##### Table of Contents



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
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year endedDecember 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 Date of event requiring this shell company report
 For the transition period from           to
 Commission file number 000-33143
 CLAXSON INTERACTIVE GROUP INC.
 (Exact name of Registrant as specified in its charter)
 CLAXSON INTERACTIVE GROUP INC.  (Translation of Registrants name into English)
 British Virgin Islands  (Jurisdiction of incorporation or organization)
 Avenida Melian 2752
C1430EYH Buenos Aires, Argentina  (Address of principal executive offices)
 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  (Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 None  (Title of Class)
  o þ
 o þ
  þ o
  o o þ
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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC.
FORM 20-F
ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2005
 INDEX
 INTRODUCTION
    
    
    2PART IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    2Item 2. Offer Statistics and Expected Timetable
    
    
    2Item 3. Key Information
    
    
    2A. Selected Financial Data
    
    
    2B. Capitalization and Indebtedness
    
    
    4C. Reasons for the Offer and Use of Proceeds
    
    
    4D. Risk Factors
    
    
    4Item 4. Information on the Company
    
    
    8A. History and Development of the Company
    
    
    8B. Business Overview
    
    
    8C. Organizational Structure
    
    
    21D. Property, Plant and Equipment
    
    
    21Item 4A. Unresolved Staff Comments
    
    
    22Item 5. Operating and Financial Review and Prospects
    
    
    22Item 6. Directors, Senior Management and Employees
    
    
    35A. Directors, Senior Management and Employees
    
    
    35B. Compensation
    
    
    39C. Board Practices
    
    
    42D. Employees
    
    
    44E. Share Ownership
    
    
    44Item 7. Major Shareholders and Related Party Transactions
    
    
    44A. Major Shareholders
    
    
    44B. Related Party Transactions
    
    
    47C. Interests of Experts and Counsel
    
    
    52Item 8. Financial Information
    
    
    52A. Consolidated Statements and Other Financial Information
    
    
    52B. Significant Changes
    
    
    54Item 9. The Offer and Listing
    
    
    54A. Listing Details
    
    
    54B. Plan of Distribution
    
    
    55C. Markets
    
    
    55D. Selling Shareholders
    
    
    55E. Dilution
    
    
    56F. Expense of the Issue
    
    
    56Item 10. Additional Information
    
    
    56A. Share Capital
    
    
    56B. Memorandum and Articles of Association
    
    
    56C. Material Contracts
    
    
    59D. Exchange Controls
    
    
    59
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E. Taxation
    
    
    59F. Dividends and Paying Agents
    
    
    63G. Statement by Experts
    
    
    63H. Documents on Display
    
    
    63I. Subsidiary Information
    
    
    63Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    64Item 12. Description of Securities Other than Equity Securities
    
    
    66PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    66Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    66Item 15. Controls and Procedures
    
    
    66Item 16.
    
    
    68A. Audit Committee Financial Expert
    
    
    68B. Code of Ethics
    
    
    68C. Principal Accountant Fees and Services
    
    
    68D. Exemptions from the Listing Standards for Audit Committees
    
    
    69E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    69PART IIIItem 17. Financial Statements
    
    
    69Item 18. Financial Statements
    
    
    69Item 19. Exhibits
    
    
    69EX-8.1 List of significant SubsidiariesEX-12.1 Section 302 Chief Executive Officer CertificationEX-12.2 Section 302 Chief Financial Officer CertificationEX-13.1 Section 906 Chief Executive Officer CertificationEX-13.2 Section 906 Chief Financial Officer CertificationEX-15.1 Consent of Deloitte & Co. S.R.L.EX-15.2 Consent of Deloitte & Touche LLPEX-15.3 Consent of McClain & Co. LLC
  INTRODUCTION
    
    
    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 together with Davivo International,
HMTF Holdings, and their affiliated Funds, 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.
  ii




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PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 
 A. Selected Financial Data
 Selected Financial Data
   2




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Consolidated Statements of Income and Comprehensive Income Data  for the Years Ended December 31:
 2002
    
    20032001
    
    As Restated
    
    As Restated
    
    2004
    
    2005(In thousands of U.S. dollars)Total net revenues
    
    $
    91,190
    
    
    $
    57,577
    
    
    $
    61,595
    
    
    $
    66,081
    
    
    $
    80,527Total operating expenses
    
    
    102,968
    
    
    
    55,561
    
    
    
    54,698
    
    
    
    58,216
    
    
    
    66,441Operating (loss) income
    
    
    (11,778
    )
    
    
    2,016
    
    
    
    6,897
    
    
    
    7,865
    
    
    
    14,086Other (expense) income
    
    
    (47,178
    )
    
    
    (70,363
    )
    
    
    4,712
    
    
    
    (1,313
    )
    
    
    (1,008
    )Gain on debt restructuring
    
    
    
    
    
    
    15,274
    
    
    
    
    
    
    
    
    
    
    
    Share of (loss) income from unconsolidated affiliates
    
    
    (19,073
    )
    
    
    (6,746
    )
    
    
    367
    
    
    
    245
    
    
    
    (2,593
    )Provision for income taxes
    
    
    (4,328
    )
    
    
    (215
    )
    
    
    (2,911
    )
    
    
    (1,861
    )
    
    
    (1,644
    )Minority interest
    
    
    127
    
    
    
    68
    
    
    
    46
    
    
    
    267
    
    
    
    267Change in accounting principle
    
    
    
    
    
    
    (74,789
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income from continuing operations
    
    
    (82,230
    )
    
    
    (134,755
    )
    
    
    9,111
    
    
    
    5,203
    
    
    
    9,108Discontinued operations
    
    
    (2,656
    )
    
    
    (4,511
    )
    
    
    (1,168
    )
    
    
    1,487
    
    
    
    (2,876
    )Net (loss) income
    
    $
    (84,886
    )
    
    $
    (139,266
    )
    
    $
    7,943
    
    
    $
    6,690
    
    
    $
    6,232Net income (loss) from continuing operations per
common shareBasic
    
    $
    (4.44
    )
    
    $
    (7.21
    )
    
    $
    0.48
    
    
    $
    0.26
    
    
    $
    0.45Diluted
    
    $
    (4.44
    )
    
    $
    (7.21
    )
    
    $
    0.48
    
    
    $
    0.26
    
    
    $
    0.41Net income (loss) per common shareBasic
    
    $
    (4.58
    )
    
    $
    (7.46
    )
    
    $
    0.42
    
    
    $
    0.34
    
    
    $
    0.31Diluted
    
    $
    (4.58
    )
    
    $
    (7.46
    )
    
    $
    0.42
    
    
    $
    0.33
    
    
    $
    0.28
 Consolidated Balance Sheet Data  As of December 31:
 2001
    
    2002
    
    2003
    
    2004
    
    2005(In thousands of U.S. dollars)Cash as cash equivalents (including
restricted investments)(1)
    
    $
    15,207
    
    
    $
    8,819
    
    
    $
    7,890
    
    
    $
    7,270
    
    
    $
    25,126Total assets (2)
    
    
    278,002
    
    
    
    147,622
    
    
    
    145,339
    
    
    
    156,515
    
    
    
    150,410Working capital (deficiency)(2) (3)
    
    
    (70,341
    )
    
    
    2,347
    
    
    
    1,280
    
    
    
    11,812
    
    
    
    7,689Total long-term liabilities
    
    
    27,689
    
    
    
    80,824
    
    
    
    77,362
    
    
    
    80,475
    
    
    
    70,160Minority interest
    
    
    
    
    
    
    1,164
    
    
    
    1,128
    
    
    
    562
    
    
    
    293Shareholders equity
    
    
    102,753
    
    
    
    3,195
    
    
    
    9,993
    
    
    
    22,603
    
    
    
    33,101Total common shares
    
    
    18,538
    
    
    
    18,678
    
    
    
    19,407
    
    
    
    20,313
    
    
    
    20,486
 
 (1)
    
    Includes U.S.$0.8 million and U.S.$0.2 million in 2002 and 2003 respectively, of restricted
investments.(2)
    
    For 2001, 2002, 2003 and 2004, includes assets and liabilities of discontinued operations.(3)
    
    For 2001, 2002, 2003, 2004 and 2005, includes U.S.$79.5 million, U.S.$3.2 million, U.S.$2.3
million, U.S.$0.5 million, and U.S.$0.4 million respectively, of Imagens 11% Senior Notes due
2005 including accrued interest. 3




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B. Capitalization and Indebtedness
  
 C. Reasons for the Offer and Use of Proceeds
  
 D. Risk Factors
  RISKS RELATED TO OUR BUSINESS
 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.
    
    
    Our cash flow available for use in our business is reduced,
    
    We are vulnerable to changes in economic conditions, and
    
    Our ability to obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes could be impaired.
 As a result of the DIRECTV Latin America business combination with Sky Latin America and our
resulting loss of most of our subscriber base in Mexico and Brazil, as well as the renegotiation
of our premium and basic channel distribution agreements with DIRECTV Latin America, we expect
to experience a significant reduction in our DIRECTV revenues in 2006 compared to 2005.
   4




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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 or renegotiation
of existing contractual terms could significantly reduce our revenues.
  Members of the Cisneros Group and Hicks Muse control Claxson, which could inhibit or cause
potential changes of control of Claxson.
   Hicks Muse and members of the Cisneros Group could have interests in other businesses which
conflict with ours.
    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.
  5




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Our businesses involve risks of liability claims for media content, which could result in significant costs.
  
    
    defamation;
    
    negligence;
    
    copyright, patent or trademark infringement; and
    
    other claims based on the nature and content of the materials distributed.
  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.
  Changes in governmental regulation could reduce our revenues, increase our operating expenses
and expose us to significant liabilities.
  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.
  We expect to incur substantial accounting and legal costs in order to comply with the internal
control over financial reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
as codified by Item 308 of Regulation S-K, and we may
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experience a loss in investor confidence,
and a decrease in the market price of our Class A common shares, if we are unable to so comply.
   RISKS RELATED TO LATIN AMERICA
 Because our pay television business is concentrated in Argentina and our broadcast 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.
   
    
    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 RELATED TO OUR CLASS A COMMON SHARES
 Our Class A common shares are not listed on any national exchange. Therefore, it may be more
difficult for investors to trade in our Class A common shares.
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Our shareholders may face difficulties in protecting their interests because we are a British
Virgin Islands international business company.
  You may experience difficulty in enforcing civil liabilities against us.
  We are a foreign private issuer and you will receive less information about us than you would
from a domestic U.S. corporation.
  
 Item 4. Information on the Company
 
 A. History and Development of the Company
   
 B. Business Overview
  8




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Year Ended December 31, 2005
 BroadbandPay
    
    Broadcast
    
    andTelevision
    
    Radio
    
    Internet
    
    Corporate
    
    TotalRevenues
    
    $
    56,139
    
    
    $
    24,001
    
    
    $
    96
    
    
    $
    291
    
    
    $
    80,527Operating Income (Loss)
    
    
    13,920
    
    
    
    5,188
    
    
    
    (708
    )
    
    
    (4,314
    )
    
    
    14,086Net Income (Loss)
    
    
    8,579
    
    
    
    617
    
    
    
    176
    
    
    
    (3,140
    )
    
    
    6,232Cash Flows from Operating Activities
    
    
    3,782
    
    
    
    8,607
    
    
    
    (278
    )
    
    
    4,617
    
    
    
    16,728Cash Flows from Investing Activities
    
    
    (1,887
    )
    
    
    9,216
    
    
    
    637
    
    
    
    (710
    )
    
    
    7,256Cash Flows from Financing Activities
    
    $
    (1,289
    )
    
    $
    (1,337
    )
    
    $
    (60
    )
    
    $
    (3,490
    )
    
    $
    (6,176
    )
 Year Ended December 31, 2004
 BroadbandPay
    
    Broadcast
    
    andTelevision
    
    Radio
    
    Internet
    
    Corporate
    
    TotalRevenues
    
    $
    47,828
    
    
    $
    18,103
    
    
    $
    100
    
    
    $
    50
    
    
    $
    66,081Operating Income (Loss)
    
    
    8,134
    
    
    
    4,484
    
    
    
    (652
    )
    
    
    (4,101
    )
    
    
    7,865Net Income (Loss)
    
    
    5,978
    
    
    
    4,822
    
    
    
    (349
    )
    
    
    (3,761
    )
    
    
    6,690Cash Flows from Operating Activities
    
    
    2,685
    
    
    
    454
    
    
    
    435
    
    
    
    539
    
    
    
    4,113Cash Flows from Investing Activities
    
    
    (3,880
    )
    
    
    957
    
    
    
    (3
    )
    
    
    (1,960
    )
    
    
    (4,886
    )Cash Flows from Financing Activities
    
    $
    (1,835
    )
    
    $
    (1,414
    )
    
    $
    (144
    )
    
    $
    3,691
    
    
    $
    298
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Year Ended December 31, 2003
 BroadbandPay
    
    Broadcast
    
    andTelevision
    
    Radio
    
    Internet
    
    Corporate
    
    TotalRevenues
    
    $
    46,816
    
    
    $
    14,601
    
    
    $
    178
    
    
    $
    
    
    
    $
    61,595Operating Income (Loss)
    
    
    9,096
    
    
    
    4,419
    
    
    
    (1,586
    )
    
    
    (5,032
    )
    
    
    6,897Net Income (Loss)
    
    
    13,289
    
    
    
    2,641
    
    
    
    (1,373
    )
    
    
    (6,614
    )
    
    
    7,943Cash Flows from Operating Activities
    
    
    3,934
    
    
    
    5,543
    
    
    
    (1,052
    )
    
    
    4,977
    
    
    
    13,402Cash Flows from Investing Activities
    
    
    (1,693
    )
    
    
    328
    
    
    
    242
    
    
    
    (3,890
    )
    
    
    (5,013
    )Cash Flows from Financing Activities
    
    $
    (1,313
    )
    
    $
    (5,559
    )
    
    $
    
    
    
    $
    (1,398
    )
    
    $
    (8,270
    )
 Business Strategy
  
    
    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 channels, thereby increasing brand awareness
while driving audience growth and reducing marketing expenditures; and
    
    aggregation of management expertise in traditional and new media to create
innovative and interactive content and to expand our brands across all media.
 
    
    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.
    
