ambev annualrepl 2003 eng

2003

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/ 2003 Annual Report

Designed by williams and phoa, London.

AmBev is the world’s fifth largest brewerand, arguably, one of the best-managedand most profitable companies in theinternational beverage industry.

The undisputed market leader in theBrazilian beer industry, with 67% marketshare, AmBev is also present in 11 otherLatin American countries, with leadingpositions in four of them.

Following the business combination with Interbrew, Canada’s second largestbrewery was merged into AmBev. WithAmBev’s footprint extending across the three Americas, we really are theAmerican Beverage Company.01/ Highlights

02/ Our operations in 2003

04/ Chairmen’s letter

06/ Moving forward

10/ Operating review

18/ Corporate governance

20/ Corporate and social responsibility

22/ The team

23/ Financial section

72/ Investor information

01

2003 2003 2002 % Change US$ million R$ million R$ million

Income statementNet sales 2,821 8,684 7,325 18.5%Gross profit 1,507 4,640 3,984 16.5%SG&A expenses 628 1,933 1,933 0.0%EBIT 749 2,306 2,051 12.4%Net income 459 1,412 1,510 -6.5%Balance sheetCash and equivalents 877 2,534 3,505 -27.7%Total assets 5,133 14,830 12,381 19.8%Total debt 2,070 5,980 4,487 33.3%Shareholders’ equity 1,510 4,363 4,130 5.6%Cash flow and profitabilityEBITDA 998 3,072 2,710 13.4%EBITDA margin – 35.4% 37.0% –Capital expenditures 280 862 545 58.3%Return on equity (%) – 32.4% 36.6% –Per share ($/1,000 shares)Book value 39.83 115.07 107.94 6.6%EPS 12.09 37.23 39.48 -5.7%Dividends (ON)* 7.52 23.14 12.40 86.6%Dividends (PN)* 8.27 25.45 13.64 86.6%CapitalizationMarket capitalization 9,135 26,392 19,686 34.1%Net debt 1,193 3,447 982 251.1%Minority interest 68 196 79 148.2%Shares outstanding** – 37,913 38,258 -0.9%ADRs equivalent – 379.1 382.6 -0.9%

* Includes payments of regular dividends and interest on capital.** Excludes shares held in treasury.US dollar amounts have been translated at an average exchange rate of R$ 3.08 or year-end exchange rate of R$ 2.89.Numbers may not add up due to rounding.

AmBev /Ibovespa Net sales /% total

70% Beer Brazil 115% CSD & Nanc Brazil 212% International 3

Operations2% Other Brazil 4

0

45

90

135

180

020406080

100120140160180 Dec 01Dec 00 Dec 02 Dec 03

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■ AmBev ■ Ibovespa

Highlights /corporate and financial

EBITDA /R$ m and EBITDA margin (%)

2001 1,990

2002 2,710

2003 3,072

2000 1,505

30.5%

37.0%

35.4%

28.7%

AmBev Annual Report 2003

Brazil

Our operations in 2003 /AmBev at a glance

Key highlights in 2003• Undisputable leader in the beer market• Strong second player in soft drinks• Unparalleled distribution system reaching

1,000,000 points of sale• 37% of volumes sold through direct

distribution• Benchmarking profitability, with

37% EBITDA margin

OverviewBrazil is AmBev’s home country and corebusiness division. It is the world’s fourth largestbeer market and third largest soft drinks market,where AmBev holds 67% and 17% market share,respectively.

Key brandsSkol, Brahma, Antarctica, Bohemia andGuaraná Antarctica

OverviewDuring 2003, in addition to our operations inBrazil, AmBev was present in nine othercountries across Latin America, including theSouthern Cone (with a leading position throughour strategic alliance with Quinsa), the Andeanregion and Central America.

Key brandsQuilmes, Brahma, Pepsi

International Key highlights in 2003• #1 brewer in Argentina, Bolivia, Paraguay

and Uruguay• 34% EBITDA margin in Quinsa operations• Successful launch of operations in Guatemala • Expansion into Ecuador and Peru• Revitalized operations in Venezuela

Distribution networkFacilities 52Points of sale 1,700,000Installed capacity (million hl/year) 175.9EmployeesManufacturing 9,823Sales and distribution 7,745Headquarters/administrative 1,322

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1/ArgentinaPlants: 7Installed capacity: 17.3 (million hl/year)POS reached: 311,000

2/BoliviaPlants: 6Installed capacity: 3.1(million hl/year)POS reached: 52,000

3/BrazilPlants: 29Installed capacity: 141.1(million hl/year)POS reached: 1,000,000

4/ChilePlants: 1Installed capacity: 0.8 (million hl/year)POS reached: 13,000

5/EcuadorPlants: 1Installed capacity: 0.9(million hl/year)POS reached: 13,000

6/GuatemalaPlants: 1Installed capacity: 1.0 (million hl/year)POS reached: 30,000

7/ParaguayPlants: 1Installed capacity: 2.2 (million hl/year)POS reached: 48,000

8/PeruPlants: 3Installed capacity: 6.1 (million hl/year)POS reached: 141,000

9/UruguayPlants: 2Installed capacity: 1.7(million hl/year)POS reached: 43,000

10/VenezuelaPlants: 1Installed capacity: 2.2 (million hl/year)POS reached: 23,000

‘2003 was a challengingyear for AmBev in Brazil.We faced a toughercompetitive environmentand high economicvolatility. Nevertheless,we kept the AmBevmachine robust andwell oiled to capture thegrowth opportunitiesin the country.’Carlos Alves de BritoChief Executive Officer

‘AmBev’s expansion in 2003 is a genuinecase of success. As the leading brewer inLatin America, we aredefinitely the bestpositioned companyto benefit from thebeverage marketgrowth in the continent.’Juan ManuelVergara GalvisInternationalOperationsExecutive Officer

02/03

Volume contribution56% Skol 127% Brahma 213% Antarctica 32% Outros 42% Bohemia 5

Sales /US$

2,481mEBITDA & EBITDA margin/US$

915m37%Sales /US$

340mEBITDA & EBITDA margin/US$

83m25%

Volume contribution71.6% Argentina 18.2% Bolivia 27.3% Paraguay 35.9% Venezuela 42.9% Uruguay 5

1.9% Chile 61.7% Peru 70.4% Guatemala 80.1% Ecuador 9

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67

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This effort has been driven by our intense focus on four key drivers that have guided AmBev since its creation:

• A culture motivated by success, based on meritocracy and performance-driven remuneration, that encouragesemployee pride, ownership and excellence;

• A commitment to continuous improvement, top line growthand excellence in execution, especially in distribution;

• Unrelenting efforts to reduce cost and increaseproductivity; and

• Strict financial discipline.

We continued to inculcate these drivers in our Brazilianbusiness, and apply them as we expand our footprint acrossLatin America by completing a successful combination ofalliances, greenfield projects and acquisitions.

As the world’s fourth-largest beer market, Brazil remains the most important contributor to AmBev’s profit pool. In2003, we faced a number of challenges from external factorsin this core market that seriously impacted our consolidatedresults. However, we have taken steps to address theseissues – our efforts are beginning to pay off and we are noweven better positioned for the future.

Specifically, we faced a sluggish beer market, as the result of unstable macroeconomic conditions, that negativelyimpacted consumer consumption. Secondly, we faced avolatile real exchange rate, early in 2003, that forced us toadjust our hedging policy and depressed operating margins.The weakened demand for consumer goods caused theBrazilian beer market to contract by roughly 2%, puttingfurther pressure on revenues.

On top of this, we faced an increased amount of pricing and marketing pressure from competitors. Over this period,AmBev’s market share decreased below our target range of67% to 70%, negatively impacting revenues and demandinghigher marketing expenditures.

Chairmen’s letter /Dear shareholder

Victorio Carlos De Marchi Co-Chairman of the Board of Directors Marcel Herrmann TellesCo-Chairman of the Board of Directors


2003 was a challenging but importantyear for AmBev. In spite of a difficultmacroeconomic environment andincreased competition in Brazil, wemade significant strides in advancingour long-term strategy by strengtheningour business in our home market anddeveloping new sources for sustainablegrowth and profit generation abroad.

The combined effect of lower volumes and higher costsoffset all of our operating improvements, and consequentlyAmBev delivered results in Brazil that were not in line with ourown profitability expectations or our industry-leading trackrecord. EBITDA from Brazilian operations, that grew by 38%in 2002, grew by only 6% in 2003.

While AmBev strengthened its position at home to meetchallenges, we also made significant strides in building ourinternational presence to complement AmBev’s corebusiness and fully seize future growth opportunities.

We embarked on a deliberate and consistent expansion to boost our position in select Latin American markets,reflecting our role as The American Beverage Company.Through a combination of alliances, greenfield developmentsand acquisitions, AmBev now spans the whole of SouthAmerica, with the exception of Colombia and the Guyanas,and extends into northern Central America. These are all fast-growing markets and our proven skill sets and clear driverswill support our efforts to build value in these markets.

By the end of January 2003 we concluded our strategicalliance with Quinsa, consolidating our leading position inSouth America. Quinsa is the number one brewer inArgentina, Bolivia, Paraguay and Uruguay, and it also holds a 10% market share in Chile. These are all markets withsignificant potential.

We have already captured significant synergies in 2003 fromthis alliance. The successful integration of AmBev’s SouthernCone assets into Quinsa’s operations boosted the results forthe new combined entity, allowing Quinsa to deliver a 108%pro forma EBITDA growth.

In the second half of the year, we started operations inCentral America. Cerveceria Rio, our joint venture inGuatemala, launched the production and sales of our Brahvabeer brand, achieving an impressive 30% market share inonly four months.

At the same time, we expanded our footprint in northwestSouth America. In October 2003 we entered the attractivePeruvian beverage market, acquiring the Pepsi franchise in Lima and the Northern Region, the two largest markets in the country. The soft drinks business will provide aneffective distribution system for our beer operations that we expect to commence by 2005. We also acquired an 80%stake in Cerveceria Suramericana, the second-largest playerin Ecuador.

Our international business has since been further enhancedby our business combination with Interbrew, now calledInBev, that we announced in March 2004. This combinationgives us a stronghold in the Canadian beer market and anexpanded platform to access other new and attractiveinternational markets.

We expect this groundbreaking transaction to unleashsignificant synergies at both AmBev and InBev, generatedthrough the exchange of best practices between two world-class beverage companies. Together, AmBev and InBev willform the world’s largest beer sales platform for some of theworld’s leading brands, including our own Brahma.

Also as part of this transaction, AmBev will incorporateLabatt Brewing Company Limited, the leading brewer in theprofitable Canadian beer market, holding 43% market share.The merger of Labatt into AmBev also consolidates ourpresence across the three Americas, providing our Companysignificant cash flows in hard currency and an attractive wayinto the imports segment of the United States beer market,the most profitable in the world.

Although 2003 had its challenges, we are a better Companybecause of our response to them. During the year, westrengthened our management skills and ability to execute,bolstered our domestic business and built a platform to seizenew opportunities abroad – we see enormous potential forlong-term sustainable and profitable growth and valuecreation for all stakeholders.

04/05

5/Enhanceprofitability

Financial discipline

3/ Improvingdistributionefficiency execution

2/Top line growth

1/ People & culture

4/Continuallyreducingcosts &expenses

Training programs deliver valueWe invest a great deal of timeand effort training and preparingour people to make increasinglyvaluable contributions to theCompany. Training courses atAmBev are offered through ourAmBev University program, andrange from one-day workshopsto one-year extended courses invaried areas of studies, such asindustrial, brewing, businessmanagement and sales.

World-class trainee programFounded in 1990, AmBev’strainee program is a valuabletool to attract young talent andprepare them for AmBev’schallenges and opportunities.This program has trained morethan 500 professionals, six ofwhom are currently ExecutiveOfficers in the Company. In 2003,almost 16,000 people applied; 37were recruited, 18 of theminternationally.

Our young talent relatesto our consumer base AmBev’s staff is renownedfor its energy and motivation.Employees closely followCompany performance, and areencouraged to share any and allsuggestions for improvement.We are a company of young,competitive, talented individuals– the average age of ourexecutive officers is 44 years,and 80% of our employees are35 years old or younger. Thismakes for an enthusiastic,driven workforce, but moreimportantly, it means that ouremployees are able to easilyrelate to the needs and demandsof our consumers, who arepredominantly in a similar agedemographic.

Performance-drivencompensationOur aggressive variablecompensation system creates astrong commitment to AmBev’scorporate goals and sense ofownership among ouremployees. Generous employeebonuses are paid only whencorporate goals are met.Because we did not meet ourcorporate targets, there were noemployee bonuses in 2003 (withthe exception of certain factoryworkers who met industrialefficiency targets).

Moving forward /strategy

Investments in training

Bonus evolution

2002 R$ 10,022m

2003 R$ 10,917m

2002 R$ 112.3m

2001 R$ 81.3m

2003 R$ 23.7m

PeopleAmBev’s performance-driven culture runs deepthroughout all levels of the organization, and representsa unique competitive advantage. Senior management’sactive involvement in the recruiting process helps ensure that we hire individuals who will thrive in AmBev’smeritocratic environment. Our training programs prepare our people to meet and exceed all job requirements andoptimize career development.

We compensate our outstanding employees accordingly;bonuses are based on an aggressive variable compensationsystem dependent on AmBev’s performance targetachievements. Top performing employees participate in ourStock Ownership Plan, which helps ensure that performancefor shareholders is an employee priority.

The motivation, drive and leadership of our people are ourgreatest assets, allowing us to transform our ambitious goalsinto accomplishments.

People and culturecreating competitiveadvantage


06/07

Our commitment to top line growth has four drivers: Portfolio management We manage our portfolio sales mix to maximize profitability, working to increase the contribution from our high margin products and by developing the Brazilian premium beer market.

Margin pool shareWe are also collaborating with retailers to capture a higher profit share from consumer beverage purchases, and since 2000 we have increased our margin pool share from 26.7% to 30.7%.

Market shareAmBev is committed to recovering Brazilian market shareback to the 67 – 70% range by leveraging brand equity,reinforcing consumer preference, and increasing brandprominence while preserving profitability.

Per capita consumptionWorking to grow the beer market is as important to us asmarket share preservation and growth. We have identifieda series of opportunities that will allow us to significantlyincrease the Brazilian share of stomach.

Focused on top linegrowth and revenuemanagement

No.1

Increase in net salesper hectoliterIn 2003, AmBev met itscommitment to keep consumerprices stable in real terms. Thiscommitment, together withadditional revenue managementinitiatives, improved net beersales per hectoliter by 16% inBrazil. Net soft drinks and Nanc sales per hectoliteralso performed strongly,improving by 13%.

Enhanced trade programsIn a nationwide effort to drivevolume growth, AmBevnegotiated a consumer pricereduction in more than 180,000points of sale throughout Brazil.As an alternative to providingretailer rebates to make up theconsumer price differential,AmBev invested in advertisingfocused on generating footfall,and thus volumes, by invitingconsumers to party in theofficial ‘Festeja’ (The BeerFestival) points of sale.

AmBev operates in 13 countriesand 3 continentsAmBev has operations in 12 countries spanning LatinAmerica*, representing sales of more than 95 millionhectoliters per year**. Thecombination with Interbrewtakes AmBev even further,giving access to North America.These markets represent anattractive mix of stable currencyrevenues as well as excitinggrowth markets.

* Including Dominican Republic and Nicaragua, which were added in 2004.

** Considering the totality of Quinsa’s volumes.

Significant growth potential onhigher margin premium segmentPremium sales in Brazilrepresented 6% of our beerportfolio in 2003, accounting for 3.4 million hectoliters.Products like Bohemia, SkolBeats and Original are thehighlights in this segment.Although still a ‘start up’initiative, we are working tomaximize the profitability of our sales mix by developing the Brazilian premium segment.

Brazil beer net sales R$/hl

2002 95.6

2003 110.7

1.7m

of total volumes sold throughdirect distributionAmBev’s direct distributionnetwork sold 37% of AmBev’stotal volumes in Brazil in 2003.Our expanded salesforce is nowpresent in each major Braziliancity, optimizing the Company’s‘go to market’ capabilities,improving service to the retailchannel and advancingAmBev’s understanding of the marketplace.

83,000 new coolers in placeIn 2003, AmBev installed 83,000new sub-zero coolers in Brazil.In a market where consumptionis predominantly on-premise,the availability of perfectly ice-cold beer is a key component ofsuccessful sales execution.

1.7 million points of sale reachedAmBev reaches 1.7 millionpoints of sale each week.Wherever someone asks for a case of beer, we are there to supply it. The extensive reach of our distribution systemis secured by an unparalleledunderstanding of marketdynamics, excellent execution,and outstanding service to retail beer stores acrossthe Americas.

Consolidation of third-partydistributorsThe number of multi-brandoperators increased from 28%to 46% of total third partyexclusive distributors in 2003.The consolidation of ourdistribution network toexclusive AmBev-brandoperators significantly improvesour ability to implement revenuemanagement initiatives.

Moving forward /strategy

Distribution efficiency and executionIn Latin America, beer is mostly consumed on-premise,and there are millions of points of sale. For this reason,distribution is particularly important to our success and is a key focus at AmBev. We constantly look for ways to furtherstreamline our operations and make our route to market more efficient.

In 2003, we made significant progress in this area through two initiatives. We reduced ‘middleman’ costs byimplementing direct distribution of our products in key urbanregions. We also began to consolidate our third-partydistribution. Multi-brand operators eliminate conflicts ofinterest and give us more control over portfolio management.

Improving ourdistribution, efficiencyand execution

Multi-brand third-party operators /%

2002 28%

2003 46%

37%


<None>/0908/09

Cost reductionAnother key strategic driver at AmBev is our continuouseffort to reduce costs and expenses. Every year we challengeourselves to achieve reductions in real terms in our coststructure. AmBev’s Supply Chain Department closely followsthe evolution of inflation, commodity prices and currencyexchange ratios, working out ways to mitigate possiblenegative impacts in our production costs. From improvedagreements with suppliers to higher plant efficiency, there is a relentless pursuit of cost reduction.

Additionally, several fixed expense reduction programsare in place, aiming to negate inflation-related fixed costincreases and fund incremental sales and marketinginvestments. We constantly investigate ways to decreasefixed expenses to sustain AmBev’s benchmarking marginswhile we allocate the appropriate expenditures to assure the health of our brands.

Continuallyreducing costsand expenses

Fixed costs reduced by R$ 3 millionAmBev’s Manufacture Projecthas not only significantlyincreased plant efficiency, but it has also considerably reducedfixed costs in our industrialoperations. This progress isillustrated by the evolution of our maintenance costs(including services and parts),which decreased by 4% in realterms in 2003.

Environmental improvementscontribute to productivity gainsAmBev promotes eco-efficiencyby developing technologies,processes and resourcesthat minimize the environmentalimpact of our Company’soperations, while maintainingour competitiveness.AmBev carefully managesproduction losses, reducingenvironmental impact as wellas creating production chainproductivity gains.

Increased plant efficiencyTo improve industrial process efficiencies, AmBevimplemented the ManufactureProject, which developedstandard procedures andexecution guidelines in ourproduction lines. The projectfocuses on four aspects:people, plant management,maintenance and quality, andwas rolled out to all plants earlyin 2003. Consequently, we havebeen able to improve productionline efficiency by 1,000 basispoints to 86% in 2003.

Saving enough water for an entire cityAmBev’s EnvironmentalManagement System iscommitted to environmentalpreservation and productioncost reduction. Our waterresources managementprogram develops eco-efficientalternatives aimed at reusingand recycling water, thereforereducing water consumptionand waste in the productionlines. AmBev’s water savings in2003 would supply thepopulation of Florianópolis(approximately 370,000 people)for an entire month.

ManufactureProject structure

PeoplePeople

ResultsResults

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4%decrease in maintenance costs

Raw materiallosses2001 8.58%

2002 7.97%

2003 6.41%Water consumptionper hl produced (hl/hl)

2001 5.62

2002 5.36

2003 4.88


Operating review /Beer Brazil

in a 7.5 percentage point declinein our market share, reaching a low of 62.6% in November.

In keeping with this scenario,the unstable macroeconomicenvironment in 2003 increasedBrazilian unemployment andimpacted disposable income,causing the beer market todecrease by 2.1%, (ACNielsen).

Consequently, Beer Brazilvolumes declined 4.7% and production costs perhectoliter increased by 17.6%,constraining bottom line growth.

AmBev’s response to theseconditions has, however,strengthened the Company, and helped prepare us to deliver long-term sustainablegrowth in adverse conditions.Specifically, we have adopted a consistently proactiveapproach to the marketplace.We will not settle for the statusquo, constantly challengingourselves with stretchedtargets, and strengthening ourleadership position whereverand whenever possible.

Every employee in Brazil ischallenged to rethink theirattitude, entering into a highly

Brazil’s sizeable beer market and AmBev’s leadership in thecountry makes Beer Brazil the centerpiece of AmBev’sprofit pool.

