UNITED STATES SECURITIES AND EXCHANGE COMMISSION ~~Washington, D.C. 20549~~

Washington, D.C. 20549

FORM 10-K

þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 27, 2008
or
o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to


þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 26, 2009


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required)

For the transition period from to

Commission file number 1-14893

The Pepsi Bottling Group, Inc.

(Exact name of Registrant as Specified in its Charter)


Incorporated in Delaware		13-4038356
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

One Pepsi Way, Somers, New York		10589
(Address of Principal Executive Offices)		(Zip code)

Registrant’s telephone number, including area code: (914) 767-6000

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


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share		New York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if ~~disclosure~~any, ofevery ~~delinquent~~Interactive ~~filers~~Date File required to be submitted and posted pursuant to ~~Item~~Rule 405 of Regulation S-~~K is~~T ~~not~~(§ ~~contained~~232.405 ~~herein,~~of ~~and~~this ~~will~~chapter) ~~not~~during ~~be contained, to~~ the ~~best~~preceding 12 months of(or ~~registrant’s~~for ~~knowledge,~~such inshorter ~~definitive~~period ~~proxy~~that ~~or information~~the ~~statements~~registrant ~~incorporated~~was byrequired ~~reference~~to ~~in Part III~~submit ofand ~~this Form 10-K or~~post ~~any~~such ~~amendment~~files). ~~to this~~Yes ~~Form 10-K.~~ þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of Common Stock and Class B Common Stock of The Pepsi Bottling Group, Inc. outstanding as of February 612, ~~2009~~2010 was ~~211~~221,~~583~~798,~~553~~326 and 100,000, respectively. The aggregate market value of The Pepsi Bottling Group, Inc. Capital Stock held by non-affiliates of The Pepsi ~~Bottling~~ Bottling Group, Inc. (assuming for the sole purpose of this calculation, that all executive officers and directors of The Pepsi Bottling Group, Inc. are affiliates of The Pepsi Bottling Group, Inc.) as of June 1312, ~~2008~~2009 was $4,~~301~~858,~~872~~397,~~063~~101 (based on the closing sale price of The Pepsi Bottling Group, Inc.’s Capital Stock on that date as reported on the New York Stock Exchange).

Documents of Which Portions Are Incorporated by Reference		Parts of Form 10-K into Which Portion of Documents Are Incorporated
Proxy Statement for The Pepsi Bottling Group, Inc. May 27, 2009 Annual Meeting of Shareholders		III
N/A		N/A

Table of Contents The Pepsi Bottling Group, Inc. Annual Report 2009

PART I		3
Item 1.	Business		3
Item 1. Business		3
Item 1A.	Risk Factors		8
Item 1A. Risk Factors		10
Item 1B.	Unresolved Staff Comments		11
Item 1B. Unresolved Staff Comments		15
Item 2.	Properties		11
Item 2. Properties		15
Item 3.	Legal Proceedings		11
Item 3. Legal Proceedings		15
Item 4.	Submission of Matters to a Vote of Security Holders		11
Item 4. Submission of Matters to a Vote of Security Holders		15
PART II		16
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		12
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
Item 6.	Selected Financial Data		14
Item 6. Selected Financial Data		19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		56
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		83
Item 8.	Financial Statements and Supplementary Data		56
Item 8. Financial Statements and Supplementary Data		83
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		56
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		83
Item 9A.	Controls and Procedures		56
Item 9A. Controls and Procedures		83
Item 9B.	Other Information		57
Item 9B. Other Information		84
PART III		85
Item 10.	Directors, Executive Officers and Corporate Governance		58
Item 10. Directors, Executive Officers and Corporate Governance		85
Item 11.	Executive Compensation		59
Item 11. Executive Compensation		88
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		59
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		122
Item 13.	Certain Relationships and Related Transactions, and Director Independence		59
Item 13. Certain Relationships and Related Transactions, and Director Independence		124
Item 14.	Principal Accountant Fees and Services		59
Item 14. Principal Accountant Fees and Services		127
PART IV		128
Item 15.	Exhibits and Financial Statement Schedules		60
Item 15. Exhibits and Financial Statement Schedules		128
SIGNATURES		129	61
INDEX TO FINANCIAL STATEMENT SCHEDULES		130	62
INDEX TO EXHIBITS		132	64
EX-10.29: AMENDED AND RESTATED PBG DIRECTORS' STOCK PLAN
EX-12
EX-10.30: AMENDED AND RESTATED PBG 2004 LONG-TERM INCENTIVE PLAN
EX-21
EX-10.31: PBG DIRECTOR DEFERRAL PROGRAM
EX-23
EX-10.32: AMENDED AND RESTATED PBG PENSION EQUALIZATION PLAN
EX-24
EX-10.33: PBG 409A EXECUTIVE INCOME DEFERRAL PROGRAM
EX-31.1
EX-10.34: AMENDED AND RESTATED PBG SUPPLEMENTAL SAVINGS PROGRAM
EX-31.2
EX-10.35: DISTRIBUTION AGREEMENT
EX-32.1
EX-12: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-32.2
EX-21: SUBSIDIARIES
EX-101 INSTANCE DOCUMENT
EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP
EX-101 SCHEMA DOCUMENT
EX-23.2: CONSENT OF DELOITTE & TOUCHE LLP
EX-101 CALCULATION LINKBASE DOCUMENT
EX-24: POWER OF ATTORNEY
EX-101 LABELS LINKBASE DOCUMENT
EX-31.1: CERTIFICATION
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-31.2: CERTIFICATION
EX-101 DEFINITION LINKBASE DOCUMENT
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION
EX-99.1: BOTTLING GROUP, LLC'S 2008 ANNUAL REPORT

PART I


ITEM 1.		BUSINESS

Introduction

The Pepsi Bottling Group, Inc. (“PBG”) was incorporated in Delaware in January, 1999, as a wholly owned subsidiary of PepsiCo, Inc. (“PepsiCo”) to effect the separation of most of PepsiCo’s company-owned bottling businesses. PBG became a publicly traded company on March 31, 1999. As of January 2322, ~~2009~~2010, PepsiCo’s ownership represented 3331.16% of the outstanding common stock and 100% of the outstanding Class B common stock, together representing 4038.26% of the voting power of all classes of PBG’s voting stock. PepsiCo also owned approximately 6.6% of the equity interest of Bottling Group, LLC, PBG’s principal operating subsidiary, as of January 2322, ~~2009~~2010. When used in this Report, “PBG,” “we,” “us,” “our” and the “Company” each refers to The Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC, which we also refer to as “Bottling LLC.”

On August 3, 2009, we entered into a merger agreement with PepsiCo and Pepsi-Cola Metropolitan Bottling Company, Inc., a wholly owned subsidiary of PepsiCo (“Metro”), pursuant to which we will merge with and into Metro, with Metro continuing as the surviving company and a wholly owned subsidiary of PepsiCo. Under the terms of the merger agreement, PepsiCo will acquire all outstanding shares of PBG common stock it does not already own for the price of $36.50 in cash or 0.6432 shares of PepsiCo common stock, subject to proration such that the aggregate consideration to be paid to PBG shareholders shall be 50 percent in cash and 50 percent in PepsiCo common stock. At a special meeting of our shareholders held on February 17, 2010, our shareholders adopted the merger agreement. The transaction is subject to certain regulatory approvals and is expected to be finalized by the end of the first quarter of 2010.

PBG operates in one industry, carbonated soft drinks and other ready-to-drink beverages, and all of our segments derive revenue from these products. We conduct business in all or a portion of the United States, Mexico, Canada, Spain, Russia, Greece and Turkey. PBG manages and reports operating results through three reportable segments: U.S. & Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico. Operationally, the Company is organized along geographic lines with specific regional management teams having responsibility for the financial results in each reportable segment.

In ~~2008~~2009, approximately 7578% of our net revenues were generated in the U.S. & Canada, 1513% of our net revenues were generated in Europe, and the remaining 109% of our net revenues were generated in Mexico. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14 13 in the Notes to Consolidated Financial Statements for additional information regarding ~~the~~ the business and operating results of our reportable segments.

Principal Products

PBG is the world’s largest manufacturer, seller and distributor of Pepsi-Cola beverages. In addition, in some of our territories we have the right to manufacture, sell and distribute soft drink products of companies other than PepsiCo, including Dr Pepper, Crush and Squirt. We also have the right in some of our territories to manufacture, sell and distribute beverages under trademarks that we own, including Electropura, e-pura and Garci Crespo. The majority of our volume is derived from brands licensed from PepsiCo or PepsiCo joint ventures.

We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of 42 states and the District of Columbia in the United States, nine Canadian provinces, Spain, Greece, Russia, Turkey and 23 states in Mexico.

In 2008, approximately 74% of our sales volume in the U.S. & Canada was derived from carbonated soft drinks and the remaining 26% was derived from non-carbonated beverages, 69% of our sales volume in Europe was derived from carbonated soft drinks and the remaining 31% was derived from non-carbonated beverages, and 52% of our Mexico sales volume was derived from carbonated soft drinks and the remaining 48% was derived from non-carbonated beverages. Our principal beverage brands include the following:

U.S. & Canada
Pepsi	Sierra Mist	Lipton
Diet Pepsi	Sierra Mist Free	SoBe
Diet Pepsi Max	Aquafina	SoBe No Fear
Wild Cherry Pepsi	Aquafina FlavorSplash	SoBe Life Water
Pepsi Lime	G2 from Gatorade	Starbucks Frappuccino®
Pepsi ONE	Propel	Dole
Mountain Dew	Crush	Muscle Milk
Diet Mountain Dew	Tropicana juice drinks
AMP	Mug Root Beer
Mountain Dew Code Red	Trademark Dr Pepper
Europe
Pepsi	Tropicana	Fruko
Pepsi Light	Aqua Minerale	Yedigun
Pepsi Max	Mirinda	Tamek
7UP	IVI	Lipton
KAS	Fiesta
Mexico
Pepsi	Mirinda	Electropura
Pepsi Light	Manzanita Sol	e-pura
7UP	Squirt	Jarritos
KAS	Garci Crespo
Belight	Aguas Frescas

No individual customer accounted for 10% or more of our total revenues in 2008, although sales to Wal-Mart Stores, Inc. and its affiliated companies were 9.9% of our revenues in 2008, primarily as a result of transactions in the U.S. & Canada segment. We have an extensive direct store distribution system in the United States, Canada and Mexico. In Europe, we use a combination of direct store distribution and distribution through wholesalers, depending on local marketplace considerations.

Raw Materials and Other Supplies

We purchase the concentrates to manufacture Pepsi-Cola beverages and other beverage products from PepsiCo and other beverage companies.

In addition to concentrates, we purchase various ingredients, packaging materials and energy such as sweeteners, glass and plastic bottles, cans, closures, syrup containers, other packaging materials, carbon dioxide, some finished goods, electricity, natural gas and motor fuel. We generally purchase our raw materials, other than concentrates, from multiple suppliers. PepsiCo acts as our agent for the purchase of such raw materials in the United States and Canada and, with respect to some of our raw materials, in certain of our international markets. The Pepsi beverage agreements, as described below, provide that, with respect to the beverage products of PepsiCo, all authorized containers, closures, cases, cartons and other packages and labels may be purchased only from manufacturers approved by PepsiCo. There are no materials or supplies used by PBG that are currently in short supply. The supply or cost of specific materials could

~~PART~~ In I2009, ~~(continued)~~approximately 76% of our sales volume in the U.S. & Canada was derived from carbonated soft drinks and the remaining 24% was derived from non-carbonated beverages, 69% of our sales volume in Europe was derived from carbonated soft drinks and the remaining 31% was derived from non-carbonated beverages, and 53% of our Mexico sales volume was derived from carbonated soft drinks and the remaining 47% was derived from non-carbonated beverages. Our principal beverage brands include the following:

be adversely affected by various factors, including price changes, economic conditions, strikes, weather conditions and governmental controls.


U.S. & Canada
Pepsi	Sierra Mist	Lipton
Diet Pepsi	Sierra Mist Free	SoBe
Diet Pepsi Max	Aquafina	SoBe Adrenaline Rush
Wild Cherry Pepsi	Aquafina FlavorSplash	SoBe Lifewater
Pepsi Lime	G2 from Gatorade	Starbucks Frappuccino^®
Pepsi ONE	Propel	Dole
Mountain Dew	Crush	Muscle Milk
Diet Mountain Dew	Tropicana juice drinks	Rockstar
Amp Energy	Mug Root Beer
Mountain Dew Code Red	Trademark Dr Pepper

Europe
Pepsi	Tropicana	Fruko
Pepsi Light	Aqua Minerale	Yedigun
Pepsi Max	Mirinda	Tamek
7UP	IVI	Lipton
KAS	Fiesta

Mexico
Pepsi	Mirinda	Electropura
Pepsi Light	Manzanita Sol	e-pura
7UP	Squirt	Jarritos
KAS	Garci Crespo	Lipton
Belight	Aguas Frescas	Sangria Casera

No individual customer accounted for 10% or more of our total revenues in 2009, except for sales to Wal-Mart Stores, Inc. and its affiliated companies which accounted for 11% of our revenues in 2009, primarily as a result of transactions in the U.S. & Canada segment. We have an extensive direct store distribution system in the United States, Canada and Mexico. In Europe, we use a combination of direct store distribution and distribution through wholesalers, depending on local marketplace considerations.

Raw Materials and Other Supplies

We purchase the concentrates to manufacture Pepsi-Cola beverages and other beverage products from PepsiCo and other beverage companies.

Franchise and Venture Agreements

We conduct our business primarily under agreements with PepsiCo. These agreements give us the exclusive right to market, distribute, and produce beverage products of PepsiCo in authorized containers and to use the related trade names and trademarks in specified territories.

Set forth below is a description of the Pepsi beverage agreements and other bottling agreements to which we are a party.

Terms of the Master Bottling Agreement. The Master Bottling Agreement under which we manufacture, package, sell and distribute the cola beverages bearing the Pepsi-Cola and Pepsi trademarks in the United States was entered into in March of 1999. The Master Bottling Agreement gives us the exclusive and perpetual right to distribute cola beverages for sale in specified territories in authorized containers of the nature currently used by us. The Master Bottling Agreement provides that we will purchase our entire requirements of concentrates for the cola beverages from PepsiCo at prices, and on terms and conditions, determined from time to time by PepsiCo. PepsiCo may determine from time to time what types of containers to authorize for use by us. PepsiCo has no rights under the Master Bottling Agreement with respect to the prices at which we sell our products.

Under the Master Bottling Agreement we are obligated to:

	(1)		maintain such plant and equipment, staff, distribution facilities and vending equipment that are capable of manufacturing, packaging, and distributing the cola beverages in sufficient quantities to fully meet the demand for these beverages in our territories;

	(2)		undertake adequate quality control measures prescribed by PepsiCo;

	(3)		push vigorously the sale of the cola beverages in our territories;

	(4)		increase and fully meet the demand for the cola beverages in our territories;

	(5)		use all approved means and spend such funds on advertising and other forms of marketing beverages as may be reasonably required to push vigorously the sale of cola beverages in our territories; and

	(6)		maintain such financial capacity as may be reasonably necessary to assure performance under the Master Bottling Agreement by us.

The Master Bottling Agreement requires us to meet annually with PepsiCo to discuss plans for the ensuing year and the following two years. At such meetings, we are obligated to present plans that set out in reasonable detail our marketing plan, our management plan and advertising plan with respect to the cola beverages for the year. We must also present a financial plan showing that we have the financial capacity to perform our duties and obligations under the Master Bottling Agreement for that year, as well as sales, marketing, advertising and capital expenditure plans for the two years following such year. PepsiCo has the right to approve such plans, which approval shall not be unreasonably withheld. In ~~2008~~2009, PepsiCo approved our plans.

If we carry out our annual plan in all material respects, we will be deemed to have satisfied our obligations to push vigorously the sale of the cola beverages, increase and fully meet the demand for the cola beverages in our territories and maintain the financial capacity required under the Master Bottling Agreement. Failure to present a plan or carry out approved plans in all material respects would constitute an event of default that, if not cured within 120 days of notice of the failure, would give PepsiCo the right to terminate the Master Bottling Agreement.

If we present a plan that PepsiCo does not approve, such failure shall constitute a primary consideration for determining whether we have satisfied our obligations to maintain our financial capacity, push vigorously the sale of the cola beverages and increase and fully meet the demand for the cola beverages in our territories.

If we fail to carry out our annual plan in all material respects in any segment of our territory, whether defined geographically or by type of market or outlet, and if such failure is not cured within six months of notice of the failure, PepsiCo may reduce the territory covered by the Master Bottling Agreement by eliminating the territory, market or outlet with respect to which such failure has occurred.

PepsiCo has no obligation to participate with us in advertising and marketing spending, but it may contribute to such expenditures and undertake independent advertising and marketing activities, as well as cooperative advertising and sales promotion programs that would require our cooperation and support. Although PepsiCo has advised us that it intends to continue to provide cooperative advertising funds, it is not obligated to do so under the Master Bottling Agreement.

The Master Bottling Agreement provides that PepsiCo may in its sole discretion reformulate any of the cola beverages or discontinue them, with some limitations, so long as all cola beverages are not discontinued. PepsiCo may also introduce new beverages under the Pepsi-Cola trademarks or any modification thereof. When that occurs, we are obligated to manufacture, package, distribute and sell such new beverages with the same obligations as then exist with respect to other cola beverages. We are prohibited from producing or handling cola products, other than those of PepsiCo, or products or packages that imitate, infringe or cause confusion with the products, containers or trademarks of PepsiCo. The Master Bottling Agreement also imposes requirements with respect to the use of PepsiCo’s trademarks, authorized containers, packaging and labeling.

5 If we acquire control, directly or indirectly, of any bottler of cola beverages, we must cause the acquired bottler to amend its bottling appointments for the cola beverages to conform to the terms of the Master Bottling Agreement. Under the Master Bottling Agreement, PepsiCo has agreed not to withhold approval for any acquisition of rights to manufacture and sell Pepsi trademarked cola beverages within a specific area – currently representing approximately 10.63% of PepsiCo’s U.S. bottling system in terms of volume – if we have successfully negotiated the acquisition and, in PepsiCo’s reasonable judgment, satisfactorily performed our obligations under the Master Bottling Agreement. We have agreed not to acquire or attempt to acquire any rights to manufacture and sell Pepsi trademarked cola beverages outside of that specific area without PepsiCo’s prior written approval.

If we acquire control, directly or indirectly, of any bottler of cola beverages, we must cause the acquired bottler to amend its bottling appointments for the cola beverages to conform to the terms of the Master Bottling Agreement. Under the Master Bottling Agreement, PepsiCo has agreed not to withhold approval for any acquisition of rights to manufacture and sell Pepsi trademarked cola beverages within a specific area — currently representing approximately 10.3% of PepsiCo’s U.S. bottling system in terms of volume — if we have successfully negotiated the acquisition and, in PepsiCo’s reasonable judgment, satisfactorily performed our obligations under the Master Bottling Agreement. We have agreed not to acquire or attempt to acquire any rights to manufacture and sell Pepsi trademarked cola beverages outside of that specific area without PepsiCo’s prior written approval.

The Master Bottling Agreement is perpetual, but may be terminated by PepsiCo in the event of our default. Events of default include:

	(1)		our insolvency, bankruptcy, dissolution, receivership or the like;

	(2)		any disposition of any voting securities of one of our bottling subsidiaries or substantially all of our bottling assets without the consent of PepsiCo;

	(3)		our entry into any business other than the business of manufacturing, selling or distributing non-alcoholic beverages or any business which is directly related and incidental to such beverage business; and

	(4)		any material breach under the contract that remains uncured for 120 days after notice by PepsiCo.

An event of default will also occur if any person or affiliated group acquires any contract, option, conversion privilege, or other right to acquire, directly or indirectly, beneficial ownership of more than 15% of any class or series of our voting securities without the consent of PepsiCo. As of February 1312, ~~2009~~2010, to our knowledge, no shareholder of PBG, other than PepsiCo, held more than 5% of our common stock.

We are prohibited from assigning, transferring or pledging the Master Bottling Agreement, or any interest therein, whether voluntarily, or by operation of law, including by merger or liquidation, without the prior consent of PepsiCo.

The Master Bottling Agreement was entered into by us in the context of our separation from PepsiCo and, therefore, its provisions were not the result of arm’s-length negotiations. Consequently, the agreement contains provisions that are less favorable to us than the exclusive bottling appointments for cola beverages currently in effect for independent bottlers in the United States.

Terms of the Non-Cola Bottling Agreements. The beverage products covered by the non-cola bottling agreements are beverages licensed to us by PepsiCo, including Mountain Dew, Aquafina, Sierra Mist, Diet Mountain Dew, Mug Root Beer and Mountain Dew Code Red. The non-cola bottling agreements contain provisions that are similar to those contained in the Master Bottling Agreement with respect to pricing, territorial restrictions, authorized containers, planning, quality control, transfer restrictions, term and related matters. Our non-cola bottling agreements will terminate if PepsiCo terminates our Master Bottling Agreement. The exclusivity provisions contained in the non-cola bottling agreements would prevent us from manufacturing, selling or distributing beverage products that imitate, infringe upon, or cause confusion with, the beverage products covered by the non-cola bottling agreements. PepsiCo may also elect to discontinue the manufacture, sale or distribution of a non-cola beverage and terminate the applicable non-cola bottling agreement upon six months notice to us.

Terms of Certain Distribution Agreements. We also have agreements with PepsiCo granting us exclusive rights to distribute AMP and Dole in all of our territories, SoBe in certain specified territories and Gatorade and G2 in certain specified channels. The distribution agreements contain provisions generally similar to those in the Master Bottling Agreement as to use of trademarks, trade names, approved containers and labels and causes for termination. We also have the right to sell Tropicana juice drinks in the United States and Canada, Tropicana juices in Russia and Spain, and Gatorade in Spain, Greece and Russia and in certain limited channels of distribution in the United States and Canada. Some of these beverage agreements have limited terms and, in most instances, prohibit us from dealing in similar beverage products.

Terms of the Master Syrup Agreement. The Master Syrup Agreement grants us the exclusive right to manufacture, sell and distribute fountain syrup to local customers in our territories. We have agreed to act as a manufacturing and delivery agent for national accounts within our territories that specifically request direct delivery without using a middleman. In addition, PepsiCo may appoint us to manufacture and deliver fountain syrup to national accounts that elect delivery through independent distributors. Under the Master Syrup Agreement, we have the exclusive right to service fountain equipment for all of the national account customers within our territories. The Master Syrup Agreement provides that the determination of whether an account is local or national is at the sole discretion of PepsiCo.

6 The Master Syrup Agreement contains provisions that are similar to those contained in the Master Bottling Agreement with respect to concentrate pricing, territorial restrictions with respect to local customers and national customers electing direct-to-store delivery only, planning, quality control, transfer restrictions and related matters. The Master Syrup Agreement had an initial term of five years which expired in 2004 and was renewed for an additional five-year period. The Master Syrup Agreement will automatically renew for additional five-year periods, unless PepsiCo terminates it for cause. PepsiCo has the right to terminate the Master Syrup Agreement without cause at any time upon twenty-four months notice. In the event PepsiCo terminates the Master Syrup Agreement without cause, PepsiCo is required to pay us the fair market value of our rights thereunder.

Our Master Syrup Agreement will terminate if PepsiCo terminates our Master Bottling Agreement.

Terms of Other U.S. Bottling Agreements. The bottling agreements between us and other licensors of beverage products, including Dr Pepper Snapple Group for Dr Pepper, Crush, Schweppes, Canada Dry, Hawaiian Punch and Squirt, the Pepsi/Lipton Tea Partnership for Lipton Brisk and Lipton Iced Tea, and the North American Coffee Partnership for Starbucks Frappuccino®, contain provisions generally similar to those in the Master Bottling Agreement as to use of trademarks, trade names, approved containers and labels, sales of imitations and causes for termination. Some of these beverage agreements have limited terms and, in most instances, prohibit us from dealing in similar beverage products.

Terms of the Country-Specific Bottling Agreements. The country-specific bottling agreements contain provisions generally similar to those contained in the Master Bottling Agreement and the non-cola bottling agreements and, in Canada, the Master Syrup Agreement with respect to authorized containers, planning, quality control, transfer restrictions, term, causes for termination and related matters. These bottling agreements differ from the Master Bottling Agreement because, except for Canada, they include both fountain syrup and non-fountain beverages. Certain of these bottling agreements contain provisions that have been modified to reflect the laws and regulations of the applicable country. For example, the bottling agreements in Spain do not contain a restriction on the sale and

~~PART~~ The IMaster ~~(continued)~~Syrup Agreement contains provisions that are similar to those contained in the Master Bottling Agreement with respect to concentrate pricing, territorial restrictions with respect to local customers and national customers electing direct-to-store delivery only, planning, quality control, transfer restrictions and related matters. The Master Syrup Agreement had an initial term of five years which expired in 2004 and has thereafter automatically renewed for two additional five-year periods, including the most recent renewal in 2009. The Master Syrup Agreement will automatically renew for additional five-year periods, unless PepsiCo terminates it for cause. PepsiCo has the right to terminate the Master Syrup Agreement without cause at any time upon twenty-four months notice. In the event PepsiCo terminates the Master Syrup Agreement without cause, PepsiCo is required to pay us the fair market value of our rights thereunder. Our Master Syrup Agreement will terminate if PepsiCo terminates our Master Bottling Agreement.

Terms of Other U.S. Bottling Agreements. The bottling agreements between us and other ~~shipment~~licensors of beverage products, including Dr Pepper Snapple Group for Dr Pepper, Crush, Schweppes, Canada Dry, Hawaiian Punch and Squirt, the Pepsi~~-Cola~~/Lipton ~~beverages~~Tea ~~into~~Partnership ~~our~~for ~~territory~~Lipton byBrisk ~~others~~and inLipton ~~response~~Iced Tea, and the North American Coffee Partnership for Starbucks Frappuccino®, contain provisions generally similar to ~~unsolicited~~those ~~orders~~in the Master Bottling Agreement as to use of trademarks, trade names, approved containers and labels, sales of imitations and causes for termination. InSome of ~~addition~~these beverage agreements have limited terms and, in ~~Mexico~~most ~~and~~instances, prohibit us from dealing in ~~Turkey~~similar webeverage ~~are~~products. ~~restricted~~The agreements with Dr Pepper Snapple Group contain a provision that permits the Dr Pepper Snapple Group to terminate the agreements in the event of a sale of more than 10% of our ~~ability~~stock. toBecause ~~manufacture~~the pending PepsiCo merger would trigger this provision, ~~sell~~PepsiCo and Dr ~~distribute~~Pepper ~~beverages~~Snapple ~~sold~~Group ~~under~~have ~~non-PepsiCo~~entered ~~trademarks.~~into new bottling agreements that will be effective upon closing of the merger.

Terms of the Country-Specific Bottling Agreements. The country-specific bottling agreements contain provisions generally similar to those contained in the Master Bottling Agreement and the non-cola bottling agreements and, in Canada, the Master Syrup Agreement with respect to authorized containers, planning, quality control, transfer restrictions, term, causes for termination and related matters. These bottling agreements differ from the Master Bottling Agreement because, except for Canada, they include both fountain syrup and non-fountain beverages. Certain of these bottling agreements contain provisions that have been modified to reflect the laws and regulations of the applicable country. For example, the bottling agreements in Spain do not contain a restriction on the sale and shipment of Pepsi-Cola beverages into our territory by others in response to unsolicited orders. In addition, in Mexico and Turkey we are restricted in our ability to manufacture, sell and distribute beverages sold under non-PepsiCo trademarks.

Terms of the Russia Venture Agreement. In 2007, PBG together with PepsiCo formed PR Beverages Limited (“PR Beverages”), a venture that enables us to strategically invest in Russia to accelerate our growth. We contributed our business in Russia to PR Beverages, and PepsiCo entered into bottling agreements with PR Beverages for PepsiCo beverage products sold in Russia on the same terms as in effect for us immediately prior to the venture. PepsiCo also granted PR Beverages an exclusive license to manufacture and sell the concentrate for such products.

Terms of Russia Snack Food Distribution Agreement. Effective January 2009, PR Beverages entered into an agreement with Frito-Lay Manufacturing, LLC (“FLM”), a wholly owned subsidiary of PepsiCo, pursuant to which PR Beverages purchases Frito-Lay snack products from FLM for sale and distribution in the Russian Federation. This agreement provides FLM access to the infrastructure of our distribution network in Russia and allows us to more effectively utilize some of our distribution network assets. This agreement replaced a similar agreement, which expired on December 31, 2008.

Seasonality

Sales of our products are seasonal, particularly in our Europe segment, where sales volumes tend to be more sensitive to weather conditions. Our peak season across all of our segments is the warm summer months beginning in May and ending in September. InMore ~~2008,~~than ~~approximately 50~~70% of our ~~volume~~operating ~~was~~income ~~generated~~is typically earned during the second and third quarters and ~~approximately 90~~more than 80% of cash flow from operations ~~was~~is typically generated in the third and fourth quarters.

Competition

The carbonated soft drink market and the non-carbonated beverage market are highly competitive. Our competitors in these markets include bottlers and distributors of nationally advertised and marketed products, bottlers and distributors of regionally advertised and marketed products, as well as bottlers of private label soft drinks sold in chain stores. Among our major competitors are bottlers that distribute products from The Coca-Cola Company including Coca-Cola Enterprises Inc., Coca-Cola Hellenic Bottling Company S.A., Coca-Cola FEMSA S.A. de C.V. and Coca-Cola Bottling Co. Consolidated. Our market share for carbonated soft drinks sold under trademarks owned by PepsiCo in our U.S. territories ranges from approximately 21% to approximately 41%. Our market share for carbonated soft drinks sold under trademarks owned by PepsiCo for each country outside the United States in which we do business is as follows: Canada 44%; Russia 21%; Turkey 17%; Spain 10% and Greece 10% (including market share for our IVI brand). In addition, market share for our territories and the territories of other Pepsi bottlers in Mexico is 18% for carbonated soft drinks sold under trademarks owned by PepsiCo. All market share figures are based on generally available data published by third parties. Actions by our major competitors and others in the beverage industry, as well as the general economic environment, could have an impact on our future market share.

Our market share for carbonated soft drinks sold under trademarks owned by PepsiCo in our U.S. territories ranges from approximately 23% to approximately 43%. Our market share for carbonated soft drinks sold under trademarks owned by PepsiCo for each country outside the United States in which we do business is as follows: Canada 46%; Russia 17%; Turkey 18%; Spain

10% and Greece 14% (including market share for our IVI brand). In addition, market share for our territories and the territories of other Pepsi bottlers in Mexico is 16% for carbonated soft drinks sold under trademarks owned by PepsiCo.

Our market share for liquid refreshment beverages sold under trademarks owned by PepsiCo in our U.S. territories is approximately 26%. Our market share for liquid refreshment beverages sold under trademarks owned by PepsiCo for each country outside the United States in which we do business is as follows: Canada 23%; Russia 21%; Turkey 17%; Spain 7% and Greece 11% (including market share for our IVI brand). In addition, market share for our territories and the territories of other Pepsi bottlers in Mexico is 18% for liquid refreshment beverage sold under trademarks owned by PepsiCo.

All market share figures are based on generally available data published by third parties. Actions by our major competitors and others in the beverage industry, as well as the general economic environment, could have an impact on our future market share.

We compete primarily on the basis of advertising and marketing programs to create brand awareness, price and promotions, retail space management, customer service, consumer points of access, new products, packaging innovations and distribution methods. We believe that brand recognition, market place pricing, consumer value, customer service, availability and consumer and customer goodwill are primary factors affecting our competitive position.

Governmental Regulation Applicable to PBG

Our operations and properties are subject to regulation by various federal, state and local governmental entities and agencies in the United States as well as foreign governmental entities and agencies in Canada, Spain, Greece, Russia, Turkey and Mexico. As a producer of food products, we are subject to production, packaging, quality, labeling and distribution standards in each of the countries where we have operations, including, in the United States, those of the Federal Food, Drug and Cosmetic Act and the Public Health Security and Bioterrorism Preparedness and Response Act. The operations of our production and distribution facilities are subject to laws and regulations relating to the protection of our employees’ health and safety and the environment in the countries in which we do business. In the United States, we are subject to the laws and regulations of various governmental entities, including the Department of Labor, the Environmental Protection Agency and the Department of Transportation, and various federal, state and local occupational, labor and employment and environmental laws. These laws and regulations include the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendments and Reauthorization Act, the Federal Motor Carrier Safety Act and the Fair Labor Standards Act.

We believe that our current legal, operational and environmental compliance programs are adequate and that we are in substantial compliance with applicable laws and regulations of the countries in which we do business. We do not anticipate making any material expenditures in connection with environmental remediation and compliance. However, compliance with, or any violation of, future laws or regulations could require material expenditures by us or otherwise have a material adverse effect on our business, financial condition or results of operations.

Bottle and Can Legislation. Legislation has been enacted in certain U.S. states and Canadian provinces where we operate that generally prohibits the sale of certain beverages in non-refillable containers unless a deposit or levy is charged for the container. These include California, Connecticut, Delaware, Hawaii, Iowa, Maine, Massachusetts, Michigan, New York, Oregon, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Quebec.

~~Oregon~~ Connecticut, ~~West Virginia~~Massachusetts, ~~British~~Michigan ~~Columbia,~~and ~~Alberta,~~New ~~Saskatchewan, Manitoba,~~York ~~New~~have ~~Brunswick,~~statutes ~~Nova~~that ~~Scotia~~require ~~and~~us ~~Quebec.~~to ~~Legislation prohibited~~pay ~~the~~all ~~sale~~or a portion of ~~carbonated~~unclaimed ~~beverages~~container indeposits ~~non-refillable containers~~to inthe ~~Prince~~state. ~~Edwards~~Hawaii ~~Islands~~and inCalifornia ~~2007,~~impose ~~but~~a ~~this~~levy ~~law was~~on ~~repealed~~beverage incontainers ~~May~~to ~~2008~~fund a waste recovery system.

Massachusetts and Michigan have statutes that require us to pay all or a portion of unclaimed container deposits to the state and Connecticut has

enacted a similar statute effective in 2009. Hawaii and California impose a levy on beverage containers to fund a waste recovery system.

In addition to the Canadian deposit legislation described above, Ontario, Canada currently has a regulation requiring that at least 30% of all soft drinks sold in Ontario be bottled in refillable containers.

The European Commission issued a packaging and packing waste directive that was incorporated into the national legislation of most member states. This has resulted in targets being set for the recovery and recycling of household, commercial and industrial packaging waste and imposes substantial responsibilities upon bottlers and retailers for implementation. Similar legislation has been enacted in Turkey.

Mexico adopted legislation regulating the disposal of solid waste products. In response to this legislation, PBG Mexico maintains agreements with local and federal Mexican governmental authorities as well as with civil associations, which require PBG Mexico, and other participating bottlers, to provide for collection and recycling of certain minimum amounts of plastic bottles.

8 We are not aware of similar material legislation being enacted in any other areas served by us. The recent economic downturn has resulted in reduced tax revenue for many states and has increased the need for some states to identify new revenue sources. Some states may pursue additional revenue through new or amended bottle and can legislation. We are unable to predict, however, whether such legislation will be enacted or what impact its enactment would have on our business, financial condition or results of operations.

We are not aware of similar material legislation being enacted in any other areas served by us. The recent economic downturn, however, has resulted in reduced tax revenue for many states and has increased the need for some states to identify new revenue sources. Some states may pursue additional revenue through new or amended bottle and can legislation. We are unable to predict, however, whether such legislation will be enacted or what impact its enactment would have on our business, financial condition or results of operations.

Soft Drink Excise Tax Legislation. Specific soft drink excise taxes have been in place in certain states for several years. The states in which we operate that currently impose such a tax are West Virginia and Arkansas and, with respect to fountain syrup only, Washington.

Value-added taxes on soft drinks vary in our territories located in Canada, Spain, Greece, Russia, Turkey and Mexico, but are consistent with the value-added tax rate for other consumer products. In addition, there is a special consumption tax applicable to cola products in Turkey. In Mexico, bottled water in containers over 10.1 liters are exempt from value-added tax, and we obtained a tax exemption for containers holding less than 10.1 liters of water. The tax exemption currently also applies to non-carbonated soft drinks.

We are not aware of any material soft drink taxes that have been enacted in any other market served by us. The recent economic downturn, however, has resulted in reduced tax revenue for many states and has increased the need for some states to identify new revenue sources. Some states may pursue additional revenue through new or amended soft drink or similar excise tax legislation. We ~~are~~ are unable to predict, however, whether such legislation will be enacted or what impact its enactment would have on our business, financial condition or results of operations.

New York State Governor, David Paterson, has included a recommendation in his 2011 proposed budget that essentially would place a one cent per ounce tax on sweetened beverages sold in that state. Whether such tax will be enacted is unknown at this point. A similar proposal was included in the 2010 proposed budget, but was withdrawn before legislative consideration due to strong public and political opposition.

Trade Regulation. As a manufacturer, seller and distributor of bottled and canned soft drink products of PepsiCo and other soft drink manufacturers in exclusive territories in the United States and internationally, we are subject to antitrust and competition laws. Under the Soft Drink Interbrand Competition Act, soft drink bottlers operating in the United States, such as us, may have an exclusive right to manufacture, distribute and sell a soft drink product in a geographic territory if the soft drink product is in substantial and effective competition with other products of the same class in the same market or markets. We believe that there is such substantial and effective competition in each of the exclusive geographic territories in which we operate.

School Sales Legislation; Industry Guidelines. In 2004, the U.S. Congress passed the Child Nutrition Act, which required school districts to implement a school wellness policy by July 2006. In May 2006, members of the American Beverage Association, the Alliance for a Healthier Generation, the American Heart Association and The William J. Clinton Foundation entered into a memorandum of understanding that sets forth standards for what beverages can be sold in elementary, middle and high schools in the United States (the “ABA Policy”). Also, the beverage associations in the European Union and Canada have recently issued guidelines relating to the sale of beverages in schools. We intend to comply fully with the ABA Policy and these guidelines. In addition, legislation has been proposed in Mexico that would restrict the sale of certain high-calorie products, including soft drinks, in schools and that would require these products to include a label that warns consumers that consumption abuse may lead to obesity.

California Carcinogen and Reproductive Toxin Legislation. A California law requires that any person who exposes another to a carcinogen or a reproductive toxin must provide a warning to that effect. Because the law does not define quantitative thresholds below which a warning is not required, virtually all manufacturers of food products are confronted with the possibility of having to provide warnings due to the presence of trace amounts of defined substances. Regulations implementing the law exempt manufacturers from providing the required warning if it can be demonstrated that the defined substances occur naturally in the product or are present in municipal water used to manufacture the product. We have assessed the impact of the law and its implementing regulations on our beverage products and have concluded that none of our products currently requires a warning under the law. We cannot predict whether or to what extent food industry efforts to minimize the law’s impact on food products will succeed. We also cannot predict what impact, either in terms of direct costs or diminished sales, imposition of the law may have.

Mexican Water Regulation. In Mexico, we pump water from our own wells and we purchase water directly from municipal water companies pursuant to concessions obtained from the Mexican government on a plant-by-plant basis. The concessions are generally for ten-year terms and can generally be renewed by us prior to expiration with minimal cost and effort. Our concessions may be terminated if, among other things, (a) we use materially more water than permitted by the concession, (b) we use materially less water than required by the concession, (c) we fail to pay for the rights for water usage or (d) we carry out, without governmental authorization, any material construction on or improvement to, our wells. Our concessions generally satisfy our current water requirements and we believe that we are generally in compliance in all material respects with the terms of our existing concessions.

9 7

PART I (continued)

Employees

As of December 2726, ~~2008~~2009, we employed approximately 6664,~~800~~ 900 workers, of whom approximately 32,~~700~~500 were employed in the United States. Approximately 8,~~700~~500 of our workers in the United ~~States~~ States are union members and approximately 1615,~~200~~100 of our workers outside the United States are union members. We consider relations with our employees to be good and have not experienced ~~significant~~ significant interruptions of operations due to labor disagreements.

