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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 20-F (Mark One)o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
 OR x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the fiscal year ended December 31, 2003
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from __________________ to ____________________
 Commission file number: 000-33143 CLAXSON INTERACTIVE GROUP INC. 
  CLAXSON INTERACTIVE GROUP INC. 
  British Virgin Islands 
  Avenida Melian 2752
C1430EYH Buenos Aires, Argentina 
  Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
    
    Name of each exchange on which registeredNONE
 Securities registered or to be registered pursuant to Section 12(g) of the Act. Class A Common Shares, Par Value $0.01 Per Share 
  Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.  
  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 was 19,407,634 Class A Common Shares, 2 Class C Common Shares, 7 Class F
Common Shares and 1 Class H Common Share. Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. x Yes o No Indicate by check mark which financial statement item the registrant has
elected to follow. o Item 17 x Item 18 (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. o Yes o No




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CLAXSON INTERACTIVE GROUP INC. FORM 20-F
ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2003  
 INDEX INTRODUCTION
    
    
    1PART IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    2Item 2. Offer Statistics and Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2Item 4. Information on the Company
    
    
    8Item 5. Operating and Financial Review and Prospects
    
    
    24Item 6. Directors, Senior Management and Employees
    
    
    38Item 7. Major Shareholders and Related Party Transactions
    
    
    48Item 8. Financial Information
    
    
    54Item 9. The Offer and Listing
    
    
    56Item 10. Additional Information
    
    
    57Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    66Item 12. Description of Securities Other than Equity Securities
    
    
    68PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    68Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    68Item 15. Controls and Procedures
    
    
    68Item 16A Audit Committee Financial Expert
    
    
    68Item 16B Code of Ethics
    
    
    69Item 16C Principal Accountant Fees and Services
    
    
    69Item 16D Exemptions from the Listing Standards for Audit Committees
    
    
    69Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    69PART IIIItem 17. Financial Statements (Not Applicable)
    
    
    69Item 18. Financial Statements
    
    
    69Item 19. Exhibits
    
    
    70INDEX TO FINANCIAL STATEMENTS
    
    
    F-1List of significant subsidiariesCode of Business Conduct and EthicsSection 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO CertificationDeloitte & Touche LLP Consent
  i




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INTRODUCTION This annual report on Form 20-F for the year ended December 31, 2003 also
constitutes our annual report to shareholders and includes our audited
consolidated financial statements at December 31, 2002 and 2003 and for each of
the three years in the period ended December 31, 2003. We were formed in a merger transaction which combined media assets
contributed by Ibero-American Media Partners II, Ltd., and other media assets
contributed by members of the Cisneros Group of Companies, which we refer to as
Cisneros Group, and El Sitio, Inc. On October 30, 2000, we entered into a combination agreement with:  
    
    El Sitio, Inc., which we refer to as El Sitio;  
    
    1945 Carlton Investments LLC and 1947 Carlyle Investments
LLC, which are the assignees of Newhaven Overseas Corp. and members
of the Cisneros Group, which we sometimes refer to as 1945 Carlton
and 1947 Carlyle, respectively;  
    
    Hicks, Muse, Tate & Furst Latin America Fund, L.P.; Hicks,
Muse, Tate & Furst Latin America Private Fund, L.P.; and HMLA 1-SBS
Coinvestors, L.P., which are funds affiliated with Hicks, Muse, Tate
& Furst Incorporated, which we sometimes collectively refer to as
Hicks Muse; and  
    
    Ibero-American Media Partners II, Ltd. which we refer to as
Ibero-American Media Partners, which was controlled by members of
the Cisneros Group and funds affiliated with Hicks Muse. Pursuant to the terms of the combination agreement, as amended as of June
26, 2001 and August 22, 2001, a subsidiary of Claxson was merged into El Sitio,
and all of the subsidiaries of Ibero-American Media Partners and the media
businesses of 1945 Carlton and 1947 Carlyle that were managed by Ibero-American
Media Partners were contributed to and combined with Claxson. As a result of
the merger, El Sitio became a wholly owned subsidiary of Claxson. The merger
transaction was consummated on September 21, 2001. The Cisneros Group is a name used to describe a group of investments,
joint ventures, strategic alliances and companies engaged in diversified
consumer businesses, including broadcast and pay television, direct-to-home
satellite television, content production and other entertainment, media and
communications enterprises, that are associated with Gustavo and Ricardo
Cisneros and trusts established by them principally for the benefit of
themselves and their families. Hicks, Muse, Tate & Furst Incorporated is an
international private investment firm with headquarters in Dallas and offices
in New York, London and Buenos Aires. Ibero-American Media Partners II, Ltd.
was a joint venture between members of the Cisneros Group and Hicks Muse. El
Sitio, Inc. is an international business company incorporated under the laws of
the British Virgin Islands. 1




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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 A. Selected Financial Data Selected Financial Data The following tables present our selected historical financial data, which
have been derived from audited financial statements. Ibero-American Media
Partners was deemed to be the acquiror for accounting purposes in the
combination agreement and accordingly, the historical financial statements of
Ibero-American Media Partners are presented as the financial statements of
Claxson preceding the transaction. The selected financial data should be read in conjunction with the
consolidated financial statements and Item 5. Operating and Financial Review
and Prospects. We prepare our financial statements in U.S. dollars and in
accordance with accounting principles generally accepted in the United States
of America (which is commonly called U.S. GAAP). Consolidated Statements of Operations Data
for the Years Ended December 31: 1999
    
    2000
    
    2001
    
    2002
    
    2003(in thousands of U.S. dollars)Total net revenues
    
    $
    67,777
    
    
    $
    107,386
    
    
    $
    106,437
    
    
    $
    74,960
    
    
    $
    81,787Total operating expenses
    
    
    71,700
    
    
    
    108,224
    
    
    
    120,796
    
    
    
    77,268
    
    
    
    76,523Operating (loss) income
    
    
    (3,923
    )
    
    
    (838
    )
    
    
    (14,359
    )
    
    
    (2,308
    )
    
    
    5,264Other income (expense)
    
    
    (13,079
    )
    
    
    (14,877
    )
    
    
    (47,391
    )
    
    
    (70,062
    )
    
    
    5,485Gain on debt restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,274
    
    
    
    Share of (loss) income from
unconsolidated affiliates
    
    
    (6,601
    )
    
    
    (4,930
    )
    
    
    (19,097
    )
    
    
    (6,746
    )
    
    
    346Benefit (provision) for income taxes
    
    
    (480
    )
    
    
    (820
    )
    
    
    (4,166
    )
    
    
    134
    
    
    
    (2,804
    )Minority interest
    
    
    305
    
    
    
    (4
    )
    
    
    127
    
    
    
    68
    
    
    
    46Change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74,789
    )
    
    
    Net (loss) income
    
    $
    (23,778
    )
    
    $
    (21,469
    )
    
    $
    (84,886
    )
    
    $
    (138,429
    )
    
    $
    8,337
 Consolidated Balance Sheet Data
As of December 31: 1999
    
    2000
    
    2001
    
    2002
    
    2003(In thousands of U.S. dollars)Cash and cash equivalents
(including restricted
investments)(1)
    
    $
    27,144
    
    
    $
    22,849
    
    
    $
    15,211
    
    
    $
    8,822
    
    
    $
    7,895Total assets
    
    
    591,833
    
    
    
    367,450
    
    
    
    278,002
    
    
    
    147,622
    
    
    
    145,339Working capital (deficiency)(2)
    
    
    40,827
    
    
    
    22,877
    
    
    
    (86,172
    )
    
    
    (10,804
    )
    
    
    (12,278
    )Total long-term liabilities
    
    
    131,673
    
    
    
    125,196
    
    
    
    28,746
    
    
    
    85,146
    
    
    
    81,387Minority interest
    
    
    5,023
    
    
    
    2,053
    
    
    
    
    
    
    
    1,164
    
    
    
    1,128Shareholders equity
    
    
    410,904
    
    
    
    180,465
    
    
    
    102,753
    
    
    
    3,195
    
    
    
    9,993
   (1)
    
    Includes U.S.$12.6 million, U.S.$4.3 million, U.S.$0.8 million and
U.S.$0.2 million in 1999, 2000, 2002 and 2003, respectively, of restricted
investments.(2)
    
    For 2001, 2002 and 2003, includes U.S.$79.5, U.S.$3.2 million and
U.S.$2.3 million, respectively, of Imagens 11% Senior Notes due 2005. 2




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B. Capitalization and Indebtedness Not Applicable C. Reasons for the Offer and Use of Proceeds Not Applicable D. Risk Factors The following summarizes certain risks that may materially affect our
business, financial condition or results of operations. GENERAL RISKS We may not be able to continue as a going concern. The
report of the independent registered public accounting firm with respect to our consolidated
financial statements includes a going concern explanatory paragraph,
indicating that our potential inability to meet our obligations as they become
due raises substantial doubt as to our ability to continue as a going concern
for a reasonable period of time. Our ability to achieve long-term
profitability is dependent on our ability to accomplish our business plan
objectives, which includes projected revenue increases, stabilization of the
economies in which we operate, and the availability of additional liquidity.
Our failure or inability to successfully carry out these plans, could
ultimately have a material adverse effect on our financial position and our
ability to meet our obligations when due. We are a highly-leveraged holding company and depend on our subsidiaries
revenues and cash flows to meet our obligations, and the availability of funds
from these subsidiaries may be limited by contractual or statutory
restrictions. We are highly leveraged. At December 31, 2003, we had approximately
U.S.$66.7 million in aggregate principal amount of indebtedness plus U.S.$20.3
million of future interest payments and U.S.$10.0 million in total
shareholders equity. As of March 31, 2004, we had approximately U.S.$64.8
million in aggregate principal amount of indebtedness, plus U.S.$18.5 million
of future interest payments. We conduct our operations through subsidiaries, and these subsidiaries are
our primary source of cash flow. Our ability to use and distribute funds out of
cash flows generated by Imagen Satelital and Radio Chile, two of our
subsidiaries that generate a significant portion of our cash flows, is
restricted. Our syndicated bank facilities also contain covenants that
restrict our and our subsidiaries ability to utilize cash and the
collateralized assets of our Chilean operations. In addition, our subsidiary,
Imagen Satelital S.A., had outstanding U.S.$2.3 million in principal amount of
11% Senior Notes due 2005, which as of March 31, 2004, has been classified as
current due to our default on interest payments as of April 2002. The degree to which we are leveraged has important consequences to us, including the following:  
    
    Our cash flow available for use in our business is reduced.  
    
    We are vulnerable to changes in economic conditions.  
    
    Our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes could be impaired. We may be exposed to litigation or other claims in Argentina by the
holders of the remaining U.S.$2.3 million principal amount of Imagen
Satelitals 11% Senior Notes due 2005. On April 30, 2002, we announced that our subsidiary Imagen Satelital, S.A.
would not make an interest payment on May 1, 2002 on its 11% Senior Notes due
2005. On November 8, 2002, we successfully completed an exchange offer and
consent solicitation with respect to 93.1% of the outstanding 11% Senior Notes
due 2005 (the Old Notes). Pursuant to the exchange offer, we issued
U.S.$41.3 million principal amount of our 8.75% Senior 3




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Notes due 2010 in exchange for U.S.$74.5 million principal amount of the
Old Notes. Immediately following the exchange offer and consent solicitation,
U.S.$5.5 million principal amount of the Old Notes remained outstanding. The
holders of some of these outstanding Old Notes had filed, or threatened to
file, various lawsuits, some with preventative injunctions, to collect certain
principal and/or interest payments for the Old Notes, including a petition for
the bankruptcy of Imagen. We have been able to settle most of these cases;
however as of June 1, 2004, U.S.$2.3 million of the remaining principal amount
of the Old Notes had still not been exchanged. Our failure to successfully
negotiate the exchange of these remaining Old Notes for new notes or other
instruments at terms that are acceptable to both the holders and us, may
adversely affect our financial performance. We depend on a limited number of pay television system operators for a
significant portion of our revenues and the loss of any of our major pay
television system operators could significantly reduce our revenues. Our five largest pay television system operators accounted for
approximately 24% and 28% of our total revenues in the years ended December 31,
2002 and 2003, respectively. The loss of any of our major existing pay
television system operators, unless replaced by other operators, could have a
material adverse effect on our financial performance. Our largest pay television system operator, DirecTV Latin America
accounted for approximately 15% and 16% of our total revenues for the years
ended December 31, 2002 and 2003. On December 22, 2003, The News Corporation
Limited completed its acquisition of a controlling interest in Hughes
Electronics Corporation, the majority owner of DirecTV Latin America. NewsCorp
owns a significant interest in Sky Latin America, a direct-to-home satellite
programming provider like DirecTV Latin America, which operates in many of the
same markets as DirecTV Latin America, including Brazil, Chile, Colombia and
Mexico. We currently have distribution agreements with Sky Latin America in
Mexico for a limited number of our channels, but do not have distribution
agreements with Sky Latin America in other markets where we have distribution
rights with DirecTV Latin America. If NewsCorp were to cause the
discontinuation of DirecTV Latin Americas service in any markets where we have
no distribution agreements with Sky Latin America, we will experience a
reduction in revenues. In addition, our existing distribution agreements with
DirecTV Latin America expire on December 31, 2005. If we are unable to
negotiate new agreements at that time, or are unable to negotiate new
agreements with similar or better terms as the existing agreements, we will
experience a reduction in our revenues. Our businesses have incurred losses and may incur losses in the future. Our businesses have a history of losses and may continue to incur losses,
given the costs of servicing our debt and the volatility of currencies in the
region in which we operate, if we are unable to increase our revenues. Our
businesses incurred total net losses of U.S. $138.4 million for the year ended
December 31, 2002 and U.S. $84.9 million for the year ended December 31, 2001. Should we experience losses in the future, the extent of such losses will
depend, in part, on whether we can increase our revenues. Our business plan
contemplates increasing our profitability by increasing our revenues while
maintaining our operating expenses at current levels. Our failure to increase
revenues or maintain our operating expenses at their current level, or
otherwise meet our business plan objectives, may result in our incurring losses
in the future. Members of the Cisneros Group and Hicks Muse control Claxson, which
could inhibit or cause potential changes of control of Claxson. Members of the Cisneros Group and Hicks Muse control, in the aggregate,
approximately 80% of the voting power on all matters submitted to our
shareholders and control the outcome of actions requiring the approval of
holders of a majority of our common shares, including a sale or a material
acquisition. In addition, through their ownership of our Class C and Class H
common shares, these shareholders are entitled to designate seven of the twelve
members of our board of directors. This control could discourage other parties
from initiating potential merger, acquisition or other change of control
transactions that might otherwise be beneficial to our shareholders. In
addition, the Cisneros Group and Hicks Muse could use their ownership position
to cause a transaction to occur in which either or both of these shareholders
or a third party would acquire most or all of Claxson, in which event other
shareholders could be deprived of the opportunity to remain shareholders of
Claxson. 4




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Conflicts may arise between members of the Cisneros Group and Hicks Muse,
on the one hand, and our other shareholders, on the other hand, whose interests
may differ with respect to, among other things, our strategic direction,
significant corporate transactions or corporate opportunities that could be
pursued by us or by either or both of our controlling shareholders. A conflict between members of the Cisneros Group and Hicks Muse could
result in deadlock. Conflicts may also arise between members of the Cisneros Group, on the one
hand, and Hicks Muse, on the other hand, with respect to matters submitted to a
shareholder vote, in which case a deadlock may occur, which could result in our
being unable to obtain shareholder approval of any matter requiring such
approval. Hicks Muse and members of the Cisneros Group could have interests in
other businesses which conflict with ours. In addition to their interests in Claxson, members of the Cisneros Group
and affiliates of Hicks Muse hold, and may in the future acquire, interests in
other media businesses in Ibero America, some of which may compete, or have
relationships with strategic partners that compete, with us. In particular,
members of the Cisneros Group own an interest in AOL Latin America and DirecTV
Latin America, and funds affiliated with Hicks Muse own interests in
CableVisión in Argentina, TV Cidade in Brazil, Intercable in Venezuela and
Digital Latin America in Latin America. DirecTV Latin America, CableVisión and
Intercable are significant pay television system operators in Latin America. Persons serving as our directors and members of the Cisneros Group or
Hicks Muse may have conflicting interests with respect to the above and other
matters. These conflicts could limit our effectiveness in capitalizing on
opportunities for growth. Competition in the media industry is intense and we expect it to
increase significantly so that any failure by us to compete successfully
would adversely affect our financial performance. We derive substantially all of our revenue from subscriber-based fees and
advertising, for which we compete with various other media, including
newspapers, television, radio stations and other pay television channels that
offer customers information and services similar to ours. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which could have a material adverse effect on our financial
performance. We face competition on both country and regional levels. In addition,
each of our businesses competes with companies that deliver content through the
same platforms and with companies that operate in different media businesses.
Our competitors may develop content that is better than our content or that
achieves greater market acceptance. Some of our competitors may have better
brand recognition and significantly greater financial, technical, marketing and
other resources than we do. We will have to devote significant resources to
maintain the competitive position of our brands. Competition in our businesses
and markets may limit our ability to expand our market share and increase
revenues in these businesses and markets. Our businesses involve risks of liability claims for media content,
which could result in significant costs. As a distributor of media content, we may face potential liability for:  
    
    defamation;  
    
    negligence;  
    
    copyright, patent or trademark infringement; and  
    
    other claims based on the nature and content of the materials distributed. These types of claims have been brought, sometimes successfully, against
broadcasters, online services and other disseminators of media content. In
addition, we could be exposed to liability in connection with material
available through our Internet sites or for information collected from and
about our users. Although we carry 5




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general liability insurance and errors and omissions insurance, our
insurance may not cover potential claims of defamation, negligence and similar
claims, and it may or may not apply to a particular claim or be adequate to
reimburse us for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance
coverage could have a material adverse effect on us. We may not be able to retain or obtain required licenses, permits and
approvals, which could result in increased costs and limit our ability to
achieve our strategic objectives and increase revenues. We must maintain licenses, permits and approvals from regulatory
authorities to conduct and expand our broadcast television and radio businesses
in Chile and Uruguay and may need to obtain additional permits and licenses.
The process for obtaining or renewing these licenses, permits and approvals
could be complex and unpredictable. In addition, many of our licenses may not
be transferred without regulatory approval. If we are unable to maintain the
licenses, permits and approvals that we currently hold or to obtain those that
we need to conduct and expand our businesses at a reasonable cost and in a
timely manner, our ability to achieve our strategic objectives could be
impaired. In addition, the regulatory environment in the countries in which
our businesses operate is complex and subject to change, and adverse changes in
that environment could also impose costs on, or limit the growth of our
business. Changes in governmental regulation could reduce our revenues, increase
our operating expenses and expose us to significant liabilities. Our businesses are regulated by governmental authorities in the countries
in which we operate. Regulation relates to, among other things, licensing,
access to satellite transponders, commercial advertising, foreign investment
and standards of decency/obscenity. Changes in the regulation of our
operations or changes in interpretations of existing regulations by courts or
regulators, could adversely affect us by reducing our revenues, increasing our
operating expenses and exposing us to significant liabilities for noncompliance
with such modified or reinterpreted regulations. El Sitio, one of our wholly-owned subsidiaries, is a defendant in
several civil securities cases arising out of its initial public offering,
which could result in significant litigation expense and, if not decided in
its favor, damage payments to the plaintiffs. El Sitio and some of its directors and principal executive officers have
been named as defendants in several civil cases arising out of its initial
public offering in December 1999. The complaints primarily relate to alleged
share allocation and commission practices undertaken by the underwriters for
the offering. We believe, after consultation with counsel, that the
allegations relating to El Sitio and its directors and principal executive
officers are without merit. However, these cases could result in significant
litigation expense for us and, if not decided in El Sitios favor or
successfully settled, damage payments which would among other things adversely
affect our financial performance. See Item 8A Financial
Information-Consolidated Statements and Other Financial Information-Legal
Proceedings for more information. RISKS RELATING TO LATIN AMERICA Because our pay television business is concentrated in Argentina and
our broadcast television and radio business is concentrated in Chile, our
financial performance is especially sensitive to risks associated with
political, regulatory and economic conditions in these two countries. For the year ended December 31, 2003, our pay television business derived
32% of its revenues from operations in Argentina. In addition, our broadcast
television and radio business derived 97% of revenues for the year ended
December 31, 2003 from our operations in Chile. As a result, changes in
Argentine or Chilean government policy affecting trade, investment, taxes,
protection of intellectual property or the media industry generally or
instability in the Argentine or Chilean currency, economy or government could
have a material adverse effect on our results of operations and financial
condition. Argentina, in particular, has had a history of political and economic
instability and has recently experienced political upheaval and a severe
economic recession. These events coincided with a serious downturn in global
investor sentiment generally, marked by significant declines in international
equity markets, pronounced investor risk aversion and a decrease in investor
confidence throughout emerging markets. Some other risks of investing in a
company with operations in Argentina, as well as other countries in Latin
America, include: 6




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
    
    the risk of expropriation, nationalization, war, revolutions,
border disputes, renegotiation or modification of existing
contracts, import, export and transportation regulations and
tariffs;
    
    exchange controls, currency fluctuations and other
uncertainties arising out of foreign government sovereignty over our
international operations;
    
    taxation policies, including royalty and tax increases and retroactive tax claims;
    
    laws and policies of the United States affecting foreign trade, taxation and investment; and
    
    the possibilities of being subjected to the exclusive
jurisdiction of foreign courts in connection with legal disputes and
the inability to subject foreign persons to the jurisdiction of
courts in the United States. RISKS RELATING TO OUR CLASS A COMMON SHARES Since our Class A common shares were delisted from the Nasdaq SmallCap
Market, it may be more difficult for investors to trade in our Class A
common shares. Our Class A common shares are currently traded on the OTC Bulletin Board.
Compared to the NASDAQ SmallCap Market, an investor may find it more difficult
to sell our securities. Also, since we are no longer traded on the NASDAQ
SmallCap Market and the average trading price of our Class A common shares
remains below $5.00 per share, trading in our Class A common shares is subject
to certain other rules of the Exchange Act. Such rules require additional
disclosure by broker-dealers in connection with certain trades involving a
stock defined as a penny stock. Penny stock is defined as any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject
to certain exceptions. Such rules require the delivery of a disclosure
schedule explaining the penny stock market and the risks associated with that
market before entering into penny stock transactions. The rules also impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. For these
types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and must receive the purchasers written
consent to the transaction prior to the sale. The additional burdens imposed
upon broker-dealers by such requirements could discourage broker-dealers from
effecting transactions in the securities. This could severely limit the market
liquidity of the securities and the ability to sell the securities in the
secondary market. Our shareholders may face difficulties in protecting their interests
because we are a British Virgin Islands international business company. Our governance matters are principally determined by our memorandum and
articles of association and the International Business Companies Act of the
British Virgin Islands. The rights of shareholders and the fiduciary
responsibilities of directors, officers and controlling shareholders under
British Virgin Islands law have not been extensively developed, particularly
when compared with statutes and judicial precedents of most states and other
jurisdictions in the United States. As a result, our shareholders may have
more difficulty in protecting their interests in the case of actions by our
directors, officers or controlling shareholders than would shareholders of a
corporation incorporated in a state or other jurisdiction in the United States. You may experience difficulty in enforcing civil liabilities against
us. We are a British Virgin Islands international business company with a
substantial portion of our assets located outside of the United States. In
addition, many of our directors and executive officers, as well as other of our
controlling persons, reside or are located outside of the United States. As a
result, it may not be possible for investors to effect service of process
within the United States upon us or these persons or to enforce judgments
obtained against us or these persons in U.S. courts predicated solely upon the
civil liability provisions of the U.S. federal or state securities laws. We
have been advised by Conyers Dill & Pearman, our British Virgin Islands
counsel, that there is doubt as to the enforceability in the British Virgin
Islands in original actions or in actions for enforcement of judgments of U.S.
courts, of civil liabilities predicated upon the U.S. federal or state
securities laws. There is also doubt as to enforceability of judgments of this
nature in several of the jurisdictions in which we operate and our assets are
located. 7




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We are a foreign private issuer and you will receive less information
about us than you would from a domestic U.S. corporation. As a foreign private issuer, we are exempt from rules under the U.S.
Securities Exchange Act of 1934 that impose certain disclosure and procedural
requirements in connection with proxy solicitations under Section 14 of the
Exchange Act. Our directors, executive officers and principal shareholders
also are exempt from the reporting and short-swing profit recovery provisions
of Section 16 of the Exchange Act and the rules thereunder with respect to
their purchases and sales of our shares. In addition, we are not required to
file periodic reports and financial statements with the U.S. Securities and
Exchange Commission as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act. As a result, you may not be
able to obtain some information relating to us as you would for a domestic U.S.
corporation. 
 Item 4. Information on the Company A. History and Development of the Company We were incorporated as an international business company under the laws
of the British Virgin Islands on October 16, 2000. Our registered office is at
Romasco Place, PO Box 3140, Wickhams Cay I, Road Town, Tortola, British Virgin
Islands. Our headquarters and principal executive offices are located at
Avenida Melian, 2752, C1430EYH Buenos Aires, Argentina and our telephone number
is 011-54-11-4546-8000. We maintain a United States principal executive office
located at 1550 Biscayne Boulevard, Miami, Florida 33132. Our telephone number
in Miami is (305) 894-3500. We were formed in a merger transaction that combined media assets
contributed by Ibero-American Media Partners II, Ltd., and other media assets
contributed by members of the Cisneros Group and El Sitio, Inc. For a
description of the merger transaction, see the Introduction to this annual
report on Form 20-F. B. Business Overview We seek to be a multimedia provider of branded entertainment content to
Spanish and Portuguese speakers around the world. We have combined assets in
pay television, broadcast television and radio, and Internet and broadband to
create an integrated media company with a portfolio of popular entertainment
brands and multiple methods of distributing our content. Our pay television business, currently our largest source of revenues,
includes 13 pay television channels distributed to approximately 10.5 million
pay television households, which account for approximately 44.7 million basic
channel subscribers through cable and direct-to-home television platforms. We
calculate the number of subscribers based on the number of channels received
per household so that if for example a household receives five channels, we
count five subscribers for such household. Three of these pay television
channels are owned by Playboy TV Latin America, our 81% owned joint venture
with an affiliate of Playboy Enterprises Inc. Our broadcast television and radio business includes an eight-station
radio network with the largest audience share in Chile, which constitutes the
largest radio group in Chile, the fourth largest broadcast television network
in Chile, and three radio stations in Uruguay. Our Internet and broadband business, which is our newest business, is
primarily dedicated to support our media assets and the production,
distribution and selling of digital content specifically developed for
broadband. We integrate licensed and proprietary content for pay television,
broadcast television and radio and Internet formats. By taking advantage of the
complementary nature of our assets and the experience of our management team,
we seek to achieve revenue growth and reduce expenses through operational
synergies that we believe will lead to enhanced long-term financial performance
and better position us to take advantage of emerging trends in media
distribution. The following tables present historical selected financial information by
our business operations for the years and periods indicated (in thousands of
U.S. dollars): 8




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Year Ended December 31, 2003BroadcastTelevision and
    
    Internet andPay Television
    
    Radio
    
    Broadband
    
    Corporate
    
    TotalRevenues
    
    $
    48,215
    
    
    $
    33,394
    
    
    $
    178
    
    
    $
    
    
    
    $
    81,787Operating Income (Loss)
    
    
    7,266
    
    
    
    4,928
    
    
    
    (1,898
    )
    
    
    (5,032
    )
    
    
    5,264Net Income (Loss)
    
    
    13,289
    
    
    
    2,953
    
    
    
    (1,685
    )
    
    
    (6,220
    )
    
    
    8,337Cash Flows from Operating Activities
    
    
    5,675
    
    
    
    6,478
    
    
    
    (1,364
    )
    
    
    2,865
    
    
    
    13,654Cash Flows from Investing Activities
    
    
    (1,322
    )
    
    
    (690
    )
    
    
    242
    
    
    
    (3,890
    )
    
    
    (5,660
    )Cash Flows from Financing Activities
    
    
    (1,313
    )
    
    
    (5,174
    )
    
    
    
    
    
    
    (1,398
    )
    
    
    (7,885
    )
 Year Ended December 31, 2002BroadcastTelevision and
    
    Internet andPay Television
    
    Radio
    
    Broadband
    
    Corporate
    
    TotalRevenues
    
    $
    46,192
    
    
    $
    28,578
    
    
    $
    190
    
    
    $
    
    
    
    $
    74,960Operating Income (Loss)
    
    
    9,303
    
    
    
    (1,152
    )
    
    
    (7,684
    )
    
    
    (2,775
    )
    
    
    (2,308
    )Net Income (Loss)
    
    
    (116,363
    )
    
    
    (7,331
    )
    
    
    (13,549
    )
    
    
    (1,186
    )
    
    
    (138,429
    )Cash Flows from Operating Activities
    
    
    (214
    )
    
    
    5,331
    
    
    
    929
    
    
    
    (4,075
    )
    
    
    1,971Cash Flows from Investing Activities
    
    
    8,322
    
    
    
    (578
    )
    
    
    (3,128
    )
    
    
    (330
    )
    
    
    4,286Cash Flows from Financing Activities
    
    
    (2,178
    )
    
    
    (5,032
    )
    
    
    (1,934
    )
    
    
    (3,881
    )
    
    
    (13,025
    )
 Year Ended December 31, 2001BroadcastTelevision and
    
    Internet andPay Television
    
    Radio
    
    Broadband
    
    Corporate
    
    TotalRevenues
    
    $
    77,397
    
    
    $
    28,289
    
    
    $
    751
    
    
    $
    
    
    
    $
    106,437Operating Income (Loss)
    
    
    (3,304
    )
    
    
    (1,333
    )
    
    
    (4,807
    )
    
    
    (4,915
    )
    
    
    (14,359
    )Net Income (Loss)
    
    
    (65,390
    )
    
    
    (8,226
    )
    
    
    (6,355
    )
    
    
    (4,915
    )
    
    
    (84,886
    )Cash Flows from Operating Activities
    
    
    12,856
    
    
    
    805
    
    
    
    (6,315
    )
    
    
    (3,850
    )
    
    
    3,496Cash Flows from Investing Activities
    
    
    (10,221
    )
    
    
    (2,679
    )
    
    
    9,520
    
    
    
    
    
    
    
    (3,380
    )Cash Flows from Financing Activities
    
    
    (8,713
    )
    
    
    (2,290
    )
    
    
    2,611
    
    
    
    3,850
    
    
    
    (4,542
    )
 Business Strategy Our vision is to provide high-quality branded content to serve the tastes
and needs of our target audience. We believe that we will be a leader in
tailoring multi-media programming to the Ibero American market by creating
original content, as well as by dubbing and translating third-party content
into Spanish and Portuguese, while remaining sensitive to local preferences.
We seek to fill the need for a pan-regional alternative that can create,
gather, package and deliver differentiated content across multiple media
platforms. The key elements of our strategy include the following:  
    
    Increase Subscription Revenues from a Portfolio of Leading
Pay Television Brands. We hold a number of well-known pay
television brands under one roof. We expect to increase
subscriber-based revenues by expanding distribution of our channels
to pay television system operators that we do not reach today, and
by benefiting from anticipated growth in pay television subscribers
in Ibero America.  
    
    Create Significant Operating Benefits. We endeavor to
combine our product offerings to create operating benefits across
all of our businesses, including:  
    
    cross-promotion across multiple media, thereby
increasing brand awareness while driving audience growth and
reducing marketing expenditures;  
    
    spreading the costs of content-creation and
gathering across multiple delivery systems, thus maximizing
the return on content investments; and  
    
    aggregation of management expertise in
traditional and new media to create innovative and interactive
content and to expand our brands across all media. 9




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
    
    Develop Additional Revenue Streams. We intend to capitalize
on our diverse media assets to develop additional sources of
revenue, including, among others, the sale or license of content
through existing and new media, such as broadband, and the provision
of other services, such as dubbing, subtitling and other services.  
    
    Exploit Market Opportunities for Growth Through Strategic
Alliances. The media industry in Ibero America is fragmented and,
because of shifts in the regulatory environment, foreign ownership
of multiple media assets in some countries has become possible.
These two factors should provide us the opportunity to develop our
businesses. Our strategy includes geographic expansion of our
existing pay television business, as well as increasing penetration
in those geographic markets in which we currently operate, through
strategic alliances and opportunistic acquisitions of channels
targeting specific genres, which compliment our channel offerings.  
    
    Leverage Strategic Relationships. We believe that our
relationships with the Cisneros Group and Hicks Muse, our principal
shareholders, provide us with competitive advantages. We intend to
draw upon the relationships, regional expertise and extensive media
assets of our principal shareholders to enhance our content
offerings and facilitate access to distribution and technology
platforms. PAY TELEVISION BUSINESS Our pay television business includes 13 pay television channels
distributed throughout various Ibero American countries, with a strong presence
in Latin America with the premium and pay-per-view services through the Playboy
TV Latin America joint venture, as well as in Argentina and the rest of the
southern portion of South America with the basic channels, which is commonly
called the Southern Cone. Our channels are tailored to Spanish- and Portuguese-speaking television
viewers throughout Ibero America and offer a diverse mix of programming,
including movies, music videos, local news, documentaries, fashion, family
series and adult entertainment on a basic, premium or pay-per-view basis.
Content for local, regional and international markets, is either originally
produced in, dubbed or subtitled into Spanish or Portuguese. At December 31, 2003, we wholly-owned seven of the channels that we
distributed: Space; I.Sat; Retro (formerly known as Uniseries); Infinito; FTV;
MuchMusic and HTV. In 2003, we rebranded the Uniseries channel and launched it
outside of the Southern Cone as the Retro channel and sold our ownership
interest in Cl@se. We control the programming content of our wholly-owned
channels. In addition to Venus (a partially owned channel), we also distribute
two other channels in Ibero America through our Playboy TV Latin America joint
venture, the Playboy TV channel and the Spice Live channel. In June 2004,
through our Playboy TV Latin America joint venture, we launched a new adult
pay-per-view service called G Channel. We also have exclusive distribution
rights throughout certain parts of Ibero America with respect to certain
channels, including Crónica TV, a channel owned by Estrella Satelital S.A., in
the Southern Cone; Venevision Continental (solely with respect to distribution
to pay television providers other than DirecTV Latin America), a channel owned
by the Cisneros Group, in the Latin America region; and Utilisima Satelital, a
channel owned by HediFam, S.A. in Latin America. Our 31% owned joint venture,
DMX MUSIC Latin America, offers digital music channels throughout Latin
America. Wholly Owned Basic Tier Channels Film Channels Spaceoffers 24 hours of a varied selection of Hollywood movies and
blockbusters from the rest of the world, among a varied programming line-up for
the entire family in the Southern Cone. Programming includes thematic blocks
featuring horror movies, Italian films, Spanish productions, action movies,
major boxing events and artistic specials. With 200 different films aired every
month, Space offers its audience an important number of movies with the
majority dubbed into Spanish. Spaces live boxing events have often set
ratings records in Argentina, frequently surpassing broadcast television. I.Satspecializes in current and alternative entertainment designed
especially for the 18-35 year old urban market. I.Sat presents contemporary
movies, series, music, documentaries and original productions. I.Sat offers
its viewers in the Southern Cone not only recent Hollywood blockbusters, but
also independent films and movies 10




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popular with the 18-35 year old urban market. In addition, all genres of
international music are featured including videos and specials showcasing
contemporary music artists from all over the world. Retro (formerly known as Uniseries)was expanded to provide regional
coverage in March 2003. Prior to March 2003, the channel featured an eclectic
mix of the American and British classic and contemporary television hits for
the whole family. In March 2003, based on the success of the Uniseries channel
in the Southern Cone, we launched the Retro channel throughout the entire Latin
America region. Retros programming includes classic films and series focused
on genres such as westerns, gladiators, cult horror, and science fiction of the
50s, 60s and 70s. Retro also showcases such milestone TV series as Mission
Impossible, The Untouchables, Combat, The Fugitiveand others. Entertainment Infinitooffers programming based on themes of the new millennium.
Infinito is dedicated to the unknown, the occult and the unexpected and
presents an alternative to traditional documentary channels. Bringing viewers
closer to the unknown, Infinito features documentaries, interviews, talk shows,
series and news. Infinito is available throughout Latin America. FTV/Fashion TVis a global television network entirely dedicated to the
fashion world. Since November 2001, we have controlled the distribution and
advertising sales rights for Latin America of FTV. Under an agreement with FTV
Paris, we develop original content featuring local celebrities and brands to
customize the channel to the preferences of the local markets. FTV is a
24-hour international television channel targeting fashion enthusiasts around
the world. FTVs programming highlights include Focus On...Argentina, a daily
show covering the Argentine fashion scene; Fashion Clips, Haute Couture Paris,
covering fashion events from Paris, Rome and Milan; and major fashion events
from Sao Paulo, New York and Buenos Aires. Music Channels MuchMusic Argentinais a channel that integrates music, interactivity and
humor. MuchMusic Argentina targets the 12-24 and 25-34 age brackets and
combines live productions and localized content with local production
packaging, and international flair through a wide spectrum of styles: Rock,
Pop, Latin Music, Dance, Hard Core and other new music trends. MuchMusic also
offers original non-musical content developed under the same localist
programming philosophy. We license the MuchMusic brand and certain content
from CHUM Limited, a Canadian company and content provider. In addition, we
have the right to develop the MuchMusic television service in Latin America and
Ibero America and we distribute the MuchMusic Argentina channel pan-regionally
on DirectTV Latin America. HTVis a vehicle of Latin culture and offers a diverse music mix
overcoming geographic barriers and language. Taking advantage of the
popularity for all things Latin and Latin music, HTV has established a
following in Latin America and the US Hispanic market. HTV programming covers
a spectrum of Latin American music genres, including pop, Latin rock, tropical,
hip-hop, reggae and ballads. HTV also features current popular crossover hits,
introduced by the artists themselves. HTV plays uninterrupted Spanish and
Portuguese-language music without VJs or other non-musical programming. Partially
Owned Channels - Adult Playboy TV Network and Spice Live Networkare owned, operated and
distributed throughout Latin America, Spain and Portugal by Playboy TV Latin
America. Playboy TV Latin America is a joint venture that was created in 1996
between a member of the Cisneros Group and an affiliate of Playboy Enterprises,
Inc. Today, a subsidiary of Claxson owns 81% of Playboy TV Latin America,
while an affiliate of Playboy Enterprises, Inc. owns the remaining 19%.
Playboy TV Latin America offers high quality adult entertainment, which
generally can be purchased monthly as a premium channel or on a pay-per-view
basis. A portion of Playboy TV Latin Americas programming is tailored to the
Ibero American market and is customized according to regional preferences. Venusis a premium and pay per view adult content channel that we launched
in 1994 and targeted specifically to the Latin American audience. Venus offers
themed features, specials and weekly shows to demanding subscribers. Venus
brings a wide variety of adult genres and high quality programming, including
original productions and a sophisticated on-air look. Venus was transferred to
the Playboy TV Latin America joint venture, as part of the overall
restructuring of the relationship with Playboy Enterprises, Inc. 11




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Distributed Channels Crónica TVis owned and produced by Estrella Satelital S.A. We are the
exclusive sales agent for Crónica TV programming in the Southern Cone. Crónica
TV is a 24-hour live news channel, delivering local and international news
coverage that is popular, in large part, for its live coverage of events in
Argentina. Crónica TV is one of the leading news channels in Argentina. Venevision Continental, which is owned by the Cisneros Group, is a general
entertainment channel with family programming that integrates highly rated
shows from the main Spanish-speaking television broadcasters. Venevision
Continentals programming includes soap operas, magazine and talk shows,
variety shows, comedy, childrens programming, beauty contests and news.
Venevision Continental was launched in August 2000 and is distributed
pan-regionally. We represent Venevision Continental for sales to cable
operators throughout Latin America. Utilisima Satelital,which is owned by HediFam S.A., is a channel designed
by and targeted to todays woman, and is the market leader in its category in
Argentina. Utilisima combines a mix of content and services in an educational,
entertaining format with subjects such as arts and crafts, cooking, beauty,
quality of life, and home decor. Utilisima broadcasts 10 daily original hours
and 3,000 premiere shows a year through 40 programs with original content.
Utilisima was launched in 1996 and we commenced pan-regional and US Hispanic
distribution for Utilisima on January 1, 2004. The Locomotion Channelwas a 50/50 partnership between a subsidiary of
Claxson and an affiliate of The Hearst Corporation that was created in November
1996. Locomotion is distributed in Ibero America and features international
animation programming created specifically for teens and young adults. On May
17, 2002, we sold our 50% participation in Locomotion to Corus Entertainment
Inc., a Canadian media company, but continued providing certain transitional
services, including sales services and post-production and technical services.
We discontinued providing the transitional sales services in August 2003 and
the post-production and technical services in January 2004. Cl@se,which we sold to the Cisneros Group, in January 2003 is a channel
that is committed to supporting education in Latin America by offering an
entertaining educational vehicle to facilitate learning by children and
teenagers. We discontinued serving as the channels sales agent in June 2004
but we continue to provide administrative sales services for the channel. Production Operations The Kitchen, Inc.commenced operations in the first quarter of 2001,
offering language dubbing and subtitling, network playout and post production
services. The language dubbing process utilizes specialized computer systems
and software and employs versatile acting talent from Miami, Latin America and
Europe. The Kitchen can dub into Spanish, Portuguese, English, French and
Italian. In network playout, The Kitchen is equipped with a tapeless
environment with daily programming supplied from computer servers. The Kitchen
offers broadcast services to our owned and partially-owned channels, and
recently to customers around the world. The Kitchen is open twenty-four hours
a day, seven days a week. The Kitchen also provides subtitling services in
various languages, playback services for television networks in the Miami area
and general post-production services. In Jauscommenced operations in 2002 as part of our strategy to obtain
third party clients for the services that we already produce for our own
channels. In Jausis our creative division in charge of broadcast design (both
video and audio) as well as the production services for commercial shoots,
feature films and made for TV movies, and documentaries or video clips (through
In Jaus Films). The original production of documentaries and other programs is
also managed by In Jaus, as well as the distribution and sale of these programs
and all proprietary programs and television formats to third parties. During
the year 2003, In Jaus provided services to external clients, including Arcor,
MTV Networks and Parmalat, generating revenues of U.S.$0.4 million as well as
U.S.$0.5 million in content sales. Pay Television Distribution As of December 31, 2003, our channels were distributed in 23 countries in
Ibero America and reached approximately 41.3 million basic channel subscribers
in over 10.5 million pay television households. We believe that our ability to
provide a diversified package of branded channels to pay television operators
is a favorable 12




