##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 20-F 
 o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR
 x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2003
 OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 for the transition period from  to
 Commission file number: 1-14278
 QUILMES INDUSTRIAL (QUINSA), SOCIÉTÉ ANONYME  Grand-Duchy of Luxembourg
  84, Grand Rue
 L-1660 Luxembourg
 Grand-Duchy of Luxembourg
  Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class:
    
    Name of each exchange on which
registered:American Depositary Shares,
    
    New York Stock Exchange,representing Class B shares
    
    Luxembourg Stock Exchange
 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: Class A shares, without par value
    
    
    637,103,500Class B shares, without par value
    
    
    70,828,653
 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. Yes x   No o Indicate by check mark which financial statement item the Registrant has
elected to follow. Item 17 x   Item 18 o




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TABLE OF CONTENTS PageFINANCIAL INFORMATION
    
    
    3FORWARD-LOOKING STATEMENTS
    
    
    3TERMS AND CONVENTIONS
    
    
    4MARKET SHARE INFORMATION
    
    
    5PART IITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    6ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    6ITEM 3.
    
    KEY INFORMATION
    
    
    6ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    17ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    53ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    76ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    84ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    88ITEM 9.
    
    THE OFFER AND LISTING
    
    
    90ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    92ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    103ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    106PART IIITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    107ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    107ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    107ITEM 16.
    
    [RESERVED]
    
    
    107ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    107ITEM 16B.
    
    CODE OF ETHICS
    
    
    107ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    107ITEM 16E.
    
    PURCHASE OF EQUITY SECURITIES BY THE COMPANY
    
    
    108PART IIIITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    108ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    109ITEM 19.
    
    EXHIBITS
    
    
    109SIGNATURES
    
    
    111EXHIBIT INDEX
    
    
    115ARTICLES OF INCORPORATIONLIST OF SUBSIDIARIESCODE OF ETHICSCERTIFICATIONCERTIFICATIONCERTIFICATIONCONSENT OF A.C. NIELSEN ARGENTINA S.A.CONSENT OF A.C. NIELSEN CHILECONSENT OF CCR/IRICONSENT OF A.C. NIELSEN URUGUAYCONSENT OF CIES INTERNATIONAL




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FINANCIAL INFORMATION Substantial changes in Argentine law that have been adopted since December
2001 have had a significant impact on our operations. One of the principal
changes affecting our financial results was the reform of the Convertibility
Law, which had pegged the Argentine peso to the U.S. dollar for a decade. As a
result of this change, the Argentine peso underwent a massive devaluation
relative to the U.S. dollar. Given that a large part of our revenues is in
Argentine pesos, our financial performance was materially and adversely
affected during the year 2002. Consequently, any comparison between our
financial statements for periods ended after December 31, 2001 and those ended
prior to that date has been rendered meaningless. General This annual report contains our audited consolidated financial statements
as of December 31, 2003 and 2002 and for the three years in the periods ended
December 31, 2003, 2002 and 2001, all of which have been audited by
PricewaterhouseCoopers, independent accountants (such statements, together with
the notes thereto, are referred to herein as the Consolidated Financial
Statements). We prepare our consolidated financial statements in U.S. dollars and in
conformity with generally accepted accounting principles used in Luxembourg
(Luxembourg GAAP), which differ in certain significant respects from
generally accepted accounting principles in the United States of America (U.S.
GAAP). Such differences involve methods of measuring the amounts shown in the
financial statements, as well as additional disclosures required by U.S. GAAP.
See Note 28 to our Consolidated Financial Statements contained elsewhere in
this annual report (such statements, together with the notes thereto, are
referred to herein as the Consolidated Financial Statements) for a
description of the principal differences between Luxembourg GAAP and U.S. GAAP,
as they relate to us, and a reconciliation to U.S. GAAP of our net income (loss)
and shareholders equity. The reconciliation does not include
disclosure of all information that would be required by U.S. GAAP and
Regulation S-X of the Exchange Act. Certain amounts which appear herein (including percentage amounts) may not
sum due to rounding. 
 FORWARD-LOOKING STATEMENTS This annual report contains statements that are or may constitute
forward-looking statements. These statements appear throughout this annual
report and include statements regarding our intent, belief or current
expectations, including but not limited to any statements concerning:  a.
    
    our corporate strategy;b.
    
    our expectations regarding our future performance, revenues,
income, earnings per share, capital expenditures, dividends, liquidity
and capital structure;c.
    
    our development of new products;d.
    
    the demand for beer, soft drinks and water;e.
    
    the supply and availability of barley and malt;f.
    
    the impact of the pending business combination between Interbrew
S.A. (Interbrew) and AmBev, our strategic partner and a major
shareholder;g.
    
    trends affecting our financial condition or results of operations;h.
    
    our future performance in light of the termination of our license
and related agreements with Heineken;i.
    
    our dividend policy;j.
    
    possible future repurchases of our stock; 3




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k.
    
    the future impact of competition and regulation;l.
    
    political and economic conditions in the countries in which we or
our affiliates operate or may operate in the future;m.
    
    any statements preceded by, followed by or that include the words
believes, expects, predicts, anticipates, intends,
estimates, should, may or similar expressions; andn.
    
    other statements contained or incorporated by reference in this
annual report regarding matters that are not historical facts. Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to:  a.
    
    uncertainties relating to political and economic conditions in
Argentina and the other emerging market countries of Latin America
where we conduct our business;b.
    
    the rate of inflation and exchange rate risks, particularly,
increases in the exchange rate;c.
    
    restrictions on the ability to exchange local currencies in the
markets where we do business into hard currencies;d.
    
    the devaluation of the peso and other local currencies of the
countries where we conduct our business;e.
    
    the adoption of a restrictive currency transfer policy in the
countries where we conduct our business;f.
    
    the nature and extent of future competition in our principal
markets; andg.
    
    the factors discussed below under Risk Factors beginning on page
9. Due to extensive and rapid changes in laws as well as economic and
business conditions in Argentina, it is difficult to predict the impact of such
changes on our financial condition. You should not place undue reliance on
such statements, which speak only as of the date that they were made. Our
independent public accountants have not examined or compiled the
forward-looking statements and, accordingly, do not provide any assurance with
respect to such statements. These cautionary statements should be considered
together with any written or oral forward-looking statements that we may issue
in the future. We do not undertake any obligation to release publicly any
revisions to forward-looking statements contained in this annual report to
reflect later events or circumstances or to reflect the occurrence of
unanticipated events. For all these forward-looking statements, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. 
 TERMS AND CONVENTIONS As used throughout this annual report, the terms Quinsa, the Company,
we, us and our refer to Quilmes Industrial (Quinsa), Société Anonyme,
together with our consolidated subsidiaries, except where we make clear that
such terms refer only to the parent company. Throughout this annual report, we refer to many of our subsidiaries, past
and present, by their initials as follows: Baesa stands for Buenos Aires Embotelladora S.A. CBN stands for Cervecería Boliviana Nacional La Paz CBNSC stands for Cervecería Boliviana Nacional Santa Cruz 4




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CCBA stands for CCBA Sociedad Anónima CCBP stands for Compañía Cervecera Brahma del Paraguay S.A. CERVEPAR stands for Cervecería Paraguaya S.A. CMQ stands for Cervecería y Maltería Quilmes S.A.I.C.A y G. CT stands for Cervecería Tarija CTq stands for Cervecería Taquiña Cympay stands for Cervecería y Maltería Paysandu S.A. Edisa stands for Embotelladoras del Interior S.A. Enalbo stands for Envases de Aluminio Boliviano S.R.L. EUSA stands for Embotelladora del Uruguay S.A. FNC stands for Fábricas Nacionales de Cerveza S.A. FPV stands for Fábrica Paraguaya de Vidrios S.A. Incesa stands for Inversiones Cerveceras Sociedad Anónima La Luisiana stands for La Luisina S.A. Linthal stands for Linthal S.A. Malsaf stands for Maltería Safac S.A. Mosa stands for Maltería Oriental S.A. Paresa stands for Paraguay Refrescos S.A. QI(B) stands for Quilmes International (Bermuda) Ltd. Salus stands for Compañía Salus S.A. Throughout this document, references to US$, $ and dollar are to
United States dollars and references to P$ or peso are to Argentine pesos. Also, unless we indicate otherwise, references to fiscal years are to our
fiscal years ending on December 31 of the same calendar year. For example,
fiscal 2003 refers to our fiscal year ended December 31, 2003. 
 MARKET SHARE INFORMATION Market share information with respect to beer and soft drinks consumed in
Argentina is based on data supplied by A.C. Nielsen Argentina S.A. (Nielsen
Argentina). Market share information presented with respect to beer consumed
in Paraguay is based on data supplied by CCR/IRI. Market share information
presented with respect to beer consumed in Chile and Bolivia is based on data
supplied by Nielsen Chile S.A. (Nielsen Chile) and CIES, respectively.
Market share information presented with respect to soft drinks consumed in
Uruguay is based on data supplied by A.C. Nielsen (A.C. Nielsen). All other
information relating to market share in the various markets we operate in is
based on our estimates. Certain market data which appear herein (including
percentage amounts) may not sum due to rounding. 5




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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 SELECTED FINANCIAL DATA The following selected consolidated financial data have been derived from
the Consolidated Financial Statements as of the dates and for each of the
periods indicated below. This information should be read in conjunction with
and is qualified in its entirety by reference to the Consolidated Financial
Statements, and the discussion in Item 5. Operating and Financial Review and
Prospects included elsewhere in this annual report. The selected consolidated
statement of income data for the years ended December 31, 2003, 2002 and 2001
and the selected consolidated balance sheet data as of December 31, 2003 and
2002, have been derived from our Consolidated Financial Statements, which have
been audited by PricewaterhouseCoopers, independent accountants, and are
included elsewhere in this annual report. We prepare our Consolidated
Financial Statements in U.S. dollars and in conformity with Luxembourg GAAP,
which differs in certain significant respects from U.S. GAAP. Such differences
involve methods of measuring the amounts shown in the Consolidated Financial
Statements, as well as additional disclosures required by U.S. GAAP. See Note
28 to our Consolidated Financial Statements contained elsewhere in this annual
report for a description of the principal differences between Luxembourg GAAP
and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of our
net income (loss) reported under Luxembourg GAAP for the years ended December
31, 2003, 2002 and 2001, and our shareholders equity reported under Luxembourg
GAAP as of December 31, 2003 and 2002. The reconciliation does not include
disclosure of all information that would be required by U.S. GAAP and
Regulation S-X of the Exchange Act. The selected consolidated statement of
income data for the years ended December 31, 2000 and 1999 and the selected
consolidated balance sheet data as of December 31, 2001, 2000 and 1999 are
derived from our audited consolidated financial statements that are not
included herein. 1999
    
    2000
    
    2001
    
    2002
    
    2003(in US$ millions except for per share information and Other Data)Income Statement Data:Luxembourg GAAP:Gross sales
    
    $
    819.9
    
    
    $
    991.9
    
    
    $
    973.0
    
    
    $
    488.2
    
    
    $
    648.5Taxes
    
    
    (29.4
    )
    
    
    (36.8
    )
    
    
    (34.3
    )
    
    
    (19.6
    )
    
    
    (25.8
    )Net sales
    
    
    790.5
    
    
    
    955.1
    
    
    
    938.7
    
    
    
    468.6
    
    
    
    622.7Cost of goods sold
    
    
    (358.4
    )
    
    
    (495.7
    )
    
    
    (490.4
    )
    
    
    (308.5
    )
    
    
    (321.3
    )Gross profit
    
    
    432.1
    
    
    
    459.4
    
    
    
    448.3
    
    
    
    160.1
    
    
    
    301.4Selling and marketing expenses
    
    
    (188.6
    )
    
    
    (236.3
    )
    
    
    (235.0
    )
    
    
    (120.5
    )
    
    
    (143.5
    )Administrative and general expenses
    
    
    (83.1
    )
    
    
    (90.8
    )
    
    
    (76.7
    )
    
    
    (43.2
    )
    
    
    (38.4
    )Operating income (loss)
    
    
    160.4
    
    
    
    132.3
    
    
    
    136.6
    
    
    
    (3.6
    )
    
    
    119.5Interest income
    
    
    7.6
    
    
    
    9.5
    
    
    
    6.5
    
    
    
    8.4
    
    
    
    12.3Other income
    
    
    14.6
    
    
    
    37.0
    
    
    
    20.4
    
    
    
    4.4
    
    
    
    36.8Foreign exchange results and
translation adjustments
    
    
    (4.0
    )
    
    
    (1.7
    )
    
    
    (12.6
    )
    
    
    (22.9
    )
    
    
    7.2Interest and financial expenses
    
    
    (10.1
    )
    
    
    (36.8
    )
    
    
    (32.4
    )
    
    
    (32.8
    )
    
    
    (38.8
    )Other expenses
    
    
    (24.3
    )
    
    
    (25.4
    )
    
    
    (63.3
    )
    
    
    (155.9
    )
    
    
    (64.2
    )Income (loss) before income taxes,
minority interest and extraordinary
items
    
    
    144.2
    
    
    
    114.9
    
    
    
    55.2
    
    
    
    (202.4
    )
    
    
    72.8Income taxes
    
    
    (45.9
    )
    
    
    (27.3
    )
    
    
    6.1
    
    
    
    47.6
    
    
    
    (23.3
    )
 6




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1999
    
    2000
    
    2001
    
    2002
    
    2003(in US$ millions except for per share information and Other Data)Minority interest(1)
    
    
    (20.8
    )
    
    
    (16.6
    )
    
    
    (18.0
    )
    
    
    18.9
    
    
    
    (12.7
    )Net income (loss) before
extraordinary items
    
    $
    77.5
    
    
    $
    71.0
    
    
    $
    43.3
    
    
    $
    (135.9
    )
    
    $
    36.8Extraordinary items, net of income tax
    
    
    
    
    
    
    (51.7
    )
    
    
    
    
    
    
    
    
    
    
    Income taxes
    
    
    
    
    
    
    51.3
    
    
    
    
    
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    77.5
    
    
    $
    72.8
    
    
    $
    43.3
    
    
    $
    (135.9
    )
    
    $
    36.8Net income (loss) per Share(2)
    
    $
    0.73
    
    
    $
    0.68
    
    
    $
    0.40
    
    
    $
    (1.26
    )
    
    $
    0.29Net income (loss) per ADS(2)
    
    
    1.46
    
    
    
    1.36
    
    
    
    0.80
    
    
    
    (2.51
    )
    
    
    0.58Dividends per Share(2)(3)
    
    
    0.30
    
    
    
    0.30
    
    
    
    
    
    
    
    
    
    
    
    0.08Dividends per ADS(2)(3)
    
    
    0.60
    
    
    
    0.60
    
    
    
    
    
    
    
    
    
    
    
    0.16U.S. GAAP(4):Operating income
    
    $
    154.3
    
    
    $
    84.5
    
    
    $
    64.6
    
    
    $
    23.9
    
    
    $
    114.4Net income (loss)
    
    $
    94.9
    
    
    $
    62.8
    
    
    $
    (96.4
    )
    
    $
    (121.5
    )
    
    $
    120.9Basic and diluted net income per
share (5)
    
    $
    0.12
    
    
    $
    0.08
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ABasic and diluted net income (loss)
per ADS(5)
    
    
    N/A
    
    
    
    N/A
    
    
    $
    (3.39
    )
    
    $
    (2.38
    )
    
    
    1.96Basic and diluted net income (loss)
per Class A common share (Class A
share)(5)
    
    
    N/A
    
    
    
    N/A
    
    
    
    (0.09
    )
    
    
    (0.11
    )
    
    
    0.09Basic and diluted net income (loss)
per Class B common share (Class B
share)(5)
    
    
    N/A
    
    
    
    N/A
    
    
    
    (1.70
    )
    
    
    (1.19
    )
    
    
    0.98Balance Sheet Data:Luxembourg GAAP:Cash and banks and short-term investments
    
    $
    131.6
    
    
    $
    49.8
    
    
    $
    116.4
    
    
    $
    162.6
    
    
    $
    139.4Total current assets
    
    
    415.0
    
    
    
    350.0
    
    
    
    348.6
    
    
    
    299.3
    
    
    
    282.9Tangible fixed assets(6)
    
    
    772.8
    
    
    
    702.9
    
    
    
    660.5
    
    
    
    572.8
    
    
    
    581.9Total assets
    
    
    1,378.9
    
    
    
    1,510.7
    
    
    
    1,451.7
    
    
    
    1,241.4
    
    
    
    1,423.0Short-term loans(7)
    
    
    305.3
    
    
    
    252.3
    
    
    
    211.4
    
    
    
    273.9
    
    
    
    104.1Long-term loans(7)
    
    
    11.8
    
    
    
    81.3
    
    
    
    157.4
    
    
    
    100.7
    
    
    
    238.6Total liabilities
    
    
    607.3
    
    
    
    681.8
    
    
    
    604.7
    
    
    
    564.5
    
    
    
    552.6Minority interest
    
    
    182.4
    
    
    
    181.1
    
    
    
    187.9
    
    
    
    153.7
    
    
    
    156.1Share capital
    
    
    33.0
    
    
    
    33.5
    
    
    
    33.5
    
    
    
    33.5
    
    
    
    41.7Shareholders equity
    
    
    589.2
    
    
    
    647.8
    
    
    
    659.1
    
    
    
    523.2
    
    
    
    714.3U.S. GAAP:Total assets
    
    
    1,304.2
    
    
    
    1,423.5
    
    
    
    1,007.8
    
    
    
    813.1
    
    
    
    1,036.3Shareholders equity
    
    
    539.6
    
    
    
    579.9
    
    
    
    295.1
    
    
    
    175.1
    
    
    
    381.5Other Data:Total brewing capacity (hectoliters in
thousands)
    
    
    18,300
    
    
    
    21,195
    
    
    
    19,675
    
    
    
    19,640
    
    
    
    23,364Total beer volume sold (hectoliters in
thousands)
    
    
    11,712
    
    
    
    11,540
    
    
    
    12,226
    
    
    
    11,429
    
    
    
    14,261Total soft drink capacity
(hectoliters in thousands)
    
    
    13,172
    
    
    
    11,709
    
    
    
    11,046
    
    
    
    10,746
    
    
    
    17,148Total soft drink and water volume sold
(hectoliters in thousands)(8)
    
    
    2,661
    
    
    
    6,775
    
    
    
    6,856
    
    
    
    5,707
    
    
    
    6,096Number of employees
    
    
    7,300
    
    
    
    7,200
    
    
    
    6,134
    
    
    
    6,085
    
    
    
    6,234Number of non-voting preferred shares (in
millions)
    
    
    38.2
    
    
    
    39.8
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ANumber of voting ordinary shares (in millions)
    
    
    68.4
    
    
    
    68.4
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ANumber of Class A shares (in millions)
    
    
    N/A
    
    
    
    N/A
    
    
    
    647.6
    
    
    
    647.6
    
    
    
    637.1Number of Class B shares (in millions)
    
    
    N/A
    
    
    
    N/A
    
    
    
    43.4
    
    
    
    43.4
    
    
    
    70.8
 7




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(1)
    
    Because the percentage of our indirect ownership varies among our various
consolidated subsidiaries, the calculation of the minority interest in
consolidated net income (loss) during any period is a function of the
minority ownership in QI(B), our principal subsidiary (our ownership was
15% until July 2003, and 12.4% since then). See Note 3 to our Consolidated
Financial Statement. It is also a function, to a lesser extent, of the
income of each of the operating subsidiaries and the percentage of each
such subsidiarys capital stock owned by minority shareholders during such
period. QI(B)s holdings in its operating subsidiaries range from 99.69%
to 100% for the most significant Argentine subsidiary and Chilean
subsidiary, respectively, to as low as 57.97% in Colosas S.A., a
Paraguayan subsidiary.(2)
    
    Net income per share and dividends per share under Luxembourg GAAP have
been computed based on the weighted average number of total shares
outstanding for the periods presented. No consideration was given to the
stock split that occurred in June 2001 because it had no effect on the
calculation. Therefore, weighted average number of total shares
outstanding used for calculation purposes amounts to 106,568,750 shares
for the year ended December 31, 1999; 106,964,085 shares for the year
ended December 31, 2000; 108,150,089 shares for the years ended December
31, 2001 and 2002 and 134,593,003 for the year ended December 31, 2003.
Net income per share for 2003 and 2002 represents the amount related to
either one Class B share or ten Class A shares. Net income and dividends
per American Depository Share (ADS) have been restated to give
retroactive effect to the change in ratio of Class B shares (after
approval of the recapitalization plan each ADS represents two Class B
shares).(3)
    
    Our Board of Directors approved the 2003 dividend per share and per ADS
payable in 2004. This proposal was approved on by our shareholders at our
annual general meeting on June 25, 2004.(4)
    
    Certain significant differences exist between Luxembourg GAAP and U.S.
GAAP in connection with the presentation of statement of income line
items. Under Luxembourg GAAP, certain asset impairment and restructuring
charges were recognized as extraordinary items in 2000. Under U.S. GAAP,
as required by APB 30, these charges did not qualify as extraordinary
items. In addition, certain financial results and other income and
expense items included in our Luxembourg GAAP financial statements, would
be included in the determination of operating income (loss) for U.S. GAAP
purposes.(5)
    
    Under U.S. GAAP, we have presented basic and diluted earnings per share
in conformity with SFAS No. 128 (Earnings per Share) and SEC Staff
Accounting Bulletin No. 98 (SAB No. 98) for all periods. In June 2001,
our shareholders approved a capital restructuring by which (i) the then
outstanding number of ordinary shares (68,400,000) were split ten-for-one
and renamed Class A shares and (ii) the then outstanding number of
preferred shares (39,750,089) were converted into ordinary shares on
a one-for-one basis and renamed Class B shares. As a result, Class B shares have
dividends and liquidation rights equal to ten times the rights of Class A
shares. Therefore, we are required to use the two-class method to report
earnings per share for the years ended December 31, 2001, 2002 and
2003. The two-class method is an earnings allocation formula that
determines earnings per share for each class of common stock according to
dividends declared and participation rights in undistributed earnings.
Outstanding shares during the prior periods were retroactively restated
for the stock split mentioned above. See Note 28(p) to our Consolidated
Financial Statements for details regarding the calculation. Each ADS
represents two Class B shares.(6)
    
    Includes industrial land and buildings, machinery, plant and equipment,
and bottles and crates.(7)
    
    Short-term loans represent our current loans and short-term portion of
long-term debt. Long-term loans include the non-current portion of
long-term debt due to banks and notes payable. See Notes 14 and 15 to our
Consolidated Financial Statements for details. Under Luxembourg GAAP, at
December 31, 2002 we classified the long-term portion of our financial
debts as non-current liabilities in accordance with their original terms.
Under U.S. GAAP, such debts would have been classified as current
liabilities since our creditors were able to require the accelerated
repayment of the outstanding balance since we were unable to comply with
certain financials covenants. See Note 28 to our Consolidated Financial
Statements for details.(8)
    
    In 1999, only six months of water sales of Eco de los Andes S.A. (Eco de
los Andes) in Argentina were consolidated, due to our strategic
association with Perrier Vittel S.A. (Perrier Vittel) in July 1999. See
Item 4. Information on the CompanyBusiness
OverviewSoft Drink and
Water Operations. Due to our acquisition of Baesa in December
1999, Glaciar and other water brands were included in our portfolio.
Water volume sold represented 12.4% and 6.0% in 2000 and 2001,
respectively. This decrease was principally due to the transfer of
Baesas Glaciar and other water businesses in March 2001 to Eco de los
Andes. 8




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EXCHANGE RATES Our Consolidated Financial Statements are prepared in U.S. dollars and in
conformity with Luxembourg GAAP. As a result, our Consolidated Financial
Statements do no reflect any exposure to fluctuations in the exchange rate
between the Luxembourg franc and the U.S. dollar. RISK FACTORS You should consider the following risks with respect to an investment in
Quinsa and the countries in which we operate. Risks Factors Related to the Current Argentine Economic Crisis Recent political and economic instability in Argentina has hindered
commercial and financial activities. Starting in the fourth quarter of 1998 and until the end of 2002, the
Argentine economy went through a recession. During the second half of 2001,
Argentinas recession worsened significantly, precipitating the political and
economic crisis described in greater detail below. As a result, Argentinas
gross domestic product decreased by 0.8% in 2000, an estimated 4.4% in 2001,
and an estimated 10.9% in 2002, according to the National Institute of
Statistics and Census (INDEC). The unemployment rate increased from 15.4% in
May 2000, to 16.4% in May 2001 and to 18.3% in October 2001. The unemployment
rate was 17.8% in October 2002 as published by INDEC. After several years of recession and major economic and social crisis, in
2003 and early 2004, the Argentine economy began to stabilize. Gross domestic
product grew by 8.7% in 2003 and unemployment rates dropped to 16.3% in March
2004 from a high of 21.5% in May 2002 (Source: INDEC). The dollar/peso
exchange rate also improved from P$3.36 per U.S. dollar as of December 31, 2002
to P$2.93 per U.S. dollar as of December 31, 2003. The inflation rate
(measured as increases in the consumer price index) for 2003 was 3.7% compared
to an inflation rate of 40.9% for 2002. While certain economic indicators improved in 2003, the Argentine economy
has not recovered to the levels that existed before the beginning of the
economic crisis. For example, in 1998 the Gross Domestic Product
(GDP) per capita was US$8.550 and in
2003 it was US$3.462. The Argentine economy remains fragile and we cannot
assure you that it will continue at current levels or that it will continue to
experience growth. Economic conditions in Argentina have deteriorated rapidly
in the past and they may deteriorate rapidly in the future. On April 27, 2003, after a series of presidents and interim presidents,
Nestor Kirchner, a former provincial governor, was elected President of
Argentina. Since taking office, the Kirchner administration generally has
continued the economic policies of Eduardo Duhalde who served as President from
January 1, 2002 until Mr. Kirchners election. Under Mr. Duhaldes leadership,
the Argentine government undertook a number of far-reaching economic
initiatives, many of which remain in place today. These initiatives include
(among others):  a.
    
    suspending payments of principal and interest on Argentinas
sovereign debt;b.
    
    abolishing the prior Argentine law that provided for an Argentine
peso/U.S. dollar parity exchange ratio and granting the executive
branch of government the power to set the exchange rates between the
peso and foreign currencies and to issue foreign exchange regulations;c.
    
    converting certain U.S. dollar-denominated loans from financial
institutions into peso-denominated debts (pesification) at a
one-to-one exchange rate plus an adjustment for variations in consumer
prices (Coeficiente de Estabilización de Referencia or
Reference Stabilization Index, CER) or in
salaries (Coeficiente de Variación Salarial,CVS) and converting U.S.
dollar denominated bank deposits into peso-denominated bank deposits at
an exchange rate of P$1.40 per US$1.00, as adjusted by CER;d.
    
    converting most U.S. dollar-denominated obligations with
non-financial institutions into peso-denominated obligations, at a
one-to-one exchange ratio, plus an adjustment by CER or CVS, as the
case may be, and an equitable adjustment, in certain cases; 9




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e.
    
    restructuring bank deposits and continuing strict restrictions on
bank withdrawals and transfers of funds abroad that were implemented by
predecessor administrations;f.
    
    with limited exceptions, requiring that all foreign currency earned
from exports be deposited into Argentine financial institutions; andg.
    
    amending the charter of Argentinas Central Bank to permit it to
print currency in excess of the amount of the foreign reserves that it
holds, make short-term advances to the federal government and provide
financial assistance to financial institutions that have liquidity
constraints or solvency problems. The institution of these measures created great financial uncertainty and
virtually paralyzed all commercial and financial activities in Argentina during
2002. In 2003, the government reduced some of these restrictions, including
those requiring the Central Banks prior authorization for the transfer of
funds abroad in order to pay principal and interest on debt obligations.
Nevertheless, significant government controls and restrictions remain in place. Since the beginning of the economic crisis, Argentina has experienced
major political and social unrest. Unemployment rates remain high despite
various efforts by the government to increase social aid programs, generate
employment opportunities and provide unemployment benefits. In recent years,
there have been rapid and radical changes in the Argentine social, political,
economic, tax and legal environments and there has not been a clear political
consensus on any particular set of economic policies. As a result, the
government has adopted numerous far-reaching, and not always consistent, laws
and regulations affecting the economy. It is not certain that the Kirchner
administration will have the political support necessary to continue its
existing policies or whether these policies will be successful. The adverse economic and social conditions in Argentina and the Argentine
governments response thereto have had a material adverse effect on our
financial condition, results of operations and business. These conditions have
resulted in reduced consumer spending which has negatively impacted consumer
demand for our products. While demand improved somewhat in 2003 and caused our
net sales to be US$622.7 million in 2003, as compared to US$468.6 million in
2002, our net sales for 2003 remained substantially lower than the US$955.1
million realized in 2000 and the US$938.7 million realized in 2001. Continuing
economic difficulties, social unrest, lack of broad political consensus and
governmental responses to these circumstances may continue to adversely affect
us and could impair our financial condition, results of operations and
business. Argentinas insolvency and default on its public debt may impair economic
recovery. On December 23, 2001, Argentine interim President Rodríguez Saá declared a
suspension of payments on most of Argentinas sovereign debt, which totaled
approximately US$140.5 billion as of December 31, 2001. President Duhalde
ratified this measure on January 2, 2002. In April of 2002, the Argentine
government declared the suspension of payments on all of Argentinas sovereign
debt, with very limited exceptions, until December 31, 2002. On March 13,
2003, this suspension of payments was extended until the end of fiscal year
2003. Since December 31, 2003, Argentina has made some limited payments to
multilateral agencies and certain other debt holders, but has made no further
payments on its defaulted debt. Since prior to December 2000, Argentina has been engaged in discussions
with the International Monetary Fund (IMF) and other multilateral
institutions, foreign governments and institutional investors with respect to a
series of financial assistance packages. On January 24, 2003, the IMF approved
a US$6.6 billion debt rollover for Argentina and agreed to provide a short-term
credit line of US$2.9 billion to allow Argentina to repay certain debts to
multinational organizations through August 2003. An initial disbursement of US$1.0 billion was made on January 28, 2003
under the January 24, 2003 credit line. The IMF also agreed to extend for one
year another US$3.7 billion of payments owed to the IMF. The IMF has demanded
consistently that Argentina implement a sustainable economic program and, at
times, has stated that future advances of funds would be conditioned upon
Argentina achieving sufficient progress towards this objective. Through
repeated pronouncements, the IMF has indicated that a sustainable economic
program should include improving methods of tax collection, forcefully
reforming the tax revenue-sharing method between the Argentine government and
the provinces and restructuring the foreign indebtedness on which Argentina has
defaulted. 10




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In September 2003, Argentina reached a new agreement with the IMF pursuant
to which the IMF agreed to provide, during the period from 2003 to 2006,
US$13.3 billion to help Argentina recover from its record debt default of
US$140.5 billion in 2002. The agreement organizes funding in a series of
installments and contemplates that funds advanced will be used to refinance
outstanding liabilities of US$21.1 billion. It also establishes a series of
quantitative and qualitative conditions to funding that are to be met by the
Argentine government during 2003 and 2004. These conditions include the
renegotiation of the public debt that is in default, tax reform, and the
adjustment of utility rates, among others. The IMF advanced a first
installment of US$300 million in February 2004. After threatening to default
on a payment to the IMF of US$3.15 billion that was due to be paid on March 9,
2004 unless the IMF advanced the second installment of US$3.1 billion under the
September 2003 agreement, the Argentine government ultimately made the required
payment and, on March 23, 2004, the IMF advanced US$3.1 billion to Argentina. The Argentine government has made very little progress in restructuring
its public debt in default and in meeting other IMF conditions. The IMF has
warned that future releases of funds will depend upon successful debt
restructuring negotiations between Argentina and foreign creditors. In
September 2003, the government announced an offer to repay US$0.25 for every
US$1.00 of its outstanding debt. This offer was subsequently rejected by both
the IMF and the other creditors. On March 17, 2004, Argentina published a
decree providing for the creation of a syndicate of commercial banks to act as
dealer managers in connection with an offer to exchange new securities and/or
other consideration for the governments outstanding debt securities as a way
to restructure the defaulted debt. Discussions between Argentina and certain
of its creditors continue from time to time; however, no agreement has been
reached. The government made a new restructuring proposal on June 1, 2004,
although we cannot yet predict what reaction the IMF or Argentinas creditors
might have to this proposal. Hence, we do not know whether future advances
will be made by the IMF. The future relationship between Argentina and the IMF
is uncertain. Many Argentines believe that the reluctance of the IMF to
advance funds to Argentina is a cause of their continuing problems. These
views, combined with the continuing social and political unrest in Argentina
and the inability of the Argentine government to satisfy IMF economic reform
requests, suggest that it may not be possible for the government to reach an
agreement with its creditors or with the IMF. As of May 30, 2004, Argentinas total gross public debt was approximately
US$187 billion. The Argentine governments default and inability to agree on
payment terms with its creditors can be expected to have a significant adverse
effect on its ability to implement needed political, social and economic
reforms. The absence of these reforms may undermine the private sectors
ability to restore, maintain or increase economic growth and may result in a
recession, higher inflation, further unemployment and greater social unrest.
As a result, our business, financial condition and results of operations could
be materially adversely affected. Argentinas continuing debt default may
adversely affect the ability of private companies, including Quinsa, to obtain
debt or equity financing or may adversely affect the cost of such financing. The devaluation of the peso creates greater uncertainties as to
Argentinas economic future. The
Argentine Convertibility Law, which established a fixed exchange rate
under which the Central Bank was obliged to sell U.S. dollars at a fixed rate
of P$1.00 per US$1.00, was repealed on January 6, 2002. In its place, the
Argentine Congress enacted the Public Emergency Law which gives the executive
branch the power to set the exchange rate between the peso and foreign
currencies and to issue regulations related to the foreign exchange market.
Hence, since the beginning of 2002, there has not been a mandatory parity
exchange rate between the U.S. dollar and the Argentine peso. The peso now
floats freely, although the Argentine Central Bank performs frequent and
significant interventions in the currency market in an effort to manage the
dollar/peso exchange rate. Nevertheless, since the devaluation of the peso in
2002, the peso has fluctuated significantly. On June 14, 2004, the peso traded
at an exchange rate of P$2.96 per US$1.00, as published by Banco de la Nación
Argentina as compared to an exchange rate of P$2.84 per US$1.00 on June 14,
2003 and an exchange rate of P$3.56 per US$1.00 on June 14, 2002. The Argentine governments ability to honor its foreign debt obligations
has been materially and adversely affected by the devaluation of the peso, as
peso-denominated tax revenues constitute the primary source of its earnings,
but most of its financial liabilities are dollar-denominated. The adoption of
the austere fiscal measures which would be required to enable Argentina to pay
its debt and to balance its budget could lead to further social unrest and
political instability. 11




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In addition, Argentina has found few opportunities to effectively raise
capital in the international markets amid sustained lack of investor confidence
in Argentinas ability to make payments due on its sovereign debt and in the
Argentine economy generally. The devaluation of the peso and accompanying
economic policy measures were intended to redress the effects of unemployment
and to stimulate economic growth. While Argentina experienced economic growth
in 2003, the countrys future economic stability and growth will depend on the
ability of the government to elicit confidence among local and international
financial and business communities in the effectiveness and sustainability of
its policies. Satisfactory future economic performance will also require the
recovery of the banking sector, the stability of the peso at current exchange
levels (which, as noted above, have been supported in part by Central Bank
interventions in the exchange market), and the absence of significant
inflation. Without these changes, several negative outcomes could occur:
investments will likely retract while economic activity decreases, unemployment
could rise beyond current levels, tax revenues could drop, and the fiscal
deficit could widen. Recent economic and political instability has placed the Argentine
financial system at risk. The Argentine economic crisis provoked major withdrawals of deposits from
Argentine financial institutions prior to the imposition of restrictions on
withdrawals in January 2002. This run on deposits had a material adverse
effect on the Argentine financial system as a whole. For the most part, banks
suspended the disbursement of new loans and focused on collection activities to
be able to pay their depositors. The magnitude of deposit withdrawals and the
general unavailability of external or local credit, together with efforts to
restructure certain public-sector debt with local holders, a substantial
portion of which was placed with banks, created a liquidity crisis that
undermined the ability of many Argentine banks to pay their
depositors. Although the original restrictions on deposits, known as
the corralito,
are no longer in place, certain new restrictions are still in place today. While the corralitoand certain other measures partially shielded banks
from a further massive withdrawal of deposits, they also led to the paralysis
of virtually all commercial and financial activities, significantly diminished
spending and greatly increased social unrest. As a result, there has been
widespread public repudiation of, and protests against, these financial
institutions, which have had a material adverse effect on the Argentine
financial system. As of the date of this annual report, there are numerous cases pending
before the Argentine Supreme Court challenging the constitutionality of several
of the measures adopted by the government to protect the financial system. On
March 5, 2003, the Argentine Supreme Court held that the Argentine governments
conversion of U.S. dollar-denominated deposits of San Luis province in 2002 was
unconstitutional. It remains unclear how far the Argentine Supreme Court and
the Argentine government will go in terms of re-dollarizing as well as how a
forced re-dollarization might affect the financial system, the Argentine
economy, and the Argentine governments need to issue additional debt. There
are also numerous other cases in the Argentine judicial system which challenge
the constitutionality of the pesification pursuant to the Public Emergency Law.
The Supreme Courts decision creates uncertainty for the Argentine banking
system as a whole, and creates a possible need for the Argentine government to
provide additional financial assistance to the banks in the form of U.S.
dollar-denominated bonds. This additional financial assistance, in turn, could
add to the countrys outstanding debt. Argentinas economic growth and the relative stability of the countrys
exchange rate and inflation during 2003 have allowed a gradual accumulation of
deposits in Argentine financial institutions and improved the liquidity of the
financial system. Nevertheless, during 2003 there was also very little
increase in the amount of loans granted by these institutions, which resulted
in the decrease of interest rates. Consequently, the Argentine financial
system faces serious risks due to lack of profitability and possible
insolvency. If the relationship between the credit supply and demand remains
weak then the financial institutions probability of collapse (as a result of
operating with negative margins for an extended period of time) would be
high. Under these circumstances, the size of the Argentine financial market
and the ability of private companies to obtain financing could be reduced. In order to improve the solvency and profitability of banks and to prevent
future collapses of the Argentine financial system, the government may have to
compensate the financial system for the asymmetric pesification of deposits and
loans while at the same time encouraging the increase in the amount of loans by
the financial 12




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institutions to the private sector. Even a partial collapse of the
Argentine banking system would have a material adverse effect on the countrys
prospects for economic recovery and political stability as well as a material
adverse effect on our company. Substantial inflation has occurred and may continue to escalate, which
would undermine prospects for economic recovery in Argentina. On January 24, 2002, the Argentine government amended the Central Banks
charter to allow it to (i) print currency in excess of the amount of foreign
reserves it holds, (ii) make short-term advances to the federal government to
cover its anticipated budget deficits and (iii) provide financial assistance to
financial institutions with liquidity constraints or solvency problems. There
is considerable concern that if the Central Bank prints currency to finance
deficit spending and to improve the liquidity of financial institutions,
significant inflation will result. Past history raises serious doubts as to
the Argentine governments ability to maintain a strict monetary policy and
control inflation. In the past, inflation materially undermined the Argentine
economy and the governments ability to create conditions that would permit
growth. According to INDEC, the devaluation of the peso has created pressures on
the domestic price system that generated inflation of 40.9% in 2002 and 3.7% in
2003. During 2003 the Wholesale Price Index (WPI) exhibited a cumulative
increase of 2.0%, compared to 118.0% for 2002. The WPI and the Argentine CPI
increased by approximately 1.5% and 1.1%, respectively, in the first quarter of
2004. No assurance can be given that the Argentine governments future policies
will efficiently control the value of the peso and it is possible that the peso
will be subject to significant fluctuations and depreciation in the future.
Although the value of the peso has stabilized in recent months, we cannot
assure you that this recovery will endure. If the positive expectations for
Argentinas economic future, as well as the strict fiscal and monetary policies
cannot stabilize the value of the peso, an increase in the inflation rate can
be expected. Risk Factors Related to the Effect on Quinsa of the Current Economic Situation
in Argentina Central Bank restrictions on the transfer of funds outside of Argentina
could prevent us from receiving sufficient funds from our Argentine
subsidiaries and inhibit the distribution of dividends and payments on our
external debt. Beginning on December 3, 2001, the Argentine government imposed a
significant number of monetary and currency exchange control measures. Even
though these actions have been progressively reduced, they include restrictions
on the free disposition of funds deposited with banks as well as tight
restrictions on transferring funds abroad, including for purposes of paying
principal and interest on debt and dividends. Since July 2003, the Central
Bank has allowed transfer of funds abroad to prepay principal under financial
debts, as long as the prepaid amount does not exceed the present value of the
debt, calculated using a discount rate equal to the rate implied in U.S.
currency future transactions (180 days) carried out in regulated local markets.
Also, unpaid interest may be paid abroad if such payment relates to
obligations that were in place during 2002 or is related to a restructuring
process. For the period starting on August 18, 2003 and ending on December 31,
2004, the Central Bank has authorized, subject to certain limitations, the
acquisition of foreign currency to be held abroad until used to pay down debt.
This authorization is subject to certain limitations, including limits on the
amounts that can be acquired, which are a function of the total amount of debt
restructured as of August 18, 2003, and a time limitation which dictates that
the foreign currency must be used to pay debt within 180 days after the
currency is acquired. In addition, funds may now be transferred abroad without
the Central Banks previous authorization in order to pay dividends
corresponding to prior periods provided that independent accountants have
certified the financial statements for such period. Funds may also be
transferred abroad to pay interest and principal on debts on the day of
maturity. Because we are a holding company, our ability to pay dividends and service
any debt obligations depends primarily upon our receipt of sufficient funds
from our principal subsidiary, QI(B), which depends in turn on QI(B)s receipt
of sufficient funds from its subsidiaries, principally those in Argentina,
Bolivia, Paraguay and Uruguay. There can be no assurance that the Argentine
Central Bank will not once again require prior authorization for dividend
payments to our foreign shareholders or for principal or interest payments by
us to our foreign creditors pursuant to the terms of our existing financial
agreements. 13




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Despite the ongoing economic crisis in our principal market, Argentina, we
have been able to continue servicing our debt obligations. There can be no
guarantee, however, that we will be able to continue doing so in the future,
particularly if the Argentine Central Bank reinstitutes strict restrictions.
While we have been able to pay out dividends in the past, we did not pay
dividends in 2002. Our Board of Directors recommended that we pay a dividend
of US$0.16 per ADS and our shareholders approved this dividend at the annual
meeting on June 25, 2004. Our results of operations have been, and may continue to be, materially
adversely affected by the recent devaluation of the Argentine peso and the
macroeconomic conditions currently prevailing in Argentina. We realize a substantial portion of our revenues in pesos while our
indebtedness is principally denominated in U.S. dollars. Therefore, not only
has the devaluation of the peso adversely affected the U.S. dollar value of our
earnings, but it has also affected our ability to pay down our
dollar-denominated debt except to the extent that we have been able to increase
our peso revenues sufficiently to compensate for the devaluation. Any further
depreciation of the peso against the U.S. dollar will correspondingly increase
the amount of our debt compared to our peso-denominated revenues to the extent
that we are unable to increase our peso revenues sufficiently to compensate for
the peso devaluation. Recessionary conditions in Argentina had a significant impact on our net
income in 2001 and 2002. During this period, there was a severe shortage of
cash and a lack of liquidity in the financial markets. These factors disrupted
Argentinas primarily cash based system for settling payment obligations,
resulted in scarcity of working capital, and contributed to a severe
contraction of customary trade credit, all of which in turn brought many
commercial activities to a standstill. In addition, the recession coupled with
the devaluation of the peso led to a reduction of wages in real terms and of
disposable income across all sectors of the Argentine population. The
reduction in consumer buying power resulted in lower sales of our products,
with a consequent reduction in revenues and cash inflows. In 2003, several factors contributed to an improvement in our sales volume
and sale prices measured in U.S. dollars and to corresponding improvements in
our revenues and cash flows. Among these were Argentine economic growth, a
more stable exchange ratio and a lower rate of inflation, coupled with the
realization of benefits from our strategic alliance with AmBev that was
implemented in January 2003. If economic conditions in Argentina deteriorate,
it is likely that our sales, revenues and cash flows will once again be
materially adversely affected. Risk Factors Relating to Other Countries in Which We Operate Latin American economic fluctuations affect our results of operations. The Argentine economic crisis has had a significant adverse effect on our
other primary markets. In particular, Argentinas existing financial, economic
and political crisis, has had an adverse effect on Paraguay and Uruguay and our
operations in those countries. As a result of the crisis in Argentina, the
governments of these other countries could take action to control inflation and
institute other policies involving wage, price and tariff rate controls among
other interventionist measures, which may include freezing bank accounts and
imposing capital controls. Changes in the policies of these governmental
authorities with respect to tariff rates, exchange controls, regulations and
taxation could adversely affect our business and financial results, as could
inflation, devaluation, social instability and other political, economic or
diplomatic developments, including the governments response to such
circumstances. In addition, we cannot assure you that more restrictive
exchange control policies and more significant withholding taxes will not be
implemented in the future by other countries in which we operate. Our subsidiaries have been negatively affected by currency devaluations
and exchange rate fluctuations. The 2002 devaluation of the local currencies in Argentina, Bolivia,
Paraguay and Uruguay adversely affected our profitability in U.S. dollars. In
2003, the local currencies appreciated relative to the U.S. dollar in
Argentina, Chile and Paraguay and we were able to raise nominal prices in
Argentina. We cannot assure you that these exchange rates will continue at
existing levels or continue to improve; the rates could deteriorate
substantially. The local currencies of Bolivia and Uruguay continued to
depreciate relative to the U.S. dollar during 2003, although at rates that were
either similar to or lower than the rate of inflation. These exchange rates
may continue to deteriorate. We cannot assure you that we will be able to
increase nominal prices in the future sufficiently to offset the impact of
possible devaluation of the local currencies in all of our markets. 14




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In
view of the foregoing, and in light of the current economic
environment
in Argentina and in the other countries in which we operate, you should
recognize that our business, earnings, asset values and prospects have been and
may continue to be materially and adversely affected by developments with
respect to inflation, interest rates, currency fluctuations, government
policies, exchange control regulations, taxation, social instability and other
political, economic or diplomatic developments in or affecting our countries of
operation and Latin America generally. We have no control over such conditions
and developments and can provide no assurance that such conditions and
developments will not further adversely affect our operations. See Item 5.
Operating and Financial Review and ProspectsOperating Results. Risk Factors Relating to Quinsa Our ability to pay dividends and to service our debt obligations depends
primarily upon our receipt of sufficient funds from our principal subsidiary. Because we are a holding company, our ability to pay dividends and service
any debt obligations depends primarily upon our receipt of sufficient funds
from our principal subsidiary, QI(B), which depends in turn on QI(B)s receipt
of sufficient funds from its direct and indirect subsidiaries in Argentina,
Bolivia, Chile, Paraguay and Uruguay. Beginning on December 3, 2001, the
Argentine government imposed a number of monetary and currency exchange control
measures that included restrictions on the free disposition of funds deposited
with banks and tight restrictions on transferring funds abroad. While
restrictions have been progressively reduced, there can be no assurance that
the Central Bank will not once again require its prior authorization for
dividend payments to foreign shareholders or for payment of debt obligations.
If this were to occur, our ability to receive funds from our Argentine
subsidiaries could be inhibited, and this, in turn, would significantly impact
our ability to pay dividends and service our debt obligations. Furthermore, the payment of dividends by our various subsidiaries is also,
in certain instances, subject to statutory restrictions and restrictive
covenants in debt instruments, like legal reserve requirements, capital and
retained earning criteria and other restrictions, and is contingent upon the
earnings and cash flow of and permitted borrowings by those subsidiaries. The
inability on the part of some of our subsidiaries to pay dividends would impact
the amount of funds available to us to pay dividends and service our debt
obligations. We face competition that threatens our market share. The growth in beer consumption in Argentina, Bolivia, Chile, Paraguay and
Uruguay had attracted new market participants over the past years, producing an
intensely competitive environment in these markets. The participants in these
markets include major local and international concerns with substantial
financial resources and particular industrial strengths. Additional economic
crises and devaluations in Argentina and in the other countries in which we
operate may make it less expensive for international concerns to make
investments in these markets. We intend to continue with strategies designed
to maintain or improve our competitive position in our markets but we cannot
guarantee that these strategies will be successful. Any loss of market share
could be permanent. Competition in the beer market may take the form of
aggressive price discounting, which could have a negative impact on our results
of operations. Apart from competition within each beer market, beer sales also
compete against wine and other alcoholic beverage sales and, to a lesser
extent, with soft drinks. You should also see Item 4. Information on the
CompanyBusiness OverviewBeer Operations. The
carbonated soft drink market and non-carbonated beverage markets are
also highly competitive. Competition in these markets could cause us to reduce
pricing, increase capital and other expenditures or lose market share, which
could have a material adverse effect on our business and financial results.
We, through our operating subsidiaries, own the largest PepsiCo® bottling
franchise in Argentina and the sole franchise in Uruguay. Our most significant
competitors are local Coca-Cola® bottlers and second-tier brands that compete
exclusively on a price basis. Our market share in some of our markets has
eroded over the past few years. There can be no guarantee that due to the
current economic crisis in Argentina and its impact on the other countries in
which we operate, consumers, and particularly lower income consumers, will not
continue to shift their purchases to lower-cost second-tier brands and away
from our subsidiaries premium products or force our subsidiaries to reduce the
prices that they charge for their products. You should also see Item 4.
Information on the CompanyBusiness OverviewSoft Drink and Water
Operations. 15




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We purchase significant quantities of commodities and raw materials, the
prices of which fluctuate widely. We purchase commodities and raw materials for the production of beer and
soft drinks. These commodities and raw materials include barley, malt,
aluminum cans and PET bottle preforms and, to a lesser extent, corn grits, rice
and hops. The prices of these commodities can fluctuate widely and are
determined by global supply and demand and other factors over which we have no
control. Because we rarely engage in hedging our raw material costs, a policy
which may change in the future, any changes in commodity and raw material
prices could have a direct and significant impact on our costs. In addition, we purchase most of our barley, malt, aluminum cans and
plastic bottle preforms in local currency and principally in Argentina;
therefore, we incur certain costs of sales and expenses in local currencies.
However, because the price of these raw materials may vary with international
prices which are denominated in U.S. dollars, we cannot guarantee that the
percentage of our cost of sales represented by these items will not increase
significantly due to currency devaluation in our countries of operation. Our business is controlled by two principal shareholders and as a result,
our other shareholders will have little or no influence over shareholder
decisions. A majority of our Class A shares without par value is owned by Beverage
Associates Corp. (BAC), a company organized under the laws of the British
Virgin Islands. BAC was organized by various individual shareholders who are
descendants of the Bemberg family, our founding family. BACs principal
purpose is to hold a controlling interest in the Class A shares, and as of
December 31, 2003 it holds 53.53% of our outstanding voting shares. On January 31, 2003, we completed the transactions involved in forming a
strategic relationship with AmBev. Pursuant to this alliance, we issued
26,388,914 of our Class B shares to AmBev in exchange for AmBev contributing to
Quinsa all the shares of capital stock of AmBevs subsidiaries which
manufacture, market, sell or distribute beer principally in Argentina, Paraguay
and Uruguay. AmBev also purchased 230,920,000 Class A shares from BAC.
Including certain additional Class B shares purchased by AmBev after February
1, 2003, AmBev owns 38.59% of the total voting rights of Quinsa as of December
31, 2003. In addition, AmBev has an option to acquire from BAC, and BAC has an
option to sell to AmBev, the remaining 373,520,000 Class A shares owned by BAC
in exchange for newly issued shares of AmBev. These options may be exercised
by BAC each year starting in 2003 and by AmBev each year starting in 2009. In
April 2004, BAC did not exercise its put option. BAC also has a right to
exercise its option to sell upon any change in control of AmBev that takes
place prior to April 2005. If any such change in control occurs after April
2005, the 375,520,000 Class A Shares owned by BAC will be exchanged
automatically for shares of AmBev. Each of AmBev and BAC now have the right to nominate 50% of the Directors
constituting our Board of Directors and 50% of the number of Directors of our
subsidiaries that Quinsa is entitled to nominate, directly or indirectly,
pursuant to corporate documents, relevant agreements or applicable law. In
addition, pursuant to an Escrow Agreement dated January 31, 2003 between BAC,
AmBev, Quinsa and The Bank of New York, as escrow agent (the Escrow
Agreement), BAC assigned and transferred 60,000,000 of its Class A shares in
escrow to The Bank of New York, as escrow agent and such Class A shares may
only be voted upon the instructions of both BAC and AmBev. The Escrow
Agreement ensures that the voting rights of BAC and AmBev in Quinsa are equal.
Therefore, as equal owners of approximately 93% as of June 24, 2004, of the
voting interest of Quinsa, AmBev and BAC together have the power to determine
all matters requiring shareholder approval. If either AmBev or BAC exercises the option to exchange BACs remaining
Class A shares for AmBev shares, or if this exchange occurs automatically as a
result of a change in control of AmBev, AmBev will have the right to elect all
of our Directors and all, or substantially all, of the Directors of our
subsidiaries. On March 3, 2004, AmBev announced that it had entered into
definitive agreements contemplating a business combination transaction among
AmBev, Interbrew and the controlling shareholders of each of these companies
(the Interbrew Transaction). If completed, the Interbrew Transaction will
result in a change in control of AmBev and may result in a change in control of
Quinsa. If the Interbrew Transaction is completed before April 2005, BAC will
have the right to exchange its Class A Shares for AmBev shares. If the
Interbrew Transaction is completed after April 2005, BACs Class A Shares will
be exchanged automatically for AmBev shares. In either event, AmBev would
obtain sole voting 16




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control of Quinsa. Even if BACs Class A Shares are not exchanged for
AmBev Shares, completion of the Interbrew Transaction will result in Interbrew
controlling AmBev and thus being able to appoint members of our Board of
Directors and to exercise joint control over our company. Upon completion of
the Interbrew Transaction, Interbrew will be under the joint control of the
persons who currently control AmBev and the persons who currently control
Interbrew. AmBev and Interbrew have announced that they expect to complete the
Interbrew Transaction during 2004. While BAC and AmBev have had certain
discussions relating to a possible exercise by BAC of its exchange rights in
connection with the Interbrew Transaction, BAC has not yet made a decision
relating to the exercise of these rights. BAC expects to make a decision prior
to the closing of the Interbrew Transaction. See Item 4. Information on the
CompanyHistory and DevelopmentRelationship with AmBev and Item 7. Major
Shareholders and Related Party TransactionsMajor Shareholders. 
 ITEM
4.  INFORMATION ON THE COMPANY HISTORY AND DEVELOPMENT Quilmes Industrial (Quinsa), Société Anonyme was established as a separate
company incorporated in the Grand-Duchy of Luxembourg (Luxembourg) in 1989
when the brewing interests of Enterprises Quilmes, a publicly traded Luxembourg
holding company, were spun off from the rest of Enterprises Quilmes business
interests. We remain a Luxembourg holding company governed by Luxembourg law
and we operate through our subsidiaries, principally QI(B), in which we hold an
87.63% interest. All of our operating companies are wholly-owned,
majority-owned or controlled subsidiaries of QI(B). The address of our
principal executive offices is Teniente General Perón 667, Buenos Aires,
Argentina, 1038. Our telephone number is +54 11 4321 2700. Our authorized
representative in the United States is Puglisi & Associates, 850 Library
Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19715. Our predecessor business, Brasserie Argentine, was founded in 1888 in
Paris by Mr. Otto Peter Bemberg. He later established a brewery in the town of
Quilmes, just south of Buenos Aires, in 1890. We eventually established
operations in Paraguay in 1932, in Uruguay in 1965, in Chile at the end of 1991
and in Bolivia in 1996. In the past, the Company has grown through the
expansion of our own facilities, the introduction and development of our own
products, through the acquisition of facilities and brands from other producers
as well as through other strategic acquisitions and investments. Recent Events Debt Restructuring An important part of senior managements efforts during 2003 were aimed at
concluding negotiations with all of our bank creditors regarding the
restructuring of our debt. Despite the Argentine economic crisis that followed
the devaluation of the peso during 2002 and 2003, Quinsa was able to continue
to pay interest on its bank debt obligations. We were also able to make
certain repayments of principal on this debt. As a result of the Argentine
economic crisis during this period, we were not able to remain in compliance
with some of the financial covenants in our bank debt. As a result, for 2002
and part of 2003, a substantial part of our bank debt was
reclassified as short-term. On September 18, 2003, we successfully completed the restructuring of our
bank debt (the Restructuring). As a result, we
moved from a position where
approximately 70% of our debt was short-term to our present position where
approximately 70% of our debt is long-term. The average life of our debt was
extended from less than 1 year to 4.3 years at no incremental cost to us. As
most of our financial indebtedness is that of Cervecería y Maltería Quilmes
S.A. (CMQ), an Argentine subsidiary of our subsidiary QI(B), the
Restructuring was accomplished largely through the renegotiation of CMQ debt
obligations totaling approximately US$308 million (approximately US$14 million
in bonds and US$294 million as bank debt) as of the Restructuring. As a result
of these renegotiations, we agreed to pay the banks approximately US$20.3
million in connection with the Restructuring and did so on September 18, 2003.
We also agreed to subordinate certain of our debt to the debt provided by the
banks. In exchange, the banks agreed to extend the maturities of the remaining
US$232.6 million of their loans so that portions of the loans will become due
in May and November of each year from May 2004 through May 2009 and to 17




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modify the financial covenants in our bank debt. The average cost of our
rescheduled debt is approximately 4.3% above LIBOR, an amount not significantly
different from the cost of our bank debt prior to the Restructuring. In addition to requiring scheduled payments of principal totaling
approximately US$24 million for each of 2004 and 2005, our new bank agreements
require us to make certain mandatory prepayments of the loans. We are required
to apply all or a portion of the proceeds of certain permitted sales of assets
to prepay the bank loans. The percentage of the proceeds that we must pay to
the banks depends upon a number of factors including the nature of the sale and
our leverage ratio at the time of the sale. We are also required to use a
portion of any excess cash flow over US$1 million to repay the bank loans.
Excess cash flow is defined by the Restructuring Agreements to be the cash flow
generated during any calendar year in excess of the cash flow projected to be
generated for that same year in the bank agreements. On February 27, 2004, we
repaid approximately US$40.3 million of debt out of excess cash flow. As a
result of both scheduled and mandatory repayments from excess cash flow, as of
June 24, 2004, our outstanding senior bank debt was approximately US$181
million, representing a reduction of approximately 28% from the level of our
senior debt immediately before the Restructuring. Our new bank agreements contain customary restrictive covenants for CMQ
including covenants limiting liens on its assets, investments in other persons,
sales of assets, incurrence of senior debt, capital expenditures, dividends and
repurchases of stock. The agreements also require CMQ to maintain certain
maximum leverage ratios and certain minimum levels of net worth. As of the
date of this Annual Report, we are in compliance with the financial covenants
of our bank debt. While we believe that we should be able to comply with these
covenants under present circumstances, we cannot be certain that continued
compliance would be possible if the situation in Argentina were to deteriorate.
We are allowed to voluntarily prepay our bank debt at any time, subject to
certain minimum repayment amounts and subject to a requirement to pay all of
our bank lenders on a pro rata basis. Stock Repurchases During 2003, on the basis of a prior authorization by the general meeting
of shareholders, our Board of Directors authorized, and we implemented, several
stock repurchase programs. Under these programs in 2003, we purchased
2,811,078 Class A shares and 5,048,200 Class B shares at an average price per
share of US$0.75 per Class A share and US$7.82 per Class B share. The
purchases were made in open market purchase transactions. On March 26, 2004, our Board approved another series of repurchases.
Specifically the Board authorized us to purchase shares for an additional
aggregate dollar amount of up to US$50 million. During the period from January
1, 2004 to June 24, 2004 we purchased 2,342,217 Class A shares and 3,590,522
Class B shares, having an aggregate purchase price of US$34.6 million and an
average price per share of US$0.96 per Class A shares and US$9.11 per Class B
shares. Our Board may
decide at any time to make additional repurchases of our stock
pursuant to an authorized repurchase program, a tender offer or
otherwise and/or decide to stop
making repurchases altogether. Relationship with AmBev On
January 31, 2003, we completed the transactions related to the
formation of our strategic relationship with AmBev, which we announced on May
1, 2002. AmBev is a holding company whose subsidiaries produce, distribute and
sell beer, soft drinks and other non-alcoholic and non-carbonated beverages
primarily in Brazil, but also in Argentina, Venezuela, Uruguay and Paraguay.
Pursuant to this alliance, we have integrated our own operations in Argentina,
Paraguay and Uruguay with those of AmBev. Throughout this annual report, we
refer to the markets of Argentina, Paraguay, Uruguay, Bolivia and Chile as the
southern cone markets. We formed our alliance with AmBev through a series of transactions. AmBev
contributed to Quinsa all of the shares of capital stock of its subsidiaries
which manufacture, market, sell or distribute beer principally in Argentina,
Paraguay and Uruguay in exchange for 26,388,914 Class B Shares. AmBev
purchased from BAC, our primary shareholder, 230,920,000 Class A Shares for
US$346.38 million in cash. Following the closing of the alliance transactions,
AmBev purchased an additional 12,000,000 Class B Shares. As a result, as of
December 31, 2003, AmBev owns approximately 38.59% of the total voting rights
in Quinsa. As part of our alliance, BAC assigned and transferred to an escrow
agent 60,000,000 of its Class A Shares. The Escrow Agreement 18