With volumes greater than 80 million hectoliters per year,one million points of sale, a largeproportion of high-margin on-premise consumption, and the predominance of low-cost returnable packaging, the Brazilian beer market offers great value creationpotential. AmBev’s 67%Brazilian market share (theaverage for 2003, according to ACNielsen) positions us to benefit from growing beerconsumption and upside ofBrazil’s economic development.

However, in 2003, Beer Brazilresults came under pressureand failed to meet our highexpectations. We achievedEBITDA of R$ 2,670 million, anincrease of 3% compared to2002, notably below the lastthree years’ compoundedaverage of 23%. The decline in 2003 performance was theconsequence of several externalfactors, and in light of these we

have taken steps to ensure thatwe are able to meet ourexpectations in the future.

First, due to the real exchangerate volatility at the beginning of the year, we hedged ourdollar-linked production costs,which represent roughly 50% of our total costs of goods sold.We were attempting to protectshareholders’ returns but thereal appreciated during the restof the year. As a result, AmBevwas forced to carry extrahedging costs through toinventories, which amounted to R$ 99 million. Those costsoffset the benefits of oursuccessful 2003 fixed costreduction initiatives andincreased productionefficiencies.

In June 2003, we adjustedprices, sticking to ourcommitment of keeping long-term consumer prices stable in real terms. Our competitorsdelayed following this move forsome months, causing a largerthan usual price gap betweenour brands and theirs for asignificant period of time. Thecombination of price differenceand marketing investments fromone of our competitors resulted

Promotion at the point of sale is key to fosteringconsumption.

We work hard to have our productsalways available for prompt delight.

The Bohemia brand is our jewel in thepremium portfolio.

Brahma sponsors‘Barretão’, the largestcow stampede in Latin America.

10/11

competitive mindset to recoverthe Company’s market share,allowing AmBev to regain the67% to 70% range. Ourcommitment to market sharerecovery is part of AmBev’s core targets in 2004.

It is essential that we outperform competitors at both the consumer and tradelevels. Improving our brandpositioning and excellence inexecution at the point of sale is critical to AmBev’s success in 2004. Also, as part of theefforts to rebuild AmBev’sBrazilian market share, we areanalyzing the successes andfailures of 2003.

Starting with the consumerfront, during the second half of 2003 we made a number of improvements: Skol was running a responsibleconsumption campaign, Brahma had halted itsadvertising campaign due to the government’s newadvertising restrictions, andAntarctica’s campaign wasunder review. To strengthen our brand positioning andmarketing, the responsibleconsumption messages were shifted from a brand

Brazilians toasted2004 with Brahma.

Our brand awareness is further enhancedby sponsoringmassive events.

Young adults party at Skol Beats,an electronic music festival that attracts 45,000 people annually.

to a corporate perspective, and our marketing executivesconcentrated on redefining our brand positioning. Newcampaigns were launchedduring the fourth quarter of2003, helping AmBev to reversethe market share loss. Movinginto 2004, it is paramount that we maintain the rightpositioning for our threemainstream brands – Skol,Brahma and Antarctica willreaffirm their rankings as one, two and three in bothconsumers’ preference andmarket share.

On the trade front, AmBev’sBrazilian distribution system isunparalleled, and the Companyis moving on several fronts toleverage this valuable asset andto anticipate and overcome anyinitiative launched by the othermarket players.

First, we have streamlined ourthird-party distributors, with the objective of establishing a single operator for our threemainstream brands in eachsales district in Brazil. Despitemaintaining separate salesforces for each portfolio ofbrands, some cost synergiesrelated to economies of scale

in warehousing and deliveryhave already been captured. In addition to the cost savingsfrom this initiative, we have been driving significant revenueupsides and market share gainsby implementing our portfoliomanagement strategy in areaswhere we are already operatingthrough a single operator. Thenumber of multi-brand exclusiveoperators increased from 28%to 46% of total third-partydistributors in 2003.

Second, we continued the shift from third-party to directdistribution in the core areas ofBrazil. By reaching the retailchannel with our own salesstructure we have been able toenjoy significant benefits. Froma better understanding of themarket to a more efficient coststructure, direct distributionbrought important contributionsto AmBev’s results. In this rollout process, significant valuewas also captured through thebenchmark of best practicesbetween AmBev and our keythird-party operators. Thelessons from our distributors’extensive experience in sales and delivery played afundamental role in the successof our direct distribution system.

In 2003 we were able to increasethe participation of directdistribution by 765 basis pointsin our sales mix, increasing itsshare of volume to 43% inDecember 2003 from 35% inDecember 2002.

Finally, we worked at full speedon rolling out our sub-zerocooler program, placing 83,000new coolers in key points of sale across Brazil. As alreadymentioned, the beer market inBrazil is predominantly basedupon on-premise consumption,and we prioritize the ability toprominently display our brandsand provide products to ourcustomers that are presentedunder ideal standards – ice-cold.

In 2003, we strengthened our business in our coreoperations in the wake ofexternal challenges. AmBev is ready for the challenges of the Brazilian market in 2004 and we are confident that our Company will excel onceagain at serving our customersas well as our shareholders.


Operating review /Brazil soft drinks

Although AmBev’s primaryfocus is on beer, soft drinks are a key part of the Company’sbusiness and an importantcontribution to the Company’sprofit pool, mainly due to thesignificant synergies and profitopportunities that complementour core beer business. In 2003,soft drinks delivered R$ 246million of EBITDA, an increase in real terms of 19% comparedto 2002.

The positive results of the lastfew years validate our decisionin 2000 to create an independentsoft drinks division. With thisspecialized team in place, theCompany has been able to focuson maximizing the potential of the soft drinks brands,implementing an effective andprofitable growth strategy.Underlying this strategy offocusing on the ‘right few’initiatives was the alignment of three key assets: AmBev’sbrand portfolio, our long-termpartnership with PepsiCo andthe Company’s unparalleleddistribution system.

Our soft drinks business hasmastered the category throughan in-depth understanding ofthe sector’s core performancelevers, encompassing amultidimensional universe ofconsumers, packaging, flavorsand sales channels. Its strategyhas been crafted to complementAmBev’s intense focus on beersales. The achievements of 2003demonstrate AmBev’s ability todeliver on both of these fronts.

First, our core portfolio posted a strong performance over thelast year, with volumes up 5% in comparison to 2002. Ourincreased emphasis on highermargin products, namelyGuaraná Antarctica, Pepsi Cola(including the successful brandextension Pepsi Twist) andGatorade, supported strongbrand positioning and superiorpoint of sale execution. GuaranáAntarctica and Gatoraderetained their leadershippositions in their respectivecategories, while Pepsi Twistbrought new momentum toPepsi Cola, reaffirming thebrand as a strong challenger inthe cola segment, the largestsector in the market.

The core portfolio accounted for82% of soft drinks volumes in2003, compared to 74% in 2002.

In addition to volume growth,pricing also improvedsignificantly. We were able to apply successful pricingtechniques from our beerbusiness to the soft drinksoperations, with clear results.Specifically, in the case ofcarbonated soft drinks, a betterunderstanding of price elasticityper package, sales channel andregion allowed us to reduce theprice gap between our productsand those of the market leader.The improved price positioningimpacted directly on our netrevenues per hectoliter, whichincreased in 2003 by 13.3%.

Our Brazilian original,with its natural andhealthy appeal, is thesecond brand in thesoft drinks market.

Gatorade is theabsolute leader inthe profitable sportsdrinks market.

Pepsi Twist effectivelyrevitalized the Pepsifranchise in Brazil.

12/13

We also made progress on the cost side. AmBevbenefited from a new PET bottle, developed by PepsiCo,and coordinated its launch in the Brazilian market. This new 2 liter size container requiredmuch less PET resin than theprevious container, leading to a significant reduction inproduction costs. Additionally,AmBev’s procurementdepartment was able to makesignificant improvements in the way it sources PET andsugar through the developmentof advanced supply chainmanagement platforms. Theseachievements partially offset the negative effects of thehedging policy that was put into place last year, and the net effect on the cost of goodssold for soft drinks in 2003 was an increase of 15%.

Pepsi X, the energyboosting cola.

What better sponsorto the Brazilian nationalsoccer team than thecountry’s favorite soda?

Looking to 2004 and beyond,we are excited about the rolethat our soft drinks businesswill play as a complement toAmBev’s core beer business.Soft drinks will play anincreasingly important role in AmBev’s strategy to drivelong-term sustainable growththrough increased per capitaconsumption, market share and operating margins. TheCompany is well-positioned to seize the opportunity offered by the third largest softdrinks market in the world.


Operating review /international

International OperationsAmBev significantly expandedits International Operations in 2003. Its contribution toAmBev’s consolidated EBITDAincreased to 8.4% compared to1.5% in 2002, with the number ofcountries in which we operateincreasing from four to ten in thesame period1 .

The main driver of our improvedperformance was thesuccessful completion of ourstrategic alliance with Quinsa,consolidating AmBev’s leadingposition in South America.Quinsa is the number onebrewer in Argentina, Bolivia,Paraguay and Uruguay, with a secondary position in theChilean market.

After the transaction closed in January, Quinsa and AmBevconducted an extensiveintegration process, dedicatedto merging the beer assets inArgentina, Paraguay andUruguay. The successfulcombination of operationsresulted in significantoperational synergies, whichallowed the newly enlargedQuinsa to deliver EBITDAgrowth, in pro forma terms, of 108% compared to 2002.

In addition to the successfulasset integration, the Argentineeconomic recovery alsocontributed to the markedimprovement in results.Following the 2001/2002economic crisis, consumerconfidence rebounded in 2003.The beer market increased byroughly 7% last year, reaching13 million hectoliters, andAmBev was well positioned to benefit from this.

In Central America, 2003 alsosaw the start of beer productionfrom our new greenfieldoperation in Guatemala.Cerveceria Rio, our joint-venturewith Central America BottlingCorporation, CabCorp,commenced operations at theend of September. The strategyis to combine AmBev’s expertisein driving beer sales withCabCorp’s strong distributionplatform. CabCorp is PepsiCo’sprimary bottler in CentralAmerica and holds the franchisefor PepsiCo’s soft drinks inGuatemala, El Salvador,Honduras and Nicaragua.

This new business model forAmBev, a greenfield beeroperation supported by a strongsoft drinks distribution platform,has proved successful in itsinitial stages. After eight monthsof operations, Cerveceria Rioalready had 22% of marketshare in Guatemala, and ourBrahva beer brand could befound at more than 80% of thecountry’s points of sale. Ourplans for Cerveceria Rio includethe roll out of beer sales to theother countries in whichCabCorp operates. In 2004Brahva has already beenintroduced to the Nicaraguanmarket, achieving roughly 8% market share in only three months.

The strong results in Guatemalaencouraged AmBev to pursue asimilar operation in Peru, whereAmBev had already announcedits intention to enter the localbeer market. In October 2003 we announced the acquisition of select production anddistribution assets fromEmbotelladora Rivera, atransaction that granted AmBevthe Pepsi franchise for theregions of Lima and NorthernPeru. Those regions representmore than 80% of the Peruvian

Argentina’sunquestionable leader.

Brahma is AmBev’sflagship brand forinternational expansion.

Patricia wassuccessfully positionedas our premium brandin Uruguay.

1 Excluding Nicaragua and Canada, which were added in 2004.

14/15

beer market, and we expect thePepsi distribution platform tofacilitate the launch of our beerbrands in the country.

AmBev entered the Ecuadorianbeer market in November 2003through its 80% acquisition ofCerveceria Suramericana. WithSuramericana’s 6% marketshare in Ecuador, AmBev gainedaccess to a state-of-the-artbrewing facility in Guayaquil,Ecuador’s largest city andprimary beer market. With acapacity close to 900,000hectoliters, this facility is able to serve up to 30% of theEcuadorian beer market andallows AmBev to introduce newbeer brands to the countrywithout investing in additionalproduction assets.

Underlying the expansion in2003 was a fundamentalelement that increasedefficiency in all of the newoperations in a short period oftime. After many greenfield andacquisition initiatives, such asthose in Argentina, Venezuela,Paraguay and Uruguay, AmBevwas able to develop a ‘servicepack’ aimed at supporting start-up operations. The pack utilizestechnology that streamlines the

integration process, allowingAmBev to assign administrativetasks from any of its operationsto its Shared Services Center inBrazil. This eliminates the needfor a full administrative structurein each new subsidiary,significantly reducing the humanresource requirements and alsoavoiding any additional fixedcost structure.

The consolidation of our current operations as well asfurther expansion will continueto be important sources ofgrowth in the future. We havealready had some success in this process in 2004. First, in February we announced the acquisition of 51% ofEmbotelladora Dominicana,PepsiCo’s anchor bottler in theCaribbean. Second, in Augustwe completed a strategicalliance with Interbrew, nowrenamed InBev.

The alliance between AmBevand InBev establishes theworld’s largest beer platform.We expect to generatesignificant synergies from bestpractices exchange betweentwo world-class brewers, whichshould be captured at bothAmBev and InBev levels.

As part of this operation AmBevwill incorporate Labatt BrewingCompany Limited, the leader inthe profitable Canadian beermarket, establishing a solidNorth American footprint. TheCompany will also gain accessto the attractive beer importssegment in the US, as well asother new and exciting markets,where we believe there is anenormous potential for thecommercialization of ourBrahma brand.

The outlook for AmBev outsideof Brazil is more exciting thanever – AmBev has madesignificant progress in growingits international business in2003. We are now well-positioned for growth in anumber of key North and SouthAmerican markets, where wewill apply the drivers that madeus a leader in Brazil in order toseize the opportunities thatthese markets present.

AmBev’s plants followthe same standardsacross the Americas.

The Pepsi franchiseplayed a key role inAmBev’s expansionin Latin America.


Operating review /people and culture

PeopleOur commitment to recruiting,training and retaining the bestpeople is a key element of one of our strategic drivers. Weknow that AmBev peoplerepresent our greatestcompetitive advantage.

Recruiting and trainingAmBev’s senior management isdirectly and actively involved inthe recruiting process and, inthe final rounds of the process,every candidate is interviewedby at least one of our topexecutives.

Our trainee program, which was originally implemented at Brahma in 1990, is thefoundation of our ability toinculcate our corporate culturein our employees. This programhas trained more than 500professionals, six of whom arecurrently Executive Officers inthe Company. 50% of themtoday hold senior strategicpositions, and 2003’s retentionrate was close to 100%. Tosupport AmBev’s internationalexpansion, our trainee program

operates in Argentina,Venezuela, Uruguay, Paraguay,and was launched in Peru in2003. This year, we screenedalmost 16,000 applications tohire 37 new trainees, 18 of themfrom the home markets of ourInternational Operations.

Reflecting the imperatives weplace on training, in 1995, wecreated the AmBev University(originally called BrahmaUniversity), a Human ResourcesDepartment task force in chargeof defining, implementing andcoordinating the Company’straining policy and guidelines. In 2003 R$ 10.9 million wasinvested in human resourcedevelopment, offering ouremployees more than 40different courses across severaldistinct disciplines. We ensurethat each of our people receivesthe preparation that they need to fulfill the requirements of their position, while at the same time optimizing careerdevelopment. These coursesoffer a broad variety of contentand formats, ranging from one-day on-site seminars to a one-year MBA Program.

Motivating and retainingTo retain our outstandingemployees, we compensatethem accordingly. To accomplishthis, they participate in a profitsharing program that is focusedon attainment of AmBev’sperformance targets. Thisensures that performance forshareholders is an employeepriority. According to ourvariable pay system, every yearthat the Company accomplishesits internal profit target, up to25% of the EVA generated isdistributed to the employeeswho have contributed. Ourmeritocracy providessubstantial motivation for our employees, as those who perform the best get themost, and those who don’taccomplish their goals do notreceive a bonus.

In 2002, the Companyoutperformed its targets, and in return R$ 112 million weredistributed to the 2,129 peoplewho contributed to the success.In 2003, however, we failed todeliver the 15% real EBITDAgrowth to which we were

Sales people leavethe daily morningmeetings energizedand motivated.

A casual and openenvironment is at the heart of our culture.

16/17

committed. Therefore, no bonuswas paid this year, except tocertain factory workers who metindustrial efficiency targets.

In addition to the compensationstructure, top performingemployees, who exemplifyAmBev’s culture and have along-term track record ofcommitment to the Company,are granted access to a StockOwnership Plan. This planenables holders to acquireAmBev’s preferred stock at a10% discount to the market, andpurchases vest over five years.This program has helped furtheralign the interests of AmBev, itsshareholders and its employees.

In the same vein, we havedeveloped sophisticatedexcellence programs tomotivate our operational unitsand our distributors. Currentlythere are three programs inplace: the PEF (for industrialunits), PEV (for our distributioncenters) and PEX (for ourdistributors). All of theseprograms are dedicated tomaximizing efficiency, and theunits compete against eachother to achieve the highestscore based on compliance witha number of procedures. The

employees of the winning unitsof each program are awardedextra compensation, and if oneunit achieves the top score morethan three times, it is granted the‘Ambassador’ title. As well asmotivating key people andpartners, the excellenceprograms effectively supportour cost reduction initiatives.

Lastly, but perhaps mostimportantly, we remain totallycommitted to employee safety.AmBev is a huge organization,working in a very dynamicindustry. Every day, more than40,000 people perform tasksdirectly or indirectly related toAmBev’s operations. From thesourcing of barley to the deliveryof beer, there are a range of risksthat we must pay close attentionto managing. We have beenworking hard to identify andcentralize knowledge regardingcauses of accidents, creating aplatform for the design andimplementation of effectiveprograms aimed at accidentprevention. AmBev is constantlyworking to improve initiatives to ensure that people are aware, informed and, mostimportantly, in compliance with the official company safetypolicies and procedures.

Culture Since its formation, AmBev has delivered strong results for its shareholders. We areproud of that track record, andwe are very clear about thefundamental contribution thatour culture makes to theseaccomplishments.

No matter how hard we haveworked or how creative we havebeen, we measure success byour ability to deliver results. Wecontinually challenge and driveourselves to set new targets andachieve greater goals.

To deliver excellence, we mustrecruit the best people and trainthem to meet a variety ofchallenges. The motivation,drive and leadership of ourpeople is our greatest asset,allowing us to transfer our goalsinto accomplishments. Ourmanagers believe that ‘handson’ guidance is the mostefficient and effective way tomotivate a workforce. Insteadof formal reports, they insist onexperiencing our operationsfirst-hand and lead by example.They are the first ones to work in the morning and the last to

leave – embracing a strict workethic and driven by a passion to produce.

We require a seriouscommitment from our people.Everyone must think and workas a business owner and takepersonal responsibility fordelivering individual, unit andcorporate goals, each of whichcomplement one another.AmBev has an uncompromisingvariable compensation systemand bonuses are only paid uponthe achievement of all the goalsestablished in this three-tieredstructure. Our people arecompensated as owners whenambitious goals are achieved.

Not everyone will fit intoAmBev’s culture; it is intenseand relentless in many respects.But this is our way forward and aunique performance advantage!

A pleasant environmenthelps to compensate forAmBev’s heavy workload.

Careful planning is thefirst step to deliveringour targets.

Company’s by-law

FiscalCouncilFiscal

Council

AuditCommittee

ExecutiveCommittee

FinanceCommittee

ShareholdersShareholders

GSMGSM

Board of DirectorsBoard of Directors AdvisoryCommittee

AdvisoryCommittee

ExecutiveOfficers

ExecutiveOfficers

Corporate governance /improving practices

CommunicationWe are heavily committed topresenting and discussing withthe market a detailed analysis of our quarterly results. We areconcerned that peopleunderstand the fundamentals of our business and how themain drivers lead to the resultswe present. To achieve this weconduct quarterly conferencecalls following the publication of our earnings releases; wealso conduct roadshows andhundreds of meetings withanalysts and investors every year.

Decision-makingand control processesThe definition of AmBev’s long-term strategy, as well as themaintenance and improvementof current competitiveness,is the responsibility of theBoard of Directors, supportedby a number of committeesand councils.

Board of DirectorsThe Board of Directors has ninemembers, seven of whom wereelected for a three-year term in1999 at a General Shareholder’sMeeting and, in 2002, had theirmandates extended until 2005.The remaining Board members,Diego Miguens and MagimRodriguez, took their seats in April 2003 and February 2004respectively. Board membersuse their sound knowledge of the business to ensure thatAmBev reaches its long-termgoals while preservingcompetitiveness. Also, theBoard of Directors ensures that AmBev’s corporate valuesare practiced and disseminated.

Day-to-day managementactivities are performed byAmBev’s executive officers, who are elected by the Boardof Directors for a two-year term.

The posts of Chairman of theBoard of Directors and ChiefExecutive Officer are separateand are held by different people.

Fiscal CouncilAmBev has a permanent FiscalCouncil, which supervises themanagement’s actions,analyzes and gives opinions onAmBev’s financial statements,as well as performing otherduties as determined byBrazilian Corporate Law.Currently, the members of theFiscal Council hold meetings atleast on a quarterly basis.

