As filed with the Securities and Exchange Commission on June 17, 2011
 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
 FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010Commission file number 1-12260 Coca‐Cola FEMSA, S.A.B. de C.V.(Exact name of registrant as specified in its charter) Not Applicable(Translation of registrant’s name into English) United Mexican States(Jurisdiction of incorporation or organization) Guillermo González Camarena No. 600Centro de Ciudad Santa Fé01210 México, D.F., México(Address of principal executive offices) José Castro Guillermo González Camarena No. 600Centro de Ciudad Santa Fé01210 México, D.F., México (52-55) 5081-5120 irelations@kof.com.mx
 (Name, telephone, e-mail and/or facsimile number andaddress 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 RegisteredAmerican Depositary Shares, each representing10 Series L Shares, without par value

   New York Stock Exchange, Inc.Series L Shares, without par value

   New York Stock Exchange, Inc.  (not for trading, for listing purposes only)
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None The number of outstanding shares of each class of capital or common stock as of December 31, 2010 was: 992,078,519

   Series A Shares, without par value583,545,678

   Series D Shares, without par value270,906,004

   Series L Shares, without par value
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. xYes

    ̈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.  ̈Yes

   xNo
 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).N/A  ̈Yes

    ̈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. xYes

    ̈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): Large Accelerated filerx

   Accelerated filer ̈

   Non-accelerated filer ̈
 Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ̈

   IFRS ̈

   Otherx
 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.  ̈Item 17

   xItem 18
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ̈Yes

   xNo


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TABLE OF CONTENTS PageIntroduction

   1Item 1.

   Not Applicable

   2Item 2.

   Not Applicable

   2Item 3.

   Key Information

   2Selected Consolidated Financial Data

   2Dividends and Dividend Policy

   6Exchange Rate Information

   7Risk Factors

   8Item 4.

   Information on the Company

   15The Company

   15Regulation

   29Bottler Agreements

   35Description of Property, Plant and Equipment

   37Significant Subsidiaries

   39Item 4A.

   Unresolved Staff Comments

   40Item 5.

   Operating and Financial Review and Prospects

   40Item 6.

   Directors, Senior Management and Employees

   61Item 7.

   Major Shareholders and Related Party Transactions

   76Major Shareholders

   76Related Party Transactions

   80Item 8.

   Financial Information

   83Consolidated Statements and Other Financial Information

   83Legal Proceedings

   83Item 9.

   The Offer and Listing

   85Trading Markets

   85Trading on the Mexican Stock Exchange

   86Item 10.

   Additional Information

   87Bylaws

   87Material Agreements

   95Taxation

   96Documents on Display

   99Item 11.

   Quantitative and Qualitative Disclosures about Market Risk

   100Item 12.

   Description of Securities Other than Equity Securities

   104Item 12.A.

   Debt Securities

   104Item 12.B.

   Warrants and Rights

   104Item 12.C.

   Other Securities

   104Item 12.D.

   American Depositary Shares

   104Items 13-14.

   Not Applicable

   105Item 15.

   Controls and Procedures

   105Item 16A.

   Audit Committee Financial Expert

   107Item 16B.

   Code of Ethics

   107Item 16C.

   Principal Accountant Fees and Services

   107Item 16D.

   Not Applicable

   108Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   108Item 16F.

   Not Applicable

   108Item 16G.

   Corporate Governance

   108Item 17.

   Not Applicable

   111Item 18.

   Financial Statements

   111Item 19.

   Exhibits

   111   i


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Table of Contents
 INTRODUCTION

References

Unless the context otherwise requires, the terms “Coca-Cola FEMSA,” “our company,” “we,” “us” and “our” are used in this annual report to refer to Coca-Cola FEMSA, S.A.B. de C.V. and its subsidiaries on a consolidated basis.

References herein to “U.S. dollars,” “US$,” “dollars” or “$” are to the lawful currency of the United States of America.  References herein to “Mexican pesos” or “Ps.” are to the lawful currency of Mexico.

“Sparkling beverages” as used in this annual report refers to nonalcoholic carbonated beverages.  “Still beverages” refers to nonalcoholic non-carbonated beverages.  Non-flavored waters, whether or not carbonated, are referred to as “waters.”

References toCoca-Colatrademark beverages in this annual report refer to products described in “Item 4. Information on the Company—The Company—Our Products.”

Currency Translations and Estimates

This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for the convenience of the reader.  These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated.  Unless otherwise indicated, such U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 12.3825 to US$ 1.00, the exchange rate for Mexican pesos on December 30, 2010, the last day in 2010 for which information is available, according to the U.S. Federal Reserve Board.  On June 10, 2011, this exchange rate was Ps. 11.8668 to US$ 1.00.  See “Item 3.  Key Information—Exchange Rate Information” for information regarding exchange rates since January 1, 2006.

To the extent that estimates are contained in this annual report, we believe such estimates, which are based on internal data, are reliable.  Amounts in this annual report are rounded, and the totals may therefore not precisely equal the sum of the numbers presented.

Sources

Certain information contained in this annual report has been computed based upon statistics prepared by theInstituto Nacional de Estadística y Geografíaof Mexico (the National Institute of Statistics and Geography), the Federal Reserve Bank of New York, the U.S Federal Reserve Board, theBanco de México(the Central Bank of Mexico), theComisión Nacional Bancaria y de Valoresof Mexico (the National Banking and Securities Commission, or the CNBV), local entities in each country and upon our estimates.

Forward-Looking Information

This annual report contains words such as “believe,” “expect,” “anticipate” and similar expressions that identify forward-looking statements.  Use of these words reflects our views about future events and financial performance.  Actual results could differ materially from those projected in these forward-looking statements as a result of various factors that may be beyond our control, including, but not limited to, effects on our company from changes in our relationship with The Coca-Cola Company, movements in the prices of raw materials, competition, significant developments in economic or political conditions in Latin America or changes in our regulatory environment.  Accordingly, we caution readers not to place undue reliance on these forward-looking statements.  In any event, these statements speak only as of their respective dates, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.  1


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Table of Contents
 Item 1.  Not Applicable Item 2.  Not Applicable

Item 3.  Key Information

SELECTED CONSOLIDATED FINANCIAL DATA

This annual report includes (under Item 18) our audited consolidated balance sheets as of December 31, 2010 and 2009 and the related consolidated statements of income and changes in shareholders’ equity and cash flows for the years ended December 31, 2010, 2009 and 2008.  Our consolidated financial statements are prepared in accordance with Mexican Financial Reporting Standards, which we sometimes refer to as Mexican FRS.  Mexican Financial Reporting Standards differ in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP.  Notes 26 and 27 to our consolidated financial statements provide a description of the principal differences between Mexican Financial Reporting Standards and U.S. GAAP as they relate to us, together with reconciliation to U.S. GAAP of net income and shareholders’ equity.

Through December 31, 2007, Mexican Financial Reporting Standards required us to recognize effects of inflation in our financial statements and re-express financial statements from prior periods in constant pesos as of the end of the most recent period presented.  For periods beginning in 2008, we adoptedNorma de Información Financiera(NIF) B-10 “Effects of Inflation” under Mexican Financial Reporting Standards.  Under this rule, the previous inflation accounting rules requiring us to re-express prior years to reflect the impact of current period inflation no longer apply, unless the economic environment in which we operate qualifies as inflationary pursuant to Mexican Financial Reporting Standards.  An economic environment is inflationary if the cumulative inflation equals or exceeds an aggregate of 26% over the preceding three consecutive years.  As a result, we ceased to recognize the effects of inflation on our financial information for our subsidiaries in Mexico, Guatemala, Panama, Colombia and Brazil.  For the rest of our subsidiaries in Argentina, Venezuela, Costa Rica and Nicaragua, we continue applying inflationary accounting in accordance with Mexican Financial Reporting Standards.

Pursuant to Mexican Financial Reporting Standards, the information presented in this annual report presents financial information for 2010, 2009 and 2008 in nominal terms that has been presented in Mexican pesos, taking into account local inflation of each inflationary economic environment and converting from local currency to Mexican pesos using the official exchange rate at the end of the period published by the local central bank of each country categorized as an inflationary economic environment.  For each non-inflationary economic environment, local currency is converted to Mexican pesos using the year-end exchange rate for assets and liabilities, the historical exchange rate for shareholders’ equity and the average exchange rate for the income statement.  Our financial information for 2007 and 2006 is expressed in constant pesos as of December 31, 2007.  2


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Table of Contents Pursuant to Mexican Financial Reporting Standards, in our consolidated financial statements and the selected financial information set forth below: ·In inflationary economic environments, the figures are restated for inflation based on the local consumer price index. ·In inflationary economic environments, gains and losses in purchasing power from holding monetary liabilities or assets are recognized in the “Comprehensive financing result” line in the income statement. ·Financial statements for 2010, 2009 and 2008 are stated in nominal Mexican pesos. ·Beginning in 2008, as a result of discontinuing inflationary accounting for subsidiaries that operate in non-inflationary economic environments, the financial statements are no longer considered to be presented in a reporting currency that comprehensively includes the effects of price level changes; therefore, the inflationary effects of inflationary economic environments arising in 2008, 2009 and 2010 result in a difference to be reconciled for U.S. GAAP purposes.  See Notes 26 and 27 to our consolidated financial statements.
 Our non-Mexican subsidiaries maintain their accounting records in the currency and in accordance with accounting principles generally accepted in the country where they are located.  For presentation in our consolidated financial statements, we adjust these accounting records into Mexican Financial Reporting Standards and reported in Mexican pesos under these standards.  3


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Table of Contents
 The following table presents selected financial information of our company.  This information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, including the notes thereto.  The selected financial information contained herein is presented on a consolidated basis, and is not necessarily indicative of our financial position or results from operations at or for any future date or period.  See Note 4 to our consolidated financial statements for our significant accounting policies. Year Ended December 31,2010(1)

   

   

   2010

   

   

   2009(2)

   

   

   2008(3)

   

   

   2007

   

   

   2006(2010, 2009 and 2008 in millions of Mexican pesos or millions of U.S. dollars; 2007 and 2006 in millions of constant Mexican pesos as of December 31, 2007, except share and per share data)Income Statement Data:Mexican FRSTotal revenues

   US$

   8,355

   

   Ps.

   103,456

   

   Ps.

   102,767

   

   Ps.

   82,976

   

   Ps.

   69,251

   

   Ps.

   64,046Cost of goods sold

   

   4,485

   

   

   55,534

   

   

   54,952

   

   

   43,895

   

   

   35,876

   

   

   33,740Gross profit

   

   3,870

   

   

   47,922

   

   

   47,815

   

   

   39,081

   

   

   33,375

   

   

   30,306Operating expenses

   

   2,491

   

   

   30,843

   

   

   31,980

   

   

   25,386

   

   

   21,889

   

   

   20,013Income from operations

   

   1,379

   

   

   17,079

   

   

   15,835

   

   

   13,695

   

   

   11,486

   

   

   10,293Comprehensive financing result

   

   99

   

   

   1,228

   

   

   1,373

   

   

   3,552

   

   

   345

   

   

   1,195Other expenses, net

   

   104

   

   

   1,292

   

   

   1,449

   

   

   1,831

   

   

   702

   

   

   1,046Income taxes

   

   344

   

   

   4,260

   

   

   4,043

   

   

   2,486

   

   

   3,336

   

   

   2,555Consolidated net income

   

   832

   

   

   10,299

   

   

   8,970

   

   

   5,826

   

   

   7,103

   

   

   5,497Controlling interest net income

   

   791

   

   

   9,800

   

   

   8,523

   

   

   5,598

   

   

   6,908

   

   

   5,292Non-controlling interest net income

   

   41

   

   

   499

   

   

   446

   

   

   228

   

   

   195

   

   

   205Net controlling income per share(4)

   

   0.43

   

   

   5.31

   

   

   4.62

   

   

   3.03

   

   

   3.74

   

   

   2.86U.S. GAAPTotal revenues.

   US$

   8,328

   

   Ps.

   103,122

   

   Ps.

   100,393

   

   Ps.

   81,099

   

   Ps.

   69,131

   

   Ps.

   59,940Cost of goods sold

   

   4,518

   

   

   55,944

   

   

   54,335

   

   

   43,490

   

   

   36,118

   

   

   31,426Gross profit

   

   3,810

   

   

   47,178

   

   

   46,058

   

   

   37,609

   

   

   33,013

   

   

   28,514Operating expenses

   

   2,566

   

   

   31,770

   

   

   31,843

   

   

   25,567

   

   

   22,279

   

   

   19,773Income from operations

   

   1,244

   

   

   15,408

   

   

   14,215

   

   

   12,042

   

   

   10,734

   

   

   8,741Comprehensive financing result

   

   102

   

   

   1,260

   

   

   1,752

   

   

   3,917

   

   

   278

   

   

   1,142Other expenses, net

   

   13

   

   

   163

   

   

   226

   

   

   440

   

   

   241

   

   

   (124)Income taxes

   

   331

   

   

   4,097

   

   

   3,525

   

   

   1,987

   

   

   3,272

   

   

   2,420Consolidated net income(5)

   

   816

   

   

   10,105

   

   

   8,853

   

   

   5,802

   

   

   6,953

   

   

   5,280Controlling interest net income

   

   776

   

   

   9,608

   

   

   8,407

   

   

   5,571

   

   

   6,765

   

   

   5,104Non-controlling interest net income

   

   40

   

   

   497

   

   

   446

   

   

   231

   

   

   188

   

   

   176Net controlling income per share(4)

   

   0.42

   

   

   5.20

   

   

   4.55

   

   

   3.02

   

   

   3.66

   

   

   2.76
  4


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Table of Contents
  Balance Sheet Data:Mexican FRSCash, cash equivalents and marketable securities

   US$

   1,012

   Ps.

   12,534

   Ps.

   9,740

   Ps.

   6,192

   Ps.

   7,542

   Ps.

   4,641Other current assets

   

   1,123

   

   13,902

   

   13,899

   

   11,800

   

   9,919

   

   7,301Property, plant and equipment, net

   

   2,592

   

   32,100

   

   31,242

   

   28,236

   

   23,709

   

   23,362Intangible assets, net

   

   4,136

   

   51,213

   

   50,898

   

   47,453

   

   42,458

   

   41,064Other assets, net

   

   348

   

   4,312

   

   4,882

   

   4,277

   

   3,550

   

   3,497Total assets.

   

   9,211

   

   114,061

   

   110,661

   

   97,958

   

   87,178

   

   80,427Short-term bank loans and notes payable.

   

   148

   

   1,840

   

   5,427

   

   6,119

   

   4,814

   

   3,419Other current liabilities

   

   1,277

   

   15,806

   

   18,021

   

   15,214

   

   11,496

   

   9,904Long-term bank loans and notes payable

   

   1,253

   

   15,511

   

   10,498

   

   12,455

   

   14,102

   

   16,799Other long-term liabilities

   

   567

   

   7,023

   

   8,243

   

   6,554

   

   5,985

   

   5,850Total liabilities

   

   3,245

   

   40,180

   

   42,189

   

   40,342

   

   36,397

   

   35,972Shareholders’ equity

   

   5,966

   

   73,881

   

   68,472

   

   57,616

   

   50,781

   

   44,454Capital stock

   

   252

   

   3,116

   

   3,116

   

   3,116

   

   3,116

   

   3,116Non-controlling interest in consolidated subsidiaries

   

   210

   

   2,602

   

   2,296

   

   1,703

   

   1,641

   

   1,475Controlling interest

   

   5,756

   

   71,279

   

   66,176

   

   55,913

   

   49,140

   

   42,979U.S. GAAPCash, cash equivalents and marketable securities

   US$

   980

   Ps.

   12,140

   Ps.

   9,740

   Ps.

   6,192

   Ps.

   7,542

   Ps.

   5,074Other current assets

   

   1,218

   

   15,081

   

   14,936

   

   12,493

   

   10,523

   

   6,868Property, plant and equipment, net

   

   2,430

   

   32,258

   

   29,835

   

   28,045

   

   23,044

   

   21,258Intangible assets, net

   

   3,961

   

   50,697

   

   49,336

   

   46,580

   

   42,458

   

   41,088Other assets, net

   

   388

   

   4,837

   

   4,582

   

   4,663

   

   5,015

   

   4,266Total assets.

   

   8,977

   

   115,013

   

   108,429

   

   97,973

   

   88,582

   

   78,554Short-term bank loans and notes payable

   

   148

   

   1,840

   

   5,427

   

   6,119

   

   4,814

   

   3,289Other current liabilities

   

   1,277

   

   15,816

   

   18,033

   

   15,226

   

   11,430

   

   9,329Long-term bank loans and notes payable

   

   1,253

   

   15,511

   

   10,497

   

   12,455

   

   14,102

   

   16,789Other long-term liabilities

   

   579

   

   8,378

   

   8,435

   

   7,705

   

   7,111

   

   6,117Total liabilities

   

   3,257

   

   41,545

   

   42,392

   

   41,505

   

   37,457

   

   35,524Equity

   

   5,720

   

   73,468

   

   66,037

   

   56,468

   

   51,125

   

   43,030Non-controlling interest in consolidated subsidiaries

   

   213

   

   2,633

   

   2,333

   

   1,707

   

   1,653

   

   1,260Controlling interest

   

   5,507

   

   70,835

   

   63,704

   

   54,761

   

   49,472

   

   41,770Capital stock

   

   252

   

   3,116

   

   3,116

   

   3,116

   

   3,116

   

   3,116Other Data:Mexican FRSDepreciation(5)

   US$

   269

   Ps.

   3,333

   Ps.

   3,472

   Ps.

   3,022

   Ps.

   2,586

   Ps.

   2,625Capital expenditures(6)

   

   604

   

   7,478

   

   6,282

   

   4,802

   

   3,682

   

   2,863U.S. GAAPDepreciation(5)

   US$

   273

   Ps.

   3,381

   Ps.

   3,696

   Ps.

   3,151

   Ps.

   2,717

   Ps.

   2,483
 
 (1)     Translation to U.S. dollar amounts at an exchange rate of Ps. 12.3825 to US$ 1.00 solely for the convenience of the reader. (2)     Includes results from the operations of Brisa from Februray 2009.  See “Item 4—Information on the Company—The Company—Corporate History.”  5




Table of Contents
 (3)     Includes results from the operations of REMIL from June 1, 2008.  See “Item 4—Information on the Company—The Company—Corporate History.” (4)     Computed on the basis of 1,846.5 million shares outstanding. (5)     Includes depreciation of coolers reclassified to property, plant and equipment during 2009. (6)     Expressed in historical Mexican pesos. DIVIDENDS AND DIVIDEND POLICY  The following table sets forth the nominal amount in Mexican pesos of dividends declared and paid per share each year and the U.S. dollar amounts on a per share basis actually paid to holders of American Depositary Shares, which we refer to as ADSs, on each of the respective payment dates. Fiscal Year with Respect to which Dividend was Declared

   Date Dividend Paid

   Mexican Pesos per Share (Nominal)

   U.S. Dollars per Share(1)2006

   May 15, 2007

   0.438

   0.0412007

   May 6, 2008

   0.512

   0.0492008

   April 13, 2009

   0.727

   0.0542009

   April 26, 2010

   1.410

   0.1162010

   April 27, 2011

   2.360

   0.204
 
 (1) Expressed in U.S. dollars using the exchange rate applicable when the dividend was paid. The declaration, amount and payment of dividends are subject to approval by a simple majority of the shareholders up to an amount equivalent to 20% of the preceding years’ retained earnings and by a majority of shareholders of each of Series A and Series D Shares voting together as a single class above 20% of the preceding years’ retained earnings, generally upon the recommendation of our board of directors, and will depend upon our operating results, financial condition, capital requirements, general business conditions and the requirements of Mexican law.  Accordingly, our historical dividend payments are not necessarily indicative of future dividends. Holders of Series L Shares, including in the form of ADSs, are not entitled to vote on the declaration and payments of dividends.  6


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Table of Contents
 EXCHANGE RATE INFORMATION The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rate expressed in Mexican pesos per U.S. dollar. Period

   Exchange RateHigh

   

   Low

   

   Average(1)

   

   End of Period2006

   11.46

   

   10.43

   

   10.90

   

   10.802007

   11.27

   

   10.67

   

   10.93

   

   10.922008

   13.94

   

   9.92

   

   11.21

   

   13.832009

   15.41

   

   12.63

   

   13.58

   

   13.062010

   13.19

   

   12.16

   

   12.64

   

   12.38
 
 Source:  The Federal Reserve Bank of New York and U.S. Federal Reserve Board (1)     Average month-end rates. Exchange RateHigh

   

   Low

   

   End of Period2009:First Quarter

   Ps.

   15.41

   

   Ps.

   13.33

   

   Ps.

   14.21Second Quarter

   

   13.89

   

   

   12.88

   

   

   13.17Third Quarter

   

   13.80

   

   

   12.82

   

   

   13.48Fourth Quarter

   

   13.67

   

   

   12.63

   

   

   13.062010:First Quarter

   Ps.

   13.19

   

   Ps.

   12.30

   

   Ps.

   12.30Second Quarter

   

   13.14

   

   

   12.16

   

   

   12.83Third Quarter

   

   13.17

   

   

   12.49

   

   

   12.63Fourth Quarter

   

   12.61

   

   

   12.21

   

   

   12.38December

   Ps.

   12.47

   

   Ps.

   12.33

   

   Ps.

   12.382011:First Quarter

   Ps.

   12.25

   

   Ps.

   11.92

   

   Ps.

   11.92January

   

   12.25

   

   

   12.04

   

   

   12.15February

   

   12.18

   

   

   11.97

   

   

   12.11March

   

   12.11

   

   

   11.92

   

   

   11.92April

   

   11.85

   

   

   11.52

   

   

   11.52May

   

   11.77

   

   

   11.51

   

   

   11.58
 
 Source:  The Federal Reserve Bank of New York and the U.S. Federal Reserve Board On June 10, 2011, the exchange rate was Ps. 11.8668 to US$ 1.00, according to the U.S. Federal Reserve Board. We pay all cash dividends in Mexican pesos.  As a result, exchange rate fluctuations will affect the U.S. dollar amounts received by holders of our ADSs, which represent ten Series L Shares, on conversion by the depositary for our ADSs of cash dividends on the shares represented by such ADSs.  In addition, fluctuations in the exchange rate between the Mexican peso and the U.S. dollar would affect the market price of our ADSs.  7


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 RISK FACTORS

Risks Related to Our Company

Our business depends on our relationship with The Coca-Cola Company, and changes in this relationship may adversely affect our results from operations and financial condition.

Approximately 99% of our sales volume in 2010 was derived from sales ofCoca-Colatrademark beverages.  We produce, market and distributeCoca-Colatrademark beverages through standard bottler agreements in certain territories in Mexico and Latin America, which we refer to as “our territories.”  See “Item 4. Information on the Company—The Company—Our Territories.”  Through its rights under our bottler agreements and as a large shareholder, The Coca-Cola Company has the right to participate in the process for making important decisions related to our business.

The Coca-Cola Company may unilaterally set the price for its concentrate.  In addition, under our bottler agreements, we are prohibited from bottling or distributing any other beverages without The Coca-Cola Company’s authorization or consent, and we may not transfer control of the bottler rights of any of our territories without consent of The Coca-Cola Company.

The Coca-Cola Company also makes significant contributions to our marketing expenses, although it is not required to contribute a particular amount.  Accordingly, The Coca-Cola Company may discontinue or reduce such contributions at any time.

We depend on The Coca-Cola Company to renew our bottler agreements.  In Mexico, we have four bottler agreements; the agreements for two territories expire in June 2013 and the agreements for the other two territories expire in May 2015.  Our bottler agreements with The Coca-Cola Company will expire for our territories in other countries as follows:  Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014.  All of our bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew a specific agreement.In addition, these agreements generally may be terminated in the case of material breach.See “Item 4. Information on the Company—Bottler Agreements.”Termination would prevent us from sellingCoca-Colatrademark beverages in the affected territory and would have an adverse effect on our business, financial conditions, results from operations and prospects.

The Coca-Cola Company and FEMSA have substantial influence on the conduct of our business, which may result in us taking actions contrary to the interests of our remaining shareholders.

The Coca-Cola Company and Fomento Económico Mexicano, S.A.B.de C.V., which we refer to as FEMSA, have substantial influence on the conduct of our business.  Currently, The Coca-Cola Company indirectly owns 31.6% of our outstanding capital stock, representing 37.0% of our capital stock with full voting rights.  The Coca-Cola Company is entitled to appoint four of our 18 directors and the vote of at least two of them is required to approve certain actions by our board of directors.  FEMSA indirectly owns 53.7% of our outstanding capital stock, representing 63.0% of our capital stock with full voting rights.  FEMSA is entitled to appoint 11 of our 18 directors and all of our executive officers.  The Coca-Cola Company and FEMSA together, or only FEMSA in certain circumstances, have the power to determine the outcome of all actions requiring approval by our board of directors, and FEMSA and The Coca-Cola Company together, or only FEMSA in certain circumstances, have the power to determine the outcome of all actions requiring approval of our shareholders.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.”  The interests of The Coca-Cola Company and FEMSA may be different from the interests of our remaining shareholders, which may result in us taking actions contrary to the interests of our remaining shareholders.  8


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 We have significant transactions with affiliates, particularly The Coca-Cola Company and FEMSA, which may create the potential for conflicts of interest and could result in less favorable terms to us. We engage in transactions with subsidiaries of both The Coca-Cola Company and FEMSA.  Our main transactions with FEMSA include supply agreements under which we purchase certain supplies and equipment, a service agreement under which a FEMSA subsidiary transports finished products from our production facilities to distribution facilities in Mexico, sales of finished products to Oxxo, a Mexican convenience store chain owned by FEMSA, a service agreement under which a FEMSA subsidiary provides administrative services to us, and sales and distribution agreements with Cervejarias Kaiser Brasil S.A., or Cervejarias Kaiser, a Brazilian subsidiary of Cuauhtémoc Moctezuma Holding, S.A. de C.V.,a brewer with operations in Mexico and Brazil, formerly known as FEMSA Cerveza, S.A. de C.V., or FEMSA Cerveza, currently a wholly-owned subsidiary of the Heineken Group.On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed.  We have agreed with Cervejarias Kaiser to continue to distribute and sell theKaiserbeer portfolio in our Brazilian territories through the 20-year term, consistent with the arrangements in place since 2006.  See “Item 4.  Information on the Company—The Company—Product and Packaging Mix—Mercosur (Brazil and Argentina).”  In addition, we have entered into cooperative marketing arrangements with The Coca-Cola Company.  We are a party to a number of bottler agreements with The Coca-Cola Company.  We also have agreed to jointly develop still beverages and waters in our territories with The Coca-Cola Company and have entered into agreements to jointly acquire companies with The Coca-Cola Company.See “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions.” Our transactions with related parties may create the potential for conflicts of interest,which could result in terms less favorable to us than could be obtained from an unaffiliated third party. Competition could adversely affect our financial performance. The beverage industry in the territories in which we operate is highly competitive.  We face competition from other bottlers of sparkling beverages such asPepsiproducts, and from producers of low cost beverages or “B brands.”  We also compete in different beverage categories, other than sparkling beverages, such as water, juice-based beverages, teas and sport drinks.  Although competitive conditions are different in each of our territories, we compete principally in terms of price, packaging, consumer sales promotions, customer service and product innovation.  See “Item 4.  Information on the Company—The Company—Competition.”  There can be no assurances that we will be able to avoid lower pricing as a result of competitive pressure.  Lower pricing, changes made in response to competition and changes in consumer preferences may have an adverse effect on our financial performance. Changes in consumer preference could reduce demand for some of our products. The non-alcoholic beverage industry is rapidly evolving as a result of, among other things, changes in consumer preferences.  Specifically, consumers are becoming increasingly more aware of and concerned about environmental and health issues.  Concerns over the environmental impact of plastic may reduce the consumption of our products sold in plastic bottles or result in additional taxes that would adversely affect consumer demand.  In addition, researchers, health advocates and dietary guidelines are encouraging consumers to reduce their consumption of certain types of beverages sweetened with sugar and high fructose corn syrup, which could reduce demand for certain of our products.  A reduction in consumer demand would adversely affect our results from operations. Water shortages or any failure to maintain existing concessions could adversely affect our business. Water is an essential component of all of our products.  We obtain water from various sources in our territories, including springs, wells, rivers and municipal and state water companies pursuant to either contracts to obtain water or pursuant to concessions granted by governments in our various territories. We obtain the vast majority of the water used in our production pursuant to concessions to exploit wells, which are generally granted based on studies of the existing and projected groundwater supply.  Our existing water


concessions or contracts to obtain water may be terminated by governmental authorities under certain circumstances and their renewal depends on receiving necessary authorizations from local and/or federal water authorities.  See “Item 4.  Information on the Company—Regulation—Water Supply Law.”  In some of our other territories, our existing water supply may not be sufficient to meet our future production needs, and the available water supply may be adversely affected by shortages or changes in governmental regulations and environmental changes.  9


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 We cannot assure you that water will be available in sufficient quantities to meet our future production needs or will prove sufficient to meet our water supply needs. Increases in the prices of raw materials would increase our cost of goods sold and may adversely affect our results from operations. Our most significant raw materials are (1) concentrate, which we acquire from affiliates of The Coca-Cola Company, (2) packaging materials and (3) sweeteners.  Prices for sparkling beverages concentrate are determined by The Coca-Cola Company as a percentage of the weighted average retail price in local currency, net of applicable taxes.  In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages in Brazil and Mexico. These increases were fully implemented in Brazil in 2008 and in Mexico in 2009.  However, we may experience further increases in the future.  The prices for our remaining raw materials are driven by market prices and local availability as well as the imposition of import duties and import restrictions and fluctuations in exchange rates.  We are also required to meet all of our supply needs from suppliers approved by The Coca-Cola Company, which may limit the number of suppliers available to us.  Our sales prices are denominated in the local currency in each country in which we operate, while the prices of certain materials, including those used in the bottling of our products, mainly resin, ingots to make plastic bottles, finished plastic bottles, aluminum cans and high fructose corn syrup, are paid in or determined with reference to the U.S. dollar, and therefore may increase if the U.S. dollar appreciates against the currency of the countries in which we operate, as was the case in 2008 and 2009.See “Item 4.  Information on the Company—The Company—Raw Materials.” Our most significant packaging raw material costs arise from the purchase of resin and plastic ingots to make plastic bottles and from the purchase of finished plastic bottles, the prices of which are tied to crude oil prices and global resin supply.  The average prices that we paid for resin and plastic ingots in U.S. dollars decreased significantly in 2010 and in 2009; however, we cannot provide any assurance that prices will remain at these levels, and they may also increase in future periods.  During 2009-2010 international sugar prices were volatile due to various factors, including shifting demands, availability and climate issues affecting production and distribution.  Sugar prices in all of the countries in which we operate other than Brazil are subject to local regulations and other barriers to market entry that cause us to pay in excess of international market prices for sugar.  Average sweetener prices paid during 2010 were higher as compared to 2009 in all of the countries in which we operate.  See “Item 4.  Information on the Company—The Company—Raw Materials.”  We cannot assure you that our raw material prices will not further increase in the future.  Increases in the prices of raw materials would increase our cost of goods sold and adversely affect our financial performance.  Taxes could adversely affect our business. The countries in which we operate may adopt new tax laws or modify existing law to increase taxes applicable to our business.  For example, in Mexico, a general tax reform became effective on January 1, 2010, pursuant to which, as applicable to us, there is a temporary increase in the income tax rate from 28% to 30% from 2010 through 2012.  This increase will be followed by a reduction to 29% for the year 2013 and a further reduction in 2014 to return to the previous rate of 28%.  In addition, the value added tax (VAT) rate increased in 2010 from 15% to 16%.   This increase had an impact on our results from operations due to the reduction in disposable income of consumers. In Panama there was an increase in a certain consumer tax, effective as of April 1, 2010, affecting syrups, powders and concentrate.   Some of these materials are used for the production of our sparkling beverages.  These taxes increased from 6% to 10%. Our products are also subject to certain taxes in many of the countries in which we operate. Certain countries in Central America, Brazil and Argentina also impose taxes on sparkling beverages.  See “Item 4.


Information on the Company—Regulation—Taxation of Sparkling Beverages.”  We cannot assure you that any governmental authority in any country where we operate will not impose new taxes or increase taxes on our products in the future.  The imposition of new taxes or increases in taxes on our products may have a material adverse effect on our business, financial condition, prospects and results from operations.  10


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 Regulatory developments may adversely affect our business. We are subject to regulation in each of the territories in which we operate.  The principal areas in which we are subject to regulation are environment, labor, taxation, health and antitrust.  Regulation can also affect our ability to set prices for our products.See “Item 4.  Information of the Company—Regulation.”The adoption of new laws or regulations or a stricter interpretation or enforcement thereof in the countries in which we operate may increase our operating costs or impose restrictions on our operations which, in turn, may adversely affect our financial condition, business and results from operations.In particular, environmental standards are becoming more stringent in several of the countries in which we operate, and we are in the process of complying with these standards, although we cannot assure you that we will be able to meet any timelines for compliance established by the relevant regulatory authorities.See “Item 4.  Information of the Company—Regulation—Environmental Matters.”Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on our future results from operations or financial condition. Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which we operate.  We are currently subject to price controls in Argentina.  The imposition of these restrictions or voluntary price restraints in other territories may have an adverse effect on our results from operations and financial position.  See “Item 4.  Information on the Company—Regulation—Price Controls.”  We cannot assure you that governmental authorities in any country where we operate will not impose statutory price controls or that we will need to implement voluntary price restraints in the future. In January 2010, the Venezuelan government amended theLey para la Defensa y Acceso a las Personas a los Bienes y Servicios(Access to Goods and Services Defense Law).  Any violation by a company that produces, distributes and sells goods and services could lead to fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation.  Although we believe we are in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes could lead to an adverse impact on us. Our operations have from time to time been subject to investigations and proceedings by antitrust authorities and litigation relating to alleged anticompetitive practices.  We have also been subject to investigations and proceedings on environmental and labor matters.  We cannot assure you that these investigations and proceedings could not have an adverse effect on our results from operations or financial condition.  See “Item 8.  Financial Information—Legal Proceedings.” Weather conditions may adversely affect our results from operations. Lower temperatures and higher rainfall may negatively impact consumer patterns, which may result in lower per capita consumption of our beverage offerings. Additionally, adverse weather conditions may affect road infrastructure in the territories in which we operate and limit our ability to sell and distribute our products, thus affecting our results from operations. As was the case in Mexico, Colombia, Venezuela and Central America in 2010, adverse weather conditions affected our sales in certain regions of theseterritories. Risks Related to the Series L Shares and the ADSs Holders of our Series L Shares have limited voting rights. Holders of our Series L Shares are entitled to vote only in certain circumstances.  In general terms they may elect three of our 18 directors and are only entitled to vote on specific matters, including certain changes in our corporate form, mergers involving our company when our company is the merged entity or when the principal corporate purpose of the merged entity is not related to the corporate purpose of our company, the cancellation of the registration of our shares on the Mexican Stock Exchange or any other foreign stock exchange, and those matters


for which theLey de Mercado de Valores(Mexican Securities Market Law) expressly allow them to vote.  As a result, Series L shareholders will not be able to influence our business or operations.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders” and “Item 10.  Additional Information—Bylaws—Voting Rights, Transfer Restrictions and Certain Minority Rights.”  11


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 Holders of ADSs may not be able to vote at our shareholder meetings. Our shares are traded on the New York Stock Exchange (NYSE) in the form of ADSs.  Holders of our shares in the form of ADSs may not receive notice of shareholders meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner. The protections afforded to non-controlling interest shareholders in Mexico are different from those afforded to minority shareholders in the United States and investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons. Under the Mexican Securities Market Law, the protections afforded to non-controlling interest shareholders are different from, and may be less than, those afforded to minority shareholders in the United States as follows:  (1) the Mexican Securities Market Law does not provide a remedy for shareholders relating to violations of fiduciary duties by our directors and officers, (2) there is no procedure for class actions as such actions are conducted in the United States and (3) there are different procedural requirements for bringing shareholder lawsuits for the benefit of companies.  Therefore, it may be more difficult for non-controlling interest shareholders to enforce their rights against us, our directors or our controlling interest shareholders than it would be for minority shareholders of a United States company. In addition, we are organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States, and all or a substantial portion of our assets and the assets of our directors, officers and controlling persons are located outside the United States.  As a result, it may not be possible for investors to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws. The enforceability against our directors, officers and controlling persons in Mexico in actions for enforcement of judgments of U.S. courts, and liabilities predicated solely upon the U.S. federal securities laws will be subject to certain requirements provided for in the Mexican Federal Civil Procedure Code and any applicable treaties.  Some of the requirements may include personal service of process and that the judgments of U.S. courts are not against Mexican public policy.  The Mexican Securities Market Law, which is considered Mexican public policy, provides that in the event of actions derived from any breach of the duty of care and the duty of loyalty against our directors and officers, any remedy would be exclusively for the benefit of the company.  Therefore, investors would not be directly entitled to any remedies under such actions. Developments in other countries may adversely affect the market for our securities. The market value of securities of Mexican companies is, to varying degrees, influenced by economic and securities market conditions in other emerging market countries.  Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the securities of issuers in other countries, including Mexico.  We cannot assure you that events elsewhere, especially in emerging markets, will not adversely affect the market value of our securities. Holders of Series L Shares in the United States and holders of ADSs may not be able to participate in any capital offering and as a result may be subject to dilution of their equity interests. Under applicable Mexican law, if we issue new shares for cash as a part of a capital increase, other than in connection with a public offering of newly issued shares or treasury stock, we are generally required to grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage.  Rights to purchase shares in these circumstances are known as preemptive rights.  We may not legally allow holders of our shares or ADSs who are located in the United States to exercise any preemptive rights in any future capital


increases unless (1) we file a registration statement with the United States Securities and Exchange Commission, or SEC, with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended.  At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of our shares in the form of ADSs in the United States and any other factors that we consider important in determining whether to file a registration statement.  12


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 We may decide not to file a registration statement with the SEC to allow holders of our shares or ADSs who are located in the United States to participate in a preemptive rights offering.  In addition, under current Mexican law, the sale by the ADS depositary of preemptive rights and the distribution of the proceeds from such sales to the holders of our shares in the form of ADSs is not possible.  As a result, the equity interest of holders of our shares in the form of ADSs would be diluted proportionately.  See “Item 10.  Additional Information—Bylaws—Preemptive Rights.” Risks Related to Mexico and the Other Countries in Which We Operate Adverse economic conditions in Mexico may adversely affect our financial condition and results from operations. We are a Mexican corporation, and our Mexican operations are our single most important geographic territory.  For the year ended December 31, 2010, 37.5% of our total revenues were attributable to Mexico.  The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in the U.S. economy may affect the Mexican economy.  Prolonged periods of weak economic conditions in Mexico may have, and in the past have had, a negative effect on our company and a material adverse effect on our results from operations and financial condition. Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation and interest rates in Mexico and exchange rates for the Mexican peso.  Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products.  See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”  In addition, an increase in interest rates in Mexico would increase the cost to us of variable rate, Mexican peso-denominated funding, which constituted approximately 18% of our total debt as of December 31, 2010, and have an adverse effect on our financial position.  See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.” Depreciation of the Mexican peso relative to the U.S. dollar could adversely affect our financial condition and results from operations. Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of some of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars and thereby may negatively affect our results from operations and financial position and shareholders’ equity.  Significant fluctuation of the Mexican peso relative to the U.S. dollar occurred in the past, for example, at the end of 2008 and into 2009.  According to the U.S. Federal Reserve Board, the exchange rate registered a low of Ps. 9.92 to US$ 1.00 at August 5, 2008, and a high of Ps. 15.41to US$ 1.00 atMarch 2, 2009 in that period.  At December 30, 2010, the exchange rate was Ps. 12.38 to U.S.$ 1.00.AtJune 10, 2011,the exchange rate was Ps. 11.8668 to US$ 1.00.  See “Item 3.  Key Information—Exchange Rate Information” and “Item 11.  Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Exchange Rate Risk.” We generally do not hedge our exposure to the U.S. dollar with respect to the Mexican peso and other currencies, other than with respect to our U.S. dollar-denominated debt obligations, and recently, the purchase of certain raw materials.  A severe depreciation of the Mexican peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated indebtedness or obligations in other currencies. While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into


U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange rate policies in the future.  Currency fluctuations may have an adverse effect on our results from operations, financial condition and cash flows in future periods.  13


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 Political events in Mexico could adversely affect our operations. Mexican political events may significantly affect our operations.  Presidential elections in Mexico occur every six years, and the most recent election occurred in July 2006.  Elections of the senate also occurred in July 2006, and although the Partido Acción Nacional won a plurality of the seats in the Mexican congress in the election, no party succeeded in securing a majority.  Elections of the Cámara de Diputados (House of Representatives) occurred in 2009, and although the Partido Revolucionario Institucional won a plurality of seats in the House of Representatives, no party succeeded in securing a majority.  The absence of a clear majority by a single party is likely to continue.  This situation may result in government gridlock and political uncertainty.  We cannot provide any assurances that political developments in Mexico, over which we have no control, will not have an adverse effect on our business, financial condition or results from operations. Economic and political conditions in the other Latin American countries in which we operate may increasingly adversely affect our business. In addition to Mexico, we conduct operations in Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina.Total revenues and income from our combined non-Mexican operations increased as a percentage of our consolidated total revenues and income from operations from42.8% and29.5%, respectively, in 2005 to62.5% and61.3%, respectively, in 2010.As a consequence, our results have been increasingly affected by the economic and political conditions in the countries, other than Mexico, where we conduct operations. Consumer demand, preferences, real prices and the costs of raw materials are heavily influenced by macroeconomic and political conditions in the other countries in which we operate.  These conditions vary by country and may not be correlated to conditions in our Mexican operations.  In Venezuela we continue to face exchange rate risk as well as scarcity of and restrictions to import raw materials.  Deterioration in economic and political conditions in any of these countries would have an adverse effect on our financial position and results from operations. Depreciation of the local currencies of the countries in which we operate against the U.S. dollar may increase our operating costs.  We have also operated under exchange controls in Venezuela since 2003 that limit our ability to remit dividends abroad or make payments other than in local currencies and that may increase the real price paid for raw materials and services purchased in local currency.  In January 2010, the Venezuelan government announced a devaluation of its official exchange rate and the establishment of a multiple exchange rate system of:  (1) 2.60 bolivars to US$ 1.00 for high priority categories (2) 4.30 bolivars to US$ 1.00 for non-priority categories and (3) the recognition of the existence of other exchange rates that the government shall determine.  In January 2011, the Venezuelan government announced that its only official exchange rate effective as of January 1, 2011 is 4.30 bolivars to US$ 1.00, although the Venezuelan government continues to recognize the existence of other exchange rates that the government shall determine.  This devaluation has had an impact on our financial results and results from operations as a result of theexchange rate as applied to our U.S. dollar-denominated raw material costs.  Future currency devaluation or the imposition of exchange controls in any of the countries in which we have operations would have an adverse effect on our financial position and results from operations. We cannot assure you that political or social developments in any of the countries in which we have operations, over which we have no control, will not have a corresponding adverse effect on the economic situation and on our business, financial condition or results from operations.    14


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Item 4.  Information on the Company

THE COMPANY

Overview

We are the largest publicly listed bottler ofCoca-Colatrademark beverages in the world, calculated by sales volume in 2010.  We operate in territories in the following countries:

·Mexico – a substantial portion of central Mexico (including Mexico City and the states of Michoacán and Guanajuato) and southeast Mexico (including the Gulf region).

·Central America – Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).

·Colombia – most of the country.

·Venezuela – nationwide.

·Brazil – the area of greater São Paulo, Campinas, Santos, the state of Mato Grosso do Sul, part of the state of Minas Gerais and part of the state of Goiás.

·Argentina – Buenos Aires and surrounding areas.

Our company was organized on October 30, 1991 as asociedad anónimade capital variable(a variable capital stock corporation) under the laws of Mexico with a duration of 99 years.  On December 5, 2006, as required by amendments to the Mexican Securities Market Law, we became asociedad anónima bursátilde capital variable(a variable capital listed stock corporation).Our legal name is Coca-Cola FEMSA, S.A.B. de C.V.Our principal executive offices are located at Guillermo González Camarena No. 600, Col. Centro de Ciudad Santa Fé, Delegación Álvaro Obregón, México, D.F., 01210, México.  Our telephone number at this location is (52-55) 5081-5100.  Our website is www.coca-colafemsa.com.

The following is an overview of our operations by reporting segment in 2010.

Operations by Reporting Segment—OverviewYear Ended December 31, 2010(1) TotalRevenues

   

   Percentage of Total Revenues

   

   Income from Operations

   

   Percentage of Income from OperationsMexico

   38,782

   

   37.5%

   

   6,605

   

   38.7%Latincentro(2)

   17,281

   

   16.7%

   

   3,022

   

   17.7%Venezuela

   14,033

   

   13.6%

   

   2,444

   

   14.3%Mercosur(3)

   33,360

   

   32.2%

   

   5,008

   

   29.3%Consolidated

   103,456

   

   100.0%

   

   17,079

   

   100.0%
 
 (1)      Expressed in millions of Mexican pesos, except for percentages. (2)      Includes Guatemala, Nicaragua, Costa Rica, Panama and Colombia. (3)      Includes Brazil and Argentina.   15


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Corporate History We are a subsidiary of FEMSA, which also owns Oxxo, the largest Mexican convenience store chain, and which formerly owned FEMSA Cerveza, now Cuauhtémoc Moctezuma Holding, S.A. de C.V., a brewer with operations in Mexico and Brazil, currently a wholly-owned subsidiary of the Heineken Group.  On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed. In 1979, a subsidiary of FEMSA acquired certain sparkling beverage bottlers that are now a part of our company.  At that time, the acquired bottlers had 13 Mexican distribution centers operating 701 distribution routes, and their production capacity was 83 million physical cases.  In 1991, FEMSA transferred its ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., the corporate predecessor to Coca-Cola FEMSA, S.A.B. de C.V. In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of our capital stock in the form of Series D Shares for US$ 195 million.  In September 1993, FEMSA sold Series L Shares that represented 19% of our capital stock to the public, and we listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the New York Stock Exchange.  In a series of transactions between 1994 and 1997, we acquired territories in Argentina and additional territories in southern Mexico. In May 2003, we acquired Panamerican Beverages, or Panamco, and began producing and distributingCoca-Colatrademark beverages in additional territories in the central and the gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories.  As a result of the acquisition, the interest of The Coca-Cola Company in the capital stock of our company increased from 30% to 39.6%. During August 2004, we conducted a rights offering to allow existing holders of our Series L Shares and ADSs to acquire newly-issued Series L Shares in the form of Series L Shares and ADSs, respectively, at the same price per share at which FEMSA and The Coca-Cola Company subscribed in connection with the Panamco acquisition.  In March 2006, our shareholders approved the non-cancellation of the 98,684,857 Series L Shares (equivalent to approximately 9.87 million ADSs, or over one-third of the outstanding Series L Shares) that were not subscribed for in the rights offering which were available for subscription at a price of no less than US$ 2.216 per share or its equivalent in Mexican currency. In November 2006, FEMSA acquired, through a subsidiary, 148,000,000 of our Series D Shares from certain subsidiaries of The Coca-Cola Company representing 9.4% of the total outstanding voting shares and 8.0% of the total outstanding equity of Coca-Cola FEMSA, at a price of US$ 2.888 per share for an aggregate amount of US$ 427.4 million.  With this purchase, FEMSA increased its ownership to 53.7% of our capital stock.  Pursuant to our bylaws, the acquired shares were converted from Series D Shares to Series A Shares. In November 2007, Administración, S.A.P.I. de C.V., or Administración, a Mexican company owned directly or indirectly by us and The Coca-Cola Company, acquired 100% of the shares of capital stock of Jugos del Valle.  The business of Jugos del Valle in the United States was acquired and sold by The Coca-Cola Company.  Subsequently, we and The Coca-Cola Company and all Mexican and BrazilianCoca-Colabottlers entered into a joint business for the Mexican and the Brazilian operations, respectively, of Jugos del Valle, through transactions completed during 2008.  We hold an interest of approximately 20% in each of the Mexican joint business and the Brazilian joint businesses.  Jugos del Valle sellsfruit juice-based beverages and fruit derivatives. In May 2008, we entered into a transaction with The Coca-Cola Company to acquire its wholly owned bottling franchise Refrigerantes Minas Gerais, Ltda., or REMIL, located in the State of Minas Gerais in Brazil, and we paid a purchase price of US$ 364.1 million in June 2008.  We began to consolidate REMIL in our financial statements as of June 1, 2008. In December 2007 and May 2008, we sold most of our proprietary brands to The Coca-Cola Company.The proprietary brandsare now being licensed back to us by The Coca-Cola Companypursuant to our bottler agreements.  The December 2007 transaction was valued at US$ 48 million and the May 2008 transaction was


valued at US$ 16 million.  We believe that both of these transactions were conducted on an arm’s length basis.Revenues from the sale of proprietary brands in which we have a significant continuing involvement are deferred and amortized against the related costs of future sales over the estimated sales period.  16


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In July 2008, we acquired theAgua De Los Angelesjug water business in the Valley of Mexico (Mexico City and surrounding areas) from Grupo Embotellador CIMSA, S.A. de C.V., one of theCoca-Colabottling franchises in Mexico, for a purchase price of US$ 18.3 million.  The trademarks remain with The Coca-Cola Company.  We subsequently mergedAgua De Los Angelesinto our jug water business under theCielbrand. In February 2009, we acquired with The Coca-Cola Company the Brisa bottled water business in Colombia from Bavaria, a subsidiary of SABMiller.  We acquired the production assets and the distribution territory, and The Coca-Cola Company acquired theBrisabrand.  We and The Coca-Cola Company equally shared in paying the purchase price of US$ 92 million.  Following a transition period, in June 2009, we started to sell and distribute theBrisaportfolio of products in Colombia. In May 2009, we entered into an agreement to develop theCrystaltrademark water products in Brazil jointly with The Coca-Cola Company. In August 2010, we acquired from The Coca-Cola Company along with other BrazilianCoca-Colabottlers the business operations of theMatte Leaotea brand.  We currently have a 13.84% indirect interest in the Matte Leao business in Brazil. On March 28, 2011, we acquired together with The Coca-Cola Company, Grupo Estrella Azul (also known as Grupo Industrias Lacteas), a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama.  We will continue to develop this business jointly with The Coca-Cola Company.  As of May 31, 2011, FEMSA indirectly owned Series A Shares equal to 53.7% of our capital stock (63.0% of our capital stock with full voting rights).  As of May 31, 2011, The Coca-Cola Company indirectly owned Series D Shares equal to 31.6% of the capital stock of our company (37.0% of our capital stock with full voting rights).  Series L Shares with limited voting rights, which trade on the Mexican Stock Exchange and in the form of ADSs on the New York Stock Exchange, constitute the remaining 14.7% of our capital stock.  Business Strategy We operate with a large geographic footprint in Latin America and have established divisional headquarters in the following three regions: ·Mexico with headquarters in Mexico City; ·Latincentro (covering territories in Guatemala, Nicaragua, Costa Rica, Panama, Colombia and Venezuela) with headquarters in San José, Costa Rica; and ·Mercosur (covering territories in Brazil and Argentina) with headquarters in São Paulo, Brazil.  17


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One of our goals is to maximize growth and profitability to create value for our shareholders.  Our efforts to achieve this goal are based on:  (1) transforming our commercial models to focus on our customers’ value potential and using a value-based segmentation approach to capture the industry’s value potential, (2) implementing multi-segmentation strategies in our major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels; (3) implementing well-planned product, packaging and pricing strategies through different distribution channels; (4) driving product innovation along our different product categories and (5) achieving the full operating potential of our commercial models and processes to drive operational efficiencies throughout our company.  To achieve these goals, we intend to continue to focus our efforts on, among other initiatives, the following: ·working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing our products; ·developing and expanding our still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to jointly acquire companies with The Coca-Cola Company; ·expanding our bottled water strategy, in conjunction with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across our market territories; ·strengthening our selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to our clients and help them satisfy the beverage needs of consumers; ·implementing selective packaging strategies designed to increase consumer demand for our products and to build a strong returnable base for theCoca-Colabrand; ·replicating our best practices throughout the value chain; ·rationalizing and adapting our organizational and asset structure in order to be in a better position to respond to a changing competitive environment; ·committing to building a multi-cultural collaborative team, from top to bottom; and ·broadening our geographic footprint through organic growth and strategic acquisitions. We seek to increase per capita consumption of our products in the territories in which we operate.  To that end, our marketing teams continuously develop sales strategies tailored to the different characteristics of our various territories and distribution channels.  We continue to develop our product portfolio to better meet market demand and maintain our overall profitability.  To stimulate and respond to consumer demand, we continue to introduce new categories, products and new presentations.  See “—Product and Packaging Mix.”  In addition, because we view our relationship with The Coca-Cola Company as integral to our business, we use market information systems and strategies developed with The Coca-Cola Company to improve our business and marketing strategies.  See “—Description of Property, Plant and Equipment.” We also continuously seek to increase productivity in our facilities through infrastructure and process reengineering for improved asset utilization.  Our capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems.  We believe that this program will allow us to maintain our capacity and flexibility to innovate and to respond to consumer demand for our products. We focus on management quality as a key element of our growth strategy and remain committed to fostering the development of quality management at all levels.  Both FEMSA and The Coca-Cola Company provide us with managerial experience.  To build upon these skills, we also offer management training programs designed to enhance our executives’ abilities and to provide a forum for exchanging experiences, know-how and talent among an increasing number of multinational executives from our new and existing territories. Sustainable development is an important pillar of our Company’s strategy.  We continually develop programs that ensure the creation of social and economic value by fostering the quality of life of our employees, promoting a culture of health and well-being, supporting our surrounding communities and minimizing our operations’ environmental impact.  18


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Our Territories The following map shows our territories, giving estimates in each case of the population to which we offer products, the number of retailers of our beverages and the per capita consumption of our sparkling beverages as of December 31, 2010:  Per capita consumption data for a territory is determined by dividing sparkling beverage sales volume within the territory (in bottles, cans, and fountain containers) by the estimated population within such territory, and is expressed on the basis of the number of eight-ounce servings of our products consumed annually per capita.  In evaluating the development of local volume sales in our territories and to determine product potential, we and The Coca-Cola Company measure, among other factors, the per capita consumption of our sparkling beverages.  19


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Our Products ****
 We produce, market and distributeCoca-Colatrademark beverages, and brands licensed from FEMSA through 2010.  TheCoca-Colatrademark beverages include:  sparkling beverages (colas and flavored sparkling beverages), waters, and still beverages (including juice drinks, teas and isotonics).  In December 2007 and May 2008, we sold most of our proprietary brands to The Coca-Cola Company.  See “—Corporate History.”  The following table sets forth our main brands as of December 31, 2010: Colas:

   Mexico

   Latincentro(1)

   Venezuela

   Mercosur(2)Coca-Cola

   a

   a

   a

   aCoca-Cola Light

   a

   a

   a

   aCoca-Cola Zero

   a

   a

   a

   a
  Flavored sparkling beverages:

   Mexico

   Latincentro(1)

   Venezuela

   Mercosur(2)Aquarius Fresh

   

   

   

   aChinotto

   

   

   aCrush

   

   a

   

   aFanta

   a

   a

   

   aFresca

   a

   aFrescolita

   

   a

   aHit

   

   

   aKuat

   

   

   

   aLift

   a

   aMundet(3)

   aQuatro

   

   a

   

   aSimba

   

   

   

   aSprite

   a

   a

   

   a
  Water:

   Mexico

   Latincentro(1)

   Venezuela

   Mercosur(2)Alpina

   

   aBrisa

   

   aCiel

   aCrystal

   

   

   

   aKin

   

   

   

   aManantial

   

   aNevada

   