    Exploit Market Opportunities for Growth Through Strategic Alliances. 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 complement 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 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
   10




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Wholly Owned Basic Tier Channels
 Film Channels
 Space
 I.Sat
 Retro
 Entertainment
 Infinito
 FTV/Fashion TV
 Music Channels
 MuchMusic Argentina
 HTV
 11




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Partially Owned Channels  Adult
 Playboy TV Network
 Venus
 G Channel
 Private
 Distributed Channels
 Crónica TV
 CM (El Canal de la Musica),
 Venevision Continental
 Utilisima Satelital
 Production Operations
 Claxson Playout, Inc., formerly known as The Kitchen, Inc .
 In Jaus
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Pay Television Distribution
   Total Number of SubscribersDecember 31,2003
    
    2004
    
    2005(In thousands)Basic PackageSpace
    
    
    4,861
    
    
    
    5,336
    
    
    
    5,635I. Sat
    
    
    4,724
    
    
    
    5,194
    
    
    
    5,521Retro
    
    
    5,005
    
    
    
    5,868
    
    
    
    6,365Infinito
    
    
    8,330
    
    
    
    9,266
    
    
    
    12,245FTV
    
    
    4,055
    
    
    
    5,520
    
    
    
    8,071MuchMusic
    
    
    4,569
    
    
    
    5,245
    
    
    
    6,012HTV
    
    
    4,947
    
    
    
    5,644
    
    
    
    6,725Cronica TV(1)
    
    
    3,881
    
    
    
    4,267
    
    
    
    4,908Venevision Continental(1)(2)
    
    
    901
    
    
    
    978
    
    
    
    2,122CM(1)(3)
    
    
    
    
    
    
    
    
    
    
    2,569Utilisima Satelital(1)(4)
    
    
    
    
    
    
    5,955
    
    
    
    7,538Total Basic Channel Subscribers
    
    
    41,273
    
    
    
    53,273
    
    
    
    67,711
 
 (1)
    
    Represented channel.(2)
    
    Represents cable subscribers only.(3)
    
    We commenced distributing CM in November, 2004.(4)
    
    We commenced distributing Utilisima Satelital on January 1, 2004. Pay Television Revenue Sources
  Subscriber-Based Fees
 13




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Advertising Revenue
  Production Revenue
 Marketing
   Programming
Sources  Basic channels
  14




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Licensed Programming
    Owned Programming
  Playboy TV Latin America Joint Venture
   
    
    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 all of our 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.
  15




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DMX MUSIC Latin America
  Digital Latin America
  BROADCAST RADIO BUSINESS
  Market Overview
  Radio Chile
 16




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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. Futuro complements
Concierto in 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.
  2005
    
    Rank
    
    2004
    
    Rank
    
    2003
    
    RankFM Dos
    
    
    6.1
    
    
    
    3
    
    
    
    6.2
    
    
    
    1
    
    
    
    5.4
    
    
    
    5Pudahuel FM
    
    
    5.6
    
    
    
    4
    
    
    
    5.6
    
    
    
    3
    
    
    
    6.3
    
    
    
    1Corazón
    
    
    6.3
    
    
    
    1
    
    
    
    5.5
    
    
    
    4
    
    
    
    5.8
    
    
    
    3Rock & Pop
    
    
    5.0
    
    
    
    5
    
    
    
    4.7
    
    
    
    7
    
    
    
    4.8
    
    
    
    7FM Hit
    
    
    4.9
    
    
    
    6
    
    
    
    4.3
    
    
    
    9
    
    
    
    4.3
    
    
    
    10Futuro
    
    
    3.9
    
    
    
    11
    
    
    
    4.0
    
    
    
    12
    
    
    
    4.1
    
    
    
    11Imagina
    
    
    4.7
    
    
    
    7
    
    
    
    3.6
    
    
    
    13
    
    
    
    2.5
    
    
    
    19Concierto
    
    
    2.5
    
    
    
    17
    
    
    
    2.7
    
    
    
    16
    
    
    
    2.7
    
    
    
    15Total audience share
    
    
    39.0
    %
    
    
    
    
    
    
    36.6
    %
    
    
    
    
    
    
    35.9
    %
 Source: Ipsos Search Marketing Reports
   Radio Sarandi
 17




---



##### Table of Contents



BROADBAND AND INTERNET BUSINESS
     Intellectual Property and Proprietary Rights
   18




---



##### Table of Contents



REGULATION
 Regulation of the Pay Television Industry in Latin America
       19




---



##### Table of Contents



Regulation of the Brazilian Pay Television Industry
    Regulation of the Chilean Broadcast Radio Industry
   COMPETITION
     20




---



##### Table of Contents



C. Organizational Structure
  
 
 (1)
    
    Playback and post-production facility.(2)
    
    Operated through lease and co-management agreement 
 D. Property, Plant and Equipment
 Properties
  Pay Television Facilities
   21




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##### Table of Contents



Broadcast Radio Facilities
   
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
   SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   Critical Accounting Policies
  22




---



##### Table of Contents



Goodwill, Intangibles and Other Assets
  Allowance for Doubtful Accounts Receivable
 Programming Rights Accounting by Producers
or Distributors of films.
 Recent Accounting Pronouncements
 Share Based Payment Accounting for Stock Based
Compensation, Accounting for Stock Issued to Employees,
 Exchanges of Nonmonetary Assets Accounting for Nonmonetary Transactions
 23




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##### Table of Contents



Share-Based Payment Share
Based Payment
 Accounting for Conditional Asset Retirement
Obligations Accounting for Asset Retirement Obligations
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109,
 Contractual Obligations and Commercial Commitments
  Less than
    
    1-3
    
    4-5
    
    More than1 Year
    
    Years
    
    Years
    
    5 Years11% Senior Notes due 2005
    
    $
    397
    
    
    $
    
    
    
    $
    
    
    
    $
    8.75% Senior Notes due 2010
    
    
    5,686
    
    
    
    22,873
    
    
    
    25,820
    
    
    
    6.25% Senior Notes due 2013
    
    
    46
    
    
    
    90
    
    
    
    90
    
    
    
    2,438Other Senior Notes
    
    
    622
    
    
    
    1,195
    
    
    
    281
    
    
    
    5Syndicated bank facility
    
    
    3,964
    
    
    
    7,716
    
    
    
    4,244
    
    
    
    Convertible debentures
    
    
    3,620
    
    
    
    
    
    
    
    
    
    
    
    Other long-term debt
    
    
    387
    
    
    
    630
    
    
    
    1,675
    
    
    
    Operating leases
    
    
    4,105
    
    
    
    6,461
    
    
    
    5,360
    
    
    
    1,786Purchase obligations
    
    
    15,862
    
    
    
    11,400
    
    
    
    9,658
    
    
    
    10,246Sublease agreements
    
    
    (862
    )
    
    
    (1,583
    )
    
    
    (577
    )
    
    
    
  Introduction to Operating Results
 Net Revenues
  24




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##### Table of Contents



Subscriber-Based Fees
    Advertising Revenues
  
    
    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.
   Production Services
  25




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##### Table of Contents



Other Revenues
  Revenues from Related Parties
  Operating Expenses
  
    
    product, content and technology;
    
    marketing and sales;
    
    corporate and administration; and
    
    depreciation and amortization.
 Product, Content and Technology Expenses
  Marketing and Sales Expenses
 Corporate and Administration Expenses
 Depreciation and Amortization
 
    
    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.
 26




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##### Table of Contents



Other Income (Expense)
 Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
  Year Ended December 31,(1)2004
    
    
    2005Broadband
    
    
    BroadbandPay
    
    
    Broadcast
    
    
    and
    
    
    
    
    
    
    
    
    
    
    Pay
    
    
    Broadcast
    
    
    andTelevision
    
    
    Radio
    
    
    Internet
    
    
    Corporate
    
    
    Total
    
    
    Television
    
    
    Radio
    
    
    Internet
    
    
    Corporate
    
    
    Total(in thousands of U.S. dollars)Net revenues:Subscriber-based fees
    
    $
    40,052
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40,052
    
    
    $
    45,697
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    45,697Advertising
    
    
    5,345
    
    
    
    17,938
    
    
    
    56
    
    
    
    
    
    
    
    23,339
    
    
    
    6,723
    
    
    
    23,654
    
    
    
    24
    
    
    
    
    
    
    
    30,401Production services
    
    
    1,130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,130
    
    
    
    1,693
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,693Other
    
    
    1,301
    
    
    
    165
    
    
    
    44
    
    
    
    50
    
    
    
    1,560
    
    
    
    2,026
    
    
    
    347
    
    
    
    72
    
    
    
    291
    
    
    
    2,736Total net revenues
    
    
    47,828
    
    
    
    18,103
    
    
    
    100
    
    
    
    50
    
    
    
    66,081
    
    
    
    56,139
    
    
    
    24,001
    
    
    
    96
    
    
    
    291
    
    
    
    80,527Operating expenses:Product, content and technology
    
    
    19,436
    
    
    
    5,470
    
    
    
    368
    
    
    
    604
    
    
    
    25,878
    
    
    
    22,761
    
    
    
    7,333
    
    
    
    174
    
    
    
    418
    
    
    
    30,686Marketing and sales
    
    
    7,975
    
    
    
    4,266
    
    
    
    188
    
    
    
    402
    
    
    
    12,831
    
    
    
    8,418
    
    
    
    6,188
    
    
    
    395
    
    
    
    452
    
    
    
    15,453Corporate and administration
    
    
    9,323
    
    
    
    2,144
    
    
    
    189
    
    
    
    3,145
    
    
    
    14,801
    
    
    
    8,914
    
    
    
    3,407
    
    
    
    235
    
    
    
    3,735
    
    
    
    16,291Depreciation and amortization
    
    
    2,960
    
    
    
    1,739
    
    
    
    7
    
    
    
    
    
    
    
    4,706
    
    
    
    2,126
    
    
    
    1,885
    
    
    
    
    
    
    
    
    
    
    
    4,011Total operating expenses
    
    
    39,694
    
    
    
    13,619
    
    
    
    752
    
    
    
    4,151
    
    
    
    58,216
    
    
    
    42,219
    
    
    
    18,813
    
    
    
    804
    
    
    
    4,605
    
    
    
    66,441Operating income (loss)
    
    $
    8,134
    
    
    $
    4,484
    
    
    $
    (652
    )
    
    $
    (4,101
    )
    
    $
    7,865
    
    
    $
    13,920
    
    
    $
    5,188
    
    
    $
    (708
    )
    
    $
    (4,314
    )
    
    $
    14,086
 
 (1)
    
    Each line item includes revenues and expenses from related parties. Net Revenues
   27




---



##### Table of Contents



Operating Expenses
 Product, Content and Technology Expenses
   28




---



##### Table of Contents



Marketing and Sales Expenses
     Corporate and Administration Expenses
    29




---



##### Table of Contents



Depreciation and Amortization
  Other Income (Expense)
  Provision for Income Taxes
  Discontinued Operations
  30




---



##### Table of Contents



Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
  Year Ended December 31,(1)2003
    
    
    2004Broadband
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BroadbandPay
    
    
    Broadcast
    
    
    and
    
    
    
    
    
    
    
    
    
    
    Pay
    
    
    Broadcast
    
    
    andTelevision
    
    
    Radio
    
    
    Internet
    
    
    Corporate
    
    
    Total
    
    
    Television
    
    
    Radio
    
    
    Internet
    
    
    Corporate
    
    
    Total(in thousands of U.S. dollars)Net revenues:Subscriber-based fees
    
    $
    38,922
    
    
    $
    
    
    
    $
    10
    
    
    $
    
    
    
    $
    38,932
    
    
    $
    40,052
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    40,052Advertising
    
    
    3,857
    
    
    
    14,601
    
    
    
    73
    
    
    
    
    
    
    
    18,531
    
    
    
    5,345
    
    
    
    17,938
    
    
    
    56
    
    
    
    
    
    
    
    23,339Production services
    
    
    1,652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,652
    
    
    
    1,130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,130Other
    
    
    2,385
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    2,480
    
    
    
    1,301
    
    
    
    165
    
    
    
    44
    
    
    
    50
    
    
    
    1,560Total net revenues
    
    
    46,816
    
    
    
    14,601
    
    
    
    178
    
    
    
    
    
    
    
    61,595
    
    
    
    47,828
    
    
    
    18,103
    
    
    
    100
    
    
    
    50
    
    
    
    66,081Operating expenses:Product, content and technology
    
    
    15,737
    
    
    
    4,401
    
    
    
    1,016
    
    
    
    213
    
    
    
    21,367
    
    
    
    19,436
    
    
    
    5,470
    
    
    
    368
    
    
    
    604
    
    
    
    25,878Marketing and sales
    
    
    6,220
    
    
    
    2,513
    
    
    
    50
    
    
    
    355
    
    
    
    9,138
    
    
    
    7,975
    
    
    
    4,266
    
    
    
    188
    
    
    
    402
    
    
    
    12,831Corporate and administration
    
    
    10,143
    
    
    
    1,769
    
    
    
    413
    
    
    
    4,286
    
    
    
    16,611
    
    
    
    9,323
    
    
    
    2,144
    
    
    
    189
    
    
    
    3,145
    
    
    
    14,801Depreciation and amortization
    
    
    3,141
    
    
    
    1,499
    
    
    
    6
    
    
    
    178
    
    
    
    4,824
    
    
    
    2,960
    
    
    
    1,739
    
    
    
    7
    
    
    
    
    
    
    
    4,706Impairment of Goodwill
    
    
    2,479
    
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    2,758
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    37,720
    
    
    
    10,182
    
    
    
    1,764
    
    
    
    5,032
    
    
    
    54,698
    
    
    
    39,694
    
    
    
    13,619
    
    
    
    752
    
    
    
    4,151
    
    
    
    58,216Operating income (loss)
    
    $
    9,096
    
    
    $
    4,419
    
    
    $
    (1,586
    )
    
    $
    (5,032
    )
    
    $
    6,897
    
    
    $
    8,134
    
    
    $
    4,484
    
    
    $
    (652
    )
    
    $
    (4,101
    )
    
    $
    7,865
 
 (1)
    
    Each line item includes revenues and expenses from related parties. Net Revenues
        31




---



##### Table of Contents



Operating Expenses
 Product, Content and Technology Expenses
     Marketing and Sales Expenses
    32




---



##### Table of Contents



Corporate and Administration Expenses
      Depreciation and Amortization
  Other Income (Expense)
  33




---



##### Table of Contents



Provision for Income Taxes
  Discontinued Operations
  Liquidity and Capital Resources
       34




---



##### Table of Contents



Research and Development, Patents and Licenses, etc.
  Trend Information
  Off Balance Sheet Arrangements
  
 Item 6. Directors, Senior Management and Employees
 
 A. Directors, Senior Management and Employees
  Name
    
    Age
    
    Director SinceRoberto Vivo-Chaneton
    
    
    53
    
    
    September 21, 2001Carlos Bardasano
    
    
    61
    
    
    September 21, 2001Eric C. Neuman
    
    
    62
    
    
    September 21, 2001Steven Bandel
    
    
    53
    
    
    April 7, 2006Frank Feather
    
    
    63
    
    
    September 21, 2001John A. Gavin
    
    
    75
    
    
    September 21, 2001Gabriel Montoya
    
    
    37
    
    
    April 30, 2002José Antonio Rìos
    
    
    60
    
    
    September 21, 2001Emilio Romano
    
    
    41
    
    
    November 12, 2001Ricardo Verdaguer
    
    
    55
    
    
    September 21, 2001Luis Villanueva
    
    
    49
    
    
    April 30, 2002Christina Vest
    
    
    35
    
    
    November 30, 2005
   Executive Officers
  35




---



##### Table of Contents

\

Current PositionName
    
    Age
    
    Position
    
    Held SinceRoberto Vivo-Chaneton
    
    
    53
    
    
    Chairman of the Board and Chief Executive
Officer
    
    September 21, 2001Ralph Haiek
    
    
    49
    
    
    Chief Strategy Officer  Pay Television
    
    January 1, 2006José Antonio Ituarte
    
    
    46
    
    
    Chief Financial Officer
    
    January 1, 2002Amaya Ariztoy
    
    
    38
    
    
    General Counsel
    
    September 21, 2001Mariano Varela
    
    
    38
    
    
    Executive Vice President  Pay TV
    
    December 1, 2005Marcelo Zuñiga
    
    
    56
    
    
    Executive Director  Ibero American Radio Chile
    
    August 30, 2002Fernando Gaston
    
    
    38
    
    
    V.P. Film & Series, Music & Documentary
Networks
    
    December 1, 2005
  Biographical Information
 Directors
 Roberto Vivo-Chaneton
 Carlos Bardasano
 Eric C. Neuman
 Steven Bandel
 36




