PBG Pepsi Bottling Grp.

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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 26, 2009

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                     

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 any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 12, 2010 was 221,798,326 and 100,000, respectively. The aggregate market value of The Pepsi Bottling Group, Inc. Capital Stock held by non-affiliates of The Pepsi Bottling 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 12, 2009 was $4,858,397,101 (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
N/A		N/A

 

 

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

PART I			3
Item 1. Business			3
Item 1A. Risk Factors			10
Item 1B. Unresolved Staff Comments			15
Item 2. Properties			15
Item 3. Legal Proceedings			15
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			16
Item 6. Selected Financial Data			19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			83
Item 8. Financial Statements and Supplementary Data			83
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			83
Item 9A. Controls and Procedures			83
Item 9B. Other Information			84
PART III			85
Item 10. Directors, Executive Officers and Corporate Governance			85
Item 11. Executive Compensation			88
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			124
Item 14. Principal Accountant Fees and Services			127
PART IV			128
Item 15. Exhibits and Financial Statement Schedules			128
SIGNATURES			129
INDEX TO FINANCIAL STATEMENT SCHEDULES			130
INDEX TO EXHIBITS			132
EX-12
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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 22, 2010, PepsiCo’s ownership represented 31.6% of the outstanding common stock and 100% of the outstanding Class B common stock, together representing 38.6% 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 22, 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 2009, approximately 78% of our net revenues were generated in the U.S. & Canada, 13% of our net revenues were generated in Europe, and the remaining 9% of our net revenues were generated in Mexico. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 13 in the Notes to Consolidated Financial Statements for additional information regarding 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 2009, 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:

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.

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

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 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.

          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 12, 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.

          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 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 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. 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 stock. Because the pending PepsiCo merger would trigger this provision, PepsiCo and Dr Pepper Snapple Group have entered 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. More than 70% of our operating income is typically earned during the second and third quarters and more than 80% of cash flow from operations 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 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.

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

          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 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.

Employees

          As of December 26, 2009, we employed approximately 64,900 workers, of whom approximately 32,500 were employed in the United States. Approximately 8,500 of our workers in the United States are union members and approximately 15,100 of our workers outside the United States are union members. We consider relations with our employees to be good and have not experienced significant 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 — 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 Transactions Committee Charter, the Compensation and Management Development Committee Charter, the Nominating and Corporate Governance Committee Charter, the Disclosure Committee 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 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 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, 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 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.

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, including 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.

          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 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.

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 relate to, among other things, food and drug laws, competition laws, labor laws, taxation requirements (including taxes specifically targeting the consumption of our products), bottle and can legislation (see above under “Governmental Regulation Applicable to PBG”), accounting standards and environmental laws.

          There is also growing 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 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 22, 2010, PepsiCo owned approximately 38.6% 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 pursuant 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.”

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.

Deterioration of economic conditions could harm our business.

          Our business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects of governmental initiatives to manage economic conditions. Any such changes could adversely affect the demand for our products or increase our costs, thereby negatively affecting 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 26, 2009, approximately 30% of our net revenues were generated in territories outside the United States. Social, economic and political developments 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 recent weakening of foreign currencies negatively impacted our earnings in 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 30% 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 significantly due to factors such as fluctuations in investment returns on pension assets, changes in discount rates used to calculate pension and related liabilities, and increases 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 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 590 manufacturing and distribution facilities, as follows:

		U.S. & Canada				Europe				Mexico
Manufacturing Facilities
Owned			50				15				22
Leased			2				—				3
Other			3				—				—
Total			55				15				25
Distribution Facilities
Owned			222				11				81
Leased			51				55				75
Total			273				66				156

          We also own or lease and operate approximately 37,100 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.

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 12, 2010, the last sales price for our common stock on the New York Stock Exchange was $37.82 per share. The following table sets forth the intra-day high and low sales prices per share of our common stock during each of our fiscal quarters in 2009 and 2008.