Available Information

We maintain a website at www.pbg.com. We make available, free of charge, through the Investor ~~Relations –~~ Relations — Financial Information – — SEC Filings section of our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).

Additionally, we have made available, free of charge, the following governance materials on our website at www.pbg.com under Investor Relations – — Company Information – — Corporate Governance: Certificate of Incorporation, Bylaws, Corporate Governance Principles and Practices, Worldwide Code of Conduct (including any amendment thereto), Director Independence Policy, the Audit and ~~Affiliated~~ Affiliated Transactions Committee Charter, the Compensation and Management Development Committee Charter, the Nominating and Corporate Governance Committee Charter, the Disclosure Committee ~~Charter~~ Charter and the Policy and Procedures Governing Related-Person Transactions. These governance materials are available in print, free of charge, to any PBG shareholder upon request.

Financial Information on Industry Segments and Geographic Areas

We operate in one industry, carbonated soft drinks and other ready-to-drink beverages, and all of our segments derive revenue from these products. PBG has three reportable segments: U.S. & Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico. Operationally, the Company is organized along geographic lines with specific regional management teams having responsibility for the financial results in each reportable segment.

For additional information, see Note 14 13 in the Notes to Consolidated Financial Statements included in Item 7 below.


ITEM 1A.		RISK FACTORS

Our business and operations entail a variety of risks and uncertainties, including those described below.

We may not be able to respond successfully to consumer trends related to carbonated and non-carbonated beverages.

Consumer trends with respect to the products we sell are subject to change. Consumers are seeking increased variety in their beverages, and there is a growing interest among the public regarding the ingredients in our products, the attributes of those ingredients and health and wellness issues generally. This interest has resulted in a decline in consumer demand for carbonated soft drinks and an increase in consumer demand for products associated with health and wellness, such as water, enhanced water, teas and certain other non-carbonated beverages. ~~Consumer~~ Consumer preferences may change due to a variety of other factors, including the aging of the general population, changes in social trends, the real or perceived impact the manufacturing of our products has on the environment, changes in consumer demographics, changes in travel, vacation or leisure activity patterns, or a downturn in economic conditions or taxes specifically targeting the consumption of our products. Any of these changes may reduce consumers’ demand for our products. ~~For~~ For example, the recent downturn in economic conditions has adversely impacted sales of certain of our higher margin products, including our products sold for immediate consumption in restaurants.

Because we rely mainly on PepsiCo to provide us with the products we sell, if PepsiCo fails to develop innovative products and packaging that respond to consumer trends, we could be put at a competitive disadvantage in the marketplace and our business and financial results could be adversely affected. In addition, PepsiCo is under no obligation to provide us distribution rights to all of its products in all of the channels in which we operate. If we are unable to enter into agreements with PepsiCo to distribute innovative products in all of these channels or otherwise gain broad access to products that respond to consumer trends, we could be put at a competitive disadvantage in the marketplace and our business and financial results could be adversely affected.

We may not be able to respond successfully to the demands of our largest customers.

Our retail customers are consolidating, leaving fewer customers with greater overall purchasing power and, consequently, greater influence over our pricing, promotions and distribution methods. Because we do not operate in all markets in which these customers operate, we must rely on PepsiCo and other Pepsi bottlers to service such customers outside of our markets. The inability of PepsiCo or Pepsi bottlers as a whole, to meet the product, packaging and service demands of our largest customers could lead to a loss or decrease in business from such customers and have a material adverse effect on our business and financial results.

PepsiCo or Pepsi bottlers as a whole to meet the product, packaging and service demands of our largest customers could lead to a loss or decrease in business from such customers and have a material adverse effect on our business and financial results.

Our business requires a significant supply of raw materials and energy, the limited availability or increased costs of which could adversely affect our business and financial results.

The production and distribution of our beverage products is highly dependent on certain ingredients, packaging materials, other raw materials, and energy. To produce our products, we require significant amounts of ingredients, such as beverage concentrate and high fructose corn syrup, as well as access to significant amounts of water. We also require significant amounts of packaging materials, such as aluminum and plastic bottle components, such as resin (a petroleum-based product). In addition, we use a significant amount of electricity, natural gas, motor fuel and other energy sources to operate our fleet of trucks and our bottling plants.

If the suppliers of our ingredients, packaging materials, other raw materials or energy are impacted by an increased demand for their products, business downturn, weather conditions (including those related to climate change), natural disasters, governmental regulation, terrorism, strikes or other events, and we are not able to effectively obtain the products from another supplier, we could incur an interruption in the supply of such products or increased costs of such products. Any sustained interruption in the supply of our ingredients, packaging materials, other raw materials or energy, or increased costs thereof, could have a material adverse effect on our business and financial results.

The prices of some of our ingredients, packaging materials, other raw materials and energy, 8including aluminum, resin, high fructose corn syrup and motor fuel, have recently experienced unprecedented volatility, which in turn can unpredictably and substantially alter our costs. We have implemented a hedging strategy to better predict our costs of some of these products. In a volatile market, however, such strategy includes a risk that, during a particular period of time, market prices fall below our hedged price and we pay higher than market prices for certain products. As a result, under certain circumstances, our hedging strategy may increase our overall costs.

~~Table~~ If there is a significant or sustained increase in the costs of ~~Contents~~our ingredients, packaging materials, other raw materials or energy, and we are unable to pass effectively the increased costs on to our customers in the form of higher prices, there could be a material adverse effect on our business and financial results.

downturn, weather conditions (including those related to climate change), natural disasters, governmental regulation, terrorism, strikes or other events, and we are not able to effectively obtain the products from another supplier, we could incur an interruption in the supply of such products or increased costs of such products. Any sustained interruption in the supply of our ingredients, packaging materials, other raw materials or energy, or increased costs thereof, could have a material adverse effect on our business and financial results.

The prices of some of our ingredients, packaging materials, other raw materials and energy, including high fructose corn syrup and motor fuel, are experiencing unprecedented volatility, which can unpredictably and substantially increase our costs. We have implemented a hedging strategy to better predict our costs of some of these products. In a volatile market, however, such strategy includes a risk that, during a particular period of time, market prices fall below our hedged price and we pay higher than market prices for certain products. As a result, under certain circumstances, our hedging strategy may increase our overall costs.

If there is a significant or sustained increase in the costs of our ingredients, packaging materials, other raw materials or energy, and we are unable to pass the increased costs on to our customers in the form of higher prices, there could be a material adverse effect on our business and financial results.

Changes in the legal and regulatory environment, including those related to climate change, could increase our costs or liabilities or impact the sale of our products.

Our operations and properties are subject to regulation by various federal, state and local governmental entities and agencies as well as foreign governmental entities. Such ~~regulations~~ regulations relate to, among other things, food and drug laws, competition laws, labor laws, taxation requirements (including ~~soft~~ ~~drink~~taxes orspecifically ~~similar~~targeting ~~excise~~the ~~taxes~~consumption of our products), bottle and can legislation (see above under “Governmental Regulation Applicable to PBG”), accounting standards and environmental laws.

There is also a growing ~~consensus~~support for the conclusion that emissions of greenhouse gases are linked to global climate change, which may result in more regional, federal and/or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases. Until any such ~~requirements~~ requirements come into effect, it is difficult to predict their impact on our business or financial results, including any impact on our supply chain costs. In the interim, we are working to improve our systems to record baseline data and monitor our greenhouse gas emissions and, during the process of developing our business strategies, we consider the impact our plans may have on the environment.

We cannot assure you that we have been or will at all times be in compliance with all regulatory requirements or that we will not incur material costs or liabilities in connection with existing or new regulatory requirements, including those related to climate change.

Our pending merger with PepsiCo may cause disruption in our business and, if the pending merger does not occur, we will have incurred significant expenses and our stock price may decline.

The announcement of our pending merger with PepsiCo, whether or not consummated, may result in a loss of key personnel and may disrupt our sales and operations, which may have an impact on our financial performance. The merger agreement generally requires us to operate our business in the ordinary course pending consummation of the merger, but includes certain contractual restrictions on the conduct of our business that may affect our ability to execute on our business strategies and attain our financial goals. Additionally, the announcement of the pending merger, whether or not consummated, may impact our relationships with third parties.

The completion of the pending merger is subject to certain conditions, including, among others (i) adoption of the merger agreement by our shareholders, (ii) the absence of certain legal impediments to the consummation of the pending merger, (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and obtaining antitrust approvals in certain other jurisdictions, (iv) subject to certain materiality exceptions, the accuracy of the representations and warranties made by us and PepsiCo, respectively, and compliance by us and PepsiCo with our and their respective obligations under the merger agreement, (v) declaration of the effectiveness by the SEC of the Registration Statement on Form S-4/A filed by PepsiCo on January 12, 2010, and (vi) the non-occurrence of a Material Adverse Effect (as defined in the merger agreement) on PBG or PepsiCo. As of February 22, 2010, some of these closing conditions, such as adoption of the merger agreement by our shareholders, obtaining antitrust approval in jurisdictions outside the United States, and declaration of the effectiveness by the SEC of the Form S-4/A filed by PepsiCo, have been satisfied. Other closing conditions, however, remained unsatisfied as of February 22, 2010, including, but not limited to, the expiration or termination of the applicable waiting period under the HSR Act.

If the merger agreement is terminated under certain circumstances, then we would be required to pay PepsiCo a termination fee of approximately $165 million. On November 16, 2009, in connection with the settlement of certain stockholder litigation, PepsiCo agreed, among other things, to reduce the termination fee to $115 million. Upon approval of the merger agreement by our shareholders on February 17, 2010, the circumstances under which we would be required to pay PepsiCo a termination fee ceased to exist.

We cannot predict whether all of the closing conditions for the pending merger set forth in the merger agreement will be satisfied. As a result, we cannot assure you that the pending merger will be completed. If the closing conditions for the pending merger set forth in the merger agreement are not satisfied or waived pursuant to the merger agreement, or if the transaction is not completed for any other reason, the market price of our common stock may decline. In addition, if the pending merger does not occur, we will nonetheless remain liable for significant expenses that we have incurred related to the transaction.

Additionally, we and members of our Board of Directors have been named in a number of lawsuits relating to the pending merger. The parties to these lawsuits entered into a settlement stipulation, which is subject to customary conditions, as more fully described in Note 18 “Contingencies” to our Consolidated Financial Statements.

These matters, alone or in combination, could have a material adverse effect on our business and financial results.

PepsiCo’s equity ownership of PBG could affect matters concerning us.

As of January 2322, ~~2009~~2010, PepsiCo owned approximately 4038.26% of the combined voting power of our voting stock (with the balance owned by the public). PepsiCo will be able to significantly affect the outcome of PBG’s shareholder votes, thereby affecting matters concerning us.

Because we depend upon PepsiCo to provide us with concentrate, certain funding and various services, changes in our relationship with PepsiCo could adversely affect our business and financial results.

We conduct our business primarily under beverage agreements with PepsiCo. If our beverage agreements with PepsiCo are terminated for any reason, it would have a material adverse effect on our business and financial results. These agreements provide that we must purchase all of the concentrate for such beverages at prices and on other terms which are set by PepsiCo in its sole discretion. Any significant concentrate price increases could materially affect our business and financial results.

PepsiCo has also traditionally provided bottler incentives and funding to its bottling operations. PepsiCo does not have to maintain or continue these incentives or funding. Termination or decreases in bottler incentives or funding levels could materially affect our business and financial results.

Under our shared services agreement, we obtain various services from PepsiCo, including procurement of raw materials and certain administrative services. If any of the services under the shared services agreement were terminated, we would have to obtain such services on our own. This could result in a disruption of such services, and we might not be able to obtain these services on terms, including cost, that are as favorable as those we receive through PepsiCo.

We may have potential conflicts of interest with PepsiCo, which could result in PepsiCo’s objectives being favored over our objectives.

Our past and ongoing relationship with PepsiCo could give rise to conflicts of interests. In addition, two members of our Board of Directors are executive officers of PepsiCo, and one of the three Managing Directors of Bottling LLC, our principal operating subsidiary, is an officer of PepsiCo, a situation which may create conflicts of interest.

These potential conflicts include balancing the objectives of increasing sales volume of PepsiCo beverages and maintaining or increasing our profitability. Other possible conflicts could relate to the nature, quality and pricing of services or products provided to us by PepsiCo or by us to PepsiCo.

Conflicts could also arise in the context of our potential acquisition of bottling territories and/or assets from PepsiCo or other independent Pepsi bottlers. Under our Master Bottling Agreement with PepsiCo, we must obtain PepsiCo’s approval to acquire any independent Pepsi bottler. PepsiCo has agreed not to withhold approval for any acquisition within agreed-upon U.S. territories if we have successfully negotiated the acquisition and, in PepsiCo’s reasonable judgment, satisfactorily performed our obligations under the Master Bottling Agreement. We have agreed not to attempt to acquire any independent Pepsi bottler outside of those agreed-upon territories without PepsiCo’s prior written approval.

In addition, we are subject to certain contractual restrictions on the conduct of our business 9pursuant to the terms of the merger agreement between us and PepsiCo, as more fully described in the risk factor above entitled “Our pending merger with PepsiCo may cause disruption in our business and, if the pending merger does not occur, we will have incurred significant expenses and our stock price may decline.”

PART I (continued)

Our acquisition strategy may be limited by our ability to successfully integrate acquired businesses into ours or our failure to realize our expected return on acquired businesses.

We intend to continue to pursue acquisitions of bottling assets and territories from PepsiCo’s independent bottlers. The success of our acquisition strategy may be limited because of unforeseen costs and complexities. We may not be able to acquire, integrate successfully or manage profitably additional businesses without substantial costs, delays or other difficulties. Unforeseen costs and complexities may also prevent us from realizing our expected rate of return on an acquired business. Any of the foregoing could have a material adverse effect on our business and financial results.

We may not be able to compete successfully within the highly competitive carbonated and non-carbonated beverage markets.

The carbonated and non-carbonated beverage markets are highly competitive. Competitive pressures in our markets could cause us to reduce prices or forego price increases required to off-set increased costs of raw materials and fuel, increase capital and other expenditures, or lose market share, any of which could have a material adverse effect on our business and financial results.

If we are unable to fund our substantial capital requirements, it could cause us to reduce our planned capital expenditures and could result in a material adverse effect on our business and financial results.

We require substantial capital expenditures to implement our business plans. If we do not have sufficient funds or if we are unable to obtain financing in the amounts desired or on acceptable terms, we may have to reduce our planned capital expenditures, which could have a material adverse effect on our business and financial results.

The level of our indebtedness could adversely affect our financial health.

The level of our indebtedness requires us to dedicate a substantial portion of our cash flow from operations to payments on our debt. This could limit our flexibility in planning for, or reacting to, changes in our business and place us at a competitive disadvantage compared to competitors that have less debt. Our indebtedness also exposes us to interest rate fluctuations, because the interest on some of our indebtedness is at variable rates, and makes us vulnerable to general adverse economic and industry conditions. All of the above could make it more difficult for us, or make us unable to satisfy our obligations with respect to all or a portion of such indebtedness and could limit our ability to obtain additional financing for future working capital expenditures, strategic acquisitions and other general corporate requirements.

~~We are~~Deterioration ~~unable to predict the impact~~ of ~~the~~economic ~~recent~~conditions ~~downturn~~could inharm ~~the credit markets and the resulting costs or constraints in obtaining financing on~~ our business ~~and financial results~~.

Our ~~principal~~business ~~sources~~may ofbe ~~cash~~adversely ~~come~~affected ~~from~~by ~~our~~changes ~~operating activities and the issuance of debt and bank borrowings. The recent and extraordinary disruption~~ in ~~the~~national ~~credit~~or ~~markets~~global ~~has~~economic ~~had a~~conditions, ~~significant~~including ~~adverse~~inflation, ~~impact~~interest onrates, aavailability ~~number~~ of ~~financial institutions and has affected the cost of~~ capital ~~available to us. At this point in time~~markets, ~~our~~consumer ~~liquidity~~spending ~~has not been materially impacted by~~rates, ~~the~~energy ~~current~~availability ~~credit environment~~ and ~~management~~costs ~~does~~(including ~~not~~fuel ~~expect that~~surcharges) itand ~~will be materially impacted in~~ the ~~near~~effects ~~future.~~of ~~We will~~governmental ~~continue~~initiatives to ~~closely~~manage ~~monitor our liquidity and the credit markets. The recent~~ economic ~~downturn has also had an adverse impact on some of our customers and suppliers~~conditions. WeAny ~~will~~such ~~continue to~~changes ~~closely~~could ~~monitor~~adversely affect the ~~credit~~demand ~~worthiness of our customers and~~for ~~suppliers and adjust~~ our ~~allowance~~products ~~for doubtful accounts, as appropriate. We cannot predict with any certainty the impact to us of any further disruption in the credit environment~~ or ~~any resulting~~increase ~~material impact on~~ our ~~liquidity~~costs, ~~future~~thereby ~~financing costs~~negatively oraffecting our financial results.

The recent deterioration of economic conditions, could, among other things, make it more difficult or costly for us to obtain financing for our operations or investments, adversely impact the credit worthiness of our customers or suppliers, and decrease the value of our investments in equity and debt securities, including our marketable debt securities and pension and other postretirement plan assets.

Our foreign operations are subject to social, political and economic risks and may be adversely affected by foreign currency fluctuations.

In the fiscal year ended December 2726, ~~2008~~2009, approximately 34 30% of our net revenues were generated in territories outside the United States. Social, economic and political developments in in our international markets (including Russia, Mexico, Canada, Spain, Turkey and Greece) may adversely affect our business and financial results. These developments may lead to new product pricing, tax or other policies and monetary fluctuations that may adversely impact our business and financial results. The overall risks to our international businesses also include changes in foreign governmental policies. In addition, we are expanding our investment and sales and marketing efforts in certain emerging markets, such as Russia. Expanding our business into emerging markets may present additional risks beyond those associated with more developed international markets. For example, Russia has been a significant source of our profit growth, but is now experiencing an economic downturn, which if sustained may have a material adverse impact on our business and financial results. Additionally, our cost of goods, our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates. For example, ~~the~~ the recent weakening of foreign currencies negatively impacted our earnings in ~~2008~~2009 compared with the prior year.

If we are unable to maintain brand image and product quality, or if we encounter other product issues such as product recalls, our business may suffer.

Maintaining a good reputation globally is critical to our success. If we fail to maintain high standards for product quality, or if we fail to maintain high ethical, social and environmental standards for all of our operations and activities, our reputation could be jeopardized. In addition, we may be liable if the consumption of any of our products causes injury or illness, and we may be required to recall products if they become contaminated or are damaged or mislabeled. A significant product liability or other product-related legal judgment against us or a widespread recall of our products could have a material adverse effect on our business and financial results.

Our success depends on key members of our management, the loss of whom could disrupt our business operations.

Our success depends largely on the efforts and abilities of key management employees. Key management employees are not parties to employment agreements with us. The loss of the services of key personnel could have a material adverse effect on our business and financial results.

If we are unable to renew collective bargaining agreements on satisfactory terms, or if we experience strikes, work stoppages or labor unrest, our business may suffer.

Approximately 3130% of our U.S. and Canadian employees are covered by collective bargaining agreements. These agreements generally expire at various dates over the next five years. Our inability to successfully renegotiate these agreements could cause work stoppages and interruptions, which may adversely impact our operating results. The terms and conditions of existing or renegotiated agreements could also increase our costs or otherwise affect our ability to increase our operational efficiency.

Benefits cost increases could reduce our profitability or cash flow.

Our profitability and cash flow is substantially affected by the costs of pension, postretirement medical and employee medical and other benefits. Recently, these costs have ~~increased~~ increased significantly due to factors such as ~~declines~~fluctuations in investment returns on pension assets, changes in discount rates used to calculate pension and related liabilities, and increases in in health care costs. Although we actively seek to control increases, there can be no assurance that we will succeed in limiting future cost increases, and continued upward pressure in ~~these~~ these costs could have a material adverse affect on our business and financial performance.

Our failure to effectively manage our information technology infrastructure could disrupt our operations and negatively impact our business.

We rely on information technology systems to process, transmit, store and protect electronic information. Additionally, a significant portion of the communications between our personnel, customers, and suppliers depends on information technology. If we do not effectively manage our information technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions and data security breaches.

Adverse weather conditions could reduce the demand for our products.

Demand for our products is influenced to some extent by the weather conditions in the markets in which we operate. Weather conditions in these markets, such as unseasonably cool temperatures, could have a material adverse effect on our sales volume and financial results.

Catastrophic events in the markets in which we operate could have a material adverse effect on our financial condition.

Natural disasters, terrorism, pandemic, strikes or other catastrophic events could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to manage such events effectively if they occur, could adversely affect our sales volume, cost of raw materials, earnings and financial results.


ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.


ITEM 2.		PROPERTIES

Our corporate headquarters is located in leased property in Somers, New York. In addition, we have a total of ~~591~~ 590 manufacturing and distribution facilities, as follows:

	U.S. & Canada		Europe		Mexico
Manufacturing Facilities
Owned		5150		1415		22
Leased		2		–—		3
Other		43		–—		–—
Total		5755		1415		25
Distribution Facilities
Owned		222		1211		8481
Leased		4951		4855		8075
Total		~~271~~273		6066		~~164~~156

We also own or lease and operate approximately 3837,~~500~~100 vehicles, including delivery trucks, delivery and transport tractors and trailers and other trucks and vans used in the sale and distribution of our beverage products. We also own more than two million coolers, soft drink dispensing fountains and vending machines.

With a few exceptions, leases of plants in the U.S. & Canada are on a long-term basis, expiring at various times, with options to renew for additional periods. Our leased facilities in Europe and Mexico are generally leased for varying and usually shorter periods, with or without renewal options. We believe that our properties are in good operating condition and are adequate to serve our current operational needs.


ITEM 3.		LEGAL PROCEEDINGS

From time to time we are a party to various litigation proceedings arising in the ordinary course of our business, none of which, in the opinion of management, is likely to have a material adverse effect on our financial condition or results of operations.

For further information about our legal proceedings see Note 18 in the Notes to Consolidated Financial Statements, which discussion is incorporated herein by reference.


ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

15 11

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange under the symbol “PBG.” Our Class B common stock is not publicly traded. On February 612, ~~2009~~2010, the last sales price for our common ~~stock~~ stock on the New York Stock Exchange was $2137.0282 per share. The following table sets forth the ~~high~~intra-day high and low sales prices per share of our common stock during each of our fiscal quarters in ~~2008~~ ~~and~~2009 ~~2007.~~and 2008.

2008	High		Low
2009		High		Low
First Quarter	$	41$23.7476	$	32$16.1582
Second Quarter	$	$34.7483	$	30$19.7159
Third Quarter	$	31$36.4657	$	26$32.4752
Fourth Quarter	$	32$38.4774	$	16$36.4902
2008		High		Low
First Quarter		$42.02		$31.53
Second Quarter		$35.10		$30.40
Third Quarter		$31.97		$26.02
Fourth Quarter		$33.13		$15.78

2007	High		Low
First Quarter	$	32.54	$	30.13
Second Quarter	$	35.23	$	31.55
Third Quarter	$	36.76	$	32.35
Fourth Quarter	$	43.38	$	34.72

Shareholders

~~Shareholders –~~ As of February 65, ~~2009~~2010, there were approximately 5647,~~777~~ 893 registered and beneficial holders of our common stock. PepsiCo is the holder of all of our outstanding shares of Class B common stock.

Dividend ~~Policy –~~ ~~Quarterly cash dividends are~~Policy usually declared in late January or early February, March, July and October and paid at the end of March, June, and September and at the beginning of January. The dividend record dates for 2009 are expected to be March 6, June 5, September 4 and December 4.

We Quarterly cash dividends are usually declared ~~the~~in ~~following~~late ~~dividends~~January onor ~~our~~early ~~common~~February, ~~stock~~March, ~~during~~July ~~fiscal~~and ~~years~~October ~~2008~~and paid at the end of March, June, and ~~2007:~~September and at the beginning of January. The dividend record date for the first quarter of 2010 is March 5, 2010.

Quarter	2008		2007
1	$	.14	$	.11
2	$	.17	$	.14
3	$	.17	$	.14
4	$	.17	$	.14
Total	$	.65	$	.53

We declared the following dividends on our common stock during fiscal years 2009 and 2008:

Performance Graph – The following performance graph compares the cumulative total return of our common stock to the Standard & Poor’s 500 Stock Index and to an index of peer companies selected by us (the “Bottling Group Index”). The Bottling Group Index consists of Coca-Cola Hellenic Bottling Company S.A., Coca-Cola Bottling Co. Consolidated, Coca-Cola Enterprises Inc., Coca-Cola FEMSA ADRs, and PepsiAmericas, Inc. The graph assumes the return on $100 invested on December 27, 2003 until December 27, 2008. The returns of each member of the Bottling Group Index are weighted according to each member’s stock market capitalization as of the beginning of the period measured and includes the subsequent reinvestment of dividends.


Quarter	2009	2008

1	$.17	$.14
2	$.18	$.17
3	$.18	$.17
4	$.18	$.17

Total	$.71	$.65

	Year-ended
	2003		2004		2005		2006		2007		2008
PBG(1)		100		114		122		134		175		99
Bottling Group Index		100		106		116		140		205		105
Standard & Poor’s 500 Index		100		112		118		137		145		88

(1) The closing price for a share of our common stock on December 26, 2008, the last trading day of our fiscal year, was $22.00.

~~PBG~~Performance ~~Purchases of Equity~~Graph Securities – We did not repurchase shares in the fourth quarter of 2008. We repurchased approximately 15.0 million shares of PBG common stock during fiscal year 2008. Since the inception of our share repurchase program in October 1999 and through the end of fiscal year 2008, approximately 146.5 million shares of PBG common stock have been repurchased. Our share repurchases for the fourth quarter of 2008 are as follows:

Maximum

Number (or

Total Number

Approximate

of Shares

Dollar Value)

(or Units)

of Shares

Purchased

(or Units)

Total

as Part of

that May Yet

Number

Average

Publicly

Be Purchased

of Shares

Price Paid

Announced

Under the

(or Units)

per Share

Plans or

Period

Purchased(1)

(or Unit)(2)

Programs(3)

Period 10

09/07/08-10/04/08

–

28,540,400

Period 11

10/05/08-11/01/08

–

28,540,400

Period 12

11/02/08-11/29/08

–

28,540,400

Period 13

11/30/08-12/27/08

–

28,540,400

Total

–

The following performance graph compares the cumulative total return of our common stock to the Standard & Poor’s 500 Stock Index and to an index of peer companies selected by us (the “Bottling Group Index”). The Bottling Group Index consists of Coca-Cola Hellenic Bottling Company S.A., Coca-Cola Bottling Co. Consolidated, Coca-Cola Enterprises Inc., Coca-Cola FEMSA ADRs, and PepsiAmericas, Inc. The graph assumes the return on $100 invested on December 25, 2004 until December 26, 2009. The returns of each member of the Bottling Group Index are weighted according to each member’s stock market capitalization as of the beginning of the period measured and includes the subsequent reinvestment of dividends.


	Year-ended
	2004		2005		2006		2007		2008		2009

PBG⁽¹⁾		100		108		118		154		87		152
Bottling Group Index		100		110		133		193		100		169
S & P 500 Index		100		105		122		129		78		103


(1)		The closing price for a share of our common stock on December 24, 2009, the last trading day of our fiscal year, was $37.56.

PBG Purchases of Equity Securities

We did not repurchase shares in 2009. Since the inception of our share repurchase program in October 1999 and through the end of fiscal year 2009, approximately 146 million shares of PBG common stock have been repurchased. Our share repurchases for the fourth quarter of 2009 are as follows:

Maximum

Number (or

Total Number

Approximate

of Shares

Dollar Value)

(or Units)

of Shares

Purchased

(or Units)

Total

as Part of

that May Yet

Number

Average

Publicly

Be Purchased

of Shares

Price Paid

Announced

Under the

(or Units)

per Share

Plans or

Period

Purchased(1)

(or Unit)(2)

Programs(3)

Period 10

09/06/09-10/03/09

—

28,540,400

Period 11

10/04/09-10/31/09

—

28,540,400

Period 12

11/01/09-11/28/09

—

28,540,400

Period 13

11/29/09-12/26/09

—

28,540,400

Total

—


(1)		Shares have only been repurchased through publicly announced programs.

(2)		Average share price excludes brokerage fees.

(3)		Our Board has authorized the repurchase of shares of our common stock on the open market and through negotiated transactions as follows:

	Number of Shares
Date Share Repurchase Programs	Authorized to be
were Publicly Announced	Repurchased
October 14, 1999		20,000,000
July 13, 2000		10,000,000
July 11, 2001		20,000,000
May 28, 2003		25,000,000
March 25, 2004		25,000,000
March 24, 2005		25,000,000
December 15, 2006		25,000,000
March 27, 2008		25,000,000
Total shares authorized to be repurchased as of December 27, 2008		175,000,000
Total shares authorized to be repurchased as of December 26, 2009		175,000,000

Unless terminated by resolution of our Board, each share repurchase program expires when we have repurchased all shares authorized for repurchase thereunder.

18 13

PART II (continued)


ITEM 6.		SELECTED FINANCIAL DATA

SELECTED FINANCIAL AND OPERATING DATA in millions, except per share data

in millions, except per share data


Fiscal years ended	2009⁽¹⁾			2008⁽²⁾			2007⁽³⁾			2006⁽⁴⁾			2005⁽⁵⁾
Statement of Operations Data:
Net revenues	$	13,219		$	13,796		$	13,591		$	12,730		$	11,885
Cost of sales		7,379			7,586			7,370			6,900			6,345

Gross profit		5,840			6,210			6,221			5,830			5,540
Selling, delivery and administrative expenses		4,792			5,149			5,150			4,813			4,517
Impairment charges		—			412			—			—			—

Operating income		1,048			649			1,071			1,017			1,023
Interest expense, net		303			290			274			266			250
Other non-operating (income) expenses, net		(4	)		25			(6	)		11			1

Income before income taxes		749			334			803			740			772
Income tax expense^{(6) (7) (8)}		43			112			177			159			247

Net income		706			222			626			581			525
Less: Net income attributable to noncontrolling interests		94			60			94			59			59

Net income attributable to PBG	$	612		$	162		$	532		$	522		$	466

Per Share Data Attributable to PBG’s Common Shareholders:
Basic earnings per share	$	2.84		$	0.75		$	2.35		$	2.22		$	1.91
Diluted earnings per share	$	2.77		$	0.74		$	2.29		$	2.16		$	1.86
Cash dividends declared per share	$	0.71		$	0.65		$	0.53		$	0.41		$	0.29
Weighted-average basic shares outstanding		216			216			226			236			243
Weighted-average diluted shares outstanding		221			220			233			242			250

Other Financial Data:
Cash provided by operations	$	1,108		$	1,284		$	1,437		$	1,228		$	1,219
Capital expenditures	$	(556	)	$	(760	)	$	(854	)	$	(725	)	$	(715	)
Balance Sheet Data (at period end):
Total assets	$	13,570		$	12,982		$	13,115		$	11,927		$	11,524
Long-term debt	$	5,449		$	4,784		$	4,770		$	4,754		$	3,939
Noncontrolling interests	$	1,292		$	1,148		$	973		$	540		$	496
Accumulated other comprehensive loss⁽⁹⁾	$	(596	)	$	(938	)	$	(48	)	$	(361	)	$	(262	)
PBG shareholders’ equity	$	2,417		$	1,343		$	2,615		$	2,084		$	2,043

Fiscal years ended	2008(1)			2007(2)			2006(3)(4)			2005(3)(5)			2004(3)
(1)	Our fiscal year 2009 results include a $40 million pre-tax charge for advisory fees related to the pending merger with PepsiCo and a $24 million pre-tax charge related to restructuring charges. See Items Affecting Comparability of Our Financial Results in Item 7.
Statement of Operations Data:
(2)	Our fiscal year 2008 results include $412 million in pre-tax non-cash impairment charges relating primarily to distribution rights and product brands in Mexico and an $83 million pre-tax charge related to restructuring charges. See Items Affecting Comparability of Our Financial Results in Item 7.
Net revenues	$	13,796		$	13,591		$	12,730		$	11,885		$	10,906
(3)	Our fiscal year 2007 results include a $30 million pre-tax charge related to restructuring charges and a $23 million pre-tax charge related to our asset disposal plan. See Items Affecting Comparability of Our Financial Results in Item 7.
Cost of sales		7,586			7,370			6,900			6,345			5,656
(4)	In fiscal year 2006, we adopted accounting guidance related to share-based payments resulting in a $65 million decrease in operating income or $0.17 per diluted earnings per share. Results for prior periods have not been restated as provided for under the modified prospective approach.
Gross profit		6,210			6,221			5,830			5,540			5,250
(5)	Our fiscal year 2005 results include an extra week of activity. The pre-tax income generated from the extra week was spent back in strategic initiatives within our selling, delivery and administrative expenses and, accordingly, had no impact on our diluted earnings per share.
Selling, delivery and administrative expenses		5,149			5,150			4,813			4,517			4,274
(6)	Our fiscal year 2009 results include a non-cash tax benefit of $158 million due to tax audit settlements in the U.S., Canada and our international jurisdictions, partially offset by a net non-cash tax charge of $65 million due to tax law changes in Canada and Mexico. See Items Affecting Comparability of Our Financial Results in Item 7.
Impairment charges		412			–			–			–			–
(7)	Our fiscal year 2007 results include a non-cash tax benefit of $46 million due to the reversal of net tax contingency reserves and a net non-cash tax benefit of $13 million due to tax law changes in Canada and Mexico. See Items Affecting Comparability of Our Financial Results in Item 7.
Operating income		649			1,071			1,017			1,023			976
(8)	Our fiscal year 2006 results include a tax benefit of $11 million from tax law changes in Canada, Turkey, and in various U.S. jurisdictions and a $55 million tax benefit from the reversal of tax contingency reserves due to completion of our IRS audit of our 1999-2000 income tax returns.
Interest expense, net		290			274			266			250			230
(9)	In fiscal year 2006, we recorded a $159 million loss, net of taxes and noncontrolling interests, to accumulated other comprehensive loss related to the adoption of new pension and postretirement rules, requiring the Company to record the funded status of each of our pension and postretirement plans.
Other non-operating expenses (income), net		25			(6	)		11			1			1
Minority interest		60			94			59			59			56
Income before income taxes		274			709			681			713			689
Income tax expense(6)(7)(8)		112			177			159			247			232
Net income	$	162		$	532		$	522		$	466		$	457
Per Share Data:
Basic earnings per share	$	0.75		$	2.35		$	2.22		$	1.91		$	1.79
Diluted earnings per share	$	0.74		$	2.29		$	2.16		$	1.86		$	1.73
Cash dividends declared per share	$	0.65		$	0.53		$	0.41		$	0.29		$	0.16
Weighted-average basic shares outstanding		216			226			236			243			255
Weighted-average diluted shares outstanding		220			233			242			250			263
Other Financial Data:
Cash provided by operations	$	1,284		$	1,437		$	1,228		$	1,219		$	1,222
Capital expenditures	$	(760	)	$	(854	)	$	(725	)	$	(715	)	$	(688	)
Balance Sheet Data (at period end):
Total assets	$	12,982		$	13,115		$	11,927		$	11,524		$	10,937
Long-term debt	$	4,784		$	4,770		$	4,754		$	3,939		$	4,489
Minority interest	$	1,148		$	973		$	540		$	496		$	445
Accumulated other comprehensive loss(9)	$	(938	)	$	(48	)	$	(361	)	$	(262	)	$	(315	)
Shareholders’ equity	$	1,343		$	2,615		$	2,084		$	2,043		$	1,949

(1)	Our fiscal year 2008 results include a $412 million pre-tax non-cash impairment charge related primarily to distribution rights and product brands in Mexico and an $83 million pre-tax charge related to restructuring charges. See Items Affecting Comparability of Our Financial Results in Item 7.
(2)	Our fiscal year 2007 results include a $30 million pre-tax charge related to restructuring charges and a $23 million pre-tax charge related to our asset disposal plan. See Items Affecting Comparability of Our Financial Results in Item 7.
(3)	In 2007, we made a classification correction for certain miscellaneous costs incurred from product losses in the trade. Approximately $90 million and $92 million of costs incurred, which were incorrectly included in selling, delivery and administrative expenses, were reclassified to cost of sales in our Consolidated Statements of Operations for the years ended 2006 and 2005, respectively. We have not reclassified these expenses for the 2004 fiscal year.
(4)	In fiscal year 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” resulting in a $65 million decrease in operating income or $0.17 per diluted earnings per share. Results for prior periods have not been restated as provided for under the modified prospective approach.
(5)	Our fiscal year 2005 results include an extra week of activity. The pre-tax income generated from the extra week was spent back in strategic initiatives within our selling, delivery and administrative expenses and, accordingly, had no impact on our diluted earnings per share.
(6)	Our fiscal year 2007 results include a non-cash tax benefit of $46 million due to the reversal of net tax contingency reserves and a net non-cash benefit of $13 million due to tax law changes in Canada and Mexico. See Note 13 in the Notes to Consolidated Financial Statements.
(7)	Our fiscal year 2006 results include a tax benefit of $11 million from tax law changes in Canada, Turkey, and in various U.S. jurisdictions and a $55 million tax benefit from the reversal of tax contingency reserves due to completion of our IRS audit of our 1999-2000 income tax returns. See Note 13 in the Notes to Consolidated Financial Statements.
(8)	Our fiscal year 2004 results include Mexico tax law change benefit of $26 million and international tax restructuring charge of $30 million.
(9)	In fiscal year 2006, we adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” and recorded a $159 million loss, net of taxes and minority interest, to accumulated other comprehensive loss.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

MANAGEMENT’S FINANCIAL REVIEW


MANAGEMENT’S FINANCIAL REVIEW
Our Business			21
Critical Accounting Policies			22
Other Intangible Assets net, and Goodwill			22
Pension and Postretirement Medical Benefit Plans			23
Casualty Insurance Costs			25
Income Taxes			26
Relationship with PepsiCo			26
Items Affecting Comparability of Our Financial Results			27
Financial Performance Summary and Worldwide Financial Highlights for Fiscal Year 2009			30
Results of Operations By Segment			31
Liquidity and Financial Condition			37
Market Risks and Cautionary Statements			40

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations			43
Consolidated Statements of Cash Flows			44
Consolidated Balance Sheets			45
Consolidated Statements of Changes in Equity			46
Consolidated Statements of Comprehensive Income (Loss)			47
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation			48
Note 2 - Summary of Significant Accounting Policies			48
Note 3 - Earnings per Share			53
Note 4 - Share-Based Compensation			54
Note 5 - Balance Sheet Details			56
Note 6 - Other Intangible Assets, net and Goodwill			57
Note 7 - Fair Value Measurements			58
Note 8 - Short-Term Borrowings and Long-Term Debt			60
Note 9 - Leases			61
Note 10 - Financial Instruments and Risk Management			62
Note 11 - Pension and Postretirement Medical Benefit Plans			64
Note 12 - Income Taxes			69
Note 13 - Segment Information			73
Note 14 - Related Party Transactions			74
Note 15 - Restructuring Charges			76
Note 16 - Accumulated Other Comprehensive Loss			77
Note 17 - Supplemental Cash Flow Information			77
Note 18 - Contingencies			78
Note 19 - Stockholders’ Rights Agreement			79
Note 20 - Selected Quarterly Financial Data (unaudited)			80
Note 21 - Subsequent Event			81
Report of Independent Registered Public Accounting Firm			82

Our Business			16
Critical Accounting Policies			17
Other Intangible Assets net, and Goodwill			17
Pension and Postretirement Medical Benefit Plans			17
Casualty Insurance Costs			19
Income Taxes			19
Relationship with PepsiCo			20
Items Affecting Comparability of Our Financial Results			20
Financial Performance Summary and Worldwide Financial Highlights for Fiscal Year 2008			22
Results of Operations By Segment			22
Liquidity and Financial Condition			26
Market Risks and Cautionary Statements			28

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations			31
Consolidated Statements of Cash Flows			32
Consolidated Balance Sheets			33
Consolidated Statements of Changes in Shareholders’ Equity			34
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation			35
Note 2 – Summary of Significant Accounting Policies			35
Note 3 – Earnings per Share			38
Note 4 – Share-Based Compensation			39
Note 5 – Balance Sheet Details			41
Note 6 – Other Intangible Assets, net and Goodwill			41
Note 7 – Investment in Noncontrolled Affiliate			42
Note 8 – Fair Value Measurements			42
Note 9 – Short-Term Borrowings and Long-Term Debt			43
Note 10 – Leases			44
Note 11 – Financial Instruments and Risk Management			44
Note 12 – Pension and Postretirement Medical Benefit Plans			46
Note 13 – Income Taxes			49
Note 14 – Segment Information			51
Note 15 – Related Party Transactions			52
Note 16 – Restructuring Charges			53
Note 17 – Accumulated Other Comprehensive Loss			54
Note 18 – Supplemental Cash Flow Information			54
Note 19 – Contingencies			54
Note 20 – Selected Quarterly Financial Data (unaudited)			54
Note 21 – Subsequent Event			54
Report of Independent Registered Public Accounting Firm			55

PART II (continued)

MANAGEMENT’S FINANCIAL REVIEW

Tabular dollars in millions, except per share data

OUR BUSINESS

The Pepsi Bottling Group, Inc. is the world’s largest manufacturer, seller and distributor of Pepsi-Cola beverages. When used in these Consolidated Financial Statements, “PBG,” “we,” “our,” “us” and the “Company” each refers to The Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC (“Bottling LLC”), our principal operating subsidiary.