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alternative to individual channels that offer a more limited menu of
programming choices. We have distribution agreements with pay
television
operators that distribute our channels in each of our markets. We intend to increase the penetration of our channels in the markets in
which they are currently distributed and expand into new markets. The
following table identifies the number of subscribers for each of our basic
channels as of December 31, 2001, 2002 and 2003. The total number of
subscribers for each channel in 2002 was strongly affected by a decrease of
approximately 25% in the total subscribers in Argentina as a result of the
economic situation during 2002. Total Number of SubscribersDecember 31,2001
    
    2002
    
    2003(In thousands)Basic PackageSpace
    
    
    5,881
    
    
    
    4,805
    
    
    
    4,861I.Sat
    
    
    5,675
    
    
    
    4,674
    
    
    
    4,724Uniseries/Retro(1)
    
    
    4,557
    
    
    
    3,555
    
    
    
    5,005Infinito
    
    
    9,251
    
    
    
    8,229
    
    
    
    8,330Júpiter/FTV(2)
    
    
    2,595
    
    
    
    3,576
    
    
    
    4,055MuchMusic
    
    
    5,185
    
    
    
    4,494
    
    
    
    4,569HTV
    
    
    5,431
    
    
    
    5,061
    
    
    
    4,947Crónica TV(4)
    
    
    5,330
    
    
    
    3,997
    
    
    
    3,881Venevision Continental(5)
    
    
    587
    
    
    
    998
    
    
    
    901Locomotion(4)(6)
    
    
    5,711
    
    
    
    5,330
    
    
    
    Cl@se(3)(4)
    
    
    1,549
    
    
    
    1,718
    
    
    
    Total Basic Channel Subscribers
    
    
    51,752
    
    
    
    46,437
    
    
    
    41,273
   (1)
    
    Uniseries was replaced by Retro in March 2003.(2)
    
    Jupiter was replaced by FTV in December 2001.(3)
    
    We sold Cl@se in January 2003 and ceased providing sales representation
services to the channel in 2004.(4)
    
    Represented channel.(5)
    
    Represents cable subscribers only. We began distributing Venevision
Continental in September 2001.(6)
    
    We sold our 50% interest in Locomotion in May 2002 and ceased providing
any transitional services for the channel in August 2003. We commenced distributing Utilisima Satelital on January 1, 2004. As of
that date, Utilisima had 3,498 subscribers. Pay Television Revenue Sources Like most providers of pay television content, we derive substantially all
of our pay television revenues from subscriber-based fees and advertising
revenue. Subscriber-based revenues currently are the primary source of revenue
for our pay television business, accounting for 81% of total pay television net
revenue in the year ended December 31, 2003 and 68% in the year ended December
31, 2002. Advertising accounted for 8% of total pay television net revenue in
the year ended December 31, 2003 and 5% in the year ended December 31, 2002.
In addition, we derived 11% of total pay television net revenue in the year
ended December 31, 2003 and 27% in the year ended December 31, 2002 from other
sources, including production services, management and other fees for services
we provide to our partially owned channels and to third parties. Subscriber-Based Fees.We charge pay television operators either a flat
or per-subscriber fee for the right to broadcast our channels through their
networks. Pricing for basic channels typically involves a lump sum monthly
payment per channel or package of channels or fixed price per subscriber.
Generally, we enter into long-term distribution agreements with an average term
of approximately three years. For premium and other pay-per-view channels, we
determine a retail price in each market and receive a percentage of the
revenues generated from subscribers of those channels. 13




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Our channels are distributed by more than 1,100 pay television operators
in Ibero America. These operators include, among others, DirecTV Latin
America, CableVisión (Argentina), Multicanal (Argentina), Digital Plus (Spain),
Sky Latin America, Net Brasil (Brazil), Cablevisión (Mexico), VTR (Chile) and
Intercable (Venezuela). Our five largest pay television distributors accounted
for 24% of total pay television net revenue for the year ended December 31,
2003, and DirecTV Latin America, our largest pay television distributor,
accounted for 16% of total pay television revenues for the year ended December
31, 2003. See Item 3D Risk Factors  We depend on a limited number of pay
television system operators for a significant portion of our revenues and the
loss of any of our major pay television system operators could significantly
reduce our revenues. Advertising Revenue.We derive revenues from the sale of advertising on
our pay television channels to advertisers and agencies. We believe that our
geographic reach will enable us to pursue local, pan-regional and global
advertising budgets. We offer advertisers pan-regional reach, local focus and
the opportunity to incorporate direct marketing and promotional events to
create multimedia campaigns. We believe that our channels spectrum of
highly-rated programming appeals to advertisers that want to target audiences
in specific demographic and other focused groups. We seek to offer advertisers
maximum value for their advertising expenditures and have implemented a
strategy that provides customized options, including the following: on-air
spots; program sponsorships; on-air promotions; product integration; customized
commercials; special events; and interactive elements. For the year ended December 31, 2003, our channels sold advertising to 292
advertisers. In the year ended December 31, 2003, our top ten advertisers
accounted for approximately 48% of our pay television advertising revenues.
Our strongest advertising sales were made for the Space channel, which
accounted for 34% of pay television advertising revenue in the year ended
December 31, 2003. On October 22, 2001 we acquired a 51% equity interest in StarTV Brazil
Ltda., a Brazilian limited liability company. StarTV is an advertising firm in
Brazil that provides advertising sales and marketing services to pay television
channels and Internet businesses. StarTV operated as the advertising sales
representative in Brazil for all of our media properties. Due to the
underperformance and reduced sales of this business, we are in the process of
transferring our ownership to the other shareholder in the company. Other Revenue Sources. We derive other revenues from services that we
provide to pay television businesses we partially own and to certain third
parties. These revenues include playback, library, satellite space, dubbing,
subtitling, creative services, and programming from our partner channels as
well as from independent third parties and fees for back office and other
services provided to these joint ventures. Marketing We focus our marketing efforts on increasing pay television operator
interest, subscriber levels and brand awareness, maintaining and improving the
ratings of our channels, and creating promotional opportunities that are
attractive to our target audiences, distributors and advertisers. We conduct
multimedia marketing campaigns designed to promote audience loyalty and support
the programming of our channels. These campaigns generally combine on-air and
off-air events with traditional print, radio and billboard advertising targeted
to current and potential viewers. Our channels also have promotional websites
that allow our subscribers to learn more about our programming and off-air
events, while providing sponsors and advertisers with another medium for
interacting with subscribers. Our marketing staff works closely with our other departments, including
advertising sales, affiliates sales, creative, programming and communications,
to coordinate and implement activities that achieve its marketing goals. For
example, our marketing, affiliate and advertising sales departments work
closely together to create marketing concepts and off-air promotional events
that appeal to its advertisers and system operators and reinforce a brands key
elements. In addition, our marketing staff works with the programming and
creative departments to develop strategic programming concepts that strengthen
the uniqueness of a channels identity, increase viewership and create
sponsorship opportunities. We believe that our marketing initiatives achieve
their primary goals of growing our brands, retaining viewer loyalty, increasing
the distribution of our channels, creating innovative promotional opportunities
for their advertisers and affiliates and maintaining or improving ratings and
audience. 14




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Programming Sources  Basic channels Our programming library includes licensed programming, owned films,
original productions and other programming totaling approximately 15,300 hours.
Approximately 14,500 hours are currently in our possession and 800 hours are
to be delivered pursuant to contracts with suppliers. We tailor our pay television programming for the Ibero American audience
and air most of our programming in Spanish or Portuguese. Our purchased
programming is dubbed or subtitled into Spanish and/or Portuguese in our own
studios through our subsidiary, The Kitchen. We believe that our library of
customized Spanish-and Portuguese-language programming represents a valuable
asset, because many of our competitors air significantly more of their
programming with subtitles, which we believe is less popular with television
audiences in Ibero America. The availability of an extensive, edited and
ready-to-air programming library permits us to schedule movies and other
programming quickly for inclusion in theme-oriented programming blocks in
response to current events. Licensed Programming.We have exhibition rights from third-party
programmers totaling approximately 13,400 hours of programming. These rights
include approximately 3,600 films, representing approximately 7,300 hours of
programming, which allows channels such as Space and I.Sat to air programming
with less repetition than many of their competitors. The remaining 6,100 hours
of programming consist of approximately 8,700 television series episodes and
documentaries, allowing Retro and Infinito not to repeat its episodes of any
series or documentary for up to one year. Our exhibition rights also include
sports and music entertainment events. Our program license agreements generally provide for the non-exclusive
right to exhibit programming within a specified period of time by means of
basic pay television in the Southern Cone, and sometimes provide for options to
extend these rights on a pan-regional basis throughout Latin America. In the
case of each of Infinito, FTV and Retro, our pan-regional channels, we obtain
exhibition rights on a pan-regional basis throughout Latin America. We have entered into programming agreements with key providers of
high-quality programming, including Sony Pictures Corp., Warner, CHUM Limited,
and FTV Paris. We believe that our relationships with pay television programming
suppliers are good. Owned Programming.We own approximately 535 classic Argentine films,
totaling approximately 700 programming hours, including the San Miguel film
library and films from the Lumiton film library that we purchased. Many of
these films date from the golden age of Argentine filmmaking in the 1940s and
1950s. We own a substantial amount of programming originally produced for the
channels, including approximately 1,200 hours of original programming recently
produced for Infinito and Fashion TV, as well as boxing and film commentaries
produced to air on Space and concert and film commentaries produced for
MuchMusic Argentina and I.Sat. We also own certain brief lead-in programming
that we produce relating to much of our film library and other interstitial
programming material. In addition to owned and licensed programs, we have a limited amount of
first-run rights relating to boxing matches and other special events, such as
music concerts, exclusive interviews and specials featuring music artists. Playboy TV Latin America Joint Venture Restructuring of the relationship with Playboy Enterprises, Inc. Playboy TV Latin America, a joint venture 81% owned by us and 19% owned by
an affiliate of Playboy Enterprises, Inc., owns, operates and distributes
Playboy TV Network, Spice Live and the Venus channel throughout Latin America,
Spain, and Portugal and the recently launched G Channel as a pay-per-view
service. In 1999, an affiliate of Playboy Enterprises, Inc. and an affiliate
of the Cisneros Group created Playboy TV International LLC, a joint venture to
own and operate Playboy TV networks outside of the United States and Canada. In December 2002, we negotiated a restructuring of our relationship with
Playboy TV. As a result of the restructuring, we: 15




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
    
    transferred our 80.1% interest in Playboy TV
International (outside of Latin America, Spain and Portugal) to
Playboy Enterprises, Inc.;  
    
    contributed the Venus channel to Playboy TV Latin America;  
    
    transferred 728,112 preferred shares of Playboy.com, Inc. to Playboy Enterprises, Inc;  
    
    were released from our capital commitments to Playboy TV International; and  
    
    revised the terms for our continued relationship in
Latin America, Spain and Portugal by retaining through a
wholly-owned subsidiary an 81% interest in Playboy TV Latin
America and now controlling the management of this joint venture. As a result of the restructuring, we began to consolidate the Playboy TV
Latin America operations into our pay television division, in December 2002.
Under the existing Playboy TV Latin America joint venture, Playboy Enterprises
has an option to buy up to 49.9% of the joint venture at any time prior to
December 2012. In addition, Playboy Enterprises has an option to buy the
remaining 50.1% of the joint venture during the year 2008, provided that, the
49.9% option has been exercised. Both options are at the fair market value at
the time of exercise. Consequently, we now operate all adult content operations
(which includes the Playboy TV, Spice Live and Venus channels) under the
Playboy TV Latin America joint venture. An affiliate of Playboy Enterprises,
Inc. will distribute the Playboy TV Latin America programs in the U.S. Hispanic
market for a 20% distribution fee to our joint venture. As part of the restructuring, an affiliate of Playboy Enterprises, Inc
agreed to exclusively license to Playboy TV Latin America its entire Playboy TV
television programming library which was in existence as of March 31, 2002.
The library consisted of approximately 12,500 hours of Playboy original
programming, licensed movies, and other shows. The program supply agreement
also requires an affiliate of Playboy Enterprises, Inc. to license exclusively
all new programs produced to Playboy TV Latin America each year, subject to a
certain minimum number of program hours. In exchange for these rights, Playboy
TV Latin America must pay an affiliate of Playboy Enterprises, Inc. 17.5% of
the net revenues from the distribution of these programs, with a guaranteed
annual minimum of U.S. $4.0 million, subject to annual increases equal to the
consumer price index. DMX MUSIC Latin America In May 2002, we completed a business combination transaction with DMX
MUSIC whereby DMX MUSIC contributed to our joint venture all its existing
affiliation agreements with cable and DTH operators in Latin America and the
U.S. Hispanic market and cash in the amount of U.S.$0.7 million, in exchange
for an additional 19% of the equity interests in the joint venture. After the
business combination, the venture re-branded its services as DMX MUSIC Latin
America and expanded its channel offerings. We now own 31% of DMX MUSIC Latin
America. DMX MUSIC Latin America also intends to develop and deliver music
services to retail and commercial establishments in Latin America. BROADCAST TELEVISION AND RADIO BUSINESSES We wholly own and operate two integrated broadcast businesses:
Iberoamerican Radio Chile, S.A., which we refer to herein as Radio Chile; and
Red de Television Chilevisión S.A., which we refer to as Chilevisión. Radio
Chile is the radio network with the largest audience in Chile and Chilevisión
is the fourth largest television broadcaster in Chile (based on ratings). Our
broadcast businesses in Chile allow us to:  
    
    cross-sell television and radio advertising; and  
    
    expand the multi-media package available to advertisers from
radio and broadcast television to also include pay television. We also operate two radio stations owned by Sarandi Communications, S.A.
in Uruguay: AM 690 (Sarandi), FM 91.9 (Radio Disney), and the recently
launched FM 91.1 (Radiofutura) which we lease from a third party. Market Overview Our broadcast business is presently concentrated in Chile. The
advertising market in Chile is seasonal, with advertising expenditures
increasing throughout the year and peaking in the fourth quarter when consumer
expenditures reach their peak. 16




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Radio Chileowns and/or operates eight centrally programmed radio
networks, namely Pudahuel FM, Rock & Pop, Corazón, FM Dos, Concierto, Futuro,
FM Hit, and Imagina, five of which were among the top ten ranked radio networks
during 2003 in Santiago, which represents 39% of the national population and
58% of Chiles purchasing power. The Radio Chile networks deploy a variety of
programming formats designed to increase Radio Chiles market share and to
present a wide range of options to advertisers. We believe that our variety of
programming formats makes Radio Chile less susceptible to changes in listening
preferences than networks focused on a single segment. The following table identifies the formats and target audiences of the
radio networks. Radio Network
    
    FormatPudahuel FM
    
    News, Latin music and talk show formats targeted to women 25 to 59 years
old.Corazón
    
    Interactive, tropical music format targeted to listeners 25 to 59 years old.Rock & Pop
    
    Rock music and talk show format targeted to listeners 15 to 24 years old.FM Dos
    
    Romantic music format in Spanish (70%) and English (30%) targeted to women
20 to 34 years old.FM Hit
    
    Top 40 music format targeted to listeners 15 to 19 years old.Futuro
    
    Classic rock format targeting men 25 to 44 years old. Futurocomplements
Conciertoin Santiago, where the two stations occupy the number one and two
spots in their segment.Imagina
    
    Romantic music format targeted to women 25 to 59 years old.Concierto
    
    Adult contemporary music format in English (70%) and Spanish (30%),
targeting men and women 25 to 44 years old.
 Radio
Chiles eight radio networks had a combined 35.9% audience share in
the Santiago market for the period from January through December 2003. The
following table presents the rank and audience share in Santiago for each Radio
Chile radio network for the periods indicated. 2003
    
    Rank
    
    2002
    
    RankPudahuel FM
    
    
    6.3
    %
    
    
    1
    
    
    
    5.9
    %
    
    
    1Corazón
    
    
    5.8
    
    
    
    3
    
    
    
    5.6
    
    
    
    2FM Dos
    
    
    5.4
    
    
    
    5
    
    
    
    5.0
    
    
    
    3Rock & Pop
    
    
    4.8
    
    
    
    7
    
    
    
    4.9
    
    
    
    5FM Hit
    
    
    4.3
    
    
    
    10
    
    
    
    4.2
    
    
    
    10Futuro
    
    
    4.1
    
    
    
    11
    
    
    
    3.7
    
    
    
    11Concierto
    
    
    2.7
    
    
    
    15
    
    
    
    2.6
    
    
    
    16Aurora/Imagina1
    
    
    2.5
    
    
    
    19
    
    
    
    2.2
    
    
    
    19Total audience share
    
    
    35.9
    %
    
    
    
    
    
    
    34.1
    %
   (1)
    
    In September 2002 Aurora changed its target audience and became Imagina.Source: Search Marketing Reports Radio Chile is a distant leader in audience share in Santiago, compared to
the other radio groups that operate more than one network. The Garcia Reyes
Group captures a 7% audience share with the operation of two networks; the
Consorcio Radial de Chile (PRISA Group) obtains 8% audience share operating
four networks; and the Bezanilla Group has an 8% audience share operating three
networks. Radio Chiles networks reach over 90% of Chiles population in 28 cities
through 142 FM concessions. Our three largest networks reach over 90% of the
total population, two reach over 70% of the total population, and the rest
reach between 40% and 70% of the total population depending on the
concentration of the target market of 17




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each network. Radio Chile had U.S.$12.6 and U.S.$13.7 million in revenue in
2002 and 2003, respectively, which accounted for an estimated 31% and 35% of
the Chilean radio advertising market in 2002 and 2003, respectively. Chilevisióncurrently is, according to Time Mediaand Asociación Chilena
de Agencias de Publicidad, Chiles fourth largest television network in terms
of ratings and revenues. Chilevisión broadcasts a mix of syndicated
programming (45%) and proprietary programming (55%) that targets a family
audience. Chilevisión reaches 35 cities that account for 98% of the Chilean
population, and is one of the five television networks with national coverage. Chilevisión Revenue Sources We derive all of our broadcast television revenues from the sale of
advertising on our television network to advertisers and agencies. Our
geographic reach enables us to pursue national advertising budgets as we give
advertisers access to the entire Chilean market. We believe that our networks
mix of licensed and proprietary programming appeals to advertisers that want to
target audiences in specific demographic and other focused groups. We seek to
offer advertisers maximum value for their advertising expenditures and have
implemented a strategy that provides customized options, including on-air
spots; program sponsorships; on-air promotions; product integration; customized
commercials; special events; and interactive elements. For the years ended
December 31, 2002 and 2003, Chilevisión sold advertising to 284 and 263
advertisers, respectively. In the year ended December 31, 2002 and 2003 our
top five advertisers accounted for approximately 16% and 20%, respectively, of
our broadcast television advertising revenues. In May 2002 a new Executive Director for Chilevisión was appointed. As
part of a restructuring of the network we reduced the number of employees and
the programming grid was changed to increase news coverage, make the
programming more attractive to a female audience, reinforce its approach, and
strengthen prime time programming. In addition, the image of the network was
repositioned through a new logo, slogan and on-air elements. In January 2004,
due to a criminal investigation related to the use of hidden cameras,
Chilevisións Executive Director was temporarily replaced pending the
resolution of the criminal investigation. In the interim, he has continued to
provide consulting services to Chilevisión. See Item 8A Consolidated
Statements and Other Financial InformationLegal Proceedings. Marketing We focus our marketing efforts on maintaining, increasing and improving
the ratings of our network, and creating promotional opportunities that are
attractive to our target audiences and advertisers. We conduct multimedia
marketing campaigns designed to promote audience loyalty and support our
network programming. These campaigns generally combine on-air and off-air
events with traditional print, radio and billboard advertising targeted to
current and potential viewers. Our network also has a promotional website that
allows our viewers to learn more about our programming and off-air events,
while providing sponsors and advertisers with another medium for interacting
with viewers. We believe that our marketing initiatives achieve their primary
goals of retaining viewer loyalty and creating innovative promotional
opportunities for its advertisers and maintaining or improving its ratings. Programming Sources We broadcast a mix of licensed programming (35%), proprietary programming
(55%) and third party productions (10%). One of the strengths of Chilevisións productions is our press department
that produces five hours of daily news programs. The press department also
produces opinion programs and journalist and investigative programs with
discussion of the current events in politics and economics. In the third
quarter of 2002, Chilevisión started simulcasting a morning news show with
Radio Futuro. Original productions are also designed to localize licensed programs while
targeting specific genre or demographic, such as children, women, teens and
young adults. These programs offer a mix of licensed programs together with
local insertions, such as a childrens local program that creates games and
activities to compliment licensed programs. 18




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We have exhibition rights from third-party programmers totaling
approximately 2,600 hours of programming. These rights include approximately
280 films, 4,000 television series episodes, documentaries, variety shows and
entertainment programming, which allows Chilevisión to vary programming during
different times of the day. Our principal programming suppliers include
Alliance Atlantis, Telefilms and Beta Films. We believe that our relationships
with television programming suppliers are good. Chilevisións management has focused on improving the networks audience
share, which were 13.9% in 2002 and 13.1% in 2003, according to Time Media.
Chilevisións growth strategy is to align its advertising market share,
estimated by management to have been approximately 8.9% in 2003 (as compared to
7.1% in 2002), with the networks higher audience share by increasing prices
per advertising spot as a result of improved programming offerings and the
appreciation of the new Chilevisión brand. Radio Sarandi On September 21, 2001, our Uruguayan subsidiary executed a five-year lease
and co-management agreement for the operation of three radio stations owned by
Sarandi Communications, S.A: AM 690 (Sarandi),AM 890 (Sport),and FM 91.9
(Music One,today known as Radio Disney). Our chairman of the board and chief
executive officer, Roberto Vivo-Chaneton and one of the beneficial owners of
our Class F common shares, Guillermo Liberman (the owner of SLI.com), each owns
a 25% equity interest in Sarandi. See Item 7B. Related Party Transactions.
We coordinate the programming and marketing strategy and manage the advertising
sales and other operational matters of AM Sarandi and operate the Radio Disney
station pursuant to a franchise agreement with an affiliate of Disney, while we
sub-lease the AM Sport station to a third party. We have also negotiated an
option with Sarandi, which we recently renegotiated (see Item 7B. Related
Party Transactions) to acquire the company holding the Sarandi radio
concession. Should we choose to exercise the option, the option price may be
paid, at our election, in cash and/or our Class A common shares, which will be
valued at the market price of the shares at the time of exercise and all
amounts previously paid by us in lease monthly payments will be applied towards
the option payment. We believe, that the proposed structure for the lease
transaction complies with Uruguayan laws and regulations that prohibit foreign
(i.e., non-Uruguayan) ownership of broadcasting transmission licenses.
However, no Uruguay regulatory authority has approved the terms and conditions
of this agreement. In June, 2004 we commenced the operation of Radiofutura91.1 FM station
which we lease from a third party under a five-year contract. Internet Business In December 2001, we embarked on a significant restructuring of our
Internet operation with the objective of maintaining the technical
functionality to support our traditional media assets, while being able to
create a broadband platform and market broadband content. The local offices of
our Internet operations were closed, and the production of content for Internet
was centralized together with broadband operations at our Buenos Aires offices
in March 2002 with a significant reduction in personnel. We created and launched El Sitio Digital Channelin the fourth quarter of
2001, with the first broadband operator in Argentina, one of the first concrete
efforts in Latin America toward digital-age content production specifically
developed for broadband. El Sitio Digital Channeloffers features organized
along three axes: video and audio streaming and pay per view; 2D and 3D
multiplayer games; and a community engine that allows users to personalize
their content. This interphase was specially designed to run in broadband
platforms such as cable modem, ADSL, wireless and satellite (DirectPC). In
addition, the user has the option to acquire content through a pay per view
system, downloading content for a limited time through a modern e-license
system. El Sitio Digital Channelsoffering includes a basic package with eight
channels (adult, music, games, new age, Your Studio, Radio Deseo, documentaries
and help), and two pay per view channels, featuring a wide range of content
tailored to the interests of its target audience. El Sitio Digital Channel
includes more than 700 digitized videos  in AVH and DVD quality  Venus and
Playboy TV clips for adults, Infinito documentaries, current events and
information, MuchMusic music, its own radio, channels to upload personal videos
and audio files, video tutorials and 2D community tools. During 2003 we were able to advance the development of a broadband and
narrowband platform to sell originally produced and third party content, as
well as improve our technology with respect to the digitalization of our
content. We were also able to continue to update and consolidate the El Sitio
Digital Channelplatform, and 19




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renew our relationship with Fibertel, a broadband provider in Argentina.
As part of our expansion strategy for the region, we entered into an agreement
with Marcos Galassi, an internet entrepreneur in Brazil, to represent us in
negotiations with a telephone company in Brazil and the rest of the region for
the distribution of our digital platform. We are currently in negotiations
with a telephone company in Brazil who has a strong broadband presence for that
purpose. However, we may not be successful in negotiating an agreement with
that company. In 2003 we also created a joint venture with America Online Latin America
for the development, launch and operation of a premium version of Cupido.Net,
our online matchmaking service, as well as for America Online Latin America to
manage our advertising inventory on our websites. In addition to the broadband operation, the Internet business unit based
in Buenos Aires groups all of our on-line content and marketing tools including
El Sitio.com; Pay TVs vertical websites including Infinito, Space, Uniseries,
I.Sat, Venus and FTV, as well as their interactive formats and the broadcast
television and radio websites. Intellectual Property and Proprietary Rights Some companies, including other participants in the media industry, use
and/or may use trademarks or service marks in English or other languages which,
when translated, are similar to certain of our core marks. This usage may
hinder our ability to build a unique brand identity and may lead to trademark
disputes. If we lose the right to use a trademark or service mark, we may be
forced to adopt a new mark which would result in the loss of substantial
resources and brand identity. In any event, even if successful, litigating a
trademark dispute would result in expenditures and diversion of executives
time. Any inability to protect, enforce or use our trademarks, service marks
or other intellectual property may have a material adverse effect on us. We also depend upon technology licensed from third parties for chat,
homepage, search and related web services. Any dispute with a licensor of the
technology may result in El Sitios inability to continue to use that
technology. Additionally, there may be patents issued or pending that are held
by third parties and that cover significant parts of the technology, products,
business methods or services used to conduct our business. We cannot be
certain that its technology, products, business methods or services do not or
will not infringe upon valid patents or other intellectual property rights held
by third parties. If a third party alleges infringement, we may be forced to
take a license, which we may not be able to obtain on commercially reasonable
terms. We may also incur substantial expenses in defending against third-party
infringement claims, regardless of the merit of those claims. Regulation Regulation of the Pay Television Industry in Latin America In general, many of the Latin American markets in which we operate do not
have specific pay television laws. As a result, many of the old broadcast laws
are applied to the pay television industry. The scope of broadcast regulation
varies from country to country, although in many significant respects a similar
approach is taken across all of the markets in which we operate. For example,
broadcast regulations in most of our markets require cable and direct-to-home
system operators to obtain licenses or concessions from the applicable domestic
authority. In addition, most countries have regulations which set certain
minimum standards regarding programming content, prescribe minimum standards
for the content and scheduling of television advertisements and provide that a
certain portion of the programming carried by the operators be produced
domestically. The content regulations concerning programming in the countries in which
we operate often prohibit material which contains excessive violence and
pornography and usually provide a restricted exhibition schedule for
adult-rated content and other material that is deemed inappropriate for
children or the population at large. The general scheme of regulations
governing the content of television advertising focuses on prohibiting
fraudulent and misleading advertising. Many countries also restrict television
advertising of alcohol and tobacco products. Generally, the domestic
broadcasting licensing authorities have the responsibility for monitoring and
enforcing compliance with broadcasting and programming content regulations;
however, the level of enforcement varies widely among the different countries
in which we operate. With the exception of Argentina, we are a foreign programmer of pay
television channels in every market in which our pay television channels
operate. As a foreign programmer, we are not directly subject to the
broadcasting and content laws of the foreign countries where we operate.
However, the local cable and direct-to-home system operators that distribute
foreign programming, including our pay television channels, are subject to 20




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local broadcasting and content regulations and are therefore responsible
for complying with any local programming requirements and advertising laws.
Consequently, many of our contracts with our cable and direct-to-home
distributors require that our programming comply with domestic programming
content and advertising regulations. There is a bill pending in the Argentine Senate that would require all
programming broadcast through pay television in Argentina to be dubbed into
Spanish. The Argentine House of Representatives has already approved the bill.
A substantial part of our programming (especially the film channels
distributed in the Southern cone and our adult channels) is subtitled.
Consequently, if this bill were to become effective it would materially
increase our programming costs. During 2003, the Federal Broadcast Commission in Argentina enacted a
resolution which was scheduled to become effective in April 2004 prohibiting
commercial breaks during movie broadcasts on pay television. The Argentine
Chamber of Satellite Programmers appealed the resolution and its application
was suspended until December 2004. Currently we may air up to three commercial
breaks during any movie broadcast. If the resolution or a similar law becomes
effective our advertising revenues from our film channels will be negatively
affected. Several Latin American countries began the process of deregulation of
their telecommunications industries during 2001. Argentina, Chile, Colombia,
Ecuador and Mexico are all opening their telecommunications markets to private
competition. While deregulation will not immediately and directly affect the
pay television industry, the effects of deregulation, including increased
competition, lowered telephone tariffs and connection rates and increased
investments in new technologies, could lead to increased opportunities for
content distribution and higher Internet and multi-channel penetration rates. Regulation of the Brazilian Pay Television Industry During 2002 the Brazilian government enacted and amended various
regulations affecting the movie theater, home video and pay television
industries. With respect to the Brazilian pay television industry, the new
regulations require cable and other pay television operators in Brazil to
withhold 11% of the payments made to foreign programming providers, unless the
programming providers elect to reinvest 3% of the revenues generated in Brazil
in local productions. The programming provider must register before the
National Film Agency (ANCINE) and the local cable operator must deposit such 3%
in a bank account in Banco do Brazil. The foreign programming provider has 270
days to utilize such deposited funds for local production projects after which
time any unused funds may be utilized by ANCINE. We have finalized the registration with ANCINE and the opening of the bank
account in Banco do Brazil. When the regulations were first enacted, most
Brazilian pay television operators refused to pay us amounts due pending the
outcome of our registration with ANCINE. We have since been able to negotiate
with some Brazilian pay television operators to pay us amounts due subject only
to a 3% withholding. Since its inception in early 2002, these regulations have
undergone many modifications and further modifications in the future remain
possible. If the regulations are further modified, it may affect our business. Regulation of the Chilean Broadcast Television and Radio Industry The radio broadcast industry in Chile is regulated by the Subsecretariat
of Telecommunications, which is known as SUBTEL, which is overseen by the
Ministry of Public Works, Transport and Telecommunications. The broadcast
television industry is regulated by the National Television Council or CNT.
Legislation regarding radio in Chile is contained in the 1982 General
Telecommunications Law, as amended. In addition, the CNT Law of 1989, as
amended, contains regulations that apply to the broadcast television industry.
Broadcast television and radio licenses are currently awarded for 25-year
terms. Broadcast television content and programming are closely regulated in
Chile. All broadcast entities must air at least one hour of cultural content
per week of programming during the primetime hours between 6:00 p.m. and 12:00
a.m. The CNT may impose a restriction that 40% of programming aired on Chilean
broadcast television be of Chilean origin. Although content is regulated to
comply with educational and moral standards, the restrictions are more lenient
on content aired between 10:00 p.m. and 6:00 a.m. The content of advertising
aired on broadcast television in Chile is also regulated. A Chilean law, published on June 4, 2001, includes provisions that may be
relevant to the ongoing operations of our Chilean broadcast businesses. The
law provides that any change in ownership or control of a radio 21




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and broadcast television business concession is subject to approval of the
Chilean authorities who must issue a report regarding the impact on the media
market of the change in control. If this report is not issued within 30 days
from the filing of the application it will be deemed that the authorities have
no objections. This law also provides that radio broadcasting concessions may
only be granted or transferred to entities that have more than 10% non-Chilean
ownership if in the country of origin of the foreign nationals, Chilean
nationals are granted similar rights. This provision may affect the manner in
which Claxson and its affiliates conduct its broadcast business in Chile,
including the renewal of the existing concession or acquisition of new ones. Competition The media and entertainment business is highly competitive. Each of our
pay television, broadcast television and radio businesses competes against
companies operating in these and other media segments. For example, our pay
television business faces competition from other pay television operators as
well as Internet companies, broadcast networks, print media and other forms of
entertainment. Within the pay television industry, our channels compete with programming
from AOL Time Warner, Viacom, Liberty Media, Disney, Globo and Televisa, among
others. We compete with their channels for carriage on cable and satellite
systems that have limited capacity. We also compete with these channels for
viewers and advertising dollars based upon quality of programming, number of
subscribers, ratings and subscriber demographics. Our broadcast television and radio business in Chile competes with
national and regional broadcasters for audience share and advertising revenues
primarily on the basis of program content that appeals to a particular target
demographic audience. Radio Chiles main competitors are the Garcia Reyes
Group, the Consorcio Radial de Chile (Prisa Group) and the Bezanilla Group,
each of which have established significant audience share. Chilevisión
competes primarily with four broadcast television networks, owned by the
Chilean Government, Cristalerias de Chile S.A., the Catholic Church, and Angel
Gonzalez, a broadcast television entrepreneur. Many companies provide websites and services targeted to Spanish- and
Portuguese-speaking audiences. All of these companies compete with our websites
for user traffic and advertising dollars. Competition for users and
advertisers is intense and there are no substantial barriers to entry in this
market. We also compete with providers of content and services over the
Internet, including web directories, portals, search engines, content sites,
Internet service providers and sites maintained by government and educational
institutions. C. Organizational Structure The following chart presents our current operational structure. The chart
omits certain intermediate holding companies. For purposes of this chart,
names in italics are brand names. 22




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(FLOW CHART)   (1)
    
    Playback, post-production, dubbing and subtitling facility.(2)
    
    Operated through lease and co-management agreement. 23




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D. Property, Plant and Equipment Properties A description of the location and use and of our principal offices and
facilities is set forth below. Pay Television Facilities Our U.S. headquarters are located at 1550 Biscayne Boulevard, Miami,
Florida in a modern production and technical operations center that is operated
by The Kitchen, Inc., one of our subsidiaries which provides network
origination, language dubbing and subtitling, video editing and graphic
services. This facility, which became operational in February 2001, occupies
approximately 25,600 square feet of leased space. Prior to January 2004, our
United States principal executive office was located in Miami Beach in
approximately 17,000 square feet, under a lease that expired December 2003,
after which we consolidated all of our U.S. based operations at 1550 Biscayne
Boulevard. Our principal executive offices and headquarters in Buenos Aires,
Argentina are located at Av. Melian 2752/54 in a 60,000 square foot building
that we own, containing both administrative and production functions, including
two television studios. We also own two additional offices that are located at
Av. Manuel Ugarte 3612/18 and Av. Melian 2760/62. We also lease approximately
8,000 square feet of warehouse space in Buenos Aires and approximately 20,000
square feet of office and production space with a street front television
studio for our Much Music channel. In addition, we lease office space in Mexico, the Bahamas and Brazil to
support sales efforts to cable and direct-to-home operators in certain markets. Broadcast Television and Radio Facilities Radio Chiles principal offices are located in Santiago, Chile, where we
own an office building containing approximately 1,600 square meters of office
space. Radio Chile owns additional office space of 400 square meters in
Santiago, Chile and either owns or leases a number of radio transmission towers
throughout Chile. Chilevisión owns a property occupying approximately 10,000 square meters
in Santiago where its headquarters, production studios and offices are located.
Chilevisión also owns 3 transmission towers and leases 25 other properties and
transmission towers throughout Chile under long-term leases. Radio Sarandi leases office space of approximately 600 square meters in
Montevideo, Uruguay. Internet Facilities On June 4, 2002, El Sitios 1,600 square meters of corporate offices were
relocated to our principal executive offices at Avenida Melian in Buenos Aires. El Sitio also leased office space in Bogotá, Caracas, Mexico City, Miami,
Montevideo, Santiago and Sao Paulo. As a result of our restructuring of
Internet operations, as of June 1, 2002, all offices have been closed or
subleased except for the office in Sao Paulo. 
 Item 5. Operating and Financial Review and Prospects SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements appear throughout this
annual report, including, without limitation, under Item 3. Key Information -
Risk Factors, Item 4. Information on the Company and Item 5. Operating and
Financial Review and Prospects. These forward-looking statements relate to,
among other things, our business model, strategy, plans and timing for the
introduction or enhancement of our services and products, proposed
dispositions, and other expectations, intentions and plans contained in this
annual report that are not historical fact. When used in this annual report, the words expects, anticipates,
intends, plans, may, believes, seeks, estimates and similar
expressions generally identify forward-looking statements. These statements 24




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reflect our current expectations. They are subject to a number of risks and
uncertainties, including but not limited to, those set forth under Item 3.
Key Information  Risk Factors. In light of the many risks and
uncertainties surrounding our business, results of operations, financial
condition and prospects, you should understand that we cannot assure you that
the forward-looking statements contained in this annual report will be
realized. The accompanying consolidated financial statements have been prepared on a
going concern basis, which assumes continuity of operations and realization of
assets and satisfaction of liabilities in the ordinary course of business. See
Item 3.D. Key Information  Risk Factors  We may not be able to continue as
a going concern and Note 1 of our consolidated financial statements. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of financial statements in conformity with generally accepted
accounting principles requires estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities in the consolidated financial
statements. A summary of our significant accounting policies and judgments can
be found in Note 2 to our consolidated financial statements. The SEC has
defined a companys most critical accounting policies as those that are most
important to the portrayal of the companys financial condition and results of
operations that require managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. These judgments and estimates often involve future
events. Although we believe our estimates and assumptions are reasonable, they
are based upon information available at the time of the valuations. Actual
results may differ significantly from estimates under different assumptions or
conditions. The following is a summary of critical accounting judgments and
estimates and is based on our accounting practices in effect during 2003. Goodwill, Intangibles and Other Assets In accordance with SFAS No. 142,
we discontinued the amortization of goodwill effective January 1, 2002, and
measured fair value based on an evaluation of estimated future discounted cash
flows, market comparisons, recent comparable transactions or a combination
thereof. This evaluation considered several earnings scenarios and the
likelihood of possible outcomes, and utilized the best information available at
the time the valuation was performed. The carrying value of goodwill is
reviewed on an annual basis by management and impairments, if any, are
recognized when the fair value of goodwill is less than their carrying value.
In 2003, as a result of our annual review, we recorded a goodwill impairment
loss of U.S.$2.5 million related to our Pay Television segment and a goodwill
impairment loss of $0.3 million related to our Broadband and Internet segment. Separable intangible assets that have finite useful lives, primarily
consisting of broadcast and television licenses, will continue to be amortized
over their respective useful lives ranging from 5 to 30 years. The carrying
value of intangible assets with finite useful lives are periodically reviewed
for impairment when factors indicating impairment are present. Allowance for Doubtful Accounts Receivable We carry accounts receivable
at the amount we deem to be collectible. Accordingly, we provide allowances
for accounts receivable deemed to be uncollectible based on our managements
estimates. Recoveries are recognized in the period they are received. The
ultimate amount of accounts receivable that become uncollectible could differ
from the estimated amount. Revenue Recognition We entered into distribution agreements with cable
and direct-to-home distributors pursuant to which we receive monthly
subscriber-based fees. The subscriber-based fee is recognized as revenue as we
provide the television services to the distributor. Advertising revenue is
recognized at the time the advertisement is aired. Revenue from the licensing
of programming rights are recognized ratably over the license period when a
contractual obligation exists. Other revenue consists primarily of fees for
playback, library, satellite, dubbing, subtitling and back office services
which are recognized as the services are performed. Recent Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS No. 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, and SFAS No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS
No. 145 also rescinds SFAS No. 44, Accounting for Leases, to 25




