20-F 1 v226493_20f.htm Unassociated Document
 
As filed with the Securities and Exchange Commission on June 21, 2011
 


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 20-F
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
for the fiscal year ended December 31, 2010
Commission File Number: 1-12090

Grupo Radio Centro, S.A.B. 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° Piso)
Col. Lomas Altas
C.P. 11950, México, D.F., México
(Address of principal executive offices)
 
Alfredo Azpeitia Mera
Constituyentes 1154 (7° Piso)
Col. Lomas Altas
C.P. 11950, México, D.F., México
aazpeitia@grc.com.mx
(5255) 5728 48 00
 (Name, telephone, e-mail and/or facsimile number and address of company contact person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class:
 
Name of each exchange on which registered
     
Series A Shares, without par value (“Series A Shares”)
 
New York Stock Exchange*
Ordinary Participation Certificates (“CPOs”), each CPO representing one  Series A Share
 
New York Stock Exchange*
American Depositary Shares (“ADSs”), each representing nine CPOs
 
New York Stock Exchange
 
*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: 162,724,561 Series A Shares
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨  Yes   x  No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act     of 1934.  ¨  Yes    x  No
 
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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). N/A
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated filer ¨  Accelerated filer ¨    Non-accelerated filer x
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP ¨   International Financial Reporting Standards  ¨   Other  x
 
Indicate by check mark which financial statement item the registrant has elected to follow:  ¨  Item 17   x  Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨  Yes   x  No
 
 
 

 
 
TABLE OF CONTENTS
 
     
Page
 
           
PART I
      2  
Item 1.
Identity of Directors, Senior Management and Advisers
    2  
Item 2.
Offer Statistics and Expected Timetable
    2  
Item 3.
Key Information
    2  
Item 4.
Information on the Company
    10  
Item 4A.
Unresolved Staff Comments
    24  
Item 5.
Operating and Financial Review and Prospects
    24  
Item 6.
Directors, Senior Management and Employees
    32  
Item 7.
Major Shareholders and Related Party Transactions
    37  
Item 8.
Financial Information
    39  
Item 9.
The Offer and Listing
    41  
Item 10.
Additional Information
    43  
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
    56  
Item 12.
Description of Securities Other than Equity Securities
    56  
Item 12A.
Debt Securities
    56  
Item 12B.
Warrants and Rights
    56  
Item 12C.
Other Securities
    56  
Item 12D.
American Depositary Shares
    56  
PART II
      58  
Item 13.
Defaults, Dividend Arrearages and Delinquencies
    58  
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
    58  
Item 15.
Controls and Procedures
    58  
Item 16A.
Audit Committee Financial Expert
    59  
Item 16B.
Code of Ethics
    59  
Item 16C.
Principal Accountant Fees and Services
    59  
Item 16D.
Exemptions from the Listing Standards for Audit Committees
    60  
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    60  
Item 16F.
Change in Registrant’s Certifying Accountant.
    60  
Item 16G.
Corporate Governance
    60  
PART III
      64  
Item 17.
Financial Statements
    64  
Item 18.
Financial Statements
    64  
Item 19.
Exhibits
    64  
 
 
i

 
 
INTRODUCTION
 
Grupo Radio Centro, S.A.B. de C.V. 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.B. de C.V. and its consolidated subsidiaries.
 
PRESENTATION OF FINANCIAL INFORMATION
 
The Company publishes its financial statements in Mexican pesos.  Our financial statements have been prepared in accordance with the Mexican Financial Reporting Standards, or MFRS, issued by the Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera (Mexican Board for Research and Development of Financial Information Standards).
 
Through the end of 2007, MFRS required us to recognize certain effects of inflation in our financial statements by restating financial statements from prior periods in constant pesos as of the end of the most recent period presented.  Due to a change in MFRS effective January 1, 2008, we are no longer required to recognize the effects of inflation in our financial statements, unless the economic environment in which we operate qualifies as “inflationary.”  The Mexican economy did not qualify as inflationary in 2008, 2009 or 2010.  As a result, we are presenting our 2008, 2009 and 2010 financial statements without inflation accounting.  We have not restated financial statements for prior periods; therefore, financial information for dates and periods prior to 2008 continue to be expressed in constant pesos as of December 31, 2007.
 
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. 12.3825 to U.S.$ 1.00, the exchange rate for pesos on December 31, 2010, as published by the U.S. Federal Reserve Board.  On June 3, 2011, the exchange rate for pesos was Ps. 11.6585 to U.S.$ 1.00.  See Item 3, “Key Information—Exchange Rate Information,” for information regarding exchange rates since January 1, 2006.
 
In this Annual Report, references to “pesos” or “Ps.” are to the lawful currency of Mexico.  References herein to “U.S. dollars” or “U.S.$” are to United States dollars.
 
FORWARD-LOOKING STATEMENTS
 
This Annual Report contains words such as “believe,” “expect,” “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.  These factors, some of which are discussed in Item 3, “Key Information—Risk Factors,” include projections of operating revenues, net income, net income per share, capital expenditures, indebtedness levels, dividends, capital structure or other financial items or ratios; statements about our future financial performance or the economic performance of Mexico or other countries; effects on the Company from competition with its broadcasting operations; material changes in the performance or popularity of key radio stations or broadcast programs; the loss of one or more key customers or a reduction in the advertising expenditures of key customers; a change in the seasonality of the Company’s business; the ability of the Company to make additional investments in radio operations or renew its broadcasting licenses; significant developments in the Mexican economic or political situation; changes in the Company’s regulatory environment or fluctuations in inflation rates or exchange rates.  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 and Advisers
 
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, our audited consolidated financial statements as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008 (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 MFRS, which differ in certain respects from generally accepted accounting principles in the United States, or U.S. GAAP.  Note 23 to the Consolidated Financial Statements provides a description of the principal differences between MFRS and U.S. GAAP as they relate to Grupo Radio Centro, including differences related to certain cash flow information and a reconciliation to U.S. GAAP of operating income, net income and shareholders’ equity.
 
For dates and periods prior to 2008, Grupo Radio Centro’s financial statements were prepared giving effect to Bulletin B-10, Recognition of the Effects of Inflation, and Bulletin B-12, Statements of Changes in Financial Position, under MFRS.  Beginning on January 1, 2008, in accordance with the adoption of MFRS B-10, we ceased to recognize the effects of inflation on our financial information. As a result, we have not applied the effects of inflation accounting to our financial information in 2008, 2009 and 2010.  In our financial information for 2008, 2009 and 2010, inflation adjustments for prior periods have not been removed from shareholders’ equity and the re-expressed amounts for non-monetary assets and liabilities at December 31, 2007 became the accounting basis for those assets and liabilities beginning on January 1, 2008 and for subsequent periods, as required by MFRS.  For dates and periods prior to 2008, the selected consolidated financial information set forth below, and data in the related Consolidated Financial Statements, have been restated in constant pesos as of December 31, 2007.  See Item 5, “Operating and Financial Review and Prospects—Changes in Inflation Accounting.”
 
Due to the adoption of MFRS B-10, effective January 1, 2008, inflation accounting methods do not apply unless the economic environment in which the Company operates is “inflationary” for purposes of MFRS.  An environment is considered inflationary if the cumulative inflation rate equals or exceeds an aggregate of 26% over the three preceding years.  Because of the relatively low level of Mexican inflation in recent years, the cumulative inflation rate in Mexico over the three-year period preceding December 31, 2008 does not qualify the Mexican economic environment as inflationary.  As a result, we have not applied the effects of inflation accounting to our financial information in 2008, 2009 and 2010.  See Item 5, “Operating and Financial Review and Prospects—Changes in Inflation Accounting.”
 
 
2

 
 
   
Year Ended December 31,
 
   
2010(1)
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(in thousands, except per ADS data)
 
Operating Data:
                                   
MFRS:
                                   
Broadcasting revenue
  U.S.$  73,323     Ps. 907,925     Ps. 785,869     Ps. 735,105     Ps. 654,760     Ps. 825,590  
Broadcasting expenses(2)
    55,571       688,113       595,011       452,350       421,970       460,072  
Broadcasting income
    17,752       219,812       190,858       282,755       232,790       365,518  
Depreciation and amortization
    1,927       23,861       26,024       31,720       33,687       37,183  
Corporate, general and administrative expenses
    1,206       14,939       14,939       14,461       14,774       14,813  
Operating income
    14,619       181,012       149,895       236,574       184,329       313,522  
Comprehensive cost of financing
    2,109       26,116       40,615       7,678       5,850       39,842  
Other expenses, net
    3,433       42,508       66,495       56,880       45,806       59,511  
Extraordinary item(3)
    -       -       -       -       -       263,523  
Net income (4)
    4,879       60,410       4,443       126,765       91,119       434,748  
Non-controlling interest
    1       8       (53,943 )     45       21       63  
Net income per ADS(4) (5)
    0.27       3.34       0.25       7.01       5.04       24.08  
Common shares outstanding(5)
    162,725       162,725       162,725       162,725       162,725       162,500  
                                                 
U.S. GAAP:
                                               
Broadcasting revenue
  U.S.$  73,323     Ps. 907,925     Ps. 785,869     Ps. 735,105     Ps. 654,760     Ps. 825,590  
Operating  income (3)
    11,186       138,504       83,400       179,694       138,523       517,534  
Net income (4)
    4,866       60,253       4,443       126,720       91,098       434,685  
Net income per ADS(4) (5)
    0.27       3.33       3.23       7.01       5.04       24.08  
Dividends per ADS(5) (6)
    0.45       5.53       5.53       5.53       5.53       4.01  
                                                 
Balance Sheet Data:
                                               
MFRS:
                                               
Working capital
  U.S.$  14,093       174,502     Ps. 246,967     Ps. 212,776     Ps. 170,056     Ps. 133,545  
Property and equipment, net
    35,251       436,499       459,941       465,034       461,555       481,220  
Excess cost over fair value of assets of subsidiaries
    66,938       828,863       828,863       828,863       828,863       828,734  
Total assets
    142,487       1,764,350       1,926,955       1,743,638       1,700,445       1,722,173  
Long-term debt excluding current portion
    7,268       90,000       130,000       -       -       -  
Total debt(7)
    10,499       130,000       170,000       -       -       -  
Shareholders’ equity(8)
    104,224       1,290,552       1,356,479       1,432,790       1,406,025       1,387,446  
                                                 
U.S. GAAP:
                                               
Total assets
  U.S.$  141,654     Ps 1,754,036     Ps. 1,916,790       1,801,377       1,779,008       1,763,734  
                                                 
Shareholders’ equity (8)
    103,366       1,279,924       1,380,103       1,422,404       1,396,585       1,378,019  
 

(1)
Peso amounts have been translated into U.S. dollars solely for the convenience of the reader at the rate of Ps. 12.3825 per U.S. dollar, the exchange rate for pesos on December 31, 2010, as published by the U.S. Federal Reserve Board.  See “—Exchange Rate Information.”
(2)
Excludes depreciation, amortization and corporate, general and administrative expenses.
(3)
The extraordinary item recorded in 2006 reflects the reversal in June 2006 of a provision for the contingent liability related to an arbitration proceeding.  See Item 5, “Operating and Financial Review and Prospects—Loss Contingency” and Item 8, “Financial Information—Other Financial Information—Legal and Arbitration Proceedings.”
(4)
In accordance with then-applicable MFRS, net income for dates and periods prior to 2008 does not give effect to minority interest.  Net income under U.S. GAAP and, for dates and periods beginning in 2008 under MFRS, does give effect to minority interest.  See Note 23 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 MFRS and U.S. GAAP and dividends per ADS under U.S. GAAP.
(6)
The Company declares dividends in any given year for the immediately preceding fiscal year.  In 2010, the Company paid dividends in the aggregate amount of Ps. 100 million with respect to 2009. In 2009, the Company paid dividends in the aggregate amount of Ps. 100 million with respect to 2008.  In 2008, the Company paid dividends in the aggregate amount of Ps. 100 million with respect to 2007. In 2007, the Company paid dividends in the aggregate amount of Ps. 71.9 million with respect to 2006.  No dividends have been declared for 2010.
(7)
Total debt consists of bank debt.  See Item 5, “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”
(8)
In 2006, the Company reduced its capital by Ps. 128.5 million (Ps. 120 million nominal amount) through cash payments to its shareholders equal to that amount.
 
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.  There can be no assurance that the government will maintain its current policies with regard to the peso or that the peso will not appreciate or depreciate 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.
 
 
3

 
 
Period
 
Exchange Rate(1)
 
Year Ended December 31, 
 
High
   
Low
   
Average(2)
   
Period End
 
2006
    11.46       10.43       10.90       10.80  
2007
    11.27       10.67       10.93       10.92  
2008
    13.94       9.92       11.21       13.83  
2009
    15.41       12.63       13.58       13.06  
2010
    13.19       12.16       12.63       12.38  
                                 
Month Ended 2010:
                               
December 31
    12.47       12.33       12.39       12.38  
                                 
Month Ended 2011:
                               
January 31
    12.25       12.04                  
February 28
    12.18       11.97                  
March 31
    12.11       11.92                  
April 30
    11.86       11.52                  
May 31
    11.77       11.50                  
 

(1)
Sources:  Federal Reserve Bank of New York and the U.S. Federal Reserve Board.
(2)
Average of month-end rates.
 
On June 3, 2011, the exchange rate was Ps. 11.6585 to U.S.$ 1.00.
 
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 American Depositary Shares, or “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 certificados de participación ordinaria (ordinary participation certificates, or “CPOs”) represented by the ADSs.
 
 
4

 
 
RISK FACTORS
 
Risks Relating to Our Operations
 
We may be unsuccessful in addressing the challenges and risks presented by our investment in the United States
 
In April 2009, we began to provide programming to, and sell advertising time on, KXOS-FM, a radio station broadcasting in Los Angeles, California that is owned by Emmis Communications Corporation.  Our investment in the United States involves risks to which we have not previously been exposed and presents different or greater risks, including from competition and regulation, than those present in Mexico.  Our potential for success should be considered in light of the expenses, complications and delays frequently encountered in connection with a new business.  In 2010, our U.S. operations generated an operating loss of Ps. 106.8 million.  We cannot predict whether or when our operations in the United States will become profitable.
 
In light of operating losses in our operations in the United States, we may not have sufficient sources of cash to meet our working capital needs
 
Although cash flow from operations historically has been sufficient to cover our working capital needs, our investment in April 2009 in a Los Angeles radio station has resulted in increased working capital needs.  On June 1, 2010, we borrowed Ps. 30 million under the revolving tranche of our credit facility to meet working capital needs, which we repaid on November 9, 2010.  We may need to borrow again under this facility in the future. We have borrowing capacity of Ps. 60 million under our credit facility, but our ability to borrow under that facility is subject to compliance with covenants or our ability to obtain a waiver of non-compliance with those covenants.  There can be no assurances that we will be able to meet our working capital needs, or, if we are in non-compliance with our debt covenants, that we will be able to borrow further amounts under the credit facility.  Such events would have a material adverse effect on our financial condition and results of operations.
 
