UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

 

Commission File Number 001-15019

 

PEPSIAMERICAS, INC.

(Exact name of registrant as specified in its charter)

 

(612) 661-4000

(Registrant’s telephone number, including area code)

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

 

 

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 Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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):

(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

 

As of July 4, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates (assuming for the sole purpose of this calculation, that all directors and officers of the registrant are “affiliates”) was $1,512.7 million (based on the closing sale price of the registrant’s common stock as reported on the New York Stock Exchange). The number of shares of common stock outstanding at that date was 124,512,095 shares.

 

The number of shares of the registrant’s common stock outstanding as of February 16, 2010 was 124,866,059.

DOCUMENTS INCORPORATED BY REFERENCE
None

 

 

PEPSIAMERICAS, INC.

FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED JANUARY 2, 2010

TABLE OF CONTENTS

 

 

 

 

General

 

On November 30, 2000, Whitman Corporation merged with the former PepsiAmericas, Inc., and in January 2001, the combined entity changed its name to PepsiAmericas, Inc. (referred to as “PepsiAmericas,” “PAS”, “we,” “our” and “us”).

 

We have entered into a merger agreement with PepsiCo, Inc. (“PepsiCo”) and Pepsi-Cola Metropolitan Bottling Company, Inc., a wholly owned subsidiary of PepsiCo (“Metro”), dated August 3, 2009, pursuant to which our company 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 PepsiAmericas common stock it does not already own for the price of $28.50 in cash or 0.5022 shares of PepsiCo common stock, subject to proration provisions which provide that an aggregate 50 percent of the outstanding PepsiAmericas common stock will be converted into the right to receive common stock of PepsiCo and an aggregate 50 percent of the outstanding PepsiAmericas common stock will be converted into the right to receive cash. We hope to close the merger by the end of February 2010, subject to regulatory approval and the satisfaction or waiver of other customary closing conditions.

 

We manufacture, distribute and market a broad portfolio of beverage products in the United States (“U.S.”) and Central and Eastern Europe (“CEE”), and distribute snack foods in certain markets.

 

In the first six months of 2009, we manufactured and distributed beverage products in the Caribbean, including Puerto Rico, Jamaica and Trinidad and Tobago, with distribution rights in the Bahamas and Barbados. On July 3, 2009, we formed a strategic joint venture with The Central America Beverage Corporation (“CABCORP”) to combine our Caribbean operations, excluding the Bahamas, with CABCORP’s Central American operations, including Guatemala, Honduras, El Salvador and Nicaragua. We own an 18 percent interest in the CABCORP joint venture.

 

We sell a variety of brands that we bottle under licenses from PepsiCo or PepsiCo joint ventures, which accounted for approximately 83 percent of our total net sales in fiscal year 2009. We account for approximately 19 percent of all PepsiCo beverage products sold by bottlers in the U.S. In some territories, we manufacture, package, sell and distribute products under brands licensed by companies other than PepsiCo, and in some territories we distribute our own brands, such as Sandora, Sadochok and Toma.

 

Our distribution channels for the retail sale of our products include supermarkets, supercenters, club stores, mass merchandisers, convenience stores, gas stations, small grocery stores, dollar stores and drug stores. We also distribute our products through various other channels, including restaurants and cafeterias, vending machines and other formats that provide for immediate consumption of our products. In fiscal year 2009, our largest distribution channels were supercenters and supermarkets.

 

We deliver our products through these channels primarily using a direct store delivery system. In our territories, we are responsible for selling products, providing timely service to our existing customers, and identifying and obtaining new customers. We are also responsible for local advertising and marketing, as well as executing national and regional selling programs created by brand owners in our territories. The bottling business is capital intensive. Manufacturing operations require specialized high-speed equipment, and distribution requires investment in trucks and warehouse facilities as well as extensive placement of fountain equipment, cold drink vending machines and coolers.

 

Our annual, quarterly and current reports, and all amendments to those reports, are included on our website at www.pepsiamericas.com, and are made available, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Our corporate governance guidelines, code of conduct, code of ethics and key committee charters are available on our website and in print upon written request to PepsiAmericas, Inc., 4000 RBC Plaza, 60 South Sixth Street, Minneapolis, Minnesota 55402, Attention: Investor Relations.

