COMPANHIA CERVEJARIA BRAHMA (Exact Name of Registrant As Specified in Its Charter)

US SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998

Commission file number 1-14630 COMPANHIA CERVEJARIA BRAHMA (Exact Name of Registrant as Specified in its Charter)

Federative Republic of Brazil (Jurisdiction of Incorporation or Organization)

Brahma Brewing Company (Translation of Registrant’s name into English)

Rua Maria Coelho Aguiar, 215 - Blo co F, 6° andar Santo Amaro, São Paulo - CEP 05804-900 Brazil (Address of principal executive offices) (Zip code)

Securities registered pursuant to Section 12(b) of the Exchange Act

Title of Each Class Name of Each Exchange in Which Registered Preferred Shares, no par value per share each represented by New York Stock Exchange American Depositary Shares

Common Shares, no par value per share each represented by New York Stock Exchange American Depositary Shares

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

The total number of issued shares of each class of stock of COMPANHIA CERVEJARIA BRAHMA as of March 31, 1999 was:

2,635,679,468 Common Shares, no par value per share 4,287,944,559 Preferred Shares, no par value per share

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark which financial statement item the Registrant has elected to follow Item 17 Item 18 X . TABLE OF CONTENTS

Page

INTRODUCTION...... 2

PART I...... 2 ITEM 1. DESCRIPTION OF BUSINESS...... 2 ITEM 2. PROPERTIES...... 34 ITEM 3. LEGAL PROCEEDINGS...... 36 ITEM 4. CONTROL OF REGISTRANT...... 38 ITEM 5. NATURE OF TRADING MARKET ...... 39 ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS...... 45 ITEM 7. TAXATION...... 47 ITEM 8. SELECTED FINANCIAL DATA ...... 56 ITEM 9. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 66 ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ...... 99 ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT...... 101 ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS ...... 105 ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES...... 105 ITEM 13. INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS...... 106

PART II ...... 107 ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED...... 107

PART III...... 108 ITEM 15. DEFAULTS UPON SENIOR SECURITIES...... 108 ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES...... 108

PART IV...... 109 ITEM 17. FINANCIAL STATEMENTS...... 109 ITEM 18. FINANCIAL STATEMENTS...... 109 ITEM 19. FINANCIAL STATEMENT AND EXHIBITS...... 109 INTRODUCTION

All references herein (i) to the “Company” or to “Brahma” are references to Companhia Cervejaria Brahma and its consolidated subsidiaries, (ii) to the “Brazilian Government” are references to the federal government of the Federative Republic of Brazil, and (iii) to “Preferred Shares” and “Common Shares” refer to the Company’s authorized and outstanding preferred stock and common stock, designated as ações preferenciais and ações ordinárias, respectively, each without par value. As used herein, one hectoliter equals one hundred liters and one billion equals one thousand million. All references herein to the “real,” “reais” or “R$” are to Brazilian reais, the official currency of Brazil. As of July 1, 1994, the denomination of the Brazilian currency unit was changed to the real from the cruzeiro real (each real being equal to 2,750 cruzeiros reais at such time), which, in turn, was changed as of August 1, 1993 from the cruzeiro (each cruzeiro real being equal to 1,000 cruzeiros at such time). All references to “ US$”, “dollars” or “US dollars” are to United States dollars. ______

The Company has prepared the consolidated financial statements included herein in conformity with generally accepted accounting principles in the United States (“US GAAP”). ______

PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

Companhia Cervejaria Brahma, a company incorporated under the laws of the Federative Republic of Brazil, and its consolidated subsidiaries (collectively, “Brahma” or the “Company”), operate in the production and sale of beer , soft drinks and other non-carbonated drinks, such as isotonic sport drinks, teas and mineral waters, in Brazil and other South American countries. Brahma is the largest beer producer in Latin America, the fifth largest beer producer in the world, the second largest soft drink producer in Brazil and the largest Brazilian consumer company listed on the São Paulo Stock Exchange, with total assets of US$3,731.6 million and shareholders’ equity of US$1,100.4 million as of December 31, 1998. For the fiscal years ended December 31, 1998, 1997 and 1996, Brahma had net sales of US$2,669.3 million, US$2,444.1 million and US$2,299.9 million, respectively; operating income of US$310.8 million, US$486.4 million, and US$418.5 million, respectively; and net income of US$238.6 million, US$395.5 million and US$388.6 million, respectively. Net income for the Index to Consolidated Financial Statements Page

Corporate History

The Company was founded in 1888 as Villiger & Cia, with an initial capacity of 12,000 liters of beer and 32 employees, and is now one of the oldest brewers in Brazil. The founders of the Company were Joseph Villiger, a Swiss immigrant and engineer, Paul Fritz, a Brazilian national, and Ludwig Mack, a German national. The Brahma brand was registered on September 6, 1888 and in 1904, the Company changed its name to Companhia Cervejaria Brahma.

One important source of the Company’s growth throughout its history has been the acquisition of small regional breweries. One of the most significant acquisitions was that of Cervejarias Reunidas Skol - Caracu S.A. in 1980. At the time of its acquisition, Skol products enjoyed a 7% to 9% market share. Since acquiring the Skol brand, the Company has increased Skol’s market share as of December 31, 1998 to 25.3%.

The Company entered the soft drink business in 1918 with the launch of its guaraná and lemon sodas. In 1984, the Company entered into an agreement with Pepsi to produce and distribute Pepsi products in most of Brazil. In 1994, Brahma ended its franchise of Pepsi products in order to focus more fully on its own soft drink brands. In October 1997, the Company re-established its relationship with Pepsi by entering into a franchise agreement, allowing the Company to produce, sell and distribute Pepsi products through out Brazil.

In 1989, BRACO S.A. (“BRACO”), an investment company controlled by the former controlling shareholders of Banco de Investimentos Garantia (“Garantia”), one of the largest investment banks in Brazil, and Empresa de Consultoria, Administração e Participações S.A. (“ECAP”), a wholly-owned subsidiary of BRACO, acquired 40.7% of the Common Shares in the Company. As of December 31, 1998 these companies held approximately 55% of the common stock of Brahma, through Common Shares and American Depositary Shares (“ADSs”). Other major common shareholders are Fundação Assistencial Brahma (Brahma Welfare Foundation), which as of December 31, 1998 owned 9.8% of the common stock; Marcel Herrmann Telles, the Chief Executive Officer of Brahma, who owns 6.7% of the Common Shares; and Fundação Centrus, the Central Bank of Brazil’s pension fund, which owns 6.6% of the Common Shares. The remaining Common Shares are owned by the public. See “Control of Registrant.” Index to Consolidated Financial Statements Page

In 1994, the Company began operating outside Brazil. Brahma acquired a controlling interest in Compania Anonima Cervecera Nacional (“CACN”) in Venezuela and constructed a brewery in Lujan, Argentina, (“CCBA”). See “Beer”.

The Company also formed strategic alliances in order to strengthen its portfolio and to participate in those beverage segments that the Company deemed potentially valuable. In September 1995, the Company entered into a joint venture with Miller Brewing Company (“Miller”) to market Miller Genuine Draft in Brazil. In December 1996, the Company also entered into a licensing agreement with Carlsberg A/S (“Carlsberg”) to begin producing Carlsberg beer in Brazil. In August 1997, the Company established a joint venture with Indústrias Gessy Lever Ltda., forming Ice Tea do Brasil Ltda., enabling the Company to produce, sell and distribute the Lipton brand of ice tea in Brazil. In the same year, the Company entered into a twenty-year agreement with PepsiCo International, Inc. (“PCI”) to produce, sell and distribute Pepsi products in Brazil. See “Joint Ventures and Strategic Alliances”.

In line with the Company’s strategy of becoming a total beverage company, the Company entered the non-carbonated beverage business. This was accomplished by producing and marketing Fratelli Vita and Fonti brands of mineral and mineralized water and the Marathon brand of isotonic sport drinks. See “Others”.

In 1996, the Company commenced share buy-back programs designed to increase shareholder value. From 1996 to 1998, the Company repurchased an aggregate of US$625.1 million of its Preferred and Common Shares through buy-back programs. In 1998, the Company repurchased 218,232,155 Preferred Shares and 49,006,000 of Common Shares (including the Brahma Welfare Foundation) for an aggregate value of US$137.6 million.

In June 1997, the Company’s American Depositary Receipts (“ADRs”) were listed on the New York Stock Exchange under the symbol “BRH.” Each ADR Index to Consolidated Financial Statements Page

The Company maintains its principal executive offices at Rua Maria Coelho Aguiar, 215 - Bloco F, 6º andar, Santo Amaro, São Paulo, SP - CEP 05804-900 Brazil and its telephone number is (011) 55-11-3741-7000.

Business

Of the Company’s total net sales in 1998, 80.5% consisted of beer sales, 16.7% consisted of soft drinks sales and 2.8% consisted of sales of other drinks. (Basis: Accounting principles prescribed in Brazilian Corporate Law). (See Item 9 “Results of Operations”).

The following tables set forth the Company’s sales volume, for the three fiscal years ended December 31, 1998.

Sales Volume ( in thousands of hectoliters )

1998 1997 1996 Beer Brazil 39,820 38,838 36,317 Argentina 1,392 1,336 1,046 Venezuela 1,301 1,147 938 Total Beer 42,513 41,321 38,301

Soft Drinks Brazil 12,114 9,362 8,811

TOTAL 54,627 50,683 47,112

Beer

Beer is the Company’s core business and the largest contributor to its revenues. Beer sales accounted for approximately 80.5% of net sales for the fiscal year ended December 31, 1998, totaling US$2,187.5 million. With sales volume of 42.5 million Index to Consolidated Financial Statements Page

In Brazil, beer sales accounted for approximately 75.8% of net sales for the fiscal year ended December 31, 1998. The Company’s Brazil beer sales were 39.8 million hectoliters in 1998 an increase of 2.5% over 1997. In 1997 and 1996 Brazil beer sales were 38.8 million hectoliters and 36.3 million hectoliters, respectively. The Company’s Brazilian breweries produce the well-known Brahma and Skol brands of beer, which collectively held 47.8% of the market share in Brazil as of the year ended December 31, 1998. These beers include Brahma Chopp, Brahma Bock, Brahma Light, Brahma Extra and Malzbier. These products held approximately 22.5% of the Brazilian beer market, while the Skol brand, which includes Skol Pielsen, Skol Bock and Caracu, held approximately 25.3% of the Brazilian beer market. According to Impact International, an industry magazine, the Brahma Chopp brand is the third most consumed brand of beer in the world, while its Skol brand ranks as the sixth most consumed brand of beer in the world.

The Brahma and Skol brands are marketed and distributed under separate distribution networks, both in Brazil, to more than one million points-of-sale, primarily through exclusive independent distributors and, to a lesser extent, through the Company’s own distribution system, and through a distribution subsidiary, Eagle Distribuidora de Bebidas Ltda. (“Eagle”). The Company’s own distribution system accounted for 20.2% of the Company sales volume in 1998, and Eagle accounted for approximately 3.0% of the Company’s sales volume in 1998.

The following table shows the Brazilian market share of the Company’s beer sold under the Brahma and Skol brand names, in comparison to other brands during the period 1991 to 1998:

Brazilian Beer Market Share by Producer (Average per year) 1998 1997 1996 1995 1994 1993 1992 1991 Brahma 47.9% 48.0% 49.8% 46.6% 50.1% 50.2% 51.5% 51.3% Antarctica 25.4% 24.9% 25.5% 31.9% 30.2% 31.5% 34.0% 35.1% Kaiser 16.0% 16.6% 16.7% 14.6% 13.9% 13.6% 11.5% 11.6% Schincariol 7.4% 6.0% 4.7% 5.4% 4.7% 3.8% 2.1% 1.2% Others 3.3% 4.5% 4.2% 1.5% 1.1% 0.9% 0.9% 0.8%

Brazilian Beer Share of Value by Producer (Average per year) Index to Consolidated Financial Statements Page

Source: Nielsen (year average)

Outside of Brazil, the Company has a controlling interest in CACN, located in Venezuela and in CCBA located in Argentina.

For the year ended December 31, 1998, beer operations in Venezuela accounted for US$67.7 million, or 2.5% of the Company’s total net sales. The Venezuela sales were 1.3 million hectoliters in 1998, an increase of 13.4% over 1997. The Company is the third largest brewer in Venezuela, with an installed annual beer production capacity of 2.2 million hectoliters and a market share in Venezuela of approximately 13.5% at the end of 1998.

For the year ended December 31, 1998, the Company’s Argentinean operations accounted for US$59.6 million, or 2.2%, of the Company’s total net sales. Argentinean beer sales totaled 1.4 million hectoliters, an increase of 4.1% over 1997, whereas industry sales volumes declined by approximately 2.0%. The main growth in the Argentinean operations in 1998 occurred in the city of Buenos Aires, where the Company began direct distribution in the second semester. Nielsen, a research company, has estimated that the Company captured a market share in Argentina of 11.7% for the year ended December 31, 1998.

Although the Company has grown substantially in the Argentinean and Venezuelan markets, only 4.7% of its revenues came from such markets for the year ended December 31, 1998.

Soft Drinks

In October 1997, the Company entered into a twenty-year agreement with PCI to produce, sell and distribute Pepsi products in an area covering some 85.0% of Brazil. Pepsi soft drinks held a total market share of approximately 6.0% during 1998 in Brazil. The distribution area originally established with PCI was increased with the Company being awarded new territories during 1998.

Index to Consolidated Financial Statements Page

The Company’s soft drinks sales were 12.1 million hectoliters in 1998 an increase of 29.4% over sales in 1997. This increase was a result of the addition of Pepsi to our product portfolio. In 1997 and 1996 soft drinks sales were 9.3 million hectoliters and 8.8 million hectoliters, respectively. The total Company market share for soft drinks was approximately 12.5% as of December 31, 1998.

The Company’s soft drinks, which are distributed by distributors of Brahma beer products under the Brahma brand name include: the Brahma Guaraná, Brahma Guaraná Diet and Brahma Guaraná Light brands of guaraná soft drinks; the Sukita and Sukita Diet brands of orange flavored soft drinks; Limão Brahma brand of lemon flavored soft drink; Tonica Brahma tonic water and Soda Cristal soda water. The Pepsi brand soft drinks, other than its cola product, such as Teem, 7-Up, Mirinda and KAS are distributed through the Skol distribution channel, while cola products are distributed through both the Brahma and Skol distribution channels.

Internationally, the Company has also expanded its soft drink operations to Argentina. In the first quarter of 1996, the Company began to export soft drinks in cans to Argentina. In 1996, the Company also entered into a licensing agreement with Evis S.A., an Argentine mineral water producer, to produce soft drinks under the Brahma name.

Others

In addition to its beer and soft drink businesses, the Company produces mineral water, mineralized water, isotonic sport drinks and ice tea.

Brahma owns 50% of the share capital of Pilcomayo Participações S.A. (“Pilcomayo”), which controls 100% of Fratelli Vita Bebidas Ltda. (“Fratelli Vita Bebidas”) which produces and markets the Fratelli Vita brand of mineral water, the Marathon brand of isotonic sport drinks and Lipton brand ice tea.

Index to Consolidated Financial Statements Page

The isotonic beverage market is still new to Brazil. The total market was 0.85 million hectoliters in 1998. The Company has the second most popular brand in this market, with 11% of market share.

The ice tea market was 0.5 million hectoliter in 1998. The Company participates in this market through a joint venture with Indústrias Gessy Lever Ltda., this joint venture held 36% of the market share at the year ended 1998. The Company also owns and operates three malt plants. Malt produced by those plants is purchased by the Company and third parties for use in brewing beer.

Net sales to third parties from malt production and other non-beer or soft drink sales amounted to US$76.9 million for the year ended December 31, 1998.

Facilities

Brahma currently controls 28 facilities, including 13 breweries (11 in Brazil and one in each of Argentina and Venezuela), seven soft drink plants, which produce both Brahma brand and Pepsi brand soft drinks, including a plant of concentrate and five mixed plants, which produce both beer and soft drinks, and three malt plants. The total beer producing capacity of the Company is 62.0 million hectoliters/per annum of which 57.6 million hectoliters is in Brazil and 2.2 million hectoliters is in each of our international operations, Argentina and Venezuela. The total capacity to produce soft drinks is 27.0 million hectoliters/per annum, which includes the production of both Brahma and Pepsi brand soft drinks.

Brahma’s CCBA facility located in Luján, Argentina has an annual production capacity of 2.2 million hectoliters. As a result in increased demand and sales in Argentina, the Company has expanded the Luján plant by 50%, adding two packaging lines: aluminum cans, which began operations in January 1998, and returnable bottles, which started operations in mid-1998.

Index to Consolidated Financial Statements Page

The Company also owns and operates three malt plants. One malt plant in Brazil, one in Argentina, “Malteria Pampa S.A”, which holds 100% of another malt plant in Uruguay, “Malteria Uruguay S.A.”

Capital Investment Plan

Since 1994, the Company has pursued an aggressive investment plan to modernize and expand its production facilities, replacing older breweries primarily located in city centers that have higher operating costs with new, technologically advanced facilities as well as by renovating certain existing facilities. The commencement of the Company’s capital investment program closely followed the explosion in consumer demand which followed the introduction of the real in July 1994. During the period 1994 through 1998, the Company invested a total of approximately US$2.5 billion in its expansion and modernization program.

The three main construction projects within the Company’s investment program were the Nova Rio plant in Rio de Janeiro, the Sergipe plant in northeastern Brazil, and the Rio Grande do Sul plant in southern Brazil. The Nova Rio plant, which produces both beer and soft drinks, utilizing highly advanced brewing technology, commenced operations in May 1996 and has an installed annual capacity of 13.8 million hectoliters of beer (which represents 23% of the Company’s total annual production in beer) and five million hectoliters of soft drinks. During 1997, the Company began construction of its Sergipe and Rio Grande do Sul facility, which each having an annual beer production capacity of 3 million hectoliters. Both plants became fully operational at the end of 1998. The Sergipe and Rio Grande do Sul plants are located in the northeastern and southern regions of Brazil and are expected to allow the Company to overcome its peak season shortages in these regions while keeping pace with expected consumption growth.

In 1998 the Company invested US$340.2 million in its modernization program which included the conclusion of the Sergipe and Rio Grande do Sul brewery plants, productivity investments, acquisition of 100% participation in Malteria Pampa S.A., and warehousing related to direct distribution. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”

In order to reduce operational costs, the Company has closed older, less efficient facilities, most of which, while well maintained, were located in constricted sites in city centers with older equipment and relatively higher operational costs. In Index to Consolidated Financial Statements Page

Joint Ventures and Strategic Alliances

In September 1995, the Company entered into a joint venture with Miller Brewing Company (“Miller”) to import and market in Brazil Miller Genuine Draft, Miller’s cold-filtered beer. Under the joint venture agreement, Brahma and Miller created Miller Brewing do Brasil Ltda, (“Miller do Brasil”) to import and distribute Miller’s products in Brazil through the Company’s distribution network and, in the future, in other countries in South America. The parties have an equal participation in the capital of the Company. The joint venture began brewing Miller Genuine Draft in Brazil in September 1996 in the Company’s Jacareí facility. The product is distributed throughout Brazil, in both long-neck bottles and aluminum cans, as a premium brand for Brahma. Through Brahma’s distribution network, Miller do Brasil sold 119,598 hectoliters of Miller beer in the year ended December 1998. Miller’s market share of the premium market was 13.9% at December 1998, according to Nielsen, a research company. The premium beer market in Brazil currently accounts for approximately 1% of the total Brazilian beer market. See “Legal Proceedings” for notification from Brazilian Antitrust Regulatory Authorities (“CADE”).

In December 1996, Skol entered into a licensing agreement with Carlsberg A/S (“Carlsberg”). Under the agreement, the Company acquired the license to begin the production of Carlsberg beer in Brazil for sale and distribution throughout the rest of South America as a premium brand for Skol. In addition, pursuant to the agreement, the Company acquired the Skol brand name, previously owned by the Company only in Brazil, for use throughout the rest of South America. Production of Carlsberg beer began in the second quarter of 1997. For the year ended December 31, 1998, the Company distributed, through its Skol distribution network, 28,283 hectoliters of Carlsberg beer. Carlsberg beer currently has a 2.6% share of the premium beer market. See “Legal Proceedings” for notification from Brazilian Antitrust Regulatory Authorities (“CADE”).

In August 1997, the Company entered into a joint venture with Indústrias Gessy Lever Ltda., a subsidiary of the United Kingdom-based Unilever Group, creating the company Ice Tea do Brasil Ltda., in which the two companies have equal participation. See “Legal Proceedings” for notification from Brazilian Antitrust Regulatory Authorities (“CADE”).

In October 1997, the Company entered into a twenty-year franchise agreement with PCI to produce, sell and distribute Pepsi products in an area covering Index to Consolidated Financial Statements Page

Corporate Structure

The Company’s operations are conducted by Companhia Cervejaria Brahma, its direct and indirect subsidiaries and through affiliate companies in which the Company holds minority interests. In 1997, the Company reorganized its corporate structure to simplify administrative procedures and achieve certain tax efficiencies. As of December 31, 1998, Brahma controlled, either directly or indirectly, the following companies:

Brahmaco International Ltd. (“Brahmaco”). Brahmaco is a holding company located in Gibraltar and a wholly-owned subsidiary of the Company.

CA Cervecera Nacional (“CACN”). CACN produces beer in Venezuela and is controlled by the Company. The Company holds 51% of the total shares of UBL, which in turn owns 98.4% of the total shares of CACN.

CCBA S.A. (“CCBA”). CCBA produces beer and soft drinks in Argentina. CCBA is controlled by the Company, which holds 70% of the total shares of CCBA.

Cervejarias Águas Claras S.A. (“Águas Claras”). Águas Claras is a brewery located in Aracajú, in the state of Sergipe, which commenced operations in the fourth quarter of 1997. The Company holds 96.3% of the total shares of Aguas Claras.

Cervejarias Reunidas Skol Caracu S.A. (‘skol”). Skol produces Skol beer through two affiliates in Guarulhos, in the State of São Paulo and in the Federal District of Brasília. Skol is controlled by the Company, which holds 99.9% of the total shares of Skol.

CRBS S.A. (formerly CRBS Industria de Refrigerantes) (“CRBS”). CRBS is a wholly-owned subsidiary of the Company which produces soft drinks and beer through subsidiaries located in various regions in Brazil. CRBS’ headquarters is located in the Cebrasa plant in Anápolis. In 1997, the following companies were merged into CRBS: Companhia Cervejaria Cuiabana, a brewery located in Cuiaba, in the state of Mato Grosso; Companhia de Bebidas da Bahia , a beer producer in Salvador, in the state of Bahia; and Cervejaria de Brasilia S.A., a beer and soft drink producer located in Anápolis, in the state of Goiás. In addition, CRBS produces beer and soft drinks through six other subsidiaries - one in São Paulo, one in Bahia, one in Paraná, one in Mato Grosso and two in Goiás. The Company owns 99.8% of the total shares of CRBS. Index to Consolidated Financial Statements Page

Eagle Distribuidora de Bebidas Ltda (“Eagle”). Eagle distributes Brahma beer and soft drinks. It has eight subsidiaries located in various regions in Brazil (five in São Paulo, one in Goias, one in Bahia, one in Ceará). Eagle is a wholly-owned subsidiary of the Company.

Pepsi-Cola Engarrafadora Ltda. (“Engarrafadora”) and PCE Bebidas Ltda. (“PCE”). In October 1997, the Company acquired all of the quota capital of these companies, both of which are Brazilian limited liability companies, for a consideration of US$1.00. Engarrafadora and PCE produce and distribute Pepsi-Cola products under license in designated areas of Brazil. The fair value of total assets acquired approximated US$209.5 million at December 31, 1997. The excess of the aggregate purchase price over the fair market value of the net liabilities acquired of approximately US$39.8 million, is being amortized over 10 years. Purchase accounting adjustments relate primarily to an adjustment of US$35.7 million to reflect property, plant and equipment at appraised value, net of the deferred tax effects thereon. On August 31, 1998, PCE was merged into Engarrafadora.

Fazenda do Poço - Agrícola e Florestamento S.A. (“Fazenda do Poço”). Fazenda do Poço is a non-operational guaraná project located in the Amazonian region. The Company holds 100% of the shares of Fazenda do Poço.

Jalua S.A. (“Jalua”). Jalua is a holding company located in Montevideo, Uruguay and a wholly-owned subsidiary of the Company.

Mahler Investment Limited (“Mahler”). Mahler is a holding company located in the Virgin Islands and is a wholly-owned subsidiary of the Company.

Malteria Pampa S.A. (“Malteria Pampa”). Malteria Pampa is a producer of malt in Argentina. In April 1998, the Company acquired 20% of the capital stock of Malteria Pampa S.A from Canada Malting Co. Ltd. for US$18,060. In August 1998 an additional holding of 40% was acquired from Londrina Sociedad Anonima, for US$34,700, thus increasing the Company’s interest to 100% (60% indirect and 40% direct investment). The aggregate goodwill paid on those acquisitions amounted to US$33,094, reflecting future expected profitability. Goodwill is to be amortized over the useful lines of these assets, a period which does not exceed 40 years. As a result of the acquisition of the remaining 60% of Malteria Pampa S.A., Brahma began to fully consolidate the company in 1998. Malteria Pampa owns 100% of Malteria Uruguay S.A., a Uruguayan malt-producing company. Index to Consolidated Financial Statements Page

Universal Breweries Limited (“UBL”). UBL is a holding company located in the Cayman Islands. UBL is controlled by the Company, which holds 51% of the shares of UBL.

CCBP S.A. (“CCBP”). CCBP is a subsidiary located in Paraguay, controlled by the Company. CCBP imports beer and soft drinks produced in Brazil and Argentina for sale in the Paraguayan market.

The following affiliated companies are those in which Companhia Cervejaria Brahma has the ability to exercise significant influence over the operating and financial policies.

Cervejaria Astra S.A. (“Astra”). Astra has two units: one is located in Fortaleza, in the state of Ceará, where it produces soft drinks, the other is located in São Luiz, in the state of Maranhão, where it produces beer. The Company owns 43.1% of the total shares, and 53.7% of the voting shares of Astra.

Cervejaria Miranda Correa S.A. (“Miranda Correa”). Miranda Correa produces beer in Manaus, in the state of Amazonas. The Company owns 60.8% of the total shares and 49.5% of the voting shares of Miranda Correa.

Fratelli Vita Bebidas Ltda. (“Fratelli Vita Bebidas”). Fratelli Vita Bebidas produces the Fratelli Vita mineral water and Marathon isotonic sport drink. The Company has 50% of the share capital of Fratelli Vita Bebidas through Pilcomayo.

Ice Tea do Brasil Ltda. The Company entered into a joint venture with Indústrias Gessy Lever Ltda., creating the company Ice Tea do Brasil Ltda., where the two companies have equal participation. With this agreement the Company is able to produce, sell and distribute the Lipton brand ice tea in Brazil. Fratelli Vita Bebidas Ltda. holds 50% of the share capital of Ice Tea do Brasil.

Miller Brewing do Brasil Ltda. (“Miller do Brasil”). Miller do Brasil is a joint venture between Brahma and the Miller Brewing Co., each of which hold 50% of Miller do Brasil’s share capital. Miller do Brasil was organized for the production and commercialization of Miller Genuine Draft beer in Brazil. In September 1996, the Company began production of Miller beer at its Jacareí production facility.

Index to Consolidated Financial Statements Page

Industry Overview

Beer Market

The Brazilian beer market is the largest in Latin America and the fourth largest in the world, with 81.6 million hectoliters of beer sold in the year ended December 31, 1998, according to SINDICERV, the association of Brazilian beer producers. The table below shows beer production in selected countries in 1997.

Principal Beer Producing Countries in 1997 Annual Production Country (Millions of Hectoliters) USA. 223.9 China 186.1 Germany 107.6 *Brazil 81.6 Japan 67.9 England 60.0 Mexico 45.9 Russia 25.9 South Africa 25.0 Source: Impact International. *SINDICERV estimate.

According to SINDICERV, beer consumption in Brazil remained stable in 1998, with a per capita level of 50.2 liters per annum. Brazilian beer consumption increased 9% per year, on average, from 1993 to 1998. This was faster than the average annual increase in real gross domestic product of 4% over the same period. Relative to the rest of the world, Brazil has a low rate of per capita beer consumption. The following table sets forth per capita consumption in various countries in 1997.

Per-Capita Consumption of Beer in 1997 Country Liters Germany 131.1 United Kingdom 101.8 United States 83.6 Spain 61.3

Index to Consolidated Financial Statements Page

Source: Impact Databank, Impact International September 1998. *SINDICERV estimate.

Beer is the second-most popular drink in Brazil behind soft drinks. Brazil is characterized by a young, large population (45% of the population is under the age of 20). The largest consumers of beer (ages 18-29) and soft drinks (ages 15 to 29) make up 29% of the country’s population. The Brazilian population is growing at an average annual rate of approximately 1.4%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Brazilian Economic Environment.”

Consumption of beer in Brazil tends to be affected primarily by consumers’ income. Brazilian per capita consumption increased dramatically after the introduction of the real in July 1994, as inflation fell from a monthly rate of 40% to a monthly rate below 1% and real disposable income increased. Historically, with high inflation, salaries lagged inflation, particularly for blue-collar workers. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Brazilian Economic Environment.”

Unlike many other markets, the Brazilian beer market is characterized by a large population, and a high proportion of on-premise consumption (restaurants and bars) relative to off-premise (at home) consumption. In 1998, approximately 78% of Brahma’s beer sales were consumed on-premise, thus creating a large number of points of distribution while just 22% of consumption was off-premise. This pattern favors returnable packaging and results in serving a greater number of points of sale, which increases distribution costs, but also leads to higher sales margins.

Beer - Competition

The Brazilian beer market is dominated by three producers: Brahma, which is the market leader through its Brahma and Skol brands, followed by Companhia Antarctica Paulista (“Antarctica”) and Cervejarias Kaiser S.A. (“Kaiser”). As of December 31, 1998, the three companies accounted for approximately 92.6% of beer sales in Brazil. The beer business in Brazil is characterized by strong competition among the three major brewers, engaged in intensive advertising and promotional campaigns and the introduction of new brands in more convenient forms of packaging.

Index to Consolidated Financial Statements Page

Companhia Antarctica Paulista, a long-established local brewer, currently commands approximately 25.0% of the domestic beer market, compared to approximately 40% in 1989. Antarctica manages a portfolio of several regional brands and two national brands, Antarctica and Bavaria Pilsen, the latter of which was launched in August 1997. The introduction of Bavaria led to a significant dilution in the market share of its main stream brand Antarctica Pilsen. As the Bavaria brand is sold at a lower price than its mainstream brand, Antarctica is undergoing a decline in profitability. Antarctica is currently restructuring its production facilities and corporate structure.

AHZ Foundation owns 88% of Companhia Antarctica Paulista, with the balance held by the public. Antarctica in turn owns 95% of Antarctica Empreendimentos e Participações Ltda, which controls several other publicly traded regional breweries. Anheuser-Busch Inc. owns 5% of Antarctica Empreendimentos e Participações Ltda, and has an option to increase its stake to approximately 30% over the next four years. Antarctica also markets the Budweiser brand in one-way glass, returnable bottles and cans.

