Table of Contents

 

As filed with the Securities and Exchange Commission on April 30, 2012

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

 

For the transition period from                       to                        

 

Commission file number 001-13142

 

Embotelladora Andina S.A.

(Exact name of Registrant as specified in its charter)

Andina Bottling Company

(Translation of the Registrant’s name in English)

Republic of Chile

(Jurisdiction of incorporation or organization)

Avenida El Golf 40, Office 401 Las Condes - Santiago, Chile

(Address of principal executive offices)

Paula Vicuña, Tel. (56-2) 338-0520  E-mail: andina.ir@koandina.com Avenida El Golf 40, 4th Floor, Las Condes - Santiago, Chile

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class		Name of each exchange on which registered
Series A Shares, Series B Shares of Registrant represented by American Depositary Shares		New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

 

Table of Contents

 

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

 

7.625% Notes due October 1, 2027

7.875% Notes due October 1, 2097

 

The number of outstanding shares of  the issuer’s stock as of December 31, 2011 was 760,274,542 as follows:

	380,137,271 Series A Shares
	380,137,271 Series B Shares

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes    o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes    x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes    o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes    o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing

 

 

If  Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow

o Item 17    o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

 

Table of Contents

 

TABLE OF CONTENTS

 

		Page
PART I		3
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	3
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	3
ITEM 3.	KEY INFORMATION	3
ITEM 4.	INFORMATION ON THE COMPANY	13
ITEM 4A.	UNRESOLVED SECURITIES AND EXCHANGE COMMISSION STAFF COMMENTS	36
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	36
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	54
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	65
ITEM 8.	FINANCIAL INFORMATION	67
ITEM 9.	THE OFFER AND LISTING	69
ITEM 10.	ADDITIONAL INFORMATION	72
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	83
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	84
ITEM 12D.3	AMERICAN DEPOSITARY RECEIPTS	84
ITEM 12D.4	DIRECT AND INDIRECT PAYMENTS BY THE DEPOSITARY	84
PART II		85
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	85
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	85
ITEM 15.	CONTROLS AND PROCEDURES	85
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	86
ITEM 16B.	CODE OF ETHICS	86
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	86
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	87
ITEM 16E.	PURCHASERS OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	87
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	87
ITEM 16G.	CORPORATE GOVERNANCE	87
PART III		91
ITEM 17.	FINANCIAL STATEMENTS	91
ITEM 18.	FINANCIAL STATEMENTS	91
ITEM 19.	EXHIBITS	92

 

1

Table of Contents

 

INTRODUCTION

 

References

Unless the context otherwise requires, as used in this annual report the following terms have the meanings set forth below:

·     the “Company” and “we” means Andina and its consolidated subsidiaries;

·     “Andina” means Embotelladora Andina S.A.;

·     “Andina Brazil” means the Company’s subsidiary, Rio de Janeiro Refrescos Ltda. and its subsidiaries;

·     “AESA” means the Company’s subsidiary, Andina Empaques Argentina S.A.

·     “EDASA” means the Company’s subsidiary, Embotelladora del Atlántico S.A.;

·     “CMF” means the Company’s affiliate, Envases CMF S.A.;

·     “ECSA” means the Company’s affiliate, Envases Central S.A.;

·     “Vital Jugos” means the the Company’s affiliate, Vital Jugos S.A., previously known as Vital S.A. ;

·     “VASA” means the Company’s affiliate, Vital Aguas S.A.;

·     “TAR” means the Company’s subsidiary, Transportes Andina Refrescos Ltda.

·     “The Coca-Cola Company” or “TCCC” means The Coca-Cola Company or any of its subsidiaries, including without limitation Coca-Cola de Chile S.A. (“CC Chile”), which operates in Chile, Recofarma Industrias do Amazonas Ltda. (“CC Brazil”), which operates in Brazil and Servicios y Productos para Bebidas Refrescantes S.R.L. (“CC Argentina”), which operates in Argentina.

·     the “Chilean territory” means the Metropolitan Region of Santiago and the neighboring provinces of Cachapoal and San Antonio;

·     the “Brazilian territory” means the majority of the State of Rio de Janeiro, and the totality of the State of Espírito Santo; and

·     the “Argentine territory” means the provinces of Córdoba, Mendoza, San Juan, San Luis, Entre Rios, Buenos Aires (only San Nicolás and Ramallo) and most of Santa Fe.

 

PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION

 

Unless otherwise specified, references herein to “dollars,” “U.S. dollars” or “US$” are to United States dollars; references to “pesos,” “Chilean pesos”, “Ch$” or “ThCh$” are to Chilean pesos; references to “UF” are to Unidades de Fomento, a daily indexed Chilean peso-denominated monetary unit that takes into account the effect of the Chilean inflation rate during the previous month; references to “Argentine pesos” or “AR$” are to Argentine pesos; and references to “real” or “reais” or “R$” are to Brazilian reais. Certain percentages and amounts contained in this annual report have been rounded for ease of presentation.

 

For the convenience of the reader, this annual report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates. Unless otherwise indicated, U.S. dollar equivalent information for amounts in Chilean pesos is based on the Observed Exchange Rate (as defined under “Item 3. Key Information—Exchange Rates”) reported by the Banco Central de Chile (the Central Bank of Chile), which we refer to as the “Central Bank.” The Federal Reserve Bank of New York does not report a noon buying rate in New York City for Chilean pesos. No representation is made that the peso or U.S. dollar figures presented in this annual report could have been or could be converted into U.S. dollars or pesos, as the case may be, at any particular rate or at all.

 

On August 28, 2007 the Chilean Superintendence of Insurance and Securities announced the adoption of the International Financial Reporting Standards (“IFRS”)in Chile which became mandatory for companies of a certain size beginning 2009 and 2010.  The Company decided to adopt the IFRS as issued by the International Accounting Standards Board (“IASB”) as its accounting and reporting rules beginning January 1, 2010.  Additionally the period between January 1 and December 31, 2009 constituted the transition period towards IFRS and the Financial Statements of the year 2010 were presented comparatively with 2009.

 

Forward-looking information

 

This annual report contains or incorporates by reference statements that constitute “forward-looking statements,” in that they include statements regarding the intent, belief or current expectations of our directors and officers with respect to our future operating performance. Such statements include any forecasts, projections and descriptions of anticipated cost savings or other synergies. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” variations of such words, and similar expressions are intended to identify such forward-looking statements. You should be aware that

 

2

Table of Contents

 

any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties, and that actual results may differ from those set forth in the forward-looking statements as a result of various factors (including, without limitations, the actions of competitors, future global economic conditions, market conditions, foreign exchange rates, and operating and financial risks related to managing growth and integrating acquired businesses), many of which are beyond our control. The occurrence of any such factors not currently expected by us would significantly alter the results set forth in these statements. You should not place undue reliance on such statements, which speak only as of the date that they were made. Our independent auditors have not examined or compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we might issue in the future. We do not undertake any obligation to release publicly any revisions to such forward-looking statements after filing of this annual report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

 

Market Data

 

We have computed the information contained in this annual report regarding annual volume and per capita growth rates and levels, and market share, product segment, and population data in bottling and franchise territories, and it is based upon statistics accumulated and certain assumptions we have made. Additional data was obtained from third parties. Market share information presented with respect to soft drinks, juices, waters and beer is based on data supplied by A.C. Nielsen Company (“A.C. Nielsen”) and is believed to be accurate although no assurances to that effect can be given. Certain market data herein (including percentage amounts) may not sum due to rounding.

 

PART I

 

ITEM 1.           IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable

 

ITEM 2.           OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable

 

ITEM 3.           KEY INFORMATION

 

A.     Selected Financial Data

 

The following table presents our selected consolidated and other financial and operating information at the dates and for the periods indicated. The selected financial information at December 31, 2011, 2010 and 2009, and for each of the three years ended December 31, 2011 has been derived from, should be read in conjunction with, and is qualified in its entirety by reference to our Consolidated Financial Statements, included in Item 18 of this annual report, that we refer to in this annual report as the “Consolidated Financial Statements .” Our Consolidated Financial Statements are prepared in accordance with IFRS.  The Securities and Exchange Commission (SEC) eliminated the requirement of preparing reconciliation between IFRS and U.S. GAAP for foreign listed companies that use IFRS as issued by the IASB.

 

Our consolidated financial results include the results of our subsidiaries located in Chile, Brazil and Argentina. Our subsidiaries outside Chile prepare their financial statements in accordance with IFRS and to comply with local regulations in accordance with generally accepted accounting principles of the country in which they operate. The Consolidated Financial Statements reflect the results of the subsidiaries outside of Chile, translated to Chilean pesos (functional and reporting currency of the parent company) and are presented in accordance with IFRS.  The International Financial Reporting Standards requires assets and liabilities to be translated from the functional currency of each entity to the reporting currency (Chilean peso) at end of period exchange rates and income and expense accounts to be translated at the average monthly exchange rate for the month in which income or expense is recognized. Unless otherwise specified, our financial data is presented herein in nominal Chilean pesos and U.S. dollars.

 

The following table presents our selected consolidated financial information. This information should be read in conjunction with, and is qualified in its entirety by reference to, our Consolidated Financial Statements, including the notes

 

3

---

Table of Contents

 

thereto in Item 18. The selected financial information contained herein is presented on a consolidated basis, and is not necessarily indicative of our financial position or results of operations at or for any future date or period.

 

		For the period ended December 31,
		2011		2011		2010		2009
		(in million nominal Chilean pesos and million US$, with the exception of those related to debt, shares and sales volume)
		MUS$		MCh$		MCh$		MCh$
Income Statement Data
IFRS :
Net Sales		1,893		982,864		888,714		785,845
Cost of sales		(1,114	)	(578,581	)	(506,882	)	(455,300	)
Administrative, distribution and selling expenses		(504	)	(261,859	)	(232,598	)	(197,422	)
Operating Income		274		142,424		149,234		133,123
Other (expense) income , net [financial results, exchange differences and share in equity investees]		(21	)	(10,712	)	(9,294	)	(5,972	)
Income taxes		(67	)	(34,685	)	(36,340	)	(29,166	)
Net Income		187		97,027		103,600		97,985
Basic and diluted earnings per share
Series A		0.23		121.54		129.78		122.75
Series B		0.26		133.69		142.75		135.02
Basic and diluted earnings per ADR(3)
Series A		1.40		729.24		778.68		736.50
Series B		1.54		802.14		856.50		810.12
Capital Stock
Series A				380,137,271		380,137,271		380,137,271
Series B				380,137,271		380,137,271		380,137,271
Issued Capital		444.71		230,892		230,892		230,892
Total dividends declared
Series A		65		33,809		33,148		29,700
Series B		72		37,190		36,463		32,670
Balance Sheet Data
IFRS:
Total assets		1,429		741,959		688,314		642,692
Current debt that accrues interest(1)		23		12,117		11,996		5,800
Non-current debt that accrues interest		144		74,641		70,449		73,150
Controlling and non-controlling shareholders’ equity		812.7		421,979		394,865		373,558
Other Financial Information
IFRS
Cash flows from operating activities		268		138,950		125,848		131,126
Cash flows from investing activities		(173	)	(89,621	)	(80,504	)	(84,318	)
Cash flows from financing activities		(129	)	(67,159	)	(62,548	)	(67,756	)
Depreciation and amortizations		76		39,498		37,015		36,807
Capital expenditures		244		126,931		95,462		49,483
Ratio of total debt to total capitalization(2)		0.21		0.21		0.21		0.21
Other Operating Data
Sales Volume
Coca-Cola Soft Drinks (million UCs)(5)		447.9		447.9		438.0		419.6
Other beverages (million UCs) (4)(5)(6)		53.3		53.3		51.2		39.0

 

(1) Includes interest bearing liabilities including current bank liabilities, bonds payable discounting issuance expenses and initial discounts that are recognized forming part of the liability and other financial liabilities that accrue short term bank interests and the portion of long—term bank liabilities and bonds payable within 12 months.

(2) Total debt is calculated as the sum of current and non-current financial interest bearing debt. Total capitalization is calculated as the sum of total financial debt, non-controlling interest and shareholders’ equity attributable to the controlling shareholder. Shareholders’ equity has been determined under IFRS.

(3) Each ADR represents six shares of common stock.

(4) Includes waters and juices (in Chile and Argentina) and beer, waters and juices (in Brazil).

(5) Unit cases (“UCs”) refer to 192 ounces of finished beverage product (24 eight-ounce servings) or 5.69 liters.

(6) Volume of waters and juices in Chile includes total sales volume of Vital Jugos and water sales volume sold by Embotelladora Andina.

 

4

Table of Contents

 

Exchange Rates

 

The following table sets forth the annual low, high, average and period-end Observed Exchange Rate for U.S. dollars for each year beginning in 2007 and for each month during the six months immediately preceding the month of this annual report, as reported by the Central Bank.

