Annual Report

1998

About BAESA

Buenos Aires Embotelladora S.A. is a franchised bottler of

PepsiCo soft drink products in Uruguay, parts of Argentina

and through a joint venture in Chile. The Company pro-

duces, sells and distributes other beverages carrying its

own proprietary trademarks and other trademarks not

owned by PepsiCo.

In addition to the Company's leading brands of Pepsi-Cola

and 7-Up, BAESA also sells Pepsi Light, Diet Pepsi, Pepsi

Max, Diet Seven-Up, Seven-Up Light, Mirinda, Teem, Paso

de los Toros and KasFruit Juices.

Contents

1Letter to Shareholders

3BAESA Post-Restructuring

4Market Profile

5Review of Operations

9Management’s Discussion

and Analysis

22Consolidated Financial Statements

41Officers and Directors

41Shareholder Information

Achieving a financial restructuring which blended the

needs of various parties with divergent interests required

compromise and patience. The Company has attempted to

balance the objectives of all those involved: allowing

BAESA to emerge with a solid capital structure well posi-

tioned to meet the challenges of an increasingly competi-

tive environment and freed from the burden of its prior

financial difficulties. The fairness of the restructuring

plan is clearly evidenced by the overwhelming approval

garnered from all those involved: 89% of all shareholders

and 99% of all creditors have voted to approve the plan.

The terms of the Restructuring Agreement specify that

BAESA's lenders will exchange their approximately $730

million of existing debt for a pro rata share of $113 million

in new debt of BAESA and the cash proceeds from a rights

offering, if any, plus any new shares that remain unsub-

scribed at the end of the rights offering. The ordinary

shares issued as a result of the $614 million rights offering

will represent 98% of BAESA's equity following the

restructuring.

Concurrent with working out our restructuring plan, we

were also faced with a challenging year on the operational

front. The year began with unseasonably cold and rainy

weather during the summer, which is typically the

Company's strongest selling season. Volumes declined in

comparison to previous years. BAESA was also faced with

a difficult pricing environment, compounded by the effects

of the introduction of lower priced B-brands in the market

place during the second half of 1997. In the face of such

challenges, BAESA has continued to reduce costs and

reposition its brands to counter the new brands.

The measures the Company implemented to counter the

effects of the competing brands included revising the

Company's pricing structure, re-designing its distribution

and merchandising process to reduce costs, reducing

manufacturing personnel and eliminating management

layers. All of these actions allowed the Company to main-

tain high levels of customer service while remaining com-

petitive.

1

To our Shareholders:

After a long and difficult period, BAESA's financial restructuring process has

entered its final stage. We hope that BAESA's recapitalization will be

finalized in early 1999. This will mark the closing of a difficult period in

BAESA's history and at the same time will give BAESA the opportunity to reestablish itself as a

viable business enterprise.

LetterTO SHAREHOLDERS

Volumes began to improve in the latter part of the year, and pricing started to show some signs of stabilizing. These

measures served to lower variable selling and distribution costs, fixed salaries and marketing spending significantly in

1998 and should translate into even greater savings in 1999.

Looking towards the new year, we expect that our significant restructuring efforts during 1998 will position the

Company for improved volume performance and diminished costs in 1999. We are also planning new marketing strate-

gies which include bolstering our leading brands, Pepsi-Cola and Seven-Up, and positioning the Mirinda brand to com-

pete directly in the price range of the new brands. This should position BAESA well to recover market share that was

lost during the disruption caused by the restructuring.

We also are extremely pleased by the prospects of operating the Company with a solid capital structure and a lower debt

burden. The finalization and acceptance of the restructuring by all those involved is a positive indication of their belief

in the strengths and growth potential of the Company.

In closing, I would like to extend my thank you to all those who continue to support BAESA as we turn the Company

around. We appreciate the relentless support and patience of our shareholders, lenders, employees, vendors and cus-

tomers.

Sincerely,

Osvaldo Baños

President and Chief Executive Officer

2

Letter TO SHAREHOLDERS

3

BAESAPOST-RESTRUCTURING

Pro Forma Financial Highlights(1)

(In Millions)

Pro Forma Income Statement(2) 1997 1998 Volume (8 oz. cases) 103.6 101.8Net sales $ 368.6 $ 299.9Operating loss (5.8) (31.7)Adjusted EBITDA, excluding charges and write-offs 37.7 13.8

Balance Sheet(3) 1998 Current assets $ 63.4Total assets 407.9Total principal of outstanding indebtedness(4) 162.6Shareholders’ equity 63.2

(1) The unaudited pro forma consolidated balance sheet data at September 30, 1998 and the pro forma consolidated statement of operations data for the years endedSeptember 30, 1998 and 1997 illustrate the effect on our financial statements of the recapitalization and the settlement of certain class action litigation against BAESA.The pro forma results for 1997 are further adjusted to reflect the sale of the Brazil and Costa Rica operations. The pro forma financial data set forth above also reflectthe payment of $9.5 million of success fees to our advisers in connection with the recapitalization and our borrowing of $20 million under a new short-term creditfacility.

(2) The pro forma results of operations include charges and write-offs of $13.8 million and $15.0 million in fiscal years 1997 and 1998, respectively.

(3) Pro forma balance sheet amounts assume that the recapitalization occurred as of the end of the fiscal year presented.

(4) Total Principal of Outstanding Indebtedness is expected to be comprised of a new $20 million short-term credit facility, $113 million in new negotiable obligationsand $30 million in debt related to past acquisitions. In accordance with FAS 15 “Accounting for Troubled Debt Restructuring,” the debt to be issued under the recapi-talization must be recorded at the total future cash payments of $211 million ($113 million for principal and $98 million for future interest payments over the term ofthe notes).

Principal of Outstanding Indebtedness Shareholders’ Equity (Deficit)

4

MarketPROFILE

BAESA’s Franchise TerritoriesArgentina(1) Uruguay Chile(2)

Population (millions) 24.1 3.3 15.1Soft Drink Industry (millions of 8 oz. cases) 306.0 24.0 239.0Net Sales ($ millions) 271.7 28.2 180.1Volume (millions of 8 oz. cases) 90.8 11.0 67.7Market Share (soft drinks) 28% 20% 29%Plants 4 1 4Points of Sale (thousands) 181 35 93

(1) Argentina - BAESA’s territories only(2) Chile - BAESA holds a 45% equity interest through the ECUSA joint venture

Córdoba

Chile

Uruguay

Buenos Aires

Mar del Plata

General Trade - 32%

Supermarkets - 29%

Concessionaires - 21%

Wholesalers - 11%

On Premise - 7%

General Trade - 34%

Supermarkets - 19%

Concessionaires - 26%

Wholesalers - 15%

On Premise - 6%

General Trade - 53%

Supermarkets - 9%

Concessionaires - 38%

Argentina

Uruguay

Chile

5

ReviewOF OPERATIONS

BAESA's operations faced a very difficult year in 1998. The

operations encountered poor volume performance through

the peak summer season due to the poor weather and the

introduction of many new low priced brands into the market place.

The key drivers of the Company's $32 million operating loss were $63

million in lost revenues due to the difficult pricing environment and

$15 million in charges for the rationalization of the manufacturing

and distribution infrastructure and the reduction of the work force.

The charges recorded during 1998 were part of the comprehensive

operational restructuring effort that reduced the Company's selling,

manufacturing and distribution costs. The Company reduced its

sales force infrastructure and implemented, in certain territories,

direct distribution and variable frequency for its customer visits.

The Company significantly streamlined its distribution infrastruc-

ture as it reduced the number of workers per truck by leveraging

the infrastructure of its customers and focusing on the non-return-

able packages that became the mainstay in the industry.

Further cost-cutting measures took place in manufacturing where

one facility was permanently shut down, while we adapted the

production capacity to handle the increase in the non-returnable

sales mix. This should leverage the manufacturing infrastructure

to increase the production capacity and lower unit production

costs. These initiatives were part of the implementation of the

four by four production schedule that has allowed

longer production runs.

The Company continues to integrate its

suppliers into the manufacturing

process and outsource non-core

activities in order to focus on its

beverage manufacturing efforts.

This has yielded significant savings

in raw materials costs and allowed

us to focus on improving efficien-

cies. Additionally, the Company is

reviewing all of its non-information

technology equipment in order to

correct any Year 2000 issues that

could arise.

6

Review of Operations

Cola - 57%

Cola - 38%

Flavor - 43%

Flavor - 62%

Non-returnable - 69%

Returnable - 31%

1998

1998

1997

1997

BAESA Packaging Mix

BAESA Cola/Flavor Mix

Non-returnable - 76%

Returnable - 24%

7

On the administrative front, the Company is implement-

ing an upgrade of its general ledger, payroll, and sales

and distribution systems in order to further centralize

certain activities, while making them Year 2000 compli-

ant. Additionally, the new sales and distribution system

will enhance our ability to monitor our clients and their

needs and the pricing of our products, as well as improve

the information and feedback to our sales force.

To fight the onslaught of B-brands into the market, we

took the following significant actions:

- first, we reduced costs to offer a lower-priced

product;

- second, we implemented a pricing architecture to

limit the price gap between the B-brands and our

premium products; and

- third, we launched Mirinda as a price fighter at a

price similar to the new B-brands.

All of these actions have better positioned the operations

to compete in the marketplace as well as to allow the

operations to leverage their lower cost infrastruc-

ture to improve operating results.

Review OF OPERATIONS

Management’s Discussionand Analysis and FinancialStatements

Contents

9Management’s Discussion and Analysis of Financial Condition and Results of Operations

22Independent Auditor’s Report

23Consolidated Balance Sheets

24Consolidated Statements of Operations

25Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss

26Consolidated Statements of Cash Flows

27Notes to Consolidated Financial Statements

8

OverviewBAESA is a franchised bottler of soft drink products of PepsiCo

in parts of Argentina and Uruguay. The Company also sells bev-

erage products through its ECUSA joint venture in Chile, and it

produces, sells and distributes other beverages carrying its own

proprietary trademarks and other trademarks not owned by

PepsiCo. The Company has experienced serious financial diffi-

culties since fiscal year 1996, including defaults under the

Company's primary debt instruments. In response to such diffi-

culties, the Company has pursued a number of initiatives, includ-

ing an operational restructuring, sales of certain subsidiaries and

a debt recapitalization plan to refinance substantially all of the

Company's debt obligations. On December 4, 1997, the Company

signed the restructuring agreement (Restructuring Agreement)

with its primary financial creditors (Financial Creditors) and

PepsiCo, which was amended and restated on April 6, 1998 and

on November 30, 1998.

Except as noted, the following discussion and analysis

relates to the Company's historical financial results of operations

and financial condition, without giving effect to the sale of the

Company's operations in Brazil and Costa Rica or to the recapi-

talization (Recapitalization) which is being contemplated by the

Company. As a result, management of the Company does not

believe that results of operations in future periods will be compa-

rable to prior periods. The Company has also prepared unaudit-

ed pro forma consolidated financial data as of and for the fiscal

year ended September 30, 1997, which give effect to the sale of

the Company's operations in Brazil and Costa Rica. Such unau-

dited pro forma consolidated financial data should be considered

in conjunction with this discussion and analysis.

This Management's Discussion and Analysis of

Financial Condition and Results of Operations contains certain

forward-looking statements, particularly with regard to expected

sales in future periods, reductions in fixed and variable costs and

the ability of BAESA to implement the Restructuring Agreement.

These statements are good faith estimates of BAESA's expected

results and reflect management's expectations based upon cur-

rently available data. BAESA wishes to ensure that such state-

ments are accompanied by meaningful cautionary statements

pursuant to the safe harbor established in the Private Securities

Litigation Reform Act of 1995. Actual results are subject to future

events and uncertainties which could materially affect actual per-

formance. The Company's future performance involves a num-

ber of risks and uncertainties. The following includes some fac-

tors that could cause actual performance to differ materially:

economic and political conditions in the countries where BAESA

operates; the impact of such conditions on consumer spending;

pricing pressures resulting from competitive discounting by

other bottlers; climatic conditions in the Southern Cone; future

action by BAESA's creditors; the ability of BAESA and its credi-

tors to consummate the Restructuring Agreement; if the

Restructuring Agreement is consummated, the inability of the

Company to get relisted on a stock exchange; and the inability of

the Company to ensure that the consolidation of certain operat-

ing subsidiaries and the reduction of the workforce will reduce

fixed and variable costs and that these measures will not have

adverse consequences for the Company, including the possibility

of employee lawsuits and prolonged work stoppages; and the

risk factors listed from time to time in BAESA's periodic reports

filed with the Securities and Exchange Commission.

The Company cautions that the above list of factors may

not be exhaustive. The Company operates in the highly competi-

tive soft drink market in countries where the economies have

been subject to past political and economic instability and some

of which are currently having economic difficulties. New risk

factors emerge from time to time, and management cannot pre-

dict such risk factors, nor can it assess the impact, if any, of such

factors on the Company's business or the extent to which any fac-

tor, or combination of factors, may cause actual results to differ

materially from those projected in any forward-looking state-

ments. Accordingly, forward-looking statements cannot be relied

upon as a prediction of actual results.

Recent DevelopmentsOn December 4, 1997, the Company signed the Restructuring

Agreement with the Financial Creditors and PepsiCo. The

Restructuring Agreement was amended and restated on April 6,

1998 and on November 30, 1998. Pursuant to the amended

Restructuring Agreement, the Financial Creditors and PepsiCo

have agreed to exchange their existing debt (Existing Debt) for (i)

new debt of BAESA (New Debt) (exclusive of the Series A

Negotiable Obligations to be issued by the Company) and (ii) the

rights offering proceeds, if any, (Rights Offering Proceeds). The

rights offering will represent 98% of the equity of the Company.

The initial aggregate principal amount of the New Debt, includ-

ing the Series A Negotiable Obligations, was reduced to approxi-

mately $113 million. This debt level is lower than that originally

9

Management's Discussion and Analysis of Financial Condition andResults of Operations

agreed to between the Company and such other parties and

reflects their mutual view that the Company's current sales and

cash flows, and the sales and cash flows expected to be realized

by the Company in future periods, could not support a signifi-

cantly greater debt level.

If (i) not all the new shares (New Shares) are subscribed

by existing shareholders in the Rights Offering and (ii) the Rights

Offering Proceeds are insufficient to repay the balance of the out-

standing Existing Debt held by the Financial Creditors, PepsiCo

and holders of existing negotiable obligations (Existing

Negotiable Obligations) evidenced by Class B exchange receipts

(Exchange Receipts) less the aggregate principal amount of the

New Debt received by them, then the holders of such Existing

Debt will receive, in addition to any Rights Offering Proceeds,

their pro rata share of any unsubscribed shares (Unsubscribed

Shares). The Company completed an exchange offer (Exchange

Offer) to the holders of Existing Negotiable Obligations on May

20, 1998, pursuant to which each Noteholder was offered the

right to exchange its Existing Negotiable Obligations for

Exchange Receipts that are redeemable for the New Debt and/or

the Rights Offering Proceeds, as applicable. Holders of 94.6% of

the Existing Negotiable Obligations tendered their securities in

favor of the Exchange Offer. The Company subsequently entered

into private exchange transactions on the same terms as outlined

in the Exchange Offer with the holders of 0.75% of the aggregate

principal amount of the Existing Negotiable Obligations.

The Company expects that the remaining carrying

amount of the Existing Debt, after reducing such amount by the

fair value of the Unsubscribed Shares granted to the Company's

creditors, will exceed the total future cash payments specified by

the terms of the New Debt, and, in accordance with Statement of

Financial Accounting Standards No. 15, "Accounting by Debtors

and Creditors for Troubled Debt Restructuring," the Company

will recognize an extraordinary gain on restructuring of debt and

will not record interest expense related to the New Debt follow-

ing the Recapitalization.

Since the principal conditions precedent to consumma-

tion of the Restructuring Agreement were determined to have

been met in the third quarter of fiscal year 1998, direct costs relat-

ing to the Recapitalization have been deferred as of that date and

will be recorded in the period during which the Recapitalization

occurs. Legal fees and other direct costs that the Company

incurs in granting the Unsubscribed Shares to its creditors will

reduce the amount otherwise recorded for such equity interest.

All other direct costs that the Company incurs will be deducted

in measuring the gain on restructuring of the debt subject to

restructure or will be included in expense for the period if no

gain on restructuring is recognized. The Company has recog-

nized $3.0 million in prepaid expenses and other current assets as

of September 30, 1998.

The Company expects that net sales in the fiscal year

ending September 30, 1999 could be negatively affected by a gen-

eral decline in economic activity in the Company's franchise terri-

tories as a result of adverse economic developments affecting cer-

tain developing economies. The extent of such decline, if any,

cannot be predicted at this time.

BAESA was a defendant in two securities fraud lawsuits

brought as a class action by certain purchasers of the Company's

ADSs and Existing Negotiable Obligations. In July 1998, the

Company reached an agreement to settle the lawsuit, which had

been consolidated into a single proceeding, with the plaintiffs.

As part of such settlement, BAESA will contribute, or cause to be

contributed, a combination of shares and cash to the plaintiffs,

which will include common shares constituting 2% of the equity

of the Company following the Recapitalization. The settlement is

contingent upon a number of factors, including, but not limited

to, successful consummation of the Recapitalization and either

registration of such shares or certification by BAESA's counsel

that the shares are exempt from registration and tradeable with-

out restriction in the United States. The Court approved the

terms of the settlement agreement on October 7, 1998 and dis-

missed the action with prejudice.