We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of the U.S., Mexico, Canada, Spain, Russia, Greece and Turkey. PBG manages and ~~reports~~ reports operating results through three reportable segments: U.S. & Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico. As shown in the graph below, the U.S. & Canada segment is the dominant driver of our results, generating 68 percent of our volume, ~~and 75~~78 percent of our net revenues and 84 percent of our operating income.

~~Volume~~ The ~~Total:~~majority 1of our volume is derived from brands licensed from PepsiCo, Inc.6 ~~Billion~~(“PepsiCo”) ~~Raw~~or PepsiCo ~~Cases~~joint ~~Revenue~~ventures. ~~Total:~~These ~~$13~~brands are some of the most recognized in the world and consist of carbonated soft drinks (“CSDs”) and non-carbonated beverages.8 ~~Billion~~Our CSDs include brands such as Pepsi-Cola, Diet Pepsi, Diet Pepsi Max, Mountain Dew and Sierra Mist. Our non-carbonated beverages portfolio includes brands with Starbucks Frapuccino in the ready-to-drink coffee category; Amp Energy and SoBe Adrenaline Rush in the energy drink category; SoBe and Tropicana in the juice and juice drinks category; Aquafina in the water category; and Lipton Iced Tea in the tea category. We continue to strengthen our powerful portfolio highlighted by our focus on the hydration category with SoBe Lifewater, Propel fitness water and G2 in the United States. In some of our territories we have the right to manufacture, sell and distribute soft drink products of companies other than PepsiCo, including Dr Pepper, Crush, Squirt and Rockstar. We also have the right in some of our territories to manufacture, sell and distribute beverages under brands that we own, including Electropura, e-pura and Garci Crespo. See Part I, Item 1 of this report for a listing of our principal products by segment.

The majority of our volume is derived from brands licensed from PepsiCo, Inc. (“PepsiCo”) or PepsiCo joint ventures. These brands are some of the most recognized in the world and consist of carbonated soft drinks (“CSDs”) and non-carbonated beverages. Our CSDs include brands such as Pepsi-Cola, Diet Pepsi, Diet Pepsi Max, Mountain Dew and Sierra Mist. Our non-carbonated beverages portfolio includes brands with Starbucks Frapuccino in the ready-to-drink coffee category; Mountain Dew Amp and SoBe Adrenaline Rush in the energy drink category; SoBe and Tropicana in the juice and juice drinks category; Aquafina in the water category; and Lipton Iced Tea in the tea category. We continue to strengthen our powerful portfolio highlighted by our focus on the hydration category with SoBe Life Water, Propel fitness water and G2 in the U.S. In some of our territories we have the right to manufacture, sell and distribute soft drink products of companies other than PepsiCo, including Dr Pepper, Crush and Squirt. We also have the right in some of our territories to manufacture, sell and distribute beverages under brands that we own, including Electropura, e-pura and Garci Crespo. See Part I, Item 1 of this report for a listing of our principal products by segment.

We sell our products through cold-drink and take-home channels. Our cold-drink channel consists of chilled products sold in the retail and foodservice channels. We earn the highest profit margins on a per-case basis in the cold-drink channel. Our take-home channel consists of unchilled products that are sold in the retail, mass merchandiser and club store channels for at-home consumption.

Our products are brought to market primarily through direct store delivery (“DSD”) or third-party distribution, including foodservice and vending distribution networks. The hallmarks of the Company’s DSD system are customer service, speed to market, flexibility and reach. These are all critical factors in bringing new products to market, adding accounts to our existing base and meeting increasingly diverse volume demands.

Our customers range from large format accounts, including large chain foodstores, supercenters, mass merchandisers, chain drug stores, club stores and military bases, to small ~~independently~~ independently owned shops and foodservice businesses. ~~Changing~~Changes in consumer shopping trends and current ~~“on-the-go”~~economic ~~lifestyles~~trends are shifting more of our volume to ~~fast-growing~~ channels such as supercenters, club and dollar stores. Retail consolidation continues to increase the strategic significance of our large-volume customers. InNo ~~2008,~~individual ~~sales~~customer toaccounted ~~our~~for ~~top five retail customers represented approximately 19~~10 percent ofor ~~our~~more ~~net~~of ~~revenues.~~

our total revenue in 2009, except for sales to Walmart Stores, Inc. and its affiliates which were 11 percent of our revenue in 2009, primarily as a result of transactions in the U.S. & Canada segment. Sales to our top five retail customers represented approximately 21 percent of our net revenues in 2009.

PBG’s focus is on superior sales execution, customer service, merchandising and operating excellence. Our goal is to help our customers grow their beverage business by making our portfolio of brands readily available to consumers at every shopping occasion, using proven methods to grow not only PepsiCo brand sales, but the overall beverage category. Our objective is to ensure we have the right product in the right package to satisfy the ever changing needs of today’s consumers.

We measure our sales in terms of physical cases sold to our customers. Each package, as sold to our customers, regardless of configuration or number of units within a package, represents one physical case. Our net price and gross margin on a per-case basis are impacted by how much we charge for the product, the mix of brands and packages we sell, and the channels through which the product is sold. For example, we realize a higher net revenue and gross margin per case on a 20-ounce chilled bottle sold in a convenience store than on a 2-liter unchilled bottle sold in a grocery store.

Our financial success is dependent on a number of factors, including: our strong partnership with PepsiCo, the customer relationships we cultivate, the pricing we achieve in the marketplace, our market execution, our ability to meet changing consumer preferences and the efficiencies we achieve in manufacturing and distributing our products. Key indicators of our financial success are: the number of physical cases we sell, the net price and gross margin we achieve on a per-case basis, cash and capital management and our overall cost productivity which reflects how well we ~~manage~~ manage our raw material, manufacturing, distribution and other overhead ~~costs,~~ ~~and cash and capital management~~costs.

The discussion and analysis throughout Management’s Financial Review should be read in conjunction with the Consolidated Financial Statements and the related accompanying notes. The preparation of our Consolidated Financial Statements in and the related accompanying notes in conformity with accounting principles generally accepted in the ~~United States of America (“~~U.S. (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts in our Consolidated Financial Statements ~~and~~ and the related accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising ~~from~~out of the normal course of business. We apply our best judgment, our knowledge of existing facts and circumstances and actions that we may undertake in the future, in determining the estimates that affect our Consolidated Financial Statements. We evaluate our estimates on an on-going basis using our historical experience as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effect cannot be determined with precision, actual results may differ from these estimates.

We evaluate our estimates on an on-going basis using our historical experience as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effect cannot be determined with precision, actual results may differ from these estimates.

CRITICAL ACCOUNTING POLICIES

~~Significant~~ Our significant accounting policies are discussed in Note 2 in the Notes to Consolidated Financial Statements. Management believes the following policies, which require the use of estimates, assumptions and the application of judgment, to be the most critical to the portrayal of PBG’s results of operations and financial condition. We applied ~~our~~these ~~critical~~ accounting policies and estimation methods consistently in all material respects and have discussed the selection of these policies and related disclosures with the Audit and Affiliated Transactions Committee of our Board of Directors.

~~Other Intangible~~OTHER ~~Assets~~INTANGIBLE ASSETS, ~~net~~NET ~~and~~AND ~~Goodwill~~GOODWILL

Our intangible assets consist primarily of franchise rights, distribution rights, licensing rights, brands and goodwill and principally arise from the allocation of the purchase price of businesses acquired. These intangible assets, other than goodwill, are classified as either finite-lived intangibles or indefinite-lived intangibles.

The classification of ~~intangibles~~intangible assets and the determination of the appropriate useful life require substantial judgment. The determination of the expected life depends upon the use and underlying characteristics of the intangible asset. In our evaluation of the expected life of these intangible assets, we consider the nature and terms of the underlying agreements; our intent and ability to use the specific asset; the age and market position of the products within the territories in which we are entitled to sell; the historical and projected growth of those products; and costs, if any, to renew the related agreement.

Intangible assets that are determined to have a finite life are amortized over their expected useful life, which generally ranges from five to twenty years. For intangible assets with finite lives, evaluations for impairment are performed only if facts and circumstances indicate that the carrying value may not be recoverable.

22 Goodwill and other intangible assets with indefinite lives are not amortized; however, they are evaluated for impairment at least annually or more frequently if facts and circumstances indicate that the assets may be impaired. Prior to 2008, the Company completed this test in the fourth quarter. During 2008, the Company changed its impairment testing of goodwill and intangible assets with indefinite useful lives to the third quarter, with the exception of Mexico’s intangible assets. Impairment testing of Mexico’s intangible assets with indefinite useful lives was completed in the fourth quarter to coincide with the completion of our strategic review of the business.

Intangible assets with indefinite lives and goodwill are not amortized; however, they are evaluated for impairment at least annually or more frequently if facts and circumstances indicate that the assets may be impaired.

We evaluate intangible assets with indefinite useful lives for impairment by comparing the fair values of the assets with their carrying values. The fair value of our franchise rights and distribution rights is measured using a multi-period excess earnings method that is based upon estimated discounted future cash flows. The fair value of our brands and licensing rights is measured using a multi-period royalty savings method, which reflects the savings realized by owning the brand or licensing right and, therefore, not requiring payment of third party royalty fees.

We evaluate goodwill for impairment at the reporting unit level, which we determined to be the countries in which we operate. We evaluate goodwill for impairment by comparing the fair value of the reporting unit, as determined by its discounted cash flows, with its carrying value. If the carrying value of a reporting unit exceeds its fair value, we compare the implied fair value of the reporting unit’s goodwill with its carrying amount to measure the amount of impairment loss.

Considerable management judgment is necessary to estimate discounted future cash flows in Weconducting ~~evaluate~~an impairment analysis for goodwill and other intangible assets. ~~with~~The ~~indefinite~~cash ~~useful~~flows ~~lives~~may be ~~for~~impacted ~~impairment~~by future actions taken by ~~comparing~~us ~~the~~and ~~fair~~our ~~values~~competitors ofand the ~~assets~~volatility ~~with~~of macroeconomic ~~their~~conditions ~~carrying~~in ~~values.~~the ~~The~~markets ~~fair~~in ~~value~~which ofwe conduct business. Assumptions used in our ~~franchise~~impairment analysis, ~~rights~~such as forecasted growth rates, ~~distribution~~ ~~rights~~cost of capital and ~~licensing~~additional ~~rights~~risk ispremiums ~~measured~~used ~~using~~in athe ~~multi~~valuations, are based on the best available market information and are consistent with our long-~~period~~term ~~excess~~strategic ~~earnings~~plans. ~~method~~An ~~that~~inability isto ~~based~~achieve ~~upon~~strategic ~~estimated~~business plan targets in a reporting ~~discounted~~unit, ~~future~~a ~~cash~~change ~~flows.~~in ~~The~~our discount rate or other assumptions could have a significant impact on the fair value of our ~~brands~~reporting ~~is measured~~units ~~using~~and other intangible assets, which could then result in a material ~~multi~~non-~~period~~cash ~~royalty~~impairment ~~savings~~charge ~~method,~~to ~~which~~our results of operations. The weakening of global ~~reflects~~macroeconomic ~~the~~conditions ~~savings~~has ~~realized~~had bya ~~owning~~negative ~~the~~impact ~~brand~~on ~~and,~~our business results. If these conditions ~~therefore~~continue, ~~not~~the ~~requiring~~fair ~~payment~~value of ~~third~~our ~~party~~intangible ~~royalty~~assets ~~fees~~could be adversely impacted.

~~Considerable~~ In ~~management~~the ~~judgment~~third isquarter ~~necessary~~of to2009, ~~estimate discounted~~the ~~future~~Company ~~cash~~completed ~~flows~~its ~~in conducting an~~ impairment ~~analysis~~ ~~for~~test of goodwill and indefinite ~~other~~lived ~~intangible~~ assets. ~~The cash flows may be impacted by future actions taken by us~~ and ~~our competitors~~recorded ~~and~~no ~~the~~impairment ~~volatility of macroeconomic conditions in the markets in which we conduct business~~charge. ~~Assumptions~~During ~~used in our impairment analysis~~2008, ~~such~~the asCompany ~~forecasted~~recorded ~~growth rates, cost~~$412 ofmillion ~~capital and additional risk premiums used~~ in ~~the valuations, are based on the best available market information and are consistent with our long~~non-~~term~~cash ~~strategic~~impairment ~~plans.~~charges Anrelating ~~inability~~primarily to ~~achieve~~ ~~strategic~~distribution ~~business~~rights ~~plan~~and ~~targets~~brands infor ~~a reporting unit, a change in our discount rate or other assumptions could have a significant impact on~~ the ~~fair value of our reporting units and~~ ~~other~~Electropura ~~intangible~~water ~~assets,~~business ~~which could then result~~ in aMexico. ~~material non-cash~~The impairment charge relating to ~~our~~these ~~results~~intangible ~~of operations. The~~assets ~~recent~~was ~~volatility~~based inupon the ~~global~~findings ~~macroeconomic~~of ~~conditions~~an ~~has~~extensive ~~had a~~strategic ~~negative~~review ~~impact~~and ~~on our business results. If this volatility continues to persist into~~ the ~~future,~~finalization ~~the fair value~~ of ~~our~~restructuring ~~intangible~~plans ~~assets~~for ~~could~~our beMexican ~~adversely impacted~~business.

As For afurther ~~result~~information ofabout ~~the~~our ~~2008 impairment test for~~ goodwill and other ~~intangible~~ assets with indefinite lives, the Company recorded a $412 million non-cash impairment charge relating primarily to distribution rights and brands for the Electropura water business in Mexico. The impairment charge relating to these intangible assets ~~was~~see ~~based~~Note ~~upon~~6 ~~the findings of an extensive~~Other ~~strategic~~Intangible ~~review~~Assets, ~~and~~net ~~the finalization of restructuring plans for our Mexican business. In light of the weakening macroeconomic conditions~~ and ~~our~~Goodwill ~~outlook for the business~~ in ~~Mexico, we lowered our expectation of~~ the ~~future~~Notes ~~performance,~~to ~~which~~Consolidated ~~reduced the~~Financial ~~value of these intangible assets and triggered the impairment charge~~Statements. ~~After recording the above mentioned~~ ~~impairment charge, Mexico’s remaining net book value of goodwill and other intangible assets is approximately $367 million.~~

~~For~~PENSION ~~further~~AND ~~information~~POSTRETIREMENT ~~about~~MEDICAL ~~our~~BENEFIT ~~goodwill and other intangible~~PLANS ~~assets see Note 6 in the Notes to Consolidated Financial Statements.~~

Pension and Postretirement Medical Benefit Plans

We sponsor pension and other postretirement medical benefit plans in various forms in the United States and similar pension plans in our international locations, covering employees who meet specified eligibility requirements. The assets, liabilities and expenses associated with our international plans were not significant to our worldwide results of operations or financial position, and accordingly, assumptions, expenses, sensitivity analyses and other data regarding these plans are not included in any of the discussions provided below.

In the U.S., the non-contributory defined benefit pension plans provide benefits to certain 17full-time salaried and hourly employees. Benefits are generally based on years of service and compensation, or stated amounts for each year of service. Effective January 1, 2007, newly hired salaried and non-union hourly employees are not eligible to participate in these plans. Additionally, effective April 1, 2009, benefits from these plans are no longer accrued for certain salaried and non-union employees that did not meet specified age and service requirements. The impact of these plan changes will significantly reduce the Company’s future long-term pension obligation, pension expense and cash contributions to the plans. Employees not eligible to participate in these plans or employees whose benefits have been frozen are receiving additional retirement contributions under the Company’s defined contribution plans.

PART II (continued)

In the U.S., the non-contributory defined benefit pension plans provide benefits to certain full-time salaried and hourly employees. Benefits are generally based on years of service and compensation, or stated amounts for each year of service. Effective January 1, 2007, newly hired salaried and non-union hourly employees are not eligible to participate in these plans. Additionally, effective April 1, 2009, benefits from these plans will no longer continue to accrue for certain salaried and non-union employees that do not meet age and service requirements. The impact of these plan changes will significantly reduce the Company’s future long-term pension obligation, pension expense and cash contributions to the plans. Employees not eligible to participate in these plans or employees whose benefits will be discontinued will receive additional Company retirement contributions under the Company’s defined contribution plans.

Substantially all of our U.S. employees meeting age and service requirements are eligible to participate in our postretirement medical benefit plans.

Assumptions

~~Effective~~ During ~~for the~~ 2008 ~~fiscal year~~, the Company ~~adopted~~changed the ~~measurement~~ date provisions of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). As a result of adopting SFAS 158, the Company’s measurement date for plan assets and benefit obligations ~~was changed~~ from September 30 to its fiscal year -end as required by the new pension accounting rules.

The determination of pension and postretirement medical benefit plan obligations and related expenses requires the use of assumptions to estimate the amount of benefits that employees earn ~~while~~ while working, as well as the present value of those benefit obligations. Significant assumptions include discount rate; expected return on plan assets; ~~certain employee-related factors~~ ~~such as retirement age, mortality, and turnover; rate of salary increases for plans where benefits are based on earnings; and for retiree medical plans, health care cost trend rates.~~

certain employee-related factors such as retirement age, mortality, and turnover; rate of salary increases for plans where benefits are based on earnings; and for retiree medical plans, health care cost trend rates.

On an annual basis we evaluate these assumptions, which are based upon historical experience of the plans and management’s best judgment regarding future expectations. These assumptions may differ materially from actual results due to changing market and economic conditions. A change in the assumptions or economic events outside our control could have a material impact on the measurement of our pension and postretirement medical benefit expenses and obligations as well as related funding requirements.

The discount rates used in calculating the present value of our pension and postretirement medical benefit plan obligations are developed based on a yield curve that is comprised of high-quality, non-callable corporate bonds. These bonds are rated Aa or better by Moody’s; have a principal amount of at least $250 million; are denominated in U.S. dollars; and have maturity dates ranging from six months to thirty years, which matches the timing of our expected benefit payments.

The expected rate of return on plan assets for a given fiscal year is based upon actual historical returns and the long-term outlook on asset classes in the pension plans’ investment portfolio. ~~In connection with the pension plan design change we changed our asset allocation targets.~~ The current target asset allocation for the U.S. pension plans is 65 percent ~~equity~~ equity investments, of which approximately half is to be invested in domestic equities and half is to be invested in foreign equities. The remaining 35 percent is to be invested primarily in long-term corporate bonds. Based on our ~~revised~~ asset allocation, historical returns and estimated future outlook of the pension plans’ portfolio, we ~~changed our~~estimate ~~2009~~the ~~estimated~~ long-term rate of return on plan assets assumption ~~from~~to be 8.50 percent toin 82010.~~0 percent.~~

Differences between the assumed rate of return and actual rate of return on plan assets are deferred in accumulated other comprehensive loss (“AOCL”) in equity and amortized to earnings utilizing ~~the~~ the market-related value method. Under this method, differences between the assumed rate of return and actual rate of return from any one year will be recognized over a five -year period to determine the market -related value.

~~Other~~ Differences ~~gains~~between assumed and ~~losses~~actual ~~resulting~~returns ~~from~~on ~~changes~~plan inassets ~~actuarial assumptions~~and other gains and losses resulting from ~~differences~~changes ~~between~~in ~~assumed~~actuarial ~~and~~assumptions ~~actual experience~~ are determined at each measurement date and ~~deferred~~ deferred in ~~accumulated~~AOCL ~~other comprehensive loss~~ in equity. To the extent the amount of all unrecognized gains and losses exceeds 10 percent of the larger of the benefit obligation or ~~plan~~the market-related value of plan assets, such amount is amortized to earnings over the average remaining service period of active participants.

The cost or benefit from benefit plan changes is also deferred in ~~accumulated~~AOCL ~~other comprehensive loss~~ in equity and amortized to earnings on a straight-line basis over the average ~~remaining~~ remaining service period of the employees expected to receive benefits.

Net unrecognized losses and unamortized prior service costs relating to the pension and postretirement plans in the United States, totaled $~~969~~763 million and $~~449~~969 million at December 2726, 2009 ~~2008~~ and December 2927, ~~2007~~2008, respectively.

The following tables provide the weighted-average assumptions for our ~~2009~~2010 and ~~2008~~2009 pension and postretirement medical plans’ expense:

Pension	~~2009~~2010			~~2008~~2009
Discount rate		6.~~20%~~25	%		6.~~70%~~20	%
Expected rate of return on plan assets (net of administrative expenses)		8.00%	%		8.~~50%~~00	%
Rate of compensation increase		3.~~53%~~04	%		3.~~56%~~53	%

Postretirement	~~2009~~2010			~~2008~~2009
Discount rate		65.~~50%~~75	%		6.~~35%~~50	%
Rate of compensation increase		3.~~53%~~43	%		3.~~56%~~53	%
Health care cost trend rate		8.~~75%~~00	%		98.~~50%~~75	%

During ~~2008~~2009, our ongoing defined benefit pension and postretirement medical plan expenses totaled $8798 million~~, which excludes one-time charges of approximately $27 million associated with restructuring actions and our pension plan design change~~. In ~~2009~~2010, these expenses are expected to ~~increase~~decrease by approximately $1115 million to to $9883 million as a result of the following factors:

• AFunding to the pension trust will decrease 2010 pension expense by $16 million. • Recognition of net asset losses will increase our pension expense by $14 million. • An increase in our weighted-average discount rate for our pension expense from 6.7020 percent to 6.2025 percent, reflecting ~~decreases~~increases in the yields of long-term corporate bonds comprising the yield curve., ~~This~~will decrease our 2010 pension expense by approximately $3 million.

24 18

~~change~~• inOther ~~assumption~~factors, including the full-year benefit of plan changes and improved health care experience, will ~~increase~~decrease our ~~2009~~2010 defined benefit pension ~~expense~~and postretirement medical expenses by approximately $18 10 million.

• Asset losses during 2008 will increase our pension expense by $20 million. • A decrease in the rate of return on plan asset assumption from 8.5 percent to 8.0 percent, due to revised asset allocation, historical trends and our projected long-term outlook. This change in assumption will increase our 2009 pension expense by approximately $8 million. • The pension design change, which will freeze benefits of certain salaried and non-union hourly employees, will decrease our 2009 pension expense by approximately $20 million. • Additional expected contributions to the pension trust will decrease 2009 pension expense by $11 million. • Other factors, including improved health care claim experience, will decrease our 2009 defined benefit pension and postretirement medical expenses by approximately $4 million.

In addition, we expect our defined contribution plan expense will increase by $10 million to $15 million due to additional contributions to this plan for employees impacted by the pension design change.

Sensitivity Analysis

It is unlikely that in any given year the actual rate of return will be the same as the assumed long-term rate of return. The following table provides a summary for the last three years of actual rates of return versus expected long-term rates of return for our pension plan assets:

	2008			2007			2006
	2009			2008			2007
Expected rates of return on plan assets (net of administrative expenses)		8.5000	%		8.50	%		8.50	%
Actual rates of return on plan assets (net of administrative expenses)		~~(28~~25.503	)%		12(28.6450	)%		912.7464	%

Sensitivity of changes in key assumptions for our pension and postretirement plans’ expense in 2010 ~~2009~~ are as follows:

• Discount rate – A 25 basis point change in the discount rate would increase or decrease the ~~2009~~2010 expense for the pension and postretirement medical benefit plans by approximately $910 million. • Expected rate of return on plan assets – A 25 basis point change in the expected return on plan assets would increase or decrease the ~~2009~~2010 expense for the pension plans by approximately $4 million. The postretirement medical benefit plans have no expected return on plan assets as they are funded from the general assets of the Company as the payments come due. • Contribution to the plan – A $20 million decrease in planned contributions to the plan for ~~2009~~2010 will increase our pension expense by $1 million.

Funding

We make contributions to the pension trust to provide plan benefits for certain pension plans. Generally, we do not fund the pension plans if current contributions would not be tax deductible. Effective in 2008, under the Pension Protection Act, funding requirements are more stringent and require companies to make minimum contributions equal to their service cost plus amortization of their deficit over a seven year period. Failure to achieve appropriate ~~funded~~funding levels will result in restrictions on employee benefits. Failure to contribute the minimum required ~~contributions~~ contributions will result in excise taxes for the Company and ~~reporting~~ an obligation to report to the regulatory agencies. During ~~2008~~2009, the Company contributed $85229 million to its funded pension trusts. The Company expects to contribute an additional $~~150~~132 million to its funded pension trusts in ~~2009, of which approximately $54 million is to satisfy minimum funding requirements~~2010. These ~~amounts~~ amounts exclude $2330 million of contributions and $3526 million of expected contributions to the unfunded plans for the years ended December 2726, ~~2008~~ 2009 and December 2625, ~~2009~~2010, respectively.

For further information about our pension and postretirement plans see Note 12 11 Pension and Postretirement Medical Benefit Plans in the Notes to Consolidated Financial Statements.

~~Casualty Insurance~~CASUALTY ~~Costs~~INSURANCE COSTS

Due to the nature of our business, we require insurance coverage for certain casualty risks. In the United States, we use a combination of insurance and self-insurance mechanisms, including a wholly owned captive insurance entity. This captive entity participates in a reinsurance pool for a portion of our workers’ compensation risk. We provide self-insurance for the workers’ compensation risk retained by the Company and automobile risks up to $10 million per occurrence, and product and general liability risks up to $5 million per occurrence. For losses exceeding these self-insurance thresholds, we purchase casualty insurance from third-party providers.

At December 2726, ~~2008~~2009, our net liability for casualty costs was $~~235~~240 million, of which $70 million was considered short-term in nature. At December 2927, ~~2007~~2008, our net liability for casualty costs was $~~222~~235 million, of which $6570 million was considered short-term in nature.

Our liability for casualty costs is estimated using individual case-based valuations and statistical analyses and is based upon historical experience, actuarial assumptions and professional judgment. We do not discount our loss expense reserves. These estimates are subject to the effects of trends in loss severity and frequency and are subject to a significant degree of inherent variability. We evaluate these estimates periodically during the year and we believe that they are appropriate; however, an increase or decrease in the estimates or events outside our control could have a material impact on reported net income. Accordingly, the ultimate settlement of these costs may vary significantly from the estimates included in our financial statements.

25 ~~Income Taxes~~

Our effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations and tax planning strategies available to us in the various jurisdictions in which we operate. Significant management judgment is required in evaluating our tax positions and in determining our effective tax rate.

Our deferred tax assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize in the future. We establish valuation

~~PART~~INCOME ~~II (continued)~~TAXES

~~allowances~~ Our toeffective ~~reduce~~tax ~~our~~rate ~~deferred~~is based on pre-tax ~~assets~~income, statutory tax rates, tax laws and regulations and tax planning strategies available to anus ~~amount~~in ~~that~~the various jurisdictions in which we ~~will~~operate. ~~more~~Significant ~~likely~~management ~~than~~judgment ~~not~~is berequired ~~realized~~in evaluating our tax positions and in determining our effective tax rate.

As Our ~~required~~deferred ~~under~~tax ~~the~~assets ~~provisions~~and ofliabilities ~~Financial~~reflect Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which we adopted as of the beginning of fiscal year 2007, we recognize the impact of our ~~tax positions~~best inestimate ~~our financial statements if those positions will more likely than not be sustained on audit, based on the technical merits~~ of the ~~position. A number of years may elapse before an uncertain~~ tax ~~position~~benefits ~~for which we have established a tax reserve is audited~~ and ~~finally resolved, and the number of~~ ~~years~~costs ~~for which~~ we ~~have~~expect ~~audits~~to ~~that~~realize ~~are~~in ~~open varies depending on~~ the ~~tax jurisdiction~~future. ~~While~~We itestablish isvaluation ~~often~~allowances ~~difficult~~ to ~~predict~~reduce ~~the final outcome or the timing of the resolution of an audit, we believe that~~ our ~~reserves for uncertain~~ deferred tax ~~benefits~~assets ~~reflect~~to ~~the outcome~~an ofamount ~~tax positions~~ that iswill more likely than not to occur. Nevertheless, it is possible that tax authorities may disagree with our tax positions, which could have a significant impact on our results of operations, financial position and cash flows. The resolution of a tax position could be ~~recognized as an adjustment to our provision for income taxes and our deferred taxes in the period of resolution, and may also require a use of cash~~realized.

We recognize the impact of our tax positions in our financial statements if those positions ~~For~~will ~~further~~more ~~information~~likely ~~about~~than not be sustained on audit, based on the technical merits of the position. A number of years may elapse before an uncertain tax position for which we have established a tax reserve is audited and finally resolved, and the number of years for which we have audits that are open varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of the resolution of an audit, we believe that our reserves for uncertain tax benefits reflect the outcome of tax positions that is more likely than not to occur. Nevertheless, it is possible that tax authorities may disagree with our tax positions, which could have a significant impact on our results of operations, financial position and cash flows. The resolution of a tax position could be recognized as an adjustment to our provision for income taxes ~~see~~and ~~“Income~~our ~~Tax~~deferred ~~Expense”~~taxes in the ~~Results~~period of ~~Operations~~resolution, and ~~Note 13 in~~may ~~the~~also ~~Notes~~require tothe ~~Consolidated~~use ~~Financial~~of ~~Statements~~cash.

For further information about our income taxes see “Income Tax Expense” in the Results of Operations and Note 12 Income Taxes in the Notes to Consolidated Financial Statements.

RELATIONSHIP WITH PEPSICO

PepsiCo is a related party due to the nature of our franchise relationship and its ownership interest in our company. More than 80 percent of our volume is derived from the sale of PepsiCo or PepsiCo joint venture brands. At December 2726, ~~2008~~2009, PepsiCo owned approximately 3331.27 percent of our outstanding common stock and 100 percent of our outstanding class B common stock, together representing approximately 4038.26 percent of the voting power of all classes of our voting stock. In addition, at December 2726, ~~2008~~2009, PepsiCo owned 6.6 percent of the equity of Bottling LLC ~~and 40 percent of PR Beverages Limited (“PR Beverages”), a consolidated venture for our Russian operations~~. ~~We fully consolidate the results of Bottling LLC and~~ ~~PR Beverages and present PepsiCo’s share as minority interest in our Consolidated Financial Statements.~~

On While ~~March 1~~we manage all phases of our operations, ~~2007~~including pricing of our products, ~~together~~we exchange production, marketing and distribution information with PepsiCo, wewhich ~~formed~~benefits PRboth companies’ ~~Beverages~~respective efforts to lower costs, aimprove ~~venture~~quality ~~that~~and ~~enables~~productivity usand toincrease ~~strategically~~product ~~invest~~sales. inWe ~~Russia~~have toa ~~accelerate~~significant ~~our~~ongoing ~~growth.~~relationship ~~PBG~~with ~~contributed~~PepsiCo ~~its~~and ~~business~~enter ininto various transactions and ~~Russia~~agreements with them. We purchase concentrate, pay royalties related to PRAquafina ~~Beverages~~products, and manufacture, ~~PepsiCo~~package, ~~entered~~sell ~~into~~and distribute cola and non-cola beverages under various bottling and fountain syrup agreements with PRPepsiCo. ~~Beverages~~These ~~for~~agreements ~~PepsiCo~~give us the right to manufacture, sell and distribute beverage products ~~sold~~ of PepsiCo in ~~Russia~~both onbottles ~~the~~and ~~same~~cans, ~~terms~~as well as fountain syrup in specified ~~effect~~territories. ~~for~~PepsiCo ~~PBG~~has ~~immediately prior~~the right under these agreements to set prices of beverage concentrate, as well as the ~~venture~~terms of payment and other terms and conditions under which we purchase concentrate. PRPepsiCo ~~Beverages~~also ~~has~~provides anus ~~exclusive~~with ~~license~~bottler funding to ~~manufacture~~ ~~and~~support ~~sell~~a ~~PepsiCo~~variety ~~concentrate~~of ~~for~~trade and consumer programs such ~~products.~~as consumer incentives, advertising support, new product support and vending ~~Increases~~and incooler ~~gross~~equipment ~~profit~~placement. The nature and ~~operating~~type ~~income~~of ~~resulting~~programs, ~~from~~ as well as the ~~consolidation~~level of ~~the~~funding, vary ~~venture~~annually. ~~are~~Additionally, ~~offset~~under bya ~~minority~~shared ~~interest~~services agreement, we obtain various services from ~~expense~~PepsiCo, ~~related~~which include services for information technology maintenance and procurement of raw materials. We also provide services to PepsiCo’s, ~~share~~including facility and credit and collection support. ~~Minority~~Because ~~interest~~we depend on PepsiCo to provide us with concentrate, bottler incentives and ~~expense~~various isservices, ~~recorded~~changes ~~below~~in ~~operating~~our ~~income~~relationship with PepsiCo could have a material adverse effect on our business and financial results.

~~Our~~ We ~~business~~also isenter ~~conducted~~into ~~primarily~~various ~~under~~transactions ~~beverage agreements~~ with ~~PepsiCo,~~joint ~~including~~ventures ain ~~master~~which ~~bottling~~PepsiCo ~~agreement,~~holds ~~non-cola bottling~~an ~~agreements, distribution agreements and a master syrup~~equity ~~agreement~~interest. ~~These~~In ~~agreements provide PepsiCo with the ability~~particular, ~~at its~~we ~~sole discretion, to establish prices, and other terms and conditions for our~~ purchase oftea ~~concentrates~~concentrate and finished beverage products from ~~PepsiCo. PepsiCo provides us with bottler funding~~the toPepsi/Lipton ~~support~~Tea Partnership, a ~~variety~~joint ofventure ~~trade~~between PepsiCo and ~~consumer programs such as consumer incentives~~Unilever, ~~advertising~~in ~~support,~~which ~~new~~PepsiCo ~~product support~~holds ~~and~~a ~~vending~~50 percent ~~and cooler equipment placement~~interest. ~~The~~We ~~nature~~also ~~and~~purchase ~~type of~~finished ~~programs,~~beverage asproducts ~~well~~from as the ~~level~~North ofAmerican ~~funding, vary annually.~~Coffee ~~Additionally~~Partnership, ~~under~~ a ~~shared~~joint ~~services~~venture ~~agreement,~~between ~~we obtain various services from~~ PepsiCo, ~~which include services for information technology maintenance~~ and ~~the~~Starbucks ~~procurement~~Corporation ofin ~~raw materials.~~which WePepsiCo ~~also~~holds ~~provide~~a ~~services to PepsiCo, including~~50 ~~facility~~percent ~~and credit and collection support~~interest.

~~Because~~ PepsiCo weowns ~~depend~~40 percent onof ~~PepsiCo~~PR toBeverages ~~provide~~Limited us(“PR ~~with~~Beverages”), ~~concentrate~~a consolidated venture for our Russian operations, which wewas ~~use~~formed inon ~~the~~March 1, ~~production~~2007. ofPR ~~CSDs~~Beverages ~~and~~has ~~non-carbonated beverages,~~an ~~bottler~~exclusive ~~incentives~~license to manufacture and ~~various~~sell ~~services,~~PepsiCo ~~changes~~concentrate for beverage products sold in Russia. PR Beverages has ~~our~~also ~~relationship~~entered into a Russian Snack Food Distribution Agreement with ~~PepsiCo~~Frito ~~could~~Lay, ~~have~~Inc., a ~~material~~subsidiary ~~adverse~~of ~~effect~~PepsiCo, onto ~~our~~sell ~~business~~ and ~~financial~~distribute ~~results~~their snack products in the Russian Federation.

For further information about our relationship with PepsiCo and its affiliates see Note 15 14 Related Party Transactions in the Notes to Consolidated Financial Statements.

ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS

The year-over-year comparisons of our financial results are affected by the following items included in our reported results:

	December 27,			December 29,			December 30,
	December			December			December
Income/(Expense)	~~2008~~26, 2009			~~2007~~27, 2008			~~2006~~29, 2007
Gross Profit
PR Beverages	$	–		$	29		$	–
Operating Income
Impairment Charges	$	(412	)	$	–		$	–
Advisory Fees	$	(40	)	$	—		$	—
2008 Restructuring Charges		(83	)		–			–
Mark-to-Market Net Impact		12			—			—
2007 Restructuring Charges		(3	)		(30	)		–
Impairment Charges		—			(412	)		—
Asset Disposal Charges		(2	)		(23	)		–
2008 Restructuring Actions		(24	)		(83	)		—
PR Beverages		–			29			–
2007 Restructuring Actions		—			(3	)		(30	)
Total Operating Income Impact	$	(500	)	$	(24	)	$	–
Asset Disposal Charges		—			(2	)		(23	)
Net Income
Operating Income Impact	$	(52	)	$	(500	)	$	(53	)
Impairment Charges	$	(277	)	$	–		$	–
Net Income Attributable to PBG(1)
2008 Restructuring Charges		(58	)		–			–
Advisory Fees(2)	$	(34	)	$	—		$	—
2007 Restructuring Charges		(2	)		(22	)		–
Mark-to-Market Net Impact(3)		7			—			—
Asset Disposal Charges		(1	)		(13	)		–
Impairment Charges(4)		—			(277	)		—
Tax Audit Settlement		–			46			55
2008 Restructuring Actions(5)		(16	)		(58	)		—
Tax Law Changes		–			10			10
2007 Restructuring Actions (6)		—			(2	)		(22	)
Total Net Income Impact	$	(338	)	$	21		$	65
Asset Disposal Charges(7)		—			(1	)		(13	)
Tax Audit Settlements(8)		151			—			46
Tax Law Changes(9)		(61	)		—			10
Net Income Attributable to PBG Impact	$	47		$	(338	)	$	21
Diluted Earnings Per Share
Impairment Charges	$	(1.26	)	$	–		$	–
Advisory Fees	$	(0.15	)	$	—		$	—
2008 Restructuring Charges		(0.26	)		–			–
Mark-to-Market Net Impact		0.04			—			—
2007 Restructuring Charges		(0.01	)		(0.09	)		–
Impairment Charges		—			(1.26	)		—
Asset Disposal Charges		–			(0.06	)		–
2008 Restructuring Actions		(0.07	)		(0.26	)		—
Tax Audit Settlement		–			0.20			0.22
2007 Restructuring Actions		—			(0.01	)		(0.09	)
Tax Law Changes		–			0.04			0.05
Asset Disposal Charges		—			—			(0.06	)
Total Diluted Earnings Per Share Impact	$	(1.53	)	$	0.09		$	0.27
Tax Audit Settlements		0.68			—			0.20
Tax Law Changes		(0.28	)		—			0.04
Diluted Earnings Per Share Impact	$	0.22		$	(1.53	)	$	0.09

Items impacting comparability described below are shown in the year the action was initiated.