 

		Daily Observed Exchange Rate Ch$ per US$(1)
Year		Low(2)		High(2)		Average(3)		Period End
2007		439.14		548.67		522.55		496.89
2008		431.22		676.75		522.35		636.45
2009		491.09		643.87		559.67		507.10
2010		468.01		549.17		510.22		468.01
2011		455.91		533.74		483.90		519.20
Month
September 2011		460.34		521.85		486.48		521.76
October 2011		490.29		533.74		510.67		490.29
November 2011		494.08		526.83		509.73		517.37
December 2011		508.67		522.62		517.26		519.20
January 2012		485.35		518.20		499.96		488.75
February 2012		475.29		487.73		480.89		476.27
March 2012		480.62		491.57		485.90		487.44

 

Source : Chilean Central Bank.

(1)       Nominal Figures.

(2)       Exchange rates are the actual low and high, on a day-by-day basis for each period.

(3)       With respect to annual periods, the average of the exchange rates on the last day of each month during the year and, with respect to monthly periods, the actual daily exchange rates.

 

The Observed Exchange Rate on April 26, 2011 was Ch$484.88 per US$1.00.

 

B.             Capitalization and Indebtedness

 

Not applicable.

 

C.             Reasons for the offer and use of proceeds

 

Not applicable.

 

D.             Risk Factors

 

The Company is subject to various economic, political, social and competitive conditions. Any of the following risks, if they materialize, could materially and adversely affect our business, results of operations, prospects and financial condition.

 

Risks Related to our Company

 

We rely heavily on our relationship with The Coca-Cola Company (“TCCC”) which has substantial influence over our business and operations

 

Approximately 84% of our net sales in 2011 were derived from the distribution of Coca-Cola soft drinks and 13% from the distribution of other beverages bearing trademarks owned by TCCC. We produce, market and distribute Coca-Cola

 

5

Table of Contents

 

products through standard bottler agreements between our bottler subsidiaries and, in each case, the local subsidiary of TCCC or, in the case of fruit juices and nectars, The Minute Maid Company, a subsidiary of TCCC. TCCC has the ability to exercise substantial influence over our business through its rights under the Bottler Agreements. See “Item 7. Major Shareholders and Related Party Transactions—Bottler Agreements.” Under the Bottler Agreements, TCCC unilaterally sets the prices for Coca-Cola soft drink concentrates and Coca-Cola beverages (in the case of soft drinks pre-mixed by TCCC) sold to us. TCCC also monitors pricing changes we institute and has the right to review and approve our marketing, operational and advertising plans. These factors may impact our profit margins which could adversely affect our net income and results of operations. Our marketing campaigns for all Coca-Cola products are designed and controlled by TCCC. Pursuant to the Bottler Agreements, we are required to submit a business plan to TCCC for prior approval on a yearly basis. In accordance with the Bottler Agreements, TCCC may, among other things, require that we demonstrate financial ability to meet our business plan and if we are not able to demonstrate our financial capacity TCCC may terminate our rights to produce, market and distribute Coca-Cola soft drinks or other Coca-Cola beverages in territories where we have such approval. Under the Bottler Agreements, we are prohibited from producing, bottling, distributing or selling any products that could be substituted for, be confused with or be considered an imitation of, Coca-Cola soft drinks or other Coca-Cola beverages and products.

 

We depend on TCCC to renew the Bottler Agreements which are subject to termination by TCCC in the event we default or upon expiration of their respective terms. We cannot assure you that the Bottler Agreements will be renewed or extended upon their expiration, and even if they are renewed, we cannot be certain that renewal will be granted on the same terms as those currently in effect. Termination, non-extension or non-renewal of any of the Bottler Agreements would have a material adverse effect on our business, financial condition and results of operation.

 

In addition, any acquisition we make of bottlers of Coca-Cola products in other countries may require, among other things, the consent of TCCC under bottler agreements to which such other bottlers are subject. We cannot assure you that TCCC will consent to any future geographic expansion of our Coca-Cola beverage business. In addition, we cannot assure you that our relationship with TCCC will not undergo significant changes in the future. If such changes do occur, our operations, and financial results and condition could be materially affected.

 

Our business is highly competitive and subject to price competition which may adversely affect our net profits and margins

 

The soft drink and non-alcoholic beverage businesses are highly competitive in each of our Company’s franchise territories. In our franchise territories we compete with bottlers of regional brands, including low cost “B brand” beverages and Pepsi products.  In Argentina and Brazil we compete with Companhia de Bebidas das Americas, commonly referred to as AmBev, the largest brewer in Latin America and a subsidiary of InBev S.A., which sells Pepsi products, in addition to a portfolio that includes local brands with flavors such as guaraná. This competition is likely to continue, and we cannot assure you that it will not intensify in the future which could materially and adversely affect our financial condition and results of operations. See “Item 4. Information on the Company — Part B. Business Overview— Soft Drink Business—Competition.”

 

Changes in the nonalcoholic beverages business environment could adversely affect our financial results

 

The nonalcoholic beverages business environment is rapidly evolving as a result of, among other things, changes in consumer preferences, including changes based on health and nutrition considerations and obesity concerns, shifting consumer tastes and needs, changes in consumer lifestyles and competitive product and pricing pressures. In addition, the industry is being affected by the trend toward consolidation in the retail channel. If we are unable to successfully adapt to this rapidly changing environment, our net income, share of sales and volume growth could be negatively affected.

 

Raw material prices may be subject to U.S. dollar/local currency exchange risk and price volatility which could increase our costs of operations

 

Numerous raw materials, including sugar and resin, are used in producing beverages and containers. We purchase raw materials from both domestic and international suppliers. See “Item 4. Information on the Company—Part B. Business Overview—Soft Drink Business—Raw Materials and Supplies.” Because the prices of raw materials are fixed in U.S. dollars, we are subject to local currency risk in each of our operations. If the Chilean peso, Brazilian real or Argentine peso were to depreciate significantly against the U.S. dollar, the cost of certain raw materials could rise significantly, which could have an adverse effect on our financial condition and results of operations. We cannot assure you that these currencies will

 

6

Table of Contents

 

not lose value against the U.S. dollar in the future.   Additionally, these raw materials are subject to international price volatility that could also have a material negative effect over our profitability.

 

Instability in the supply of utility services and oil prices may adversely impact our results of operations

 

Our operations depend on a stable supply of utilities and fuel in the countries where we operate that the Company cannot assure fluctuations in oil prices have adversely affected our cost of energy and transportation in the three countries we operate and we expect that they will continue to do so in the future.   We believe that the increase of energy prices will not have a significant effect over our results of operations.

 

Water scarcity and poor quality could negatively impact the Company’s production costs and capacity.

 

Water is the main ingredient in substantially all of our products. It is also a limited resource in many parts of the world, facing unprecedented challenges from overexploitation, increasing pollution and poor management. As demand for water continues to increase around the world, and as the quality of available water deteriorates, the Company may incur increasing production costs or face capacity constraints that could adversely affect our profitability or net operating revenues in the long run.

 

Significant additional labeling or warning requirements may inhibit sales of affected products.

 

The countries in which we operate, may adopt significant additional product labeling or warning requirements relating to the chemical content or perceived adverse health consequences of certain of the Coca-Cola products. These types of requirements, if they become applicable to one or more of the Coca-Cola products under current or future environmental or health laws or regulations, may inhibit sales of such products.

 

If we are unable to protect our information systems against data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

 

We are increasingly dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information. In particular, we depend on our information technology infrastructure for digital marketing activities and electronic communications among the Company and our clients, suppliers and also among our subsidiaries. Security breaches of this infrastructure can create system disruptions, shutdowns or unauthorized disclosure of confidential information. If we are unable to prevent such breaches, our operations could be disrupted, or we may suffer financial damage or loss because of lost or misappropriated information.

 

Perception of risk in emerging economies may impede our access to international capital markets, hinder our ability to finance our operations and adversely affect the market price of our common shares and American Depositary Receipts.

 

As a general rule, international investors consider Argentina, and to a lesser extent Chile and Brazil, to be emerging market economies. Consequently, economic conditions and the market for securities of emerging market countries influence investors’ perceptions of Chile, Brazil and Argentina and their evaluation of companies’ securities located in these countries.

 

During periods of heightened investor concern regarding emerging market economies, in particular Argentina and to a lesser extent Brazil, have experienced significant outflows of U.S. dollars. In addition, Brazilian and Argentine companies have faced higher costs for raising funds, both domestically and abroad, as well as limited access to international capital markets, which have negatively affected the prices of Brazilian and Argentine securities. Although economic conditions are different in each of the emerging-market countries, investors’ reactions to developments in one of these countries may affect the securities of issuers in the others, including Chile. For example, adverse developments in other developing or emerging market countries may lead to decreased investor interest in investing in Chile or in the securities of Chilean companies, including securities of the Company.

 

It may be difficult to enforce civil liabilities against us or our directors, executive officers or controlling persons

 

We are a sociedad anónima , or stock corporation, organized under the laws of Chile. Some of our directors, executive officers and controlling persons reside in Chile or outside of the United States. In addition, all or a substantial portion of the assets of these persons and of our assets are located outside of the United States. As a result, it may not be possible for

 

7

Table of Contents

 

investors to effect service of process within the United States upon such persons, or to enforce against them in U.S. courts judgments predicated upon civil liability provisions of the federal securities laws of the United States or otherwise obtained in U.S. courts. Because our assets are located outside of the United States, any judgment obtained in the United States against us may not be fully collectible in the United States.

 

If we experience strikes, work stoppages or labor unrest, our business would suffer.

 

Strikes, work stoppages or other forms of labor unrest at any of our production facilities could impair our ability to supply products to customers, which would reduce our revenues and could expose us to customer claims.

 

Risks Relating to Chile

 

Our growth and profitability depend on economic conditions in Chile

 

Approximately 43% of our assets and 31% of our net sales in 2011 were derived from our operations in Chile. Thus, our financial condition and results of operations depend significantly on economic conditions prevailing in Chile. According to data published by the Central Bank, the Chilean economy grew at a rate of -1.7% in 2009,  5.2 % in 2010 and 6.3% in 2011. Our financial condition and results of operations could also be adversely affected by changes over which we have no control, including, without limitation:

 

·          the economic or other policies of the Chilean government, which has a substantial influence over many aspects of the private sector;

·          other political or economic developments in or affecting Chile;

·          regulatory changes or administrative practices of Chilean authorities;

·          inflation and governmental policies to combat inflation;

·          currency exchange movements; and

·          global and regional economic conditions.

 

Inflation in Chile may disrupt our business and have an adverse effect on our financial condition and results of operations

 

The annual rates of inflation in Chile which in 2009, 2010 and 2011 were  —1.4%,  3.0% and 4.4%, respectively (as measured by changes in the consumer price index and as reported by the Chilean National Institute of Statistics) could adversely affect the Chilean economy and have a material adverse effect on our financial condition and results of operations. We cannot assure you that Chilean inflation will not continue to increase significantly. We cannot assure you that, under competitive pressure, we will be able to realize price increases, which could adversely impact our financial condition and results of operations.

 

The Chilean peso is subject to depreciation and volatility which could adversely affect the value of an investment in our securities

 

The Chilean government’s economic policies and any future changes in the value of the Chilean peso against the U.S. dollar, could adversely affect our operations and financial results and the dollar value of an investor’s return. The Chilean peso has been subject to large nominal devaluations in the past and may be subject to significant fluctuations in the future. Based on the Observed Exchange Rates for U.S. dollars in the period from 2008 to 2011 the Chilean peso relative to the U.S. dollar appreciated 7.39% in nominal terms. During 2011 the Chilean peso relative to the U.S. dollar appreciated 5.15% in nominal terms. See “Item 3. Key Information-Exchange Rates.”

 

Our Class A shares and Class B shares are traded in Chilean pesos on the Chilean Stock Exchanges. Cash distributions with respect to the shares will be received in Chilean pesos by the depositary, currently The Bank of New York Mellon Corporation (as depositary for the Series A and Series B shares represented by the Series A and Series B ADRs), which will convert such Chilean pesos to U.S. dollars at the then prevailing exchange rate to make U.S. dollar payments in respect of the ADRs. If the value of the Chilean peso depreciates relative to the U.S. dollar, the value of the ADRs and any distributions to be received from the depositary would be adversely affected. In addition, the depositary will incur costs (to be ultimately borne by the ADR holders) in connection with the foreign currency conversion and subsequent distribution of dividends or other payments with respect to our ADRs.

 

8

Table of Contents

 

Exchange controls and withholding taxes in Chile may limit repatriation of foreign investments

 

Equity investments in Chile by persons who are not Chilean residents are generally subject to various exchange control regulations that govern the convertibility and repatriation of the investments and earnings. The ADRs are governed by an Agreement among us, the depositary and the Central Bank of Chile (the “Foreign Investment Agreement”). The Foreign Investment Agreement guarantees the depositary and the ADR holders access to Chile’s Formal Exchange Market, permits the depositary to remit dividends it receives from us to the ADR holders and permits the holders of ADRs to repatriate the proceeds of the sale of shares withdrawn from the ADR facility, thereby enabling them to acquire currencies necessary to repatriate investments in the shares and earnings there from.  Pursuant to current Chilean law, the Foreign Investment Agreement may not be amended unilaterally by the Central Bank of Chile, and there are judicial precedents (which are not binding with respect to future judicial decisions) indicating that the Foreign Investment Agreement may not be voided by future legislative changes.