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provides that the escrow agent may only vote these shares upon receipt of
joint instructions of both BAC and AmBev. This escrow arrangement effectively
causes BAC and AmBev to hold approximately 93% as of June 24, 2004, of the
voting rights in Quinsa, with BAC having sole control over 53.99% of the
voting rights, AmBev having sole control over
38.93% and BAC and AmBev
sharing control over 93%. Exchange Rights. BAC has a put option that is exercisable in April of
every year starting in 2003 and that gives BAC the right to exchange its
remaining 373,520,000 Class A Shares for newly issued common and preferred
shares of AmBev (the Exchange). AmBev also has a call option that is
exercisable in April of every year starting in 2009 and that gives AmBev the
right to require that BAC exchange its remaining Class A Shares for the AmBev
common and preferred shares. Except as described under Change in Control
below, pursuant to the Exchange, BAC will receive a number of AmBev shares
determined by reference to a formula that compares the value of a Quinsa share
to the value of an AmBev share. Also, except as described under Change in
Control below, BAC will (1) receive approximately 60% of its interest in AmBev
in the form of AmBev Preferred Shares and approximately 40% of its interest in
AmBev Common Shares and (2) will receive the AmBev shares in two installments
with 75% of the number of AmBev shares to which BAC is entitled (computed based
on the relative values of the two companies for periods prior the Exchange)
being delivered in the year of the Exchange and the remainder of the AmBev
shares (computed based on the relative values of the two companies for periods
that include the year following the year of the Exchange) being delivered one
year later. The Quinsa shares held under the Escrow Agreement will be included
in the Exchange, with the escrow agent delivering the escrow shares to AmBev
and AmBev delivering the corresponding AmBev shares to BAC. Change in Control. Our alliance agreements with AmBev contain certain
provisions that apply if there is a change in control of AmBev. If a change of
control occurs before April 2005, BAC has a right to accelerate the Exchange so
that the Exchange happens at or about the time of the change of control. If
the change of control happens during or after April 2005, the Exchange will be
done automatically at that time. If the Exchange occurs in connection with a
change of control, BAC will receive all of its AmBev shares at the time of the
Exchange rather than in two installments. Our agreements also provide that, if
the Exchange occurs as a result of, or after, a change in control of AmBev, and
if either or both classes of AmBevs shares are not listed and traded on a
national securities exchange at the time of the Exchange, instead of delivering
to BAC that class or classes of shares, AmBev must give BAC the type and amount
of securities, cash or other consideration that BAC would have received if BAC
had been the holder of the AmBev shares at the time of the change of control. Interbrew Transaction. On March 3, 2004, AmBev and its controlling
shareholders (such shareholders, collectively, the AmBev Shareholders)
entered into a series of agreements with Interbrew and its controlling
shareholders (such shareholders, collectively, the Interbrew Shareholders)
contemplating a business combination transaction that includes a change in
control of AmBev. Pursuant to these agreements, the AmBev Shareholders will
contribute to Interbrew the stock of a holding company (Tinsel Lux) formed to
hold all of their AmBev shares, in exchange for Interbrew shares. In addition,
Labatt Brewing Company Limited, a subsidiary of Interbrew (Labatt) will merge
with a subsidiary of AmBev. The merger will result in AmBev owning Labatt and
in Interbrew receiving additional AmBev shares. As a result of these
transactions, Interbrew will control AmBev and, therefore, will control the
Quinsa shares held by AmBev and all of AmBevs decisions under our alliance
agreements. These shareholders have agreed that these Interbrew shares will be
held through a holding company and the holding company will be controlled
jointly by the AmBev Shareholders and the Interbrew Shareholders. The
agreement between these shareholders also provides that four members of the
Interbrew Board (which will consist of between twelve and fourteen persons)
will be appointed by the AmBev Shareholders and that four other members will be
appointed by the fourteen Interbrew Shareholders. The remaining Directors will
be persons who are not affiliates of these shareholders. This board representation structure, together with other contractual
provisions relating to required quorums and the level of votes required to take
various actions, will give the AmBev Shareholders and the Interbrew
Shareholders substantial influence over Interbrew and over the appointment of
Interbrews Directors, its subsidiaries and affiliates, including AmBev and
Quinsa. We cannot predict how a change of control of AmBev, if consummated,
will affect AmBevs selection of Directors for the Quinsa board or the
decisions of such Directors. 19




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BAC has not yet determined whether to accelerate the Exchange as a result
of the AmBev change of control. If BAC accelerates the Exchange, AmBev will
have sole direct control of Quinsa, Interbrew will control AmBev and the AmBev
Shareholders and the Interbrew Shareholders will jointly control Interbrew.
Upon the Exchange, AmBev will have the right to appoint all of the members of
our Board of Directors. AmBev has stated that it expects to complete the
Interbrew Transaction during the third quarter of 2004. BAC will make a
decision with respect to accelerating the Exchange prior to the closing of the
Interbrew Transaction. Restrictions on Transfer of Quinsa Shares.BAC has agreed not to transfer
or encumber or permit to be transferred, in any way, any of the remaining
Quinsa Class A shares held by BAC other than to its affiliates, family members,
AmBev or AmBevs designee. Quinsa Shareholders Agreement. As part of our alliance with AmBev, on
January 31, 2003 we entered into a Shareholders Agreement with AmBev and BAC to
govern certain matters relating to the voting, transfer and issuance of Quinsa
shares (the Quinsa Shareholders Agreement). Under the Quinsa Shareholders
Agreement, Quinsa has agreed that if it at any time proposes to effect a
capital increase through the issuance of shares or rights of any class or
series, BAC and AmBev will have the right to subscribe for their proportionate
percentage of such shares or rights. The Quinsa Shareholders Agreement also
provides for certain significant restrictions on BAC and AmBev regarding the
acquisition, disposition or transfer of, or the encumbrance on any Quinsa Class
A or Class B shares, other than in accordance with the terms of the agreements
related to the alliance between Quinsa and AmBev. AmBev further agreed not to
acquire any equity or other ownership interest in, or any substantial assets
of, any business involving the manufacture, marketing, sale or distribution of
beverages for a period of ten years, in Argentina, Paraguay, Uruguay, or
Bolivia, other than through Quinsa or its subsidiaries. In addition, until the
consummation of the Exchange, AmBev may not acquire any equity or other
ownership interest in, or any substantial assets of, any business involving the
manufacture, marketing, sale or distribution of beverages in Peru or Chile,
without first offering to Quinsa the opportunity to make such acquisition;
providedthat in the case of Peru, AmBev has the option to either (i)
contribute to Quinsa 50% of the cash consideration agreed to be paid for such
assets or business in exchange for Class B shares, or (ii) acquire 50% of such
assets or business directly, with the remaining 50% acquired by Quinsa. It
must be pointed out, however, that since the execution of the Quinsa
Shareholder Agreement, BAC resigned its rights to invest in Peru. The Quinsa
Shareholders Agreement also contains important provisions relating to Quinsa
shareholder voting rights, the appointment of Quinsa Directors and the voting
and veto rights of these Directors. See Item 7. Major Shareholders and
Related Party TransactionsMajor Shareholders for a discussion of the voting
rights and veto rights described in the Quinsa Shareholders Agreement. License and Distribution Agreements.As part of our alliance with AmBev,
we entered into a license agreement with AmBev (the License Agreement).
Pursuant to the License Agreement, AmBev granted Quinsa and its subsidiaries a
perpetual, royalty free license to manufacture, market, sell and distribute
AmBev beer brands in Argentina, Chile, Uruguay, Paraguay and Bolivia. Quinsa
and AmBev also entered into a distribution agreement (the Distribution
Agreement) pursuant to which AmBev may distribute certain Quinsa beer brands
in Brazil. Approval of the Argentine Antitrust Authorities; Action by CCU.One of
the conditions to closing the transactions contemplated by the share exchange
agreement (Share Exchange Agreement) was the receipt of approval of the Argentine antitrust authorities of
such transactions. On January 13, 2003, the Argentine antitrust authorities
approved the transactions subject to certain conditions as described
below.  a.
    
    Within 12 months of January 13, 2003, AmBev and Quinsa must transfer
ownership of the following assets:  1.
    
    to an independent, experienced, financially sound, third party with
no current production in Argentina   i.
    
    the Bieckert and Palermo brands and recipes;ii.
    
    the license for production of the Heineken brand (the
Heineken License); however, we received a notice from Heineken
terminating the Heineken License, as of June 17, 2003. As a result,
we were required to transfer the Imperial brand instead; 20




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iii.
    
    at the option of the purchaser, the Norte brand. If an
agreement cannot be reached on price, an internationally recognized
investment bank appointed by Quinsa and AmBev shall establish the
price; andiv.
    
    the brewery located in Luján, Buenos Aires, that produced the
Brahma brand and now produces Brahma, Palermo and Bieckert;  2.
    
    to a third party, not related to the purchaser of the assets
described above and also not currently producing beer in
Argentina   i.
    
    our malt production facility, adjacent to the former Bieckert
brewery located in Llavallol, Buenos Aires. Alternatively, AmBev
and Quinsa can agree to allow such third party to operate the
facility for 10 years.  b.
    
    By the end of the required twelve month period, AmBev and Quinsa must:  1.
    
    allow the purchaser access to Quinsas distribution network for a
period of 7 years;2.
    
    refrain from forcing or inducing their clients to purchase products
other than beer from them; and3.
    
    at the option of the purchaser, AmBev and Quinsa must commit to
produce the Bieckert, Palermo, and Imperial brands of beer for the
purchaser for a period of two years. Due to legal proceedings instituted by one of our competitors, Compañía
Cervecerías Unidas S.A. (CCU), the deadline for compliance with these
conditions has been suspended. In April 2003, CCU contested the conditions
imposed by the Argentine antitrust authorities by filing a claim in the Federal
Court of Appeals in Argentina seeking to enjoin our sale of these brands
because CCU believes it should be entitled to bid for them. CCU is currently
barred from bidding on such brands because it has operations in Argentina, and
therefore does not qualify as a foreign purchaser pursuant to the Argentine
antitrust authoritys stipulations. CCUs claim tolled the time period in
which we are required to sell our brands. Although CCUs claim was rejected by the Federal Court of Appeals, CCU has
appealed to the Argentine Supreme Court for review of the Federal Court of
Appeals decision. Until a final decision is reached, the twelve month time
period in which we were required to comply with the antitrust conditions will
remain suspended. At this point in time, it is not possible for us to
determine when this process will be resumed. In the meantime, we continue to
produce and sell the brands involved. We cannot predict when CCUs claim
finally will be determined or what the outcome of the equal proceedings might
be or what response the Argentine antitrust authorities might have to the
outcome. Settlement with Heineken.In June 2002, we received a notice from the
International Chamber of Commerce (the ICC) stating that Heineken, which, at
that time, owned 15% of our principal subsidiary QI(B), had begun an
arbitration proceeding against Quinsa and BAC relating to our AmBev alliance.
On January 13, 2003, Heineken, Quinsa and BAC and certain of their respective
affiliates entered into a memorandum of agreement whereby Heineken and Quinsa
agreed to terminate the arbitration proceeding before the ICC and released all
claims against each other arising in connection with the AmBev
alliance (Memorandum of Agreement).
Heineken and BAC also released all claims against each other. The Memorandum
of Agreement provided, among other things, for the purchase of shares of QI(B)
then held by Heineken, and AmBev purchased approximately 58% of such QI(B)
shares while BAC purchased the remaining 42%. The aggregate purchase price for
all of Heinekens QI(B) shares was US$102.7 million in cash. Just prior to
this purchase Quinsa declared and paid US$26.5 million in dividends, 15% of
which was paid to Heineken. As a result of the settlement, the shareholder
agreement between QI(B), Heineken and Quinsa, and the technical assistance
agreements between Heineken and QI(B) or its operating companies were
terminated (Technical Assistance Agreements). In addition, Heineken was granted the option to terminate the
Heineken License pursuant to which we have produced, sold and distributed
Heineken beer. Heineken terminated this license as of June 17, 2003. See
Material Licenses and ContractsRelationship with Heineken. At the time of the Heineken settlement, AmBev, BAC and Quinsa entered into
an agreement that gives Quinsa the right to purchase the QI(B) shares held by
AmBev and BAC for cash at fair market value if and when Quinsas 21




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Board of
Directors decides to exercise such right. BAC and AmBev further agreed to
cause all members of the Quinsa board nominated by BAC or AmBev, respectively,
to consider the exercise of the call option in good faith and cause each such
member not to unreasonably withhold its approval of the exercise of the call
option. Consolidation of Our Bolivian Subsidiaries In May 2003, we completed the previously announced consolidation of our
ownership interests in our Bolivian breweries. As a result of this
consolidation, all of our Bolivian breweries are owned by CBN and we, through
Incesa, indirectly own a 79.98% interest in CBN. Merger of EDISA  Coroplas  CMQ In April 2003, the shareholders of CMQ, EDISA and Coroplas (a
wholly-owned subsidiary of CMQ) approved the merger of the three companies into
CMQ, effective January 1, 2003. As a consequence of this, at December 31,
2003, Quinsa held an indirect interest of 99.69% in CMQ. Merger of La Luisiana  Salus  FNC In September 2003, QI(B) acquired an additional 36.82% equity stake in FNC
for a total amount of US$7.7 million. Thereafter, in November 2003, after
carrying out pertinent legal formalities, FNC and La Luisiana, the Uruguayan
subsidiary contributed by AmBev, executed a merger agreement whereby FNC
absorbed La Luisiana, which was dissolved without being liquidated. In February 2004,
the Boards of Directors of FNC and Salus executed a
spin-off/merger agreement, which was subsequently approved by the extraordinary
meeting of shareholders (Extraordinary Meeting of
Shareholders) held on the same month. This operation resulted in the
spin-off of the beer business (including soft drink, malt and cider) and water
business and the subsequent addition to FNC of Salus spun-off beer business. Merger of CCBP  Cervepar The process of merging CCBP, the Paraguayan subsidiary contributed by
AmBev, and Cervepar commenced during the second quarter of 2003, and the merger
was approved at each of their shareholders meetings, held on August 8 and
August 7, 2003, respectively. Final approval of the merger was granted by the
Paraguayan regulatory authorities once a final merger agreement was filed on
December 18, 2003. As a result of this corporate reorganization, as of
December 31, 2003, Quinsa held an indirect 85.80% interest in Cervepar. Capital Expenditures For a discussion of our principal capital expenditures currently in
progress and for the last three fiscal years, see Item 5. Operating and
Financial Review and ProspectsLiquidity and Capital ResourcesCapital
Expenditures. BUSINESS OVERVIEW Overview We produce beer in Argentina, Paraguay, Uruguay, Bolivia and Chile and
produce, to a lesser extent, soft drinks and mineral water in Argentina and
Uruguay. In 2003, our business benefited significantly from the improvement in
the economic environment in the southern cone countries and from the
implementation of our alliance with AmBev. For discussion of the impact of
this environment on our business, see Item 5. Operating and Financial Review
and ProspectsOperating Results. During this period, however, we faced three
interrelated business challenges: (1) the full absorption of AmBevs business
in Argentina, Paraguay and Uruguay, (2) the restructuring along functional
lines of management and reporting systems across all markets and (3) the
completion of the full merger of beer and soft drinks businesses in Argentina. 22




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Our alliance with AmBev In 2003, our business benefited substantially from the implementation of
our alliance with AmBev. Our alliance allowed us both to increase revenues, or
realize revenue synergies and to decrease operating costs, or realize cost
synergies. We were also able to realize synergies from changes in our sales
and distribution network. The revenue synergies resulted primarily from the
simplification of the competitive environments in Argentina, Paraguay and
Uruguay which allowed us to increase our market shares in these regions to 80%,
94% and 98%, respectively. In
addition to achieving these market share improvements in 2003 we were able
to increase prices by more than 20% in real terms, relative to inflation. Our revenue synergies also resulted from reconfiguring the composition of
our brand portfolio, repositioning the price of certain brands, reevaluating
the relative portions of the final retail price of our products that are
captured by each participant in our production, distribution and sales chain,
restrictions in margins for distributors and retailers, and the elimination of
discounts and promotions not targeted to customers. Our cost synergies included savings associated with the consolidation of
the finance, information and technology and administrative functions of our
business and that of AmBevs southern cone assets. We also completed a complex
reorganization of warehouses, logistics, and transportation operations,
achieved a reduction in the cost of raw materials, and introduced the
capability to produce the Brahma brand at any of the breweries in Argentina and
Paraguay. Our integration with AmBev in Paraguay and Uruguay also included the
closing of breweries and warehouses, reductions in the cost of labor and
combining the distribution systems of both companies. Also during the second half of the year 2003, our sales and distribution
systems underwent significant and complex changes. We implemented initiatives
in Argentina to rationalize more than 200 distributors for the Brahma brand, to
incorporate AmBevs volume sales to the Quilmes network, to expand our direct
sales operations and to redefine distributors geographical areas. We were
able to implement these changes without losing market share in Argentina as a
result of our alliance with AmBev. Future benefits derived from the AmBev transaction. Our revenue and cost
synergies were implemented between the second and fourth quarters of year 2003.
We expect that these synergies will continue to have a positive impact in the
year 2004. Having focused on the implementation of synergies in 2003, we began
and continue to work on the identification of best practices and processes at
Quinsa and AmBev. We have finished a benchmarking process in the Industrial
and Procurement areas. Narrowing of the gaps identified from the
identification of best practices has already been included as a specific
objective to be achieved throughout our three-year business plan. Similar
processes will be conducted in the future for the Sales and Distribution areas,
as well as for Finance, Administration and Information Technology. Centralization of management During 2003, we caused administrative software used by Quinsa, and that
used by AmBevs former subsidiaries in Argentina, Paraguay and Uruguay to
become fully compatible so that we could absorb the latters operations in
these markets without increasing headcount. During 2003, we also centralized all accounting, administrative, human
resources and finance functions in Argentina for our Chilean and Uruguayan
businesses. We expect to complete this centralization in Paraguay before the
end of 2004 and we expect that centralization in Bolivia will follow shortly
thereafter. Overall, our administrative costs were reduced from 9.2% of net sales in
2002, to 6.2% of net sales in 2003. We expect to achieve further improvements
once we complete the centralization of administrative functions in Paraguay and
Bolivia. The merging of our beer and soft drink operations Prior to our relationship with AmBev, our soft drink and beer operations
had not been fully merged. We subsequently changed our operations so that beer
and soft drinks are now two divisions of the same business which share the same
warehousing, distribution and all other aspects of the business. In addition,
we have now redefined our sales force. Because our Argentine soft drink
operation had a large number of stock keeping units 23




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(SKUs), it had been
impractical to sell all of Quinsas portfolio through one unified sales force.
This problem was alleviated by the absorption of a third sales force, that of
Brahma Argentina, which allowed us to combine three separate sale forces into
two. Currently, we have the Quilmes brand, the Gatorade portfolio, the Eco de
los Andes brand and certain specialty beers with one sales force and the
PepsiCo carbonated soft drinks, the Brahma, Palermo and Bieckert brands, and
the Glaciar and Nestle Pureza Vital bottled waters with the other. These
changes allow for a balanced portfolio in terms of volume and market
positioning. As a result of this merger, we have been able to implement a different
cost structure which in turn is largely responsible for the turnaround
experienced by our soft drinks business. Our strategy to increase
profitability for the soft drinks business was based on an extremely low cost
structure and a greater flexibility from PepsiCo to develop advertising and
marketing actions tailored to local consumers. Brand repositioning has also
enabled us to close the price gap as compared to the market leader. When we
acquired the PepsiCo franchise in 1999, the margin gap versus the market
leaders largest bottler was approximately 15 points. Today it has been
narrowed substantially to less than 4 points, as we compensated for our lower
critical mass in the soft drinks industry with a different cost structure, the
result of merging beer and soft drinks and of brand repositioning. Beer Operations Based on our internal estimates, we are the largest beer producer both in
Argentina and in the combined southern cone markets. In 2003, according to
internal estimates, our breweries enjoyed leading market shares of
approximately 80.0% in Argentina, 94.3% in Paraguay, 98.5% in Uruguay, 97.3% in
Bolivia and 10% in Chile. On January 31, 2003, we completed the
formation of a strategic
relationship with AmBev, the largest brewer in Brazil and in South America,
involving the integration of our respective operations in the southern cone
markets. Pursuant to this alliance, we have begun to manufacture, market, sell
and distribute the AmBev beer brands in the southern cone markets under a
perpetual royalty-free exclusive license, and AmBev may distribute some of our
beer brands in Brazil, which would provide us access to AmBevs extensive
distribution network in that country. See History and DevelopmentRecent
EventsRelationship with AmBev. Our 2003 consolidated net sales totaled US$622.7 million, of which
US$469.2 million, or 75.3%, was attributable to sales of beer, and out of which
US$267.4 million, or 42.9%, was attributable to beer sales in Argentina. Based
on internal estimates, our sales accounted for 67% of the 21.2 million
hectoliters of beer sold in the combined southern cone markets. As of December
2003, we had a total brewing capacity of 23.4 million hectoliters. Until
January 13, 2003, Heineken, one of the largest beer producers in the world,
held a 15% equity interest in QI(B). In connection with this relationship,
Heineken provided us with technical advice regarding our brewing facilities and
beer products and granted us the Heineken License, pursuant to which we
manufactured, sold and distributed Heineken beer in the southern cone markets.
In January of 2003, Heineken sold its interest in QI(B) to BAC for cash as part
of a Memorandum of Agreement between Quinsa, BAC and Heineken. Subsequently,
we received a notification from Heineken terminating the Heineken License. See
History and DevelopmentRecent EventsRelationship with AmbevSettlement with
Heineken. Points of Sale. Our beer products are sold to more than 466,000 points of
sale throughout the southern cone markets. The number of points of sale
covered by us in each country of operation varies widely from more than 311,000
in Argentina to 52,000 in Bolivia, 13,000 in Chile, 48,000 in Paraguay and over
42,000 in Uruguay. The on-premise consumption segment comprises restaurants
and bars, while in the off-premise segment, we distinguish between supermarkets
on the one hand, and primarily convenience stores, medium size grocery stores
and kiosks on the other. The on-premise segment accounts for a smaller
percentage of total beer sales in the southern cone markets. For Argentina,
Chile, Paraguay and Uruguay, our sales in the on-premise segment were 18%, 14%,
26% and 31%, respectively in 2003. The Bolivian market is different; we sell
56% of our volume in the on-premise segment. Sales of beer in supermarkets, a
less significant sales channel compared to other more developed markets,
accounted for 30.0% of our sales in Chile, 7.0% of our sales in Argentina, 7.0%
of our sales in Uruguay, approximately 1.0% of our sales in Paraguay and less
than 1.0% of our total sales in Bolivia in 2003. Terms of Sale. Even though the Argentine economic scenario improved in
2003, we continued to focus on reducing our working capital and maximizing cash
generation. We succeeded in negotiating new credit terms with most of our
clients, particularly those in Argentina, and especially with supermarkets.
Our average receivables measured in terms of days of sales declined from 21
days in 2002 to 13 days in 2003. The terms of the credit 24




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extended, including
the length of credit, often depend on competitive factors and the strategic
importance of the particular outlet. Indirect Sales. The large majority of our beer sales are indirect sales
conducted through independent distributors, except for in Chile where direct
sales account for a much larger percentage of our total market sales.
Distributors vary in size from small operations with a handful of employees to
larger, established companies. The number of points of distribution within an
area is determined by taking into consideration, among other things,
market needs, number of points of sale to be covered, geographic features
and the availability of communication systems. Normally, arrangements with the distributors in each of our countries of
operation are based on a standard contract that requires the distributor to
carry our products exclusively and grants it exclusive rights to sell those
products within a defined area to retailers. The contract may also prohibit
the distributor from selling to wholesalers and supermarkets to which we
reserve the right to sell products directly. The distributors return empty
bottles and crates to our plants or distribution centers and collect full ones.
When dealing with distributors, the only transportation cost we pay is the
cost of transporting beer from our plants to our distribution centers, although
it is very common for our distributors to collect our bottles and crates at our
plants. Direct Sales. In Argentina, we contract a transportation service for
direct distribution of our beer to large supermarket chains and to over 57,000
retailers. In Bolivia, we distribute our products using our own sales force,

which accounts for approximately 13% of total volume sold and covers 7,500
points of sale. In Chile, our sales are primarily executed by means of a
contracted transportation service that delivers our beer products to
supermarkets and other retailers. In Paraguay, direct sales are conducted
exclusively on a pre-sell system covering more than 21,000 points of sale, 72%
of which are in the capital city of Asunción. In Uruguay, our direct sales
amount to 34% of total beer sales and cover 9,700 points of sale including
wholesalers and supermarkets. In each of the countries in which we operate,
our direct sales are delivered within 24 hours from the time an order is
placed. Sales Force. In each of our countries of operation, we maintain sales
forces whose responsibilities are divided largely by geographic area or channel
of distribution. In addition to selling our products, our sales forces monitor
the performance of our products in several different ways such as: making daily
evaluations of sales by brand and presentation, completing monthly reports on
sales by distributor and major retailer, and maintaining registers of actual
and potential points of sale. The sales forces also oversee the merchandising
of our products, maintain frequent customer contact, supervise the turnover of
customers stock of our beverages and monitor the prices charged to consumers. Distribution. We deliver our beer products in each of our countries of
operation through a system of breweries, distribution centers and warehouses.
We believe that the extensive and strong distribution systems in each of our
countries of operation have enhanced the profile and penetration of our
well-recognized brands. In addition, in connection with our strategic
relationship with AmBev, we entered into a License Agreement with AmBev in
January 2003 which grants Quinsa and its subsidiaries a perpetual,
royalty-free, exclusive license to use the AmBev beer brands in connection with
the manufacture, marketing, sale and distribution of beer in the southern cone
markets. During the second half of 2003, our sales and distribution systems
underwent enormous changes in Argentina including the rationalization of more
than 100 distributors for the Brahma brand, the incorporation of AmBevs volume
sales to the Quilmes network, the expansion of our direct sales operations and
the redefinition of distributors geographical areas. While our business
experienced upheaval on the commercial front, all of these changes were
implemented at no loss of market share. Our integration with AmBev in Paraguay and Uruguay has also been
successful. It included the closing of breweries and warehouses, reductions in
the cost of labor and combining the distribution systems of both companies. Future Growth in the Southern Cone Markets. As the following table
demonstrates, per capita beer consumption in each of our countries of operation
remains lower than that in many other countries. We therefore believe that
there is ample room for growth in consumption of beer in all of our markets. 25




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Per Capita Beer Consumption for 2002 Country
    
    Liters per Capita  2002USA
    
    
    83Spain
    
    
    77Canada
    
    
    68Venezuela
    
    
    70Mexico
    
    
    50Brazil
    
    
    49Paraguay*
    
    
    33Argentina*
    
    
    31Chile*
    
    
    25Uruguay*
    
    
    17Peru
    
    
    23Bolivia*
    
    
    19
   Sources: Canadean Beer Service, The Global Beer Report, October 2003 Edition.*
    
    Indicates country in which Quinsa operates. The following table demonstrates per capita beer consumption in each of
our countries of operation based on internal management estimates. Per Capita Beer Consumption for 2003 Country
    
    Liters per Capita  2003Paraguay
    
    
    33Argentina
    
    
    35Chile
    
    
    27Uruguay
    
    
    14Bolivia
    
    
    22
 In addition, compared with the countries of Western Europe and North
America, the demographics in our countries of operation indicate relatively
faster growth in the drinking age population. We believe that we are well
placed to promote and participate in any growth in the regions beer
consumption given what we believe to be our:  a.
    
    leadership position in the southern cone markets;b.
    
    strong and diversified product portfolio;c.
    
    marketing and distribution capabilities;d.
    
    significant market share position; ande.
    
    technologically advanced breweries. Soft Drink and Water Operations Our sales of soft drinks in Argentina and Uruguay began in December 1999
with the acquisition of Baesa, the largest PepsiCo® bottler in Argentina and
the sole PepsiCo® bottler in Uruguay. We subsequently acquired a 99.21%
interest in EDISA, the second largest PepsiCo® producer and bottler in
Argentina. CMQ now owns exclusive rights to produce, sell and distribute
PepsiCo® soft drink products, including Pepsi Cola®, Pepsi Cola Light®, Pepsi
Twist®, Pepsi Twist Light®, Seven-Up®, Seven-Up Light®, Mirinda®, Paso de los
Toros®, Paso de los Toros Light®, Kasfruit Juice®, Teem®, Tropicana® and
Gatorade®. In December 2001, we introduced ready-to-drink Tropicana and
started manufacturing and distributing Gatorade nationwide, so that we now
distribute the three lines of PepsiCo beverages. During 2002, we launched
Pepsi Twist, and introduced the Gatorade Fierce line of 26




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products. Based on
management estimates, we currently control more than 88% of the production and
sale of PepsiCo® carbonated soft drinks in Argentina and 100% in Uruguay. Our mineral water business in Argentina is currently conducted through our
48.82% minority participation in Eco de los Andes, a joint venture that we
formed in 1999 as a result of our strategic alliance with Perrier Vittel. Eco
de los Andes produces and provides marketing services for the Eco de los Andes,
Glaciar and Nestle Pureza Vital brands which we distribute and sell. BEER OPERATIONS BY COUNTRY Argentina With a population of approximately 37 million, Argentina is our largest
and most important market for beer, and we are the largest beer producer in the
country, according to Nielsen Argentina. We operate five breweries (including
the brewery contributed by AmBev), a bottling facility in Tucumán and a
nationwide distribution system for our beer products which we sell under ten
different brands. We also own two malting facilities in the province of Buenos
Aires. Our beer, malt and hops operations in Argentina were conducted through
CMQ, Cervecería del Río Paraná S.A., Cuyo y Norte Argentino S.A., Patagonia
Hops S.A., Malsaf and Bieckert until most of these companies were merged into
CMQ, although CMQ subsequently sold its 100% interest in Malsaf in September
2001. We conduct crown bottle top production operations through the former
Coroplás S.A., which was merged into CMQ in July 2003. As of December 2003, we
own, through QI(B), a 99.69% ownership interest in CMQ. See Note 3 to the
Consolidated Financial Statements. From 1998 until 2002, per capita consumption of beer decreased
approximately 6% in Argentina due to recessionary conditions. Since
the beginning of 2003,
however, we have seen a positive trend in beer consumption, with an increase in
per capita consumption of almost 6% to 35 liters per capita according to
management estimates. The table below shows the total hectoliters of beer
consumed in Argentina in each of 2001 through 2003: Beer Consumption in Argentina Hectolitersin Thousands2001
    
    
    12,1702002
    
    
    12,1412003
    
    
    12,956
   Source:
    
    Management estimates based on published reports from three of the four
local beer producers (for 2003 they are based on published reports from two
of the three local producers, since AmBev and Quinsa are no longer
independent companies).Note:
    
    Includes both domestically brewed and imported beer. According to Nielsen Argentina, on-premise consumption declined from 21.8%
in 1999 to 18.0% in 2003. This decline reflects the changes that occurred in
consumer behavior as a result of the difficult economic circumstances existing
in Argentina. Total sales of beer in supermarkets accounted for approximately
10% of total beer sales in Argentina, according to management estimates. Sales We cover over 311,000 points of sale in Argentina. Approximately 18% of
our sales were to the on-premise segment and sales of our beer in the
off-premise channels (excluding supermarkets) accounted for approximately 75%
of our total sales. As compared to the rest of the beer market, we sell a
smaller percentage of our volume to the supermarket channel which accounts for
only 7% of our total beer volume. In 2003, we sold a total of 9,921,000 hectoliters of beer in Argentina, a
market share of 80.0% according to Nielsen Argentina. Returnable formats
accounted for 95.6% of our sales, with the one-liter returnable bottle
accounting for 90.8% of our sales. 27




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Our net sales for 2003 were US$267.4 million compared to US$163.8 million
in 2002. This increase was primarily due to the addition of AmBevs volumes
and to a 25.2% increase in average prices, measured in U.S. dollars. The
Companys sales performance throughout the year has been remarkable, showing no
signs of disruption despite the enormous upheaval that its sales and
distribution systems have undergone, as we combined the former Quilmes, AmBev
and PepsiCo networks into two sales forces and a single distribution network. The following tables present our domestic beer sales volume, market share
and net sales in Argentina for the years 2001 to 2003: Quinsas Domestic Beer Sales Volume, Market Share and Net Sales in Argentina 2001
    
    2002
    
    2003Sales volume (hectoliters in thousands)(1)(2)
    
    
    8,167.0
    
    
    
    7,619.0
    
    
    
    9,921.0Market share(1)
    
    
    67.9
    %
    
    
    64.5
    %
    
    
    80.0
    %Net sales (in US$ millions)(3)
    
    
    426.4
    
    
    
    163.8
    
    
    
    267.4
   Source of market share information: Nielsen Argentina.(1)
    
    Data includes both domestically brewed and imported beer. Our beer
imports accounted for 1,000 hectoliters in 2001. During 2002 and 2003
there were virtually no imports.(2)
    
    Data does not include export sales to our companies in other countries in
which we operate, principally Chile, Paraguay and Uruguay, which amounted
to 14,000 hectoliters, 7,000 hectoliters and 5,000 hectoliters in 2001,
2002 and 2003 respectively. Data for 2001, 2002 and 2003 also excludes
12,000 hectoliters, 16,000 hectoliters and 33,000 hectoliters
respectively, sold to third parties outside of Argentina.(3)
    
    Includes exports, if any. Geographic Coverage and Brands Our beer is sold in all provinces of Argentina. Approximately 40% of our
beer is sold in the city of Buenos Aires and the surrounding metropolitan area
(greater Buenos Aires), a region of approximately 17 million people, and
which accounts for about one-third of total beer consumption in the country.
Commercially, our Argentine operations were divided until 2003, into the
following nine geographic divisions:  a.
    
    greater Buenos Aires;b.
    
    the Atlantic region (comprising the main cities on the coast in the
province of Buenos Aires);c.
    
    the Northeast region (comprising the provinces of Chaco, Formosa,
Corrientes and Misiones);d.
    
    the Litoral region (comprising the provinces of Santa Fé and Entre
Ríos);e.
    
    the Northwest region (comprising the provinces of La Rioja,
Tucumán, Salta, Jujuy, Santiago del Estero and Catamarca);f.
    
    the Central region (comprising the provinces of Córdoba and San
Luis);g.
    
    the Western region (comprising the provinces of Mendoza and San
Juan);h.
    
    the Southern region (comprising the rest of the Buenos Aires
province, and the province of La Pampa); andi.
    
    Patagonia (comprising the provinces of Neuquén, Rio Negro, Chubut
and Tierra del Fuego). In 2004, we reorganized our Argentine geographic divisions into the
following four general areas: greater Buenos Aires, North (including the prior
Northeast, and Northwest regions), Central (including Litoral and Central
regions) and South (including Western, Atlantic, Southern and Patagonia
regions). We serve all of the provinces in Argentina with several distinct brands.
Our leading brand is Quilmes Cristal, which, according to Nielsen Argentina,
was the leading brand in each of the nine regions listed above during 2003,
except for the Northwest region, where it was second to our Andes brand.
Quilmes Cristal sets the price standard in 28




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the industry, and had a national
market share of approximately 45.8% in 2003 according to company estimates.
Our Imperial brand is a premium brand sold mainly in the on-premise segment.
Iguana is a specialty brand malted beer. Andes and Norte are our two regional
brands. We also sell five other domestic beers in Argentina: (1) Liberty, a
non-alcoholic beer; (2) Quilmes Bock, a dark beer sold principally during
winter months; (3) Palermo, which is sold nationally and targets the low-price
segment of the market; (4) Quilmes Light, a beer with a low alcoholic content;
and (5) Bieckert, a value brand. As a result of our alliance with AmBev, as of
February 1, 2003, we have the right to produce and distribute the Brahma beer
brand, which had a market share of 15.9% in 2002, according to Nielsen
Argentina. See History and DevelopmentRecent EventsRelationship with
AmBev for information on our alliance with AmBev. During 2002, we produced the Heineken brand locally pursuant to a
trademark license agreement. Heineken targets the premium segment of the
market, and sales of the Heineken brand accounted for approximately 2% of our
sales during 2002. In 2003, however, pursuant to its rights under the
Memorandum of Agreement, Heineken delivered a notice to the Company terminating
this trademark license as of June 2003. Therefore, we no longer produce or
sell the Heineken brand. See History and DevelopmentRecent
EventsRelationship with AmBevSettlement with Heineken. As a condition to approving some of our transactions with AmBev, the
Argentine antitrust authorities have required us to transfer our Imperial,
Bieckert and Palermo brands to a foreign purchaser, and, at the option of such
foreign purchaser, our Norte brand within 12 months of January 13, 2003.
Subsequently, CCU, one of our competitors, filed a claim in Argentina in April
2003 seeking to enjoin our sale of these brands because it believes it should
be permitted to bid for them. CCU is currently barred from acquiring any of
these brands because it conducts beer operations in Argentina, and is therefore
not considered a foreign purchaser under the Argentine antitrust authoritys
stipulations. See History and DevelopmentRecent EventsRelationship with
AmBevApproval of the Argentine Antitrust Authorities; Action by CCU. Until
the claim filed by CCU is resolved by the courts, we continue to sell all of
our brands as well as Brahma. Brewing Capacity To increase asset utilization and productivity of our brewery network in
Argentina, during December 2000 we decided to close down our Llavallol plant
used to produce the Bieckert brand and to relocate the bottling line and
warehouse to the Quilmes brewery. These actions were completed in April 2001.
Our installed brewing capacity at December 31, 2003 was approximately 16
million hectoliters. Part of our strategic relationship with AmBev involved the contribution by
AmBev of its brewery located in Luján, in the province of Buenos Aires. This
brewery has an installed capacity of 2.9 million hectoliters and had been used
to produce AmBevs Brahma brand. As of May 2003, this brewery is producing the
Brahma, Palermo and Bieckert brands, although the approval of our transaction
with AmBev by the Argentine regulators was conditioned, in part, on the sale of
this brewery. See History and DevelopmentRecent EventsRelationship with
AmBev. We will, however, continue
production at this plant until it is sold, and we have sufficient capacity to
produce the Brahma brands at all of our other breweries in Argentina. Indeed,
during 2003 we produced the Brahma brand at all of our facilities for
distribution in Argentina. We believe our brewing equipment to be modern and technologically
advanced. In addition, we have made recent investments to allow us to
transport the bulk beer we produce at all of our plants in order to supply our
Tucumán bottling facility. During 2003, the Corrientes plant supplied 40% of
the beer bottled at the Tucumán facility, the Mendoza plant supplied 33% and
the Quilmes plant supplied the remaining 27%. The following table provides the location of our beer facilities in
Argentina, their installed capacity and the geographic areas supplied by these
breweries: 29




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Location of Brewery
    
    Installed Capacity
    
    Region Supplied(hectoliters in millions)Quilmes(1)
    
    
    5.1
    
    
    greater Buenos Aires, Atlantic, Central and Southern RegionsZárate
    
    
    4.4
    
    
    all the regions in ArgentinaCorrientes(1)
    
    
    1.7
    
    
    Northeast, Northwest RegionsMendoza(1)
    
    
    2.0
    
    
    Western and Southern RegionsTucumán (bottling facility)
    
    
    1.2
    
    
    Northwest RegionLuján(2)
    
    
    2.9
    
    
    all the regions in Argentina with the exception of Northeast
   (1)
    
    Produces bulk beer to supply our Tucumán bottling facility for final
processing and bottling.(2)
    
    Contributed by AmBev as part of our strategic relationship. We have been
in charge of operations at this brewery since March 2003. The approval of
our transaction with AmBev by the Argentine regulators was conditioned, in
part, on the sale of this brewery. Malting Operations We currently own two malting plants in the province of Buenos Aires. The
majority of our malt production is used to supply our own beer plants. Using
the barley we purchase from Argentine farmers as discussed below, we ordinarily
satisfy all of the malt requirements of our Argentine beer operations and a
part of the requirements of our Bolivian, Chilean and Paraguayan operations.
Only occasional excess production is sold to third parties. In 2003, our
malting plant, Maltería Tres Arroyos, produced approximately 89,000 tons of
malt. In addition, we also own a small malting facility in Llavallol, Buenos
Aires that produces approximately 24,000 tons of malt. As a further condition
to approving some of our transactions with AmBev, the Argentine antitrust
authorities have required us to transfer or rent this malting facility to a
third party not currently producing beer in Argentina. See History and
DevelopmentRecent EventsRelationship with AmBevApproval of the Argentine
Antitrust Authorities; Actions by CCU. Distribution Sales through independent distributors account for approximately 68% of
our sales. For our direct sales, which account for 32% of our total sales, we
use vehicles on a contracted basis for direct distribution of our beer to large supermarket
chains and to over 57,000 retailers. We operate our distribution system from
five facilities and several distribution centers covering different geographic
areas. This helps us to more effectively serve our regions of distribution as
well as to reduce transportation costs, which gives us, we believe, a distinct
advantage over our competitors. As a result of our strategic relationship with
AmBev, we have almost finished with the unification of the distribution systems
of both companies in Argentina. To date, more than 90% of Quinsas total
volumes are sold through a single distribution system, enabling us to take
advantage of important economies of scale. We have also continued with the
roll-out of our direct sales operations, focusing on Buenos Aires, Mar de
Plata, Córdoba, Rosario, Corrientes, Tucumán and Neuquén. This process will
continue throughout 2004. Bolivia In September and December 2000, we indirectly acquired controlling
interests in our previous competitors in Bolivia, CBN and CBNSC, which
increased our ownership interest in these entities to 70.34% and 80.92%,
respectively. With these acquisitions, QI(B) increased its market share in
Bolivia to approximately 98.1%, according to internal estimates, having
previously acquired the breweries CSC and CTq. During the last quarter of
2001, the Boards of Directors of CBN, CBNSC, CSC and CT decided to merge with
and into CBN. As a result of the merger, our indirect ownership interests in
these various breweries were consolidated. During 2002, we increased our
indirect ownership in CBN to 78.13% and in CTq to 91.95%. In addition, in the
fourth quarter of 2002, the Boards of Directors of CBN, CTq and CBNs wholly
owned subsidiary Enalbo, which produces aluminum cans, decided to merge with
and into CBN. The decision to merge was further approved by the Extraordinary
Meeting of Shareholders of CBN, CTq and Enalbo and in May 2003, the Bolivian
authorities approved that merger. Since completion of this transaction, our
indirect ownership in CBN is 79.98%. In order to generate synergies from our brewery acquisitions in Bolivia,
we have undertaken various restructuring measures to reduce our cost structure.
In 2001, we closed three distribution centers and centralized 30




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administrative
functions. In 2002, we continued the restructuring process by reallocating
production among our different plants, eliminating certain formats and brands,
and by reducing our headcount by 9%. We also continued with the implementation
of our cost reduction programs in 2003, as headcount was reduced a further 12%
that year. With these changes, we believe we have realized most of the cost
savings resulting from the combination of our businesses in Bolivia. The reorganization of our brands and packaging formats have resulted in a
better brand mix per region and in a better positioning of our one-way
packaging relative to returnable bottles in terms of pricing. These successes
helped to buoy the average selling prices of our products, which declined
approximately 5% in dollar terms in line with a 4.5% currency devaluation. We
were also able to broaden the penetration of our largest brand, Paceña, which
alone accounted for a market share of 66.6% during 2003, according to
management estimates. The Bolivian market is strongly influenced by macroeconomic trends and
governmental, regulatory and fiscal policies. In February 2000, the Bolivian
government increased excise taxes on beer by 39%, which was partially
responsible for a 2% decline in market volumes for that year. The tax increase
was eliminated in December 2000, and market volumes for 2001 were virtually the
same as those in 2000, despite a continuing economic recession and social
unrest that hindered distribution. In 2002, market volumes increased by more
than 6% as a result of targeted
marketing campaigns and increased consumer confidence leading up to the
presidential election held in June 2002. In 2003, market volumes increased by
9.2% rewarding our decision not to increase average price on a nation-wide
basis. We continue to believe that the Bolivian market offers opportunities
for growth due to our strong position in this market, the favorable age
distribution of Bolivias population and the current relatively low per capita
consumption of 22 liters. The table below shows the total hectoliters of beer
consumed in Bolivia in each of 2001 through 2003: Beer Consumption in Bolivia Hectolitersin Thousands2001
    
    
    1,6242002
    
    
    1,7302003
    
    
    1,881
   Note: Includes both domestically brewed and imported beer.Source: Management estimates. Sales We cover approximately 52,000 points of sale in Bolivia. Bolivia is a
different market for us in that 56% of our sales correspond to the on-premise
segment while the supermarket channel accounts for less than 0.1% of our sales.
The remainder of our sales occurs in the other off-premise segments. The beer
market in Bolivia is comprised primarily of returnable formats, which account
for 93% of our sales. Sales volume, including exports, increased from 1,688,000 hectoliters in
2002 to 1,843,000 hectoliters in 2003 as a result of successful marketing
campaigns, the repositioning of our brand portfolio, and the decision not to
increase average prices on a nation-wide basis. During 2003, we advanced our
segmentation strategy further, by re-launching two of our brands: Huari, at a
10% price premium, and Bock, which competes with liquor and similar beverages
outside the beer category due to its high alcoholic content. According to
management estimates, our total market share for 2003 was 97.3%. We had net sales of US$92.2 million, an increase of 4% compared to 2002.
This increase was a result of increased sales in terms of volume which was
partially offset by the 4.5% devaluation of the local currency. The following table presents our domestic beer sales volume, market share
and net sales in Bolivia for the years 2001 to 2003: 31




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Quinsas Domestic Beer Sales Volume, Market Share and Net Sales in Bolivia 2001
    
    2002
    
    2003Sales volume (hectoliters in thousands)(1)
    
    
    1,590
    
    
    
    1,683
    
    
    
    1,826Market share
    
    
    98.1
    %
    
    
    97.5
    %
    
    
    97.3
    %Net sales (in US$ millions)(2)
    
    
    86.7
    
    
    
    88.7
    
    
    
    92.2
 Source of market share information: Management estimates and CIES.  (1)
    
    Includes both domestically brewed and imported beers. Does not include
exports of 3,000, 5,000 and 17,000 hectoliters in 2001, 2002, and 2003
respectively.(2)
    
    Includes exports, if any. Geographic Coverage and Brands We have a broad portfolio of brands and presentations in Bolivia. Our
main brand, Paceña, which includes Paceña Pilsener, a national brand; Tropical
Extra, a brand sold in tropical regions; and Centenario, account for
approximately 68.4% of our sales in Bolivia. Our other important brands are
(1) Taquiña Export, the leader in the Cochabamba market; (2) Huari, a premium
brand leader in the Oruro region which was recently repositioned and whose
coverage was extended to other regions in the country; (3) Ducal, a regional
brand for the Santa Cruz area; (4) Imperial and Pilsener, which are both aimed
at the lower income segment of the market; and (5) Maltín, a non-alcoholic
liquid malt. There are also three other minor brands in terms of sales. In
terms of geographic distribution of consumption, La Paz, Bolivias capital,
accounted for 46% of our volume sales during 2003, Santa Cruz accounted for
35% and Cochabamba accounted for 11%. We own production facilities in
each of these regions. The balance of our volume sales was distributed
throughout the rest of the country. Brewing Capacity During 2003, we operated 6 breweries with a total brewing capacity of 3.1
million hectoliters. In the beginning of 2004 we closed our Ducal plant,
located in the Region of Santa Cruz, near our CBN plant. The largest of these
breweries is located in La Paz, and it is principally responsible for
production of the Paceña brand. We now operate one brewery in the city of
Santa Cruz which primarily produces Maltín, Ducal and Paceña, and one brewery
in Cochabamba which mostly produces Taquiña, Maltín and Imperial. The following table provides the location of our beer facilities in
Bolivia, their installed capacity and the geographic areas supplied by these
breweries: Location of Brewery
    
    Installed Capacity
    
    Region Supplied(hectoliters in millions)La Paz
    
    1.1
    
    Principally La PazSanta Cruz (CBN)
    
    0.6
    
    Principally Santa CruzSanta Cruz (Ducal) (1)
    
    0.6
    
    Santa CruzTaquiña
    
    0.6
    
    CochabambaHuari
    
    0.2
    
    Oruro, La Paz and PotosíTarija
    
    (+)
    
    Tarija
   (1)
    
    Closed in April 2004(+)
    
    Capacity: 38,000 hectoliters Distribution As part of the restructuring measures to reduce our cost structure after
our acquisitions of CBN and CBNSC, we closed three distribution centers in
Bolivia in 2001 and two more in 2003. As a result, our beer is distributed
from our five plants and from one warehouse located near La Paz. At the
beginning of 2004 we closed a plant located in the region of Santa Cruz. Sales
through independent distributors account for approximately 87% of our total
sales volume in Bolivia. Our direct sales, for which we distribute our
products using our own sales force, account for approximately 13% of total
volume sold and covers 7,400 points of sale. 32




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Chile Our beer operations in Chile are conducted through Cervecería Chile S.A.
QI(B) holds, indirectly, a 100% ownership interest in this entity. We originally entered the Chilean market with the expectation that we
would be participating in a growing market but this growth did not occur as
expected, and, from 1998 until 2002, consumption declined by 4% on a per capita
basis. However, during 2003, consumption increased almost 9% on a per capita
basis. Since the entry of the Chilean brewer CCU to the Argentine market, our
presence in Chile has taken on a strategic significance for us since we are now
both competing in each others principal market. The following table
illustrates beer consumption in Chile in the years 2001 to 2003: Beer Consumption in Chile Hectolitersin Thousands2001
    
    
    3,9552002
    
    
    3,9782003
    
    
    4,178
   Source: Management estimates.Note: Includes both domestically brewed and imported beer. Sales We cover approximately 13,000 points of sale in Chile. Of our total sales
in this country, 14% occurred in the on-premise segment, 30% were through the
supermarket channel, and the remaining off-premise segment accounted for 56% of
our sales. Sales volumes for 2003 were 419,000 hectoliters, a decrease of 3% over
sales volumes for 2002. This was due to the loss of the Heineken brand in June
2003, which represented approximately one third of the business. Net of this
effect, the rest of our portfolio grew by 11.1% during the year. Revenues were
almost flat at US$22.2 million. We also worked on the business cost structure,
transferring the administration and other service functions such as finance,
human resources and information, and technology to Argentina and reducing
headcount by 17% throughout the year. Our market share in Chile was 10.0% in
2003 compared to 10.8% in 2002, a small decline considering the loss of the
Heineken brand which represented approximately one third of our business. The leading format in the Chilean beer market is the 1-liter returnable
bottle, which accounts for 59% of total volume, while returnable formats as a
whole represent 66% of the total market volume. Non-returnable formats
represent 34% of the Chilean beer market with cans accounting for the largest
presentation of this kind. Kegs represent 5% of the market, according to
management estimates. The following table presents our domestic beer sales volume, market share
and net sales in Chile from 2001 to 2003: Quinsas Domestic Beer Sales Volume, Market Share and Net Sales in Chile 2001
    
    2002
    
    2003Sales volume (hectoliters in thousands)(1)
    
    
    425
    
    
    
    431
    
    
    
    418Market share
    
    
    10.7
    %
    
    
    10.8
    %
    
    
    10.0
    %Net sales (in US$ millions)(2)
    
    
    23.9
    
    
    
    22.0
    
    
    
    22.2
   (1)
    
    Data does not include sales to our subsidiaries in Argentina and Paraguay
which amounted to 5,000 hectoliters in 2001 and 1,000 hectoliters in 2003.
This data also excludes exports to third parties of 1,000 hectoliters in
2001 and 2002.(2)
    
    Includes exports, if any. 33




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Geographic Coverage and Brands Our brands are sold throughout Chile. In 2003, we served Chile with two
locally-brewed brands, Becker and Báltica, and we imported the Paceña brand
from Bolivia. The loss of the Heineken brand led the Company to redefine its
strategy. Thus, we defined a new role for Becker by focusing our marketing on
that brand. Becker accounted for 46% of our sales in 2003. Báltica is a
higher alcohol content, dry beer aimed at the lower-income segment of the
market, and accounted for 42% of our total Chilean beer sales in 2003. Paceña
is sold in non-returnable formats, and is sold primarily in the on-premise
segment and in supermarkets. Pursuant to its rights under the Memorandum of Agreement, Heineken
delivered a notice to the Company terminating the trademark license as of June
2003, under which Quinsa produced, marketed and distributed the Heineken brand.
See History and DevelopmentRecent EventsRelationship with
AmBevSettlement with Heineken. Since then, we have been
working on
reorganizing the portfolio by eliminating non-profitable SKUs. Focused
attention on the repositioning of our remaining portfolio allowed for an 11.1%
increase in our volumes excluding the Heineken brand. In addition, on January
14, 2003, Heineken announced that it would acquire a 50% stake in IRSA which
owns 62% of CCU, a substantial beer producer whose share of the Chilean beer
market was approximately 89% in 2003, according to our internal estimates. As
part of its purchase of the 50% stake in IRSA, Heineken transferred the
licensing agreements to produce the Heineken brand in Chile and Argentina to
CCU. Brewing Capacity We
operate one brewery in Chile which is located north of Santiago. The
plant currently has a capacity of approximately 0.76 million hectoliters. Distribution In Chile, our sales are primarily executed by means of a contracted
transportation service that delivers our beer to supermarkets and other
retailers in the on- and off-premise segment. Direct sales account for 89% of
our total volume sold. We distribute our products to the metropolitan Santiago
area from our brewery outside of Santiago and from our distribution centers in
Coquimbo, Talca, Concepción, Temuco and Quilpué for all other regions in the
country. Paraguay According to CCR, we are the largest beer producer in Paraguay, a country
of 5.8 million people. As a consequence of the AmBev agreement, in December
2003, Cervecería Paraguaya and CCBP merged upon the final approval of the
Paraguayan regulatory authorities. As a result of this corporate
reorganization, as of December 31, 2003 Quinsa held an indirect 85.80% interest
in Cervecería Paraguaya S.A. We also conduct glass bottle manufacturing
operations through FPV, in which QI(B) indirectly controls a 77.54% ownership
interest. The market for beer in Paraguay has traditionally distinguished itself
from those in our other countries of operation in certain respects. First,
beer has not faced significant competition from wine as an alternative
alcoholic beverage. Second, domestic beer has faced significant competition
from imported beer, which accounted for a far higher market share in Paraguay
than in neighboring countries. Third, the seasonality of our products is lower
than in other countries where we operate due to warmer conditions throughout
the year. In recent years however, consumption of beer in Paraguay has been affected
by adverse economic conditions including increased inflation and economic
recession. In addition, during 2002, the Paraguayan economy was severely
affected by the Argentine crisis: Gross Domestic Product (GDP) declined 2.2%,
inflation on consumer prices amounted to approximately 15%, and the local
currency depreciated 52% against the U.S. dollar. During 2003, the Paraguayan
economy improved with an appreciation of the local currency of approximately
15%, an increased in GDP of 2% and inflation rate amounted to 9%. Although
this recovery increased as the year progressed, the beer market still saw a
decline of 6%. We believe that an important competitive advantage for us is
the fact that we are a local brewer. The following table illustrates the total hectoliters of beer consumed in
Paraguay for the years 2001 to 2003: 34




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Beer Consumption in Paraguay Hectolitersin
Thousands2001
    
    
    2,1452002
    
    
    1,8402003
    
    
    1,737
   Source: Management estimates. Sales We cover 48,000 points of sale in Paraguay. The on-premise segment
represented 26% of our sales in 2003, while sales to supermarkets accounted for
approximately 1% of our sales. The remaining 73% of our sales occurred in the
other off-premise segments. Returnable formats accounted for approximately 84%
of our sales; the liter and can format represented 81.0% and 13.3%,
respectively, of our sales. Sales volumes increased 15% to 1,614,000 hectoliters in 2003 as a result
of the addition of AmBevs former operations, which accounted for approximately
29% of our volume sales for the year. Our market share in 2003 was 94.3%. Our revenues for 2003 were US$71.6 million, a 26% increase from 2002. The following table presents our domestic beer sales volume, market share
and net sales for each of 2001 through 2003: Quinsas Domestic Beer Sales Volume, Market Share and Net Sales in Paraguay 2001
    
    2002
    
    2003Sales volume (hectoliters in thousands)(1)
    
    
    1,675
    
    
    
    1,402
    
    
    
    1,614Market share(1)
    
    
    78.1
    %
    
    
    76.1
    %
    
    
    94.3
    %Net sales (in US$ millions)(2)
    
    
    82.9
    
    
    
    57.0
    
    
    
    71.6
 Source: CCR/IRI and Company estimates.  (1)
    
    Includes domestically brewed and imported beers.(2)
    
    Includes exports, if any. Geographic Coverage and Brands In 2003 we produced and distributed ten brands which were sold throughout
Paraguay. Our main brand, and the leading national brand in Paraguay, is
Pilsen, with an estimated market share of 38.6% in 2003 according to internal
estimates. Our other brands are: Dorada, which is aimed at the urban markets of the
countrys interior; Baviera, which is positioned as a premium beer; and
Quilmes, which accounts for 7% of our sales. In 2003, we began to sell
AmBevs brands, Brahma and Ouro Fino, which have gained participation in our
sales mix reaching an average of almost 30% of our sales. As a consequence of
the addition of AmBevs brands, we reorganized the portfolio, repositioning the
relative pricing of our different brands and eliminating unprofitable SKUs.
Pursuant to its rights under the Memorandum of Agreement between Heineken and
Quinsa, Heineken delivered a notice to the Company terminating the trademark
license as of June 2003, under which Quinsa produced, marketed and distributed
the Heineken brand. See History and DevelopmentRecent EventsRelationship
with AmBevSettlement with Heineken. Therefore, we have discontinued the sale
of Heineken in Paraguay. Brewing Capacity We made investments at our Ypané brewery which doubled the capacity of the
brewery to 2.0 million hectoliters in 2001. These investments also allowed us
to create efficiencies by producing cans and brewing Quilmes locally. 35