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 is highly competitive, and programming popularity, an important factor in advertising sales, is readily susceptible to change.  There can be no assurance that increased competition within, or a decline in the popularity of, a given format will not decrease our aggregate audience share in the future.  In addition, we face strong competition for advertising revenues from both television and various print media.  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.
 
In the past, we have not complied with a financial covenant under our credit facility
 
We have entered into a credit facility for a secured peso-denominated loan having an outstanding aggregate principal amount of Ps. 110 million as of the date hereof.  This amount is guaranteed by several of our subsidiaries and secured by a first priority lien on substantially all of our property, including our corporate headquarters but excluding any equipment used for broadcasting.
 
The credit facility contains covenants requiring us to maintain certain financial ratios and comply with other financial conditions that, among other things, limit our ability to incur additional indebtedness, pay dividends, pledge assets and enter into transactions with affiliates.  We were not in compliance with the fixed charges coverage ratio for the first and second quarters of 2010 and obtained waivers from the lender of this non-compliance for each quarter.   Since then, we have been in compliance with our financial covenants.  If we fail to comply with any covenant under the credit facility in the future, there can be no assurance that we will be able to obtain waivers or that the lender will not accelerate amounts due under the credit facility.  If we are unable to repay amounts due under the credit facility, the lender could proceed against the collateral securing our indebtedness.  Such events would have a material adverse effect on our business, financial condition and results of operations.
 
 
5

 
 
If we lose one or more of our key customers in Mexico, we could lose a significant amount of our revenue
 
Our two largest individual customers in 2010 were Wal Mart de México, S.A.B. de C.V. (“Wal Mart”) and Organización Soriana, S.A.B. de C.V. Soriana (“Tiendas Soriana”). In 2008 and 2009, our two largest customers were Wal Mart and Tiendas Comercial Mexicana, S.A.B. de C.V. (“Comercial Mexicana”).  In 2010, Wal Mart represented 10.4% and Tiendas Soriana represented 3.4% of our total broadcasting revenue, excluding revenue from our operations in the United States.  In 2009, Wal Mart represented 7.0% and Comercial Mexicana represented 4.0% of our total broadcasting revenue, excluding revenue from our operations in the United States.  In 2008, Wal Mart represented 6.6% and Comercial Mexicana represented 3.7% of our total broadcasting revenue.  The companies comprising Grupo Carso are also key customers, representing 5.2% of our total broadcasting revenue in 2010 and 6.4% in 2009, excluding revenue from our operations in the United States.  We cannot assure you our key customers will continue to purchase advertising from us at current levels or at all.  The loss of our relationship with any one of our principal customers could have a material adverse effect on our results of operations.
 
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.
 
The Mexican Federal Competition Commission may prohibit us from making additional 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 the acquisition of Radiodifusión RED, S.A. in 1996, we are required by the Mexican Comisión Federal de Competencia (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.
 
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 Secretaría de Comunicaciones y Transportes (Secretary of Communication and Transportation, or “SCT”).  Because the SCT generally grants renewals to licensees that have substantially complied with applicable law, we expect that our future renewal applications will be granted.  However, if we were unable to renew these licenses in the future, our business could be significantly harmed.
 
Adverse global economic conditions and, in particular, the slowdown of the U.S. and Mexican economies, may affect our client base and could have a negative impact on our business and results of operations
 
Our business is influenced by general economic conditions worldwide and in Mexico.  The risks associated with our business become more acute in periods of a slowing economy or recession, which may be accompanied by a decrease in advertising.  A decline in the level of business activity of our advertisers could have an adverse effect on our revenue and profit margins.  In response to negative market conditions, customers may choose to make fewer advertising expenditures, to slow their spending on or cancel our services or to seek contract terms more favorable to them.  Adverse economic conditions may also lead to an increase in the number of our customers that are unable to pay for services.  If these events were to occur, it could have a material adverse effect on our business and results of operations.
 
 
6

 
 
If we are required by the Mexican courts to pay a pending arbitration award, it may have a material adverse effect on our financial condition
 
We are party to legal proceedings in Mexico relating to an arbitration award granted in 2004 against us in favor of Infored, S.A. de C.V. and Mr. José Gutiérrez Vivó.  If we are ultimately unsuccessful in challenging the enforcement of the arbitration award, we will be required to finance all or part of the amount due.  Our ability to obtain financing is subject to various factors, including general market conditions, our financial condition and results of operations and the fact that we have pledged substantially all of our assets under outstanding indebtedness.  Accordingly, we may not be able to obtain financing in a timely manner, or on acceptable terms, or at all.  If we incur additional indebtedness or we are unable to obtain financing when needed, our financial condition may be materially and adversely affected.
 
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.
 
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 a Mexican trust, which they control, that holds 51.6%, of the outstanding Series A Shares as of June 6, 2011.
 
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
 
Our 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 our shares or other securities 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 our 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.
 
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 Mexican trust through which they hold most of 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, other than those contained in our U.S.$ 21 million credit facility, which requires the Aguirre family to maintain 51% of our capital stock.

 
7

 
 
You may not be able to participate in any future preemptive rights offering and, as a result, your equity interest in the Company may be diluted
 
Under current Mexican law, if we issue new shares for cash as a part of a capital increase, we generally must 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 be legally 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 (“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.  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.
 
We cannot assure you 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.  Furthermore, under current Mexican law, sales by the Depositary of preemptive rights and distribution of the proceeds from such sales to ADS holders are not possible.  As a result, the equity interest of ADS holders would be diluted proportionately.  In addition, preemptive rights will not arise under current Mexican law upon the sale of newly issued shares in a public offering or the resale of shares of capital stock previously repurchased by us.
 
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, from which we derive revenue constituting the principal source of our earnings, generally declines during periods of economic difficulty.
 
In 2010, Mexico’s gross domestic product, or GDP, grew by 5.5% and inflation was 4.4%.  In 2009, Mexico’s GDP fell by 6.1% and inflation was 3.6%.  The Mexican economy is experiencing an upturn. In 2011, according to preliminary estimates of the Mexican government, GDP is expected to increase by 4.3% and inflation is expected to be 3.9%.  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 with the U.S., 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 the past, 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 in the past.  The annual rate of inflation, as measured by changes in the INPC, was 4.4% for 2010.  Inflation for the first quarter of 2011 was 1.1%.  If inflation in Mexico does not remain within the government’s projections, we may 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 may result in lower demand for broadcast advertising.
 
Interest rates on 28-day Mexican treasury bills, or Cetes, averaged 4.5% during 2010.  During the first quarter of 2011, the average 28-day Cetes rate was 4.2%.  High interest rates in Mexico could adversely affect our financing costs, and to the extent that we incur peso-denominated debt in the future, it could be at high interest rates.
 
 
8

 
 
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.  We cannot assure you that the current political situation or any future political developments will not have a broad adverse effect on growth trends in the Mexican broadcasting industry or in the economy generally, or directly and adversely affect us.
 
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 2010, the peso appreciated against the U.S. dollar at year-end by 5.2%, and the average value of the peso against the U.S. dollar during 2010 was 3.2% higher than in 2009. In 2009, the peso appreciated against the U.S. dollar at year-end by 5.6%, while the average value of the peso against the U.S. dollar during 2009 was 21.1% lower than in 2008.  In 2008, the peso depreciated against the U.S. dollar at year-end by 26.6%, and the average value of the peso against the U.S. dollar during 2008 was 2.7% lower than in 2007. 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.
 
In 2010, our operating costs payable in U.S. dollars increased due to our investment in a radio station in Los Angeles, California.  These expenses represented 24.8% of our consolidated broadcasting expenses in 2010.  We prepaid the first two years of fees (U.S.$ 14 million) under the related local marketing agreement and, beginning in April 2011, we have been making monthly fee payments of U.S.$583,333. Although at December 31, 2010, we had no U.S. dollar-denominated indebtedness, we may incur U.S. dollar-denominated indebtedness in the future.  Declines in the value of the peso relative to the U.S. dollar increase our operating costs, increase our interest costs in pesos relative to any U.S. dollar-denominated indebtedness, increase our obligations payable in U.S. dollars, 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.  Since we fund our operations in the United States with peso-denominated revenue earned in Mexico, the decline of the peso relative to the U.S. dollar could increase our operating costs.
 
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 operating costs or obligations payable in U.S. dollars.
 
Developments in other countries may affect the price of the ADSs
 
As is the case with respect to securities of issuers from other emerging markets, the market value of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other countries.  Although economic conditions in other countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in other countries may have an adverse effect on the market value of securities of Mexican issuers.  In recent years, for example, economic conditions in Mexico have become increasingly correlated to economic conditions in the United States as a result of NAFTA and increased economic activity between the two countries.  Adverse economic conditions in the United States and other related events could have a material adverse effect on the Mexican economy.  Prices of Mexican securities also dropped substantially as a result of developments in Russia, Asia, Brazil and Argentina in the late 1990s.  The Mexican securities markets also have been adversely affected by ongoing developments in the global credit markets.  We cannot assure you that events in other emerging market countries, in the United States or elsewhere, will not have a material adverse effect on our business, financial condition or results of operations.
 
 
9

 
 
Item 4.   Information on the Company
 
THE COMPANY
 
Organization
 
Grupo Radio Centro is a corporation (sociedad anónima bursátil 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° Piso), Col. Lomas Altas, C.P. 11950, México, D.F., México.  The telephone number of Grupo Radio Centro is (525) 55-728-4800.
 
History
 
Grupo Radio Centro is a family-controlled radio broadcasting company with roots in Mexican radio broadcasting dating back approximately 65 years.  Francisco Aguirre J., the founder of Grupo Radio Centro, initiated his radio broadcasting activities in 1946.  In 1952, he founded Organización Radio Centro (“ORC”), the sole owner and operator of two radio stations, Radio Centro and Radio Exitos.  In 1965, the Company formed Organización Impulsora de Radio (“OIR”), to provide national sales representation to affiliated radio stations outside Mexico City.  The Company was incorporated as Técnica de Desarrollo Publicitario, S.A. de C.V. on June 8, 1971, renamed Grupo Radio Centro, S.A. de C.V. on July 14, 1992 and renamed Grupo Radio Centro, S.A.B. de C.V. on July 31, 2006.  The bylaws of the Company provide for its indefinite existence.
 
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 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 these securities on the NYSE and the Mexican Stock Exchange.  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, pursuant to the Company’s bylaws (see Item 10, “Additional Information—Bylaws and Mexican Law—Limitations Affecting Non-Mexican Holders—Share Ownership”), 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 arrangement, 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, so the Series A Share trading line reflects trading of both Series A Shares and CPOs.
 
Capital Expenditures and Divestitures
 
Capital Expenditures
 
Capital expenditures were Ps. 13.0 million in 2010, Ps. 27.7 million in 2009 and Ps. 36.4 million in 2008.  In 2010, 2009 and 2008, capital expenditures were financed from working capital. In 2010, the Company’s principal capital expenditures were for transportation equipment.  In 2009 and 2008, the Company’s principal capital expenditures were for transportation equipment, which consists primarily of promotional trucks and vans.  The increase in 2010 compared to 2009 was primarily due to increased expenditures related to transportation equipment and office equipment.
 
 
10

 
 
Capital Divestitures
 
The Company had capital divestitures in the amount of Ps. 10.5 million in 2010, Ps. 6.6 million in 2009 and Ps. 1.2 million in 2008.  In each year, these divestitures were principally related to the sale of transportation equipment.   See Notes 1 and 12 to the Consolidated Financial Statements.
 
BUSINESS OVERVIEW
 
Grupo Radio Centro is a leading radio broadcasting company in Mexico.  For more than 40 years, the Company 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 music, entertainment, news and special event programs.  The Company’s revenue is derived primarily from the sale of commercial airtime to advertising agencies and businesses.  According to IBOPE AGB México (“IBOPE”), the Company’s Mexico City average audience share for the year ended December 31, 2010 was 49.0%, more than three times that of the next most popular radio broadcasting company in Mexico City for the same period.  See “—Broadcasting Operations” and “—Competition.”
 
In Mexico, Grupo Radio Centro currently owns eight AM and five FM radio stations.  The Company manages and operates an additional FM station located in Mexico City and an additional FM station located in the United States.  Of these 15 radio stations, Grupo Radio Centro operates five AM and six FM stations in Mexico City, one AM station in both Guadalajara and Monterrey, and one FM station in Los Angeles.  The remaining AM radio station in Mexico City is managed and operated by a third party pursuant to an operating agreement.
 
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.  According to IBOPE, for the year ended December 31, 2010, Grupo Radio Centro’s radio stations ranked as  five of the top 10 FM radio stations (out of a total of 31 FM stations) and three of the top 10 AM stations (out of a total of 35 AM stations). See “—Business Strategy.”
 
In the United States, we entered into an agreement on April 3, 2009 with Emmis Communications Corporation (“Emmis”), a U.S. radio broadcasting company.  We agreed to provide programming to, and sell advertising time on, KXOS-FM for up to seven years.  KXOS-FM is an Emmis-owned radio station broadcasting in Los Angeles, California, on the 93.9 FM frequency. We began operating the station in the contemporary Spanish-language hits format on April 15, 2009. We operate KXOS-FM through our subsidiary, Grupo Radio Centro LA, LLC (“GRC-LA”), which was incorporated on March 13, 2009 as a Delaware limited liability company.  According to Arbitron Inc., a media and marketing research firm, as of December 31, 2010, KXOS-FM had an audience share of 1.6% and was ranked 25 out of a total of 76 stations in the Los Angeles metropolitan area and an audience share of 3.1% and was ranked 14 in terms of the Hispanic population.
 
In addition to its radio broadcasting activities, the Company, under the trade name Organización Impulsora de Radio, acts as the national sales representative for, and provides programming to, a network of affiliates in Mexico.  At December 31, 2010, the Company had 110 affiliates in76 cities throughout Mexico.
 
Business Strategy
 
The Company’s strategy is to optimize cash flow from operations by maintaining its leading market position.
 
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 major station formats, including the following:
 
 
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·
Grupera—Diverse Musical Genres,
 
 
·
Juvenil—Youth Oriented,
 
 
·
Spanish Language—Contemporary Music,
 
 
·
English Language—Classic Rock,
 
 
·
English Language—Contemporary Music,
 
 
·
Spanish Language—Classics, News/Talk Show, and
 
 
·
English Language—Music/News.
 
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 rationales:  (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 distinguishes itself from its smaller competitors, who cannot offer as comprehensive coverage of the Mexican radio audience.  The Company offers advertisers exposure to listening audiences targeted to correspond with the demographic profiles advertisers seek and provides advertisers with their choice of either focused or broad audience exposure across a comprehensive range of income classes and age groups.
 
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 balancing the mix of its station formats to correspond to the needs of the overall market and being proactive in the management of each individual station format and adjusting to the evolution of its particular market segment.
 