   

   a
  Other Categories:

   Mexico

   Latincentro(1)

   Venezuela

   Mercosur(2)Aquarius(4)

   

   

   

   aCepita

   

   

   

   aHi-C(5)

   

   aJugos del Valle(5)

   a

   a

   

   aNestea

   a

   a

   aPowerade(6)

   a

   a

   a

   aMatte Leao(7)

   

   

   

   a
 
 (1)            Includes Guatemala, Nicaragua, Costa Rica, Panama and Colombia. (2)            Includes Brazil and Argentina. (3)            Brand sold in Mexico by FEMSA to The Coca-Cola Company in September 2010 through The Coca-Cola Company’s acquisition of 100% of the equity interest ofPromotora de Marcas Nacionales, S.A. de C.V.We remain the licensee of theMundettrademark under license agreements withPromotora de Marcas Nacionales, S.A. de C.V.See “Item 7.Major Shareholders and Related Party Transactions—Related Party Transactions.” (4)            Flavored water.  In Brazil, also flavored sparkling beverage. (5)            Juice-based beverage.  IncludesValleFrutin Mexico andFreshin Colombia. (6)            Isotonic. (7)            Ready to drink tea  20


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Sales Overview We measure total sales volume in terms of unit cases.  Unit case refers to 192 ounces of finished beverage product (24 eight-ounce servings) and, when applied to soda fountains, refers to the volume of syrup, powders and concentrate that is required to produce 192 ounces of finished beverage product.  The following table illustrates our historical sales volume for each of our territories. Sales VolumeYear Ended December 31,2010

   2009

   2008(millions of unit cases)Mexico

   1,242.3

   1,227.2

   1,149.0LatincentroCentral America(1)

   137.0

   135.8

   132.6Colombia(2)

   244.3

   232.2

   197.9Venezuela

   211.0

   225.2

   206.7MercosurBrazil(3)

   475.6

   424.1

   370.6Argentina

   189.3

   184.1

   186.0Combined Volume

   2,499.5

   2,428.6

   2,242.8
 
 (1)   Includes Guatemala, Nicaragua, Costa Rica and Panama. (2)   As of June 1, 2009, includes sales from the Brisa bottled water business. (3)   Excludes beer sales volume.  As of June 1, 2008, includes sales from REMIL.  As of the first quarter of 2010, we began to distribute certain ready to drink products under theMatte Leaobrand. Product and Packaging Mix Out of the more than 100 brands and line extensions of beverages that we sell and distribute, our most important brand,Coca-Cola, together with its line extensions,Coca-Cola LightandCoca-Cola Zero, accounted for 61.7% of total sales volume in 2010.  Our next largest brands,Ciel(a water brand from Mexico),Fanta(and its line extensions),Sprite(and its line extensions) andValleFrut(and its line extensions), accounted for 9.9%, 5.8%, 2.6% and 2.2%, respectively, of total sales volume in 2010.  We use the term line extensions to refer to the different flavors in which we offer our brands.  We produce, market and distributeCoca-Colatrademark beverages in each of our territories in containers authorized by The Coca‐Cola Company, which consist of a variety of returnable and non-returnable presentations in the form of glass bottles, cans and plastic bottles made of polyethylene terephtalate, which we refer to as PET. We use the term presentation to refer to the packaging unit in which we sell our products.  Presentation sizes for ourCoca-Colatrademark beverages range from a 6.5-ounce personal size to a 3-liter multiple serving size.  For all of our products excluding water, we consider a multiple serving size as equal to, or larger than, 1.0 liter.In general, personal sizes have a higher price per unit case as compared to multiple serving sizes.  We offer both returnable and non-returnable presentations, which allow us to offer portfolio alternatives based on convenience and affordability to implement revenue management strategies and to target specific distribution channels and population segments in our territories.  In addition, we sell someCoca-Colatrademark beverage syrups in containers designed for soda fountain use, which we refer to as fountain.  We also sell bottled water products in bulk sizes, which refer to presentations equal to or larger than 5 liters, which have a much lower average price per unit case than our other beverage products. The characteristics of our territories are very diverse.  Central Mexico and our territories in Argentina are densely populated and have a large number of competing sparkling beverages brands as compared to the rest of our territories.  Our territories in Brazil are densely populated but have lower per capita consumption of sparkling beverage products as compared to Mexico.  Portions of southern Mexico, Central America and Colombia are large


and mountainous areas with lower population density, lower per capita income and lower per capita consumption of sparkling beverages.  In Venezuela, we face operational disruptions from time to time, which may have an effect on our volumes sold, and consequently, may result in lower per capita consumption.  21


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The following discussion analyzes our product and packaging mix by reporting segment.  The volume data presented is for the years 2010, 2009 and 2008. Mexico.Our product portfolio consists ofCoca-Colatrademark beverages.  In 2008, as part of our efforts to strengthen our multi-category beverage portfolio, we incorporated theJugos del Valleline of juice based beverages.Total beverage per capita consumption of our products in our Mexican territories in 2010 was 598 eight-ounce servings. The following table highlights historical sales volume and mix in Mexico for our products: Year Ended December 31,2010

   2009

   2008Total Sales Volume

   (millions of unit cases)Total

   1,242.3

   1,227.2

   1,149.0% Growth

   1.2%

   6.8%

   3.5%Unit Case Volume Mix by Category

   (in percentages)Sparkling beverages

   74.1%

   73.4%

   75.4%Water(1)

   20.6

   21.5

   21.6Still beverages

   5.3

   5.1

   3.0Total

   100.0%

   100.0%

   100.0%
 
 (1)   Includes bulk water volumes. In 2010, our most popular sparkling beverage presentations were the 2.5-liter returnable plastic bottle, the 0.6-liter non‐returnable plastic bottle (the 20-ounce bottle that is also popular in the United States) and the 3.0-liter non-returnable plastic bottle, which together accounted for 54.3% of total sparkling beverage sales volume in Mexico.  Multiple serving presentations represented 67.5% of total sparkling beverages sales volume in Mexico in 2010, a 3.2% increase compared to 2009.  Our strategy is to foster consumption in single serving presentations while maintaining multiple serving volumes.  In 2010, our sparkling beverages increased as a percentage of our total sales volume from 73.4% in 2009 to 74.1% in 2010, mainly due to a decrease of the bulk water business and the strong preference of our consumers for theCoca-Colabrand. Total sales volume reached 1,242.3 million unit cases in 2010, an increase of 1.2% compared to 1,227.2 million unit cases in 2009.  Sparkling beverages sales volume increased 2.3% as compared to 2009.  The sparkling beverage category and the still beverage category accounted for total incremental volumes during the year. Latincentro (excluding Venezuela).Our total sales volume in Latincentro consist predominantly ofCoca-Colatrademark beverages.  Per capita consumption of our beverage products in Colombia and Central America was 127 and 171 eight-ounce servings, respectively, in 2010.  22


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The following table highlights historical total sales volume and sales volume mix in Latincentro: Year Ended December 31,2010

   2009

   2008Total Sales Volume

   (millions of unit cases)Total

   381.3

   368.0

   330.5% Growth

   3.6%

   11.3%

   1.4%Unit Case Volume Mix by Category

   (in percentages)Sparkling beverages

   76.9%

   79.3%

   87.9%Water(1)

   15.3

   13.0

   7.7Still beverages

   7.8

   7.7

   4.4Total

   100.0%

   100.0%

   100.0%
 
 (1)           Includes bulk water volume. In 2010, multiple serving presentations, as a percentage of total sparkling beverage sales volume, represented 56.3% in Central America and 58.7% in Colombia.  In 2008, as part of our efforts to strengthen our multi-category beverage portfolio, we incorporated theJugos del Valleline of juice-based beverages.  The acquisition of Brisa in 2009 helped us to become leader, based on sales volume, in the water market in Colombia. Total sales volume was 381.3 million unit cases in 2010, increasing 3.6% compared to 368.0 million in 2009.  Water sales, including bulk water, represented approximately 80% of total incremental volume, mainly driven by the integration of the Brisa bottled water business in Colombia.  Sparkling beverages, driven by theCoca-Colabrand and still beverages, mainly driven by theJugos del Valleline of products andNestea, represented the balance. Venezuela.Our product portfolio in Venezuela consists ofCoca-Colatrademark beverages.  Per capita consumption of our beverages in Venezuela during 2010 was 175 eight-ounce servings. The following table highlights historical total sales volume and sales volume mix in Venezuela: Year Ended December 31,2010

   2009

   2008Total Sales Volume

   (millions of unit cases)Total

   211.0

   225.2

   206.7% Growth

   (6.3%)

   9.0%

   (1.1%)Unit Case Volume Mix by Category

   (in percentages)Sparkling beverages

   91.2%

   91.7%

   91.3%Water(1)

   5.4

   5.0

   5.8Still beverages

   3.4

   3.3

   2.9Total

   100.0%

   100.0%

   100.0%
 
 (1)           Includes bulk water volume. We have implemented a product portfolio rationalization strategy that allows us to minimize the impact of certain operating disruptions that have been recurrent in the last several years.  During 2010, we faced a difficult economic environment that prevented us from growing sales volume for our products, and our sparkling beverage volume decreased by 6.8%. In 2010, multiple serving presentations represented 77.6% of total sparkling beverages sales volume in Venezuela.  Total sales volume was 211.0 million unit cases in 2010, a decrease of 6.3% compared to 225.2 million in 2009.  23


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Mercosur (Brazil and Argentina).Our product portfolio in Mercosur consists mainly ofCoca-Colatrademark beverages and theKaiserbeer brand in Brazil, which we sell and distribute.  In 2009, as part of our efforts to strengthen our multi-category beverage portfolio, we incorporated theJugos del Valleline of juice based beverages in Brazil.In 2010, we incorporated ready to drink beverages under theMatte Leaobrand in Brazil.  Per capita consumption of our beverages in Brazil and Argentina was 259 and 374 eight-ounce servings, respectively, in 2010.  The following table highlights historical total sales volume and sales volume mix in Mercosur, not including beer: Year Ended December 31,2010

   2009

   2008Total Sales Volume

   (millions of unit cases)Total

   664.9

   608.2

   556.6% Growth

   9.3%

   9.3%

   17.1%Unit Case Volume Mix by Category

   (in percentages)Sparkling beverages

   90.8%

   92.0%

   93.3%Water(1)

   4.2

   4.1

   4.2Still beverages

   5.0

   3.9

   2.5Total

   100.0%

   100.0%

   100.0%
 
 (1)           Includes bulk water volume. In 2008, in our continued effort to develop the still beverage category in Argentina, we launchedAquarius, a flavored water. During 2010, as part of our efforts to foster sparkling beverage per capita consumption in Brazil, we re-launched a 2.0-liter returnable plastic bottle for theCoca-Colabrand and introduced two single-serve 0.25-liter presentations. These presentations accounted for close to 50% of incremental volumes in Brazil. Total sales volume was 664.9 million unit cases in 2010, an increase of 9.3% compared to 608.2 million in 2009. Growth in sparkling beverages mainly driven by sales of theCoca-Colabrand in both Brazil and Argentina, accounted for close to 80% of the growth during the year. Growth in still beverages, mainly driven by theJugos del Valleline of products in Brazil andAquariusflavored water in Argentina, represented more than 15% of incremental volumes.  In 2010, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 28.5% in Argentina and 14.9% in Brazil.  In 2010, multiple serving presentations represented 71.1% and 84.6% of total sparkling beverages sales volume in Brazil and Argentina, respectively. We sell and distribute theKaiserbrands of beer in our territories in Brazil.  InJanuary 2006, FEMSA Cerveza acquired acontrolling stake in Cervejarias Kaiser.  Since that time, we have distributed theKaiserbeer portfolio in our Brazilian territories, consistent with the arrangements between us and Cervejarias Kaiser in place prior to 2004.Beginning in the second quarter of 2005, we ceased including beer that we distribute in Brazil in our reported sales volumes.  On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed.  We have agreed with Cervejarias Kaiser to continue to distribute and sell theKaiserbeer portfolio in our Brazilian territories through the 20-year term, consistent with the arrangement in place since 2006. Seasonality Sales of our products are seasonal, as our sales levels generally increase during the summer months of each country and during the Christmas holiday season.  In Mexico, Central America, Colombia and Venezuela, we typically achieve our highest sales during the summer months of April through September as well as during the Christmas holidays in December.  In Brazil and Argentina, our highest sales levels occur during the summer months of October through March and the Christmas holidays in December.  24


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Marketing Our Company, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of our products.  We rely extensively on advertising, sales promotions and retailer support programs to target the particular preferences of our consumers.  Our consolidated marketing expenses in 2010, net of contributions by The Coca-Cola Company, were Ps. 3,979 million.  The Coca-Cola Company contributed an additional Ps. 2,386 million in 2010, which mainly includes contributions for coolers, bottles and cases.  Through the use of advanced information technology, we have collected customer and consumer information that allow us to tailor our marketing strategies to target different types of customers located in each of our territories and to meet the specific needs of the various markets we serve. Retailer Support Programs.  Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples. Coolers.  Cooler distribution among retailers is important for the visibility and consumption of our products and to ensure that they are sold at the proper temperature. 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 The Coca-Cola Company’s local affiliates, with our input at the local or regional level. Channel Marketing.  In order to provide more dynamic and specialized marketing of our products, our strategy is to classify our markets and develop targeted efforts for each consumer segment or distribution channel.  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 beverage consumers in each of the different types of locations or distribution channels.  In response to this analysis, we tailor our product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel. Multi-Segmentation.  We have been implementing a multi-segmentation strategy in the majority of our markets.  This strategy consists of the implementation of different product/price/package portfolios by market cluster or group.  These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels. Client Value Management.  We have been transforming our commercial models to focus on our customers’ value potential using a value-based segmentation approach to capture the industry’s potential.  We have started the rollout of this new model in our Mexico, Brazil, Colombia and Central America operations. We believe that the implementation of these strategies described above also enables us to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses.  In addition, it allows us to be more efficient in the way we go to market and invest our marketing resources in those segments that could provide a higher return.  Our marketing, segmentation and distribution activities are facilitated by our management information systems.  We have invested significantly in creating these systems, including in hand-held computers to support the gathering of product, consumer and delivery information for most of our sales routes throughout our territories.   25


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Product Sales and Distribution The following table provides an overview of our distribution centers and the retailers to which we sell our products: Product Distribution Summary as of December 31, 2010 Mexico

   Latincentro(1)

   Venezuela

   Mercosur(2)Distribution centers

   83

   57

   32

   32Retailers (3)

   621,053

   474,387

   211,568

   269,349
 
 (1)     Includes Guatemala, Nicaragua, Costa Rica, Panama and Colombia. (2)     Includes Brazil and Argentina. (3)     Estimated. We continuously evaluate our distribution model in order to fit with the local dynamics of the marketplace and analyze the way we go to market, recognizing different service needs from our customers, while looking for a more efficient distribution model.  As part of this strategy, we are rolling out a variety of new distribution models throughout our territories looking for improvements in our distribution network. We use several sales and distribution models depending on market, geographic conditions and the customer’s profile:  (1) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency, (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck, (3) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system, (4) the telemarketing system, which could be combined with pre-sales visits and (5) sales through third-party wholesalers of our products. As part of the pre-sale system, sales personnel also provides merchandising services during retailer visits, which we believe enhance the shopper experience at the point of sale.  We believe that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system for our products. Our distribution centers range from large warehousing facilities and re-loading centers to small deposit centers.  In addition to our fleet of trucks, we distribute our products in certain locations through electric carts and hand-trucks in order to comply with local environmental and traffic regulations.  In some of our territories, we retain third parties to transport our finished products from the bottling plants to the distribution centers. Mexico.  We contract with a subsidiary of FEMSA for the transportation of finished products to our distribution centers from our Mexican production facilities.  See “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions.”  From the distribution centers, we then distribute our finished products to retailers through our own fleet of trucks. In Mexico, we sell a majority of our beverages at small retail stores to consumers who may take the beverages for consumption at home or elsewhere.  We also sell products through the “on-premise” consumption segment, supermarkets and other locations.  The “on-premise” consumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines as well as sales through point-of-sale programs in concert halls, auditoriums and theaters. Brazil.In Brazil, we sold 21.4% of our total sales volume through supermarkets in 2010.  Also in Brazil, the delivery of our finished products to customers is completed by a third party, while we maintain control over the selling function.  In designated zones in Brazil, third-party distributors purchase our products at a discount from the wholesale price and resell the products to retailers.  26


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Territories other than Mexico and Brazil.  We distribute our finished products to retailers through a combination of our own fleet of trucks and third party distributors.  In most of our territories, an important part of our total sales volume is sold through small retailers, with low supermarket penetration. Competition Although we believe that our products enjoy wider recognition and greater consumer loyalty than those of our principal competitors, the markets in the territories in which we operate are highly competitive.  Our principal competitors are localPepsibottlers and other bottlers and distributors of national and regional sparkling beverage brands.  We face increased competition in many of our territories from producers of low price beverages, commonly referred to as “B brands.”  A number of our competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies. Price discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among bottlers.  We compete by seeking to offer products at an attractive price in the different segments in our markets and by building on the value of our brands.  We believe that the introduction of new products and new presentations has been a significant competitive technique that allows us to increase demand for our products, provide different options to consumers and increase new consumption opportunities.  See “—Sales Overview.” Mexico.  Our principal competitors in Mexico are bottlers ofPepsiproducts, whose territories overlap but are not co-extensive with our own.  In central Mexico we compete with a subsidiary of PepsiCo, Pepsi Beverage Company, the largest bottler ofPepsiproducts globally, and Grupo Embotelladores Unidos, S.A.B. de C.V., thePepsibottler in central and southeast Mexico.Our main competition in the juice category in Mexico is Grupo Jumex.  In the water category,Bonafont, a water brand owned by Groupe Danone, is our main competition.In addition, we compete with Cadbury Schweppes in sparkling beverages and with other national and regional brands in our Mexican territories, as well as low-price producers, such as Big Cola and Consorcio AGA, S.A. de C.V., that offer various presentations of sparkling and still beverages. Latincentro (excluding Venezuela).Our principal competitor in Colombia is Postobón, a well-established local bottler that sells flavored sparkling beverages, some of which have a wide consumption preference, such asmanzana Postobón(apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume.  Postobón also sellsPepsiproducts.  Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia.  We also compete with low-price producers, such as the producers ofBig Cola, which principally offer multiple serving size presentations in the sparkling and still beverage industry. In the countries that comprise our Central America region, our main competitors arePepsiandBig Colabottlers.  In Guatemala and Nicaragua, we compete with a joint venture between AmBev and The Central American Bottler Corporation.  In Costa Rica, our principal competitor is Florida Bebidas S.A., subsidiary of Florida Ice and Farm Co. S.A.  InPanama, our main competitor is Cervecería Nacional, S.A.We also face competition from low-price producers offering multiple serving size presentations in some Central American countries. Venezuela.  In Venezuela, our main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country.  We also compete with the producers ofBig Colain part of the country. Mercosur (Brazil and Argentina).  In Brazil, we compete against AmBev, a Brazilian company with a portfolio of brands that includesPepsi, local brands with flavors such as guaraná, and proprietary beers.  We also compete against “B brands” or “Tubainas,” which are small, local producers of low‐cost flavored sparkling beverages in multiple serving presentations that represent a significant portion of the sparkling beverage market. In Argentina, our main competitor is Buenos Aires Embotellador S.A. (BAESA), aPepsibottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev.  In addition,


we compete with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands.  27


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Raw Materials Pursuant to our bottler agreements, we are authorized to manufacture, sell and distributeCoca-Colatrademark beverages within specific geographic areas, and we are required to purchase in some of our territories for allCoca-Colatrademark beverages concentrate from companies designated by The Coca-Cola Company and artificial sweeteners from companies authorized by The Coca-Cola Company.  Concentrate prices for sparkling beverages are determined as a percentage of the weighted average retail price in local currency net of applicable taxes.  Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company. In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages in Brazil and Mexico. These increases were fully implemented in Brazil in 2008 and in Mexico in 2009.  As part of the cooperation framework that we reached with The Coca-Cola Company at the end of 2006, The Coca-Cola Company will provide a relevant portion of the funds derived from the concentrate increase for marketing support of our sparkling and still beverages portfolio.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—Cooperation Framework with The Coca-Cola Company.” In addition to concentrate, we purchase sweeteners, carbon dioxide and other raw materials, resin and ingots to make plastic bottles, finished plastic and glass bottles, cans, closures and fountain containers, as well as other packaging materials.  Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for most of our beverages.  Our bottler agreements provide that, with respect toCoca-Colatrademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company, including affiliates of FEMSA.  Prices for packaging materials and high fructose corn syrup historically have been determined with reference to the U.S. dollar, although the local currency equivalent in a particular country is subject to price volatility in accordance with changes in exchange rates.  Our most significant packaging raw material costs arise from the purchase of resin, plastic ingots to make plastic bottles and finished plastic bottles, which we obtain from international and local producers.  The prices of these materials are tied to crude oil prices and global resin supply.  In recent years we have experienced volatility in the prices we pay for these materials.  Across our territories, our average price for resin in U.S. dollars increased in 2010 as compared to 2009. Under our agreements with The Coca-Cola Company, we may use raw or refined sugar or high fructose corn syrup as sweeteners in our products.  Sugar prices in all of the countries in which we operate, other than Brazil, are subject to local regulations and other barriers to market entry that cause us to pay in excess of international market prices for sugar in certain countries.  During 2010, international sugar prices experienced significant volatility. None of the materials or supplies that we use is presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls or national emergency situations. Mexico.  We purchase our returnable plastic bottles from Graham Packaging México, S.A. de C.V., known as Graham, which is the exclusive supplier of returnable plastic bottles to The Coca-Cola Company and its bottlers in Mexico.  We also mainly purchase resin from Arteva Specialties, S. de R.L. de C.V., M. & G. Polímeros México S.A. de C.V. and DAK Resinas Americas Mexico S.A. de C.V., which ALPLA México S.A. de C.V., known as ALPLA, and Envases Innovativos de México S.A. de C.V. manufacture into non-returnable plastic bottles for us. We purchase all of our cans from Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative ofCoca-Colabottlers, in which we hold a 5.0% equity interest.  We mainly purchase our glass bottles from Compañía Vidriera, S.A. de C.V., known as VITRO, and Silices de Veracruz, S.A. de C.V., known as SIVESA,a wholly-owned subsidiary of FEMSA Cerveza,now Cuauhtémoc Moctezuma Holding, S.A. de C.V., currently a wholly-owned subsidiary of the Heineken Group.  28


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We purchase sugar from, among other suppliers, Beta San Miguel, S.A. de C.V., a sugar cane producer in which we currentlyhold a 2.6% equity interest. We purchase high fructose corn syrup from CPIngredientes, S.A. de C.V. and Almidones Mexicanos, S.A. de C.V., known as Almex. Imported sugar is subject to import duties, the amount of which is set by the Mexican government.  As a result, sugar prices in Mexico are in excess of international market prices for sugar, and in 2010, were 73% higher in Mexico.  In2010,sugar prices increased compared to2009. Latincentro (excluding Venezuela).  In Colombia, we use sugar as a sweetener in most of our products, which we buy from several domestic sources.  We purchase plastic bottles from Amcor and Tapón Corona de Colombia S.A.  We purchase all our glass bottles from Peldar O-I and cans from Crown, both suppliers in which Grupo Ardila Lulle, owners of our competitor Postobón, owns an equity interest.  Glass bottles and cans are available only from these local sources. In Central America, the majority of our raw materials such as glass and plastic bottles are purchased from several local suppliers.  We purchase all of our cans from PROMESA.  Sugar is available from suppliers that represent several local producers.  Local sugar prices, in the countries that comprise the region, have increased mainly due to volatility in international prices.  In Costa Rica, we acquire plastic non-returnable bottles from ALPLA C.R. S.A., and in Nicaragua we acquire such plastic bottles from ALPLA Nicaragua, S.A. Venezuela.  We use sugar as a sweetener in most of our products, which we purchase mainly from the local market.  Since 2003,from time to time,we have experienced a sugar shortage due to lower domestic production and the inability of the predominant sugar importers to obtain permission to import in a timely manner.  Sugar supply was affected in2010due to (1) shortages inlocalsugar cane production, (2)quotas imposed by the government to sugar suppliers that limit the quantity of sugar that can be deliveredto the food and beverages industry and (3) a production decrease by certain sugar mills.  We cannot assure you that we will be able to meet our sugar requirements in the long term if sugar supply conditions do not improve.We buy glass bottles from one local supplier, Productos de Vidrio, S.A., but there are alternative suppliers authorized by The Coca-Cola Company.  We acquire most of our plastic non-returnable bottles from ALPLA de Venezuela, S.A. and all of our aluminum cans from a local producer, Dominguez Continental, C.A. Under current regulations promulgated by the Venezuelan authorities, our ability to import some of our raw materials and other supplies used in our production could be limited, and access to the official exchange rate for these items for us and our suppliers, including, among others, resin, aluminum, plastic caps, distribution trucks and vehicles is only achieved by obtaining proper approvals from the relevant authorities. Mercosur (Brazil and Argentina).  Sugar is available in Brazil at local market prices, which historically have been similar to international prices.  Sugar prices in Brazil in recent periods have been volatile, mainly due to the increased demand for sugar cane for production of alternative fuels, and our average acquisition cost for sugar in2010increased.  See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.”  We purchase glass bottles, plastic bottles and cans from several domestic and international suppliers. In Argentina, we mainly use high fructose corn syrup that we purchase from several different local suppliers as a sweetener in our products instead of sugar.  We purchase glass bottles, plastic cases and other raw materials from several domestic sources.  We purchase pre-formed plastic ingots, as well as returnable plastic bottles, at competitive prices from Embotelladora del Atlántico S.A., a local subsidiary of Embotelladora Andina S.A., a Coca-Cola bottler with operations in Argentina, Chile and Brazil, and other local suppliers.  We also acquire pre-formed plastic ingots from ALPLA Avellaneda S.A.  We produce our own can presentations for distributionof our productstoourcustomers in Buenos Aires. REGULATION We are subject to regulation in each of the territories in which we operate.  The adoption of new laws or regulations in the countries in which we operate may increase our operating costs, our liabilities or impose restrictions on our operations which, in turn, may adversely affect our financial condition, business and results from


operations.  Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on our future results from operations or financial condition.  29


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Price Controls Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which we operate.  At present, there are no price controls on our products in any of the territories in which we have operations, except for Argentina, where authorities directly supervise certain products sold through supermarkets to control inflation. Taxation of Sparkling Beverages All the countries in which we operate, except for Panama, impose a value-added tax on the sale of sparkling beverages, with a rate of 16% in Mexico beginning in January 2010 (15% through the end of 2009), 12% in Guatemala, 15% in Nicaragua, 13% in Costa Rica, 16% in Colombia (applied only to the first sale in supply chain), 12% in Venezuela (beginning in April 2009), 17% (Mato Grosso do Sul) and 18% (São Paulo and Minas Gerais) in Brazil, and 21% in Argentina.  In addition, several of the countries in which we operate impose the following excise or other taxes: ·Guatemala imposes an excise tax of 0.18 cents in local currency (approximately Ps. 0.2775 as of December 31, 2010) per liter of sparkling beverage. ·Costa Rica imposes a specific tax on non-alcoholic bottled beverages based on the combination of packaging and flavor, currently assessed at 15.50 colones (approximately Ps. 0.3705 as of December 31, 2010) per 250 ml, and an excise tax on local brands of 5%, foreign brands of 10% and mixers of 14%. ·Nicaragua imposes a 9% tax on consumption, and municipalities impose a 1% tax on our Nicaraguan gross income. ·Panama imposes a 5% tax based on the cost of goods produced.  Panama also imposes a 10% selective consumption tax on syrups, powders and concentrate. ·Brazil imposes an average production tax of approximately 4.4% and an average sales tax of approximately 7.9%, both assessed by the federal government.  Most of these taxes are fixed, based on average retail prices in each state where the company operates (VAT) or fixed by the federal government (excise and sales tax). ·Argentina imposes an excise tax on sparkling beverages containing less than 5% lemon juice or less than 10% fruit juice of 8.7%, and an excise tax on flavored sparkling beverages with 10% or more fruit juice and on sparkling water of 4.2%, although this excise tax is not applicable to certain of our products. Water Supply Law In Mexico, we obtain water directly from municipal water companies and pump water from our own wells pursuant to concessions obtained from the Mexican government on a plant-by-plant basis.  Water use in Mexico is regulated primarily by theLey de Aguas Nacionales de 1992(the 1992 Water Law), and regulations issued thereunder, which created theComisión Nacional del Agua(the National Water Commission).  The National Water Commission is charged with overseeing the national system of water use.  Under the 1992 Water Law, concessions for the use of a specific volume of ground or surface water generally run for five-, ten- or fifteen-year terms, depending on the supply of groundwater in each region as projected by the National Water Commission.  Concessionaires may request concession terms to be extended upon termination.  The Mexican government is authorized to reduce the volume of ground or surface water granted for use by a concession by whatever volume of water is not used by the concessionaire for two consecutive years.  However, because the current concessions for


each of our plants in Mexico do not match each plant’s projected needs for water in future years, we successfully negotiated with the Mexican government the right to transfer the unused volume under concessions from certain plants to other plants anticipating greater water usage in the future.  Our concessions may be terminated if, among other things, we use more water than permitted or we fail to pay required concession-related fees and do not cure such situations on a timely manner.  Although we have not undertaken independent studies to confirm the sufficiency of the existing or future groundwater supply, we believe that our existing concessions satisfy our current water requirements in Mexico.  30


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In Argentina, a state water company provides water to our Alcorta plant on a limited basis; however, we believe the authorized amount meets our requirements for this plant.  In our Monte Grande plant in Argentina, we pump water from our own wells without the need for any specific permit or license, regulated by the Law 25.688. In Brazil, we buy water directly from municipal utility companies, and we also pump water from our own wells or rivers (MogidasCruzesplant) pursuant to concessions granted by the Brazilian government for each plant.  According to the Brazilian Constitution, water is considered an asset of common use and can only be exploited for the national interest, by Brazilians or companies formed under Brazilian law.  Dealers and users have the responsibility for any damage to the environment.  The exploitation and use of water is regulated by theCódigo de Mineraç*ã*o(Code of Mining, Decree Law No. 227/67), theCódigo de Águas Minerais(Mineral Water Code, Decree Law No. 7841/45), the National Water Resources Policy (Law No. 9433 / 97) and by regulations issued thereunder.  The companies that exploit water are supervised by theDepartamento Nacional de Produç*ã*o Mineira – DNPM(National Department of Mineral Production) and the National Water Agency in connection with federal health agencies, as well as state and municipal authorities.  In theJundiaíand BeloHorizonteplants, we do not exploit mineral water.  In theMogidasCruzesand Campo Grande plants, we have all the necessary permits related to the exploitation of mineral water. In Colombia, in addition to natural spring water, we obtain water directly from our own wells and from utility companies.  We are required to have a specific concession to exploit water from natural sources.  Water use in Colombia is regulated by law no. 9 of 1979 and decrees no. 1594 of 1984 and no. 2811 of 1974.  The National Institute of National Resources supervises companies that exploit water. In Nicaragua, the use of water is regulated by theLey General de Aguas Nacionales(National Water Law).  In Costa Rica, the use of water is regulated by theLey de Aguas(Water Law).  In both of these countries, we own and exploit our own water wells granted to us through governmental concessions.  In Guatemala, no license or permits are required to exploit water from the private wells in our own plants.  In Panama, we acquire water from a state water company, and the use of water is regulated by theReglamento de Uso de Aguas de Panamá(Panama Use of Water Regulation).  In Venezuela, we use private wells in addition to water provided by the municipalities, and we have taken the appropriate actions, including actions to comply with water regulations, to have water supply available from these sources, regulated by theLey de Aguas(Water Law). We cannot assure you that water will be available in sufficient quantities to meet our future production needs, that we will be able to maintain our current concessions or that additional regulations relating to water use will not be adopted in the future in our territories.  We believe we are in material compliance with the terms of our existing water concessions and that we are in compliance with all relevant water regulations. Environmental Matters In all of our territories, our operations are subject to federal and state laws and regulations relating to the protection of the environment.  In Mexico, the principal legislation is theLey General de Equilibrio Ecológico y Protección al Ambiente(the Federal General Law for Ecological Equilibrium and Environmental Protection) or the Mexican Environmental Law and theLey General para la Prevención y Gestión Integral de los Residuos(the General Law for the Prevention and Integral Management of Waste) which are enforced by theSecretaría del Medio Ambiente y Recursos Naturales(the Ministry of the Environment and Natural Resources, or SEMARNAT).  SEMARNAT can bring administrative and criminal proceedings against companies that violate environmental laws, and it also has the power to close non-complying facilities.  Under the Mexican Environmental Law, rules have been promulgated concerning water, air and noise pollution and hazardous substances.  In particular, Mexican environmental laws and regulations require that we file periodic reports with respect to air and water emissions and


hazardous wastes and set forth standards for waste water discharge that apply to our operations.  We are also subject to certain minimal restrictions on the operation of delivery trucks in Mexico City.  We have implemented several programs designed to facilitate compliance with air, waste, noise and energy standards established by current Mexican federal and state environmental laws, including a program that installs catalytic converters and liquid petroleum gas in delivery trucks for our operations in Mexico City.  See “—The Company—Total Sales Distribution.”  31


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In addition, we are subject to theLey de Aguas Nacionales(the Natural Waters Law), enforced by the Mexican National Water Commission.  Adopted in December 1992, the law provides that plants located in Mexico that use deep water wells to supply their water requirements must pay a fee to the city for the discharge of residual waste water to drainage.  Pursuant to this law, certain local authorities test the quality of the waste water discharge and charge plants an additional fee for measurements that exceed certain standards published by the Mexican National Water Commission.  All of our bottler plants located in Mexico have met these standards.  In addition, our plants in Apizaco and San Cristóbal are certified with ISO 14001.  See “—Description of Property, Plant and Equipment.” In our Mexican operations, we established a partnership with The Coca-Cola Company and ALPLA, a supplier of plastic bottles to us in Mexico, to createIndustria Mexicana de Reciclaje(IMER), a PET recycling facility located in Toluca, Mexico.  This facility started operations in 2005 and has a recycling capacity of approximately 25,000 metric tons per year from which 15,000 metric tons can be re-used in PET bottles for food packaging purposes.  We have also continued contributing funds to a nationwide recycling company, ECOCE, orEcologíayCompromiso Empresarial(Environmentally Committed Companies).  In addition, our plants located inToluca, Reyes,Cuautitlan,Apizaco, SanCristobal,Morelia,Ixtacomitanand Coatepec have received aCertificadodeIndustriaLimpia(Certificate of Clean Industry). As part of our environmental protection and sustainability strategies, in December 2009, we, jointly with strategic partners, entered into a wind energy supply agreement with a Mexican subsidiary of the Spanish wind farm developer, GAMESA Energía, S.A., or GAMESA, to supply green energy to our bottling facility in Toluca, Mexico, owned by our subsidiary, Propimex, S.A. de C.V., or Propimex, and to supply green energy to some of our suppliers of PET bottles.  The wind farm, which is located in La Ventosa, Oaxaca, is expected to generate approximately 100 thousand megawatt hours annually.  The energy supply services began in April 2010 and, during 2010, provided us with approximately 45 thousand megawatt hours. Additionally, several of our subsidiaries have entered into 20-year wind power supply agreements with Energía Alterna Istmeña, S. de R.L. de C.V., a company in which FEMSA indirectly holds a 45% interest,to receive electricity for use at our production and distribution facilities throughout Mexico. GAMESA sold its interest in the Mexican subsidiary that owned the wind farm to Iberdrola Renovables México, S.A. de C.V. The wind farms will be located in the state of Oaxaca and we expect that the wind power farms will begin operations in 2013.  Our Central American operations are subject to several federal and state laws and regulations relating to the protection of the environment, which have been enacted in the last ten years, as awareness has increased in this region about the protection of the environment and the disposal of hazardous and toxic materials, as well as water usage.  In some countries in Central America, we are in the process of bringing our operations into compliance with new environmental laws on the timeline established by the relevant regulatory authorities.  Our Costa Rica and Panama operations have participated in a joint effort along with the local division of The Coca-Cola Company,Misión Planeta(Mission Planet), for the collection and recycling of non-returnable plastic bottles. Our Colombian operations are subject to several Colombian federal, state and municipal laws and regulations related to the protection of the environment and the disposal of treated water and toxic and hazardous materials.  These laws include the control of atmospheric emissions, noise emissions, disposal of treated water and strict limitations on the use of chlorofluorocarbons.  For our plants in Colombia, we have obtained theCertificación Ambiental Fase IV(Phase IV Environmental Certificate) demonstrating our compliance at the highest level with relevant Colombian regulations. We are also engaged in nationwide campaigns for the collection and recycling of glass and plastic bottles as well as reforestation programs. Our Venezuelan operations are subject to several Venezuelan federal, state and municipal laws and regulations related to the protection of the environment.  The most relevant of these laws are theLey Orgánica del Ambiente(the Organic Environmental Law), theLey Sobre Sustancias, Materiales y Desechos Peligrosos(the


Substance, Material and Dangerous Waste Law), theLey Penal del Ambiente(the Criminal Environmental Law) and theLey de Aguas(the Water Law).  Since the enactment of the Organic Environmental Law in 1995, our Venezuelan subsidiary has presented the proper authorities with plans to bring our production facilities and distribution centers into compliance with applicable laws, which mainly consist of building or expanding the capacity of water treatment plants in our bottling facilities.  Even though we have had to adjust some of the originally proposed timelines due to construction delays, in 2009, we completed the construction and received all the required permits to operate a new water treatment plant in our bottling facility located in the city of Barcelona.  At the end of 2009, we also agreed with the relevant authorities to construct a water treatment plant in our Valencia plant within the next 18 months, and construction has begun.  We are also in the process of obtaining the necessary authorization and licenses before we can begin the construction of  two additional water treatment plants in Antimano and Maracaibo.  We expect that by the end of 2011, these three plants will be in operation.  We are also in process of obtaining the ISO 14000 certification for all of our plants in Venezuela.  32


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In addition, in December 2010, the Venezuelan government approved theLey Integral de Gestión de la Basura(Comprehensive Waste Management Law), which will regulate solid waste management and which may be applicable to manufacturers of products for mass consumption.  The full scope of this law has not yet been established. Our Brazilian operations are subject to several federal, state and municipal laws and regulations related to the protection of the environment.  Among the most relevant laws and regulations are those dealing with the emission of toxic and hazardous gases and disposal of wastewater and solid waste, which impose penalties, such as fines, facility closures or criminal charges depending upon the level of non-compliance. Our production plant located in Jundiaí has been recognized by the Brazilian authorities for its compliance with environmental regulations and for having standards well above those imposed by the law.  The plant has been certified for (i) ISO 9001 since March 1995; (ii) ISO 14001 since March 1997; (iii) norm OHSAS 18001 since 2005; and (iv) ISO 22000 since 2007.  In Brazil it is also necessary to obtain concessions from the government to cast drainage.  Our plants in Brazil have been granted this concession, except Mogi das Cruzes, where we have timely begun the process of obtaining one.  In December, 2010 we increased the capacity of the water treatment plant in ourJundiaí facility. In Brazil, a municipal regulation of the City of São Paulo, implemented pursuant to Law 13.316/2002, came into effect in May 2008.  This regulation requires us to collect for recycling a specified annual percentage of plastic bottles made from PET sold in the City of São Paulo; such percentage increases each year.  As of May 2009, we were required to collect for recycling 50% of the PET bottles sold in the City of São Paulo, as of May 2010, we were required to collect 75%, and as of May 2011, we were required to collect 90%.  Currently, we are not able to collect the entire required volume of PET bottles we sold in the City of São Paulo for recycling.  If we do not meet the requirements of this regulation, which we believe to be more onerous than those imposed by the countries with the highest recycling standards, we could be fined and be subject to other sanctions, such as the suspension of operations in any of our plants and/or distribution centers located in the City of São Paulo.  In May 2008, we and other bottlers in the City of São Paulo, through theAssociação Brasileira das Indústrias de Refrigerantes e de Bebidas Não-alcoólicas(Brazilian Soft Drink and Non-Alcoholic Beverage Association, or ABIR), filed a motion requesting a court to overturn this regulation due to the impossibility of compliance.  In October 2010 the municipal authority of São Paulo levied a fine on our Brazilian operating subsidiary of 250,000 Brazilian reais (approximately Ps. 1,750,000 as of December 31, 2010) on the grounds that the report submitted by our Brazilian operating subsidiary did not comply with the 75% proper disposal requirement for the period from May 2008 to May 2010.  We filed an appeal against this fine.  In addition, in November 2009, in response to a municipal authority request for us to demonstrate the destination of the PET bottles sold in São Paulo, we filed a motion presenting all of our recycling programs and requesting a more practical timeline to comply with the requirements of the law.  We are currently awaiting resolution of both matters.  In August 2010, Law No. 12.305/2010 established the Brazilian National Solid Waste Policy.  This policy is based on the principle of shared responsibility between the government, companies and the public, and provides for the post-consumption return of products to companies and requires public authorities to implement waste management programs.  This law is regulated by Federal Decree No. 7.404/2010, and was published in December


2010.  We are currently discussing with the relevant authorities the impact this law may have on Brazilian companies in complying with the regulation in effect in the City of São Paulo.  33


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Our Argentine operations are subject to federal and municipal laws and regulations relating to the protection of the environment.  The most significant of these are regulations concerning waste water discharge, which are enforced by theSecretaría de Ambiente y Desarrollo Sustentable(the Ministry of Natural Resources and Sustainable Development) and theOrganismo Provincial para el Desarrollo Sostenible(the Provincial Organization for Sustainable Development) for the province of Buenos Aires.  Our Alcorta plant is in compliance with environmental standards and we have been certified for ISO 14001:2004 for the plants and operative units in Buenos Aires. For all of our plant operations, we employ an environmental management system:Sistema de Administración Ambiental(Environmental Administration System, or EKOSYSTEM) that is contained within theSistema Integral de Calidad(Integral Quality System or SICKOF). We do not believe that our business activities pose a material risk to the environment, and we believe that we are in material compliance with all applicable environmental laws and regulations. We have expended, and may be required to expend in the future, funds for compliance with and remediation under local environmental laws and regulations.  Currently, we do not believe that such costs will have a material adverse effect on our results from operations or financial condition.  However, since environmental laws and regulations and their enforcement are becoming increasingly stringent in our territories, and there is increased recognition by local authorities of the need for higher environmental standards in the countries where we operate, changes in current regulations may result in an increase in costs, which may have an adverse effect on our future results from operations or financial condition.  Management is not aware of any significant pending regulatory changes that would require a significant amount of additional remedial capital expenditures. Other regulations In December 2009, the Venezuelan government issued a decree requiring a reduction in energy consumption by at least 20% for industrial companies whose consumption is greater than two megawatts per hour and to submit an energy-usage reduction plan.  Some of our bottling operations in Venezuela outside of Caracas met this threshold and we submitted a plan, which included the purchase of generators for our plants.  In January 2010, the Venezuelan government subsequently implemented power cuts and other measures for all industries in Caracas whose consumption was above 35 kilowatts per hour. In January 2010, the Venezuelan government amended theLey para la Defensa y Acceso a las Personas a los Bienes y Servicios(Access to Goods and Services Defense Law).  Any violation by a company that produces, distributes and sells goods and services could lead to fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation.  Although we believe we are in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes.   34


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BOTTLER AGREEMENTS

Coca-Cola Bottler Agreements Bottler agreements are the standard agreements for each territory that The Coca-Cola Company enters into with bottlers outside the United States.  Pursuant to our bottler agreements, we are authorized to manufacture, sell and distributeCoca-Colatrademark beverages within specific geographic areas, and we are required to purchase in some of our territories for allCoca-Colatrademark beverages concentrate from companies designated by The Coca-Cola Company and artificial sweeteners from companies authorized by The Coca-Cola Company. These bottler agreements also provide that we will purchase our entire requirement of concentrate forCoca-Colatrademark beverages from The Coca-Cola Company and other authorized suppliers at prices, terms of payment and on other terms and conditions of supply as determined from time to time by The Coca-Cola Company at its sole discretion.  Concentrate prices for sparkling beverages are determined as a percentage of the weighted average retail price in local currency, net of applicable taxes.  Although the price multipliers used to calculate the cost of concentrate and the currency of payment, among other terms, are set by The Coca-Cola Company at its sole discretion, we set the price of products sold to customers at our discretion, subject to the applicability of price restraints.  We have the exclusive right to distributeCoca-Colatrademark beverages for sale in our territories in authorized containers of the nature prescribed by the bottler agreements and currently used by our company.  These containers include various configurations of cans and returnable and non-returnable bottles made of glass and plastic and fountain containers. The bottler agreements include an acknowledgment by us that The Coca-Cola Company is the sole owner of the trademarks that identify theCoca-Colatrademark beverages and of the secret formulas with which The Coca-Cola Company’s concentrates are made.  Subject to our exclusive right to distributeCoca-Colatrademark beverages in our territories, The Coca-Cola Company reserves the right to import and exportCoca-Colatrademark beverages to and from each of our territories.  Our bottler agreements do not contain restrictions on The Coca-Cola Company’s ability to set the price of concentrates charged to our subsidiaries and do not impose minimum marketing obligations on The Coca-Cola Company.  The prices at which we purchase concentrates under the bottler agreements may vary materially from the prices we have historically paid.  However, under our bylaws and the shareholders agreement among certain subsidiaries of The Coca-Cola Company and certain subsidiaries of FEMSA, an adverse action by The Coca-Cola Company under any of the bottler agreements may result in a suspension of certain voting rights of the directors appointed by The Coca-Cola Company.  This provides us with limited protection against The Coca-Cola Company’s ability to raise concentrate prices to the extent that such increase is deemed detrimental to us pursuant to the shareholder agreement and the bylaws.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.” The Coca-Cola Company has the ability, at its sole discretion, to reformulate any of theCoca-Colatrademark beverages and to discontinue any of theCoca-Colatrademark beverages, subject to certain limitations, so long as allCoca-Colatrademark beverages are not discontinued.  The Coca-Cola Company may also introduce new beverages in our territories in which case we have a right of first refusal with respect to the manufacturing, packaging, distribution and sale of such new beverages subject to the same obligations as then exist with respect to theCoca-Colatrademark beverages under the bottler agreements.  The bottler agreements prohibit us from producing, bottling or handling beverages other thanCoca-Colatrademark beverages, or other products or packages that would imitate, infringe upon, or cause confusion with the products, trade dress, containers or trademarks of The Coca-Cola Company, except under the authority of, or with the consent of, The Coca-Cola Company. The bottler agreements also prohibit us from acquiring or holding an interest in a party that engages in such restricted activities.  The bottler agreements impose restrictions concerning the use of certain trademarks, authorized containers, packaging and labeling of The Coca-Cola Company so as to conform to policies prescribed by The Coca-Cola Company.  In particular, we are obligated to: ·maintain plant and equipment, staff and distribution facilities capable of manufacturing, packaging and distributing theCoca-Colatrademark beverages in authorized containers in accordance with our bottler agreements and in sufficient quantities to satisfy fully the demand in our territories;  35


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·undertake adequate quality control measures prescribed by The Coca-Cola Company; ·develop, stimulate and satisfy fully the demand forCoca-Colatrademark beverages using all approved means, which includes the investment in advertising and marketing plans; ·maintain a sound financial capacity as may be reasonably necessary to assure performance by us and our affiliates of our obligations to The Coca-Cola Company; and ·submit annually to The Coca-Cola Company our marketing, management, promotional and advertising plans for the ensuing year. The Coca-Cola Company contributed a significant portion of our total marketing expenses in our territories during 2010 and has reiterated its intention to continue providing such support as part of our cooperation framework.  Although we believe that The Coca-Cola Company will continue to provide funds for advertising and marketing, it is not obligated to do so.  Consequently, future levels of advertising and marketing support provided by The Coca-Cola Company may vary materially from the levels historically provided.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement” and “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—Cooperation Framework with The Coca-Cola Company.” We have separate bottler agreements with The Coca-Cola Company for each of the territories in which we operate, on substantially the same terms and conditions.  These bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew a specific agreement. In Mexico, we have four bottler agreements; the agreements for two territories expire in June 2013 and the agreements for the other two territories expire in May 2015.  Our bottler agreements with The Coca-Cola Company will expire for our territories in the following countries:  Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014. The bottler agreements are subject to termination by The Coca-Cola Company in the event of default by us.  The default provisions include limitations on the change in ownership or control of our company and the assignment or transfer of the bottler agreements and are designed to preclude any person not acceptable to The Coca-Cola Company from obtaining an assignment of a bottler agreement or from acquiring our company independently of other rights set forth in the shareholders agreement.  These provisions may prevent changes in our principal shareholders, including mergers or acquisitions involving sales or dispositions of our capital stock, which will involve an effective change of control, without the consent of The Coca-Cola Company.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.” We have also entered into tradename license agreements with The Coca-Cola Company pursuant to which we are authorized to use certain trademark names of The Coca-Cola Company with our corporate name.  These agreements have a ten-year term, but are terminated if we cease to manufacture, market, sell and distributeCoca-Colatrademark products pursuant to the bottler agreements or if the shareholders agreement is terminated.  The Coca-Cola Company also has the right to terminate a license agreement if we use its trademark names in a manner not authorized by the bottler agreements.  36


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DESCRIPTION OF PROPERTY, PLANT AND EQUIPMENT Over the past several years, we made significant capital investments to modernize our facilities and improve operating efficiency and productivity, including: ·increasing the annual capacity of our bottling plants by installing new production lines; ·installing clarification facilities to process different types of sweeteners; ·installing plastic bottle-blowing equipment; ·modifying equipment to increase flexibility to produce different presentations, including faster sanitation and changeover times on production lines; and ·closing obsolete production facilities. See “Item 5.  Operating and Financial Review and Prospects—Capital Expenditures.” As of December 31, 2010, we owned 30 bottling plants company-wide.  By country, we have nine bottling facilities in Mexico, five in Central America, six in Colombia, four in Venezuela, four in Brazil and two in Argentina. As of December 31, 2010, we operated 204 distribution centers, approximately 40% of which were in our Mexican territories.  We own more than 88% of these distribution centers and lease the remainder.  See “—The Company—Product Sales and Distribution.” We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions.  The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism, riot and losses incurred in connection with goods in transit.  In addition, we maintain an “all risk” liability insurance policy that covers product liability.  We purchase our insurance coverage through an insurance broker.  In most cases the policies are issued by Allianz México, S.A., Compañía de Seguros, and the coverage is partially reinsured in the international reinsurance market. The table below summarizes by country principal use, installed capacity and percentage utilization of our production facilities: Bottling Facility Summary
As of December 31, 2010  Country
     Installed Capacity (thousands of unit cases)
     % Utilization(1)Mexico
     1,651,786
     73%Guatemala
     35,909
     72%Nicaragua
     63,674
     55%Costa Rica
     85,194
     53%Panama
     41,428
     60%Colombia
     484,344
     50%Venezuela
     266,859
     76%Brazil
     630,276
     69%Argentina
     277,992
     67%
 
 (1)     Annualized rate.  37


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The table below summarizes by country plant location and facility area of our production facilities: Bottling Facility by Location
As of December 31, 2010 Country
     Plant
     Facility Area
(thousands of sq.meters)Mexico
     San Cristóbal de las Casas, Chiapas
     45Cuautitlán, Estado de México
     35Los Reyes la Paz, Estado de México
     50Toluca, Estado de México
     242León, Guanajuato
     124Morelia, Michoacán
     50Ixtacomitán, Tabasco
     117Apizaco, Tlaxcala
     80Coatepec, Veracruz
     142Guatemala
     Guatemala City
     47Nicaragua
     Managua
     54Costa Rica
     Calle Blancos (San José)
     52Coronado (San José)
     14Panama
     Panama City
     29Colombia
     Barranquilla
     37Bogotá
     105Bucaramanga
     26Cali
     76Manantial
     67Medellín
     47Venezuela
     Antímano
     15Barcelona
     141Maracaibo
     68Valencia
     100Brazil
     Campo Grande
     36Jundiaí
     191Mogi das Cruzes
     119Belo Horizonte
     73Argentina
     Alcorta
     73Monte Grande (Buenos Aires)
     32
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**SIGNIFICANTSUBSIDIARIES** The table below sets forth all of our direct and indirect significant subsidiaries and the percentage of equity of each subsidiary we owned directly or indirectly as of December 31, 2010: Name of Company
     Jurisdiction of Incorporation
     Percentage Owned
     DescriptionPropimex, S.A. de C.V..
     Mexico
     100.00%
     Manufacturer of bottles and distributor of bottled beverages.Refrescos Latinoamericanos S.A. de C.V.
     Mexico
     100.00%
     Holding company of manufacturers and distributors of beverages.Controladora Interamericana de Bebidas, S.A. de C.V.
     Mexico
     100.00%
     Holding company of manufacturers and distributors of beverages.Spal Industria Brasileira deBebidas,S.A.
     Brazil
     97.71%
     Manufacturer of cans and related products for bottling beverages.Coca-Cola FEMSA de Venezuela S.A. (formerly, Panamco Venezuela, S.A. de C.V.)
     Venezuela
     100.00%
     Manufacturer of bottles and related products for bottling beverages.Industria Nacional de Gaseosas S.A.
     Colombia
     100.00%
     Manufacturer of bottles and related products for bottling beverages.
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Item 4A.  Unresolved Staff Comments None.
Item 5.  Operating and Financial Review and Prospects
General
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements including the notes thereto.  Our consolidated financial statements were prepared in accordance with Mexican Financial Reporting Standards, which differ in certain respects from U.S. GAAP.  Notes 26 and 27 to our consolidated financial statements provide a description of the principal differences between Mexican Financial Reporting Standards and U.S. GAAP as they relate to us, together with a reconciliation to U.S. GAAP of net income and equity.
Average Price Per Unit Case.  We use average price per unit case to analyze average pricing trends in the different territories in which we operate.  We calculate average price per unit case by dividing net sales by total sales volume.  Sales of beer in Brazil, which are not included in our sales volumes, are excluded from this calculation.
Effects of Changes in Economic Conditions.  Our results from operations are affected by changes in economic conditions in Mexico and in the other countries in which we operate.  For the years ended December 31, 2010, 2009 and 2008, 37.5%, 35.8% and 40.7%, respectively, of our total revenues were attributable to Mexico.  In addition to Mexico, we also conduct operations in Central America, Colombia, Venezuela, Brazil and Argentina.
Our future results may be significantly affected by the general economic and financial conditions in the countries where we operate.  Decreases in economic growth rates, periods of negative growth, devaluation of local currencies, increases in inflation or interest rates and political developments may result in lower demand for our products, lower real pricing or a shift to lower margin products or lower margin presentations.
The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, further deterioration in economic conditions in, or delays in recovery of, the U.S. economy may hinder any recovery in Mexico.  In addition, an increase in interest rates in Mexico would increase our cost of Mexican peso-denominated variable interest rate indebtedness and would have an adverse effect on our financial condition.  Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of a portion of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars and thereby may negatively affect our financial condition.
Recent developments
In January 2010, the Venezuelan government announced a devaluation of its official exchange rate and the establishment of a multiple exchange rate system of:  (1) 2.60 bolivars to US$ 1.00 for high priority categories (2) 4.30 bolivars to US$ 1.00 for non-priority categories and (3) the recognition of the existence of other exchange rates which the government shall determine.  In January 2011, the Venezuelan government announced that its only official exchange rate effective as of January 1, 2011 is 4.30 bolivars to US$ 1.00, although the Venezuelan government continues to recognize the existence of other exchange rates that the government shall determine.
Beginning in 2012, Mexican issuers with securities listed with the CNBV will be required to prepare financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board (IASB).  Issuers may voluntarily report using IFRS before the change in the reporting standards becomes mandatory.   We will begin reporting under IFRS in 2012 with a December 31, 2012 adoption date and a comparative year transition date of January 1, 2011.
On February 18, 2011, our board of directors proposed an ordinary dividend of approximately Ps. 4,358 million.  This dividend was approved at the annual shareholders meeting held on March 23, 2011, paid on April 27, 2011, and represents an increase of 67.4% as compared to the dividend paid in April 2010.  40