 

Dividends received by ADR holders of are paid net of foreign currency exchange fees and expenses of the depositary and are subject to Chilean withholding tax, currently imposed at a rate of 35%, subject to credits in certain cases as described under “Item 10. Additional Considerations —Tax Considerations Relating to Equity Securities”.

 

We cannot assure you that additional restrictions applicable to ADR holders , the disposition of the shares underlying the ADRs and the convertibility and/or the repatriation of the proceeds from such disposition or the payment of dividends will not be imposed in the future, nor can we advise as to the duration or impact of such restrictions if imposed. If for any reason, including changes in the Foreign Investment Agreement or Chilean law, the depositary was unable to convert Chilean pesos to U.S. dollars, investors would receive dividends or other distributions, if any, in Chile and in Chilean pesos.

 

Risks Relating to Brazil

 

Our business is dependent to some extent on economic conditions in Brazil

 

Approximately 41% of our assets and 45% of our consolidated net sales in 2011 were derived from our operations in Brazil. Because demand for soft drinks and beverage products is usually correlated to economic conditions prevailing in the relevant local market, which in turn is dependent on the macroeconomic condition of the country in which the market is located, our financial condition and results of operations to a considerable extent are dependent upon political and economic conditions prevailing in Brazil.  According to data available to general public, the Brazilian economy grew at a rate of, -0.6% in 2009,  7.5% in 2010 and 2.8% in 2011.

 

The Brazilian government exercises influence over the Brazilian economy, which together with historically volatile Brazilian political and economic conditions, could adversely affect our financial condition and results of operations and the market price of our shares and ADRs

 

Historically, the Brazilian government has changed monetary, credit, tariff, and other policies to influence the course of Brazil’s economy. Such government actions have included wage and price controls as well as other measures such as freezing bank accounts, imposing exchange controls and imposing limits on imports and exports. Changes in policy and other political and economic developments could adversely affect the Brazilian economy and have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that present economic conditions and policies intended to promote a sustainable economic development will continue.

 

9

Table of Contents

 

Although inflation in Brazil has stabilized in recent years, increased inflation may adversely affect the operations of Andina Brazil which could adversely impact our financial condition and results of operations

 

As meas ured by the Brazilian Índice Nacional de Preços ao Consumidor or INPC, inflation in Brazil was 4.1% 6.5% and 6.1% in 2009, 2010 and 2011, respectively. Increased inflation rates may result in lower consumer purchasing power on behalf of consumers and lower sales volume for Andina Brazil. We cannot assure you that levels of inflation in Brazil will not increase in future years and have a material adverse effect on our business, financial condition or results of operations. Inflationary pressures may lead to further government intervention in the economy, including the introduction of government policies that could adversely affect the results of operations of Andina Brazil and consequently our financial condition and results of operations and the market price of our shares and ADSs.

 

The Brazilian real is subject to depreciation and volatility which could adversely affect our financial condition and results of operations

 

During 2008,  the real depreciated 31.9% due to the world economic crisis and in 2009,  2010 and 2011, it appreciated 25.5% , 4.3% and 4.9% respectively against the U.S. dollar compared to the prior year period. In the event of a devaluation of the real, the financial condition and results of operations of our Brazilian subsidiary could be adversely affected.

 

Depreciation of the real relative to the U.S. dollar may increase the cost of servicing foreign currency-denominated debt that we may incur in the future, which could adversely affect our results of operations and financial condition. In addition, depreciation of the real can create inflationary pressures in Brazil that may negatively affect our results of operations. Depreciation generally curtails access to international capital markets and combined with other macroeconomic aspects, may prompt recessionary government intervention. It also reduces the U.S. dollar value of our revenues, distributions and dividends, and the U.S. dollar equivalent of the market price of our common shares. On the other hand, the appreciation of the real against the U.S. dollar may lead to the deterioration of Brazil’s public accounts and balance of payments, as well as to lower economic growth from exports.

 

The Brazilian government imposes certain restrictions on currency conversions and remittances abroad which could affect the timing and amount of any dividend or other payment we receive

 

Brazilian law guarantees foreign shareholders of Brazilian companies the right to repatriate their invested capital and to receive all dividends in foreign currency provided that their investment is registered with Brazil’s Central Bank. We registered our investment in Andina Brazil with the Brazilian Central Bank on October 19, 1995. Although dividend payments related to profits obtained subsequent to January 1, 1996 are not subject to income tax, after the sum of repatriated capital and invested capital exceeds the investment amount registered with the Brazilian Central Bank, repatriated capital is subject to a capital gains tax of 15%. Under current Chilean tax law, we will realize a tax credit in respect of all Brazilian taxes paid relating to Andina Brazil. There can be no assurance that the Brazilian government will not impose additional restrictions or modify existing regulations that would have an adverse effect on an investor’s ability to repatriate funds from Brazil nor can there be any assurance of the timing or duration of such restrictions, if imposed in the future.

 

Risks Relating to Argentina

 

Our business is dependent to some extent on economic conditions in Argentina

 

Approximately 17% of our assets and 24% of our net sales in 2011 were derived from our operations in Argentina. Because demand for soft drinks and beverage products usually is correlated to economic conditions prevailing in the local market, which in turn is dependent on the macroeconomic condition of the country, the financial condition and results of operations of our franchise in Argentina are, to a considerable extent, dependent upon political and economic conditions prevailing in Argentina.

 

GDP growth in Argentina was 8.3% in 2011 and 9.2% in 2010. Facing the international financial crisis, the public sector did not default and carried out payments using the reserves of Argentina’s Central bank and loans from Banco de la Nación Argentina, generating new and significant macroeconomic policy challenges. Although Argentina managed to roll with the punches of a recessive year and an international crisis without upsetting the main financial variables, we cannot assure that economic conditions in Argentina will continue improving or that our operations will continue experiencing good results.

 

10

Table of Contents

 

Political and economic instability may recur which could have a material adverse effect on our Argentine operations and on our financial condition and results of operations.

 

In the period from 1998 through 2003, Argentina experienced acute economic problems that culminated with the restructuring of substantially all of Argentina’s sovereign bond indebtedness. A succession of presidents were inaugurated during this crisis period and various states of emergency were declared that suspended civil liberties and instituted restrictions on transfers of funds abroad and foreign exchange controls, among other measures. Argentina’s GDP contracted 10.9% in 2002. Beginning 2003, Argentine GDP began to recover and from 2004 to 2008 recorded an average rate of growth of 8.4%.  In the political environment, legislative elections carried out in June of 2009 were a misfortune for the government’s political party losing the majority in both houses. This new political scenario in Argentina could make the executive power need to arrive at a consensus with the opposition regarding rules and regulations in order for them to be approved by the legislative power.

 

The macroeconomic condition in Argentina has been characterized by:

 

·                   increased inflation which has been slightly controlled by price control;

·                   deeper state of intervention in the economy;

·                   fiscal deficit ; and

·                   strong salary pressures.

 

The Argentine government continues to face significant exposure to litigation from holders of its defaulted debt that did not participate in the Argentine government’s exchange offer.

 

The Argentine government could impose certain restrictions on currency conversions and remittances abroad which could affect the timing and amount of any dividends or other payment we receive from our Argentine franchise

 

Until December 2001, the Argentine peso was pegged 1-to-1 to the U.S. dollar. From January 1 st , 2002, the Argentine peso has been allowed to float freely against the U.S. dollar and other foreign currencies.

 

Since 2003 and following a series of restrictive measures in the money market and fund movements, the Argentine Central Bank removed several of the foreign exchange restrictions, including elimination of the requirement that the Argentine Central Bank approve the repayment of principal of financial indebtedness, extended the term for the repatriation of export proceeds, allowed earlier payments of imports, and starting  2004, increased up to US$2 million, the monthly amount that Argentine-domiciled individuals or corporations are allowed to purchase and transfer abroad.

 

There can be no assurance that the Argentine Central Bank will not once again require its prior authorization for the transfer of funds abroad in the form of dividends or payment of inter-company or third party loans. Any such inability to transfer funds outside of Argentina, in the form of dividends or otherwise, could adversely affect the value of our Argentine operations and the market value of our ADRs.

 

Inflation in Argentina may adversely affect our operations which could adversely impact our financial condition and results of operations

 

Argentina has experienced high levels of inflation in recent decades, resulting in large devaluations of its currency. Argentina’s historically high rates of inflation resulted mainly from its lack of control over fiscal policy and the money supply. The official annual rates of inflation (published by INDEC- Instituto Nacional de Estadísticas y Censos - National Statistics and Census Institute as measured by changes in the consumer price index) between 2009, 2010 and 2011 were, 7.7%, 10.9% and 9.5%, respectively for each year.  High levels of inflation in Argentina could adversely affect the Argentine economy and have a material adverse effect on our financial condition and results of operations.

 

The Argentine peso is subject to depreciation and volatility which could adversely affect our financial condition and results of operations

 

During 2011, the exchange rate in Argentina underwent a depreciation of 5.6%. The Argentine government’s economic policies and any future devaluation of the Argentine peso against the U.S. dollar could adversely affect our financial

 

11

Table of Contents

 

condition and results of operations. The Argentine peso has been subject to large devaluations in the past and may be subject to significant fluctuations in the future.

 

The Public Emergency Law and Foreign Exchange Regime Reform Law of 2002 put an end to more than ten years of U.S. dollar-peso parity and authorized the Argentine government to set the exchange rate. Subsequent to the devaluation of the Argentine peso in early 2002 and since the beginning of the Argentine economic crisis, there have been significant fluctuations in the value of the Argentine peso causing repeated Argentine Central Bank interventions to stabilize the Argentine peso through purchases and sales of U.S. dollars said devaluation of the Argentine peso has had a negative impact on our results.

 

We cannot assure you that the policies to be implemented by the Argentine government in the future will stabilize the value of the Argentine peso against foreign currencies. Therefore, the Argentine peso may continue to be subject to significant fluctuations and further depreciations which might significantly and adversely affect our financial condition and the results of our operations.

 

Risk Factors Relating to the ADRs and Common Stock

 

Preemptive rights may be unavailable to ADR holders

 

According to the Ley de Sociedades Anónimas No. 18.046 and the Reglamento de Sociedades Anónimas (collectively, the “Chilean Companies Law”), whenever we issue new shares for cash, we are required to grant preemptive rights to holders of our shares (including shares represented by ADRs), giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. However, we may not be able to offer shares to United States holders of ADRs pursuant to preemptive rights granted to our shareholders in connection with any future issuance of shares unless a registration statement under the U.S. Securities Act of 1933, as amended, is effective with respect to such rights and shares, or an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended, is available.

 

Under the procedure established by the Central Bank of Chile, the foreign investment agreement of a Chilean company with an existing ADR program will become subject to an amendment (which will also be deemed to incorporate all laws and regulations applicable to international offerings in effect as of the date of the amendment) that will extend the benefits of such contract to new shares issued pursuant to a preemptive rights offering to existing ADR owners and to other persons residing and domiciled outside of Chile that exercise preemptive rights, upon request to the Central Bank of Chile. We intend to evaluate at the time of any rights offering the costs and potential liabilities associated with any such registration statement as well as the indirect benefits to us of enabling United States ADR holders to exercise preemptive rights and any other factors that we consider appropriate at the time, and then make a decision as to whether to file such registration statement.

 

We cannot assure you that any registration statement would be filed. To the extent ADR holders are unable to exercise such rights because a registration statement has not been filed, the depositary will attempt to sell such holders’ preemptive rights and distribute the net proceeds thereof if a secondary market for such rights exists and a premium can be recognized over the cost of any such sale. If such rights cannot be sold, they will expire and ADR holders will not realize any value from the grant of such preemptive rights. In any such case, such holder’s equity interest in the Company would be diluted proportionately.

 

Shareholders’ rights are less well defined in Chile than in other jurisdictions, including the United States

 

Under the United States federal securities laws, as a foreign private issuer, we are exempt from certain rules that apply to domestic United States issuers with equity securities registered under the United States Securities Exchange Act of 1934, as amended, including the proxy solicitation rules, the rules requiring disclosure of share ownership by directors, officers and certain shareholders. We are also exempt from certain of the corporate governance requirements of the Sarbanes-Oxley Act of 2002 and the New York Stock Exchange, Inc., including the requirements concerning independent directors.

 

Our corporate affairs are governed by the laws of Chile and our estatutos or bylaws, which function not only as our bylaws but also as our articles of incorporation. Under such laws, our shareholders may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction.

 

12

Table of Contents

 

Pursuant to Law No. 19,705, enacted in December 2000, the controlling shareholders of an open stock corporation can only sell their controlling shares via a tender offer issued to all shareholders in which the bidder would have to buy all the offered shares up to the percentage determined by it, when the price paid is substantially higher than the market price (that is, when the price paid was higher than the average market price of a period starting 90 days before the proposed transaction and ending 30 days before such proposed transaction, plus 10%).

 

The market for our shares may be volatile and illiquid

 

The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The Bolsa de Comercio de Santiago (the “Santiago Stock Exchange”), which is Chile’s principal securities exchange, had a market capitalization of approximately US$269,247  million at December 31, 2011 and an average monthly trading volume of approximately US$4,698 million for 2011. The lack of liquidity owing, in part, to the relatively small size of the Chilean securities markets may have a material adverse effect on the trading prices of our shares. Because the market for our ADRs depends, in part, on investors’ perception of the value of our underlying shares, this lack of liquidity for our shares in Chile may have a significant effect on the trading prices of our ADRs.

