##### 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 x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the fiscal year ended December 31, 2003 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from _____________________to ____________________
 Commission file number 333-7616 Distribución y Servicio D&S S.A. (Exact name of Registrant as specified in its charter) Distribution and Service D&S Inc. (Translation of the Registrants name in English) The Republic of Chile
(State or other jurisdiction
of incorporation or organization)   Avenida Presidente Eduardo Frei Montalva 8301
Quilicura
Santiago, Chile
(56-2) 200-5000
(Address and telephone number 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
registeredCommon Stock of Registrant
    
    New York Stock Exchangerepresented by American Depositary Shares, or ADSs
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
None Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None   Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report. Common Stock, with no par value: 1,380,000,000   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. x Yes o No Indicate by check mark which financial statement item the registrant has
elected to follow. oItem 17 xItem 18




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TABLE OF CONTENTS  
 PageINTRODUCTION
    
    
    3PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION
    
    
    4PART I
    
    
    5Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    5Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    5Item 3. KEY INFORMATION
    
    
    5Item 4. INFORMATION ON THE COMPANY
    
    
    19Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    40Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    60Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    67Item 8. FINANCIAL INFORMATION
    
    
    68Item 9. THE OFFER AND LISTING
    
    
    69Item 10. ADDITIONAL INFORMATION
    
    
    71Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    
    
    88Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    89PART II
    
    
    89Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    89Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
    
    
    89Item 15. CONTROLS AND PROCEDURES
    
    
    89Item 16. [Reserved]
    
    
    89Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    89Item 16B. CODE OF ETHICS
    
    
    90Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    90Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
    
    
    90Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
    
    
    90PART III
    
    
    90Item 17. FINANCIAL STATEMENTS
    
    
    90Item 18. FINANCIAL STATEMENTS
    
    
    91Item 19. EXHIBITS
    
    
    91INDEX TO EXHIBITS
    
    
    91SIGNATURE
    
    
    93CODE OF ETHICSCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION
 2




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INTRODUCTION Distribución y Servicio D&S S.A. is a corporation organized under the laws
of Chile. We completed our initial public offering of common shares in Chile
in December 1996. We listed our common shares on the New York Stock Exchange
under the symbol DYS and completed an initial public offering of ADSs in the
United States in October 1997. We also listed our common shares on the Madrid
Stock Exchange in December 2002. Our principal executive offices are located
at Avenida Presidente Eduardo Frei Montalva 8301, Quilicura, Santiago, Chile.
Our telephone number is 011-562-200-5000, and our website is www.dys.cl. Special Note Regarding Forward-Looking Statements This annual report contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements appear throughout this
annual report, including, without limitation, under Item 3  Key Information
 Risk Factors, Item 4  Information on the Company and Item 5 
Operating and Financial Review and Prospects. These forward-looking
statements relate to, among other things:  
    
    our strategy, and particularly our focus since mid-2003 on Every Day Low Prices;  
    
    the integration of the stores acquired from Carrefour Chile in December 2003;  
    
    any new store openings;  
    
    our expectations regarding ongoing litigation, and
particularly the likelihood of full recovery on the purchase price
owed on our sale of Ekono Argentina;  
    
    our capital expenditure plans;  
    
    industry trends; and  
    
    other expectations, intentions and plans contained in this
annual report that are not historical fact. When used in this annual report, the words expects, anticipates,
intends, plans, may, believes, seeks, estimates and similar
expressions generally identify forward-looking statements. These statements
reflect our current expectations. They are subject to a number of risks and
uncertainties, including, but not limited to, unforeseen competitive pressures,
Chilean economic conditions and changes in the marketplace. In light of the
many risks and uncertainties surrounding our marketplace, you should understand
that we cannot assure you that the forward-looking statements contained in this
annual report will be realized. 3




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PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION Unless otherwise specified, in this annual report:  
    
    U.S. dollars, dollars, $, or US$ refer to United States dollars;  
    
    pesos or Ch$ refer to Chilean pesos, the legal currency of Chile;  
    
    Argentine pesos or A$ refer to Argentine pesos, the legal currency of Argentina; and  
    
    UF refers to Unidades de Fomento, an inflation-indexed,
peso-denominated monetary unit. The UF rate is set daily in advance
based on changes in the previous months inflation rate.  
    
    " refers to euros, the legal currency of the European
Union. In the presentation of results by format, the contributions to net
revenues are included in the store format to which they were attributable. The
term sales, as used in this annual report, is distinct from net revenues,
and is limited to product sales (net of value added tax) attributed to our
retail operations. Chile is divided into political subdivisions, each called a Region. The
Regions are denominated by Roman numerals (i.e., I-XIII), except for the
Santiago metropolitan region. We have computed the information contained in this annual report regarding
annual volume, per capita growth rates and levels, market share, product
segment, and population data in the supermarket industry based upon market
statistics. Sales figures for the supermarket industry in Chile, which are
based upon industry surveys and information reported to the Instituto Nacional
de Estadísticas, or INE, are based on data supplied by the A.C. Nielsen
Company. Additional data was obtained from third parties and from our own
research. We believe that our estimates are reliable, but they have not been
confirmed by independent sources. 4




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PART I 
 Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 Item 3. KEY INFORMATION General The following table presents our summary consolidated financial data and
other financial and operating information at the dates and for the periods
indicated. The summary consolidated financial data as of December 31, 2002 and
2003 and for the years ended December 31, 2001, 2002 and 2003, was derived from
our consolidated financial statements, including the notes thereto, which were
audited by Deloitte & Touche, Sociedad de Auditores y Consultores Ltda.,
independent registered public accounting firm. The summary consolidated
financial information as of December 31, 2001 was derived from our consolidated
financial statements, including the notes thereto, which were audited by
Deloitte & Touche, Sociedad de Auditores y Consultores Ltda., independent
registered public accounting firm. The consolidated financial data should be
read in conjunction with our consolidated financial statements, including the
notes thereto, and with Managements Discussion and Analysis of Results of
Operations and Financial Condition. Our consolidated financial statements are
prepared in accordance with Chilean GAAP, which differs in certain significant
respects from U.S. GAAP. Note 25 to our consolidated financial statements
provides a description of the principal differences between Chilean GAAP and
U.S. GAAP as they relate to us and a reconciliation to U.S. GAAP of net income
and shareholders equity for the periods and as of the dates covered by the
financial statements. As required by Chilean GAAP, our financial statements are adjusted to
reflect changes in purchasing power of the Chilean peso due to inflation.
These changes are based on the consumer price index, or CPI, measured from
December 1 to November 30 of each year. All non-monetary assets and
liabilities and income statement accounts have been restated to reflect the
changes in the Chilean consumer price index from the date such assets and
liabilities were acquired or incurred to the end of the period. For the convenience of the reader, this annual report contains
translations of certain Chilean peso amounts into U.S. dollars at specified
rates. Unless otherwise indicated, U.S. dollar equivalent information for
amounts in Chilean pesos is based on the observed exchange rate reported by the
Chilean Central Bank for December 31, 2003, which was Ch$593.80 = US$1.00. The
Federal Reserve Bank of New York does not report a noon buying rate in New York
City for Chilean pesos. No representation is made that the Chilean peso or
U.S. dollar amounts presented in this annual report could have been or could be
converted into Chilean pesos or U.S. dollars, as the case may be, at any
particular rate or at all. Recent Developments Acquisition of Carrefour Chile S.A.On December 19, 2003, we agreed to
acquire 100% of the shares of Carrefour Chile S.A., which we refer to as
Carrefour Chile, representing all of Carrefours operations in Chile, for 100
million (at that time, approximately US$124 million). Actual payment relating
to the acquisition and stock transfer and consummation of the transaction took
place on January 7, 2004. Through the acquisition, we acquired seven
hypermarkets in the city of Santiago with a total sales area of 58,638 square
meters (an average of 8,377 square meters per store). In 2003, these acquired 5




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stores had sales of US$180 million and an estimated market share of 2.8%
of the Chilean supermarket industry based on annualized revenues for 2003. As
of the date of this annual report, we have integrated six of these stores into our business and
closed the seventh store, which was located adjacent to an existing
Lider
hypermarket. We believe that the acquisition of Carrefour Chile will allow us
to expand our retail operations in densely populated areas of the Santiago
metropolitan region as well as further expand our non-food businesses,
specifically in the areas of housewares, general merchandise, clothing and
electronics. 6




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Selected Financial and Operating Data At and for the year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(1)(amounts in millions of constant Ch$ and millions of US$, and except per share andper ADS information and percentages or as otherwise indicated)INCOME STATEMENT DATA:Chilean GAAP:Net revenue
    
    Ch$
    912,188
    
    
    Ch$
    860,704
    
    
    Ch$
    949,713
    
    
    Ch$
    1,058,719
    
    
    Ch$
    1,163,000
    
    
    US$
    1,959Cost of sales
    
    
    (721,235
    )
    
    
    (673,410
    )
    
    
    (735,918
    )
    
    
    (817,078
    )
    
    
    (901,115
    )
    
    
    (1,518
    )Gross profit
    
    
    190,953
    
    
    
    187,293
    
    
    
    213,795
    
    
    
    241,641
    
    
    
    261,885
    
    
    
    441Selling and administrative expenses
    
    
    (160,712
    )
    
    
    (138,494
    )
    
    
    (157,179
    )
    
    
    (198,977
    )
    
    
    (216,643
    )
    
    
    (365
    )Operating income
    
    
    30,241
    
    
    
    48,800
    
    
    
    56,616
    
    
    
    42,664
    
    
    
    45,242
    
    
    
    76Non-operating income
    
    
    1,488
    
    
    
    2,566
    
    
    
    1,613
    
    
    
    1,320
    
    
    
    1,484
    
    
    
    2Non-operating expenses
    
    
    (37,438
    )
    
    
    (17,696
    )
    
    
    (15,425
    )
    
    
    (20,751
    )
    
    
    (18,532
    )
    
    
    (31
    )Net price-level restatement and
foreign exchange gain (loss)
    
    
    (1,588
    )
    
    
    671
    
    
    
    5,760
    
    
    
    5,485
    
    
    
    (872
    )
    
    
    (1
    )Non-operating loss
    
    
    (37,538
    )
    
    
    (14,459
    )
    
    
    (8,052
    )
    
    
    (13,946
    )
    
    
    (17,920
    )
    
    
    (30
    )Income (loss) before income taxes
    
    
    (7,295
    )
    
    
    34,340
    
    
    
    48,564
    
    
    
    28,718
    
    
    
    27,322
    
    
    
    46Income taxes
    
    
    (2,405
    )
    
    
    (3,547
    )
    
    
    (7,612
    )
    
    
    (4,703
    )
    
    
    (6,503
    )
    
    
    (11
    )Net income (loss)
    
    Ch$
    (9,702
    )
    
    Ch$
    30,793
    
    
    Ch$
    40,952
    
    
    Ch$
    24,015
    
    
    Ch$
    20,819
    
    
    US$
    35Net income (loss) per share(2)
    
    Ch$
    (7.03
    )
    
    Ch$
    22.3
    
    
    Ch$
    29.67
    
    
    Ch$
    17.40
    
    
    Ch$
    15.09
    
    
    US$
    0.03Net income (loss) per ADS(3)
    
    
    (105.46
    )
    
    
    334.63
    
    
    
    445.12
    
    
    
    261.03
    
    
    
    226.29
    
    
    
    0.38Dividends per share(4)
    
    Ch$
    8.0
    
    
    Ch$
    10.0
    
    
    Ch$
    10.0
    
    
    Ch$
    10.0
    
    
    Ch$
    5.00
    
    
    US$
    0.01Dividends per ADS(3)(4)
    
    
    120.0
    
    
    
    150.0
    
    
    
    150.0
    
    
    
    150.0
    
    
    
    75.00
    
    
    
    0.13Weighted average shares outstanding
(in millions)(5)
    
    
    1,378
    
    
    
    1,380
    
    
    
    1,380
    
    
    
    1,380
    
    
    
    1,380U.S. GAAP:Net revenue
    
    Ch$
    854,836
    
    
    Ch$
    802,308
    
    
    Ch$
    878,258
    
    
    Ch$
    975,867
    
    
    Ch$
    1,068,304
    
    
    US$
    1,799Operating income
    
    
    29,819
    
    
    
    48,379
    
    
    
    56,173
    
    
    
    32,221
    
    
    
    44,800
    
    
    
    75Net income (loss)
    
    
    (18,704
    )
    
    
    32,355
    
    
    
    44,446
    
    
    
    29,407
    
    
    
    23,667
    
    
    
    39Net income (loss) per share
    
    Ch$
    (13.56
    )
    
    Ch$
    23.44
    
    
    Ch$
    32.21
    
    
    Ch$
    21.3
    
    
    Ch$
    17.15
    
    
    US$
    0.03Net income (loss) per ADS(3)
    
    
    (203.30
    )
    
    
    351.69
    
    
    
    483.11
    
    
    
    319.64
    
    
    
    257.25
    
    
    US$
    0.43Weighted average shares outstanding
(in millions)(5)
    
    
    1,378
    
    
    
    1,380
    
    
    
    1,380
    
    
    
    1,380
    
    
    
    1,380
    
    
    
    1,380BALANCE SHEET DATA:Chilean GAAP:Total current assets
    
    Ch$
    166,636
    
    
    Ch$
    138,049
    
    
    Ch$
    156,434
    
    
    Ch$
    249,988
    
    
    Ch$
    320,900
    
    
    US$
    540Property, plant and equipment-net
    
    
    402,261
    
    
    
    417,095
    
    
    
    458,774
    
    
    
    494,475
    
    
    
    499,646
    
    
    
    841Total assets
    
    
    634,607
    
    
    
    626,720
    
    
    
    693,549
    
    
    
    762,814
    
    
    
    844,726
    
    
    
    1,423Short-term debt
    
    
    91,233
    
    
    
    13,106
    
    
    
    45,432
    
    
    
    115,838
    
    
    
    135,047
    
    
    
    227Long-term debt
    
    
    126,520
    
    
    
    190,293
    
    
    
    163,673
    
    
    
    138,851
    
    
    
    175,064
    
    
    
    295Total shareholders equity
    
    
    248,988
    
    
    
    268,906
    
    
    
    293,858
    
    
    
    303,740
    
    
    
    310,829
    
    
    
    523Ratio of shareholders equity to
capitalization (6)
    
    
    65.3
    %
    
    
    57.8
    %
    
    
    59.6
    %
    
    
    62.3
    %
    
    
    60.5
    %
    
    
    60.5
    %U.S. GAAP:Total assets
    
    Ch$
    635,914
    
    
    Ch$
    629,066
    
    
    Ch$
    695,428
    
    
    Ch$
    768,298
    
    
    Ch$
    846,197
    
    
    US$
    1,425Long-term debt
    
    
    128,927
    
    
    
    194,187
    
    
    
    163,673
    
    
    
    138,851
    
    
    
    175,064
    
    
    
    296Total shareholders equity
    
    
    236,475
    
    
    
    254,743
    
    
    
    278,084
    
    
    
    293,122
    
    
    
    303,713
    
    
    
    511OTHER FINANCIAL INFORMATIONChilean GAAP:Capital expenditures
    
    Ch$
    27,842
    
    
    Ch$
    50,539
    
    
    Ch$
    71,911
    
    
    Ch$
    68,842
    
    
    Ch$
    44,159
    
    
    US$
    74Depreciation and amortization
    
    
    35,869
    
    
    
    30,102
    
    
    
    31,757
    
    
    
    34,597
    
    
    
    37,999
    
    
    
    64Net cash provided from operating
activities
    
    
    91,938
    
    
    
    64,557
    
    
    
    66,792
    
    
    
    29,385
    
    
    
    33,451
    
    
    
    56Financial Ratios(7) (Chilean GAAP):Gross margin
    
    
    20.9
    %
    
    
    21.8
    %
    
    
    22.5
    %
    
    
    22.8
    %
    
    
    2 2.5
    %Operating margin
    
    
    3.3
    
    
    
    5.7
    
    
    
    6.0
    
    
    
    4.0
    
    
    
    3.9Net margin
    
    
    (1.1
    )
    
    
    3.6
    
    
    
    4.3
    
    
    
    2.3
    
    
    
    1.8Current ratio
    
    
    65.0
    
    
    
    84.5
    
    
    
    68.3
    
    
    
    79.5
    
    
    
    91.2Total debt/total shareholders equity
    
    
    87.4
    
    
    
    75.6
    
    
    
    74.1
    
    
    
    83.9
    
    
    
    99.8
 7




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At and for the year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(1)(amounts in millions of constant Ch$ and millions of US$, and except per share andper ADS information and percentages or as otherwise indicated)Operating Information:Number of stores (at end of period):Almac(8)
    
    
    5
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    Ekono(9)
    
    
    31
    
    
    
    31
    
    
    
    28
    
    
    
    23
    
    
    
    Lider Express
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Lider
    
    
    13
    
    
    
    14
    
    
    
    16
    
    
    
    21
    
    
    
    23Lider Vecino
    
    
    
    
    
    
    3
    

    
    
    5
    
    
    
    13
    
    
    
    19Lider Mercado(10)
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    Total
    
    
    51
    
    
    
    52
    
    
    
    54
    
    
    
    62
    
    
    
    68Total selling space(11)
    
    
    230,031
    
    
    
    242,007
    
    
    
    263,635
    
    
    
    309,361
    
    
    
    333,344Average selling space per store(12)
    
    
    4,510
    
    
    
    4,566
    
    
    
    4,810
    
    
    
    5,005
    
    
    
    4,902Average sales per store
(in millions)(13)(14)
    
    Ch$
    14,511
    
    
    Ch$
    14,676
    
    
    Ch$
    16,179
    
    
    Ch$
    16,196
    
    
    Ch$
    16,108
    
    
    US$
    27Increase (decrease) in same store
sales(14)(15)
    
    
    (9.7
    )%
    
    
    2.4
    %
    
    
    3.0
    %
    
    
    (1.4
    )%
    
    
    0.3
    %Sales per square meter (in
millions)(14)(16)
    
    Ch$
    3.3
    
    
    Ch$
    3.2
    
    
    Ch$
    3.4
    
    
    Ch$
    3.2
    
    
    Ch$
    3.3
    
    
    US$
    0.006Total number of employees(17)
    
    
    10,536
    
    
    
    12,154
    
    
    
    15,988
    
    
    
    17,912
    
    
    
    17,400Sales per employee(14)(18)
    
    Ch$
    71.8
    
    
    Ch$
    67.9
    
    
    Ch$
    66.5
    
    
    Ch$
    58.7
    
    
    Ch$
    65.4
    
    
    US$
    110,059
   (1)
    
    Chilean peso amounts (except dividends) have been translated into U.S.
dollars at the rate of Ch$593.80 per U.S. dollar, the Observed Exchange
Rate at December 31, 2003. Dividends are translated at the Observed
Exchange Rate on the date of payment. Such U.S. dollar transactions are
presented for the convenience of the reader and should not be construed as
representations that the Chilean peso amounts have been or could be
converted into U.S. dollars at that rate or any other rate.(2)
    
    Net income (loss) per share expressed in constant Chilean pesos.(3)
    
    Determined by multiplying per share amounts by 15 (one ADS = 15 shares).(4)
    
    Figures are in constant Chilean pesos and U.S. dollars. U.S. dollar
amounts for dividends are calculated by applying the Observed Exchange
Rate on the dividend payment date to the nominal peso amount.(5)
    
    Calculated on the basis of the number of shares outstanding and fully
paid.(6)
    
    Capitalization is equal to the current portion of long-term debt plus
long-term debt plus minority interest and equity.(7)
    
    These ratios, which are expressed as percentages, were calculated as
follows: Gross margin = Gross income/Net revenues; Operating margin =
Operating income/Net revenues; Net margin = Net income/Net revenues;
Current ratio = Current assets/Current liabilities.(8)
    
    During 2003, we converted all of our Almacstores into Lider Express
supermarkets.(9)
    
    During 2003, we converted three of our EkonoStores into Lider Vecino
compact hypermarkets and the remaining Ekonostores into Lider Express
supermarkets.(10)
    
    During 2003, we converted our Lider Mercadostore into a Lider
hypermarket.(11)
    
    In square meters at period end. For 1999 includes a reduction of 32,002
square meters due to our sale of Ekono-Argentinato Disco S.A.(12)
    
    In square meters. Calculated by adding the average monthly selling space
for each month during the year and dividing the result by 12. Average
monthly selling space is defined as total selling space as of the last day
of the month divided by the number of stores open on the last day of such
month. Sales area of FarmaLiderstores not included (marginal).(13)
    
    Sales for the period divided by the average number of stores at the end
of each month during the period. Includes sales from FarmaLiderstores.(14)
    
    Sales set forth net revenues under Chilean GAAP, excluding vendor
allowances. As such, sales is equal to net revenues under U.S. GAAP.(15)
    
    Reflects increase (decrease) in net revenues of all stores open and
operated by our company through out two corresponding financial periods
and, consequently, excludes net revenues of stores opened or closed or
which underwent renovation during either of such periods.(16)
    
    Sales for the period divided by the average square meters of selling
space at the end of each month during the period includes sales from
FarmaLiderstores, sales area of these stores is not included.(17)
    
    Number of full-time equivalent employees at period-end (company total).(18)
    
    Sales for the period divided by the average number of employees at the
end of each month during the period (full time shifts in stores) including
employees in FarmaLiderstores. 8




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##### Table of Contents



Exchange Rates Chile has two currency markets, the Mercado Cambiario Formal, or the
Formal Exchange Market and the Mercado Cambiario Informal, or the Informal
Exchange Market. The Chilean Central Bank is empowered to determine that
certain purchases and sales of foreign currencies must be carried out in the
Formal Exchange Market. Pursuant to Chilean Central Bank regulations which are
currently in effect, all payments, remittances or transfers of foreign currency
abroad which are required to be effected through the Formal Exchange Market may
be effected with foreign currency procured outside the Formal Exchange Market.
The Formal Exchange Market is comprised of the banks and other entities so
authorized by the Chilean Central Bank. Current regulations require that the
Chilean Central Bank be informed of certain transactions and that they be
effected through the Formal Exchange Market. The reference exchange rate for the Formal Exchange Market is reset daily
by the Chilean Central Bank, taking internal and external inflation into
account, and is adjusted daily to reflect variations in parities between the
peso and each of the U.S. dollar, the euro and the Japanese yen. The observed
exchange rate for a given date is the average exchange rate of the transactions
conducted in the Formal Exchange Market on the immediately preceding banking
day, as certified by the Chilean Central Bank. Prior to September 2, 1999, authorized transactions by banks were
generally transacted within a certain band above or below the reference
exchange rate. In order to maintain the average exchange rate within such
limits, the Chilean Central Bank intervened by selling and buying foreign
currencies on the Formal Exchange Market. On September 2, 1999, the Chilean
Central Bank eliminated the exchange rate band as an instrument of exchange
rate policy, introducing more flexibility to the exchange market. The Chilean
Central Bank announced that it will intervene in the exchange market only in
special and qualified cases. Purchases and sales of foreign currencies which may be effected outside
the Formal Exchange Market can be carried out in the Informal Exchange Market.
The Informal Exchange Market reflects transactions carried out at informal
exchange rates by entities not expressly authorized to operate in the Formal
Exchange Market, such as certain foreign exchange houses and travel agencies.
There are no limits imposed on the extent to which the rate of exchange in the
Informal Exchange Market can fluctuate above or below the observed exchange
rate. At December 31, 2003, the average exchange rate in the Informal Exchange
Market was approximately the same as the published observed exchange rate for
such date of Ch$ 593.80 per US$1.00. The following table sets forth the high, low, average and year-end
observed exchange rates for U.S. dollars for the periods indicated as expressed
in pesos per US$1.00, as reported by the Chilean Central Bank. No indication is
made that the Chilean peso or U.S. dollar amounts referred to in this annual
report actually represent, could have been or could be converted into, U.S.
dollars or Chilean pesos, as the case may be, at the rates indicated, at any
particular rate or at all. The Federal Reserve Bank of New York does not
report a daily 12:00 p.m. buying rate for Chilean pesos: Observed Exchange Rate (3)Period
    
    Low (1)
    
    High (1)
    
    Average (3)
    
    Year End1999
    
    Ch$
    470.23
    
    
    Ch$
    550.93
    
    
    Ch$
    512.85
    
    
    Ch$
    530.072000
    
    
    501.04
    
    
    
    580.37
    
    
    
    542.08
    
    
    
    573.652001
    
    
    557.13
    
    
    
    716.62
    
    
    
    636.39
    
    
    
    654.792002
    
    
    641.75
    
    
    
    756.56
    
    
    
    694.46
    
    
    
    718.612003
    
    
    593.10
    
    
    
    758.21
    
    
    
    691.40
    
    
    
    593.80December 2003
    
    
    593.10
    
    
    
    617.85
    
    
    
    602.90
    
    
    
    N/AJanuary 2004
    
    
    559.21
    
    
    
    596.78
    
    
    
    573.64
    
    
    
    N/AFebruary 2004
    
    
    571.35
    
    
    
    598.60
    
    
    
    584.31
    
    
    
    N/AMarch 2004
    
    
    588.04
    
    
    
    623.21
    
    
    
    603.92
    
    
    
    N/AApril 2004
    
    
    596.61
    
    
    
    624.98
    
    
    
    608.19
    
    
    
    N/AMay 2004
    
    
    622.25
    
    
    
    644.42
    
    
    
    635.76
    
    
    
    N/A
 9




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(1)
    
    Reflects pesos at historical values rather than constant pesos.(2)
    
    The average of observed exchange rates for pesos on the last day of each
full month during the relevant period.(3)
    
    The average of closing observed exchange rates for pesos for each day of
transactions during the month.(4)
    
    Transactions carried out on the previous bank business day reported by
the Central Bank. Source: The Chilean Central Bank 10




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RISK FACTORS An investment in our common shares involves a high degree of risk.
Investors in our common shares should carefully consider the following risk
factors and the other information in this annual report. Risks Relating to Our
Company Our Every Day Low Prices strategy may erode our profitability. In 2003, we strengthened our commitment to our Every Day Low Prices, or
EDLP, strategy. The long-term success of this strategy in increasing our net
income will depend on our ability to achieve a combination of increased sales
volume and cost reductions that is significant enough to offset the reduction
in our average operating margins. In the short term, we expect our EDLP
strategy to reduce our profitability because we do not expect volume increases
and cost reductions to fully offset the price decreases. In the
second half of 2003 and in the first quarter of 2004, our operating
margins have
declined principally due to the implementation of our EDLP strategy. The
long-term success of our EDLP strategy is subject to significant risks,
including the following:  
    
    we may generate less additional sales volume than expected;  
    
    we may encounter difficulties obtaining additional vendor
allowances from suppliers in the expected amounts and within the
timeframe we currently anticipate;  
    
    our competitors may decide to match or undercut some or all
of our reduced prices, making it difficult to sustain a sufficient
price differential to attract the desired increase in customers;  
    
    we may fail to achieve desired reductions in selling expenses;  
    
    our Faro efficiency projects may yield lower cost reductions than expected; and  
    
    even if we are successful in implementing our strategy, it
may take longer than planned to achieve the desired results. Any one of these factors could adversely affect our EDLP strategy and,
consequently, our business, financial condition, results of operations, cash
flows and prospects. Increased competition may adversely affect our results of operations. The retail food industry in Chile is characterized by growing competition
and increasing pressure on profit margins. The number and type of competitors
and the degree of competition experienced by individual stores vary by
location. Competition occurs on the basis of price, location, quality of
products and services, product variety and store conditions. Through our Lider
store formats (hypermarkets, compact hypermarkets and supermarkets), we compete
across the full spectrum of food retailing in Chile with a number of national
hypermarket and supermarket chains, smaller chains and unaffiliated independent
food stores. Additionally, there is a trend towards consolidation in the Chilean
supermarket industry. Our Chilean competitor, Cencosud S.A., which owns Jumbo,
purchased Santa Isabel from Royal Ahold in 2003, and we purchased Carrefour
Chile S.A. from Carrefour in January 2004. As a result of the Cencosud
acquisition of Santa Isabel, Cencosud has recently become a stronger competitor
in the Chilean market. Also, some companies in other areas of the retail
industry in Chile are expanding into other retail 11




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areas, including, for example, the merger of Falabella (a department
store) with Sodimac (a home improvement store). If these retailers expand into
the supermarket sector and are successful in capturing market share, our
results of operations may be adversely affected. We have adopted a strategy of Every Day Low Prices, which has had an
adverse effect on our average operating margins. The pricing responses of our
competitors may cause us to lower our prices further and take other actions
that may adversely affect our profitability, compel us to reduce our planned
capital expenditures or otherwise force us to forego growth opportunities. Some
of our competitors and potential competitors in Chile have greater financial
resources than we do and could use these resources to take steps which could
adversely affect our financial condition and competitive position. Future
competition may materially and adversely affect our business, financial
condition, results of operations, cash flows or prospects. The Chilean retail market may become saturated and prevent us from
carrying out our plans for expansion or from achieving further growth. Historically, our sales growth has resulted primarily from the addition of
new stores. As the number of stores increases, we may not be able to expand
our floor space without decreasing sales of our existing stores. Additionally,
during the 1990s, aggressive expansion by supermarket and hypermarket retailers
operating in Chile resulted in an average annual growth in retail floor space
of 11% that continued through 2002. If the Chilean retail industry continues
to expand and becomes saturated relative to the current purchasing power of the
Chilean consumer, it may limit our ability to profitably expand through new
store openings. The growth of our credit card operations may expose us to increased credit
and financial risk, which may adversely affect our financial condition and
results of operations. Our Prestocredit card business is a growing segment of our operations.
Over the twelve months from December 31, 2002 to December 31, 2003, we
increased our number of accounts in good standing by 43.3% from 455,403 to
652,541 account holders. From 2002 to 2003, our net revenues derived from
credit card financial income increased 69.5% to C$19,086 million or 1.6% of our
net revenue. At the same time our delinquency rates have been increasing. Our
amounts past-due have increased 551% from Ch$1,753 million at December 31, 2002
to Ch$11,419 million at December 31, 2003 and as a percentage of total accounts
receivable have increased from 5% to 13%. At December 31, 2003, we had 652,541
accounts in good standing with credit outstanding of Ch$75,763 million
(US$127.6 million), and we intend to continue to increase the number of account
holders in the near term. At December 31, 2003 our allowance for doubtful
accounts was Ch$3,059 million (US$5.2 million), representing 4.2% of our total
net receivables. We assume sole responsibility for account approval and credit risk by
administering Prestoas a separate operating unit. As a result, we are exposed
to increased credit and financial risk, which may adversely affect our
financial condition and results of operation. These risks include:  
    
    Economic Downturns- Our credit card business is affected by
general economic conditions beyond our control, including employment
levels, consumer confidence and interest rates. A downturn in the
Chilean economy may lead to a decrease in credit sales;  
    
    Increased Delinquencies and Charge-offs- Subject to our credit
standards, we seek to increase the in-store credit available to our
customers, particularly to permit the purchase of more expensive,
higher-margin durable goods. As a result, our credit card operations
accept a significant portion of applicants otherwise rejected by credit
card operations administered by local Chilean banks. These customers
generally have higher rates of charge-offs and 12




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delinquencies and are more adversely affected by downturns in the Chilean
economy than customers with better credit profiles;  
    
    Inability to Predict Future Charge-offs- The approaches we use to
select our customers may not be as effective at predicting future
charge-offs due to changes in the economy, which may result in higher
incidence of delinquencies among our customers;  
    
    Changes in Credit Card Use- A variety of social factors may cause
changes in credit card use, including changes in consumer confidence
levels, the publics perception of the use of credit cards, and
changing attitudes about incurring debt; and  
    
    Increased Regulation- Although our credit card business is
currently not subject to government regulation other than generally
applicable laws, the Chilean government may impose regulations in the
future. Any such regulations could increase our costs and limit the
manner in which we may offer and extend credit. The Chilean government
is currently considering new legislation which may require additional
disclosure by retail companies granting credit to consumers. For a
fuller discussion of this proposed legislation, see Information on the
Company  Regulation. If we are unable to access capital markets in the future, our financial
condition and results of operations may be adversely affected. We cannot assure you that we will be able to generate sufficient cash
flows from our operations or obtain sufficient funds from external sources to
fund our capital expenditure requirements. Our ability to access financial
markets in sufficient amounts and at acceptable costs to finance our operations
and fund our future capital expenditures will depend to some degree on
prevailing capital and financial market conditions over which we have no
control. Our failure to generate sufficient cash flows from operations or to
obtain such financing could cause us to delay or abandon some or all of our
planned capital expenditures, which, in turn, could adversely affect our
competitive position, financial condition, results of operations, cash flows
and prospects. A change in antitrust law, regulation or regulatory oversight in Chile
could require that we take certain compliance measures including the incurrence
of significant incremental expenses which could adversely impact our ability to
expand our business. Chile has antitrust laws that limit the abuse of market share by a company
in any particular industry. The Chilean government recently issued findings
and recommendations related to a fact finding investigation regarding
procurement practices in the food retailing sector. These findings and
recommendations noted the potential for abuse of market position by supermarket
companies in their relationship with suppliers and recommended the
implementation of rules of conduct that would safeguard the functioning of the
market. Although we believe our procurement policies comply with applicable laws and
regulations, Chilean regulatory scrutiny and policies requiring further
objective, uniform and non-discriminatory procurement policies may constrain
our ability to achieve optimal pricing based on our market leading market
share, which may adversely affect the success of our EDLP strategy. The default on the payment of the deferred amount of the purchase price
for Ekono-Argentina may adversely affect our financial condition and results of
operations. We sold our former Argentine subsidiary, Ekono-Argentina,to Disco S.A. in
December of 1999 for US$150 million. However, only US$60 million of the
purchase price for our Argentine operations was paid in May 2000, with the
balance of US$90 million payable in May 2003 and guaranteed by the Netherlands
Antilles Company Disco-Ahold International Holdings N.V., which we refer to
as Ahold. We were informed in December 2002 that Disco S.A. would not pay us
the entire US$150 million amount 13




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in dollars, but would instead convert the US$90 million balance owed to us
into Argentine pesos under Argentine foreign currency convertibility
regulations. On May 2, 2003, Disco S.A. made payment of A$126 million. After
approval by the Central Bank of Argentina in August 2003, this amount plus
accrued interest was remitted to us based on an effective exchange rate of A
$3.00 to US$1.00 and totalled US$42 million. We are involved in various legal challenges to recover the remaining
amounts due. If we are unable to recover the remaining balance (currently
US$47.5 million), plus interest and costs, owed to us, our financial condition
and prospects may be adversely affected. Moreover, if we are unable to
recover, or if we determine it is probable that we will be unable to recover,
the remaining amounts owed, we may be required to write off the amount in
dispute, which would lower our net income for that period. For more
information, see Item 4  Information on the Company  Legal Proceedings. Our controlling shareholders own a substantial majority of our share
capital and exercise significant influence over board decisions. Control of our company is vested in a series of companies beneficially
owned or controlled by our controlling shareholders, Messrs. Felipe and Nicolás
Ibáñez Scott. Together, these companies and related persons controlled 74.8%
of our outstanding capital stock at December 31, 2003. In addition, Mr.
Cristóbal Lira Ibáñez, our chief executive officer, is a cousin of Messrs.
Felipe and Nicolás Ibáñez Scott. Therefore, our controlling shareholders are
in a position to direct our management and to determine the result of
substantially all matters to be decided by a shareholders vote, including:  
    
    the election of a majority of the members of our board of
directors;  
    
    the determination of the amount of dividends we distribute
(subject to the legally mandated minimum of 30% of net income);  
    
    the ability to control persons named to our board of directors and management;  
    
    the acquisition or disposition of assets; and  
    
    future issuance of shares or other securities and other management policies. In addition, if the depositary does not receive voting instructions from a
holder of ADSs on or before the date set by the depositary, such holder will be
deemed to have instructed the depositary to give a discretionary proxy with
full power of substitution to the president of our board of directors, or to a
person designated by the president of our board of directors, to vote such
shares on any such matter described under Item 10  Additional Information 
Other Limitations. For more information on the Depositary Agreement, see Item
10  Additional Information  The Deposit Agreement. The decision of our controlling shareholders to dispose of a significant
number of their shares could adversely affect the trading price of our shares
and ADSs. The disposition by the companies controlled by certain members of the
Ibáñez family of a significant number of the shares of our company they hold,
or the perception that such a disposition might occur, could adversely affect
the trading price of our shares and ADSs. If a significant disposition were to
occur, the Ibáñez family may not continue to own a controlling percentage of
our capital stock and an actual or potential reduction in their ownership
percentage may have an adverse effect on our results of operations or financial
condition. 14




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Risks Relating to Chile Our growth and profitability depend on the level of economic activity in
Chile and other emerging markets. At December 31, 2003, all of our assets and revenues were located or
generated in Chile. Retail food sales show a high degree of correlation with
the economic situation prevailing in the relevant market. Accordingly, our
financial condition and results of operations are dependent to a significant
extent upon economic conditions prevailing in Chile. Chilean economic
conditions can be adversely affected by a variety of factors, most of which are
beyond our control, including:  
    
    the economic or other policies of the Chilean government,
which has a substantial influence over many aspects of the private
sector;  
    
    other political or economic developments in or affecting Chile;  
    
    regulatory changes or administrative practices of Chilean authorities;  
    
    inflation and government policies to combat inflation;  
    
    currency exchange movements;  
    
    global and regional economic conditions;  
    
    copper prices, which influence the profitability of Chiles copper exports; and  
    
    other factors. Our financial condition and results of operations to some extent also
depend on the level of economic activity in both Latin American and other
countries, especially the United States and certain nations in Asia. In
addition, although economic conditions are different in each country,
investors reactions to developments in one country may affect the securities
of issuers in other countries, including Chile. For example, adverse
developments in other developing or emerging market countries may lead to
decreased investor interest in investing in Chile or in the securities of
Chilean companies. Currency fluctuations could adversely affect our financial condition and
results of operations and the value of our shares and ADSs. The Chilean governments economic policies and any future changes in the
value of the Chilean peso against the U.S. dollar could affect the dollar value
of our common stock and our ADSs. The peso has been subject to large
devaluations in the past and, more recently, periods of significant
appreciation, and could be subject to significant fluctuations in the future.
In the period from December 31, 2002 to December 31, 2003, the value of the
Chilean peso relative to the U.S. dollar increased by 15.9%. The Observed
Exchange Rate on May 31, 2004 was Ch$ 636.02 = US$1.00. Our results of
operations may be affected by fluctuations in the exchange rates between the
peso and the U.S. dollar. In the event of a devaluation of the Chilean peso, our financial condition
and results of operations, and our ability to meet obligations in foreign
currencies, could be adversely affected. The Chilean governments economic
policies and future fluctuations in the value of the Chilean peso against the
U.S. dollar could adversely affect our operating results and the dollar value
of an investors return on an investment in the ADSs. 15




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Chilean trading in the shares of our common stock that underlie our ADSs
is conducted in pesos. Cash distributions with respect to shares of our common
stock will be received in Chilean pesos by the depositary and converted by the
depositary into U.S. dollars at the then-prevailing exchange rate for the
purpose of making payments in respect of our ADSs. If the value of the Chilean
peso falls relative to the U.S. dollar, the value of our ADSs and any
distributions to be received from the depositary would be adversely affected.
In addition, the depositary will incur customary currency conversion costs (to
be borne by the holders of our ADSs) in connection with the conversion and
subsequent distribution of dividends or other payments. Inflation could adversely affect our financial condition, results of
operations and the value of our shares and ADSs. Although Chilean inflation has moderated in recent years, Chile has
experienced high levels of inflation in the past. High levels of inflation in
Chile could adversely affect the Chilean economy and have a material adverse
effect on our financial condition and results of operations. The annual rates
of inflation (as measured by changes in the CPI and as reported by the INE) in
1999, 2000, 2001, 2002 and 2003 were 2.3%, 4.5%, 3.1%, 3.0% and 1.1%,
respectively. We cannot assure you that Chilean inflation will not increase
significantly in the future. We generally pass on our increased costs
resulting from inflation to our customers through increases in the prices of
the products we sell. There can be no assurance, however, whether or to what
extent we will pass on increased costs in the future. Further, the performance
of the Chilean economy, our operating results or the value of the ADSs may be
adversely affected by continuing or increased levels of inflation and Chilean
inflation may increase significantly from the current level. The Chilean market for our shares may be volatile and illiquid and such
volatility and lack of liquidity may have adverse effects on the market for our
ADSs. The Chilean securities markets are substantially smaller, less liquid and
more volatile than major securities markets in the United States. The
companies listed on the Santiago Stock Exchange, which is Chiles principal
exchange, had an aggregate equity market capitalization of approximately
Ch$51,271,067 million (US$86,344 million) at December 31, 2003 and an aggregate
average monthly trading volume of approximately US$626 million for 2003. The
ten largest companies in terms of market capitalization at December 31, 2003,
represented approximately 48.5% of the Santiago Stock Exchanges aggregate
market capitalization. Daily share trading volumes on the Santiago Stock
Exchange are on average substantially lower than those on the principal
national securities exchanges in the United States. For 2003, approximately
12.6% of the securities listed and traded on the Santiago Stock Exchange traded
on 90% or more of the trading days. The lack of liquidity owing, in part, to the relatively small size of the
Chilean securities markets may have a significant effect on the trading prices
of our shares. Because the market for our ADSs depends, in part, on investors
perception of the value of our underlying shares, this lack of liquidity for
our shares in Chile may have a significant effect on the trading prices of our
ADSs. In addition, the Chilean securities markets may be affected by
developments in other emerging markets, particularly other countries in Latin
America. The depth and liquidity of the market for our shares and the potential
impact of developments in other emerging markets may cause the trading prices
of our ADSs to fluctuate significantly. 16




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Chile imposes controls on foreign investment and repatriation of
investments that may affect your investment in, and earnings from, our ADSs. Equity investments in Chile by non-Chilean residents generally are subject
to various exchange control regulations that restrict the repatriation of
investments and earnings from investments. The ADS facility, however, is the
subject of a Foreign Investment Contract among the depositary, us and the
Chilean Central Bank, which grants the depositary and the holders of ADSs
access to Chiles Mercado Cambiario Formal,or Formal Exchange Market.
Pursuant to current Chilean law, the Foreign Investment Contract may not be
amended unilaterally by the Central Bank. Additionally, there are judicial
precedents (although not binding on future judicial decisions) indicating that
the Foreign Investment Contract may not be abrogated by future legislative
changes. However, additional Chilean restrictions applicable to the holders of
ADSs, to the disposition of underlying shares of common stock or to the
repatriation of the proceeds from such disposition may be imposed in the
future, and the duration or implications of any such restrictions that might be
imposed are difficult to predict. If, for any reason, including changes in the
Foreign Investment Contract or Chilean law, the depositary were unable to
convert pesos to U.S. dollars, investors might receive dividends or other
distributions in pesos. Transferees of shares withdrawn from the ADS facility
will not be entitled to access the Formal Exchange Market unless the withdrawn
shares are redeposited with the depositary. If transferees are unable to
access the Formal Exchange Market, they may be unable to convert peso amounts
to dollars in connection with the sale of these shares. Cash and property dividends paid by us with respect to ADSs held by a
foreign (non-Chilean) holder will be subject to a 35.0% Chilean withholding
tax, which is withheld by our company. Stock dividends are not subject to
Chilean taxation. Chile has different corporate disclosure, governance and accounting
standards than those you may be familiar with in the United States. The securities laws of Chile which govern publicly listed companies, such
as our company, impose disclosure requirements that are more limited than those
in the United States in certain important respects. As a foreign private
issuer, we are exempt from many of the corporate governance standards the New
York Stock Exchange applies to issuers that are U.S. companies. For a
description of the chief differences between Chilean corporate governance
practices and the corporate governance standards of the New York Stock
Exchange, see Item 10  Additional Information  New York Stock Exchange
(NYSE) and Chilean Corporate Governance Requirements. In addition, although
Chilean law imposes restrictions on insider trading and price manipulation, the
Chilean securities markets are not as highly regulated and supervised as the
U.S. securities markets. There are also important differences between Chilean
and U.S. accounting and financial reporting standards. As a result, Chilean
financial statements and reported earnings generally differ from those reported
based on U.S. accounting and reporting standards. See Note 25 to our audited
financial statements for a description of the principal differences between
Chilean GAAP and U.S. GAAP as they relate to us and a reconciliation to U.S.
GAAP of net income for the years ended December 31, 2001, 2002 and 2003 and
shareholders equity as of December 31, 2002 and 2003 reported under Chilean
GAAP. Pursuant to Chilean Companies Law No. 19,705, enacted in December 2000,
the controlling shareholders of a Chilean open stock corporation can only sell
their controlling shares through a tender offer issued to all shareholders in
which the bidder would have to buy all the offered shares up to the percentage
determined by it, when the price paid is substantially higher than the market
price (that is, when the price paid was higher than the average market price of
a period starting 90 days before the proposed transaction and ending 30 days
before such proposed transaction, plus 10%). 17




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Minority shareholders of our company may nevertheless still have fewer and
less well-defined rights under Chilean law and our bylaws than they might have
as minority shareholders of a U.S. corporation. 18




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Item 4. INFORMATION ON THE COMPANY Overview We are Chiles leading hypermarket and supermarket company in terms of
sales, with an estimated market share in the hypermarket and supermarket
industry of 30.7% for 2003. With over a century of experience in the
distribution and retailing of food in the Chilean market, at March 31, 2004, we
operated 75 stores in three complementary store formats under the Lider
brandname. In January 2004, we acquired Carrefour Chile S.A. for 100 million,
adding seven hypermarkets of which six have been converted into Liderstores. Over the
last five years, we have increased our total number of stores from 50 to 74
(including six stores acquired from Carrefour), of which 46 are located
in the Santiago metropolitan region. Our expansion program currently projects
the opening of seven new stores in 2004 (exclusive of the Carrefour
acquisition) and eight stores in 2005. We had total net revenues in 2003 of
Ch$1,163,000 million (US$1,959 million). We have positioned ourselves as Chiles low price leader in the
hypermarket and supermarket industry. In mid-2003, we strengthened our
commitment to offering low prices through our strategy of Every Day Low
Prices, or EDLP, and re-branded all of our existing Ekonoand Almacstores
under our Liderbrand. We believe our strong market position, our Lider
brands reputation for value and our competitive cost structure will enhance
our ability to successfully pursue our EDLP strategy, allowing us to cross-sell
an expanded selection of quality non-food products and offer other
complementary products and services, such as pharmacies, restaurants and credit
cards to a large and growing customer base attracted by our traditional
supermarket offering and our low prices. We operate three store formats under the Liderbrand umbrella:  
    
    Our 30 Liderhypermarkets (including seven acquired
from Carrefour) have an average selling space of 9,317 square
meters, and offer one-stop shopping for traditional food items
and non-food items such as home appliances, electronics, apparel
and toys. In 2003, our hypermarkets (excluding the stores
acquired from Carrefour) generated 60.5% of our net revenues.  
    