⁽¹⁾		Represents items net of taxes and noncontrolling interests. Taxes have been calculated based on the tax rate of the tax jurisdiction in which the item was recorded. Noncontrolling interests has been calculated based upon the ownership structure within the entity in which the item was recorded.

⁽²⁾		Net of taxes of $6 million.

⁽³⁾		Net of taxes and noncontrolling interests of $4 million and $1 million, respectively.

⁽⁴⁾		Net of taxes and noncontrolling interests of $115 million and $20 million, respectively.

⁽⁵⁾		Net of taxes and noncontrolling interests of $7 million and $1 million, respectively, in 2009 and $19 million and $6 million, respectively, in 2008.

⁽⁶⁾		Net of both taxes and noncontrolling interests of $1 million in 2008 and net of taxes and noncontrolling interests of $6 million and $2 million, respectively, in 2007.

⁽⁷⁾		Net of both taxes and noncontrolling interests of $1 million in 2008 and net of taxes and noncontrolling interests of $8 million and $2 million, respectively, in 2007.

⁽⁸⁾		Net of noncontrolling interests of $7 million in 2009.

⁽⁹⁾		Net of noncontrolling interests of $4 million in 2009 and $1 million in 2007.

27 20

Advisory Fees ~~2008 Items~~

On August 3, 2009, PBG and PepsiCo entered into a definitive merger agreement, under which PepsiCo will acquire, subject to the satisfaction of certain conditions, all outstanding shares of PBG common stock it does not already own. In connection with this transaction, the Company has retained certain external advisors and expects to incur aggregate fees in the range of $50 million to $60 million. During 2009, the Company recorded pre-tax charges of $40 million, or $0.15 per diluted share, relating to these services, which were recorded in selling, delivery and administrative expenses (“SD&A”).

For further information about the pending merger with PepsiCo see Note 18 Contingencies in the Notes to Consolidated Financial Statements.

Mark-to-Market Net Impact

The Company’s corporate headquarters centrally manages commodity derivatives on behalf of our segments. During 2009, we expanded our hedging program to mitigate price changes associated with certain commodities utilized in our production process. These derivatives hedge the underlying price risk associated with the commodity and are not entered into for speculative purposes. Certain commodity derivatives do not qualify for hedge accounting treatment. Others receive hedge accounting treatment but may have some element of ineffectiveness based on the accounting standard. These commodity derivatives are marked-to-market each period until settlement, resulting in gains and losses being reflected in corporate headquarters’ results. The gains and losses are subsequently reflected in the segment results when the underlying commodity’s cost is recognized. Therefore, segment results reflect the contract purchase price of these commodities. During 2009, the Company recognized a net pre-tax gain of $12 million, or $0.04 per diluted share, related to these commodity derivatives. The Company did not have any comparable activity in prior years.

Impairment Charges

During the fourth quarter of 2008, the Company recorded a $412 million, or $1.26 per diluted share, in non-cash impairment ~~charge~~charges relating primarily to distribution rights and brands for the Electropura water business in Mexico. For further information about the impairment charges, see ~~section~~Note 6 ~~entitled “~~Other ~~Intangible Assets~~Intangibles, net and Goodwill,” in ~~our~~the ~~Critical~~Notes ~~Accounting~~to ~~Policies~~Consolidated Financial Statements.

2008 Restructuring ~~Charges~~Actions

In the fourth quarter of 2008, we announced a restructuring program to enhance the Company’s operating capabilities in each of our reportable segments. The program’s ~~key objectives~~was ~~are~~substantially ~~to strengthen customer service and selling~~complete ~~effectiveness;~~in ~~simplify~~December ~~decision~~of ~~making~~2009 and ~~streamline~~certain ~~the organization;~~restructuring ~~drive~~actions ~~greater~~previously ~~cost~~planned ~~productivity~~for to2010 ~~adapt~~have tobeen ~~current~~cancelled ~~macroeconomic~~as ~~challenges;~~a ~~and~~result ~~rationalize the Company’s supply chain infrastructure. We anticipate the program to be substantially complete by the end~~ of ~~2009 and~~ the ~~program~~ ispending ~~expected~~merger towith ~~result in annual pre-tax savings of approximately $150 million to $160 million~~PepsiCo.

The ~~Company~~program ~~expects~~will toresult ~~record~~in annual pre-tax ~~charges~~savings of approximately $~~140~~110 million. toThe Company recorded pre-tax charges of $~~170~~107 million, or $0.33 per diluted share, over the course of the restructuring program, which iswere recorded in SD&A. These charges were primarily for severance and related benefits, pension and other employee-related costs and other charges, including employee relocation and asset disposal costs. AsIn ~~part of the restructuring program~~2009, ~~approximately~~we ~~3,150 positions~~recorded ~~will~~pre-tax becharges ~~eliminated~~of ~~including 750 positions in the U.S.~~$24 ~~& Canada~~million, ~~200~~or ~~positions~~$0.07 inper ~~Europe~~diluted ~~and 2~~share,~~200 positions~~ inof ~~Mexico.~~which $10 million ~~The~~was ~~Company~~recorded ~~will also close four facilities~~ in the U.S., as& ~~well~~Canada assegment ~~three plants~~ and ~~approximately~~$14 million ~~30 distribution~~was ~~centers~~recorded in ~~Mexico. The program will also include~~ the ~~elimination of approximately 700 routes in~~ Mexico~~. In~~ ~~addition, the Company will modify its U~~segment.~~S. defined benefit~~ ~~pension plans, which will generate long-term savings and significantly reduce future financial obligations.~~

~~During~~ As ~~2008,~~part of the ~~Company~~restructuring ~~incurred~~program, ~~pre-tax~~approximately ~~charges of $83 million~~4,000 ofpositions ~~which~~were ~~$53 million~~eliminated ~~was~~including 600 ~~recorded~~positions in the U.S. & Canada ~~segment~~, ~~$27 million~~500 ~~was~~positions ~~recorded~~ in ~~our~~ Europe ~~segment~~ and ~~the remaining $3 million was recorded in the Mexico segment. All of these charges were recorded in selling~~2,900 ~~delivery and administrative expenses. During 2008, we eliminated approximately 1,050~~ positions ~~across all reportable segments and closed three facilities~~ in ~~the U.S. and two plants in~~ Mexico ~~and eliminated 126 routes in Mexico~~.

The Company expects ~~about~~to incur approximately $~~130~~80 million in pre-tax cash expenditures from these restructuring actions, of which $1375 million ~~was~~has been paid insince the ~~fourth~~inception ~~quarter~~ of ~~2008~~the program, with the balance expected to occur in 2010. During 2009, ~~and~~we ~~2010~~paid $62 million in pre-tax cash expenditures for these restructuring actions.

For further information about our restructuring charges see Note 16 in15 Restructuring Charges in the Notes to Consolidated Financial Statements.

2007 Restructuring Actions ~~Items~~

In the third quarter of 2007, we announced a restructuring program to realign the Company’s organization to adapt to changes in the marketplace, improve operating efficiencies and enhance the growth potential of the Company’s product portfolio. We completed the organizational realignment during the first quarter of 2008, which resulted in the elimination of approximately 800 positions. Annual cost savings from this restructuring program are approximately $30 million. Over the course of the program we incurred a pre-tax charge of approximately $29 million, which was recorded in SD&A. During 2007, we recorded pre-tax charges of $26 ~~Restructuring~~million, ~~Charges~~of which $18 million was recorded in the U.S. & Canada segment and the remaining $8 million was recorded in the Europe segment. During the first half of 2008, we recorded an additional $3 million of

28 In the third quarter of 2007, we announced a restructuring program to realign the Company’s organization to adapt to changes in the marketplace, improve operating efficiencies and enhance the growth potential of the Company’s product portfolio. We substantially completed the organizational realignment during the first quarter of 2008, which resulted in the elimination of approximately 800 positions. Annual cost savings from this restructuring program are approximately $30 million. Over the course of the program we incurred a pre-tax charge of approximately $29 million. During 2007, we recorded pre-tax charges of $26 million, of which $18 million was recorded in the U.S. & Canada segment and the remaining $8 million was recorded in the Europe segment. During the first half of 2008, we recorded an additional $3 million of pre-tax charges primarily relating to relocation expenses in our U.S. & Canada segment. We made approximately $24 million of after-tax cash payments associated with these restructuring charges.

InTable the fourth quarter of 2007, we implemented and completed an additional phase of restructuring actions to improve operating efficiencies. In addition to the amounts discussed above, we recorded a pre-tax charge of approximately $4 million in selling, delivery and administrative expenses, primarily related to employee termination costs in Mexico, where an additional 800 positions were eliminated as a result of this phase of the restructuring. Annual cost savings from this restructuring program are approximately $7 million. Contents

pre-tax charges primarily relating to relocation expenses in our U.S. & Canada segment. We made approximately $24 million of after-tax cash payments associated with these restructuring charges.

In the fourth quarter of 2007, we implemented and completed an additional phase of restructuring actions to improve operating efficiencies. In addition to the amounts discussed above, we recorded a pre-tax charge of approximately $4 million in SD&A, primarily related to employee termination costs in Mexico, where an additional 800 positions were eliminated as a result of this phase of the restructuring. Annual cost savings from this restructuring program are approximately $7 million.

Asset Disposal Charges

In the fourth quarter of 2007, we adopted a Full Service Vending (“FSV”) Rationalization plan to rationalize our vending asset base in our U.S. & Canada segment by disposing of older underperforming assets and redeploying certain assets to higher return accounts. Our FSV business portfolio consists of accounts where we stock and service vending equipment. This plan, which we completed in the second quarter of 2008, was part of the Company’s broader initiative to improve operating income margins of our FSV business.

Over the course of the FSV Rationalization plan, we incurred a pre-tax asset disposal charge of approximately $25 million, the majority of which was non-cash. The charge included costs associated with the removal of these assets from service, disposal costs and redeployment expenses. Of this amount, we recorded a pre-tax charge of approximately $23 million in 2007 with the remainder being recorded in 2008. This charge is recorded in ~~selling, delivery and administrative expenses~~SD&A.

Tax Audit Settlements ~~PR Beverages~~

In 2009, our tax provision was reduced by the reversal of tax reserves, net of noncontrolling ~~For~~interests, ~~further~~of ~~information~~approximately ~~about~~$151 million, PRor ~~Beverages~~$0.68 ~~see~~per diluted share, from the resolution of tax ~~“Relationship~~audits ~~with~~and ~~PepsiCo~~the expiration of statute of limitations in the U.”S. and in our international jurisdictions.

During 2007, PBG recorded a net non-cash tax benefit of approximately $46 million, or $0.20 per diluted share, to income tax expense related to the reversal of tax reserves resulting from the ~~Tax Audit~~expiration ~~Settlement~~of the statute of limitations on the IRS audit of our U.S. 2001 and 2002 tax returns.

~~During~~ For ~~2007,~~further ~~PBG~~information ~~recorded~~about aour ~~net non-cash benefit of approximately $46 million to income~~ tax ~~expense~~audit ~~related~~settlements ~~to the~~see ~~reversal~~Note of12 ~~reserves~~Income ~~for~~Taxes ~~uncertain~~in ~~tax benefits resulting from~~ the ~~expiration of the statute of limitations on the IRS~~Notes ~~audit~~to ofConsolidated ~~our~~Financial UStatements.~~S. 2001 and 2002 tax returns.~~

Tax Law Changes

~~During~~ In ~~2007~~the fourth quarter of 2009, ~~tax~~there ~~law~~was ~~changes~~a ~~were~~significant ~~enacted~~tax inlaw ~~Canada~~change ~~and~~in Mexico, which required us to re-measure our deferred tax assets and liabilities resulting in a net provision expense, net of noncontrolling interests, of $68 million, or $0.31 ~~The~~per ~~impact~~diluted share. Certain aspects of the tax ~~reduction~~law change in Mexico are still subject to clarification with the tax ~~rates~~authorities inand ~~Canada~~may ~~was~~require ~~partially~~that ~~offset~~we byrevise our deferred taxes in the future as new information becomes available. There was also a tax law ~~changes~~change in ~~Mexico~~Canada which ~~decreased~~ ~~our~~reduced ~~income~~certain provincial tax ~~expense~~rates onand which resulted in a tax provision benefit, net ~~basis~~of noncontrolling interests, of $7 million, or $0.03 per diluted share.

In addition, during 2007, tax law changes were enacted in Canada and Mexico, which required us 21to re-measure our deferred tax assets and liabilities. The impact of the tax law change in Canada was partially offset by the tax law change in Mexico decreasing our income tax expense on a net basis. As a result of these changes, net income attributable to PBG increased approximately $10 million, or $0.04 per diluted share.

~~PART~~FINANCIAL IIPERFORMANCE ~~(continued)~~SUMMARY AND WORLDWIDE FINANCIAL HIGHLIGHTS FOR FISCAL YEAR 2009

After the impact of minority interest, net income increased approximately $10 million as a result of these tax law changes.


						% Change
	December		December			Better/
	26, 2009		27, 2008			(Worse)
Net revenues	$	13,219	$	13,796			(4	)%
Gross profit		5,840		6,210			(6	)%
Selling, delivery and administrative expenses		4,792		5,149			7	%
Operating income
U.S. & Canada	$	868	$	886			(2	)%
Europe		112		101			11	%
Mexico		56		(338	)		116	%

Total segments		1,036		649			60	%
Corporate – net impact of mark-to-market on commodity hedges		12		—		NM

Total operating income	$	1,048	$	649			61	%

Net income attributable to PBG	$	612	$	162			277	%

Diluted earnings per share ⁽¹⁾	$	2.77	$	0.74			275	%

~~2006 Items~~ (1) Percentage change for diluted earnings per share is calculated using earnings per share data expanded to the fourth decimal place. NM – Not meaningful.

Reported net revenues decreased four percent versus the prior year driven by volume declines and the negative impact from foreign currency translation. This impact was partially offset by ~~Tax Audit~~increases ~~Settlement~~in rate per case in each of our reportable segments.

~~During~~ On ~~2006~~a currency neutral basis*, ~~PBG~~net ~~recorded~~revenues aincreased ~~tax~~one ~~gain~~percent ~~from~~and ~~the~~net ~~reversal~~revenue ofper case ~~approximately~~increased ~~$55 million~~four ofpercent ~~tax~~versus ~~contingency~~the ~~reserves. These~~prior ~~reserves~~year, ~~which~~reflecting ~~related to~~ the ~~IRS~~solid ~~audit~~execution of ~~PBG’s~~our revenue and ~~1999-2000 income~~margin ~~tax~~management ~~returns,~~strategy ~~resulted~~in ~~from~~a ~~the~~challenging ~~expiration~~economic ofenvironment. ~~the~~Reported ~~statute~~net revenue per case ofdeclined ~~limitations~~one ~~for~~percent, ~~this~~which ~~IRS~~includes ~~audit~~the onnegative ~~December 30,~~impact ~~2006~~from foreign currency translation of five percentage points.

Reported gross profit declined six percent versus the prior year, driven by the negative impact of foreign currency translation and volume declines. This impact was partially offset by a ~~Tax~~two percent increase in gross profit per case on a currency neutral basis, as rate gains from the ~~Law~~Company’s ~~Changes~~global pricing strategy and savings from productivity initiatives more than offset higher raw material costs. Reported gross profit per case declined three percent, which includes the negative impact from foreign currency translation of five percentage points.

~~During~~ Reported ~~2006,~~SD&A ~~tax~~declined ~~law~~by ~~changes~~seven ~~were~~percent ~~enacted~~versus inthe ~~Canada~~prior year, ~~Turkey~~driven ~~and in~~by ~~various~~lower ~~state~~operating ~~jurisdictions~~costs due into ~~the~~continued ~~United~~productivity ~~States~~improvements ~~which decreased~~across ~~our~~all ~~income~~segments ~~tax~~coupled ~~expense.~~with ~~After~~ the favorable impact of ~~minority~~ ~~interest,~~foreign ~~net~~currency ~~income~~translation. ~~increased~~Foreign bycurrency ~~approximately~~translation ~~$10 million as~~contributed afive ~~result~~percentage ofpoints ~~these~~to the ~~tax~~decline ~~law~~in ~~changes~~SD&A growth.

Reported operating income increased 61 percent versus the prior year. Items impacting comparability** in the current and prior year contributed 65 percent to the operating income growth ~~FINANCIAL~~for the year. The remaining four percent decrease in operating income growth for the year was ~~PERFORMANCE~~impacted ~~SUMMARY~~by ~~AND~~the ~~WORLDWIDE~~negative ~~FINANCIAL~~impact ~~HIGHLIGHTS~~of ~~FOR~~foreign currency translation of four percentage points and ~~FISCAL~~volume ~~YEAR~~declines. ~~2008~~This impact was partially offset by increases in currency neutral gross profit per case, cost and productivity improvements and the positive impact from acquisitions.

	December 27,		December 29,		Fiscal Year
	2008		2007		% Change
Net Revenues	$	13,796	$	13,591		2	%
Cost of Sales	$	7,586	$	7,370		3	%
Gross Profit	$	6,210	$	6,221		–	%
Selling, Delivery and Administrative Expenses	$	5,149	$	5,150		–	%
Operating Income	$	649	$	1,071		(39	)%
Net Income	$	162	$	532		(69	)%
Diluted Earnings Per Share(1)	$	0.74	$	2.29		(68	)%

Net income attributable to PBG increased 277 percent versus the prior year to $612 million and includes a net after-tax gain of $47 million, or $0.22 per diluted share, resulting from items impacting comparability**. Items impacting comparability in the current and prior year contributed 264 percentage points to the growth rate for the year. The remaining 13 percentage point increase in growth for the year was driven by a lower effective tax rate in the current year and the impact from foreign currency transactional losses which occurred in the prior year.

~~(1)~~* ~~Percentage~~Currency ~~change~~neutral ~~for~~results ~~diluted~~are ~~earnings~~calculated ~~per~~using ~~share~~prior isyear’s ~~calculated~~exchange byrates ~~using~~when ~~earnings~~calculating ~~per~~foreign ~~share~~currency ~~data~~translation ~~that~~effects. is** ~~expanded~~See tosection ~~the~~entitled ~~fourth~~Items ~~decimal~~Affecting ~~place~~Comparability of our Financial Results for further information about these items.

30 Volume – Decrease of four percent versus the prior year driven by declines in each of our segments due to the soft economic conditions globally which have negatively impacted the liquid refreshment beverage category.

NetTable revenues – Increase of two percent versus the prior year is driven by strong increases in net price per case in each of our segments, partially offset by volume declines. Net price per case increased six percent due primarily to rate increases and includes one percentage point of growth from foreign currency. Contents

Cost of sales – Increase of three percent versus the prior year due to rising raw material costs partially offset by volume declines. Cost of sales per case increased seven percent, which includes one percentage point from foreign currency. Increase in costs of sales per case was driven by plastic bottle components, sweetener and concentrate.

Gross profit – Growth was flat driven by rate increases offset by volume declines and higher raw material costs. Rate gains more than offset higher raw material costs driving a four percent increase in gross profit per case.

Selling, Delivery and Administrative (“SD&A”) expenses – Flat results versus the prior year include one percentage point of growth relating to restructuring and asset disposal charges taken in the current and prior year. The remaining one percentage point improvement in SD&A expenses was driven by lower operating costs due to decreases in volume and continued cost and productivity improvements across all our segments, partially offset by the negative impact from strengthening foreign currencies during the first half of the year.

Operating income – Decrease of 39 percent versus the prior year was driven primarily by the impairment, restructuring and asset disposal charges taken in the current and prior year, which together contributed 41 percentage points to the operating income decline for the year. The remaining two percentage points of growth in operating income were driven by increases in Europe and the U.S. & Canada. During 2008, we captured over $170 million of productivity gains reflecting an increased focus on cost containment across all of our businesses. Savings include productivity from manufacturing and logistics coupled with reduced headcount and decreased discretionary spending. Operating income growth includes one percentage point of growth from foreign currency translation.

Net income – Net income for the year of $162 million includes a net after-tax charge of $338 million, or $1.53 per diluted share, from impairment and asset disposal charges, and restructuring initiatives discussed above. In addition, net income reflects higher interest and foreign currency transactional expenses versus the prior year. For 2007, net income of $532 million included a net after-tax gain of $21 million, or $0.09 per diluted share, from tax items, restructuring charges and asset disposal charges.

RESULTS OF OPERATIONS BY SEGMENT

Except where noted, tables and discussion are presented as compared to the prior fiscal year. Growth rates are rounded to the nearest whole percentage.

Volume

2009 vs. 2008


				U.S. &
	Worldwide			Canada			Europe			Mexico
Base volume		(4	)%		(4	)%		(8	)%		(4	)%
Acquisitions		1			1			—			—

Total Volume Change		(3	)%		(2)	%*		(8	)%		(4	)%


*		Does not add due to rounding to the whole percentage.

U.S. & Canada

In our U.S. & Canada segment, base volume, which excludes the impact of acquisitions, decreased four percent for the year due primarily to the macroeconomic factors negatively impacting the liquid refreshment beverage category. Our newly acquired rights to distribute Crush, Rockstar and Muscle Milk in the U.S. contributed three percentage points to our base volume for the year.

Take-home and cold-drink channels declined by three percent and six percent, respectively, versus last year. The decline in the take-home channel was driven primarily by our small format stores as changes in consumer shopping trends are shifting more of our volume to channels such as supercenters, club and dollar stores due to the economic downturn. Declines in our cold-drink channel were mainly driven by our foodservice channel, including restaurants, travel and leisure, education and workplace, which have been particularly impacted by the economic downturn in the United States.

Europe

In our Europe segment, volume declined by eight percent versus the prior year. Soft volume performance reflected the overall weak macroeconomic environment and category softness throughout Europe, driven by double digit declines in Russia.

Mexico

In our Mexico segment, volume decreased four percent versus the prior year. Volume declines were driven by difficult macroeconomic conditions and category softness, coupled with pricing actions taken by the Company to drive improved margins across its portfolio.

2008 vs. 2007


				U.S. &
	Worldwide			Canada			Europe			Mexico
Total Volume Change		(4	)%		(4	)%		(3	)%		(5	)%

U.S. & Canada

In our U.S. & Canada segment, volume decreased four percent due to declining consumer confidence and spending, which has negatively impacted the liquid refreshment beverage category. Cold-drink and take-home channels both declined by four percent versus last year. The decline in the take-home channel was driven primarily by our large format stores, which was impacted by the overall declines in the liquid refreshment beverage category as well as pricing actions taken to improve profitability in our take-home packages including our unflavored water business. Decline in the cold-drink channel was driven by our foodservice channel, including restaurants, travel and leisure and workplace, which has been particularly impacted by the economic downturn in the United States.

Europe

In our Europe segment, volume declined by three percent resulting from a soft volume performance in the second half of the year. Results reflect overall weak macroeconomic environments throughout Europe with high single digit declines in Spain and flat volume growth in Russia. Despite the slowing growth in Russia, we showed improvements in our energy and tea categories, partially offset by declines in the CSD category. In Spain, there were declines across all channels due to a weakening economy and our continued focus on improving revenue and gross profit growth.

31 22

single digit declines in Spain and flat volume growth in Russia. Despite the slowing growth in Russia, we showed improvements in our energy and tea categories, partially offset by declines in the CSD category. In Spain, there were declines across all channels due to a weakening economy and our continued focus on improving revenue and gross profit growth.

Mexico

In our Mexico segment, volume decreased five percent driven by slower economic growth coupled with pricing actions taken by the Company to drive improved margins across its portfolio. This drove single digit declines in our jug water and multi-serve packages, which ~~was~~were partially offset by one percent improvement in our bottled water package.

~~2007 vs.~~Net ~~2006~~Revenues

				U.S. &
	Worldwide			Canada			Europe			Mexico
Base volume		–	%		–	%		4	%		(2	)%
Acquisitions		1			–			–			3
Total Volume Change		1	%		–	%		4	%		1	%

2009 vs. 2008


				U.S. &
	Worldwide			Canada			Europe			Mexico
2009 Net revenues	$	13,219		$	10,315		$	1,755		$	1,149
2008 Net revenues	$	13,796		$	10,300		$	2,115		$	1,381

% Impact of:
Volume		(4	)%		(4	)%		(8	)%		(4	)%
Net price impact (rate/mix)		4			3			6			6
Acquisitions		1			1			—			—
Currency translation		(5	)		(1	)		(16	)		(19	)

Total Net Revenues Change		(4	)%		—	%*		(17)	%*		(17	)%


*		Does not add due to rounding to the whole percentage.

U.S. & Canada

In our U.S. & Canada segment, ~~volume~~net ~~was~~revenues ~~unchanged, driven~~were ~~primarily by~~ flat ~~volume~~for in the Uyear.~~S. Our~~ ~~performance in~~The ~~the~~results ~~U.S. reflected~~reflect improvements ~~growth~~ in ~~the~~net ~~take-home channel of approximately one percent~~pricing, ~~driven~~partially ~~primarily~~offset by ~~growth~~volume ~~in supercenters,~~declines ~~wholesale clubs~~ and ~~mass~~the ~~merchandisers.~~negative ~~This growth~~impact ~~was offset by a decline~~ of ~~three percent in the~~foreign ~~cold-drink~~currency ~~channel,~~translation. asNet arevenue ~~result~~per ofcase ~~declines~~on ~~in our small format and foodservice channels. From~~ a ~~brand~~currency ~~perspective,~~neutral ~~our U.S. non-carbonated~~basis ~~portfolio~~improved ~~increased~~by ~~six~~three percent, ~~reflecting~~driven ~~significant~~by rate increases. inReported ~~Trademark~~net ~~Lipton~~revenue ~~and~~per ~~water, coupled~~case ~~with~~increased ~~strong~~two ~~growth~~percent, inwhich ~~energy~~includes ~~drinks. The growth in our~~the ~~U.S. non-carbonated~~negative ~~portfolio~~impact ~~was~~from ~~offset~~foreign bycurrency ~~declines~~translation ~~in our CSD portfolio~~ of ~~three~~one ~~percent,~~percentage ~~driven primarily by declines in Trademark Pepsi~~point.

In Canada, volume grew two percent, driven primarily by three percent growth in the cold-drink channel and two percent growth in the take-home channel. From a brand perspective, our non-carbonated portfolio increased 13 percent, reflecting a 12 percent increase in Trademark Lipton and a five percent increase in water.

Europe

In our Europe segment, ~~overall~~net ~~volume~~revenues ~~grew~~declined ~~four~~ 17 percent, due primarily to the negative impact of foreign currency translation and volume declines. This ~~growth~~ was ~~driven~~offset ~~primarily~~ by ~~17 percent~~ growth in ~~Russia,~~net revenue per ~~partially~~case ~~offset~~on bya ~~declines~~currency neutral basis of ~~eight~~seven percent indriven ~~Spain~~primarily by rate actions and ~~two~~disciplined ~~percent~~promotional ~~in Turkey~~spending. ~~Volume~~Europe’s ~~increases~~reported innet ~~Russia~~revenue ~~were~~per ~~strong~~case indeclined ~~all channels~~10 percent, ~~led~~which byincludes the ~~growth~~negative ofimpact ~~40 percent~~from inforeign ~~our~~currency ~~non-carbonated portfolio~~translation of 17 percentage points.

Mexico

In our Mexico segment, ~~overall~~declines ~~volume~~in ~~increased~~net ~~one~~revenues of 17 percent, reflected the negative impact of ~~driven~~foreign ~~primarily~~currency bytranslation ~~acquisitions~~and volume declines, partially offset by aimprovements ~~decrease~~in currency ofneutral ~~two~~net ~~percent~~revenue inper ~~base~~case. ~~business~~Net ~~volume.~~revenue ~~This~~per ~~decrease~~case ~~was~~on a currency neutral basis grew six percent, primarily ~~attributable~~due to ~~four~~rate ~~percent~~increases ~~declines~~to indrive ~~both~~margin ~~CSD~~improvement. ~~and jug~~Mexico’s ~~water~~reported ~~volumes,~~net ~~mitigated~~revenue byper case ~~nine~~declined 14 percent, ~~growth~~which inincludes ~~bottled water~~a ~~and~~20 percentage ~~greater~~point ~~than~~negative ~~40 percent~~impact ~~growth~~from ~~in non-carbonated~~foreign ~~beverages~~currency translation.

32 ~~Net Revenues~~

2008 vs. 2007

	Worldwide			U.S. & Canada			Europe			Mexico
				U.S. &
	Worldwide			Canada			Europe			Mexico
2008 Net revenues	$	13,796		$	10,300		$	2,115		$	1,381
2007 Net revenues	$	13,591		$	10,336		$	1,872		$	1,383
% Impact of:
Volume		(4	)%		(4	)%		(3	)%		(5	)%
Net price per case (rate/mix)		5			4			10			6
Net price impact (rate/mix)		5			4			10			6
Currency translation		1			–—			6			(1	)
Total Net Revenues Change		2	%		–—	%		13	%		–—	%

U.S. & Canada

In our U.S. & Canada segment, net revenues were flat versus the prior year driven by net price per case improvement offset by volume declines. The four percent improvement in net price per case was primarily driven by rate increases taken to offset rising raw material costs and to improve profitability in our take-home packages, including our unflavored water business.

Europe

In our Europe segment, growth in net revenues for the year reflects an increase in net price per case and the positive impact of foreign currency translation, partially offset by volume declines. Net revenue per case grew in every country in Europe led by double-digit growth in Russia and Turkey due mainly to rate increases.

Mexico

In our Mexico segment, net revenues were flat versus the prior year reflecting increases in net price per case offset by declines in volume and the negative impact of foreign currency translation. Growth in net price per case was primarily due to rate increases taken within our multi-serve CSDs, jugs and bottled water packages.

~~2007 vs.~~Operating ~~2006~~Income

				U.S. &
	Worldwide			Canada			Europe			Mexico
2007 Net revenues	$	13,591		$	10,336		$	1,872		$	1,383
2006 Net revenues	$	12,730		$	9,910		$	1,534		$	1,286
% Impact of:
Volume		–	%		–	%		4	%		(2	)%
Net price per case (rate/mix)		4			4			9			7
Acquisitions		1			–			–			3
Currency translation		2			–			9			–
Total Net Revenues Change		7	%		4	%		22	%		8	%

2009 vs. 2008


				U.S. &
	Worldwide			Canada			Europe			Mexico			Corporate
2009 Operating income	$	1,048		$	868		$	112		$	56		$	12
2008 Operating income (loss)	$	649		$	886		$	101		$	(338	)	$	—

% Impact of:
Operating activities		(3	)%		(4	)%		(12	)%		17	%		—	%
Advisory fees		(6	)		(5	)		—			—			—
Mark-to-market net impact		2			—			—			—		NM
Impairment charges		60			—			2			125			—
2008 Restructuring actions		8			5			23			(3	)		—
2007 Restructuring actions		1			1			—			—			—
Asset disposal charges		—			—			—			—			—
Acquisitions		3			2			14			—			—
Currency translation		(4	)		(1	)		(17	)		(23	)		—

Total operating income change		61	%		(2	)%		11	%*		116	%	NM%


*		Does not add due to rounding to the whole percentage.

NM – Not meaningful.

U.S. & Canada

In our U.S. & Canada segment, ~~four~~operating ~~percent~~income ~~growth~~decreased ~~in net~~two ~~revenues~~percent ~~was~~versus ~~driven~~the ~~mainly~~prior ~~by increases in net price per~~year, ~~case~~driven asby avolume ~~result~~declines, ofpartially ~~rate~~offset ~~gains.~~by ~~The~~an ~~favorable~~improvement ~~impact~~in ~~of Canada’s~~gross ~~foreign~~profit ~~currency~~per ~~translation~~case, ~~added~~cost ~~slightly less~~and ~~than~~productivity ~~one~~savings ~~percentage~~and ~~point of growth to~~ the ~~segment’s~~favorable ~~four percent~~impact ~~increase. In the U.S., we achieved revenue growth as a result~~ of ~~a net price per case improvement of four percent~~acquisitions.

33 23

~~PART~~ Reported IIgross ~~(continued)~~profit per case increased one percent, which includes the negative impact from foreign currency translation of one percentage point for the year. Gross profit per case on a currency neutral basis increased two percent for the year driven by growth in net revenue per case and savings from productivity initiatives, which more than offset higher raw material costs.

SD&A improved one percent for the year. The decrease in SD&A expenses for the year reflects lower costs resulting from productivity initiatives and volume declines coupled with a favorable impact from foreign currency translation of one percentage point, partially offset by higher pension and employee related costs.

Europe

In our Europe segment, ~~22 percent~~operating ~~growth~~income inincreased ~~net~~11 percent ~~revenues reflected~~driven ~~exceptionally~~primarily ~~strong~~by ~~increases~~the inimpact ~~net~~of restructuring ~~price~~and ~~per~~other ~~case, strong~~charges ~~volume~~taken ~~growth~~ in ~~Russia~~the prior year and ~~the~~additional ~~positive~~income ~~impact~~from ofour newly ~~foreign~~acquired ~~currency~~equity ~~translation.~~investment ~~Growth~~ in ~~net~~Russia, ~~revenues~~partially inoffset ~~Europe was~~by ~~mainly~~decreases ~~driven~~in byvolume aand ~~44 percent~~the ~~increase~~negative impact inof ~~Russia~~foreign currency.

Reported gross profit per case in Europe declined 14 percent for the year, which includes the negative impact from foreign currency translation of 15 percentage points. Gross profit per case on a currency neutral basis increased one percent driven by strong rate increases which offset higher raw material costs resulting from the foreign currency transactional impact for U.S. dollar denominated purchases.

SD&A in Europe improved 24 percent for the year, which includes a benefit from foreign currency translation of 13 percentage points. The remaining improvement in SD&A was driven by volume declines, restructuring and other customer related charges taken in the prior year, lower costs resulting from productivity initiatives throughout Europe and income generated from our equity investment in Russia.

Mexico

In our Mexico segment, ~~eight~~operating income increased 116 percent ~~growth~~versus inthe ~~net~~prior ~~revenues~~year. ~~reflected~~Impairment ~~strong~~and ~~increases~~restructuring incharges ~~net~~contributed ~~price~~122 percent ~~per~~to ~~case~~the growth, ~~and~~which ~~the~~was ~~impact~~partially offset by foreign currency translation of ~~acquisitions,~~23 percent. ~~partially~~The ~~offset~~remaining 17 percent of growth for the year was driven primarily by ~~declines~~improved inpricing ~~base~~actions ~~business~~and lower costs resulting from productivity ~~volume~~initiatives.

Reported gross profit per case declined 15 percent for the year, which includes the negative impact from foreign currency translation of 19 percentage points. Gross profit per case on a ~~Operating~~currency neutral basis increased four percent, reflecting solid margin management and cost savings ~~Income~~from productivity initiatives, which offset rising raw material costs. Higher raw material costs were driven by the negative impact of foreign currency transactional costs resulting from U.S. dollar denominated purchases.

SD&A improved 18 percent for the year, which includes an 18 percentage point benefit from foreign currency translation. Restructuring charges increased SD&A by two percentage points. The remaining decrease in SD&A growth was driven by improved route and cost productivity initiatives.

Corporate

Corporate reflects a net gain of $12 million for the year related to the mark-to-market of commodity derivatives used to hedge against price changes associated with certain commodities utilized primarily in our U.S. and Canada production processes. The Company did not have any comparable mark-to-market commodity derivative activity in prior years.

2008 vs. 2007

				U.S. &
	Worldwide			Canada			Europe			Mexico
2008 Operating income	$	649		$	886		$	101		$	(338	)
2008 Operating income (loss)	$	649		$	886		$	101		$	(338	)
2007 Operating income	$	1,071		$	893		$	106		$	72
% Impact of:
Operations		1	%		1	%		2	%		(3	)%
Operating activities		1	%		1	%		2	%		(3	)%
Currency translation		1			–			12			2
Impairment charges		(38	)		—			(3	)		(571	)
Impairment charges		(38	)		–			(3	)		(571	)
2008 Restructuring charges		(8	)		(6	)		(25	)		(4	)
2007 Restructuring charges		3			2			8			4
Asset disposal charges		2			2			–—			–—
Total Operating Income Change		(39	)%		(1	)%		(5	)%*		(572	)%
Currency translation		1			—			12			2
Total Operating Income Change		(39	)%		(1	)%		(5)	%*		(572	)%


*		Does not add due to rounding to the whole percentage.

U.S. & Canada

In our U.S. & Canada segment, operating income was $886 million in 2008, decreasing one percent versus the prior year. Restructuring and asset disposal charges taken in the current and prior year together contributed a decrease of two percentage points to the operating income decline. The remaining one percentage point of growth includes increases in gross profit per case and lower operating costs, partially offset by lower volume in the United States.

Gross profit per case improved two percent versus the prior year in our U.S. & Canada segment. This includes growth in net revenue per case, which was partially offset by a six percent increase in cost of sales per case. Growth in cost of sales per case includes higher concentrate, sweetener and packaging costs.

SD&A expenses improved three percent versus the prior year in our U.S. & Canada segment due to lower volume and pension costs and cost productivity initiatives. These productivity initiatives reflect a combination of headcount savings, reduced discretionary spending and leveraged manufacturing and logistics benefits. Results also include one percentage point of growth due to restructuring and asset disposal charges taken in the current and prior year.

Europe

In our Europe segment, operating income was $101 million in 2008, decreasing five percent versus the prior year. The net impact of restructuring and impairment charges contributed 20 percentage points to the decline for the year. The remaining 14 percentage point increase in operating income growth for the year reflects improvements in gross profit per case and the positive impact from foreign currency translation, partially offset by higher SD&A expenses.

Gross profit per case in Europe increased 16 percent versus the prior year due to net price per case increases and foreign currency translation, partially offset by higher sweetener and packaging costs. Foreign currency contributed six percentage points of growth to gross profit for the year.

SD&A expenses in Europe increased 16 percent due to additional operating costs associated with our investments in Europe coupled with charges in Russia due to softening volume and weakening economic conditions in the fourth quarter. Foreign currency contributed five percentage points to SD&A growth. Restructuring charges taken in the current and prior year contributed approximately two percentage points of growth to SD&A expenses for the year.

Mexico

In our Mexico segment, we had an operating loss of $338 million in 2008 driven primarily by impairment and restructuring charges taken in the current and prior years. The remaining one percent decrease in operating income growth for the year was driven by volume declines, partially offset by increases in gross profit per case and the positive impact from foreign currency translation.

Gross profit per case improved six percent versus the prior year driven by improvements in net revenue per case, as we continue to improve our segment profitability in our jug water and multi-serve packages. Cost of sales per case in Mexico increased by five percent due primarily to rising packaging costs.

SD&A remained flat versus the prior year driven by lower volume and reduced operating costs as we focus on route productivity, partially offset by cost inflation.

2007 vs. 2006

				U.S. &
	Worldwide			Canada			Europe			Mexico
2007 Operating income	$	1,071		$	893		$	106		$	72
2006 Operating income	$	1,017		$	878		$	57		$	82
% Impact of:
Operations		6	%		6	%		41	%		(11	)%
Currency translation		1			1			11			1
PR Beverages		3			–			50			–
2007 Restructuring		(3	)		(2	)		(15	)		(4	)
Asset disposal charges		(2	)		(3	)		–			–
Acquisitions		–			–			–			2
Total Operating Income Change		5	%		2	%		86	%*		(13	)%*

* Does not add due to rounding to the whole percentage.

U.S. & Canada

In our U.S. & Canada segment, operating income increased two percent versus the prior year. Growth in operating income includes a five

percentage point negative impact from restructuring and asset disposal charges. The remaining seven percentage point improvement in operating income growth was the result of increases in gross profit, coupled with cost productivity improvements. These improvements were partially offset by higher SD&A expenses.