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In addition, we closed our Asunción brewery in 2000, which allowed us to reduce
labor and production costs. Thus, we have been able to increase our capacity
while reducing our costs. In addition, our brewing capacity at the Ypané
brewery increased to 2.2 million hectoliters during 2002. As part of our strategic relationship, AmBev contributed the small brewery
where it had been producing its Brahma and Ouro Fino brands to the Company.
During April 2003, we closed this brewery and we transferred production of
AmBevs two brands to our Ypané brewery. Distribution We distribute our beer from the Ypané plant as well as from four
distribution centers. We sell through direct sales in the cities of Asunción
and greater Asunción, Encarnación, Capitán Miranda, Ciudad del Este,
Hernandarias, Presidente Franco, Villa Rica and Coronel Oviedo. We conduct our
direct sales exclusively on a pre-sell system covering approximately 21,000
points of sale, 72% of which are in the capital city of Asunción. Direct sales
accounted for 44% of our total sales during 2003. The rest of our sales are
conducted through 97 distributors. As a result of our strategic relationship
with AmBev, we have combined the distribution systems of both companies in an
effort to reduce costs and take advantage of resulting synergies. We have
established two sales forces for Asunción and Greater Asunción that split the
product portfolio between them. The rest of the country is served through a
single sales force. Uruguay With a population of 3.3 million, Uruguay is our smallest market in terms
of beer sales, although we are the leading beer producer in this market based
on our internal estimates. Our beer operations in Uruguay are conducted
through FNC. In November 2001 we merged FNC and EUSA. As a consequence of
the merger between FNC and EUSA, we closed our soft drink bottling facility in
Montevideo. We now manage both our beer and soft drink businesses out of our
brewery in Montevideo. By the end of 2003 after carrying out pertinent legal
formalities, FNC and La Luisiana, an AmBev subsidiary prior to the deal,
executed a merger agreement whereby FNC absorbed La
Luisiana. As result of this merger and the acquisition of minority
shareholdings, as of December 31, 2003, QI(B) holds a 97.91% ownership interest in FNC, the surviving
entity. In 2004, the Boards of Directors of FNC and Salus executed a
spin-off/merger agreement, which was subsequently approved by the Extraordinary
Meeting of Shareholders. This operation consisted in the spin-off of the beer
(including soft drink, malt and cider) and water businesses and the subsequent
addition to FNC of Salus beer business. Pursuant to this business
reorganization, all of our beer and soft drink businesses are now conducted
through FNC. The consolidation of these operations has created operational
synergies for us and has led to cost reductions. As a result of the Argentine economic crisis, the Uruguayan economy had
been steadily contracting during recent years, particularly in 2002.
Consequently, beer market volumes in Uruguay declined by 10% to 466,000
hectoliters in 2003. However, as a result of improvements in the economy,
market declines compared to the previous year became progressively smaller. In
fact, during the first quarter of 2004 we have seen a significant increase in
market volumes compared to 2003. The following table shows the consumption of
beer in Uruguay from 2001 to 2003: 36




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Beer Consumption in Uruguay Hectolitersin
Thousands2001
    
    
    6212002
    
    
    5212003
    
    
    466
   Source: Company estimates.Note: Includes domestically brewed and imported beer. Sales We cover over 43,000 points of sale in Uruguay. Returnable formats
account for approximately 97% of our sales, while the liter and can formats
represented 89% and 1%, respectively, in 2003. In terms of breakdown by sales
channel, on-premise consumption accounted for 31% of our sales, while
supermarkets and other off-premise sales channels accounted for 7% and 62%,
respectively. Domestic volumes increased 65% to 445,000 in 2003, as a result
of the introduction of AmBevs beer brands, Norteña and
Patricia, to our
portfolio. Our average prices measured in U.S. dollars declined approximately 14% in
2003. This was the result of an 8% local currency devaluation and of our
conservative pricing policy of not increasing nominal prices of beer. It was
also due to the addition of Patricia, a former AmBev brand which had a lower
average price than the rest of our portfolio. Our revenues for 2003 were US$19.7 million, a 39% increase compared to
2002 revenues. This was the result of the additional volumes contributed by
AmBevs former operations. The following table provides information regarding
our beer sales volume, market share and net sales in Uruguay for the years 2001
to 2003: Quinsas Beer Sales Volume, Market Share and Net Sales in Uruguay 2001
    
    2002
    
    2003Domestic sales volume (hectoliters in thousands)
    
    
    340
    
    
    
    269
    
    
    
    445Market share
    
    
    54.6
    %
    
    
    51.9
    %
    
    
    98.5
    %Exports (hectoliters in thousands)(1)
    
    
    11
    
    
    
    6
    
    
    
    0Net sales (in US$ millions)(2)
    
    
    23.2
    
    
    
    14.2
    
    
    
    19.7
   (1)
    
    Represent exports to southern Brazil.(2)
    
    Includes exports, if any. Geographic Coverage and Brands Our beer brands accounted for 98.5% of all beer sold in Uruguay in 2003
with our Pilsen brand being the leading national brand and accounting for 58%
of the market, based on management estimates. Our beer is sold in all regions
of Uruguay, with approximately 57% of our sales volume occurring in the
metropolitan area of Montevideo, which
accounts for 1.6 million of Uruguays total population. We serve this
market with four domestic brands and three imported brands. Pilsen is
positioned as a standard beer; it is strong in all regions of the country, but
particularly so in the interior. Since February 2003, as a consequence of our
strategic relationship with AmBev, we have sold AmBevs former brands, Norteña
and Patricia. We also sell Zillertal, which is our premium brand in this
market. In order to make our portfolio more efficient we eliminated some SKUs
and we no longer produce our brand Doble Uruguaya, which had been targeted to
traditional beer consumers. In the import segment of the market, we offered
the Heineken brand in addition to Quilmes, Iguana and Liberty brands. Pursuant
to its rights under the Memorandum of Agreement between Heineken and Quinsa,
Heineken delivered a notice to the Company terminating the trademark license as
of June 2003, under which Quinsa produced, marketed and distributed the
Heineken brand. See History and DevelopmentRecent EventsRelationship with
AmBevSettlement with Heineken. Therefore, we have discontinued the sale of
Heineken in Uruguay. 37




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Brewing Capacity We operated two breweries in Uruguay during 2003. One brewery is located
in Montevideo, while the second brewery, acquired as part of the AmBev deal, is
located in Minas. As part of our strategic relationship, AmBev has contributed
the beer businesses of Salus and Cympay, each of which included a brewery, to
the Company. The Salus brewery had been producing AmBevs Patricia brand and
the Cympay brewery had been producing its Norteña brand. During April 2003,
the Cympay brewery was closed and we transferred production of the Norteña
brand to our plant in Montevideo. Location of Brewery
    
    Installed Capacity
    
    Region Supplied(hectoliters in millions)Montevideo
    
    
    0.8
    
    
    Entire countryMinas
    
    
    0.4
    
    
    Entire countryPaysandú (1)
   (1)
    
    This plant was received as part of the deal with AmBev and was closed in
April 2003. Distribution. As a result of our strategic relationship with AmBev, we
combined the distribution systems of both companies in an effort to reduce
costs and take advantage of resulting synergies. Approximately 66% of our
total sales in Uruguay are indirect through 33 distributors that cover all of
Uruguay (with the exception of Montevideo). Patricia, a former AmBev brand,
maintains its former network, i.e. Salus distributors, who cover the entire
country. Approximately 34% of total sales are conducted directly by the
Companys sales force, who cover 9,700 points of sale including wholesalers and
supermarkets, all of them in Montevideo. SOFT DRINK AND WATER OPERATIONS We produce soft drinks and bottled water in Argentina and Uruguay which
have populations of approximately 37 million and 3.3 million people,
respectively. In 2003, the average person in Argentina and Uruguay consumed
approximately 91 and 57 liters of soft drinks, respectively, according to
management estimates. Our sales of soft drinks in Argentina and Uruguay began in December 1999
with the acquisition of Baesa, the largest PepsiCo® bottler in Argentina and
the sole PepsiCo® bottler in Uruguay. Baesa conducted its soft drink
operations in Uruguay through EUSA, its wholly-owned subsidiary. After
receiving approval from the relevant governmental authorities, in March 2001,
Baesa merged with CMQ, a majority shareholder of Baesa and our beer subsidiary
in Argentina. CMQ is the surviving entity, and the Baesa business has become
the soft drink division of our Argentine business. Having chosen to focus on
expanding its ownership interest in PepsiCo® franchises in Argentina and
Uruguay, QI(B) sold its 57.97% equity stake in Paresa, a Coca-Cola® franchise
in Paraguay, to Coca-Cola® Interamerican Corporation in October 2000. The synergies resulting from the merger of Baesa have benefited both beer
and soft drink operations through cost reductions and through the adoption of
more efficient fiscal policies. For example, we unified and also closed
certain distribution centers of CMQ and Baesa that affected the storage and
delivery of beer and soft drinks all over the country. In addition, the volume
of soft drinks sold through distributors increased due to the integration of
the distribution networks of CMQ and Baesa. During October 2002, we further
merged our Argentine beer and soft drinks operations, including unifying their
administration, so that they ceased to operate as separate businesses.
During 2003, as a result of our association with AmBev, we also unified
the distribution of their brands with our soft drink and beer brands. In December 2000, CMQ acquired a 99.21% equity stake in EDISA, the second
largest PepsiCo® bottler in Argentina. Beginning in August 2001, EDISA and CMQ
agreed that EDISA would manufacture and bottle the PepsiCo® brands while CMQ
would continue the sale and distribution of these brands. Subsequently, during
2003 CMQ, EDISA and Coroplás S.A. (a wholly-owned subsidiary of CMQ that
produces crown bottle tops) merged with and into CMQ, which remained the
surviving entity. In 2000, we began managing our soft drink operations in Argentina and
Uruguay as separate businesses. In November 2001, we merged our beer
operations in Uruguay conducted through FNC with our soft drink operations 38




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conducted by EUSA. This involved closing the soft drink facility owned by EUSA
and adapting FNCs brewery to accommodate the soft drink lines. Upon the
merger, EUSA remained the surviving entity in which QI(B) holds a 59.67%
ownership interest. On November 11, 2002, EUSA changed its name to FNC in
order to preserve the more recognized initials of FNC. Based on management
estimates, we currently control more than 88% of the production and sale of
PepsiCo® carbonated soft drinks in Argentina and 100% in Uruguay. Until March 2001, Baesa and EDISA sold four water brands in Argentina:
Glaciar, Villa de los Arroyos, La Moderna and Sierras del Sur. We acquired the
Glaciar and Villa de los Arroyos brands of water as part of our acquisitions of
Baesa and EDISA, and sold these mineral water businesses to Hecatón S.A.
(Hecatón) during the first quarter of 2001. As of April 2001, we no longer
consolidate the Glaciar and Villa de los Arroyos businesses in our financial
statements. Prior to December 2001, Hecatón leased the assets related to the mineral
water businesses of Glaciar and Villa de los Arroyos to Eco de los Andes, our
joint venture with Perrier Vittel, which we spun off as a separate company in
1999. On December 12, 2001, the Board of Directors of Eco de los Andes began
negotiations with Hecatón to merge the two companies. The boards of Directors
of the two companies agreed to the merger because they believed it would enable
them to take advantage of potential synergies and economies of scale. This
merger was approved by the Argentine regulators during the second quarter of
2002. Our current mineral water business in Argentina mainly comprises the Eco
de los Andes, Nestle Pureza Vital and Glaciar brands which we manage through
our 48.82% minority participation in Eco de los Andes. As a result of the
uncertain future performance of the water business in Argentina, the Company
has decided to discontinue the financing of its investment in Eco de los Andes
S.A. See Notes 3 and 4 to the Consolidated Financial Statements for details.
After the sale of the Glaciar and Villa de los Arroyos bottled water assets to
Hecatón, CMQs only bottled water sales during 2003 resulted from the sale of
minor regional brands, including La Moderna and Sierras del Sur. See Note 3 to
our Consolidated Financial Statements. Sales In 2003, net sales in Argentina for soft drinks (including water, juices
and isotonic beverages) amounted to US$139.2 million, or 22.3% of our
consolidated net sales and Quinsas volume increased 8%. The volume sold was
5,857,000 hectoliters of soft drinks and 44,000 hectoliters of bottled water
during 2003. During 2002, the Company made a strategic decision not to
participate in the B-brand segment of the market, where profitability is lower,
but to focus on the top, A-brand segment. Consequently, while our total market
share declined 1.4 percentage points to 19.5% in 2003, our share of the A-Brand
segment increased to 26%. As a result of this, and of large cost reductions
resulting from the merger of this business into the beer business, our margins
improved significantly compared to previous years. In Uruguay, we had net soft
drink sales of US$6.6 million, and sold 195,000 hectoliters of soft drinks and
water in 2003. Our market share for soft drinks in Uruguay was 9.8% according
to A.C. Nielsen. Quinsas Soft Drink & Other Beverages Sales Volume, Market Share and Net Sales in Argentina 2001
    
    2002
    
    2003Sales volume (hectoliters in thousands)
    
    
    6,438
    
    
    
    5,468
    
    
    
    5,901Market share
    
    
    21.0
    %
    
    
    20.9
    %
    
    
    19.5
    %Market share A brands
    
    
    23.0
    %
    
    
    25.4
    %
    
    
    26.0
    %Net sales (in US$ millions)
    
    
    260.0
    
    
    
    107.3
    
    
    
    139.2
 Quinsas Soft Drink & Other Beverages Sales Volume, Market Share and Net Sales in Uruguay 2001
    
    2002
    
    2003Sales volume (hectoliters in thousands)
    
    
    419
    
    
    
    239
    
    
    
    195Market share
    
    
    12.0
    %
    
    
    11.3
    %
    
    
    9.8
    %Net sales (in US$ millions)
    
    
    17.8
    
    
    
    9.3
    
    
    
    6.6
 39




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In contrast to the sales trends in our beer sales, soft drinks in
non-returnable packaging accounted for approximately 83% of our soft drink
sales in Argentina and Uruguay in 2003. The growing tendency towards sales of
our 1.5 liter, 2 liter and 2.25 liter containers, which combined accounted for
69% of our total soft drink sales, has stopped since the introduction of the
glass returnable bottle in mid-2002. This preference for large format
packaging is a result of the unfavorable economic situation in Argentina and
Uruguay, which had led consumers to opt for the more cost-effective
presentations. However, our introduction of the returnable 1.25 liter glass
bottle is reversing this trend, particularly in Uruguay where it already
accounts for 15% of our sales. Terms of Sale. Most of our sales of soft drinks and water are made on a
credit basis. Due to the effect of the Argentine economic crisis and
managements focus on reducing our working capital, average credit terms for
our soft drink sales were reduced from 21 days in December 2002 to 9 days in
December 2003. The terms of the credit extended, including the length of
credit, often depend on competitive factors and the strategic importance of the
particular outlet. Points of Sale. Our soft drink products are sold to more than 350,000
points of sale, of which 311,000 are located in Argentina and 42,000 in
Uruguay. In 2003, supermarkets accounted for approximately 18% of our volume
sold in Argentina and approximately 20% in Uruguay. Geographic Coverage At the time of its acquisition by CMQ, EDISA owned bottling facilities in
the cities of Tucumán, Rosario and Resistencia in Argentina, and its franchise
covered nine Argentine provinces. During 2001 we closed three soft drink bottling
facilities located in Rosario, Resistencia and Buenos Aires, in order to reduce
costs and eliminate redundancies in our operations. Also during 2001, we
incurred different costs through CMQ related to the introduction and further
distribution of soft drinks that allowed CMQ to begin commercial activities in
the province of Neuquén and certain areas of Río Negro and La Pampa. We
currently account for approximately 88% of PepsiCo beverage sales in Argentina
covering 18 provinces of the total 23. In Uruguay we account for 100% of
PepsiCo beverage sales and our franchise covers the whole country. Brands We own exclusive rights to produce, sell and distribute PepsiCo® soft
drink products, including Pepsi Cola®, Pepsi Cola Light®, Pepsi Twist®, Pepsi
Twist Light®, Seven-Up®, Seven-Up Light®, Mirinda®, Paso de los Toros®, Paso de
los Toros Light®, Kasfruit Juice®, Tropicana®, Gatorade® and Teem®. In
December 2001, we introduced ready-to-drink Tropicana and started manufacturing
and distributing Gatorade nationwide, so that we now distribute the three lines
of PepsiCo beverages. During 2002, we launched Pepsi Twist, and introduced the
Gatorade Fierce line of products. During 2003, we introduced Pepsi Twist
Light. Other new packaging, formats and marketing activities for the soft drink
market included: a. the development and introduction of proprietary PET bottles; b. the launching of new Mirinda and Gatorade flavors; c. the introduction of new multipack units; and d. increasing the territories reached by glass returnable formats. Sales and Distribution In 2003, approximately 32% of our sales volume in Argentina was conducted
by our own sales force, while 68% was sold through distributors. For Uruguay,
56% of our sales volume was direct, while 44% was sold through our
distributors. Direct Sales. Direct sales include sales to supermarkets, grocery stores,
convenience stores and kiosks as well as sales to the on-premise market segment
such as bars and restaurants. In Argentina, we use rented vehicles for the
distribution of our direct sales of soft drinks to large supermarket chains and
to over 57,000 retailers from our 40




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distribution centers. In 2000, we unified
our beer and soft drink distribution centers in Mar del Plata, and we did the
same for the two centers in Buenos Aires in 2001. We currently operate seven
other distribution centers in Buenos Aires, Córdoba, Rosario, Mar del Plata,
Neuquén, Corrientes and Tucumán, from which we distribute all of our brands.
In the beginning of 2004, we closed the distribution center in Trelew. Indirect Distribution. Indirect distribution includes sales to
distributors and wholesalers. Distributors may distribute our products only in
specified geographic areas, whereas wholesalers are not restricted
geographically. The following table shows, by country of operation, the approximate
percentage of total soft drink sales by volume accounted for by independent
distributors, the approximate number of distributors operating in each country
and the approximate number of points of sale covered in 2003: Soft Drink Sales through Independent Distributors Argentina
    
    UruguayPercentage of Total Sales
    
    
    68
    %
    
    
    44
    %Number of Distributors
    
    
    210
    (1)
    
    
    21Points of Sale Covered (in thousands)
    
    
    253
    
    
    
    17
   (1)
    
    Includes 18 distributors who only distribute our soft drinks and 192
distributors who distribute both our soft drinks and beer products. After the introduction of AmBevs brands in our portfolio, we unified both
AmBevs and Quilmes networks. In May 2003, we were working with 307
distributors, but as a consequence of the merger, by December 2003 we had 258.
By the end of 2004, we expect to decrease our number of distributors by 13%.
We kept the best distributor for each area, operating with larger volumes,
allowing a bigger drop size that reduced the cost of distribution per delivery,
and lowering margins compared to the previous system. We also launched a
program labeled galaxia Q, which is aimed at helping distributors implement
the best practices and reward the best performers. Because distributors are limited to sales of our products in specified
geographic areas, we generally maintain written agreements with them.
Normally, arrangements with the distributors in each of our countries of
operation are based on a standard contract that requires the distributor to
carry our products exclusively and grants it exclusive rights to sell those
products within a defined area to retailers. The contract may also prohibit
the distributor from selling to wholesalers and supermarkets to which we
reserve the right to sell products directly. The distributors return empty
bottles and crates to our plants or distribution centers and collect full ones.
When dealing with distributors, the only transportation cost we pay is the
cost of transporting soft drinks from our plants to our distribution centers. SEASONALITY Our sales in all of the southern cone markets are impacted by seasonal
changes. The largest percentage of our sales occur in the first and fourth
quarters of the calendar year during the summer season in the Southern
Hemisphere, although this is more the case for our beer sales. The following
charts show a breakdown of volume sales by quarter as a percentage of total
annual sales for each market in which we sell beer and soft drinks: Beer Volume Sales by Quarter as a Percentage of Total Annual Sales1st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th Quarter2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003Argentina
    
    
    33
    %
    
    
    30
    %
    
    
    28
    %
    
    
    18
    %
    
    
    17
    %
    
    
    18
    %
    
    
    20
    %
    
    
    18
    %
    
    
    20
    %
    
    
    29
    %
    
    
    35
    %
    
    
    34
    %Bolivia
    
    
    25
    %
    
    
    22
    %
    
    
    22
    %
    
    
    23
    %
    
    
    20
    %
    
    
    21
    %
    
    
    23
    %
    
    
    27
    %
    
    
    25
    %
    
    
    30
    %
    
    
    31
    %
    
    
    30
    %Chile
    
    
    31
    %
    
    
    31
    %
    
    
    34
    %
    
    
    17
    %
    
    
    17
    %
    
    
    20
    %
    
    
    19
    %
    
    
    20
    %
    
    
    18
    %
    
    
    32
    %
    
    
    32
    %
    
    
    28
    %Paraguay
    
    
    29
    %
    
    
    30
    %
    
    
    24
    %
    
    
    19
    %
    
    
    18
    %
    
    
    21
    %
    
    
    20
    %
    
    
    22
    %
    
    
    19
    %
    
    
    32
    %
    
    
    30
    %
    
    
    34
    %Uruguay
    
    
    28
    %
    
    
    29
    %
    
    
    23
    %
    
    
    14
    %
    
    
    15
    %
    
    
    15
    %
    
    
    17
    %
    
    
    14
    %
    
    
    17
    %
    
    
    41
    %
    
    
    41
    %
    
    
    46
    %
 41




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##### Table of Contents



Soft Drink Volume Sales by Quarter as a Percentage of Total Annual Sales1st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th Quarter2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003
    
    2001
    
    2002
    
    2003Argentina
    
    
    30
    %
    
    
    28
    %
    
    
    27
    %
    
    
    20
    %
    
    
    20
    %
    
    
    20
    %
    
    
    22
    %
    
    
    22
    %
    
    
    22
    %
    
    
    27
    %
    
    
    30
    %
    
    
    31
    %Uruguay
    
    
    33
    %
    
    
    35
    %
    
    
    24
    %
    
    
    21
    %
    
    
    23
    %
    
    
    17
    %
    
    
    19
    %
    
    
    19
    %
    
    
    18
    %
    
    
    27
    %
    
    
    23
    %
    
    
    42
    %
 RAW MATERIALS Raw Materials  Beer Beer production involves several raw materials. The main ingredient in
beer is malt, a product made from germinated and roasted barley. Malt is mixed
with water, hops and corn grits or rice in various proportions until the
desired taste is obtained. The resulting mixture is called wort. Wort is malt
that has fermented with selected yeasts to produce beer, which is then
filtered, pasteurized and bottled. Aside from these natural ingredients, beer
production also relies on other raw materials such as bottles, aluminum cans,
labels and crown tops. We develop, produce and market out of our own farms in Argentina five
barley strains that we use in our beer operations in Argentina and occasionally
in Uruguay. This allows us to exercise a significant degree of control over
the quality of our beer. The barley strains we develop and patent account for
substantially all of the barley grown in Argentina. Since 1982, we have
developed five strains of barley on an experimental farm located in Tres
Arroyos, 500 kilometers southeast of Buenos Aires. Although we develop the barley strains, we do not grow our barley
requirements. Rather, we sell the barley seed to local farmers under
arrangements pursuant to which we receive specified quantities of the harvested
product. We make any additional purchases of harvested product at prices
negotiated at the time of purchase. Barley is a commodity and the price
loosely follows the price of wheat. As described above, we purchase malt locally for our operations in
Argentina. For our operations in the other southern cone markets, we purchase
malt from third party suppliers, and occasionally from our operations in
Argentina. We use either corn grits or rice in our beer production, depending on
market prices, and purchase these products locally in each of our countries of
operation. We obtain our water requirements from wells located at each of our
breweries in the southern cone markets or from public utilities. We monitor
the quality, taste and composition of the water we use and treat it to remove
impurities and to comply with internal quality standards as well as all
applicable regulations. We do not foresee any shortage in our current water
supply. Due to the economic situation in Argentina, towards the end of 2001, we
began to purchase most of the raw materials that we used to import from local
suppliers for our Argentine business. Although we did not experience any
supply problems in 2002 and 2003, if economic conditions worsen, even our local
suppliers of raw materials may have difficulty providing such materials in the
future. Furthermore, since all commodities are pegged to international prices,
their prices are necessarily volatile and any devaluation of the currencies of
the countries in which we operate could impact our direct costs associated with
the purchase of these raw materials. We purchase most of our requirements for bottles in Argentina from local
suppliers and, on occasion, from our subsidiary FPV in Paraguay. In Chile and
in Bolivia, we purchase our bottles from local suppliers. In Paraguay, we
purchase our bottles locally from FPV, and in Uruguay, we purchase bottles from
Brazil. We purchase locally most of our aluminum can and can-end requirements
for our operations in Argentina. CBN absorbed a former subsidiary, Envases de
Aluminio Boliviano S.R.L (Enalbo). It produces all of the aluminum can
requirements for our breweries in Bolivia. We purchase aluminum cans locally
for our requirements in Chile, and we import aluminum cans from Argentina to
satisfy our requirements in Paraguay and Uruguay. 42




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As of August 2002, we stopped purchasing some of our label requirements
from Belgium. We now purchase all of our labels locally and from Argentina for
our requirements in Argentina, Bolivia, and Chile. We import labels from
various countries for our requirements in Paraguay and Uruguay. We purchase
crown tops locally and a small portion is imported from Brazil for our
requirements in Argentina, Bolivia and Paraguay; we purchase crown tops locally
in Chile; and we import crown tops from Brazil in Uruguay. Raw Materials  Soft Drinks and Water We use concentrate, syrup, water, sugar and carbon dioxide gas, as well as
containers purchased from third-party manufacturers in our production of soft
drinks. For our soft drink production, our major raw material cost is for the
purchase of PET which we buy locally, but whose price is determined based on
international prices. We obtain water from publicly available supplies such as
municipal water systems and from our own wells. We purchase most of our raw
material requirements from local independent suppliers in Argentina and
Uruguay; however, the prices charged by these suppliers may be tied to hard
currencies. Our other important cost is related to the concentrate that we purchase
from PepsiCo in local currency. Under the terms of our franchise arrangements,
we must purchase all concentrate used to make PepsiCo® soft drinks from PepsiCo
or its affiliates. In March 1998, Baesa entered into a five-year supply agreement with Alusud
Argentina S.A. (Alusud) (now Amcor, Amcor) to supply us with preforms (which
we use to blow into our plastic PET bottles). We renewed this supply contract
for an additional 5-year term until June 2008. Under this agreement, Amcor
manages and operates preform machines that we have leased to them and supplies
us with 100% of our preform requirements. In Uruguay, we also purchase our
preform requirements from Alcoa. During 2002, we introduced a returnable 1.25 liter glass bottle in the
Argentine market. We purchase these bottles locally. We also purchase our
12-ounce bottles for the on-premise segment locally and from our Paraguayan
subsidiary, FPV. None of the raw materials or supplies that we use is
currently in short supply. In the past five years, we have experienced no
material difficulties in obtaining adequate supplies of necessary materials and
expect that we will be able to continue doing so, although we may experience
shortages of some of these materials in the future due to factors beyond our
control. We do not believe that we are dependent on any one supplier for a
material portion of any of our raw materials with the exception of the
concentrate we purchase from PepsiCo. See Material Licenses and
ContractsRelationship with PepsiCo below. If necessary, we could satisfy our
raw material requirements, other than concentrate used to make PepsiCo® soft
drinks, from alternative suppliers. MARKETING IN THE SOUTHERN CONE MARKETS Marketing  Beer Product Presentations We sell 31 different brands of beer in 11 different presentations through
all major channels of distribution throughout all of our markets. The vast
majority of our beer sales in the southern cone markets are made in glass
containers of various sizes. Our most important packaging is the one-liter
returnable bottle, which represented more than 90% of our total beer sales
volume in Argentina in 2003. This reflects the price advantage of the
one-liter returnable packaging over others as well as traditional consumer
preferences. Even though we have launched different non-returnable formats
over time, the economic situation in most of our markets has led us to focus on
returnable packaging. In 2003, aluminum can sales accounted for about 2% of
our total sales volume in Argentina. Our volume of aluminum cans sold
represented 5% in Bolivia, 13% in Chile, 13% in Paraguay and 1% in Uruguay. In
Chile and Paraguay, the sales of this presentation increased significantly
once local production of cans began in late 1999. We sell 30-liter kegs in all
of our markets and 50-liter kegs in all of our markets except for Paraguay. We believe we have led packaging innovation in our markets over the years.
In 2000, we launched 0.5 liter glass and PET non-returnable bottles under
the Quilmes brand, the latter of which was the first to be introduced in the
Argentine market. We also introduced a one-liter non-returnable bottle for the
Iguana brand in Argentina. In 43




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Uruguay, we introduced Pilsen
in 0.5 liter
non-returnable bottles. In Chile, we produce Becker and Báltica beer in a
range of locally produced returnable and non-returnable bottle presentations
with twist-off tops. In 2001, we launched a special Quilmes bottle of
approximately one-third of a liter, with a sleeve decorated based on various themes;
a limited edition 5 liter keg; a variety of new designs on our Quilmes cans;
and a shaped can for the Quilmes Cristal brand as well. During 2003, we
introduced a 330cc non-returnable bottle for our brand Huari in Bolivia among
other new presentations, while in Uruguay we introduced a 960cc bottle for
Norteña. Advertising and Promotional Activity We also invest in advertising and promotional activities to support the
launch of new brands and packaging formats as well as to maintain the
visibility of our other national and regional brands. We advertise and promote
our beer primarily through television and radio campaigns and, to a lesser
extent, through other media such as newspapers and magazines with large
circulation, and billboards in strategic locations including stadiums and major
intersections. We also use sponsorship of popular and highly publicized sports
and other recreational events as well as sponsorship of individual sports teams
as a means of advertising and marketing our products. During 2001, we continued to focus our marketing efforts on sports
sponsorships including sponsorship of the national soccer team, the national
rugby squad and the national basketball team in Argentina. We also sponsored
the two most popular soccer teams in Argentina, the national soccer team in
Uruguay and various soccer teams in Bolivia. During 2002, our Quilmes brand
ceased to sponsor local soccer teams in Argentina except for a second-division
soccer team based in Quilmes, but we continue to sponsor the national soccer
team. This sponsorship was particularly important for us in 2002, a year in
which the World Soccer Championship was played. We sponsored three national
squads during this tournament, a major sporting event held every four years and
followed by hundreds of millions of viewers worldwide. During 2003, we
organized Quilmes Rock Festival again, which gathered more than 80 rock bands
and approximately 100,000 people in 7 days. We increasingly engage in various
point of purchase promotional activities at the trade level. In the
on-premise segment, we place special emphasis on ensuring that our main outlets
are easily identifiable through the use of promotional sun umbrellas, tables,
chairs and draft beer columns displaying our brand logos. In Argentina, we
have also established a trade marketing department which has been effective in
coordinating consumer promotions and joint promotions with other brands,
regions, channels and companies, in order to maximize the resources we devote
to advertising and promotional activities. Also in Argentina, we have worked
closely with our distribution network to provide proprietary merchandising
manuals, supplementary training, benchmarking activities, marketing and sales
software and advice on optimal infrastructure designs, among other actions. We regularly conduct surveys in all our markets to monitor the progress of
our products and the success of our marketing strategies. Among many varied
market research techniques, we commission monthly surveys in both the regional
and national markets in which we operate to evaluate the position of our brands
within those markets. We also regularly conduct follow-up tests to evaluate
the effectiveness of particular advertising strategies. For 2003, our total investment in beer promotion and advertising as a
percentage of sales was 8.4% in Argentina, 6.2% in Bolivia, 16.6% in Chile,
4.9% in Paraguay and 8.3% in Uruguay. As a consequence of our strategic
relationship with AmBev, our investment in advertising and promotion declined
as a percentage of revenues. Pricing There is no regulation of wholesale or retail beer prices in our countries
of operation. In pricing our products, we consider many factors, which vary in
individual importance from time to time. These factors include general
economic conditions, the success and profitability of our various product
presentations, the prices of our competitors products, the prices of
substitute products such as wine and soft drinks, the effects of inflation and
taxes as well as the level of costs. 44




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Marketing  Soft Drinks and Water Product Presentations Most of our products are sold in one-way presentations, principally PET
bottles and cans. In any franchise area, we may sell products in as many as
ten different types of packaging. PepsiCo must approve all of the packaging
formats that we use for PepsiCo® soft drinks. In 2001, we introduced a new 12
ounce bottle (replacing the 10 ounce bottle) for the on-premise segment, the
most profitable segment in the market. In 2002, we also introduced an 8-ounce
bottle for the Seven-Up and Pepsi brands, targeted at kiosks and small grocery
and convenience stores. In 2003, we introduced a proprietary PET bottle for
all the soft drink brands. In order to reduce costs associated with one of our major raw materials
used to produce plastic bottles for our soft drinks, and to make our products
more affordable, we introduced the 1.25 liter returnable glass bottle in mid
2002. This format has met with continued success; by December 2003, it
accounted for 17% of our sales. Advertising and Marketing Activity During 2003, we continued with the strategic decision not to participate
in the B-brand segment of the market. Instead, we focused on promoting our
leading brands through marketing campaigns, new product launches and packaging
innovations. In addition to the enlargement of the territories covered with
the 1.25 liter returnable glass bottle, we also (i) introduced a new Mirinda
promotional campaign and launched two new flavors; (ii) began sponsoring the
Argentine rugby team Los Pumas with our Paso de los Toros brand; (iii)
launched Pepsi Twist Light; and (iv) in relation with Gatorade, we made the
first promotion for this brand, and launched a new flavor called Berry. Also, through Pepsi, we continued sponsoring a popular Argentine soccer
team since 2002. Our relationship with PepsiCo includes a marketing element to
support the PepsiCo beverages we distribute in each of our franchise
territories. See Material Licenses and ContractsRelationship with PepsiCo
below. COMPETITION IN THE SOUTHERN CONE MARKETS Competition  Beer Factors influencing beer choice among consumers in the southern cone
markets include price and product availability. Beer producers in these
markets have responded to increased competition through promotional activities,
enhanced customer service to retailers, and differentiation through brand
presentation. Also, aside from competition with other beer brands, we compete
against producers of wine and other alcoholic beverages as well as with other
soft drink producers, although to a lesser extent. The beer business in each of our countries of operation has been
characterized by strong competition among the major brewers. The participants
in these markets include major local and international concerns with
substantial financial resources and particular industrial strengths. In recent
years these major competitors had expanded into new markets, engaged in
intensive advertising and promotional campaigns, and introduced new brands. We
have increased our advertising and promotion expenditures as new competitors
have entered the market with the objective of building brand equity and
protecting our market share. The consummation of our transactions with AmBev
in January 2003, however, has somewhat changed the competitive environment in
the southern cone markets, since this alliance combines the two largest beer
companies in Argentina, Paraguay and Uruguay. We face competition from Warsteiner Brauerei Hans Cramer GmbH & Co.
(Warsteiner), a large German brewer that serves the Argentine market from its
1.4 million hectoliter brewery at Zárate, also near Buenos Aires. We also
compete with CCU of Chile which acquired the regional Argentine breweries
Compañía Industrial Cervecería Salta S.A., Cervecería Santa Fé S.A. and
Cervecería Córdoba S.A. CCUs share of the Chilean beer market in 2003 was
approximately 89%. CCU of Argentina entered into a brewing joint venture with
Anheuser-Busch Companies, Inc. (Anheuser-Busch), the worlds largest brewer,
to produce, market and distribute Anheuser-Buschs Budweiser brand in
Argentina. The joint venture also distributes the brands produced by CCUs
Argentine breweries, which have an installed capacity of 3.2 million
hectoliters in Argentina. 45




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Subsequent to the termination of our relationship with Heineken, on
January 14, 2003, Heineken announced that it would acquire a 50% stake in IRSA
which owns 62% of CCU. As part of its purchase of the 50% stake in IRSA,
Heineken transferred the licensing agreements to produce the Heineken
brand in Chile and Argentina to CCU. Therefore, we have begun to compete with
Heineken, which is being produced and sold by CCU, in the Chilean and
Argentinean markets. Until January 31, 2003, we also faced competition from AmBev, who served
the Argentine market from its 2.9 million hectoliter brewery at Luján, near
Buenos Aires. As a condition to approving some of our transactions with AmBev,
the Argentine antitrust authorities have required AmBev to transfer this
brewery to a purchaser. See History and DevelopmentRecent
EventsRelationship with AmBevApproval of the Argentine Antitrust Authorities;
Actions by CCU. In Argentina, we have met the challenge of increased competition by giving
our sales force greater autonomy to make sales decisions more quickly in
response to location-specific needs. According to Nielsen Argentina, as a
consequence of the integration of AmBevs portfolio, our market share of the
Argentine beer market in 2003 was 80%, compared with 64.5% in 2002 and 67.9% in
2001. See History and DevelopmentRecent EventsRelationship with AmBev.
However, we cannot guarantee that the economic situation in Argentina or other
factors such as aggressive action by our competitors will not cause us to lose
market share in our most important market. Due to the acquisition of our two previous competitors, CBN and CBNSC, our
market share in Bolivia increased to approximately 98.1% in 2001 and currently
remains above 97%. Our only competition stems from imported beer and minor
local brewers. In Chile, we continue to be the new entrant challenging the leadership of
CCU. In 2003, pursuant to its rights under the Memorandum of Agreement between
Heineken and Quinsa, Heineken delivered a notice to the Company terminating the
Heineken License, under which we produced, marketed and distributed the
Heineken brand. See History and DevelopmentRecent EventsRelationship with
AmBevSettlement with Heineken. Therefore, as of June 2003, we no longer
produce nor sell the Heineken brand. Subsequent to the termination of our
relationship with Heineken, on January 14, 2003, Heineken announced that it
would acquire a 50% stake in IRSA which owns 62% of CCU. As part of its
purchase of the 50% stake in IRSA, Heineken transferred the licensing
agreements to produce the Heineken brand in Chile and Argentina to CCU.
Therefore, we have begun to compete with Heineken, which is being produced and
sold by CCU in at least some of our markets, including Chile, where Heineken
represented a significant portion of our sales. As a consequence of lower beer
sale volumes in Chile, we have re-defined our beer business in the country,
focusing on streamlining the costs of our beer operations while focusing on
repositioning our Becker brand. Through our goal of redefining Beckers
position in the market with respect to target consumers and venues, we achieved
better results than in the previous year. We cannot guarantee that we will be
able to replace our lost sales due to our loss of the Heineken brand, nor can
we assure you that our sales volume will continue to increase in the future. In Paraguay and Uruguay, our main competitor until 2003 was AmBev. Our
strategic relationship with AmBev gives us a combined market share of 94.3% in
Paraguay and 98.5% in Uruguay based on management estimates. Competition  Soft Drinks The soft drink industry is highly competitive. Our main competitors are
local bottlers of Coca-Cola® brands and bottlers of second-tier brands
(B-brands). In recent years, B-brands have substantially increased their
presence in our core markets. These actions eroded our market share in the
Buenos Aires metropolitan area, our main region in Argentina, from
approximately 27.0% in 2000 to approximately 21.1% in 2003. In 2003, our
market share in Uruguay was 9.8%. We have responded to competition in our soft
drink markets through marketing and promotions in diverse segments. B-brands have historically competed based on their price. Due to worsened
economic conditions that have affected our markets in recent years, these
brands were having greater difficulty negotiating terms with suppliers and with
clients, notably supermarkets. This led to difficulties in terms of financing
their working capital and therefore, we had expected less aggressive
competition in the future from these low-priced brands. During 2003, the lower
volatility of financial and economic indicators allowed B-brand producers to
stabilize what had been a declining 46




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market share, and that now accounts for
approximately 25% of the market. We made a strategic decision in 2002 not to
participate in the B-brand segment of the market, where profitability is lower,
focusing instead on the top, A-Brand segment. In February 2004, the spin-off of the beer (including soft drink, malt and
cider) and water business and the subsequent addition to FNC of Salus spin-off
beer business was executed. See Note 3 to our Consolidated Financial
Statements. MATERIAL LICENSES AND CONTRACTS Relationship with Heineken From 1984 to January 13, 2003, Heineken owned a 15% equity interest in our
principal subsidiary, QI(B), while we retained the remaining 85%. QI(B) Shareholders Agreement Prior to January 13, 2003, Heineken was an investor in QI(B). Our
relationship with Heineken was governed by a shareholders agreement (the
QI(B) Shareholders Agreement) that gave Heineken the right to nominate a
certain number of nominees to the QI(B) Board of Directors and to the boards of
various operating companies. Through January 13, 2003, the Board of Directors
of QI(B) contained two Heineken nominees and six Quinsa nominees. In addition,
the QI(B) Shareholders Agreement required the QI(B) Board of Directors and
shareholders to obtain the consent of Heineken (such consent not to be
unreasonably withheld by Heineken) prior to undertaking certain corporate
actions including the issuance of new QI(B) shares, changes to QI(B)s articles
of association and by-laws, reinvestment of dividends received by QI(B) from
its operating subsidiaries and a liquidation of QI(B). Heineken was allowed to export its products for sale in Argentina, Chile,
Paraguay or Uruguay only to the extent that (i) our local operating company was
unable to meet demand for those products; and (ii) such products were not
produced locally under a Heineken license. Pursuant to trademark license
agreements, we brewed the Heineken brand in Argentina beginning in 1997, and in
Chile beginning in 1999. We ceased to produce the Heineken brand as of June
2003, as further described below. Under the QI(B) Shareholders Agreement, Heineken was able to require us
to purchase Heinekens interest in QI(B) at fair value if, without Heinekens
consent, we either (a) produced or sold, other than through QI(B), a beer brand
from a non-Argentine brewery under a trademark or license and such beer was not
produced by a Heineken group company, or (b) engaged a company that did not
belong to the Heineken group for the provision of technical advice. The AmBev
transactions did not trigger this right because the AmBev beer brands were to
be produced and sold through QI(B). In any event, these restrictions ended
with the termination of the QI(B) Shareholders Agreement described below. Technical Assistance Agreements Our relationship with Heineken as a technical adviser was governed by
technical assistance agreements relating to both our brewing and malting
operations. These agreements covered issues relating to both product quality
and the maintenance of production equipment and facilities. In 2001, 2002 and
2003, fees and expenses paid for services provided by Heineken were US$1.0
million, US$1.5 million and US$0.1 million, respectively (excluding salaries
paid by us to no more than five Heineken employees in each year). These fees
and expenses were included as technical advisory service expenses within cost
of goods sold in the Consolidated Statement of Income. Termination of QI(B) Shareholders Agreement and Technical Assistance
Agreements In June 2002, we received a notice from the ICC stating that Heineken had
begun an arbitration proceeding against us and BAC alleging that the proposed
AmBev transactions violated certain contracts between Heineken and us and
asking that the arbitration panel (i) prohibit completion of the AmBev
transactions; (ii) declare that Heineken is entitled to purchase Quinsas 85%
interest in QI(B) for terms economically equivalent to the value placed by
QI(B) on the AmBev transactions; and (iii) award money damages to Heineken of
an unspecified amount. 47




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Subsequently however, on January 13, 2003, Quinsa, BAC
and Heineken, and certain of their respective affiliates entered into a
Memorandum of Agreement whereby the parties agreed to settle all disputes and
claims brought by and against each other. The Memorandum of Agreement
provided, among other things, for (i) the purchase by BAC from Heineken of all
the shares of QI(B) held by Heineken for US$102.7 million; (ii) the declaration
and payment by QI(B), prior to January 15, 2002, of a dividend in the amount of
US$26.5 million, 15% of which would go to Heineken; (iii) the termination of
the QI(B) Shareholders Agreement between QI(B), Heineken and Quinsa; and (iv) the
termination of the Technical Assistance Agreements between Heineken and QI(B)
or its operating companies. Transfer of Heineken License In addition, under the Memorandum of Agreement, Heineken had the option
until December 31, 2004 to terminate its license agreements with QI(B) or its
relevant operating company granting the licensee the rights to produce, sell
and distribute Heineken beer in the licensees territory. Heineken
subsequently delivered a notice to the Company terminating the trademark
license as of June 17, 2003. See History and DevelopmentRecent
EventsRelationship with AmBevSettlement with Heineken. Under the QI(B) Shareholders Agreement, we were only able to launch a new
beer product or enter into a new marketing venture in Argentina, Paraguay or
Uruguay if we conducted our business through QI(B) or one of its subsidiaries.
In addition, the QI(B) Shareholders Agreement required the QI(B) Board of
Directors and shareholders to obtain the consent of Heineken (such consent not
to be unreasonably withheld by Heineken) prior to undertaking certain corporate
actions including the issuance of new QI(B) shares, changes to QI(B)s articles
of association and by-laws and the reinvestment of dividends received by QI(B)
from its operating subsidiaries. With the termination of this Shareholders
Agreement, we have more flexibility to evaluate new product and marketing
ideas. Furthermore, the QI(B) Board of Directors is not dependent on the
consent of an outside party with respect to the taking of certain actions. Our alliance with Heineken, including all of the related legal agreements
and licenses, terminated in 2003. The termination of these agreements paved
the way for Heineken to compete with us directly. We believe the Heineken
brand to be the largest brand in the premium segment of the market in Argentina
and Chile, according to our internal estimates. However, Heineken accounted
for less than 2% of our sales in Argentina, and approximately 22% of our sales
in Chile. These two countries accounted for the vast majority of Heinekens
sales in the southern cone markets. We are currently evaluating possible
options to add a new premium brand to our brand portfolio. Nonetheless, the
loss of sales from Heineken did not have a significant impact on our results in
2003. In Chile, although total volumes decreased 3% for the year, this was
exclusively due to the loss of the Heineken brand. In fact, the rest of our
portfolio grew by 11.1% during 2003. This was achieved by defining a new role
for Becker and focusing marketing actions on that brand. In 2003, Heineken
acquired a 50% stake in the controlling company of CCU and entered into licensing
arrangements to permit the subsidiary to manufacture and sell Heineken beer in
Chile. Although in 2003, our results of operations were not materially
impacted by these developments, we cannot assure that future operations will
not be adversely affected by them. Relationship with PepsiCo In December 1999, PepsiCo agreed to grant us exclusive bottling rights for
each of our franchise territories for periods exceeding ten years in duration.
Each franchise agreement requires us to purchase the concentrate and syrups
used to produce PepsiCo® soft drink and fruit juice products from designated
affiliates of PepsiCo. The price we pay for concentrate is calculated on the
basis of the price per unit sold to retailers within a given territory (net of
sales taxes, credit for non-returnable bottles and discounts). In addition,
each franchise agreement requires that we meet certain standards established by
PepsiCo. The agreements governing our relationship with PepsiCo include franchise
commitment letters with PepsiCo regarding the sale of PepsiCo® soft drink
products in each of our franchise territories, and exclusive bottling
arrangements regarding certain trademarks of PepsiCo. Our franchise commitment
letters operate concurrently with these exclusive bottling arrangements and
terminate automatically if the corresponding bottling arrangement expires or is
terminated. 48




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Our franchise commitment letters with PepsiCo require us to attain minimum
volume and market share levels of the cola market, flavored soft drink market
and total markets, as well as minimum levels of nominal and effective
distribution. While these goals are negotiated on an annual basis, they vary
by franchise territory. Similarly, our exclusive bottling arrangements require
us to meet specified market share, distribution and expenditure targets for the
PepsiCo® products that are covered by the corresponding franchise commitment
letters. Our agreements with PepsiCo define the amount that we are required to
spend for marketing activities, usually as a percentage of total concentrate
purchases. These agreements also establish a framework for funding marketing
expenditures in each of our franchise territories. Pursuant to these
agreements, each franchise territory develops, in cooperation with PepsiCo, an
annual marketing plan to promote PepsiCo® products in that territory. The
annual marketing plan defines the types and amounts of advertising and
promotional expenses and investments in marketing-related assets that we are
required to fund in each territory. In our franchise territories, PepsiCo sets
aside
a percentage of the amount we pay for concentrate to support these
marketing activities. PepsiCo either gives us these amounts or purchases
services or goods directly from third parties, in both cases to support
marketing activities. If we fail to submit our annual marketing and
advertising plans each year to PepsiCo for its review and approval, or fail to
carry out these plans in all material respects, PepsiCo is entitled to
terminate the franchise agreement. Any termination of our franchise
arrangement with PepsiCo would severely impact our soft drink operations. See
also Item 3. Key InformationRisk FactorsRisk Factors Relating to QuinsaWe
face competition that threatens our market share. REGULATION Production and Marketing Unlike many other countries, the southern cone countries do not heavily
regulate the production and marketing of alcoholic beverages. We are not
required to comply with any significant regulations, other than with standards
imposed by food and health regulatory agencies, applicable to our production
and marketing of beer, soft drinks and bottled water. The drinking age is 18 years in Bolivia, 20 years in Paraguay and 18 years
in Chile and Uruguay. In Argentina, a federal law prohibits the sale of
alcoholic beverages to persons under 18 years of age. The law also establishes
specific rules with respect to the advertising of alcoholic products, including
prohibiting the participation of underage persons in such advertising or any
advertising message that alcohol improves either physical, sexual or
intellectual performance. This law also requires that all alcoholic drink
packaging and advertising state that alcoholic beverages may not be sold to
persons under the age of 18 and that such beverages should be drunk in
moderation. As of December 2003 it is forbidden to sell beer in kiosks in
Buenos Aires city. In the province of Buenos Aires, a license is required to
sell alcohol. Paraguayan law bans any portrayal of children, family life, the
work environment and sports in alcoholic beverage advertisements, and also
regulates the form, duration and time of the day during which the
advertisements can be shown on TV. In Paraguay, advertisement can only be
shown on TV after 8 p.m. In Bolivia, advertisements cannot show people
actually drinking beer, they cannot involve children and they must include a
warning against excessive drinking. In Chile, advertisements can only be shown
on TV after 10 p.m., and licenses are necessary for on-premise consumption. In
Uruguay, there are no legal restrictions regarding advertisements. However,
there is an agreement between advertisers and the government that the
advertisement should encourage moderate consumption, be adult-oriented and
should not appear in childrens or youth programming. Pricing Controls, Excise Taxes and Import Tariffs There are no formal governmental price controls on the wholesale or retail
prices of beer, soft drinks and water in our countries of operation. Sales of
our products are subject to a variety of excise and value-added taxes that are
generally passed on to consumers. During 2003, the Bolivian government
increased the excise tax on beer by 0.6%. In addition, in January 2004, this
tax was further increased by 3.2%. This is a fixed amount calculated on a per
hectoliter basis. As of 2003, this tax was adjusted based on inflation. In
2003, we paid approximately US$76.0 million in excise taxes on a consolidated
basis. Any increase in such taxes may have an adverse effect on the
consumption of our products and, to the extent we are not able to pass on such
taxes to consumers, may have a 49




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material adverse effect on our financial
condition and results of operations. Our imports and sales of beer and soft
drink products and ingredients across the borders of our countries of operation
are subject to customs tariffs and duties. In 2003, we paid US$2.4 million in
such charges on a consolidated basis. Operation of the Mercosur Treaty, a
common market agreement among Argentina, Brazil, Paraguay and Uruguay, should
result in a gradual decrease in such tariff charges. Environmental Regulation; Occupational Safety and Quality Control Our operations are subject to national and local environmental laws and
regulations in each of the southern cone countries. The level of environmental
regulation and enforcement of such regulation is increasing in each of our
markets. All of our business units already comply with the environmental
regulations of their respective jurisdiction, so that incremental investments
in this area are marginal. However, we cannot guarantee that there will not be
significant changes in the regulatory environment. During 2003, our
investments in this area were not material, accounting for no more than 1% of
our capital expenditures. In addition to efforts to comply with environmental regulation, we also
undertook efforts to improve the quality control systems in our plants and
distribution centers as well as the implementation of occupational safety
measures in Argentina. We intend to continue to focus on these areas in the
future. ORGANIZATIONAL STRUCTURE We are a Luxembourg holding company that operates through our
subsidiaries, principally QI(B), in which we hold an 87.63% interest.
QI(B)
has direct and indirect holdings in our various operating subsidiaries in
Argentina, Bolivia, Chile, Paraguay and Uruguay. These holdings range from
99.69% and 100% in CMQ and in our Chilean subsidiary, Cervecería Chile,
respectively, to as low as 57.97% in Colosas S.A., one of our Paraguayan
subsidiaries. QI(B) owns a 48.82% interest in Eco de los Andes, a company that
sells mineral water in Argentina. Pursuant to the strategic alliance agreement
with AmBev, the Company acquired 100% of Linthal in exchange for 26,388,914
newly issued Quinsa Class B shares. We conduct our operations through various subsidiaries in which, in
certain cases, minority shareholders hold significant interests. Most notably,
Heineken held 15% of the capital stock of our principal subsidiary, QI(B) until
January 13, 2003. Heinekens former stake was acquired by AmBev and BAC.
Subsequently, Quinsa contributed the assets it received from AmBev as a result
of our strategic alliance, to QI(B). Therefore Quinsa currently owns 87.63% of
QI(B), while AmBev owns an indirect 7.05% and BAC owns 5.32%. See History
and DevelopmentRecent EventsRelationship with AmBevSettlement Agreement with
Heineken. 50




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The following chart shows our corporate structure and our ownership
interest in our principal operating subsidiaries in Argentina, Bolivia, Chile,
Paraguay and Uruguay as of June 16, 2004: (FLOW CHART) * QI(B) holds its interest in Cervecería Chile directly and through
wholly-owned U.S. and Chilean non-operating subsidiaries. * The ownership interest information provided above corresponds to voting
control. For a list of our direct and indirect equity holdings in each of the
companies which form the Quinsa group as of December 31, 2003, see Note 5 to
the Consolidated Financial Statements. 51




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PROPERTY, PLANT AND EQUIPMENT Property Our properties consist primarily of brewing, malting, bottling,
distribution and office facilities in Argentina, Bolivia, Chile, Paraguay and
Uruguay. There are no major encumbrances on our properties and we have no
major leased properties. Set forth below by country and type of facility is
certain information, as of December 31, 2003, regarding our principal
production facilities, all of which we own. Type of Facility
    
    Location
    
    Technical Capacity
    
    Average Utilized (1)(hectoliters in thousands)Brewery
    
    Quilmes  Argentina
    
    
    5,050
    
    
    57%Brewery
    
    Zárate  Argentina
    
    
    4,400
    
    
    65%Brewery
    
    Luján  Argentina
    
    
    2,900
    
    
    55%Brewery
    
    Mendoza  Argentina
    
    
    2,000
    
    
    58%Brewery
    
    Corrientes  Argentina
    
    
    1,700
    
    
    55%Beer Bottling Facility
    
    Tucumán  Argentina
    
    
    1,200
    
    
    66%Malting Plant
    
    Tres Arroyos  Argentina
    
    
    93,000
    (2)
    
    97%Malting Plant
    
    Llavallol  Argentina (3)
    
    
    25,000
    (2)
    
    95%Brewery
    
    La Paz  Bolivia
    
    
    1,058
    
    
    80%Brewery
    
    Taquiña  Bolivia
    
    
    626
    
    
    29%Brewery
    
    Santa Cruz  Bolivia
    
    
    640
    
    
    82%Brewery
    
    Santa Cruz  Bolivia (4)
    
    
    572
    
    
    20%Brewery
    
    Huari  Bolivia
    
    
    199
    
    
    72%Brewery
    
    Tarija  Bolivia
    
    
    38
    
    
    57%Brewery
    
    Santiago  Chile
    
    
    759
    
    
    55%Brewery
    
    Ypané  Paraguay
    
    
    2,208
    
    
    67%Brewery
    
    Montevideo  Uruguay
    
    
    831
    
    
    41%Brewery
    
    Minas  Uruguay
    
    
    383
    
    
    32%Soft Drinks
    
    Montevideo  Uruguay
    
    
    708
    
    
    27%Soft Drinks
    
    Buenos Aires South  Argentina
    
    
    10,500
    
    
    39%Juices
    
    Buenos Aires South  Argentina
    
    
    410
    
    
    10%Isotonics(5)
    
    Buenos Aires  Argentina
    
    
    460
    
    
    27%Soft Drinks
    
    Córdoba  Argentina
    
    
    2,100
    
    
    38%Soft Drinks
    
    Tucumán  Argentina
    
    
    2,400
    
    
    30%Soft Drinks
    
    Trelew  Argentina
    
    
    570
    
    
    21%
   (1)
    
    Demand for our products is subject to marked seasonal fluctuations.
Consequently, the utilized capacity of our production facilities during
peak months may be considerably higher than the averages shown above. In
addition, average utilized capacity does not necessarily reflect capacity
utilization for any particular presentation.(2)
    
    Measured in tons.(3)
    
    As a condition to their approval of our alliance with AmBev, the
Argentine antitrust authorities have required us to sell this facility or
lease it to third parties for at least 10 years.(4)
    
    Closed in April 2004.(5)
    
    We own only the plant and the equipment at this facility, which we use as
a filling line for the Gatorade® brands we produce. We do not own the
underlying land, although we are not required to pay any amounts under a
lease for use of such land. During 2003 we changed the way we measure the capacity of the soft drink
plants and this is the reason for the increase in capacity. To the best of our knowledge, there are no existing environmental issues
affecting our use of these facilities. Plant Investment/Productivity Gains From January 1, 2001, through December 31, 2003, we invested approximately
US$108.4 million (excluding expenditures for bottles, crates and acquisitions)
to modernize and expand the capacity of existing facilities. In 52




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2004, we
intend, business conditions permitting, to spend approximately US$66 million
for capital expenditures including bottles and crates. Capital expenditures in
2003, excluding bottles, crates and acquisitions were US$25.3 million. These
were related primarily to the purchase of coolers to place at points of sale
and the installation of a filling line
for our soft drink business in Argentina. Other than these expenditures,
there were no significant investments to expand capacity. See Item 5.
Operating and Financial Review and ProspectsLiquidity and Capital
ResourcesCapital Expenditures. After the completion of our strategic
relationship with AmBev, we in fact closed AmBevs brewery in Paraguay and one
of their plants in Uruguay. In addition, as a condition to the approval of our
alliance with AmBev, the Argentine regulatory authorities have required us to
sell AmBevs brewery in Argentina. See History and DevelopmentRecent
EventsRelationship with AmBevApproval of the Argentina Regulatory
Authorities; Actions by CCU. Increased brewing capacity in recent years has allowed us to participate
in periods of beer consumption growth. Recent and future increases in capacity
should allow us to meet customer demand although there may continue to be short
periods, particularly during the high summer season, when we are constrained
for capacity. Since our business market is seasonal, we typically advance
production ahead of the high season and store our surplus until it is sold. We
have been able to increase productivity in recent years with more
technologically advanced facilities. The strength of our cash flow from
operations in past years has allowed us to finance capital expenditures with
relatively low levels of long term debt. However, given the volatility of the
markets we do business in, this may not continue to be the case in the future.
Our investments for 2004 are projected to include the expansion of capacity at
our Tres Arroyos malting plant in Argentina by approximately 35%, with an
investment of approximately US$8.0 million. This will be completed by the year
2005. In Bolivia, as a consequence of having closed our Ducal plant in Santa
Cruz, we are expanding the capacity of our other plant in that city by
approximately 30% with an investment of US$3.2 million. Further, we are
analyzing the possibility of refurbishing our glass bottle production facility
in Paraguay (FPV) which will require an investment of between US$10 million and
US$15 million. This project would be finalized in 2005. With regard to our soft drinks business, the only capacity expansion we
completed in 2002 was related to the introduction of our returnable glass
bottles. In 2003, our investments were mostly related to bottles and crates,
and to the purchase of a new filling line for Tucumán. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS INTRODUCTION The following Operating and Financial Review and Prospects should be read
together with Item 3. Key InformationSelected Financial Data and our
Consolidated Financial Statements and related notes appearing elsewhere in this
annual report. The Consolidated Financial Statements have been prepared in
accordance with Luxembourg GAAP, which differs in certain significant respects
from U.S. GAAP. Note 28 to the Consolidated Financial Statements provides a
description of the principal differences between Luxembourg GAAP and U.S. GAAP,
as they relate to us, and a reconciliation to U.S. GAAP of shareholders equity
as of December 31, 2003 and 2002 and net income (loss) for the years ended
December 31, 2003, 2002 and 2001. The differences involve methods of measuring
the amounts shown in the Consolidated Financial Statements as well as
additional disclosures required by U.S. GAAP. The reconciliation does not
include disclosure of all information that would be required by U.S. GAAP and
Regulation S-X of the Exchange Act. This Operating and Financial Review and Prospects discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
These forward-looking statements include, among others, those statements
including the words expects, anticipates, intends, believes and similar
language. The actual results may differ materially from those anticipated in
these forward-looking statements as a result of many factors, including those
set forth elsewhere in this annual report. Principal differences between Luxembourg GAAP and U.S. GAAP We prepare our consolidated financial statements in accordance with
Luxembourg GAAP which differ in certain significant respects from U.S. GAAP.
Such differences involve methods of measuring the amounts shown in the
consolidated financial statements as well as additional disclosures required by
U.S. GAAP and Regulation S-X of the 53