 

ITEM 4.                               INFORMATION ON THE COMPANY

 

A.                      History and development of the Company

 

Our legal name is Embotelladora Andina S.A. and our commercial name is Andina. We were incorporated and organized on February 7, 1946 under the Chilean Companies Law as a sociedad anónima (stock corporation). An abstract of our bylaws is registered with the Registro de Comercio de Santiago (Public Registry of Commerce of the City of Santiago) under No. 581 on page 768 of the year 1946. Pursuant to our bylaws, our term of duration is indefinite.

 

Our shares of common stock are listed and traded on the Bolsa de Comercio de Santiago (Santiago Stock Exchange),  on the Bolsa Electrónica de Chile (the Chilean Electronic Stock Exchange) and the Bolsa de Comercio de Valparaiso (the Valparaiso Stock Exchange). Our Series A and Series B ADRs representing our Series A and Series B shares, respectively, are listed on the New York Stock Exchange. Our principal executive offices are located at Avenida El Golf 40, Piso 4, Las Condes, Santiago, Chile. Our telephone number is +56-2-338-0520 and our website is www.embotelladoraandina.com.

 

Our depositary agent for the ADRs in the United States is The Bank of New York Mellon Corporation, located at One Wall Street, New York, New York 10286. Our depositary agent’s telephone number is (212) 815-2296. Our authorized representative in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711, United States and their phone number is (302) 738-6680.

 

History

 

In 1941, The Coca-Cola Company licensed a private Chilean company to produce Coca-Cola soft drinks in Chile, and production began in 1943. In 1946, the original licensee withdrew from the license arrangement, and a group of U.S. and Chilean investors formed Andina, which became The Coca-Cola Company’s sole licensee in Chile. Between 1946 and the early 1980s, Andina developed the Chilean market for Coca-Cola soft drinks with a system of production and distribution facilities covering the central and southern regions of Chile. In the early 1980s, Andina sold its Coca-Cola licenses for most areas outside the Santiago metropolitan region and concentrated on the development of its soft drink business in the Santiago area. Although no longer the sole Coca-Cola bottler in Chile, Andina has been the principal manufacturer of Coca-Cola products in Chile for an uninterrupted period of 65 years.

 

In 1985, a majority of Andina’s shares was acquired by four Chilean families who compromise Inversiones Freire Ltda. (“Freire” or “the Controlling Shareholders”). On December 31, 2011, the Controlling Shareholders owned 55.0% of our outstanding Series A shares, which have preferred voting rights and thereby control the Company; and 42.4% of our outstanding Series B shares, consequently the Controlling Shareholders of Andina hold a 48.7% ownership interest in the Company.   Further information regarding our Controlling Shareholders can be found on page 73 of our 2011 Annual Report which is available at our website: www.embotelladoraandina.com.

 

Andina Brazil, our Brazilian subsidiary, began production and distribution of Coca-Cola soft drinks in Rio de Janeiro in 1942. In June 1994, we acquired 100% of the capital stock of Andina Brazil for approximately US$120 million and

 

13

---

Table of Contents

 

contributed an additional US$31 million to Andina Brazil’s capital immediately after the acquisition to repay certain indebtedness of Andina Brazil.   In 2000, we purchased through Andina Brazil, from the Coffin Group, a Coca-Cola franchise license for a territory in Brazil comprising the State of Espírito Santo and part of the States of Rio de Janeiro and Minas Gerais (NVG), for US$74.5 million. NVG was merged into Andina Brazil in 2000, and its operations were integrated with Andina Brazil in 2001.   In 2004, Andina Brazil entered into a franchise swap agreement with the Brazilian subsidiary of The Coca-Cola Company, Recofarma Indústria do Amazonas Ltda., for (1) an exchange of franchising rights, goods and other assets of Andina Brazil in the territory of Governador Valadares in the State of Minas Gerais, and (2) other franchise rights of The Coca-Cola Company in the territories of Nova Iguaçu in the state of Rio de Janeiro, which was previously owned by Companhia Mineira de Refrescos S.A.  In 2007 TCCC along with the Coca-Cola bottlers in Brazil create a Joint Venture, Mais Indústria de Alimentos, in order to enhance the non-carbonated business for the entire System in that country, and in   2008 The Coca-Cola System acquires a second company that produces non carbonated beverages called Sucos del Valle do Brasil Ltda  These two companies merged in 2011 and SABB (Sistema de Alimentos y Bebidas do Brasil) was created  in which Andina Brazil holds a 5.74% ownership interest. In 2010 TCCC along with the Coca-Cola bottlers in Brazil acquired Leão Junior S.A. through a Joint Venture.  Leão Junior S.A. among others, commercializes Matte Leão.  This company has a consolidated presence and market share within the ready-to-drink teas category in Andina Brazil’s territory. Andina Brazil has an 18.20% ownership interest in Leão Junior S.A.  Andina Brazil holds an average ownership interest of 10.74% in Leão Junior and SABB.

 

Production of Coca-Cola soft drinks in the Argentine territory began in 1943 with the start-up of operations in the province of Córdoba, Argentina, through Inti S.A.I.C., which we refer to as “INTI”. In July 1995, we (through Inversiones del Atlántico S.A., an investment company incorporated in Argentina), which we refer to as “IASA”, acquired a 59% interest in Edasa, the parent company of Rosario Refrescos S.A. and Mendoza Refrescos S.A. These entities were subsequently merged to create Rosario Mendoza Refrescos S.A., which we refer to as “Romesa”. In 1996 we acquired an additional 35.9% interest in Edasa, an additional 78.7% interest in Inti, a 100% interest in Cipet located in Buenos Aires (a PET plastic bottle and packaging business) and a 15.2% interest in Cican S.A. During 1997, the operations of Romesa were merged with INTI. In 1999, Edasa was merged into IASA. In 2000, IASA was merged into Inti, which in turn changed its corporate name to Embotelladora del Atlántico S.A. (EDASA). In 2002 Cipet merged into Edasa. During 2007 EDASA’s ownership interest in Cican S.A. was sold to Femsa. Currently, Edasa is the Coca-Cola bottler in the provinces of Entre Rios, San Luis, San Juan, Mendoza, part of Santa Fe and part of Buenos Aires (San Nicolás y Ramallo.)

 

In 1998, Andina repurchased from The Coca-Cola Company its 49% stake in Vital. Concurrently with that transaction, The Coca-Cola Company purchased Vital’s mineral water springs located at Chanqueahue, 80 miles south of Santiago. As part of the transaction, the Vital bottler agreement was replaced with a juice bottler agreement with Minute Maid International Inc., as well as a new mineral water bottling agreement with The Coca-Cola Company. In addition, the 1995 shareholders’ agreement between us and The Coca-Cola Company regarding ownership of Vital was terminated. The restructuring of the water and juice business in Chile enhanced our focus on the production of soft drinks, water and juice.  During 2005, the production and packaging business of water, juice and non-carbonated beverages licensed by TCCC in Chile was restructured. Vital Aguas S.A., which we refer to as VASA, was created to develop the production and packaging businesses of Vital de Chanqueahue, mineral water and other water products. VASA is focused on developing juice and non-carbonated beverages. Andina, Embonor S.A. and Embotelladora Coca-Cola Polar S.A. own 56.5%, 26.4% and 17.1%, respectively, of the outstanding capital of VASA.  During January of 2011, the juice business was restructured, allowing the incorporation of the other Coca-Cola bottlers in Chile to the property of Vital S.A. which changed its name to Vital Jugos S.A.  Andina, Embonor S.A. and Embotelladora Coca-Cola Polar S.A. own 57%, 28% and 15%, respectively, of the outstanding capital of Vital Jugos S.A.

 

In Chile we participate in the business of producing PET bottles through a 50/50 joint venture we entered into with Cristalerías de Chile in the year 2001.  On January 27, 2012, Coca-Cola Embonor through its subsidiary, Embonor Empauqes S.A. acquired Cristalerías de Chile’s stake equivalente to a 50% ownership interest in Envases CMF.

 

On March 30, 2012, after completion of due-diligence procedures, the Company signed a Promissory Merger Agreement with Embotelladoras Coca-Cola Polar S.A. (“Polar”).    Polar is also a Coca-Cola bottler, with its operations in Chile and Paraguay.

 

The terms of the merger prescribe the exchange of newly issued Company shares at a rate of 0.33269 Series A shares and 0.33269 Series B shares, for each outstanding share of Polar.  This exchange rate implies that the current shareholders of Polar will acquire a 19.68% interest in the Company.

 

14

Table of Contents

 

Prior to closing the merger, and subject to the approval by of each of the respective shareholders’ meetings, Andina and Polar will each distribute dividends to their shareholders, in addition to those already declared and distributed to date.   Company dividends will amount to Ch$28,155,862,307 and Ch$29,565,609,857, respectively, which represents Ch$35.27 per Series A share and Ch$38.80 per Series B share.

 

Closing of the merger first requires the approval of the Chilean Superintendence of Securities and Insurance, the Boards of Directors and shareholders of both companies, and the Coca-Cola Company.  It also requires registration of new shares to be issued in the exchange.  The merger is scheduled to close before August 31, 2012.

 

Based on the historical results for the year ended December 31, 2011, the merged entity would have a pro-forma net revenues of approximately US$2.643 million, becoming one of the largest Coca-Cola bottlers in Latin America with operations in Argentina, Brazil, Chile and Paraguay.

 

In 1996, our shareholders approved the Reclassification of Capital Stock, which we refer to as the “Reclassification”, of Andina’s common stock into two new series of shares. Pursuant to the Reclassification, each outstanding share of Andina’s common stock was replaced by one newly issued Series A share and one newly issued Series B share. The Series A and Series B shares are principally differentiated by their voting and economic rights: the holders of the Series A shares have full voting power and are entitled to elect six of seven regular and alternate members of the board of directors, and the holders of the Series B shares have no voting rights but for the right to elect one regular and one alternate member of the board of directors. In addition, holders of Series B shares are entitled to a dividend 10% greater than any dividend on Series A shares.

 

After the Reclassificaction, the Superintendence of Pension Fund Managers ( Superintendencia de Administradores de Fondos de Pensiones ) decreed that Chilean pension funds would not be permitted to acquire Series B Shares due to their limited voting rights. Later, during 2004, the Superintendence approved Series B shares as investment instruments for Chilean Pension funds. Series A shares have always been eligible as investment instruments.

 

Capital Expenditures

 

During 2011 the Company financed its permanent investments exclusively from internal resources.

 

The following table sets forth our capital expenditures by territory and line of business for the periods indicated:

 

		Year ended December 31,
		2011		2010		2009
		MCh$		MCh$		MCh$
Soft Drinks:
Chilean territory		72,669		46,673		21,369
Brazilian territory		28,951		35,607		18,892
Argentine territory		18,801		8,961		7,362
Other Beverages:
Vital Jugos S.A.		—		3,315		1,566
Argentine territory		3,780		—		—
PET Packaging:
Argentine territory		2,730		906		294
Total		126,931		95,462		49,483

 

During 2011, the Company has made disbursements totaling Ch$3,198 million for improvements in industrial processes, equipment to measure industrial waste flows, laboratory analyses, consulting on environmental impacts and other studies.  For further details please refer to Note 27 of our Consolidated Financial Statements filed herewith.

 

15

Table of Contents

 

Our total capital expenditures were Ch$126,931million in 2011, Ch$95,462  million in 2010.  In 2011, capital expenditures were principally related to the following:

 

Soft drinks:

 

Chile

·                   Returnable bottles (glass and PET bottles) and bottle cases;

·                   Cooling equipment, post mix and other point of sale equipment;

·                   New equipment to increase efficiency and production capacity;

·                   Implementation of the new Renca bottling facility.

 

Brazil

·                   Returnable glass bottles and bottle cases;

·                   Coolers, post-mix and other point-of-sale equipment;

·                   Equipment to increase efficiency and production capacity; and

·                   Remodeling of the Nova Iguacú distribution center

·                   Industrial projects at Jacarepaguá: cooling, syrup, tanks and “short finish”

 

Argentina

·                   Bottles (glass and PET bottles) and bottle cases;

·                   Coolers and pos tmix equipment;

·                   Returnable PET production line;

·                   Line for waters and sensitive products

·                   Semi-automatic sorting

·                   Injectors (2), one to increase operating capacity and the other one for the waters project.

 

Juices and Waters

 

Juices

 

·                   New SACMI filling line for Pet/glass OW Hot Fill bottles (Line N ° 3);

·                   Dase Seal labelor acquisition for Line N°3 Pet/glass OW;

·                   Automatic mixed system for beverages without pulp;

·                   Remodelling of quality control laboratory;

·                   Adaptation of Line N°2 Pet OW for new Powerade one liter format;

·                   Acquisition of automatic mixing system for beverages without pulp;

·                   Upgrade of central controlling system in formulation room;

·                   Relocation and enlargement of the general warehouse for raw materials; and

·                   Expansion of finished product warehouse.