Gross profit for our U.S. & Canada segment increased three percent driven by net price per case improvement, which was partially offset by a five percent increase in cost of sales. Increases in cost of sales are primarily due to growth in cost of sales per case resulting from higher concentrate and sweetener costs and a one percentage point negative impact from foreign currency translation.

SD&A in the U.S. & Canada segment increased four percent driven primarily by strategic initiatives in connection with the hydration category, partially offset by cost productivity improvements.

Europe

In our Europe segment, operating income increased 86 percent versus the prior year. Operating income growth includes 35 percentage points of growth from the consolidation of PR Beverages and restructuring charges taken during the year. The remaining 52 percentage points of growth reflect strong increases in volume, gross profit per case, cost productivity improvements and an 11 percentage point positive impact of foreign currency translation. This growth was partially offset by higher operating expenses in Russia.

Gross profit per case in Europe grew 26 percent versus the prior year. This growth was driven by improvements in net revenue per case partially offset by a 16 percent increase in cost of sales. Increases in cost of sales reflected a nine percentage point impact from foreign currency translation, cost per case increases resulting from higher raw material costs, shifts in package mix and strong volume growth. These increases were partially offset by a three percentage point impact from consolidating PR Beverages in our financial results.

SD&A costs in Europe increased 25 percent versus the prior year, which includes a nine percentage point negative impact from foreign currency translation. The remaining increase in SD&A costs is due to higher operating expenses in Russia due to its growth during the year.

Mexico

In our Mexico segment, operating income decreased 13 percent as a result of declines in base business volume and higher SD&A expenses. Restructuring charges and the impact of acquisitions together contributed a two percentage point impact to the operating income decline for the year.

Gross profit per case in Mexico grew five percent versus the prior year due primarily to increases in net revenue per case partially offset by a nine percent increase in cost of sales. Increase in cost of sales reflects cost per case increases resulting from significantly higher sweetener costs and the impact of acquisitions, partially offset by base volume declines.

SD&A expenses in Mexico grew eight percent versus the prior year, which includes three percentage points of growth from acquisitions. The remaining growth is driven by higher operating expenses versus the prior year.

Interest Expense, net

2009 vs. 2008

Net interest expense increased by $13 million largely due to higher debt levels, proceeds of which were utilized to fund our acquisitions, coupled by the pre-funding of our $1.3 billion debt that matured in February 2009.

2008 vs. 2007

Net interest expense increased by $16 million largely due to higher average debt balances throughout the year and our treasury rate locks that were settled in the fourth quarter. These increases were partially offset by lower effective interest rates from interest rate swaps which convert our fixed-rate debt to variable-rate debt.

35 ~~2007 vs. 2006~~

NetTable interestof expense increased by $8 million largely due to higher effective interest rates and additional interest associated with higher average debt balances throughout the year. Contents

Other Non-Operating ~~Expenses~~ (Income) Expenses, net

2009 vs. 2008

Other net non-operating income was $4 million in 2009 as compared to $25 million of net non-operating expenses in 2008 reflecting the transactional impact of U.S. dollar and euro purchases in Mexico and Europe. The positive change versus the prior year reflects the stabilization of the Mexican peso and Russian ruble during 2009.

2008 vs. 2007

Other net non-operating expenses were $25 million in 2008 as compared to $6 million of net non-operating income in 2007. Foreign currency transactional losses in 2008 resulted primarily from our U.S. dollar and euro purchases in Mexico and Russia, reflecting the impact of the weakening peso and ruble during the second half of 2008.

~~2007 vs.~~Net ~~2006~~Income Attributable to Noncontrolling Interests

~~Other~~ 2009 ~~net non-operating income was $6 million in 2007 as compared to $11 million of net non-operating expenses in 2006~~vs. ~~Income in 2007 was primarily a result of foreign exchange~~2008 gains due to the strength of the Canadian dollar, Turkish lira, Russian ruble and euro. The expense position in 2006 was primarily a result of foreign exchange losses associated with the devaluation of the Turkish lira.

Net income attributable to noncontrolling interests primarily reflects PepsiCo’s ownership in Bottling LLC of 6.6 percent, coupled with their 40 percent ownership in the PR Beverages venture in ~~Minority~~Russia. The $34 million increase versus the prior year was primarily driven by higher net income ~~Interest~~due to the impairment and restructuring charges taken in the prior year.

2008 vs. 2007

~~Minority interest primarily reflects PepsiCo’s ownership in Bottling LLC of 6.6 percent, coupled with their 40 percent ownership in the PR Beverages venture.~~ The $34 million decrease versus the prior year was primarily driven by lower operating results due to the impairment and restructuring charges taken in the fourth quarter of 2008.

2007 vs. 2006

The $35 million increase in 2007 was primarily driven by PepsiCo’s minority interest in the PR Beverages venture. The remaining increase was a result of higher operating results in Bottling LLC.

PART II (continued)

Income Tax Expense

2009 vs. 2008

Our effective tax rate for 2009 and 2008 was 5.7 percent and 33.4 percent, respectively. The decrease in our effective tax rate is primarily due to year-over-year comparability associated with the following:

During 2009, our tax provision was reduced by $158 million due to the reversal of tax reserves from the resolution of tax audits and the expiration of the statute of limitations in the U.S. and in our international jurisdictions, for an effective tax rate benefit of approximately 21.1 percentage points.

In the fourth quarter, we reversed approximately $39 million of valuation allowances on some of our deferred tax assets as we anticipate receiving future benefit from those tax assets, which decreased our effective tax rate by approximately 5.2 percentage points.

Our effective tax rate was also favorably impacted in 2009 by favorable country earnings mix, lower carrying charges on tax reserves due to the audit settlements discussed above, as well as tax planning strategies.

Also, in the fourth quarter of 2009, there was a significant tax law change in Mexico which required us to re-measure our deferred tax assets and liabilities resulting in a net provision expense of $72 million. Certain aspects of the tax law change in Mexico are still subject to clarification with the tax authorities and may require that we revise our deferred taxes in the future as new information becomes available. There was also a tax law change in Canada which reduced certain provincial tax rates and which resulted in a tax provision benefit of $7 million. The net effect of these law changes increased our effective tax rate by approximately 8.7 percentage points.

In 2008, our effective tax rate was unfavorably impacted by the impairment charges primarily related to Mexico and restructuring charges, the net effect of which increased our effective tax rate by 3.8 percentage points.

2008 vs. 2007

Our effective tax rates for 2008 and 2007 were 4033.74 percent and 2522.01 percent, respectively. The increase in our effective tax rate is primarily due to year-over-year comparability associated with the ~~following:~~2008 impairment charges primarily related to Mexico and restructuring charges the net effect of which increased our effective tax rate by 3.8 percentage points and a 2007 tax audit settlement which reduced our tax provision by $46 million, coupled with tax law changes that reduced our deferred income tax provision by $13 million, which decreased our effective tax rate by 7.3 percentage points.

•

In 2008, we had pre-tax impairment charges related primarily to Mexico which resulted in a tax provision benefit of $115 million as well as pre-tax restructuring charges, which provided a tax provision benefit of $21 million. The net effect of these items increased our effective tax rate by 7.7 percentage points as most of these charges were in our international jurisdictions, which have lower effective tax rates.

•

In 2007, we had a tax audit settlement which reduced our tax provision by $46 million, coupled with tax law changes that reduced our deferred income tax provision by $13 million. These items decreased our effective tax rate by 8.3 percentage points.

2007 vs.Table 2006 of Contents

Our effective tax rates for 2007 and 2006 were 25.0 percent and 23.4 percent, respectively. The increase in our effective tax rate is primarily due to year-over-year comparability associated with the reversal of tax contingency reserves resulting from the expiration of the statute of limitations on the IRS audits in 2007 versus 2006. The tax law changes enacted in 2007 and 2006 that required us to re-measure our deferred taxes had approximately the same impact in both years.

Diluted Weighted-Average Shares Outstanding

Diluted weighted-average shares outstanding includes the weighted-average number of common shares outstanding plus the potential dilution that could occur if equity awards from our stock compensation plans were exercised and converted into common stock.

Our diluted weighted-average shares outstanding for ~~2008~~2009, ~~2007~~ 2008 and ~~2006~~2007 were ~~220~~221 million, ~~233~~ 220 million and ~~242~~ 233 million, respectively. The ~~decrease~~increase in diluted shares outstanding for ~~2008~~2009 reflects share issuances from the ~~effect~~exercise of ~~our~~equity ~~share~~awards ~~repurchase program,~~and ~~which~~a ~~began~~higher inshare ~~October 1999~~price, partially offset by the effect of our share ~~issuances~~ ~~from~~repurchase ~~the~~program ~~exercise~~in ofthe ~~equity~~prior ~~awards~~year. The amount of shares authorized by the Board of Directors to be repurchased totals 175 million shares, of which we have repurchased approximately ~~15 million shares in 2008 and~~ 146 million shares since the inception of our share repurchase program. We did not repurchase shares of PBG common stock in 2009. For further discussion on our earnings per ~~share~~ share calculation see Note 3 Earnings per Share in the Notes to Consolidated Financial Statements.

LIQUIDITY AND FINANCIAL CONDITION

Cash Flows

2009 vs. 2008

PBG generated $1,108 million of net cash from operations, a decrease of $176 million from 2008. The decrease in net cash provided by operations was driven primarily by an increase in pension contributions offset by the timing of disbursements, net of collections primarily related to promotional activities and tax.

Net cash used for investments was $714 million, a decrease of $1,044 million from 2008. The decline in cash used for investments was due to $742 million of payments made in 2008, associated with our investment in JSC Lebedyansky (“Lebedyansky”) and lower capital expenditures and acquisition spending in 2009. This was partially offset by a loan made to Lebedyansky in 2009, which was contemplated as part of the initial capitalization of the purchase of Lebedyansky between PepsiCo and us.

Net cash used for financing activities was $470 million, an increase of $1,320 million from 2008. This increase in cash used for financing activities reflects the repayment of our $1.3 billion bond that matured in February 2009. In addition in 2008, the Company issued $1.3 billion in senior notes to pre-fund the 2009 bond maturity and received $308 million of cash from PepsiCo for their proportional share in the acquisitions by PR Beverages. This was partially offset by the issuance of a $750 million bond in 2009, lower share repurchases and short-term borrowings, and more proceeds from stock option exercises in 2009.

2008 vs. 2007

~~PBG~~ Net ~~generated $1,284 million of net~~ cash ~~from~~provided by operations, ~~a decrease~~decreased of $153 million ~~from~~to ~~2007.~~$1,284 million ~~The decrease~~ in ~~net cash~~2008, ~~provided by operations was~~ driven primarily by a change in working capital due largely to timing of accounts payable ~~disbursements~~ disbursements and higher payments relating to promotional activities and pensions.

Net cash used for investments ~~was~~increased $~~1,758~~875 million, ~~an increase~~to of $~~875~~1,758 million ~~from 2007. The increase~~ in ~~cash used~~2008, ~~for investments~~ primarily ~~reflects $742 million of~~due to payments associated with our investment in ~~JSC~~ Lebedyansky and payments for acquisitions ~~of Lane Affiliated Companies~~, ~~Inc., Sobol-Aqua JSC and Pepsi-Cola Batavia Bottling Corp.,~~ partially offset by lower capital expenditures.

Net cash provided by financing activities ~~was~~increased $~~850 million, an increase of $~~1,414 million ~~as compared~~ to ~~a use of cash of~~ $~~564~~850 million in ~~2007. This increase in cash from~~2008, ~~financing~~primarily ~~reflects~~due ~~proceeds~~to ~~from~~a ~~the~~debt issuance ~~of $1.3 billion~~and ~~in senior notes to partially pre-fund the February 2009 bond maturity of $1.3 billion. Also reflected in financing activities was $308 million of~~ cash received from PepsiCo for their proportional share in the ~~acquisition of~~ ~~JSC~~acquisitions ~~Lebedyansky and Sobol-Aqua JSC~~ by PR Beverages.

2007 vs. 2006

Net cash provided by operations increased by $209 million to $1,437 million in 2007. Increases in net cash provided by operations were driven by higher cash profits and favorable working capital.

Net cash used for investments increased by $152 million to $883 million, driven by higher capital spending due to strategic investments in the U.S. and Russia, including the building of new plants in Las Vegas and Moscow and additional dedicated water lines in the U.S.

Net cash used for financing increased by $193 million to $564 million, driven primarily by lower net proceeds from long-term debt, partially offset by lower share repurchases in 2007.

Capital Expenditures

Our business requires substantial infrastructure investments to maintain our existing level of operations and to fund investments targeted at growing our business. Capital expenditures included in our cash flows from investing activities totaled $~~760~~556 million, $~~854~~760 million and $~~725~~854 million during ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007, respectively. Capital expenditures decreased $94204 million in ~~2008~~2009 ~~as a~~due ~~result~~to ofour ~~lower~~disciplined ~~investments~~approach ~~due~~ to ~~the~~capital ~~economic slowdown, primarily in the United States~~spending.

Liquidity and Capital Resources

Our principal sources of cash include cash from our operating activities and the issuance of debt and bank borrowings. We believe that these cash inflows will be sufficient ~~for the foreseeable future~~ to fund capital expenditures, benefit plan contributions, acquisitions, share repurchases, dividends and ~~working~~ working capital requirements for the foreseeable future. Our liquidity remains healthy and management does not expect that it will be materially impacted in the near-future.

37 The recent and extraordinary disruption in the world credit markets in 2008 had a significant adverse impact on a number of financial institutions. At this point in time, the Company’s liquidity has not been materially impacted by the current credit environment and management does not expect that it will be materially impacted in the near-future. Management will continue to closely monitor the Company’s liquidity and the credit markets. However, management cannot predict with any certainty the impact to the Company of any further disruption in the credit environment.

Acquisitions and Investments

We During ~~completed~~2009, awe ~~joint acquisition with PepsiCo of Russia’s leading branded juice company JSC Lebedyansky (“Lebedyansky”) for approximately $1.8 billion. Lebedyansky was~~ acquired ~~58.3 percent~~a byPepsi-Cola ~~PepsiCo~~ and ~~41.7 percent~~ byDr PRPepper ~~Beverages,~~franchise ~~our~~bottler ~~Russian~~serving ~~venture~~portions ~~with~~of ~~PepsiCo.~~central WeTexas, ~~have~~as ~~recorded~~well anas ~~equity~~a ~~investment~~Pepsi-Cola ~~for~~franchise ~~PR Beverages’~~bottler ~~share~~serving innortheastern ~~Lebedyansky~~Massachusetts. ~~In addition, we have~~The ~~recorded~~total ~~minority~~cost ~~interest~~of ~~for~~these ~~PepsiCo’s~~acquisitions ~~proportional contribution~~during to2009 PRwas ~~Beverages~~approximately ~~relating to Lebedyansky~~$92 million.

During ~~2008~~2009, we acquired ~~Pepsi-Cola~~distribution ~~Batavia~~rights ~~Bottling~~for ~~Corp~~certain ~~and Lane~~energy ~~Affiliated~~drinks ~~Companies,~~in ~~Inc.~~the ~~(“Lane”),~~United ~~Pepsi-Cola~~States ~~franchise~~and ~~bottlers~~Canada ~~which serve certain New York counties~~ and ~~portions~~ ofprotein-enhanced ~~Colorado,~~functional ~~Arizona~~beverages ~~and~~in ~~New~~the ~~Mexico~~United States. In addition, we acquired ~~Sobol-Aqua~~rights ~~JSC~~to ~~(“Sobol”),~~manufacture ~~a company that manufactures Sobol brands~~ and ~~co-packs~~distribute ~~various~~Crush ~~Pepsi~~in ~~products~~portions ~~in Siberia~~of ~~and~~the ~~Eastern~~United ~~Russia~~States. The total cost of ~~acquisitions~~ these distribution and franchise rights during ~~2008~~2009 was approximately $~~279~~40 million, of which $20 million will be paid over the next four years.

During 2008, we completed a joint acquisition with PepsiCo of Russia’s leading branded juice company Lebedyansky for approximately $1.8 billion. Lebedyansky was acquired 58.3 percent by PepsiCo and 41.7 percent by PR Beverages, our Russian venture with PepsiCo. We have recorded an equity investment for PR Beverages’ share in Lebedyansky and a noncontrolling interest for PepsiCo’s proportional contribution to PR Beverages relating to Lebedyansky. As a result of PepsiCo’s 40 percent ownership of PR Beverages, PepsiCo and PBG have acquired a 75 percent and 25 percent economic stake in Lebedyansky, respectively.

Also during 2008, we acquired two Pepsi-Cola franchise bottlers serving certain New York counties and portions of Colorado, Arizona and New Mexico. In addition we acquired a company that will manufacture various Pepsi products in Siberia and Eastern Russia. The total cost of acquisitions during 2008 was approximately $279 million.

Long-Term Debt Activities

During the ~~fourth~~first quarter of 2009, we issued $~~1.3~~750 ~~billion~~million in senior notes, with a coupon rate of 65.95125 percent, maturing in ~~2014~~2019. A ~~portion~~The ofnet ~~this~~proceeds ~~debt~~of ~~was~~the ~~used~~offering, totogether ~~repay~~with ~~our~~a ~~senior~~portion ~~notes due in~~of ~~2009~~the atproceeds ~~their~~from ~~maturity~~the onoffering ~~February 17,~~of ~~2009.~~our Insenior ~~the interim,~~notes ~~these~~issued ~~proceeds~~in ~~were~~the ~~placed~~fourth inquarter ~~short-term~~of ~~investments. In addition~~2008, wewere used to arepay ~~portion~~our ofsenior ~~the~~notes ~~proceeds~~due toat ~~finance~~their ~~the Lane~~scheduled ~~acquisition~~maturity ~~and~~on ~~repay~~February 17, ~~short-term~~2009. ~~commercial~~The ~~paper debt, a~~next ~~portion~~significant ofscheduled ~~which~~debt ~~was~~maturity ~~used~~is tonot ~~finance~~until ~~our acquisition of Lebedyansky~~2012.

In During ~~addition, during~~ the ~~first~~fourth quarter of ~~2009~~2008, we issued ~~an additional~~ $~~750~~1.3 ~~million~~billion in senior notes, with a coupon rate of 56.~~125~~95 percent, maturing in ~~2019~~2014. ~~The~~A ~~net proceeds of the offering, together with a~~ portion of the proceeds ~~from the offering~~ of ~~our~~this ~~senior~~debt ~~notes~~was ~~issued in the fourth quarter of 2008, were~~ used to ~~repay our senior notes due in 2009, at their~~finance ~~scheduled~~acquisitions ~~maturity~~and onrepay ~~February 17,~~short-term ~~2009.~~commercial ~~Any~~paper ~~excess proceeds of this offering will be used for general corporate purposes. The next significant scheduled~~ debt ~~maturity is not until 2012~~.

Short-Term Debt Activities

We have a committed revolving credit facility of $1.12 billion and an uncommitted credit facility of $500 million. Both of these credit facilities are guaranteed by Bottling LLC and are used to support our $1.2 billion commercial paper program and working capital requirements. AtWe ~~December 27, 2008, we~~ had no ~~outstanding~~ commercial paper. Atoutstanding at December 2926, ~~2007,~~2009 weor ~~had $50~~December ~~million~~27, ~~in outstanding commercial paper with a weighted-average interest rate of 5~~2008.~~3 percent.~~

In addition to the revolving credit facilities discussed above, we had available short-term bank credit lines of approximately $~~772~~892 million at December 2726, ~~2008~~2009, of which the majority was uncommitted. These lines were primarily used to support the general operating needs of our ~~international~~ international locations. As of ~~year-end~~December 26, ~~2008~~2009, we had $~~103~~188 million outstanding under these lines of credit at a weighted-average interest rate of 103.01 percent. As of ~~year-end~~December 27, ~~2007~~2008, we ~~had~~ had available short-term bank credit lines of approximately $~~748~~772 million, of which $~~190~~103 million was outstanding at a weighted-average interest rate of 510.30 percent.

Our peak borrowing timeframe varies with our working capital requirements and the seasonality of our business. Additionally, throughout the year, we may have further short-term borrowing requirements driven by other operational needs of our business. During ~~2008~~2009, borrowings from our commercial paper program in the U.S. peaked at $~~702~~240 million. Borrowings from our line of credit facilities peaked at $~~484~~245 million, reflecting payments for working capital requirements.

Debt Covenants and Credit Ratings

Certain of our senior notes have redemption features and non-financial covenants that will, among other things, limit our ability to create or assume liens, enter into sale and lease-back transactions, engage in mergers or consolidations and transfer or lease all or substantially all of our assets. Additionally, certain of our credit facilities and senior notes have financial covenants. These ~~requirements~~covenants are not, and it is not anticipated that they will become, restrictive to our liquidity or capital resources. We are in compliance with all debt covenants. For a discussion of our covenants, see Note 9 8 Short-Term Borrowings and Long-Term Debt in the Notes to Consolidated Financial Statements.

Our credit ratings are periodically reviewed by rating agencies. Currently our long-term ratings from Moody’s and Standard and Poor’s are A2 and A, respectively. Changes in our operating results or financial position could impact the ratings assigned by the various agencies resulting in higher or lower borrowing costs.

Pensions

During ~~2009~~2010, we expect to contribute $~~185~~158 million to fund our U.S. pension and postretirement plans. For further information about our pension and postretirement plan funding see section entitled “Pension and Postretirement Medical Benefit Plans” in our Critical Accounting Policies.

Dividends

On March 2726, ~~2008~~2009, the Company’s announced that its Board of Directors approved an increase in the Company’s quarterly dividend from $0.1417 to $0.1718 per share on the outstanding common stock of the Company. This action resulted in a 21 six percent increase in our quarterly dividend.

PART II (continued)

Contractual Obligations

The following table summarizes our contractual obligations as of December 2726, ~~2008~~2009:

			Payments Due by Period	~~Payments Due by Period~~
							2010-			2012-			2014 and
						2011-			2013-			2015 and
Contractual Obligations	Total		2010	~~2009~~		2012	~~2011~~		2014	~~2013~~		beyond	~~beyond~~
Long-term debt obligations(1)	$	65,~~087~~516	$	$8	~~1,301~~	$	$1,008	36	$	$1,700	~~1,400~~	$	$2,800	~~3,350~~
Capital lease obligations(2)		928		8	4		13	3		5	–		2	2
Operating leases(2)		~~279~~249		56	58		61	69		31	34		101	~~118~~
Interest obligations(3)		2,~~638~~666		287	~~307~~		639	~~560~~		481	~~516~~		1,259	~~1,255~~
Purchase obligations:
Raw material obligations(4)		~~821~~408		387	~~718~~		21	~~100~~		—	–		—	3
Capital expenditure obligations(5)		3350		50	33		—	–		—	–		—	–
Other obligations(6)		~~325~~224		127	~~135~~		62	~~114~~		13	38		22	38
Other long-term liabilities(7)		2347		10	5		19	8		12	6		6	4
	$	109,~~215~~188	$	$933	~~2,561~~	$	$1,823	~~890~~	$	$2,242	~~1,994~~	$	$4,190	~~4,770~~

(1)	~~See Note 9 in the Notes to Consolidated Financial Statements for additional information relating to our long-term debt obligations.~~	See Note 8 Short-Term Borrowings and Long-Term Debt in the Notes to Consolidated Financial Statements for additional information relating to our long-term debt obligations.
(2)	~~Lease obligation balances include imputed interest. See Note 10 in the Notes to Consolidated Financial Statements for additional information relating to our lease obligations.~~	Capital lease obligation balances include imputed interest. See Note 9 Leases in the Notes to Consolidated Financial Statements for additional information relating to our lease obligations.
(3)	Represents interest payment obligations related to our long-term fixed-rate debt as specified in the applicable debt agreements. A portion of our long-term debt has variable interest rates due to either existing swap agreements or interest arrangements. We have estimated our variable interest payment obligations by using the interest rate forward curve where practical. Given uncertainties in future interest rates we have not included the beneficial impact of interest rate swaps after the year 2010.	Represents interest payment obligations related to our long-term fixed-rate debt as specified in the applicable debt agreements. A portion of our long-term debt has variable interest rates due to existing swap agreements. We have estimated our variable interest payment obligations by using the interest rate forward curve where practical. Given uncertainties in future interest rates we have not included the beneficial impact of interest rate swaps after the year 2010.
(4)	~~Represents obligations to purchase raw materials pursuant to contracts entered into by PepsiCo on our behalf and international agreements to purchase raw materials.~~	Represents obligations to purchase raw materials pursuant to contracts entered into by PepsiCo on our behalf and international agreements to purchase raw materials.
(5)	~~Represents commitments to suppliers under capital expenditure related contracts or purchase orders.~~	Represents legally binding commitments to suppliers under capital expenditure related contracts or purchase orders.
(6)	Represents legally binding agreements to purchase goods or services that specify all significant terms, including: fixed or minimum quantities, price arrangements and timing of payments. If applicable, penalty, notice, or minimum purchase amount is used in the calculation. Balances also include non-cancelable customer contracts for sports marketing arrangements.	Represents legally binding agreements to purchase goods or services that specify all significant terms, including: fixed or minimum quantities, price arrangements and timing of payments. If applicable, penalty, notice, or minimum purchase amount is used in the calculation. Balances also include non-cancelable customer contracts for sports marketing arrangements.
(7)	Primarily represents non-compete contracts that resulted from business acquisitions. The non-current portion of unrecognized tax benefits recorded on the balance sheet as of December 27, 2008 is not included in the table. There was no current portion of unrecognized tax benefits as of December 27, 2008. For additional information about our income taxes see Note 13 in the Notes to Consolidated Financial Statements.	Primarily represents non-compete contracts and future payment obligations related to distribution rights that resulted from various acquisitions. The non-current portion of unrecognized tax benefits recorded on the balance sheet as of December 26, 2009 is not included in the table. There was no current portion of unrecognized tax benefits as of December 26, 2009. For additional information about our income taxes see Note 12 Income Taxes in the Notes to Consolidated Financial Statements.

This table excludes our pension and postretirement liabilities recorded on the balance sheet. For a discussion of our future pension contributions, as well as expected pension and postretirement benefit payments see Note 12 11 Pension and Postretirement Medical Benefit Plans in the Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our results of operations, financial condition, liquidity, capital expenditures or capital resources.

MARKET RISKS AND CAUTIONARY STATEMENTS

Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, our financial position is routinely subject to a variety of risks. These risks include changes in the price of commodities purchased and used in our business, interest rates on outstanding debt and currency movements impacting our non-U.S. dollar ~~denominated~~ denominated assets and liabilities. We are also subject to the risks associated with the business environment in which we operate. We regularly assess ~~all of~~ these risks and have strategies in place to reduce the adverse effects of these exposures.

Our objective in managing our exposure to fluctuations in commodity prices, interest rates and foreign currency exchange rates is to minimize the volatility of earnings and cash flows ~~associated~~ associated with changes in the applicable rates and prices. To achieve this objective, we have derivative instruments to hedge against the risk of adverse movements in commodity prices, interest rates and foreign currency. We monitor our counterparty credit risk on an ongoing basis. Our corporate policy prohibits the use of derivative instruments for trading or speculative purposes, and we have procedures in place to monitor and control their use. See Note 11 10 Financial Instruments and Risk Management in the Notes to Consolidated Financial Statements for additional information relating to ~~our~~ our derivative instruments.

A sensitivity analysis has been prepared to determine the effects that market risk exposures may have on our financial instruments. These sensitivity analyses evaluate the effect of hypothetical changes in commodity prices, interest rates and foreign currency exchange rates and changes in our stock price on our unfunded deferred compensation liability. Information provided by these sensitivity analyses does not necessarily represent the actual changes in fair value that we would incur under normal market conditions because, due to practical limitations, all variables other than the specific market risk factor were held constant. As a result, the reported changes in the values of some financial instruments that are affected by the sensitivity analyses are not matched with the offsetting changes in the values of the items that those instruments are designed to finance or hedge.

Commodity Price Risk

We are subject to market risks with respect to commodities because our ability to recover increased costs through higher pricing may be limited by the competitive business environment in in which we operate. We use ~~future~~forward and option contracts to hedge the risk of adverse movements in commodity prices related primarily to anticipated purchases of raw materials and energy used in our operations. With respect to commodity price risk, we currently have various contracts outstanding for commodity purchases in 2010 and 2011, which establish our purchase prices within defined ranges. We estimate that a 10 percent decrease in commodity prices with all other variables held constant would have resulted in a change in the fair value of our financial instruments of $48 million and $14 million at December 26, 2009 and December 27, 2008, respectively.

prices related primarily to anticipated purchases of raw materials and energy used in our operations. With respect to commodity price risk, we currently have various contracts outstanding for commodity purchases in 2009 and 2010, which establish our purchase prices within defined ranges. We estimate that a 10 percent decrease in commodity prices with all other variables held constant would have resulted in a change in the fair value of our financial instruments of $14 million and $7 million at December 27, 2008 and December 29, 2007, respectively.

Interest Rate Risk

Interest rate risk is inherent to both fixed-rate and floating-rate debt. We effectively converted $1.125 billion of our senior notes to floating-rate debt through the use of interest rate swaps. Changes in interest rates on our interest rate swaps and other variable debt would change our interest expense. We estimate that a 50 basis point increase in interest rates on our variable rate debt and cash equivalents, with all other variables held constant, would have resulted in an increase to net interest expense of $14 million and $21 million in fiscal years ~~2008~~2009 and ~~2007~~2008, respectively.

Foreign Currency Exchange Rate Risk

In ~~2008~~2009, approximately 3430 percent of our net revenues were generated from outside the United States. Social, economic and political conditions in these international markets may ~~adversely~~ adversely affect our results of operations, financial condition and cash flows. The overall risks to our ~~international~~ international businesses include changes in foreign governmental policies and other social, political or economic developments. These developments may lead to new product pricing, tax or ~~other~~ other policies and monetary fluctuations that may adversely impact our business. In addition, our results of operations and the value of our foreign assets and liabilities are affected by fluctuations in foreign currency exchange rates.

40 As currency exchange rates change, translation of the statements of operations of our businesses outside the U.S. into U.S. dollars affects year-over-year comparability. We generally have not hedged against these types of currency risks because cash flows from our international operations have been reinvested locally. We have foreign currency transactional risks in certain of our international territories for transactions that are denominated in currencies that are different from their functional currency. We have entered into forward exchange contracts to hedge portions of our forecasted U.S. dollar cash flows in these international territories. A 10 percent weaker U.S. dollar against the applicable foreign currency, with all other variables held constant, would result in a change in the fair value of these contracts of $5 million and $6 million at December 27, 2008 and December 29, 2007, respectively.

InTable 2007, we entered into forward exchange contracts to economically hedge a portion of intercompany receivable balances that are denominated in Mexican pesos. A 10 percent weaker U.S. dollar versus the Mexican peso, with all other variables held constant, would result in a change of $4 million and $9 million in the fair value of these contracts at December 27, 2008 and December 29, 2007, respectively. Contents

As currency exchange rates change, translation of the statements of operations of our businesses outside the U.S. into U.S. dollars affects year-over-year comparability. We generally have not hedged against these types of currency risks because cash flows from our international operations have been reinvested locally. We have foreign currency transactional risks in certain of our international territories for transactions that are denominated in currencies that are different from their functional currency. We have entered into forward exchange contracts to hedge portions of our forecasted U.S. dollar cash flows in these international territories. A 10 percent weaker U.S. dollar against the applicable foreign currency, with all other variables held constant, would result in a change in the fair value of these contracts of $16 million and $5 million at December 26, 2009 and December 27, 2008, respectively.

In 2007, we entered into forward exchange contracts to economically hedge a portion of intercompany receivable balances that are denominated in Mexican pesos. A 10 percent weaker U.S. dollar versus the Mexican peso, with all other variables held constant, would result in a change of $4 million in the fair value of these contracts at December 26, 2009 and December 27, 2008.

Unfunded Deferred Compensation Liability

Our unfunded deferred compensation liability is subject to changes in our stock price, as well as price changes in certain other equity and fixed-income investments. Employee investment elections include PBG stock and a variety of other equity and fixed-income investment options. Since the plan is unfunded, employees’ deferred compensation amounts are not directly invested in these investment vehicles. Instead, we track the performance of each employee’s investment selections and adjust the employee’s deferred compensation account accordingly. The adjustments to the employees’ accounts increases or decreases the deferred compensation liability reflected on our Consolidated Balance Sheet with an offsetting increase or decrease to our selling, delivery and administrative expenses in our Consolidated Statements of Operations. We use prepaid forward contracts to hedge the portion of our deferred compensation liability that is based on our stock price. Therefore, changes in compensation expense as a result of changes in our stock price are substantially offset by the changes in the fair value of these contracts. We estimate that a 10 percent unfavorable change in the year-end stock price would have reduced the fair value from these forward contract commitments by $12 million and $21 million at December 2726, ~~2008~~2009 and December 2927, ~~2007~~ 2008, respectively.

Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this annual report on Form 10-K ~~and~~ ~~in the annual report to the shareholders~~ may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available competitive, financial and economic data and our operating plans. These statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different. Among the events and uncertainties that could adversely affect ~~future~~ future periods are:

• ~~changes~~risk inassociated with our ~~relationship~~pending merger with PepsiCo;, •including ~~PepsiCo’s~~satisfaction ~~ability to affect matters concerning us through its equity ownership~~ of ~~PBG,~~certain ~~representation~~conditions ~~on our Board and approval rights under our Master Bottling Agreement; • material changes in expected levels~~ of ~~bottler incentive payments from PepsiCo; • restrictions imposed by PepsiCo on our raw material suppliers that could increase our costs; • material changes from expectations in~~ the ~~cost~~pending ~~or availability of ingredients~~merger, ~~packaging~~contractual ~~materials,~~restrictions ~~other raw materials or energy; • limitations~~ on the ~~availability~~conduct of ~~water~~our ~~or obtaining water rights; • an inability to achieve strategic~~ business ~~plan~~included ~~targets that could result~~ in athe ~~non-cash~~merger ~~intangible~~agreement, ~~asset impairment charge; • an inability to achieve cost savings; • material changes in capital investment for infrastructure~~ and ~~an inability to achieve~~ the ~~expected~~potential ~~timing~~ for ~~returns~~loss onof ~~cold-drink~~key ~~equipment~~personnel, ~~and~~disruption ~~related~~of ~~infrastructure expenditures; • decreased demand for~~ our ~~product~~sales ~~resulting from changes in consumers’ preferences; • an inability to achieve volume growth through product~~ and ~~packaging~~operations ~~initiatives;~~or •any impact ~~of competitive activities~~ on our ~~business;~~relationships •with ~~impact~~third ofparties ~~customer~~as ~~consolidations~~a onresult ~~our~~of ~~business;~~the •pending ~~unfavorable weather conditions in our markets~~merger;

29 • PepsiCo’s ability to affect matters concerning us through its equity ownership of PBG, representation on our Board and approval rights under our Master Bottling Agreement;

•

material changes in expected levels of bottler incentive payments from PepsiCo;

•

restrictions imposed by PepsiCo on our raw material suppliers that could increase our costs;

•

material changes from expectations in the cost or availability of ingredients, packaging materials, other raw materials or energy, including changes resulting from restrictions on our suppliers required by PepsiCo;

•

limitations on the availability of water or obtaining water rights;

•

an inability to achieve strategic business plan targets;

•

an inability to achieve cost savings;

•

material changes in capital investment for infrastructure and an inability to achieve the expected timing for returns on cold-drink equipment and related infrastructure expenditures;

•

decreased demand for our product resulting from changes in consumers’ preferences;

•

an inability to achieve volume growth through product and packaging initiatives;

•

impact of competitive activities on our business;

•

impact of customer consolidations on our business;

•

unfavorable weather conditions in our markets;

•

an inability to successfully integrate acquired businesses or to meet projections for performance in newly acquired territories;

•

loss of business from a significant customer;

•

loss of key members of management;

•

failure or inability to comply with laws and regulations;

•

litigation, other claims and negative publicity relating to alleged unhealthy properties or environmental impact of our products;

~~PART~~• IIchanges in laws and regulations governing the manufacture and sale of food and beverages (~~continued~~including taxes on sweetened beverages), the environment, transportation, employee safety, labor and government contracts;

• an inability to successfully integrate acquired businesses or to meet projections for performance in newly acquired territories; • loss of business from a significant customer; • loss of key members of management; • failure or inability to comply with laws and regulations; • litigation, other claims and negative publicity relating to alleged unhealthy properties or environmental impact of our products; • changes in ~~laws and regulations governing the manufacture and sale of food and beverages, the environment, transportation, employee safety, labor and government contracts; • changes in~~ accounting standards and taxation requirements (including unfavorable outcomes from audits performed by various tax authorities); • an increase in costs of pension, medical and other employee benefit costs; • unfavorable market performance of assets in our pension plans or material changes in key assumptions used to calculate the liability of our pension plans, such as discount rate; • unforeseen social, economic and political changes; • possible recalls of our products; • interruptions of operations due to labor disagreements; • limitations on our ability to invest in our business as a result of our repayment obligations under our existing indebtedness; • changes in our debt ratings, an increase in financing costs or limitations on our ability to obtain credit; and • material changes in expected interest and currency exchange rates.

30 • an increase in costs of pension, medical and other employee benefit costs;

•

unfavorable market performance of assets in our pension plans or material changes in key assumptions used to calculate the liability of our pension plans, such as discount rate;

•

unforeseen social, economic and political changes;

•

possible recalls of our products;

•

interruptions of operations due to labor disagreements;

•

limitations on our ability to invest in our business as a result of our repayment obligations under our existing indebtedness;

•

changes in our debt ratings, an increase in financing costs or limitations on our ability to obtain credit; and

•

material changes in expected interest and currency exchange rates.

AUDITED CONSOLIDATED ~~STATEMENTS~~ OFFINANCIAL ~~OPERATIONS~~STATEMENTS

Fiscal years ended December 27, 2008, December 29, 2007 and December 30, 2006
in millions, except per share data	2008		2007			2006
Net Revenues	$	13,796	$	13,591		$	12,730
Cost of sales		7,586		7,370			6,900
Gross Profit		6,210		6,221			5,830
Selling, delivery and administrative expenses		5,149		5,150			4,813
Impairment charges		412		–			–
Operating Income		649		1,071			1,017
Interest expense, net		290		274			266
Other non-operating expenses (income), net		25		(6	)		11
Minority interest		60		94			59
Income Before Income Taxes		274		709			681
Income tax expense		112		177			159
Net Income	$	162	$	532		$	522
Basic Earnings per Share	$	0.75	$	2.35		$	2.22
Weighted-average shares outstanding		216		226			236
Diluted Earnings per Share	$	0.74	$	2.29		$	2.16
Weighted-average shares outstanding		220		233			242
Dividends declared per common share	$	0.65	$	0.53		$	0.41

The Pepsi Bottling Group, Inc.

Consolidated Statements of Operations

Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007
in millions, except per share data


	2009			2008		2007
Net Revenues	$	13,219		$	13,796	$	13,591
Cost of sales		7,379			7,586		7,370


Gross Profit		5,840			6,210		6,221
Selling, delivery and administrative expenses		4,792			5,149		5,150
Impairment charges		—			412		—


Operating Income		1,048			649		1,071
Interest expense, net		303			290		274
Other non-operating (income) expenses, net		(4	)		25		(6	)


Income Before Income Taxes		749			334		803
Income tax expense		43			112		177


Net Income		706			222		626
Less: Net income attributable to noncontrolling interests		94			60		94

Net Income Attributable to PBG	$	612		$	162	$	532


Earnings per Share Attributable to PBG’s Common Shareholders
Basic Earnings per Share	$	2.84		$	0.75	$	2.35


Weighted-average shares outstanding		216			216		226

Diluted Earnings per Share	$	2.77		$	0.74	$	2.29


Weighted-average shares outstanding		221			220		233

Dividends Declared per Common Share	$	0.71		$	0.65	$	0.53

See accompanying notes to Consolidated Financial Statements.