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Exchange Act. Our Consolidated Financial
Statements include solely a reconciliation of net income (loss) and
shareholders equity to U.S. GAAP. Pursuant to Item 17 of Form 20-F, such
reconciliation does not include disclosure of all information that would be
required by U.S. GAAP and Regulation S-X of the Exchange Act, with the
exception of the presentation of the statement of other comprehensive income as
required by SFAS No. 130, Reporting Comprehensive Income. See Note 28 to our
Consolidated Financial Statements for details. The principal differences between Luxembourg GAAP and U.S. GAAP, as they
relate to us, are summarized as follows:  a.
    
    the application of SFAS No. 52 to the translation into U.S. dollars
of the financial statements of our foreign subsidiaries;b.
    
    the reversal of the impairment charge of intangible assets
recognized under Luxembourg GAAP during 2002 and the related effect on
amortization expense in 2003;c.
    
    the reversal of the write-down of inventories recognized under
Luxembourg GAAP in 2002 and the related impact on reported earnings
during 2003;d.
    
    the recognition of certain impairment losses under U.S. GAAP when
the criteria for recognizing impairment losses for assets held for
disposal, as specified in Staff Accounting Bulletin No. 100 and SFAS
No. 121, were met, and the reversal of the subsequent partial
restoration recognized under Luxembourg GAAP in 2003;e.
    
    certain differences in the application of the purchase method of
the acquisition of businesses, including:  1.
    
    the reversal of certain liabilities pertaining to
restructuring charges recognized as part of the purchase price
allocation of certain acquisitions because the criteria for
recognizing such liabilities, as specified in EITF 95-3 were not
met;2.
    
    the reduction of goodwill for tax benefits derived from a
valuation allowance associated with our acquisition of Baesa under
U.S. GAAP while such benefits were charged to income under
Luxembourg GAAP;3.
    
    the application of EITF 99-12 in determining the purchase
price under U.S. GAAP in connection with the acquisition of Linthal;4.
    
    the recognition of the costs of registering and issuing our
shares in connection with the acquisition of Linthal as a reduction
of the otherwise determinable fair value of the securities in
accordance with FAS No. 141, while under Luxembourg GAAP these costs
were considered as part of the purchase price in accounting for the
acquisition; and5.
    
    the recognition under U.S. GAAP of identifiable intangible
assets, apart from goodwill, and their related deferred tax
liabilities.  f.
    
    the accounting of certain business combinations accounted for as
purchases under Luxembourg GAAP while they were accounted for in a
manner similar to a pooling-of-interests under U.S. GAAP;g.
    
    the recognition of treasury stock as a separate component of
shareholders equity under U.S. GAAP;h.
    
    the recognition of certain restructuring costs under U.S. GAAP when
the criteria for recognizing restructuring charges, as specified in the
EITF 94-3, are met;i.
    
    the retroactive adjustment, as required by APB No. 18, to reflect
investment in CBN under the equity method of accounting;j.
    
    other minor and not significant adjustments presented on an
aggregated basis, including: 54




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1.
    
    the deferral of certain pension costs over the remaining
service years of the beneficiaries under U.S. GAAP;2.
    
    the deferral and amortization in 5 years of certain technical
fees incurred in the construction of a plant under Luxembourg GAAP
while under U.S. GAAP such costs were capitalized as part of the
cost of the asset and are being depreciated on a straight-line basis
over periods ranging from 15 to 50 years;3.
    
    the deferral of certain advertising and other marketing costs
under Luxembourg GAAP while they are expensed as incurred under U.S.
GAAP; k. the effect on deferred income taxes of the foregoing reconciling
items, as appropriate; and l. the effect on minority interest of the foregoing reconciling items,
as appropriate. We have elected to present the statements of cash flows in the primary
financial statements using the guidance set forth in SFAS No. 95 (Statement of
Cash Flows) but using Luxembourg GAAP numbers. Since we consider all highly
liquid investments with original maturities of three months or less to be cash
equivalents, no differences exist between cash flows from operating, investing
and financing activities reported in the primary financial statements and cash
flows from operating, investing and financing activities that would be reported
in a statement of cash flows prepared using U.S. GAAP numbers. There are additional distinctions between Luxembourg GAAP and U.S. GAAP.
First, certain significant differences exist between Luxembourg GAAP and U.S.
GAAP in connection with the presentation of balance sheet items. Generally,
under Luxembourg GAAP, items with a lower degree of liquidity are disclosed
before items which have higher convertibility into cash. In addition, certain
captioned items differ from balance sheets presented under U.S. GAAP formats.
For U.S. GAAP purposes, at December 31, 2002, because our financial debts were
callable by the creditors, we had not obtained a permanent waiver and there was
no assurance that an acceleration would not take place within a one-year
period, classifying the entire outstanding balance as a current liability.
Second, certain significant differences exist between Luxembourg GAAP and U.S.
GAAP in connection with the presentation of statement of income line items. In
addition, certain financial results and most of other income and expense items
included in our Luxembourg GAAP financial statements would be included in the
determination of operating income (loss) for U.S. GAAP purposes. OPERATING RESULTS We are a holding company that provides beer, soft drinks and water across
the southern half of Latin America in Argentina, Bolivia, Chile, Paraguay and
Uruguay through our majority-owned subsidiary QI(B) and its direct and indirect
subsidiaries. Factors such as the impact of price changes in our products,
inflation, currency fluctuations and the economic, monetary, fiscal and
political policies of the governments of the countries in which we operate are
important in determining our financial results. In addition, our critical
accounting policies also have a significant effect on our consolidated results
of operations. Impact of Changes in our Prices and Changes in Volumes Sold on our Net Sales Our consolidated net sales were US$622.7 million in 2003, compared to
US$468.6 million in 2002 and US$938.7 million in 2001. The improvement in 2003
compared to 2002 was principally the result of higher average prices for beer
and soft drinks combined with increased volumes sold due to strong market
performance in Argentina and the contribution of volumes sold by AmBevs former
subsidiaries in Argentina, Paraguay and Uruguay since February 2003.
Appreciation of the peso also helped increase prices in U.S. dollar terms. The
decline in 2002 compared to 2001 was principally due to the devaluation of the
Argentine peso, which caused our average sale prices to decline when measured
in U.S. dollars, and to lower beer volumes sold in Argentina and Paraguay.
Thus, for example, in our largest market, Argentina, the peso rate per U.S.
dollar fluctuated significantly, being at P$1.00, P$3.36 and P$2.93 on
December 31, 2001, 2002 and 2003, respectively. 55




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Impact of Inflation Our operations are carried out in countries that have experienced high
inflation and/or governmental price control in the past. Our sales and the
majority of our operating costs in each of Argentina, Bolivia, Chile, Paraguay
and Uruguay are denominated in the currency of the respective countries, while
borrowings and purchases of machinery and equipment are usually made in U.S.
dollars. For periods when the rate of devaluation of the local currency
against the U.S. dollar exceeds the rate of inflation, our income statement
amounts tend to be lower when translated into U.S. dollars. In fact, from 2001
to 2002, when such a trend occurred in the majority of our markets, it resulted
in the reduction of our sales prices measured in U.S. dollars. Even though the
rate of inflation in Argentina has begun to return to previous levels,
declining to 4% in 2003 and to 1% during the first quarter of 2004, there can
be no assurance that such recent levels will be maintained in the future and
that significant inflation will not occur again in the southern cone markets. The following table provides information relating to the rates of
inflation, as measured by certain national consumer price indexes, as well as
the rates of devaluation or appreciation in the southern cone markets for 2001
through 2003: 2001
    
    2002
    
    2003Argentina(Deflation)/Inflation
    
    
    (1.6
    %)
    
    
    40.9
    %
    
    
    3.7
    %Currency (Devaluation)/Appreciation
    
    
    0
    %(1)
    
    
    (236.3
    %)
    
    
    13.0
    %BoliviaInflation
    
    
    0.9
    %
    
    
    2.5
    %
    
    
    3.9
    %Currency (Devaluation)
    
    
    (6.7
    %)
    
    
    (9.8
    %)
    
    
    (4.5
    %)ChileInflation
    
    
    2.6
    %
    
    
    2.8
    %
    
    
    1.1
    %Currency (Devaluation)/Appreciation
    
    
    (15.1
    %)
    
    
    (9.0
    %)
    
    
    17.7
    %ParaguayInflation
    
    
    8.4
    %
    
    
    14.6
    %
    
    
    9.3
    %Currency (Devaluation)/Appreciation
    
    
    (33.2
    %)
    
    
    (52.1
    %)
    
    
    15.3
    %UruguayInflation
    
    
    3.6
    %
    
    
    25.9
    %
    
    
    10.2
    %Currency (Devaluation)
    
    
    (18.1
    %)
    
    
    (84.3
    %)
    
    
    (7.8
    %)
   Note:
    
    Currency devaluation/appreciation figures are based on official U.S.
dollar exchange rates and are derived by dividing the exchange rate at
year-end for the current period by the exchange rate at year-end for the
previous period.  (1)
    
    Beginning December 21, 2001, all working days until the end of the year
were declared bank holidays. On January 11, 2002, the peso began trading
on a floating rate exchange system, after ten years of dollar-peso parity
under the Convertibility Law which had fixed the exchange rate at P$1.00
to US$1.00. Because an exact exchange rate between the peso and dollar
did not exist at the balance sheet date, the first subsequent rate (P$1.70
per US$1.00) was used for translating monetary assets and liabilities of
the Argentine subsidiaries at December 31, 2001. With the floating rate
system, the peso devalued significantly in 2002, and as of December 31,
2002, the exchange rate was P$3.36 per US$1.00. As of December 31, 2003,
the exchange rate was P$2.93 per US$1.00. Impact of Currency Fluctuations Currency fluctuations have a large impact on our revenues when measured in
U.S. dollars. Our net sales are realized, and a portion of our cash costs and
expenses are incurred locally and are thus denominated in local currency.
However, on a consolidated basis, approximately 35% of our cash costs and
expenses (i.e. excluding depreciation) for 2003 were costs either incurred in
hard currencies or pegged to the U.S. dollar. Most of these costs were related
to raw materials purchased from other southern cone markets. In recent years the peso rate per U.S. dollar has fluctuated
significantly, being at P$1.00, P$3.36 and P$2.93 on December 31, 2001, 2002 and
2003, respectively. While the Argentine economic situation appears to have
stabilized, no assurance can be given that this will continue in the future.
Because we currently only hedge our foreign exchange exposure on a limited
basis, our results of operation and liquidity may be adversely affected by
exchange rate movements. 56




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Financial statements of our foreign consolidated and unconsolidated
subsidiaries have been translated into U.S. dollars on the basis of the
financial statements of such subsidiaries expressed in the local currency of
the country of origin. The method of translation involves the translation of
property, other long-lived assets, long-term liabilities and related statement
of income accounts at historical rates of exchange. Additionally, net monetary
asset and liability related translation adjustments are included in our
financial results in the period in which they occur. Assets and liabilities
denominated in foreign currencies are translated at the prevailing exchange
rates as of year-end. Transactions denominated in foreign currencies are
translated into U.S. dollars at the prevailing exchange rates on the date of
the transaction settlement. See Note 28 to the Consolidated Financial
Statements for a description of foreign currency translation differences
between Luxembourg GAAP and U.S. GAAP. Impact of Economic, Fiscal, Monetary and Political Policies on Our Operations Economic Crisis in Argentina We carry out a significant portion of our business in Argentina, through
our principal subsidiary, CMQ. Starting in the fourth quarter of 1998 and
until the end of 2002, the Argentine economy went through a recession. During
the second half of 2001, Argentinas recession worsened significantly,
precipitating a political and economic crisis. On December 3, 2001, the
Argentine government instituted measures restricting the availability and
circulation of cash and the transfer of foreign currency abroad. On December
21, 2001, the government declared a bank holiday that lasted through the end of
2001, and subsequently defaulted on its sovereign debt. On January 6, 2002, the Argentine Congress enacted the Public Emergency
Law, which amended certain provisions of the Convertibility Law and eliminated
the requirement that the Argentine Central Banks reserves in gold and foreign
currency at all times be equivalent to at least 100% of the monetary base. The
Public Emergency Law abolished the U.S. dollar to Argentine peso parity regime
that had been in place for a decade, and granted the executive branch the power
to set the exchange rate between the peso and foreign currencies and to issue
regulations related to the foreign exchange market. The situation in Argentina led to a significant decrease in the demand for
goods and services and a large rise in the level of unemployment. Listed below
are some of the measures adopted by the government in Argentina over the past
two years. Transfers outside Argentina Beginning on December 3, 2001, the Argentine government imposed a number
of monetary and currency exchange control measures that included restrictions
on the free disposition of funds deposited with banks and tight restrictions on
transferring funds abroad, including for purposes of paying principal and
interest on debt and dividends. This affected CMQs ability to pay dividends
to us as well as CMQs ability to make payments on its indebtedness to foreign
creditors. Subsequent to the date of our Consolidated Financial Statements for
the fiscal year 2002, restrictions requiring the Central Banks prior
authorization for the transfer of funds abroad in order to make payments of
principal and/or interest were progressively reduced from January to May 2003.
Since July 2003, the Central Bank has allowed transfer of funds abroad to
prepay principal under financial debts, as long as the amount so prepaid does
not exceed the present value of the debt, calculated using a discount rate
equal to the rate implied in U.S. currency future transactions (180 days)
carried out in regulated local markets. Also, unpaid interest may be paid
abroad if such payment relates to obligations that were in place during 2002 or
is related to a restructuring process. The Central Bank has authorized, within
certain limitations and for the period beginning on August 18, 2003 and ending
on December 31, 2004, the acquisition of foreign currency to be held abroad
until used to pay down debt. Limitations include the amounts that can be
acquired, which are a function of the total amount of debt restructured as from
August 18, 2003, and the fact that the foreign currency must be used to pay
debt no later than 180 days after having been acquired. Also, funds may be
transferred abroad to pay interest and principal maturities on debts, on the
day of maturity. In addition, funds may now be transferred abroad without
previous authorization of the Central Bank in order to pay dividends
corresponding to prior periods provided that we have audited financial
statements from independent accountants for such periods. 57




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Deposits in Argentine financial institutions Beginning on February 3, 2002, deposits in U.S. dollars or other foreign
currencies in Argentine financial institutions were converted to pesos at the
exchange rate of P$1.40 per US$1.00 or its equivalent in such other currency.
This did not impact our results of operation in Argentina. Conversion of foreign currency denominated debts governed by Argentine law Debts in U.S. dollars or other foreign currencies in the Argentine
financial system were converted to pesos at the exchange rate of P$1.00 per
US$1.00 or its equivalent in another currency. As of February 3, 2002, the
CER plus an interest rate was applied to
these debts. The CER is an index that measures the daily rate of change
derived from the monthly change in the Consumer Price Index (CPI) published by
the INDEC. However, because we have no material indebtedness governed by
Argentine law, this policy did not impact our results of operation in any
significant way. Credits and debts not related to the banking sector Obligations, unrelated to the banking sector, to pay sums denominated in
U.S. dollars or other foreign currency, were, regardless of their origin or
nature, converted to pesos at a P$1.00 to US$1.00 exchange rate. The CER was
applied to these balances as of February 3, 2002. If application of this
provision led to the resulting value of the item, good or service being higher
or lower at the time of payment, the affected party could request a fair
readjustment of the price. If no agreement could be reached, the case was
submitted to the Argentine courts. However, because we had no material credits
and debts of this nature this provision did not impact our results of
operations in any significant way. Deferral of the deductions from income tax The net negative results caused by the devaluation of the peso, which
occurred on January 11, 2002, are deductible from taxable income over a
five-year period beginning in 2002. Impact on financial information In accordance with Luxembourg GAAP, at December 31, 2003 monetary assets
and liabilities of our Argentine subsidiaries were translated at the exchange
rate of P$2.93 per US$1.00 (P$3.36 per US$1.00 as of December 31, 2002). As a
result, we recorded a net translation profit of US$7.2 million during 2003, as
compared to a loss of US$22.9 million in 2002. Recent Improvements During 2003, the economic situation in Argentina evolved more favorably,
with the Argentine peso appreciating relative to the U.S. dollar and a marked
deceleration in the rate of inflation (in particular in the case of wholesale
prices, which went from 118% in 2002 to 2% in 2003). In addition, the IMF
approved a debt rollover plan on January 24, 2003, and agreed to provide a
short-term credit line to Argentina to repay its debts to multilateral
organizations that could not be postponed through August 2003. The IMF agreed
to grant a one-year extension on the US$3.7 billion of payments due to them.
The agreement clears the way for the multilateral development banks to resume
their support of social programs following Argentinas recent payment of
outstanding obligations to them. However, Argentinas short-term ability to
stimulate economic growth, ameliorate social unrest and repay its debt is
likely to depend on external financial assistance. To date, the IMF and other
multilateral and official-sector lenders have indicated an unwillingness to
provide any significant amount of financial aid until a sustainable economic
program has been presented and until defaulted foreign debt is restructured.
The future evolution of the economic situation in Argentina could require the
Argentine government to modify measures taken or issue additional regulations.
As a result, our Consolidated Financial Statements should be read in light of
these circumstances. 58




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Discussion of Critical Accounting Policies In connection with the preparation of the financial statements included in
this document, we have relied on variables and assumptions derived from
historical experience and various other factors that we deemed reasonable and
relevant. Although we review these estimates and assumptions in the ordinary
course of business, the portrayal of our financial condition and results of
operations often requires our management to make judgments regarding the
effects of matters that are inherently uncertain on the carrying value of our
assets and liabilities. Actual results may differ from those estimated under
different variables, assumptions or conditions. In order to provide an
understanding about how management forms its judgments about future events,
including the variables and assumptions underlying the estimates, and the
sensitivity of those judgments to different variables and conditions, we have
included comments related to each critical accounting policy described as
follows:  a.
    
    allowance for doubtful accounts;b.
    
    provision for contingencies;c.
    
    recognition of deferred income taxes;d.
    
    impairment of long-lived assets; ande.
    
    revenue recognition. Allowance for doubtful accounts We maintain our allowance for bad debts at a level believed adequate by
our management to reflect probable losses in our trade receivables due to
customer default, insolvency, or bankruptcy. Our management establishes this
provision by using the following criteria: customer credit history, customer
current credit rating and other relevant factors. Such criteria are
re-evaluated on a quarterly basis. Provision for contingencies We have certain contingent liabilities with respect to material existing
or potential claims, lawsuits and other proceedings, including those involving
tax, social security and other matters. We accrue a liability when it is
probable that future costs will be incurred and such costs can be reasonably
estimated. Such accruals are based on developments to date, our estimate of
the outcome of these matters, the opinion of our lawyers, and their experience
in contesting, litigating and settling other matters. As the scope of the
liabilities becomes more clearly defined, there may be changes in the estimates
of future costs, which could have a material effect on our future results of
operations and financial condition or liquidity. Recognition of deferred income taxes We recognize income taxes using the comprehensive liability method of
accounting. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and the
income tax bases of assets, liabilities and carryforwards using currently
enacted tax rates. We estimate the tax valuation allowance by assessing the
future recoverability of the deferred tax assets. The allowance is based on
estimates of taxable income in each jurisdiction in which we operate and the
period over which the assets will be recoverable. In the event that actual
results differ from those estimates, we may need to establish additional
valuation allowances, and such allowances may be material. We consider the
effect of translating non-monetary assets at historical rates of exchange as
permanent differences in determining deferred income tax. Accordingly, as of
December 31, 2003, we had recognized a valuation allowance of US$26.5 million
(US$26.7 million as of December 31, 2002) against our
deferred tax assets. A decrease of 22% in the future taxable income from our projections
utilized in assessing the recoverability of deferred tax assets will not have
any impact on the amount of the valuation allowance already recognized. Impairment of long-lived assets We periodically evaluate the carrying value of our long-lived assets,
which consist primarily of tangible fixed assets and intangible assets, for
impairment. We consider the carrying value of a long-lived asset to be
impaired when the anticipated discounted cash flows from such asset are
separately identifiable and result in less than its 59




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carrying value. In that event, a loss would be recognized based on the
amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved. Assets released from productive activities are carried at the lower
of cost or its estimated net realizable value. During the year ended December
31, 2002, we recognized an impairment charge of goodwill related to the soft
drink business in Argentina amounting to US$90 million. We did
not recognize an impairment charge during the year ended
December 31, 2003. See Note 4 to our
Consolidated Financial Statements. A decrease of 30% in operating
cash flows (excluding interest charges) from our projections utilized in assessing the recoverability of
long-lived assets would require recognition of an additional impairment of
US$5 million of goodwill related to the soft drink business in
Argentina. Revenue Recognition The Company does not consider its revenue recognition policy a critical
accounting policy because the recognition of revenues does not involve
estimates with a high degree of uncertainty, does not require subjective
judgment and it is not likely that materially different amounts would be
reported under different conditions. Summary of Results of Operations The following table sets forth, for each of the years ended December 31,
2001, 2002 and 2003, selected components of our results of operations as a
percentage of net sales for each of those years: 2001
    
    2002
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    (52.2
    )
    
    
    (65.8
    )
    
    
    (51.6
    )Gross profit
    
    
    47.8
    
    
    
    34.2
    
    
    
    48.4Selling and marketing expenses
    
    
    (25.0
    )
    
    
    (25.7
    )
    
    
    (23.0
    )Administrative and general expenses
    
    
    (8.2
    )
    
    
    (9.2
    )
    
    
    (6.2
    )Operating income (loss)
    
    
    14.6
    
    
    
    (0.8
    )
    
    
    19.2Net income (loss)
    
    
    4.6
    
    
    
    (29.0
    )
    
    
    5.9
 The following table sets forth, for each country of operation and for the
years ended December 31, 2001, 2002 and 2003, our net sales, operating income
(loss) as well as total assets at the end of each of those years, in each case
before adjustments for intercompany transactions. See Note 20 to the
Consolidated Financial Statements. Geographic Segment Data
    
    2001
    
    2002
    
    2003(in US$ millions)ArgentinaNet sales
    
    $
    699.5
    
    
    $
    278.5
    
    
    $
    412.4Operating income (loss)
    
    
    93.8
    
    
    
    (29.8
    )
    
    
    63.2Total assets
    
    
    878.3
    
    
    
    689.1
    
    
    
    764.8BoliviaNet sales
    
    
    86.9
    
    
    
    88.7
    
    
    
    92.2Operating income
    
    
    21.3
    
    
    
    28.9
    
    
    
    35.6Total assets
    
    
    270.4
    
    
    
    268.5
    
    
    
    280.4ChileNet sales
    
    
    23.9
    
    
    
    22.0
    
    
    
    22.2Operating loss
    
    
    (3.8
    )
    
    
    (2.9
    )
    
    
    (2.0
    )Total assets
    
    
    27.2
    
    
    
    22.4
    
    
    
    20.4ParaguayNet sales
    
    
    85.8
    
    
    
    59.5
    
    
    
    74.7Operating income
    
    
    30.3
    
    
    
    11.7
    
    
    
    24.2Total assets
    
    
    142.1
    
    
    
    99.6
    
    
    
    129.6UruguayNet sales
    
    
    49.8
    
    
    
    23.6
    
    
    
    26.4Operating income (loss)
    
    
    (0.6
    )
    
    
    (3.8
    )
    
    
    0.3Total assets
    
    
    45.8
    
    
    
    32.9
    
    
    
    43.8
 60




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Note:
    
    Net sales and operating income (loss) figures in the table above include
intercompany sales and operations that have been eliminated in
consolidation. Total assets figures include intercompany balances that
have been eliminated in consolidation and do not include assets related to
corporate headquarters. See Note 20 to the Consolidated Financial
Statements. Our results of operations are dependent upon a combination of (1) changes
in volumes of beer consumption in our markets, (2) our ability to sustain our
market share and (3) our ability to maintain positive gross, operating and net
profit margins in relation to our sales. It is therefore important for us to
increase our sales volumes, sustain our prices and control our costs in order
to improve our results of operations, especially in Argentina, our principal
market. Fiscal 2003 Compared with Fiscal 2002 The economic recession that had affected our largest market, Argentina,
for three years eventually led to a run on bank deposits towards the end of
2001, and to significant government intervention in the financial markets. On
January 2002, the Argentine government repealed the Convertibility Law, as a
consequence of which the fixed foreign currency exchange rate that had existed
for ten years was abandoned. This led the price of hard currencies to
quadruple in the course of a few months, and to a resurgence of consumer
inflation, which amounted to 41% for 2002. In 2002, Argentinas GDP declined
10.9% compared to the previous year. This crisis severely impacted the
economies of neighboring Paraguay and Uruguay. Both of these countries
suffered large devaluations of their local currencies that far exceeded the
rate of consumer inflation. However, during 2003 the situation in Argentina changed significantly.
GDP increased approximately 9% compared to the previous year, while inflation
declined from 41% to 3.7%. The exchange rate stabilized, and the peso
appreciated approximately 13% through the course of the year. Consequently
the economies of neighboring Paraguay and Uruguay also improved. Net Sales We reported consolidated net sales of US$622.7 million for the year ended
December 31, 2003, compared to US$468.6 million in 2002. This improvement in
net sales of US$154.1 million was primarily due to an increase in beer sales
and higher average prices for beer and soft drinks. First, the increase in
beer volumes sold was due to strong market performance in Argentina, and to the
addition of volumes contributed by AmBevs former subsidiaries in Argentina,
Paraguay and Uruguay since February 2003. Second, in March and September of
2003, we raised the average price of beer in Argentina through two price
increases of approximately 10% each. Appreciation of the peso relative to the
U.S. dollar also helped increase prices in dollar terms. Our 2003 performance
for each of our business categories is described below. Beer Beer sales represented 75.4% of our total consolidated net sales in 2003
compared to 73.1% of our total consolidated net sales in 2002. Net beer sales
for 2003 increased to US$469.2 million from US$342.6 million in 2002. Total
beer volume sold during 2003 was 14,261,000 hectoliters, a 24.8% increase from
the volume sold in 2002. This increase was due to economic recovery in the
southern cone countries and to the incorporation of AmBevs volumes during the
last eleven months of the year, which represented 16% of our total beer volume
sales for the year. The following is a geographical breakdown of our total beer volumes and
net beer sales in 2003, in both cases compared to 2002: 61




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Volumes  2003
    
    Volumes  2002
    
    Net sales  2003
    
    Net sales  2002Country
    
    (in hectoliters)
    
    (in hectoliters)
    
    (in US$ million)
    
    (in US$ million)Argentina
    
    
    9,959,000
    
    
    
    7,642,000
    
    
    
    267.4
    
    
    
    163.8Bolivia
    
    
    1,843,000
    
    
    
    1,688,000
    
    
    
    92.2
    
    
    
    88.7Chile
    
    
    419,000
    
    
    
    432,000
    
    
    
    22.2
    
    
    
    22.0Paraguay
    
    
    1,614,000
    
    
    
    1,402,000
    
    
    
    71.6
    
    
    
    57.0Uruguay
    
    
    445,000
    
    
    
    275,000
    
    
    
    19.7
    
    
    
    14.2Intercompany sales
    
    
    (19,000
    )
    
    
    (9,000
    )
    
    
    (3.8
    )
    
    
    (3.1
    )Total
    
    
    14,261,000
    
    
    
    11,429,000
    
    
    
    469.2
    
    
    
    342.6
 The 2,317,000 hectoliter volume increase in Argentina was the result of
both the addition of AmBevs volumes (1.6 million hectoliters) and an increase
in volumes of our own brand portfolio which we achieved despite the loss of the
Heineken brand in June 2003. Net sales in this market increased principally as
a result of nominal price increases and the appreciation of the peso. Thus,
the average price for our beer in 2003 was US$26.8 per hectoliter, compared to
US$21.4 per hectoliter in 2002. The increase in volume partially contributed
to an increase in sales. The overall beer market volume in Bolivia increased by 8% in 2003. This
was due to the improvement of economic indicators and the strengthening of
consumer confidence in the country. Given our dominant position in the market,
our domestic volumes increased at a similar rate, from 1,688,000 hectoliters in
2002 to 1,843,000 hectoliters in 2003. Our net beer sales for 2003 increased
to US$92.2 million from US$88.7 million, as a result of the higher volumes
sold. This increase in net sales compensated for a 4.5% devaluation of the
local currency. Indeed, average prices, measured in U.S. dollars, declined to
US$50.0 per hectoliter, from US$52.5 per hectoliter in 2002. Although the overall beer market volume in Chile grew by 5% during 2003,
our beer volumes declined from 432,000 hectoliters in 2002 to 419,000
hectoliters in 2003, due to the loss of the Heineken brand, an important part
of our business in June 2003. Net of the effect of the loss of Heineken,
however, the rest of our portfolio grew by 11% for the year. Despite the
decline in our sales volume, our net sales were virtually unchanged compared to
2002 because of a 17.7% appreciation of the local currency which led to an
increase in average prices in dollar terms. Paraguayan market volumes declined 6% during 2003, although the fourth
quarter sales showed an improvement which has continued in 2004. The local
currency appreciated approximately 15.3% relative to the U.S. dollar and this
had a favorable impact on prices in dollar terms. Our own volumes increased
from 1,402,000 hectoliters in 2002 to 1,614,000 hectoliters in 2003. This
increase was due to the addition of volumes from AmBevs former operation in
the country and a 6% increase in our average prices in dollar terms as compared
to 2002. In the end, our net sales increased approximately 26%. In Uruguay, the beer market continued to decline during 2003, with total
volumes for the year 11% lower than in 2002. Again, fourth quarter sales
showed an improvement which has continued in 2004. Our beer volumes increased
62% from 275,000 hectoliters in 2002 to 445,000 hectoliters in 2003. This
increase was due to the addition of volumes from AmBevs former businesses.
Yet, average beer prices declined 14% as a result of a local currency
devaluation and because we adopted a conservative price policy, which is paying
off in 2004 as market volumes have recovered significantly. Soft Drinks and Water We sell soft drinks and water in Argentina and Uruguay. Our water volumes
have declined substantially compared to the years prior to 2001, when we
transferred substantially all of our water business in Argentina to Eco de los
Andes S.A., a company in which we have an approximate 49% ownership interest
and in which Nestlé Waters owns an approximate 51%. Our water volumes in
Uruguay are also declining and we are close to discontinuing this business in
that country. Our soft drink volumes correspond to our sales under franchise
and bottling agreements with PepsiCo. The following is a geographical
breakdown of our soft drink and water volumes and sales, in both cases compared
to 2002: 62




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Volumes  2003
    
    Volumes  2002
    
    Net sales  2003
    
    Net sales  2002Country
    
    (in hectoliters)
    
    (in hectoliters)
    
    (in US$ million)
    
    (in US$ million)Argentina (of which water is)
    
    
    5,901,000
    
    
    
    5,468,000
    
    
    
    139.2
    
    
    
    107.1(44,000
    )
    
    
    (60,000
    )
    
    
    (0.5
    )
    
    
    (0.5
    )Uruguay (of which water is)
    
    
    195,000
    
    
    
    239,000
    
    
    
    6.6
    
    
    
    9.3(11,000
    )
    
    
    (47,000
    )
    
    
    (0.1
    )
    
    
    (0.7
    )Total(of which water is)
    
    
    6,096,000
    
    
    
    5,707,000
    
    
    
    145.8
    
    
    
    116.5(55,000
    )
    
    
    (107,000
    )
    
    
    (0.6
    )
    
    
    (1.3
    )
 The Argentine soft drinks market grew 13% in terms of volume during 2003,
as compared to the previous year. This represented a partial recovery from the
15% decline of the previous year, and was due to the strong performance of the
Argentine economy. The lower volatility of financial and economic indicators
allowed B-brand producers to stabilize what had been a declining market share,
and they now account for approximately 25% of the market. In 2002 our company
made a strategic decision not to participate in the B-brand segment of the
market, where profitability is lower, choosing instead to focus on the top
segment. Consequently, Quinsas volumes increased 8% during 2003, shedding 1.7
points of market share, according to Nielsen. Our focus on A-brands resulted
in our share of value increasing slightly
year-to-year, according to Nielsen. Thus, average prices increased more than 20% in dollar terms, as actual price
increases were further boosted by an appreciation of the Argentine peso. The
combination of higher prices and higher volumes resulted in revenue growth of
30%. In Uruguay, the total soft drink market volumes for the country declined.
While our total sales declined as well, the introduction of our 
1.25-liter returnable glass bottle has helped us defend volumes. Average prices, measured
in U.S. dollars, decreased 21% on average as a result of a 14% local currency
devaluation. The combination of lower volumes and lower prices resulted in a
decline in net sales. Other Sales Other sales consisted of opportunistic sales of excess barley and malt
inventories to third parties, as well as sales of glass bottles from our bottle
factory in Paraguay and crown bottle tops from our plant in Argentina. These
sales totaled US$7.6 million in 2003 and US$9.6 million in 2002. Cost of Goods Sold Cost of goods sold was US$321.3 million in 2003, compared to US$308.5
million in 2002. This increase was principally a result of a 19% increase in
total beverages sold since our volumes increased. However, on a per hectoliter
basis, cost of goods sold actually declined 10%. The decline in cost of goods
sold on a per hectoliter basis was a consequence of synergies gained from our
association with AmBev. We closed a brewery in Paraguay and another in
Uruguay, and achieved production efficiencies in Argentina, Paraguay and
Uruguay. We were also successful at reducing procurement costs because the
cost of raw materials declined 10% on a per hectoliter basis. Gross Profit Gross profit was US$301.4 million in 2003, compared to US$160.1 million in
2002. This increase in gross profit was principally due to the combination of
the increases in volumes and nominal prices mostly in Argentina, and lower
industrial costs per unit of output. Selling and Marketing Expenses Our selling and marketing expenses increased 19% to US$143.5 million in
2003, from US$120.5 million in 2002. This increase was principally due to
higher costs of freight and labor, owing to the addition of AmBevs former
operations. However, despite this increase, measured on a per hectoliter
basis, our cost of labor declined almost 4%. Advertising and promotion
expenses increased 7%, although as measured as a percentage of sales, they were
approximately 1.5 percentage points lower than last year. 63




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Administrative and General Expenses As a result of the Companys continued focus on expense control and
cost-reduction initiatives, administrative and general expenses declined 11% to
US$38.4 million in 2003 despite the appreciation of the Argentine peso and the
addition of the AmBev businesses. Contributing to this was an 11% reduction in
headcount on a pro forma basis. Also contributing to this decrease, was the
absence of expenses incurred in 2002 in relation to both the alliance with
AmBev and to arbitration proceedings with Heineken. Operating Income (Loss) Our operating income for 2003 was US$119.5 million, compared to a loss of
US$3.6 million in 2002. This difference was principally due to the increase in
sales described above and to the reduction of costs and expenses on a per
hectoliter basis. Interest Income Interest income increased to US$12.3 million in 2003 from US$8.4 million
in 2002 reflecting larger cash balances held in banks, on average throughout
the year, as a result of our business cash generation. Cash balances as of
year-end are net of the up-front down-payment made in connection with the
renegotiation of CMQs debt in September 2003. Therefore, average cash
balances for 2003 were higher than suggested by the year-end balance. Further,
it must be noted that long-term certificates of deposits and participation
agreements also accrued interest income, with year-end balances of US$57.7
million in 2003 and US$1.7 million in 2002. Other Income Other income increased from US$4.4 million in 2002 to US$36.8 million in
2003. In 2003, other income included a gain of US$29.4 million related to the
settlement of pre-acquisition contingencies, and to the reduction in related
reserves. See Note 23 to the Consolidated Financial Statements. Foreign Exchange Results and Translation Adjustments Foreign exchange results and translation adjustments improved from a
charge of US$22.9 million in 2002 to a gain of US$7.2 million in 2003. This
reflects the effect of local currency appreciations relative to the U.S. dollar
on our net monetary positions in Argentina, Paraguay and Chile since December
2002. Interest and Financial Expenses Interest and financial expenses was US$38.8 million in 2003, an increase
compared to US$32.8 million in 2002. This was principally due to the fact that
during 2003 we included a write-down of certain Argentine government securities
we held in our investment portfolio in this item. Other Expenses Other expenses decreased from US$155.9 million in 2002 to US$64.2 million
in 2003, principally due to the review of the value of our long-lived assets in
Argentina and elsewhere during 2002. This review included an assessment of the
effect that the economic crisis had on the future business environment for the
soft drinks business. As a result of this assessment, goodwill was reduced by
US$90 million in 2002, largely accounting for the decrease in other expenses.
See Note 17 to the Consolidated Financial Statements. Income Taxes Under present Luxembourg law, so long as we maintain our status as a
holding company, no income tax is payable in Luxembourg by us. Income taxes
relate to our operating subsidiaries and include current income tax expenses as
well as deferred income taxes. We adopted the criterion of considering the
effects of the translation as a permanent difference when calculating the
deferred tax. Income tax benefit decreased to a charge of US$23.3 million
compared to a benefit of US$47.6 million in 2002. This was due to the
positive result of the operations and the effect of the appreciation of the
peso. See Note 18 to the Consolidated Financial Statements. 64




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Net Income Based upon the foregoing results, net income loss for 2003 was US$36.8
million, compared to a loss of US$135.9 million in 2002. Fiscal 2002 Compared with Fiscal 2001 An economic recession that had affected our largest market for three years
eventually led to a run on bank deposits towards the end of 2001, and to
significant government intervention in the financial markets. In January 2002,
the Argentine government repealed the Convertibility Law, as a consequence of
which, the fixed foreign currency exchange rate that had existed for ten years
was abandoned. This led the price of hard currencies to quadruple in the
course of a few months, and to a resurgence of consumer inflation, which
reached 41% in 2002. The crisis in Argentina severely impacted the economies
of neighboring Paraguay and Uruguay. Both of these countries suffered large
devaluations of their local currencies which far exceeded the rate of consumer
inflation. Net Sales We reported consolidated net sales of US$468.6 million for the year ended
December 31, 2002, compared to US$938.7 million in 2001. This decline was
primarily due to the devaluation of the Argentine peso. Since nominal prices
are increased at or about the rate of inflation in each market, and the rate of
local currency devaluations far exceeded the rate of inflation in each of our
markets, our average sales prices declined when measured in U.S. dollars. This
unfavorable effect accounted for approximately 80% of the decline in our net
sales. The balance of this decline was principally the result of (i) lower
beer volumes sold, particularly in Argentina and Paraguay, which was partially
offset by greater volume sales in Bolivia and (ii) lower soft drink sales. The net sales performance of each business segment during 2002 is
described below. Beer Net beer sales for 2002 declined to US$342.6 million, from US$637.0
million in 2001. The effect of the Argentine peso devaluation on sales prices
measured in U.S. dollars accounted for 79% of the decline, while lower sales
volumes in Paraguay and Argentina (also a consequence of the Argentine economic
crisis) accounted for an additional 14% decline in net beer sales. Lower
average sales prices for beer, measured in U.S. dollars, caused by large
devaluations in all of our markets as explained above, largely accounted for
the remainder of this decline. Our total beer volume sold during 2002 was 11.4
million hectoliters, a 6.5% decline as compared to 2001. This was due to
recessionary conditions in the southern cone countries which led to a decrease
in the demand for beer. Thus, beer sales represented 73.1% of our total
consolidated net sales in 2002 as compared to 67.9% of our total consolidated
net sales in 2001. The economic environment in Argentina contributed to the decline in net
beer sales to US$163.8 million in 2002 from US$426.4 million in 2001. Our beer
sales volume in Argentina decreased to approximately 7,642,000 hectoliters in
2002, compared to 8,193,000 hectoliters in 2001. Signs of recovery finally
appeared in the fourth quarter when sales volumes exceeded those of the same
quarter in 2001 for the first time that year. That improvement continued in
2003. Our total Bolivian sales volume increased from 1,593,000 hectoliters in
2001 to 1,688,000 hectoliters in 2002. Net beer sales increased from US$86.7
million in 2001 to US$88.7 million in 2002 due to an increase in demand
for beer in Bolivia in 2002. In Chile, sales volumes, excluding exports, increased 1.6% to 432,000
hectoliters in 2002 from 425,000 hectoliters in 2001. This improvement was the
result of solid performances by all of our brands, particularly Becker in the
regular segment of the market. Net sales declined to US$22.0 million in 2002
from US$23.9 million in 2001 because of a 9% devaluation in local currency
which could not be fully offset by nominal price increases. Paraguays economy was severely affected by the Argentine crisis. Its
currency suffered a 52% devaluation vis-à-vis the U.S. dollar. This led to
volume declines of approximately 16% during 2002, making total volumes for the 65




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year 1,402,000 hectoliters. Net revenues were US$57.0 million in 2002,
compared to US$82.9 million in 2001, and were attributable to
the Argentine crisis. Our Uruguayan beer net sales decreased to US$14.2 million from US$23.2
million in 2001. This decline was the result of a (i) 21% decrease in volume
sales, which declined to 269,000 hectoliters from 340,000 hectoliters in 2001,
and a (ii) 43% decrease in U.S. dollar prices as a result of a devaluation of
the Uruguayan peso by 84%. Soft Drinks and Water Our total volume sales of soft drinks and water declined to 5,707,000
hectoliters in 2002 from 6,857,000 in 2001. The transfer of our Glaciar water
business in March 2001 to Eco de los Andes accounted for 137,000 hectoliters of
the decline. In addition, the extremely unfavorable economic environment in
both Argentina and Uruguay led to a decline in consumption and, to a lesser
extent, to a switch to
lower-priced brands. Volume sales in Argentina
(including water, juices and isotonic beverages) were 5,468,000 hectoliters in
2002 compared to 6,472,000 hectoliters in 2001. Volume sales in Uruguay
(including soft drinks and water) were 239,000 hectoliters compared to 419,000
a year earlier. Net revenues from soft drink and water sales declined from US$279.8
million in 2001 to US$116.7 million in 2002. A decline in average sales prices
in U.S. dollar terms, the result of large currency devaluations, was largely
responsible for the decline in net revenues from our soft drink and water
sales. New businesses, such as Gatorade and Tropicana, contributed US$6.8
million in revenues, slightly more than the Glaciar water business revenues
lost as a result of their divestiture. Cost of Goods Sold Cost of goods sold decreased to US$308.5 million in 2002 from US$490.4
million in 2001, as a result of the decline in volumes sold. The large
devaluation of the Argentine peso during 2002 increased the price of certain
raw materials, whose cost is linked to the U.S. dollar. Furthermore, the
depreciation of fixed assets is a dollar expense for our Company. The
combination of these effects led to an increase in cost of goods sold when
measured as a percentage of sales, from 52.2% in 2001 to 65.8% in 2002.
Stripped of the effect of dollar-denominated depreciation costs (which are not
cash costs) this increase would have been 6.1 percentage points instead of
13.6. Gross Profit Gross profit was US$160.1 million in 2002, compared to US$448.3 million in
2001. This decline was principally due to the combination of lower revenues
and the effect of the peso devaluation on dollar-linked raw materials and fixed
asset depreciation. Selling and Marketing Expenses Our selling and marketing expenses decreased by 48.7% to US$120.5 million
in 2002 from US$235.0 million in 2001. This decline was principally due to the
effect of the peso devaluation on our labor costs. In addition, we closely
monitored our advertising expenditures, which declined as a percentage of sales
due to recessionary market conditions and a decline in the volume sold. Administrative and General Expenses As a result of the Companys continued focus on expense control and
cost-reduction initiatives, administrative and general expenses declined 43.7%
to US$43.2 million in 2002. Importantly, in 2002 these expenses included
approximately US$5.7 million in non-recurring fees primarily related to the
Companys transaction with AmBev and the arbitration proceedings with Heineken.
Excluding these fees, administrative and general expenses on a cash basis
(i.e. excluding depreciation) would have declined 54.0%. 66




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Operating Income (Loss) Our operating loss for the period was US$3.6 million, compared to a profit
of US$136.6 million in 2001. This difference was principally due to the effect
of the currency devaluations on our revenues and to lower volumes, which
outweighed the positive effect of the devaluation on fixed and other local
costs when measured in U.S. dollars. A meaningful comparison of the Companys results for the year is made
extremely difficult by the sheer magnitude of the Argentine peso devaluation
and its consequences on the Companys financial information. We have tried to
clarify this comparison by breaking out the different components in the table
below: Operating Income  Fiscal Year 2001
    
    
    
    
    
    
    136.6Revenue variations (net of variable costs) caused by:Volume differences
    
    
    
    
    
    
    (23.0
    )Pricing
    
    
    
    
    
    
    (423.2
    )- nominal price variations
    
    
    64.8- devaluation effect
    
    
    (488.0
    )Variable cost variations:
    
    
    
    
    
    
    142.6Nominal decreases/(increases)
    
    
    (63.9
    )Devaluation effect
    
    
    206.5Fixed cost variations:
    
    
    
    
    
    
    181.7Other nominal decreases/(increases)
    
    
    1.3Devaluation effect
    
    
    180.4Other cost variations:
    
    
    
    
    
    
    (18.3
    )Holding losses
    
    
    (11.5
    )Other
    
    
    (6.8
    )Operating Loss  Fiscal Year 2002
    
    
    
    
    
    
    (3.6
    )
 Interest Income Interest income increased to US$8.4 million in 2002 from US$6.5 million in
2001, reflecting larger cash balances held as a result of our business cash
generation. Other Income Other income decreased from US$20.4 million in 2001 to US$4.4 million in
2002. In 2001, other income included a gain of US$14.9 million from the
transfer of the Glaciar and Villa de los Arroyos mineral water business to Eco
de los Andes. See Note 16 to the Consolidated Financial Statements. Foreign Exchange Results and Translation Adjustments Foreign exchange results and translation adjustments increased from a
charge of US$12.6 million in 2001 to a charge of US$22.9 million in 2002. This
increase reflects the effect of currency devaluation on our net monetary
position, since the large devaluation of the Argentine peso affected the value
of local currency-denominated assets when measured in U.S. dollars. Thus, the
charge to our Argentine businesses was US$20.2 million, and accounted for
substantially all of the increase. Interest Expense Interest expense was US$32.8 million in 2002, virtually unchanged from the
US$32.4 million of 2001. This was due to the fact that our total bank debt
increased only slightly, from US$368.8 million in 2001 to US$374.6 million in
2002. Other Expenses Other expenses increased from US$63.3 million in 2001 to US$155.9 million
in 2002. Due to the macroeconomic crisis in Argentina, the Company reviewed
the value of its long-lived assets in Argentina and 67




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elsewhere. This review included an assessment of the effect that the
economic crisis had on the future business environment for the soft drinks
business. As a result of this assessment, goodwill was reduced by US$90.0
million, largely accounting for the increase in other expenses. See Note 17 to
the Consolidated Financial Statements. Income Taxes Under present Luxembourg law, so long as we maintain our status as a
holding company, no income tax is payable in Luxembourg by us. Income taxes
reflect the effect of a deferred tax benefit (largely the result of the
Argentine peso devaluation on our Argentine subsidiarys dollar-denominated
debt) net of current tax expense. We adopted the criterion of considering the
effects of the translation as a permanent difference when calculating the
deferred tax. Income tax benefit increased to US$47.6 million compared to a
benefit of US$6.1 million in 2001. This was the result of the loss caused by
the devaluation that occurred in Argentina during 2002. See Note 18 to the
Consolidated Financial Statements for details. Net Income Based upon the foregoing results, net income (loss) for 2002 was
US$(135.9) million, compared to US$43.3 million in 2001. LIQUIDITY AND CAPITAL RESOURCES Because we are a holding company, our ability to pay dividends and service
any debt obligations depends primarily upon our receipt of sufficient funds
from our principal subsidiary, QI(B), which depends in turn on QI(B)s receipt
of sufficient funds from its direct and indirect subsidiaries in Argentina,
Bolivia, Chile, Paraguay and Uruguay. Beginning on December 3, 2001, the
Argentine government imposed a number of monetary and currency exchange control
measures that included restrictions on the free disposition of funds deposited
with banks and tight restrictions on transferring funds abroad. These
restrictions have been progressively reduced. (See Item 3. Key
InformationRisk FactorsRisk Factors Related to the Effect on Quinsa of the
Current Economic Situation in ArgentinaCentral Bank restrictions on the
transfer of funds outside of Argentina could prevent us from receiving
sufficient funds from our Argentine subsidiaries and inhibit the distribution
of dividends and payments on our external debt above.) There can be no
assurance, however, that the Central Bank will not once again require its prior
authorization for dividend payments to foreign shareholders or for payment of
debt obligations. If this were to occur, our ability to receive funds from our
Argentine subsidiaries could be inhibited, and this, in turn, would
significantly impact our ability to pay dividends and service our debt
obligations. Current limitations imposed by the Central Bank of Argentina affected our
operations including the following:  a.
    
    the acquisition of foreign currency as an investment is limited, on
a monthly basis, to the larger of US$2 million or three times the
amount paid of certain taxes during the second month prior to the
acquisition of said foreign currency. The total amount of U.S. dollars
held as investments of foreign currency by our Argentine subsidiary,
CMQ, was US$22.8 million as of June 24, 2004; andb.
    
    the acquisition of foreign currency to pay principal and interest
maturities on debt obligations can be made on the date of such
maturities with no restrictions. However, should the Company want to
acquire this foreign currency before principal and/or interest
maturities become due, it must adhere to the following limitations: (i)
during the period from August 18, 2003 to December 31, 2004, CMQ may
acquire up to 25% of the principal amount of its restructured debt and
(ii) the funds so acquired must be applied to pay principal and/or
interest within 180 days from the date of acquisition. As of June 24,
2004, CMQ had purchased the maximum amount of foreign currency allowed
under this limitation. A total of US$73.4 million was acquired by CMQ
under this program, of which US$63.3 million has already been used to
pay principal and interest on its bank debt as of June 24, 2004. The
balance of US$10.1 million is being held for the payment of future principal
installments on its bank debt. Unless the Central Bank of Argentina modifies current regulations to allow
for an extension of these programs, CMQs alternatives to acquire dollars in
order to hedge its dollar exposure are severely limited. 68




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Furthermore, the payment of dividends by our various subsidiaries is in
certain instances subject to statutory restrictions and restrictive covenants
in debt instruments, such as legal reserve requirements, capital and retained
earnings criteria and other restrictions, and is contingent upon the earnings
and cash flow of and permitted borrowings by those subsidiaries. The inability
on the part of some of our subsidiaries to pay dividends would impact the
amount of funds available to us to pay dividends and service our debt
obligations. Our Argentine subsidiary, CMQ, is currently limited in its ability to pay
dividends by certain covenants included in its credits agreements, described in
detail under Other Liquidity MattersCMQ Liquidity Matters below. As of December 31, 2003, we had cash and cash equivalents totaling
US$139.4 million, an increase of US$12.3 million from US$127.1 million of cash
and cash equivalents held as of December 31, 2002. This increase resulted from
cash flows provided by operating activities totaling US$146.7 million and the
effect of exchange rate changes on cash and cash equivalents amounting to
US$7.3 million, partially offset by cash used in investing and financing
activities totaling US$141.7 million. We believe our working capital is
sufficient for our present requirements. Operating Activities Our operating activities resulted in net cash inflows of US$146.7 million,
US$62.4 million and US$147.5 million for 2003, 2002 and 2001, respectively.
The decline in 2002 compared to the previous year was principally the result of
the Argentine economic crisis particularly after the local currency devaluation
of January 2002 that ended a decade during which the peso had been pegged to
the U.S. dollar. Thus, beer sales volumes declined not only in Argentina but
also in Paraguay and Uruguay, whose economies suffered contagion effects. The
U.S. dollar exchange rate increased from P$1.00 / US$ to P$3.36 / US$ over the
12 months to December 2002, while our nominal prices for beer in that market
could only be increased in line with inflation of approximately 40%, due to the
very severe economic recession. A significant portion of our costs were at the time either in U.S. dollars
or pegged to the dollar. The combination of these effects led to a significant
narrowing of our cash margins, and therefore also of our cash generation. During 2003, however, our net cash provided by operating activities more
than doubled compared to the previous year, principally as a result of the
following:  a.
    
    the addition of volumes from the former AmBev operations in
Argentina, Paraguay and Uruguay as of February 1, 2003. These
additional volumes represented approximately 16% of the total beer
volumes sold in 2003 in Argentina, approximately 39% of the total beer
volumes sold in Uruguay and approximately 29% of the total beer volumes
sold in Paraguay;b.
    
    an appreciation of the local currencies in Argentina, Chile and
Paraguay, that resulted in an increase in revenues (measured in U.S.
dollars) for those countries, and a decrease in dollar-related costs
(measured in local currency);c.
    
    price increases in Argentina: Nominal prices for beer were
increased in March and September 2003, approximately 10% on average
each time. The rate of inflation over the same period (which is a
reasonable proxy for the cost increases) was negligible; andd.
    
    the success of our integration with AmBevs former operations in
Argentina, Paraguay and Uruguay, which allowed for significant cost
savings, particularly in terms of administrative expenses (as AmBev
subsidiaries were absorbed by our operations), industrial costs (as we
closed certain plants, increasing average capacity utilization at the
others), procurement (as our larger combined volumes allowed us to
obtain lower prices for our raw material), sales and distribution and
advertising. Further, strict control over our working capital allowed us to reduce it
despite an increase of approximately 33% in revenues, compared to 2002. Thus,
for example, trade receivables actually declined by US$5.7 million as credit
terms for customers were reduced, while accounts payable and accrued expenses
increased by US$15.0 million. 69




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Our operating cash inflows for 2001 primarily resulted from the following:
operating gains (net of non-cash charges) totaling US$209.1 million, decreases
in inventory and accounts receivable totaling US$18.8 million, partially offset
by decreases in taxes payable and other current liabilities, and an increase in
other fixed assets totaling US$79.6 million. Investing Activities Our investing activities resulted in net cash outflows of US$46.4 million,
US$23.4 million and US$100.6 million for 2003, 2002 and 2001, respectively.
Our investing activities in 2003 principally consisted of purchases of tangible
fixed assets amounting to US$38.0 million (US$12.7 million in bottles and
crates and the balance in other fixed assets), an increase in financial assets
of US$20.7 million, and the acquisition of minority interests of US$11.4
million (principally in our subsidiary in Uruguay, FNC, in which we
now hold, as of December 31, 2003, an
indirect ownership interest of 97.91%, and in our subsidiary in Bolivia, CBN, in
which we hold, as of December 31, 2003, an indirect ownership interest of 79.98%). These cash outflows
were partially offset by net proceeds from the sale of tangible fixed assets
for US$10.5 million and US$12.9 million in cash received as a result of the
acquisition of subsidiaries (the former AmBev operations in Argentina, Uruguay
and Paraguay). Our investing activities in 2002 principally consisted of
purchases of tangible fixed assets totaling US$20.5 million (US$6.1 million in
bottles and crates and the balance in other fixed assets) and acquisitions of
minority interests amounting to US$6.7 million. Our investing activities in
2001 primarily included purchases of tangible fixed assets amounting
to US$72.0 million (US$3.3 million in bottles and crates and the balance in other fixed assets),
acquisitions of minority interests for a total consideration of US$22.6 million
(principally in our Bolivian subsidiary, CBN) and acquisitions of certain
financial investments totaling US$23.2 million. These investments were
partially offset by the disposition of certain of our water business assets for
US$16.7 million. Financing Activities Our financing activities resulted in net cash outflows of US$95.3 million,
US$41.6 million and US$9.5 million for 2003, 2002 and 2001, respectively. Our
financing activities in 2003 primarily consisted of the repayment of long-term
debt totaling US$54.7 million, the acquisition of treasury stock totaling
US$41.7 million and the repayment of dividends to minority shareholders in our
subsidiaries in the amount of US$8.3 million. The treasury stock acquired
included 2.8 million Class A shares (0.4% of total Class A shares outstanding)
and 5.0 million Class B shares (7.1% of total Class B shares outstanding).
Dividends to minority shareholders are related to the dividends paid by our
subsidiaries in Paraguay and in Bolivia, and also include US$4.0 million paid
by QI(B) to Heineken. These cash outflows were partially offset by a net
increase in short-term debt of US$9.4 million. We intend to acquire treasury
stock from time to time under our stock repurchase programs and any other
programs the Board of Directors may approve in the future, at prices that
represent an attractive investment for us and our shareholders. See also Item
4. Information on the CompanyHistory and DevelopmentRecent Events Stock
Repurchases. Our financing activities in 2002 principally consisted of the
repayment of short-term and long-term debt totaling US$71.6 million and
payments of dividends to minority shareholders in our subsidiaries in the
amount of US$8.3 million, partially offset by new long-term bank loans totaling
US$40.0 million. Our financing activities in 2001 included the repayment of
short-term and long-term bank loans totaling US$109.5 million, the payment of
dividends to our shareholders in the amount of US$32.0 million, the acquisition
of treasury stock totaling US$11.0 million and the payment of dividends to
minority shareholders in our subsidiaries in the amount of US$9.2 million.
These activities were financed with new borrowings of long-term bank loans
totaling US$147.5 million. Capital Expenditures Capital expenditures in 2001, excluding bottles, crates and acquisitions,
were US$68.7 million, and primarily related to the (1) installation of a new
multi-format line in the Zárate brewery; (2) relocation of a filling line to
the Quilmes brewery from the Llavallol brewery that we closed in 2001; (3)
relocation of bottling lines in Baesas soft drink plant from the North Plant,
which was closed in 2001, to the South Plant in Buenos Aires; (4) merger
between EUSA and FNC which involved closing EUSAs soft drink facility and
adapting FNCs brewery to accommodate soft drink lines; (5) construction of new
buildings in Buenos Aires to house the administrative offices of our soft drink
business and our joint beer and soft drink distribution center; and (6)
continued installation of coolers in our points of sale, particularly in
Paraguay. 70




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Capital expenditures for 2002, excluding bottles, crates and acquisitions,
were US$14.4 million. These expenditures were primarily related to the
installation of new filling lines for our soft drink business in Argentina, and
the purchase and installation of coolers to place at our points of sale. Other
than these investments, there were no significant expenditures to expand
capacity. In 2003, excluding bottles, crates and acquisitions, our capital
expenditures amounted to US$25.3 million. They were primarily related to the
installation of coolers and to the installation of a filling line for our soft
drink glass returnable bottle business. The following table summarizes our capital expenditures, excluding
bottles, crates and acquisitions, for each of 2001, 2002 and 2003: 2001
    
    2002
    
    2003(in US$ millions)Brewing Business
    
    $
    47.6
    
    
    $
    8.0
    
    
    $
    16.6Malting Facilities
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0Soft Drinks and Water Business
    
    
    20.8
    
    
    
    6.0
    
    
    