    Our 19 Lider Vecinocompact hypermarkets have an
average selling space of 3,824 square meters, and seek to combine
the proximity and friendly atmosphere of neighborhood
supermarkets with the advantages of low prices and a broad
non-food product assortment that allows one-stop shopping. In
2003, our compact hypermarkets generated 21.1% of our net
revenues.  
    
    Our 26 Lider Expresssupermarkets have an average
selling space of 1,532 square meters, and emphasize quality
groceries and perishables at low prices. In 2003, our
supermarkets generated 12.7% of our net revenues. We also operate businesses complementary to our core retail operations,
including real estate development, credit card operations, pharmacies and
restaurants, which together generated 5.7% of our net revenues in 2003. Our Core Strengths We believe our core competitive strengths provide us with a strong
platform for successful deployment of Liders EDLP strategy. 19




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
    
    Chiles value leader.Based on market surveys and our own
monitoring of our competitors pricing, we believe we offer
consumers the lowest overall prices of any major supermarket or
hypermarket chain in Chile.  
    
    Chiles leading hypermarket and supermarket company.At
December 31, 2003, we estimate that our market share in the Chilean
hypermarket and supermarket industry was 30.7% (excluding the
Carrefour acquisition), compared to a market share of 19.4% for our
nearest competitor (pro forma for their year-end acquisitions). We
believe our leading market position helps us establish and maintain
strong supplier relationships and gives us access to the largest
customer base of any Chilean hypermarket and supermarket company.  
    
    Strong brand with a reputation for value.We believe that
our stores derive substantial benefit from the widespread
recognition of the Liderbrand name in Chile and its reputation for
value. This strong brand identity helps us gain more immediate
recognition with customers when opening new stores and reinforces
our Every Day Low Price strategy.  
    
    Low cost competitor.Based on publicly available market
data, in proportion to net revenues, we have the lowest overall
operating costs of any major hypermarket or supermarket company in
Chile. This cost advantage derives, we believe, from our scale
advantage, our unified branding strategy and our advanced
distribution and technology. We believe, for example, our
distribution center on the outskirts of Santiago is among the most
advanced of its kind in Chile. Our Strategy Our goal is to maximize value to our shareholders, while expanding our
position as the leading hypermarket and supermarket company in Chile. We
believe we can best achieve this goal by delivering a broader selection of
goods and services to our customers at low prices. Key elements of our
strategy include:  
    
    Continuing to expand customer traffic.We have approximately
15 million customer visits to our stores each month, providing us
with what we believe is the greatest retail opportunity in Chile.
To further expand our customer base, we are:  
    
    Offering Every Day Low Prices.In mid-2003, we
strengthened our commitment to our EDLP strategy, which seeks
to generate additional customer traffic in Liderstores by
maintaining a discernable pricing difference with respect to
the total price of a basket of goods purchased at Liderversus
the same basket of goods purchased at competitors stores. We
believe that the economies of scale arising from our large
size and low selling costs, combined with our brand equity as
the low cost leader will enable this strategy to succeed.  
    
    Expanding Liders presence.We intend to open
seven new Liderstores in 2004 and eight additional Lider
stores in 2005 (exclusive of FarmaLiderpharmacies or other
non-supermarket stores). These are in addition to six
hypermarkets we acquired from Carrefour in January 2004 that
are being converted into the Liderformat. As such, assuming
no further acquisitions, we project increased year-over-year
selling space of 25% at year-end 2004 and 10% at year-end
2005.  
    
    Increasing our share of wallet.We estimate that for 2003
our share of Chilean food sales was 10%, while our market share for
products in the non-food sectors in which we compete 20




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was 4.3%. We estimate that for 2003 our overall market share for food
and non-food products was approximately 7.5%. We intend to steadily
increase our share of the Chilean wallet by cross-selling both food
and non-food products to our strong and growing base of customers, as
well as by expanding our credit card operations. To do so, we are:  
    
    Expanding our offerings of non-food products.We
estimate that our customers visit Liderstores an average of
six to seven times per month. To capitalize on this traffic,
we intend to sell an expanding range of quality non-food
products to customers attracted by our traditional supermarket
offerings and our low prices. Key product categories include
greater selections of apparel, housewares and electronics.  
    
    Building FarmaLider and other new businesses.We
are expanding Lidersoffering of complementary businesses,
including FarmaLiderpharmacies, restaurants and cafes and
other new value-added services.  
    
    Leveraging our Presto credit card.Our in-house
credit card, Presto, had 652,241 accounts in good standing at
year-end 2003. We believe that our market-leading in-store
traffic should permit us to continue to expand the number of
Prestoaccount holders and will afford us cross-marketing
opportunities to expand into financial and other services that
we may seek to provide in the future.  
    
    Maintaining a competitive cost structure.Our Every Day Low Price
strategy builds upon our competitive cost structure. We are focused
on:  
    
    Maximizing efficiency.In 2003, we rolled out a
comprehensive store-by-store operational review which we refer
to as the Faro Project(translated as the Lighthouse Project).
This program consists of four different focus areas:
improving productivity, improving our supply chain, reducing
costs, and reducing shrinkage.  
    
    Taking advantage of single brand and EDLP to
reduce advertising costs.Over time, as a result of
re-branding all of our stores under the Liderbrand and as we
implement our EDLP strategy, we expect to achieve significant
reductions in the proportion of our revenues that we spend on
advertising. A single brand allows us to have a single
marketing strategy. Moving away from a high-low pricing
strategy in favor of EDLP allows us to pursue a broad-based
advertising strategy that eliminates costly weekly mailings
and promotions.  
    
    Recruiting and developing talent.To implement our strategy, we
seek to recruit and develop talented personnel at all levels of our
business. We have strengthened our management team with executives
recruited from leading international and Chilean companies. This team
is invested in the success of our EDLP strategy. We also seek to
become a preferred place to work in Chile which, we believe, over time,
will help ensure our continued success. History We are a corporation organized under the laws of Chile, incorporated in
1985. We completed an initial public offering of our common shares in Chile in
December 1996. We listed our ADSs on the New York Stock Exchange under the
symbol DYS and completed an initial public offering of ADSs in the United
States in October 1997. We also listed our common shares on the Madrid Stock
Exchange (Latibex) in December 2002. Our principal subsidiaries are
Administradora de Concesiones Comerciales 21




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de Hipermercados S.A., Administradora de Concesiones Comerciales de
Supermercados S.A., Sociedad Anónima Inmobiliaria Terrenos y Establecimientos
Comerciales S.A. (SAITEC S.A.), and Maquinsa S.A. Our history began in 1893 as the trading firm of Gratenau y Cía., founded
by German immigrants in Valparaíso, a Chilean port city. Mr. Adolfo Ibáñez
Boggiano joined Gratenau y Cía. in 1899. In the 1930s, Ibáñez y Cía., the
successor firm to Gratenau y Cía., opened Depósitos Tres Montes, small retail
warehouses selling coffee, tea and mate in bulk. In 1944, Mr. José Manuel
Ibáñez Ojeda, in keeping with the evolving retail environment, converted the
warehouses into self-service establishments selling an expanded range of
products. The firm entered the modern age of food retailing in 1957 with the
opening in Santiago of the first Supermercado Almac. During the 1980s, we entered a new period of expansion. In 1984, we
established our first Ekonosupermarket in Santiago. In 1985, our company was
incorporated as a distribution and service center for our related Almacand
Ekonosupermarkets. Over the next decade, we significantly increased our
market presence by expanding our existing store formats. In 1995, we opened
our first hypermarket store under the Lidertradename and began offering
non-food products. Since 1995, we have focused our expansion on the Lider
hypermarket format and have opened a total of 39 new stores. We began offering
our customers financial services with the launch of our Prestocredit card in
1996. In 2003, we rebranded all of our stores under the Liderbrand. Market Overview Food Retailing Industry in Chile Although the Chilean food retailing industry has historically been highly
fragmented, it has been undergoing a period of rapid consolidation over the
last ten years as national retailers, like Lider, expand and then as the larger
of these acquire smaller competitors. In addition to supermarkets and larger
format stores, Chile continues to support smaller grocery stores, convenience
stores and open-air markets. The level of competition and the identity of
competitors vary from region to region. Supermarket chains in Chile generally
compete on the basis of price, location, quality of products and services,
product variety and store conditions. We
estimate that in 2003 the six largest supermarket chains in Chile
accounted for approximately 62.6% of total supermarket net sales. In 2003, we
accounted for approximately 30.7% of total net sales of the supermarket
industry in Chile, which represents the highest total market share in Chile
(calculation of this percentage includes supermarket/hypermarket sales of
non-food items). In the Santiago metropolitan region, Chiles most densely
populated area (with 40% of Chiles population), with the highest levels of per
capita disposable income, and highest level of supermarket penetration, Lider
has the largest market share in terms of sales (including both food and
non-food items), with approximately 38.7% of the total market. Increasing acceptance of supermarkets as principal outlets of foodstuffs
and other household items in Chile has resulted in steady increases in
supermarket sales. We believe that total net sales by supermarkets in Chile
grew at an average annual rate of 9.9% during the last ten years, exceeding the
7.6% average annual growth rate of GDP in Chile. The growth of larger stores
(including increased numbers of hypermarkets), both on a free-standing basis
and within shopping centers and other commercial developments such as anchor
tenants, and a consolidation of ownership in fewer, larger supermarket chains,
has been a developing trend in the Chilean supermarket industry during the last
several years. Current trends in the industry include increased
differentiation among competitors, with some supermarket chains emphasizing a
low-price and low-service strategy, while others pursue a strategy of moderate
or higher prices accompanied by higher levels of service. Other important
trends in the Chilean supermarket industry include increased funding of
marketing costs by suppliers, expansion by 22




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leading chains into the regions outside the Santiago metropolitan region,
the growth of private label products and increased demand for prepared foods. Growth in total net sales by supermarkets and other food stores in Chile
is positively correlated to growth in consumer disposable income and the growth
in GDP and inversely correlated to significant increases in real prices and
sales or value added taxes. In Chile, all products sold by supermarkets are
subject to a value added tax of 19%. Soft drinks and alcoholic beverages are
subject to additional taxes. Our Business Our Store Formats At December 31, 2003, we operated 68 stores which together comprised
333,344 square meters of total selling space. Of the 68 stores we operated, 26
were Lider Expresssupermarkets, 23 were Liderhypermarkets and 19 were Lider
Vecinocompact hypermarkets. We have reorganized our store formats by
re-branding our Ekonoand Almacsupermarkets as Lider Expresssupermarkets, and
by converting our larger Ekonosupermarkets into Lider Vecinocompact
hypermarkets and our Lider Mercadostore into a Liderhypermarket. We believe
that consolidating our store formats will help reduce marketing and advertising
expenses and will allow all of our stores to benefit from the low price
reputation that is a distinctive feature of the Liderbrand. In January 2004,
we acquired Carrefour Chile, which had seven hypermarkets in the Santiago
Metropolitan region. We are converting these stores to Liderhypermarkets. The following table sets forth data by store classification at and for the
year ended December 31, 2003 after giving effect to the Carrefour acquisition: Total
    
    Average
    
    AverageNumber of
    
    Selling
    
    Selling Area
    
    Sales per
    
    Number of
    
    Sales PerStores
    
    Area(1)
    
    per Store(1)
    
    Sq. Meter(2)(3)
    
    Employees(4)
    
    Employee(2)Hypermarket  Lider
    
    
    23
    
    
    
    220,862
    
    
    
    9,603
    
    
    Ch$
    3.1
    
    
    
    9,924
    
    
    Ch$
    72.9Compact
Hypermarket  Lider Vecino
    
    
    19
    
    
    
    72,660
    
    
    
    3,824
    
    
    
    3.9
    
    
    
    4,720
    
    
    
    55.6Supermarket
 Lider Express
    
    
    26
    
    
    
    39,822
    
    
    
    1,532
    
    
    
    3.2
    
    
    
    2,756
    
    
    
    53.9Total
    
    
    68
    
    
    
    333,344
    
    
    
    4,902
    
    
    Ch$
    3.3
    
    
    
    17,400
    
    
    Ch$
    65.4Hypermarkets acquired from Carrefour
Chile(5)
    
    
    7
    
    
    
    58,638
    
    
    
    8,377
    
    
    
    NA
    
    
    
    NA
    
    
    
    NATotal
    
    
    75
    
    
    
    391,982Other stores(6)
    
    
    41
   (1)
    
    In square meters.(2)
    
    In millions of constant Chilean pesos. Sales sets forth net revenues
under Chilean GAAP, excluding vendor allowances. As such, sales is equal
to net revenues under U.S. GAAP.(3)
    
    Average square meters.(4)
    
    Full-time equivalent employees.(5)
    
    Acquired as of January 7, 2004.(6)
    
    Includes pharmacies and restaurants. The following table sets forth, for the periods indicated, the net
revenues from retail operations by store format and the respective percentage
of our total net revenues each format represents: 23




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Year ended December 31,2001
    
    2002
    
    2003% of Total Net
    
    
    
    
    
    % of Total Net
    
    
    
    
    
    % of Total NetNet Revenues
    
    Revenues
    
    Net Revenues
    
    Revenues
    
    Net Revenues
    
    Revenues(in millions of constant Ch$)Lider
    
    Ch$
    589,803
    
    
    
    62.1
    %
    
    Ch$
    667,165
    
    
    
    63.0
    %
    
    Ch$
    703,273
    
    
    
    60.5
    %Lider Vecino(1)
    
    
    144,812
    
    
    
    15.3
    
    
    
    177,282
    
    
    
    16.7
    
    
    
    245,872
    
    
    
    21.1Lider Express(1)
    
    
    185,521
    
    
    
    19.2
    
    
    
    178,386
    
    
    
    16.9
    
    
    
    147,433
    
    
    
    12.7Other(2)
    
    
    32,577
    
    
    
    3.4
    
    
    
    35,887
    
    
    
    3.4
    
    
    
    66,421
    
    
    
    5.7Total
    
    Ch$
    949,713
    
    
    
    100.0
    %
    
    Ch$
    1,058,719
    
    
    
    100.0
    %
    
    Ch$
    1,163,000
    
    
    
    100.0
    %
   (1)
    
    Includes stores formerly operated under the Almacand Ekonobrands.(2)
    
    Other includes credit card operations, logistics services and real
estate operations. Hypermarkets  Lider As of the date of this annual report, we operate 29 Liderhypermarkets
(including six acquired from Carrefour) of which 18 are located in the Santiago
metropolitan region. All of our hypermarkets operate under the Lider
brandname. The Liderhypermarket, which was modeled after European
hypermarkets and was introduced to Chile in 1995, is characterized by floor
space of between 6,020 and 13,243 square meters, offering, in addition to
traditional foodstuffs, non-food items such as home appliances, electronics,
hardware, sports, toys, apparel and articles for the home. Liderhypermarkets
typically occupy strategic sites at the intersection of major thoroughfares
connecting communities, allowing us to service various communities with one
store. The Lidersites have ample parking space and are generally developed in
conjunction with an assortment of complementary stores, such as Blockbuster,
McDonalds, hardware superstores, cinemas, food courts and pharmacies. Lider
stores have an average of 431 employees, 42 to 76 checkouts, an average store
size of 9,603 square meters, and are generally open from 9:00 a.m. to 10:00
p.m., seven days a week. Our Liderstores offer one-stop shopping in an
easily accessible store layout. Net revenues of our Liderhypermarkets totaled Ch$703,273 million
(US$1,184 million) in 2003, accounting for 60.5% of our total net revenues in
2003. Compact Hypermarkets  Lider Vecino We currently operate 20 Lider Vecinohypermarkets, 12 of which are located
in the Santiago metropolitan region. We developed our Lider Vecinoformat in
2000 to target smaller neighborhoods with a compact hypermarket format by
converting our larger, existing Ekonosupermarket facilities, which ranged
between 2,400 and 4,720 square meters, into Lider Vecinocompact hypermarkets.
Our Lider Vecinoformat combines the convenience and pleasant atmosphere that
characterizes neighborhood supermarkets with some of the advantages of Lider
hypermarkets. These advantages include a broad assortment of non-food items to
facilitate one-stop shopping and low prices. We believe these factors provide
us an advantage over our primary competitors in these communities, which are
generally comprised of traditional supermarkets. Lider Vecinostores have an
average of 248 employees, 23 to 37 checkout centers, an average store size of
3,824 square meters, and are generally open from 8:30 a.m. to 10:00 p.m., seven
days a week Net revenues of our Lider Vecinocompact hypermarkets totaled Ch$245,872
million (US$414 million) in 2003, accounting for 21.1% of our total net
revenues in 2003. Supermarkets  Lider Express We currently operate 25 supermarkets under the Lider Expressbrandname, 16
of which are located in the Santiago metropolitan region. Lider Expressstores
are traditional neighborhood supermarkets providing a friendly atmosphere and
personalized attention. These stores emphasize the 24




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food products offered, which include a broad assortment of quality
perishables and groceries. Additionally, these supermarkets offer a variety of
prepared dishes. Lider Expressstores have an average of 106 employees, eight
to 19 checkouts, an average selling area of 1,532 square meters and are
generally open from 8:30 a.m. to 10:00 p.m., seven days a week. Net revenues of our Lider Expresssupermarkets totaled Ch$147,433 million
(US$248 million) in 2003, accounting for 12.7% of our total net revenues in
2003. Complementary Businesses As part of our strategy to offer consumers a broader range of products
beyond our traditional grocery business and thereby increase our share of the
Chilean wallet, we have expanded our product offerings to include pharmacy and
restaurant food sales as well as non-food offerings. We believe that we will
be able to leverage our brand, our established market presence in the Chilean
supermarket industry and our land bank of retail properties to move efficiently
into these areas, thereby increasing our share of total Chilean consumer
spending. Pharmacy  FarmaLider. We have used our existing retail infrastructure
and real estate to begin opening our own pharmacies located in small retail
spaces in our hypermarkets. Our first pharmacy opened in July 2001, and at
December 31, 2003 we had 42 pharmacies in operation, which in the aggregate
accounted for 1.4% of our total 2003 net revenues. In Chile, pharmaceuticals
are regulated and even non-prescription drugs must be dispensed from behind the
counter. Our FarmaLideroutlets are located in our stores but outside of the
selling space beyond the check-out counters. The average floor space dedicated
to FarmaLiderretail averages 86 square meters, with two check-out counters.
Our pharmacies typically employ seven workers. FarmaLidergenerated net
revenues of Ch$16,282 million in 2003. Cafes and Restaurants. We believe that moderately priced restaurants
assist in generating traffic to our stores and are an attractive business. We
offer 24 LiderCaferestaurants and eight CafeBuffetrestaurants, all of which
are located in our Liderstores. These restaurants principally offer
sandwiches and prepared foods as well as, in LiderCaferestaurants, short-order
prepared dishes. We have recently opened a larger format restaurant in certain
of our Liderstores under the Revivename and anticipate opening three more
restaurants by year-end. Reviveis an assisted self-service format serving
economical, homestyle foods targeting the working population during the week
and families on the weekend. Real Estate Development. We rent small retail spaces to other retailers
in the foyers of our stores and adjacent to our stores. We select tenants that
are complementary to our stores, such as photo shops and laundromats, in order
to draw more traffic to our stores. See   Real Estate Development. Our Pricing and Marketing Strategy Pricing. Our strategy is to be the lowest price retailer in Chile.
During 2003, we re-branded all of our Ekonoand Almacstores as Lider Express
stores, and our Lider Mercadostore as a Liderstore, so that all of our stores
would operate under the Liderbrand and reinforce our EDLP strategy. Once we
fully implement our EDLP strategy across formats, we expect to achieve, over
the long term, a 10% lower price position with respect to the total price of a
basket of goods purchased at our stores versus the same basket of goods
purchased at a competitors store. Lider, Lider Vecino, and Lider Expresss
low price strategy requires each store to be a low-cost operator with high
sales volumes to obtain economies of scale on fixed costs. Although our
promotional offers are generally the same in all our stores, we otherwise
manage our pricing strategy in clusters of stores with reference to the prices
of specific local competing stores. A significant component of this strategy
is our offering of private label products under the Lider brandname and other
private brands (Acuentaand Buffet, among others) which permit us to 25




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offer lower prices at moderate gross margins as well as improved
bargaining power with suppliers. See Our ProductsNon-Food ProductsPrivate
Label Products. Marketing. Lider, Lider Vecino, and Lider Expresspursue a joint
marketing strategy designed to reinforce Lidersimage of providing every day
low prices. Concurrent with the re-branding of our stores under the Lider
brand, we have implemented the EDLP strategy in all of our stores. In line
with our EDLP strategy, we have shifted our marketing focus away from marketing
based on specific promotions or special weekend offers and toward an emphasis
on every day low prices. We continue, however, to make extensive use of
in-store promotions and signage to offer sales and particularly low priced
items. We have also focused our marketing efforts on mass media, especially
television and radio. All of our audiovisual and written advertisements make
reference to the slogan Todos los Precios Bajos Siempre or Always Low
Prices. We have discontinued periodically printed materials such as weekly
leaflets or bi-weekly catalogs and have focused on catalogs for specific
seasonal campaigns such as Summer, Outdoors, Back to School and
Christmas. These campaigns are mainly oriented toward non-food products and
special food campaigns for specific holidays such as Independence Day and
New Years Eve. Advertising expenses represented 1.0% of our net revenues in
2003. In past years, this percentage has been higher, ranging from 1.3% to
1.5% of net revenues. As part of the implementation of our EDLP strategy, we
are targeting further reductions in our advertising expenses in the future. Our Products Product Mix.Our product mix varies according to the store format, with
our larger formats offering a greater variety and number of stock keeping
units, or SKUs, and a higher proportion of non-food items. The following table
sets forth our product mix by store category: Percentage of Selling Spaceby Product CategoryYear ended December 31, 2003Non-foodGroceries(1)
    
    Perishables
    
    Products(2)
    
    TotalLider
    
    
    25.0
    %
    
    
    24.0
    %
    
    
    51.0
    %
    
    
    100
    %Lider Vecino
    
    
    48.3
    
    
    
    37.1
    
    
    
    14.6
    
    
    
    100
    %Lider Express
    
    
    47.5
    
    
    
    47.3
    
    
    
    5.2
    
    
    
    100
    %FarmaLider
    
    
    9.4
    
    
    NA
    
    
    90.6
    
    
    
    100
    %
  (1)
    
    For purposes of FarmaLider, groceries principally
includes perfumes.(2)
    
    Non-food products includes apparel, electronics and appliances,
housewares and furniture, pharmaceuticals and general merchandise. In addition to the foregoing, we have also installed family-style
cafeterias referred to as Patios de Comida(foodcourts) and coffee shops at
certain locations in order to increase the use of Liderstores as destinations
apart from traditional grocery stores. The following table sets forth, for the periods indicated, each product
categorys percentage contribution to our sales: 26




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##### Table of Contents



Percentage Contribution to Sales by Product CategoryYear ended December 31,2001
    
    2002
    
    2003Groceries
    
    
    50.0
    %
    
    
    48.5
    %
    
    
    47.0
    %Perishables
    
    
    35.4
    
    
    
    34.9
    
    
    
    34.1Apparel
    
    
    3.7
    
    
    
    5.2
    
    
    
    6.0Electronics and appliances
    
    
    2.0
    
    
    
    2.3
    
    
    
    3.0Housewares and furniture
    
    
    2.5
    
    
    
    2.5
    
    
    
    3.0Other non-food products(1)
    
    
    6.3
    
    
    
    6.6
    
    
    
    6.9Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  (1)
    
    Percentages are of our total product sales from our retail operations and
sets forth net revenues under Chilean GAAP, excluding vendor allowances.
As such, sales is equal to net revenues under U.S. GAAP. Other non-food
products includes sporting goods, toys, office supplies and general
merchandise. Groceries.Grocery sales represented 47% of our sales in 2003. Along with
our perishable offerings, grocery products have historically formed the core of
our business. Our grocery product offerings comprise a wide variety of
consumer packaged goods such as cereals, jellies, sauces, canned food items,
paper towels and assorted paper products. Our chief long-term goal with
respect to our grocery products is full implementation of our EDLP strategy by
which we seek to achieve a 10% lower price position with respect to the total
price of a basket of goods purchased at our stores versus the same basket of
goods purchased at a competitors store. We believe that by maintaining
consistently lower prices than our principal competitors with respect to our
grocery products, we can generate a greater amount of customer traffic in our
stores. Perishables.Sales of our perishable products represented 34.1% of our
sales in 2003. Along with our grocery products mentioned above, sales of
perishables have historically formed the core of our business. Our perishables
include a wide variety of traditional food products, such as meats, fish, dairy
products, fruits and vegetables, frozen foods, bakery goods and prepared foods
and include a wide array of private label products. Our main strategy for our
perishable products is to increase consumer perception of the quality of our
products by expanding the breadth of our product offerings. We believe that by
increasing the product quality and customer service levels in relation with our
perishables we will be able to improve customer loyalty and, thereby, increase
customer traffic and improve net sales of these products. Non-Food Products Sales of non-food products represented 18.9% of our sales in 2003. In
order to increase our share of the Chilean consumers wallet and to take
advantage of our high customer traffic levels, we have expanded our products
beyond groceries to include non-traditional items such as apparel, housewares,
electronics, sporting goods, toys and office supplies. Many of our purchases
in these areas are made abroad through our worldwide network of suppliers. Apparel.Our apparel department seeks to provide customers of all ages
with a variety of types and styles of high-quality clothing at affordable
prices. In 2003, sales of our apparel products accounted for 6% of our sales.
Our apparel department consists primarily of private label brands catering to
women, men and infants. Our marketing strategies and the layout of our apparel
department aim to create strong brand identification with our BLVDprivate
label, as an affordable brand that is similar in quality to those offered at
department stores. In 2003, we launched a new strategy in womens clothing
through which we emphasize providing women with high quality, basic clothing
items, such as skirts, blouses, pants and other basic casual and business
attire items. We have implemented this new strategy, in part, because women
have traditionally been the primary purchasers of family clothing in Chile. We
believe that by expanding the clothing options for women, we will be able to
increase the sales of our clothing generally. 27




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Electronics and Appliances. The electronics and appliances we offer in
our stores include products manufactured by well-known producers such as Sony
and Panasonic, as well as a growing number of our own products marketed under
our Grövenand Hausprivate labels. In 2003, sales of electronics and
appliances were 3% of our sales. Our chief strategy regarding home electronics
and appliances is to offer a diverse assortment of these products that include
both offerings from well-known producers and our own private label products.
Consistent with our Every Day Low Prices strategy, we seek to offer our
electronics and appliances at a discernible price differential versus our main
department store competitors, such as Ripley and Falabella. We believe that,
combined with our high traffic levels as a food retailer, our EDLP strategy
will provide us with a significant advantage in selling these products. During
2004, we plan to expand the amount of home computing products available in our
stores to take advantage of the growth in this sector in Chile. Housewares and Furniture. Our housewares department offers our customers
an assortment of products in the areas of home decorating, including bath and
kitchen supplies, and home improvement, including hardware and furniture. In
2003, sales of housewares generated 3% of our sales. In addition to the
products we offer that are manufactured by other manufacturers, we also market
a growing number of products under our Hausprivate label, including general
kitchen products, decorating supplies and furniture. Our chief strategy
regarding our housewares involves further marketing of our Hausprivate label.
To increase awareness of our Hausproducts, we offer seasonal promotions around
such holidays as Christmas and Easter. As with our electronics and appliances,
we seek to offer our housewares at a discernible price differential versus our
department store rivals, such as Ripley and Falabella. Other Products. We also offer a variety of other non-food products,
including sporting goods, toys, office supplies, auto parts and pet supplies.
In 2003, sales of other non-food products were equal to 3% of our sales. We
offer the following private labels in these categories: Paragon(sporting
goods); Toi(toys); and Alquimia(office supplies). In 2004, we plan to expand
our offerings in toys and office supplies, including expansion of our Toiand
Alquimiaprivate labels. Private Label Products. Sales
of our private label products represented 14.6% or Ch$149,375
million of our sales in 2003. In groceries, they accounted for 9.6% or
Ch$111,648 million of 2003 net groceries sales, while in perishables our
private labels represented 6.7% or Ch$77,921 million of 2003 net perishables
sales. In beauty care products, private label sales represented 5.1% or
Ch$59,313 million of 2003 net beauty care sales. Private labels have become
very prominent in the non-food area. In 2003, private label products accounted
for 30.6% of our sales in general merchandise, 69.5% in home supplies, 89.7% in
clothing and 54.0% for our non-food area as a whole. We seek to achieve three primary goals through our private labels:  
    
    as part of our EDLP strategy, we plan to use our private
label products to generate customer recognition of our image as a
low price provider of high quality products;
    
    we plan to use our private labels to increase the
profitability of sales of both food and non-food products; and
    
    we seek to increase brand loyalty through our private labels,
by offering high quality goods that customers can only find at our
stores. We plan to introduce in 2004 our new private label in groceries,
Presidents Choice, and a new private label in health and beauty products,
which we have not yet named. Both will consist of premium quality products
similar to our private label Buffetline. In 2004, we plan to increase
profitability and 28




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customer loyalty through these new private labels by offering a unique
selection of the highest quality products at affordable prices. Our proprietary private labels include the following: Lider(groceries
and perishables) Buffet(perishables), Acuenta(groceries, perishables and home
supplies), BLVD(apparel), Haus(housewares), Gröven(electronics), Paragon
(sporting goods), Toi(toys) and Alquimia(office supplies). Customer Service and Standardization In order to ensure that we are providing our targeted levels of customer
service, we use several metrics and indicators. Adimark, a Chilean market
research company, assists us with annual market surveys and quarterly customer
surveys, which allow us to monitor market and customer perceptions of the level
of service provided in our stores. In addition, we have a customer service
call center that received an average of 9,000 calls per month in 2003 and an
internet site that received an average of 900 queries a month in 2003. Each
store has a suggestion/complaint box offering a means for customers to
communicate with management. In addition, we have invested in customer service
phone lines as part of our effort to facilitate communication between our
customers and management. We are engaged in an ongoing effort to standardize both the appearance of
our stores and their operating procedures. Our renovation program is designed,
in part, to bring the stores within each format into closer conformity in
appearance, thereby projecting a consistent brand image. We also operate
laboratories located at our distribution center in order to conduct random
testing of products and approve new products as part of ongoing efforts to
ensure the quality of our products. In order to monitor the quality of our
customer interaction and enhance quality control, we employ a mystery shopper
program in all of our stores. Through our mystery shopper program, in 2004,
we made an average of almost 5,000 visits each month to our locations selected
at random to monitor service. Purchasing and Distribution Purchasing and Supply We carry out our purchasing activities on a centralized basis for all of
our stores. Through the use of our automatic store and warehouse replenishment
systems, we have centralized the purchase of our products from suppliers. We
attempt to take advantage of our resulting large purchasing volume to obtain an
advantageous mix of price and payment terms. For 2003, the average payment
term was 53.3 days and inventory was held for an average of 40.1 days. As part of our Faro Project, through which we seek to increase our
operating productivity and enhance the efficiency of our business, we have
implemented software and technological changes in our supply chain. These
include the introduction of the computerized inventory replenishment programs,
SLIM, or Store Level Inventory Management, and TRIM, or True Replenishment
Inventory Management. In implementing SLIM and TRIM, we have created a
centralized and automated computer network connecting all of our stores and our
central distribution facility. Through the use of SLIM, our store
replenishment system automatically allocates the required quantities to be
delivered to our stores. In order to process and allocate the quantities to
match our stores requirements, SLIM automatically calculates, with respect to
each of our stores, information including the amount of a given product on
hand, the amount on order, the required lead time needed to replenish such
product, the historic use of the product at the store, the maximum shelf
capacity and projected future use of the product. Much like SLIM, TRIM uses a
similar process to calculate the supply requirements of our central
distribution center. We believe that the use of SLIM and TRIM will enhance the
efficiency in allocating proper quantities of our products to meet our stores
demand. 29




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Through our Faro Project, we have sought to enhance the efficiency of our
supply chain by reducing the number of suppliers we use and centralizing our
negotiations with these suppliers. In 2003, no single supplier accounted for
more than 3.7% of total goods purchased. Our ten largest suppliers
collectively accounted for approximately 22.7% of our purchases in 2003, and
the 50 largest accounted for 53.3%. Certain products such as fish are purchased
from affiliated companies. We purchase nearly all food products on a spot or
short-term basis, within the context of long-term relationships with the
suppliers. We conduct our business with our suppliers on terms which we
believe are at least as favorable as those generally available to the industry. Distribution and Inventory Management Distribution. We have centralized distribution from our distribution
center through the use of SLIM as described above. Our two distribution
centers, with 72,000 and 49,000 square meters of space, supply fully 65% of the
products sold in our stores. By the end of 2004, our goal is to increase this
percentage to 80% of all our products. Centralized distribution consists of shipping, from a central warehouse to
the stores, mixed pallets of products selected to satisfy the daily inventory
requirements of the particular store. Our integrated information management
system allows pallets to be prepared on the basis of real-time information on
sales and inventory levels in each store. We also use direct deliveries to our
stores from suppliers. Under the direct delivery system, a product can be
ordered either directly by the store or through a central purchasing office.
Because direct deliveries generally result in additional costs and introduce
inefficiencies into our distribution process, we have decreased our reliance on
such deliveries. We transport our products with our fleet of tractor-trailers. At December
31, 2003, our fleet consisted of 33 tractors and 132 trailers. Our trailers
are equipped with global positioning systems permitting us to track their
location. Expanding and improving the quality of our fleet of tractor-trailers
complements our strategy of emphasizing centralized distribution by allowing us
to avoid the costs associated with independent or third-party tractor-trailer
operators chartered to deliver products to our stores by our suppliers. Deliveries from the distribution center occur principally at night during
hours of low traffic, thereby allowing a greater number of deliveries per truck
and avoiding stock-outs (i.e., running out of stock) resulting from delays
caused by traffic. Our policy is to charge suppliers for distribution and
transportation services to cover effectively the cost of these activities. Inventory Management. A principal objective of our investments in
distribution and information management technology is inventory control. In
2003, we began implementing a significant change in the way we manage our
inventory by switching from a staple stock to a flow-through system of
inventory management. Staple stock inventory management involves the delivery
of products to a distribution center where such products are stored and
subsequently distributed to stores as they are needed. In contrast,
flow-through inventory management involves the receipt and immediate allocation
and delivery of products to local stores. Under our flow-through system, lower
product quantities are held in our distribution center, further increasing our
centralization and reducing our average number of days of inventory. At
December 31, 2003, we held approximately 90% of our inventory in traditional
staple stock and used flow-through inventory management for the remaining 10%.
We plan to increase the use of flow-through inventory management to cover
approximately 40% of our total products by the end of 2004 and over the
long-term achieve flow-through management for up to approximately 80% of our
total products. In addition, we are seeking to reduce our shrinkage, which includes
losses in inventory, losses and damage during transportation, and theft. We
expect to reduce our shrinkage by centralizing our 30




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distribution system, improving the efficiency of our supply chain, and
improving our operational processes. Shrinkage in all of our stores
remained constant at 2.0% of total sales at year-end
2003 as compared to 2002. Shrinkage reduction is another goal of our Faroproject. In addition,
our stores have extensive security systems, including our own security service,
to discourage theft and enhance shopper safety. Credit Card Operations Presto Credit Card.As we have expanded our business to include higher
priced durable goods, including apparel, housewares and electronics, we have
recognized the importance of making an in-store credit card available as a
means of financing consumer purchases of these higher priced items. Through
our Prestocard, we extend to our customers revolving credit, with respect to
purchases of our food products, and both revolving credit and installment
payment options with respect to our non-food products. A customer accessing a
revolving line of credit has a period of up to thirty days to pay the entire
balance of the account without incurring interest. A customer can also choose
to pay a minimum of 10% of the balance monthly. Any balance remaining after
such payment accrues interest. A customer can also elect to pay a balance in
installments of between 3 to 36 months at the applicable interest rate. Since
we seek to use our Prestocredit card to increase our sales, we strive to offer
the lowest interest rates that are competitive with those offered by the
in-store cards of our principal competitors. During 2003, our number of
accounts in good standing increased by 43%. At December 31, 2003, Prestohad a
total of 652,541 accounts in good standing. We intend to continue to grow our
number of accountholders. In 2003, our Prestocredit card operations averaged a
monthly charge volume of Ch$14,344 million (US$24 million), representing
approximately 14% of our net revenues. Interest income service fees generated
by our Prestocredit card operations is recorded under other revenues and
represented 1.64% of our consolidated net revenues in 2003. The following tables set forth, for the periods indicated, information
concerning our credit card operations: Year Ended December 31,2001
    
    2002
    
    2003(in millions of constant Ch$)Net revenues
    
    
    7,606
    
    
    
    11,257
    
    
    
    19,086Provisions for doubtful accounts
    
    
    2,279
    
    
    
    3,584
    
    
    
    8,585Financial expenses
    
    
    1,242
    
    
    
    1,498
    
    
    
    2,252Other expenses
    
    
    2,072
    
    
    
    3,505
    
    
    
    3,916Selling and administrative expenses
    
    
    5,592
    
    
    
    8,587
    
    
    
    14,753Operating income
    
    
    2,013
    
    
    
    2,670
    
    
    
    4,333Total accounts receivable, end of period
    
    
    25,058
    
    
    
    42,181
    
    
    
    83,401Allowance for doubtful accounts
    
    
    635
    
    
    
    980
    
    
    
    3,059Net total
accounts receivable, end of period
    
    
    24,423
    
    
    
    41,201
    
    
    
    80,342
 At December 31,2001
    
    2002
    
    2003Allowance for Doubtful Accounts, Detail
    
    (in millions of constant Ch$)January 31, balance
    
    
    443
    
    
    
    635
    
    
    
    980Provisions for doubtful accounts
    
    
    2,279
    
    
    
    3,584
    
    
    
    8,585Write-off, net
    
    
    (2,087
    )
    
    
    (3,239
    )
    
    
    (6,506
    )December 31, balance
    
    
    635
    
    
    
    980
    
    
    
    3,059Number of accounts in good standing (1)Accounts end
of period carrying a balance over last 30 days (2)
    
    
    203,557
    
    
    
    455,403
    
    
    
    652,541Delinquent accounts (3)
    
    
    
    
    
    
    
    
    
    
    102,720
 31




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At December 31,2001
    
    2002
    
    2003Allowance for Doubtful Accounts, Detail
    
    (in millions of constant Ch$)Average balance per account (in thousands of constant Ch$)
    
    
    123
    
    
    
    92
    
    
    
    128Allowance for doubtful accounts/Total net receivables
    
    
    2.6
    %
    
    
    2.8
    %
    
    
    4.2
    %
  (1)
    
    Includes all open accounts for which cards have been picked up and that
have not been blocked by reason of delinquency.(2)
    
    Excludes delinquent accounts.(3)
    
    Includes all accounts past due for 90 days or more. We
began recording delinquent accounts in 2003. The management of our Prestooperations reports to a committee of our
board of directors which also includes our chief financial officer. In January
2004, we appointed Mr. Elias Ayub Uauy as general manager of our Prestocredit
card operations. Prior to his appointment, Mr. Ayub Uauy was the principal
owner and chief executive of a credit card processing business in Chile that in
the past provided consulting services to our credit card business. Mr. Ayub
Uauy was also formerly responsible for Citibanks Chilean credit card
operations. Our strategy for development of our Prestocard combines significant
growth and expansion of our credit card operations. Historically, our losses
resulting from payment defaults have totaled 6.9% of our credit card sales.
Our goal is to reduce these losses to 6.5% by the end of 2004 and, over the
long term, to 4% to 5% of our total credit card sales. We cannot assure you,
however, that we will be successful in reducing our losses, particularly as we
expand the number of account holders. Our credit analysis is based on each
applicants current income and credit record as obtained from Chilean credit
agencies. In Chile, detailed information relating to the individual account
balances of an applicant with other commercial creditors is not made publicly
available by Chilean credit agencies and is, therefore, unavailable. Our loss
recovery process involves gathering information relating to the type and amount
of unpaid balances, as well as communicating with our customers to try to
secure recovery of these balances. We evaluate the results of our process and
then decide to write off certain debts based on our analysis of the reasons for
non-payment and our estimation of the likelihood of eventual payment of these
balances. Real Estate Development We have actively assembled a land bank of developed and undeveloped
strategic properties for use as potential future store locations. We believe
that owning these properties insulates us from the volatility of real estate
leases and provides investors with an underlying asset of considerable value.
Our real estate development division, to the extent appropriate and
complementary to the strategic requirements of the core retail business,
develops some properties as shopping malls where our store formats serve as the
anchor tenant. Our real estate division also manages all rental spaces
associated with our supermarkets and hypermarkets which are not located in
shopping malls. At December 31, 2003, we operated six shopping malls that house a total of
305 stores and have a total of 183,635 square meters of sales area of which
64%, or approximately 86,403 square meters, is rented to third-party merchants,
with the remainder rented to our stores (49,249 square meters). The real
estate division also manages leases corresponding to approximately 705 retail
locations (106,276 square meters in total) in our supermarkets and hypermarkets
(small shops usually located in the front part of the store, past the check-out
counters and sales area). In total, at December 31, 2003, our real estate
operations generated rental income from 192,679 square meters of rental space,
corresponding to 1,025 retail locations in total, including stores in shopping
malls and supermarkets. In 2003, our real estate operations generated
consolidated net revenues in the amount of Ch$15,264 million (US$25.7 million)
in annual rental income from our properties representing approximately 1.3% of
our net revenues, after deducting Ch$18,862 million (US$31.8 million) in rental
income received from our supermarkets. 32




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In 2004, we plan to expand our properties by opening seven new Lider
stores in addition to our seven recently acquired Carrefour stores. These new
stores will include three Liderhypermarkets, two Lider Vecinocompact
hypermarkets, and two Lider Expresssupermarkets. We also plan to purchase new
properties in targeted cities where we are not yet present or where we want to
expand our presence by increasing our number of stores. Description of Property In the last five years we invested approximately US$441 million in real
estate and opened 18 stores (excluding investments in Ekono-Argentinastores). An important component of our development is the early acquisition of
strategically located properties, by which we accumulate a stock of valuable,
undeveloped properties that gives us control of our expansion plans. We
increasingly develop our projects as commercial centers in which one of our
stores is combined with other non-competing stores, such as McDonalds or
Blockbuster, to create a complete shopping destination for consumers. We have
developed seven stores in power centers, where the property was developed in
conjunction with Homecenter Sodimac, a hardware superstore. This strategy has
also allowed us to partially offset our real estate costs by developing the
commercial potential of the properties. At December 31, 2003, we owned 52 (of which five were subject to financial
leases) of our 68 store locations in Chile with total retail space of 1,032,139
square meters fully developed and 1,009,777 square meters of land available for
new projects. In addition, we own the La Dehesa, Maipú, Puente Alto and Gran
Avenida shopping centers in Santiago, and the Viña del Mar and Antofagasta
shopping centers in the cities of the same name. In addition, at December 31,
2003, we owned our headquarters and service school and the adjacent
distribution center at Quilicura, in the outskirts of Santiago, and 14
additional sites for new projects. A significant portion of these sites are
strategically located at major intersections or other desirable store
locations. The following table presents a breakdown of our real estate holdings in
Chile as of December 31, 2003: Undeveloped Sites(2)
    
    Stores(1)RegionV, SMR
    
    
    12
    
    
    
    47VI, VIII, IX, X, XII
    
    
    2
    
    
    
    14I, II, III, IV
    
    
    0
    
    
    
    7Total
    
    
    14
    
    
    
    68
  (1)
    
    Excluding the seven recently acquired Carrefour
stores.(2)
    
    Not including four new sites which are currently under construction. Although our general policy is to purchase our properties in order to
secure strategic locations against competitors, this is not feasible in certain
cases, particularly for store sites within shopping centers. In such
instances, we lease the desired locations, if strategically justified. Our
leased stores have initial terms ranging from one to five years. We generally
pay a variable rent based upon the stores revenues. We regularly remodel our stores and invest on an ongoing basis in new
decorations and fixtures, updated signage and technology. To the extent that
we centralize distribution of inventory, it is anticipated to result in a
reduction of the required stocking area and permit an expansion of selling
space in certain of our existing stores. Currently, some of our properties are
held in wholly-owned subsidiaries while others are held directly by us. 33