---



##### Table of Contents



Frank Feather
 John A. Gavin
 Gabriel Montoya
 José Antonio Ríos
 Emilio Romano
 37




---



##### Table of Contents



Ricardo Verdaguer
 Christina Vest
 Luis Villanueva
 Executive Officers
 Ralph Haiek
 José Antonio Ituarte
 Marcelo Zuñiga
 38




---



##### Table of Contents



Amaya Ariztoy
 Mariano Varela
 Fernando Gastón
 
 B. Compensation
    Options to Purchase Securities from Registrant or Subsidiaries
 2001 Share Incentive Plan
  39




---



##### Table of Contents



Administration
  Shares Subject to Plan
  Share Options
     40




---



##### Table of Contents



Restricted Shares
    Change in Control
  
    
    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
  Grant of Stock Options
  41




---



##### Table of Contents



Manager
    
    Business
    
    Stock OptionsRoberto Vivo
    
    Corporate
    
    
    403,565Ralph Haiek
    
    Pay TV
    
    
    109,112José Antonio Ituarte
    
    Corporate
    
    
    109,112Leandro Feliz Añon*
    
    
    
    
    12,800
 
 *
    
    As per employment separation and post employment consulting agreement.  Grant of Restricted Shares to Cisneros Television Group Employees
  
 C. Board Practices
 Directors
  Members of Management Body
  Benefits Upon Termination of Employment
   42




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##### Table of Contents



Committees of the Board of Directors
  Executive Committee
  
    
    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.
  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 registered public accounting firm;
    
    reviews our financial statements;
    
    reviews and evaluates our internal control functions and financial reporting process; and
    
    reviews and approves all related party transactions.
  Compensation Committee
  
    
    executive compensation;
    
    salaries and incentive compensation for our employees and consultants; and
    
    the administration of our share option plans.
  43




---



##### Table of Contents



D. Employees
         
 E. Share Ownership
  
 Item 7. Major Shareholders and Related Party Transactions
 
 A. Major Shareholders
 Ownership of Major Shareholders
  
    
    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.
  44




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##### Table of Contents



NumberNumber of
    
    Percentage of
    
    of Class
    
    Number
    
    NumberClass A
    
    Class A
    
    C
    
    of Class F
    
    of Class HCommon
    
    Common
    
    Common
    
    Common
    
    CommonBeneficial Owner
    
    Shares
    
    Shares (%)(1)
    
    Shares
    
    Shares
    
    Shares1945 Carlton Investments LLC(2)(18)
    
    
    4,178,846
    
    
    
    20.2
    
    
    
    11947 Carlyle Investments LLC(3)(18)
    
    
    4,358,058
    
    
    
    20.9
    
    
    
    1Ricardo J. Cisneros(4)(18)
    
    
    4,358,058
    
    
    
    20.9Gustavo A. Cisneros(5)(18)
    
    
    4,178,846
    
    
    
    20.2Hicks, Muse(6)(18)
    
    
    7,770,708
    
    
    
    37.9
    
    
    
    
    
    
    
    
    
    
    
    1Thomas O. Hicks(6)(18)
    
    
    7,770,708
    
    
    
    37.9Militello Limited(18)(19)
    
    
    3⁄4
    
    
    
    *
    
    
    
    
    
    
    
    1SLI.com, Inc.(18)(19)
    
    
    489,417
    
    
    
    2.4
    
    
    
    
    
    
    
    1Tower Plus International(18)(19)
    
    
    3⁄4
    
    
    
    *
    
    
    
    
    
    
    
    1Roberto Vivo-Chaneton(7)(18)(19)
    
    
    1,260,978
    
    
    
    5.9
    
    
    
    
    
    
    
    4Carlos Bardasano (8)
    
    
    5,000
    
    
    
    *Eric C. Neuman(9)
    
    
    7,532
    
    
    
    *Steven Bindel
    
    
    3⁄4
    
    
    
    *Gabriel Montoya (10)
    
    
    5,865
    
    
    
    *John A. Gavin (11)
    
    
    5,000
    
    
    
    *Ricardo Verdaguer(12)
    
    
    5,000
    
    
    
    *Frank Feather (13)
    
    
    5,000
    
    
    
    *José Antonio Ríos (14)
    
    
    5,000
    
    
    
    *Emilio Romano (15)
    
    
    5,000
    
    
    
    *Luis Villanueva
    
    
    
    
    
    
    *Christina Weaver Vest
    
    
    
    
    
    
    *Ralph Haiek(16)
    
    
    235,028
    
    
    
    1.1José Antonio Ituarte (17)
    
    
    146,628
    
    
    
    *Amaya Ariztoy
    
    
    800
    
    
    
    *Mariano Julian Varela
    
    
    2,433
    
    
    
    *Marcelo Zuniga
    
    
    
    
    
    
    *All directors and executive officers as a
group (18 persons)
    
    
    1,685,264
    
    
    
    7.8Kingdom Capital Management, LLC(20)
    
    
    1,440,638
    
    
    
    7.0
 
 *
    
    indicates less than 1%(1)
    
    Based on 20,486,463 shares of our Class A common shares outstanding as of
June 15, 2006 and calculated according to Rule 13(d)-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 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 3,999,635 Class A common shares owned by 1947 Carlyle Investments
LLC, of which 1945 Carlton Investments LLC disclaims beneficial ownership.
Includes convertible debentures issued to 1945 Carlton Investments, LLC that
may be converted into 179,211 Class A common shares. 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. 45




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##### Table of Contents



(3)
    
    Excludes 3,999,635 Class A common shares owned by 1945 Carlton Investments
LLC, of which 1947 Carlyle Investments LLC disclaims beneficial ownership.
Includes convertible debentures issued to 1947 Carlyle Investments, LLC that
may be converted into 358,422 Class A common shares. 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 3,999,635 Class A common shares owned by 1947 Carlyle Investments
LLC. Includes convertible debentures issued to 1945 Carlton Investments, LLC
that may be converted into 358,422 Class A common shares. Ricardo J. Cisneros
disclaims beneficial ownership of the shares to be owned by 1945 Carlton
Investments LLC.(5)
    
    Includes 3,999,635 Class A common shares owned by 1945 Carlton Investments
LLC. Includes convertible debentures issued to 1945 Carlton Investments, LLC
that may be converted into 179,211 Class A common shares. Gustavo A. Cisneros
disclaims beneficial ownership of the shares owned by 1947 Carlyle
Investments, LLC.(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.;·
    
    830,259 Class A common shares held of record by Davivo International Ltd;·
    
    217,360 Class A common shares held of record by HMLA 1-SBS Coinvestors,
L.P.;·
    
    107,945 Class A common shares held of record by HMTF Holdings;·
    
    508 Class A common shares held of record by Mr. Muse; 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, which are currently exercisable.
 
 John R. Muse 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. Muse 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.; andHMLA 1  SBS Coinvestors, L.P. Mr. Muse, Jack D. Furst and Thomas O. Hicks
are members of a three-person committee which exercises voting and
dispositive and/or voting power over the shares held by Hicks Muse. No
single member of the committee has dispositive and/or voting power over the
shares held by Hicks Muse. As a result of the foregoing, each of Messrs.
Muse, Furst and Hicks may be deemed to beneficially own all or a portion of
the Class A common shares held by Hicks Muse as described above. Each of
Messrs. Muse, Furst and Hicks disclaims the existence of a group and
disclaims beneficial ownership of Class A common shares not owned of record
by him.(7)
    
    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 316,274 shares of Class A common shares granted
to Mr. Vivo-Chaneton under the Claxson 2001 Share Incentive Plan which are
currently exercisable. Includes convertible debentures issued to Mr. Vivo
that may be converted into 462,963 Class A common shares.(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. 46




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##### Table of Contents



(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, Muse Co. Partners L.P. on October 7,
2003.(10)
    
    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.(11)
    
    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.(12)
    
    Consists of 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.(13)
    
    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.(14)
    
    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.(15)
    
    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.(16)
    
    Includes 7,400 Class A Common Shares held directly by Mr. Haiek. Includes
65,467 shares of Class A common shares granted to Mr. Haiek under the Claxson
2001 Share Incentive Plan which are currently exercisable. Includes
convertible debentures issued to Mr. Haiek that may be converted into 77,161
Class A common shares.(17)
    
    Includes 65,467 shares of Class A common shares granted to Mr. Ituarte under
the Claxson 2001 Share Incentive Plan which are currently exercisable.
Includes convertible debentures issued to Mr. Ituarte that may be converted
into 77,161 Class A common shares.(18)
    
    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.(19)
    
    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.(20)
    
    Kingdom Capital Management, LLC is the beneficial owner of 1,440,638 Class A
common shares according to a Schedule 13G filed by such firm on February
13, 2006. Voting
  
 B. Related Party Transactions
   47




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48




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
    
    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. Effective June
2004, Claxson ceased being the sales agent for Cl@se and limited its services to the
provision of administrative sales support in exchange for a 5% commission based on
sales.
    
    certain management services for an annual fee until May 2005;
    
    program origination, playback, signal distribution, satellite transponder, uplink
and other technical services for an annual fee until May 2005; and
    
    sublease of office space.
  
    
    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.
    49




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50




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51




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C. Interests of Experts and Counsel
  
 Item 8. Financial Information
 
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
   52




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53




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Dividend Policy
  
 B. Significant Changes
  
 Item 9. The Offer and Listing
 
 A. Listing Details
  54




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##### Table of Contents



Fiscal Year Ended
    
    Sales PricesDecember 31,
    
    High
    
    Low2001
    
    
    U.S.$3.2344
    
    
    
    U.S.$1.42192002
    
    
    1.4000
    
    
    
    0.06002003
    
    
    3.0500
    
    
    
    0.16002004
    
    
    6.3500
    
    
    
    2.50002005
    
    
    5.8000
    
    
    
    3.1500
 Sales PricesHigh
    
    Low2004First Quarter
    
    
    U.S.$6.3500
    
    
    
    U.S.$2.6000Second Quarter
    
    
    5.8000
    
    
    
    2.5000Third Quarter
    
    
    4.5000
    
    
    
    2.5500Fourth Quarter
    
    
    5.2600
    
    
    
    3.50002005First Quarter
    
    
    U.S.$5.8000
    
    
    
    U.S.$3.4500Second Quarter
    
    
    5.5000
    
    
    
    3.7000Third Quarter
    
    
    4.7500
    
    
    
    3.6500Fourth Quarter
    
    
    4.7500
    
    
    
    3.15002006First Quarter
    
    
    U.S.$4.2500
    
    
    
    U.S.$3.0500Second Quarter
    
    
    4.2500
    
    
    
    3.5000
  Sale PricesHigh
    
    LowJuly 2006
    
    
    U.S.$4.4200
    
    
    
    U.S.$3.6100June 2006
    
    
    4.2500
    
    
    
    3.6100May 2006
    
    
    4.2500
    
    
    
    3.6000April 2006
    
    
    3.9500
    
    
    
    3.5000March 2006
    
    
    3.6000
    
    
    
    3.2000February 2006
    
    
    4.0000
    
    
    
    3.0500January 2006
    
    
    4.2500
    
    
    
    3.6000
 
 B. Plan of Distribution
  
 C. Markets
  
 D. Selling Shareholders
  55




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##### Table of Contents



E. Dilution
  
 F. Expense of the Issue
  
 Item 10. Additional Information
 
 A. Share Capital
  
 B. Memorandum and Articles of Association
 Register
  Corporate Object and Purpose
  Board of Directors
    56




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Rights, Preferences and Restrictions Attaching to Each Class of Shares
 Dividends
  Voting Rights
  
    
    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);
    
    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.
  
    
    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.
   Rights to Share in Profits
  Redemption and Liquidation Rights
  57




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Procedures to Change the Rights of Shareholders
  Ordinary and Extraordinary Shareholders Meeting
     Limitations to Own Securities
  Differences in Applicable Law
 Enforceability of Certain Civil Liabilities
  58




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Availability of Representative Actions
  
 C. Material Contracts
  
 D. Exchange Controls
   
 E. Taxation
  59




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##### Table of Contents



British Virgin Islands Tax Considerations
  U.S. Federal Income Tax Considerations
  
    
    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.
  Taxation of Dividends
   60




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Taxation of Capital Gains
   61




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Passive Foreign Investment Company Rules
     62




---



##### Table of Contents



de minimis
 Information Reporting and Backup Withholding
   
 F. Dividends and Paying Agents
  
 G. Statement by Experts
  
 H. Documents on Display
 http://www.sec.gov
 
 I. Subsidiary Information
  63




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##### Table of Contents



Item 11.
Quantitative and Qualitative Disclosures About Market Risk
 Market Risks
  Interest Rate Sensitivity
    64




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##### Table of Contents



Twelve Months Ended
 December 31,
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Total
    
    
    Fair Value(in thousands of U.S. dollars except percentages)Long-Term Debt:8.75% Senior Notes due 2010
    
    $
    2,068
    
    
    $
    6,203
    
    
    $
    10,338
    
    
    $
    10,338
    
    
    $
    12,406
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    41,353
    
    
    $
    37,218Fixed U.S. Rate
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    
    
    
    
    
    
    
    
    Syndicated Bank Facility
    
    $
    3,858
    
    
    $
    3,858
    
    
    $
    3,858
    
    
    $
    4,244
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15,818
    
    
    $
    15,818Average interest rate
    
    
    4.34
    %
    
    
    4.34
    %
    
    
    4.34
    %
    
    
    4.34
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible Debentures
    
    $
    3,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,500
    
    
    $
    3,500Fixed U.S. Rate
    
    
    8.25
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.25% Senior Notes due 2013
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,150
    
    
    $
    1,150
    
    
    $
    2,300
    
    
    $
    2,300Fixed U.S. Rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.25
    %
    
    
    6.25
    %11% Senior Notes due 2005(1)
    
    $
    255
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    255
    
    
    $
    126Fixed U.S. Rate
    
    
    11
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    $
    986
    
    
    $
    1,038
    
    
    $
    767
    
    
    $
    461
    
    
    $
    1,489
    
    
    $
    5
    
    
    $
    
    
    
    $
    
    
    
    $
    4,746
    
    
    $
    4,746Average interest rate
    
    
    7
    %
    
    
    6
    %
    
    
    5
    %
    
    
    4
    %
    
    
    4
    %
    
    
    9
    %
    
    
    
    %
    
    
    
    %
 
 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. Exchange Rate Sensitivity
     65




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##### Table of Contents



Monetary Assets and Liabilities ExposureAs of December 31, 2005Monetary
    
    
    Monetary
    
    
    NetCountry
    
    Assets
    
    
    Liabilities
    
    
    ExposureArgentina
    
    $
    6,038
    
    
    $
    11,800
    
    
    $
    (5,762
    )Chile
    
    
    898
    
    
    
    63
    
    
    
    835Other (1)
    
    
    3,295
    
    
    
    2,198
    
    
    
    1,097Total
    
    $
    10,231
    
    
    $
    14,061
    
    
    $
    (3,830
    )
 
 (1)
    
    Primarily represents Brazil, Spain and Uruguay.   
 Item 12. Description of Securities Other than Equity Securities
  
 PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  66




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##### Table of Contents



Remediation Plans
  
    
    Adopting a more rigorous communication approach among our legal, finance and
accounting departments at both corporate and subsidiaries levels, as well as external
advisors, to allow proper identification and evaluation of non-routine and
non-systematic transactions;
    
    Implementing monitoring controls at a corporate level of adequate application of
selected accounting policies;
    
    Providing additional detailed accounting policy and procedures guidance for the
identification of and accounting for complex or unusual transactions by the
subsidiaries, including specific guidance on the proper application of U.S. GAAP.
  67




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Changes in Internal Control Over Financial Reporting
  
 Item 16.
 