Members of the Fiscal Councilare appointed every year at theGeneral Shareholders’ Meeting.None of them combines thisposition with a seat on the Boardof Directors, the ExecutiveCommittee or a seniormanagement position inthe Company.

Members:• Antonio Luiz Benevides Xavier• Everardo de Almeida Maciel• José Fiorita

Advisory CouncilThe General Shareholders’Meeting held on April 25, 2003included a provision in the by-laws authorizing the Board ofDirectors to create an AdvisoryCouncil, formed by threeindependent membersappointed by the Board ofDirectors every three years or incase of vacancy. The AdvisoryCouncil’s role is:

• to issue opinions for theGeneral Shareholders’Meeting regarding: theconducting of business andthe compliance of legalobligations by the Company’ssenior management,discussions on the seniormanagement and on theCompany’s analysis report,and any proposal to besubmitted by the Board ofDirectors to the GeneralShareholders’ Meetings; and

• to present recommendationsconcerning new businessesand general issues submittedfor their consideration and advice.

The mandate of currentmembers of the AdvisoryCouncil expires in 2006.

Corporate governanceis a critical matter relatedto public companies.Capital market investorsmust be assured thatorganizations where theyhold stakes are managedto maximize firm value.AmBev cares about this.We believe that suchtransparency is achievedthrough the coordinationof three basic principles:

• An efficient bilateralcommunication channelbetween the Company and the market

• Appropriate decision-making and controlprocesses

• Senior management, Board members andcounselors’ experience and competence


18/19

Executive CommitteeThe Executive Committee is themain link between the policiesand decisions taken by theBoard of Directors and AmBev’smanagement team. The explicitresponsibilities of the ExecutiveCommittee are:

• to present medium-termplanning proposals to the Board of Directors, with their respectivepluriannual projects;

• to propose annualperformance targets for the Company, as well as thenecessary budgets to reachthe projected goals; and

• to monitor the Company’spositioning by analysis of results and marketdevelopments.

The Executive Committee is alsoresponsible for the interests ofAmBev’s employees, and itsmembers are involved inrecruiting programs, variablecompensation policies and inthe dissemination of theCompany’s culture.

The Executive Committee holdsat least eight meetings per year,in which are discussed, amongother matters: the evolution of the Company’s results, thebeverage market, integratedplanning, goals, budget, people, investment planning,compensation policy, andpricing policy.

The members of the ExecutiveCommittee are also members ofthe Board of Directors. They areappointed according to theirstrong experience in thebeverage business.

Members:• Marcel Herrmann Telles• Victório Carlos de Marchi• Carlos Alberto da Veiga

Sicupira

Audit CommitteeThe Audit Committee acts onbehalf of the Board of Directorsand is responsible formonitoring the integrity andaccuracy of the Company’sfinancial statements and theperformance of internal andexternal auditors.

Moreover, it oversees theCompany’s compliance with the legislation in relation to its operations, themanagement of its internalcontrols and the appointment of external auditors.

Throughout the year, the AuditCommittee holds quarterlymeetings, in which arediscussed, among othermatters: the Company’sfinancial statements, internalaudit, fiscal risks andcompliance with the Sarbanes-Oxley Act.

The members of the AuditCommittee are also members of the Board of Directors. They are selected according to their knowledge of finance and accounting, and alsotheir experience in thebeverage business.

Members:• Victório Carlos de Marchi• Jorge Paulo Lemann• José Heitor Attílio Gracioso

Finance CommitteeThe Finance Committeeanalyzes and monitors theCompany’s annual investmentplan and ensures its execution.This Committee evaluatesopportunities for mergers and acquisitions beforepresenting them to the Board of Directors. It is also part of the Finance Committee’sresponsibilities to evaluate the most appropriate capitalstructure for the Company,aiming at maximizing theEconomic Value Added (EVA).

Throughout the year, theFinance Committee holdsat least three meetings, in whichare discussed, among othermatters: budget, financial riskanalysis, treasury policy,and merger and acquisitionopportunities.

The members of the FinanceCommittee are also members of the Board of Directors. They are appointed according to their knowledge of financeand their experience in thebeverage business.

Members:• Marcel Herrmann Telles• Carlos Alberto da Veiga

Sicupira• Roberto Moses Thompson

Motta

Members of the Board ofDirectors and Executive OfficersThe most appropriate indicationof the abilities of AmBev’sDirectors and Executive Officersis the Company’s successfultrack record. Their experienceand competence are directlytranslated into the Company’sstrong results.

Also important to mention is AmBev’s stock ownershipplan. As top and key middlemanagement becomecommitted to a long-terminvestment in AmBev non votingshares, their interests areautomatically aligned withAmBev shareholders.


CSR /corporate social responsibility

Formed by companies whose evolution has been part of Brazilian history formore than a century, AmBevhas learned the importance of a serious commitmenttowards the improvement of the quality of life in thecommunities where itoperates. During 2003 weworked to a strategy built oncorporate responsibility andethical principles, which isfocused on three key pillars:

• Responsible Consumption of Alcohol

• Responsibility Towardsthe Community

• EnvironmentalResponsibility

Responsible consumption of alcohol As one of the largest beveragecompanies in the world,responsible consumption ofalcohol is one of the mostimportant issues in ourcorporate responsibility policy.International experience andinternal research conducted bythe Company show that theutilization of supervisingmeasures, by Government,associated with educational andawareness campaigns, are thebest way to achieve satisfactoryand effective results.

Based on that research,we have been working ontwo main programs. The first of them is named AmBev andResponsible Consumption, andit is aimed at our clients, pointsof sale, and final consumers,including several actions topromote the responsibleconsumption of our beerbrands. The two main issuestackled by this program are theincompatibility of drinking anddriving and the prevention ofalcohol consumption by peopleunder 18 years old, the legal agefor drinking in Brazil. Thesecond program is targetedinternally on our marketingdepartment, the advertising and

events agencies that we hire andour distributors. It involves thedevelopment of a ResponsibleMarketing Procedures Manual,which guides the preparationand execution of marketingevents, assuring the compliancewith procedures dedicatedto responsible consumption and safety.

Responsibility towards the communityAmBev runs a number ofcontinuous initiatives dedicatedto improving the social andeconomic situation of thecommunities in which weoperate. Some of theseinitiatives include:

Recycling LibraryAn engagement in partnership with the non-governmentalorganization Ecomarapendi,dedicated to the development of recycling activities. We havedeveloped one of the largestinformation centers dedicatedto this matter in Latin America.Furthermore, we have alsoestablished a supply system toartists who work with waste astheir primary raw material, andcreated a special program,Solidarity Recycling, devoted to assisting cooperatives ofwaste collectors.

Maués ProjectAn initiative developed in thecity of Maués, located in theAmazon region, which is thegreatest source of the guaranáfruit used by AmBev. The purposeof this project is the economic,social and environmentaldevelopment of the region, basedon the improvement of guaranácultivation techniques. Inpartnership with the localcity hall, Embrapa (Brazil’s leadingagriculture research center) andIDAM (the Institute for theDevelopment of the Amazonregion), the project providestechnical assistance to localfarmers and supports researchto improve cultivation productivity.

Education ProgramsAmBev acknowledges therelevance of education as afundamental component ofsustainable development. Wesupport different initiativesdedicated to improving access toschools and to reducing illiteracy.AmBev sponsors the work ofSolidaryEducation, a non-governmental organization, in four cities in the North andNortheast regions of Brazil, locatedin critical areas where illiteracylevels are higher than 21%. Anotherinitiative fully supports the WalterBelian Technical School, located in

Responsibleconsumption isfundamental for thesustainability of thebeverage industry.

Skol sponsoreda broad campaigndedicated to theprevention of drinkingand driving.

20/21

the city of São Paulo, in order toprovide free education for thechildren of our employees. Thisis achieved through the Antonioand Helena ZerennerFoundation.

Environmental responsibilityOne of AmBev’s beliefs is todevelop activities, products and services that involve a pro-active attitude to environmentalpreservation and contribute tothe expansion of environmentalawareness. We have embracedthe principles of sustainabledevelopment, convinced of the imperative to combinedevelopment with sustainability.

In the last five years, R$ 200million were invested in ourenvironmental managementpolicy. Besides reaching thegoal of unifying and maximizingAmBev’s environmental actions,this process also led tosignificant cost reductionsthrough programs designed tominimize losses, reutilize waste,and save energy and water.

In a pioneer action, we haveimplemented an EnvironmentalManagement System in all our plants, in accordance withISO 14001 standards.

Clean technologiesWe have made a clearcommitment to promotesustainable development andthe search for eco-efficiency,which means producing theminimum impact on theenvironment, often exceedinglegal requirements. We useclean technologies – includingmachinery that leads to lesswaste and no toxic substances,chemical by-products or heavymetals – and constantlyresearch new technologies,production processes and raw materials.

In numbers, these effortsrepresent the economy of:

• 9 million m3 per year in waterconsumption;

• 10,000 tons of glass per year,equivalent to approximately 42 million bottles;

• 600 tons of PET, equivalent to14 million soft drink bottles;

• 1,800 tons of aluminum,equivalent to 12 million cans.

Waste recycling Another success of ourenvironmental policy is therecycling of industrialproduction waste. Currently, this index is at 95% and our goal is to reach 100%. In someplants it is already at 99%,thanks to the efficiency of theselective collection system,rigorous enforcement of therules established in AmBev’sEnvironmental ProceduresManual and specific programs,such as the destination of wastefor the manufacturing of animalfood, fertilizers and packaging.

Malt husks, for instance, can beused, with great results, as partof the diet of dairy cattle. Thevolume discarded at AmBev’splants is enough to feed 720,000head, which in turn are capableof producing up to 3 million litersof milk per day. The labelsleftovers, originated from thecleaning of returnable bottles,are specially prepared to berecycled into cardboard and egg boxes.

Full of nutrients, by-products of the waterfiltering process in compoundplants are turned into fertilizer.

This reutilization cycle producesvaluable benefits to theenvironment, to communitiesand to the Company itself.AmBev contributes to theprotection of the environmentand benefits the economy – bycreating direct and indirect jobs– as an intelligent alternative to simply dumping waste.

AmBev supports the guaranácultivation in the Amazonthrough the Maués Project,dedicated to the socialdevelopment of the region.


The team /management

Board of Directors

Marcel Herrmann TellesCo-Chairman

Victorio Carlos De MarchiCo-Chairman

Carlos Alberto da Veiga Sicupira

Diego Fernando Miguens Bemberg

Jorge Paulo Lemann

José Heitor Attílio Gracioso

Magim Rodriguez Junior

Roberto Herbster Gusmão

Vicente Falconi Campos

Roberto Moses Thompson MottaAlternate

Fersen Lamas LambranhoAlternate

01 /

08 /

02 / 04 / 05 /03 / 06 / 07 /

09 / 10/ 13 /12 /11 /

Fiscal Council

Antonio Luiz Benevides Xavier

Everardo de Almeida Maciel

José Fiorita

Executive Directors

01 / Carlos Alves de BritoChief Executive Officer

02 / Bernando Pinto PaivaLogistics Executive Officer

03 / Cláudio Bráz FerroIndustrial Executive Officer

04 / Claudio GarciaShared Services andInformation TechnologyExecutive Officer

05 / João M. Castro NevesSoft Drinks Executive Officer

06 / José Adilson MiguelThird-Party DistributionExecutive Officer

07 / Juan Manuel Vergara GalvisInternational OperationsExecutive Officer

08 / Luis Felipe Pedreira Dutra LeiteChief Financial and InvestorRelations Officer

09 / Luiz Fernando EdmondSales and ManagementExecutive Officer

10 / Miguel Nuno da Mata PatrícioMarketing Executive Officer

11 / Milton SeligmanCorporate RelationsExecutive Officer

12 / Pedro de Abreu MarianiGeneral Counsel

13 / Ricardo WuerkertPeople and ManagementExecutive Officer

<None>/2322/23

Financial section /contents

24/ Management’s discussion and analysis

35/ Report of the independent auditors

36/ Balance sheet

38/ Income statement

40/ Statement of changes in shareholders’ equity of the parent company

41/ Statement of changes in financial position

43/ Notes to the financial statements

70/ Supplementary information

72/ Investor information

AmBev /Annual Report 2003

Management’s discussion and analysis

Consolidated financial highlights(in R$ million, except volumes, percentages and per share data) 2003 2002 Change %

Sales volume (000 hl) (1) 84,310 81,590 3.3%Net revenue per hectoliter – R$/hl 103.0 89.8 14.7%Net revenue 8,683.8 7,325.3 18.5%

Gross profit 4,639.6 3,983.6 16.5%Gross margin (%) 53.4% 54.4%

EBIT 2,306.1 2,050.9 12.4%EBIT margin (%) 26.6% 28.0%

EBITDA 3,072.4 2,710.4 13.4%EBITDA margin (%) 35.4% 37.0%

Net income 1,411.6 1,510.3 -6.5%EPS – R$/000 shares (2) 37.23 39.48 -5.7%

Market capitalization 26,392 19,686 34.1%Return on equity 32% 37%

(1) Sales volumes include beer, CSD and Nanc. Quinsa consolidation according to the Company’s proportional stake in each quarter.

(2) Based on the number of shares outstanding, excluding shares in treasury, at the end of each year.

Values may not add up due to rounding.

24/25

Financial highlights by business segment (in R$ million, except volumes, percentages and per share data) 2003 2002

Brazil International Brazil International

Sales volume (000 hl) (1) 74,058 10,252 77,650 3,939 Net revenue 7,637.7 1,046.1 6,929.0 396.3 Cost of goods sold (3,509.4) (534.7) (3,127.6) (214.1)

Gross profit 4,128.3 511.3 3,801.4 182.2 Gross margin (%) 54.1% 48.9% 54.9% 46.0%

Sales, general and administrative expenses (1,957.5) (376.0) (1,767.5) (165.2)

EBIT 2,170.7 135.3 2,033.9 17.0 EBIT margin (%) 28.4% 12.9% 29.4% 4.3%

Total depreciation 644.8 121.5 635.9 23.6

EBITDA 2,815.6 256.8 2,669.7 40.6 EBITDA margin (%) 36.9% 24.6% 38.5% 10.3%

(1) Sales volumes include beer, CSD and Nanc. Quinsa consolidation according to the Company’s proportional stake in each quarter.


Financial highlights by product segment(in R$ million, except volumes, percentages and per share data) 2003 2002

Beer CSD + Nanc Others Beer CSD + Nanc Others

Sales volume (000 hl) 55,260 18,798 NA 58,010 19,641 NA Net revenue per hectoliter – R$/hl 110.7 70.9 NA 95.6 62.6 NA

Net revenues 6,114.6 1,332.1 190.9 5,546.4 1,228.9 153.7 Cost of goods sold (2,503.6) (887.3) (118.6) (2,237.1) (809.0) (81.5)

Gross profit 3,611.0 444.9 72.3 3,309.3 419.9 72.2 Gross margin (%) 59.1% 33.4% 37.9% 59.7% 34.2% 47.0%

Sales, general, administrative expenses (1,624.1) (330.8) (2.6) (1,433.4) (311.7) (22.4)

EBIT 1,987.0 114.0 69.7 1,875.9 108.2 49.8EBIT margin (%) 32.5% 8.6% 36.5% 33.8% 8.8% 32.4%

Total depreciation 513.0 131.8 – 549.1 80.5 6.2

EBITDA 2,500.0 245.9 69.7 2,425.0 188.7 56.0 EBITDA margin (%) 40.9% 18.5% 36.5% 43.7% 15.4% 36.5%




Net revenuesNet revenues increased 18.5% toR$ 8,683.8 million in 2003 (2002:R$ 7,325.3 million). This increase reflectsthe successful performance of ourBrazilian Operations (up 10.2%), whichinclude the beer segment (up10.2%), soft drinks (CSD) and non-alcoholic non-carbonated beverages (Nanc) (up 8.4%)and others – malt and by-products (up24.2%), as well as our significantexpansion abroad during 2003, which led to a 164% increase in revenues for the International Operations.

Net revenues – Brazilian OperationsNet revenues for the Brazilian Operationsamounted to R$ 7,637.7 million, up 10.2%(2002: R$ 6,929.0 million). The continuousfocus on our revenue managementstrategy, increase of direct distribution,best practices for POS execution, and ourpolicy to keep consumer prices stable inreal terms, were the main levers to achievethis result.

BeerDue to the combined impact of theadverse economic scenario (decreasingdisposable income and increasingunemployment rates), unfavorableweather and a more competitiveenvironment, beer volumes decreased by 4.7% in 2003. Despite this decrease in volumes, net revenues grew by 10.2% in 2003, totaling R$ 6,114.6 million. The good performance of the segment reflectsthe 15.7% increase in net revenues perhectoliter. Although we maintain ourstrategic commitment to keep consumerprices stable in real terms, we managed to leverage revenue per hectoliter throughour revenue management strategy,evidenced by the greater participation of Skol in our sales mix (56.4% in 2003,55.0% in 2002), as well as by the increaseof direct distribution as a percentage oftotal volume of beer sold (32.4% in 2003,27.1% in 2002).

Other initiatives, such as: (i) the launch of new products (Bohemia Dark, Bohemia Weiss and Brahma Light); (ii) the re-launch of Original in the super-premium segment; (iii) betterstandardization and execution at POS;and (iv) the increase in the participation of multi-brand distributors, also helped to increase net sales per hectoliter.

In 2003, the Beer Brazil segmentaccounted for 70.4% of AmBev’sconsolidated net revenues, 530 bps less than in 2002 (75.7%).

CSD and NancFollowing our strategy to focus on our core portfolio – Guaraná Antarctica, Pepsi and Gatorade – we reached netsales of R$1,332.1 million in 2003, up 8.4% (2002: R$1,228.9 million).

Net sales for the CSD segment increased9.9%, totaling R$1,205.1 million, (2002: R$1,096.3 million). The introduction of thenew Pepsi Twist 2 liter PET presentation,and the focus on Guaraná Antarctica,allowed for an increase of the participationof our core portfolio (Guaraná Antarcticaand Pepsi in the case of CSD) in our salesmix from 78.2% to 84.7% and an increaseof 5.3% in CSD core volumes during theyear, compared to a 2.8% decrease in ourtotal CSD volumes and a 3.3% contractionof the Brazilian CSD market. Net revenues per hectoliter increased by 13.1% in 2003,reaching R$ 68.1/hl. The greater presence of our core brands in the sales mix, in addition to the evolution of directdistribution (49.2% of volume in 2003compared to 48.0% in 2002), and ourstrategy to realign prices, were the mainfactors leading to increased revenues perhectoliter. On the other hand, a significantincrease in the participation of PETpresentation in our packaging mix, from 65.6% in 2002 to 69.6% in 2003, had a negative impact in net revenues per hectoliter.

In the Nanc segment, despite the decreasein net sales in 2003 of 4.X%, our strategyto focus on high value added products,especially Gatorade, allowed for anincrease in net sales per hectoliter of 24.X%,improving the business’s profitability.

In the year, the CSD and Nanc segmentaccounted for 15.3% of AmBev’sconsolidated net revenues, slightly below2002 (16.8%).

OthersDue to a higher volume of malt sold to thirdparties and greater commercialization ofby-products, net revenues for the segmentincreased by 24.2%, totaling R$ 190.9million in 2003.

Net revenues – InternationalOperations In 2003, International Operationscontributed net revenues of R$ 1,046.1million, 164% above 2002 (R$ 396.3million). Through the combination ofstrategic alliances, joint venture, greenfieldprojects and acquisitions, AmBev hassignificantly expanded its presence in Latin America. In February 2003, we consolidated our strategic alliance with Quinsa, which allowed us to expandour presence and leadership in SouthAmerica. In September, we beganoperating in Guatemala through theconstruction of a beer plant having aspartner a local Pepsi bottler, CabCorp. In November, we announced theacquisition of some assets fromEmbotelladora Rivera in Peru, the mainPepsi bottler for the Northern region of the country and Lima. Lastly, inDecember, we acquired the second-largest brewery in Ecuador.

Net revenues per hectoliter, for bothinternational beer and CSD, wereR$ 102.0/hl.

In the year, the international segmentaccounted for 12.0% of AmBev’sconsolidated net revenues, significantlyhigher than the 5.4% reported in 2002.

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Cost of goods sold (COGS)COGS increased 21% in 2003, reachingR$ 4,044.2 million, (2002: R$ 3,341.7million). Our dollar-linked variable costs,such as aluminum cans, malt, hops, sugarand PET resin, remained attached to afixed exchange rate (through currencyhedging transactions) in a similar way to 2002. However, unlike 2002, when the strong currency devaluationconcentrated mainly in the second half of the year allowed for a R$ 345.7 million-gain, our hedging transactions in 2003increased our costs by R$ 99.0 million, due to the Brazilian real appreciationduring the year.

Excluding the impact of the hedgingtransactions on both periods, COGSwould have been only 7.0% higher than 2002. Additionally, eliminating the exchange rate impact, which resultedin a R$ 161.1 million loss in 2003 against2002 (average exchange rate in 2003 was R$ 3.08/US$ against R$ 2.93/US$),the increase in COGS would have beenonly 2.5%.

