
companies; as of December 31, 2003 the Company has the following consolidated
tax loss carryforwards:
F-30
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Fiscal year
incurred Amount Expiration year
----------- ------------------ ---------------
2001 Ps 53,633 2011
2002 202 2012
------------------
Ps 53,835
==================
In accordance with Mexico's Income Tax Law, if, in any given year, the
Company pays an amount of tax on assets in excess of the amount of income tax
payable, this excess may be used to offset income taxes payable in excess of tax
on assets payable in any of the ten years following such year. As of December
31, 2003, the excess of tax on assets paid over income taxes payable was as
follows:
Fiscal year
incurred Amount Expiration year
----------- ------------------ ---------------
1994 Ps 5,864 2004
1995 2,943 2005
1996 1,612 2006
1997 505 2007
------------------
Ps 10,924
==================
During 2003, the Company amortized Ps 110,035 of tax loss carryforwards in
consolidation, resulting from the period ended December 31, 2001.
During 2002, the Company offset its taxable income by utilizing tax loss
carryforwards in the amount of Ps 76,604 (historical amounts) from GRC Medios,
S.A. de C.V. and Ps 99 from Radio Sistema Mexicano, S.A. de C.V.
In 2001, the Company offset its taxable income by utilizing tax loss
carryforwards in the amounts of Ps 5,488 from Palco Deportivo Multimedia, S.A.
de C.V., Ps 10,162 from Palco Deportivo Mexico, S.A. de C.V., Ps 1,270 from
Palco Deportivo.Com, S.A. de C.V. and Ps 58,765 from GRC Medios, S.A. de C.V. In
addition, in 2001, the Company had a tax deduction of Ps 159,805 as a result of
the tax loss incurred in the sale of its shares of Radiodifusion Red, S.A. de
C.V. (see Note 9).
The net fiscal profit account for tax purposes (the "CUFIN") represents
the amount of accumulated earnings that may be distributed without additional
corporate tax charge to the Company. As of December 31, 2003, this account
amounted to Ps 224,278.
The reinvested net fiscal profit account for tax purposes (the "CUFINRE")
represents the amount of accumulated earnings which, when distributed, will be
subject to the payment of additional income tax by the Company (at rates of
approximately 5% multiplied by a factor of 1.5385 on amounts earned in 2000 and
3% multiplied by a factor of 1.5385 on amounts earned in 1999), until such time
as the total additional income tax equals 35% of the taxable earnings
corresponding to the year of generation. As of December 31, 2003 and 2002, this
account amounted to Ps 0.
F-31
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
As of December 31, 2003, capital stock, restated for tax purposes, which
constituted the capital contributions account, amounted to Ps 1,093,498.
NOTE 21 Provisions for senior management bonuses
The Company has a policy of awarding bonuses to its senior executives
based on, among other factors, the results of the Company's annual operations
and individual performance. For the year ended December 31, 2003, provisions for
senior management bonuses were Ps 6,306 and are recorded in general corporate
and administrative expenses. For the year ended December 31, 2002, there were no
provisions for senior management bonuses made.