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On March 28, 2011, we acquired together with The Coca-Cola Company, Grupo Estrella Azul, a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama.  We will continue to develop this business jointly with The Coca-Cola Company.  On April 18, 2011, we successfully issued two tranches ofCertificados Bursátiles – a five-year bond in the aggregate amount of Ps. 2,500 million at a yield of 28-day TIIE plus 13 basis points and a 10-year bond in the aggregate amount of Ps. 2,500 million at a fixed rate of 8.27%.  A portion of the proceeds from this placement will be used to pay our KOF-07 Certificado Bursátil at maturity in March 2012, in the amount of Ps. 3,000 million.  The remainder of the proceeds will be used for general corporate purposes, including capital expenditures and working capital.  Critical Accounting Estimates The preparation of our consolidated financial statements requires that we make estimates and assumptions that affect (1) the recorded amounts of our assets and liabilities, (2) the disclosure of our estimates of assets and contingent liabilities as of the date of the financial statements and (3) the recorded amounts of revenues and expenses during the reporting period.  We base our estimates and judgments on our historical experience and on various other reasonable factors, which together form the basis for making judgments about the carrying values of our assets and liabilities.  Our actual conclusions may differ from these estimates under different assumptions or conditions.  We evaluate our estimates and judgments on an on‐going basis.  Our significant accounting policies are described in Note 4 to our consolidated financial statements.  We believe our most critical accounting policies that imply the application of estimates and/or judgments are:  Allowance for Doubtful Accounts.We determine our allowance for doubtful accounts based on an evaluation of the aging of our receivables portfolio.  The amount of the allowance is based on an analysis of recoverability of each balance.  Most of our sales, however, are realized on a cash basis and consequently do not give rise to doubtful accounts.  Returnable and Non-Returnable Bottles and Cases.We have two types of bottles and cases: returnable and non-returnable.Non returnable bottles and cases are recorded in the results from operations at the time of product sale; returnable bottles and cases are classified as long-lived assets as a component of property, plant and equipment.  Returnable bottles and cases are recorded at acquisition cost for countries with an inflationary economy, then restated applying inflation factors as of the balance sheet date, according to NIF B-10.  There are also two types of returnable bottles and cases:  (1) those that are in our control within our facilities, plants and distribution centers; and (2) those that have been placed in the hands of customers, but still belong to our Company.  Depreciation of returnable bottles and cases is computed using the straight line method over acquisition cost.  We estimate depreciation rates, considering their estimated useful lives.  Estimated useful life for returnable glass bottles and plastic cases in plants and distribution centers is four years, and 18 months for returnable plastic bottles.  Estimated useful life for returnable bottles and plastic cases that have been placed in the hands of customers is 24 months for glass bottles and 12 months for plastic bottles.  Our returnable bottles and cases in the market and for which a deposit from customers has been received are presented net of such deposits, and the difference between the cost of these assets and the deposits received is depreciated according to their useful lives.  Property, Plant and Equipment and Other Assets.We depreciate and amortize property, plant and equipment and other assets over their useful lives.  The estimated useful lives represent the period we expect the assets to remain in service and to generate revenues.  We base our estimates on the experience of our technical personnel.Depreciation and amortization are computed using the straight-line method.  Valuation of Intangible Assets.Our intangible assets mainly consist of rights to produce and distributeCoca-Colatrademark products in our territories, recognized at their fair value at the date of acquisition, in accordance with Mexican Financial Reporting Standards.  We separate intangible assets between those with a finite useful life and those with an indefinite useful life, in accordance with the period over which we expect to receive the benefits.  41


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We value at fair value all assets and liabilities as of the date of acquisition and we conduct an analysis of the excess purchase price over the fair value of the net assets.  This analysis results in the recognition of an intangible asset with indefinite life for the right to produce and distributeCoca‐Colatrademark beverages, which are subject to annual impairment tests under Mexican Financial Reporting Standards.  Intangible assets are recorded in the functional currency of the subsidiary in which the investment was made and are subsequently translated into Mexican pesos applying the closing exchange rate of each period.  Beginning in 2008, for operations in an inflationary economic environment the intangible assets are restated by applying inflation factors of the country of origin and are translated into Mexican pesos at the year-end exchange rate.  Through 2007, the intangible assets with indefinite lives were restated by applying inflation factors of the country of origin, regardless of the economic environment, and were translated at the year-end exchange rate.  Intangible assets with indefinite life are no longer subject to amortization, but instead are subject to an initial impairment review and subsequent impairment test.  Historically, our bottler agreements have been renewed, and we have not experienced any significant termination of our bottler agreements.  All of our bottler agreements provide for renewal at no cost and without any change in their terms and conditions.  We also do not believe that any law or regulation could oppose or otherwise adversely affect the renewal of such agreements.  Impairment of Intangible Assets (with indefinite and definitive lives) and Long-Lived Assets.  We continually review the carrying value of our intangible assets and long-lived assets for accuracy.  We review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on our projections of anticipated future cash flows.  While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.  This test is performed annually or more frequently if deemed necessary.  Our evaluations indicate that no significant impairment of intangible assets or long-lived assets has been required.  We can give no assurance that our expectations will not change as a result of new information or developments.  Changes in economic or political conditions in all the countries in which we operate or in the industries in which we participate, however, may cause us to change our current assessment.  Labor Liabilities.Our labor liabilities include obligations for pension and retirement plans, seniority premiums and severance payments from causes other than restructuring.  Labor liabilities are determined using long-term assumptions.  We evaluate our assumptions at least annually.  Those assumptions include the discount rate, expected long-term rate of return on plan assets, rates of increase in compensation costs and certain employee-related factors, such as turnover, retirement age and mortality rate.  The assumptions include the economic risks existing in the countries in which our business operates.  In accordance with Mexican Financial Reporting Standards, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expenses and recorded obligations in such future periods.  While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our labor obligations and our future expense.   42


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The following table is a summary of the three key assumptions used in determining 2010 annual labor cost, along with the impact on pension cost of a 1% change in each assumed rate: Assumption
     2010 real rates for inflationary countries(1)
     2010 nominal rates for noninflationary countries(1)
     Impact of 1% change
(millions)(2)Annual discount rate
     1.5% - 2.6%
     5.5% - 9.7%
     + Ps. (162)- Ps.  210Salary increase
     1.5%
     4.0% - 6.5%
     + Ps.  168- Ps.  114Estimated return on plan assets
     0.5%(3)
     7.0% - 11.2%(3)
     + Ps.  86
 
 (1)     Calculated using a measurement date of December 2010. (2)     “+” indicates an increase of 1%; “-” indicates a decrease of 1%. (3)     Not applicable for Colombia and Guatemala. The total period cost related to the pension plan is recorded as an operating expense. Deferred Income Taxes – Valuation Allowance.We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities.  We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences.  If these estimates and related assumptions change in the future, we may be required to adjust valuation allowances. Tax, Legal and Labor Contingencies.We are subject to various claims and contingencies related to tax, labor and other legal proceedings.  Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions.  Management periodically assesses the probability of loss for such contingencies and accrues a liability and/or discloses the applicable relevant circumstances, as appropriate.  We accrue a liability for the estimated loss in accordance with accounting rules. New Accounting Pronouncements Presented below is a summary of recently issued accounting pronouncements. Mexican Financial Reporting Standards. NIF C-4, “Inventories.”In November 2010, theConsejo Mexicano de Normas de Información Financiera, A.C., or the CINIF, issued NIF C-4, which will be effective for fiscal years beginning on or after January 1, 2011 and will replace Mexican accounting Bulletin C-4, “Inventories.”  Any accounting changes resulting from the adoption of this standard related to changes in the formula for assigning inventory costs are to be recognized retrospectively.  Changes in valuation methods must be recognized prospectively. The principal difference between Mexican accounting Bulletin C-4 and NIF C-4 is that the new standard does not allow using direct costs as the inventory valuation method nor does it allow the usage of the LIFO cost method as the formulas (under the former method) for the assignment of unit cost to the inventories.  Mexican NIF C-4 establishes that inventories must be valued at the lower of either acquisition cost or net realizable value and that advances to suppliers for the acquisition of merchandise must be classified as inventories provided that the risks and benefits are transferred to the Company.  NIF C-4 also establishes the standards for service supplier inventory valuations. We have estimated that the adoption of NIF C-4 will not have a material impact on our consolidated financial statements.  43


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NIF C-5, “Prepaid Expenses.”In November 2010, the CINIF issued NIF C-5, which will be effective for fiscal years beginning on or after January 1, 2011.  NIF C-5 will replace Mexican accounting Bulletin B-5.  Any accounting changes resulting from the adoption of this standard shall be recognized retrospectively. This standard establishes that the main characteristic of prepaid expenses is that they do not result in the transfer to the entity of the benefits and risks inherent to the goods or services to be received.  Consequently, prepaid expenses must be recognized in the balance sheet as either current or non-current assets, depending on the item classification in the statement of financial position.  Moreover, NIF C-5 establishes that prepaid expenses made for goods or services whose inherent benefits and risks have already been transferred to the entity must be carried to the appropriate caption. We have estimated that the adoption of NIF C-5 will not have a material impact on our consolidated financial statements. NIF C-6, “Property, Plant and Equipment.”NIF C-6 was issued by the CINIF in December 2010 to replace Mexican accounting Bulletin C-6, “Property, Machinery and Equipment,” and will be effective for fiscal years beginning on or after January 1, 2011, except for the changes related to the segregation of property, plant and equipment into separate components for those assets with different useful lives.  For entities that have not performed this component segregation, the provisions of this new standard will be effective as of January 1, 2012. Unlike Mexican accounting Bulletin C-6, this standard includes within its scope the tax treatment for assets acquired to develop or maintain biological assets and assets related to the mining industry.  Among other elements, it establishes that for acquisitions of free-of charge assets, the cost of the assets must be zero, thus eliminating the option of performing appraisals.  In the case of asset exchanges, NIF C-6 requires entities to determine the commercial substance of the transaction and the depreciation of these assets must be applied against the components of the assets, and the amount to be depreciated is the cost of acquisition less the asset’s residual value.  Prepaid expenses for the acquisition of assets are to be recognized as a component of the asset as of the time the benefits and risks inherent to such assets are transferred.  In the case of retirement of assets, income is recognized when the requirements for income recognition outlined under the standard have been met.  There are also specific disclosures required for public entities. We have estimated that the adoption of NIF C-6 will not have a material impact on our consolidated financial statements. NIF C-18, “Obligations related to retirement of property, plant and equipment.”In December 2010, the CINIF issued NIF C-18, which will be effective for fiscal years beginning on or after January 1, 2011. This standard establishes the accounting treatment for the initial and subsequent recognition of a liability for provision for legal obligations or assumed related to the retirement of property, plant and equipment recognized as a result of the acquisition, construction, development and/or normal operating of such components. This standard also establishes that an entity must initially recognize a provision for obligations related to retirement of property, plant and equipment based on its best estimate of the disbursements required to settle the present obligation at the time it is assumed, provided a reliable estimate can be made of the amount of the obligation.  The best estimate of a provision for an obligation associated with the retirement of property, plant and equipment components should be determined using the expected present value method. We have estimated that the adoption of NIF C-18 will not have a material impact on our consolidated financial statements. U.S. GAAP.  There are no significant new accounting standards effective in year 2011 impacting the Company.  44


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Results from Operations The following table sets forth our consolidated income statement for the years ended December 31, 2010, 2009 and 2008. Year Ended December 31,2010(1)
     
     2010
     
     2009
     
     2008(2010, 2009 and 2008 in millions of Mexican pesos or millions of U.S. dollars)Revenues:Net sales
     US$
     8,317
     
     Ps.
     102,988
     
     Ps.
     102,229
     
     Ps.
     82,468Other operating revenues
     
     38
     
     
     468
     
     
     538
     
     
     508Total revenues
     
     8,355
     
     
     103,456
     
     
     102,767
     
     
     82,976Cost of good sold
     
     4,485
     
     
     55,534
     
     
     54,952
     
     
     43,895Gross profit
     
     3,870
     
     
     47,922
     
     
     47,815
     
     
     39,081Operating expenses:Administrative
     
     359
     
     
     4,449
     
     
     5,308
     
     
     4,095Selling
     
     2,132
     
     
     26,394
     
     
     26,672
     
     
     21,2912,491
     
     
     30,843
     
     
     31,980
     
     
     25,386Income from operations
     
     1,379
     
     
     17,079
     
     
     15,835
     
     
     13,695Other expenses, net
     
     104
     
     
     1,292
     
     
     1,449
     
     
     1,831Comprehensive financing result:Interest expense
     
     141
     
     
     1,748
     
     
     1,895
     
     
     2,207Interest income
     
     (23)
     
     
     (285)
     
     
     (286)
     
     
     (433)Foreign exchange loss
     
     34
     
     
     423
     
     
     370
     
     
     1,477Gain on monetary position in inflationary subsidiaries
     
     (33)
     
     
     (414)
     
     
     (488)
     
     
     (658)Market value (gain) loss on ineffective portion of derivative financial instruments
     
     (20)
     
     
     (244)
     
     
     (118)
     
     
     95999
     
     
     1,228
     
     
     1,373
     
     
     3,552Income before income taxes
     
     1,176
     
     
     14,559
     
     
     13,013
     
     
     8,312Income taxes
     
     344
     
     
     4,260
     
     
     4,043
     
     
     2,486Consolidated net income
     US$
     832
     
     Ps.
     10,299
     
     Ps.
     8,970
     
     Ps.
     5,826Controlling interest net income
     
     791
     
     
     9,800
     
     
     8,523
     
     
     5,598Non-controlling interest net income
     
     41
     
     
     499
     
     
     447
     
     
     228Consolidated net income
     US$
     832
     
     Ps.
     10,299
     
     Ps.
     8,970
     
     
     Ps. 5,826Netcontrollingincome(U.S. dollars and Mexican pesos):Data per share
     US$
     0.43
     
     Ps.
     5.31
     
     Ps.
     4.62
     
     Ps.
     3.03
 
 (1)     Translation to U.S. dollar amounts at an exchange rate of Ps. 12.3825 per US$ 1.00 solely for the convenience of the reader.   45


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Operations by Reportable Segment The following table sets forth certain financial information for each of our reportable segments for the years ended December 31, 2010, 2009 and 2008.  See Note 25 to our consolidated financial statements for additional information by reporting segment. Year Ended December 31,2010
     
     2009
     
     2008(2010, 2009 and 2008 in millions of Mexican pesos)Total revenuesMexico
     Ps.
     38,782
     
     Ps.
     36,785
     
     Ps.
     33,799Latincentro(1)
     
     17,281
     
     
     15,993
     
     
     12,791Venezuela
     
     14,033
     
     
     22,430
     
     
     15,182Mercosur(2)
     
     33,360
     
     
     27,559
     
     
     21,204Gross profitMexico
     Ps.
     19,049
     
     Ps.
     18,389
     
     Ps.
     17,315Latincentro(1)
     
     8,126
     
     
     7,690
     
     
     6,057Venezuela
     
     6,472
     
     
     9,950
     
     
     6,294Mercosur(2)
     
     14,275
     
     
     11,786
     
     
     9,415Income from operationsMexico
     Ps.
     6,605
     
     Ps.
     6,849
     
     Ps.
     6,715Latincentro(1)
     
     3,022
     
     
     2,937
     
     
     2,370Venezuela
     
     2,444
     
     
     1,815
     
     
     1,289Mercosur(2)
     
     5,008
     
     
     4,234
     
     
     3,321
 
 (1)     Includes Guatemala, Nicaragua, Costa Rica, Panama and Colombia. (2)     Includes Brazil and Argentina.  Results from Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009 Consolidated Results from Operations  Total Revenues.Consolidated total revenues increased 0.7% to Ps. 103,456 million in 2010, as compared to 2009, as a result of revenue growth in our Mercosur and Mexico divisions and despite the devaluation of the Venezuelan bolivar.  On a currency neutral basis and excluding the acquisition of Brisa in Colombia, our consolidated revenues for 2010 increased by approximately 15%.  Total sales volume increased 2.9% to 2,499.5 million unit cases in 2010, as compared to 2009.  The sparkling beverage category, driven by a 4% growth of theCoca-Colabrand, contributed more than 70% of incremental volumes. The still beverage category, mainly driven by the performance of theJugos del Valleline of business across our territories, grew 11% and accounted for approximately 20% of incremental volumes. The consolidation of theBrisawater brand in Colombia drove an 8% growth in our bottled water portfolio and represented the balance. Excluding the non-comparable effect of Brisa, total sales volume increased 2.1% to reach 2,479.6 million unit cases.  Consolidated average price per unit case declined 2.6%, reaching Ps. 39.89 in 2010, as compared to Ps. 40.95 in 2009 as a consequence of the devaluation of the Venezuelan bolivar. In local currency, average price per unit case increased in all of our territories mainly driven by price increases implemented during the year and higher volumes of sparkling beverages, which carry higher average price per unit case.  46


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Gross Profit.Gross profit increased 0.2% to Ps. 47,922 million in 2010, as compared to 2009, despite the devaluation of the Venezuelan bolivar. Cost of goods sold increased 1.1% as a result of increases in the cost of sweetener across our operations, which was partially offset by the appreciation of the Brazilian real, the Colombian peso and the Mexican peso as applied to our U.S. dollar-denominated raw material costs.  Gross margin reached 46.3% for 2010, a decrease of 20 basis points as compared to 2009.  The components of cost of goods sold include raw materials (principally soft drink concentrate and sweeteners), packaging materials, depreciation costs attributable to our production facilities, wages and other employment costs associated with the labor force employed at our production facilities and certain overhead costs. Concentrate prices are determined as a percentage of the retail price of our products in local currency net of applicable taxes. Packaging materials, mainly PET and aluminum, and high fructose corn syrup, used as a sweetener in some countries, are denominated in U.S. dollars.  Operating Expenses.Consolidated operating expenses as a percentage of total revenues decreased to 29.8% in 2010 from 31.1% in 2009. Operating expensesin absolute terms decreased 3.6%, mainly as a result of the devaluation of the Venezuelan bolivar.  In local currency, operatingexpenses increased mainly as a result of (i) continued marketing investment in our Mexico division to support our execution in themarketplace, widen our cooler coverage and broaden our returnable base availability, (ii) higher labor and freight costs in Argentina,and (iii) higher labor costs in Venezuela.  Income from Operations.Our consolidated operating income increased 7.9% to Ps. 17,079 million in 2010, as compared to 2009. Our Mercosur division and Venezuelaaccounted for more than 90% of incremental operating income in 2010, while Colombia and Central America represented thebalance. These increases compensated for an operating income decline in our Mexico division. Our operating margin was 16.5% in2010, an expansion of 110 basis points as compared to 2009.  Other Expenses, Net.During 2010, we recorded Ps. 1,292 million in other expenses, net. These expenses were mainly composed of employee profit sharingand the loss on sale of certain fixed assets.  Comprehensive Financing Result.The term “comprehensive financing result” refers to the combined financial effects of net interest expense, net foreign exchange gains or losses, and net gains or losses on monetary position from our countries which qualify as inflationary economies.  Net foreign exchange gains or losses represent the impact of changes in foreign-exchange rates on assets or liabilities denominated in currencies other than local currencies and gains or losses resulting from derivative financial instruments.  A foreign exchange loss arises if a liability is denominated in a foreign currency that appreciates relative to the local currency between the date the liability is incurred or the beginning of the period, whichever comes first, and the date it is repaid or the end of the period, whichever comes first, as the appreciation of the foreign currency results in an increase in the amount of local currency, which must be exchanged to repay the specified amount of the foreign currency liability.  Comprehensive financing results in 2010 recorded an expense of Ps. 1,228 million, as compared to an expense of Ps. 1,373 million in2009, mainly due to lower net interest cost.  Income Taxes.Income taxes increased to Ps. 4,260 million in 2010 from Ps. 4,043 million in 2009. During 2010, taxes as a percentage of income beforetaxes were 29.3% as compared to 31.1% in the previous year.  Controlling Interest Net Income.Consolidated controlling interest net income increased 15.0% to Ps. 9,800 million in 2010 as compared to 2009, mainly as a result ofhigher operating income. Earnings per share (EPS) in 2010 was Ps. 5.31 (Ps. 53.07 per ADS) computed on the basis of 1,846.5 millionshares outstanding (each ADS represents 10 local shares).  Consolidated Results from Operations by Reporting Segment  Mexico   47


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Total Revenues.Total revenues from our Mexico division increased 5.4% to Ps. 38,782 million in 2010, as compared to 2009. Higher average price perunit case accounted for close to 80% of the incremental revenues during this period. Average price per unit case increased to Ps. 31.12,a 4.2% increase, as compared to 2009, mainly reflecting selective price increases implemented during the year, higher volumes fromtheCoca-Colabrand, which carries higher average prices per unit case and, to a lesser extent, higher average prices per unit casefrom our growing still beverage portfolio.Excluding bulk water under theCielbrand, our average price per unit case was Ps. 36.06, a3.4% increase, as compared to 2009.  Total sales volume increased 1.2% to 1,242.3 million unit cases in 2010, as compared to 1,227.2 million unit cases in 2009, resulting from incremental volume of theCoca-Colabrand, that grew by close to 3%, and an increase of close to 5% in the still beverage category, mainly driven by theJugos del Valleproduct line andNestea, our ready-to-drink tea line.  These increases more than compensated for a 4% decline in the bulk water category.  Operating Income.Gross profit increased 3.6% to Ps. 19,049 million in 2010, as compared to 2009. Cost of goods sold increased 7.3% mainly as a resultof higher sweetener and PET costs, which were partially offset by the appreciation of the Mexican peso as applied to our U.S.dollar-denominated raw material costs. Gross margin decreased from 50.0% in 2009 to 49.1% in 2010.  Operating income decreased 3.6% to Ps. 6,605 million in 2010, compared to Ps. 6,849 million in 2009. Operating expenses grew 7.8%mainly due to continued marketing investment to support our execution in the marketplace, widen our cooler coverage and broadenour returnable base availability. Our operating margin was 17.0% in 2010, a decrease of 160 basis points as compared to 2009, mainlydue to gross margin pressures.  Latincentro (excluding Venezuela)  Total Revenues.Total revenues for Colombia and Central America were Ps. 17,281 million in 2010, an increase of 8.1% as compared to 2009.  Higheraverage price per unit case contributed almost 55% of incremental revenues during this period.  Consolidated average price per unitcase for Colombia and Central America was Ps. 45.30 in 2010, representing a 4.2% increase as compared to 2009.  On a currency neutralbasis and excluding the acquisition of Brisa, our Colombian and Central American revenues increased by approximately 6%.  Total sales volume for Colombia and Central America increased 3.6% to 381.3 million unit cases in 2010 resulting from (i) a 23% increase in our bottled water business, mainly due to the integration of Brisa in Colombia, accounting for approximately 80% of incremental volumes, (ii) incremental volumes in sparkling beverages, driven by theCoca-Colabrand, which grew 1%, representing approximately 10% of the growth of our total sales volume and (iii) an increase of 4% in the still beverage category, mainly driven by theJugos del Valleproduct line, contributing the balance. These increases more than compensated for a decline in flavored sparkling beverages volumes.  Operating Income.Gross profit was Ps. 8,126 million, an increase of 5.7% in 2010, as compared to 2009. Cost of goods sold increased 10.3%, mainly as aresult of higher sweetener costs in the region, which were partially offset by the appreciation of certain local currencies as appliedto our U.S. dollar-denominated raw material costs. Gross margin decreased from 48.1% in 2009 to 47.0% in 2010, a decrease of110 basis points.  Our operating income increased 2.9% to Ps. 3,022 million in 2010, compared to the previous year. Operating expenses grew 7.4% mainly due to the integration of theBrisaportfolio in Colombia and the continued expansion of the Jugos del Valle line of business in Colombia and Central America during the first half of 2010. Our operating margin reached 17.5% in 2010, resulting in a 90 basis points decline as compared to 2009.  Venezuela  Total Revenues.Total revenues in Venezuela reached Ps. 14,033 million in 2010, a decline of 37.4% as compared to 2009, due principally to the devaluationof the Venezuelan bolivar.  Average price per unit case was Ps. 66.41 in 2010, representing a decrease of 33.2% as compared to2009.  In local currency, higher average price per unit case accounted for incremental revenues during the year.  On a currency neutralbasis, our revenues in Venezuela increased by approximately 32%.  48


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Total sales volume decreased 6.3% to 211.0 million unit cases in 2010, as compared to 225.2 million unit cases in 2009.  The sales volume in the sparkling beverages and still beverages categories declined approximately 7% and 3%, respectively, while sales volume in the bottled water category, including bulk water, remained flat.  Operating Income.Gross profit was Ps. 6,472 million in 2010, a decrease of 35.0% compared to 2009, principally due to the devaluation of the Venezuelanbolivar. Cost of goods sold decreased 39.4%.  In local currency, cost of goods sold increased mainly due to higher sweetenercosts. Gross margin increased from 44.4% in 2009 to 46.1% in 2010, an expansion of 170 basis points.  Operating income increased 34.7% to Ps. 2,444 million in 2010 compared to the previous year. Operating expenses declined 50.5%,principally due to the devaluation of the Venezuelan bolivar.   In local currency, higher labor costs were partially offset by lowermarketing and administrative expenses.  Operating margin was 17.4% in 2010, as compared to 8.1% in 2009.  Mercosur  Total Revenues.Total revenues increased 21.0% to Ps. 33,360 million in 2010, as compared to 2009. Excluding beer sales, which accounted for Ps. 3,313million during 2010, total revenues increased 21.3% to Ps. 30,047 million compared to 2009. Higher average price per unit case accountedfor approximately 55% of incremental revenues, excluding beer. On a currency neutral basis, revenues for 2010 increased byapproximately 19%.  Sales volume, excluding beer, increased 9.3% to 664.9 million unit cases in 2010, as compared to 2009. The sparkling beverage category grew 8%, mainly driven by a 9% increase in theCoca-Colabrand, accounting for close to 80% of incremental volumes. The still beverage category grew 41%, mainly driven by theJugos del Valleline of products in Brazil and volumes ofAquarius,our flavored water brand in Argentina, contributing more than 15% of incremental volumes. The bottled water category grew 13%, representing the balance.  Operating Income.In 2010, gross profit increased 21.1% to Ps. 14,275 million, as compared to the previous year. Cost of goods sold increased 21.0%,mainly due to higher cost of sweetener in the division and higher cost of PET in Argentina, which was partially offset by the appreciation of the Brazilian real as applied to our U.S. dollar-denominated raw material cost. Gross margin remained flat at42.8% in 2010.  Operating income increased 18.3% to Ps. 5,008 million in 2010, as compared to Ps. 4,234 million in 2009. Operating expenses grew 22.7% mainly due to higher labor and freight costs in Argentina. Operating margin was 15.0% in 2010, a decrease of 40 basis points as compared to 2009.  Results from Operations for the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008 Consolidated Results from Operations Total Revenues.Consolidated total revenues increased 23.9% to Ps. 102,767 million in 2009, as compared to 2008, as a result of revenue growth in all of our divisions. Organic growth across our operations contributed more than 75% of incremental revenues; the acquisitions of REMIL in Brazil and the Brisa water business in Colombia together contributed slightly less than 15% and a positive exchange rate translation effect, resulting from the depreciation of the Mexican peso against the local currencies in the other countries where we operate, accounted for approximately 10%, representing the balance.  For comparison purposes, REMIL was first included in our operating results beginning June 1, 2008.  REMIL was included as an acquisition during the months of January through May 2009.  Brisa has been included in our operating results for Colombia, the Latincentro division and on a consolidated basis beginning June 1, 2009.  On a currency neutral basis and excluding the acquisitions of REMIL and Brisa, our consolidated revenues for 2009 would have increased by approximately 19%. Total sales volume increased 8.3% to 2,428.6 million unit cases in 2009, as compared to 2008. Excluding the acquisitions of REMIL and Brisa, total sales volume increased 5.1% to reach 2,357.0 million unit cases. Organic


volume growth was a result of (1) growth in sparkling beverages, driven by a 4% increase in theCoca-Colabrand across our territories, accounting for approximately 45% of incremental volumes, (2) growth in the still beverage category, mainly driven by theJugos del Valleline of products in our operations in Mexico and Colombia, contributing less than 45% of incremental volumes and (3) a 4% increase in our bottled water category, representing the balance.  49


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Consolidated average price per unit case grew 13.9%, reaching Ps. 40.95 in 2009, as compared to Ps. 35.94 in 2008.  The increase in consolidated average price per unit case resulted from price increases implemented across our territories and higher volumes of sparkling beverages, which carry higher average price per unit case. Gross Profit.Gross profit increased 22.3% to Ps. 47,815 million in 2009, as compared to 2008, driven by gross profit growth across all of our divisions. Cost of goods sold increased 25.2% as a result of (1) the devaluation of local currencies in our operations in Mexico, Colombia and Brazil as applied to our U.S. dollar-denominated raw material costs, (2) the higher cost of sweetener across our operations, (3) the integration of REMIL and (4) the third and final stage of the scheduled Coca-Cola Company concentrate price increase announced in 2006 in Mexico, all of which were partially offset by lower resin costs.  Gross margin reached 46.5% in 2009, a decrease of 60 basis points as compared to 2008. Operating Expenses.Consolidated operating expenses as a percentage of total revenues increased to 31.1% in 2009 from 30.6% in 2008.  Operating expenses in absolute terms increased 26.0% mainly as a result of (1) higher labor costs in Venezuela, (2) increased marketing investments in the Mexico division to support execution in the marketplace, widen our cooler coverage and increase our returnable base, (3) the integration of REMIL in Brazil and (4) increased marketing expenses in the Latincentro division mainly due to the integration of theBrisaportfolio in Colombia and the continued expansion of theJugos del Valleline of products in Colombia and Central America. Income from Operations.  Consolidated operating income increased 15.6% to Ps. 15,835 million in 2009, as compared to 2008.  Increases in operating income from our Latincentro division, including Venezuela, accounted for approximately 50% of this growth, while operating income growth in our Mercosur division accounted for more than 40% of incremental operating income.  Our operating margin was 15.4% in 2009, a decline of 110 basis points as compared to 2008. Other Expenses, Net.During 2009, we recorded Ps. 1,449 million in other expenses.  These expenses were mainly composed of employee profit sharing and the loss on the sale of certain fixed assets. Comprehensive Financing Result.Comprehensive financing result in 2009 recorded an expense of Ps. 1,373 million, as compared to an expense of Ps. 3,552 million in 2008, mainly due to the appreciation of the Mexican peso as applied to a lower U.S. dollar-denominated net debt position and lower interest expenses due to lower gross debt. Income Taxes.Income taxes increased to Ps. 4,043 million in 2009 from Ps. 2,486 million in 2008.  During 2009, taxes as a percentage of income before taxes were 31.1% as compared to 29.9% in the previous year.The difference in the effective tax rate was mainly due tothe reversal of a tax allowance during 2008 recorded in previous periods. Controlling Interest Net Income.Consolidated net controlling interest income (previously referred to as “majority net income” under Mexican Financial Reporting Standards) was Ps. 8,523 million in 2009, an increase of 52.3% compared to 2008, mainly reflecting higher operating income in combination with a more favorable comprehensive financing result.  Net controlling interest earnings per share, or EPS, was Ps. 4.62 (Ps. 46.16 per ADS) in 2009, computed on the basis of 1,846.5 million shares outstanding (each ADS represents 10 local shares).  50


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Consolidated Results from Operations by Reporting Segment Mexico

Total Revenues.Total revenues from our Mexico division increased 8.8% to Ps. 36,785 million in 2009, as compared to 2008.  Incremental volumes accounted for close to 80% of incremental revenues during this period.  Average price per unit case increased to Ps. 29.86, a 1.9% increase, as compared to 2008, mainly reflecting higher volumes from theCoca-Colabrand, which carries higher average prices per unit case, higher average prices per unit case from our growing still beverage portfolio and selective price increases implemented during the fourth quarter of 2009.  Excluding bulk water under theCielbrand, our average price per unit case was Ps. 34.89, a 1.7% increase, as compared to 2008.

Total sales volume increased 6.8% to 1,227.2 million unit cases in 2009, as compared to 1,149.0 million unit cases in 2008, resulting from (1) incremental volumes of theCoca-Colabrand, that grew more than 6%, (2) an increase of more than 80% in the still beverage category, driven by theJugos del Valleproduct line and (3) more than 6% volume growth in our bottled water business, including bulk water.

Operating Income.Gross profit increased 6.2% to Ps. 18,389 million in 2009, as compared to 2008.  Cost of goods sold increased 11.6% mainly as a result of (1) the devaluation of the Mexican peso as applied to our U.S. dollar-denominated raw material costs, (2) the third and final stage of the scheduled Coca-Cola Company concentrate price increase and (3) higher sweetener costs, all of which were partially offset by lower resin costs.  Gross margin decreased from 51.2% in 2008 to 50.0% in 2009.

Operating income increased 2.0% to Ps. 6,849 million in 2009, compared to Ps. 6,715 million in 2008. Operating expenses grew 8.9% as a result of increased marketing investment to support our execution in the marketplace and higher selling expenses, mainly due to the integration of the specialized Jugos del Valle sales force and the development of the jug water business in the Valley of Mexico during the first half of 2009.  Our operating margin was 18.6% in 2009, a decrease of 130 basis points as compared to 2008, mainly due to gross margin pressures.

Latincentro (excluding Venezuela) Total Revenues.Total revenues for Colombia and Central America were Ps. 15,993 million in 2009, an increase of 25.0% as compared to 2008.  Higher average price per unit case and volume growth each contributed equally to incremental revenues during this period.  Consolidated average price per unit case for Colombia and Central America was Ps. 43.47 in 2009, representing a 12.5% increase as compared to 2008.  Organic growth across our operations contributed more than 45% of incremental revenues, a positive currency translation effect, resulting from the depreciation of the Mexican peso against our operation’s local currencies, represented approximately 40% of incremental revenues and the integration of Brisa represented the balance.  Without the effect of a currency translation and excluding the acquisition of Brisa, our Colombian and Central American revenues would have increased by approximately 12%. Total sales volume for Colombia and Central America increased 11.3% to 368.0 million unit cases in 2009 resulting from (1) a more than 85% growth in our bottled water business, due to the integration of Brisa in Colombia, accounting for close to 60% of incremental volumes, (2) an increase of more than 95% in the still beverage category, driven by theJugos del Valleproduct line, contributing more than 35% of the incremental and (3) incremental volumes of theCoca-Colabrand, that grew 3%, representing the balance. Operating Income.Gross profit was Ps. 7,690 million, an increase of 27.0% in 2009, as compared to 2008.  Cost of goods sold increased 23.3%, mainly as a result of higher sweetener costs and the depreciation of certain local currencies as applied to our U.S. dollar-denominated raw material costs, which were partially offset by the lower cost of resin.  Gross margin increased from 47.4% in 2008 to 48.1% in 2009, an expansion of 70 basis points. Our operating income increased 23.9% to Ps. 2,937 million in 2009, compared to the previous year. Operating expenses grew 28.9% as a result of increased marketing expenses, mainly due to the integration of the


Brisaportfolio in Colombia and the continued expansion of the Jugos del Valle line of business in Colombia and Central America. Our operating margin reached 18.4% in 2009, resulting in a 10 basis points decline as compared to 2008.  51


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Venezuela Total Revenues.Total revenues in Venezuela reached Ps. 22,430 million in 2009, an increase of 47.7% as compared to 2008.  Higher average price per unit case accounted for approximately 75% of incremental revenues during the period.  Average price per unit case was Ps. 99.47 in 2009, representing an increase of 35.6% as compared to 2008.  Without the negative effect of currency translation resulting from the appreciation of the Mexican peso against our operation’s local currency, our revenues in Venezuela would have increased by approximately 53%. Total sales volume increased 9.0% to 225.2 million unit cases in 2009, as compared to 206.7 million unit cases in 2008, mainly due to an increase of more than 9% in sparkling beverages sales volume, principally related to flavored sparkling beverages. Operating Income.Gross profit was Ps. 9,950 million in 2009, an increase of 58.1% compared to 2008.  Cost of goods sold increased 40.4% mainly due to higher packaging and sweetener costs.  Gross margin increased from 41.5% in 2008 to 44.4% in 2009, an expansion of 290 basis points. Operating income increased 40.8% to Ps. 1,815 million in 2009 compared to the previous year. Operating expenses grew 62.5% mainly as a result of higher labor costs.  Operating margin was 8.1% in 2009, a decline of 40 basis points as compared to 2008. Mercosur Total Revenues.Total revenues increased 30.0% to Ps. 27,559 million in 2009, as compared to 2008.  Excluding beer, which accounted for Ps. 2,783 million during 2009, total revenues increased 28.2% to Ps. 24,776 million compared to 2008.  Organic growth contributed more than 40% of incremental revenues, the acquisition of REMIL in Brazil contributed more than 30% of incremental revenues and a positive exchange rate translation effect, mainly due to the depreciation of the Mexican peso against the Brazilian real, represented the balance.  Without the effect of currency translation and the acquisition of REMIL, revenues for 2009 would have increased by approximately 13%. Sales volume, excluding beer, increased 9.3% to 608.2 million unit cases in 2009, as compared to 2008, mainly due to the acquisition of REMIL. Sales volume, excluding REMIL and beer, increased 1.3% to 564.0 million unit cases.  The still beverage category grew almost 55%, as a result of volume increases in flavored bottled water sales in Argentina and the Jugos del Valle line of business in Brazil, which was partially offset by a decline in sparkling beverages in Argentina. Operating Income.In 2009, gross profit increased 25.2% to Ps. 11,786 million, as compared to the previous year.  Cost of goods sold increased 33.8%, due to (i) the integration of REMIL in Brazil, (ii) the devaluation of local currencies as applied to our U.S. dollar-denominated raw material cost and (iii) higher sweetener costs, all of which were partially compensated by lower resin costs.  Gross margin decreased 160 basis points to 42.8% in 2009. Operating income increased 27.5% to Ps. 4,234 million in 2009, as compared to Ps. 3,321 million in 2008.  Operating expenses grew 23.9% mainly due to the integration of REMIL and higher labor and freight costs in Argentina.  Operating margin was 15.4% in 2009, a decrease of 30 basis points as compared to 2008. Liquidity and Capital Resources Liquidity.  The principal source of our liquidity is cash generated from operations.  A significant majority of our sales are on a cash basis with the remainder on a short-term credit basis.  We have traditionally been able to


rely on cash generated from operations to fund our working capital requirements and our capital expenditures.  Our working capital benefits from the fact that most of our sales are made on a cash basis, while we generally pay our suppliers on credit.  In recent periods, we have mainly used cash generated from operations to fund acquisitions.  We have also used a combination of borrowings from Mexican and international banks and issuances in the Mexican and international capital markets.  52


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Our total indebtedness was Ps. 17,351 million as of December 31, 2010, as compared to Ps. 15,925 million as of December 31, 2009.  Short-term debt and long-term debt were Ps. 1,840 million and Ps. 15,511 million, respectively, as of December 31, 2010, as compared to Ps. 5,427 million and Ps. 10,498 million, respectively, as of December 31, 2009.  Total debt increased Ps. 1,426 million in 2010, compared to year end 2009.In February 2010, we issued 4.625% Senior Notes due on February 15, 2020, in an aggregate principal amount of US$ 500 million.  The proceeds were used to pay the maturity of Ps. 2,000 million and Ps. 1,000 million ofCertificados Bursátilesin February and April 2010, respectively, and to prepay US$ 202 million of bank loans.  In addition, during 2010, we increased our debt denominated in Colombian pesos by an amount equivalent to US$ 127 million (as calculated at the exchange rate on December 31, 2010).   Net debt decreased Ps.1,154 million in 2010 mainly as a result of cash generated by our operations, net of debt and dividend payments made during the year.  As of December 31, 2010, cash and cash equivalents, were Ps. 12,534 million, as compared to Ps.9,954 million as of December 31, 2009.  As of December 31, 2010, our cash and cash equivalents were comprised of 61% U.S. dollars, 20% Mexican pesos, 13% Brazilian reais, 3% Venezuelan bolivars, 1% Colombian pesos and 1% Argentinean pesos.  As of March 31, 2011, our cash and cash equivalents balance was Ps. 13,488 million, including US$ 600 million denominated in U.S. dollars.  These funds, in addition to the cash generated by our operations, are sufficient to meet our operating requirements. As part of our financing policy, we expect to continue to finance our liquidity needs with cash from operations.  Nonetheless, as a result of regulations in certain countries in which we operate, it may not be beneficial or, as in the case of exchange controls in Venezuela, practicable for us to remit cash generated in local operations to fund cash requirements in other countries.  Exchange controls like those in Venezuelamay also increasethe real price of remitting cash from operations to fund debt requirements in other countries.  In the event that cash from operations in these countries is not sufficient to fund future working capital requirements and capital expenditures, we may decide, or be required, to fund cash requirements in these countries through local borrowings rather than remitting funds from another country.In addition, our liquidity in Venezuela could be affected by changes in therules applicable to exchange rates as well as other regulations, such as exchange controls.  In the future we may finance our working capital and capital expenditure needs with short-term or other borrowings. In January 2010, the Venezuelan government announced a devaluation of its official exchange rate and the establishment of a multiple exchange rate system of:  (1) 2.60 bolivars to US$ 1.00 for high priority categories (2) 4.30 bolivars to US$ 1.00 for non-priority categories and (3) the recognition of the existence of other exchange rates which the government shall determine.  In January 2011, the Venezuelan government announced that its only official exchange rate effective as of January 1, 2011 is 4.30 bolivars to US$ 1.00, although the Venezuelan government continues to recognize the existence of other exchange rates that the government shall determine; we expect that this could have an impact on our financial results and shareholders’ equity. We continuously evaluate opportunities to pursue acquisitions or engage in strategic transactions.  We would expect to finance any significant future transactions with a combination of any of cash from operations, long-term indebtedness and the issuance of shares of our Company. Sources and Uses of Cash.  The following table summarizes the sources and uses of cash for the years in the periods ended December 31, 2010, 2009 and 2008, from our consolidated statements of cash flows:   53


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Principal Sources and Uses of CashYears ended December 31, 2010, 2009 and 2008(in millions of Mexican pesos)2010
     
     2009
     
     2008Net cash flows from operating activities
     Ps.
     14,350
     Ps.
     16,663
     Ps.
     11,901Net cash flows used in investing activities(1)
     
     (6,845)
     
     (8,900)
     
     (7,299)Net cash flows used in financing activities(2)
     
     (2,011)
     
     (6,029)
     
     (5,261)Dividends declared and paid
     
     (2,612)
     
     (1,344)
     
     (945)
 
 (1)     Includes property, plant and equipment, investment in shares and other assets. (2)     Includes dividends declared and paid.  54


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Contractual Obligations ****
 The table below sets forth our contractual obligations as of December 31, 2010: Maturity(in millions of Mexican pesos)Less than 1 year
     1-3 years
     4 –5 years
     In excess of 5 years
     TotalDebt(1)Mexican pesos
     Ps.—
     Ps.4,726
     Ps.2,824
     Ps.—
     Ps.7,550U.S. dollars
     —
     222
     —
     6,179
     6,401Brazilian reais
     —
     25
     20
     35
     81Colombian pesos
     1,227
     839
     —
     —
     2,066Argentine pesos
     569
     622
     —
     —
     1,190Capital LeasesU.S. dollars
     4
     —
     —
     —
     4Brazilian reais
     40
     15
     4
     —
     59Interest Payments on Debt(2)Mexican pesos
     377
     670
     68
     —
     1,115U.S. dollars
     287
     859
     572
     893
     2,611Brazilian reais
     5
     14
     8
     13
     40Colombian pesos
     73
     21
     —
     —
     94Argentine pesos
     135
     37
     —
     —
     172Interest Rate Swaps(3)Mexican pesos float to fixed
     —
     (111)
     (152)
     —
     (263)Cross Currency Swaps(4)Mexican pesos to U.S.dollars(5)
     (147)
     (73)
     —
     —
     (220)Forwards(6)U.S. dollars to Mexican pesos
     (16)
     —
     —
     —
     (16)Operating LeasesMexican pesos
     226
     522
     138
     566
     1,452U.S. dollars
     25
     39
     —
     —
     64Commodity Hedge ContractsSugar(7)
     430
     15
     —
     —
     445Expected Benefits to be Paid for Pension and Retirement Plans and Seniority Premium
     186
     276
     99
     716
     1,277Other Long-Term Liabilities(8)
     —
     —
     —
     —
     —
 
 (1)     Excludes the effect of cross currency swaps. (2)     Interest was calculated using debt as of and nominal interest rate amounts in effect on December 31, 2010.  Liabilities denominated in U.S. dollars were translated to Mexican pesos at an exchange rate of Ps. 12.3571 per U.S. dollar, the exchange rate reported byBanco de Méxicoquoted to us by dealers for the settlement of obligations in foreign currencies on December 31, 2010. (3)     Reflects the market value as of December 31, 2010 of interest rates swaps that are considered hedges for accounting purposes.  The amounts shown in the table are fair value figures as of December 31, 2010. (4)     Includes cross currency swap contracts held as of December 31, 2010.  U.S. dollar‐denominated amounts were translated to Mexican pesos as described in footnote (2) above.  The amounts shown in the table are fair value figures as of December 31, 2010. (5)     Cross‐currency swaps used to convert Mexican peso‐denominated floating rate debt into U.S. dollar‐denominated floating rate debt with a notional amount of Ps. 166 million with maturity date as of September 16, 2011, Ps. 328 million with maturity date as of December 2, 2011, Ps. 824 million with maturity date as of December 5, 2011 and Ps. 357 million with maturity date as of March 2, 2012.  These cross-currency swaps are not considered hedges for accounting purposes.  55


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(6)     Reflects the market value as of December 31, 2010 of forward derivative instruments used to hedge against Mexican peso fluctuation.  These instruments are considered hedges for accounting purposes.  The amounts shown in the table are fair value figures as of December 31, 2010. (7)     Reflects the market value as of December 31, 2010 of futures contracts used to hedge sugar cost.  These instruments are considered hedges for accounting purposes.  The amounts shown in the table are fair value figures as of December 31, 2010. (8)     Other long-term liabilities reflects liabilities whose maturity dates are undefined and depends on a series of circumstances out of our control, therefore these liabilities have been considered to have a maturity of more than five years.  Debt Structure The following chart sets forth the current debt breakdown of our company and its subsidiaries by currency and interest rate type as of December 31, 2010: Currency
     Percentage of Total Debt(1)
     Average Nominal Rate(2)
     Average Adjusted Rate(1)(3)Mexican pesos
     33.5%
     6.5%
     6.5%U.S. dollars
     47.4%
     3.2%
     3.4%Colombian pesos
     11.8%
     4.6%
     4.6%Brazilian reais
     0.6%
     4.5%
     4.5%Argentine pesos
     6.8%
     17.8%
     17.8%
 
 (1)     Includes the effect of derivative contracts held by us as of December 31, 2010, including cross currency swaps from Mexican pesos to U.S. dollars and U.S. dollar. (2)     Annual weighted average interest rate per currency as of December 31, 2010. (3)     Annual weighted average interest rate per currency as of December 31, 2010 after giving effect to interest rate  swaps and cross currency swaps.  See “Item 11.  Quantitative and Qualitative Disclosures about Market Risk––Interest Rate Risk.” Summary of Significant Debt Instruments The following is a brief summary of our significant long-term indebtedness with restrictive covenants outstanding as of May 31, 2011: Mexican Peso-Denominated Bonds (Certificados Bursátiles).On April 18, 2011, we issuedcertificados bursátilesguaranteed by Propimex, S.A. de C.V., our main operating subsidiary in Mexico, in 5-year floating rate and 10-year fixed rate tranches of Ps. 2,500 million each, priced at TIIE + 0.13% and 8.27%, respectively.  We have thefollowingcertificados bursátilesoutstanding in the Mexican securities markets: Issue Date
     Maturity
     Amount
     Rate2007
     March 2, 2012
     Ps. 3,000 million
     28-day TIIE(1) – 6 bps2011
     April 11, 2016
     Ps. 2,500 million
     28-day TIIE(1) + 13 bps2011
     April 5, 2021
     Ps. 2,500 million
     8.27%
 
 (1)     TIIE means theTasa de Interés Interbancaria de Equilibrio(the Equilibrium Interbank Interest Rate). Ourcertificados bursátilescontain reporting obligations in which we will furnish to the bondholders consolidated audited annual financial reports and consolidated quarterly financial reports. 4.625% Notes due 2020.On February 5, 2010, we issued 4.625% Senior Notes due on February 15, 2020, in an aggregate principal amount of US$ 500 million.  The indenture imposes certain conditions upon a consolidation or merger by us and restricts the incurrence of liens and sale and leaseback transactions by us or our significant subsidiaries.  Propimex guaranteed these notes on April 1, 2011.  56


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Bank Loans.  As of December 31, 2010, we had a number of loans with individual banks in Mexican pesos, U.S. dollars, Colombian pesos, Brazilian reais, and Argentine pesos, with an aggregate principal amount of Ps.8,129million.  The bank loans denominated in Mexican pesos and U.S. dollars guaranteed by Propimex contain restrictions on liens, fundamental changes such as mergers and sale of certain assets.  In addition, we are required to comply with a maximum net leverage ratio.  Finally, some of our bank loans include a mandatory prepayment clause in which the lender has the option to require us to prepay such loans upon a change of control. We are in compliance with all of our restrictive covenants as of the date of filing of this annual report.  A significant and prolonged deterioration in our consolidated results from operations could cause us to cease to be in compliance under certain indebtedness in the future.  We can provide no assurances that we will be able to incur indebtedness or to refinance existing indebtedness on similar terms in the future. Off-Balance Sheet Arrangements We do not have any material off-balance sheet arrangements. Contingencies We are party to a number of tax, legal and labor proceedings that have arisen throughout the normal course of our business and which are common in the industry in which we operate.  We recognize a liability for a loss contingency when it is probable that certain effects related to past events would materialize and can be reasonably quantified. The following table presents in millions of Mexican pesos the nature and amount of the recorded loss contingencies as of December 31, 2010:  Long-TermTax
     Ps.799Legal
     1,133Labor
     220Total
     Ps.2,152
  We do not recognize an asset as a contingency gain until the gain is realized.  When the risk of loss is deemed to be other than remote, but less than probable, according to a legal assessment, its financial impact is disclosed as loss contingencies in the notes of the consolidated financial statements.  The estimated amount of the damages sought in these proceedings is Ps.5,767million.  In recent years, our Mexican, Costa Rican and Brazilian subsidiaries have been required to submit certain information to relevant authorities regarding possible monopolistic practices.  We currently do not have any pending investigations in Mexico.  See “Item 8.  Financial Information—Legal Proceedings—Mexico—Antitrust Matters.”  Such proceedings are a normal occurrence in the beverage industry and we do not expect any significant liability to arise from these contingencies.  As is customary in Brazil, we have been required by the tax authorities to collateralize tax contingencies currently in litigation amounting to Ps. 2,292 million and Ps. 2,342 million as of December 31, 2010 and 2009, respectively, by pledging fixed assets, or providing bank guarantees.  In connection with certain past business combinations, we have been indemnified by the sellers for certain contingencies.  Capital Expenditures The following table sets forth our capital expenditures, including investment in property, plant and equipment, deferred charges and other investments for the periods indicated on a consolidated and by reporting segment basis:  57


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Year Ended December 31,2010
     
     2009
     
     2008(millions of Mexican pesos)Property, plant and equipment, deferred charges and other investments
     Ps.
     7,478
     
     Ps.
     6,282
     
     Ps.
     4,802
   Year Ended December 31,2010
     
     2009
     
     2008(millions of Mexican pesos)Mexico
     Ps.
     2,932
     
     Ps.
     2,710
     
     Ps.
     1,926Latincentro(1)
     
     1,731
     
     
     1,269
     
     
     1,209Venezuela
     
     504
     
     
     1,248
     
     
     715Mercosur(2)
     
     2,311
     
     
     1,055
     
     
     952Total
     Ps.
     7,478
     
     Ps.
     6,282
     
     Ps.
     4,802
 
 (1)     Includes Guatemala, Nicaragua, Costa Rica, Panama and Colombia. (2)     Includes Brazil and Argentina. In 2010, we focused our capital expenditures on investments in (1) increasing production capacity, (2) placing coolers with retailers, (3) returnable bottles and cases, (4) improving the efficiency of our distribution infrastructure and (5) information technology.  Through these measures, we strive to improve our profit margins and overall profitability. We have budgeted approximately US$600 million for our capital expenditures in 2011.  Our capital expenditures in 2011 are primarily intended for: ·investments in production capacity; ·market investments (primarily for the placement of coolers); ·returnable bottles and cases; ·improvements throughout our distribution network; and ·investments in information technology. We estimate that of our projected capital expenditures for 2011, approximately 33% will be for our Mexican territories and the remaining will be for our non-Mexican territories.  We believe that internally generated funds will be sufficient to meet our budgeted capital expenditure for 2011.  Our capital expenditure plan for 2011 may change based on market and other conditions and our results from operations and financial resources. Historically, The Coca-Cola Company has contributed resources in addition to our own capital expenditures.  We generally utilize these contributions for initiatives that promote volume growth ofCoca-Colatrademark beverages, including the placement of coolers with retailers.  Such payments may result in a reduction in our selling expenses line.  Contributions by The Coca-Cola Company are made on a discretionary basis.  Although we believe that The Coca-Cola Company will make additional contributions in the future to assist our capital expenditure program based on past practice and the benefits to The Coca-Cola Company as owner of theCoca-Colabrands from investments that support the strength of the brands in our territories, we can give no assurance that any such contributions will be made.  58


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Hedging Activities We hold or issue derivative instruments to hedge our exposure to market risks related to changes in interest rates, foreign currency exchange rates and commodity price risk. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” The following table provides a summary of the fair value of derivative instruments as of December 31, 2010.  The fair market value is estimated using market prices that would apply to terminate the contracts at the end of the period and are confirmed by external sources, which are also our counterparties to the relevant contracts. Fair Value 
At December 31, 2010Maturity less than 1 year
     Maturity 
1 – 3
years
     Maturity 
4 – 5 years
     Maturity in excess of 5 years
     Total
fair
value(millions of Mexican pesos)Interest Rate SwapsMexican pesos float to fixed
     —
     (111)
     (152)
     —
     (263)Cross Currency SwapsMexican pesos to U.S. Dollars
     (147)
     (73)
     —
     —
     (220)ForwardsU.S. dollars to Mexican pesos
     (16)
     —
     —
     —
     (16)Commodity Hedge ContractsSugar
     430
     15
     —
     —
     445
  U.S. GAAP Reconciliation The principal differences between Mexican Financial Reporting Standards and U.S. GAAP that affect our net income and equity are explained in Note 26 to our consolidated financial statements and primarily relate to the accounting and disclosure for: ·reversal of inflationary adjustments in countries considered inflationary under Mexican FRS, but not considered hyper-inflationary under U.S. GAAP; ·certain balance sheet and income statement classification differences; ·deferred promotional expenses; ·intangible assets; ·restatement of imported equipment; ·capitalization of comprehensive financing result; ·disclosures related to the fair value of financial instruments; ·accounting and disclosures for deferred income tax, employee profit sharing and uncertain tax positions; ·employee benefits; ·non-controlling interest acquisition; and  59