The following table shows the breakdown of total cost, and the COGS per hectoliter:

Cost of goods sold – BrazilianOperationsCOGS for the Brazilian Operationsincreased 12.2% totaling R$ 3,509.4million (2002: R$ 3,127.6 million). Aspreviously mentioned, excluding thehedging transactions’ effect and theimpact of the exchange rate on both years, COGS would have decreased by 6.2% in 2003.

COGS per hectoliter was R$ 47.4/hl, 17.6% higher than the R$ 40.3/hl recordedin 2002. Excluding the impact of thehedging transactions and of the exchange rate, COGS per hectoliter in 2003 would have decreased by 1.6%,demonstrating the Company’s efforts to reduce costs. Regarding those efforts, the following stand out during the year: (i) development of alternative raw materialand packaging suppliers; (ii) tollingoperations; (iii) packaging engineering(highlighting the new 2 liter PET bottle); (iv) greater process efficiency, reducing losses and optimizing the workforce; and (v) reduction of fixed costs through thecentralization of some activities.

Variable costs, comprised mainly of rawmaterial (malt, hop, corn syrup, sugar andconcentrates) and packaging (aluminumcans, PET bottles and disposable glassbottles), represented 72.6% and 69.6% of total COGS for the Brazilian Operationsin 2003 and 2002, respectively.

Cost of goods sold – Brazilian Operations – BeerCOGS for the segment reached R$ 2,503.6 million in 2003, up 11.9%(2002: R$ 2,237.1 million). Excluding thehedging transactions’ effect and theimpact of the exchange rate on both years,the COGS of the beer segment wouldhave been reduced by 6.8%.

In terms of hectoliters, COGS for the beersegment was R$ 45.3/hl, 17.5% higherthan in 2002 (R$ 38.6/hl). Again, excludingthe hedging transactions’ effect and theimpact of the exchange rate on both years, the cost per hectoliter would havedecreased by 2.1%. Due to a higherpresence of returnable presentations in the sales mix, the efforts to increase theefficiency at the production lines and thereduction of losses, we were able to netout the negative impact of unfavorableprice changes of the main commodities,specially malt (due to 2003’s barley cropunder-expectations), and the decrease in volumes throughout the second half of the year.

Cost breakdown2003 2002 2003 2002

(in R$ million) (in R$ million) (R$/hl) (R$/hl) Change %

AmBev BrazilRaw material 998.9 794.2 13.5 10.2 31.9%Packaging 1,548.9 1,383.1 20.9 17.8 17.4%Labor 195.4 212.3 2.6 2.7 -3.5%Depreciation 272.0 316.9 3.7 4.1 -10.0%Others 494.2 421.2 6.7 5.4 23.0%Total – AmBev Brazil 3,509.4 3,127.7 47.4 40.3 17.6%International Operations 534.7 561.1 52.2 59.5 -12.4%Total – AmBev Consolidated 4,044.1 3,688.8 48.0 42.4 13.2%




Cost of goods sold – BrazilianOperations – CSD and NancCOGS for the CSD and Nanc segmentreached R$ 887.3 million in 2003, up 9.7% (2002: R$ 809.0 million). In terms of hectoliters, COGS for the segment was R$ 47.2/hl, 14.6% higher than the R$ 41.2/hl reported in 2002.

Considering only the CSD segmentperformance, COGS was R$ 785.3million, a 12.4% increase against 2002.Excluding the hedging transactions’ effectand the impact of the exchange rate on both years, the cost of operations would have decreased by 9.2%. In termsof hectoliters, cost of goods sold was R$ 44.4/hl, 15.7% above 2002. Excluding the hedging transactions’ effect and theimpact of the exchange rate on both years,cost per hectoliter would have been 6.5%lower. Again, such result reflects our efforts to increase efficiency and reduce losses atthe production line, as well as a morefavorable packaging mix in terms of cost (PET bottles represented 69.6% in 2003against 65.6% in 2002).

Cost of goods sold – InternationalOperationsIn 2003, COGS for the InternationalOperations increased 150% to R$ 534.7 million (2002: R$ 214.1 million), as a result of the expansion of ouroperations. However, the positiveevolution of the gross margin (48.9% in 2003 compared to 46.0% in 2002) and the reductions of COGS per hectoliter(from R$ 54.3/hl in 2002 to R$ 52.2/hl in 2003) reflect the initial capture ofsynergies between our pre-existingoperations (Argentina, Uruguay andParaguay) and Quinsa, as well as theeconomic recovery in Argentina after the economic crisis in 2002.

Gross profitAmBev’s consolidated gross profit rose16.5% to R$ 4,639.6 million in 2003(2002: R$ 3,983.6 million). Excluding thepositive impact of the hedgingtransactions on the dollar-linked variablecosts in 2002 (R$ 345.7 million) and thenegative impact in 2003 (R$ 99.0 million),gross profit would have increased by over30%. In 2003 gross margin was 53.4%,slightly below the 54.4% recorded in 2002.Once again, excluding the losses fromhedging transactions associated with ourdollar-linked variable costs, gross marginin 2003 would have been 54.6%.

Sales and marketing expensesSales and marketing expenses reachedR$ 847.1 million in 2003, up 23.3% (2002: R$ 687.2 million). This increaseis fully explained by the expansion of our International Operations, since sales and marketing expenses for theBrazilian Operations remained stable in 2003, totaling R$ 627.9 million (2002: R$ 628.5 million).

Adhering to our strategic commitment, we maintained our policy to reduce fixedsales expenses as much as possible, in order to finance higher marketingexpenditures, which we consider essentialfor the Company.

Direct distribution expenses Consolidated direct distribution expensesreached R$ 648.6 million in 2003, anincrease of 20.7% (2002: R$ 537.4 million).Going forward with our strategy toincrease volume sold through our directdistribution network, the total volumedistributed directly reached 36.9% for theBrazilian Operations in 2003, significantlyhigher than the 32.6% reported in 2002.

Direct distribution expenses per hectoliter for the Brazilian Operations were R$ 22.2/hl, 18.4% above the previousyear. This increase is mainly due to theincrease of freight prices resulting fromhigher fuel costs in 2003, and the increasein the number of distribution centers. Thecombination of lower volumes, especiallyin the second half of the year, with moredistribution centers resulted in higher fixedcosts per hectoliter.

Regarding the International Operations,the volume commercialized through directdistribution in Venezuela represented84.4% of total volumes in that country, 230 basis points higher than in 2002.Direct distribution expenses per hectoliteramounted to R$ 39.4/hl, 6.4% above theprevious year.

Administrative expensesConsolidated administrative expensesamounted to R$ 417.9 million in 2003,11.9% above 2002. The Company’sinternational expansion was the maincause of the increase in administrativeexpenses.

Regarding Brazilian Operations,administrative expenses amounted to R$ 351.6 million, slightly above 2002(R$ 346.4 million). The implementation of new regional offices in addition to one-time expenses related to informationtechnology net out the gains obtainedfrom our initiatives to reduce fixed costs.

Regarding International Operations, AmBev’s presence in several new marketsand its economic stake in Quinsa,impacted international administrativeexpenses, which amounted to R$ 66.3million in 2003.

Depreciation and amortizationConsolidated depreciation andamortization increased 25.5% in 2003,reaching R$ 420.0 million (2002: R$ 334.6million). Depreciation and amortization for the Brazilian Operations totaled R$ 372.9 million in 2003, 16.9% higherthan in 2002 (R$ 319.0 million). Thisincrease is due to continuous investmentin our cooler program, direct distributionexpansion and investments in IT for oursales team (palm tops).

Regarding our International Operations,depreciation and amortization expensesaccounted for R$ 47.1 million, 202.3%higher than the R$ 15.6 million in 2002.

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EBITIn 2003, AmBev’s consolidated EBIT reached R$ 2,306.1 million, up 12.4% (2002: R$ 2,050.9 million).

Brazilian Operations accounted for R$ 2,170.7 million in 2003, or 94.1% ofconsolidated EBIT, 6.7% above 2002. On a per hectoliter basis, Brazilian OperationsEBIT reached R$ 29.3/hl, 11.9% higher than the R$ 26.2/hl recorded in 2002. This performance reflects the positiveeffects of our revenue managementinitiatives and efforts to reduce costs andfixed expenses. In spite of these positiveeffects, the negative impact of our hedgeagainst dollar-linked variable costs, lowervolumes and higher direct distributionexpenses partially offset the gains.

International Operations recorded a R$ 135.3 million EBIT in 2003,representing 5.9% of consolidated EBIT,and nearly eight times greater than 2002EBIT. The expansion of our InternationalOperations, in addition to the recovery ofthe Argentinean macroeconomic scenario,has driven these results.

EBITDAConsolidated EBITDA in 2003 totaled R$ 3,072.4 million, up 13.4% (2002: R$ 2,710.4 million).

EBITDA – Brazilian OperationsEBITDA for the Brazilian Operationsrepresented 91.6% of consolidatedEBITDA in 2003, an increase of 5.5% inrelation to R$ 2,669.7 million in 2002(98.5% of consolidated EBITDA).

BeerBeer Brazil segment EBITDA presentedgrowth of 3.1% in 2003, reaching R$ 2.50billion (2002: R$ 2.43 billion). The impact ofour hedge policy for dollar-linked variablecosts, in addition to higher sales andmarketing expenses, due to the morecompetitive scenario in the second half of the year, have almost completely offset the results of our revenue management and cost-cutting initiatives.

CSD and NancThe focus on our core portfolio, the launch of Pepsi Twist 2 liter PET presentation,lower prices for some of our raw materialsand lower sales and marketing expenses, were the main drivers to spur profitability.CSD and Nanc EBITDA grew 30.3%,reaching R$ 245.9 million (an 18.5%EBITDA margin). On a per hectoliter basis, growth was even more impressive:36.1% – R$ 13.1/hl in 2003 compared to R$ 9.6/hl in 2002.

EBITDA – International OperationsIn 2003, EBITDA for the InternationalOperations reached R$ 256.8 million,representing a remarkable growth of532% when compared to the R$ 40.6million EBITDA recorded in 2002. Theexpansion of our International Operations,together with the capture of the firstsynergies and early implementation of bestpractices following our strategic alliancewith Quinsa, and the improvement ofArgentinean economic scenario were thekey drivers of international EBITDA growth.In 2003, the International Operationsaccounted for 8.4% of consolidatedEBITDA, compared to only 1.5% in 2002.

Provisions for contingenciesNet provisions for contingencies totaledR$ 187.9 million in 2003 (2002: R$ 123.7million). Brazilian Operations accounted forR$231.8 million in provisions, comprisedof: (i) labor disputes of R$104.9 million; (ii) sales tax (ICMS) provisions regarding theacquisition of PP&E of R$ 77.4 million; (iii) legal disputes on the applicability ofPIS/COFINS taxes over financial revenues of R$ 35.2 million; and (iv) provisionsregarding the cancellation of contractsbetween the Company and certaindistributors of R$ 9.7 million. Various minoritems account for the remaining balance.

International Operations accounted for a R$ 43.8 million reversal of provisions. This comprised a reversal of a R$ 51.4 million provision regarding the operations of our strategic alliance with Quinsa and a R$ 7.6 million provision from ouroperations in Venezuela.

Other net operating revenues(expenses)Other consolidated net operatingexpenses amounted to R$ 240.1 million in the year, compared to net operatingrevenues of R$ 199.4 million in 2002.Expenses resulting from BrazilianOperations totaled R$ 230.7 millionand were constituted as follows: (i)effect of the real appreciation overinvestments held by the Company abroad of R$ 214.5 million; (ii) goodwillamortization – Antarctica, Astra, Cympay,Salus, Quinsa and others of R$ 195.5million; and (iii) re-evaluation of theCompany’s actuarial liabilities, pursuant to the Brazilian Corporate Law based on CVM Resolution # 371 amounting to R$ 16.5 million. Revenues coming from fiscal incentives made throughAmBev’s subsidiaries (mainly CBB) of R$ 175.9 million and from gains resultingfrom VAT advanced payment enjoyingdiscounts of R$ 16.6 million contributed to the reduction in net operating expensesof Brazilian Operations.

International Operations, on the other hand, added R$ 9.4 million to net operating expenses, which mostly resulted from Quinsa.



Financial revenues and expensesAmBev’s debt exposure to exchange rate volatility continues to be fully hedgedthrough investments in dollar-linkedassets, as well as through the use ofswaps and derivatives. Pursuant to thedispositions of Brazilian Corporate Law,liabilities must be accounted for based on their initial value in addition to accruedinterest as opposed to being based onmarket value. Assets, on the other hand,must be accounted for based on the lesser of their initial value in addition to accruedinterest, and their market value (the initialvalue in addition to accrued interest iscalculated based on the terms of theagreement between the Company and its counterpart). As a result, the volatility of both the Real/US dollar exchange rate and the interest rate may causesignificant variations in financial revenuesand expenses.

Financial revenues in 2003 reached R$ 601.8 million, significantly lower than in the previous year (R$ 2,530.3 million).Brazilian Operations contributed withfinancial revenues of R$ 554.5 million in the period, against R$ 2,506.7 millionreported in 2002. The appreciation of the Real during 2003, as opposed to its significant devaluation in 2002, was the main factor that impacted financialrevenues resulting from BrazilianOperations. In 2003, we realized R$ 133.1million in exchange losses over foreigncurrency denominated assets, while in2002 we had realized gains of over R$1,007.5 million. The appreciation offinancial assets due to the reduction of risk aversion in the world market, as well as the increase of liquidity positivelycontributed to financial revenues. In theyear, we accounted for provisions of R$ 205.9 million referring to theadjustment of financial assets’ marketvalue according to the value of thetheoretical curve.

Financial expenses in 2003 amounted to R$ 508.7 million, significantly lower than in 2002 (R$ 3,277.3 million). Financialexpenses for Brazilian Operations totaledR$ 446.7 million, against R$ 3,135.1 millionreported in 2002. Once again, theexchange rate effect was the main reasonfor the difference between the periods. In 2002, the currency devaluationnegatively affected the value in Reais of our foreign currency denominated debt.In 2003, the Real appreciation against theUS dollar caused a positive effect on thevalue in Reais of the foreign currencydenominated debt.

As of December 31, 2003 ourconsolidated net debt amounted to R$ 3,187.5 million, while the consolidatedEBITDA in the last 12 months reached R$ 3,072.4 million, confirming our strongcredit profile through the indicators: netdebt/EBITDA = 1.0x; and EBITDA/netdebt plus interests = 13.5x.

Net non-operating revenues(expenses)Consolidated net non-operating expensesamounted to R$ 100.7 million in 2003(2002: R$ 72.2 million). BrazilianOperations had non-operating expensesof R$ 80.4 million in 2003. Expensesamounting to R$ 47.9 million referred toprovisions of losses related to assets andreal estate for sale, and another R$ 32.6million referred to the net effect of Quinsa’sshare repurchase programs which,despite increasing our stake in thecompany, had a negative effect onQuinsa’s shareholders’ equity, since itsshares are traded above their book value.

International Operations had non-operating expenses of R$ 20.2 million.

Income tax and social contributionIncome tax and social contributionprovisions in 2003 amounted to R$ 426.1million. If provisions for income tax andsocial contributions had been calculated at the nominal rate of 34%, the amount in 2003 would have reached R$ 625.8million. The provision for income tax waspositively affected by: (i) provision forinterest on equity of R$ 152.7 million; (ii)fiscal losses in previous years of R$ 147.9million; (iii) equity gains in subsidiaries of

R$ 59.8 million; and (iv) write-off of Astra’sgoodwill in CBB’s balance sheet of R$ 37.1million. Results reported by subsidiariesabroad not subject to taxation amountedto R$ 182.9 million and other itemsnegatively affected the provision.

Profit sharing to employees andmanagementIn 2003, profit sharing to employees andmanagement was R$ 23.7 million, down81.1% when compared to the previous year. This was because corporate goalsestablished for the year were not met, and therefore no bonus was paid, with theexception of certain factory employeeswho met efficiency targets.

Minority interestsMinority shareholders of our subsidiariesshared profits that amounted to R$ 2.9million in 2003, compared to losses of R$ 47.4 million in 2002.

Net incomeNet income reported in 2003 amounted to R$ 1,411.6 million, 6.5% lower than theprevious year’s net income of R$ 1,510.3million.

DividendsThe Company has paid dividendsamounting to R$ 23.15 per thousandcommon shares and R$ 25.46 perthousand preferred shares, representing a payout ratio of 69.4% of 2003 adjustednet income, excluding the 5% deductionfor statutory reserve.

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Liquidity and capital resourcesOur primary sources of liquidity havehistorically been cash flows from operating activities and borrowings. Our material cash requirements haveincluded the following:

• the servicing of our indebtedness;

• capital expenditures;

• our share buyback program;

• payments of dividends and interestattributable to shareholders’ equity;

• increases in ownership of oursubsidiaries or companies in whichwe have equity investments; and

• investments in companiesparticipating in the brewing, softdrink and malting industries.

Our cash and cash equivalents and short-term marketable securities at December31, 2003 were R$ 2,690.0 million (2002:R$ 3,290.0 million). The increase in theamount of our cash and cash equivalentsat the end of 2003 compared to the end of2002 was primarily a result of: (i) paymentfor the acquisition of our interest in Quinsaand other acquisitions; (ii) payment ofdividends during the year; and (iii) capitalexpenditures. Proceeds from the issuanceof CBB’s US$ 500 million 10-year SeniorNotes in September 2003 and liquidationof certain short-term investmentspositively affected our cash position.

We believe that cash flows from operatingactivities, available cash and cashequivalents and short-term investments,along with our derivative instruments andour access to borrowing facilities, will besufficient to fund our capital expenditures,debt service and dividend payments going forward.

Cash flows

Operating activitiesOur cash flows from operating activitiesdecreased 29.7% for the year endedDecember 31, 2003 to R$ 2,527.6 million from R$ 3,595.0 million for the year endedDecember 31, 2002. All the foregoing cashrequirements were partially mitigated byother transactions generating a net cashinflow of R$ 8.3 million in 2003.

Investing activitiesCash flows used in our investing activitiesfor the year ended December 31, 2003totaled R$ 2,014.7 million (2002: R$ 1,603.1 million). The increased cashutilized in investing activities in 2003compared o 2002 primarily reflects theacquisition of our economic interest inQuinsa and our investments in newmarkets in South and Central America,such as Ecuador, Peru and Guatemala, as well as investments in our directdistribution network, mainly through theacquisition of third-party distributors.

Financing activitiesCash flows used in financing activities for the year ended December 31, 2003totaled R$ 346.7 million (2002: R$ 2,912.2million). The proceeds of loans, primarilythe US$500 million 10-year Senior Notesissued in September 2003, as well as thecash generated from our operatingactivities, were used to repay R$2,510.1million in debt in 2003.

DebtAs of December 31, 2003, our outstandingdebt totaled R$ 5,980.4 million (of whichR$ 1,976.1 million was short-term debt,including R$ 1,427.4 million of the currentportion of long-term debt). Our debtconsisted of R$ 901.5 million of real-denominated debt and R$ 5,078.9 million of foreign currency-denominated debt. The weighted average annual interest ratefor the short- and long-term portions of the local currency-denominated debt atDecember 31, 2003 was 12.1% and 6.8%,and the average duration was five monthsand 2.3 years, respectively. The weightedaverage annual interest rate for the short-and long-term portions of the foreigncurrency-denominated debt wasapproximately 7.0% and 10.5%, and the average duration was six months and 7.0 years, respectively.

Short-term debtAs of December 31, 2003 our short-termdebt totaled R$ 1,976.1 million, consistingprimarily of the current portion of oursyndicated loan denominated in JapaneseYen which matures in August 2004. As ofDecember 31, 2003, 86.7% of our short-term debt was denominated in foreigncurrencies, with an annual weightedaverage interest rate of approximately7.0%. The Japanese Yen-denominatedloan represented 53.8% of our short-term debt.

Net debt consolidated positionR$ million 2003 2002

Local Foreign Local Foreigncurrency currency Total currency currency Total

Short-term debt* 262.0 1,714.1 1,976.1 269.1 338.3 607.4 Long-term debt 639.5 3,364.8 4,004.3 719.0 3,160.3 3,879.3 Total 901.5 5,078.9 5,980.4 988.1 3,498.6 4,486.7

*Includes current portion of long-term debt.




Long-term debt maturity(R$ million) Maturity

2005 232.5 2006 390.9 2007 152.8 2008 150.0 2009 20.4 2010 53.2 2011 1,498.1 2012 and later 1,506.4

Total 4,004.3

Excludes current portion of long-term debt.


Contractual obligations(R$ million) Less than 1 year 1–3 years 3–5 years More than 5 years Total

Long-term debt 1,427.6 623.4 302.8 3,077.9 5,431.7 Sales tax deferrals 161.8 103.9 130.3 – 396.0 Capital expenditure commitments 100.0 – – – 100.0 Aluminum procurements 1,100.0 2,200.0 – – 3,300.0 Plastic procurements 98.0 98.0 – – 196.0

Total contractual cash commitments 2,887.4 3,025.3 433.1 3,077.9 9,423.7

Long-term debtAs of December 31, 2003, our long-termdebt, excluding the current portion of long-term debt, totaled R$ 4,004.3 million, ofwhich R$ 639.5 million was denominated in Reais. The remainder was denominatedprimarily in US dollars. The current portion of our local long-term debt totaled R$ 1,427.4 million as of December 31, 2003.