F-32
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
NOTE 22 Other expenses, net
The components of other expenses, net, during the years ended December 31,
2003, 2002 and 2001 were as follows:
2003 2002 2001
------------------ ---------------- -----------------
Income:
Other Ps 1,386 Ps 4,677 Ps 4,136
Sale of surplus broadcasting supplies to
affiliates of Organizacion de Impulsora de Radio 178 1,916 1,581
Leasing and maintenance of properties 276 275 299
Sale of equipment -- 7,046 --
------------------ ----------------- ----------------
Total other income 1,840 13,914 6,016
------------------ ----------------- ----------------
Expenses:
Fees to Executive Committee (17,016) (15,871) (16,142)
Maintenance and leasing costs (10,989) (10,761) (10,747)
Arbitration costs (c) (10,322) (6,216) --
Compliance with securities regulations and
corporate restructuring expenses (9,384) (6,830) (8,077)
Other (4,366) (4,057) (8,434)
Losses incurred by affiliated start-up Internet
companies (a) (4,299) (17,102) (25,218)
Indemnities to employees (b) (3,919) -- (4,701)
Write-off of tax credits (2,904) -- --
Loss on sale of equipment (1,718) -- (301)
Internet subscription (1,498) (1,729) (3,841)
Reduction in book value of buildings held for
sale (see Note 12) (1,407) (1,754) (1,428)
Donation -- (2,081) --
Cancellation of projects -- -- (3,120)
------------------ ---------------- ----------------
Total other expenses (67,822) (66,401) (82,009)
------------------ ---------------- ----------------
Net other expenses Ps (65,982) Ps (52,487) Ps (75,993)
================== ================ ================
----------
Notes:
(a) During 2001, the Company acquired To2 Mexico, S.A. de C.V., a company
owning the Internet website www.to2.com, and Palco Deportivo.Com, S.A. de
C.V., a company owning the Internet website www.palcodeportivo.com (see
Note 24). In 2003, 2002 and 2001, these companies and certain related
companies owned by the Company incurred losses of Ps 4,299, Ps 17,102 and
Ps 25,218, respectively.
F-33
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
(b) In recent years the Company restructured and downsized its administrative
and operating departments, with a consequent reduction in personnel. This
resulted in severance payments, which were charged to other expenses.
(c) In 2003 and 2002, the Company paid legal fees for arbitration commenced by
Infored and Mr. Gutierrez in May 2002.
NOTE 23 XEN-AM agreement
On March 31, 2001, the Company entered into two agreements in
contemplation of its acquisition of Radio Sistema Mexicano, S.A. ("RSM"), the
owner of the concession for the radio station XEN-AM.
Pursuant to an operating agreement entered into with La Telera Post, S.A.
de C.V., the Company agreed to manage and operate XEN-AM. To guarantee the
performance of its obligations under the operating agreement, the Company paid
to the Sellers (as defined below), on behalf of La Telera Post, a deposit of US$
3,500, from which a monthly fee of US$ 80 was deducted and paid to La Telera
Post.
Pursuant to a stock purchase agreement entered into with Teresa Guadalupe
Vale Castilla, Javier Vale Castilla and Juan Antonio Hernandez Venegas
(together, the "Sellers"), the Company agreed to purchase, through its
subsidiary Desarrollos Empresariales, S.A. de C.V., all of the capital stock of
RSM on March 1, 2002, subject to the approvals of the Mexican Ministry of
Communication and Transport and the Federal Competition Commission, for a
purchase price of approximately US$ 3,400. To guarantee its performance under
the stock purchase agreement, the Company agreed to make monthly deposits of US$
167 up to the closing date, which amounts would be applied to the purchase
price.
The agreements provided that, on the closing date, the Company would use
approximately US$ 1,630 of the deposit under the operating agreement to pay La
Telera Post primarily in connection with the termination of a marketing services
contract between La Telera Post and RSM (US$ 1,100) and facilitation of the
transaction (US$ 530), and would pay the remaining balance of the deposit,
together with US$ 500 in cash, to the Sellers in satisfaction of the balance of
the purchase price after application of the deposits under the stock purchase
agreement.
F-34
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
On July 12, 2001, the Federal Competition Commission approved the purchase
of RSM by the Company, and on December 31, 2001, the parties consummated the
transaction. Upon consummation of the transaction, the Company credited US$1,630
of the deposit under the operating agreement to La Telera Post as described
above. As of December 31, 2001, Ps 11,873 was liquidated during 2002 by the
Company to the Sellers, including the remaining deposits under the purchase
agreement to be credited against the purchase price and US$ 500 in cash to be
paid in satisfaction of the balance of the purchase price. This amount is
accounted for under Suppliers and other accounts payable (See Note 17). The
purchase of RSM by the Company remains subject to the approval of the Mexican
Ministry of Communication and Transport.
NOTE 24 Investments in Palco Deportivo and To2 Mexico
Palco Deportivo
On March 14, 2001 the Company acquired Palco Deportivo.Com, S.A. de C.V.