43 31

~~PART~~The IIPepsi ~~(continued)~~Bottling Group, Inc. Consolidated Statements of Cash Flows

~~CONSOLIDATED STATEMENTS~~Fiscal OFyears ~~CASH~~ended ~~FLOWS~~December 26, 2009, December 27, 2008 and December 29, 2007 in millions

Fiscal years ended December 27, 2008, December 29, 2007 and December 30, 2006
	2009			2008			2007
in millions	2008			2007			2006
Cash Flows—Operations
Cash Flows – Operations
Net income	$	706		$	222		$	626
Net income	$	162		$	532		$	522
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		~~673~~637			~~669~~673			~~649~~669
Deferred income taxes		~~(47~~88	)		(4247	)		(6142	)
Stock-based compensation		56			62			65
Share-based compensation		58			56			62
Impairment charges		~~412~~—			–412			–—
Defined benefit pension and postretirement expenses		~~114~~98			~~121~~114			~~119~~121
Minority interest expense		60			94			59
Casualty self-insurance expense		76			87			90
Casualty self-insurance expense		87			90			80
Net other non-cash charges and credits		52			95			79
Other non-cash charges and credits		95			79			67
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net		40(67	)		~~(110~~40	)		(~~120~~110	)
Inventories		3(46	)		~~(19~~3	)		(5719	)
Prepaid expenses and other current assets		10(26	)		~~(17~~10	)		1(17	)
Accounts payable and other current liabilities		~~(134~~55	)		~~185~~(134	)		88185
Income taxes payable		14(147	)		914			(29	)
Net change in operating working capital		(67231	)		48(67	)		~~(90~~48	)
Casualty insurance payments		(7970	)		(7079	)		(6770	)
Pension contributions to funded plans		(85229	)		(7085	)		(6870	)
Other, net		(97	)		(76	)		(47	)
Other operating activities, net		(77	)		(97	)		(76	)
Net Cash Provided by Operations		1,~~284~~108			1,~~437~~284			1,~~228~~437
Cash Flows – Investments
Cash Flows—Investments
Capital expenditures		(~~760~~556	)		(~~854~~760	)		(~~725~~854	)
Acquisitions, net of cash acquired		(~~279~~112	)		(49279	)		(3349	)
Investments in noncontrolled affiliates		(~~742~~2	)		–(742	)		–—
Proceeds from sale of property, plant and equipment		2415			1424			1814
Other investing activities, net		(1	)		6			9
Issuance of note receivable from noncontrolled affiliate		(92	)		—			—
Net Cash Used for Investments		(1,758	)		(883	)		(731	)
Repayments of note receivable from noncontrolled affiliate		28			—			—
Cash Flows – Financing
Other investing activities, net		5			(1	)		6
Short-term borrowings, net – three months or less		(108	)		(106	)		(107	)
Net Cash Used for Investments		(714	)		(1,758	)		(883	)
Proceeds from short-term borrowings – more than three months		117			167			96
Cash Flows—Financing
Payments of short-term borrowings – more than three months		(91	)		(211	)		(74	)
Short-term borrowings, net—three months or less		66			(108	)		(106	)
Proceeds from issuances of long-term debt		1,290			24			793
Proceeds from short-term borrowings – more than three months		—			117			167
Payments of long-term debt		(10	)		(42	)		(604	)
Payments of short-term borrowings – more than three months		—			(91	)		(211	)
Minority interest distribution		(73	)		(17	)		(19	)
Proceeds from issuances of long-term debt		741			1,290			24
Dividends paid		(135	)		(113	)		(90	)
Payments of long-term debt		(1,330	)		(10	)		(42	)
Excess tax benefit from the exercise of equity awards		2			14			19
Distribution to noncontrolling interest holder		(30	)		(73	)		(17	)
Proceeds from the exercise of stock options		42			159			168
Dividends paid		(150	)		(135	)		(113	)
Share repurchases		(489	)		(439	)		(553	)
Excess tax benefit from the exercise of equity awards		10			2			14
Contributions from minority interest holder		308			–			–
Proceeds from the exercise of stock options		202			42			159
Other financing activities		(3	)		–			–
Share repurchases		—			(489	)		(439	)
Net Cash Provided by (Used for) Financing		850			(564	)		(371	)
Contributions from noncontrolling interest holder		33			308			—
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(57	)		28			1
Other financing activities, net		(12	)		(3	)		—
Net Increase in Cash and Cash Equivalents		319			18			127
Net Cash (Used for) Provided by Financing		(470	)		850			(564	)
Cash and Cash Equivalents – Beginning of Year		647			629			502
Effect of Exchange Rate Changes on Cash and Cash Equivalents		17			(57	)		28
Cash and Cash Equivalents – End of Year	$	966		$	647		$	629
Net (Decrease) Increase in Cash and Cash Equivalents		(59	)		319			18
Cash and Cash Equivalents—Beginning of Year		966			647			629
Cash and Cash Equivalents—End of Year	$	907		$	966		$	647

See accompanying notes to Consolidated Financial Statements.

44 32

The Pepsi Bottling Group, Inc. ~~CONSOLIDATED~~ ~~BALANCE~~ Consolidated ~~SHEETS~~Balance Sheets

December 27, 2008 and December 29, 2007
in millions, except per share data	2008			2007
ASSETS
Current Assets
Cash and cash equivalents	$	966		$	647
Accounts receivable, net		1,371			1,520
Inventories		528			577
Prepaid expenses and other current assets		276			342
Total Current Assets		3,141			3,086
Property, plant and equipment, net		3,882			4,080
Other intangible assets, net		3,751			4,181
Goodwill		1,434			1,533
Investments in noncontrolled affiliates		619			–
Other assets		155			235
Total Assets	$	12,982		$	13,115
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and other current liabilities	$	1,675		$	1,968
Short-term borrowings		103			240
Current maturities of long-term debt		1,305			7
Total Current Liabilities		3,083			2,215
Long-term debt		4,784			4,770
Other liabilities		1,658			1,186
Deferred income taxes		966			1,356
Minority interest		1,148			973
Total Liabilities		11,639			10,500
Shareholders’ Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares		3			3
Additional paid-in capital		1,851			1,805
Retained earnings		3,130			3,124
Accumulated other comprehensive loss		(938	)		(48	)
Treasury stock: 99 shares and 86 shares in 2008 and 2007, respectively, at cost		(2,703	)		(2,269	)
Total Shareholders’ Equity		1,343			2,615
Total Liabilities and Shareholders’ Equity	$	12,982		$	13,115

December 26, 2009 and December 27, 2008
in millions, except per share data


	2009			2008
ASSETS
Current Assets
Cash and cash equivalents	$	907		$	966
Accounts receivable, net		1,491			1,371
Inventories		600			528
Prepaid expenses and other current assets		414			276

Total Current Assets		3,412			3,141

Property, plant and equipment, net		3,899			3,882
Other intangible assets, net		3,941			3,751
Goodwill		1,506			1,434
Investments in noncontrolled affiliates		627			619
Other assets		185			155

Total Assets	$	13,570		$	12,982


LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and other current liabilities	$	1,762		$	1,675
Short-term borrowings		188			103
Current maturities of long-term debt		15			1,305

Total Current Liabilities		1,965			3,083

Long-term debt		5,449			4,784
Other liabilities		1,162			1,658
Deferred income taxes		1,285			966

Total Liabilities		9,861			10,491


Equity
Common stock, par value $0.01 per share:
authorized 900 shares, issued 310 shares		3			3
Additional paid-in capital		1,861			1,851
Retained earnings		3,585			3,130
Accumulated other comprehensive loss		(596	)		(938	)
Treasury stock: 89 shares and 99 shares in 2009 and 2008, respectively, at cost		(2,436	)		(2,703	)

Total PBG Shareholders’ Equity		2,417			1,343
Noncontrolling interests		1,292			1,148

Total Equity		3,709			2,491

Total Liabilities and Equity	$	13,570		$	12,982

See accompanying notes to Consolidated Financial Statements.

45 33

~~PART~~The IIPepsi ~~(continued)~~Bottling Group, Inc. Consolidated Statements of Changes in Equity Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007 in millions, except per share data

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


									Accumulated
									Other															Compre-
			Additional						Compre-						Total PBG			Noncon-						hensive
	Common		Paid-In			Retained			hensive			Treasury			Shareholders’			trolling			Total			Income
	Stock		Capital			Earnings			Loss			Stock			Equity			Interests			Equity			(Loss)
Balance at December 30, 2006	$	3	$	1,751		$	2,708		$	(361	)	$	(2,017	)	$	2,084		$	540		$	2,624
Comprehensive income:
Net income		—		—			532			—			—			532			94			626		$	626
Net currency translation adjustment		—		—			—			220			—			220			15			235			235
Cash flow hedge adjustment, net of tax of $(1)		—		—			—			(1	)		—			(1	)		—			(1	)		(1	)
Pension and postretirement medical benefit plans adjustment, net of tax of $(61)		—		—			—			94			—			94			11			105			105

Total comprehensive income																								$	965

Equity awards exercises: 7 shares		—		(28	)		—			—			187			159			—			159
Tax benefit – equity awards		—		22			—			—			—			22			—			22
Share repurchases: 13 shares		—		—			—			—			(439	)		(439	)		—			(439	)
Share-based compensation		—		60			—			—			—			60			—			60
Impact from the adoption of new income tax standard		—		—			5			—			—			5			(3	)		2
Cash dividends declared on common stock (per share: $0.53)		—		—			(121	)		—			—			(121	)		—			(121	)
Distribution to noncontrolling interest holder		—		—			—			—			—			—			(17	)		(17	)
Contributions from noncontrolling interest holder		—		—			—			—			—			—			333			333


Balance at December 29, 2007		3		1,805			3,124			(48	)		(2,269	)		2,615			973			3,588
Comprehensive income (loss):
Net income		—		—			162			—			—			162			60			222		$	222
Net currency translation adjustment		—		—			—			(554	)		—			(554	)		(109	)		(663	)		(663	)
Cash flow hedge adjustment, net of tax of $24		—		—			—			(33	)		—			(33	)		(4	)		(37	)		(37	)
Pension and postretirement medical benefit plans adjustment, net of tax of $204		—		—			—			(322	)		—			(322	)		(38	)		(360	)		(360	)

Total comprehensive loss																								$	(838	)

Pension and postretirement measurement date adjustment, net of tax of $(5)		—		—			(16	)		19			—			3			—			3
Equity awards exercises: 2 shares		—		(13	)		—			—			55			42			—			42
Tax benefit and withholding tax – equity awards		—		2			—			—			—			2			—			2
Share repurchases: 15 shares		—		—			—			—			(489	)		(489	)		—			(489	)
Share-based compensation		—		57			—			—			—			57			—			57
Cash dividends declared on common stock (per share: $0.65)		—		—			(140	)		—			—			(140	)		—			(140	)
Distribution to noncontrolling interest holder		—		—			—			—			—			—			(73	)		(73	)
Contributions from noncontrolling interest holder		—		—			—			—			—			—			339			339

Balance at December 27, 2008		3		1,851			3,130			(938	)		(2,703	)		1,343			1,148			2,491
Comprehensive income:
Net income		—		—			612			—			—			612			94			706		$	706
Net currency translation adjustment		—		—			—			160			—			160			3			163			163
Cash flow hedge adjustment, net of tax of $(43)		—		—			—			63			—			63			7			70			70
Pension and postretirement medical benefit plans adjustment, net of tax of $(78)		—		—			—			119			—			119			14			133			133

Total comprehensive income																								$	1,072

Equity awards exercises: 10 shares		—		(65	)		—			—			267			202			—			202
Tax benefit – equity awards		—		21			—			—			—			21			—			21
Withholding tax – equity awards		—		(7	)		—			—			—			(7	)		—			(7	)
Share-based compensation		—		55			—			—			—			55			—			55
Dividends declared on common stock and equity awards (per share: $0.71)		—		6			(157	)		—			—			(151	)		—			(151	)
Distribution to noncontrolling interest holders		—		—			—			—			—			—			(30	)		(30	)
Contributions from noncontrolling interest holder		—		—			—			—			—			—			56			56

Balance at December 26, 2009	$	3	$	1,861		$	3,585		$	(596	)	$	(2,436	)	$	2,417		$	1,292		$	3,709

Fiscal years ended December 27, 2008, December 29, 2007 and December 30, 2006

												Accumulated
												Other
	Common		Additional			Deferred			Retained			Comprehensive			Treasury						Comprehensive
in millions, except per share data	Stock		Paid-In Capital			Compensation			Earnings			Loss			Stock			Total			Income (Loss)
Balance at December 31, 2005	$	3	$	1,709		$	(14	)	$	2,283		$	(262	)	$	(1,676	)	$	2,043
Comprehensive income:
Net income		–		–			–			522			–			–			522		$	522
Net currency translation adjustment		–		–			–			–			25			–			25			25
Cash flow hedge adjustment (net of tax and minority interest of $(5))		–		–			–			–			8			–			8			8
Minimum pension liability adjustment (net of tax and minority interest of $(21))		–		–			–			–			27			–			27			27
Total comprehensive income																					$	582
FAS 158 – pension liability adjustment (net of tax and minority interest of $124)		–		–			–			–			(159	)		–			(159	)
Stock option exercises: 9 shares		–		(44	)		–			–			–			212			168
Tax benefit – equity awards		–		35			–			–			–			–			35
Share repurchases: 18 shares		–		–			–			–			–			(553	)		(553	)
Stock compensation		–		51			14			–			–			–			65
Cash dividends declared on common stock (per share: $0.41)		–		–			–			(97	)		–			–			(97	)
Balance at December 30, 2006		3		1,751			–			2,708			(361	)		(2,017	)		2,084
Comprehensive income:
Net income		–		–			–			532			–			–			532		$	532
Net currency translation adjustment		–		–			–			–			220			–			220			220
Cash flow hedge adjustment (net of tax and minority interest of $(1))		–		–			–			–			(1	)		–			(1	)		(1	)
Pension and postretirement medical benefit plans adjustment (net of tax and minority interest of $(72))		–		–			–			–			94			–			94			94
Total comprehensive income																					$	845
Stock option exercises: 7 shares		–		(28	)		–			–			–			187			159
Tax benefit – equity awards		–		22			–			–			–			–			22
Share repurchases: 13 shares		–		–			–			–			–			(439	)		(439	)
Stock compensation		–		60			–			–			–			–			60
Impact from adopting FIN 48		–		–			–			5			–			–			5
Cash dividends declared on common stock (per share: $0.53)		–		–			–			(121	)		–			–			(121	)
Balance at December 29, 2007		3		1,805			–			3,124			(48	)		(2,269	)		2,615
Comprehensive income (loss):
Net income		–		–			–			162			–			–			162		$	162
Net currency translation adjustment		–		–			–			–			(554	)		–			(554	)		(554	)
Cash flow hedge adjustment (net of tax and minority interest of $28)		–		–			–			–			(33	)		–			(33	)		(33	)
Pension and postretirement medical benefit plans adjustment (net of tax and minority interest of $242)		–		–			–			–			(322	)		–			(322	)		(322	)
Total comprehensive loss																					$	(747	)
FAS 158 – measurement date adjustment (net of tax and minority interest of $(5))		–		–			–			(16	)		19			–			3
Equity awards exercises: 2 shares		–		(13	)		–			–			–			55			42
Tax benefit and withholding tax – equity awards		–		2			–			–			–			–			2
Share repurchases: 15 shares		–		–			–			–			–			(489	)		(489	)
Stock compensation		–		57			–			–			–			–			57
Cash dividends declared on common stock (per share: $0.65)		–		–			–			(140	)		–			–			(140	)
Balance at December 27, 2008	$	3	$	1,851		$	–		$	3,130		$	(938	)	$	(2,703	)	$	1,343

See accompanying notes to Consolidated Financial Statements.

46 34

The Pepsi Bottling Group, Inc.

Consolidated Statements of Comprehensive Income (Loss)
Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007
in millions


	2009		2008			2007
Net income	$	706	$	222		$	626
Net currency translation adjustment		163		(663	)		235
Cash flow hedge adjustment, net of tax		70		(37	)		(1	)
Pension and postretirement medical benefit plans adjustment, net of tax		133		(360	)		105

Comprehensive income (loss)		1,072		(838	)		965
Less: Comprehensive income (loss) attributable to noncontrolling interests		118		(91	)		120

Comprehensive income (loss) attributable to PBG	$	954	$	(747	)	$	845

See accompanying notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tabular dollars in millions, except per share data

Note 1 ~~– Basis~~—BASIS ofOF ~~Presentation~~PRESENTATION

The Pepsi Bottling Group, Inc. is the world’s largest manufacturer, seller and distributor of Pepsi-Cola beverages. We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of the U.S., Mexico, Canada, Spain, Russia, Greece and Turkey. When used in these Consolidated Financial Statements, “PBG,” “we,” “our,” “us” and the “Company” each refers to The Pepsi Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC (“Bottling LLC”), our principal operating subsidiary.

At December 2726, ~~2008~~2009, PepsiCo, Inc. (“PepsiCo”) owned 70,166,458 shares of our common stock, consisting of 70,066,458 shares of common stock and all 100,000 authorized shares of Class B common stock. This represents approximately 3331.27 percent of our outstanding common stock and 100 percent of our outstanding Class B common stock, together representing 4038.26 percent of the voting power of all classes of our voting stock. In addition, PepsiCo owns approximately 6.6 percent of the equity of Bottling LLC and 40 percent of PR Beverages Limited (“PR Beverages”), a consolidated venture for our Russian operations, which was formed on March 1, 2007.

The common stock and Class B common stock both have a par value of $0.01 per share and are substantially identical, except for voting rights. Holders of our common stock are entitled to one vote per share and holders of our Class B common stock are entitled to 250 votes per share. Each share of Class B common stock is convertible into one share of common stock. Holders of our common stock and holders of our Class B common stock share equally on a per-share basis in any dividend distributions.

Our Board of Directors has the authority to provide for the issuance of up to 20,000,000 shares of preferred stock, and to determine the price and terms, including, but not limited to, preferences and voting rights of those shares without stockholder approval. At December 2726, ~~2008~~2009, there was no preferred stock outstanding.

On August 3, 2009, PBG and PepsiCo entered into a definitive merger agreement, under which PepsiCo will acquire all outstanding shares of PBG common stock it does not already own for the ~~Note~~price of $36.50 in cash or 0.6432 shares of PepsiCo common stock, subject to proration such that the aggregate consideration to be paid to PBG shareholders shall be 50 2percent in cash and 50 percent in PepsiCo common stock. At a special meeting of our shareholders held on February –17, ~~Summary~~2010, our shareholders adopted the merger agreement. The transaction is subject to certain regulatory approvals and is expected to be finalized by the end of ~~Significant~~the ~~Accounting~~first ~~Policies~~quarter of 2010.

~~The~~Note ~~preparation~~2—SUMMARY ofOF ~~our~~SIGNIFICANT ~~consolidated~~ACCOUNTING ~~financial statements in~~POLICIES conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) often requires management to make judgments, estimates and assumptions that affect a number of amounts included in our financial statements and related disclosures. We evaluate our estimates on an on-going basis using our historical experience as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effect cannot be determined with precision, actual results may differ from these estimates.

~~Basis~~ The preparation of our Consolidated Financial Statements in conformity with accounting ~~Consolidation –~~principles Wegenerally ~~consolidate~~accepted in ~~our~~the U.S. (“GAAP”) often requires management to make judgments, ~~financial~~estimates ~~statements~~and ~~entities~~assumptions that affect the reported amounts included in ~~which~~our weConsolidated ~~have~~Financial Statements aand ~~controlling~~related disclosures. We evaluate our estimates on an on-going basis using our ~~financial~~historical ~~interest,~~experience as well as ~~variable~~other ~~interest~~factors ~~entities where~~ we ~~are~~believe appropriate under the ~~primary~~circumstances, ~~beneficiary.~~such as ~~Minority~~current ~~interest~~economic inconditions, ~~earnings~~ and ~~ownership~~adjust ~~has~~or ~~been~~revise ~~recorded~~our ~~for~~estimates ~~the~~as ~~percentage~~circumstances ofchange. ~~these~~As ~~entities~~future ~~not~~events ~~owned~~and bytheir ~~PBG~~effect cannot be determined with precision, actual results may differ from these estimates. WeIn preparation of these financial statements, we have ~~eliminated~~evaluated ~~all~~and ~~intercompany~~assessed all ~~accounts~~events occurring subsequent to December 26, 2009 and ~~transactions~~through inFebruary 22, ~~consolidation~~2010, which is the date our financial statements were issued.

~~Fiscal Year~~ Basis of Consolidation – ~~Our~~We ~~U.S. and~~consolidate ~~Canadian operations~~in ~~report~~our ~~using~~financial astatements ~~fiscal~~entities ~~year~~in ~~that~~which ~~consists~~we ofhave ~~52 weeks~~a controlling financial interest, ~~ending~~as onwell as variable interest entities where we are the ~~last~~primary beneficiary. ~~Saturday~~Noncontrolling interests in ~~December.~~earnings ~~Every~~and ownership has been recorded for the ~~five~~percentage orof ~~six~~these ~~years~~entities anot ~~53rd week~~owned isby ~~added~~PBG. ~~Fiscal~~In ~~years 2008~~addition, we use the equity method of accounting ~~2007~~to recognize investments in and ~~2006~~income ~~consisted~~from ofentities ~~52 weeks.~~where ~~Our~~we ~~remaining countries~~have ~~report~~significant oninfluence, but do not have a ~~calendar-year~~controlling ~~basis~~financial interest. ~~Accordingly,~~We ~~we recognize~~have ~~our~~eliminated ~~quarterly~~all ~~business~~intercompany ~~results~~accounts asand transactions ~~outlined~~in ~~below:~~consolidation.

Fiscal Year – Our U.S. and Canadian operations report using a fiscal year that consists of 52 weeks, ending on the last Saturday in December. Every five or six years a 53rd week is added. Fiscal years 2009, 2008 and 2007 consisted of 52 weeks. Our remaining countries report on a calendar-year basis. Accordingly, we recognize our quarterly business results as outlined below:


Quarter	U.S. & Canada	Mexico & Europe
First Quarter	12 weeks	January and February
Second Quarter	12 weeks	March, April and May
Third Quarter	12 weeks	June, July and August
Fourth Quarter	16 weeks	September, October, November and December

Revenue Recognition – Revenue, net of sales returns, is recognized when our products are delivered to customers in accordance with the written sales terms. We offer certain sales incentives on a local and national level through various customer trade agreements designed to enhance the growth of our revenue, market share and consumer brand awareness. Customer trade agreements are accounted for as a reduction to our revenues.

Customer trade agreements with our customers include payments for in-store displays, volume rebates, equipment placements, featured advertising and other growth incentives. A number of our customer trade agreements are based on quarterly and annual targets that generally do not exceed one year. Amounts recognized in our financial statements are based on amounts estimated to be paid to our customers depending upon current performance, historical experience, ~~forecasted~~actual and forecasted volume and other performance criteria.

Advertising and Marketing Costs – We are involved in a variety of programs to promote our products. We include advertising and marketing costs in selling, delivery and administrative expenses (“SD&A”). Advertising and marketing costs were $~~437~~360 million, $~~424~~437 million and $~~403~~424 million in ~~2008~~2009, ~~2007~~2008 and ~~2006~~2007, respectively, before bottler incentives received from PepsiCo and other brand owners.

Bottler Incentives – PepsiCo and other brand owners, at their discretion, provide us with various forms of bottler incentives. These incentives cover a variety of initiatives, including direct marketplace support and advertising support. We classify bottler incentives as follows:

• Direct marketplace support represents PepsiCo’s and other brand owners’ agreed-upon funding to assist us in offering sales and promotional discounts to retailers and is generally recorded as an adjustment to cost of sales. If the direct marketplace support is a reimbursement for a specific, incremental and identifiable program, the funding is recorded as an offset to the cost of the program either in net revenues or ~~selling, delivery and administrative expenses~~SD&A. • Advertising support represents agreed-upon funding to assist us with the cost of media time and promotional materials and is generally recorded as an adjustment to cost of sales. Advertising support that represents reimbursement for a specific, incremental and identifiable media cost, is recorded as a reduction to advertising and marketing expenses within ~~selling, delivery and administrative expenses~~SD&A.

Total bottler incentives recognized as adjustments to net revenues, cost of sales and SD&A in our Consolidated Statements of Operations were as follows: 35


	Fiscal Year Ended
	2009		2008		2007
Net revenues	$	100	$	93	$	66
Cost of sales		539		586		626
Selling, delivery and administrative expenses		47		57		67

Total bottler incentives	$	686	$	736	$	759

Share-Based Compensation – The Company grants a combination of stock option awards and restricted stock units to our middle and senior management and our Board of Directors. See Note 4 Share-based Compensation for further discussion on our share-based compensation.

Shipping and Handling Costs – Our shipping and handling costs reported in the Consolidated Statements of Operations are recorded primarily within SD&A. Such costs recorded within SD&A totaled $1.7 billion in 2009, 2008 and 2007.

~~PART~~ Foreign IICurrency Gains and Losses and Currency Translation – We translate the balance sheets of our foreign subsidiaries at the exchange rates in effect at the balance sheet date, while we translate the statements of operations at the average rates of exchange during the year. The resulting translation adjustments of our foreign subsidiaries are included in accumulated other comprehensive loss (~~continued~~“AOCL”), net of noncontrolling interests on our Consolidated Balance Sheets. Transactional gains and losses on our financial assets and liabilities arising from the impact of currency exchange rate fluctuations on transactions in foreign currency that is different from the local functional currency are included in other non-operating (income) expenses, net in our Consolidated Statements of Operations.

Total bottler incentives recognized as adjustments to net revenues, cost of sales and selling, delivery and administrative expenses in our Consolidated Statements of Operations were as follows:

	Fiscal Year Ended
	2008		2007		2006
Net revenues	$	93	$	66	$	67
Cost of sales		586		626		612
Selling, delivery and administrative expenses		57		67		70
Total bottler incentives	$	736	$	759	$	749

Share-Based Compensation – The Company grants a combination of stock option awards and restricted stock units to our middle and senior management and our Board of Directors. See Note 4 for further discussion on our share-based compensation.

Shipping and Handling Costs – Our shipping and handling costs reported in the Consolidated Statements of Operations are recorded primarily within selling, delivery and administrative expenses. Such costs recorded within selling, delivery and administrative expenses totaled $1.7 billion in 2008, 2007 and 2006.

Foreign Currency Gains and Losses and Currency Translation – We translate the balance sheets of our foreign subsidiaries at the exchange rates in effect at the balance sheet date, while we translate the statements of operations at the average rates of exchange during the year. The resulting translation adjustments of our foreign subsidiaries are included in accumulated other comprehensive loss, net of minority interest on our Consolidated Balance Sheets. Transactional gains and losses arising from the impact of currency exchange rate fluctuations on transactions in foreign currency that is different from the local functional currency are included in other non-operating expenses (income), net in our Consolidated Statements of Operations.

Pension and Postretirement Medical Benefit Plans – We sponsor pension and other postretirement medical benefit plans in various forms in the U.S. and other similar plans in our international locations, covering employees who meet specified eligibility requirements.

On Based ~~December 30,~~on ~~2006,~~new wepension ~~adopted~~accounting ~~the funded status provision of Statement of Financial Accounting Standards (“SFAS”) No. 158~~rules, ~~“Employers’ Accounting~~we ~~for~~began ~~Defined~~to ~~Benefit Pension and Other Postretirement Plans” (“SFAS 158”), which requires that we~~ recognize the overfunded or underfunded status of each of the pension and other postretirement plans beginning on December 30, 2006. In addition, on December 30, 2007, we ~~adopted~~changed ~~the~~our measurement date ~~provisions~~ ~~of SFAS 158, which requires that our assumptions used~~ to ~~measure our annual pension and postretirement medical expenses be determined as of~~ the year-end balance sheet date ~~and~~ ~~all~~for our plan assets, ~~and~~ liabilities beand ~~reported as of that date~~expenses. For fiscal years ended 2007 and prior, the majority of the pension and other postretirement plans used a September 30 measurement date and all plan assets and obligations were generally reported as of that date. As part of measuring the plan assets and benefit obligations on December 30, 2007, we adjusted our opening balances of retained earnings and ~~accumulated~~AOCL ~~other comprehensive loss~~ for the change in net periodic benefit cost ~~and~~ and fair value, respectively, from the previously used September 30 measurement date. The adoption of the measurement date provisions resulted in a net decrease in the pension and other ~~postretirement~~ postretirement medical benefit plans liability of $9 million, a net decrease in retained earnings of $16 million, net of ~~minority~~noncontrolling ~~interest~~interests of $2 million and taxes of $9 million and a net decrease in ~~accumulated~~ ~~other~~AOCL ~~comprehensive loss~~ of $19 million, net of ~~minority interest~~noncontrolling interests of $2 million and taxes of $14 million. There was no impact on our results of operations.

The determination of pension and postretirement medical benefit plan obligations and related expenses requires the use of assumptions to estimate the amount of benefits that employees earn ~~while~~ while working, as well as the present value of those benefit obligations. Significant assumptions include discount rate; expected rate of return on plan assets; certain employee-related ~~factors~~ factors such as retirement age, mortality, and turnover; rate of salary increases for plans where benefits are based on earnings; and for retiree medical plans, health care cost trend rates. We ~~evaluate~~ evaluate these assumptions on an annual basis at each measurement date based upon historical experience of the plans and management’s best judgment regarding future expectations.

Differences between the assumed rate of return and actual return of on plan assets are deferred in ~~accumulated~~AOCL ~~other comprehensive loss~~ in equity and amortized to earnings utilizing the market-related value method. Under this method, differences between the assumed rate of return and actual rate of return from any one year will be recognized over a five -year period in ~~the~~ the market -related value.

See Note 12 11 Pension and Postretirement Medical Benefit Plans for further discussion on our pension and postretirement medical benefit plans.

Income Taxes – Our effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations and tax planning strategies available to us in the various jurisdictions in which we operate.

Our deferred tax assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize in the future. We establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.

As Effective ~~required~~fiscal ~~under~~year ~~the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48~~2007, ~~“Accounting~~ ~~for Uncertainty in Income Taxes” (“FIN 48”), which~~ we adopted asthe ofnew ~~the~~income ~~beginning of~~tax ~~fiscal~~standard ~~year~~and ~~2007,~~began weto recognize the impact of our tax positions in our financial statements if those positions will more likely than not be sustained on audit, based on the technical merit of the position. The impact of adopting this standard was recorded by adjusting opening retained earnings.

50 36

Significant management judgment is required in evaluating our tax positions and in determining our effective tax rate.

See Note 13 12 Income Taxes for further discussion on our income taxes.

Earnings Per Share – We compute basic earnings per share by dividing net income attributable to PBG by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if stock options or other equity awards from stock compensation plans were exercised and converted into common stock that would then participate in net income.

Cash and Cash Equivalents – Cash and cash equivalents include all highly liquid investments with original maturities not exceeding three months at the time of purchase. The fair value of our cash and cash equivalents ~~approximate~~approximates the amounts shown on our Consolidated Balance Sheets due to their short-term nature.

Allowance for Doubtful Accounts – A portion of our accounts receivable will not be collected due to non-payment, bankruptcies and sales returns. ~~Our~~We ~~accounting~~reserve ~~policy for the provision for doubtful accounts requires reserving~~ an amount based on the evaluation of the aging of accounts receivable, sales return trend analysis, detailed analysis of high-risk customers’ accounts, and the overall market and economic conditions of our customers.

Inventories – We value our inventories at the lower of cost or net realizable value. The cost of our inventory is generally computed onusing the ~~first-in, first-out~~ average cost method.

Property, Plant and Equipment – We record property, plant and equipment (“PP&E”) at cost, except for PP&E that has been impaired, for which we write down the carrying amount to estimated fair market value, which then becomes the new cost basis.

~~Other~~ We ~~Intangible~~depreciate ~~Assets,~~PP&E ~~net~~on ~~and Goodwill –~~a ~~Goodwill~~straight-line ~~and~~basis ~~other~~over ~~intangible assets~~the ~~with~~estimated ~~indefinite useful~~ lives ~~are~~as ~~not amortized; however,~~follows: ~~they are evaluated for impairment at least annually, or more frequently if facts and circumstances indicate that the assets may be impaired.~~


Buildings and improvements		20-33 years
Manufacturing and distribution equipment		2-15 years
Marketing equipment		2-7 years

Other Intangible Assets, net and Goodwill – Intangible assets with indefinite useful lives and goodwill are not amortized; however, they are evaluated for impairment at least annually, or more frequently if facts and circumstances indicate that the assets may be impaired.

Intangible assets that are determined to have a finite life are amortized on a straight-line basis over the period in which we expect to receive economic benefit, which generally ranges from five to twenty years, and are evaluated for impairment only if facts and circumstances indicate that the carrying value of the asset may not be recoverable.

The determination of the expected life depends upon the use and the underlying characteristics of the intangible asset. In our evaluation of the expected life of these intangible assets, we consider the nature and terms of the underlying agreements; our intent and ability to use the specific asset; the age and market position of the products within the territories in which we are entitled to sell; the historical and projected growth of those products; and costs, if any, to renew the related agreement.

If See ~~the~~Note ~~carrying~~6 ~~value~~Other isIntangible ~~not recoverable~~Assets, ~~impairment~~net isand ~~measured as~~Goodwill ~~the~~for ~~amount~~further bydiscussion ~~which the carrying value exceeds its fair value. Initial fair value is generally based~~ on ~~either~~our ~~appraised~~goodwill ~~value~~and or other ~~valuation~~intangible ~~techniques~~assets.

See Note 6 for further discussion on our goodwill and other intangible assets.

Casualty Insurance Costs – In the United States, we use a combination of insurance and self-insurance mechanisms, including a wholly owned captive insurance entity. This captive entity participates in a reinsurance pool for a portion of our workers’ compensation risk. We provide self-insurance for the workers’ compensation risk retained by the Company and automobile risks up to $10 million per occurrence, and product and general liability risks up to $5 million per occurrence. For losses exceeding these self-insurance thresholds, we purchase casualty insurance from a third-party provider. Our liability for casualty costs is estimated using individual case-based valuations and statistical analyses and is based upon historical experience, actuarial assumptions and professional judgment. We do not discount our loss expense reserves.

~~Minority Interest~~ At December –26, ~~Minority~~2009, ~~interest~~our isnet ~~recorded~~ liability for ~~the~~casualty ~~entities~~costs ~~that~~was we$240 million, ~~consolidate~~of ~~but~~which ~~are not wholly owned by~~$70 ~~PBG.~~million ~~Minority~~was ~~interest~~considered ~~recorded~~short-term in ~~our Consolidated Financial Statements is primarily comprised of PepsiCo’s share of Bottling LLC and PR Beverages~~nature. At December 27, 2008, our net liability for casualty ~~PepsiCo~~costs ~~owned~~was ~~6.6~~$235 ~~percent~~million, of ~~Bottling~~which ~~LLC and 40~~$70 ~~percent~~million ofwas PRconsidered ~~Beverages~~short-term ~~venture~~in nature.

51 Treasury Stock – We record the repurchase of shares of our common stock at cost and classify these shares as treasury stock within shareholders’ equity. Repurchased shares are included in our authorized and issued shares but not included in our shares outstanding. We record shares reissued using an average cost. At December 27, 2008, we had 175 million shares authorized under our share repurchase program. Since the inception of our share repurchase program in October 1999, we have repurchased approximately 146 million shares and have reissued approximately 47 million for stock option exercises.

Financial Instruments and Risk Management – We use derivative instruments to hedge against the risk of adverse movements associated with commodity prices, interest rates and foreign currency. Our corporate policy prohibits the use of derivative instruments for trading or speculative purposes, and we have procedures in place to monitor and control their use.

All derivative instruments are recorded at fair value as either assets or liabilities in our Consolidated Balance Sheets. Derivative instruments are generally designated and accounted for as either a hedge of a recognized asset or liability (“fair value hedge”) or a hedge of a forecasted transaction (“cash flow hedge”). The derivative’s gain or loss recognized in earnings is recorded consistent with the expense classification of the underlying hedged item.

If a fair value or cash flow hedge were to cease to qualify for hedge accounting or were terminated, it would continue to be carried on the balance sheet at fair value until settled, but hedge accounting would be discontinued prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in accumulated other comprehensive loss are reclassified to earnings at that time.

We also may enter into a derivative instrument for which hedge accounting is not required because it is entered into to offset changes in the fair value of an underlying transaction recognized in earnings (“economic hedge”). These instruments are reflected in the Consolidated Balance Sheets at fair value with changes in fair value recognized in earnings.

~~PART~~ Noncontrolling IIInterests ~~(continued)~~– Noncontrolling interests are recorded for the entities that we consolidate but are not wholly owned by PBG. Noncontrolling interests recorded in our Consolidated Financial Statements is primarily comprised of PepsiCo’s share of Bottling LLC and PR Beverages. At December 26, 2009, PepsiCo owned 6.6 percent of Bottling LLC and 40 percent of PR Beverages venture.

Treasury Stock – We record the repurchase of shares of our common stock at cost and classify these shares as treasury stock within PBG shareholders’ equity. Repurchased shares are included in our authorized and issued shares but not included in our shares outstanding. We record shares reissued using an average cost. At December 26, 2009, we had 175 million shares authorized under our share repurchase program. Since the inception of our share repurchase program in October 1999, we have repurchased approximately 146 million shares and have reissued approximately 57 million for stock option exercises.

Financial Instruments and Risk Management –All derivative instruments are recorded at fair value as either assets or liabilities in our Consolidated Balance Sheets. Derivative instruments are generally designated and accounted for as either a hedge of a recognized asset or liability (“fair value hedge”) or a hedge of a forecasted transaction (“cash flow hedge”). Certain of these derivatives are not designated as hedging instruments and are used as “economic hedges” to manage certain risks in our business.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the change in the fair value of a derivative instrument is deferred in AOCL until the underlying hedged item is recognized in earnings. The derivative gain or loss recognized in earnings is recorded consistent with the expense classification of the underlying hedged item. The ineffective portion of a fair value change on a qualifying cash flow hedge is recognized in earnings immediately. For derivatives that receive fair value hedge treatment, we recognize the change in fair value for both the derivative and hedged item currently in earnings.

Derivative instruments that are not designated as hedging instruments, but are used as economic hedges to manage certain risks in our business, are marked-to-market on a periodic basis and recognized currently in earnings consistent with the expense classification of the underlying hedged item.

Commitments and Contingencies – We are subject to various claims and contingencies related to lawsuits, environmental and other matters arising out of the normal course of business. Liabilities related to commitments and contingencies are recognized when a loss is probable and reasonably estimable.

New Accounting Standards

Accounting Codification ~~SFAS No. 157~~

In ~~September 2006~~June 2009, the Financial Accounting Standards Board (“FASB”) issued ~~SFAS~~ Accounting Standards Codification Update No. ~~157, “Fair~~2009-01 ~~Value Measurements”~~ (“~~SFAS~~ASU No. ~~157~~2009-1”), “Topic 105 – Generally Accepted Accounting Principles,” which establishes athe ~~framework~~FASB ~~for~~Accounting ~~reporting~~Standards ~~fair value and~~CodificationTM ~~expands~~(“Codification”) ~~disclosures~~as ~~about~~the ~~fair~~source ~~value~~of ~~measurements.~~authoritative ~~The~~accounting ~~Company adopted~~principles ~~SFAS 157~~recognized asby itthe ~~applies~~FASB to ~~financial~~be applied ~~assets~~in ~~and liabilities~~the preparation of financial statements in ~~our~~conformity ~~first~~with ~~quarter~~generally ofaccepted ~~2008~~accounting principles. The ~~adoption~~guidance also explicitly recognizes rules and interpretive releases of ~~these~~the ~~provisions~~Securities ~~did~~and ~~not~~Exchange ~~have~~Commission a(“SEC”) ~~material~~under ~~impact~~federal onsecurities ~~our~~laws ~~Consolidated~~as authoritative GAAP for ~~Financial~~SEC ~~Statements~~registrants. ~~For~~This ~~further~~standard ~~information~~became ~~about~~effective in the ~~fair value~~fourth ~~measurements~~quarter of ~~our~~2009 ~~financial~~and ~~assets~~required ~~and~~the Company ~~liabilities~~to update all GAAP references to refer to the new Codification topics, ~~see Note 8~~where applicable.