In accordance with our foreign currencyrisk management policy, we have enteredinto forward and cross-currency interestrate swap contracts in order to mitigatecurrency and interest rate risks.

In September 2003, CBB issued US$ 500million 83/4% Notes due 2013, fullyguaranteed by AmBev. The proceeds of the notes issued in 2003 were usedprincipally to repay short-term debt, to finance part of AmBev’s capitalexpenditure program, and also for general corporate purposes.

Sales tax deferrals and other tax creditsWe currently participate in severalprograms by which a portion of paymentsof value-added tax on sales and services(ICMS) due from sales generated byspecific production facilities are deferred for periods of generally five years from their original due date. The total amountdeferred at December 31, 2003, includingICMS financing, was R$ 768.7 million.Percentages deferred typically range from 40% to 100% over the life of theprogram. Balances deferred generallyaccrue interest and are partially inflationindexed, with adjustments generally set at 60% to 80% of a general price index.The amount of sales taxes deferred as of December 31, 2003, R$ 393.6 million,included a current portion of R$ 161.8million, and R$ 231.8 million payablethereafter. The remaining R$ 375.1 millionrelates to ICMS financing.

We also participate in ICMS value-addedtax credit programs offered by variousBrazilian states which provide tax credits

to offset ICMS value-added tax payable.In return, we are committed to meetingcertain operational requirements including,depending on the state, productionvolume and employment targets, amongothers. The grants are received over thelives of the respective programs. In theyears ended December 31, 2003 and2002 we recorded R$ 175.9 million andR$ 151.9 million, respectively, of taxcredits as gains on tax incentive programs. The benefits granted are not subject towithdrawal in the event that we do notmeet the program’s targets, but futurebenefits may be withdrawn.

Commitments and contingencies We are subject to numerous commitmentsand contingencies with respect to tax,labor, distributors and other claims.

The following table and discussion provideadditional disclosure regarding ourmaterial contractual obligations andcommercial commitments as ofDecember 31, 2003.

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Capital investment programIn 2003, capital expenditures on property,plant and equipment totaled R$ 862.2million (2002: R$ 522.3 million). Theseexpenditures primarily includedinvestments in quality, automation,modernization, replacement of packaginglines, and others of approximately R$ 162.7 million (2002: R$ 192.8 million);investment in warehousing for directdistribution of R$ 405.9 million (2002: R$ 149.9 million); investments in coolers of R$ 157.8 million (2002: R$ 72.4 million);expenditures for the replacement ofbottles and crates of R$ 112.2 million(2002: R$ 77.7 million); and continuedinvestments in information technology of R$ 23.6 million (2002: R$ 29.6 million).

At December 31, 2003, our investments in subsidiaries and affiliates, includingacquisitions of intangible assets net ofcash, totaled R$ 1,745.3 million, includingthe acquisition of our economic interest in Quinsa (2002: R$ 75.6 million includingthe purchase of an additional stake inAstra). The purchase price of our initial40.475% economic interest in Quinsaincluded a cash disbursement of R$ 1,429.0 million in 2003.

As of December 31, 2003, we haddisbursed an additional R$ 249.6million to increase our economicinterest in Quinsa to 49.66% throughthe purchase of an additional 12.0million Quinsa class B shares on theopen market. Also included in the R$1,745.3 million are the acquisition of our interests in our Peruvian andEcuadorian assets.

QuinsaIn March 2003, the Company acquired, for the amount of R$ 1,730 million (R$ 1,429 million paid in cash and R$ 301million through the contribution of assetslocated in Mercosur, at book values),230,920,000 class A shares and26,388,914 class B shares issued byQuilmes Industrial S.A. (Quinsa), as wellas 8.6% of the capital stock of QuilmesInternational (Bermuda) Ltd. (QIB), totalingan aggregate stake of 40.5% in Quinsa.In addition, during 2003, the Companyacquired 12,000,000 class B shares ofQuinsa, for the amount of R$ 250 million,thus increasing its interest in Quinsato 47.99%.

Since then, Quinsa has been acquiring itsown shares, therefore changing AmBev’spercentage of interest in Quinsa, whichreached 50.98% as of June 30, 2004.These acquisitions generated a R$ 17million loss in the Company’s results for the quarter ended June 30, 2004, (R$ 14million in the quarter ended March 31,2004), because the amount paid washigher than the shares’ equity value. The total goodwill determined in theacquisition of Quinsa is economicallybased on expected future profitability, to be amortized over ten years.

On August 18, 2004, Quinsa announced a modified ‘Dutch Auction’ offer torepurchase class B shares of its ownissuance (including class B shares held as American Depositary Shares – ADSs).On September 22, 2004, Quinsaannounced the final results of such offer, through which it has accepted for purchase 9,584,689 class B shares at a purchase price of $9.50 per share (or $19.00 per ADS). Following thepurchase of these shares, Quinsa will have approximately 49,649,780 class Bshares issued and outstanding, andtherefore AmBev’s aggregate intereststake in Quinsa should increase to 54.5%.

Subsequent events

Closing of transactions with InterbrewOn August 27, 2004, AmBev announced the closing of the transactions withInterbrew S.A., which were originallyannounced on March 3, 2004. Thecombination between AmBev and InBev,the new name of Interbrew, establishes the world’s largest beer platform.

The business combination wasestablished as follows:

a) Labatt Brewing Company Limited(Labatt) was merged into AmBev inexchange for newly issued 7.9 billioncommon shares and 11.4 billionpreferred shares; and

b) Interbrew S.A. issued 141.7 millionshares in favor of AmBev’s currentcontrolling shareholders, receiving inexchange the indirect ownership of 8.3billion common shares of the Company.

AmBev started consolidating Labatt’sresults as of September 2004.

Brazil’s anti-trust authority – CADE’s ruling for the sale of theMarathon brand On July 15, 2004, the AdministrativeCouncil for Economic Defense (CADE),Brazil’s anti-trust authority, announced itsdecision regarding the sale and distributionof Gatorade by AmBev, stating that theGatorade brand may only be maintained on the condition that the Marathon brandis sold. Deadlines and conditions for the sale were not established.

Acquisition of Embotelladora Dominicana (Embodom)In February 2004, the Company acquired 51% of the share capital ofEmbodom, located in the DominicanRepublic, with a goodwill in the amount of R$ 173 million based on the expectationof future results, to be amortized over ten years. That subsidiary is an integralpart of the Company’s consolidatedfinancial statements.



Share buyback programsDuring 2004 (until the closing of thisreport), AmBev launched four sharebuyback programs.

All the below mentioned programs wereapproved along with programs to acquire call options and issue put options linked to AmBev’s shares, in accordance with CVM (Brazilian Securities and ExchangeCommission) Instruction 390/03, eachrespecting the limits set for the overallrespective share buyback program.

Relationship with independentauditorsOur working policy in relation to ourindependent external auditors when theyare providing services that do not relate to external auditing, is based on theprinciples that preserve the auditors’independence.

These principles are defined as follows:

• The auditor must not audit his own work;

• The auditor must not performmanagerial functions; and

• The auditor must not advocate the interests of clients.

The independence of our external auditors is ensured in every service eventuallyprovided by them, by means of specificprocedures. These include the involvement of professionals who do not provide

auditing services when the contractedservices do not require the accumulatedknowledge of the auditors or do not referto the hiring of auditing services ruled, in this case, by specific procedures ofprofessional independence; or through the involvement of other independentprofessionals (‘second opinion’), amongother actions performed.

Additionally, all rendered services, whichare not related to independent auditing,are supervised by the management, beingthe management bodies, depending on the levels of approval required by the Company’s bylaws, responsible for all decisions.

In the period under analysis, the amountreferring to the hiring of services not relatedto independent auditing was not higherthan 5% of the total amount spent withindependent auditing services.

Date closedDate approved Limit Period or expired % Consumed

03/22/04 R$ 500 million 60 days 05/23/04 39%05/24/04 R$ 500 million 360 days 07/06/04 98%07/06/04 R$ 500 million 360 days 09/14/04 99%09/14/04 R$ 500 million 360 days NA NA

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Report of the independent auditors

To the Management and ShareholdersCompanhia de Bebidas das Américas – AmBev1 We have audited the accompanying balance sheets of Companhia de Bebidas das Américas – AmBev and the consolidated balance

sheets of Companhia de Bebidas das Américas – AmBev and its subsidiaries at December 31, 2003 and 2002 and the relatedstatements of income, of changes in shareholders’ equity and of changes in financial position of Companhia de Bebidas dasAméricas – AmBev and the consolidated statements of income and of changes in financial position for the years then ended. Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements.

2 We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtainreasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our workincluded, among other procedures: (a) planning our audits taking into consideration the significance of balances, the volume oftransactions and the accounting and internal control systems of the companies, (b) examining, on a test basis, evidence and recordssupporting the amounts and disclosures in the financial statements, and (c) assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financial statement presentation.

3 In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of Companhia deBebidas das Américas – AmBev and of Companhia de Bebidas das Américas – AmBev and its subsidiaries at December 31, 2003and 2002, and the results of operations, of changes in shareholders’ equity and of changes in financial position of Companhia deBebidas das Américas – AmBev, as well as the consolidated results of operations and changes in financial position, for the years thenended, in conformity with accounting practices adopted in Brazil.

4 Our audits were conducted for the purpose of forming an opinion on the financial statements referred to in the first paragraph, takenas a whole. The consolidated statement of cash flows, which is being presented to provide supplementary information about theCompany, is not required as an integral part of the financial statements. The consolidated statement of cash flows was submitted tothe auditing procedures described in the second paragraph and, in our opinion, is fairly presented in all material respects in relation tothe financial statements taken as a whole.

São Paulo, February 12, 2004, except for note 21, which is dated as of March 1, 2004

PricewaterhouseCoopersAuditores IndependentesCRC 2SP000160/O-5

Paulo Cesar Estevão NettoContador CRC 1RJ026365/O-8 ‘T’ SP


Balance sheet As at December 31 / In millions of Reais

Parent company Consolidated

Assets 2003 2002 2003 2002

CurrentCash and cash equivalents 0.1 1,196.1 1,131.6Marketable securities 1,338.1 2,158.4Unrealized gain on derivatives 258.7 214.9Trade accounts receivable 725.7 679.0Inventories 954.6 837.4Taxes recoverable 68.9 47.3 771.4 410.3Other 0.4 6.3 255.9 139.8

69.3 53.7 5,500.5 5,571.4

Long-term receivablesCompulsory and judicial deposits 43.8 41.6 365.9 256.9Loans to employees for purchase of shares 182.1 145.5 234.7 324.8Deferred income tax and social contribution 239.0 139.8 1,831.8 1,558.4Properties for sale 144.1 121.6Other 78.0 78.0 616.1 444.3

542.9 404.9 3,192.6 2,706.0

Permanent assetsInvestments

Holdings in direct subsidiaries, including goodwilland negative goodwill, net 5,765.9 4,589.7 1,687.3 626.9

Other investments 16.2 1.4 24.1 10.4

5,782.1 4,591.1 1,711.4 637.3

Property, plant and equipment 4,166.3 3,330.6Deferred charges 259.3 136.2

5,782.1 4,591.1 6,137.0 4,104.1

Total assets 6,394.3 5,049.7 14,830.1 12,381.5

The accompanying notes are an integral part of the financial statements.

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Liabilities and shareholders’ equity 2003 2002 2003 2002

CurrentSuppliers 0.2 800.3 789.1Financings 1,976.1 607.4Unrealized loss on derivatives 11.7 3.7Salaries, profit sharing and social security charges 1.2 94.1 59.7Dividends payable 290.8 345.0 293.9 345.7Income tax and social contribution 543.2 74.4Other taxes and contributions 0.2 0.7 758.3 619.4Accounts payable to related parties 1,544.1 329.5 0.8 76.8Other 15.7 241.6 257.5

1,835.1 692.3 4,720.0 2,833.7

Long-term liabilitiesFinancings 4,004.3 3,879.3Deferrals of taxes on sales 235.2 306.9Liabilities related to tax and other claims and

provision for contingencies 146.0 125.3 1,232.9 989.3Other 133.1 163.6

146.0 125.3 5,605.5 5,339.1

Minority interest 196.4 79.1

Shareholders’ equitySubscribed capital stock 3,124.1 3,046.2 3,124.1 3,046.2Capital reserve 16.6 16.6 16.6 16.6Revenue reserves

Legal 208.7 138.1 208.7 138.1Future capital increase 26.1 1,033.9 26.1 1,033.9Statutory 1,271.2 75.4 1,271.2 75.4

Treasury stock (233.5) (78.1) (338.5) (180.6)

4,413.2 4,232.1 4,308.2 4,129.6

Total liabilities and shareholders’ equity 6,394.3 5,049.7 14,830.1 12,381.5



Income statementYears ended December 31 / In millions of Reais, except for net income per thousand shares


2003 2002 2003 2002

Gross sales Product sales 17,143.5 14,279.9

Sales deductionsSales taxes, discounts and returns (8,459.7) (6,954.6)

Net sales 8,683.8 7,325.3Cost of products sold (4,044.2) (3,341.7)

Gross profit 4,639.6 3,983.6

Operating income (expenses)Selling (847.1) (687.2)Direct distribution (648.6) (537.4)Administrative (1.9) (4.8) (412.0) (350.5)Tax, labor and other contingencies (26.5) (2.0) (187.9) (123.7)Management and Directors’ compensation (1.0) (6.9) (5.9) (23.0)Depreciation and amortization (420.0) (334.6)Financial income 35.8 42.7 601.8 2,530.3Financial expenses (66.7) (68.4) (508.7) (3,277.3)Equity in results of investees 1,665.1 1,462.3 (6.2)Other operating income (expenses), net (85.7) 73.9 (240.1) 199.4

1,519.1 1,496.8 (2,674.7) (2,604.0)

Operating profit (carried forward) 1,519.1 1,496.8 1,964.9 1,379.6

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2003 2002 2003 2002

Operating profit (brought forward) 1,519.1 1,496.8 1,964.9 1,379.6Other non-operating expenses, net (215.5) (100.7) (72.2)

Income before income tax and social contribution on net income 1,303.6 1,496.8 1,864.2 1,307.4Income tax and social contribution benefit (expense) 100.4 20.4 (426.1) 280.6

Income before profit sharing and contributions 1,404.0 1,517.2 1,438.1 1,588.0Profit sharing and contributions

To employees and management 7.6 (6.9) (23.6) (112.3)To Zerrenner Foundation (12.8)

Income before minority interest 1,411.6 1,510.3 1,414.5 1,462.9Minority interest (2.9) 47.4

Net income for the year 1,411.6 1,510.3 1,411.6 1,510.3

Total number of shares of capital stock at year-end (in thousands) 38,537,333 38,620,730

Net income per thousand shares of total capital at year-end, in Reais 36.63 39.11

Net income per thousand shares at year-end,excluding treasury stock, in Reais 37.23 39.48



Statement of changes in shareholders’ equity of the parent companyIn millions of Reais

Revenue reserves

StatutorySubscribed Future reserve

and paid Capital capital Treasury Retainedin capital reserve Legal increase Investments stock earnings Total

At December 31, 2001 2,944.2 4.9 62.7 854.9 52.6 (397.9) 3,521.4Exercise of options of the stock

ownership plan 102.0 102.0Effect of implementation of

NPC No. 26 in subsidiary (56.3) (56.3)Share buyback (354.7) (354.7)Realization of the reserve

for investments (52.6) 52.6Cancellation of treasury stock (674.5) 674.5Premium on the transfer

of treasury stock linked to financings 11.7 11.7

Net income for the year 1,510.3 1,510.3Appropriations of net income

for the yearLegal reserve 75.4 (75.4)Prepayment of dividends (160.9) (160.9)Final dividends (341.4) (341.4)Reserves for future capital

increase and statutory 853.5 75.4 (928.9)

At December 31, 2002 3,046.2 16.6 138.1 1,033.9 75.4 (78.1) 4,232.1Exercise of options of the

stock ownership plan 77.4 77.4Capital increase through

warrants 0.5 0.5Share buyback (310.0) (310.0)Cancellation of treasury stock (154.6) 154.6Transfer of reserves (853.2) 853.2Net income for the year 1,411.6 1,411.6Appropriations of net income

for the yearLegal reserve 70.6 (70.6)Prepayment of dividends (717.7) (717.7)Final dividends (280.7) (280.7)Statutory reserve 342.6 (342.6)

At December 31, 2003 3,124.1 16.6 208.7 26.1 1,271.2 (233.5) 4,413.2


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Statement of changes in financial position Years ended December 31 / In millions of Reais


2003 2002 2003 2002

Source of fundsOperations

Net income for the year 1,411.6 1,510.3 1,411.6 1,510.3Expenses (income) not affecting working capital

Equity in results of investees (1,665.1) (1,462.3) 6.2Deferred income tax and social contribution (99.2) (20.4) (198.3) (404.0)Discount on the settlement of tax incentives (16.6)Reversal of provision for losses on unsecured liabilities , net (147.6)Amortization of goodwill, net of realized negative goodwill 84.8 69.8 252.4 90.5Depreciation and amortization 766.3 659.5Tax, labor and other contingencies 26.5 2.0 187.9 123.7Financial charges on tax and fiscal contingencies 59.8 32.9Provision for loss on permanent assets 58.7 97.5Financial charges and variations on the stock ownership plan (28.1) (88.1) (47.7) (88.1)Exchange rate variation and charges on long-term financings (496.6) 867.3Minority interest 2.9 (47.4)Exchange gains or losses on foreign subsidiaries 367.3 (155.8)Loss of interest ownership in subsidiaries 215.4 33.3

Residual value of property, plant and equipment and divestments 88.3 73.8 159.8Reimbursement of capital by subsidiary 1,338.3Dividends received and receivable 1,386.0 44.4

1,331.9 1,334.7 2,461.0 2,846.2

From shareholdersCapital increase 77.9 102.0 77.9 102.0Changes in the capital of minority shareholders 4.8Loans to employees for purchase of shares 91.3Premium on the transfer of treasury stock linked to financings 11.7

From third partiesChanges in long-term receivables

Receivables from related parties 35.1Other accounts receivable 44.1

Changes in long-term receivablesFinancings 295.7 162.6Deferrals of taxes on sales 57.3

Total sources of funds 1,409.8 1,448.4 3,032.1 3,145.9


Statement of changes in financial position Years ended December 31 / In millions of Reais


2003 2002 2003 2002

Uses of fundsChanges in long-term receivables

Compulsory and judicial deposits 2.3 3.6 84.0 51.3Loans to employees for purchase of shares 8.5 2.8 21.4Receivables from related parties 14.5Other taxes and charges recoverable 11.5 6.0Other 9.7 4.3

Changes in long-term liabilitiesOther accounts payable 98.3 28.3Tax, labor and other contingencies 5.6 8.5 123.8 32.6

Permanent assetsInvestments, including goodwill and negative goodwill 1,212.2 444.5 2,100.6 107.7Property, plant and equipment 862.2 544.7Deferred charges 91.2 45.5

Capital transactionsShare buyback 310.0 354.7 311.9 337.1Proposed and paid dividends 998.4 502.3 1,004.0 502.3

Working capital of acquired subsidiary 277.6

Total funds used 2,537.0 1,316.4 4,989.3 1,681.2

Increase (reduction) in working capital (1,127.2) 132.0 (1,957.2) 1,464.7

Changes in working capital

Current assetsAt the end of the year 69.3 53.7 5,500.5 5,571.4At the beginning of the year 53.7 219.1 5,571.4 4,685.0

15.6 (165.4) (70.9) 886.4

Current liabilitiesAt the end of the year 1,835.1 692.3 4,720.0 2,833.7At the beginning of the year 692.3 989.7 2,833.7 3,412.0

1,142.8 (297.4) 1,886.3 (578.3)

Increase (reduction) in working capital (1,127.2) 132.0 (1,957.2) 1,464.7


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Notes to the financial statements As at December 31, 2003 and 2002 / In millions of Reais, unless otherwise indicated

1 Operating activities(a) General considerationsCompanhia de Bebidas das Américas – AmBev (the ‘Company’ or ‘AmBev’), headquartered in São Paulo, Brazil, produces and marketsbeer, draft beer, soft drinks, other non-alcoholic beverages, and malt either directly or by participating in other companies in Brazil andother Latin American countries.

AmBev has a franchise agreement with PepsiCo International, Inc. (‘PepsiCo’) to bottle, sell and distribute Pepsi products in Brazil,including Gatorade, the isotonic sports drink, which is still under review by the Administrative Council for Economic Defense (CADE).AmBev also has an agreement with PepsiCo for bottling, sale and distribution of ‘Guaraná Antarctica’ internationally. Based on thisagreement, the product is already being sold in Portugal, Puerto Rico and Spain.