Brahma’s second largest competitor is Kaiser, a joint venture created in 1982 by Heineken N.V., the Coca-Cola Company and 18 Brazilian Coca-Cola bottlers. Kaiser maintains a broad product portfolio, which includes Kaiser Pilsen, Kaiser Bock, Kaiser Gold and Summer Draft. Kaiser also produces Heineken brand beer. Kaiser’s market share has increased from 7.9% in 1989 to approximately 15.5% as of December 1998. Kaiser’s price discounting policy caused the rise in its market share, with products generally priced 15% to 20% below the prices of Brahma’s products.

The Company’s average share of the Argentine beer market was 11.4% in 1998 representing 3.3% of the Company’s total beer sales volumes. Brahma’s largest competitor in the Argentine market is Quilmmes, which held 75.0% of the beer market in 1998.

The Company’s average share of the Venezuelan beer market was 13.5% in 1998 representing 3.1% of the Company’s total beer sales volumes. Brahma’s largest competitor in the Venezuelan market is Polar, which held 80.0 % of the beer market in 1998. Index to Consolidated Financial Statements Page

Sales of soft drinks in Brazil reached 110 million hectoliters in 1998. By the end of 1998, the Brahma soft drink brands held a share of approximately 6.5% of Brazil’s soft drink market while Pepsi brand products distributed by the Company had a market share of approximately 6.0%. Together, Brahma and Pepsi brands account for 12.5% of the total soft drink market.

As in the case of beer, per capita consumption of soft drinks in Brazil is relatively low in comparison to the rest of South America, but consumption has been growing rapidly since the introduction of the real in 1994. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Brazilian Economic Environment.” For the year ended December 31, 1998, per capita soft drink consumption in Brazil was 69 liters, according to ABIR (Association of Brazilian Soft Drink Producers). Per capita consumption is generally affected by economic conditions. The following table sets forth per capita annual consumption of soft drinks in various countries, in 1997. (1998 is not yet available)

Per Capita Consumption of Soft Drinks in 1997 Country Liters United States 203 Mexico 117 Argentina 73 Venezuela 63 Colombia 56 *Brazil 67 Source: PepsiCo. *ABIR estimate.

Soft Drinks - Competition

Although Coca-Cola bottlers dominate the soft drink market in Brazil, with an approximately 47.1% market share as of December 31, 1998, their position has been declining since 1990, when Coca-Cola bottlers had an almost 60% market share. The Coca-Cola bottlers also dominate the cola market, with a market share of approximately 84%.

Index to Consolidated Financial Statements Page

Soft drink bottlers compete for market share through distribution, product availability, pricing, service provided to retail outlets (including merchandising equipment, maintenance of bottle inventories and frequency of visits), product packaging and consumer promotions. In recent years, price discounting has been used as a means of increasing market share.

Business Strategy

Enhancing Domestic Market Share and Expanding International Sales. The Company has and intends to continue to invest substantial resources in maintaining and enhancing its share of the Brazilian beer market while expanding beer sales in other countries in Latin America. Since 1994, the Company has commenced international expansion in the Venezuelan and Argentine markets and intends to explore additional ventures in Latin America.

Pursuing Profitable Growth in the Domestic Soft Drink Market. The Company intends to continue its program to expand its share of the Brazilian soft drink market while improving profit margins. The Company believes that its strong position in the Brazilian beverage market, strengthened by the acquisition of the Pepsi franchise, enables the Company to achieve its strategy as it allows for greater profitability, enhanced purchasing and pricing power, and an increase in delivery volumes.

Continuing to Expand the Company’s Product Line to Become a “Total Beverage Company”. The Company is currently the world’s fifth largest brewer, with the Brahma brand as the world’s third-largest selling brand of beer and the Skol brand as the world’s sixth largest selling brand of beer. In addition, as a result of the franchise agreement with Pepsi, the Company has become the second largest soft drink producer in Brazil. The Company also sells and distributes mineral and mineralized water, ice tea and isotonic sport drinks.

Maintaining and Expanding Strategic Alliances. The Company intends to continue its strategy of entering into joint ventures and other investments to enhance utilization of its resources to provide a higher return on capital and secure or improve participation in particular product entries into established Company markets. The Index to Consolidated Financial Statements Page

Continuing to Increase Efficiencies and Competitiveness. In 1994, the Company began a process of replacing older and less efficient production facilities with new, modern, technologically advanced facilities. This modernization program has included the closure of some breweries, the expansion and modernization of almost all its plants and the building of three additional facilities with total capital expenditures aggregating approximately US$2.2 billion from 1994 through 1998. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Overview.”

Enhancing distribution system. In recent years, the company has focused on improving economies of scale in its distribution network, as well as implementing the Excellence Program, which focuses on quality of service. In 1998, additional initiatives to continuously improve the quality and efficiency of the Company’s distribution system were made through investments in technology and training. These investments were made together with distributors, as well as independently in the company’s direct distribution system, implemented in late 1997.

The company expanded its direct distribution system, reaching 15 Brazilian cities by year-end 1998. Direct distribution was expanded to cities where the Company identified opportunities for market share growth. By distributing directly, Brahma is more focused on its sales effort and execution at the point of sale. Additionally, direct distribution enhances the Company’s knowledge of the market through closer contact with the retailer and final consumer, improves distribution costs, due either to better knowledge of the distribution system or savings since third party distributor margin is no longer paid for the relevant area. Currently, 20% of the Company’s total volume is sold through direct distribution.

Sales and Marketing

The Company’s domestic operations are divided into five regions, each headed by a regional director: São Paulo, South, North/Northeast, Central/West and Rio de Janeiro/Minas Gerais/Bahia/Espirito Santo. Of the 39.8 million hectoliters of beer sold by the Company in Brazil during 1998, 29% was sold in the São Paulo region, 37% in the Rio de Janeiro/Minas Gerais/Bahia/Espirito Santo region, 13% in the Southern Index to Consolidated Financial Statements Page

The following table sets forth the Company’s sales volumes by product line for each quarter in the years presented:

Sales volume of the Company’s products by product line (in thousands of hectoliters)

1998 1997 1996

Quarter Beer Soft Drinks Beer Soft Drinks Beer Soft Drinks

1st 10,431 3,576 10,121 2,278 9,596 1,905 2nd 9,602 2,560 8,921 1,827 8,650 2,052 3rd 9,941 2,739 9,538 2,052 8,916 2,084 4th 12,539 3,240 12,741 3,205 11,140 2,769 Total 42,513 12,115 41,321 9,362 38,302 8,810

Points-of-Sale. Brahma’s products are sold in more than one million points- of-sale throughout Brazil. Beer is primarily sold in on-premise outlets, while most soft drinks are sold through supermarket retailers. The table below reflects the Company’s beer and soft drink sales volume by distribution channel in 1998. % Beer Sales % Soft Drink Sales

Supermarkets 22 48 Bars and Restaurants 78 52 Source: Nielsen.

Terms of Sale. Most of the Company’s sales are on a cash basis. Direct sales to certain customers, such as major supermarkets, fast-food restaurants and convenience store chains and other major customers may be on a credit basis, with terms currently running to 18 days. The length and other credit terms will often depend on competitive factors and the strategic importance of the particular outlet. Index to Consolidated Financial Statements Page

Product Presentations. The vast majority of the Company’s beer is sold in glass containers, most of which are returnable. About 73% of the Company’s beer product mix is sold in 600 milliliter returnable glass bottles, approximately 23% of its product packaging consists of cans, 2% consists of one-way bottles, and the remainder consists of draft beer in barrels.

Beer Presentations (%) 1998 1997 1996 Returnable Bottles 73% 79% 84% One-Way Bottles 2% 2% 1% Cans 23% 17% 11% Barrels (Draft Beer) 2% 2% 4%

Packaging in the domestic beer market is characterized by the predominance of glass bottles. One reason why packaging costs have increased significantly over the past years is the growth of the cans segment. This growth is due to the increased purchasing power of consumers, especially after the implementation of the Real Plan, as well as the decision made by some supermarkets to discontinue handling returnable bottles. In 1998, 23% of Brahma’s beer production sold was packaged in aluminum cans, while in the United States, over 90% of beer is sold in cans. The use of cans increased significantly in 1997 and 1998 due to an increase in aluminum can suppliers, which caused the price of cans to decline.

Index to Consolidated Financial Statements Page

Soft Drink Presentations 1998 1997 1996 Returnable Bottles 9% 8% 21% One-Way Plastic Bottles 73% 76% 65% Cans 17% 12% 10% Post Mix 1% 4% 4%

In order to maximize sales and per capita consumption of its products, the Company continually examines sales data in an effort to develop a mix of product presentations that will satisfy its customers.

Advertising and Promotional Activity. Brahma advertises and promotes its beer sales through campaigns on television and other media such as billboards in strategic locations such as sports stadiums and major crossroads and sponsorship of popular and highly publicized sports and other recreational events. In addition, Brahma engages in various “point-of-sale” promotional activities aimed at enhancing share of value. These point-of-sale promotional activities include end-aisle displays, special promotions, contests. Brahma regularly conducts surveys in all of its markets to monitor the progress of its products and the outcome of marketing strategies.

In 1998, Brahma launched several advertising campaigns designed to enhance consumer awareness and increase point-of-sale purchases. In addition, the Company initiated several marketing plans, which were designed to assist in making selling strategy decisions for each environment in which it competes. The Company has also utilized a telephone service, the “Consumer Service Center”, which enables the Company to listen to its consumer’s expectations and thoughts about its products. The Company estimates that it receives approximately 5,000 calls per month from consumers.

Index to Consolidated Financial Statements Page

Distribution

The Company maintains an extensive and strong distribution system, which has enhanced the profile and penetration of Brahma’s well-known brands. Distribution is a critical factor in Brazil due to great distances and because the majority of beer products are sold in returnable bottles. The Company maintains two separate distribution networks, one for Brahma brands and one for Skol brands. The Company’s distribution system is divided into five domestic regions and two international regions. The distribution regions for each of the Brahma and Skol product lines are substantially the same. The two distribution networks have the advantage of working with a complete portfolio of beer and soft drinks. Brahma distributors distribute Brahma soft drinks and Pepsi Cola brand soft drinks. Skol distributors distribute Pepsi Cola and other Pepsi drinks.

Third Party Distribution Network. Brahma has exclusive distribution agreements with approximately 380 distributors for its products through which it reaches approximately one million points-of-sale. In general, arrangements with distributors are based on a standard contract, which requires the distributor to exclusively carry the Company’s products and grants it exclusive rights to sell such products within a defined area. The initial contract is for five years, and may be renewed for another five years after which the contract is open-ended. Either party may terminate the contract at any time, but 180 days notice must be given before termination. All sales to distributors are made F.O.B.; therefore Brahma does not pay transportation costs and is not responsible for delivery from the warehouse.

Distributors are responsible for ensuring proper display and rotation of the Company’s beer and soft drinks. Beer products typically have a 90-day turnover and if any product is not sold to the final consumer within 150 days of production, the distributor is obligated to repurchase and dispose of it. Soft drinks are subject to similar rotation requirements. If soft drinks in returnable bottles are not sold within six months of production (four months in the case of soft drinks in one-way plastic bottles), the distributor is obligated to repurchase and dispose of it.

Index to Consolidated Financial Statements Page

Distributors vary in size, but all are well-established companies. The number of distributors within an area is determined by taking into consideration, among other things, market needs, number of points-of-sale, geographic features and the availability of communication systems. No single distributor dominates the Company’s sales volume.

A major initiative of the Company is to continuously improve its distribution network in order to increase volumes of sales and deliveries per distributor, thereby improving economies of scale. As part of its “Excellence Program”, the Company has chosen to concentrate on fewer distributors and increase the volume and the quality of the service provided by these distributors. The Company has reduced the number of distributors since 1994, while at the same time has increased the volume of products that each distributor distributes.

Direct Distribution System. In the regions where the Company determined that its market share could be increased, it introduced a system of direct distribution to the point-of-sale. The Company initiated this system in Recife in 1996. With the success of this system in Recife, it extended the system to 15 other cities in Brazil. At the end of 1998, 20.2% of the Company total volume sold was distributed directly to the point-of-sale. The Company is constantly seeking to improve its competitiveness in the market place by improving the efficiency of its distribution system and quality of its client service, all while seeking the lowest possible cost. (See Business Strategy)

Sales Force. The Company maintains two separate sales forces whose responsibilities are divided largely by geographic area. These sales forces monitor performance of the Company’s products in several different ways, including evaluation of sales by brand and presentation and sales by distributors. The Company’s regional corporate directors are responsible for the distribution of the Skol and Brahma brands. Separate sales forces for the Skol and Brahma lines coordinate sales activities with the Skol and Brahma distributors. The Skol and Brahma distributors, in turn, make sales to the various points of sale in their distribution regions. The regional corporate directors report directly to the Sales Director.

Production and Availability of Raw Materials.

Index to Consolidated Financial Statements Page

Beer production involves several raw materials and several production stages. The main ingredient in beer is malt, which is the result of germination and roasting of barley. Malt is mixed with water, hops and corn grits or rice in the proportions necessary to obtain the desired taste. The resulting mixture is called wort. Wort is malt that is fermented with selected yeast’s to produce beer, which is then filtered and bottled. Aside from these natural ingredients, the product that reaches consumers includes packaging such as bottles, labels, crown tops and aluminum cans.

Due to high humidity levels, Brazil is not a major producer of wheat or barley (the major raw materials used in the fermentation of the hops and malt which are used to produce beer). Malt requirements are largely met by imports of barley, whereupon the Company processes or by direct imports of malt from either of its affiliated plants in Argentina or Uruguay or from international suppliers. Approximately 40% of the Company’s malt is purchased in the international markets at prevailing market prices, which depend in part on the quality of the malt harvests. In addition, the Company is assured supplies of malt from its malting facilities in Brazil, Argentina and Uruguay, which can supply the other 60% of the Company’s needs. The Company also acquires hops from international suppliers. All other raw materials are acquired locally.

Water is one of the most significant components of the cost of production. The Company obtains its water requirements from lakes and reservoirs, from deep wells located near its breweries and from public utilities. The Company monitors the quality, taste and composition of the water it uses and treats it to remove impurities and to comply with its own quality standards as well as applicable regulations. As a result of advances in technology, the Company has reduced its water consumption per hectoliters produced. Management does not foresee any shortage in its current water supply.

The Company contracts its annual malt needs in the last quarter of the year for the following years’ requirements. Malt needs for fiscal year 1999 were contracted during the fourth quarter of 1998.

Brahma does not believe that it is dependent on any one supplier for a material portion of any of its raw materials. In the past five years, Brahma has experienced no material difficulties in obtaining adequate supplies of necessary raw materials at satisfactory prices, and expects that it will be able to continue doing so in the future. The Company does not believe that the loss of any one or limited group of vendors would have a materially adverse effect on its supply sources.

Packaging costs are comprised of the cost of cans, bottles, labels and paper. Until recently, Latas de Aluminio S.A. - Latasa (“Latasa”) was the sole supplier of cans Index to Consolidated Financial Statements Page

The Company purchases glass bottles from the Brazilian subsidiaries of St. Gobain Emballage S.A. and Owens-Brockway Glass Containers, Inc. Most of the Company’s bottles are returnable, with a useful life of less than five years. Bottle costs are approximately US$111 per thousand. The higher cost of bottles relative to cans is offset by their longer useful life.

As a result of its significant capital investments in modernizing and expanding its physical plants during the period from 1994 through 1998, the Company has technologically advanced production facilities, which utilize modern and efficient production processes. In addition, as a result of its relations with Miller and Carlsberg, the Company has had access to production technology processes used by these other leading international beer producers. For example, the Company utilizes a micro- filtration process used by Miller in producing Miller Genuine Draft beer, which has the result of prolonging the shelf life of draft beer without pasteurization.

Unlike many other international brewers, which produce up to 60 different brands in a single plant, the Company has relatively few brands, resulting in greater economies of scale and production efficiency. In addition, the different brands share the same production process until the filtration stage, relatively late in the brewing process, thereby maintaining production efficiency.

Soft Drinks

Index to Consolidated Financial Statements Page

The raw materials involved in the manufacture and packaging of Brahma’s soft drink products include concentrate, sugar, sweetener, water, carbon dioxide, bottles, labels and tops. The Company obtains water from various sources, including springs, wells, rivers and municipal water systems. Other materials are obtained mostly from local suppliers. The Company produces its own concentrates for its own soft drink production at Arosuco, Manaus, and mixes the concentrate with sugar and carbonated water at its soft drink and mixed plant facilities. The concentrate of Pepsi products is purchased from PepsiCo.

Almost all of the Company’s soft drink plants and mixed plants have plastic blowing capacity from pre-forms thereby reducing packaging costs. The remainder of the Company’s raw materials and packaging requirements are purchased from third parties. In the past six years, Brahma has experienced no material difficulties in obtaining adequate supplies of necessary raw materials at satisfactory prices, and expects that it will be able to continue doing so in the future. The Company does not believe that it is dependent on any one supplier for a material portion of any of its raw materials or packaging materials for soft drinks or that the loss of any one or limited group of vendors would have a materially adverse effect on its sources of supply.

Research and Development

The Company maintains a state-of-the art pilot brewery and laboratory at its plant in Aguas da Serra, staffed by 12 employees to test new brewing processes and products. The Company conducts research regarding developments in the beverage market on an ongoing basis. Expenditures on research and development are not material. The Company’s process technology standardization program allows the Company to monitor production processes, standardize operations and train personnel providing the Company increased control over the manufacturing processes. In addition, the productivity program identifies opportunities for operational and technological improvements in the Company’s facilities. The systematic monitoring of performance has enabled the Company to maximize its production facilities while reducing fixed and variable costs.

Trademarks Index to Consolidated Financial Statements Page

Environmental Standards

The Company is subject to Brazilian Federal, State and local laws and regulations relating to the environment. These laws generally provide for control of air and emissions and require responsible parties to undertake remediation of hazardous waste disposal sites. Civil penalties may be imposed for non-compliance.

The Company’s operations do not result in significant air emissions other than from boilers that process steam. The Company’s plant facilities contain air emission control systems and wastewater treatment systems that were upgraded in 1995. In addition to applicable laws, the Company is subject to compliance with World Bank environmental standards pursuant to its loan facility with the International Finance Corporation. As a result of its compliance with these requirements, all of the Company’s plants have invested in wastewater treatment facilities, and Brahma is considered a leader in wastewater treatment in Brazil. In addition, the Company’s Minas Gerais facility became the world’s first brewery to receive ISO 14001 certification by the Bureau Veritas the international standard board for ensuring the consistent and measurable quality of environmental controls.

For a number of years, the Company has made substantial capital expenditures to bring existing facilities into conformity with various environmental laws and requirements. More recent expenditures are as follows:

Capital Expenditures on Environmental Property, Plant and Equipment (in millions of US$)

Year ended Property, plant Waste December 31 and equipment treatment Total 1996 US$7.6 US$10.3 US$17.9 1997 16.2 7.8 24.0 1998 5.7 15.4 21.1

The Company believes that its current operations are in substantial compliance with applicable laws and regulations relating to the protection of the environment as Index to Consolidated Financial Statements Page

Regulations

Unlike the practice in many other countries, the production and marketing of alcoholic beverages is not heavily regulated in Brazil. Similarly, there are no significant regulations, other than compliance with standards imposed by food and health regulatory agencies, applicable to Brahma’s production and marketing of soft drinks and bottled water. The age at which it is legal to consume alcoholic beverages in Brazil is 18.

The Company’s joint ventures with Miller and Indústrias Gessy Lever Ltda., its licensing agreement with Carlsberg and its franchise agreement with Pepsi were required to be submitted to the Brazilian federal government’s anti-trust Administrative Council for Economic Defense (“CADE”) for approval (See “Legal Proceedings”).

Price Controls and Taxes

There are no Brazilian Government imposed price controls on the wholesale or retail prices on any of the products Brahma sells in Brazil. Until July 1990, prices for beer and soft drinks were subject to formal governmental price controls.

Brazilian beverage producers operate in a relatively unfavorable tax environment. Brazilian taxes on the Company’s operations include a federally imposed excise tax on industrialized products (IPI), which is a fixed amount for each dozen units or liters sold of beer or soft drinks which is adjusted for price increases; state value- added taxes (ICMS), with rates that vary from 17% to 25% depending on the state; state value-added taxes which the Company collects on sales to retailers, wholesalers and points-of-sale (ICMS-ST) and pays to the state government where the product is to be consumed; federal social security taxes (COFINS) at a rate of 3% of sales as from 1999 (2% through 1998 although the additional 1% may be offset against annual Social Contribution tax on income) and a federal unemployment insurance contribution (PIS) at a rate of 0.65% of sales. The Company estimates that taxes on beer amount to more than 100% of net sales. The Company is negotiating the reduction of the ICMS tax base in several states, to reflect the taxable base on the actual margin rather than on estimated margins.

Index to Consolidated Financial Statements Page

As at December 31, 1998, the Company and its affiliates employed an aggregate of 10,708 persons, of which 294 are located in the administrative office, 6,489 are located in the industrial units and 3,925 are located in the distribution area. The following table sets forth, on an annual basis, the number of employees of the Company and its affiliates.

Employees 1994 1995 1996 1997 1998 9,003 9,535 9,987 10,955 10,708

The Company believes that qualified and motivated employees are its strength. The Company has made significant progress with the programs of Brahma University, which was established to train and improve employee performance and the performance of its distributors’ employees. In 1998, the University trained more than 10,000 people, who were employed at the Company and at its distributors. At the management level, the Company participates in several business and technical training programs at leading US and European universities. Training schools in the major facilities provide courses, mainly technical in nature, for supervisory and operating personnel. Together with its competitors, the Company has established a training school at Vassouras, near Rio de Janeiro, which includes a micro-brewery, bottling line and malting plant. As a result, the Company believes its personnel are well trained and responsive, and keep abreast of current technical and business developments.

The following table shows productivity as measured by hectoliters sold per employee for the period from 1994 through 1997.

Productivity Year Sales in Hectoliters Per Employee 1994 4,476 1995 5,133 1996 5,222 1997 6,289 1998 8,684

Index to Consolidated Financial Statements Page

The Company provides post-employment benefits to certain employees through the Instituto Brahma de Seguridade Social – IBSS ( “Brahma Pension Fund”). The Brahma Pension Fund is a defined-benefit pension plan, which supplements benefits that the Brazilian government social security system provides to employees of the Company and its Brazilian subsidiaries. The Brahma Pension Fund was established solely for the benefit of employees of the Company and its assets are held independently of the Company. The Company nominates the three directors to the Brahma Pension Fund.

The Brahma Pension Fund is available to both active and retired members. Upon being employed by the Company, or six months thereafter for employees contracted after June 30, 1990, employees may choose to join the Brahma Pension Fund. Upon leaving the Company (unless upon retirement) members are required to leave the Brahma Pension Fund. Members who joined after June 30, 1990 and request to leave, receive the minimum benefit in a single installment based on past contributions.

The Fundação Assistencial Brahma (“The Brahma Welfare Foundation”) was formed in 1983 to provide medical, dental, educational, sporting and social assistance to sponsoring Company employees and their dependents (approximately 25,100 beneficiaries at December 31, 1998 and 1997). The Company, at its option, may contribute up to 10% of the Company’s Brazilian Corporation Law consolidated net income to support the Brahma Welfare Foundation.

Beneficiaries pay up to a maximum of 50% of the cost of medical and dental consultations and the balance is paid by the Brahma Welfare Foundation. Inpatient health services are normally fully covered by the Brahma Welfare Foundation. The Brahma Welfare Foundation also offers medical assistance to approximately 1,200 former employees and their 1,700 dependents. The Brahma Welfare Foundation primarily administers its medical and dental assistance through independent health providers.

The Company has a stock option plan (the “Plan”) designed to promote the social objectives of the Company and to obtain and retain the services of qualified executives and employees. Both common and preferred shares are granted in the Plan.

Index to Consolidated Financial Statements Page

Profit Sharing

The Company’s by-laws provide for the distribution to employees of up to 10% of consolidated net income determined in accordance with accounting principles prescibed by Brazilian Corporate Law. Members of the Diretoria (Executive Officers) are entitled to profit sharing in an amount not to exceed their annual remuneration or in aggregate 5% of net income, whichever is lower.

Payments under this profit sharing plan are subject to the availability of cash resources of the Company. The distribution of the Executive Officers’ bonus is determined based on individual performance and efficiency as approved by the Board of Directors of the Company.

ITEM 2. PROPERTIES

The Company’s properties consist primarily of brewing, malting, bottling, distribution and office facilities in Brazil, Venezuela, Argentina and Uruguay. The Company currently controls or has equity interests in 13 breweries, five mixed plants producing both beer and soft drinks, seven soft drink plants, including a concentrate plant and three malt producing plants. The following table sets forth the facilities of the Company and its affiliates by location and type. All of these facilities are owned by the Company or its affiliates. Index to Consolidated Financial Statements Page

Venezuela Beer (1) CACN

Argentina Beer (1) CCBA

Malt (1) Malteria Pampa

Uruguay Malt (1) Malteria Uruguay

Index to Consolidated Financial Statements Page

As of December 31, 1998, the consolidated net book value of the Company’s property, plant and equipment is US$1,745.6 million.

ITEM 3. LEGAL PROCEEDINGS

Except as set forth below, there are no legal proceedings in which the Company or any of its subsidiaries is a party, or to which any of their respective properties are subject, that are not presently provided for, which either individually or in the aggregate may have a material adverse effect on the results of operations or financial position of the Company. See “Financial Statements.”

Value-added taxes (ICMS)

Brahma is the subject of administrative proceedings in connection with a tax assessment made by the Tax Authority of the State of São Paulo for the alleged non- payment of certain value-added taxes. The case, which was filed in 1995, is pending on an appeal filed a superior state administrative court in São Paulo. At December 31, 1998, there are three claims outstanding relating to this proceeding, totaling US$99.2 million.

The first claim relates to the Company’s short-term financing of distributors in connection with credit sales to supermarkets and other major customers. According to the State Tax Authority, interest charged to distributors should be included in the price of products sold for the purpose of calculating ICMS. Based upon the advice of legal counsel, management of the Company believes that such interest, which accrued pursuant to loan agreements independent of the sales to the distributors, is not a component of the sales price for purposes of computing ICMS. On the basis of advice from outside legal counsel, as of December 31, 1998, the Company has provided US$12.3 million for probable losses on this claim. During the first quarter of 1999, following a favorable decision issued by the Taxpayers Council, the Company reversed this provision, thereby eliminating all provisions in respect. Possibility of loss from Index to Consolidated Financial Statements Page

The Company is subject to an administrative proceeding in connection with a tax assessment made by the Tax Authorities of the State of São Paulo for the alleged non-payment of certain value added taxes at the Jacareí production facility. The case was filed against the Company on July 28, 1998 and still has not been ruled on. As of December 31, 1998, the Company had provided US$14.7 million for probable losses on this claim and an additional US$20.3 million for unasserted claims of a similar nature. During the first quarter of 1999, the Company provided for US$10.7 referring to retroactive capital expenditures credited against ICMS and IPI (Federal Excise Tax) payments.

Other actions or claims pending against the Company in relation to ICMS primarily involve the State Tax Authorities questioning the Company’s basis for calculating ICMS. None of these individual claims for which the Company has provided for probable losses at December 31, 1998 are in excess of US$2.0 million, except for one claim which is approximately US$3.2 million.

Income taxes and social contribution

The Company reversed to “other operating income” certain amounts, provided in prior periods as probable loss contingencies, following legal or judicial ruling in the current and prior periods, as follows:

In September 1998, the Company reversed US$21.1 million relating to income tax and social contribution payable, among other issues, which the tax authorities claimed should not have been offset by depreciation charges generated from supplemental indexation of property, plant and equipment accounts applied by a law enacted in 1991. Following a favorable administrative decision on January 7, 1998 and published on June 12, 1998, which eliminates any right of appeal, management considers the possibility of loss no longer to be probable

Also in September 1998, a reversal of US$80.4 million was made by the Company, relating to unasserted income tax and social contribution risks which are eliminated by the statutes of limitations, following the expiration of a five-year period without issue of notification by the tax authorities.

Index to Consolidated Financial Statements Page

Labor and distributors claims

The Company is subject to claims pending which were filed by former employees. Escrow deposits (Restricted deposits for legal proceedings), principally for labor claims totaled US$14.0 million at December 31, 1998 (1997-US$13.0 million). During 1998, legal counsel reviewed and reassessed the existing provisions for labor contingencies. Based on new evidence and interpretations, certain amounts were reversed to “Other operating income” or complemented, leading to a net reduction in the provision of US$30.2 million.

Breach of contract claims have been filed against the Company by former distributors of the Company whose contracts were terminated due to low sales volumes, failure of distributors to meet Company guidelines and a general restructuring of the distribution network. No claims filed by distributors for which the Company has provided for probable losses based upon the advice of outside legal counsel are in excess of US$2.5 million at December 31, 1998.

The Company’s joint ventures with Miller and Industries Gessy Lever Ltda., its licensing agreement with Carlsberg and its franchise agreement with Pepsi were required to be submitted to the Brazilian federal government’s anti-trust Administrative Council for Economic Defense (“CADE”) for approval

In June 1997, CADE rejected the Company’s joint venture with Miller, requiring the Company to terminate the venture within two years. The Company and Miller appealed the ruling and subsequently on May 12, 1998, CADE approved the joint venture with Miller, subject to two conditions: that the Company enter into a bottling contract with a third party that meets certain specified conditions and that the Company offer technical assistance to three microbreweries.

In September 1997, CADE approved the franchise agreement with PepsiCo International, Inc. The licensing arrangement with Carlsberg was also approved by CADE in early 1999. The Company is still awaiting for final approval of the Ice Tea do Brasil Ltda. joint venture.

ITEM 4. CONTROL OF REGISTRANT

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Name Amount and % of Preferred Amount and % of Common Shares Shares BRACO S.A.(1) 16,732,839 0.36% 644,001,000 24.14% Emp de Adm e Part S.A. Ecap — 807,913,000 30.29% The Bank of New York - ADR 912,467,580 19.77% 2,728,000 22.97% Department Caixa de Previd. Func. Banco do 817,025,671 17.70% 14,668,154 0.55% Brasil PREVI (Brahma Welfare Foundation)(2) 30,699,304 0.67% 260,889,354 9.78% Marcel Herrmann Telles(3) 54,004,104 1.17% 177,642,964 6.66% Fund Bco Cen Prev Priv Centrus 10,000,000 0.22% 176,937,000 6.63% All executive officers as a group(9 77,857,840 1.69% 30,344,971 1.14% persons), excluding Marcel H. Telles (above)

(1) Braco is an investment company owned by the former controlling shareholders of Garantia, one of the leading investment banks in Brazil. (2) The Brahma Welfare Foundation, is a non-profit entity established by the Company to provide social and other benefits to its employees. (3) Marcel Herrmann Telles is the chairman of the Company’s Board of Director.

ITEM 5. NATURE OF TRADING MARKET

The principal trading market for the Company’s Preferred Shares and Common Shares is the São Paulo Stock Exchange. The Common Shares and the Preferred Shares are also traded on the Rio de Janeiro Stock Exchange. At March 31, 1999, there were an aggregate of 4,287,944,559 Preferred Shares and 2,635,679,468 Common Shares issued.