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Information Technology We seek to be a leader in the application of modern information technology
in our industry in Chile, with technology that is comparable to the highest
standards worldwide. Over the last three years, we have invested an average of
US$6.0 million per year (approximately 0.5% of our net sales and over 5% of our
capital expenditures) in computers and information technology. As our back
office, distribution and check-out operations were already automated, these
investments were directed towards renewing and upgrading our information
technology and enhancing the integration of our systems. These investments
have contributed to reduced labor costs and increased efficiencies in customer
check-outs, purchasing, distribution, inventory management and the provision of
information in a timely manner. Store Systems. All of our stores are equipped with point-of-sale
scanners. Transactions recorded by laser scanners located at the check-out
aisle permit the reporting of real time information regarding product sales.
Each laser scanner reads bar codes imprinted on the labels of all of our
products, enabling us to accurately record all transactions. The computers in
our stores nationwide are connected to the central mainframe at our
headquarters, permitting both senior managers and store managers to receive
near real time information by store, SKU or product category, including both
sales volume and margins, thus enhancing inventory management, cost controls
and sales tracking. We also use radio frequency inventory devices for our
stores, which allows inventories to be taken in a faster and more accurate
manner. Furthermore, our stores are interconnected with the Transbank credit
approval system in connection with both our Prestocredit card and other bank
credit cards, as well as with entities such as RedBanc which allow us to offer
in-store ATM machines for our customers. The store systems are supplemented by
point of sale technology at our distribution center and at the receiving points
for supplies at store locations, thereby permitting strict control over
incoming as well as outgoing merchandise. Management Information Systems. We have consistently invested in modern
computer hardware and software in order to improve the efficiency of our
accounting, control systems and financial management operations and employ 50
computer professionals. Although some of our software was developed in-house,
we principally rely on outside vendors to purchase software platforms which we
then modify to respond to our unique specifications. These platforms include:  
    
    in connection with distribution, TRIM and SLIM (both as
described above) and Worldwide Chain Store System (a warehouse
management system);
    
    in our stores, the IBM Supermarket Application platform (POS
software); and
    
    in our headquarters, the SAP platform (back-office solutions)
and a platform developed in-house for core business management,
commercial tools, price and promotion management inventory service
levels). We use the electronic data interchange (EDI) system to integrate our suppliers
within our systems, thereby reducing the paperwork and delays in communications
with our suppliers. We are currently implementing greater integration with our
suppliers, including electronic invoicing, and developing a business continuity
plan and enhanced system redundancy. Employees and Human Resources At December 31, 2003, we had a total of 19,494 full-time equivalent
employees. Of those employees, 17,703 were employed in stores (including the
303 full-time equivalent employees employed in our FarmaLiderpharmacies), 675
were employed in our distribution facilities and 1,116 were employed in our
headquarters and other business units. As part of our Faro Project, we have
increased the 34




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number of our part-time employees and reduced the number of our full-time
employees. This allows us to maximize efficiencies in our labor cost structure
by reducing excess staffing during non-peak hours. At December 31, 2003, approximately 1.5% of our employees were represented
by three independent unions. Other store employees negotiate collective
contracts at each store, which generally have a term of three years. Employees
receive benefits established by the collective bargaining agreements, benefits
provided for by law (including disability insurance) and certain additional
benefits provided for by us, including scholarships for children of employees
and assistance in financing the purchase of homes. We also operate a
merit-based, quarterly bonus program for our employees. The bonus is
determined in accordance with clearly-defined criteria, including our overall
performance, the performance of the employees store, his or her performance
relative to specific targets established at the beginning of the year and other
more subjective standards. We recognize that any service industry depends fundamentally on the
training and motivation of its employees. As a result, we attempt to develop a
distinctive corporate culture that explicitly affirms the value of the
individual employee and encourages the development of the individuals skills.
Employees are regularly briefed on the performance of their store and our
company as a whole and are expected to attend ongoing training programs. In
2003, 16,155 associates were trained in 942 courses, 429 of which were offered
directly by the company and 513 by third parties. Competition Our retail competitors include hypermarkets, supermarkets, self-service
stores, department stores, home supply stores and pharmacies. In recent years,
each of these store categories has expanded its product offerings to compete
for an increasing share of consumer spending in overlapping markets. Although
competition is already intense in many locations, we expect it to increase as
existing competitors expand the number of their stores and improve the quality
of their operations and as new competitors enter the market. Our principal
competitive strategy is to be the low-price leader in Chile. We operate the largest chain of hypermarkets and supermarkets in Chile in
terms of net sales. Our largest competitors are Cencosud, the owner of the
Jumboand Santa Isabelchains, and Unimarc. Cencosuds Jumbo, a hypermarket
operator, focuses on the middle and high-income sectors of the population
emphasizing a broad range of high quality goods and services. Santa Isabel, a
supermarket operator, is especially strong in the regions outside the capital
city. The combined market share of Jumboand Santa Isabelin 2003 was
approximately 19.4%. Unimarc,our second largest competitor,is a traditional
supermarket chain focusing on the middle and high-income sectors. Its market
share in 2003 was approximately 3.5%. The following table sets forth estimates of the percentage of annual
supermarket net sales attributable to each of the eight largest supermarket
companies in Chile in terms of 2003 net sales and the estimated number of
stores owned by such company at December 31, 2003. Percentage
    
    Numberof Sale
    
    of StoresD&S(1)
    
    
    33.5
    %
    
    
    75Cencosud(2)
    
    
    19.4
    
    
    
    82Unimarc
    
    
    3.5
    
    
    
    39San Francisco
    
    
    3.2
    
    
    
    9Montserrat
    
    
    3.0
    
    
    
    20Montecarlo
    
    
    2.7
    
    
    
    14Rendic
    
    
    2.5
    
    
    
    14Las Brisas
    
    
    2.0
    
    
    
    17Others
    
    
    30.3
    
    
    
    408Total
    
    
    100.0
    %
    
    
    678
 35




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(1)
    
    Includes Lider, Lider Vecino, and Lider Express,and Carrefour stores
acquired on January 7, 2004.(2)
    
    Includes Jumbohypermarkets and Santa Isabelsupermarkets. Asociación de Supermercados de Chile
 As a result of our efforts to increase our share of Chilean family
spending by emphasizing the areas of our business which are considered
non-traditional for the supermarket industry (housewares and furniture,
electronics and appliances, apparel, pharmaceuticals and cafeterias), we
compete in a market that is larger than the supermarket industry. With respect
to our non-food product offerings, our principal competitors at December 31,
2003 included department stores such as Ripley and Falabella, and hardware and
home supply centers such as Home Store. This market provides numerous
opportunities to expand the scope of our business but also exposes us to new
competitors with greater expertise and experience in the non-food areas. Trademarks, Tradenames and Service Marks We own certain trademarks, tradenames and service marks used in our
business, including Lider, Lider Vecinoand Lider Expressand their respective
logos, covering the Chilean market. We also own trademarks of our superseded
store formats, including Almacand Ekono. We also own, or hold licenses to
use, our private label brands including Lider, Buffet, Acuentaand BLVD. We
believe that our trademarks, tradenames and service marks are valuable assets,
which differentiate us from our competitors. Our brands are duly registered
under applicable law. Insurance We maintain insurance policies covering, among other things, fires,
earthquakes, floods and general business and third party liability. Our
management believes that our insurance coverage is adequate for our business. Regulation We are subject to a full range of governmental regulation and supervision,
including labor laws, social security laws, public health laws, consumer
protection laws, environmental laws, securities laws and anti-trust laws in
Chile. These include regulations to ensure sanitary and safe conditions in
sale and distribution facilities of foodstuffs and requirements to obtain
construction permits for our new facilities. We believe that we are in
compliance in all material respects with all applicable statutory and
administrative regulations. Except for government licenses required for the sale of alcoholic
beverages, baked goods, pharmaceuticals, seafood and vegetables and customary
business licenses required by local governmental authorities, there are no
special governmental licenses or permits required for the sale and distribution
of foodstuffs or other products in Chile. Our supermarkets are subject to
inspection by the Servicio Nacional de Salud(National Health Service), which
inspects supermarkets on a regular basis and takes samples for analysis. We
regularly hire a private inspection company to undertake private inspections of
our facilities to ensure that they meet or surpass all Chilean health
standards. Our supermarkets are also subject to inspection by the Servicio
Agrícola y Ganadero(Agricultural and Livestock Service). Concessionaires that
operate pharmacies within some of our supermarkets are also subject to
licensing and inspection by the SNS. In addition, the Chilean Antitrust Commission has broad regulatory powers
and is empowered to intervene to prevent acquisitions tending to decrease the
levels of competition in the marketplace or 36




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##### Table of Contents



anticompetitive behavior in general. The Chilean government recently
issued findings and recommendations related to a fact finding investigation
regarding procurement practices in the food retailing sector. These findings
and recommendations noted the potential for abuse of market position by
supermarket companies in their relationship with suppliers and recommended the
implementation of rules of conduct that would safeguard the functioning of the
market. We believe our procurement policies comply with applicable laws and regulations.
Moreover, we plan to consider any additional recommendations agreed by the
Chilean supermarket industry relating to the foregoing. With respect to our credit card business, we are currently exempt from
Chilean regulations affecting the administration of bank credit cards. At
present, there are no regulations in Chile affecting in-store credit cards,
such as our Prestocard, that cannot be used in unaffiliated stores or in other
commercial contexts. However, the Chilean Congress is currently considering
two bills which, if passed, may require additional disclosure by retail
companies granting credit to consumers. The first bill would amend the
Chilean Consumer Rights Law to require that retail companies granting direct
credit to customers inform the customers about certain terms and conditions of
the credit, including interest rates, costs and extrajudicial collection fees.
The second bill under consideration would amend the Chilean laws governing
capital markets to allow the Superintendency of Banks and Financial
Institutions to oversee companies issuing credit cards or allowing customers to
use other similar means of credit. This amendment would require such companies
to disclose to the Superintendency of Banks and Financial Institutions
information regarding interest rates and the total amount of credit granted.
We cannot determine at this time the likelihood that these two bills will be
passed or the specific nature of the new regulations that may be enacted
although we note that the first bill described above has been passed by the
Chilean Congress and awaits only presidential approval before it becomes
effective. Capital Expenditures The supermarket business is capital intensive. Over the past five years,
we have invested approximately US$441 million in capital expenditures,
primarily to develop and expand our store formats. In 2004 and 2005, we expect
to invest a total of Ch$118,600 million or US$200 million in capital
expenditures primarily to open 15 new stores in Chile, not including the seven
stores acquired from Carrefour. We expect that the majority of these stores
will be built on properties owned by us, and two will be built on leased sites.
We expect to open seven stores before the end of 2004 in addition to the seven
supermarkets we purchased from Carrefour Chile. In 2004, we also plan to open
a new warehouse to store all our frozen goods. The following table sets forth our actual capital expenditures for 2001,
2002 and 2003 and projected capital expenditures for 2004 and 2005. Our actual
capital expenditures may vary substantially from the projected numbers set
forth below as a result of competition and the cost and availability of the
necessary funds. 37




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Actual for year endedDecember 31,
    
    Projected
    
    Total Projected2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2004-2005Number of stores at beginning of period
    
    
    52
    
    
    
    54
    
    
    
    62
    
    
    
    68
    
    
    
    81
    
    
    
    68New stores opened or acquired
    
    
    3
    
    
    
    8
    
    
    
    6
    
    
    
    14
    
    
    
    8
    
    
    
    22Stores sold or closed
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Existing stores remodeled or expanded
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Existing stores transformed into
another format
    
    
    2
    
    
    
    6
    
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    2Number of supermarkets at end of period
    
    
    54
    
    
    
    62
    
    
    
    68
    
    
    
    81
    
    
    
    89
    
    
    
    89Format of stores at end of year:Almac/Lider Express(1)
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Ekono/Lider Express(1)
    
    
    28
    
    
    
    23
    
    
    
    22
    
    
    
    22
    
    
    
    26
    
    
    
    26Lider-Lider Mercado(2)
    
    
    17
    
    
    
    22
    
    
    
    23
    
    
    
    33
    
    
    
    34
    
    
    
    34Lider Vecino
    
    
    5
    
    
    
    13
    
    
    
    19
    
    
    
    23
    
    
    
    26
    
    
    
    26Ch$71,199
    
    Ch$68,842
    
    Ch$44,159
    
    Ch$132,931
    
    Ch$59,300
    
    Ch$192,231Capital expenditures(3)
    
    (US$99.1)
    
    (US$115.9)
    
    (US$74.4)
    
    (US$224)
    
    (US$100)
    
    US$324
  (1)
    
    Transformed into Lider Expressbeginning September 2003(2)
    
    Lider Mercadowas transformed into Liderbeginning September 2003(3)
    
    In millions of constant Chilean pesos and U.S. dollars. For 2004,
includes the 100 million (Ch$73,631 million) used to acquire Carrefour
Chile S.A. Exchange rate: US$1.00 = Ch$593.80 as of Dec. 31, 2003. Legal Proceedings We are party to legal proceedings arising from the normal course of our
business which we believe are routine in nature and incidental to our
operations. We do not believe that the outcome of the proceedings to which we
currently are a party, other than as noted below, are likely to have a material
adverse effect on our operations, financial condition, results of operations,
cash flows or prospects. Disco-Ahold Litigation We are currently litigating a series of disputes stemming from the sale of
our former Argentine subsidiary, Ekono-Argentina,to Disco S.A. in December
1999. Under the terms of the sale, in May 2000 Disco S.A. paid us US$60
million of the US$150 million purchase price, with the balance of US$90 million
coming due in May 2003. Of this US$90 million, US$80 million was evidenced by
ten promissory notes of US$8 million each, and US$10 million was held by Disco
S.A. as collateral for certain liabilities of Ekono-Argentinato be borne by
our company. The deferred payment amount was guaranteed by Disco S.A.s parent
company, Disco-Ahold International Holdings N.V., a Netherlands Antilles
Company. We were informed in December 2002 that Disco S.A. did not intend to
pay us the entire US$90 million amount in dollars, but would instead convert
the US$90 million balance owed to us into Argentine pesos under then-prevailing
Argentine dollar convertibility regulations. On May 2, 2003, Disco S.A. made
payment of A$126 million. After approval by the Central Bank of Argentina in
August of 2003, this amount plus accrued interest was remitted to us based on
an effective exchange rate of A$3.0 to 1 U.S. dollar (US$42 million). Our company has steadfastly rejected the applicability of the Argentine
currency convertibility regime to Disco S.A. and to Disco-Ahold International
Holdings N.V., the guarantor, a non-Argentine entity, as to this obligation
(which was explicitly undertaken to be a U.S. dollar obligation). We have
retained counsel in Chile, Argentina and the Netherlands and are pursuing legal
actions in order to collect the amounts due to us. In April 2003, we initiated an action against the guarantor, Disco-Ahold
International Holdings N.V., in the Court of Curaçao in the Netherlands
Antilles. Our claim is for US$47.5 million plus interest and expenses. Both
parties have submitted initial papers to the court and expect final resolution
of our claim by the end of 2004. 38




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In April 2003, we initiated an action against the guarantors parent,
Royal Ahold, in the Court of Haarlem in the Netherlands. Our claim is for
US$47.5 million, plus interest and expenses to the extent not recovered from
Disco-Ahold. In January 2004, we initiated arbitration proceedings with Disco S.A.
before the Chairman of the Buenos Aires Bar in Argentina. Our claim is for
US$1.5 million, the amount we believe was wrongfully withheld by Disco S.A. We
expect final resolution of these proceedings by the end of 2004. Based on advice from counsel as to the likely results in these
proceedings, we have not provisioned for a potential loss regarding these
matters. 39




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Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS Basis of Presentation The following discussion should be read in conjunction with our audited
consolidated financial statements including the notes thereto included
elsewhere in this annual report. We prepare our financial statements in
accordance with Chilean GAAP, which differs in certain important respects from
U.S. GAAP. Note 25 to our audited consolidated financial statements provides a
description of the principal differences between Chilean GAAP and U.S. GAAP as
they relate to us and a reconciliation to U.S. GAAP of net income and total
shareholders equity. Chilean GAAP requires that financial statements recognize the effects of
inflation. We are therefore required to adjust our financial statements to
reflect the effect of variations in the purchasing power of the Chilean peso
during each year. See Impact of Inflation, Price-level Restatement and
Foreign Exchange and Note 2 to our consolidated financial statements. Unless otherwise specified, our financial data is presented in this annual
report in constant Chilean pesos of December 31, 2003 purchasing power. Certain of our liabilities are denominated in Unidades de Fomento(UFs).
A UF is a daily, inflation-indexed, Chilean peso-denominated monetary unit
which is set in advance based on changes in the Chilean CPI of the immediately
preceding month. The adjustments to the closing value of UF-denominated assets
and liabilities are included in the price-level restatement account in our
consolidated statements of income. Overview Key Factors Affecting Net Revenues and Results of Operations Our EDLP Business Model In mid-2003, we strengthened our commitment to our EDLP strategy, which
seeks to maintain a discernible difference in the total price of a basket of
goods purchased at our stores compared to the purchase price of the same basket
at competitors stores. In the short term, we expect our EDLP strategy to
reduce our operating margins. For 2003, for example, although our lower prices
were only implemented during the third quarter, our operating margin (operating
income as a percentage of net revenues) was 3.9% versus 4.0% for 2002. Over
time, however, we believe that the increased volume generated by our EDLP
strategy, combined with our efforts to increase our traffic levels, our ability
to cross-sell other products, and, ultimately to reduce our costs, should more
than offset the impact of our price reductions. Our
strengthened EDLP strategy had a positive impact on our net revenues in 2003,
helping fuel a 9.9% increase from Ch$1,058,719 million for 2002 to Ch$1,163,000
million (US$1,959 million) for 2003. At the same time, however,
our operating margins declined in 2003 because we were unable to
achieve cost reductions sufficient to offset the reductions in our
selling prices. In response to our EDLP strategy, our
chief competitors have sought to reduce their prices. This will maintain the
pressure on our operating margins as we seek to sustain a pricing differential
that is discernible to the consumer. Our EDLP strategy is designed to position us as the lowest price retailer
in Chile and is premised on several assumptions.  
    
    Low prices drive higher volume.According to market surveys,
price is one of the key factors Chilean consumers consider when
deciding where to shop. By maintaining a discernible price
difference compared to our competitors, we expect to attract more
customers to our stores. 40




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
    
    High traffic provides opportunities for cross-selling.We
intend to take advantage of the higher volume of customer traffic we
expect to generate through our EDLP strategy by cross-selling an
expanding range of quality non-food products and complementary
services to our customers. By capturing a greater share of the
consumers wallet, we expect to increase our revenues.
    
    Higher volumes and a clear every day low prices message
provide opportunities for economies of scale and cost reductions.
The success of our EDLP strategy in increasing our net income will
depend on our ability to achieve offsetting reductions in our costs.
In the third and fourth quarters of 2003, our operating margins
declined principally due to the implementation of our EDLP strategy.
Over time, however, we believe our higher volumes will allow us to
achieve economies of scale that are less available to lower-volume
competitors. We expect to reduce our costs by increasing the
centralization of our distribution facilities, increasing the use of
flow-through inventory management and lowering our advertising
costs, in part, by the consolidation of all of our stores under the
Liderbrand (which we accomplished in 2003). To date, our EDLP strategy has helped increase our customer traffic
levels, improve our net revenues and reverse a negative trend in our same store
sales. Our same store sales increased in 2003 by 0.3%, reversing a decrease of
1.4% for 2002. Key Factors Affecting Our Net Revenues Our Supermarket and Hypermarket Revenues.We generate our supermarket and
hypermarket revenues primarily from sales of groceries, perishables and
non-food products in our stores and contractually agreed upon participation
fees paid by suppliers to us for advertising and distribution services, special
promotions, and opening new stores. Product revenues are generally driven by
volume and average selling prices. Contractual vendor allowances are generally
a function of volume. Key factors influencing our hypermarket and supermarket
revenues include:  
    
    Pricing policies.  
    
    EDLP.In mid-2003, we began implementing our EDLP
strategy, which seeks to maintain a discernable difference in
the total price of a basket of goods purchased at our stores
compared to the purchase price of the same basket at
competitors stores. Despite a reduction in our operating
margins, our EDLP strategy was one of the principal factors
behind a 9.9% increase in our net revenues from Ch$1,058,719
million for 2002 to Ch$1,163,000 million (US$1,959 million)
for 2003.
    
    Product mix.The mix of products we sell has a
significant impact on our net revenues. In particular, because
non-food products generally have higher average margins than
our food products, our operating results are positively
affected as the proportion of non-food products in our product
mix increases. Sales of our non-food products represented
18.9% of our net revenues for 2003, versus 18.8% for 2002.  
    
    Expansion of sales area.Opening and acquiring new stores,
and expanding existing stores, has been one of the principal drivers
of sales volume in recent years, fueling much of our hypermarket and
supermarket revenue growth. In 2003, new or remodeled stores
accounted for 6.9% of our net revenues. We plan to add fourteen new
stores in 2004 (including seven acquired from Carrefour), and eight
new stores in 2005. In June 2004, we closed one of the seven stores
we acquired from Carrefour owing to its proximity to an existing
Liderstore. 41




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##### Table of Contents




    
    Chilean economic conditions.Our net revenues are strongly
influenced by changes in Chilean economic conditions that affect the
purchasing power and habits of our customers. Chile recorded GDP
growth of 2.8% for 2001, 2.1% for 2002 and 3.4% for 2003. During the
same period, unemployment declined from 7.9% for 2001 to 7.8% for
2002 to 7.4% for 2003. As of April 30, 2004, unemployment was 8.7%,
representing a slight increase as compared to 8.5% at April 30,
2003.
    
    Vendor Allowances.Vendor allowances, which are generally
recorded at an agreed-upon percentage of sales to customers, have
increased steadily as a percentage of our hypermarket and
supermarket net revenues over the last three years, primarily as a
result of our increased purchase volumes with our suppliers. We
expect this trend to continue to the extent we continue to increase
our purchase volumes with our suppliers. The following table sets forth, for the periods indicated, changes in net
revenues and same store sales together with certain macroeconomic indicators.
Same store sales means net revenues earned during the period for all stores
which were open and operated by us during the corresponding period in the
previous year, excluding stores which underwent renovation during the prior
twelve months: Year Ended December 31,2001
    
    2002
    
    2003Increase in net revenues during period
    
    
    10.3
    %
    
    
    11.5
    %
    
    
    9.8
    %Increase in sales of groceries, perishables and non-food items during the period
    
    
    9.5
    
    
    
    10.0
    
    
    
    9.0Increase (decrease) in same store sales
    
    
    3.0
    
    
    
    (1.4
    )
    
    
    0.3Increase (decrease) in suppliers fees
    
    
    16.7
    
    
    
    20.7
    
    
    
    9.8Increase in selling space (1)
    
    
    21.6
    
    
    
    45.7
    
    
    
    25.7Increase (decrease) in sales per square meter
    
    
    5.0
    
    
    
    (4.7
    )
    
    
    1.2Increase in Chilean GDP(2)
    
    
    2.8
    
    
    
    2.1
    
    
    
    3.4Increase in Chilean consumption
    
    
    1.4
    
    
    
    1.4
    
    
    
    2.6
    (2)
  (1)
    
    In square meters.(2)
    
    Preliminary estimates. Credit Card Revenues.We generate our credit card revenues primarily from
finance charges on outstanding balances and late fees charged to our credit
card customers. Our credit card revenues depend primarily on the total number
of active Prestoaccounts, the average outstanding balances on those accounts,
and the average interest rates we charge on those balances. We include, as part
of our total trade receivables amounting to Ch$101.3 million, Ch$76.3 million
of trade accounts receivable of our Prestosubsidiary, to be received from
Prestocard users. Key factors influencing our credit card
revenues include:  
    
    Food Sales.In 2003, our Prestocard was used in
approximately 9.7% of our sales with respect to food products as
compared to 6.5% for 2002. Sales of food products represented 81.1%
of our sales for 2003 as compared to 83.4% for 2002.
    
    Non-Food Sales.The expansion of our retail business to
include higher priced durable goods, such as household appliances
and electronics, has contributed to the growth of our credit card
business. Our customers often require credit to purchase these
higher-priced items. For 2003, our Prestocard was used in
approximately 29.8% of our sales in non-food areas as compared to
15.5% in 2002. Sales of non-food products represented 18.9% of our
sales for 2003 as compared to 16.6% in 2002. We believe our strategy
of expanding our non-food offerings will continue to play a major
role in the net revenues generated by our credit card business.
    
    Number of Accounts.At December 31, 2003, we had a total of
652,541 accounts in good standing, representing an increase of 43.3%
compared with 455,403 accounts in good 42




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standing at December 31, 2002. The increase was driven primarily by
our devotion of greater resources to this business and expansion of
our promotional activities relating to our Prestocard.
    
    Average account balances.Average account balances are
generally a function of the credit limits we allocate to each
account, and the frequency with which the cards are used as well as
the average purchase volume. We set credit limits by analyzing an
applicants current income and credit record as obtained from
Chilean credit agencies.
    
    Finance charges.Since we intend to use our Prestocard to
help increase our total sales volume, our goal is to offer interest
rates that are competitive with those offered by the in-store credit
cards of our principal competitors in order to complement our low
prices on our products. Other revenues.Our other revenues include revenues from our real estate
operations, which primarily comprise revenues from lease payments from
merchants that lease space in our stores and malls. Except for 2003, when
increased lease payments derived from other revenues resulted in an appreciable
increase (See  Results of Operations  2003 Compared to 2002  Net Revenues 
Other Revenues below), our other revenues have remained relatively constant,
owing principally to the fact that we have not opened new shopping centers in
recent years and that we do not own the property on which many of our newer
stores operate. We expect these revenues to remain constant for 2004 because we
do not intend to expand our real estate activities significantly. Key Factors Affecting Our Cost Structure Cost of Sales and Gross Profit.Our cost of sales includes our purchasing
costs associated with our products, plus the shrinkage from our store
operations, plus reductions in the prices of our products related to promotions
that are not offset by corresponding decreases in the cost of such products to
us. Shrinkage includes losses in inventory, losses and damage of our products
during transportation and losses caused by theft. As part of our EDLP strategy,
we have significantly reduced the prices our customers pay for our products. A
key element of our strategy is to seek corresponding reductions in the cost of
our products. We have sought to reduce these costs in part by increasing the
volume and, thereby, improving the terms of our purchases from our suppliers.
As we have increased our sales of higher-priced non-food products, shrinkage
has become an increasingly important factor in our cost structure. Selling and Administrative Expenses.Our selling and administrative
expenses primarily include the following costs: labor and personnel, utilities,
advertising, maintenance, credit card commissions paid to third parties,
insurance and provisions for doubtful accounts related to our credit card
business.  
    
    Our Faro Project.Through our Faro Project, we seek to
improve our operating efficiency by, in part, reducing our cost
structure. A part of our effort to reduce our costs includes our
plan to reduce our labor costs by increasing the number of part-time
workers in our stores. We believe that part-time workers will allow
us to better manage our labor costs by reducing excess staffing
during non-peak hours.
    
    Advertising expenses.Our advertising expenses have decreased
as a percentage of our net revenues over the past three years. Over
time, we expect that our EDLP strategy, which does not rely on
weekly mailings to promote sales, will allow us to reduce our
advertising costs further.
    
    Provisions for doubtful accounts.In connection with our
credit card operations, we record an allowance for doubtful
accounts, which is used to offset write-offs and maintain an
allowance 43




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deemed appropriate to the amount of total receivables. Our allowances
for doubtful accounts have risen in recent years and are primarily a
function of the total number of credit card accounts and delinquency
rates. Moreover, our new management team for our credit card
operations has in recent years increased our allowances for doubtful
accounts as we have expanded our credit card operations. We record
provisions of a set percentage of outstanding balances for each past
due credit card loan and evaluate these provisions based on the
number of days past due and the historical behavior of our customers. As we continue to expand our credit
card business, we expect our aggregate allowance for doubtful accounts
to increase. Other Factors Affecting Our Net Income Price-level Restatement and Foreign Exchange Gain (Loss).As required by
Chilean GAAP, our financial statements have been price-level restated to
reflect the effect of changes in the purchasing power of the Chilean peso
during each period. See Note 2 to our consolidated financial statements.
Exchange rate differences arising on the settlement of monetary items at rates
different from those at which they were originally recorded are recognized in
our consolidated statements of income for the period. Because we finance a
portion of our current and fixed assets with short-term and long-term foreign
currency obligations and because of the amount of our non-monetary assets,
liabilities and income statement accounts which require price level restatement
under Chilean GAAP, price-level restatement and foreign exchange gain (loss)
can have a significant effect on our net income. Income tax expense.We account for income taxes using the asset and
liability method. Accordingly, deferred taxes are recorded for the differences
between the tax and book basis of assets and liabilities that will reverse in
future periods. Changes in the tax versus the book basis of certain of our
assets may, from time to time, increase our deferred tax liabilities in a given
period. In 2003, we recorded deferred tax liabilities due to increased tax
losses corresponding to losses of two of our subsidiaries, Administradora de
Concesiones Comerciales de Supermercados and Administradora de Concesiones
Comerciales de Hipermercados S.A., resulting from the opening of new stores. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with
Chilean GAAP with a reconciliation to U.S. GAAP. The preparation of our
consolidated financial statements requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities, including the
disclosure of contingent assets and contingent liabilities and the reported
amounts of revenue and expenses during the reporting period. Our critical
accounting policies are those that are most important to our financial
condition and results of operations and those that require the most difficult,
subjective or complex judgments by our management. On an on-going basis,
management evaluates its estimates and assumptions. Management bases its
estimates and assumptions on historical experience and various other factors
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Because of
the uncertainty of factors surrounding the estimates or judgments used in the
preparation of our consolidated financial statements, actual results may vary
from these estimates. We believe that the following policies are our critical accounting
policies. Vendor Allowances and Distribution Network Revenue We receive various types of previously agreed upon vendor allowances in
the form of rebates (in the form of cash or credits) and other forms of
payments that effectively reduce our cost of goods purchased from a vendor or
the cost of promotional activities conducted by us that benefit a vendor. Such
payments are generally presented for Chilean GAAP purposes as net revenues in
the income statement. 44




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For U.S. GAAP purposes, these payments are recorded as deductions from the
cost of sales. In addition, we receive previously agreed upon payments from
suppliers for use of our distribution system which are recorded as revenue and,
in U.S. GAAP, as deductions from cost of sales. The most common allowances offered are (1) volume allowances, which are
off-invoice based on the quantity of products purchased from a vendor and (2)
promotional allowances, which generally relate to reductions in sales prices to
customers for limited time periods which are reimbursed by the supplier to us.
Vendor allowances are recognized as income or an offset to expense, depending
on the Chilean GAAP convention. Rebates received relating to volume allowances are recognized on a
systematic basis as a reduction of the purchase price of the related products
as they are purchased or sold to customers. If these volume allowances are
contingent on achieving certain minimum volume targets, the allowances are
recognized only to the extent it is probable that the minimum volume targets
will be achieved and the amount of the allowance can be reasonably estimated. Promotional allowances are recognized as the sales to the customers which
are the requirement for earning the promotional allowance are made. Revenue from use of the distribution network is recognized as the service
is provided. Allowance for Doubtful Accounts and Delinquent Credit Card Balance Policy We maintain an allowance for doubtful accounts for estimated losses, which
results from our customers not making required payments. We perform ongoing
credit evaluations of our customers and adjust credit limits based upon payment
history and the customers current creditworthiness, as determined by our
review of their current credit information. Particularly, regarding our credit
card loss reserve, we base our allowance on the likelihood of loss in our
credit card loan portfolio based on past experience and by reviewing current
collection trends that are expected to continue. In addition, we discontinue
accruing interest on credit card loans that are more than 90 days past due and
write off credit card loans that are more than 360 days past due. Prior to
April 2004, we wrote off annually at December 31st. Beginning in the second
quarter of 2004, we will perform such write-offs on a quarterly basis. In
addition, we record provisions of a set percentage of outstanding balances for
each past due credit card loan and evaluate these provisions based
on the number of days past due and the historical behavior of our
customers.
Changes in the levels of provisions we record are recognized in the
results for each period during which these changes are introduced.
These changes historically have not caused large fluctuations in our
results. We
believe that our policy for recording our provisions for doubtful accounts and
credit card loan loss reserve is a critical accounting estimate because of the
uncertainty related to the collectibility of these receivables. In addition,
any assumption we make about when to discontinue accrual of interest income on
delinquent accounts may differ from our actual experience of interest income
default. If actual experience differed from our estimate, we would be required
to adjust our provisions and allowances for doubtful accounts. Receivable from Disco S.A. We believe that our receivable from Disco S.A. for the sale of
Ekono-Argentinawill ultimately be collected. The lack of a valuation allowance
for this receivable is a critical accounting policy as management must make
decisions regarding the viability of legal recourse where the outcome is
uncertain. Moreover, if we are unable to recover, or if we determine that it is
probable that we would be unable to recover any remaining amount and that the
amount of such loss is estimable, we would be required to create a valuation
allowance for such amount. 45




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Inventories Inventories are valued at price-level restated purchase cost, on a
weighted-average-cost basis, which does not exceed their net realizable sale
value. Products that are obsolete or out of season are sold during the year.
Eventually, allowances for obsolescence could exist for those products that are
not sold in that year. Our allowance for obsolescence is based on our estimate
about assumptions related to sales volume, seasonal trends, etc. In addition,
we book to cost of goods sold our estimated shrinkage related to damage and
pilferage. This estimate is trued up periodically to our actual experience. We
consider the valuation of inventories to be a critical accounting policy due to
the uncertainty inherent in such assumptions. Should our assumptions prove to
have been optimistic, we would adjust our inventory obsolescence reserve
accordingly with the consequent impact on our results of operations. Purchase Accounting and Goodwill Goodwill includes the cost of acquired subsidiaries in excess of the
carrying value of the net assets recorded in connection with acquisitions.
Accounting for goodwill requires managements estimate regarding (1) the
amortization period and (2) the recoverability of the carrying value of
goodwill. Factors that are considered in estimating the useful life of goodwill include:  
    
    the foreseeable life of the business or industry;
    
    the effects of product obsolescence, changes in demand and other economic factors;
    
    the service life expectancies of key individuals or groups of employees;
    
    expected actions by competitors or potential competitors; and
    
    legal, regulatory or contractual provisions affecting the useful life. We have considered goodwill as an asset with an indefinite life and have
therefore always used the maximum amortization period allowed under Chilean
GAAP for goodwill which is 20 years and the same for U.S. GAAP (prior to the
adoption of SFAS No. 142). Under Chilean GAAP and U.S. GAAP, goodwill is tested for impairment when
events or changes in circumstances so require (as well as annually under U.S.
GAAP). Such changes in circumstances have not occurred nor have we, under U.S.
GAAP, determined that our carrying value is less than our estimated fair value. Our goodwill as of December 31, 2003 primarily originated from the
purchase of Fullmarket S.A. (currently known as Maquinsa S.A.) in 1996. In January, 2004, we acquired Carrefour Chile. On January 1, 2004,
Technical Bulletin 72 became effective for business combinations in Chile. This
bulletin requires that goodwill be calculated in a manner similar to U.S. GAAP.
However, unlike U.S. GAAP, goodwill will continue to be amortized over a
maximum 20 year life as well as tested annually for impairment. Therefore, the
goodwill related to our acquisition of Carrefour Chile will be determined under
this new pronouncement and the factors listed above considered in determination
of the useful life of the goodwill will continue to be used by us. In our
annual calculations of the implied fair value of goodwill for determination of
impairment, certain assumptions regarding the projected sales growth, operating
income, and projected amount for capital expenditures will be used. Because a
change in these assumptions could result in a significant change in 46




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the recorded amount of goodwill, we believe that the accounting for
goodwill is one of our critical accounting policies. Severance Indemnities We sponsor a severance indemnity plan for employees which is treated, for
accounting purposes, as a defined benefit plan. The defined benefit pension plans pay benefits to employees at retirement
using formulas based on participants years of service and compensation. We
fund these plans as claims are incurred. Recorded severance indemnities reflect our best estimate of the future
cost of honoring our obligations under these benefit plans. We believe the
accounting estimate relating to costs for pensions is a critical accounting
estimate because changes in it can materially affect the projected benefit
obligations and net periodic pension costs. In accounting for defined benefit
plans, we make actuarial calculations. These calculations contain key
assumptions, which include: discount rates and employee service lives. The
assumptions for the calculations are uncertain and require judgment. Should
these assumptions change, our pension benefit obligation would require increase
or decrease in the balance sheet and the recording of the offsetting effect in
the income statement. Property, Plant and Equipment Property, plant and equipment are stated at price-level restated purchase
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The preparation of consolidated financial
statements in conformity with Chilean GAAP requires us to make estimates and
assumptions, relating to the useful lives of such assets which affects the
reported amounts of such assets and disclosure at the date of the publication
of the financial statements as well as reported amounts of expenses during the
reporting periods. The factors which we use to determine the useful lives
include:  
    
    the estimated service life of the asset; and
    
    the estimated technological life of the asset. Impairment of Long-Lived assets We review long-lived assets 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 future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets, derived from the present value
of expected cash flows. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Recent Chilean GAAP Accounting Pronouncement In January 2003, the Chilean Association of Accountants issued Technical
Bulletin No. 72, Combinación de Negocios Inversiones Permanentes y
Consolidación de Estados Financieros. This standard complements or replaces
existing accounting literature for business combinations under Chilean GAAP,
and requires all acquisitions initiated after January 1, 2003 to be accounted
for using the purchase method based on fair values of assets acquired and
liabilities assumed. In addition, in exceptional cases, the
pooling-of-interest method may be used in reorganizations between related
parties or for those transactions, where there is no clear acquirer.
Technical Bulletin No. 72 continues to require the amortization of goodwill,
and specifies the requirement for an impairment test. Notwithstanding any 47




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future transactions, the adoption of Technical Bulletin No. 72 is not
expected to have a significant effect on our results of operations, financial
position or cash flows of the company. Results of Operations The following table sets forth, for the periods indicated, certain items
in our income statement and their respective percentages of net revenues: Year ended December 31,2001
    
    2002
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    (77.5
    )
    
    
    (77.2
    )
    
    
    (77.5
    )Gross income
    
    
    22.5
    
    
    
    22.8
    
    
    
    22.5Selling and administrative expenses
    
    
    (16.6
    )
    
    
    (18.8
    )
    
    
    (18.6
    )Operating income
    
    
    6.0
    
    
    
    4.0
    
    
    
    3.9Non-operating income
    
    
    0.2
    
    
    
    0.1
    
    
    
    Non-operating expenses
    
    
    (1.6
    )
    
    
    (2.0
    )
    
    
    (1.6
    )Price-level restatement and foreign exchange gain (loss)
    
    
    0.6
    
    
    
    0.5
    
    
    
    (0.1
    )Taxes
    
    
    (0.8
    )
    
    
    (0.4
    )
    
    
    (0.6
    )Net income
    
    
    4.3
    %
    
    
    2.3
    %
    
    
    1.8
    %
 2003 Compared to 2002 For 2003, our net revenues increased 9.9% compared to 2002 to Ch$1,163,000
million (US$1,958.6 million). Our operating income rose to Ch$45,242 million
(US$76.2 million) for 2003, an increase of 6.0% compared to Ch$42,665 million
for 2002. These improvements in our net revenues and operating income resulted
primarily from the opening of new stores, the improved performance of the
Chilean economy and the implementation of our EDLP strategy. Despite the
increases in our net revenues and operating income, our net income for 2003
decreased by 13.3% to Ch$20,819 million (US$35.1 million) as compared with
2002. This decline in our net income resulted primarily from net price level
restatement, an increase in our income taxes and other financial expenses that
more than offset the decline in non-operating expenses incurred in connection
with restructuring charges in 2002 associated with severance payments to former
management and employees. In December 2002, we announced significant changes
to our senior management team, including the appointment of a new chief
executive officer, as well as the departure of four senior executives and
another 70 employees in the corporate offices. Net Revenues.Our net revenues for 2003 were Ch$1,163,000 million
(US$1,958.6 million), which represented an increase of 9.9% compared to
Ch$1,058,719 million for 2002. The following table sets forth the composition
of our net revenues for the periods indicated and the percentage change between
periods. Year ended December 31,2002
    
    2003
    
    % change(in millions of constant Ch$)Hypermarket and Supermarket
    
    Ch$
    1,022,833
    
    
    Ch$
    1,112,258
    
    
    
    8.7
    %Credit cards
    
    
    11,257
    
    
    
    19,086
    
    
    
    69.6Other
    
    
    24,629
    
    
    
    31,656
    
    
    
    28.5Total
    
    Ch$
    1,058,719
    
    
    Ch$
    1,163,000
    
    
    
    9.9
 The 9.9% increase in our net revenues for 2003 resulted primarily from: 48




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
    
    Hypermarkets and Supermarkets. A 8.7% increase in net
revenues derived from our hypermarket and supermarket business,
to Ch$1,112,258 million (US$1,873 million) for 2003 from
Ch$1,022,833 million for 2002. This increase resulted from an
addition of 23,983 square meters of sales area (one new Lider
hypermarket, three new Lider Vecinocompact hypermarkets and two
new Lider Expresssupermarkets), an increase of approximately 8%
over the total sales area at December 31, 2002. These new stores
accounted for 9.3% of our hypermarket and supermarket sales for
2003. Another factor which contributed to the increase in
hypermarket and supermarket business was a 0.3% increase in
same-store sales compared to 2002, compared to a decline of 1.4%
in same-store sales in 2002, which we believe resulted from the
implementation of our EDLP strategy, which helped to increase our
customer traffic levels and, consequently, our net revenues, as
well as the improved performance of the Chilean economy.
    
    Credit Card. An 69.6% increase in net revenues derived
from our credit card operations compared to 2002 reflecting an
increase in our net financial revenues, including primarily
interest and commissions, to Ch$19,086 million (US$32.14 million)
for 2003 from Ch$11,257 million for 2002, which increase was
attributable to a 43% increase in the number of active accounts,
an increase in average monthly account balances per individual
account to Ch$128 million for 2003 from Ch$92 million for 2002,
and our promotion of sales of non-food products through our
Prestocard, leading to increased use of our Prestocredit card
to purchase higher priced non-food products.
    
    Other Revenues. A 28.5% increase in net revenues
derived from other revenues to Ch$31,656 million (US$53.3
million) for 2003 from Ch$24,629 for 2002. This increase
resulted primarily from increased lease payments received from
merchants leasing space in our stores and in our shopping
centers. Cost of Sales and Gross Profit. Our gross profit for 2003 was Ch$261,885
million (US$441.0 million), representing an increase of 8.4%, compared to
Ch$241,642 million for 2002. As a percentage of net revenues, our cost of sales for 2003 was 77.5%
compared to 77.2% for 2002. Shrinkage for 2003 remained constant at 2.0% of
total sales, as compared to 2.0% of total sales for 2002. The increase in cost
of sales as a percentage of net revenues was principally attributable to the
implementation of our EDLP strategy in the second half of 2003 by which we
reduced our prices by a greater amount than we were able to reduce our costs of
sales. As a result of our increase in cost of sales as a percentage of net
revenues, our gross margin in 2003 declined to 22.5% from 22.8% for 2002. We
expect to experience continued pressure on our gross margin in connection with
our EDLP strategy. Selling and Administrative Expenses.Selling and administrative expenses
for 2003 were Ch$216,643 million (US$364.8 million), representing a 8.9%
increase as compared to Ch$198,977 million for 2002. As a percentage of net
revenues, selling and administrative expenses fell to 18.6% for 2003 from 18.8%
for 2002 principally due to decreased advertising expenses and labor costs,
which were partially offset by increased utilities costs in each case as a
percentage of net revenues. Our selling and administrative expenses related to our credit card
operations increased 81.5% to Ch$14,346 million for 2003 (US$24.2 million) from
Ch$7,904 million (US$13.3 million) for 2002. This increase was principally
attributable to our allowance for doubtful accounts which increased 139.5% for
2003 compared to 2002 and other expenses which increased 24.4% for 2003
compared to 2002. 49




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Operating Income.Our operating income for 2003 was Ch$45,242 million
(US$76.2 million), representing an increase of 6.0% as compared to Ch$42,665
million for 2002 reflecting the revenue and cost trends described above. As a
percentage of net revenues, operating income for 2003 was 3.9%, representing a
decrease of 0.1% as compared to operating income of 4.0% of net revenues for
2002. Non-operating Income.The following table sets forth, for the periods
indicated, information concerning our non-operating income on a consolidated
basis: Year ended December 31,2002
    
    2003(in millions of constant Ch$)Interest income
    
    Ch$
    459
    
    
    Ch$
    539Other non-operating income(1)
    
    
    515
    
    
    
    592Amortization of negative goodwill
    
    
    346
    
    
    
    353Total non-operating income
    
    Ch$
    1,320
    
    
    Ch$
    1,484
   (1)
    
    Other includes principally equity in earnings of related companies. Non-operating Expense.The following table sets forth, for the periods
indicated, the components of our non-operating expenses on a consolidated
basis: Year ended December 31,2002
    
    2003(in millions of constant Ch$)Financial expense
    
    Ch$
    13,522
    
    
    Ch$
    16,408Minority interest
    
    
    63
    
    
    
    43Other non-operating expense(1)
    
    
    6,372
    
    
    
    1,286Amortization of goodwill
    
    
    795
    
    
    
    795Total non-operating expense
    
    Ch$
    20,752
    
    
    Ch$
    18,532
   (1)
    
    Other includes equity in losses of related companies, charitable
contributions and, in 2002, severance payments to former management and
employees including our former Chief Executive Officer, current director
and controlling shareholder, Mr. Nicolás Ibáñez Scott. Non-operating expense for 2003 was Ch$18,532 million (US$31.2 million),
representing a decrease of 10.7% compared to non-operating expense of Ch$20,752
million for 2002. This decrease for 2003 resulted primarily from lower other
non-operating expenses for 2003 of Ch$1,286 million (US$2.2 million), as
compared to Ch$6,372 million for 2002. Other non-operating expense was higher
for 2002 because of restructuring expenses incurred in connection with
severance payments made to former management and employees totaling Ch$4,997
million. See Item 7Major Shareholders and Related Party Transactions. Price-level Restatement and Foreign Exchange Gain (Loss).Our net
price-level restatement and foreign exchange gain (loss) amounted to a net loss
of Ch$872 million (US$1.5 million) for 2003, as compared to a net gain of
Ch$5,485 million for 2002. The net loss for 2003 is primarily attributable to
a Ch$2,997 million foreign exchange loss for 2003, compared to a Ch$5,004
million foreign exchange gain for 2002, reflecting the impact of exchange rate
variations on our foreign currency denominated assets. Income Taxes.Income taxes for 2003, including current and deferred
taxes, amounted to Ch$6,503 million (US$11.0 million), representing an increase
of 38.3% as compared to Ch$4,703 million (US$7.9 million) for 2002. This
increase occurred primarily because of a larger amount of fixed asset
acquisitions for 2003 resulting in an increase in deferred tax expense relating
to the book versus tax depreciation of such fixed assets. The statutory income
tax rate applicable to Chilean companies for 2003 was 16.5% of income before
income taxes, as compared to 16.0% for 2002. In accordance with Chilean law,
we and each of our subsidiaries compute and pay taxes on a separate,
unconsolidated basis. 50




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##### Table of Contents



Net Income.Net income in 2003 was Ch$20,819 million (US$35.1 million),
representing a decrease of 13.3% as compared to net income of Ch$24,015 million
in 2002. As a percentage of net revenues, net income was 1.8% in 2003, as
compared to 2.3% in 2002. 2002 Compared to 2001 Net income for 2002 was Ch$24,015 million, representing a decrease of
41.4% as compared to net income of Ch$40,952 million for 2001. As a percentage
of net revenues, net income was 2.3% for 2002, as compared to 4.3% for 2001.
The decline in our net income for 2002 was attributable primarily to a
reduction in our operating income resulting from increases in our operating
expenses such as our selling and administrative expenses and our cost of sales,
as well as from increased non-operating expenses, which together outweighed the
impact of increased net revenues and gross profit. Net Revenues.Our net revenues for 2002 were Ch$1,058,719 million, which
represented an increase of 11.5% as compared to Ch$949,713 million for 2001.
The following table sets forth the composition of our net revenues for the
periods indicated. Year ended December 31,2001
    
    2002
    
    % change(in millions of constant Ch$)Hypermarket and Supermarket
    
    Ch$
    920,136
    
    
    Ch$
    1,022,833
    
    
    
    11.1
    %Credit cards
    
    
    7,606
    
    
    
    11,257
    
    
    
    48.0Other
    
    
    21,970
    
    
    
    24,629
    
    
    
    12.1Total
    
    Ch$
    949,713
    
    
    Ch$
    1,058,719
    
    
    
    11.5
    %
 The 11.5% increase in our net revenues in 2002 resulted primarily from:  
    
    Hypermarkets and Supermarkets. A 11.1% increase in net
revenues derived from our hypermarket and supermarket business,
to Ch$1,022,833 million for 2002 from Ch$920,136 million for
2001. This increase resulted from the addition of 45,726 square
meters of sales area (the transformation of six Ekono
supermarkets into Lider Vecinohypermarkets, the opening of five
Liderhypermarkets, two Lider Vecinohypermarkets, and one Ekono
supermarket), an increase of approximately 17.3% over the total
sales area at December 31, 2001. Same-store sales decreased by
1.4% for 2002 compared to 2001, which reflected a lack of growth
in domestic consumption and additional competition that resulted
as we and our competitors continued to open new stores during
2002. The increase in our selling space more than offset the
costs we incurred in connection with rebranding our former Ekono
stores and opening our new locations for 2002.
    