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 de Radio Red” from 5:45 a.m. to 10:00 a.m. to the 23 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 “—OIR Network.”
 
 
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Broadcasting Operations
 
Radio Stations
 
Except as noted, the following table sets forth certain information about the radio stations Grupo Radio Centro operates in Mexico City as of December 31, 2010:
 
Station
 
Frequency
 
Power 
(Watts)
 
 
 
Station Format
 
Total
Market
Rank(1)(2)
   
Total
Audience
Share(1)(3)
   
Band
Rank(1)(4)
 
Target
Demographic
Segments
XEQR-FM
 
107.3 mhz
    100,000  
Grupera—Diverse Musical Genres
    1       14.0 %     1  
Ages 13-44
                                         
XERC-FM
 
97.7 mhz
    100,000  
Juvenil— Youth Oriented
    9       3.5 %     8  
Ages 8-34
                                         
XEJP-FM
 
93.7 mhz
    100,000  
Spanish Language—Contemporary Music
    4       6.5 %     4  
Ages 18-44
                                         
XHFO-FM(5)
 
92.1 mhz
    150,000  
English Language—Classic Rock
    5       5.7 %     5  
Ages 18-44
                                         
XHFAJ-FM
 
91.3 mhz
    100,000  
English Language—Contemporary Music
    3       8.4 %     3  
Ages 13-34
                                         
XEQR-AM
 
1030 khz
    50,000  
Spanish Language—Talk Show
    6       4.3 %     1  
Ages 25+
                                         
XEJP-AM
 
1150 khz
    50,000  
Spanish Language Classics
    10       3.4 %     2  
Ages 35+
                                         
XERED-AM
 
1110 khz
    100,000  
News / Talk Show
    22       1.1 %     5  
Ages 25+
                                         
XHRED-FM
 
88.1 mhz
    100,000  
News / English Language—Music
    21       1.1 %     17  
Ages 25 +
                                         
XERC-AM
 
790 khz
    50,000  
News
    38       0.4 %     13  
Ages 25+
                                         
XEN-AM
 
690 khz
    100,000  
News / Talk Show
    37       0.4 %     12  
Ages 25+
 

(1)
Source: IBOPE AGB México.
(2)
Total market rank is determined based on each station’s annual average share of the total radio audience.
(3)
Total audience share represents each station’s annual average share of the total radio audience.
(4)
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).
(5)
XHFO-FM is operated by Grupo Radio Centro pursuant to an operating agreement that was renewed on October 16, 2008 for five years ending on January 2, 2014.  For the year ended December 31, 2010, XHFO-FM accounted for approximately 13.0% of Grupo Radio Centro’s broadcasting revenue.
 
 
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Programming
 
The Company currently produces all of the programming for the stations it owns or operates.  The Company also provides programming to its network of affiliates.
 
The programming the Company produces includes playing recorded music, covering live music events (such as concerts), and airing special musical programs and news and talk show programs.  Through its Noticentro news division, the Company produces daily news programs consisting of three-minute updates and 10-minute summaries of local, national and international news that are broadcast through Formato 21, the Company’s 24-hour all-news station, and the majority of its other stations in Mexico City.
 
The Company’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 regularly conducts 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.  Grupo Radio Centro conducted approximately 287,000 interviews in 2010 and 250,000 interviews in 2009.  The Company believes that no competitor has developed an internal research capability as extensive as its own.
 
Production and Transmission of Programming
 
Audio Engineering.  Grupo Radio Centro has 18 production studios in which musical material, advertisements, informational messages, news and promotional spots are recorded on hard drive, compact disk, and DVD-audio through the Maestro Automation System.  This system permits the direct transmission of audio recordings to the Company’s 35 workstations, where they are processed and sent to broadcast sites.
 
Grupo Radio Centro also maintains 13 on-air studios, each of which is linked to Grupo Radio Centro’s automated programming computer network via fiber optics.  Grupo Radio Centro’s primary studio operations are substantially fully digital and utilize state-of-the-art computer networks to record, schedule and play all news, music, promotional and advertising material.  Currently, the Company has a single high-speed computer network installed both in on-air studios and in production studios.  In 2008, the Company installed two digital mixer consoles used by OIR.
 
Grupo Radio Centro’s news division uses the News Room system, which enables news writers to provide radio announcers with information directly through scrolling text that runs across a flat-panel screen while the announcers are on air.  The system is used primarily in the Formato 21 radio station, but it also provides information to news centers in other radio stations.  The News Room system, which receives news reports from the Associated Press (AP), Agence France-Presse (AFP), Notimex F Agency and Reuters, has reduced considerably the amount of paper used during news programs.
 
 Transmission.  Each of the Company’s radio stations 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 switch to back-up power in case of a power outage.  In addition, the main FM transmitter facility is equipped with an uninterruptible power supply to prevent the loss of airtime during the transfer to back-up power.
 
Grupo Radio Centro uses multiplexed networks for transmission, which allows five of its AM stations to operate at three sites, each using one antenna.  Similarly, five FM stations are multiplexed in a common panel master antenna on the Cerro del Chiquihuite, which Grupo Radio Centro believes is ideally located at 540 meters above the average terrain level in Mexico City.  One FM radio station operated by the Company transmits from the World Trade Center building in Mexico City.
 
In 2007, the Company renovated a location to serve as an alternate transmission site as a back-up studio and production space.  This facility is equipped with two small production studios, six transmission booths for talk show or news programs, and five workstations for music programs.  The facility also has a sophisticated multiplexing network for up to five stereo channels for the FM stations and six digital encoders/decoders to connect to the transmitting plants.  If there is an emergency, the alternate site can be controlled remotely from the XERC-FM, XEJP-FM and XEQR-FM radio stations in Mexico City.
 
 
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In 2008, the Company began renovating an additional alternate transmission site for the studios of 11 of the Company’s Mexico City radio stations.  The alternate site, which was completed in 2009, is equipped with two small production studios, six transmitter booths for talk show and news programs, and five workstations for music programs.
 
In December 2008, the Company obtained authorization from the SCT to increase the power at two stations: XEDKR-AM (in Jalisco) was increased from one to 10 kilowatts, and XESTN-AM (in Monterrey) was increased from one to five kilowatts.  In June 2009 the Company completed a new transmission site which is controlled remotely in a new building from which XEDKR-AM currently operates. In September 2009, the Company completed upgrades to its XESTN-AM transmission site.  Both stations now operate with increased power.
 
Investment in Technology
 
The Company consistently invests in state-of-the-art equipment, the development and deployment of new operating systems and the training of its engineering and operating personnel.  The Company believes these investments enable it to produce high-quality programming with few on-air errors and to broadcast a superior signal to listeners’ radios.  In addition, the Company’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, which reduces customers’ monitoring costs and enhances customers’ goodwill.  The Company believes that its equipment and engineering staff give it a competitive edge in Mexico City radio broadcasting.
 
Currently, all AM and FM radio broadcast signals in Mexico are analog.  However, in recent years there have been efforts to develop, test and implement radio digital audio broadcasting (DAB), using either the “in-band-on-channel” (IBOC) U.S. broadcasting model or the “out-of-band” European broadcasting model.  The Cámara Nacional de la Industria de Radio y Televisión (National Chamber of the Radio and Television Industries, or “CIRT”) has been analyzing DAB proposals and created a task force with the Comisión Federal de Telecomunicaciones (Mexican Federal Telecommunications Commission or “Cofetel”) in order to introduce DAB in Mexico.  In February 2011, Cofetel approved the IBOC standard for AM and FM radio broadcast signals in Mexico.  Cofetel announced that the adoption of IBOC would be voluntary for AM and FM station licensees and that IBOC would be used in hybrid mode, allowing for continued use of analog signals.  The approval of IBOC does not prevent Cofetel from evaluating other broadcasting technologies in other bands of frequencies assigned to broadcasting.  The adoption of IBOC is pending final approval by the Comisión Federal de Mejora Regulatoria (Federal Commission for the Improvement of Regulations).  If implemented, IBOC would eliminate fading, static and other interference that adversely affects the listening experience.
 
The Company has actively participated in the analysis of the adoption of DAB in Mexico through its representation in CIRT and by supporting Cofetel’s Comité Mixto de Tecnologías Digitales (Mixed Committee on Digital Technology).  The Company has also supported the adoption of DAB in Mexico by installing and operating advanced digital radio transmission systems on an experimental basis.   From October to December 2008, the Company tested a Digital Broadcasting System from its Constituyentes building.  The system’s capabilities included the transmission on one digital radio channel of two video programs, eight audio CD quality programs, data, and a webcam signal. The Company demonstrated the system with a reduced power transmitter during “CIRT Radio Week” in October 2008.   The demonstration included more than 20 different types of DAB receivers.  The Company plans to adopt IBOC by 2015.
 
Sale of Airtime and Marketing
 
Our two largest individual customers in 2010 were Wal Mart de México, S.A.B. de C.V. (“Wal Mart”) and Organización Soriana, S.A.B. de C.V. Soriana (“Tiendas Soriana”). In 2008 and 2009, our two largest customers were Wal Mart and Tiendas Comercial Mexicana, S.A.B. de C.V. (“Comercial Mexicana”).  In 2010, Wal Mart represented 10.4% and Tiendas Soriana represented 3.4% of our total broadcasting revenue, excluding revenue from our operations in the United States.  In 2009, Wal Mart represented 7.0% and Comercial Mexicana represented 4.0% of our total broadcasting revenue, excluding revenue from our operations in the United States.  In 2008, Wal Mart represented 6.6% and Comercial Mexicana represented 3.7% of our total broadcasting revenue.  The Companies comprising Grupo Carso are also key customers, representing 5.2% of our total broadcasting revenue in 2010 and 6.4% in 2009, excluding revenue from our operations in the United States.
 
 
15

 
 
Sales of commercial airtime 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, 2010, the Company had a sales force of 29 individuals, of which 15 marketed primarily to advertising agencies and major customer accounts, and 14 marketed to small and mid-sized customer 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 customers who purchase airtime on multiple stations; the largest discounts are offered to customers who purchase airtime on all of its stations.  The Company charges higher rates to customers who purchase airtime during “special events,” such as live concerts and special news features.
 
The Company sells some commercial airtime in advance.  The advance-sales arrangements guarantee the rate in effect at the time of purchase to advertisers who deposit cash with Grupo Radio Centro in an amount equal to their advertising commitment for an agreed period.  These advertisers are also 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 2010, revenue recognized under advance-sale arrangements, including related interest income, accounted for approximately 22.0% of total broadcasting revenue (excluding revenue from our operations in the United States), compared to 24.9% for 2009 and 33.7% for 2008.
 
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 sold 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 the benefits of guaranteed rates and bonus airtime under its advance-sales plans attract advertisers who would not otherwise purchase advertising time.  However, any decrease in future inflation rates 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, 2010, Grupo Radio Centro had 110 affiliates located in 76 cities throughout Mexico. During the last three years, broadcasting revenue from OIR-related activities ranged from 3.2% to 3.3% of total broadcasting revenue (excluding revenue from our operations in the United States).  In 2010, approximately 3.2% of the Company’s revenue (excluding revenue from our operations in the United States) was attributable to its work through OIR, and no single affiliate represented more than 15.6% of total OIR-related revenue.
 
At December 31, 2010, 13 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 advertising aimed at a national audience is sold through networks of affiliated radio stations.  Pursuant to its standard affiliate agreement, which is terminable at will by either party on 60 days’ notice, OIR agrees to purchase commercial airtime from affiliated stations, compensating such stations for their airtime with a percentage of the revenue obtained on the resale of commercial airtime to national advertisers.  The affiliates agree to broadcast certain programs at specified times with advertising spots of specified duration.  Compensation paid to each affiliate varies depending on the size of each affiliate’s market.
 
 
16

 
 
OIR transmits special event programs, including national advertising, directly to certain affiliates via satellite.  In December 2005, the Company installed a new satellite up-link system with state-of-the-art technologies, including Digital Video Broadcasting (DVB) transmission, with 10 digital stereo channels.  All of our affiliates are able to receive OIR special event programs via satellite from Mexico City.
 
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, 2010, there were 54 commercial radio stations in Mexico City 31 AM and 23 FM stations) and twelve not-for-profit, public-service stations (four FM and eight AM).  These stations 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 December 31, 2010, and a chart depicting the audience share of each.
 
Operation of Mexico City Stations by Grupo Radio Centro and its Principal Competitors(1)
 
   
AM Stations
   
FM Stations
   
Total
 
                         
Grupo Radio Centro
    5       6       11  
Grupo Acir
    2       4       6  
Televisa Radio
    3       3       6  
NRM Comunicaciones
    3       3       6  
Grupo Radio Fórmula
    3       2       5  
Grupo Imagen
    0       2       2  
MVS Radio
    0       2       2  
                         
Total
    16       22       38  
 

(1)      Source: Grupo Radio Centro.
 
 
17

 
 
Mexico City Radio Audience Share (1970-2010)(1)
 
 

(1)
Sources: INRA, Arbitron, Inc. and IBOPE.
(2)
In 1995, the Company began operating the three stations owned by Radio Programas de México.  Accordingly, from 1995, the Company’s audience share includes the audience share of these three stations.  In 1996, the Company acquired these stations.
(3)
In 1995, Grupo Acir acquired the three stations owned by Grupo Artsa.
(4)
As of 1994, Núcleo Radio Mil (NRM) no longer owns XECO-AM and XEUR-AM.  In 1995, NRM purchased XHMM-FM.
(5)
Includes average audience share of stations owned by Grupo Imagen until its separation from MVS Radio in December 1999.
 
According to IBOPE, the Company’s Mexico City audience share increased to 50.4% in 2010.  According to IBOPE, the Company’s average Mexico City audience share increased from 42.9% in 2008 to 43.4% in 2009.  The Company has experienced gradual declines in previous years, which were mainly attributable to increased competition from other radio stations that adopted formats similar to the Company’s most successful formats, including Juvenil—Youth Oriented, Grupera—Diverse Musical Genres and News/Talk Show.
 
The Company believes that its balanced portfolio of station formats reduces the impact of a decline in audience share of any one format segment or station.  For example, the Company’s most popular station, XEQR-FM, which was the top-ranked station in Mexico City for the year ended December 31, 2010, represented only 27.6% of the Company’s total radio audience.  However, there can be no assurance that competition within, or a decline in the popularity of, a given format will not decrease the Company’s aggregate audience share in the future.
 
In addition, the Company faces strong competition for advertising revenue from both television and various print media.
 
OIR Network Competition
 
The Mexican radio-network market is highly competitive.  As of December 31, 2010, there were 28 radio networks serving 706 AM radio stations and 443 FM radio 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 served by OIR to compete effectively.
 
 
18

 
 
Significant Subsidiaries
 
The following table sets forth the Company’s significant subsidiaries at December 31, 2010:
 
Name of the Company
 
Jurisdiction of
Establishment
 
Percentage of
Ownership and
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
    99.9 %
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
               
Estación 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 LA, LLC
 
United States of America
    100.0 %(1)
Radio station
               
GRC Comunicaciones, S.A. de C.V.
 