 A. Audit Committee Financial Expert
  
 B. Code of Ethics
  
 C. Principal Accountant Fees and Services
  Amount of FeesDescription of Fees
    
    2005
    
    
    2004(In thousands of U.S.Dollars)Audit Fees
    
    $
    496
    
    
    $
    493Audit-Related Fees
    
    
    
    
    
    
    52Tax Fees
    
    
    97
    
    
    
    257All Other Fees
    
    
    
    
    
    
    Total
    
    $
    593
    
    
    $
    802
 Audit Fees
 68




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##### Table of Contents



Audit-Related Fees
 Tax Fees
 Other Fees
 
 D. Exemptions from the Listing Standards for Audit Committees
  
 E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 (a)
    
    Index to Financial Statements.
Report of Deloitte & Co. S.R.L.
Report of Deloitte & Touche LLP(b)
    
    List of Exhibits
 ExhibitNumber
    
    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).
 69




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ExhibitNumber
    
    Description of Documents2.2
    
    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.4.1
    
    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).
 70




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##### Table of Contents



ExhibitNumber
    
    Description of Documents4.6
    
    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, 2002). Claxson agrees to furnish supplementary 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.*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
Ethics (incorporated herein by reference to Exhibit 11.1 to
Form 20-F filed with the Commission on July 15, 2004).12.1
    
    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 & Co. S.R.L.
 71




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##### Table of Contents



ExhibitNumber
    
    Description of Documents15.2
    
    Consent of Deloitte & Touche LLP15.3
    
    Consent of McClain & Company L.C.
 
 *
    
    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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##### Table of Contents



/s/ Roberto Vivo-ChanetonName: Roberto Vivo-ChanetonDate:
September 20, 2006
    
    Title:   Chief Executive Officer and Chairman of the Board/s/ Jose Antonio ItuarteName: Jose Antonio ItuarteDate:
September 20, 2006
    
    Title:   Chief Financial Officer
 73




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 - Claxson Interactive Group Inc.Report of independent registered public accounting firm of Claxson Interactive Group Inc.
as of December 31, 2005
    
    
    F-3Report of independent registered public accounting firm of Claxson Interactive Group Inc.
as of December 31, 2003 and 2004
    
    
    F-4Consolidated Balance Sheets as of December 31, 2004 (as restated and reclassified) and 2005
    
    
    F-5Consolidated Statements of Income and Comprehensive Income for the fiscal years ended
December 31, 2003 (as restated and reclassified), 2004 (as restated and reclassified) and
2005
    
    
    F-6Consolidated Statements of Shareholders Equity for the fiscal years ended December 31,
2003 (as restated), 2004 (as restated) and 2005
    
    
    F-7Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2003 (as
restated), 2004 (as restated) and 2005
    
    
    F-8Notes to Consolidated Financial Statements as of December 31, 2003 (as restated),
2004 (as restated) and 2005
    
    
    F-9- DLA Holdings, Inc.Report of independent registered public accounting firm of DLA Holdings, Inc. as of
December 31, 2005
    
    
    F-35Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-36Consolidated Statements of Operations for fiscal year ended December 31, 2005 and the
period from October 29, 2004 through December 31, 2004
    
    
    F-37Consolidated Statements of Changes in Shareholders Deficit for the fiscal year ended
December 31, 2005 and the period from October 29, 2004 through December 31, 2004
    
    
    F-38Consolidated Statements of Cash Flows for the fiscal year ended December 31, 2005 and the
period from October 29, 2004 through December 31, 2004
    
    
    F-39Notes to Consolidated Financial Statements as of December 31, 2005 and 2004
    
    
    F-41
 F-1




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[This Page Intentionally Left Blank]
 F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 DELOITTE & Co. S.R.L.
 
 F-3




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 
 F-4




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
As of December 31, 2004 and 2005
(In thousands of U.S. dollars except share and per share data)
 2004(As restated andreclassified, seeNote 14)
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    7,270
    
    
    $
    25,126Accounts receivable, net
    
    
    18,590
    
    
    
    18,511Due from related parties
    
    
    4,748
    
    
    
    4,950Assets held for sale
    
    
    25,404
    
    
    
    Other current assets
    
    
    8,675
    
    
    
    5,958Total current assets
    
    
    64,687
    
    
    
    54,545PROPERTY AND EQUIPMENT, NET
    
    
    10,946
    
    
    
    10,583PROGRAMMING RIGHTS, NET
    
    
    4,028
    
    
    
    4,413INVESTMENTS IN UNCONSOLIDATED AFFILIATES
    
    
    3,407
    
    
    
    2,381INVESTMENTS IN DEBT AND EQUITY SECURITIES
    
    
    54
    
    
    
    BROADCAST AND TELEVISION LICENSES, NET
    
    
    16,722
    
    
    
    16,841GOODWILL
    
    
    51,021
    
    
    
    53,164OTHER ASSETS, NET
    
    
    5,292
    
    
    
    8,115DUE FROM RELATED PARTIES
    
    
    358
    
    
    
    368TOTAL ASSETS
    
    $
    156,515
    
    
    $
    150,410LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    8,321
    
    
    $
    10,705Liabilities related to assets held for sale
    
    
    14,927
    
    
    
    Due to related parties
    
    
    1,731
    
    
    
    1,814Accrued compensation
    
    
    2,914
    
    
    
    3,270Other current liabilities
    
    
    9,243
    
    
    
    9,578Current portion of programming rights obligations
    
    
    5,332
    
    
    
    4,687Current portion of long-term debt
    
    
    8,172
    
    
    
    14,722Unearned revenues
    
    
    2,235
    
    
    
    2,080Total current liabilities
    
    
    52,875
    
    
    
    46,856LONG-TERM LIABILITIES:Long-term debt, net of current portion
    
    
    77,680
    
    
    
    67,057Other long-term liabilities
    
    
    2,795
    
    
    
    3,103Total long-term liabilities
    
    
    80,475
    
    
    
    70,160MINORITY INTEREST
    
    
    562
    
    
    
    293COMMITMENTS AND CONTINGENCIES (Note 11)SHAREHOLDERS EQUITY:Class A common shares; $0.01 par value;
30,000,000 shares authorized, 20,312,674 and
20,486,465 shares issued and outstanding as of
December 31, 2004 and 2005, respectively
    
    
    204
    
    
    
    205Class C common shares; $1.00 par value; 2 shares
authorized, issued and outstanding as of
December 31, 2004 and 2005
    
    
    
    
    
    
    Class F common shares; $1.00 par value; 7 shares
authorized, issued and outstanding as of
December 31, 2004 and 2005
    
    
    
    
    
    
    Class H common shares; $1.00 par value; 1 share
authorized, issued and outstanding as of
December 31, 2004 and 2005
    
    
    
    
    
    
    Additional paid-in capital
    
    
    265,136
    
    
    
    265,263Deferred share-based compensation
    
    
    (74
    )
    
    
    (17
    )Accumulated deficit
    
    
    (254,766
    )
    
    
    (248,534
    )Accumulated other comprehensive income
    
    
    12,103
    
    
    
    16,184Total shareholders equity
    
    
    22,603
    
    
    
    33,101TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    156,515
    
    
    $
    150,410
  F-5




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 2003, 2004 and 2005
(In thousands of shares and U.S. dollars, except per share data)
 2003
    
    2004(As restated and
    
    (As restated andreclassified, see
    
    reclassified, seeNote 14)
    
    Note 14)
    
    2005REVENUES:Subscriber-based fees
    
    $
    21,266
    
    
    $
    22,472
    
    
    $
    28,904Advertising
    
    
    18,491
    
    
    
    23,337
    
    
    
    30,353Production services
    
    
    1,225
    
    
    
    520
    
    
    
    1,198Other
    
    
    1,752
    
    
    
    524
    
    
    
    928Related parties
    
    
    18,861
    
    
    
    19,228
    
    
    
    19,144Total revenues, net
    
    
    61,595
    
    
    
    66,081
    
    
    
    80,527OPERATING EXPENSES:Product, content and technology
    
    
    (21,354
    )
    
    
    (25,878
    )
    
    
    (30,348
    )Marketing and sales
    
    
    (9,129
    )
    
    
    (12,801
    )
    
    
    (15,443
    )Corporate and administration
    
    
    (15,631
    )
    
    
    (13,723
    )
    
    
    (15,463
    )Depreciation and amortization
    
    
    (4,824
    )
    
    
    (4,706
    )
    
    
    (4,011
    )Impairment of goodwill
    
    
    (2,758
    )
    
    
    
    
    
    
    Related parties
    
    
    (1,002
    )
    
    
    (1,108
    )
    
    
    (1,176
    )Total operating expenses
    
    
    (54,698
    )
    
    
    (58,216
    )
    
    
    (66,441
    )OPERATING INCOME
    
    
    6,897
    
    
    
    7,865
    
    
    
    14,086OTHER INCOME
(EXPENSE):Interest expense
    
    
    (2,046
    )
    
    
    (1,791
    )
    
    
    (1,162
    )Interest income
    
    
    136
    
    
    
    96
    
    
    
    343Foreign currency exchange gain (loss)
    
    
    8,478
    
    
    
    (175
    )
    
    
    (1,113
    )Other
    
    
    (1,856
    )
    
    
    637
    
    
    
    661Interest expense related parties
    
    
    
    
    
    
    (116
    )
    
    
    (286
    )Interest income  related parties
    
    
    
    
    
    
    36
    
    
    
    549Equity in earnings (losses) from unconsolidated affiliates and related transactions
    
    
    367
    
    
    
    245
    
    
    
    (2,593
    )Other income (expense), net
    
    
    5,079
    
    
    
    (1,068
    )
    
    
    (3,601
    )INCOME BEFORE PROVISION FOR INCOME TAXES, MINORITY INTEREST, AND DISCONTINUED
OPERATIONS
    
    
    11,976
    
    
    
    6,797
    
    
    
    10,485PROVISION FOR INCOME TAXES
    
    
    (2,911
    )
    
    
    (1,861
    )
    
    
    (1,644
    )INCOME BEFORE MINORITY INTEREST AND DISCONTINUED OPERATIONS
    
    
    9,065
    
    
    
    4,936
    
    
    
    8,841MINORITY INTEREST
    
    
    46
    
    
    
    267
    
    
    
    267NET INCOME FROM CONTINUING OPERATIONS
    
    
    9,111
    
    
    
    5,203
    
    
    
    9,108DISCONTINUED OPERATIONS  (Loss) income from operations of discontinued divisions,
net (Note 3)
    
    
    (1,168
    )
    
    
    1,487
    
    
    
    (2,876
    )NET INCOME
    
    
    7,943
    
    
    
    6,690
    
    
    
    6,232OTHER COMPREHENSIVE (LOSS) INCOME  Foreign currency translation
    
    
    (1,194
    )
    
    
    2,419
    
    
    
    4,081COMPREHENSIVE INCOME
    
    $
    6,749
    
    
    $
    9,109
    
    
    $
    10,313NET INCOME PER COMMON SHARE:Net income from continuing operationsBasic
    
    $
    0.48
    
    
    $
    0.26
    
    
    $
    0.45Diluted
    
    $
    0.48
    
    
    $
    0.26
    
    
    $
    0.41Discontinued operationsBasic
    
    
    ($0.06
    )
    
    $
    0.08
    
    
    
    ($0.14
    )Diluted
    
    
    ($0.06
    )
    
    $
    0.07
    
    
    
    ($0.13
    )Net incomeBasic
    
    $
    0.42
    
    
    $
    0.34
    
    
    $
    0.31Diluted
    
    $
    0.42
    
    
    $
    0.33
    
    
    $
    0.28WEIGHTED AVERAGE NUMBER OF COMMON SHARES:Basic
    
    
    18,886
    
    
    
    19,611
    
    
    
    20,416Diluted
    
    
    18,980
    
    
    
    20,490
    
    
    
    21,895
  F-6




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2003, 2004 and 2005
(In thousands of shares and U.S. dollars)
 AccumulatedAdditional
    
    Deferred
    
    
    
    
    
    OtherPreferred
    
    
    
    
    
    Common
    
    
    
    
    
    Paid-In
    
    Share-based
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Deficit
    
    Income
    
    TotalBALANCE, DECEMBER 31,
2002, as previously reported
    
    
    15,000
    
    
    $
    15,000
    
    
    
    18,678
    
    
    $
    187
    
    
    $
    246,592
    
    
    $
    (63
    )
    
    $
    (268,562
    )
    
    $
    10,041
    
    
    $
    3,195Effect of restatement (Note 14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (837
    )
    
    
    837
    
    
    
    BALANCE, DECEMBER 31,2002, (as restated, see Note 14)
    
    
    15,000
    
    
    
    15,000
    
    
    
    18,678
    
    
    
    187
    
    
    
    246,592
    
    
    
    (63
    )
    
    
    (269,399
    )
    
    
    10,878
    
    
    
    3,195Amortization of deferred
share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    49Conversion of preferred
shares into common
shares
    
    
    (15,000
    )
    
    
    (15,000
    )
    
    
    750
    
    
    
    8
    
    
    
    14,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (as restated, see
Note 14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,943
    
    
    
    
    
    
    
    7,943Change in foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,194
    )
    
    
    (1,194
    )BALANCE, DECEMBER 31,
2003, (as restated, see Note 14).
    