On December 31, 1998 a tax reform bill was enacted into

law that requires Argentine companies to pay a 1% tax on quali-

fying assets. This will result in an estimated tax charge of $4.0

million to be recorded during fiscal year 1999.

Unusual Impairment and Disposal ChargesIn fiscal year 1998, as a result of the continued shift in multiserve

packages from returnable to nonreturnable packages, the

Company accelerated the depreciation of the assets used in the

manufacturing and distribution process by reducing their esti-

mated useful lives. Such change will result in additional depreci-

ation being charged to operating results of approximately $4.1

million per year (approximately $0.06 per share).

In the third quarter of fiscal year 1998, the Company

recorded a $10.5 million charge in unusual impairment and dis-

posals to write down the value of certain equipment and return-

able plastic containers as a result of the rationalization of its

10

Management's Discussion and Analysis of Financial Condition and Results of Operations

infrastructure in light of the market's continued shift to nonre-

turnable packaging.

BAESA's results of operations for fiscal year 1997

included $198.8 million of unusual impairment and disposal

charges. Such charges included $184.7 million to reduce the car-

rying value of long-lived assets (mainly property, plant and

equipment and identifiable intangible assets) in its Brazilian

operations to their expected fair market value, less cost to sell. In

1997, BAESA sold its Brazilian operations to Brahma. The princi-

pal terms of the sale were approved by BAESA's shareholders on

September 30, 1997 and included: the acquisition of the shares of

BAESA's Brazilian subsidiaries; the release of certain guarantees

by certain Brazilian creditors of the Company; and the assump-

tion of all liabilities of the Brazil operations, except for $25 mil-

lion of bank debt that was assumed by BAESA and is subject to

the Restructuring Agreement. See Note 13 to the Consolidated

Financial Statements.

The fiscal year 1997 results also included $7.5 million of

impairment losses to write down the carrying value of long-lived

assets in the Company's plastic operations in Colonia, Uruguay,

to their estimated fair value less costs to sell and $6.6 million to

record an additional impairment to the carrying value of proper-

ty, plant and equipment based on the final offer related to the

sale of the Company's operations in Costa Rica.

In Argentina, BAESA temporarily closes a manufactur-

ing facility on a seasonal basis, which the Company expects to

permanently close, to reduce excess production capacity and

fixed costs. The investment required for the permanent shut-

down was originally planned for fiscal year 1997, but, due to the

current economic constraints under which the Company is oper-

ating, it has been deferred until the Company has cash available

to pay associated shutdown costs. In May 1998, the Company

also halted production activities at its Mar del Plata plant,

although the facility will continue to be used for storage and dis-

tribution.

The fiscal year 1996 results included $21.5 million of

unusual impairment and disposal charges. The charges reflected

the reduction of the carrying value of long-lived assets to their

expected fair market value, less cost to sell, as follows: the Costa

Rica operations, $11.6 million; two bottling lines held in storage

in Brazil, $7.1 million; and a bottling plant in Argentina, $2.8 mil-

lion.

Restructuring ChargesAs a result of cost containment and efficiency improvement pro-

grams, the Company reduced its workforce by 510 employees in

Argentina and Uruguay between September 30, 1997 and

September 30, 1998. In July 1998, the Company experienced

picketing at its Buenos Aires plant by members of a truckers'

union demanding the affiliation of the BAESA distribution work

force with their union. The Buenos Aires Labor Department

commenced hearings to resolve the dispute, and BAESA has

moved to have its existing distribution workers' union joined in

the action. Such hearings are continuing, and the truckers' union

has ceased its picketing of the Company. As of the date hereof,

the union's action has disrupted the distribution of the

Company's products on one business day.

In June 1998, as required by Uruguayan law, BAESA

gave a 45-day notice of termination of 46 employees to the

employees' union at its Uruguayan operations. The employees'

union commenced negotiations with the Company with respect

to the terminations but, after the expiration of the 45-day period

and an additional 10-day waiting period, the union and the

Company did not reach an agreement. Accordingly, the 46

employees were terminated on August 11, 1998, and the employ-

ees' union went on strike and shut down the operations in

Uruguay for 14 days. The Company has reached an agreement

with the union by which four of the 46 terminated employees

were reinstated.

During fiscal years 1997 and 1996, BAESA undertook

operational restructuring measures (Operational Restructuring)

in an effort to lower its costs, including the consolidation of cer-

tain manufacturing and distribution facilities primarily in Brazil

and the consolidation of corporate and divisional administrative

functions, culminating in personnel reductions of approximately

2,023 employees, or 28.2% of the Company's workforce. The

costs associated with these restructuring measures included sev-

erance costs, relocation expenses and costs related to the consoli-

dation of certain operating subsidiaries. See Note 15 to the

Consolidated Financial Statements.

In Argentina during fiscal years 1997 and 1996, the

Company eliminated 678 positions, representing a 26.0% reduc-

tion of its Argentine workforce, including manufacturing opera-

tors, distribution employees and certain middle level manage-

ment positions. Additionally, in late November 1997 the

Company began a new work shift schedule for manufacturing

employees in its Buenos Aires operation to improve operating

efficiencies and to reduce overtime hours and weekend pay.

11

Management's Discussion and Analysis of Financial Condition and Results of Operations

Pursuant to an option provided by Argentine law, certain

employees declined the new work schedule and instead chose to

be dismissed and receive severance payments, which the

Company was legally obligated to make.

In Uruguay during fiscal years 1997 and 1996, the

Company eliminated 85 positions, representing a 28.0% reduction

of its Uruguayan work force. In connection therewith, the

Company streamlined its sales and distribution structure, allow-

ing it to more efficiently reach its customer base, and eliminated

certain middle level management positions.

BAESA believes that these restructuring measures have

not affected its ability to manufacture, sell and distribute its

products, nor are they expected to affect BAESA's ability to meet

sales needs if demand were to increase.

Relationship with PepsiCoThe franchise arrangements require BAESA to purchase its entire

requirement of concentrate and syrups for all of the PepsiCo soft

drink and fruit juice products sold by BAESA from certain affili-

ates of PepsiCo at a unit price which is based on a formula based

on a percentage of the wholesale price (net of taxes and credit for

nonreturnable bottles) of each case of the respective brand sold to

retailers within its territory.

The relationship between the Company and PepsiCo is

governed by several agreements. These agreements define the

calculation of the concentrate price and the amount to be expend-

ed for marketing activities (usually as a percentage of total con-

centrate purchases) and set forth a framework for funding mar-

keting expenditures for each of the franchise territories. Under

the terms of these agreements, each franchise territory, in cooper-

ation with PepsiCo, develops an annual marketing plan (AMP) to

promote PepsiCo beverage products in such territory. The AMP

defines the types and amounts of advertising and promotional

expenses and investments in marketing related assets to be

incurred by the Company in each of these franchises. Upon each

purchase of concentrate, the Company expenses 100% of the

amounts agreed to be expended under the AMP. As defined by

these agreements, in certain franchise territories, an agreed upon

portion of the payments for concentrate purchases is set aside by

PepsiCo to support the marketing activities defined under the

AMP. PepsiCo disburses these amounts to the Company or

makes direct disbursements to third parties for such marketing

activities. In other franchise territories, PepsiCo does not receive

such funds, and the Company disburses all marketing expendi-

tures directly

The Company may also receive additional marketing

support from PepsiCo (in excess of the amounts agreed to under

the terms of the AMP) for new market launches, new package or

product introductions, etc. Such additional support may be pro-

vided in the form of reduced cost of concentrate, expenditures on

behalf of the Company and reimbursement for marketing related

assets or expenses incurred by the Company. The Company

received additional marketing support of $8.1 million, $30.6 mil-

lion and $0.0 million in fiscal years 1998, 1997 and 1996, respec-

tively, in the form of direct cash contributions which were record-

ed as reductions to marketing expense. See Note 2.12 to the

Consolidated Financial Statements. Subsequent to September 30,

1996, PepsiCo advanced $25.0 million to BAESA in the form of a

loan pursuant to the Standstill Agreement.

Currency FluctuationsHistorically, a significant portion of costs of sales and expenses

were incurred in the currencies of the countries where the

Company operates. In the future, the Company's consolidated

cash flows from operations will be generated primarily in

Argentina, and, therefore, the Company will be increasingly sub-

ject to the effects of fluctuations in the value of the Argentine

Peso. Prior to 1991, the Argentine currency faced significant

devaluation accompanied by high inflation and declining pur-

chasing power, which adversely affected sales and profitability of

the Company's subsidiaries. Argentina's historically high infla-

tion rates resulted mainly from the inability of the Argentine

Government to control fiscal policy and the money supply. To

reduce inflationary pressures, the Argentine Government intro-

duced a tax reform and public expenditure reduction program

aimed at reducing inflation and restructuring the economy. In

1991, a new economic reform plan known as the Convertibility

Plan was announced, which fixed the Argentine Peso at parity

with the U.S. dollar. Consumer demand in Argentina has shifted

the Company's sales mix towards nonreturnable packages, whose

packaging materials (i.e., resin and aluminum) are commodities

subject to international pricing. Packaging cost represents

approximately 27% of a nonreturnable package's total cost. If the

Argentine Peso were to devalue, such costs would increase in

local currency terms.

The Company has an investment in Chile in ECUSA, a

joint venture with CCU. ECUSA is a stand-alone enterprise.

Additionally, BAESA's obligation to repay interest and principal

for the next two years on its outstanding debt obligation with

CCU is dependent on ECUSA's ability to generate dividends.

12

Management's Discussion and Analysis of Financial Condition and Results of Operations

Therefore, in the short term, an adverse change in the Chilean

peso would not have a direct cash flow effect on the Company.

See Note 11 to the Consolidated Financial Statements. Since the

Company's financial statements are prepared in U.S. Dollars, and

sales prices tend to increase with inflation rates, net sales and

other financial statement accounts, including net loss/income,

tend to increase when the rate of inflation in any country where

the Company sells its products exceeds the rate of devaluation

against the U.S. Dollar in such country.

In periods of high inflation and interest rates, borrow-

ings denominated in local currency carry higher interest charges

than borrowings indexed to the U.S. Dollar or other foreign cur-

rencies. However, such U.S. Dollar or other foreign currency-

denominated borrowings can generate net losses or charges

against shareholders' equity in periods of devaluation. BAESA

records a foreign exchange gain or loss if the exchange rate of the

functional currency to the other currency in which the monetary

assets or liabilities are denominated fluctuates. The Company

could be further adversely affected if it becomes necessary to

increase indebtedness in order to finance capital expenditures or

for other purposes. See Note 2.3 to the Consolidated Financial

Statements.

For the 1998, 1997, and 1996 fiscal years, the rate of

inflation in Argentina, as measured by the Wholesale Price Index

(WPI), was (4.1%), (0.5%) and 2.8%, respectively, and the rate of

the currency devaluation for the Peso relative to the U.S. Dollar

was 0.0%. Inflation in Brazil was approximately 5.5% in 1997

and 13.7% in 1996 as measured by the General Index of Market

Prices.

BAESA does not anticipate any significant devaluation

or revaluation of the currencies of the countries in which it oper-

ates relative to the U.S. Dollar in the short term. BAESA does not

presently engage in any hedging or other transactions intended

to offset the effects of fluctuations in currency exchange rates,

although it may do so in the future.

Changes in Accounting Presentation andRestatement of Prior PeriodsFinancial information presented herein through fiscal year 1996

has been restated from that reported previously by the Company

to reflect the subsequent reclassification of certain costs and

expenses.

The consolidated statements of operations, shareholders'

equity (deficit) and comprehensive loss and cash flows for the

year ended September 30, 1996 has been restated as discussed in

Note 14.1 to the Consolidated Financial Statements.

ComparabilityThe results of operations of the Chilean joint venture, are reflect-

ed as equity in net earnings of affiliated company. As a result of

the Company's disposal of its Costa Rica operations in July 1997,

the results for the (i) 10 months of operations are included in the

fiscal year 1997 financial statements and (ii) 12 months of opera-

tions are included in the fiscal year 1996 financial statements.

Additionally, the Company disposed of its Brazil opera-

tions in October 1997. The results of the Brazil operations are

therefore included for all of fiscal years 1997 and 1996. The

results of operations of the Brazilian business subsequent to

September 30, 1997 were assumed by Brahma at closing and thus

no results of operations are included in fiscal year 1998.

SeasonalityBAESA's results of operations are seasonal. A larger percentage

of BAESA's net sales are earned in the months of December

through February, which correspond to the summer and the holi-

day season in the countries where BAESA operates.

Year 2000 IssueThe Company has evaluated the potential impact of the comput-

er systems and software products situation commonly referred to

as the "Year 2000 Issue". The Year 2000 Issue, which affects most

corporations, concerns the inability of information systems, pri-

marily computer software programs, to properly recognize and

process date sensitive information relating to the year 2000 and

beyond. The Company utilizes computer software programs in

its internal record-keeping and payroll operations, manufactur-

ing and in its sales and distribution systems.

13

Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company has developed a remediation plan for its

year 2000 issue that involves three overlapping phases:

1) Inventory. This phase includes the creation of an inventory

of three functional areas:

a) Applications and information technology (IT) equip-

ment - These include all mid-range, network and desk-

top hardware and software, including custom and pack-

aged applications, and IT embedded systems.

b) Non-information technology (non-IT) embedded sys-

tems - These include non-IT equipment and machinery.

Non-IT embedded systems, such as palletizers, convey-

ors, filling equipment, bottle blowing machinery, etc.,

typically include embedded technology, such as micro-

controllers.

c) Vendor relationships - These include significant third

party vendors and suppliers of goods and services, as

well as customer supplier interfaces.

The Company completed the inventory phase as of December

1998.

2) Analysis. This phase includes the evaluation of the invento-

ried items for year 2000 compliance, determination of the

remediation method and resources required and the devel-

opment of an implementation plan. In conjunction with

PepsiCo, the Company has completed a significant portion

of the analysis phase. It expects to complete the analysis

phase for non-IT embedded systems by February 1999 and

all other components of the analysis phase are expected to

be completed by March 1999.

3) Implementation. This phase includes executing the imple-

mentation plan for all applicable hardware and software,

interfaces and systems. This involves testing the changes,

beginning to utilize the changed procedures in actual opera-

tions, testing in a year 2000-simulated environment and

vendor interface testing. Subsequent to implementation,

the Company will conduct live testing in August 1999. The

Company has commenced the implementation phase and it

is expected to be completed by June 1999 for applications

and IT equipment and by August 1999 for non-IT embed-

ded systems.

The Company's remediation plan for its year 2000 issue is an

ongoing process and the estimated completion dates above are

subject to change.

Overall, at this time the Company believes that its sys-

tems will be year 2000 compliant in a timely manner for several

reasons. Several significant sales and distribution and general

ledger systems are already compliant. In addition, the Company

extensively utilizes certain third-party applications that should

be remediated and then deployed to all appropriate markets.

Also, comprehensive testing of all critical systems is planned to

be conducted in a simulated year 2000 environment.

The Company believes that one area of risk to the

Company surrounding the year 2000 issue relates to significant

suppliers' failing to remediate their year 2000 issues in a timely

manner. The Company has relationships with certain significant

suppliers in most of the locations in which it operates. These

relationships may be material to some local operations and, in

the aggregate, may be material to the Company. The Company is

conducting formal communications with its significant suppliers

in all locations to determine the extent to which it may be affect-

ed by those third parties' plans to remediate their own year 2000

issue in a timely manner. If a number of significant suppliers are

not year 2000 compliant, this could have a material adverse effect

on the Company's results of operations, financial position or cash

flow.

BAESA estimates that a total of $3.5 million will have

been spent by the middle of 1999 to resolve its Year 2000 issues

and to modify and upgrade its systems. Although there can be

no assurance in this regard, BAESA believes that such expenses

will not have a material impact on the Company's financial con-

dition or results of operations.

Results of Operations

Fiscal Year 1998 Compared to Fiscal Year 1997. The Company's

Brazil and Costa Rica operations represented approximately

44.4% of net sales during fiscal year 1997.

As a result of the disposal of the Brazil and Costa Rica

operations, the Company's results for fiscal year 1998 are not

comparable to those for fiscal year 1997. Therefore, this discus-

sion and analysis compares the Company's results for fiscal year

1998 with the pro forma results for fiscal year 1997 adjusted to

reflect the disposition of the Brazil and Costa Rica operations as

if such dispositions had occurred on October 1, 1996.