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·presentment aspects of statement of cash flows. A more detailed description of the differences between Mexican Financial Reporting Standards and U.S. GAAP as they relate to us and a reconciliation of net income and shareholders’ equity under Mexican Financial Reporting Standards to net income and equity under U.S. GAAP are contained in Notes 26 and 27 to our consolidated financial statements. Pursuant to Mexican Financial Reporting Standards, our consolidated financial statements recognize effects of inflation in accordance with Bulletin B-10. These effects were not reversed in the reconciliation to U.S. GAAP. Under U.S. GAAP, we had consolidated net income of Ps. 10,105  million in 2010, Ps. 8,853 million in 2009 and Ps. 5,802 million in 2008.  Consolidated net income as reconciled to U.S. GAAP was lower than consolidated net income as reported under Mexican Financial Reporting Standards by Ps. 194 million in 2010, Ps. 117 million in 2009 and lower by Ps. 24 million in 2008. Equity under U.S. GAAP was Ps. 73,468 million, Ps. 66,037 million and Ps. 56,468 million in 2010, 2009, and 2008, respectively. Compared to shareholders’ equity under Mexican Financial Reporting Standards, equity under U.S. GAAP was lower by Ps. 413 million, Ps. 2,435 million and  Ps. 1,148 million in 2010, 2009 and 2008, respectively.  60


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Item 6.  Directors, Senior Management and Employees Directors Management of our business is vested in our board of directors and in our chief executive officer.  Our bylaws provide that our board of directors will consist of 18 directors elected at the annual ordinary shareholders meeting for renewable terms of one year.  Our board of directors currently consists of 18 directors and 17 alternate directors.  The directors are elected as follows:  11 directors and their respective alternate directors are elected by holders of the Series A Shares voting as a class; four directors and their respective alternate directors are elected by holders of the Series D Shares voting as a class; and three directors and their respective alternate directors are elected by holders of the Series L Shares voting as a class.  Directors may only be elected by a majority of shareholders of the appropriate series, voting as a class. In accordance with our bylaws and article 24 of the Mexican Securities Market Law, at least 25% of the members of our board of directors must be independent (as defined by the Mexican Securities Market Law).  The board of directors may designate interim directors in the case that a director is absent or an elected director and corresponding alternate are unable to serve; the interim directors serve until the next shareholders meeting, at which the shareholders elect a replacement. Our bylaws provide for the issuance of Series B Shares with full voting rights that are freely transferable, although no Series B Shares have been issued.  Shareholders holding duly paid Series B Shares or any duly paid limited voting shares that did not vote in favor of the directors elected, either individually or acting together with other dissenting shareholders of any series, would be entitled to elect one additional director and the corresponding alternate director for each 10% of our outstanding capital stock held by such individual or group and to remove one director and the corresponding alternate. Our bylaws provide that the board of directors shall meet at least four times a year. Since our major shareholders amended their Shareholders Agreement in February 2010, our bylaws were modified accordingly establishing that actions by the board of directors must be approved by at least a majority of the directors present and voting, except under certain limited circumstances which must include the favorable vote of at least two directors elected by the Series D Shares.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.”  The chairman of the board of directors, the chairman of our audit or Corporate Practices Committee, or at least 25% of our directors may call a board of directors’ meeting to include matters in the meeting agenda. See “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions” for information on relationships with certain directors and senior management.  61


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As of the date of this annual report, our board of directors had the following members: Series A DirectorsJosé Antonio Fernández Carbajal

   Born:

   February 1954Chairman

   First elected:

   1993, as director; 2001 as chairmanTerm expires:

   2012Principal occupation:

   Chief Executive Officer, FEMSA.Other directorships:

   Chairman of the board of directors of FEMSA.  Vice-Chairman of the board of directors of Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM).  Member of the boards of directors of Grupo Financiero BBVA Bancomer (BBVA Bancomer); Industrias Peñoles, S.A.B. de C.V. (Peñoles); Grupo Industrial Bimbo, S.A.B. de C.V. (Bimbo); Grupo Televisa S.A.B. (Televisa); Controladora Vuela Compañia de Aviación,S.A. de C.V. (Volaris); and Cemex, S.A.B. de C.V. (Cemex).Business experience:

   Joined FEMSA’s strategic planning department in 1987; held managerial positions at FEMSA Cerveza’s Commercial Division and the Oxxo Retail Chain.  Appointed Chief Executive Officer of FEMSA in 1995.Education:

   Holds a degree in Industrial Engineering and a Masters in Business Administration (MBA) from ITESM.Alternate director:

   Alfredo Livas CantúAlfonso Garza Garza(1)

   Born:

   July 1962Director

   First elected:

   1996Term expires:

   2012Principal occupation:

   Chief Human Resources, Procurement and Information Technology Officer, FEMSA.Other directorships:

   Member of the board of ITESM and Nutec, S.A. de C.V. and Chairman of the Board of Coparmex Nuevo León.Business experience:

   Has experience in several FEMSA business units and departments, including domestic sales, international sales, procurement and marketing, mainly at FEMSA Empaques, S.A. de C.V., or FEMSA Empaques, and FEMSA Cerveza, and was Chief Executive Officer of FEMSA Empaques.Education:

   Holds a degree in Industrial Engineering from ITESM and an MBA from Instituto Panamericano de Alta Dirección de Empresa (IPADE).Alternate director:

   Bárbara Garza Lagüera Gonda(2)José Luis Cutrale

   Born:

   September 1946Director

   First elected:

   2004Term expires:

   2012Principal occupation:

   Chief Executive Officer of Sucocítrico Cutrale.Other directorships:

   Member of the boards of directors of Cutrale North America, Cutrale Citrus Juice, and Citrus Products.Business experience:

   Founding partner of Sucocitrico Cutrale and member of ABECITRUS (the Brazilian Association of Citrus Exporters) and CDES (the Brazilian Government’s Counsel for Economic and Social Development).Alternate director :

   José Luis Cutrale, Jr.Carlos Salazar Lomelín

   Born:

   April 1951Director

   First elected:

   2001Term expires:

   2012Principal occupation:

   Chief Executive Officer, Coca-Cola FEMSA.Other directorships:

   Member of the board of directors of BBVA Bancomer, Bancomer, AFORE Bancomer, S.A. de C.V., Seguros Bancomer, S.A. de C.V. and member of the advisory board ofC entro Internacional de Negocios Monterrey A.C. (CINTERMEX), APEX, EGADE Business School from the ITESM and the Eugenio Garza Sada Award.Business experience:

   Has held managerial positions within FEMSA, including Grafo Regia S.A. de C.V. and Plásticos Técnicos Mexicanos S.A. de C.V.  Served as Chief Executive Officer of FEMSA Cerveza until 2000.Education:

   Holds a degree in Economics from ITESM, a graduate degree in Economic Development in Italy from the Instituto di Studio per lo Sviluppo Economico Milano e Napoli and an MBA from ITESM.Alternate director:

   Max Michel SubervilleRicardo Guajardo Touché

   Born:

   May 1948Director

   First elected:

   1993Term expires:

   2012Principal occupation:

   President of SOLFI, S.A.Other directorships:

   Member of the boards of directors of Valores de Monterrey, S.A. de C.V. (Valores de Monterrey), BBVA Bancomer, Bimbo, El Puerto de Liverpool, Grupo Industrial Alfa (Alfa), Grupo Aeroportuario del Sureste, S.A. de C.V. (ASUR), Grupo Coppel and FEMSA.Business experience:

   Has held senior executive positions in FEMSA, Grupo AXA, S.A. de C.V. (Grupo AXA) and Valores de Monterrey.Education:

   Holds degrees in Electrical Engineering from ITESM and the University of Wisconsin and a Masters degree from the University of California, Berkeley.Alternate director:

   Eduardo Padilla Silva
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Series A DirectorsPaulina Garza Lagüera Gonda(2)

   Born:

   March 1972Director

   First elected:

   2009Term expires:

   2012Business experience:

   Private investorOther directorships:

   Alternate director of the board of directors of FEMSA.Education:

   Holds a Business Administration degree from ITESM.Alternate director:

   Mariana Garza Lagüera Gonda(2)Federico Reyes García

   Born:

   September 1945Director

   First elected:

   1993Term expires:

   2012Principal occupation:

   Corporate Development Officer of FEMSA.Business experience:

   Served as Vice President of Finance and Corporate Development of FEMSA, Director of Corporate Staff at Grupo AXA, a major manufacturer of electrical equipment, and Chairman of the board of directors of Valores de Monterrey.  Has extensive experience in the insurance sector.Education:

   Holds a degree in Business and Finance from ITESM.Alternate director:

   Alejandro Bailleres GualJavier Gerardo Astaburuaga Sanjines

   Born:

   July 1959Director

   First elected:

   2006Term expires:

   2012Principal occupation:

   Chief Financial and Strategic Development Officer of FEMSA.Business experience:

   Joined FEMSA as a financial information analyst and later acquired experience in corporate development, administration and finance, held various senior positions at FEMSA Cerveza between 1993 and 2001, including Chief Financial Officer and Director of Sales for the north region of Mexico.  Prior to his current position, was FEMSA Cerveza’s Co-Chief Executive Officer.Other directorships:

   Member of the board of Heineken N.V. and supervisory board of Heineken N.V.Education:

   Holds a degree in Accounting from ITESM.Alternate director:

   Francisco José Calderón RojasAlfonso González Migoya

   Born:

   January 1945Independent Director

   First elected:

   2006Term expires:

   2012Principal occupation:

   Chairman of the board of directors and Chief Executive Officer of Grupo Industrial Saltillo, S.A.B. de C.V.Other directorships:

   Member of the board of directors of several Mexican companies, including Banco Regional de Monterrey, S.A., Bolsa Mexicana de Valores, S.A.B. de C.V. and Berel, S.A.Business experience:

   Served from 1995 until 2005 as Corporate Director of Alfa.Education:

   Holds a degree in Mechanical Engineering from ITESM and an MBA from the Stanford Graduate School of Business.Alternate director:

   Francisco Garza ZambranoDaniel Servitje Montull

   Born:

   April 1959Independent Director

   First elected:

   1998Term expires:

   2012Principal occupation:

   Chief Executive Officer, Bimbo.Other directorships:

   Member of the boards of directors of Banco Nacional de Mexico and Bimbo.Business experience:

   Served as Vice President of Bimbo.Education:

   Holds a degree in Business from the Universidad Iberoamericana in Mexico and an MBA from the Stanford Graduate School of Business.Alternate director:

   Sergio Deschamps EbergenyiEnrique F. Senior Hernández

   Born:

   August 1943Director

   First elected:

   2004Term expires:

   2012Principal occupation:

   Managing Director of Allen & Company.Other directorship:

   Member of the boards of directors of Televisa and Cinemark Corp.Business experience:

   Among other clients, has provided financial advisory services to FEMSA and Coca-Cola FEMSA.Alternate director:

   Herbert Allen III
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Series D DirectorsGary Fayard

   Born:

   April 1952Director

   First elected:

   2003Term expires:

   2012Principal occupation:

   Chief Financial Officer, The Coca-Cola Company.Other directorships:

   Member of the boards of directors of Coca-Cola Enterprises and Coca-Cola Sabco.Business experience:

   Senior Vice President of The Coca-Cola Company and former Partner of Ernst & Young.Education:

   Holds a degree from the University of Alabama and is licensed as a Certified Public Accountant (CPA).Alternate director:

   Marie Quintero-JohnsonIrial Finan

   Born:

   June 1957Director

   First elected:

   2004Term expires:

   2012Principal occupation:

   President of Bottling Investments Group and Supply Chain, The Coca-Cola Company.Other directorships:

   Member of the boards of directors of Coca-Cola Enterprises, Coca-Cola Amatil and Coca-Cola Hellenic.Business experience:

   Chief Executive Officer of Coca-Cola Hellenic.  Has experience in several Coca-Cola bottlers, mainly in Europe.Education:

   Holds a Bachelor’s degree from National University of Ireland.Alternate director:

   Mark HardenCharles H. McTier

   Born:

   January 1939Independent Director

   First elected:

   1998Term expires:

   2012Principal occupation:

   Trustee, Robert W. Woodruff Foundation.Other directorships:

   Member of the boards of directors of AGL Resources.Business experience:

   Served as a President of Robert W. Woodruff Foundation during the period 1971-2007 and on the board of directors of nine U.S. Coca-Cola bottling companies in the 1970s and 1980s.Education:

   Holds a degree in Business Administration from Emory University.Eva María Garza Lagüera Gonda(3)

   Born:

   April 1958Director

   First elected:

   2011Term expires:

   2012Principal occupation:

   Private InvestorOther directorships:

   Member of the boards of directors of FEMSA, ITESM and Premio Eugenio Garza SadaEducation:

   Holds a degree in Communication Sciences from ITESMAlternate director:

   Geoffrey J. Kelly
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Series L DirectorsAlexis E. Rovzar de la Torre

   Born:

   July 1951Independent Director

   First elected:

   1993Term expires:

   2012Principal occupation:

   Executive partner, White & Case, S.C.Other directorships:

   Member of the boards of directors of FEMSA (chairman of its audit committee), Bank of Nova Scotia, Bimbo, Grupo Comex and Grupo ACIR.Business experience:

   Expert in private and public mergers and acquisitions as well as other aspects of financial law and has been advisor to many companies on international business and joint venture transactions.Education:

   Holds a Law degree from Universidad Nacional Autónoma de México (UNAM).Alternate director:

   Arturo Estrada TreanorJosé Manuel Canal Hernando

   Born:

   February 1940Independent Director

   First elected:

   2003Term expires:

   2012Principal occupation:

   Private consultant.Other directorships:

   Member of the board of directors of FEMSA, BBVA Bancomer, Banco Compartamos, S.A., ALSEA, S.A.B. de C.V., Kuo, Consorcio Comex and Grupo Proa.Business experience:

   Former managing partner at Ruiz, Urquiza y Cía, S.C. from 1981 to 1999, acted as our statutory examiner from 1984 to 2002, presided in the Committee of Surveillance of the Mexican Institute of Finance Executives, has participated in several commissions at the Mexican Institute of Public Accountants and has extensive experience in financial auditing for holding companies, banks and financial brokers.Education:

   Holds a Public Accounting degree from UNAM.Alternate director:

   Helmut PaulFrancisco Zambrano Rodríguez

   Born:

   January 1953Independent Director

   First elected:

   2003Term expires:

   2012Principal occupation:

   Chief Executive Officer of Desarrollo de Fondos Inmobiliarios S.A. de C.V. (DFI) and Vice-president of Desarrollo Inmobiliarios y de Valores, S.A. de C.V. (DIV).Other directorships:

   Member of the boards of directors of several Mexican companies, including DFI, DIV and Grupo Camino Real, S.A. de C.V.Business experience:

   Has extensive experience in investment banking and private investment services in México.Education:

   Holds a degree in Chemical Engineering from ITESM and an MBA from The University of Texas at Austin.Alternate director:

   Karl Frei Buechi
 
 (1)     Cousin of Eva María Garza Lagüera Gonda, Paulina Garza Lagüera Gonda, Mariana Garza Lagüera Gonda and Bárbara Garza Lagüera Gonda. (2)     Sister of Eva Maria Garza Lagüera Gonda and sister-in-law of José Antonio Fernández Carbajal. (3)     Wife of José Antonio Fernández Carbajal. The secretary of the board of directors is Carlos Eduardo Aldrete Ancira and the alternate secretary of the board of directors is Carlos Luis Díaz Sáenz. In June 2004, a group of Brazilian investors, among them José Luis Cutrale, a member of our board of directors, made a capital contribution equivalent to approximately US$50 million to our Brazilian operations in exchange for approximately 16.9% equity stake in these operations.  We have entered into an agreement with Mr. Cutrale pursuant to which he was invited to serve as a director of our company.  The agreement also provides for a right of first offer on transfers by the investors, tag-along and drag-along rights and certain rights upon a change of control of either party, with respect to our Brazilian operations.  65


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Table of Contents Executive Officers The following are the principal executive officers of our company: Carlos Salazar Lomelín(1)

   Born:

   April 1951Chief Executive Officer

   Joined:

   2000Appointed to current position:

   2000Héctor Treviño Gutiérrez

   Born:

   August 1956Chief Financial and Administrative Officer

   Joined:

   1993Appointed to current position:

   1993Other business experience:

   At FEMSA, was in charge of International Financing, served as General Manager of Financial Planning, General Manager of Strategic Planning and General Manager of Business Development and headed the Corporate Development Department.Education:

   Holds a degree in Chemical and Administrative Engineering from ITESM and an MBA from the Wharton School of Business.Rafael Alberto Suárez Olaguibel

   Born:

   April 1960Chief Operating Officer – Latincentro

   Joined:

   1986Appointed to current position:

   2007Business experience with us:

   Has held several director positions with us, including Commercial Planning and Strategic Development Officer and Chief Operating Officer in Mexico and Argentina.  Also served as Distribution and Marketing Director for the Valley of Mexico and Corporate Planning Manager of FEMSA’s sparkling beverages division.Other business experience:

   Has worked in the Administrative, Distribution and Marketing departments of The Coca-Cola Export Company.Education:

   Holds a degree in Economics from ITESM and an MBA-ONE from ITESM and the partner schools from each continent.Alejandro Duncan

   Born:

   May 1957Technical Officer

   Joined:

   1995Appointed to current position:

   2002Business experience with us:

   Infrastructure Planning Director of Mexico.Other business experience:

   Has undertaken responsibilities in different production, logistics, engineering, project planning and manufacturing departments of FEMSA and was a Plant Manager in central Mexico and Manufacturing Director in Buenos Aires.Education:

   Holds a degree in Mechanical Engineering from ITESM and an MBA from the Universidad de Monterrey.Eulalio Cerda Delgadillo

   Born:

   July 1958Human Resources Officer

   Joined:

   1996Appointed to current position:

   2001Business experience with us:

   Manager, positions in several departments, including maintenance, projects, packaging and human resources.Other business experience:

   At FEMSA Cerveza, served as New Projects Executive and worked in several departments including marketing, maintenance, packaging, bottling, human resources, technical development and projects.Education:

   Holds a degree in Mechanical Engineering from ITESM.John Anthony Santa María Otazúa

   Born:

   August 1957Commercial Planning and Strategic Development Officer

   Joined:

   1995Appointed to current position:

   2009Business experience with us:

   Has served as Strategic Planning and Business Development Officer and Chief Operating Officer of Mexican operations.  He has experience in several areas of the company, namely development of new products and mergers and acquisitions.Other business experience:

   Has experience with different bottler companies in Mexico in areas such as Strategic Planning and General Management.Education:

   Holds a degree in Business Administration and an MBA with a major in Finance from Southern Methodist University.
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Ernesto Silva Almaguer

   Born:

   March 1953Chief Operating Officer – Mexico

   Joined:

   1996Appointed to current position:

   2009Business experience with us:

   Has served as Chief Operating Officer –Mercosur in Buenos Aires and New Business Development and Information Technology Director.Other business experience:

   Has worked as General Director of packaging subsidiaries of FEMSA (Fábricas de Monterrey, S.A. de C.V. and Quimiproductos), served as Vice President of International Sales at FEMSA Empaques and Manager of FEMSA’s Corporate Planning and held several positions at Alfa.Education:

   Holds a degree in Mechanical and Administrative Engineering from Universidad Autónoma de Nuevo León and an MBA from The University of Texas at Austin.Miguel Angel Peirano

   Born:

   March 1959Chief Operating Officer – Mercosur

   Joined:

   1997Appointed to current position:

   2009Business experience with us:

   Strategic Planning Officer-Argentina, Manufacturing Officer-Argentina, Commercial Officer-Argentina and Chief Operating Officer-Argentina.Other business experience:

   Chief Operating Officer in FEMSA Cerveza Brazil and Senior Project Manager / Associate at McKinsey & Co.Education:

   Holds a degree in Electronic Engineering from the Technological Institute of Buenos Aires, holds the McKinsey MBA and completed the General Manager Program at Harvard Business School.Hermilo Zuart Ruíz

   Born:

   March 1949Strategic Supply Officer

   Joined:

   1992Appointed to current position:

   2010Business experience with us:

   Former New Business Officer, Chief Operating Officer in the Latincentro division, Chief Operating Officer in the Valley of Mexico and Chief Operating Officer in the Southeast Mexico.Other business experience:

   Has undertaken several responsibilities in the manufacturing, commercialization, planning and administrative areas of FEMSA:  Franquicias Officer, mainly in charge of Mundet products.Education:

   Holds a degree in Public Accounting from UNAM and completed a graduate course in Business Management from IPADE.Juan Ramón Felix

   Born:

   December 1961New Business Officer

   Joined:

   1997Appointed to current position:

   2010Business experience with us:

   Former Commercial Director in Mexico, Commercial Development Director in Brazil, Commercial Director for the Bajío division in Mexico, Commercial Director for the southeast in Mexico, Logistics Director and Sales Manager of the Valley of Mexico.Other business experience:

   Has worked as the Franchises Director at Cadbury Beverages, several positions in sales and operating areas in Cadbury Aguas Minerales and MFG Supervisor at Procter & Gamble.Education:

   Holds a degree in Industrial and Systems Engineering from ITESM and an MBA from The Garvin School of International Management/ITESM.
 
 (1)     See “—Directors.”  Compensation of Directors and Officers For the year ended December 31, 2010, the aggregate compensation of all of our executive officers paid or accrued for services in all capacities was approximately Ps. 217 million.  The aggregate compensation amount includes approximately Ps. 127 million of cash bonus awards and bonuses paid to certain of our executive officers pursuant to our incentive plan for stock purchases.  See “––EVA-Based Bonus Program.” The aggregate compensation for directors during 2010 was Ps. 9 million.  For each meeting attended we paid US$ 10,000 to each director with foreign residence and US$ 6,500 to each director with residence in Mexico in 2010.  We paid US$ 3,500 to each of the members of the Audit Committee per each meeting attended, and we paid US$ 2,500 per meeting attended to each of the members of the Finance and Planning and the Corporate Practices Committees. Our senior management and executive officers participate in our benefit plans on the same basis as our other employees.  Members of our board of directors do not participate in our benefit plans.  As of December 31, 2010, amounts accrued for all employees under these pension and retirement plans were Ps. 1,636 million, of which Ps. 774 million is already funded. EVA-Based Bonus Program Our bonus program for executives is based on meeting certain goals established annually by management, which include quantitative and qualitative objectives as well as the completion of special projects.   67


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Approximately 50% of the bonus is based on quantitative objectives determined by the Economic Value Added, or EVA, methodology.  The objectives established for executives are based on a combination of the EVA generated by us and FEMSA on a consolidated basis, calculated at approximately 70% and 30%, respectively.  Qualitative objectives and special projects represent the remaining 50% of the annual bonus and are based on the critical success factors established at the beginning of the year for each executive.  In addition, we provide a defined contribution plan of share compensation to certain key executives, consisting of an annual cash bonus to purchase FEMSA and our Company’s shares or options, based on the executive’s responsibility in the organization, the EVA result achieved by the business unit that the executive works within, and the executive’s individual performance.  The acquired shares or options are deposited in a trust, and executives may access them one year after they are vested at 20% per year.  Fifty percent of our annual executive bonus is permitted to be used to purchase FEMSA shares or options and the remaining 50% to purchase our shares or options.  As of December 31, 2010, 2009 and 2008, no options have been granted to employees.  The incentive plan target is expressed in months of salary, and the final amount payable is computed based on a percentage of the completion of goals established each year.  The bonuses are recorded as income from operations and are paid in cash for the acquisition of shares of the trust the following year.  During the years ended December 31, 2010, 2009 and 2008, the bonus expense recorded amounted to Ps. 547 million, Ps. 630 million and Ps.525 million, respectively. Share Ownership As ofApril 25, 2011, several of our directors and alternate directors serve on the technical committee as trust participants under the Irrevocable Trust No. 463 established at INVEX, S.A., Institución de Banca Múltiple, Invex Grupo Financiero, as Trustee, which is the owner of 74.86% of the voting stock of FEMSA, which in turn owns 53.7% of our outstanding capital stock.  As a result of the technical committee’s internal procedures, the technical committee as a whole is deemed to have beneficial ownership with sole voting power of all the shares deposited in the voting trust, and the trust participants, as technical committee members, are deemed to have beneficial ownership with shared voting power over those same deposited shares.  These directors and alternate directors are Alfonso Garza Garza, Paulina Garza de Marroquín, Bárbara Garza Gonda de Braniff, Mariana Garza de Treviño, Max Michel Suberville and Eva Garza de Fernández.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders.”  Our honorary (non-voting) life chairman Eugenio Garza Lagüera was a trust participant and technical committee member before he passed away in May 2008.  None of our other directors, alternate directors or executive officers is the beneficial owner of more than 1% of any class of our capital stock. Board Practices Our bylaws state that the board of directors will meet at least four times a year to discuss our operating results and progress in achieving strategic objectives.  It is the practice of our board of directors to meet following the end of each quarter.  Our board of directors can also hold extraordinary meetings.  See “Item 10.  Additional Information—Bylaws.” Under our bylaws, directors serve one-year terms although they continue in office for up to 30 days until successors are appointed.  If no successor is appointed during this period, the board of directors may appoint interim members, which will be ratified or substituted at the next shareholders meeting after such event occurs.  None of the members of our board of directors or senior management of our subsidiaries has service agreements providing for benefits upon termination of employment. Our board of directors is supported by committees, which are working groups that analyze issues and provide recommendations to the board of directors regarding their respective areas of focus.  The executive officers interact periodically with the committees to address management issues.  The following are the three committees of the board of directors: Finance and Planning Committee.  The Finance and Planning Committee works with management to set annual and long-term strategic and financial plans of the company and monitors adherence to these plans.  It is


responsible for setting our optimal capital structure and recommends the appropriate level of borrowing as well as the issuance of securities.  Financial risk management is another responsibility of the Finance and Planning Committee.  Irial Finan is the chairman of the Finance and Planning Committee.  The additional members include:  Javier Astaburuaga Sanjines, Federico Reyes García, Ricardo Guajardo Touché and Enrique Senior Hernández.  The secretary of the Finance and Planning Committee is Héctor Treviño Gutiérrez, our Chief Financial Officer.  68


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Audit Committee.  The Audit Committee is responsible for reviewing the accuracy and integrity of quarterly and annual financial statements in accordance with accounting, internal control and auditing requirements.  The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent auditor, who reports directly to the Audit Committee; the internal auditing function also reports to the Audit Committee. The Audit Committee has implemented procedures for receiving, retaining and addressing complaints regarding accounting, internal control and auditing matters, including the submission of confidential, anonymous complaints from employees regarding questionable accounting or auditing matters.  To carry out its duties, the Audit Committee may hire independent counsel and other advisors.  As necessary, the company compensates the independent auditor and any outside advisor hired by the Audit Committee and provides funding for ordinary administrative expenses incurred by the Audit Committee in the course of its duties.  Alexis E. Rovzar de la Torre is the chairman of the Audit Committee.  The additional members are:  Alfonso González Migoya, Charles H. McTier, José Manuel Canal Hernando, who is our “audit committee financial expert” within the meaning of Item 16A, and Francisco Zambrano Rodríguez.  Each member of the Audit Committee is an independent director, as required by the Mexican Securities Market Law and applicable New York Stock Exchange listing standards.  The secretary of the Audit Committee, who is not a member, is José González Ornelas, head of FEMSA’s auditing and operating control area. Corporate Practices Committee.  The Corporate Practices Committee, which consists of exclusively of independent directors, is responsible for preventing or reducing the risk of performing operations that could damage the value of our company or that benefit a particular group of shareholders.  The committee may call a shareholders meeting and include matters on the agenda for that meeting that it deems appropriate, approve policies on related party transactions, approve the compensation plan of the chief executive officer and relevant officers, and support our board of directors in the elaboration of related reports.  The chairman of the Corporate Practices Committee is Daniel Servitje Montul.  The additional members include:  Helmut Paul and Karl Frei Buechi.  The secretaries of the Corporate Practices Committee are Gary Fayard and Alfonso Garza Garza. Employees As of December 31, 2010, our headcount was as follows:28,726in Mexico,13,246in Latincentro,8,123in Venezuela and18,354in Mercosur.  In the headcount we include the employees of third party distributors.  The table below sets forth headcount by category for the periods indicated: As of December 31,2010

   2009

   2008Executives

   759

   708

   514Non-union

   18,017

   17,633

   16,262Union

   33,085

   31,692

   30,177Employees of third party distributors

   17,347

   17,393

   18,068Total

   69,208

   67,426

   65,021
  As of December 31, 2010, approximately48% of our employees, most of whom were employed in Mexico, were members of labor unions.  We had112separate collective bargaining agreements with67labor unions.  In general, we have a good relationship with the labor unions throughout our operations, except in Colombia, Venezuela and Guatemala, which are or have been the subjects of significant labor-related litigation.  See “Item 8.  Financial Information—Consolidated Statements and Other Financial Information” and “Item 8.  Financial Information—Legal Proceedings.”  We believe we have appropriate reserves for these litigation proceedings and do not currently expect them to have a material adverse effect.  69


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During January 2011, our production and distribution facility in Valencia, which produces approximately 50% of the total sales volume in Venezuela, went on strike for 26 days, completely halting production.  Productivity resumed when a final agreement was reached with the union that resulted in additional expenses for our Venezuelan subsidiary through increases in wages and expenditures associated with improving work conditions for employees. Insurance Policies We maintain a number of different types of insurance policies for all employees.  These policies mitigate the risk of having to pay death benefits in the event of an industrial accident.  We maintain directors’ and officers’ insurance policies covering all directors and certain key executive officers for liabilities incurred in their capacities as directors and officers.  70


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Item 7.  Major Shareholders and Related Party Transactions MAJOR SHAREHOLDERS Our capital stock consists of three classes of securities:  Series A Shares held by FEMSA, Series D Shares held by The Coca-Cola Company and Series L Shares held by the public.  The following table sets forth our major shareholders as of May 31, 2011: Owner

   OutstandingCapital Stock

   Percentage Ownership ofOutstandingCapital Stock

   Percentage ofVoting RightsFEMSA (Series A Shares)(1)

   992,078,519

   53.7%

   63.0%The Coca-Cola Company (Series D Shares)(2)

   583,545,678

   31.6%

   37.0%Public (Series L Shares)(3)

   270,906,004

   14.7%

   —Total

   1,846,530,201

   100.0%

   100.0%
 
 (1)FEMSA owns these shares through its wholly-owned subsidiary Compañía Internacional de Bebidas, S.A. de C.V., which we refer to in this annual report as CIBSA.  74.86% of the voting stock of FEMSA is owned by the technical committee and trust participants under Irrevocable Trust No. 463 established at Banco Invex, S.A. Institución de Banca Múltiple, Invex Grupo Financiero, as Trustee.  As a consequence of the voting trust’s internal procedures, the following trust participants are deemed to have beneficial ownership with shared voting power of the shares deposited in the voting trust: BBVA Bancomer Servicios, S.A., as Trustee under Trust No. F/25078-7 (controlled by Max Michel Suberville), Paulina Garza Lagüera Gonda, Bárbara Garza Lagüera Gonda, Mariana Garza Lagüera Gonda, Eva Gonda Rivera, Eva Maria Garza Lagüera Gonda, Consuelo Garza Lagüera de Garza, Alfonso Garza Garza, Patricio Garza Garza, Juan Carlos Garza Garza, Eduardo Garza Garza, Eugenio Garza Garza, Alberto Bailleres Gonzalez, Maria Teresa Gual Aspe de Bailleres, Inversiones Bursátiles Industriales, S.A. de C.V. (controlled by the Garza Lagüera family), Corbal, S.A. de C.V. (controlled by Alberto Bailleres González), Magdalena Michel de David, Alepage, S.A. (controlled by Consuelo Garza Lagüera), BBVA Bancomer Servicios, S.A. as Trustee under Trust No.  F/29013-0 (controlled by the estate of José Calderón Ayala, late father of José Calderón Rojas), Max Michel Suberville, Max David Michel, Juan David Michel, Monique David de VanLathem, Renee Michel de Guichard, Magdalena Guichard Michel, Rene Guichard Michel, Miguel Guichard Michel, Graciano Guichard Michel, Juan Guichard Michel, Franca Servicios, S.A. de C.V. (controlled by the estate of José Calderón Ayala, late father of José Calderón Rojas), BBVA Bancomer Servicios, S.A., as Trustee under Trust No. F/29490-0 (controlled by Alberto, Susana and Cecilia Bailleres), BBVA Bancomer Servicios, S.A., as Trustee under Trust No. F/710004 (controlled by Magdalena Michel de David) and BBVA Bancomer Servicios, S.A., as Trustee under Trust No. F/700005 (controlled by Renee Michel de Guichard). (2)     The Coca-Cola Company indirectly owns these shares through its wholly-owned subsidiaries, The Inmex Corporation and Dulux CBAI 2003 B.V. (3)     Holders of Series L Shares are only entitled to vote in limited circumstances.  See “Item 10.  Additional Information—Bylaws.”  Holders of ADSs are entitled, subject to certain exceptions, to instruct The Bank of New York, a depositary, as to the exercise of the limited voting rights pertaining to the Series L Shares underlying their ADSs. Our Series A Shares, owned by FEMSA, are held in Mexico and our Series D Shares, owned by The Coca-Cola Company, are held outside of Mexico. As of December 31, 2010, there were 22,382,439 of our ADSs outstanding, each ADS representing ten Series L Shares.  82.6% of our outstanding Series L Shares were represented by ADSs.  As of May 31, 2011, 78.5% of our outstanding Series L Shares were represented by ADSs, held by 365 holders (including The Depositary Trust Company) with registered addresses outside of Mexico. The Shareholders Agreement We operate pursuant to a shareholders agreement among two subsidiaries of FEMSA, The Coca-Cola Company and certain of its subsidiaries.  This agreement, together with our bylaws, sets forth the basic rules under which we operate.  71


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In February 2010, our main shareholders, FEMSA and The Coca-Cola Company, amended the shareholders agreement, and our bylaws were amended accordingly.  The amendment mainly relates to changes in the voting requirements for decisions on:  (1) ordinary operations within an annual business plan and (2) appointment of the chief executive officer and all officers reporting to him, all of which now may be taken by the board of directors by simple majority voting.  Also, the amendment provides that payment of dividends, up to an amount equivalent to 20% of the preceding years’ retained earnings, may be approved by a simple majority of the shareholders.  Any decision on extraordinary matters, as they are defined by our bylaws and which include any new business acquisition, business combinations or any change in the existing line of business, among other things, shall require the approval of the majority of the members of the board of directors, with the vote of two of the members appointed by The Coca-Cola Company.  Also, any decision related to such extraordinary matters or any payment of dividends above 20% of the preceding years’ retained earnings shall require the approval of a majority of shareholders of each of Series A and Series D Shares voting together as a single class. Under our bylaws and shareholders agreement, our Series A Shares and Series D Shares are the only shares with full voting rights and, therefore, control actions by our shareholders. The shareholders agreement also sets forth the principal shareholders’ understanding as to the effect of adverse actions of The Coca-Cola Company under the bottler agreements.  Our bylaws and shareholders agreement provide that a majority of the directors appointed by the holders of Series A Shares, upon making a reasonable, good faith determination that any action of The Coca-Cola Company under any bottler agreement between The Coca-Cola Company and our company or any of our subsidiaries is materially adverse to our business interests and that The Coca-Cola Company has failed to cure such action within 60 days of notice, may declare a simple majority period at any time within 90 days after giving notice.  During the simple majority period, as defined in our bylaws, certain decisions, namely the approval of material changes in our business plans, the introduction of a new, or termination of an existing, line of business, and related party transactions outside the ordinary course of business, to the extent the presence and approval of at least two Series D directors would otherwise be required, can be made by a simple majority vote of our entire board of directors, without requiring the presence or approval of any Series D director.  A majority of the Series A directors may terminate a simple majority period but, once having done so, cannot declare another simple majority period for one year after the termination.  If a simple majority period persists for one year or more, the provisions of the shareholders agreement for resolution of irreconcilable differences may be triggered, with the consequences outlined in the following paragraph. In addition to the rights of first refusal provided for in our bylaws regarding proposed transfers of Series A Shares or Series D Shares, the shareholders agreement contemplates three circumstances under which one principal shareholder may purchase the interest of the other in our company:  (1) a change in control in a principal shareholder, (2) the existence of irreconcilable differences between the principal shareholders or (3) the occurrence of certain specified events of default. In the event that (1) one of the principal shareholders buys the other’s interest in our company in any of the circumstances described above or (2) the ownership of our shares of capital stock other than the Series L Shares of the subsidiaries of The Coca-Cola Company or FEMSA is reduced below 20% and upon the request of the shareholder whose interest is not so reduced, the shareholders agreement requires that our bylaws be amended to eliminate all share transfer restrictions and all special-majority voting and quorum requirements, after which the shareholders agreement would terminate. The shareholders agreement also contains provisions relating to the principal shareholders understanding as to our growth.  It states that it is The Coca-Cola Company’s intention that we will be viewed as one of a small number of its “anchor” bottlers in Latin America.  In particular, the parties agree that it is desirable that we expand by acquiring additional bottler territories in Mexico and other Latin American countries in the event any become available through horizontal growth.  In addition, The Coca-Cola Company has agreed, subject to a number of conditions, that if it obtains ownership of a bottler territory that fits with our operations, it will give us the option to acquire such territory.  The Coca-Cola Company has also agreed to support prudent and sound modifications to our capital structure to support horizontal growth.  The Coca-Cola Company’s agreement as to horizontal growth expires upon either the elimination of the super-majority voting requirements described above or The Coca-Cola Company’s election to terminate the agreement as a result of a default.  72


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The Coca-Cola Memorandum In connection with the acquisition of Panamco in 2003, we established certain understandings primarily relating to operational and business issues with both The Coca-Cola Company and FEMSA that were memorialized in writing prior to completion of the acquisition.  We believe the memorandum should be interpreted in the context of subsequent events, some of which have been noted in the description below.  The terms are as follows: ·The shareholder arrangements between directly wholly owned subsidiaries of FEMSA and The Coca-Cola Company will continue in place.  On February 1, 2010, FEMSA amended its shareholders agreement with The Coca-Cola Company.  See “—The Shareholders Agreement.” ·FEMSA will continue to consolidate our financial results under Mexican Financial Reporting Standards. ·The Coca-Cola Company and FEMSA will continue to discuss in good faith the possibility of implementing changes to our capital structure in the future. ·There will be no changes in concentrate pricing or marketing support by The Coca-Cola Company up to May 2004.  After such time, The Coca-Cola Company has complete discretion to implement any changes with respect to these matters, but any decision in this regard will be discussed with us and will take our operating condition into consideration.  In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages over a three-year period in Brazil beginning in 2006 and in Mexico beginning in 2007.  These increases were fully implemented in Brazil 2008 and in Mexico in 2009. ·The Coca-Cola Company may require the establishment of a different long-term strategy for Brazil.  If, after taking into account our performance in Brazil, The Coca-Cola Company does not consider us to be part of this long-term strategic solution for Brazil, then we will sell our Brazilian franchise to The Coca-Cola Company or its designee at fair market value.  Fair market value would be determined by independent investment bankers retained by each party at their own expense pursuant to specified procedures.  We currently believe the likelihood of this term applying is remote. ·FEMSA, The Coca-Cola Company and us will meet to discuss the optimal Latin American territorial configuration for theCoca-Colabottler system.  During these meetings, we will consider all possible combinations and any asset swap transactions that may arise from these discussions.  In addition, we will entertain any potential combination as long as it is strategically sound and done at fair market value. ·We would like to keep open strategic alternatives that relate to the integration of sparkling beverages and beer.  The Coca-Cola Company, FEMSA and us would explore these alternatives on a market-by-market basis at the appropriate time. ·The Coca-Cola Company agreed to sell to a subsidiary of FEMSA sufficient shares to permit FEMSA to beneficially own 51% of our outstanding capital stock (assuming that this subsidiary of FEMSA does not sell any shares and that there are no issuances of our stock other than as contemplated by the acquisition).  As a result of this understanding, in November 2006, FEMSA acquired, through a subsidiary, 148,000,000 of our Series D shares from certain subsidiaries of The Coca-Cola Company, representing 9.4% of the total outstanding voting shares and 8.02% of the total outstanding equity of Coca-Cola FEMSA, at a price of US$ 2.888 per share for an aggregate amount of US$ 427.4 million.  Pursuant to our bylaws, the acquired shares were converted from Series D Shares to Series A Shares. ·We may be entering some markets where significant infrastructure investment may be required.  The Coca-Cola Company and FEMSA will conduct a joint study that will outline strategies for these markets, as well as the investment levels required to execute these strategies.  Subsequently, it is intended that FEMSA and The Coca-Cola Company will reach agreement on the level of funding to be


provided by each of the partners.  The parties intend that this allocation of funding responsibilities would not be overly burdensome for either partner.  73


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·We entered into a stand-by credit facility in December 2003, with The Coca-Cola Export Corporation, which expired in December 2006 and was never used. Cooperation Framework with The Coca-Cola Company In September 2006, The Coca-Cola Company and we reached at a comprehensive cooperation framework for a new stage of collaboration going forward.  This new framework includes the main aspects of our relationship with The Coca-Cola Company and defines the terms for the new collaborative business model.  The framework is structured around three main objectives, which have been implemented as outlined below: ·Sustainable growth of sparkling beverages, still beverages and waters:Together with The Coca-Cola Company, we have defined a platform to jointly pursue incremental growth in the sparkling beverages category, as well as accelerated development of still beverages and waters across Latin America.  To this end, The Coca-Cola Company will provide a relevant portion of the funds derived from the concentrate increase for marketing support of the entire portfolio.  In addition, the framework contemplates a new, all-encompassing business model for the development, organically and through acquisitions, of still beverages and waters that further aligns our and The Coca-Cola Company’s objectives and should contribute to incremental long-term value creation for both companies.With this objective in mind, we have jointly acquired the Brisa bottled water business in Colombia, we have formalized a joint venture regarding theJugos del Valleproducts in Mexico and Brazil and we have formalized our agreements to jointly develop theCrystalwater business in Brazil, the Matte Leao business in Brazil jointly with other bottlers and the business ofGrupo Estrella Azul in Panama. ·Our horizontal growth:The framework includes The Coca-Cola Company’s endorsement of our aspiration to continue being a leading participant in the consolidation of the Coca-Cola system in Latin America, as well as our exploration of potential opportunities in other markets where our operating model and strong execution capabilities could be leveraged.  For example, in 2008we entered into a transaction with The Coca-Cola Company to acquire from it, REMIL, which was The Coca-Cola Company’s wholly owned bottling franchise in the majority of the State of Minas Gerais of Brazil. ·Long-term vision in relationship economics:We and The Coca-Cola Company understand each other’s business objectives and growth plans, and the new framework provides long-term perspective on the economics of our relationship.  This will allow us and The Coca-Cola Company to focus on continuing to drive the business forward and generating profitable growth.  74


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RELATED PARTY TRANSACTIONS

We believe that our transactions with related party transactions are on terms comparable to those that would result from arm’s length negotiations with unaffiliated parties and are reviewed and approved by our Corporate Practices Committee.



FEMSA We regularly engage in transactions with FEMSA and its subsidiaries. We sell our products to certain FEMSA subsidiaries, substantially all of which consists of our sales to a chain of convenience stores under the name Oxxo.  The aggregate amount of these sales to Oxxo was Ps. 1,623 million, Ps. 1,263 million and Ps. 992 million in 2010, 2009 and 2008, respectively. We also purchase products from FEMSA and its subsidiaries.  The aggregate amount of these purchases was Ps. 5,412million,Ps. 5,941 million and Ps. 5,010 million in 2010, 2009 and 2008, respectively.  These amounts principally relate to raw materials, beer, assets and services provided to us by FEMSA.  In January 2008, we renewed our service agreement with another subsidiary of FEMSA, which provides for the continued provision of administrative services relating to insurance, legal and tax advice, relations with governmental authorities and certain administrative and internal auditing services that it has been providing since June 1993.  In November 2000, we entered into a service agreement with a subsidiary of FEMSA for the transportation of finished products from our production facilities to our distribution centers within Mexico.  In November 2001, we entered into two franchise bottler agreements with Promotora de Marcas Nacionales, S.A. de C.V., an indirect subsidiary of FEMSA, under which we became the sole franchisee for the production, bottling, distribution and sale ofMundetbrands in the valley of Mexico and in most of our operations in Southeast Mexico.  In September 2010, FEMSA sold theMundetbrand in Mexico to The Coca-Cola Companythrough The Coca-Cola Company’s acquisition of 100% of the equity interest ofPromotora de Marcas Nacionales, S.A. de C.V.We remain the licensee of theMundettrademark under the license agreements withPromotora de Marcas Nacionales, S.A. de C.V.Both agreements are renewable for ten-year terms, subject to non-renewal by either party with notice to the other party.  We recently expanded the territories covered by these agreements to certain of our operations outside of Mexico.  We primarily purchase our glass bottles in Mexico from SIVESA, a wholly-owned subsidiary of FEMSA Cerveza,now Cuauhtémoc Moctezuma Holding, S.A. de C.V., currently a wholly-owned subsidiary of the Heineken Group.  The aggregate amount of our purchases from SIVESA amounted to Ps.304.5 million,Ps. 355.1 million and Ps. 408.5 million in 2010, 2009 and 2008, respectively.  Finally, we sell and distribute theKaiserbrands of beer in our territories in Brazil.  In January 2006, FEMSA Cerveza acquired a controlling stake in Cervejarias Kaiser.Since that time, we have distributed theKaiserbeer portfolio in our Brazilian territories, consistent with the arrangements between us and Cervejarias Kaiser in place prior to 2004.On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed.  We have agreed with Cervejarias Kaiser to continue to distribute and sell theKaiserbeer portfolio in our Brazilian territories through the 20-year term, consistent with arrangement in place since 2006.  FEMSA is also a party to the understandings we have with The Coca-Cola Company relating to specified operational and business issues.  A summary of these understandings is set forth under “—Major Shareholders—The Coca-Cola Memorandum.” The Coca-Cola Company We regularly engage in transactions with The Coca-Cola Company and its affiliates.  We purchase all of our concentrate requirements forCoca-Colatrademark beverages from The Coca-Cola Company.  Total expenses charged to us by The Coca-Cola Company for concentrates were approximately Ps. 19,371 million, Ps. 16,863 million and Ps. 13,518 million in 2010, 2009 and 2008, respectively.  Our company and The Coca-Cola Company pay and reimburse each other for marketing expenditures.  The Coca-Cola Company also contributes to our coolers, and bottles and cases investment program.  We received contributions to our marketing expenses and coolers, and bottles and cases investment program of Ps. 2,386 million, Ps. 1,945 million and Ps. 1,995 million in 2010, 2009 and 2008, respectively.  75


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In December 2007 and May 2008, we sold most of our proprietary brands to The Coca-Cola Company.The proprietary brandsare licensed back to us by The Coca-Cola Companypursuant to our bottler agreements.  The December 2007 transaction was valued at US$ 48 million and the May 2008 transaction was valued at US$ 16 million.  We believe that both of these transactions were conducted on an arm’s length basis.Revenues from the sale of proprietary brands realized in prior years in which we have a significant continuing involvement are deferred and amortized against the related costs of future sales over the estimated sales period.The balance to be amortized amounted to Ps.547 million,Ps. 616million and Ps. 571 million as of December 31, 2010, 2009 and 2008, respectively.  The short-term portions to be amortized amounted to Ps.276 million,Ps.203million and Ps. 139 million at December 31, 2010, 2009 and 2008, respectively.  The short-term portions are included in other current liabilities.  The long-term positions are included in other liabilities. In Argentina, we purchase pre-formed plastic ingots, as well as returnable plastic bottles from Embotelladora del Atlántico S.A., a local subsidiary of Embotelladora Andina S.A., aCoca-Colabottler with operations in Argentina, Chile and Brazil in which The Coca-Cola Company has a substantial interest. In November 2007, Administración and The Coca-Cola Company, acquired 100% of the shares of capital stock of Jugos del Valle.  The business of Jugos del Valle in the United States was acquired and sold by The Coca-Cola Company.  In June 2008, Administración and Jugos del Valle (surviving company) were merged.  Subsequently, we and The Coca-Cola Company and all Mexican and BrazilianCoca-Colabottlers entered into a joint business for the Mexican and the Brazilian operations, respectively, of Jugos del Valle, through transactions completed during 2008.  We hold an interest of approximately 20% in each of the Mexican and the Brazilian joint businesses.  Jugos del Valle sellsfruit juice-based beverages and fruit derivatives.  Wedistribute theJugos del Valleline of juice-based beverages in Brazil and our territories in Latincentro. In February 2009, we acquired together with The Coca-Cola Company the Brisa bottled water business in Colombia from Bavaria, a subsidiary of SABMiller.We acquired the production assets and the rights to distribute in the territory, and The Coca-Cola Company acquired theBrisabrand.We and The Coca-Cola Company equally shared in paying the purchase price of US$ 92 million.  Following a transition period, in June 2009, we started to sell and distribute theBrisaportfolio of products in Colombia. In May 2009, we completed a transaction to develop theCrystaltrademark water business in Brazil jointly with The Coca-Cola Company. In August 2010, we acquired from The Coca-Cola Company along with other BrazilianCoca-Colabottlers the business operations of theMatte Leaotea brand.  We currently have a 13.84% indirect interest in the Matte Leao business in Brazil. In March 2011, we acquired together with The Coca-Cola Company, Grupo Estrella Azul, a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama.  We will continue to develop this business jointly with The Coca-Cola Company. Associated Companies We also regularly engage in transactions with companies in which we own an equity interest that are not affiliated with The Coca-Cola Company, as described under “—The Coca-Cola Company.”  We believe these transactions are on terms comparable to those that would result from arm’s length negotiations with unaffiliated third parties. In Mexico, we purchase sparkling beverages in cans from Industria Envasadora de Querétaro, S.A. de C.V., or IEQSA, in which we hold an equity interest of approximately 13.5%.  We paid IEQSA Ps. 196 million, Ps. 208 million and Ps. 333 million in 2010, 2009 and 2008, respectively.  IEQSA purchases aluminum cans from FEMSA.  We also purchase sugar from Beta San Miguel S.A. de C.V., or Beta San Miguel, a sugar-cane producer in which we currentlyhold a 2.6% equity interest.  We paid Ps. 1,307 million, Ps. 713 million and Ps. 687 million to Beta San Miguel in 2010, 2009 and 2008, respectively.  76


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In Mexico, we participate with certainCoca-Colabottlers in PROMESA, in which we hold a 5% interest.  Through PROMESA, we purchase our cans for our Mexican operations, which are manufactured by Fábricas de Monterrey, S.A. de C.V., or FAMOSA, a wholly-owned subsidiary of FEMSA Cerveza, now Cuauhtémoc Moctezuma Holding, S.A. de C.V., currently a wholly-owned subsidiary of the Heineken Group.  We purchased from PROMESA approximately Ps. 684 million, Ps. 783 million and Ps. 525 million in 2010, 2009, and 2008, respectively. Other Related Party Transactions José Antonio Fernández Carbajal, and Ricardo Guajardo Touché, who are directors of Coca-Cola FEMSA, are also members of the board of directors ofInstituto Tecnológico de Estudios Superiores de Monterrey, or ITESM, a Mexican private university that routinely receives donations from us. Allen & Company LLC provides investment banking services to us and our affiliates in the ordinary course of its business.  Enrique Senior, one of our directors, is a Managing Director of Allen & Company LLC, and Herbert Allen III, an alternate director, is the president of Allen & Company LLC. We are insured in Mexico primarily under certain of FEMSA’s insurance policies with Grupo Nacional Provincial S.A., of which the son of the chairman of its board of directors, Alejandro Bailleres Gual is one of our alternate directors.  The policies were purchased pursuant to a competitive bidding process.   77


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Item 8.  Financial Information CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Consolidated Financial Statements

See “Item 18.  Financial Statements” beginning on page F-1.

Dividend Policy

For a discussion of our dividend policy, see “Item 3.  Key Information—Dividends and Dividend Policy.”

Significant Changes

No significant changes have occurred since the date of the annual financial statements included in this annual report.

LEGAL PROCEEDINGS

We are party to various legal proceedings in the ordinary course of business.  Other than as disclosed in this annual report, we are not currently involved in any litigation or arbitration proceeding, including any proceeding that is pending or threatened of which we are aware, which we believe will have, or has had, a material adverse effect on our company.  Other legal proceedings that are pending against or involve us and our subsidiaries are incidental to the conduct of our and their business.  We believe that the ultimate disposition of such other proceedings individually or in an aggregate basis will not have a material adverse effect on our consolidated financial condition or results from operations.

Mexico

Antitrust Matters.  During 2000, theComisión Federal de Competenciain Mexico (the Mexican Antitrust Commission, or CFC), pursuant to complaints filed by PepsiCo and certain of its bottlers in Mexico, began an investigation of The Coca-Cola Company Export Corporation (TCCEC) and its bottlers for alleged monopolistic practices through exclusivity arrangements with certain retailers.  After the corresponding legal proceedings in 2008 in theTribunal Colegiado de Circuito(Mexican federal court), a final adverse judgment was rendered against two out of our six Mexican subsidiaries involved, upholding a fine of approximately Ps.10.5 million imposed by CFC on each of the two subsidiaries and ordering the immediate suspension of such practices of alleged exclusivity arrangements and conditional dealing.  The Mexican Supreme Court decided to resolve the proceedings with respect to the complaints against the remaining four subsidiaries, and on June 9, 2010, the Mexican Federal Court ordered the CFC to reconsider certain aspects of these proceedings.  In March 2011, the CFC ruled in favor of our subsidiaries, on the grounds of insufficient evidence to prove individual and specific liability of our subsidiaries in the alleged antitrust violations.  PepsiCo filed for an administrative recourse against the CFC’s resolution.

In February 2009, the CFC began a new investigation of alleged monopolistic practices consisting of sparkling beverage sales subject to exclusivity agreements and the granting of discounts and/or benefits in exchange for exclusivity arrangements with certain retailers.  As part of this investigation, the CFC has been requiring severalCoca-Colabottlers in Mexico to deliver information regarding their commercial practices and we were required to do so in February 2010.  In the event that the CFC finds evidence of monopolistic practices, it may begin administrative proceedings against the companies involved.  We cannot determine the scope of the investigation at this time.  78


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Central America Antitrust Matters in Costa Rica.  During August 2001, the Comisión para Promover la Competencia in Costa Rica (Costa Rican Antitrust Commission) pursuant to a complaint filed by PepsiCo. and its bottler in Costa Rica initiated an investigation of the sales practices of The Coca-Cola Company and our Costa Rican subsidiary for alleged monopolistic practices in retail distribution, including sales exclusivity arrangements.  A ruling from the Costa Rican Antitrust Commission was issued in July 2004, which found our subsidiary in Costa Rica engaged in monopolistic practices with respect to exclusivity arrangements, pricing and the sharing of coolers under certain limited circumstances and imposed a fine of US$ 130,000 (approximately Ps. 1.5 million).  Our appeal of the Costa Rican Antitrust Commission’s ruling was dismissed.  We have filed judicial proceedings challenging the ruling of the Costa Rican Antitrust Commission and the process is still pending in court.  We believe that this matter will not have a material adverse effect on our financial condition or results from operations.

In November 2004, Ajecen del Sur S.A., the bottler of Big Cola in Costa Rica, filed a complaint before the Costa Rican Antitrust Commission related to monopolistic practices in retail distribution and exclusivity agreements against The Coca-Cola Company and our Costa Rican subsidiary.  The Costa Rican Antitrust Commission has decided to pursue an investigation.  The period for gathering of evidence ended in August 2008, and the final arguments have been filed.  We expect that the maximum fine that could be imposed is US$ 300,000 (approximately Ps. 3.5 million).  We are waiting for the final resolution to be issued by the Costa Rican Antitrust Commission.