    Credit Cards. A 48.0% increase in net revenues derived
from our credit card operations, resulting from an increase in
our net financial revenues, including primarily interest and
commissions to Ch$11,257 million for 2002 from Ch$7,606 million
for 2001, reflecting the increasing sale of our higher-priced
non-food products which our customers increasingly financed with
our Prestocredit card.
    
    Other Revenues. A 12.1% increase in net revenues
derived from other revenues to Ch$24,629 million for 2002 from
Ch$21,970 in 2001. Our net revenues from other sources remained
relatively constant in 2002 owing to the fact that we did not
open any new shopping centers in 2002 and that we do not own the
property on which many of our newer stores operate. 51




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Cost of Sales and Gross Profit. Gross profit for 2002 was Ch$241,641
million, representing an increase of 13.0%, as compared to Ch$213,794 million
for 2001. As a percentage of net revenues, our cost of sales for 2002 was 77.2%, as
compared to 77.5% for 2001. Shrinkage for 2002 represented 2.0% of total
sales, as compared to 1.7% of total sales for 2001. The increase in cost of
sales as a percentage of net revenues was principally attributable to the
increase in shrinkage as compared to 2001. Shrinkage increased for 2002
primarily because of changes to the product mix offered in our stores, notably
the increase in higher-priced non-food products such as home appliances and
electronics. As a result of the increase in cost of sales as a percentage of net
revenues, our gross margin for 2002 increased to 22.8% from 22.5% for 2001. The costs associated with our credit card business are included in our
selling and administrative expenses. Selling and Administrative Expenses.Selling and administrative expenses
for 2002 were Ch$198,977 million, representing a 26.6% increase as compared to
Ch$157,179 million for 2001. Additionally, selling and administrative
expenses, as a percentage of net revenues, were 18.8% for 2002, representing an
increase of 13.2% as compared to 16.6% for 2001. The increase in our selling
and administrative expenses in 2002 was largely the result of the opening of
new stores and the development of recently opened stores, as well as increased
losses as we expanded our credit card operations. As a percentage of net
revenues, selling and administrative expenses increased in 2002 because we were
unable to offset these increased expenses with corresponding growth of our net
revenues. Our selling and administrative expenses related to our credit card
operations increased 48.0% to Ch$7,904 million for 2002 from Ch$5,341 million
for 2001. This increase was principally attributable to our provisions for
doubtful accounts which increased 57.3% for 2002 compared to 2001 and other
expenses which increased 55.0% for 2002 compared to 2001. Operating Income.Our operating income for 2002 was Ch$42,665 million,
representing a decrease of 24.6% as compared to Ch$56,615 million for 2001
reflecting the variations described above. As a percentage of net revenues,
operating income for 2002 was 4.0%, representing a decrease of 33.3% as
compared to operating income of 6.0% of net revenues for 2001. Non-operating Income.The following table sets forth, for the periods
indicated, information concerning our non-operating income on a consolidated
basis: Year ended December 31,2001
    
    2002(in millions of constant Ch$)Interest income
    
    Ch$
    1,011
    
    
    Ch$
    459Other non-operating income(1)
    
    
    256
    
    
    
    515Amortization of negative goodwill
    
    
    346
    
    
    
    346Total non-operating income
    
    Ch$
    1,613
    
    
    Ch$
    1,320
   (1)
    
    Other includes principally gains on sales of fixed assets and tax
refunds. Non-operating income in 2002 was Ch$1,320 million, representing a decrease
of 18.1% compared to non-operating income of Ch$1,613 million in 2001. This
decrease was principally a result of a decrease in interest income. Non-operating Expense.The following table sets forth, for the periods
indicated, the components of our non-operating expenses on a consolidated
basis: 52




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##### Table of Contents



Year ended December 31,2001
    
    2002(in millions of constant Ch$)Financial expense
    
    Ch$
    12,777
    
    
    Ch$
    13,522Minority interest
    
    
    171
    
    
    
    63Other non-operating expense(1)
    
    
    1,689
    
    
    
    6,372Amortization of goodwill
    
    
    787
    
    
    
    795Total non-operating expense
    
    Ch$
    15,424
    
    
    Ch$
    20,752
   (1)
    
    Other includes equity in losses of related companies, charitable
contributions and, in 2002, severance payments to former management and
employees including our former chief executive officer, current director
and controlling shareholder, Mr. Nicolás Ibáñez Scott. Non-operating expense for 2002 was Ch$20,752 million, representing an
increase of 34.5% compared to non-operating expense of Ch$15,424 million for
2001. This increase resulted primarily from higher financial expenses and an
increase in other non-operating expenses for 2002 of Ch$6,372 million, as
compared to Ch$1,689 million for 2001. Other non-operating expense was higher
in 2002 because of charges recorded in connection with severance payments made
to former management and employees totaling Ch$4,997 million. See Item
7Major Shareholders and Related Party Transactions. Price-level Restatement and Foreign Exchange Gain (Loss).Our net
price-level restatement and foreign exchange gain (loss) amounted to a net gain
of Ch$5,485 million for 2002, as compared to a net gain of Ch$5,760 million for
2001. This net gain for 2002 was primarily attributable to a Ch$5,004 million
foreign exchange gain in 2002, compared to a Ch$6,234 million foreign exchange
gain in 2001, reflecting the impact of exchange rate variations on our foreign
currency denominated assets. Income Taxes.Income taxes for 2002, including current and deferred
taxes, amounted to Ch$4,703 million, representing a decrease of 38.2% as
compared to Ch$7,612 million for 2001. This decrease was attributable
primarily to changes in our deferred taxes and higher non-operating expenses,
resulting in part from severance payments in 2002 to former management and
employees. The statutory income tax rate applicable to Chilean companies for
2002 was 16.0% of income before income taxes, as compared to 15.0% for 2001. Starting on January 1, 2001, we began to record all deferred taxes arising
from temporary differences, tax losses and other events that create differences
between the book value and tax basis of our assets and liabilities. Pursuant
to Technical Bulletin No. 71 of the Chilean Institute of Accounts, deferred
taxes are accounted for by reference to the income tax rate effective during
the year in which such deferred taxes are recognized. In 2002, the income tax
rate began to increase progressively and is scheduled to reach a maximum of 17%
in 2004. In accordance with Chilean law, we and each of our subsidiaries
compute and pay taxes on a separate, unconsolidated basis. Net Income.Net income in 2002 was Ch$24,015 million, representing a
decrease of 41.4% as compared to net income of Ch$40,952 million in 2001. As a
percentage of net revenues, net income was 2.3% in 2002, as compared to 4.3% in
2001. Impact of Inflation, Price-level Restatement and Foreign Exchange Chilean GAAP requires that financial statements recognize the effects of
inflation. We are therefore required to adjust our financial statements to
reflect the effect of variations in the purchasing power of the Chilean peso
during each year. These adjustments are based on the variation of the official
Chilean CPI from December 1 to November 30 of each year, with the exception of
assets and liabilities denominated in foreign currency which are adjusted to
closing exchange rates at period-end. For practical reasons, the CPI
adjustment used to compute the price-level restatement is delayed one month.
See Note 2 to our consolidated financial statements for a description of these
price-level adjustments. 53




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Because of Chiles past history of relatively high inflation, the
financial markets have developed a system of borrowing or lending in UFs. The
debt associated with our long-term assets, including our property, plant and
equipment and the bulk of our other current assets and liabilities is
denominated in pesos and any adjustment necessary for price-level restatement
is reflected in the price-level adjustment account. The use of UF-denominated
transactions offsets the effect of inflation in the preparation of price-level
adjusted financial statements. For example, a company with UF-denominated
obligations will record both a financing cost (from the adjustment to the value
of the UF due to the effects of inflation) and a price-level gain (from holding
a liability during a period of inflation) of comparable amounts, excluding the
difference between actual inflation and the inflation rate used for purposes of
the UF index. In the case of UF-denominated assets, the price-level adjustment
(a loss) and the UF valuation (a gain) also offset each other, with the
exception of the difference in the UF index referred to above. The required price-level restatement of our non-monetary assets and
liabilities, equity and income-expense accounts in 2003, together with foreign
exchange gains (losses), resulted in a net loss of Ch$872 million (US$1.5
million), compared to a net gain of Ch$5,485 million in 2002. This was
principally due to lower rates of inflation applicable to our non-monetary
assets, the appreciation of the Chilean peso (affecting our dollar-denominated
assets) and the fact that a greater proportion of our liabilities are
denominated in Chilean pesos and not in UFs. We finance a portion of our current and fixed assets with short-term and
long-term liabilities denominated in foreign currency. Because assets are
generally restated using the Chilean CPI and liabilities in foreign currency
are restated to closing exchange rates, the price-level restatement line in our
consolidated statements of cash flows is affected by the relationship between
local inflation and the exchange rate of the Chilean peso against the
applicable foreign currency. Lower rates of Chilean inflation have increased
the relative importance of the foreign currency exchange rate conversion as a
component of the price-level restatement credit or charge in our consolidated
statements of income. Liquidity and Capital Resources Overview Our principal uses of funds are for capital expenditures, dividend
payments and the repayment of short-term and long-term liabilities. We have
historically met these requirements by using cash generated from our
operations, as well as through short-term and long-term debt. We believe that
these sources of funds, together with our cash and cash equivalents on hand,
will be sufficient to enable us to meet our currently contemplated capital and
debt service requirements. In 2004, we expect our major cash needs to include:  
    
    repayment or refinancing of short-term contractual
obligations in the amount of Ch$75,280 million (US$126.8 million);
    
    repayment or refinancing of outstanding debt incurred in
connection with our acquisition of Carrefour Chile S.A. in the
amount of Ch$53,000 million (US$90 million);
    
    budgeted capital expenditures of Ch$59,380 million (US$100 million);
    
    budgeted cash dividends of approximately Ch$17,250 million (US$29.1 million); and
    
    increased working capital needs, primarily in connection with
our planned expansion of our credit card operations in the amount of
Ch$41,500 million (US$70 million).   54




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We expect to meet these cash requirements in 2004 through a combination of:  
    
    existing cash resources and cash flow to be generated from our operations in 2004;
    
    additional short-term and long-term debt that we will incur as necessary; and
    
    and, potentially, the proceeds from equity offerings relating
to our capital increase approved by our shareholders in April 2004. Sources of Funds Cash and Working Capital.At December 31, 2003, we had net working
capital in the amount of negative Ch$31,161 million (negative US$52.5 million),
compared with net working capital of Ch$64,367 million at December 31, 2002. Net Cash Provided by (Used in) Operations.Net cash used in operations in
2003 was Ch$33,451 million (US$56.3 million), representing an increase of 13.8%
as compared to Ch$29,385 million in 2002. Funds derived from operations
consist principally of cash generated by our retail operations. Uses of Funds Contractual Cash Obligations.The following table summarizes our
contractual cash obligations and commercial commitments as of December 31, 2003
and the breakdown of such obligations in specified future periods. Payment due by period(in millions of constant Ch$ as of December 31, 2003)Contractual Obligation
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsLong-term bank debt,
including current portion
    
    Ch$
    53,846
    
    
    Ch$
    20,388
    
    
    Ch$
    13,154
    
    
    Ch$
    20,304
    
    
    Ch$
    Short-term bank debt
    
    
    49,450
    
    
    
    49,450
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    14,713
    
    
    
    5,420
    
    
    
    7,966
    
    
    
    1,327
    
    
    
    Purchase obligations
    
    
    240
    
    
    
    22
    
    
    
    44
    
    
    
    44
    
    
    
    130Bonds and commercial paper
    
    
    192,082
    
    
    
    59,768
    
    
    
    68,391
    
    
    
    16,200
    
    
    
    47,723Total contractual obligations
    
    Ch$
    310,331
    
    
    Ch$
    135,048
    
    
    Ch$
    89,555
    
    
    Ch$
    37,876
    
    
    Ch$
    47,853
 We have incurred our long-term debt obligations primarily to replace
certain short-term debt obligations and to enable us to pursue strategic
acquisitions. Subsequent to December 31, 2003, we acquired Carrefour Chile. In
connection with that acquisition we incurred additional short-term debt in the
amount of CH$ 53,000 million (US$90 million). We intend to refinance this
entire amount with additional short-term obligations. Dividends. In 2003, dividends paid totaled Ch$13,800 million (US$23.2
million), as compared with Ch$14,342 million in 2002. Chilean law generally
requires us to distribute a minimum of 30% of our net income to our
shareholders in the form of dividends. In addition to this requirement, we
have a general policy of declaring an annual dividend of at least Ch$0.10 per
share. For more information on our dividend policy, see Item 10  Additional
Information  Dividend Policy and Dividends. Capital Expenditures.Our capital expenditures in 2003 totaled Ch$44,159
million (US$74.4 million). These capital expenditures were invested in the
opening of six new stores, including three Lider 55




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Vecinocompact hypermarkets, one Liderhypermarket and two Lider Express
supermarkets, and the re-branding of all existing Ekonosupermarkets as Lider
Expresssupermarkets. Our capital expenditures in 2002 were Ch$68,842 million.
We currently plan to make capital expenditures totaling Ch$59,380 million
(US$100 million) in 2004. We plan to make capital expenditures in 2004
primarily to construct and develop new stores and to purchase additional
properties. Working Capital.In addition to the capital expenditures listed above, we
also plan to allocate Ch$41,500 million (US$70 million) of cash to our credit
card business in 2004 to cover additional working capital requirements in
connection with the issuance of additional credit by Presto. This amount
represents our estimated cash requirements based on our current projected
levels of growth in credit card charge volume. Our expected growth in the use
of our Prestocredit card may not materialize. Debt Debt Status.In addition to cash flow from our operations, we also rely
on external borrowings in the local Chilean capital markets, as well as other
borrowings from financial institutions. The costs associated with using
external sources of financing will depend in large part on our credit ratings.
A significant downgrade of any of our debt ratings by Moodys, Standard &
Poors or Fitch may increase the cost of our future borrowings or make it more
difficult to access the public debt markets. At the date hereof, our senior
unsecured local and foreign currency-denominated debt had a credit rating of
BBB+ with Fitch. In addition to our own performance, such credit agencies may
give consideration to the general macroeconomic and political trends affecting
Chile and Latin America generally. At December 31, 2003, our aggregate outstanding debt and lease obligations
were Ch$310,111 million (US$522.3 million), consisting of:  
    
    long-term debt including lease obligations of Ch$175,064
million (US$294.8 million), which includes financial debt of
Ch$165,772 million (US$279.2 million) and lease obligations in the
amount of Ch$9,292 million (US$15.6 million), and
    
    short-term debt including the current portion of long-term
debt of Ch$135,048 million (US$227.4 million), including short-term
financial debt of Ch$107,434 million (US$180.9 million) and the
current portion of long-term debt in the amount of Ch$ 27,614
million (US$ 46.5 million). In addition to our aggregate outstanding debt, we have short-term
obligations incurred with our suppliers of Ch$180,300 (US$303.4 million). We are also party to various capital lease and lease-back operations, of
which, the total long-term portion amounted to Ch$9,292 million (US$15.6
million) at December 31, 2003, as compared to Ch$11,892 million at December 31,
2002. At December 31, 2003, our foreign currency liabilities totaled Ch$17,387
million (US$29.3 million). At December 31, 2002, we had liabilities of
Ch$19,113 million denominated in U.S. dollars. Our major categories of indebtedness are as follows:  
    
    Bonds and commercial paper placed in the local capital
markets in an aggregate principal amount of (Ch$192,082 million
(US$323.5 million) at December 31, 2003. We have issued four series
of bonds in Chile which bear interest at a rate of 7.0%, 6.5%, 4.5%
and 5.5%, and commercial paper bearing interest at a rate of 5.0%,
4.8% and 4.32%. 56




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
    
    Local bank debt in aggregate principal amount at December 31,
2003 of Ch$82,908 million (US$139.6 million). We have a Series of
Chilean peso, UF- and U.S. dollar-denominated loans, the bulk of
which are payable in UF and bear market interest rates according to
the terms of the debt agreements.
    
    Subsequent to December 31, 2003, we incurred a total of
Ch$53,000 million (US$90 million) with local banks in connection
with our acquisition of Carrefour Chile S.A. For further information regarding our debt, see Note 12 to our
consolidated financial statements. Debt Restrictions Some of our long-term debt instruments contain standard financial
covenants. Our principal covenants require us to maintain certain minimum
ratios, such as debt-to-equity and interest coverage. We were in full
compliance with our key financial covenants as of December 31, 2003. Moreover,
we believe that our existing covenants will not significantly restrict our
ability to borrow additional funds as needed to meet our capital expenditure
requirements for 2004 and 2005. We believe that we will be able to operate
within the terms of our financial covenants for the foreseeable future. The material covenants of our long-term debt agreements at December 31,
2003 are described in the table below: Our Principal Loan Covenants Banco Santander-
Santiago
    
    1. Minimum coverage of interest expenses of 3.75 (operating income
plus depreciation divided by interest expense) for June and
December.2. Not to sell or use as collateral the Ekono, Almacand Lider
brands.3. Financial leverage less than 1.2 (interest-bearing liabilities
divided by equity).4. Not to grant new guarantees.Bonds
Series A, B, C, D
    
    1. Maintain an indebtedness relationship lower than 1.2 times,
defined as the ratio between liabilities that accrue interest and
equity.2. Minimum coverage of interest expenses of 3.5 times (operating
results plus depreciation expenses/interest expenses).3. Keeping assets free from liens in a total amount equal to at
least 1.3 times the outstanding balance of the total bonds issued
for the issuer, which are in force, calculated and measured each
quarter over the consolidated balance sheet.4. Keeping consolidated total equity of an amount equal at least to
UF13,000,000, calculated and measured each quarter.Commercial Paper
    
    1. Minimum Coverage of interest expenses of 3.5 (operating income
plus depreciation divided by interest expenses) for March, June,
September and December.2. Leverage less than 1.2 (interest-bearing liabilities divided by
equity) for March, June, September and December.
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Seasonality Historically, we have experienced distinct seasonal sales patterns due to
heightened consumer activity throughout the Christmas and New Year holiday
season, as well as during the beginning of each school year. During these
periods, we promote the sale of non-food items, particularly by discounting
imported goods, such as toys, throughout the Christmas holiday season, and
school supplies during the back-to-school period. Conversely, a decrease in
sales usually occurs during the summer vacation months of January and February. U.S. GAAP Reconciliation and Accounting Pronouncements Reconciliation Our financial statements have been prepared in accordance with Chilean
GAAP. The following table sets forth net income and shareholders equity for the
years ended and at December 31, 2001, 2002 and 2003 under Chilean GAAP and U.S.
GAAP. Year ended December 31,2001
    
    2002
    
    2003(in millions of constant Ch$ and millions of US$)Net income (Chilean GAAP)
    
    Ch$
    40,952
    
    
    Ch$
    24,015
    
    
    Ch$
    20,819
    
    
    US$
    35.0Net income (U.S. GAAP)
    
    
    44,446
    
    
    
    29,407
    
    
    
    23,667
    
    
    
    39.8Shareholders equity (Chilean GAAP)
    
    Ch$
    293,859
    
    
    Ch$
    303,740
    
    
    Ch$
    310,829
    
    
    US$
    523.4Shareholders equity (U.S. GAAP)
    
    
    278,084
    
    
    
    293,122
    
    
    
    303,713
    
    
    
    511.5
 For further information as to these differences between Chilean GAAP and
U.S. GAAP, see Note 25 to our consolidated financial statements. The principal differences between Chilean GAAP and U.S. GAAP as they
affected our results and shareholders equity in the three years ended December
31, 2001, 2002 and 2003 were:  
    
    the effects of non-designation of certain derivative
instruments as hedges under U.S. GAAP;
    
    the reversal under U.S. GAAP of the technical revaluation of
certain property, plant and equipment under Chilean GAAP, along with
the associated accumulated depreciation, depreciation expense and
any necessary recalculation of gain/loss on disposal of such
property, plant, and equipment;
    
    the reversal under U.S. GAAP of severance indemnities for
prior service costs that arose when we began to record a severance
indemnity liability, which were charged to income under Chilean GAAP
and deferred and amortized under U.S. GAAP;
    
    the accrual under U.S. GAAP of deferred income taxes;
    
    the reclassification under U.S. GAAP of the restructuring costs to operating expenses;
    
    the recording of accounts receivable from Disco S.A. at the
net present value under U.S. GAAP; 58




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
    
    purchase accounting differences between U.S. GAAP and Chilean
GAAP and the related differences in goodwill, negative goodwill,
amortization expense, accumulated amortization, depreciation, and
accumulated depreciation;
    
    the reclassification of revenues obtained from suppliers to
cost of goods sold under U.S. GAAP; and
    
    the timing difference related to the accrual of mandatory
dividends under Chilean law. Pursuant to Chilean GAAP, our consolidated financial statements also
recognize the effects of inflation. The effect of inflation has not been
reversed in the reconciliation to U.S. GAAP as permitted by the rules and
regulations of the U.S. Securities and Exchange Commission. Recent U.S. GAAP Accounting Pronouncements The following recent accounting pronouncements relate solely to the
reconciliation to U.S. GAAP of our net income and shareholders equity. In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, or
FIN 46, which is an interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, or ARB 51. FIN 46 addresses consolidation
by business enterprises of variable interest entities, which are entities
subject to consolidation according to the provisions of FIN 46. For interests
acquired on or after February 1, 2003, FIN 46 applies immediately. For
interests existing as of January 31, 2003, FIN 46 is effective for us on
January 1, 2004. In December 2003, the FASB issued a revision to Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46R clarifies the application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. FIN 46R requires the consolidation of these
entities, known as variable interest entities, by the primary beneficiary of
the entity. The primary beneficiary is the entity, if any, that will absorb a
majority of the entitys expected losses, receive a majority of the entitys
expected residual returns, or both. Among other changes, FIN 46R revised FIN 46 by: (a) clarifying some
requirements of the original FIN 46, which had been issued in January 2003, (b)
easing some implementation problems, and (c) adding new scope exceptions. FIN
46R deferred the effective date of the Interpretation for public companies to
the end of the first reporting period ending after March 15, 2004, except that
all public companies must at a minimum apply the provisions of the
Interpretation to entities that were previously considered special purpose
entities under the FASB literature prior to the issuance of FIN 46R by the end
of the first reporting period ending after December 15, 2003. We are evaluating
whether the adoption of FIN 46R will have a material impact on our financial
position, cash flows and results of operations. We did not enter into any
transactions under the scope of FIN 46R after February 1, 2003. In December 2003, the Securities Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updated
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretative guidance
consistent with current authoritative accounting and auditing guidance and SEC
regulations. We believe the application of the guidance under SAB 104 did not
have a significant impact on the results of operations, financial conditions or
cash flow. 59




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In April 2003, FASB issued Statement of Financial Accounting Standards
SFAS No. 149 (SFAS No. 149), Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133.
SFAS No. 149 is applied prospectively and is effective for contracts entered
into or modified after June 30, 2003, except for SFAS No. 133 implementation
issues that have been effective for fiscal quarters that began prior to June
15, 2003, and certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist. We have not
identified effects on the results of operations, financial conditions or cash
flows relating to the adoption of this pronouncement. In June 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, or SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement clarifies
classification and measurement of certain financial instruments with
characteristics of both liability and equity. It requires classification of
financial instruments within a companys scope as liabilities. Such financial
instruments may include mandatorily redeemable shares, financial instruments
which embody an obligation to repurchase shares or require the issuer to settle
the obligation by transferring assets, or financial instruments that embody an
unconditional obligation, or in certain circumstances, an unconditional
obligation. In connection with our U.S. GAAP reconciliation, we have
implemented SFAS 150 without any significant effects on our results of
operations, financial position or cash flows. For U.S. GAAP purposes, we adopted Statement of Financial Accounting
Standards No. 143, as of January 1, 2003. We have determined that we have no
asset retirement obligations to be accounted for under the guidelines of this
pronouncement. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. 
 Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES Directors Pursuant to Chilean Companies Law No. 19.705, enacted in December 2000,
Chilean publicly traded companies with a net worth exceeding the equivalent of
US$50 million must have no less than seven directors, as well as an audit
committee composed of no less than three board members. We are now managed by
a board of directors that consists of eight directors who are elected at the
annual regular shareholders meeting as mandated by our bylaws and have an
audit committee composed of three independent board members. The entire board
of directors is elected every three years. If a vacancy occurs, our board of
directors may elect a temporary director to fill the vacancy until the next,
regularly scheduled meeting of shareholders, at which time the entire board of
directors will be elected or re-elected. There are regularly scheduled monthly meetings of our board of directors.
Extraordinary meetings are convened when called by the president of the board,
when requested by any other director with the assent of the president or when
requested by an absolute majority of the directors. Our board of directors is
responsible, among other things, for the overall supervision and administration
of our business activities, for the appointment and removal of the executive
officers, for reviewing our financial statements, for approving our budget and
for approving any purchase or sale of real estate. 60




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The current board of directors was elected on April 29, 2003 and their
three-year tenure will end upon the election of the new members at the annual
shareholders meeting to be held at the end of April 2006. The following are
the current members of the board of directors and their respective positions: Name
    
    Position
    
    AgeFelipe Ibáñez Scott(1)
    
    President
    
    
    50Hans Eben Oyanedel
    
    Vice President
    
    
    61Nicolás Ibáñez Scott (1)(2)
    
    Director
    
    
    48Manuel Ibáñez Ojeda(1)
    
    Director
    
    
    83Enrique Barros Bourie
    
    Director
    
    
    58Jonny Kulka Fraenkel
    
    Director
    
    
    59Gonzalo Eguiguren Correa(3)
    
    Director
    
    
    45Fernando Larraín Cruzat(4)
    
    Director
    
    
    45Rodrigo Cruz Matta
    
    Director
    
    
    51
   (1)
    
    Mr. Felipe Ibáñez Scott and Mr. Nicolás Ibáñez Scott are sons of Mr.
Manuel Ibáñez.(2)
    
    Between 1994 and 2002, Mr. Nicolás Ibáñez Scott served as our companys
CEO.(3)
    
    Between 1985 and 1995, Mr. Eguiguren served our company in our commercial
operations department and as a director of corporate finance. Mr.
Eguiguren is the brother-in-law of Mr. Cristóbal Lira Ibáñez, our CEO.(4)
    
    Mr. Larraín is the Managing Director of
Larrain Vial S.A., an underwriter we have engaged in connection with a potential offering in Chile of our shares. Audit Committee Our Audit Committee is composed of the following board members: Name
    
    Position
    
    AgeGonzalo Eguiguren Correa(1)
    
    President
    
    
    45Rodrigo Cruz Matta(2)
    
    Director
    
    
    51Fernando Larraín Cruzat(3)
    
    Director
    
    
    45
   (1)
    
    Between 1985 and 1995, Mr. Eguiguren served our company in our commercial
operations department and as a director of corporate finance. Mr.
Eguiguren is the brother-in-law of Mr. Cristóbal Lira Ibáñez, our CEO.(2)
    
    Mr. Cruz has been our corporate controller since 1992.(3)
    
    Mr. Larraín is a Managing Director of
Larrain Vial S.A., an underwriter we have engaged in connection with
a potential offering in Chile of our shares. Our Audit Committee has the following responsibilities:  
    
    to propose external auditors to the board of directors;
    
    to propose rating agencies to the board of directors;
    
    to review audits and internal reports;
    
    to review annual and interim financial statements and inform
the board of directors of the results of such reviews;
    
    to review the procedures and content of reports from external
risk evaluators;
    
    to coordinate with our external auditors as they conduct
their audit and to review the reports, procedures and extent of the
work of our external auditors; 61




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
    
    to review and deliberate on issues related to conflicts of
interest; and
    
    to review the pay scale of primary managers and executives to
ensure that it is rational, transparent and justified. Executive Officers Our principal executive officers are as follows: Years withName
    
    Position
    
    Age
    
    our companyCristóbal Lira Ibáñez (1)
    
    Chief Executive Officer
    
    
    45
    
    
    
    22Marcelo Gálvez Saldías
    
    Chief Operating Officer
    
    
    40
    
    
    
    15José Pedro Varela Alfonso
    
    Chief Commercial Officer
    
    
    43
    
    
    
    20Miguel Núñez Sfeir
    
    Chief Financial Officer
    
    
    38
    
    
    
    15Juan Pablo Vega Walker
    
    Development Manager
    
    
    36
    
    
    
    1Emilio del Real Sota (2)
    
    Human Resources Manager
    
    
    39
    
    
    <1Christopher Jones Ferrer (3)
    
    Logistics Manager
    
    
    35
    
    
    
    1Vicente Tredinick Rogers (4)
    
    Information Technology Manager
    
    
    37
    
    
    <1
   (1)
    
    Mr. Cristóbal Lira Ibáñez is the nephew of Manuel Ibáñez Ojeda and first
cousin to Mr. Felipe Ibáñez Scott and Mr. Nicolás Ibáñez Scott, each of
whom are members of our board of directors.(2)
    
    Took office in June 2003.(3)
    
    Took office in May 2003.(4)
    
    Took office in September 2003. Biographical Information The following is a selected biographical description of each of the
members of our board of directors and our executive officers: Directors Felipe Ibáñez Scotthas been the President of our board of directors since
1994. His previous positions with us include operations manager, manager of
accounting and finance, commercial manager of Almac, general director of Ekono,
executive vice president of Ekono, as well as director of Almac, Ekonoand
other of our subsidiaries. Mr. Ibáñez graduated from the University of
Edinburgh summa cum laudewith a degree in business administration. He is the
son of Mr. Manuel Ibañez, the brother of Mr. Nicolás Ibañez Scott and the first
cousin of Mr. Cristóbal Lira Ibañez. Hans Eben Oyanedelhas been a Director of our company since 1998, and he
is currently the President of our Audit Committee. Mr. Eben is President of
the Board of directors of Gillette Chile, where he has held the positions of
financial analyst and marketing coordinator for the United States, Europe and
Latin America. Mr. Eben holds a masters in business administration from the
Universidad de Chile. In addition to serving on our companys board of
directors as Vice President of the Board, Mr. Eben also serves on the Board of
several other local and multinational companies such as Grupo Santander
Santiago, Ultramar, Sitrans, Senexco, and Carter Holt Harvey. Manuel Ibáñez Ojeda, fruit farmer, fruit exporter and businessman, has
been President of the board of directors of Almac S.A. and Honorary President
of our board of directors since 1986. Mr. Ibáñez has also served as Chief
Executive Officer, President and salesman for our company. Mr. Ibáñez is
currently serving as president of the board of directors of Fundación
Universidad Adolfo Ibáñez, a foundation supporting the Universidad Adolfo
Ibáñez founded by and named after Mr. Ibáñezs father, 62




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and is active in numerous charitable organizations, including as president
of Fundación Lukas. He is the father of Mr. Felipe Ibañez Scott and Mr.
Nicolás Ibañez Scott and the uncle of Mr. Cristóbal Lira Ibañez. Nicolás Ibáñez Scotthas been a Director of our company since 2003 and
served as our companys Chief Executive Officer from 1994 to 2002. Mr. Ibáñez
previously held positions in our company in our accounting department, as
commercial manager for Almac and as a buyer. Mr. Ibáñez, who received his
primary education in England, holds a degree in business administration from
the Universidad Adolfo Ibáñez. He serves as a member of the board of directors
of Universidad Adolfo Ibáñez. He is the son of Mr. Manuel Ibañez, the brother
of Mr. Nicolás Ibañez Scott and the first cousin of Mr. Cristóbal Lira Ibañez. Enrique
Barros Bouriehas been a Director of our company since 1996. Mr. Barros is senior partner of Barros, Court y Correa Cía Ltda., a
reputable Santiago law firm. In addition to holding a law degree from the
Universidad de Chile, Mr. Barros also holds a doctorate in law from the
University of Munich (summa cum laude). Mr. Barros was a member of the
Constitutional Commission and has been a director of several non-profit
organizations, including the Judiciary Academy, Centro de Estudios Públicos,
Fundación Andes and Santiagos Cultural Foundation. Jonny Kulka Fraenkelhas been a Director of our company since 1994. Mr.
Kulka previously served as chief executive officer of El Mercurio, Chiles
leading daily newspaper, operations manager with Compañía Cervecerías Unidas,
and director of administration and finance for Compañías Chilenas CIC S.A. In
2001, Mr. Kulka returned to El Mercurio to resume his post as chief executive
officer. Mr. Kulka Fraenkel holds a degree in business administration from
Universidad Adolfo Ibáñez. Gonzalo Eguiguren Correahas been a Director of our company since April of
2001. On the same date he was appointed President of our Audit Committee. Mr.
Eguiguren is the executive director of Kimberly Clark Chile, one of our
principal suppliers. Between 1985 and 1995, Mr. Eguiguren held positions in
our commercial operations department and served as our director of corporate
finance. Mr. Equiguren holds a degree in business administration from
Universidad de Santiago. He is the brother-in-law of Mr. Cristóbal Lira
Ibañez. Fernando Larraín Cruzathas been a Director of our company and a member of
our Audit Committee since April of 2001. Mr. Larraín is the Managing Director
of Larraín Vial S.A., a Chilean investment bank. Mr. Larraín is also a
professor at Universidad de Los Andes. Mr. Larraín holds a degree in economics
from Pontificia Universidad Católica de Chile and a masters in business
administration from Harvard University. Rodrigo Cruz Mattahas been a Director of our company since 2003 and has
been our Corporate Controller since 1992. Previously, Mr. Cruz has held the
positions of accounting assistant, buyer of meat products and internal auditor.
He also served as chief executive officer of one of our companys
subsidiaries. In June of 2003, Mr. Cruz was appointed as a member of our Audit
Committee. Executive Officers Cristóbal Lira Ibáñezhas been our companys Chief Executive Officer since
2003 and was the Manager of Corporate Development since 1994 and Commercial
Manager since 1999. Over the past 15 years, Mr. Lira has served in various
positions with our company, including store manager, buyer of groceries, in our
companys finance division, as a commercial manager of Ekonoand as a manager
of our companys Ekonodivision. Mr. Lira holds a degree in business
administration from Universidad Adolfo Ibáñez. He is the nephew of Manuel
Ibañez Ojeda and first cousin to Mr. Felipe Ibañez Scott and Mr. Nicolás Ibañez
Scott. 63




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Marcelo Gálvez Saldíashas been our companys Chief Operating Officer
since 2002. Over the past 15 years he has served in various positions with our
company, including Chief Financial Officer, store manager, a buyer of
groceries, dairy, and meat products and Ekono-Almacdivision manager. Mr.
Gálvez holds a degree in business administration from Universidad Adolfo Ibáñez
and a masters in business administration from the University of Bath, England. Miguel Núñez Sfeirhas been our Chief Financial Officer since 2000. Over
the past 14 years he has served in various positions with our company,
including manager for our in-store credit card Prestoand sub-manager of
Finance. Mr. Núñez holds a degree in business administration from the
Universidad Adolfo Ibáñez. José Pedro Varela Alfonsohas been our companys Chief Commercial Officer
since 2002. Over the past 20 years he has served in various positions with our
company, including buyer of groceries and manager for our apparel division.
Mr. Varela holds a degree in statistics from Unversidad Católica de Chile and a
post-graduate degree in administration from Universidad Adolfo Ibáñez. Juan Pablo Vega Walkerjoined our company in July 2002 and currently
serves as our Development Manager. Before joining our company, Mr. Vega spent
3 years at McKinsey & Company, where he served several retail clients in both
Chile and Brazil. Mr. Vega holds an MBA from the Kellogg School of Management
at Northwestern University and a degree in industrial engineering from the
Universidad Católica in Chile. Emilio Del Real Sotahas been the Human Resources Manager of Lidersince
June 2003. Before joining our company, Mr. Del Real served for seven years as
human resources manager of Lever S.A. at Unilever Chile. During this time, he
also served for three years as human resources manager of customer management
in Latin America. Before working at Unilever Chile, Mr. Del Real worked in
private practice for eight years. Mr. Del Real holds a degree in psychology
from Universidad Gabriela Mistral. Christopher Jones Ferrerhas recently joined our company as Logistics
Manager, replacing Rodrigo Cruz Matta who retired from the post in 2003. Prior
to joining us, over the past nine years, he has worked as a director of
logistics for Wal-Mart Argentina. Mr. Jones holds an undergraduate degree in
business from the University of Pennsylvanias Wharton School of Business. Vicente Tredinick Rogersjoined our company as Chief Information Officer
in September of 2003. From 2000 to 2003, Mr. Tredinick worked at LanChile as
its Technology Manager. From 1993 to 2000, Mr. Tredinick served at Banco
Santander in the information technology department before taking on the
position of Assistant Manager of Technology at Banco Santander. He received a
degree in civil and electrical engineering from the University of Santiago and
an MBA from the Universidad Adolfo Ibáñez in Chile. Director and Executive Officer Compensation Directors are paid an annual fee for attendance at Board meetings. The
total compensation paid to each director of our company (all of which was
approved by the shareholders of our company) during 2003 was as follows: Board of DirectorsAttendance Fees
    
    Remuneration(in thousands of constant Ch$)(1)Felipe Ibáñez Scott
    
    Ch$
    96,000
    
    
    Ch$
    30,251Nicolas Ibáñez Scott (2)
    
    
    16,000
    
    
    
    10,000Manuel Ibáñez Ojeda
    
    
    20,000
    
    
    
    25,879
 64




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Board of DirectorsAttendance Fees
    
    Remuneration(in thousands of constant Ch$)(1)Jonny Kulka Fraenkel
    
    
    48,000
    
    
    
    Enrique Barros Bourie
    
    
    48,000
    
    
    
    Hans Eben Oyanedel
    
    
    60,000
    
    
    
    Gonzalo Eguiguren Correa
    
    
    24,000
    
    
    
    4,000Fernando Larraín Cruzat
    
    
    24,000
    
    
    
    5,000Rodrigo Cruz Matta (2)
    
    
    16,000
    
    
    
    120,000Total
    
    Ch$
    352,000
    
    
    Ch$
    195,130
   (1)
    
    The amounts paid to each director for attendance at Board meetings varies
in accordance with the position held and the time period during which such
position was held.(2)
    
    Director since April 2003. There are regularly scheduled monthly meetings of the Audit Committee, and
attendance fees paid to its members during 2003 were as follows: Audit CommitteeAttendance fees(thousands of Ch$)(1)Gonzalo Eguiguren Correa
    
    Ch$
    11,333Hans Eben Oyanedel(1)
    
    
    3,333Rodrigo Cruz Matta
    
    
    4,000Fernando Larraín Cruzat
    
    
    7,333Total
    
    Ch$
    25,999
   (1)
    
    Resigned from the Audit Committee in June 2003. The Audit Committee incurred expenses of Ch$602,242 in 2003. For the year ended December 31, 2003, the aggregate amount of compensation
we paid to all directors and executive officers was Ch$1,303,986 of which
Ch$769,857 was paid to our executive officers as remunerations. Moreover,
Ch$4,997 million was paid to those executive officers who retired from office
as severance indemnities. We do not disclose to our shareholders or otherwise
make available to the public, information as to the compensation of our
individual executive officers. We do not maintain any stock options, pension
or retirement programs for our directors or executive officers. Employees At December 31, 2003, we had a total of 19,494 full-time equivalent
employees. Of these full-time equivalent employees, 17,703 were employed in
the stores (including the 303 full-time equivalent employees employed in our
FarmaLiderpharmacies), 675 were employed in the distribution facilities (the
distribution center, warehouses and transportation) and 1,116 were employed in
the headquarters and other business units. Store employees typically negotiate collective contracts at each store,
which generally have a term of three years. Our employees receive benefits
established by the collective bargaining agreements, salaries in accordance
with our corporate policy, benefits provided for by law (including disability
insurance) and certain additional benefits we provide. Among these, we provide
educational training for our employees and opportunities for their families
(including scholarships for children of employees) and assistance in financing
the purchase of homes. 65




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We operate a merit based bonus program for our managers, both at the
headquarters/service school and store level, as well as for department heads at
each store. The bonus fluctuates between one and four months salary and is
determined in accordance with clearly defined criteria, including our overall
performance, the performance of the employees store, his or her performance as
compared to specific targets established at the beginning of the year and more
subjective standards such as fostering an open, constructive working
environment. Share Ownership Certain of our directors and executive officers own shares of our company.
Set forth below are the number of shares and the ownership percentages for the
directors and executive officers (excluding indirectly held shares). At December 31, 2003Number ofShares owned
    
    Ownership %DirectorsFelipe Ibáñez Scott(1)
    
    
    
    
    
    
    Manuel Ibáñez Ojeda
    
    
    
    
    
    
    Jonny Kulka Fraenkel
    
    
    72,754
    
    
    
    0.0053Fernando Larraín
    
    
    
    
    
    
    Hans Eben
    
    
    
    
    
    
    Enrique Barros Bourie
    
    
    77,950
    
    
    
    0.0056Gonzalo Eguiguren Correa
    
    
    170,212
    
    
    
    0.0123Rodrigo Cruz Matta
    
    
    233,853
    
    
    
    0.0169Nicolás Ibáñez Scott(1)
    
    
    425,531
    
    
    
    0.0308Executive OfficersCristóbal Lira Ibáñez(1)
    
    
    218,263
    
    
    
    0.0158Marcelo Galvez Saldías
    
    
    233,853
    
    
    
    0.0169José Pedro Varela Alfonso
    
    
    57,577
    
    
    
    0.0042Miguel Núñez Sfeir
    
    
    148,936
    
    
    
    0.0108Juan Pablo Vega Walker
    
    
    
    
    
    
    Emilio del Real Sota
    
    
    
    
    
    
    Christopher Jones Ferrer
    
    
    
    
    
    
    Vicente Tredinick
    
    
    
    
    
    
    Total
    
    
    1,638,929
    
    
    
    0.1186
   (1)
    
    Amount refers to directly held shares only A series of companies beneficially owned or controlled by Messrs. Felipe
Ibáñez Scott, President of our board of directors and Nicolás Ibáñez Scott, a
director and our former Chief Executive Officer holds 74.8% of the shares
issued by our company. The remainder of our directors and officers hold
995,135 shares of the company. 66




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Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Principal Shareholders Control of our company is vested in a series of companies beneficially
owned or controlled by Messrs. Felipe and Nicolás Ibáñez Scott. Together,
these companies and related parties controlled 74.8% of our outstanding capital
stock at December 31, 2003. At December 31, 2003 (and at the date hereof), we
had 1,380,000,000 shares outstanding. Our only outstanding voting securities
are the shares. The following table sets forth certain information concerning
ownership of our shares at December 31, 2003 with respect to each shareholder
that we know to own 5% or more of the outstanding shares, all shareholders
related to the controlling shareholders and all directors and executive
officers as a group: At December 31, 2003Number ofShareholders
    
    Shares Owned
    
    OwnershipServicios Profesionales y de Comercialización S.A.(1)
    
    
    576,457,874
    
    
    
    41.8Empresas Almac S.A.(1)(2)
    
    
    179,943,140
    
    
    
    13.0Future Investments S.A.(3)
    