    8.6Other
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.1Total
    
    $
    68.7
    
    
    $
    14.4
    
    
    $
    25.3
 In 2001, 2002 and 2003, we spent US$3.3 million, US$6.1 million and
US$12.7 million, respectively, on bottles and crates. The increase in 2003 was
due to an increase in volumes sold as well as to the expansion of soft drink
sales in our 1.25 liter glass bottle, which was introduced in 2002. The
introduction of 1.25 liter glass bottles explains the increase in our capital
expenditures for 2002. Including the acquisitions of new businesses and minority interests, total
capital expenditures amounted to US$94.6 million, US$27.2 million and US$49.4
million, in 2001, 2002 and 2003, respectively. During 2003, of the total
amount we invested in capital expenditures and bottles and crates, we invested
approximately 38% of this amount in our Argentine beer business, 43% in our
Argentine soft drink business and 9% in our total business in Bolivia. With
regard to the balance of our investment activities for 2003, approximately 73%
of our resources dedicated to this area were used for the acquisition of
minority interests in our Uruguayan subsidiary. We financed all investment
activities with internally generated cash. Our principal capital expenditures currently in progress are related to
the acquisition of bottles and crates and to the maintenance and modernization
of our facilities, computer systems and offices. Our capital expenditures are
funded principally with internally generated cash. We intend to fund future
capital expenditures with internally generated cash as well as with borrowings.
Currently, management expects capital expenditures for 2004 to be
approximately US$66.0 million, which includes expenditures for bottles and
crates. Estimates of our capital expenditures for 2004 are based on current
expectations and are subject to change. We cannot assure you that actual costs
will not exceed estimates or that we will not reallocate or alter our capital
expenditures. External Funding Our short-term debt is principally denominated in U.S. dollars and
represents borrowings from banks. At December 31, 2003, our current loans and
short-term portion of long-term debt amounted to US$104.1 million compared to
US$273.9 million at December 31, 2002 and US$211.4 million at December 31,
2001. The increase during 2002 resulted from ongoing negotiations between our
subsidiary CMQ and its creditor banks. While negotiations were in progress,
principal maturities on our bank debt were renewed for short periods of time.
Thus, until negotiations were successfully concluded in September 2003, a large
part of our long-term debt became short-term debt. As a result of the
successful conclusion to these negotiations we were able to extend the maturity
of our bank debt to an average life of 4.3 years. As a result of this we moved
from a position where more than 70% of our debt was short-term to our present
position, where more than 70% is long-term. It must be noted that short-term
bank debt for the year 2003 includes a mandatory prepayment obligation of
US$40.3 million, which we paid in February 2004. This mandatory prepayment was
related to cash flow generated by CMQ in excess of projected amounts included
in the debt renegotiation agreements, which called for the sharing among
creditors of 50% of any 71




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such excess cash. The successful conclusion of these negotiations put an
end to concerns about Quinsas liquidity that may have arisen after the 2002
currency crisis in Argentina. See Other Liquidity MattersCMQ Liquidity Matters below. Our long-term debt is principally denominated in U.S. dollars and
represents borrowings from banks. At December 31, 2003, our long-term debt,
excluding the current portion, amounted to US$238.6 million, compared to
US$100.7 million in 2002 and US$157.4 million in 2001. The average life of our
bank debt was extended to 4.3 years from 9 months and 22 months in 2002 and
2001 respectively, at no incremental cost to us. As of December 31, 2003 and
2002, we had long-term debt of US$14.2 million and US$14.3 million,
respectively, at fixed interest rates and US$315.0 and US$180.4 million,
respectively, at rates which varied in relation to established indices,
principally LIBOR, plus a fixed spread. Of our total outstanding long-term
debt at December 31, 2003, US$51.4 million will mature in 2005, US$33.4 million
will mature in 2006, US$53.8 million will mature in 2007, and US$60.3 million
will mature in 2008, and the rest, US$39.7 million, will mature in 2009 and
2010. See Note 14 to the Consolidated Financial Statements. Dividends Our Board of Directors recommended dividends be paid in 2004. On June 25,
2004, our shareholders approved the proposal to pay dividends in that year. We
did not pay dividends in 2003 or 2002. In 2001, we paid dividends of US$32.0
million. Dividends paid in any year are related to results of the previous
year. Dividends to minority shareholders in
consolidated subsidiaries, excluding Heineken, were US$4.3 million, US$8.3
million and US$2.6 million in 2003, 2002 and 2001, respectively. Heineken received dividends from
QI(B) in 2001 of US$6.6 million and in 2003 of US$4.0 million. Because we are a holding company, our ability to pay dividends depends
primarily upon our receipt of sufficient funds from our principal subsidiary,
QI(B), which depends in turn on QI(B)s receipt of sufficient funds from its
direct and indirect subsidiaries in the southern cone markets. Beginning on
December 3, 2001, the Argentine government imposed a number of monetary and
currency exchange control measures that included restrictions on the free
disposition of funds deposited with banks and tight restrictions on
transferring funds abroad, with certain exceptions for transfers related to
foreign trade and other authorized transactions. These restrictions were
progressively reduced from January to May 2003. Nonetheless, the reintroduction of any such restrictions may
inhibit our ability to receive funds from our Argentine subsidiaries. Furthermore, the payment of dividends by our various subsidiaries is also,
in certain instances, subject to statutory or legal restrictions and
restrictive covenants in debt instruments, like legal reserve requirements,
capital and retained earning criteria and other restrictions, and is contingent
upon the earnings and cash flow of and permitted borrowings by those
subsidiaries. Any inability on the part of some of our subsidiaries to pay
dividends would impact the amount of funds available to us to pay dividends and
service our debt obligations. Bermuda does not restrict or tax the payment of dividends by QI(B) to us,
and Luxembourg does not restrict or impose withholding taxes on the payment of
dividends by us to our shareholders. However, dividends paid by subsidiaries
to QI(B) are subject to withholding taxes in Bolivia, Chile and Paraguay and,
in certain cases, in Argentina. Dividends from CMQ, our subsidiary in
Argentina, to QI(B) are currently subject to withholding tax of 35%. This is
so because CMQ is making use of a tax loss carried forward resulting from its
1999 acquisition of the PepsiCo bottler, Baesa, and is therefore paying no
income tax. See Item 10. Additional InformationExchange Controls. Other Liquidity Matters In response to the economic situation in Argentina and the highly
inflationary environment that existed in the past few years, we have been
working to reduce our working capital and improve our cash generation. At
December 31, 2003, the average life of our accounts receivable decreased to 13
days from an average life of 21 days in 2002. These figures vary among the
different countries in which we operate based on the particularities of each
market. We have not experienced significant credit problems with our customers
in the periods under review. 72




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We do not engage in
hedging of our raw material costs although our policy
may change in the future. Our foreign exchange exposure, which is principally
represented by CMQs dollar denominated debt, is not easy to hedge because of
the Argentine Central Banks restrictions. These restrictions include
limitations on the amounts of foreign currency that can be acquired for
investment purposes and they also condition the possibility of prepaying
foreign currency denominated debt (see the introductory paragraphs to
Liquidity and Capital Resources above for more details). Since we do not
hedge our raw material costs and only do so on a limited basis for our foreign
exchange exposure, our results of operations and liquidity may adversely be
affected by fluctuations in commodity prices and exchange rate movements. The Argentine
economic situation made access to new credit difficult,
particularly during 2002 and 2003. We were able, however, to raise US$14
million in long-term financing during the 2002 economic crisis. Furthermore,
given the increase in local currency liquidity that Argentine banks have
experienced starting in the second half of 2003, CMQ intends to raise
medium-term local currency bank loans with which to acquire U.S. dollars to
prepay its foreign currency debt. As of June 24, 2004, CMQ had already raised
the equivalent of US$20.0 million in local currency, for an average life of 2
years, for this purpose. We do not have any off-balance sheet financings nor
securitizations. Since our
business is very seasonal (see Item 4. Information on the
CompanySeasonality), our cash flow follows the same trend. We tend to
generate cash flow in excess of our operating needs during the first and fourth
quarters of the year (the summer season in the Southern Hemisphere), while our
cash flow generation tends to be lower during the second and third quarters.
All cash generated in excess of anticipated operating needs is used to acquire
U.S. dollars which are transferred to our accounts with international banks in
New York. These dollar balances are invested in overnight accounts in order to
preserve liquidity. This policy is used both to hedge the dollar exposure
represented by CMQs bank debt, and to preserve the value of our investments in
a highly volatile economic environment. CMQs access to foreign currency is
currently limited by Central Bank regulations in Argentina. Its excess cash
flow is therefore used to acquire U.S. dollar-denominated instruments, such as
U.S. Government Treasury bills which were bought in 2004. CMQ Liquidity Matters Most of our loan agreements contain restrictive financial covenants that
require us or our subsidiaries to, among other things, maintain certain
financial ratios, limit the amount of dividends paid and restrict indebtedness
and guarantee liabilities. Management carried out negotiations during
2002 which led to the execution of a refinancing agreement on September 18, 2003.
The bank debt subject to renegotiation amounted to US$293.6 million. The
agreement contemplated the following: (a) a down payment of US$20.3 million on
the agreement date, (b) an extension of the term to 4, 5, 6 and 7 years, (c) the
setting of new interest rates on the remaining principal balance of US$273.3
million ranging between LIBOR + 3% and LIBOR + 5%, (d) the establishment of new
financial ratios and indices adapted to the new situation in
Argentina, and (e) certain restrictions on dividend payments, the borrowing of new loans, disposal
of assets and prepayment obligation-related issues. These covenants vary
depending on CMQs leverage ratios. CMQ is currently within the least
restrictive leverage ratio bracket. The following is a summary of the
principal financial covenants CMQ has agreed to:  a.
    
    leverage ratio: lower than 2.75 times;b.
    
    total senior indebtedness: not to exceed US$280 million;c.
    
    consolidated net worth: not less than US$100 million;d.
    
    dividend payment: permitted, as long as financial covenants are not
breached;e.
    
    new debt: permitted as long as repayment is set beyond the final
maturity of current senior bank debt; andf.
    
    additional financial covenants, including a minimum interest expense
coverage ratio. The renegotiation agreements provide that in the event CMQ generates
excess cash (as defined in such agreement), we must use a portion of this
excess cash to prepay the non-current portion of the refinanced debt. The 73




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current portion of long-term debt includes US$40.3 million that we paid in
February 2004 as a result of the prepayment clause included in the agreement. A significant amount of CMQs bank loans are denominated in U.S. dollars.
Its cash flow has been increasing in the past year. This has allowed CMQ to
pursue an aggressive policy of prepayment of bank debt in order to reduce our
interest expense and our leverage to levels that are more in line with current
market volatility. In fact, during the first six months following the
execution of the debt restructuring, we had already paid down approximately 26%
of CMQs senior debt. RESEARCH AND DEVELOPMENT Research and development costs are expensed in the year in which these
costs are incurred. Historically, these expenses have not been significant.
During the last three years, we did not pay any royalties under our trademark
or franchise license agreements. TREND INFORMATION The Argentine Economy We realize a substantial portion of our revenues in pesos and other
volatile currencies, while our indebtedness is principally denominated in U.S.
dollars. Therefore, devaluation of the peso adversely affects the U.S. dollar
value of our earnings and our ability to pay down our
dollar-denominated debt. The recession events which led to the January 2002 devaluation of the peso
resulted in a reduction of wages in real terms and of disposable income across
all class sectors of the Argentine population. This reduction in consumer
buying power resulted in lower sales of our products with a consequent
reduction in revenues and cash inflows during fiscal year 2002. Furthermore,
even though we raised our nominal prices during 2002, the rate of local
currency devaluations in Argentina, Paraguay and Uruguay far exceeded the rate
of inflation in each of these markets, causing our average prices in U.S.
dollars to decline. In addition, we purchase most of our barley, malt, aluminum cans and
plastic bottle preforms in local currency and principally in Argentina and,
therefore, we incur certain costs of sales and expenses in local currencies.
However, the price of these raw materials may vary with international grain,
aluminum and PET prices, which are denominated in U.S. dollars. Therefore, we
cannot guarantee that the percentage of our cost of sales represented by these
items will not increase significantly due to further currency devaluation in
our countries of operation. Because the Argentine economic crisis of 2002 had a significant adverse
effect on our other markets, the governments of these other countries could
have taken actions to control inflation and institute other policies involving
wage, price and tariff rate controls as well as engaged in other
interventionist measures, including freezing bank accounts and imposing capital
controls. While none of this actually occurred in any material way, no
assurances can be given that it will not occur in the future, should any of the
countries in which we do business undergo similar crises. Changes in the
policies of these governmental authorities with respect to tariff rates,
exchange controls, regulations and taxation could affect our business and
financial results adversely, as could inflation, devaluation, social
instability and other political, economic or diplomatic developments, including
the governments response to such circumstances. The economies of the countries in which we do business recovered
significantly during 2003. This is particularly true of Argentina, our largest
market, where consumer inflation declined to 3.7% for the year, compared to 41%
in 2002, and GDP grew vigorously after having declined nearly 11% in 2002.
Paraguay and Uruguay, which had been most adversely affected by the situation
in neighboring Argentina, also saw their economies improve during the year. In
light of the recent economic troubles in Argentina and in the other countries
in which we operate, you should recognize that our business, earnings, asset
values and prospects have been and may again be materially and adversely
affected by developments with respect to inflation, interest rates, currency
fluctuations, government policies, exchange control regulations, taxation,
social instability and other political, economic or diplomatic developments in
or affecting our countries of operation. We have no control over such
conditions and developments 74




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and can provide no assurance that such conditions and developments will
not further adversely affect our results of operation and financial condition. Off Balance Sheet Arrangements Quinsa is not a party to any off balance sheet transactions. Tabular Disclosure of Contractual Obligations The table sets forth our cash payment obligations as of December 31, 2003. Payments due by Period Less
    
    
    
    
    
    
    
    
    
    MoreContractual Obligations Total
    
    Total
    
    than 1 year
    
    1-3 years
    
    3-5 years
    
    than 5 yearsLong-Term Debt Obligations
    
    
    329.2
    
    
    
    90.6
    
    
    
    84.8
    
    
    
    114.1
    
    
    
    39.7Capital (Finance) Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
Long-Term Liabilities Reflected on the Companys Balance
Sheet under Luxembourg GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    329.2
    
    
    
    90.6
    
    
    
    84.8
    
    
    
    114.1
    
    
    
    39.7
 75




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES DIRECTORS AND SENIOR MANAGEMENT Directors Our administration is conducted by our Board of Directors which, in
accordance with our articles of incorporation (our charter and
bylaws, together the Articles of Incorporation or
Articles), consists of a minimum of three
and a maximum of fifteen members elected at ordinary general meetings of
holders of Class A and Class B shares. In case of a vacancy in any Director
position, the remaining Directors may temporarily fill such vacancy by a
majority vote. The holders of Class A and Class B shares would be asked to
ratify such election at their next general meeting. The Quinsa Shareholders Agreement provides, among other things, that so
long as AmBev and BAC each has a certain percentage of all shares entitled to
vote at our shareholders meetings, each of AmBev and BAC will have the right to
nominate 50% of the Directors constituting our Board of Directors. See Item
7. Major Shareholders and Related Party TransactionsMajor ShareholdersQuinsa
Shareholders Agreement. Alvaro Sainz de Vicuña was appointed to replace Jean
de Ganay, who resigned on May 8, 2003. All of these Directors must be
confirmed at the Annual General Shareholders Meeting scheduled to occur on
June 25, 2004. Thus, our current Directors are as follows: Name
    
    Date of BirthJacques-Louis de Montalembert (1)
    
    08-06-45Carlos J. Miguens (1)
    
    02-16-49Alvaro Sáinz de Vicuña (1)(2)(4)
    
    07-12-52Federico Sáinz de Vicuña (1)(2)
    
    02-26-57Juan
Manuel Vergara Galvis (5)
    
    07-09-59Victorio Carlos De Marchi (3)
    
    11-13-38Carlos Alberto da Veiga Sicupira (3)
    
    05-01-48Magim Rodriguez Júnior (3)
    
    03-22-42Beverages Associates (BAC) Corp.
    
    Dunvegan S.A. (6)
    
    
   (1)
    
    These Directors were nominated by BAC pursuant to its rights under the
Quinsa Shareholders Agreement. See Item 4. Information on the
CompanyHistory and DevelopmentRecent EventsRelationship with AmBev,
and Item 7. Major Shareholders and Related Party TransactionsMajor
ShareholdersQuinsa Shareholders Agreement.(2)
    
    Alvaro Sáinz de Vicuña and Federico Sáinz de Vicuña are brothers.(3)
    
    These Directors were nominated by AmBev pursuant to its rights under the
Quinsa Shareholders Agreement. See Item 4. Information on the
CompanyHistory and DevelopmentRecent EventsRelationship with AmBev,
and Item 7. Major Shareholders and Related Party TransactionsMajor
ShareholdersQuinsa Shareholders Agreement.(4)
    
    Replaced Jean de Ganay on May 9, 2003; Mr. de Ganay resigned from Quinsas
board on May 8, 2003.(5)
    
    Replaced Mr. Marcel Herrmann Telles who resigned in May 2004.(6)
    
    Dunvegan S.A., an affiliate of AmBev, replaced Mr. Roberto Moses Thompson Motta
who resigned in May 2004. Following are brief biographies of each of our Directors: Jacques-Louis de Montalembertis currently Co-Chairman of the Board of
Directors. He has been a Director of Quinsa since 1989. His term of office
expires in June 2008. He has represented the Bemberg family in Latin America
since 1978 and is a member of various Boards of Directors, including Cervecería
Chile and Bodegas Ruca Malen S.A. and he is chairman of Fundación Pro Vivienda
Social. Carlos J. Miguenshas been a Director of Quinsa since 1989. His term of
office expires in June 2009. His professional experience includes serving as
President of CMQ, Malsaf and Mosa. He has also been President of M.B.P.
International, and is currently President of M.B. Holdings and Agropecuaria
Cantomi. 76




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Alvaro Sáinz de Vicuñahas been a Director of Quinsa and of Quilvest since
1996. His term of office expires in June 2005. He is Chief Executive Officer
and Vice President of the Board of Directors of Sociedad Ibérica de Cartera,
S.A.SIBEC, where he has worked since 1984. He has also been chairman of
Quilvest since 2000. He has also held various positions at Merrill Lynch
International Banking Group, Banco Urquijo in Madrid and S.G. Warburg. He
holds a degree in economics and business administration from Universidad
Complutense in Madrid. Federico Sáinz de Vicuñahas been a Director of Quinsa since June 1993.
His term of office expires in June 2009. He is the President and Chief
Executive Officer of FEIBA S.A. He has held various positions with CS First
Boston Limited, Warner Home Video Española S.A. and Impala S.A. Mr. Sáinz de
Vicuña holds a B.S. degree in economics from the Wharton School of the
University of Pennsylvania. Juan Manuel Vergara Galvisis a member of the Board of Directors of Quinsa
and his term of office expires in 2008. He is also an International Executive
Officer of AmBev. He served as the Executive Soft Drink and Non-alcoholic
Non-Carbonated Beverages Officer of AmBev from 2001 to 2003. Prior to this
appointment he was the Marketing Executive Officer of Brahma and AmBev from
1997 to 2000. He holds a degree in business administration from the Colegio de
Estudios Superiores de Administración, in Bogotá, Colombia. His principal
business address is Rua Dr. Renato Paes de Barros 1017, 4th floor, São Paulo,
Brazil. Victorio Carlos De Marchiis a Director of Quinsa and the Co-Chairman of
the Board of Directors of AmBev and the Chairman of the Board of Directors of
CBB. His term of office expires in 2009. Mr. De Marchi joined Companhia
Antarctica Paulista in 1961 and held various positions during his tenure,
including Chief Executive Officer from 1998 to April 2000. Mr. De Marchi was
also president of the Brewing Industry National Association (Sindicerv) until
February 2002 and is a member of the Orientation Committee of FAHZ. Mr. De
Marchi has a degree in economics from Faculdade de Economia, Finanças e
Administracão de São Paulo and a law degree from Faculdade de Direito de São
Bernardo do Campo. His principal business address is Rua Dr. Renato Paes de
Barros 1017, 4th floor, São Paulo, Brazil. Carlos Alberto da Veiga Sicupirais a Director of Quinsa and a member of
the Board of Directors of AmBev. He also served as a member of the Board of
Directors of Brahma from 1990 until 1999. His term of office expires
in 2009.
Mr. Sicupira is a partner of GP Investimentos Ltda. He is also currently a
board member of São Carlos Emprendimentos e Participações, ALL and Lojas
Americanas S.A. He is also a member of the Board of Associates of Harvard
Business School since 1988. Mr. Sicupira has a degree in business
administration from the Universidad Federal do Rio de Janeiro and a degree from
the Harvard Business School. His principal business address is Av. Brig. Faria
Lima, 3729, 7th floor, São Paulo, Brazil. Magim
Rodriguez Júnioris the Co-Chairman of the Board of Directors
of Quinsa and the Vice Chairman of the
Board of Directors of AmBev. His term of office expires in 2008. He served as
Chief Executive Officer of AmBev from 1999 to 2003. He is also Chief Executive
Officer of CBB. He has been associated with Brahma since 1989, serving first
as Marketing Executive Officer. He holds a degree in business administration
and accounting from Universidad Mackenzie. His principal business address is
Rua Dr. Renato Paes de Barros 1017, 4th floor, São Paulo, Brazil. Beverages Associates (BAC) Corp. Under Luxembourg law, a corporation may
serve on the Board of Directors of another corporation. BAC has authorized
Guillermo Engels to represent BAC on our Board of Directors. His term of office
expires in June 2008. Dunvegan
S.A. Under Luxembourg law, a corporation may serve on the Board of
Directors of another corporation. Dunvegan has authorized Roberto Moses
Thompson Motta to represent Dunvegan on our Board of Directors. His term of
office expires in June 2005. Senior Management Our current executive officers are set forth below. We have a board of
management that helps facilitate coordination between our various business
units. As of December 31, 2003, the five members of the board of management
were Agustín García Mansilla, Carlos Adjoyán, Gustavo Castelli, Nestor Del
Campo, and Faustino Arias. 77




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Current Position
    
    
    
    
    
    Number of YearsName
    
    Position
    
    Held Since
    
    Date of Birth
    
    with QuinsaAgustín García Mansilla
    
    Chief Executive Officer
(CEO)
    
    
    1998
    
    
    
    01-11-56
    
    
    
    8Carlos Adjoyán
    
    Director, Human Resources
    
    
    1998
    
    
    
    03-05-52
    
    
    
    6Gustavo Castelli
    
    Chief Financial Officer (CFO)
    
    
    2002
    
    
    
    08-10-59
    
    
    
    5Néstor Del Campo
    
    Director, Argentina Beverages
Division (ABD)
    
    
    2002
    
    
    
    08-03-63
    
    
    
    11Faustino Arias
    
    Director,  International Beverage Division
    
    
    2003
    
    
    
    06-25-61
    
    
    
    18Pablo González(1)
    
    Logistics Manager, ABD
    
    
    2004
    
    
    
    05-18-68
    
    
    
    9Nicolás Bamberg
    
    Industrial Manager, ABD
    
    
    2002
    
    
    
    10-28-56
    
    
    
    12Francis Cressall
    
    Group Treasurer
    
    
    2003
    
    
    
    06-03-59
    
    
    
    6Héctor Dorribo
    
    Group Controller
    
    
    2002
    
    
    
    04-07-52
    
    
    
    23Miguel A Gómez Eiriz
    
    General Manager Bolivia
    
    
    2003
    
    
    
    10-13-62
    
    
    
    13Adrián González Fischer
    
    National Sales and Distribution Manager, ABD
    
    
    2003
    
    
    
    02-23-63
    
    
    
    11Fernando Lascano
    
    Corporate Communications Manager
    
    
    2000
    
    
    
    12-28-45
    
    
    
    4Jorge Mastroizzi
    
    Marketing Manager, ABD
    
    
    2003
    
    
    
    10-04-69
    
    
    
    5Daniel Montero
    
    Internal Auditor
    
    
    1999
    
    
    
    05-18-43
    
    
    
    5Fernando Ragni
    
    Soft Drinks Manager, ABD
    
    
    2003
    
    
    
    10-07-51
    
    
    
    10Pablo Pereyra
    
    General Manager, Cervecería Paraguaya
    
    
    2003
    
    
    
    08-28-67
    
    
    
    12Celso Rojas
    
    General Manager, FPV
    
    
    1998
    
    
    
    05-10-41
    
    
    
    31Gustavo Sampayo
    
    General Manager, Uruguay
    
    
    2003
    
    
    
    09-09-65
    
    
    
    17Pablo Sanchez
    
    General Manager, Cervecería Chile
    
    
    2003
    
    
    
    06-21-64
    
    
    
    6Hector Ordoqui
    
    Country Manager, Uruguay
    
    
    2003
    
    
    
    09-28-42
    
    
    
    15Silvio Szostak
    
    Chief Information Officer
    
    
    1998
    
    
    
    09-15-48
    
    
    
    6
   (1)
    
    Replaced Dario Aparicio in May 2004. There is no family relationship between any of the members of our senior
management nor between any members of our senior management and the members of
our board. There is no arrangement with our major shareholders, customers,
suppliers or other person pursuant to which the members of our senior
management were selected. Following are brief biographies of each of our
executive officers: Agustín García Mansilla*has been Chief Executive Officer and Chairman of
the board of management since January 1998. He is a Director of CMQ and of
some other operating subsidiaries. Prior to his present position, he was Vice
President of Operations for Latin America and General Manager for Argentina for
Burns Philip, General Manager for CALSA, and was Marketing Manager for a major
footwear brand called Alpargatas SAIC. He holds a degree in Industrial
Engineering from the University of Buenos Aires and has also attended
Stanfords Executive Program as well as the program for executives at the
Instituto de Altos Estudios Empresariales. Carlos Adjoyán* has been Director of Human Resources and a member of the
board of management since joining the Company in 1998. Prior to his current
position, he was Director of Human Resources for Johnson Wax Argentina, and
Management Development Manager of Unilever Argentina. He holds a degree in
Industrial Relations from the UADE University. Gustavo Castelli* has been Chief Financial Officer since 2002.
Previously, he was General Manager for BAESA, as well as Vice President for
Argentina, Chile and Uruguay at Burns Philip. Mr. Castelli earned a CPA degree
and a degree in Business Administration from the Catholic University of
Argentina. Néstor Del Campo* was appointed Director for ABD in 2002. Prior to that
time, he served as General Manager of CMQ as well as Marketing & Sales Manager
of CMQ. Previously he had been Marketing Manager for Pepsi. He holds a degree
in Business Administration from the Catholic University of Argentina. He has
also attended the Executive Program at Darden School, University of Virginia. 78




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Faustino Arias*has been Director of International Beverages since
January 2003. Previously, he was General Manager of Incesa. Prior to that, he
was Finance and Administration Manager of Cervecería Chile and he worked in the
Zárate Project. He holds a CPA degree from the University of Buenos Aires. He
has also attended the Executive Program at Darden School, University of
Virginia. Pablo Gonzálezhas been the Logistics Manager of ABD since May 2004.
Previously he was the Indirect Sales Manager. He holds a degree in Industrial
Engineering from the University of Buenos Aires and an Executive Master in
Business from the Catholic University of Argentina. He has also attended a
Logistic Program in IAE in Buenos Aires. Nicolás Bamberghas been Industrial Manager of ABD since 2002. Prior to
this position, he was Industrial Manager of CMQ, Plant Manager of the Quilmes
Brewery and Plant Manager of the Zárate Brewery. He holds a degree in
Industrial Engineering from the Catholic University of Argentina. He has also
attended the Executive Program at Darden School, University of Virginia, and
the program of Supply Chain Management at Stanford University. Francis Cressallhas been Group Treasurer since January 2004. Previously,
he was Manager of Corporate Finance. Prior to this position, he was a Vice
President with J.P. Morgan. He holds a degree in Business Administration from
the University of Buenos Aires. Héctor Dorribohas been Group Controller since 2002. Previously, he was
Finance and Administration Manager of CMQ and Controller for CALSA. He holds a
degree in Business Administration from the University of Buenos Aires. He has
also attended an Advanced Management Program, at the Wharton School of the
University of Pennsylvania. Miguel Gómez Eirizhas been General Manager of Incesa since January 2003.
Prior to his current position, he was the Finance and Administration Manager at
Baesa, the General Manager of Paresa, the Group Controller at Quinsa and
Finance and Administration Manager of CMQ. Mr. Eiriz earned a CPA degree from
the Catholic University of Argentina. Adrián González Fischerhas been the National Sales and Distribution
Manager for ABD since April 2003. Previously, he held the position of Sales
Manager of CMQ and prior to that, Distribution and Retail Sales Manager at CMQ.
He was also the Commercial Manager in Chile. Mr. González Fischer earned a
degree in Business Administration from the University of Buenos Aires and has
also attended programs on Finance Accounting at the Wharton School of the
University of Pennsylvania. Fernando Lascanohas been Corporate Communications Manager since September
2000. Previously, he was a professional journalist and chief economic editor
for La Nación, one of the principal newspapers in Buenos Aires. Jorge Mastroizzihas been Marketing Manager for ABD since April 2003.
Prior to his current position, he was the Brand Manager for the Quilmes brand.
He also worked as a Product Manager at Molinos Ríos de la Plata SA. Mr.
Mastroizzi holds a degree in Business Administration from the University of
Buenos Aires. He has attended the Competitive Marketing Strategy Program at
the Wharton School of the University of Pennsylvania. Daniel Monterohas been Corporate Audit Manager since January 1999. Prior
to this position, he was General Audit Vice-President for South America at
Burns Philip International Ltd., General Audit Manager at CALSA and Internal
Audit Manager at General Electric Argentina. He holds a degree in Business
Administration from the Argentine University of Business. Pablo Pereyrahas been General Manager of Cervecería Paraguaya since
December 2003. Previously he was Finance and Administration Manager of INCESA
(Bolivia). Mr. Pereyra earned a CPA degree from the University of Buenos
Aires. He completed the Developing Managerial Excellence Program, the
Strategic Marketing Management Program and the Strategic Sales Management
Program at the Darden School, University of Virginia. Fernando Ragnihas been Soft Drinks Manager for ADB since April 2003.
Previously, he was Marketing Manager for CMQ, Manager for Commercial Services
at CMQ, Commercial Manager at Bieckert and Marketing Manager at Pepsi
Argentina. Mr. Ragni holds a degree in Advertising from the Universidad del
Salvador. 79




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Celso Rojashas been the General Manager of FPV since 1998. Prior to his
current position, he was Financial Manager and General Manager of Paresa and
Assistant Manager at Citibank Paraguay. He holds a degree in economics from
the Universidad Nacional de Asunción and, since 1971, has been a Professor at
the Catholic University of Paraguay. He has attended a seminar of Finance and
Accounting at the Wharton School of the University of Pennsylvania. Gustavo Sampayohas been General Manager for Uruguay since March 2003.
Prior to his current position, he was Controller of BAESA and Finance and
Administration Manager of PARESA and Cervecería Chile. Mr. Sampayo earned a
CPA degree from the University of Buenos Aires and a Masters degree from IAE
in Buenos Aires. He has recently completed the Advanced Executive Program at
Kellogg Business School at Northwestern University. Pablo Sánchezhas been General Manager of Cervecería Chile since July
2003. Previously, he was Marketing manager of Cervecería Chile and Trade
Marketing Manager of Unilever Chile. Mr. Sánchez holds a degree in Commercial
Engineering from the University of Chile. Hector Ordoquihas been the Country Manager for Uruguay since June 2003.
Prior to his current position, he was General Manager of Uruguay Beverages
Division. He holds an engineering degree from the Universidad de la República
Oriental del Uruguay, an MS degree from Leeds University, and a degree in
Brewing technology from Berlin University. Silvio Szostakhas been Chief Information Officer since 1998. Prior to
that, he was Technology Manager and then General Manager at Inventica. He
holds a CPA and Systems Engineering degree from the University of Buenos Aires.   *
    
    Members of our board of management. Management Committees We established a disclosure committee (the Disclosure Committee) which
is responsible for monitoring the collection, processing and submission to the
CEO and CFO of information relating to the Company and its consolidated
subsidiaries that is required to be included in disclosure reports (such as
this annual report on Form 20-F) in order to ensure timely and accurate
disclosure of material information. The duties of the Disclosure Committee
include the following: (a) assisting the CEO and CFO in evaluating the
effectiveness of the Companys internal controls and disclosure procedures
within 90 days prior to the filing of annual reports; (b) suggesting any
improvements in internal controls and/or disclosure procedures as a result of
such evaluation; (c) verifying that the Companys processes for information
collection, processing and control are in compliance with its internal controls
and disclosure procedures such that the accuracy of its disclosures can be
verified; and (d) providing assistance in determining whether information may
be considered material to the Company and its subsidiaries. The Disclosure
Committee is comprised of Francis Cressall, our Group Treasurer; Hector
Dorribo, our Group Controller; Silvio Szostak, our Chief Information Officer;
Daniel Montero, our Internal Auditor and Coordinator of the Disclosure
Committee; as well as Ricardo Siri, our General Counsel. COMPENSATION A new compensation system for Management In the past, our top management had benefited from a profit-sharing plan,
whereby they were distributed up to 5% of each years net profit after tax.
This distribution was not dependent on having achieved the years budget. In 2003 the Board of Directors approved a new compensation package for
management. The primary difference of this compensation scheme compared to the
previous plan is that the actual accrual of benefits is now significantly
dependent on performance for Management and Executive Directors. In fact,
senior management may be entitled to nothing if a certain percentage of the
years budget is not achieved. 80




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We believe this package is much more effective as it ties top managements
compensation to actual performance, and therefore to the shareholders
compensation. The aggregate amount of compensation approved under this new
system for management for fiscal year 2003 was US$6.5 million. Compensation of Directors On
June 23, 2004, the Board of Directors recommended, and the
shareholders approved, at the annual general meeting, the proposal to pay an aggregate amount
of compensation to Directors of US$1.9 million for fiscal year 2003. Amounts Accrued for Pension, Retirement and Similar Benefits Pension Benefits CMQ sponsors a defined contribution pension plan (the Plan) for
qualified employees that is funded with contributions from both CMQ and plan
participants. Employees are eligible to participate and may enter the Plan
during the first quarter of each year. Argentine law provides for mandatory pension benefits to be paid to
retired employees from government pension plans and/or private fund managed
plans (Pension Funds) to which employees may elect to direct their mandatory
contributions. Under the features of the Plan, participants may elect to
direct their voluntary contributions to retirement funds or to the same Pension
Fund where their mandatory contributions are held. Due to the Argentine
economic crisis, while CMQ remained current on its funding obligations under
the Plan, deposits in private companies were suspended, and the Company
maintained these pension reserves on its records. These reserved contributions
will be deposited with the funds designated by the Plan participants once the
final treatment of the funds already deposited has been determined. Retirement Funds Provided the participant has elected to direct his or her contributions to
an authorized investment retirement fund, eligible participants may make
monthly pre-tax contributions to the Plan of up to 7.5% of their eligible
earnings, and CMQ makes matching contributions equal to 100% of the employee
contribution. Separate accounts are maintained for each participant in the
Plan. The portion of a participants account attributable to his or her own
contributions will be 100% vested. The portion of the account attributable to
CMQs contributions, including matching contributions, will vest after the
individual has been employed with CMQ for 5 years. Distributions from the Plan
may be made in the form of a lump-sum cash payment or in installment payments.
Under certain circumstances, employees may make withdrawals from the Plan prior
to attaining age 60 in the case of male employees or 55 in the case of female
employees. During the years ended December 31, 2003, 2002 and 2001, CMQ made
contributions of approximately US$0.1 million each year to the Plan. The
amounts corresponding to both 2003 and 2002 have still not been deposited under
the Plan. Pension Funds Provided the participant has elected to direct his or her contributions to
an authorized Pension Fund, eligible participants may make monthly pre-tax
contributions to the Plan of up to 11% of their eligible earnings. Elective
contributions made by employees are fully vested at all times. CMQ makes
matching contributions equal to 100% of the participants contribution. Under
the pension feature of the Plan, CMQs contributions are deferred and
maintained in separate accounts for each participant until the participant has
completed five years of service with CMQ. Interest income is recognized based
on certain governmental yield rate information. After the completion of five
years of service, CMQs matching contributions are transferred to the Pension
Fund where the participants elective contributions are being held.
Contributions by CMQ were US$0.2 million for each of 2003 and 2002 and US$0.3
million for 2001. The amounts corresponding to both 2003 and 2002 have still
not been deposited. Post-Employment Benefits Under the features of the Plan, CMQ also provides certain benefits to
former or inactive plan participants after employment but before retirement
provided the participant completed five years of service with CMQ. These 81




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benefits include disability-related benefits and death benefits. The
Company maintains an insurance policy to cover any potential liability related
to these benefits. BOARD PRACTICES The following chart provides the year in which each person became a
Director of the Company as well as the date of expiration of their current term
of office: Name
    
    Director Since
    
    Term ExpirationJacques-Louis de Montalembert
    
    
    1996
    
    
    June 2008Carlos J. Miguens
    
    
    1989
    
    
    June 2009Alvaro Sáinz de Vicuña
    
    
    1996
    
    
    June 2005Federico Sáinz de Vicuña
    
    
    1993
    
    
    June 2009Juan Vergara
    
    
    2004
    
    
    June 2008Victorio Carlos De Marchi
    
    
    2003
    
    
    June 2009Carlos Alberto da Veiga Sicupira
    
    
    2003
    
    
    June 2009Magim Rodriguez Júnior
    
    
    2003
    
    
    June 2008Beverage
Associates (BAC) Corp., represented by Guillermo Engels
    
    
    2003
    
    
    June 2008Dunvegan S.A., represented by Roberto Moses Thompson Motta
    
    
    2004
    
    
    June 2005
 None of our Directors have entered into service contracts with us or any
of our subsidiaries providing for benefits upon termination of employment. As
of May 28, 2003, we also established a compensation committee
(Compensation Committee). Its
members are Mr. Alberto Sicupira, Mr. Guillermo Engels and Mr. Carlos Miguens.
Mr. Marcel Telles was a member until he resigned in May 2004. The Compensation
Committee makes recommendations to the Board regarding the compensation of
management which is subsequently decided on by the Board of Directors. In 2003
the Board of Directors approved a new compensation package dependent on
performance for management based on the recommendations of the Compensation
Committee. The aggregate amount of compensation approved under this new system
for management for fiscal year 2003 was US$6.5 million. On
October 29, 2002 the Board of Directors decided to establish an audit committee (Audit Committee)
although such a committee is not required under Luxembourg law.
Before we were able to formalize the Audit Committee, Jean de Ganay,
our financial expert, resigned from the Board of Directors in
May 2003. Consequently we currently do not have an Audit Committee. We expect
to reestablish an Audit Committee with a financial expert in
July 2004; until then, our Board of Directors
is acting as our Audit Committee. EMPLOYEES As of December 31, 2003, we employed 6,234 people. Of these 6,234
employees, approximately 4,168 were based in Argentina, 858 in Bolivia, 239 in
Chile, 557 in Paraguay and 412 in Uruguay. Of these same employees, 3,243 are
engaged in industrial activities such as brewing, malting and bottling, 2,416
in commercial activities such as sales and marketing and 575 in finance,
administration and other activities. The average number of temporary employees
during 2003 was approximately 600. Labor relations between our various operating companies and their
employees are governed by 15 different industry-wide collective bargaining
agreements negotiated separately for each operating subsidiary. In Argentina,
Bolivia, Chile, Paraguay and Uruguay, our collective agreements are negotiated
every two years. We believe that we have positive labor relations with our
employees. Except for occasional industrial disputes, we have not experienced
any significant labor strike or other nationwide industrial dispute during the
past five years that has materially affected our results of operations. 82




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SHARE OWNERSHIP As of March 31, 2004, none of our Directors or executive officers held any
of the Class A or Class B shares and no stock options have been granted to our
Directors, executive officers or any other employee. Since March 31, 2004,
certain members of our senior management have purchased 6,500 Class B Shares. 83




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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS MAJOR SHAREHOLDERS Our largest shareholder is BAC which, as of December 31, 2003, held
373,520,000, or 53.53%, of our outstanding voting shares net of treasury stock.
BAC was organized in the British Virgin Islands in 1994 by various individual
shareholders who are descendants of the Bemberg family, our founding family.
BACs principal purpose is to hold a controlling interest in the Class A
shares. Shareholders of BAC are restricted in their ability to transfer shares
in BAC to persons other than BAC shareholders. On January 31, 2003, AmBev subscribed for 26,388,914 Class B shares from
Quinsa and acquired 230,920,000 Class A shares from BAC, together totaling
36.18% of the voting rights in Quinsa. As disclosed in its Schedule 13D/A
filed with the SEC on October 9, 2003, AmBev completed an acquisition of
12,000,000 Class B shares. In addition, pursuant to the stock purchase
agreement (Stock Purchase Agreement), BAC has granted AmBev a call option, beginning in April 2009, to
purchase from BAC, and AmBev has granted BAC a put option, beginning in April
2003, to sell to AmBev BACs remaining 373,520,000 Quinsa Class A shares in
exchange for newly issued shares of AmBev. In April 2004, BAC did not exercise its put option. See Item 4. Information on the
Company  History and Development  Recent Events  Relationship with
AmBev. As of December 31, 2003, AmBev owned 38.6% of the voting power in Quinsa,
and BAC owned 38.59% of such voting power. The Escrow Agreement among Quinsa,
BAC, AmBev, and the Bank of New York as escrow agent, ensures that AmBevs
voting rights in the Company are equal to those of BAC. Pursuant to this
agreement, BAC has deposited 60,000,000 of its Quinsa Class A shares with the
escrow agent in order to ensure that such shares will only be voted upon joint
written instructions from both BAC and AmBev for so long as both BAC and AmBev
hold the Requisite Percentage (as defined below). If necessary, the 60,000,000
Class A shares will be adjusted in amount from time to time to maintain voting
parity between BAC and AmBev. The following table sets forth the estimated relative ownership interests
in the Class A shares and the Class B shares of BAC, AmBev and our Directors
and executive officers as a group and their respective economic and voting
power as of March 31, 2004: Directors andBAC
    
    AmBev
    
    Executive OfficersClass A shares
    
    
    373,520,000
    
    
    
    230,920,000
    
    
    
    0Class B shares
    
    
    
    
    
    
    38,388,914
    (4)
    
    
    0
    (7)Economic Interest (1)
    
    
    30.01
    %(2)
    
    
    49.40
    %(5)
    
    
    0Voting Power(1)
    
    
    53.70
    %(3)
    
    
    38.72
    %(6)
    
    
    0
   (1)
    
    Net of treasury stock.(2)
    
    As of June 24, 2004, BAC had 30.46% economic
interest.(3)
    
    BACs voting power is limited by the Escrow Agreement, as explained
above. Therefore, pursuant to the Escrow Agreement, each of BAC and AmBev
have equal voting power. As of June 24, 2004, BAC had 53.99%
voting power.(4)
    
    Includes 12,000,000 Class B shares acquired after February 1, 2003 as
disclosed on AmBevs Schedule 13D/A filed, with the SEC on October 9,
2003.(5)
    
    As of June 24, 2004, AmBev had 50.14% economic
interest.(6)
    
    As of June 24, 2004, AmBev had 38.93% voting
power.(7)
    
    As of June 20, 2004, certain members of our senior management have
purchased 6,500 Class B shares. As
of June 8, 2004, there were 1,016,910 ADSs (which translates into
2,033,820 Class B shares) held by 439 U.S. registered
holders, representing approximately 3% of the total outstanding
Class B shares. At the same date, there were fewer than
14.1 million Class A shares held in the U.S., representing
less than 2.2% of the total outstanding Class A shares. The Board of Directors approved several stock repurchase programs in order
to provide liquidity to shareholders, particularly in an environment where
trading for the Companys stock had become rather shallow. Quinsas investment
under these programs during 2003 was US$41.7 million. In March 2004, the Board
authorized the expenditure of up to an additional US$50 million to make market
purchases of ADSs. Our Board may decide at any time to make additional repurchases of our stock pursuant to an authorized repurchase
program, a tender offer or otherwise and/or decide to stop making repurchases altogether. Quinsa Shareholders Agreement Pursuant to the Quinsa Shareholders Agreement, so long as AmBev and BAC
each has the Requisite Percentage (as defined below) each of AmBev and BAC will
have the right to nominate:  a.
    
    50% of the Directors constituting the Quinsa Board of Directors,
and 84




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b.
    
    for each of our subsidiaries, 50% of the number of Directors that
Quinsa is entitled to nominate under such subsidiarys charter
documents or by-laws, any existing shareholders agreement or applicable
law. The Quinsa Shareholders Agreement further provides that if either BAC or
AmBev ceases to own at least 40% (the Requisite Percentage) of the combined
ownership of BAC and AmBev of all shares entitled to vote at our shareholder
meetings (such combined ownership interest of BAC and AmBev being termed the
Voting Interest), then the number of Directors that each will be entitled to
nominate will be determined based on the percentage of the Voting Interest held
multiplied by number of Directors constituting the Quinsa board or, in the case
of one of our subsidiaries, the number of Directors that Quinsa is entitled to
nominate, subject to certain exceptions. Upon exercise of the call option by AmBev or the put option by BAC under
the Stock Purchase Agreement, resulting in the purchase by AmBev of BACs
remaining 373,520,000 Quinsa Class A shares in exchange for newly issued shares
of AmBev, (i) BAC will no longer have any rights to nominate Directors; (ii)
the Directors nominated by BAC must resign; (iii) as promptly as practicable,
the Quinsa board and each subsidiary board will be reconstituted to include
only Directors nominated or approved by AmBev, subject to the rights of any
shareholders under any subsidiarys charter or by-laws or any existing
shareholders agreement to nominate Directors; and (iv) the Quinsa Shareholders
Agreement will terminate. So long as AmBev and BAC each own the Requisite Percentage, each will
have the right to elect a Co-Chairman of the Quinsa board, as well as the right
to jointly appoint a Chairman of each subsidiary board. In addition, as long as each of AmBev and BAC owns the Requisite
Percentage, we agreed not to take certain actions, and not to permit our
subsidiaries to take certain action, without the consent of AmBev and BAC.
Examples of actions taken by us or our subsidiaries that could or would require
prior consent by AmBev and BAC include: capital expenditures, material or
multi-year contracts, business outside of beverages or South America, product
pricing, issuance or repurchase of shares or incurrence of debt above certain
threshold amounts, changes in senior management compensation, changes in
dividend policy, merger or sale of Quinsa or its significant subsidiaries,
material asset sales or spin offs, material acquisitions, changes to our
charter or by-laws or those of our significant subsidiaries, filing for
bankruptcy, and liquidation or dissolution for us or our significant
subsidiaries. If AmBevs or BACs Voting Interest decreases, but remains
above certain threshold amounts, then certain actions above will continue to
require consent by both parties, and so long as AmBev and BAC own one-third or
more of the Voting Interest, the affirmative vote of both will be required for
any capital increase. Because the Quinsa Shareholders Agreement does not
include any mechanism for breaking a tie vote on the Quinsa Board of Directors,
there is a risk that some of the actions described above cannot or will not be
taken. AmBev also agreed to refrain from acquiring any ownership interest in or
substantial assets of any businesses involving the manufacture, marketing, sale
or distribution of beverages in certain specified regions in South America
without first offering us the opportunity to make such acquisition, with
certain limited caveats. After the execution of the Quinsa Shareholder
Agreement, BAC resigned its rights to invest in Peru. Disclosure of Shareholder Ownership Luxembourg law and the rules of the Luxembourg Stock Exchange require any
person who acquires securities representing 10% or more of our total voting
rights to notify us and the Luxembourg Stock Exchange Supervisory Authority of
his or her 10% ownership within seven calendar days of the date he or she knows
or should have known of such ownership. In addition, Luxembourg law requires
any person to disclose to us and the Luxembourg Stock Exchange Supervisory
Authority the percentage of voting rights held by him or her within seven
calendar days from the day he or she knows or should have known that such
percentage, as a result of an acquisition, sale or other transfer of Class A
and/or Class B shares, equals, exceeds or falls below 10%, 20%, 33.3%, 50% or
66.6% of our total voting rights existing at such time, subject to certain
exceptions. The percentage of voting rights held by any such holder includes
voting rights directly and indirectly controlled. 85




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RELATED PARTY TRANSACTIONS We purchase certain raw materials, goods for resale and services from
related parties. These transactions are summarized as follows: 2003
    
    2002
    
    2001(in US$ millions)Purchase of raw materials
    
    $
    8.5
    
    
    $
    3.0
    
    
    $
    4.8Transportation services
    
    
    0.8
    
    
    
    1.7
    
    
    
    4.0Fees for services
    
    
    0.7
    
    
    
    0.6
    
    
    
    2.9Technical assistance fees
    
    
    0.1
    
    
    
    1.5
    
    
    
    1.0Purchase of goods for resale
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.4Total
    
    $
    10.3
    
    
    $
    7.1
    
    
    $
    13.1
 Purchase of Raw Materials In 2003, the company purchased several raw materials, including malt, from
AmBevs subsidiaries (Maltería Pampa S.A., Cervecería y Maltería Paysandú S.A.
y Companhia Brasileira de Bebidas S.A.). We also bought and continue to buy
corn grits and rice from Compal, S.A. (Compal) which is 60% owned by Arfinsa
S.A. (Arfinsa). Arfinsa is indirectly owned by certain members of the
Bemberg family, and Compal is our sole supplier of corn grits and rice. In 2001 and 2002, the Company purchased several raw materials, including
malt and barley, from Heineken. In January 2003, the Company reached an
agreement with Heineken to cease producing and selling the Heineken brand
during 2003 (see Note 23 to our Consolidated Financial Statements).
Consequently, we stopped purchasing raw materials from Heineken in 2003. Transportation Services Transportes Ader S.A. (Tasa) and Compal provide integrated logistics
support for our entire supply chain. This logistics support includes inbound
raw materials supply, finished goods distribution, dedicated contract carriage,
the management of carriers and other supply chain services. These costs are
included as selling and marketing expenses in our consolidated statement of
income. Until the beginning of 2003, Tasa was controlled by Bemberg
Inversiones S.A., an investment firm owned by certain members of the Bemberg
family. Fees for Services These fees relate to certain administrative fees charged by Arfinsa S.A.
These costs are included as administrative and general expenses in our
consolidated statement of income. Technical Assistance Agreements Until January 2003, our relationship with Heineken as a technical adviser
was governed by technical assistance agreements relating to both our brewing
and malting operations. The technical assistance agreements covered issues
relating to product quality, the maintenance of production equipment and
facilities, the purchase of raw materials, environmental issues and managerial
systems. We were also able to request assistance with certain additional
services related to our breweries. The fees and expenses generated under these
agreements are included as technical assistance fees within cost of goods sold
in our consolidated statement of income. Pursuant to the Memorandum of
Agreement between Heineken and Quinsa, these technical assistance agreements
were terminated in January 2003. See Item 4. Information on the
Company  History and Development  Recent Events  Relationship with
AmBev  Settlement with Heineken. Purchase of Goods for Resale In 2003, the Company purchased imported bottled beer from AmBevs
subsidiaries for a total amount of US$0.2 million. During 2002 and 2001, the
Company purchased imported bottled beer from Heineken. However, as of June 86




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17, 2003, we no longer distribute the Heineken brand in the southern cone
markets. See Item 4. Information on the Company  History and Development 
Recent Events  Relationship with AmBev  Settlement with Heineken. Related Party Loans and Guarantees On September 22, 1993, QI(B) signed a guaranty agreement as the guarantor
and primary obligor with the International Finance Corporation (IFC), a
branch of the World Bank, guaranteeing a loan of US$30.0 million in principal
extended by the IFC to CMQ as part of an investment agreement. In 2003, CMQ
paid off this loan. 87




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ITEM 8. FINANCIAL INFORMATION CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See Item 17 for our Consolidated Financial Statements. Legal Proceedings and Contingencies We have certain contingent liabilities with respect to material existing
or potential claims, lawsuits and other proceedings, including those involving
tax, social security and other matters. We accrue liabilities when it is
probable that future costs will be incurred and such costs can be reasonably
estimated. Such accruals are based on developments to date, our own estimates
of the outcome of these matters, the opinions of our lawyers, and their
experience in contesting, litigating and settling other matters. As the scope
of the liabilities becomes better defined, there will be changes in the
estimates of future costs, which could have a significant effect on our future
financial position or profitability. Primarily as a result of the acquisitions of businesses in 2000, and as
part of the allocation of the purchase price of such acquisitions, during 2000
we recognized a contingency reserve of US$51.4 million with respect to tax,
social security and commercial lawsuits. Such matters arose in the ordinary
course of business of the particular entities prior to our acquisitions. On
August 2, 2003, through Law N° 2492, the National Congress of Bolivia passed a
temporary and exceptional Voluntary Plan for regularizing tax debts. In
November 2003, the Company (through its subsidiary in Bolivia, CBN) decided to
adhere to this plan and made a lump sum payment for US$12.3 million, which
enabled us to reduce potential and social security contingencies that had been
covered by such reserve. As a result, we recognized a gain on settlement of
pre-acquisition contingencies of US$29.4 million. See note 23 to our
Consolidated Financial Statements. As a result of the adhesion to the
Voluntary Plan mentioned above, the tax claim was ceased by the Bolivian
authorities. See Note 23 to our Consolidated Financial Statements. As of December 31, 2003, we maintained reserves amounting to US$10.6
million to cover contingent liabilities with respect to material existing or
potential claims, lawsuits and other proceedings, including those involving
tax, social security and other matters, and including the balance of the
contingency reserve described in the preceding paragraph. Our past experience
with similar contingencies leads us to believe that our current provisions for
such contingencies are adequate. If all such claims were determined adversely
within the same period, which we believe highly unlikely, our results of
operations for such period would be materially adversely affected. In 1997, our former subsidiary Baesa sold its Brazilian soft-drink
business (the Brazilian Business) to AmBev (formerly Cervejaria Brahma, the
Buyer). At the time of the sale, the Brazilian Business had certain material
existing and potential claims, lawsuits and proceedings, including those
involving tax, social security and other matters. Under a tax indemnification
agreement, Baesa agreed to indemnify the Buyer for these liabilities, but in no
event to exceed US$20.0 million, and PepsiCo has agreed to indemnify Baesa up
to US$10 million. Therefore, we have established a reserve amounting to US$9.9
million which we believe is adequate to cover losses related to this
transaction. In June 2002, we also received a summons indicating that Heineken had
commenced a legal proceeding against our company in a Luxembourg court. The
summons alleged that our proposed transaction with AmBev violated certain
contractual agreements between Heineken and Quinsa, and requested that the
court issue an order prohibiting the completion of the transaction with AmBev
until the contract dispute is resolved by an arbitrator. Later in June, the
Luxembourg court dismissed Heinekens summons after noting that we and AmBev
had agreed not to complete the AmBev transactions before September 15, 2002,
the earliest date by which the required approval of the Argentina antitrust
authorities was expected. This proceeding has been resolved. See Item 4.
Information on the Company  History and Development  Recent Events 
Settlement with Heineken. Dividend Policy For a description of our dividend policy, see Item 10. Additional
Information  Memorandum and Articles of Incorporation  Capital
Stock  Dividends
below. 88




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Significant Changes Except as otherwise described in our annual financial statements, there
have been no significant changes in our business, financial conditions or
results since December 31, 2003. 89




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ITEM 9. THE OFFER AND LISTING Market for the Class B shares Our ADSs, each representing two Class B shares without par value, are
listed on the New York Stock Exchange (NYSE) and trade under the symbol
LQU. Our Class B shares are listed and trade on the Luxembourg Stock
Exchange (LSE) as well. Each ADS is represented by an American Depositary Receipt, or ADR, issued pursuant to the deposit agreement dated
February 28, 2002 among us, The Bank of New York, as depositary, and the
holders from time to time of ADRs (Deposit Agreement). The ADSs (initially representing our
non-voting shares and now representing Class B voting shares) and non-voting
shares (which are now our Class B voting shares) began trading on the NYSE and
the LSE, respectively, on March 28, 1996. The table below sets forth, for the
periods indicated, the reported high and low daily closing prices of the
non-voting shares or Class B shares, as the case may be, and the ADSs on the
LSE and the NYSE, respectively. Price per Class B share(1)
    
    Price per ADS(2)(3)High
    
    Low
    
    High
    
    Low1999
    
    $
    12.25
    
    
    $
    7.20
    
    
    $
    25.25
    
    
    $
    15.002000
    
    
    13.75
    
    
    
    7.85
    
    
    
    28.25
    
    
    
    15.132001
    
    
    10.90
    
    
    
    5.00
    
    
    
    24.12
    
    
    
    9.952002
    
    
    6.38
    
    
    
    2.52
    
    
    
    13.09
    
    
    
    5.732003
    
    
    8.16
    
    
    
    2.90
    
    
    
    16.77
    
    
    
    6.3520021st Quarter
    
    
    6.10
    
    
    
    4.31
    
    
    
    13.01
    
    
    
    8.752ndQuarter
    
    
    6.38
    
    
    
    4.49
    
    
    
    13.09
    
    
    
    8.753rd Quarter
    
    
    4.50
    
    
    
    3.42
    
    
    
    9.24
    
    
    
    6.704th Quarter
    
    
    3.48
    
    
    
    2.52
    
    
    
    7.40
    
    
    
    5.7320031st Quarter
    
    
    3.52
    
    
    
    2.72
    
    
    
    8.11
    
    
    
    6.352nd Quarter
    
    
    6.15
    
    
    
    3.21
    
    
    
    13.80
    
    
    
    7.653rd Quarter
    
    
    7.20
    
    
    
    5.69
    
    
    
    15.61
    
    
    
    11.564th Quarter
    
    
    8.16
    
    
    
    7.20
    
    
    
    16.77
    
    
    
    14.9420041st Quarter
    
    
    9.99
    
    
    
    7.80
    
    
    
    20.18
    
    
    
    16.65December 2003
    
    
    8.16
    
    
    
    7.45
    
    
    
    16.77
    
    
    
    15.91January 2004
    
    
    9.94
    
    
    
    7.80
    
    
    
    20.18
    
    
    
    16.65February 2004
    
    
    9.53
    
    
    
    9.00
    
    
    
    19.57
    
    
    
    18.20March 2004
    
    
    9.99
    
    
    
    9.00
    
    
    
    20.14
    
    
    
    17.89April 2004
    
    
    9.75
    
    
    
    9.05
    
    
    
    19.46
    
    
    
    18.24May 2004
    
    
    9.35
    
    
    
    8.25
    
    
    
    18.79
    
    
    
    16.34
   (1)
    
    Source: Luxembourg Stock Exchange.(2)
    
    Source: New York Stock Exchange.(3)
    
    The ADSs have been restated to give retroactive effect to the change in
ratio of Class B shares to ADS. After approval of the recapitalization
plan, each ADS represents
two Class B shares, whereas previously each ADS had represented one non-voting share. The Board of Directors approved three stock repurchase programs during
November and December 2003 in order to provide liquidity to shareholders,
particularly in an environment where trading for the Companys stock had become
rather shallow. Following the substantial completion of these programs,
totaling approximately US$60 million in the aggregate, the Board of Directors
approved a further program of up to an additional US$50 million, on March 26,
2004. 90




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The Company intends to acquire shares from time to time under this and any
other programs the Board of Directors may approve in the future, at prices that
represent an attractive investment for the Company and its shareholders. Market for the Class A shares Our Class A shares are currently listed and trade in U.S. dollars on the
LSE. The table below sets forth, for the periods indicated, the reported high
and low daily closing prices of our Class A shares on the LSE. The price per
Class A share has been adjusted to reflect the 10:1 stock split that occurred
upon approval of our recapitalization plan by holders of our ordinary and
non-voting shares, including holders of our ADSs, on June 8, 2001. Pursuant to
the recapitalization plan, each ordinary share was redesignated as a Class A
share and split into 10 Class A shares. Price per Class A share(1)(2)High
    