 

Waters

 

·                   New network of for sanitary air;

·                   Gas boiler

·                   Electric generator bottling plant;

·                   Electric generator fire network;

·                   Electric generator neumatic transport Blowing Plant;

·                   Depalletizor and transportation of line N°1 for the new 330 cc product

·                   Adpatation of Line N°2 for the new 6 lt format

 

16

Table of Contents

 

Divestitures

 

In May 2011, EDASA sold the property where the bottling facility was originally located in the Castro Barros area in Córdoba for an amount of US$3.5 million.

 

B.                      Business Overview

 

Andina is among the ten largest Coca-Cola bottlers in the world, servicing franchised territories with 36 million people, delivering over 7.8 million liters of soft drinks, juices, and bottled waters on a daily basis. We are the largest producer of soft drinks in Chile and the second largest soft drink producer in Brazil and in Argentina. Our principal business is the production and distribution of Coca-Cola soft drinks, which accounted for 84.4% of our consolidated net sales in 2011. On 2011, we recorded consolidated net sales of Ch$829,888 million and total sales volume of 447.9 million unit cases of Coca-Cola soft drinks.

 

In addition to the Coca-Cola soft drinks business, through Vital Jugos S.A., we produce and distribute fruit juices and other fruit-flavored beverages in Chile under trademarks owned by TCCC. Through Vital Aguas S.A., we produce and sell mineral water and purified water in Chile under trademarks owned by TCCC.  Through Envases Central S.A. we produce flavored waters and certain formats for soft drinks under trademarks owned by TCCC.  We also manufacture PET bottles primarily for our own use in the packaging of Coca-Cola soft drinks in Chile and Argentina. In Brazil, we also distribute the beer brands Amstel, Bavaria, Birra Moretti, Dos Equis (XX), Edelweiss, Heineken, Kaiser, Murphy´s, Sol and Xingú.

 

Our Products

 

We produce, market and distribute the following Coca-Cola trademark beverages and brands licensed from third parties throughout our franchise territories:

 

Chile: Andina, Andina Light, Aquarius, Benedictino, Burn, Coca-Cola, Coca-Cola Light, Coca-Cola Zero, Dasani Citrus, Dasani Durazno, Dasani Manzana, Dasani Tangerine, Fanta Frutilla, Fanta Limón, Fanta Naranja, Fanta Naranja Zero, Fanta Uva, Hugo, Kapo, Minute Maid 100%, Nestea, Nestea Light, Nordic Mist Ginger Ale, Nordic Mist Tónica, Powerade, Powerade Light, Quatro Guarana, Quatro Light, Sprite, Sprite Zero andVital

 

Brazil: Amstel, Aquarius Fresh, Bavaria, Birra Moretti, Burn, Chá Leão, Coca-Cola, Coca-Cola Light, Coca-Cola Light Plus, Coca-Cola Zero, Crystal, Del Valle, Del Valle Frut, Del Valle Limao & Nada, Del Valle Fruta & Nada, Del Valle Mais, Del Valle Mais Soja, Dos Equis, Edelweiss, Fanta, Fanta Diet, Fanta Zero, Gladiator, Guaraná Leão, Heineken, I9, Kaiser, Kapo, Kapo Chocolate, Kuat, Kuat Eko, Kuat Zero, Leão Ice Tea, Matte Leão, Matte+Guaraná Leão, Murphy’s, Powerade, Schweppes, Schweppes Light, Sol, Sprite, Sprite Diet, Sprite Zero, Xingú.

 

Argentina: Aquarius, Cepita (8 flavors), Cepita Nutri Defense, Cepita 100%, Cepita Naranja Light, Coca-Cola, Coca-Cola Light, Coca-Cola Light Plus, Coca-Cola Zero, Crush Lima-Limón, Crush Naranja, Dasani,  Soda Kin, Fanta Limón, Fanta Pomelo, Fanta Naranja, Fanta Naranja Zero, Powerade Naranja, Powerade Manzana, Powerade Mountain Blast, Powerade Frutas Tropicales (tropical fruits), Powerade Naranja Light, Powerade Citrus, Quatro Liviana  Schweppes Citrus, Schweppes Citrus Light Schweppes Tónica, Sprite and Sprite Zero.

 

We produce, market and distribute Coca-Cola soft drinks in our franchise territories through standard bottler agreements between our bottler subsidiaries and the local subsidiary in each jurisdiction of TCCC (collectively, the “Bottler Agreements”). We consider the enhancement of our relationship with TCCC an integral part of our business strategy.

 

We seek to enhance our business throughout the franchise territories by developing existing markets, penetrating other soft drink, waters and juices markets, forming strategic alliances with retailers to increase consumer demand for our products, increasing productivity, and by further internationalizing our operations.

 

17

Table of Contents

 

1. Soft Drink Business

 

Sales Overview

 

We measure sales volume in terms of unit cases, which we refer to as UCs. Unit cases contain 192 ounces of finished beverage product (24 eight-ounce servings) or 5.69 liters. The following table illustrates our historical sales volumes for each of our territories:

 

		Soft Drink Sales Volumes
		Year ended December 31,
		2011		2010		2009
		(millions of UCs)
Chile		134.8		132.6		128.0
Brazil		183.5		187.0		173.7
Argentina		129.6		118.4		117.9

 

In 2011, our Coca-Cola soft drinks business accounted for net sales of Ch$829,888 million and operating income of Ch$128,783 million representing 84.4% and 90.4% of our consolidated net sales and operating income, respectively.

 

Our Chilean soft drink operations accounted for net sales in 2011 of Ch$255,436 million; the Brazilian soft drink operations for net sales of Ch$365,604 million; and the Argentine soft drink operations for net sales of Ch$208,848 million.

 

The following tables set forth, for the periods indicated, our net sales and volume of Coca-Cola soft drinks sold in our franchise territories for the periods indicated.

 

		Year ended December 31, 2011
		Chile				Brazil				Argentina
		MCh$		MUCs		MCh$		MUCs		MCh$		MUCs
Colas		197,610		104.3		302,278		148.5		162,180		101.7
Flavored soft drinks		57,826		30.5		63,326		35.0		46,668		27.9
Total		255,436		134.8		365,604		183.5		208,848		129.6

 

		Year ended December 31, 2010
		Chile				Brazil				Argentina
		MCh$		MUCs		MCh$		MUCs		MCh$		MUCs
Colas		189,941		104.4		297,644		155.6		127,808		91.5
Flavored soft drinks		51,231		28.2		53,180		31.4		39,139		26.9
Total		241,172		132.6		350,824		187.0		166,947		118.4

 

		Year ended December 31, 2009
		Chile				Brazil				Argentina
		MCh$		MUCs		MCh$		MUCs		MCh$		MUCs
Colas		179,470		102.5		253,514		144.3		120,982		90.8
Flavored soft drinks		45,843		25.5		44,812		29.4		39,115		27.1
Total		225,313		128.0		298,326		173.7		160,097		117.9

 

18

Table of Contents

 

In Chile, Coca-Cola soft drinks are distributed in returnable and non-returnable glass and PET bottles and aluminum cans of various sizes. It is also distributed as Post-mix syrup, which is mixed with carbonated water in a dispenser at the point of sale, in stainless steel and bag-in-box containers. In Brazil, Coca-Cola soft drinks are distributed in returnable and non-returnable glass, in PET bottles of various sizes, in aluminum cans and also as post-mix syrup. In Argentina, Edasa produces and distributes Coca-Cola soft drinks in returnable and non-returnable glass and PET bottles of various sizes, in aluminum cans and as post-mix syrup.  Regarding Juices, they are distributed in non-returnable glass and PET bottles, returnable glass bottles, in bi-laminated sachets, cardboard Tetra Pak containers and bag-in-box as concentrated juice that is mixed with water at the point of sale. Waters are distributed in returnable glass bottles and non-returnable PET bottles.

 

The following table sets forth, for the periods indicated, our sales of Coca-Cola soft drinks in Chile, Brazil and Argentina, by packaging type, measured as a percentage of total sales volume:

 

Soft Drink Sales by Packaging Type

 

		Year Ended December 31,
		2011						2010
		Chile		Brazil		Argentina		Chile		Brazil		Argentina
		% Total		% Total		% Total		% Total		% Total		% Total
		Mix		Mix		Mix		Mix		Mix		Mix
Returnable		61		11		51		61		12		49
Non-returnable		35		86		48		36		85		50
Post Mix		4		3		1		3		3		1
Total		100		100		100		100		100		100

 

Customers and Distribution

 

As of December 31, 2011, we sold our products to approximately 47,743 customers in Chile, 67,900 customers in Brazil, and 44,382 customers in Argentina. Although the mix varies significantly among the franchise territories, our distribution network generally relies on a combination of Company-owned trucks and independent distributors in each territory.

 

The following table sets forth, for the periods indicated, our sales of Coca-Cola soft drinks in Chile, Brazil and Argentina, by type of customer, measured as a percentage of total sales volume:

 

Soft Drink Sales by Type of Customer

 

		Year ended December 31,
		2011						2010
		Chile		Brazil		Argentina		Chile		Brazil		Argentina
		(%)
Mom & Pops		53		22		50		59		20		50
Supermarkets		17		28		18		21		30		18
On Premise		11		26		3		13		26		3
Wholesale distributors		19		24		29		7		24		29
Total		100		100		100		100		100		100

 

19

Table of Contents

 

Chile . As of December 31, 2011, Andina’s sales force consisted of 199 salespeople (158 workers hired indefinitely and 41 hired on a fixed term basis) who call on most customers on average 1.6 times per week. For sales to major supermarkets, we employ 8 key account heads, 14 field supervisors and 522 third party promoters who are on-site supervisors who handle our products, monitor displays and track the pricing and marketing strategies of our competitors. Account executives are also assigned to major fast food outlets to work with the customer to develop sales on a consistent basis. Our distribution system for our soft drink products consisted of a group of 16 exclusive distributors, which are independent businesses that collectively deploy approximately 380 trucks (30 of which are company property), depending on seasonal demand. The 18 distributors collectively service all of our Chilean customers. In most cases, the distributor collects payment from the customer in cash or check. Where applicable, the driver also either collects empty returnable glass or PET bottles of the same type and quantity as the bottles being delivered, or collects cash deposits for the net returnable bottles delivered. This task is particularly significant in the Chilean territory where returnable containers accounted for approximately 61% of total soft drinks volume in 2011. Certain important customers (such as supermarkets), maintain accounts receivables with us, which are settled on average every 45 days after invoices are issued. On average, accounts receivable from all clients are liquidated on a 20-day term.

 

Brazil . As of December 31, 2011, Andina Brazil’s sales force in Brazil consisted of an average of 612 salespeople (402 commercial representatives and 209 supermarket promoters) divided into three major groups responsible for: (i) sales to key accounts and fast food chains (who purchase soft drinks in post-mix dispensers, in cans and bottles), (ii) sales to supermarkets (consisting of bottle and can sales) and (iii) all other traditional customers. Each of these three groups also manages sales of the other beverages (beer, water, juice, energy drinks and ready-to-drink tea) distributed by Andina Brazil. In Brazil, we generally distribute Coca-Cola soft drinks through a distribution system that includes: (i) trucks operated by independent distributors pursuant to exclusive distribution arrangements with us and (ii) trucks operated by independent transport companies on a non-exclusive basis. In 2011, 9.5% were distributed by exclusive distributors, and 90.5% by independent transport companies. Distribution of all of Andina Brazil’s beverages takes place from distribution centers and production facilities. In 2011, approximately 19% of Andina Brazil’ soft drink sales were paid for in cash at the time of delivery, 19% were paid by check to be cashed between one and ten days after delivery and 62% were paid between 10 and 45 days after delivery by invoice.

 

Argentina . As of December 31, 2011, our sales force in Argentina consisted of 416 employees, grouped in salespeople, merchandisers, and Contact Center personnel. In 2011, 71% of Edasa’s Coca-Cola soft drinks were distributed by direct distribution (trucking) and 29% by wholesale distribution. All of the direct distribution is done by a group of independent transport companies (each with three or more trucks). In 2011, approximately 78% of Edasa’s soft drink sales were paid for in cash and 22% were credit sales.

 

Competition

 

We face intense competition throughout the franchise territories principally from bottlers of competing soft drink brands. See “Item 3. Key Information — Risk Factors — Risks Related to our Company — Our business is highly competitive and subject to price competition which may adversely affect our net profits and margins.”

 

Chile. The soft drink segment of the Chilean beverage industry is highly competitive. The most important areas of competition are product image, pricing, advertising, ability to deliver product in popular bottle sizes, distribution capacity, and the amount of returnable bottles held by retailers or by consumers. Returnable bottles can be exchanged at the time of new purchases in lieu of paying a bottle deposit, thereby decreasing the purchase price. Our main competitor in the Chilean franchise territory is Embotelladora Chilenas Unidas or ECUSA, a subsidiary of Compañía Cervecerías Unidas S.A. or CCU, the major brewer in Chile. ECUSA produces and distributes Pepsi-Cola products and its own brands (soft drinks and bottled water).

 

Brazil. The soft drink segment of the Brazilian beverage industry is highly competitive. The most important areas of competition are product image, pricing, advertising and distribution capacity (including the number and location of sales outlets). According to A.C. Nielsen, our main soft drink competitor in the Brazilian territory is American Beverage Company or Ambev, the largest beer producer and distributor in Brazil and also produces soft drinks, including Pepsi-Cola products.