The Company has registered two classes of ADSs on Form 20-F pursuant to the Securities Act of 1933, as amended: ADSs evidenced by American Depositary Index to Consolidated Financial Statements Page

Since June 1997, the Common and Preferred ADSs have been traded on the New York Stock Exchange under the symbol “BRH”. As at March 31, 1999, there were 13 registered holders of the Preferred ADSs, 99.99% of which were registered in the name of “The Depository Trust Company” and the remainder were registered in the names of 12 holders; there were 2 registered holders of the Common ADSs, 99.99% of which were registered in the name of “The Depository Trust Company” and the remainder were registered in the name of one holder.

Market Price Information

The table below sets forth the quoted high and low sales prices in reais on the São Paulo Stock Exchange for the Company’s Preferred and Common Shares and the equivalent high and low sales prices. Preferred Shares Brazilian reais US dollars per per 1,000 Preferred Shares 1,000 Preferred Shares (1) High Low High Low

1997:

First quarter...... 740 551 698 520 Second quarter...... 840 687 780 638 Third quarter...... 855 712 779 649 Fourth quarter...... 840 555 752 497

1998:

First quarter...... 881 703 775 618 Second quarter...... 880 653 761 564 Third quarter...... 835 400 704 337 Index to Consolidated Financial Statements Page

Common Shares Brazilian reais US dollars per per 1,000 Preferred Shares 1,000 Common Shares (1) High Low High Low

1997:

First quarter...... 755 598 712 564 Second quarter...... 861 697 799 647 Third quarter...... 831 732 758 667 Fourth quarter...... 812 550 727 492

1998:

First quarter...... 800 685 703 602 Second quarter...... 798 640 690 553 Third quarter...... 700 400 590 337 Fourth quarter...... 535 385 443 319

(1) Amounts were translated, for the convenience of the reader, to US dollars using exchange rates in effect at the end of each applicable quarter. There was a significant devaluation of the Brazilian real as from mid-January 1999. See “Exchange Rate.”

On March 31, 1999, the closing sales prices on the São Paulo Stock Exchange were R$ 807 (US$469) per 1,000 Preferred shares and R$ 630 (US$366) per 1,000 Common shares.

The table below sets forth the high and low trading prices, which is based on the average daily volume of trading activity, for the Company’s Preferred and Common ADRs on the New York Stock Exchange.

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1998: First quarter ...... 17.70 14.50 15.56 12.75 Second quarter...... 18.00 13.17 15.56 11.38 Third quarter...... 17.05 7.86 14.38 6.63 Fourth quarter...... 13.97 8.09 11.56 6.69

Common ADRs Brazilian reais U. S. dollars High Low High Low 1997: Third quarter...... 17.37 15.31 15.88 14.00 Fourth quarter...... 16.89 11.58 15.13 10.38

1998: First quarter...... 15.50 13.80 13.63 12.13 Second quarter...... 15.91 12.73 13.75 11.00 Third quarter...... 14.52 8.75 12.25 7.38 Fourth quarter...... 10.27 8.01 8.50 6.63

On March 31, 1999 the closing sales prices on the New York Stock Exchange were US$9.31 per Preferred ADRs and US$8.75 per Common ADRs.

Trading on the Brazilian Stock Exchanges

Of Brazil’s nine stock exchanges, the São Paulo Stock Exchange and the Rio de Janeiro Stock Exchange are the most significant. During 1998, the São Paulo Stock Exchange accounted for approximately 95.0% of the trading value of all Brazilian stock

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Each Brazilian stock exchange is a not-for-profit entity owned by its member brokerage firms. Trading on each exchange is limited to member brokerage firms and a limited number of authorized non-members. The São Paulo Stock Exchange and the Rio de Janeiro Stock Exchange have two open trading sessions each day, from 10:30 a.m. to 4:30 p.m. The Comissão de Valores Mobilários (the “CVM” or the “Brazilian Securities Commission”), has discretionary authority to suspend trading in shares of a particular issuer under certain circumstances. Trading in securities listed on the Brazilian stock exchanges may be effected off the exchanges in certain circumstances, although such trading is very limited.

Settlement of transactions is effected three business days after the trade date. Payment for shares is made through the facilities of separate clearinghouses for each exchange, which maintains accounts for the member brokerage firms. The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date. The clearinghouse for the São Paulo Stock Exchange is Calispa S.A., which is owned by that Exchange. The clearinghouse for the Rio de Janeiro Stock Exchanges is CLC-Câmara de Liquidação e Custódia S.A., which is 99% owned by that exchange.

At December 31, 1998, the aggregate market capitalization of the 506 companies listed on the São Paulo Stock Exchange was equivalent to approximately US$175 billion and the ten largest companies, which includes the Company, represented approximately 49% of the total market capitalization of all listed companies. Although any of the outstanding shares of a listed company may trade on any Brazilian stock exchange, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by governmental entities or by one principal shareholder. Trading on Brazilian stock exchanges by non-residents of Brazil is subject to certain limitations under Brazilian foreign investment legislation. See Item 6 - “Exchange Controls and Other Limitations Affecting Securities Holders” Index to Consolidated Financial Statements Page

The Brazilian securities markets are regulated by the CVM, which has general authority over the stock exchanges and securities markets, as well as by the Banco Central do Brasil (the “Central Bank”), which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by Law No. 6385 dated December 7, 1976, as amended (the “Brazilian Securities Law”) and the Brazilian Corporate Law.

Under Brazilian Corporate Law, a company is either listed, a “companhia aberta”, such as the Company, or private, a “companhia fechada”. All listed companies are registered with the CVM and are subject to certain reporting and regulatory requirements. A company registered with the CVM may trade its securities either on the Brazilian stock exchanges or in the Brazilian over-the-counter (“Brazilian OTC”) market. The shares of a listed company, including the Company, may also be traded privately subject to certain limitations. To be listed on the Brazilian stock exchanges, a company must apply for registration with the CVM and the stock exchanges in the jurisdiction where the head office of the company is located. Once this stock exchange has admitted a company to listing and the CVM has accepted its registration as a listed company, its securities may, under certain circumstances, be tradable on all other Brazilian stock exchanges.

The Brazilian OTC market is responsible for the coordination of direct trades between individuals where a financial institution registered with the CVM, serves as an intermediary. No special application, other than registration with the CVM, is necessary for securities of a listed company to be traded in the Brazilian OTC market. The CVM requires that it be given notice of all trades carried out in the Brazilian OTC market by the respective intermediaries.

Trading in securities on the Brazilian stock exchanges may be suspended at the request of a company in anticipation of a material announcement. Trading may also be suspended on the initiative of a Brazilian stock exchange or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to the inquiries by the CVM or the relevant stock exchange.

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ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

There are no restrictions on ownership or voting rights in respect to the Company’s capital stock owned by individuals or legal entities domiciled outside Brazil.

The right to convert dividend payments, interest attributed to shareholders’ equity payments and proceeds from the sale of the Company’s capital stock, into foreign currency and to remit such amounts outside Brazil is subject to exchange control restrictions and foreign investment legislation which generally requires that the relevant investment be registered with the Central Bank. Restrictions on the remittance of foreign capital abroad could hinder or prevent Banco Itaú S.A. (the “Custodian”) or holders who have exchanged Preferred or Common ADSs for Preferred or Common Shares, from converting dividend distributions, interest on shareholders’ equity payments or the proceeds from any sale of Preferred or Common into US dollars and remitting such US dollars abroad. Holders of Preferred or Common ADSs could be adversely affected by delays in, or refusal to grant any required government approval for conversions of Brazilian real payments and remittances abroad.

Under Annex IV to Resolution No. 1,289 of the National Monetary Council (the “Annex IV Regulations”), qualified foreign investors registered with the CVM and acting through authorized custody accounts managed by a local agent may buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of capital registration for each transaction. Investors under the Annex IV Regulations are also entitled to favorable tax treatment. See “Taxation-Brazilian Tax Considerations.”

Resolution No. 1,927 of the National Monetary Council, which is the restated and amended Annex V to Resolution No. 1,289 (the “Annex V Regulations”), provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The ADSs have been approved under the Annex V Regulations by the Central Bank and the CVM. Accordingly, the proceeds from the sale of the ADSs by ADR holders outside Brazil are free of Brazilian foreign investment controls and holders of the ADSs will be entitled to favorable tax treatment. Index to Consolidated Financial Statements Page

There are two principal foreign exchange markets in Brazil: the commercial rate exchange market (the “Commercial Market”) and the floating rate exchange market (the “Floating Market”). Most trade and financial foreign exchange transactions, including transactions relating to the purchase or sale of shares or the payment of dividends with respect to shares are carried out on the Commercial Market. Purchases of foreign currencies in the Commercial Market may be carried out only through a Brazilian bank authorized to buy and sell currency in that market. In both markets, rates are freely negotiated but may be strongly influenced by Central Bank intervention. See ‘selected Financial Data -- Exchange Rates.”

Under current legislation, the Brazilian Government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately nine months in 1989 and early 1990, the Brazilian Government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with Brazilian Government directives. There can be no assurance that the Brazilian Government will not impose similar restrictions on foreign repatriations in the future.

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The following summary contains a description of the principal Brazilian and US federal income tax consequences of the purchase, ownership and disposition of Preferred and Common Shares as well as Preferred and Common ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase any of such securities. In particular, this summary deals only with holders that will hold Preferred Shares or Preferred ADSs or Common Shares or Common ADSs as “capital assets” within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), and does not address the tax treatment of a holder that may be subject to special tax rules, such as banks, insurance companies, dealers in securities, persons that will hold Preferred Shares or Preferred ADSs or Common Shares or Common ADSs in a hedging transaction or as a position in a ‘straddle” or “conversion transaction” for tax purposes, persons that have a “functional currency” other than the US dollar, persons liable for alternative minimum tax or persons that own or are treated as owning 10% or more of the voting shares of the Company. Prospective purchasers of any of such securities should consult their own tax advisors as to the tax consequences of the purchase, ownership and disposition of Preferred Shares or Preferred ADSs or Common Shares or Common ADSs, including, in particular, the effect of any state, local or other national tax laws.

The summary is based upon the tax laws of Brazil and the United States and regulations thereunder as in effect on the date hereof, which are subject to change. There is at present no income tax treaty between Brazil and the United States. This summary is also based upon the representations of the Depositary and on the assumption that each obligation in the Deposit Agreement relating to the Preferred and Common ADSs and any related documents will be performed in accordance with its terms.

Brazilian Tax Considerations

In the opinion of Barbosa, Müssnich & Aragão, Brazilian counsel to the Company, the following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of Preferred and Common Shares or Preferred and Common ADSs by a holder that is not deemed to be domiciled in Brazil for purposes of Brazilian taxation and, in the case of a holder of Preferred or Common Shares, which has registered its investment in such securities with the Central Bank as a US dollar investment (in each case, a “non-Brazilian holder”). The following discussion does not specifically address all of the Brazilian tax considerations applicable to any particular non-Brazilian holder, and each non-Brazilian holder should consult his or her own tax advisor concerning the Brazilian tax consequences of an investment in securities. Index to Consolidated Financial Statements Page

Taxation of Gains. Gains realized outside Brazil by a non-Brazilian holder on the disposition of Preferred or Common ADSs to another non-Brazilian holder are not subject to Brazilian tax.

The withdrawal of Preferred or Common Shares in exchange for Preferred or Common ADSs is not subject to Brazilian tax. The deposit of Preferred or Common Shares in exchange for Preferred or Common ADSs is not subject to Brazilian tax provided that the Preferred or Common Shares are registered by the investor or its agent under the Annex IV Regulations. In the event the Preferred or Common Shares are not so registered, the deposit of Preferred or Common Shares in exchange for Preferred or Common ADSs may be subject to Brazilian capital gains tax at the rate of 15%. Upon receipt of the underlying Preferred or Common Shares, a non-Brazilian holder who qualifies under the Annex IV Regulations will be entitled to register the US dollar value of such shares with the Central Bank as described below.

Non-Brazilian holders are not subject to tax in Brazil on gains realized on sales of Preferred Shares or Common Shares that occur abroad. As a general rule, non- Brazilian holders are subject to a withholding tax imposed at a rate of 15% on gains realized on sales or exchanges of Preferred Shares or Common Shares that occur in Brazil to or with a resident of Brazil. Non-Brazilian holders are generally subject to withholding tax at a rate of 10% on gains realized on sales or exchanges in Brazil of Common Shares or Preferred Shares that occur on a Brazilian Stock Exchange but will not be subject to tax if such sales are made on a Brazilian stock exchange or such sales are made under the Annex IV Regulations by certain qualified institutional non- Brazilian holders which register with the CVM. The “gain realized” as a result of a transaction in Brazil corresponds to the difference between the amount in Brazilian reais realized on the sale or exchange and the acquisition cost, without any indexation for inflation, of the shares sold. Indexation for inflation is allowed for shares which were purchased prior to 1995. There can be no assurance that the current preferential treatment for holders of Preferred or Common ADSs and non-Brazilian holders of Preferred or Index to Consolidated Financial Statements Page

Any exercise of preemptive rights relating to the Preferred or Common Shares will not be subject to Brazilian taxation. Any gain on the sale or assignment of preemptive rights relating to the Preferred or Common Shares by the Depositary will not be subject to the Brazilian taxation.

Interest Attributed to Shareholders’ Equity

Distribution of interest charge on shareholders’ equity in respect of the Preferred or Common Shares as an alternative form of payment to shareholders who are either Brazilian residents or non-Brazilian residents, including holders of ADSs, are subject to Brazilian withholding tax at the rate of 15%. Such payments, subject to certain limitations, are deductible for income tax purposes and, as from 1997, deductible in determining social contribution on net income by the Company as long as the payment of a distribution of interest is approved at the Company’s General Meeting of shareholders. The distribution of interest attributed to shareholders’ equity is proposed by the Board of Directors of the Company and subject to subsequent declaration by the shareholders’ at the General Meeting.

Other Brazilian Taxes. There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of Preferred Shares or Common Shares or Preferred ADSs or Common ADSs by a non-Brazilian holder except for gift and inheritance taxes which are levied by some States of Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or domiciled within the state to individuals or entities resident or domiciled within such State in Brazil. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of Preferred Shares or Common Shares or Preferred ADSs or Common ADSs.

Pursuant to Decree 2,219 of May 2, 1997, Brazilian currency resulting from the conversion of the proceeds received by a Brazilian entity from a foreign investment in the Brazilian securities market (including those in connection with the investment in the Preferred Shares or Common Shares, the Preferred ADSs or Common ADSs and those made under Annex IV Regulations) is subject to a financial transactions tax (“IOF”) although at present the rate of such tax is 0%. The Minister of Finance is empowered to establish the applicable IOF tax rate. Under Law 8,894 of June 21, 1994, such IOF tax rate may be increased at any time to a maximum of 25%, but any such increase will only be applicable to transactions occurring after such increase becomes effective.

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On March 19, 1999, Constitutional Amendment no. 21 was enacted, which among other things extended the period for the levy of the “CPMF”. This contribution is levied on debt on bank accounts and redemption of financial operations at the rate of 0.38% for the first 12 months of its application (from June 17, 1999 through June 16, 2000), and at a rate of 0.30% for the remainder 2 years of its collection, i.e. through June 16, 2002.

Registered Capital. The amount of an investment in Preferred or Common Shares held by a non-Brazilian holder who qualified under the Annex IV Regulations and obtains registration with the CVM, or by the Depositary representing such holder, is eligible for registration with the Central Bank; such registration (the amount so registered is referred to as “Registered Capital”) allows the remittance outside Brazil of foreign currency, converted at the Commercial Market Rate, acquired with the proceeds of distributions on, and amounts realized with respect to disposition of, such Preferred or Common Shares. The Registered Capital for Preferred Shares purchased in the form of a Preferred ADSs or Common Shares purchased in the form of a Common ADS or purchased in Brazil, and deposited with the Depositary in exchange for a Preferred or Common ADS will be equal to their purchase price (in US dollars) to the purchaser. The Registered Capital for Preferred or Common Shares that are withdrawn upon surrender of Preferred or Common ADSs, as applicable, will be the US dollar equivalent of (i) the average price of the Preferred or Common Shares, as applicable, on the Brazilian stock exchange on which the greatest number of such Preferred or Common Shares, as applicable, was sold on the day of withdrawal, or (ii) if no Preferred or Common Shares, as applicable, were sold on such day, the average price of Preferred or Common Shares, as applicable, were sold in the fifteen trading sessions immediately preceding such withdrawal. The US dollar value of the Preferred or Common Shares, as applicable, is determined on the basis of the average Commercial Market Rates quoted by the Central Bank on such date (or, if the average price of Preferred or Common Shares is determined under clause (ii) of the preceding sentence, the average of such average quoted rates on the same fifteen dates used to determine the average price of the Preferred or Common Shares).

A non-Brazilian holder of Preferred or Common Shares may experience delays in effecting such registration which may delay remittances abroad. Such a delay may adversely affect the amount, in US dollars, received by the non-Brazilian holder.

US Federal Income Tax Considerations Index to Consolidated Financial Statements Page

In general, for US federal income tax purposes, a holder of an American Depository Receipt evidencing an ADS, will be treated as the beneficial owner of the Preferred Share(s) or Common Share(s) represented by the applicable ADSs.

Taxation of Dividends. In general, a distribution made with respect to a Preferred Share, Preferred ADS, Common Share or Common ADS (which for this purpose will include distributions of interest on equity) will, to the extent made from the current or accumulated earnings and profits of the Company, as determined under US federal income tax principles, constitute a dividend for US federal income tax purposes. If a distribution exceeds the amount of the Company’s current and accumulated earnings and profits, it will be treated as a non-taxable return of capital to the extent of the US holder’s tax basis in the Preferred Share or Preferred ADS or Common Share or Common ADS on which it is paid and thereafter as capital gain. As discussed below, the term “dividend” means a distribution that constitutes a dividend for US federal income tax purposes.

The gross amount of any dividend paid (which will include any amounts withheld in respect of Brazilian taxes) with respect to a Preferred Share or Preferred ADS or Common Share or Common ADS generally will be subject to US federal income taxation as foreign source dividend income and will not be eligible for the dividends received deduction generally allowed to US corporations. A dividend paid in Brazilian currency will be included in the income of a US holder at its value in US dollars calculated by reference to the prevailing spot market exchange rate in effect on the day it is received by the US holder or, in the case of a dividend received in respect of Preferred ADSs or Common ADSs, on the date the dividend is received by the Depositary, whether or not the dividend is converted into US dollars. Any gain or loss realized on a subsequent conversion or other disposition of the Brazilian currency will be treated as US source ordinary income or loss. In the case of a U.S. holder that is not a United

Index to Consolidated Financial Statements Page

Subject to generally applicable limitations under US federal income tax law, the Brazilian withholding tax will be treated as a foreign income tax eligible for credit against a US holder’s US federal income tax liability. For purposes of the computation of the foreign tax credit limitation separately for specific categories of income, any dividends generally will constitute foreign source “passive income” or, in the case of certain holders, “financial services income.” Alternatively, a US holder may elect not to claim a credit for any of its foreign taxes and deduct all of those taxes in computing taxable income.

Taxation of Capital Gains. A deposit or withdrawal of Preferred Shares or Common Shares by a holder in exchange for a Preferred ADS or Common ADS will not result in the realization of gain or loss for US federal income tax purposes.

A US holder generally will recognize capital gain or loss upon a sale or other disposition of a Common Share or Common ADS or Preferred Share or Preferred ADS held by the US holder or the Depositary in an amount equal to the difference between the US holder’s adjusted basis in the Common Share or Common ADS or Preferred Share or Preferred ADS, as the case may be (determined in US dollars) and the US dollar amount realized on the sale or other disposition. If a Brazilian tax is withheld on the sale or disposition of a share, the amount realized by a US holder will include the gross amount of the proceeds of that sale or disposition before deduction of the Brazilian tax. Capital gain recognized by certain non-corporate US holders is taxed at a maximum tax rate of 20% in respect of property held more than one year. Capital gain, if any, realized by a US holder on the sale or other disposition of a Common Share or Common ADS or a Preferred Share or Preferred ADS generally will be treated as US source income for US foreign tax credit purposes. Consequently, in the case of a disposition of a Common Share or Preferred Share that is subject to Brazilian tax imposed on the gain (or, in the case of a deposit, in exchange for a Common ADS or Preferred ADS of a Common Share or Preferred Shares, as the case may be, that is not registered under the Annex IV regulations, on which a Brazilian capital gains tax is imposed) (see “-Brazilian Tax Considerations-Taxation of Gains”), the US holder may not be able to use the foreign tax credit for that Brazilian tax unless it can apply the credit against US tax payable on other income from foreign sources in the appropriate income category, or, alternatively, it may take a deduction for the Brazilian tax if it elects to deduct all of its foreign income taxes. In general, any loss will be sourced to the taxpayer’s residence (as specially defined in Section 865(g) of the Code), subject to certain exceptions that can treat a loss recognized by a U.S. resident in whole or in part as a foreign source losss.

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If the Company is treated as a PFIC, contrary to the discussion in “US Federal Income Tax Considerations-Taxation of Dividends” and “-US Federal Income Tax Considerations-Taxation of Capital Gains” above, a US holder would be subject to special rules with respect to (i) any gain realized on the sale or other disposition of Common Shares or Common ADSs or Preferred Shares or Preferred ADSs and (ii) any “excess distribution” by the Company to the US holder (generally, any distribution during a taxable year in which distributions to the US holder on the Common Shares or Common ADSs or Preferred Shares or Preferred ADSs exceed 125% of the average annual taxable distributions the US holder received on the Common Shares or Common ADSs or Preferred Shares or Preferred ADSs during the proceeding three taxable years or, if shorter, the US holder’s holding period for the Common Shares or Common ADSs or Preferred Shares or Preferred ADSs). Under those rules, (i) the gain or excess distribution would be allocated ratably over the US holder’s holding period for the Common Shares or Common ADSs or Preferred Shares or Preferred ADSs, (ii) the amount allocated to the taxable year in which the gain or excess distribution is realized would be taxable as ordinary income, (iii) the amount allocated to each prior year, with certain exceptions, would be subject to tax at the highest tax rate in effect for that year and (iv) the interest charge generally applicable to underpayments of tax would be imposed in respect of the tax attributable to each prior year.

A US holder who owns Common Shares or Common ADSs or Preferred Shares or Preferred ADSs during any year the Company is a PFIC must file Internal Revenue Service Form 8621. In general, if the Company is treated as a PFIC, the rules described in the second sentence of this paragraph can be avoided by a U.S. holder making, in the first year the U.S. holder owns Preferred Shares or Preferred ADSs while Company is treated as a PFIC, an election to treat the Preferred Shares or Preferred ADSs as shares in qualified electing fund (“QEF”). In that event, the U.S. holder must include in income each year his pro rata share of the Company’s ordinary earnings and net capital gains, whether or not distributed. In general, distributions of such Index to Consolidated Financial Statements Page

Report of Independent Accountants F-2 Consolidated Balance Sheet F-3 Consolidated Statement of Operations F-6 Consolidated Statement of Cash Flows F-8 Consolidated Statement of Changes in Shareholders' Equity F-11 Notes to the Consolidated Financial Statements F-17 previously taxed income are not taxable. A U.S. holder’s basis in the Preferred Shares or Preferred ADSs increases by amounts included in income pursuant to a QEF election and decreases by any nontaxable distributions. A QEF election is available only if the Company provides certain information to its shareholders, including the amount of its ordinary earnings and net capital gains computed generally in accordance with U.S. federal income tax rules, and the Company presently does not intend to make those computations or to provide that information. Alternatively, a U.S. holder may elect to be subject to a mark-to-market regime for stock in a PFIC. The mark-to-market rules, effective for taxable years of US holders beginning after December 31, 1997, also would apply to the exclusion of the rules described, except generally to the extent that the Company is a PFIC at any time while a US holder has owned Common Shares or Common ADSs or Preferred Shares or Preferred ADSs and the US holder has not made either the mark-to-market election or an election to treat the Company as a QEF. Under the mark-to-market rules, a US holder may elect mark-to-market treatment for its Common Shares or Common ADSs or Preferred Shares or Preferred ADSs, provided the Common Shares or Common ADSs or Preferred Shares or Preferred ADSs, for purposes of these rules, constitute “marketable stock” pursuant to Treasury regulations that have yet to be promulgated. A US holder electing the mark-to-market regime generally would treat any gain recofnized under mark-to-market treatment or on an actual sale of Preferred Shares or Preferred ADSs as ordinary income and would be allowed an ordinary deduction for any decrease in the value of Common Shares or Common ADSs or Preferred Shares or Preferred ADSs in any taxable year and for any loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to- market income not offset by previously deducted decreases in value. A US holder’s basis in Common Shares or Common ADSs or Preferred Shares or Preferred ADSs would increase or decrease by gain or loss taken into account under the mark-to-market regime. A mark-to-market election is generally irrevocable.

Information Reporting and Backup Withholding. A US holder of a Preferred Share or Preferred ADS or Common Share or Common ADS will generally be subject to information reporting to the US Internal Revenue Service (“IRS”) and to “backup withholding” at the rate of 31% with respect to dividends paid on or the proceeds of a sale or other disposition of a Preferred Share or Preferred ADS or, Common Share or Common ADS, paid within the United States, unless such holder (i) is a corporation or comes within certain other exempt categories, and demonstrates this fact when so required, or (ii) provides a correct taxpayer identification number, certifies that it is not subject to backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. Any amount withheld under these rules will be creditable against the holder’s US federal income tax liability, and a US holder may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS. While holders that are not US holders generally are exempt from backup withholding and information reporting on payments made within the United Index to Consolidated Financial Statements Page

Index to Consolidated Financial Statements Page

US GAAP Presentation

The following table presents selected financial data as of the dates and for each of the periods indicated. The Company’s US GAAP consolidated balance sheets as of December 31, 1998 and 1997 and related consolidated statements of operations and cash flows for the three years ending December 31, 1998 appear elsewhere herein, together with the report of PricewaterhouseCoopers Auditores Independentes (formerly Price Waterhouse Auditores Independentes). The selected financial information at and for the year ended December 31, 1996, 1995 and 1994, respectively, have been derived from the Company’s US GAAP financial statements, which are not included herein. This information should be read in conjunction with Item 9, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and is qualified in its entirety by reference to the Financial Statements and the notes thereto appearing elsewhere herein. The reader should note that there was a significant devaluation of the Brazilian real as from mid-January 1999. See “Exchange Rate.”

At and For the Year Ended December 31, (expressed in thousands of US dollars, except per share amounts)

1998 1997 1996 1995 1994 Statement of operations data: Net sales...... 2,669,338 2,444,103 2,299,992 2,133,824 1,384,255 Cost of sales...... (1,533,888) (1,393,395) (1,283,881) (1,113,759 ) (794,313 Gross profit...... 1,135,450 1,050,708 1,016,111 1,020,065 589,942 Selling and marketing expenses...... (580,150) (426,222) (353,904) (316,760) (298,915 General and administrative expenses...... (281,601) (288,967) (275,483) (480,541) (276,952 Other operating income, net...... 37,126 150,878 31,789 27,058 22,834 Operating income...... 310,825 486,397 418,513 249,822 36,909 Financial income...... 198,636 121,278 132,205 186,457 182,012 Financial expenses...... (289,504) (142,318) (97,248) (66,955) (106,343 Other, net...... 14,994 40,310 25,895 71,145 46,421 Income tax expense – Current...... (10,910) (75,390) (156,152) (172,797) (72,642 Income tax benefit (expense) – Deferred...... 2,170 (7,806) 64,415 (11,474) 28,459

Index to Consolidated Financial Statements Page

Equity in earnings (losses) of affiliates...... 2,962 (28,138) 5,648 14,310 (1,420 Minority interest...... 9,404 1,133 (4,700) 21,319 (1,225 Net income...... 238,577 395,466 388,576 291,827 112,171 Earnings per thousand shares(1) Basic Preferred shares...... 36.56 57.91 56.82 44.58 17.52 Common shares...... 33.24 52.64 56.82 44.58 17.52 Diluted (2) Preferred shares...... 35.70 56.02 55.08 41.73 Common shares...... 32.45 50.93 55.08 41.73

1998 1997 1996 1995 1994 Number of preferred and common shares Outstanding(3) Basic Preferred shares...... 4,346,727 4,622,175 4,552,726 4,412,452 4,343,813 Common shares...... 2,396,620 2,428,003 2,286,457 2,134,175 2,058,381 Diluted Preferred shares...... 4,486,158 4,825,779 4,740,211 4,697,334 4,659,109 Common shares...... 2,418,471 2,456,931 2,314,701 2,295,170 2,180,218 Balance sheet data: Cash and cash equivalents...... 723,250 657,434 649,891 569,810 590,588 Trading securities...... 157,552 123,332 141,360 288,024 181,167 Net working capital(4) ...... 309,964 275,602 413,924 562,501 445,838 Property, plant and equipment...... 1,745,600 1,888,663 1,602,734 1,311,481 764,750 Total assets...... 3,731,568 3,701,220 3,244,667 2,933,221 2,102,070 Short-term debt(5) ...... 733,511 593,331 415,298 200,563 326,424 Long-term debt(6) ...... 1,069,009 896,208 553,437 360,003 132,909 Shareholders’ equity...... 1,100,409 1,260,195 1,206,529 1,249,875 973,320 Other financial information: Depreciation and amortization(7) ...... 263,354 243,036 168,616 90,637 82,093 Capital expenditures(8)...... (249,105) (467,508) (530,401) (697,986) (327,621) Index to Consolidated Financial Statements Page

Other Data: Total brewing capacity - Beer(9) ...... 62.0 56.9 51.7 42.7 38.7 Total production capacity - Soft Drinks.... 27.0 27.0 13.0 10.0 10.0 Total beer volume sold...... 42,513 41,321 38,302 36,495 30,949 Total soft drink volume sold...... 12,115 9,362 8,810 7,498 6,885 Number of employees(10) ...... 10,708 10,955 9,987 9,535 9,003 Productivity - Hectoliters Per 8,694 6,289 5,222 5,133 4,470 Employee(11) ...... (1) Net income divided by the weighted average number of Common and Preferred shares outstanding during the relevant years. (2) Gives effect to share options issued to employees and management and share warrants, both of which are considered as common stock equivalents in calculating diluted earnings per shares. (3) Weighted average number of shares outstanding during the year (4) Represents total current assets less total current liabilities. (5) Includes short-term debt and current portion of long-term debt. (6) Includes long-term portion of long-term debt and sales tax deferrals. (7) Includes depreciation on property, plant and equipment and amortization of goodwill and intangible assets. (8) Represents cash expenditures for property, plant and equipment. (9) Represents available production capacity at the end of each year (thousands of hectoliters of the Company and its affiliates). (10) Includes all employees of the Company and its affiliates, both production and non-production related at the end of each period. (11) Calculated by dividing the total volume of beer and soft drinks produced by the number of employees involved in the production processes at the end of each period.

Dividends and Dividend Policy

The authorized capital stock of the Company is comprised of Common and Preferred Shares. As of March 31, 1999, a total of 4,287,944,559 Preferred Shares and 2,635,679,468 Common Shares have been issued by the Company.