    Low1999
    
    $
    0.98
    
    
    $
    0.712000
    
    
    1.14
    
    
    
    0.702001
    
    
    0.98
    
    
    
    0.552002
    
    
    0.73
    
    
    
    0.432003
    
    
    0.83
    
    
    
    0.2920021st Quarter
    
    
    0.63
    
    
    
    0.432nd Quarter
    
    
    0.73
    
    
    
    0.463rd Quarter
    
    
    0.70
    
    
    
    0.504th Quarter
    
    
    0.53
    
    
    
    0.4820031st Quarter
    
    
    0.51
    
    
    
    0.302nd Quarter
    
    
    0.71
    
    
    
    0.293rd Quarter
    
    
    0.83
    
    
    
    0.604th Quarter
    
    
    0.83
    
    
    
    0.7620041st Quarter
    
    
    1.03
    
    
    
    0.82December 2003
    
    
    0.83
    
    
    
    0.80January 2004
    
    
    1.03
    
    
    
    0.82February 2004
    
    
    0.95
    
    
    
    0.90March 2004
    
    
    1.00
    
    
    
    0.90April 2004
    
    
    0.99
    
    
    
    0.91May 2004
    
    
    0.95
    
    
    
    0.83
   (1)
    
    Source: Luxembourg Stock Exchange.(2)
    
    The prices of our Class A shares have been restated to give retroactive
effect to the 10:1 split which occurred as a result of our
recapitalization in June 2001. 91




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ITEM 10. ADDITIONAL INFORMATION MEMORANDUM AND ARTICLES OF INCORPORATION Recapitalization At
an Extraordinary General Meeting held on June 8, 2001, the shareholders
of our ordinary shares, non-voting shares and ADSs representing non-voting
shares approved the share capital reorganization plan to alter the respective
rights of holders of our ordinary shares without par value and holders of our
non-voting shares including ADS holders. As a result, we:  a.
    
    redesignated the outstanding ordinary shares as Class A shares and
split each outstanding ordinary share into ten Class A shares;b.
    
    converted the outstanding non-voting shares into Class B voting
ordinary shares and canceled the class of non-voting shares;c.
    
    adjusted the rights to dividends and liquidation proceeds of the
two classes so that each Class B share is entitled to receive, with
respect to any dividends or liquidation proceeds, ten times the amount
per share paid on the Class A shares;d.
    
    permitted conversion of Class A shares into Class B shares for a
limited period of time each year, provided that as a result of such
conversion a shareholder does not hold more than 5% of the
Class B shares in the aggregate;e.
    
    restated the existing provision of our Articles (as the term is
defined below) relating to authorized capital and waived preferential
subscription rights of shareholders to subscribe for further issues of
Class A shares or Class B shares; andf.
    
    changed the ratio of Class B shares to ADSs from 1:1 to 2:1. Because the Class B shares now have voting rights, implementation of the
plan has increased the voting power of the public stockholders, although voting
control of Quinsa remains with the holder or holders of the Class A shares.
The purpose of the share capital reorganization plan was to create a publicly
traded security having characteristics that would make it eligible for
investments by Argentine pension funds. Register We were incorporated by deed of Maître Camille Hellinckx, a notary
residing in Luxembourg, on December 20, 1989. This deed was published in the
Mémorial Recueil des Sociétés et Associations (the Mémorial), number 209 on
June 26, 1990. Our Statuts Coordonnés, which include both charter and by-laws,
(the Articles or Articles of Incorporation) were amended on the following dates: (1) June 11, 1992 by
deed of Maître Camille Hellinckx published in the Mémorial, number 339 on
August 6, 1992; (2) December 10, 1993 by deed of Maître Camille Hellinckx
published in the Mémorial, number 7 on January 7, 1994; (3) June 24, 1994 by
deed of Maître André Schwachtgen, published in the Mémorial, number 325 on
September 6, 1994; (4) February 6, 1996 by deed of Maître Camille Hellinckx
published in the Mémorial, number 117 on March 7, 1996; (5) April 25, 1996 by
deed of Maître Camille Hellinckx published in the Mémorial, number 299 on June
19, 1996; (6) October 9, 2000 by deed of Maître Reginald Neuman published in
the Mémorial, number 830 on November 13, 2000; (7) June 8, 2001 by deed of
Maître Reginald Neuman published in the Mémorial, number 1173 on December 15,
2001; (8) August 8, 2001 by deed of Maître Reginald Neuman published in the
Mémorial, number 117 on January 22, 2002; (9) January 31, 2003 by deed of
Maître Jean-Joseph Wagner published in the Mémorial, number 270 on March 13,
2003; (10) June 27, 2003 by deed of Maître Jean-Joseph Wagner published in the
Mémorial, number 829 on August 12, 2003; and (11) August 4, 2003 by deed of
Maître Jean-Joseph Wagner published in the Mémorial, number 941 on September
12, 2003. We are registered with the Companies Registrar in Luxembourg under the
number RCB 32.501. 92




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Objects and Purposes Article 2 of the Articles states that our object is the direct or indirect
holding of business interests in Luxembourg or foreign corporations or other
business entities as well as the administration, management, control and
development of such business entities. We may use our resources to (1) organize, manage, enhance in value and
liquidate a portfolio consisting of any securities, patents and licenses, (2)
participate in the organization, development and control of any business
entity, (3) acquire by way of capital contribution, subscription, underwriting,
option, purchase or any other manner any securities, patents and licenses, (4)
sell, transfer, exchange or otherwise enhance the value of such securities,
patents and rights and (5) provide companies in which we have an interest any
assistance, loans, advances or guarantees. In general, we may carry out any
operations which we deem useful to achieve our corporate objects and purposes,
within the limits established by the law of July 31, 1929 and subsequent
amendments. Article 2 of the Articles states that we may not directly carry on any
industrial activity or maintain a commercial establishment open to the public. The Board of Directors Our Board of Directors consists of a minimum of three and a maximum of
fifteen members appointed at general meetings. Directors are not required to
own our shares in order to act as members of the board. A Directors term of
office may not exceed six years; although Directors may be reappointed and
dismissed at any time. The Articles do not provide for classes of Directors
nor mandatory retirement of our Directors on the basis of age. Voting. The Board of Directors meets as often as is required, upon notice
given by either of the co-chairmen or by two Directors either at the registered
office or at any place indicated in the notice. The Board of Directors may
deliberate and act only if a majority of its members are present in person or
by proxy. All decisions are taken by a majority of votes of Directors present
or represented. Powers. The Board of Directors is vested with broad powers to act on our
behalf. It may authorize all acts of management (including the borrowing of
funds) within our corporate purposes other than those specifically reserved to
general meetings of shareholders. Within the limits of Luxembourg law, the
Board of Directors may:  a.
    
    delegate to any of its members, the powers to carry out its
decisions and to provide day-to-day management;b.
    
    confer to any person the powers necessary for our technical,
administrative and commercial management;c.
    
    constitute any committee and determine its function and authority;
andd.
    
    authorize all substitutions in the powers it has delegated or
conferred. Compensation.
On the basis of Article 14, the shareholders at the general
meeting approve a global amount for the remuneration of our Board of
Directors. Conflicts of Interest. Any Director who may have an interest adverse to
us with respect to a transaction submitted to the approval of the Board of
Directors is required to notify the board of such adverse interest. This
notice must be reflected in the minutes of the meeting in question, and the
Director is required to abstain from deliberating or voting on such
transaction. In addition, these transactions must be specifically reported at
the next general meeting. Capital Stock Following the latest exchange procedure (July 1  July 21, 2003) provided
by Article 5 (Share Capital), we
amended our articles of incorporation by notarial deed on August 4, 2003 to
reflect the changes in shares. Therefore, as of the date of this report the
share capital is set as US$41,699,101, represented by 637,103,500 Class A
shares without par value and 70,828,653 Class B without par value. The
authorized share capital is US$400,000,000, represented by Class A shares
without par value and Class B shares 93




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without par value, totaling 8,729,308,855 shares which includes the number
of Class A shares and Class B shares as are issued and outstanding from time to
time. Dividends. Each Class B share is entitled, if dividends are declared by
the general meeting of shareholders or, in case of interim dividends, by the
Board of Directors, to receive an amount of dividends equal to ten times the
amount of dividends to which each Class A share is entitled. The right to
dividends of Class A shares and Class B shares rank pari passuwithout
preference to each other. Prior to paying any dividends, we are required under
Luxembourg law to transfer 5% of our annual net profits to a non-distributable
legal reserve until the reserve amounts to 10% of our issued share capital. Voting Rights. Each Class A share and each Class B share entitles the
holder to cast one vote at any shareholders meeting. Class A shares and Class
B shares will ordinarily vote as one class at any shareholders meeting.
However, any resolutions affecting the respective rights of particular classes
must be approved separately by each class, pursuant to the quorum and majority
requirements established by Luxembourg law. Our Articles do not provide for
cumulative voting, nor do they contain any provision discriminating against any
existing or prospective holder of such securities as a result of such
shareholder owning a substantial number of our shares. Rights to Share in Company Profits. The surplus after deduction of
charges and amortizations represents the net profit at the disposal of the
general meeting for free allocation. With the approval of the auditor(s) the
Board of Directors may initiate interim dividend payments. Dividends decided
by the general meeting as well as those initiated by the Board of Directors are
paid at the periods and places fixed by the Board of Directors. Liquidation Rights. In the event of a liquidation of Quinsa, any surplus
assets available for distribution will be distributed to Class A and Class B
shareholders after payment of all the companys debts and obligations. Each
Class B share is entitled to liquidation proceeds equal to ten times the amount
of liquidation proceeds to which each Class A share is entitled. The rights to
the liquidation proceeds of Class A shares and Class B shares rank pari passu
without preference to each other. Conversion Rights. Class A shares are convertible into Class B shares at
a ratio of ten Class A shares for one Class B share for the first 15 Luxembourg
business days every July, provided (i) Class A holders submit their request to
convert such shares (the Requests) within the given time frame and (ii) such
request is accompanied by a certification, in such form determined by the
board, by the tendering holder (the Certification) of the amount of Class B
shares he or she holds prior to giving effect to this Request. The Class A holders will be able to convert all of the Class A shares
covered by his or her Request to the extent that each holders Class B share
holdings does not reach 5%. To the extent that upon effecting the Request, any
Class A holder would be the beneficial owner of 5% or more of the Class B
shares outstanding, the holder will only be allowed to convert as many Class A
shares as would leave the Class A holder with Class B share holdings under 5%.
Class A holders who will not receive all of the Requested shares because the
holder would be the beneficial owner of greater than 5% of the Class B share
holdings may not withdraw their Request, but will instead receive as many
Requested Class B shares as is possible in accordance with their Request
without triggering the 5% threshold. Class A holders requesting conversion of
their Class A shares will be notified by July 31 of each year whether and to
what extent their Requests were permitted and what their resulting Class B
share holdings are. Pre-emptive Rights. Our Articles provide that within the limits of the
authorized share capital referred to above, any issue of shares of any class
may be made with or without reserving to holders of shares of any class a
preferential subscription right for such shares. Redemption Rights/Sinking Fund. In respect of the Class A or Class B
shares, the Articles do not provide for redemption rights or the establishment
of a sinking fund in respect of the Class A or Class B shares. Business Combinations. The Articles do not contain any provisions which
would operate only with respect to a merger, acquisition or corporate
restructuring involving us or any of our subsidiaries. Under Luxembourg law,
there are no appraisal rights with respect to the Class A or Class B shares in
the event of a business combination transaction. 94




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Nonresident or Foreign Shareholders. There are no limitations, under
Luxembourg law or the Articles (except as described under Conversion Rights
above), on the right of our non-resident or foreign shareholders to hold the
Class A or the Class B shares. Transferability. Our shares may be issued in registered or bearer form
and may be converted by shareholders from one form to another. The Class A and
Class B shares in bearer form are transferable by delivery. Those in
registered form are transferable only by a written declaration of transfer,
signed by the transferor and the transferee, or their attorneys-in-fact, and
recorded in our share register. General Meetings The annual general meeting of our Class A and Class B shares is held in
the city of Luxembourg, at the place indicated in the notices of meeting, on
the first business day following the fourth Thursday of June at 10:00 A.M.
Notices of ordinary and extraordinary general meetings must contain the agenda,
date, time and place of the meeting. These notices are made by announcements
published twice in the Mémorial, as well as in a Luxembourg newspaper. There
is an eight-day interval between the two notices, and the second notice is
published at least eight days before the meeting. Notices for any
extraordinary general meeting reconvened for lack of a quorum must also
contain, according to Luxembourg law, the result of the first meeting. These
notices must be made by announcements published twice in the Mémorial and two
other Luxembourg newspapers, with a 15-day interval between the two notices and
with the second notice published at least 15 days before the meeting. In order to be admitted to general meetings, holders of Class A or Class B
shares must deposit their shares (1) at our registered office at least five
days before the meeting or (2) at the offices of specified depositaries at
least eight days before the meeting. Holders of Class A or Class B shares in
registered form must advise us within five days of the meeting of their
intention to attend the general meeting. If a shareholder intends to vote by
proxy holder, the latter is required to deposit the proxy at our registered
office within five days of the meeting. The Board of Directors may reduce
these time limits or accept share deposits irrespective of such limits. Except as set forth below, under Luxembourg law and the Articles,
shareholder action may be taken at a general meeting, the purpose of which is
not to amend the Articles, by a simple majority vote of shares present or
represented. There are no quorum requirements for ordinary meetings. An extraordinary general meeting convened for the purpose of amending the
Articles must have a quorum of at least 50% of all issued and outstanding Class
A and Class B shares. If a quorum is not present, the meeting may be
reconvened according to Luxembourg law at a later date with no quorum. The
unanimous consent of all holders of Class A and Class B shares is required if
the proposed amendment to the Articles involves (1) changing our jurisdiction
of incorporation or (2) adding to the financial obligations of our
shareholders. For any other amendment to the Articles, a two-thirds majority
vote is required of all Class A and Class B shares present or represented. If
the amendment relates to a matter for which a separate class vote by holders of
Class A and Class B shares is required, the quorum and majority vote
requirements must be fulfilled separately with respect to the Class A and Class
B shares. MATERIAL CONTRACTS In connection with our strategic relationship with AmBev, during 2002 we
entered into the agreements described below. Share Exchange Agreement.On May 1, 2002, we signed a Share Exchange
Agreement with AmBev pursuant to which AmBev contributed to Quinsa all the southern
holding shares related to AmBev subsidiaries that manufacture, market, sell or
distribute beer in Argentina, Uruguay and Paraguay (Southern
Holding Shares) in exchange for 26,388,914
newly issued Quinsa Class B shares. AmBev contributed the Southern Holding
Shares to Quinsa and Quinsa issued the Class B shares to AmBev on January 31,
2003. The completion of the transactions contemplated by the Share Exchange
Agreement was subject to the satisfaction of the conditions set forth in the
Share Exchange Agreement, including the approval of the applicable antitrust
authorities, which Quinsa received on January 13, 2003, subject to certain
conditions. See Item 4. Information on the Company  History and Development
 Recent Events  Relationship with AmBev  Approval of the Argentine
Antitrust Authorities; Action by CCU and Item 4. Information on the Company
 History and Development  Recent Events  Relationship with AmBev. 95




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License Agreement. Pursuant to the Share Exchange Agreement, we entered
into the License Agreement with AmBev on January 31, 2003, pursuant to which
AmBev granted Quinsa and its subsidiaries a perpetual royalty free exclusive
license to manufacture, market, sell and distribute the AmBev beer brands in
Argentina, Chile, Uruguay, Paraguay and Bolivia. The exclusive license is
subject to certain requirements on the part of Quinsa set forth in the License
Agreement including, (i) the requirement that Quinsa provide access to
facilities and regular updates to AmBev with respect to the licensed AmBev
beer; (ii) the requirement that Quinsa purchase the culture yeast needed for
the production of the beer only from AmBev or its designee; (iii) the
requirement that Quinsa refrain from producing, selling or distributing any
other beer marketed or sold in Brazil under a trademark or trade name that is
of Brazilian origin, or from distributing the licensed AmBev beer outside of
its designated territory; and (iv) the development by Quinsa of policies and
strategies relating to the marketing of the licensed AmBev beer in the regions
covered by the license. The parties also agreed to other undertakings to
facilitate each others performance under the License Agreement. Distribution Agreement. Pursuant to the Share Exchange Agreement, we also
entered into the Distribution Agreement on January 31, 2003 pursuant to which
we have granted AmBev the exclusive right to produce, distribute and sell
certain specified Quinsa beer brands in Brazil in exchange for a royalty of 3%
of the net revenues AmBev receives on the sales of the licensed Quinsa beer in
Brazil. The exclusive license is subject to certain requirements on the part
of AmBev set forth in the Distribution Agreement including, (i) the requirement
that AmBev provide access to facilities and regular updates to Quinsa with
respect to the licensed Quinsa beer; (ii) the requirement that AmBev purchase
the culture yeast needed for the production of the beer only from Quinsa or its
designee; (iii) the requirement that Quinsa refrain from distributing the
licensed Quinsa beer outside of its designated territory; and (iv) the
requirement that AmBev achieve certain specified sales volume targets. The
parties also agreed to other undertakings to facilitate each others
performance under the Distribution Agreement. Quinsa Shareholders Agreement. We entered into the Quinsa Shareholders
Agreement with regard to certain matters relating to the voting, transfer and
issuance of Quinsa shares. See Item 7. Major Shareholders and Related Party
Transactions  Major Shareholders  Quinsa Shareholders Agreement for more
information on this agreement. Memorandum of Agreement. We entered into a Memorandum of Agreement with
Heineken on January 13, 2003, pursuant to which we agreed with Heineken to
settle and resolve all disputes and claims brought by and against each other in
an arbitration proceeding before the ICC. See Item 4. Information on the
Company  History and Development  Recent Events  Relationship with AmBev
 Settlement with Heineken and Item 4. Information on the Company 
Material Licenses and Contracts  Relationship with Heineken for more
information on this agreement. Letter Agreement between Quinsa, BAC and AmBev.Simultaneously with the
Memorandum of Agreement, Quinsa, BAC and AmBev executed a Letter Agreement
pursuant to which AmBev agreed to acquire approximately 57% of the QI(B) shares
that Heineken was selling to BAC, or approximately 8.6% of all outstanding
shares of QI(B), for approximately US$58.5 million. As a result, as of this
date, BAC and AmBev owned approximately 6.4% and 8.6%, respectively, of QI(B)s
outstanding stock. Subsequently Quinsa contributed the Southern Holding Shares
it had acquired from AmBev to QI(B) in exchange for new, additional QI(B)
shares. As a result, Quinsa now owns 87.63% of QI(B) while AmBev and BAC own
7.05% and 5.32%, respectively. Pursuant to the Letter Agreement, AmBev and
BAC have agreed that Quinsa will have the right to purchase the QI(B) shares
held by AmBev and BAC for cash at fair market value if and when Quinsas Board
of Directors decides to exercise such right. See Item 4. Information on the
Company  History and Development  Recent Events  Relationship with AmBev
 Settlement with Heineken for more information on this agreement. During
the year ended December 31, 2003 and as of April 2004, BAC had not exercised the put
option to sell AmBev the remaining 373,520,000 Quinsa Class A shares held by
BAC in exchange for newly issued shares of AmBev. AmBev  Interbrew Deal.On March 3, 2004, it was announced that AmBev and
Interbrew N.V. (Interbrew) have agreed to a combination establishing a new
company called InterbrewAmBev. See Note 26 to our Financial Consolidated
Statements. 96




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EXCHANGE CONTROLS As a holding company, our ability to pay dividends depends primarily upon
our receipt of sufficient funds from our principal subsidiary, 
QI(B), which
depends in turn on QI(B)s receipt of sufficient funds from its subsidiaries in
Argentina, Bolivia, Chile, Paraguay and Uruguay. Beginning on December 3, 2001, the Argentine government imposed a number
of monetary and currency exchange control measures that included restrictions
on the free disposition of funds deposited with banks and tight restrictions on
transferring funds abroad, with certain exceptions for transfers related to
foreign trade and other authorized transactions. The restrictions requiring
the Central Banks prior authorization for the transfer of funds abroad in
order to make payments of principal and/or interest, which were in place during
2002, were progressively reduced from January to May 2003. In addition, funds
may now be transferred abroad without previous authorization of the Central
Bank in order to pay dividends corresponding to prior periods provided that
independent accountants have certified the financial statements for such
period. However, there can be no assurance that the Argentine government will
not once again place tight restrictions on the transfer of funds abroad by
requiring prior approval from the Argentine Central Bank. Such restrictions
could inhibit our ability to receive funds from our Argentine subsidiaries.
Current limitations imposed by the Central Bank of Argentina which affected our
operations include the following:  a.
    
    the acquisition of foreign currency as an investment is limited on
a monthly basis to the larger of: US$2 million and three times the
amount paid in certain taxes on the month prior to the month of the
acquisition of said foreign currency. The total amount of U.S. dollars
held as foreign currency investments by our Argentine subsidiary, CMQ,
was US$22.8 million as of June 24; andb.
    
    the acquisition of foreign currency to pay principal and interest
maturities on debt obligations can be made on the day of such
maturities with no restrictions. However, should the Company want to
acquire this foreign currency before principal and/or interest
maturities become due, it must adhere to the following limitations: (i)
during the period from August 18, 2003 to December 31, 2004, CMQ may
acquire up to 25% of the principal amount of its restructured debt, and
(ii) the funds so acquired must be applied to pay principal and/or
interest within 180 days from the date of acquisition. As of June 24,
2004, CMQ had purchased the maximum amount of foreign currency allowed
under this limitation. The total of US$73.4 million was acquired by
CMQ under this program, of which US$63.3 million has already been used
to pay principal and interest on its bank debt as of June 24, 2004.
The balance of US$10.1 million is being held for the payment of future
principal installments and interest on its bank debt. Unless the Central Bank of Argentina modifies current regulations to allow for
an extension of these programs, CMQs alternatives to acquire dollars in order
to hedge its dollar exposure are severely limited. Bolivia, Chile, Paraguay and Uruguay do not currently restrict the
remittance of dividends paid by subsidiaries to QI(B), although Chilean law
precludes persons who are not Chilean residents from repatriating their
investments in Chile for the first year of such investment. In Argentina, remittance of dividends on profits registered in excess of
accumulated profits as of June 30, 1998 will be subject to a withholding tax
if, and only if, the net income for a given period, according to Argentine
GAAP, is higher than the net income reported in the tax return for the same
period to the Argentine tax authorities. If that is the case, a 35%
withholding tax is applied to the difference. Dividends from CMQ, our
subsidiary in Argentina, to QI(B) are currently subject to a withholding tax of
35%. This is so because CMQ is making use of a tax loss carried forward
resulting from its 1999 acquisition of the PepsiCo bottler, Baesa, and is
therefore paying no income tax. Bolivia has a 12.5% withholding tax rate on
dividends, although there are no taxes withheld on dividends in Panama, where
the holding company of the Bolivian subsidiaries is located. Chile imposes
withholding tax at the statutory rate of 35%, which can be reduced to an
effective withholding rate of 19% to the extent our Chilean subsidiaries have
paid Chilean income tax in the relevant period. Paraguay imposes a 5%
withholding tax on dividends paid to foreign investors. Under Uruguayan law,
there is no withholding tax in respect of payments of dividends to holding
companies incorporated in certain jurisdictions, including Bermuda (the
jurisdiction of incorporation of QI(B)). Bermuda does not restrict or tax the
payment of dividends by QI(B) to us, and Luxembourg does not restrict or impose
withholding taxes on the payment of dividends by us to our shareholders. 97




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No assurance can be given that more restrictive exchange control policies
and more significant withholding taxes, which could affect the ability of our
subsidiaries to pay dividends to QI(B) and ultimately to us, will not be
imposed in the future. The payment of dividends by our various subsidiaries is
also in certain instances subject to statutory restrictions and restrictive
covenants in debt instruments and is contingent upon the earnings and cash flow
of and permitted borrowings by such subsidiaries. There are no limitations on the right of non-resident or foreign owners to
hold or vote our Class A or Class B shares. TAXATION The following summary describes certain material Luxembourg and United
States federal income tax consequences of the acquisition, ownership and
disposition of ADSs or our Class A or Class B shares by a U.S. holder. Luxembourg Taxes Under present Luxembourg law, and provided we maintain our status as a
holding company governed by the Law of July 31, 1929, and the Grand-Ducal
Decree of December 17, 1938, no income tax, withholding tax (with respect to
dividends) or capital gains tax is payable in Luxembourg by us. However, under
the Grand-Ducal Decree of December 17, 1938, we are subject to a special tax at
a rate ranging from 0.1% to 3.0% on dividends distributed by us and on any
interest paid by us on any outstanding bonds. In addition, while there does
exist a double tax treaty between the United States and Luxembourg, this treaty
does not apply to us, a holding company governed by the law of July 31, 1929
because we are not a resident company. Holders of ADSs or our shares, except those who are a resident of (or, in
certain circumstances, formerly a resident of), or are domiciled or have a
permanent establishment in, Luxembourg, are not subject to income tax, wealth
tax, or capital gains tax in respect of the ADSs or shares held. If however, a
non-resident holder of ADSs or shares will be subject to Luxembourg tax on
capital gains on the disposition of ADSs or shares during the first six months
following their acquisition, if such non-resident holder has owned alone, or
together with his spouse and minor children, directly or indirectly, at any
point within the 5 year term preceding the disposition, more than 10% (or 25%
until and including December 31, 2007 for certain shareholdings acquired prior
to January 1, 2002) of our share capital. No inheritance tax is payable by a holder of ADSs or shares unless the
deceased holder was a resident of Luxembourg at the time of death. There is no Luxembourg transfer duty or stamp tax on the purchase or
disposition of shares. United States Taxes The following summary describes certain United States federal income tax
consequences of the acquisition, ownership and disposition of ADSs or our
shares, but it does not purport to be a comprehensive description of all of the
tax considerations that may be relevant to a decision to acquire such
securities. The summary applies only to holders that hold ADSs or shares as
capital assets and does not address special classes of holders, such as:  a.
    
    certain financial institutions;b.
    
    insurance companies;c.
    
    dealers and traders in securities or foreign currencies;d.
    
    persons holding ADSs or shares as part of a hedge, straddle or
other conversion transaction;e.
    
    persons whose functional currency for U.S. federal income tax
purposes is not the U.S. dollar;f.
    
    persons liable for the alternative minimum tax; 98




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g.
    
    tax-exempt organizations;h.
    
    partnerships or other entities classified as partnerships for U.S.
federal income tax purposes; ori.
    
    persons holding ADSs or shares that own or are deemed to own more
than ten percent of any class of our stock. The summary is based upon tax laws of the United States including the
Internal Revenue Code of 1986, as amended to the date hereof (the Code),
administrative pronouncements, judicial decisions and final, temporary and
proposed Treasury Regulations, changes to any of which may affect the tax
consequences described herein possibly with retroactive effect. In addition,
the summary is based in part on representations of the Depositary and assumes
that each obligation provided for in, or otherwise contemplated by, the Deposit
Agreement or any other related document will be performed in accordance with
its terms. Prospective purchasers of the ADSs or shares should consult their
own tax advisors as to the United States, Luxembourg or other tax consequences
of the purchase, ownership and disposition of such securities in their
particular circumstances, including the effect of any state or local tax laws. The discussion below applies to you only if you are a beneficial owner of
ADSs or shares and are, for United States federal income tax purposes:  a.
    
    a citizen or resident of the United States;b.
    
    a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States or of any political
subdivision thereof; orc.
    
    an estate or trust the income of which is subject to United States
federal income taxation regardless of its source. In general, for United States federal income tax purposes, if you hold
ADSs you will be treated as the holder of the underlying Class B shares.
Accordingly, no gain or loss will be recognized if you exchange ADSs for the
underlying Class B shares. The U.S. Treasury has expressed concerns that parties to whom ADSs are
released may be taking actions that are inconsistent with the claiming of
foreign tax credits for United States holders of ADSs. Such actions would also
be inconsistent with claiming the 15% rate applicable to certain dividends
received by non-corporate holders. Accordingly, the creditability of
Luxembourg taxes and the availability of the 15% rate for dividends received by
certain non-corporate holders described below could be affected by actions
taken by parties to whom ADSs are pre-released. Taxation of Distributions. To the extent paid out of our current or
accumulated earnings and profits (as determined in accordance with United
States federal income tax principles), distributions made with respect to ADSs
or shares (other than certain distributions of our capital stock or rights to
subscribe for shares of our capital stock) will be includible in income as
ordinary dividend income. Under recently enacted legislation, dividends
received by non-corporate U.S. holders on ADSs or shares may be subject to U.S.
federal income tax at lower rates (generally 15%) than other types of ordinary
income if certain conditions are met. U.S. holders should consult their own
tax advisors regarding the implications of this new legislation in their
particular circumstances. Such dividends will not be eligible for the
dividends received deduction generally allowed to corporations under the
Code. Dividends generally will constitute foreign source passive income for
U.S. foreign tax credit purposes. Sale and Other Disposition of ADSs or Shares. For U.S. federal income tax
purposes, gain or loss you realize on (1) the sale or exchange of ADSs or
shares or (2) the Depositarys sale or exchange of shares received as
distributions on the ADSs will generally be subject to United States federal
income tax as capital gain or loss, and will be long-term capital gain or loss
if you held the ADSs or shares for more than one year. The amount of your gain
or loss will be equal to the difference between your tax basis in the ADSs or
shares and the amount realized on their disposition. Gain or loss, if any,
will be U.S. source for foreign tax credit purposes. 99




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Passive Foreign Investment Company Rules. We believe that we will not be
considered a passive foreign investment company, or PFIC, for United States
federal income tax purposes for the taxable year 2003. However, since our PFIC
status for each year depends upon the composition of our income and assets and
upon the market value of our assets (including, among others, equity
investments in non-controlled entities) from time to time, there can be no
assurance that we will not be considered a PFIC. If we were considered a PFIC
for any taxable year during which a U.S. shareholder holds ADSs or shares,
certain adverse consequences could apply to the shareholder, including the
imposition of tax at higher rates than would otherwise apply. If we are treated as a PFIC for any taxable year, the gain recognized by
such U.S. shareholder on a sale or other disposition of the ADS or share would
be allocated ratably over the U.S. shareholders holding period for the ADS or
ordinary share. The amounts allocated to the taxable year of the sale or
exchange and to any year before we became a PFIC would be taxed as ordinary
income. The amount allocated to each other taxable year would be subject to
tax at the highest rate in effect for individuals or corporations, as
appropriate, and an interest charge would be imposed on the amount allocated to
such taxable year. Further, any distribution in respect of ADSs or shares in
excess of 125 percent of the average of the annual distributions on ADSs or
ordinary shares received by the U.S. shareholder during the preceding three
years or the U.S. shareholders holding period, whichever is shorter, would be
subject to taxation as described above. Certain elections may be available
(including a mark to market election) to United States persons that may
mitigate the adverse consequences resulting from PFIC status. Information Reporting and Backup Withholding. Payments of dividends and
sales proceeds that are made within the United States or through certain
U.S.-related financial intermediaries generally are subject to information
reporting and to backup withholding unless (i) you are a corporation or other
exempt recipient or (ii) you provide a correct taxpayer identification number
and certify that no loss of exemption from backup withholding has occurred. The
amount of any backup withholding from a payment to you will be allowed as a
credit against your United States federal income tax liability and may entitle
you to a refund, provided that the required information is furnished to the
Internal Revenue Service. CORPORATE GOVERNANCE Significant Differences between Quinsas Corporate Governance Practices and
U.S. Companies Practices under NYSE Sections Quinsas corporate governance practices are governed by the applicable
Luxembourg law (particularly, the law of 10th August 1915 concerning commercial
companies (as amended)), as well as by its Articles of Incorporation. Quinsa has securities that are registered with the SEC and are
listed on the NYSE, and is therefore subject to corporate governance
requirements applicable to NYSE-listed non-U.S. companies. NYSE-listed non-U.S. companies may, in general, follow their home country
corporate governance practices in lieu of most of the new NYSE corporate
governance requirements (the NYSE Sections) codified in Section 303A of the
NYSEs Listed Company Manual. However, NYSE-listed non-U.S. companies must
comply with NYSE Sections 303A.06, 303A.11 and 303A.12(b). NYSE-listed
non-U.S. companies must comply with Section 303A.06 prior to July 31, 2005 and
with Sections 303A.11 and 303A.12(b) prior to the next annual meeting of
shareholders held after January 15, 2004, or by October 31, 2004. NYSE Section 303A.11 requires that non-U.S. Companies disclose any
significant ways in which their corporate governance practices differ from U.S.
companies under NYSE listing standards. In order to comply with NYSE Section
303A.11, we describe below the relevant differences between Quinsas corporate
governance practices and NYSE standards for listed companies. Director Independence.Under NYSE Section 303A.01, a NYSE-listed company
must have a majority of independent Directors on its Board of Directors. There
is no requirement under Luxembourg law or Quinsas Articles as to residence or
independence of board members. Neither Luxembourg law nor Quinsa Articles
require board members to hold shares in the Company. Standards for Evaluating Director Independence.NYSE Section 303A.02
establishes general standards to evaluate Directors independence (no Director
qualifies as independent unless the Board of Directors affirmatively 100




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determines that the Director has no material relationship with the listed
company (either directly or as a partner, shareholder or officer of an
organization that has a relationship with the company)), and emphasizes that
the concern is independence from management. The board is also required, on a
case by case basis, to express an opinion with regard to the independence or
lack of independence, of each individual Director. Neither Luxembourg law nor
Quinsas Articles provide for such standards of evaluating Directors
independence. Non-management Directors Meetings.Under NYSE Section 303A.03,
non-management Directors must meet at regularly scheduled executive meetings
not attended by management. Luxembourg law does not contain any specific rules
on the procedure of board meetings. The Quinsa Articles provide that the Board
of Directors shall meet as often as required by the interests of the Company
upon notice by any of the two co-chairmen or by two Directors either at the
registered office or at any other place indicated in the notice. There are no
other requirements as to non-management meetings or frequency of board meetings
either in the law or in the Quinsa Articles. Given that the Board of Directors
must annually approve the accounts, Luxembourg law implicitly imposes at least
one board meeting per year. Nominating/Corporate Governance Committee.Under NYSE Section 303A.04,
listed companies shall have a nominating/corporate governance committee
comprised entirely of independent Directors. Neither Luxembourg law nor
Quinsas Articles require the formation of a nominating/corporate governance
committee. Pursuant to Luxembourg law and Quinsas Articles, Quinsa is managed
by a Board of Directors of at least three members who are appointed at the
general meeting of shareholders. Their term of office shall not exceed six
years. Directors can be revoked at any time and without cause. Compensation Committee.Under NYSE Section 303A.05(a), listed companies
shall have a compensation committee comprised entirely of independent
Directors. Neither Luxembourg law nor Quinsas Articles require the formation
of a compensation committee. Under NYSE Section 303A.05(b), the compensation
committee shall have a written charter establishing certain minimum
responsibilities as set forth in NYSE Section 303A.05(b)(i). Neither
Luxembourg law nor Quinsas Articles require the formation of a compensation
committee charter. Pursuant to Quinsas Articles, the remuneration of board members is decided,
based on a board recommendation, by the shareholders at the annual
general meeting. Audit Committee.Under NYSE Section 303A.06, listed companies must have
an audit committee that complies with SEC requirements. Foreign private
issuers (non-U.S. Companies) shall have this audit committee in place prior to
July 31, 2005. Luxembourg law allows the board to delegate day-to-day
management and Quinsas Articles allow for the establishment of an audit
committee. Under NYSE Section 303A.07(a), the audit committee shall consist of at
least three members. All of its members shall be financially literate or must
acquire such financial knowledge within a reasonable period and at least one of
its members shall have experience in accounting or financial administration.
Luxembourg law and Quinsas Articles allow for an audit committee expert. Under NYSE Section 303A.07(a), if a member of the audit committee is
simultaneously a member of the audit committee of more than three public
companies, and the listed company does not limit the number of audit committees
on which its members may serve, then, in each case the board shall determine
whether the simultaneous service would prevent such member from effectively
serving on the listed companys audit committee, and shall report its decision
in the annual proxy statement of the Company or in the Companys annual report
on Form 10-K filed with the SEC. No such provision regarding an audit committee
members simultaneous membership on public companies exists under Luxembourg
law or Quinsas Articles. Under NYSE Section 303A.07(b), all members of the audit committee are
required to be independent. No such provision regarding the independence of
all members of the audit committee is required by Luxembourg Law or Quinsas
Articles. Under NYSE Section 303A.07(c), the audit committee shall have a charter
establishing the duties and responsibilities of its members, including the
duties and responsibilities required, at a minimum, by Section 10A of
the Securities Exchange Act of 1934 (the Exchange Act) and as set forth
in NYSE Section 303A.7(c) of the NYSE Manual. No such provision regarding a
charter is required by Luxembourg laws or Quinsas Articles. 101




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NYSE Section 303A.07(c)(iii)(B) and (C) establishes audit committee
objectives: (i) to discuss the annual audited financial statements and the
quarterly financial statements of the company with management and the
independent auditor, including the information disclosed under the heading
Managements Discussion and Analysis of Financial Conditions and Results of
Operations; (ii) to discuss the companys press releases relating to its
earnings, as well as the financial information and guidelines relating to its
earnings that are supplied to equity researchers and rating agencies. No such
provision is contained in the Luxembourg law or Quinsas Articles. NYSE Section 303A.07(c)(iii)(B) provides that the audit committee shall
establish clear policies for hiring external auditors employees. No such
provision regarding hiring external auditors employees is contained in
Luxembourg law or Quinsas Articles. NYSE Section 303A.07(d) provides that each company must have an internal
audit function in order to provide to the management and to the audit committee
permanent assessments on the companys risk management processes and internal
control system. Luxembourg law and Quinsas Articles allow for an internal
audit function. Disclosure of Corporate Governance Guidelines.NYSE Section 303A.09
provides that companies must adopt and disclose corporate governance
guidelines, including several issues for which such reporting is mandatory, and
include such information on the companys website, which should also include
the charters of the audit committee, the nominating committee and the
compensation committee. No such provision regarding disclosure of corporate
governance differences is required by Luxembourg law and Quinsas Articles. Evaluation of Board Performance.Under NYSE Section 303A.09, the Board of
Directors must make a self-assessment of its performance at least once a year
to determine if it or its Committees function effectively and report thereon.
Under Luxembourg law, the boards performance is evaluated at the annual
Shareholders meeting, at which the board presents a report and a resolution on
the Directors discharge of their duties. The Directors are by law responsible
for the due performance of their duties and may be liable to the Company for
mismanagement. Shareholders will individually have no action against Directors
except for violation of corporate law or Quinsas Articles. Code of Ethics.NYSE Section 303A.10 provides for the adoption of a Code
of Business Conduct and Ethics and sets out the topics that such code must
contain. Quinsas Board has approved the adoption of a Code of Ethics, which
applies to all Directors, management, and employees, with no exceptions, the
English translation of which was submitted to the SEC and to the NYSE. Quinsa
believes that its Code complies with the NYSE requirements. Certifications by the CEO.NYSE Section 303A.12(a) provides that the CEO
shall on a yearly basis certify to NYSE that he/she knows of no violation by
the company of NYSE rules relating to corporate governance. No such
certification is required by Luxembourg law or by Quinsas Articles. Notification of Non-fulfillment.Under NYSE Section 303A.12(b), the CEO
shall notify the NYSE in writing whenever any executive officer of the company
becomes aware of any substantial non-fulfillment of any applicable provision
under NYSE Section 303A. No such provision regarding non-fulfillment of NYSE
Section 303A is contained in Luxembourg law or Quinsas Articles, but Quinsas
CEO shall comply with the notice provisions as set forth under NYSE Section
303A.12(b). Delegations by the Board.Luxembourg law allows for the Board of
Directors to delegate day-to-day management of the business of the Company to
one or more Directors, officers, managers or other agents who may be, but are
not required to be members of the board (acting either alone or jointly).
Quinsas Articles further allow the board to constitute any committee, members
of which may be selected either from among the Directors or outside thereof and
determine their functions and authority. The Takeover Directive.The European Union has adopted a Takeover
Directive (Directive) on May 20, 2004 which is expected to lead to certain changes in
Luxembourg laws affecting corporate governance. The Takeover Directive
requires that Luxembourg adopt laws reflecting the Directive no later than May
20, 2006. The Directive contemplates laws that will differ, in certain
instances, from existing SEC rules and from certain state corporation
laws. For example, the Directive requires that Luxembourg adopt a law
compelling an offeror who acquires voting control of a company to make an offer
to all holders of the companys securities at an equitable price. Conversely,
the Directive contemplates laws pursuant to which minority shareholders could
be forced to sell their shares or could 102




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##### Table of Contents



force the controlling shareholder to
acquire their shares at an equitable price once another threshold of control is
reached by the acquiror. In addition, the Directive contemplates restrictions
of the defensive measures that a company may take in response to a takeover bid
unless the measures are approved by shareholders. It is not clear when
Luxembourg will adopt legislation responding to the Directive or what the
precise content of this legislation will be. DOCUMENTS ON DISPLAY We file annual, quarterly and other information with the SEC. You may
read and copy any document that we file at our public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site at http://www.sec.gov, from where you
can access our filings. Our Internet address is http://www.quinsa.com. You may request a copy of these filings at no cost, by writing or calling
the office of Francis Cressall, Quilmes Industrial (Quinsa) S.A., Avenida 12 de
Octubre y Gran Canaria, Quilmes B1878 AAB Argentina, Tel: +5411-4349-1700. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows due to adverse changes
in financial and commodity market prices and interest rates. We are exposed to
market risk in the areas of interest rates, commodity prices and foreign
currency exchange rates. These exposures are directly related to our use of
agricultural commodities and other raw materials in our operations, and our
normal investing and funding activities. We have established various policies
and procedures to manage our exposure to market risks. This discussion
contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors. Uncertainties that are either non-financial or non-quantifiable, such
as political, economic, tax, other regulatory or credit risks, are not included
in the following assessment of our market risks. Interest Rate Risk Our exposure to interest rate risk is limited to the exposure related to
our cash on hand and deposited with banks, and our short-term investments
(referred to as cash and cash equivalents) and short-term and long-term
obligations, which are tied to market interest rates. As of December 31, 2003,
we had cash equivalents and short-term investments of US$139.4 million as well
as certificates of deposit and government bonds in the amount of US$61.2
million. Our investment portfolio primarily consists of cash equivalents.
Accordingly, the carrying amounts approximate market value. We had an investment portfolio primarily comprised of fixed income
certificates of deposit until October 2001. The fixed income certificates of
deposit, like all fixed income securities, were subject to interest rate risk.
We attempted to limit this exposure by investing primarily in short-term
deposits. From November 2001 until the present we have principally invested in
overnight accounts in order to reduce our financial exposure. We have a
finance group who oversees the management of our debt and investment portfolio
and evaluates investment opportunities and their related risks and tax
consequences as well as overall financing strategies. We are exposed to changes in interest rates primarily as a result of our
borrowing activities which include short-term borrowings, variable-rate and
fixed-rate long-term debt used to maintain liquidity and fund our business
operations. The instruments actual cash flows are principally denominated in
U.S. dollars and to a lesser extent in other currencies. Our interest expense
is sensitive to changes in the general level of interest rates because a
substantial portion of our short-term debt and long-term debt arrangements bear
interest at variable rates. Therefore, our results of operations would be
affected by interest rate changes. However, the variable rates on our debt are
all
substantially in the form of LIBOR plus a certain spread, which is fixed.
Therefore, our only exposure in these cases is to variations in LIBOR. 103




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In view of the nature of our portfolio, a 10% movement in market interest
rates would not have a significant impact on the total value of our portfolio
as of December 31, 2003. As a matter of policy, we do not use derivative instruments to manage
these risks. However, there can be no assurance that such risks will not be
managed in the future through a variety of strategies, including the use of
hedging transactions. We do not use derivative instruments for trading or
speculative purposes. For debt obligations, the following table presents principal cash flows
and related weighted average interest rates by expected maturity dates. The
information is presented in U.S. dollars, which is our reporting currency. AverageWeightedInterest Rate
    
    Currency
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Total(1)(in US$ million)Fixed rate4 Loans
        
    
    10.6
    %
        
        
    US$
        
        
        
    3.5
        
        
        
    13.7
        
        
        
    
        
        
        
    
        
        
        
    
        
        
        
    
        
        
        
        
        
        
        
    17.23 Loans
        
    
    9.3
    %
        
    Other
        
        
    9.0
        
        
        
    
        
        
        
        
        
        
        
    
        
        
        
    
        
        
        
    
        
        
        
        
        
        
        
    9.0Total fixed rate loans
        
        
        
        
        
        
        
        
        
        
    12.5
        
        
        
    13.7
        
        
        
        
        
        
        
    
        
        
        
    
        
        
        
    
        
        
        
        
        
        
        
    26.2Floating rate loans
        
        
        
        
        
        
        
        
        
        
        
        
        
        
    
        
        
        
        
        
        
        
        
        
        
        
    
        
        
        
    1 Loan
        
    
    8.0
    %(2)
        
    
    P$
        
        
        
    0.4
        
        
        
    0.4
        
        
        
    0.4
        
        
        
    0.4
        
        
        
    0.5
        
        
        
    0.6
        
        
        
        
        
        
        
    2.7Syndicated 1 Loan
        
    
    4.9
    %(3)
        
        
    US$
        
        
        
    16.5
        
        
        
    6.2
        
        
        
    6.9
        
        
        
    9.9
        
        
        
    20.7
        
        
        
    2.6
        
        
        
        
        
        
        
    62.8Other 14 Loans
        
    
    4.2
    %(3)
        
        
    US$
        
        
        
    74.7
        
        
        
    31.1
        
        
        
    26.1
        
        
        
    43.5
        
        
        
    39.1
        
        
        
    3.2
        
        
        
    33.3
        
        
        
    251.0Total floating rate loans
        
    
    4.4
    %(3)
        
        
    US$
        
        
        
    91.6
        
        
        
    37.7
        
        
        
    33.4
        
        
        
    53.8
        
        
        
    60.3
        
        
        
    6.4
        
        
        
    33.3
        
        
        
    316.5Total
        
        
        
        
        
        
        
        
        
        
    104.1
        
        
        
    51.4
        
        
        
    33.4
        
        
        
    53.8
        
        
        
    60.3
        
        
        
    6.4
        
        
        
    33.3
        
        
        
    342.7
   (1)
    
    The carrying amounts of short-term debt and long-term debt approximate
their respective fair values.(2)
    
    Plus CER.(3)
    
    Plus LIBOR. Commodity Price Exposure Agricultural commodities constitute the principal raw materials used in
our business, including barley, malt, rice and corn grits. Other raw materials
purchased include aluminum cans and PET bottle preforms. These raw materials
are normally purchased through supplier contracts. Prices of agricultural
commodities tend to fluctuate due to seasonal, climatic and economic factors
that may also affect our business. We believe that the raw materials for our
products are readily available from a variety of independent suppliers. We are
subject to market risk with respect to the cost of commodities because our
ability to recover increased costs through higher pricing may be limited by the
competitive environment in which we operate. In addition, we may enter into
commodity futures and options contracts as deemed appropriate to reduce the
effect of price fluctuations, although we have not done so for significant
amounts. However, we may do so in the future. For inventory, the following table presents the carrying amount at
December 31, 2003 per major category: Commodity Position on Balance Sheet
        
    Carrying Amount(1)(in US$ millions)Barley Inventory
        
    $
    26.7Cans Inventory
        
        
    1.1Malt Inventory
        
        
    2.8PET preforms Inventory
        
        
    0.6Total
        
    $
    31.2
   (1)
    
    The carrying amounts of these inventories approximate their respective
fair values. 104




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Foreign Exchange Exposure We derive almost all of our revenues from operations in Latin America.
The currencies of many countries in Latin America have experienced substantial
depreciation and volatility in recent years, particularly against the U.S.
dollar. Historically, volatility has been caused by currency devaluation,
among other factors. Currency movements, as well as higher interest rates,
have materially and adversely affected the economies of many Latin American
countries, including our southern cone markets of Argentina, Paraguay, Bolivia,
Chile and Uruguay. On January 6, 2002, the Argentine Congress enacted the Public Emergency
Law, which amended certain provisions of the Convertibility Law and eliminated
the requirement that the Argentine Central Banks reserves in gold and foreign
currency at all times be equivalent to at least 100% of the monetary base. The
Public Emergency Law abolished the U.S. dollar to Argentine peso parity regime
and granted the executive branch the power to set the exchange rate between the
peso and foreign currencies and to issue regulations related to the foreign
exchange market. The peso now floats freely, although the Argentine Central
Bank from time to time enters into the market to minimize fluctuations. From a
low of P$2.84 to US$1.00 on June 14, 2003, the peso has since appreciated
relative to the dollar, and on June 14, 2004, the peso traded at an exchange
rate of P$2.96 per US$1.00, as published by Banco de la Nación Argentina. Argentine operations accounted for approximately 66.2% of our revenues in
2003 and almost 53% of our consolidated operating profit. During 2002, our
Argentine operations accounted for 59.4% of our revenues, although our results
from operations were negative due to the economic crisis. In 2002, the
devaluation of the Argentine peso coupled with the financial and economic
crisis that has been affecting Argentina, has limited the capability of CMQ to
generate cash flows in US$ and comply with certain of its original financial
ratios commitments under its U.S. dollar-denominated bank loans. Consequently,
management carried out negotiations during 2002, which led to the execution of
a refinancing agreement on September 18, 2003. The Bank debt subject to renegotiation amounted to US$293.6 million. The
agreement contemplated:  a.
    
    a down payment of US$20.3 million, made on the agreement date;b.
    
    an extension of the term to 4, 5, 6 and 7 years;c.
    
    the setting of new interest rates on the remaining principal
balance of US$273.3 million ranging between LIBOR + 3% and LIBOR + 5%;
andd.
    
    the establishment of new financial ratios and indexes adapted to
the new situation of Argentina, as well as certain restrictions on
dividend payments, the borrowing of new indebtedness, disposal of
assets and prepayment obligation-related issues. At December 31, 2003, the Companys loans have been classified as either
current or non-current on the basis of their due dates. The renegotiation
agreements provide that in the event CMQ generates excess cash (as defined in
such agreement), the Company must use a portion of this excess cash to prepay
the non-current portion of the refinanced debt. The current portion of the
long-term debt included US$40.3 million that was paid by the Company in
February 2004 as a result of the prepayment clause included in the agreements. Operating in other international markets involves exposure to movements in
other foreign exchange rates, primarily the Bolivian peso, Chilean peso,
Paraguayan guaranties and Uruguayan pesos. Changes in foreign exchange rates
would have the largest impact on translating our international operating profit
into U.S. dollars. To date, we have not hedged the value of net investments in foreign
currency denominated operations and translated earnings of foreign
subsidiaries. The possibility of hedging in Argentina is, and has been for at
least two years, extremely limited, both in terms of the instruments available
and of the lack of liquidity in the markets. We will assess the need to
utilize financial instruments to hedge currency exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes. 105




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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 106




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PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS The Quinsa Shareholders Agreement may require us to obtain the consent of
AmBev and BAC before we fund certain activities or transactions with our
working capital. See Item 7. Major Shareholders and Related Party
TransactionsMajor ShareholdersQuinsa Shareholders Agreement. 
 ITEM 15. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures As of December 31, 2003, Quinsa, under the supervision and with the
participation of Quinsas management, including the Chief Executive Officer and
the Chief Financial Officer, performed an evaluation of the effectiveness of
Quinsas disclosure controls and procedures. Quinsas management necessarily
applied its judgment in assessing the costs and benefits of such controls and
procedures, which by their nature can provide only reasonable assurance
regarding managements control objectives. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that Quinsas
disclosure controls and procedures are effective at the reasonable assurance
level for gathering, analyzing and disclosing the information Quinsa is
required to disclose in the reports it files under the Securities Exchange Act
of 1934, within the time periods specified in the SECs rules and forms. Changes in internal controls There has been no change in Quinsas internal control over financial
reporting that occurred during the period covered by this annual report that
has materially affected, or is reasonably likely to materially affect, Quinsas
internal control over financial reporting. 
 ITEM 16. [RESERVED] 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT On
October 29, 2002 our Board of Directors decided to
establish an Audit Committee, although such a
committee is not required under Luxembourg law. Before we were able
to formalize our Audit Committee, Jean de Ganay, our financial
expert, resigned from our Board of Directors in May 2003.
Consequently, we currently do not have an Audit Committee. We expect to
reestablish an Audit Committee with a new financial expert in
July 2004; until then, our Board of Directors is acting as our
Audit Committee. 
 ITEM 16B. CODE OF ETHICS Quinsa has adopted a code of ethics governing the principal executive
officer, the principal financial officer and the chief accounting officer, as
of June 2004. A copy of Quinsas code of ethics is being filed as Exhibit 11.1
to this Form. 
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following fees were paid to PricewaterhouseCoopers, our independent
auditors, for services rendered during the year (US$ thousand): 2003
    
    2002Audit Fees
    
    
    752.4
    
    
    
    534.3Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    224.3
    
    
    
    202.1All Other Fees
    
    
    4.2
    
    
    
    4.6
 107




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Audit Fees includes fees for audit or review services in accordance with
generally accepted auditing standards, including statutory audit work for
foreign operations. Tax Fees includes fees for tax compliance services. All Other Fees includes fees billed related to publication provided to the
Company. Audit Committees Approval Policies and Procedures.These procedures will be
established when our Audit Committee is reestablished. 
 ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE COMPANY The Board of Directors approved three stock repurchase programs during
November and December of 2003 in order to provide liquidity to shareholders,
particularly in an environment where trading for the Companys stock had become
rather shallow. Following the substantial completion of these programs
totaling approximately US$60 million in the aggregate, the Board of Directors
approved a further program of up to an additional US$50 million, on March 26,
2004. The Company intends to acquire shares from time to time under this and any
other programs the Board of Directors may approve in the future, at prices that
represent an attractive investment for the Company and its shareholders. The total amount of Class B shares, or ADS equivalent, acquired pursuant
to the programs as described above is the following: Number of
    
    AmountClass B shares
    
    invested (US$Year
    
    acquired
    
    million)2003
    
    
    5,048,200
    
    
    
    39.62004
    
    
    3,526,922
    
    
    
    32.2
 Furthermore, the Company has also purchased Class A shares from time to
time through the Luxembourg Stock Exchange, pursuant to the authorization
provided at the Annual General Shareholders Meeting held on June 27, 2003.
During 2003, we acquired 2,811,068 Class A shares for a total consideration of
US$2.1 million. During 2004, and up to June 15 of that year, we acquired
2,331,767 Class A shares for a total consideration of US$2.2 million. 
 PART III 
 ITEM 17. FINANCIAL STATEMENTS The following financial statements are filed as part of this Form 20-F: PageReport of Independent Auditors
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Income for each of the three years in the
period ended December 31, 2003
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for each
of the three years in the period ended December 31, 2003
    
    
    F-5Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2003
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7
 108




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ITEM 18. FINANCIAL STATEMENTS We have responded to Item 17 in lieu of responding to this Item. 
 ITEM 19. EXHIBITS Exhibits  1.1
    
    Articles of Incorporation of Quinsa, as amended (equivalent of both charter and
by-laws).2.1
    
    Deposit Agreement dated February 28, 2002 among Quinsa, The Bank of New York and the
holders from time to time of American Depositary Receipts issued thereunder
(incorporated by reference to the registration statement on Form F-6
filed on
February 20, 2002; File No. 333-83226).*2.2
    
    Form of American Depositary Receipt for Quinsa Class B shares (included in Exhibit 2.1).4.1
    
    Share Exchange Agreement dated May 1, 2002 among Companhia de Bebidas das Américas 
AMBEV and Quinsa (incorporated by reference to Exhibit 2.1 of the Schedule 13D relating
to Quinsa, filed on May 13, 2002 by AmBev). *4.2
    
    Memorandum of Agreement dated January 13, 2003 between Heineken, Quinsa, BAC and
certain of their respective affiliates dated January 13, 2003 (incorporated by
reference to our Annual Report on Form 20-F filed on June 27, 2003 filed as Exhibit
4.2). *4.3
    
    Letter Agreement dated January 13, 2003 between AmBev, BAC and Quinsa (incorporated by
reference to Exhibit 2.4 of the Schedule 13D/A relating to Quinsa filed on February 4,
2003 by AmBev).*4.4
    
    Quinsa Shareholders Agreement dated as of January 31, 2003 among BAC and AmBev
(incorporated by reference to Exhibit 2.5 to Amendment No. 1 to the Schedule 13D
relating to Quinsa filed on February 4, 2003 by AmBev).*4.5
    
    License Agreement dated January 31, 2003 between Quinsa and AmBev (incorporated by
reference to our Annual Report on Form 20-F filed on June 27, 2003 as Exhibit 4.4).*4.6
    
    Distribution Agreement dated January 31, 2003 between Quinsa and AmBev (incorporated by
reference to our Annual Report on Form 20-F filed on June 27, 2003 as Exhibit 4.5).*4.7
    
    Share Pledge Agreement dated as of January 31, 2003, among BAC, AmBev and Quinsa
(incorporated by reference to Exhibit 2.9 to Amendment No. 1 to the Schedule 13D
relating to Quinsa filed on February 4, 2003 by AmBev).*4.8
    
    Escrow Agreement dated as of January 31, 2003, among BAC, AmBev and The Bank of New
York (incorporated by reference to Exhibit 2.10 to Amendment No. 1 to the Schedule 13D
relating to Quinsa filed on February 4, 2003 by AmBev).*8.1
    
    List of Subsidiaries.10.4
    
    Resolution of the Office of Competition, Deregulation and Consumer Advocacy of the
Ministry of Production of the Republic of Argentina regarding the business combination
of AmBev and Quinsa  English Translation (incorporated by
reference to Exhibit 2.11 to
Amendment No. 1 to the Schedule 13D relating to Quinsa
filed on February 4, 2003 by AmBev).*11.1
    
    Code of Ethics.12.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.15.1
    
    Consent of A.C. Nielsen Argentina S.A.15.2
    
    Consent of A.C. Nielsen Chile.15.3
    
    Consent of CCR/IRI.15.4
    
    Consent of A.C. Nielsen Uruguay.   *
    
    Incorporated by reference. 109




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Exhibits  15.5
    
    Consent of CIES Internacional. 110




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SIGNATURES 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 and authorized the undersigned to sign
this annual report on its behalf. QUILMES INDUSTRIAL (QUINSA), Société Anonyme.By:
    /s/ Gustavo CastelliName:
    Gustavo CastelliTitle:
    Chief Financial Officer Date: June 30, 2004 111




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA)
SOCIETE ANONYME
Consolidated Financial Statements
As of December 31, 2003 and 2002 and for each of
the three years in the period ended December 31, 2003




---



QUILMES INDUSTRIAL (QUINSA) SOCIETE ANONYME
Index to the Consolidated Financial Statements PageReport of Independent Auditors
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Income for each of the three years in the period ended December 31, 2003
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for each of the three years in the period ended December 31, 2003
    
    
    F-5Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7
  F - 1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of
Quilmes Industrial (QUINSA) Société Anonyme In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in
shareholders equity present fairly, in all material respects, the financial
position of Quilmes Industrial (QUINSA) Société Anonyme and its subsidiaries at
December 31, 2003 and 2002, 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 Luxembourg. These
financial statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. Accounting principles generally accepted in Luxembourg vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Information relating to the nature and effect of such
differences is presented in Note 28 to the consolidated financial statements. PRICE WATERHOUSE & Co. by /s/ Marcelo De Nicola (Partner) 
 Marcelo De Nicola Buenos Aires, Argentina.
April 30, 2004 F - 2