Colombia

Labor Matters.  During July 2001, a labor union and several individuals from the Republic of Colombia filed a lawsuit in the U.S. District Court for the Southern District of Florida against certain of our subsidiaries.  The plaintiffs alleged that the subsidiaries engaged in wrongful acts against the labor union and its members in Colombia, including kidnapping, torture, death threats and intimidation.  The complaint alleges claims under the U.S. Alien Tort Claims Act, Torture Victim Protection Act, Racketeer Influenced and Corrupt Organizations Act and state tort law and seeks injunctive and declaratory relief and damages of more than US$ 500 million, including treble and punitive damages and the cost of the suit, including attorney fees.  In September 2006, the federal district court dismissed the complaint with respect to all claims.  The plaintiffs appealed and in August 2009, the Appellate Court affirmed the decision in favor of our subsidiaries. The plaintiffs moved for a rehearing, and in September 2009, the rehearing motion was denied.  Plaintiffs attempted to seek reconsiderationen banc, but so far, the court has not considered it.

Venezuela

Tax Matters.  In 1999, some of our Venezuelan subsidiaries received notice of indirect tax claims asserted by the Venezuelan tax authorities.  These subsidiaries have taken the appropriate measures against these claims at the administrative level and filed appeals with the Venezuelan courts.  The claims currently amount to approximately US$ 21.1 million (approximately Ps. 250 million).  We have certain rights to indemnification from Venbottling Holding, Inc., a former shareholder of Panamco and The Coca-Cola Company, for a substantial portion of the claims.  We do not believe that the ultimate resolution of these cases will have a material adverse effect on our financial condition or results from operations.

Brazil

Antitrust Matters.  Several claims have been filed against us by private parties that allege anticompetitive practices by our Brazilian subsidiaries.  The plaintiffs are Ragi (Dolly), a Brazilian producer of “B Brands,” and PepsiCo, alleging anticompetitive practices by Spal Indústria Brasileira de Bebidas S.A. and Recofarma Indústria do Amazonas Ltda.  Of the four claims Dolly filed against us, the only one remaining concerns a denial of access to common suppliers.  Of the two claims made by PepsiCo, the first concerns exclusivity arrangements at the point of sale, and the second is an alleged corporate espionage allegation against the Pepsibottler, BAESA, which the Ministry of Economy recommended to be dismissed for lack of evidence.  Under Brazilian law, each of these claims could result in substantial monetary fines and other penalties although we believe each of the claims is without merit.  79


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Item 9.  The Offer and Listing TRADING MARKETS The following table sets forth, for the periods indicated, the reported high and low nominal sale prices for the Series L Shares on the Mexican Stock Exchange and the reported high and low nominal sale prices for the ADSs on the New York Stock Exchange: Mexican Stock Exchange

   

   New York Stock ExchangeMexican pesos per Series L Share

   

   U.S. dollars per ADSHigh(1)

   

   Low(1)

   

   High(1)

   

   Low(1)2006:Full year

   Ps.

   41.45

   

   Ps.

   29.30

   

   US$

   38.00

   

   US$

   26.752007:Full year

   Ps.

   53.65

   

   Ps.

   37.78

   

   US$

   49.28

   

   US$

   34.052008:Full year

   Ps.

   64.49

   

   Ps.

   38.00

   

   US$

   62.50

   

   US$

   27.742009:First quarter

   Ps.

   62.90

   

   Ps.

   40.96

   

   US$

   45.13

   

   US$

   26.41Second quarter

   

   56.83

   

   

   48.23

   

   

   43.09

   

   

   35.16Third quarter

   

   65.81

   

   

   53.31

   

   

   49.47

   

   

   39.03Fourth quarter

   

   86.71

   

   

   66.43

   

   

   66.87

   

   

   47.752010:First quarter

   Ps.

   88.07

   

   Ps.

   74.24

   

   US$

   69.67

   

   US$

   57.67Second quarter

   

   94.00

   

   

   79.90

   

   

   70.99

   

   

   62.59Third quarter

   

   103.37

   

   

   81.83

   

   

   81.26

   

   

   62.76Fourth quarter

   

   103.36

   

   

   92.25

   

   

   83.61

   

   

   76.96December

   

   103.36

   

   

   97.72

   

   

   83.61

   

   

   78.742011:First quarter

   Ps.

   102.34

   

   Ps.

   87.40

   

   US$

   83.65

   

   US$

   72.08January

   

   102.34

   

   

   95.27

   

   

   83.65

   

   

   78.79February

   

   99.00

   

   

   87.48

   

   

   82.33

   

   

   72.34March

   

   94.95

   

   

   87.40

   

   

   79.16

   

   

   72.08April

   

   96.50

   

   

   91.86

   

   

   83.02

   

   

   79.23May

   

   100.60

   

   

   91.00

   

   

   86.91

   

   

   78.47
 
 (1)     High and low closing prices for the periods presented.   80


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TRADING ON THE MEXICAN STOCK EXCHANGE The Mexican Stock Exchange or theBolsa Mexicana de Valores, S.A.B. de C.V., located in Mexico City, is the only stock exchange in Mexico.  Trading takes place principally through automated systems that are open between the hours of 8:30 a.m. and 3:00 p.m. Mexico City time, each business day.  Beginning in March 2008, during daylight savings time, trading hours change to match the New York Stock Exchange trading hours, opening at 7:30 a.m. and closing at 2:00 p.m. local time.  The Mexican Stock Exchange operates a system of automatic suspension of trading in shares of a particular issuer as a means of controlling excessive price volatility, but under current regulations this system does not apply to securities such as the Series L Shares that are directly or indirectly (for example, through ADSs) quoted on a stock exchange outside of Mexico. Settlement is effected three business days after a share transaction on the Mexican Stock Exchange.  Deferred settlement, even by mutual agreement, is not permitted without the approval of the Mexican Stock Exchange.  Most securities traded on the Mexican Stock Exchange, including our shares, are on deposit with S.D. Indeval, S.A. de C.V., Instituto para el Depósito de Valores, which we refer to as Indeval, a privately owned securities depositary that acts as a clearinghouse for Mexican Stock Exchange transactions.  81


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**Item 10.  AdditionalInformation** BYLAWS

The following is a summary of the material provisions of our bylaws and applicable Mexican law.  The last amendment of our bylaws was approved on April 14, 2010, in accordance with the amendment of the shareholders agreement among our major shareholders, dated as of February 1, 2010.  For a description of the provisions of our bylaws relating to our board of directors and executive officers, see “Item 6.  Directors, Senior Management and Employees.”

Organization and Register We were incorporated on October 30, 1991, as asociedad anónima de capital variable(Mexican variable stock corporation) in accordance with theLey General de Sociedades Mercantiles(Mexican General Corporations Law).  On December 5, 2006, we became asociedad anónima bursátil de capital variable(Mexican variable capital listed stock company) and amended our bylaws in accordance with the Mexican Securities Market Law.  We were registered in theRegistro Público de la Propiedad y del Comercio(Public Registry of Property and Commerce) of Monterrey, Nuevo León, Mexico on November 22, 1991 under mercantile number 2986, folio 171, volume 365, third book of the Commerce section. Purposes The main corporate purposes of our company include the following: ·to establish, promote and organize corporations or companies of any type, as well as to acquire and possess shares or equity participations in them; ·to carry out all types of active and passive transactions involving bonds, shares, participations and securities of any type; ·to provide or receive advisory, consulting or other types of services in business matters; ·to conduct business with equipment, raw materials and any other items necessary to the companies in which we have an interest in or with which we have commercial relations; ·to acquire and dispose of trademarks, tradenames, commercial names, copyrights, patents, inventions, franchises, distributions, concessions and processes; ·to possess, build, lease and operate real and personal property, install or by any other title operate plants, warehouses, workshops, retail or deposits necessary for our corporate purpose; ·to subscribe, buy and sell stocks, bonds and securities among other things; and ·to draw, accept, make, endorse or guarantee negotiable instruments, issue bonds secured with real property or unsecured, and to make us jointly liable, to grant security of any type with regard to obligations entered into by us or by third parties, and in general, to perform the acts, enter into the agreements and carry out other transactions as may be necessary or conducive to our business purpose. Voting Rights, Transfer Restrictions and Certain Minority Rights Series A and Series D Shares have full voting rights and are subject to transfer restrictions.  Although no Series B Shares have been issued, our bylaws provide for the issuance of Series B Shares with full voting rights that are freely transferable.  Series L Shares are freely transferable but have limited voting rights.  None of our shares are exchangeable for shares of a different series.  The rights of all series of our capital stock are substantially identical except for:  82


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·restrictions on transfer of the Series A and Series D Shares; ·limitations on the voting rights of Series L Shares; ·the respective rights of the Series A, Series D and Series L Shares, voting as separate classes in a special meeting, to elect specified numbers of our directors and alternate directors; ·the respective rights of Series D Shares to participate in the voting of extraordinary matters, as they are defined by our bylaws; and ·prohibitions on non-Mexican ownership of Series A Shares.  See “Item 6.  Directors, Senior Management and Employees,” and “—Additional Transfer Restrictions Applicable to Series A and Series D Shares.” Under our bylaws, holders of Series L Shares are entitled to vote in limited circumstances.  They may appoint for election and elect up to three of our 18 directors and, in certain circumstances where holders of Series L Shares have not voted for the director elected by holders of the majority of these series of shares, they may be entitled to elect and remove one director, through a general shareholders meeting, if they own 10% or more of all issued, subscribed and paid shares of the capital stock of the company, pursuant to the Mexican Securities Market Law.  See “Item 6.  Directors, Senior Management and Employees.”  In addition, they are entitled to vote on certain matters, including certain changes in our corporate form, mergers involving our company when our company is the merged entity or when the principal corporate purpose of the merged entity is not related to the corporate purpose of our company, the cancellation of the registration of our shares in the Mexican Stock Exchange or any other foreign stock exchange and those matters for which the Mexican Securities Market Law expressly allow them to vote. Holders of our shares in the form of ADSs will receive notice of shareholders meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner.  Our past practice, which we intend to continue, has been to inform the depositary to timely notify holders of our shares in the form of ADSs of upcoming votes and ask for their instructions. A quorum of 82% of our subscribed and paid shares of capital stock (including the Series L Shares) and the vote of at least a majority of our capital stock voting (and not abstaining) at such extraordinary meeting is required for: ·the transformation of our company from one type of company to another (other than changing from a variable capital to fixed-capital corporation and vice versa); ·any merger where we are not the surviving entity or any merger with an entity whose principal corporate purposes are different from those of our company or our subsidiaries; and ·cancellation of the registration of our shares with the Mexican Registry of Securities, or RNV, maintained by the CNBV or with other foreign stock exchanges on which our shares may be listed. In the event of cancellation of the registration of any of our shares in the RNV, whether by order of the CNBV or at our request with the prior consent of 95% of the holders of our outstanding capital stock, our bylaws and the Mexican Securities Market Law require us to make a public offer to acquire these shares prior to their cancellation. Holders of Series L Shares may attend, but not address, meetings of shareholders at which they are not entitled to vote. Under our bylaws and the Mexican General Corporations Law, holders of shares of any series are entitled to vote as a class in a special meeting governed by the same rules that apply to extraordinary meetings on any action that would have an effect on the rights of holders of shares of such series.  There are no procedures for determining


whether a particular proposed shareholder action requires a class vote, and Mexican law does not provide extensive guidance on the criteria to be applied in making such a determination.  83


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Pursuant to the Mexican Securities Market Law, we are subject to a number of minority shareholder protections.  These minority protections include provisions that permit: ·holders of at least 10% of our outstanding capital stock entitled to vote (including in a limited or restricted manner) may require the chairman of the board of directors or of the Audit or Corporate Practices Committees to call a shareholders meeting; ·holders of at least 5% of our outstanding capital stock may bring an action for liability against our directors, the secretary of the board of directors or certain key officers; ·holders of at least 10% of our outstanding capital stock who are entitled to vote, including limited or restricted vote, at any shareholders meeting to request that resolutions with respect to any matter on which they considered they were not sufficiently informed be postponed; ·holders of 20% of our outstanding capital stock to oppose any resolution adopted at a shareholders meeting in which they are entitled to vote and file a petition for a court order to suspend the resolution temporarily within 15 days following the adjournment of the meeting at which the action was taken, provided that (1) the challenged resolution violates Mexican law or our bylaws, (2) the opposing shareholders neither attended the meeting nor voted in favor of the challenged resolution and (3) the opposing shareholders deliver a bond to the court to secure payment of any damages that we may suffer as a result of suspending the resolution in the event that the court ultimately rules against the opposing shareholder; and ·holders of at least 10% of our outstanding capital stock who are entitled to vote, including limited or restricted vote, to appoint one member of our board of directors and one alternate member of our board of directors. Shareholders Meetings General shareholders meetings may be ordinary meetings or extraordinary meetings.  Extraordinary meetings are those called to consider certain matters specified in Article 182 of the Mexican General Corporations Law, Article 53 of the Mexican Securities Market Law and in our bylaws.  These matters include, among others: amendments to the bylaws, liquidation, dissolution, merger and transformation from one form of company to another, issuance of preferred stock and increases and reductions of the fixed portion of our capital stock.  In addition, our bylaws require an extraordinary meeting to consider the cancellation of the registration of our shares with the RNV or with other foreign stock exchanges on which our shares may be listed, the amortization of distributable earnings into capital stock, and an increase in our capital stock.  All other matters, including increases or decreases affecting the variable portion of our capital stock, are considered at an ordinary meeting. An ordinary meeting of the holders of Series A and Series D Shares must be held at least once each year (1) to consider the approval of the financial statements of our Company for the preceding fiscal year and (2) to determine the allocation of the profits of the preceding year.  Further, any transaction to be entered into by us or our subsidiaries within the next fiscal year that represents 20% or more of our consolidated assets must be approved at an ordinary shareholders meeting at which holders of Series L Shares shall be entitled to vote. Mexican law provides for a special meeting of shareholders to allow holders of shares of a series to vote as a class on any action that would prejudice exclusively the rights of holders of such series.  Holders of Series A, Series D and Series L Shares at their respective special meetings must appoint, remove or ratify directors, as well as determine their compensation. The quorum for ordinary and extraordinary meetings at which holders of Series L Shares are not entitled to vote is 76% of the holders of subscribed and paid Series A and Series D Shares, and the quorum for an extraordinary


meeting at which holders of Series L Shares are entitled to vote is 82% of the subscribed and paid shares of capital stock.  84


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The quorum for special meetings of any series of shares is 75% of the holders of the subscribed and paid capital stock of such shares, and action may be taken by holders of a majority of such series of shares. Resolutions adopted at an ordinary or extraordinary shareholders meeting are valid when adopted by holders of at least a majority of the subscribed and paid in capital stock voting (and not abstaining) at the meeting, unless in the event of any decisions defined as extraordinary matters by the bylaws or any payment of dividends above 20% of the preceding years’ retained earnings, which shall require the approval of a majority of shareholders of each of Series A and Series D Shares voting together as a single class.  Resolutions adopted at a special shareholders meeting are valid when adopted by the holders of at least a majority of the subscribed and paid shares of the series of shares entitled to attend the special meeting. Shareholders meetings may be called by the board of directors, the Audit Committee or the Corporate Practices Committee and, under certain circumstances, a Mexican court.  Holders of 10% or more of our capital stock may require the chairman of the board of directors, or the chairmen of the Audit Committee or Corporate Practices Committee to call a shareholders meeting.  A notice of meeting and an agenda must be published in a newspaper of general circulation in Mexico City at least 15 days prior to the meeting.  Notices must set forth the place, date and time of the meeting and the matters to be addressed and must be signed by whomever convened the meeting.  All relevant information relating to the shareholders meeting must be made available to shareholders starting on the date of publication of the notice.  To attend a meeting, shareholders must deposit their shares with the company or with Indeval or an institution for the deposit of securities prior to the meeting as indicated in the notice.  If entitled to attend the meeting, a shareholder may be represented by an attorney-in-fact. Additional Transfer Restrictions Applicable to Series A and Series D Shares Our bylaws provide that no holder of Series A or Series D Shares may sell its shares unless it has disclosed the terms of the proposed sale and the name of the proposed buyer and has previously offered to sell the shares to the holders of the other series for the same price and terms as it intended to sell the shares to a third party.  If the shareholders being offered shares do not choose to purchase the shares within 90 days of the offer, the selling shareholder is free to sell the shares to the third party at the price and under the specified terms.  In addition, our bylaws impose certain procedures in connection with the pledge of any Series A or Series D Shares to any financial institution that are designed, among other things, to ensure that the pledged shares will be offered to the holders of the other series at market value prior to any foreclosure.  Finally, a proposed transfer of Series A or Series D Shares other than a proposed sale or a pledge, or a change of control of a holder of Series A or Series D Shares that is a subsidiary of a principal shareholder, would trigger rights of first refusal to purchase the shares at market value.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.” Dividend Rights At the annual ordinary meeting of holders of Series A and Series D Shares, the board of directors submits our financial statements for the previous fiscal year, together with a report thereon by the board of directors.  Once the holders of Series A and Series D Shares have approved the financial statements, they determine the allocation of our net income for the preceding year.  Mexican law requires the allocation of at least 5% of net income to a legal reserve, which is not subsequently available for distribution until the amount of the legal reserve equals 20% of our capital stock.  Thereafter, the holders of Series A and Series D Shares may determine and allocate a certain percentage of net income to any general or special reserve, including a reserve for open-market purchases of our shares.  The remainder of net income is available for distribution in the form of dividends to the shareholders. All shares outstanding and fully paid (including Series L Shares) at the time a dividend or other distribution is declared are entitled to share equally in the dividend or other distribution.  No series of shares is entitled to a preferred dividend.  Shares that are only partially paid participate in a dividend or other distributions in the same proportion that the shares have been paid at the time of the dividend or other distributions.  Treasury shares are not entitled to dividends or other distributions.  85


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Change in Capital According to our bylaws, any change in our authorized capital stock requires a resolution of an extraordinary meeting of shareholders.  We are permitted to issue shares constituting fixed capital and shares constituting variable capital.  The fixed portion of our capital stock may be increased or decreased only by amendment of our bylaws adopted by a resolution at an extraordinary meeting of the shareholders.  The variable portion of our capital stock may be increased or decreased by resolution of an ordinary meeting of the shareholders without amending our bylaws.  All changes in the fixed or variable capital have to be registered in our capital variation registry. A capital stock increase may be effected through the issuance of new shares for payment in cash or in kind, or by capitalization of indebtedness or of certain items of shareholders’ equity.  Treasury stock may only be sold pursuant to a public offering. Preemptive Rights The Mexican Securities Market Law permits the issuance and sale of shares through a public offering without granting shareholders preemptive rights, if permitted by the bylaws and upon, among other things, express authorization of the CNBV and the approval of the extraordinary shareholders meeting called for such purpose.  Under Mexican law and our bylaws, except in these circumstances and other limited circumstances (including mergers, sales of repurchased shares, conversion into shares of convertible securities and capital increases by means of payment in kind for shares or shares issued in return for the cancellation of debt), in the event of an increase in our capital stock, a holder of record generally has the right to subscribe to shares of a series held by such holder sufficient to maintain such holder’s existing proportionate holding of shares of that series.  Preemptive rights must be exercised during a term fixed by the shareholders at the meeting declaring the capital increase, which term must last at least 15 days following the publication of notice of the capital increase in the Mexican Official State Gazette.  As a result of applicable United States securities laws, holders of ADSs may be restricted in their ability to participate in the exercise of preemptive rights under the terms of the deposit agreement.  Shares subject to a preemptive rights offering, with respect to which preemptive rights have not been exercised, may be sold by us to third parties on the same terms and conditions previously approved by the shareholders or the board of directors.  Under Mexican law, preemptive rights cannot be waived in advance or be assigned, or be represented by an instrument that is negotiable separately from the corresponding shares. Limitations on Share Ownership Ownership by non-Mexican nationals of shares of Mexican companies is regulated by the 1993 Foreign Investment Law and its regulations.  The Mexican Foreign Investment Commission is responsible for the administration of the Mexican Foreign Investment Law and its regulations. As a general rule, the Mexican Foreign Investment Law allows foreign holdings of up to 100% of the capital stock of Mexican companies, except for those companies engaged in certain specified restricted industries.  The Mexican Foreign Investment Law and its regulations require that Mexican shareholders retain the power to determine the administrative control and the management of corporations in industries in which special restrictions on foreign holdings are applicable.  Foreign investment in our shares is not limited under either the Mexican Foreign Investment Law or its regulations. Although the Mexican Foreign Investment Law grants broad authority to the Mexican Foreign Investment Commission to allow foreign investors to own more than 49% of the capital of Mexican enterprises after taking into consideration public policy and economic concerns, our bylaws provide that Series A Shares must at all times constitute no less than 51% of all outstanding common shares (excluding Series L Shares) and may only be held by Mexican investors.  Under our bylaws, in the event Series A Shares are subscribed or acquired by any other shareholders holding shares of any other series, and the shareholder is of a nationality other than Mexican, these Series A Shares are automatically converted into shares of the same series of stock that this shareholder owns, and this conversion will be considered perfected at the same time as the subscription or acquisition, provided however that Series A Shares may never represent less than 51% of the capital stock.  86


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Other Provisions Authority of the Board of Directors.  The board of directors is our legal representative and is authorized to take any action in connection with our operations not expressly reserved to our shareholders.  Pursuant to the Mexican Securities Market Law, the board of directors must approve, observing at all moments their duty of care and duty of loyalty, among other matters: ·any transactions with related parties outside the ordinary course of our business; ·significant asset transfers or acquisitions; ·material guarantees or collateral; ·appointment of officers and managers deemed necessary, as well as the necessary committees; ·the five-year business plan and the annual business plan; ·internal policies; and ·other material transactions. Meetings of the board of directors are validly convened and held if a majority of the members are present.  Resolutions passed at these meetings will be valid if approved by a majority of the directors voting (and not abstaining).  The majority of the members, which shall include the vote of at least two Series D Shares directors, shall approve any extraordinary decision including any new business acquisition or combination or any change in the existing line of business, among others.  If required, the chairman of the board of directors may cast a tie-breaking vote. See “Item 6.  Directors, Senior Management and Employees—Directors” and “Item 6.  Directors, Senior Management and Employees—Board Practices.” Redemption.  Our fully paid shares are subject to redemption in connection with either (1) a reduction of capital stock or (2) a redemption with distributable earnings, which, in either case, must be approved by our shareholders at an extraordinary shareholders meeting.  The shares subject to any such redemption would be selected by us by lot or in the case of redemption with distributable earnings, by purchasing shares by means of a tender offer conducted on the Mexican Stock Exchange, in accordance with the Mexican General Corporations Law and the Mexican Securities Market Law. Repurchase of Shares.  According to our bylaws, and subject to the provisions of the Mexican Securities Market Law and under rules promulgated by the CNBV, we may repurchase our shares. In accordance with the Mexican Securities Market Law, our subsidiaries may not purchase, directly or indirectly, shares of our capital stock or any security that represents such shares. Forfeiture of Shares.  As required by Mexican law, our bylaws provide that non-Mexican holders of our shares are (1) considered to be Mexican with respect to such shares that they acquire or hold and (2) may not invoke the protection of their own governments in respect of the investment represented by those shares.  Failure to comply with our bylaws may result in a penalty of forfeiture of a shareholder’s capital stock in favor of the Mexican state.  Under this provision, a non-Mexican holder of our shares (including a non-Mexican holder of ADSs) is deemed to have agreed not to invoke the protection of its own government by asking such government to interpose a diplomatic claim against the Mexican state with respect to its rights as a shareholder, but is not deemed to have waived any other rights it may have, including any rights under the United States securities laws, with respect to its investment in our company.  If a shareholder should invoke governmental protection in violation of this agreement, its shares could be forfeited to the Mexican state.  87


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Duration.  Our bylaws provide that our company’s term is for 99 years from its date of incorporation, unless extended through a resolution of an extraordinary shareholders meeting. Fiduciary Duties—Duty of Care.  The Mexican Securities Market Law provides that the directors shall act in good faith and in our best interest and in the best interest of our subsidiaries.  In order to fulfill its duty, the board of directors may: ·request information about us or our subsidiaries that is reasonably necessary to fulfill its duties; ·require our officers and certain other persons, including the external auditors, to appear at board of directors’ meetings to report to the board of directors; ·postpone board of directors’ meetings for up to three days when a director has not been given sufficient notice of the meeting or in the event that a director has not been provided with the information provided to the other directors; and ·require a matter be discussed and voted upon by the full board of directors in the presence of the secretary of the board of directors. Our directors may be liable for damages for failing to comply their duty of care if such failure causes economic damage to us or our subsidiaries and the director (1) failed to attend, board of directors’ or committee meetings and as a result of, such failure, the board of directors was unable to take action, unless such absence is approved by the shareholders meeting, (2) failed to disclose to the board of directors or the committees material information necessary for the board of directors to reach a decision, unless legally prohibited from doing so or required to do so to maintain confidentiality, and (3) failed to comply with the duties imposed by the Mexican Securities Market Law or our bylaws. Fiduciary Duties—Duty of Loyalty.  The Mexican Securities Market Law provides that the directors and secretary of the board of directors shall keep confidential any non-public information and matters about which they have knowledge as a result of their position.  Also, directors should abstain from participating, attending or voting at meetings related to matters where they have a conflict of interest. The directors and secretary of the board of directors will be deemed to have violated the duty of loyalty, and will be liable for damages, when they obtain an economic benefit by virtue of their position.  Further, the directors will fail to comply with their duty of loyalty if they: ·vote at a board of directors’ meeting or take any action on a matter involving our assets where there is a conflict of interest; ·fail to disclose a conflict of interest during a board of directors’ meeting; ·enter into an voting arrangement to support a particular shareholder or group of shareholders against the other shareholders; ·approve transactions without complying with the requirements of the Mexican Securities Market Law; ·use company property in violation of the policies approved by the board of directors; ·unlawfully use material non-public information; and ·usurp a corporate opportunity for their own benefit or the benefit of a third party, without the prior approval of the board of directors.  88


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Appraisal Rights.  Whenever the shareholders approve a change of corporate purpose, change of nationality or the transformation from one form of company to another, any shareholder entitled to vote on such change that has voted against it, may withdraw as a shareholder of our company and have its shares redeemed at a price per share calculated as specified under applicable Mexican law, provided that it exercises its right within 15 days following the adjournment of the meeting at which the change was approved.  In this case, the shareholder would be entitled to the reimbursement of its shares, in proportion to the company’s assets in accordance with the last approved balance sheet.  Because holders of Series L Shares are not entitled to vote on certain types of these changes, these withdrawal rights are available to holders of Series L Shares in fewer cases than to holders of other series of our capital stock. Liquidation.  Upon our liquidation, one or more liquidators may be appointed to wind up our affairs.  All fully paid and outstanding shares of capital stock (including Series L Shares) will be entitled to participate equally in any distribution upon liquidation.  Shares that are only partially paid participate in any distribution upon liquidation in the proportion that they have been paid at the time of liquidation.  There are no liquidation preferences for any series of our shares. Actions Against Directors.  Shareholders (including holders of Series L Shares) representing, in the aggregate, not less than 5% of the capital stock may directly bring an action against directors In the event of actions derived from any breach of the duty of care and the duty of loyalty, liability is exclusively in favor of the company.  The Mexican Securities Market Law, contrary to the previous securities law, establishes that liability may be imposed on the members and the secretary of the board of directors, as well as to the relevant officers. Notwithstanding, the Mexican Securities Market Law provides that the members of the board of directors will not incur, individually or jointly, in liability for damages and losses caused to the company, when their acts were made in good faith, provided that (1) the directors complied with the requirements of the Mexican Securities Market Law and with the company’s bylaws, (2) the decision making or voting was based on information provided by the relevant officers, the external auditor or the independent experts, whose capacity and credibility do not offer reasonable doubt; (3) the negative economic effects could not have been foreseen, based on the information available; and (4) the resolutions of the shareholders meeting were observed. Limited Liability.  The liability of shareholders for our company’s losses is limited to their shareholdings in our company.  89


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MATERIAL AGREEMENTS We manufacture, package, distribute and sell sparkling beverages, still beverages and bottled water under bottler agreements with The Coca-Cola Company.  In addition, pursuant to a tradename license agreement with The Coca-Cola Company, we are authorized to use certain trademark names of The Coca-Cola Company.  For a discussion of the terms of these agreements, see “Item 4.  Information on the Company—Bottler Agreements.” We operate pursuant to a shareholders agreement, as amended from time to time, among two subsidiaries of FEMSA, The Coca-Cola Company and certain of its subsidiaries.  For a discussion of the terms of this agreement, see “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.” We purchase the majority of our non-returnable plastic bottles from ALPLA, a provider authorized by The Coca-Cola Company, pursuant to an agreement we entered into in April 1998 for our original operations in Mexico.  Under this agreement, we rent plant space to ALPLA, where it produces plastic bottles to certain specifications and quantities for our use. In September 2010, we renewed and extended our existing agreements with Hewlett Packard (formerly known as Electronic Data Systems before acquisition by Hewlett Packard), for the outsourcing of technology services in all of our territories. These agreements are valid until August 2015, unless terminated by us through previous notice to Hewlett Packard.  See “Item 5.  Operating and Financial Review and Prospects—Summary of Significant Debt Instruments” for a brief discussion of certain terms of our significant debt agreements. See “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions” for a discussion of other transactions and agreements with our affiliates and associated companies.  90


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TAXATION The following summary contains a description of certain U.S. federal income and Mexican federal tax consequences of the purchase, ownership and disposition of our Series L Shares or ADSs by a holder that is a citizen or resident of the United States, a U.S. domestic corporation or a person or entity that otherwise will be subject to U.S. federal income tax on a net income basis in respect of the Series L Shares or ADSs, which we refer to as a U.S. holder, but it does not purport to be a description of all of the possible tax considerations that may be relevant to a decision to purchase the Series L Shares or ADSs.  In particular, this discussion does not address all Mexican or U.S. federal income tax considerations that may be relevant to a particular investor, nor does it address the special tax rules applicable to certain categories of investors, such as banks, dealers, traders who elect to mark to market, tax-exempt entities, insurance companies, certain short-term holders of Series L Shares or ADSs or investors who hold the Series L Shares or ADSs as part of a hedge, straddle, conversion or integrated transaction or investors who have a “functional currency” other than the U.S. dollar.  U.S. holders should be aware that the tax consequences of holding the Series L Shares or ADSs may be materially different for investors described in the preceding sentence.  This summary deals only with U.S. holders that will hold the Series L Shares or ADSs as capital assets and does not address the tax treatment of a U.S. holder that owns or is treated as owning 10% or more of the voting shares (including Series L Shares) of our company. This summary is based upon the federal tax laws of the United States and Mexico as in effect on the date of this annual report, including the provisions of the income tax treaty between the United States and Mexico and the protocols thereto, which we refer in this annual report as the Tax Treaty, which are subject to change.  The summary does not address any tax consequences under the laws of any state or locality of Mexico or the United States or the laws of any taxing jurisdiction other than the federal laws of Mexico and the United States.  Holders of the Series L Shares or ADSs should consult their tax advisers as to the U.S., Mexican or other tax consequences of the purchase, ownership and disposition of Series L Shares or ADSs, including, in particular, the effect of any foreign, state or local tax laws. Mexican Taxation For purposes of this summary, the term “non-resident holder” means a holder that is not a resident of Mexico and that does not hold the Series L Shares, or ADSs in connection with the conduct of a trade or business through a permanent establishment in Mexico.  For purposes of Mexican taxation, an individual is a resident of Mexico if he or she has established his or her home in Mexico, or if he or she has another home outside Mexico but his or her “center of vital interests” (as defined in the Mexican Tax Code) is located in Mexico.  The “center of vital interests” of an individual is situated in Mexico when, among other circumstances, more than 50% of that person’s total income during a calendar year originates from within Mexico.  A legal entity is a resident of Mexico if either it is organized under the laws of Mexico or it has its principal place of business or its place of effective management in Mexico.  A Mexican citizen is presumed to be a resident of Mexico unless such a person can demonstrate that the contrary is true.  If a legal entity or an individual is deemed to have a permanent establishment in Mexico for tax purposes, all income attributable to such a permanent establishment will be subject to Mexican taxes, in accordance with applicable tax laws. Tax Considerations Relating to the Series L Shares and the ADSs Taxation of Dividends.  Under Mexican income tax law, dividends, either in cash or in kind, paid with respect to the Series L Shares represented by ADSs or the Series L Shares are not subject to Mexican withholding tax. Taxation of Dispositions of ADSs or Series L Shares.  Gains from the sale or disposition of ADSs by non-resident holders will not be subject to Mexican withholding tax.  Gains from the sale of Series L Shares carried out by non resident holders through the Mexican Stock Exchange or other securities markets situated in countries that have a tax treaty with Mexico will generally be exempt from Mexican tax provided certain additional requirements are met.  Also, certain restrictions will apply if the Series L Shares are transferred as a consequence of public offerings.  91


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Gains on the sale or other disposition of Series L Shares or ADSs made in other circumstances generally would be subject to Mexican tax, regardless of the nationality or residence of the transferor.  However, under the Tax Treaty, a holder that is eligible to claim the benefits of the Tax Treaty will be exempt from Mexican tax on gains realized on a sale or other disposition of Series L Shares or ADSs in a transaction that is not carried out through the Mexican Stock Exchange or other approved securities markets, so long as the holder did not own, directly or indirectly, 25% or more of our total capital stock (including Series L Shares represented by ADSs) within the 12-month period preceding such sale or other disposition and provided that the gains are not attributable to a permanent establishment or a fixed base in Mexico.  Deposits of Series L Shares in exchange for ADSs and withdrawals of Series L Shares in exchange for ADSs will not give rise to Mexican tax. Non-resident holders that do not meet the requirements referred to above are subject to a 5% withholding tax on the gross sales price received upon the sale of Series L Shares through the Mexican Stock Exchange.  Alternatively, non-resident holders may elect to be subject to a 20% tax rate on their net gains from the sale as calculated pursuant to the Mexican Income Tax Law provisions.  In both cases, the financial institutions involved in the transfers must withhold the tax. Other Mexican Taxes There are no Mexican inheritance, gift, succession or value added taxes applicable to the ownership, transfer, exchange or disposition of the ADSs or the Series L Shares, although gratuitous transfers of Series L Shares may in certain circumstances cause a Mexican federal tax to be imposed upon the recipient.  There are no Mexican stamp, issue, registration or similar taxes or duties payable by holders of the ADSs or Series L Shares.

United States Taxation

Tax Considerations Relating to the Series L Shares and the ADSs In general, for U.S. federal income tax purposes, holders of ADSs will be treated as the owners of the Series L Shares represented by those ADSs. Taxation of Dividends.  The gross amount of any dividends paid with respect to the Series L Shares represented by ADSs or the Series L Shares generally will be included in the gross income of a U.S. holder as ordinary income on the day on which the dividends are received by the U.S. holder, in the case of the Series L Shares, or by the depositary, in the case of the Series L Shares represented by ADSs, and will not be eligible for the dividends received deduction allowed to corporations under the Internal Revenue Code of 1986, as amended.  Dividends, which will be paid in Mexican pesos, will be includible in the income of a U.S. holder in a U.S. dollar amount calculated, in general, by reference to the exchange rate in effect on the date that they are received by the U.S. holder, in the case of the Series L Shares, or by the depositary, in the case of the Series L Shares represented by the ADSs (regardless of whether such Mexican pesos are in fact converted into U.S. dollars on such date).  If such dividends are converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividends.  Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual U.S. holder in respect of Series L Shares or ADSs before January 1, 2011 is subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.”  Dividends paid on the ADSs will be treated as qualified dividends if (1) the issuer is eligible for the benefits of a comprehensive income tax treaty with the United States that the Internal Revenue Service has approved for the purposes of the qualified dividend rules and (2) the issuer was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid a passive foreign investment company.  The income tax treaty between Mexico and the United States has been approved for the purposes of the qualified dividend rules.  Based on our audited consolidated financial statements and relevant market and shareholder data, we believe that we were not treated as a passive foreign investment company for U.S. federal income tax purposes with respect to our 2010 taxable year.  In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a passive foreign investment company for our 2011 taxable year.  U.S. holders should consult their tax advisers regarding the treatment of the foreign currency gain or loss, if any, on any Mexican pesos received that are converted into U.S. dollars on a date subsequent to the


date of receipt.  Dividends generally will constitute foreign source “passive income” for U.S. foreign tax credit purposes.  92


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Distributions to holders of additional Series L Shares with respect to their ADSs that are made as part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax. A holder of Series L Shares or ADSs that is, with respect to the United States, a foreign corporation or non-U.S. holder generally will not be subject to U.S. federal income or withholding tax on dividends received on Series L Shares or ADSs unless such income is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States. Taxation of Capital Gains.  A gain or loss realized by a U.S. holder on the sale or other disposition of ADSs or Series L Shares will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the amount realized on the disposition and such U.S. holder’s tax basis in the ADSs or the Series L Shares.  Any such gain or loss will be a long-term capital gain or loss if the ADSs or Series L Shares were held for more than one year on the date of such sale.  Long-term capital gain recognized by a U.S. holder that is an individual is subject to reduced rates of federal income taxation.  The deduction of capital loss is subject to limitations for U.S. federal income tax purposes.  Deposits and withdrawals of Series L Shares by U.S. holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes. Gain, if any, realized by a U.S. holder on the sale or other disposition of Series L Shares or ADSs will be treated as U.S. source income for U.S. foreign tax credit purposes. A non-U.S.holder of Series L Shares or ADSs will not be subject to U.S. federal income or withholding tax on any gain realized on the sale of Series L Shares or ADSs, unless (1) such gain is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States, or (2) in the case of gain realized by an individual non-U.S. holder, the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met. United States Backup Withholding and Information Reporting A U.S. holder of Series L Shares or ADSs may, under certain circumstances, be subject to “backup withholding” with respect to certain payments to such U.S. holder, such as dividends or the proceeds of a sale or disposition of Series L Shares or ADSs unless such holder (1) is a corporation or comes within certain exempt categories, and demonstrates this fact when so required, or (2) provides a correct taxpayer identification number, certifies that it is not subject to backup withholding and otherwise complies with applicable requirements of the backup withholding rules.  Any amount withheld under these rules does not constitute a separate tax and will be creditable against the holder’s U.S. federal income tax liability.  While non-U.S. holders generally are exempt from backup withholding, a non-U.S. holder may, in certain circumstances, be required to comply with certain information and identification procedures in order to prove this exemption.  93


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DOCUMENTS ON DISPLAY We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers.  You may read and copy any materials filed with the SEC at its public reference room in Washington, D.C., at 100 F Street, N.E., Washington, D.C.  20549.  Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.  Filings we make electronically with the SEC are also available to the public on the Internet at the SEC’s website at www.sec.gov and at our website at www.coca-colafemsa.com.  (This URL is intended to be an inactive textual reference only.  It is not intended to be an active hyperlink to our website.  The information on our website, which might be accessible through a hyperlink resulting from this URL, is not and shall not be deemed to be incorporated into this annual report.)  94


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Item 11.  Quantitative and Qualitative Disclosures about Market Risk As a part of our risk management strategy, we use derivative financial instruments with the purpose of (1) achieving a desired liability structure with a balanced risk profile, (2) managing the exposure to production input and raw material costs and (3) hedging balance sheet and cash flow exposures to foreign currency fluctuation.  We do not use derivative financial instruments for speculative or profit-generating purposes.  We track the fair value (mark to market) of our derivative financial instruments and its possible changes using the Value at Risk methodology, as well as by generating scenario analyses.



Interest Rate Risk Interest rate risk exists principally with respect to our indebtedness that bears interest at floating rates.  At December 31, 2010, we had total indebtedness of Ps.17,351million, of which43% bore interest at fixed interest rates and57% bore interest at variable interest rates.  After giving effect to our swap and forward contracts, as of December 31, 2010,84% of our debt was fixed-rate and16% of our debt was variable-rate, calculated by weighting each year’s outstanding debt balance mix.  The interest rate on our variable rate debt denominated in U.S. dollars is generally determined by reference to the London Interbank Offer Rate, or LIBOR, and the interest rate on our variable rate debt denominated in Mexican pesos is generally determined by reference to theTasa de Interés Interbancaria de Equilibrio(the Equilibrium Interbank Interest Rate), or TIIE.  If these reference rates increase, our interest payments would consequently increase. The table below provides information about our financial instruments that are sensitive to changes in interest rates, without giving effect to interest rate swaps.  The table presents weighted average interest rates by expected contractual maturity dates.  Weighted average variable rates are based on the reference rates on December 31, 2010, plus spreads, contracted by us.  The instruments’ actual payments are denominated in U.S. dollars, Mexican pesos, Brazilian reais, Colombian pesos and Argentine pesos.  All of the payments in the table are presented in Mexican pesos, our reporting currency, assuming the foreign exchange of Ps. 12.3571Mexican pesos per U.S. dollarreported by Banco de México quoted to us by dealers for the settlement of obligations in foreign currencies on December 31, 2010 The table below also includes the fair value of long-term debt based on the discounted value of contractual cash flows.  The discount rate is estimated using rates currently offered for debt with similar terms and remaining maturities.  Furthermore, the fair value of long-term notes payable is based on quoted market prices on December 31, 2010.  As of December 31, 2010, the fair value represents a profit amount of Ps. 2 million.   95


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Principal by Year of Maturity (millions of Mexican pesos)
 At December 31, 2010

   

   At Dec.

   31, 20092011

   

   2012

   

   2013

   

   2014

   

   2015

   

   2016 and thereafter

   

   Total Carrying Value

   

   Total Fair Value

   

   Total Carrying ValueLong-Term Debt and Notes:Fixed Rate Debt and NotesU. S. dollars

   4

   

   -

   

   -

   

   -

   

   -

   

   6,179

   

   6,183

   

   6,378

   

   15Interest Rate(1)

   3.8%

   

   -

   

   -

   

   -

   

   -

   

   4.6%

   

   4.6%

   

   -

   

   3.8%Mexican pesos

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   1,000Interest Rate(1)

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   10.4%Brazilian reais

   4

   

   10

   

   15

   

   15

   

   14

   

   45

   

   102

   

   84

   

   -Interest Rate(1)

   4.5%

   

   4.5%

   

   4.5%

   

   4.5%

   

   4.5%

   

   4.5%

   

   4.5%

   

   -

   

   -Argentine pesos

   62

   

   622

   

   -

   

   -

   

   -

   

   -

   

   684

   

   693

   

   69Interest Rate(1)

   20.5%

   

   16.1%

   

   -

   

   -

   

   -

   

   -

   

   16.5%

   

   -

   

   20.5%Total Fixed Rate

   70

   

   632

   

   15

   

   15

   

   14

   

   6,224

   

   6,969

   

   7,155

   

   1,084Variable Rate DebtU.S. dollars

   -

   

   37

   

   185

   

   -

   

   -

   

   -

   

   222

   

   218

   

   2,873Interest Rate(1)

   -

   

   0.5%

   

   0.6%

   

   -

   

   -

   

   -

   

   0.6%

   

   -

   

   0.5%Mexican pesos

   -

   

   3,067

   

   267

   

   1,392

   

   2,824

   

   -

   

   7,550

   

   7,367

   

   9,550Interest Rate(1)

   -

   

   4.9%

   

   5.1%

   

   5.1%

   

   5.1%

   

   -

   

   5.0%

   

   -

   

   5.1%Brazilian reais

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   2Interest Rate(1)

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (Various)Colombian pesos

   155

   

   839

   

   -

   

   -

   

   -

   

   -

   

   994

   

   994

   

   -Interest Rate(1)

   4.7%

   

   4.7%

   

   -

   

   -

   

   -

   

   -

   

   4.7%

   

   -

   

   -Total Variable Rate

   155

   

   3,943

   

   452

   

   1,392

   

   2,824

   

   -

   

   8,767

   

   8,579

   

   12,425Long Term Debt

   225

   

   4,575

   

   467

   

   1,407

   

   2,838

   

   6,224

   

   15,736

   

   15,734

   

   13,509Current portion of long term debt

   225

   

   -

   

   -

   

   -

   

   -

   

   -

   

   225

   

   222

   

   3,011Total Long-Term Debt

   -

   

   4,575

   

   467

   

   1,407

   

   2,838

   

   6,224

   

   15,511

   

   15,512

   

   10,498Derivative Instruments:Interest Rate Swaps Mexican pesosVariable to fixed(3)

   -

   

   1,600

   

   1,312

   

   575

   

   1,963

   

   -

   

   5,450

   

   (263)

   

   5,600Interest pay rate

   -

   

   8.06%

   

   8.48%

   

   8.43%

   

   8.63%

   

   -

   

   8.41%

   

   -

   

   8.45%Interest receive rate

   -

   

   4.83% /

   

   

   

   

   

   5.12% /

   

   -

   

   4.95% /

   

   

   

   4.90% /28dTIIE

   

   28dTIIE

   

   28dTIIE

   

   28dTIIE

   

   

   

   28dTIIE

   

   

   

   28dTIIE-0.06%

   

   +0.22%(2)

   

   +0.24%(2)

   

   +0.21%(2)

   

   

   

   +0.14%(2)

   

   

   

   +0.21%(2)
 
 (1)     Calculated by a weighted average annual rate. (2)     Forward starting swaps in which the receive rate is not known, until the start of the validity period. (3)     Notional amount.  A hypothetical, instantaneous and unfavorable change of 100 basis points in the average interest rate applicable to our floating-rate financial instruments held during 2010 would have increased our interest expense by approximately Ps.74million, or4.2% over our interest expense of 2010, assuming no additional debt is incurred


during such period, in each case after giving effect to all of our interest rate swap and cross-currency swap agreements.  96


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Foreign Currency Exchange Rate Risk Our principal exchange rate risk involves changes in the value of the local currencies of each country in which we operate, relative to the U.S. dollar.  In 2010, the percentage of our consolidated total revenues was denominated as follows: Total Revenues by CurrencyAt December 31, 2010Currency

   %Mexican peso

   37.5%Colombian peso

   10.5%Venezuelan bolivar

   13.6%Argentine peso

   6.3%Brazilian real

   25.9%Other (Central America)

   6.2%
  We estimate that approximately 22% of our consolidated costs of goods sold are denominated in U.S. dollars for Mexican subsidiaries and in the aforementioned currencies for our non-Mexican subsidiaries.Substantially all of our costs denominated in a foreign currency, other than the functional currency of each country in which we operate, are denominated in U.S. dollars.  During 2010, we entered into forward derivative instruments to hedge part of our Mexican peso fluctuation risk relative to our raw material costs denominated in U.S. dollars.  These instruments are considered hedges for accounting purposes.  As of December 31, 2010, 47.4% of our indebtedness was denominated in U.S. dollars, 33.5% in Mexican pesos and the remaining 19.1% in Brazilian reais, Colombian pesos and Argentine pesos (including the effect of derivative contracts held by us as of December 31, 2010, including cross currency swaps from Mexican pesos to U.S. dollars and U.S. dollar forward positions).  Decreases in the value of the different currencies relative to the U.S. dollar will increase the cost of our foreign currency-denominated operating costs and expenses and of the debt service obligations with respect to our foreign currency-denominated debt.  A depreciation of the Mexican peso relative to the U.S. dollar will also result in foreign exchange losses, as the Mexican peso value of our foreign currency denominated-indebtedness is increased.  See also “Item 3.  Key Information—Risk Factors—Depreciation of the Mexican peso relative to the U.S. dollar could adversely affect our financial condition and results from operations.” A hypothetical, instantaneous and unfavorable 10% devaluation in the value of the Mexican peso relative to the U.S. dollar occurring on December 31, 2010, would have resulted in an increase in our net consolidated comprehensive financing result expense of approximately Ps. 21.2, million, reflecting higher interest expense and foreign exchange gain generated by the cash balances held in U.S. dollars as of that date, net of the loss based on our U.S. dollar-denominated indebtedness at December 31, 2010.  However, this result does not take into account any gain on monetary position that would be expected to result from an increase in the inflation rate generated by a devaluation of the Mexican peso relative to the U.S. dollar, which gain on monetary position would reduce the consolidated net comprehensive financing result, after giving effect to all of our interest rate swap and cross-currency swap agreements. As of June 10, 2011, the exchange rates relative to the U.S. dollar of all the countries in which we operate have appreciated or depreciated compared to December 31, 2010 as follows: Exchange RateAs of June 10, 2011

   (Depreciation) orAppreciationMexico

   11.87

   3.95%Guatemala

   7.84

   2.14%Nicaragua

   22.36

   (2.18)%Costa Rica

   510.77

   1.41%Panama

   1.00

   —Colombia

   1,772.59

   7.39%Venezuela

   4.30

   —Brazil

   1.60

   3.91%Argentina

   4.09

   (2.94)%
  97


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A hypothetical, instantaneous and unfavorable 10% devaluation in the value of the currencies of each of the countries in which we operate relative to the U.S. dollar at December 31, 2010, would produce a reduction in shareholders’ equity of approximately the following amounts: Reduction in Shareholders’ Equity(millions of Mexican pesos)Mexico

   Ps.        255Colombia

   814Venezuela

   458Brazil

   1,491Argentina

   97Other (Central America)

   684
  Equity Risk As of December 31, 2010 we did not have any equity risk derivatives.

Commodity Price Risk During 2010 we entered into futures contracts to hedge the cost of sugar in Brazil with a notional value of Ps.615million, maturing in 2011 and 2012.  The result of these commodity price contracts was a fair market value gain of Ps. 445 million as of December 31, 2010.  98


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Item 12. Description of Securities Other than Equity Securities Item 12.A.             Debt Securities

Not applicable.

Item 12.B.             Warrants and Rights

Not applicable.

Item 12.C.             Other Securities

Not applicable.

Item 12.D.             American Depositary Shares The Bank of New York Mellon serves as the depositary for our ADSs.  Holders of our ADSs, evidenced by American Depositary Receipts, or ADRs, are required to pay various fees to the depositary, and the depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid. ADS holders are required to pay the depositary amounts in respect of expenses incurred by the depositary or its agents on behalf of ADS holders, including expenses arising from compliance with applicable law, taxes or other governmental charges, cable, telex and facsimile transmission, or conversion of foreign currency into U.S. dollars.  The depositary may decide in its sole discretion to seek payment by either billing holders or by deducting the fee from one or more cash dividends or other cash distributions. ADS holders are also required to pay additional fees for certain services provided by the depositary, as set forth in the table below. Depositary service

   Fee payable by ADS holdersIssuance and delivery of ADRs, including in connection with share distributions

   Up to US$ 5.00 per 100 ADSs (or portion thereof)Withdrawal of shares underlying ADSs

   Up to US$ 5.00 per 100 ADSs (or portion thereof)Registration for the transfer of shares

   Registration or transfer fees that may from time to time be in effect
  In addition, holders may be required to pay a fee for the distribution or sale of securities.  Such fee (which may be deducted from such proceeds) would be for an amount equal to the lesser of (1) the fee for the issuance of ADSs that would be charged as if the securities were treated as deposited shares and (2) the amount of such proceeds.  Direct and indirect payments by the depositary  The depositary reimburses us for certain expenses we incur in connection with the ADS program, subject to a ceiling agreed between us and the depositary.These reimbursable expenses include listing fees and fees payable to service providers for the distribution of material to ADR holders.  For the year ended December 31, 2010, this amount was approximately US$ 74,400.   99


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Items 13-14.  Not Applicable Item 15.  Controls and Procedures (a)Disclosure Controls and Procedures We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2010.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. (b)Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Securities Exchange Act of 1934, as amended.  Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that (i) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions or our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts an expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Based on our evaluation under the framework in Internal Controls – Integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.  100


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(c)Attestation Report of the Registered Public Accounting Firm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING  THE BOARD OF DIRECTORS AND SHAREHOLDERS OF Coca-Cola FEMSA, S.A.B. DE C.V.:  We have audited Coca-Cola FEMSA, S.A.B. de C.V. and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  Coca-Cola FEMSA, S.A.B. de C.V.  and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.  We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Mexican Financial Reporting Standards, including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20F.   A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with Mexican Financial Reporting Standards, including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20F, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  In our opinion, Coca-Cola FEMSA, S.A.B. de C.V. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.  We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Coca-Cola FEMSA, S.A.B. de C.V. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated June 17, 2011 expressed an unqualified opinion thereon.  Mancera, S.C. A member practice of Ernst & Young Global  Oscar Aguirre Hernandez  Mexico City, Mexico  June 17, 2011  101


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(d)Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting during 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 16A.  Audit Committee Financial Expert Our shareholders and our board of directors have designated José Manuel Canal Hernando, an independent director as required by the Mexican Securities Market Law and applicable New York Stock Exchange listing standards, as an “audit committee financial expert” within the meaning of this Item 16A.  See “Item 6.  Directors, Senior Management and Employees—Directors.”

Item 16B.  Code of Ethics

We have adopted a code of ethics, within the meaning of this Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended.  Our code of ethics applies to our chief executive officer, chief financial officer and persons performing similar functions as well as to our directors and other officers and employees.  Our code of ethics is available on our website at www.coca-colafemsa.com.  If we amend the provisions of our code of ethics that apply to our chief executive officer, chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website at the same address.  In accordance with our code of ethics, we have developed a voice mailbox available to our employees to which complaints may be reported.

Item 16C.  Principal Accountant Fees and Services

Audit and Non-Audit Fees The following table summarizes the aggregate fees billed to us by Mancera, S.C. and other Ernst & Young practices (collectively, Ernst and Young) during the fiscal years ended December 31, 2010 and December 31, 2009: Year ended December 31,2010

   2009(millions of Mexican pesos)Audit fees

   Ps.            41

   Ps.            41Audit-related fees

   3

   4Tax fees

   1

   1Other fees

   —

   —Total fees

   Ps.            45

   Ps.            46
 Audit Fees.  Audit fees in the above table are the aggregate fees billed by Ernst & Young in connection with the audit of our annual financial statements, the review of our quarterly financial statements, and statutory and regulatory audits. Audit-related Fees.  Audit-related fees in the above table are the aggregate fees billed by Ernst & Young for assurance and other services related to the performance of the audit, mainly in connection with special audits and reviews. Tax Fees.  Tax fees in the above table are fees billed by Ernst & Young for services based upon existing facts and prior transactions in order to assist us in documenting, computing and obtaining government approval for amounts included in tax filings such as value-added tax return assistance, transfer pricing documentation and requests for technical advice from taxing authorities.  102


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Other fees.Other fees in the above table are consulting related fees.  For the years ended December 31, 2010 and 2009 there were no other fees. Audit Committee Pre-Approval Policies and Procedures We have adopted pre-approval policies and procedures under which all audit and non-audit services provided by our external auditors must be pre-approved by the Audit Committee as set forth in the Audit Committee’s charter.  Any service proposals submitted by external auditors need to be discussed and approved by the Audit Committee during its meetings, which take place at least four times a year.  Once the proposed service is approved, we or our subsidiaries formalize the engagement of services.  The approval of any audit and non-audit services to be provided by our external auditors is specified in the minutes of our Audit Committee.  In addition, the members of our Audit Committee are briefed on matters discussed by the different committees of our board of directors. Item 16D.  Not Applicable 2 Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers We did not directly purchase any of our equity securities in 2010.  The following table presents purchases by trusts that we administer in connection with our bonus incentive plans, which purchases may be deemed to be purchases by an affiliated purchaser of us.  See “Item 6.  Directors, Senior Management and Employees—EVA-Based Bonus Program.” Purchases of Equity Securities Period

   Total Number of Series L Shares Purchased by trusts that we administer in connection with our bonus incentive plans

   Average Price Paid per Series L Share

   Total Number of Shares Purchased as part of Publicly Announced Plans or Programs

   Maximum Number (or Appropriate U.S. Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or ProgramsJan. 5–Mar. 19

   993,500

   Ps.76.15

   ─

   ─Total

   993,500

   Ps.76.15

   ─

   ─
  Item 16F.  Not Applicable

Item 16G.  Corporate Governance Pursuant to Rule 303A.11 of the Listed Company Manual of the New York Stock Exchange (NYSE), we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards.  We are a Mexican corporation with shares listed on the Mexican Stock Exchange. Our corporate governance practices are governed by our bylaws, the Mexican Securities Market Law and the regulations issued by the CNBV.  We also disclose the extent to which we comply with theCódigo de Mejores Prácticas Corporativas(Mexican Code of Best Corporate Practices), which was created by a group of Mexican business leaders and was endorsed by the BMV. The table below discloses the significant differences between our corporate governance practices and the NYSE standards.   103


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NYSE Standards

   Our Corporate Governance PracticesDirectors Independence:A majority of the board of directors must be independent.  There is an exemption for “controlled companies” (companies in which more than 50% of the voting power is held by an individual, group or another company rather than the public), which would include our company if we were a U.S. issuer.