Index to Consolidated Financial Statements Page

The following table sets forth the dividends paid to the Company’s Common and Preferred Shareholders since 1994 in US dollars translated from Brazilian reais at the Commercial Exchange Rate as of the date of payment. The amounts as from 1997 include interest attributable to shareholders’ equity, net of withholding tax. See “Interest Attributed to Shareholders’ Equity”

Earnings generated First payment date Brazilian reais per USdollar equivalent per thousand thousand shares shares at payment date(1)

1st half/94 October 4, 1994 0.66 0.78 1st half/94 October 4, 1994 0.55 0.65 pro-rata 2nd half/94 May 15, 1995 3.75 4.21 2nd half/94 May 15, 1995 1.87 2.10 pro-rata 1st half/95 October 2, 1995 3.66 3.83 1st half/95 October 2, 1995 3.05 3.19 pro-rata 1st half/95 October 2, 1995 0.61 0.64 pro-rata Extraordinary March 25, 1996 57.00 57.70 2nd half/95 May 2, 1996 5.20 5.24 1st half/96 September 26, 1996 4.55 4.46 2nd half/96 March 21, 1997 6.35 5.98 1st half/97 October 9, 1997 8.057 7.34 (Preferred) 7.3245 6.67 (Common) 2nd half/97 May 7, 1998 8.6570 7.56 (Preferred) 7.8700 6.87 (Common) 1st half/98 October 8, 1998 7.7776 6.57 (Preferred) 7.0706 5.97 (Common) 2nd half/98 April 5, 1999 13.9474 8.08 (Preferred) 12.6794 7.35 (Common)

(1) These amounts differ from the amounts presented in the Financial Statements as the amounts were determined based on the prior year-end number of shares outstanding.

Calculation of Distributable Amounts

At each annual shareholders’ meeting, the Board of Directors is required to propose how the Company’s earnings for the preceding fiscal year are to be allocated. For purposes of Brazilian Corporate Law, a company’s net income after income taxes and social contribution taxes for such fiscal year, net of any accumulated losses from Index to Consolidated Financial Statements Page

Statutory Reserve. Under the Brazilian Corporate Law, the Company is required to maintain a “legal reserve” to which it must allocate 5% of its “net profits” for each fiscal year until the amount of the reserve equals 20% of the Company’s paid-in capital. Accumulated losses, if any, may be charged against the legal reserve.

Discretionary Reserves. Under Brazilian Corporate Law, a company may also provide for discretionary allocations of “net profits” to the extent set forth in its by-laws (collectively referred to as “discretionary reserves”). The Company’s By-laws provide for a discretionary reserve account for capital increases, which cannot exceed 80% of paid-in capital after distributions of dividends.

Reserve for Investment Projects. Under Brazilian Corporate Law, a portion of the Company’s “net profits” may be allocated for discretionary appropriations for plant expansion and other capital investment projects, the amount of which is based on an capital budget previously presented by management and approved by shareholders. After completion of the relevant capital projects, the company may retain the appropriation until a shareholder vote to transfer all or a portion of the reserve to capital or retained earnings.

Unrealized Revenue Reserve. Under Brazilian Corporate Law, if the amount of “unrealized income” (as hereinafter defined) for any particular year exceeds the sum allocated to (i) the statutory reserve, (ii) the discretionary reserves, (iii) the contingency reserve and (iv) the reserve for investment projects in such year, such excess may be allocated to an “unrealized income reserve”. “Unrealized income” in any particular year represents the sum of (i) price-level restatement of certain balance sheet accounts (through 1995) in such year, (ii) the share of equity earnings of subsidiary and associated companies in such year and (iii) profits from installment sales to be received after the end of the next succeeding fiscal year.

Tax Incentive Reserve. Under the Brazilian tax laws, a portion of “net profits” may also be allocated to a general “tax incentive reserve” in amounts corresponding to reductions in the Company’s income tax generated by credits for particular government

Index to Consolidated Financial Statements Page

Brazilian Corporate Law provides that all discretionary allocations of “net profits”, including the discretionary reserves, the unrealized revenue reserve and the reserve for investment projects are subject to approval by the shareholders’ voting at the annual meeting and may be transferred to capital or used for the payment of dividends in subsequent years. The fiscal incentive investment reserve and the legal reserve are also subject to approval by the shareholders’ voting at the annual meeting and may be transferred to capital but are not available for the payment of dividends in subsequent years.

The Company’s calculation of “net profits” and allocations to reserves for any fiscal year are determined on the basis of financial statements prepared in accordance with accounting principles prescribed by Brazilian Corporate Law, which differs from financial statements prepared under US GAAP. The Financial Statements included herein have been prepared in accordance with US GAAP and, although the Company’s allocations to reserves and dividends will be reflected in such Financial Statements, investors will not be able to calculate such allocations or required dividend amounts from the Financial Statements.

Mandatory Dividend

Under its By-laws, the Company is required to distribute to shareholders’ as dividends in respect to each fiscal year ending on December 31 an amount equal to and not less than 25% of the Distributable Amount (the “Mandatory Dividend”) in any particular year. In addition to the Mandatory Dividend, the Board of Directors may recommend to the shareholders’ payment of dividends from other funds legally available. Any payment of interim dividends or payment of interest attributed to shareholders’ equity will be netted against the amount of the Mandatory Dividend for that fiscal year. Under Brazilian Corporate Law, if the Board of Directors determines prior to the annual shareholders’ meeting that payment of the Mandatory Dividend for the preceding fiscal year would be inadvisable in view of the Company’s financial condition, the Mandatory Dividend need not be paid. Such determination must be reviewed by the Audit Committee and reported to the shareholders and to the CVM. If a Mandatory Dividend is not paid, any retained earnings must be allocated to a special reserve account. If the Company does not incur the expected losses which caused it to withhold the Mandatory Dividend, the Company will be obligated to pay the Mandatory Dividend.

Dividend Preference of Preferred Shares

Index to Consolidated Financial Statements Page

Other Rights of Preferred Shares

The Company’s By-laws do not provide for the conversion of Preferred Shares into Common Shares. In addition, there are no redemption provisions associated with the Preferred Shares. The Preferred Shares have preference in respect to the proceeds of liquidation of the Company, without any premium to existing shareholders. Preferred Shareholders are not entitled to vote at the Company’s general annual meeting of shareholders.

Payment of Dividends

The Company is required by Brazilian Corporate Law to hold an annual shareholders’ meeting by no later than April 30 of each year at which time an annual dividend is declared. Additionally, interim dividends may be declared by the Board of Directors. Under Brazilian Corporate Law, dividends are generally required to be paid to the holder of record on a dividend declaration date within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur prior to the end of the fiscal year in which such dividend was declared. According to the Company’s By-laws, the dividends shall be paid within 60 days following the publication of the resolution which approved the distribution. The Mandatory Dividend is satisfied through payments made in the form of dividends and interest attributed to shareholders’ equity. A shareholder has a three- year period from the dividend payment date to claim dividends in respect of its shares, after which the Company has no liability for such payment.

Payments of cash distributions by the Company on Preferred and Common shares underlying the Preferred ADSs will be made in Brazilian reais to the Custodian on behalf of the Depositary, which will then convert such proceeds into US dollars and Index to Consolidated Financial Statements Page

Shareholders who are not residents of Brazil must register with the Central Bank in order for dividends, sales proceeds or other amounts to be eligible for remittance in foreign currency outside of Brazil. The Preferred and Common Shares underlying the ADSs are held in Brazil by the Custodian), as agent for the Depositary, which is the registered owner of the Company’s shares.

Payments of cash dividends and distributions, if any, will be made in Brazilian reais to the Custodian on behalf of the Depositary, which will then convert such proceeds into US dollars and will deliver such US dollars to the Depositary for distribution to the holders of ADRs. In the event that the Custodian is unable to immediately convert the Brazilian real dividends into US dollars, holders of the Preferred and Common ADSs may be adversely affected by devaluations or other exchange rate fluctuations before such dividends can be converted and remitted.

Interest Attributed to Shareholders’ Equity

Pursuant to a change in Brazilian tax law effective January 1, 1996, Brazilian companies are permitted to pay limited additional amounts to shareholders of equity securities and treat such payments as an expense for Brazilian income tax purposes. The amount of any such notional “interest” payment to holders of equity securities is generally limited in respect of any particular year to (i) retained earnings for such year plus 50% of pre-tax profits for such year multiplied by (ii) the Taxa de Juros de Longo Prazo interest rate, which is the official rate for governmental long-term loans. The additional payment may take the form of supplemental dividends to shareholders. For accounting purposes, although the interest charge must be reflected in the statement of operations to be tax-deductible, the charge is reversed before striking net income in the statutory financial statements and deducted from shareholders’ equity in a manner similar to a dividend. In the US GAAP financial statements, this notional interest distribution is treated in a manner similar to a dividend, as a deduction from shareholders’ equity. A 15% withholding tax is payable by the Company upon distribution of the interest amount. In 1996, the withholding tax was payable by the Company and was accrued and charged to income. As from 1997, the withholding tax is paid by the Company on behalf of the shareholders. In 1996, this interest expense was deductible in determining Brazilian income tax payable. As from 1998, such payments are also deductible for social contribution purposes.

Index to Consolidated Financial Statements Page

Dividend Policy

The Company currently intends to pay dividends or interest attributed to shareholders’ equity on its outstanding Preferred and Common Shares in the amount of its required distributions for any particular fiscal year, subject to any determination by the Board of Directors that such distributions would be inadvisable in view of the Company’s financial conditions.

Exchange Rate

There are two legal foreign exchange markets in Brazil, the Commercial Market and the Floating Market. The Commercial Market is reserved primarily for foreign trade transactions and transactions that generally require prior approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons and related remittances of funds abroad. Purchases of foreign exchange in the Commercial market may be carried out only through a financial institution in Brazil authorized to buy and sell currency in that market. The Commercial Market Rate is the commercial selling rate for Brazilian currency into US dollars, as reported by the Central Bank. The “Floating Market Rate” is the prevailing selling rate for Brazilian currency into US dollars which applies to transactions to which the Commercial market Rate does not apply, as reported by the Central Bank. Prior to the implementation of the Real Plan, the Commercial Market Rate and the Floating Market Rate differed significantly at times. Since the introduction of the real, the two rates have not differed significantly, although there can be no assurance that there will not be significant differences between the two rates in the future. Both the Commercial Market Rate and the Floating Market Rate are reported by the Central Bank on a daily basis.

Both the Commercial Market Rate and the Floating Rate are freely negotiated but are strongly influenced by the Central Bank. After implementation of the Real Plan, the Central Plan initially allowed the real to float with minimal intervention. On March 6, 1995, the Central Bank announced that it would intervene in the market and buy or sell US dollars, establishing a trading band in which the exchange rate between the real and the US dollar could fluctuate.

Devaluation of Brazilian real Index to Consolidated Financial Statements Page

The following table sets forth information on the Commercial Market Rate for US dollars for the periods and dates indicated.

Exchange Rate of Brazilian reais per US dollar

Period Low High Average (1) Period-End 1994 0.120444 1.000000 0.645000 0.846000 1995 0.834000 0.972600 0.917700 0.972500 1996 0.972600 1.040700 1.004800 1.039400 1997 1.039400 1.116400 1.078083 1.116400 1998 1.116500 1.208700 1.127000 1.208700 1999 (through March 31) 1.207800 2.164700 1.770800 1.722000 Check rates for 1998 Source: Central Bank (1) Represents the average of the monthly average exchange rates during the relevant period.

Index to Consolidated Financial Statements Page

ITEM 9. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion is based on and should be read in conjunction with the Company’s audited Financial Statements, including the notes thereto, contained elsewhere herein. The Company’s Financial Statements have been prepared in accordance with US GAAP, and the Company’s annual Financial Statements will continue to be prepared in accordance with US GAAP. For certain purposes, such as filing financial statements with the Brazilian Securities Commission, and determining dividend payments and tax liabilities in Brazil, the Company has and will continue to prepare financial statements in Brazil in accordance with accounting principles prescribed in Brazilian Corporate Law.

In 1998, the Company adopted the Brazilian real as the functional currency to measure transactions. See below and “Financial Statements”. The significant devaluation of the Brazilian real in mid-January 1999 is expected to reduce shareholders’ equity as reported in US dollars as at December 31, 1998. ---- See “Foreign Exchange Risk”

Index to Consolidated Financial Statements Page

The Company has elected to present its Financial Statements in US dollars. For this purpose, amounts in Brazilian currency for all periods presented have been remeasured into US dollars in accordance with the methodology set forth in the US Financial Standards Board’s Statement of Financial Accounting Standards (SFAS) No. 52.

The Company has concluded that, as from 1998, the Brazilian economy is no longer highly-inflationary as the increase in the general price index has been measured at less than 100% over the last three years. The Company has adopted the Brazilian real as its functional currency, to substitute for the US dollar as used in the preparation of US GAAP financial statements, as from January 1, 1998. The measurement of results of operations beginning in 1998 has been subject to modified criteria for recording foreign currency translation and foreign currency exchange gains and losses. The net gain or loss on translation of the financial statements from the real to the US dollar is no longer allocated among the line items of the statement of but rather reflected in the Cumulative Translation Account (CTA). ---- See Note 2 to the Financial Statements.

The remeasurement procedures adopted by the Company through December 31, 1997 were as follows: (i) inventories, property, plant and equipment and accumulated depreciation, as well as shareholders’ equity accounts, were translated at historical exchange rates and monetary assets and liabilities denominated in Brazilian currency were translated at period-end exchange rates (December 31, 1997- R$ 1.1164: US$1.00; December 31, 1996 – R$ 1.0394:US$1.00); (ii) depreciation and other costs and expenses relating to assets remeasured at historical exchange rates were calculated based on the US dollar amount of the assets. Other accounts in the statements of operations and cash flows were translated at the average exchange rates prevailing during the period; and (iii) the translation gain or loss resulting from this remeasurement process was included in the statements of operations currently.

As from January 1, 1998 the Company changed its functional currency from the reporting currency (US dollars) to the local currency (Brazilian reais – R$). Accordingly, at January 1, 1998, the Company translated the US dollar amounts of non- monetary assets and liabilities into reais at the current exchange rate and those amounts became the new accounting bases for such assets and liabilities. The resulting deferred taxes associated with the differences between the new functional currency bases and the tax bases were reflected as a deferred tax liability and a charge of US$8.0 million to the cumulative translation adjustment component of shareholders’ equity.

Index to Consolidated Financial Statements Page

Brazilian general price inflation (as measured by the IGP-DI, compiled by the Fundação Getúlio Vargas, an independent statistical institute), devaluation of the Brazilian currency against the US dollar and the year-end and average-annual exchange rates are presented below:

Index to Consolidated Financial Statements Page

Devaluation of the Brazilian real in 1999

In an effort to address concerns about the overvaluation of the real relative to the U. S. dollar and to avoid a situation similar to the economic crisis in Mexico that resulted from the rapid devaluation of the Mexican peso at the end of 1994, the Brazilian government introduced new exchange rate policies in March 1995 that resulted in a gradual devaluation of the real relative to the US dollar. The Central Bank in the beginning of each year set a wide range of exchange rates as annual targets. A second, narrow range was continuously reset by the Central Bank to allow for a gradual devaluation under a “crawling peg” of the real to the US dollar. The Central Bank bought or sold US dollars in the market to ensure that the exchange rate remained within the narrow range. The “crawling peg” remained in effect from March 1995 to mid-January 1999.

In an attempt to stem the increasing capital outflows and concerns about the commitment of certain state governments to fiscal austerity, on January 13, 1999, the Central Bank announced changes to its foreign exchange policy, including a redefinition of the wider trading band for the real to US dollar exchange rate. The immediate effect of these changes were that the Central Bank ceased to intervene in the exchange market to ensure that the real traded between R$1.1975 and R$1.2115 per US$1.00. Also, on January 13, 1999, in the commercial market, the exchange rate rose to R$1.32 per US$1.00 producing a devaluation of the real of approximately 8.3% and effectively reaching the ceiling of the new trading range set by the Central Bank.

The policy established by the Central Bank on January 13, 1999 eliminated the prior system, in which the real to US dollar exchange rate moved within a narrow trading range. The Central Bank intervened in the market until January 15, 1999, to ensure that the real to US dollar exchange rate remained within the newly defined wider range of between R$1.20 and R$1.32 per US$1.00. This controlled devaluation did not ease investor concerns, however, and heavy capital outflows continued after January 13. Index to Consolidated Financial Statements Page

Since December 31, 1998 and through May 14, 1999, the real has depreciated by 27.1% against the US dollar and at May 14, 1999 the Commercial Rate for purchasing US dollars was R$ 1.6570 to US$1.00.

Presentation of segment financial data

In 1998, the Company adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” with respect to its operating segments. SFAS No. 131 introduces a “management approach” concept for reporting segment information. See Note 16 to the “Financial Statements.”

The Company’s business is comprised by two main segments: beer and soft drinks, which together account for 97% of the Company’s sales. All financial information relating to revenues from the beer and soft drink segments reported below is presented in US dollars but based on underlying data prepared in accordance with accounting principles prescribed by Brazilian Corporate Law, which represents the accounting bases used by the Company to manage each of its business segments. The revenues were translated to US dollars on a basis consistent with that used in the Financial Statements presented under US GAAP. The principal differences between US GAAP and accounting principles prescribed by Brazilian Corporate Law with respect to revenues relate to the principles of consolidation (certain investee revenues and costs are included on a proportional consolidation basis under accounting principles prescribed by the Brazilian Corporate Law, whereas these affiliated company revenues and costs are not included in the consolidation under US GAAP).

The accounting policies underlying the segment financial information are based on Brazilian accounting principles used for statutory purposes, except that certain expenses were not allocated to the segments. These unallocated expenses are corporate Index to Consolidated Financial Statements Page

The local currency segment information related to the statement of operations data derived from underlying data prepared in accordance with accounting principles prescribed by Brazilian Corporate Law has been translated to US dollars, for convenience purposes, at the average rate for each period presented. The information as at the balance sheet date has been translated to US dollars at the respective year-end exchange rates.

The Company has prepared a reconciliation of segment information to its consolidated financial statements and restated prior period information as practicable. See Note 16 to the “Financial Statements.”

Overview

Brahma is the largest publicly traded consumer goods company in Brazil and the largest beer producer in Latin America. The Company’s operations are largely dependent upon the general economic environment of Brazil and to a lesser extent the economic environment of other developing markets in Latin America and the world. Continued growth of consumer purchasing power, which is largely impacted by inflation, individual tax rates, real increases in wage rates and levels of employment remains a key to the continued economic success of the Company and other Brazilian consumer goods companies.

The period 1994 through 1998 was characterized by increased competition among the Company, Antarctica and Kaiser, the second largest beer producer in Brazil, and the third largest beer producer in Brazil, respectively. See “Description of Business -- Competition.”. Competition has not impeded the Company’s ability to increase market share in the beer segment and the acquisition of the Pepsi companies will allow the Company to be ever more competitive in the strategical soft drink segment.

In 1998, the Company continued to focus on improving return on investment for its stockholders. The Company uses Economic Value Added (EVA) as a key criterion for the measurement of financial performance. The Company defines EVA as adjusted net operational profit reduced by taxes and the cost of the capital employed to generate operational profit (under accounting principles prescribed under Brazilian Index to Consolidated Financial Statements Page

Brazilian Economic Environment

In July 1994, the Brazilian Government launched the Real Plan, an economic stabilization plan designed to reduce inflation by reducing certain public expenditures, collecting liabilities owed to the Brazilian Government, increasing tax revenues, continuing a privatization program and introducing a new currency into circulation. On July 1, 1994, as part of the Real Plan, the Brazilian Government introduced a new currency, the real. Until the implementation of the Real Plan and the introduction of the real, Brazil had experienced extremely high rates of inflation and economic instability. The recurrent threat of hyperinflation in the latter half of the 1980s and the early 1990s prompted successive Brazilian administrations to adopt a series of economic programs.

Year ended December 31, (in US$ billions)

1998(1) 1997 1996 1995 1994

Exports 51.1 52.9 47.7 46.5 43.6 Imports 57.6 61.3 53.2 49.7 33.2 Trade balance (6.5) (8.4) (5.5) (3.2) 10.4 surplus (deficit) Current account (35.2) (33.4) (24.3) (17.9) (1.6) deficit

(1) Preliminary Source: Central Bank, Fundação Getúlio Vargas, CEPAL, IPEA

Index to Consolidated Financial Statements Page

In November 1997, in a move to counteract speculation of currency devaluation generated by the financial crisis in Asian markets, the Brazilian Government increased annual interest rates from approximately 20% to approximately 40% per annum. At April 30, 1998 these rates had decreased to approximately 23%. The Government again increased annual interest rates to approximately 50% per annum after the devaluation of the real associated with the Brazilian Governments decision to allow the real to float freely in foreign exchange markets. As at May 14, 1999 such rates had fallen back to approximately 27% per aunnum.

Following the reelection of President Cardoso to a second four-year term in October 1998, the Brazilian government confirmed its intention to implement a policy of fiscal adjustments to produce increasing primary budget surpluses over the next three years. The program would combine temporary tax increases, the elimination of subsidies and tax benefits, spending cuts and certain structural measures, including structural reform of the Brazilian social security and civil-service systems. A reform of certain other aspects of the tax system is also expected to generate gains. Other reform proposals affect the labor laws, the collection of taxes and the fiscal management of states, municipalities and state-owned companies.

In March 1999, the Brazilian government revised its fiscal adjustment program in consultation with the International Monetary Fund (“IMF”) to adapt its fiscal targets to the new economic environment created by the floating exchange rate. Additional measures announced by the Brazilian government include increases in public tariffs linked to certain imported raw materials, a suspension of certain fiscal benefits, an increase in a tax on certain financial transactions tax (the “IOF tax”) applicable to consumer loans, expanded contributions to social security and reductions in federal expenditures with personnel.

The implementation of the fiscal adjustment program is intended to address macroeconomic problems and investor concerns highlighted by events in the Asian financial markets and by Russia’s default on its debt obligations. The program is also intended to achieve the targets established as conditions to drawdowns under the IMF Index to Consolidated Financial Statements Page

The Brazilian governments fiscal adjustment program and its new monetary policy are expected to be instrumental in reestablishing investor confidence, reducing the volatility of the foreign exchange market and easing the rate of inflation caused by the devaluation of the real. Consolidation of these policies, however, depends on the effective implementation of the fiscal adjustment program, this program is expected to narrow the current account deficits and reduce net outflows of foreign currency, which, in conjunction with high interest rates, is expected to result in reduced economic growth.

The Company believes that, since the implementation of the Real Plan, it has benefited in that the population has, on average, had more disposable income for the purchase of products such as beer that and soft drinks. However, there can be no assurance that the prevailing lower level of inflation will continue, there will not be a significant reduction in per-capita GDO, that future Brazilian governmental actions (including actions to adjust the value of the Brazilian currency) will not trigger an increase in inflation or that any such increase will not have a material adverse effect on the Company’s financial condition and results of operations.

Acquisitions

On October 22, 1997 the Company acquired all of the quota capital of Engarrafadora PCE, both of which are Brazilian limited liability companies, for a consideration of R$ 1.00. Engarrafadora and PCE produce and distribute Pepsi-Cola products under license in designated areas of Brazil.

The Engarrafadora and PCE acquisitions were recorded using the purchase method of accounting and accordingly, the results of operations of Engarrafadora and PCE for the period from October 22, 1997 through December 31, 1997 are included in these financial statements. The purchase price has been allocated to assets acquired and liabilities assumed based on estimated fair market values at the date of acquisition. The fair value of total assets acquired approximated US$209.5 million at December 31, 1997. The excess of the aggregate purchase price over the fair market value of the net Index to Consolidated Financial Statements Page

The following summarized combined pro forma financial information assumes the acquisition of Engarrafadora and PCE had occurred on January 1, 1996, (in millions):

1997 1996

Net sales 2,721 2,607 Net income 170 103 Earnings per share - Basic Preferred 24.89 15.11 Common 22.63 15.11

In management’s opinion, the pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at January 1, 1996.

On October 22, 1997, the Company also signed a franchise commitment letter with PCI under which the Company obtained the rights to produce, sell and distribute PCI products on an exclusive basis in certain designated regions of Brazil. The original term of the franchise agreement is twenty years with renewal terms of ten years being subject to the approval of both parties. Under the franchise agreement the Company has agreed to purchase certain raw materials from PCI.

On April 23, 1998, the Company purchased an additional 20% interest in the voting capital of its equity investee, Maltaria Pampa S.A., for US$18.0 million, increasing its share in such company to 60%. On August 27, 1998, the Company purchased the remaining 40% for US$34.7 million. The purchase consideration exceeded the fair value of assets acquired and liabilities assumed by US$33.1 million, which is being amortized over the useful lives of these assets, a period which does not exceed 40 years. The subsidiary has been consolidated as though it had been acquired at the beginning of the year.

Seasonality

Index to Consolidated Financial Statements Page

Sales volume of the Company’s products by product line (in thousands of hectoliters)

1998 1997 1996

Quarter Beer Soft Drinks Beer Soft Drinks Beer Soft Drinks

1st 10,431 3,576 10,121 2,278 9,596 1,905 2nd 9,602 2,560 8,921 1,827 8,650 2,052 3rd 9,941 2,739 9,538 2,052 8,916 2,084 4th 12,539 3,240 12,741 3,205 11,140 2,769

Total 42,513 12,115 41,321 9,362 38,302 8,810

Results of Operations

The following table sets forth certain items in the Company’s US GAAP statement of operations expressed as percentages of net sales for the years indicated.

Year ended December 31, 1998 1997 1996 Net sales...... 100% 100% 100% Cost of sales...... (57)% (57)% (56)% Gross profit...... 43% 43% 44%

Selling and marketing...... (22)% (17)% (15)% General and administrative expenses...... (11)% (12)% (12)% Other operating income/(expenses), net...... 1% 6% 1%

Operating income...... 12% 20% 18%

Index to Consolidated Financial Statements Page

Year ended December 31 , Percentage change

1998 1997 1996 1998-1997 1997-1996 Net Sales (Brazilian Corporate Law basis) Beer 2,187,505 2,155,974 1,965,577 1.5% 9.7% Soft Drinks 454,869 338,546 308,204 34.4% 9.8% Others 76,863 83,818 91,001 (8.3)% (7.9)% Total 2,719,237 2,578,338 2,364,782 5.5% 9.0% Adjustments from accounting principles prescribed in the Brazilian Corporate Law to US GAAP (49,899) (134,235) (64,790) Total (US GAAP) 2,669,338 2,444,103 2,299,992 9.2% 6.3%

Cost of sales (Brazilian Corporate Law basis) Beer 1,142,489 1,176,182 1,026,422 (2.9)% 14.6% Soft Drinks 365,275 275,576 261,068 32.5% 5.6% Others 43,056 55,698 68,019 (22.7)% (18.1)% Total 1,550,820 1,507,456 1,355,509 2.9% 11.2% Adjustments from accounting principles prescribed in the Brazilian Corporate Law to US GAAP (16,932) (114,061) (71,628) Total (US GAAP) 1,533,888 1,393,395 1,283,881 10.1% 8.5%

Gross profit (Brazilian Corporate Law basis) Beer 1,045,016 979,792 939,155 6.7% 4.3% Soft Drinks 89,593 62,970 47,137 42.3% 33.6% Others 33,808 28,120 22,982 20.2% 22.4% Total 1,168,417 1,070,882 1,009,274 9.1% 6.1% Adjustments from accounting principles prescribed in the Brazilian Corporate Law to US GAAP (32,967) (20,174) 6,837 Total (US GAAP) 1,135,450 1,050,708 1,016,111 8.1% 3.4%

Index to Consolidated Financial Statements Page

Financial income 198,636 121,278 132,205 63.8% (8.3)% Financial expense (289,504) (142,318) (97,248) 103.4% 46.3% Other operating income, net 14,994 40,310 25,895 (62.8)% 55.7% Income tax (8,740) (83,196) (91,737) (89.5)% (9.3)% Equity in earnings (losses) 2,962 (28,138) 5,648 - - Minority interest 9,404 1,133 (4,700) 730.0% Net income (US GAAP) 238,577 395,466 388,576 39.7% 1.8% Depreciation and amortization Beer 228,356 218,888 159,692 4.3% 37.1% Soft Drinks 51,020 28,391 19,139 79.% 48.3% Others 5,658 5,498 2,875 2.9% 91.2% Total 285,034 252,778 181,706 12.8% 39.1% Adjustments from accounting principles prescribed in (21,680) (9,742) (13,090) the Brazilian Corporate Law to US GAAP Total (US GAAP) 263,354 243,036 168,616 8.4% 44.1%

EBITDA (1) Beer 638,572 760,722 645,155 16.1% 17.9% Soft Drinks 17,142 (1,740) (11,528) 1000.8% 84.9% Others 18,841 18,721 17,728 .01% .06% Total 674,555 777,703 651,355 (13.3%) 19.4% Adjustments from accounting principles prescribed in (100,376) (48,270) (64,226) the Brazilian Corporate Law to US GAAP Total (US GAAP) 574,179 729,433 587,129 (21.3%) 24.2%

Index to Consolidated Financial Statements Page

The following table sets forth the components of the Company’s cost of sales (on the basis of accounting principles prescribed in Brazilian Corporate Law) for the years indicated:

Cost of Sales - Breakdown 1998 1997 1996 Raw materials...... 25.7% 27.0% 31.8% Packaging...... 35.0% 31.7% 27.2% Labor ...... 6.6% 7.6% 10.0% Depreciation/amortization...... 13.7% 13.7% 11.5% Other costs...... 19.1% 20.1% 19.5%

Total Costs 100% 100% 100%

Index to Consolidated Financial Statements Page

Year Ended December 31, 1998 Compared with Year Ended December 31, 1997

Net sales revenues

Group. Net sales of the for the year ended December 31, 1998 increased to US$2,669.3 million or 9.2 % over net sales for 1997 of US$2,444.1 million.

Beer. Net sales of beer (basis: accounting principles prescribed under Brazilian Corporate Law) increased by 1.5 % from US$2,156.0million in the year ended December 31, 1997 to US$2,187.5million in the year ended December 31, 1998 due primarily to an overall 2.9% increase in volume sales. Volume sales increases from 1997 to 1998 by country are as follows:

Increase Contribution to volume Brazil 2.5% 93.6% Argentina 4.1% 3.3% Venezuela 13.4% 3.1%

Volume sales increases in 1998 reflect the Company’s significant efforts to improve distribution, both through third party distributors as well as through direct distribution, a focus on marketing efforts at the point-of- sale, and as a result of the increase in demand due to the 1998 World Cup Soccer games. Net sales per hectoliter of beer sold in Brazil was US$51.8 in 1998, 5.4% above 1997, principally due to an increase in volume sold through the direct distribution system and an increase in the volume of beer sold in non-returnable packaging formats.

In Argentina, volume sales increased 4.1% in 1998, while the Argentine beer industry experienced a decline of approximately 2%. The growth in sales volume was the result of market share gains, as well as improvements in the Argentine economic climate in the final quarter of 1998. The Company’s average share of the Argentine beer market was 11.4% in 1998. In mid-1998, the Company implemented direct distribution in the Argentine capital of Buenos Aires, as well as in the surrounding metropolitan area, leading to an increase in the Company’s sales volume in that region of 14% during the fourth quarter of the year. Net sales rose 8.3% to US$42.8 per hectoliter as a result of an increase in non-returnable packaging and a higher percentage of volumes sold through direct distribution. Index to Consolidated Financial Statements Page

Soft Drinks. Net sales of soft drinks (basis: accounting principles prescribed in the Brazilian Corporate Law) increased by 34.4 % from US$338.5 million in the year ended December 31, 1997 to US$454.9 million in the year ended December 31, 1998 primarily due to a 29.7% increase in sales volumes. Market share in Brazil, decreased by approximately 16.7% to approximately 12.5% in 1998 from 15.0% in 1997, primarily due to increases in Brahma brand product prices which resulted in an increase in market share for cheaper, generic brands. The Company’s sales volume of soft drinks rose 29.7% in 1998 compared to 1997 sales volume due to the addition of Pepsi products to the Company’s soft drinks product portfolio. Net sales per hectoliter increased 3.8% during the year, to US$37.5 million/ hectoliter.