14

Management's Discussion and Analysis of Financial Condition and Results of Operations

The adjusted fiscal year 1997 results excluding the Brazil

and Costa Rica operations are as follows:

Pro FormaActual excluding

September 30, Brazil and (In millions) 1997 Adjustments Costa Rica

Volume (8 oz. cases) 215.3 (111.7) 103.6

Net sales $ 655.0 $ (286.4) $ 368.6

Cost of sales (350.1) 161.1 (189.0)

Other operating expenses (544.6) 359.2 (185.4)

Operating loss (239.7) 233.9 (5.8)

Net financing and

other expenses (112.1) 33.3 (78.8)

Income tax expense (0.2) 0.1 (0.1)

Net loss before equity

in net earnings of

affiliated company (352.0) 267.3 (84.7)

Equity in net earnings

of affiliated company 9.4 - 9.4

Net loss $ (342.6) $ 267.3 $ (75.3)

Argentina. During fiscal year 1998, Argentina's case sales volume

declined by 0.5% to 90.8 million cases from 91.3 million cases

sold during fiscal year 1997. Argentina's net sales decreased by

17.9% to $271.7 million as compared to $330.8 million in fiscal

year 1997. Net sales per case declined despite an increase in the

percentage of nonreturnable packages in the sales mix, which

generally have higher prices. The decline in net sales prices was

primarily driven by a decline in per unit case sales price of 17.4%

in the Company's franchise territories, as the Company decreased

its prices in order to narrow the price gap between its products

and certain new brands (New Brands) introduced, primarily in

the Buenos Aires franchise territory, in the first half of calendar

year 1997. The introduction of such competing brands caused

the Company's market share in Buenos Aires to erode. Lower

pricing in the Buenos Aires market affected BAESA's other fran-

chise territories due to their proximity and ease of access. The

New Brands reversed the higher pricing that the Company expe-

rienced throughout much of the first six months of fiscal year

1997. Additionally, a regional soft drink manufacturer of low-

priced brands, located in the province of Córdoba, emerged from

a financial reorganization and regained market share and volume

by repositioning its brands and expanding its distribution cover-

age. In the Córdoba franchise territory, the Company experi-

enced a decline in net sales price per case of 17.7% during the

third quarter of fiscal year 1998 as compared to the prior year

period, whereas during the second quarter of fiscal year 1998 it

had experienced a 10.9% decline as compared to the prior year

period. The decline during the first seven months of fiscal year

1997 was partially offset by market share gains and strong indus-

try growth in the Córdoba franchise territory prior to the third

quarter as compared to the prior year period.

During fiscal year 1998, income from operations, exclud-

ing impairment and restructuring charges, declined by $21.8 mil-

lion to a loss of $15.1 million. The lower volume for the period

negatively affected operating results by $0.6 million, and the

lower pricing per case negatively affected net sales by $57.4 mil-

lion. The Company's operational restructuring and cost reduc-

tions, as well as lower costs negotiated with suppliers, resulted

in: lower variable manufacturing, selling and distribution costs

of sales per case, which benefitted results by $14.5 million; lower

spending on consumer and other promotions and marketing

expenses of $7.7 million; and lower fixed manufacturing, selling,

and administration costs of $16.0 million. Administrative

expenses were negatively affected by a $2.0 million charge to

reserve past due accounts receivables from distributors.

Uruguay. During fiscal year 1998, Uruguay's case sales volume

declined by 10.7%, to 11.0 million cases from 12.3 million cases

sold during fiscal year 1997. Uruguay's net sales decreased by

25.3% to $28.2 million as compared to $37.8 million in fiscal year

1997. The Company decreased its average net sales price per

case by 16.4% in order to narrow the gap with the illegally

imported soft drink products from bordering countries, which

significantly impacted the Uruguay operation over the last 18

months. The illegal importation of soft drink products is a result

of the high tax rates charged on soft drinks produced in Uruguay

(such taxes represented approximately 65% of the cost of the

product to the consumer).

During fiscal year 1998, loss from the bottling opera-

tions, excluding impairment and restructuring charges, increased

by $2.3 million to a loss of $2.8 million. The lower volume for

the period negatively affected operating results by $1.1 million,

and the lower pricing per case affected net sales by $5.5 million.

The Company's operational restructuring and cost reductions, as

well as lower costs negotiated with suppliers, resulted in: lower

variable manufacturing, selling and distribution costs of sales per

case, which benefitted results by $1.8 million; lower spending on

consumer and other promotions and marketing expenses of $0.3

million; and lower fixed manufacturing, selling, and administra-

tive costs of $2.2 million.

15

Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company's estimate that it will fully recover the

value of the goodwill and other long-lived assets of its

Uruguayan operations is dependent upon the continued validity

of certain assumptions with respect to small increases in volume

and market share in the Uruguayan market. Actual future condi-

tions may differ from those projected by the Company, and fail-

ure to achieve anticipated increases in volume and market share

could lead the Company to record an impairment charge with

respect to the carrying value of such assets to their fair market

value.

Net Sales. Case sales volume declined by 1.8 million cases, or

1.8%, to 101.8 million cases for fiscal year 1998 from fiscal year

1997. Net sales decreased by $68.7 million, or 18.6%, to $299.9

million, as compared to $368.6 million in fiscal year 1997. The

loss in volume for the period was due primarily to unseasonably

cool and wet weather resulting from the "El Niño" weather pat-

tern and the loss of market share in Buenos Aires as compared to

the prior year period.

Cost of Sales. Cost of sales decreased by $11.9 million, or 6.3%,

to $177.1 million in fiscal year 1998 from $189.0 million in fiscal

year 1997. Lower case sales volume contributed to a $2.3 million

decline in cost of sales. Lower fixed and variable costs of $9.6

million were achieved through the implementation of the

Operational Restructuring during fiscal year 1997 and a lower

cost of returnable packaging, which were partially offset by an

increase in sales of nonreturnable packages, that have higher raw

material costs, in the overall sales mix.

Selling and Marketing Expenses. Selling and marketing expenses

decreased by $22.7 million, or 17.4%, to $107.7 million in fiscal

year 1998 from $130.4 million in fiscal year 1997. Lower case

sales volume contributed to a $1.9 million decline in the cost of

selling and marketing. Reduced marketing expenses per case

benefitted operating results by $8.0 million, primarily due to

lower spending on trade promotions. The decline in fixed and

variable selling and distribution costs per case contributed $12.8

million to operating results. Significant reductions in selling and

distribution costs were driven by higher sales of nonreturnable

packages in the overall sales mix, which have lower distribution

costs than returnable packages, and by the restructuring and effi-

ciency measures implemented during fiscal year 1997 as part of

the Operational Restructuring.

Administrative Expenses. Administrative expenses decreased by

$11.4 million, or 26.4%, to $31.7 million in fiscal year 1998 from

$43.1 million in fiscal year 1997. Such decrease was primarily

attributable to lower operating costs of $13.4 million due to the

restructuring measures implemented during fiscal year 1997, off-

set in part by $2.0 million in charges related to overdue payments

from distributors.

Unusual Impairment and Disposals. Unusual impairment and

disposals decreased by $3.0 million to $10.5 million for fiscal year

1998 from $7.5 million in fiscal year 1997. The Company record-

ed $10.5 million in unusual impairment and disposals during fis-

cal year 1998 for the write-down of certain equipment and

returnable plastic containers as a result of the rationalization of

its infrastructure in light of the market's continued shift to nonre-

turnable packaging. In the first half of fiscal year 1998, as a result

of the continued shift in multiserve containers from returnable to

nonreturnable, the Company accelerated the depreciation of cer-

tain assets used in the manufacturing and distribution process of

returnable packages by reducing their estimated useful lives.

Such change in estimate will result in additional depreciation

being charged to cost of sales and selling and marketing expenses

of approximately $4.1 million per year.

During fiscal year 1997 the Company recorded $7.5 mil-

lion to reduce the carrying value of long-lived assets in the

Company's Uruguay preforms operations.

Restructuring Charges. Restructuring charges increased by $0.1

million, to $4.5 million in fiscal year 1998 from $4.4 million in fis-

cal year 1997.

Other (Expense) Income, Net. Other (expense) income, net

decreased by $11.9 million, or 15.1%, to $66.9 million in fiscal

year 1998 from $78.8 million in fiscal year 1997. The results for

fiscal year 1997 included a $1.0 million nonoperating charge

relating to certain obligations of the Company's beverage opera-

tion in Uruguay, which did not recur in fiscal year 1998.

Debt restructuring decreased by $8.0 million, or 63.8%,

to $4.6 million in fiscal year 1998 from $12.6 million in fiscal year

1997. Such decrease resulted primarily from the application of

Statement of Financial Accounting Standard No. 15, “Accounting

by Debtors and Creditors for Troubled Debt Restructuring”,

which calls for the deferral of certain costs relating to the

Recapitalization. The Company accounted for $3.0 million in

debt restructuring costs as deferred costs. The Company deter-

16

Management's Discussion and Analysis of Financial Condition and Results of Operations

mined that the principal conditions precedent to consummation

of the Restructuring Agreement were met in the third quarter of

1998. Therefore, the Company began deferring any direct costs

related to the Recapitalization in order to record these costs in the

period during which the Recapitalization occurs. Legal fees and

other direct costs that the Company incurs in granting the

Unsubscribed Shares to its creditors will reduce the amount oth-

erwise recorded for such equity interest. All other direct costs

that the Company incurs shall be deducted from the gain on

restructuring of the debt subject to restructuring, if any. If no

gain is recorded, the amount will be recorded to expense upon

final consummation of the Recapitalization.

Equity in Net Earnings of Affiliated Company. Equity in net

earnings of affiliated company decreased by $0.1 million, or

1.0%, to $9.3 million in fiscal year 1998 from $9.4 million in fiscal

year 1997. The operations posted a 4.1% decrease in revenues as

compared to the prior year period on a 1.7% increase in case sales

volume. The decrease in unit case sales prices was primarily

attributable to the devaluation of the Chilean Peso relative to the

U.S. Dollar, while ECUSA maintained prices flat in Chilean

Pesos. The Chilean Peso has devalued 7.2% relative to the U.S.

Dollar from the prior year period.

The Company increased marketing expenses by 13.8%,

or $2.0 million, in fiscal year 1998 as compared to fiscal year 1997,

primarily focused on Pepsi and proprietary-brand products. The

decrease in net sales was offset by cost reduction measures,

which offset all but the increased marketing expenses.

Fiscal Year 1997 Compared to Fiscal Year 1996(as restated)

Argentina. During fiscal year 1997, Argentina's case sales volume

increased by 0.8% to 91.3 million cases from 90.5 million cases

sold during fiscal year 1996. Argentina's net sales decreased 3.9%

to $330.8 million as compared to $344.2 million in fiscal year

1996. The decline in net sales occurred in spite of a slight

increase in the case sales volume and a higher percentage of non-

returnable packages in the sales mix, which generally have high-

er prices. The decline resulted from a 4.7% decrease in average

case sales prices, primarily attributable to the introduction of

New Brands, principally in the Buenos Aires franchise territory,

during the second half of the fiscal year, at prices generally below

the prices of the leading brands. These New Brands reversed the

higher pricing that the Company experienced throughout much

of the first six months of fiscal year 1997.

During fiscal year 1997, income from operations

improved by $59.6 million to $13.5 million. The 1997 results

include restructuring charges of $2.8 million as compared to

restructuring charges of $11.7 million and unusual impairment

and disposal charges of $2.9 million in fiscal year 1996. The sig-

nificant increase in income from operations, excluding restructur-

ing charges, resulted principally from reductions in costs

achieved through the Operational Restructuring, lower market-

ing expenses and significant reductions in raw materials costs.

Brazil and Other Operations Disposed of by the Company. The

following paragraphs contain a discussion and analysis of the

historical results for fiscal year 1997 compared to fiscal year 1996

of the Brazilian and Other operations disposed of by the

Company.

During fiscal year 1997, the net sales in the Brazilian and

Other operations of $286.4 million represented approximately

44.4% of the total net sales of the Company. Of this amount,

$277.1 million, or 96.7%, was attributable to the Brazil operations.

During fiscal year 1997, Brazil's case sales volume decreased by

5.3% to 108.7 million cases from 114.8 million cases in fiscal year

1996. Brazil's net sales decreased 9.9% to $277.1 million as com-

pared to $307.4 million in fiscal year 1996. The decrease in net

sales is attributable to lower volumes and lower prices received

for the Company's products. Sales volume and pricing during

fiscal year 1997 were affected by the highly competitive environ-

ment found in the Brazil soft drink industry which prevented the

Company from passing along price increases in the local curren-

cy equal to the devaluation of the Brazilian currency during the

period.

During fiscal year 1997, the cost of sales and operating

expenses in the Brazilian and Other operations of $329.0 million

represented approximately 47.6% of the total cost of sales and

operating expenses of the Company. In Brazil, cost of sales and

operating expenses decreased $117.1 million, or 31.4%, to $256.1

million during the period, mainly driven by a significant

improvement in performance on lower volume and lower pricing

attributable to lower fixed and variable costs generated through

the Operational Restructuring (reductions in headcount and raw

materials costs), as well as lower net marketing expense due to

the recognition of the $30.6 million additional contribution to

17

Management's Discussion and Analysis of Financial Condition and Results of Operations

marketing expense from PepsiCo. During fiscal year 1997, the

Company recorded $184.7 million and $6.6 million to reduce the

carrying value of long-lived assets in the Brazil and Costa Rica

operations, respectively.

During fiscal year 1997, results from operations in the

Brazilian operations improved by $44.9 million to a loss of $225.4

million. The fiscal year 1997 results include an unusual impair-

ment and disposal charge of $184.7 million, as compared to

restructuring charges of $13.4 million and $7.0 million in impair-

ment and disposal charges in fiscal year 1996. The improvement

in the results from operations of $209.2 million to a loss of $40.8

million, excluding unusual impairment and disposals and

restructuring charges, resulted principally from significant reduc-

tions in costs achieved through the Operational Restructuring,

the reduction in marketing expenses, and an additional market-

ing contribution received from PepsiCo of $30.6 million.

However, despite these significant improvements, the Company

was unable to get its Brazilian operations to a profitable basis

and, therefore, ultimately decided to dispose of those sub-

sidiaries.

During fiscal year 1997, the net financing and other

expenses in the Brazilian and Other operations were $33.3 mil-

lion, which represented approximately 29.7% of the total net

financing and other expenses of the Company.

Net Sales. Net sales decreased by $48.3 million, or 6.9%, for fis-

cal year 1997 from fiscal year 1996, to $655.0 million. This

decrease resulted primarily from a decline in sales prices in its

Brazil and Argentina operations and lower sales volumes in

Brazil.

Cost of Sales. Cost of sales decreased by $96.7 million, or 21.7%,

to $350.1 million for fiscal year 1997 from $446.8 million in fiscal

year 1996 as restated. Despite the increased sales of nonreturn-

able packages, which have higher direct costs, direct costs

declined by $38.2 million due to a decrease in resin and alu-

minum can prices, lower sales volume in Brazil and operational

efficiencies implemented in fiscal years 1997 and 1996. Fixed

manufacturing cost declined by $58.5 million primarily due to

the non-reoccurrence of write-downs recorded in fiscal year 1996

and lower costs resulting from the Operational Restructuring.

Selling and Marketing Expenses. Selling and marketing expenses

decreased by $144.6 million, or 38.2%, for fiscal year 1997 from

fiscal year 1996 to $234.3 million. The decrease resulted from a

$75.1 million reduction in marketing spending as a result of an

extraordinary marketing contribution of $30.6 million by PepsiCo

to the Brazil operations in fiscal year 1997, large investments

made during fiscal year 1996 in the Argentine and Brazilian mar-

kets for new brand introductions, and the response to competi-

tive pressures in the Argentine markets as a result of the refran-

chising of the Buenos Aires territory by the Company’s main

competitor during fiscal year 1996. Finally, lower selling and dis-

tribution costs were attributable to the non-recurrence of write-

offs recorded in fiscal year 1996, and lower salaries and wages,

depreciation and other selling and distribution costs.

Administrative Expenses. Administrative expenses decreased by

$71.9 million, or 40.2%, for fiscal year 1997 from fiscal year 1996

to $107.1 million. Lower administrative expenses were attributa-

ble to the non-reoccurrence of write-offs recorded in fiscal year

1996 and the Operational Restructuring, which reduced salaries

and wages and depreciation.

Unusual Impairment and Disposals. The results of operations

for fiscal year 1997 include $198.8 million of unusual impairment

and disposals. The charges included $184.7 million and $7.5 mil-

lion to reduce the carrying value of long-lived assets in the

Company's Brazilian operations as well as its Uruguay preform

operations, respectively. In addition, the Company recorded a

$6.6 million charge to record an additional impairment to the car-

rying value of property, plant and equipment based on the final

offer related to the sale of the Company's operations in Costa

Rica. The results of operations for fiscal year 1996 include $21.5

million of unusual impairment and disposals, as follows: the

Costa Rica operations, $11.6 million; two bottling lines held in

storage in Brazil, $7.1 million; and a plant in Argentina, $2.8 mil-

lion.

Restructuring Charges. The results of operations for fiscal year

1997 included $4.4 million in restructuring charges. The

Company undertook certain operational restructuring measures

in Argentina and Uruguay, including the reduction of approxi-

mately 270 manufacturing, distribution and sales positions, and

the streamlining of certain middle level management positions,

resulting in a total of $4.4 million in charges for severance. The

18

Management's Discussion and Analysis of Financial Condition and Results of Operations

results of operation for fiscal year 1996 included $34.8 million in

restructuring charges. The restructuring measures undertaken to

reduce 1,500 positions in the Company's operations and the con-

solidation of distribution, manufacturing and administrative

functions resulted in $19.1 million of charges. Additionally, the

Company incurred $12.2 million in other operational restructur-

ing charges.

Other (Expenses) Income, Net. Other (expenses) income, net

decreased by $(36.7) million, or 48.6%, for fiscal year 1997 from

fiscal year 1996 to $(112.1) million.

Interest expense for fiscal year 1997 increased by $22.6

million from fiscal year 1996. This increase resulted primarily

from penalties and interest incurred by the Brazil operations for

past due excise and other taxes owed to Brazilian federal and

state governments.