2009			High				Low
First Quarter			$23.76				$16.82
Second Quarter			$34.83				$19.59
Third Quarter			$36.57				$32.52
Fourth Quarter			$38.74				$36.02
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

Shareholders

          As of February 5, 2010, there were approximately 47,893 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 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 date for the first quarter of 2010 is March 5, 2010.

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

Quarter			2009				2008
1			$.17				$.14
2			$.18				$.17
3			$.18				$.17
4			$.18				$.17
Total			$.71				$.65

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 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

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

Plans or

Period

Purchased(1)

(or Unit)(2)

Programs(3)

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

—

—

—

		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 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.

ITEM 6.		SELECTED FINANCIAL DATA

SELECTED FINANCIAL AND OPERATING 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

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

TABLE OF CONTENTS

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

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 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, 78 percent of our net revenues and 84 percent of our operating income.

     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; 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.

     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 owned shops and foodservice businesses. Changes in consumer shopping trends and current economic trends are shifting more of our volume to channels such as supercenters, club and dollar stores. Retail consolidation continues to increase the strategic significance of our large-volume customers. No individual customer accounted for 10 percent or more of

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 our raw material, manufacturing, distribution and other overhead 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 and the related accompanying notes in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts in our Consolidated Financial Statements and the related accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising 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.

CRITICAL ACCOUNTING POLICIES

     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 these 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 ASSETS, NET AND 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 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.

     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 conducting an impairment analysis for goodwill and other intangible assets. The cash flows may be impacted by future actions taken by us and our competitors and the volatility of macroeconomic conditions in the markets in which we conduct business. Assumptions used in our impairment analysis, such as forecasted growth rates, cost of capital and additional risk premiums used in the valuations, are based on the best available market information and are consistent with our long-term strategic plans. An inability to achieve strategic business plan targets in 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 intangible assets, which could then result in a material non-cash impairment charge to our results of operations. The weakening of global macroeconomic conditions has had a negative impact on our business results. If these conditions continue, the fair value of our intangible assets could be adversely impacted.

     In the third quarter of 2009, the Company completed its impairment test of goodwill and indefinite lived assets and recorded no impairment charge. During 2008, the Company recorded $412 million in non-cash impairment charges relating primarily to distribution rights and brands for the Electropura water business in Mexico. The impairment charge relating to these intangible assets was based upon the findings of an extensive strategic review and the finalization of restructuring plans for our Mexican business.

     For further information about our goodwill and other intangible assets see Note 6 Other Intangible Assets, net and Goodwill 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 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. 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.

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

Assumptions

     During 2008, the Company changed the measurement date for plan assets and benefit obligations 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 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.

     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. The current target asset allocation for the U.S. pension plans is 65 percent 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 asset allocation, historical returns and estimated future outlook of the pension plans’ portfolio, we estimate the long-term rate of return on plan assets assumption to be 8.0 percent in 2010.

     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 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.

     Differences between assumed and actual returns on plan assets and other gains and losses resulting from changes in actuarial assumptions are determined at each measurement date and deferred in AOCL in equity. To the extent the amount of all unrecognized gains and losses exceeds 10 percent of the larger of the benefit obligation or 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 AOCL in equity and amortized to earnings on a straight-line basis over the average 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 $763 million and $969 million at December 26, 2009 and December 27, 2008, respectively.

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

Pension		2010				2009
Discount rate			6.25	%			6.20	%
Expected rate of return on plan assets (net of administrative expenses)			8.00	%			8.00	%
Rate of compensation increase			3.04	%			3.53	%

Postretirement		2010				2009
Discount rate			5.75	%			6.50	%
Rate of compensation increase			3.43	%			3.53	%
Health care cost trend rate			8.00	%			8.75	%

     During 2009, our ongoing defined benefit pension and postretirement medical plan expenses totaled $98 million. In 2010, these expenses are expected to decrease by approximately $15 million to $83 million as a result of the following factors:

	•		Funding 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 6.20 percent to 6.25 percent, reflecting increases in the yields of long-term corporate bonds comprising the yield curve, will decrease our 2010 pension expense by approximately $3 million.