Indirect sales taxes

Indirect sales taxes (basis: accounting principles prescribed under Brazilian Corporate Law) consisting primarily of state value-added taxes, excise taxes and indirect taxes on sales increased from 54.4% of gross sales in 1997 to 56.9% of gross sales in 1998. This increase was due to a 10% increase in excise taxes on beer and soft drinks for returnable bottles (beer) and non-returnable bottles (soft drinks) and a 25% increase for cans (beer and soft drinks). As the tax increase became effective in November 1997, the 2.5% increase in indirect sales taxes is principally a result of twelve months of application as compared to only two months in 1997. The costs of these taxes were passed on to the final consumer, which represented an increase of 2% and 4% respectively, on the final end-product price.

Cost of sales

Group. Cost of sales (basis: US GAAP) increased by 10.1 % from US$1,393.4 million in the year ended December 31, 1997 to US$1,533.9 million in the year ended December 31, 1998.

Beer. Cost of sales for beer (basis: accounting principles prescribed under Brazilian Corporate Law) decreased by 2.9% from US$1,176.2 million in the year ended Index to Consolidated Financial Statements Page

Soft Drinks. Cost of sales for soft drinks (basis: accounting principles prescribed under Brazilian Corporate Law) increased by 32.5% from US$275.6 million in the year ended December 31, 1997 to US$365.3 million in the year ended December 31, 1998. This increase was principally due to a 29.7% increase in volume sales principally as a result of the Pepsi acquisition. Increased costs were partly mitigated by greater efficiency in the production process resulting from the ongoing modernization of production facilities and a reduction in the price of aluminum cans.

Gross profit

Group. Gross profit (basis: US GAAP) increased 8.1 % from US$1,050.7 million for 1997 to US$1,135.5 million for 1998. Gross profit as a percentage of net sales decreased to 42.5% for the year ended December 31, 1998 from 43.0% for the year ended December 31, 1997.

Beer. Gross profit (basis: accounting principles prescribed under Brazilian Corporate Law) increased by 6.7% from US$979.8 million for 1997 and US$1,045.0 million for 1998. Gross margins increased from 45.4% in 1997 to 47.8 % in 1998.

Soft Drinks. Gross profit (basis: accounting principles prescribed under Brazilian Corporate Law) increased by 42.3 % from US$63.0 million in 1997 to US$89.6 million in 1998. Gross margins increased from 18.6% in 1997 to 19.7% in 1998.

Selling and marketing expenses

Selling and marketing expenses (basis: US GAAP) increased by 36.1 % from US$426.2 million for the year ended December 31, 1997 to US$580.2 million for the year ended December 31, 1998. This increase primarily reflects significant new expenses totaling approximately US$151.5 million to distribute products directly to the point-of- sale, which in the past was primarily outsourced through the distributor network, as well as increased expenses in marketing and selling Pepsi products throughout Brazil. Index to Consolidated Financial Statements Page

General and administrative expenses (basis: US GAAP) decreased by 2.6% from US$289.0 million in the year ended December 31, 1997 to US$281.6 million in the year ended December 31, 1998. The decrease is primarily a result of changing the functional currency from the US dollar to the real. In 1997, other costs and expenses relating to assets and liabilities remeasured at historical exchange rates were calculated based on the US dollar amount of the related asset or liability and a translation loss of approximately US$28.9 million related to the Company’s contingencies was included in general and administrative expense, whereas from January 1, 1998 translation gains or losses are recorded directly in the Cumulative translation adjustment account in shareholders’ equity without impacting results for the year. This decrease was partially offset by: (1) an increase in depreciation and amortization expenses of US$26.4 million, due to the commencement of operations at the Sergipe and Rio Grande do Sul plants, as well as an entire year of depreciation of the Pepsi plants and (2) an increase of 36% in administrative expenses related to the Brahma Welfare Foundation from US$13.9 million in 1997 to US$18.9 million in 1998, primarily a result of a new law which subjects the Foundation’s financial income to withholding tax while in prior years the Foundation was tax exempt.

The number of administrative employees of the Company remained relatively stable for both periods but the overall number of Company employees decreased by approximately 2.3% reflecting a decrease in the number of clerical and administrative positions in 1998. See “Description of Business.”

Other operating income, net

Other operating income, net (basis: US GAAP), decreased from US$150.9 million for the year ended December 31, 1997 to US$37.1 million for the year ended December 31, 1998. This decrease is primarily the result of a reversal of tax and labor related provisions of US$101.4 million in 1998 as compared to similar reversals of US$114.1 million in 1997, gains on sales of property, plant and equipment which increased by US$10.0 million in 1998, as well as expenses totaling US$47.1 million in relation to the Company’s expanded direct distribution function for its products. Additionally, as noted above, upon changing the functional currency from the US dollar to the real, all accounts in the statements of operations including amounts relative to local currency indexation and exchange variances on assets are translated at the average rates prevailing during the period whereas in 1997 other costs and expenses relating to assets remeasured at historical exchange rates were calculated based on the US dollar amount of the assets and a translation gain of US$19.7 million resulting from this remeasurement process was included in the other operating income. Index to Consolidated Financial Statements Page

Financial income (basis: US GAAP) increased 63.8% from US$121.3 million for the year ended December 31, 1997 to US$198.6 million for the year ended December 31, 1998. This change is primarily a result of higher nominal rates of return obtainable on investments in Brazil in 1998 as compared to 1997 as well as gains from the increased proportion of US dollar trading securities in 1998. Additionally, the effects of exchange rate variations on US dollar-denominated cash and cash equivalents and trading securities resulted in a gain of US$19.1 million due to the change in the functional currency from the US dollar to the real. Upon changing the functional currency after Brazil ceased to be highly inflationary, exchange variations are measured in local currency and translated to the reporting currency (U. S. dollars) in the statement of operations. Realized and unrealized gains from security trading were US$26.0 million in the year ended December 31, 1998 against gains of US$8.6 million in the year ended December 31, 1997.

Financial expenses

Financial expenses (basis: US GAAP) increased 103.4 % from US$142.3 million for the year ended December 31, 1997 to US$289.5 million for the year ended December 31, 1998. This change is principally a result of the following:

Charges on US dollar debt: Interest expense on US dollar-denominated debt of US$65.0 million increased by US$10.3 million, an 18.8 % increase from the 1997 total of US$54.7 million. Additionally, the effects of exchange rate variations on foreign currency debt resulted in charges of US$52.7 million, an increase of US$46.9 million from the 1997 charge of US$5.8 million, primarily due to the change in the functional currency from the US dollar to the real.

Charges on Brazilian real debt: Interest expense on Brazilian real debt of US$82.7 million increased by US$57.3 million, a 225.6% increase from the 1997 total of US$25.4 million. Interest expense on loans increased primarily as a result of the increase in year-end loans and sales tax deferrals outstanding in 1998 as compared to 1997. While market interest rates on Brazilian bank debt increased in 1997 and 1998 as a result of the Asian and Russian Crises (see below for Asian Crisis and Russian Crisis), the Company did not experience increased financial costs as a significant portion of the Company’s interest bearing debt is payable to BNDES and FINAME, both of which are Brazilian governmental. See “Liquidity and Capital Resources.”

Index to Consolidated Financial Statements Page

Other non-operating income net (basis: US GAAP) fell from US$40.3 million for the year ended December 31, 1997 to US$15.0 million for the year ended December 31, 1998 due in part to a provision of US$13.0 million booked in 1998 to reflect the excess of the Company’s share of investee net liabilities (see below),

Income tax (expense) benefit

Income tax expense (basis: US GAAP) decreased by 89.5 % from US$83.2 million for the year ended December 31, 1997 to US$8.7 million for the year ended December 31, 1998. This reduction primarily relates to the lower pre-tax income. The reduction also reflects a US$53.6 million benefit from the election to calculate and therefore treat as tax deductible a notional interest charge attributed to equity in 1998, as compared to the 1997 benefit of US$32.2 million, partially offset by an increase of US$19.5 million of losses in subsidiaries for which no corresponding net tax assets were recognized. See Note 4(b) to Financial Statements.

Equity in (losses) earnings of equity investees

Equity earnings of investees (basis: US GAAP) was US$3.0 million for the year ended December 31, 1998 against a loss of US$28.1 million for the year ended December 31, 1997, primarily a result of the Company’s share of liabilities in certain investees having exceeded their assets in 1998. Because the Company has an agreement to honor investee commitments with third parties, a provision was recorded in Other operating income of US$13.0 million to reflect the Company’s obligation. In 1997, the losses incurred up to the time liabilities exceeded assets of the investees, were recorded as equity accounting adjustments. These losses relate primarily to increased selling and marketing expenses associated with new product launches, product development and expenses incurred in expanding the distribution networks of these companies.

Losses attributable to minority interests of consolidated subsidiaries (basis: US GAAP) increased for the year ended December 31, 1998, when attributable losses totaled US$9.4 million, as compared to the year ended December 31, 1997 when minorities shared in losses totaling US$1.1 million. This increase is due to the share of losses generated in the Venezuelan operations which increased from US$0.7 million in the year ended December 31, 1997, to US$6.0 million for the year ended December 31, 1998.

Net income (basis: US GAAP) decreased 39.7 % from US$395.5 million for the year ended December 31, 1997 to US$238.6million for the year ended December 31, 1998.

Index to Consolidated Financial Statements Page

Net sales revenues

Group. Net sales of the Company (basis : US GAAP) for the year ended December 31, 1997 increased to US$2,444.1 million or 6.3% over net sales for 1996 of US$2,300.0 million.

Beer. Net sales of beer (basis: accounting principles prescribed under Brazilian Corporate Law) increased by 9.7% from US$2,241.1 million in the year ended December 31, 1996 to US$2,422.5 million in the year ended December 31, 1997 due primarily to an overall 7.9% increase in beer sales volumes. Volume sales increases from 1996 to 1997 by country are as follows:

Increase Contribution to volume Brazil 6.9% 94.8 % Argentina 27.6% 2.7% Venezuela 22.3% 2.4%

Volume sales increases reflect positively on the Company’s significant marketing efforts in 1997 and on the ability of the Company’s production and distribution infrastructure to meet increased demand See, “Selling and Marketing Expenses”. Additionally, volume sales were positively affected by the Company’s direct distribution to the point-of-sales program which commenced in late 1996 but which was more fully implemented in 1997 See, “Description of Business”. The Company was able to increase market share for beer from 46.9% to 48.0% (Nielsen/Gazeta Mercantil). According to SINDICERV, the association of beer producers in Brazil, the market grew only 1.7%.

Soft Drinks. Net sales of soft drinks (basis: accounting principles prescribed under Brazilian Corporate Law) increased by 9.8% from US$308.2 million in the year ended December 31, 1996 to US$338.5 million in the year ended December 31, 1997 primarily due to a 6.3% increase in volume sales. Increased volumes primarily represent a 6.0% increase reflecting the acquisition of the Pepsi Franchise Rights in October 1997. Through the Pepsi acquisition the Company achieved a critical mass that diluted overall fixed costs and lessened the need for the use of discounts in pricing. Revenues from the sale of Pepsi products during the months of November and December 1997 contributed US$42.7 million to the Company’s net sales for that period. See, “Description of Business”. Excluding the acquisition, volume sales decreased by 0.1% as the Company offered fewer price reductions in 1997 than in 1996 when the Company aggressively priced soft drinks to gain market share. Market share in Brazil, including Index to Consolidated Financial Statements Page

Indirect sales taxes

Indirect sales taxes (basis: accounting principles prescribed under Brazilian Corporate Law) consisting primarily of state value-added taxes, excise taxes and indirect taxes on sales increased from 51.6% of gross sales in 1996 to 52.5% of gross sales in 1997. The increase is primarily due to an increase in excise taxes on beer and soft drinks in November 1997 of 10% for returnable bottles (beer) and non-returnable bottles (soft drinks) and 25% for cans (beer and soft drinks). The cost of these taxes was passed on to the ultimate consumer, which represented an increase of 2% and 4% respectively, on the ultimate price.

Cost of sales

Group. Cost of sales (basis : US GAAP) increased by 8.5% from US$1,283.9 million in the year ended December 31, 1996 to US$1,393.4 million in the year ended December 31, 1997.

Beer. Cost of sales for beer (basis: accounting principles prescribed in the Brazilian Corporate Law) increased by 14.6% from US$1,026.4 million in the year ended December 31, 1996 to US$1,176.2 million in the year ended December 31, 1997. The increase was primarily due to an increase in sales volumes and an increase in production costs due to a change in sales mix whereby sales of one-way bottles and cans increased by 1% and 6%, respectively, over 1996 while sales of returnable bottles in 1997 decreased by 5% as compared with 1996. The decrease in sales of returnable bottles reflects large supermarket chains preferences for cans and one-way bottles. On average, the use of one-way bottles and cans cost ten times more than returnable bottles. Also affecting cost of sales was increased depreciation (principally as a result of twelve months operation of the Nova Rio plant in 1997 as compared to only seven months in 1996). Increased costs were partially mitigated by greater efficiency in the production process resulting from the ongoing modernization of production facilities and decreases in the price of malt and aluminum cans.

Soft Drinks. Cost of sales for soft drinks (basis: accounting principles prescribed in the Brazilian Corporate Law) increased by 5.6% from US$261.1 million in the year ended December 31, 1996 to US$275.6 million in the year ended December 31, 1997. This increase was principally due to a 6.3% increase in volume sales in the year ended December 31, 1997. Additional factors increasing cost of sales include increased depreciation from the Nova Rio plant as discussed above and that resulting from the acquisition of the Pepsi companies. Increased costs were partly mitigated by greater Index to Consolidated Financial Statements Page

Gross profit

Group. Gross profit (basis : US GAAP) remained relatively stable at US$1,016.1 million for 1996 and US$1,050.7 million for 1997. Gross profit as a percentage of net sales decreased from 44.2% in the year ended December 31, 1996 to 43.0% in the year ended December 31, 1997.

Beer. Gross profit (basis: accounting principles prescribed in the Brazilian Corporate Law) increased at US$939.2 million for 1996 and US$980.0 million for 1997. Gross margins decreased from 47.3% in 1996 to 45.4% in 1997.

Soft Drinks Gross profit (basis: accounting principles prescribed in the Brazilian Corporate Law) increased by 33.6% from US$47.1 million in 1996 to US$62.9 in 1997. Gross margins increased from 15.3% in 1996 to 18.6% in 1997.

Selling and marketing expenses

Selling and marketing expenses (basis : US GAAP) increased by 20.4% from US$353.9 million in the year ended December 31, 1996 to US$426.2 million in the year ended December 31, 1997. This increase primarily reflected heavy investment of approximately US$50 million to distribute products directly to the point-of-sale, and, in 1997, the Company purchased more than 25,000 freezers and over 250,000 table sets last year to further increase its presence at point of sale locations throughout Brazil investing approximately US$30 million. Additional factors include increased expenses in marketing and selling Pepsi products throughout Brazil.

General and administrative expenses

General and administrative expenses (basis : US GAAP) increased by 4.9% from US$275.5 million in the year ended December 31, 1996 to US$289.0 million in the year ended December 31, 1997. The increase was primarily a result of approximately US$12.8 million in additional costs for operational costs relating to the Pepsi companies acquired in October 1997.

Administrative employees of the Company remained relatively stable for both periods but the overall number of Company employees increased by approximately 10% reflecting increases in the number of clerical and administrative positions in 1997. See “Description of Business”.

Index to Consolidated Financial Statements Page

Other operating income (basis : US GAAP), net, increased from US$31.8 million for the year ended December 31, 1996 to US$150.9 million for the year ended December 31, 1997. The increase was primarily the result of the reversal of a tax related contingency provision of US$114.1 million reversed to that account in June 1997. See, “Legal Proceedings”.

Financial income

Financial income (basis : US GAAP) decreased 8.3% from US$132.2 million for the year ended December 31, 1996 to US$121.3 million for the year ended December 31, 1997. The change was primarily a result of lower nominal rates of return obtainable on investments in Brazil in 1997 as compared to 1996. The decrease in the rate of return was partially mitigated by an increase in interest rates available on investments from November and December 1997.

Financial expenses

Financial expenses (basis: US GAAP) increased 46.4% from US$97.2 million for the year ended December 31, 1996 to US$142.3 million for the year ended December 31, 1997. This change was principally a result of the following:

Charges on US dollar debt: Interest expense on US dollar-denominated debt of US$49.6 million increased by US$13.9 million, a 38.9% increase from the 1996 total of US$35.7 million.

Charges on Brazilian real debt: Interest expense on Brazilian real debt of US$25.4 million increased by US$10.2 million, a 67.1% increase from the 1996 total of US$15.2 million. Interest expense on loans increased primarily as a result of a 53.8% increase in year-end loans and sales tax deferrals outstanding in 1997 as compared to 1996. While interest rates on Brazilian bank debt increased in November 1997 as a result of the Asian Crisis (see below for Asian Crisis), the Company did not experience additional financial costs as a significant portion of the Company’s interest bearing debt is payable to BNDES and FINAME, both of which are Brazilian governmental agencies. See, “Liquidity and Capital Resources”.

Tax on financial transactions: In late 1996 the Brazilian government implemented a tax, Contribuição Provisória sobre Movimentação Financeira, (CPMF), of 0.2% of the value all bank account debits. In the year ended December 31, 1997 CPMF expenses totaled US$15.5 million.

Index to Consolidated Financial Statements Page

Other non-operating income (expenses)

Other non-operating income (basis: US GAAP) remained relatively stable at US$25.9 million for the year ended December 31, 1996 and US$40.3 million for the year ended December 31, 1997.

Income tax (expense) benefit

Income tax expense (basis: US GAAP) decreased by 9.3% from US$91.7 million for the year ended December 31, 1996 to US$83.2 million for the year ended December 31, 1997. This reduction primarily relates to a US$33.9 million benefit from the election to calculate and therefore treat as income tax deductible a notional interest charge attributed to equity in 1997 as compared to the 1996 benefit of US$14.8 million. This charge was deductible only in 1997 for social contribution purposes. Offsetting this increase is a US$21.6 million benefit on the prepayment of inflationary profits, which was recognized in 1996. No such prepayment benefit was available in 1997. See, Note 4(b) to Financial Statements.

Equity in earnings of equity investees

Equity earnings of investees (basis: US GAAP) was US$5.6 million for the year ended December 31, 1996 against a loss of US$28.1 million for the year ended December 31, 1997, primarily a result of increased losses of Pilcomayo of US$15.3 million and provisions for losses in Miller and Pilcomayo totaling US$12.0 million. These losses relate primarily to increased selling and marketing expenses associated with new product launches, product development and expenses incurred in expanding the distribution networks of these companies.

Minority interest

Earnings attributable to minority interests (basis: US GAAP) of consolidated subsidiaries remained relatively stable for the year ended December 31, 1996, when attributable earnings totaled US$4.7 million, as compared to the year ended December 31, 1997, when minorities shared in losses totaling US$1.1 million.

Net income

Index to Consolidated Financial Statements Page

Liquidity and Capital Resources

Liquidity

The Company’s principal cash requirements include: (i) the servicing of the Company’s indebtedness, (ii) capital expenditures, including the construction of new facilities, (iii) investments in companies participating in the brewing and soft drink industries (iv) dividend and interest attributed to equity payments to shareholders and (v) share buyback program.

The Company’s primary sources of liquidity have historically been cash flows from operating activities and borrowings. Cash flows from operating activities totaled US$384.0 million, US$469.7 million, and US$692.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. In 1998, these cash flows were primarily used to repurchase shares of the Company (US$137.6 million), the payment of dividends and interest on own capital (US$104.4 million, combined), the payment of certain liabilities of the Maltaria Pampa acquisitions (including cash) in April and August 1998 totaling US$52.8 million and investments in the capital expenditures program totaling US$249.1 million.

Total assets of the Company increased by US$30.3 million primarily as a result of an increase in cash, cash equivalents and trading securities of US$100.0 million, an increase of US$34.6 million in inventories and US$29.9 million in long- term receivables from affiliated companies, partially offset by a US$121.0 million decrease in property, plant and equipment and goodwill and intangible assets and a US$22.8 million decrease in trade accounts receivable. See “Description of Business”.

Cash expended on the share buy-back program is summarized as follows:

Thousands of shares Cost in Millions of Program approval Preferred Common US dollars November 14, 1997 to May 1998 161,885 60,798 139.9 May 12 to August 1998 79,602 24,264 61.4 August 10 to November 1998 109,892 1,154 49.4 November 10 to December 31, 1998 10,750 4,049 6.0

Index to Consolidated Financial Statements Page

Net working capital at December 31, 1998 of US$310.0 million increased by US$34.4 million or 12.5 % from US$275.6 million in 1996, principally as a result of an increase of US$100.0 million in cash, cash equivalents and trading securities and a reduction in payroll and profit sharing payables (US$67.2 million) partially offset by an increase in debt (primarily increase of US$122.4 million in current portion of long-term debt) and interest attributable to own equity payable.

Index to Consolidated Financial Statements Page

Total Debt

At December 31, 1998, the Company’s total outstanding debt with third parties plus sales tax deferrals totaled US$1,802.5 million, consisting of (i) US$1,062.4 million of real-denominated loans (including sales tax deferrals of US$341.2 million) and (ii) US$740.1 million of US-dollar denominated debt. Total debt, including sales tax deferrals, at December 31, 1998 increased US$313.0 million from US$1,489.5 million at December 31, 1997. The Company’s most significant debt was incurred in connection with the ongoing construction of new plants and the overall expansion of production capacity during the years 1995 to 1997. Cash-interest expense of the Company was US$143.8 million, US$75.0 million and US$39.8 million for the three years ended December 31, 1998, 1997 and 1996, respectively. The US$12.7 million increase in cash-interest expense in 1998 related directly to the increase in the Company’s debt.

Long Term Debt

The Company’s long-term debt with third parties, at December 31, 1998 totalled US$1,018.2 million. The balance consists primarily of long-term plant expansion program loans from governmental agencies including BNDES, Fundo de Financiamento para Aquisição de Máquinas e Equipamentos Industriais - FINAME (Fund for Financing the Acquisition of Industrial Machinery and Equipment), Fundo de Financiamento de Estudos e Projetos - FINEP (Financing Agency for Studies and Projects), Financiamento à Empresa - FINEM (Financing Enterprises) and Títulos de Desenvolvimento Económico - TDE (Economic Development Notes). These loans accrue annual interest of between 2% and 10%, plus indexation of principal, when applicable, for inflation pursuant to various indices. The balance also includes US$134.7 million of an US dollar-denominated project-financing loan agreement with the International Finance Corporation, (“IFC”).

BNDES has been a principal low cost-lending source for the Company, and the only source of financing for new plants prior to 1995. In January 1996, the Company received a US$158 million expansion and modernization loan from the IFC. Under the terms of the IFC facility, interest accrues at a rate of between 2.5% and 2.75% per annum above the London interbank offered rate (LIBOR), falling due in installments through June 2003.

In 1997 the Company executed a line of credit agreement with BNDES for designated investments completed through 1998The full balance drawn of US$324.0 Index to Consolidated Financial Statements Page

Certain of the Company’s loan agreements contain restrictive covenants. Long- term debt at December 31, 1998, matures as follows: In millions of US$

2000...... 228.4 2001...... 163.1 2002 120.9 ...... 2003 95.2 ...... Thereafter...... 120.1 727.7

At December 31, 1998, 50.6% of the Company’s total indebtedness was denominated in foreign currencies, as compared with 47.9% at the December 31, 1997. As a multinational company, the Company is exposed to market risks from changes in foreign exchange markets and interest rates.

The Company is conservatively leveraged, with long-term debt representing 66.1% of total shareholders’ equity at December 31, 1998.

Index to Consolidated Financial Statements Page

Pursuant to current legislation, certain states in Brazil provide tax incentives in the form of deferrable tax payments and partial or complete tax abatements for periods ranging from one to twenty years to promote investments in the region. The Company currently participates in programs whereby a percentage of payments of Value-Added Tax on Sales and Services (ICMS) due from sales generated by specific production facilities are deferrable for periods of, generally, five years from their original due date. Percentages deferrable usually range from 75% in the first year to 40% in the final year or a fixed percentage over the life of the program. Amounts deferrable under these programs are without limit, except in the State of Santa Catarina where the Company has attained approximately 100% (US$69.0 million) of the limit at December 31, 1998. Balances deferred generally accrue interest and are only partially inflation indexed, such adjustment being linked, in the majority of cases, to 60% to 80% of a general price index. Of the total amount deferred as of December 31, 1998, US$294.0 million will become payable in 2003 and the balance of US$47.2 million thereafter. Certain (1998 – US$10.4 million) tax deferrals may be forgiven at maturity if all obligations are fulfilled by the Company.

Short Term Debt

The Company’s short-term debt in 1998 primarily consists of financing for the importation of raw materials and equipment. In 1998, financing for the importation of raw materials was US$426.7 million, compared to US$358.7 million in 1997. Short- term debt at December 31, 1998 is mostly denominated in US dollars with weighted average interest rates of approximately 8% (as compared to 4% and 10% in 1997). Raw material importation terms are normally for payment in a single installment on the 360th day. The Company has no formal lines of credit at December 31, 1998.

Commitments and Contingencies

At December 31, 1998, the Company has provided US$208.0 million for contingencies, in long-term liabilities. Partially offsetting these amounts is US$25.9 million included in long-term assets as restricted deposits for legal proceedings. Restricted deposits represent escrow payments made when the Company disputes claims (principally employment related). ---- See “Legal Proceeding’s.

Probable losses, provided as liabilities of the Company based on the advice of outside legal counsel, are summarized below:

Index to Consolidated Financial Statements Page

Income tax and social contribution 55.7 Value-added sales taxes (ICMS) 81.4 Labor claims 35.9 Claims from distributors, suppliers and product-related 23.9 Others 11.1

Total accrued liabilities for legal proceedings 208.0

Capital Expenditures

To meet growing consumer demand, the Company continues to strive towards having the most modern and efficient production facilities in South America and the world.

Capital expenditures totaled US$249.1 million in 1998, principally related to the construction of the Company’s Rio Grande do Sul plant, continued investments in increasing plant productivity, the purchase of additional bottles and crates, strategic acquisitions and investments in direct distribution.

Since 1994, the Company has been investing in capacity expansion and modernization of existing facilities. In 1998 the Company concluded the final stage of this investment program with the inauguration of the Rio Grande do Sul plant which has an annual production capacity of 3.0 million hectoliters. In 1997 the Nova Rio plant in the State of Rio de Janeiro became fully operational; after an investment of US$680.0 million over a 2 year period through 1997. Additionally, in November 1997, construction of a plant in the State of Sergipe, Brazil was completed. No additional investments in production capacity are planned for the next two years, which will reduce the Company’s level of capital expenditures by over US$170.0 million

As a result of these productivity investments, measured in hectoliters produced per employee per annum, the Company realized an average annual increase in productivity of 29% over the last five years.

Year 2000

Each of the Company’s business segments and corporate headquarters has established teams to identify and correct Year 2000 compliance issues. Information (IT) systems with non-compliant code are expected to be modified or replaced with systems that are Year 2000 compliant. Similar actions are being taken with respect to non-IT systems, primarily systems embedded in production and other facilities. The teams are Index to Consolidated Financial Statements Page

Key IT systems have been inventoried and assessed for compliance, and detailed plans are in place for required system modifications or replacements. Remediation and testing activities are well underway with approximately 80% of the systems already compliant. This percentage is expected to increase to approximately 90% by year-end, to approximately 95% and 100% by the end of the first and second quarters of 1999, respectively. Remediation of all non-IT systems has begun in the fourth quarter with a mid-year 1999 target completion date.

Independent consultants are monitoring progress against remediation programs and performing testing at certain key locations. In addition, progress against the programs is also monitored by senior management, and periodically reported to the Company’s Board of Directors.

The Company has identified critical suppliers, customers and other third parties and has surveyed their Year 2000 remediation programs. Risk assessments and contingency plans, when necessary, will be finalized in the first quarter of 1999. Independent consultants have completed a survey of the state of readiness of the Company’s significant industrial plants. Such surveys have identified readiness issues and, therefore, potential risk to the Company. As a result, the industrial plants remediation programs are being accelerated to minimize the risk.

Incremental costs directly related to Year 2000 issues are estimated to be approximately US$2.4 million (from 1998 to 1999) of which US$1.2 million or 50% has been spent to date. Approximately 50% of the total estimated spending represents costs to modify existing systems. Costs incurred prior to 1998 were not material. This estimate assumes that the Company will not incur significant Year 2000 related costs on behalf of its suppliers, customers, industrial plants or other third parties.

In summary, based on the Company’s current assessments Year 2000 issues are fully expected to be resolved in a timely manner. However, the Year 2000 problem presents a number of risks that are beyond the reasonable control of the Company, particularly with respect to the compliance of third parties, both private and government providers. Although the Company is making every effort to identify and address those issues which are within the Company’s reasonable control, there can be no assurance that the efforts will be fully effective or that Year 2000 issues will not have a material adverse effect upon results of operations, cash flows or financial condition.

Forward-Looking Statements

Index to Consolidated Financial Statements Page

ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market Risk

The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rate and prices, such as foreign currency exchange rates and interest rates. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company enters into financial instruments to manage and reduce the impact of changes in foreign currency exchange rates and interest rates. The Company adopted a finance policy in September of 1998 to hedge 100% of its foreign currency exposure originating from US dollar denominated debt in order to limit the risk that would otherwise result from changes in exchange rates. The counterparties are major financial institutions. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial activities.

See Notes 2 and 12 to the Financial Statements for discussion of the accounting policies for derivative financial instruments and information on financial instruments.

Interest Rate Risk

Index to Consolidated Financial Statements Page

The Company has not experienced, nor does it expect to experience, difficulty obtaining financing or refinancing existing debt. At December 31, 1998, the Company and its subsidiaries had approximately US$121 million available under committed line of credit agreements.

The table below provides information on the Company’s long-term debt outstanding at December 31, 1998. Variable interest rates are based on effective rates at December 31, 1998. See Note 10 to the Financial Statements for further information. All amounts are presented in thousands of US dollars.

Principal by year of maturity 1999 2000 2001 2002 2003 Thereafter US dollar 130,168 84,878 51,933 27,532 6,594 12,273 Fixed rate 7.63% 7.92% 7.85% 7.55% 8.21% 8.19%

Brazilian real 160,297 143,503 111,167 93,406 88,613 107,871 Variable rate (1) 21.83% As at Dec 31,1998

(1) The variable rate comprises, substantially, the TJLP plus a weighted-average spread of 3.77%. The TJLP - Taxa de Juros de Longo Prazo - is a long-term nominal interest rate fixed by the government on a quarterly basis. The TJLP has been fixed as follows:

1998 1997 1996

February 28 11.77 10.33 18.34 May 31 10.63 10.15 15.44 August 30 11.68 9.40 14.97 November 30 18.06 9.89 11.02

Index to Consolidated Financial Statements Page

Foreign Exchange Risk

The Company is exposed to fluctuations in foreign currency cash flows related to debt payments, certain third party purchases as well as to the Company’s investment in foreign subsidiaries and cash flows relating to the repatriation of these investments. Primary exposure is to the US dollar.