    
    131,353,559
    
    
    
    9.5Servicios e Inversiones Trucha S.A.(4)
    
    
    120,048,776
    
    
    
    8.7El Roquerío S.A.(2)
    
    
    16,000,460
    
    
    
    1.2Inversiones Miramar Limitada(5)
    
    
    7,258,397
    
    
    
    0.5Controlling shareholders(6)
    
    
    1,031,487,737
    
    
    
    74.8Directors and executive officers as a group(7)
    
    
    995,135
    
    
    
    0.1
    %
   (1)
    
    Servicios Profesionales y de Comercialización S.A., Empresas Almac S.A.
and Estudios y Proyectos Comerciales e Inmobiliarios S.A. are companies
beneficially owned or controlled by Messrs. Nicolás Ibáñez Scott and
Felipe Ibáñez Scott.(2)
    
    In 2000, Empresas Almac S.A. was split into two companies, resulting in
the creation of Empresas Almac S.A. and Empresas Almac Dos S.A. In 2002,
Empresas Almac Dos S.A. changed its name to El Roquerío S.A. El Roquerío
S.A. is beneficially owned or controlled by Mr. Cristóbal Lira Ibáñez.(3)
    
    Future Investments S.A. is a company beneficially owned or controlled by
Mr. Nicolás Ibáñez Scott.(4)
    
    Servicios e Inversiones Trucha S.A. is a company beneficially owned or
controlled by Mr. Felipe Ibáñez Scott.(5)
    
    Inversiones Miramar Limitada is a company beneficially owned or
controlled by Messrs. Nicolás Ibáñez Scott and Felipe Ibáñez Scott.(6)
    
    This number includes shares held by the Ibañez family.(7)
    
    Sets forth the number of shares owned by directors and officers as a
group, excluding the controlling shareholders. Related Party Transactions In the ordinary course of our business, we engage in a variety of
transactions with certain of our affiliates at an arms length basis. These
transactions are primarily for the purchase of goods and services which may
also be provided by other suppliers. Article 89 of the Chilean Companies Act
requires that transactions with related parties be on a market basis or on
terms similar to those customarily prevailing in the market. Article 89
requires us to compare the terms of any such transaction to those prevailing in
the market at the date the transaction is to be entered into. Directors of
companies that violate Article 89 are liable for losses resulting from such
violation. In addition, Article 44 of the Chilean Companies Act states that
any transaction in which a director has a personal interest, or one in which
such director is acting on behalf of a third-party, may only be approved when
the board of directors has been informed of such directors interest and the
terms of such transaction are similar to those prevailing in the market.
Moreover, resolutions approving such transactions must be reported to the
companys shareholders at the annual shareholders meeting immediately
following the relevant transaction. Violation of Article 44 may result in
administrative or criminal sanctions and civil liability to shareholders or
third parties who suffer losses as a result of such violation. We have
complied with the requirements of Article 89 and Article 44 in all transactions
with related parties and affirm that we will continue to comply with such
requirements. See Note 19 of our consolidated financial statements for a more
detailed accounting of transactions with related parties. 67




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Purchase of Shares by Controlling Shareholders During January and February of 2003, Future Investments S.A., a company
beneficially owned or controlled by Mr. Nicolás Ibáñez Scott, purchased a total
of 9,651,432 of our shares. As of December 31, 2003, Future Investments owns
131,353,559 shares, an amount equal to 9.52% of our total shares. Donations to Universidad Adolfo Ibáñez Universidad Adolfo Ibáñez is a highly reputed private university in Chile,
which was founded by the family of our controlling shareholders and is named
after the grandfather of Messrs. Nicolás and Felipe Ibáñez Scott, our
controlling shareholders. We made charitable contributions to the Universidad
Adolfo Ibáñez of Ch$245,877 million in 2003, Ch$260,861 million in 2002 and
Ch$239,327 million in 2001. Loans from Servicios Profesionales y de Comercialización S.A. We have historically received loans from Servicios Profesionales y de
Comercialización S.A., or SERPROCOM, one of our controlling shareholders and a
company beneficially owned or controlled by Messrs. Nicolás and Felipe Ibáñez
Scott. The amounts of these loans are equal to the amounts payable to
SERPROCOM based on its pro rata ownership interest in our company. As of the
date of this annual report, SERPROCOM holds approximately 41.8% of our shares.
We make interest payments on these loans at market rates of interest. The
loans we have received from SERPROCOM amounted to Ch$7,787 million at December
31, 2003, Ch$7,695 million at December 31, 2002 and Ch$4,879 million at
December 31, 2001. Relationship with Larraín Vial S.A. Fernando Larraín Cruzat, a member of our board of directors, is a managing
director of Larraín Vial S.A., a prominent Chilean investment bank. From time
to time, Larraín Vial S.A. provides investment banking and other financial
services to us. We have also engaged Larraín Vial S.A. as an
underwriter in connection with a potential offering in Chile of our
shares relating to our recently approved capital increase. Relationship with Barros, Court & Correa Enrique Barros Bourie, a member of our board of directors, is a
senior partner at Barros Court & Correa, a prominent Chilean law firm that
provides us with general legal services. 2002 Restructuring and Related Severance Payments In December 2002, we announced significant changes to our senior
management team, including the appointment of a new chief executive officer, as
well as the departure of four senior executives and another 70 employees. As
part of this restructuring, we incurred an aggregate of Ch$4,997 million in
2002 in severance payments to former management and other employees, including
our former chief executive officer, Mr. Nicolás Ibáñez Scott. Loans to Related Parties Currently, there are no outstanding loans to executive officers or our controlling shareholders. 
 Item 8. FINANCIAL INFORMATION See Item 18  Financial Statements for our consolidated financial
statements filed as part of this annual report. 68




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Item 9. THE OFFER AND LISTING Our shares are listed on the Bolsa de Comercio de Santiago(the Santiago
Stock Exchange), the Bolsa Electrónica de Chile(the Electronic Stock
Exchange), the Bolsa de Valoresand the Bolsa de Corredores/Bolsa de Valores de
Valparaíso, collectively referred to as the Chilean Stock Exchanges. The
Santiago Stock Exchange, established in 1893, is a private company whose equity
consists of 48 shares held by 47 shareholders. At December 31, 2003, the
Santiago Stock Exchange was comprised of 239 companies with listed shares. The
Santiago Stock Exchange is Chiles principal exchange and accounted for
approximately 76.5 of the equity trading volume in Chile during 2003. Since October 1997, our ADSs, each representing 15 shares of common stock,
have been listed on the New York Stock Exchange under the symbol DYS. The
Depositary for the ADSs is the Morgan Guaranty Trust Company of New York.
Since December 2002, we have listed our common shares on the Madrid Stock
Exchange (Latibex). At a shareholders meeting held on May 23, 2002, our shareholders approved
a capital increase in the amount of Ch$163,622,500,000 through the issuance of
250 million no-par value payment shares of a single series. At a shareholders
meeting held on April 12, 2004, our shareholders voted to cancel this capital
increase and approved a new capital increase in the amount of
Ch$170,000,000,000 through the issuance of 250 million no-par value payment
shares of a single series. We plan to issue these shares within the next three
years. We also filed an initial registration statement on Form F-3 with the
U.S. Securities and Exchange Commission on April 7, 2004 relating to a
potential offering of our ADSs in furtherance of this capital increase.
However, the size, timing and pricing of this or any other future offering of
common stock have not been determined. Pricing of any future offering will
likely be based on our then-current market value. Our board of directors may
determine, without further approval by our shareholders, the timing and the
terms and conditions of any such offering. The table below shows the high and low daily closing prices of the shares
in Chilean pesos and the trading volume of the shares on the Santiago Stock
Exchange for the last five years. It also shows the high and low daily closing
prices of the ADSs on the New York Stock Exchange and the quarterly trading
volume of the ADSs for the fourth quarter of 1997 through March of 2004. 69




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Quarterly Share Prices on theSantiago Stock Exchange
    
    Quarterly ADS Prices on the NYSEShareVolume
    
    Ch$ per Share(1)
    
    ADS Volume
    
    US$ per ADS(In thousands)
    
    High
    
    Low
    
    (In thousands)
    
    (High)
    
    Low19991st Quarter
    
    
    19,257
    
    
    Ch$
    406
    
    
    Ch$
    280
    
    
    
    2,726
    
    
    US$
    12.9
    
    
    US$
    8.52nd Quarter
    
    
    30,767
    
    
    
    635
    
    
    
    405
    
    
    
    1,007
    
    
    
    18.8
    
    
    
    12.53rd Quarter
    
    
    9,227
    
    
    
    665
    
    
    
    545
    
    
    
    2,874
    
    
    
    19.4
    
    
    
    15.84th Quarter
    
    
    35,962
    
    
    
    679
    
    
    
    540
    
    
    
    6,049
    
    
    
    19.5
    
    
    
    15.020001st Quarter
    
    
    20,300
    
    
    
    800
    
    
    
    585
    
    
    
    6,373
    
    
    
    23.7
    
    
    
    17.32nd Quarter
    
    
    19,847
    
    
    
    690
    
    
    
    540
    
    
    
    2,302
    
    
    
    20.2
    
    
    
    16.03rd Quarter
    
    
    17,427
    
    
    
    690
    
    
    
    600
    
    
    
    2,650
    
    
    
    18.7
    
    
    
    15.94th Quarter
    
    
    20,020
    
    
    
    685
    
    
    
    570
    
    
    
    2,273
    
    
    
    18.4
    
    
    
    14.920011st Quarter
    
    
    37,078
    
    
    
    665
    
    
    
    530
    
    
    
    3,654
    
    
    
    17.3
    
    
    
    13.12nd Quarter
    
    
    27,954
    
    
    
    650
    
    
    
    482
    
    
    
    2,975
    
    
    
    16.0
    
    
    
    11.93rd Quarter
    
    
    55,106
    
    
    
    680
    
    
    
    487
    
    
    
    3,826
    
    
    
    15.1
    
    
    
    10.54th Quarter
    
    
    61,158
    
    
    
    600
    
    
    
    476
    
    
    
    4,987
    
    
    
    13.3
    
    
    
    10.120021st Quarter
    
    
    39,604
    
    
    
    650
    
    
    
    519
    
    
    
    3,783
    
    
    
    14.8
    
    
    
    11.52nd Quarter
    
    
    68,598
    
    
    
    663
    
    
    
    540
    
    
    
    6,006
    
    
    
    15.4
    
    
    
    11.83rd Quarter
    
    
    56,221
    
    
    
    561
    
    
    
    440
    
    
    
    3,613
    
    
    
    12.0
    
    
    
    8.74th Quarter
    
    
    70,856
    
    
    
    497
    
    
    
    385
    
    
    
    3,345
    
    
    
    10.7
    
    
    
    7.520031st Quarter
    
    
    87,051
    
    
    
    481
    
    
    
    404
    
    
    
    6,439
    
    
    
    10.20
    
    
    
    8.32nd Quarter
    
    
    71,964
    
    
    
    600
    
    
    
    398
    
    
    
    6,961
    
    
    
    12.80
    
    
    
    8.23rd Quarter
    
    
    46,920
    
    
    
    759
    
    
    
    580
    
    
    
    4,029
    
    
    
    16.98
    
    
    
    12.44th Quarter
    
    
    34,819
    
    
    
    890
    
    
    
    690
    
    
    
    4,029
    
    
    
    20.75
    
    
    
    16.5December 2003
    
    
    27,487
    
    
    
    830
    
    
    
    740
    
    
    
    1,281
    
    
    
    20.66
    
    
    
    18.220041st Quarter
    
    
    59,241
    
    
    
    640
    
    
    
    845
    
    
    
    5,925
    
    
    
    22.0
    
    
    
    15.5January 2004
    
    
    12,191
    
    
    
    837
    
    
    
    660
    
    
    
    1,593
    
    
    
    22.0
    
    
    
    16.3February 2004
    
    
    32,274
    
    
    
    794
    
    
    
    640
    
    
    
    2,784
    
    
    
    20.0
    
    
    
    16.2March 2004
    
    
    14,776
    
    
    
    800
    
    
    
    700
    
    
    
    1,548
    
    
    
    20.2
    
    
    
    17.0April 2004
    
    
    14,133
    
    
    
    720
    
    
    
    635
    
    
    
    1,020
    
    
    
    17.58
    
    
    
    15.18May 2004
    
    
    21,748
    
    
    
    655
    
    
    
    580
    
    
    
    1,121
    
    
    
    15.53
    
    
    
    13.44
   (1)
    
    Chilean pesos per share reflect nominal price at trade date per share of
Common Stock; the price has not been restated in constant Chilean pesos. Source: Santiago Stock Exchange Official Quotations Bulletin, NYSE. The Chilean stock exchanges are substantially smaller, less liquid and
more volatile than major securities markets in the United States. The Santiago
Stock Exchange had a market capitalization of approximately US$86.3 billion
(Ch$51,271 billion) as of December 31, 2003 and an average monthly trading
volume of US$626 million during 2003. Trading activity on the Santiago Stock
Exchange is on average substantially less than that on the principal national
securities exchanges in the United States. For the year ended December 31,
2003, the percentage of securities listed on the Santiago Stock Exchange that
traded on an average of 90% or more of the trading days was approximately
12.6%. We estimate that for the year ended December 31, 2003, our shares were
traded on the Santiago Stock Exchange on an average of approximately 90.0% of
such trading days. On December 31, 2003, the closing sales price for our shares was Ch$830 per
share on the Santiago Stock Exchange, US$20.66 per ADS on the New York Stock
Exchange and 16.70 per bundle of 15 shares on the Latibex. At December 31,
2003, there were 9,084,633 ADSs (equivalent to 70




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136,269,495 shares). Such ADSs represented at such date 9.9% of the total
number of issued and outstanding shares. At December 31, 2003 the equivalent
of 255,000 shares, traded on the Latibex in bundles of 15, representing 0.02%
of the total number of our issued and outstanding shares. 
 Item 10. ADDITIONAL INFORMATION Bylaws General.Our authorized capital consists of 1,630,000,000 shares, each
without par value. On December 31, 2003, 1,380,000,000 of the shares were
issued, fully paid and non-assessable. Our stated objective is to:  
    
    maintain and improve our leadership position in our core
business area, as well as to be the best, most efficient and most
profitable retailer in the region;  
    
    capture and develop new business opportunities that will
allow for sustained growth in the future;  
    
    run a profitable business that will create value for our
shareholders and contribute to economic development in our country;
and  
    
    emphasize clear corporate governance rules and accountability
to maintain shareholders confidence and attract new investors for
the continued growth and long-term endurance of our company. Shareholders Meetings. Our annual shareholders meeting is held within
four months of the end of our fiscal year, generally in April, but, in any
case, following the preparation of our financial statements for the previous
fiscal year. Extraordinary shareholders meetings can be called by the board
when, in its judgment, a meeting of the shareholders is warranted.
Shareholders representing 10% of our total share capital may request that the
board call a general or extraordinary shareholders meeting. Only shareholders
of record as of five days prior to a meeting of shareholders will be allowed to
vote on matters presented at that meeting. Resolutions may be adopted at the annual meeting of shareholders by an
absolute majority of the shares present at that meeting. Resolutions that
amend our bylaws to allow the merger or sale of our company, change of our
corporate form, amendment of the terms of our terms of existence, acceleration
of our dissolution, change of our legal domicile, reduction of our capital,
approval of contributions and their assessment whenever consisting of assets
other than money, amendment of the rights reserved for a general shareholders
meeting, amendment of the boards authority, decrease in the number of board
members, disposition of a substantial portion of our assets or amendment of our
distribution preferences may only be adopted in an extraordinary shareholders
meeting by the vote of at least two-thirds of all outstanding shares. Share Capital Common Shares At December 31, 2003, we had 1,380,000,000 shares outstanding. Our only
outstanding voting securities are the shares. At a shareholders meeting held
on May 23, 2002, our shareholders approved a capital increase in the amount of
Ch$163,622,500,000 through the issuance of 250 million no-par value payment
shares of a single series. At a shareholders meeting held on April 12, 2004,
our shareholders voted to cancel this capital increase and approved a new
capital increase in the amount of 71




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Ch$170,000,000,000 through the issuance of 250 million no-par value
payment shares of a single series. We plan to issue these shares within the
next three years. We also filed an initial registration statement on Form F-3
with the U.S. Securities and Exchange Commission on April 7, 2004 relating to a
potential offering of our ADSs in furtherance of this capital increase.
However, the size, timing and pricing of this or any other future offering of
common stock have not been determined. Pricing of any future offering will
likely be based on our then-current market value. Our board of directors may
determine, without further approval by our shareholders, the timing and the
terms and conditions of any such offering. Voting Holders of common stock are entitled to one vote for each share of record
on all maters submitted to a vote of our shareholders. American Depositary Shares At December 31, 2003, we had 9,084,633 ADSs issued and outstanding,
equivalent to 136,269,495 shares, which represented 9.87% of the total shares
of our company. Each ADS represents 15 shares of common stock. Material Contracts The Deposit Agreement American Depositary Receipts (ADRs) evidencing American Depositary Shares
(ADSs) are issuable by the Morgan Guaranty Trust Company of New York, as
depositary (the Depositary), pursuant to the terms of the Deposit Agreement
dated as of October 7, 1997 (the Deposit Agreement) among our company, the
Morgan Guaranty Trust Company of New York and the registered holders from time
to time of the ADRs issued thereunder. Each ADS represents the right to
receive fifteen (15) shares deposited under the Deposit Agreement with Banco
Santiago, the principal offices of which are located at Bandera 201, Santiago,
Chile, as custodian under the Deposit Agreement. An ADR may evidence any
number of ADSs. Only persons in whose names ADRs are registered on the books
of the Depositary will be treated by the Depositary and us as holders of ADRs.
Copies of the Deposit Agreement are available for inspection at the principal
office of the Depositary in New York, which is presently located at 60 Wall
Street, New York, New York 10260. See Exhibit 2.4  Deposit Agreement. Acquisition of Carrefour Chile S.A. On December 19, 2003, we agreed to acquire 100% of the shares of Carrefour
Chile S.A., which we refer to as Carrefour, representing all of Carrefours
operations in Chile, for
100 million (at that time, approximately US$124
million). Actual payment relating to the acquisition and stock transfer and
consummation of the transaction took place on January 7, 2004. Through the
acquisition, we acquired seven hypermarkets in the city of Santiago with a
total sales area of 58,638 square meters. In 2003, these acquired stores had
sales of US$180 million and an estimated market share of 2.7% of the Chilean
supermarket industry based on annualized revenues for 2003. As of the date of this annual report, we have integrated six of these stores into our business and closed the
seventh store, which was located adjacent to an existing Lider hypermarket. We
believe that the acquisition of Carrefour Chile S.A. will allow us to expand
our retail operations in densely populated areas of the Santiago metropolitan
region as well as further expand our non-food businesses, specifically in the
areas of housewares, general merchandise, clothing and electronics. 72




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Exchange Controls The Central Bank of Chile is responsible for, among other things, monetary
policy and exchange controls in Chile. Appropriate registration of a foreign
investment in Chile permits the investor access to Chiles Mercado Cambiario
Formal(the Formal Exchange Market). Foreign investments can be registered
with the Foreign Investment Committee under Decree Law 600 of 1974, or can be
registered with the Central Bank of Chile under Chapter XIV of the Compendium
and the Central Bank Act. The Central Bank of Chile Act is an organic
constitutional law requiring a special majority vote of the Chilean Congress
to be modified. Equity investments in Chile by persons who are not Chilean residents are
generally subject to various exchange-control regulations which restrict the
repatriation and earnings of the investment. The securities, however, are the
subject of a contract (the Foreign Investment Contract) among Morgan Guaranty
Trust Company of New York (in its capacity as the depositary for shares
represented by the ADSs, the Depository), us and the Central Bank of Chile.
Pursuant to Article 47 of the Central Bank of Chile Act and Chapter XXVI of the
Compendium of Foreign Exchange Regulations of the Central Bank of Chile
(Chapter XXVI), which addresses the issuances of ADSs by a Chilean company,
the Foreign Investment Contract is intended to grant the Depositary and the
holders of the ADSs access to the Formal Exchange Market. See Exhibit 2.5 
Foreign Investment Contract. Absent the Foreign Investment Contract, under applicable Chilean exchange
controls, investors would not be granted access to the Formal Exchange Market
for the purpose of converting from Chilean pesos to U.S. dollars and
repatriating from Chile amounts received with respect to deposited shares or
shares withdrawn from deposit on surrender of ADSs (including amounts received
as cash dividends and proceeds from the sale in Chile of the underlying shares
and any rights with respect thereto). The following is a summary of certain
material provisions that are contained in the Foreign Investment Contract, a
copy of which was filed as an exhibit to a Registration Statements on Form F-1
(file number 333-07616). This summary does not purport to be complete and is
qualified by reference to Chapter XXVI and the Foreign Investment Contract. Under Chapter XXVI and the Foreign Investment Contract, the Central Bank
of Chile has agreed to grant to the Depositary, on behalf of ADR holders, and
to any non-Chilean resident investor who withdraws shares upon delivery of ADSs
(Withdrawn Shares) access to the Formal Exchange Market to convert pesos to
dollars (and to remit such dollars outside of Chile) in respect of shares
represented by ADSs or Withdrawn Shares, including amounts received as:  
    
    cash dividends;  
    
    proceeds from the sale in Chile of Withdrawn Shares, or from
shares distributed because of our liquidation, merger or
consolidation, subject to receipt by the Central Bank of Chile of a
certificate from the holder of the Withdrawn Shares (or from an
institution authorized by the Central Bank of Chile) that such
holders residence and domicile are outside Chile and a certificate
from a Chilean stock exchange (or from a brokerage or securities
firm established in Chile) that such Withdrawn Shares were sold on a
Chilean exchange;  
    
    proceeds from the sale in Chile of preemptive rights to subscribe for additional shares;  
    
    proceeds from our liquidation, merger or consolidation; and  
    
    other distributions, that result from holding shares
represented by ADSs or Withdrawn Shares, including without
limitation, those resulting from any recapitalization. 73




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Transferees of Withdrawn Shares are not entitled to any of the foregoing
rights under Chapter XXVI, unless the Withdrawn Shares are redeposited with the
Depositary. Investors receiving Withdrawn Shares in exchange for ADSs have the
right to redeposit such shares in exchange for ADSs, provided that the
conditions to redeposit are satisfied. Chapter XXVI provides that access to the Formal Exchange Market in
connection with dividend payments will be conditioned upon our certification to
the Central Bank of Chile that a dividend payment has been made and that any
applicable tax has been withheld. Chapter XXVI also provides that the access
to the Formal Exchange Market, in connection with the sale of Withdrawn Shares
or distributions thereon, will be conditioned upon receipt by the Central Bank
of Chile of certification by the Depositary that such shares have been
withdrawn in exchange for the pertinent ADSs and receipt of a waiver of the
benefit of the Foreign Investment Contract with respect thereto until such
Withdrawn Shares are redeposited. Chapter XXVI and the Foreign Investment Contract provide that a person who
brings foreign currency into Chile to purchase shares with the benefit of the
Foreign Investment Contract must convert such currency into pesos on the date
of entry and has five business days from such date to invest in shares in order
to receive the benefits of the Foreign Investment Contract. If such person
decides not to acquire shares within such period, he can access the Formal
Exchange Market to reacquire dollars, provided that the applicable request is
presented to the Central Bank of Chile within seven days of the initial
conversion into pesos. Shares acquired as described above may be deposited for
ADSs and receive the benefits of the Foreign Investment Contract, subject to:  
    
    receipt by the Central Bank of Chile of a certificate from
the Depositary that such deposit has been effected and that the
related ADSs have been issued; and  
    
    receipt by the Custodian of a declaration from the person
making such deposit waiving the benefits of the Foreign Investment
Contract with respect to the deposited Shares. Access to the Formal Exchange Market under any of the circumstances
described above is not automatic. Pursuant to Chapter XXVI, such access
requires approval of the Central Bank of Chile based on a request for such
approval presented through a banking institution established in Chile. The
Foreign Investment Contract provides that if the Central Bank of Chile has not
acted on such request within seven banking days, the request will be deemed
approved. Pursuant to current Chilean law, the Foreign Investment Contract cannot be
amended unilaterally by the Central Bank of Chile. Additionally, there are
judicial precedents (which are not binding with respect to future judicial
decisions) indicating that the Foreign Investment Contract may not be abrogated
by future legislative changes. There can be no assurance, however, that
additional Chilean restrictions applicable to the holders of ADSs, to the
disposition of underlying shares or to the repatriation of the proceeds from
such disposition will not be imposed in the future, nor can there be any
assessment of the duration or impact of such restrictions if imposed. If for
any reason, including changes in the Foreign Investment Contract or Chilean
Law, the Depositary were unable to convert pesos to dollars, investors would
receive dividends or other distributions in pesos. Other Limitations Dividends Policy In accordance with Chilean law, we must distribute cash dividends equal to
at least 30% of our annual net income calculated in accordance with Chilean
GAAP, unless otherwise decided by a unanimous vote of the holders of the
shares, and unless, and except to the extent, that we have 74




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accumulated losses. For a more detailed discussion of our policy on
dividends, see   Dividend Policy and Dividends. Exchange Rates All payments and distributions with respect to ADSs must be transacted in
the Formal Exchange Market. Share Capital Under Article 12 of the Securities Market Law and Circular 585 of the
Chilean Superintendencia de Valores y Seguros(the SVS), certain information
regarding transactions in shares of publicly held companies must be reported to
the SVS and the Chilean stock exchanges. Since the ADSs are deemed to
represent the underlying shares, transactions in ADSs will be subject to these
reporting requirements. Shareholders of a publicly held corporation are
required to report the following to the SVS and the Chilean stock exchanges:  
    
    any direct or indirect acquisition or sale of shares or
options to buy or sell shares, in any amount, if made by a holder of
10% or more of the publicly-held corporations capital;  
    
    any direct or indirect acquisition or sale of shares or
options to buy or sell shares, in any amount, if made by a director,
receiver, senior officer, C.E.O. or manager of such corporation; and  
    
    any direct or indirect acquisition of shares resulting in a
person acquiring, directly or indirectly, 10% or more of a publicly
held corporations share capital. A beneficial owner of ADSs representing 10% or more of our share capital
will be subject to these reporting requirements under Chilean law. Under Article 54 of the Securities Market Law, persons or entities aiming
to acquire direct or indirect control of an open stock corporation are also
required to:  
    
    send a written communication to the target corporation, the
entities controlled by such corporation or the entities that control
such corporation, as well as to the SVS and the Chilean stock
exchanges, and  
    
    inform the general public, in advance, through notice
published in two Chilean newspapers of national distribution. This written communication and notice must be published at least ten business
days in advance of the date of the execution of the documents that will entitle
the person to acquire control of the open stock corporation, and, in all cases,
concurrently with the commencement of negotiations that include delivery of
information and documentation about the corporation. The content of the notice
and written communication are determined by SVS regulations and include, among
other information, the identification of persons or entities purchasing or
selling, the price as well as the other essential conditions of negotiation. Title XV of the Securities Market Law sets forth the basis for determining
what constitutes control, a direct holding and a related party, while Title XXV
establishes a special procedure for acquiring control of an open stock
corporation. 75




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The Chilean Companies Act requires Chilean companies to offer existing
shareholders the right to purchase a sufficient number of shares to maintain
their existing ownership percentage of such company whenever such company
issues new shares. United States holders of ADSs are not entitled to exercise
preemptive rights unless a registration statement under the Securities Act is
effective with respect to such rights or an exemption from the registration
requirement for such rights is available. At the time of any preemptive rights
offering, we intend to evaluate the costs and potential liabilities associated
with any such registration statement, as well as the indirect benefits to it
from enabling the exercise by the holders of ADSs of such preemptive rights and
any other factors we consider appropriate at the time, and then to make a
decision as to whether to file such a registration statement. No assurance can
be given that any registration statement would be filed. If no registration
statement is filed and no exemption from the registration requirements of the
Securities Act is available, the Depositary will sell such holders preemptive
rights and distribute the proceeds from the sale of such rights in a secondary
market, if a market for such rights exists and a premium can be recognized over
the cost of such sale. Should the Depositary not be permitted or otherwise be
unable to sell such preemptive rights, the rights may be allowed to lapse with
no consideration received. Dissenting Shareholders The Chilean Companies Act provides that, upon the adoption at an
extraordinary meeting of shareholders of any of the resolutions enumerated
below, dissenting shareholders acquire the right to withdraw from a Chilean
issuer and to compel that issuer to repurchase their shares, subject to the
fulfillment of certain terms and conditions described below. In order to
exercise such rights, holders of ADSs must first withdraw the shares
represented by their ADSs pursuant to the terms of the Depositary Agreement.
Dissenting shareholders are defined as those who vote against a resolution
which results in the withdrawal right, or if absent at such a meeting, those
who stated their opposition to such resolution in writing to the issuer within
30 days of its adoption. Dissenting shareholders must perfect their withdrawal
rights by tendering their stock to the issuer within 30 days after adoption of
the resolution. The resolutions that result in a shareholders right to withdraw are the
following:  
    
    the transformation of the issuer into an entity which is not
a stock corporation governed by the Chilean Companies Act;  
    
    the merger of the issuer with and/or into another company;  
    
    the sale of 50% or more the assets of the issuer; whether or
not its liabilities are included, or the formulation of a business
plan contemplating a sale on those terms;  
    
    creation of personal securities or asset-backed securities
for the purpose of guaranteeing third-party obligations in excess of
50% of the companys assets;  
    
    the creation of preferential rights for a class of shares or
an amendment to those already existing, in which case the right to
withdraw only accrues to the dissenting shareholders of the class or
classes of shares adversely affected;  
    
    the creation of preferential rights for a class of shares or
an amendment to preferential rights already existing, in which case
the right to withdraw only accrues to the dissenting shareholders of
the class or classes of shares adversely affected; and  
    
    such other resolutions as may be established by an issuers
bylaws (no such additional resolutions currently are specified in
the Bylaws of our company). 76




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Under Article 69 BIS of the Chilean Companies Act, the right to withdraw
is also granted to shareholders, other than the Administradoras de Fondos de
Pensiones (AFPs), subject to certain terms and conditions, if we become
controlled by the Chilean government, directly or through any of its agencies,
and if two independent rating agencies downgrade the rating of our stock from
first class due to certain actions specified in Article 69 BIS and actions
undertaken by us or the Chilean Government that negatively and substantially
affect our earnings. Shareholders must perfect their withdrawal rights by
tendering their stock to us within 30 days of the date of the publication or of
the new rating by two independent rating agencies. If the withdrawal right is
exercised by a shareholder invoking Article 69 BIS, the price paid to the
dissenting shareholder shall be the weighted average of the shares sales price
as reported on the stock exchanges on which our shares are quoted for the
six-month period preceding the publication of the new rating by two independent
rating agencies. If the SVS determines that the shares are not actively
traded, the price shall be book value calculated as described above. Voting Shares of Common Stock The Depositary will mail a notice to all holders containing the
information (or a summary thereof) included in any notice of a shareholders
meeting received by the Depositary, a statement that each holder of ADSs at the
close of business on a specified record date will be entitled, subject to
Chilean law or the regulations and provisions governing deposited shares, to
instruct the Depositary as to the exercise of the voting rights, if any,
pertaining to the deposited securities represented by the ADSs evidenced by
such holders ADSs and a brief statement as to the manner in which each such
holder may instruct the Depositary to exercise voting rights in respect of
shares represented by ADSs held by the holders. Holders on the record date set
by the Depositary are entitled to instruct the Depositary in writing, subject
to the terms of Chilean law, the Bylaws and the Deposit Agreement, as to the
exercise of voting rights attached to the deposited shares, and upon receipt of
such instructions, the Depositary will endeavor, insofar as practicable, to
vote or cause to be voted the shares underlying such holders ADSs in
accordance with such written instructions. The Depositary has agreed not to, and shall instruct the Custodian and
each of its nominees, if any, not to vote the shares evidenced by an ADS other
than in accordance with such written instructions from the holder. The
Depositary may not itself exercise any voting discretion over any shares. If
no instructions are received by the Depositary from any holder with respect to
any of the deposited securities represented by the ADSs evidenced by such
holders ADSs on or before the date established by the Depositary for such
purpose, the Depositary shall deem such holder to have instructed the
Depositary to give a discretionary proxy to a person designated by us to vote
the underlying shares. Disclosure Holders of ADSs are subject to certain provisions of the rules and
regulations promulgated under the Exchange Act relating to the disclosure of
interests in the shares. Any holder of ADSs who is or becomes directly or
indirectly interested in 5% (or such other percentage as may be prescribed by
law or regulation) or more of the outstanding shares must notify us, any U.S.
securities exchange on which the ADSs or shares are traded and the Securities
and Exchange Commission (as required by such rules and regulations) within ten
days after becoming so interested and thereafter upon certain changes in such
interests. In addition, holders of ADSs are subject to the reporting
requirements contained in Articles 12 and 54 and Title XV of the Securities
Market Law, which provisions may apply when a holder beneficially owns 10% or
more of the shares or has the intention of taking control of us. Chilean Tax Considerations The following discussion is based on the opinion of Carey y Cía with
respect to certain Chilean income tax laws presently in force, and summarizes
the material Chilean income tax consequences of an 77




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investment in our common stock or ADSs by an individual who is not
domiciled or resident in Chile or a legal entity that is not organized under
the laws of Chile and does not have a permanent establishment located in Chile
(a Foreign Holder). This discussion is based upon Chilean income tax laws
presently in force, including Ruling No. 324 of January 29, 1990 of the Chilean
Internal Revenue Service and other applicable regulations and rulings. The
discussion is not intended as tax advice to any particular investor, which can
be rendered only in light of that investors particular tax situation.
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE CHILEAN TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES.
Under Chilean law, tax rates applicable to foreign investors, the computation
of taxable income for Chilean purposes and the manner in which Chilean taxes
are imposed and collected may only be established or amended by another
statute. In addition, the Chilean tax authorities enact rulings and
regulations of both general and specific application and interpret the
provisions of Chilean tax law. Chilean tax may not be assessed retroactively
against taxpayers who rely in good faith on such rulings, regulations and
interpretations, but Chilean tax authorities may change such rulings,
regulations and interpretations. There is no income tax treaty in force
between Chile and the United States. Cash Dividends and Other Distributions Cash dividends paid by our company with respect to the ADSs or shares held
by a Foreign Holder will be subject to a 35% Chilean withholding tax, which is
withheld and paid to the Chilean tax authorities by us (the Withholding Tax).
A credit against the Withholding Tax is available based on the level of
corporate income tax actually paid by us on the income to be distributed (the
First Category Tax). However, since the amount of First-Category Tax we pay
is added to the taxable base in calculating the Withholding Tax, the overall
tax burden to the holder will be 35%, regardless of whether we register a tax
profit, with the corresponding credit for First-Category Tax paid, or a tax
loss. Full applicability of the First Category-Tax Credit at the 17% rate
results in an effective dividend withholding tax rate of 21.68%. Consequently,
the effective withholding tax rate with respect to dividends fluctuates between
21.68% and 35%, depending on whether or not the dividends are attributable to
taxable profits that were subject to First-Category Tax at the corporate level. Under Chilean income tax law, dividends generally are assumed to have been
paid out of our oldest retained profits for the purpose of determining the
level of First-Category Tax that we paid. For information as to our retained
earnings for tax purposes and the tax credit available on the distribution of
such retained earnings, see Note 14 to the audited consolidated financial
statements. For dividends attributable to our profits during years when the
First-Category Tax was 10% (before 1991), the effective dividend Withholding
Tax rate will be 27.8%. However, whether the First-Category Tax is 10% or 17%,
the effective overall tax burden imposed on our distributed profits will be
35%. When the First-Category Tax credit is available, it does not reduce the
Withholding Tax on a one-for-one basis because it also increases the base on
which the Withholding Tax is imposed. In addition, if we distribute less than
all of our distributable taxable income, the credit for First Category Tax is
used proportionately. Presently, the First-Category Tax rate is 17%. The
example below illustrates the effective Chilean Withholding Tax burden on a
cash dividend received by a foreign holder, assuming a Withholding Tax rate of
35%, an effective First-Category Tax rate of 17% and a distribution of 30% of
our consolidated net income distributable after payment of the First-Category
Tax. D&S taxable income
    
    
    100First Category Tax (16.5% of Ch$100)
    
    
    -17.0Net distributable income
    
    
    83.0Dividend distributed (30% of net distributable income)
    
    
    24.9
 78




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Withholding Tax (35% of the sum of Ch$25.2 dividend
plus Ch$4.8 First Category Tax paid)
    
    
    -10.5Credit for 16.5% of First Category Tax paid
    
    
    5.1Net additional tax withheld
    
    
    5.4Net dividend received
    
    
    19.5Effective dividend withholding rate
    
    
    22.7
    %
 In general, the effective dividend Withholding Tax rate, after giving
effect to the credit for the First-Category Tax, can be calculated using the
following formula: Effective dividend Withholding Tax Rate
    =
    (Withholding Tax Rate)  (First Category Tax Rate)1  (First Category Tax Rate) Dividend distributions made in property would be subject to the same
Chilean tax rules as cash dividends. Stock dividends are not subject to
Chilean taxation. Capital Gains Gain from the sale or exchange of ADSs (or ADRs evidencing ADSs) outside
of Chile, including those traded on the Santiago Stock Exchange Offshore
Market, will not be subject to Chilean taxation. The deposit and withdrawal of
common shares in exchange for ADRs will not be subject to any Chilean taxes. Gain recognized on a sale or exchange of shares (as distinguished from
sales or exchanges of ADSs representing such shares) will be subject to both
the First-Category Tax and the Withholding Tax (the former being creditable
against the latter) if either:  
    
    the foreign holder has held the shares for less than one year
since exchanging the ADSs for the common shares;  
    
    the foreign holder acquired and disposed of the shares in the
ordinary course of its business or as a habitual trader of shares;  
    
    the foreign holder and the purchaser of the shares are related parties. For these purposes, a related party is an entity in which the foreign holder is:  
    
    a partner;  
    
    a shareholder if the entity is a closed stock corporation; or  
    
    a shareholder with more than 10% of the shares if the entity is an open stock corporation. In all other cases, gain on the disposition of shares will be subject to a
flat 16.5% First-Category Tax, and no Withholding Tax will apply. The tax basis of our common shares received in exchange for ADRs generally
will be the acquisition value of those shares on the date of the exchange,
adjusted according to the Chilean Consumer Price Index (domestic inflation)
variation between the month preceding the exchange and the month preceding the
sale. The valuation procedure set forth in the deposit agreement, which values
common shares that are being exchanged at the highest price at which they trade
on the Santiago Stock Exchange 79




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on the date of the exchange, will determine the acquisition value for this
purpose. Consequently, the conversion of ADRs into common shares and the
immediate sale of those common shares for no more than the value established
under the deposit agreement will not generate a gain subject to Chilean
taxation. Notwithstanding the foregoing, in accordance with a Chilean Internal
Revenue Service ruling (Oficio No.3708/99), if a foreign holder sells the
common shares received in exchange for ADRs on a Chilean Stock Exchange, within
two business days prior to the date on which the share transfer with respect to
the exchange for ADRs is registered in Santiagos registry, the acquisition
value is permitted to be the price at which the shares were sold, as evidenced
by the invoice issued by the stockbroker with respect to the sale.
Consequently, such a sale would not generate a gain subject to taxation in
Chile. The exercise of preemptive rights relating to our common shares will not
be subject to Chilean taxation. Any gain on the sale or assignment of
preemptive rights relating to the common shares will be subject to both the
First-Category Tax and the Withholding Tax (the former being creditable against
the latter). Other Chilean Taxes There are no Chilean inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of ADRs by a foreign holder, but such
taxes generally will apply to the transfer at death or by gift of the shares by
a foreign holder. There are no Chilean stamp, issue, registration or similar
taxes or duties payable by holders of ADRs or shares. Withholding Tax Certificates Upon request, we will provide to foreign holders appropriate documentation
evidencing the payment of Chilean withholding taxes. United States Tax Considerations The following summary describes certain United States federal income tax
consequences of the ownership of our shares and ADSs by U.S. Holders (as
defined below) as of the date hereof. Except where noted, it deals only with
shares and ADSs held as capital assets and does not deal with special
situations, such as those of dealers in securities or currencies, financial
institutions, regulated investment companies, real estate investment trusts,
tax-exempt entities, insurance companies, traders in securities that elect to
use the mark-to-market method of accounting for their securities, persons
holding shares or ADSs as part of a hedging, integrated, conversion or
constructive sale transaction or a straddle, persons owning 10% or more of our
voting stock, persons liable for alternative minimum tax, investors in
pass-through entities or persons whose functional currency is not the United
States dollar. Furthermore, the discussion below is based upon the provisions
of the Internal Revenue Code of 1986, as amended (the Code), and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in United
States federal income tax consequences different from those discussed below.
In addition, this summary is based, in part, upon representations made by the
depositary to us and assumes that the Deposit Agreement, and all other related
agreements, will be performed in accordance with their terms. PERSONS
CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF SHARES OR ADSS SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. As used herein, the term U.S. Holder means a beneficial holder of a
share or ADS that is: 80




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
    
    an individual citizen or resident of the United States,  
    
    a corporation (or other entity treated as a corporation for
United States federal income tax purposes) created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia,  
    
    an estate the income of which is subject to United States
federal income taxation regardless of its source or  
    
    a trust:  
    
    that is subject to the supervision of a court within
the United States and the control of one or more United States
persons as described in section 7701(a)(30) of the Code, or  
    
    that has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a United States
person. If a partnership holds shares or ADSs, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the
partnership. U.S. Holders that are partners of a partnership holding shares or
ADSs should consult their own tax advisors. ADSs In general, for United States federal income tax purposes, U.S. Holders of
ADSs will be treated as the owners of the underlying shares that are
represented by such ADSs. Accordingly, deposits or withdrawals of shares by
U.S. Holders for ADSs will not be subject to United States federal income tax. Taxation of Dividends The gross amount of distributions made to U.S. Holders of ADSs or shares
(including the amount of any Chilean taxes withheld) will be treated as
dividend income to such U.S. Holders, to the extent paid out of current or
accumulated earnings and profits, as determined under United States federal
income tax principles. Such income will be includable in the gross income of a
U.S. Holder as ordinary income on the day received by the depositary, in the
case of ADSs, or by the U.S. Holder, in the case of shares. Such dividends
will not be eligible for the dividends received deduction allowed to
corporations under the Code. With respect to U.S. non-corporate holders,
certain dividends received before January 1, 2009 from a qualified foreign
corporation may be subject to reduced rates of taxation. A foreign corporation
is treated as a qualified foreign corporation with respect to dividends
received from that corporation on shares (or ADSs backed by such shares) that
are readily tradable on an established securities market in the United States.
United States Treasury Department guidance indicates that our ADSs (which are
listed on the New York Stock Exchange), but not our shares, are readily
tradable on an established securities market in the United States. Thus, we do
not believe that dividends that we pay on our shares currently meet the
conditions required for these reduced tax rates. There can be no assurance
that our ADSs will be considered readily tradable on an established securities
market in later years. Non-corporate holders that do not meet a minimum
holding period requirement during which they are not protected from the risk of
loss or that elect to treat the dividend income as investment income
pursuant to section 163(d)(4) of the Code will not be eligible for the reduced
rates of taxation regardless of our status as a qualified foreign corporation.
In addition, the rate reduction will not apply to dividends if the recipient of
a dividend is obligated to make related payments with respect to positions in
substantially similar or related property. This disallowance applies even if
the minimum holding period has been met. U.S. non-corporate holders should
consult their own tax advisors regarding the application of these rules given
their particular circumstances. 81




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The amount of any dividend paid in pesos will equal the United States
dollar value of the pesos received calculated by reference to the exchange rate
in effect on the date the dividend is received by the depositary, in the case
of ADSs, or by the U.S. Holder, in the case of shares, regardless of whether
the pesos are converted into United States dollars. If the pesos received as a
dividend are not converted into United States dollars on the date of receipt, a
U.S. Holder will have a basis in the pesos equal to their United States dollar
value on the date of receipt. Any gain or loss realized on a subsequent
conversion or other disposition of the pesos will be treated as United States
source ordinary income or loss. Subject to certain conditions and limitations, Chilean withholding taxes
(after taking into account the credit for the First Category Tax) may be
treated as foreign taxes eligible for credit against a U.S. Holders United
States federal income tax liability. The overall limitation on foreign taxes
eligible for credit is calculated separately with respect to specific classes
or baskets of income. For purposes of calculating the foreign tax credit,
dividends paid on the ADSs or shares will be treated as income from sources
outside the United States and will generally constitute passive income or, in
the case of certain U.S. Holders, financial services income. Foreign tax
credits allowable with respect to each income basket cannot exceed the U.S.
federal income tax otherwise payable with respect to such income. Special
rules apply to certain individuals whose foreign source income during the
taxable year consists entirely of qualified passive income and whose
creditable foreign taxes paid or accrued during the taxable year do not exceed
$300 ($600 in the case of a joint return). Further, in certain circumstances,
if a U.S. Holder:  
    
    has held ADSs or shares of common stock for less than a
specified minimum period during which such U.S. Holder was not
protected from risk of loss, or  
    
    is obligated to make payments related to the dividends. The U.S. Holder will not be allowed a foreign tax credit for foreign taxes
imposed on dividends paid on ADSs or shares of common stock. The rules
governing the foreign tax credit are complex. U.S. Holders are urged to
consult their tax advisors regarding the availability of the foreign tax credit
under their particular circumstances. To the extent that the amount of any distribution exceeds our current and
accumulated earnings and profits for a taxable year, the distribution will
first be treated as a tax-free return of capital, causing a reduction in the
adjusted basis of the ADSs or shares (thereby increasing the amount of gain, or
decreasing the amount of loss, to be recognized by the investor on a subsequent
disposition of the ADSs or shares), and the balance in excess of adjusted basis
will be taxed as capital gain recognized on a sale or exchange. Consequently,
such distributions in excess of our current and accumulated earnings and
profits would generally not give rise to foreign source income and a U.S.
Holder would generally not be able to use the foreign tax credit arising from
any Chilean withholding tax imposed on such distribution unless such credit can
be applied (subject to applicable limitations) against U.S. tax due on other
foreign source income in the appropriate category for foreign tax credit
purposes. Distributions of ADSs, shares or preemptive rights to subscribe for shares
that are received as part of a pro rata distribution to all of our shareholders
generally will not be subject to United States federal income tax. Passive Foreign Investment Companies We believe, based on our current operations and assets, that we should not
be classified a passive foreign investment company (a PFIC) for United States
federal income tax purposes although there can be no assurance in this regard.
This conclusion is a factual determination based on, among other things, a
valuation of our assets, which is subject to change from time to time. The
determination of whether we are a PFIC is made annually. Accordingly, it is
possible that we may become a PFIC in the current or any 82