In Variable ~~February~~Interest ~~2008, the FASB issued FASB Staff Position~~Entity No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP 157-2 will become effective beginning with our first quarter of 2009 and will not have a material impact on our Consolidated Financial Statements.

In June 2009, the FASB issued an accounting standard on variable interest entities, which was incorporated into the Consolidation topic of the Codification, to address the elimination of the ~~SFAS No~~concept of a qualifying special purpose entity. ~~141(R)~~ This standard also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, it provides more timely and useful information about an enterprise’s involvement with a variable interest entity. The standard will become effective in the first quarter of 2010. We do not expect that this standard will have a material impact on our Consolidated Financial Statements.

In Postretirement ~~December~~Benefit ~~2007,~~Plan ~~the FASB issued SFAS No. 141(revised~~Disclosure 2007), “Business Combinations” (“SFAS 141(R)”), which addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interest in business combinations. Certain costs, which were previously capitalized as a component of goodwill, such as acquisition closing costs, post acquisition restructuring charges and changes to tax liabilities and valuation allowances after the measurement period, will now be expensed. SFAS 141(R) also establishes expanded disclosure requirements for business combinations. SFAS 141(R) will become effective for new transactions closing in our 2009 fiscal year.

In December 2008, the FASB issued an accounting standard enhancing employer’s disclosures about postretirement benefit plan assets, which was incorporated into the Codification topic ~~SFAS No~~Compensation – Retirement Benefits. ~~160~~ This new standard requires companies to disclose information about the fair value measurement of plan

52 In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”), which addresses the accounting and reporting framework for minority interests by a parent company. SFAS 160 also addresses disclosure requirements to distinguish between interests of the parent and interests of the noncontrolling owners of a subsidiary. SFAS 160 will become effective beginning with our first quarter of 2009. We will be reporting minority interest as a component of equity in our Consolidated Balance Sheets and below income tax expense in our Consolidated Statement of Operations. As minority interest will be recorded below income tax expense, it will have an impact to our total effective tax rate, but our total taxes will not change. For comparability, we will be retrospectively applying the presentation of our prior year balances in our Consolidated Financial Statements.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced disclosures for derivative and hedging activities. SFAS 161 will become effective beginning with our first quarter of 2009.

EITF Issue No. 07-1

In December 2007, the FASB ratified its Emerging Issues Task Force’s (“EITF”) Consensus for Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”), which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 will become effective beginning with our first quarter of 2009. We do not believe this standard will have a material impact on our Consolidated Financial Statements.

Note 3 – Earnings per Share

The following table reconciles the shares outstanding and net earnings used in the computations of both basic and diluted earnings per share:

	Fiscal Year Ended
Shares in millions	2008		2007		2006
Net Income	$	162	$	532	$	522
Weighted-average shares outstanding during period on which basic earnings per share is calculated		216		226		236
Effect of dilutive shares
Incremental shares under stock compensation plans		4		7		6
Weighted-average shares outstanding during period on which diluted earnings per share is calculated		220		233		242
Basic earnings per share	$	0.75	$	2.35	$	2.22
Diluted earnings per share	$	0.74	$	2.29	$	2.16

Basic earnings per share are calculated by dividing the net income by the weighted-average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur if stock options or other equity awards from our stock compensation plans were exercised and converted into common stock that would then participate in net income.

Diluted earnings per share for the fiscal years ended 2008 and 2006 exclude the dilutive effect of 11.6 million and 1.7 million stock options, respectively. These shares were excluded from the diluted earnings per share computation because for the years noted, the exercise price of the stock options was greater than the average market price of the Company’s common shares during the related periods and the effect of including the stock options in the computation would be anti-dilutive. For the fiscal year ended 2007, there were no stock options excluded from the diluted earnings per share calculation.

assets. The standard became effective in the fourth quarter of 2009. See Note 411 –Pension ~~Share-Based~~and Postretirement ~~Compensation~~Medical Benefit Plans for further information.

~~Accounting~~ Derivative ~~for~~Instruments Share-Based Compensation – Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). Among its provisions, SFAS 123(R) requires the Company to recognize compensation expense for equity awards over the vesting period based on their grant-date fair value. The Company adopted SFAS 123(R) in using the modified prospective approach. Under this transition method, the measurement and ~~our method~~Hedging ~~of amortization of costs for share-based payments granted~~Activity prior to, but not vested as of January 1, 2006, would be based on the same estimate of the grant-date fair value and the same amortization method that was previously used in our SFAS 123 pro forma disclosure. Results for prior periods have not been restated as provided for under the modified prospective approach. For equity awards granted after the date of adoption, we amortize share-based compensation expense on a straight-line basis over the vesting term.

~~Compensation~~ In ~~expense~~March 2008, isthe ~~recognized~~FASB ~~only~~issued ~~for~~an ~~share-based~~accounting ~~payments expected to vest. We estimate forfeitures~~standard, ~~both~~which atwas ~~the~~incorporated ~~date~~into ofthe ~~grant~~Derivatives asand ~~well~~Hedging astopic ~~throughout~~of the ~~vesting period~~Codification, ~~based~~requiring onenhanced ~~the Company’s~~disclosure ~~historical~~for ~~experience~~derivative and hedging ~~future expectations~~activities. ~~Prior~~ toThe ~~the~~standard ~~adoption~~became ofeffective ~~SFAS 123(R),~~in the ~~effect~~first quarter of ~~forfeitures~~ on2009. ~~the~~See ~~pro~~Note ~~forma~~10 Financial ~~expense~~Instruments ~~amounts~~and ~~was~~Risk ~~recognized based~~Management onfor ~~estimated~~the ~~forfeitures~~required disclosures.

Business Combinations

In December 2007, the FASB issued an accounting standard which addresses the accounting and disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a business combination. The standard, which was incorporated into the Business Combinations topic of the Codification, became effective in 2009 and did not have a material impact on our Consolidated Financial Statements.

Noncontrolling Interests

In December 2007, the FASB issued an accounting standard on noncontrolling interests which addresses the accounting and reporting framework for noncontrolling interests by a parent company. The standard, which was incorporated into the Consolidation topic of the Codification, also addresses disclosure requirements to distinguish between interests of the parent and interests of the noncontrolling owners of a subsidiary. The standard became effective in the first quarter of 2009 and required that minority interest be renamed noncontrolling interests and that a company present a consolidated net income measure that includes the amount attributable to such noncontrolling interests for all periods presented. In addition, it requires reporting noncontrolling interests as a component of equity in our Consolidated Balance Sheets and below income tax expense in our Consolidated Statements of Operations. We have retrospectively applied the presentation to our prior year balances in our Consolidated Financial Statements.

Note 3—EARNINGS PER SHARE

The following table reconciles the shares outstanding and net income attributable to PBG used in the computations of both basic and diluted earnings per share attributable to PBG’s common shareholders:


Shares in millions	Fiscal Year Ended
	2009		2008		2007
Net income attributable to PBG	$	612	$	162	$	532
Weighted-average shares outstanding during period on which basic earnings per share is calculated		216		216		226
Effect of dilutive shares
Incremental shares under stock compensation plans		5		4		7

Weighted-average shares outstanding during period on which diluted earnings per share is calculated		221		220		233


Earnings per share attributable to PBG’s common shareholders
Basic earnings per share	$	2.84	$	0.75	$	2.35

Diluted earnings per share	$	2.77	$	0.74	$	2.29

Basic earnings per share are calculated by dividing the net income attributable to PBG by the weighted-average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur if stock options or other equity awards from our stock compensation plans were exercised and converted into common stock that would then participate in net income.

Diluted earnings per share for the fiscal years ended 2009 and 2008 exclude the dilutive effect of 8.4 million and 11.6 million stock options, respectively. These shares were excluded from the diluted earnings per share computation because for the years noted, the exercise price of the stock options was greater than the average market price of the Company’s common shares during the related periods and the effect of including the stock options in the computation would be anti-dilutive. For the fiscal year ended 2007, there were no stock options excluded from the diluted earnings per share calculation.

Note 4—SHARE-BASED COMPENSATION

Accounting for Share-Based Compensation

Effective January 1, 2006, the Company began recognizing compensation expense for equity awards over the vesting period based on their grant-date fair value. The Company uses the modified prospective approach. Under this transition method, the measurement and our method of amortization of costs for share-based payments granted prior to, but not vested as of January 1, 2006, would be based on the same estimate of the grant-date fair value and the same amortization method that was previously used in our pro forma disclosure. Results for prior periods have not been restated as provided for under the modified prospective approach. For equity awards granted after the date of adoption, we amortize share-based compensation expense on a straight-line basis over the vesting term.

Compensation expense is recognized only for share-based payments expected to vest. We estimate forfeitures, both at the date of grant as well as throughout the vesting period, based on the Company’s historical experience and future expectations.

Total share-based compensation expense recognized in the Consolidated Statements of Operations is as follows:

	Fiscal Year Ended
	2008			2007			2006
	2009			2008			2007
Total share-based compensation expense	$	5658		$	6256		$	6562
Income tax benefit		(1617	)		(1716	)		(1817	)
Minority interest		(3	)		(5	)		(4	)
Noncontrolling interests		(5	)		(3	)		(5	)
Net income impact	$	37		$	40		$	43
Net income attributable to PBG impact	$	36		$	37		$	40

Share-Based Long-Term Incentive Compensation Plans ~~– Prior to 2006, we~~ granted non-qualified stock options to certain employees, including middle and senior management under our share-based long-term incentive compensation plans (“incentive plans”). Additionally, we granted restricted stock units to certain senior executives. Non-employee members of our Board of Directors (“Directors”) participate in a separate incentive plan and receive non-qualified stock options or restricted stock units.

~~Beginning~~ We ~~in 2006, we~~ grant a mix of stock options and restricted stock units to middle and senior management ~~employees~~ employees and our Board of Directors under our incentive plans.

Shares available for future issuance to employees and our Board of Directors under existing plans were 169.45 million at December 2726, ~~2008~~ 2009.

The fair value of PBG stock options was estimated at the date of grant using the Black-Scholes-Merton option-valuation model. The table below outlines the weighted-average assumptions for options granted during years ended December 2726, ~~2008~~2009, December 2927, ~~2007~~2008 and December 3029, ~~2006~~2007:

	2008			2007			2006
	2009			2008			2007
Risk-free interest rate		2.82	%		42.58	%		4.75	%
Expected term (in years)		5.3			5.63			5.76
Expected volatility		2430	%		2524	%		2725	%
Expected dividend yield		2.08	%		12.80	%		1.58	%

The risk-free interest rate is based on the implied yield available on U.S. ~~Treasury~~ Treasury zero-coupon issues with an equivalent remaining expected term. The expected term of the ~~options~~ options represents the estimated period of time employees will retain their vested stocks until exercise. Due to the lack of historical experience in stock option exercises, we estimate expected term utilizing a combination of the simplified method as ~~prescribed by the United States Securities~~ and ~~Exchange Commission’s Staff Accounting Bulletin No. 110 and~~ historical experience of similar awards, ~~giving~~ giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on a combination of historical volatility of the Company’s stock and the implied volatility of its traded options. The expected dividend yield is management’s long-term estimate of annual dividends to be paid as a percentage of share price.

The fair value of restricted stock units is based on the fair value of PBG stock on the date of grant.

We receive a tax deduction for certain stock option exercises when the options are exercised, generally for the excess of the stock price over the exercise price of the options. Additionally, we receive a tax deduction for certain restricted stock units equal to the fair market value of PBG’s stock at the date the restricted stock units are converted to PBG stock. ~~SFAS 123(R)~~ GAAP requires that benefits received from tax deductions ~~resulting~~up ~~from~~to the grant-date fair value of equity awards be reported as operating cash inflows in our Consolidated ~~Statement~~ Statements of Cash Flows. Benefits from tax deductions in excess of the grant-date fair value from equity awards are treated as financing cash inflows in our Consolidated ~~Statement~~Statements of Cash Flows. For the year ended December 2726, ~~2008~~2009, we ~~recognized~~ recognized $736 million in tax ~~benefits from equity awards in the~~ ~~Consolidated Statements of Cash Flows, of which $2 million was recorded in the financing section with the remaining being recorded in cash from operations.~~

54 As of December 27, 2008, there was approximately $75 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the incentive plans. That cost is expected to be recognized over a weighted-average period of 2.0 years.

Stock Options – Stock options expire after 10 years and generally vest ratably over three years. Stock options granted to Directors are typically fully vested on the grant date.

~~PART~~benefits IIfrom ~~(continued)~~equity awards in the Consolidated Statements of Cash Flows, of which $10 million was recorded in the financing section with the remaining being recorded in cash from operations.

As of December 26, 2009, there was approximately $71 million of total unrecognized ~~The~~compensation ~~following~~cost ~~table~~related ~~summarizes~~to ~~option~~non-vested ~~activity~~share-based ~~during~~compensation ~~the~~arrangements ~~year~~granted under the ~~ended~~incentive ~~December 27,~~plans. ~~2008:~~That cost is expected to be recognized over a weighted-average period of 1.8 years.

						Weighted-Average
				Weighted-Average		Remaining		Aggregate
	Shares			Exercise Price		Contractual		Intrinsic
	(in millions)			per Share		Term (years)		Value
Outstanding at December 29, 2007		26.9		$	25.27		5.9	$	395
Granted		3.7		$	33.69
Exercised		(1.9	)	$	21.70
Forfeited		(0.7	)	$	30.46
Outstanding at December 27, 2008		28.0		$	26.50		5.5	$	35
Vested or expected to vest at December 27, 2008		27.6		$	26.42		5.4	$	35
Exercisable at December 27, 2008		21.4		$	24.81		4.5	$	35

Stock Options

~~The~~ Stock ~~aggregate~~options ~~intrinsic~~expire ~~value~~after in10 years ~~the~~and ~~table~~generally ~~above~~vest isratably ~~before income~~over ~~taxes,~~three ~~based~~years. onStock options ~~the~~granted ~~Company’s~~to ~~closing~~our ~~stock~~Board ~~price~~ of ~~$22.00~~ ~~and~~Directors ~~$39.96~~are astypically offully ~~the~~vested ~~last~~on ~~business day of~~ the ~~period ended~~grant ~~December 27, 2008 and December 29, 2007, respectively~~date.

For the years ended December 27, 2008, December 29, 2007 and December 30, 2006, the weighted-average grant-date fair value of stock options granted was $7.10, $8.19 and $8.75, respectively. The ~~total~~following ~~intrinsic~~table ~~value~~summarizes ofoption ~~stock~~activity ~~options exercised~~ during the ~~years~~year ended December 2726, ~~2008,~~2009: ~~December 29, 2007 and December 30, 2006 was $21 million, $100 million and $115 million, respectively.~~

Restricted Stock Units – Restricted stock units granted to employees generally vest over three years. In addition, restricted stock unit awards to certain senior executives contain vesting provisions that are contingent upon the achievement of pre-established performance targets. The initial restricted stock unit award to Directors remains restricted while the individual serves on the Board. The annual grants to Directors vest immediately, but receipt of the shares may be deferred. All restricted stock unit awards are settled in shares of PBG common stock.


				Weighted-		Weighted-
				Average		Average
				Exercise		Remaining
	Shares			Price		Contractual		Aggregate
	(in millions)			per Share		Term (years)		Intrinsic Value
Outstanding at December 27, 2008		28.0		$	26.50		5.5	$	35
Granted		5.8		$	18.93
Exercised		(9.1	)	$	22.23
Forfeited		(0.8	)	$	25.32

Outstanding at December 26, 2009		23.9		$	26.33		6.2	$	268

Vested or expected to vest at December 26, 2009		23.2		$	26.46		6.1	$	258

Exercisable at December 26, 2009		14.8		$	27.57		4.7	$	148

The ~~following~~aggregate intrinsic value in the table ~~summarizes~~above ~~restricted~~is ~~stock~~before ~~unit~~income ~~activity~~taxes, based on the ~~during~~Company’s closing stock price of $37.56 and $22.00 as of the ~~year~~last business day of the years ended December 26, 2009 and December 27, 2008:, respectively.

						Weighted-Average
				Weighted-Average		Remaining		Aggregate
	Shares			Grant-Date		Contractual		Intrinsic
	(in thousands)			Fair Value		Term (years)		Value
Outstanding at December 29, 2007		2,379		$	29.96		1.7	$	95
Granted		1,319		$	35.38
Converted		(163	)	$	30.63
Forfeited		(182	)	$	31.61
Outstanding at December 27, 2008		3,353		$	31.97		1.3	$	74
Vested or expected to vest at December 27, 2008		2,826		$	32.25		1.4	$	62
Convertible at December 27, 2008		190		$	28.81		–	$	4

For the years ended December 26, 2009, December 27, 2008 and December 29, 2007, the weighted-average grant-date fair value of stock options granted was $4.55, $7.10 and $8.19, respectively. The total intrinsic value of stock options exercised during the years ended December 26, 2009, December 27, 2008 and December 29, 2007 was $98 million, $21 million and $100 million, respectively.

Restricted Stock Units 40

Restricted stock units granted to employees generally vest over three years. In addition, restricted stock unit awards to certain senior executives contain vesting provisions that are contingent upon the achievement of pre-established performance targets. The initial restricted stock unit award to our Board of Directors remains restricted while the individual serves on the Board. The annual grants to our Board of Directors vest immediately, but receipt of the shares may be deferred. All restricted stock unit awards are settled in shares of PBG common stock.

The following table summarizes restricted stock unit activity during the year ended December 26, 2009:


						Weighted-
				Weighted-		Average
	Shares			Average		Remaining		Aggregate
	(in			Grant-Date		Contractual		Intrinsic
	thousands)			Fair Value		Term (years)		Value
Outstanding at December 27, 2008		3,353		$	31.97		1.3	$	74
Granted		1,887		$	18.82
Converted		(930	)	$	29.39
Forfeited		(208	)	$	29.15

Outstanding at December 26, 2009		4,102		$	26.65		1.4	$	154

Vested or expected to vest at December 26, 2009		3,593		$	26.69		1.4	$	135

Convertible at December 26, 2009		60		$	27.05		—	$	2

For the years ended December 2726, ~~2008~~2009, December 2927, ~~2007~~ 2008 and December 3029, ~~2006~~2007, the weighted-average grant-date fair value of restricted stock units granted was $3518.3882, $3135.~~02 and~~38 and $2931.5502, respectively. The total intrinsic value of restricted stock units converted during the years ended December 2726, ~~2008~~2009, December 2927, ~~2007~~2008 and December 3029, ~~2006~~2007 was approximately $4 19 million, $~~575 thousand~~4 million and $~~248~~575 thousand, respectively.

Note 5—BALANCE –SHEET ~~Balance Sheet Details~~DETAILS

	2008			2007
	2009			2008
Accounts Receivable, net
Trade accounts receivable	$	1,~~208~~278		$	1,~~319~~208
Allowance for doubtful accounts		(7169	)		(5471	)
Accounts receivable from PepsiCo		~~154~~210			~~188~~154
Other receivables		8072			6780
	$	1,~~371~~491		$	1,~~520~~371
Inventories
Raw materials and supplies	$	~~185~~220		$	~~195~~185
Finished goods		~~343~~380			~~382~~343
	$	~~528~~600		$	~~577~~528
Prepaid Expenses and Other Current Assets
Prepaid expenses	$	~~244~~317		$	~~290~~244
Other current assets		3297			5232
	$	~~276~~414		$	~~342~~276
Property, Plant and Equipment, net
Property, Plant and Equipment, net(1)
Land	$	~~300~~306		$	~~320~~300
Buildings and improvements		1,~~542~~704			1,~~484~~542
Manufacturing and distribution equipment		34,~~999~~192			43,~~091~~999
Marketing equipment		2,~~246~~192			2,~~389~~246
Capital leases		23			36
Capital leases(2)		46			23
Other		~~154~~153			~~164~~154
		8,264			8,484
		8,593			8,264
Accumulated depreciation		(4,~~382~~694	)		(4,~~404~~382	)
	$	3,~~882~~899		$	43,~~080~~882

Capital leases primarily represent manufacturing and distribution equipment and other equipment.


⁽¹⁾		Pursuant to the terms of an industrial revenue bond, we transferred title of certain fixed assets with a net book value of $70 million to a state governmental authority in the U.S. to receive a property tax abatement. The title to these assets will revert back to PBG upon retirement or cancellation of the bond. These fixed assets are still recognized in the Company’s Consolidated Balance Sheets as all risks and rewards remain with the Company.

⁽²⁾		Capital leases primarily represent manufacturing and office equipment.

We calculate depreciation on a straight-line basis over the estimated lives of the assets as follows:


	2009		2008
Other Assets
Note receivable from noncontrolled affiliate	$	73	$	—
Other assets		112		155

	$	185	$	155

Buildings and improvements	20–33 years
	2009		2008
Manufacturing and distribution equipment	2–15 years
Accounts Payable and Other Current Liabilities
Marketing equipment	2–7 years
Accounts payable	$	497	$	444
Accounts payable to PepsiCo		204		217
Trade incentives		232		189
Accrued compensation and benefits		256		240
Other accrued taxes		121		128
Accrued interest		86		85
Other current liabilities		366		372
	$	1,762	$	1,675

56 Industrial Revenue Bonds – Pursuant to the terms of an industrial revenue bond, we transferred title of certain fixed assets with a net book value of $72 million to a state governmental authority in the U.S. to receive a property tax abatement. The title to these assets will revert back to PBG upon retirement or cancellation of the bond. These fixed assets are still recognized in the Company’s Consolidated Balance Sheet as all risks and rewards remain with the Company.

	2008		2007
Accounts Payable and Other Current Liabilities
Accounts payable	$	444	$	615
Accounts payable to PepsiCo		217		255
Trade incentives		189		235
Accrued compensation and benefits		240		276
Other accrued taxes		128		140
Accrued interest		85		70
Other current liabilities		372		377
	$	1,675	$	1,968

Note 6 ~~– Other~~—OTHER ~~Intangible~~INTANGIBLE ~~Assets~~ASSETS, ~~net~~NET ~~and~~AND ~~Goodwill~~GOODWILL

The components of other intangible assets are as follows:

	2008			2007
	2009			2008
Intangibles subject to amortization:
Gross carrying amount:
Customer relationships and lists	$	4547		$	5445
Franchise and distribution rights		4179			4641
Other identified intangibles		3426			3034
		120			130
		152			120
Accumulated amortization:
Customer relationships and lists		(1518	)		(15	)
Franchise and distribution rights		(3136	)		(31	)
Other identified intangibles		(217	)		(1721	)
		(67	)		(63	)
		(61	)		(67	)
Intangibles subject to amortization, net		5391			6753
Intangibles not subject to amortization:
Carrying amount:
Franchise rights		3,~~244~~390			3,~~235~~244
Licensing rights		315			315
Distribution rights		4952			~~294~~49
Brands		3940			~~213~~39
Other identified intangibles		5153			5751
Intangibles not subject to amortization		3,~~698~~850			43,~~114~~698
Total other intangible assets, net	$	3,~~751~~941		$	43,~~181~~751

During the ~~first~~second quarter of ~~2008~~2009, we acquired a Pepsi-Cola ~~Batavia Bottling~~and ~~Corp.~~Dr ~~This~~Pepper ~~Pepsi-Cola~~ franchise bottler ~~serves certain~~ ~~New~~serving ~~York~~portions ~~counties~~of incentral ~~whole or in part~~Texas. As a result of ~~the~~ this acquisition, we recorded approximately $19 56 million of non-amortizable franchise rights and $48 million of non-compete agreements, with a weighted-average amortization period of 5 years.

During the third quarter of 2009, we acquired a Pepsi-Cola franchise bottler serving northeastern Massachusetts. As a result of this acquisition we recorded approximately $24 million of non-amortizable franchise rights and $1 million of non-compete agreements, with a weighted-average amortization period of 5 years.

During 2009, we acquired distribution rights for certain energy drinks in the United States, Canada and Mexico, and protein-enhanced functional beverages in the United States. As a result of these acquisitions we recorded approximately $36 million of amortizable distribution rights, with a weighted-average amortization period of 10 years.

During 2009, we acquired rights to manufacture and distribute Crush brands in portions of the United States and recorded approximately $4 million of non-amortizable franchise rights.

During the first quarter of 2008, we acquired a Pepsi-Cola franchise bottler serving certain New York counties in whole or in part. As a result of the acquisition we recorded approximately $18 million of non-amortizable franchise rights and $4 million of non-compete agreements, with a weighted-average amortization period of 10 years.

During the first quarter of 2008, we acquired distribution rights for SoBe brands in portions of Arizona and Texas and recorded approximately $6 million of non-amortizable distribution rights.

During the fourth quarter of 2008, we acquired ~~Lane~~a ~~Affiliated Companies, Inc. (“Lane”). This~~ Pepsi-Cola franchise bottler ~~serves~~serving portions of Colorado, Arizona and New Mexico. As a result of the acquisition we recorded approximately $176 million of non-amortizable franchise rights.

The total cost of acquisitions and distribution and franchise rights during 2009 and 2008 was 41approximately $132 million and $279 million, respectively.

Intangible Asset Amortization

Intangible asset amortization expense was $10 million, $9 million and $10 million in 2009, 2008 and 2007, respectively. Amortization expense for each of the next five years is estimated to be approximately $12 million or less.

~~PART II (continued)~~Goodwill

~~Arizona~~ The ~~and~~changes ~~New~~in ~~Mexico.~~the Ascarrying avalue ~~result~~ of goodwill by reportable segment for the ~~acquisition,~~years weended ~~recorded~~December 27, ~~approximately~~2008 ~~$176~~and December ~~million~~26, ~~of non-amortizable franchise~~2009 ~~rights.~~are as follows:

During the first quarter of 2007, we acquired from Nor-Cal Beverage Company, Inc., franchise and bottling rights for select Cadbury Schweppes brands in the Northern California region. As a result of the acquisition, we recorded approximately $50 million of non-amortizable franchise rights.


				U.S. &
	Total			Canada			Europe			Mexico
Balance at December 29, 2007	$	1,533		$	1,290		$	17		$	226
Purchase price allocations		27			20			13			(6	)
Impact of foreign currency translation and other		(126	)		(75	)		(4	)		(47	)

Balance at December 27, 2008		1,434			1,235			26			173
Purchase price allocations		13			11			2			—
Impact of foreign currency translation and other		59			49			—			10

Balance at December 26, 2009	$	1,506		$	1,295		$	28		$	183

As During a2009, ~~result of~~ the ~~formation~~purchase ofprice ~~the~~allocations ~~PR Beverages venture~~ in the ~~second~~ ~~quarter~~U.S. of& ~~2007,~~Canada wesegment ~~recorded~~primarily ~~licensing~~relate ~~rights valued at $315 million, representing the fair value of the exclusive license and related rights granted by PepsiCo~~ to ~~PR Beverages to~~ ~~manufacture~~goodwill ~~and~~allocations ~~sell~~resulting ~~the~~from ~~concentrate~~changes ~~for PepsiCo beverage products sold~~ in ~~Russia.~~taxes ~~The~~associated ~~licensing~~with ~~rights~~our ~~have~~previous ~~an indefinite useful life and are not subject to amortization~~acquisitions. ~~For further~~ ~~discussion on the PR Beverages venture see Note 15.~~

~~Intangible~~ During ~~Asset Amortization –~~2008, ~~Intangible~~the ~~asset amortization~~purchase ~~expense~~price ~~was~~allocations ~~$9 million,~~in ~~$10 million~~the ~~and~~U.S. & Canada segment primarily relate to ~~$12 million~~goodwill inallocations ~~2008,~~resulting ~~2007~~from ~~and~~the ~~2006,~~acquisitions ~~respectively~~discussed above. In the Europe segment, the ~~Amortization~~purchase ~~expense~~price ~~for~~allocations ~~each~~primarily relate to Russia’s purchase of ~~the~~a ~~next~~company ~~five~~that ~~years~~will ismanufacture ~~estimated~~various Pepsi products in Siberia and Eastern Russia. The purchase price allocations in the Mexico segment primarily relate to begoodwill ~~approximately~~allocations ~~$7 million~~resulting orfrom ~~less~~changes in taxes associated with our previous acquisitions.

~~Goodwill – The~~Annual ~~changes~~Impairment ~~in the carrying value of goodwill by reportable~~Testing ~~segment for the years ended December 29, 2007 and December 27, 2008 are as follows:~~

	U.S. & Canada			Europe			Mexico			Total
Balance at December 30, 2006	$	1,229		$	16		$	245		$	1,490
Purchase price allocations		1			–			(16	)		(15	)
Impact of foreign currency translation and other		60			1			(3	)		58
Balance at December 29, 2007		1,290			17			226			1,533
Purchase price allocations		20			13			(6	)		27
Impact of foreign currency translation and other		(75	)		(4	)		(47	)		(126	)
Balance at December 27, 2008	$	1,235		$	26		$	173		$	1,434

The Company completed its impairment test of goodwill and indefinite lived intangible assets during the third quarter of 2009 and recorded no impairment charge. In the fourth quarter of 2008, the Company recorded $412 million in non-cash impairment charges ($277 million net of tax and noncontrolling interests), relating primarily to distribution rights and brands for the Electropura water business in Mexico. The impairment charge relating to these intangible assets was determined based upon the findings of an extensive strategic review and the finalization of certain restructuring plans for our Mexican business. The fair value of our distribution rights was estimated using a multi-period excess earnings method that is based upon estimated discounted future cash flows. The fair value of our brands was estimated using a multi-period royalty savings method, which reflects the savings realized by owning the brand and, therefore, not having to pay a royalty fee to a third party.

~~During~~Note ~~2008,~~7—FAIR ~~the~~VALUE ~~purchase price allocations in the~~MEASUREMENTS U.S. & Canada segment primarily relate to goodwill allocations resulting from the Lane acquisition discussed above. In the Europe segment, the purchase price allocations primarily relate to Russia’s purchase of Sobol-Aqua JSC (“Sobol”) in the second quarter of 2008. Sobol manufactures its brands and co-packs various Pepsi products in Siberia and Eastern Russia.

During 2008, ~~and~~the ~~2007,~~Company began disclosing the ~~purchase~~fair ~~price~~value ~~allocations~~of inall financial instruments valued on a recurring basis, at least annually. Fair value is defined as the price that would be received ~~Mexico~~to ~~segment~~sell ~~primarily~~an ~~relate~~asset or paid to ~~goodwill~~transfer ~~allocations~~a liability in an orderly transaction between market ~~resulting~~participants ~~from~~at ~~changes~~the inmeasurement ~~taxes~~date. ~~associated~~It ~~with~~also ~~prior~~establishes ~~year~~a three level fair value hierarchy that ~~acquisitions~~prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:

~~Annual~~Level ~~Impairment Testing –~~1 ~~The~~— ~~Company~~Unadjusted ~~completes~~quoted ~~its impairment~~prices ~~testing of goodwill~~ in ~~accordance~~active ~~with SFAS No. 142,~~markets ~~“Goodwill~~for ~~and~~identical ~~Other Intangible Assets” annually, or more frequently as indicators warrant. Goodwill and intangible~~ assets ~~with indefinite lives are not amortized; however, they are evaluated for impairment at least annually~~ or ~~more frequently if facts and circumstances indicate that the assets may be impaired~~liabilities. ~~In previous years the Company~~ completed this test in the fourth quarter using a measurement date of third quarter-end. During the second quarter ended June 14, 2008, the Company changed its impairment testing of goodwill to the third quarter, using a measurement date at the beginning of the third quarter. With the exception of Mexico’s intangible assets, the Company has also changed its impairment testing of intangible assets with indefinite useful lives to the third quarter, using a measurement date at the beginning of the third quarter. Impairment testing of Mexico’s intangible assets with indefinite useful lives was completed in the fourth quarter to coincide with the completion of the strategic review of the business.

AsLevel a2 ~~result~~— ofObservable ~~this~~inputs ~~testing,~~other ~~the~~than ~~Company~~quoted ~~recorded~~prices ~~a $412 million~~included ~~non-cash~~in ~~impairment~~Level ~~charge~~1, ~~($277 million net~~such ofas ~~tax and minority interest). The impairment charge relates~~quoted ~~primarily~~prices ~~to distribution rights and brands~~ for ~~Electropura water~~identical ~~business in Mexico. The impairment charge relating to these intangible~~ assets ~~was~~or ~~determined~~liabilities ~~based~~in ~~upon~~non-active ~~the~~markets, ~~findings of~~quoted anprices ~~extensive strategic review and the finalization of certain restructuring plans~~ for ~~our Mexican business. In light of~~similar ~~weakening~~assets ~~macroeconomic~~or ~~conditions~~liabilities ~~and our outlook for the business~~ in ~~Mexico,~~active wemarkets ~~lowered our expectations of the future performance, which reduced the value of these intangible assets~~ and ~~triggered~~inputs another ~~impairment~~than ~~charge.~~quoted ~~The~~prices ~~fair value of our franchise rights and distribution rights was estimated using a multi-period excess earnings method~~ that isare ~~based upon estimated~~observable ~~discounted~~for ~~future~~substantially ~~cash~~the ~~flows.~~full ~~The~~term ~~fair value~~ of ~~our brands was estimated using a multi-period royalty savings method, which reflects~~ the ~~savings~~asset ~~realized~~or ~~by owning the brand and, therefore, not having to pay a royalty fee to a third party~~liability.

~~Note 7 – Investment~~Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in pricing ~~Noncontrolled~~the ~~Affiliate~~asset or liability.

During the second half of 2008, together with PepsiCo, we completed a joint acquisition of JSC Lebedyansky (“Lebedyansky”) for approximately $1.8 billion. The acquisition does not include the company’s baby food and mineral water businesses, which were spun off to shareholders in a separate transaction prior to our acquisition. Lebedyansky was acquired 58.3 percent by PepsiCo and 41.7 percent by PR Beverages, our Russian venture with PepsiCo. We and PepsiCo have an ownership interest in PR Beverages of 60 percent and 40 percent, respectively. As a result, PepsiCo and we have acquired a 75 percent and 25 percent economic stake in Lebedyansky, respectively.

We have recorded an equity investment for PR Beverages’ share in Lebedyansky. In addition, we have recorded a minority interest contribution for PepsiCo’s proportional contribution to PR Beverages relating to Lebedyansky.

Note 8 – Fair Value Measurements

We adopted SFAS 157 at the beginning of fiscal 2008 for all financial instruments valued on a recurring basis, at least annually. The standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability.

If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

58 ~~The following table summarizes the financial assets and liabilities we measure at fair value on a recurring basis as of December 27, 2008:~~

	Level 2
Financial Assets:
Foreign currency forward contracts(1)	$	13
Prepaid forward contracts(2)		13
Interest rate swaps(3)		8
	$	34
Financial Liabilities:
Commodity contracts(1)	$	57
Foreign currency contracts(1)		6
Interest rate swaps(3)		1
	$	64

(1)	Based primarily on the forward rates of the specific indices upon which the contract settlement is based.
(2)	Based primarily on the value of our stock price.
(3)	Based primarily on the London Inter-Bank Offer Rate (“LIBOR”) index.

Note 9 – Short-Term Borrowings and Long-Term Debt

	2008			2007
Short-term borrowings
Current maturities of long-term debt	$	1,305		$	7
Other short-term borrowings		103			240
	$	1,408		$	247
Long-term debt
5.63% (5.2% effective rate)(2)(3) senior notes due 2009	$	1,300		$	1,300
4.63% (4.6% effective rate)(3) senior notes due 2012		1,000			1,000
5.00% (5.2% effective rate) senior notes due 2013		400			400
6.95% (7.4% effective rate)(4) senior notes due 2014		1,300			–
4.13% (4.4% effective rate) senior notes due 2015		250			250
5.50% (5.3% effective rate)(2) senior notes due 2016		800			800
7.00% (7.1% effective rate) senior notes due 2029		1,000			1,000
Capital lease obligations (Note 10)		8			9
Other (average rate 14.43%)		37			29
		6,095			4,788
SFAS 133 adjustment(1)		6			–
Unamortized discount, net		(12	)		(11	)
Current maturities of long-term debt		(1,305	)		(7	)
	$	4,784		$	4,770

(1)	In accordance with the requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), the portion of our fixed-rate debt obligations that is hedged is reflected in our Consolidated Balance Sheets as an amount equal to the sum of the debt’s carrying value plus a SFAS 133 fair value adjustment, representing changes recorded in the fair value of the hedged debt obligations attributable to movements in market interest rates.
(2)	Effective interest rates include the impact of the gain/loss realized on swap instruments and represent the rates that were achieved in 2008.
(3)	These notes are guaranteed by PepsiCo.
(4)	Effective interest rate excludes the impact of the loss realized on Treasury Rate Locks in 2008.

Aggregate Maturities — Long-Term Debt – Aggregate maturities of long-term debt as of December 27, 2008 are as follows: 2009: $1,301 million, 2010: $29 million, 2011: $7 million, 2012: $1,000 million, 2013: $400 million, 2014 and thereafter: $3,350 million. The maturities of long-term debt do not include the capital lease obligations, the non-cash impact of the SFAS 133 adjustment and the interest effect of the unamortized discount.

On October 24, 2008, we issued $1.3 billion of 6.95 percent senior notes due 2014 (the “Notes”). The Notes were guaranteed by PepsiCo on February 17, 2009. A portion of this debt was used to repay our senior notes due in 2009 at their maturity on February 17, 2009. In the interim, these proceeds were placed in short-term investments. In addition, we used a portion of the proceeds to finance the Lane acquisition and repay short-term commercial paper debt, a portion of which was used to finance our acquisition of Lebedyansky.

2008 Short-Term Debt Activities – We have a committed credit facility of $1.1 billion and an uncommitted credit facility of $500 million. Both of these credit facilities are guaranteed by Bottling LLC and are used to

~~PART~~ The IIfollowing ~~(continued)~~table summarizes the financial assets and liabilities we measure at fair value on a recurring basis as of December 26, 2009 and December 27, 2008:

support our $1.2 billion commercial paper program and working capital requirements.


	Level 2
	2009		2008
Financial Assets:
Commodity contracts⁽¹⁾	$	81	$	—
Foreign currency contracts ⁽¹⁾		—		13
Prepaid forward contracts ⁽²⁾		15		13
Interest rate swaps ⁽³⁾		—		8

	$	96	$	34


Financial Liabilities:
Commodity contracts ⁽¹⁾	$	3	$	57
Foreign currency contracts ⁽¹⁾		6		6
Interest rate swaps ⁽³⁾		64		1

	$	73	$	64

At December 27, 2008, we had no outstanding commercial paper. At December 29, 2007, we had $50 million in outstanding commercial paper with a weighted-average interest rate of 5.3 percent.


⁽¹⁾		Based primarily on the forward rates of the specific indices upon which contract settlement is based.

⁽²⁾		Based primarily on the value of our stock price.

⁽³⁾		Based primarily on the London Inter-Bank Offer Rate (“LIBOR”) index.

InOther ~~addition~~Financial toAssets ~~the~~and ~~credit facilities discussed above, we had~~Liabilities available bank credit lines of approximately $772 million at year-end 2008, of which the majority was uncommitted. These lines were primarily used to support the general operating needs of our international locations. As of year-end 2008, we had $103 million outstanding under these lines of credit at a weighted-average interest rate of 10.0 percent. As of year-end 2007, we had available short-term bank credit lines of approximately $748 million with $190 million outstanding at a weighted-average interest rate of 5.3 percent.