   Directors Independence:Pursuant to the Mexican Securities Market Law, we are required to have a board of directors with a maximum of 21 members, 25% of whom must be independent.The Mexican Securities Market Law sets forth, in article 26, the definition of “independence,” which differs from the one set forth in Section 303A.02 of the Listed Company Manual of the NYSE. Generally, under the Mexican Securities Market Law, a director is not independent if such director: (i) is an employee or a relevant officer of the company or its subsidiaries; (ii) is an individual with significant influence over the company or its subsidiaries; (iii) is a shareholder or participant of the controlling group of the company; (iv) is a client, supplier, debtor, creditor, partner or employee of an important client, supplier, debtor or creditor of the company; or (v) is a family member of any of the aforementioned persons.

   In accordance with the Mexican Securities Market Law, our shareholders are required to make a determination as to the independence of our directors at an ordinary meeting of our shareholders, though the CNBV may challenge that determination.Our board of directors is not required to make a determination as to the independence of our directors.Executive sessions:Non-management directors must meet at regularly scheduled executive sessions without management.

   Executive sessions:Under our bylaws and applicable Mexican law, our non-management and independent directors are not required to meet in executive sessions.

   Our bylaws state that the board of directors will meet at least four times a year, following the end of each quarter, to discuss our operating results and progress in achieving strategic objectives.  Our board of directors can also hold extraordinary meetings.Nominating/Corporate Governance Committee:A nominating/corporate governance committee composed entirely of independent directors is required.  As a “controlled company,” we would be exempt from this requirement if we were a U.S. issuer.

   Nominating/Corporate Governance Committee:We are not required to have a nominating committee, and the Mexican Code of Best Corporate Practices does not provide for a nominating committee.

   However, Mexican law requires us to have a Corporate Practices Committee.  Our Corporate Practices Committee is composed of three members, and as required by the Mexican Securities Market Law and our bylaws, the three members are independent.Compensation committee:Acompensation committee composed entirely of independent directors is required.  As a “controlled company,” we would be exempt from this requirement if we were a U.S. issuer.

   Compensation committee:We do not have a committee that exclusively oversees compensation issues. OurCorporate Practices Committee, composed entirely of independent directors, reviews and recommends management compensation programs in order to ensure that they are aligned with shareholders interests and corporate performance.Audit committee:Listed companies must have an audit committee satisfying the independence and other requirements of Rule 10A-3 under the Exchange Act and the NYSE independence standards.

   Audit committee:We have anAudit Committeeof five members.Each member of the Audit Committee is an independent director, as required by the Mexican Securities Market Law.Equity compensation plan:Equity compensation plans require shareholder approval, subject to limited exemptions.

   Equity compensation plan:Shareholder approval is not required under Mexican law or our bylaws for the adoption and amendment of an equity compensation plan. Such plans should provide for general application to all executives.Code of business conduct and ethics:Corporate governance guidelines and a code of conduct and ethics are required, with disclosure of any waiver for directors or executive officers.

   Code of business conduct and ethics:We have adopted a code of ethics, within the meaning of Item 16B of SEC Form 20-F.  Our code of ethics applies to our chief executive officer, chief financial officer and persons performing similar functions as well as to our directors and other officers and employees.  Our code of ethics is available on our website at www.coca-colafemsa.com. If we amend the provisions of our code of ethics that apply to our chief executive officer, chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website at the same address.
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Item 17.  Not Applicable Item 18.  Financial Statements Reference is made to Item 19(a) for a list of all financial statements filed as part of this annual report. **Item 19.  Exhibits** (a)List of Financial Statements

   PageReport of Mancera S.C., A Member Practice of Ernst & Young Global

   F-1Consolidated Balance Sheets at December 31, 2010 and 2009

   F-2Consolidated Income Statements For the Years Ended December 31, 2010, 2009 and 2008

   F-3Consolidated Statement of Cash Flows For the Years Ended December 31, 2010, 2009 and 2008

   F-4Consolidated Statements of Changes in Shareholders’ Equity For the Years Ended December 31, 2010, 2009 and 2008

   F-5Notes to the Consolidated Financial Statements*

   F-7
 
 *    All supplementary schedules relating to the registrant are omitted because they are not required or because the required information, where material, is contained in the Financial Statements or Notes thereto. (b)List of Exhibits Exhibit No:

   DescriptionExhibit 1.1

   Amended and restated bylaws (Estatutos Sociales) of Coca-Cola FEMSA, S.A.B. de C.V., approved April 14, 2010 (English translation) (incorporated by reference to Exhibit 1.1 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 10, 2010 (File No. 1-12260)).Exhibit 2.1

   Deposit Agreement, dated as of September 1, 1993, among Coca-Cola FEMSA, the Bank of New York, as Depositary, and Holders and Beneficial Owners of American Depository Receipts (incorporated by reference to Exhibit 3.5 to the Registration Statement of FEMSA on Form F-4 filed on April 9, 1998 (File No. 333-8618)).Exhibit 2.2

   Indenture dated as of February 5, 2010 among Coca-Cola FEMSA, S.A.B. de C.V., and The Bank of New York Mellon (incorporated by reference to Exhibit 2.2 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 10, 2010 (File No. 1-12260)).Exhibit 2.3

   First Supplemental Indenture dated as of February 5, 2010 among Coca-Cola FEMSA, S.A.B. de C.V., and The Bank of New York Mellon and the Bank of New York Mellon (Luxembourg) S.A. (incorporated by reference to Exhibit 2.3 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 10, 2010 (File No. 1-12260)).Exhibit 2.4

   Second Supplemental Indenture dated as of April 1, 2011 among Coca-Cola FEMSA, S.A.B. de C.V., Propimex, S.A. de C.V., as Guarantor, and The Bank of New York Mellon.Exhibit 4.1

   Amended and Restated Shareholders Agreement dated as of July 6, 2002, by and among CIBSA, Emprex, The Coca-Cola Company and Inmex, (incorporated by reference to Exhibit 4.13 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 27, 2003 (File No. 1-12260)).Exhibit 4.2

   Amendment, dated May 6, 2003, to the Amended and Restated Shareholders Agreement, dated as of July 6, 2002, among CIBSA, Emprex, The Coca-Cola Company, Inmex, Atlantic Industries, Dulux CBAI 2003 B.V. and Dulux CBEXINMX 2003 B.V. (incorporated by reference to Exhibit 4.14 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 27, 2003 (File No. 1-12260)).Exhibit 4.3

   Second Amendment, dated as of February 1, 2010, to the to the Amended and Restated Shareholders Agreement, dated as of July 6, 2002, by and among CIBSA, Emprex, The Coca-Cola Company, Inmex and Dulux CBAI 2003 B.V. (incorporated by reference to Exhibit 4.3 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 10, 2010 (File No. 1-12260)).Exhibit 4.4

   Amended and Restated Bottler Agreement, dated June 21, 2003, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in the valley of Mexico (incorporated by reference to Exhibit 4.3 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on April 5, 2004 (File No. 1-12260)).Exhibit 4.5

   Supplemental Agreement, dated June 21, 1993, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in the valley of Mexico (with English translation) (incorporated by reference to Exhibit 10.3 to Coca-Cola FEMSA’s Registration Statement on Form F-1 filed on August 13, 1993 (File No. 333-67380)).Exhibit 4.6

   Amended and Restated Bottler Agreement, dated June 21, 2003, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in the southeast of Mexico (incorporated by reference to Exhibit 4.5 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on April 5, 2004 (File No. 1-12260)).Exhibit 4.7

   Supplemental Agreement, dated June 21, 1993, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in the southeast of Mexico (with English translation) (incorporated by reference to Exhibit 10.4 to Coca-Cola FEMSA’s Registration Statement on Form F-1 filed on August 13, 1993 (File No. 333-67380)).Exhibit 4.8

   Bottler Agreement and Side Letter dated June 1, 2005, between Panamco Golfo, S.A. de C.V.  and The Coca−Cola Company with respect to operations in Golfo, Mexico (English translation) (incorporated by reference to Exhibit 4.7 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on April 18, 2006 (File No. 1-12260)).Exhibit 4.9

   Bottler Agreement and Side Letter dated June 1, 2005, between Panamco Bajio, S.A. de C.V., and The Coca-Cola Company with respect to operations in Bajio, Mexico (English translation) (incorporated by reference to Exhibit 4.8 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on April 18, 2006 (File No. 1-12260)).Exhibit 4.10

   Bottler Agreement, dated August 22, 1994, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in Argentina (with English translation) (incorporated by reference to Exhibit 10.1 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 30, 1995 (File No. 1-12260)).Exhibit 4.11

   Supplemental Agreement, dated August 22, 1994, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in Argentina (with English translation) (incorporated by reference to Exhibit 10.2 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 30, 1995 (File No. 1-12260)).Exhibit 4.12

   Amendments, dated May 17 and July 20, 1995, to Bottler Agreement and Letter of Agreement, dated August 22, 1994, each with respect to operations in Argentina, between Coca-Cola FEMSA and The Coca-Cola Company (with English translation) (incorporated by reference to Exhibit 10.3 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 28, 1996 (File No. 1-12260)).Exhibit 4.13

   Bottler Agreement, dated December 1, 1995, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in SIRSA (with English translation) (incorporated by reference to Exhibit 10.4 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 28, 1996 (File No. 1-12260)).Exhibit 4.14

   Supplemental Agreement, dated December 1, 1995, between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in SIRSA (with English translation) (incorporated by reference to Exhibit 10.6 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 28, 1996 (File No. 1-12260)).
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Exhibit No:

   DescriptionExhibit 4.15

   Amendment, dated February 1, 1996, to Bottler Agreement between Coca-Cola FEMSA and The Coca-Cola Company with respect to operations in SIRSA, dated December 1, 1995 (with English translation) (incorporated by reference to Exhibit 10.5 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 28, 1996 (File No. 1-12260)).Exhibit 4.16

   Amendment, dated May 22, 1998, to Bottler Agreement with respect to the former SIRSA territory, dated December 1, 1995, between Coca-Cola FEMSA and The Coca-Cola Company (with English translation) (incorporated by reference to Exhibit 4.12 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 20, 2001 (File No. 1-12260)).Exhibit 4.17

   Coca-Cola Tradename License Agreement dated June 21, 1993, between Coca-Cola FEMSA and The Coca-Cola Company (with English translation) (incorporated by reference to Exhibit 10.40 to FEMSA’s Registration Statement on Form F-4 filed on April 9, 1998 (File No. 333-8618)).Exhibit 4.18

   Amendment to the Trademark License Agreement, dated December 1, 2002, entered by and among Administración de Marcas S.A. de C.V., as proprietor, and The Coca-Cola Export Corporation Mexico branch, as licensee (incorporated by reference to Exhibit 10.3 of Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)).Exhibit 4.19

   Trademark Sub-License Agreement, dated January 4, 2003, entered by and among Panamco Golfo S.A. de C.V., as licensor, and The Coca-Cola Company, as licensee (incorporated by reference to Exhibit 10.6 of Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)).Exhibit 4.20

   Trademark Sub-License Agreement, dated January 4, 2003, entered by and among Panamco Bajio S.A. de C.V., as licensor, and The Coca-Cola Company, as licensee (incorporated by reference to Exhibit 10.7 of Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)).Exhibit 4.21

   Supply Agreement dated June 21, 1993, between Coca-Cola FEMSA and FEMSA Empaques, (incorporated by reference to Exhibit 10.7 to Coca-Cola FEMSA’s Registration Statement on Form F-1 filed on August 13, 1993 (File No. 333-67380)).Exhibit 4.22

   Supply Agreement dated April 3, 1998, between ALPLA Fábrica de Plásticos, S.A.de C.V.  and Industria Embotelladora de México, S.A.de C.V. (with English translation) (incorporated by reference to Exhibit 4.18 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on July 1, 2002 (File No. 1-12260)).*Exhibit 4.23

   Services Agreement, dated November 7, 2000, between Coca-Cola FEMSA and FEMSA Logística (with English translation) (incorporated by reference to Exhibit 4.15 to Coca-Cola FEMSA’s Annual Report on Form 20-F filed on June 20, 2001 (File No. 1-12260)).Exhibit 4.24

   Promotion and Non-Compete Agreement, dated March 11, 2003, entered by and among The Coca-Cola Export Corporation Mexico branch and Panamco Bajio S.A. de C.V. (with English translation) (incorporated by reference to Exhibit 10.8 of Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)).Exhibit 4.25

   Promotion and Non-Compete Agreement, dated March 11, 2003, entered by and among The Coca-Cola Export Corporation Mexico branch and Panamco Golfo S.A. de C.V. (with English translation) (incorporated by reference to Exhibit 10.9 of Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)).Exhibit 4.26

   Memorandum of Understanding, dated as of March 11, 2003, by and among Panamco, as seller, and The Coca-Cola Company, as buyer (incorporated by reference to Exhibit 10.14 of Panamco’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-12290)).Exhibit 7.1

   The Coca-Cola Company memorandum, to Steve Heyer from José Antonio Fernández, dated December 22, 2002 (incorporated by reference to Exhibit 10.1 to FEMSA’s Registration Statement on Amendment No. 1 to the Form F-3 filed on September 20, 2004 (File No. 333-117795)).Exhibit 8.1

   Significant Subsidiaries.Exhibit 12.1

   CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated June17, 2011.Exhibit 12.2

   CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated June17, 2011.Exhibit 13.1

   Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated June17, 2011.





*  Portions of Exhibit 4.22 were omitted pursuant to a request for confidential treatment.  Such omitted portions were filed separately with the Securities and Exchange Commission.

Omitted from the exhibits filed with this annual report are certain instruments and agreements with respect to long-term debt of Coca-Cola FEMSA, none of which authorizes securities in a total amount that exceeds 10% of the total assets of Coca-Cola FEMSA.  We hereby agree to furnish to the SEC copies of any such omitted instruments or agreements as the SEC requests.

106


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Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Coca-Cola FEMSA, S.A.B. de C.V. We have audited the accompanying consolidated balance sheets of Coca-Cola FEMSA, S.A.B. de C.V. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Coca-Cola FEMSA, S.A.B. de C.V. and subsidiaries at December 31, 2010 and 2009, and the consolidated results of their operations and consolidated cash flows, for each of the three years in the period ended December 31, 2010, in conformity with Mexican Financial Reporting Standards, which differ in certain respects from accounting principles generally accepted in the United States (See Notes 26 and 27 to the consolidated financial statements). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Coca-Cola FEMSA, S.A.B. de C.V. and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 17, 2011 expressed an unqualified opinion thereon. Mancera, S.C.A member practice of Ernst & Young Global /s/ Oscar Aguirre HernandezOscar Aguirre Hernandez Mexico City, Mexico June 17, 2011 F-1


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CONSOLIDATED BALANCE SHEETSCOCA-COLA FEMSA, S.A.B. DE C.V. AND SUBSIDIARIESAt December 31, 2010 and 2009. Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.). 2010

   

   2009AssetsCurrent Assets:Cash and cash equivalents

   $

   1,012

   Ps.

   12,534

   Ps.

   7,841Marketable securities (Note 4c)

   

   -

   

   -

   

   2,113Accounts receivable, net (Note 6)

   

   514

   

   6,363

   

   5,931Inventories, net (Note 7)

   

   414

   

   5,130

   

   5,002Recoverable taxes

   

   134

   

   1,658

   

   1,776Other current assets (Note 8)

   

   61

   

   751

   

   976Total current assets

   

   2,135

   

   26,436

   

   23,639Investment in shares (Note 9)

   

   170

   

   2,108

   

   2,170Property, plant and equipment, net (Note 10)

   

   2,592

   

   32,100

   

   31,242Intangible assets, net (Note 11)

   

   4,136

   

   51,213

   

   50,898Deferred tax asset (Note 23d)

   

   28

   

   345

   

   1,019Other assets, net (Note 12)

   

   150

   

   1,859

   

   1,693TOTAL ASSETS

   $

   9,211

   Ps.

   114,061

   Ps.

   110,661Liabilities and shareholders’ equityCurrent Liabilities:Bank loans and notes payable (Note 17)

   $

   130

   Ps.

   1,615

   Ps.

   2,416Current portion of long-term debt (Note 17)

   

   18

   

   225

   

   3,011Interest payable

   

   12

   

   151

   

   61Suppliers

   

   726

   

   8,988

   

   9,368Accounts payable

   

   302

   

   3,743

   

   4,733Taxes payable

   

   156

   

   1,931

   

   2,974Other current liabilities (Note 24a)

   

   81

   

   993

   

   885Total current liabilities

   

   1,425

   

   17,646

   

   23,448Long-Term Liabilities:Bank loans and notes payable (Note 17)

   

   1,253

   

   15,511

   

   10,498Labor liabilities (Note 15b)

   

   98

   

   1,210

   

   1,089Deferred tax liability (Note 23d)

   

   154

   

   1,901

   

   2,659Contingencies and other liabilities (Note 24b)

   

   315

   

   3,912

   

   4,495Total long-term liabilities

   

   1,820

   

   22,534

   

   18,741Total liabilities

   

   3,245

   

   40,180

   

   42,189Shareholders’ Equity:Non-controlling interest in consolidated subsidiaries (Note 20)

   

   210

   

   2,602

   

   2,296Controlling interest:Capital stock (Note 21)

   

   252

   

   3,116

   

   3,116Additional paid-in capital

   

   1,069

   

   13,239

   

   13,220Retained earnings from prior years (Note 21)

   

   3,562

   

   44,108

   

   38,189Net income (Note 21)

   

   791

   

   9,800

   

   8,523Cumulative other comprehensive income

   

   82

   

   1,016

   

   3,128Total controlling interest

   

   5,756

   

   71,279

   

   66,176Total shareholders’ equity

   

   5,966

   

   73,881

   

   68,472TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $

   9,211

   Ps.

   114,061

   Ps.

   110,661
  The accompanying notes are an integral part of these consolidated balance sheets.Mexico City ** Carlos Salazar Lomelín

   

   Héctor Treviño GutiérrezChief Executive Officer

   

   Chief Financial Officer
  F-2


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CONSOLIDATED INCOME STATEMENTSCOCA-COLA FEMSA, S.A.B. DE C.V. AND SUBSIDIARIES *For the years ended December 31, 2010, 2009 and 2008. Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.), except for data per share.*

2010

   

   2009

   

   2008Net sales

   $

   8,317

   Ps.

   102,988

   Ps.

   102,229

   Ps.

   82,468Other operating revenues

   

   38

   

   468

   

   538

   

   508Total revenues

   

   8,355

   

   103,456

   

   102,767

   

   82,976Cost of goods sold

   

   4,485

   

   55,534

   

   54,952

   

   43,895Gross profit

   

   3,870

   

   47,922

   

   47,815

   

   39,081Operating expenses:Administrative

   

   359

   

   4,449

   

   5,308

   

   4,095Selling

   

   2,132

   

   26,394

   

   26,672

   

   21,291Operating expenses

   

   2,491

   

   30,843

   

   31,980

   

   25,386Income from operations

   

   1,379

   

   17,079

   

   15,835

   

   13,695Other expenses, net (Note 18)

   

   104

   

   1,292

   

   1,449

   

   1,831Comprehensive financing result:Interest expense

   

   141

   

   1,748

   

   1,895

   

   2,207Interest income

   

   (23)

   

   (285)

   

   (286)

   

   (433)Foreign exchange loss, net

   

   34

   

   423

   

   370

   

   1,477Gain on monetary position in inflationary subsidiaries

   

   (33)

   

   (414)

   

   (488)

   

   (658)Market value (gain) loss on ineffectiveportion of derivative financial instruments

   

   (20)

   

   (244)

   

   (118)

   

   959Comprehensive financing result

   

   99

   

   1,228

   

   1,373

   

   3,552Income before income taxes

   

   1,176

   

   14,559

   

   13,013

   

   8,312Income taxes (Note 23)

   

   344

   

   4,260

   

   4,043

   

   2,486Consolidated net income

   $

   832

   Ps.

   10,299

   Ps.

   8,970

   Ps.

   5,826Controlling interest net income

   $

   791

   Ps.

   9,800

   Ps.

   8,523

   Ps.

   5,598Non-controlling interest net income

   

   41

   

   499

   

   447

   

   228Consolidated net income

   $

   832

   Ps.

   10,299

   Ps.

   8,970

   Ps.

   5,826Net controlling income (U.S. dollars andMexican pesos): Data per share

   $

   0.43

   Ps.

   5.31

   Ps.

   4.62

   Ps.

   3.03The accompanying notes are an integral part of these consolidated income statements.
   F-3


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CONSOLIDATED STATEMENTS OF CASH FLOWSCOCA-COLA FEMSA, S.A.B. DE C.V. AND SUBSIDIARIESFor the years ended December 31, 2010, 2009 and 2008.Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.). 2010

   

   2009

   

   2008Operating Activities:Income before income taxes

   $

   1,176

   Ps.

   14,559

   Ps.

   13,013

   Ps.

   8,312Non-cash operating expenses

   

   17

   

   208

   

   170

   

   159Equity in earnings affiliated companies

   

   (18)

   

   (217)

   

   (142)

   

   (104)Unrealized gain on marketable securities

   

   -

   

   -

   

   (112)

   

   -Other adjustments regarding operating activities

   

   -

   

   -

   

   -

   

   641Adjustments regarding investing activities:Depreciation

   

   269

   

   3,333

   

   3,472

   

   3,022Amortization

   

   56

   

   694

   

   307

   

   240Loss on sale of long-lived assets

   

   19

   

   231

   

   186

   

   170Disposal of long-lived assets

   

   4

   

   47

   

   124

   

   372Interest income

   

   (23)

   

   (285)

   

   (286)

   

   (433)Adjustments regarding financing activities:Interest expenses

   

   128

   

   1,579

   

   1,850

   

   2,080Foreign exchange loss, net

   

   34

   

   424

   

   370

   

   1,477Monetary position gain, net

   

   (33)

   

   (413)

   

   (488)

   

   (658)Derivative financial instruments (gain) loss

   

   (38)

   

   (468)

   

   (318)

   

   9611,591

   

   19,692

   

   18,146

   

   16,239Increase in accounts receivable

   

   (88)

   

   (1,092)

   

   (394)

   

   (179)Decrease (increase) in inventories

   

   -

   

   5

   

   33

   

   (486)(Increase) decrease in other assets

   

   (45)

   

   (557)

   

   (276)

   

   304Increase in suppliers and other accounts payable

   

   47

   

   585

   

   2,808

   

   71Decrease in other liabilities

   

   (17)

   

   (209)

   

   (424)

   

   (263)Decrease in labor liabilities

   

   (15)

   

   (192)

   

   (169)

   

   (167)Income tax paid

   

   (314)

   

   (3,882)

   

   (3,061)

   

   (3,618)Net cash flows from operating activities

   

   1,159

   

   14,350

   

   16,663

   

   11,901Investing Activities:Acquisition of Minas Gerais Ltda. “REMIL”, net ofcash acquired (Note 5)

   

   -

   

   -

   

   -

   

   (3,633)Acquisition of Brisa business (Note 5)

   

   -

   

   -

   

   (717)

   

   -Acquisition of Agua de los Angeles business (Note 5)

   

   -

   

   -

   

   -

   

   (206)Purchases of investment available-for-sale

   

   -

   

   -

   

   (2,001)

   

   -Proceeds from investment available-for-sale

   

   89

   

   1,108

   

   -

   

   -Proceeds from sales of shares of Jugos del Valle

   

   -

   

   -

   

   -

   

   741Interest received

   

   23

   

   285

   

   286

   

   433Acquisition of long-lived assets

   

   (554)

   

   (6,863)

   

   (5,752)

   

   (4,608)Proceeds from the sale of long-lived assets

   

   39

   

   477

   

   638

   

   532Other assets

   

   (43)

   

   (527)

   

   1

   

   521Intangible assets

   

   (107)

   

   (1,325)

   

   (1,355)

   

   (1,079)Net cash flows from investing activities

   

   (553)

   

   (6,845)

   

   (8,900)

   

   (7,299)Net cash flows available for financing activities

   

   606

   

   7,505

   

   7,763

   

   4,602Financing Activities:Bank loans obtained

   

   747

   

   9,251

   

   6,641

   

   4,319Bank loans repaid

   

   (551)

   

   (6,824)

   

   (9,376)

   

   (6,161)Interest paid

   

   (116)

   

   (1,436)

   

   (2,047)

   

   (2,087)Dividends declared and paid

   

   (211)

   

   (2,612)

   

   (1,344)

   

   (945)Acquisition of non-controlling interests

   

   (23)

   

   (282)

   

   -

   

   (223)Other liabilities

   

   (9)

   

   (108)

   

   97

   

   (164)Net cash flows from financing activities

   

   (163)

   

   (2,011)

   

   (6,029)

   

   (5,261)Increase (decrease) in cash and cash equivalents

   

   443

   

   5,494

   

   1,734

   

   (659)Translation and restatement effects

   

   (64)

   

   (801)

   

   (476)

   

   (538)Initial balance of cash and cash equivalents

   

   633

   

   7,841

   

   6,583

   

   7,780Ending balance of cash and cash equivalents

   $

   1,012

   Ps.

   12,534

   Ps.

   7,841

   Ps.

   6,583The accompanying notes are an integral part of these consolidated statements of cash flows.
  F-4


---



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITYCOCA-COLA FEMSA, S.A.B. DE C.V. AND SUBSIDIARIESFor the years ended December 31, 2010, 2009 and 2008.Amounts expressed in millions of Mexican pesos (Ps.). RetainedAdditional

   

   EarningsCapital

   

   Paid-in from

   

   PriorStock

   

   Capital

   

   YearsBalances at December 31, 2007

   Ps.

   3,116

   Ps.

   13,333

   Ps.

   27,930Transfer of prior year net income

   

   -

   

   -

   

   6,908Effect of changes in NIF B-10 (Note 2h)

   

   -

   

   -

   

   42Effect of changes in NIF D-3 (Note 2k)

   

   -

   

   -

   

   -Dividends declared and paid (Note 21)

   

   -

   

   -

   

   (945)Acquisitions of non-controlling interest (Note 5)

   

   -

   

   (113)

   

   -Comprehensive income

   

   -

   

   -

   

   -Balances at December 31, 2008

   

   3,116

   

   13,220

   

   33,935Transfer of prior year net income

   

   -

   

   -

   

   5,598Dividends declared and paid (Note 21)

   

   -

   

   -

   

   (1,344)Comprehensive income

   

   -

   

   -

   

   -Balances at December 31, 2009

   

   3,116

   

   13,220

   

   38,189Transfer of prior year net income

   

   -

   

   -

   

   8,523Dividends declared and paid (Note 21)

   

   -

   

   -

   

   (2,604)Acquisitions of non-controlling interest

   

   -

   

   19

   

   -Comprehensive income

   

   -

   

   -

   

   -Balances at December 31, 2010

   Ps.

   3,116

   Ps.

   13,239

   Ps.

   44,108The accompanying notes are an integral part of these consolidated statements of changes in shareholders’ equity.
  F-5


---



Cumulative

   

   

   

   Non-controllingOther

   

   Total

   

   Interest in

   

   TotalNet

   

   Comprehensive

   

   Controlling

   

   Consolidated

   

   Shareholders’Income

   

   Income (Loss)

   

   Interest

   

   Subsidiaries

   

   EquityPs.

   6,908

   Ps.

   (2,147)

   Ps.

   49,140

   Ps.

   1,641

   Ps.

   50,781(6,908)

   

   -

   

   -

   

   -

   

   --

   

   (42)

   

   -

   

   -

   

   --

   

   98

   

   98

   

   -

   

   98-

   

   -

   

   (945)

   

   -

   

   (945)-

   

   -

   

   (113)

   

   (110)

   

   (223)5,598

   

   2,135

   

   7,733

   

   172

   

   7,9055,598

   

   44

   

   55,913

   

   1,703

   

   57,616(5,598)

   

   -

   

   -

   

   -

   

   --

   

   -

   

   (1,344)

   

   -

   

   (1,344)8,523

   

   3,084

   

   11,607

   

   593

   

   12,2008,523

   

   3,128

   

   66,176

   

   2,296

   

   68,472(8,523)

   

   -

   

   -

   

   -

   

   --

   

   -

   

   (2,604)

   

   -

   

   (2,604)-

   

   -

   

   19

   

   (301)

   

   (282)9,800

   

   (2,112)

   

   7,688

   

   607

   

   8,295Ps.

   9,800

   Ps.

   1,016

   Ps.

   71,279

   Ps.

   2,602

   Ps.

   73,881The accompanying notes are an integral part of these consolidated statements of changes in shareholders’ equity.
  F-6


---



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSCOCA-COLA FEMSA, S.A.B. DE C.V. AND SUBSIDIARIESFor the years ended December 31, 2010, 2009 and 2008.Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.). Note 1. Activities of the Company.Coca-Cola FEMSA, S.A.B. de C.V. (“Coca-Cola FEMSA” or “the Company”) is a Mexican corporation, mainly engaged in acquiring, holding and transferring all types of bonds, capital stock, shares and marketable securities. Coca-Cola FEMSA is indirectly owned by Fomento Economico Mexicano, S.A.B. de C.V. (“FEMSA”), which holds 53.7% of its capital stock and 63% of its voting shares and The Coca-Cola Company (“TCCC”), which indirectly owns 31.6% of its capital stock and 37% of the voting shares. The remaining 14.7% of Coca-Cola FEMSA’s shares trade on the Bolsa Mexicana de Valores, S.A.B. de C.V. (BMV: KOFL). Its American Depositary Shares (ADS) trade on the New York Stock Exchange, Inc. (NYSE: KOF). In February 2010, the Company’s main shareholders, FEMSA and The Coca-Cola Company, amended the shareholders agreement, and the Company’s bylaws were amended accordingly. The amendment related to changes in the voting requirements for decisions on: (1) ordinary operations within an annual business plan and (2) appointment of the chief executive officer and all officers reporting to him, all of which now may be taken by the board of directors by simple majority voting. Coca-Cola FEMSA and its subsidiaries (the “Company”), as an economic unit, are engaged in the production, distribution and marketing of certain Coca-Cola trademark beverages in Mexico, Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela, Brazil and Argentina. As of December 31, 2010 and 2009, the most significant companies over which the Company exercises control are: OwnershipPercentageCompany

   

   Activity Country

   

   2010

   

   2009Propimex, S.A. de C.V.

   

   Manufacturing and distribution

   

   Mexico

   

   100.00%

   

   100.00%Controladora Interamericana deBebidas, S.A. de C.V.

   

   Holding

   

   Mexico

   

   100.00%

   

   100.00%Refrescos Latinoamericanos, S.A. de C.V.

   

   Holding

   

   Mexico

   

   100.00%

   

   100.00%Spal Industria Brasileira de Bebidas, S.A.

   

   Manufacturing and distribution

   

   Brazil

   

   97.71%

   

   97.71%Coca-Cola Femsa de Venezuela, S.A.

   

   Manufacturing and distribution

   

   Venezuela

   

   100.00%

   

   100.00%Industria Nacional de Gaseosas, S.A.

   

   Manufacturing and distribution

   

   Colombia

   

   100.00%

   

   100.00%
  Note 2. Basis of Presentation. The consolidated financial statements include the financial statements of Coca-Cola FEMSA and those companies over which it exercises control. All intercompany account balances and transactions have been eliminated in consolidation process. The accompanying consolidated financial statements were prepared in accordance with Mexican Financial Reporting Standards (“Mexican FRS”), individually referred to as “NIFs,” and are stated in millions of Mexican pesos (“Ps.”). The translation of Mexican pesos into U.S. dollars (“$”) is included solely for the convenience of the reader, using the noon buying exchange rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the U.S. Federal Reserve Board of 12.3825 pesos per U.S. dollar as of December 30, 2010, the last day in 2010 for which information is available, according to the U.S. Federal Reserve Board. The Company classifies its costs and expenses by function in the consolidated income statement, in order to conform to the industry practices where the Company operates. The income from operations line in the income statement is the result of subtracting cost of goods sold and operating expenses from total revenues and it has been included for a better understanding of the Company’s financial and economic performance. F-7


---



The accompanying consolidated financial statements and its notes were approved for issuance by the Company’s Chief Executive Officer and Chief Financial Officer on June 17, 2011 and subsequent events have been considered through that date (see Note 29). On January 1, 2010, 2009 and 2008 several new NIF’s came into effect. Such changes and their application are described as follows: New NIF’s adopted in 2010: a) NIF C-1 “Cash and Cash Equivalents” In 2010, the Company adopted NIF C-1 “Cash and Cash Equivalents”, which superseded Bulletin C-1 “Cash”. NIF C-1 establishes that cash shall be measured at nominal value, and cash equivalents shall be measured at acquisition cost for initial recognition. Subsequently, cash equivalents should be measured according to its designation: precious metals shall be measured at fair value, foreign currencies shall be translated to the functional and reporting currency applying the closing exchange rate. Cash and cash equivalents will be presented in the first line of assets, including restricted cash. This pronouncement was applied retrospectively, causing an increase in the cash balances reported as a result of the treatment of presentation of restricted cash, which was reclassified from “other current assets” for an amount of Ps. 394 and Ps. 214, for the years ended December 31, 2010 and 2009, respectively. b) INIF 19, “Accounting change as a result of IFRS adoption”: On September 30, 2010, the Consejo Mexicano de Normas de Información Financiera (CINIF) issued the INIF 19 “Accounting change as a result of International Financial Reporting Standards (IFRS) adoption.” This INIF states disclosure requirements for: (a) financial statements based on Mexican FRS that were issued before IFRS adoption and (b) financial statement based on Mexican FRS that are issued within the IFRS period adoption. Either a) or b) will result in additional disclosures regarding IFRS adoption, such as date of adoption, significant financial impact, significant changes in accounting policies, among others. See Note 29. New NIF’s adopted in 2009: c) NIF B-7, “Business Acquisitions”: In 2009, the Company adopted NIF B-7 “Business Acquisitions”, which is an amendment to the previous Bulletin B-7 “Business Acquisitions”. NIF B-7 establishes general rules for recognizing the fair value of net assets of businesses acquired as well as the fair value of non-controlling interests, at the purchase date. This statement differs from the previous Bulletin B-7 in the following ways: a) to recognize all assets and liabilities acquired at their fair value, including the non-controlling interest based on the acquirer accounting policies, b) acquisition-related costs and restructuring expenses should not be part of the purchase price, and c) changes to tax amounts recorded in acquisitions must be recognized as part of the income tax provision. This pronouncement was applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. d) NIF B-8, “Consolidated and Combined Financial Statements”: In 2009, the Company adopted NIF B-8 “Consolidated or combined financial statements”, which was issued in 2008, and amends Bulletin B-8 “Consolidated and combined financial statements and valuation of permanent share investments”. NIF B-8 is similar to previous Bulletin B-8; however, this statement differs from the previous Bulletin B-8 in the following ways: a) defines control as the power to govern financial and operating policies, b) establishes that there are other facts, such as contractual agreements that have to be considered to determine whether an entity exercises control or not, c) defines “Specific-Purpose Entity” (“SPE”), as those entities that are created to achieve a specific purpose and are considered within the scope of this pronouncement, d) establishes new terms, such as “controlling interest” instead of “majority interest” and “non-controlling interest” instead “minority interest”, and e) confirms that non-controlling interest must be assessed at fair value at the subsidiary acquisition date. NIF B-8 has been applied prospectively beginning on January 1, 2009. e) NIF C-7, “Investment in Associates and Other Permanent Investments”: In 2009, the Company adopted NIF C-7 “Investment in Associates and Other Permanent Investments”. NIF C-7 establishes general rules of accounting recognition for the investment in associates and other permanent investments not joint or fully controlled or significantly influenced by an entity. This pronouncement includes guidance to determine the existence of significant influence. Previous Bulletin B-8 “Consolidated and combined financial statements and valuation of permanent share investments”, defined that permanent share investments were accounted for using the equity method if the entity held 10% or more of its outstanding shares. NIF C-7 establishes that permanent share investments should be accounted by equity method if: a) an entity holds 10% or more of a public entity, b) an entity holds 25% or more of a private company, and c) an entity exercise significant influence over the investments of a company, as described in NIF C-7. As disclosed in Note 9, the Company owns certain privately held investments for which it owns less than 25% but still applies the equity method of accounting as it has determined that it exercises significant influence over those entities. Accordingly, the adoption of NIF C-7 did not have an impact on the Company’s consolidated financial statements. F-8


---



f) NIF C-8, “Intangible Assets”: In 2009, the Company adopted NIF C-8 “Intangible Assets” which is similar to previous Bulletin C-8 “Intangible Assets”. NIF C-8, establishes the rules of valuation, presentation and disclosure for the initial and subsequent recognition of intangible assets that are acquired individually or through acquisition of an entity, or generated internally in the course of the entity’s operations. This NIF considers intangible assets as non-monetary items, broaden the criteria of identification to include not only if they are separable (asset could be sold, transferred or used by’s the entity) but also whether they come from contractual or legal rights. NIF C-8 establishes that preoperative costs capitalized before this standard went into effect have to be accomplished with intangible assets characteristics, otherwise preoperative costs must be expensed as incurred. The adoption of NIF C-8 did not have an impact on the Company’s consolidated financial statements. g) NIF D-8, “Share-Based Payments”: In 2009, the Company adopted NIF D-8 “Share-Based Payments” which establishes the recognition of share-based payments. When an entity purchases goods or pay services with equity instruments, the NIF D-8 requires the entity to recognize those goods and services at fair value and the corresponding increase in equity. If an entity cannot determine the fair value of goods and services, it should determine it using an indirect method, based on fair value of the equity instruments. This pronouncement substitutes for the supplementary use of IFRS 2 “Share-based payments”. The adoption of NIF D-8 did not have an impact on the Company’s consolidated financial statements. New NIF’s adopted in 2008: h) NIF B-10, “Effects of Inflation”: In 2008, the Company adopted NIF B-10 “Effects of Inflation.” Before 2008, the Company restated prior year’s financial statements to reflect the impact of current period inflation for comparison purposes. NIF B-10 establishes two types of inflationary environments: a) Inflationary Economic Environment; this is when cumulative inflation of the three preceding years is 26% or more, in such case, inflation effects should be recognized in the financial statements by applying the comprehensive method as described in NIF B-10; the recognized restatement effects for inflationary economic environments is made starting in the period that the entity becomes inflationary; and b) Non-Inflationary Economic Environment; this is when cumulative inflation of the three preceding years is less than 26%, in such case, no inflationary effects should be recognized in the financial statements, keeping the recognized restatement effects until the last period in which the inflationary accounting was applied. NIF B-10 establishes that the results of holding non-monetary assets (RETANM) recognized in previous periods should be reclassified in retained earnings. On January 1, 2008, the amount of RETANM reclassified in retained earnings was Ps. 42 (see Consolidated Statements of Changes in Shareholders’ Equity). Through December 31, 2007, the Company accounted for inventories at specific cost. As a result of NIF B-10 adoption, beginning in 2008, the Company carries out the inventories valuation based on valuation methods described in Bulletin C-4 “Inventories” for noninflationary environment subsidiaries. Inventories from subsidiaries companies that operate in inflationary environments are restated using inflation factors. The change in accounting for inventories impacted the consolidated income statement, through an increase to cost of goods sold of Ps. 350 as of December 31, 2008. In addition, NIF B-10 eliminates the restatement of imported equipment by applying the inflation factors and exchange rate of the country where the asset was purchased. Beginning in 2008, these assets are recorded using the exchange rate of the acquisition date. Subsidiaries companies that operate in inflationary environments shouldrestate imported equipment using the inflation factors of the country where the asset is acquired. The change in this methodology did not significantly impact the consolidated financial statements of the Company. F-9


---



i) NIF B-2, “Statement of Cash Flows”: In 2008, the Company adopted NIF B-2 “Statement of Cash Flows.” As established in NIF B-2, the Consolidated Statement of Cash Flows is presented as part of these financial statements for the years ended December 31, 2010, 2009 and 2008. The adoption of NIF B-2 also resulted in several complementary disclosures not previously required. j) NIF B-15, “Translation of Foreign Currencies”: In 2008, the Company adopted NIF B-15. NIF B-15 incorporates the concepts of recording currency, functional currency and reporting currency, and establishes the methodology to translate financial information of a foreign entity, based on those terms. Additionally, this rule is aligned with NIF B-10, which defines translation procedures of financial information from subsidiaries that operate in inflationary and non-inflationary environments. Prior to the application of this rule, translation of financial information from foreign subsidiaries was according to inflationary environments methodology. The adoption of this pronouncement was prospective and did not impact the consolidated financial statements of the Company. k) Mexican FRS D-3, “Employee Benefits”: In 2008, the Company adopted Mexican FRS D-3, which eliminates the recognition of the additional liability which resulted from the difference between obligations for accumulated benefits and the net projected liability. On January 1, 2008, the additional liability derecognized amounted to Ps. 421, from which Ps. 277 corresponds to the intangible asset and Ps. 98 to the majority cumulative other comprehensive income, net from its deferred tax of Ps. 45. Through 2007, Bulletin D-3, “Labor Liabilities,” required the presentation of labor liabilities financial expenses from labor obligations as part of income from operations. Beginning in 2008, NIF D-3 allows the presentation of financial expenses from labor liabilities as part of the comprehensive financing result. As of December 31, 2010, 2009 and 2008, the financial expenses from labor liabilities presented as part of the comprehensive financing result was Ps. 89, Ps. 96 and Ps. 81, respectively. Through 2007, the labor costs of past services of severance indemnities and pension and retirement plans were amortized over the remaining labor life of employees. Beginning in 2008, NIF D-3 establishes a maximum five-year period to amortize the initial balance of the labor costs of past services of pension and retirement plans and the same amortization period for the labor cost of past service of severance indemnities, previously defined by Bulletin D-3 as unrecognized transition obligation and unrecognized prior service costs. This change did not impact prior service costs of pension and retirement plans amortization since the remaining amortization period as of the adoption date was already five years or less. For the years ended December 31, 2010, 2009 and 2008, labor cost of past services amounted to Ps. (3), Ps. 1, Ps. (3), respectively; and were recorded within the operating income. Beginning in 2008, actuarial gains and losses of severance indemnities are recognized in the operating income of the year they were generated and the balance of unrecognized actuarial gains and losses were recorded in other expenses (see Note 18). As of December 31, 2008, the unrecognized actuarial loss amounted to Ps. 137. Note 3. Incorporation of Foreign Subsidiaries. The accounting records of foreign subsidiaries are maintained in the local currency and in accordance with the local accounting principles of each country. For incorporation into the Company’s consolidated financial statements, each foreign subsidiary’s individual financial statements are adjusted to Mexican FRS and beginning in 2008, they are restated into Mexican pesos, as described as follows: •For inflationary economic environments- the inflation effects of the country of origin are recognized, and the financial statements are subsequently translated into Mexican pesos using the year-end exchange rate. •For non-inflationary economic environments- assets and liabilities are translated into Mexican pesos using the period-end exchange rate, shareholders’ equity is translated into Mexican pesos using the historical exchange rate, and the income statement is translated using the average exchange rate of each month. F-10


---



Local Currencies to Mexican PesosAverage Exchange Rate for Exchange Rate as of December 31Country

   Functional / Recording Currency

   

   2010

   

   2009

   

   2010(1)

   

   2009(1)

   

   2008(1)Mexico

   Mexican peso

   Ps.

   1.00

   Ps.

   1.00

   Ps.

   1.00

   Ps.

   1.00

   Ps.

   1.00Guatemala

   Quetzal

   

   1.57

   

   1.66

   

   1.54

   

   1.56

   

   1.74Costa Rica

   Colon

   

   0.02

   

   0.02

   

   0.02

   

   0.02

   

   0.02Panama

   U.S. dollar

   

   12.64

   

   13.52

   

   12.36

   

   13.06

   

   13.54Colombia

   Colombian peso

   

   0.01

   

   0.01

   

   0.01

   

   0.01

   

   0.01Nicaragua

   Cordoba

   

   0.59

   

   0.67

   

   0.56

   

   0.63

   

   0.68Argentina

   Argentine peso

   

   3.23

   

   3.63

   

   3.11

   

   3.44

   

   3.92Venezuela (2)

   Bolivar

   

   2.97

   

   6.29

   

   2.87

   

   6.07

   

   6.30Brazil

   Reais

   

   7.18

   

   6.83

   

   7.42

   

   7.50

   

   5.79(1) Year-end exchange rates used for translation of financial information.(2) Equals 4.30 in 2010 (2.15 in 2009) bolivars per one U.S. dollar, translated to Mexican pesos applying the average exchange rate or period-end rate.
  Prior to the adoption of NIF B-10 in 2008, translation of financial information from all foreign subsidiaries was performed according to the inflationary environments methodology described above. Variances in the net investment in foreign subsidiaries generated in the translation process are included in the cumulative translation adjustment, which is recorded in shareholders’ equity as a cumulative other comprehensive income item. Beginning in 2003, the government of Venezuela established a fixed exchange rate control of 2.15 bolivars per U.S. dollar, which is the rate used by the Company to translate the financial statements of the Venezuelan subsidiaries. The Company has operated under exchange controls in Venezuela since 2003 that affect its ability to remit dividends abroad or make payments other than in local currencies and that may increase the real price to us of raw materials purchased in local currency. In January 2010, the Venezuelan government announced a devaluation of its official exchange rates and the establishment of a multiple exchange rate system which considers 2.60 bolivars to one U.S. dollar for high priority categories, 4.30 bolivars to one U.S. dollar for non-priority categories, and recognizes the existence of other exchange rates in which the government shall intervene. As a result of this devaluation, the balance sheet of the Company’s Venezuelan subsidiary reflected a reduction in shareholders’ equity of Ps. 3,700 million which was accounted for at the time of the devaluation in January 2010. In December 2010, the Venezuelan Government authorities announced a change in the authorized exchange rates, by which the preferential rate of 2.60 bolivars to one U.S. dollar was eliminated. Intercompany financing balances with foreign subsidiaries are considered as long-term investments, since there is no plan to pay down such financing in the foreseeable future. Monetary gain and losses and exchange gain and losses on these balances are recorded in equity as part of the cumulative translation adjustment, which is presented as part of cumulative other comprehensive income. The translation of assets and liabilities denominated in foreign currencies into Mexican pesos is for consolidation purposes and does not indicate that the Company could realize or settle the reported value of those assets and liabilities in Mexican pesos. Additionally, this does not indicate that the Company could return or distribute the reported Mexican peso value equity to its shareholders. F-11


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Note 4. Significant Accounting Policies. The Company’s accounting policies are in accordance with Mexican FRS, which require that the Company’s management use estimates and assumptions in valuing certain items included in the consolidated financial statements. The Company’s management believes that the estimates and assumptions used were appropriate as of the date of these consolidated financial statements. However, actual results are dependent on the outcome of future events and uncertainties, which could materially affect the Company’s real performance. The significant accounting policies are as follows: a) Recognition of the Effects of Inflation in Countries with Inflationary Economic Environments: The Company recognizes the effects of inflation on the financial information of its subsidiaries that operate in inflationary economic environments (when cumulative inflation of the three preceding years is 26% or more) using the comprehensive method, which consists of: •Using inflation factors to restate non-monetary assets, such as inventories, fixed assets, intangible assets, including related costs and expenses when such assets are consumed or depreciated; •Applying the appropriate inflation factors to restate capital stock, additional paid-in capital and retained earnings by the necessary amount to maintain the purchasing power equivalent in Mexican pesos on the dates such capital was contributed or income was generated up to the date of these consolidated financial statements are presented; and •Including the monetary position gain or loss in the comprehensive financing result (see Note 4u). The Company restates the financial information of its subsidiaries that operate in inflationary economic environments using the consumer price index of each country. As of December 31, 2010, the operations of the Company are classified as follows considering the cumulative inflation of the three preceding years. The following classification also applies to 2009: Cumulative Inflation

   

   Type ofInflation 2010

   

   2007-2009

   

   EconomyMexico

   

   4.4%

   

   14.5%

   

   Non-InflationaryGuatemala

   

   5.4%

   

   18.6%

   

   Non-InflationaryColombia

   

   3.2%

   

   16.1%

   

   Non-InflationaryBrazil

   

   5.9%

   

   16.6%

   

   Non-InflationaryPanama

   

   4.9%

   

   15.7%

   

   Non-InflationaryVenezuela

   

   27.2%

   

   100.5%

   

   InflationaryNicaragua

   

   9.2%

   

   34.2%

   

   InflationaryCosta Rica

   

   5.8%

   

   31.3%

   

   InflationaryArgentina (1)

   

   10.9%

   

   25.3%

   

   Inflationary(1) Argentina has been considered an inflationary economy in 2008, 2009 and 2010. While the cumulative inflation for 2007-2009 was less than 26%(25.3%), inflationary trends in Argentina continue to support this classification.
 b) Cash and Cash Equivalents Cash and Cash Equivalents: Cash consists of bank deposits. Cash equivalents consist principally of short-term bank deposits and highly liquid investments, for example those with maturities of three months or less and are recorded at their acquisition cost plus interest income not yet received, which is similar to market prices. As of December 31, 2010, and 2009, cash equivalents were Ps. 9,938 and Ps. 6,192, respectively. F-12


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Restricted Cash: Additionally, as of December 31, 2010 and 2009, the Company has restricted cash as collateral against accounts payable in different currencies. 2010

   

   2009Venezuelan bolivars

   Ps.

   143

   Ps.

   161Brazilian reais

   

   249

   

   53Argentinian Pesos

   

   2

   

   -Ps.

   394

   Ps.

   214
  c) Marketable Securities: Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable debt securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses and exchange rate fluctuation net of tax, reported in other comprehensive income. Interest and dividends on securities classified as available-for-sale are included in investment income. The fair values of the investments are readily available based on quoted market prices. The following is a detail of available-for-sale securities: Grossunrealized

   FairDecember 31, 2010

   Cost

   gain

   ValueDebt securities

   Ps.

   -

   Ps.

   -

   Ps.

   -December 31, 2009Debt securities

   Ps.

   2,001

   Ps.

   112

   Ps.