•

Other factors, including the full-year benefit of plan changes and improved health care experience, will decrease our 2010 defined benefit pension and postretirement medical expenses by approximately $10 million.

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:

		2009				2008				2007
Expected rates of return on plan assets (net of administrative expenses)			8.00	%			8.50	%			8.50	%
Actual rates of return on plan assets (net of administrative expenses)			25.3	%			(28.50	)%			12.64	%

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

	•		Discount rate – A 25 basis point change in the discount rate would increase or decrease the 2010 expense for the pension and postretirement medical benefit plans by approximately $10 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 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 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 funding levels will result in restrictions on employee benefits. Failure to contribute the minimum required contributions will result in excise taxes for the Company and an obligation to report to the regulatory agencies. During 2009, the Company contributed $229 million to its funded pension trusts. The Company expects to contribute an additional $132 million to its funded pension trusts in 2010. These amounts exclude $30 million of contributions and $26 million of expected contributions to the unfunded plans for the years ended December 26, 2009 and December 25, 2010, respectively.

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

CASUALTY 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 26, 2009, our net liability for casualty costs was $240 million, of which $70 million was considered short-term in nature. At December 27, 2008, our net liability for casualty costs was $235 million, of which $70 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.

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 allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.

     We 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 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 and our deferred taxes in the period of resolution, and may also require the use of 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 26, 2009, PepsiCo owned approximately 31.7 percent of our outstanding common stock and 100 percent of our outstanding class B common stock, together representing approximately 38.6 percent of the voting power of all classes of our voting stock. In addition, at December 26, 2009, PepsiCo owned 6.6 percent of the equity of Bottling LLC.

     While we manage all phases of our operations, including pricing of our products, we exchange production, marketing and distribution information with PepsiCo, which benefits both companies’ respective efforts to lower costs, improve quality and productivity and increase product sales. We have a significant ongoing relationship with PepsiCo and enter into various transactions and agreements with them. We purchase concentrate, pay royalties related to Aquafina products, and manufacture, package, sell and distribute cola and non-cola beverages under various bottling and fountain syrup agreements with PepsiCo. These agreements give us the right to manufacture, sell and distribute beverage products of PepsiCo in both bottles and cans, as well as fountain syrup in specified territories. PepsiCo has the right under these agreements to set prices of beverage concentrate, as well as the terms of payment and other terms and conditions under which we purchase concentrate. PepsiCo also provides us with bottler funding to support a variety of trade and consumer programs such as consumer incentives, advertising support, new product support and vending and cooler equipment placement. The nature and type of programs, as well as the level of funding, vary annually. Additionally, under a shared services agreement, we obtain various services from PepsiCo, which include services for information technology maintenance and procurement of raw materials. We also provide services to PepsiCo, including facility and credit and collection support. Because we depend on PepsiCo to provide us with concentrate, bottler incentives and various services, changes in our relationship with PepsiCo could have a material adverse effect on our business and financial results.

     We also enter into various transactions with joint ventures in which PepsiCo holds an equity interest. In particular, we purchase tea concentrate and finished beverage products from the Pepsi/Lipton Tea Partnership, a joint venture between PepsiCo and Unilever, in which PepsiCo holds a 50 percent interest. We also purchase finished beverage products from the North American Coffee Partnership, a joint venture between PepsiCo and Starbucks Corporation in which PepsiCo holds a 50 percent interest.

     PepsiCo owns 40 percent of PR Beverages Limited (“PR Beverages”), a consolidated venture for our Russian operations, which was formed on March 1, 2007. PR Beverages has an exclusive license to manufacture and sell PepsiCo concentrate for beverage products sold in Russia. PR Beverages has also entered into a Russian Snack Food Distribution Agreement with Frito Lay, Inc., a subsidiary of PepsiCo, to sell and distribute their snack products in the Russian Federation.