(which was merged with Enlaces Troncales, S.A. de C.V. on October 1, 2001, a
company providing sports-related content for radio, television, various print
media and its own Internet portal (see Note 1)). In connection with this
acquisition, the Company paid a purchase price of US$ 4,000 and assumed
liabilities of US$ 700.
Also on March 14, 2001, in connection with its purchase of Palco
Deportivo.Com, the Company acquired Servicios Corporativos Palco, S.A. de C.V.
(which was merged with Promo Red, S.A. de C.V. on October 2, 2001 (see Note 1))
and assumed an exclusive employment contract with Alfredo Dominguez Muro
providing that he will continue to be host of Palco Deportivo radio programming
through 2015.
To2 Mexico
On February 16, 2001, the Company purchased from Polom, S.A. de C.V. 100%
of the shares of To2 Mexico, S.A. de C.V., an Internet portal company and owner
of the website www.to2.com. In connection with this acquisition, the Company
paid a purchase price of US$ 900 and assumed liabilities owing to various
Mexican and foreign companies in an aggregate amount of up to US$ 1,250.
As of March 26, 2001, GRC Medios, S.A. de C.V. had Ps 155,985 (Ps 139,681
historical amount) of tax loss carryforwards that could be used to offset future
taxable income of the Company on its consolidated tax return.
F-35
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
NOTE 25 Significant differences between Mexican and US GAAP
The financial statements of the Company are presented on the basis of
accounting principles generally accepted in Mexico ("Mexican GAAP").
Except for inflation accounting, Mexican GAAP are, in general terms,
similar to generally accepted accounting principles in the United States ("US
GAAP"). However, there are other areas in which Mexican accounting standards and
practices differ from the requirements of US GAAP.
The major differences between Mexican and US GAAP are as follows:
Recognition of the effects of inflation on financial information:
The provisions of Bulletin B-10 and its amendments relating to the
recognition of the effects of inflation on financial information have no
counterpart under US GAAP. However, as Mexican GAAP includes the effects of
inflation in the primary financial statements, the US Securities and Exchange
Commission does not require the reversal of the restatement of the financial
statements recognizing the effects of inflation.
Deferred income taxes:
In 1999, the Company elected early to adopt the provisions of Bulletin
D-4, issued by the Mexican Institute of Public Accountants, which requires
recognizing the income tax effects of the differences in bases of assets and
liabilities for financial accounting and accounting for tax reporting purposes,
similar to US GAAP.
As under US GAAP, the Company recognized deferred taxes in prior years for
Mexican GAAP purposes for certain timing differences, such as advances from
customers and certain prepaid expenses, expected to reverse over a definite
period of time (see Note 20).
As a result of the Company's early adoption of Bulletin D-4 in 1999, there
were no differences related to deferred taxes that had to be reconciled between
Mexican and US GAAP for financial statement purposes for the years ended
December 31, 2003 and 2002, except for the balance sheet classification of
deferred taxes, under US GAAP, as current and non-current.
Mexican GAAP requires that all deferred taxes be classified as long term
on the balance sheet; however, under US GAAP, balances of deferred taxes are
classified as either current or non-current, based on the classification of the
related asset or liability for financial reporting. An analysis of the balance
of deferred taxes in accordance with US GAAP, as of December 31, 2003 and 2002,
is as follows:
2003 2003 2002 2002
------------- ------------- -------------- --------------
Current deferred tax:
Advances from customers US$ 1,751 Ps 19,687 US$ 1,331 Ps 14,431
Tax loss carryforwards 1,489 16,742
Other reserves 34 387 207 2,240
Prepaid expenses for Infored
services -- -- (309) (3,350)
------------- ------------- -------------- --------------
Net current deferred asset 3,274 36,816 1,229 13,321
Non-current deferred tax
Liability:
Long-term
Tax loss carryforwards -- -- 790 8,569
Prepaid expenses and labor
liabilities 1,131 12,716 (2,501) (27,115)
Property and equipment, net (6,840) (76,898) (7,266) (78,767)
------------- ------------- -------------- --------------
Net long-term deferred tax
liability US$ (2,435) Ps (27,366) US$ (7,748) Ps (83,992)
============= ============= ============== ==============
F-36
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Statement of changes in financial position:
Under Mexican GAAP, the Company presents statements of changes in
financial position in constant Mexican pesos. This presentation identifies the
generation and application of resources resulting in differences between
beginning and ending financial statement balances in constant Mexican pesos.