   2,113
  d) Allowance for doubtful accounts Allowance for doubtful accounts is based on an evaluation of the aging of the receivable portfolio and the economic situation of the Company’s clients, as well as the Company’s historical loss rate on receivables and the economic environment in which the Company operates. The carrying value of accounts receivable approximates its fair value as of both December 31, 2010 and 2009. e) Inventories and Cost of Goods Sold: Inventories represent the acquisition or production cost which is incurred when purchasing or producing a product, and are valued using the average cost method. Advances to suppliers of raw materials are included in the inventory account. Cost of goods sold is based on average cost of the inventories at the time of sale. Cost of goods sold includes expenses related to the purchase of raw materials used in the production process, as well as labor costs (wages and other benefits), depreciation of production facilities, equipment and other costs, including fuel, electricity, depreciation of returnable bottles during the production process, equipment maintenance, inspection and plant transfer costs. f) Other Current Assets: Other current assets are comprised of payments for services that will be received over the next 12 months and the fair market value of derivative financial instruments with maturity dates of less than one year (see Note 4v). Prepaid expenses principally consist of advertising, promotional, leasing and insurance expenses, and are recognized in the income statement when the services or benefits are received. Prepaid advertising costs consist of television and radio advertising airtime paid in advance. These expenses are generally amortized over a 12-month period based on the transmission of the television and radio spots. The related production costs are recognized in income from operations as of the first date the advertising is broadcasted. Promotional costs are expensed as incurred, except for those promotional costs related to the launching of new products or presentations before it is on the market. These costs are recorded as prepaid expenses and amortizedover the period during which they are estimated to increase sales of the related products or container presentations to normal operating levels, which is generally no longer than one year. F-13


---



g) Investment in Shares: Investment in shares of associated companies over which the Company exercises significant influence are initially recorded at their acquisition cost and are subsequently accounted for using the equity method. Investment in affiliated companies over which the Company does not have significant influence are recorded at acquisition cost and restated using the consumer price index if that entity operates in an inflationary environment. The other investments in affiliated are valued at acquisition cost. h) Returnable and Non-Returnable Bottles and Cases: The Company has two types of bottles and cases; returnable and non-returnable. •Non returnable: Are recorded in the results of operations at the time of product sale. •Returnable: Are classified as long-lived assets as a component of property, plant and equipment. Returnable bottles and cases are recorded at acquisition cost for countries with inflationary economy then restated applying inflation factors as of the balance sheet date, according to NIF B-10. There are two types of returnable bottles and cases: •Those that are in the Company’s control within its facilities, plants and distribution centers; and •Those that have been placed in the hands of customers, but still belong to the Company. Depreciation of returnable bottles and cases is computed using the straight line method over acquisition cost. The Company estimates depreciation rates considering their estimated useful lives. Estimated useful life for returnable glass bottles and plastic cases in plants and distribution centers is four years, and 18 months for returnable plastic bottles. Estimated useful life for returnable bottles and plastic cases that have been placed in the hands of customers is 24 months for glass bottles and 12 months for plastic bottles. The Company’s returnable bottles and cases in the market and for which a deposit from customers has been received are presented net of such deposits, and the difference between the cost of these assets and the deposits received is depreciated according to their useful lives. i) Property, Plant and Equipment, net: Property, plant and equipment are initially recorded at their cost of acquisition and/or construction. The comprehensive financing result incurred to fund long-term assets investment is capitalized as part of the total acquisition cost. Major renovations and betterment costs are capitalized as part of total acquisition cost. Routine maintenance and minor repair costs are expensed as incurred. Construction in progress consists of long lived assets not yet placed into service. Depreciation is computed using the straight-line method over acquisition cost. The Company estimates depreciation rates, considering the estimated remaining useful lives of the assets. F-14


---



The estimated useful lives of the Company’s principal assets are as follows: YearsBuildings and construction

   40–50Machinery and equipment

   10–20Distribution equipment

   7–15Refrigeration equipment

   5–7Other equipment

   3–10
  F-15


---



j) Other Assets: Other assets represent payments whose benefits will be received in future years and consists of the following: •Agreements with customers for the right to sell and promote the Company’s products over a certain period. The majority of the agreements have terms of more than one year, and the related costs are amortized using the straight-line method over the term of the contract, with the amortization presented as a reduction of net sales.During the years ended December 31, 2010, 2009 and 2008, such amortization aggregated to Ps. 553, Ps. 604 and Ps. 383, respectively. The costs of agreements with terms of less than one year are recorded as a reduction in net sales when incurred. •Leasehold improvements are amortized using the straight-line method over the shorter of either the useful life of the assets or the related lease term. In countries considered inflationary, these assets are restated for inflation.The amortization of leasehold improvements for the years ended December 31, 2010, 2009 and 2008 was Ps. 19, Ps. 20 and Ps. 60, respectively. k) Leases:Building and equipment leases are capitalized if i) the contract transfers ownership of the leased asset to the lessee at the end of the lease, ii) the contract contains an option to purchase the asset at a reduced price, iii) the lease period is substantially equal to the remaining useful life of the leased asset (75% or more) or iv) the present value of future minimum payments at the inception of the lease is substantially equal to the market value of the leased asset, net of any residual value (90% or more). When the inherent risks and benefits of a leased asset remains substantially with the lessor, leases are classified as operating and rent is charged to results of operations as incurred. l) Intangible Assets:Intangible assets represent payments whose benefits will be received in future years. These assets are classified as either intangible assets with defined useful lives or intangible assets with indefinite useful lives, in accordance with the period over which the Company expects to receive the benefits. Intangible assets with defined useful lives are amortized and mainly consist of: •Information technology and management system costs incurred during the development stage which are currently in use. Such amounts are capitalized and then amortized using the straight-line method over seven years. Expenses that do not fulfill the requirements for capitalization are expensed as incurred. •Other computer system costs in the development stage, that are not yet in use. Such amounts are capitalized as they are expected to add value such as income or cost savings in the future. Such amounts will be amortized on a straight-line basis over their estimated economic life after they are placed into service. Intangible assets with indefinite life are not amortized and are subject to impairment tests on an annual basis or more frequently if deemed necessary. These assets are recorded in the functional currency of the subsidiary in which the investment was made and are subsequently translated into Mexican pesos using the closing exchange rate of each period. In countries with inflationary economic environments intangible assets are restated by applying inflation factors of the country of origin and are translated into Mexican pesos at the year-end exchange rate. The Company’s intangible assets with indefinite life mainly consist of rights to produce and distribute Coca-Cola trademark products in the Company’s territories. These rights are contained in agreements that are standard contracts that The Coca-Cola Company has with its bottlers. In Mexico, the Company has four bottler agreements; the agreements for two territories expire in June 2013 and the agreements for the other two territories expire in May 2015. The Company’s bottler agreements with The Coca-Cola Company will expire for our territories in the following countries: Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014. All of the Company’s bottler agreements are renewable for ten-year terms. These bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew the agreement. In addition, these agreements generally may be terminated in the case of material breach. Termination would prevent the Company from selling Coca-Cola trademark beverages in the affected territory and would have an adverse effect on the Company’s business, financial conditions, results from operations and prospects. F-16


---



m) Impairment of Long-Lived Assets: Depreciated tangible long-lived assets, such as property, plant and equipment are reviewed for impairment whenever certain circumstances indicate that the carrying amount of those tangible long-lived assets exceeds its recoverable value. Amortized intangible assets, such as definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable through its expected future cash flows. For assets with indefinite useful lives, such as distribution rights, the Company tests for impairment on an annual basis as well as whenever certain circumstances indicate that the carrying amount of those intangible assets exceeds its recoverable value. These evaluations are performed by comparing the carrying value of the assets with its recoverable amount. The recoverable amount is calculated using various recognized methodologies, primarily an evaluation of expected future cash flows. For the years ended December 31, 2010, 2009 and 2008, the Company has not recorded any impairment related to its long-lived assets. n) Payments from The Coca-Cola Company: The Coca-Cola Company participates in certain advertising and promotional programs as well as in the Company’s refrigeration equipment and returnable bottles investment program. Contributions received by the Company for advertising and promotional incentives are recognized as a reduction in selling expenses and contributions received for the refrigeration equipment and returnable bottles investment program are recorded as a reduction in the investment in refrigeration equipment and returnable bottles items. Contributions received were Ps. 2,386, Ps. 1,945 and Ps. 1,995; during the years ended December 31, 2010, 2009 and 2008, respectively. o) Labor Liabilities: Labor liabilities include obligations for pension and retirement plans, seniority premiums and severance indemnity liabilities other than restructuring, all based on actuarial calculations, and are computed using the projected unit credit method. Costs related to compensated absences, such as vacations and vacation premiums, are accrued on a cumulative basis, for which an accrual is made. Labor liabilities are considered to be non-monetary and are determined using long-term assumptions. The yearly cost of labor liabilities is charged to income from operations and labor cost of past services is recorded as expenses over the remaining working life period of the employees during which they will receive the benefits of the plan. Certain subsidiaries of the Company have established funds for the payment of pension benefits through irrevocable trusts of which the employees are named as beneficiaries. p) Contingencies: The Company recognizes a liability for a loss contingency when it is probable (i.e. the probability that the event will occur is greater than the probability that it will not) that certain effects related to past events, would materialize and can be reasonably quantified. These events and their financial impact are also disclosed as loss contingencies in the consolidated financial statements when the risk of loss is deemed to be other than remote. The Company does not recognize an asset for a gain contingency until the gain is realized. In connection with certain past business combinations, the Company has been indemnified by the sellers related to certain contingencies. F-17


---



q) Revenue Recognition: Sales of products are recognized as revenue upon delivery to the customer, and once the customer has taken ownership of the goods. Net sales reflect units delivered at list prices reduced by promotional allowances, discounts and the amortization of the agreements with customers to obtain the rights to sell and promote the Company’s products. During 2007 and 2008, the Company sold certain of its private label brands to The Coca-Cola Company. Because the Company has significant continuing involvement with these brands, proceeds received from The Coca-Cola Company were initially deferred and are being amortized against the related costs of future product sales over the estimated period of such sales. The balance of unearned revenues as of December 31, 2010 and 2009 amounted to Ps. 547 and Ps. 616, respectively. The short-term portions of such amounts are presented as other current liabilities, amounted Ps. 276 and Ps. 203 at December 31, 2010 and 2009, respectively. r) Operating Expenses: Operating expenses are comprised of administrative and selling expenses. Administrative expenses include labor costs (salaries and other benefits) of employees not directly involved in the sale of the Company’s products, as well as professional service fees, the depreciation of office facilities and the amortization of capitalized information technology system implementation costs. Selling expenses include: •Distribution: labor costs (salaries and other benefits), outbound freight costs, warehousing costs of finished products, breakage of returnable bottles in the distribution process, depreciation and maintenance of trucks and other distribution facilities and equipment. For the years ended December 31, 2010, 2009 and 2008, these distribution costs amounted to Ps. 12,774, Ps. 13,395 and Ps. 10,468, respectively; •Sales: labor costs (salaries and other benefits) and sales commissions paid to sales personnel; •Marketing: labor costs (salaries and other benefits), promotional expenses and advertising costs. s) Other Expenses: Other expenses include Employee Profit Sharing (“PTU”), equity interest in affiliated companies, gains or losses on sales of fixed assets and contingencies reserves as well as their related subsequent interest and penalties, severance payments from restructuring programs and all other non-recurring expenses related to activities that are different from the Company’s main business activities and that are not recognized as part of the comprehensive financing result. PTU is applicable to Mexico and Venezuela. In Mexico, employee profit sharing is computed at the rate of 10% of the individual company taxable income, excluding the restatement of depreciation expense, foreign exchange gains and losses, which are not included until the asset is disposed of or the liability is due and other effects of inflation are also excluded. In Venezuela, employee profit sharing is computed at 15% of taxable income, not in excess of four months of salary per employee. The Company has not recorded a provision for deferred employee profit sharing during any of the periods presented herein as the Company does not expect the relevant deferred items to materialize. Severance payments resulting from restructuring programs and associated with an ongoing benefit arrangement are charged to other expenses on the date when it is decided to dismiss personnel under a formal program or for specific causes. These severance payments are included in other expenses (see Note 18). t) Income Taxes: Income taxes (including deferred income taxes) are charged to results of operations as they are incurred. For the purposes of recognizing the effects of deferred income taxes in the consolidated financial statements, the Company utilizes both retrospective and prospective analysis of taxable income over the medium term when more than one tax regime exists per jurisdiction. The Company then recognizes the tax expense amount based on the tax regime it expects to be subject to in the future. F-18


---



Deferred income tax assets and liabilities are recognized for temporary differences resulting from the comparison of the book values and tax values of assets and liabilities (including any future benefits from tax loss carry-forwards). Deferred income taxes are recorded by applying the income tax rate enacted at the balance sheet date that will be in effect when the deferred tax assets and liabilities are expected to be recovered or settled. Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that they will not be recovered. The balance of deferred taxes is comprised of both monetary and non-monetary items, based on the temporary differences that gave rise to them. Deferred income taxes are classified as a long-term asset or liability, regardless of when the temporary differences are expected to reverse. On January 1, 2010 an amendment to Mexican Tax Reform became effective. The most important effects in the Company are described as follows: the value added tax rate (IVA) increases from 15% to 16%; and income tax rate changes from 28% in 2009 to 30% for 2010, 2011 and 2012, and then in 2013 and 2014 will decrease to 29% and 28%, respectively. u) Comprehensive Financing Result: The comprehensive financing result includes interest, foreign exchange gain and losses, market value gain or loss on ineffective portion of derivative financial instruments and gain or loss on monetary position, except for those amounts capitalized and those that are recognized as part of the cumulative other comprehensive income, and are described as follows: •Interest: Interest income and expenses are recorded when earned or incurred except for capitalized interest incurred on the financing of long-term assets; •Foreign Exchange Gains and Losses: Transactions in foreign currencies are recorded in local currencies using the exchange rate applicable on the date they occur. Assets and liabilities in foreign currencies are adjusted to the year-end exchange rate, recording the resulting foreign exchange gain or loss directly in the income statement, except for the foreign exchange gains or losses arising on intercompany financing foreign currency denominated balances, which are considered to be of a long-term investment nature and the foreign exchange gains or losses on the financing of long-term assets (see Note 3); •Market Value Gain or Loss on Ineffective Portion of Derivative Financial Instruments: this represents the net change in the fair value of the ineffective portion of derivative financial instruments and the net change in the fair value of embedded derivative financial instruments; and •Monetary Position Gain or Loss: The gain or loss on monetary position is the result of changes in the general price level of monetary accounts of those subsidiaries that operate in inflationary environments. Monetary position gain or loss is calculated by applying inflation factors of the country of origin to the net monetary position at the beginning of each month, excluding the intercompany financing in foreign currency, which is considered to be a long-term investment because of its nature (see Note 3), and the monetary position gain or loss on long-term debt taken on to finance long-term assets. •As of December 31, 2010, the Company has capitalized Ps. 12 in comprehensive financing result. Capitalization of comprehensive financing result is based on a capitalization rate of 5.3% applied to the long-term assets investments that require one year or more for the Company to ready the asset for its intended use. For the year ended December 31, 2009 the Company capitalized Ps. 55. For the year ended 2008, the Company did not have qualifying assets and accordingly, did not capitalized comprehensive financing result. v) Derivative Financial Instruments: The Company is exposed to different risks related to cash flows, liquidity, market and credit. As a result, the Company contracts different derivative financial instruments in order to reduce its exposure to the risk of exchange rate fluctuations between the Mexican peso and other currencies, the risk of exchange rate and interest rate fluctuations associated with its borrowings denominated in foreign currencies and the exposure to the risk of fluctuation in the costs of certain raw materials. F-19


---



The Company values and records all derivative financial instruments and hedging activities, including certain derivative financial instruments embedded in other contracts, in the balance sheet as either an asset or liability measured at fair value, considering quoted prices in recognized markets. If such instruments are not traded in a formal market, fair value is determined by applying techniques based upon technical models supported by sufficient, reliable and verifiable market data, recognized in the financial sector. Changes in the fair value of derivative financial instruments are recorded each year in current earnings or as a component of cumulative other comprehensive income based on the item being hedged and the effectiveness of the hedge. As of December 31, 2010 and 2009, the balance in other current assets of derivative financial instruments was Ps. 16 and Ps. 26 (see Note 8), and in other assets Ps. 1 and Ps. 1, respectively (see Note 12). The Company recognized liabilities regarding derivative financial instruments in other current liabilities of Ps. 19 and Ps. 22, as of the end of December 31, 2010 and 2009, respectively (see note 24a), and other liabilities of Ps. 498 and Ps. 497 for the same periods (see note 24b). The Company designates its financial instruments as cash flow hedges at the inception of the hedging relationship, when transactions meet all hedging accounting requirements. For cash flow hedges, the effective portion is recognized temporarily in cumulative other comprehensive income within stockholders’ equity and subsequently reclassified to current earnings at the same time the hedged item is recorded in earnings. When derivative financial instruments do not meet all of the accounting requirements for hedging purposes, the change in fair value is immediately recognized in net income. For fair value hedges, the changes in the fair value are recorded in the consolidated results in the period the change occurs as part of the market value gain or loss on ineffective portion of derivative financial instruments. The Company identifies embedded derivatives that should be segregated from the host contract for purposes of valuation and recognition. When an embedded derivative is identified and the host contract has not been stated at fair value the embedded derivative is segregated from the host contract, stated at fair value and is classified as trading. Changes in the fair value of the embedded derivatives at the closing of each period are recognized in the consolidated results. w) Cumulative Other Comprehensive Income: The cumulative other comprehensive income represents the period net income as described in NIF B-3 “Income Statement”, plus the cumulative translation adjustment resulted from translation of foreign subsidiaries to Mexican pesos and the effect of unrealized gain/ loss on cash flow hedges from derivative financial instruments. The cumulative balances of the Company’s components of controlling other comprehensive income (loss), net of deferred income taxes (see Note 23d), are as follows: 2010

   

   2009Cumulative translation adjustment

   Ps.

   1,000

   Ps.

   3,055Unrealized gain on marketable securities

   

   -

   

   76Unrealized loss on cash flow hedges

   

   17

   

   (3)Ps.

   1,017

   Ps.

   3,128
  The changes in the cumulative translation adjustment balance were as follows: 2010

   

   2009

   

   2008Initial balance

   Ps.

   3,055

   Ps.

   118

   Ps.

   (2,101)Translation effect

   

   (2,078)

   

   2,877

   

   2,143Foreign exchange effect from intercompany long-term loans

   

   23

   

   60

   

   76Ending balance

   Ps.

   1,000

   Ps.

   3,055

   Ps.

   118
  F-20


---





x) Issuance of Subsidiary Stock:





The Company recognizes the issuance of a subsidiary’s stock as a capital transaction. The difference between the book value of the shares issued and the amount contributed by the non-controlling interest holder or third party is recorded as additional paid-in capital.

y) Earnings per Share: Earnings per share are computed by dividing net controlling income by the average weighted number of shares outstanding during the period. Note 5. Acquisitions. The Company has made certain business acquisitions that were recorded using the purchase method. The results of the acquired operations have been included in the consolidated financial statements since the date on which the Company obtained control of the business, as disclosed below. Therefore, the consolidated income statements and the consolidated balance sheets in the years of such acquisitions are not comparable with previous periods. i)In February 2009, the Company, along with The Coca-Cola Company, completed the acquisition of certain assets of the Brisa bottled water business in Colombia. This acquisition was made so as to strengthen the Company position in the local water business in Colombia. The Brisa bottled water business was previously owned by a subsidiary of SABMiller. The terms of the transaction called for an initial purchase price of $92, of which $46 was paid by the Company, and $46 by The Coca-Cola Company. The Brisa brand and certain other intangible assets were acquired by The Coca-Cola Company, while production related property and equipment and inventory was acquired by the Company. The Company also acquired the distribution rights over Brisa products in its Colombian territory. In addition to the initial purchase price, contingent purchase consideration also existed related to the net revenues of the Brisa bottled water business subsequent to the acquisition. The total purchase price incurred by the Company was Ps. 730, consisting of Ps. 717 in cash payments, and accrued liabilities of Ps. 13. Transaction related costs were expensed by the Company as incurred as required by Mexican FRS. Following a transition period, Brisa was included in operating results beginning June 1, 2009. The estimated fair value of the Brisa net assets acquired by the Company is as follows: Production related property and equipment, at fair value

   Ps.

   95Distribution rights, at relative fair value, with an indefinite life

   

   635Net assets acquired / purchase price

   Ps.

   730
  The results of operation of Brisa for the period from the acquisition through December 31, 2009 were not material to the Company ́s consolidated results of operations. ii)In July 2008, the Company acquired certain assets of the Agua de Los Angeles business, which sells and distributes water in the Valley of Mexico, for Ps. 206, net of cash received. This acquisition was made so as to strengthen the Company position in the local water business in Mexico, through the merger with our jug water business under the Ciel brand. Based on the purchase price allocation, the Company identified intangible assets with indefinite life of Ps. 18 consisting of distribution rights and intangible assets of definite life of Ps. 15 consisting of a non-compete right, amortizable in the following five years. iii)In May 2008, the Company concluded the acquisition of 100% of the voting shares of Refrigerantes Minas Gerais Ltda., “REMIL”, in Brazil from The Coca-Cola Company for a total of Ps. 3,059 net of cash received, assuming liabilities for Ps. 1,966. The Company had an additional account payable to The Coca-Cola Company of Ps. 574 which was considered a component of the Ps. 3,633 purchase price. The Company identified intangible assets with indefinite lives consisting of distribution rights based on the purchase price allocation of Ps. 2,242. Total cash included in REMIL as of the date of acquisition was Ps. 220. This acquisition was made so as to strengthen the Company position in the local soft drinks business in Brazil. F-21


---



The estimated fair value of the REMIL net assets acquired by the Company is as follows: Total current assets

   Ps.

   881Total long-term assets, mainly property and equipment

   

   1,902Distribution rights

   

   2,242Total current liabilities

   

   (1,152)Total long-term liabilities

   

   (814)Net assets acquired

   Ps.

   3,059
  The condensed income statement of REMIL for the seven-month period from June 1 to December 31, 2008 is as follows: Income StatementTotal revenues

   Ps.

   3,169Income from operations

   

   334Loss before taxes

   

   (10)Net loss

   

   (45)
  iv)In January 2008, a reorganization of the Colombian operations occurred by way of a spin-off of the previous non-controlling interest shareholders. The total amount paid to the non-controlling interest shareholders for the buy-out was Ps. 213. v)Unaudited Pro Forma Financial Data. The results of operations of Brisa for both the years ended December 31, 2009 and 2008 were not material to the Company’s consolidated results of operations for those periods. Accordingly, pro forma 2009 and 2008 financial data considering the acquisition of Brisa as of January 1, 2008 has not been presented herein. Note 6. Accounts Receivable, net. 2010

   

   2009Trade receivables

   Ps.

   4,616

   Ps.

   4,253Short-term trade customer notes receivable

   

   232

   

   234Allowance for doubtful accounts

   

   (223)

   

   (215)The Coca-Cola Company (related party) (Note 13)

   

   1,030

   

   1,034Jugos del Valle (Formerly Administracion S.A.P.I.) (related party) (Note 13)

   

   9

   

   2FEMSA and subsidiaries (Note 13)

   

   161

   

   228Other related parties (Note 13)

   

   114

   

   -Other

   

   424

   

   395Ps.

   6,363

   Ps.

   5,931
  The changes in the allowance for doubtful accounts are as follows: 2010

   

   2009

   

   2008Opening balance

   Ps.

   215

   Ps.

   185

   Ps.

   152Allowance for the year

   

   113

   

   78

   

   184Charges and write-offs of uncollectible accounts

   

   (95)

   

   (73)

   

   (150)Restatement of beginning balance in inflationary economies

   

   (10)

   

   25

   

   (1)Ending balance

   Ps.

   223

   Ps.

   215

   Ps.

   185
  F-22


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Note 7. Inventories, net. 2010

   

   2009Finished products

   Ps.

   1,732

   Ps.

   1,638Raw materials

   

   2,032

   

   2,103Spare parts

   

   596

   

   547Packing material

   

   128

   

   138Inventories in transit

   

   545

   

   381Allowance for obsolescence

   

   (105)

   

   (102)Other

   

   202

   

   297Ps.

   5,130

   Ps.

   5,002
  Note 8. Other Current Assets. 2010

   

   2009Advertising and deferred promotional expenses

   Ps.

   290

   Ps.

   190Derivative financial instruments (Note 19)

   

   16

   

   26Prepaid insurance

   

   20

   

   16Prepaid expenses

   

   15

   

   16Advance for services

   

   102

   

   142Assets available for sale

   

   123

   

   325Other

   

   185

   

   261Ps.

   751

   Ps.

   976
  Advertising and deferred promotional expenses recorded in the consolidated income statements for the years ended December 31, 2010, 2009 and 2008 amounted to Ps. 3,979, Ps. 3,278 and Ps. 2,376, respectively. Note 9. Investment in Shares. Investee

   Ownership%

   

   2010

   

   2009Industria Envasadora de Queretaro, S.A. de C.V.(“IEQSA”)(1)(3)

   13.5%

   Ps.

   67

   Ps.

   Ps. 78Jugos del Valle, S.A.P.I. de C.V.(1)(3)

   19.8%

   

   603

   

   1,162KSP Partiçipações, LTDA(1)

   38.7%

   

   93

   

   88Sucos del Valle do Brasil, LTDA(1)(3)

   19.9%

   

   340

   

   325Mais Industria de Alimentos, LTDA(1)(3)

   19.9%

   

   474

   

   289Estancia Hidromineral Itabirito, LTDA(1)

   50.0%

   

   87

   

   76Holdfab2 Partiçipações Societárias, LTDA (“Holdfab2”)(1)

   27.7%

   

   300

   

   -Industria Mexicana de Reciclaje, S.A. de C.V.(1)

   35.0%

   

   69

   

   76Beta San Miguel, S.A. de C.V. (“Beta San Miguel”)(2)

   2.5%

   

   69

   

   69Other

   Various

   

   6

   

   7Ps.

   2,108

   Ps.

   Ps. 2,170Accounting method:(1) Equity method. The date of the financial statements of the investees used to account for the equity method is December 2010and 2009.(2) Acquisition cost.(3) The Company has significant influence due to the fact that it has representation on the board and the ability to make operatingdecisions of the investee.
  In August 2010, the Company made an investment for approximately Ps. 295 (R$40 million) in Holdfab2 representing 27.7%. Holdfab2 has a 50% investment in Leao Junior, a tea production company in Brazil. During 2010, the shareholders of Jugos del Valle, including the Company, agreed to spin-off the distribution rights. This distribution resulted in a decrease of the Company ́s investment in shares of Ps. 735 and an increase to in its intangible assets (distribution rights of a separate legal entity) for the same amount. F-23


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Note 10. Property, Plant and Equipment, net. 2010

   

   2009Land

   Ps.

   3,399

   Ps.

   3,661Buildings, machinery and equipment

   

   38,742

   

   40,712Accumulated depreciation

   

   (19,222)

   

   (21,193)Refrigeration equipment

   

   9,829

   

   9,180Accumulated depreciation

   

   (5,849)

   

   (6,016)Returnable bottles and cases

   

   3,342

   

   2,726Accumulated depreciation

   

   (1,061)

   

   (812)Strategic spare parts

   

   460

   

   527Accumulated depreciation

   

   (168)

   

   (195)Construction in progress (See Note 4i)

   

   2,439

   

   2,364Long-lived assets stated at net realizable value

   

   189

   

   288Ps.

   32,100

   Ps.

   31,242
  Depreciation of property, plant and equipment for the years ended as of December 31, 2010, 2009 and 2008 was Ps. 3,333, Ps. 3,472 and Ps. 3,022, respectively. The Company has identified certain long-lived assets that are not strategic to its current or future business and are not being used. Such assets are comprised of land, buildings and equipment, in accordance with an approved program for the disposal of certain investments. These long-lived assets have been recorded at their estimated net realizable value without exceeding their acquisition cost and are presented in the property, plant and equipment caption, as shown below by location: 2010

   

   2009Brazil

   Ps.

   33

   Ps.

   23Venezuela

   

   96

   

   265Panama

   

   37

   

   -Costa Rica

   

   12

   

   -Nicaragua

   

   9

   

   -Guatemala

   

   2

   

   -Ps.

   189

   Ps.

   288Land

   Ps.

   100

   Ps.

   23Buildings, machinery and equipment

   

   89

   

   265Ps.

   189

   Ps.

   288
  As a result of selling certain long-lived assets, the Company recognized losses (gains) of Ps. 41, Ps. (8) and Ps. (1), for the years ended December 31, 2010, 2009 and 2008, respectively. Fixed assets available for sale are presented in “current assets”.The estimated total amount of the construction projects in process is Ps. 1,601, which is expected to be completed within a period not exceeding one year. During the years ended December 31, 2010 and 2009 the Company capitalized Ps. 12 and Ps. 55 in comprehensive financing costs in relation to Ps. 1,929 and Ps. 845 in qualifying assets. Amounts were capitalized assuming an annual capitalization rate of 5.3% and 7.2% and an estimated life of the qualifying assets of seven years. For the years ended December 31, 2010, 2009 and 2008 the comprehensive financing result is analyzed as follows: 2010

   

   2009

   

   2008Comprehensive financing result

   Ps.

   1,240

   Ps.

   1,428

   Ps.

   3,552Amount capitalized

   

   12

   

   55

   

   -Net amount in income statements

   Ps.

   1,228

   Ps.

   1,373

   Ps.

   3,552
  F-24


---



Note 11. Intangible Assets, net. 2010

   

   2009Unamortized intangible assets:Rights to produce and distribute Coca-Cola trademark products in the territories of(1):Mexico, Central America(2),Venezuela, Colombia and Brazil

   Ps.

   44,157

   Ps.

   45,326Argentina, Buenos Aires

   

   297

   

   297Mexico, Tapachula, Chiapas

   

   132

   

   132Costa Rica, Compañía Latinoamericana de Bebidas

   

   148

   

   133Argentina (CICAN)

   

   14

   

   14Mexico (Agua de los Angeles) (Note 5)

   

   18

   

   18Brazil (REMIL) (Note 5)

   

   2,866

   

   2,905Colombia (Brisa) (Note 5)

   

   705

   

   695Bebidas Integradas Propimex, S.A.P.I de C.V.(3)

   

   735

   

   -Mundet (Fersan)

   

   97

   

   -Amortized intangible assets:Systems in development costs

   

   1,898

   

   1,188Cost of systems implementation, net

   

   138

   

   179Other

   

   8

   

   11Ps.

   51,213

   Ps.

   50,898(1) Territories in the table above are grouped based upon their specific acquisition transaction. For example, production anddistribution rights in Mexico, Central America, Venezuela, Colombia and Brazil were all purchased from Panamco in 2003 andthus presented together.(2) Includes Guatemala, Nicaragua, Costa Rica and Panama.(3) Resulting from the spin-off of Jugos del Valle, S.A.P.I. de C.V. (see Note 9)
  The changes in the carrying amount of unamortized intangible assets are as follows: 2010

   

   2009

   

   2008Beginning balance

   Ps.

   49,520

   Ps.

   46,892

   Ps.

   42,225Acquisitions

   

   832

   

   695

   

   2,260Translation adjustment of foreign currency denominated intangible assets

   

   (1,183)

   

   1,933

   

   2,407Ending balance

   Ps.

   49,169

   Ps.

   49,520

   Ps.

   46,892
  During the years ended as of December 31, 2010, 2009 and 2008, there was no research expenses charged to operating results. The changes in the carrying amount of amortized intangible assets are as follows: Investments

   

   

   AmortizationAccumulated

   

   

   Accumulatedat the

   

   

   

   at the

   

   

   

   

   

   EstimatedBeginning of

   

   

   Beginning of

   For the

   

   

   Amortizationthe Year

   Additions

   

   the Year

   

   Year

   

   Net

   

   Per Year2010Systems in development costs

   Ps.

   1,188

   Ps.

   751

   Ps.

   -

   Ps.

   (41)

   Ps.

   1,898

   Ps.

   271Cost of systems implementation, net

   694

   

   37

   

   (515)

   

   (78)

   

   138

   

   35Other

   

   15

   

   -

   

   (4)

   

   (3)

   

   8

   

   32009Systems in development costs

   Ps.

   333

   Ps.

   855

   Ps.

   -

   Ps.

   -

   Ps.

   1,188

   Ps.

   170Cost of systems implementation, net

   558

   

   136

   

   (344)

   

   (171)

   

   179

   

   18Other

   

   15

   

   -

   

   (1)

   

   (3)

   

   11

   

   32008Systems in development costs

   Ps.

   -

   Ps.

   333

   Ps.

   -

   Ps.

   -

   Ps.

   333

   Ps.

   -Cost of systems implementation, net

   482

   

   76

   

   (249)

   

   (95)

   

   214

   

   107Other

   

   -

   

   15

   

   -

   

   (1)

   

   14

   

   -
  F-25


---





The estimated amortization over the next five years of intangible assets with defined useful lives is as follows:

2011

   

   2012

   

   2013

   

   2014

   

   2015Systems amortization

   Ps.

   293

   Ps.

   309

   Ps.

   273

   Ps.

   258

   Ps.

   239Others

   

   3

   

   3

   

   2

   

   -

   

   -
  Note 12. Other Assets. 2010

   

   2009Agreements with customers, net (Note 4j)

   Ps.

   186

   Ps.

   260Leasehold improvements, net

   

   267

   

   59Long-term accounts receivable

   

   15

   

   16Derivative financial instruments (Note 19)

   

   1

   

   1Loan fees, net

   

   56

   

   7Long-term prepaid advertising expenses

   

   125

   

   106Guarantee deposits

   

   893

   

   854Prepaid bonuses

   

   84

   

   86Other

   

   232

   

   304Ps.

   1,859

   Ps.

   1,693
  Note 13. Balances and Transactions with Related Parties and Affiliated Companies. The consolidated balance sheets and income statements include the following balances and transactions with related parties and affiliated companies: Balances

   

   2010

   

   2009Assets (included in accounts receivable)FEMSA and subsidiaries

   Ps.

   161

   Ps.

   157The Coca-Cola Company

   

   1,030

   

   1,034Others

   

   134

   

   7Ps.

   1,325

   Ps.

   1,198Liabilities (included in suppliers and other liabilities and loans)FEMSA and subsidiaries

   Ps.

   603

   Ps.

   534The Coca-Cola Company

   

   1,911

   

   2,405BBVA Bancomer, S.A. (1)

   

   1,000

   

   1,000Banco Nacional de Mexico, S.A. (1)

   

   500

   

   500Other

   

   388

   

   344Ps.

   4,402

   Ps.

   4,783
    F-26


---



Balances due from related parties are considered to be recoverable. Accordingly, for the years ended December 31, 2010, 2009 and 2008, there was no expense resulting from the uncollectibility of balances due from related parties. Transactions

   

   2010

   

   2009

   

   2008Income:Sales to affiliated parties

   Ps.

   Ps. 1,665

   Ps.

   Ps. 1,300

   Ps.

   Ps. 1,068Expenses:Purchases of raw material, beer, assets and operating expenseswith FEMSA and subsidiaries

   

   5,412

   

   5,941

   

   5,010Purchases of concentrate from The Coca-Cola Company

   

   19,371

   

   16,863

   

   13,518Purchases of beer from and operating expenses paid to CerveceriaCuauhtemoc Moctezuma

   

   2,619

   

   -

   

   -Advertisement expenses refunded to The Coca-Cola Company

   

   1,117

   

   780

   

   931Purchases of sugar from Beta San Miguel

   

   1,307

   

   713

   

   687Purchase of sugar, cans and caps from Promotora Mexicanade Embotelladores, S.A. de C.V.

   

   684

   

   783

   

   525Purchases from Jugos del Valle, S.A.P.I. de C.V.

   

   1,206

   

   1,044

   

   863Purchase of canned products from IEQSA

   

   196

   

   208

   

   333Interest paid to The Coca-Cola Company

   

   5

   

   25

   

   27Purchase of plastic bottles from Embotelladora del Atlantico, S.A.(formerly Complejo Industrial Pet, S.A.)

   

   52

   

   54

   

   42Interest expenses related to debt with BBVA Bancomer, S.A.(1)

   

   52

   

   65

   

   86Interest expenses related to debt with Banco Nacional de Mexico, S.A.(1)

   

   26

   

   33

   

   43Donations to Instituto Tecnologico y de Estudios Superiores de Monterrey, A.C.(1)

   -

   

   38

   

   24Insurance premiums for policies with Grupo NacionalProvincial, S.A.B.(1)

   

   29

   

   39

   

   32Other expenses with related parties

   

   16

   

   17

   

   15(1) One or more members of the Board of Directors or senior management of the Company are also members of the Board ofDirectors or senior management of the counterparties to these transactions.
  The benefits and aggregate compensation paid to executive officers and senior management of the Company were as follows: 2010

   

   2009

   

   2008Short- and long-term benefits paid

   Ps.

   748

   Ps.

   762

   Ps.

   665Severance indemnities

   

   31

   

   41

   

   10
  F-27


---



Note 14. Balances and Transactions in Foreign Currencies. In accordance with NIF B-15, assets, liabilities and transactions denominated in foreign currencies are those realized in a currency different than the recording, functional or reporting currency of each reporting unit. As of the end of December 31, 2010 and 2009, assets, liabilities and transactions denominated in foreign currencies, expressed in Mexican pesos are as follows: 2010

   

   

   

   

   2009Balances

   

   U.S. Dollars

   Euros

   Total U.S.

   

   Dollars

   

   Euros

   

   TotalAssetsShort-term

   Ps.

   7,154 Ps.

   -

   Ps. 7,154

   Ps.

   5,234

   Ps.

   -

   Ps.

   5,234Long-term

   

   20

   -

   20

   

   17

   

   -

   

   17LiabilitiesShort-term

   

   1,250

   245

   1,495

   

   1,392

   

   17

   

   1,409Long-term

   

   6,401

   -

   6,401

   

   2,877

   

   -

   

   2,877
  2010

   

   2009

   

   

   

   2008Transactions

   U.S. Dollars

   U.S. Dollars

   U.S. Dollars

   Euros

   

   TotalRevenues

   Ps.

   429

   Ps.

   571

   Ps.

   418

   Ps.

   -

   Ps.

   418Expenses:Purchases of raw materials

   Ps.

   5,197

   Ps.

   6,907

   Ps.

   6,354

   Ps.

   -

   Ps.

   6,354Interest expense

   

   -

   

   148

   

   238

   

   -

   

   238Assets acquisitions

   

   258

   

   173

   

   530

   

   39

   

   569Other

   

   652

   

   682

   

   400

   

   -

   

   400Ps.

   6,107

   Ps.

   7,910

   Ps.

   7,522

   Ps.

   39

   Ps.

   7,561
  As of February 25, 2011, the issuance date of these consolidated financial statements, the exchange rate published by “Banco de México” was Ps. 12.1730 Mexican pesos per one U.S. Dollar, and the foreign currency position was similar to that as of December 31, 2010. Note 15. Labor Liabilities. The Company has various labor liabilities in connection with pension, seniority and severance benefits. Benefits vary depending upon country. a) Assumptions: The Company annually evaluates the reasonableness of the assumptions used in its labor liability computations. Actuarial calculations for the liability for pension and retirement plans, seniority premiums and severance indemnities, as well as the net cost of labor obligations for the period, were determined using the following long-term assumptions: 2010

   2010

   2009

   2009

   2008

   2008Nominal

   

   Nominal

   Real

   NominalReal rates for

   rates for

   Real rates for

   rates for

   rates for

   rates for|inflationary

   noninflationary

   inflationary

   noninflationary

   inflationary

   noninflationarycountries

   countries

   countries

   countries

   countries

   countriesAnnual discount rate

   1.5% - 2.6%

   5.5% - 9.7%

   1.5% - 3.0%

   6.5% - 9.8%

   4.5%

   8.2%Salary increase

   1.5%

   4.0% - 6.5%

   1.5%

   4.5% - 8.0%

   1.5%

   5.1%Estimated return on plan assets

   0.5%

   7.0% - 11.2%

   1.5% - 3.0%

   8.2% - 9.8%

   4.5%

   11.3%
  F-28


---



The long-term rate of return associated with the return on assets percentages shown above were determined based on an historical analysis of average returns in real terms for the last 30 years of Mexican Federal Government Treasury Bond (known as CETES in Mexico) and in the case of investments in foreign markets, the performance of the treasury bill of the country in question, as well as the expected long-term yields of the Company’s current pension plan investment portfolio. Based on these assumptions, the amounts of benefits expected to be paid out in the following years are as follows: Pension andRetirement

   

   Seniority

   

   SeverancePlans

   Premiums

   Indemnities2011

   Ps.

   180

   Ps.

   6

   Ps.

   812012

   

   90

   

   5

   

   692013

   

   87

   

   6

   

   652014

   

   82

   

   6

   

   622015

   

   92

   

   7

   

   592016 to 2020

   

   667

   

   49

   

   254
  b) Balances of the Liabilities: 2010

   

   2009Pension and retirement plans:Vested benefit obligation

   Ps.

   569

   Ps.

   518Non-vested benefit obligation

   

   671

   

   509Accumulated benefit obligation

   

   1,240

   

   1,027Projected benefit obligation

   

   1,636

   

   1,424Pension plan funds at fair value

   

   (774)

   

   (727)Unfunded projected benefit obligation

   

   862

   

   697Unrecognized past services

   

   (198)

   

   (209)Unamortized actuarial net loss

   

   115

   

   211Total

   Ps.

   779

   Ps.

   699Seniority premiums:Vested benefit obligation for personnel with more than 15 years seniority

   

   7

   

   2Non-vested benefit obligation for personnel with less than 15 years seniority

   

   57

   

   52Accumulated benefit obligation

   

   64

   

   54Unfunded projected benefit obligation

   

   94

   

   85Unrecognized actuarial net loss

   

   (11)

   

   (12)Total

   Ps.

   83

   Ps.

   73Severance indemnities:Accumulated benefit obligation

   

   560

   

   358Projected benefit obligation

   

   421

   

   426Unrecognized net transition obligation

   

   (73)

   

   (109)Total

   Ps.

   348

   Ps.

   317Total labor liabilities

   Ps.

   1,210

   Ps.

   1,089
  Accumulated actuarial gains and losses are generated by differences in the assumptions used for the actuarial calculations at the beginning of the year versus the actual behavior of those variables at the end of the year. F-29


---



c) Trust Assets: Trust assets consist of fixed and variable-return financial instruments recorded at market value. Trust assets are invested as follows: Type of instrument

   2010

   2009Fixed Return:Traded securities

   3%

   3%Bank instruments

   3%

   3%Federal government instruments

   76%

   81%Variable Return:Publicly-traded shares

   18%

   13%100%

   100%
  The Company has a policy of maintaining at least 30% of trust assets in Mexican Federal government instruments. Objective portfolio guidelines have been established for the remaining percentage, and investment decisions are made to comply with those guidelines to the extent that market conditions and available funds allow. The amounts of securities of the Company and related parties included in plan assets are as follows: 2010

   

   2009Portfolio:Coca-Cola FEMSA, S.A.B. de C.V.

   Ps.

   2

   Ps.

   2Grupo Industrial Bimbo, S.A.B. de C.V.

   

   2

   

   2
  During the years ended December 31, 2010, 2009 and 2008, the Company did not make significant contributions to the plan assets and does not expect to make material contributions to the plan assets during the following fiscal year. d) Net Cost for the Year: 2010

   

   2009

   

   2008Pension and retirement plans:Service cost

   Ps.

   85

   Ps.

   88

   Ps.

   78Interest cost

   

   119

   

   115

   

   97Expected return on trust assets

   

   (60)

   

   (51)

   

   (54)Amortization of prior year services

   

   11

   

   1

   

   (2)Amortization of actuarial loss

   

   (3)

   

   11

   

   10152

   

   164

   

   129Seniority premiums:Service cost

   

   11

   

   11

   

   11Interest cost

   

   7

   

   6

   

   6Actuarial loss recognized in other expenses

   

   -

   

   -

   

   17Amortization of net actuarial loss

   

   3

   

   -

   

   121

   

   17

   

   35Severance indemnities:Service cost

   

   52

   

   47

   

   57Interest cost

   

   23

   

   26

   

   32Actuarial loss recognized in other expenses

   

   -

   

   -

   

   143Amortization of unrecognized transition obligation

   

   36

   

   36

   

   37Amortization of net actuarial loss

   

   49

   

   23

   

   17160

   

   132

   

   286Ps.

   333

   Ps.

   313

   Ps.

   450
  F-30


---



e) Changes in the Balance of the Obligations: 2010

   

   2009Pension and retirement plans:Initial balance

   Ps.

   1,424

   Ps.

   1,351Service cost

   

   85

   

   88Interest cost

   

   119

   

   115Actuarial loss (gain)

   

   102

   

   (147)Foreign exchange rate valuation (gain) loss

   

   (3)

   

   103Benefits paid

   

   (91)

   

   (86)Ending balance

   

   1,636

   

   1,424Seniority premiums:Initial balance

   

   85

   

   79Service cost

   

   11

   

   11Interest cost

   

   6

   

   6Actuarial loss (gain)

   

   3

   

   (4)Benefits paid

   

   (11)

   

   (7)Ending balance

   

   94

   

   85Severance indemnities:Initial balance

   

   426

   

   392Service cost

   

   52

   

   47Interest cost

   

   23

   

   26Actuarial loss

   

   49

   

   24Benefits paid

   

   (129)

   

   (63)Ending balance

   Ps.

   421

   Ps.

   426
  f) Changes in the Balance of the Trust Assets: 2010

   

   2009Pension and retirement plans:Initial balance

   Ps.

   727

   Ps.

   517Actual return on trust assets

   

   69

   

   108Foreign exchange rate valuation (gain) loss

   

   (5)

   

   110Benefits paid

   

   (17)

   

   (8)Ending balance

   Ps.

   774

   Ps.

   727
  Note 16. Bonus Program. The bonus program for executives is based on complying with certain goals established annually by management, which include quantitative and qualitative objectives and special projects. The quantitative objectives represent approximately 50% of the bonus, and are based on the Economic Value Added (“EVA”) methodology. The objective established for the executives at each entity is based on a combination of the EVA generated by the Company and FEMSA consolidated, calculated at approximately 70% and 30%, respectively. The qualitative objectives and special projects represent the remaining 50% of the annual bonus and are based on the critical success factors established at the beginning of the year for each executive. In addition, the Company provides a defined contribution plan of share compensation to certain key executives, consisting of an annual cash bonus to purchase FEMSA shares or options, based on the executive’s responsibility in the organization, their business’ EVA result achieved, and their individual performance. The acquired shares or options are deposited in a trust, and the executives may access them one year after they are vested at 20% per year. The 50% of Coca-Cola FEMSA’s annual executive bonus is to be used to purchase FEMSA shares or options and the remaining 50% to purchase Coca-Cola FEMSA shares or options. As of December 31, 2010, 2009 and 2008, no options have been granted to employees. F-31


---



The incentive plan target is expressed in months of salary, and the final amount payable is computed based on a percentage of compliance with the goals established every year. The bonuses are recorded to income from operations and are paid in cash the following year. During the years ended December 31, 2010, 2009 and 2008, the bonus expense recorded amounted to Ps. 547, Ps. 630 and Ps. 525, respectively. Note 17. Bank Loans and Notes Payable. At December 31, 2010Carrying

   December2011

   

   2012

   

   2013

   

   2014

   

   2015

   Thereafter

   

   Value

   

   2009Short-term debt:Argentine pesosBank loans

   Ps.

   507

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   507

   Ps.

   1,179Interest rate(1)

   

   15.3%

   -

   

   -

   

   -

   

   -

   

   -

   

   

   15.3%

   

   20.7%Colombian pesosBank loans

   

   1,072

   

   -

   

   -

   

   -

   

   -

   

   -

   

   1,072

   

   496Interest rate(1)

   

   4.4%

   

   -

   

   -

   

   -

   

   -

   

   -

   

   4.4%

   

   4.9%Venezuelan bolivarsBank loans

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   741Interest rate(1)

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   18.1%Brazilian reaisNotes payable

   

   36

   

   -

   

   -

   

   -

   

   -

   

   -

   

   36

   

   -Interest rate(1)

   Various

   

   -

   

   -

   

   -

   

   -

   

   -

   

   Various

   

   -Subtotal

   Ps.

   1,615

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   1,615

   Ps.

   2,416Long-term debt:Fixed rate debt:U.S. dollarsSenior Notes

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   -

   Ps.

   6,179

   Ps.

   6,179

   Ps.

   -Interest rate(1)

   

   -

   

   -

   

   -

   

   -

   

   -

   

   4.6%

   

   4.6%

   

   -Capital leases

   

   4

   

   -

   

   -

   

   -

   

   -

   

   -

   

   4

   

   15Interest rate(1)

   

   3.8%

   

   -

   

   -

   

   -

   

   -

   

   -

   

   3.8%

   

   3.8%Mexican pesosDomestic Senior Notes(Certificados Bursatiles)(2)

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   1,000Interest rate(1)

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   10.4%Argentine pesosBank loans

   

   62

   

   622

   

   -

   

   -

   

   -

   

   -

   

   684

   

   69Interest rate(1)

   

   20.5%

   

   16.1%

   

   -

   

   -

   

   -

   

   -

   

   16.5%

   

   20.5%Brazilian reaisNotes payable

   

   4

   

   9

   

   15

   

   15

   

   14

   

   45

   

   102

   

   -Interest rate(1)

   

   4.5%

   

   4.5%

   

   4.5%

   

   4.5%

   

   4.5%

   

   4.5%

   

   4.5%

   

   -Variable rate debt:U.S. dollarsBank loans

   

   -

   

   37

   

   185

   

   -

   

   -

   

   -

   

   222

   

   2,873Interest rate(1)

   

   -

   

   0.5%

   

   0.6%

   

   -

   

   -

   

   -

   

   0.6%

   

   0.5%Mexican pesosBank loans

   

   -

   

   67

   

   267

   

   1,392

   

   2,824

   

   -

   

   4,550

   

   4,550Interest rate(1)

   

   -

   

   5.1%

   

   5.1%

   

   5.1%

   

   5.1%

   

   -

   

   5.1%

   

   5.2%Domestic senior notes(Certificados bursatiles)(2)

   -

   

   3,000

   

   -

   

   -

   

   -

   

   -

   

   3,000

   

   5,000Interest rate(1)

   

   -

   

   4.8%

   

   -

   

   -

   

   -

   

   -

   

   4.8%

   

   5.1%Colombian pesosBank loans

   

   155

   

   839

   

   -

   

   -

   

   -

   

   -

   

   994

   

   -Interest rate(1)

   

   4.7%

   

   4.7%

   

   -

   

   -

   

   -

   

   -

   

   4.7%

   

   -Brazilian reaisNotes payable

   

   -

   

   1

   

   -

   

   -

   

   -

   

   -

   

   1

   

   2Interest rate(1)

   

   -

   Various

   

   -

   

   -

   

   -

   

   -

   

   Various

   

   VariousLong term debt

   

   225

   

   4,575

   

   467

   

   1,407

   

   2,838

   

   6,224

   

   15,736

   

   13,509Current portion of longterm debt

   

   225

   

   -

   

   -

   

   -

   

   -

   

   -

   

   225

   

   3,011Total long term debt

   Ps.

   -

   Ps.

   4,575

   Ps.

   467

   Ps.

   1,407

   Ps.

   2,838

   Ps.

   6,224

   Ps.

   15,511

   Ps.

   10,498(1) Weighted average annual rate.
  F-32


---



The Company has received financing from a number of institutional lenders. Such debt has different restrictions and covenants that mainly consist of maximum leverage ratios. As of the date of these consolidated financial statements, the Company was in compliance with all the restrictions and covenants contained in its financing agreements. (2)At December 31, 2010, the Company has the following domestic senior notes (certificados bursatiles) issued in the Mexican stock exchange: Issue Date

   Maturity

   

   Amount

   Rate2007

   2012

   Ps.

   3,000

   28-day TIIE(1) – 6 bps(1) TIIE means the Tasa de Interes Interbancaria de Equilibrio (the Equilibrium Interbank Interest Rate).
  On February 5, 2010, the Company issued US $500 in Senior Notes, bearing interest at a fixed rate of 4.625%. These Senior Notes are due on February 15, 2020. Note 18. Other Expenses. 2010

   

   2009

   

   2008Employee profit sharing (see Note 4s)

   Ps.

   672

   Ps.

   792

   Ps.

   664Loss on sale of fixed assets

   

   231

   

   187

   

   170Provision for contingencies from past acquisitions

   

   104

   

   152

   

   174Brazil tax amnesty (see Note 23a)

   

   (179)

   

   (311)

   

   -Severance payments

   

   470

   

   113

   

   169Amortization of unrecognized actuarial loss, net (see Note 2k)

   

   -

   

   -

   

   137Equity method in earnings affiliated companies

   

   (217)

   

   (142)

   

   (104)Vacation provision

   

   -

   

   236

   

   -Loss on the retirement of long-lived assets

   

   7

   

   124

   

   372Other

   

   204

   

   298

   

   249Total

   Ps.

   1,292

   Ps.

   1,449

   Ps.

   1,831
  Note 19. Fair Value of Financial Instruments. The Company uses a three-level fair value hierarchy to prioritize the inputs used to measure the fair value of its financial instruments. The three input levels are described as follows: ·Level 1:quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has access to at the measurement date. ·Level 2:inputs that are observable for the assets or liability, either directly or indirectly, but that are not the quoted prices included in level 1. ·Level 3:unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value when observable inputs are not available, which allows for fair value valuations even when there is little, if any, market activity for the asset or liability at the measurement date. The Company measures the fair value of its financial assets and liabilities classified as level 2, using the income approach methodology, which estimates fair value based on expected cash flows discounted to net present value. The following table summarizes the Company’s financial assets and liabilities measured at fair value as of December 31, 2010 and December 2009: 2010

   

   2009Level 1

   

   Level 2

   

   Level 1

   

   Level 2Pension plan trust assets (Note 15f)

   Ps.

   774

   Ps.

   -

   Ps.

   727

   Ps.

   -Derivative financial instruments asset (Note 4v)

   

   -

   

   17

   

   -

   

   27Derivative financial instruments (liability) (Note 4v)

   

   -

   

   (517)

   

   -

   

   (519)Marketable securities (Note 4c)

   

   -

   

   -

   

   2,113

   

   -
  The Company has no inputs classified as level 3 for fair value measurement. F-33


---



a) Total Debt: The fair value of bank and syndicated loans is calculated based on the discounted value of contractual cash flows whereby the discount rate is estimated using rates currently offered for debt of similar amounts and maturities. The fair value of notes is based on quoted market prices as of December 31. 2010

   

   2009Carrying value

   Ps.

   17,351

   Ps.

   15,925Fair value

   

   17,350

   

   15,334
  b) Interest Rate Swaps: The Company uses interest rate swaps to offset the interest rate risk associated with its borrowings. Through these swaps the Company pays amounts based on a fixed rate and receives amounts based on a floating rate. These instruments have been designated as cash flow hedges and are recognized in the consolidated balance sheet at their estimated fair value. The fair value is estimated using market prices that would apply to terminate the contracts at the end of the period. Changes in fair value are recorded in cumulative other comprehensive income until such time as the hedged amount is recorded in earnings. At December 31, 2010, the Company has the following outstanding interest rate swap agreements: Notional

   

   Fair ValueMaturity Date

   Amount

   

   Liability2012

   Ps.

   1,600

   Ps.

   (57)2013

   

   1,312

   

   (30)2014

   

   575

   

   (24)2015 to 2018

   

   1,963

   

   (152)
  A portion of certain interest rate swaps do not meet the criteria for hedge accounting; consequently, changes in the estimated fair value of their ineffective portions were recorded as part of the comprehensive financing result under the caption “market value gain/loss on ineffective portion of derivative financial instruments”. The net effect of expired contracts treated as hedges is recognized as interest expense as part of the comprehensive financing result. c) Forward Agreements to Purchase Foreign Currency: The Company has entered into forward agreements to reduce its exposure to the risk of exchange rate fluctuations between the Mexican peso and other currencies. These instruments are recognized in the consolidated balance sheet at their estimated fair value which is determined based on prevailing market exchange rates to end the contracts at the end of the period. Changes in the fair value of these forwards are recorded as part of cumulative other comprehensive income. Net gain/loss on expired contracts is recognized as part of foreign exchange. Net changes in the fair value of forward agreements that do not meet hedging criteria for hedge accounting are recorded in the consolidated results of operations as part of the comprehensive financing result. The net effect of expired contracts that do not meet the criteria for hedge accounting is recognized in the income statement under the caption “market value gain/loss on the ineffective portion of derivative financial instruments”. At December 31, 2010, the Company had the following outstanding forwards agreements to purchase foreign currency: Notional

   

   Fair ValueMaturity Date

   

   Amount

   

   Liability2011

   Ps.

   2,269

   Ps.

   (16)
  F-34


---



d) Cross-Currency Swaps: The Company has contracted a number of cross-currency swaps to reduce its exposure to exchange rate and interest rate fluctuations associated with its borrowings denominated in U.S. dollars and other foreign currencies. These instruments are recognized in the consolidated balance sheet at their estimated fair value which is estimated using market prices that would apply to terminate the contracts at the end of the period. Those contracts do not meet the criteria for hedge accounting; consequently, changes in the fair value were recorded in the income statement under the caption “market value gain/loss on the ineffective portion of derivative financial instruments” as part of the consolidated results. At December 31, 2010, the Company had the following outstanding cross currency swap agreements: Notional Fair ValueMaturity Date

   

   Amount

   

   Liability2011

   Ps.

   1,318

   Ps.

   (147)2012

   

   357

   

   (73)
  e) Commodity Price Contracts: The Company has entered into various commodity price contracts to reduce its exposure to the risk of fluctuation in the price of certain raw material. The fair value is estimated based on the market valuations to the end of the contracts at the closing date of the period. Changes in the fair value were recorded as part of cumulative other comprehensive income. Net changes in the fair value of current and expired commodity price contracts were recorded as part of the cost of goods sold. f) Embedded Derivative Financial Instruments: The Company has determined that its leasing contracts denominated in U.S. dollars host embedded derivative financial instruments. The fair value is estimated based on formal technical models. Changes in fair value of these instruments were recorded as part of the comprehensive financing result under the caption of “market value gain/loss on the ineffective portion of derivative financial instruments”. g) Fair Value of Derivative Instruments that Met Hedging Criteria: Derivatives designated as hedging instruments

   

   2010

   

   2009

   

   2008CASH FLOW HEDGES:Assets (Liabilities):Interest rate swaps

   Ps.

   (263)

   Ps.

   (133)

   Ps.

   (49)Forward Agreements to Purchase Foreign Currency

   

   (16)

   

   -

   

   -Commodity price contracts

   

   445(1)

   

   133(1)

   

   (68)(1)(1)Commodity Price Contracts with maturity dates ending in 2011 and 2012.
  F-35


---



h) Net Effects of Expired Contracts that Met Hedging Criteria: Impact in IncomeTypes of derivatives

   Statement

   

   2010

   

   2009

   

   2008Interest rate swaps

   Interest expense

   Ps.

   169

   Ps.

   46

   Ps.

   26Forward agreements to purchaseforeign currency

   Foreign exchange/Interest expense

   

   27

   

   -

   

   -Cross-currency swaps

   Foreign exchange/Interest expense

   

   -

   

   -

   

   (26)Commodity price contracts

   Cost of goods sold

   

   (393)

   

   (247)

   

   (2)
  i) Net Effect of Changes in Fair Value of Derivative Financial Instruments that Did Not Meet the Hedging Criteria for Accounting Purposes: Impact in IncomeTypes of derivatives

   Statement

   2010

   

   2009

   

   2008Forward agreements to purchase foreign currency

   Market value gain/loss on Ps.

   -

   Ps.

   63

   Ps.

   706Interest rate swaps

   ineffective portion of

   -

   

   -

   

   (24)Cross-currency swaps

   derivative financial instruments

   (256)

   

   (220)

   

   538
  j) Net Effect of Expired Contracts that Did Not Meet the Hedging Criteria for Accounting Purposes: Impact in IncomeTypes of derivatives

   Statement

   2010

   2009

   2008Embedded derivative financial instruments

   Market value gain/loss on ineffective Ps.

   (38)

   (12)

   53portion of derivative financialCross-currency swaps

   instruments

   50

   51

   (314)
  Note 20. Non-controlling Interest in Consolidated Subsidiaries. Coca-Cola FEMSA’s non-controlling interest in its consolidated subsidiaries for the years ended December 31, 2010 and 2009 is as follows: 2010

   

   2009Mexico

   Ps.

   2,147

   Ps.

   1,908Colombia

   

   25

   

   25Brazil

   

   430

   

   363Ps.

   2,602

   Ps.