     For further information about our relationship with PepsiCo and its affiliates see Note 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				December				December
Income/(Expense)		26, 2009				27, 2008				29, 2007
Operating Income
Advisory Fees		$	(40	)		$	—			$	—
Mark-to-Market Net Impact			12				—				—
Impairment Charges			—				(412	)			—
2008 Restructuring Actions			(24	)			(83	)			—
2007 Restructuring Actions			—				(3	)			(30	)
Asset Disposal Charges			—				(2	)			(23	)
Operating Income Impact		$	(52	)		$	(500	)		$	(53	)
Net Income Attributable to PBG (1)
Advisory Fees (2)		$	(34	)		$	—			$	—
Mark-to-Market Net Impact (3)			7				—				—
Impairment Charges (4)			—				(277	)			—
2008 Restructuring Actions (5)			(16	)			(58	)			—
2007 Restructuring Actions (6)			—				(2	)			(22	)
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
Advisory Fees		$	(0.15	)		$	—			$	—
Mark-to-Market Net Impact			0.04				—				—
Impairment Charges			—				(1.26	)			—
2008 Restructuring Actions			(0.07	)			(0.26	)			—
2007 Restructuring Actions			—				(0.01	)			(0.09	)
Asset Disposal Charges			—				—				(0.06	)
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

      Advisory Fees

     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 $412 million, or $1.26 per diluted share, in non-cash impairment charges relating primarily to distribution rights and brands for the Electropura water business in Mexico. For further information about the impairment charges see Note 6 Other Intangibles, net and Goodwill in the Notes to Consolidated Financial Statements.

      2008 Restructuring 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 was substantially complete in December of 2009 and certain restructuring actions previously planned for 2010 have been cancelled as a result of the pending merger with PepsiCo.

     The program will result in annual pre-tax savings of approximately $110 million. The Company recorded pre-tax charges of $107 million, or $0.33 per diluted share, over the course of the restructuring program, which were 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. In 2009, we recorded pre-tax charges of $24 million, or $0.07 per diluted share, of which $10 million was recorded in the U.S. & Canada segment and $14 million was recorded in the Mexico segment.

     As part of the restructuring program, approximately 4,000 positions were eliminated including 600 positions in the U.S. & Canada, 500 positions in Europe and 2,900 positions in Mexico.

     The Company expects to incur approximately $80 million in pre-tax cash expenditures from these restructuring actions, of which $75 million has been paid since the inception of the program, with the balance expected to occur in 2010. During 2009, we paid $62 million in pre-tax cash expenditures for these restructuring actions.

     For further information about our restructuring charges see Note 15 Restructuring Charges in the Notes to Consolidated Financial Statements.

      2007 Restructuring Actions

     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 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.

     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 SD&A.

      Tax Audit Settlements

     In 2009, our tax provision was reduced by the reversal of tax reserves, net of noncontrolling interests, of approximately $151 million, or $0.68 per diluted share, from the resolution of tax audits and 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 expiration of the statute of limitations on the IRS audit of our U.S. 2001 and 2002 tax returns.

     For further information about our tax audit settlements see Note 12 Income Taxes in the Notes to Consolidated Financial Statements.

      Tax Law Changes

     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, net of noncontrolling interests, of $68 million, or $0.31 per diluted share. 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, net 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 to 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.

FINANCIAL PERFORMANCE SUMMARY AND WORLDWIDE FINANCIAL HIGHLIGHTS FOR FISCAL YEAR 2009

										% 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	%

     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 increases in rate per case in each of our reportable segments.

     On a currency neutral basis*, net revenues increased one percent and net revenue per case increased four percent versus the prior year, reflecting the solid execution of our revenue and margin management strategy in a challenging economic environment. Reported net revenue per case declined one percent, which includes the negative impact 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 two percent increase in gross profit per case on a currency neutral basis, as rate gains from the Company’s 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.

     Reported SD&A declined by seven percent versus the prior year, driven by lower operating costs due to continued productivity improvements across all segments coupled with the favorable impact of foreign currency translation. Foreign currency translation contributed five percentage points to the decline in 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 for the year. The remaining four percent decrease in operating income growth for the year was impacted by the negative impact of foreign currency translation of four percentage points and volume declines. This impact was partially offset by increases in currency neutral gross profit per case, cost and productivity improvements and the positive impact from acquisitions.