The changes in the consolidated financial statement balances included in
this statement constitute cash-flow activity stated in constant Mexican pesos
(including monetary gains, which are considered cash gains in the financial
statements presented in constant Mexican pesos).
In accordance with Mexican GAAP, the reduction in current and long-term
debt due to restatement in constant Mexican pesos is presented as a resource
applied to financing activities, and the gain from monetary position is
presented as a component of operating activities. SFAS No. 95, "Statement of
Cash Flows," under US GAAP however, does not provide guidance with respect to
inflation-adjusted financial statements. If the gain from net monetary position
were treated as a component of financing activities for US GAAP purposes, funds
provided by operating and financing activities would be as follows:
2003 2003 2002 2001
----------- ------------ ------------ ------------
Operating activities:
Resources provided by operations, per
Mexican GAAP US$ 19,734 Ps 221,795 Ps 40,213 Ps 155,058
Less-- gain on monetary position on
current and long-term debt (987) (11,095) (21,403) (19,192)
------------- --------------- ------------ ------------
Resources provided by operations, per
US GAAP US$ 18,747 Ps 210,700 Ps 18,810 Ps 135,866
============= ============ ============ ============
Financing activities:
Resources applied to financing
activities, per Mexican
GAAP US$ (16,483) Ps (185,272) Ps (64,261) Ps (100,744)
Plus-- gain on monetary position on
current and long-term debt 987 11,095 21,403 19,192
------------- ------------ ------------ ------------
Resources applied to financing
activities, per US GAAP US$ (15,496) Ps (174,177) Ps (42,858) Ps (81,552)
============= ============ ============ ============
Supplemental cash-flow information:
Interest paid US$ 2,508 Ps 28,195 Ps 19,924 Ps 30,542
============= ============ ============ ============
Taxes paid US$ 1,509 Ps 16,966 Ps 12,276 Ps 51,617
============= ============ ============ ============
F-37
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Personnel compensation and seniority premiums:
Under Mexican GAAP, vacation expense is recognized when taken rather than
in the period it is earned by the employee, as is required under US GAAP.
The Company is required under the Mexican Labor Law to pay seniority
premiums to certain employees upon termination of employment. Beginning in 2000,
the Company established a pension plan for unionized personnel. The Company
determines its liabilities with respect to such benefits based upon actuarial
studies, which is similar to the US GAAP criteria of SFAS 87, "Employee
Accounting for Pensions".
Minority interest:
Under Mexican GAAP, the minority interest in subsidiaries must be included
as a component of shareholders' equity. In accordance with US GAAP, minority
interest in subsidiaries is generally shown below liabilities on the balance
sheet.
Goodwill:
Under Mexican and US GAAP, the excess of cost over net fair value of the
net assets in subsidiaries acquired is recognized as an intangible asset
("goodwill"). Under US GAAP, however, goodwill arising from entities under
common control is not recognizable. In addition, under US GAAP, effective
January 1, 2002, goodwill is no longer amortized but instead is tested for
impairment at least annually. For Mexican GAAP purposes, goodwill is amortized
based on the estimated useful lives of the assets calculated on the
straight-line method. It also establishes, among other things, new principles
for the calculation and recognition of impairment losses for long-lived assets
and including any subsequent reversals of such impairment losses.
Under U.S. GAAP, in accordance with the requirements of FAS 142, the
Company performed an analysis for impairment of its goodwill as of December 31,
2003 resulting in an impairment charge of Ps 152,491; there was no impairment
charge required under Mexican GAAP.
F-38
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Other expenses, net:
Under Mexican GAAP, certain net expenses are classified as non-operating
on the Company's statement of income. Under US GAAP, some of these net expenses
are classified as operating expenses.