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##### Table of Contents



eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Adoption on SFAS 145 precluded the gain on the exchange offer from
being reflected as an extraordinary item. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 requires companies to
recognize the costs associated with exit or disposal activities when they are
incurred. Currently these types of costs are recognized at the time management
commits the company to the exit/disposal plan in accordance with EITF Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 is effective for exit or disposal activities that are
initiated subsequent to December 31, 2002. Application of the provisions of
SFAS 146 did not have a material impact on our consolidated financial
statements. In November 2002, the EITF reached a consensus on EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables. EITF 00-21 provides guidance on how
to account for arrangements that involve the deliver or performance of multiple
products, services and/or rights to use assets. The provisions of EITF 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We do not believe EITF 00-21 provisions will have a
material effect on our consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires that a liability be
recorded in the guarantors balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. Adoption of FIN 45
did not have a material effect on our consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock
Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No.
123, Accounting for Stock Based Compensation to provide alternative methods
of transition for a voluntary change from the intrinsic-value-based method of
recognizing stock compensation expense under APB Opinion No. 25, Accounting
for Stock Issued to Employees, to the SFAS No. 123 fair-value-based method of
accounting for stock-based employee compensation. Under the fair value method,
the fair value of the stock options granted to employees is recognized as
compensation expense over the service period (usually the vesting period).
Under the intrinsic value method, compensation expense is recognized for
options that are -in-the-money, thereby having intrinsic value, at the date of
grant. The transition guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ended after December 15, 2002. The adoption of the
disclosure provisions of SFAS 148 did not have a material effect on our
consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entitiesan Interpretation of ARB No.
51 as further clarified and amended by the FASBs Issuance
of a Revision in December 2003. FIN 46 addresses consolidation by business
enterprises of variable interest entities (formerly special purpose entities or
SPEs). In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support
its activities. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. This
interpretation applies immediately to variable interest entities
created after January 31, 2003 and in the quarter ending March 15,
2004 for variable interests in variable interest entities created
before February 1, 2003. We do not have any variable
interest entities as defined in FIN 46. Accordingly, we have
determined that it is not reasonably possible to consolidate or
disclose information about a variable interest entity upon the
adoption of FIN 46. 26




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In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities", effective for contracts
entered into or modified after June 30, 2003, with certain exceptions. This
statement amends and clarifies financial accounting and reporting for
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities". The adoption of SFAS 149 did
not have a material effect on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
effective for financial instruments entered into or modified after May 31, 2003
with certain exceptions. This statement establishes standards for how an issuer
must classify and measure certain financial instruments with characteristics of
both debt and equity, requiring an issuer to classify a financial instrument
that is within its scope as a liability (or an asset in certain circumstances).
The adoption of SFAS No. 150 did not result in the reclassification of any
financial instruments in our consolidated financial statements. Contractual Obligations and Commercial Commitments The following table illustrates our contractual obligations and commercial
commitments as of December 31, 2003 after giving effect to the refinancing of
our Radio Chile syndicated credit facility which is explained below. The debt
obligations include interest payments payable: Less than
    
    1-3
    
    4-5
    
    More than1 Year
    
    Years
    
    Years
    
    5 Years11% Senior Notes due 2005
    
    $
    2,928
    
    
    $
    
    
    
    $
    
    
    
    $
    8.75% Senior Notes due 2010
    
    
    3,618
    
    
    
    9,304
    
    
    
    22,873
    
    
    
    25,8206.25% Senior Notes due 2013
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    2,666Other Senior Notes
    
    
    
    
    
    
    121
    
    
    
    123
    
    
    
    Syndicated bank facilities
    
    
    3,654
    
    
    
    4,177
    
    
    
    4,914
    
    
    
    2,702Other long term liabilities
    
    
    1,645
    
    
    
    2,306
    
    
    
    1,188
    
    
    
    Operating leases
    
    
    5,049
    
    
    
    8,108
    
    
    
    7,448
    
    
    
    5,587
 On June 25, 2004, we completed the restructuring of our Radio Chile
syndicated credit facility. Under the new syndicated credit facility, which
was used to repay the prior facility, we received approximately U.S.$2.6
million in additional funds, after the cancellation of the prior facility and
deduction of expenses and underwriting fees. As part of the restructuring we
were able to extend the maturity of the facility an additional three years,
improve the amortization schedule to bi-annual payments as compared to
quarterly payments, release the non-Radio Chile Claxson guarantees (including
an escrow amount), relax our covenant ratios and reduce the interest rate to
the local prime lending rate plus 2.50%. The total principal amount of the new
facility is approximately U.S.$14.7 million and matures in 2009. On July 8, 2004, we executed agreements with Mr. Vivo-Chaneton (our
Chairman and Chief Executive Officer), Mr. Haiek (our Pay Television Chief
Operating Officer) and Mr. Ituarte (our Chief Financial Officer) for the
purchase of U.S.$2.0 million of convertible debentures. These convertible
debentures may be converted to our Class A common shares at a conversion price
of U.S.$3.24 per share (based on the average stock price over the five days
preceding the date the debentures were issued), mature on July 31, 2006 and
bear annual interest at 8.25%. Additionally, in the event the we prepay the
debentures, the investors have the right to receive warrants to purchase shares
of our Class A common shares in an amount equal to the principal amount of the
debenture. These convertible debentures have not been included in the
contractual commitments and commercial obligations chart above. Introduction to Operating Results We have presented certain historical financial information of ours,
including certain historical information of our predecessor, Ibero-American
Media Partners. Net Revenues We derive our revenues from subscriber-based fees charged to pay
television system operators that distribute our branded television channels,
from advertising on our pay television channels and broadcast media 27




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##### Table of Contents



assets and
from advertising on our network of websites. We also generate revenues through
production services, sales commissions, management fees and other services
provided to certain affiliated channels as well as from third parties. Subscriber-Based Fees To date, we have derived a majority of our revenues from subscriber-based
fees we charge to pay television system operators that distribute our branded
television channels. We charge pay television system operators either a flat or
per-subscriber fee for the right to broadcast our branded television channels
through their cable or direct-to-home distribution systems. Pricing for basic
channels typically involves either a monthly lump sum payment per channel or
package of channels or a fixed price per subscriber. For premium and
pay-per-view channels, we receive a percentage of the revenues generated from
the subscribers to these channels. We typically enter into long-term distribution agreements with pay
television system operators with an average term of approximately three years.
We recognize revenues on long-term agreements on a monthly basis as the branded
television channels are provided to the pay television system operators.
Revenues from exclusivity arrangements are recognized ratably over the term of
the related agreement. Payment for exclusivity received in advance are
recorded as unearned revenues. We also derive subscriber-based fees in the form of sales commissions that
we charge to the channels that we represent for acting as their sales agent. Advertising Revenues We derive revenues from the sale of advertising on our pay television
channels, our broadcast media assets and our websites. Our multiple sales
offices enable us to solicit local, pan-regional and global advertising
accounts from advertisers and agencies directly. We derive advertising revenues
principally from:  
    
    advertising arrangements under which we receive fees for
advertising spots placed on our pay television channels and
broadcast stations for specified periods of time;  
    
    sponsorship arrangements that allow advertisers to sponsor a
program on one or more of our pay television channels, broadcast
stations or networks in exchange for fixed payments;  
    
    advertising arrangements under which we receive fixed fees
for banners placed on our websites for specified periods of time;
and  
    
    reciprocal services arrangements, under which we exchange
advertising space on our media assets for advertising or services
from other parties. We generally recognize advertising revenues as advertising spots are
aired. In the case of certain advertising spots placed on our broadcast
television channel and radio stations, we guarantee minimum viewership ratings
to the advertiser. In those cases, we do not recognize the corresponding
revenues until we achieve the guaranteed ratings. Payments received before an
advertisement spot is displayed are recorded as unearned revenues. Revenues
from sponsorship arrangements are recognized ratably. The terms of our
contracts with advertisers and advertising agencies range from one to twelve
months. With respect to Internet advertising, we recognize advertising revenues
ratably in the period in which the advertisement is displayed, so long as no
significant obligations remain and collection of the resulting receivable is
probable. When minimum impression levels are guaranteed, we do not recognize
the corresponding revenues until we achieve guaranteed levels. Production Services The Kitchen, Inc., one of our subsidiaries, provides playback program
origination, dubbing, subtitling and post-production services to certain
affiliated channels as well as to third parties. We recognize production
services revenues as work is performed. 28




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##### Table of Contents



Other Revenues We also derive revenues from management fees and other services provided
to pay television channels and other businesses that we partially own or are
affiliated with, as well as from third parties. These services include
technical, satellite space, back office support and other services. We also
derive revenues from the licensing of programming rights to third parties.
Revenue from the licensing of programming rights is recognized when the license
period begins and a contractual obligation exists. Operating Expenses Our operating expenses consist of:  
    
    product, content and technology;  
    
    marketing and sales;  
    
    corporate and administration;  
    
    depreciation and amortization; and  
    
    merger, restructuring and severance expenses. Product, Content and Technology Expenses.Product, content and technology
expenses consist primarily of the amortization of rights to broadcast acquired
or licensed television content and related rights, the cost of satellite space
used in delivering our pay television channels, and personnel and related costs
associated with programming, purchase and production of content,
post-production, dubbing, playback, and the up-link of our pay television
channels or transmission of our broadcast television and radio stations. The
cost of broadcast and license rights is amortized over the term of licenses and
based on the anticipated usage of the program. Product, content and technology expenses also consist of personnel costs
associated with development, testing and upgrading of our network of websites
and systems, purchases of content and specific technology, particularly
software, and telecommunications links and access charges. Except for hardware
(which is depreciated), we expense product, content and technology expenses and
telecommunications infrastructure costs as they are incurred. Marketing and Sales Expenses.Our marketing and sales expenses consist
primarily of salaries and expenses of marketing and sales personnel,
commissions, withholding taxes and other marketing-related expenses, including
expenses related to our branding and advertising activities and to the
provision for uncollectible accounts receivable. Corporate and Administration Expenses.Corporate and administration
expenses consist primarily of costs related to corporate personnel, occupancy
costs, general operating costs and professional fees, such as accounting, legal
and consulting fees. Corporate and administration expenses also include
monitoring fees paid to our principal shareholders, as well as fee and expenses
related to our board of directors. Depreciation and Amortization.Depreciation and amortization expenses
consist primarily of depreciation and amortization of production,
post-production and other equipment, servers and other computer equipment,
buildings, office furniture and leasehold improvements. Investments in
property and equipment, other than leasehold improvements, are depreciated
using the straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are amortized over the lesser of the
term of the lease or the useful life of the improvement. Property and
equipment is being depreciated and amortized, as the case may be as follows:  
    
    buildings 20 - 50 years;
    
    computers, software and other equipment 3 - 10 years;  
    
    leasehold improvements 5 - 7 years; and  
    
    furniture, fixtures and other fixed assets 5-10 years. 29




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##### Table of Contents



We have historically incurred significant amortization expense as a result
of goodwill. Additionally, we incur amortization expense related to the
amortization of broadcast television and radio licenses. The implementation of
SFAS 142 on January 1, 2002 has reduced total depreciation and amortization as
a result of the cessation of amortization of goodwill. Merger, Restructuring and Severance Expenses.For 2001, merger,
restructuring and severance expenses consist primarily of severance cost
related to the rationalization of the different business units and the
corporate and administration areas of Claxson as a result of the merger
transaction. Other Income (Expense).Other income (expense) consists primarily of the
foreign exchange income (loss) resulting from the effect of changes in the
Argentine peso and Chilean peso exchange rates per U.S. dollar on our Argentine
and Chilean based assets and liabilities denominated in U.S. dollars. Other
income (expense) also includes interest expense, net of interest earned, on
Imagens outstanding U.S.$80 million 11% Senior Notes due 2005, and the
outstanding Radio Chile syndicated bank facility, as well as other
miscellaneous income and expense items. Other income (expense) does not
include the interest expense of our 8.75% Senior Notes due 2010 as the total
amount of such future interest was already included in the carrying amount of
the debt in the determination of the gain on debt restructuring that we
reported in 2002. Therefore, as interest on the notes is paid, the debt is
reduced proportionately with no effect on our income statement. Share of Loss from Unconsolidated Affiliates.Share of loss from
unconsolidated affiliates includes our proportionate share of the net income of
DMX Music Latin America for 2003. For 2001 and 2002 it represents our
proportionate share of the net income or loss of Playboy TV Latin America, LLC
(prior to December 2002), The Locomotion Channel, Playboy TV International, DMX
Music Latin America and certain other companies in which we had investments.
Share of loss from unconsolidated affiliates also includes gains or losses
resulting from the divestiture of certain of these investments. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 The following table sets forth, for the periods indicated, selected
financial information for our pay television, broadcast television and radio,
Internet and broadband businesses, and our corporate department. The results
of operations in the following chart are affected by a 6% appreciation of the
Argentine Peso and a 2% depreciation of the Chilean Peso in 2003 compared to
2002, against the U.S. dollar. Year Ended December 31,2002
    
    2003Broadcast
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BroadcastTelevision and
    
    Internet and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Television and
    
    Internet andPay Television
    
    Radio
    
    Broadband
    
    Corporate
    
    Total
    
    Pay Television
    
    Radio
    
    Broadband
    
    Corporate
    
    Total(in thousands of U.S. dollars)Net revenues:Subscriber-based fees
    
    $
    31,493
    
    
    $
    
    
    
    $
    73
    
    
    $
    
    
    
    $
    31,566
    
    
    $
    38,922
    
    
    $
    
    
    
    $
    10
    
    
    $
    
    
    
    $
    38,932Advertising
    
    
    2,260
    
    
    
    28,166
    
    
    
    121
    
    
    
    
    
    
    
    30,547
    
    
    
    3,857
    
    
    
    33,394
    
    
    
    73
    
    
    
    
    
    
    
    37,324Production services
    
    
    7,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,081
    
    
    
    3,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,051Other
    
    
    5,358
    
    
    
    412
    
    
    
    (4
    )
    
    
    
    
    
    
    5,766
    
    
    
    2,385
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    2,480Total net revenues
    
    
    46,192
    
    
    
    28,578
    
    
    
    190
    
    
    
    
    
    
    
    74,960
    
    
    
    48,215
    
    
    
    33,394
    
    
    
    178
    
    
    
    
    
    
    
    81,787Operating expenses:Product, content and
technology
    
    
    16,142
    
    
    
    16,722
    
    
    
    1,846
    
    
    
    
    
    
    
    34,710
    
    
    
    18,581
    
    
    
    16,771
    
    
    
    1,016
    
    
    
    213
    
    
    
    36,581Marketing and sales
    
    
    7,434
    
    
    
    4,655
    
    
    
    1,001
    
    
    
    
    
    
    
    13,090
    
    
    
    6,382
    
    
    
    5,789
    
    
    
    50
    
    
    
    355
    
    
    
    12,576Corporate and administration
    
    
    8,016
    
    
    
    3,582
    
    
    
    1,554
    
    
    
    4,012
    
    
    
    17,164
    
    
    
    10,145
    
    
    
    3,459
    
    
    
    725
    
    
    
    4,286
    
    
    
    18,615Depreciation and
amortization
    
    
    5,297
    
    
    
    4,771
    
    
    
    3,473
    
    
    
    (1,237
    )
    
    
    12,304
    
    
    
    3,362
    
    
    
    2,447
    
    
    
    6
    
    
    
    178
    
    
    
    5,993Impairment of Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,479
    
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    2,758Operating income (loss)
    
    $
    9,303
    
    
    $
    (1,152
    )
    
    $
    (7,684
    )
    
    
    (2,775
    )
    
    $
    (2,308
    )
    
    $
    7,266
    
    
    $
    4,928
    
    
    $
    (1,898
    )
    
    $
    (5,032
    )
    
    $
    5,264
 Net Revenues Net revenues increased U.S.$6.8 million, or 9%, to U.S.$81.8 million in
2003 from U.S.$75.0 million in 2002. Approximately 48% of net revenues in 2003
was comprised of subscriber-based revenues. For 2002 and 2003, 21% and 19% of
net revenues were earned in Argentina, while Chile represented 38% and 43% of
net revenues in 2002 and 2003, respectively. 30




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Pay television revenues increased U.S.$2.0 million, or 4%, to U.S.$48.2
million in 2003 from U.S.$46.2 million in 2002. Approximately 81% of pay
television revenues in 2003 was comprised of subscriber-based fees, compared to
68% in 2002. Pay television subscriber-based fees increased U.S.$7.4 million, or 24%,
to U.S.$38.9 million in 2003 from U.S.$31.5 million in 2002. This increase was
due to the net impact of the consolidation of Playboy TV Latin America of
approximately U.S.$8.2 million and U.S.$1.8 million as a result of the increase
in distribution of our channels. This increase in pay television
subscriber-based fees was partially offset by a U.S.$2.6 million decrease in
revenues from DirecTV Latin America as a result of our renegotiation in late
2002 of our affiliation agreements with DirecTV Latin America which reduced per
subscriber rates for our basic channels and converted prices into local
currencies in exchange for a two-year extension of the contracts. The average
monthly fee per subscriber increased to U.S.$0.07 per subscriber in 2003 from
U.S.$0.05 per subscriber in 2002. The increase in the average monthly fee per
subscriber resulted primarily from the consolidation of Playboy TV Latin
America which, as a premium and pay-per-view service, derives a higher per
subscriber revenue, partially offset by the decrease in rates for our basic
package to DirecTV Latin America. For 2002 and 2003, 44% and 30%, respectively, of pay television
subscriber-based revenues were earned in Argentina. The decrease is a result
of the consolidation of Playboy TV Latin America and to a lesser extent to the
increase in distribution outside of Argentina as a result of the increased
distribution of FTV and the launch of Retro in March 2003. Advertising revenues increased U.S.$6.8 million, or 22%, to U.S.$37.3
million in 2003 from U.S.$30.5 million in 2002. Approximately 89% and 87% of
advertising revenues were earned in Chile in 2002 and 2003, respectively. Pay television advertising revenues increased U.S.$1.6 million, or 71%, to
U.S.$3.9 million in 2003, from U.S.$2.3 million in 2002. This increase resulted
from the stabilization of the Argentine Peso compared to the U.S. dollar, and a
corresponding increase in Argentine Peso advertising spending as a result of
the slight economic recovery in Argentina during 2003, which represents our
primary market of pay television advertising. Broadcast television and radio advertising revenues increased U.S.$5.2
million, or 19%, to U.S.$33.4 million in 2003, from U.S.$28.2 million in 2002.
The increase is primarily due to an increase in Chilevisións revenues of
U.S.$3.8 million as a result of increased ratings which enabled the channel to
increase the price for advertising, as well as the increase in Radio Chiles
revenues of U.S.$1.5 million as a result of increased advertising spending in
Chile. Revenues from Sarandi were U.S.$0.1 million lower than in 2002. Internet and Broadband advertising revenues were almost unchanged in 2003
compared to 2002. Production
services revenues decreased U.S.$4.1 million to U.S.$3.0 million in 2003, from U.S.$7.1 million in 2002. The decrease is principally
attributable to the consolidation of the operations of Playboy TV Latin
America, which represented revenues of U.S.$2.5 million in 2002, and whose
revenues are now eliminated upon consolidation, as well as a slowdown in the
market for language conversion created by the uncertainties in content
acquisition as a result of the war in Iraq and a preference for subtitling over
dubbing, with the later generating higher revenues. Other revenues decreased U.S.$3.3 million, or 57%, to U.S.$2.5 million in
2003, from U.S.$5.8 million in 2002. The decrease is principally attributable
to the consolidation of the operations of Playboy TV Latin America which
represented U.S.$2.1 million in revenues for 2002. In addition, approximately
U.S.$0.5 million of the decrease is attributable to a reduction in the
services provided to Locomotion, while the remaining decrease is explained by
the termination during 2003 of services provided to Playboy TV International. Operating Expenses Product, Content and Technology Expenses Product, content and technology expenses increased U.S.$1.9 million, or
5%, to U.S.$36.6 million in 2003 from U.S.$34.7 million in 2002. Product,
content and technology expenses as a percentage of revenues decreased to 45% in
2003 from 46% in 2002. 31




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Product, content and technology expenses for pay television increased
U.S.$2.5 million, or 15%, to U.S.$18.6 million in 2003 from U.S.$16.1 million
in 2002. Product, content and technology expenses for pay television as a
percentage of pay television revenues increased from 35% in 2002 to 39% in
2003. The increase in these expenses is primarily due to a U.S. $4.6 million
increase in programming expense due to the consolidation of the Playboy TV
Latin America operation and a U.S.$0.9 million increase in programming expense
due to the expansion of rights necessary to launch Retro pan-regionally,
partially offset by a U.S.$1.8 million decrease in language conversion expenses
as a result of the lower revenues and a restructuring of the department, and
U.S.$1.4 million in reduced satellite expenses as a result of a renegotiation
and price reduction with our satellite provider. Product, content and technology expenses for broadcast television and
radio increased slightly, to U.S.$16.8 million in 2003, from U.S.$16.7 million
in 2002. Product, content and technology expenses for broadcast television and
radio decreased as a percentage of broadcast television and radio revenues from
59% in 2002 to 50% in 2003. The decrease is primarily attributable to (a) a
U.S.$0.5 million increase in television expenses as a result of the increase in
production of original programs, partially offset by a U.S.$0.3 million
decrease from the reduction of programming and production personnel as a result
of a reorganization of the department; (b) a U.S.$1.0 million increase in
programming and production expenses for Radio Chile, excluding personnel, as a
result of the increase in investment in independent production to maintain our
position in the market, partially offset by a U.S. $0.5 million reduction in
production personnel expense as a result of a switch to independent productions
and (c) a U.S.$0.5 million reduction in production expenses in the Uruguayan
radios as a result of the reduced investment in programming to adjust for a
lower level of revenues. Product, content and technology expenses for Internet and broadband
decreased U.S.$0.8 million, to U.S.$1.0 million in 2003, from U.S.$1.8 million
in 2002. The decrease is attributable to the elimination of certain service
offerings. Marketing and Sales Expenses Marketing and sales expenses decreased U.S.$0.5 million, or 4%, to
U.S.$12.6 million in 2003 from U.S.$13.1 million in 2002. Marketing and sales
expenses as a percentage of net revenues decreased to 15% in 2003, from 17% in
2002. Pay television marketing and sales expenses decreased U.S.$1.0. million,
or 14%, to U.S.$6.4 million in 2003, from U.S.$7.4 million in 2002. Marketing
and sales expenses for pay television as a percentage of pay television
revenues decreased from 16% in 2002 to 14% in 2003. The overall decrease was
primarily due to a reduction in sales expense of U.S.$1.4 as a result of
reduced provisions for uncollectible accounts receivables following our
significant effort to improve the aging of receivables and the collection of
receivables that were provisioned for, partially offset by U.S.$0.7 million
increase attributable to the consolidation of Playboy TV Latin America. Marketing and sales expenses for broadcast television and radio increased
U.S.$1.1 million, or 23.4%, to U.S.$5.8 million in 2003, from U.S.$4.7 million
in 2002. Marketing and sales expenses for broadcast television and radio as a
percentage of broadcast television and radio revenues increased to 17% in 2003
compared to 16% in 2002. The increase is attributable to a U.S.$1.3 million
increase in agency commissions for Chilean television and radio as a result of
the increase in revenues and a U.S.$0.4 million increase in marketing expenses
for our Chilean television and radio as part of the efforts to maintain and
increase ratings and market share, partially offset by reduced marketing and
sales expenses in Radio Sarandi of U.S.$0.6 million as a result of the
reorganization of the operation in an effort to adjust to the lower revenue
level. Marketing and sales expenses for Internet and broadband represented
U.S.$0.1 million for 2003, which reflect the reduction of expenses in the
Internet and broadband division from 2002 expense of U.S.$1.0 million. Corporate and Administration Expenses Corporate and administration expenses increased U.S.$1.5 million, or 9%,
to U.S.$18.6 million in 2003 from U.S.$17.1 million in 2002. Corporate and
administration expenses as a percentage of net revenues remained unchanged at
23% for both 2003 and 2002. Corporate and administrative expense for pay television increased U.S.$2.1
million, or 26%, to U.S.$10.1 million in 2003 from U.S.$8.0 million in 2002.
Corporate and administration expenses for pay television as a 32




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percentage of pay
television revenues increased to 21% for 2003 compared to 17% in 2002. The
increase in corporate and administration expenses for pay television was
primarily attributable to an expense increase of U.S.$1.0 million related to
the transfer of corporate and administrative personnel formerly employed by the
Internet division to our pay television division, approximately U.S.$0.2
related to the appreciation of the Argentine currency, and increased legal and
audit expenses as a result of the negotiations with the remaining holders of
the 11% Senior Notes due 2005. Corporate and administrative expenses for broadcast television and radio
decreased U.S.$0.1 million, or 3%, to U.S.$3.5 million in 2003 from U.S.$3.6
million in 2002. Corporate and administration expenses for broadcast
television and radio as a percentage of broadcast television and radio net
revenues decreased to 10% in 2003 from 13% in 2002 due to a stable level of
expenses in Chile and a U.S.$0.1 million reduction in the expenses related to
Radio Sarandi. Corporate and administrative expenses for Internet and broadband decreased
U.S.$0.9 million, or 56%, to U.S.$0.7 million in 2003 from U.S.$1.6 million in
2002. The decrease in corporate and administration expenses for Internet and
broadband was primarily attributable to the transfer of personnel and related
expenses that were not specifically related to our Internet from our Internet
division to our pay television division. Finally, expenses at the corporate department of Claxson increased
U.S.$0.3 million to U.S.$4.3 million in 2003 from U.S.$4.0 million in 2002. The
increase is primarily attributable to the U.S.$0.7 million increase in the
accrual of personnel compensation related to senior management bonuses,
partially offset by reduced insurance premiums as a result of the elimination
of directors insurance for El Sitio, Inc. Depreciation and Amortization Depreciation and amortization expenses decreased U.S.$6.3 million, or 51%,
to U.S.$6.0 million in 2003 from U.S.$12.3 million in 2002. Depreciation and
amortization expenses as a percentage of net revenues decreased to 7% in 2003
from 16% in 2002. This decrease is due to the extension by the Chilean
government of the life of the license for a significant number of our radio
concessions which decreased our amortization expense by $2.0 million for the
year, a U.S.$5.9 million decrease in depreciation related to our Internet
assets as a result of the full depreciation of a majority of these assets in
2002, and a reduction in pay television depreciation as a result of the full
depreciation during 2002 of assets related to information systems and
implementations that were not going to be used by us and that represented
U.S.$1.5 million of depreciation during 2002 Other Income (Expense) Other income (expense), which principally consists of foreign currency
exchange loss, net, interest expense, interest income, and other miscellaneous
income (expenses) consisted of net expenses of U.S.$5.5 million in 2003
compared with net expenses of U.S.$54.8 million in 2002. This change resulted
primarily from a foreign currency exchange gain of U.S.$9.1 million in 2003
compared to a foreign exchange loss of U.S.$61.3 million in 2002, due primarily
to the stabilization of the exchange rate of the Argentine Peso against the
U.S. dollar in 2003 and a decrease in interest expense of U.S.$10.2 million as
a result of our debt restructuring whereby we were required to expense all
future interest payments on our 8.75% Senior Notes due 2010 at issuance in
2002. Share of Loss from Unconsolidated Affiliates Share of loss from unconsolidated affiliates represents our proportionate
share of the net income or loss from DMX MUSIC Latin America and other
companies in which we have investments. For 2002, in addition to our interest
in DMX MUSIC Latin America, loss from unconsolidated affiliates represented our
proportionate share of the net income or loss of Playboy TV International,
Playboy TV Latin America, and The Locomotion Channel. Our share of loss from
unconsolidated affiliates increased U.S.$7.0 million to a gain of U.S.$0.3
million in 2003 from a loss of U.S.$6.7 million in 2002. The increase is due
to the divestiture of our interest in companies that had net losses, primarily
the renegotiation with Playboy Enterprises, Inc which resulted in a net loss of
U.S.$9.3 million in 2002, and the sale of our share of The Locomotion Channel
which generated a net gain of U.S.$1.6 million in 2002. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 The following table sets forth, for the periods indicated, selected
financial information for our pay television, broadcast television and radio
and Internet and broadband businesses, and our corporate department. The 33




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results of
operations for the Internet and broadband business correspond to the period
after the merger transaction, commencing on September 22, 2001 and ending
December 31, 2001. The results of operations of pay television in the
following chart are affected by a 68% devaluation of the Argentine Peso in
2002, and a 9% devaluation of the Chilean Peso in 2002, against the U.S.
dollar. Year Ended December 31,2001
    
    2002Broadcast
    
    Internet
    
    
    
    
    
    
    
    
    
    
    
    
    
    Broadcast
    
    InternetPay
    
    Television
    
    and
    
    
    
    
    
    
    
    
    
    Pay
    
    Television
    
    andTelevision
    
    and Radio
    
    Broadband
    
    Corporate
    
    Total
    
    Television
    
    and Radio
    
    Broadband
    
    Corporate
    
    Total(in thousands of U.S. dollars)Net revenues:Subscriber-based fees
    
    $
    60,173
    
    
    $
    
    
    
    $
    20
    
    
    $
    
    
    
    $
    60,193
    
    
    $
    31,493
    
    
    $
    
    
    
    $
    73
    
    
    $
    
    
    
    $
    31,566Advertising
    
    
    8,264
    
    
    
    28,289
    
    
    
    731
    
    
    
    
    
    
    
    37,284
    
    
    
    2,260
    
    
    
    28,166
    
    
    
    121
    
    
    
    
    
    
    
    30,547Production services
    
    
    2,516
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,516
    
    
    
    7,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,081Other
    
    
    6,444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,444
    
    
    
    5,358
    
    
    
    412
    
    
    
    (4
    )
    
    
    
    
    
    
    5,766Total net revenues
    
    
    77,397
    
    
    
    28,289
    
    
    
    751
    
    
    
    
    
    
    
    106,437
    
    
    
    46,192
    
    
    
    28,578
    
    
    
    190
    
    
    
    
    
    
    
    74,960Operating expenses:Product, content
and technology
    
    
    27,692
    
    
    
    13,304
    
    
    
    1,836
    
    
    
    
    
    
    
    42,832
    
    
    
    16,142
    
    
    
    16,722
    
    
    
    1,846
    
    
    
    
    
    
    
    34,710Marketing and sales
    
    
    15,731
    
    
    
    5,036
    
    
    
    987
    
    
    
    
    
    
    
    21,754
    
    
    
    7,434
    
    
    
    4,655
    
    
    
    1,001
    
    
    
    
    
    
    
    13,090Corporate and
administration
    
    
    13,178
    
    
    
    4,281
    
    
    
    1,697
    
    
    
    4,915
    
    
    
    24,071
    
    
    
    8,016
    
    
    
    3,582
    
    
    
    1,554
    
    
    
    4,012
    
    
    
    17,164Depreciation and
amortization
    
    
    20,548
    
    
    
    6,135
    
    
    
    588
    
    
    
    
    
    
    
    27,271
    
    
    
    5,297
    
    
    
    4,771
    
    
    
    3,473
    
    
    
    (1,237
    )
    
    
    12,304Merger,
restructuring and
severance
    
    
    3,552
    
    
    
    866
    
    
    
    450
    
    
    
    
    
    
    
    4,868
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    $
    (3,304
    )
    
    $
    (1,333
    )
    
    $
    (4,807
    )
    
    $
    (4,915
    )
    
    $
    (14,359
    )
    
    $
    9,303
    
    
    $
    (1,152
    )
    
    $
    (7,684
    )
    
    $
    (2,775
    )
    
    $
    (2,308
    )
 Net Revenues Net revenues decreased U.S.$31.5 million, or 30%, to U.S.$75.0 million in
2002 from U.S.$106.4 million in 2001. This decrease was primarily due to the
decrease in pay television revenues of U.S.$31.2 million, or 40%, to U.S.$46.2
million in 2002 from U.S.$77.4 million in 2001. Approximately 42% of net
revenues in 2002 was comprised of subscriber-based revenues compared to 57% in
2001. Subscriber-Based Fees Subscriber based fees decreased U.S.$28.6 million, or 48%, to U.S.$31.6
million in 2002 from U.S.$60.2 million in 2001. Pay television subscriber-based fees decreased U.S.$28.7 million, or 48%,
to U.S.$31.5 million in 2002 from U.S.$60.2 million in 2001. This decrease was
due primarily to the impact of the devaluation of the Argentine Peso during
2002 of approximately U.S.$27.4 million, and a decrease in demand for
pay-per-view and premium services in the region. The average monthly fee per
subscriber decreased to U.S.$0.055 per subscriber in 2002 from U.S.$0.106 per
subscriber in 2001. The decrease in the average monthly fee per subscriber
resulted primarily from the effects of the devaluation of the Argentine Peso. For 2001 and 2002, 67% and 44%, respectively, of pay television
subscriber-based revenues were earned in Argentina. The decrease is a result
of the impact of the devaluation of the Argentine Peso compared to the U.S.
dollar. Advertising Advertising revenues decreased U.S.$6.7 million, or 18%, to U.S.$30.5
million in 2002 from U.S.$37.3 million in 2001. Approximately 89% and 75% of
advertising revenues were earned in Chile in 2002 and 2001, respectively. Pay television advertising revenues decreased U.S.$6.0 million, or 73%, to
U.S.$2.3 million in 2002, from U.S.$8.3 million in 2001. This decrease resulted
from the effect of the devaluation of the Argentine Peso compared to the U.S.
dollar, as well as a reduction in the Peso advertising spending as a result of
the economic crisis, uncertainty and recession in Argentina during the year
2002, which represents our primary market of pay television advertising. 34




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Broadcast television and radio advertising revenues decreased U.S.$0.1
million, or 1%, to U.S.$28.2 million in 2002, from U.S.$28.3 million in 2001.
The decrease is primarily due to a decrease in Radio Chiles revenues of $1.5
million as a result of a 9% decrease in the advertising spending in radio in
Chile, partially offset by an increase of U.S.$ 0.9 million in television
advertising as a result of the increase in television advertising as a
percentage of total advertising and U.S.$0.6 million from the new operations of
Sarandi. The decrease in Internet and Broadband advertising revenues of U.S.$0.6
million was attributable to the reduction of the Internet and broadband
operations and the general downturn of internet advertising. Production Services Production services revenues increased U.S.$4.6 million to U.S.$7.1
million in 2002, from U.S.$2.5 million in 2001. The increase is principally
attributable to the first full year of operations of The Kitchen, Inc during
2002, compared to a start-up year in 2001. Other Revenues Other revenues decreased U.S.$0.7 million, or 11%, to U.S.$5.8 million in
2002, from U.S.$6.4 million in 2001. The decrease is principally attributable
to reduced services provided to The Locomotion Channel. Operating Expenses Product, Content and Technology Expenses Product, content and technology expenses decreased U.S.$8.1 million, or
19%, to U.S.$34.7 million in 2002 from U.S.$42.8 million in 2001. Product,
content and technology expenses as a percentage of revenues increased to 46% in
2002 from 40% in 2001. Product, content and technology expenses for pay television decreased
U.S.$11.6 million, or 42%, to U.S.$16.1 million in 2002 from U.S.$27.7 million
in 2001. Product, content and technology expenses for pay television as a
percentage of pay television revenues decreased from 36% in 2001 to 35% in
2002. The decrease in these expenses is primarily due to approximately
U.S.$7.1 million effect of the devaluation of the Argentine Peso, and U.S.$4.4
million in reduced amortization of programming as a result of the renegotiation
with programmers, and a reduction in new purchases. Product, content and technology expenses for broadcast television and
radio increased U.S.$3.4 million, or 20%, to U.S.$16.7 million in 2002, from
U.S.$13.3 million in 2001. Product, content and technology expenses for
broadcast television and radio increased as a percentage of broadcast
television and radio revenues from 47% in 2001 to 59% in 2002. The increase is
primarily attributable to a U.S.$0.7 million increase in the amortization of
programming and U.S.$1.3 million increased expenses related to increased
production, and U.S.$0.4 million from the addition of the operations of Radio
Sarandi in Uruguay. Product, content and technology expenses for Internet and broadband
represented U.S.$1.8 million for 2002, which reflects the reduction of expenses
in the Internet and broadband division from 2001 expense of U.S.$1.8 million
for the period from September 22, 2001 to December 31, 2001. Marketing and Sales Expenses Marketing and sales expenses decreased U.S.$8.7 million, or 40%, to
U.S.$13.1 million in 2002 from U.S.$21.8 million in 2001. Marketing and sales
expenses as a percentage of net revenues decreased to 17% in 2002, from 20% in
2001. Pay television marketing and sales expenses decreased U.S.$8.3 million, or
53%, to U.S.$7.4 million in 2002, from U.S.$15.7 million in 2001. Marketing and
sales expenses for pay television as a percentage of pay
television revenues decreased from 20% in 2001 to 16% in 2002. The
overall decrease was primarily due to approximately U.S.$7.2 million effect of
the devaluation of the Argentine Peso, and the reduction in marketing
expenditures as a result of the lower sales volume and the general need of the
company to conserve its cash resources. 35




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Marketing and sales expenses for broadcast television and radio decreased
U.S.$0.4 million, or 8%, to U.S.$4.7 million in 2002, from U.S.$5.1 million in
2001. Marketing and sales expenses for broadcast television and radio as a
percentage of broadcast television and radio revenues decreased to 16% in 2002
compared to 18% in 2001. The decrease is attributable to the effect of the
devaluation of the Chilean Peso, partially offset by a U.S.$0.6 million
increase as a result of the incorporation of the operations of Radio Sarandi. Marketing and sales expenses for Internet and broadband represented
U.S.$1.0 million, for 2002, which reflect the reduction of expenses in the
Internet and broadband division from 2001 expense of U.S.$1.0 million for the
period from September 22, 2001 to year end 2001. Corporate and Administration Expenses Corporate and administration expenses decreased U.S.$6.9 million, or 29%,
to U.S.$17.1 million in 2002 from U.S.$24.1 million in 2001. Corporate and
administration expenses as a percentage of net revenues remained unchanged at
23%. Corporate and administrative expense for pay television decreased U.S.$5.2
million, or 39%, to U.S.$8.0 million in 2002 from U.S.$13.2 million in 2001.
Corporate and administration expenses for pay television as a percentage of pay
television revenues remained unchanged at 17%. The year-to-year decrease in
corporate and administration expenses for pay television was primarily
attributable to approximately U.S.$3.5 million as a result of the devaluation
of the Argentine Peso, and the continued efforts of management in reducing
administration expenses. Corporate and administrative expenses for broadcast television and radio
decreased U.S.$0.7 million, or 16%, to U.S.$3.6 million in 2002 from U.S.$4.3
million in 2001. Corporate and administration expenses for broadcast
television and radio as a percentage of broadcast television and radio net
revenues decreased to 13% in 2002 from 15% in 2001. The decrease is primarily
attributable to the consolidation of the administrative and corporate
departments of our radio and television operations and elimination of
duplicative costs, partially offset by the incorporation of the operations of
Radio Sarandi. Corporate and administrative expenses for Internet and broadband decreased
U.S.$0.1 million, or 8%, to U.S.$1.6 million in 2002 from U.S.$1.7 million in
2001. The year-to-year decrease in corporate and administration expenses for
Internet and broadband was primarily attributable to the restructuring of the
Internet and broadband divisions. Finally, expenses at the corporate department of Claxson decreased
U.S.$0.9 million to U.S.$4.0 million in 2002 from U.S.$4.9 million in 2001. The
decrease is primarily attributable to the full year effect of the corporate
expenses in 2002, offset by a decrease of U.S.$3.8 million due to the exercise
of certain options as a result of the merger transaction in 2001. Depreciation and Amortization Depreciation and amortization expenses decreased U.S.$15.0 million, or
55%, to U.S.$12.3 million in 2002 from U.S.$27.3 million in 2001. Depreciation
and amortization expenses as a percentage of net revenues decreased to 16% in
2002 from 26% in 2001. This decrease is due to a decrease of U.S.$8.9 million
as a result of the elimination of the amortization of goodwill pursuant to FASB
142, as well as U.S.$8.5 million due to the devaluation of the Argentine Peso
on our Argentine assets, partially offset by increased depreciation expenses as
a result of the combination transaction with El Sitio. Other Income (Expense) Other income (expense), excluding share of loss from unconsolidated
affiliates, which principally consists of interest expense, interest income,
gain on debt restructuring, other miscellaneous income (expenses) and foreign
currency exchange loss, consisted of net expenses of U.S.$54.8 million in 2002
compared with net expenses of
U.S.$47.4 million in 2001. This increase in other expenses resulted
primarily from a foreign currency exchange loss of U.S.$61.3 million in 2002
compared to U.S.$29.6 million in 2001, due primarily to foreign exchange loss
on certain U.S. dollar-denominated debt held by our Argentine subsidiary as a
result of the Argentine currency devaluation, partially offset by a U.S.$15.3
million gain on debt restructuring during 2002 as a result of the 36