 

Argentina. The soft drink segment of the Argentine beverage industry is highly competitive. The most important areas of competition are product image, pricing, advertising, ability to produce bottles in popular sizes and distribution capacity.

 

20

Table of Contents

 

The greatest competitor is Ambev, the Latin American unit of the largest brewery group of the world (Inbev) that produces and commercializes Pepsi-Cola products. As far as B-brands, the most significant are: Talca, Pritty and Naranpol representing over 78% of the volume for B-brands. Productora Alimentaria S.A. is dedicated to the production, commercialization, and distribution of juices, soft drinks, appetizers and mass consumption products; and among others it also commercializes, the Naranpol brand with a strong market presence in the coast of Argentina. Pritty S.A., a company established in the city of Córdoba, is dedicated to the production and sale of beverages without alcohol; it commercializes Pritty, Doble Cola, Saldán, Switty, Rafting, Hook and Magna. O.E.S.A., a preceding Pepsi bottler in the province of Mendoza, produces and commercializes soft drinks and soda water under the brand Talca.

 

Based on reports by A.C. Nielsen, we estimate that in 2011, our average soft drink market share within our franchise territories reached 69.3%, 57.4%, and 57.3% for Chile, Brazil, and Argentina, respectively.

 

The following table presents the market share of our main competitors in Chile, Brazil and Argentina for the periods indicated:

 

Market Share

 

		Year ended December 31,
		2011						2010
		Chile		Brazil		Argentina		Chile		Brazil		Argentina
		(%)
Coca-Cola soft drinks		69		57		57		69		57		55
ECUSA soft drinks		20						20		—		—
Pepsi-Cola and 7 Up products		4		4		21		3		5		21
Pritty products		—				8		—		—		9
Antarctica products		—		12				—		11		—
Brahma products		—		2				—		2		—
Other		7		25		14		8		25		15
Total		100		100		100		100		100		100

 

Source: A.C. Nielsen

 

Seasonality

 

Each of our lines of business is seasonal. Most of our beverage products have their highest sales volumes during the South American summer (October through March), with the exception of nectar products, which have a higher sales volume during the South American winter (April through September). Our Chilean and Argentine operations generally experience higher levels of seasonal price fluctuations than our Brazilian operations.

 

Raw Materials and Supplies(1)

 

The principal raw materials used in the production of Coca-Cola soft drinks are concentrate, sweetener, water and carbon dioxide gas. Production also requires glass and plastic bottles, bottle tops and labels. Water used in soft drink production is treated for impurities and adjusted for taste reasons. All raw materials, especially water, are subjected to continuous quality control.

 

Chile—Raw Materials. We purchase concentrate at prices established by TCCC. We mainly purchase sugar from Industria Azucarera Nacional S.A., IANSA, the only producer of sugar in Chile, although we may purchase sugar in the international market when prices are favorable, and have done so on occasion. Chilean sugar prices are subject to a price band established by the Chilean government on an annual basis. We obtain carbon dioxide gas from AGA Chile S.A. Andina’s affiliate Envases CMF, produces returnable PET bottles and non-returnable PET pre-forms which are blown at our San Joaquín plant. We purchase glass bottles principally from Cristalerías de Chile S.A. and Cristalerías Toro S.A.I.C.  Bottle caps are purchased from Closure Systems International, Alucaps Mexicana S.A. de C.V., Inyecal S.A. and other suppliers.

 

(1)  For detailed information please visit our website www.embotelladoraandina.com

 

21

Table of Contents

 

During  2011, 77% of the variable cost of sales for softdrinks produced by Andina Chile coprresponded to main raw materials.  The cost of each raw material within the total of main raw materials is the following: concentrate represents 59%; sugar and artificial sweeteners 28%; non-returnable bottles 8%; bottle caps 4% and carbon dioxide 1%. Water does not constitute an important cost as raw material. Additionally, the cost of finished products purchased from third parties (“ECSA”) is included within the cost of sales of soft drinks. These costs represent 21% of the total costs of sales of soft drinks and correspond to cans and some PET bottles.

 

Brazil - Raw Materials. Andina Brazil purchases concentrate in the city of Manaus at prices established by TCCC. Manaus has been designated as a duty-free development zone by the Brazilian government. Andina Brazil purchases sugar from Brazilian suppliers, in particular from Copersucar Ltda. It purchases carbon dioxide gas mainly from Companhia White Martins Gases S.A..  PET pre-forms from Braspla Ltda., and Amcor Ltda. Glass bottles are purchased from Owens-Illinois ; Cans are purchased from Rexam and Latapack Ball;  metal bottle caps from Aro S.A.;  and Plastic bottle caps are purchased from Closure Systems International and Rexam.  Andina Brazil purchases water from the municipality of Rio de Janeiro.

 

During  2011, 98.1% of the variable cost of sales for softdrinks produced by Andina Brazil coprresponded to main raw materials  The cost of each raw material within the total of main raw materials is the following: concentrate (including juice used for some flavors) represents 31.1%; sugar and artificial sweeteners 22.8.%; non-returnable bottles 21.4%; cans 12.2%, bottle caps 3.3%, carbon dioxide 7.3%. Additionally, the cost of soft drinks finished products purchased from third parties is included within the cost of sales of soft drinks. These costs represent 1.89% of the total costs of sales of soft drinks and correspond to some formats of cans, PET and non-returnable glass bottles.

 

Argentina - Raw Materials. Edasa purchases concentrate at prices established by The Coca-Cola Company. Edasa purchases sugar mainly from Ing. y Refinería San Martín de Tabacal S.A., Cía. Azucarera Concepción S.A., and Atanor S.C.A.;  fructose from Productos de Maíz S.A. and Glucovil S.A., and carbon dioxide gas from Praxair S.A. and Air Liquide S.A. Edasa produces non-returnable and returnable PET bottles through its own packaging division, and glass bottles from Cattorini Hermanos S.A. ,Cristalerías de Chile S.A. and Cristalerías Toro de Chile, plastic caps from Alusud S.A. and Inyecal S.A.,  and metal caps from Metalgráfica Cearense S.A. and Aro S.A. in Brazil. Regarding water supply for the production of soft drink, Edasa owns water wells and pays a fee to the Dirección Provincial de Aguas Sanitarias.  Edasa also buys stretch wrap from Manuli Packaging Argentina, Plastiandino S.A., Sanlufilm S.A., Atiles S.A., IPESA Ind. Plast. S.A. and Rio Chico S.A., and carton from Cartocor S.A. and Papeltécica S.A.

 

The cost of each raw material as a percentage of the total cost of raw materials is the following: concentrate 46%; sugar and artificial sweeteners 26%; non-returnable bottles 14%; bottle caps 3% and carbon dioxide 1%, and the remaining 2% correspond to packaging. Water does not represent a significant cost as raw material.  Additionally, the cost of finished products purchased from third parties is included within the cost of sales of soft drinks. These costs represent 2% of the total costs of sales of soft drinks and correspond to can formats, juices and some bottled water products.

 

Argentina PET Packaging - Raw Materials. The principal raw material required for production of PET bottles is PET resin, during 2011 this raw material was mainly from DAK Américas de Argentina S.A. In 2011, the Edasa Packaging Division’s costs for PET resin accounted for 92% of the total variable cost of its sales of PET bottles and preforms.

 

Marketing

 

We and TCCC jointly promote and market Coca-Cola soft drinks in our franchise territories, in accordance with the terms of our respective Bottler Agreements. During 2011, we paid approximately 50% of the advertising and promotional expenses incurred by TCCC  in our franchise territories. Nearly all media advertising and promotional materials for Coca-Cola soft drinks are produced and distributed by TCCC . See “Item 4. Information on the Company —Bottler Agreements.”

 

Channel Marketing . In order to provide more dynamic and specialized marketing of our products, our strategy is to divide our market into distribution channels. Our principal channels are small retailers, “on-premise” consumption such as restaurants and bars, supermarkets and third party distributors. Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of soft drink consumers in each type of location or distribution channel. In response to this analysis, we seek to tailor our product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel.

 

22

Table of Contents

 

We believe that the implementation of our channel marketing strategy also enables us to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses. This focused response capability isolates the effects of competitive pressure in a specific channel, thereby avoiding costlier market-wide responses. Our channel marketing activities are facilitated by our management information systems. We have invested significantly in creating such systems, including providing hand-held computer and data gathering equipment to support the gathering of product, consumer and delivery information required to implement our channel marketing strategies effectively for most of our sales routes in Chile, Brazil and Argentina. We will continue investing to increase pre-sale coverage in our territories.

 

Our consolidated total advertising expenditures in 2011 were Ch$31,892 million.

 

Advertising

 

We advertise in all major communications media. We focus our advertising efforts on increasing brand recognition by consumers and improving our customer relations. National advertising campaigns are designed and proposed by TCCC ‘s local affiliates, with our input at the local or regional level.

 

2.  Other Beverages

 

Chile . In addition to Coca-Cola soft drinks, through Vital Jugos S.A., we produce and sell juices, other fruit flavored beverages, ready-to-drink tea and sports drinks, and through Vital Aguas S.A. we produce and sell mineral water and purified water. Juices are produced and sold under the brands Andina Frut (fruit juices), Andina Nectar (fruit nectars), Kapo (fantasy drink), Aquarius (flavored water) Nestea (ready-to-drink tea), Hugo (dairy product with fruit juice) and Powerade (isotonic).Waters are produced and sold under the brands Vital (mineral water) in the following versions: with gas, without gas and Soft Gas; Dasani (purified water) in the following versions: with gas, without gas, and flavored; Benedictino (purified water) in the following versions:  with gas and without gas.

 

Brazil . We distribute beer under the Amstel, Birra Moretti, Dos Equis (XX), Edelweiss, Heineken, Kaiser, Murphys, Sol, Xingu and Bavária labels. We also distribute water under the labels Crystal and Aquarius Fresh and sell and distribute ready-to-drink juices under the labels Del Valle Frut, Del Valle Mais, and Kapo; milk and cocoa-based beverages under the Kapo Chocolate brand, energy drinks under the brand names Burn and Gladiator, isotonics under i9 and Powerade brand names and Chá Leão, Leão Ice Tea, Matte Leão, and Guaraná Leão ready-to-drink teas.

 

Argentina . We produce and distribute ready-to-drink juices under the Cepita brand name. We also produce and sell water under the brands Dasani (purified water) and Aquarius (flavored water), as well as Powerade in the isotonic segment.

 

Waters and Juices in Chile

 

Sales . In 2011, net sales of waters and juices in Chile represented 16.2% of our consolidated net sales. On a consolidated basis, sales of waters and juices in Chile were Ch$49,512 million.

 

The following table sets forth for the periods indicated, Vital Jugos’ net sales and sales by volume of unit cases of waters and juices:

 

Waters and Juices Sales by Net Sales and Volume(1)

 

		Year-ended December 31,
		2011				2010
		In million Ch$ and million UCs
		Ch$		UCs		Ch$		UCs
Andina Frut an Andina Néctar		29,222		17		24,637		14.5
Kapo		6,629		4.6		5,578		3.9
Powerade		2,545		1.0		1,713		0.7
Nestea		951		0.5		689		0.3
Fruitopia, Hugo and Aquarius		388		0.2		432		0.2
Dasani (purified and flavored water)		450		0.4		535		0.6
Benedictino (purified water)		2,225		4.0		2,000		3.5
Vital (mineral water)		9,342		14.0		8,150		13.3
Total(2)		51,752		41.6		43,734		37.0

 

23

Table of Contents

 

(1)Reflects the sale of Vital Jugos and Vital Aguas to bottlers of The Coca-Cola Company.

(2)Includes sales to related companies which are eliminated upon consolidation.

 

Marketing. Marketing and promotional programs, including television, radio and print advertising, point-of-sale advertising, sales promotions and entertainment are developed by TCCC for all Vital Jugos’ and Vital Aguas’ products.

 

Customers and Distribution . Juices and waters throughout Chile are distributed by means of distribution agreements between TCCC and the Coca-Cola bottlers in Chile. In 2011, Andina distributed approximately 52% of the products of Vital Jugos and Vital Aguas , and the other two Coca-Cola bottlers in Chile distributed an aggregate of 48%. Each Coca-Cola bottler in Chile distributes the products of Vital Jugos and Vital Aguas in its respective franchise territory. Under Vital Jugos’ and Vital Aguas’ distribution agreements, each bottler has the exclusive right to distribute waters and juices in its territory.

 

Our management believes that our distribution arrangements for waters and juices provide an effective means of distributing those products throughout Chile using the extensive distribution system of the Coca-Cola bottlers. We have a good working relationship with the Coca-Cola bottlers that distribute waters and juices. If any Coca-Cola bottler were to cease distribution, our management believes it could arrange alternative distribution arrangements, but the transition to the new arrangements could involve significant delays in distributing products and would involve additional costs and an initial reduction in sales.