    
    
    
    
    
    
    
    
    
    19,428
    
    
    
    195
    
    
    
    261,584
    
    
    
    (14
    )
    
    
    (261,456
    )
    
    
    9,684
    
    
    
    9,993Deferred share-based
compensation related to
share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131
    
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    885
    
    
    
    9
    
    
    
    3,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,430Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,690
    
    
    
    
    
    
    
    6,690Change in foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,419
    
    
    
    2,419BALANCE, DECEMBER 31,
2004, (as restated, see Note 14)
    
    
    
    
    
    
    
    
    
    
    20,313
    
    
    
    204
    
    
    
    265,136
    
    
    
    (74
    )
    
    
    (254,766
    )
    
    
    12,103
    
    
    
    22,603Amortization of deferred
share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    173
    
    
    
    1
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,232
    
    
    
    
    
    
    
    6,232Change in foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,081
    
    
    
    4,081BALANCE, DECEMBER 31,
2005
    
    
    
    
    
    
    
    
    
    
    20,486
    
    
    $
    205
    
    
    $
    265,263
    
    
    $
    (17
    )
    
    $
    (248,534
    )
    
    $
    16,184
    
    
    $
    33,101
  F-7




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Year Ended December 31,2003
    
    2004(As restated, see
    
    (As restated, seeNote 14)
    
    Note 14)
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    7,943
    
    
    $
    6,690
    
    
    $
    6,232Adjustments to reconcile net income to net cash provided by
operating activities:Amortization of programming rights
    
    
    1,205
    
    
    
    2,291
    
    
    
    4,111Share-based compensation
    
    
    49
    
    
    
    71
    
    
    
    57Depreciation and amortization
    
    
    5,045
    
    
    
    4,910
    
    
    
    4,456Accrued and (uncollected) unpaid interest
    
    
    126
    
    
    
    211
    
    
    
    (324
    )Net (gain) loss on disposal of assets
    
    
    (97
    )
    
    
    32
    
    
    
    (1,135
    )Exchange rate (gain) loss
    
    
    (8,478
    )
    
    
    175
    
    
    
    1,546Impairment of goodwill
    
    
    2,758
    
    
    
    
    
    
    
    Impairment of investment in equity securities
    
    
    394
    
    
    
    
    
    
    
    Equity in (earnings) losses from unconsolidated affiliates and
related transactions
    
    
    (367
    )
    
    
    (245
    )
    
    
    2,593Dividends from unconsolidated affiliates
    
    
    371
    
    
    
    493
    
    
    
    478Minority interest
    
    
    (46
    )
    
    
    (267
    )
    
    
    (267
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (934
    )
    
    
    1,568
    
    
    
    300Acquisition of programming rights
    
    
    (1,755
    )
    
    
    (3,600
    )
    
    
    (3,750
    )Due from related parties and other current assets
    
    
    12,583
    
    
    
    (5,713
    )
    
    
    568Other assets
    
    
    1,195
    
    
    
    (1,442
    )
    
    
    (1,648
    )Accounts payable, accrued expenses and other
    
    
    (5,894
    )
    
    
    96
    
    
    
    3,663Due to related parties
    
    
    (1,585
    )
    
    
    (579
    )
    
    
    83Programming rights obligations
    
    
    435
    
    
    
    (662
    )
    
    
    (336
    )Other long-term liabilities
    
    
    454
    
    
    
    84
    
    
    
    101Net cash provided by operating activities
    
    
    13,402
    
    
    
    4,113
    
    
    
    16,728CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of property and equipment
    
    
    (2,271
    )
    
    
    (1,984
    )
    
    
    (2,465
    )Acquisition of minority interest and transaction costs paid
    
    
    (4,285
    )
    
    
    (1,580
    )
    
    
    Investments in unconsolidated affiliates
    
    
    
    
    
    
    (3,375
    )
    
    
    (1,128
    )Restricted cash released in guarantee of Chilean syndicated loan
    
    
    706
    
    
    
    907
    
    
    
    Proceeds from sale of investments in subsidiaries and affiliates
    
    
    837
    
    
    
    625
    
    
    
    10,938Proceeds from sale of equity securities
    
    
    
    
    
    
    
    
    
    
    417(Redemption of ) deposit for the sale of subsidiary
    
    
    
    
    
    
    521
    
    
    
    (506
    )Net cash (used in) provided by investing activities
    
    
    (5,013
    )
    
    
    (4,886
    )
    
    
    7,256CASH FLOWS FROM FINANCING ACTIVITIES:Repayments of long-term debt
    
    
    (8,270
    )
    
    
    (6,252
    )
    
    
    (6,304
    )Proceeds from issuance of convertible debentures
    
    
    
    
    
    
    3,500
    
    
    
    Proceeds from sale of common shares to shareholders (see Note 3)
    
    
    
    
    
    
    3,375
    
    
    
    Distributions to minority owners of consolidated subsidiary
    
    
    
    
    
    
    (380
    )
    
    
    Proceeds from exercised stock options (see Note 8)
    
    
    
    
    
    
    55
    
    
    
    128Net cash (used in) provided by financing activities
    
    
    (8,270
    )
    
    
    298
    
    
    
    (6,176
    )EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS
    
    
    (511
    )
    
    
    68
    
    
    
    48NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (392
    )
    
    
    (407
    )
    
    
    17,856CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    8,069
    
    
    
    7,677
    
    
    
    7,270CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    7,677
    
    
    $
    7,270
    
    
    $
    25,126SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (See Note 13)
  F-8




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 1. GENERAL BACKGROUND AND ORGANIZATION
 General
 Organization
  Basis of Presentation
   F-9




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Consolidation
 Consolidated Financial Statements" Consolidation of All
Majority Owned Subsidiaries Consolidation of
Variable Interest Entities"
    
    
    CTG Inversora S.A. and subsidiaries, 100% owned;
    
    Claxson Chile S.A. and subsidiaries, 100% owned (see Note 3);
    
    Claxson USA II Inc. and subsidiaries, 100% owned (see Note 3);
    
    Carson International Ltd., 100% owned;
    
    El Sitio, Inc. and subsidiaries, 100% owned (see Note 3); and
    
    Playboy TV Latin America, LLC (PTVLA) and subsidiaries, 81% owned (see Note 3)
    Use of Estimates
 F-10




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
  Fair Value of Financial Instruments
 Foreign Currency Translation/Foreign Currency Exchange Loss Foreign Currency Translation
  Cash and Cash Equivalents
 Allowance for Doubtful Accounts Receivable
 Year Ended December 31,2003
    
    2004
    
    2005Beginning balance
    
    $
    9,388
    
    
    $
    6,240
    
    
    $
    6,313Provision
    
    
    1,212
    
    
    
    1,533
    
    
    
    1,294Write-offs, net
    
    
    (4,535
    )
    
    
    (1,514
    )
    
    
    (1,650
    )Exchange rate effect
    
    
    175
    
    
    
    54
    
    
    
    72Ending balance
    
    $
    6,240
    
    
    $
    6,313
    
    
    $
    6,029
 Programming Rights
  F-11




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Accounting by Producers or
Distributors of Films.
 Property and Equipment
 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 Accounting for Certain Investments in Debt and
Equity Securities
 Goodwill, Licenses and Other Assets Goodwill and
Other Intangible Assets
 December 31,2004
    
    2005Goodwill:Pay Television
    
    $
    25,481
    
    
    $
    25,481Broadcast Radio
    
    
    25,540
    
    
    
    27,683Total goodwill
    
    $
    51,021
    
    
    $
    53,164
    F-12




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
  Revenue Recognition Revenue Recognition.
  Share-based Compensation Accounting for Stock Issued to
Employees, Accounting for Stock-Based
Compensation (SFAS No. 123)
 Accounting for Stock Based Compensation-Transition and Disclosure"
 F-13




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
  Year Ended December 31,2003
    
    2004
    
    2005Net income as reported in the accompanying Income
statements
    
    $
    7,943
    
    
    $
    6,690
    
    
    $
    6,232Add: Total stock based employee compensation expense
included in reported net income
    
    
    49
    
    
    
    71
    
    
    
    57Deduct: Total fair value stock based employee compensation
expense not included in reported net income
    
    
    (193
    )
    
    
    (660
    )
    
    
    (662
    )Pro forma net income
    
    $
    7,799
    
    
    $
    6,101
    
    
    $
    5,627Net income per share as reported:-Basic
    
    $
    0.42
    
    
    $
    0.34
    
    
    $
    0.31-Diluted
    
    $
    0.42
    
    
    $
    0.33
    
    
    $
    0.28Pro forma net income per share:-Basic
    
    $
    0.41
    
    
    $
    0.31
    
    
    $
    0.28-Diluted
    
    $
    0.41
    
    
    $
    0.30
    
    
    $
    0.26
  Risk free rate
    
    
    3.39
    %Dividend yield
    
    
    0.0
    %Volatility factors
    
    
    344.30
    %Weighted-average life (years)
    
    
    7.50
   Advertising Expenses
 Barter Transactions Accounting for
Advertising Barter Transactions
 Income Taxes Accounting for Income Taxes.
 F-14




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Net Income Per Common Share
 New Accounting Pronouncements Share Based Payment (SFAS No. 123(R)) Accounting for Stock Based Compensation, Accounting for Stock
Issued to Employees,
 Exchanges of Nonmonetary Assets" Accounting for Nonmonetary Transactions"
 Share-Based Payment Share
Based Payment
 Accounting for Conditional Asset Retirement
Obligations Accounting for Asset Retirement Obligations
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109,
 F-15




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Earnings Per Share
 (In
thousands of shares and U.S. dollars, except per share data)
 2003
    
    2004
    
    2005Numerator:Net income
    
    $
    7,943
    
    
    $
    6,690
    
    
    $
    6,232Denominator:Weighted average number of common shares:Basic
    
    
    18,886
    
    
    
    19,611
    
    
    
    20,416Effect of dilutive securities:Stock options
    
    
    94
    
    
    
    432
    
    
    
    324Convertible debentures
    
    
    
    
    
    
    447
    
    
    
    1,155Diluted
    
    
    18,980
    
    
    
    20,490
    
    
    
    21,895Basic net income per share
    
    $
    0.42
    
    
    $
    0.34
    
    
    $
    0.31Diluted net income per share
    
    $
    0.42
    
    
    $
    0.33
    
    
    $
    0.28
 Disclosure requirements under SFAS No. 129, Disclosure of Information About
Capital Structure, Relating to Contingently Convertible Securities.
 3. ACQUISITIONS AND DISPOSALS
 Sale of Unconsolidated Affiliate
 Sale of Rainbow
 Investment in DLA Holdings, Inc (DLA) 
   F-16




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
    ,
    Sale of Chilevision
  F-17




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Sale of certain assets of El Sitio México
 Sale of certain assets and operations of Claxson Playout, Inc.
   Discontinued operations
 Balance Sheet information as of December 31, 2004
 Chilevisión
    
    PlayoutCash
    
    $
    5
    
    
    $
    Accounts receivables, net
    
    
    4,547
    
    
    
    399Other currents assets
    
    
    2,147
    
    
    
    Total currents assets
    
    $
    6,699
    
    
    $
    399Property and equipment, net
    
    
    6,352
    
    
    
    421Programming rights, net
    
    
    3,333
    
    
    
    Investment in unconsolidated affiliates
    
    
    249
    
    
    
    Broadcast and television licenses, net
    
    
    4,443
    
    
    
    Goodwill
    
    
    3,498
    
    
    
    Other non current assets
    
    
    10
    
    
    
    Total assets classified as Assets held for sale
    
    $
    24,584
    
    
    $
    820Accounts payables and accrued expenses
    
    $
    4,785
    
    
    $
    175Accrued compensation
    
    
    1,586
    
    
    
    Other current liabilities
    
    
    452
    
    
    
    Current portion of programming rights obligation
    
    
    2,787
    
    
    
    Current portion of long-term debt
    
    
    513
    
    
    
    Unearned revenues
    
    
    822
    
    
    
    Total current liabilities
    
    $
    10,945
    
    
    $
    175Long-term debt, net of current portion
    
    
    1,429
    
    
    
    Other long-term liabilities
    
    
    2,378
    
    
    
    Total liabilities classified as Liabilities related to assets held for sale
    
    $
    14,752
    
    
    $
    175
 F-18




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Statements
of operations Chilevision:
 Year Ended December 31,2003
    
    2004
    
    2005Revenues
    
    $
    18,793
    
    
    $
    27,487
    
    
    $
    5,647Expenses
    
    
    (19,122
    )
    
    
    (24,791
    )
    
    
    (8,035
    )Other(1)
    
    
    991
    
    
    
    354
    
    
    
    213Net income (loss) from
Discontinued operations
    
    $
    662
    
    
    $
    3,050
    
    
    $
    (2,175
    )
  (1)
    
    Includes $518 gain on the sale of Chilevision in 2005.
 Statements of operations Playout:
 Year Ended December 31,2003
    
    2004
    
    2005Revenues
    
    $
    1,399
    
    
    $
    2,103
    
    
    $
    487Expenses(1)
    
    
    (3,229
    )
    
    
    (3,666
    )
    
    
    (1,188
    )Net loss from Discontinued
operations
    
    $
    (1,830
    )
    
    $
    (1,563
    )
    
    $
    (701
    )
  (1)
    
    Includes $400 loss on the sale of certain businesses of
Playout in 2005.
 4. PROPERTY AND EQUIPMENT
  December 31,2004
    
    2005Land and buildings
    
    $
    4,546
    
    
    $
    4,557Furniture, fixtures, equipment and software
    
    
    32,985
    
    
    
    35,815Leasehold improvements
    
    
    7,969
    
    
    
    8,059Total
    
    
    45,500
    
    
    
    48,431Less accumulated depreciation and amortization
    
    
    (34,554
    )
    
    
    (37,848
    )Property and equipment, net
    
    $
    10,946
    
    
    $
    10,583
  F-19




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 5. INVESTMENT IN UNCONSOLIDATED AFFILIATES
  Balance sheet information:
 2004Current assets
    
    $
    4,819Non-current assets
    
    
    10,609Total assets
    
    $
    15,428Current liabilities
    
    $
    3,743Non-current liabilities
    
    
    14,259Equity (deficit)
    
    
    (2,574
    )Total liabilities and equity (deficit)
    
    $
    15,428Claxsons investment in unconsolidated affiliates
    
    $
    3,407
 Statements of operations information:
 Year Ended December 31,2003
    
    2004Revenues
    
    $
    2,845
    
    
    $
    4,332Expenses
    
    
    (1,842
    )
    
    
    (4,294
    )Other
    
    
    
    
    
    
    (390
    )Net income (loss)
    
    $
    1,003
    
    
    $
    (352
    )Claxsons share of income (loss) from
unconsolidated affiliates
    
    $
    367
    
    
    $
    (380
    )
  6. LONG-TERM DEBT
  December 31,2004
    
    2005Senior Notes11% Senior Notes due 2005, including accrued interest
    
    $
    450
    
    
    $
    3978.75% Senior Notes due 2010, including accrued interest
    
    
    57,997
    
    
    
    54,3796.25% Senior Notes due 2013, including accrued interest
    
    
    2,725
    
    
    
    2,664Other Senior Notes, including accrued interest
    
    
    2,796
    
    
    
    2,103Syndicated bank facility
    
    
    16,453
    
    
    
    15,924Convertible debentures
    
    
    3,616
    
    
    
    3,620Other long-term debt
    
    
    1,815
    
    
    
    2,692Total
    
    
    85,852
    
    
    
    81,779Less Current Portion:11% Senior Notes due 2005
    
    
    (450
    )
    
    
    (397
    )8.75% Senior Notes due 2010
    
    
    (3,618
    )
    
    
    (5,686
    )6.25% Senior Notes due 2013
    
    
    (58
    )
    
    
    (46
    )Other Senior Notes
    
    
    (535
    )
    
    
    (622
    )Syndicated bank facility
    
    
    (2,441
    )
    
    
    (3,964
    )Convertible debentures
    
    
    
    
    