In addition, for the year ended December 31, 2003, the Company's
extraordinary item relating to the provisions for contingent arbitration losses
is classified as a non-operating charge to earnings under Mexican GAAP whereas
for U.S. GAAP reporting purposes, this represents an operating charge against
the Company's earnings.
Convenience statements:
The 2002 US dollar amounts (denoted by the symbol "US$") shown in the
financial statements have been included solely for the convenience of the reader
and were translated at the rate of Ps 11.24/US$1.00, the noon buying rate of
Mexican pesos on December 31, 2003, as published by the Federal Reserve Bank of
New York. Such translation should not be construed as a representation that the
Mexican peso amounts have been or could be converted into US dollars at this or
any other rate.
The following is a summary of the estimated adjustments to net income
(loss) and shareholders' equity that would have been required had the Company
applied US GAAP instead of Mexican GAAP:
F-39
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
2003 2003 2002 2001
------------ ------------ ----------- -----------
Net (loss) income, as recorded
under Mexican GAAP US$ (21,865) Ps (245,795) Ps 2,271 Ps 18,470
US GAAP adjustments:
Amortization of goodwill
arising from entities under
common control 141 1,585 1,585 1,585
Amortization of goodwill 6,933 77,930 72,372 --
Goodwill impairment (13,569) (152,491) -- --
Minority interest (1) (6) (14) (17)
------------ ------------ ----------- -----------
Net (loss) income under US GAAP US$ (28,361) Ps (318,777) Ps 76,214 Ps 20,038
============ ============ =========== ===========
Net (loss) income per share (basic
and diluted) under US GAAP US$ (0.17) Ps (1.96) Ps 0.46 Ps 0.12
============ ============ =======-=== ===========
Average common shares outstanding
(000's) 162,722 162,722 163,235 163,918
============ ============ =========== ===========
If SFAS No. 142 had been in effect prior to January 1, 2002, our reported net
income, net income per share and shareholders' equity would have been as
follows:
2003 2003 2002 2001
------------ ------------ ------------- -------------
Net (loss) income under US GAAP: US$ (28,361) Ps (318,777) Ps 76,214 Ps 20,037
Goodwill amortization -- -- -- 76,870
------------ ------------ ------------- -------------
Adjusted US$ (28,361) Ps (318,777) Ps 76,214 Ps 96,907
============ ============ ============= =============
Net (loss) income per share under
US GAAP: US$ (0.17) Ps (1.96) Ps 0.46 Ps 0.12
Effect of goodwill amortization
-- -- -- 0.47
------------ ------------ ------------- -------------
Adjusted US$ (0.17) Ps (1.96) Ps 0.46 Ps 0.59
============ ============ ============= =============
Shareholders' equity under Mexican US$ 79,869 Ps 897,720 Ps 1,200,486 Ps 1,204,010
GAAP
US GAAP adjustments:
Goodwill arising from entities
under common control (1,598) (17,966) (19,551) (21,136)
Amortization of goodwill 13,372 150,302 72,372 --
Goodwill impairment (13,569) (152,491)
Minority interest (45) (507) (501) (487)
------------ ------------ ------------- -------------
(1,840) (20,662) 52,320 (21,623)
------------ ------------ ------------- -------------
Shareholders' equity under
US GAAP US$ 78,029 Ps 877,058 Ps 1,252,806 Ps 1,182,387
============ ============ ============= =============
Shareholders' equity under US GAAP US$ 78,029 Ps 877,058 Ps 1,252,806 Ps 1,182,387
Goodwill amortization -- -- -- 76,870
------------ ------------ ------------- -------------
Adjusted US$ 78,029 Ps 877,058 Ps 1,252,806 Ps 1,259,257
============ ============ ============= =============
F-40
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
In the income statement, employee profit sharing is classified as a
component of the tax provisions and certain net expenses are classified as
non-operating under Mexican GAAP. Under US GAAP, these items should be included
or excluded as operating expenses, as applicable. The following is a
reconciliation of operating income:
---------------------------------------------------------------------------------------------------------------
2003 2003 2002 2001
---------------------------------------------------------------------------------------------------------------
Operating (loss) income under Mexican
GAAP US$ 14,059 Ps 157,903 Ps 99,514 Ps 101,058
---------------------------------------------------------------------------------------------------------------
Amortization of goodwill
arising from entities
under common control 141 1,585 1,585 1,585
---------------------------------------------------------------------------------------------------------------