 

Competition . Vital Aguas’ principal competitor regarding water is CCU with the Cachantún brand.   Additionally there are low priced brands (B-brands) in the water segment in Chile.   Vital Jugos S.A.’s principal competitors regarding juices are, Watt’s-CCU, Corpora Tres Montes and three of the leading dairy producers in Chile: Soprole S.A., Nestlé Chile S.A. and Loncoleche S.A., who is also a subsidiary of Watt’s S.A. During 2006, the largest Chilean brewery CCU acquires from Watts S.A. a 50% ownership interest of the juice brands in Chile, creating a joint venture for the management of this business area. The Chilean market for fruit-flavored beverages and waters also includes low-cost, lower-quality fruit juice concentrates and artificially flavored powdered beverage mixes. We do not consider these products to compete with our waters and juices business because we believe that these products are of lower quality and value.

 

Based on reports by A.C. Nielsen, we estimate that in 2011, our market share within our Chilean franchise territories reached 35.9% for the juice segment and 339.5% for waters.

 

Raw material for Juices . The principal raw materials used by Vital Jugos S.A. in the production of juices and as a percentage of total raw material costs, are sweeteners 15.3%, fruit pulp and juices 12.3%, flavors, aromas and citric acid 17.3%, containers 24.6% and wrapping material 5.1%, all of which during 2011 accounted for 80.7% of total costs for sales of juice, including packaging.

 

Raw materials for Waters: The principal raw materials used by Vital Aguas S.A. in the production of mineral water and purified unflavored and purified flavored water and as a percentage of total raw material costs are: Non-returnable PET packaging 42.1%, mineral water, flavor, aromas, sweeteners and citric acid 23.9%, packaging material 5.2%, caps 5.3% and carbonation 0.8%, all of which during 2011 accounted for 81.9% of total costs for sales of water, including packaging.

 

Beer, Juices and Waters in Brazil

 

Sales . In 2011, net sales of beer, juices, waters, tea based beverages, isotonics and energy drinks in Brazil were Ch$80,089 million, representing 8.1% of our consolidated net sales.

 

Andina Brazil uses its distribution system to distribute beer in the Brazilian territory. Andina Brazil started distributing beer in the 1980s as a result of the acquisition of Kaiser by a consortium of Coca-Cola bottlers (including Andina Brazil) in Brazil. In March 2002, the Canadian brewing company Molson Inc. acquired Cervejarias Kaiser S.A. (“Kaiser”). In 2006, Femsa acquired from Molson the controlling ownership interest over Kaiser y later in 2010 Heineken acquired the controlling interest of Femsa’s beer operation. Andina Brazil buys beer from Heineken at a price determined by Heineken and sells it to its customers with a fixed margin. In the case of certain discount sales that have been approved by Heineken, Heineken shares between 50% and 100% of the cost of such discounts. In 2011, Andina Brazil’s net sales of beer were Ch$17,913 million, of which Bavaria brand beer accounted for 52.4%, Heineken for 23.0%, Kaiser for 17.2%, Sol for 6.0%, y Xingú for 1.1%, and all the other brands accounted for 0.3% of net sales.

 

24

Table of Contents

 

Competition . In the beer sector, Andina Brazil’s main competitor is Ambev that during 20111 had a very dominant position in the Brazilian market.

 

The Distribution Agreements.  TCCC and the Brazilian Association of Coca-Cola Manufacturers entered into an agreement regarding the distribution through the Coca-Cola System of beer produced and imported by Heineken. The agreements were signed May 30, 2003, and are renewable for a period of 20 years.

 

Andina Brazil is not allowed to produce, bottle, sell or obtain any interest in any bottled or tap beer under any other label or in any bottle or packaging that could be confused with brand beers, except as may be mutually agreed in writing between Andina Brazil and Heineken.

 

Under the terms of the distribution agreement, Heineken undertakes all responsibility for planning and managing advertising, marketing and promotional activities related to beer.  Andina Brazil, however, is free to undertake marketing or promotional activities with Heineken´s prior approval. The parties have agreed to assume joint responsibility for the costs of certain promotional activities (radio or television) and for certain outdoor events which take place in the Rio de Janeiro and Espirito Santo region. Andina Brazil has agreed to devote at least 2.6% of its sales net of taxes of Heineken products to such promotional activities or events.

 

Andina Brazil is prohibited from assigning, transferring, or otherwise encumbering the Heineken distribution agreement or any interest therein for the benefit of third parties without prior written consent from Heineken may terminate the distribution agreement immediately in the event that Andina Brazil (i) declares bankruptcy, is made a party to bankruptcy proceedings or is placed under judicial administration, (ii) is dissolved or liquidated or its assets are nationalized, expropriated, attached or intervened, (iii) undergoes a change of business or of control, (iv) ceases to be a franchisee of TCCC or (v) causes a material breach of the Heineken distribution agreement. In addition, Heineken may terminate the Heineken distribution agreement one year after delivery of notice that Andina Brazil is not complying with the terms thereof. Andina Brazil may terminate the Heineken distribution agreement in the event of a material breach thereof by Heineken.

 

3. PET Packaging

 

Overview and Background

 

We produce PET bottles in both returnable and non-returnable formats. As a returnable packaging material, PET has advantages compared to glass because it is lightweight, difficult to break, transparent and easily recyclable. On average, returnable PET bottles can be used up to 12 times. Non-returnable PET bottles also are produced in various sizes and are used by a variety of soft drink producers and, in Chile, by producers of edible oil products, wine and personal hygiene products.

 

In 2011, the Edasa Packaging Division was one of the largest manufacturers of PET products in Argentina. In 2011, Andina Brazil purchased its PET preforms mainly from Brasalpla and also from Amcor and Owens-Illinois.

 

Sales. In 2011, the Edasa Packaging Division had net sales of Ch$23,985 million with sales to Edasa Soft Drinks Division amounting to Ch$16,130 million. The Edasa Packaging Division also sold PET bottles to third parties accounting for approximately Ch$7,855 million.

 

Competition . We are suppliers of returnable and non-returnable PET bottles for Coca-Cola bottlers in Argentina and Chile. According to the pre-existing agreements between TCCC and the other Coca-Cola bottlers within South America, we must obtain the consent and assistance of TCCC  to expand our sales of returnable PET bottles to said bottlers.

 

In Chile, we do not have any principal competitors in the non—returnable PET bottles market for oils, wines and personal hygiene. There are a few producers of non-returnable PET bottles in Chile who are significantly smaller than CMF. Plasco S.A., the second Chilean manufacturer of non-returnable PET bottles, does not compete with us because it is the exclusive supplier of PET bottles for ECUSA. (The Chilean Pepsi bottler).

 

In Argentina, we compete principally with Alpla S.A. and Amcor. The Edasa Packaging Division is the supplier of returnable PET bottles to all Coca-Cola bottlers in Argentina.

 

25

Table of Contents

 

4.                                       Patents and Licenses

 

The Company has entered into Bottler Agreements with TCCC by which it has the license to produce and distribute Coca-Cola brand products within its operating franchise territories in Chile, Brazil and Argentina. The Company’s operations are highly dependent on maintaining and renewing the Bottler Agreements which provide for the production and distribution of Coca-Cola brand products.

 

Bottler Agreements

 

The Bottler Agreements are international standard contracts TCCC enters into with bottlers outside the United States for the sale of concentrates and beverage basis for certain Coca-Cola soft drinks and non-soft drink beverages.

 

Bottler Agreements are renewable upon request by the bottler and at the sole discretion of TCCC. We cannot assure you that the Bottler Agreements will be renewed upon their expiration, and even if they are renewed.

 

The Bottler Agreements provide that we will purchase our entire requirement of concentrates and beverage basis for Coca-Cola soft drinks and other Coca-Cola beverages from The Coca-Cola Company and other authorized suppliers. Although under the Bottler Agreements TCCC, in its sole discretion, may set the price of concentrates and beverage basis, among other terms, we set the price of products sold to retailers at our discretion, subject only to certain price restraints.

 

We are the sole producer of Coca-Cola soft drinks and other Coca-Cola beverages in our franchise territories. Although this right is not exclusive, TCCC  has never authorized any other entity to produce or distribute Coca-Cola soft drinks or other Coca-Cola beverages in such territories, although we cannot assure you that in the future it will not do so. In the case of post-mix soft drinks, the Bottler Agreements explicitly establish such non-exclusive rights.

 

The Bottler Agreements include an acknowledgment by us that TCCC is the sole owner of the trademarks that identify the Coca-Cola soft drinks and other Coca-Cola beverages and of any secret formula used in concentrates.

 

All distribution must be in authorized containers. TCCC has the right to approve, at its sole discretion, any and all kinds of packages and containers for beverages, including their size, shape and any of their attributes. TCCC  has the authority at its sole discretion to redesign or discontinue any package of any of the Coca-Cola products, subject to certain limitations, so long as Coca-Cola soft drinks and other Coca-Cola beverages are not all discontinued at the same time. We are prohibited from producing or handling any other beverage products, other than those of TCCC or other products or packages that would imitate, infringe or cause confusion with the products, trade dress, containers or trademarks of TCCC, or from acquiring or holding an interest in a party that engages in such activities. The Bottler Agreements also impose restrictions concerning the use of certain trademarks, authorized containers, packaging and labeling of TCCC and prohibit bottlers from distributing Coca-Cola soft drinks or other Coca-Cola beverages outside their designated territories.

 

The Bottler Agreements require us to maintain adequate production and distribution facilities; inventories of bottles, caps, boxes, cartons and other exterior packaging or materials; to undertake adequate quality control measures prescribed by TCCC; to develop, stimulate, and fully satisfy the demand for Coca-Cola soft drinks and other Coca-Cola beverages and to use all approved means, and spend such funds on advertising and other forms of marketing, as may be reasonably required to meet that objective; and to maintain such sound financial capacity as may be reasonably necessary to assure performance by us and our affiliates of our obligations to TCCC. All Bottler Agreements require us annually to submit our business plans for such franchise territories to TCCC, including without limitation, marketing, management and promotional and advertising plans for the following year.

 

TCCC  has no obligation to contribute to our expenditures derived from advertising and marketing, but it may, at its discretion, contribute to such expenditures and undertake independent advertising and marketing activities, as well as cooperative advertising and sales promotion that would require our cooperation and support. In each of the franchise territories, TCCC  has been contributing approximately 50% of advertising and marketing expenses, but no assurances can be given that equivalent contributions will be made in the future.

 

Each bottler is prohibited from, directly or indirectly, assigning, transferring or pledging its Bottler Agreement, or any interest therein, whether voluntarily, involuntarily or by operation of law, without the consent of TCCC, and each Bottler

 

26

Table of Contents

 

Agreement is subject to termination by TCCC  in the event of default by us. Moreover, the bottler may not undergo a material change of ownership or control without the consent of TCCC.

 

TCCC  may terminate a Bottler Agreement immediately, by written notice to the bottler, in the event that, inter alia, (i) the bottler suspends payments to creditors, declares bankruptcy, is declared bankrupt, is expropriated or nationalized, is liquidated, dissolved, changes its legal structure, or pledges or mortgages its assets; (ii) the bottler does not comply with instructions and standards established by TCCC  relating to the production of its authorized soft drink products; (iii) the bottler ceases to be controlled by its controlling shareholders; or (iv) the terms of the Bottler Agreement come to violate applicable law.

 

Either party to any Bottler Agreement may, with 60 days’ notice thereof to the other party, terminate the Bottler Agreement in the event of non-compliance by the other party with the terms thereof so long as the party in non-compliance has not remedied such non-compliance during this period. In addition, if a bottler does not wish to pay the required price for concentrate for any Coca-Cola products, it must notify TCCC within 30 days of receipt of The Coca-Cola Company’s new prices. In the case of any Coca-Cola soft drink or other Coca-Cola beverages other than Coca-Cola concentrate, the franchise regarding such product shall be deemed automatically canceled three months after TCCC’ s receipt of the bottler’s notice of refusal. In the case of Coca-Cola concentrate, the Bottler Agreements shall be deemed terminated three months after TCCC’s receipt of the bottler’s notice of refusal. TCCC may also terminate the Bottler Agreements if the bottler or any individual or legal entity that controls, owns a majority share in or directly or indirectly influences the management of the bottler, engages in the production of any non-Coca-Cola beverage, whether through direct ownership of such operations or through control or administration thereof, provided that, upon request, the bottler shall be given six months to remedy such situation.

 

Chile Bottler Agreements :  (i) the Bottler Agreement entered into between Andina and TCCC celebrated on January 1, 2008 for a 5-year term until December 31, 2012; (ii) on December 22, 2005, Vital S.A. and The Coca-Cola Company entered into a Juice Bottler Agreement by which The Coca-Cola Company authorized Vital S.A. to produce, prepare and bottle in packaging previously approved by TCCC the following brands: Andina Frut Andina Nectar, Kapo, Nestea, Fruitopia and Powerade.  The Agreement will expire on December 31, 2015, and sets forth that Andina, and the other two Chilean Coca-Cola bottlers, Embonor and Polar, have the right to purchase products from Vital S.A. as well as produce, package, and sell these products at their respective production facilities; (iii) on December 22, 2005, Vital Aguas S.A. and TCCC entered into a Water Manufacturing and Packaging Agreement for the preparation and packaging of beverages that will be in effect until December 31, 2015, regarding the brands Vital, Chanqueahue, Vital de Chanqueahue, Benedictino, Dasani and Aquarius.