Mexico
    100.0 %
Marketing company
               
GRC Radiodifusión, S.A. (formerly Aerocer, S.A.)
 
Mexico
    99.9 %
Marketing company
               
Promotora Técnica 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
 

(1) As the result of a capital reduction in February 2010, the Company owns 100% of Grupo Radio Centro LA, LLC.  See Item 7, “Major Shareholders and Related Party Transactions—Related Party Transactions—Investment in GRC-LA.”
 
19

 
 
Name of the Company
 
Jurisdiction of
Establishment
 
Percentage of
Ownership and
Voting Interest
 
Description
To2 México, S.A. de C.V.
 
Mexico
    100 %
Service company
               
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
               
Radiodifusión 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
               
Música, Música, Música, S.A. de C.V.
 
Mexico
    99.9 %
Non-operating company
               
Promotora de Éxitos, S.A. de C.V.
 
Mexico
    99.9 %
Non-operating company
               
Producciones Artísticas Internacionales, S.A. de C.V.
 
Mexico
    99.9 %
Non-operating company
 
Property and Equipment
 
All of Grupo Radio Centro’s tangible assets are located in Mexico.  At December 31, 2010, the net book value of all property and equipment was approximately Ps. 436.5 million (U.S.$ 35.3 million).
 
Grupo Radio Centro’s principal executive offices and studios are located in Mexico City and are owned by the Company.  In 1992 Grupo Radio Centro purchased the Constituyentes building, a 102,000 square foot building of which, at December 31, 2010, the Company occupied approximately 81,000 square feet.  The remainder is 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 Mexican law, Grupo Radio Centro purchased and received authorization from Telecomunicaciones de México, a state-owned entity, to operate its own up-link equipment.  This up-link equipment has been operational since the end of 1994 and was upgraded in December 2005 and the first quarter of 2006 (see “—Business Strategy—Production and Transmission of Programming”).
 
Grupo Radio Centro continues to own the building in which its administrative offices and studios were located immediately before 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.
 
Substantially all of the Company’s property, excluding its broadcasting equipment, is subject to a first priority lien under our credit facility. See Item 5, “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”
 
 
20

 
REGULATORY FRAMEWORK
 
The business of Grupo Radio Centro is subject to regulation and oversight by the SCT and Cofetel.  The SCT is part of the executive branch of the Mexican federal government and Cofetel is a separate administrative agency independent of the SCT.  Regulation and oversight are governed by the Ley Federal de Radio y Televisión (Federal Radio and Television Law), the Ley Federal de Telecomunicaciones (Federal Telecommunications Law), the regulations issued pursuant to these laws and the licenses granted by the SCT.  We are also subject to oversight by the Procuraduría Federal del Consumidor (Federal Agency for Consumer Protection) and the Comisión Federal de Competencia Económica (Federal Competition Commission).
 
Regulation of Radio Broadcasting by Mexico
 
Licenses.  Under the Federal Radio and Television Law, amended by the Mexican Congress in April 2006 and June 2009, 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.  After a call for bids and a public bidding process, a 20-year license is granted to the winning applicant upon payment of a fee.  The SCT through Cofetel, 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 specific 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, if the Company’s license were revoked for certain specified reasons, Grupo Radio Centro would forfeit to the Mexican government its transmission and antenna facilities with respect to the license.  If the license were terminated early 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, if the SCT, through Cofetel, terminates or revokes a license, the licensee may not obtain a new license for one to five years and, in some cases, may be forbidden from obtaining a new license at all.  Under current regulations, we believe that it is unlikely that additional licenses will be granted in the Mexico City market.
 
The licensee has a preferential right to renew the license for periods of up to 20 years (with most terms for renewal currently being granted for up to 12 years) under a non-competitive renewal process.  Renewals are generally granted to licensees that have substantially complied with the applicable law and the terms of their licenses.  The licenses for nine of Grupo Radio Centro’s radio stations (XEQR-AM, XERC-AM, XEEST-AM, XEJP-AM, XERED-AM, XEN-AM, XEQR-FM, XERC-FM AND XHFAJ-FM) were renewed and are now set to expire in 2016.  The license for XHRED-FM was renewed and is now set to expire in 2019.  The license for XEJP-FM is set to expire in 2012.  The license for XEDKR-AM (in Guadalajara) will expire in October 2015, and the license for XESTN-AM (in Monterrey) will expire in November 2015.
 
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 is subject to the prior approval of the SCT.  A license may only be assigned if the license has been in effect for more than three years, the licensee has complied with all of its obligations under the license and has obtained a favorable opinion of the Federal Competition Commission.
 
Supervision of Operations.  Cofetel conducts regular inspections of the operations of the radio stations, and the companies or persons to whom licenses have been granted must file annual technical, statistical, financial and legal reports with Cofetel.
 
Under Mexican law, radio programming is not subject to judicial or administrative censorship, except that programming is subject to various regulations, including prohibitions on explicit 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.
 
 
21

 
 
Each licensee is required to provide a limited amount of broadcasting time free of charge to all registered political parties and the Instituto Federal Electoral (Federal Electoral Institute or “IFE”).  See “— Political Advertising.”
 
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.  Licensees are also prohibited from broadcasting advertisements that are misleading.  Advertisements for certain products and services are subject to restrictions or require government approval before 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 total broadcast time may be used for advertisements.  That time must be divided proportionately among broadcasting hours.
 
The Company sets its minimum advertising rates and registers such rates through Cofetel.  Commercial airtime may not be sold at lower rates than those registered with the SCT.  There are no restrictions on maximum rates that may be charged.
 
Broadcast Tax.  All radio stations in Mexico are subject to a tax payable by granting the Mexican government the right to use a portion of broadcast time.  Radio stations must satisfy this tax by providing the Mexican government with several advertising spots lasting between 20 to 30 seconds each.  The amount of broadcasting time allotted to the government is currently fixed at 35 minutes each day between 6:00 a.m. and midnight.  The use of this time is not cumulative, and the Mexican government forfeits any time it does not use in any day.  The Mexican government’s spots must be distributed on a proportional and equitable basis throughout the relevant programming period.
 
Public service announcements provided by the Mexican government are prohibited from competing with the licensee’s programming, and Mexican government programming that promotes the consumption of products or services must be limited to the general promotion of Mexico’s goods and services.
 
Political Advertising.  Several articles of the Mexican constitution relating to political parties and elections were amended in November 2007.  A new electoral code implementing the amendments became effective on January 15, 2008.  The constitutional amendments and the electoral code prohibit political parties from directly or indirectly purchasing broadcast time on any radio or television station.  In addition, private individuals and entities are prohibited from purchasing advertising on radio or television aimed at influencing voter preferences.
 
The Mexican government is allotted a certain amount of time under concession agreements with broadcasters and, in turn, gives a portion of that time to the IFE to distribute among the political parties (during election years) and for the use of the IFE.  The broadcast time that political parties receive through the IFE is free of charge and airs during primetime hours.  During campaign season, the IFE is granted 48 minutes of the 65 minutes the Mexican government receives daily as a broadcast tax.  In other periods, the IFE receives eight minutes.  The time allocated by IFE to political parties is the only broadcast time at their disposal as, under the electoral code, political parties are prohibited from purchasing broadcast time.  IFE has supervisory powers and is able to administer sanctions for violations of the provisions of the electoral code.
 
Other.  Mexican companies are subject to the Ley Federal de Competencia Económica (Federal Economic Competition Law), which promotes fair competition and prevents monopolistic practices.
 
 
22

 
 
As a result of the increase in Grupo Radio Centro’s share of the Mexico City radio market following its acquisition of Radiodifusión RED, S.A. in 1996, 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 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 generally are not subject.  The Company received Federal Competition Commission approval of its acquisition of XEN-AM in July 2001 because the Company sold two of its AM stations in 2000.  No assurance can be given that the Federal Competition Commission will permit the Company to make any additional investments should it desire to do so.
 
The Federal Economic Competition Law was amended in 2006.  These amendments strengthened the authority of the Federal Competition Commission, expanded the definition of monopolistic practices, provided a more rigorous approval process for business combinations and established more stringent penalties, including substantially higher fines and the divestiture of assets.  As a result, it is possible that the Federal Competition Commission will more strictly enforce the Federal Economic Competition Law, which could restrict our operations.
 
The Federal Telecommunications Law was also amended in 2006, and interpretive regulations were issued in October 2007.  The amendments to the Federal Telecommunications Law subject radio and television broadcasting companies such as Grupo Radio Centro to the oversight of Cofetel.  The Federal Telecommunications Law also covers the transmission of restricted radio signals and other telecommunications services at certain frequencies.
 
The Federal Telecommunications Law expanded Cofetel’s authority to conduct public auctions of available radio and television frequencies.  Under this law, while the SCT retains the ultimate authority to issue licenses, Cofetel is permitted to engage in granting, prorogation, and completion of concessions, permissions and allocations to use and operate frequency bands attributed to the broadcasting service, acting as a branch of the SCT.
 
Mexican law prohibits 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 did not change these Mexican regulations.
 
 
23

 
 
Intellectual Property
 
Mexico.  Grupo Radio Centro (directly or through its subsidiaries) has registered or filed for registration with the Instituto Mexicano de la Propiedad Industrial (Mexican Institute of Industrial Property) the following service marks (and their corresponding design, where indicated):
 
·      “Radio Red”
·      “Stereo 97.7”
·      “Joya”
·      “Alegría”
·      “El Fonógrafo del Recuerdo”
·      “Centro”
·      “Variedades”
·      “Formato 21”
·      “Stereo Joya”
·      “Hoy”
·      “NotiCentro” (and design)
·      “OIR”
·      “Sensación” (and design)
·      “Palco Deportivo”
·      “Universal” (and design)
·      “To2”
·      “Radio Programas de México”
·      “UNIRED”
·      “RPM”
·      “SERVIRED”
·      “ALFA 91.3”
·      “AUTORED”
·      “BANG”
 

In addition, Grupo Radio Centro (directly or through its subsidiaries) has registered or filed for registration the following commercial slogans:
 
·          “CRC Radiodifusión Internacional”
·          “Grupo Radio Centro Radiodifusión de México al Mundo”
·          “ORC Radiodifusión Valle de México”
·          “OIR Radiodifusión Nacional”
·          “Radio Centro, la Estación de la Gran Familia Mexicana”
·          “SER, Servicios Especializados de Radiodifusión”

United States. Grupo Radio Centro has filed for registration with the United States Patent and Trademark Office for the following service mark:
 
·         “Radio Éxitos”
 
Item 4A. Unresolved Staff Comments
 
Not applicable.
 
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 MFRS, which differ in certain respects from U.S. GAAP. Note 23 to the Consolidated Financial Statements provides a description of the principal differences between MFRS and U.S. GAAP, as they relate to Grupo Radio Centro, including differences related to certain cash flow information and a reconciliation to U.S. GAAP of operating income, net income and shareholders’ equity.
 
Beginning in 2008, the inflation accounting methods previously required by MFRS no longer apply, except if the economic environment in which we operate qualifies as inflationary. See “—Changes in Inflation Accounting.” As a result, the financial information in the Consolidated Financial Statements and throughout this Annual Report, for dates and periods after January 1, 2008 has been presented without inflation accounting. The financial information for dates and periods prior to January 1, 2008 has been expressed in constant pesos as of December 31, 2007.
 
 
24

 
 
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, its 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 airtime. 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 airtime, 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. Grupo Radio Centro historically has had sufficient cash flow from operations to meet its operating needs in all four calendar quarters.
 
The following table sets forth the Company’s broadcasting revenue and broadcasting income (excluding depreciation, amortization and corporate, general and administrative expenses) on a quarterly basis, in each case as a percentage of its respective total, for 2010, 2009 and 2008.
 
   
Broadcasting Revenue
   
Broadcasting Income
 
   
2010
   
2009
   
2008
   
2010
   
2009
   
2008
 
First quarter.
    18.3 %     19.8 %     17.4 %     2.5 %     22.8 %     8.5 %
Second quarter.
    23.0       22.6       23.6       18.8       24.3       22.9  
Third quarter.
    24.9       24.3       27.5       24.4       6.8       30.8  
Fourth quarter.
    33.8       33.3       31.5       54.3       46.1       37.8  
Total
    100 %     100 %     100 %     100 %     100 %     100 %

Historically, advertising expenditures by political campaigns represented an important part of the Company’s total broadcasting revenue during the congressional elections that occur every three years, including 2006, and during presidential elections that occur every six years (coinciding with congressional elections), including 2006. Since January 2008, Mexican law has prohibited political parties and private individuals from purchasing broadcast time for political advertising on any radio or television station. As a result, we no longer receive revenues from advertising by political campaigns. See Item 4, “Information on the Company—Business Overview—Broadcasting Operations—Sale of Airtime and Marketing.”
 
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.
 
Mexico began to enter a recession in the fourth quarter of 2008 during which GDP fell by approximately 1.6%. GDP fell by 6.5% in 2009 and has grown by approximately 5.5% in 2010. If the Mexican economy experiences another recession, if inflation or interest rates increase significantly or if the Mexican economy is otherwise adversely impacted, our business, financial condition or results of operations could be materially and adversely affected.
 
The annual rate of inflation in Mexico, as measured by changes in the INPC, was 4.4% for 2010. Inflation for the first quarter of 2011 was 1.1%. The adverse effects of high inflation on the Mexican economy might result in lower demand for broadcast advertising.
 
 
25

 
 
Loss Contingency
 
In 2002, Infored, S.A. de C.V. (“Infored”) and José Gutiérrez Vivó initiated an arbitration proceeding against us, seeking the rescission of a production contract and damages. In March 2004, an arbitration panel of the International Chamber of Commerce notified us of its decision to rescind the contract and award Infored and Mr. Gutiérrez Vivó, collectively, U.S.$ 21.1 million. As a result of the damages award, we recorded a provision for this contingent liability in the amount of U.S.$ 21.1 million as of December 31, 2003. For the year ended December 31, 2005, we recorded Ps. 14.3 million and, for the year ended December 31, 2004, we recorded Ps. 7.0 million in interest relating to this provision. As of March 31, 2006, the provision amounted to Ps. 253.6 million (nominal amount). We challenged the validity of the arbitration award, and on June 16, 2006, a Mexican court set aside and refused to enforce the arbitration award in Mexico. As a result, we reversed the provision and recorded it as an extraordinary income item in June 2006.
 
Since the June 2006 decision, legal proceedings have continued, and in June 2008, the June 2006 decision was reversed. We currently do not consider it necessary to record a provision for this matter because the June 2008 decision does not impose an obligation to pay the arbitration award and we have continued to challenge the award’s validity in the Mexican courts. See Item 8, “Financial Information¾Other Financial Information¾Legal and Arbitration Proceedings.”
 