The Company assesses foreign currency risk based on transactional cash flows and enters into forward contracts to reduce fluctuations in net long or short currency positions. As of December 31, 1998, hedging activities consisted exclusively of hard currency forward contracts to directly offset hard currency exposure. These irrevocable contracts reduce the risk to financial positions and results of operations of changes in the underlying foreign exchange rate. Any variation in the exchange rate accruing to the contract would be offset by a similar change in the related obligation. Therefore, after execution of the contract, variations in exchange rates would not impact the Company’s financial statements. The Company does not enter into derivative financial instruments for speculation or trading purposes. See Note 12 to the Financial Statements for information on foreign currency future contracts open at December 31, 1998.

As described above, since mid- January, 1999, the real has traded in a volatile market, reaching a low of R$2.161 per US$1.00 on March 31, 1999. Since December 31, 1998 and through May 14, 1999, the real has depreciated by 27.1% against the US dollar and at May 14, 1999 the Commercial Market Rate for purchasing US Dollars was R$ 1.6570 to US$1.00.

ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT

Officers and Directors

The administration of the Company is conducted by the Board of Directors and the Executive Officers. Overall strategic direction of Brahma is provided by the Board of Directors, comprised by three members that must be resident of Brazil and shareholders of the Company. Directors are elected at ordinary general meetings of holders of Common Shares for a three-year term. Day-to day management is delegated to the Executive Officers of the Company, which must number at least six but no more than 13. The Board of Directors appoints Executive Officers for a two-year term.

The following table sets forth information with respect to the Directors and Executive Officers of the Company as at December 31, 1998. Index to Consolidated Financial Statements Page

Following are brief biographies of each of the Company’s directors.

MARCEL HERRMANN TELLES. Mr. Telles is currently a Chairman of the Board of Directors and Chief Executive Officer of the Company. He has been associated with the Company since 1989. He was appointed Chief Executive Officer in 1990 and was appointed for successive terms in 1993 and 1995. Mr. Telles has a degree in economics from the Federal University of Rio de Janeiro and attended the Owners/President Management Program at Harvard Business School.

CARLOS ALBERTO SICUPIRA. Mr. Sicupira has been a member of the Board of Directors of the Company since 1990. He is also a Managing Partner in GP Investimentos S/C Ltda., a member of the Board of Directors of Multicanal Participações S.A. since 1994, a member of the Board of Directors of Playholding since 1995, a Non-Executive Chairman of Artex since 1993 and Lojas Americanas S.A. since 1992, where he served as Chairman and Chief Executive Officer from 1983 to 1991. Mr. Sicupira has a degree in business administration from Universidade Federal do Rio de Janeiro and a degree from Harvard Business School..

JORGE PAULO LEMANN. Mr. Lemann was elected to the Board of Directors of the Company in 1990. He holds a degree in economics from Harvard University.

Index to Consolidated Financial Statements Page

Following are brief biographies of each of the Company’s executive officers.

MAGIM RODRIGUEZ, JR. Mr. Rodriguez was appointed President in 1998. He has been associated with the Company since 1990, serving first as Marketing Executive Officer. He holds degrees in administrative and accounting from Mackenzie University and Fundação Getulio Vargas.

LUIS FELIPE PEDREIRA DUTRA LEITE. Mr. Leite was appointed Financial Executive Officer in April 1999. He began his career in the Company’s Treasury Department in 1990. In 1997 Mr. Leite was appointed General Manager of the new age beverage division. Mr. Leite holds a degree in economics.

JOSE ADÍLSON MIGUEL. Mr. Miguel has been an Executive Officer since 1993, and has been associated with the Company since 1962. He was appointed Marketing Executive Officer in 1983.

CLÁUDIO BRÁZ FERRO. Mr. Ferro has served as Industrial Executive Officer since 1996. Mr. Ferro started working with the Company in 1977 as a brew producer and was responsible for the Production and Bottling divisions. In 1987 he was appointed Industrial Department Manager and in 1993 Manager of the Rio de Janeiro unit. Mr. Ferro earned a degree in industrial chemistry from Santa Maria de Porto Alegre University. Index to Consolidated Financial Statements Page

FRANCISCO CLAUDIO ALVES LEITE. In 1996 Mr. Leite was appointed an Regional Officer of the Company. Mr. Leite started working with the Company in 1973 as an accountant and became Financial Manager in 1974. In 1982, Mr. Leite became General Manager of the São Paulo branch and in 1985 became General Manager of the Rio de Janeiro branch. He holds degrees in economics from the Faculdade de Economia, Financas e Administracão de São Paulo; business administration from the Faculdade de Administração e Ciencias Economicas ‘santana”, and accounting from the Faculdade Moraes Junior.

CARLOS ALVES DE BRITO. Mr. de Brito was appointed Executive Officer in 1993. He started working with the Company in 1989. In 1991 he became Manager of the Agudos branch. Mr. de Brito earned a degree in mechanical engineering from the Federal University of Rio de Janeiro and a masters degree in business administration from Stanford University.

GUILHERME RODOLFO LAGER. Mr. Lager was appointed Supply Director in 1997. He was a manager in the Filial Minas plant and a manager of the Jacarei plant. He holds a degree in civil engineering from the Universidade Federal do Rio de Janeiro.

JUAN MANOEL VERGARA GALVIS. Mr. Galvis was appointed Marketing Director in 1997. He holds a degree in Business Administration from the Colegio de Estudos Superiores de Administracao - Bogota Colombia.

There are no pending legal proceedings to which any director, nominee for director or executive officer of the Company is a party adverse to the Company.

All of the Executive Officers of the Company are appointed in such capacities by the Board of Directors to serve for two year terms which are renewable at the pleasure of the Board of Directors.

The Company has a Conselho Fiscal (“Fiscal Audit Committee”) which reviews the Company’s internal financial statements, meets with the Company’s auditors on financial matters and recommends the selection of independent accountants for the Company or its subsidiaries. Regular members of the Fiscal Audit Committee are Ary Waddington, Ricardo Scalzo and Adolpho Gongalves Nogueíra. Alternate Index to Consolidated Financial Statements Page

ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS

For the year ended December 31, 1998, the aggregate compensation paid by the Company to all Executive Directors and all Executive Officers (12 persons) for services in all capacities was approximately R$17.8 million (US$14.7 million). In addition, for the year ended December 31, 1998, the Company granted stock options to Executive Directors and Executive Officers having a total value of R$1.2 million in the aggregate (US$1.0 million), as measured by the difference between the option price and the fair market value at the date granted.

In addition, the members of the Board of Directors and the Executive Officers receive certain additional Company benefits generally provided to Company employees and their families, such as medical assistance, educational expenses and supplementary social security benefits.

ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES

On February 14, 1996, the Board of Directors granted approval of the private placement of 404,930,519 subscription warrants at R$50 per 1,000-share lot, convertible on a one-to-one basis in April 2003 at a strike price of R$1,000. The strike price is adjusted by inflation plus 12%, minus dividends paid from January 1997 onwards, which are also adjusted by the same conditions. Of the total issue, 35% is convertible into Common Shares. Of the 404,930,519 warrants, 262,891,498 are for subscription of Preferred Shares and 142,039,021 for subscription of Common Shares to the value of US$13.4 million for the Preferred Shares and US$7.2 million for the Common Shares, granting purchasers the right to subscribe one warrant for each 17 shares held during the period of 30 days as from February 28, 1996. Each warrant will have the right to subscribe for one share, this number being adjusted proportionately should there be any reverse splits, splits or distributions of stock dividends and may be exercised during the month of April 2003.

Pursuant to a financing agreement signed with International Finance Corporation, funds equivalent to an aggregate of US$158 million were advanced on January 23 and 24, 1996. Together with cash generated by the Company and BNDES and FINAME lines, these resources financed investment program estimated to be at least US$600 million during the period 1994 through 1996. Under the terms of the facility Index to Consolidated Financial Statements Page

The Company has a stock option plan (the “Plan”) designed to stimulate the growth of the Company and to retain the services of executives and certain employees by enabling them to become shareholders in the Company. Both Common and Preferred Shares are granted in the Plan.

The Plan is administered by a committee, formed by non-executive members of the Board of Directors of the Company. This committee periodically creates programs of share options defining the terms and employees to be included in the Plan. The committee decides which of the executives and employees are eligible to be included in the program and the price of the shares to be issued. This price can never be less than 90% of the average price of the shares traded on the Rio de Janeiro stock exchange in the previous three business days, inflation indexed through the date the option is granted. The number of shares which may be granted in each year cannot exceed 5% of the total number of shares of each class of shares being granted at that date. When share options are exercised, the Company either issues new shares or transfers treasury shares to the new shareholder. The share options granted to date do not specify a final date by which they must be exercised. If an employee leaves the employment of Brahma (other than for retirement), Brahma may repurchase such shares, at its option, at a price equal to (i) the amount paid by such employee, if the employee leaves during the first thirty months after the exercise of such option, (ii) 50% of the price paid, and 50% at the prevailing market price, if the employee leaves after the first thirty months but before the sixtieth month after the exercise of such option, and (iii) the market price thereafter.

Except as described above, there are no outstanding options to purchase any Preferred Shares or Common Shares from the Company or any of its subsidiaries.

ITEM 13. INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS

Not applicable.

Index to Consolidated Financial Statements Page

ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED Not applicable.

Index to Consolidated Financial Statements Page

ITEM 15. DEFAULTS UPON SENIOR SECURITIES Not applicable.

ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES

Not applicable.

Index to Consolidated Financial Statements Page

ITEM 17. FINANCIAL STATEMENTS The Company has responded to Item 18 in lieu of responding to this item.

ITEM 18. FINANCIAL STATEMENTS Reference is made to Item 19 for a list of all financial statements filed as part of this Annual Report on Form 20-F.

ITEM 19. FINANCIAL STATEMENT AND EXHIBITS (a) 1. Financial Statements.

Report of Independent Accountants...... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997...... F-3

Consolidated Statements of Operations for the years ended December 31, 1998, 1997, and 1996...... F-6

Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996...... F-8

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 1998, 1997 and 1996...... F-11

Notes to Consolidated Financial Statements...... F-17

(b) List of Exhibits

None

Index to Consolidated Financial Statements Page

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20- F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

COMPANHIA CERVEJARIA BRAHMA

By: /s/ Luis Felipe Pedreira Dutra Leite Name: Luis Felipe Pedreira Dutra Leite Title: Financial Executive Officer

Dated: June 2, 1999

Index to Consolidated Financial Statements Page

COMPANHIA CERVEJARIA BRAHMA

By:

Name: Luis Felipe Pedreira Dutra Leite Title: Financial Executive Officer

Dated: June 2, 1999

Index to Consolidated Financial Statements Page

To the Board of Directors and Shareholders Companhia Cervejaria Brahma

1 We have audited the accompanying consolidated balance sheets of Companhia Cervejaria Brahma and its subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, of cash flows and of changes in shareholders' equity for each of the three years in the period ended December 31, 1998, all expressed in United States dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

2 We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

3 In our opinion, the accompanying consolidated financial statements audited by us present fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America.

PricewaterhouseCoopers São Paulo, Brazil Auditores Independentes January 29, 1999, except as to Note 18 which is dated as of February 12, 1999

F - 2 Companhia Cervejaria Brahma Consolidated Balance Sheet (Expressed in thousands of United States dollars)

December 31

Assets 1998 1997

Current assets Cash and cash equivalents 723,250 657,434 Trading securities 157,552 123,332 Trade accounts receivable, net 247,511 270,303 Advances to distributors and suppliers 14,420 9,915 Sales and income taxes recoverable 83,484 52,189 Inventories 298,766 264,158 Deferred income tax 7,639 10,197 Prepaid expenses 16,235 15,552 Other 41,415 53,599

1,590,272 1,456,679

Investments Investment in affiliates 33,980 33,613 Other 8,126 8,653

42,106 42,266

Property, plant and equipment, net 1,745,600 1,888,663

Goodwill and intangible assets, net 83,856 61,786

Other assets Receivables from affiliated companies 70,889 40,962 Deferred income tax 69,841 72,493 Prepayment to Brahma Welfare Foundation 41,013 48,756 Prepaid benefit cost 10,996 10,916 Restricted deposits for legal proceedings 25,854 32,896 Tax incentive investments 33,349 33,634 Other 17,792 12,169

269,734 251,826

3,731,568 3,701,220

F - 3 Companhia Cervejaria Brahma Consolidated Balance Sheet (Expressed in thousands of United States dollars) (continued

December 31

Liabilities and shareholders' equity 1998 1997

Current liabilities Suppliers 207,714 247,063 Payroll, profit sharing and related charges 39,837 107,093 Taxes on sales 159,085 178,537 Short-term debt 443,046 425,313 Current portion of long-term debt 290,465 168,018 Interest attributed to shareholders' equity, gross of tax 76,599 Deferred income tax 488 Accrued liability for legal proceedings 20,105 Other 63,074 34,948

1,280,308 1,181,077

Long-term liabilities Long-term debt 727,770 677,992 Accrued liability for legal proceedings 208,033 312,790 Sales tax deferrals 341,239 218,216 Deferred income tax 6,481 128 Other 31,951 9,810

1,315,474 1,218,936

Minority interest 35,377 41,012

Commitments and contingencies (Note 15)

F - 4 Companhia Cervejaria Brahma Consolidated Balance Sheet (Expressed in thousands of United States dollars, except number of shares) (continued

December 31

1998 1997

Shareholder's equity

Preferred shares - no par value, 8,266,559 thousand authorized - 4,614,948 thousand issued at December 31, 1998 (1997 - 4,523,714 thousand issued) 427,906 397,020 Common shares - no par value, 4,133,279 thousand authorized - 2,667,456 thousand issued at December 31, 1998 (1997 - 2,706,374 thousand issued) 244,516 239,718 Treasury shares (350,203) (299,628 Advances to employees for purchase of shares (63,568) (48,480 Appropriated retained earnings 119,061 153,025 Unappropriated retained earnings 832,842 818,540 Accumulated other comprehensive income (110,145)

1,100,409 1,260,195

3,731,568 3,701,220

The accompanying notes are an integral part of these consolidated financial statements.

F - 5 Companhia Cervejaria Brahma Consolidated Statement of Operations (Expressed in thousands of United States dollars)

Years ended December 31

1998 1997 1996

Gross sales, net of discounts, returns and allowances Total gross sales 5,933,040 5,140,326 4,755,884 Value-added and excise tax on sales (3,263,702) (2,696,223) (2,455,892

Net sales 2,669,338 2,444,103 2,299,992

Cost of sales (1,533,888) (1,393,395) (1,283,881

Gross profit 1,135,450 1,050,708 1,016,111

Selling and marketing expenses (580,150) (426,222) (353,904 General and administrative expenses (281,601) (288,967) (275,483 Other operating income, net 37,126 150,878 31,789

Operating income 310,825 486,397 418,513

Non-operating income (expenses) Financial income 198,636 121,278 132,205 Financial expenses (289,504) (142,318) (97,248 Other, net 14,994 40,310 25,895

Income before income tax, equity in affiliates and minority interest 234,951 505,667 479,365

Income tax (expense) benefit Current (10,910) (75,390) (156,152 Deferred 2,170 (7,806) 64,415

(8,740) (83,196) (91,737

F - 6 Companhia Cervejaria Brahma Consolidated Statement of Operations (Expressed in thousands of United States dollars, except per share amounts and number of shares) (continued

Years ended December 31

1998 1997 1996

Income before equity in affiliates and minority interest 226,211 422,471 387,628 Equity in earnings (losses) of affiliates 2,962 (28,138) 5,648 Minority interest 9,404 1,133 (4,700

Net income 238,577 395,466 388,576

Earnings per thousand shares (US$) Basic Preferred shares 36.56 57.91 56.82 Common shares 33.24 52.64 56.82 Diluted Preferred shares 35.70 56.02 55.08 Common shares 32.45 50.93 55.08

Weighted-average number of shares outstanding (in thousands) Basic Preferred shares 4,346,727 4,622,175 4,552,726 Common shares 2,396,620 2,428,003 2,286,457 Diluted Preferred shares 4,486,158 4,825,779 4,740,211 Common shares 2,418,471 2,456,931 2,314,701

The accompanying notes are an integral part of these consolidated financial statements.

F - 7 Companhia Cervejaria Brahma Consolidated Statement of Cash Flows (Expressed in thousands of United States dollars)

Years ended December 31

1998 1997 1996

Cash flows from operating activities Net income 238,577 395,466 388,576 Adjustments to reconcile net income to cash provided by operating activities Gain on translation (39,096) (17,476 Stock based compensation 4,512 4,622 4,081 Depreciation 254,628 237,933 166,489 Amortization of goodwill and intangible assets 8,726 5,103 2,127 (Gain) loss on disposal of property, plant and equipment, net (10,036) 10,397 47,879 Equity in (earnings) losses of affiliates (2,962) 28,138 (5,648 Sales tax deferrals 145,489 130,195 74,646 Deferred income tax (benefit) expense (2,170) 7,806 (64,415 Minority interest (9,404) (1,133) 4,700 Other (951) (947) (593 (Increase) decrease in assets Trading securities (45,451) 18,200 146,664 Trade accounts receivable 9,804 (158,516) 64,212 Advances to distributors and suppliers (10,978) 2,616 16,070 Sale and income taxes recoverable (23,548) 6,621 (22,588 Inventories 5,518 54,968 (100,358 Prepaid expenses (1,024) (2,071) (14,396 Other (25,976) (53,809) (1,727 (Decrease) increase in liabilities Suppliers (23,984) 32,151 72,378 Payroll, profit sharing and related charges (70,327) 19,936 (2,256 Income tax and social contribution (27,319) (70,312 Taxes on sales (8,554) 9,461 (20,909 Accrued liability for legal proceedings, net of restricted deposits (98,854) (151,040) (1,448 Other 50,990 (64,097) 26,963

Net cash provided by operating activities 384,025 469,727 692,659

F - 8 Companhia Cervejaria Brahma Consolidated Statement of Cash Flows (Expressed in thousands of United States dollars) (continued

Years ended December 31

1998 1997 1996

Cash flows from investing activities Investments in affiliates (4,621) (4,563 Other investments 357 (3,370) (615 Property, plant and equipment (249,105) (467,508) (530,401 Intangible assets (3,452) (7,872) (3,450 Proceeds on disposal of property, plant and equipment 83,870 59,897 24,780 Purchase of minority interest participation (18,694) Minority interest and dividends of subsidiaries 6,798 7,863 3,160 Payment for purchase of subsidiary, net of cash acquired (48,423)

Net cash used in investing activities (214,576) (429,684) (511,089

Cash flows from financing activities Loans with original maturities of less than 90 days, net 41,902 27,513 (13,951 Short-term debt Issuances 389,139 298,593 340,980 Repayments (415,177) (275,859) (187,343 Long-term debt Issuances 404,903 488,856 327,484 Repayments (255,238) (250,939) (139,573 Capital subscriptions and contributions 41,046 46,947 208,464 Repurchase of treasury shares (137,638) (267,615) (182,478 Dividends and interest distributions paid (104,450) (101,402) (463,528

Net cash used in financing activities (35,513) (33,906) (109,945

F - 9 Companhia Cervejaria Brahma Consolidated Statement of Cash Flows (Expressed in thousands of United States dollars) (continued

Years ended December 31

1998 1997 1996

Effect of exchange rate changes on cash (68,120) 1,406 8,456

Net increase in cash and cash equivalents 65,816 7,543 80,081

Cash and cash equivalents, at beginning of year 657,434 649,891 569,810

Cash and cash equivalents, at end of year 723,250 657,434 649,891

Supplemental disclosure of cash flow information

Cash paid during the year for

Interest, net of capitalized interest 147,670 75,003 39,769 Taxes on income 23,357 60,811 189,373

The accompanying notes are an integral part of these consolidated financial statements.

F - 10 Companhia Cervejaria Brahma Consolidated Statement of Changes in Shareholders' Equity (Expressed in thousands of United States dollars, except number of shares)

1998 1997 1996

Shares US$ Shares US$ Shares US$

Share capital

Preferred shares At beginning of year 4,523,713,704 397,020 4,728,367,970 398,716 4,579,565,86 293,487 7 Exercise of stock options 91,234,671 30,886 64,021,734 19,747 495,237,203 123,337 Cancellation of shares (268,676,000) (21,443) (346,435,100) (28,469 Warrants exercised 10,361

At end of year 4,614,948,375 427,906 4,523,713,704 397,020 4,728,367,97 398,716

Common shares At beginning of year 2,706,374,468 239,718 2,655,424,468 213,293 2,414,663,34 164,290 9 Exercise of stock options 19,575,000 10,160 59,853,000 27,200 260,961,119 64,516 Cancellation of shares (58,493,000) (5,362) (8,903,000) (775) (20,200,000) (22,293 Warrants exercised 6,780

At end of year 2,667,456,468 244,516 2,706,374,468 239,718 2,655,424,46 213,293

Treasury shares

Preferred shares At beginning of year (165,338,300) (98,701) (72,915,300) (38,178) (110,410,400) (12,630 Repurchase of shares (207,536,000) (105,945) (361,099,000) (237,306) (308,940,000) (169,990 Cancellation of shares 268,676,000 176,783 346,435,100 144,442

At end of year (372,874,300) (204,646) (165,338,300) (98,701) (72,915,300) (38,178

Common shares At beginning of year (41,264,000) (25,076) (1,440,000) (882) Repurchase of shares (49,006,000) (28,313) (88,927,000) (55,536) (21,640,000) (12,488 Cancellation of shares 58,493,000 35,639 8,903,000 6,317 20,200,000 11,606 Sale of shares 40,200,000 25,025

At end of year (31,777,000) (17,750) (41,264,000) (25,076) (1,440,000) (882

F - 11 Companhia Cervejaria Brahma Consolidated Statement of Changes in Shareholders' Equity (Expressed in thousands of United States dollars, except number of shares) (continued

1998 1997 1996

Shares US$ Shares US$ Shares US$

Treasury shares held by Brahma Welfare Foundation (Note 14(c))

Preferred shares At beginning of year (20,003,149) (13,436) (16,848,408) (9,207) (2,307,683) (869 Fair value adjustment 3,408 (3,366) (4,341 Purchase of shares (10,696,155) (3,380) (3,154,741) (863) (14,540,725) (3,997

At end of year (30,699,304) (13,408) (20,003,149) (13,436) (16,848,408) (9,207

Common shares At beginning of year (260,889,354) (162,415) (260,889,354) (150,160) (234,844,557) (96,593 Fair value adjustment 48,016 (12,255) (46,270 Purchase of shares (26,044,797) (7,297

At end of year (260,889,354) (114,399) (260,889,354) (162,415) (260,889,354) (150,160

Total Brahma Welfare Foundation (127,807) (175,851) (159,367

Total treasury shares (350,203) (299,628) (198,427

F - 12 Companhia Cervejaria Brahma Consolidated Statement of Changes in Shareholders' Equity (Expressed in thousands of United States dollars, except number of shares) (continued

1998 1997 1996

Additional paid-in capital

Stock purchase warrants

Preferred shares At beginning of year 13,393 13,393 10,361 Warrants issued, net of exercised 3,032

At end of year 13,393 13,393 13,393

Common shares At beginning of year 7,218 7,218 6,780 Warrants issued, net of exercised 438

At end of year 7,218 7,218 7,218

Outstanding employee stock options (Note 13(h))

Preferred shares At beginning of year 10,065 6,649 3,923 Stock options granted, net of exercised 3,523 3,416 2,726

At end of year 13,588 10,065 6,649

Common shares At beginning of year 4,524 3,318 1,963 Stock options granted, net of exercised 989 1,206 1,355

At end of year 5,513 4,524 3,318

F - 13 Companhia Cervejaria Brahma Consolidated Statement of Changes in Shareholders' Equity (Expressed in thousands of United States dollars, except number of shares) (continued

1998 1997 1996

Other additional paid-in capital At beginning of year 91,265 37,292 35,684 Gain on sale of treasury shares 202 Capitalization of appropriated retained earnings 159 Capitalization of unappropriated retained earnings 534 597 1,449 Transfer from unappropriated retained earnings 76,656 53,174

At end of year 168,455 91,265 37,292

Brahma Welfare Foundation At beginning of year 139,703 124,082 73,471 Fair value adjustment of treasury shares (Note 14(c)) (51,424) 15,621 50,611

At end of year 88,279 139,703 124,082

Cancellation of treasury shares At beginning of the year (266,168) (105,286) Cancellations (30,278) (160,882) (105,286

At the end of the year (296,446) (266,168) (105,286

Total additional paid-in capital 86,666

Advances to employees for purchase of shares

At beginning of year (48,480) (24,990) (37,823 Advances, net of repayments (15,088) (23,490) 12,833

At end of year (63,568) (48,480) (24,990

F - 14 Companhia Cervejaria Brahma Consolidated Statement of Changes in Shareholders' Equity (Expressed in thousands of United States dollars, except number of shares) (continued

1998 1997 1996

Appropriated retained earnings

Statutory reserve At beginning of year 93,701 78,691 67,400 Transfer from unappropriated retained earnings 6,459 15,010 11,291

At end of year 100,160 93,701 78,691

Tax incentive reserve At beginning of year 18,696 15,449 7,540 Capitalized (159 Transfer from unappropriated retained earnings 205 3,247 8,068

At end of year 18,901 18,696 15,449

Interest attributed to shareholders' equity At the beginning of year 40,628 148,409 Transfer (to) from unappropriated retained earnings (40,628) (107,781) 148,409

At end of year 40,628 148,409

Total appropriated retained earnings 119,061 153,025 242,549

F - 15 Companhia Cervejaria Brahma Consolidated Statement of Changes in Shareholders' Equity (Expressed in thousands of United States dollars, except number of shares and distributions to shareholders) (continued

1998 1997 1996

Unappropriated retained earnings

At beginning of year 818,540 488,722 732,891 Net income for the year 238,577 395,466 388,576 Distributions declared (US$ per thousand shares) Dividends 1998 - Preferred - US$ 2.42; Common - US$ 2.20 1997 - Preferred - US$ 6.23; Common - US$ 5.66 1996 - Preferred - US$ 66.27; Common - US$ 66.27 (15,440) (44,506) (463,528 Interest attributed to shareholders' equity 1998 - Preferred- US$ 25.99; Common - US$ 23.63 1997 - Preferred - US$ 7.96; Common - US$ 7.24 (165,609) (56,896) Transfer from (to) appropriated retained earnings 33,964 89,525 (167,768 Transfer to additional paid-in capital (77,190) (53,771) (1,449

Total unappropriated retained earnings 832,842 818,540 488,722

Accumulated other comprehensive income

Cumulative translation adjustment Recognition of deferred tax liability on change in functional currency (Note 2(b)) (8,016)

Net translation loss in the year (102,129)

Total cumulative translation adjustment (110,145)

Total shareholders' equity 1,100,409 1,260,195 1,206,529

Comprehensive income

Net income 238,577 395,466 388,576 Cumulative translation adjustment (110,145)

Comprehensive income 128,432 395,466 388,576

The accompanying notes are an integral part of these consolidated financial statements.

F - 16 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

1 The Group and its Operations

(a) Business

Companhia Cervejaria Brahma, a company incorporated under the laws of the Federative Republic of Brazil, and its subsidiaries (Companhia Cervejaria Brahma and its subsidiaries are collectively referred to herein as the "Company") operate mainly in the production and sale of beer and soft drinks in Brazil and certain other South American countries.

The Company's shares are traded on the São Paulo and Rio de Janeiro Stock Exchanges and, as from June 1997, the Company's American Depository Receipts (ADRs) are listed on the New York Stock Exchange. The Company has registered two classes of American Depositary Shares (ADSs) on Form 20-F pursuant to the U.S. Securities Act of 1933, as amended: ADSs evidenced by ADRs representing 20 preferred shares without par value and ADSs evidenced by ADRs representing 20 common shares without par value.

(b) Significant acquisitions

On October 22, 1997 the Company acquired all of the quota capital of Pepsi-Cola Engarrafadora Ltda. ("Engarrafadora") and PCE Bebidas Ltda. ("PCE"), both of which are Brazilian limited liability companies, for a consideration of R$ 1.00. Engarrafadora and PCE produce and distribute Pepsi-Cola products under license in designated areas of Brazil.

The Engarrafadora and PCE acquisitions were recorded using the purchase method of accounting; and accordingly, the results of operations of Engarrafadora and PCE for the period from October 22, 1997 through December 31, 1997 are included in these financial statements. The purchase price has been allocated to assets acquired and liabilities assumed based on estimated fair market values at the date of acquisition. The fair value of total assets acquired approximated US$ 209,500 at December 31, 1997. The excess of the aggregate purchase price over the fair market value of the net liabilities acquired of approximately US$ 39,826, is being amortized over 10 years. Purchase accounting adjustments relate primarily to an adjustment of US$ 35,750 to reflect property, plant and equipment at appraised value, net of the deferred tax effects thereon.

F - 17 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The following summarized combined unaudited pro forma financial information assumes the acquisition of Engarrafadora and PCE had occurred on January 1, 1996:

1997 1996

Net sales 2,721,184 2,607,436 Net income 170,022 103,312 Earnings per share - Basic Preferred 24.89 15.11 Common 22.63 15.11 Earnings per share - Diluted Preferred 24.08 14.64 Common 21.89 14.64

In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at January 1, 1996.

The vendor has agreed to indemnify the Company against 80% of certain contingencies, but in no event to exceed US$ 20,000 in aggregate within a period of five years from the date of purchase. Additionally, the Company has an indemnity agreement, without limit, from PepsiCo, Inc. (PCI) which requires PCI to reimburse the Company for 80% of certain contingencies within a period of five years from the date of purchase. To date no substantial payments in relation to such contingencies have been made by the Company.

Upon realization of net operating tax loss carryforwards of Engarrafadora and PCE existing at the date of purchase, within a period of five years from the date of purchase, subject to certain limitations, 80% of amounts realized, will be payable by the Company to the vendor and PCI. Amounts payable will be reduced by amounts owing to the Company under the indemnification provisions discussed above. As at December 31, 1998 no tax losses of Engarrafadora or PCE have been realized. Tax losses existing at the date of purchase will only be realized after all current period losses are fully realized. The Company has limited recognition of net operating tax loss carryforwards, which are fully offset by a valuation allowance, to 20% of the losses available; the remaining losses are considered to be contingent upon future events. No amounts payable to the vendor or PCI have been recorded in these financial statements.

F - 18 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

On April 23, 1998, the Company purchased an additional 20% interest in the voting capital of its equity investee, Maltaria Pampa S.A., for US$ 18,060, increasing its share to 60%, and on August 27, 1998, the Company purchased the remaining 40% for US$ 34,700. The purchase consideration exceeded the fair value of assets acquired and liabilities assumed by US$ 33,094, which is being amortized over the useful lives of these assets, a period which does not exceed 40 years. The subsidiary has been consolidated as though it had been acquired at the beginning of the year.