Interest income declined by $2.7 million to $0.3 million

in fiscal year 1997 as a result of lower cash balances.

An increase in foreign exchange gains of $6.3 million to

$7.6 million in fiscal year 1997 resulted primarily from holding

net liabilities in currencies which devalued against the U.S. dol-

lar.

Additionally, the Company incurred $12.6 million in

fees paid to professionals for the financial restructuring in fiscal

year 1997.

Income Tax Expense. Income tax expense decreased $8.0 million

for fiscal year 1997 from fiscal year 1996, to $0.2 million. The

structure of the Company is composed of several legal entities;

therefore, the Company generated statutory income tax in fiscal

year 1997 that the Company could not offset against the accumu-

lated net operating losses of other entities. The losses incurred in

fiscal year 1996 resulted from changes in the corporate income

tax rate in Brazil and the write-down of deferred tax assets previ-

ously recognized. If the Company were to return to profitability,

it does not expect to make significant income tax payments for

the next five years since its remaining net operating losses of

$163.8 million for tax purposes are in the operating companies

with the significant business activity. See Note 10 to the

Consolidated Financial Statements.

Equity in Net Earnings of Affiliated Company. BAESA holds a

45% equity in the net earnings of ECUSA. Equity in net earnings

of affiliated company increased by $5.3 million, or 128.4%, for fis-

cal year 1997 from fiscal year 1996 to $9.4 million. The increase in

the fiscal year 1997 results was attributable to an increase in case

sales prices of 5.4%, lower raw materials cost of 4.8%, increased

sales volume of 1.5%, and cost containment programs.

Liquidity and Capital ResourcesAt September 30, 1998, BAESA was in default under the provi-

sions of certain of its debt agreements. As a result, the Company

had reclassified the majority of its long-term debt as current,

resulting in a working capital deficiency of $736.7 million.

Under Argentine GAAP, the Company had a total share-

holders' deficit of $330.1 million as of September 30, 1997. Under

Argentine law, a company reporting a shareholders' deficit in its

annual financial statements, when approved by the stockholders,

is placed in a state of liquidation unless the shareholders agree to

a recapitalization of the company. Management is currently

implementing a plan of recapitalization that was approved at the

Company's annual shareholders' meeting on January 29, 1998.

On December 4, 1997, the Company entered into the

Restructuring Agreement with its primary financial creditors in

Argentina, representing 89% of the debt subject to restructuring,

to restructure $711.6 million of the Company's debt obligations as

of September 30, 1998, which is composed of $496.7 million in

unsecured commercial bank debt, $60.0 million of Eurobonds and

$49.4 million of obligations to PepsiCo, plus $105.4 million of

accrued interest thereon. The Restructuring Agreement was

amended and restated on April 6, 1998 and on November 30,

1998. Under the terms of the amended Restructuring Agreement,

the debt subject to restructuring will be exchanged as follows: (i)

approximately the first $113 million, for New Negotiable

Obligations, of which $20.0 million will be Series A Negotiable

Obligations, $85.5 million will be Series B Negotiable Obligations

and $7.5 million will be the Series C Negotiable Obligations, and

(ii) the remaining debt balance, for New Shares and/or the pro-

ceeds from the issuance of New Shares. This debt level is lower

than that originally agreed between the Company and such other

parties and reflects their mutual view that the Company's current

19

Management's Discussion and Analysis of Financial Condition and Results of Operations

sales and cash flows, and the sales and cash flows expected to be

realized by the Company in future periods, could not support a

significantly greater debt level. In connection with the

Recapitalization, the Company expects to enter into a short-term

facility to provide the Company with a source of liquidity imme-

diately following the Recapitalization. Following the

Recapitalization, the new indentures will contain a number of

covenants that will impose significant operating and financial

restrictions on the Company and its subsidiaries.

The New Negotiable Obligations will be unsecured obli-

gations of BAESA and will rank equally with all other unsecured

and unsubordinated obligations of BAESA. PepsiCo's propor-

tionate share of the New Negotiable Obligations will be subordi-

nated in certain aspects to the other New Negotiable Obligations.

The New Shares, representing 98% of the Company's

outstanding equity after the Recapitalization, will be offered for

subscription on a preferential basis to existing shareholders in the

Rights Offering. The proceeds of the Rights Offering, if any, will

be used to reduce the debt subject to restructuring. The unse-

cured commercial bank debt holders, PepsiCo and the holders of

the Eurobonds who participated in the Exchange Offer and are to

receive Series B Negotiable Obligations will receive pro rata any

unsubscribed New Shares. Any such distributions of unsub-

scribed New Shares will result in a pro rata reduction of the

existing shareholders' equity ownership.

The consummation of the Restructuring Agreement is

subject to certain conditions, including (i) final consummation of

the settlement of certain class action litigation (see Note 20 to the

Consolidated Financial Statements) on terms acceptable to the

holders of more than 65% of the outstanding aggregate principal

amount of the Financial Debt and the PepsiCo Debt, and (ii) the

Company entering into the Short-term Facility.

Management believes that the conditions precedent to

consummation of the Restructuring Agreement will be met by

January 31, 1999, thereby removing the risk of mandatory liqui-

dation under Argentine law. In addition, management believes

consummation of the Restructuring Agreement and completion

of other measures discussed above will allow the Company to

generate positive cash flows and enhance the profitability of the

restructured Company. However, no assurances can be given

that the conditions precedent to the consummation of the

Restructuring Agreement will be satisfied or that, if such condi-

tions are satisfied, the Company will be successful in achieving

profitability or positive cash flows.

In addition, pursuant to its regulations, the Buenos

Aires Stock Exchange will suspend from trading the securities of

any company reporting a shareholders' deficit under Argentine

GAAP. The Company reported a shareholders' deficit of $(18.7)

million as of March 31, 1997 and, upon the Company's announce-

ment of such amount on May 8, 1997, the Buenos Aires Stock

Exchange suspended trading of the Class B Shares, which

adversely affected the liquidity of the Class B Shares. Following

such suspension, the New York Stock Exchange halted the

Company's ADSs from trading. Upon the successful completion

of the Recapitalization and the consequent restatement of the

Company's shareholders' equity, the Company expects to apply

for reinstatement of trading of its Class B Shares on the Buenos

Aires Stock Exchange. There can be no assurance that such

application will be acted upon favorably. If the Buenos Aires

Stock Exchange lifts its suspension on trading of the Class B

Shares, the Company expects to apply to reinstate trading of its

ADSs on the New York Stock Exchange. The Company does not

expect that trading of the ADSs will be reinstated until such time

as trading of the Class B Shares is reinstated on the Buenos Aires

Stock Exchange and the Company meets certain other minimum

requirements for trading on the New York Stock Exchange. In

late 1998, the Company was informed that if it were not to suc-

cessfully complete the Recapitalization prior to December 31,

1998, the New York Stock Exchange would delist the ADSs; how-

ever, the Company continues to discuss the conditions for a

resumption of trading with the New York Stock Exchange. Even

if the Recapitalization is completed, there can be no assurance

that trading of the ADSs on the New York Stock Exchange will

resume.

On September 30, 1998, the Company had cash and cash

equivalents of $3.7 million and $635.5 million in indebtedness for

borrowed money, including short-term borrowings of $607.5 mil-

lion.

BAESA does not anticipate any significant devaluation

or revaluation of the currencies of the countries in which it oper-

ates relative to the U.S. Dollar in the short term. BAESA does not

presently engage in any hedging or other transactions intended

to offset the effects of fluctuations in currency exchange rates,

although it may do so in the future.

20

Management's Discussion and Analysis of Financial Condition and Results of Operations

During the past year, the primary source of liquidity has

been the Company’s operations. Net cash provided by (used in)

operating activities was $5.2 million, $(31.8) million and $(112.9)

million for fiscal years 1998, 1997 and 1996, respectively. The

Company's significant losses in fiscal year 1998 were offset by a

decrease in working capital as well as non-payment of interest in

Argentina.

Net cash used in investing activities amounted to $(1.4)

million, $(16.4) million and $(80.9) million in fiscal years 1998,

1997 and 1996, respectively.

Substantial investments in capital goods and equipment

were made in fiscal year 1996 to expand production and distribu-

tion capacity. Capital expenditures totaled $112.8 million in fiscal

year 1996. A combination of internally generated funds, borrow-

ings from third parties and the proceeds of a public offering

financed the capital expenditures. In fiscal year 1997 capital

expenditures totaled $28.9 million. The Argentina and Uruguay

operations funded $18.1 million of capital expenditures from

internally generated funds in fiscal year 1997. The Company

invested $14.6 million in capital expenditures in fiscal year 1998,

primarily for equipment relating to nonreturnable packaging

lines. The Company expects that in future years it will continue

to make investments in the marketplace, which will be funded

primarily through internally generated funds.

Net cash (used in) provided by financing activities dur-

ing fiscal years 1998, 1997 and 1996 was $(2.6) million, $23.3 mil-

lion and $173.4 million, respectively. Cash provided by financing

activities in fiscal year 1996 was mainly attributable to proceeds

from long-term and short-term borrowings.

BAESA is a party to various loan agreements which con-

tain restrictive covenants requiring, among other things, the

maintenance of certain financial ratios, restrictions on the encum-

brance of assets and creation of indebtedness, restrictions on the

disposal of assets, and limits on certain payments, including pay-

ments of dividends. The material terms of these agreements set

forth below have been substantially renegotiated and relate to

debt subject to restructure under the Restructuring Agreement.

Thus, these covenants will continue to bind the Company until

the consummation of the Restructuring Agreement. The financial

covenants: (i) do not permit BAESA's Consolidated Tangible Net

Worth (defined as the excess of (a) tangible assets of BAESA

determined after deducting any reserves required by U.S. GAAP,

over (b) all indebtedness of BAESA), to fall below $130.0 million

as determined at the end of each fiscal quarter; (ii) require

BAESA to maintain a ratio of current assets to current liabilities

of not less than 0.80 to 1.0 until certain debt is paid in full; (iii)

require BAESA to maintain an excess of total assets over total lia-

bilities of not less than $325.0 million in United States Dollars (or

its equivalents in another currency) and an excess of consolidated

total assets over consolidated total liabilities of BAESA and its

subsidiaries of not less than $320.0 million in United States

Dollars (or its equivalent in another currency); (iv) prohibit

BAESA from creating or suffering to exist any debt if, after the

creation of such debt, the ratio of the aggregate amount of debt of

BAESA and its subsidiaries, on a consolidated basis, to the aggre-

gate amount of assets of BAESA and its subsidiaries, on a consol-

idated basis, would be greater than 0.60 to 1.00; and (v) prohibit

BAESA from declaring or paying any dividends, purchasing or

acquiring for value any of its outstanding capital stock, making

any distribution of assets to its shareholders, or permitting any

subsidiaries to purchase or acquire BAESA stock, or from declar-

ing or paying dividends to shareholders and purchasing or

acquiring shares of BAESA capital stock solely out of 40% of

BAESA's net income arising after September 30, 1994, and com-

puted on a cumulative basis. The Company continues to be in

default under such loan agreements and expects such default to

continue until the consummation of the Recapitalization.

21

Management's Discussion and Analysis of Financial Condition and Results of Operations

Independent Auditors’ Report

The Board of DirectorsBuenos Aires Embotelladora S.A.

We have audited the accompanying consolidated balance sheets of Buenos Aires Embotelladora S.A. and subsidiaries asof September 30, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity (deficit) andcomprehensive loss and cash flows for the years ended September 30, 1998, September 30, 1997 and September 30, 1996(as restated (See Note 14.1)) which have been prepared on the basis of generally accepted accounting principles in theUnited States. These consolidated financial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits. We did not auditthe financial statements of Embotelladoras Chilenas Unidas S.A. (ECUSA), a forty five percent owned investee company.The Company's investment in ECUSA at September 30, 1998 and 1997, was $111 million and $114 million, respectively,and its equity in earnings of ECUSA was $9 million, $9 million and $4 million for the fiscal years 1998, 1997 and 1996,respectively. The financial statements of ECUSA were audited by other auditors whose report has been furnished to us,and our opinion, insofar as it relates to the amounts included for ECUSA, is based solely on the report of the other audi-tors.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the finan-cial position of Buenos Aires Embotelladora S.A. and subsidiaries as of September 30, 1998 and 1997, and the results oftheir operations and their cash flows for the years ended September 30, 1998, September 30, 1997 and September 30, 1996(as restated (See Note 14.1)) in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as agoing concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred net losses ofapproximately $90 million, $343 million and $437 million for the years ended September 30, 1998, September 30, 1997and September 30, 1996 (as restated), respectively, and has a net capital deficiency as of September 30, 1998 raising sub-stantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are alsodescribed in Note 1. The consolidated financial statements do not include any adjustments that might result from theoutcome of this uncertainty.

KPMG Finsterbusch Pickenhayn Sibille

Guillermo R. CalciatiPartner

Buenos Aires, ArgentinaDecember 9, 1998

22

September 30, 1998 1997

Assets

Current assets:Cash and cash equivalents $ 3,666 $ 2,477 Accounts receivable:

Trade, less allowance of $9,262 and $6,428 in fiscal year 1998and 1997, respectively 27,562 27,477

Other (including $7,580 due from PepsiCo in fiscal year 1997) 3,619 11,065 Inventories 10,929 11,109 Deferred income tax, net 1,711 4,057 Prepaid expenses and other current assets 5,342 2,494

Total current assets 52,829 58,679

Property, plant and equipment, net 171,314 197,690 Intangible assets, net 57,173 58,784 Investment in affiliated company 111,420 113,819 Deferred income tax, net - 1,945 Other assets 4,641 8,744

Total assets $ 397,377 $ 439,661

Liabilities and Shareholders’ Deficit Current liabilities:

Short-term borrowings $ 558,056 $ 558,041 Note payable to PepsiCo 49,400 49,400 Accrued interest 106,712 48,529 Accounts payable – trade 42,661 34,310 Other current liabilities 32,667 36,863

Total current liabilities 789,496 727,143

Long-term debt, excluding current portion 28,002 30,655 Deferred income tax, net 1,576 5,442 Other long-term liabilities 6,134 7,693

Total liabilities $ 825,208 $ 770,933

Commitments and contingencies

Shareholders’ deficit:Class A common shares of $0.01 par value. Authorized, issued and

outstanding of 16,372,973 shares at the end of fiscal years 1998 and 1997, respectively 164 164

Class B common shares of $0.01 par value. Authorized 4,056,127,114 and 56,127,114 shares at September 30, 1998 and 1997, respectively; issued and outstanding of 56,127,114 at the end of fiscal years 1998 and 1997, respectively 561 561

Additional paid-in capital 372,501 372,501 Accumulated deficit (unappropriated) (794,335) (704,535)Accumulated other comprehensive (loss) income (6,722) 37

Total shareholders’ deficit (427,831) (331,272)Total liabilities and shareholders’ deficit $ 397,377 $ 439,661

See accompanying notes to consolidated financial statements.

23

Consolidated Balance Sheets(U.S. Dollars in thousands, except share data)

September 30,1998 1997 1996

(as restated)Net sales $ 299,880 $ 654,986 $ 703,246Cost and expenses:

Cost of sales (177,186) (350,100) (446,820)Selling and marketing expenses (107,711) (234,266) (378,890)Administrative expenses (31,673) (107,128) (179,068)Unusual impairment and disposals (10,492) (198,760) (21,514)Restructuring charges (4,503) (4,434) (34,782)

Operating expenses (331,565) (894,688) (1,061,074)Loss from operations (31,685) (239,702) (357,828)

Other (expenses) income:Interest expense, net (61,350) (101,426) (76,037)Foreign exchange gain, net 214 7,639 1,360Debt restructuring (4,564) (12,598) - Other, net (1,242) (5,747) (782)

Other expenses, net (66,942) (112,132) (75,459)Loss before tax expense and equity in net

earnings of affiliated company (98,627) (351,834) (433,287)Income tax expense (435) (190) (8,191)

Loss before equity in net earnings ofaffiliated company (99,062) (352,024) (441,478)

Equity in net earnings of affiliated company 9,262 9,356 4,097Net loss $ (89,800) $(342,668) $(437,381)

Loss per share:Basic and diluted $ (1.24) $ (4.73) $ (6.03)

Weighted average number of shares outstanding (in thousands):

Basic and diluted 72,500 72,500 72,500

See accompanying notes to consolidated financial statements.