Other expenses, net (5,870) (65,982) (52,487) --
---------------------------------------------------------------------------------------------------------------
Provisions for contingent
arbitration losses (30,322) (340,705) -- --
---------------------------------------------------------------------------------------------------------------
Amortization of other goodwill 6,933 77,930 72,372 --
---------------------------------------------------------------------------------------------------------------
Goodwill impairment (13,569) (152,491) -- --
---------------------------------------------------------------------------------------------------------------
Employee profit sharing 37 414 (88) (211)
---------------------------------------------------------------------------------------------------------------
Operating (loss) income under US GAAP US$ (28,591) Ps (321,346) Ps 120,896 Ps 102,432
---------------------------------------------------------------------------------------------------------------
If SFAS No. 142 had been in effect prior to January 1, 2002, our operating
income would have been as follows:
2003 2003 2002 2001
-------------- ------------- ------------- -------------
Operating (loss) income
under US GAAP: US$ (28,591) Ps (321,346) Ps 120,896 Ps 102,432
Goodwill amortization -- -- -- 76,870
-------------- ------------- ------------- -------------
Adjusted US$ (28,591) Ps (321,346) Ps 120,896 Ps 179,302
============== ============= ============= =============
The basic net (loss) income per common share is computed by dividing the
net income (loss) available to common shareholders by the weighted average
number of common shares outstanding.
Diluted net (loss) income per common share is computed by dividing the net
(loss) income available to common shareholders, adjusted on an "as if" converted
basis, by the weighted average number of common shares outstanding plus
potential dilutive securities.
For the years ended December 31, 2003, 2002 and 2001, there were no
outstanding potential dilutive securities of the Company.
F-41
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
Effect of recently issued Accounting Standards:
In July 2001, the FASB issued Statement of Financial Accounting Standard
No. 141 (SFAS 141), "Business Combinations," and Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 141 also sets forth
criteria for recognizing and reporting separately from goodwill intangible
assets acquired in a business combination accounted for under the purchase
method. SFAS 141 applies to all business combinations closing after June 30,
2001, except for business combinations initiated prior to June 30, 2001 that
contemplate the pooling method of accounting. As the Company's previous business
combinations have been accounted for under the purchase method, the Company does
not expect the adoption of SFAS 141 to have a material impact on its financial
position or results of operations.
For purposes of the reconciliation to U.S. GAAP, the Company adopted SFAS
142 and SFAS 144 effective January 1, 2002. SFAS 142 eliminates the amortization
of goodwill and intangible assets with indefinite life, and addresses the
amortization of intangible assets with finite lives and impairment testing and
recognition for goodwill and intangible assets. SFAS 144 establishes a single
model for the impairment of long-lived assets and broadens the presentation of
discontinued operations to include disposal of individual businesses. As a
result of such adoption, beginning January 1, 2002, amortization ceased for
goodwill under U.S. GAAP.
As a result of the implementation of SFAS 142 and 144 during 2002,
pursuant to which goodwill is defined as an intangible asset with indefinite
life and is no longer amortized, the Company ceased the amortization of the net
amounts of goodwill as of January 1, 2002; therefore such amounts will be fixed
and subject to impairment testing as required by the new rules. For the year
ended December 31, 2003 and 2002, goodwill under Mexican GAAP continued to be an
amortizable intangible asset. In compliance with the accounting rules set forth
by SFAS 142, the Company assesses goodwill and indefinite-lived intangibles for
impairment annually, unless events occur that require more frequent reviews.
Long-lived assets, including amortizable intangibles, are tested for impairment
if impairment triggers occur. Discounted cash flow analyses are used to assess
the possible impairment of both amortizable and non-amortizable intangible
assets, while undiscounted cash flow analyses are used to assess long-lived
asset impairment.