Changes in Inflation Accounting
 
Through the end of 2007, MFRS required us to recognize certain effects of inflation in our financial statements. It also required us to restate financial statements from prior periods in constant pesos as of the end of the most recent period presented. As discussed below, due to the current level of inflation in Mexico, we have not applied the effects of inflation to our financial information in 2008, 2009 and 2010.
 
Due to the adoption of MFRS B-10, effective January 1, 2008, inflation accounting methods no longer apply unless the economic environment qualifies as “inflationary” for purposes of MFRS. An environment is considered inflationary if the cumulative inflation rate equals or exceeds 26.0% over the three preceding years (equivalent to an average of 8.0% in each year). Because of the relatively low level of Mexican inflation in recent years (4.4% in 2010, 3.6% in 2009 and 6.5% in 2008), the cumulative inflation rate in Mexico over the three-year period preceding December 31, 2010 does not qualify the Mexican economic environment as inflationary.
 
As a result, we have not applied the effects of inflation to our financial information in 2010, 2009 and 2008. In our financial information for 2010, 2009 and 2008, inflation adjustments for prior periods have not been removed from shareholders’ equity and the re-expressed amounts for non-monetary assets and liabilities at December 31, 2007 became the accounting basis for those assets and liabilities beginning on January 1, 2008 and for subsequent periods, as required by MFRS. In this respect, our financial statements for 2010, 2009 and 2008 are not comparable to those for prior periods.
 
In comparing our results for 2008 and any future periods without inflation accounting to results for prior periods that used inflation accounting, we consider that the most important effects of the cessation of inflation accounting, and of related changes in other accounting standards, to be as follows:
 
 
·
We no longer recognize monetary gains and losses attributable to the effects of inflation on our monetary assets and liabilities.
 
 
·
We have ceased to adjust the carrying values of non-monetary assets for inflation.
 
 
·
We no longer restate results of prior periods. Financial information for dates and periods prior to 2008 will continue to be expressed in constant pesos as of December 31, 2007.
 
 
·
We have ceased to use inflation-adjusted assumptions in determining our employee benefit obligations and instead use nominal discount rates and other assumptions.
 
 
26

 
 
Changes in MFRS
 
Note 3 to our Consolidated Financial Statements discusses new accounting pronouncements under MFRS that came into force in 2008, 2009 and 2010. The 2008, 2009 and 2010 pronouncements have already been fully implemented in the financial statements included in this Annual Report. Certain pronouncements have required us to change our financial presentation in 2010 in ways that have not had a material effect on our results of operations and our balance sheet.
 
Critical Accounting Policies
 
Revenue Recognition
 
Grupo Radio Centro’s revenue is generated mainly from the sale of commercial airtime to advertising agencies and businesses. The Company does not recognize sales of commercial airtime until after the relevant advertisement is broadcasted.
 
Impairment Testing
 
The Company is required to test for impairment of its long-lived assets in use, including goodwill and other intangible assets, at least on an annual basis. To calculate impairment loss of long-lived assets in use, it is necessary to determine the asset’s recovery value. Recovery value is defined as the greater of the net sales price of a cash-generating unit of the asset and the asset’s use value, which is the present value of estimated future cash flows. The determination of the underlying assumptions related to the recoverability of long-lived assets, including goodwill and other intangible assets, is subjective and requires the exercise of considerable judgment. Any changes in key assumptions about the Company’s business and prospects, or changes in market conditions, could result in an impairment charge.
 
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 at the time services are rendered by employees, based on the present value of the benefits determined under actuarial estimates. The amortization of unrecognized prior service cost, which represents changes in assumptions and adjustments based on experience that has not been recognized, is based on the employee’s estimated active service life. Other benefits to which employees may be entitled in accordance with Mexican law are recognized as an expense in the year in which they are paid.
 
The Company records a reserve for the estimated accrued seniority premiums, severance payments under certain circumstances and pension benefits, the amount of which is determined through actuarial estimates.
 
Deferred Taxes
 
Under MFRS, the Company is required to recognize income tax effects of basis differentials between the Company’s assets and liabilities for financial accounting and tax reporting purposes. This standard is similar to U.S. GAAP.
 
MFRS requires that all deferred taxes be classified as long-term. Under U.S. GAAP, deferred taxes are classified as either current or non-current based on the classification of the related asset or liability for financial reporting purposes.
 
2010 vs. 2009 Results of Operations
 
For the year ended December 31, 2010, broadcasting revenue was Ps. 907.9 million, representing a 15.5% increase compared to the Ps. 785.9 million reported in 2009. The increase in broadcasting revenue was mainly attributable to an increase in advertising expenditures by the Company’s clients, who purchased an additional Ps. 81.6 million worth of airtime in 2010 compared to 2009, as well as to an increase in revenues of Ps. 40.4 million from the Los Angeles radio station KXOS-FM during 2010 (due, in part, to KXOS-FM beginning in April 2009, resulting in a comparison between twelve months for the 2010 period and eight and a half months for the 2009 period).
 
 
27

 
 
The Company’s broadcasting expenses (excluding depreciation, amortization and corporate, general and administrative expenses) for the year ended December 31, 2010 were Ps. 688.1 million, a 15.6% increase compared to the Ps. 595.0 million reported in the same period for 2009. This increase was primarily due to (i) KXOS-FM beginning in April 2009, resulting in a comparison between twelve months for the 2010 period and eight and a half months for the 2009 period, (ii) higher sales commissions due to an increase in broadcasting revenue, and (iii) expenses related to the Company’s mass media advertising campaigns.
 
Broadcasting income (i.e., broadcasting revenue minus broadcasting expenses, excluding depreciation, amortization and corporate, general and administrative expenses) for the year ended December 31, 2010 was Ps. 219.8 million, an increase of 15.2% compared to the Ps. 190.9 million reported in 2009. This increase was mainly attributable to the increase in broadcasting revenue described above.
 
Depreciation and amortization expenses for the year ended December 31, 2010 were Ps. 23.9 million, a decrease of 8.3% compared to the Ps. 26.0 million reported in 2009. This decrease was due to a reduction in the Company’s depreciable asset base.
 
The Company’s corporate, general and administrative expenses for the year ended December 31, 2010 were Ps. 14.9 million, the same amount reported in 2009.
 
As a result of the foregoing, the Company reported operating income of Ps. 181.0 million for the year ended December 31, 2010, a 20.8% increase compared to the Ps. 149.9 million reported in 2009.
 
Other expenses, net, for the year ended December 31, 2010 were Ps. 42.5. million, a 36.1% decrease compared to the Ps. 66.5 million reported in 2009. This decrease was mainly attributable to legal expenses incurred in 2009 related to contractual agreements for the Los Angeles radio station, as well as revenue from tax credits during the third quarter of 2010 and to a reduction of the reserve for labor liabilities in the fourth quarter 2010.
 
The Company’s comprehensive financing cost for 2010 was Ps. 26.1 million, compared to the Ps. 40.6 million reported in 2009. This decrease was mainly due to a lower loss on net foreign currency exchange from Ps. 17.1 million in 2009 to Ps. 217,000 in 2010.
 
For the year ended December 31, 2010, the Company reported income before taxes of Ps. 112.4 million, compared to Ps. 42.8 million reported in 2009, mainly due to the increase in broadcasting revenue and to the decrease in the Company’s other expenses, net, and the Company’s comprehensive cost of financing .
 
The Company recorded income taxes of Ps. 51.9 million for the year ended December 31, 2010, compared to Ps. 38.3 million recorded in 2009, primarily due to higher taxable income. The Company’s effective tax rate decreased to 46.2% in 2010 from 89.6% in 2009. Although after 2007 we no longer recognize the effects of inflation in our financial statements, we do continue to recognize the impact of inflation for tax purposes. This causes our pretax income to be affected by taxable monetary gain or loss on our net monetary liabilities and by higher depreciation due to the application of inflation indexation on our assets. Additionally, our effective tax rate was lower in 2010 than in 2009 mainly because we recognized other income in 2010 that was exempt from taxes.
 
As a result of the foregoing, the Company recorded net income of Ps. 60.4 million for the year ended December 31, 2010, a significant increase when compared to net income of Ps. 4.4 million reported in 2009.
 
2009 vs. 2008 Results of Operations
 
For the year ended December 31, 2009, broadcasting revenue was Ps. 785.9 million, representing a 6.9% increase compared to the Ps. 735.1 million reported in 2008. The increase in broadcasting revenue was mainly attributable to a Ps. 27.2 million increase in advertising expenditures by the Company’s Mexican customers, who purchased more airtime in 2009 than in 2008 and to Ps. 23.6 million in revenues from the radio station we operate in Los Angeles.
 
 
28

 
 
 
The Company’s broadcasting expenses (excluding depreciation, amortization and corporate, general and administrative expenses) for the year ended December 31, 2009 were Ps. 595.0 million, an increase of 31.5% compared to the Ps. 452.4 million reported in 2008.  This increase was primarily due to (i) broadcasting expenses of Ps. 130.9 million incurred in connection with the radio station we operate in Los Angeles, which the Company began operating in April 2009, and (ii) higher sales commissions to the Company’s sales force, as a result of the increase in broadcasting revenue during 2009.
 
Broadcasting income (i.e., broadcasting revenue minus broadcasting expenses, excluding depreciation, amortization and corporate, general and administrative expenses) for the year ended December 31, 2009 was Ps. 190.9 million, a decrease of 32.5% compared to the Ps. 282.8 million reported in 2008.  This decrease was mainly attributable to the increase in broadcasting expenses, as described above.
 
Depreciation and amortization expenses for the year ended December 31, 2009 were Ps. 26.0 million, a decrease of 18.0% compared to the Ps. 31.7 million reported in 2008.  This decrease was due to a reduction in the Company’s depreciable asset base.
 
The Company’s corporate, general and administrative expenses for the year ended December 31, 2009 were Ps. 14.9 million, slightly higher than the Ps. 14.5 million reported in 2008.
 
As a result of the foregoing, the Company reported operating income of Ps. 149.9 million for the year ended December 31, 2009, a 36.6% decrease compared to the Ps. 236.6 million reported in 2008.
 
Other expenses, net, for the year ended December 31, 2009 were Ps. 66.5 million, a 16.9% increase compared to the Ps. 56.9 million reported in 2008.  This increase was mainly attributable to legal expenses incurred in connection with the transactions related to the radio station we operate in Los Angeles that the Company entered into with Emmis in April 2009.
 
The Company’s comprehensive financing cost for 2009 was Ps. 40.6 million, compared to the Ps. 7.7 million reported in 2008.  This increase was mainly due to interest expense related to the Company’s Ps. 200.0 million loan obtained from Banco Inbursa, S.A. in March 2009 and net foreign exchange loss attributable to an appreciation of the peso against the U.S. dollar, which resulted in a decline in the peso value of the Company’s U.S. dollar-denominated loan to GRC-LA.
 
For the year ended December 31, 2009, the Company reported income before taxes of Ps. 42.8 million, compared to Ps. 172.0 million reported in 2008, mainly due to an increase in broadcasting expenses and comprehensive financing cost, as described above.
 
The Company recorded income taxes of Ps. 38.3 million for the year ended December 31, 2009, compared to Ps. 45.3 million recorded in 2008, primarily due to lower taxable income.  The Company’s effective tax rate increased to 89.6% in 2009 from 26.3% in 2008.  Although after 2007 we no longer recognize the effects of inflation in our financial statements, we do continue to recognize the impact of inflation for tax purposes.  This causes our pretax income to be affected by taxable monetary gain or loss on our net monetary liabilities and by higher depreciation due to the application of inflation indexation on our assets.  Additionally, our effective tax rate was higher in 2009 than in 2008 because of the Company’s assessment that the tax losses resulting from the operating losses from the Company’s Los Angeles radio station will not be utilized to offset future taxable income in 2010.  Accordingly, the Company recorded a reserve against the total deferred tax benefits that would be derived from such tax losses.
 
As a result of the foregoing, the Company recorded net income of Ps. 4.4 million for the year ended December 31, 2009, compared to net income of Ps. 126.8 million reported in 2008.  The Company’s lower net income in 2009 reflected, in large part, operating losses generated by the radio station we operate in Los Angeles.  In 2009, the Aguirre family owned 49.0% of the investment in this station.  However, following a capital reduction of GRC-LA in February 2010, described under Item 7, “Major Shareholders and Related Party Transactions— Related Party Transactions –Investment in GRC-LA,” the Company owns 100% of this investment.  As a result, future losses or income generated by GRC-LA will not be offset by the family’s minority interest and will be borne fully by the Company.
 
 
29

 
 
Liquidity and Capital Resources
 
The Company’s primary source of liquidity is cash flow from operations.  The Company’s operating activities provided Ps. 136.8 million in 2010, Ps. 55.4 million in 2009 and Ps. 69.3 million in 2008. Working capital at December 31, 2010 was Ps. 174.5 million and at December 31, 2009 was Ps. 247.0 million.
 
Although cash flow from operations historically has been sufficient to cover the Company’s working capital needs, the Company’s investment in April 2009 in a Los Angeles radio station has resulted in increased working capital needs.  On June 1, 2010, the Company borrowed Ps. 30 million under the revolving tranche of our credit facility to meet working capital needs, which we repaid on November 9, 2010.  The Company currently has a borrowing capacity of Ps. 60 million under its credit facility but its ability to borrow under that facility is subject to compliance with covenants.  Although the Company currently expects to be able to meet its working capital needs in 2011 with cash flow from operations, there can be no assurances that it will not need to borrow further amounts.
 
During 2010, the Company’s principal use of funds, other than for operating purposes and capital expenditures was the payment of dividends in the amount of Ps. 100 million and the repayment of indebtedness in the principal amount of Ps. 70.0 million.  During 2009, the Company’s principal use of funds, other than for operating purposes and capital expenditures was the payment of dividends in the amount of Ps. 100.0 million and the repayment of indebtedness in the principal amount of Ps. 30.0 million.  In 2008, the Company’s principal use of funds, other than for operating purposes and capital expenditures was the payment of dividends in the amount of Ps. 100.0 million. Grupo Radio Centro may from time to time repurchase its outstanding equity securities if market conditions and other relevant considerations make such repurchases appropriate.
 
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.  The Company has not entered into any arrangements for the purpose of hedging interest rate or currency risk.
 
Indebtedness
 
In 2006, we entered into a credit facility with Banco Inbursa S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa for a secured peso-denominated loan in two tranches in an aggregate principal amount equivalent to up to U.S.$ 21.0 million.  As of the date hereof, Ps. 110 million (or approximately U.S.$ 9.4 million) is outstanding under this credit facility.  The first, non-revolving tranche is for a peso-denominated amount equivalent to up to U.S.$ 14 million to be used for capital expenditures and other corporate purposes.  The second, revolving tranche is for a peso-denominated amount equivalent to up to U.S.$ 7 million to be used for working capital purposes.
 