    
    (3,620
    )Other long-term debt
    
    
    (1,070
    )
    
    
    (387
    )Long-term debt, net of current portion
    
    $
    77,680
    
    
    $
    67,057
 Senior Notes
 F-20




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
         Senior
Secured Syndicated Bank Facility
  F-21




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
     Convertible Debentures  )
   Other Long-Term Debt
 Renegotiation of financing of land and building of Chilean Radios 
  F-22




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
  Twelve Months Ending December 31,2006
    
    $
    14,7222007
    
    
    14,5812008
    
    
    17,9162009
    
    
    17,0852010
    
    
    15,030Thereafter
    
    
    2,445Total
    
    $
    81,779
 7. INCOME TAXES
 2003
    
    2004
    
    2005Current
    
    $
    2,587
    
    
    $
    1,813
    
    
    $
    2,603Deferred
    
    
    324
    
    
    
    48
    
    
    
    (959
    )Total provision for income taxes
    
    $
    2,911
    
    
    $
    1,861
    
    
    $
    1,644
  Year Ended December 31,2003
    
    2004
    
    2005Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Expected tax provision (benefit)
using statutory tax rate
    
    $
    4,192
    
    
    
    35
    
    
    $
    2,379
    
    
    
    35
    
    
    $
    3,670
    
    
    
    35Non taxable results (1)
    
    
    70
    
    
    
    1
    
    
    
    388
    
    
    
    6
    
    
    
    1,192
    
    
    
    12Effect of differences in rates
from Chile, US and Uruguay
    
    
    639
    
    
    
    5
    
    
    
    495
    
    
    
    7
    
    
    
    (599
    )
    
    
    (6
    )Effects of change in valuation
allowance
    
    
    (4,746
    )
    
    
    (40
    )
    
    
    (2,837
    )
    
    
    (42
    )
    
    
    (3,642
    )
    
    
    (35
    )Gain on anticipated payment of
long-term debt (net present
value)
    
    
    1,182
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Withholding taxes
    
    
    911
    
    
    
    8
    
    
    
    676
    
    
    
    10
    
    
    
    1,157
    
    
    
    11Non-deductible write off of
accounts receivable
    
    
    276
    
    
    
    2
    
    
    
    154
    
    
    
    2
    
    
    
    43
    
    
    
    Other items
    
    
    387
    
    
    
    3
    
    
    
    606
    
    
    
    9
    
    
    
    (177
    )
    
    
    (1
    )Total provision for income taxes
    
    $
    2,911
    
    
    
    24
    
    
    $
    1,861
    
    
    
    27
    
    
    $
    1,644
    
    
    
    16
  (1)
    
    Includes non taxable income from foreign sources, non deductible expenses and results from non
taxable corporations.
 F-23




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
  December 31,2004
    
    2005Net operating loss carryforwards
    
    $
    25,464
    
    
    $
    22,895Income tax credits
    
    
    3,093
    
    
    
    4,359Intangible assets
    
    
    90
    
    
    
    48Foreign currency items
    
    
    1,397
    
    
    
    687Property, equipment, and other assets
    
    
    2,332
    
    
    
    4,225Total deferred tax assets
    
    
    32,376
    
    
    
    32,214Total deferred tax liabilities
    
    
    (1,522
    )
    
    
    (1,518
    )Valuation allowance
    
    
    (28,069
    )
    
    
    (25,686
    )Net deferred tax asset
    
    $
    2,785
    
    
    $
    5,010
    Twelve Months Ending December 31,2006
    
    $
    3,6262007
    
    
    16,0702008
    
    
    8882009
    
    
    832018 through 2023
    
    
    32,969NOLS from Chile without forfeiture
    
    
    18,494Total
    
    $
    72,130
 8. SHARE OPTION PLAN
     F-24




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CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
   9. PREFERRED SHARES
   10. SEGMENT INFORMATION
  F-25




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Pay
    
    Broadcast
    
    Broadband andTelevision
    
    Radio
    
    Internet
    
    Corporate
    
    TotalYear Ended December 31, 2003Total net revenues
    
    $
    46,816
    
    
    $
    14,601
    
    
    $
    178
    
    
    $
    
    
    
    $
    61,595Operating income (loss)
    
    
    9,096
    
    
    
    4,419
    
    
    
    (1,586
    )
    
    
    (5,032
    )
    
    
    6,897Net income (loss)
    
    
    13,289
    
    
    
    2,641
    
    
    
    (1,373
    )
    
    
    (6,614
    )
    
    
    7,943Depreciation and
amortization
    
    
    3,141
    
    
    
    1,499
    
    
    
    6
    
    
    
    178
    
    
    
    4,824Total assets, including
those related to
discontinued operations
(see Note 3)
    
    
    62,193
    
    
    
    81,245
    
    
    
    2,332
    
    
    
    (431
    )
    
    
    145,339Year Ended December 31, 2004Total net revenues
    
    $
    47,828
    
    
    $
    18,103
    
    
    $
    100
    
    
    $
    50
    
    
    $
    66,081Operating income (loss)
    
    
    8,134
    
    
    
    4,484
    
    
    
    (652
    )
    
    
    (4,101
    )
    
    
    7,865Net income (loss)
    
    
    5,978
    
    
    
    4,822
    
    
    
    (349
    )
    
    
    (3,761
    )
    
    
    6,690Depreciation and
amortization
    
    
    2,960
    
    
    
    1,739
    
    
    
    7
    
    
    
    
    
    
    
    4,706Total assets, including
those related to
discontinued operations
(see Note 3)
    
    
    64,333
    
    
    
    89,636
    
    
    
    703
    
    
    
    1,843
    
    
    
    156,515Year Ended December 31, 2005Total net revenues
    
    $
    56,139
    
    
    $
    24,001
    
    
    $
    96
    
    
    $
    291
    
    
    $
    80,527Operating income (loss)
    
    
    13,920
    
    
    
    5,188
    
    
    
    (708
    )
    
    
    (4,314
    )
    
    
    14,086Net income (loss)
    
    
    8,579
    
    
    
    617
    
    
    
    176
    
    
    
    (3,140
    )
    
    
    6,232Depreciation and
amortization
    
    
    2,126
    
    
    
    1,885
    
    
    
    
    
    
    
    
    
    
    
    4,011Total assets
    
    
    61,506
    
    
    
    65,569
    
    
    
    534
    
    
    
    22,801
    
    
    
    150,410
  11. COMMITMENTS AND CONTINGENCIES
 Commitments
   F-26




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Twelve Months Ending December 31,2006
    
    $
    4,1052007
    
    
    3,6242008
    
    
    2,8372009
    
    
    2,6802010
    
    
    2,680Thereafter
    
    
    1,786Total
    
    $
    17,712
     Twelve Months Ending December 31,2006
    
    $
    15,8622007
    
    
    6,7812008
    
    
    4,6192009
    
    
    4,7582010
    
    
    4,900Thereafter
    
    
    10,246Total
    
    $
    47,166
   Legal Proceedings
 F-27




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
   Cámara Nacional de Apelaciones en lo Comercial
     12. RELATED PARTY TRANSACTIONS
 Management Services
 F-28




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
  Revenues
   Expenses
     13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Supplemental Disclosure of Non-Cash Investing and Financing Activities:
 Acquisitions and disposals
 F-29




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 Unrealized gain (loss) from investment in equity securities
 Investments in equity securities
 Supplemental Disclosure of Cash Flow Information
  14. RESTATEMENT AND RECLASSIFICATION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
 Restatement of Previously Issued Financial Statements
           F-30




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
   Reclassifications for Discontinued Operations
  CONSOLIDATED BALANCE SHEET  AS OF DECEMBER 31, 2004:
 Correction of errorsReclassificationsAs
    
    Impairment of
    
    Reclassifications
    
    due to
    
    As restatedpreviously
    
    investment in
    
    due to related
    
    discontinued
    
    andreported
    
    ARTISTdirect
    
    party balances
    
    operations
    
    reclassifiedAccounts receivable, net
    
    $
    15,863
    
    
    $
    
    
    
    $
    3,126
    
    
    
    ($399
    )
    
    $
    18,590Due from related parties
    
    
    7,851
    
    
    
    
    
    
    
    (3,103
    )
    
    
    
    
    
    
    4,748Assets held for sale
    
    
    24,584
    
    
    
    
    
    
    
    
    
    
    
    820
    
    
    
    25,404Other current assets
    
    
    8,698
    
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    8,675PROPERTY AND EQUIPMENT, NET
    
    
    11,367
    
    
    
    
    
    
    
    
    
    
    
    (421
    )
    
    
    10,946OTHER ASSETS, NET
    
    
    5,650
    
    
    
    
    
    
    
    (358
    )
    
    
    
    
    
    
    5,292DUE FROM RELATED PARTIES
    
    
    
    
    
    
    
    
    
    
    358
    
    
    
    
    
    
    
    358Accounts payables and accrued expenses
    
    
    8,469
    
    
    
    
    
    
    
    27
    
    
    
    (175
    )
    
    
    8,321Liabilities related to assets held for sale
    
    
    14,752
    
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    14,927Due to related parties
    
    
    1,768
    
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    1,731Other current liabilities
    
    
    9,233
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    9,243Accumulated deficit
    
    
    (253,535
    )
    
    
    (1,231
    )
    
    
    
    
    
    
    
    
    
    
    (254,766
    )Accumulated other comprehensive income
    
    
    10,872
    
    
    
    1,231
    
    
    
    
    
    
    
    
    
    
    
    12,103
 F-31




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 CONSOLIDATED STATEMENT OF INCOME  AND COMPREHENSIVE INCOME  Year Ended December 31, 2003:
 Correction of errorsReclassificationsAs
    
    Impairment of
    
    Reclassifications
    
    due to
    
    As restatedpreviously
    
    investment in
    
    due to related
    
    discontinued
    
    andreported
    
    ARTISTdirect
    
    party transactions
    
    operations
    
    reclassifiedSubscriber-based fees
    
    $
    38,932
    
    
    $
    
    
    
    
    ($17,666
    )
    
    $
    
    
    
    $
    21,266Advertising
    
    
    18,531
    
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    18,491Production services
    
    
    3,051
    
    
    
    
    
    
    
    (427
    )
    
    
    (1,399
    )
    
    
    1,225Other
    
    
    2,480
    
    
    
    
    
    
    
    (728
    )
    
    
    
    
    
    
    1,752Related parties
    
    
    
    
    
    
    
    
    
    
    18,861
    
    
    
    
    
    
    
    18,861Total revenues, net
    
    
    62,994
    
    
    
    
    
    
    
    
    
    
    
    (1,399
    )
    
    
    61,595Product, content and technology
    
    
    (24,211
    )
    
    
    
    
    
    
    13
    
    
    
    2,844
    
    
    
    (21,354
    )Marketing and sales
    
    
    (9,300
    )
    
    
    
    
    
    
    9
    
    
    
    162
    
    
    
    (9,129
    )Corporate and administration
    
    
    (16,613
    )
    
    
    
    
    
    
    980
    
    
    
    2
    
    
    
    (15,631
    )Depreciation and amortization
    
    
    (5,045
    )
    
    
    
    
    
    
    
    
    
    
    221
    
    
    
    (4,824
    )Related parties
    
    
    
    
    
    
    
    
    
    
    (1,002
    )
    
    
    
    
    
    
    (1,002
    )Total operating expenses
    
    
    (57,927
    )
    
    
    
    
    
    
    
    
    
    
    3,229
    
    
    
    (54,698
    )Other
    
    
    (1,462
    )
    
    
    (394
    )
    
    
    
    
    
    
    
    
    
    
    (1,856
    )Other income (expense), net
    
    
    5,473
    
    
    
    (394
    )
    
    
    
    
    
    
    
    
    
    
    5,079NET INCOME FROM CONTINUING
OPERATIONS
    
    
    7,675
    
    
    
    (394
    )
    
    
    
    
    
    
    1,830
    
    
    
    9,111DISCONTINUED OPERATIONS  (Loss)
income from operations of
discontinued division, net (Note
3)
    
    
    662
    
    
    
    
    
    
    
    
    
    
    
    (1,830
    )
    
    
    (1,168
    )NET INCOME
    
    
    8,337
    
    
    
    (394
    )
    
    
    
    
    
    
    
    
    
    
    7,943Unrealized
gain (loss) from investment in equity securities
    
    
    (394
    )
    
    
    394
    
    
    
    
    
    
    
    
    
    
    
    
 NET INCOME PER COMMON SHARE,  Year Ended December 31, 2003:
 Correction of errorsReclassificationsAs
    
    Impairment of
    
    Reclassifications
    
    due to
    
    As restatedpreviously
    
    investment in
    
    due to related
    
    discontinued
    
    andreported
    
    ARTISTdirect
    
    party transactions
    
    operations
    
    reclassifiedNet income from continuing operationsBasic
    
    $
    0.41
    
    
    
    ($0.02
    )
    
    
    
    
    
    $
    0.09
    
    
    $
    0.48Diluted
    
    $
    0.41
    
    
    
    ($0.02
    )
    
    
    
    
    
    $
    0.09
    
    
    $
    0.48Discontinued operationsBasic
    
    $
    0.03
    
    
    
    
    
    
    
    
    
    
    
    ($0.09
    )
    
    
    ($0.06
    )Diluted
    
    $
    0.03
    
    
    
    
    
    
    
    
    
    
    
    ($0.09
    )
    
    
    ($0.06
    )Net incomeBasic
    
    $
    0.44
    
    
    
    ($0.02
    )
    
    
    
    
    
    
    
    
    
    $
    0.42Diluted
    
    $
    0.44
    
    
    
    ($0.02
    )
    
    
    
    
    
    
    
    
    
    $
    0.42
 F-32




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 CONSOLIDATED STATEMENT OF INCOMEAND COMPREHENSIVE INCOME  Year Ended December 31, 2004:
 Correction of errors:
    

ReclassificationsAs
    
    Reclassifications
    
    due to
    
    As restatedpreviously
    
    due to related
    
    discontinued
    
    andreported
    
    party transactions
    
    operations
    
    reclassifiedSubscriber-based fees
    
    $
    40,052
    
    
    $
    (17,580
    )
    
    $
    
    
    
    $
    22,472Advertising
    
    
    23,339
    
    
    
    (2
    )
    
    
    
    
    
    
    23,337Production services
    
    
    3,233
    
    
    
    (610
    )
    
    
    (2,103
    )
    
    
    520Other
    
    
    1,560
    
    
    
    (1,036
    )
    
    
    
    
    
    
    524Related parties
    
    
    
    
    
    
    19,228
    
    
    
    
    
    
    
    19,228Total revenues, net
    
    
    68,184
    
    
    
    
    
    
    
    (2,103
    )
    
    
    66,081Product, content and technology
    
    
    (29,292
    )
    
    
    
    
    
    
    3,414
    
    
    
    (25,878
    )Marketing and sales
    
    
    (12,874
    )
    
    
    30
    
    
    
    43
    
    
    
    (12,801
    )Corporate and administration
    
    
    (14,806
    )
    
    
    1,078
    
    
    
    5
    
    
    
    (13,723
    )Depreciation and amortization
    
    
    (4,910
    )
    
    
    
    
    
    
    204
    
    
    