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future taxable year due to changes in our asset or income composition or
changes in governing law. If we are or become a PFIC, a U.S. Holder could be
subject to additional United States federal income taxes on gain recognized
with respect to the ADSs or shares and on certain distributions, plus an
interest charge on certain taxes treated as having been deferred under the PFIC
rules. Non-corporate U.S. Holders will not be eligible for reduced rates of
taxation on any dividends received from us prior to January 1, 2009, if we are
a PFIC in the taxable year in which such dividends are paid or in the preceding
taxable year. Capital Gains For United States federal income tax purposes, a U.S. Holder will
recognize taxable gain or loss upon the sale or other disposition of ADSs or
shares in an amount equal to the difference between the amount realized for the
ADSs or shares and the U.S. Holders basis in the ADSs or shares. Such gain or
loss will generally be capital gain or loss. Capital gains of individuals
derived with respect to capital assets held for more than one year are eligible
for reduced rates of taxation. The deductibility of capital losses is subject
to limitations. Any gain or loss recognized by a U.S. Holder generally will be
treated as United States source gain or loss. Consequently, in the case of a
disposition of shares (which, unlike a disposition of ADSs, may be taxable in
Chile), the U.S. Holder may not be able to use the foreign tax credit for
Chilean tax imposed on the gain unless it can apply the credit (subject to
applicable limitations) against tax due on other income from foreign sources. Estate and Gift Taxation As discussed above under Chilean Tax Considerations  Other Chilean
Taxes, there are no Chilean inheritance, gift or succession taxes applicable
to the ownership, transfer or disposition of ADSs by a foreign holder, but such
taxes generally will apply to the transfer at death or by gift of shares by a
foreign holder. The amount of any inheritance tax paid to Chile may be
eligible for credit against the amount of United States federal estate tax
imposed on the estate of a U.S. Holder. Prospective purchasers should consult
their personal tax advisors to determine whether and to what extent they may be
entitled to such credit. The Chilean gift tax generally will not be treated as
a creditable foreign tax for United States tax purposes. Information Reporting and Backup Withholding In general, information reporting requirements will apply to dividends
paid in respect of ADSs or shares or the proceeds received on the sale,
exchange or redemption of ADSs or shares within the United States (and in
certain cases, outside the United States) by U.S. Holders other than certain
exempt recipients (such as corporations). A backup withholding tax may apply
to such payments if the U.S. Holder fails to provide an accurate taxpayer
identification number or certification of other exempt status or fails to
report in full dividend and interest income. Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against the U.S. Holders United States federal income tax
liability provided the required information is furnished to the Internal
Revenue Service. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF
ADSs OR SHARES. 83




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Dividend Policy and Dividends Our companys dividend policy is decided upon from time to time by the
board of directors and is announced at the regular annual shareholders
meeting, which is generally held in April of each year. However, the board of
directors must submit at the annual regular shareholders meeting for
shareholder approval each year a proposal for the declaration of the final
dividend or dividends to be paid for the preceding year, consistent with the
then-established dividend policy. Our current dividend policy is to pay a
minimum annual dividend of Ch$10.0 per share. As required by the Chilean
Companies Act, unless otherwise decided by unanimous vote of the issued and
subscribed shares, we must distribute a cash dividend in an amount equal to at
least 30% of our net income for a given year, unless and except to the extent
we have a deficit in retained earnings. There can be no assurance that future
dividends will be paid in an amount exceeding the 30% level required by law.
Our board has the authority to decide whether such dividends will be paid in
the form of interim dividends or a single annual payment. When one (or more) interim dividends are paid during the fiscal year, a
final dividend is declared at the annual shareholders meeting in an amount
that, together with the interim dividends previously paid, is sufficient to
satisfy the statutory requirement that at least 30% of net income for the year
be paid out in dividends. Such final dividend is paid on a date fixed by the
board of directors, generally in March or April. The amount and timing for payment of dividends is subject to revision from
time to time, depending upon our current level of sales, costs, cash flow and
capital requirements, as well as market conditions. Any change in dividend
policy would ordinarily be effective for dividends declared in the year
following adoption of the change, and a notice as to any such change of policy
would be required to be filed with Chilean regulatory authorities and would be
publicly available information. Notice of such a change of policy would not,
however, be sent to each shareholder or ADS holder. There can be no assurance
as to the amount or timing of the declaration or payment of dividends in the
future. Dividends are paid to shareholders of record on the fifth business day
preceding the date set for payment of the dividend. The holders of ADSs on the
applicable record dates for the ADSs will be entitled to all dividends paid on
the ADSs. Direct shareholders who are not residents of Chile must register as
foreign investors under one of the foreign investment regimes contemplated by
Chilean law to have dividends, sale proceeds or other amounts with respect to
their shares remitted outside of Chile through the formal exchange market.
Under our foreign investment contract, the depositary, on behalf of ADR
holders, will be granted access to the formal exchange market to convert cash
dividends from pesos to U.S. dollars and to pay such U.S. dollars to ADR
holders outside of Chile. See Exchange Controls. Dividends received in
respect of shares of common stock by holders, including holders of ADRs who are
not Chilean residents, are subject to Chilean withholding tax. See  
Additional Information  Chilean Tax Considerations. The following table sets forth our dividend paid ratio and the amounts of
total dividends paid on each fully paid share and ADS in respect of the year
indicated. Amounts in Chilean pesos are presented in historical Chilean pesos
as of the respective payment dates. Amounts are translated into U.S. dollars
per ADS (representing 15 shares) at the Observed Exchange Rate of each of the
respective dividend dates. See Exchange Rates. Dividend
    
    Dividend per
    
    Dividend perYear Declared
    
    Paid Ratio
    
    Share
    
    ADS1999(1)
    
    NA
    
    Ch$
    8.0
    
    
    US$
    0.202000
    
    
    48.1
    
    
    
    10.0
    
    
    
    0.252001
    
    
    35.1
    
    
    
    10.0
    
    
    
    0.252002
    
    
    58.0
    
    
    
    10.0
    
    
    
    0.252003(2)
    
    
    33.1
    
    
    
    5.0
    
    
    
    0.13
 84




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(1)
    
    In 1999, dividends were paid despite the net loss recorded for the year
and were charged to retained earnings.(2)
    
    Not including the final dividend for 2003, which we expect to be
authorized by the general shareholders meeting on April 29 and to be paid
in May 2004. Exchange Rates All payments and distributions with respect to the ADSs must be transacted
in the Formal Exchange Market. See Item 3. Key Information  Risk Factors. New York Stock Exchange and Chilean Corporate Governance Requirements In accordance with Section 303A.11 of the New York Stock Exchanges Listed
Company Manual, the following table sets forth significant differences between
Chilean corporate governance requirements and comparable corporate governance
requirements applicable to U.S. corporations listed on the New York Stock
Exchange. ITEM
    
    NYSE REQUIREMENTS
    
    CHILEAN LAW REQUIREMENTSCode of Business Conduct
    
    A company must adopt
a code of business
conduct for its
directors, officers
and employees. Such
company must
disclose any waiver
of its code of
conduct that is
granted to an
officer or director.
    
    There is no legal
obligation to adopt
a code of business
conduct. Chilean
law requires that a
company have a set
of internal
regulations which
regulates employee
conduct. Such
regulations may
contain, among other
things, regulations
related to ethics
and good behavior.
Notwithstanding the
above, a company may
create internal
codes of conduct,
provided that they
do not require or
prohibit behavior or
impose sanctions
that contravene
Chilean law.Internal Audit Function
    
    A company must have
in place an internal
audit function to
provide management
and its audit
committee with
ongoing assessments
of such companys
risk management
processes and system
of internal control.
A company may
choose to outsource
this function to a
firm other than its
independent
auditors.
    
    There is no similar
obligation under
Chilean law.
However, Chilean law
requires that
companies must have
both external
auditors and an
audit department.
 85




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ITEM
    
    NYSE REQUIREMENTS
    
    CHILEAN LAW REQUIREMENTSMeetings of
Non-Management Directors
    
    Non-management
directors must meet
regularly without
management of the
company.
    
    No similar legal
obligation exists
under Chilean law.
Under Chilean law,
the position of
director of a
corporation is
incompatible with
the position of
manager, auditor,
accountant or
president of the
company. Directors
must meet in a
properly convened
meeting in order to
agree on the matters
under their
competence.Audit Committee
    
    A company must have
an audit committee
with a minimum of
three members. All
the members must be
independent
directors. At least one
member of the audit
committee must have
accounting or related financial management expertise as a
companys board interprets such qualification in its business
judgment. While the NYSE does not require that a listed
companys audit committee have an audit
committee financial
expert as defined by the U.S. securities laws, a companys
board may presume that such a person has accounting or related
financial management expertise sufficient to satisfy the NYSE
requirement.
    
    No similar legal
obligation exists
under Chilean law.
However, in
accordance with the
Chilean Companies
Law 18,046, listed
companies that have
a net worth of more
than 1.5 million Ufs
(US$ 41 MM) must
have a committee of
directors, formed by
three board members
who are independent
from the controller
of the company. The
committees
compensation is set
by the ordinary
shareholders
meeting, and it
performs the
following functions: (1)
examine the
reports of account
inspectors and
external auditors,
financial statements
and give an opinion
on such reports and
statements, (2)
suggests external
auditors and rating
agencies to the
board of directors,
(3) examine
conflicts of
interest and
related-party
transactions and
inform the board
regarding such
conflicts and
transactions, (4)
examine compensation
systems and plans
for directors and
executive officers,
and (5) any other
matters that the
bylaws, the
shareholders meeting
or the board of
directors decide.
 86




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ITEM
    
    NYSE REQUIREMENTS
    
    CHILEAN LAW REQUIREMENTSCEO Certifications
    
    A companys CEO must
certify annually
that he or she is
not aware of any
violations by such
company of the
NYSEs corporate
governance standards
(this certification
is in addition to
the certification
required by Section
302 of the U.S.
Sarbanes-Oxley Act
of 2002).
    
    No similar
obligation exists
under Chilean
law.
However, in
accordance with
Chilean law, the
directors of a
company must
annually submit for
approval such
companys annual
report and financial
statements to its
shareholders at such
companys annual
shareholders
meeting. Similarly,
public companies
must, from time to
time, provide all
relevant company
information by means
of the publications
and notifications
established by law,
both to the public
and to the
Superintendencia de
Valores y Seguros.Notification by the CEO
to the NYSE of
Non-compliance with
Corporate Gov. standards
    
    A companys CEO must
promptly notify the
NYSE in writing
after any executive
officer of the
company becomes
aware of any
material
non-compliance with
any applicable NYSE
corporate governance
standard.
    
    No similar
obligation exists
under Chilean
law.Disclosure of
Significant Differences
with Respect to
Corporate Governance
Practices
    
    A company must
provide a summary
description of
significant
differences between
its home country
corporate governance
practices and the
corporate governance
requirements
established by the
NYSE and applicable
to U.S. domestic
listed companies.
    
    No similar
obligation exists
under Chilean
law.Shareholder
Approval of Equity Compensation Plans
    
    Shareholders must be given the
opportunity to vote on all equity compensation plans and material
revisions to the terms of such plans with certain limited exceptions.
An equity-compensation plan is a plan or other
arrangement that provides for the delivery of equity securities
(either newly issued or treasury shares) of the listed company to any
employee, director or other service provider as compensation for
services.
    
    Under Chilean law, 10% of any
capital increase may be set aside by shareholders for use in equity
compensation plans. Additionally, shareholders may also set aside the
companys other unsubscribed shares with respect to which preemptive
rights were waived or not exercised for use in equity compensation
plans. If the company offers shares in connection with shareholder
approved equity compensation plans, such offerings are not subject to
Chilean preemptive rights requirements applicable to other offerings.Adoption
and Disclosure of Corporate Governance Guidelines
    
    Listed companies must adopt and
disclose corporate governance guidelines, encompassing such areas as
director qualification standards, director responsibilities, director
access to management, director compensation, director
orientation/continuing education, management succession, and annual
performance evaluations of the companys board. Each listed
companys website must include its corporate governance
guidelines and the charters of its most important committees.
    
    No similar
obligation exists
under Chilean
law.
 Documents on Display We have filed with the Securities and Exchange Commission this annual
report on Form 20-F, including exhibits, under the Securities Exchange Act of
1934 with respect to the common shares. You may read and copy all or any portion of the annual report or other
information in our files in the Commissions public reference room at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the Securities and Exchange Commission located at Seven
World Trade Center, 13th Floor, New York, NY 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You can request copies of these documents
upon payment of a duplicating fee, by writing to the Securities and Exchange
Commission. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. 87




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Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to impacts from interest rate changes, foreign currency
fluctuations and changes in the market values of our investments. Generally,
we monitor our positions so as to seek lower costs of funds while maintaining
our market risk within acceptable parameters. Our principal exposures relate
to our investments in Chile, and short-term liabilities denominated in U.S.
dollars. Policies and Procedures In the normal course of our business, we actively manage our exposure to
changes in interest rates, foreign currencies and the fair market value of
certain of our investments using a variety of financial instruments. It is our
policy to enter into foreign currency and interest rate transactions and other
financial instruments only to the extent considered necessary to meet our
objectives as stated above. We do not enter into these transactions for
speculative purposes. The following discussion about our risk management includes
forward-looking statements that involve risks and uncertainties. Actual
results could differ from those projected in the forward-looking statements.
See Special Note Regarding Forward Looking Statements. In addition to the
inherent risks related to the operations in each of our segments in which we do
business, we face material market risk exposures in two categories: foreign
currency exchange rate risk and interest rate risk. The following discussion
provides additional information regarding our exposure to each of these risks
as of December 31, 2003. Foreign Currency Exchange Rate Risk At December 31, 2003, approximately 8% of our short-term debt and
long-term debt of $Ch310,111 million and the U.S. dollar receivable from Disco
in the amount of US$ 45,000.000 was exposed to risk from exchange rate
fluctuations between the Chilean peso and the U.S. dollar. As of December 31,
2003, we had entered into 30-day forward contracts for Ch$1,385 million to
limit the exposure to fluctuations between the Chilean peso and the U.S.
dollar. The forward contract which we entered into for Ch$74,580,000 thousand
for the acquisition of the Carrefour stores was to limit our exposure to
fluctuations between the Chilean peso and the Euro for the amount to be paid on
January 7, 2004 related to such transaction. The following table summarizes the amounts sensitive to foreign currency
exchange rates held by us at December 31, 2003 by maturity date. The U.S.
dollar-denominated debt has been converted to Chilean pesos based on the
observed exchange rate of December 31, 2003 which was Ch$593.80 = US$1.00. On balance sheet financial instruments Expected maturity date 20092004
    
    2005
    
    2006
    
    2007
    
    2008
    
    and thereafter
    
    TotalU.S.$ denominated
    
    CH$
    
    CH$
    
    CH$
    
    CH$
    
    CH$
    
    CH$
    
    CH$Letters of credit
    
    
    21,241,217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,241,217Long term debt
    
    
    
    
    
    
    1,326,694
    
    
    
    1,326,694
    
    
    
    1,326,693
    
    
    
    
    
    
    
    
    
    
    
    3,980,081Disco receivable (1)
    
    
    28,338,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,338,921Mutual funds
    
    
    1,481,852
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,481,852Total
    
    
    51,061,990
    
    
    
    1,326,694
    
    
    
    1,326,694
    
    
    
    1,326,693
    
    
    
    
    
    
    
    
    
    
    
    55,042,071
   (1)
    
    The Disco receivable has been placed in the 2004 column of this analysis 88




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Interest Rate Risk Exposure to interest rate risk reflects our exposure to floating interest
debt as well as debt renewals or rollovers which could be reset at higher than
existing interest rates. At December 31, 2003, approximately 51.1% of our
total debt was represented by short-term debt and floating rate debt. Our net
exposure to interest rate risk as of December 31, 2003 was Ch$25,259 million.
Assuming a 100 basis point increase during 2004 in the weighted average
interest rate with respect to 2003 year-end balances, the result would be an
increase in our net annual interest expenses of approximately Ch$252 million.
However, interest rates showed a decreasing trend throughout 2003. Due to
depressed consumption levels in Chile, the Central Bank of Chile gradually
lowered the referential interest rate from 2.75% in March 2003 to 1.75% in
March 2004. In addition, a significant amount of our debt is indexed to Chilean
inflation (UF indexed debt), and as such, an increase in Chilean inflation
would affect the total interest that we pay on such debt. All interest rate sensitive instruments issued or held by the Company are
non-trading instruments. 
 Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 
 PART II 
 Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Not applicable. 
 Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Not applicable. 
 Item 15. CONTROLS AND PROCEDURES As of December 31, 2003, we carried out an evaluation of the controls and
procedures of our company with the participation of our Chief Executive Officer
and Chief Financial Officer to determine the effectiveness of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in all material respects to ensure that the
information we file and submit under the U.S. Securities and Exchange Act of
1934 is recorded, processed, summarized and reported as and when required. Furthermore, the evaluation found no significant changes in our internal
controls or other factors that could significantly affect these controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses. 
 Item 16. [Reserved] 
 Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has determined that Mr. Fernando Larraín Cruzat
will serve as our audit committee financial expert as defined in Item 16A of
Form 20-F. Our Board of Directors has not determined that Mr. Larraín Cruzat
is an independent director as defined in Section 303A.02 of the 89




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NYSEs Listed Company Manual. However, we expect that our audit committee
will be solely composed of independent directors by July 31, 2005. 
 Item 16B. CODE OF ETHICS We have adopted a code of ethics that applies to our chief executive
officer and all senior financial officers of our company, including the chief
financial officer, chief accounting officer or controller, or persons
performing similar functions. Our code of ethics is filed as Exhibit 11.1. 
 Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees. The aggregate fees paid to Deloitte & Touche, Sociedad de
Auditores y Consultores Ltda. (Deloitte) in connection with the annual audit
of our financial statements and for services normally provided by Deloitte in
connection with our statutory and regulatory filings for the fiscal years ended
December 31, 2002 and December 31, 2003 were Ch$139,670,354 and Ch$85,631,585,
respectively, including out of pocket expenses. Audit Related Fees. The aggregate fees paid to Deloitte in connection
with assurance and related services related to the annual audit of our company
and for review of our financial statements, other than the Audit Fees described
above, for the fiscal years ended December 31, 2002 and December 31, 2003 were
Ch$0 and Ch$0, respectively. Tax Fees. The aggregate fees paid for domestic and international
tax-related services, including tax compliance, tax advice and tax planning,
rendered by Deloitte to our company for the fiscal years ended December 31,
2002 and December 31, 2003 were Ch$60,690,618 and Ch$96,125,888, respectively. All Other Fees. The aggregate fees billed for all other non-audit
services rendered by Deloitte to our company for the fiscal years ended
December 31, 2002 and December 31, 2003 were Ch$0 and Ch$0,
respectively. 
 Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. 
 Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS During 2003 no issuer or affiliated parties made purchases pursuant to
publicly announced plans or programs or not pursuant to such plans. 
 PART III 
 Item 17. FINANCIAL STATEMENTS Reference is made to Item 18 for a list of all financial statements filed
as a part of this annual report. 90




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Item 18. FINANCIAL STATEMENTS The following consolidated financial statements of our company and
its subsidiaries are included at the end of this annual report: Index to Audited Consolidated Financial Statements
    
    
    F-1Independent Auditors Report
    
    
    F-2Consolidated balance sheets at December 31, 2002 and 2003
    
    
    F-3Consolidated statements of income for the years ended December 31, 2001, 2002 and 2003
    
    
    F-4Consolidated statements of cash flows at December 31, 2001, 2002 and 2003
    
    
    F-5Notes to the Consolidated Financial Statements
    
    
    F-6
 
 Item 19. EXHIBITS The exhibits filed with or incorporated by reference in this annual report
are listed in the index of exhibits below. 
 INDEX TO EXHIBITS Exhibit Number
    
    Description1.1
    
    English translation of our Amended Bylaws, dated April 29, 2003 (as filed
in our annual report on Form 20-F, dated as of June 30, 2003, and
incorporated herein by reference).2.1
    
    English translation of our Bond Issue Agreement, dated October 17, 2000,
with Banco de Chile, relating to our issuance of bonds in Chile totaling
approximately US$127 million (as filed in our annual report on Form 20-F,
dated as of June 30, 2001, and incorporated herein by reference).2.2
    
    English translation of our Loan Agreements with each of Banco Santander
and Banco Santiago (as filed in our annual report on Form 20-F, dated as
of June 30, 2001, and incorporated herein by reference).2.3
    
    English translation of one of the ten promissory notes executed by Disco
S.A. (as filed with our annual report on Form 20-F dated as of June 30,
2000 and incorporated herein by reference).2.4
    
    Deposit Agreement, dated as of October 7, 1997, between us and Morgan
Guaranty Trust Company of New York, as Depository and the registered
holders from time to time of American Depository Receipts (as filed in
Amendment No. 2 to our Form F-1 dated as of October 6, 1997 and
incorporated herein by reference).2.5
    
    English translation of our Foreign Investment Contract with the
Depository and the Central Bank of Chile relating to the foreign exchange
treatment of the investment in ADSs and ADRs (as filed in Amendment No.
2 to our Form F-1 dated as of October 6, 1997 and incorporated herein by
reference).
 91




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##### Table of Contents



Exhibit Number
    
    Description8.1
    
    List of subsidiaries of the company (as filed in our annual report on
Form 20-F, dated as of June 30, 2003, and incorporated herein by
reference).11.1
    
    Code of Ethics of the company, dated June 29, 2004 (filed herewith).12.1
    
    Certification of Mr. Cristóbal Lira pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).12.2
    
    Certification of Mr. Miguel Nuñez pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).13.1
    
    Certification of Mr. Cristóbal Lira pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes  Oxley Act of 2002 (filed
herewith).13.2
    
    Certification of Mr. Miguel Nuñez pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes  Oxley Act of 2002 (filed
herewith).
 92




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SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report on Form 20-F to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Santiago, Chile on June 30, 2004. DISTRIBUCION Y SERVICIO D&S S.A./s/ Miguel NuñezMiguel NuñezChief Financial Officer
 93




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DISTRIBUCION Y SERVICIO D&S S.A. Audited consolidated financial statements as of
December 31, 2002 and 2003 and for the years
ended December 31, 2001, 2002 and 2003




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DISTRIBUCION Y SERVICIO D&S S.A. INDEX TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Audited Consolidated Financial Statements
    
    PageIndependent Auditors Report
    
    
    F-2Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-3Consolidated Statements of Income for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-4Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-5Notes to the Consolidated Financial Statements for the years
ended December 31, 2001, 2002 and 2003
    
    
    F-6
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of   Distribución
y Servicio D&S S.A. We
have audited the consolidated balance sheets of Distribución
y Servicio D&S S.A. and subsidiaries (the Company)
as of December 31, 2002 and 2003 and the related consolidated
statements of income and of cash flows for each of the
three years in the period ended December 31, 2003, all
expressed in thousands of constant Chilean pesos. These consolidated
financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We
conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Companys
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion. In
our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Distribución
y Servicio D&S S.A. and its subsidiaries as of December 31,
2002 and 2003 and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles
generally accepted in Chile. Accounting
principles generally accepted in Chile vary in certain significant
respects from accounting principles generally accepted in the United
States of America. Information relating to the nature and effects of
such differences is presented in Note 25 to the consolidated
financial statements. Our
audits also comprehended the translation of constant Chilean pesos
amounts into U.S. dollar amounts and, in our opinion, such
translation has been made in conformity with the basis stated in
Note 2.u. Such U.S. dollar amounts are presented solely for the
convenience of readers in the United States of America. /s/ Deloitte & Touche
Sociedad de Auditores y Consultores Limitada
Santiago, Chile
January 30, 2004, except for Note 25 as   to
which the date is March 4, 2004 F-2




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DISTRIBUCION Y SERVICIO D&S S.A. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos (ThCh$) as of
December 31, 2002 and December 31, 2003) At December 31,Notes
    
    2002
    
    2003
    
    2003ThCh$
    
    ThCh$
    
    ThUS$(note 2u)ASSETSCURRENT ASSETS:Cash
    
    
    
    
    
    
    19,961,139
    
    
    
    31,395,705
    
    
    
    52,873Marketable securities
    
    
    4
    
    
    
    1,389,916
    
    
    
    3,695,636
    
    
    
    6,224Notes and accounts receivable (net of allowance for doubtful accounts of
ThCh$4,678,224 and ThCh$7,353,567 at December 31, 2002
and 2003, respectively)
    
    
    5
    
    
    
    126,281,052
    
    
    
    131,849,382
    
    
    
    222,043Due from related companies
    
    
    19
    
    
    
    1,467,759
    
    
    
    1,448,226
    
    
    
    2,439Inventories
    
    
    6
    
    
    
    90,149,797
    
    
    
    89,511,263
    
    
    
    150,743Refundable taxes
    
    
    14
    
    
    
    5,091,523
    
    
    
    5,158,317
    
    
    
    8,687Prepaid expenses
    
    
    
    
    
    
    2,470,870
    
    
    
    2,953,190
    
    
    
    4,973Other current assets
    
    
    7
    
    
    
    3,175,957
    
    
    
    54,887,830
    
    
    
    92,434Total current assets
    
    
    
    
    
    
    249,988,013
    
    
    
    320,899,549
    
    
    
    540,416PROPERTY,
PLANT AND EQUIPMENT - NET
    
    
    8
    
    
    
    494,474,604
    
    
    
    499,645,904
    
    
    
    841,438OTHER ASSETS
- NET
    
    
    9
    
    
    
    18,351,102
    
    
    
    24,180,570
    
    
    
    40,722TOTAL ASSETS
    
    
    
    
    
    
    762,813,719
    
    
    
    844,726,023
    
    
    
    1,422,576LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Banks and financial institutions
    
    
    12
    
    
    
    46,521,186
    
    
    
    49,449,788
    
    
    
    83,277Current portion of long-term liabilities
    
    
    12
    
    
    
    44,989,109
    
    
    
    27,613,744
    
    
    
    46,504Commercial paper
    
    
    12
    
    
    
    24,327,311
    
    
    
    57,983,564
    
    
    
    97,648Dividend payable
    
    
    
    
    
    
    6,969,000
    
    
    
    6,900,000
    
    
    
    11,620Accounts payable
    
    
    10
    
    
    
    160,100,454
    
    
    
    180,299,739
    
    
    
    303,637Sundry creditors
    
    
    12
    
    
    
    5,933,680
    
    
    
    7,076,117
    
    
    
    11,917Due to related companies
    
    
    19
    
    
    
    7,710,153
    
    
    
    7,802,355
    
    
    
    13,140Accruals and withholdings
    
    
    11
    
    
    
    17,610,100
    
    
    
    14,548,440
    
    
    
    24,501Other current liabilities
    
    
    
    
    
    
    194,704
    
    
    
    386,661
    
    
    
    648Total current liabilities
    
    
    
    
    
    
    314,355,697
    
    
    
    352,060,408
    
    
    
    592,892LONG-TERM LIABILITIES:Banks and financial institutions
    
    
    12
    
    
    
    33,063,941
    
    
    
    33,458,024
    
    
    
    56,346Commercial paper and bonds
    
    
    12
    
    
    
    93,893,794
    
    
    
    132,314,401
    
    
    
    222,827Lease obligations
    
    
    12
    
    
    
    11,892,295
    
    
    
    9,292,368
    
    
    
    15,649Sundry creditors
    
    
    12
    
    
    
    239,265
    
    
    
    217,456
    
    
    
    366Accruals
    
    
    20
    
    
    
    2,957,628
    
    
    
    3,494,263
    
    
    
    5,885Other long-term liabilities
    
    
    
    
    
    
    2,585,621
    
    
    
    2,932,525
    
    
    
    4,938Total long-term liabilities
    
    
    
    
    
    
    144,632,544
    
    
    
    181,709,037
    
    
    
    306,011MINORITY INTEREST
    
    
    
    
    
    
    85,035
    
    
    
    127,691
    
    
    
    215SHAREHOLDERS EQUITY:Paid-in capital (Common stock, no par value; authorized,
issued and outstanding 1,380,000,000 shares at December 31, 2002 and 2003)
    
    
    
    
    
    
    216,932,458
    
    
    
    216,932,458
    
    
    
    365,329Technical revaluation reserve and other reserves
    
    
    
    
    
    
    1,313,802
    
    
    
    1,313,802
    
    
    
    2,213Retained earnings
    
    
    
    
    
    
    85,494,183
    
    
    
    92,582,627
    
    
    
    155,916Total shareholders equity
    
    

    13
    
    
    
    303,740,443
    
    
    
    310,828,887
    
    
    
    523,458TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    762,813,719
    
    
    
    844,726,023
    
    
    
    1,422,576
 The accompanying notes are an integral part of these consolidated financial statements F-3




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DISTRIBUCION Y SERVICIO D&S S.A. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos (ThCh$) for the
years ended December 31, 2001, 2002 and 2003) For the year ended December 31,Notes
    
    2001
    
    2002
    
    2003
    
    2003ThCh$
    
    ThCh$
    
    ThCh$
    
    ThUS$(note 2u)OPERATING RESULTNet revenue
    
    
    
    
    
    
    949,712,768
    
    
    
    1,058,719,340
    
    
    
    1,162,999,797
    
    
    
    1,958,572Cost of sales
    
    
    
    
    
    
    (735,918,297
    )
    
    
    (817,077,720
    )
    
    
    (901,115,253
    )
    
    
    (1,517,540
    )Gross profit
    
    
    
    
    
    
    213,794,471
    
    
    
    241,641,620
    
    
    
    261,884,544
    
    
    
    441,032Selling and administrative expenses
    
    
    
    
    
    
    (157,179,364
    )
    
    
    (198,976,821
    )
    
    
    (216,642,780
    )
    
    
    (364,841
    )Operating income
    
    
    
    
    
    
    56,615,107
    
    
    
    42,664,799
    
    
    
    45,241,764
    
    
    
    76,191NON-OPERATING RESULTSNon-operating income
    
    
    18
    
    
    
    1,613,272
    
    
    
    1,319,631
    
    
    
    1,483,660
    
    
    
    2,499Non-operating expenses
    
    
    18
    
    
    
    (15,424,951
    )
    
    
    (20,751,276
    )
    
    
    (18,531,701
    )
    
    
    (31,209
    )Foreign exchange gain (loss)
    
    
    16
    
    
    
    6,233,786
    
    
    
    5,004,430
    
    
    
    (2,996,808
    )
    
    
    (5,047
    )Price-level restatement
    
    
    16
    
    
    
    (473,949
    )
    
    
    481,050
    
    
    
    2,125,190
    
    
    
    3,579Non-operating loss
    
    
    
    
    
    
    (8,051,842
    )
    
    
    (13,946,165
    )
    
    
    (17,919,659
    )
    
    
    (30,178
    )INCOME BEFORE INCOME TAXES
    
    
    
    
    
    
    48,563,265
    
    
    
    28,718,634
    
    
    
    27,322,105
    
    
    
    46,013INCOME TAXES
    
    
    14
    
    
    
    (7,611,569
    )
    
    
    (4,703,377
    )
    
    
    (6,502,661
    )
    
    
    (10,951
    )NET INCOME
    
    
    
    
    
    
    40,951,696
    
    
    
    24,015,257
    
    
    
    20,819,444
    
    
    
    35,062
 The accompanying notes are an integral part of these consolidated financial statements F-4




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DISTRIBUCION Y SERVICIO D&S S.A. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos (ThCh$) for the
years ended December 31, 2001, 2002 and 2003) For the year ended December 31,Notes
    
    2001
    
    2002
    
    2003
    
    2003ThCh$
    
    ThCh$
    
    ThCh$
    
    ThUS$(note 2u)CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    
    
    
    
    
    40,951,696
    
    
    
    24,015,257
    
    
    
    20,819,444
    
    
    
    35,062Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization expense
    
    
    
    
    
    
    31,757,013
    
    
    
    34,596,848
    
    
    
    37,998,551
    
    
    
    63,992Write offs and accruals
    
    
    
    
    
    
    2,087,309
    
    
    
    3,238,804
    
    
    
    6,505,571
    
    
    
    10,956Equity in
earnings of equity - method investees (gain - net)
    
    
    
    
    
    
    (172,972
    )
    
    
    (316,663
    )
    
    
    (452,784
    )
    
    
    (763
    )(Gain) loss on sales of property, plant and equipment, net
    
    
    
    
    
    
    (32,598
    )
    
    
    126,885
    
    
    
    (9,134
    )
    
    
    (15
    )Minority interest
    
    
    
    
    
    
    170,575
    
    
    
    62,535
    
    
    
    42,657
    
    
    
    72Price-level restatement
    
    
    16
    
    
    
    473,949
    
    
    
    (481,050
    )
    
    
    (2,125,190
    )
    
    
    (3,579
    )Foreign exchange
    
    
    16
    
    
    
    (6,233,786
    )
    
    
    (5,004,430
    )
    
    
    2,996,808
    
    
    
    5,047Others
    
    
    
    
    
    
    (1,612,536
    )
    
    
    2,035,995
    
    
    
    2,143,976
    
    
    
    3,610Changes in assets and liabilities:Increase in accounts receivable
    
    
    
    
    
    
    (10,171,383
    )
    
    
    (18,393,938
    )
    
    
    (52,264,900
    )
    
    
    (88,018
    )(Increase) decrease in inventory
    
    
    
    
    
    
    (18,417,357
    )
    
    
    (18,537,973
    )
    
    
    638,534
    
    
    
    1,075Decrease (increase) in other assets
    
    
    
    
    
    
    1,102,236
    
    
    
    887,412
    
    
    
    (3,331,981
    )
    
    
    (5,611
    )Increase in accounts payable
    
    
    
    
    
    
    24,338,304
    
    
    
    4,682,575
    
    
    
    20,199,285
    
    
    
    34,017Increase (decrease) in income tax payable
    
    
    
    
    
    
    3,820,773
    
    
    
    (2,065,821
    )
    
    
    1,022,952
    
    
    
    1,723Increase (decrease) in other accounts payable
    
    
    
    
    
    
    852,177
    
    
    
    8,764,409
    
    
    
    (3,858,251
    )
    
    
    (6,498
    )Increase (decrease) in interest payable
    
    
    
    
    
    
    (200,373
    )
    
    
    (235,022
    )
    
    
    762,557
    
    
    
    1,284Increase (decrease) in accruals and withholdings
    
    
    
    
    
    
    (1,921,009
    )
    
    
    (3,990,442
    )
    
    
    2,363,270
    
    
    
    3,980Net cash provided by operating activities
    
    
    
    
    
    
    66,792,018
    
    
    
    29,385,381
    
    
    
    33,451,365
    
    
    
    56,334CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property, plant and equipment
    
    
    
    
    
    
    (71,910,741
    )
    
    
    (68,841,520
    )
    
    
    (44,158,872
    )
    
    
    (74,367
    )Sale of other investments
    
    
    
    
    
    
    1,783
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    990,031
    
    
    
    72,992
    
    
    
    309,771
    
    
    
    522Proceeds from sale of Disco S.A. and others
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,478,996
    
    
    
    49,645Decrease in loans from related companies
    
    
    
    
    
    
    (998,348
    )
    
    
    (406,295
    )
    
    
    
    
    
    
    Collection of loans to related companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,533
    
    
    
    33Payment of capitalized interest
    
    
    
    
    
    
    (1,832,524
    )
    
    
    (1,052,575
    )
    
    
    (400,465
    )
    
    
    (674
    )Purchase of related company
    
    
    
    
    
    
    (606,216
    )
    
    
    
    
    
    
    
    
    
    
    Standby deposit for letter of credit related to purchase of Carrefour and others
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,426,650
    )
    
    
    (88,290
    )Other
    
    
    
    
    
    
    (1,262,497
    )
    
    
    376,925
    
    
    
    (988,926
    )
    
    
    (1,665
    )Net cash used in investing activities
    
    
    

    
    
    
    (75,618,512
    )
    
    
    (69,850,473
    )
    
    
    (68,166,613
    )
    
    
    (114,796
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from long-term debt
    
    
    
    
    
    
    32,199,677
    
    
    
    78,547,712
    
    
    
    135,711,896
    
    
    
    228,548Proceeds from loans from related companies
    
    
    
    
    
    
    3,637,812
    
    
    
    1,938,966
    
    
    
    
    
    
    
    Paid others loans related companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (281,912
    )
    
    
    (475
    )Repayment of debt
    
    
    
    
    
    
    (27,884,162
    )
    
    
    (70,711,066
    )
    
    
    (170,836,063
    )
    
    
    (287,700
    )Dividends paid
    
    
    13
    
    
    
    (8,820,413
    )
    
    
    (14,342,202
    )
    
    
    (13,800,000
    )
    
    
    (23,240
    )Proceeds from issuance of bonds
    
    
    
    
    
    
    
    
    
    
    36,577,949
    
    
    
    94,012,094
    
    
    
    158,323Payment of charges for issuance of bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,058,391
    )
    
    
    (1,782
    )Net cash (used in) provided by financing activities
    
    
    
    
    
    
    (867,086
    )
    
    
    32,011,359
    
    
    
    43,747,624
    
    
    
    73,674NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    
    
    
    
    (9,693,580
    )
    
    
    (8,453,733
    )
    
    
    9,032,376
    
    
    
    15,212EFFECT OF CHANGES IN THE PURCHASING POWER OF THE
CHILEAN PESO ON CASH AND CASH EQUIVALENTS
    
    
    
    
    
    
    175,811
    
    
    
    1,226,878
    
    
    
    3,089,218
    
    
    
    5,202CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR
    
    
    
    
    
    
    39,018,880
    
    
    
    29,501,111
    
    
    
    21,274,256
    
    
    
    35,827CASH AND CASH EQUIVALENTS AT END OF THE YEAR
    
    
    
    
    
    
    29,501,111
    
    
    
    22,274,256
    
    
    
    33,395,850
    
    
    
    56,241
 The accompanying notes are an integral part of these consolidated financial statements F-5




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DISTRIBUCION Y SERVICIO D&S S.A. 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Restated for general price-level changes)  1.
    
    THE COMPANYDistribución y Servicio D&S S.A. (D&S) is a corporation organized under
the laws of the Republic of Chile. Its common shares are listed on the
Chilean Stock Exchange and its American Depositary Receipts are listed on
the New York Stock Exchange. D&S is regulated by the Chilean
Superintendency of Securities and Insurance (SVS) with whom they file
their annual audited financial statements and the United States Securities
and Exchange Commission (SEC).D&S and its subsidiaries (the Company) are engaged principally in the
operation of supermarkets in Chile. At December 31, 2003, the Company
operated 68 supermarkets in Chile.2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESa. Basis of Presentation- The accompanying consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in Chile (Chilean GAAP). For the convenience of the
reader, the consolidated financial statements have been translated into
English from Spanish.b. Reporting Entity- Until December 1996, the Ibáñez Scott family owned
100% of the outstanding shares of the Company. In prior years, the Ibáñez
Scott family owned, through separate companies, substantially all of the
shares of Sociedad Anónima Inmobiliaria Terrenos y Establecimientos
Comerciales S.A. (SAITEC S.A.), Almac Internacional S.A. and Constructora e
Inmobiliaria El Rodeo S.A. (El Rodeo S.A.). These three companies were
operated as an integral part of the Companys operations, as they
principally owned land and buildings used by the supermarkets and held
related investments.In December 1995, D&S acquired the shares in the three companies, that had
been separately held by the Ibáñez Scott family, by means of an exchange of
shares, thus effectively uniting in the Company with all of the Ibáñez Scott
familys supermarket holdings.The consolidated financial statements of the Company as of December 31, 2002
and 2003 and for each of the three years in the period ended December 31,
2003 reflect this restructuring of the legal ownership of the companies
controlled by the Ibáñez Scott family as a business combination between
entities under common control. The change in reporting entity is reported
under Chilean GAAP in a manner generally similar to a pooling of interests
in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP). However, the book value of the net assets
of the companies included in the combination is greater than the value
attributed by the shareholders to the increase in the capital of D&S which
is equal to the shareholders tax basis in the shares of SAITEC S.A., Almac
Internacional S.A., and El Rodeo S.A. The difference between these amounts
is recorded in the financial statements as negative goodwill. F-6




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DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  On June 30, 1997, through purchases from the minority shareholders, D&S
acquired 100% of the shares of Almac Internacional S.A. and El Rodeo S.A.,
as a result of which D&S absorbed the assets and liabilities of these
companies and became the legal successor of such companies.c. Basis of Consolidation- All significant intercompany transactions and
balances have been eliminated in consolidation and the minority interests in
subsidiaries have been recognized.The consolidated group comprises D&S and all majority-owned subsidiaries.
The principal subsidiaries are the following: Total ownership percentageat December 31,2001
    
    2002
    
    2003%
    
    %
    
    %Administradora de Concesiones
Comerciales de Hipermercados S.A.
    
    
    99.50
    
    
    
    99.50
    
    
    
    99.50Administradora de Concesiones
Comerciales de Supermercados S.A.
    
    
    99.17
    
    
    
    99.17
    
    
    
    99.17SAITEC S.A.
    
    
    99.96
    
    
    
    99.96
    
    
    
    99.96Maquinsa S.A.
    
    
    99.99
    
    
    
    99.99
    
    
    
    99.99
  d. Price-Level Restatement- The financial statements have been price-level
restated in order to reflect the effect of changes in the purchasing power
of the Chilean currency during each period. All non-monetary assets and
liabilities and income statement accounts have been restated to reflect the
changes in the Chilean consumer price index from the date they were acquired
or incurred to the end of the period.The purchasing power gains and losses have been included in net income
within the account price-level restatement and reflect the effects of
Chilean inflation on the value of monetary assets and liabilities held by
the Company.The restatements were calculated using the official consumer price index of
the Chilean National Institute of Statistics (CPI) and based on the prior
month rule, in which inflation adjustments are base on the consumer price
index at the close of the month preceding the close of the respective period
or transaction. This index is considered by the business community, the
accounting profession and the Chilean government to be the index which most
closely complies with the technical requirement to reflect the variation in
the general level of price in the country and, consequently, is widely used
for financial reporting purposes in Chile. F-7




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DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) The values of the Chilean consumer price index are as follows: Change over previousIndex
    
    December 31Year ended December 31, 2001
    
    
    109.76
    
    
    
    2.6
    %Year ended December 31, 2002
    
    
    112.86
    
    
    
    2.8
    %Year ended December 31, 2003
    
    
    114.07
    
    
    
    1.07
    %
 The values of the Chilean consumer price index used for financial accounting
price-level restatement purposes are as follows: Change over previousIndex
    
    December 31November 30, 2001
    
    
    110.10
    
    
    
    3.1
    %November 30, 2002
    
    
    113.36
    
    
    
    3.0
    %November 30, 2003
    
    
    114.44
    
    
    
    1.0
    %
 The above-mentioned price-level restatements do not purport to represent
appraisal or replacement values and are only intended to restate all
non-monetary financial statement components in terms of local currency of a
single purchasing power and to include in the net result for each period the
gain or loss in purchasing power arising from the holding of monetary assets
and liabilities exposed to the effects of inflation. Assets and liabilities that are denominated in index-linked units of account
are stated at the period-end values of their respective units of account.
The principal index-linked unit used in Chile is the Unidad de Fomento (UF),
which changes daily to reflect the changes in Chiles consumer price index.
Many of the Companys financial investments are denominated in UFs. As the
Companys indexed liabilities exceed its indexed assets, the increase in the
index results in a net loss on indexation. Values for the UF are as follows (historical pesos per UF): Ch$Year ended December 31, 2001
    
    
    16,262.66Year ended December 31, 2002
    
    
    16,744.12Year ended December 31, 2003
    
    
    16,920.00
 F-8




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DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) Comparative financial statements: For comparative purposes, the December 31, 2001, 2002 and 2003 consolidated
financial statements, and the amounts disclosed in the related notes to the
consolidated financial statements, have been restated in terms of Chilean
pesos of December 31, 2003 purchasing power. This updating does not change
the prior periods statements or information in any way except to update the
amounts to constant Chilean pesos of similar purchasing power. e. Assets and Liabilities Denominated in Index-Linked Units of Account and
in Foreign Currencies- Assets and liabilities denominated in foreign
currencies and unidades de fomento (UF  an inflation-indexed, Chilean
peso-denominated monetary unit) are presented in Chilean pesos at the
following year-end rates (stated in Chilean pesos per foreign currency): At December 31,2002
    
    2003Ch$
    
    Ch$U.S. dollar
    
    
    718.61
    
    
    
    593.80UF
    
    
    16,744.12
    
    
    
    16,920.00
 f. Statements of Cash Flows- The statements of cash flows have been
prepared using the indirect method. Cash and cash equivalents include cash
and investments in fixed income mutual funds with original maturities of
less than 90 days at the date of purchase. g. Marketable Securities- Marketable securities correspond to investments
in shares, mutual funds and funds delivered for administration, which are
stated as follows:  
    
    Sharesare stated at the lower of price-level restated purchase
cost or year-end market value.  
    