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME
AND SUBSIDIARIES 
 Consolidated Balance Sheets
 2003
    
    2002AssetsFixed assetsIntangible assets (Note 6)
    
    
    318.4
    
    
    
    236.0Industrial land and buildings (Note 7)
    
    
    270.3
    
    
    
    254.6Machinery, plant and equipment (Note 7)
    
    
    272.3
    
    
    
    296.6Bottles and crates (Note 7)
    
    
    39.3
    
    
    
    21.6Other fixed assets (Note 8)
    
    
    103.0
    
    
    
    97.8Financial assets (Note 9)
    
    
    131.2
    
    
    
    28.81,134.5
    
    
    
    935.4Current assetsInventories (Note 10)
    
    
    78.8
    
    
    
    70.3Trade receivables, net
    
    
    43.1
    
    
    
    45.9Other current assets (Note 11)
    
    
    21.6
    
    
    
    20.5Short-term investments
    
    
    123.3
    
    
    
    123.6Cash and banks
    
    
    16.1
    
    
    
    39.0282.9
    
    
    
    299.3PrepaymentsPrepaid expenses
    
    
    5.6
    
    
    
    6.7Total assets
    
    
    1,423.0
    
    
    
    1,241.4Shareholders equity and liabilitiesShareholders equityShare capital (Note 12.a)
    
    
    41.7
    
    
    
    33.5Paid-in capital (Note 12.b)
    
    
    138.3
    
    
    
    33.9Reserve for treasury stock (Note 12.c)
    
    
    62.2
    
    
    
    20.5Legal reserve (Note 12.d)
    
    
    3.4
    
    
    
    3.4Retained earnings (Note 12.e)
    
    
    431.9
    
    
    
    567.8Net income (loss) for the year
    
    
    36.8
    
    
    
    (135.9
    )714.3
    
    
    
    523.2Minority interest
    
    
    156.1
    
    
    
    153.7Total shareholders equity and minority interest
    
    
    870.4
    
    
    
    676.9Provisions (Note 13)
    
    
    32.2
    
    
    
    66.7Long-term liabilitiesLong-term loans and other liabilities (Note 14)
    
    
    246.1
    
    
    
    108.5Current liabilitiesCurrent loans and short-term portion of long-term debt (Note 15)
    
    
    104.1
    
    
    
    273.9Accounts payable and accrued expenses
    
    
    131.8
    
    
    
    93.1Taxes payable and other current liabilities
    
    
    38.4
    
    
    
    22.3274.3
    
    
    
    389.3Total liabilities
    
    
    552.6
    
    
    
    564.5Total
shareholders equity, minority interest and liabilities
    
    
    1,423.0
    
    
    
    1,241.4
 The accompanying notes are an integral part of these consolidated financial statements. F - 3




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME
AND SUBSIDIARIES 
 Consolidated Statements of Income
 2003
    
    2002
    
    2001Gross sales
    
    
    648.5
    
    
    
    488.2
    
    
    
    973.0Taxes
    
    
    (25.8
    )
    
    
    (19.6
    )
    
    
    (34.3
    )Net sales (Note 20)
    
    
    622.7
    
    
    
    468.6
    
    
    
    938.7Cost of goods sold
    
    
    (321.3
    )
    
    
    (308.5
    )
    
    
    (490.4
    )Gross profit
    
    
    301.4
    
    
    
    160.1
    
    
    
    448.3Selling and marketing expenses
    
    
    (143.5
    )
    
    
    (120.5
    )
    
    
    (235.0
    )Administrative and general expenses
    
    
    (38.4
    )
    
    
    (43.2
    )
    
    
    (76.7
    )Operating income (loss) (Note 20)
    
    
    119.5
    
    
    
    (3.6
    )
    
    
    136.6Interest income
    
    
    12.3
    
    
    
    8.4
    
    
    
    6.5Other income (Note 16)
    
    
    36.8
    
    
    
    4.4
    
    
    
    20.4Foreign exchange results and translation adjustments
    
    
    7.2
    
    
    
    (22.9
    )
    
    
    (12.6
    )Interest and financial expenses
    
    
    (38.8
    )
    
    
    (32.8
    )
    
    
    (32.4
    )Other expenses (Note 17)
    
    
    (64.2
    )
    
    
    (155.9
    )
    
    
    (63.3
    )Income (loss) before income taxes and minority interest
    
    
    72.8
    
    
    
    (202.4
    )
    
    
    55.2Income tax (expense) benefit (Note 18)
    
    
    (23.3
    )
    
    
    47.6
    
    
    
    6.1Minority interest
    
    
    (12.7
    )
    
    
    18.9
    
    
    
    (18.0
    )Net income (loss) for the year
    
    
    36.8
    
    
    
    (135.9
    )
    
    
    43.3
 The accompanying notes are an integral part of these consolidated financial statements. F - 4




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME
AND SUBSIDIARIES 
 Consolidated Statements of Changes in Shareholders Equity
 Reserve forShare
    
    Paid-in
    
    treasury
    
    Legal
    
    Retainedcapital
    
    capital
    
    stock
    
    reserve
    
    earnings
    
    TotalBalances as of December 31, 2000
    
    
    33.5
    
    
    
    54.4
    
    
    
    
    
    
    
    3.3
    
    
    
    556.6
    
    
    
    647.8Increase in legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    Dividends to shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32.0
    )
    
    
    (32.0
    )Increase in reserve for treasury stock
    
    
    
    
    
    
    (18.8
    )
    
    
    18.8
    
    
    
    
    
    
    
    
    
    
    
    Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43.3
    
    
    
    43.3Balances as of December 31, 2001
    
    
    33.5
    
    
    
    35.6
    
    
    
    18.8
    
    
    
    3.4
    
    
    
    567.8
    
    
    
    659.1Increase in reserve for treasury stock
    
    
    
    
    
    
    (1.7
    )
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135.9
    )
    
    
    (135.9
    )Balances as of December 31, 2002
    
    
    33.5
    
    
    
    33.9
    
    
    
    20.5
    
    
    
    3.4
    
    
    
    431.9
    
    
    
    523.2Capital increase (Note 12)
    
    
    8.2
    
    
    
    146.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154.3Increase in reserve for treasury stock
    
    
    
    
    
    
    (41.7
    )
    
    
    41.7
    
    
    
    
    
    
    
    
    
    
    
    Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36.8
    
    
    
    36.8Balances as of December 31, 2003
    
    
    41.7
    
    
    
    138.3
    
    
    
    62.2
    
    
    
    3.4
    
    
    
    468.7
    
    
    
    714.3
 The accompanying notes are an integral part of these consolidated financial statements. F - 5




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME
AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows
 2003
    
    2002
    
    2001Cash flows from operating activities:Net income (loss) for the year
    
    
    36.8
    
    
    
    (135.9
    )
    
    
    43.3Adjustments to reconcile net income (loss) to net cash flows
from operating activities:Depreciation
    
    
    91.7
    
    
    
    96.4
    
    
    
    96.5Amortization of goodwill
    
    
    21.3
    
    
    
    21.9
    
    
    
    21.6Impairment of goodwill
    
    
    
    
    
    
    90.0
    
    
    
    Impairment of tangible fixed assets
    
    
    1.4
    
    
    
    6.0
    
    
    
    Inventories write-down
    
    
    
    
    
    
    12.0
    
    
    
    Tangible fixed assets write-off
    
    
    
    
    
    
    
    
    
    
    1.4Deferred income tax
    
    
    9.6
    
    
    
    (50.3
    )
    
    
    (13.9
    )Minority interest
    
    
    12.7
    
    
    
    (18.9
    )
    
    
    18.0Interest in related companies
    
    
    2.7
    
    
    
    5.2
    
    
    
    18.3Allowance for doubtful accounts
    
    
    2.1
    
    
    
    3.2
    
    
    
    10.7Loss (gain) from sale of tangible fixed assets and bottles
    
    
    6.9
    
    
    
    4.8
    
    
    
    (3.0
    )Gain from sale of subsidiaries
    
    
    0.0
    
    
    
    
    
    
    
    0.2Contingencies (Note 16) and provisions
    
    
    (25.0
    )
    
    
    3.5
    
    
    
    10.2Allowance for obsolescence
    
    
    
    
    
    
    
    
    
    
    1.8Foreign exchange results and translation adjustments
    
    
    (7.2
    )
    
    
    (19.8
    )
    
    
    4.3Management bonus program
    
    
    6.5
    
    
    
    
    
    
    
    Impairment of Argentine government bonds
    
    
    7.2
    
    
    
    
    
    
    
    Other no cash results
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Changes in operating assets and liabilities:Decrease (increase) in trade receivables
    
    
    5.7
    
    
    
    (5.0
    )
    
    
    7.6(Increase) in other current assets
    
    
    (0.3
    )
    
    
    (13.3
    )
    
    
    (1.7
    )(Increase) decrease in inventories
    
    
    (16.7
    )
    
    
    25.8
    
    
    
    11.2(Increase) decrease in other fixed assets
    
    
    (4.4
    )
    
    
    4.4
    
    
    
    (31.2
    )Decrease in prepaid expenses
    
    
    1.9
    
    
    
    3.7
    
    
    
    3.2Increase in intangible assets
    
    
    
    
    
    
    
    
    
    
    (6.0
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    15.0
    
    
    
    20.0
    
    
    
    (4.6
    )Increase in other long-term liabilities
    
    
    0.5
    
    
    
    11.3
    
    
    
    5.1Increase (decrease) in taxes payable and other current liabilities
    
    
    12.3
    
    
    
    3.4
    
    
    
    (24.9
    )(Decrease) in provisions
    
    
    (36.7
    )
    
    
    (8.6
    )
    
    
    (23.5
    )Increase in interest payable
    
    
    2.7
    
    
    
    2.6
    
    
    
    3.2Net cash provided by operating activities
    
    
    146.7
    
    
    
    62.4
    
    
    
    147.5Cash flows from investing activities:Proceeds from sale (acquisition) of marketable securities
    
    
    0.3
    
    
    
    
    
    
    
    (10.2
    )Acquisition of minority interest
    
    
    (11.4
    )
    
    
    (6.7
    )
    
    
    (22.6
    )Net proceeds from sale of subsidiaries, net of cash sold
    
    
    
    
    
    
    
    
    
    
    0.5(Increase) decrease in financial assets
    
    
    (20.7
    )
    
    
    0.5
    
    
    
    (13.0
    )Net proceeds from sale of tangible fixed assets
    
    
    10.5
    
    
    
    3.3
    
    
    
    16.7Purchase of tangible fixed assets
    
    
    (38.0
    )
    
    
    (20.5
    )
    
    
    (72.0
    )Cash received from acquisition of subsidiaries
    
    
    12.9
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (46.4
    )
    
    
    (23.4
    )
    
    
    (100.6
    )Cash flows from financing activities:Payment of dividends to shareholders
    
    
    
    
    
    
    
    
    
    
    (32.0
    )Dividends to minority interest
    
    
    (8.3
    )
    
    
    (8.3
    )
    
    
    (9.2
    )Minority interest contributions
    
    
    
    
    
    
    
    
    
    
    4.7Acquisition of treasury stock
    
    
    (41.7
    )
    
    
    (1.7
    )
    
    
    (11.0
    )Increase (decrease) in short-term debt
    
    
    9.4
    
    
    
    (33.3
    )
    
    
    (29.1
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    40.0
    
    
    
    147.5Repayment of long-term debt
    
    
    (54.7
    )
    
    
    (38.3
    )
    
    
    (80.4
    )Net cash (used in) provided by financing activities
    
    
    (95.3
    )
    
    
    (41.6
    )
    
    
    (9.5
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    7.3
    
    
    
    23.5
    
    
    
    19.0Increase in cash and cash equivalents
    
    
    12.3
    
    
    
    20.9
    
    
    
    56.4Cash and cash equivalents as of the beginning of the year
    
    
    127.1
    
    
    
    106.2
    
    
    
    49.8Cash and cash equivalents as of the end of the year
    
    
    139.4
    
    
    
    127.1
    
    
    
    106.2
 The accompanying notes are an integral part of these consolidated financial statements. F - 6




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##### Table of Contents



QUILMES INDUSTRIAL
(QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES 
 Notes to the Consolidated Financial Statements
 1. Nature of the business and basis of presentation Nature
of operations The Company is a multinational brewer and marketer of beer and other
beverages, including soft drinks and bottled water. The vast majority of the
Companys volume is sold in Argentina to independent distributors and
retailers. The Company has significant operations in the combined Southern Cone
markets of Argentina, Bolivia, Chile, Paraguay and Uruguay. Principles
of consolidation The accompanying consolidated financial statements have been prepared to
reflect the financial position and results of operations of Quilmes Industrial
Société Anonyme (QUINSA), a Luxembourg holding company (a corporation
organized under the laws of the Grand-Duchy of Luxembourg), and its
majority-owned and controlled foreign subsidiaries (collectively referred to as
the Company). The Companys consolidated financial statements include those
subsidiaries in which it holds either directly or indirectly more than 50 % of
the voting rights. (See Note 5 for details). All significant intercompany
accounts and transactions have been eliminated. Basis
of presentation The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles used in Luxembourg
(Luxembourg GAAP) and Luxembourg regulations, which differ in certain
significant respects from generally accepted accounting principles in the
United States of America (US GAAP). Such differences involve methods of
measuring the amounts shown in the consolidated financial statements, as well
as additional disclosures required by US GAAP. These consolidated financial
statements include solely a reconciliation of net income (loss) and
shareholders equity to US GAAP. Pursuant to Item 17 of Form 20-F, this
reconciliation does not include disclosure of all information that would be
required by US GAAP and Regulation S-X of the Securities and Exchange
Commission (SEC) of the United States of America (See Note 28). The Company elects to report its consolidated financial statements in US
dollars (US$). The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used when accounting for the
allowance for doubtful accounts, depreciation, impairment of long-lived assets,
income taxes, provisions for contingencies and other allowances. Actual results
could differ from those estimates. Reclassifications Certain reclassifications have been made to the prior years financial
statements to conform to the current year presentation. 2. Argentine economic context Argentina is immersed in a critical economic situation. The main features
of the current economic context are a major external debt burden and a crisis
of the financial system that led mainly towards the end of 2002 to a
significant decrease in the demand for goods and services and a large rise in
the level of unemployment. F - 7




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 2. Argentine economic context (continued) To confront the crisis Argentina is enduring, as from December 2001, the
Government issued measures, laws, decrees and regulations that involved
profound changes to the prevailing economic model. Among the measures adopted
was the establishment of an exchange rate float that led to a significant
devaluation of the Argentine peso during the first months of 2002 and the
conversion into pesos of certain assets and liabilities in foreign currency
held in Argentina. Mainly during 2002, the situation described produced a significant and
unequal increase in various economic indicators, such as the exchange rate and
the domestic wholesale price index. These circumstances affect the
comparability of the financial statements presented and they must be analyzed
considering those circumstances. See Notes 4(g) and 14 for details of the impact that the Argentine
critical economic situation had on the Companys financial position and results
of operations during 2002. During 2003, national and provincial elections were held, which made the
political situation more stable. The economy has continued to show signs of
recovery since the last quarter of 2002. Inflation and exchange rates were able
to be kept under control. 3. Acquisitions, joint ventures, mergers and divestitures Mergers and acquisitions Linthal S.A. (Linthal) As more fully described in Note 25, in January 2003 the Argentine control
authorities approved the strategic alliance agreement entered into by the
Company with Companhia de Bebidas das Américas (AmBev). Pursuant to this
agreement, the Company acquired 100% of Linthal in exchange for 26,388,914
Quinsa newly issued Class B shares. Linthal is a holding company organized in
Uruguay which, through its wholly-owned and majority-owned subsidiaries, namely
CCBA S.A. (CCBA), Compañía Cervecera Brahma del Paraguay S.A. (CCBP) and La
Luisiana S.A. (La Luisiana) and Compañía Salus S.A. (Salus), carried out the
AmBev beer activities in Argentina, Paraguay and Uruguay, respectively. The
acquisition was accounted for as a purchase. The purchase price amounting to
US$ 157.7 million (including US$ 3.4 million of related fees and expenses) was
determined based on the fair market value of the business acquired. The excess
of the purchase price over the fair value of the net assets acquired and
liabilities assumed (excluding any identifiable intangible assets) resulted in
recognition of goodwill of US$ 96.7 million which is being amortized over 20
years using the straight-line method. As a result of the issuance of the Class
B shares, the Company increased its share capital and issue premium by US$ 8.2
million and US$ 146.1 million, respectively. See Note 12 for details. In July 2003, the Company made a reorganization pursuant to which Quinsa
contributed 100% of Linthal to Quilmes International (Bermuda) Ltd. QI(B) in
exchange for newly issued shares of QI(B). As a result, the Company increased
its ownership interest in QI(B) from 85% to 87.63%, resulting in recognition of
additional goodwill amounting to US$ 3.5 million. Cervecería y Maltería Quilmes S.A.I.C.A y G (CMQ)  Buenos Aires
Embotelladora S.A. (Baesa)  Soft drinks business Baesa was an Argentine company that had exclusive franchise agreements to
manufacture, bottle and market Pepsi Co soft drink brands, primarily in largely
populated provinces of Argentina (Buenos Aires and Córdoba) and in Uruguay. On September 20, 2000, CMQ and Baesas Board of Directors decided to merge
Baesa with and into CMQ, a wholly  owned subsidiary of the Company (the
Merger). F - 8




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 3. Acquisitions, joint ventures, mergers and divestitures (continued) Mergers and acquisitions On March 9, 2001 the Merger was approved by the local authority
(Inspección General de Justicia) and CMQ was the surviving entity. During the year ended December 31, 2001 the Company incurred, through CMQ,
in different costs related with the enhancement of the distribution and
commercialization area of soft drinks, that allowed CMQ to begin commercial
activities in the Province of Neuquén and certain zones of Río Negro and La
Pampa. These costs totaled US$ 4.9 million and were accounted for as intangible
assets. Cervecería y Maltería Quilmes S.A.I.C.A y G (CMQ)  Embotelladoras del
Interior S.A. (EDISA)  Coroplas S.A.I.C.I. y F. (Coroplas) In December 2000, the Company, through one of its wholly-owned
subsidiaries, purchased a 99.21% indirect equity interest in EDISA, an
Argentine bottler and producer of the Pepsi brand, for US$ 18.3 million. Its
franchise covers the territory of nine Argentine provinces. The acquisition was
accounted for as a purchase. The excess of the total purchase price over the
fair value of total net assets acquired was allocated to goodwill, resulting in
recognition of goodwill of US$ 45.2 million, which is being amortized over 20
years utilizing the straight-line method. During the year ended December 31, 2001, the Company finalized its
evaluation of the fair value of assets acquired and liabilities assumed. This
evaluation resulted in an increase to the value of tangible fixed assets
acquired of US$ 3.4 million and in a reduction in goodwill of US$ 2.3 million.
Additionally, during the first quarter 2001, goodwill was increased in US$ 1.1
million as a result of recognizing acquisition expenses incurred. In August 2001 EDISA and CMQ agreed that the latter would take charge of
the sale and distribution of products from the PepsiCo line. As a result of
this agreement, as from that date, EDISA began to provide manufacturing and
bottling services of such products for CMQ. In
December 2002, CMQ, EDISA and Coroplass (a wholly-owned subsidiary of
CMQ) Boards of Directors decided to merge those companies with and into CMQ
(the surviving entity), a decision that was ratified in April 2003 by the
meetings of shareholders of those companies, being effective January 1, 2003.
In July 2003 the Superintendency of Corporations, the control authority in
Argentina, approved the merger. As a consequence of this, at December 31, 2003,
Quinsa held an indirect interest of 99.69% in CMQ. Cerveceria
Paraguaya S.A. (Cervepar)  CCBP The process for merging CCBP (the Paraguayan subsidiary contributed by
AmBev) and Cervepar commenced during the second quarter of 2003, and was
approved at each of their shareholders meetings, held on August 7 and August 8,
2003, respectively. Final approval of the merger was granted by the Paraguayan
regulatory authorities once a Final Merger Agreement was filed on December 18,
2003. As a result of this corporate reorganization, as of December 31, 2003
Quinsa held an indirect 85.80% interest in Cervecería Paraguaya S.A. F.N.C.
S.A.(FNC)  Embotelladora del Uruguay S.A.(EUSA)  La Luisiana 
Salus In May 2001, FNC capitalized certain capital reserves by issuing
176,405,900 shares. This operation did not change the shareholders ownership. During the second quarter 2001, the Company, through QI(B), acquired
47,301,300 shares of FNC for US$ 0.7 million that led to an increase in
ownership of 3.12%. F - 9




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 3. Acquisitions, joint ventures, mergers and divestitures (continued) Mergers and acquisitions (continued) Also, during November 2001 the Uruguayan local authority approved the
merger between FNC and EUSA, being EUSA the surviving entity. As part of this
operation 45,455,956 shares, representing 3.34% of the ownership, were sold to
minority shareholders. As a consequence of these operations the Company had an
indirect ownership in the surviving entity of 59.7%. Additionally, EUSA changed
its name to FNC. In September 2003, QI(B) (directly controlled by Quinsa) acquired an
additional 36.82% equity stake in FNC for a total amount of US$ 7.7 million.
The Company recorded these acquisitions of additional ownership interests under
the purchase method of accounting as step acquisitions. The excess of purchase
price over the fair value of net assets acquired and liabilities assumed
resulted in recognition of an additional goodwill of US$ 2.4 million. On November 30, 2003, after having carried out the pertinent legal
formalities, FNC and La Luisiana (the Uruguayan subsidiary contributed by
AmBev) executed a merger agreement whereby FNC absorbed La Luisiana, which was
dissolved without being liquidated. This operation did not produce significant
effects on the financial statements. On February 3, 2004, the Boards of Directors of FNC and Salus executed a
spin-off/merger agreement, which was subsequently approved by the Extraordinary
Meeting of Shareholders held on February 27, 2004. This operation consists of
the spin-off of the beer (including soft drinks, malt and cider) and water
businesses and the subsequent addition to FNC of Saluss spun-off beer
business. Cervecería Boliviana Nacional La Paz (CBN), Cervercería Boliviana Nacional
Santa Cruz (CBNSC), Cervecería Santa Cruz (SC), Cervecería Taquiña (CTq),
Cervecería Tarija, Envases de Aluminio Boliviano S.R.L. (Enalbo) and
Inversiones Cerveceras Sociedad Anónima (INCESA) As of December 31, 1999, the Company had a 14.55% indirect equity interest
in CBN, which in turn had a 30.0% direct equity interest in CBNSC, two Bolivian
brewers. In 1999, the Company accounted for this investment at cost. In
September 2000, the Company increased its indirect equity ownership in CBN to
70.34% for a total consideration of US$ 77.4 million. In December 2000, CBN
acquired an additional 50.92% equity stake in CBNSC. With the increase in
equity ownership of CBN to 70.34%,the Company has effective control, and
therefore, the Company changed its accounting method for CBN from cost to the
consolidation method effective September 1, 2000. Because a controlling
interest in CBN was acquired in September 2000, the results of operations of
CBN have been included in the consolidated statements of income for the period
beginning September 1, 2000. The Company recorded these acquisitions of additional ownership interest
in CBN under the purchase method of accounting as step acquisitions. The excess
of purchase price over the fair value of net assets acquired and liabilities
assumed resulted in a recognition of goodwill amounting to US$ 109.6 million
and is being amortized over 20 years using the straight-line method. During the year ended December 31, 2001, the Company finalized its
evaluation of the fair value of assets acquired and liabilities assumed. This
evaluation resulted in a reduction of tangible fixed assets acquired of US$ 4.7
million, an increase of goodwill of US$ 3.4 million and a decrease in minority
interest of US$ 1.3 million. F - 10




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 3. Acquisitions, joint ventures, mergers and divestitures (continued) Mergers
and acquisitions (Continued) During the year ended December 31, 2001, in several transactions, the
Company increased its indirect ownership in CBN to 74.03% and in CBNSC to
88.92% for a total consideration of US$ 11.4 million and US$ 4.9 million,
respectively. The Company recorded these acquisitions of additional ownership
interests in CBN and CBNSC under the purchase method of accounting as step
acquisitions. The excess of the purchase prices over the fair values of net
assets acquired and liabilities assumed resulted in the recognition of goodwill
amounting to US$ 3.5 million and US$ 1.0 million for CBN and CBNSC
acquisitions, respectively. Goodwill is being amortized over 20 years using the
straight-line method. During the year ended December 31, 2001, as a consequence of
capitalization of loans with shareholders, INCESA increased its capital by US$
102.3 million by issuing 10,230 shares. Of this share increase, the Company,
through QI(B), subscribed 9,880 shares. Also, during the year ended December
31, 2001 the Company increased, in several transactions, its indirect ownership
in INCESA through the acquisitions of shares from minority shareholders for a
total consideration of US$ 4.5 million. As a result of these operations, as of
December 31, 2001 the Company increased its indirect ownership in INCESA to
96.15%. The Company recorded these acquisitions of additional ownership
interests under the purchase method of accounting as step acquisitions. The
excess of purchase price over the fair value of net assets acquired and
liabilities assumed resulted in recognition of an additional goodwill of US$
2.6 million. In the last quarter 2001, CBN, CBNSC, SC and Cervecería Tarija  ́s Board of
Directors decided to merge Cervecería Santa Cruz, CBNSC and Cervecería Tarija
with and into CBN (surviving entity). A preliminary merger agreement was
executed between the above mentioned companies, and the merger was approved by
the shareholders of each company in their respective shareholders  ́ general
meetings. The accompanying consolidated financial statements as of December
2002, were prepared taking into consideration the above mentioned merger and
considering Incesa  ́s equity ownership in the surviving entity (CBN) of 75.16%.
During the second quarter of 2002, the Bolivian authorities approved the
merger. During the year ended December 31, 2002, the Company increased its
indirect ownership in CBN to 78.13% and in CTq to 91.95% for a total
consideration of US$ 3.8 million and US$ 0.1 million, respectively. The Company
recorded these acquisitions of additional ownership interests under the
purchase method of accounting as step acquisitions. In the last quarter of 2002, CBN, CTq and Enalbos (a wholly-owned CBN
subsidiary) Boards of Directors decided to merge those companies with and into
CBN (surviving entity), which was approved by the Extraordinary Meeting of
Shareholders of those companies. The Bolivian authorities approved that merger
in May 2003. As a result of this operation, Incesas interest in CBN was taken
to 79.98%. INCESA During 2003, the Company increased its indirect interest in Incesa to
97.44% for a total amount of US$ 4.3 million (including a cash payment of US$
3.8 million), which generated goodwill of US$ 4.0 million. The Company recorded
these acquisitions of additional ownership interests under the purchase method
of accounting as step acquisitions. CMQ In 2001, the Company, through QI(B), acquired 155,469 shares of CMQ for a
total consideration of US$ 2.0 million, increasing the ownership to 99.67% and
generating goodwill of US$ 1.0 million. Also, during the second quarter of
2002, the Company, through QI(B), acquired 35,053 shares of CMQ for a total
consideration of US$ 0.1 million, increasing the ownership to 99.72%. As a
consequence of the merger between CMQ, Edisa and Coroplas with and CMQ being
the surviving entity, at December 31, 2003, Quinsa held an indirect interest of
99,69% in CMQ. F - 11




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 3. Acquisitions, joint ventures, mergers and divestitures (continued) Joint ventures Eco de los Andes S.A. (Eco)/ Hecatón S.A. (Hecatón) In July 1999,the Company entered into a strategic association with
Perrier-Vittel, a company of The Nestle Group, to manage its mineral water
business in Argentina through the formation of a new company, Eco. The Company
consummated a spin-off of its mineral water business and contributed its
related assets to Eco. After the spin-off, the Company retained a 48.83% in
Eco. Ecos objective is to focus on the bottling and marketing of various
mineral water brands, including the Eco brand. During the first quarter 2001, the Company, through Hecatón, CMQ and
EDISA, transferred certain assets related to the mineral water business of
Glaciar and Villa de los Arroyos (VDA)s lines of products to Eco. Also during the year ended December 31, 2001, and in several share
transactions the Company, through QI(B), transferred to Perrier  Vittel 51.00%
of its indirect ownership in Hecatón. As of December 31, 2001,the Company had
an indirect ownership interest in Hecatón of 49.00%. On December 12, 2001 the Board of Eco began negotiations with Hecatón, in
order to merge both companies. During the second quarter of 2002, the merger
was approved by the corresponding local controlling authorities. The objective
of this merger is to better use available resources and to increase
administrative efficiency, therefore improving financial results. Divestitures Maltería Safac S.A. (Safac) In September 2001, the Company through QI(B) and CMQ, sold its 100%
interest in Safac for a total consideration of US$ 1.5 million. As a result,
the Company recorded an after tax loss of approximately US$ 0.2 million on this
sale in 2001. 4. Summary of significant accounting principles and policies The significant accounting principles and policies of the Company are as
follow: (a) Revenue recognition Sales represent the invoiced value of goods sold, net of discounts and
excise taxes. Sales and sales discounts are recognized upon delivery of goods
to customers. (b) Statements of cash flows The Company considers all highly liquid temporary investments with
original maturities of three months or less, consisting of primarily fixed-term
deposits to be cash equivalents for purposes of the statements of cash flows. (c) Foreign currency assets and liabilities Financial statements of foreign consolidated subsidiaries have been
translated into US dollars on the basis of the financial statements of such
subsidiaries expressed in the local currency of the country of origin. The
method of translation involves the translation of property, other long-lived
assets, long-term liabilities and related profit and loss accounts at
historical rates of exchange. Additionally, net monetary asset and liability
related translation adjustments are included in financial results in the
current period. The effects of F - 12




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) this translation procedure have been treated as permanent differences in
determining deferred tax. 4. Summary of significant accounting principles and policies (continued) (c) Foreign currency assets and liabilities (continued) Assets and liabilities denominated in foreign currencies are translated at
the prevailing exchange rates as of year-end. Transactions denominated in
foreign currencies are translated into US dollars at the prevailing exchange
rates on the date of transaction settlement. Foreign currency transaction gains
and losses are recorded within financial results. (d) Inventories Inventories are stated at the lower of cost or market value. Cost, which
comprises direct materials, direct labor costs and overhead associated with the
manufacturing processes, is calculated using the first-in, first-out method.
During the fourth quarter of 2002 the Company reviewed the recoverable value of
certain inventories in Argentina, and as a consequence of the devaluation of
the respective local currency against the US dollar, a write-down of US$ 12.0
million was recorded as a reduction of the related account balance and
recognized within that years financial results. (e) Provision for contingencies and allowances The Company records an allowance for doubtful accounts based on several
indicators of risk of uncollectability. This allowance is shown as a reduction
of the related receivable balance. The Company has certain contingent liabilities with respect to material
existing or potential claims, lawsuits and other proceedings, including those
involving tax, social security and other matters. The Company accrues
liabilities when it is probable that future costs will be incurred and such
costs can be reasonably estimated. Such accruals are based on developments to
date, the Companys estimates of the outcome of these matters,
the lawyers opinion, and its experience in contesting, litigating and settling other
matters. As the scope of the liabilities becomes better defined, there will be
changes in the estimates of future costs, which could have a material effect on
the Companys future results of operations and financial condition or
liquidity. (f) Income taxes The Company tax status is governed by the tax provision of the law of July
31, 1929 as amended by the rules set by The Grand Ducal decree of December 17,
1939 governing Holding Milliardaire Companies. Income taxes are accounted for using a comprehensive liability method of
accounting for income taxes. Under the comprehensive liability method, deferred
income taxes are recognized for the tax consequences of temporary differences
by applying the statutory tax rate to the difference between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities, calculated on a country by country basis. The effect on deferred
income taxes of a change in tax rates is recognized in income in the period of
enactment. A valuation allowance is established to reduce the carrying amounts
of deferred tax assets unless such assets are more likely than not to be
realized. (g) Intangible assets Goodwill, representing the excess of the purchase price over the fair
value of net assets of acquired businesses, is amortized on a straight-line
basis, primarily, over 20 years. Amortization for the years ended December 31,
2003, 2002 and 2001 was US$ 21.3 million, US$ 21.9 million and US$ 21.6
million, respectively. The ongoing recoverability of goodwill is monitored on a
country by country basis taking into account significant events or changes in
the overall business environment. F - 13




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 4. Summary of significant accounting principles and policies (continued) (g) Intangible assets (continued) Also, this caption includes costs related with the enhancement of the
distribution and commercialization area of soft drinks that allowed the Company
to begin commercial activities in the Province of Neuquén and certain zones of
Río Negro and La Pampa. Considering the critical economic situation of Argentina during the third
quarter of 2002 the Companys management reviewed the value of its tangible and
intangible assets in Argentina for potential impairment. Consequently, the
Company recorded a US$ 90 million write off of goodwill related to the soft
drink business. This loss was included in other expenses. (h) Tangible fixed assets Tangible fixed assets primarily consist of industrial land and buildings,
machinery, plant and equipment and bottles and crates. Tangible fixed assets
are carried at cost and include expenditures for new facilities and
expenditures which substantially increase the useful lives of existing
facilities. The cost of maintenance, repairs and minor renewals is expensed as
incurred. When tangible fixed assets are retired or otherwise disposed, the
related cost and accumulated depreciation are eliminated and any gain or loss
on disposition is recognized in financial results. Depreciation is provided on the straight-line method over the following
estimated useful lives: buildings and improvements, 50 years; other tangible
fixed assets, including machinery and equipment and bottles and crates, 3 to 20
years. The carrying value of tangible fixed assets does not exceed its
recoverable value based on estimates made by the Companys management. (i) Impairment of long-lived assets The Company periodically evaluates the carrying value of its long-lived
assets for impairment. The carrying value of a long-lived asset is considered
impaired by the Company when the anticipated discounted cash flows from such
asset are separately identifiable and result in less than its carrying value.
In that event, a loss would be recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Assets released from
productive activities are carried at the lower of cost or its estimated net
realization value. As mentioned in Note 4 (g), during the year ended December 31, 2002, the
Companys management determined that goodwill related with its soft drink
business in Argentina was impaired. Consequently, the Company recorded a US$
90 million write off (see Note 4 g). (j) Research and development costs Research and development costs are expensed in the year in which these
costs are incurred. Historically, these expenses have not been significant. (k) Financial assets Financial assets primarily consist of treasury stock, certificates of
deposits and participation agreements, government bonds and investments in
affiliated companies. Treasury stock is carried at cost. Dividends collected on these shares are
deducted from the acquisition cost. Certificates of deposits and participation agreements are carried at cost
plus accrued interest at year-end. F - 14




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 4. Summary of significant accounting principles and policies (continued) (k) Financial assets (continued) In 2002, the Company included under the heading of other fixed assets,
US$ 10.0 million corresponding to the nominal value of Argentine government
bonds purchased by CMQ, and accrued and unpaid interest through 2002. These
bonds are denominated in US$ and are due on May 11, 2004. Since February 2002
the Argentine Government suspended the monthly interest payment on those bonds.
This situation as described, added to the economic crisis that Argentina was
experiencing and raised doubts as to the capacity of the countrys government
to comply with its financial obligations. However, since these bonds were
expected to be recovered in the form of a similar amount tax credit, management
estimated that the Company may be able to recover the par value plus unpaid
interest accrued at the date of maturity of the bonds. Consequently, the
investment in these bonds was valued at its nominal value plus interest accrued
through the end of 2002. During 2003, the Argentine Government suspended the possibility of
recovering these bonds in the form of a similar tax credit amount and in
September 2003, the Argentine government made an initial offering to refinance
its debt, which included a 75% reduction of the principal amount due. In view
of the Argentine Governments proposal, a valuation allowance of US$ 7.2
million was recorded as a reduction of the nominal value and accrued interest
of those bonds and charged to results for the current year. The equity method of accounting is used for the Companys investments in
affiliates where the Company has the ability and the intention to exercise
significant influence. As a result of the uncertain future performance of the
water business in Argentina, the Company has decided to discontinue the
financing of its investment in Eco de los Andes S.A. (Eco). In view of the
decision made, the Company has valued its investment in that company at zero. (l) Other fixed assets At December 31, 2003, other fixed assets consist primarily of deferred
income taxes and spare parts. As mentioned in Note 4(k) the Company has decided
to include the Argentine government  ́s bonds under the heading Financial
assets, while during 2002 they were included under the heading Other fixed
assets, because the Argentine government suspended the possibility of
recovering these bonds in the form of a similar tax credit amount. (m) Prepaid expenses Deferred advertising expense, sponsorship and marketing promotional
programs are classified as prepaid expenses. Deferred advertising costs
primarily consist of prepaid radio and television airtime. Deferred advertising
costs are expensed as airtime is consumed, the rest of the deferred prepaid
expenses are amortized under the straight-line method over the respective terms
of the programs. The Company is party to certain sponsorship agreements,
whereby it recognizes the related costs over the life of the agreement,
generally ranging from one to four years. 5. Summary of the QUINSA group of companies The consolidated financial statements of QUINSA include the accounts of
QUINSA and foreign controlled and affiliated subsidiaries. The following list
summarizes the direct and indirect equity holdings in each of the companies,
which form the QUINSA group. See Note 3 for a description of acquisitions,
joint ventures and divestitures occurred during the years ended December 31,
2001, 2002 and 2003. Participation or interest owned is shown as of December 31, 2003: Held directly:  .
    
    Quilmes International (Bermuda) Ltd. (QI(B)), Hamilton, Bermuda, at 87.63%. F - 15




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 5. Summary of the QUINSA group of companies (continued) Held indirectly through QI(B): .
    
    Cervecería y Maltería Quilmes S.A. (CMQ), Buenos Aires, Argentina, at 99.69%..
    
    Eco de los Andes S.A., Buenos Aires, Argentina, at 48.82 %.
    
    Colosas S.A., Barcequillo, Paraguay, at 57.97%..
    
    Inversiones Bemberg Chile Ltda., Santiago de Chile, Chile, at 100.00%.
    
    Noitca Ltd., Tortola, British Virgin Islands and its subsidiaries, at
100.00%..
    
    Linthal S.A., Montevideo, Uruguay, at 100.00%..
    
    Sociedad de Inversiones y Comercio Vienher S.A., Panamá, Panamá, at 100.00%. Held indirectly through Linthal: .
    
    CCBA S.A. Lujan, Argentina, at 100.00%..
    
    SPV Salus S.A., Montevideo, Uruguay, at 26.25%. Held indirectly through QI (B) at 26.10 %, Noitca at 8.56% and SPV Salus at
57.35% .
    
    Compañía Salus S.A., Uruguay. Held indirectly through CMQ: .
    
    Quilmes Do Brasil Ltda., Porto Alegre, Brazil, at 100.00%..
    
    Publicidad Relator S.A., Buenos Aires, Argentina, at 99.99%..
    
    Seven Up Concesiones S.A.I. y C., Buenos Aires, Argentina, at 99.99%..
    
    Embotelladora Perla del Norte S.A.I.C.I.A. y F., Pergamino, Argentina, at
99.99%..
    
    Intergal S.A., Montevideo, Uruguay, at 100.00%..
    
    Aydecar S.A., Buenos Aires, Argentina, at 99.99 %. Held indirectly through QI(B) at 64.04%, Linthal S.A. at 21.54% and FNC S.A. at
0.22%: .
    
    Cervecería Paraguaya S.A., Asuncion, Paraguay Held indirectly through QI(B) at 88.72% and Inversiones Bemberg Chile Ltda. at
11.28%: .
    
    Cervecería Chile S.A., Santiago de Chile, Chile. Held indirectly through QI(B) at 55.44%, Linthal S.A. at 36.57% and CMQ at
5.90%: .
    
    FNC S.A., Montevideo, Uruguay Held indirectly through Cervecería Paraguaya S.A. at 81.79% and Colosas S.A. at
12.70%: .
    
    Fábrica Paraguaya de Vidrios S.A., Asunción, Paraguay. Held indirectly through QI(B) at 97.44% and Sociedad de Inversiones y Comercio
Vienher S.A. at 0.01%: .
    
    Inversiones Cerveceras S.A. (Incesa), Panamá, Panamá. Held indirectly through Incesa at 79.98% .
    
    Cervecería Boliviana Nacional S.A. (CBN), La Paz, Bolivia. Held indirectly through Embotelladora Perla del Norte S.A.I.C.I.A. y F. at
99.99% and CMQ at 0.01%: .
    
    Embotelladora 9 de Julio S.A.I.C.I. y F., Pergamino, Argentina. Held directly at 90.00% and indirectly through CMQ at 3.00%, Cervecería Chile
S.A. at 1.50%, Cervecería Paraguaya S.A. at 2.50% and Embotelladora del Uruguay
S.A. at 3.00%: .
    
    Quilmes Industrial S.A., Buenos Aires, Argentina. F - 16




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 6. Intangible assets As of December 31,2003
    
    2002Goodwill and other intangible
assets, netBaesa
    
    
    82.5
    
    
    
    86.5Edisa
    
    
    15.6
    
    
    
    20.6Cervecería Boliviana Nacional
    
    
    100.7
    
    
    
    106.8Incesa, Taquiña and Santa Cruz
    
    
    8.8
    
    
    
    6.8Salus (Beer business)
    
    
    4.3
    
    
    
    4.5Salus (Water business)
    
    
    4.1
    
    
    
    4.4Cervecería Bieckert S.A.
    
    
    1.8
    
    
    
    2.4QI(B)
    
    
    3.5
    
    
    
    Linthal
    
    
    92.4
    
    
    
    Other
    
    
    4.7
    
    
    
    4.0318.4
    
    
    
    236.0
 Due to the critical economic situation of Argentina and its related
effects, during the year ended December 31, 2002, the Companys management
reviewed the value of its intangible assets in Argentina. Consequently,
goodwill related to the soft drink business (BAESA and EDISA) was reduced in
2002 by US$ 90.0 million. 7. Tangible fixed assets BottlesIndustrial land and
    
    Machinery, plant
    
    andTotal
    
    buildings
    
    and equipment
    
    cratesTotal cost or valuation as of January 1, 2003
    
    
    1,372.5
    
    
    
    321.6
    
    
    
    935.8
    
    
    
    115.1Acquisitions of businesses (Notes 1 and 3)
    
    
    84.9
    
    
    
    32.0
    
    
    
    47.4
    
    
    
    5.5Additions
    
    
    55.0
    
    
    
    0.3
    
    
    
    25.0
    
    
    
    29.7Disposals
    
    
    (41.3
    )
    
    
    (6.5
    )
    
    
    (21.8
    )
    
    
    (13.0
    )Total cost or valuation as of December 31, 2003
    
    
    1,471.1
    
    
    
    347.4
    
    
    
    986.4
    
    
    
    137.3Accumulated depreciation as of January 1, 2003
    
    
    (799.7
    )
    
    
    (67.0
    )
    
    
    (639.2
    )
    
    
    (93.5
    )Acquisitions of businesses (Notes 1 and 3)
    
    
    (20.0
    )
    
    
    (5.0
    )
    
    
    (14.9
    )
    
    
    (0.1
    )Additions
    
    
    (91.7
    )
    
    
    (7.1
    )
    
    
    (73.7
    )
    
    
    (10.9
    )Disposals
    
    
    22.2
    
    
    
    2.0
    
    
    
    13.7
    
    
    
    6.5Accumulated depreciation as of December 31, 2003
    
    
    (889.2
    )
    
    
    (77.1
    )
    
    
    (714.1
    )
    
    
    (98.0
    )Net book value as of December 31, 2003
    
    
    581.9
    
    
    
    270.3
    
    
    
    272.3
    
    
    
    39.3
 BottlesIndustrial land and
    
    Machinery, plant
    
    andTotal
    
    buildings
    
    and equipment
    
    cratesTotal cost or valuation as of January 1, 2002
    
    
    1,401.7
    
    
    
    320.5
    
    
    
    959.3
    
    
    
    121.9Additions
    
    
    27.7
    
    
    
    1.8
    
    
    
    12.6
    
    
    
    13.3Disposals
    
    
    (56.9
    )
    
    
    (0.7
    )
    
    
    (36.1
    )
    
    
    (20.1
    )Total cost or valuation as of December 31, 2002
    
    
    1,372.5
    
    
    
    321.6
    
    
    
    935.8
    
    
    
    115.1Accumulated depreciation as of January 1, 2002
    
    
    (741.2
    )
    
    
    (60.9
    )
    
    
    (582.4
    )
    
    
    (97.9
    )Additions
    
    
    (101.1
    )
    
    
    (6.8
    )
    
    
    (80.9
    )
    
    
    (13.4
    )Disposals
    
    
    42.6
    
    
    
    0.7
    
    
    
    24.1
    
    
    
    17.8Accumulated depreciation as of December 31, 2002
    
    
    (799.7
    )
    
    
    (67.0
    )
    
    
    (639.2
    )
    
    
    (93.5
    )Net book value as of December 31, 2002
    
    
    572.8
    
    
    
    254.6
    
    
    
    296.6
    
    
    
    21.6
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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 8. Other fixed assets As of December 31,2003
    
    2002Deferred income taxes (Note 18)
    
    
    81.3
    
    
    
    72.3Spare parts
    
    
    15.3
    
    
    
    14.4Argentine government bonds (Note 4 k)
    
    
    
    
    
    
    10.0Tax receivables
    
    
    1.1
    
    
    
    0.1Others (Net of allowance for
doubtful accounts of US$ 0.8 million
in 2003 and US$ 1.9 million in 2002)
    
    
    5.3
    
    
    
    1.0103.0
    
    
    
    97.8
 9. Financial assets As of December 31,2003
    
    2002Treasury stock (Note 12)
    
    
    62.2
    
    
    
    20.5Argentine government bond (Note 4 k)
    
    
    3.5
    
    
    
    Investments at equity method
    
    
    1.1
    
    
    
    3.8Certificates of deposit and participation agreements
    
    
    57.7
    
    
    
    1.7Others
    
    
    6.7
    
    
    
    2.8131.2
    
    
    
    28.8
 As of December 31, 2003 and 2002, the details of total treasury shares
held by the Company are as follows: 2003
    
    2002- Class A shares:
    
    
    2,272,245
    
    
    
    3,734,797- Class B shares:
    
    
    1,153,416
    
    
    
    726,053- ADS (*):
    
    
    3,358,216
    
    
    
    834,116
 (*) representing 2 Class B shares for each ADS During 2003, the Company acquired 2,811,078 Class A shares and 2,524,100 ADS
for a total amount of US$ 2.1 million and US$ 39.6 million, respectively.
Additionally, 4,273,630 Class A shares were converted into 427,363 class B
shares. 10. Inventories As of December 31,2003
    
    2002Finished goods and goods for resale
    
    
    16.7
    
    
    
    17.7Work in process
    
    
    6.8
    
    
    
    6.6Raw material and supplies (net of valuation
allowance of US$ 12.0 million in 2002 - see
Note 4.d)
    
    
    48.3
    
    
    
    44.171.8
    
    
    
    68.4Advances to suppliers and inventories in transit
    
    
    7.0
    
    
    
    1.978.8
    
    
    
    70.3
 11. Other current assets As of December 31,2003
    
    2002Advances to suppliers
    
    
    8.0
    
    
    
    6.2Prepaid taxes
    
    
    0.6
    
    
    
    6.4Deferred income taxes (Note 18)
    
    
    6.1
    
    
    
    3.2Advances to personnel
    
    
    0.9
    
    
    
    0.6Others
    
    
    6.0
    
    
    
    4.121.6
    
    
    
    20.5
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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 12. Shareholders equity (a) Share capital The share capital issued and outstanding of US$ 41.7 million is
represented by 707,932,153 shares (637,103,500 shares of Class A common stock
and 70,828,653 shares of Class B common stock, both classes without par value). The following is a summary of the share activity of the Company: Voting Shares
    
    Non-voting shares
    
    Class A common stock
    
    Class B common stockBalances as of December 31, 2000
    
    
    68,400,000
    
    
    
    39,750,089
    
    
    
    
    
    
    
    Capital restructuring (i):Ten-for-one split of ordinary
shares
    
    
    615,600,000
    
    
    
    
    
    
    
    
    
    
    
    Rename of ordinary shares
    
    
    (684,000,000
    )
    
    
    
    
    
    
    684,000,000
    
    
    
    Conversion of preferred shares
into ordinary shares
    
    
    39,750,089
    
    
    
    (39,750,089
    )
    
    
    
    
    
    
    Rename of ordinary shares
    
    
    (39,750,089
    )
    
    
    
    
    
    
    
    
    
    
    39,750,089Conversion of Class A shares
into Class B shares
    
    
    
    
    
    
    
    
    
    
    (36,381,160
    )
    
    
    3,638,116Balances as of December 31,
2001 and 2002
    
    
    
    
    
    
    
    
    
    
    647,618,840
    
    
    
    43,388,205Capital increase by
contribution of Linthal shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,388,914Conversion of Class A shares
into Class B shares
    
    
    
    
    
    
    
    
    
    
    (10,515,340
    )
    
    
    1,051,534
    
    
    
    
    
    
    
    637,103,500
    
    
    
    70,828,653
 (i) The Shareholders Meeting held on June 8, 2001 approved the capital
restructuring proposal as submitted. The restructuring, which was approved by
the separate class vote of each of the preferred and ordinary shareholders,
consisted principally of the following:  The 68,400,000 ordinary shares outstanding at that date were split
ten-for-one resulting in 684,000,000 shares, without par value, and were
renamed Class A shares.  The 39,750,089 non-voting preferred shares outstanding at that date were
converted into ordinary shares, without par value, and renamed Class B shares.
The class of non-voting preferred shares was cancelled. Class A and Class B shares vote as one class at any shareholders meeting
and each Class A and Class B share is entitled to cast one vote at any
shareholders meeting, provided that any resolutions affecting the rights of a
particular class must be approved separately by the quorum and majority
requirements established by law for each class. Class B shares have dividend and liquidation rights equal to ten times the
rights of Class A shares. Upon the request of holders of Class A shares, the Class A shares may be
converted into Class B shares at the rate of ten Class A shares for one Class B
share. Conversion requests will be accepted during a limited period of time
every year, and are subject to certain limitations. The company is listed on the Luxembourg Stock Exchange (LSE) since July
1991 and on the New-York Stock Exchange (NYSE) since March 1996. F - 19




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 12. Shareholders equity (continued) (a) Share capital (continued) Class A and Class B shares have been listed on the Luxembourg Stock
Exchange since June 11, 2001. American Depositary Shares (ADS), each
representing two Class B shares as from June 11, 2001, are listed on the New
York Stock Exchange. Pursuant to information requirements from the Luxembourg Stock Exchange,
the Company has also confirmed that during the last financial year and the
current year no public takeover or exchange offers were made by third parties
in respect of its shares, and no public exchange offers were made by it in
respect of other companies shares. In January 2003, AmBev contributed its assets in Argentina, Paraguay and
Uruguay to the Company in exchange for 26,388,914 Class B shares. Additionally, the holders made a conversion of 10,515,340 Class A to
1,051,534 Class B. The authorized capital is fixed at US$ 400 million represented by Class A
shares and Class B shares, both without par value, in a total amount of
6,790,862,498 shares which includes the number of shares of the presently
subscribed capital in such portions of Class A and B shares as shall reflect
the outstanding portions from time to time of Class A and B shares under the
subscribed share capital. This authorization is valid for five years until June
8, 2006. The Board of Directors is authorized to issue bonds convertible into
shares to the extent that there shall be available authorized capital. This
authorization is valid for five years until June 8, 2006. No bonds have been
issued as of December 31, 2003. (b) Paid-in capital In January 2003, paid-in capital was increased when AmBev contributed to
the Company all the shares of capital stock of its subsidiaries (the Southern
Holding shares) in exchange for 26,388,914 newly issued Quinsa Class B shares.
These shares were valued at their fair value of US$ 154.3 million which
resulted in additional share premium of US$ 146.1 million. In accordance with regulations established in the Luxembourg Company law,
during fiscal year 2003 US$ 41.7 million (US$ 1.7 million in 2002) of the
paid-in capital balance was allocated to the reserve for treasury stock (to be
ratified by the 2004 Ordinary General Meeting). (c) Reserve for treasury stock Under Luxembourg regulations, the Company has to maintain a
non-distributable reserve for treasury stock. In order to comply with that
requirement, at the Ordinary General Meeting of June 29, 2001 it was decided to
allocate US$ 7.8 million from the paid-in capital balance to that reserve.
During year 2001 the Company also allocated an additional US$ 11 million to
that reserve corresponding to treasury stock acquired during 2001 (ratified by
the Ordinary General Meeting of June 28, 2002). Additionally during 2002 and 2003 the company allocated US$ 1.7 million
(ratified by the Ordinary General Meeting of June 27, 2003) and US$ 41.7
million, respectively, to that reserve. The allocation of US$ 41.7 million is
yet to be ratified by the 2004 Ordinary General Meeting. (d) Legal reserve Under Luxembourg Company Law, the Company is required to transfer to a
legal reserve a minimum of 5% of its net profits each year until this reserve
equals 10% of the issued share capital (determined on the Companys stand alone
financial statements). This reserve is not available for distribution. F - 20




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 12. Shareholders equity (continued) (e) Retained earnings Retained earnings are generally distributable to the extent that the
legislation of the jurisdiction, in which such retained earnings are held, so
permits. 13. Provisions As of December 31,2003
    
    2002Contingencies (Note 23)
    
    
    10.6
    
    
    
    48.9Employee benefits (Note 22)
    
    
    6.0
    
    
    
    1.8Acquisition-related and restructuring charges (i)
    
    
    2.7
    
    
    
    5.1Baesas indemnification agreement (ii)
    
    
    9.9
    
    
    
    9.9Others
    
    
    3.0
    
    
    
    1.032.2
    
    
    
    66.7
 (i) Acquisition-related and restructuring charges comprised primarily
severance and other termination benefits and certain exit costs related to the
closure of plants. (ii) In 1997, Baesa sold its Brazilian soft-drink business (the Brazilian
Business) to AmBev. At the time of the sale, the Brazilian Business had
certain material existing and potential claims, lawsuits and proceedings,
including those involving tax, social security and other matters. Under a tax
indemnification agreement, Baesa has agreed to indemnify AmBev for these
liabilities, but in no event to exceed US$ 20.0 million. In this connection,
PepsiCo has also agreed to reimburse Baesa up to US$ 10 million. 14. Long-term loans and other liabilities As of December 31,2003
    
    2002Due to banks
    
    
    224.9
    
    
    
    87.0Notes payable
    
    
    13.7
    
    
    
    13.7Deferred income taxes (Note 18)
    
    
    0.5
    
    
    
    1.3Other accounts payable
    
    
    7.0
    
    
    
    6.5246.1
    
    
    
    108.5
 CMQ (formerly Baesa) has outstanding notes as described below: As of December 31,2003
    
    2002Series A, due September 1, 2005,
interest at 11% per annum, payable
semiannually
    
    
    2.7
    
    
    
    2.7Series B, due September 1, 2005,
interest at 12% per annum, payable
semiannually
    
    
    11.5
    
    
    
    11.514.2
    
    
    
    14.2
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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 14. Long-term loans and other liabilities (continued) The following table categorizes long-term loans by interest rate: As of December 31,2003
    
    2002Less than 4%
    
    
    10.5
    
    
    
    29.4From 4 to 5.99%
    
    
    160.8
    
    
    
    151.1From 6 to 7.99%
    
    
    141.1
    
    
    
    From 8 to 9.99%
    
    
    
    
    
    
    From 10 to 11.99%
    
    
    2.7
    
    
    
    2.7More than 11.99%
    
    
    14.1
    
    
    
    11.5Total
    
    
    329.2
    
    
    
    194.7Less current portion of long-term loans (Note 15)
    
    
    (90.6
    )
    
    
    (94.0
    )Total debt to banks
    
    
    238.6
    
    
    
    100.7
 The Companys long-term debt is principally denominated in US dollars and
represents borrowings from banks. As of December 31, 2003 and 2002, the Company
had long-term debt of US$ 14.2 million and US$ 14.3 million, respectively, at
fixed interest rates and US$ 315.0 and US$ 180.4 million, respectively, at
rates which varied in relation to established indices, principally LIBOR, plus
a fixed spread. The aggregate maturities of long-term loans as of December 31, 2003 are as
follows: Year
    
    2003
    
    20022004
    
    
    
    
    
    
    55.02005
    
    
    51.4
    
    
    
    45.72006
    
    
    33.4
    
    
    
    2007
    
    
    53.8
    
    
    
    2008
    
    
    60.3
    
    
    
    2009 or +
    
    
    39.7
    
    
    
    Total
    
    
    238.6
    
    
    
    100.7
 QI(B) Commitments On September 22, 1993 QI(B), (the guarantor and primary obligor), signed a
guaranty agreement with the IFC guaranteeing a loan of US$ 30.0 million in
principal extended by the IFC to CMQ on the basis of an investment agreement.
As of December 31, 2002, the amount due from that loan totaled US$ 4.0 million
and during 2003 that loan was fully repaid. Additionally, the total amount
granted by QI(B) related to other loans of CMQ at December 31, 2003 and 2002
was approximately US$ 37.4 million and 41.5 million, respectively. Compliance with certain covenants / Debt refinancing Most of the Companys loan agreements contain restrictive covenants that
require the Company or its subsidiaries to maintain certain financial ratios,
limit the amount of dividends paid, restrict indebtedness and guarantee
liabilities, among other requirements. CMQ has a significant amount of bank loans denominated in US dollars.
Devaluation of the Argentine Peso as well as the financial and economic crisis
that has been affecting Argentina, has limited the ability of that subsidiary
to generate cash flows in and comply with certain financial ratios originally
committed to. Consequently, management carried out negotiations during 2002,
which led to the execution of a refinancing agreement on September 18, 2003. F - 22




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 14. Long-term loans and other liabilities (continued) The bank debt subject to renegotiation amounted to US$ 293.6 million. The
agreement contemplated:  a)
    
    a down payment of US$ 20.3 million, made on the agreement date,  b)
    
    an extension of the term to 4, 5, 6 and 7 years,  c)
    
    the setting of new interest rates on the remaining principal
balance of US$ 273.3 million ranging from Libor + 3% to Libor + 5%,
and  d)
    
    the establishment of new financial ratios and indexes adapted
to the new situation of Argentina, as well as certain restrictions
on dividend payments, the borrowing of new indebtedness, disposal of
assets and prepayment obligation-related issues. At December 31, 2003 the Companys loans have been classified under
current and non-current on the basis of the due dates established in the
above-mentioned renegotiation. The renegotiation agreements provide that in the
event CMQ generates excess cash (as defined in such agreements), the Company
must use this excess to prepay the non-current portion of the refinanced debt.
The current portion of long-term debt includes US$ 40.3 million that the
Company had to pay in March 2004 as a result of the prepayment clause included
in the agreements. 15. Current loans and short-term portion of long-term debt As of December 31,2003
    
    2002Overdraft facilities
    
    
    0.9
    
    
    
    1.5Short-term loans
    
    
    12.6
    
    
    
    178.4Notes payables (Note 14)
    
    
    0.5
    
    
    
    0.5Financial leasing (Note 14)
    
    
    0.4
    
    
    
    1.3Current portion of long-term debt (Note 14)
    
    
    89.7
    
    
    
    92.2104.1
    
    
    
    273.9
 The Companys short-term debt is principally denominated in US dollars and
represents mainly, borrowings from banks. 16. Other income Year ended December 31,2003
    
    2002
    
    2001Recovery of expenses
    
    
    1.6
    
    
    
    1.3
    
    
    
    0.3Rental income
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.9Gain on settlement of pre-acquisition
contingencies (see Note 23)
    
    
    29.4
    
    
    
    
    
    
    
    Sale of Glaciar and VDA water business
    
    
    
    
    
    
    
    
    
    
    14.9Gain from sale of tangible fixed assets
    
    
    
    
    
    
    
    
    
    
    3.0Sale of by-products and others
    
    
    1.0
    
    
    