24

Consolidated Statements of Operations(U.S. Dollars in thousands, except share data)

Fiscal Years Ended September 30, 1998, 1997 and 1996 (see note 2.1)

OtherComprehensiveIncome (Loss)-

Class A Class B Additional Retained Earnings CumulativeCommon Common Paid-In (Accumulated Deficit) Translation Comprehensive

Stock Stock Capital Unappropriated Appropriated Adjustment Loss Total

Balances at September 30,1995 (as restated) $ 303 $ 422 $ 335,547 $ 66,302 $ 25,887 $ (3,693) $ 424,768

Cash dividends declared inDecember 1995(per share $0.23) - - - (16,675) - - (16,675)

Use of voluntary reserve - - - 2,231 (2,231) - -Conversion of Class A shares

into Class B shares (30) 30 - - - - -Appropriation to legal reserve - - - (2,327) 2,327 - -Net loss (as restated) - - - (437,381) - - (437,381) (437,381)Other comprehensive loss, net of

tax-translation adjustment - - - - - (3,986) (3,986) (3,986)Comprehensive loss $ (441,367)Balances at September 30, 1996 273 452 335,547 (387,850) 25,983 (7,679) (33,274)

Absorption of deficit - - - 25,983 (25,983) - -Conversion of Class A shares

into Class B shares (109) 109 - - - - -Capital contributed by PepsiCo - - 36,954 - - - 36,954Net loss - - - (342,668) - - (342,668) (342,668)Other comprehensive income, net of

tax-translation adjustmentincluding $7,005 write off related to the sale of subsidiary - - - - - 7,716 7,716 7,716

Comprehensive loss $ (334,952)Balances at September 30, 1997 164 561 372,501 (704,535) - 37 (331,272)

Net loss - - - (89,800) - - (89,800) (89,800)Other comprehensive loss, net of

tax-translation adjustment - - - - - (6,759) (6,759) (6,759)Comprehensive loss $ (96,559)Balances at September 30, 1998 $ 164 $ 561 $ 372,501 $ (794,335) $ - $ (6,722) $ (427,831)

See accompanying notes to consolidated financial statements.

25

Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss(U.S. Dollars in thousands, except share data)

Fiscal Years Ended September 30, 1998, 1997 and 1996 (see note 2.1)

September 30, 1998 1997 1996

(as restated)Net loss $ (89,800) $ (342,668) $ (437,381)Adjustments to reconcile net loss to net

cash (used in) provided by operating activities:Depreciation and amortization 30,927 64,844 85,984Deferred income tax 425 12 3,511Gain on sale of fixed assets (156) - -Equity in net earnings of affiliated company (9,262) (9,356) (4,097)Impairment, other non-cash charges and write-offs 9,602 204,393 75,405Changes in assets and liabilities:

Accounts receivable, net 7,361 (3,863) 41,648Inventories 180 12,307 24,723Prepaid expenses and other current assets (2,848) 8,010 16,148Accounts payable 8,351 (11,650) 21,635Accrued expenses, accrued interest and other current

liabilities 53,987 46,775 60,972Other, net (3,534) (619) (11,442)

Net cash provided by (used in) operating activities 5,233 (31,815) (122,894)

Cash flow from investing activities:Purchases of property, plant and equipment (14,550) (28,911) (112,780)Proceeds from the sale of property, plant and equipment 8,250 10,313 29,951Dividends received, net of taxes 4,894 3,683 1,952Cash disbursed in association with sale of subsidiary - (1,443) -

Net cash used in investing activities (1,406) (16,358) (80,877)

Cash flow from financing activities:Increase in bank loans and overdrafts, net 608 1,424 184,768Proceeds from long-term debt - - 49,753Dividends paid - - (16,675)Principal payments on long-term debt (3,246) (15,089) (44,299)Proceeds from PepsiCo loan - 36,954 - Principal payments under capital lease obligations - - (125)

Net cash (used in) provided by financing activities (2,638) 23,289 173,422Effect of exchange rate changes on cash - - 93Net increase (decrease) in cash and cash equivalents 1,189 (24,884) (30,256)

Cash and cash equivalents at beginning of year 2,477 27,361 57,617Cash and cash equivalents at end of year $ 3,666 $ 2,477 $ 27,361Supplemental disclosures:

Cash paid for:Interest $ 4,415 $ 61,199 $ 80,521Income tax $ - $ 1,201 $ 140

Non-cash activities:Capital contribution in the form of debt forgiveness by PepsiCo $ - $ 36,954 $ -

See accompanying notes to consolidated financial statements.

26

Consolidated Statements of Cash Flows(U.S. Dollars in thousands)

Fiscal Years Ended September 30, 1998, 1997 and 1996 (see note 2.1)

27

1| Basis of Presentation, Liquidity and DebtRestructuring

The accompanying consolidated financial statements have beenprepared assuming Buenos Aires Embotelladora S.A. ("BAESA"or the "Company") will continue as a going concern which con-templates the realization of assets and the settlement of liabilitiesand commitments in the normal course of business. TheCompany incurred net losses of $89,800, $342,668 and $437,381for the years ended September 30, 1998, 1997 and 1996, respec-tively. The losses were mainly a result of operating losses, signif-icant interest expense related to high levels of debt as well as cer-tain unusual impairment, disposals and restructuring charges(see Notes 13, 14 and 15). At September 30, 1998 BAESA was indefault under the provisions of debt agreements (see Notes 11and 12). As a result, the Company reclassified a portion of itslong-term debt as current, resulting in a working capital deficien-cy at September 30, 1998 of $736,667.

Under generally accepted accounting principles inArgentina ("Argentine GAAP") the Company had total share-holders' deficit of $330,058 as of September 30, 1997. UnderArgentine law, a company reporting a shareholders' deficit in itsannual financial statements, when approved by the stockholders,is placed in a state of liquidation unless the shareholders agree tothe recapitalization of the company. Under Argentine GAAP, theCompany has recorded the effects of the Agreement (as definedbelow), reporting a positive equity of $173,385 at September 30,1998.

Starting in 1996, management performed a comprehen-sive review of the Company's operational and financial situationand has taken measures to improve cash flows and enhance prof-itability. The measures included reductions of fixed costs, thedisposal of operations generating negative cash flows such asBrazil and Costa Rica, the sale of certain non strategic assets, theredefinition of its marketing strategies and the restructuring of itsmanufacturing and distribution operations in Argentina.

On December 4, 1997, the Company entered into arestructuring and exchange agreement (the "Agreement") asamended and restated on April 6, 1998 and November 30, 1998with its primary financial creditors, representing 89% of the debtsubject to restructuring, to restructure $711,591 of the Company'sdebt obligations at September 30, 1998 ($496,746 of unsecuredcommercial bank debt, $60,000 of 8.5% negotiable obligations("Eurobonds"), $49,400 of obligations to PepsiCo, and $105,445million of accrued interest thereon) plus accrued interest throughthe closing date. The Agreement contemplates that the primaryfinancial creditors will exchange their debt for a share of (i) newdebt of BAESA in an aggregate principal amount, which willvary depending upon the accrued interest outstanding on theconsummation date, of $113,200 (assuming an expected consum-mation date of January 29, 1999) and (ii) the proceeds from theissuance of new class B shares representing 98% of the equityownership of BAESA.

In April 1998 the Company launched an exchange offer,by which the Company offered each holder of existing negotiableobligations the right to exchange its existing negotiable obliga-

tions for a pro rata share of exchange receipts. The Companywill redeem the exchange receipts pursuant to their terms fornew negotiable obligations and rights offering results.Noteholders holding an aggregate principal amount of approxi-mately $56,800 (or 94.6%) of existing negotiable obligations ten-dered in favor of the exchange offer, which ended on May 20,1998. The Company expects to enter into private exchange agree-ments with the remaining noteholders prior to the closing. As ofyear end an additional $450 of the debt was exchanged.

The new negotiable obligations will be unsecured obli-gations of BAESA and will rank equally with all other unsecuredand unsubordinated obligations of BAESA. PepsiCo's propor-tionate share of the new negotiable obligations will be subordi-nated in certain aspects to the other new negotiable obligations.

Assuming the Agreement was consummated onSeptember 30, 1998, the principal amount of the new negotiableobligations would be as follows:

Series A $ 20,000Series B $ 85,300Series C $ 7,520

The issuance of new Class B shares, representing 98% ofthe Company's outstanding equity after restructuring, has beenoffered for subscription to existing shareholders (the "RightsOffering"). The proceeds of the rights offering, if any, will beused to reduce the debt subject to restructuring on a pro ratabasis. The unsecured commercial bank debt holders, the holdersof the Eurobonds and PepsiCo will receive any unsubscribedshares, which will be exchanged for an equivalent amount ofdebt subject to restructuring. Any such distributions of unsub-scribed shares will result in a pro rata reduction of the existingshareholders' equity ownership.

The consummation of the Agreement is still subject tocertain conditions, including the following: (i) final consummation of the settlement of certain class

action litigation (See Note 20), and (ii) the Company entering into a short-term borrowing facili-

ty. The Company expects to enter into a $20,000 aggre-gate principal amount short-term credit facility on orbefore the closing date, to be used to pay closing costs andfund working capital needs.

If consummated, the recapitalization will extinguish the existingdebt subject to restructure.

Management believes that the conditions precedent toconsummation of the Agreement will be met by January 31, 1999,thereby removing the risk of mandatory liquidation underArgentine law. In addition, management believes consummationof the Agreement and completion of other measures discussedabove will allow the Company to generate positive cash flowsand enhance profitability in the restructured company. However,no assurances can be given that the conditions precedent to theconsummation of the Agreement will be satisfied or that, if suchconditions are satisfied, the Company will be successful inachieving profitability or positive cash flows.

Notes to Consolidated Financial Statements(U.S. Dollars in thousands, except per share data)

Fiscal Years Ended September 30, 1998, 1997 and 1996 (as restated)

28

In late 1998, the Company was informed that if it werenot to successfully complete the Recapitalization prior toDecember 31, 1998, the New York Stock Exchange would delistthe ADSs, which would greatly affect the liquidity of the ADSs;however, the Company continues to discuss conditions for aresumption of trading with the New York Stock Exchange. Evenif the Recapitalization is completed, there can be no assurancethat trading of the ADSs on the New York Stock Exchange willresume.

2|Summary of Significant Accounting Policies

2.1 Basis of ConsolidationThe consolidated financial statements, which have been preparedin accordance with generally accepted accounting principles inthe United States, include the accounts of BAESA and its sub-sidiaries. Significant inter-company accounts and transactionshave been eliminated in consolidation.

As a consequence of the sale of the Costa Rican andBrazilian operations (see Notes 13 and 14), the comparability ofthe September 30, 1998 consolidated statements of operations,shareholders' equity (deficit) and comprehensive loss, cash flowsand related notes have been affected.

2.2 Use of EstimatesThe preparation of financial statements in conformity with gener-ally accepted accounting principles in the United States requiresmanagement to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of con-tingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those esti-mates.

2.3 Foreign CurrencyThe financial statements of subsidiaries, except those in Uruguayand Brazil through fiscal year 1997 which are located in a highlyinflationary economy, are generally measured using the local cur-rency as the functional currency. Assets, including goodwill, andliabilities of these subsidiaries are translated at the rates ofexchange at the balance sheet date. The resultant translationadjustments are included in cumulative translation adjustment, aseparate component of shareholders' equity. Income and expenseitems are translated at average monthly rates of exchange. Gainsand losses from foreign currency transactions of these sub-sidiaries are included in net earnings. For subsidiaries operatingin highly inflationary economies, gains and losses from balancesheet translation adjustments are included in net earnings.

2.4 Inventories and Cost of SalesInventories are valued at the lower of cost or market value. Costof sales is determined utilizing the average cost method.

2.5 Property, Plant and Equipment, NetProperty, plant and equipment are stated at cost, except for thosethat have been impaired, for which the carrying amount isreduced to estimated fair market value.

Depreciation of property, plant and equipment is calcu-lated using the straight-line method at rates based on the estimat-ed useful lives of the assets.

The estimated useful lives (in years) of the Company's property,plant and equipment are as follows:

Buildings and improvements 50Machinery and equipment 2.5 - 15Glass returnable bottles 5Cases and shells 2.5 - 10Plastic returnable bottles 2.5 - 4

2.6 Intangible Assets, NetGoodwill represents the cost in excess of fair value of net assetsof companies acquired in purchase transactions. Goodwill isamortized using the straight-line method over an economic life of40 years.

2.7 Impairment of Long-Lived AssetsBAESA reviews its long-lived assets, certain identifiable intangi-bles and goodwill related to those assets to be held and used inthe business for impairment whenever events or changes in cir-cumstances indicate that the carrying amount of an asset or agroup of assets may not be recovered. BAESA considers a histo-ry of operating losses to be a primary indicator of potentialimpairment. Assets are grouped and evaluated for impairmentat the lowest level for which there are identifiable cash flows thatare largely independent of the cash flows of other groups ofassets. Assets are generally grouped at the country level of oper-ations. BAESA deems an asset to be impaired if a forecast ofundiscounted future operating cash flows directly related to theassets, including disposal value if any, is less than its carryingamount. If an asset is determined to be impaired, the loss ismeasured as the amount by which the carrying amount of theasset exceeds its fair value. Fair value is based on quoted pricesin active markets, if available or based on the best informationavailable, including prices for similar assets or the results of valu-ation techniques such as discounting estimated future cash flowsas if the decision to continue to use the impaired asset was a newinvesting decision. Considerable management judgment is neces-sary to estimate discounted future cash flows. Accordingly, actu-al results could vary significantly from such estimates.

Recoverability of other long-lived assets, primarilyinvestment in a joint venture not identified with impaired assetscovered by the above paragraph, will continue to be evaluated ona recurring basis. The primary indicators of recoverability arecurrent or forecasted profitability over the estimated remaininglife of these assets, based on the operating profit of the businessdirectly related to the assets. If recoverability is unlikely basedon the valuation, the carrying amount is reduced by the amountit exceeds the forecasted operating profit and any estimated dis-posal value.

Assets to be disposed of are reported at the lower of thecarrying amount or fair value less costs to sell and are no longerdepreciated.

2.8 Investment in Affiliated CompanyInvestment in joint venture is accounted for under the equitymethod. The excess in cost over fair value of assets acquiredincluded in this account is $55,246 net of amortization of $6,040,which is being amortized over a period of 40 years.

Notes to Consolidated Financial Statements

29

2.9 Cash and Cash EquivalentsAll highly liquid investments with an original maturity of threemonths or less at the date of purchase are considered to be cashequivalents.

2.10 Revenue RecognitionThe Company recognizes revenues when its products are deliv-ered to its customers.

2.11 DerivativesThe Company sometimes uses selected derivative financialinstruments to reduce its exposure to market risks from changesin interest and foreign currency exchange rates. The Companydoes not hold or issue financial instruments for trading purposesand none of the derivative financial instruments are leveraged.The derivative instruments used were foreign currency options,and interest rate swap and cap agreements.

The Company had entered into interest rate swap andcap agreements as part of the management of its long-term debtinterest rate exposure. The interest rate swap agreements wereused to convert debt with floating interest rates to fixed rateswhile interest rate caps provide the Company with the right toreceive the excess of the floating rate over the contracted fixedrate. The Company accounts for the interest rate swaps and capsas a hedge when the derivative financial instrument is specifical-ly identified with a debt instrument, there is a high degree of cor-relation between fluctuations in the market value of the deriva-tive financial instrument and the underlying debt instrument,and the derivative instrument reduces the Company's interestrate risk. For interest rate swaps and caps that meet the hedgecriteria, interest expense is adjusted to reflect the net amountreceivable or payable under the hedged long-term debt. Gainsand losses on interest rate swaps accounted for as a hedge whichare terminated early are deferred over the remaining original lifeof the related long-term debt while interest rate swaps purchasedfor speculative purposes are recognized as interest expense. Anyfees paid for the swaps and caps are recorded in prepaid expens-es and other current assets, amortized over the term of the relat-ed long-term debt, and reflected in interest expense.

As it is customary for these types of derivatives, thefinancial institutions that are counterparties to these instrumentsdo not require or grant any collateral for these instruments. TheCompany is exposed to risk of credit loss to the extent the coun-terparties fail to meet their obligations under the agreements.However, the Company minimizes such risk by dealing onlywith major international banks and financial institutions withinvestment grade ratings.

2.12 Marketing SpendingThe relationship between the Company and PepsiCo is governedby several agreements. These agreements define the calculationof the concentrate price and the amount to be expended for mar-keting activities (usually as a percentage of total concentrate pur-chases), and set forth a framework for funding marketing expen-ditures for each of the franchise territories. Under the terms ofthese agreements, each franchise territory, in cooperation withPepsiCo, develops an annual marketing plan (AMP) to promotePepsiCo beverage products in such territory. The AMP definesthe types and amounts of advertising and promotional expensesand investments in marketing related assets to be incurred by the

Company in each of these franchises. Upon each purchase ofconcentrate, the Company expenses in the manner describedbelow 100% of the amounts agreed to be expended under theAMP. As defined by these agreements, in certain franchise terri-tories, an agreed upon portion of the payments for concentratepurchases is set aside by PepsiCo to support the marketing activ-ities defined under the AMP. PepsiCo disburses these amountsto the Company or makes direct disbursements to third partiesfor such marketing activities. In other franchise territories,PepsiCo does not receive such funds, and the Company disburs-es all marketing expenditures directly.

External costs incurred in producing advertising arecharged to expense the first time the advertising takes place. Allother advertising and promotional costs are charged to expensein the fiscal year when such costs are incurred. All advertisingcosts incurred during the year are allocated ratably in relation tosales volume over the fiscal year. Advertising and marketingexpenditures, (net of contributions from PepsiCo for additionalmarketing costs as explained below), included in selling andmarketing expenses in the accompanying statements of opera-tions amounted to $43,089, $80,081 and $155,199 in fiscal 1998,1997 and 1996, respectively.

Purchases of marketing related assets are recorded inproperty, plant and equipment in the year of purchase and amor-tized over their useful lives. Under the terms of the AMP, theCompany expended approximately $2,377, $26,696 and $29,868for marketing related assets in fiscal 1998, 1997 and 1996, respec-tively.