On March 26, 2009, we drew down on the first tranche, in the amount of Ps. 200 million, to finance the prepayment of the first two years of fees under the local marketing agreement we entered into with Emmis.  We are required to repay the principal amount over five years in 20 quarterly installments beginning June 1, 2009 and make quarterly interest payments at an annual rate of 13.0% through March 18, 2010 and at 9.5% thereafter.  On June 1, 2010, we borrowed Ps. 30 million under the second tranche for working capital purposes, which we repaid on November 9, 2010.
 
Amounts borrowed under the credit facility are guaranteed by several of our subsidiaries and secured by a first priority lien on substantially all of our property, including our corporate headquarters but excluding any equipment used for broadcasting.
 
 
30

 

As of the date hereof, our remaining borrowing capacity under the credit facility is Ps. 60 million.  The credit facility will expire on June 16, 2015.  The principal conditions to drawing down include that we are in compliance with our obligations under the credit facility; there be no material adverse change resulting in a loss or liability to us equivalent to 5% or more of our total assets (as such condition is more fully defined in the credit facility) and no material adverse change in the banking environment or international capital markets; borrowed amounts be secured by a first priority lien on substantially all of our property; and there be no event of default under the credit facility has occurred.  If any of the conditions to draw down is not met or waived, we will be unable to obtain funds under the credit facility.
 
The credit facility contains covenants requiring us to maintain certain financial ratios and comply with other financial conditions that, among other things, limit our ability to incur additional indebtedness, pay dividends, pledge assets and enter into transactions with affiliates. The financial covenants (using terms defined in the credit facility) include an interest coverage ratio of at least 2.5 to 1, a total debt to EBITDA ratio of no more than 3 to 1, a fixed charges coverage ratio of at least 1.75 to 1, a cash balance of at least U.S.$ 1.75 million, and shareholders’ equity of at least Ps. 850 million.
 
We were not in compliance with the fixed charges coverage ratio for the first and second quarters of 2010 and obtained waivers from the lender of this non-compliance for each quarter.   Since then, we have been in compliance with our financial covenants.  If we fail to comply with any covenant under the credit facility in the future, there can be no assurance that we will be able to obtain waivers or that the lender will not accelerate amounts due under the credit facility.  If we are unable to repay amounts due under the credit facility, the lender could proceed against the collateral securing our indebtedness.  Such events would have a material adverse effect on our business, financial condition and results of operations.
 
Off-Balance Sheet Arrangements
 
In 2010, the Company had no off-balance sheet arrangements that have or, in the opinion of the Company, are reasonably likely to have a current or future effect on the Company’s financial condition.
 
Contractual Obligations
 
In the table below we set forth contractual obligations consisting of long-term debt as of December 31, 2010 and the period in which the contractual obligations come due.  The amount of our long-term debt reported in the table excludes fee payments, which are primarily variable amounts.  The table below does not include pension liabilities, tax liabilities or accounts payable.
 
   
Payments Due by Period
 
   
(as of December 31, 2010)
 
   
Total
   
2011
    2012-2013     2014-2015    
2016 and beyond
 
   
(in millions of Mexican pesos)
 
Contractual obligations:
                                 
Total debt(1)
  Ps. 130.0     Ps. 40.0     Ps. 80.0     Ps. 10.0     Ps.  
Interest
    20.8       10.7       9.9       0.2        
 

(1)
Excludes interest payments and fees.
 
U.S. GAAP Reconciliation
 
Net income under U.S. GAAP was Ps. 60.4 million for 2010, Ps. 4.4 million for 2009 and Ps. 126.7 million for 2008.  For the year ended December 31, 2009, no U.S. GAAP adjustment to net income was required because, as of January 1, 2009, a non-controlling interest in subsidiaries is treated as a part of shareholders’ equity under both U.S. GAAP and MFRS.  The slight difference between net income under MFRS and U.S. GAAP for the years ended December 31, 2008 and 2007 was due to the treatment under U.S. GAAP of a non-controlling interest in subsidiaries of the Company as a liability.
 
 
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Operating income under U.S. GAAP was Ps. 138.5 million for the year ended December 31, 2010, Ps. 83.4 million for 2009 and Ps. 179.7 million for 2008.  For the years ended December 31, 2010, 2009 and 2008, certain other expenses, net of the Company that are classified as non-operating charges under MFRS are charged against operating income under U.S. GAAP
 
Shareholders’ equity under U.S. GAAP was Ps. 1,279.9 million at December 31, 2010, Ps. 1,380.1 million at December 31, 2009 and Ps.1,422.4 million at December 31, 2008.  In 2010 and 2008, the difference between shareholders’ equity under MFRS and U.S. GAAP was mainly due to the U.S. GAAP limitation, which unlike MFRS, does not allow the Company to record an increase in value of previously impaired buildings held for sale.  In 2009, the difference was mainly due to the treatment under U.S. GAAP of a non-controlling interest in subsidiaries of the Company as a liability, which was offset by the increase in value of previously impaired buildings held for sale.
 
Pursuant to MFRS, for dates and periods prior to 2008, 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, the Company’s financial statements for 2010, 2009 and 2008 include an expanded recognition of deferred taxes under MFRS 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.
 
For a further discussion of the differences between MFRS and U.S. GAAP as they relate to Grupo Radio Centro, see Note 23 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 and the chief executive officer.  Our bylaws provide that the board of directors consist of a minimum of seven and a maximum of 21 directors and an equal number of alternate directors.  The Company’s shareholders elect each director and alternate director by simple majority vote at the annual ordinary general meeting.  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.  A person who has acted as an external auditor of the Company or of companies that form a part of the Company’s corporate group or consortium during the year prior to appointment may not be a director.
 
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, controlling shareholders, important customers, 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 alternates of independent directors, must also meet the requirements for independent directors.
 
The board of directors currently consists of 12 members.  Alejandro Sepulveda de la Fuente is the secretary to the board of directors.  The current members of the board of directors were reelected at the annual shareholders meeting on April 28, 2011 for a one-year term.  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, two Aguirre members of the board of directors, Francisco Aguirre and María Adriana Aguirre, sit on the boards of directors of various radio stations in Mexico.
 
 
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Name
 
Position
 
Age
 
Years as
director
 
Principal occupation
 
Other directorships
Francisco Aguirre G.
 
Chairman
 
69
 
11
 
Private investor
 
Chairman of the board of
Grupo Radio México,
S.A. de C.V.
María Esther Aguirre G.
 
First Vice
Chairperson
 
71
 
11
 
Private investor
 
María Adriana Aguirre G.
 
Second Vice
Chairperson
 
64
 
11
 
Private investor
 
Ana María Aguirre G.
 
Director
 
66
 
40
 
Private investor
 
Carlos Aguirre G.
 
Director
 
56
 
11
 
Chief Executive Officer
of Grupo Radio Centro
 
Rafael Aguirre G.
 
Director
 
53
 
18
 
Private investor
 
Director of the Quintana Roo branch of HSBC
México, S.A. (formerly Banco Internacional,
S.A.); Director of the Yucatan Peninsula branch
of Banco Nacional de México, S.A.
José Manuel Aguirre G.
 
Director
 
48
 
11
 
Real estate investor
 
Pedro Beltrán N.
 
Director
 
67
 
9
 
Finance & Administrative Director and Chief Financial Officer of Grupo Radio Centro
 
Luis Alfonso Cervantes Muñiz
 
Director
 
55
 
6
 
Attorney
 
Gustavo Gabriel Llamas Monjardín
 
Director
 
48
 
6
 
Public accountant
 
Thomas Harold Raymond Moffet
 
 
Director
 
69
 
11
 
President of Amsterdam Pacific Capital, LLC (a financial advisory firm)
 
Luis Manuel de la Fuente Baca
 
Director
 
65
 
11
 
Financial advisor
 

Francisco Aguirre G., María Adriana Aguirre G., María Esther Aguirre G., Ana María Aguirre G., Carlos Aguirre G., Rafael Aguirre G. and José Manuel Aguirre G. are siblings.  Until she passed away on June 23, 2008, their mother María Esther G. de Aguirre was the honorary chairperson of the board of directors of the Company.
 
Francisco Aguirre G., María Esther Aguirre G., María Adriana Aguirre G., Ana María Aguirre G., Carlos Aguirre G., Rafael Aguirre G. and José Manuel Aguirre G. are shareholders of the Company.  Pedro Beltrán N. is an employee of the Company and Luis Alfonso Cervantes Muñiz is an advisor to affiliates of the Company.  Thomas Harold Raymond Moffet, Gustavo Gabriel Llamas Monjardín and Luis de la Fuente Baca are independent directors, as defined under the Mexican Securities Market Law.
 
The Company’s bylaws provide that the board of directors shall meet at least four times during each fiscal year.  Each of the chairman of the board of directors, the chairman of the Audit Committee, the chairman of the Corporate Practices Committee or at least 25% of the members of the board of directors is entitled to call a meeting of the Board and to include items in the agenda for each meeting.
 
 
33

 
 
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 (i) the report on the transactions and activities in which it has been involved in accordance with the Mexican Securities Market Law, (ii) the report on the main accounting and information policies and criteria employed in the preparation of financial information, (iii) the reports prepared by the chairpersons of the Audit Committee and the Corporate Practices Committee and (iv) the report prepared by the chief executive officer together with the external auditors’ report.  The board of directors shall also present its opinion on the content of the report prepared by the chief executive officer.
 
The bylaws of the Company were amended on April 22, 2005 to provide that, independently and without prejudice to the exercise of the powers granted to the board of directors pursuant to Mexican law, the board of directors is entitled to grant or delegate in favor of the Audit Committee those powers that it deems necessary or convenient to comply with the legal and regulatory provisions applicable to the Company, as well as to determine the rules pursuant to which the Audit Committee shall exercise such powers, including the right to revoke or modify them.
 
The bylaws of the Company were further amended on July 31, 2006 to meet the requirements of the Mexican Securities Market Law. The amendments granted the board of directors and the Audit Committee greater authority and provided for the creation of the Corporate Practices Committee.  The amendments to the bylaws also increased the authority that the board of directors may exert over the Company’s accounting, auditing and internal control.  With prior favorable opinion from the Audit Committee, the board of directors may approve the Company’s financial statements, internal control and audit guidelines and accounting policies.
 
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’s operations are subject to the same rules applicable to the operation 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 José Manuel Aguirre G. (chairman), Carlos Aguirre G. (vice-chairman), Ana María Aguirre G., María Esther Aguirre G., María Adriana Aguirre G., Rafael Aguirre G. and Francisco Aguirre G.
 
Audit Committee
 
The Audit Committee consists of Thomas Harold Raymond Moffet, Gustavo Gabriel Llamas Monjardín and Luis Manuel de la Fuente Baca (chairman).  All three members of the Audit Committee also serve on the Company’s board of directors.  The shareholders ratified the appointment of these members to the Audit Committee and Mr. de la Fuente Baca’s appointment as committee chairman at the annual shareholders’ meeting held on April 28, 2011.  As required by our bylaws and applicable law, all members of the Audit Committee are independent, as defined under Mexican Securities Market Law and Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  See Item 16A, “Audit Committee Financial Expert.”  In order for a meeting of the Audit Committee to be valid, the majority of its members must be present, and the Audit Committee must adopt resolutions by majority vote.
 
The chairman of the Audit Committee may not also be the chair of the board of directors and is appointed and removed exclusively through a majority vote of the shareholders.  The shareholders base their decision on the experience, ability and professional prestige of the appointee.  The chairman of the Committee must submit an annual report on the activities of the Audit Committee to the board of directors.
 
 
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The Audit Committee is responsible for assisting the Board in overseeing the activities of the Company.  The members evaluate the performance, opinions and reports of the external auditor.  In addition, the Audit Committee is responsible for regulation within the Company.  The Audit Committee investigates possible violations of internal guidelines and also verifies the establishment of internal controls and the filing of related information.  Additionally, the Audit Committee renders an opinion on the report regarding the financial information and results of operations of the Company, which is filed by the chief executive officer, and provides further information concerning that report to the board of directors.
 
The Audit Committee further assists the board of directors in oversight activities by requesting periodic meetings with executive officers.  The Audit Committee also monitors the filing of information related to the internal control systems and internal audits of the Company and is responsible for preparing an opinion on the report filed by the chief executive officer.  Additionally, the Audit Committee is responsible for verifying that the chief executive officer abides by the resolutions adopted in shareholder meetings and by the board of directors.
 
Corporate Practices Committee
 
The Corporate Practices Committee consists of Thomas Harold Raymond Moffet, Gustavo Gabriel Llamas Monjardín and Luis Manuel de la Fuente Baca, with Mr. de la Fuente Baca (chairman).  All three members of the Corporate Practices Committee also serve on the Company’s board of directors.  The shareholders ratified the appointment of these members to the Corporate Practices Committee and Mr. de la Fuente Baca’s appointment as committee chairman at the annual shareholders’ meeting held on April 28, 2011.  As required by our bylaws and applicable law, all members are independent, as defined by the Mexican Securities Market Law and Rule 10A-3 of the Exchange Act.  In order for a meeting of the Corporate Practices Committee to be valid, the majority of its members must be present, and the Corporate Practices Committee must adopt resolutions by majority vote.
 
In accordance with the Securities Market Law, the Corporate Practices Committee is responsible for rendering opinions to the board of directors and requesting the opinions of independent experts if the Corporate Practices Committee considers it necessary.  The Corporate Practices Committee assists the board of directors in generating reports on the main accounting policies and the criteria used to prepare the financial statements of the Company.  The Corporate Practices Committee also reports on the transactions and activities of the Company in which the board of directors intervened.  The Corporate Practices Committee may call shareholders’ meetings and contribute items to the agenda when needed.
 
The chairman of the Corporate Practices Committee must submit an annual report on the activities of the Corporate Practices Committee to the board of directors.  This report includes information regarding related party transactions, waivers granted and the performance and compensation of the Company’s executive officers.
 
Executive Officers
 
The executive officers of Grupo Radio Centro are as follows:
 
       
Years as
 
Years of
Name
 
Position
 
officer
 
service
             
Carlos Aguirre G.
 
Chief Executive Officer
 
32
 
37
             
Pedro Beltrán N.
 
Finance & Administrative Director and Chief Financial Officer
 
25
 
25
             
Arturo Yáñez F.
 
Auditing Director
 
27
 
27
             
Sergio González L.
 
Operations Director
 
27
 
27
             
Luis Cepero A.
 
Audio Engineering Director
 
28
 
50
 
Eduardo Stevens A.
 
Transmission Engineering Director
 
21
 
31
             
Gonzalo Yáñez V.
 
Marketing Director
 
11
 
14
             
Rodolfo Nava C.
 
Treasurer and Financial Information Manager
 
11
 
25
             
Alvaro Fajardo de la Mora
 
General Counsel
 
26
 
26
             
Luis Miguel Carrasco N.
 