    Mutual Fundsare stated at the year-end value of the units, which
is considered market value. h. Inventories -Inventories are stated at the lower of price-level restated
cost, on a weighted-average-cost basis, which is not in excess of the net
realizable value. i. Allowance for doubtful accounts- In order to cover the risk of
uncollectibility, the Company provided for an allowance by calculating a
general provision for doubtful accounts based on historical write-off or
loss experience (updated for current trends or facts and circumstances) in
its separate aging categories of accounts receivable, notes receivable, and
sundry debtors. F-9




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) j. Property, Plant and
Equipment, and Depreciation -Property, plant and
equipment is stated at price-level restated purchase cost. The revaluation
of property, plant and equipment resulting from an independent technical
appraisal is recorded, with a corresponding increase in shareholders
equity. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The cost of financing the works under construction is included as part of
the cost of the fixed assets under construction. This capitalization is
determined considering the average rate of the actual financing cost. Assets acquired under finance leases are accounted for in the same manner as
the purchase of property, plant and equipment, recording the total liability
and the interest on the accrual basis. The Company records the sale and
leaseback of assets as lessee under financial - type lease maintaining the
same value of the assets prior to the transaction. These assets are not legally owned by the Company until it exercises its
purchase option. k. Investments in Affiliated Companies- Investments in affiliated companies
are recorded using the equity method of accounting, if the Company can
exercise significant influence over the affiliate. Under Chilean GAAP, such
significant influence is presumed when the investment represents more than
10% of the investees outstanding shares. Accordingly, investments are
recorded using the equity method when they represent more than 10% but less
than 50% of the voting stock of the investee. l. Goodwill and Negative Goodwill- The excess of carrying value over cost
of investments and the excess of cost over carrying value are amortized over
the estimated term of return on the investments which is 10 and 20 years,
respectively. m. Bonds payable -Bonds payable are reported as liabilities at the par
value of the bonds issued. The difference between the proceeds and the par
value at the time of placement is deferred, and then amortized on a straight
 - line basis our the period in which the bonds nominal interest is accrued
an a straight - line basis. The straight - line method of amortization
approximates the effective interest rate method. n. Income Taxes- The Company has recognized income tax obligations
according to legal stipulations in force at year-end. o. Deferred Taxes- The Company records income taxes in accordance with
Technical Bulletin N°60 of the Chilean Association of Accountants, and with
Circular N°1466 issued on January 27, 2000 by the SVS, recognizing the
deferred tax effects of temporary differences between the financial
statement and tax values of assets and liabilities using the tax rates
estimated to be in effect at the time of reversal. F-10




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) p. Vacation Expense- The annual cost of employee vacations and benefits is
recorded on the accrual basis. q. Research and Development Expenses- Research and development expenses are
charged to the income statement during the year incurred. r. Severance Indemnities- The liabilities for voluntary severance
indemnities paid to employees are accrued at the discounted present value of
the vested benefits using a 7% discount rate and considering future service
until retirement (age 60 for women; age 65 for men), adjusted for estimated
employee turnover. s. Revenue Recognition- Revenue from product sales is recognized when the
merchandise is delivered to the customer. At such point, all requirements
for completing the earnings process have been complied with under Chilean
GAAP. Revenue obtained from suppliers for reaching volume targets in purchases is
recorded on an accrual basis and included in operating revenue on the
statements of income. Such volume rebates are recognized on a pro rata
basis as purchases are made. t. Use of Estimates- The preparation of consolidated financial statements
in conformity with Chilean GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. u. Translation to U.S. Dollars- The Company maintains its accounting
records and prepares its financial statements in Chilean pesos. The U.S.
dollar amounts disclosed in the accompanying consolidated financial
statements are presented solely for the convenience of the readers, at the
December 31, 2003 Observed Exchange Rate of Ch$593.80 per U.S.$1.00 reported
by the Chilean Central Bank. This translation should not be construed as a
representation that the Chilean peso amounts actually represent or have
been, could have been or could in the future be converted into U.S. dollars
at that or any other rate. v. Forward contracts -The Company has entered into foreign currency forward
contracts with financial institutions. Rights and obligations of these
contracts are valued at fair value through the income statement at year end
in accordance with Technical Bulletin N°57 issued by the Chilean Institute
of Accounts. F-11




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  w. Long-lived assets The Company reviews long-lived assets 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 future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair
value of the assets, derived from the present value of expected cash flows.Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.3.
    
    CHANGES IN ACCOUNTING PRINCIPLESDuring 2003, there were no changes in accounting policies from the prior
year that would have a significant impact on these consolidated financial
statements.4.
    
    MARKETABLE SECURITIESThe detail of marketable securities is as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Shares
    
    
    76,799
    
    
    
    213,639Mutual funds (fixed income securities)
    
    
    1,313,117
    
    
    
    2,000,145Mutual funds (1)
    
    
    
    
    
    
    1,481,852Total
    
    
    1,389,916
    
    
    
    3,695,636
  (1)
    
    This amount represents an investment in a combined portfolio of
fixed and variable rate instruments. F-12




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  5.
    
    NOTES AND ACCOUNTS RECEIVABLEThe detail of notes and accounts receivable is as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Trade accounts receivable (b)
    
    
    58,435,927
    
    
    
    101,287,943Notes receivable
    
    
    1,525,336
    
    
    
    2,084,418Sundry debtors (a)
    
    
    70,998,013
    
    
    
    35,830,588Allowance for uncollectible receivables
    
    
    (4,678,224
    )
    
    
    (7,353,567
    )Total
    
    
    126,281,052
    
    
    
    131,849,382
  (a)
    
    This principally corresponds, at December 31, 2003, to the unpaid
portion of the receivable from Disco S.A. (U.S.$90,000,000 agreed-upon
price), owned by the Company. The receivable relates to the 1999 sale
of the shares of Supermercados Ekono S.A. (Argentina). Its maturity
date was May 12, 2003. Disco S.A. paid the above-mentioned amount on
the basis of the Argentine law which stipulates that the obligations
expressed and payable in dollars should be converted to Argentine
pesos. Such pesoified payment amount left an outstanding receivable
of ThCh$28,338,921 as of December 31, 2003.At December 31, 2002, the amount of the aforementioned account
receivable amounted to ThCh$65,321,649, equivalent to U.S.$90,000,000,
the original amount of the accounts receivable.Management believes that the Company has contractual and legal recourse
to recover the remaining balance, in the form originally agreed to and,
as a result, no provision is necessary for the receivable due from Disco
S.A., which is guaranteed by Disco Ahold International Holding N.V.(Note
22d.).(b)
    
    In 2003, this amount includes ThCh$76,293,458 (ThCh$39,246,573 in
2002) of trade accounts receivable of Servicios y Administración de
Créditos Comerciales Presto Ltda. the finance subsidiary of the
Company. F-13




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  6.
    
    INVENTORIESThe detail of inventories is as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Merchandise for sale
    
    
    86,005,796
    
    
    
    85,174,597Imports in transit
    
    
    4,734,602
    
    
    
    3,754,190Supplies
    
    
    564,155
    
    
    
    582,476Subtotal
    
    
    91,304,553
    
    
    
    89,511,263Allowance to reduce inventory to net realizable value (1)
    
    
    (1,154,756
    )Total
    
    
    90,149,797
    
    
    
    89,511,263
  (1)
    
    At December 31, 2003, the Company had no allowance for inventory
obsolescence as there was no inventory whose net realizable value was
lower than cost.At December 31, 2002, an allowance was recorded for inventory whose
aging was more than one year and for discontinued and out-of-season
products.  7.
    
    OTHER CURRENT ASSETSThe detail of other current assets is as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Deferred taxes (Note 14.b)
    
    
    2,019,050
    
    
    
    1,406,557Other (1)
    
    
    1,156,907
    
    
    
    53,481,273Totals
    
    
    3,175,957
    
    
    
    54,887,830
  (1)
    
    In 2003, this amount includes a ThCh$51,000,000 short-term deposit
endorsed to Citibank N.A., in order to guarantee the payment of the
Agreement for Standby Letter of Credit, for an amount of
100,000,000, corresponding to the payment that the Company was
required to make to Carrefour Nederland B.V. for the purchase of the
shares of Carrefour Chile S.A. F-14




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  8.
    
    PROPERTY, PLANT AND EQUIPMENT  NETThe detail of property, plant and equipment is as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Land
    
    
    130,125,368
    
    
    
    136,547,232Buildings and infrastructure:Buildings
    
    
    336,198,878
    
    
    
    352,460,383Construction in progress
    
    
    6,749,859
    
    
    
    12,348,915Machinery and equipment
    
    
    128,418,282
    
    
    
    139,785,868Other:Leased assets (1)
    
    
    35,571,131
    
    
    
    39,167,877Fixtures
    
    
    29,159,131
    
    
    
    24,643,435Subtotal
    
    
    666,222,649
    
    
    
    704,953,710Technical revaluation (2):Land
    
    
    3,521,123
    
    
    
    3,521,121Buildings
    
    
    544,882
    
    
    
    544,883Subtotal
    
    
    4,066,005
    
    
    
    4,066,004Total gross property, plant and equipment
    
    
    670,288,654
    
    
    
    709,019,714Accumulated depreciation
    
    
    (175,814,050
    )
    
    
    (209,373,810
    )Total net property, plant and equipment
    
    
    494,474,604
    
    
    
    499,645,904
  (1)
    
    Corresponds to land, buildings and equipment leased under finance
type leases for store premises. The Company is a lessee in these
transactions.(2)
    
    The technical revaluation was determined based on a study by
independent consultants, in accordance with Circular No1529 of the SVS.  The depreciation is determined using the straight-line method. Depreciation
amounted to ThCh$31,320,912 in 2001, ThCh$34,155,288 in 2002 and
ThCh$37,556,991 in 2003 and includes ThCh$28,957 in each year for the
depreciation of the technical revaluation. These amounts include the
amortization expense associated with leased assets. F-15




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  Useful lives assigned to property, plant and equipment:The detail of the useful life assigned to property, plant and equipment is
as follows: 
    
    Buildings and infrastructure
    
    20 to 60 years
    
    Machinery and equipment
    
    4 to 7 years
    
    Leased assets
    
    5 to 7 years
    
    Fixtures
    
    10 years
    
    Other fixed assets
    
    4 years
  9.
    
    OTHER ASSETS  NETOther assets are summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Goodwill (net) (Note 9a)
    
    
    9,756,195
    
    
    
    9,366,986Other long-term assets (Note 9b)
    
    
    8,594,907
    
    
    
    14,813,584Total
    
    
    18,351,102
    
    
    
    24,180,570
  a.
    
    Goodwill and negative goodwillGoodwill and (negative goodwill) net of accumulated amortization are
detailed as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$SAITEC S.A.
    
    
    (414,612
    )
    
    
    (276,408
    )El Rodeo S.A.
    
    
    (623,289
    )
    
    
    (415,526
    )Inversiones Solpacific Ltda.
    
    
    (59,571
    )Maquinsa S.A.
    
    
    10,390,156
    
    
    
    9,639,060Other
    
    
    463,511
    
    
    
    419,860Total
    
    
    9,756,195
    
    
    
    9,366,986
  The accumulated amortization for goodwill and negative goodwill was
ThCh$5,820,552 and ThCh$6,615,299 at December 31, 2002 and December 31,
2003. F-16




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) Incorporation of Saitec S.A., El Rodeo S.A. and Almac Internacional S.A. On December 28, 1995, the Company received 99.96%, 99.99% and 99.99%
interests in SAITEC S.A., El Rodeo S.A., and Almac Internacional S.A.,
respectively, as payment for the capital increase approved at the
Extraordinary Shareholders Meeting held on that date. These investments
were contributed by the shareholders Empresas Almac S.A. and Estudios y
Proyectos Comerciales e Inmobiliarios S.A. The acquisitions were accounted for as described in Note 2b. The excess of
the carrying value of the underlying net assets over the stated increase in
the Companys capital (negative goodwill) was recognized and is being
amortized over ten years. Acquisition of Maquinsa S.A. (formerly Fullmarket S.A.) On October 31, 1996, the Company acquired from unrelated third parties a
100% interest in Maquinsa S.A. for ThCh$12,666,554, that was paid during
1997. During 1999 the Company increased the goodwill balance by
ThCh$1,043,256 paid as the result of an arbitration proceeding that settled
a dispute with Fullmarkets former owners. The acquisition was accounted
for as a purchase. Excess of cost over assets acquired and liabilities
assumed was designated as goodwill, which is being amortized over twenty
years. b. Other long-term assets Other long-term assets are detailed as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Electric utility refundable advances
    
    
    268,953
    
    
    
    189,740Deferred discount on bond issuance
    
    
    2,175,910
    
    
    
    2,965,682Deferred expenses of bond placement and issuance costs
    
    
    1,333,560
    
    
    
    1,854,373Investment in related companies
    
    
    1,624,679
    
    
    
    1,538,699Long term receivables
    
    
    2,935,031
    
    
    
    7,108,467Other
    
    
    256,774
    
    
    
    1,156,623Total
    
    
    8,594,907
    
    
    
    14,813,584
 F-17




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  10.
    
    ACCOUNTS PAYABLEAccounts payable are summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Domestic suppliers
    
    
    159,336,449
    
    
    
    179,531,104Foreign suppliers
    
    
    764,005
    
    
    
    768,635Total
    
    
    160,100,454
    
    
    
    180,299,739
  11.
    
    ACCRUALS AND WITHHOLDINGSAccruals and withholdings are summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Accruals:Vacations
    
    
    2,687,336
    
    
    
    2,784,473Restructuring expenses (1)
    
    
    4,997,480
    
    
    
    Bonuses payable
    
    
    1,918,075
    
    
    
    1,979,928Other
    
    
    5,578,816
    
    
    
    4,925,583Subtotal
    
    
    15,181,707
    
    
    
    9,689,984Withholdings:VAT
    
    
    
    
    
    
    1,789,839Other
    
    
    2,428,393
    
    
    
    3,068,617Total
    
    
    17,610,100
    
    
    
    14,548,440
  (1)
    
    In December 2002, the Company announced significant changes to its
senior management team, including the appointment of a new chief
executive officer, as well as the departure of four senior executives
and another 70 employees. As part of this restructuring, the Company
incurred an aggregate of ThCh$4,997,480 in payments to former
management and other employees. F-18




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  12.
    
    BANK DEBT, SUNDRY CREDITORS AND OTHER LIABILITIES  a.   Short-term bank debtShort-term bank debt is summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Payable in:United States dollars
    
    
    19,113,322
    
    
    
    17,387,483Chilean pesos (not indexed)
    
    
    26,963,099
    
    
    
    31,530,487Inflation-linked units (UFs)
    
    
    444,765
    
    
    
    531,818Total
    
    
    46,521,186
    
    
    
    49,449,788Weighted average interest rates are as follows:Loans in U.S. Dollars
    
    
    5.60
    %
    
    
    3.66
    %Loans in Chilean pesos (not indexed)
    
    
    5.75
    %
    
    
    4.16
    %Loans in inflation-linked units (UFs)
    
    
    9.60
    %
    
    
    4.80
    %
 Balance
    
    
    
    BalanceDecember 31,
    
    
    
    December 31,
    
    StatedBank/Financial Institution
    
    2002
    
    Currency
    
    2003
    
    Interest RateSantander - Santiago
    
    
    2,666,013
    
    
    US$
    
    
    2,468,369
    
    
    LIBOR + 0,5444,765
    
    
    UF
    
    
    531,818
    
    
    4.80%
    
    
    Ch$
    
    
    4,004,669
    
    
    4.16%Bice
    
    
    1,981,946
    
    
    US$
    
    
    2,502,244
    
    
    LIBOR + 0,5Chile
    
    
    7,212,986
    
    
    US$
    
    
    10,498,148
    
    
    LIBOR + 0,51,202,865
    
    
    Ch$
    
    
    5,000,000
    
    
    4.16%Scotiabank
    
    
    1,799,843
    
    
    US$
    
    
    1,186,464
    
    
    LIBOR + 0,5166,472
    
    
    Ch$
    
    
    3,202,180
    
    
    4.16%Citibank
    
    
    96
    
    
    Ch$
    
    
    170
    
    
    4.16%1,552,070
    
    
    US$
    
    
    
    
    
    Bhif
    
    
    8,002,322
    
    
    Ch$
    
    
    4,514,231
    
    
    4.16%Estado
    
    
    101,108
    
    
    US$
    
    
    246,547
    
    
    LIBOR + 0,517,591,344
    
    
    Ch$
    
    
    
    
    
    BCI
    
    
    95,531
    
    
    US$
    
    
    116,838
    
    
    7.16%
    
    
    Ch$
    
    
    7,991,400
    
    
    LIBOR + 0,5Corpbanca
    
    
    3,703,825
    
    
    US$
    
    
    
    
    
    BankBoston
    
    
    
    
    
    US$
    
    
    368,873
    
    
    LIBOR + 0,5
    
    
    Ch$
    
    
    3,017,623
    
    
    4.16%Security
    
    
    
    
    
    Ch$
    
    
    3,800,214
    
    
    4.16%46,521,186
    
    
    
    
    
    49,449,788
 F-19




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  b.   Long-term bank debtLong-term bank debt is summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Payable in:Inflation-linked units (UFs)
    
    
    70,508,620
    
    
    
    53,845,798Less: Current portion
    
    
    37,444,679
    
    
    
    20,387,774Long-term portion
    
    
    33,063,941
    
    
    
    33,458,024
 Balance
    
    
    
    BalanceDecember 31,
    
    
    
    December 31,
    
    Stated
    
    MaturityBank/Financial Institution
    
    2002
    
    Currency
    
    2003
    
    Interest rate
    
    dateSantander - Santiago
    
    
    33,063,941
    
    
    UF
    
    
    13,154,024
    
    
    TAB+1.25%
    
    04-06-2005Estado
    
    
    
    
    
    UF
    
    
    20,304,000
    
    
    2.25%
    
    02-09-200733,063,941
    
    
    
    
    
    33,458,024
 TAB is a referenced rate in the Chilean Market, and corresponds to the
average rate for fund investments of 90,180 and 360 days. Long-term bank debt is payable as follows: ThCh$2005
    
    
    13,154,0242006
    
    
    2007
    
    
    20,304,000Total
    
    
    33,458,024
 The material covenants of our long-term debt agreements at December 31,
2003 are described in the table below: Principal Loan Covenants Banco Santander
Santiago
    
    
    1.
    
    
    Minimum coverage of interest expenses of 3.75 (operating income
plus depreciation divided by interest expense) for June and
December2.
    
    
    Not to sell or use as collateral the Ekono, Almac and Lider brands.3.
    
    
    No leverage more than 1.2 times
(interest - bearing liabilities
divided by equity plus accumulated amortization of goodwill and
negative goodwill).4.
    
    
    Not to grant new guarantees.
 F-20




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  c.
    
    Capital lease and leaseback obligationsCapital lease and leaseback obligations are summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Lease obligations
    
    
    7,676,697
    
    
    
    7,949,752Less: Current portion
    
    
    2,552,946
    
    
    
    3,310,604Long-term portion
    
    
    5,123,751
    
    
    
    4,639,148Leaseback obligations
    
    
    8,707,736
    
    
    
    6,762,311Less: Current portion
    
    
    1,939,193
    
    
    
    2,109,092Long-term portion
    
    
    6,768,543
    
    
    
    4,653,219Total long-term lease and leaseback obligations
    
    
    11,892,294
    
    
    
    9,292,368
 Lease and leaseback obligations are denominated in U.F.s and accrue
interest at rates that range from 7.00% to 13.56%. Leaseback agreements Selling
    
    Nominal
    
    
    
    Interest
    
    
    
    Income (loss)price in
    
    value
    
    No of
    
    rate
    
    
    
    from transactionsCreditor
    
    Asset
    
    UF
    
    UF
    
    installments
    
    %
    
    Term of contract
    
    ThCh$Bansa Santander S.A.
    
    Land and buildings Alameda
    
    
    380,518
    
    
    
    570,504
    
    
    121
    
    8.57
    
    18.12.1996 to 20.01.2007
    
    
    Bansa Santander S.A.
    
    Land and buildings Maipú
    
    
    519,499
    
    
    
    763,499
    
    
    121
    
    8.28
    
    30.08.1996 to 02.10.2006
    
    
    (309,441
    )Bansa Santander S.A.
    
    Land San Bernardo
    
    
    109,893
    
    
    
    111,711
    
    
    121
    
    8.20
    
    14.03.1997 to 14.03.2007
    
    
    (50,602
    )Bansa Santander S.A.
    
    Land San Bernardo
    
    
    21,026
    
    
    
    30,904
    
    
    123
    
    8.65
    
    04.12.1997 to 14.03.2007
    
    
    
 The losses derived when comparing the book value with the selling price are
amortized over the term of the respective contracts and are included in
fixed assets, as part of leased assets. F-21




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) Future minimum lease payments on the long-term portion of capital lease and
leaseback obligations at December 31, 2003 are as follows: ThCh$2005
    
    
    5,188,0162006
    
    
    3,514,9612007
    
    
    589,391Total
    
    
    9,292,368
  d.
    
    Short-term sundry creditorsShort-term sundry creditors are summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Provision for merchandise rebate obligation (1)
    
    
    1,443,219
    
    
    
    2,147,671Other (in Chilean pesos)
    
    
    4,490,462
    
    
    
    4,928,446Total
    
    
    5,933,681
    
    
    
    7,076,117
  (1)
    
    Represents an obligation for rebates on merchandise provisioned 100%.e.
    
    Commercial paper and bonds At December 31,2002
    
    2003Short term
    
    ThCh$
    
    ThCh$Payable in:Chilean pesos
    
    
    24,327,311
    
    
    
    57,983,564
 F-22




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) The commercial paper all matures at various dates throughout 2004 and the
detail of the assurances is as follows: Series
    
    Stated interest rate003-3
    
    
    5.04
    %003-4
    
    
    4.80
    %003-5
    
    
    4.32
    %011-1
    
    
    4.32
    %011-2
    
    
    4.32
    %
 Long-term bonds and commercial paper is summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$Payable in:Inflation-linked units (UFs)
    
    
    83,323,152
    
    
    
    134,098,747Chilean pesos
    
    
    12,166,447Less: current portion
    
    
    1,595,805
    
    
    
    1,784,346Total
    
    
    93,893,794
    
    
    
    132,314,401
 D&S and its subsidiary SAITEC S.A. have issued bonds to the Chilean public
in UFs. The issues are summarized as follows: Bonds: D&Shas issued four series of bonds issued in 2000 and 2003. The detail is
as follows: Bond
    
    Date of
    
    
    
    Amount
    
    
    
    Maturity
    
    Nominal
    
    Amortization
    
    InterestIssued
    
    issuance
    
    Indexation
    
    issued
    
    Series
    
    date
    
    interest rate
    
    Terms
    
    PaymentSERIES A
    
    15.11.2001
    
    U.F.
    
    
    3,500,000
    
    
    A1 U.F.  300,000A2 U.F.3,200,000
    
    20062014
    
    7.0% compounded semiannually
    
    1 installment due on April 1, 2006
    
    Semiannually, due on April 1,and October 1, each year, as from April 1, 2001SERIES B
    
    15.11.2001
    
    U.F.
    
    
    1,200,000
    
    
    B1 U.F. 200,000B2 U.F. 1,000,000
    
    20222022
    
    6.5% compounded semiannually
    
    32 semiannual equal installments as from April 1, 2007
    
    Semiannually, due on April 1, and October 1, each year, as from April 1, 2001SERIES C
    
    01.12.2003
    
    U.F.
    
    
    2,000,000
    
    
    C1 U.F. 2,000,000
    
    2009
    
    4.5% compounded semiannually
    
    10 semiannual Installments as from December, 2009
    
    Semiannually, due on April 1,and December 1, each  year As from June 1SERIES D
    
    01.12.2003
    
    U.F.
    
    
    1,000,000
    
    
    D1 U.F. 1,000,000
    
    2025
    
    5.5% compounded semiannually
    
    38 semiannual Installments as from December, 2009
    
    Semiannually, due on April 1, and December 1, each  year As from June 1
 F-23




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) SAITEC S.A.has issued to UF350,000 of 22 year debentures issued in 1992.
Principal is paid down semiannually from October 1, 1995, after a three-year
grace period. Interest is payable semiannually at 6.5%. These debentures
are not secured. Interest accrued on these debentures at December 31, 2003 and 2002 was
ThCh$1,570,620 and ThCh$1,434,565 respectively and is included under current
liabilities. The difference between par value and the proceeds is being
deferred and amortized by the straight line method which approximates the
effective interest method. The discount at December 31, 2003, was
ThCh$3,358,248 (ThCh$2,508,545 in 2002) and is included under current assets
for ThCh$392,566 (ThCh$332,635 in 2002) and other assets for ThCh$2,965,682
(ThCh$2,175,910 in 2002). Commercial paper: On November 15, 2002, the Company registered an issue of bearer promissory
notes amounting to UF2,150,000, with the SVS, under number 003. On October 14, 2003, the Company also registered with the SVS, under the
number 011, an issuance of bearer promissory notes for UF1,250,000. The principal characteristics of which are:  a)
    
    Accrued interest on the promissory notes at year end is shown with
the current portion of long-term liabilities together with the current
portion of the liability.b)
    
    Long-term principal is shown under commercial paper and bonds on
the consolidated balance sheets.c)
    
    The promissory notes are not secured.d)
    
    At December 31, 2003, the premium from the placement of the
promissory notes amounted to ThCh$307,840 (ThCh$169,488 in 2002). At
December 31, 2003, this amount is shown in other short - term
liabilities (in 2002, ThCh$77,981 is shown in other short-term
liabilities and ThCh$91,507, in other long-term liabilities).e)
    
    The expenses incurred in the issue and placement of these
promissory notes were capitalized and are being amortized over the
issue term of the securities. At December 31, 2002, ThCh$36,994 have
been amortized and included in the financial expenses for 2002. Of the
balance of ThCh$711,002, ThCh$669,808 is included in other current
assets and in ThCh$41,194 in other long-term assets. F-24




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) Bonds and Commercial Paper Covenants Bonds
Series A, B, C, D
    
    
    1.
    
    
    Maintain an indebtedness relationship lower
than 1,2 times, defined as the ratio between
current liabilities that accrue interest and
equity.2.
    
    
    Minimum coverage of interest expense of 3.5
times (operating results plus depreciation plus
amortization of intangibles divided by interest
expenses).3.
    
    
    Keeping assets free from liens in a total
amount equal to at least 1.3 times the
outstanding balance of the total bonds issued
for the Issuer, which are in force, calculated
and measured each quarter over the consolidated
balance sheet.4.
    
    
    Keeping consolidated total equity of an amount
equal at least to UF13,000,000, calculated and
measured each quarter.Commercial paper
    
    
    1.
    
    
    Minimum Coverage of financial expenses of 3.5
(operating income plus depreciation divided by
interest expenses) for March, June, September
and December.2.
    
    
    Leverage less than 1.2 (current liabilities
divided by equity) for March, June, September
and December.
  f.
    
    Long-term sundry creditorsThe details of long - term portion of sundry creditors is as follows. At December 31,2002
    
    2003ThCh$
    
    ThCh$Due to Compañía de Petróleos de Chile S.A.
and accruing interest at 8.59% a year
    
    
    261,193
    
    
    
    239,384Due to Inmobiliaria Los Condores S.A. and others and
accruing interest at 6.58% a year
    
    
    1,434,558
    
    
    
    Less: Current portion
    
    
    1,456,486
    
    
    
    21,928Total
    
    
    239,265
    
    
    
    217,456
 F-25




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  13.
    
    SHAREHOLDERS EQUITY The changes in shareholders equity accounts are as follows: Additional
    
    Technical
    
    
    
    
    
    Retained earningsPaid-in
    
    paid-in
    
    revaluation
    
    Other
    
    Retained
    
    Net income
    
    Interimcapital
    
    capital
    
    reserve
    
    reserves
    
    earnings
    
    for the year
    
    dividends
    
    TotalThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$Balances, January 1, 2001
    
    
    201,222,599
    
    
    
    1,037,107
    
    
    
    1,193,466
    
    
    
    31,467
    
    
    
    24,141,173
    
    
    
    28,710,369
    
    
    
    (5,619,360
    )
    
    
    250,716,821Transfers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,091,009
    
    
    
    (28,710,369
    )
    
    
    5,619,360Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,280,000
    )
    
    
    
    
    
    
    
    
    
    
    (8,280,000
    )Capitalization of reserves
    
    
    1,038,144
    
    
    
    (1,038,144
    )Monetary correction
    
    
    6,268,006
    
    
    
    1,037
    
    
    
    36,997
    
    
    
    977
    
    
    
    1,265,478
    
    
    
    
    
    
    
    
    
    
    
    7,572,495Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,365,276
    
    
    
    (6,900,000
    )
    
    
    32,465,276Balances, December 31, 2001
    
    
    208,528,749
    
    
    
    
    
    
    
    1,230,463
    
    
    
    32,444
    
    
    
    40,217,660
    
    
    
    39,365,276
    
    
    
    (6,900,000
    )
    
    
    282,474,592Price-level restatement
    
    
    8,403,709
    
    
    
    
    
    
    
    49,588
    
    
    
    1,307
    
    
    
    1,620,772
    
    
    
    1,586,420
    
    
    
    (278,070
    )
    
    
    11,383,726Balances as of December
31, 2001 price-level restated
at December 31, 2002
    
    
    216,932,458
    
    
    
    
    
    
    
    1,280,051
    
    
    
    33,751
    
    
    
    41,838,432
    
    
    
    40,951,696
    
    
    
    (7,178,070
    )
    
    
    293,858,318Balances, January 1, 2002
    
    
    208,528,749
    
    
    
    
    
    
    
    1,230,463
    
    
    
    32,444
    
    
    
    40,217,660
    
    
    
    39,365,276
    
    
    
    (6,900,000
    )
    
    
    282,474,592Transfers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,365,276
    
    
    
    (39,365,276
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,800,000
    )
    
    
    
    
    
    
    6,900,000
    
    
    
    (6,900,000
    )Monetary correction
    
    
    6,255,863
    
    
    
    
    
    
    
    36,914
    
    
    
    973
    
    
    
    1,987,288
    
    
    
    
    
    
    
    
    
    
    
    8,281,038Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,777,482
    
    
    
    (6,900,000
    )
    
    
    16,877,482Balances, December 31, 2002
    
    
    214,784,612
    
    
    
    
    
    
    
    1,267,377
    
    
    
    33,417
    
    
    
    67,770,224
    
    
    
    23,777,482
    
    
    
    (6,900,000
    )
    
    
    300,733,112Price-level restatement
    
    
    2,147,846
    
    
    
    
    
    
    
    12,674
    
    
    
    334
    
    
    
    677,702
    
    
    
    237,775
    
    
    
    (69,000
    )
    
    
    3,007,331Balances as of December
31, 2002 price-level restated
at December 31, 2003
    
    
    216,932,458
    
    
    
    
    
    
    
    1,280,051
    
    
    
    33,751
    
    
    
    68,447,926
    
    
    
    24,015,257
    
    
    
    (6,969,000
    )
    
    
    303,740,443Balances, January 1, 2003
    
    
    214,784,612
    
    
    
    
    
    
    
    1,267,377
    
    
    
    33,417
    
    
    
    67,770,224
    
    
    
    23,777,482
    
    
    
    (6,900,000
    )
    
    
    300,733,112Transfers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,777,482
    
    
    
    (23,777,482
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,800,000
    )
    
    
    
    
    
    
    6,900,000
    
    
    
    (6,900,000
    )Monetary correction
    
    
    2,147,846
    
    
    
    
    
    
    
    12,674
    
    
    
    334
    
    
    
    894,777
    
    
    
    
    
    
    
    20,700
    
    
    
    3,076,331Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,819,444
    
    
    
    (6,900,000
    )
    
    
    13,919,444Balances, December 31, 2003
    
    
    216,932,458
    
    
    
    
    
    
    
    1,280,051
    
    
    
    33,751
    
    
    
    78,642,483
    
    
    
    20,819,444
    
    
    
    (6,879,300
    )
    
    
    310,828,887
  a.
    
    Paid-in capital  In accordance with article 10 of Law No18,046, the amount corresponding to
monetary correction of capital has been included in paid-in capital. At
December 31, 2003 and 2002, D&Ss paid-in capital consists of into
1,380,000,000 no-par-value common shares.  b.
    
    Capital increases  The Extraordinary Shareholders Meeting held on April 28, 1998 resolved to
increase D&Ss capital to ThCh$180,360,266 (historical) consisting of
1,380,000,000 no-par-value common shares. This capital increase was paid
through an additional share issuance of ThCh$98,208,861 (historical),
monetarily corrected as of March 31, 1998. At December 31, 1999 there was a
balance of ThCh$117,360 (historical), equivalent to 1,740,210 shares, yet to
be subscribed and paid in. In 2000 those shares were subscribed and
ThCh$1,131,589 (historical) was paid in for them. F-26




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes)  The Tenth Extraordinary Meeting of Shareholders held on April 24, 2001
resolved on increase in the capital of the Company from ThCh$201,222,599 to
ThCh$202,260,743, capitalizing share premiums amounting to ThCh$1,037,107
(historical) monetarily corrected at March 31, 2001.The Eleventh Extraordinary Meeting of Shareholders held on May 23, 2002
resolved an increase in the capital of the Company by ThCh$163,622,500. The
Company agreed to issue 250 million shares, no par value, to the public
within three years. The Board of Directors meeting held on December 23,
2003, resolved to issue the entirety of these shares during the first six
months of 2004.  c.
    
    Income distribution policy  In compliance with current Chilean law, the Company must distribute at least
30% of its net income as a cash dividend, unless the General Shareholders
Meeting decides otherwise by a unanimous vote of the issued shares.  d.
    
    Reserve for technical revaluation of property, plant and equipment  This reserve corresponds to D&Ss share in technical revaluations made by
subsidiaries in prior years.  e.
    
    Other reserves  These reserves correspond to the technical revaluation of property, plant
and equipment.  14.
    
    INCOME TAXES  a.
    
    The detail of accrued income taxes is as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$First category income taxes
    
    
    
    
    
    
    (5,890,823
    )
    
    
    (5,945,046
    )Less:Estimated monthly payments
    
    
    
    
    
    
    6,081,521
    
    
    
    7,790,727Personnel training credit and
Real estate tax credit
    
    
    
    
    
    
    2,279,917
    
    
    
    2,795,096Benefit from tax loss carryback
    
    
    
    
    
    
    
    
    
    
    508,621Arica Law tax credit
    
    
    
    
    
    
    8,913
    
    
    
    8,919Net income taxes receivable
    
    
    
    
    
    (1)
    2,479,528
    
    
    
    5,158,317
  (1)
    
    At December 31, 2002, recoverable income tax includes other recoverable
taxes such as VAT. No such other recoverable tax balances existed at
December 31, 2003. F-27




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes) At December 31, 2003, the Company had no retained taxable income and its
subsidiaries have retained taxable income of approximately ThCh$119,806,877
(ThCh$109,280,980 in 2002). The latter are entitled to a credit for first
category tax when dividends are distributed to the shareholders. Certain
subsidiaries have tax losses for tax purposes totaling ThCh$21,025,647 as of
December 31, 2003 (ThCh$9,078,813 in 2002). b. Deferred taxes- The detail of accumulated consolidated balances of
deferred taxes is as follows: Balance, December 31, 2002Deferred assets
    
    Deferred LiabilitiesShort -
    
    
    
    
    
    Long-
    
    
    
    
    
    Short -
    
    
    
    
    
    Long-term
    
    
    
    
    
    term
    
    
    
    
    
    term
    
    
    
    
    
    termTemporary
difference
    
    
    
    
    
    ThCh $
    
    
    
    
    
    ThCh $
    
    
    
    
    
    Th Ch $
    
    
    
    
    
    ThCh $Allowance for uncollectible accounts
    
    
    
    
    
    
    691,674Vacations accrual
    
    
    
    
    
    
    472,931Leased assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472,632Depreciation of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,952,322Severance indemnity
    
    
    
    
    
    
    124,988
    
    
    
    
    
    
    
    502,796Realization allowance on inventory
    
    
    
    
    
    
    190,534Sundry provisions
    
    
    
    
    
    
    760,285Sundry debtors
    
    
    
    
    
    
    37,032Capitalized financial cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,501,154Deferred charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,988
    
    
    
    
    
    
    
    1,323,274Tax loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,512,361Total deferred taxes
    
    
    
    
    
    
    2,277,444
    
    
    
    
    
    
    
    2,015,157
    
    
    
    
    
    
    
    116,988
    
    
    
    
    
    
    
    6,249,382Complementary accounts balance
    
    
    
    
    
    
    (141,406
    )
    
    
    
    
    
    
    (576,221
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,599,309
    )Net balances per balance sheet
    
    
    
    
    
    (2)
    2,136,038
    
    
    
    
    
    
    (1)
    1,438,936
    
    
    
    
    
    
    (2)
    116,988
    
    
    

    
    
    
    (1)
    3,650,073
   [Continued from above table, first column(s) repeated] Balance, December 31, 2003Deferred assets
    
    Deferred LiabilitiesShort -
    
    
    
    
    
    Long-
    
    
    
    
    
    Short -
    
    
    
    
    
    Long-term
    
    
    
    
    
    term
    
    
    
    
    
    term
    
    
    
    
    
    termTemporary difference
    
    
    
    
    
    ThCh $
    
    
    
    
    
    ThCh $
    
    
    
    
    
    ThCh $
    
    
    
    
    
    ThCh $Allowance for uncollectible accounts
    
    
    
    
    
    
    1,053,754Vacations accrual
    
    
    
    
    
    
    473,360Leased assets
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    761,904Depreciation of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,640,764Severance indemnity
    
    
    
    
    
    
    121,670
    
    
    
    
    
    
    
    594,025Realization allowance on inventory
Sundry provisions
    
    
    
    
    
    
    53,972Sundry debtors
    
    
    
    
    
    
    196,352Capitalized financial cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,497,331Deferred charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    363,894
    
    
    
    
    
    
    
    1,252,631Tax loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,574,122Total deferred taxes
    
    
    
    
    
    
    1,899,108
    
    
    
    
    
    
    
    4,168,147
    
    
    
    
    
    
    
    363,894
    
    
    
    
    
    
    
    8,152,630Complementary accounts balance
    
    
    
    
    
    
    (128,656
    )
    
    
    
    
    
    
    (488,289
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,851,174
    )Net balances per balance sheet
    
    
    
    
    
    (2)
    1,770,452
    
    
    
    
    
    
    (1)
    3,679,858
    
    
    
    
    
    
    (2)
    363,894
    
    
    
    
    
    
    (1)
    6,301,456
  (1)
    
    Long-term deferred tax liabilities are presented net of long-term
deferred tax assets under other long-term liabilities.(2)
    
    Short-term deferred tax assets are presented net of short-term
deferred tax liabilities under other current assets. The complementary accounts are amortized over the estimated period the
differences will reverse. c. The charge to income for income taxes is as follows: For the year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Current tax expenseFor the year
    
    
    (5,895,471
    )
    
    
    (5,890,823
    )
    
    
    (5,945,046
    )Prior year adjustment
    
    
    (784,586
    )
    
    
    32,912
    
    
    
    (43,283
    )Deferred taxesChange in deferred taxes
    
    
    (1,243,868
    )
    
    
    1,817,772
    
    
    
    (375,500
    )Benefit from tax loss carryback
    
    
    
    
    
    
    
    
    
    
    508,621Effect of amortization of complementary accounts
of deferred tax assets and liabilities
    
    
    312,356
    
    
    
    (663,238
    )
    
    
    (647,453
    )Total charge to results
    
    
    (7,611,569
    )
    
    
    (4,703,377
    )
    
    
    (6,502,661
    )
 F-28




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Restated for general price-level changes) 15. FOREIGN CURRENCIES Balances in foreign currencies, all of which are denominated in United
States dollars, are summarized as follows: At December 31,2002
    
    2003ThCh$
    
    ThCh$ASSETSCurrent assets
    
    
    65,467,550
    
    
    
    42,482,711LIABILITIESCurrent liabilities
    
    
    21,888,921
    
    
    
    21,241,217Long-term liabilities
    
    
    4,086,329
    
    
    
    3,968,081Total liabilities
    
    
    25,975,250
    
    
    
    25,209,298Net asset position
    
    
    39,492,300
    
    
    
    17,273,413
 16. PRICE-LEVEL RESTATEMENT AND FOREIGN EXCHANGE Price-level restatement (monetary correction) and foreign exchange,
described in Note 2d and 2e, credited (charged) to income is as follows: For the year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Property,
plant and equipment - net
    
    
    13,732,746
    
    
    
    14,672,985
    
    
    
    4,895,005Non-monetary
liabilities - net of other long-term
non-monetary assets
    
    
    1,903,479
    
    
    
    1,629,410
    
    
    
    762,793Shareholders equity
    
    
    (7,877,666
    )
    
    
    (8,363,848
    )
    
    
    (3,076,331
    )Indexation
    
    
    (7,078,020
    )
    
    
    (6,038,077
    )
    
    
    (407,931
    )Income statement amounts
    
    
    (1,154,488
    )
    
    
    (1,419,420
    )
    
    
    (48,346
    )Price-level
restatements - net
    
    
    (473,949
    )
    
    
    481,050
    
    
    
    2,125,190Foreign exchange gain (loss)
    
    
    6,233,786
    
    
    
    5,004,430
    
    
    
    (2,996,808
    )Gain (loss) from changes in the purchasing
power of the Chilean peso
    
    
    5,759,837
    
    
    
    5,485,480
    
    
    
    (871,618
    )
 F-29




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes) 17. DIRECTORS REMUNERATION The remuneration paid to the Directors of D&S and its subsidiaries for
performing their duties is summarized as follows: For the year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Attendance fees
    
    
    259,841
    
    
    
    314,216
    
    
    
    364,300
 The following amounts were also paid to the Directors for activities not
related to their positions as Directors: For the year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Per  diem
    
    
    54,853
    
    
    
    53,255
    
    
    
    52,728
 18. NON-OPERATING INCOME AND EXPENSES a. Non-operating income for each year is summarized as follows: For the year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Interest income
    
    
    1,011,450
    
    
    
    458,614
    
    
    
    538,573Amortization of negative goodwill
    
    
    345,967
    
    
    
    345,967
    
    
    
    353,188Other
    
    
    255,855
    
    
    
    515,050
    
    
    
    591,899Total
    
    
    1,613,272
    
    
    
    1,319,631
    
    
    
    1,483,660
 b. Non-operating expense for each year is summarized as follows: Year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Financial expense
    
    
    12,777,399
    
    
    
    13,521,673
    
    
    
    16,407,864Amortization of goodwill
    
    
    787,483
    
    
    
    794,748
    
    
    
    794,748Minority interest
    
    
    170,575
    
    
    
    62,536
    
    
    
    42,657Restructuring expenses
    
    
    
    
    
    
    4,997,480Other
    
    
    1,689,494
    
    
    
    1,374,839
    
    
    
    1,286,432Totals
    
    
    15,424,951
    
    
    
    20,751,276
    
    
    
    18,531,701
 F-30




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  19.
    
    TRANSACTIONS WITH RELATED PARTIES  a.
    
    Related companies- The Company has transactions with its equity -
method investees and other related parties. Balances due from and due
to these companies are shown on the consolidated balance sheets. The
detail of accounts receivable and payable is the following: At December 31,Receivable
    
    Payable2002
    
    2003
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$Short-term:Servicios Profesionales y de
Comercialización S.A. (1)
    
    
    
    
    
    
    
    
    
    
    7,694,844
    
    
    
    7,787,046Intersuper Argentina S.A.
    
    
    
    
    
    
    
    
    
    
    15,309
    
    
    
    15,309Aquapuro S.A.
    
    
    210,935
    
    
    
    208,847
    
    
    
    
    
    
    
    Inversiones Solpacific S.A.
    
    
    108,095
    
    
    
    107,025
    
    
    
    
    
    
    
    Inmobiliaria Mall Calama S.A.
    
    
    1,148,729
    
    
    
    1,132,354
    
    
    
    
    
    
    
    Totals
    
    
    1,467,759
    
    
    
    1,448,226
    
    
    
    7,710,153
    
    
    
    7,802,355
  (1)
    
    The balance payable is owed to a shareholder, bears
interest at 3.8% a year on UF denominated principal.  The accounts receivable and payable, other than that mentioned in (1), are
not subject to interest or indexation.  b.
    
    Transactions with related companies- The principal transactions
with related companies are summarized as follows: Transaction
    
    LossCompany
    
    Description of transaction
    
    2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$Servicios
Profesionales y de Comercialización S.A.
    
    Interest and indexation on current account
    
    
    351,128
    
    
    
    695,650
    
    
    
    418,655
    
    
    
    (351,128
    )
    
    
    (695,650
    )
    
    
    (418,655
    )Lease
    
    
    968
    
    
    
    979
    
    
    
    
    
    
    
    (968
    )
    
    
    (979
    )
    
    
    Aquapuro S.A.
    
    Purchase of merchandise
    
    
    7,068,056
    
    
    
    8,061,622
    
    
    
    9,389,458
    
    
    
    
    
    
    
    
    
    
    
    Alimentos y Servicios Ltda.
    
    Purchase of merchandise
    
    
    1,618,172
    
    
    
    2,342,928
    
    
    
    4,050,855
    
    
    
    
    
    
    
    
    
    
    
    Larrain Vial S.A. Corredora de Bolsa
    
    Professional services
    
    
    
    
    
    
    
    
    
    
    395,328
    
    
    
    
    
    
    
    
    
    
    
    Kimberly Clarke Chile S.A.
    
    Purchase of merchandise
    
    
    
    
    
    
    
    
    
    
    3,637,263
    
    
    
    
    
    
    
    
    
    
    
    
 F-31




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  20.
    
    SEVERANCE INDEMNITIESThe Company records an accrual for voluntary severance indemnities, which
has been accrued at the discounted present value of the vested benefit using
7% discount rate and considering future service until retirement (age 60 for
women, age 65 for men).The accrual amounts to ThCh$2,957,628 in 2002 and ThCh$3,494,263 in 2003,
and is included as accruals under long-term liabilities. The short-term
accrual in 2002 and 2003, respectively, amounts to ThCh$757,500 and
ThCh$715,708.21.
    