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exchange
offer and consent solicitation, and U.S.$3.7 million in other income primarily
as a result of a U.S.$3.4 million credit for certain tax credits related to the
acquisition of assets in Argentina. Share of Loss from Unconsolidated Affiliates Share of loss from unconsolidated affiliates represents our proportionate
share of the net income or loss of Playboy TV International, Playboy TV Latin
America, The Locomotion Channel, DMX MUSIC Latin America and other companies in
which we had investments during 2002. Share of loss from unconsolidated
affiliates decreased U.S.$12.4 million to U.S.$6.7 million in 2002 from
U.S.$19.1 million in 2001. The decrease is due primarily due to (a) the
renegotiation with Playboy Enterprises, Inc which resulted in a net loss of
U.S.$9.3 million in 2002, compared to our share of the net loss of Playboy TV
International and Playboy TV Latin America in 2001 of $16.4 million, and (b)
the sale of our share of The Locomotion Channel which generated a net gain of
U.S.$1.6 million in 2002 compared to a net loss of U.S.$2.5 million in the year
2001. Liquidity and Capital Resources The accompanying consolidated financial statements have been prepared on a
going concern basis, which assumes continuity of operations and realization of
assets and satisfaction of liabilities in the ordinary course of business. See
Item 3D. Key InformationRisk FactorsWe may not be able to continue as a
going concern and Note 1 of our consolidated financial statements. Our principal liquidity and capital resources needs in the future include
the debt service on our outstanding debt, which will require principal and
interest payments of approximately U.S.$12.8 million in 2004, and the payment
of U.S.$1.5 million in obligations under payment agreements related to the
cancellation of merger related expenses with investment bankers. We believe
that our cash, cash equivalents and investments, and other working capital
resources (including the issuance of debt instruments) will be sufficient to
meet our capital resources and liquidity requirements through 2004. A failure
to meet our business plan objectives could result in an inability to meet our
obligations when due. Our liquidity may be limited if we are not able to
negotiate extended payment terms with the remaining holders of Imagen
Satelitals 11% Senior Notes due 2005. Our principal sources of liquidity and capital resources consist of our
balance of cash and cash equivalents, cash from operations and, to lesser
degree, debt financing. At December 31, 2003, we had total cash and cash equivalents of U.S.$7.7
million, as compared to U.S.$8.1 at December 31, 2002. As of December 31, 2003, we had approximately U.S.$76.2 million in
long-term debt and U.S.$11.9 million in short-term debt, as compared to
U.S.$80.8 million in long-term debt and U.S.$11.7 million in short-term debt,
at December 31, 2002. Our debt included U.S.$61.6 million under Claxsons
8.75% Senior Notes due 2010 (which includes U.S.$20.2 million in future
interest payments as required by accounting principles applicable to us due to
the debt restructuring of our 11% Senior Notes due 2005), and U.S.$15.4 million
under a syndicated bank facility payable through 2006, which has subsequently
been refinanced to mature through 2009. Since year-end 2002 we were able to
exchange U.S.$3.2 million of Imagen 11% Senior Notes due 2005 into other debt,
including new 6.25% Senior Notes due 2013 of Imagen Satelital. The remaining
U.S.$2.3 million principal amount of Imagens 11% Senior Notes due 2005 that
are outstanding continue to be in default and are classified as short-term.
The indenture for the 8.75% Senior Notes and the syndicated bank debt agreement
restrict the ability of some of our operating subsidiaries from, among other
things, incurring additional indebtedness and paying dividends. Cash flow provided by operating activities was U.S.$13.7 million in the
twelve months ended December 31, 2003 compared to U.S.$2.0 million in 2002.
This increase is due to our improved operating performance and the result of
our strong collection effort that enabled us to reduce the number of days that
our receivables are outstanding while maintaining the same terms with our
providers, which helped improve our working capital position. Capital expenditures of U.S.$2.6 million were made in the twelve months
ended December 31, 2003 primarily in connection with general equipment
maintenance and upgrades compared to U.S.$1.6 million in 2002. Cash provided
by investing activities during the twelve months ended December 31, 2003
included U.S.$0.8 million from the sale of Cl@se and other non-strategic
assets, and U.S.$0.4 million in dividends from minority interests. Investments
made during the year 2003 included U.S.$2.4 million related to the final
installments of the payment of 37




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the purchase price for a minority stake in our
Chilean operations, and U.S.$1.9 million for the payment of certain
capitalizable transaction costs related to the merger transaction. Cash used in financing activities during the year 2003 was U.S.$7.9
million as compared to cash used in financing activities of U.S.$13.0 million
for 2002. During 2003 we paid U.S.$7.2 million of principal payments under
Radio Chiles syndicated credit facility, as well as other miscellaneous debt.
In addition, during the year 2003 we made extraordinary cash payments of
U.S.$1.4 million related to the Imagens 8.75% Senior Notes due 2010. Research and Development, Patents and Licenses, etc. Not Applicable Trend Information For a description of the trends affecting our business see Item 3D Risk
Factors and Item 5 Operating and Financial Review and Prospects. 
 Item 6. Directors, Senior Management and Employees A. Directors and Senior Management The following table presents the names of our members of the board of
directors as of June 1, 2004, their ages, the date each member accepted office
and the date of expiration of their current term: Current Position
    
    TermName
    
    Age
    
    Held Since
    
    ExpirationRoberto Vivo-Chaneton
    
    51
    
    September 21, 2001
    
    2004Carlos Bardasano
    
    59
    
    September 21, 2001
    
    2004Eric C. Neuman
    
    58
    
    September 21, 2001
    
    2004Ana Teresa Arismendi
    
    38
    
    April 30, 2002
    
    2004Frank Feather
    
    61
    
    September 21, 2001
    
    2004John A. Gavin
    
    72
    
    September 21, 2001
    
    2004Gabriel Montoya
    
    35
    
    April 30, 2002
    
    2004José Antonio Rìos
    
    57
    
    September 21, 2001
    
    2004Emilio Romano
    
    39
    
    November 12, 2001
    
    2004Marcos Clutterbuck
    
    33
    
    August  23, 2002
    
    2004Ricardo Verdaguer
    
    53
    
    September 21, 2001
    
    2004Luis Villanueva
    
    47
    
    April 30, 2002
    
    2004
 Mr. Vivo-Chaneton is the chairman of the board of directors and Messrs.
Bardasano and Neuman are vice chairmen of the board of directors. Each member of the board of directors serves for a period ending at each
annual meeting of our shareholders, which generally will be held during the
last quarter of each year. Executive Officers The following table sets forth the names of each of our and our
subsidiaries executive officers as of June 1, 2004, their ages, the position
they hold in Claxson and the date of employment in said position: Current PositionName
    
    Age
    
    Position
    
    Held SinceRoberto Vivo-Chaneton
    
    51
    
    Chairman of the Board and Chief Executive Officer
    
    September 21, 2001Ralph Haiek
    
    47
    
    Chief Operating Officer  Pay Television
    
    September 21, 2001José Antonio Ituarte
    
    44
    
    Chief Financial Officer
    
    January 1, 2002Roberto Cibrian-Campoy
    
    45
    
    Executive Vice President  Broadband and Internet
    
    September 21, 2001Amaya Ariztoy
    
    36
    
    General Counsel
    
    September 21, 2001Mariano Varela
    
    36
    
    Senior Vice President  Sales and Marketing
    
    January 1, 2003Javier Urrutia
    
    33
    
    Executive Director  Chilevisión
    
    January 8, 2004
 38




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Current PositionName
    
    Age
    
    Position
    
    Held SinceMarcelo Zuñiga
    
    54
    
    Executive Director - Ibero American Radio Chile
    
    August 30, 2002Jaime De Aguirre Hoffa
    
    52
    
    Executive Director  Chilevisión (until Jan. 2004)
    
    April 15, 2002
 Executive officers are appointed by, and serve at the discretion of, our
board of directors. Biographical Information Directors Roberto Vivo-Chanetonis our chairman of the board and chief executive
officer. Mr. Vivo-Chaneton was El Sitios co-founder and served as chairman of
El Sitios board of directors from inception. Mr. Vivo-Chaneton was one of the
founders of, and since 1988 has served as a director and deputy chief executive
officer of, IMPSAT Fiber Networks, Inc., a provider of private networks of
integrated data and voice communications systems in a number of countries in
Latin America. Mr. Vivo-Chaneton holds degrees in Business Administration from
Universidad Argentina de la Empresa and Macroeconomics from Instituto Torcuato
di Tella, both in Buenos Aires, Argentina. Carlos Bardasanois director and vice chairman of our board of directors.
Mr. Bardasano joined the Cisneros Group of Companies 38 years ago. Mr.
Bardasano is a vice president of the Cisneros Group of Companies. Mr.
Bardasano served as president of the Venevision Television Network from 1993
through 1999. Mr. Bardasano began his career in the television industry as
general manager of the Venevision Television Network and later became president
and chief executive officer of Venevision International. Mr. Bardasano is also
a member of the board of directors of Caracol TV Network, a television network
in Colombia, and a permanent executive member of the programming committee of
Caracol TV. Mr. Bardasano holds a Bachelor of Science degree in Production
Engineering and a Masters of Business Administration degree from Universidad
Central de Venezuela. Mr. Bardasano has been appointed to our board of
directors by our Class C common shareholders. See Item 10B Memorandum and
Articles of AssociationVoting Rights. Eric C. Neumanis director and vice chairman of our board of directors.
Mr. Neuman has been a partner of Hicks Muse since January, 2001 and principal
of Hicks Muse from April, 1999 to December, 2000. Between June, 1998 and
March, 1999, Mr. Neuman served as senior vice president and chief strategic
officer of Chancellor Media, a company that was founded by and whose largest
shareholder was Hicks Muse. From 1993 to 1998, Mr. Neuman was an officer with
Hicks Muse. Mr. Neuman is chairman of Fox Pan American Sports Network and
Cablevision and serves on the boards of directors of Digital Latin America,
Media Capital and Grupo Multivision. He previously was a director of
Chancellor Media, Capstar Broadcasting Partners and Sunrise Television
Corporation. Mr. Neuman holds a Bachelor of Arts degree from the University of
South Florida and a Masters of Business Administration degree (with
distinction) from the J.L. Kellogg Graduate School of Management, Northwestern
University. Mr. Neuman has been appointed to our board of directors by our
Class H common shareholders. See Item 10B Memorandum and Articles of
AssociationVoting Rights. Ana Teresa Arismendiis currently the executive vice president of finance
and administration of Venevision Productions, the newly created television
production unit of The Cisneros Group of Companies. She was previously managing
director of the Chairmans Office of the Cisneros Group of Companies in New
York and came from senior vice president of finance and administration at
Playboy TV International. In 1996, Ms. Arismendi joined the Cisneros
Television Group as finance director. Prior to joining the Cisneros Television
Group, Ms. Arismendi was administration manager at Televen, a Cisneros Group
television channel, and financial analysis manager of the communications
division at the Organización Cisneros, both in Caracas, Venezuela. Ms.
Arismendi holds a Bachelor of Arts degree in Business Administration from the
Universidad Metropolitana in Caracas, Venezuela. Ms. Arismendi has been
appointed to our board of directors by our Class C common shareholders. See
Item 10B Memorandum and Articles of Association-Voting Rights. Marcos Clutterbuckis a Principle of Hicks, Muse, Tate & Furst
Incorporated . He has been with Hicks Muse since 1998 and is currently based in the
Buenos Aires office. Prior to joining Hicks Muse, Mr. Clutterbuck worked
with R. Arriazu & Associates in Buenos Aires and with Mercer Management
Consulting in Boston. He was also an assistant professor of Economics at the
Universidad Católica Argentina. Mr. Clutterbuck also serves on the boards of
several corporations, including Cablevisión S.A., International Outdoor
Advertising and Editorial Atlántida S.A. Mr. Clutterbuck received a Licentiate
in Economics from the Universidad Católica Argentina and his Masters of
Business Administration degree from Stanford University, where he was
designated an Arjay Miller Scholar, distinction awarded to the top 10% of the
class. Mr. Clutterbuck has been appointed to our board of 39




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directors by our
Class H common shareholders. See Item 10B Memorandum and Articles of
AssociationVoting Rights. Frank Featheris a consulting business futurist and author. Until 1981,
Mr. Feather was a senior international banking executive with Barclays Bank,
Toronto Dominion Bank and Canadian Imperial Bank of Commerce. In 1981, Mr.
Feather began consulting national governments and global corporations on future
trends. Mr. Feather has written several books, the most recent of which is
Future Consumer.Com: The Webolution of Shopping to 2010. He hosts the
Furture-Trends.com website. Mr. Feather holds an Honors Bachelor of Arts
degree in Business Administration from York University in Toronto, Canada. John A. Gavinserved more than five years as U.S. Ambassador to Mexico
during the administration of President Ronald Reagan. Thereafter, he was vice
president of Atlantic Richfield Company and president of Univisa Satellite
Communications, a division of a Spanish-speaking broadcast network. He is the
founder and chairman of Gamma Holdings, an international capital and consulting
firm. He also serves on the boards of International Wire Holdings, The
Hotchkis & Wiley Funds, The TCW Galileo Funds, and Causeway Capital Management.
He is also a member of the Latin America Strategy Board of Hicks, Muse, Tate &
Furst Incorporated. Ambassador Gavin holds a Bachelor of Arts degree in
Economic History of Latin America from Stanford University. Mr. Gavin has been
appointed to our board of directors by our Class H common shareholders. See
Item 10B Memorandum and Articles of AssociationVoting Rights. Gabriel Montoyais vice president of the office of the chairman and chief
executive officer of the Cisneros Group of Companies since May 2004. Prior to
his current position, he was managing director, assistant to the President of
the Cisneros Group of Companies. Previously, Mr. Montoya was director of new
business development at the Cisneros Television Group. Previously, Mr. Montoya
was corporate finance manager at the Cisneros Group of Companies in Caracas,
Venezuela. Before joining the Cisneros Group of Companies, he was a financial
advisor at Fondo de Garantía de Depósitos y Protección Bancaria (FOGADE) and a
project manager at Coca-Cola de Venezuela. Mr. Montoya has a Bachelor of
Science degree in Systems Engineering from Universidad Metropolitana in
Caracas, Venezuela (1990) and a Masters of Business Administration degree from
the Instituto de Estudios Superiores de Administración (IESA) in Caracas,
Venezuela (1993). Mr. Montoya was also associate professor of Valuation and
Financial Investments at IESA, Caracas, Venezuela and professor of the Finance
for Lawyers seminar at Universidad Católica Andres Bello, Caracas, Venezuela.
Mr. Montoya has been appointed to our board of directors by our Class C common
shareholders. See Item 10B Memorandum and Articles of AssociationVoting
Rights. José Antonio Rìosis Chief Administrative Officer of Global Crossing Ltd.,
and also serves as President of the companys international operation covering
the Americas, Europe and Asia. Mr. Rìos also serves as Chairman of the Board of
Global Marine Systems Ltd., a unit of Global Crossing. Prior to joining Global
Crossing, Mr. Rìos served as president and chief executive officer of
Telefónica Media. Additionally, Mr. Rìos was one of seven members of the
corporate executive committee of Telefónica S.A. and a corporate general
director. He also has served on the boards of over 30 companies within the
Telefónica group. Mr. Rìos is the former chairman of the supervisory board of
Endemol Entertainment, a television production company based in Holland.
Earlier in his career, Mr. Rìos was the founding president and chief executive
officer of Galaxy Latin America, where he was responsible for the planning,
development and launch of DIRECTV. Mr. Rìos previously served as chief
operating officer and corporate vice president of the Cisneros Group of
Companies. Mr. Rìos holds a Bachelor of Science degree in Industrial
Engineering from the Andres Bello Catholic University in Caracas, Venezuela. Emilio Romanois the chief executive officer of Mexicana Airlines. In
2001, he co-founded Border Group, LLC and served as an advisor to several
entertainment and media companies. Mr. Romano co-founded SportsYA Media Group,
a sports media and marketing company for the Spanish-speaking world. Mr.
Romano served as its chief executive officer from 1999 to 2001. Between 1995
and 1998, he worked at Grupo Televisa as director of mergers & acquisitions and
later as vice-president of international operations. While at Televisa, Mr.
Romano was a director of Univision Communications (NYSE:UVN) where he was
responsible for Televisas operations outside Mexico, as well as co-managing
Cablevisión, the largest cable network in Mexico. From 1989 to 1994, Mr.
Romano served in many roles within the Mexican Ministry of Finance, including
General Director of Revenue Policy and Federal Fiscal Attorney. Mr. Romano
holds a law degree from the Escuela Libre de Derecho in Mexico City and was a
graduate student at the City of London Polytechnic. Ricardo Verdaguerhas served as the president and chief executive officer
of IMPSAT Fiber Networks, Inc. since 1988. In 1988, as a senior executive of
Corporación IMPSA S.A., an Argentina-based multinational 40




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company with holdings
in manufacturing, transportation and telecommunications, Mr. Verdaguer was
involved in the founding of IMPSAT Fiber Networks, Inc. From 1976 to 1988, Mr.
Verdaguer occupied various operational positions at Industrias Metalurgicas
Pescarmona as an electromechanical engineer. He holds a Bachelor of Science
degree in Engineering from Universidad Juan Agustin Mazza in Mendoza,
Argentina. Mr. Verdaguer has been appointed to our board of directors by our
Class F common shareholders. See Item 10B Memorandum and Articles of
AssociationVoting Rights. Luis Villanuevais the President and CEO of Venevision International LLC,
a leading Spanish language entertainment company which engages in TV
programming distribution and production, film distribution, music and
theater,
owned by the Cisneros Group. Since joining the Cisneros Group in 1982, Mr.
Villanueva has held several key positions within the organization, including
Vice-President of Venevision Television Network in Venezuela, Executive
Vice-President of Corporate Finance and Development of the Cisneros Group, and
President of Venevision de Chile. Mr. Villanueva is also a director of Union de
Cervecerias Peruanas Backus & Johnston, Perus leading beer company. Mr.
Villanueva holds a Bachelor of Arts degree in Economics and a Masters of
Business Administration degree from Andres Bello Catholic University, Caracas,
Venezuela. Mr. Villanueva has been appointed to our board of directors by our
Class C common shareholders. See Item 10B Memorandum and Articles of
AssociationVoting Rights. Executive Officers Ralph Haiekis our chief operating officer-pay television. Previously,
Mr. Haiek was chief operating officer of the Cisneros Television Group (CTG)
and, prior to that, senior vice president and general manager of CTG Music.
Before joining CTG, Mr. Haiek founded MuchMusic Argentina, one of the leading
music channels in Latin America. Mr. Haiek is a founding member of Promax
Latin America and a member of the Latin Academy of Recording Arts and Sciences.
He holds a Bachelors degree in Economics from Universidad de Buenos Aires and a
Masters of Business Administration from Instituto de Altos Estudios
Empresariales (Universidad Austral) in Argentina. Mr. Haiek was recently given
the 2003 Pay TV President of the Year Award at the INTE Awards held in Miami,
FL, an industry event that recognizes the best of the Spanish-speaking
television industry. José Antonio Ituarteis our chief financial officer. Prior to this
position, Mr. Ituarte had served as Claxsons chief staff officer, chief
operating officer and general manager and chief financial officer at Ibero
American Media Holdings Chile, one of our current subsidiaries. Before joining
Ibero American, Mr. Ituarte spent almost a decade at Radio Pudahuel FM as
strategic consultant and information technology specialist. Prior to that, he
acted as consulting director for KPMG Peat Marwick. Additionally, Mr. Ituarte
is a founding partner of ITC Consultores, a consulting firm that provides
services to financial institutions, public service enterprises, and educational
institutions. Mr. Ituarte holds a Bachelors degree in Computer Engineering
with a Masters of Business Administration from Universidad Adolfo Ibañez in
Chile. Roberto Cibrian-Campoyis our executive vice president  broadband and
Internet. Mr. Cibrian-Campoy was El Sitios co-founder and served as the chief
executive officer, president and a director of El Sitio from inception. In
1992, Mr. Cibrian-Campoy founded and served as president of Cibrian-Campoy
Creativos, S.A., a producer of computer animation and developer of multimedia
projects. From 1989 to 1992, Mr. Cibrian-Campoy served as advisor to the
Minister of Culture and Education of Argentina. From 1982 to 1989, Mr.
Cibrian-Campoy was an architect at his own firm and a designer with a leading Buenos
Aires architecture firm. Mr. Cibrian-Campoy holds a degree in Architecture
from the Universidad de Belgrano in Buenos Aires, Argentina. Jaime De Aguirre Hoffawas Chilevisións Executive Director until January
2004. In January 2004, due to a criminal investigation related to the use of
hidden cameras, Mr. Aguirre was temporarily replaced pending the outcome of the
investigation but is still performing certain consulting services for
Chilevision. See Item 8A Consolidated Statements and Other Financial
InformationLegal Proceedings. Mr. Aguirre is an experienced Chilean
television executive, prior to joining Chilevisión, Mr. Aguirre was Programming
Director for 11 years at Television Nacional de Chile (TVN). Prior to joining
TVN, de Aguirre was founding partner of the independent production firm
Filmocentro. Mr. Aguirre holds studies in Law and is a Sound Engineer. Javier Urrutiais Executive Director of Chilevisión and General Secretary
of Ibero American Radio Chile. Having worked as a lawyer in several
prestigious Chilean law firms, he later became business editor of El
Metropolitano Newspaper and subsequently its director until September 2001 when
he was named General Secretary of Claxson Chile. Mr. Urrutia holds a law
degree from Universidad de Chile and graduate degree in business law from
Universidad Adolfo Ibañez in Chile. He also studied intellectual property in
Geneva, Switzerland. Mr. Urrutia currently serves as director of the National
Association of Television in Chile (Anatel). 41




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Marcelo Zuñigais Executive Director of Ibero American Radio Chile (IARC).
Under his tenure, IARC has grown to become the largest radio holding in Chile
with eight of the most successful radio stations, each one of them a leader in
its segment and six of them among the top ten. His extensive radio and
television career includes a tenure as Director of Radio Cooperativa at
Compañía Chilena de Comunicaciones (CCC), position he held for 18 years and
where he lead Cooperativa to become the most important radio station in Chile.
While at CCC he also gave life to Rock & Pop, a project that revolutionized
the Chilean radio market in the 90s, and to Radio Corazón, a station that since
its inception has ranked among the top five radio stations in Chile. He joined
IARCs founding team in 1998 as Operations Manager, leading the music and sales
strategy of the holding to make it today the undisputed leader in the Chilean
market with close to 40% of the national audience share. Amaya Ariztoyis our general counsel. Ms. Ariztoy has served as vice
president of legal and business affairs for Cisneros Television Group since
1998. Ms. Ariztoy also manages and oversees corporate legal matters with
channel partners, affiliates and advertisers. Ms. Ariztoy has worked in
several areas within the Cisneros Group of Companies, including the
Venezuelan-based broadcast television station, Venevision, and
DirecTV/Venezuela. Ms. Ariztoy holds a law degree from the School of Law of
Universidad Católica Andres Bello in Caracas, Venezuela. Mariano Varelais our senior vice president of sales and marketing.
Before taking this position, Mr. Varela was Claxsons vice president of
corporate marketing, after the merger transaction. Previously, Mr. Varela held
the position of vice president of marketing at El Sitio, where he developed
strategic marketing initiatives, including the creation of a global brand
identity of El Sitio as a provider of content for Portuguese and
Spanish-speaking users. Before joining El Sitio, Mr. Varela was Client
Services Director & Regional Account Director at Leo Burnett. Mr. Varela has
also worked as an account manager for Young & Rubicam and as an account
executive for Marcet, Dreyfus y Asociados. Mr. Varela holds a degree in
Communications Sciences from Universidad del Salvador, Argentina. B. Compensation Each independent director and up to one director appointed by each of
Hicks Muse and the Cisneros Group who is not an employee of each respective
organization is entitled to receive $40,000 annually for service on our board
of directors, payable quarterly. The directors who received the annual
compensation for the year ended December 31, 2003, were Messrs. Rios, Romano
and Feather, our independent directors, Mr. Gavin a non-employee director
appointed by Hicks Muse and Mr. Verdaguer. In addition, each independent
director is entitled to receive an additional $20,000 if he is a member of our
Audit Committee. All directors receive reimbursement for out-of-pocket
expenses incurred in connection with our board of directors meetings. (All
options are vested and exercisable.) Prior to June 14, 2004, our non-independent directors were also entitled
to an annual directors fee. With the exception of Mr. Gavin and Mr.
Verdaguer, these fees were never paid. On June 14, 2004, in exchange for the
renewal of the existing advisory fee agreement with the Cisneros Group (our
Class C common shareholders), Hicks Muse (our Class H common shareholders) and
the members of the founders of El Sitio (our Class F common
shareholders), our non-independent directors (who are appointed by the
Cisneros Group, Hicks Muse and the El Sitio founders), except for Mr. Gavin,
who is a non-employee director appointed by Hicks Muse agreed to waive all
unpaid fees and forego any annual directors fees in the future. See Item 7.B.
Related Party Transactions for a description of the terms of the advisory fee
agreement. In the year ended December 31, 2003, the aggregate amount of compensation
paid to our nine executive officers as a group was approximately
U.S.$2,759,696. We did not set aside or accrue any amounts for pension,
retirement or similar benefits, as we did not provide such benefits for our
executive officers. The above amount does not include share options issued to
these executive officers under any of our share option plans. Options to Purchase Securities from Registrant or Subsidiaries 2001 Share Incentive Plan We have adopted the 2001 Share Incentive Plan, which is referred to herein
as the 2001 share incentive plan or plan. The plan is intended to remain
in effect until 2011. The following description summarizes the material terms
of the plan, but is qualified in its entirety by reference to the full text of
the plan. 42




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Administration The 2001 share incentive plan is administered by our compensation
committee. The plan provides for the grant of both non-qualified and incentive
share options and for the grant of restricted shares. Incentive share options
are share options that satisfy the requirements of Section 422 of the U.S.
Internal Revenue Code of 1986. Non-qualified share options are share options
that do not satisfy the requirements of Section 422 of the U.S. Internal
Revenue Code. Share options will be granted by the compensation committee.
Restricted shares will be granted by our board of directors. Some grants of share options and restricted shares may be made by a
subcommittee of the compensation committee in order to satisfy certain tax
requirements that must be complied with in order for us to avoid the loss of
any U.S. federal income tax deduction. Shares Subject to Plan The 2001 share incentive plan provides that the maximum number of Class A
common shares available for grant under the plan is 930,000. As of June 2004
all of the shares available for grant under the plan have been granted. The
2001 plan provides that no single participant may be granted share options
covering in excess of 85,000 Class A common shares in any fiscal year, except
that Roberto Vivo-Chaneton, our chairman of the board and chief executive
officer, has received an initial grant of share options covering 185,338 Class
A common shares. The number of Class A common shares subject to these limits,
as well as the number and kind of shares subject to outstanding awards, may be
adjusted by the compensation committee or by our board of directors in the
event of any change in corporate capitalization. On March 9, 2004, our board
approved an amendment to the plan, subject to shareholder ratification, that
increased to 225,000 the number of Class A common shares that each of our chief
executive officer, chief financial officer, and the chief operations officer of
our Pay Television Division may be granted in any fiscal year. Share Options All share options granted under the 2001 share incentive plan must be
evidenced by, and subject to the terms of, a written award agreement. Unless
otherwise provided by the compensation committee in an award agreement, the
term of share options granted under the plan will be ten years. Unless
otherwise provided by the compensation committee in the applicable award
agreement, share options will vest in three annual installments of 30%, 30% and
40%. Share options will have an exercise price per Class A common share equal
to the fair market value of each share on the date of grant. Under the 2001 share incentive plan, unvested share options held by a
participant will generally expire upon termination of that participants
employment. If termination is due to death, the optionees estate will have
one year to exercise vested share options, unless the compensation committee
provides otherwise in the applicable award agreement. If termination results
from retirement or disability, the optionee will have two years to exercise
vested share options, unless the compensation committee provides otherwise in
the applicable award agreement. If termination is for cause, no share options will thereafter be exercisable,
unless the compensation committee provides otherwise in the applicable award
agreement. Upon termination for a reason other than death, disability,
retirement or cause, vested share options will remain exercisable for six
months, unless the compensation committee provides otherwise in the applicable
award agreement. Unless the compensation committee provides otherwise in the
applicable award agreement, if a participant dies during, and within one year
immediately preceding the conclusion of, a post-termination exercise period,
the participants estate will be permitted to exercise share options until the
earlier of the first anniversary of the date of death or the expiration of the
stated term of the share option, even if such date is later than the end of the
initial post-termination exercise period. A participant exercising a share option may pay the exercise price in cash
or, if approved by the compensation committee, with previously acquired Class A
common shares or in a combination of cash and Class A common shares. However,
Class A common shares may be used for this purpose only if they have been held
by the participant for at least six months prior to the time of exercise or if
they were purchased by the participant on the open market. The compensation
committee, in its discretion, may allow the cashless exercise of share options
or may permit the exercise price to be satisfied through the withholding of
Class A common shares subject to the portion of the share option being
exercised. Upon receipt of a notice of exercise of a share option, the
compensation committee may, in its discretion, choose to cash out such share
option by providing the participant with cash or with Class A common shares
equal in value to the product of (1) the difference in value between the fair
market value of 43




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a Class A common share and the exercise price of such share
option times (2) the number of shares for which the share option would have
been exercised. Unless otherwise provided by the board of directors, share options will be
nontransferable other than by will or the laws of descent and distribution. The compensation committee may establish procedures pursuant to which
participants may defer the receipt of the Class A common shares subject to a
share option exercise. Restricted Shares Restricted shares may be granted under the 2001 share incentive plan
subject to performance goals or service requirements. Prior to the lapse of
restrictions, a participant may not sell, assign, transfer, pledge or otherwise
encumber restricted shares, although a participant may pledge restricted shares
as security for a loan, the sole purpose of which is to provide funds for the
purchase of share options under the plan. Prior to the lapse of restrictions,
any certificate issued with respect to restricted shares must contain a legend
noting that the shares are restricted. Generally, all restricted shares will
be forfeited if a participant terminates employment prior to the lapse of
restrictions. However, our board of directors shall have the discretion to
waive the restrictions with respect to a participant who is terminating
employment. Participants will be entitled to vote their restricted shares and to
receive dividends upon their restricted shares. However, our board of
directors may provide in an award agreement that any such dividends will
themselves be invested in restricted shares. All restricted shares granted under the plan must be evidenced by, and
subject to the terms of, a written award agreement. Change in Control If a change in control occurs, any option that is not then exercisable and
vested will become fully exercisable and vested and restrictions on all
restricted shares will lapse. In addition, the board of directors will have
the power to make any additional adjustments to outstanding awards that it
deems appropriate, including, without limitation, the power to make cash
payments in cancellation of outstanding awards, and the power to issue a
substitute award in place of outstanding awards. A change in control will
occur generally upon any of the following events:  
    
    any acquisition by a person, other than a member or affiliate
of the Cisneros Group, an affiliate of Hicks Muse or an affiliate of
the El Sitio founders, of more than 50% of our outstanding share
capital or voting securities, in each case subject to specified
exceptions;
    
    a change in the majority of the members of the board of
directors, unless approved by the incumbent directors;
    
    the consummation of certain mergers or restructurings, or
certain sales of all or substantially all of our assets; or
    
    approval by our shareholders of a liquidation, dissolution or
sale of substantially all of our assets. Amendments The board of directors may at any time amend or terminate the 2001 share
incentive plan and may amend the terms of any outstanding option or other
award, except that no termination or amendment may materially and adversely
impair the rights of participants as they relate to outstanding options or
awards. However, no amendment to the plan will be made without the approval of
our shareholders to the extent approval is required by applicable law or rule
of any stock exchange on which the Class A common shares may be listed or
traded. 44




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##### Table of Contents



Grant of Stock Options The chart below lists options held under the 2001 Share Incentive Plan by
our executive officers and certain consultants, as follows: Manager
    
    Business
    
    Stock OptionsRoberto Vivo
    
    
    Corporate
    
    
    
    185,338
    *Ralph Haiek
    
    
    Pay TV
    
    
    
    85,000
    *Roberto Cibrian Campoy
    
    
    Broadband
    
    
    
    27,800José Antonio Ituarte
    
    
    Corporate
    
    
    
    60,000
    *Mariano Varela
    
    
    Pay TV
    
    
    
    9,500José Maria Bustamante
    
    
    Corporate
    
    
    
    9,500Amaya Ariztoy
    
    
    Corporate
    
    
    
    9,500Alfredo Richard
    
    
    Corporate
    
    
    
    4,600Leandro Feliz Añon**
    
    
    
    
    
    
    27,800Benjamin Moody**
    
    
    
    
    
    
    19,511
 * Does not include options that were approved on March 9, 2004 by our
board but are subject to shareholder ratification for Messrs. Vivo, Haiek and
Ituarte to purchase an additional 218,227, 109,112 and 109,112 shares of Class
A common shares, respectively, at an exercise price of $3.20 per share (the
closing sales price of our stock for the date immediately preceding the date of
grant) and vesting 60% on the second anniversary of the grant and 40% on the
third anniversary of the grant. ** As per employment separation and post employment consulting agreement. The exercise price is the average of the closing price for the five-day
trading period beginning on January 17, 2002, the date of grant which was
U.S.$0.738. Except for the options granted to Leandro Añon and Benjamin Moody
which are fully vested, the options vest in two tranches, 60% on the second
anniversary of grant which are currently vested and exercisable and 40% on the
third anniversary. Except for Roberto Vivos options which are exercisable for
10 years from the date of grant, the options are exercisable for five years
from the date of grant. Grant of Restricted Shares to Cisneros Television Group Employees On January 17, 2001, we granted approximately 50,000 restricted Class A
common shares to employees of the Cisneros Television Group and its affiliates,
50% of which vested upon the consummation of the merger transaction with the
remaining 50% vesting on March 2002. These shares were issued in connection
with the consummation of the merger transaction. C. Board Practices Directors See Item 6, Section A Directors and Senior Management. Members of Management Body See Item 6, Section A Directors and Senior Management. Benefits Upon Termination of Employment Mr. Vivo-Chaneton, our chief executive officer, is based in Argentina.
Under the terms of the employment agreement with Claxson, upon termination of
employment without cause or by Mr. Vivo-Chaneton with good reason, Mr.
Vivo-Chaneton will receive all earned, but unpaid, salary, bonus, including the
greater of a pro rated target bonus or the guaranteed minimum bonus for the
year of termination, and continued benefits. In addition, Mr. Vivo-Chaneton
will receive a cash severance package equal to his base salary and target bonus
for the balance of the employment term plus one years base salary and target
bonus, not to exceed 200% of annual base salary and annual target bonus. Mr.
Vivo- Chaneton will also receive accelerated vesting of one-half of his
unvested options, with all his vested options being exercisable for one year
following such termination. 45




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##### Table of Contents



Upon termination of employment due to the non-renewal of the employment
agreement by us, Mr. Vivo-Chaneton will receive a lump sum amount in cash equal
to one years base salary plus a target bonus of 100% of the base salary, with
vested share options remaining exercisable for a period of one year following
such non-renewal. While employed and for a period of one year thereafter, Mr.
Vivo-Chaneton will not compete with us or our subsidiaries. In the event of a
future change in control, Mr. Vivo-Chanetons share options will become
immediately vested and fully exercisable for the balance of the ten-year term
of these options, except that if company performance targets have not been met
at the time of the change in control, the options will be exercisable for a
period of one year following the change in control, or such longer period as
Mr. Vivo-Chaneton and the board of directors may agree. Committees of the Board of Directors Our board of directors has standing audit, compensation and executive
committees. Executive Committee The executive committee consists of Roberto Vivo-Chaneton, Carlos
Bardasano and Eric C. Neuman. The executive committee serves at the pleasure of
the board of directors and has such powers, authority and duties as the board
of directors may designate. Meetings of the executive committee are the forum
in which our chairman of the board and chief executive officer share, discuss
and review with the members of the committee, among other things, the
following:  
    
    strategic initiatives;
    
    material transactions and matters; and
    
    matters to be presented to the full board of directors and
board committees; and such other matters as the board of directors
may determine from time to time. The executive committee consist of three members as follows: (i) the chairman
of the board and chief executive officer, (ii) one member appointed by Class C
directors (directors elected by holders of the Class C common shares) and (iii)
one member appointed by the Class H directors (directors elected by holders of
the Class H common shares). All matters submitted to the executive committee
must be decided by a unanimous vote of the members of the committee. In the
event that a unanimous vote is not reached with respect to a material matter,
then two of the members of the executive committee, acting jointly, may refer
such matter to the board of directors. Audit Committee The audit committee consists of Frank Feather, José Antonio Ríos and
Emilio Romano, all of whom are independent as that term is defined in
relevant Securities and Exchange Committee rules. The audit committee:  
    
    is responsible for selecting and overseeing the engagement of
our independent auditors;
    
    reviews the results and scope of the audit and other services
provided by our independent auditors;
    
    reviews our financial statements;
    
    reviews and evaluates our internal control functions and financial reporting process; and
    
    review and approve all related party transactions. The members of the committee are elected by our board of directors following
each annual meeting of shareholders and will serve until their successors are
duly elected and qualified or until their earlier resignation or removal. Compensation Committee We have appointed a compensation committee with a majority of the members
being independent directors. The members of the compensation committee consist
of Messrs. Feather, Rìos and Romano, the three independent directors, and
Messrs. Bardasano and Neuman. The compensation committee makes recommendations
to the board of directors regarding the following matters: 46




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##### Table of Contents




    
    executive compensation;
    
    salaries and incentive compensation for our employees and consultants; and
    
    the administration of our share option plans. The members of the committee are elected by the board of directors following
each annual meeting of shareholders and will serve until their successors are
duly elected and qualified or until their earlier resignation or removal. The
committee will be comprised of at least two independent directors. All matters
submitted to the compensation committee must be decided by a majority of the
members of the committee present at a duly held and convened meeting. D. Employees As of December 31, 2003, our consolidated businesses had an aggregate of
954 full-time employees. Our wholly owned pay television businesses had 439
full-time employees, of whom 67 worked in our Miami offices, 360 in our Buenos
Aires offices, and 12 employees in our Mexico, Bahamas and Brazil offices. Our
broadcast business had 482 full-time employees as of the same date, of whom 120
worked for Radio Chile, 208 worked for Chilevisión, 119 worked for our
administrative and other staff areas in Claxon Chile and 35 worked for the
Sarandi Radio Group. Of the 482 employees of our broadcast radio and
television businesses, 447 worked in our Chile offices and 35 worked in our
Uruguay offices. At December 31, 2003, our Internet and broadband business had 27 full-time
employees. At December 31, 2003, our executive offices, comprised of the office of
the chairman of the board and chief executive officer and the chief financial
officer, had 6 full-time employees. As of December 31, 2003, our non-consolidated joint venture, DMX Music
Latin America, had an aggregate of 5 full-time employees. Our employees work in a variety of departments, including programming and
production, sales and marketing, creative, engineering and operations, and
finance and administration. From time to time, we employ independent
contractors to support our production, creative, talent and technical
departments. Chilevisión is party to a collective bargaining agreement with two unions:
the Sindicato de Empresa Chilevisión, S.A. and the Sindicato Nacional de
Trabajadores No. 2 de los Departamentos de Prensa y Administración RTU.
Approximately 196 of Chilevisións employees are represented by these unions
and a total of 208 employees are covered by the collective bargaining
agreement. The employees covered by the collective bargaining agreement are
at-will employees and occupy non-managerial positions in various areas of
Chilevisión. The collective agreement with the Chilean unions will expire on
August 31, 2004. We have started negotiations with the union regarding the
renewal. Our subsidiary, Canal Joven S.A., which operates the MuchMusic channel in
Argentina, is party to a statutory collective bargaining agreement, the terms
of which are set forth in the National Collective Bargaining Agreement No.
131/75 (Convención Colectiva de Trabajo Nacional No. 131/75). Approximately 40
of Canal Jovens employees are represented by the Argentine Television Union
(Sindicato Argentino de Television) and are covered by the statutory collective
bargaining agreement. Since the agreement is statutory, it will continue to be
in effect until either Canal Joven or the union decide to terminate it, in
which case the parties would need to negotiate a private collective bargaining
agreement. Imagen, the operator of the Space, I.Sat, Retro, FTV, and Infinito
channels, has entered into a private collective bargaining agreement with the
union representing its employees rather than adopt the terms of the statutory
collective bargaining agreement set by Argentine law. The Imagen collective
bargaining agreement will expire on November 1, 2005. We believe that our relations with our employees are generally good. 47




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##### Table of Contents



E. Share Ownership See Item 6, Section B Compensation and Item 7, Section A Major Shareholders. 
  Item 7.
    Major Shareholders and Related Party Transactions A. Major Shareholders Ownership of Major Shareholders The following table presents, as of June 1, 2004, the beneficial ownership
of our Class A common shares by:  
    
    each person or entity which, to our knowledge, owns
beneficially more than 5% of the outstanding shares;
    
    each of our directors and executive officers; and
    
    all of our directors and executive officers as a group.  Unless otherwise indicated, to our knowledge, all persons listed below
have sole voting and investment power with respect to their Class A common
shares, except to the extent applicable law gives spouses shared authority. PercentageNumber of
    
    of Class A
    
    Number of
    
    Number of
    
    Number ofClass A
    
    common
    
    Class C
    
    Class F
    
    Class Hcommon
    
    shares
    
    Common
    
    Common
    
    CommonBeneficial Owner
    
    shares
    
    (%)(1)
    
    Shares
    
    Shares
    
    Shares1945 Carlton Investments LLC(2)(21)
    
    
    4,709,769
    
    
    
    24.3
    
    
    
    11947 Carlyle Investments LLC(3)(21)
    
    
    4,709,769
    
    
    
    24.3
    
    
    
    1Ricardo J. Cisneros(4)(21)
    
    
    4,709,769
    
    
    
    24.3Gustavo A. Cisneros(5)(21)
    
    
    4,709,769
    
    
    
    24.3Hicks, Muse(6)(21)
    
    
    6,940,449
    
    
    
    35.8
    
    
    
    
    
    
    
    
    
    
    
    1Thomas O. Hicks(6)
    
    
    6,940,449
    
    
    
    35.8IMPSAT Fiber Networks, Inc(21)(22)
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    1Militello Limited(21)(22)
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    1RC Limited(21)(22)
    
    
    79,236
    
    
    
    *
    
    
    
    
    
    
    
    1SLI.com, Inc.(21)(22)
    
    
    489,417
    
    
    
    2.5
    
    
    
    
    
    
    
    1Tower Plus International(21)(22)
    
    
    133,538
    
    
    
    *
    
    
    
    
    
    
    
    1Roberto Vivo-Chaneton(7)(21)(22)
    
    
    993,779
    
    
    
    4.7
    
    
    
    
    
    
    
    1Carlos Bardasano (8)
    
    
    5,000
    
    
    
    *Eric C. Neuman(9)
    
    
    7,500
    
    
    
    *Ana Teresa Arismendi (10)
    
    
    5,465
    
    
    
    *Gabriel Montoya (11)
    
    
    5,865
    
    
    
    *John A. Gavin (12)
    
    
    5,000
    
    
    
    *Ricardo Verdaguer(13)
    
    
    135,000
    
    
    
    *Frank Feather (14)
    
    
    5,000
    
    
    
    *
 48




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##### Table of Contents



PercentageNumber of
    
    of Class A
    
    Number of
    
    Number of
    
    Number ofClass A
    
    common
    
    Class C
    
    Class F
    
    Class Hcommon
    
    shares
    
    Common
    
    Common
    
    CommonBeneficial Owner
    
    shares
    
    (%)(1)
    
    Shares
    
    Shares
    
    SharesJosé Antonio Rìos (15)
    
    
    5,000
    
    
    
    *Emilio Romano (16)
    
    
    5,000
    
    
    
    *Luis Villanueva (17)
    
    
    5,000
    
    
    
    *Marcos Clutterbuck (18)
    
    
    
    
    
    
    *Ralph Haiek
    
    
    7,400
    
    
    
    *José Antonio Ituarte
    
    
    
    
    
    
    *Roberto Cibrian Campoy(19)(20)(21).