If an assessment indicates impairment, the impaired asset is written down
to its fair market value based on the best information available. Estimated fair
market value is generally measured with discounted estimated future cash flows.
The useful lives of amortizable intangibles are evaluated periodically, and
subsequent to impairment reviews, to determine whether revision is warranted. If
cash flows related to a nonamortizable intangible are not expected to continue
for the foreseeable future, a useful life would be assigned. Considerable
management judgment is necessary to estimate undiscounted and discounted future
cash flows. Assumptions used for these cash flows are consistent with internal
forecasts and industry practices.
The Company adopted the provisions of SFAS 142 for US GAAP purposes
reported in 2002 and determined that no impairment adjustment was required.
F-42
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
In June 2001, the FASB issued Statement of Financial Accounting Standard
No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations," which applies
the requirements of Statement of Financial Accounting Standard No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies" to all
companies. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets resulting from the
acquisition, construction, development and/or normal use of such assets and the
associated asset retirement costs. SFAS 143 applies to asset retirement
obligations that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or written or oral contract, or by legal
construction of a contract under the doctrine of estoppel. 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 fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for an amount other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. While the Company is not yet required to
adopt SFAS 143, it does not expect that the adoption will have a material effect
on the financial condition or results of operations of the Company.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13 to require sale-leaseback accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The adoption of
SFAS No. 145 is not expected to have a material effect on the Company's
financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS 146 is not expected to have a material effect on the Company's
financial statements.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements 5, 57
and 107 and a rescission of FASB Interpretation 34." This interpretation
elaborates on the disclosures required by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, the fair value of the obligation undertaken as a
liability. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." This
F-43
GRUPO RADIO CENTRO, S.A. DE C.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
statement amends FASB Statement 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this statement amends the disclosure F-56 requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements. The
adoption of SFAS 148 is not expected to have a material effect on the Company's
financial statements.
In May 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 of
Derivative Instruments and hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. As the Company has no such
instruments, the adoption of this statement did not have an impact on the
Company's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer measures certain financial
instruments with characteristics of both liabilities and equity and requires
that an issuer classify a financial instrument within its scope as a liability
(or asset in some circumstances). SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003 and otherwise was
effective and adopted by the Company on July 1, 2003. As the Company has no such
instruments, the adoption of this statement did not have an impact on the
Company's financial condition or results of operations.
During December 2003, the FASB issued Interpretation No. 46R,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires the
consolidation of certain entities that are determined to be variable interest
entities ("VIE"). An entity is considered to be a VIE when either (i) the entity
lacks sufficient equity to carry on its principal operations, (ii) the equity
owners of the entity cannot make decisions about the entity's activities or
(iii) the entity's equity neither absorbs losses or benefits from gains. The
Company owns no interests in variable interest entities, and therefore this new
interpretation has not affected the Company's consolidated financial statements.
F-44
Exhibit Index
Exhibit
Number Description of Exhibit
------- ----------------------
1.1 Charter (Escritura Constitutiva), together with an English translation
(incorporated by reference to our Registration Statement on Form F-1
(Reg. No. 333-63878) filed on June 4, 1993).
1.2 Amended and Restated Bylaws of Grupo Radio Centro, S.A. de C.V. dated
April 25, 2003, filed as English translation (incorporated by reference
to our Annual Report on Form 20-F (Commission File No. 001-12090) filed
on June 30, 2003).
3.1 Amended and Restated Controlling Trust Agreement, No. F/23020-1, dated
April 24, 1992, with amendments dated September 2, 1992, May 18, 1993
and September 14, 1993, between certain members of the Aguirre family
and Bancomer, S.A., as trustee, together with an English translation
(incorporated by reference to our Annual Report on Form 20-F
(Commission File No. 001-12090) filed on December 31, 1993).