The Company may also receive additional marketingsupport from PepsiCo (in excess of the amounts agreed to underthe terms of the AMP) for new market launches, new package orproduct introductions, etc. Such additional support may be pro-vided in the form of reduced cost of concentrate, expenditures onbehalf of the Company and reimbursement for marketing relatedassets or expenses incurred by the Company. The Companyreceived additional marketing support of $8,100, $30,600 and $0in fiscal years 1998, 1997 and 1996, respectively, in the form ofdirect cash, all of which was recorded as a reduction to market-ing expense.

2.13 Income TaxIncome taxes are accounted for under the asset and liabilitiesmethod. Deferred tax assets and liabilities are recognized for theestimated future tax consequences attributable to differencesbetween financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assetsand liabilities are measured using enacted tax rates in effect forthe year in which those temporary differences are expected to berecovered or settled. For subsidiaries in highly inflationary coun-tries, deferred tax assets and liabilities are not recognized on tem-porary differences arising from changes in exchange rates orinflationary indexing for tax purposes related to non-monetaryassets and liabilities that are measured using historical exchangerates. The effect on deferred tax assets and liabilities of a changein tax rates is recognized in income for the period that includesthe enacted date.

2.14 ReclassificationsCertain prior year amounts in the consolidated financial state-ments have been reclassified to conform to the presentation usedin 1998.

Notes to Consolidated Financial Statements

2.15 Earnings per ShareThe Company adopted the provisions of Statement of FinancialAccounting Standards No. 128, "Earnings Per Share" ("StatementNo. 128"), during fiscal year 1998. In accordance with StatementNo. 128, basic and diluted earnings per share is calculated usingthe weighted average number of shares of the Company's com-mon stock outstanding during the period. The weighted averagenumber of shares of the Company's common stock outstandingduring the period plus shares issuable under the Agreementwould have been included in the calculation of diluted earningsper share but the effects were antidilutive as the company record-ed a loss in the current year. The Company expects to issue3,552,504,263 new shares, which, assuming no rights are exer-cised by current shareholders, would result in a 98% dilution ofthe equity ownership of the Company. The issuance of the addi-tional shares was approved by the shareholders of the companyon January 29, 1998.

The calculation of earnings per share does not reflect a100:1 reverse stock split and the corresponding change in parvalue from $0.01 to $1.00 which will occur after the consumma-tion of the Agreement. Under Argentine law the reverse stocksplit must be approved by Argentine regulators.

2.16 Comprehensive (Loss) IncomeDuring fiscal year 1998 the Company adopted the provisions ofStatement of Financial Accounting Standards No. 130, "ReportingComprehensive Income " ("Statement No. 130"). Statement No.130 requires the Company to separately report the translationadjustments of Statement of Financial Accounting Standards No.52 "Foreign Currency Translation" as a component of comprehen-sive loss. The Company has reported comprehensive loss on acomparative basis on the face of the Statement of shareholders'equity (deficit) and comprehensive loss.

2.17 New Accounting PronouncementsThe following statement issued by the Financial AccountingStandards Board became effective subsequent to September 30,1998 and will not have a material effect on the financial positionand the results of operations of the Company:

- Statement No. 133, "Accounting for Derivative Instrumentsand Hedging Activities". This statement establishes account-ing and reporting standards for derivative instruments,including certain derivative instruments embedded in othercontracts and for hedging activities. This statement is effec-tive for all fiscal quarters of fiscal years beginning after June15, 1999. At September 30, 1998 the Company did not engagein any derivative activity; therefore, the pronouncementwould not have a significant effect on the results of opera-tions or disclosures of the Company.

3| Inventories

Inventories as of September 30, 1998 and 1997 consist of the fol-lowing:

1998 1997Finished goods $ 5,600 $ 4,180Raw materials 5,329 6,929

Total inventories $ 10,929 $ 11,109

4|Property, Plant and Equipment, Net

Property, plant and equipment is summarized as follows atSeptember 30, 1998 and 1997:

1998 1997Land and improvements $ 6,972 $ 6,972Building and improvements 41,956 41,866Machinery and equipment 201,663 185,266Bottles, cases and shells 53,576 81,736Construction in process 1,192 6,692

$ 305,359 $ 322,532Accumulated depreciation

and amortization (134,045) (124,842)$ 171,314 $ 197,690

Depreciation expense was $29,343, $60,001 and $79,054 for theyears 1998, 1997 and 1996, respectively. The Brazilian operationswere classified as assets held for sale as of June 30, 1997 and, as aresult, the balance in these assets was adjusted to fair marketvalue and depreciation was discontinued.

In the first half of fiscal year 1998, as a result of the con-tinued shift in multiserve packages from returnable to nonreturnable packages, the Company accelerated the depreciationof these assets from 4 to 15 years to a remaining life of 30months. Such change resulted in additional depreciation beingcharged to operating results of approximately $4,100 (or approxi-mately $0.06 per share).

BAESA often provides retailers with returnable bottles,coolers, racks, fountain equipment and vending equipment on aconsignment basis at no charge to encourage increased purchasesof its products. At September 30, 1998, the net book value of alltools of the trade on a consignment basis was approximately$29,381.

5| Investment in Affiliated Company

The Company participates in Embotelladoras Chilenas UnidasS.A. ("ECUSA"), a joint venture with Cervecerías Chilenas UnidasS.A. ("CCU"), which has the exclusive rights to produce, sell anddistribute certain beverages licensed by PepsiCo and otherbrands in Chile. ECUSA is owned 45% by the Company and 55%by CCU. Condensed financial information of ECUSA as ofSeptember 30, 1998 and 1997 and for the years ended September30, 1998, 1997 and 1996 is as follows:

1998 1997Current assets $ 63,067 $ 50,658Noncurrent assets 109,933 129,148

Total assets 173,000 179,806Current liabilities 24,685 27,305Long-term liabilities 23,547 25,672

Total liabilities 48,232 52,977Shareholders' equity 124,768 126,829Total liabilities and

shareholders’ equity $ 173,000 $ 179,806

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Notes to Consolidated Financial Statements

1998 1997 1996Net sales $ 180,121 $ 187,777 $ 175,284Cost and expenses (155,072) (158,709) (159,368)Other expenses, net (1,138) (4,758) (3,634)Net income $ 23,911 $ 24,310 $ 12,282

The excess in cost over fair value of net assets acquired is $55,246net of amortization of $6,040 at September 30, 1998. Goodwillamortization related to this investment approximated $1,500 foreach year in the three year period ended September 30, 1998.Undistributed retained earnings for ECUSA amounted to $45,870as of September 30, 1998.

The shares of ECUSA held by BAESA serve as collateralto the $26,589 outstanding debt related to its acquisition.

During fiscal years 1998, 1997 and 1996, BAESA receivedcash dividends net of taxes of $4,894, $3,683 and $1,952, respec-tively. The entire amount of the dividends paid in fiscal 1998was applied towards payment of principal and interest of thedebt with CCU.

During fiscal year 1998 there was a devaluation in theChilean peso which led the Company to record a cumulativetranslation adjustment of $6,759.

6| Intangible Assets, Net

Intangible assets at September 30, 1998 and 1997 were comprisedsolely of Goodwill:

1998 1997 Goodwill (40 years) $ 64,806 $ 64,806Accumulated amortization (7,633) (6,022)

$ 57,173 $ 58,784

Amortization expense was $1,608, $4,002 and $6,930 in fiscalyears 1998, 1997 and 1996, respectively.

7|Other Current Liabilities

Other current liabilities at September 30, 1998 and 1997 are sum-marized as follows:

1998 1997Taxes payable

other than income tax $ 5,584 $ 6,571Accrued payroll 7,647 9,509Restructuring reserve 2,834 4,786Due to PepsiCo for marketing 133 -Other 16,469 15,997

$ 32,667 $ 36,863

8|Related Party Transactions

BAESA has been a franchisee of PepsiCo since its inception. InNovember 1993, PepsiCo, including certain of its affiliates, andArgentine Bottling Associates ("ABA"), a general partnershipowned by PepsiCola Puerto Rico Bottling Company ("PCPRB"),

entered into a partnership agreement forming a Delaware generalpartnership, BAESA Shareholder Associates ("BSA"), to hold andvote the BAESA common shares owned by PepsiCo and ABA.The BAESA common shares held by BSA represented at that timea majority of the voting power of BAESA's capital stock. Prior toJuly 2, 1996, ABA had the right, pursuant to such partnershipagreement, to vote all of the BAESA common shares held by BSA.Since July 1996, PepsiCo obtained the right to vote all the BAESAcommon shares held by BSA. In addition, in 1997 the partner-ship agreement was amended to reflect the withdrawal of ABA.As a result, PepsiCo has the power to elect a majority of BAESA'sBoard of Directors and management and to determine the out-come of substantially all matters to be decided by a vote of share-holders, including the election of directors.

During the fiscal years ended September 30, 1996 theCompany paid $659 to a company owned by a shareholder ofBAESA for consulting services pertaining to the installation andoperations of production equipment.

The Company has obtained legal services from a lawfirm with certain partners that are members of the board of direc-tors of the Company. Total fees paid by the Company for profes-sional legal services to such law firm totaled $1,929, $886 and$508 during the fiscal years ended September 30, 1998, 1997, and1996, respectively.

BAESA provided management consulting, accounting,legal and other administrative services to PCPRB for $656 for thefiscal year 1996.

BAESA purchased preforms (small molded plastic unitswhich are expanded with hot air to produce plastic bottles) fromPCPRB in the amount of $1,413 for fiscal year 1996. In manage-ment's opinion, the terms of this long-term supply contract werereasonable and, at the time such contract was entered into, noother comparable long-term supply contract was available to theCompany from unrelated parties due to hyperinflationary condi-tions in Argentina. The prices paid for the preforms purchasedfrom PCPRB were established pursuant to a long-term contractwhich BAESA entered into in order to ensure itself adequatelong-term supply of preforms. In November 1996, BAESA andPCPRB terminated this long-term preform supply agreement,whereby a fee in connection with the cancellation of this contractwas completely offset with the amount due to BAESA by PCPRBof approximately $2,250. Furthermore, BAESA agreed to assumefull responsibility for the payment of certain leased office premis-es in the United States where BAESA's corporate headquarterswere established and PCPRB is the lessee. These offices are sub-leased under a long-term agreement. BAESA is entitled toreceive the proceeds from the sublease arrangements (see Note20). As of September 30, 1998, the discounted payments dueunder the lease arrangement amounts to approximately $1,300,while the discounted amounts to be received pursuant to the sub-lease agreements approximated $1,200. As part of the termina-tion of the agreement, PCPRB agreed to pay $50 to BAESA.

The Company sold finished goods and preforms toECUSA in the amount of $1,701 for fiscal year 1996.

BAESA is party to certain contracts and arrangementswith PepsiCo relating to exclusive franchise arrangements, jointmarketing activities and purchases of concentrate (see Note 2.12).Purchases of concentrate amounted to $59,675, $96,718 and$118,821 for fiscal years 1998, 1997 and 1996, respectively.BAESA received additional marketing support from PepsiCo of$8,100, $30,600 and $0 for fiscal years 1998, 1997 and 1996, respec-tively.

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Notes to Consolidated Financial Statements

BAESA also leases commercial space and subcontractsthe services of certain employees from an affiliate of PepsiCo forthe UPSA facility. The lease payments made by BAESA underthis arrangement are based on market conditions in place at thetime this arrangement was entered into during fiscal year 1994.BAESA reimburses the PepsiCo affiliate for the salaries and bene-fits earned by employees under subcontract. Total paymentsmade by the Company for subcontracted employees amounted to$1,465, $1,781 and $609 in fiscal years 1998, 1997 and 1996,respectively.

Through July 1, 1996, a majority of PCPRB's Board ofDirectors and certain of its executive officers were also directorsand/or officers of the Company.

9| Interest

1998 1997 1996 Interest expense $ (62,131) $ (101,717) $ (79,077)Interest income 781 291 3,040

Total interest expense, net $ (61,350) $ (101,426) $ (76,037)

The Company capitalizes interest cost as a component of the costof certain land, buildings and improvements, and machinery.The following is a summary of interest cost incurred for the fiscalyears ended September 30, 1998, 1997 and 1996:

1998 1997 1996 Interest cost capitalized $ - $ - $ 2,699Interest cost charged to income 62,131 101,717 79,077

Total interest cost incurred $ 62,131 $ 101,717 $ 81,776

10| Income Tax

Income tax payable is calculated separately for the Company andeach of its subsidiaries as required by the tax laws of the coun-tries in which the Company and its subsidiaries operate.

Combined income tax expense for the fiscal years endedSeptember 30, 1998, 1997 and 1996 consists of the following:

1998 1997 1996 Current:

Argentina $ 10 $ 91 $ 4,618Other - 87 62

10 178 4,680Deferred:

Argentina $ 425 $ 12 $ (7,337)Brazil - - 10,848

425 12 3,511Combined income tax

expense $ 435 $ 190 $ 8,191

The statutory income tax rate in Argentina is 33%, Uruguay andCosta Rica is 30% and Chile 15% for all fiscal years presented.The statutory income tax rate in Brazil is 33% for the fiscal year1997, and 30.56% for the fiscal year 1996. UPSA operates in a taxfree zone that has an indefinite tax exemption period. Dividendspaid by UPSA are not currently taxable under laws in Uruguayand Argentina. The Company also earns income in another non-taxing jurisdiction.

The Company has not provided for deferred taxes forthe differences between its financial statement carrying valuesand tax basis for its investment in any of its subsidiaries, exceptfor its investment in ECUSA, because they are considered by

management to be permanently invested under the indefinitereversal criteria of APB 23, "Accounting for Income Taxes" ("APB23"). Beginning in the fiscal year 1996, management determinedthat the indefinite reversal criteria of APB 23 were no longer metwith respect to its investment in ECUSA, and therefore theCompany began to provide for deferred taxes on the investment.The investment in ECUSA gave rise to a deferred tax asset forwhich the Company determined that it is more likely than notthat it will not be realized and therefore established a valuationallowance against the related deferred tax asset.

The significant components of deferred income taxexpense are as follows for the fiscal years ended September 30,1998, 1997 and 1996:

1998 1997 1996(as restated)

Deferred tax (benefit) (exclusive of the effects of other components listed below) $ (29,155) $ (118,000) $ (142,270)

Change in deferred tax valuation allowance 29,580 118,012 140,787

Adjustment to deferred tax assets and liabilitiesfor change in tax rate - - 4,994

$ 425 $ 12 $ 3,511

The tax effects of temporary differences that give rise to signifi-cant portions of the deferred tax assets and deferred tax liabilitiesas of September 30, 1998 and 1997 are presented below:

1998 1997 Deferred tax assets:

Accounts receivable, principally due to allowance for doubtfulaccounts $ 2,205 $ 1,421

Net operating loss carryforwards 77,672 58,643Property, plant and equipment,

principally due to differencesin depreciation rates 2,127 -

Inventories, principally due toreplacement cost 1,175 768

Accrued expenses not deductible 4,163 5,303Investment in ECUSA 2,568 2,568Reserve for contingency 4,900 -Other 67 -

Total gross deferred tax assets 94,877 68,703Less valuation allowance (93,166) (63,586)Net deferred tax assets 1,711 5,117

Deferred tax liabilities:Property, plant and equipment,

principally due to differencesin depreciation rates 1,346 4,396

Other assets deductible for tax purposes 230 161Total gross deferred tax liabilities 1,576 4,557Net deferred tax assets $ 135 $ 560

32

Notes to Consolidated Financial Statements

33

Income tax expense (benefit) attributable to earnings from continuing operations for the fiscal years ended September 30,1998, 1997 and 1996 differed from the amounts computed by applying the statutory income tax rate applicable to thecountries in which the Company and its subsidiaries operate as a result of the following:

1998Argentina Brazil Others Total

Loss before income taxes and equity inEarnings of affiliated company $ (96,845) $ - $ (1,782) $ (98,627)

Computed “expected” tax (benefit) expense (31,960) - (534) (32,494)Increase (reduction) in income taxes resulting from:

Change in deferred tax valuation allowance 29,102 - 478 29,580Amortization of goodwill 900 - - 900Tax exempt income, net (70) - - (70)Non-deductible expenses 2,077 - - 2,077Other, net 386 - 56 442

Income tax expense $ 435 $ - $ - $ 435

1997Argentina Brazil Others Total

Loss before income taxes and equity inearnings of affiliated company $ (74,440) $ (258,129) $ (19,265) $ (351,834)

Computed “expected” tax (benefit) expense (24,562) (85,183) (2,134) (111,879)Increase (reduction) in income taxes resulting from:

Change in deferred tax valuation allowance 33,028 85,183 (199) 118,012Non-deductible expenses 1,501 - 1,978 3,479Amortization of goodwill 900 - 338 1,238Tax benefit from sale of subsidiary (10,936) - - (10,936)Other, net 172 - 104 276

Income tax expense $ 103 $ - $ 87 $ 190

1996 (as restated)Argentina Brazil Others Total

(Loss) income before income taxes and equity inearnings of affiliated company $ (117,217) $ (334,769) $ 18,699 $ (433,287)

Computed “expected” tax expense (38,682) (102,272) 5,393 (135,561)Increase (reduction) in income taxes resulting from:

Change in deferred tax valuation allowance 30,892 115,235 (5,340) 140,787Adjustment to deferred tax assets and liabilities

for enacted change in tax rate 811 4,183 - 4,994Non-deductible expenses 5,134 - 400 5,534Amortization of goodwill 908 - - 908Withholding taxes on dividend distribution 683 - - 683Effect of indexing for tax purposes - - (297) (297)Tax exempt income, net (2,516) - - (2,516)Other, net 51 (6,298) (94) (6,341)

Income tax expense (benefit) $ (2,719) $ 10,848 $ 62 $ 8,191

Notes to Consolidated Financial Statements

At September 30, 1998, BAESA and certain of its subsidiarieshave accumulated operating loss carryforwards of $235,514 tooffset future taxable income in the corresponding countries ofoperations of each entity. The operating loss carryforwardsexpire in varying amounts through 2003.