    (4,706
    )Related parties
    
    
    
    
    
    
    (1,108
    )
    
    
    
    
    
    
    (1,108
    )Total operating expenses
    
    
    (61,882
    )
    
    
    
    
    
    
    3,666
    
    
    
    (58,216
    )OTHER (EXPENSE) INCOME:Interest expense
    
    
    (1,907
    )
    
    
    116
    
    
    
    
    
    
    
    (1,791
    )Interest income
    
    
    132
    
    
    
    (36
    )
    
    
    
    
    
    
    96Interest expense-related parties
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    (116
    )Interest income-related parties
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36NET INCOME FROM CONTINUING
OPERATIONS
    
    
    3,640
    
    
    
    
    
    
    
    1,563
    
    
    
    5,203DISCONTINUED OPERATIONS -
(Loss) income from operations
of discontinued division, net
(Note 3)
    
    
    3,050
    
    
    
    
    
    
    
    (1,563
    )
    
    
    1,487
 NET INCOME PER COMMON SHARE,  Year Ended December 31, 2004:
 As
    
    
    
    
    
    Reclassification
    
    As restatedpreviously
    
    Correction
    
    to discontinued
    
    andreported
    
    of errors
    
    operations
    
    reclassifiedNet income from continuing operationsBasic
    
    $
    0.19
    
    
    
    
    
    
    $
    0.07
    
    
    $
    0.26Diluted
    
    $
    0.18
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.26Discontinued operationsBasic
    
    $
    0.15
    
    
    
    
    
    
    
    ($0.07
    )
    
    $
    0.08Diluted
    
    $
    0.15
    
    
    
    
    
    
    
    ($0.08
    )
    
    $
    0.07
 F-33




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##### Table of Contents



CLAXSON INTERACTIVE GROUP INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2004 and 2005
(In thousands of U.S. dollars)
 2003
    
    
    
    2004As previously
    
    2003
    
    As previously
    
    2004reported
    
    As restated
    
    reported
    
    As restatedCONSOLIDATED STATEMENTS OF CASH FLOWS:CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    8,337
    
    
    $
    7,943
    
    
    $
    6,690
    
    
    $
    6,690Impairment of investment in equity securities
    
    
    
    
    
    
    394
    
    
    
    
    
    
    
    Dividends from unconsolidated affiliates
    
    
    
    
    
    
    371
    
    
    
    
    
    
    
    493Change in accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    4,598
    
    
    
    1,568Change in due from related parties and other current assets
    
    
    
    
    
    
    
    
    
    
    (8,743
    )
    
    
    (5,713
    )Net cash provided by operating activities
    
    
    13,031
    
    
    
    13,402
    
    
    
    3,620
    
    
    
    4,113CASH FLOWS FROM INVESTING ACTIVITIESDistributions to minority owners of consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    (380
    )
    
    
    Restricted cash released in guarantee of Chilean syndicated loan
    
    
    
    
    
    
    706
    
    
    
    
    
    
    
    907Investments in unconsolidated affiliates
    
    
    371
    
    
    
    
    
    
    
    (2,882
    )
    
    
    (3,375
    )Net cash used in investing activities
    
    
    (5,348
    )
    
    
    (5,013
    )
    
    
    (5,680
    )
    
    
    (4,886
    )CASH FLOWS FROM FINANCING ACTIVITIESDistributions to minority owners of consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (380
    )Restricted cash released in guarantee of Chilean syndicated loan
    
    
    706
    
    
    
    
    
    
    
    907
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (7,564
    )
    
    
    (8,270
    )
    
    
    1,585
    
    
    
    298
 15. SUBSEQUENT EVENT
 Conversion of Convertible Debentures into Common Shares 
 F-34




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
         F-35




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##### Table of Contents



(Reviewed)2005
    
    2004ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    599,057
    
    
    $
    1,395,961Accounts receivable
    
    
    1,090,001
    
    
    
    482,254Unbilled revenue
    
    
    455,256
    
    
    
    373,233Prepaid expenses and other current assets
    
    
    50,750
    
    
    
    654,347Total current assets
    
    
    2,195,064
    
    
    
    2,905,795PROPERTY AND EQUIPMENT, NET
    
    
    5,589,044
    
    
    
    7,284,300DEPOSITS AND OTHER ASSETS
    
    
    2,133,550
    
    
    
    3,305,239Total assets
    
    $
    9,917,658
    
    
    $
    13,495,334LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESNote payable, current portion
    
    $
    402,052
    
    
    $
    Accounts payable and accrued expenses
    
    
    3,840,380
    
    
    
    2,374,425Accrued payroll related costs
    
    
    8,381
    
    
    
    30,976Other current liabilities
    
    
    913,801
    
    
    
    590,782Total current liabilities
    
    
    5,164,614
    
    
    
    2,996,183OTHER LIABILITIESNotes payable
    
    
    6,283,523
    
    
    
    6,685,575Preferred shares subject to mandatory redemption
    
    
    7,591,773
    
    
    
    7,013,713Other liabilities
    
    
    617,088
    
    
    
    560,346Total other liabilities
    
    
    14,492,384
    
    
    
    14,259,634Total liabilities
    
    
    19,656,998
    
    
    
    17,255,817Commitments and contingencies (Notes 7, 8, 12 and 13)
    
    
    
    
    
    
    STOCKHOLDERS DEFICITCommon stock, $.01 par value, 15,000,000 shares
authorized, 9,375,001 shares issued and
outstanding
    
    
    93,750
    
    
    
    93,750Additional paid-in capital
    
    
    1,425,000
    
    
    
    1,425,000Accumulated deficit
    
    
    (11,258,090
    )
    
    
    (5,279,233
    )Total stockholders deficit
    
    
    (9,739,340
    )
    
    
    (3,760,483
    )Total liabilities and stockholders deficit
    
    $
    9,917,658
    
    
    $
    13,495,334
  F-36




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##### Table of Contents



(Reviewed)2005
    
    2004REVENUES
    
    $
    5,708,692
    
    
    $
    711,464COSTS AND EXPENSESDirect operating (excluding depreciation and amortization)
    
    
    4,368,991
    
    
    
    798,608Other operating, general and administrative
    
    
    4,231,884
    
    
    
    1,272,320Depreciation and amortization
    
    
    2,095,596
    
    
    
    346,609Total operating costs and expenses
    
    
    10,696,471
    
    
    
    2,417,537Loss from operations
    
    
    (4,987,779
    )
    
    
    (1,706,073
    )OTHERInterest expense
    
    
    (991,078
    )
    
    
    (165,412
    )Net loss
    
    $
    (5,978,857
    )
    
    $
    (1,871,485
    )
  F-37




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##### Table of Contents



TotalCommon Stock
    
    Additional
    
    Accumulated
    
    ShareholdersShares
    
    Amount
    
    Paid-in Capital
    
    Deficit
    
    DeficitBalance at October 29, 2004
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common stock
    
    
    9,375,001
    
    
    
    93,750
    
    
    
    
    
    
    
    
    
    
    
    93,750Contribution to capital
    
    
    
    
    
    
    
    
    
    
    1,425,000
    
    
    
    
    
    
    
    1,425,000Transfer of net members equity as a
result of corporate reorganization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,407,748
    )
    
    
    (3,407,748
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,871,485
    )
    
    
    (1,871,485
    )Balance at December 31, 2004 (Reviewed)
    
    
    9,375,001
    
    
    
    93,750
    
    
    
    1,425,000
    
    
    
    (5,279,233
    )
    
    
    (3,760,483
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,978,857
    )
    
    
    (5,978,857
    )Balance at December 31, 2005
    
    
    9,375,001
    
    
    $
    93,750
    
    
    $
    1,425,000
    
    
    $
    (11,258,090
    )
    
    $
    (9,739,340
    )
  F-38




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##### Table of Contents



(Reviewed)2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (5,978,857
    )
    
    $
    (1,871,485
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,095,596
    
    
    
    346,609Bad debt expense
    
    
    175,873
    
    
    
    57,926Accrued interest expense on preferred stock
    
    
    578,060
    
    
    
    96,675Changes in operating assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (783,620
    )
    
    
    33,223Increase in unbilled revenue
    
    
    (82,023
    )
    
    
    (250,927
    )Decrease (increase) in prepaid expenses and other current assets
    
    
    603,597
    
    
    
    (488,385
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    1,465,955
    
    
    
    (1,667,996
    )Decrease in accrued payroll and related costs
    
    
    (22,595
    )
    
    
    (18,458
    )Increase in other current liabilities
    
    
    323,019
    
    
    
    378,904Decrease other liabilities
    
    
    56,741
    
    
    
    49,390Total adjustments
    
    
    4,410,603
    
    
    
    (1,463,039
    )Net cash used in operating activities
    
    
    (1,568,254
    )
    
    
    (3,334,524
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (356,150
    )
    
    
    (9,426
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from subscription receivable
    
    
    1,127,500
    
    
    
    Proceeds from mandatory redeemable preferred stock
    
    
    
    
    
    
    3,000,000Proceeds from issuance of common stock
    
    
    
    
    
    
    1,500,000Net cash provided by financing activities
    
    
    1,127,500
    
    
    
    4,500,000Net (decrease) increase in cash and cash equivalents
    
    
    (796,904
    )
    
    
    1,156,050CASH AND CASH EQUIVALENTS, beginning of period
    
    
    1,395,961
    
    
    
    239,911CASH AND CASH EQUIVALENTS, end of period
    
    $
    599,057
    
    
    $
    1,395,961
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##### Table of Contents



(Reviewed)2005
    
    2004Cash paid during the year for interest
    
    $
    67,857
    
    
    $
    9,563Cash paid during the year for income taxes
    
    
    
    
    
    
    
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##### Table of Contents



NOTE 1 -
    
    ORGANIZATIONDLA Holdings, Inc. (Holdings or the Company) is a
British Virgin Islands international business company formed in
October 2004 to acquire 100% of the membership interest in
Digital Latin America, LLC and its 100% owned subsidiary, PPV
Services, LLC (DLA). Digital Latin America, LLC and PPV
Services, LLC, a Delaware Limited Liability Company, were formed
on March 8, 2000, as a venture funded by HMTF DLA, Inc. (HM),
Liberty International DLA, Inc. (Liberty), and DLA Partners,
Inc. (a 100% indirect subsidiary of Motorola, Inc. or
Motorola) (individually, a Member, or collectively, the
Members). DLA operates from its headquarters in South Florida.
Liberty sold its interest to HM on October 29, 2004, immediately
before the Company underwent an ownership and debt restructuring
(see Note 7). DLA Holdings, Inc. and DLA are under common
control, thus the accounting treatment for the business
combination was similar to pooling of interests.NOTE 2 -
    
    NATURE OF BUSINESSIn 2002, DLA commenced its planned principal operations of delivery of digital
programming, data and other services to cable operators in Latin America. DLA has
been subject to all the risks inherent in establishing a new business venture. In
2002, DLAs primary focus was launching and marketing its services to cable operators
in Latin America and the Caribbean, and continued generating losses through the year
ended December 31, 2005, as it builds its customer base and markets its services.
There can be no assurances that managements plans will be successful.DLAs cash flows from operations have been insufficient to pay for its operations.
Shortfalls in cash flows have been met through shareholder financing. On October 29,
2004, DLA restructured its obligations and obtained funding from new investors (see
Note 7) to help ensure there is sufficient capital to maintain DLA during its growth
phase, and to continue as a going concern.NOTE 3 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESCONSOLIDATION
The consolidated financial statements of the Company include the accounts of DLA
Holdings, Inc., Digital Latin America, LLC, and its wholly-owned subsidiary, PPV
Services, LLC (DLA). All significant intercompany balances and transactions have
been eliminated in consolidation.CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
  F-41




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##### Table of Contents



NOTE 3 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)ACCOUNTS RECEIVABLE
Accounts receivable are due from sales of digital programming and other services and
are net of an allowance for doubtful accounts of $1,036,924 and $97,277 at 2005 and
2004, respectively. Included in accounts receivable is approximately $0 and $12,300
due from affiliates of shareholders for 2005 and 2004, respectively. Trade
receivables are periodically evaluated for collectibility based on past credit
history with customers and their current financial condition.UNBILLED REVENUE
The Company believes unbilled revenue is realizable in accordance with the provisions
of the respective contracts. Included in 2005 unbilled revenue is approximately
$20,000 due from affiliates of shareholders.PREPAID LICENSE AND PRODUCTION COSTS (INCLUDED IN OTHER ASSETS)
The Company has paid license fees and production costs for movies to be aired on its
pay-per-view channels during 2005 and 2004. License fees are expensed when the
movies first air. Production costs generally relate to movie language translation
and promotional spots and are expensed when incurred.PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are recorded using the straight-line
method over the estimated useful lives of the assets or the lease term, if shorter.
Expenditures for repairs and maintenance are charged to expense as incurred.IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted SFAS No. 144 on January 1, 2002. In accordance with SFAS No.
144, long-lived assets, such as property and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the assets exceeds the fair value of the
asset. The adoption of SFAS No. 144 did not have an impact on the Companys
consolidated financial statements.
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##### Table of Contents



NOTE 3 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)REVENUE
Revenue is primarily the result of providing basic, pay-per-view and transport
services.Basic services are per subscriber fees which include digital music, interactive
programming guide, general access to pay-per-view services and infocast, a scrolling
news service. Basic services revenue is recognized in the month the services are
delivered to subscribers.Pay-per-view services include movies, events and adult programming. Revenues are
based on a per buy basis and may include minimum guarantees. Revenues from minimum
guarantees are recognized when the programming is first aired, and revenues generated
from buys are recognized in the months buys occur. Revenue generated from buys in
excess of the minimum guarantee is recognized at the end of the license period.Transport/playout services and niche channel revenue is recognized in the month the
services are provided to customers.For 2005 and the period from October 29, 2004 through December 31, 2004, revenue
consisted mainly of the following:
 2005
    
    2004Basic service
    
    
    64
    %
    
    
    49
    %Pay-per-view services
    
    
    20
    %
    
    
    31
    %Transport/playout
    
    
    14
    %
    
    
    19
    %Other
    
    
    2
    %
    
    
    1
    %100
    %
    
    
    100
    %
 DIRECT OPERATING COSTS
Direct operating costs consist primarily of transport costs which include satellite
and uplink services. The Companys license fees and production costs are based on
contracts with programming content suppliers whose compensation is typically based on
a flat fee and/or a percentage of the Companys gross receipts or a fee determined by
calculating the number of average subscribers in the period.For 2005 and the period from October 29, 2004 through December 31, 2004, direct cost
consisted mainly of the following:
 2005
    
    2004Transport costs
    
    
    64
    %
    
    
    70
    %Programming costs
    
    
    25
    %
    
    
    26
    %Other
    
    
    11
    %
    
    
    4
    %100
    %
    
    
    100
    %
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##### Table of Contents