    
    
    
    
    Others
    
    
    4.6
    
    
    
    2.9
    
    
    
    1.336.8
    
    
    
    4.4
    
    
    
    20.4
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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 17. Other expenses Year ended December 31,2003
    
    2002
    
    2001Severance costs and other benefits to
employees (i)
    
    
    11.8
    
    
    
    4.6
    
    
    
    9.3Amortization of goodwill
    
    
    21.3
    
    
    
    21.9
    
    
    
    21.6Impairment of goodwill (see Note 4.g)
    
    
    
    
    
    
    90.0
    
    
    
    Impairment of tangible fixed assets
    
    
    1.4
    
    
    
    6.0
    
    
    
    Management bonus program (see Note 22.c)
    
    
    6.5
    
    
    
    
    
    
    
    Inventories write-down (see Note 4.d)
    
    
    
    
    
    
    12.0
    
    
    
    Expenses related to unproductive assets
    
    
    1.3
    
    
    
    1.6
    
    
    
    3.1Labor lawsuits and termination of
distribution agreement
    
    
    1.1
    
    
    
    1.5
    
    
    
    3.7Loss from sale of tangible fixed assets
and bottles
    
    
    6.9
    
    
    
    4.8
    
    
    
    Interest in related companies (ii)
    
    
    2.7
    
    
    
    5.2
    
    
    
    18.3Research and development costs
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.4Others
    
    
    11.0
    
    
    
    8.1
    
    
    
    6.964.2
    
    
    
    155.9
    
    
    
    63.3
 (i) The Company expenses severance indemnities incurred in the normal
course of business when paid. (ii) In 2001 includes a write off made by Eco of approximately US$ 12.7
million of the goodwill originally generated as a consequence of the
acquisition of Hielos Merlo (an Eco subsidiary). 18. Income taxes Year ended December 31,2003
    
    2002
    
    2001Current tax expense
    
    
    13.7
    
    
    
    2.7
    
    
    
    7.8Deferred tax expense (benefit)
    
    
    9.6
    
    
    
    (50.3
    )
    
    
    (13.9
    )Income tax expense (benefit)
    
    
    23.3
    
    
    
    (47.6
    )
    
    
    (6.1
    )
 The Company has adopted the criterion of considering the effects of the
translation as a permanent difference when calculating the deferred tax (see
Note 4.c). Income tax expense (benefit) differs from the amounts computed by
applying the statutory rate for each country to pre-tax income (loss) for the
year ended December 31, as follows: Year ended December 31,2003
    
    2002
    
    2001Net income (loss) before taxes
and minority interest
    
    
    72.8
    
    
    
    (202.4
    )
    
    
    55.2Blended average income tax rate
    
    
    20.8
    %
    
    
    34.9
    %
    
    
    33.6
    %Income tax expense (benefit)
at blended income tax rate
    
    
    15.1
    
    
    
    (70.6
    )
    
    
    18.5Foreign exchange and change in
valuation allowance
    
    
    0.9
    
    
    
    (42.3
    )
    
    
    (31.7
    )Non-deductible expenses
    
    
    14.7
    
    
    
    61.4
    
    
    
    5.8Tax promotional benefits
    
    
    (6.3
    )
    
    
    (1.7
    )
    
    
    (4.8
    )Others
    
    
    (1.1
    )
    
    
    5.6
    
    
    
    6.1Income tax expense (benefit)
    
    
    23.3
    
    
    
    (47.6
    )
    
    
    (6.1
    )
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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 18. Income taxes (continued) The tax effects of temporary differences that give rise to significant
portions of the Companys deferred tax assets and liabilities are presented
below: As of December 31,2003
    
    2002Tax loss carry-forwards
    
    
    91.3
    
    
    
    87.0Deferred exchange loss
    
    
    7.8
    
    
    
    8.2Employee benefits accruals
    
    
    2.8
    
    
    
    1.7Provisions
    
    
    4.7
    
    
    
    4.0Depreciation
    
    
    3.4
    
    
    
    0.5Allowance for doubtful accounts and other reserves
    
    
    2.8
    
    
    
    1.9Others
    
    
    0.3
    
    
    
    (2.6
    )Subtotal
    
    
    113.1
    
    
    
    100.7Valuation allowance
    
    
    (26.5
    )
    
    
    (26.7
    )Net deferred income tax asset
    
    
    86.6
    
    
    
    74.0
 Balance sheet classification of net deferred tax asset is disclosed below: As of December 31,2003
    
    2002Deferred tax asset  current
    
    
    6.1
    
    
    
    3.2Deferred tax
asset  non-current
    
    
    81.3
    
    
    
    72.3Deferred tax
liability  current
    
    
    (0.3
    )
    
    
    (0.2
    )Deferred tax liability  non-current
    
    
    (0.5
    )
    
    
    (1.3
    )Net deferred income tax asset
    
    
    86.6
    
    
    
    74.0
 As of December 31, 2003 the Company and its subsidiaries had accumulated
tax loss carryforwards of approximately US$ 284.5 million (US$ 303.2 million as
of December 31, 2002), of which US$ 65.5 million (US$ 51.9 million as of
December 31, 2002) have no expiration dates. In assessing the realizability of deferred tax assets, management assesses
the likelihood that either a portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning in making these assessments. Based on current financial information,
the Company is uncertain that it will recover its entire deferred tax assets
through future taxable income. Accordingly, at December 31, 2003, the Company
had recognized a valuation allowance of US$ 26.5 million (US$ 26.7 million at
December 31, 2002) against its deferred tax assets. 19. Related parties The Company purchases certain raw materials, goods for resale and services
from related parties. These transactions are summarized as follows: Year ended December 31,2003
    
    2002
    
    2001Purchase of raw materials
    
    
    8.5
    
    
    
    3.0
    
    
    
    4.8Transportation services
    
    
    0.8
    
    
    
    1.7
    
    
    
    4.0Fees for services
    
    
    0.7
    
    
    
    0.6
    
    
    
    2.9Technical assistance fees
    
    
    0.1
    
    
    
    1.5
    
    
    
    1.0Purchase of goods for resale
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.4
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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 19. Related parties (continued) Purchase
of raw materials: During 2003, the Company purchased several raw
materials, including malt, from AmBev ́s subsidiaries (Malteria Pampa S.A.,
Cervecería y Maltería Paysandú S.A. and Companhia Brasileira de Bebidas S.A.)
and corn grits and rice from Compal S.A. (Compal) which is 60 % owned by
Arfinsa S.A. (Arfinsa) for a total amount of US$ 3.9 million and US$ 4.6
million, respectively. Arfinsa is indirectly owned by certains members of the
Bemberg family, and Compal is our sole supplier of corn grits and rice. During 2001 and 2002, the Company purchased several raw materials,
including malt and barley, from Heineken. As a consequence of the agreement
reached with Heineken in January 2003, the Company agreed to cease producing
and selling the Heineken brand during 2003 (see Note 23). Consequently, the
above mentioned purchases were terminated. Transportation
services: Transportes Ader S.A. (TASA) and Compal provide
integrated logistics support of the Companys entire supply chains, from
inbound raw materials supply through finished goods distribution, including
dedicated contract carriage, the management of carriers, and other supply chain
services. These costs are included as selling and marketing expenses in the
consolidated statements of income. Fees for services: These fees relate to certain administrative fees
charged by Arfinsa. These costs are included as administrative and general
expenses in the consolidated statements of income. Technical
Assistance Agreements: The Companys relationship with Heineken
as a technical adviser was governed by technical assistance agreements relating
to both the brewing and malting operations. The technical assistance agreements
covered issues relating to both product quality and the maintenance of
production equipment and facilities. Heineken assisted the Company in the
quality control process by conducting laboratory analyses of raw materials,
taste tests, evaluations of the Companys technical reports and annual
technological audits of the operating companies and provided advice regarding
the purchase of raw materials, environmental issues and managerial systems.
Furthermore, under the technical assistance agreements, the Company was able to
request certain additional services with respect to its breweries, including
assistance in planning and constructing new breweries, training brewers and
engineers and developing new products, production methods and packaging
materials. These fees and expenses are included as technical assistance fees
within cost of goods sold in the consolidated statements of income. As a consequence of the agreement reached with Heineken in January 2003,
the Company agreed to cease producing and selling the Heineken brand during
2003 (see Note 23). Consequently, the above mentioned agreements were
terminated. Purchase
of goods for resale: During 2003, the Company purchased imported
bottled beer from AmBev ́s subsidiaries for a total amount of US$ 0.2 million.
During 2001 and 2002, the Company had purchased imported bottled beer from
Heineken. As mentioned above, during 2003 the Company ceased to sell the
Heineken brand. F - 26




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 20. Credit concentration and geographic information Most of the Companys customers are located in South America. No single
customer accounted for more than five percent of the Companys sales or
receivables in the years disclosed. Year ended December 31,2003
    
    2002
    
    2001Net salesArgentina
    
    
    412.4
    
    
    
    278.5
    
    
    
    699.5Bolivia
    
    
    92.2
    
    
    
    88.7
    
    
    
    86.9Chile
    
    
    22.2
    
    
    
    22.0
    
    
    
    23.9Paraguay
    
    
    74.7
    
    
    
    59.5
    
    
    
    85.8Uruguay
    
    
    26.4
    
    
    
    23.6
    
    
    
    49.8Consolidation adjustments
    
    
    (5.2
    )
    
    
    (3.7
    )
    
    
    (7.2
    )622.7
    
    
    
    468.6
    
    
    
    938.7
 Year ended December 31,2003
    
    2002
    
    2001Operating income (loss)Argentina
    
    
    63.2
    
    
    
    (29.8
    )
    
    
    93.8Bolivia
    
    
    35.6
    
    
    
    28.9
    
    
    
    21.3Chile
    
    
    (2.0
    )
    
    
    (2.9
    )
    
    
    (3.8
    )Paraguay
    
    
    24.2
    
    
    
    11.7
    
    
    
    30.3Uruguay
    
    
    0.3
    
    
    
    (3.8
    )
    
    
    (0.6
    )Corporate headquarters &
consolidation
adjustments
    
    
    (1.8
    )
    
    
    (7.7
    )
    
    
    (4.4
    )119.5
    
    
    
    (3.6
    )
    
    
    136.6
 As of December 31,2003
    
    2002Identifiable assetsArgentina
    
    
    764.8
    
    
    
    689.1Bolivia
    
    
    280.4
    
    
    
    268.5Chile
    
    
    20.4
    
    
    
    22.4Paraguay
    
    
    129.6
    
    
    
    99.6Uruguay
    
    
    43.8
    
    
    
    32.9Corporate headquarters
    
    
    206.0
    
    
    
    123.5Consolidated adjustments and eliminations
    
    
    (22.0
    )
    
    
    5.41,423.0
    
    
    
    1,241.4
 21. Personnel Personnel expenses amounted to US$ 89.3 million, US$ 79.0 million and US$
186.4 million in the years ended December 31, 2003, 2002 and 2001,
respectively. F - 27




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 22. Employee benefits (a) Defined contribution pension plan One of the Companys majority owned subsidiaries, CMQ, sponsors a defined
contribution pension plan (the Plan). CMQ sponsors a Plan for qualified
employees that is funded with contributions from both CMQ and plan
participants. A group of employees are eligible to participate and may enter
the Plan during the first quarter of each year. Argentine laws provide for mandatory pension benefits to be paid to
retired employees from government pension plans and/or private fund managed
plans (Pension Funds) to which employees may elect to direct their mandatory
contributions. Under the features of the Plan, participants may elect to direct
their voluntary contributions to Retirement Funds or the same Pension Fund
where their mandatory contributions are held. Based on the uncertainty regarding the updating of the funds deposited,
generated by the current economic crisis that Argentina is experiencing, which
involved the departure from monetary convertibility in this country, although
the plan remained current, deposits in private companies were suspended,
maintaining the reserves on the companys records. The reserved contributions
will be deposited once the final treatment of the funds already deposited has
been determined. Retirement
Funds Provided the participant has elected to direct his or her contributions to
an authorized Investment Retirement Fund, eligible participants may make
monthly pre-tax contributions to the Plan of up to 7.5% of their eligible
earnings. This defined contribution plan provides monthly matching CMQ
contributions equal to 100% of the employee contribution. Separate accounts are
maintained for each participant in the Plan. The portion of a participants
account attributable to his or her own contributions will be 100% vested. The
portion of the account attributable to CMQs contributions, including matching
contributions, will vest after 5 years of service with CMQ. Distributions from
the Plan may be made in the form of a lump-sum cash payment or in installment
payments. Employees may make withdrawals from the Plan prior to attaining age
60 in case of male employees or 55 in case of female employees. During the years ended December 31, 2003, 2002 and 2001, CMQ made
contributions of approximately US$ 0.1 million, US$ 0.1 million and US$ 0.1
million, respectively. The amounts corresponding to both 2002 and 2003 have
still not been deposited. Pension
Funds Provided the participant has elected to direct his or her contributions to
an authorized Pension Fund, eligible participants may make monthly pre-tax
contributions to the Plan of up to 11% of their eligible earnings. Elective
contributions made by employees are fully vested at all times. CMQ makes
matching contributions at the rate of 100% of the participants contribution.
Under the pension feature of the Plan, CMQs contributions are deferred and
maintained into separate accounts for each participant upon the completion of
five years of service with CMQ. Interest income is recognized based on certain
governmental yield rate information. After the completion of five years of
service, CMQs matching contributions are transferred to the Pension Fund where
the participants elective contributions are being held. Contributions by CMQ were US$ 0.2 million, US$ 0.2 million and US$ 0.3
million in 2003, 2002 and 2001, respectively. The amounts corresponding to both
2002 and 2003 have still not been deposited. F - 28




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 22. Employee benefits
(Continued) (b) Post-employment benefits Under the features of the Plan, CMQ also provides certain benefits to
former or inactive plan participants after employment but before retirement
provided the participant completed five years of service with CMQ. These
benefits include disability-related benefits and death benefits. The Company
maintains an insurance policy to cover any potential liability related to these
benefits. (c) Management bonus program During 2002, some of our directors and officers participated in
performance and seniority-based remuneration plans pursuant to which up to 5%
of the annual consolidated net income of QI(B), a majority-owned subsidiary, is
set aside to pay incentive compensation to those directors and officers. No
expense was recognized during 2002 since QI(B) incurred losses. During 2003, the Company implemented a new system for calculating that
incentive, through which it became a 100% variable incentive depending on the
Companys financial results. Under this new system, the amounts approved for
fiscal year 2003 totaled US$ 6.5 million. 23. Contingencies / Restricted assets Bolivia During 2000, as part of the acquisitions described in Note 3, as well as
its ongoing operations in general, the Company recorded a contingency reserve
of US$ 51.4 million for tax, social security and commercial lawsuits. As a consequence of a federal and state tax claim initiated against a
former CBN subsidiary, the Bolivian Supreme Court of Justice had ruled that
assets of CBN were restricted. The total amount of tax challenged by Bolivian
authorities amounted to approximately US$ 10.0 million. On August 2, 2003, through Law No. 2492 the National Congress of Bolivia
passed a temporary and exceptional Voluntary Plan for regularizing tax debts.
In November 2003, the Company (through its subsidiary in Bolivia, CBN) decided
to adhere to this plan and made a lump sum payment for US$ 12.3 million, which
enabled Quinsa to reduce potential tax and social security contingencies that
had been covered by an amount included in the provision mentioned above.
Consequently, the gain amounting to US$ 29.4 million has been recognized in the
results for the period and disclosed under Other income, in the consolidated
statements of income. Also, as a result of this, the tax claim above mentioned
was terminated by the Bolivian authorities. Relationship with Heineken. Heineken settlement. In June 2002, Quinsa received a notice from the International Chamber of
Commerce stating that Heineken, which owned 15% of our principal subsidiary
QI(B), had begun arbitration proceedings against the Company and Beverage
Associates Corp. (BAC). In its request for arbitration, Heineken alleged
that the proposed AmBev transactions violated certain contracts between
Heineken and the Company. Heineken had requested that the arbitration panel
prohibit completion of the AmBev transactions and declare that Heineken was
entitled to purchase Quinsas 85% interest in QI(B) for terms economically
equivalent to the value placed by QI(B) on the AmBev transactions. Heineken
had also requested that the arbitration panel require Quinsa and BAC to pay
Heineken an unspecified amount of money in damages. F - 29




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 23. Contingencies / Restricted assets (continued) Relation with Heineken. Heineken settlement (continued) Furthermore, in June 2002, Quinsa also received a summons indicating that
Heineken had commenced a legal proceeding against the Company in a Luxembourg
court. Like the arbitration notice, the summons alleged that the proposed
transaction with AmBev violated certain contractual agreements between Heineken
and Quinsa, and requested that the court issue an order prohibiting the
completion of the transaction with AmBev until the contract dispute was
resolved by an arbitrator. Also in June 2002, the Luxembourg court dismissed
Heinekens summons after noting that Quinsa and AmBev had agreed not to
complete the AmBev transactions before the required approval of the Argentine
antitrust authorities was obtained. On January 14, 2003 Quinsa and Heineken announced that they had entered
into an agreement to settle the above mentioned arbitration proceedings.
Pursuant to the settlement agreement BAC agreed to purchase Heinekens 15%
equity interest in QI(B), for an aggregate price of US$ 102.7 million. BACs
purchase of the QI(B) shares occurred simultaneously with the completion of the
AmBev transaction (see Note 25). As a result of the settlement agreement, the shareholders agreement
between Quinsa and Heineken relating to Heinekens investment in QI(B) was
terminated. In January 2003, AmBev acquired 57% of the QI(B) shares that BAC had
acquired from Heineken. 24. Remuneration of Board In accordance with article 14 of the Articles of Incorporation, a
remuneration of US$ 1.0 million (US$ 0.2 million and US$ 0.3 million for the
years 2002 and 2001, respectively) will be proposed for the year 2003. No
delegation of tasks was made by the Board of Directors to any of its members
resulting in any other salary allocation or remuneration. 25. Strategic alliance On May 1, 2002 it was announced that an agreement had been signed by which
Quinsa and AmBev agreed to merge the activities of AmBev in Argentina, Paraguay
and Uruguay relating to the production and sale of beer with the activities
carried out by Quinsa. As a result of the agreement, Quinsa will be granted an
exclusive license to produce and distribute the AmBev brands in the Southern
Cone free of charge. It also provides for the distribution by AmBev of the
Quilmes brands in Brazil. This agreement was subject to several conditions,
such as approval by Argentinas National Commission of Defense of Competition,
the local control authority. On January 13, 2003 the Commission approved this agreement for Argentina,
imposing certain restrictions such as the sale of some brands currently
marketed by Quinsa and the sale of certain productive assets. As a result of this approval by the Commission, on January 31, 2003 Quinsa
and AmBev signed an agreement by which the terms of the strategic alliance were
established between the parties. This alliance included the acquisition by
Quinsa of Linthal S.A. (Linthal), a company that controls the beer activities
carried out by AmBev in Argentina, Paraguay and Uruguay. Company management
understands that this alliance will allow the optimization of the operating
processes and the strengthening of the Companys financial position at the same
time as it will allow the Company to reach a more competitive position in the
region in order to compete with other international companies. The above mentioned transaction is governed by certain agreements
described in further detail in the paragraphs that follow. F - 30




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 25. Strategic alliance (continued) Share Exchange Agreement.AmBev sold to Quinsa all the shares of capital
stock of its subsidiaries (the Southern Holding Shares) which manufacture,
market, sell or distribute beer in Argentina, Uruguay, Paraguay and Bolivia in
exchange for 26,388,914 newly issued Quinsa Class B shares. Pursuant to the
Share Exchange Agreement, Quinsa and AmBev also executed (i) an agreement
granting Quinsa the exclusive right to manufacture, market, sell and distribute
the AmBev beer brands in Argentina, Chile, Uruguay, Paraguay and Bolivia, and
(ii) a distribution agreement pursuant to which AmBev agreed to distribute the
Quilmes Cristal brand in Brazil. The Companys rights with respect to the
AmBev beer products are perpetual in nature and Quinsa will not be required to
pay any royalty or other fees to AmBev in exchange for these rights. Stock Purchase Agreement.In connection with the Share Exchange
Agreement, AmBev and BAC entered into a Stock Purchase Agreement, dated May 1,
2002 pursuant to which, AmBev agreed to acquire from BAC 230,920,000 Class A
shares, without par value, of Quinsa for an aggregate purchase price of
US$346,380,000. In addition to the initial purchase of shares, BAC granted
AmBev a call option, beginning in 2009, to acquire the remaining 373,520,000
Quinsa Class A shares held by BAC in exchange for newly issued shares of AmBev,
and AmBev granted BAC a put option, beginning in 2003, to sell AmBev the
remaining 373,520,000 Quinsa Class A shares held by BAC in exchange for newly
issued shares of AmBev. In the event of a change in control in AmBev occurring
before April 2005, BAC has the right to accelerate and exercise its put option
immediately. In the event of such a change in control occurring on or after
April 2005, both AmBevs call option and BACs put option will be deemed to
have been exercised prior to the consummation of any change in control in
AmBev. Therefore, in the event of a change in control in AmBev, BAC would
either have the option or the obligation (depending on the date on which the
change in control occurs) to exchange its Quinsa Class A shares for AmBev
shares, if such shares will continue to be listed and traded on a securities
exchange after consummation of the change in control, and otherwise, for the
type and amount of securities, cash or other property that would have been
received by BAC had BAC been the holder of such AmBev shares. Under the Stock Purchase Agreement, BAC has agreed not to transfer or
encumber or permit to be transferred, in any way, any of the remaining Quinsa
Class A shares held by BAC other than to its affiliates, family members, AmBev
or AmBevs designee. In order to ensure delivery of such remaining Quinsa
Class A shares, free and clear of all liens and encumbrances, BAC, AmBev and
Quinsa entered into a Share Pledge Agreement dated January 31, 2003, pursuant
to which BAC pledged all 373,520,000 of its remaining Class A shares as
security for the performance of its obligations under the Stock Purchase
Agreement. Quinsa Shareholders Agreement. Pursuant to the Stock Purchase Agreement,
Quinsa agreed to enter into a Shareholders Agreement with AmBev and BAC to
govern certain matters relating to the voting, transfer and issuance of Quinsa
shares. Under the Shareholders Agreement, Quinsa will grant AmBev certain
preemptive rights with respect to Quinsas Class B shares. Pursuant to the Quinsa Shareholders Agreement, so long as AmBev and BAC
each have the Requisite Percentage (defined as at least 40% of the combined
ownership of BAC and AmBev of all outstanding voting shares) each of AmBev and
BAC will have the right to nominate:  
    
    50% of the directors constituting the Quinsa board of
directors, and  
    
    for each of our subsidiaries, 50% of the number of
directors that BAC is entitled to nominate under such subsidiarys
charter documents or by-laws, any existing shareholders agreement
or applicable law. F - 31




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 25. Strategic alliance (continued) So long as AmBev and BAC each own at least 40% of the Voting Interest,
each will have the right to elect a Co-Chairman of the Quinsa board, as well as
the right to jointly appoint a Chairman of each subsidiary board. Upon exercise of the Call Option by AmBev or the Put Option by BAC,
whereby AmBev purchases the remaining 373,520,000 Quinsa Class A shares in
exchange for newly issued shares of AmBev, BAC will no longer have any rights
to nominate directors, the directors nominated by BAC must resign and, as
promptly as practicable, the Quinsa board and each subsidiary board will be
reconstituted to include only directors nominated or approved by AmBev, subject
to the rights of any shareholders under any subsidiarys charter or by-laws or
any existing shareholders agreement to nominate directors. The Shareholders Agreement also provides for certain significant
restrictions on BAC and AmBev regarding the acquisition, disposition or
transfer of, or the encumbrance on any Quinsa Class A or Class B shares, other
than in accordance with the terms of the agreements related to the alliance
between Quinsa and AmBev. AmBev further agreed not to acquire any equity or
other ownership interest in, or any substantial assets of, any business
involving the manufacture, marketing, sale or distribution of beverages (a) for
a period of ten years, in Argentina, Paraguay, Uruguay, or Bolivia, other than
through Quinsa or its subsidiaries or (b) until the consummation of the put and
call options described above in Peru or Chile, without first offering to Quinsa
the opportunity to make such acquisition; provided that in the case of Peru,
AmBev has the option to either (i) contribute to Quinsa 50% of the cash
consideration agreed to be paid for such assets or business in exchange for
Class B shares, or (ii) acquire 50% of such assets or business directly, with
the remaining 50% acquired by Quinsa. During the year ended December 31, 2003, BAC did not exercised the put
option
to sell AmBev the remaining 373,520,000 Quinsa Class A shares held by BAC in
exchange for newly issued shares of AmBev. 26. Recent events On March 3, 2004, it was announced that AmBev and Interbrew N.V.
(Interbrew) have agreed to a combination establishing a new company called
InterbrewAmBev. As mentioned in Note 25, in the event of a change in control of AmBev
occurring before April 2005, BAC has a right to accelerate and exercise its put
option immediately. In the event of such a change in control occurring on or
after April 2005, both AmBevs call option and BACs put option will be deemed
to have been exercised prior to the consummation of any change in control in
AmBev. Therefore, in the event of a change in control in AmBev, BAC would
either have the option or the obligation (depending on the date on which the
change in control occurred) to exchange its Quinsa Class A shares for AmBev
shares, if such shares will continue to be listed and traded on a securities
exchange after consummation of the change in control, and otherwise, for the
type and amount of securities, cash or other property that would have been
received by BAC had BAC been the holder of such AmBev shares. At the date of
issuing of these financial statements, BAC has not exercised the mentioned
option. 27. Compliance with IFRS As the Company is listed on the Luxembourg Stock Exchange, it is required
by the European Commission to fully comply with International Financial
Reporting Standards (IFRS) as of January 1, 2005. As a result, the Companys
primary accounting principles will no longer be Luxembourg GAAP, but fully
replaced by IFRS as from January 1, 2005. The Company started working on the
IFRS conversion project to ensure full compliance with IFRS at such date. F - 32




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP The Companys consolidated financial statements are prepared in accordance
with Luxembourg GAAP, which differ in certain significant respects from US
GAAP. Such differences involve methods of measuring the amounts shown in the
consolidated financial statements, as well as additional disclosures required
by US GAAP. These consolidated financial statements include solely a
reconciliation of net income (loss) and shareholders equity to US GAAP.
Pursuant to Item 17 of Form 20-F, this reconciliation does not include
disclosure of all information that would be required by US GAAP and Regulation
S-X of the SEC. The principal differences between Luxembourg GAAP and US GAAP are
described below, together with an explanation, where appropriate, of the
methods used in the determination of the necessary adjustments. Reconciliation of net income (loss):
    
    Year ended December 31,2003
    
    2002
    
    2001Net income (loss) as reported under
Luxembourg GAAP
    
    
    36.8
    
    
    
    (135.9
    )
    
    
    43.3US GAAP adjustments:Translation of foreign currencies (a)
    
    
    101.5
    
    
    
    (87.0
    )
    
    
    (135.0
    )Impairment of intangible assets (b)
    
    
    (5.6
    )
    
    
    90.0
    
    
    
    Write-down of inventories (c)
    
    
    (5.3
    )
    
    
    12.0
    
    
    
    Impairment of tangible fixed assets (d)
    
    
    (3.0
    )
    
    
    
    
    
    
    (31.5
    )Differences in basis relating to
purchase accounting (e)
    
    
    6.1
    
    
    
    2.5
    
    
    
    3.2Accounting for business combinations (f)
    
    
    1.1
    
    
    
    1.1
    
    
    
    0.1Restructuring (h)
    
    
    (2.1
    )
    
    
    (2.7
    )
    
    
    (9.2
    )Change to consolidation (i)
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1Other adjustments (j)
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.4
    )Deferred income tax effect of above (k)
    
    
    4.4
    
    
    
    1.8
    
    
    
    8.6Minority interest effect of above (l)
    
    
    (13.0
    )
    
    
    (3.5
    )
    
    
    24.4Net income (loss) under US GAAP
    
    
    120.9
    
    
    
    (121.5
    )
    
    
    (96.4
    )Basic and diluted earnings per share under
US GAAP (p):Net income (loss) per Class A common share
    
    
    0.09
    
    
    
    (0.11
    )
    
    
    (0.09
    )Net income (loss) per Class B common share
    
    
    0.98
    
    
    
    (1.19
    )
    
    
    (1.70
    )
  Reconciliation of shareholders equity:
    As of December 31,2003
    
    2002Shareholders equity as reported under Luxembourg GAAP
    
    
    714.3
    
    
    
    523.2US GAAP adjustments:Translation of foreign currencies (a)
    
    
    (365.6
    )
    
    
    (438.2
    )Impairment of intangible assets (b)
    
    
    84.4
    
    
    
    90.0Write-down of inventories (c)
    
    
    6.7
    
    
    
    12.0Impairment of tangible fixed assets (d)
    
    
    (3.0
    )
    
    
    Differences in basis relating to purchase accounting (e)
    
    
    (37.1
    )
    
    
    (56.2
    )Accounting for business combinations (f)
    
    
    (17.8
    )
    
    
    (18.9
    )Treasury stock (g)
    
    
    (62.2
    )
    
    
    (20.5
    )Restructuring (h)
    
    
    2.7
    
    
    
    4.8Change to consolidation (i)
    
    
    (0.9
    )
    
    
    (1.1
    )Other adjustments (j)
    
    
    0.9
    
    
    
    1.1Deferred income tax effect of above (k)
    
    
    7.9
    
    
    
    3.5Minority interest effect of above (l)
    
    
    51.2
    
    
    
    75.4Shareholders equity under US GAAP
    
    
    381.5
    
    
    
    175.1
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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) Description of changes in shareholders equity under US GAAP:
    
    Year endedDecember 31,2003
    
    2002Shareholders equity under US GAAP as of the beginning
of the year
    
    
    175.1
    
    
    
    295.1Capital increase
    
    
    153.9
    
    
    
    Purchase of treasury stock
    
    
    (41.7
    )
    
    
    (1.7
    )Foreign currency translation
    
    
    (26.7
    )
    
    
    3.2Net income (loss) under US GAAP
    
    
    120.9
    
    
    
    (121.5
    )Shareholders equity under US GAAP as of the end of
the year
    
    
    381.5
    
    
    
    175.1
 Description of reconciling items: (a) Translation of foreign currencies Under Luxembourg GAAP, financial statements of foreign consolidated and
unconsolidated subsidiaries have been translated to US$ on the basis of the
financial statements of such subsidiaries expressed in the local currency of
the country of origin. The method of translation involves the translation of
property, other long-lived assets, long-term liabilities and related income and
loss accounts at historical rates of exchange. Additionally, net monetary asset
and liability related translation adjustments are included in earnings in the
current period. Under US GAAP, the financial statements of the Companys subsidiaries are
translated in accordance with SFAS No 52 Foreign Currency Translation.
Financial statements of foreign operations where the local currency is the
functional currency are translated using period-end exchange rates for assets
and liabilities, and weighted average exchange rates during the period for the
results of operations. Adjustments resulting from these translations are
accumulated and reported as a component of accumulated other comprehensive loss
in shareholders equity. (b) Impairment of intangible assets As mentioned in Note 4(c), under Luxembourg GAAP long-lived assets are
translated into US dollars at historical rates of exchange. Since the Company
carries out most of its operations in Argentina, its cash flows suffered a
significant decrease in 2002 when measured in US dollars as a result of the
devaluation of the Argentine peso. Accordingly, during fiscal 2002 the Company
recognized an impairment charge of goodwill related to the Argentine soft drink
business amounting to US$ 90 million. Under US GAAP, the Company translates its long-lived assets at current
rates of exchange since the Argentine peso is considered to be the functional
currency for the Companys operations in Argentina. Accordingly, long-lived
assets are tested for impairment based on the Companys functional currency. As
a result of the analysis made by the Companys management no impairment has
been recognized under US GAAP. This adjustment gave rise to a greater
amortization charge of US$ 5.6 million during the year ended December 31, 2003. F - 34




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (c) Write-down of inventories Under Luxembourg GAAP, bottles and cases are translated into US dollars at
historical rates of exchange. As a result of the devaluation of the Argentine
peso that occurred in 2002, the Company assessed the valuation of bottles and
cases held for sale to customers and reduced their value to their estimated net
realizable value. The write-down recognized in earnings during 2002 amounted to
US$ 12.0 million. Under US GAAP, no write-down was necessary since inventories are stated at
historical cost in Argentine pesos and translated into US dollars at current
rates of exchange. During 2003, bottles and cases were reclassified to tangible fixed assets
and are being depreciated over a 3-year period on a straight-line basis. The
2003 income adjustment represents a greater depreciation charge recognized
under US GAAP as a result of having a different original cost as mentioned
above. (d) Impairment of tangible fixed assets Under Luxembourg GAAP, the Company had recognized during 2000 certain
impairment charges totaling US$ 31.5 million in connection with the closure of
the Llavallol plant in Argentina. Under US GAAP, in accordance with Staff
Accounting Bulletin No. 100 Restructuring and Impairment Charges and SFAS No.
121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS 121), the Company recognized that impairment
during 2001 when required criteria were met. Under Luxembourg GAAP, during 2003 the Company reversed US$ 3.0 million of
the above mentioned impairment as a result of an increase in the fair market
value of the assets. Under US GAAP, restoration of a previously recognized
impairment loss is prohibited. When an impairment loss is recognized, the
adjusted carrying amount of the asset becomes the new cost basis, which is
amortized over the remaining useful life of the asset. (e) Differences in basis relating to purchase accounting Under Luxembourg GAAP and US GAAP the Company applied the purchase method
of accounting to all of the acquisitions of businesses. Accordingly, the fair
market value of the assets acquired and liabilities assumed was estimated and
the excess of the purchase price over the fair value was considered goodwill.
The US GAAP adjustment for Differences in basis relating to purchase
accounting reflects the application of certain US GAAP adjustments when
estimating the fair value of such acquired assets and liabilities assumed. This
adjustment gives rise to differences in amortization expense. The adjustment is comprised of the following: Purchase accounting for the Baesa acquisition occurred in 2000.Under US
GAAP, the Company reversed (i) certain liabilities recognized under Luxembourg
GAAP pertaining to restructuring charges of US$ 2.6 million (US$ 1.8 million
net of the related deferred tax asset), and (ii) the income tax benefit
recognized under Luxembourg GAAP associated with the change in the valuation
allowance of deferred tax assets originally recorded in the purchase price
allocation of US$ 53.8 million. These differences gave rise to a decrease in
the amount of goodwill recorded under Luxembourg GAAP for US$ 55.6 million and
therefore, lower amortization expense charges totaling US$ 2.9 million, US$ 2.1
million and US$ 2.8 million for the years ended December 31, 2003, 2002 and
2001, respectively. F - 35




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (e) Differences in basis relating to purchase accounting (continued) CBN acquisition and other acquisitions occurred in 2001.As stated in Note
3, during fiscal year 2001 the Company increased its ownership interest in
certain subsidiaries. Therefore, goodwill recognized under Luxembourg GAAP was
increased as a result of certain US GAAP adjustments totaling US$ 1.0 million.
In addition, as stated in Note 28 (h), under US GAAP the Company reversed US$
7.5 million of certain liabilities recognized under Luxembourg GAAP pertaining
to restructuring charges recognized in the purchase price allocation of CBN
acquisition. These adjustments gave rise to a decrease in amortization expense
of US$ 0.4 million, US$ 0.4 million and US$ 0.4 million for fiscal year 2003,
2002 and 2001, respectively. Acquisition of Linthal occurred in 2003.As described in Note 3, in
January 2003 the Argentine control authorities approved the strategic alliance
agreement entered into by the Company with AmBev, pursuant to which the Company
acquired 100% of Linthal in exchange for 26,388,914 Quinsa newly issued Class B
shares. Under both Luxembourg GAAP and US GAAP, the acquisition was accounted
for as a purchase. However, certain differences existed in accounting for this
transaction between both generally accepted accounting principles:  Under Luxembourg GAAP, the purchase price was determined based on the
fair market value of the business acquired amounting to US$ 154.3 million plus
US$ 3.4 million of related fees and expenses (including US$ 3.1 million of
costs of registering and issuing the Companys securities). Under US GAAP, as
required by EITF 99-12, the purchase price amounting to US$ 157.0 million was
determined based on the fair market value of the securities issued by the
Company on the date the transaction was agreed to and announced (May 2002). In
addition, in accordance with FAS 141, the costs of registering and issuing the
Companys securities were recognized as a reduction of the otherwise
determinable fair value of the securities.  Under Luxembourg GAAP, the excess of the purchase price over the fair
market value of the net assets acquired and liabilities assumed (excluding any
identifiable intangible assets) resulted in recognition of goodwill of US$ 96.7
million which is being amortized over 20 years using the straight-line method.
Under US GAAP, the Company recognized apart from goodwill certain acquired
identifiable intangible assets (basically trademarks) with a fair market value
of US$ 32.8 million and also recognized Several open amounts in the notes.the
related deferred tax liability amounting to US$ 10.7 million.  As a result, goodwill under US GAAP totaled US$ 74.2 million. Under US
GAAP, trademarks are being amortized under the straight-line basis over a
20-year period. Goodwill under US GAAP is not amortized but tested for
impairment at least annually. Amortization recognized under Luxembourg GAAP and
reversed for US GAAP purposes amounted to US$ 2.8 million during the year ended
December 31, 2003. Reorganization.As described in Note 3, in July 2003, the Company made a
reorganization pursuant to which Quinsa contributed 100% of Linthal to QI(B) in
exchange for newly issued shares of QI(B). As a result, the Company increased
its ownership interest in QI(B) from 85% to 87.63%, resulting in recognition of
additional goodwill amounting to US$ 3.5 million. Under US GAAP, as a result of
certain US GAAP adjustments when estimating the fair value of the net assets
acquired, goodwill totaled US$ 13.0 million. F - 36




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (e) Differences in basis relating to purchase accounting (continued) Adoption
of FAS 142 and FAS 144 Under US GAAP, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (FAS 142) effective
January 1, 2002. FAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes Accounting
Principles Board Opinion No. 17, Intangible Assets. Under FAS 142, goodwill
and indefinite lived intangible assets are no longer amortized but are reviewed
at least annually for impairment. Intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives and
are also subject to review for impairment. Upon adoption of FAS 142, in
accordance with the transition provisions, the Company determined that
previously recognized goodwill represents licenses and trademarks that qualify
for separate recognition as identifiable intangible assets in accordance with
FAS 142. These intangible assets continue to be amortized over their remaining
estimated useful lives (originally 20 years) and, therefore, no difference
existed in amortization charges as a result of adopting FAS 142 as compared
with prior years. Amortizable intangible assets are tested for impairment in accordance with
the provisions of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144).
In accordance with FAS 144, long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may be impaired.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to undiscounted future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired on this
basis, the impairment loss to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The
Company adopted FAS 144 effective January 1, 2002. As a result of the analysis
made by the Companys management, no impairment has been recognized under US
GAAP. (f) Accounting for business combinations During 1992, the Company accounted for certain business combinations using
the purchase method of accounting under Luxembourg GAAP. As such, assets
acquired and liabilities assumed were recorded at their estimated fair market
values. Under US GAAP, these business combinations would have to be considered
a transaction between entities under common control and would have to be
accounted for in a manner similar to a pooling of interests. As such, assets
and liabilities would have to be recorded using their respective historical
costs. Accordingly, the excess over the historical cost of the acquired net
assets at the date of the combination would have been accounted for as a
dividend. The foregoing gave rise to differences in depreciation expense
charges. In addition, during 1999, the Company recognized an impairment charge
related to the tangible fixed assets which had a stepped up carrying basis as
discussed above. Under US GAAP, such fixed assets had been recognized using the
historical cost basis, and as a result, the impairment charge would not have
been necessary under US GAAP. (g) Treasury stock Under Luxembourg GAAP, treasury stock is reported at cost and classified
within financial assets in the Companys consolidated balance sheets. Under US
GAAP, treasury stock is presented as a separate component of shareholders
equity. F - 37




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (h) Restructuring Under Luxembourg GAAP, during fiscal year 2000 the Company recognized
restructuring charges of US$ 10.0 million related to severance, termination and
relocation costs associated with the closure of the Llavallol plant and certain
other termination costs incurred in several subsidiaries of the Company. Under
US GAAP, the Company applied the guidance of Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit and Activity (EITF 94-3). As such, during fiscal year
2000 the Company reversed US$ 6.6 million of restructuring charges recognized
under Luxembourg GAAP as certain criteria specified by EITF 94-3 were not met.
These restructuring charges were recognized as a charge to earnings during
fiscal year 2001 when this criterion was met. In addition, during fiscal year 2000 the Company recognized certain
liabilities pertaining to restructuring charges totaling US$ 15.0 million and
US$ 9.1 million as part of the purchase price allocation of Baesa and CBN
acquisitions, respectively. Under US GAAP, the Company applied EITF 95-3
Recognition of Liabilities in Connection with a Purchase Business Combination
(EITF 95-3). As such, during fiscal year 2000 and 2001 the Company reversed
US$ 2.6 million and US$ 7.5 million of these restructuring charges against
goodwill, respectively, as certain criteria specified by EITF 95-3 were not
met. These restructuring charges are being recognized in earnings when paid
(US$ 2.0 million, US$ 2.7 million and US$ 2.6 million for fiscal year 2003,
2002 and 2001, respectively). (i) Change to consolidation During the year ended December 31, 2000, the Company acquired an
additional 55.79% in CBN. With the increase in equity ownership of CBN to
70.34%, the Company gained effective control, and therefore, the Company
changed its accounting method from the cost to the consolidation method
effective September 1, 2000. Because a controlling interest in CBN was acquired
in September 2000, the results of operations of CBN have been included in the
statements of income since such date. Under US GAAP, the financial statements of prior periods would be
retroactively adjusted as required by APB 18 to reflect the investment under
the equity method of accounting. (j) Other adjustments The Company has aggregated under this caption certain reconciling items
which management believes are not significant to the Companys financial
position and results of operations. These items are described as follows:  Pre-operating costs: under Luxembourg GAAP, between 1994 and 1996 the
Company capitalized certain technical fees incurred in the construction of a
plant as pre-operating costs. These costs were amortized over a five-year
period. Under US GAAP, these fees were capitalized as part of the cost of the
related fixed assets and are being depreciated under the straight-line method
over periods ranging from 15 to 50 years.  Pension costs: under Luxembourg GAAP, the Company gave retroactive
benefits to certain pension plan participants and recognized the prior services
costs in 1993 and 1994. Under US GAAP, such costs were recognized as pension
expenses over the remaining service years of the beneficiaries.  Prepaid expenses: under Luxembourg GAAP, from time to time the Company
capitalizes certain costs related to advertising and certain other marketing
efforts. Under US GAAP, such costs are expensed as incurred. F - 38




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (k) Deferred income tax The adjustment represents the effect on deferred income taxes of the
foregoing reconciling items, as appropriate. (l) Minority interest The adjustment represents the effect on minority interest of the foregoing
reconciling items, as appropriate. (m) Balance sheet presentation and classification differences Certain significant differences exist between Luxembourg GAAP and US GAAP
in connection with the presentation of balance sheet items. Generally, under
Luxembourg GAAP, items with lower degree of liquidity are disclosed before
items which have higher convertibility into cash. In addition, certain
captioned items differ from balance sheets presented under US GAAP formats. As a result of the devaluation of the Argentine peso as well as the
financial and economic crisis that affected Argentina in 2002, at December 31,
2002 CMQ did not comply with certain restrictive covenants set forth in its
bank loan agreements. As a consequence of that non-compliance, creditors were
able to require the accelerated repayment of all amounts due amounting to US$
221.5 million, of which US$ 59.3 million were classified as non-current
liabilities according to their original terms. At the time of issuance of the
2002 financial statements, the Companys management was carrying out
negotiations with lenders in order to obtain, among other matters, an extension
of the original loan terms, new credit facilities and the change of the above
mentioned covenants. Under US GAAP, Statement of Financial Accounting Standards
(SFAS) No.78 Classification of Obligations That Are Callable by the
Creditor clarifies how obligations that are callable by the creditor should be
presented by the debtor in a classified balance sheet. Specifically, it
addresses whether an obligation should be classified as a current liability if
the debtor is in violation of a provision of a long-term debt agreement at the
balance-sheet date and (a) the violation makes the obligation callable at the
balance-sheet date or (b) the violation, if not cured within a specified grace
period, will make the obligation callable within one year from the
balance-sheet date. Pursuant to this guidance and given that the Company did
not obtain a permanent waiver and there was no assurance that an acceleration
would not take place within a one year period, for US GAAP purposes the entire
outstanding balance at December 31, 2002 would have been classified as a
current-liability. (n) Statement of income presentation and classification differences Certain significant differences exist between Luxembourg GAAP and US GAAP
in connection with the presentation of statement of income line items. Certain significant differences also exist between Luxembourg GAAP and US
GAAP in connection with the classification of income line items. Certain
financial results and other income and expense items included in the Luxembourg
GAAP financial statements of the Company would be included in the determination
of operating income for US GAAP purposes. F - 39




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (o) Comprehensive income (loss) On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes guidelines for the reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. SFAS
No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Accumulated other comprehensive income (loss) is
presented below, net of income tax expense/benefit: Year ended December 31,2003
    
    2002
    
    2001Net income (loss) under US GAAP
    
    
    120.9
    
    
    
    (121.5
    )
    
    
    (96.4
    )Other comprehensive (loss) income:Foreign currency translation
    
    
    (26.7
    )
    
    
    3.2
    
    
    
    (145.4
    )Comprehensive income (loss)
    
    
    94.2
    
    
    
    (118.3
    )
    
    
    (241.8
    )
 As of December 31,2003
    
    2002
    
    2001Accumulated other comprehensive loss
    
    
    (231.1
    )
    
    
    (204.4
    )
    
    
    (207.6
    )
 (p) Earnings per share Under US GAAP, the Company computes earnings per common share in
accordance with SFAS No. 128 Earnings per Share (SFAS No.128). Under the
provisions of SFAS No.128, basic earnings per common share (Basic EPS) is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period. Income
available to common stockholders is computed by deducting preferred stock
dividends (if applicable for the period) from net income. Diluted earnings per
common share (Diluted EPS) are computed by dividing net income by the sum of
the weighted-average number of common shares plus dilutive common shares for
the period. The calculation of diluted net income (loss) per share excludes
potential common shares if their effect is anti-dilutive. There were no
dilutive common stock equivalents for all periods presented. As stated in Note 12(a), on June 8, 2001 the Companys shareholders
approved a capital restructuring by which (i) the then outstanding number of
ordinary shares (68,400,000) were split ten-for-one and renamed Class A common
shares and (ii) the then outstanding number of preferred shares (39,750,089)
were converted into ordinary shares at a rate 1 per 1 and renamed Class B
common shares. As a result, Class B shares have dividends and liquidation
rights equal to ten times the rights of Class A shares. Therefore, the Company
is required to use the two-class method to report its earnings per share for
all years presented. The two-class method is an earnings allocation formula
that determines earnings per share for each class of common stock according to
dividends declared and participation rights in undistributed earnings. Outstanding shares during prior periods were retroactively restated for
the stock split mentioned above. The following tables set forth the computation of basic and diluted net
income (loss) per share for the years ended December 31, 2003, 2002 and 2001: F - 40




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (p) Earnings per share (continued) Year ended December 31, 2003Class A
    
    Class BNumerator:Actual dividends declared
    
    
    
    
    
    
    Allocated undistributed net income
    
    
    57.3
    
    
    
    63.6Net income
    
    
    57.3
    
    
    
    63.6Denominator:Weighted-average shares outstanding
    
    
    639,966,516
    
    
    
    64,957,459Basic and diluted net income per common share
    
    
    0.09
    
    
    
    0.98
 Year ended December 31, 2002Class A
    
    Class BNumerator:Actual dividends declared
    
    
    
    
    
    
    Allocated undistributed net loss
    
    
    (72.8
    )
    
    
    (48.7
    )Net loss
    
    
    (72.8
    )
    
    
    (48.7
    )Denominator:Weighted-average shares outstanding
    
    
    645,096,279
    
    
    
    40,993,920Basic and diluted net loss per common share
    
    
    (0.11
    )
    
    
    (1.19
    )
 Year ended December 31, 2001Class A
    
    Class BNumerator:Actual dividends declared
    
    
    20.3
    
    
    
    11.7Allocated undistributed net loss
    
    
    (76.9
    )
    
    
    (51.5
    )Net loss
    
    
    (56.6
    )
    
    
    (39.8
    )Denominator:Weighted-average shares outstanding
    
    
    661,973,336
    
    
    
    23,457,253Basic and diluted net loss per common share
    
    
    (0.09
    )
    
    
    (1.70
    )
 (q) Statements of cash flows The Company has elected to present the statements of cash flows in the
primary financial statements using the guidance set forth in SFAS No. 95
Statement of Cash Flows but using Luxembourg GAAP numbers. As further
described in Note 4(b), the Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents. As a
result, no differences exist between cash flows from operating, investing and
financing activities reported in the primary financial statements and cash
flows from operating, investing and financing activities that would be reported
in a statement of cash flows prepared using US GAAP numbers. Under US GAAP, the total amounts of cash and cash equivalents at the
beginning and end of the years shown in the statements of cash flows are
required to be the same amounts as similarly titled line items shown in the
balance sheets, as of those dates. The following table reconciles the balances
included as cash and banks in the balance sheets to the total amounts of cash
and cash equivalents at the beginning and end of the years shown in the
statements of cash flows: F - 41




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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (q) Statements of cash flows (continued) As of December 31,2003
    
    2002
    
    2001Cash and banks
    
    
    16.1
    
    
    
    39.0
    
    
    
    37.2Cash equivalents:Time deposits and money-market funds
    
    
    123.3
    
    
    
    88.1
    
    
    
    69.0Total cash and cash equivalents
    
    
    139.4
    
    
    
    127.1
    
    
    
    106.2
 Under US GAAP, as required by SFAS 95, supplemental cash flow information
should be disclosed as presented below: Year ended December 31,2003
    
    2002
    
    2001Cash paid during the year for:Interest
    
    
    25.3
    
    
    
    26.5
    
    
    
    16.8Income tax
    
    
    6.2
    
    
    
    8.7
    
    
    
    23.6Non-cash activities:
    
    
    Issuance of preferred shares in exchange
for minority interest
    
    
    
    
    
    
    
    
    
    
    Acquisition of subsidiaries through
issuance of debt
    
    
    
    
    
    
    
    
    
    
    Sale of subsidiaries through an increase
in other current assets
    
    
    
    
    
    
    
    
    
    
    1.0Increase in tangible fixed assets
through an increase in accounts payable
    
    
    
    
    
    
    
    
    
    
    Acquisition of unconsolidated companies:
    
    
    Equity / Cost
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    
    
    
    
    
    
    
    
    Purchase price
    
    
    
    
    
    
    
    
    
    
    Seller financing
    
    
    
    
    
    
    
    
    
    
    Acquisition of minority interests:Minority interests
    
    
    5.5
    
    
    
    6.7
    
    
    
    14.6Goodwill
    
    
    6.4
    
    
    
    
    
    
    
    8.0Purchase price
    
    
    11.9
    
    
    
    6.7
    
    
    
    22.6Acquisition through offsetting of credits
    
    
    (0.5
    )
    
    
    
    
    
    
    11.4
    
    
    
    6.7
    
    
    
    22.6
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QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (q) Statements of cash flows (continued) Year ended December 31,2003
    
    2002
    
    2001Acquisition of subsidiaries:Industrial land and buildings
    
    
    29.2
    
    
    
    
    
    
    
    Machinery, plant and equipment
    
    
    30.8
    
    
    
    
    
    
    
    Bottles and crates
    
    
    3.7
    
    
    
    
    
    
    
    Other fixed assets
    
    
    1.5
    
    
    
    
    
    
    
    Financial assets
    
    
    
    
    
    
    
    
    
    
    Inventories
    
    
    9.8
    
    
    
    
    
    
    
    Trade receivables
    
    
    3.7
    
    
    
    
    
    
    
    Other current assets
    
    
    3.9
    
    
    
    
    
    
    
    Prepaid expenses
    
    
    
    
    
    
    
    
    
    
    Restricted cash and short-term investments
    
    
    
    
    
    
    
    
    
    
    Total non-cash assets acquired
    
    
    82.6
    
    
    
    
    
    
    
    Provisions
    
    
    17.9
    
    
    
    
    
    
    
    Long-term loans and other liabilities
    
    
    
    
    
    
    
    
    
    
    Current loans and short-term portion of
long-term debt
    
    
    10.9
    
    
    
    
    
    
    
    Accounts payable and accrued expenses
    
    
    6.8
    
    
    
    
    
    
    
    Taxes payable and other current liabilities
    
    
    2.1
    
    
    
    
    
    
    
    Total non-cash liabilities assumed
    
    
    37.7
    
    
    
    
    
    
    
    Net non-cash assets acquired
    
    
    44.9
    
    
    
    
    
    
    
    Cash and cash equivalents
    
    
    16.3
    
    
    
    
    
    
    
    Net assets acquired
    
    
    61.2
    
    
    
    
    
    
    
    Minority interest
    
    
    (3.6
    )
    
    
    
    
    
    
    Equity interest
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    96.7
    
    
    
    
    
    
    
    Purchase price
    
    
    154.3
    
    
    
    
    
    
    
    Shares issued in exchange for the acquisition
    
    
    (154.3
    )
    
    
    
    
    
    
    Fees and expenses paid
    
    
    (3.4
    )Cash and cash equivalents acquired
    
    
    16.3
    
    
    
    
    
    
    
    12.9
    
    
    
    
    
    
    
    
 F - 43




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##### Table of Contents



QUILMES INDUSTRIAL (QUINSA) SOCIÉTÉ ANONYME AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
for the years ended December 31, 2003, 2002 and 2001
(In US$ million, except share data) 28. Differences between Luxembourg GAAP and US GAAP (continued) (q) Statements of cash flows (continued) Year ended December 31,2003
    
    2002
    
    2001Sale / Spin off of subsidiaries:Intangible assets
    
    
    
    
    
    
    
    
    
    
    Industrial land and buildings
    
    
    
    
    
    
    
    
    
    
    0.6Machinery, plant and equipment
    
    
    
    
    
    
    
    
    
    
    0.9Bottles and crates
    
    
    
    
    
    
    
    
    
    
    Financial assets
    
    
    
    
    
    
    
    
    
    
    Inventories
    
    
    
    
    
    
    
    
    
    
    Trade receivables
    
    
    
    
    
    
    
    
    
    
    Other current assets
    
    
    
    
    
    
    
    
    
    
    0.3Prepaid expenses
    
    
    
    
    
    
    
    
    
    
    Total non-cash assets sold
    
    
    
    
    
    
    
    
    
    
    1.8Provisions
    
    
    
    
    
    
    
    
    
    
    0.1Long-term loans and other liabilities
    
    
    
    
    
    
    
    
    
    
    Current loans and short-term portion of
long-term debt
    
    
    
    
    
    
    
    
    
    
    Accounts payable and accrued expenses
    
    
    
    
    
    
    
    
    
    
    Taxes payable and other current liabilities
    
    
    
    
    
    
    
    
    
    
    Total non-cash liabilities sold
    
    
    
    
    
    
    
    
    
    
    0.1Net non-cash assets sold
    
    
    
    
    
    
    
    
    
    
    1.7Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    Net assets sold
    
    
    
    
    
    
    
    
    
    
    1.7Minority interest
    
    
    
    
    
    
    
    
    
    
    Equity interest
    
    
    
    
    
    
    
    
    
    
    Gain from the sale
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Sell price
    
    
    
    
    
    
    
    
    
    
    1.5Cash and cash equivalents sold
    
    
    
    
    
    
    
    
    
    
    Seller financing
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    
    0.5
 F - 44




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##### Table of Contents



EXHIBIT INDEX


Exhibits



|1.1  |  | Articles of Incorporation of Quinsa, as amended (equivalent of both charter and
by-laws).                                                                                                                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|2.1  |  | Deposit Agreement dated February 28, 2002 among Quinsa, The Bank of New York and the
holders from time to time of American Depositary Receipts issued thereunder
(incorporated by reference to the registration statement on Form F-6
filed on
February 20, 2002; File No. 333-83226).*                                                                       
|    
|2.2  |  | Form of American Depositary Receipt for Quinsa Class B shares (included in Exhibit 2.1).                                                                                                                                                                                                                                                                      
|    
|4.1  |  | Share Exchange Agreement dated May 1, 2002 among Companhia de Bebidas das Américas 
AMBEV and Quinsa (incorporated by reference to Exhibit 2.1 of the Schedule 13D relating
to Quinsa, filed on May 13, 2002 by AmBev). *                                                                                                                                    
|    
|4.2  |  | Memorandum of Agreement dated January 13, 2003 between Heineken, Quinsa, BAC and
certain of their respective affiliates dated January 13, 2003 (incorporated by
reference to our Annual Report on Form 20-F filed on June 27, 2003 filed as Exhibit
4.2). *                                                                                                   
|    
|4.3  |  | Letter Agreement dated January 13, 2003 between AmBev, BAC and Quinsa (incorporated by
reference to Exhibit 2.4 of the Schedule 13D/A relating to Quinsa filed on February 4,
2003 by AmBev).*                                                                                                                                                                
|    
|4.4  |  | Quinsa Shareholders Agreement dated as of January 31, 2003 among BAC and AmBev
(incorporated by reference to Exhibit 2.5 to Amendment No. 1 to the Schedule 13D
relating to Quinsa filed on February 4, 2003 by AmBev).*                                                                                                                                      
|    
|4.5  |  | License Agreement dated January 31, 2003 between Quinsa and AmBev (incorporated by
reference to our Annual Report on Form 20-F filed on June 27, 2003 as Exhibit 4.4).*                                                                                                                                                                                       
|    
|4.6  |  | Distribution Agreement dated January 31, 2003 between Quinsa and AmBev (incorporated by
reference to our Annual Report on Form 20-F filed on June 27, 2003 as Exhibit 4.5).*                                                                                                                                                                                  
|    
|4.7  |  | Share Pledge Agreement dated as of January 31, 2003, among BAC, AmBev and Quinsa
(incorporated by reference to Exhibit 2.9 to Amendment No. 1 to the Schedule 13D
relating to Quinsa filed on February 4, 2003 by AmBev).*                                                                                                                                    
|    
|4.8  |  | Escrow Agreement dated as of January 31, 2003, among BAC, AmBev and The Bank of New
York (incorporated by reference to Exhibit 2.10 to Amendment No. 1 to the Schedule 13D
relating to Quinsa filed on February 4, 2003 by AmBev).*                                                                                                                           
|    
|8.1  |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                         
|    
|10.4 |  | Resolution of the Office of Competition, Deregulation and Consumer Advocacy of the
Ministry of Production of the Republic of Argentina regarding the business combination
of AmBev and Quinsa  English Translation (incorporated by
reference to Exhibit 2.11 to
Amendment No. 1 to the Schedule 13D relating to Quinsa
filed on February 4, 2003 by AmBev).*
|    
|11.1 |  | Code of Ethics.                                                                                                                                                                                                                                                                                                                                               
|    
|12.1 |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                      
|    
|12.2 |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                      
|    
|13.1 |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                      
|    
|15.1 |  | Consent of A.C. Nielsen Argentina S.A.                                                                                                                                                                                                                                                                                                                        
|    
|15.2 |  | Consent of A.C. Nielsen Chile.                                                                                                                                                                                                                                                                                                                                
|    
|15.3 |  | Consent of CCR/IRI.                                                                                                                                                                                                                                                                                                                                           
|    
|15.4 |  | Consent of A.C. Nielsen Uruguay.                                                                                                                                                                                                                                                                                                                              
|15.5 |  | Consent of CIES Internacional.                                                                                                                                                                                                                                                                                                                                



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|* |  | Incorporated by reference.
|- |  | --------------------------