    
    
    79,236
    
    
    
    *
    
    
    
    
    
    
    
    1Amaya Ariztoy
    
    
    865
    
    
    
    *Mariano Julian Varela
    
    
    2,433
    
    
    
    *Marcelo Zuniga
    
    
    
    
    
    
    *Javier Urrutia
    
    
    
    
    
    
    *All directors and executive
officers as a group (19 persons)
    
    
    1,188,408
    
    
    
    6.4
   *
    
    indicates less than 1%  (1)
    
    Calculated according to Rule 13d-3(d) of the Securities Exchange Act of
1934. Under Rule 13d-3(d), shares not outstanding which are subject to
options, warrants, rights or conversion privileges exercisable within 60
days are deemed outstanding for the purpose of calculating the number and
percentage owned by the holder of the options, warrants, rights or
conversion privileges but not deemed outstanding for the purpose of
calculating the percentage owned by any other person listed.(2)
    
    Excludes 4,709,769 Class A common shares owned by 1947 Carlyle
Investments LLC, of which 1945 Carlton Investments LLC disclaims
beneficial ownership. Includes 710,134 Class A common shares owned by the
estate of Carlos E. Cisneros. Carlos E. Cisneros had granted 1945 Carlton
Investments LLC and 1947 Carlyle Investments LLC the right to vote the
710,134 Class A common shares pursuant to an Irrevocable Proxy and Right
of First Offer Agreement. 1945 Carlton Investments LLC is indirectly
owned by a trust established by Gustavo A. Cisneros primarily for the
benefit of himself and members of his family. Gustavo A. Cisneros
disclaims beneficial ownership of the shares owned by 1947 Carlyle
Investments LLC. Both 1945 Carlton Investments LLC and 1947 Carlyle
Investments LLC are members of the Cisneros Group of Companies.(3)
    
    Excludes 4,709,769 Class A common shares owned by 1945 Carlton
Investments LLC, of which 1947 Carlyle Investments LLC disclaims
beneficial ownership. Includes 710,134 Class A common shares owned by the
estate of Carlos E. Cisneros. Carlos E. Cisneros had granted 1947 Carlyle
Investments LLC and 1945 Carlton Investments LLC the right to vote the
710,134 Class A common shares pursuant to an Irrevocable Proxy and Right
of First Offer Agreement. 1947 Carlyle Investments LLC is indirectly
owned by a trust established by Ricardo J. Cisneros primarily for the
benefit of himself and members of his family. Ricardo J. Cisneros
disclaims beneficial ownership of the shares to be owned by 1945 Carlton
Investments LLC. Both 1947 Carlyle Investments LLC and 1945 Carlton
Investments LLC are members of the Cisneros Group of Companies.(4)
    
    Includes 4,709,769 Class A common shares owned by 1947 Carlyle
Investments LLC. Includes 710,134 Class A common shares owned by the
estate of Carlos E. Cisneros. Carlos E. Cisneros had granted 1945 Carlton
Investments LLC and 1947 Carlyle Investments LLC the right to vote the
710,134 Class A common shares pursuant to an Irrevocable Proxy and Right
of First Offer Agreement.(5)
    
    Includes 4,709,769 Class A common shares owned by 1945 Carlton
Investments LLC. Includes 710,134 Class A common shares owned by the
estate of Carlos E. Cisneros. Carlos E. Cisneros had granted 1945 Carlton
Investments LLC and 1947 Carlyle Investments LLC the right to vote the
710,134 Class A common shares pursuant to an Irrevocable Proxy and Right
of First Offer Agreement.(6)
    
    Includes:  
    
    5,589,525 Class A common shares and 1 Class H Common
Shares, held of record by Hicks, Muse, Tate & Furst Latin America
Fund, L.P.;
    
    1,014,813 Class A common shares held of record by
Hicks, Muse, Tate & Furst Latin America Private Fund, L.P.;
    
    217,360 Class A common shares held of record by HMLA 1-SBS Coinvestors, L.P.; 49




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##### Table of Contents




    
    107,945 Class A common shares held of record by HMTF Holdings;
    
    807 Class A common shares held of record by Mr. Hicks; and
    
    Options to acquire 10,000 Class A common shares granted
to Mr. Neuman and Mr. Clutterbuck under the Claxson 2001 Share
Incentive Plan, which were assigned by Mr. Neuman and Mr.
Clutterbuck to Hicks, Muse Co. Partners, L.P. on October 7, 2003.  Mr. Hicks is the sole shareholder, director and an executive officer of
Hicks, Muse, Latin America Fund I Incorporated, which is the ultimate
general partner of Hicks, Muse Tate & Furst Latin America Fund, L.P.;
Hicks, Muse Tate & Furst Latin America Private Fund, L.P. and HMLA 1-SBS
Coinvestors, L.P. Accordingly, Mr. Hicks may be deemed to be the
beneficial owner of Class A common shares and Series A Preferred Shares
held by Hicks, Muse, Tate & Furst Latin America Fund, L.P.; Hicks, Muse,
Tate & Furst Latin America Private Fund, L.P.; and HMLA 1SBS
Coinvestors, L.P. John R. Muse, Andrew S. Rosen, Joe Colonnetta, Jack D.
Furst, Dan H. Blanks, Eric C. Neuman, Peter Brodsky and Lyndon Lea are
also executive officers of Hicks, Muse, Latin America Fund I Incorporated
and as such may be deemed to share with Mr. Hicks the power to vote or
dispose of the Class A common shares held by Hicks, Muse, Tate & Furst
Latin America Fund, L.P.; Hicks, Muse, Tate & Furst Latin America Private
Fund, L.P.; HMLA 1-SBS Coinvestors, L.P.; and HMTF Holdings. Each of
Messrs. Hicks, Muse, Rosen, Colonnetta, Furst, Blanks, Neuman, Brodsky
and Lea disclaims the existence of a group and disclaims beneficial
ownership of Class A common shares not owned of record by him.  (7)
    
    Includes 473,691 Class A common shares which Militello Limited, an entity
wholly owned by Roberto Vivo-Chaneton, transferred to Mr. Vivo-Chaneton on
December 30, 2002. In addition, it includes 6,250 Class A common shares
issued to Sarandi Comunicaciones S.A., which is also an affiliate of Mr.
Vivo-Chaneton. Mr. Vivo-Chaneton disclaims beneficial ownership of all
            shares owned by Sarandi Comunicaciones S.A. Includes options to acquire
111,203 shares of Class A common shares granted to Mr. Vivo-Chaneton under
the Claxson 2001 Share Incentive Plan which are currently exercisable.(8)
    
    Consists of options to acquire 5,000 shares of Class A common shares
granted to Mr. Bardasano under the Claxson 2001 Share Incentive Plan which
are currently exercisable.(9)
    
    Consists of 7,500 Class A common shares held directly by Mr. Neuman.
Excludes options to acquire 5,000 shares of Class A common shares granted
to Mr. Neuman under the Claxson 2001 Share Incentive Plan which are
currently exercisable but were assigned to Hicks, Mose Co. Partners L.P.
on October 7, 2003. Mr. Neuman is an executive officer of Hicks, Muse,
Latin America Fund I Incorporated, and accordingly may be deemed to be the
beneficial owner of Class A common shares held by Hicks, Muse, Tate &
Furst Latin America Fund, L.P.; Hicks, Muse, Tate & Furst Latin America
Private Fund, L.P., HMLA 1-SBS Coinvestors, L.P., and HMTF Holdings. Mr. Neuman disclaims the
existence of a group and disclaims beneficial ownership of Class A common
            shares not owned of record by him.(10)
    
    Includes options to acquire 5,000 Class A common shares granted to Mrs.
Arismendi under the Claxson 2001 Share Incentive Plan which are currently
exercisable.(11)
    
    Includes options to acquire 5,000 Class A common shares granted to Mr.
Montoya under the Claxson 2001 Share Incentive Plan which are currently
exercisable.(12)
    
    Consists of options to acquire 5,000 Class A common shares granted to Mr.
Gavin under the Claxson 2001 Share Incentive Plan which are currently
exercisable.(13)
    
    Includes beneficial ownership of 130,000 Class A common shares
attributable to Ricardo Verdaguer as a result of his controlling interest
in Tower Plus International and options to acquire 5,000 shares of Class A
common shares granted to Mr. Verdaguer under the Claxson 2001 Share
Incentive Plan which are currently exercisable.(14)
    
    Consists of options to acquire 5,000 Class A common shares granted to Mr.
Feather under the Claxson 2001 Share Incentive Plan which are currently
exercisable.(15)
    
    Consists of options to acquire 5,000 Class A common shares granted to Mr.
Rios under the Claxson 2001 Share Incentive Plan which are currently
exercisable.(16)
    
    Consist of options to acquire 5,000 Class A common shares granted to Mr.
Romano under the Claxson 2001 Share Incentive Plan which are currently
exercisable.(17)
    
    Consist of options to acquire 5,000 Class A common shares granted to Mr.
Villanueva under the Claxson 2001 Share Incentive Plan which are currently
exercisable.(18)
    
    Excludes options to acquire 5,000 Class A common shares granted to Mr.
Clutterbuck under the Claxson 2001 Share Incentive Plan which are
exercisable within 60 days and were assigned to Hicks, Muse Co. Partners
L.P. on October 7, 2003.(19)
    
    Includes 79,236 Class A common shares held through RC Limited, which is
wholly owned by Roberto Cibrian Campoy and his wife. 50




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##### Table of Contents



(20)
    
    Certain shareholders entered into an agreement dated as of September 21,
2001 (the Holdco Agreement). Pursuant to Section 2.1 of the Holdco
Agreement, the Company will not propose and the board of directors of the
Company will not approve or recommend, any amendment of the Amended and
Restated Memorandum of Association or Amended and Restated Articles of
Association of the Company which materially adversely affects the rights
of the shareholder under the Holdco Agreement, without the prior written
consent of the shareholder.(21)
    
    Each holder of Class F Common Shares, which is a party to the Holdco
Agreement, must consult with, and take into account the views of Luis H.
Moreno, III in exercising the voting rights of those shares. Voting See Item 10, Section B Memorandum and Articles of Association. B. Related Party Transactions The following discussion presents related party transactions involving
Claxson, 1945 Carlton/1947 Carlyle (Cisneros Group), Hicks Muse and/or El
Sitio, including their respective affiliates, and our executives/employees and
directors for the period beginning January 1, 2003 through June 15, 2004. DirecTV Latin America distributes all of our channels pursuant to
affiliation agreements. Members of the Cisneros Group of Companies own
approximately 21% of DirecTV Latin America which currently distributes the
following channels on a pan-regional basis: Playboy TV, Spice Live, Venus,
Infinito, MuchMusic, the DMX MUSIC Latin America channels, Retro, FTV, Cl@se
and HTV and the recently launched pay-per-view channel, the G Channel. DirecTV
Latin America also distributes Space and I.Sat in the Southern Cone. On
February 2004 we entered into new affiliation agreements with DirecTV Latin
America. The affiliation agreements expire in December 2005 for our basic
channels and in December 2004 for our premium and pay-per-view channels and
grant DirecTV Latin America the right to distribute our channels in certain
Latin American markets in exchange for a per subscriber, local currency
denominated license fee for our basic channels and a percentage of revenues for
our premium channels. Imagen Satelital and CableVisión S.A., a cable operator in Argentina,
entered into an affiliation agreement effective as of January 1, 2003 through
December 31, 2005. Funds affiliated with Hicks, Muse, Tate & Furst
Incorporated own approximately 50% of CableVisión. The affiliation agreement
provides for the distribution of the following channels: Space; I.Sat; Retro; Infinito; FTV; MuchMusic and
Crónica for the basic tier; Playboy and Venus as a premium channels and
pay-per-view service. In Venezuela, a number of Claxsons pay television channels are
distributed pursuant to an affiliation agreement between a subsidiary of
Claxson and Corporación Telemic S.A., which is also known as Intercable. A
fund affiliated with Hicks, Muse, Tate & Furst Incorporated has a significant
equity interest in Intercable. Due to the currency devaluation and foreign
currency control system imposed in Venezuela, the parties renegotiated the
agreement to provide that the license fees be paid in local currency. In
January 2004, we renewed this affiliation agreement until December 2004. For the year ended December 31, 2003, we realized approximately U.S. $16.4
million in aggregate revenues from our affiliation agreements with DirecTV
Latin America, CableVisión and Intercable. In May 1997, Imagen Satelital entered into an agreement with Venevision
International LLC, a member of the Cisneros Group, for the sub-license of
various movie titles distributed by BMG Ariola Argentina, S.A. for broadcast
and pay television distribution in Argentina, Uruguay, Paraguay and Chile. As
of June 2001, Imagen Satelital had paid only a portion of the license fees due
under the program license agreement. BMG, Imagen Satelital and Venevision
International entered into a release and settlement agreement on July 24, 2001
under which BMG agreed to grant Imagen Satelital a license to use the movie
titles for six years. In 2003, Imagen Satelital paid U.S.$500,503 to BMG to
settle the outstanding disputes. On June 19, 2000, Playboy TV International entered into a program license
agreement (as amended by letters dated July 27, 2001 and October 4, 2001) with
Venevision International LLC, a member of the Cisneros Group, pursuant to which
Venevision International distributes certain Playboy television programs on
broadcast television in Latin America, Portugal and Spain. The license fee was
U.S.$525,000 for 2003. This Agreement was assigned to Playboy TV Latin America
as part of the Playboy TV Latin America restructuring. 51




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On March 28, 2001, Chilevisión entered into an agreement to license to
Venevision International Corporation, a member of the Cisneros Group, rights to
broadcast and pay television distribution of certain original programming to be
produced by Chilevisión during a three year, renewable term. The distribution
rights cover the United States, Latin America, the Caribbean and Spain. The
license fee was U.S.$65,000. The contract was not renewed upon expiration. In March 2004, Chilevision licensed from Venevision International the
broadcast rights for a television series for a license fee of up to
U.S.$75,000. Venevision International is a member of the Cisneros Group. From time to time, the Kitchen, our dubbing and post production facility
in Miami provides dubbing and other post production services to Venevision
International, a member of the Cisneros Group, for a fee negotiated on a case
by case basis. A subsidiary of Claxson is the exclusive affiliate sales representative of
Venevision Continental, a pay television channel that is wholly owned by
members of the Cisneros Group. With the exception of DirecTV Latin America, for
which Claxson receives no commission, Claxson receives a 20% commission for
affiliate sales. In addition, Claxson sub-leases satellite space for the
carriage of Venevision Continental as well as office and studio space. A
subsidiary of Claxson is also the advertising sales representative of
Venevision Continental. Effective January 1, 2003, Claxson sold the Cl@se channel to the Cisneros
Group for U.S. $208,000. As part of the transaction, Claxson will continue to
provide services to Cl@se, including:  
    
    affiliate sales services for the representation of the Cl@se
channel in sales to cable operators in Latin America in exchange for
a 20% sales commission. In June 2004, Claxson ceased to be the
sales agent for Chase and will only provide administrative sales
support in exchange for a 5% commission based on sales.
    
    creative services for on- and off-air promotions for an annual fee;
    
    certain management services for an annual fee;
    
    program origination, playback, signal distribution, satellite
transponder, uplink and other technical services for an annual fee;
and
    
    sublease of office space. Simultaneously with the closing of this transaction, the parties entered into
various agreements in order to set off and cancel the outstanding liabilities
between Claxson and its subsidiaries on the one hand and the Cisneros Group and
its affiliates on the other, which resulted in the Cisneros Group having a
total credit balance with Claxson of US$1,118,429. The parties also agreed
that Cisneros Group and/or Cl@se are entitled to offset any fees, costs or
expenses payable in connection with the services to be rendered by Claxson
described above against an equal amount of such Cisneros Group credit balance. On June 5, 2003, our subsidiary, El Sitio Management S.A., and America On
Line Latin America, a company in which the Cisneros Group has an equity
interest, entered into a strategic alliance agreement covering the following:  
    
    the joint provision of a paid, personal listing and
matchmaking service under the brand Cupido VIP;
    
    El Sitios operation of virtual, web-based interactive chat
rooms to be used by America On Line Latin Americas subscribers and
general Internet users under the AOL and El Sitio brands; and
    
    the launch of a new web-based personal listing service,
provided to general Internet users for a monthly fee, on a
subscription basis, leveraging the brand Cupido, and combining the
databases of Amor and Cupido existing services to create a new joint
database. The revenues generated will be distributed based on a 50/50 sharing formula
minus certain costs incurred by the parties. 52




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On July 1, 2003, Imagen Satelital (successor in interest to El Sitio
Management, S.A.) entered into an agreement with Cablevision, S.A. (owner and
operator of the subscriber based broadband service known as Fibertel). Under
such agreement Fibertel pays Imagen $5,000 pesos per month and 90% for the
revenues derived from all online and pay-per-view transactions. Funds
affiliated with Hicks, Muse, Tate & Furst Incorporated hold an approximately
50% ownership interest in Cable Visión S.A. Under the terms of the memorandum
of understanding, Fibertel will guarantee to Claxson payment of 100% of all
revenue derived from the first 1,000 subscribers to Fibertels online games
service. In addition, Fibertel would pay to Claxson 50% of all revenue derived
from all online games subscribers beyond the first 1,000. On September 21, 2001, our Uruguayan subsidiary executed a five-year lease
and co-management agreement for the operation of three radio stations owned by
Sarandi Communications, S.A: AM 690 (Sarandi),AM 890 (Sport),and FM 91.9
(Music One,today known as Radio Disney). Our chairman of the board and chief
executive officer, Roberto Vivo-Chaneton and one of the beneficial owners of
one of our Class F shares of common stock, Guillermo Liberman (the owner of
SLI.com), each owns a 25% equity interest in Sarandi. We have also negotiated
an option with Sarandi which would grant us the right to acquire the company
holding the Sarandi radio concession. Should we choose to exercise the option,
the option price may be paid, at our election, in cash and/or our Class A
common shares, which will be valued at the market price of the shares at the
time of exercise and all amounts previously paid by us in lease monthly
payments will be applied towards the option payment. On August 1, 2003, we
renegotiated the terms and conditions of the option and the lease and
co-management agreement. Pursuant to these renegotiations, we reduced the
original exercise price of the option by 50% (the ultimate option exercise
price will depend on when it is exercised, ranging from US$3,346,000 to
US$3,793,200) and reduced the monthly payments due under the lease and
co-management agreement from $60,000 to $36,000. Claxson has agreed to pay certain advisory fees to 1945 Carlton/1947
Carlyle (our Class C shareholders), Hicks Muse (our Class H shareholders) and
the El Sitio founders (our Class F shareholders) for so long as each such
shareholder owns at least three percent of Claxsons outstanding common shares
during a three year term from September 21, 2001. Claxson is required to pay
to each of 1945 Carlton/1947 Carlyle and Hicks Muse U.S.$150,000 per year and
the El Sitio founders, as a group, U.S.$50,000 per year. On June 14, 2004, the
disinterested directors of the Claxson board of directors approved the renewal
of the existing advisory agreement for an additional 3 year term (from
September 2004 through September 2007). Claxson approved this renewal in
exchange for a waiver and termination of all unpaid and future directors fees
($40,000 annually per director) for those directors designated by Hicks Muse, Cisneros Group and the El Sitio
founders, provided that the Cisneros Group and Hicks Muse are still entitled to
designate up to one director that is not an employee of either company who will
receive director fees for $40,000 per year. Hicks Muse designated Mr. Gavin as
such director. On June 21, 2004, our audit committee and the disinterested directors of
our board approved the issuance of convertible debentures in an amount up to
U.S.$5 million. On July 8, 2004, we executed agreements with Mr. Vivo-Chaneton
(our Chairman and Chief Executive Officer), Mr. Haiek (our Pay Television Chief
Operating Officer) and Mr. Ituarte (our Chief Financial Officer) for the
purchase of U.S.$2.0 million of convertible debentures. These convertible
debentures may be converted to our Class A common shares at a conversion price
of U.S.$3.24 per share (based on the average stock price over the five days
preceding the date the debentures were issued), mature on July 31, 2006 and
bear annual interest at 8.25%. Additionally, in the event that we prepay the
debentures, the investors have the right to receive warrants to purchase shares
of our Class A common shares in an amount equal to the principal amount of the
debenture. Although we have no formal commitment, we are in negotiations with
the Cisneros Group for the sale of the remaining amount of the convertible
debentures that has been approved by our board. We expect to conclude the
funding process in the next 30 days. Commencing on December 2003, our United States based office contracted
local and long distance telephone services and internet connectivity services
from Global Crossing Ltd. Mr. Jose A. Rios, a director of our board, is the
president of international operations for Global Crossing Ltd. Since December 2001, Imagen Satelital receives connectivity services for
nine connections among Claxsons different locations and the Internet from
IMPSAT Fiber Networks. Roberto Vivo-Chaneton, our chairman of the board and
chief executive officer, used to be a director of IMPSAT. Ricardo Vedaguer, a
director of Claxson, is the president and chief executive officer of IMPSAT. C. Interests of Experts and Counsel Not Applicable 53




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Item 8.
    Financial Information A. Consolidated Statements and Other Financial Information The consolidated statements and other financial information required by
Regulation S-X are included in this Annual Report on Form 20-F commencing on
page F-1. Legal Proceedings Except as described below, Claxson is not involved in any material legal
proceedings. Four civil complaints have been filed in the U.S. District Court for the
Southern District of New York against El Sitio, certain of its directors and
principal executive officers, and the underwriters which led El Sitios initial
public offering in December 1999. The complaints, which request that the cases
be certified as class actions, are: Howard M. Lasker, on behalf of himself and
all others similarly situated, vs. El Sitio, Inc., et. al (filed on June 8,
2001 in the U.S. District Court for the Southern District of New York); Bais
Kahana, on behalf of himself and all others similarly situated, vs. El Sitio,
Inc., et. al. (filed on June 12, 2001 in the U.S. District Court for the
Southern District of New York); Shapaour Yavari, on behalf of himself and all
others similarly situated, vs. El Sitio, Inc., et. al. (filed on June 22, 2001
in the U.S. District Court for the Southern District of New York); and Warren
and Frances Foster and Larry Walls, on behalf of themselves and all others
similarly situated, vs. El Sitio, Inc., et al. (filed on July 11, 2001 in the
U.S. District Court for the Southern District of New York). The complaints
allege, among other things, that the prospectus and registration statement for
the initial public offering were materially misleading because they did not
disclose the following alleged actions on the part of the underwriters: (1) the
underwriters solicited and received additional and excessive commissions from
certain investors in exchange for special allocations of common shares in the
initial public offering; and (2) the underwriters entered into agreements with
these investors whereby such investors agreed to purchase additional common
shares of El Sitio in the aftermarket at pre-determined prices, thereby
artificially supporting or inflating the market price of El Sitios common
shares. The claims are alleged under both the U.S. Securities Act of 1933 and
the U.S. Securities Exchange Act of 1934. The complaints seek unspecified
money damages. In August, 2001, the Court ordered that these cases be consolidated for
all pre-trial purposes in In re Initial Public Offering Securities Litigation,
21 MC 92, an intra-district proceeding involving approximately 900 lawsuits
relating to the initial public offerings of approximately 310 companies. In
April 2002, the Court appointed Lead Plaintiffs, and the Lead Plaintiffs filed
a Consolidated Amended Class Action Complaint. In July 2002, we and the other
defendants in the class action filed a motion to dismiss. In November 2002,
the plaintiffs dismissed their claims against our current and former officers
and directors without prejudice. Our motion to dismiss, as well as those of
most of the other defendants in the class action, were denied in February 2003. In April 2003, we were advised that the global settlement discussions
between the Lead Plaintiffs and our insurer (on El Sitios behalf) to resolve
all of the plaintiffs claims against the 310 issuer defendants in the
consolidated proceeding had reached an advanced stage. On May 16, 2003, the
independent directors on our board of directors authorized our management to
allow El Sitio to participate in the proposed settlement. Among other things,
the proposed settlement would result in a broad release of claims against El
Sitio, its officers and directors, and other issuers, and their officers and
directors without a direct financial contribution by El Sitio. The proposed
settlement would require El Sitio to assign to the plaintiffs certain claims it
potentially could bring against its underwriters arising from its initial
public offering, and to release or waive certain other legal rights it may
have, including recovery of attorneys fees spent to date. The proposed
settlement would not release claims that El Sitios underwriters could bring
against El Sitio or its officers, directors, or agents. The settlement is
subject to court approval, and satisfactory finalization of the settlement
papers. Notwithstanding a possible settlement, Claxson believes that the
allegations in the complaint relating to El Sitio and its directors and
principal executive officers are without merit, and have retained counsel to
vigorously defend El Sitio and its directors and principal executive officers
in these cases if necessary. On April 30, 2001, the Brazilian tax authorities (Municipalidade do Sao
Paulo) appealed before the Special Jurisdiction Appellate Court of the State of
Sao Paulo the lower tax court decision that held in favor of our subsidiary,
Osite Informatica Ltda., in a suit for taxes alleged to be due by O Site
Entertenimentos Ltda. in the amount of 1.1 million reals (approximately
U.S.$473,000). Based on preliminary assessments of our Brazilian tax advisors,
we anticipate that this appeal will be dismissed and that the lower court
ruling will be upheld. 54




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On September 15, 2000, New Yetem, S.A. filed a petition, technically
called beneficio de litigar sin gastos requesting a waiver of the mandatory
litigation fee (3% of the amount of the lawsuit) and the right to bring forth a
claim without prior payment of the litigation fee. Such petition was granted
on November 15, 2001. A favorable response to such petition bears no relation
to the outcome of the potential claim that could subsequently be filed. On
November 2, 2000, in light of the press coverage regarding the announcement of
the merger transaction, New Yetem requested that the judge compel legal
representatives of one of our subsidiaries, to provide details on the
transaction since a merger could jeopardize New Yetems ability to collect from
El Sitio Argentina in the event of a final court decision. The judge rejected
this petition, and New Yetem appealed five days later. The Camara Nacional de
Apelaciones en lo Comercialupheld the lower courts decision in favor of El
Sitio Argentina on February 7, 2001. On June 25, 2002, Claxson was formally
served with the summons and complaint in our executive offices in Buenos Aires,
claiming U.S.$14 million in damages. We responded to the claim on August 2002
by requesting the judge to reject such claim. Currently the case is in the
discovery phase. We believe New Yetems claims are without merit.
Nonetheless, in the unlikely event New Yetem should prevail, we believe the
actual damages are likely to be significantly lower than the U.S.$14 million
claimed. On June 17, 2003, Imagen Satelital, received a police search order
issued by a lower Criminal Court in Buenos Aires to seek information as part of
a criminal accusation against Mr. Vivo, our chief executive officer, and Mr.
Cibrian, our executive vice president of our Broadband and Internet division.
Imagen provided the requested information. The initial phase of a criminal
investigation is confidential and therefore we have no further information
about the alleged charges or merits thereof. The Chilean Antitrust General Attorney was conducting a confidential,
general investigation regarding the level of concentration in the radio
broadcasting industry in Chile. On June 27, 2001, the Commission asked Radio
Chile to provide certain information regarding its business and operations.
Radio Chile complied with this request and submitted the requested information
on September 11, 2001. No further petition or notice has been received by
Radio Chile, and we believe that this investigation has been closed. If the Chilean Antitrust Commission were to reopen its investigation and
find an unacceptable level of concentration in the radio broadcasting industry,
it may order a variety of relief measures, including one or more of the
following:  
    
    request that the Chilean Antitrust General Attorney monitor
the relevant market to prevent anti-competitive practices;
    
    order the dominant players to seek prior approval for further
mergers, acquisitions or changes in control;
    
    order the dominant players to discontinue or avoid activities which raise antitrust concerns;
    
    order the divestiture of certain assets; and
    
    impose fines in Chilean currency up to the equivalent of approximately U.S.$480,000. Claxson cannot predict the outcome of the investigation if it is reopened
or whether the investigation will be reopened or will lead to further
information requests or other actions by the Commission that might affect Radio
Chile. On April 23, 2002, SUBTEL, the Chilean telecommunications regulatory
agency, filed an administrative complaint against Radio Chile alleging that
Radio Chile had illegally broadcast its signal in Rengo, Chile, without a
permit. The possible penalties for such a violation include either the
imposition of a fine (US$ 5,000) or the loss of the concession to broadcast in
that specific location. Both penalties are appealable before the Chilean
Supreme Court. Although Claxson cannot predict the outcome of this complaint,
Claxson does not believe that this allegation has any merit. On April 30, 2002, we announced that our subsidiary Imagen Satelital, S.A.
would not make an interest payment on May 1, 2002 on its 11% Senior Notes due
2005. On November 8, 2002, we successfully completed an exchange offer and
consent solicitation with respect to 93.1% of the outstanding 11% Senior Notes
due 2005 (the Old Notes). Pursuant to the exchange offer, we issued
U.S.$41.3 million principal amount of our 8.75% Senior Notes due 2010 in
exchange for U.S.$74.5 million principal amount of the Old Notes. Immediately
following the exchange offer and consent solicitation, U.S.$5.5 million
principal amount of the Old Notes remained outstanding. 55




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As of June 1, 2003,
all but U.S.$2.3 million of the remaining principal amount of the Old Notes has
been exchanged. The holders of some of these outstanding Old Notes filed
various lawsuits, some with preventative injunctions, to collect certain
principal and/or interest payments for the Old Notes, including a petition for
the bankruptcy of Imagen. As of June 2004, we had settled most of these
lawsuits and claims and were not aware of any claims related to the Old Notes.
Nonetheless, it is possible that if we are unable to successfully negotiate an
acceptable exchange offer with the remaining holders of the Old Notes that they
will commence proceedings against us which would negatively impact our
financial performance. In December 2003, due to Chilevisións use of hidden camera recordings
made and/or broadcast by Chilevisión as part of its investigative reporting on
high profile news of local interest, certain officers and journalists of
Chilevisión, including Chilevisións then executive director, Jaime de Aguirre,
were named the subject of several criminal investigations in Chile. No formal
criminal charges have been brought against any of Chilevisións employees and
no civil actions have been filed against Chilevisión or its employees.
However, since Chilean regulations prohibit any person from serving as an
executive director of a television station who is the subject of a criminal
action Chilevisións then executive director, Jaime de Aguirre, has been
temporarily replaced with a new executive director pending the outcome of the
investigation. However, Mr. Aguirre continues to provide certain services to
our Chilean broadcast division as a consultant. These proceedings have been of
high profile in the Chilean media and although we cannot predict their outcome,
we believe that the allegations are without merit and have retained counsel to
vigorously defend Chilevisión and its employees. Dividend Policy Subject to the prior rights of any series of shares that may be issued in
the future, holders of Class A common shares are entitled to receive, ratably,
dividends that are declared by our board of directors from funds legally
available therefor and are entitled to share, ratably, in all our assets
available for distribution to holders of our Class A common shares upon the
liquidation, dissolution or winding up of our affairs. B. Significant Changes No significant change, other than as otherwise described in this Form
20-F, has occurred in our operations since the date of our Form 6-K filed with
the Securities and Exchange Commission on May 27, 2003. 
  Item 9.
    The Offer and Listing A. Listing Details Listing Details The following table sets forth, for the periods indicated, the reported high
and low prices for our Class A common shares, as reported by Nasdaq for the
Nasdaq National Market prior to June 12, 2001, by Nasdaq for the Nasdaq
SmallCap Market from June 12, 2001 until December 17, 2002 and the OTC Bulletin
Board thereafter. Sales PricesFiscal Year Ended December 31,
    
    High
    
    Low2001
    
    
    U.S.$3.2344
    
    
    
    U.S.$1.42192002
    
    
    1.4000
    
    
    
    0.06002003
    
    
    3.0500
    
    
    
    0.1600
 56




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Sales PricesHigh
    
    Low2002First Quarter
    
    
    1.4063
    
    
    
    0.3125Second Quarter
    
    
    0.4400
    
    
    
    0.0600Third Quarter
    
    
    0.3600
    
    
    
    0.0700Fourth Quarter
    
    
    0.9900
    
    
    
    0.06002003First Quarter
    
    
    0.2900
    
    
    
    0.2300Second Quarter
    
    
    0.5700
    
    
    
    0.1600Third Quarter
    
    
    1.0000
    
    
    
    0.3300Fourth Quarter
    
    
    3.0500
    
    
    
    0.55002004First Quarter
    
    
    6.3500
    
    
    
    2.6000Second Quarter
    
    
    5.8000
    
    
    
    2.5000
 The following table sets forth, for the most recent six months, the high and
low prices for the Class A common shares, as recorded by the OTC Bulletin
Board. Sale PricesHigh
    
    LowJune 2004
    
    
    U.S.$3.9500
    
    
    
    U.S.$3.0000May 2004
    
    
    5.2000
    
    
    
    2.5000April 2004
    
    
    5.8000
    
    
    
    4.7000March 2004
    
    
    6.3500
    
    
    
    4.1500February 2004
    
    
    4.9000
    
    
    
    3.1000January 2004
    
    
    4.6000
    
    
    
    2.6000
 B. Plan of Distribution Not Applicable C. Markets Our Class A common shares are currently quoted and traded on the OTC
Bulletin Board (ticker symbol: XSON). Our Class A common shares were first
listed and began trading on The Nasdaq National Market on September 21, 2001
immediately following the consummation of the merger transaction. On June 12,
2002, our Class A common shares were transferred to The Nasdaq SmallCap Market
and on December 18, 2002 our Class A common shares were transferred to the OTC
Bulletin Board. D. Selling Shareholders Not Applicable E. Dilution Not Applicable F. Expense of the Issue Not Applicable 
  Item 10.
    Additional Information A. Share Capital Not Applicable 57




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B. Memorandum and Articles of Association Register Claxson is registered with the Registrar of Companies of the British
Virgin Islands IBC No. 412275. Our registered office is located at Romasco
Place, P.O. Box 3140, Wickhams Cay I, Road Town, Tortola, British Virgin
Islands. Corporate Object and Purpose Section 4 of our amended and restated memorandum of association states
that our object is to engage in any act or activity that is not prohibited
under any laws of the British Virgin Islands. To that end, Claxson has all
such powers permitted by the laws of the British Virgin Islands to perform all
acts and engage in all activities necessary or conducive to the conduct,
promotion or attainment of the object of the company. Board of Directors Our board of directors is made up of 12 directors. Our amended and
restated articles of association require that the board consists of a minimum
of 11 directors and a maximum of 12 directors. Members of the board of
directors are appointed at the annual general meeting of shareholders and are
elected for a period of one fiscal year, at the end of which they may be
re-elected or replaced in accordance with the amended and restated articles of
association. The amended and restated articles of association do not establish
any requirements or provisions regarding age limits for directors retirement,
nor do they require a number of shares a director must own to qualify for the
position. Our amended and restated articles of association further provide that our
board of directors has all the power of the company to borrow money and to
mortgage or charge its undertakings and property thereof, to issue debentures,
debenture stock and other securities whenever money is borrowed or as security
for any debt, liability or obligation of Claxson or any third party. A
director who has an interest in a particular business to be considered at a
meeting of the board of directors, may be present at the respective meeting
that approves the agreement or transaction, and may vote for that purpose, if
the material facts of each director interest in the agreement or transaction
are disclosed in good faith. Our amend and restated articles of association do not establish the
compensation to be paid to the members of the board of directors and the
executive officers. The compensation of all officers are to be determined by
the compensation committee. The compensation committee has full power and
authority to establish compensation for our officers and recommend compensation
levels for the directors, employees and consultants of Claxson. Rights, Preferences and Restrictions Attaching to Each Class of Shares Dividends Subject to the prior rights of any series of shares that may be issued in
the future, holders of Class A common shares are entitled to receive, ratably,
dividends that are declared by the board of directors from funds legally
available thereof. The holders of the Class C, Class F and Class H common
shares are also entitled to receive such dividends as the board of directors
may from time to time declare pari passu on the respective shares. Voting Rights The holders of Class A common shares are entitled to one vote for each
share held of record on all matters submitted to a vote of our shareholders.
Cumulative voting is not permitted. The holders of Class C, Class F and Class H
common shares are entitled to special rights with respect to the designation of
directors as follows:  
    
    four directors to be designated by 1945 Carlton/1947 Carlyle,
as the holders of the Class C common shares (Class C Group);
    
    one director designated by the El Sitio founders, as the
holders of the Class F common shares (Class F Group); 58