3.2 Amended and Restated CPO Trust Agreement, dated as of June 27, 2003,
between GE Capital Bank S.A., Institucion de Banca Multiple, GE Capital
Grupo Financiero, as CPO Trustee, and Grupo Radio Centro, S.A. de C.V.,
filed as an English translation (incorporated by reference to our
Annual Report on Form 20-F (Commission File No. 001-12090) filed on
June 30, 2003).
3.3 Trust Agreement, dated June 3, 1998, among certain principal
shareholders of Grupo Radio Centro, S.A. de C.V., together with an
English translation (incorporated by reference to our Annual Report on
Form 20-F (Commission File No. 001-12090) filed on June 30, 1998).
4.1 Deposit Agreement, dated June 30, 1993, among Grupo Radio Centro, S.A.
de C.V., Citibank N.A. and holders from time to time of American
Depositary Receipts issued thereunder, including the form of American
Depositary Receipt (incorporated by reference to our Registration
Statement on Form F-6 (Reg. No. 333-8224) filed on January 16, 1998).
4.2 Amended and Restated Public Deed, dated as of June 27, 2003 (the
"Amended and Restated CPO Deed"), filed as an English translation
(incorporated by reference to our Annual Report on Form 20-F
(Commission File No. 001-12090) filed on June 30, 2003).
4.3 Modifying Agreement, dated December 14, 1998, between Grupo Radio
Centro, S.A. de C.V. and Comercializadora Siete, S.A. de C.V.,
modifying Service Agreement, dated October 2, 1995 with respect to
XHFO-FM, together with an English translation (incorporated by
reference to our Annual Report on Form 20-F (Commission File No.
001-12090) filed on June 30, 1999).
Exhibit Index
(continued)
4.4 Programming Services Agreement, dated December 23, 1998, among Grupo
Radio Centro, S.A. de C.V., Infored and Jose Gutierrez Vivo, together
with an English translation translation (incorporated by reference to
our Annual Report on Form 20-F (Commission File No. 001-12090) filed on
June 30, 1999) (incorporated by reference to our Annual Report on Form
20-F (Commission File No. 001-12090) filed on June 30, 2003).
4.5 Loan Agreement, dated October 30, 2000, between Grupo Radio Centro,
S.A. de C.V. and Banco Inverlat, S.A., (the "Loan Agreement") together
with an English translation (incorporated by reference to our Annual
Report on Form 20-F (Commission File No. 001-12090) filed on May 9,
2001).
4.6 Letter Agreement, dated April 17, 2001, between Grupo Radio Centro,
S.A. de C.V. and Scotiabank Inverlat, S.A. (formerly Banco Inverlat,
S.A.), amending Loan Agreement, together with an English translation
(incorporated by reference to our Annual Report on Form 20-F
(Commission File No. 001-12090) filed on May 9, 2001).
4.7 Waiver and Amendment Letter, dated June 19, 2002, executed by
Scotiabank Inverlat and Grupo Radio Centro, S.A. de C.V. in connection
with the Loan Agreement (incorporated by reference to our Annual Report
on Form 20-F (Commission File No. 001-12090) filed on June 24, 2002).
4.8 Amendment, dated December 10, 2002, to the Loan Agreement, filed as an
English translation (incorporated by reference to our Annual Report on
Form 20-F (Commission File No. 001-12090) filed on June 30, 2003).
4.9 Amendment, dated December 3, 2003, to the Loan Agreement, filed as an
English translation.
4.10 Amendment, dated as of June 29, 2004, to the Loan Agreement, to be
filed as an English translation pursuant to Rule 12b-25.
4.11 Modifying Agreement, dated June 29, 2001, between Grupo Radio Centro,
S.A. de C.V. and Comercializadora Siete, S.A. de C.V., modifying
Service Agreement, dated October 2, 1995, with respect to XHFO-FM,
together with an English translation (incorporated by reference to our
Annual Report on Form 20-F (Commission File No. 001-12090) filed on
June 24, 2002).
8.1 List of Subsidiaries of the Company (incorporated by reference to our
Annual Report on Form 20-F (Commission File No. 001-12090) filed on
June 30, 2003).
12.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
12.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
13.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.