On September 28, 1995, the Company formed a joint venture with Miller Brewing Co., based in Milwaukee, Wisconsin. Miller Brewing do Brasil was created to distribute Miller products in Brazil and, in the future, in other South American markets. The parties have an equal participation in the capital of Miller Brewing do Brasil Ltda. In September 1996, the Company began production of Miller beer at its Jacareí production facility.

On May 6, 1998, the Company received a favorable ruling from the Brazilian anti-trust regulatory authorities, Conselho Administrativo de Defesa Econômica (CADE), approving the joint venture formed with the Miller Brewing Co. Additionally, on October 9, 1998 the Company received approval from CADE for the production and distribution of Pepsi products. The Company has submitted for approval to CADE agreements for the production and distribution of Lipton Ice Tea and Carlsberg products in Brazil. The Company is awaiting a ruling from the regulatory authorities.

F - 19 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(d) Consolidation

The consolidated financial statements include the accounts of the Company and all subsidiaries, as listed below. All significant inter-company accounts and transactions are eliminated. Direct and indirect ownership percentage of the capital of significant subsidiary companies at December 31 are presented below:

Subsidiary companies 1998 1997 1996

Brahmaco International Ltd. 100 100 100 CA Cervecera Nacional (i) 50.2 50.2 50.2 CCBA S.A. 70.0 70.0 70.0 Cervejaria Águas Claras S.A. 96.3 99.5 99.5 Cervejarias Reunidas Skol Caracu S.A. 99.9 99.6 99.6 CRBS Indústria de Refrigerantes S.A. - Salvador (ii) 100 100 CRBS S.A. (iii) 99.7 99.7 99.7 Dahlen S.A. 100 100 100 Eagle Distribuidora de Bebidas Ltda. 100 100 100 Jalua S.A. 100 100 100 Mahler Investment Limited 100 100 100 Malteria Pampa S.A. 100 40.0 40.0 Panaro S.A. 100 100 100 PCE Bebidas Ltda. (iv) 100 Pepsi Cola Engarrafadora Ltda. 100 100 Universal Breweries Limited 51.0 51.0 51.0

(i) Consolidated as control, through direct and indirect ownership, ultimately rests with the Company (ii) Company name was changed to Fratelli Vita Indústria e Comércio S.A.; the investment was then subsequently sold and merged into CRBS S.A. (iii) Company name has been changed from CRBS Indústria de Refrigerantes Ltda. (iv) On August 31, 1998, PCE Bebidas Ltda. (included in the consolidated statements at December 31, 1997) was merged into Pepsi Cola Engarrafadora Ltda.

F - 20 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(e) Affiliated companies

Investments in affiliated companies in which the Company has the ability to exercise significant influence over the operating and financial policies are accounted for under the equity method. Accordingly, the Company's share of net earnings (losses) of these companies is included in consolidated net income. Direct and indirect ownership percentages of the capital of significant affiliated companies at December 31 are presented below:

Affiliated companies 1998 1997 1996

Cervejaria Astra S.A. 43.1 43.1 43.1 Cervejaria Miranda Corrêa S.A. (*) 60.8 60.8 60.8 Miller Brewing do Brasil Ltda. 50.0 50.0 50.0 Pilcomayo Participações Ltda. 50.0 50.0 50.0

(*) Accounted for under the equity method as the Company has a 50% interest in the investee's voting share capital and does not exercise control.

Other investments in which the Company does not exercise significant influence or has less than a 20% interest in the voting capital, are accounted for at cost. Long-term receivables from related parties at December 31, 1998 relate primarily to advances made to Cervejaria Astra S.A. and Pilcomayo Participações Ltda.

The Company has suspended applying the equity method in relation to Miller Brewing do Brasil Ltda. and Pilcomayo Participações Ltda., as the Company's investment in each affiliate has been reduced to zero. Accordingly, as the Company has a commitment to cover investee losses, a provision for additional losses in excess of the carrying amount of its original investments of US$ 19,970, has been included in "Other long-term liabilities."

F - 21 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

2 Summary of Significant Accounting Policies

(a) Basis of presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which differ in certain respects from the accounting principles applied by the Company in its financial statements prepared in accordance with accounting principles generally accepted in Brazil or for other statutory purposes in Brazil.

Shareholders' equity and net income included in these financial statements differ from those included in the statutory accounting records as a result of differences between the rate of devaluation of the Brazilian real (R$) against the United States dollar and the indices mandated for indexation of statutory financial statements in the past in Brazil, as well as adjustments made to reflect the requirements of US GAAP.

(b) Basis of presentation and translation

In preparing the consolidated financial statements, the use of estimates is required to account for certain assets, liabilities and other transactions. The Company's consolidated financial statements therefore include various estimates concerning the selection of useful lives of property, plant and equipment, provisions necessary for contingent liabilities, income tax valuation allowances and other similar evaluations; actual results may vary from the estimates.

The U.S dollar amounts for the periods presented have been remeasured (translated) from the Brazilian currency amounts in accordance with the criteria set forth in the U.S. Financial Standards Board's Statement of Financial Accounting Standards (SFAS) No. 52.

Prior to December 31, 1997 Brazil was considered under SFAS No. 52 to have a highly-inflationary economy, defined as an economy in which the cumulative inflation rate over the latest three-year period exceeded 100%. Accordingly the remeasurement procedures adopted by the Company through December 31, 1997 were as follows:

F - 22 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(i) inventories, property, plant and equipment and accumulated depreciation, as well as shareholders' equity accounts, were translated at historical exchange rates and monetary assets and liabilities denominated in Brazilian currency were translated at period-end exchange rates (December 31, 1997- R$ 1.1164: US$ 1.00);

(ii) depreciation and other costs and expenses relating to assets remeasured at historical exchange rates were calculated based on the U.S. dollar amount of the assets. Other accounts in the statements of operations and cash flows were translated at the average exchange rates prevailing during the period;

(iii) the translation gain or loss resulting from this remeasurement process was included in the statements of operations currently; and

(iv) pursuant to paragraph 9(f) of SFAS No. 109 "Accounting for Income Taxes", deferred taxes were not recorded with respect to differences relating to assets and liabilities translated as historical rates that resulted from changes in exchange rates or indexing for Brazilian tax purposes.

As from January 1, 1998 the Company concluded that the Brazilian economy had ceased to be highly- inflationary and changed its functional currency from the reporting currency (U.S. dollars) to the local currency (Brazilian reais – R$). Accordingly, at January 1, 1998, the Company translated the U.S. dollar amounts of non-monetary assets and liabilities into reais at the current exchange rate and those amounts became the new accounting bases for such assets and liabilities. The resulting deferred taxes associated with the differences between the new functional currency bases and the tax bases ((iv) above) were reflected as a deferred tax liability and a charge to the cumulative translation adjustment component of shareholders' equity.

For the year ended December 31, 1998 the Company has remeasured all assets and liabilities into U.S. dollars at the current exchange rate, (December 31, 1998 - R$ 1.2087: US$ 1.00), and all accounts in the statements of operations and cash flows (including amounts relative to local currency indexation and exchange variances on assets and liabilities denominated in foreign currency, which were not translated prior to 1998) at the average rates prevailing during the period, (R$ 1.1605: US$ 1.00). The net translation loss resulting from this new remeasurement process is included in the cumulative translation adjustment account of shareholders' equity.

F - 23 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The Company enters into forward contracts primarily to hedge transactions denominated in foreign currencies. Gains and losses on future contracts that do not qualify for hedge accounting are provided for in current liabilities and recognized currently in income/expenses. Gains and losses on forward contracts which hedge specific foreign currency denominated commitments are deferred and recognized in the basis of the transaction when completed.

(d) Reclassifications

Certain amounts in 1997 and 1996 have been reclassified to conform to the 1998 presentation.

(e) Cash and cash equivalents

Cash and cash equivalents are carried at cost plus accrued interest. Cash equivalents, primarily consisting of time deposits denominated in Brazilian reais, have a ready market and an original maturity of 90 days or less. The Company also invests in time deposits denominated in U.S. dollars through its offshore subsidiaries.

(f) Trading securities

The Company buys and sells debt and equity securities with the objective of generating profits on short-term differences in price. In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", these securities are measured at fair value at the balance sheet dates and unrecorded gains/losses are reflected in the Statement of operations. The securities comprise primarily fixed-term investments, investments in listed Companies and Government securities.

(g) Accounts receivable

Accounts receivable are stated at estimated realizable values. Allowances are provided, when necessary, in an amount considered by management to be sufficient to meet probable future losses related to uncollectible accounts.

F - 24 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(h) Inventories

Inventories are stated at the lower of average cost of purchase or production, or realizable values.

(i) Property, plant and equipment

Property, plant and equipment are recorded at cost and include interest capitalized during construction of major facilities. Interest on construction-period borrowings denominated in reais is capitalized, net of related purchasing power gains. Interest on construction-period borrowings denominated in foreign currencies is capitalized using contractual interest rates, exclusive of foreign exchange gains or losses. Expenditures for maintenance and repairs are charged to expense when incurred.

Returnable bottles are included within property, plant and equipment. Losses on breakage of bottles and crates during production are included within cost of sales.

Depreciation is computed on a straight-line basis over the useful lives of the assets as follows:

Years

Buildings 25 Machinery and equipment, including equipment with third parties 5 to 10 Bottles and crates 5 Vehicles 5

(j) Acquisitions and intangible assets

Acquisitions from third parties have been accounted for under the purchase method of accounting. Accordingly, the purchase price, plus direct costs of acquisition, is allocated to assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The excess of the purchase consideration over the estimated fair value of net assets acquired is recorded as goodwill. Results of operations are included as from the acquisition date.

F - 25 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

Goodwill and other intangible assets are stated at cost and are amortized on a straight-line basis, over the estimated future periods to be benefited. Recoverability of goodwill is assessed on a regular basis using undiscounted future cash flows and any impairment would be recognized in operating results if a permanent decrease in value were to occur.

(k) Prepayment to Brahma Welfare Foundation

The Company provides postretirement benefits to certain through Fundação Assistencial Brahma (the "Brahma Welfare Foundation") (Notes 14 (b) and (c)). SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions", was adopted as of January 1, 1995 and requires employers to provide for the costs of postretirement benefits expected to be paid to current, former or inactive employees upon retirement.

Contributions from the Company to the Brahma Welfare Foundation are classified as Prepayments to Brahma Welfare Foundation. The Brahma Welfare Foundation, upon receipt of contributions from the Company, invests primarily in bank certificates of deposits. Cash and shares contributed to the Brahma Welfare Foundation are not considered plan assets for purposes of SFAS No. 106. Expenses relating to benefits provided to current employees of the Company are expensed as incurred whereas those relating to retired employees and their dependents are amortized in accordance with SFAS No. 106.

Shares of the Company contributed to the Brahma Welfare Foundation are included in treasury shares at their fair market value at each of the balance sheet dates. The difference between historical reacquisition cost and fair market value is included as additional paid-in capital.

Prepayments to the Brahma Welfare Foundation or shares of the Company contributed to the Brahma Welfare Foundation are restricted as to use by the Company and may only be used by the Brahma Welfare Foundation for purposes stated in its charter (Notes 14 (b) and (c)).

F - 26 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(l) Recoverability of long-lived assets

In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of", management reviews long-lived assets, primarily property, plant and equipment to be held and used in the business, investments accounted for under the equity method, goodwill and certain deposits and tax incentive investments, for the purpose of determining and measuring impairment whenever events or changes in circumstances indicate that the carrying value of an asset or group of assets may not be recoverable.

Assets are grouped and evaluated for possible impairment at a plant level; impairment is assessed based on undiscounted cash flows from forecasted operating results of the business over the estimated remaining lives of the assets. No impairment losses have been recorded for any of the periods presented, except as disclosed in Note 7.

(m) Compensated absences

The liability for future compensation for employee vacations is fully accrued.

(n) Income taxes

Brazilian income taxes comprise federal income tax and social contribution, the latter a federally mandated tax based on income, as recorded in the Company's and its subsidiaries respective statutory accounting records. There are no state or local income taxes in Brazil.

For the purposes of these financial statements, the Company has applied SFAS No. 109 for all periods presented. The effect of adjustments made to reflect the requirements of US GAAP, as well as differences between the tax basis of non-monetary assets as stated in the statutory accounting records, prepared in accordance with Brazilian Corporation Law, have been recognized as temporary differences for the purpose of recording deferred income taxes except that, prior to 1998, in accordance with paragraph 9(f) of SFAS No. 109, deferred taxes were not recorded for differences relating to certain assets and liabilities that were remeasured from reais to U.S. dollars at historical exchange rates and that resulted from changes in exchange rates or indexing to inflation in local currency for tax purposes.

F - 27 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

Such accumulated differences were recognized in shareholders' equity when the Company adopted the real as the functional currency on January 1, 1998 (Note 2(b)). All net operating loss carryforwards are recognized as deferred tax assets. Valuation allowances are established, when necessary, based on management's expectation as to whether realization of deferred tax assets, including net operating loss carryforwards, is more likely than not.

All current and non-current deferred tax liabilities and assets are offset unless they relate to different tax paying entities of the Company or to entities operating in different tax jurisdictions.

(o) Pension plan

The Company operates a funded defined-benefit pension fund, Instituto Brahma de Seguridade Social - IBSS ("Brahma Pension Plan"). The Brahma Pension Plan is accounted for in accordance with SFAS No. 87, "Employers' Accounting for Pensions" under the projected unit method and the accompanying notes to the financial statements have been presented in accordance with SFAS No. 132, "Employer's Disclosures about Pensions and other Post-retirement Benefits" (Notes 14 (a) and (c)).

(p) Stock-based compensation

The Company has chosen to account for stock-based compensation using the intrinsic value method described in U.S. Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee or Director must pay to acquire the stock. The value of the option is determined when the option is granted but is charged ratably to compensation cost and shareholders' equity over a period of five years from the date the option is granted, the period over which the related employee or Director services are rendered.

SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. Pro forma net income and earnings per share, calculated on the fair value based method, as required by SFAS No. 123, are disclosed in Note 13(h). This information is not representative of the effects on net income for future periods, as the options vest over five years and additional awards may be made each year.

F - 28 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The Company provides advances to certain employees, who may also be directors or shareholders of the Company, to finance the purchases of these shares. Financing arrangements are normally for periods not exceeding four years and accrue interest of 8% per annum over a designated general price index. As the advances are collaterized by the stock issued upon exercise of the stock option, the receivable from advances is recorded as a reduction of shareholders' equity.

(q) Treasury shares

Treasury shares, are recorded at cost which approximates market prices at the date of purchase. Treasury shares held by the Brahma Welfare Foundation (Note 2 (j)) are recorded at fair market value as at the date of the balance sheet. Treasury shares cancelled are recorded as a reduction of share capital and additional paid-in capital. Amounts allocated to share capital are determined based upon the proportion of the number of shares cancelled to the number of shares outstanding at the date of cancellation. This proportion is applied to share capital at the date of cancellation. The difference between reacquisition cost of treasury shares and the reduction of share capital is recorded as a component of additional paid-in capital.

(r) Subscription warrants

The fair value of subscription warrants is recorded as additional paid-in capital when such amounts are received. When subscription warrants are exercised, the amount originally recorded as additional paid-in capital is transferred to share capital.

(s) Interest attributed to shareholders' equity

In 1996, Brazilian corporations were permitted to determine a tax-deductible notional interest expense attributable to shareholders' equity, which could either be paid in cash in the form of a dividend or used to increase capital stock in the statutory books. As from 1997, this interest charge may only be distributed in a manner similar to a dividend. For financial reporting purposes, interest attributed to shareholders' equity is recorded as a deduction from unappropriated retained earnings. In 1996, the withholding tax was payable by the Company and was accrued and charged to income. As from 1997, the withholding tax is paid by the Company on behalf of the shareholder (Note 4(a)).

F - 29 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(t) Revenues and expenses

Sales revenues and related cost of sales are recognized when products are shipped. Other expenses and costs are recognized on the accrual basis.

(u) Marketing costs

Marketing costs are reported in selling and marketing expenses and include costs of advertising and other marketing activities. Marketing costs not deferred at year-end are charged to expense ratably in relation to sales over the year in which incurred. Advertising expenses were US$ 244,319, US$ 203,690 and US$ 139,969 for the years ended December 31, 1998, 1997 and 1996, respectively. Deferred advertising consists of media and advertising-related prepayments and promotional and production costs of future media advertising; these assets are expensed in the first period used. There were no deferred advertising assets recorded at the balance sheet dates presented. Additionally, in the year ended December 31, 1998, the Company expensed certain promotional materials and other related costs totaling US$ 35,319.

(v) Environmental expenditures

Expenditures relating to ongoing environmental programs are charged against earnings as incurred. Ongoing programs are designed to minimize the environmental impact of the Company's operations and to manage the environmental risks of its activities. Provisions with respect to such costs are recorded at the time they are considered to be probable and reasonably estimable. Management believes that, at present, there are no significant environmental contingencies.

(w) Earnings per share

Basic earnings per share is computed by dividing consolidated net income by the weighted-average number of common and preferred shares outstanding during the relevant years. Share options issued to employees and management and share warrants are considered as common stock equivalents in calculating diluted earnings per share. Pursuant to SFAS No. 128, "Earnings Per Share", the Company has presented its earnings per share for each class of share and accordingly has restated 1996 earnings per share amounts. Diluted earnings per share, as originally stated, is as follows (US$ per thousand shares).

F - 30 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

1996

Preferred shares 52.18 Common shares 52.18

Until 1996, each share of each class of stock participated equally in distributed and undistributed earnings, and, accordingly, earnings per share were of equal amounts for all classes. Beginning in 1997, pursuant to Law 9457/97, preferred shares without minimum or fixed dividends are entitled to a dividend of 10% in excess of that granted to common shares. Earnings per share amounts for 1998 and 1997 have been determined as though all earnings will be distributed. Earnings may be capitalized or otherwise appropriated, consequently such earnings would no longer be outstanding as dividends. Therefore, no assurance can be made that preferred shareholders will receive the 10% premium on undistributed earnings.

(x) Comprehensive income

The Company has adopted SFAS No. 130, "Reporting Comprehensive Income". The Company has elected to present comprehensive income in the statement of changes in shareholders' equity. Comprehensive income consists of net income for the period and the cumulative translation adjustment.

(y) Segment information

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" with respect to its operating segments for all periods presented. SFAS No. 131 introduces a "management approach" concept for reporting segment information.

The Company's reportable business segments are comprised of beer and soft drinks, which account for 97% of the Company's sales.

F - 31 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(z) New accounting standards

SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," was issued during 1998. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognizes all derivatives as either assets or liabilities and measure those instruments at fair value.

This statement is effective for fiscal years beginning after June 15, 1999 (January 1, 2000 in the case of the Company). Management is evaluating SFAS No. 133 to determine its impact, if any, on the consolidated financial statements.

Also during 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and SOP No. 98-5, "Reporting on the Costs of Start-up Activities."

SOP No. 98-1 requires certain costs incurred in connection with developing or obtaining internal-use software to be capitalized and other costs to be expensed. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, (January 1, 1999 in the case of the Company) and will be applied to internal-use software costs incurred in fiscal years after adoption for all projects, including those projects in progress upon initial application of the SOP. The Company believes that the adoption of this pronouncement will not result in significant differences from current practice.

SOP No. 98-5 states that costs of start-up activities, including organization costs, should be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998, (January 1, 1999 in the case of the Company.) The Company believes that the adoption of SOP 98-5 will not result in significant differences from current practice.

F - 32 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

3 Financial Income and Expense

December 31

1998 1997 1996

Financial income Interest income on cash equivalents 118,535 96,817 101,397 Exchange rate variations due to change in functional currency 19,093 Trading securities gains 26,001 8,609 21,828 Other 35,007 15,852 8,980

198,636 121,278 132,205 Financial expense Charges on Brazilian real debt (82,691) (25,407) (15,214 Charges on U.S. dollar debt (64,979) (54,690) (35,676 Exchange rate variations on loans (52,673) (5,760) (8,352 Interest on liabilities other than loans (principally contingencies) (26,619) (20,324) (29,859 Hedging activities (26,745) (15,272) Banking charges, taxes and other (35,797) (20,865) (8,147

(289,504) (142,318) (97,248

F - 33 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

4 Income Taxes

(a) Tax rates

Income taxes in Brazil include federal income tax and social contribution. The Brazilian statutory rates for the years presented below are as follows (in percentages):

December 31

1998 1997 1996

Federal income tax 25.00 25.00 25.00 Social contribution 8.00 8.00 8.00 Adjustments to composite rate (*) (2.44

Composite federal income tax rate 33.00 33.00 30.56

(*) The social contribution was deductible both for federal income tax and social contribution purposes in 1996.

The prospective effects of the non-deductibility of the social contribution charge as from 1997, in determining income tax and social contribution, on deferred taxes was reflected in income for the year ended December 31, 1996.

The price-level restatement of financial statements and of net operating loss carryforwards for Brazilian Corporation Law and tax purposes was abolished as from January 1, 1996.

The interest attributed to shareholders' equity, which is deducted directly from retained earnings without being charged to income, was deductible for income tax purposes in 1996 and for income tax and social contribution purposes in 1997 and 1998.

(b) Income tax reconciliation

Income tax expense relating to operations in each of the following years is reconciled to the Brazilian statutory rates as follows:

F - 34 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

1998 1997 1996

Income before income taxes, equity in affiliates and minority interest 234,951 505,667 479,365

Tax expense, at statutory rates (77,534) (166,870) (146,494 Adjustments to derive effective rate Deferred tax on adjustments made to local book above basis of equity in affiliates (432) (2,705) (901 Permanent differences 19,381 25,593 (4,970 Difference in foreign income tax rates 11,182 9,721 14,205 Effect of changes in tax rates 5,380 Benefit from deductibility of interest attributed to shareholders' equity 53,643 33,896 14,841 Reversal of income tax provision on profits generated offshore (1) 18,598 Current net operating losses for which deferred tax assets have not been constituted (29,200) (9,733) Constitution of deferred tax assets on tax losses from prior years 21,273 Income tax incentives 104 4,313 8,553 Gain on prepayment of inflationary profits (2) 21,604 Effects of differences between indexation and translation (3) 640 160 Other (4,482) 676 (4,115

Tax expense per statement of operations (8,740) (83,196) (91,737

(1) The deferred tax liability on earnings from offshore affiliates, provided through to December 31, 1997, was reversed to income in 1998 following the enactment of a law which confirms such earnings will be taxed upon repatriation on a prospective basis. Management is confident that prudent, feasible and cost effective tax planning strategies will assure no tax will be payable upon repatriation or distribution from offshore earnings occurring prior to 1998.

(2) During 1996, the Company elected to exercise an option available to fully prepay the deferred tax balance in relation to inflationary profits, generated by the tax indexation system in place through December 31, 1995, at the reduced income tax rate of 10%, as opposed to the standard income tax rate of 25%.

(3) These differences arise due to the indexation of financial statements and temporary differences by the Fiscal Reference Unit (UFIR) for Brazilian income tax purposes through to December 31, 1995 and the remeasurement into the U.S. dollar functional currency for purposes of these financial statements, excluding results of changes in exchange rates or prior indexing for inflation in local currency for tax purposes.

F - 35 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The major components of the deferred tax accounts are as follows:

1998 1997

Income tax assets Brazilian net operating loss carryforwards 133,795 138,393 Foreign net operating loss carryforwards 33,339 20,048 Provisions for payments to Brahma Welfare Foundation 2,115 1,205 Investments adjustments made to local book basis, accounted for under the equity method 1,495 1,989 Deferred charges 14,750 3,761 Provision for employee profit sharing 2,500 22,726 Accrued liability for legal proceedings 50,238 67,411 Fair value adjustment on acquisition 14,371 17,320 Provision for losses on equity investments 20,884 7,264 Other 9,786 7,645

Total deferred income tax assets 283,273 287,762

Valuation allowance for Brazilian net operating loss carryforwards (116,338) (119,642 Valuation allowance for foreign net operating loss carryforwards (33,339) (20,048

Deferred income tax assets, net of valuation allowances 133,596 148,072

F - 36 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

1998 1997

Income tax liabilities Brahma Pension Fund and Brahma Welfare Foundation (Note 14) (5,075) (7,763 Restricted deposits for legal proceedings (2,616 Accelerated depreciation (25,903) (24,409 Equity in offshore companies (16,057) (24,695 Capitalized interest on property, plant and equipment (1,809) (2,216 Deferred tax relative to temporary differences established on the January 1, 1998 change in functional currency, less reversals (7,403) Other (6,838) (3,811

Total deferred income tax liabilities (63,085) (65,510

Net deferred tax assets 70,511 82,562

Components of the deferred tax accounts in the balance sheet are as follows:

1998 1997

Deferred tax assets Current 7,639 10,197 Non-current 69,841 72,493 Deferred tax liabilities Current (488) Non-current (6,481) (128

Net deferred tax assets 70,511 82,562

Net deferred income tax assets include Brazilian net operating losses, which have no expiration dates, available for offset against future taxable income. Carryforward losses are available for offset within any year up to 30% of annual income before tax, determined in accordance with the Brazilian Corporation Law.

F - 37 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The deferred income tax asset relating to foreign net operating losses has been fully provided for as management is not confident that realization is more likely than not. Movement in the deferred tax asset arising from foreign net operating loss carryforwards is as follows:

1998 1997

At beginning of year 20,048 13,243 Net operating loss 13,291 6,805

At end of year 33,339 20,048

These losses expire as follows:

Country Expiry date Pre-tax

Argentina September 1999 to 2003 81,380 Venezuela December 1999 to 2001 19,647

101,027

Tax losses of Engarrafadora and PCE acquired on acquisition approximated US$ 259,000 (Note 1(b)). As 20% of this total, US$ 51,800, is not subject to provisions of the purchase agreement, the Company recorded this amount as an asset at December 31, 1997. However, this deferred tax asset continues to be fully provided for as management is not confident that realization of this asset is more likely than not.

F - 38 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

5 Trade Accounts Receivable

Trade accounts receivable relate primarily to sales to domestic customers. Allowances are provided, when necessary, in an amount considered by management to be sufficient to meet probable future losses related to uncollectible accounts. At December 31, 1998, the Company has provided US$ 23,453 as an allowance for doubtful accounts (1997 - US$ 17,522). Credit risk has been minimized due to a large customer base and control procedures which monitor the creditworthiness of customers. The increase in the allowance during 1998 is primarily due to the increase in the Company's own distribution system whereas in prior years the Company exclusively used third party distributors.

6 Inventories

1998 1997

Raw materials 139,451 109,048 Finished products 63,152 38,813 Work in process 20,731 20,346 Production materials 30,618 33,062 Bottles and crates 8,070 3,668 Maintenance materials 33,434 34,273 Promotional materials 2,756 9,970 Other 554 14,978

298,766 264,158

F - 39 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

7 Property, Plant and Equipment

1998

Accumulated Cost depreciation Net

Land 63,489 63,489 Buildings 642,318 (147,679) 494,639 Machinery and equipment 1,776,068 (853,242) 922,826 Bottles 84,463 (21,635) 62,828 Crates 79,545 (25,788) 53,757 Vehicles 26,720 (10,112) 16,608 Equipment with third parties 67,764 (25,894) 41,870 Other 7,831 (1,139) 6,692

2,748,198 (1,085,489) 1,662,709 Construction in progress 82,891 82,891

2,831,089 (1,085,489) 1,745,600

1997

Accumulated Cost depreciation Net

Land 69,606 69,606 Buildings 579,949 (136,666) 443,283 Machinery and equipment 1,652,480 (747,602) 904,878 Bottles 93,509 (18,558) 74,951 Crates 83,599 (21,831) 61,768 Vehicles 30,375 (10,860) 19,515 Equipment with third parties 70,975 (26,544) 44,431 Other 2,600 (628) 1,972

2,583,093 (962,689) 1,620,404 Construction in progress 268,259 268,259

2,851,352 (962,689) 1,888,663

F - 40 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

Construction in progress at December 31, 1998 relates primarily to upgrades and operational improvements. The balance at December 31, 1997 represented projects to increase brewing and soft drink production capacity (Note 15(c)).

At December 31, 1998 the Company reflected US$ 5,855 (1997 - US$ 7,918) of non-operational assets comprising plant and equipment (US$ 4,519) and land (US$ 1,337) as held-for-sale. In 1997, the Company wrote- off non-operational assets, provided for in previous years, totaling US$ 2,144.

As of December 31, 1998, certain plants, carried at US$ 91,322 have been identified by management to be included in a phase-out plan. No significant losses are expected to be realized in connection with the closing of these plants.

8 Goodwill and Intangible Assets, Net

Goodwill 1998 1997

At beginning of year, net 48,649 10,857 Goodwill on acquisitions 33,094 39,826 Amortization (10,322) (2,034

At end of year, net 71,421 48,649

Other intangible assets, net of amortization 12,435 13,137

Total goodwill and intangible assets 83,856 61,786

Fair value of Goodwill net liabilities Goodwill on acquisition (Note 1(b)) on acquisition 1998 1997

Engarrafadora (28,759) 28,759 PCE (11,067) 11,067 Malteria Pampa S.A. (33,094) 33,094

33,094 39,826

F - 41 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

Accumulated amortization of goodwill and intangible assets was US$ 15,196 and US$ 4,874 at December 31, 1998 and 1997, respectively.

9 Short-term Debt

1998 1997

Raw material importation and financing 335,418 358,689 Importation of equipment 80,862 34,987 Working capital financing 26,766 31,637

443,046 425,313

Short-term debt denominated in U.S. dollars at December 31, 1998 totaled US$ 426,677 (1997 - US$ 394,849) with a weighted average interest rate of approximately 8% at December 31, 1998 (1997 - 7%). Raw material import finance terms are normally for payment in a single installment on the 360th day. The Company has no formal lines of credit at December 31, 1998.

F - 42 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

10 Long-term Debt

(a) Summary

Nominal annual interest Index(1) rates - % 1998 1997 Brazilian reais Plant expansion program (2) UFIR 2 to 4 381 21 UMBNDES 6 to 8 25,255 25,773 TJLP 0 to 4 485,135 362,111 4 to 6 163,765 213,251 6 to 12 4,246 20,452 TR 6 to 8 18,535 10,738 10 to 12 7,540 U.S. dollar – denominated 2 to 6 20,052 4,390 6 to 8 110,355 16,375 8 to 10 174,218 192,886 10 to 12 8,753 13

1,018,235 846,010 Less current portion (290,465) (168,018

727,770 677,992

(1) UFIR Tax Referential Rate used to index certain tax liabilities: 1998-1.65%; 1997 - 5.52% UMBNDES Weighted-Average exchange rate variations on currencies held by BNDES (Brazilian Economic and Social Development Bank), used to index certain liabilities: 1998- 11.80%; 1997 - 5.32% TJLP Long-Term Interest Rate fixed by the government on a quarterly basis (average annual rate): 1998- 18.06%; 1997 - 9.89% TR Referential Rate published by the government on a daily basis – (average annual rate): 1998- 7.78%; 1997 - 9.75% LIBOR London Interbank Offered Rate: 1998 – 5.10 %; 1997 – 5.97 %

F - 43 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(2) The Company has several loans, principally for plant expansion, outstanding with governmental agencies including the BNDES, FINAME - Government Agency for Machinery and Equipment Financing, FINEP - Financing Agency for Studies and Projects, FINEM - Financing Enterprises, and through Economic Development Notes (TDE).