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
    
    three directors to be designated by Hicks Muse, as the holder
of the Class H common share (Class H Group); and
    
    one director elected by a resolution of directors who shall
also be the chief executive officer of the company. Any of our designed group of shareholders that has a right to designate
directors to serve on the board of directors will lose those rights as follows:  
    
    when the shareholder owns less than 25% of the outstanding
common shares, the shareholder would be able to designate two
directors;
    
    when the shareholder owns less than 15% of outstanding common shares, the shareholder could designate one director; and
    
    if the shareholder owns less than 3% of the outstanding
common shares, the shareholder would not have any right to designate
directors to our board of directors. Prior to a groups reduction in ownership percentage and loss of the right
to elect directors attributable to the applicable group, the Class C Group,
Class H Group and Class F Group will be able to remove any director elected by
such group, and, in the event of such removal, will have the right to appoint a
replacement director. So long as a group owns 3% or more, directors designated
by that group may only be removed by the respective group which elected them to
board. Any transaction involving Claxson and having in excess of U.S.$250,000 in
which a group (or any affiliate of, or person related to, a member of a group)
has an interest requires the approval of the majority of directors who were not
elected solely by such group. Rights to Share in Profits As noted above, the holders of common shares have the right to participate
in our profits. Claxson may declare and pay dividends, but the dividends may
only be declared and paid out of the surplus. The directors may, before
declaring any dividend, set aside out of the profits such sum as they deem
proper as a reserve fund and may invest the sum set aside as a reserve. Redemption and Liquidation Rights Class A common shares are subject to redemption with the consent of the
shareholders whose shares are to be redeemed for a fair value, except that
Class A common shares owned by an entity for which more than 50% of the voting
shares of such entity are owned by Claxson will be for any price at our option
and without consent of the holders thereof. On the date on which the holder of
the Class C, Class F and Class H common shares ceases to own 3% or more of our
outstanding common shares, such shares are subject to redemption, purchase or
acquisition for par value at our option. Each of the classes of common share will be entitled, pari passu, to share
pro rate in the surplus assets, in the event of a winding-up or dissolution of
Claxson, whether voluntary or involuntary. Procedures to Change the Rights of Shareholders The rights attached to any class or series (unless otherwise provided by
the terms of issuance of the shares of that class or series) may, whether or
not Claxson is being wound up, be varied with written consent of the holders of
not less than two-thirds of the issued shares of that class or series and of
the holders of not less than two-thirds of the issued shares of any other class
or series of shares which may be affected by such variation. Ordinary and Extraordinary Shareholders Meeting Our amended and restated articles of association establish that a meeting
of the shareholders must be called by the board of directors or at the request
of the holders of shares representing 50% or more of the outstanding voting
shares of Claxson. There is no distinction between an ordinary meeting and an
extraordinary meeting. The meetings shall be presided by the chairman of the
board. 59




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Any shareholder may appoint any person as its duly authorized
representative at a meeting by granting a proxy pursuant to the provisions of
the amended and restated articles of association. Quorum for a meeting of shareholders requires that no less than 50% of the
votes of the shares or class or series of shares entitled to vote be present in
person or by proxy. If within two hours from the time appointed for the
meeting a quorum is not present, the meeting, if convened upon the requisition
of the shareholders, will be dissolved; in any other case, the meeting will
stand adjourned to the next business day as determined by the directors. If at
the adjourned meeting one-third or more of the votes of the shares or class or
series of shares entitled to vote are present in person or by proxy, those
present will constitute quorum; if less than one-third of the votes are
present, the meeting will be dissolved. Decisions are adopted by a resolution approved at a duly convened and
constituted meeting of the shareholders by a simple majority vote of the votes
of the shares or the votes of each class or series of shares entitled to vote
thereon. Limitations to Own Securities Shares of Class C, Class F and Class H common shares may not be
transferred other than to a corporate affiliate of the transferee group who
agrees to be bound by the Holdco Agreement, which Holdco Agreement has been
previously filed as Annex B to our Registration Statement on Form F-4
(Registration No. 333-13062) filed with the Securities and Exchange Commission
on August 15, 2001. There are no legal limitations to own securities or
exercise voting rights by non-residents or foreign shareholders. Differences in Applicable Law Enforceability of Certain Civil Liabilities We are an international business company organized under the laws of the
British Virgin Islands. Many of our directors, officers and controlling persons
and some of the experts named in this annual report reside outside the United
States and all or a significant portion of our assets and of these persons are
located outside the United States. As a result, it may not be possible for
investors to effect service of process within the United States upon these
persons or to enforce against us or these persons in the United States any
court judgments predicated upon the civil liability provisions of the U.S.
federal securities laws. We have been advised by Conyers Dill & Pearman, our
British Virgin Islands counsel, that there is doubt as to the enforceability,
in original actions in British Virgin Islands courts, of liabilities predicated solely on the U.S. federal securities
laws and as to the enforceability in British Virgin Islands courts of judgments
of U.S. courts obtained in actions predicated upon the civil liability
provisions of the U.S. federal securities laws. Consequently, our shareholders
may be effectively precluded from pursuing remedies under the U.S. federal
securities laws against us or such persons. We have been informed by Conyers Dill & Pearman that the United States and
the British Virgin Islands do not have a treaty providing for reciprocal
recognition and enforcement of judgments of U.S. courts in civil and commercial
matters and that a final judgment for the payment of money rendered by any
general or state court in the United States based on civil liability, whether
or not predicated solely upon the U.S. federal securities laws, would, not be
automatically enforceable in the British Virgin Islands. We have also been
advised by Conyers Dill & Pearman that the courts of the British Virgin Islands
would recognize as a valid judgment, a final and conclusive judgment in
personam obtained in the U.S. courts against us under which a sum of money is
payable (other than a sum of money payable in respect of multiple damages,
taxes or other charges of a like nature or in respect of a fine or other
penalty) and would give a judgment based thereon provided that (i) such courts
had proper jurisdiction over the parties subject to such judgment, (ii) such
courts did not contravene the rules of natural justice of the British Virgin
Islands, (iii) such judgment was not obtained by fraud, (iv) the enforcement of
the judgment would not be contrary to the public policy of the British Virgin
Islands, (v) no new admissible evidence relevant to the action is submitted
prior to the rendering of the judgment by the courts of the British Virgin
Islands and (vi) there is due compliance with the correct procedures under the
laws of the British Virgin Islands. A British Virgin Islands court may impose civil liability on us or our
directors or officers in a suit brought in the High Court of the British Virgin
Islands against us or these persons with respect to a violation of U.S. federal
securities laws, provided that the facts surrounding any violation constitute
or give rise to a cause of action under British Virgin Islands law. 60




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Availability of Representative Actions With respect to representative actions, British Virgin Islands courts
ordinarily would be expected to follow English case law precedent, which would
permit a shareholder to commence an action in the name of a company to remedy a
wrong done to a company where the act complained of is alleged to be beyond the
companys corporate power, would result in the violation of its memorandum of
association or articles of association, or is illegal. In addition, the courts
would give consideration to acts that are alleged to constitute a fraud against
the minority shareholders or where an act requires the approval of a greater
percentage of the companys shareholders then actually approved it. C. Material Contracts We have not entered into any material contract, other than contracts
entered into in the ordinary course of business, or as otherwise described
herein in Item 4, Section B Business Overview, Item 7, Section B Related
Party Transactions or provided in the Exhibits to this Form 20-F. D. Exchange Controls There are currently no British Virgin Islands laws or regulations
restricting the import or export of capital or affecting the payment of
dividends or other distributions to shareholders who are non-residents of the
British Virgin Islands. Some of our subsidiaries may be subject from time to time to exchange
control laws and regulations that may limit or restrict the payment of
dividends or distributions or other transfers of funds by those subsidiaries to
us. The existing exchange control laws and regulations affecting our
subsidiaries in Argentina and Chile have had and may continue to have a
material adverse effect on our operations. Please refer to Item 11, Section
Quantitative and Qualitative Discussion About Market Risks for further
discussion on the exchange control laws and regulations in Argentina and Chile. E. Taxation The following summary contains a description of the principal British
Virgin Islands and U.S. federal income tax consequences of the ownership and
disposition of a Claxson Class A common share. It does not purport to be a
comprehensive description of all of the tax considerations that may be relevant
to a holder of those securities. In particular, this summary deals only with holders that will hold Claxson
Class A common shares as capital assets and does not address the tax treatment
of a holder that may be subject to special tax rules, like a bank, an insurance
company, a dealer in securities, a tax-exempt organization, a person that will
hold Claxson Class A common shares in a hedging transaction or as a position in
a straddle, conversion transaction, constructive sale or other integrated
transaction for tax purposes, a person that has a functional currency other
than the U.S. dollar, a person liable for alternative minimum tax, a
partnership (or other entity treated as a partnership for U.S. federal income
tax purposes), a person that owns or is treated as owning 10% or more of
Claxsons voting shares or a person who receives Claxson Class A common shares
pursuant to the exercise of employee share options or otherwise as
compensation. Each holder of a Claxson Class A common share should consult his
own tax advisers as to his personal tax consequences, which may vary for
investors in different tax situations. This summary is based upon tax laws of the British Virgin Islands and the
United States and applicable regulations, judicial decisions and administrative
pronouncements as in effect on the date hereof. Those authorities are subject
to change or new interpretations, possibly with retroactive effect. British Virgin Islands Tax Considerations Claxson is exempt from all provisions of the Income Tax Act of the British
Virgin Islands with respect to all dividends, interests, rents, royalties,
compensation and other amounts payable by it to persons who are not persons
resident in the British Virgin Islands. Persons who are not persons resident
in the British Virgin Islands are also exempt from any capital gains realized
with respect to any of Claxsons shares, debt obligations or other securities,
including its Class A common shares. No estate, inheritance, succession or
gift tax, rate, duty, levy or other charge is payable by persons who are not
persons resident in the British Virgin Islands with respect to any of Claxons
shares, debt obligations or other securities, including its Class A common
shares. There is no comprehensive income tax treaty in force between the
British Virgin Islands and the United States, although there is 61




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a tax
information exchange agreement. U.S. Federal Income Tax Considerations As used below, a U.S. holder is a beneficial owner of a Claxson Class A
common share that is, for U.S. federal income tax purposes,  
    
    a citizen or resident alien individual of the United
States,
    
    a corporation (or an entity treated as a corporation)
organized under the law of the United States, any State thereof
or the District of Columbia,
    
    an estate the income of which is subject to U.S.
federal income tax without regard to its source or
    
    a trust if a court within the United States is able to
exercise primary supervision over the administration of the
trust, and one or more United States persons have the authority
to control all substantial decisions of the trust, or the trust
was in existence on August 20, 1996 and properly elected to
continue to be treated as a United States person. For purposes of this discussion, a non-U.S. holder is not included in
the definition of a U.S. holder. Taxation of Dividends U.S. holders.In general, subject to the PFIC rules discussed below, a
distribution on a Claxson Class A common share will constitute a dividend for
U.S. federal income tax purposes to the extent made from Claxsons current or
accumulated earnings and profits as determined under U.S. federal income tax
principles. If a distribution exceeds Claxsons current and accumulated
earnings and profits, it will be treated as a non-taxable reduction of basis to
the extent of the U.S. holders tax basis in the Claxson Class A common share
on which it is paid, and to the extent it exceeds that basis it will be treated
as capital gain. For purposes of this discussion, the term dividend means a
distribution that constitutes a dividend for U.S. federal income tax purposes. The gross amount of any dividend on a Claxson Class A common share will be
subject to U.S. federal income tax as foreign source dividend income. If a
dividend is paid in a currency other than the U.S. dollar, the amount of the
dividend will be its value in U.S. dollars based on the prevailing spot market
exchange rate in effect on the day the U.S. holder receives the dividend,
whether or not the dividend is converted into U.S. dollars. Any gain or loss
realized on a conversion or other disposition of currency other than the U.S.
dollar generally will be treated as U.S. source ordinary income or loss. For purposes of computing
the limitations on foreign tax credits that apply separately to specific
categories of income, a dividend generally will constitute foreign source
passive income or, in the case of certain holders, financial services
income. However, if Claxson is a United States-owned foreign corporation,
for foreign tax credit limitation purposes, dividends it pays in any year will
be U.S. source income in proportion to the percentage of Claxsons earnings and
profits in that year that are attributable to U.S. sources (provided at least
10% of Claxsons earnings and profits are so attributable). For this purpose,
Claxson will be treated as a United States-owned foreign corporation if 50% or
more of the voting power or value of its shares is owned, directly or
indirectly, by United States persons. A dividend will not be eligible for the
corporate dividends received deduction. Subject to certain exceptions for short-term and hedged positions, a
dividend an individual receives on a Claxson Class A common share before
January 1, 2009 will be subject to a maximum tax rate of 15% if the dividend is
a qualified dividend. A dividend on a Claxson Class A common share will be a
qualified dividend if (i) the Claxson Class A common shares are readily
tradable on an established securities market in the United States, and (ii)
Claxson was not, in the year prior to the year the dividend was paid, and is
not, in the year the dividend is paid, a passive foreign investment company
(PFIC), foreign personal holding company (FPHC) or foreign investment
company (FIC). The Claxson Class A common shares are listed on the OTC
Bulletin Board and thus currently do not qualify as readily tradable on an
established securities market in the United States. The Internal Revenue
Service has stated that it continues to consider whether, for future years,
shares listed on the OTC Bulletin Board will qualify as readily tradable on an
established securities market in the United States and whether any such
qualification should be conditioned on the satisfaction of parameters regarding
minimum trading volume, minimum number of market makers, maintenance and
publication of historical trade or quotation data, issuer reporting
requirements under Securities and Exchange Commission or exchange rules, or
issuer disclosure or determinations regarding PFIC, FPHC or FIC status. Based
on Claxsons audited financial statements and relevant market and shareholder
data, Claxson believes it was not a PFIC or FIC for U.S. federal income tax
purposes for its 2003 62




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taxable year. In addition, based on Clasxons audited
financial statements and its current expectations regarding the value and
nature of its assets, the sources and nature of its income, and relevant market
and shareholder data, Claxson does not anticipate becoming a PFIC or FIC for
its 2004 taxable year. For a discussion of Claxson and the FPHC rules, see
TaxationU.S. Federal Income Tax ConsiderationsForeign Personal Holding
Companies below. The U.S. Treasury has announced its intention to promulgate
rules pursuant to which holders of stock of non-U.S. corporations, and
intermediaries though whom such stock is held, will be permitted to rely on
certifications from issuers to establish that dividends are treated as
qualified dividends. Because those procedures have not yet been issued, it is
not clear whether, if the Claxson Class A common shares become readily tradable
on an established securities market in the United States and otherwise qualify
for the reduced tax rate on dividends, Claxson will be able to comply with
them. Holders of Claxson Class A common shares should consult their own tax
advisers regarding the availability of the reduced dividend tax rate. Non-U.S. holders. A dividend paid to a non-U.S. holder on a Claxson Class
A common share will not be subject to U.S. federal income tax unless the
dividend is effectively connected with the conduct of trade or business by the
non-U.S. holder within the United States (and is attributable to a permanent
establishment or fixed base the non-U.S. holder maintains in the United States
if an applicable income tax treaty so requires as a condition for the non-U.S.
holder to be subject to U.S. federal income taxation on a net income basis on
income from the Claxson Class A common share). A non-U.S. holder generally
will be subject to tax on an effectively connected dividend in the same manner
as a U.S. holder. A corporate non-U.S. holder may also be subject under
certain circumstances to an additional branch profits tax, the rate of which
may be reduced pursuant to an applicable income tax treaty. Taxation of Capital Gains U.S. holders.Subject to the PFIC rules discussed below, on a sale or
other taxable disposition of a Claxson Class A common share, a U.S. holder will
recognize capital gain or loss in an amount equal to the difference between the
U.S. holders adjusted basis in the Claxson Class A common share and the amount
realized on the sale or other disposition, each determined in U.S. dollars.
Any gain a U.S. holder recognizes generally will be U.S. source income for U.S.
foreign tax credit purposes, and, subject to certain exceptions, any loss
generally will be a U.S. source loss. In general, any adjusted net capital gain of an individual in a taxable
year ending before January 1, 2009 is subject to a maximum tax rate of 15%. In
later years, the maximum tax rate on the net capital gain of an individual will
be 20%. The deductibility of capital losses is subject to limitations. Non-U.S. holders.A non-U.S. holder will not be subject to U.S. federal
income tax on gain recognized on a sale or other disposition of a Claxson Class
A common share unless (i) the gain is effectively connected with the conduct of
trade or business by the non-U.S. holder within the United States (and is
attributable to a permanent establishment or fixed base the non-U.S. holder
maintains in the United States if an applicable income tax treaty so requires
as a condition for the non-U.S. holder to be subject to U.S. federal income
taxation on a net income basis on income from the Claxson Class A common
share), or (ii) in the case of a non-U.S. holder who is an individual, the
holder is present in the United States for 183 or more days in the taxable year
of the sale or other disposition and certain other conditions apply. Any
effectively connected gain of a corporate non-U.S. holder may also be subject
under certain circumstances to an additional branch profits tax, the rate of
which may be reduced pursuant to an applicable income tax treaty. Passive Foreign Investment Company Rules A special set of U.S. federal income tax rules applies to a foreign
corporation that is a PFIC for U.S. federal income tax purposes. As noted
above, based on Claxsons audited financial statements and relevant market and
shareholder data, Claxson believes it was not a PFIC for U.S. federal income
tax purposes for its 2003 taxable year. In addition, based on Claxsons
audited financial statements and its current expectations regarding the value
and nature of its assets, the sources and nature of its income, and relevant
market and shareholder data, Claxson does not anticipate becoming a PFIC for
its 2004 taxable year. In general, a foreign corporation is a PFIC if at least 75% of its gross
income for the taxable year is passive income or if at least 50% of its assets
for the taxable year produce passive income or are held for the production of
passive income. In general, passive income for this purpose means, with
certain designated exceptions, dividends, interest, rents, royalties (other
than certain rents and royalties derived in the active conduct of trade or
business), annuities, net gains from dispositions of certain assets, net
foreign currency gains, income equivalent to interest, 63




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income from notional
principal contracts and payments in lieu of dividends. The determination of
whether a foreign corporation is a PFIC is a factual determination made
annually and is therefore subject to change. Subject to certain exceptions,
once stock in a foreign corporation is stock in a PFIC in the hands of a
particular shareholder that is a United States person, it remains stock in a
PFIC in the hands of that shareholder. If Claxson is treated as a PFIC, contrary to the tax consequences
described in U.S. Federal Income Tax ConsiderationsTaxation of Dividends
and U.S. Federal Income Tax ConsiderationsTaxation of Capital Gains above,
a U.S. holder that does not make an election described in the succeeding two
paragraphs would be subject to special rules with respect to (i) any gain
realized on a sale or other disposition of a Claxson Class A common share and
(ii) any excess distribution by Claxson to the U.S. holder (generally, any
distribution during a taxable year in which distributions to the U.S. holder on
the Claxson Class A common share exceed 125% of the average annual taxable
distributions the U.S. holder received on the Claxson Class A common share
during the preceeding three taxable years or, if shorter, the U.S. holders
holding period for the Claxson Class A common share). Under those rules, (i)
the gain or excess distribution would be allocated ratably over the U.S.
holders holding period for the Claxson Class A common share, (ii) the amount
allocated to the taxable year in which the gain or excess distribution is
realized would be taxable as ordinary income and (iii) the amount allocated to
each prior year, with certain exceptions, would be subject to tax at the
highest tax rate in effect for that year, and (iv) the interest charge
generally applicable to underpayments of tax would be imposed in respect of the
tax attributable to each such year. A U.S. holder who owns a Claxson Class A
common share during any year Claxson is a PFIC must file Internal Revenue
Service Form 8621. The special PFIC rules described above will not apply to a U.S. holder if
the U.S. holder makes a timely election to treat Claxson as a qualified
electing fund (QEF) in the first taxable year in which the U.S. holder owns
a Claxson Class A common share and if Claxson complies with certain reporting
requirements. Instead, a shareholder of a QEF generally is currently taxable
on a pro rata share of Claxsons ordinary earnings and net capital gain as
ordinary income and long-term capital gain, respectively. Neither that
ordinary income nor any actual dividend from Claxson would qualify for the 15%
maximum tax rate on dividends described above if Claxson is a PFIC in the
taxable year the ordinary income is realized or the dividend is paid or in the
preceding taxable year. If Claxson is treated as a PFIC, Claxson intends to
notify U.S. Holders and provide them each year with the information required
for the QEF election. Although a QEF election generally cannot be revoked, if
a U.S. holder made a timely QEF election for the first taxable year it owned a
Claxson Class A common share and Claxson is a PFIC (or is treated as having
done so pursuant to any of certain elections), the QEF election will not apply
during any later taxable year in which Claxson does not satisfy the tests to be
a PFIC. If a QEF election is not made in that first taxable year, an election in a later year generally will require the
payment of tax and interest, and in certain circumstances the election may
cease to be available at a later date. In lieu of a QEF election, a U.S. holder of stock in a PFIC that is
considered marketable stock could elect to mark the stock to market annually,
recognizing as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of
the stock and the U.S. holders adjusted basis in the stock. Losses would be
allowed only to the extent of net mark-to-market gain previously included in
income by the U.S. holder under the election for prior taxable years. A U.S.
holders adjusted basis in Claxson Class A common shares will be adjusted to
reflect the amounts included or deducted with respect to the mark-to-market
election. If the mark-to-market election is made, the rules set forth in the
second preceding paragraph would not apply for periods covered by the election.
A mark-to-market election will not apply during any later taxable year in
which Claxson does not satisfy the tests to be a PFIC. In general, the
Claxson Class A common shares will be marketable stock if they are traded,
other than in de minimisquantities, on a qualified exchange on at least 15
days during each calendar quarter. Under current law, the mark-to-market
election would not be available to a U.S. holder since the OTC Bulletin Board,
on which Claxsons Class A Common Shares trade, is not a qualified exchange
within the meaning of the Code. Foreign Personal Holding Companies If five or fewer individuals who are United States citizens or residents
in the aggregate own, or under attribution rules are treated as owning, more
than 50% of the voting power or value of the shares of a foreign corporation,
and at least 60%, or 50% in certain circumstances, of the gross income of
that foreign corporation in a taxable year is foreign personal holding company
income, that corporation will be an FPHC in that year. Foreign personal
holding company income includes dividends, interest, certain rents and
royalties and net gains from the sale of stock or securities. 64




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If a foreign corporation is an FPHC, United States persons that own shares
in the FPHC, directly or indirectly through foreign entities, regardless of the
size of their shareholding and regardless of whether they are individuals,
generally will be subject to current U.S. federal income tax on a pro rata
portion of the FPHCs undistributed net income for the taxable year. In
addition, a dividend from a foreign corporation that otherwise would qualify
for the 15% maximum tax rate does not qualify for that rate if the foreign
corporation is an FPHC in either the taxable year of the dividend or the
preceding taxable year. Further, those United States persons who acquire
shares in a foreign corporation from decedents generally will not receive a
stepped-up tax basis in those shares if the foreign corporation was an FPHC
in the year preceding the year of the decedents death. Instead, those United
States persons will have a tax basis equal to the lower of the fair market
value of the shares and the decedents tax basis. United States persons that
under these rules are required to include in income undistributed taxable
income for a taxable year and that own at least 5% of the value of the FPHCs
shares are required to comply with certain reporting requirements under the
Code. Based on shareholder data available to it, Claxson believes it did not
satisfy the FPHC stock ownership test for its 2003 taxable year. However,
Claxson has not undertaken any comprehensive study to determine whether it or
any of its subsidiaries was or is an FPHC. Claxson believes that, on a
separate-company basis, it and certain of its subsidiaries that are holding
companies satisfied the FPHC income test in 2003 but that none of those
companies should have had any undistributed net income in 2003 that would be
taxable to Claxson shareholders if it were an FPHC. It is possible that one or
more of Claxsons other non-U.S. subsidiaries has satisfied or will satisfy the
FPHC income test in a given year. Although Claxson believes, based on
shareholder data available to it, that it did not satisfy the FPHC stock
ownership test in 2003, the determination whether Claxson satisfied the stock
ownership test can depend on a number of factors outside the scope of Claxsons
knowledge, including the application of broad constructive ownership rules,
changes in residence or citizenship of shareholders or of persons who own
Claxson Class A shares indirectly or constructively, and transfers of direct,
indirect or constructive ownership of Claxson Class A common shares by
purchase, gift, bequest, death or otherwise. Accordingly, Claxson cannot
provide assurance that it was not an FPHC in 2003 or has not or will not become
an FPHC in 2004 or thereafter. Information Reporting and Backup Withholding Dividends paid on, and proceeds from the sale or other disposition of, a
Claxson Class A common share to a U.S. holder generally may be subject to
information reporting requirements and may be subject to backup withholding at
the rate of 28% unless the U.S. holder provides an accurate taxpayer
identification number or otherwise establishes an exemption. The amount of any
backup withholding collected from a payment to a U.S. holder will be allowed as a credit against the U.S. holders U.S. federal
income tax liability and may entitle the U.S. holder to a refund, provided
certain required information is furnished to the Internal Revenue Service. A non-U.S. holder generally will be exempt from these information
reporting requirements and backup withholding tax but may be required to comply
with certain certification and identification procedures in order to establish
its eligibility for exemption. F. Dividends and Paying Agents Not Applicable G. Statement by Experts Not Applicable H. Documents on Display We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements, we
file reports and other information with the Securities and Exchange Commission.
These materials, including this annual report and the accompanying exhibits,
may be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at the Commissions Regional Offices at 7 World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Northwestern
Atrium Center, Chicago, Illinois 60661. You may obtain information on the
operation of the public reference room by calling 1(800)-SEC-0330, and you may
obtain copies at prescribed rates from the Public Reference Section of the
commission at its principal office 65




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in Washington, D.C. 20549. In addition,
documents referred to in this annual report may be inspected at the Companys
principal executive offices at Avenida Melian 2752, C1430EYH, Buenos Aires,
Argentina. I. Subsidiary Information Not Applicable 
  Item 11.
    Quantitative and Qualitative Disclosures About Market Risk Market Risks Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows due to adverse changes
in financial and commodity and market prices and interest rates. We are
exposed to market risk in the areas of interest rates and foreign currency
exchange rates. This section contains forward-looking statements that are
subject to risks and uncertainties. Actual results could vary materially as a
result of a number of factors. Uncertainties that are either non-financial or
non-quantifiable, such a political, economic, tax, other regulatory or credit
risks, are not included in the following assessment or our market risks. Interest Rate Sensitivity As of December 31, 2003, we had U.S. $88.1 million in total debt, U.S.$
61.6 million due under our 8.75% senior notes due 2010 (U.S.$20.3 million of
which represented future interest payments), U.S.$17.6 million under a
subsidiarys senior secured credit facility payable through 2006 which we have
subsequently refinanced with a facility maturing in 2009, U.S.$3.0 million due
under Imagens 11% senior notes due 2005, and U.S.$2.7 million under Imagens
6.25% senior notes due 2013. The senior notes have a fixed interest rate and
are denominated in U.S. dollars and the senior secured credit facility has a
floating interest rate equal to the Chilean tasa activa bancaria, which is a
published Chilean prime rate, plus 250 basis points. The senior secured credit
facility is denominated in unidades de fomento, which is equivalent to the
inflation adjusted Chilean Peso. We are exposed to changes in interest rates primarily as a result of our
borrowing activities. We have interest rate exposure because of the credit
facility debt balance. The indebtedness is at a variable rate without
corresponding variable rate assets and therefore a material increase in
interest rates would significantly increase interest expense without offsetting
interest income. Our actual interest rate risk is not quantifiable or
predictable because of the variability of future interest rates and business financing
requirements. However, we do not believe such risk is material. We do not
customarily use derivative instruments to adjust interest rate risk. For debt obligations, the following table presents principal cash flows
and related fixed and weighted average interest rates by expected maturity
dates. The following table presents relevant information relating to our
long-term debt interest rate risk: Twelve Months EndedDecember 31,
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013
    
    Total
    
    Fair ValueLong-Term Debt:11% Senior Notes due 2005
    
    
    2,320
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,320
    
    
    
    855Fixed U.S. Rate
    
    
    11
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.25% Senior Notes due 2013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,150
    
    
    
    1,150
    
    
    
    2,300
    
    
    
    N/AFixed U.S. Rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.25
    %
    
    
    6.25
    %8.75% Senior Notes due 2010
    
    
    
    
    
    
    
    
    
    
    2,068
    
    
    
    6,203
    
    
    
    10,338
    
    
    
    10,338
    
    
    
    12,406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,353
    
    
    
    27,707Fixed U.S. Rate
    
    
    
    
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    
    
    
    
    
    
    
    
    Syndicated Bank Facility
    
    
    3,562
    
    
    
    1,720
    
    
    
    2,457
    
    
    
    2,457
    
    
    
    2,457
    
    
    
    2,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,355
    
    
    
    N/AAverage interest rate
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    7.25
    %
    
    
    -7.25
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    1,635
    
    
    
    1,353
    
    
    
    1,048
    
    
    
    1,262
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,339
    
    
    
    N/AAverage interest rate (range)
    
    
    9
    %
    
    
    9
    %
    
    
    9
    %
    
    
    9
    %
    
    
    5
    %
  Notes:(1)
    
    There is no market for these securities. Fair value is estimated based
on a conversion of 55% of the fair price of the 8.75% Senior Notes due
2010, which represents the conversion rate at the time of exchange offer
and consent solicitation. 66




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(2)
    
    After the refinancing of the Radio Chile syndicated credit facility
described in Contractual Obligations and Commercial Commitments. Exchange Rate Sensitivity Our principal foreign currency exposure is related to our asset base,
which consists principally of monetary assets and liabilities, in the countries
in which we operate, specifically in Argentina and Chile. We use the Argentine
peso as the functional currency for our Argentine subsidiaries and the Chilean
peso as the functional currency for our Chilean subsidiaries. Because our
assets and liabilities, as well as interest earned or paid on our assets and
liabilities are affected by changes in the value of the Argentine peso and
Chilean peso, our reported income is affected by exchange fluctuation in these
countries. The Argentine government and Chilean governments economic policies
and any future changes in the value of the Argentine peso and Chilean peso
against the U.S. dollar could adversely affect the financial condition and
results of our operations. Until January 2002, the Convertibility Law No. 23,928 was in effect in
Argentina. The Convertibility Law established a fixed exchange rate, under
which the Central Bank was obligated to sell U.S. dollars to any person at a
fixed rate of Ps1.00 per U.S.$1.00. Accordingly, the foregoing currency
fluctuations were reduced to a minimum level during this period. In January
2002, the Argentine government announced the devaluation of the Argentine peso
and repealed the Ps. 1.00 per U.S.$1.00 exchange rate that was set forth under
the Convertibility Law. Decree No. 71/02 established a temporary dual exchange rate system
comprised of : (i) a fixed rate export and certain import transactions at a
rate of Ps. 1.40 per U.S.$1.00 and (ii) a floating rate to be freely determined
by the market for all other transactions. On February 8, 2002, the executive
branch of Argentina, however, issued Decree No. 260/02 providing for the
elimination of the dual exchange rate in favor of a single floating rate for
all transactions. As a result of the foregoing initiatives, our local
agreements in Argentina have been converted into peso-denominated obligations.
In addition, many Argentine companies have suspended payment of their debt
obligations. It is unclear how the Argentine government will address the
continuing economic crises. Foreign currency exchange restrictions hereafter
imposed by the Argentine government could prevent or restrict our access to
U.S. dollars, affecting our ability to service our U.S. dollar liabilities. In Chile, the Chilean peso has been subject to large devaluation in the
past, including a decrease of 11% in 1999, 9% in 2000, 17% in 2001, 9% in 2002
and a 17% appreciation for 2003, and may be subject to significant fluctuations
in the future. Our operations may be affected by the continuing fluctuations
in exchange rates between the Chilean peso and the U.S. dollar. The following table summarizes our monetary assets and liability exposure
in foreign jurisdictions, including without limitation, Argentina, Chile,
Brazil and Uruguay: Monetary Assets and Liabilities ExposureAs of December 31, 2003(In thousands of U.S. dollars)Monetary
    
    Monetary
    
    NetCountry
    
    Assets
    
    Liabilities
    
    ExposureArgentina
    
    $
    6,776
    
    
    $
    13,344
    
    
    $
    (6,568
    )Chile
    
    
    155
    
    
    
    4,104
    
    
    
    (3,949
    )Other(1)
    
    
    1,827
    
    
    
    1,126
    
    
    
    701Total
    
    $
    8,758
    
    
    $
    18,574
    
    
    $
    (9,816
    )
   (1)
    
    Primarily represents Brazil and Uruguay. We do not currently hedge against currency exchange transaction risks, nor
do we use derivative financial instruments for speculative trading purposes.
We could, however, in the future engage in hedging activities against specific
foreign exchange transaction risks. Foreign exchange net losses during fiscal year 2002 was U.S.$61.3 million
while in 2003 we experienced a U.S. $9.1 million foreign exchange gain. At
December 31, 2003, we had the equivalent of approximately U.S.$5.4 million in
Argentine peso-denominated receivables and investments and U.S.$23.2 million in
dollar-denominated receivables and investments. 67




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Item 12.
    Description of Securities Other than Equity Securities Not Applicable 
 PART II 
  Item 13.
    Defaults, Dividend Arrearages and Delinquencies On April 30, 2002, we announced that our subsidiary Imagen Satelital, S.A.
would not make an interest payment on May 1, 2002 on its 11% Senior Notes due
2005. On November 8, 2002, we successfully completed an exchange offer and
consent solicitation with respect to 93.1% of the outstanding 11% Senior Notes
due 2005 (the Old Notes). Pursuant to the exchange offer, we issued
U.S.$41.3 million principal amount of our 8.75% Senior Notes due 2010 in
exchange for U.S.$74.5 million principal amount of the Old Notes. The holders
of some of these outstanding Old Notes had filed, or threatened to file,
various lawsuits, some with preventative injunctions, to collect certain
principal and/or interest payments for the Old Notes, including a petition for
the bankruptcy of Imagen. We have been able to settle most of these cases;
however as of June 1, 2004, U.S.$2.3 million of the remaining principal amount
of the Old Notes had still not been exchanged. Our failure to successfully
negotiate the exchange of these remaining Old Notes for new notes or other
instruments at terms that are acceptable to both the holders and us, may
adversely affect our financial performance. See Item 3D Risk FactorsWe may
be exposed to litigation or other claims in Argentina by the holders of the
remaining U.S.$2.3 million principal amount of Imagen Satelitals 11% Senior
Notes due 2005. 
  Item 14.
    Material Modifications to the Rights of Security Holders and Use of Proceeds Not Applicable 
  Item 15.
    Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this annual report on Form 20-F, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934. Based on this evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that all information required
to be disclosed in our filings and submissions under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the SECs rules and forms. Our management, including the Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures will
prevent all error and all fraud. Because of inherent limitations in any systems
of disclosure controls and procedures, no evaluation of controls can provide
absolute assurance that all instances of error or fraud, if any, within the
Company may be detected. Changes in Internal Control Over Financial Reporting There were no changes in the Companys internal controls over financial
reporting that were identified in connection with the evaluation of our
internal controls over financial reporting during the period covered by this
annual report on Form 20-F that materially affected, or is reasonably likely to
affect, our internal controls over financial reporting. 
  Item 16A
    Audit Committee Financial Expert Our board of directors has determined that Mr. Rios qualifies as an audit
committee financial expert as defined by the rules and regulations of the
Securities and Exchange Commission and is independent. Since, we are not
currently listed on any national securities exchange, in determining that Mr.
Rios is independent, our board of directors has relied on the independence
requirements of the National Association of Securities Dealers Marketplace
Rules. 68




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##### Table of Contents



Item 16B
    Code of Ethics We have adopted a Code of Business Conduct and Ethics that applies to our
Chief Executive Officer and senior financial officers, including our Chief
Financial Officer. A copy of the Code of Business Conduct and Ethics has been
filed as an exhibit to this Annual Report on Form 20-F. 
  Item 16C
    Principal Accountant Fees and Services Deloitte & Touche LLP audited our financial statements for the years ended
December 31, 2003 and 2002. The table below provides information concerning
fees for which we were billed for the last two fiscal years for services
rendered by Deloitte & Touche LLP: Description of Fees
    
    Amount of Fees2003
    
    2002(in thousands of U.S.
Dollars)Audit Fees
    
    $
    611
    
    
    
    514Audit-Related Fees
    
    
    29
    
    
    
    52Tax Fees
    
    
    240
    
    
    
    260All Other Fees
    
    
    
    
    
    
    13Total
    
    $
    880
    
    
    
    839
 Audit FeesThese fees were primarily for professional services rendered
by Deloitte & Touche LLP in connection with their audit of our annual
consolidated financial statements and reviews of the consolidated
financial statements included in our quarterly press releases for the
first three fiscal quarters of our fiscal years ended December 31, 2003
and 2002. Those fees also include audits of subsidiaries and joint
ventures which we consolidate, as well as review procedures and consents
related to SEC, and other local filings. Audit-Related FeesThese fees were primarily for services rendered by
Deloitte & Touche LLP for matters such consultation on Sarbanes-Oxley Act
compliance, accounting standards and transactions. Tax FeesThese fees were for services rendered by Deloitte & Touche LLP
for assistance with tax return preparation and tax consultation. Other FeesOther fees paid to Deloitte & Touche LLP relate primarily to
the auditing of number of subscribers for one of our customers. 
  Item 16D
    Exemptions from the Listing Standards for Audit Committees Not Applicable. 
  Item 16E
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not Applicable. 
 PART III 
  Item 17.
    Financial Statements Not Applicable 
  Item 18.
    Financial Statements The consolidated statements and other financial information required by
Regulation S-X are included in this Annual Report on Form 20-F commencing on
page F-1. 69




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##### Table of Contents



Item 19.
    Exhibits  (a)
    
    Index to Financial Statements.Report of Deloitte & Touche LLP for Claxson Interactive
Group and
Subsidiaries                
             F-3(b)
    
    List of Exhibits Exhibit Number
    
    Description of Documents1.1
    
    Amended and Restated Memorandum of Association of Claxson
Interactive Group Inc. (incorporated herein by reference to the
Registration Statement on Form F-4/A (No. 333-13062) filed with
the Commission on August 15, 2001).1.2
    
    Amended and Restated Articles of Association of Claxson
Interactive Group Inc. (incorporated herein by reference to the
Registration Statement on Form F-4/A (No. 333-13062) filed with
the Commission on August 15, 2001).2.1
    
    Combination Agreement, dated as of October 30, 2000, by and among
Claxson Interactive Group Inc. (formerly, New Site Inc.),
Newhaven Overseas Corp., Hicks, Muse, Tate & Furst Latin America
Fund, L.P., Hicks, Muse, Tate and Furst Latin America Private
Fund, L.P.; HMLA 1-SBS Coinvestors, L.P., and El Sitio, Inc.
(included as Annex A-1 to the proxy statement/prospectus forming
a part of the Registration Statement on Form F-4 (No. 333-13062)
filed with the Commission on August 17, 2001 which is
incorporated herein by reference).2.2
    
    Amendment No. 1 to Combination Agreement, dated as of June 26,
2001, by and among Claxson Interactive Group Inc., formerly known
as New Site Inc., Carlyle Investments LLC and Carlton Investments
LLC, Ibero-American Media Partners II Ltd., Hicks, Muse, Tate &
Furst Latin America Fund, L.P., Hicks, Muse, Tate & Furst Latin
America Private Fund, L.P., HMLA 1-SBS Coinvestors, L.P. and El
Sitio, Inc. (included as Annex A-2 to the proxy
statement/prospectus forming a part of the Registration Statement
on Form F-4 (No. 333-13062) filed with the Commission on August
17, 2001 which is incorporated herein by reference).2.3
    
    Amendment No. 2 to Combination Agreement, dated as of August 7,
2001, by and among Claxson Interactive Group Inc., formerly known
as New Site Inc., Carlyle Investments LLC and Carlton Investments
LLC, Ibero-American Media Partners II Ltd., Hicks, Muse, Tate &
Furst Latin America Fund, L.P., Hicks, Muse, Tate & Furst Latin
America Private Fund, L.P., HMLA 1-SBS Coinvestors, L.P. and El
Sitio, Inc. (included as Annex A-3 to the proxy
statement/prospectus forming a part of the Registration Statement
on Form F-4 (No. 333-13062) filed with the Commission on August
17, 2001 which is incorporated herein by reference).2.4
    
    Indenture, dated as of April 4, 1998, among IMASAC S.A. and
Imagen Satelital, S.A. (as guarantor), The Bank of New York,
Banco Rio de la Plata S.A. and Banque International a Luxembourg
(incorporated herein by reference to the Registration Statement
on Form F-4/A (No. 333-13062) as filed with the Commission on
February 26, 2001).2.5
    
    Indenture, dated as of November 7, 2002, among Claxon Interactive
Group, Inc., Imagen Satelital, S.A. (as guarantor), The Bank of
New York and Banco Río de la Plata S.A.3.1
    