AmBev shares are traded on the São Paulo Stock Exchange (BOVESPA), and on the New York Stock Exchange (NYSE), as AmericanDepositary Receipts (ADRs).

(b) Main activities abroad in 2003Quilmes Industrial S.A. (‘Quinsa’)

During 2003, AmBev and Quinsa integrated their operations, mainly in the Mercosur. The transaction, authorized with certain restrictionsby the Comisión Nacional de Defensa de la Competencia (Argentine National Commission for the Protection of Competition – ‘CNDC’),has been delayed as a consequence of the legal action filed by a company pertaining to the Compañía Cervecerías Unidas S.A. (‘CCU’)group in April 2003, through which it claimed the right to participate in the process of acquisition of the assets in item (i) below. A summaryof the principal restrictions imposed by the CNDC is as follows:

(i) Quinsa and AmBev (the ‘Parties’) are required to dispose of the brands Bieckert, Palermo, Imperial and Norte, as well as thebrewery located in Lujan, where the Brahma brand was produced, to an independent brewery, which must be financially soundand which does not produce beer in the Argentinean market (the ‘Purchaser’);

(ii) the Parties should submit documentation to the CNDC evidencing the commitment to allow the Purchaser, for a period of sevenyears starting on the date of the sale of the assets in item (i), to have access to Quinsa’s distribution network in Argentina, for thebrands sold to the Purchaser; and

(iii) the Parties shall assume a commitment with the Purchaser to produce the Bieckert, Palermo and Imperial brands, for a two-yearperiod, as from the date on which such assets are sold.

Industrias del Atlántico (‘Atlántico’)

The Company and the Central American Bottling Corporation (‘CabCorp’), launched their operations in the Central American andCaribbean beer markets in September 2003, through the subsidiary Atlántico, located in Guatemala, which is consolidated in theCompany’s financial statements.

Compañia Cervecera AmBev Peru S.A.C. (‘AmBev Peru’)

In October 2003, the Company acquired, for the amount of R$ 86.7, machinery and equipment, inventory and the franchise of PepsiCo forthe production, marketing and sale of Pepsi products in Lima and in the northern region of Peru. Such assets were contributed to thesubsidiary, which is consolidated in the Company’s financial statements.

Cerveceria Suramericana (‘Cervesursa’)

In December 2003, the Company acquired 80% of the capital of Cervesursa, located in Ecuador, generating a negative goodwill of R$ 18.5, based on the expectation of future results, to be amortized in up to ten years. That subsidiary is included in the Company’sconsolidated financial statements.



2 Significant accounting practices(a) Financial statementsThe preparation of financial statements requires management to make estimates that affect the reported amount of assets, liabilitiesand other transactions. Estimates are used for, but not limited to, the determination of useful lives of property, plant and equipment, theprovisions necessary for contingent liabilities, and provisions for income tax, which are based on the best estimates of the Company’smanagement; however, actual results could differ from those estimates.

(b) Determination of net incomeIncome and expenses are recorded on the accrual basis. Sales revenues and the corresponding cost of sales are recorded upon deliveryof products.

(c) Current assets and long-term receivablesCash and cash equivalents, represented by highly liquid investments with original maturity of 90 days or less, are recorded at acquisitioncost, equivalent to their market values.

Financial investments, substantially represented by notes and securities, government securities and bank deposit certificates, includingthose denominated in foreign currency, are recorded at cost, plus prorated accrued earnings when applicable and a provision is madefor the reduction to market values when necessary. Investment fund quotas are measured at market values, and any unrealized resultsover variable interest and earnings are deferred for recognition only when realized.

The balance of financial investments at December 31, 2003 includes bank deposits and financial investments given as guarantee inconnection with the issuance of foreign debt securities of subsidiaries, in the amount of R$ 29.9 (December 31, 2002 – R$ 292.4).

The consolidated allowance for doubtful accounts of R$ 182.3 at December 31, 2003 (December 31, 2002 – R$ 139.4) is recorded atan amount deemed sufficient by management to cover probable losses on realization of receivables.

Inventories are recorded at the average cost of purchases or production, adjusted by a provision for reduction to realizable values whennecessary. On December 31, 2003, the consolidated provision for reduction of inventories to net realization value amounted to R$ 33.7(December 31, 2002 – R$ 28.7), and was recorded under ‘Supplies and others, net’.

Advertising and marketing expenses are deferred within each fiscal year and systematically appropriated to results of each period,in accordance with projected sales volume, thereby reflecting the seasonal nature of monthly sales.

Other current assets and long-term receivables are recorded at cost, including, when applicable, accrued earnings. A provision forreduction to market values is recorded when necessary.

(d) Permanent assetsThe parent company records investments in subsidiaries and jointly controlled companies using the equity method of accounting, andharmonizes, upon initial determination, their accounting practices with those adopted by the Company, and separates the acquisitioncost into equity investment, goodwill (determined as the difference between consideration paid and underlying book values) and negativegoodwill. Goodwill justified based on the appreciation of property, plant and equipment is amortized proportionally to the depreciation orrealization of the book value of the subsidiary’s assets, whereas the goodwill (negative goodwill) attributable to expected future results isamortized over five to ten years. Amortization of goodwill is recorded under ‘Other operating expenses’. The negative goodwill, attributedto various economic factors, will only be amortized in the event of divestment.

Property, plant and equipment are stated at cost and include the interest incurred in financing the construction phase of certain qualifiedassets. Maintenance and repair costs are recorded as expenses, when incurred. Losses from breakages of bottles and crates duringproduction are included in the cost of sales. Depreciation is calculated on the straight-line method, considering the useful lives of theassets, at the annual rates listed in note 7.

Amortization of deferred charges is calculated on the straight-line basis, in up to ten years, as from the date of start of operations.The write-off of deferred charges is recorded when totally amortized.

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2 Significant accounting practices continued(e) Translation of financial statements of subsidiaries and associated companies headquartered abroadWith the exception of the operations mentioned in the following paragraph, the financial statements of foreign subsidiaries and associatedcompanies are prepared using the local currency as their functional currency (ie the main currency of the economic environment in whichsuch companies operate) adjusted to reflect the inflation rate, when applicable, based on local price indices. Accordingly, their assets,liabilities and shareholders’ equity are translated into Reais at the current exchange rate at the balance sheet date. Income and expenseaccounts are translated and maintained in Reais at average exchange rates for the period. The difference between the net resultdetermined at the exchange rates at the balance sheet date, and that determined on average exchange rates for the period, is adjustedunder ‘Other operating income’.

The US dollar was adopted as the functional currency for malt operations in Argentina and Uruguay, since their revenues and cashflows are substantially based on that currency. Thus the following procedures are adopted when preparing the financial statements ofsuch subsidiaries:

(i) inventories, property, plant and equipment, accumulated depreciation, as well as shareholders’ equity accounts, are translated toUS dollars at historical exchange rates and converted into Reais, as with monetary assets and liabilities, at the exchange rates atthe balance sheet dates; and

(ii) depreciation and other costs and expenses related to assets recorded at historical exchange rates are calculated based on thevalue of assets in US dollars, and translated to Reais at average exchange rates for the period. Other income and expenseaccounts are translated to Reais at average exchange rates for the period. The difference between the net result determined at theexchange rates on the date of the financial statements, and that determined at average exchange rates for the period, is adjustedunder ‘Other operating income’.

(f) Current and long-term liabilitiesCurrent and long-term liabilities are stated at known or estimated amounts, including accrued charges and monetary variations,where applicable.

(g) Forwards and cross-currency interest rate swapsThe nominal values of cross-currency interest rate swap operations and forwards are not recorded in the balance sheet.

The Company enters into derivative financial instruments to hedge its consolidated exposure to currency and interest rate risks, but whichdoes not prohibit redemption prior to final maturities. Accordingly, as determined by Brazilian Corporate Law, operations not designated foraccounting purposes are measured at the lower of cost based on the contractual conditions between the Company and counterparties(yield curve) or market value and accounted for as ‘Unrealized gain on derivatives’ or ‘Unrealized loss on derivatives’.

In order to neutralize the result of certain swaps, the Company at times contracts other identical operations of offsetting positions, with thesame value at maturity, settlement date and restatement index. These two offsetting positions are recorded in the Company’s balancesheet as ‘Other’, based on the value of the yield curve, being designated as hedges for accounting purposes.

(h) Forward and swap operations in commoditiesThe Company enters into derivative financial instruments to hedge its consolidated exposure to prices of raw material to be acquired,denominated in foreign currency.

The net results of such derivative instruments, designated for accounting purposes as hedges, are recorded at cost (equivalent to theirmarket value), deferred and recorded in the Company’s balance sheet under ‘Other’, and recognized in the result under ‘Cost of productssold’ when the product is sold.

(i) Provision for contingencies and liabilities related to tax and other claimsProvision for contingencies is recorded at current values for labor, tax, civil and commercial claims being disputed at the administrative andjudicial levels, based on estimates of losses determined by the Company’s and its subsidiaries’ external legal advisors, for lawsuits in whicha loss is considered probable.

Expected tax savings obtained based on provisional court decisions resulting from claims filed by the Company and its subsidiaries againstthe tax authorities, if recognized in the statement of income, are subject to provisioning until the right is assured through a final legaldecision in favor of the Company and its subsidiaries.



2 Significant accounting practices continued(j) Investment tax creditsThe Company’s subsidiaries enjoy state fiscal incentive programs for the deferral of sales taxes in which taxes are partially or totallyreduced. In some states, the grace periods and reductions are unconditional. Where conditions have been established, however, theyare related to events under the Company’s control. The benefits relative to reduction in the payment of taxes are treated as a reserve forinvestment tax credits and recorded in the shareholders’ equity of the subsidiaries, on the accrual basis, or when the subsidiaries complywith the main requirements of state programs, in order to have the benefit granted. This benefit is recorded as ‘Other operating income’in the Company’s consolidated financial statements (December 31, 2003 – R$ 175.9; December 31, 2002 – R$ 151.9).

(k) Income tax and social contribution on net incomeIncome tax and social contribution on net income are calculated at rates determined by applicable tax law. Charges relating to income taxand social contribution are recorded on the accrual basis, with the addition of deferred taxes calculated on the temporary differencesbetween the book and tax bases of assets and liabilities.

A deferred income tax asset is also recorded, relating to future tax benefits of tax loss carry-forwards for subsidiaries in which the realizationof such benefits is probable, over a maximum period of ten years, based on future forecasts of taxable income, discounted to present value.

(l) Actuarial assets and liabilities related to employee benefitsThe initial effect arising from the adoption of the Accounting Standards and Procedures – NPC No. 26 was fully recognized in theshareholders’ equity of the subsidiary Companhia Brasileira de Bebidas (‘CBB’) on December 31, 2001.

Actuarial gains and losses are recorded in an amount exceeding the higher of (a) 10% of the present value of the actuarial liability and(b) 10% of the fair value of the plan’s assets, amortized over the average future working life of the plan’s members.

(m) Consolidated financial statementsThe totality of assets, liabilities and results of companies controlled by the Company are consolidated, and the interest of minorityshareholders in the equity and results for the year of subsidiaries is shown separately.

Investments in subsidiaries and their shareholders’ equities, as well as inter-company assets, liabilities, income and expenses, wereeliminated on consolidation. Also, unrealized results arising from the purchase of raw materials and products from subsidiaries andassociated companies included in the balance of inventory at the end of each period, as well as other transactions between the Company’ssubsidiaries, are eliminated.

The consolidated financial statements include the financial statements, prepared at the same dates, of the companies either directlyor indirectly controlled by the Company.

(n) Proportionally consolidated financial statementsThe assets and liabilities, income and expenses of entities which are jointly controlled through a shareholders’ agreement wereconsolidated proportionally to the Company’s total ownership of their capital. Amounts corresponding to the proportional assets,liabilities, income and expenses arising from inter-company transactions were eliminated on the proportional consolidation.

In March 2003, the Company acquired for the amount of R$ 1,729.7 (paid in cash – R$ 1,429 and through the contribution of assets locatedin Mercosur, at book values, R$ 300.7), 230,920,000 class A shares and 26,388,914 class B shares issued by Quinsa, as well as 8.6%of the capital stock of Quilmes International (Bermuda) Ltd. (QIB), totaling an aggregate economic interest of 40.5% in Quinsa. In addition,during 2003 the Company acquired 12,000,000 class B shares of Quinsa for the amount of R$ 249.6, thus increasing its economic interestin Quinsa to 47.99%. Quinsa has been acquiring its own shares, therefore changing the Company’s percentage of economic interest inQuinsa. On December 31, 2003 the Company consolidated proportionally, as a result of such transactions, its 49.66% interest in Quinsa.The total goodwill determined on the acquisition of Quinsa is justified based on expected future profitability, to be amortized over ten years.

Quinsa’s controlling shareholders have the right to exchange their 373.5 million class A shares of Quinsa for AmBev shares, at specificperiods each year, starting as from April 2003. AmBev also has the right to determine the exchange of class A shares of Quinsa for AmBevshares starting from the end of the seventh year (counted from April 2003). In both cases, the number of AmBev shares to be issued toQuinsa’s controlling shareholders will be determined based on the EBITDA of the two companies.

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2 Significant accounting practices continued(n) Proportionally consolidated financial statements continuedThe net assets of Quinsa and Agrega Inteligência em Compras Ltda. (‘Agrega’), proportionally consolidated in the Company’s financialstatements, are as follows:

December 31, 2003

Quinsa (i) Agrega (ii) Total

Current assets 513.4 1.3 514.7Long-term receivables 132.4 132.4Permanent assets 1,156.3 0.5 1,156.8Current liabilities (382.4) (1.1) (383.5)Long-term liabilities (401.9) (401.9)Minority interest (199.6) (199.6)

Total net assets 818.2 0.7 818.9

(i) 49.66% ownership interest.

(ii) 50% ownership interest.

December 31, 2002

Agrega

Current assets 1.0Permanent assets 0.4Current liabilities (0.9)

Total net assets 0.5

Quinsa’s and Agrega’s results, proportionally consolidated in the Company’s financial statements, are as follows:

Year ended December 31, 2003

Quinsa Agrega Total

Net sales 773.7 0.5 774.2Cost of products and services sold (387.3) (387.3)

Gross profit 386.4 0.5 386.9Operating expenses (210.6) (2.4) (213.0)

Operating profit (loss) 175.8 (1.9) 173.9

Non-operating results (11.3) (11.3)Income taxes 27.5 27.5Profit sharing (9.3) (9.3)Minority interest (33.0) (33.0)

Net income (loss) for the year 149.7 (1.9) 147.8



2 Significant accounting practices continued(n) Proportionally consolidated financial statements continued

Year endedDecember 31, 2002

Agrega

Net sales 0.4Cost of services sold and operating expenses (2.4)

Loss for the year (2.0)

The table below shows Quinsa’s main holdings in subsidiaries, fully consolidated in its financial statements, and proportionally adjustedin the AmBev’s consolidated financial statements:

Total holdings onDecember 31, 2003 – %

Cervecería y Maltería Quilmes S.A.I.C.A. y G. 87.3Cervecería Boliviana Nacional La Paz 68.1Cervecería Chile S.A. 87.6Cervecería Paraguay S.A. 75.2Fábrica Paraguaya de Vitrios S.A. 67.4Fábricas Nacionales de Cerveza S.A. 85.8QIB 94.7Salus S.A. (*) 81.2

(*) Only the brewery portion, not including the mineral water operation.

(o) ReclassificationsFor purposes of assuring comparability with the current year, the amount of R$ 1,637.9 was reclassified in the balance sheet ofDecember 31, 2002, from the balance of ‘Cash and cash equivalents’, to ‘Marketable securities’ (R$ 1,423) and to ‘Unrealized gainon derivatives’ (R$ 214.9).

For the same reason, R$ 19.3 was reclassified from ‘Deferred charges’ and R$ 22.3 from ‘Inventories’ to ‘Property, plant and equipment’in the balance sheet of December 31, 2002. Such adjustment is due to the alignment of certain accounting criteria used in Venezuelawith accounting practices adopted in Brazil.

3 InventoriesConsolidated

2003 2002

Finished products 145.6 157.8Work in progress 63.9 50.8Raw materials 564.2 425.3Production materials 112.9 119.0Supplies and other, net 68.0 84.5

954.6 837.4

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4 Transactions with related partiesThe main transactions of the Company with related parties are listed in the following table:

2003

Balances Transactions

Accounts Accounts Loan Net financialCompanies receivable payable agreements Net revenues results

AmBev (8.5) (1,535.5) (44.7)CBB 11.9 218.1 166.8 277.5Skol (5.1) (0.4)IBA-Sudeste (1.7) 977.9 4.4 18.5Jalua (55.5) (35.5)Hohneck (0.6)Monthiers 1,226.6 (250.2)Arosuco 3.8 246.1 334.4 6.0Dunvegan (802.0) 30.8Cympay (4.1) 0.3 76.9Malteria Pampa 7.4 115.7 14.0Aspen (173.0) (19.2)Other nationals 41.8 (55.7) (33.6) 241.8 1.5Other internationals 19.8 (12.0) (60.0) 112.0 (0.8)

2002

Balances Transactions

Advances forAccounts Accounts Loan future capital Net financial

Companies receivable payable agreements increase Net revenues results

AmBev 4.1 (327.7) (60.7)CBB (1.8) (87.7) 591.5 60.6 (903.5)Skol (0.8) (4.2) 575.3 (52.7)IBA-Sudeste 0.2 159.8 11.4Jalua (1,299.9) 71.8 (593.5)Hohneck 1,366.0 (1,166.8) 353.6Monthiers 319.3 29.8 1,316.9Arosuco 0.7 118.9 276.2 9.9DunveganCympay (5.4) 9.7 94.4Malteria Pampa 0.2 17.7 169.4Aspen (252.8) (27.0)Other nationals 18.6 (13.8) 7.4 26.0 (31.8)Other internationals 19.1 (310.0) 215.3 (101.7) 103.4 (4.9)

Names used:

• Cervejarias Reunidas Skol Caracu S.A. (‘Skol’)

• Indústria de Bebidas Antarctica do Sudeste S.A. (‘IBA-Sudeste’)

• Jalua Spain S.L. (‘Jalua’)

• Hohneck Sociedad Anónima (‘Hohneck’)

• Monthiers S.A. (‘Monthiers’)

• Arosuco Aromas e Sucos Ltda. (‘Arosuco’)

• Dunvegan S.A. (‘Dunvegan’)

• Cervecería y Maltería Paysandú – Cympay (‘Cympay’)

• Maltería Pampa S.A. (‘Maltería Pampa’)

• Aspen Equities Corporation (‘Aspen’)



4 Transactions with related parties continuedTransactions with related parties include, among other operations, the purchase and sale of raw materials such as malt, concentrates,labels, corks and several finished products, eliminated in the Company’s consolidated financial statements, except for the non-consolidated portion of operations with jointly controlled entities (recorded based on the proportional consolidation method) andrelated parties.

Loan agreements among the Company’s subsidiaries in Brazil have undetermined maturity terms and are not subject to financial chargesfrom July 1, 2003. The agreements that involve the Company’s subsidiaries headquartered abroad are indexed to the US dollar exchangerate plus 10% p.a. interest. Inter-company loans are consolidated based on the same criteria described above.

5 Other assetsParent company Consolidated

2003 2002 2003 2002

Current assetsDeferred income from commodities

swap and forward operations, net 0.1Other accounts receivable 0.4 6.3 106.0 89.1Prepaid expenses 123.3 40.1Advances to suppliers and others 26.5 10.6

0.4 6.3 255.9 139.8

Long-term receivablesLong-term financial investments 77.0Other taxes and charges recoverable 78.0 78.0 348.4 340.7Prepaid expenses 119.3 51.1Other accounts receivable 49.4 30.9Surplus assets – Instituto AmBev 22.0 21.6

78.0 78.0 616.1 444.3

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6 Investments in direct subsidiaries(a) Movement of investments in direct subsidiaries, including goodwill and negative goodwillDescription CBB Arosuco Agrega Hohneck (i) Eagle Polar Total

Balance on December 31, 2001 2,878.4 0.8 1,290.0 111.0 4,280.2Acquisition of investment 0.4 0.4Divestment (88.3) (88.3)Dividends received and receivable (44.4) (44.4)Effect of implementation of NPC No. 26 (56.3) (56.3)Increase (reduction) of capital (1,338.3) 1.8 442.2 (894.3)Equity in results (240.9) (2.1) 215.4 1,483.4 6.5 1,462.3Amortization of (goodwill) negative goodwill (84.7) 14.8 (69.9)

Balance on December 31, 2002 1,158.2 0.5 215.4 3,215.6 4,589.7Acquisition of investment 85.7 85.7Dividends received and receivable (v) (1,351.8) (34.2) (1,386.0)Increase (reduction) of capital 3,660.9 2.0 (v) (2,551.3) 1,111.6Loss of interest ownership in subsidiary (iii) (215.4) (215.4)Equity in results 2,158.7 172.5 (1.9) 0.1 (664.3) 1,665.1Amortization of goodwill (84.8) (84.8)

Balance on December 31, 2003 (ii) 5,541.2 224.0 0.6 0.1 5,765.9

(i) Headquartered abroad.