     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.

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	)%

      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.

      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 were partially offset by one percent improvement in our bottled water package.

Net Revenues

      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	)%

      U.S. & Canada

     In our U.S. & Canada segment, net revenues were flat for the year. The results reflect improvements in net pricing, partially offset by volume declines and the negative impact of foreign currency translation. Net revenue per case on a currency neutral basis improved by three percent, driven by rate increases. Reported net revenue per case increased two percent, which includes the negative impact from foreign currency translation of one percentage point.

      Europe

     In our Europe segment, net revenues declined 17 percent, due primarily to the negative impact of foreign currency translation and volume declines. This was offset by growth in net revenue per case on a currency neutral basis of seven percent driven primarily by rate actions and disciplined promotional spending. Europe’s reported net revenue per case declined 10 percent, which includes the negative impact from foreign currency translation of 17 percentage points.

      Mexico

     In our Mexico segment, declines in net revenues of 17 percent reflected the negative impact of foreign currency translation and volume declines, partially offset by improvements in currency neutral net revenue per case. Net revenue per case on a currency neutral basis grew six percent, primarily due to rate increases to drive margin improvement. Mexico’s reported net revenue per case declined 14 percent, which includes a 20 percentage point negative impact from foreign currency translation.

      2008 vs. 2007

						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 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.

Operating Income

      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%

      U.S. & Canada

     In our U.S. & Canada segment, operating income decreased two percent versus the prior year, driven by volume declines, partially offset by an improvement in gross profit per case, cost and productivity savings and the favorable impact of acquisitions.

     Reported gross 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, operating income increased 11 percent driven primarily by the impact of restructuring and other charges taken in the prior year and additional income from our newly acquired equity investment in Russia, partially offset by decreases in volume and the negative impact of 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, operating income increased 116 percent versus the prior year. Impairment and restructuring charges contributed 122 percent to the growth, which was partially offset by foreign currency translation of 23 percent. The remaining 17 percent of growth for the year was driven primarily by improved pricing actions and lower costs resulting from productivity 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 currency neutral basis increased four percent, reflecting solid margin management and cost savings 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 (loss)		$	649			$	886			$	101			$	(338	)
2007 Operating income		$	1,071			$	893			$	106			$	72
% Impact of:
Operating activities			1	%			1	%			2	%			(3	)%
Impairment charges			(38	)			—				(3	)			(571	)
2008 Restructuring charges			(8	)			(6	)			(25	)			(4	)
2007 Restructuring charges			3				2				8				4
Asset disposal charges			2				2				—				—
Currency translation			1				—				12				2
Total Operating Income Change			(39	)%			(1	)%			(5)	%*			(572	)%

      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.

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.

Other Non-Operating (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.

Net Income Attributable to Noncontrolling Interests

      2009 vs. 2008

     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 Russia. The $34 million increase versus the prior year was primarily driven by higher net income due to the impairment and restructuring charges taken in the prior year.

      2008 vs. 2007

     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.

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 33.4 percent and 22.1 percent, respectively. The increase in our effective tax rate is primarily due to year-over-year comparability associated with the 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.

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 2009, 2008 and 2007 were 221 million, 220 million and 233 million, respectively. The increase in diluted shares outstanding for 2009 reflects share issuances from the exercise of equity awards and a higher share price, partially offset by the effect of our share repurchase program in the prior year. The amount of shares authorized by the Board of Directors to be repurchased totals 175 million shares, of which we have repurchased approximately 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 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

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

     Net cash used for investments increased $875 million to $1,758 million in 2008, primarily due to payments associated with our investment in Lebedyansky and payments for acquisitions, partially offset by lower capital expenditures.

     Net cash provided by financing activities increased $1,414 million to $850 million in 2008, primarily due to a debt issuance and cash received from PepsiCo for their proportional share in the acquisitions by PR Beverages.