    Holdco Agreement, dated September 21, 2001, by and among 1947
PTVI, LLC, 1945 PTVI, LLC, Hicks, Muse, Tate & Furst Latin
America Fund, L.P., Hicks, Muse, Tate & Furst Latin America
Private Fund, L.P., HMLA 1-SBS Coinvestors, L.P., Certain Claxson
Interactive Group, Inc. Stockholders and Claxson Interactive
Group, Inc.
 70




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##### Table of Contents



Exhibit Number
    
    Description of Documents4.1
    
    Transfer Agreement, dated as of December 23, 2002, by and among
Playboy Enterprises, Inc., Playboy Entertainment Group, Inc.,
Playboy Enterprises International, Inc., Claxson Interactive
Group Inc., Carlyle Investments LLC (in its own right and as a
successor in interest to Victoria Springs Investments Ltd.),
Carlton Investments LLC (in its own right and as a successor in
interest to Victoria Springs Investments Ltd.), Lifford
International Co. Ltd. and Playboy TV International, LLC
(incorporated herein by reference to Form 6-K (No. 035-22883)
filed with the Commission on January 23, 2003). Claxson agrees
to furnish supplementally any omitted schedule to the Commission
upon request.4.2
    
    Full-Time Transponder Lease Agreement, dated October 22, 1997, by
and between PanAmSat International Systems, Inc. and Cisneros
Television Services, Inc. (incorporated herein by reference to
the Registration Statement on Form F-4/A (No. 333-13062) as filed
with the Commission on April 26, 2001).4.3
    
    First Amendment to Full-Time Transponder Lease Agreement (Pre
Launch), dated as of July 31, 2000, by and between PanAmSat
International Systems, Inc. and Cisneros Television Services,
Inc. (incorporated herein by reference to the Registration
Statement on Form F-4/A (No. 333-13062) as filed with the
Commission on April 26, 2001).4.4
    
    Letter Agreement Re: Full-Time Transponder Lease Agreement, dated
as of May 1, 1998, by and between PanAmSat International Systems,
Inc. and Cisneros Television Services, Inc. (incorporated herein
by reference to the Registration Statement on Form F-4/A (No.
333-13062) as filed with the Commission on April 26, 2001).4.5
    
    First Amendment to Full-Time Transponder Lease Agreement, dated
as of July 31, 1998, by and between PanAmSat International
Systems, Inc. and Cisneros Television Services, Inc.
(incorporated herein by reference to the Registration Statement
on Form F-4/A (No. 333-13062) as filed with the Commission on
April 26, 2001).4.6
    
    Letter Agreement Re: First Amendment to the Full-Time Transponder
Lease Agreement, dated July 31, 2000, by and between PanAmSat
International Systems, Inc. and Cisneros Television Services,
Inc. (incorporated herein by reference to the Registration
Statement on Form F-4/A (No. 333-13062) as filed with the
Commission on April 26, 2001).4.7
    
    Letter Agreement Re: Full-Time Transponder Lease Agreement, as
amended (dated October 22, 1997), Full-Time Transfer Lease
Agreement, as amended (dated May 1, 1998) and Letter Agreement
for Retransmission Services, as amended (dated October 17, 1997),
dated as of April 3, 2003, by and between PanAmSat International
Systems, Inc. and Claxon USA Inc., formerly known as Cisneros
Television Services, Inc.4.8
    
    Claxson Interactive Group Inc. 2001 Share Incentive Plan
(included as Annex E to the proxy statement/prospectus forming a
part of the Registration Statement on Form F-4 (No. 333-13062
filed with the Commission on August 17, 2001 which is
incorporated herein by reference).*4.9
    
    Second Amended and Restated Operating Agreement for Playboy TV 
Latin America, LLC, effective as of April 1, 2002, by and between
Playboy Entertainment Group, Inc. and Lifford International Co.
Ltd. (incorporated herein by reference to Form 6-K (No.
035-22883) filed with the Commission on January 23, 2003).
Claxson agrees to furnish supplementally any omitted schedule to
the Commission upon request.*4.10
    
    Playboy TV  Latin America Program Supply and Trademark License
Agreement, dated December 23, 2002, by and between Playboy
Entertainment Group, Inc. and Playboy TV  Latin America, LLC
(incorporated herein by reference to Form 6-K (No. 035-22883)
filed with the Commission on January 23, 2003). Claxson agrees
to furnish supplementally any omitted schedule to the Commission
upon request.
 71




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##### Table of Contents



Exhibit Number
    
    Description of Documents*4.11
    
    Venus Contribution Agreement, dated as of December 23, 2002, by
and among Claxson Interactive Group Inc., Lifford International
Co. Ltd, Playboy TV  Latin America, LLC and Playboy
Entertainment Group, Inc. (incorporated herein by reference to
Form 6-K (No. 035-22883) filed with the Commission on January 23,
2003). Claxson agrees to furnish supplementally any omitted
schedule to the Commission upon request.4.12
    
    Playboy TV International Program Supply Agreement, dated as of
August 31, 1999 by and among Playboy Entertainment Group, Inc.,
Playboy TV International LLC and PTVLA U.S., LLC (incorporated
herein by reference to the Registration Statement on Form F-4/A
(No. 333-13062) as filed with the Commission on April 26, 2001).4.13
    
    Amendment No. 1 to the Playboy TV International Program Supply
Agreement, dated as of December 22, 2002, by and among Playboy
Entertainment Group, Inc., Playboy TV International LLC and PTVLA
U.S., LLC (incorporated herein by reference to Form 6-K (No.
035-22883) filed with the Commission on January 23, 2003).8.1
    
    List of Significant Subsidiaries11.1
    
    Claxson Interactive Group Inc. Code of Business Conduct and Ethics12.1
    
    Certification of Claxon Interactive Group Inc.s Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.12.2
    
    Certification of Claxon Interactive Group Inc.s Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.13.1
    
    Certification of Claxson Interactive Group Inc.s Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.13.2
    
    Certification of Claxson Interactive Group Inc.s Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.15.1
    
    Consent of Deloitte & Touche LLP.
   *Portions of this exhibit have been omitted and filed separately with the
Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, requesting confidential treatment. 72




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Signatures The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. July 15, 2004
    Date:/s/ Roberto Vivo-ChanetonName:
    Roberto Vivo-ChanetonTitle:
    Chief Executive Officer and Chairman of the
Board July 15, 2004
    Date:/s/ Jose Antonio ItuarteName:
    Jose Antonio ItuarteTitle:
    Chief Financial Officer 73




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements of Claxson Interactive Group Inc. and subsidiaries
    
    
    F-3
 F-1




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##### Table of Contents



[This Page Intentionally Left Blank] F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  
 We have audited the accompanying consolidated balance sheets of Claxson
Interactive Group Inc. and subsidiaries (collectively, Claxson) as of
December 31, 2002 and 2003 and the related consolidated statements of
operations and comprehensive (loss) income, of shareholders equity and of cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of Claxsons management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Claxson at December 31, 2002 and
2003 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming
that Claxson will continue as a going concern. As described in Note 1 to the
consolidated financial statements, Claxsons operating history and its
liquidity constraints raise substantial doubt about Claxsons ability to
continue as a going concern. Managements plans concerning these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty. As discussed in Note 2 to the consolidated financial statements, Claxson
changed its method of accounting for goodwill in 2002 to conform to the
requirements of Statement of Financial Accounting Standards No. 142.    /s/ Deloitte & Touche
LLP
Certified Public
Accountants Miami, Florida
July 15, 2004 F-3




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2003
(In thousands of U.S. dollars except per share data) 2002
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    8,072
    
    
    
    7,682Restricted investments
    
    
    750
    
    
    
    213Accounts receivable, net
    
    
    19,448
    
    
    
    20,091Due from related parties
    
    
    11,166
    
    
    
    5,179Other current assets
    
    
    7,877
    
    
    
    7,388Total current assets
    
    
    47,313
    
    
    
    40,553RESTRICTED INVESTMENTS
    
    
    750
    
    
    
    750PROPERTY AND EQUIPMENT, NET
    
    
    18,573
    
    
    
    19,107PROGRAMMING RIGHTS, NET
    
    
    5,554
    
    
    
    4,679INVESTMENTS IN UNCONSOLIDATED AFFILIATES
    
    
    1,025
    
    
    
    1,061INVESTMENTS IN DEBT AND EQUITY SECURITIES
    
    
    448
    
    
    
    54BROADCAST AND TELEVISION LICENSES, NET
    
    
    18,065
    
    
    
    21,160GOODWILL, NET
    
    
    51,837
    
    
    
    53,627OTHER ASSETS, NET
    
    
    4,057
    
    
    
    4,348TOTAL ASSETS
    
    $
    147,622
    
    
    $
    145,339LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    14,011
    
    
    $
    12,409Due to related parties
    
    
    3,931
    
    
    
    2,347Accrued compensation
    
    
    2,470
    
    
    
    2,641Other current liabilities
    
    
    11,901
    
    
    
    9,889Current portion of programming rights obligations
    
    
    9,899
    
    
    
    10,082Current portion of long-term debt
    
    
    11,667
    
    
    
    11,925Unearned revenue
    
    
    4,238
    
    
    
    3,538Total current liabilities
    
    
    58,117
    
    
    
    52,831LONG-TERM LIABILITIES:Programming rights obligations, net of current portion
    
    
    2,302
    
    
    
    1,885Long-term debt, net of current portion
    
    
    80,821
    
    
    
    76,194Other long-term liabilities
    
    
    2,023
    
    
    
    3,308Total long-term liabilities
    
    
    85,146
    
    
    
    81,387MINORITY INTEREST
    
    
    1,164
    
    
    
    1,128COMMITMENTS AND CONTINGENCIES (Note 11)SHAREHOLDERS EQUITY:Preferred shares; $1.00 par value; 15,000,000 shares
authorized, issued and outstanding as of December 31,
2002 and converted into 750,000 Class A common shares;
$0.01 par value as of September 21, 2003
    
    
    15,000
    
    
    
    Class A common shares; $0.01 par value; 30,000,000
shares authorized, 18,677,993 and 19,427,993 shares
issued and outstanding as of December 31, 2002 and
2003, respectively
    
    
    187
    
    
    
    195Class C common shares; $1.00 par value; 2 shares
authorized, issued and outstanding as of December 31,
2002 and 2003
    
    
    
    
    
    
    Class F common shares; $1.00 par value; 7 shares
authorized, issued and outstanding as of December 31,
2002 and 2003
    
    
    
    
    
    
    Class H common shares; $1.00 par value; 1 share
authorized, issued and outstanding as of December 31,
2002 and 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    246,592
    
    
    
    261,584Deferred share-based compensation
    
    
    (63
    )
    
    
    (14
    )Accumulated deficit
    
    
    (268,562
    )
    
    
    (260,225
    )Accumulated other comprehensive income
    
    
    10,041
    
    
    
    8,453Total shareholders equity
    
    
    3,195
    
    
    
    9,993TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    147,622
    
    
    $
    145,339
 See notes to consolidated financial statements. F-4




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
Years Ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars, except per share data) 2001
    
    2002
    
    2003REVENUES:Subscriber-based fees
    
    $
    60,193
    
    
    $
    31,566
    
    
    $
    38,932Advertising
    
    
    37,284
    
    
    
    30,547
    
    
    
    37,324Production services
    
    
    2,516
    
    
    
    7,081
    
    
    
    3,051Other
    
    
    6,444
    
    
    
    5,766
    
    
    
    2,480Total revenues, net
    
    
    106,437
    
    
    
    74,960
    
    
    
    81,787OPERATING EXPENSES:Product, content and technology
    
    
    42,832
    
    
    
    34,710
    
    
    
    36,581Marketing and sales
    
    
    21,754
    
    
    
    13,090
    
    
    
    12,576Corporate and administration
    
    
    24,071
    
    
    
    17,164
    
    
    
    18,615Depreciation and amortization
    
    
    27,271
    
    
    
    12,304
    
    
    
    5,993Merger, restructuring and severance expenses
    
    
    4,868
    
    
    
    
    
    
    
    Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    2,758Total operating expenses
    
    
    120,796
    
    
    
    77,268
    
    
    
    76,523OPERATING (LOSS) INCOME
    
    
    (14,359
    )
    
    
    (2,308
    )
    
    
    5,264OTHER INCOME (EXPENSE):Interest expense
    
    
    (13,062
    )
    
    
    (12,422
    )
    
    
    (2,246
    )Interest income
    
    
    554
    
    
    
    748
    
    
    
    136Gain on debt restructuring
    
    
    
    
    
    
    15,274
    
    
    
    Foreign currency exchange (loss) gain
    
    
    (29,565
    )
    
    
    (61,349
    )
    
    
    9,095Other
    
    
    (5,318
    )
    
    
    2,961
    
    
    
    (1,500
    )Net (loss) income from unconsolidated affiliates
    
    
    (19,097
    )
    
    
    (6,746
    )
    
    
    346Other income (expense), net
    
    
    (66,488
    )
    
    
    (61,534
    )
    
    
    5,831(LOSS) INCOME BEFORE (PROVISION) BENEFIT FOR INCOME TAXES,
MINORITY INTEREST AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
    
    
    (80,847
    )
    
    
    (63,842
    )
    
    
    11,095(PROVISION) BENEFIT FOR INCOME TAXES
    
    
    (4,166
    )
    
    
    134
    
    
    
    (2,804
    )(LOSS) INCOME BEFORE MINORITY INTEREST AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    (85,013
    )
    
    
    (63,708
    )
    
    
    8,291MINORITY INTEREST
    
    
    127
    
    
    
    68
    
    
    
    46(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
    
    
    (84,886
    )
    
    
    (63,640
    )
    
    
    8,337CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    
    
    
    
    (74,789
    )
    
    
    NET (LOSS) INCOME
    
    
    (84,886
    )
    
    
    (138,429
    )
    
    
    8,337OTHER COMPREHENSIVE INCOME (LOSS):Unrealized gain (loss) from investment in equity securities
    
    
    26,196
    
    
    
    (2,400
    )
    
    
    (394
    )Foreign currency translation
    
    
    (26,123
    )
    
    
    41,198
    
    
    
    (1,194
    )Other comprehensive income (loss), net
    
    
    73
    
    
    
    38,798
    
    
    
    (1,588
    )COMPREHENSIVE (LOSS) INCOME
    
    $
    (84,813
    )
    
    $
    (99,631
    )
    
    $
    6,749BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE:(Loss) income before cumulative effect of change in
accounting principle
    
    $
    (4.58
    )
    
    $
    (3.41
    )
    
    $
    0.44Cumulative effect of change in accounting principle
    
    
    N/A
    
    
    $
    (4.00
    )
    
    
    N/ANet (loss) income
    
    $
    (4.58
    )
    
    $
    (7.41
    )
    
    $
    0.44WEIGHTED AVERAGE NUMBER OF COMMON SHARES:Basic
    
    
    18,539
    
    
    
    18,678
    
    
    
    18,886Diluted
    
    
    18,539
    
    
    
    18,678
    
    
    
    18,980
 See notes to consolidated financial statements. F-5




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2001, 2002 and 2003(In thousands of U.S. dollars) Ibero-AmericanMedia Partners
    
    Claxson Interactive GroupCommon
    
    
    
    
    
    Preferred
    
    
    
    
    
    CommonShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBALANCE, DECEMBER 31,
2000
    
    
    2
    
    
    $
    2
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Capital
contributions in
anticipation of
preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distribution to
Predecessor
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Merger transaction
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    18,539
    
    
    
    185Issuance of
common shares for
acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    2Issuance of
preferred shares
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in
unrealized gain
from investment
in Equity
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in foreign
currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE, DECEMBER
31, 2001
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    18,678
    
    
    
    187Deferred
share-base
compensation
related to share
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
deferred
share-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss
from investment
in Equity
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in foreign
currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE, DECEMBER
31, 2002
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    18,678
    
    
    
    187Amortization of
deferred
share-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of
preferred shares
into common
shares
    
    
    
    
    
    
    
    
    
    
    (15,000
    )
    
    
    (15,000
    )
    
    
    750
    
    
    
    8Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss
from investment
in Equity
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in foreign
currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE,
DECEMBER 31, 2003
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    19,428
    
    
    $
    195
   [Continued from above table, first column(s) repeated] Deferred
    
    
    
    
    
    AccumulatedShare-
    
    
    
    
    
    OtherAdditional
    
    base
    
    Accumu-
    
    Comprehen-Paid-In
    
    Compen-
    
    lated
    
    sive (Loss)Capital
    
    sation
    
    Deficit
    
    Income
    
    TotalBALANCE, DECEMBER 31,
2000
    
    $
    254,540
    
    
    $
    
    
    
    $
    (45,247
    )
    
    $
    (28,830
    )
    
    $
    180,465Capital
contributions in
anticipation of
preferred shares
    
    
    3,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,553Share-based
compensation
    
    
    658
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    658Distribution to
Predecessor
shareholders
    
    
    (1,210
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,210
    )Merger transaction
    
    
    3,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,749Issuance of
common shares for
acquisitions
    
    
    349
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    351Issuance of
preferred shares
    
    
    (15,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (84,886
    )
    
    
    
    
    
    
    (84,886
    )Change in
unrealized gain
from investment
in Equity
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,196
    
    
    
    26,196Change in foreign
currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,123
    )
    
    
    (26,123
    )BALANCE, DECEMBER
31, 2001
    
    
    246,456
    
    
    
    
    
    
    
    (130,133
    )
    
    
    (28,757
    )
    
    
    102,753Deferred
share-base
compensation
related to share
options
    
    
    149
    
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    Forfeited options
    
    
    (13
    )
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
deferred
share-based
compensation
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73Net loss
    
    
    
    
    
    
    
    
    
    
    (138,429
    )
    
    
    
    
    
    
    (138,429
    )Unrealized loss
from investment
in Equity
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,400
    )
    
    
    (2,400
    )Change in foreign
currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,198
    
    
    
    41,198BALANCE, DECEMBER
31, 2002
    
    
    246,592
    
    
    
    (63
    )
    
    
    (268,562
    )
    
    
    10,041
    
    
    
    3,195Amortization of
deferred
share-based
compensation
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    49Conversion of
preferred shares
into common
shares
    
    
    14,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    8,337
    
    
    
    
    
    
    
    8,337Unrealized loss
from investment
in Equity
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (394
    )
    
    
    (394
    )Change in foreign
currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,194
    )
    
    
    (1,194
    )BALANCE,
DECEMBER 31, 2003
    
    $
    261,584
    
    
    $
    (14
    )
    
    $
    (260,225
    )
    
    $
    8,453
    
    
    $
    9,993
 See notes to consolidated financial statements. F-6




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) Year Ended December 31,2001
    
    2002
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (84,886
    )
    
    $
    (138,429
    )
    
    $
    8,337Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:Amortization of programming rights
    
    
    8,836
    
    
    
    4,903
    
    
    
    4,623Share-based compensation
    
    
    658
    
    
    
    73
    
    
    
    49Depreciation and amortization
    
    
    27,271
    
    
    
    12,304
    
    
    
    5,993Non cash interest expense
    
    
    321
    
    
    
    838
    
    
    
    126Preferred dividend receivable
    
    
    (311
    )
    
    
    (342
    )
    
    
    Net loss (gain) on disposal of assets
    
    
    2,439
    
    
    
    567
    
    
    
    (97
    )Gain on sale of investment in unconsolidated affiliates
    
    
    (478
    )
    
    
    
    
    
    
    Exchange rate gain (loss)
    
    
    29,565
    
    
    
    61,349
    
    
    
    (9,095
    )Impairment of goodwill
    
    
    
    
    
    
    74,789
    
    
    
    2,758Gain on debt restructuring
    
    
    
    
    
    
    (15,274
    )
    
    
    Gain (loss) from unconsolidated affiliates
    
    
    19,097
    
    
    
    6,746
    
    
    
    (346
    )Minority interest
    
    
    (127
    )
    
    
    (68
    )
    
    
    (46
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (2,839
    )
    
    
    6,976
    
    
    
    3,858Acquisition of programming rights
    
    
    (4,741
    )
    
    
    (2,273
    )
    
    
    (2,785
    )Due from related parties and other current assets
    
    
    3,905
    
    
    
    (6,018
    )
    
    
    6,206Other assets
    
    
    7,619
    
    
    
    (117
    )
    
    
    503Accounts payable, accrued expenses and other
    
    
    (4,164
    )
    
    
    28,721
    
    
    
    (4,499
    )Due to related parties
    
    
    9,707
    
    
    
    (3,591
    )
    
    
    (1,585
    )Programming rights obligations
    
    
    (6,411
    )
    
    
    570
    
    
    
    (923
    )Other long-term liabilities
    
    
    (1,965
    )
    
    
    (29,753
    )
    
    
    577Net cash provided by operating activities
    
    
    3,496
    
    
    
    1,971
    
    
    
    13,654CASH FLOWS FROM INVESTING ACTIVITIES:Redemption of restricted investments
    
    
    4,319
    
    
    
    
    
    
    
    Acquisition of property and equipment
    
    
    (6,288
    )
    
    
    (1,605
    )
    
    
    (2,583
    )Net cash balance of newly consolidated affiliate
    
    
    
    
    
    
    909
    
    
    
    Acquisitions, net of cash acquired, and including
transaction costs paid
    
    
    8,788
    
    
    
    (3,288
    )
    
    
    (4,285
    )(Investments in) distributions from unconsolidated affiliates
    
    
    (10,078
    )
    
    
    (130
    )
    
    
    371Sale of investments in affiliates
    
    
    5,014
    
    
    
    8,400
    
    
    
    837Investment in equity securities
    
    
    (5,135
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (3,380
    )
    
    
    4,286
    
    
    
    (5,660
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings under long-term debt
    
    
    1,598
    
    
    
    
    
    
    
    Repayments of long-term debt
    
    
    (9,693
    )
    
    
    (7,689
    )
    
    
    (8,591
    )Capital contributions
    
    
    3,553
    
    
    
    
    
    
    
    Payment of debt restructuring costs
    
    
    
    
    
    
    (3,868
    )
    
    
    Restricted cash released (deposited) in guarantee of Chilean
syndicated loan
    
    
    
    
    
    
    (1,500
    )
    
    
    706Capital contribution from minority shareholder
    
    
    
    
    
    
    32
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (4,542
    )
    
    
    (13,025
    )
    
    
    (7,885
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS
    
    
    1,107
    
    
    
    (371
    )
    
    
    (499
    )NET (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (3,319
    )
    
    
    (7,139
    )
    
    
    (390
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    18,530
    
    
    
    15,211
    
    
    
    8,072CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    15,211
    
    
    $
    8,072
    
    
    $
    7,682SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (See Note 13)
 See notes to consolidated financial statements F-7




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) 1. GENERAL BACKGROUND AND ORGANIZATION General Claxson Interactive Group Inc. and subsidiaries (collectively,
Claxson, or the Company), a British Virgin Islands international business
company, is a multimedia provider of branded entertainment content to Spanish
and Portuguese speakers around the world. Claxson owns and operates several
branded pay television channels, certain broadcast television and radio
stations, and certain internet assets throughout Ibero America. Claxson has
significant operations in Argentina and Chile, and is headquartered in Buenos
Aires, Argentina and Miami, Florida. Claxson derives a significant portion of
its revenues from subscriber-based fees charged to cable system and
direct-to-home operators that distribute Claxsons branded television channels
throughout Ibero America. Claxson also generates revenues from the sale of
advertising time and, to a lesser extent, production services, management fees
and other services. Organization Claxson was incorporated as an international business
company in the British Virgin Islands on October 16, 2000. Claxson was formed
to combine the assets of Ibero-American Media Partners II, Ltd. (Ibero
American Media Partners), El Sitio, Inc. (El Sitio), and certain other media
businesses of the Cisneros Group under the terms of a combination agreement
dated October 30, 2000, as amended on June 2, 2001 and August 22, 2001 and
consummated on September 21, 2001. As the former shareholders of Ibero-American
Media Partners became the majority shareholders in Claxson, Ibero-American
Media Partners was deemed to be the acquiror for accounting purposes. The merger of El Sitio into a subsidiary of Claxson and the contribution
of the shares representing interests in Rainbow Heights International, Ltd.,
208 shares of ARTISTdirect Inc.(ARTISTdirect), a 50% interest in AEI
Collingham Holdings Co. Ltd. (DMX MUSIC Latin America), and an 80.1% interest
in Playboy TV International and PTVI US LLC (collectively Playboy TV
International) to Claxson has been recorded in accordance with the purchase
method of accounting in Claxsons consolidated balance sheet at estimated fair
value (other than the 18% of El Sitio already owned by Ibero-American Media
Partners). Fair value was determined by reference to El Sitios average share
price before and after execution and delivery of the amendments relating to the
combination agreement. Background Ibero-American Media Partners was incorporated as a company
in the Cayman Islands on July 28, 1998 and did not have any operations prior to
December 31, 1998. Ibero-American Media Partners was a joint venture between a
member of the Cisneros Group and funds affiliated with Hicks, Muse, Tate &
Furst Incorporated (Hicks Muse). The Cisneros Group is a name used to
describe a group of investments, joint ventures, strategic alliances and
companies that are engaged in diversified consumer businesses, including
broadcast and pay television, direct-to-home satellite television, content
production and other entertainment, media and communications enterprises, and
that are associated with Ricardo J. and Gustavo A. Cisneros and trusts
established by them for the benefit of themselves and members of their
families. On December 31, 1998, a member of the Cisneros Group (the
Contributing Shareholder) contributed to Ibero-American Media Partners its
ownership interest in certain entities in exchange for a 50% ownership interest
in Ibero-American Media Partners. On the same date, Hicks Muse made a cash
contribution of $78,900 in exchange for the remaining 50% ownership interest in
Ibero-American Media Partners. Concurrent with these contributions,
Ibero-American Media Partners purchased from the Contributing Shareholder its
ownership interest in certain other entities for cash amounting to $78,900.
These transactions were recorded at December 31, 1998 by carrying over the
Contributing Shareholders historical carrying value in the net assets
contributed to the extent that the Contributing Shareholder continued to have
an interest in the contributed assets (i.e., 50%). The net assets attributable
to the purchase of a 50% ownership interest by Hicks Muse have been recorded at
their estimated fair values. These transactions resulted in additional
goodwill of $54,172 above the goodwill that had been originally recorded on the
Contributing Shareholders historical financial statements for previous
acquisitions. Going Concern The accompanying consolidated financial statements have been
prepared with the assumption that Claxson will continue as a going concern.
Claxson had incurred cumulative net losses of $268,562 from its formation
through December 31, 2002, which included Claxsons net loss of $138,429 for
the year then ended. However, for 2003, Claxson had net income of $8,337. A
major contributing factor to the cumulative loss has been F-8




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) the negative impact of the monetary devaluation in Argentina and the economic
unrest in Argentina and the rest of Latin America, where Claxson has
significant operations. These matters have caused liquidity constraints
resulting in a working capital deficiency of $12,278 as of December 31, 2003,
and difficulties in meeting Claxsons obligations when due. In an effort to achieve long-term profitability and improve liquidity,
Claxson took certain steps during 2002 and 2003, including the disposition of
non-strategic assets (see Note 3) and the restructuring of certain subsidiaries
debt (see Notes 6 and 14). Although management is encouraged by Claxsons 2003
performance, achieving long-term profitability is dependent on managements
ability to accomplish its business plan objectives, which includes projected
revenue increases, stabilization of the economies in which Claxson operates,
and the availability of additional liquidity. Claxsons operating history and
its liquidity constraints raise substantial doubt as to its ability to remain a
going concern unless Claxson is successful in achieving these business plan
objectives. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial
statements include the accounts of Claxson and its wholly and majority owned
and controlled subsidiaries from the date of acquisition/contribution. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The following are Claxsons principal subsidiaries:  
    
    Imagen Satelital S.A. and subsidiaries, 100% owned;
    
    Claxson Chile S.A. and subsidiaries, 100% owned;
    
    Claxson USA II Inc. and subsidiaries, 100% owned;
    
    Carson International Ltd., 100% owned;
    
    El Sitio, Inc., 100% owned; and
    
    Playboy TV Latin America, LLC and subsidiaries, 81% owned (see Note 3) Claxson also owned 100% of Rainbow Heights International Ltd. (Rainbow),
which was sold to affiliates of the Cisneros Group effective as of January 1,
2003 (see Note 3). Claxson also has several unconsolidated operating subsidiaries. Claxson,
through several holding companies, holds a 31% interest in DMX MUSIC Latin
America (DMX LA), a 33.34% interest in Sociedad Torre Conjunto Cerro San
Cristobal S.A. (San Cristobal) and a 50% interest in Latin America Internet
Company (ARTISTdirect). DMX LA, San Cristobal and ARTISTdirect joint
ventures are not controlled by Claxson and, therefore, are accounted for under
the equity method of accounting. In addition, Claxson held a 50% interest in The Locomotion Channel and The
Locomotion Channel B.V. (collectively, Locomotion) until May 17, 2002 (see
Note 3), which was also accounted for under the equity method of accounting as
Claxson did not control Locomotion. Claxson also held an 80.1% interest in Playboy TV International, LLC
(PTVI) until December 23, 2002, when a new agreement was reached with Playboy
Enterprises, Inc. and its affiliates (PEI). As part of the new agreement,
Claxson transferred its 80.1% interest in PTVI, excluding the Latin America,
Spain and Portugal territories, in exchange for PEI  ́s release of Claxson from
future capital commitments to that venture (see Note 3). Accordingly, as of
December 31, 2002, the accompanying consolidated balance sheet of Claxson does
not include any investment in PTVI. Prior to the renegotiation of agreements
with PEI, Claxson did not control PTVI or PTVLA and, therefore, accounted for
its interest in PTVI and PTVLA under the equity method of accounting. F-9




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) Claxson retained its 81% interest in Playboy TV Latin America LLC
(Playboy TV Latin America or PTVLA). As part of the new agreement, Claxson
and PEI executed the Second Amended and Restated Operating Agreement for PTVLA
whose provisions provided Claxson with management control of the venture, and
therefore Claxson consolidated PTVLA as of December 23, 2002. Accordingly,
PTVLAs balance sheet is included in the consolidated balance sheets as of
December 31, 2002 and 2003, and its operations for the eight day period from
December 24 to December 31, 2002 and for the full year 2003, have been included
in the consolidated statements of operations. Operations of PTVLA prior to
December 24, 2002 were accounted for under the equity method of accounting. Use of Estimates The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
(US GAAP) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Fair Value of Financial Instruments The fair value of financial
instruments held by Claxson is based on a number of factors and assumptions and
may not necessarily be representative of the actual gains or losses that may be
realized upon settlement. The carrying amounts of cash equivalents, accounts
receivable and payable, accrued expenses, due to related parties and other
current liabilities approximate their fair value due to their short-term
nature. The carrying amounts of restricted investments and investments in
equity securities approximate fair value based on current market prices and
rates. The carrying amount of long-term liabilities, other than Imagens 11%
Senior Notes due 2005, approximates fair value as determined based on rates
estimated by Claxson to be currently available from other lenders. The fair
value of Imagens 11% Senior Notes due 2005 and Claxsons 8.75% Senior Notes
due 2010, which are carried at $2,320 and $41,353, respectively, approximates
$855 and $27,707, respectively, as of December 31, 2003 as determined by quoted
market prices. Foreign Currency Translation/Foreign Currency Exchange Loss  Management
has determined that the Argentine peso (ARS) is the functional currency of
the Argentine subsidiaries and the Chilean peso is the functional currency of
the Chilean subsidiaries. The financial statements of these subsidiaries have
been translated into U.S. dollars in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translation. Adjustments resulting from the translation of the financial
statements from their functional currency to U.S. dollars are accumulated as
other comprehensive (loss) income within shareholders equity and are not
included in the determination of (loss) income for the relevant periods. For
the years ended December 31, 2001, 2002, and 2003, these foreign currency
translation amounts resulted in a (loss) gain of $(26,123), $41,198, and
$(1,194), respectively. Certain assets and liabilities of these non-U.S. subsidiaries are
denominated in currencies other than the functional currency; foreign currency
exchange gains and losses on those assets and liabilities are included in the
determination of income (loss) for the relevant periods. The decision of the
Argentine Government on December 20, 2001, to preclude exchanges of ARS and
U.S. dollars created a condition of non-exchangeability, which resulted in
Claxson using the first subsequent free-floating rate (ARS 1.65 per U.S.
dollar) for which transactions could be settled to remeasure Claxsons
Argentine subsidiaries financial position and results of operations. The ARS
free market opened on January 11, 2002 and traded at 1.65 ARS to the U.S.
dollar, with peaks of 3.90 ARS to the U.S. dollar in 2002, closing at 3.37 and
2.96 ARS to the U.S. dollar as of December 31, 2002 and 2003, respectively.
This resulted in remeasurement (losses) gains of approximately $(29,565),
$(61,349) and $9,095, which are reflected in net (loss) gain on foreign
currency exchange in the accompanying consolidated statements of operations for
the years ended December 31, 2001, 2002 and 2003, respectively. Currency Risks Beginning in December of 2001 the Argentine Government
took several measures that affected the exchange rate of the ARS, the transfer
of funds, and the denomination of contracts in currencies other than the ARS.
The Argentine Government restricted the withdrawal of funds and froze time
deposits and savings accounts for a period between six months to three years.
All contracts between Argentine private parties previously denominated in
foreign currencies were converted to ARS. F-10




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) Numerous uncertainties exist surrounding the ultimate resolution of
Argentinas economic and political instability and actual results could differ
from those estimates and assumptions utilized. The Argentine economic and
political situation continues to evolve and the Argentine Government may enact
future regulations or policies that, when finalized and adopted, may adversely
and materially impact, among other items, (i) the realized revenues that
Claxson receives for services offered in Argentina; (ii) the timing of cash
flows from Argentine companies to Claxson subsidiaries; (iii) Claxsons asset
valuations; and (iv) Claxsons ARS-denominated monetary assets and liabilities. Risk Management Claxson currently operates in countries throughout
Ibero America, and principally in Argentina and Chile. Claxsons financial
performance may be affected by inflation, exchange rates and controls, price
controls, interest rates, changes in governmental economic policy, taxation and
political, economic or other developments in or affecting the Latin American
countries in which Claxson operates. Additionally, a significant portion of
the debt has a fixed interest rate thereby limiting Claxsons interest rate
risk exposure. Accordingly, Claxson does not enter into derivative
transactions to hedge against these potential risks. As a result, the January
1, 2001 implementation of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 138, did not have a material
impact on Claxsons consolidated financial position, results of operations, or
cash flows. Cash and Cash Equivalents Cash and cash equivalents include cash and
interest-bearing deposits held in banks with an original maturity date of three
months or less when acquired. Restricted Investments Restricted investments consist of funds held in
an escrow account to be used to complete any payment to the lenders of the
syndicated bank facility described in Note 6. The funds in the escrow account
will be released upon reaching certain coverage ratios. Allowance for Doubtful Accounts Receivable Claxson carries accounts
receivable at the amount it deems to be collectible. Accordingly, Claxson
provides allowances for accounts receivable deemed to be uncollectible based on
managements best estimates. Recoveries are recognized in the period in which
they are received. The ultimate amount of accounts receivable that become
uncollectible could differ from the estimated amount. The activity for the
allowance for doubtful accounts receivable is as follows: Year Ended December 31,2001
    
    2002
    
    2003Beginning balance
    
    $
    4,460
    
    
    $
    6,662
    
    
    
    10,128Acquired allowances
    
    
    2,631
    
    
    
    
    
    
    
    Provision
    
    
    4,333
    
    
    
    5,069
    
    
    
    1,296Write-offs, net
    
    
    (1,523
    )
    
    
    (1,327
    )
    
    
    (4,598
    )Exchange rate effect
    
    
    (3,239
    )
    
    
    (276
    )
    
    
    304Ending balance
    
    $
    6,662
    
    
    $
    10,128
    
    
    $
    7,130
 Programming Rights Programming rights consist of the right to broadcast
and distribute acquired or licensed television content and related rights.
Programming rights and the related obligations are recorded at gross contract
prices. The costs are amortized on varying bases related to the license
periods and anticipated usage of the program. Expected amortization for the
year ending December 31, 2004 is estimated to be $5,251. In the event that an
acquired program is replaced and no longer used or the unamortized cost exceeds
fair value, Claxson reduces the carrying value of the related programming
rights accordingly. Claxson believes that these policies conform to Statement
of Position No. 00-2, Accounting by Producers or Distributors of Films. Property and Equipment Property and equipment is stated at cost less
accumulated depreciation and amortization. Property and equipment, other than
leasehold improvements, is depreciated using the straight-line method over the
estimated useful lives of the respective assets. Leasehold improvements are
amortized over the lesser of the term of the lease or the useful life of the
respective improvement. Property and equipment is being depreciated or
amortized, as the case may be, as follows: F-11




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) Buildings
    
    20  50 yearsEquipment
    
    3  10 yearsLeasehold improvements
    
    5  7 yearsFurniture, fixtures and other fixed assets
    
    5  10 years
 Investments in Debt and Equity Securities Claxson accounts for its
investments in accordance with the provisions of SFAS No. 115. Claxsons
investments in equity securities have been classified as available for sale and
accordingly are recorded at fair value. Unrealized gains or losses are
reported as a net amount in a separate component of shareholders equity until
realized. Claxsons investments in equity securities are as follows: December 31,2001
    
    2002
    
    2003Investment at fair value
    
    $
    8,290
    
    
    $
    448
    
    
    $
    54Investment at original cost
    
    
    6,727
    
    
    
    1,285
    
    
    
    1,285Unrealized gain (loss) from investment
    
    $
    1,563
    
    
    $
    (837
    )
    
    $
    (1,231
    )
 Claxsons investments in equity securities are subject to equity price
risk. Claxson has not taken any actions to hedge this market risk exposure. In March 2001, Claxson invested $5,135 (including expenses) in Series A
Convertible Preferred Stock of Playboy.com, Inc. (the Series A Preferred
Stock). As of December 31, 2001, Claxson accounted for its investment in the
Series A Preferred Stock at cost plus accrued dividends. In December 2002, as
part of the restructuring of the relationship with PEI, Claxson transferred its
interest in Playboy.com, Inc. to PEI. (See Note 3). Goodwill, Intangibles and Other Assets Effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 142 (SFAS
142), Goodwill and Other Intangible Assets, which establishes the accounting
and financial reporting standards for acquired goodwill and other intangible
assets. SFAS 142 requires that goodwill and certain intangible assets deemed to
have an indefinite useful life no longer be amortized, but instead tested for
impairment at least annually. Separable intangible assets that have finite
useful lives will continue to be amortized over their respective useful lives.
Before performing the review for impairment, the new guidance requires that all
goodwill deemed to relate to the entity as a whole be assigned to all of the
Companys reporting units in a reasonable and supporting manner. Measurement of
any impairment loss would be based on managements estimate of fair value.
Impairment of goodwill and intangible assets deemed to have an indefinite
useful life exists if their carrying value exceeds their fair value. The
components of goodwill by segments are as follows: Year Ended December 31,2002
    
    2003Goodwill:Pay Television
    
    $
    27,960
    
    
    $
    25,481Broadcast television and Radio
    
    
    23,598
    
    
    
    28,146Broadband and Internet
    
    
    279
    
    
    
    Total goodwill
    
    $
    51,837
    
    
    $
    53,627
 In accordance with SFAS No. 142, Claxson discontinued the amortization of
goodwill effective January 1, 2002, and measured fair value based on an
evaluation of estimated future discounted cash flows, market comparisons,
recent comparable transactions or a combination thereof. This evaluation
considered several earnings scenarios and the likelihood of possible outcomes,
and utilized the best information available at the time the valuation was
performed. As a result of this valuation, Claxson recorded in 2002 a goodwill
impairment loss of $74,789 ($70,833 corresponding to the Pay Television segment
and $3,956 to the Broadband and Internet segment) which is classified as a
cumulative effect of a change in accounting principle. F-12




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) In 2003, as a result of the annual valuation, Claxson recorded a goodwill
impairment loss of $2,758 ($2,479 corresponding to the Pay Television segment
and $279 to the Broadband and Internet segment) which is classified as
operating expense in accordance with SFAS No. 142. However, because the
goodwill of our Broadcast television and radio business is carried in Chilean
pesos and translated for consolidation, the U.S. dollar value of goodwill
increased as a result of a 21% appreciation of the Chilean Peso from December
31, 2002 to December 31, 2003. Prior to January 1, 2001, goodwill was amortized on a straight-line method
over a 20-year period. Amortization of goodwill was $8,935 for the year ended
December 31, 2001, and accumulated amortization amounted to $31,196. The
following is a reconciliation of net loss and loss per share reported in the
accompanying Consolidated Statements of Operations and Comprehensive Income
(Loss) to the pro forma amounts adjusted for the exclusion of goodwill
amortization. The pro forma results reflecting the exclusion of goodwill
amortization have been prepared only to demonstrate the impact of goodwill
amortization on net loss and loss per common share and are for comparative
purposes only. 2001Reported net loss
    