(b) BNDES line of credit

On July 14, 1997, the Company executed a line of credit agreement with the BNDES, which was utilized for investments throughout 1998.

R$ US$

Balance Balance Annual drawn down drawn down finance Original line December 31, December 31, charge of credit 1998 1997

TJLP + 3.1% 670,338 434,133 315,380 TJLP + 1.6% 14,289 12,162 8,675

684,627 446,295 324,055

The line of credit is payable in 72 monthly installments with final maturity from July 2004 through July 2005.

In the event the TJLP exceeds 6% per annum, the differential is added to the principal balance outstanding.

F - 44 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The Company has obtained a loan from the International Finance Corporation (IFC), the balance of which at December 31, 1998 was US$ 134,700 (1997 - US$ 172,548; 1996 - US$ 199,147), which contain certain restrictive covenants. The loans are US dollar-denominated and accrue annual interest of between 2.5% and 2.75% above LIBOR, falling due in installments through June 2003. Part of this loan (3.16%) may be converted into preferred stock of the Company, at the option of IFC. Restrictive covenants include a requirement to invest all the funds in the approved investment program and compliance with certain minimum liquidity and indebtedness ratios.

(d) Long-term debt maturities

1998

2000 228,381 2001 163,100 2002 120,938 2003 95,207 Thereafter 120,144

727,770

(e) Guarantees

Certain loans, principally long term, are secured by liens on equipment in the amount of approximately US$ 106,834.

F - 45 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

11 Sales Tax Deferrals

Pursuant to current legislation, certain states in Brazil provide tax incentives in the form of deferrable tax payments and partial or complete tax abatements for periods ranging from one to twenty years to promote investments in the region. The Company currently participates in programs whereby a percentage of payments of Value-Added Tax on Sales and Services (ICMS) due from sales generated by specific production facilities are deferrable for periods of, generally, five years from their original due date. Percentages deferrable usually range from 75% in the first year to 40% in the final year or a fixed percentage over the life of the program. Amounts deferrable under these programs are without limit, except in the State of Santa Catarina where the Company has attained approximately 100% (US$ 68,995) of the limit at December 31, 1998. Balances deferred generally accrue interest and are only partially inflation indexed, such adjustment being linked, in the majority of cases, to 60% to 80% of a general price index. Of the total amount deferred as of December 31, 1998, US$ 293,986 will become payable in 2003 and the balance of US$ 47,253 thereafter. Certain tax deferrals (1998 – US$10,391) may be forgiven at maturity if all obligations are fulfilled by the Company.

12 Foreign Currency Trading Activities and Financial Instruments

(a) Concentration of credit risk

The Company's sales are to distributors and direct to customers. Credit risk is minimized due to this large customer base and ongoing control procedures which monitor the creditworthiness of customers. Historically, the Company has not experienced significant losses on trade receivables.

In order to minimize credit risk from its investments, the Company has adopted policies restricting cash and/or investments that may be allocated among financial institutions which take into consideration monetary limits and financial institution credit ratings.

F - 46 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(b) Foreign currency

Foreign currency positions and trading activities, not designated as hedges, consist of short and long-term debt, accounts payable and receivable to/from foreign suppliers, and investments in overseas markets.

The Company enters into forward exchange contracts and futures to hedge against overall exposure in foreign currencies including certain firm purchase commitments. The purpose of the Company's foreign currency hedging activities is to manage overall foreign currency exposures and to protect the Company from the risk that the future foreign currency cash outflows for purchases from suppliers will be adversely affected by changes in exchange rates.

December 31, 1998

Market value Notional (losses) in Financial instruments Currency amount the year

Currency and interest rate swaps US$ 852,034 (5,126)

Gains and losses on futures are provided for in current liabilities and recognized currently in income/expenses. Gains/(losses) on forward contracts which hedge specific foreign currency denominated commitments, are deferred and recognized on the basis of the when the transaction is completed. Gains/(losses) from hedging activities totaled approximately (US$ 22,267), (US$ 1,525) and US$ 888 for the years ended December 31, 1998, 1997 and 1996, respectively.

The carrying amount of the Company's current financial instruments generally approximates fair market value because of the short-term maturity or frequent repricing of these instruments, and as non-indexed instruments, they are stated at present value.

Fair market value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

F - 47 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

13 Shareholders' Equity

(a) Capital and shareholders' rights

(i) Capital

Subscribed and paid-in capital comprises 7,282,405 thousand (1997 - 7,230,088 thousand) shares of no par value, of which 4,614,948 thousand (1997 - 4,523,714 thousand) are preferred shares and 2,667,456 thousand (1997 - 2,706,374 thousand) are common shares. Preferred and common shares issued during the year of 91,235 thousand and 19,575 thousand, respectively, relate to the stock option plan (Note 13(h)).

(ii) Share rights

Preferred shares are non-voting but have priority in the return of capital in the event of liquidation. Common shares have the right to vote at shareholder meetings. Preferred shares also have priority to the receipt of a mandatory non-cumulative dividend of 25%, due to both preferred and common shares, of their proportionate share of net income (based on the number of outstanding preferred shares in relation to total outstanding shares). As from 1997 and as reflected in the determination of earnings per share, preferred shares are entitled to a dividend premium of 10% over that received by the common shareholders. Earnings per share amounts for 1997 and 1998 have been determined as though all earnings will be distributed. As such earnings may be capitalized or otherwise appropriated, there can be no assurance that preferred shareholders will receive the 10% premium referred to above, unless earnings are fully distributed.

(iii) Subscription warrants

At joint meetings, the Conselho de Administração ("Board of Directors") and the Conselho Fiscal ("Fiscal Audit Committee") approved the following:

F - 48 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

. In September 1996, 668,240,764 warrants from the August 25, 1993 issuance were exercised for US$ 166,470. Warrants exercised comprised 229,376,119 common shares (US$ 57,141) and 438,864,645 preferred shares (US$ 109,329). Proceeds from the aforementioned share issuances are included in the statement of shareholders' equity as issuances. At the date of exercise, US$ 10,361 and US$ 6,780 were transferred from additional paid-in capital to share capital-preferred shares and share capital-common shares, respectively.

. On February 14, 1996, approval of the private placement of 404,930,519 subscription warrants, of which 262,891,498 are for subscription of preferred shares and 142,039,021 for subscription of common shares to the value of US$ 13,393 for the preferred shares and US$ 7,218 for the common shares. Each warrant grants the right to subscribe one warrant for each 17 shares held during the period of 30 days as from February 28, 1996. Each warrant will have the right to subscribe for one share, this number being adjusted proportionately should there be any reverse splits, splits or distribution of stock dividends and may be exercised during April 2003, at the total value of US$ 266,624 for preferred shares and US$ 144,056 for common shares.

(iv) Share buy-back program

Thousands of shares

Authorized Purchased

Program approval Preferred Common Preferred Common Cost

November 14, 1997 (extended to May 14, 1998) 432,701 82,567 161,885 60,798 139,892

May 12, 1998 (extended to August 10, 1998) 258,022 78,491 79,602 24,264 61,409

August 10, 1998 (extended to November 8, 1998) 173,521 51,170 109,892 1,159 49,403

November 10, 1998 51,846 44,266 10,750 4,049 6,032

F - 49 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(b) Appropriated retained earnings

(i) Under the Brazilian Corporation Law, the Company and its Brazilian subsidiaries are required to appropriate 5% of their annual local currency earnings, after absorbing accumulated losses, to a statutory reserve. The reserve may be used to increase capital or absorb losses, but may not be distributed as dividends.

(ii) The tax incentive reserve results from an option to apply a portion of income tax otherwise payable, for the acquisition of capital stock of companies undertaking specified government-approved projects. The amount so applied is credited to income tax and subsequently appropriated from retained earnings to this reserve. No recapture provisions are required to be satisfied unless the corresponding capital reserve presented in the financial statements prepared in accordance with the Brazilian Corporation Law is used to pay dividends, at which time the income tax not previously paid on such credits would become due, together with penalties. The Company does not intend to pay dividends out of its capital reserves. As such amounts are generally restricted as to distribution in the form of dividends, an equal amount is appropriated from retained earnings.

(iii) The interest attributed to equity reserve reflects appropriations made in 1996 net of subsequent prepayments or declarations in the form of dividends.

Dividend distributions are limited to retained earnings of the Company as determined in accordance with the Brazilian Corporation Law. Distributable retained earnings at December 31, 1998, are limited to the amount provided for in the statutory financial statements of the Company as at December 31, 1998: Reserva para futuro aumento de capital (US$ 446,533 at the period-end exchange rate) reduced by Açoes em tesouraria (US$ 209,583 at the period-end exchange rate).

F - 50 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(d) Advances for purchase of shares

The Company operates a stock-based compensation plan and finances the purchase of shares at the option of employees and directors (Note 13(h)). Financing arrangements are normally for periods not exceeding four years and accrue interest of 8% per annum over a designated general price index.

(e) Dividends

Dividends are payable in Brazilian reais and may be converted into United States dollars and remitted to shareholders abroad provided that the non-resident shareholder's capital is registered with the Brazilian Central Bank. No withholding tax is payable on dividends paid out of profits earned as from January 1, 1996.

(f) Interest attributed to shareholders' equity

Management is required by the Brazilian Corporation Law to propose dividends at year-end to meet the 25% of adjusted annual net income mandatory dividend requirements; a requirement met through payments made in the form of dividends and interest attributed to shareholders' equity. A proposal to supplement the interest attributed to equity of US$ 76,599 has been made at December 31, 1998 to meet the 25% minimum, in addition to US$ 43,649 of interest attributed to shareholders' equity paid during the year. At December 31, 1997, a proposal to distribute dividends of US$ 15,440 had not yet been credited to the shareholders, and the tax paid thereon, and therefore, was not considered to have been declared and was not provided for. The unprovided dividend proposed for statutory purposes in 1997 was subsequently declared by the shareholders in 1998.

F - 51 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(g) Payroll, profit sharing and related charges

The Company's by-laws provide for the distribution to employees of up to 10% of consolidated net income, determined in accordance with Brazilian Corporation Law, to employees. Additionally, a further 5%, in aggregate, may be paid to the Executive Officers. The distribution of the Executive Officers' bonus is determined based on individual performance and efficiency as approved by the Board of Directors of the Company. Expenses of the Company under the performance-based compensation programs, included in general and administrative expenses, amounted to US$ 36,418 (employees - US$ 29,849, Executive Officers - US$ 6,569) in the year ended December 31, 1998, US$ 32,329 (employees - US$ 24,475, Executive Officers - US$ 7,854) in the year ended December 31, 1997 and US$ 13,524 (employees - US$ 9,710, Executive Officers - US$ 3,814) in the year ended December 31, 1996. Liabilities for accrued profit sharing totaled US$ 45,230 at December 31, 1997. Amounts paid in 1998 relative to the year ended December 31, 1997 totaled US$ 36,791. The year-end provision is an estimate made by management as the final determination of the amount payable is not available at the date of preparation of the financial statements. Amounts paid with respect to the program may differ from the liability accrued. No individual bonus will be paid to employees and executive officers for the year ended December 31, 1998 as the goals set by the company were not met.

During the third quarter of 1998, the Company reversed US$ 29,895, relating to social security and severance contributions, provided in the Provision for payroll, profit sharing and related charges, which the tax authorities had claimed were due on amounts paid to employees as profit sharing. Following a favorable administrative ruling in June 1998, which eliminates any right of appeal, management considered the possibility of loss to be remote. The reversal is included in the current year results as a reduction of "Other operating expenses."

F - 52 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(h) Stock option plan

The Company's stock option plan (the "Plan") is designed to obtain and retain the services of executives and certain employees. Both common and preferred shares are granted in the Plan.

The Plan is administered by a committee comprised of non-executive members of the Board of Directors of the Company. This committee periodically creates programs of share options defining the terms, vesting requirements and employees to be included and establishes the price at which the shares are to be issued. This price cannot be less than 90% of the average price of the shares traded on the Rio de Janeiro stock exchange in the previous three business days, inflation indexed through the date the option is granted. The number of shares which may be granted each year through the Plan cannot exceed 5% of the total number of shares outstanding of each group of shares at that date. When share options are exercised, the Company either issues new shares or transfers treasury shares to the new shareholder. The share options granted to date do not specify a final date by which they must be exercised. If an employee leaves the employment of the Company (other than upon retirement), the Company may repurchase such shares, at its option, at a price equal to (i) the inflation-indexed price paid by such employee, if the employee leaves during the first thirty months after the exercise of such option, (ii) 50% at the inflation-indexed price paid, and 50% at the prevailing market price, if the employee leaves after the first thirty months but before the sixtieth month after the exercise of such option, and (iii) the market price thereafter.

F - 53 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

1998 1997 1996

Outstanding at beginning of year (in thousands) 361,109 408,808 315,396 Granted 145,649 136,600 178,614 Exercised (110,810) (123,875) (85,202 Forfeited (23,598) (60,424)

Outstanding and exercisable at December 31, 1998 372,350 361,109 408,808

Shares available at end of each year for options that may be granted in the subsequent year 364,120 361,504 369,190

Range of exercise prices for outstanding options 111.57 to 156.07 to 156.07 to (US$ per thousand shares) 487.34 563.09 484.70

Weighted average grant-date exercise price of options (US$ per thousand shares) 335.48 556.32 467.31

Weighted average grant-date quoted market price of shares (US$ per thousand shares) (based on quoted market value at date granted) 410.77 611.26 528.63

Weighted average grant-date value (difference between quoted market price and exercise price) of options granted during the year (US$ per thousand shares) 75.30 54.94 61.32

Compensation cost recognized in the income statement was US$ 4,512, US$ 4,622 and US$ 4,081 at December 31, 1998, 1997 and 1996 respectively.

F - 54 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

1998 1997 1996 Weighted-average exercise prices (US$ per thousand) shares)

At beginning of year 417.35 333.31 230.06 Granted 335.48 556.32 467.30 Exercised 370.42 379.30 232.93 Forfeited 380.15 208.88 At end of year 397.31 417.35 333.31

Outstanding and exercisable:

Weighted - average Range of exercise prices exercise prices Number of shares (thousands) (US$ per thousand shares (US$ per thousand shares) 1998 1997 1996 1998 1997 1996

156.07 - 237.30 35,390 82,853 168,605 219.28 214.76 201.73 237.31 - 318.92 44,068 52,300 61,588 303.71 304.86 304.93 318.93 - 484.70 204,049 89,356 178,615 379.67 458.61 467.31 484.71 - 563.09 88,843 136,600 555.19 556.32

372,350 361,109 408,808 397.31 417.35 333.31

The Company has calculated the pro forma effects of accounting for the Plan in accordance with SFAS No. 123. Had compensation cost for the Plan been determined based on the fair value at the grant date in accordance with the provisions of SFAS No. 123, the Company's net income and earnings per thousand shares, would have been as follows:

F - 55 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

1998 1997 1996

Net income - pro forma 224,049 384,214 382,389

Earnings per thousand shares - pro forma Basic Preferred 34.33 56.25 55.91 Common 31.21 51.14 55.91 Diluted Preferred 33.52 54.43 54.20 Common 30.47 49.48 54.20

These pro-forma results are not necessarily indicative of future amounts.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998: dividend yield 10.0% (1997 - 2.2%, 1996 – 1.8%), expected volatility 59.1% (1997 - 28.0%, 1996 – 27.7%) risk-free interest rate- nominal terms- 30.0% (above inflation index; real terms- 1997 - 10.8%, 1996 – 11.0%) and expected lives of three years (1997 - three years, 1996 - three years).

1998 1997 1996

Weighted average grant date fair value (US$ per thousand shares) 254.02 251.05 191.58

Market value of options granted in the year, all of which were less than the quoted market price of the stock on grant date (in thousands) 36,998 34,293 34,219

F - 56 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

Weighted average shares outstanding used in determining diluted earnings per share (in thousands) are as follows:

1998 1997 1996

Weighted average number of shares outstanding during the year, plus additional shares Preferred 4,486,158 4,825,779 4,740,211 Common 2,418,471 2,456,931 2,314,701

6,904,629 7,282,710 7,054,912

14 Employee Benefits

(a) Brahma Pension Plan

The Brahma Pension Fund is a defined-benefit pension plan, which supplements benefits which the Brazilian government social security system provides to employees of the Company and its Brazilian subsidiaries. The Brahma Pension Fund was established solely for the benefit of employees of the Company and its assets are held independently of the Company. The Company nominates the three directors to the Brahma Pension Fund.

The Brahma Pension Fund is available to both active and retired members. Upon being employed by the Company, or six months thereafter for employees contracted after June 30, 1990, employees may opt to join the Brahma Pension Fund. Upon leaving the Company (unless upon retirement) members are required to leave the Brahma Pension Fund. Members who joined after June 30, 1990 and request to leave, receive the minimum benefit in a single installment based on past contributions.

F - 57 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(b) Brahma Welfare Foundation

The Brahma Welfare Foundation was formed in 1983 to provide medical, dental, educational, sporting and social assistance to sponsoring Company employees and their dependents (approximately 25,100 beneficiaries at December 31, 1998 and 1997). The Company, at its option, may contribute up to 10% of the Company's Brazilian Corporation Law consolidated net income to support the Brahma Welfare Foundation.

Based on the report of the Brahma Pension Fund's and the Brahma Welfare Foundation's independent actuary, the funded status and amounts recognized in the Company's balance sheet have been disclosed in accordance with SFAS No. 132, "Employer's Disclosures about Pensions and other Post-retirement Benefits", as follows:

F - 58 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

Brahma Pension Brahma Welfare Fund Foundation

1998 1997 1998 1997

Change in benefit obligation

Net benefit obligation at beginning of year 153,465 137,678 39,977 34,755 Service cost 8,198 7,092 Interest cost 11,727 8,079 3,031 2,027 Actuarial (loss)/gain (13,723) 12,632 4,003 5,345 Gross benefits paid (15,120) (12,016) (1,784) (2,150 Foreign currency adjustment (11,978) (3,115)

Net benefit obligation at end of year 132,569 153,465 42,112 39,977

Change in plan assets

Fair value of plan assets at beginning of year 173,137 149,889 Actual return on plan assets 41,048 26,986 Employer contributions 2,315 2,772 Plan participants contributions 4,866 5,506 Gross benefits paid (15,120) (12,016) Foreign currency adjustment (14,572)

Fair value of plan assets at end of year 191,674 173,137 0 0

Funded status at end of year 59,105 19,672 (42,112) (39,977 Unrecognized net actuarial (gain)/loss (51,647) (13,226) 18,652 16,618 Unrecognized net transition obligation 3,538 4,470 17,050 19,712

Prepaid (accrued) benefit cost 10,996 10,916 (6,410) (3,647

Included within the fair value of the Brahma Pension Fund's plan assets as of December 31, 1998 and 1997 are 1,919,034 Preferred shares and 17,732,970 Common shares of the Company with a total fair value of US$ 13,764 (1997 - US$ 13,764) at such date.

F - 59 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

Brahma Pension Brahma Welfare Fund Foundation

(1) (2) (1) (2 1998 1997 1998 1997

Weighted-average assumptions as of December 31 - % Discount rate 8.12% 6.00% 8.12% 6.00% Expected return on plan assets 8.12% 6.00% Rate of compensation increase 5.10% 4.00% Health care cost trend on covered charges 7.10% 5.00%

It has been assumed, for measurement purposes, that health care cost trends for 1999 not be different from 1998. As the Brazilian health care market is still developing and trend cost data continues to be accumulated, the Company's actuaries are unable to project the direction and pattern of change in the assumed trend rates, the ultimate trend rates, nor estimate when the rates are expected to be achieved.

(1) Expressed in real terms (% above consumer price index) (2) Expressed in nominal terms

Year ended December 31

Brahma Pension Fund Brahma Welfare Foundation

Components of net periodic 1998 1997 1996 1998 1997 1996 benefit cost

Service cost 8,198 7,092 6,158 Interest cost 11,727 8,079 7,778 3,031 2,027 1,480 Expected return on assets (13,581) (8,975) (7,210) Amortization of: Transition obligation/assets 614 639 639 1,199 1,248 1,248 Actuarial loss 503 725 477 Employee contribution (5,590) (5,010) (3,960)

Total net periodic benefit cost 1,368 1,825 3,908 4,955 3,752 2,728

F - 60 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The accounting for the Brahma Welfare Foundation anticipates future cost-sharing changes. Assumed health care cost trend rates have a significant effect on the amounts reported for the welfare plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (all assumptions have been held constant):

One-percentage One-percentage point increase point decrease

Total service and interest cost components 398 (330 Post-retirement benefit obligation 4,896 (4,067

Shares of the Company held by the Brahma Welfare Foundation at year-end and included in treasury shares are as follows:

1998 1997

Number of Number of shares Market value shares Market value

Preferred shares 30,699,304 13,408 20,003,149 13,436 Common shares 260,889,354 114,399 260,889,354 162,415

Total 127,807 175,851

Prepayment to Brahma Welfare Foundation movements are as follows:

1998 1997

At beginning of year 48,756 51,690 Income on investments 11,321 10,183 Benefits paid (15,684) (12,254 Purchase of treasury shares (3,380) (863

At end of year 41,013 48,756

F - 61 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

15 Commitments and Contingencies

(a) Tax and legal claims

The Company is contesting the payment of certain taxes and contributions and has made court escrow deposits (restricted deposits for legal proceedings) of equivalent or lesser amounts pending final legal decisions. Management believes that the Accrued liability for legal proceedings, including accrued interest, is sufficient to meet probable and reasonably estimable losses in the event of unfavorable rulings.

Probable losses, provided as liabilities of the Company based on the advice of outside legal counsel, are summarized below:

1998 1997

Income tax 48,867 127,776 Social contribution 6,804 29,240 Value-added sales taxes (ICMS) 81,379 51,181 Labor claims 35,917 77,940 Claims from distributors 19,338 17,716 Supplier and product claims 4,584 8,189 Others 11,144 20,853

Total accrued liabilities for legal proceedings 208,033 332,895

(i) Income taxes and social contribution

The Company reversed to "Other operating expense" certain amounts, provided in prior periods as probable loss contingencies, following legal or judicial ruling in the current and prior periods, as follows:

F - 62 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

. In September 1998, the Company reversed US$ 21,070 relating to income tax and social contribution payable, among other issues, which the tax authorities claimed should not have been offset by depreciation charges generated from supplemental indexation of property, plant and equipment accounts applied by a law enacted in 1991. Following a favorable administrative decision on January 7, 1998, published on June 12, 1998, which eliminates any right of appeal, management considered the possibility of loss no longer to be probable.

. In September 1998, a reversal of US$ 80,366 was made by the Company, relating to unasserted income tax and social contribution risks which are eliminated by the statutes of limitations, following the expiration of a five-year period without issue of notification by the tax authorities.

. In September 1997, the Company reversed US$ 114,507 relating to asserted and unasserted income tax and social contribution contingencies, among other issues, following expiration of prescriptive periods or favorable judicial rulings.

(ii) ICMS

The Company is the subject of administrative proceedings in connection with a tax assessment made by the Tax Authority of the State of São Paulo for the alleged non-payment of certain value-added taxes. The case, which was filed in 1995, is pending on an appeal filed a superior state administrative court in São Paulo. At December 31, 1998, there are three claims outstanding relating to this proceeding, totaling US$ 99,280.

The first claim relates to the Company's short-term financing of distributors in connection with credit sales to supermarkets and other major customers. According to the State Tax Authority, interest charged to distributors should be included in the price of products sold for the purpose of calculating ICMS. Based upon the advice of legal counsel, management of the Company believes that such interest, which accrued pursuant to loan agreements independent of the sales to the distributors, is not a component of the sales price for purposes of computing ICMS. On the basis of advice from its outside legal counsel, as of December 31, 1998, the Company has provided US$ 12,286 for probable losses on this claim. Possibility of loss from the remaining two claims is considered remote. In December 1998, the State Superior Administrative Court issued a favorable ruling to the Company in relation to these unprovided claims.

F - 63 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The Company is subject to an administrative proceeding in connection with a tax assessment made by the Tax Authorities of the State of São Paulo for the alleged non-payment of certain value added taxes at the Jacareí production facility. The case was filed against the Company on July 28, 1998 and is still pending ruling. As of December 31, 1998, the Company has provided US$ 14,738 for probable losses on this claim and an additional US$ 20,286 for unasserted claims of a similar nature.

Other actions or claims pending against the Company in relation to ICMS primarily involve the State Tax Authorities questioning the Company's basis for calculating ICMS. None of these individual claims for which the Company has provided for probable losses at December 31, 1998 are in excess of US$ 2,000, except for one claim approximating US$ 3,202.

(iii) Labor claims

During 1998, legal counsel reviewed and reassessed the existing provisions for labor contingencies. Based on new evidence and interpretations, certain amounts were reversed to Other operating income or complemented, leading to a net reduction in the provision of US$ 30,234.

The account balance primarily represents provisions for claims pending against the Company which were filed by former employees. Escrow deposits (Restricted deposits for legal proceedings) against probable losses, principally for labor claims totaled US$ 13,986 at December 31, 1998 (1997-US$ 13,011).

(iv) Claims from distributors

Primarily represent provisions for breach of contract cases brought by former distributors of the Company whose contracts were terminated due to low sales volumes, failure of distributors to meet Company guidelines and a general restructuring of the distribution network. No claims filed by distributors for which the Company has provided for probable losses based upon the advice of outside legal counsel are in excess of US$ 2,500 at December 31, 1998.

F - 64 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

(b) Postemployment benefits

The Company and certain subsidiaries maintain a pension plan and other postemployment benefits (Note 14) for their employees and make monthly contributions based on payroll expense to the government pension, social security and severance indemnity plans. Such payments are expensed as incurred.

In addition, certain payments are due on dismissal of employees, being principally one month's salary and a severance payment calculated at 40% of the accumulated contributions made to the government severance indemnity plan on behalf of the employee. Any such terminations occur in the ordinary course of business and are not material to the Company's operations or financial condition. Termination expenses were US$ 6,615, US$ 6,202 and US$ 9,582 in the years ended December 31, 1998, 1997 and 1996, respectively. The related obligation for postemployment benefits has not been accrued at December 31, 1998 and 1997 as the amount could not be reasonably estimated within the context of SFAS No. 112, "Employers' Accounting for Postemployment Benefits".

The Company completed the construction of a new facility located in the State of Sergipe late in 1997, and the plant became operational in the first quarter of 1998. Also during 1998, the Company completed the construction of the Águas Claras do Sul plant, in the State of Rio Grande do Sul.

(d) Environmental issues

The Company is subject to Federal, State and local laws and regulations relating to the environment. These laws generally provide for control of air and effluent emissions and require responsible parties to undertake remediation of hazardous waste disposal sites. Civil penalties may be imposed for noncompliance.

The Company provides for remediation costs and penalties when a loss is probable and the amount is reasonably determinable. It is not presently possible to estimate the amount of all remediation costs that might be incurred or penalties that may be imposed; however, management does not presently anticipate that such costs and penalties, to the extent not previously provided for, will have a material adverse effect on the consolidated financial position of the Company.

F - 65 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The Company has made substantial capital expenditures to bring existing facilities into compliance with various environmental laws. Recent expenditures are as follows:

Year ended Property, plant Waste December 31 and equipment treatment Total

1998 5,709 15,387 21,095 1997 16,148 7,829 23,977 1996 7,539 10,334 17,873

Budgeted expenditures for the five-year period ending December 31, 2003 total approximately US$ 40,000 (unaudited).

16 Business Segments

The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in 1998. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the company’s reportable segments. SFAS No. 131 also requires disclosure about products and services, geographical areas, and major customers.

The Company has two identifiable reportable segments, beer and soft drinks.

The accounting policies underlying the financial information provided for the segments are based on Brazilian accounting principles used for statutory purposes, except that certain operating units do not separate operational expenses. These amounts were allocated based on statutory gross sales. The Company evaluates segment performance information generated from the statutory accounting records.

F - 66 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

The local currency information related to the statement of operations data has been translated to U.S. dollars, for convenience purposes, at the average rate for each period presented. The information as at the balance sheet date has been translated to U.S. dollars at the respective year-end exchange rates.

The Company has prepared a reconciliation of segment information to its consolidated financial statements and restated prior period information as practicable.

1998 1997 1996

Beer 2,187,505 2,155,974 1,965,577 Soft Drinks 454,869 338,546 308,204 Others 76,863 83,818 91,001 U.S. GAAP adjustments (49,899) (134,235) (64,790

Net sales 2,669,338 2,444,103 2,299,992

Beer 410,216 541,834 485,463 Soft Drinks (33,878) (30,131) (30,667 Others 13,183 13,223 14,853 U.S. GAAP adjustments (78,696) (38,529) (51,136

Operating income before net financial expense 310,825 486,397 418,513

Less: Financial income (expense) 29,384 (5,327) (5,232 Other non-operating income (expense) (114,925) (48,285) (36,737 Income taxes (29,620) (49,776) (97,775 Minority interest participation 9,223 1,767 (6,659) U.S. GAAP adjustments 33,690 10,690 116,466

Net income 238,577 395,466 388,576

Revenues from no individual customer represented more than 10% of consolidated sales of the Company.

F - 67 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

1998 1997 1996

Beer 1,890,654 2,022,148 1,862,851 Soft Drinks 405,556 491,603 260,435 Others 225,548 118,099 135,241 U.S. GAAP adjustments (97,625) (103,412) (129,512

Total segments assets 2,424,133 2,528,438 2,129,015

General corporate 1,307,435 1,172,782 1,115,652

Total assets 3,731,568 3,701,220 3,244,667

Beer 228,356 218,888 159,692 Soft Drinks 51,020 28,392 19,139 Others 5,658 5,498 2,875 U.S. GAAP adjustments (21,680) (9,742) (13,090

Total depreciation and amortization 263,354 243,036 168,616

Information on the Company's geographic areas is as follows:

1998 1997 1996

Domestic 2,521,407 2,422,493 2,241,062 International 197,830 155,845 123,722 U.S. GAAP adjustments (49,899) (134,235) (64,792

Total net sales 2,669,338 2,444,103 2,299,992

Domestic 1,567,779 1,725,397 1,525,129 International 389,997 341,627 280,494 U.S. GAAP adjustments (86,214) (74,309) (125,128

Total long-lived assets 1,871,562 1,992,715 1,680,495

International sales and operations arise from the Company's subsidiaries in Argentina and Venezuela.

F - 68 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

17 Supplemental Cash Flow Information

As described in Note 11, pursuant to current legislation, the Company defers payment of certain sales taxes recorded as sales tax deferrals. Amounts deferred during 1998 approximated US$123,023. Non-cash transactions include the reversal of the contingency provisions detailed in Note 15.

18 Subsequent Events

In mid-January 1999, significant changes occurred in the Brazilian foreign exchange rate policy which resulted in the elimination of certain exchange controls, previously effected by means of a system of currency trading bands, following the Brazilian Central Bank's decision to withdraw its commitment to support the Brazilian real in the foreign exchange market. At February 12, 1999, the real was trading at approximately R$ 1.93 to US$ 1.00, representing an accumulated devaluation of approximately 38 % in relation to the exchange rate in effect at December 31, 1998.

* * *

F - 69 Companhia Cervejaria Brahma Notes to the Consolidated Financial Statements at December 31, 1998 and 1997 (Expressed in thousands of United States dollars, unless otherwise stated)

F - 1