   2,296
  Note 21. Shareholders’ Equity. As of December 31, 2010 and 2009, the capital stock of Coca-Cola FEMSA is represented by 1,846,530,201 common shares, with no par value. Fixed capital stock is Ps. 821 (nominal value) and variable capital is unlimited. The characteristics of the common shares are as follows: ·Series “A” and series “D” shares are ordinary, have unlimited voting rights, are subject to transfer restrictions, and at all times must represent a minimum of 75% of subscribed capital stock; ·Series “A” shares may only be acquired by Mexican individuals and may not represent less than 51% of the ordinary shares. ·Series “D” shares have no foreign ownership restrictions and may not represent more than 49% of the ordinary shares. ·Series “L” shares have no foreign ownership restrictions and have limited voting rights and other corporate rights.  F-36


---



As of December 31, 2010 and 2009, the number of each share series representing Coca-Cola FEMSA’s capital stock is comprised as follows: Thousands ofSeries of shares

   Shares“A”

   992,078“D”

   583,546“L”

   270,906Total

   1,846,530
  The restatement of shareholders’ equity for inflation is allocated to each of the various shareholders’ equity accounts, as follows: Historical Value

   2010Restatement

   

   **Restated****Value**Capital stock

   Ps.

   821

   Ps.

   2,295

   Ps.

   3,116Additional paid-in capital

   

   9,612

   

   3,627

   

   13,239Retained earnings from prior years

   

   37,438

   

   6,670

   

   44,108Net controlling interest income

   

   9,324

   

   476

   

   9,800Cumulative other comprehensive income

   

   1,016

   

   -

   

   1,016Historical Value

   2009Restatement

   

   Restated ValueCapital stock

   Ps.

   821

   Ps.

   2,295

   Ps.

   3,116Additional paid-in capital

   

   9,593

   

   3,627

   

   13,220Retained earnings from prior years

   

   32,072

   

   6,117

   

   38,189Net controlling income

   

   7,970

   

   553

   

   8,523Cumulative other comprehensive income

   

   3,128

   

   -

   

   3,128
  The net income of the Company is not currently subject to the legal requirement that 5% thereof be transferred to a legal reserve, since such reserve already equals 20% of capital stock at nominal value. The legal reserve may not be distributed to shareholders during the life of the Company, except as a stock dividend. As of December 31, 2010 and 2009, the legal reserve is Ps. 164 (at nominal values). Retained earnings and other reserves distributed as dividends, as well as the effects of capital reductions, are subject to income tax at the prevailing tax rate at the time of distribution, except for dividends and capital reductions paid from the Net taxes profits accounts (“CUFIN”) which is where restated shareholder contributions and consolidated taxable income are recorded, or from the Net reinvested taxed profits account (“CUFINRE”), which is where reinvested consolidated taxable income is recorded. Dividends paid in excess of the CUFIN and CUFINRE are subject to income tax at a grossed-up rate based on the current statutory rate. Since 2003, this tax may be credited against the income tax of the year in which the dividends are paid or against the income tax and estimated tax payments of the following two years. As of December 31, 2010 and 2009, the Company’s balance of CUFIN is Ps. 1,242 and Ps. 2,312, respectively. F-37


---



As of December 31, 2010, 2009 and 2008 the dividends paid by the Company are as follows: Series of shares

   

   2010(1)

   

   2009(2)

   

   2008(3)“A”

   Ps.

   1,399

   Ps.

   722

   Ps.

   508“D”

   

   823

   

   425

   

   299“L”

   

   382

   

   197

   

   138Total

   Ps.

   2,604

   Ps.

   1,344

   Ps.

   945(1)At an ordinary extrashareholders’ meeting of Coca-Cola FEMSA held on April 14, 2010, the shareholders declared a dividendof Ps. 2,604 that was paid in April 2010.(2)At an ordinary shareholders’ meeting of Coca-Cola FEMSA held on March 23, 2009, the shareholders declared a dividend ofPs. 1,344 that was paid in April 2009.(3)At an ordinary shareholders’ meeting of Coca-Cola FEMSA held on April 8, 2008, the shareholders declared a dividend of Ps.945 that was paid in May 2008.
  Note 22. Net Controlling Income per Share. This represents the net controlling income on each share of the Company’s capital stock and is computed on the basis of the weighted average number of shares outstanding during the period which was 1,846,530,201 common shares for each of the three years ended December 31, 2010, 2009 and 2008. Note 23. Taxes. a) Income Tax: Income tax is computed on taxable income, which differs from net income for accounting purposes principally due to differences in the book and tax treatment of the comprehensive financing result, the cost of labor liabilities, depreciation and other accounting provisions. The tax loss of a given year may be carried forward and applied against the taxable income of future years. The difference between the sum of the above amounts and the consolidated income before income tax relates to dividends which are eliminated in the consolidated financial statement of the Company. Such dividends have been remitted on a tax-free basis. The statutory income tax rates applicable in the countries where the Company operates, the number of years tax loss carry-forwards may be applied and the period open to review by the tax authorities as of December 31, 2010 are as follows: Statutory

   Expiration

   Open PeriodTax Rate

   (Years)

   (Years)Mexico

   30%

   10

   5Guatemala

   31%

   N/A

   4Nicaragua

   30%

   3

   4Costa Rica

   30%

   3

   4Panama

   27.5%

   5

   3Colombia

   33%

   Indefinite

   2-5Venezuela

   34%

   3

   4Brazil

   34%

   Indefinite

   6Argentina

   35%

   5

   5
  In Colombia, tax losses may be carried forward for an indefinite number of years and carry-forwards are limited to 25% of the taxable income of each year. Additionally, the statutory income tax rate in Colombia was decreased from 34% for 2007 to 33% in 2008. In Brazil, tax losses never expire but they cannot be restated for inflation and are limited to 30% of the taxable income of each year. F-38


---



During 2009 and 2010, Brazil adopted new laws providing for certain tax amnesties. The tax amnesty programs offer Brazilian legal entities and individuals an opportunity to pay off their income tax and indirect tax debts under less stringent conditions than would normally apply. The amnesty programs also include a favorable option under which taxpayers may utilize income tax loss carry-forwards (“NOLs”) when settling certain outstanding income tax and indirect tax debts. The Company decided to participate in the amnesty programs allowing it to settle certain previously accrued indirect tax contingencies. During the years ended, December 31, 2010 and 2009 the Company de-recognized indirect tax contingency accruals of Ps. 333 and Ps. 433 respectively (see Note 24d), making payments of Ps. 118 and Ps. 243, recording a credit to other expenses of Ps. 179 and Ps. 311 (see Note 18), reversing previously recorded Brazil valuation allowances against NOL’s in 2009, and recording certain taxes recoverable. b) Asset tax: On January 1, 2007, the asset tax in Mexico rate was reduced from 1.8% to 1.25% and the deduction of liabilities in the computation of the asset tax base was disallowed. Effective in 2008, the asset tax was abolished in Mexico and has been replaced by a flat rate business tax (Impuesto Empresarial a Tasa Unica, “IETU” - see Note 23c). Asset tax paid in periods prior to the introduction of the IETU can be credited against income tax payable in the period, provided that income tax exceeds IETU for the same period, and only up to an amount equal to 10% of the lesser asset tax paid for 2007, 2006 or 2005. Guatemala, Nicaragua, Colombia and Argentina also have minimum taxes that are determined primarily on a percentage of assets. Under certain conditions, payments made for these minimum taxes are recoverable in future years. c) Flat-Rate Business Tax (“IETU”): Effective in 2008, IETU came into effect in Mexico and replaced the Asset Tax. IETU essentially works as a minimum corporate income tax, except that amounts paid cannot be creditable against future income tax payments. The payable tax for a taxpayer in a given year is the higher of IETU or income tax computed under the Mexican income tax law. Both individuals and corporations are subject to IETU as well as permanent establishments of foreign entities in Mexico. The IETU rate for 2008 and 2009 was 16.5% and 17.0%, respectively and is 17.5% beginning in 2010. IETU is computed on a cash-flow basis, which means the tax base is equal to cash proceeds, less certain deductions and credits. In the case of export sales, where cash on the receivable has not been collected within 12 months, income is deemed received at the end of the 12-month period. In addition, unlike the Income Tax Law, which allows for tax consolidation, companies that incur IETU are required to file their returns on an individual basis. Based on its financial projections for purposes of its Mexican tax returns, the Company expects to pay corporate income tax in the future and does not expect to have IETU payable. This being the case, the introduction of the IETU law had no impact the Company’s consolidated financial statements. d) Deferred Income Tax: An analysis of the temporary differences giving rise to deferred income tax liabilities (assets) is as follows: Deferred Income Taxes

   

   2010

   

   2009Inventories

   Ps.

   26

   Ps.

   (9)Property, plant and equipment

   

   1,519

   

   1,568Investment in shares

   

   (7)

   

   (12)Intangibles and other assets

   

   1,887

   

   2,185Labor obligations

   

   (260)

   

   (236)Tax loss carry-forwards

   

   (347)

   

   (659)Other deferred liabilities

   

   (1,262)

   

   (1,197)Deferred income tax liability

   

   1,556

   

   1,640Deferred income tax asset recoverable

   

   345

   

   1,019Deferred income tax payable

   Ps.

   1,901

   Ps.

   2,659
  F-39


---



An analysis of changes in the balance of the net deferred income taxes liability is as follows: 2010

   

   2009

   

   2008Initial balance

   Ps.

   1,640

   Ps.

   434

   Ps.

   225Provision for the year

   

   481

   

   267

   

   (1,153)Restatement effect in inflationary subsidiaries

   

   244

   

   453

   

   (9)Cumulative other comprehensive (loss) income items

   

   (809)

   

   486

   

   1,371Ending balance

   Ps.

   1,556

   Ps.

   1,640

   Ps.

   434
  As of January 2008, in accordance with NIF B-10 in Mexico, the application of inflationary accounting in Mexico was suspended. However, for taxes purposes, the balance of fixed assets is restated based on the Mexican National Consumer Price Index (NCPI) and consequently, the difference between the book and tax values of the assets will gradually increase, giving rise to a deferred tax. e) Provision for the Year: 2010

   

   2009

   

   2008Current-year income tax

   Ps.

   3,779

   Ps.

   3,776

   Ps.

   3,639Deferred income tax cost (benefit)

   

   474

   

   309

   

   (1,153)Effect of change in the statutory income tax rate

   

   7

   

   (42)

   

   -Income taxes

   Ps.

   4,260

   Ps.

   4,043

   Ps.

   2,486
  An analysis of the domestic and foreign components of pre-tax income and income tax for the years ended December 31, 2010, 2009 and 2008 is as follows: 2010

   

   Mexico

   Foreign

   

   TotalIncome before income taxes

   Ps.

   5,368

   Ps.

   9,191

   Ps.

   14,559Current-year income tax

   

   1,649

   

   2,130

   

   3,779Deferred income tax (benefit) cost

   

   (59)

   

   540

   

   481Total income tax

   Ps.

   1,590

   Ps.

   2,670

   Ps.

   4,2602009

   

   Mexico

   Foreign

   

   TotalIncome before income taxes

   Ps.

   5,579

   Ps.

   7,435

   Ps.

   13,013Current-year income tax

   

   1,585

   

   2,191

   

   3,776Deferred income tax (benefit) cost

   

   (16)

   

   283

   

   267Total income tax

   Ps.

   1,569

   Ps.

   2,474

   Ps.

   4,0432008

   

   Mexico

   Foreign

   

   TotalIncome before income taxes

   Ps.

   4,902

   Ps.

   3,410

   Ps.

   8,312Current-year income tax

   

   1,925

   

   1,714

   

   3,639Deferred income tax (benefit)

   

   (1,115)

   

   (38)

   

   (1,153)Total income tax

   Ps.

   810

   Ps.

   1,676

   Ps.

   2,486
  F-40


---



f) Tax Loss Carry-forwards and Recoverable Asset tax: The subsidiaries in Mexico, Panama, Colombia, Venezuela and Brazil have tax loss carry-forwards and/or recoverable tax on assets. The aggregate amounts of such future benefits and their years of expiration are as follows: Tax Loss

   RecoverableYear of expired

   Carry-forwards

   

   Asset tax2017 and thereafter

   Ps.

   637

   Ps.

   40No expiration (Brazil - see Note 23a)

   

   457

   

   -Ps.

   1,094

   Ps.

   40
  An analysis of the changes in the valuation allowance that give rise to decreases in the related deferred tax asset is as follows: 2010

   

   2009

   

   2008Beginning balance

   Ps.

   1

   Ps.

   45

   Ps.

   99Reversal of valuation allowance

   

   -

   

   (57)

   

   (51)Restatement of beginning balance in inflationary subsidiaries

   

   (1)

   

   13

   

   (3)Ending balance

   Ps.

   -

   Ps.

   1

   Ps.

   45
  g) Reconciliation of Mexican Statutory Income Tax Rate to Consolidated Effective Income Tax Rate: 2010

   2009

   2008Mexican statutory income tax rate

   30.00%

   28.00%

   28.00%Income tax from prior years

   (0.76)

   0.52

   0.12Monetary position gain

   (0.85)

   (1.05)

   (2.22)Annual inflation adjustment

   1.15

   1.31

   3.69Non-deductible expenses

   0.61

   0.87

   2.64Non-taxable income

   (0.66)

   (0.15)

   (0.62)Income taxed at a rate other than the Mexican statutory rate

   1.86

   2.97

   3.69Effect of restatement of tax values

   (1.03)

   (0.78)

   (2.21)Changes in valuation allowance for tax losses

   -

   (0.38)

   (0.42)Effect of change in statutory rate

   0.05

   (0.33)

   -Other

   (1.11)

   0.09

   (2.77)Consolidated effective income tax rate

   29.26%

   31.07%

   29.90%
  Note 24. Other Liabilities and Contingencies. a) Other Current Liabilities: 2010

   

   2009Derivative financial instruments (Note 19)

   Ps.

   19

   Ps.

   22Sundry creditors

   

   974

   

   863Total

   Ps.

   993

   Ps.

   885
  b) Other Liabilities: 2010

   

   2009Contingencies

   Ps.

   2,152

   Ps.

   2,467Other liabilities

   

   1,262

   

   1,531Derivative financial instruments (Note 19)

   

   498

   

   497Total

   Ps.

   3,912

   Ps.

   4,495
  F-41


---



c) Contingencies Recorded in the Balance Sheet: The Company has various loss contingencies, and has recorded reserves as other liabilities for those legal proceedings for which it believes an unfavorable resolution is probable. Most of these loss contingencies are the result of the Company’s business acquisitions. The following table presents the nature and amount of the loss contingencies recorded as of December 31, 2010 and 2009: 2010

   

   2009Indirect taxes

   Ps.

   799

   Ps.

   1,084Labor

   

   1,133

   

   1,182Legal

   

   220

   

   201Total

   Ps.

   2,152

   Ps.

   2,467
  d) Changes in the Balance of Contingencies Recorded: 2010

   

   2009

   

   2008Initial balance

   Ps.

   2,467

   Ps.

   2,076

   Ps.

   1,784Penalties and other charges

   

   376

   

   258

   

   50New contingencies

   

   156

   

   475

   

   947(1)Cancellation and expiration

   

   (205)

   

   (241)

   

   (189)Payments

   

   (211)

   

   (190)

   

   (472)Brazil tax amnesty (see Note 23a)

   

   (333)

   

   (433)

   

   -Restatement of the beginning balance of inflationary subsidiaries

   

   (97)

   

   522

   

   (44)Ending balance

   Ps.

   2,153

   Ps.

   2,467

   Ps.

   2,076(1)Includes contingencies resulting from the acquisition of REMIL in 2008.
  e) Pending Lawsuits: The Company is party to a number of tax, legal and labor lawsuits that have arisen throughout the normal course of its business and which are common in its industry.The estimated amount of these lawsuits is Ps. 5,767. The Company’s legal counsel estimates that the changes of these cases being ruled against the Company are less than probable but more than remote. However, the Company does not believe that the rulings, one way or the other, will have a material adverse effect on its consolidated financial position or result of operations. In recent years, the Company’s Mexican, Costa Rican and Brazilian territories have been required to submit certain information to their relevant authorities regarding possible monopolistic practices. Such proceedings are a normal occurrence in the soft drink industry and the Company does not expect any significant liability to arise from these contingencies. f) Collateralized Contingencies: As is customary in Brazil, the Company has been required by the tax authorities there to collateralize tax contingencies currently in litigation amounting to Ps. 2,292 and Ps. 2,342 as of December 31, 2010 and 2009, respectively, by pledging fixed assets and entering into available lines of credit covering the contingencies. g) Commitments: As of December 31, 2010, the Company has operating lease commitments for the leasing of production machinery and equipment, distribution equipment and computer equipment. F-42


---



The contractual maturities of the lease commitments by currency, expressed in Mexican pesos as of December 31, 2010, are as follows: Mexican

   

   U.S.Pesos

   

   Dollars2011

   Ps.

   226

   Ps.

   252012

   

   229

   

   242013

   

   158

   

   72014

   

   135

   

   82015

   

   138

   

   -2016 and thereafter

   

   566

   

   -Total

   Ps.

   1,452

   Ps.

   64
  Rental expense charged to results of operations amounted to approximately Ps. 570, Ps. 546 and Ps. 438 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company has some operating leases that are denominated in U.S. dollars, for which embedded derivatives have been identified and accounted for in the accompanying financial statements. Note 25. Information by Reporting Segment. Information by reporting segment is presented considering the geographical areas in which the Company operates. The Company’s operations are aggregated as follows: : (i) Mexico; (ii) Latincentro, which aggregates Colombia and Central America; (iii) Venezuela; and (iv) Mercosur, which aggregates Brazil and Argentina.Venezuela operates in an economy with exchange control; as a result, Bulletin B-5 “Information by Segments” does not allow its integration into another geographical segment. IncomeTotal

   

   from

   

   Capital

   

   Long-term

   

   Total2010

   

   Revenues

   Operations

   Expenditures

   

   Assets

   

   AssetsMexico

   Ps.

   38,782

   Ps.

   6,605

   Ps.

   2,932

   Ps.

   46,847

   Ps.

   58,440Latincentro(1)

   

   17,281

   

   3,022

   

   1,731

   

   18,815

   

   21,484Venezuela

   

   14,033

   

   2,444

   

   504

   

   5,472

   

   7,779Mercosur(2)

   

   33,360

   

   5,008

   

   2,311

   

   16,491

   

   26,358Consolidated

   Ps.

   103,456

   Ps.

   17,079

   Ps.

   7,478

   Ps.

   87,625

   Ps.

   114,061IncomeTotal

   

   from

   

   Capital

   

   Long-term

   

   Total2009

   

   Revenues

   Operations

   Expenditures

   

   Assets

   

   AssetsMexico

   Ps.

   36,785

   Ps.

   6,849

   Ps.

   2,710

   Ps.

   45,455

   Ps.

   54,722Latincentro(1)

   

   15,993

   

   2,937

   

   1,269

   

   17,854

   

   20,120Venezuela

   

   22,430

   

   1,815

   

   1,248

   

   8,959

   

   13,672Mercosur(2)

   

   27,559

   

   4,234

   

   1,055

   

   14,754

   

   22,147Consolidated

   Ps.

   102,767

   Ps.

   15,835

   Ps.

   6,282

   Ps.

   87,022

   Ps.

   110,661IncomeTotal

   

   from

   

   Capital2008

   

   Revenues

   Operations

   ExpendituresMexico

   Ps.

   33,799

   Ps.

   6,715

   Ps.

   1,926Latincentro(1)

   

   12,791

   

   2,370

   

   1,209Venezuela

   

   15,182

   

   1,289

   

   715Mercosur(2)

   

   21,204

   

   3,321

   

   952Consolidated

   Ps.

   82,976

   Ps.

   13,695

   Ps.

   4,802(1) Includes Guatemala, Nicaragua, Costa Rica, Panama and Colombia.(2) Includes Brazil and Argentina.
  F-43


---



Note 26. Differences Between Mexican FRS and U.S. GAAP As discussed in Note 2, the consolidated financial statements of the Company are prepared in accordance with Mexican FRS, which differs in certain significant respects from U.S. GAAP. A reconciliation of the reported net income, equity and comprehensive income to U.S. GAAP is provided in Note 27. The United States Financial Accounting Standards Board (“FASB”) released the FASB Accounting Standards Codification, or Codification for short, on January 15, 2008 and it became effective in 2009. At that time all previous U.S. GAAP reference sources became obsolete. The Codification organizes several U.S. GAAP pronouncements under approximately 90 accounting topic areas. The objective of this project was to arrive at a single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the Securities and Exchange Commission of the United States of America (“SEC”). Included in Notes 26, 27 and 28 are references to certain U.S. GAAP Codifications (“ASC”) that were adopted during the periods presented herein. The principal differences between Mexican FRS and U.S. GAAP included in the reconciliation that affect the consolidated financial statements of the Company are described below. a) Restatement of Prior Year Financial Statements for Inflationary Effects: Under U.S. GAAP, the Company applies the regulations of the SEC which include certain accounting accomodations. Consequently, the Company was not required to reconcile the inflation effects prior to the adoption of NIF B-10, since the consolidated financial statements were comprehensively restated in constant units of the reporting currency. Beginning on January 1, 2008, in accordance with NIF B-10, the Company discontinued inflationary accounting for subsidiaries that operate in non-inflationary economic environments. As a result, prior year’s financial information and all other adjustments for U.S. GAAP purposes were restated and translated as of December 31, 2007, which is the date of the last recognition of inflation effects. The cumulative effect of the previously realized and unrealized results from holding nonmonetary assets (RETANM) for previous periods was reclassified to retained earnings as described in Note 2h. This reclassification did not result in a difference that is being reconciled for U.S. GAAP. Beginning in 2008, as a result of discontinuing inflationary accounting for subsidiaries that operate in non-inflationary economic environments, the Company’s financial statements are no longer considered to be presented in a reporting currency that includes the comprehensive effects of price level changes. Therefore, the inflationary effects of economic environments that are inflationary under Mexican FRS, but not hyper-inflationary under US GAAP arising in 2008 through 2010 represent a difference that is reconciled for U.S. GAAP purposes. As disclosed in Note 4a, the three year cumulative inflation rate for Venezuela was 100.5% for the period 2007 through 2009. The three year cumulative inflation rate for Venezuela was 108.2% as of December 31, 2010. Accordingly, the Company considers its Venezuela subsidiary as a hyper-inflationary economy for U.S. GAAP purposes beginning January 1, 2010. For U.S. GAAP reconciliation purposes, the Company has applied an accommodation available in Item 18 to the instructions to Form 20-F whereby an International Accounting Standard 21 and 29 indexation approach is applied. U.S. GAAP would otherwise require a hyper-inflationary economy to be reported using the U.S. dollar as the functional currency. The information related to the revenues and income from operations as well as long term assets and total assets related to the Venezuelan subsidiary are shown separately in the segment disclosure footnote (see Note 25). Recent devaluations in the Venezuelan currency are also discussed in Note 3 above. b) Classification Differences: Certain items require a different classification in the balance sheet or income statement under U.S. GAAP. A description of these different classifications is as follows: ·As explained in Note 4e, under Mexican FRS, advances to suppliers are recorded under inventories. Under U.S.GAAP, advances to suppliers are classified as prepaid expenses; ·Gains or losses on the disposal of fixed assets, all severance payments associated with an ongoing benefit and amendments to the pension plans, as well as financial expenses from labor liabilities and employee profit sharing are recorded as part of operating income under U.S. GAAP; F-44


---



·Under Mexican FRS, deferred taxes are classified as non-current, while under U.S. GAAP they are classified based on the classification of the related asset or liability, or their estimated reversal date when not associated with an asset or liability; ·Under Mexican FRS, restructuring costs are recorded as other expenses. For U.S. GAAP purposes, restructuring costs are recorded as operating expenses. ·Under Mexican FRS, due to the changes in NIF C-1, restricted cash was reclassified to cash and cash equivalents, and for U.S. GAAP purposes, restricted cash is presented in other current assets. c) Deferred Promotional Expenses: As explained in Note 4f, for Mexican FRS purposes, the promotional costs related to the launching of new products or product presentations are recorded as prepaid expenses. For U.S. GAAP purposes, such promotional costs are expensed as incurred. d) Intangible Assets: In conformity with Mexican FRS, the amortization of intangible assets with indefinite useful lives was discontinued in 2003. For U.S. GAAP purposes, the amortization of intangible assets with indefinite useful lives was discontinued as of 2002. As a result, the Company performed an initial impairment test of intangible assets as of January 1, 2002 and found no impairment. Subsequent impairment tests are performed annually by the Company or more frequently, if events or changes in circumstances between annual tests indicate that the asset might be impaired. During the year ended December 31, 2009, the Company acquired the Brisa water business in Colombia (see Note 5). For U.S. GAAP, acquired distribution rights intangible assets are recorded at estimated fair value at the date of the purchase. Under Mexican FRS, this distribution rights intangible asset is recorded at its estimated fair value, limited to the underlying amount of the purchase price consideration. This results in a difference in accounting for acquired intangible assets between Mexican FRS and U.S. GAAP. These differences have resulted in a gain being recorded in 2009 for U.S. GAAP purposes in the amount of Ps. 72. e) Restatement of Imported Equipment: Through December 2007, the Company restated imported machinery and equipment by applying the inflation rate and the exchange rate of the currency of the country of origin. The resulting amounts were then translated into Mexican pesos using the period end exchange rate. As explained in Note 2h, on January 1, 2008, the Company adopted Mexican FRS B-10 which establishes that imported machinery and equipment must be recorded using the acquisition-date exchange rate. Companies that operate in inflationary economic environments must restate imported machinery and equipment by applying the inflation rate of the country in which the asset is acquired. However, this change in methodology did not have a material impact on the consolidated financial statements of the Company (see Note 4a). f) Capitalization of Comprehensive Financing Result: In accordance with U.S. GAAP, if interest expense is incurred during the construction of qualifying assets and the net effect is material, capitalization is required for all assets that require a period of time to get them ready for their intended use. The net effect of interest expenses incurred to bring qualifying assets to the condition for its intended use was Ps. 90, Ps. 61 and Ps. 40 for the years ended on December 31, 2010, 2009 and 2008, respectively. A reconciling item is included for the difference in capitalized comprehensive financing result policies under Mexican FRS and capitalized interest expense policies under U.S. GAAP. g) Fair Value Measurements FASB pronouncements establish a framework for measuring fair value with a focus towards exit price and the use of market- based inputs over company-specific inputs. This pronouncement requires companies to consider its own nonperformance risk (the risk that the obligation will not be fulfilled) to measure liabilities carried at fair value, including derivative financial instruments. The effective date of this standard for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a recurring basis (at least annually) started on January 1, 2009. F-45


---



U.S. GAAP allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). Except in certain circumstances, the fair value option is applied on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. Whenever, the fair value option is chosen for an instrument, the unrealized gains and losses from that instrument must be reported in earnings at each subsequent reporting date. The Company did not elect to adopt the fair value option for any of its outstanding instruments; therefore, it did not have any impact on its consolidated financial statements. h) Deferred Income Taxes, Employee Profit Sharing and Uncertain Tax Positions: The calculation of deferred income taxes and employee profit sharing for U.S. GAAP purposes differs from Mexican FRS in the following respects: ·Under Mexican FRS, inflation effects on the balance of deferred taxes generated by monetary items are recognized in the income statement as part of the monetary position result when entities operate in an inflationary economic environment. Under U.S. GAAP, the deferred taxes balance is classified as a nonmonetary item. As a result, the consolidated income statement differs with respect to the presentation of the gain or loss on monetary position and deferred income taxes provision; ·Under Mexican FRS, deferred employee profit sharing is calculated using the asset and liability method, which is the method used to compute deferred income taxes under U.S. GAAP. Employee profit sharing is deductible for purposes of Mexican taxes on profit. This deduction reduces the payments of income taxes in subsequent years.For Mexican FRS purposes, the Company did not record deferred employee profit sharing, since is not expected to materialize in the future; and ·The differences in restatement of imported machinery and equipment, capitalization of comprehensive result, promotional expenses, employee profit sharing and employee benefits explained in Note 26c, e, f and i, give rise to a difference in income tax calculated under U.S. GAAP compared to income tax computed under Mexican FRS (see Note 23d). A reconciliation of deferred income tax and employee profit sharing for U.S. GAAP and Mexican FRS purposes, as well as the changes in the balances of deferred taxes, are as follows: Reconciliation of Deferred Income Taxes, Net

   

   

   

   2010

   

   2009Deferred income taxes under Mexican FRS

   

   

   Ps.

   1,556

   Ps.

   1,640U.S. GAAP adjustments:

   

   

   

   -

   

   -Fixed assets

   

   

   

   (33)

   

   (518)Intangible assets

   

   

   

   (166)

   

   (449)Inventories

   

   

   

   -

   

   (127)Deferred charges

   

   

   

   (20)

   

   (25)Deferred revenues

   

   

   

   26

   

   41Tax deduction for deferred employee profit sharing

   

   

   

   55

   

   7Deferred promotional expenses

   

   

   

   (14)

   

   (31)Pension liability

   

   

   

   (17)

   

   11Seniority premiums

   

   

   

   (3)

   

   (3)Severance indemnities

   

   

   

   (21)

   

   (33)Total U.S. GAAP adjustments

   

   

   

   (193)

   

   (1,127)Net deferred income tax liability, under U.S. GAAP

   

   

   Ps.

   1,363

   Ps.

   513Changes in the Balance of Deferred Income Taxes

   

   2010

   

   2009

   

   2008Beginning liability (asset) balance

   Ps.

   513

   Ps.

   (183)

   Ps.

   360Provision for the year

   

   327

   

   (202)

   

   (1,634)Cumulative other comprehensive income

   

   523

   

   898

   

   1,091Ending liability (asset) balance

   Ps.

   1,363

   Ps.

   513

   Ps.

   (183)
  F-46


---



Reconciliation of Deferred Employee Profit Sharing

   

   

   

   2010

   

   2009Deferred employee profit sharing under Mexican FRS

   

   

   Ps.

   -

   Ps.

   -U.S. GAAP adjustments:Inventories

   

   

   

   4

   

   5Property, plant and equipment

   

   

   

   (11)

   

   121Deferred charges

   

   

   

   4

   

   7Labor liabilities

   

   

   

   (84)

   

   (73)Severance indemnities

   

   

   

   (18)

   

   (17)Other reserves

   

   

   

   (90)

   

   (67)Total U.S. GAAP adjustments

   

   

   

   (195)

   

   (24)Net deferred employee profit sharing (asset) under U.S. GAAP

   

   

   Ps.

   (195)

   Ps.

   (24)Changes in the Balance of Deferred Employee Profit Sharing

   

   2010

   

   2009

   

   2008Beginning liability balance

   Ps.

   (24)

   Ps.

   71

   Ps.

   230Provision for the year

   

   (163)

   

   (83)

   

   (95)Cumulative other comprehensive income

   

   (8)

   

   (12)

   

   (64)Ending (asset) liability balance

   Ps.

   (195)

   Ps.

   (24)

   Ps.

   71
  According to U.S. GAAP, the Company is required to recognize a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized. Any excess between the tax position taken in the tax return and the tax position recognized in the financial statements using the criteria above results in the recognition of a liability in the financial statements for the uncertain tax position. According to Mexican FRS, the Company is required to record tax contingencies in its financial statements when such liabilities are probable in nature and estimable. While the underlying concepts for recognizing income tax uncertainties differs between Mexican FRS and U.S. GAAP, this difference has not resulted in any reconciling items during the periods presented herein. i) Employee Benefits: On January 1, 2008, the Company adopted NIF D-3. This standard eliminates the recognition of an additional labor liability for the difference between actual benefits and the net projected liability, NIF D-3 also establishes a maximum of five years period for the amortization of the beginning balance of prior service costs of pension plans and severance indemnities and requires that actuarial gains or losses of severance indemnities be credited or charged to income from operations of the period they arise. The adoption of NIF D-3 gave rise to a difference between the unamortized net transition liability and the actual amortization expense of pension plans and severance indemnities. Under U.S. GAAP the Company is required to fully recognize as an asset or liability for the overfunded or underfunded status of defined benefit pension and other postretirement benefit plans as NIF D-3. The adoption of NIF B-10 for Mexican FRS, required the application of real rates for actuarial calculations for entities that operate in inflationary economic environments and nominal rates for those that operate in non-inflationary economic environments. The Company uses those same criteria under U.S. GAAP. F-47


---



The reconciliation of the pension cost for the year and related labor liabilities is as follows: Net Pension Cost

   

   2010

   

   2009

   

   2008Net pension cost recorded under Mexican FRS

   Ps.

   152

   Ps.

   164

   Ps.

   129U.S. GAAP adjustments:Amortization of unrecognized transition obligation

   

   -

   

   1

   

   1Amortization of prior service cost

   

   1

   

   1

   

   1Amortization of net actuarial loss

   

   (3)

   

   (1)

   

   (4)Net pension cost under U.S. GAAP

   Ps.

   150

   Ps.

   165

   Ps.

   127
  Pension Liability

   

   2010

   

   2009Pension liability under Mexican FRS

   Ps.

   779

   Ps.

   699U.S. GAAP adjustments:Unrecognized prior service

   

   199

   

   209Unrecognized net actuarial loss

   

   (115)

   

   (211)Pension liability under U.S. GAAP

   Ps.

   863

   Ps.

   697
  The reconciliation of the net severance indemnity cost and severance indemnity liability is as follows: Net Severance Indemnity Cost

   

   2010

   

   2009

   

   2008Net severance indemnity cost under Mexican FRS

   Ps.

   160

   Ps.

   132

   Ps.

   289U.S. GAAP adjustments:Amortization of unrecognized net transition obligation

   

   (36)

   

   (36)

   

   (36)Amortization of prior service

   

   -

   

   -

   

   (17)Amortization of net actuarial

   

   -

   

   -

   

   (228)Net severance indemnity cost under U.S. GAAP

   Ps.

   124

   Ps.

   96

   Ps.

   8
  Severance Indemnity Liability

   

   2010

   

   2009Severance indemnity liability under Mexican FRS

   Ps.

   348

   Ps.

   316U.S. GAAP adjustments:Unrecognized net transition obligation

   

   72

   

   110Severance indemnity liability under U.S. GAAP

   Ps.

   420

   Ps.

   426
  The reconciliation of the seniority premiums liability is as follows: Seniority Premium Cost

   

   2010

   

   2009

   

   2008Net seniority premium cost under Mexican FRS

   Ps.

   22

   Ps.

   17

   Ps.

   35U.S. GAAP adjustments:Amortization of unrecognized net transition obligation, (gain) loss

   

   (2)

   

   2

   

   (15)Net seniority premium cost under U.S. GAAP

   Ps.

   20

   Ps.

   19

   Ps.

   20
  Seniority premium liability

   

   2010

   

   2009Seniority premium liability under Mexican FRS

   Ps.

   83

   Ps.

   73U.S. GAAP adjustments:Unrecognized net actuarial loss

   

   11

   

   12Seniority premium liability under U.S. GAAP

   Ps.

   94

   Ps.

   85
  F-48


---



Estimates of the unrecognized items expected to be recognized as components of net periodic pension cost during 2011 are shown in the table below: Pension and

   SeniorityRetirement Plans

   PremiumActuarial net loss and prior service cost recognized in cumulativeother comprehensive income during the year

   Ps.

   7

   Ps.

   -Actuarial net loss and prior service cost recognized as a component of net periodic cost

   6

   

   1Actuarial net loss, prior service cost and transition liability included cumulative othercomprehensive income

   

   9

   

   -Estimate to be recognized as a component of net periodic cost over the following fiscal year:Transition obligation

   

   (11)

   

   -Actuarial (loss) gain

   

   (15)

   

   1
  j) Colombia Non-Controlling Interest Acquisition: In 2008 the Company indirectly acquired an additional equity interest in Colombia. Under Mexican FRS B-7, “Business Acquisitions”, this acquisition is considered to be a transaction made between existing shareholders that has no effect on the Company’s net assets and likewise, the payment made in excess of the book value of the shares acquired is recorded in equity as a reduction in additional paid-in capital. For U.S. GAAP purposes, a non-controlling interest acquisition represents a “step acquisition” that must be recorded using the purchase method, whereby the purchase price is allocated to the proportionate fair value of the assets and liabilities acquired.The Company recorded a loss of Ps. 113 on this transaction in its net income for 2008 and did not recognize any goodwill from this acquisition. k) Deconsolidation of Crystal operations: During 2009, the Company established a joint venture with The Coca-Cola Company for the production and sale of Crystal brand water in Brazil. The Company has recorded a gain for U.S. GAAP purposes of Ps.120 related to the deconsolidation of its net assets related to the Crystal operations. Approximately, Ps.120 of previously recorded unearned revenues related to Crystal operations remained recorded for Mexican FRS purposes, and are being amortized into income along with the results from the joint venture over the following three years (through 2010) for Mexican FRS purposes. F-49


---



i) Financial Information Under U.S. GAAP: Consolidated Balance Sheets

   

   2010

   

   2009ASSETSCurrent Assets:Cash and cash equivalents

   Ps.

   12,140

   Ps.

   7,627Marketable securities

   

   -

   

   2,113Accounts receivable

   

   6,363

   

   5,931Inventories

   

   4,962

   

   4,391Recoverable taxes

   

   1,658

   

   1,776Other current assets

   

   1,268

   

   1,321Deferred income tax and employee profit sharing

   

   830

   

   1,517Total current assets

   

   27,221

   

   24,676Investment in shares

   

   2,108

   

   2,170Property, plant and equipment, net

   

   32,258

   

   29,835Intangible assets, net

   

   50,697

   

   49,336Deferred income tax and employee profit sharing

   

   1,197

   

   880Other assets

   

   1,532

   

   1,532TOTAL ASSETS

   Ps.

   115,013

   Ps.

   108,429LIABILITIES AND EQUITYCurrent Liabilities:Bank loans

   Ps.

   1,615

   Ps.

   2,416Current maturities of long-term debt

   

   225

   

   3,011Interest payable

   

   151

   

   61Suppliers

   

   8,988

   

   9,368Accounts payable

   

   3,743

   

   4,733Taxes payable

   

   1,931

   

   2,974Other liabilities

   

   993

   

   886Deferred income tax and employee profit sharing

   

   10

   

   11Total current liabilities

   

   17,656

   

   23,460Long-Term Liabilities:Bank loans and notes payable

   

   15,511

   

   10,497Deferred income tax and employee profit sharing

   

   3,185

   

   2,875Labor liabilities

   

   1,378

   

   1,208Contingencies

   

   2,152

   

   2,467Other liabilities

   

   1,663

   

   1,885Total long-term liabilities

   

   23,889

   

   18,932Total liabilities

   

   41,545

   

   42,392Equity:Non-controlling interest

   

   2,633

   

   2,333Controlling interest

   

   70,835

   

   63,704Total equity:

   

   73,468

   

   66,037TOTAL LIABILITIES AND EQUITY

   Ps.

   115,013

   Ps.

   108,429
  F-50


---



Consolidated Income Statements and Comprehensive Income

   

   2010

   

   2009

   

   2008Net sales

   Ps.

   102,640

   Ps.

   99,835

   Ps.

   80,595Other operating revenues

   

   482

   

   558

   

   504Total revenues

   

   103,122

   

   100,393

   

   81,099Cost of goods sold

   

   55,944

   

   54,335

   

   43,490Gross profit

   

   47,178

   

   46,058

   

   37,609Operating expenses:Administrative

   

   4,555

   

   5,341

   

   3,954Selling

   

   27,253

   

   26,514

   

   21,560Market value, (gain) loss of operating derivative instruments

   

   (38)

   

   (12)

   

   5331,770

   

   31,843

   

   25,567Income from operations

   

   15,408

   

   14,215

   

   12,042Comprehensive financing result:Interest expense

   

   1,595

   

   1,775

   

   1,961Interest income

   

   (285)

   

   (282)

   

   (427)Foreign exchange loss, net

   

   384

   

   365

   

   1,477Gain on monetary position

   

   (228)

   

   -

   

   -Market value (gain) loss on ineffective portion of derivativefinancial instruments

   

   (206)

   

   (106)

   

   9061,260

   

   1,752

   

   3,917Other expenses, net

   

   163

   

   226

   

   440Income before income taxes

   

   13,985

   

   12,237

   

   7,685Income taxes

   

   4,097

   

   3,525

   

   1,987Income before participation in affiliated companies

   

   9,888

   

   8,712

   

   5,698Equity interest in results of affiliated companies

   

   217

   

   141

   

   104Consolidated net income

   

   10,105

   

   8,853

   

   5,802Less: net income attributable to the non-controlling interests

   

   (497)

   

   (446)

   

   (231)Net income attributable to the controlling interests

   Ps.

   9,608

   Ps.

   8,407

   Ps.

   5,571Consolidated net income

   Ps.

   10,105

   Ps.

   8,853

   Ps.

   5,802Other comprehensive income

   

   (70)

   

   2,060

   

   486Consolidated comprehensive income

   

   10,035

   

   10,913

   

   6,288Less: comprehensive income attributable to the non-controlling interest

   

   (604)

   

   (592)

   

   (175)Comprehensive income attributable to the controlling interest

   Ps.

   9,431

   Ps.

   10,321

   Ps.

   6,113Net income per share

   Ps.

   5.20

   Ps.

   4.55

   Ps.

   3.02
  F-51


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Consolidated Cash Flows

   

   2010

   

   2009

   

   2008Operating Activities:Consolidated Net Income

   Ps.

   10,105

   Ps.

   8,853

   Ps.

   5,802Non-cash operating expenses

   

   323

   

   228

   

   310Equity in earnings affiliated companies

   

   (217)

   

   (142)

   

   (104)Unrealized gain on marketable securities

   

   -

   

   (112)

   

   -Gain on deconsolidation of Crystal operations

   

   -

   

   (120)

   

   -Gain on acquisition of Brisa intangible assets

   

   -

   

   (72)

   

   -Other adjustments regarding operating activities

   

   -

   

   8

   

   -Adjustments regarding investing activities:Depreciation

   

   3,381

   

   3,696

   

   3,151Amortization

   

   694

   

   307

   

   240Loss on sale of long-lived assets

   

   231

   

   186

   

   170Disposal of long-lived assets

   

   47

   

   124

   

   372Interest income

   

   (285)

   

   (286)

   

   (433)Non-controlling interest

   

   -

   

   -

   

   113Income tax

   

   4,106

   

   3,574

   

   2,100Adjustments regarding financing activities:Interest expenses

   

   1,579

   

   1,850

   

   2,080Foreign exchange loss, net

   

   424

   

   370

   

   1,477Monetary position gain, net

   

   (228)

   

   -

   

   -Derivative financial instruments

   

   (468)

   

   (318)

   

   961Increase in accounts receivable

   

   (1,092)

   

   (394)

   

   (179)Decrease (increase) in inventories

   

   5

   

   33

   

   (486)(Increase) decrease in other assets

   

   (738)

   

   (314)

   

   151Increase in suppliers and other accounts payable

   

   585

   

   2,808

   

   71Decrease in other liabilities

   

   (208)

   

   (424)

   

   (263)Decrease in labor liabilities

   

   (192)

   

   (169)

   

   (167)Income tax paid

   

   (3,882)

   

   (3,061)

   

   (3,618)Net cash flows from operating activities

   

   14,170

   

   16,625

   

   11,748Investing Activities:Acquisition of Minas Gerais Ltda. “REMIL”, net of cash acquired (Note 5)

   

   -

   

   -

   

   (3,633)Acquisition of Brisa business (Note 5)

   

   -

   

   (717)

   

   -Acquisition of Agua de los Angeles business (Note 5)

   

   -

   

   -

   

   (206)Purchases of investment available-for-sale

   

   -

   

   (2,001)

   

   -Proceeds from disposal of marketable securities

   

   1,108

   

   -

   

   -Proceeds from sales of shares of Jugos del Valle

   

   -

   

   -

   

   741Interest received

   

   285

   

   286

   

   433Acquisition of long-lived assets

   

   (6,863)

   

   (5,752)

   

   (4,608)Proceeds from the sale of long-lived assets

   

   477

   

   638

   

   532Other assets

   

   (527)

   

   1

   

   521Acquisition of intangible assets

   

   (1,325)

   

   (1,355)

   

   (1,079)Net cash flows from investing activities

   

   (6,845)

   

   (8,900)

   

   (7,299)Financing Activities:Bank loans obtained

   

   9,251

   

   6,641

   

   4,319Bank loans repaid

   

   (6,824)

   

   (9,376)

   

   (6,161)Interest paid

   

   (1,436)

   

   (2,047)

   

   (2,087)Dividends declared and paid

   

   (2,612)

   

   (1,344)

   

   (945)Acquisition of non-controlling interests

   

   (282)

   

   -

   

   (223)Other liabilities

   

   (108)

   

   97

   

   (164)Net cash flows from financing activities

   

   (2,011)

   

   (6,029)

   

   (5,261)Increase (decrease) in cash and cash equivalents

   

   5,314

   

   1,696

   

   (812)Translation and restatement effects

   

   (801)

   

   (261)

   

   (538)Initial cash and cash equivalents

   

   7,627

   

   6,192

   

   7,542Ending balance of cash and cash equivalents

   Ps.

   12,140

   Ps.

   7,627

   Ps.

   6,192
  F-52


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Consolidated Statements of Changes in Equity

   

   2010

   

   2009Equity at the beginning of the year

   Ps.

   66,037

   Ps.

   56,468Dividends declared and paid

   

   (2,604)

   

   (1,344)Cumulative other comprehensive (loss) income:Cumulative translation adjustment

   

   (2,084)

   

   3,085(Losses) gains on cash flow hedges

   

   (56)

   

   147Reversal of inflation effects for inflationary subsidiaries

   

   2,070

   

   (1,172)Total other comprehensive (loss) income

   

   (70)

   

   2,060Net income

   

   10,105

   

   8,853Equity at the end of the year

   Ps.

   73,468

   Ps.

   66,037
  Note 27. Reconciliation of Mexican FRS to U.S. GAAP. a) Reconciliation of Net Income: 2010

   

   2009

   

   2008Consolidated net income under Mexican FRS

   Ps.

   10,299

   Ps.

   8,970

   Ps.

   5,826U.S. GAAP adjustments:Reversal of inflation effects (Note 26a)

   

   (116)

   

   (553)

   

   (355)Restatement of imported equipment (Note 26e)

   

   (184)

   

   (195)

   

   (193)Capitalization of comprehensive financing result (Note 26f)

   

   57

   

   (29)

   

   64Gain on deconsolidation of Crystal operations (Note 26k)

   

   (44)

   

   120

   

   -Gain on acquisition of Brisa intangible assets (Note 26d)

   

   -

   

   72

   

   -Deferred income taxes (Note 26h)

   

   154

   

   469

   

   481Deferred employee profit sharing (Note 26h)

   

   (163)

   

   (83)

   

   (95)Pension Cost (Note 26i)

   

   2

   

   (1)

   

   2Seniority premium cost (Note 26i)

   

   2

   

   (2)

   

   15Severance indemnity cost (Note 26i)

   

   36

   

   36

   

   281Deferred promotional expenses (Note 26c)

   

   62

   

   49

   

   (111)Acquisition of non-controlling interest (Note 26j)

   

   -

   

   -

   

   (113)Total U.S. GAAP adjustments

   

   (194)

   

   (117)

   

   (24)Consolidated net income under U.S. GAAP

   Ps.

   10,105

   Ps.

   8,853

   Ps.

   5,802
  Under U.S. GAAP, the monetary position effect of the income statement adjustments of inflationary economic environments is included in each adjustment, except for the capitalization of interest expenses, intangible assets as well as pension plan liabilities, which are nonmonetary. b) Reconciliation of Equity: 2010

   

   2009Total equity under Mexican FRS

   Ps.

   73,881

   Ps.

   68,472U.S. GAAP adjustments:Reversal of inflation effects

   

   (1,334)

   

   (4,325)Intangible assets (Note 26d)

   

   46

   

   46Restatement of imported equipment (Note 26e)

   

   366

   

   594Capitalization of comprehensive financing result (Note 26f)

   

   184

   

   132Gain on deconsolidation of Crystal operations (Note 26k)

   

   75

   

   120Gain on acquisition of Brisa intangible assets (Note 26d)

   

   72

   

   72Deferred income taxes (Note 26h)

   

   193

   

   1,127Deferred employee profit sharing (Note 26h)

   

   195

   

   24Deferred promotional expenses (Note 26c)

   

   (43)

   

   (105)Pension liability (Note 26i)

   

   (84)

   

   2Seniority premiums (Note 26i)

   

   (11)

   

   (12)Severance indemnities (Note 26i)

   

   (72)

   

   (110)Total U.S. GAAP adjustments

   

   (413)

   

   (2,435)Equity under U.S. GAAP

   Ps.

   73,468

   Ps.

   66,037
  F-53


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c) Reconciliation of Comprehensive Income: 2010

   

   2009

   

   2008Consolidated comprehensive income under Mexican FRS

   Ps.

   8,295

   Ps.

   12,200

   Ps.

   8,003U.S. GAAP adjustments:Net income (Note 27a)

   

   (194)

   

   (117)

   

   (24)Cumulative translation adjustment

   

   (136)

   

   (59)

   

   (29)Reversal of inflation effects

   

   2,070

   

   (1,171)

   

   (1,556)Labor obligations

   

   -

   

   60

   

   (106)Consolidated comprehensive income under U.S. GAAP

   Ps.

   10,035

   Ps.

   10,913

   Ps.

   6,288
  Note 28. Future Impact of Recently Issued Accounting Standards Not Yet in Effect. a) Mexican FRS: The following accounting standards have been issued under Mexican FRS. The application of which is required as indicated. NIF C-4, “Inventories”: In November 2010, the CINIF issued NIF C-4, which will be effective for fiscal years beginning on or after January 1, 2011 and will replace Mexican accounting Bulletin C-4,Inventories. Any accounting changes resulting from the adoption of this standard related to changes in the formula for assigning inventory costs are to be recognized retrospectively. Changes in valuation methods must be recognized prospectively. The principal difference between Mexican accounting Bulletin C-4 and NIF C-4 is that the new standard does not allow using direct costs as the inventory valuation method nor does it allow using the LIFO cost method as the formulas (formerly method) for the assignment of unit cost to the inventories. NIF C-4 establishes that inventories must be valued at the lower of either acquisition cost or net realizable value. Such standard also establishes that advances to suppliers for the acquisition of merchandise must be classified as inventories provided the risks and benefits are transferred to the Company. NIF C-4 also establishes the standards for service supplier inventory valuations. The Company estimated that the adoption of NIF C-4 will not have a material impact on the Company ́s consolidated financial statements. NIF C-5, “Prepaid Expenses”: In November 2010, the CINIF issued NIF C-5, which will be effective for fiscal years beginning on or after January 1, 2011. NIF C-5 will replace Mexican accounting Bulletin B-5. Any accounting changes resulting from the adoption of this standard shall be recognized retrospectively. This standard establishes that the main characteristic of prepaid expenses is that they do not result in the transfer to the entity of the benefits and risks inherent to the goods or services to be received. Consequently, prepaid expenses must be recognized in the balance sheet as either current or non-current assets, depending on the item classification in the statement of financial position. Moreover, NIF C-5 establishes that prepaid expenses made for goods or services whose inherent benefits and risks have already been transferred to the entity must be carried to the appropriate caption. The Company estimated that the adoption of NIF C-5 will not have a material impact on the Company ́s consolidated financial statements. NIF C-6, “Property, Plant and Equipment”: NIF C-6 was issued by the CINIF in December 2010 to replace Mexican accounting Bulletin C-6, Property, Machinery and Equipment, and will be effective for fiscal years beginning on or after January 1, 2011, except for the changes related to the segregation of property, plant and equipment into separate components for those assets with different useful lives. For entities that have not performed this component segregation, the provisions of this new standard will be effective as of January 1, 2012. F-54


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Unlike Mexican accounting Bulletin C-6, this standard includes within its scope the tax treatment for assets acquired to develop or maintain biological assets and assets related to the mining industry. Among other points, it establishes that for acquisitions of free-ofcharge assets, the cost of the assets must be null, thus eliminating the option of performing appraisals. In the case of asset exchanges, NIF C-6 requires entities to determine the commercial substance of the transaction and the depreciation of these assets must be applied against the components of the assets, and the amount to be depreciated is the cost of acquisition less the asset’s residual value. Prepaid expenses for the acquisition of assets are to be recognized as a component of the asset as of the time the benefits and risks inherent to such assets are transferred. In the case of retirement of assets, income is recognized when the requirements for income recognition outlined under the standard have been met. There are specific disclosures for public entities. The Company estimated that the adoption of NIF C-6 will not have a material impact on the Company ́s consolidated financial statements. NIF C-18, “Obligations related to retirement of property, plant and equipment”: In December 2010, the CINIF issued NIF C-18, which came into force for fiscal years beginning on or after January 1, 2011. This standard establishes the accounting treatment for the initial and subsequent recognition of a liability for provision for legal obligations or assumed related to the retirement of property, plant and equipment recognized as a result of the acquisition, construction, development and/or normal operating of such components. This standard also establishes that an entity must initially recognize a provision for obligations related to retirement of property, plant and equipment based on its best estimate of the disbursements required to settle the present obligation at the time it is assumed, provided a reliable estimate can be made of the amount of the obligation. The best estimate of a provision for an obligation associated with the retirement of property, plant and equipment components should be determined using the expected present value method. The Company estimated that the adoption of NIF C-18 will not have a material impact on the Company ́s consolidated financial statements. b) U.S. GAAP: There are no significant accounting standards effective in year 2011 impacting the Company. Note 29. Subsequent events. On February 18, 2011, the Company’s Board of Directors agreed to propose an ordinary dividend of Ps. 4,358 million which represents an increase of 67.4% as compared to the dividend was paid in April 2010. This dividend was approved at the Annual Shareholders meeting on March 23, 2011. During December 2010, authorities of the Venezuelan Government announced the unification of their two fixed U.S. dollar exchange rates to 4.30 Bolivars per U.S. dollar effective January 1, 2011. As a result of this change, the balance sheet of the Company’s Venezuelan subsidiary did not have an impact in shareholders’ equity since transactions performed by this subsidiary were already using the 4.30 exchange rate. TheComisión Nacional Bancaria y de Valores(Mexican National Banking and Securities Commission, or CNBV) announced that from 2012, all Mexican public companies must report their financial information in accordance with International Financial Reporting Standards (“IFRS”). Since 2006, theCINIF(Mexican Board of Research and Development of Financial Reporting Standards) has been modifying Mexican Financial Reporting Standards in order to ensure their convergence with IFRS. Coca-Cola FEMSA will adopt IFRS in 2012. The consolidated financial statements of the Company as of December 31, 2012 will be presented in accordance with IFRS as issued by the International Accounting Standards Board (IASB). The SEC has previously changed its rules to allow foreign private issuers that report under IFRS as issued by the IASB to not reconcile their financial statements to US GAAP. F-55


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On March 28, 2011 the Company acquired together with the Coca-Cola Company,Grupo Estrella Azul, a Panamanian conglomerate in the dairy and juice-based beverage categories business in Panama. The Company acquired a 50% interest and will continue to develop this business jointly with the Coca-Cola Company. On April 18, the Company successfully issued two tranches of Certificados Bursátiles – a five-year bond in the aggregate amount of Ps. 2,500 million at a yield of 28-day TIIE plus 13 basis points and a 10-year bond in the aggregate amount of Ps. 2,500 million at a fixed rate of 8.27%. A portion of the proceeds from this placement will be used to pay the Company’s KOF-07 Certificado Bursátil at maturity in March 2012, in the amount of Ps. 3,000 million. The remainder of the proceeds will be used for general corporate purposes, including capital expenditures and working capital. F-56


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Table of Contents



SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. Coca-Cola FEMSA, S.A.B.  de C.V.By:/s/ Héctor Treviño GutiérrezHéctor Treviño GutiérrezChief Financial Officer
  Date: June 17, 2011


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