 

Brazil—Bottler Agreement: the Bottler Agreement between Andina Brazil and TCCC will expire on October 4, 2013.

 

Argentina —Bottler Agreement: (i)  the Bottler Agreement, between Edasa and TCCC expired in February of 2012, and was renewed for another 5 years; and (ii) with respect to the Argentine territory the Juice and Water Bottler Agreement is currently being negotiated.

 

PET Agreements

 

On June 29, 2001, we and Cristalerías de Chile S.A. signed a series of contracts forming a joint venture for the development of a PET production facility in Chile through the formation of Envases CMF S.A. We contributed the assets necessary to further the development of the joint venture. Our subsidiary Andina Inversiones Societarias S.A. holds a 50% stake in the joint venture while Cristalerías de Chile S.A. retains the other 50% interest. On January 27, 2012, Coca-Cola Embonor through its subsidiary, Embonor Empaques S.A. acquired Cristalerías de Chile’s stake equivalente to a 50% ownership interest in Envases CMF.

 

5.                             Regulation

 

General

 

We are subject to the full range of government regulations generally applicable to companies engaged in business in our franchise territories, including but not limited to labor, social security, public health, consumer protection, environmental, sanitation, employee safety, securities and anti-trust laws. Currently, no material legal or administrative proceedings are pending against us with respect to any regulatory matter in any of our franchise territories except those listed as such in “Item

 

27

Table of Contents

 

8. Financial Information—Legal Proceedings.” We believe, to the best of our knowledge that we are in compliance in all material respects with applicable statutory and administrative regulations relating to our business in each of our franchise territories.

 

Chile . There are no special licenses or permits required to manufacture and distribute soft drinks and juices in the Chilean territory. Food and beverage producers in Chile, however, must obtain authorization from (and their activities are subject to supervision by) the Chilean Environmental Protection Services ( Servicio Sanitario Metropolitano del Ambiente ), which inspects production facilities and takes liquid samples for analysis on a regular basis. Our permit from the Chilean Environmental Protection Authority was obtained on January 8, 1992 and is in effect indefinitely. In addition, production and distribution of mineral water is subject to special regulations such that mineral water may be drawn only from sources designated for such purpose by presidential decree. Certification of compliance with such decree is provided by the National Health Service, the Undersecretary’s Office of the Ministry of Health ( Servicio de Salud Metropolitano del Ambiente ). Our mineral water production facilities have received the required certification.

 

Brazil . Labor laws, in addition to mandating employee benefits, include regulations to ensure sanitary and safe working conditions in our production facilities located in Brazil. Food and beverage producers in Brazil must register their products with and receive a ten-year permit from the Ministry of Agriculture and Provisioning and the Ministry of Health, which oversees diet products. Our permits from said Ministries are valid and in force for a term of ten years for each product we produce. Although we cannot assure you that they will be renewed, we have not experienced any material difficulties in renewing our permits in the past nor do we expect to experience any difficulties in the future. The Ministries do not regularly inspect facilities but they do send inspectors to investigate any complaints it receives.

 

Argentina . While most laws applicable to Edasa are enforced at the federal level, some, such as sanitary and environmental regulations, are primarily enforced by provincial and municipal governments. There are no licenses or permits required for the manufacture or distribution of soft drinks in the Argentine territory. However, our production facilities are subject to registration with federal and provincial authorities and to supervision by municipal health agencies, which certify compliance with applicable laws.

 

Environmental Matters

 

It is our policy to conduct environmentally sound operations on a basis consistent with applicable laws and with criteria established by TCCC. Although regulation of matters relating to the protection of the environment is not as well-developed in the franchise territories as in the United States and other industrialized countries, we expect that additional laws and regulations may be enacted in the future with respect to environmental matters that may impose additional restrictions on us which could materially or adversely affect our results of operations in the future. There are no material legal or administrative proceedings pending against us in any of the franchise territories with respect to environmental matters, and we believe that, to the best of our knowledge, we are in compliance in all material respects with all environmental regulations applicable to us.

 

Chile. The Chilean government has several regulations governing environmental matters relating to our operations. For instance, Law 3,133 regulated discharge of residual industrial waste, and the Sanitary Code contains provisions relating to liquid and solid waste disposal, basic environmental conditions in the workplace, and the protection of water for human consumption. In 1993, the Chilean government published regulations that updated the provisions of Law 3,133, which was finally repealed in 2002 by Law 19,821, which also reaffirmed the control of the Superintendence of Sanitary Services over industrial liquid waste These regulations place limits on the disposal of harmful substances which may be hazardous to water used in irrigation or water for consumption by people or animals without prior authorization from the Ministry of Public Works and a favorable determination from the Superintendence of Sanitary Services. The regulations also mandate governmental approval of any systems to treat or discharge liquid industrial waste (regulated by Supreme Decree 90 for discharges to open courses and by Supreme Decree 609 for discharges to sewage collectors, amended during 2000 by Supreme Decree 3592). In 1996, we installed a liquid industrial waste treatment plant to comply with the Chilean liquid waste emissions standards, in effect since 1998. As of May of 2006, the first stages of liquid industrial waste treatment are done at our facilities and then it is completed at La Farfana. Currently there is an outsourcing agreement with the company Ecoriles for the treatment of liquid industrial waste.

 

28

Table of Contents

 

Law 19,300, passed in March 1994, addresses general environmental concerns that may be applicable to our activities and which, if applicable, would require us to hire independent experts to conduct environmental impact studies or declarations of any future projects or activities that could be impacted by the regulations of Law 19,300. This Law creates the National Commission on the Environment, which is supported by regional commissions to supervise environmental impact studies and declarations for all new projects, to enforce the regulations of Law 19,300 and to grant discretionary power to regulators. In January 2010 the law suffered an organic amendment with the enactment publication of Law 20,417, which created a new environmental institution, contemplating the creation of the Ministry of Environment, Environmental Assessment Services and the Superintendence of Environmental Protection. There can be no assurance that future legislative regulatory developments will not impose further restrictions that would be material to our operations in Chile. We believe that, to the best of our knowledge we are in compliance with all material aspects of the Chilean environmental regulations.

 

In 2006 TCCC  issued its audit regarding Certifications of Quality, Security and Environment Systems known as PHASE 3, and we have become the first production facility in Chile to receive this certification with the maximum qualifications.. These certifications were revalidated according to the new KORE (Coca-Cola Requirements) dispositions beginning August 2010.

 

During 2005, our  production facility in Chile , became the first plant in Latin America to achieve the four Quality System Certifications, Food Safety and Quality Management System (HACCP-Hazard Analysis and Critical Control Point), Environment (ISO 14001:2004), Security and Occupational Health (OHSAS 18001:1999) and Quality (ISO 9001:2000). Also in 2005 it achieves the National Award for Quality from Chilecalidad. In September of 2007 and 2010 these certifications were extended for another 3 years. Additionally during December 2010 we achieved certification for Food Safety Management (ISO 2200)

 

During 2011, with the new Renca Bottling facility beginning operations,  the geographical spread of our integrated management system was expanded, in a first stage, certifying, the Quality Management System (ISO 9000) and Food Safety (ISO 22000). The respective certifications for Environment (ISO 14000) and Security and Occupational Health (ISO 18000) remain pending for 2012.

 

The distribution centers also count with the following certifications:  Food Safety and Quality Management System (HACCP) since 2007 and Security and Occupational Health (OHSAS 18001:2008) since June 2009, both valid for a period of 3 years. As part of the logistics management, distribution centers were audited during the first half of 2011, maintaining the aforementioned systems certifications.

 

In 2003, the production facilities of Rengo and Vital were certified under the Codex Alimentarius and the Chilean regulation 2861:2004 for their production processes. These certifications were renewed in 2006. As of December 31, 2011 these production facilities held the following certifications: (i) Food Safety and Quality Management (HACCP); (ii) Quality Management (ISO 9001); (iii) Environment Management (ISO 14001);  (iv) Security and Occupational Health (ISO 18000); and (v) Food Safety Management under ISO 22000 regulations and Best Practices of Food Manufacturing under PAS 220.

 

Brazil . Our Brazilian operations are subject to several environmental laws, none of which currently impose substantial restrictions on us. The Brazilian Constitution establishes the broad guidelines for the new treatment of environmental concerns, dedicating an entire chapter (Chapter VI, Article 225) to the protection of the environment, along with several other articles related to the environmental law and urban law. Environmental issues are regulated at the federal, state and municipal levels.  The Brazilian Constitution empowers the public authorities to develop regulations designed to preserve and restore the environment and to control industrial processes that affect human life. Violations of these regulations are subject to criminal, civil and administrative penalties.

 

In addition, Law No. 6,938 of 1981, known as the Brazilian Environmental Policy, introduced an entirely different environmental regime by which no environmental damage is exempt from coverage. The legislation is based on the idea that even a polluting waste tolerated under the established standards could cause environmental damage, and therefore subjects the party causing such damage to payment of an indemnity. Moreover, as mentioned above, activities damaging to the environment lead to criminal and administrative penalties, provided for in Law 9,605 of 1998 or the Environmental Crimes Act.

 

Numerous governmental bodies have jurisdiction over environmental matters. At the federal level, the Ministério do Meio Ambiente (Brazilian Ministry of Environment) and the Conselho Nacional do Meio-Ambiente or CONAMA dictate

 

29

Table of Contents

 

environmental policy, including, without limitation, initiating environmental improvement projects, establishing a system of fines and administrative penalties and reaching agreements on environmental matters with offending industries. The Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis or IBAMA enforces environmental regulations set by CONAMA. In addition, various federal authorities have jurisdiction over specific industrial sectors, but none of these currently affect us. Finally, various state and local authorities regulate environmental matters in the Brazilian territory including the Fundação Estadual de Engenharia do Meio-Ambiente or FEEMA, the principal environmental authority in Rio de Janeiro and the Instituto Estadual de Medio Ambiente e Recursos Hídricos or IEMA, the principal environmental authority in Espírito Santo. FEEMA and IEMA periodically inspect industrial sites and test liquid waste for contamination. We believe to the best of our knowledge that we are in compliance in all material respects with the standards established by all the governmental authorities applicable to our operations in Brazil. We cannot assure you, however, that additional regulations will not be enacted in the future, and that such restrictions would not have a material adverse effect on our results or operations. The operation in Brazil as that of Chile counts with all certifications  mentioned in terms of Quality, Environment and Occupational Health and Safety and those associated with Food Safety and Best Practices in Food Processing.

 

Argentina . The Argentine Constitution, as amended in 1994, allows any individual who believes a third party may be damaging the environment to initiate an action against it. No such action has ever been instituted against us, but we cannot assure you that an action will not be brought in the future. Though provincial governments have primary regulatory authority over environmental matters, municipal and federal authorities are also competent to enact decrees and laws on environmental issues. Thus, municipalities are competent on local environmental matters, such as waste management, while the federal government regulates inter-province environmental issues, such as transport of hazardous waste or environmental matters covered by international treaties.

 

In 2002, the National Congress approved federal Law No. 25,612, Gestión Integral de Residuos Industriales y de Actividades de Servicios (Integral Management of Industrial Residues and Service Activities) and Law No. 25,675, Ley General del Ambiente (General Environmental Law) establishing minimum guidelines for the protection of the sustainable environmental management and the protection of biodiversity, applicable throughout Argentina. The law establishes the purposes, principles and instruments of the national environmental policy, the concept of  “minimum guidelines,” the judicial competence and the rules governing environmental education and information, citizens’ participation and self-management, among other provisions.

 

Provincial governments within the Argentine territory have enacted laws establishing a framework for the preservation of the environment.  Provincial laws that are applicable to industrial facilities at EDASA, among others are Law No. 7,343 of the Province of Córdoba, and Law No. 11,459 of the Province of Buenos Aires. These laws contain principles on environmental policy and management, as well as rules on environmental impact assessment. They also give certain agencies competence in environmental issues.

 

Almost all provinces as well as many municipalities have established rules regarding the use of water, the sewage system and the disposal of liquids into underground flows of water or rivers. There are currently no claims pending against us on this matter. The violation of these rules usually results in fines.

 

During October of 2009, the National Award for Quality Foundation that promotes excellence in the development of processes and products in that country, granted us the 2009 National Award for Quality, which was handed by the president of Argentina, Cristina Fernandez de Kirchner.

 

In the operation in Argentina we maintain all certifications mentioned for Chile in addition to the Excellence Level Award of TCCC achieved in December 2010 by EDASA, due to the constant importance given to the excellence in the development of processes, products and activities.

 

Another international recognition was the obtaining achieving the Iberoamerican Quality Award for Plants from FUNDIBEQ, organization attached to the Ibero-American Summit of Heads of State and Government of the Iberoamerican Secretary General’s office (SEGIB).

 

In 2011 EDASA was recognized by the Ministry of Industry, Trade and Labor of the province of Córdoba, with the “Award for Eco efficiency”, for its efforts in reducing the carbon footprint in its operations during 2010. Another important award during of 2011 has been the “Live Positively” Cup awarded by the Latin America South Division of TCCC, who governed by the concept of sustainable development in our “social license” to operate, conducted a Ranking of bottlers

 

30