Commercial Director
 
13
 
18
             
Alfredo Azpeitia Mera
 
Investor Relations Manager
 
18
 
22

 
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Compensation
 
For the year ended December 31, 2010, the aggregate compensation for the executive officers of the Company paid or accrued in that year for services in all capacities was Ps. 25.8 million, of which approximately Ps. 7.1 million was paid in the form of bonus compensation.  The bonus compensation amounts 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 2010 was Ps. 23.4 million.  The total of payments to directors for attendance at Board of Director meetings during 2010 was Ps. 189,000.  The total payments to Audit Committee members for attendance at Audit Committee meetings during 2010 was Ps. 739,000.
 
Board Practices
 
None of the directors have entered into a service contract with the Company that provides for benefits upon termination of employment.
 
Employees
 
At December 31, 2010, Grupo Radio Centro employed a total of 467 full-time employees, fewer than half of whom are members of the Sindicato de Trabajadores de la Industria de Radio y Televisión, Similares y Conexos de la República Mexicana (Radio and Telecommunications Workers Union, or the “Union”).  The Company employed a total of 481 full-time employees at December 31, 2009 and a total of 484 full-time employees at December 31, 2008.  Grupo Radio Centro also employs a varying number of temporary employees.  During 2010, the Company employed an average of 85 temporary employees.  All employees of Grupo Radio Centro work in Mexico City.
 
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 if 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 was renewed on February 1, 2010; however, salary increases are implemented annually.  On February 1, 2011, the Company and the Union agreed to a 4.6% 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.
 
Share Ownership
 
As of December 31, 2010, the Aguirre members of the board of directors had beneficial ownership, through a Mexican trust through which they hold Series A Shares, of 84,064,946 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.”
 
 
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None of the Company’s other directors or officers is the beneficial owner of more than 1% of the Company’s outstanding capital stock.
 
Item 7.  Major Shareholders and Related Party Transactions
 
Major Shareholders
 
The Company was incorporated as Técnica 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 had been 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”).  Before 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 María Esther G. de Aguirre, with the remainder divided equally among her children.  Simultaneously with the division, María Esther G. de Aguirre acquired a 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 interests in the Company’s Series A Shares and CPOs held by the Controlling Trusts to María 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 María 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—María Esther Aguirre G., Francisco Aguirre G., María Adriana Aguirre G., Ana María Aguirre G., Carlos Aguirre G., Rafael Aguirre G. and José Manuel Aguirre G.
 
On April 5, 2000, María 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 María Esther G. de Aguirre as grantor and beneficiary, those seven children owned, in equal parts, 100% of the interests in the Controlling Trusts.   In 2003, all CPOs held by the Controlling Trusts were converted to Series A Shares.
 
In 2007, the Controlling Trusts were amended to change the trustee and consolidate the Controlling Trusts.  Pursuant to agreements dated June 15, 2007, Bancomer, S.A. was replaced with Banco IXE S.A. as trustee of each Controlling Trust.  Pursuant to an agreement dated June 18, 2007, the New Controlling Trust was dissolved and all of its assets were transferred to the Old Controlling Trust (now referred to simply as the “Trust”).  The same seven members of the Aguirre family continue to own, in equal parts, 100% of the interests in the Trust.  Under the terms of the Trust, the Series A Shares held by the Trust are ordinarily voted as directed by a majority of the beneficiaries of the Trust.
 
The following table sets forth certain information regarding the beneficial ownership of Series A Shares by beneficial holders of more than 5% of the outstanding Series A Shares as of June 6, 2011.
 
Name of Person or Group
 
Series A Shares 
Beneficially Owned
   
Percentage of 
Series A
Shares(1)
 
The Trust                                                         
    84,064,946       51.6 %
María Esther Aguirre G.                                                         
    84,064,946 (2)     51.6 %
Francisco Aguirre G.                                                         
    84,064,946 (2)     51.6 %
María Adriana Aguirre G.                                                         
    84,064,946 (2)     51.6 %
Ana María Aguirre G.                                                         
    84,098,246 (2)(3)     51.7 %
Carlos Aguirre G.                                                         
    84,088,346 (2)(4)     51.6 %
Rafael Aguirre G                                                         
    84,064,946 (2)     51.6 %
José Manuel Aguirre G.                                                         
    84,064,946 (2)     51.6 %
 
 
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(1)
Percentages are based on 162,724,561 Series A Shares issued and outstanding as of June 6, 2011.
(2)
All Series A Shares beneficially owned by the Trust (the “Family Shares”) are held for the benefit of the Aguirre Family and are deemed to be beneficially owned by each member of the Aguirre Family, each of whom is deemed to share power to vote or dispose, or direct the vote or disposition of, the Family Shares as a member of the Technical Committee of the Trust.
(3)
Includes 33,300 Series A Shares beneficially owned by Ana María Aguirre G. in addition to Family Shares.
(4)
Includes 2,600 ADSs beneficially owned by Carlos G. Aguirre in addition to Family Shares.
 
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 and Mexican Law—Limitations Affecting Non-Mexican Holders—Share Ownership.”  At June 1, 2011, to the best knowledge of the Company, approximately 2.9% of the outstanding Series A Shares was represented by ADSs.  It is not practical for the Company to determine the number of U.S. holders of CPOs or ADSs, the portion of each class of securities held in Mexico or the number of record holders in Mexico.
 
Related Party Transactions
 
The Company engages in a variety of transactions with affiliates.  Pursuant to the Company’s bylaws, the operating rules of the board of directors and Mexican law, the Corporate Practices Committee of Company’s board of directors must express an opinion on, and the Company’s board of directors has exclusive power to approve, any transaction with a related party unless the transaction (i) is considered to be not material based on the value of the transaction; (ii) is entered into with a controlled entity, provided that such a transaction is either in the ordinary course of the Company’s business and carried out at market price or supported in valuations prepared by external experts; or (iii) is entered into with employees, provided that the transaction is conducted under the same conditions as it would be for a client or as a result of general labor benefits.
 
Investment in GRC-LA
 
On May 13, 2009, certain members of the Aguirre family acquired a 49% equity stake in Grupo Radio Centro LA, LLC, a wholly-owned subsidiary of the Company formed to provide programming to KXOS-FM pursuant to the local marketing agreement with Emmis Communications Corporation.  In exchange for their 49% equity stake, the Aguirre family members agreed to be responsible for 49% of the cost of the Company’s investment.  On February 26, 2010, the Company undertook a capital reduction of Grupo Radio Centro LA, LLC by returning U.S.$ 1.47 million in capital contributions to certain members of the Aguirre family, which was the same amount initially invested by them.  As a result of the capital reduction, the Company is the sole shareholder of Grupo Radio Centro LA, LLC.
 
Family Control of OIR Network Affiliates
 
In addition to their ownership interest in the Company, members of the Aguirre family owned or controlled 13 of the 110 affiliates in the network serviced by OIR at December 31, 2010.  Affiliated stations owned or controlled by members of the Aguirre family accounted for approximately 7.4% of OIR revenue (or 0.2% of the Company’s total broadcasting revenue) for 2010 (excluding revenue from our operations in the United States), 10.3% of OIR revenue (or 0.3% of the Company’s total broadcasting revenue) for 2009, and 9.6% of OIR revenue (or 0.3% the Company’s total broadcasting revenue) for 2008. The Company has provided administrative and other services to such family-owned stations in the OIR network and under certain circumstances has provided commercial airtime to related parties, on terms that are more favorable than those provided to unrelated parties.  The Company does not believe that such transactions have been material.
 
 
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Service Contract
 
On January 5, 2000, Grupo Radio Centro entered into a contract with an entity owned by Francisco Aguirre G., 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 airtime provided to the Company by Mr. Aguirre.  The Company incurred expenses under this contract totaling Ps. 4.0 million in 2010, Ps. 4.0 million in 2009 and Ps. 3.3 million in 2008. See Note 6 to the Consolidated Financial Statements.
 
Sale of Doubtful Accounts Receivable
 
In December 2006, the Company sold to an entity owned by Francisco Aguirre G. accounts receivable representing Ps. 40.3 million owed to it mainly by political parties in connection with purchases of airtime from 2003 to 2005 for a cash purchase price of Ps. 12.2 million.  The Company had been unsuccessful in its attempts to collect the accounts receivable and, accordingly, increased its allowance for doubtful accounts beginning in 2005.  The Company sold the accounts receivable because
 
 
·
it believed, based on its past efforts, that the accounts receivable were not recoverable, and
 
 
·
the sale enabled the Company to take a tax deduction in connection with the unrecoverable accounts receivable, which deduction otherwise would not have been available without bringing legal proceedings against the customers.  The Audit Committee ratified this transaction on February 19, 2007.
 
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.  The Company received a total of Ps. 3.8 million in 2010, Ps. 3.5 million in 2009 and Ps. 3.1 million in 2008 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 Chief Executive Officer, Pedro Beltrán, the Chief Financial Officer, and Alvaro Fajardo, the General Counsel, have spent a portion of their time on Aguirre family matters for which the Company has not been separately compensated.
 
Item 8.  Financial Information
 
Consolidated Financial Statements
 
See Item 18, “Financial Statements” and pages F-1 through F-46.
 
Other Financial Information
 
Legal and Arbitration Proceedings
 
Through a series of transactions effected in 1995 and 1996, the Company acquired five radio stations owned by Radiodifusión RED, S.A., as well as the exclusive radio broadcasting rights to Monitor, a news and talk radio program.  On December 23, 1998, the Company entered into an agreement with Infored and Mr. Gutiérrez Vivó, the principal anchor of Monitor, pursuant to which they would provide the Company with original news programs and special-event productions until 2015 (the “Infored Agreement”).  The Infored Agreement provided that Mr. Gutiérrez Vivó would continue as Monitor’s host until at least the end of 2003.
 
 
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In May 2002, Mr. Gutiérrez Vivó and Infored initiated an arbitration proceeding pursuant to which they sought rescission of the Infored Agreement and damages.  On March 1, 2004, the International Chamber of Commerce, or 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. Gutiérrez Vivó.  As a result, the contract was rescinded and Infored and Mr. Gutiérrez Vivó together were awarded a total of U.S.$ 21.1 million in damages, which represents the amount the Company would be required to pay under the contract after taking into account prepayments made by the Company.  The Company challenged the validity of this decision in the Mexican courts and, on November 11, 2004, Civil Judge 63 of the Federal District Superior Tribunal of Justice, set aside the arbitration award.  Infored and Mr. Gutiérrez Vivó initiated an amparo, which is a type of proceeding used to challenge the legality of a decision under Mexican law, in November 2004.  On August 11, 2005, District Judge 6 of Civil Matters granted Infored and Mr. Gutiérrez Vivó an amparo, in effect overturning the November 2004 decision.  On August 25, 2005, the Company challenged District Judge 6’s ruling in a proceeding before the Federal District’s Thirteenth Circuit Court of Civil Matters.  On June 16, 2006, the Federal District’s Thirteenth Circuit Court of Civil Matters ratified the decision of the Civil Judge 63 of the Federal District Superior Tribunal of Justice to set aside the arbitration award and refused to enforce the arbitration award in Mexico.
 
Following an appeal by Infored and Mr. Gutiérrez Vivó, on January 30, 2007, the Mexican Supreme Court (Suprema Corte de Justicia de la Nación), in a 5 to 4 decision based on procedural grounds, reversed the Federal District’s Thirteenth Circuit Court of Civil Matters’ decision that had ratified a lower court’s decision to set aside the arbitration award.  The Supreme Court remanded the case to the Thirteenth Circuit Court, instructing the court to reexamine the matter under different procedural rules, which required the court to review the merits of the case.  On June 12, 2008, the Thirteenth Circuit Court reversed its prior decision, granted the amparo of Infored and Mr. Gutiérrez Vivó, denied the amparo of the Company, and remanded the case to Civil Judge 63 of the Federal District Superior Tribunal of Justice.  On July 11, 2008, Civil Judge 63 of the Federal District Superior Tribunal of Justice ruled that the decision that set aside the arbitration award was invalid.  The July 2008 decision of Civil Judge 63 of the Federal District Superior Tribunal of Justice did not constitute an order to pay the arbitration award, the enforcement of which remains subject to lower court review.
 
In August 2008, the Company challenged the arbitration award as unconstitutional in an amparo filed with District Judge 6 of Civil Matters.  District Judge 6 of Civil Matters dismissed the amparo based on procedural grounds.  The Company challenged this action before the Thirteenth Circuit Court, and in February 2009, that court ruled the Company’s amparo was admissible and remanded it to District Judge 6 of Civil Matters.  In April 2009, District Judge 6 of Civil Matters granted the Company’s amparo, in part, but dismissed the amparo with respect to the Company’s challenge of the constitutionality of certain provisions of the Mexican commercial code.  The Company then appealed this dismissal to the Thirteenth Circuit Court in July 2009, which in turn referred the constitutional question to the Mexican Supreme Court.  In September 2010, the Mexican Supreme Court concluded that the disputed commercial code provisions are constitutional, thus denying the Company’s amparo in which it sought to challenge the arbitration award as unconstitutional.  The Company believes that enforcement of the arbitration award remains subject to lower court proceedings.  In May 2011, Infored and Mr. Gutiérrez Vivó requested that Civil Judge 63 of the Federal District Superior Tribunal of Justice enforce the arbitration award on summary judgment.  Civil Judge 63 denied summary judgment.
 
The Company plans to continue to challenge the validity of the arbitration award in the Mexican courts.  Although the Company believes it has merits to achieve a favorable outcome, if the Company is ultimately unsuccessful in challenging the enforcement of the arbitration award in Mexico, it will be required to finance any amounts due.  See Item 5, “Operating and Financial Review and Prospects—Liquidity and Capital Resources.”  The Company’s ability to obtain financing is subject to various factors, including general market conditions, the Company’s financial condition and results of operations and the fact that the Company has pledged substantially all of its assets under its outstanding indebtedness.  Accordingly, the Company may not be able to obtain financing in a timely manner, or on acceptable terms, or at all.  If the Company incurs additional indebtedness or it is unable to obtain financing when needed, the Company’s financial condition and results of operations may be materially and adversely affected.
 
 
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The Company is involved in various other legal proceedings related to the Infored and Gutiérrez Vivó transaction.  In 2004, the Company and a subsidiary, along with four minority shareholders, initiated two lawsuits against Mr. Gutiérrez Vivó and Ms. María Ivonne Gutiérrez Vivó to seek rescission of the stock purchase agreement entered into as an “accessory contract” to the Infored Agreement.  One case pertains to the shares of the licensee of the radio station formerly known as XEJP-AM (now XENET-AM), and the other case pertains to the shares of the licensee of the radio station formerly known as XEFAJ-AM (now XEINFO-AM).
 
In addition, in 2008, Mr. Gutiérrez Vivó and Infored initiated additional claims against the Company for alleged violations of labor law in connection with the Infored Agreement.  In 2009, Mr. Gutiérrez Vivó and Infored initiated a civil law suit against the Company and individual members of the Aguirre family, seeking consequential damages in an amount of approximately Ps. 9.46 billion arising out of the Company’s alleged wrongful failure to pay the arbitration award.  The Company’s management believes that these cases will be resolved in favor of the Company.
 