In assessing the realization of these net operating losscarryforwards, management considers whether it is more likelythan not that some portion or all of these loss carryforwards willbe realized. The ultimate realization of the operating loss carry-forwards and the other deferred tax assets are dependent uponthe generation of future taxable income during the periods priorto the expiration of the operating loss carryforwards.Management considers the scheduled reversal of deferred tax lia-bilities, projected future taxable income, and tax planning strate-gies in making this assessment. Based upon the level of histori-cal taxable income and projections for future taxable income overthe operating loss carryforward periods, management believes itis more likely than not that the Company will not realize the ben-efits of these net operating loss carryforwards and of the otherdeferred tax assets. For the net operating loss carryforward ofeach entity, management established full valuation allowancesduring fiscal years ended September 30, 1998 and 1997 becauserealization of such benefits was not considered likely.

11| Short-Term Borrowings and Long-Term Debt

Short-term borrowing as of September 30, 1998 and 1997 consistsof the following:

1998 1997 Current portion of long-term debt $ 257,443 $ 257,944Unsecured bank loans and overdrafts 300,613 300,097Total short-term borrowings $ 558,056 $ 558,041

Bank loans and bank overdrafts outstanding at September 30,1998 represent borrowings utilized under lines of credit. Theinterest rate on bank loans and overdrafts outstanding, which aresubject to the Agreement described in Note 1, is 9.479% perannum.

Long-term debt as of September 30, 1998 and 1997 consists of thefollowing:

1998 1997

Negotiable Obligations of $60,000 due December 29, 2000,interest at 8.5% per annum, payable semiannually in arrears $ 60,000 $ 60,000

Unsecured Notes payable, due in installments of varyingamounts through July 2001, interest ranging from LIBOR plus 0.25% to 10.4% (9.479% since October 1, 1996) 196,746 196,746

Note payable of $40,000 to CCU due in variable payments fromMay 2000 through May 2002, interest at 9.375% per annum, collateralized by shares of ECUSA held by BAESA 26,589 28,798Others 2,110 3,055Total long-term debt 285,445 288,599Less current portion 257,443 257,944Long-term debt, excluding current portion $ 28,002 $ 30,655

The $60,000 Negotiable Obligations due 2000 are redeemable atthe option of the Company, in whole but not in part, on each ofDecember 29, 1997, December 29, 1998 and December 29, 1999 at103%, 102% and 101%, respectively, of the outstanding principalbalance of each security. The securities constitute direct, uncon-ditional and unsecured obligations of the Company and rankpari passu without preference among themselves and equal inpriority of payment with other present and future unsecured andunsubordinated indebtedness of the Company.

The Company's credit agreements with several financialinstitutions contain restrictive covenants which include therequirement to maintain tangible net worth, as defined, of notless than $180,000 and certain financial ratios.

The Company defaulted on certain principal and inter-est payments and failed to meet certain covenant requirements asof and for the fiscal years ended September 30, 1998 and 1997,which place the Company in default. As of September 30, 1998and 1997, the Company reclassified approximately $134,585 and$171,405 of its long-term debt as current since covenant viola-tions had occurred and no loan modifications or waivers werereceived. Early in fiscal year 1997 BAESA entered into aStandstill Agreement that required payment of accrued interestthrough September 30, 1996. Such payment totaling $16,754 wasmade in October 1996.

In November 1997, BAESA entered into a receivablefinancing agreement (the "Heller Sud Agreement") with HellerSud Servicios Financieros S.A. ("Heller Sud") pursuant to whichHeller Sud granted BAESA a one-year credit line up to anamount of $7,000 of which $820 was payable at September 30,1998. The amount payable is included in short-term borrowings.

34

Notes to Consolidated Financial Statements

35

As collateral for BAESA's obligations under the Heller SudAgreement, BAESA transferred to Heller Sud accounts receivableand related documents of certain of its major clients. Heller Sudwill collect such accounts receivable and, after deducting theagreed-upon commission for such collection process, will applythe proceeds of the collection to offset the debt under BAESA'scredit line. The risk of collection the pledged accounts receivableremains with BAESA and BAESA has agreed to repurchase anyreceivables which are deemed non-collectible. The agreementwas approved by BAESA's Board of Directors and by theSteering Committee.

As discussed in Note 1, BAESA entered into anAgreement with its primary financial creditors in Argentina, rep-resenting 89% of the debt subject to restructuring, that wouldallow the Company to restructure substantially all of theCompany's debt obligations, including interest accrued fromOctober 1, 1996 through the closing date. Except for theEurobonds, the remaining debt subject to restructuring bearsinterest at 9.479% per annum.

As discussed in Note 13, certain debt of the Brazilianoperations amounting to approximately $25,000, including thedeficiency amount related to the sale and lease-back agreementdiscussed in Note 20, has been transferred to BAESA (Argentinelegal entity) and will be part of the debt subject to theAgreement, discussed in Note 1. The $25,000 is included inshort-term borrowings.

BAESA's debt related to the joint venture in Chile hasbeen refinanced by CCU to be paid in variable amounts fromMay 2000 through May 2002. All cash dividends declared byECUSA will be used to reduce the outstanding debt with CCU.

The Company entered into interest rate swap and capagreements to fix the interest rate on certain variable interest rateborrowings. These agreements effectively converted an aggre-gate principal amount outstanding at September 30, 1996 of$80,952 with an interest rate ranging from LIBOR (5.0% atSeptember 30, 1996) plus 1.0% to LIBOR plus 1.5% to a fixed rateon the committed debt ranging from 6.1% to 7.4%. The agree-ments mature on varying dates from 1999 to 2000. In December1997, such agreements were canceled, except for $346 that isincluded as part of the Agreement. The cancellation fee was $476which is included in interest expense in other (expenses) income,net in the statement of operations.

Excluding the debt subject to restructure under theterms of the Agreement, the aggregate maturities of long-termdebt at September 30, 1998 are as follows:

1999 $ 6972000 7,2952001 10,7072002 10,000

Total $ 28,699

12| Note Payable to PepsiCo

In May 1995, PepsiCo and BAESA reached an agreement where-by on May 16, 1995 PepsiCo loaned $49,400 to BAESA to berepaid in various installments, including principal and interest atan effective rate of approximately 18%, over the period from thedate of such agreement through December 31, 1999, as BAESApurchases concentrate from PepsiCo for any of BAESA's fran-chised territories in Brazil. The installment amount will equal3/17 of the concentrate purchase price. At the end of each calen-dar year, from 1995 to 1999, there was to be a true-up paymentbetween BAESA and PepsiCo, depending on the total amount ofinstallment payments paid by BAESA to PepsiCo in relation tocertain minimum amounts.

BAESA has been in default under this agreement since1996. Consequently, the debt to PepsiCo was reclassified as cur-rent in the September 30, 1998 and 1997 consolidated balancesheets. PepsiCo is a participant in the Agreement discussed inNote 1. Therefore, the debt to PepsiCo is subject to the terms andconditions of the Agreement. Interest accrued and unpaidthrough September 30, 1996 was paid to PepsiCo during October1996 pursuant to the Standstill Agreement. The Company hasnot made any principal payments on the debt to PepsiCo. ThePepsiCo loan is included in the debt subject to restructuring andbears interest at 9.479%. Accrued interest was $10,783 and $6,035at September 30, 1998 and 1997, respectively.

13| Sale of Brazilian Operations

In the third quarter of fiscal year 1997, BAESA circulated an offer-ing document to sell its Brazilian subsidiaries, and on July 29,1997, BAESA received an offer from Compañhia CervejariaBrahma ("Brahma") to acquire its Brazilian operations. TheCompany recorded a charge of approximately $184,692 to reducethe carrying value of long-lived assets (mainly property, plantand equipment of $169,307 and identifiable intangible assets of$15,385) in its Brazilian operations to their expected fair marketvalue, less cost to sell. Such charge is reported as a component ofunusual impairment and disposals in the accompanying state-ments of operations.

After negotiations, the principle terms of the transactionwere approved by BAESA's shareholders on September 30, 1997with Brahma assuming management control of the day to dayoperations on that date. For financial statement purposes, all lia-bilities retained by the Company related to the Brazilian opera-tions are included in other current liabilities and short-term debtin the accompanying consolidated balance sheet. The assets andliabilities sold to Brahma are shown in the accompanying consol-idated balance sheet at their net amount, which was not signifi-cant at September 30, 1997.

The final closing occurred on October 22, 1997. Thefinal loss on sale did not differ materially from the charge previ-ously recorded to reduce the carrying value of the long-livedassets to their fair market value. The results of operations of the

Notes to Consolidated Financial Statements

Brazilian business subsequent to September 30, 1997 wereassumed by Brahma at closing and thus had no impact on thefinal loss on sale. The principal terms of the transaction include:

- Brahma acquired all of the outstanding quotas (shares) ofBAESA's two Brazilian subsidiaries (collectively the "BrazilianCompanies") for approximately one dollar and the assump-tion of $208,000 of liabilities;

- Certain debt obligations of the Brazilian Companies amount-ing to approximately $25,000 were assumed by BAESA(Argentine legal entity) and are included as short term bor-rowings in the accompanying consolidated balance sheet;

- BAESA was released from certain guarantees ($60,000) relat-ing to debt of the Brazilian Companies;

- BAESA capitalized certain inter-company loans to theBrazilian Companies prior to completion of the transaction;

- Brahma and the Brazilian banks agreed to reduce the out-standing bank debt of the Brazilian Companies upon the pur-chase of the Brazilian operations by Brahma;

- BAESA agreed to indemnify Brahma against certain contin-gencies, but in no event to exceed $20,000 in the aggregate.BAESA, in turn, received an indemnity from PepsiCo whichindemnifies BAESA against certain contingencies andrequires PepsiCo to reimburse BAESA to the extent amountsowed by BAESA to Brahma under the purchase agreementexceed $10,000 in the aggregate;

- PepsiCo agreed to transfer the bottling franchise for Brazil toBrahma, and to contribute $36,954 of indebtedness owed bythe Brazilian Companies to PepsiCo; and

- BAESA pledged the shares of its subsidiary located in theCayman Islands and agreed to use its best efforts to sell suchshares. Any proceeds from the sale of the shares will be forthe benefit of PepsiCo in consideration for amounts con-tributed to Brahma to support the sale. The book value of thenet assets of such subsidiary was zero.

14| Restatement of Fiscal Year 1996 Results ofOperations and Impairments, Disposals andWrite-Offs of Certain Assets and Other Charges

14.1 Restatement of Fiscal Year 1996 Results of Operations.During October 1996, the Company became aware of allegationsregarding the inappropriate capitalization of certain amounts ascapital assets in the accounting records of the Company'sBrazilian operations. The Company initiated an investigation ofthe allegations with the assistance of outside legal and financialadvisors. It was determined that certain employees, who wereno longer employed by the Company, acted in concert to circum-vent the Company's system of internal controls and inappropri-ately recorded amounts to property, plant and equipment in itsBrazilian operations. In fiscal 1996, the Company recorded a$40,000 provision against property, plant and equipment, ofwhich $15,000 related to fiscal year 1995, to reflect the appropri-ate carrying value, including adjustments resulting from the

identification of those irregularities. The financial statements forfiscal years 1996 have been restated to properly reflect the $15,000in fiscal year 1995. The Company has reemphasized its capital-ization policies, has established additional formal approvals thatmust be obtained prior to recording capital assets costs and hasundertaken closer monitoring of capital expenditures. TheCompany subsequently disposed of its Brazilian operations asdiscussed in Note 13.

Following is a summary of the impact of the restatementon fiscal year 1996:

1996As restated As previously

reportedNet sales $ 703,246 $ 703,246Loss from operations (357,828) (372,828)Net loss (437,381) (452,381)Net loss per share: (6.03) (6.24)(Accumulated deficit) $ (361,867) $ (361,867)

14.2 Impairments, Disposals and Write-offs of Certain Assetsand Other Charges.During fiscal year 1998 BAESA recorded $10,492 of impairmentand disposals to write down certain equipment and returnableplastic containers as a result of the rationalization of its infra-structure in light of the market's continued shift to nonreturn-able packaging.

In addition to the $184,692 impairment loss related tothe Brazilian operations discussed under Note 13, during fiscalyear 1997 BAESA recorded $14,068 of impairments and disposals.The most significant items included were: (i) $7,474 to writedown the carrying value of the long-lived assets in the plasticoperations in Colonia, Uruguay, to their estimated fair value lesscosts to sell, these assets were sold in March of 1998 (See Note 20)and (ii) $6,594 to record an additional impairment to the carryingvalue of property, plant and equipment based on the final offerrelated to the sale of the Company's operations in Costa Ricawhich occurred in July 1997. Such charges totaling $198,760 arereported as unusual impairment and disposals in the accompany-ing statements of operations.

During 1997, the Company also charged to operationsapproximately $1,900 to recognize the physical loss of coolersand other tools of the trade in its Argentine operations based oncompleted studies. Such charges were included in Selling andmarketing costs in the Statement of operations.

During the fiscal year ended September 30, 1996, theCompany recorded $139,800 of impairment losses, write-offs andother charges to operations. The most significant items includedwere: (i) a $25,000 provision against property, plant and equip-ment based on management's estimate of the appropriate carry-ing value including adjustments resulting from the identificationof certain irregularities involving inappropriate capitalization ofcertain expenses in property, plant and equipment that occurredin the Company's Brazilian operations; (ii) approximately $37,100

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Notes to Consolidated Financial Statements

37

to recognize the physical loss of bottles, coolers and other tools ofthe trade in its Brazilian operations as discussed below; (iii)approximately $28,800 to write down the carrying value of theCompany's operations in Costa Rica which were held for sale($11,600, based on an unsolicited offer to purchase these opera-tions by a third party; the subsequent negotiations were unsuc-cessful) and to write down other assets identified as obsolete orof no further value $17,200; (iv) approximately $11,500 to writedown certain intangible assets to estimated recoverable valuebased on current assessments of the level of future operations;and (v) approximately $9,700 to increase reserves for bad debtsin order to recognize the deterioration in the aging of tradeaccounts receivable and collection problems currently beingexperienced. A portion of such charges totaling $21,514 is report-ed as unusual impairment and disposals in the accompanyingstatements of operations, which includes: write-down of theCosta Rica net assets, approximately $11,614; write-down of cer-tain bottling equipment held for sale in Brazil, approximately$7,100; and write-down of certain buildings and bottling equip-ment held for sale in Argentina, approximately $2,800. Theremaining part of such charges included: approximately $43,500in Cost of sales; approximately $28,786 in Administrativeexpenses; and approximately $46,000 in Selling and marketingexpenses.

During mid-1996, the Company noticed a change in theexpected proportion of sales of returnable to nonreturnable bot-tles. As a result, the Company undertook an analysis of the esti-mated losses of returnable bottles to evaluate whether the origi-nally estimated lives of those items continued to be appropriate.The Company determined that losses of returnable containerswere greater than had been originally estimated.

Based on an analysis of purchasing patterns of softdrink consumers in Brazil, the Company further concluded thatthe losses appeared to be attributable to customers in the Rio deJaneiro and São Paulo markets not distinguishing betweenreturnable and nonreturnable containers and disposing of return-able containers as if they were nonreturnable. Accordingly, theCompany decided to substantially reduce sales of returnable con-tainers in those areas, transferred remaining returnable contain-ers to other areas where losses were expected to be lower andadjusted the estimated lives of returnable containers. At thesame time, the Company undertook a partial survey of equip-ment in the Brazilian market. As a result of the survey, theCompany adjusted the useful lives of equipment and other toolsof the trade related to returnable containers to reflect its revisedassessment of the ultimate value of such assets. The effect of thechange in the estimate of such useful lives in fiscal year 1996 wasto increase the net loss by approximately $37,100 (or approxi-mately $0.51 per share).

15| Restructuring Charges

During the fiscal year ended September 30, 1998, the Companyrecorded $4,503 of restructuring charges primarily for reductionof workforce (approximately 510 employees) to reduce costs andenhance profitability and efficiency in Argentina and Uruguay.In addition, $4,564 related to expenses incurred in the consum-mation of Agreement was reflected as a debt restructuringcharges in non-operating expenses. Through September 30, 1998,$7,191 of restructuring costs had been incurred, of which $4,370were employee related costs and $2,821 were for debt restructur-ing charges. It is currently anticipated that the majority of theremaining accrual will be paid or settled by the end of the fiscalyear ending September 30, 1999.