(ii) Balance consisting of goodwill net of amortization R$ 468.9, negative goodwill to be amortized R$ 149.9 and investment accounted for by the equity method R$ 5,222.2.

(iii) In January 2003, the Company recorded a loss of holdings in Hohneck resulting from the capitalization made by Skol and CBB without the respective proportionalparticipation of AmBev in the amount of R$ 215.4, eliminated in the Company’s consolidated financial statements.

(iv) In May 2003, the subsidiary CBB sold its investment in Arosuco to the Company for its book value of R$ 85.7.

(v) In July 2003, the Company made a capital investment in its subsidiary CBB, partly with its investment in Eagle Distribuidora de Bebidas S.A. (‘Eagle’) for the book valueof R$ 2,551.3, and partly with a portion of the balance of dividends receivable from CBB in the amount of R$ 1,109.6.



6 Investments in direct subsidiaries continued(b) Goodwill and negative goodwill


2003 2002 2003 2002

GoodwillCBB – based on:

Property, plant and equipment fair value excess 144.6 144.6 144.6 144.6Expected future profitability 702.7 702.7 702.7 702.7

847.3 847.3 847.3 847.3

Expected future profitabilityQuinsa 1,123.2Cympay (i) 34.2 34.2Salus S.A. (i) 19.0 19.0Pilcomayo Participações S.A. (ii) 33.9Pati do Alferes Participações S.A. (ii) 16.9Cervejaria Astra S.A. (ii) 123.3Maltería Pampa 28.1 28.1Atlântico 5.1Cervejaria Miranda Corrêa S.A. 5.5 5.5

847.3 847.3 2,062.4 1,108.2Quinsa and subsidiaries (proportionally consolidated) 510.4

Total goodwill 847.3 847.3 2,572.8 1,108.2

Accumulated amortization (378.4) (293.7) (708.6) (331.4)

Total goodwill, net 468.9 553.6 1,864.2 776.8

Negative goodwillCBB (149.9) (149.9) (149.9) (149.9)Cervesursa (18.5)Incesa (8.5)

Total negative goodwill (149.9) (149.9) (176.9) (149.9)

319.0 403.7 1,687.3 626.9

(i) Subsidiaries that made part of the total contributed by the Company and its subsidiaries in the Quinsa operation. Gains and losses in the transaction, determinedindividually in the financial statements of these subsidiaries were eliminated in the Company’s financial statements.

(ii) Goodwill reclassified to deferred charges in the consolidated financial statements arising from the mergers of subsidiaries between related parties.

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6 Investments in direct subsidiaries continued(c) Information on direct subsidiaries

2003 2002

Description CBB Arosuco Agrega Hohneck CBB Agrega Eagle Hohneck

Number of shares/quotas held– in thousandsCommon shares/quotas 19,881,631 0.3 1,375 10,000 3,442,186 1,375 276 10,000Preferred shares 35,206,009 6,073,132

Total shares/quotas 55,087,640 0.3 1,375 10,000 9,515,318 1,375 276 10,000

Percentage of direct holdingIn relation to preferred shares 99.9 99.5In relation to common

shares/quotas 99.9 99.7 50 0.009 100 50 99.9 100In relation to total

shares/quotas 99.9 99.7 50 0.009 99.7 50 99.9 100

Financial statements: Of direct subsidiaries

Adjusted shareholders’ equity 5,222.2 224.7 1.2 1,315.1 756.7 1.1 3,217.8 215.4

Adjusted net income (loss) 2,046.7 176.3 (3.8) (67.1) (334.4) (4.2) 1,484.7 363.0

Due to inter-company results, unrealized profits and fiscal incentives, the equity in the results of certain subsidiaries, as shown in note 6(a),may not correspond to the holding percentage applied to the subsidiary’s result in the period, as presented in this note.

(d) Main indirect holdings in subsidiariesTotal indirect holdings

%

Company name 2003 2002

BrazilArosuco 100 100Eagle 100 100IBA-Sudeste 99.3 98.8

AbroadMonthiers (i) 100 100Aspen (i) 100 100CCBP S.A. (ii) 100CCBA S.A. (ii) 70

(i) Wholly owned subsidiary of Jalua Spain S.A.

(ii) Subsidiaries that were part of the total contributed by the Company and its subsidiaries in the Quinsa operation.



7 Property, plant and equipment(a) Composition of property, plant and equipment

Consolidated

2003 2002

AnnualAccumulated Residual Residual depreciation

Cost depreciation amounts amounts rates – %

Land 244.6 244.6 147.1Buildings and constructions 2,090.8 (903.5) 1,187.3 1,108.1 4Machinery and equipment 5,673.3 (4,323.1) 1,350.2 1,147.2 10 to 20Off-site equipment 1,030.4 (423.6) 606.8 431.6 10 to 20Other assets and intangibles 987.0 (363.3) 623.7 278.4 4 to 20Construction in progress 153.7 153.7 218.2

10,179.8 (6,013.5) 4,166.3 3,330.6

On December 31, 2003, the subsidiaries held for sale properties with a book value of R$ 144.1 (December 31, 2002 – R$ 121.6),which are classified under long-term receivables, net of a provision for expected losses on realization, in the amount of R$ 89.1(December 31, 2002 – R$ 55.9).

During the year, a provision for potential losses on the sale of property, machinery and equipment was constituted in the amount of R$ 58.7 (December 31, 2002 – R$ 69.9), accounted for in the Company’s consolidated financial statements in ‘Non-operating expenses’.

(b) Assets with restrictionsPursuant to bank loans and leases taken by the Company and its subsidiaries, at December 31, 2003 the disposal of certain property,machinery and equipment is restricted, the residual amount of which totals R$ 909.3 (December 31, 2002 – R$ 963.5). Such restrictionhas no impact on the use of such assets and on the Company’s operations.

8 Deferred chargesConsolidated

2003 2002

CostPre-operating 190.6 247.3Implementation and expansion expenses 55.7 214.0Other 217.8(*) 107.1

464.1 568.4

Accumulated amortization (204.8) (432.2)

259.3 136.2

(*) This includes the balance of goodwill in subsidiaries in the amount of R$ 146.3, reclassified from ‘Investments’ to ‘Deferred charges’, arising from the mergers ofsubsidiaries between related parties.

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9 Loans and financing – consolidatedCurrent Long-term

Types/purposes Financial charges (p.a.) Final maturity 2003 2002 2003 2002

Local currencyICMS sales tax

incentives 5.21% June 2013 34.6 31.4 340.5 310.7Permanent assets 2.40% above the TJLP December 2008 227.2 237.7 298.6 408.3Other 2.62% above the TJLP June 2007 0.2 0.4

262.0 269.1 639.5 719.0

Foreign currencySyndicated loan 2.4% above

quarterly LIBOR (i) August 2004 1,063.0 7.1 1,150.8Bonds 10.55% September 2013 53.7 9.2 2,889.2 1,766.6Raw material import financing 4.77% May 2005 183.7 207.6 22.1 81.4Permanent assets 5.87% January 2009 303.5 51.0 418.4 160.2Other (ii) 89.57% October 2008 110.2 63.4 35.1 1.3

1,714.1 338.3 3,364.8 3,160.3

1,976.1 607.4 4,004.3 3,879.3

(i) Fixed interest rate of 5.95% per annum through a LIBOR swap operation (note 9(d)).

(ii) This includes local currency loans (including interest) in Argentina, Ecuador, Peru, Uruguay and Venezuela.

Abbreviations used:

• TJLP – Long-Term Interest Rate.

• LIBOR – London Interbank Offered Rate.

• ICMS – Value-Added Tax on Sales and Services

(a) GuaranteesLoans and financings for expansion, construction of new plants and purchases of equipment are guaranteed by mortgages on the plantproperties and financial liens on equipment. Loans for the purchase of raw materials, mainly malt, syndicated loans and the issue of Notesin the international market are guaranteed by collaterals of AmBev and its subsidiaries, which on December 31, 2003 totaled R$ 199.1.

(b) Maturities As at December 31, 2003, long-term financings fall due as follows:

2005 232.52006 390.92007 152.82008 150.02009 20.42010 53.22011 1,498.12012 and 2013 1,506.4

4,004.3



9 Loans and financing – consolidated continued(c) ICMS sales tax incentivesDescription 2003 2002

Short and long-term balancesFinancings 375.1 342.1Deferrals of taxes on sales 393.6 461.0

768.7 803.1

Financings refer to programs offered by certain Brazilian states, through which a percentage of the ICMS sales tax due is financed bythe financial agent of the state, usually over five years as from the original due date.

The amount of R$ 393.6 (December 31, 2002 – R$ 461.0) of ‘Sales tax deferrals’ includes a current portion of R$ 161.8 (December 31,2002 – R$ 154.1) classified under ‘Other taxes and contributions payable’.

The remaining amounts refer to the deferrals of ICMS due for periods of up to 12 years, as part of industrial incentive programs.The percentages deferred may be fixed during the program or vary regressively, from 75% in the first year to 40% in the final year.The deferred amounts are partially indexed at 60% to 80% of a general price index.

(d) Syndicated loanThe syndicated loan in Yen is guaranteed by co-signatures of AmBev and its subsidiaries. On December 31, 2003 and 2002, by meansof a LIBOR swap, the interest on this loan was fixed at 5.95% per annum (originally 2.4% above quarterly LIBOR).

(e) Notes issued in the international marketIn September 2003 CBB issued US$ 500 million in foreign securities (Bond 2013), with a guarantee from AmBev. These Notes bear8.75% interest p.a. and will be repaid semi-annually as from March 2004 with final maturity in September 2013. The original contractedinterest rate may be increased by 0.5%, if Bond 2013 is not registered with the US Securities and Exchange Commission (SEC) bySeptember 18, 2004.

In December 2001 CBB issued US$ 500 million in foreign securities (Bond 2011), with a guarantee from AmBev. These Notes bear10.7% interest p.a. and are repayable semi-annually as from July 2002 with final maturity in December 2011. The Company registeredBond 2011 with the SEC on October 4, 2002, eliminating the possibility of a 0.5% p.a. increase in the original interest rate as set forthin the contract.

(f) Contractual clausesOn December 31, 2003, the Company and its subsidiaries are in compliance with debt and liquidity ratio covenants in connection withloans, except as mentioned in the following paragraph.

During 2003, certain subsidiaries of Quinsa in Argentina concluded a debt renegotiation process, covering also financings payment terms.On December 31, 2003, the portion of long-term debt that was not in compliance with certain liquidity ratio covenants is recorded undercurrent liabilities, in the amount of US$ 4.2 million.

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10 Other liabilitiesParent company Consolidated

2003 2002 2003 2002

Current liabilitiesProfit sharing – employees and management 15.6 11.5 134.6Other accounts payable 0.1 196.1 113.1Advance from customer 31.0 9.8Deferred result from commodities swap and forward operations 3.0

15.7 241.6 257.5

Long-term liabilitiesProvision for medical assistance benefits and others 72.9 53.4Deferred income tax and social contribution 26.2 25.7Other accounts payable 33.2 55.1Suppliers 0.8 29.4

133.1 163.6

11 Liabilities related to tax and other claims, and provision for contingenciesConsolidated

2003 2002

Social Integration Program (PIS) and Social Contribution on Revenue (COFINS) 339.2 260.3Value-Added Tax on Sales and Services (ICMS) and Excise Tax (IPI) 532.1 458.1Income tax and social contribution 50.2 43.2Labor claims 211.1 131.5Lawsuits involving distributors and resellers 28.6 18.7Other 71.7 77.5

1,232.9 989.3

On December 31, 2003, the Company and its subsidiaries had other ongoing lawsuits which, in the opinion of legal counsel, are subject topossible, but not probable, losses of approximately R$ 1,266.6 (December 31, 2002 – R$ 976).

Principal liabilities related to fiscal claims and provisions for contingencies:

(a) PIS and COFINSThe Company obtained an injunction in the first quarter of 1999 granting the right to pay PIS (up to December 31, 2002) and COFINS onbillings, without paying these taxes on other revenues. On December 31, 2003, the provision primarily refers to amounts that were not paidpursuant to this injunction and which will be subject to provisioning until they are assured by a final decision in favor of the Company and itssubsidiaries. Following the enactment of Law 10,637 of December 31, 2002, which established new rules for calculating PIS with effect asfrom December 1, 2002, the Company began to pay such contribution including on other revenues.

(b) ICMS and IPI taxThis provision relates mainly to tax disputes of presumed zero-rated IPI credits and to extemporaneous ICMS credits on purchases ofproperty, plant and equipment prior to 1996. Such amounts, recorded as liabilities related to tax claims, will be subject to provisioninguntil they are assured by a final decision in favor of the Company and its subsidiaries.

Zero-rated IPI credits, which have never been used by the Company, in the amount of R$ 228.1 on December 31, 2003, are recordedunder ‘Other taxes and charges recoverable’ in long-term assets.



11 Liabilities related to tax and other claims, and provision for contingencies continued(c) Income Tax and Social Contribution on Net Income (CSLL)This provision relates substantially to the recognition of the deductibility of interest on own capital in the calculation of CSLL for theyear 1996.

(d) Labor claimsThis provision relates to claims from former employees. On December 31, 2003, judicial deposits made by the Company and itssubsidiaries related to labor claims, restated based on official indices, amounted to R$ 111.6 (December 31, 2002 – R$ 74.7).

(e) Claims of distributors and resellersThese relate mainly to the termination of agreements between Company subsidiaries and certain distributors, by virtue of the restructuringprocess carried out in the distribution network, as well as the non-compliance with contractual directives by distributors in some cases.

(f) Other provisionsThese provisions relate substantially to issues involving the National Social Security Institute (INSS), products and suppliers.

12 Social programs(a) AmBev Pension Fund – Instituto AmBevCBB and its subsidiaries have two kinds of pension plans: one following the defined contribution model (open to new members) and theother following the defined benefit model (no new members accepted since May 1998), with the possibility of migrating from the definedbenefit plan to the defined contribution plan. These plans are funded by members and the sponsor, and managed by Instituto AmBev(IAAP). The main purpose is to supplement the retirement benefits of employees and management. During the year ended December 31,2003, the Company and its subsidiaries made contributions of R$ 4.4 (December 31, 2002 – R$ 4.2) to Instituto AmBev.

Based on the independent actuary reports, the position of Instituto AmBev’s plans at December 31 is as follows:

2003 2002

Fair value of assets 501.5 458.7Present value of actuarial liability (334.4) (325.6)

Surplus assets – Instituto AmBev 167.1 133.1

The surplus of assets of Instituto AmBev is recognized by the Company in its consolidated financial statements under ‘Surplus assets –Instituto AmBev’, in the amount of R$ 22 (December 31, 2002 – R$ 21.6), estimated as the maximum limit of its future use, also taking intoaccount the legal restrictions that prevent the return of a possible remaining actuarial surplus, not used in the payment of private securitybenefits, in the event of a winding up of Instituto AmBev.

(b) Medical assistance and other post-employment benefits provided directly by CBBCBB directly provides medical assistance, reimbursement of medicine expenses and other benefits to certain retired pensioners.On December 31, 2003, the balance of R$ 72.9 (December 31, 2002 – R$ 53.4) was recorded in the Company’s consolidated financialstatements under ‘Provision for employee benefits’.

Changes in the provision for employee benefits, according to the independent actuary report:

Balance on December 31, 2002 53.4Financial charges incurred 8.5Actuarial calculation update 16.5Payment of benefits (5.5)

Balance on December 31, 2003 72.9

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12 Social programs continued(c) Fundação Antônio e Helena Zerrenner Instituição Nacional de Beneficência (the Zerrenner Foundation)The main purposes of the Zerrenner Foundation are to provide the sponsoring companies’ employees and management with healthcareand dental benefits, to aid in professional specialization or university courses, and to maintain organizations that provide aid and assistanceto the elderly, amongst others, through direct actions or financial aid agreements with other entities.

The changes in the actuarial liabilities of Zerrenner Foundation, according to the independent actuary report, were as follows:

Balance on December 31, 2002 154.1Financial charges incurred 24.9Actuarial loss amortization 1.2Payment of benefits (16.7)

Balance on December 31, 2003 163.5

The actuarial liabilities related to the benefits provided by the Zerrenner Foundation were fully offset by an equivalent amount of assetsexisting in the Zerrenner Foundation on the same date. The surplus assets were not recorded by the Company in its financial statements,due to the possibility of using them for other purposes, not exclusively related to the payment of benefits.

(d) Actuarial assumptionsThe medium and long-term assumptions adopted by the independent actuary, in the calculation of the actuarial liability were as follows:

Annual percentagein nominal terms

2003 2002

Discount rate 10.9 10.6Expected rate of return on assets 16.6 18.0Increase in the remuneration factor 7.3 7.5Increase in healthcare costs 7.3 7.5



13 Shareholders’ equity(a) Subscribed and paid-in capitalThe Company’s capital stock on December 31, 2003 amounted to R$ 3,124.1 (December 31, 2002 – R$ 3,046.2), represented by38,537,333 thousand nominative and no-par value shares (December 31, 2002 – 38,620,730 thousand), comprised of 15,735,878thousand common shares and 22,801,455 thousand preferred shares (December 31, 2002 – 15,795,903 thousand and 22,824,827thousand, respectively).

In April 2003, the Company increased capital by R$ 77.4, through the private subscription of 259,007 thousand preferred shares,exclusively to fulfill the provision in the stock ownership plan. In addition, the Company changed the destination of the reserveconstituted from the 2002 results, in the amount of R$ 853.2, from the reserve for future capital increase to investment reserve,in accordance with its by-laws.

(b) WarrantsDuring the period for the exercise of warrants between April 1 and April 30, 2003, 25 thousand common and 489 thousand preferredshares were subscribed, for the total amount of R$ 0.5. Certain warrant holders challenged in court the CVM’s and Company’sunderstanding related to the warrant conversion criteria.

(c) Appropriation of net income for the year and transfers to statutory reservesThe Company’s by-laws provide for the following appropriation of net income for the year, after statutory deductions:

(i) 27.5% as mandatory dividend payment to all shareholders. Preferred shareholders are legally entitled to a dividend 10% greaterthan that paid to common shareholders.

(ii) An amount not lower than 5% and not higher than 68.875% of net income to be transferred to a reserve for investments, in orderto finance the expansion of the activities of the Company and its subsidiaries, including subscriptions to capital increases or thefoundation of enterprises. This reserve cannot exceed 80% of the capital stock. Should this limit be reached, a General Meetingof shareholders must deliberate on the balance, either distributing it to shareholders or increasing capital.

(iii) Employee profit sharing of up to 10% of net income for the period, based on predetermined criteria. Directors are allotted a 5.0%participation in net income for the period, limited to the amount equivalent to their annual remuneration, whichever is lower. Profitsharing is conditioned to the achievement of collective and individual targets, which are established in advance by the Board ofDirectors at the beginning of the fiscal year.

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13 Shareholders’ equity continued(d) Proposed dividendsThe calculation of the dividends percentage approved by the Board of Directors on net income for the years ended December 31is as follows:

2003 2002

Net income for the year 1,411.6 1,510.3Legal reserve (5%) (70.6) (75.5)

Dividends basis 1,341.0 1,434.8

Prepayment of dividends 495.2 160.9Dividends prepaid as interest on own capital 222.5Supplemental dividends as interest on own capital 226.1Supplemental dividends 54.6 341.4Withholding tax on dividends as interest on own capital (67.3)

Total proposed dividends 931.1 502.3

Percentage of dividends on dividends basis – % 69.43 35.01

Dividends net of withholding tax per thousand shares outstanding (excluding treasury stock) at year-end – R$

Common 23.15(*) 12.40

Preferred 25.46(*) 13.64

(*) Dividends per thousand shares outstanding (excluding treasury stock) at year-end – before withholding tax (IRRF): common – R$ 24.82 and preferred – R$ 27.30.



13 Shareholders’ equity continued(e) Interest on own capitalCompanies legally have the option to distribute to shareholders interest on own capital based on the TJLP – long-term interest rate – onshareholders’ equity, and such interest, which is tax deductible, can be considered as part of the mandatory dividend when distributed.Although such interest is recorded in the results for tax purposes, it is reclassified to shareholders’ equity and shown as dividends.

(f) Reconciliation between the company’s shareholders’ equity and consolidated shareholders’ equity at December 31, 2003Shareholders’ equity of the parent company 4,413.2

Treasury stock acquired by the subsidiary CBB (105.0)

Total consolidated shareholders’ equity 4,308.2

(g) Treasury stockChanges in the Company’s treasury stock for the year were as follows:

Number of shares (in thousands)

In millionsDescription Preferred Common Total of Reais

Balance on December 31, 2002 121,788 40,400 162,188 78.1Purchases 529,339 63,464 592,803 310.0Cancellations (282,868) (60,049) (342,917) (154.6)

Balance on December 31, 2003 368,259 43,815 412,074 233.5

In addition, CBB holds 60,731 thousand common shares and 151,894 thousand preferred shares issued by the Company, in the amountof R$ 105. On December 31, 2003, the balance of treasury stock totals R$ 338.5 in the Company’s consolidated financial statements.