    FINANCIAL DERIVATIVESAs of December 31, 2003 the Company and its subsidiaries held the following
financial derivative contracts with financial institutions with the object
of decreasing exposure to foreign currency risk, as follows: As of December 31, 2003
    
    UnrealizedNominal
    
    
    
    
    
    Date of
    
    
    
    
    
    Sales/
    
    Hedged
    
    Initial hedged
    
    Closing hedged
    
    gain inType
    
    amount
    
    Currency
    
    Maturity
    
    Item
    
    purchase
    
    item
    
    amount
    
    amount (1)
    
    incomeThCh$
    
    ThCh$
    
    ThCh$FR
    
    
    6,288,500
    
    
    US$
    
    I quarter 2004
    
    Exchange rate
    
    P
    
    
    
    Accounts receivable
    
    
    27,988,421
    
    
    
    28,338,921
    
    
    
    350,500FR
    
    
    6,271,100
    
    
    US$
    
    I quarter 2004
    
    Exchange rate
    
    P
    
    
    
    Accounts receivable
    
    
    28,005,821
    
    
    
    28,338,921
    
    
    
    333,100FR
    
    
    5,031,200
    
    
    US$
    
    I quarter 2004
    
    Exchange rate
    
    P
    
    
    
    Accounts receivable
    
    
    28,058,121
    
    
    
    28,338,921
    
    
    
    280,800FR
    
    
    7,546,800
    
    
    US$
    
    I quarter 2004
    
    Exchange rate
    
    P
    
    
    
    Accounts receivable
    
    
    27,917,721
    
    
    
    28,338,921
    
    
    
    421,200FR
    
    
    100,000,000
    
    
    EUR
    
    I quarter 2004
    
    Exchange rate
    
    P
    
    
    
    Forecast transaction
    
    
    74,580,000
    
    
    
    74,580,000
    
    
    
    FR: Forward contract
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,385,600
  (1)
    
    Includes unrealized gain, if any. F-32




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  22.
    
    CONTINGENCIES AND COMMITMENTSParent company  a.
    
    Direct commitments  a.1.
    
    To secure the loans granted by Banco Santiago and Banco
Santander, the following guarantees were entered into, which were
in force at December 31, 2003:  
    
    Mortgage in favor of Banco Santiago for land
located in the Community of Lo Barnechea and at 15 Norte St. in
Viña del Mar with a book value of ThCh$52,635,206.
    
    Mortgage in favor of Banco Santander on land
located in the Community of La Reina with a book value of
ThCh$12,661,967.
    
    Mortgage in favor of Inversiones Inmobiliaria
Quilicura, Inversiones Bancard and Ases e Inversiones CMB S.A.
for land located in the Community of Chicureo with a book value
of ThChM$4,228,037.  a.2.
    
    The Company has commitments arising from imports of
inventory and plant and equipment under bank letters of credit
amounting to ThCh$4,729,710.  b.
    
    Indirect commitmentsThe Company has no indirect commitments.c.
    
    Management restrictions and financial covenants:In accordance with long-term loan contracts with Banco Santiago and
Banco Santander, the Company must comply with certain financial
covenants. At December 31, 2003, the Company is in compliance with
these covenants.d.
    
    LawsuitsAt December 31, 2003, the Company and its subsidiaries had lawsuits
filed against them which are related to their normal business activity.
According to the Companys legal advisors and the Companys management,
they do not present risk of significant loss.Due to the non-payment of a certain portion of the account receivable
related to the sale of Supermercado Ekono S.A. (Argentina), the Company
initiated judicial action against the guarantor of this debt as well as
its parent. Management believes that the Company has contractual and
legal recourse to recover the remaining balance in the form originally
agreed to and, as a result, no provision is necessary. F-33




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DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  Management believes that the Company has contractual and legal recourse
to recover the remaining balance, in the form originally agreed to and
as a result, no provision is necessary for the debt due by Disco S.A.,
which is guaranteed by Disco Ahold International Holding N.V..  SubsidiariesDirect commitments:  
    
    General mortgage in favor of Banco Santander on the
property located in La Dehesa St. No2016, Community of Lo
Barnechea. The book value of such asset is ThCh$5,886,924.  23.
    
    SUPPLEMENTARY CASH FLOW INFORMATION For the year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Interest collected
    
    
    627,924
    
    
    
    128,454
    
    
    
    81,220Interest paid
    
    
    12,378,656
    
    
    
    11,744,958
    
    
    
    14,762,985Income taxes paid
    
    
    872,353
    
    
    
    878,374
    
    
    
    641,646Property, plant and equipment acquired by
assuming directly related debt
    
    
    5,976,682
    
    
    
    5,820,569
    
    
    
    5,715,300
  24.
    
    SUBSEQUENT EVENTSOn December 19, 2003, the Company signed a letter of intent with Carrefour
Nederland B.V. to buy the shares of Carrefour Chile S.A. The Company
entered into this transaction to expand the number of locations it services
within its market area.On January 7, 2004, the purchase agreement entered into on December 19, 2003
was consummated by virtue of which Carrefour Nederland B.V. sold to the
Company 1,701,403 shares of Carrefour Chile S.A., corresponding to 99.9999%
of the shares of the latter, for a price of ¬99,999,940. At that same
date, and based on the same document, Intercross Roads B.V. (a company
related to Carrefour Nederland B.V.) sold to Administradora de Concesiones
Comerciales de Hipermercados S.A. (a subsidiary of the Company) one share of
Carrefour Chile S.A., corresponding to 0.0001% of the shares of the latter,
for a price of ¬60. With these purchases, the Company acquired the
entirety of the issued shares of Carrefour Chile S.A.Due to the recent acquisition date, the Company has not completed its
analysis of the fair value of the assets acquired and liabilities assumed in
this purchase. F-34




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  25.
    
    DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLESThe Companys consolidated financial statements have been prepared in
accordance with Chilean GAAP, which varies in certain respects from U.S.
GAAP. Such differences involve methods for measuring the amounts shown in
the consolidated financial statements as well as additional disclosures
required by U.S. GAAP. The principal differences between Chilean GAAP and
U.S. GAAP for the Company are quantified and described below.Under Chilean GAAP, financial statements are restated to reflect the full
effects of the gain (loss) in the purchasing power of the Chilean peso on
the financial position and results of operations of reporting entities. The
method is based on a model that enables calculation of net inflation gains
or losses caused by monetary assets and liabilities exposed to changes in
the purchasing power of Chilean peso, by restating all non-monetary accounts
in the financial statements. The model prescribes that the historical cost
of such accounts be restated for general price-level changes between the
date of origin of each item and the year-end. The price-level restatement
adjustments under Chilean GAAP are not reversed in the U.S. GAAP
reconciliation as allowed under Securities and Exchange Commission rules.a.1. Income Taxes- Since January 1, 2000, under Technical Bulletin No. 60
of the Chilean Institute of Accountants, the Company records income taxes
using the liability method where deferred tax effects of temporary
differences between the financial statement and tax values of assets and
liabilities are booked. Upon adoption, contra assets or liabilities
(complementary accounts) were recorded offsetting the effects of the
deferred tax assets and liabilities not recorded prior to January 1, 2000.
The complementary accounts are amortized to income over the estimated
average reversal periods corresponding to the underlying temporary
differences to which the deferred tax asset or liability relates.Under U.S. GAAP, the accounting is similar. However, at the adoption date
of Statement of Accounting Standards No. 109, Accounting for Income Taxes,
the change in accounting principle was immediately recognized through the
income statement as a Cumulative Effect of a Change in Accounting
Principle. Therefore, under U.S. GAAP, the amortization of the
complementary accounts created under Chilean GAAP is reversed. In addition,
there are tax effects recorded for any deferred tax effects related to other
differences between Chilean GAAP and U.S. GAAP described herein.a.2. Mandatory dividends- As required by Law No. 18,046, unless the
shareholders unanimously agree otherwise, the Company must distribute a
minimum cash dividend equivalent to 30% of net income. Since the payment of
these dividends is a legal requirement in Chile, an accrual for U.S. GAAP
purposes is made to recognize the corresponding decrease in equity at each
balance sheet date whilst under Chilean GAAP, dividends are not recognized
until approved by the shareholders. The effect on equity is included in the
reconciliation below. F-35




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  a.3. Marketable equity securities- Under U.S. GAAP, marketable equity
securities (mutual funds) investments other than those accounted for under
the equity method are required to be accounted for under SFAS 115
Accounting for Certain Investments in Debt and Equity Securities. This
standard requires investments to be accounted for as follows: (1)
held-to-maturity securities, which are defined as debt securities that a
company has a positive intent and ability to hold to maturity, are reported
at amortized cost, (2) trading securities, which are defined as those that
are bought and held principally for the purpose of selling them in the near
term, are reported at fair value with unrealized gains and losses included
in earnings, and (3) available for sale securities, which include securities
not classified in either of the other two categories, are reported at fair
value with unrealized gains and losses excluded from earnings and included
as a separate component of shareholders equity.Under Chilean GAAP, the Company presents marketable equity (see Note 4 for
detail) securities at the lower of cost plus price-level restatement or
market. Under U.S. GAAP, all investments in marketable equity securities
which the Company holds would be classified as available-for-sale and be
presented at fair value with unrealized gains and losses included as a
separate component of shareholders  ́ equity. The effect of this difference
is not material.The Company has not recorded any other than temporary impairment under U.S.
GAAP related to these securities.a.4. Property plant and equipment- Under Chilean GAAP, certain property,
plant and equipment is reported in the financial statements at amounts
determined in accordance with a technical appraisal. Such revaluation is
not permitted under U.S. GAAP. The effects of this revaluation, as well as
of the reversal of the related accumulated depreciation and depreciation
expense for the year, are included in the reconciliations below.a.5. Purchase accounting and impairment of goodwill- In accordance with
Chilean GAAP, business combinations with companies under common control are
accounted for at the book value of the underlying net assets with the excess
of cost over net book value recorded as goodwill to be amortized to income
over a period not exceeding 20 years. Under U.S. GAAP, these business
combinations involving companies under common control were as poolings of
interests in accordance with Accounting Interpretation No. 39. No goodwill
is recorded under U.S. GAAP. Under Chilean GAAP, at the merger date with
Saitec S.A., El Rodeo S.A. and Almac Internacional S.A., the Company
recorded negative goodwill due to the excess of the carrying value of the
investment over the stated increase in the Companys capital. Under U.S.
GAAP, such negative goodwill and its subsequent amortization is eliminated.Under Chilean GAAP, the acquisition of Maquinsa, an unrelated company, in
1997, was recorded at cost with the assets acquired and liabilities assumed
stated at their book carryover basis, with any excess up to the purchase
price being recorded as goodwill. Under U.S. GAAP, such business
combinations are recorded at cost with the assets acquired and liabilities
assumed stated at their respective fair value with any excess up to the
purchase price being recorded as goodwill. The effects of such differences
are recorded in the reconciliation below and include differences in the
carrying values for assets, liabilities and goodwill and the resulting
depreciation and amortization. In 1999, the Company settled an amount of
ThCh$1,043,256 F-36




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  with the former owner of Maquinsa S.A. in arbitration. Maquinsa S.A. had been acquired by
the Company in 1997. Under Chilean GAAP, this amount was recorded as
goodwill. Under U.S. GAAP, this amount would have been expensed. The
effects of this difference are presented in the reconciliation below.In 1996 the Company purchased a 100% interest in Supermercados Ekono S.A.
(Argentina). The Company previously held a 49.99% non-controlling interest,
accounted for under the equity method for the period from December 27, 1991
to December 31, 1995, when it sold this interest to the Companys
shareholders and subsequently repurchased the 100% interest from such
shareholders. Under Chilean GAAP, these transactions were accounted for
separately. Under U.S. GAAP, the sale and repurchase from shareholders were
treated as capital transactions. In December 1999, the Company sold its
100.0% interest in Supermercados Ekono S.A. (Argentina). The effects of
such differences are recorded in the reconciliation.Under U.S. GAAP, in accordance with the adoption of Statement of Accounting
Standard No. 142 (SFAS No. 142) on January 1, 2002, goodwill is no longer
amortized, but is tested for impairment on an annual basis or whenever
indicators of impairment arise. No cumulative effect of a change in
accounting principle was recognized at that date nor has the annual
impairment test required under SFAS No. 142 resulted in any goodwill
impairment.The transitional provisions of SFAS No. 142 required disclosure of reported
net income in all periods presented, exclusive of amortization expense
recognized in those periods related to goodwill and the effects of other
accounting changes pursuant to the adoption of SFAS No. 142. Those
disclosures are set forth below, presented as a reconciliation from U.S.
GAAP net income to adjusted net income under U.S. GAAP excluding the
amortization of goodwill. 2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Net income under U.S. GAAP
    
    
    44,446,071
    
    
    
    29,406,796
    
    
    
    23,667,385Add back:Goodwill amortization under U.S. GAAP
    
    
    1,185,746
    
    
    
    
    
    
    
    Adjusted net income under U.S. GAAP
    
    
    45,631,817
    
    
    
    29,406,796
    
    
    
    23,667,385
 2001
    
    2002
    
    2003Ch$
    
    Ch$
    
    Ch$Basic earnings per share:Reported net income
    
    
    32.21
    
    
    
    21.31
    
    
    
    17.15Add back:Goodwill amortization
    
    
    0.86Adjusted net income
    
    
    33.07
    
    
    
    21.31
    
    
    
    17.15
 F-37




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DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  The movement in this account under U.S. GAAP only relates to currency
restatement.a.6. Severance indemnities- The Company has committed to provide a lump sum
payment to each employee with more than six months of service at the end of
his or her employment. Under Chilean GAAP, the Company records the present
value of the liability, calculated based on total expected service, current
salary levels of all employees with more than six months of service, and a
discount rate of 7%. Under U.S. GAAP, this arrangement is considered to be
a benefit plan, and the liability should be measured by projecting future
expected severance payments using an assumed salary progression rate and
discounting the resulting amounts to their present value. In practice, the
Company believes that the salary progression rate will not differ
significantly from the general inflation rate. Prior service costs are
recorded as deferred assets and charged to income using the straight-line
method over the estimated average remaining service period of the employees.
For Chilean GAAP, prior service costs which arose when the Company started
recording severance indemnity liabilities in 1995, were expensed
immediately. The difference related to the treatment for prior service
costs is recorded as an adjustment in the reconciliation to U.S. GAAP.The difference between U.S. GAAP and Chilean GAAP for the projected benefit
obligation related to SFAS No. 87 and the related obligation under Chilean
GAAP is not significant. The severance indemnity plan is unfunded.a.7. Present value adjustment on accounts receivable- Under Chilean GAAP,
the account receivable from Disco S.A. for the sale of Ekono Argentina in
1999 was recorded without discounting the long-term portion to its net
present value at the date of sale. Under U.S. GAAP, in accordance with
Accounting Principle Board Opinion No. 21, such receivable is recorded at
the net present value of the amount using a 7% annual interest rate with the
associated interest income accreted over the life of the loan. The effects
of conforming with U.S. GAAP are shown in the reconciliation below. As the
maturity date of the note was May 12, 2003, the cumulative foreign exchange
gains or losses on the accreted interest income on the life of the note
comprise the reconciling item.a.8. Derivative instruments -Under U.S. GAAP, SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, was adopted by the Company
as of January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including embedded derivatives, and
for hedging activities. SFAS No. 133 requires that all derivatives be
recognized as either assets or liabilities in the consolidated balance sheet
and measured at fair value. Depending on the documented designation of a
derivative instrument, any change in fair value is recognized in either
income or shareholders  ́ equity (as a component of accumulated other
comprehensive income). As the Company did not meet documentation standards
for its forward exchange contracts, the unrealized gain associated with its
forward exchange contracts is recognized through the income statement for
U.S. GAAP purposes. F-38




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  Under Chilean GAAP, the forward exchange contracts which the Company has
entered into, are classified as cash flow hedges. The unrealized gain
from marking these contracts to market is flowed through the income
statement. Therefore, there is no U.S. GAAP to Chilean GAAP difference for
these contracts.The Company entered into an additional forward exchange contract (designated
as a cash flow hedge of a forecasted transaction under Chilean GAAP ) to
cover the fluctuation in the Chilean peso versus the Euro for its
anticipated ¬100,000,000 purchase of Carrefour Chile S.A. (see note 24)
on December 19, 2003, which purchase was completed on January 7, 2004. At
December 31, 2003, the fair value of the financial instrument did not differ
significantly from its recorded value. On January 7, 2004, upon settlement
of this financial instrument, the Company realized a loss of approximately
ThCh$3,042,000.Under Chilean GAAP, the realized loss on this contract will be considered
part of the purchase price of Carrefour Chile S.A. Under U.S. GAAP, SFAS
No. 133 does not permit the designation of a forecast transaction related to
a business combination as a hedge, therefore the loss will be recognized in
income in 2004.a.9. Effect of Conforming to U.S. GAAP- The adjustments required to conform
reported net income under Chilean GAAP to U.S. GAAP are as follows (all
amounts are expressed in thousands of constant Chilean pesos of December 31,
2003 purchasing power and thousands of U.S. dollars): Year ended December 31,2001
    
    2002
    
    2003
    
    2003Paragraph
    
    ThCh$
    
    ThCh$
    
    ThCh$
    
    ThUS$(except for shares and earnings per share)
    
    (note 2u)Net income, in accordance with Chilean GAAP
    
    
    
    
    
    
    40,951,696
    
    
    
    24,015,257
    
    
    
    20,819,444
    
    
    
    35,061Reversal of depreciation of the technical
revaluation of property, plant and equipment
    
    
    a.4
    
    
    
    28,957
    
    
    
    28,957
    
    
    
    28,957
    
    
    
    49Adjustment for deferred taxes
    
    
    a.1
    
    
    
    (312,356
    )
    
    
    663,238
    
    
    
    647,453
    
    
    
    1,090Amortization of deferred asset for prior service cost
    
    
    
    
    
    
    (22,816
    )
    
    
    (22,816
    )
    
    
    (22,816
    )
    
    
    (38
    )Reversal of amortization of negative goodwill
    
    
    a.5
    
    
    
    (345,967
    )
    
    
    (345,967
    )
    
    
    (353,188
    )
    
    
    (595
    )Adjustment to depreciation and amortization
and monetary correction for fair value
adjustment of acquired subsidiaries and
reversal of amortization of goodwill in 2002 and 2003
    
    
    a.5
    
    
    
    398,263
    
    
    
    794,748
    
    
    
    794,748
    
    
    
    1,338Present value adjustment on accounts receivable
from Disco S.A.
    
    
    a.7
    
    
    
    3,748,294
    
    
    
    4,273,379
    
    
    
    1,752,787
    
    
    
    2,952Net income and other comprehensive income,
in accordance with US GAAP
    
    
    
    
    
    
    44,446,071
    
    
    
    29,406,796
    
    
    
    23,667,385
    
    
    
    39,857Weighted average number of shares
    
    
    
    
    
    
    1,380,000,000
    
    
    
    1,380,000,000
    
    
    
    1,380,000,000
    
    
    
    1,380,000,000Basic earnings per share
    
    
    
    
    
    
    32.21
    
    
    
    21.31
    
    
    
    17.15
    
    
    
    0.03
  Consolidated operating income in accordance with U.S. GAAP was
ThCh$56,173,591 in 2001, ThCh$32,221,059 in 2002 and ThCh$44,800,204 in 2003
which includes in 2002 a reclassification for restructuring expenses into
operating income which were classified as non-operating expenses in Chilean
GAAP. F-39




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  The adjustments to reported net equity required to conform to U.S. GAAP are
as follows (all amounts are expressed in thousands of constant Chilean pesos
of December 31, 2003 purchasing power and thousands of U.S. dollars): December 31,2002
    
    2003
    
    2002Paragraph
    
    ThCh$
    
    ThCh$
    
    ThUS$(note 2u)Net equity, in accordance with Chilean
GAAP
    
    
    
    
    
    
    303,740,443
    
    
    
    310,828,887
    
    
    
    523,457Reversal of the technical revaluation
of property, plant and equipment
    
    
    a.4
    
    
    
    (1,873,416
    )
    
    
    (1,873,416
    )
    
    
    (3,155
    )Reversal of the accumulated depreciation
of the technical revaluation of property,
plant and equipment
    
    
    a.4
    
    
    
    648,081
    
    
    
    677,038
    
    
    
    1,140Adjustment for deferred taxes
    
    
    a.1
    
    
    
    (2,596,279
    )
    
    
    (1,948,826
    )
    
    
    (3,282
    )Reversal of severance indemnity
prior service cost
    
    
    a.6
    
    
    
    684,495
    
    
    
    684,495
    
    
    
    1,153Amortization of deferred asset for
prior-service cost
    
    
    a.6
    
    
    
    (182,531
    )
    
    
    (205,347
    )
    
    
    (346
    )Mandatory dividend required by law (30%
of net income less interim dividends paid)
    
    
    a.2
    
    
    
    (8,553,962
    )
    
    
    (7,899,805
    )
    
    
    (13,304
    )Reversal of negative goodwill
    
    
    a.5
    
    
    
    3,459,670
    
    
    
    3,459,670
    
    
    
    5,826Reversal of amortization of negative goodwill
    
    
    a.5
    
    
    
    (2,447,048
    )
    
    
    (2,800,236
    )
    
    
    (4,716
    )Adjustment for discontinuation of amortization
of goodwill
    
    
    a.5
    
    
    
    794,748
    
    
    
    1,589,496
    
    
    
    2,676Adjustment to depreciation and
monetary correction for fair value
adjustment of acquired companies
    
    
    a.5
    
    
    
    1,775,501
    
    
    
    1,775,501
    
    
    
    2,990Dividend paid in connection with the purchase
of Supermercados Ekono S.A. (Argentina)
from controlling shareholder
    
    
    a.5
    
    
    
    (1,350,730
    )
    
    
    (1,350,730
    )
    
    
    (2,275
    )Adjustment to net loss on sale of
Supermercados Ekono S.A. (Argentina)
    
    
    a.5
    
    
    
    (1,277,219
    )
    
    
    (1,277,219
    )
    
    
    (2,151
    )Present value adjustment on accounts receivable
from Disco S.A.
    
    
    a.7
    
    
    
    1,344,466
    
    
    
    3,097,253
    
    
    
    5,216Adjustment for difference for arbitration settlement
for Maquinsa S.A.
    
    
    a.5
    
    
    
    (1,043,256
    )
    
    
    (1,043,256
    )
    
    
    (1,757
    )Net equity, in accordance with U.S. GAAP
    
    
    
    
    
    
    293,122,963
    
    
    
    303,713,505
    
    
    
    511,472
 F-40




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  The changes in net equity accountsdetermined under U.S. GAAP are summarized
as follows (all amounts are expressed in thousands of constant Chilean pesos
of December 31, 2003 purchasing power): ThCh$Balance at January 1, 2001
    
    
    254,744,774Dividends declared
    
    
    (15,998,482
    )Mandatory dividend required by law
    
    
    (5,108,485
    )Net income for the year
    
    
    44,446,071Balance at January 1, 2002
    
    
    278,083,878Dividends declared
    
    
    (14,133,134
    )Mandatory dividend required by law
    
    
    (235,577
    )Net income for the year
    
    
    29,406,796Balance at December 31, 2002
    
    
    293,121,963Dividends declared
    
    
    (13,729,999
    )Mandatory dividend required by law
    
    
    654,156Net income for the year
    
    
    23,667,385Balance at December 31, 2003
    
    
    303,713,505
  b. Additional Disclosure Requirementsb.1. Reporting Comprehensive IncomeU.S. GAAP requires that comprehensive income be displayed within the
consolidated financial statements. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. For the year ended December 31,2001
    
    2002
    
    2003ThCh
    
    $ ThCh
    
    $ ThCh$Net income under U.S. GAAP
    
    
    44,446,071
    
    
    
    29,406,796
    
    
    
    23,667,385Comprehensive income for the year
    
    
    44,446,071
    
    
    
    29,406,796
    
    
    
    23,667,385
 F-41




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  b.2. Income Taxes- The consolidated provision for income taxes charged to
income is as follows: For the year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Current tax (expense)
    
    
    (6,680,057
    )
    
    
    (5,857,911
    )
    
    
    (5,479,708
    )Deferred tax (expense) benefit
    
    
    (1,243,868
    )
    
    
    1,817,772
    
    
    
    (375,500
    )Charge for the year under U.S. GAAP
    
    
    (7,923,925
    )
    
    
    (4,040,139
    )
    
    
    (5,855,208
    )
  The consolidated U.S. GAAP deferred tax liability is summarized as follows: At December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Short-termAllowance for notes and accounts receivable
    
    
    367,717
    
    
    
    691,674
    
    
    
    1,053,753Inventory
    
    
    
    
    
    
    190,534
    
    
    
    Accruals
    
    
    390,674
    
    
    
    1,395,236
    
    
    
    845,354Deferred charges
    
    
    
    
    
    
    (116,988
    )
    
    
    (363,894
    )Tax loss carryforwards (1)
    
    
    112,866
    
    
    
    
    
    
    
    Net short-term deferred tax assets
    
    
    871,257
    
    
    
    2,160,456
    
    
    
    1,535,213Long-termProperty, plant and equipment
    
    
    (4,277,418
    )
    
    
    (4,926,109
    )
    
    
    (6,899,999
    )Accruals
    
    
    411,724
    
    
    
    502,796
    
    
    
    594,025Deferred charges
    
    
    (1,602,280
    )
    
    
    (1,323,274
    )
    
    
    (1,252,631
    )Tax loss carryforwards (1)
    
    
    705,175
    
    
    
    1,512,361
    
    
    
    3,574,122Net long-term deferred tax liability
    
    
    (4,762,799
    )
    
    
    (4,234,226
    )
    
    
    (3,984,483
    )Net deferred tax liability
    
    
    (3,891,542
    )
    
    
    (2,073,770
    )
    
    
    (2,449,270
    )
  (1)
    
    In Chile tax loss carryforwards may be utilized indefinitely. F-42




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DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  The consolidated U.S. GAAP provision for income taxes differs from the
amount of income tax determined by applying the applicable tax rate of 15%
in 2001, 16% in 2002 and 16.5% in 2003 (Chilean statutory income tax rate)
to U.S. GAAP pretax income as a result of the following: Year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$At statutory Chilean tax rate
    
    
    7,293,255
    
    
    
    4,594,982
    
    
    
    4,508,147Effect of enacted change in tax rate
    
    
    197,930Effect of price level restatement at accounts
receivable from Disco S.A.
    
    
    (1,139,534
    )
    
    
    (928,128
    )
    
    
    1,248,787Other price-level restatements and other
    
    
    1,572,274
    
    
    
    373,286
    
    
    
    98,274Effective tax
    
    
    7,923,925
    
    
    
    4,040,140
    
    
    
    5,855,208
  b.3. Cash flow informationi.The statement of cash flows under Chile GAAP differs in certain respects
from the presentation of a statement of cash flow under U.S. GAAP as
follows: Year ended December 31,2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Cash provided by operating activities under Chilean GAAP
    
    
    66,792,020
    
    
    
    27,940,144
    
    
    
    33,451,365Cash provided by operating activities under U.S. GAAP
    
    
    66,792,020
    
    
    
    27,940,144
    
    
    
    33,451,365Cash provided by (used in) financing activities under Chilean GAAP
    
    
    (867,088
    )
    
    
    32,456,596
    
    
    
    43,747,624Cash provided by (used in) financing activities under U.S. GAAP
    
    
    (867,088
    )
    
    
    32,456,596
    
    
    
    43,747,624Cash used in investing activities under Chilean GAAP
    
    
    (75,618,511
    )
    
    
    (69,850,473
    )
    
    
    (68,166,613
    )Purchase of investments (1)
    
    
    (5,638,222
    )
    
    
    (1,313,117
    )
    
    
    (2,000,145
    )Cash used in investing activities under U.S. GAAP
    
    
    (81,256,733
    )
    
    
    (71,163,590
    )
    
    
    (70,166,758
    )
  (1)
    
    This amount correspond to mutual fund investment.  The reclassification above relates to instruments which would not be
considered cash equivalents in U.S. GAAP. F-43




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  b.4. Estimated Fair Value of Financial Instruments- U.S. GAAP requires
disclosure of the fair value of financial instruments owned by the Company
and its subsidiaries, other than investments in related companies that are
accounted for under the equity method of accounting. The estimated fair
values are based on the following methods and assumptions:  
    
    Cash- The fair value of the Companys cash is equal to its
carrying value.
    
    Marketable securities- The fair value of the investments was
determined based on market value.
    
    Notes and accounts receivable and payable- The carrying amount
of trade notes and accounts receivable and payable approximate fair
value because of the short maturity of these instruments. The fair
value of the note receivable from Disco approximates its carrying
value, due to what management considers to be the short-term nature of
the note in 2003. In 2002, the fair value of the note was estimated
based on the present value at a discount rate determined in accordance
with conditions in the local market (see Note 24).
    
    Long-term debt and bonds- The fair value of the Companys
long-term debt is estimated based on the current interest rates offered
to the Company for loans of the same remaining maturities.
    
    Short-term debt- Short-term debt has interest rates that vary with
market conditions and accordingly, the carrying amount approximates
fair value.
    
    Derivatives- Estimates of fair values of derivative instruments
for which no quoted prices or secondary market exists have been made
using valuation techniques such as forward pricing models, present
value of estimated future cash flows, and other modeling techniques.
These estimates of fair value include assumptions made by the Company
about market variables that may change in the future. Changes in
assumptions could have a significant impact on the estimate of fair
values disclosed. As a result, such fair value amounts are subject to
significant volatility and are highly dependent on the quality of the
assumptions used.  The estimated fair values of the Companys financial instruments are as
follows: As of December 31,2002
    
    2003Carrying
    
    Fair
    
    Carrying
    
    Fairamount
    
    value
    
    amount
    
    valueThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$Cash
    
    
    19,961,139
    
    
    
    19,961,139
    
    
    
    34,395,705
    
    
    
    34,395,705Marketable securities
    
    
    1,389,916
    
    
    
    1,416,668
    
    
    
    3,695,636
    
    
    
    3,797,152Notes and accounts receivable, net
    
    
    126,281,052
    
    
    
    126,281,052
    
    
    
    131,849,382
    
    
    
    131,849,382Due from related companies
    
    
    1,467,759
    
    
    
    1,467,759
    
    
    
    1,448,226
    
    
    
    1,448,226Accounts payable
    
    
    160,100,454
    
    
    
    160,100,454
    
    
    
    180,299,719
    
    
    
    180,299,719Commercial paper and bonds
    
    
    93,343,794
    
    
    
    111,923,797
    
    
    
    132,314,401
    
    
    
    137,454,766Due to related companies
    
    
    7,710,100
    
    
    
    7,710,100
    
    
    
    7,802,355
    
    
    
    7,802,355Bank and financial institutions
    
    
    79,585,127
    
    
    
    79,585,127
    
    
    
    82,907,812
    
    
    
    82,907,812Derivative instruments (1)
    
    
    
    
    
    
    
    
    
    
    1,385,600
    
    
    
    1,385,600
 F-44




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  (1)
    
    The Company enters into foreign currency forward contracts in order to
hedge its exposure to non  Chilean peso foreign currency fluctuations related
to non-Chilean peso denominated transactions. The Companys accounting policy
for such contracts is described in Note 1.The Company is exposed to credit-related losses in the event of
non-performance by counterparties to these financial instruments, but
does not expect any counterparties to fail to meet their obligations
given their high credit ratings. The credit exposure of foreign
exchange contracts is represented by the fair value of contracts with a
positive fair value at the reporting date.The notional amounts, carrying amounts and fair values of these
contracts are as follows: At December 31, 2002
    
    At December 31, 2003Notional
    
    Carrying
    
    Fair
    
    Notional
    
    Carrying
    
    Fairamount
    
    Amount
    
    value
    
    amount
    
    amount
    
    ValueDr. (Cr.)
    
    Dr. (Cr.)Foreign currency
forward contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,716,600
    
    
    
    (1,385,600
    )
    
    
    (1,385,600
    )
  The amounts of credit risk to which the Company is exposed in the event
of the nonperformance by counterparties under these agreements is shown
by the fair values of the gross amounts receivable by the Company in the
above table.  b.5. Lease CommitmentsThe Company and its subsidiaries lease eight of their retail outlets and
five of their warehouses under rental agreements for remaining terms of two
to twelve years, substantially all of which have options for renewal. For
the most part, rentals are determined as a percentage of sales ranging from
1% to 3% with minimum rentals. Minimum future rentals are as follows: ThCh$2004
    
    
    3,261,8622005
    
    
    3,076,3952006
    
    
    3,002,6532007
    
    
    2,995,8812008 and thereafter
    
    
    27,047,158Total
    
    
    39,383,949
  Consolidated rental expense was ThCh$1,974,983, ThCh$3,054,623 and
ThCh$4,107,339 for the years ended December 31, 2001, 2002 and 2003,
respectively. F-45




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  b.6 Segment InformationThe Companys operations are organized under two established store formats,
allowing it to segment the market and target growth areas with the preferred
format for the local market conditions. The formats provide the flexibility
to match each store site with the format best suited to the surrounding
area.The Companys store formats have been aggregated into one reporting segment
in 2003 (supermarket format/hypermarket formats). The Company has also
identified its credit card operations as a segment. These operations
consist of the financing of customer accounts receivable on a long-term
basis. The accounting policies of the segments are the same as those
described in the summary of accounting policies included in the Chilean GAAP
financial statements. The Company has reflected this method of segmentation
in all years presented.Summarized financial information concerning the segments of the Company and
its subsidiaries is shown in the following table. Managements uses
operating income as its measure of performance for segments. Hypermarketand Supermarket
    
    Creditformat
    
    card
    
    
    
    
    
    Other
    
    TotalThCh$
    
    ThCh$
    
    
    
    
    
    ThCh$
    
    ThCh$2001Revenues
    
    
    920,136,470
    
    
    
    7,606,006
    
    
    
    
    
    
    
    21,970,292
    
    
    
    949,712,768Segment gross profit
    
    
    182,358,964
    
    
    
    7,606,006
    
    
    
    (1
    )
    
    
    23,829,501
    
    
    
    213,794,471Identifiable assets
    
    
    337,875,641
    
    
    
    
    
    
    
    
    
    
    
    95,408,053
    
    
    
    433,283,694Goodwill (2)
    
    
    11,339,515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,339,515Operating income
    
    
    45,311,605
    
    
    
    2,013,405
    
    
    
    
    
    
    
    9,290,097
    
    
    
    56,615,1072002Revenues
    
    
    1,022,833,539
    
    
    
    11,256,760
    
    
    
    
    
    
    
    24,629,041
    
    
    
    1,058,719,340Segment gross profit
    
    
    206,905,303
    
    
    
    11,256,760
    
    
    
    (1
    )
    
    
    23,479,557
    
    
    
    241,641,620Identifiable assets
    
    
    364,167,567
    
    
    
    
    
    
    
    
    
    
    
    108,374,187
    
    
    
    472,541,754Goodwill (2)
    
    
    11,516,905
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,516,905Operating income
    
    
    30,649,030
    
    
    
    2,669,567
    
    
    
    
    
    
    
    9,346,202
    
    
    
    42,664,7992003Revenues
    
    
    1,112,257,702
    
    
    
    19,086,291
    
    
    
    
    
    
    
    31,655,804
    
    
    
    1,162,999,797Segment gross profit
    
    
    222,894,972
    
    
    
    19,086,291
    
    
    
    (1
    )
    
    
    19,903,281
    
    
    
    261,884,544Identifiable assets
    
    
    367,976,095
    
    
    
    
    
    
    
    
    
    
    
    113,295,073
    
    
    
    481,271,168Goodwill (2)
    
    
    10,706,373
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,706,373Operating income
    
    
    29,146,916
    
    
    
    4,333,300
    
    
    
    
    
    
    
    11,761,54845,241,764
  (1)
    
    This amount does not include ThCh$1,241,707 for 2001;
ThCh$1,498,277 for 2002; and ThCh$2,252,252 for 2003, corresponding to
financial expenses which are included in non operating expenses in the
consolidated income statements, which for segment operating profit
purposes are classified as operational. F-46




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  (2)
    
    The only change in goodwill is related to the amortization under
Chilean GAAP. Information in this footnote is presented under Chilean
GAAP as it represents the basis upon which the operational personnel
evaluate the business.  Reconciliation of identifiable assets to total assets: 2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Identifiable assets
    
    
    433,283,694
    
    
    
    472,541,754
    
    
    
    481,271,168Corporate assets
    
    
    25,490,964
    
    
    
    21,932,850
    
    
    
    18,374,736Total
    
    
    458,774,658
    
    
    
    494,474,604
    
    
    
    499,645,904
  Supermarkets/HypermarketsSupermarkets are characterized by traditional neighborhood supermarkets
(average selling area of 2,000 m2) providing a pleasant, friendly atmosphere
and personalized attention, with an emphasis on food. These stores offer a
broad assortment of quality perishables and groceries. Additionally, a
variety of prepared dishes is available in those stores located in higher
income areas. The hypermarket, which was modeled on the European model, is
characterized by selling spaces of between 6,000 and 13,000 square meters
offering, in addition to traditional food items, non - food items such as
home appliances, electronics, hardware, sports, toys, textiles and articles
for the home.Credit card operationsServicios Administración de Créditos Comerciales Presto Ltda. is an
subsidiary of the Company. Its corporate purpose is the placement of
long-term financing on personal consumer debt taking advantage of all
synergies of the supermarket segment. This segments income consists of the
interest income associated with its credit cards. The financing of its
operations is generated by 100% by the Company, for which Presto pays
interest to the parent, D&S, for funding its operations. During 2003,
Prestos operation increased significantly. This is primarily related to
the increased usage of financing by customers.The following information is disclosed related to credit card operations.  Allowance for credit risk associated to accounts receivable- The
allowance for credit risk associated to accounts receivable is
established taking into account the experience of delinquency and
write-offs. Accounts and notes receivable are stated net of such
allowance.Interest- The amount recorded in the balance sheet for loans includes
accrued interest. F-47




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  The Company discontinues the accrual of interest on high - risk or past
 - due loans (90 days).The allowance for doubtful credit card accounts receivable was
ThCh$634,583 at December 31, 2001, ThCh$979,665 in December 31, 2002 and
ThCh$3,059,394 at December 31, 2003. See provisions and write-offs in
note 25.b.9.The short - term and long - term components of the credit card loan
receivables are as follows: 2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Short - term
    
    
    24,539,113
    
    
    
    39,246,573
    
    
    
    76,293,458Long - term
    
    
    519,458
    
    
    
    2,820,468
    
    
    
    7,108,467Total
    
    
    25,058,571
    
    
    
    42,067,041
    
    
    
    83,401,925
  Amount of past due (90 days) credit card loans at each year end was as
follows: ThCh$2001
    
    
    792,9592002
    
    
    1,752,9072003
    
    
    11,418,898
  The past due credit card loans increased at December 31, 2003 due to an
increase in the loan portfolio undertaken in conjunction with the Companys
strategy to expand this business segment.OtherThis amount is mainly composed of rental revenue, for kiosks, etc., within
the supermarkets and hypermarkets.The Company operates in only one geographic segment, Chile.b.7. Advertising CostsThe Company expenses advertising costs as incurred. Consolidated
advertising costs for the years ended December 31, 2001, 2002 and 2003 were
ThCh$11,711,674, ThCh$14.366.790 and ThCh$12,053,950, respectively. F-48




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  b.8. Vendor allowancesNet revenue includes revenue obtained from suppliers for reaching selling
goals and purchasing a certain volume of goods, which is recorded on an
accrual basis and included in net revenue on the statements of income. The
amounts recorded have been reclassified from revenue to deductions from the
cost of sales line for U.S. GAAP purposes as follows: 2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$Dr (Cr)
    
    Dr (Cr)
    
    Dr (Cr)OPERATING RESULTSNet revenue
    
    
    71,455,372
    
    
    
    82,851,516
    
    
    
    94,695,935Cost of sales
    
    
    (71,455,372
    )
    
    
    (82,851,516
    )
    
    
    (94,695,935
    )
  b.9. Servicios y Administración de Créditos Comerciales Presto Ltda. 
Additional DisclosureThe Company provides credit operations through its subsidiary, Servicios y
Administración de Créditos Comerciales Presto Ltda.The following summarizes the activity in the allowance for doubtful account
for the periods indicated: 2001
    
    2002
    
    2003ThCh$
    
    ThCh$
    
    ThCh$January 1, balance
    
    
    442,801
    
    
    
    634,583
    
    
    
    979,965Additional provisions
    
    
    2,279,091
    
    
    
    3,584,186
    
    
    
    8,585,000Write-offs, net
    
    
    (2,087,309
    )
    
    
    (3,238,804
    )
    
    
    (6,505,571
    )December 31, balance
    
    
    634,583
    
    
    
    979,965
    
    
    
    3,059,394
 F-49




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DISTRIBUCION Y SERVICIO D&S S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (Restated for general price-level changes)  b.10 Valuation and Qualifying Accounts(In thousands of constant Chilean pesos of December 31, 2003) Balance
    
    Additionsat
    
    charged to
    
    
    
    
    
    
    
    
    
    Balancebeginning
    
    costs and
    
    
    
    
    
    
    
    
    
    at end ofof period
    
    expenses
    
    Deductions
    
    Other
    
    periodThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$
    
    ThCh$December 31, 2001Allowance for doubtful Accounts receivable
    
    
    1,608,493
    
    
    
    3,740,326
    
    
    
    (2,306,227
    )
    
    
    
    
    
    
    3,042,592Allowance for inventory
    
    
    1,760,729
    
    
    
    
    
    
    
    (1,760,729
    )
    
    
    
    
    
    
    December 31, 2002Allowance for doubtful Accounts receivable
    
    
    3,042,592
    
    
    
    5,073,047
    
    
    
    (3,437,415
    )
    
    
    
    
    
    
    4,678,224Allowance for inventory
    
    
    
    
    
    
    1,154,756
    
    
    
    
    
    
    
    
    
    
    
    1,154,756Allowance for restructuring
    
    
    
    
    
    
    4,997,480
    
    
    
    
    
    
    
    
    
    
    
    4,997,480December 31, 2003Allowance for doubtful Accounts receivable
    
    
    4,678,224
    
    
    
    9,270,202
    
    
    
    (6,594,858
    )
    
    
    
    
    
    
    7,353,567Allowance for inventory
    
    
    1,154,756
    
    
    
    
    
    
    
    (1,154,756
    )
    
    
    
    
    
    
    Allowance for restructuring
    
    
    4,997,480
    
    
    
    
    
    
    
    (4,997,480
    )
    
    
    
    
    
    
    
  b.11. Recent Accounting PronouncementsIn January 2003, the Chilean Institute of Accountants issued Technical
Bulletin N°72, Business Combination and Consolidation of Financial
Statements. This standard complements or replaces existing accounting
literature for business combinations under Chilean GAAP, and requires all
acquisitions initiated after January 1, 2004 to be accounted for using the
purchase method based on fair values of assets acquired and liabilities
assumed. In addition, in exceptional cases, the pooling-of-interest method
may be used in reorganizations between related parties or for those
transactions where there is no clear acquirer. Technical Bulletin N°72
continues to require the amortization of goodwill, and specifies the
requirement for an impairment test. Notwithstanding any future
transactions, the adoption of Technical Bulletin N°72 is not expected to
have a significant effect on the results of operations, financial position
or cash flows of the Company.In January, 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46), an interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements (ARB 51). FIN 46 addresses consolidation by business
enterprises of variable interest entities, which are entities subject to
consolidation according to the provisions of FIN 46. For interests acquired
on or after February 1, 2003, FIN 46 applies immediately. For existing
interests as of January 31, 2003, FIN 46 is effective for the Company on
January 1, 2003. F-50




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##### Table of Contents



DISTRIBUCION Y SERVICIO D&S S.A. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Concluded)  In December 2003, the FASB issued a revision to interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51 (FIN 46R or the Interpretation). FIN 46R clarifies the application
of ARB No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial support.
FIN 46R requires the consolidation of these entities, known as variable
interest entities (VIEs), by the primary beneficiary of the entity. The
primary beneficiary is the entity, if any, that will absorb a majority of
the entitys expected losses, receive a majority of the entitys expected
residual returns, or both.Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN46, which had been issued in January 2003,
(b) eased some implementation problems, and (c) added new scope exceptions.
FIN 46R deferred the effective date of the Interpretation for public
companies, to the end of the first reporting period ending after March 15,
2004, except that all public companies must at a minimum apply the
provisions of the Interpretation to entities that were previously considered
special  purpose entities under the FASB literature prior to the issuance
of FIN 46R by the end of the first reporting period ending after December
15, 2003. We believe that the adoption of FIN 46 will
have a material impact on the Companys financial position, cash flows and results of
operations. The Company did not enter into any transactions under the scope
of FIN 46R after February 1, 2003. The Company is still evaluating the
effect that FIN 46R will have in respect of arrangements already in place at
January 1, 2003.In December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) N°104, Revenue Recognition. SAB 104 updated
portions of the interpretive guidance included in Topic 13 of the
codification of Staff Accounting Bulletins in order to make this
interpretative guidance consistent with current authoritative accounting and
auditing guidance and SEC regulations. The Company believes it is following
the guidance of SAB104.In June, 2003, the FASB issued SFAS No.150, Accounting for Certain Financial
Instrument with Characteristics of both Liabilities and Equity. This
Statement clarifies classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. It
requires classification of financial instruments within a Companys scope as
liabilities. Such financial instruments may include mandatorily redeemable shares, financial instruments
which embody an obligation to repurchase shares or require the issuer to settle the obligation by transferring
assets, or financial instruments that embody an unconditional obligation, or
in certain circumstances, an unconditional obligation. The Company
does not believe that there will be any effects on the results of
operations, financial condition, or cash flows relating to the
adoption of this pronouncement. * * * * * * F-51