The Company is also involved in a variety of labor claims initiated by former employees between 2000 and 2004 seeking an aggregate amount of approximately Ps. 30.5 million.  The Company has not recorded a provision for these claims, as the Company’s management believes that the cases will be resolved in favor of the Company.
 
Other than proceedings related to labor claims and proceedings related to the arbitration with Infored described above, neither the Company nor any of its subsidiaries is currently engaged in any material litigation or arbitration, and no 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 from 2007 to 2010, 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.
 
Date Dividend Paid
 
Fiscal
Year with
Respect to
which
Dividend
Paid
 
Aggregate Amount of
Dividend Paid
(Nominal Pesos)
 
Dividend
Per Series A
Share
(Nominal
Pesos)(1)
   
Dividend Per
Series A Share
(U.S. dollars)(1)
   
Dividend Per
ADS
(U.S. dollars)(1)(2)
 
March 14, 2008
 
2007
   Ps.    100,000,000     0.61       0.06       0.51  
April 13, 2009
 
2008
   Ps.  100,000,000     0.61       0.05       0.42  
March 24, 2010
 
2009
   Ps.   100,000,000     0.61       0.05       0.44  
 

(1)
Per Series A Share and ADS amounts are calculated based on number of shares outstanding on the date of payment of the dividend.
(2)
Nominal peso amounts have been translated to U.S. dollar amounts at the exchange rate for pesos on the date of payment of the dividend, as published by the Federal Reserve Bank of New York and the U.S. Federal Reserve Board.
 
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.  Depending on the Company's financial position and compliance with the covenants in its credit facility, the Company may declare dividends in the future.  See Item 10, “Additional Information—Bylaws and Mexican Law—Dividends.”
 
Item 9.  The Offer and Listing
 
Since July 1, 1993, the CPOs have been listed on the Mexican Stock Exchange and the ADSs have been listed on the NYSE.  The ADSs have been issued by the Depositary.  Each ADS represents nine CPOs.  Each CPO represents a financial interest in one Series A Share.
 
 
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The CPOs were originally issued by Nacional Financiera, S.N.C., Institución de Banca de Desarrollo, Dirección 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:
 
 
·
Nafin was replaced as the CPO trustee by GE Capital Bank, S.A., Institución de Banca Múltiple, GE Capital Grupo Financiero, División Fiduciaria, as successor trustee for the CPO Trust (the “CPO Trustee”).
 
 
·
The term of the CPO Trust was extended 20 years until June 29, 2023 (which term may be further extended).
 
 
·
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 and Mexican Law––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 S.D. Indeval, S.A. de C.V., Institución para el Depósito de Valores, 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.
 
On April 6, 2010 GE Money Bank, S.A., Institución de Banca Múltiple, GE Capital Grupo Financiero (formerly GE Capital Bank, S.A.) was replaced as CPO Trustee of the CPO Trust, by Banco Multiva, S.A., Institución de Banca Múltiple, Grupo Financiero Multiva, División Fiduciaria (“Multiva”), as a result of the divesture by GE Money of its managing trust portfolio, which included the Trust.  Multiva assumed the position of CPO Trustee under the Trust.
 
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.
 
 
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Mexican
Stock Exchange
 
New York
Stock Exchange
 
   
Amounts per Series A
Share and per CPO
(in nominal pesos)
 
  Amounts per ADS
(in U.S. dollars)
 
    High   Low   High   Low  
                         
2006 
    13.10       7.15       10.75       5.50  
2007 
    18.95       12.30       15.65       8.90  
2008 
    16.00       9.50       14.14       5.21  
2009 
    14.10       7.00       10.60       2.96  
First quarter
    14.00       7.00       9.99       2.96  
Second quarter
    11.5       7.00       8.25       4.36  
Third quarter
    11.50       8.99       8.89       5.85  
Fourth quarter
    14.10       8.99       10.60       7.07  
2010 
    14.50       7.50       9.31       6.35  
First quarter
    14.00       9.00       9.00       8.00  
Second quarter
    12.00       7.60       8.95       6.38  
Third quarter
    11.70       7.50       8.11       6.35  
Fourth quarter
    14.50       9.01       9.31       7.65  
Most Recent Six Months
                               
December 2010
    13.30       11.12       9.31       7.80  
January 2011
    13.40       11.40       10.03       9.47  
February 2011
    16.00       12.86       13.03       9.66  
March 2011
    18.40       13.60       11.00       9.35  
April 2011
    14.59       13.00       11.65       9.95  
May 2011
    14.45       13.00       11.50       8.36  

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 currently held by brokerage firms that are exclusively authorized to trade on the Exchange.  Trading on the Mexican Stock Exchange takes place through the Sentra 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 three 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 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 AND MEXICAN LAW
 
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 Mexican law and the bylaws of the Company, which have been filed as an exhibit to this Annual Report.  For a description of the Company’s bylaws relating to the board of directors, Executive Committee, Audit Committee and Corporate Practices Committee, see Item 6, “Directors, Senior Management and Employees.”
 
 
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The bylaws of the Company were amended on July 31, 2006 to incorporate provisions required by the Mexican Securities Market Law.  The most recent amendment to the bylaws was on December 16, 2009.
 
Mexican Securities Market Law
 
On December 30, 2005, a new Mexican Securities Market Law was enacted.  The law became effective on June 28, 2006 and, in some cases, it provided issuers until December 2006 to adopt the new corporate governance requirements.  The Securities Market Law introduces significant changes to the regime in which issuers operate, including:
 
 
·
the establishment of the sociedad anónima bursátil, a separate corporate form of organization for issuers with stock registered with the Comisión Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission or the “CNBV”) and listed on the Mexican Stock Exchange, which provides for a new set of corporate governance requirements;
 
 
·
the redefinition of the functions and structure of the board of directors, including (i) increasing the number of members of the board of directors (up to 21, with independent members comprising at least 25%) and (ii) requiring that the status of members of the board of directors as independent be determined by the shareholders’ meeting, subject to the CNBV’s authority to challenge such determination;
 
 
·
the application of a legal framework to the chief executive officer (director general) and executive officers (directivos relevantes) entrusted with the day-to-day management of the issuer;
 
 
·
the adoption of a clear definition of fiduciary duties, including but not limited to the duty of care and the duty of loyalty, for members of the board of directors and, in certain cases to its secretary, the chief executive officer and other executive officers;
 
 
·
the increase in liability for members of the board of directors and its secretary with respect to the operations and performance of the issuer, including (i) payment of damages and losses resulting from the breach of their duty of care or loyalty and (ii) criminal penalties from one to 12 years of imprisonment for certain illegal acts involving willful misconduct.  Civil actions under (i) above may be brought by the issuer or by shareholders that represent 5% or more of the capital stock of the issuer; and criminal actions under (ii) above may be brought by the issuer, the Secretaría de Hacienda y Crédito Público (Mexican Ministry of Finance and Public Credit) after consultation with the CNBV, and in certain cases, by injured shareholders;
 
 
·
the elimination of the requirement that the issuer have a statutory auditor and the delegation of specific obligations of corporate governance and oversight to the audit committee, the corporate practices committee and the external auditors;
 
 
·
the requirement that all the members of the audit and corporate practices committees be independent as such term is defined under the new law, except with respect to the corporate practices committee in the case of issuers like us that have controlling shareholders;
 
 
·
the enhancement of the functions and responsibilities of the audit committee, including (i) the evaluation of the performance of the external auditor, (ii) the review and discussion of the financial statements of the issuer and the conveyance to the board of directors of the committee’s recommendations regarding the approval of such financial statements, (iii) the surveillance of internal controls and internal audit procedures of the issuer, (iv) the reception and analysis of recommendations and observations regarding the committee’s functions by the shareholders, members of the board of directors and senior management, and the authority to act upon such recommendations and observations, (v) the authority to call a shareholders’ meeting and to contribute to the meeting’s agenda and (vi) the oversight of the execution of resolutions enacted at meetings of shareholders or the board of directors;

 
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·
the requirement that the shareholders’ meeting approve all transactions that represent 20% or more of the consolidated assets of the issuer within a given fiscal year; and
 
 
·
the inclusion of a new set of rules requiring an issuer to obtain prior authorization from the CNBV to effect public offerings of securities and tender offers.
 
Organization and Register
 
The Company was incorporated on June 8, 1971, as a Mexican limited liability stock company (sociedad anónima de capital variable) in accordance with Chapter V of the Ley General de Sociedades Mercantiles (the “Mexican Companies Law”).  It was registered in the Registro Público de Comercio de la Ciudad de México (the “Public Registry of Commerce of Mexico City”) on August 28, 1992 under number 20694.  Pursuant to the Mexican Securities Market Law, Grupo Radio Centro adopted the corporate form of sociedad anónima bursátil de capital variable on July 31, 2006 through an amendment to its bylaws.
 
Purpose
 
The Company’s purpose is, among others, to market advertising services through media as well as to represent or act as an agent of all types of associations, civil or commercial companies, services, industrial or commercial corporations and in general, Mexican or foreign individuals or entities and to provide consulting and technical assistance services related to accounting, commercial, financial, tax, legal or administrative issues for companies in which it is a shareholder or for other third parties.
 
Share Capital
 
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 competent authorities such as the Ministry of Economy and of the CNBV, of special series of shares including those with limited or no voting rights.
 
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, among others, amendments to 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.
 
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 for the preceding fiscal year, to elect directors for holders of Series A Shares 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.
 
 
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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 Audit Committee, the Corporate Practices Committee or a court.  Holders of 10% of the Series A Shares may require the chairpersons of the board of directors, the Audit Committee or the Corporate Practices Committee to call a meeting of the shareholders.  Additionally, if holders of shares with full or limited voting rights representing 10% of the capital stock of the Company do not have sufficient information on the matters to be voted on, those shareholders may request one postponement of shareholders’ meetings per matter.  These postponements may be extended for up to three business days if necessary.  Notice of meetings must be published in the Diario Oficial de la Federación or a newspaper of general circulation in Mexico City at least 15 days before 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 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 or (ii) on the conversion of convertible debentures, if an extraordinary general shareholders meeting called for such purpose approved such issuance or conversion 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 Federación.  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 of such preemptive rights absent registration of the preemptive rights offering under the U.S. Securities Act of 1933, which the Company is not obligated to do.
 
 
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Under the new Mexican Securities Market Law, however, if Grupo Radio Centro were to increase its capital stock to effect a public offering of newly issued shares or were to resell any repurchased shares, no preemptive rights would be available to the holders of outstanding shares as a result of the issuance or resale.
 
Variable Capital
 
Under the Company’s bylaws and Mexican law, the Company’s capital stock must consist of fixed capital and may include 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.  Should the Company have any outstanding variable capital, its outstanding shares will not be specifically assigned to the fixed or variable portion.
 
The bylaws of the Company were amended on December 13, 2006, to increase the Company’s minimum capital stock.  On December 16, 2009, the Company’s bylaws were further amended to increase the peso amount of our fixed minimum capital stock to Ps. 1,611,620,660.  We did not authorize or issue any new shares.  As of the date hereof, we have 247,414,768 authorized common shares, of which 162,724,561 shares are outstanding and fully paid for and 84,690,207 shares are held in treasury shares.
 
Limitations Affecting Non-Mexican Holders
 
Share Ownership
 
Ownership by non-Mexican investors of shares of Mexican enterprises is regulated by the 1993 Ley de Inversión Extranjera (Foreign Investment Law), as amended, and the 1998 Reglamento de la Ley de Inversión Extranjera y del Registro Nacional de Inversiones Extranjeras (Foreign Investment Regulations) thereunder.  The Secretaría de Economía (Ministry of Economy) and the Comisión Nacional de Inversiones Extranjeras (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.  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 shares.  The Company, however, has received approval from the Foreign Investment 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.
 
 
47

 
 
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 Dirección General de Inversión 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 Trust holds a substantial majority of the Series A Shares not held in the form of CPOs.  As a result, the Trust 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 Mexico City) 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 before termination of written notice from the technical committee of the CPO Trust.  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.
 
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.
 
See Item 9, “The Offer and Listing” on the replacement of the CPO Trustee by Multiva on April 6, 2010.
 
 
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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 consists of four members and their respective alternates.  Each of the following appoints one member: the Foreign Investment Commission, the Mexican Stock Exchange, the Asociación Mexicana de Intermediarios Bursátiles, A.C. (Mexican Association of Securities Brokerage Firms) and the common representative of the CPO holders (HSBC México, S.A., Institución de Banca Multiple, Grupo Financiero HSBC).  Actions taken by the technical committee of the CPO Trust must 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 the Mexican Securities Market Law, the Company is permitted to repurchase its own shares at their current market price on the Mexican Stock Exchange under certain circumstances with funds from a special reserve created for such purpose.  The maximum amount that may be authorized by the shareholders to be spent by the Company for the repurchase of shares (see “—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, shares of companies that are majority shareholders of the Company or invest in derivative instruments having shares of the Company as underlying assets.  However, subsidiaries or other entities controlled by the Company may acquire equity interests in investment companies that in turn invest in shares of the Company.
 
Conflict of Interest
 
A shareholder who 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.  In accordance with the Securities Market Law, a conflict of interest is assumed, unless proven otherwise, when a controlling shareholder votes in favor of or against transactions and in so doing obtains benefits that not obtained by other shareholders, the Company or its controlled entities.
 
Additionally, any members of the board of directors who have a conflict of interest must abstain from discussing or voting on any matter.  This condition does not affect the quorum requirement for Board meetings.
 
 
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Duty of Care
 
The members of the board of directors must comply with the duty of care by acting in good faith and in the best interest of the Company and its controlled entities.  In order to obtain the necessary information to comply with the duty of care, the members are authorized to request information on the Company and its controlled entities as well as solicit meetings with executive officers and other persons that may contribute to the decision-making processes of the Board.
 
Duty of Loyalty
 
Directors and the secretary of the board of directors are bound to preserve the confidentiality of information regarding the Company when such information has not been made public.  As part of the duty of loyalty, directors must inform the Audit Committee and the external auditor of any irregularities that occurred during the tenure of former board members as well as any irregularities that become apparent during their tenure.
 
Directors who breach the duty of loyalty may be jointly liable with other directors and must indemnify the Company against any losses or damages caused by the breach.  Such individuals shall be removed from their positions.
 
Actions Against Directors
 
Actions for civil liabilities against the directors, the secretary of the board of directors or executive officers may be initiated by resolution passed at a general ordinary shareholders meeting.  If 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 5% of the outstanding Series A Shares may directly bring such action provided that the claim covers all damages allegedly suffered by the Company or its controlled entities and not only by such shareholders.  Any recovery of damages with respect to actions for civil liabilities against directors, the secretary of the Board or executive officers will be for the benefit of the Company or its controlled entities and not for the shareholders bringing such actions.
 
Obligations of Majority Shareholders
 
If the Company seeks to cancel the registration of its shares with the Registro Nacional de Valores (National Registry of Securities, or “RNV”) or the registry is cancell