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14 Stock ownership plan AmBev has a plan for the purchase of shares by qualified employees, which is aimed at aligning the interests of both shareholders andexecutives. As defined in the by-laws, the plan is managed by a committee including non-executive members of the Company.This committee creates, periodically, stock purchase programs for common or preferred shares, defining the terms and categories oremployees to be benefited, and determines the price for which the shares will be acquired, which cannot be lower than 90% of the averagestock price traded on the São Paulo Stock Exchange (BOVESPA) during the three business days prior to granting such rights, indexedto inflation up to the date of actual exercise. The number of shares that may be granted during each year cannot exceed 5% of the totalnumber of shares of each class on that date (1.0% and 0.03% in 2003 and 2002, respectively).

When shares are bought, the Company may issue new shares, or use the balance of treasury stock. The shares granted have no exercisedate. Should the existing labor agreement come to an end, the rights expire. Regarding the shares purchased by employees, theCompany has the right to repurchase them at a price equal to:

(i) the price paid by the employee, adjusted for inflation, if the employee sells the shares during the first 30 months after the purchase;

(ii) the price paid by the employee, adjusted for inflation, for 50% of the lot, and at the market price for the remainder, if theemployee sells the shares after the first 30 months, but before 60 months after the purchase;

(iii) the market price, if the sale takes place 60 months after the purchase.

Employees who do not apply at least 70% of their annual profit sharing bonuses (net of income tax and other charges) to subscribe sharesunder the stock ownership plan, will forfeit their rights to the underlying shares in the same proportion of the bonuses not applied, unlessthe equivalent amount had been previously subscribed in cash by the employee.

The Company and its subsidiaries could make advances to employees for the purchase of shares for plans granted until the year 2002.Such financings normally do not exceed periods of up to four years and carry 8% interest p.a. above the General Market Price Index (IGP-M). These financings are guaranteed by the shares issued at the time of purchase. On December 31, 2003, the outstandingconsolidated balance of these advances amounted to R$ 234,7 (December 31, 2002 – R$ 324.8). Starting in 2003, the Companyand its subsidiaries will no longer finance the purchase of shares, and such shares must be purchased in cash, by the beneficiaries,upon subscription.

The change in stock purchase rights during the years ended December 31 is as follows:

Stock purchaserights – in thousands

2003 2002

Balance of shares available for purchase exercisable at the beginning of the year 640,800 1,031,221

Changes during the yearExercised (259,007) (384,074)Cancelled (34,104) (16,847)Granted 386,000 10,500

Balance of shares available for purchase exercisable at year-end 733,689 640,800

15 Treasury(a) General considerationsThe Company and its subsidiaries hold certain amounts of cash and cash equivalents in foreign currency, and enter into cross-currencyinterest rate and commodities swaps and currency forward contracts to hedge against the effects of exchange rate variations on theconsolidated exposure in foreign currency, interest rate fluctuations, and changes in raw materials prices, particularly aluminum and sugar.

Financial assets are purchased to hedge against financial liabilities, which does not prevent the Company from redeeming them at anytime, even though its actual intention is to carry such assets to maturity on their respective due dates.



15 Treasury continued(b) Derivative instrumentsThe following is the composition of nominal amounts of outstanding derivatives on December 31:

Description 2003 2002

Currency hedgeUS$/R$ 4,686.5 2,300.0Yen/R$ 775.7 1,059.7Peso/US$ 152.4

Interest rate hedgeFloating LIBOR vs. fixed LIBOR 944.6 1,277.4IDC x Fixed (201.8) (42.1)

Commodities hedgeAluminum 166.3Sugar 22.3 0.2

6,379.7 4,761.5

(i) Currency and interest rate hedgesOn December 31, 2003, unrealized gains on variable earnings in derivative operations were limited to the lower value of theinstruments’ ‘yield curve’ and their relative market value, in accordance with the Brazilian Corporate Law.

Had the Company recorded its derivative instruments at market value, it would have had an additional gain amounting to R$ 205.9 in the result for the year ended December 31, 2003 (December 31, 2002 – R$ 240.3) as shown in the table below:

Unrealizedvariable

Financial instruments Book value Market gains

Public securities 1,198.8 1,249.0 50.2Swaps/forwards (49.2) 106.5 155.7

1,149.6 1,355.5 205.9

(ii) Commodities and currency hedgesThese commodities operations were entered into to specifically minimize Company exposure to fluctuations in the prices of rawmaterials to be acquired. Their net results, calculated at cost (equivalent to market value), are deferred and recognized in resultswhen the corresponding sales of final products occur.

During the year ended December 31, 2003, the following effect relating to the currency hedging operations was recorded in theresult under ‘Cost of sales’.

Net increase in the Description cost of sales

Currency hedge (99.0)Hedge of aluminum 16.7

(82.3)

On December 31, 2003, the amount of R$ 1.2 was deferred and will be recognized as a charge to the results, when thecorresponding finished product sale is made.

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15 Treasury continued(c) Financial liabilitiesThe Company’s financial liabilities, represented mainly by the bonds, syndicated loan and import financings, are stated at cost plusaccrued interest and monetary and exchange variations, based on closing rates and indices of each period.

Had the Company been able to use a method where its financial liabilities could be recognized at market values, it would have determinedan additional loss, before income taxes, of approximately R$ 202.2, on December 31, 2003, as shown in the table below:

UnrealizedFinancial instruments Book value Market variable gains

Bonds 2,942.9 3,270.7 (327.8)Syndicated loan 1,063.0 938.7 124.3Import financing 115.0 113.7 1.3

4,120.9 4,323.1 (202.2)

The criteria used to estimate the market value of the financial liabilities are as follows:

• bonds: secondary market value of the Notes based on the closing quotation on the base date of December 31, 2003 (approximately116.99% of face value for Bond 2011 and 106.5% for Bond 2013);

• syndicated loan: estimated value based on the secondary market for securities with a similar risk (on average, 2.14% p.a.);

• import financing: estimated value for new operations with financial institutions on the base date of December 31, 2003, for outstandinginstruments with similar maturity terms (on average, 1.76% p.a.).

(d) Financial income and expenses Consolidated

2003 2002

Financial incomeNet gains on derivative instruments 319.8 1,202.4Foreign exchange rate variation on financial investments (97.2) 1,007.2Financial income on cash equivalents 233.7 120.5Financial charges on taxes, contributions and judicial deposits 77.4 34.2Other 68.1 166.0

601.8 2,530.3

Financial expensesExchange rate variation on financings 524.3 (1,738.8)Net losses on derivative instruments (298.2) (883.6)Financial charges on foreign currency loans payable (344.6) (332.4)Financial charges on loans in Reais (129.9) (109.4)Taxes on financial transactions (90.9) (95.0)Financial charges on contingencies and others (95.4) (95.7)Other (74.0) (22.4)

(508.7) (3,277.3)

(e) Concentration of credit riskA substantial part of the Company’s sales is made to distributors, supermarkets and retailers, through a broad distribution network.Credit risk is low because of the large client portfolio and the risk control monitoring procedures. Historically, the subsidiaries have notrecorded significant losses on receivables from customers.

To minimize the credit risk of its investments, the Company has adopted procedures for the allocation of cash and investments, taking intoaccount the limits and credit ratings of financial institutions, and avoids any credit risk concentration.



16 Income tax and social contribution(a) Reconciliation of the consolidated of income tax and CSLL benefit (expense) with nominal values

2003 2002

Consolidated net income, before income tax and CSLL 1,864.2 1,307.4

Profit sharing and contributions (23.6) (125.1)

Consolidated net income, before income tax, CSLL and minority interest 1,840.6 1,182.3

Income tax and CSLL expense at nominal rates (625.8) (402.0)

Adjustments to determine the effective rateTax losses from previous years 147.9Interest on own capital 152.7Effect of write-off of goodwill upon merger of subsidiary 37.1Amortization of goodwill, non-deductible portion (21.2) (24.5)Interest ownership gains arising from corporate restructuring (6.9) (1.5)Results of subsidiaries abroad not subject to taxation (182.9) 621.5Equity gains in subsidiaries 59.8 51.7Permanent additions, exclusions and other 13.2 35.4

(Expense) benefit of income tax and CSLL (426.1) 280.6

(b) Composition of the benefit (expense) of income tax and CSLLParent company Consolidated

2003 2002 2003 2002

Current 1.2 (624.4) (123.4)Deferred 99.2 20.4 198.3 404.0

100.4 20.4 (426.1) 280.6

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16 Income tax and social contribution continued(c) Composition of deferred taxes


2003 2002 2003 2002

Long-term receivablesTax loss carry-forwards 111.7 95.1 1,163.5 1,080.6Temporary differences

Non-deductible provisions 49.6 42.6 410.0 350.8Other 77.7 2.1 258.3 127.0

239.0 139.8 1,831.8 1,558.4

Long-term liabilitiesTemporary differences

Accelerated depreciation 17.9 17.9Other 8.3 7.8

26.2 25.7

Based on projections of future taxable income of the Company and its subsidiaries located in Brazil and abroad, the estimated recoveryof the consolidated deferred income tax and social contribution asset on tax losses is as follows:

Nominal values

2004 178.52005 249.62006 292.72007 308.02008 134.7

1,163.5



16 Income tax and social contribution continued(c) Composition of deferred taxes continuedThe asset recorded is limited to the amounts for which an offset is supported by taxable income projections, discounted to present values,to be realized by the Company over the next ten years, also considering that the offset of tax losses is limited to 30% of pre-tax income forthe year, under Brazilian tax legislation.

The deferred income tax asset as of December 31, 2003 includes the total effect of tax losses of Brazilian subsidiaries, which have noexpiration dates and are available for offset against future taxable income. Part of the tax benefit corresponding to the tax losses of foreignsubsidiaries was not recorded as an asset, as management cannot ascertain that realization is probable.

It is estimated that the balance of deferred taxes on temporary differences as of December 31, 2003 should be realized by the fiscal year2008. However, it is not possible to estimate accurately when such temporary differences will be realized, because the major part dependson legal decisions over which the Company has no control nor any means of anticipating exactly when a final decision will be reached.

The forecasts of future taxable income include several estimates relative to the performance of the Brazilian and the global economy,the determination of foreign exchange rates, sales volume, sales prices, tax rates, and other factors that may differ from actual dataand amounts.

Since the income tax and social contribution derive not only from taxable income but also depend on the Company’s tax and corporatestructure, the existence of non-taxable income, non-deductible expenses, tax exemptions and incentives, and several other variables,there is no relevant correlation between the Company’s net income and the result of income tax and social contribution. Therefore, the taxloss carry-forwards should not be taken as an indicator of future profits.

17 Commitments with suppliersThe Company has agreements with certain suppliers to acquire certain quantities of materials for the production and packagingprocesses, such as plastics for PET bottles, aluminum and natural gas.

18 Operating income (expenses), netParent company Consolidated

2003 2002 2003 2002

Operating incomeEquity gains in subsidiaries 175.9 151.9Exchange gains on investments abroad 128.8Other operating income 23.5 45.4Discount on the settlement of tax incentives 16.6Recovery of taxes and contributions 24.6 26.7Write-off of goodwill on divestment 14.8 14.8Reversal of provision for losses on unsecured liabilities 190.0

204.8 240.6 367.6

Operating expensesProvision for losses on unsecured liabilities (42.4)Exchange losses on investments abroad (142.4)Amortization of goodwill (84.8) (84.7) (252.4) (105.3)Taxes on other income (31.2)Other operating expenses (0.9) (3.8) (54.7) (62.9)

(85.7) (130.9) (480.7) (168.2)

Operating income (expenses), net (85.7) 73.9 (240.1) 199.4

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19 Non-operating income (expenses), netParent company Consolidated

2003 2002 2003 2002

Non-operating incomeGain of interest ownership in investments 31.8Gain on disposal of property, plant and equipment 38.5Other non-operating income 5.6 4.0

44.1 35.8

Non-operating expensesProvision for loss on permanent assets (58.7) (69.9)Loss of interest ownership in subsidiaries (215.4) (33.3)Loss on disposal of property, plant and equipment (25.8) (12.4)Other non-operating expenses (0.1) (27.0) (25.7)

(215.5) (144.8) (108.0)

Non-operating income (expenses), net (215.5) (100.7) (72.2)

20 InsuranceAt December 31, 2003, the main assets of the Company and its subsidiaries, such as property, plant and equipment and inventories,are insured against fire and other risks at replacement value. Insurance coverage is higher than the book values.

21 Subsequent events(a) Activities abroad in 2004On February 12, 2004, the Company announced an alliance with Embotelladora Dominicana CXA (‘Embodom’), headquartered in theDominican Republic and a PepsiCo bottler in that country. This transaction will make AmBev and Embodom partners in a company thatwill market and produce beer and soft drinks in the Dominican Republic.

(b) Distribution of dividendsOn February 27, 2004, the Company’s Board of Directors approved, based on the accumulated results to December 31, 2003, thedistribution of supplemental dividends in the total amount of R$ 54.6 (without withholding tax), and the distribution of interest on owncapital in the total amount of R$ 226.1. The payments will start on March 25, 2004, based on the shareholding position as of March 15,2004 and record date for ADRs on March 18, 2004.

(c) Material information press releaseThe Company informed on March 1, 2004 that it is negotiating with Interbrew S.A. in respect to a possible worldwide transaction.The Company mentioned, however, that no agreement has been reached yet and there can be no assurance that an agreement willbe reached, nor can the Company anticipate with details the final conditions of the operation or the effective structure of the allianceunder discussion.


Supplementary informationYears ended December 31 / In millions of Reais

Consolidated statement of cash flows2003 2002

Operating activitiesNet income for the year 1,411.6 1,510.3Expenses (income) not affecting cash and cash equivalents

Depreciation and amortization 766.3 659.5Tax, labor and other contingencies 187.9 123.7Financial charges on tax and fiscal contingencies 59.8 32.9Discount on the settlement of tax incentives (16.6)Provision for losses on inventory and permanent assets 64.6 113.4Financial charges and variations on the stock ownership plan (47.7) (88.1)Financial charges and variations on taxes and contributions (43.5) (21.4)Loss on disposal of permanent assets 41.3 63.3Exchange rate variation and charges on financings (40.1) 2,120.4Unrealized exchange rate variation and gains on financial assets 183.3 (840.0)Reduction of deferred income tax and social contribution (198.3) (404.0)Exchange rate gains or losses on subsidiaries abroad that do not affect cash 203.5 (108.7)Amortization of goodwill, net of realized negative goodwill 252.4 90.5Minority interest 2.9 (47.4)Equity in results of investees 6.2Loss of interest ownership in subsidiaries 33.3

Decrease (increase) in assets Trade accounts receivable (12.8) 107.9Taxes recoverable (253.2) (35.6)Inventories (48.6) 37.8Judicial deposits (102.9) (51.5)Other (120.5) 25.9

Increase (decrease) in liabilities Suppliers (14.1) 260.6Salaries, profit sharing and social charges (86.4) 50.6Income tax, social contribution and other taxes 491.3 (195.3)Disbursements linked to contingency provision (104.8) (34.6)Other (87.3) 224.8

Cash generated by operating activities 2,527.6 3,595.0

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Consolidated statement of cash flows continued2003 2002

Investing activitiesMarketable securities (maturity over 90 days) 423.1 (808.7)Securities and collateral 228.6 (249.3)Acquisition of investments (1,745.3) (75.5)Disposal of property, plant and equipment 32.4 98.3Acquisition of property, plant and equipment (862.2) (522.4)Expenditures on deferred charges (91.3) (45.5)

Cash used in investing activities (2,014.7) (1,603.1)

Financing activitiesFinancings

Funding obtained 3,359.2 620.1Amortization (2,510.1) (2,925.3)

Changes in the capital of minority shareholders 4.8 10.5Capital increase 4.6 29.0Loans to employees for purchase of shares 130.2 26.2Share buyback (308.5) (337.1)Payment of dividends (1,026.9) (335.6)

Cash used in financing activities (346.7) (2,912.2)

Exchange rate gains or losses on cash and cash equivalents (101.7) 639.1

Increase in cash and cash equivalents 64.5 (281.2)

Cash and cash equivalents at beginning of the year 1,131.6 1,412.8Cash and cash equivalents at end of the year 1,196.1 1,131.6

Increase (decrease) in cash and cash equivalents 64.5 (281.2)


Investor information

Shares outstanding at year end 2003:

37,913 million shares379.1 million ADRs equivalents.

Stock Exchange

BovespaTicker symbol: AMBV3 (ON), AMBV4 (PN)

Shares listed and traded: Bolsa de Valores de São Paulo (Bovespa)

The main indices AmBev stock participated in are: IBX and Ibovespa

NYSETicker symbol: ABV.c (ON), ABV (PN)

ADRs listed and traded: New York Stock Exchange (NYSE)

Dividend policyAmBev’s by-laws provide for a mandatory dividend of 35% of the company’s annual net income, as determined by BrazilianCorporate Law accounting principles. The actual payout ratio was69% in 2003 and 35% in 2002. The mandatory dividend includesamounts paid as interest attributable to shareholders’ equity. This is equivalent to a dividend but is a more tax efficient way to distributeearnings as they are generally deductible by the Company forBrazilian income tax purposes. However, shareholders (includingholders of ADRs) pay Brazilian withholding tax on the amountsreceived as interest attributable to shareholders’ equity, whereas no such payment is required in connection with dividends received.Withholding tax is usually paid by Brazilian companies on behalf of their shareholders.

Cash dividends declaredR$ per US$ equivalent

Earnings generated First payment date Share type 1,000 shares per 1,000 shares

Second half 2003 25 Mar 2004 preferred 6.75 2.30common 6.14 2.09

First half 2003 13 Oct 2003 preferred 18.70 6.59common 17.00 5.99

Second half 2002 28 Feb 2003 preferred 9.27 2.60common 8.43 2.37

First half 2002 25 Nov 2002 preferred 4.37 1.15common 3.97 1.04


First half 2001 17 Sep 2001 preferred 3.11 1.16common 2.83 1.06


Share price performance% change % change

31/12/2003 31/12/2002 02/03 31/12/2001 01/02

AMBV4 (PN) – R$ 739.00 540.00 36.9 476.00 13.4AMBV3 (ON) – R$ 635.00 478.00 32.8 428.00 11.7ABV (PN) – US$ 25.51 15.56 63.9 20.29 -23.3ABV.c (ON) – US$ 25.51 13.00 96.2 18.52 -29.8IBOVESPA – R$ 22,236.00 11,268.00 97.3 13,577.00 -17.0S&P 500 – US$ 1,111.92 879.82 26.4 1,148.08 -23.4

AmBev has two classes of shares, common (ON) and preferred (PN). Common shareholders are entitled to voting rights, while preferredshares have priority in liquidation. As per Brazilian Corporate Law, dividend payments to preferred shareholders must be 10% greater thanthose made to common shareholders.

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RatingsAgency Local rating Foreign rating Outlook

Fitch BBB- BB- PositiveMoody’s Baa3 B1 DevelopingS&P BBB- BB- Positive

As of October 2004.

Shareholder account assistanceFor address changes, dividend checks, account consolidations,direct deposit of dividends, registration changes, lost stockcertificates, stock holdings and Dividend and Cash Investmentplan, please contact:

Retail shareholders in BrazilNilson CasemiroTel 55 11 2122-1402Email [email protected]

Depositary bank in BrazilBanco ItaúTel 55 11 5029-7780

Depositary bank and transfer agent in the USAThe Bank of New York101 Barclay StreetNew York, NY 10286Tel 1 888 269-2377Email [email protected]

Independent auditorsDeloitte Touche TohmatsuRua Alexandre Dumas, 1981São Paulo, SP 04717-004BrazilTel 55 11 5185-2444

Corporate officesRua Dr. Renato Paes de Barros, 1017 – 4th floorSão Paulo, SP 04530-000BrazilTel 55 11 2122-1200 Fax 55 11 2122-1526

Information resourcesPlease direct all requests for information to:

AmBev – Investor Relations DepartmentRua Dr. Renato Paes de Barros, 1017 – 4th floorSão Paulo, SP 04530-000BrazilTel 55 11 2122-1414/1415Email [email protected]

Investor websiteOur investor website has additional Company financial andoperating information, as well as transcripts of conference calls.Investors may also register to automatically receive press releasesby email and be notified of Company presentations and events.

www.ambev-ir.com

PublicationsThe Company’s Annual Report, Proxy Statement, Form 20-Freports are available free of charge from the Investor RelationsDepartment, listed above. If you are receiving duplicate orunwanted copies of our Annual Report, please contact the Investor Relations Department.

Send us your feedbackWe value your views on this Annual Report. Did it help you understand more about AmBev?

Please send your comments to [email protected]

2003

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