NOTE 3 -
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)OTHER OPERATING COSTS
Other operating costs include all other costs directly related to the generation of
the Companys services and are expensed as incurred.CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk include cash and cash equivalents. The Company maintains cash balances
at financial institutions that may exceed federally insured limits. The Company has
not experienced any losses in such accounts and believes it is not exposed to any
significant credit risks. The exposure to the Company from these transactions is
solely dependent upon the bank balances and the financial strength of the respective
institutions. The Company also invests its excess cash in a money market mutual fund
and overnight repurchase agreements. The overnight repurchase agreements represent
an interest in low risk U.S. government reserves, the Federal Deposit Insurance
Corporation or any other U.S. government agency.FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable,
and notes payable are reflected in the financial statement at cost, which
approximates fair value.USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 revenue and expenses during the reporting period. Actual results
could differ from those estimates.INCOME TAXES
The Company is not a taxpaying entity for purposes of federal or state income taxes.
An election has been made by the Company to be treated as a partnership for U.S. tax
purposes, with income or loss of the Company passed through to the shareholders in
proportion to their ownership interest and, accordingly, no provision for income
taxes is made in these statements. As a British Virgin Islands IBC, the Company is
exempt from that countrys income and capital gains taxes for 20 years from the date
of its formation (October 2004).COMPREHENSIVE INCOME
The Company has no components of other comprehensive income. Accordingly,
comprehensive income is equal to historical net loss.
  F-44




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##### Table of Contents



NOTE 4 -
    
    PROPERTY AND EQUIPMENTProperty and equipment consist of the following at the respective balance sheet
dates:
 Useful Lives
    
    2005
    
    2004Computer equipment and software
    
    3
    
    $
    880,244
    
    
    $
    734,244Office furniture and equipment
    
    5 - 7
    
    
    427,187
    
    
    
    422,786Leasehold improvements
    
    Shorter of lease or asset life
    
    
    1,471,065
    
    
    
    1,456,137Audio and video reception,
processing and monitoring
equipment
    
    7
    
    
    12,284,627
    
    
    
    12,093,80615,063,123
    
    
    
    14,706,973Less accumulated depreciation
and amortization
    
    
    
    
    9,474,079
    
    
    
    7,422,673Property and equipment, net
    
    
    
    $
    5,589,044
    
    
    $
    7,284,300
 NOTE 5 -
    
    DEPOSITS AND OTHER ASSETSDeposits and other assets consist of the following at the respective balance sheet
dates:
 2005
    
    2004Related party receivable
    
    $
    1,872,500
    
    
    $
    3,000,000Facility, utility and other deposits
    
    
    195,086
    
    
    
    195,086Other assets
    
    
    65,964
    
    
    
    110,153$
    2,133,550
    
    
    $
    3,305,239
 NOTE 6 -
    
    ACCOUNTS PAYABLE AND ACCRUED EXPENSESAccounts payable and accrued expenses consist of the following:
 2005
    
    2004Accounts payable
    
    $
    1,780,280
    
    
    $
    890,888Accrued expenses
    
    
    2,060,100
    
    
    
    1,483,537$
    3,840,380
    
    
    $
    2,374,425
  F-45




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##### Table of Contents



NOTE 7 -
    
    BUSINESS COMBINATIONOn October 29, 2004, DLA executed an ownership restructuring plan, pursuant to the
Exchange, Contribution and Subscription Agreement (Exchange Agreement) dated October
29, 2004 among DLA Holdings, Inc., Digital Latin America, LLC, HMTF DLA, Inc., DLA
Partners, Inc., General Instrument Corporation (Motorola Parent), Motorola, Inc.,
Claxson Interactive Group, Inc. (Claxson), and Lifford International Co. Ltd.
(Lifford). The details of the agreement are as follows and explained in further
detail in Notes 8, 9, 10 and 12.HM contributed 35,260,000 units of DLA, LLC. Outstanding notes and accrued interest
were consolidated and contributed to DLA Holdings, Inc. in exchange for 3,604,688
Class A Common Shares and 417,038 Series A Preferred Shares in Holdings and a note
from Holdings in the amount of $512,316.Motorola contributed 5,740,000 units of DLA, LLC. Outstanding notes and accrued
interest were consolidated into one and contributed, and Motorola released the
obligations under the Motorola Management and Oversight agreement in exchange for
1,270,313 shares of Class A Common Shares and 750,000 Series A Preferred Shares of
Holdings, a secured note and security agreement for $4,000,000 and a common stock
warrant. The issuance of 250,000 of the 750,000 Series A Preferred Shares was
subject to the release of a security interest in certain surplus equipment which DLA
planned to sell. As of December 31, 2005, the equipment had not yet been sold, thus
$250,000 remains as a liability to Motorola and is included in accrued expenses.Lifford contributed $4,500,000 in cash, and agreed to contribute an additional
$3,000,000 over three years to pay the fees pursuant to the terms of the Claxson
Services Agreement. In exchange Lifford received 4,499,999 Class A Common Shares and
6,000,000 Series A Preferred Shares of Holdings. At December 31, 2005, the balance
still to be contributed was $1,872,500.In addition to the aforementioned contributions and exchanges, the Company amended
certain agreements and entered into various other agreements with shareholders and
affiliates as discussed in Note 8.NOTE 8 -
    
    COMMITMENTS AND CONTINGENCIESThe Company leases its corporate office space under a five-year renewable lease
agreement entered into in December 2000. This lease was renewed in 2005. Also, the
Company has entered into non-cancelable agreements with certain companies for
satellite transponder space and uplink services. The initial lease term for the
satellite transponder space began in November 2001 and was to expire in April 2014.
In 2004, the lease was amended to reduce the amount of space and extend the lease
term to April 30, 2017. In June 2005, the lease was reduced by an additional
transponder. The uplink service agreement began January 2001 and is through December
2010. The uplink service agreement is cancelable, however, during the first five
years, a six-month
  F-46




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##### Table of Contents



NOTE 8 -
    
    COMMITMENTS AND CONTINGENCIES (CONTINUED)cancellation notice must be provided. The Company would have to replace such service
if the uplink service agreement were cancelled. Total lease expense under the above
leases for 2005 and the period from October 29, 2004 through December 31, 2004, was
approximately $2,575,000 and $589,000, respectively.In addition, the Company entered into monitoring agreements with its shareholders or
their affiliates. On October 29, 2004, pursuant to the Exchange Agreement discussed
in Note 7, the monitoring agreements were amended or cancelled, and an additional
monitoring agreement was added. Under the original agreements, the Company was
required to pay an annual fee of $250,000 each to Liberty and an affiliate of HM, and
an annual fee of $81,395 to an affiliate of Motorola. The term of each of the
agreements was 10 years and began in 2000. The Members had agreed that payments of
the monitoring fees would be delayed until the Company generated enough funds to
fulfill this obligation. On October 29, 2004, Liberty sold its interest in the
monitoring fees to the affiliate of HM and the accrued fees were converted to a note.
Also, HMs agreement was amended to change the term of the agreement to expire on
December 31, 2009, and the annual fee was changed to $290,500. No payments are
required until October 1, 2006. Interest of 6% per annum will accrue on the
outstanding balance. The Company also entered into a new monitoring and oversight
agreement with Claxson Interactive Group, an affiliate of Lifford, requiring an
annual fee of $290,500, payable quarterly until December 31, 2009. The monitoring
and oversight agreement with the Motorola affiliate was terminated on October 29,
2004. Total monitoring and oversight expense for 2005 and the period from October
29, 2004 through December 31, 2004, was approximately $581,000 and $77,000,
respectively.Pursuant to the Exchange Agreement, the Company entered into an agreement with
Claxson Playout, Inc. (f/k/a The Kitchen, Inc.) (Claxson Playout). For a five-year
term, Claxson Playout will provide services including program origination and
playback services for the playback of certain channels, traffic management,
post-production and digital editing services, library organization services, and
signal distribution satellite space. The fee for all services, is $80,834 per month.
The satellite service did not begin until May 2005. Total expenses under these
agreements for 2005 and the period from October 29, 2004 through December 31, 2004,
was approximately $747,000 and $25,000 respectively.
  F-47




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##### Table of Contents



NOTE 8 -
    
    COMMITMENTS AND CONTINGENCIES (CONTINUED)Pursuant to the Exchange Agreement, the Company entered into an agreement with
Claxson USA II, Inc. (Claxson), an affiliate of a shareholder. For a five-year term,
Claxson will provide management services to the Company. These services include cash
management, accounting and financial reporting, human resources and facilities
management, business and legal affairs, information technology services, website
services, and program administration and scheduling services. The fee for these
services is $265,000 per year, billed monthly. Total expenses for these services for
2005 and the period from October 29, 2004 through December 31, 2004, was
approximately $225,000 and $20,000, respectively.Minimum future payments under these agreements at December 31, 2005 are:
 Related
    
    Non-relatedDecember 31
    
    Parties
    
    Parties
    
    Total2006
    
    $
    1,816,008
    
    
    $
    2,135,634
    
    
    $
    3,951,6422007
    
    
    1,816,008
    
    
    
    2,141,537
    
    
    
    3,957,5452008
    
    
    1,816,008
    
    
    
    2,147,736
    
    
    
    3,963,7442009
    
    
    1,816,008
    
    
    
    2,154,243
    
    
    
    3,970,2512010
    
    
    
    
    
    
    2,148,559
    
    
    
    2,148,559Thereafter
    
    
    
    
    
    
    10,234,975
    
    
    
    10,234,975$
    7,264,032
    
    
    $
    20,962,684
    
    
    $
    28,226,716
 Pursuant to an agreement among the Company, one of its vendors, and an affiliate
third party, the Company has guaranteed to pay the vendor up to approximately
$27,000, should the third party either not return certain equipment lent to it for
testing purposes by the vendor or default on payment if the third party elects to
purchase the equipment.Pursuant to the Exchange Agreement, the Company entered into an agreement with
Motorola to provide Set-Top Authorization Services to cable operators (MSOs) that
are the Companys customers at a fixed price for a five-year term with any customer
which is, or becomes, a customer of the Company during the period from October 29,
2004 to July 31, 2005. Motorola agrees to provide the service exclusively to the
Companys MSO customers. The Company agrees to cooperate with Motorola in the
marketing to MSOs of head-end units and set-top terminals for use with the Companys
services and will establish, with some exceptions, that as a condition for MSOs to
receive the Companys services, Motorola shall be the exclusive provider of set-top
terminals.NOTE 9 -
    
    LONG-TERM DEBTAt December 31, 2005 and 2004, long-term debt consisted of the following:
 2005
    
    2004Notes payable to Motorola, secured
by the Companys assets, interest
at 6% per annum, compounded
quarterly, accrued interest and
principal payments payable based
on a formula and certain criteria
stipulated in the note, maturity
on December 31, 2008. The note
contains optional conversion
rights that may be exercised at
any time at one share per each
$.01 of debt outstanding, up to
289,948 shares.
    
    $
    4,000,000
    
    
    $
    4,000,000Note payable to an affiliate of
HM, interest at 6% per annum,
compounding quarterly; interest
and principal payments payable
based on a formula and certain
criteria stipulated in the note,
maturity on December 31, 2008.
    
    
    534,548
    
    
    
    534,548Note payable to HM, interest at 6%
per annum, compounding quarterly;
interest and principal payments
payable based on a formula and
certain criteria stipulated in the
note, maturity on December 31,
2008.
    
    
    534,548
    
    
    
    534,548Note payable to HM, interest at 6%
per annum, compounding quarterly;
interest and principal payments
payable based on a formula and
certain criteria stipulated in the
note, maturity on December 31,
2008.
    
    
    512,316
    
    
    
    512,316Note payable to a vendor,
PanAmSat, secured by the Companys
assets, interest at 5% per annum,
monthly interest only payments
until December 31, 2005, monthly
principal and interest payments of
$25,000 January 2006 through June
2006, $50,000 July 2006 through
December 31, 2006, $100,000
January 2007 through May 2007, and
the balance due on June 15, 2007.
    
    
    1,104,163
    
    
    
    1,104,1636,685,575
    
    
    
    6,685,575Less current portion
    
    
    402,052
    
    
    $
    6,283,523
    
    
    $
    6,685,575
 Interest expense on these notes for 2005 and the period from October 29, 2004 to
December 31, 2004, was approximately $401,000 and $67,000, respectively.
  F-48




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##### Table of Contents



NOTE 9 -
    
    LONG-TERM DEBT (CONTINUED)Following are maturities of long-term debt for each of the next 3 years:
 2006
    
    $
    402,0522007
    
    
    702,1112008
    
    
    5,581,412$
    6,685,575
 NOTE 10 -
    
    SHARES SUBJECT TO MANDATORY REDEMPTIONPursuant to the Exchange Agreement discussed in Note 7, the Company issued 6,917,038
shares of $1 par preferred stock with mandatory redemption requirements. The Company
may redeem or purchase all or any part of the issued and outstanding preferred
shares, but is required to redeem the shares upon the twelfth anniversary of the
issued date, or October 29, 2016. The redemption price shall be equal to its
liquidation preference which is defined as the original par value plus all accrued,
unpaid dividends. Cumulative cash dividends of 8% of the par value plus accrued and
unpaid dividends per annum are payable quarterly in arrears but will not be paid
until after October 29, 2009. The amount of all accrued and unpaid dividends shall
be added to the liquidation preference for each share.The dividends accrued and unpaid at December 31, 2005 and 2004, were approximately
$675,000 and $97,000, respectively, and $578,000 and $97,000, respectively, are
included in interest expense. Total liquidation preference of the shares subject to
mandatory redemption, including accrued and unpaid dividends at 2005 and 2004, are
$7,591,772 and $7,013,713, respectively.NOTE 11 -
    
    RELATED-PARTY TRANSACTIONSFor 2005, and the period from October 29, 2004 through December 31, 2004, in addition
to the transactions discussed in Note 7 and Note 9, the accompanying consolidated
balance sheets and statements of operations include the following amounts relating to
subscriber fees, transport and uplink services, monitoring fees, management services
and other services discussed in these financial statements:
 2005
    
    2004Accounts receivable
    
    $
    
    
    
    $
    128,316Unbilled receivables
    
    
    19,788
    
    
    
    12,282Accounts payable and accrued expenses
    
    
    1,393,370
    
    
    
    98,123Revenue
    
    
    272,207
    
    
    
    12,282Other operating general and administrative expenses
    
    
    1,609,129
    
    
    
    109,770
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NOTE 12 -
    
    STOCK WARRANTSPursuant to the Exchange Agreement, the Company issued a warrant to Motorola to
purchase 445,416 fully paid and non-assessable Class A Common Shares of the Company
at an exercise price of $5.17 per share. The warrant may be exercised in whole or in
part during the period from October 29, 2004 to October 28, 2009, paid in cash or
through the surrender of that portion of the $4,000,000 promissory note.NOTE 13 -
    
    OTHER CONTINGENCIESAs of February 2005, the Company is a party in a lawsuit with a private equity firm
that was contracted in 2003 to find additional investors for the Company. The
private equity firm has claimed that the reorganization referred to above is subject
to a fee in the range of $350,000 to $1,500,000. The Company believes that it is not
liable to the claimant and is unable to estimate a potential liability, if any.
  F-50




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNo.
    
    Description8.1
    
    List of significant subsidiaries12.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes Oxley Act of 200212.2
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes Oxley Act of 200213.1
    
    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
    
    Consent of Deloitte & Co. S.R.L.15.2
    
    Consent of Deloitte & Touche LLP15.3
    
    Consent of McClain & Company L.C.