~~Debt Covenants –~~ Financial ~~Certain~~assets ofwith ~~our~~carrying ~~senior~~values ~~notes have~~approximating ~~redemption~~fair ~~features~~value ~~and~~include ~~non-financial~~cash ~~covenants~~and ~~that will,~~cash ~~among~~equivalents ~~other~~and ~~things,~~accounts ~~limit~~receivable. ~~our~~Financial ~~ability~~liabilities towith ~~create~~carrying orvalues ~~assume~~approximating ~~liens,~~fair ~~enter~~value ~~into~~include ~~sale~~accounts payable and ~~lease-back~~other ~~transactions,~~accrued ~~engage~~liabilities inand ~~mergers or~~short-term ~~consolidations~~debt. ~~and~~The ~~transfer~~carrying values orof ~~lease~~these ~~all~~financial orassets ~~substantially~~and ~~all of~~liabilities ~~our~~approximates ~~assets.~~fair ~~Additionally,~~value ~~certain~~due ofto ~~our~~their ~~credit facilities~~short maturities and ~~senior~~since ~~notes~~interest ~~have~~rates ~~financial~~approximate ~~covenants~~current ~~consisting~~market ofrates ~~the~~for short-term debt. ~~following:~~

• Long-term ~~Our~~ debt, towhich ~~capitalization~~includes ~~ratio should not be greater than .75 on~~ the ~~last~~current ~~day~~maturities of ~~a fiscal quarter when PepsiCo’s ratings are A- by S&P and A3 by Moody’s or higher. Debt is defined as total~~ long-term ~~and short-term~~ debt, ~~plus~~at ~~accrued~~December 26, ~~interest~~2009, had ~~plus~~a ~~total~~carrying ~~standby~~value ~~letters of credit~~ and ~~other~~fair ~~guarantees~~value ~~less~~of ~~cash~~$5.5 billion and ~~cash equivalents not in excess of~~ $~~500 million~~6.1 billion, ~~Capitalization~~respectively isand ~~defined~~at asDecember 27, ~~debt~~2008, ~~plus~~had ~~shareholders’~~a ~~equity~~carrying ~~plus~~value ~~minority~~and ~~interest,~~fair ~~excluding~~value ~~the impact~~ of ~~the~~$6.1 billion ~~cumulative~~and ~~translation~~$6.4 billion, ~~adjustment~~respectively. •The fair ~~Our~~value ~~debt~~is tobased ~~EBITDA ratio should not be greater than five~~ on ~~the~~interest ~~last~~rates ~~day~~that ~~of a fiscal quarter when PepsiCo’s ratings~~ are ~~less~~currently ~~than~~available A-to byus ~~S&P~~for orissuance ~~A3 by Moody’s. EBITDA is defined as the last four quarters~~ of ~~earnings before depreciation, amortization, net interest expense, income taxes, minority interest, net other non-operating expenses and extraordinary items. • New secured~~ debt ~~should~~with similar ~~not~~terms ~~be greater than 15 percent of our net tangible assets. Net tangible assets are defined as total assets less current liabilities~~ and ~~net~~remaining ~~intangible assets~~maturities.

59 ~~As of December 27, 2008 we were in compliance with all debt covenants.~~

Interest Payments and Expense – Amounts paid to third parties for interest, net of settlements from our interest rate swaps, were $293 million, $305 million and $289 million in 2008, 2007 and 2006, respectively. Total interest expense incurred during 2008, 2007 and 2006 was $316 million, $305 million and $298 million, respectively.

Letters of Credit, Bank Guarantees and Surety Bonds – At December 27, 2008, we had outstanding letters of credit, bank guarantees and surety bonds valued at $294 million from financial institutions primarily to provide collateral for estimated self-insurance claims and other insurance requirements.

Note 10 – Leases

We have non-cancelable commitments under both capital and long-term operating leases, principally for real estate and office equipment. Certain of our operating leases for real estate contain escalation clauses, holiday rent allowances and other rent incentives. We recognize rent expense on our operating leases, including these allowances and incentives, on a straight-line basis over the lease term. Capital and operating lease commitments expire at various dates through 2072. Most leases require payment of related executory costs, which include property taxes, maintenance and insurance.

The cost of real estate and office equipment under capital leases is included in the Consolidated Balance Sheets as property, plant and equipment. Amortization of assets under capital leases is included in depreciation expense.

Capital lease additions totaled $4 million, $7 million and $33 million for 2008, 2007 and 2006, respectively. Included in the 2006 additions was a $25 million capital lease agreement with PepsiCo to lease vending equipment. In 2007, we repaid this lease obligation with PepsiCo.

The future minimum lease payments by year and in the aggregate, under capital leases and non-cancelable operating leases consisted of the following at December 27, 2008:

	Leases
	Capital		Operating
2009	$	4	$	58
2010		2		43
2011		1		26
2012		–		20
2013		–		14
Thereafter		2		118
	$	9	$	279
Less: amount representing interest		1
Present value of net minimum lease payments		8
Less: current portion of net minimum lease payments		3
Long-term portion of net minimum lease payments	$	5

Components of Net Rental Expense Under Operating Leases:

	2008			2007			2006
Minimum rentals	$	120		$	114		$	99
Sublease rental income		(1	)		(2	)		(3	)
Net rental expense	$	119		$	112		$	96

Note 11 – Financial Instruments and Risk Management

We are subject to the risk of loss arising from adverse changes in commodity prices, foreign currency exchange rates, interest rates, and our stock price. In the normal course of business, we manage these risks through a variety of strategies, including the use of derivatives. Certain of these derivatives are designated as either cash flow or fair value hedges.

Cash Flow Hedges – We are subject to market risk with respect to the cost of commodities because our ability to recover increased costs through

~~higher~~Note ~~pricing~~8—SHORT-TERM ~~may~~BORROWINGS beAND ~~limited~~LONG-TERM ~~by the competitive business~~DEBT environment in which we operate. We use future and option contracts to hedge the risk of adverse movements in commodity prices related primarily to anticipated purchases of raw materials and energy used in our operations. These contracts generally range from one to 24 months in duration and qualify for cash flow hedge accounting treatment. At December 27, 2008 the fair value of our commodity contracts was a $57 million net loss, of which $48 million and $9 million was recorded in other current liabilities and other liabilities, respectively, in our Consolidated Balance Sheets. In 2008, $48 million of a net loss was recognized in accumulated other comprehensive loss (“AOCL”). Additionally, in 2008, $14 million of a net gain was reclassified into earnings in selling, delivery and administrative expenses for our commodity contracts.

We are subject to foreign currency transactional risks in certain of our international territories for transactions that are denominated in currencies that are different from their functional currency. We enter into forward exchange contracts to hedge portions of our forecasted U.S. dollar purchases in our foreign businesses. These contracts generally range from one to 12 months in duration and qualify for cash flow hedge accounting treatment. At December 27, 2008, the fair value of our foreign exchange contracts was a $4 million gain recorded in other current assets in our Consolidated Balance Sheets. In 2008, $11 million of a gain was recognized in AOCL and $2 million of a loss was reclassified into earnings in cost of goods sold for our foreign exchange contracts.


	2009			2008
Short-term borrowings
Current maturities of long-term debt	$	15		$	1,305
Other short-term borrowings		188			103

	$	203		$	1,408


Long-term debt
5.63% (5.0% effective rate) ⁽²⁾ ⁽³⁾ senior notes due 2009	$	—		$	1,300
4.63% (4.6% effective rate)⁽³⁾ senior notes due 2012		1,000			1,000
5.00% (5.2% effective rate) senior notes due 2013		400			400
6.95% (7.4% effective rate) ⁽³⁾ senior notes due 2014		1,300			1,300
4.13% (4.4% effective rate) senior notes due 2015		250			250
5.50% (5.3% effective rate) ⁽²⁾ senior notes due 2016		800			800
5.125% (4.9% effective rate)⁽²⁾ senior notes due 2019		750			—
7.00% (7.1% effective rate) senior notes due 2029		1,000			1,000
Capital lease obligations (Note 9)		25			8
Other (average rate 3.8%)		16			37

		5,541			6,095

Fair value hedge adjustment ⁽¹⁾		(64	)		6
Unamortized discount, net		(13	)		(12	)
Current maturities of long-term debt		(15	)		(1,305	)

	$	5,449		$	4,784

For these cash flow hedges, the effective portion of the change in the fair value of a derivative instrument is deferred in AOCL until the underlying hedged item is recognized in earnings. The ineffective portion of a fair value change on a qualifying cash flow hedge is recognized in earnings immediately and is recorded consistent with the expense classification of the underlying hedged item.


⁽¹⁾		The portion of our fixed-rate debt obligations that is hedged is reflected in our Consolidated Balance Sheets as an amount equal to the sum of the debt’s carrying value plus a fair value adjustment, representing changes recorded in the fair value of the hedged debt obligations attributable to movements in market interest rates.

⁽²⁾		Effective interest rates include the impact of the gain/loss realized on swap instruments and represent the rates that were achieved in 2009.

⁽³⁾		These notes are guaranteed by PepsiCo.

WeAggregate ~~have~~Maturities ~~also~~— ~~entered~~Long-Term ~~into treasury rate lock agreements to hedge~~Debt against adverse interest rate changes on certain debt financing arrangements, which qualify for cash flow hedge accounting. Gains and losses that are considered effective are deferred in AOCL and amortized to interest expense over the duration of the debt term. In 2008, we recognized a $20 million loss in AOCL for treasury rate locks that settled in the fourth quarter. Additionally, in 2008, we reclassified from AOCL $7 million of a loss to interest expense from our treasury rate locks that previously settled.

Aggregate maturities of long-term debt as of December 26, 2009 are as follows: 2010: $8 million, 2011: $8 million, 2012: $1,000 million, 2013: $400 million, 2014: $1,300 million, 2015 and thereafter: $2,800 million. The ~~following~~maturities ~~summarizes~~of ~~activity~~long-term indebt ~~AOCL~~do ~~related~~not toinclude ~~derivatives~~the capital lease ~~designated~~obligations, asthe non-cash ~~flow~~impact ~~hedges~~of ~~held~~the byfair value hedge adjustment and the ~~Company~~interest ~~during~~effect of the ~~applicable~~unamortized ~~periods:~~discount.

	Before									Net of
	Minority									Minority
	Interest			Minority						Interest
	and Taxes			Interest			Taxes			and Taxes
Accumulated net gains as of December 31, 2005	$	5		$	–		$	(2	)	$	3
Net changes in the fair value of cash flow hedges		14			(1	)		(5	)		8
Net gains reclassified from AOCL into earnings		(1	)		–			1			–
Accumulated net gains as of December 30, 2006		18			(1	)		(6	)		11
Net changes in the fair value of cash flow hedges		(4	)		–			–			(4	)
Net losses reclassified from AOCL into earnings		4			–			(1	)		3
Accumulated net gains as of December 29, 2007		18			(1	)		(7	)		10
Net changes in the fair value of cash flow hedges		(57	)		4			23			(30	)
Net gains reclassified from AOCL into earnings		(4	)		–			1			(3	)
Accumulated net losses as of December 27, 2008	$	(43	)	$	3		$	17		$	(23	)

On January 14, 2009, we issued $750 million in senior notes, with a coupon rate of 5.125 percent, maturing in 2019. The net proceeds of the offering, together with a portion of the proceeds from the offering of our senior notes issued in the fourth quarter of 2008, were used to repay our senior notes due in 2009, at their scheduled maturity on February 17, 2009. Any excess proceeds of this offering were used for general corporate purposes. The next significant scheduled debt maturity is not until 2012.

~~Assuming~~ On ~~no change in the commodity prices and foreign currency rates as measured on December~~October 2724, 2008, we issued $471.3 ~~million~~billion of ~~unrealized~~ ~~losses~~6.95 percent ~~will~~senior benotes ~~recognized~~due in2014 ~~earnings over~~ (the ~~next~~ ~~24 months~~“Notes”). ~~During~~The ~~2008~~Notes wewere ~~recognized~~guaranteed ~~$8 million~~by ~~of ineffectiveness~~PepsiCo ~~for~~on ~~the~~February 17, ~~treasury locks that were settled in the fourth quarter~~2009. ~~The~~A ~~ineffective~~ portion of the ~~change~~proceeds ~~in fair~~of ~~value~~this ofdebt ~~our other contracts~~ was ~~not~~used ~~material~~ to ~~our~~finance ~~results~~acquisitions ~~of operations~~and inrepay ~~2008,~~short-term ~~2007~~commercial orpaper ~~2006~~debt.

~~Fair~~2009 ~~Value Hedges – We finance a portion of our operations through fixed~~Short-~~rate~~Term ~~debt~~Debt ~~instruments. We effectively~~Activities converted $1.1 billion of our senior notes to floating-rate debt through the use of interest rate swaps with the objective of reducing our overall borrowing costs. These interest rate swaps meet the criteria for fair value hedge accounting and are 100 percent effective in eliminating the market rate risk inherent in our long-term debt. Accordingly, any gain or loss associated with these swaps is fully offset by the opposite market impact on the related debt. During 2008, the fair value of the interest rate swaps increased to a net asset of $6.1 million at December 27, 2008 from a liability of $0.3 million at December 29, 2007. The fair value of our swaps was recorded in other assets and other liabilities in our Consolidated Balance Sheets.

~~Foreign Currency Hedges –~~ We ~~entered~~have ~~into~~a ~~forward~~committed ~~exchange contracts~~credit tofacility ~~economically hedge a portion~~ of ~~our intercompany receivable balances that are denominated in Mexican pesos~~$1. ~~At December~~2 ~~27,~~billion ~~2008,~~and ~~the~~an ~~fair~~uncommitted ~~value~~credit facility of ~~these contracts was~~ $9 500 million. ~~and~~Both ~~was~~of ~~classified~~these incredit ~~other~~facilities ~~current~~are ~~assets~~guaranteed ~~in our~~by ~~Consolidated~~Bottling ~~Balance~~LLC ~~Sheet.~~and ~~The~~are ~~earnings~~used ~~impact~~to ~~from these~~support ~~instruments~~our is$1.2 billion ~~classified~~commercial inpaper ~~other~~program ~~non-operating~~and ~~expenses (income),~~working ~~net~~capital ~~in the Consolidated Statements of Operations~~requirements.

~~Unfunded~~ We ~~Deferred~~had ~~Compensation Liability –~~no ~~Our~~commercial ~~unfunded~~paper ~~deferred compensation~~outstanding ~~liability~~at isDecember 26, ~~subject~~2009 toor ~~changes~~December 27, ~~in our stock price~~2008. ~~as well as~~

In addition to the credit facilities discussed above, we had available short-term bank credit 45lines of approximately $892 million at year-end 2009, of which the majority was uncommitted. These lines were primarily used to support the general operating needs of our international locations. As of December 26, 2009, we had $188

~~PART~~million IIoutstanding ~~(continued)~~under these lines of credit at a weighted-average interest rate of 3.1 percent. As of December 27, 2008, we had available short-term bank credit lines of approximately $772 million with $103 million outstanding at a weighted-average interest rate of 10.0 percent.

~~price~~Debt ~~changes in other equity and fixed-income investments.~~Covenants Participating employees in our deferred compensation program can elect to defer all or a portion of their compensation to be paid out on a future date or dates. As part of the deferral process, employees select from phantom investment options that determine the earnings on the deferred compensation liability and the amount that they will ultimately receive. Employee investment elections include PBG stock and a variety of other equity and fixed-income investment options.

~~Since~~ Certain ~~the~~of ~~plan~~our issenior ~~unfunded,~~notes ~~employees’~~have ~~deferred compensation~~redemption ~~amounts~~features ~~are~~and ~~not~~non-financial ~~directly~~covenants ~~invested~~that ~~in these~~will, ~~investment~~among ~~vehicles.~~other ~~Instead~~things, welimit ~~track~~our ~~the~~ability ~~performance~~to ofcreate ~~each employee’s~~or ~~investment~~assume ~~selections~~liens, ~~and~~enter ~~adjust~~into ~~his~~sale orand ~~her~~lease-back ~~deferred~~transactions, ~~compensation~~engage ~~account~~in ~~accordingly.~~mergers ~~The~~or ~~adjustments~~consolidations ~~to employees’~~and ~~accounts~~transfer ~~increases~~ or ~~decreases~~lease ~~the~~all ~~deferred compensation~~or ~~liability~~substantially ~~reflected~~all on of our ~~Consolidated~~assets. ~~Balance Sheets~~Additionally, ~~with~~certain anof ~~offsetting~~our ~~increase~~credit orfacilities ~~decrease~~and tosenior ~~our~~notes ~~selling,~~have financial ~~delivery~~covenants ~~and~~consisting ~~administrative~~of ~~expenses.~~the following:

We• ~~use~~Our ~~prepaid~~debt ~~forward contracts~~ to ~~hedge~~capitalization ~~the~~ratio ~~portion~~should ofnot ~~our deferred~~be ~~compensation~~greater ~~liability~~than ~~that~~0.75 ison ~~based~~the onlast ~~our~~day ~~stock price.~~of Ata ~~December 27,~~fiscal ~~2008,~~quarter wewhen ~~had~~PepsiCo’s aratings ~~prepaid~~are ~~forward contract~~A- ~~for~~by ~~585,000 shares~~S&P atand aA3 ~~price~~by ofMoody’s ~~$22~~or higher.~~00,~~ ~~which~~Debt ~~was accounted~~is ~~for~~defined as antotal ~~economic~~long-term ~~hedge.~~and ~~This~~short-term ~~contract~~debt ~~requires~~plus ~~cash settlement~~accrued interest plus total standby letters of credit and ~~has~~other aguarantees ~~fair~~less ~~value~~cash atand ~~December 27,~~cash ~~2008,~~equivalents not in excess of $13 500 million. ~~recorded~~Capitalization inis ~~prepaid~~defined ~~expenses~~as ~~and~~debt ~~other~~plus ~~current assets~~PBG inshareholders’ ~~our~~equity ~~Consolidated~~plus ~~Balance~~noncontrolling ~~Sheet.~~interests, ~~The~~excluding ~~fair~~the ~~value~~impact of ~~this contract~~the ~~changes~~cumulative ~~based~~translation adjustment. • Our debt to EBITDA ratio should not be greater than five on the ~~change~~last inday ~~our~~of ~~stock~~a ~~price~~fiscal ~~compared with~~quarter ~~the~~when ~~contract~~PepsiCo’s ~~exercise~~ratings ~~price~~are less than A- by S&P or A3 by Moody’s. WeEBITDA ~~recognized~~is andefined ~~expense~~as ~~of $10 million~~the ~~and~~last ~~income~~four quarters of ~~$5 million~~earnings inbefore ~~2008~~depreciation, ~~and~~amortization, ~~2007~~net interest expense, ~~respectively~~ income taxes, ~~resulting~~net ~~from~~income ~~the~~attributable ~~change~~to innoncontrolling ~~fair~~interests, ~~value~~net other non-operating expenses and extraordinary items. • New secured debt should not be greater than 15 percent of ~~these prepaid~~our ~~forward~~net ~~contracts~~tangible assets. ~~The~~Net ~~earnings~~tangible ~~impact~~assets ~~from~~are ~~these instruments~~defined isas ~~recorded~~total inassets ~~selling,~~less ~~delivery~~current liabilities and ~~administrative expenses~~net intangible assets.

~~Other~~Interest ~~Financial~~Payments ~~Assets~~ and ~~Liabilities –~~ ~~Financial assets with~~Expense carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities and short-term debt. The carrying value of these financial assets and liabilities approximates fair value due to their short maturities and since interest rates approximate current market rates for short-term debt.

~~Long-term~~ Amounts ~~debt,~~paid ~~which~~to ~~includes~~third ~~the~~parties ~~current~~for ~~maturities of long-term debt~~interest, atnet ~~December 27,~~of ~~2008,~~settlements ~~had~~from aour ~~carrying~~interest ~~value~~rate swaps, ~~and~~were ~~fair~~$323 million, ~~value of~~ $~~6.1~~293 ~~billion~~million and $~~6.4~~305 ~~billion, respectively,~~million ~~and~~in ~~at December 29~~2009, ~~2007,~~2008 ~~had a carrying value~~ and ~~fair value of $4.8 billion and $4.9 billion~~2007, respectively. ~~The fair value is based on~~ Total interest ~~rates~~expense ~~that~~incurred ~~are currently~~during ~~available~~2009, to2008 usand ~~for~~2007 ~~issuance~~was of$324 million, ~~debt~~$316 million ~~with~~and ~~similar~~$305 ~~terms~~million, ~~and remaining maturities~~respectively.

~~Note 12 – Pension~~Letters ~~and~~of ~~Postretirement~~Credit, ~~Medical~~Bank ~~Benefit~~Guarantees ~~Plans~~and Surety Bonds

~~Employee~~ At ~~Benefit Plans~~December –26, We2009, ~~sponsor~~we ~~both~~had ~~pension~~outstanding ~~and~~letters ~~other postretirement~~of ~~medical~~credit, ~~benefit~~bank ~~plans~~guarantees ~~in various forms in the United States~~ and ~~other~~surety ~~similar pension plans in our~~bonds ~~international~~valued ~~locations,~~at ~~covering~~$314 million ~~employees~~from ~~who~~financial ~~meet~~institutions ~~specified eligibility~~primarily ~~requirements.~~to ~~The~~provide ~~assets,~~collateral ~~liabilities~~for ~~and expense~~estimated ~~associated~~self-insurance ~~with~~claims ~~our international plans were not significant to our results of operations~~ and ~~are~~other ~~not~~insurance ~~included in the tables and discussion presented below~~requirements.

~~Defined~~Note ~~Benefit Pension~~9—LEASES Plans – In the U.S. we participate in non-contributory defined benefit pension plans for certain full-time salaried and hourly employees. Benefits are generally based on years of service and compensation, or stated amounts for each year of service. Effective January 1, 2007, newly hired salaried and non-union hourly employees are not eligible to participate in these plans. Additionally, effective April 1, 2009, we will no longer continue to accrue benefits for certain of our salaried and non-union employees that do not meet age and service requirements.

~~Postretirement~~ We ~~Medical Plans –~~have ~~Our~~non-cancelable ~~postretirement~~commitments ~~medical~~under ~~plans provide~~both ~~medical~~capital and ~~life~~long-term ~~insurance~~operating ~~benefits~~ leases, principally ~~to U.S. retirees~~for real estate and ~~their~~manufacturing ~~dependents~~and office equipment. ~~Employees~~Certain ~~are~~of ~~eligible~~our operating leases for ~~benefits~~real ifestate ~~they~~contain ~~meet~~escalation ~~age~~clauses, holiday rent allowances and ~~service~~other ~~requirements~~rent incentives. ~~The~~We recognize rent expense on our operating leases, including these allowances and ~~plans~~incentives, ~~are~~on ~~not~~a ~~funded~~straight-line basis over the lease term. Capital and ~~since~~operating ~~1993~~lease ~~have~~commitments expire ~~included~~at ~~retiree~~various ~~cost~~dates through 2072. Most leases require payment of related executory costs, ~~sharing~~which include property taxes, maintenance and insurance.

The ~~Defined~~cost ~~Contribution Benefits – Nearly all~~ of ~~our U.S. employees~~manufacturing ~~are~~and ~~eligible~~office toequipment ~~participate~~under incapital ~~our~~leases ~~defined contribution~~is ~~plans,~~included ~~which~~in ~~are voluntary defined contribution savings plans. We make matching contributions to~~ the ~~defined~~ ~~contribution~~Consolidated ~~savings~~Balance ~~plans~~Sheets onas ~~behalf of participants eligible to receive such contributions~~PP&E. ~~Additionally,~~Amortization ~~employees~~of ~~not~~assets ~~eligible to participate in the defined benefit pension plans and employees whose benefits will be discontinued will receive additional Company retirement contributions~~ under ~~the defined~~capital ~~contribution~~leases ~~plans.~~is ~~Defined~~included ~~contribution expense was $29 million, $27 million and $22 million~~ in ~~2008, 2007~~depreciation ~~and 2006, respectively~~expense.

~~Components of~~ Capital ~~Net~~lease ~~Pension~~additions ~~Expense~~totaled $25 million, $4 million and ~~Other~~$7 million ~~Amounts~~for ~~Recognized~~2009, in2008 ~~Other~~and ~~Comprehensive~~2007, ~~Loss/(Income)~~respectively.

	Pension
	2008			2007			2006
Net pension expense
Service cost	$	51		$	55		$	53
Interest cost		100			90			82
Expected return on plan assets – (income)		(116	)		(102	)		(94	)
Amortization of net loss		15			38			38
Amortization of prior service amendments		7			7			9
Curtailment charge		20			–			–
Special termination benefits		7			4			–
Net pension expense for the defined benefit plans		84			92			88
Other comprehensive loss (income)
Prior service cost arising during the year		14			8			N/A
Net loss (gain) arising during the year		619			(114	)		N/A
Amortization of net loss		(15	)		(38	)		N/A
Amortization of prior service amendments(1)		(27	)		(7	)		N/A
Total recognized in other comprehensive loss (income)(2)		591			(151	)		N/A
Total recognized in net pension expense and other comprehensive loss (income)	$	675		$	(59	)	$	88

(1)		2008 includes curtailment charge of $20 million.
(2)		Prior to taxes and minority interest.

~~Components of~~ The ~~Postretirement~~future ~~Medical~~minimum ~~Expense~~lease payments by year and ~~Other~~in ~~Amounts~~the ~~Recognized~~aggregate, under capital leases and innon-cancelable ~~Other~~operating ~~Comprehensive~~leases ~~Loss/(Income)~~consisted of the following at December 26, 2009:

		Postretirement
	Leases
		2008				2007			2006
	Capital				Operating
Net postretirement expense
2010	$	8			$	56
Service cost		$	5			$	5		$	4
2011		7				34
Interest cost			21				20			20
2012		6				27
Amortization of net loss			3				4			7
2013		5				18
Special termination benefits			1				–			–
2014		—				13
Net postretirement expense			30				29			31
Thereafter		2				101
Other comprehensive loss (income)
	$	28			$	249
Net (gain) arising during the year			(30	)			(4	)		N/A
Less: amount representing interest		3
Amortization of net loss			(3	)			(4	)		N/A
Present value of net minimum lease payments		25
Total recognized in other comprehensive loss (income)(1)			(33	)			(8	)		N/A
Less: current portion of net minimum lease payments		7
Total recognized in net postretirement expense and other comprehensive loss (income)		$	(3	)		$	21		$	31
Long-term portion of net minimum lease payments	$	18

~~(1)~~ The ~~Prior~~total minimum rentals to ~~taxes~~be ~~and~~received ~~minority~~in ~~interest~~the future from our non-cancelable subleases were $3 million at December 26, 2009.

Components of Net Rental Expense Under Operating Leases


	2009			2008			2007
Minimum rentals	$	107		$	120		$	114
Sublease rental income		(2	)		(1	)		(2	)

Net rental expense	$	105		$	119		$	112

Note 10—FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

We are subject to the risk of loss arising from adverse changes in commodity prices, foreign currency exchange rates, interest rates and our stock price. In the normal course of business, we manage these risks through a variety of strategies, including the use of derivatives. Our corporate policy prohibits the use of derivative instruments for trading or speculative purposes, and we have procedures in place to monitor and control their use.

We are exposed to counterparty credit risk on all of our derivative financial instruments. We have established and maintain counterparty credit guidelines and only enter into transactions with financial institutions of investment grade or better. We monitor our counterparty credit risk and utilize numerous counterparties to minimize our exposure to potential defaults. We do not require collateral under these transactions.

Commodity — We use forward and option contracts to hedge the risk of adverse movements in commodity prices related primarily to anticipated purchases of raw materials and energy used in our operations. These contracts generally range from one to 24 months in duration. Our open commodity derivative contracts that qualify for cash flow hedge accounting have a notional value, based on the contract price, of $347 million as of December 26, 2009. Our open commodity derivative contracts that act as economic hedges but do not qualify for hedge accounting have a notional value, based on the contract price, of $50 million as of December 26, 2009.

Foreign Currency — We are subject to foreign currency transactional risks in certain of our international territories primarily for the purchase of commodities that are denominated in currencies that are different from their functional currency. We enter into forward contract agreements to hedge a portion of this foreign currency risk. These contracts generally range from one to 24 months in duration. Our open foreign currency derivative contracts that qualify for cash flow hedge accounting have a notional value, based on the contract price, of $150 million as of December 26, 2009.

We have foreign currency derivative contracts to economically hedge the foreign currency risk associated with certain assets on our balance sheet, which have a notional value, based on the contract price, of $40 million as of December 26, 2009. Additionally, we fair value certain vendor and customer contracts that have embedded foreign currency derivative components. These contracts generally range from one year to three years and as of December 26, 2009 have a notional value, based on the contract price, of $10 million.

Interest — We have entered into treasury rate lock agreements to hedge against adverse interest rate changes relating to the issuance of certain fixed rate debt financing arrangements. The settled gains and losses from these treasury rate lock agreements that were considered effective were deferred in AOCL and are being amortized to

interest expense over the duration of the debt term. The Company has a $3 million net deferred gain in AOCL related to these instruments, which will be amortized over the next six years. For the year ended December 26, 2009, we recognized in interest expense a loss of $0.4 million.

We effectively converted $1.25 billion of our fixed-rate debt to floating-rate debt through the use of interest rate swaps with the objective of reducing our overall borrowing costs. These interest rate swaps meet the criteria for fair value hedge accounting and are assumed to be 100 percent effective in eliminating the market-rate risk inherent in our long-term debt. Accordingly, any gain or loss associated with these swaps is fully offset by the opposite market impact on the related debt and recognized currently in earnings.

Unfunded Deferred Compensation Liability — Our unfunded deferred compensation liability is subject to changes in our stock price as well as price changes in other equity and fixed-income investments. We use prepaid forward contracts to hedge the portion of our deferred compensation liability that is based on our stock price. At December 26, 2009, we had a prepaid forward contract for 410,000 shares.

Balance Sheet Classification

The following summarizes the fair values and location in our Consolidated Balance Sheet of all derivatives held by the Company as of December 26, 2009:


Derivatives Designated as Hedging
Instruments	Balance Sheet Classification	Fair Value
Assets
Commodity contracts	Prepaid expenses and other current assets	$	61
Commodity contracts	Other assets		14

		$	75


Liabilities
Foreign currency contracts	Accounts payable and other current liabilities	$	1
Commodity contracts	Accounts payable and other current liabilities		3
Interest rate swaps	Other liabilities		64

		$	68


Derivatives Not Designated as
Hedging Instruments	Balance Sheet Classification	Fair Value
Assets
Commodity contracts	Prepaid expenses and other current assets	$	4
Prepaid forward contracts	Prepaid expenses and other current assets		15
Commodity contracts	Other assets		2

		$	21


Liabilities
Foreign currency contracts	Accounts payable and other current liabilities	$	4
Foreign currency contracts	Other liabilities		1

		$	5

Cash Flow Hedge Gains (Losses) Recognition

The following summarizes the gains (losses), recognized in the Consolidated Statement of Operations and AOCL, of derivatives designated and qualifying as cash flow hedges for the year ended December 26, 2009:


	Amount of Gain				Amount of Gain
Derivatives in Cash	(Loss)			Location of Gain (Loss)	(Loss) Reclassified
Flow Hedging	Recognized in			Reclassified from AOCL into	from AOCL into
Relationships	AOCL			Income	Income
Foreign currency contracts	$	(19	)	Cost of sales	$	(10	)
Commodity contracts		77		Cost of sales		5
Commodity contracts		8		Selling, delivery and administrative expenses		(42	)

	$	66			$	(47	)

Assuming no change in the commodity prices and foreign currency rates as measured on December 26, 2009, $50 million of unrealized gains will be recognized in earnings over the next 12 months. During 2009, we recognized $7 million of ineffectiveness relating to our commodity cash flow hedges. During 2008, we recognized $8 million of ineffectiveness for the treasury rate locks that were settled in the fourth quarter.

Other Derivatives Gains (Losses) Recognition

The following summarizes the gains (losses) and the location in the Consolidated Statement of Operations of derivatives designated and qualifying as fair value hedges and derivatives not designated as hedging instruments for the year ended December 26, 2009:


	Location of Gain (Loss)	Amount of Gain (Loss)
	Recognized in Income on	Recognized in Income on
	Derivative	Derivative
Derivatives in Fair Value Hedging Relationship
Interest rate swaps	Interest expense, net	$	27

Derivatives Not Designated as Hedging Instruments
Prepaid forward contracts	Selling, delivery and administrative expenses	$	9
Foreign currency contracts	Other non-operating (income) expenses, net		(4	)
Commodity contracts	Cost of sales		6

		$	11

The Company has recorded $4 million of net foreign currency transactional gains in other non-operating (income) expenses, net in the Consolidated Statement of Operations for the year ended December 26, 2009.

Note 11—PENSION AND POSTRETIREMENT MEDICAL BENEFIT PLANS

Employee Benefit Plans

We sponsor both pension and other postretirement medical benefit plans in various forms in the United States and other similar pension plans in our international locations, covering employees who meet specified eligibility requirements. The assets, liabilities and expense associated with our international plans were not significant to our results of operations and are not included in the tables and discussion presented below.

Defined Benefit Pension Plans

In the U.S., we sponsor non-contributory defined benefit pension plans for certain full-time salaried and hourly employees. Benefits are generally based on years of service and compensation, or stated amounts for each year of service. Effective January 1, 2007, newly hired salaried and non-union hourly employees are not eligible to

participate in these plans. Additionally, effective April 1, 2009, benefits from these plans are no longer accrued for certain salaried and non-union employees that did not meet specified age and service requirements.

Postretirement Medical Plans

Our postretirement medical plans provide medical and life insurance benefits principally to U.S. retirees and their dependents. Employees are eligible for benefits if they meet age and service requirements. The plans are not funded and since 1993 have included retiree cost sharing.

Defined Contribution Benefits

Nearly all of our U.S. employees are eligible to participate in our defined contribution plans, which are voluntary defined contribution savings plans. We make matching contributions to the defined contribution savings plans on behalf of participants eligible to receive such contributions. Additionally, employees not eligible to participate in the defined benefit pension plans and employees whose benefits have been frozen as of April 1, 2009, are currently receiving additional retirement contributions under the defined contribution plans. Defined contribution expense was $42 million, $29 million and $27 million in 2009, 2008 and 2007, respectively.

Components of Net Pension Expense and Other Amounts Recognized in Other Comprehensive (Income) Loss


	Pension
Net pension expense	2009			2008			2007
Service cost	$	45		$	51		$	55
Interest cost		104			100			90
Expected return on plan assets — (income)		(120	)		(116	)		(102	)
Amortization of net loss		35			15			38
Amortization of prior service amendments		6			7			7
Settlement / curtailment charges		1			20			—
Special termination benefits		—			7			4

Net pension expense for the defined benefit plans		71			84			92

Other comprehensive (income) loss
Prior service cost arising during the year		7			14			8
Net (gain) loss arising during the year		(147	)		619			(114	)
Amortization of net loss		(36	)		(15	)		(38	)
Amortization of prior service amendments ⁽¹⁾		(6	)		(27	)		(7	)

Total recognized in other comprehensive (income) loss ⁽²⁾		(182	)		591			(151	)


Total recognized in net pension expense and other comprehensive (income) loss	$	(111	)	$	675		$	(59	)


⁽¹⁾		2008 includes curtailment charge of $20 million.

⁽²⁾		Prior to taxes and noncontrolling interests.

Components of Postretirement Medical Expense and Other Amounts Recognized in Other Comprehensive (Income) Loss


	Postretirement
Net postretirement expense	2009			2008			2007
Service cost	$	5		$	5		$	5
Interest cost		21			21			20
Amortization of net loss		1			3			4
Special termination benefits		—			1			—

Net postretirement expense		27			30			29

Other comprehensive (income) loss
Net gain arising during the year		(22	)		(30	)		(4	)
Amortization of net loss		(1	)		(3	)		(4	)

Total recognized in other comprehensive (income) loss⁽¹⁾		(23	)		(33	)		(8	)

Total recognized in net postretirement expense and other comprehensive (income) loss	$	4		$	(3	)	$	21


⁽¹⁾		Prior to taxes and noncontrolling interests.

Changes in Benefit Obligations

	Pension						Postretirement
	2008			2007			2008			2007
	2009			2008			2009			2008
Obligation at beginning of year	$	1,~~585~~724		$	1,~~539~~585		$	~~353~~327		$	~~354~~353
SFAS 158 adoption		(53	)		–			(5	)		–
Adjustment for measurement date change		—			(53	)		—			(5	)
Service cost		5145			5551			5			5
Interest cost		~~100~~104			90100			21			2021
Plan amendments		147			814			–—			–—
Plan curtailment		~~(50~~—	)		–(50	)		–—			–—
Actuarial (gain) loss		141			(53	)		(30	)		(4	)
Actuarial loss (gain)		17			141			(22	)		(30	)
Benefit payments		(6975	)		(5769	)		(1920	)		(2319	)
Special termination benefits		7—			47			1—			–1
Adjustment for Medicare subsidy		–—			–—			1—			1
Transfers		(2	)		(12	)		–—			–—
Obligation at end of year	$	1,~~724~~820		$	1,~~585~~724		$	~~327~~311		$	~~353~~327

Changes in the Fair Value of Plan Assets

	Pension						Postretirement
	2008			2007			2008			2007
	2009			2008			2009			2008
Fair value of plan assets at beginning of year	$	1,~~455~~045		$	1,~~289~~455		$	–—		$	–—
SFAS 158 adoption		(17	)		–			–			–
Adjustment for measurement date change		—			(17	)		—			—
Actual return on plan assets		~~(412~~284	)		~~163~~(412	)		–—			–—
Transfers		(2	)		(12	)		–—			–—
Employer contributions		90239			6190			1820			2218
Adjustment for Medicare subsidy		–—			–—			1—			1
Benefit payments		(6975	)		(5769	)		(1920	)		(2319	)
Fair value of plan assets at end of year	$	1,~~045~~491		$	1,~~455~~045		$	–—		$	–—

66 ~~Amounts Included in AOCL(1)~~

	Pension				Postretirement
	2008		2007		2008		2007
Prior service cost	$	38	$	48	$	3	$	3
Net loss		879		308		49		90
Total	$	917	$	356	$	52	$	93

~~(1)~~ Amounts ~~Prior~~Included toin ~~taxes~~AOCL ~~and minority interest~~(1)

Estimated Gross Amounts in AOCL to be Amortized in 2009


	Pension				Postretirement
	2009		2008		2009		2008
Prior service cost	$	38	$	38	$	3	$	3
Net loss		696		879		26		49

Total	$	734	$	917	$	29	$	52

	Pension		Postretirement
Prior service cost	$	6	$	–
Net loss	$	35	$	1


⁽¹⁾		Prior to taxes and noncontrolling interests.

~~The~~ Estimated ~~accumulated~~Gross ~~benefit~~Amounts ~~obligations~~in ~~for~~AOCL ~~all~~to ~~U.S. pension plans~~be ~~were~~Amortized ~~$1,636 million~~in ~~and $1,458 million at~~2010 ~~December 27, 2008 and December 29, 2007, respectively.~~


	Pension		Postretirement
Prior service cost	$	6	$	—
Net loss	$	40	$	—

Selected Information for Plans with Liabilities in Excess of Plan Assets

	Pension				Postretirement
	2008		2007(1)		2008		2007(1)
	2009		2008		2009		2008
Projected benefit obligation	$	1,~~724~~820	$	~~777~~1,724	$	~~327~~311	$	~~353~~327
Accumulated benefit obligation	$	1,~~636~~772	$	~~649~~1,636	$	~~327~~311	$	~~353~~327
Fair value of plan assets	$	1,~~045~~491	$	~~598~~1,045	$	–—	$	–—

~~(1) 2007 balances were measured on September 30, 2007.~~ Fair ~~value~~Market Value of ~~plan~~Pension ~~assets~~Plan ~~for 2007 includes fourth quarter employer contributions.~~Assets

Reconciliation of Funded Status

Filing Compare · PEPSI BOTTLING GROUP INC