    $
    (84,886
    )Add: goodwill amortization
    
    
    8,935Adjusted net loss
    
    $
    (75,951
    )Net loss per common share basic and diluted
    
    $
    (4.58
    )Add: goodwill amortization
    
    
    0.48Adjusted net loss per common share basic and diluted
    
    $
    (4.10
    )
 Remaining intangible assets consist of broadcast and television licenses
and trademarks that are being amortized on a straight-line method over periods
ranging from 5 to 30 years. As of December 31, 2002 and 2003, accumulated
amortization of broadcast television and radio licenses amount to $10,283 and
$13,274, respectively. Amortization of these intangible assets and trademarks
was $4,664 in 2001, $2,978 in 2002 and $858 in 2003. It is anticipated that
amortization expense will continue at approximately $1,400 annually for 2004
through 2008. The carrying value of intangible assets is periodically reviewed
by management and impairments, if any, are recognized when the expected future
undiscounted cash flows related to such intangible assets are less than their
carrying value. Revenue Recognition Claxson, through its subsidiaries, enters into
distribution agreements with cable and direct-to-home distributors pursuant to
which it receives monthly subscriber-based fees. The subscriber-based fee is
recognized as revenue as Claxson provides the television services to the
distributor. Advertising revenue is recognized at the time the advertisement
is aired. Revenue from the licensing of programming rights are recognized
ratably over the license period when a contractual obligation exists. Other
revenue consists primarily of fees for playback, library, satellite, dubbing,
subtitling and back office services which are recognized as the services are
performed. Claxson believes that its revenue recognition policies conform to
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Three main customers accounted for 15%, 8% and 6% of net revenues for the
year ended December 31, 2001, 15%, 4% and 3% of net revenues for the year ended
December 31, 2002 and 16%, 5% and 3% of net revenues for the year ended
December 31, 2003, respectively. Share-based Compensation SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for employees under share-based compensation plans at fair
value. Claxson has chosen to continue to account for share-based compensation
to employees using the intrinsic value method as prescribed by Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost for
share options issued to employees are measured as the excess, if any, of the
fair value of Claxsons common shares at the date of grant over the amount an
employee must pay for the common shares. On January 17, 2001, certain
employees of various subsidiaries of Claxson received 50,000 restricted shares
of Claxson. The shares vested immediately and were issued at no cost to F-13




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) such
employees. Compensation expense of $658 was recorded at the date of grant,
based on the fair value of the shares at the date of grant. Advertising Expenses Claxson expenses advertising costs as incurred.
Advertising expenses totaled $4,613, $1,741 and $2,504 for the years ended
December 31, 2001, 2002 and 2003, respectively. Barter Transactions The Company enters into transactions that exchange
advertising for products and services. Such transactions are recorded at the
estimated fair value of the advertising received or given in accordance with
the provisions of the Emerging Issues Task Force (EITF) Issue No. 99-17,
Accounting for Advertising Barter Transactions. Revenue from barter
transactions is recognized when advertising is provided, and services received
are charged to expense when used. Barter transactions are not material to the
Companys consolidated statement of operations for year ending December 31,
2001 and amount to $1,940 and $1,920 for years ending December 31, 2002 and
2003, respectively. Merger, Restructuring and Severance Expenses Merger, restructuring and
severance expenses consist primarily of severance costs related to
organizational changes undertaken to take advantage of the synergies among the
different business units and the corporate and administration areas of Claxson
as a result of the 2001 merger transaction. Claxson has recorded such costs as
they have been incurred. Severance expenses incurred during 2002 and 2003 were
classified in the relevant account of operating expenses as they pertain to the
ordinary course of business. Income Taxes Claxsons subsidiaries that are subject to income taxes
account for income taxes in accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes.SFAS No. 109 requires an asset and liability
approach for differences in financial accounting and income tax purposes.
Under this method, a deferred tax asset or liability is recognized with respect
to all temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities, and the benefit from utilizing tax
loss carryforwards and asset tax credits is recognized in the year in which the
loss or credit arises (subject to a valuation allowance with respect to any tax
benefits not expected to be realized). Net Loss Per Common Share Basic net income (loss) per common share is
computed based on the average number of common shares outstanding and diluted
net income (loss) per common share is computed based on the average number of
common shares outstanding and, when dilutive, potential common shares from
share options and warrants to purchase common shares using the treasury stock
method and from convertible securities using the if-converted basis. New Accounting Pronouncements In April 2002, the FASB issued SFAS No.
145, Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and
Technical Corrections". SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, and
SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". SFAS No. 145 also rescinds SFAS No. 44, Accounting for Leases,
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Adoption on SFAS 145
precluded the gain on the exchange offer from being reflected as an
extraordinary item. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires companies to
recognize the costs associated with exit or disposal activities when they are
incurred. Currently these types of costs are recognized at the time management
commits the company to the exit/disposal plan in accordance with EITF Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring).SFAS 146 is effective for exit or disposal activities that are
initiated subsequent to December 31, 2002. Application of the provisions of
SFAS 146 did not have a material impact on the Companys consolidated financial
statements. F-14




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) In November 2002, the EITF reached a consensus on EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables.EITF 00-21 provides guidance on how
to account for arrangements that involve the deliver or performance of multiple
products, services and/or rights to use assets. The provisions of EITF 00-21
will apply to
revenue arrangements entered into in fiscal periods beginning after June
15, 2003. The Company does not believe EITF 00-21 provisions will have a
material effect on its consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 requires that a liability be
recorded in the guarantors balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entitys product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. Adoption of FIN 45
did not have a material effect on the Companys consolidated financial
statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock
Based Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No.
123, Accounting for Stock Based Compensationto provide alternative methods
of transition for a voluntary change from the intrinsic-value-based method of
recognizing stock compensation expense under APB Opinion No. 25, Accounting
for Stock Issued to Employees, to the SFAS No. 123 fair-value-based method of
accounting for stock-based employee compensation. Under the fair value method,
the fair value of the stock options granted to employees is recognized as
compensation expense over the service period (usually the vesting period).
Under the intrinsic value method, compensation expense is recognized for
options that are -in-the-money, thereby having intrinsic value, at the date of
grant. The transition guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ended after December 15, 2002. The adoption of the
disclosure provisions of SFAS 148 did not have a material effect on the
Companys consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities  an Interpretation of ARB No.
51as further clarified and amended by the FASBs issuance of a revision in
December 2003. FIN 46 addresses consolidation by business enterprises of
variable interest entities (formerly special purpose entities or SPEs). In
general, a variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. This interpretation applies immediately to
variable interest entities created after January 31, 2003 and in the quarter
ending March 15, 2004 for variable interests in variable interest entities
created before February 1, 2003. The Company does not have any variable
interest entities as defined in FIN 46. Accordingly, the Company has determined
that it is not reasonably possible to consolidate or disclose information about
a variable interest entity upon the adoption of FIN 46. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities", effective for contracts
entered into or modified after June 30, 2003, with certain exceptions. This
statement amends and clarifies financial accounting and reporting for
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities". The adoption of this SFAS did
not have a material effect on the Companys consolidated financial statements. In May 2003, the FASB issued SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
effective for financial instruments entered into or modified after May 31,
2003, otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, with the exception of an indefinite deferral
relating to application to limited life entities. This statement establishes
standards for how an issuer must classify and measure certain financial
instruments with characteristics of both F-15




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) liabilities and equity, requiring an
issuer to classify a financial instrument that is within its scope as a
liability (or an asset in certain circumstances). The adoption of SFAS No. 150
did not result in the reclassification of any financial instruments in the
Companys consolidated financial statements. Reclassifications Certain amounts in the consolidated financial
statements previously presented have been reclassified to conform to the
presentation for the current year. 3. ACQUISITIONS AND DISPOSALS As discussed in Note 1, Claxson was formed in September of 2001 through a
combination and merger of Ibero-American Media Partners, El Sitio and certain
other media assets of the Cisneros Group. The contribution of the assets of
Ibero-American Media Partners, was recorded at historical carrying value. The
contribution of El Sitio, Rainbow Heights International, Ltd., and the
interests in ARTISTdirect, DMX LA, and Playboy TV International was recorded at
estimated fair value. Claxson issued 5,505 shares with a fair market value of
$39,097 for the contribution of assets to Ibero-American Media Partners. The
purchase price allocation of the fair market value is as follows: Cash and cash equivalents
    
    $
    15,793Accounts receivable, net
    
    
    8,174Other current assets
    
    
    4,191Property and equipment, net
    
    
    2,400Investment in unconsolidated affiliates
    
    
    12,315Investment in debt and equity securities
    
    
    1,240Other assets, net
    
    
    2,897Assumed liabilities
    
    
    (7,913
    )Total
    
    $
    39,097
 The transaction was completed on September 21, 2001, and accordingly, the
accompanying consolidated financial statements include the results of
operations from the contributed assets for the period from that date to
December 31, 2001. The pro forma information below displays the statement of
operations as though the transaction had occurred as of the beginning of 2001.
For comparative purposes, Claxson calculated net loss per common share using
the weighted average number of common shares as of December 31, 2001. 2001Revenues
    
    $
    113,796Operating loss
    
    
    (60,595
    )Net loss
    
    
    (167,046
    )Net loss per common share
    
    
    (9.01
    )
 In 2001, Claxson acquired four entities for a total purchase price of
$3,775, consisting of $925 in cash, $350 in Common Stock (139 Shares) and
$2,500 in notes payable and assumption of debt. The assets of the entities
acquired consisted primarily of distribution rights for a fashion oriented pay
television channel (FTV) in Latin America and a 51% interest in an advertising
representation entity in Brazil (Star TV). Sale of Unconsolidated Affiliates On May 11, 2001, Kedar Enterprises
Ltd., a subsidiary of Claxson, entered into an agreement with Caribbean
Communications Networks Limited (CCN) for the purchase by the CCN Group
Employees Share Ownership Plan of Kedar Enterprises entire equity stake in CCN
for a purchase price of $5,000. The transaction resulted in a gain of
approximately $600. On May 17, 2002, CGP, and Santori N.V., subsidiaries of Claxson, entered
into an agreement with a subsidiary of Corus Entertainment Inc. (Corus) for
the sale of CGP, Inc. and Santori N.V.s entire equity stake in The Locomotion
Channel and The Locomotion Channel B.V. for a sales price of $10,500. Of that
amount, $2,100 was subject to a holdback in the event of economic changes that
could impact revenue projections. Net gain on the sale of this investment
amounted to $1,900, excluding the holdback. In June, 2004, Claxson collected
$625 of the F-16




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) amounts subject to the holdback as the final payment for the sale
of Locomotion. As part of that transaction, Claxson continued to provide
certain services to the channel including affiliate sales support in Latin
America through July 31, 2003, and program origination and post-production
services through December 31, 2003. Dilution of Investment in Unconsolidated Affiliate On June 5, 2002,
Claxson agreed to the contribution of certain assets to DMX MUSIC Latin America
by DMX Music, Inc.(DMX), the non-Claxson joint venture partner. The
contributed assets consisted primarily of affiliation agreements and cash of
$742. After this contribution, the joint venture changed its commercial name
to DMX MUSIC Latin America. In consideration for these assets, DMXs equity
share in the venture was increased to 69% from 50%. Accordingly, Claxsons
share in the venture was reduced to 31%. There was no gain or loss on this
transaction. Termination of Operations of El Metropolitano On June 12, 2002, Claxson
approved a plan to terminate the operations of El Metropolitano, a daily
newspaper in Chile acquired in 2001 in exchange for advertising time. The loss
from this termination is included in other income (expense). Restructuring of the relationship with Playboy Enterprises Inc. (PEI)
In January 2002, Claxson began negotiating a restructuring of the PTVI joint
venture in an effort to adjust the fixed cost structure and obligations owed to
PEI by PTVI, resulting from PTVIs lower than anticipated actual revenues. If
Claxson had not restructured the PTVI joint venture agreement, Claxson would
have been responsible for making additional capital contributions of up to
$21,400 over the life of the joint venture. In addition, PTVI was obligated to
pay an affiliate of PEI, $57,500 in several lump sum payments prior to
September 2004. On December 24, 2002, Claxson, PEI, and their respective affiliates,
completed the restructuring of their existing joint venture agreement for PTVI.
Pursuant to the restructuring, Claxson transferred its 80.1% interest in PTVI
(outside of Latin America, Spain and Portugal) to PEI, contributed the Venus
channel to PTVLA and transferred its Series A Preferred Stock in Playboy.com to
PEI. In exchange, Claxson was released from its capital commitments to PTVI,
and revised the terms of the relationship with PEI in Latin America, Spain and
Portugal. As a result, the Company, through a subsidiary, retained its 81%
interest in PTVLA, and obtained management control of PTVLA. Consequently,
after the restructuring, the Company operates all adult content operations
(which include the Playboy TV, Spice Live and Venus channels) under the PTVLA
joint venture. An affiliate of PEI will distribute the PTVLA programs in the US
Hispanic market for a 20% distribution fee to the joint venture. The
restructuring of the PTVI/PTVLA joint ventures resulted in the offset of
various receivables and payables between Claxson and PEI and the removal of the
carrying values of the assets relinquished which resulted in a loss of $2,931.
Such amount is included in net loss from unconsolidated affiliates. Sale of Clase On February 7, 2003 the Board of Directors of Claxson
approved the sale and transfer of Rainbow Heights International Ltd
(Rainbow), a British Virgin Islands international business company which owns
and operates the Clase television channel (Clase), to the Cisneros Group. On
June 11, 2003, Claxson and its subsidiaries executed agreements with affiliates
of the Cisneros Group, all effective as of January 1, 2003, to sell Rainbow at
book value. Accordingly, there was no gain or loss on the transaction. The
Company decided to sell Rainbow, and initiated negotiations to accomplish this,
prior to year-end 2002, and as a result classified its net investment in other
current assets and the net income in other income (expenses). As part of the abovementioned transaction, Clase entered into certain
services agreements with Claxson: (i) Affiliate sales representation for the
sales to cable operators, (ii) Production services agreement for website
programming maintenance and hosting and creative services for on and off air
promotions, (iii) Management services agreement for accounting, legal and
communications services and (iv) Program origination and satellite services
agreement. F-17




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following: December 31,2002
    
    2003Land and buildings
    
    $
    8,178
    
    
    $
    9,424Equipment and software
    
    
    33,496
    
    
    
    40,194Leasehold improvements
    
    
    7,887
    
    
    
    8,886Total
    
    
    49,561
    
    
    
    58,504Less accumulated depreciation and amortization
    
    
    (30,988
    )
    
    
    (39,397
    )Property and equipment, net
    
    $
    18,573
    
    
    $
    19,107
 Depreciation expense for the years ended December 31, 2001, 2002 and 2003
was $10,459, $9,179 and $4,966, respectively. 5. INVESTMENT IN UNCONSOLIDATED AFFILIATES Combined condensed financial information of significant investees as of
December 31, 2002, and 2003 and for the years ended December 31, 2001, 2002 and
2003, is as follows: Balance sheet information: December 31,2002
    
    2003Current assets
    
    $
    1,616
    
    
    $
    2,028Non-current assets
    
    
    529
    
    
    
    625Total assets
    
    $
    2,145
    
    
    $
    2,653Current liabilities
    
    $
    287
    
    
    $
    606Equity
    
    
    1,858
    
    
    
    2,047Total liabilities and equity
    
    $
    2,145
    
    
    $
    2,653Claxsons investment in unconsolidated affiliates
    
    $
    1,025
    
    
    $
    1,061
 Statement of operations information: Year Ended December 31,2001
    
    2002
    
    2003Revenues
    
    $
    57,658
    
    
    $
    51,193
    
    
    $
    3,038Expenses
    
    
    (84,001
    )
    
    
    (54,754
    )
    
    
    (2,105
    )Other
    
    
    (4,437
    )
    
    
    (3,566
    )
    
    
    (3
    )Net (loss) gain
    
    $
    (30,780
    )
    
    $
    (7,127
    )
    
    $
    930Claxsons share of (loss) income
from unconsolidated affiliates
    
    $
    (19,097
    )
    
    $
    (6,248
    )
    
    $
    346
 The statement of operations includes the effect of unconsolidated
affiliates which were disposed of during the year through the date of
disposal. Net loss from unconsolidated affiliates for the year 2002 also
includes $1,900 of gain on the sale of Locomotion, and a loss of $2,931 related
to the restructuring of the PTVI/PTVLA joint ventures (see Note 3). F-18




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) 6. LONG-TERM DEBT Long-term debt consists of the following: December 31,2002
    
    2003Senior Notes11% Senior Notes due 2005, including accrued
interest
    
    $
    3,647
    
    
    $
    2,9288.75% Senior Notes due 2010 , including accrued
interest
    
    
    62,972
    
    
    
    61,6156.25% Senior Notes due 2013 , including accrued
interest
    
    
    2,605
    
    
    
    2,746Other Senior Notes, including accrued interest
    
    
    
    
    
    
    244Syndicated bank facility
    
    
    17,578
    
    
    
    15,447Other long-term debt
    
    
    5,686
    
    
    
    5,139Total
    
    
    92,488
    
    
    
    88,119Less Current Portion:11% Senior Notes due 2005
    
    
    (3,647
    )
    
    
    (2,928
    )8.75% Senior Notes due 2010
    
    
    (1,396
    )
    
    
    (3,618
    )6.25% Senior Notes due 2013
    
    
    
    
    
    
    (80
    )Syndicated bank facility
    
    
    (5,699
    )
    
    
    (3,654
    )Other long-term debt
    
    
    (925
    )
    
    
    (1,645
    )Long-term debt, net of current portion
    
    $
    80,821
    
    
    $
    76,194
 Senior Notes In April 1998, Imagen issued $80,000 principal amount of
11% Senior Notes due 2005. The net proceeds (after deducting certain fees and
expenses incurred in connection with the issuance of the Notes) amounted to
approximately $79,000. Interest on the Notes is payable semiannually. On
April 30 and November 1, 2002, Imagen failed to make the interest payments of
$4,400 each on the Notes. The default accelerated the maturity of the Notes
and accordingly, the Notes were classified as current at December 31, 2001. On
November 8, 2002, the Company completed the Exchange Offer for the Imagen
Notes. Claxson offered $0.55 in principal amount of its 8.75% Senior Notes due
2010 (the New Notes) in exchange for each $1.00 principal amount of the
Notes. Claxson received valid tenders from holders representing $74,510
principal amount of the Notes, which represent 93.1% of the Notes. Pursuant to
the Exchange Offer, Claxson issued $41,353 principal amount of New Notes. Under the terms of the New Notes, Claxson and Imagen guarantee, on a
senior unsecured basis, the payment of the principal and interest on the New
Notes issued by Claxson, as well as any additional amounts, extraordinary cash
payments, or excess cash flow payments due on the New Notes, when and as they
become due and payable. As the carrying amount of debt as of the date of restructuring (November
8, 2002), exceeded the total future cash payments specified by the new terms
(including future interest, consent, legal, advisory fees and other direct
transaction costs payments), the Company reduced the carrying amount of its
debt to the total future cash payments, including future interest, specified by
the new terms and recognized a gain on debt restructuring of $15,274.
Accordingly, the Company does not recognize interest expense on the New Notes
at each year-end, as all future interests are included in the carrying amount
of the debt. On March 24, 2003, Imagen and certain Noteholders that did not participate
in the Exchange Offer, entered into agreements by which certain Noteholders
exchanged $2,300 in principal amount of the Notes for new notes in the same
principal amount, payable in two equal installments of $1,150 due July 15, 2012
and 2013, and two extraordinary payments of $22, bearing interest at an annual
rate of 6.25% from July 15, 2003, payable semi-annually on January 15 and July
15 (Imagen 6.25% Senior Notes due 2013). Restructured debt of $2,300 and
related accrued interest, have been classified as long-term as of December 31,
2002 and 2003. F-19




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) During the year 2003, Imagen and certain Noteholders that did not
participate in the Exchange Offer entered into agreements by which Imagen
exchanged $870 in principal amount of the Notes for other debt instruments with
longer average term and reduced principal amount. Notes in the principal amount of $2,320 that were not exchanged as of the
date of issuance of the accompanying consolidated financial statements, and
$608 of related accrued interest, have been classified as current as of
December 31, 2003. Syndicated Bank Facility The Chilean syndicated bank facility consists
of a term loan for an original amount of $35,000. The facility, originally
maturing through 2005, is collateralized by Claxsons Chilean radio assets, and
guaranteed by Claxsons Chilean subsidiary. Interest is payable quarterly at
the local prime lending rate plus 2.50% through February 2, 2003, and 2.75%
thereafter. The applicable interest rates were 6.74%, 6.00% and 4.19% for the
years ended December 31, 2001, 2002 and 2003, respectively. The facility
contains customary restrictive covenants. During 2002, Claxson was not in compliance with the coverage ratios
required under the credit facility, primarily as a result of the devaluation of
the Chilean peso against the US dollar. On December 12, 2002, Claxson completed
the renegotiation of the terms of the syndicated bank facility with its
lenders. The amended terms included: (i) the modification of financial covenant
ratios, (ii) the extension of the term of the loan by one year to mature on May
5, 2006, and (iii) the increase in the interest rate by the local prime lending
rate plus 2.75%. In addition, Claxson is required to maintain $1,500 in an
escrow account until certain ratios are met. Chilevisión, Claxsons broadcast
television operation in Chile, guaranteed the Syndicated Credit Facility. In
the event the funds in the escrow fall below $750, Claxson is obligated to
increase the amount in the escrow account to reestablish a minimum level of
$1,000. As of December 31, 2003, there was $963 in escrow. Other Long-Term Debt Other long-term debt bears interest at rates
ranging from 4% to 10% and has maturity dates ranging from 2004 through 2008.
Certain other long-term debt is issued and collateralized by the assets of The
Kitchen, Inc., one of Claxsons subsidiaries. On March 25, 2003, Imagen renegotiated a portion of its other long-term
debt and accordingly, principal of $611 was classified as long-term as of
December 31, 2002. Aggregate maturities of long-term debt are as follows: Twelve Months Ended December 31,2004
    
    $
    11,9252005
    
    
    6,7082006
    
    
    9,2002007
    
    
    13,3632008
    
    
    15,735Thereafter
    
    
    31,188Total
    
    $
    88,119
 7. INCOME TAXES Certain subsidiaries of Claxson are subject to income taxes in various
countries at statutory rates ranging from 15% to 35%. The (provision) benefit
for income taxes is as follows: F-20




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) Year Ended December 31,2001
    
    2002
    
    2003Current
    
    $
    756
    
    
    $
    652
    
    
    $
    2,672Deferred
    
    
    3,410
    
    
    
    (786
    )
    
    
    132Total provision (benefit) for
income taxes
    
    $
    4,166
    
    
    $
    (134
    )
    
    $
    2,804
 The following table provides a reconciliation of the statutory tax rate to
the effective tax rate. As the operations of the Argentine subsidiaries are
the most significant of Claxson, the following reconciliation has been prepared
utilizing the Argentine statutory tax rate. Year Ended December 31,2001
    
    2002
    
    2003Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Expected tax provision (benefit) using
statutory tax rate
    
    $
    (28,296
    )
    
    
    (35
    )
    
    $
    (48,520
    )
    
    
    (35
    )
    
    $
    3,883
    
    
    
    35Adjustment for operating losses in
taxable jurisdictions
    
    
    5,523
    
    
    
    7
    
    
    
    6,614
    
    
    
    5
    
    
    
    (892
    )
    
    
    (8
    )Adjustment for operating losses in
non-taxable jurisdictions
    
    
    12,181
    
    
    
    15
    
    
    
    10,336
    
    
    
    7
    
    
    
    781
    
    
    
    7Non-deductible goodwill in Argentina
    
    
    2,504
    
    
    
    3
    
    
    
    17,859
    
    
    
    13
    
    
    
    
    
    
    
    Utilization of prior year losses in
Argentina
    
    
    (2,634
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of differences in rates from Chile
    
    
    (1,053
    )
    
    
    (1
    )
    
    
    (1,061
    )
    
    
    (1
    )
    
    
    741
    
    
    
    7Effects of change in valuation
allowance
    
    
    16,038
    
    
    
    19
    
    
    
    9,429
    
    
    
    7
    
    
    
    (4,654
    )
    
    
    (42
    )Gain on anticipated payment of long
term debt (net present value)
    
    
    
    
    
    
    
    
    
    
    3,143
    
    
    
    2
    
    
    
    1,182
    
    
    
    10Other items
    
    
    (97
    )
    
    
    
    
    
    
    2,066
    
    
    
    1
    
    
    
    1,763
    
    
    
    16Total provision (benefit) for income
taxes
    
    $
    4,166
    
    
    
    5
    
    
    $
    (134
    )
    
    
    (1
    )
    
    $
    2,804
    
    
    
    25
 Net deferred income tax assets as of December 31, 2002 and 2003 are
reflected in other current assets in the accompanying consolidated balance
sheets and consist of the following: December 31,2002
    
    2003Net operating loss carryforwards
    
    $
    35,922
    
    
    $
    32,335Intangible assets
    
    
    228
    
    
    
    (984
    )Foreign currency items
    
    
    2,214
    
    
    
    2,104Property, equipment, and other
    
    
    (577
    )
    
    
    3,636Total
    
    
    37,787
    
    
    
    37,091Valuation allowance
    
    
    (37,195
    )
    
    
    (36,631
    )Net deferred tax asset
    
    $
    592
    
    
    $
    460
 Claxson has assessed the recoverability of the net deferred tax asset as
of December 31, 2003 and believes that it is more likely than not that the
deferred tax asset will be realized through future taxable income. 8. SHARE OPTION PLAN In late 2001, Claxson adopted the 2001 Share Incentive Plan (the Plan),
pursuant to which 930,000 common shares were reserved for issuance upon
exercise of options. Options granted under the Plan are non statutory share
options and have an exercise term of no longer than ten years from the grant
date. The Plan is designed as a means to retain and motivate key employees,
directors and consultants. The Compensation Committee of Claxsons Board of
Directors, or in the absence thereof, the full Board of Directors administers
and interprets the Plan and is authorized to grant options thereunder to all
eligible employees of Claxson, including F-21




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) directors (whether or not they are
employees) and executive officers of Claxson or affiliated companies. The Plan
will terminate in 2011, unless sooner terminated by the Board of Directors. On January 17, 2002, Claxson granted options underlying 513,849 and 55,000
shares at an exercise price of $0.738 per share, to its executive employees and
directors, respectively, resulting in deferred share-based compensation of
$149. Those options have a five year term and different vesting periods.
Amortization of deferred share-based compensation for the year ended December
31, 2003 was $49. As of December 31, 2003, 47,311 options are exercisable, and
75,300 have been forfeited during 2002. In January and April, 2004, 234,743 of the options outstanding to senior
management and 50,000 of the options outstanding to directors, became vested.
Accordingly, as of the date of issuance of the accompanying consolidated
financial statements, 332,054 options outstanding are exercisable and 69,780
shares were issued as a result of options being exercised. On February 3, 2004, Claxson granted, subject to shareholder ratification,
the remaining share options under the Plan underlying 493,549 shares at an
exercise price of $3.20 per share, to certain executive employees, resulting in
deferred share-based compensation of $131. Those options have a five year
term, except for those options granted to the CEO which have a ten year term
and vest 60% on February 2006 and 40% on February 2007. 9. PREFERRED SHARES In 2000 and 2001 Claxson issued an aggregate of 15,000,000 preferred
shares as follows: 8,400,000 to the Cisneros Group; and 6,600,000 to Hicks
Muse. These preferred shares were convertible, at the option of the holder,
commencing twelve months after completion of the transaction and for a period
of twelve months, into Class A common shares at a conversion ratio per share
equal to the greater of $20.00 or the fair market value of the Class A common
shares on the date of conversion. The preferred shares were automatically
convertible into Class A common shares twenty four months after completion of
the transaction. The preferred shares had the same voting rights as Class A
common shares. On September 2003, 15,000,000 preferred shares were automatically
converted into 750,000 Class A common shares at the conversion ratio of $20.00
per share. 10. SEGMENT INFORMATION Claxson currently has three business segments: Pay television; Broadcast
television and radio; and Internet and broadband. These segments are
consistent with the manner in which senior management analyzes and manages
Claxsons businesses. The primary measure used by senior management in
analyzing and managing its business segments is operating income (loss).
Segment information is as follows: BroadcastPay
    
    Television
    
    BroadbandTelevision
    
    and Radio
    
    and Internet
    
    Corporate
    
    TotalYear Ended December 31, 2001Total net revenues
    
    $
    77,397
    
    
    $
    28,289
    
    
    $
    751
    
    
    $
    
    
    
    $
    106,437Operating loss
    
    
    (3,304
    )
    
    
    (1,333
    )
    
    
    (4,807
    )
    
    
    (4,915
    )
    
    
    (14,359
    )Net loss
    
    
    (65,390
    )
    
    
    (8,226
    )
    
    
    (6,355
    )
    
    
    (4,915
    )
    
    
    (84,886
    )Total assets
    
    
    172,130
    
    
    
    82,379
    
    
    
    23,493
    
    
    
    
    
    
    
    278,002Year Ended December 31, 2002Total net revenues
    
    $
    46,192
    
    
    $
    28,578
    
    
    $
    190
    
    
    $
    
    
    
    $
    74,960Operating income (loss)
    
    
    9,303
    
    
    
    (1,152
    )
    
    
    (7,684
    )
    
    
    (2,775
    )
    
    
    (2,308
    )Net loss
    
    
    (116,363
    )
    
    
    (7,331
    )
    
    
    (13,549
    )
    
    
    (1,186
    )
    
    
    (138,429
    )Total assets
    
    
    69,000
    
    
    
    73,053
    
    
    
    6,650
    
    
    
    (1,081
    )
    
    
    147,622Year Ended December 31, 2003Total net revenues
    
    $
    48,215
    
    
    $
    33,394
    
    
    $
    178
    
    
    $
    
    
    
    $
    81,787Operating income (loss)
    
    
    7,266
    
    
    
    4,928
    
    
    
    (1,898
    )
    
    
    (5,032
    )
    
    
    5,264Net income (loss)
    
    
    13,289
    
    
    
    2,953
    
    
    
    (1,685
    )
    
    
    (6,220
    )
    
    
    8,337Total assets
    
    
    62,193
    
    
    
    81,245
    
    
    
    2,332
    
    
    
    (431
    )
    
    
    145,339
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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) A substantial portion of Claxsons pay television and internet and
broadband assets and operations are based in Argentina. Claxsons broadcast
television and radio assets and operations are primarily based in Chile. 11. COMMITMENTS AND CONTINGENCIES Commitments Claxson contracts for certain services (up-linking of
signals) and leases transponder capacity on certain satellites, office and
warehouse space and equipment under agreements expiring at various dates
through 2013. For the years ended December 31, 2001, 2002 and 2003, rent
expense incurred by Claxson for these items totaled $4,946, $6,632 and $4,925,
respectively. As discussed in Note 3 to the consolidated financial statements, under the
restructuring of the relationship with PEI, the Company has a commitment to PEI
for future minimum annual licensing fees of $4,000, annually. Aggregate future minimum payments under these noncancelable operating
leases are as follows: Twelve Months Ended December 31,2004
    
    $
    5,0492005
    
    
    4,0962006
    
    
    4,0122007
    
    
    3,7122008
    
    
    3,736Thereafter
    
    
    5,587Total
    
    $
    26,192
 Legal Proceedings Four civil complaints were filed between June and
July 2001 in the U.S. District Court for the Southern District of New York
against El Sitio, certain of its directors and principal executive officers,
and the underwriters which led El Sitios initial public offering in December
1999. The complaints, which request that the cases be certified as class
actions, allege, among other things, that the prospectus and registration
statement for the initial public offering were materially misleading because
they did not disclose certain alleged actions on the part of the underwriters.
The claims are alleged under both the U.S. Securities Act of 1933 and the U.S.
Securities Exchange Act of 1934. The complaints seek unspecified money
damages. Claxson believes that the allegations in the complaints relating to
it and its directors and principal executive officers are without merit, and
intends to defend vigorously itself and its directors and principal executive
officers in these cases. In November, 2002, the plaintiffs dismissed its claims
against the Companys current and former officers and directors without
prejudice. The Companys motions to dismiss, as well as those of most of the
other defendants, were denied in February 2003. On May 16, 2003, Claxsons
board of directors authorized El Sitios participation in a global settlement
on the four civil complaints. Under the proposed settlement, El Sitio would be
required to assign to the plaintiffs certain claims El Sitio could potentially
bring against El Sitios underwriters arising from its initial public offering,
and to release or waive certain other legal rights El Sitio may have, including
recovery of attorneys fees spent to date. The proposed settlement would not
release claims that El Sitios underwriters could bring against El Sitio or its
officers, directors, or agents. The settlement is subject to court approval,
and satisfactory finalization of the settlement papers. On April 30, 2001, the Brazilian tax authorities (Municipalidade do Sao
Paulo) appealed before the Special Jurisdiction Appellate Court of the State of
Sao Paulo the lower tax court decision that held in favor of our subsidiary,
Osite Informatica Ltda., in a suit for taxes alleged to be due by O Site
Entertenimentos Ltda. in the amount of 1,100 reals (approximately $473). Based
on preliminary assessments of our Brazilian tax advisors, we anticipate that
this appeal will be dismissed and that the lower court ruling upheld. On September 15, 2000, New Yetem, S.A. filed a petition, technically
called beneficio de litigar sin gastos requesting a waiver of the mandatory
litigation fee (3% of the amount of the lawsuit) and the right to bring forth a
claim without prior payment of the litigation fee. Such petition was granted
on November 15, 2001. A favorable response to such petition bears no relation
to the outcome of the potential claim that could subsequently be filed. On
November 2, 2000, in light of the press coverage regarding the announcement of
the merger transaction, F-23




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) New Yetem requested that the judge compel legal
representatives of a subsidiary of Claxson, to provide details on the
transaction since a merger could jeopardize New Yetems ability to collect from
El Sitio Argentina in the event of a final court decision. The judge rejected
this petition, and New Yetem appealed five days later. The Cámara Nacional de
Apelaciones en lo Comercialupheld the lower courts decision in favor of El
Sitio Argentina on February 7, 2001. As of December 2002 New Yetem has filed a
claim against El Sitio Argentina for $14,000. Counsel has advised that they
believe New Yetems claims are without merit, and Claxson intends to defend
this claim vigorously. Nonetheless, if New Yetem should prevail, Claxson
believes the actual damages are likely to be much lower than the $14,000
claimed in damages. In addition, on June 17, 2003, Imagen Satelital received a
police
search order, issued by a lower Criminal Court in Buenos Aires, to seek
information as part of a criminal accusation against Mr. Vivo, Claxsons chief
executive officer, and Mr. Cibrian, Claxsons executive vice president of
Broadband and Internet division. Imagen provided the requested information.
The initial phase of a criminal investigation is confidential and therefore
Claxson does not have any further information about the alleged charges or
merits thereof. In December 2003, due to Chilevisions use of hidden camera recordings
made and/or broadcasted by Chilevision as part of its investigative reporting
on high profile news of local interest, certain officers and journalists of
Chilevision were named the subject of several pending criminal proceedings in
Chile. No formal criminal charges have been brought against any of
Chilevisions employees and no civil actions have been filed against
Chilevision or its employees. These proceedings have been of high profile in
the Chilean media and although Claxson can not predict their outcome, it
believes that the allegations in these proceedings are without merit and have
retained counsel to vigorously defend Chilevision and its employees in these
cases. From time to time, Claxson is involved in certain other litigation.
Management believes that the ultimate outcome of any such litigation will not
be significant to its financial position, results of operations or cash flows. 12. RELATED PARTIES TRANSACTIONS Management Services Subsidiaries of Claxson perform management services
for certain affiliates, including: cash management; accounting and financial
reporting; facilities management and affiliated and advertising sales. For
performing these services, the respective affiliates pay Claxson a commission
fee on revenues, net of any advertising agency commission or discount or a fee
for back office services. The Kitchen Inc., a subsidiary of Claxson, provides
network playout, post-production services and language dubbing to affiliates
and third parties. For the years ended December 31, 2001, 2002 and 2003,
Claxson earned management, sales commissions and other service fees (included
in other revenues) from these affiliates amounting to $9,566, $9,967 and
$1,405, respectively. Included in due from related parties as of December 31,
2002 and 2003 are receivables from these affiliates for management and other
service fees, sales commissions and other expenses paid on behalf of these
affiliates, amounting to $2,705 and $1,049, respectively. Revenues For the years ended December 31, 2001, 2002 and 2003, Claxson
derived subscriber-based fees amounting to $22,626, $14,064 and $16,414,
respectively, from affiliated distributors. These revenues do not include
those of Clase and PTVLA, as they were not consolidated in Claxsons
consolidated statements of operations for the years ended December 31, 2001 and
2002. Included in accounts receivable as of December 31, 2002 and 2003 are
$8,431 and $4,123, respectively, due from these affiliates. During the fourth
quarter of year 2002, Claxson renegotiated its contract with DTVLA, reducing
per subscriber rates and translating prices to local currencies, in exchange
for a two year extension in the contracts maturity and the grant of an option
to launch a new channel. For
the year ended and as of December 31, 2003, the Company derived $40 of other
revenue and held $58 of accounts receivable, respectively, from an arrangement with a strategic
partner in which one of our shareholders holds an equity interest. F-24




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2001, 2002 and 2003
(In thousands of U.S. dollars) Expenses For the years ended December 31, 2001, 2002 and 2003, Claxson
incurred expenses amounting to $1,009, $421 and $220, respectively, to
affiliated distributors and service providers. Included in accounts payable as
of December 31, 2002 and 2003, are $1,304 and $916, respectively, to these
affiliated entities. Claxson has agreed to pay advisory fees to certain shareholders in an
amount of $150 per year to each of the Cisneros Group and Hicks Muse and $50 to
the El Sitio founders. Advisory fees incurred in relation to the agreement
amounted to $97, $350 and $350 for the years ended December 31, 2001, 2002 and
2003, respectively, of which $97, $255 and $113, were outstanding as of each
year end. During 2001, Claxson acquired a minority interest (approximately 3%) in
one of its subsidiaries from certain officers. The purchase price for such
interest was $3,900 of which $1,899 is reflected as accounts payable as of
December 31, 2002. There were no outstanding amounts as of December 31, 2003. 13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Supplemental Disclosure of Non-Cash Investing and Financing Activities: Acquisitions and Disposals See Note 3. Unrealized gain (loss) from investment in equity securities See Note 2. Investments in equity securities See Note 2. Supplemental Disclosure of Cash Flow Information For the years ended
December 31, 2001, 2002 and 2003 cash paid for income taxes amounted to $1,006,
$955 and $1,406, respectively. For the years ended December 31, 2001, 2002 and 2003, cash paid for
interest amounted to $12,695, $1,708, and $1,393, respectively. 14. SUBSEQUENT EVENTS Syndicated Bank Facility On June 25, 2004, Claxsons Chilean
subsidiary, Radio Chile, completed the restructuring of its syndicated credit
facility. Under the new syndicated credit facility, which was used to repay
the prior facility, Radio Chile received approximately $2.6 million in
additional funds, after the cancellation of the prior facility and deduction of
expenses and underwriting fees. As part of the restructuring Radio Chile was
able to extend the final maturity of the facility an additional three years,
improve the amortization schedule to bi-annual payments as compared to
quarterly payments, release the Chilevision and escrow account guarantees,
relax the covenant ratios and reduce the interest rate to the local prime
lending rate plus 2.50%. The total principal amount of the new facility is
approximately $14.7 million and matures in 2009. Convertible Debentures On June 21, 2004, Claxsons audit committee and
its disinterested directors approved the issuance of convertible debentures in
an amount up to $5 million. On July 8, 2004, the Company executed agreements
with Mr. Vivo-Chaneton (Chairman and Chief Executive Officer), Mr. Haiek (Pay
Television Chief Operating Officer) and Mr. Ituarte (Chief Financial Officer)
for the purchase of $2.0 million of convertible debentures. These convertible
debentures may be converted to Class A common shares at a conversion price of
$3.24 per share (based on the average stock price over the five days preceding
the date the debentures were issued), mature on July 31, 2006 and bear annual
interest at 8.25%. Additionally, in the event the Company prepays the
debentures, the investors have the right to receive warrants to purchase shares
of Class A common shares in an amount equal to the principal amount of the
debenture. Although there is no formal commitment, the Company is in
negotiations with the Cisneros Group for the sale of the remaining amount of
the convertible debentures that has been approved by the board. F-25




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INDEX TO EXHIBITS Exhibit No.
    
    Description8.1
    
    List of significant subsidiaries.11.1
    
    Claxson Interactive Group Inc. Code of Business Conduct and Ethics.12.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.12.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.13.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.13.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.15.1
    
    Deloitte & Touche LLP Consent.