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 $556 million, $760 million and $854 million during 2009, 2008 and 2007, respectively. Capital expenditures decreased $204 million in 2009 due to our disciplined approach to capital 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 to fund capital expenditures, benefit plan contributions, acquisitions, share repurchases, dividends and 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.

      Acquisitions and Investments

     During 2009, we acquired a Pepsi-Cola and Dr Pepper franchise bottler serving portions of central Texas, as well as a Pepsi-Cola franchise bottler serving northeastern Massachusetts. The total cost of these acquisitions during 2009 was approximately $92 million.

     During 2009, we acquired distribution rights for certain energy drinks in the United States and Canada and protein-enhanced functional beverages in the United States. In addition, we acquired rights to manufacture and distribute Crush in portions of the United States. The total cost of these distribution and franchise rights during 2009 was approximately $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 first quarter of 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 at their scheduled maturity on February 17, 2009. The next significant scheduled debt maturity is not until 2012.

     During the fourth quarter of 2008, we issued $1.3 billion in senior notes with a coupon rate of 6.95 percent, maturing in 2014. A portion of the proceeds of this debt was used to finance acquisitions and repay short-term commercial paper debt.

      Short-Term Debt Activities

     We have a committed revolving credit facility of $1.2 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. We had no commercial paper outstanding at December 26, 2009 or December 27, 2008.

     In addition to the revolving credit facilities discussed above, we had available short-term bank credit lines of approximately $892 million at December 26, 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 million outstanding 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, of which $103 million was outstanding at a weighted-average interest rate of 10.0 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 2009, borrowings from our commercial paper program in the U.S. peaked at $240 million. Borrowings from our line of credit facilities peaked at $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 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 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 2010, we expect to contribute $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 26, 2009, the Company announced that its Board of Directors approved an increase in the Company’s quarterly dividend from $0.17 to $0.18 per share on the outstanding common stock of the Company. This action resulted in a six percent increase in our quarterly dividend.

Contractual Obligations

     The following table summarizes our contractual obligations as of December 26, 2009:

						Payments Due by Period
										2011-				2013-				2015 and
Contractual Obligations		Total				2010				2012				2014				beyond
Long-term debt obligations (1)		$	5,516			$	8			$	1,008			$	1,700			$	2,800
Capital lease obligations (2)			28				8				13				5				2
Operating leases (2)			249				56				61				31				101
Interest obligations (3)			2,666				287				639				481				1,259
Purchase obligations:
Raw material obligations (4)			408				387				21				—				—
Capital expenditure obligations (5)			50				50				—				—				—
Other obligations (6)			224				127				62				13				22
Other long-term liabilities (7)			47				10				19				12				6
		$	9,188			$	933			$	1,823			$	2,242			$	4,190

     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 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 assets and liabilities. We are also subject to the risks associated with the business environment in which we operate. We regularly assess 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 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 10 Financial Instruments and Risk Management in the Notes to Consolidated Financial Statements for additional information relating to 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 which we operate. 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. 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.

      Interest Rate Risk

     Interest rate risk is inherent to both fixed-rate and floating-rate debt. We effectively converted $1.25 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 $4 million and $1 million in fiscal years 2009 and 2008, respectively.

      Foreign Currency Exchange Rate Risk

     In 2009, approximately 30 percent of our net revenues were generated from outside the United States. Social, economic and political conditions in these international markets may adversely affect our results of operations, financial condition and cash flows. The overall risks to our 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 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.

     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. 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 $2 million and $1 million at December 26, 2009 and December 27, 2008, respectively.

Cautionary Statements

     Except for the historical information and discussions contained herein, statements contained in this annual report on Form 10-K 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 periods are:

•

risk associated with our pending merger with PepsiCo, including satisfaction of certain conditions of the pending merger, contractual restrictions on the conduct of our business included in the merger agreement, and the potential for loss of key personnel, disruption of our sales and operations or any impact on our relationships with third parties as a result of the pending merger;

•

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;

•

changes in laws and regulations governing the manufacture and sale of food and beverages (including taxes on sweetened 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.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

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