During the fiscal year ended September 30, 1997, theCompany recorded $4,434 of restructuring charges primarily forreduction of workforce (approximately 270 employees) to reducecosts and enhance profitability and efficiency in Argentina andUruguay. In addition, $12,598 related to expenses incurred in thenegotiation of the Agreement was reflected as debt restructuringcharges in non-operating costs. Through September 30, 1997,$17,032 of restructuring costs had been incurred, of which $4,434were employee related costs and $12,598 were for debt restruc-turing charges.

During the fiscal year ended September 30, 1996, theCompany recorded a $34,782 restructuring charge for actionsaimed at reducing costs and enhancing profitability and efficien-cy. The restructuring was driven by continued recessionary eco-nomic conditions in Argentina which resulted in lower sales vol-ume and the Company's earnings in its Brazilian operationsbeing negatively impacted by the large infrastructure invest-ments to cover future anticipated volume needs. BAESA'srestructuring measures include the consolidation of certain oper-ations and a reduction of workforce of approximately 1,500employees. The costs associated with these restructuring meas-ures include (i) $19,090 for severance costs; (ii) $2,383 for realproperty lease termination; (iii) $6,109 as a result of the write-down of property, plant and equipment to its estimated net real-izable value as a result of the decision by the Company's man-agement to close certain manufacturing facilities in Argentina;(iv) $3,500 for the reduction to net realizable value of propertyand equipment as a result of a decision by the Company's man-agement to cease the sale and manufacture of certain products incertain of its franchise territories; and (v) $3,700 in relocationcosts for terminated employees and other costs. ThroughSeptember 30, 1997, $24,223 of restructuring costs had beenincurred, of which $19,090 were employee related costs, $1,433 inreal property lease terminations and $3,700 in relocation andother costs.

The outstanding balance of the operating restructuringreserve is $1,091 and $1,841 at September 30, 1998 and 1997 and$1,743 and $2,945 at September 30, 1998 and 1997, respectively,for debt restructuring reserves.

Notes to Consolidated Financial Statements

16| Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of September 30,1998 and 1997 consist of the following:

1998 1997Deferred debt restructuring costs $ 3,031 $ -Exclusivity contracts 1,325 787Other 986 1,707Total prepaid expenses

and other current assets $ 5,342 $ 2,494

In the third quarter of fiscal year 1998 the Company determinedthat the principal conditions precedent to the consummation ofthe Agreement discussed in Note 1 were met; therefore, theCompany began deferring any direct costs related to theAgreement in order to record these costs in the period duringwhich the restructuring occurs. Legal fees and other direct coststhat the Company incurs in granting the unsubscribed shares toits creditors will reduce the amount otherwise recorded for suchequity interest. All other direct costs that the Company incursshall be deducted from the gain on restructuring of the debt sub-ject to restructure, if any, or will be recorded as an expense uponthe consummation of the Agreement if no gain on restructuringis recognized. At September 30, 1998, $3,031 in debt restructuringcosts had been deferred and are included in prepaid expensesand other current assets.

17| Shareholders’ Equity (Deficit)

The Company's common stock consists of Class A shares, entitledto five votes each, and Class B shares, entitled to one vote each,of $0.01 par value.

In 1992, the shareholders approved an application to listthe Class B shares on the Buenos Aires Stock Exchange.

In 1993, the Company applied to list the Class B shares(represented by American Depositary Shares ("ADS")) on theNew York Stock Exchange ("NYSE").

As a consequence of the existence of a shareholders'deficit in the Company's financial statements prepared underArgentine GAAP, the Buenos Aires Stock Exchange suspendedtrading of BAESA's stock in May 1997. The NYSE has also sus-pended trading of BAESA's ADS.

In 1997, ABA notified the Company of its intent to con-vert 10,928,729 Class A shares into 10,928,729 Class B shares. Asa result, the Board of Directors approved an increase in the num-ber of authorized Class B shares by 10,928,729 and the sameamount of Class A shares were converted into Class B shares.

In 1996, certain shareholders notified the Company oftheir intent to convert 2,998,298 Class A shares into 2,998,298Class B shares. As a result, the Board of Directors approved anincrease in the number of authorized Class B shares by 2,998,298,and the same amount of Class A shares were converted into ClassB shares.

On January 29, 1998 the shareholders of BAESA author-ized the issuance of up to 4,000,000,000 Class B ordinary sharespar value $0.01 per share.

On November 25, 1998, the CNV authorized theissuance of 3,552,504,263 new Class B shares, which have beenoffered for subscription on a preferential basis to existing share-holders (See Note 1).

18| Restrictions on Retained Earnings

ReservesBy law, a minimum of 5% of net income for the year as reportedin the financial statements prepared under Argentine GAAPmust be appropriated by resolution of the shareholders to legalreserve until such reserve reaches 20% of the issued capital. Thelegal reserve may be used only to absorb deficits. In 1997 thelegal reserve amounting to $8,900 was fully absorbed againstaccumulated deficit. As a result, under Argentine law, theCompany will have to restore the balance of the legal reserveused to absorb the accumulated deficit before declaring divi-dends.

On December 9, 1994, the shareholders of the Companyapproved the establishment of a voluntary reserve of $19,314.This voluntary reserve may be used only to absorb future lossesarising from investments in foreign subsidiaries carried on anadjusted basis, as required by Argentine GAAP. In 1996, theCompany utilized $2,231 of this voluntary reserve. In 1997, theshareholders authorized the remaining balance of this reserve tobe used to absorb the accumulated deficit.

Dividend PaymentsPayments of dividends are based on profits as determined byArgentine statutory financial statements. As a result of the accu-mulated losses as of September 30, 1998, the Company cannotremit further dividends until profitability is restored underArgentine GAAP.

19| Employee Stock Option Plan

In December 1994, shareholders of the Company approved theestablishment of an incentive stock option for certain keyemployees of the Company. The Company would issue non-vot-ing Class C shares of $0.01 of par value to the key employees.These Class C shares would be converted to Class B shares uponexercise of the options. The price at which the options may beexercised shall be equal to the fair value of the Class B shares ofthe Company as of the date of grant. As of September 30, 1996,the shareholders of the Company had authorized 7,000,000 ClassC shares. The new stock option plan was pending final imple-mentation and modifications to the Company's by-laws and CNVapproval. The Company had granted 3,969,834 options underthis plan at an exercise price ranging from $2.47 to $3.23 pershare.

On January 29, 1998, regardless of the final outcome ofthe restructuring process, the shareholders of the Company can-

38

Notes to Consolidated Financial Statements

39

celed the stock option plan and existing options. Such cancella-tion, which is a condition of the Agreement, was made at no sig-nificant cost to the Company, as the exercise price was in excessof the most recent market price.

20| Commitments and Contingencies

The Company leases office and operating facilities under operat-ing leases with unexpired terms ranging from two to six years.Total rental expense for all operating leases was $1,063, $16,010and $12,141 for the fiscal years ended September 30, 1998, 1997and 1996, respectively. Sublease income received during the fis-cal years ended September 30, 1998, 1997 and 1996 was $0, $0,$52, respectively. Minimum lease payments and receipts undernon-cancelable operating leases expiring subsequent toSeptember 30, 1998 are:

Lease SubleasePayments Receipts

1999 $ 378 $ 3882000 378 3882001 378 3882002 378 388Thereafter 359 -

$ 1,871 $ 1,552

In connection with the disposal of its Brazilian opera-tions, BAESA agreed to indemnify Brahma against certain contin-gencies, but in no event to exceed $20,000 in the aggregate.BAESA, in turn, received an indemnity from PepsiCo whichindemnifies BAESA against certain contingencies and requiresPepsiCo to reimburse BAESA to the extent amounts owed byBAESA to Brahma under the purchase agreement exceed $10,000in the aggregate. In management's opinion and based on consul-tation with its legal counsel, the Company believes its accruals atSeptember 30, 1998 are adequate to provide for any potentiallosses related to these guarantees.

During December 1995, under a sale and leasebackagreement, the Company sold its fleet of vehicles in Brazil forapproximately $29,100 and leased it back for a five year period.The Company had a purchase option at fair market value at expi-ration of the lease, and an early termination option which per-mits the Company to purchase the fleet of vehicles, contingentupon cancellation or failure to renew. The transaction wasaccounted for as an operating lease. The lease had severalrestrictive covenants which required the maintenance of certaintangible net worth, minimum current ratio and restrictions on thelevel of additional debt to be incurred. As of September 30, 1997,the Company agreed to cancel the agreement and to assume anydeficiency resulting from deducting the proceeds of the sale ofthe fleet to the debt owed to the lessor. The amount to beassumed by the Company is contingent upon the sale of the fleetand is expected to range from $12,400 to $20,800. The Companyhas recorded an accrual of $14,923 for the final deficiency, whichis part of the Agreement discussed in Note 1.

As discussed in Note 1, the Company will issue newSeries A, B and C negotiable obligations as part of theAgreement. The new negotiable obligations will mature in 2005and will be unsecured obligations that will rank equally with all

other unsecured and unsubordinated obligations. The terms ofthe obligations will be as follows:

Series A - Interest at 11% per annum, payable semi-annuallybeginning three years after issuance. Redeemable in whole butnot in part as of July 15, 1999.

Series B - Interest of approximately 12% per annum, payablesemi-annually beginning on the issuance date. Redeemable inwhole but not in part as of July 15, 2002.

Series C - Interest of approximately 12% per annum, payablesemi-annually beginning on the issuance date (subordinate toboth the Series A and B negotiable obligations). Redeemable inwhole but not in part as of July 15, 2002.

Following the consummation of the Agreement, theindentures governing the new debt will contain significantcovenants and other restrictions affecting the Company, includ-ing among others: (i) a requirement that the Company redeem aportion of the new debt if a change of control should occur; and(ii) a restriction on new borrowings to an aggregate amount of$50,000.

The Company is involved in a number of labor relatedlegal proceedings. In management's opinion and based on con-sultation with its legal counsel, the Company accrued approxi-mately $2,001 as of September 30, 1998 as a provision for anypotential losses related to these labor related proceedings.

Seven-Up Concesiones S.A.C.I. ("SUC"), a subsidiary ofthe Company, is a defendant in a lawsuit whereby the trustee forCompañía Embotelladora Argentina ("CEA"), the company whichowned the PepsiCo franchise prior to BAESA, had demandedthat the bankruptcy of CEA be extended to SUC. Managementdoes not believe that such action will have a material adverseimpact on the Company.

The Company is a defendant in two securities lawsuitsbrought as a class action in the United States District Court forthe Southern District of New York by certain purchasers of theCompany's ADSs and bonds. The lawsuits were consolidated byorder of the Court on December 16, 1996 into a single action. InJuly 1998, the Company reached an agreement to settle the law-suit with the plaintiffs. As part of such settlement, BAESA willcontribute, or cause to be contributed, a combination of sharesand cash to the plaintiffs, which will include common shares con-stituting 2% of the equity of the Company following the consum-mation of the Agreement. The settlement is contingent upon anumber of factors, including, but not limited to, successful con-summation of the Agreement and either registration of suchshares or certification by BAESA's counsel that the shares areexempt from registration and tradeable without restriction in theUnited States. The Court approved the terms of the settlementagreement on October 7, 1998 and dismissed the action with prej-udice.

In March 1998 BAESA entered into a five-year supplyagreement with Alusud Argentina S.A. ("Alusud"), a whollyowned subsidiary of Alcoa, whereby Alusud will manage andoperate the Company's Buenos Aires preform plant and will sup-ply to BAESA all necessary preforms to conduct its business. Allthe costs of the preforms will be borne by Alusud and manufac-tured in BAESA's facilities using BAESA's equipment, which

Notes to Consolidated Financial Statements

BAESA will make available for Alusud's use. BAESA has agreedto purchase a minimum of approximately $3,600 annually in pre-forms manufactured by Alusud in the Buenos Aires plant for aperiod of five years. This agreement was executed concurrentlywith the agreement among BAESA. UPSA and Alcoa withrespect to UPSA's preform operations, and the execution of thisagreement was a condition to the execution of the agreementwith respect to UPSA.

After the sale of its Brazilian subsidiaries, theCompany's demand for preforms was reduced significantly andit could no longer profitably support UPSA, its internal preformmanufacturing operations in Colonia, Uruguay. In March 1998,the Company entered into an agreement with Alcoa in whichUPSA agreed to sell its assets to Alcoa in exchange for $6,300,plus interest of $2,898 and a three-year commitment by Alcoa tosupply UPSA with certain raw materials and to purchase pre-forms manufactured by UPSA at a minimum fixed cost of $3,440.The agreement also contemplates an option for Alcoa to purchasethe common stock of UPSA at the end of such three-year periodat a nominal value. The Company recorded a net receivable of$6,300 in conjunction with the sale. The receivable, includingrelated interest, will be collected over a three-year period.

The Company and/or its subsidiaries are involved incertain legal proceedings not described herein that are incidentalto the normal conduct of their business. The Company does notbelieve that liabilities relating to such proceedings will have amaterial adverse effect on the Company's consolidated financialcondition or results of operations.

21| Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accountsreceivable, accounts payable, bank loans and overdrafts andaccrued payroll, taxes and other current liabilities approximatesfair value because of the short maturity of these instruments.

The fair value of each of the Company's long-term debtinstruments is usually based on the amount of future cash flowsassociated with each instrument discounted using the rates cur-rently available to the Company for similar debt instruments ofcomparable maturity. However, considering the financial posi-tion of the Company and the existence of the Agreement,described in Note 1, the fair values of the Company's unsecuredfinancial instruments as of September 30, 1998 were estimated tobe in a range of 35% to 45% of the carrying value. The fair valueof such debt was computed on a portfolio basis assuming thatquotations obtained from secondary market brokers for individ-ual sale transactions could be expanded to the entire portfolio.The carrying value of the note payable to CCU of $26,589 approx-imates its fair value, because such debt is secured; therefore, theinterest rate represents a low risk rate that approximates fairvalue.

22| Business Risk and Credit Concentrations

Most of the Company's customers are located in the Buenos AiresMetropolitan Area, and other metropolitan areas in Argentinaand Uruguay. In fiscal year 1998 one customer in Argentinaaccounted for more than 5% of net sales. Approximately 13% ofthe net trade receivable outstanding at September 30, 1998 is duefrom three large customers in Argentina. The Company typicallyreviews a customers credit history before extending credit. TheCompany establishes an allowance for doubtful accounts basedupon factors surrounding the credit risk of specific customers,historical trends, and other information.

Approximately 24% of trade payables outstanding atSeptember 30, 1998 was due to two suppliers.

At September 30, 1998, the Company had a total ofapproximately 2,143 employees throughout its operations.Approximately 42% of the Company's employees were represent-ed by labor unions. The existing labor contracts, except for thosein Argentina, expire within one year. In Argentina a new collec-tive agreement was signed in fiscal 1997.

23| Geographic Financial Information

The Company operates in one principal industry segment: theproduction, sale and distribution of certain PepsiCo products incertain areas of Argentina and Uruguay. In prior years theCompany also operated in Brazil and Costa Rica. Furthermore,as discussed in Note 5, BAESA participates in a joint venture inChile.

Information in the table below is presented on the samebasis as utilized by the Company to manage the business. Exportsales and expenses are reported in the geographic area where thefinal sale is made rather than where the transaction originates.

1998 1997 1996(as restated)

Net sales to customers:Argentina $ 271,661 $ 330,834 $ 344,187Brazil - 277,081 307,444Others 28,219 47,071 51,615

Total $ 299,880 $ 654,986 $ 703,246

Operating income (loss):Argentina $ (29,124) $ 3,810 $ (70,888)Brazil - (225,444) (270,364)Others (2,561) (18,068) (16,576)

Total $ (31,685) $ (239,702) $ (357,828)

Identifiable assets:Argentina $ 357,604 $ 395,639 $ 437,853Brazil - - 424,574Others 39,773 44,022 64,953

Total $ 397,377 $ 439,661 $ 927,380

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Notes to Consolidated Financial Statements

Group 1Osvaldo Baños ChairmanMichael White DirectorPeter Thompson Director

Group 2Ricardo Moreno Vice ChairmanEnrique Garrido DirectorDavid Expósito DirectorBarry Shea Director

Fiscalization CommitteeMaría Rosa Villegas ArévaloHéctor WencelblatCarlos Joaquín García Díaz, Jr.

Corporate OfficersOsvaldo Baños President and Chief Executive OfficerRicardo Moreno Executive Vice President and Chief

Operating OfficerClaudio Valencia Finance DirectorCarlo Fava Director of Corporate Planning and

Investor RelationsSalvador Correa Corporate ControllerRodolfo Massini Director of Human Resources

Board of Directors and Officers

Shareholder Information

Transfer Agent and RegistrarThe Bank of New YorkNew York, NY

Annual MeetingThe Annual Meeting of Shareholders will be held at 1:00p.m. on January 28, 1999 at the Hotel Intercontinental,Morena 809, Buenos Aires, Argentina.

Corporate OfficesDiógenes Taborda 15331437 - Buenos AiresArgentina54 1 630 0500

For information contact:Carlo Fava

Investor RelationsCitigate Dewe Rogerson1440 BroadwayNew York, NY 10018212 688 6840

Independent AuditorsKPMG Finsterbusch Pickenhayn SibilleBuenos Aires, Argentina54 1 316 5700

Legal CounselShearman & SterlingNew York, NY212 848 4000

Allende & BreaBuenos Aires, Argentina54 1 313 9191

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NYSE: BAE

BCBA: BAES

Diógenes Taborda 15331437 - Buenos Aires

Argentina54 1 630 0500