Business Segments

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 20 to the Consolidated Financial Statements for additional information regarding business and operating results of our geographic segments. See “Risk Factors” in Item 1A for additional information regarding specific risks in our international operations.

 

Relationship with PepsiCo

 

PepsiCo beneficially owned approximately 43 percent of PepsiAmericas’ outstanding common stock as of the end of fiscal year 2009. We have entered into a merger agreement with PepsiCo and Metro, dated August 3, 2009, pursuant to which our company will merge with and into Metro, with Metro continuing as the surviving company and a wholly owned subsidiary of PepsiCo. Closing of the merger is subject to regulatory approval and the satisfaction or waiver of other customary closing conditions.

 

While we manage all phases of our operations, including pricing of our products, PepsiAmericas and PepsiCo exchange production, marketing and distribution information, which benefits both companies’ respective efforts to lower costs, improve quality and productivity and increase product sales. We have entered into a number of significant transactions and agreements with PepsiCo.

 

We purchase concentrates from PepsiCo, pay royalties related to Aquafina products, and manufacture, package, sell and distribute cola and non-cola beverages under various bottling agreements with PepsiCo. These agreements give us the right to manufacture, package, sell and distribute beverage products of PepsiCo in both bottles and cans, as well as fountain syrup in specified territories. These agreements provide PepsiCo with the ability to set prices of concentrates, as well as the terms of payment and other terms and conditions under which we purchase such concentrates. See “Franchise Agreements” for discussion of significant agreements. We also purchase finished beverage and snack food products from PepsiCo, as well as products from certain affiliates of PepsiCo.

 

Other significant transactions and agreements with PepsiCo include arrangements for marketing, promotional and advertising support; manufacturing services related to PepsiCo’s national account customers; procurement of raw materials; and the acquisition of Sandora LLC (“Sandora”) (see “Related Party Transactions” in Item 7 and Note 21 to the Consolidated Financial Statements for further discussion).

 

Products and Packaging

 

Our portfolio of beverage products includes some of the best-recognized trademarks in the world. Our three largest brands in terms of volume are Pepsi, Mountain Dew and Diet Pepsi. While the majority of our volume is derived from brands licensed from PepsiCo and PepsiCo joint ventures, we also sell and distribute brands licensed from others, including Dr Pepper, Crush and ROCKSTAR, as well as some of our own brands. Our top five beverage brands in fiscal year 2009 based on volume by geographic segment are listed below:

 

 

In addition to the beverage products described above, we distribute snack food products in the Czech Republic and Ukraine pursuant to a distribution agreement with Frito-Lay, Inc., a subsidiary of PepsiCo.

 

Our beverages are available in different package types, including but not limited to, aluminum cans, glass and polyethylene terephthalate (“PET”) bottles, paperboard cartons and bag-in-box packages for fountain use. The bottle and can packages are available in both single-serve and multi-pack offerings.

Territories

 

We serve a significant portion of 19 states throughout the central region of the U.S. Internationally, we serve Central and Eastern European markets, including Ukraine, Poland, Romania, Hungary, the Czech Republic and Slovakia. We have distribution rights and distribute in Moldova, Estonia, Latvia and Lithuania. We have a 20 percent equity interest in a joint venture that owns Agrima JSC (“Agrima”), which produces, sells and distributes PepsiCo products and other beverages in Bulgaria. We have an 18 percent equity interest in a joint venture with CABCORP, which produces, sells and distributes PepsiCo products and other beverages in the Caribbean and Central America. We serve areas with a total population of more than 240 million people in these markets. In addition, through our joint venture investment in Sandora, we sell Sandora-branded products to third-party distributors in Belarus, Azerbaijan, Russia and other countries in Eastern Europe and Central Asia. In fiscal year 2009, we derived 77 percent of our net sales from U.S. operations and 23 percent of our net sales from international operations (see Note 20 to the Consolidated Financial Statements for further discussion).

 

Sales, Marketing and Distribution

 

Our sales and marketing approach varies by region and channel to respond to unique local competitive environments. In the U.S., channels with larger stores can accommodate a number of beverage suppliers and, therefore, marketing efforts tend to focus on increasing the amount of shelf space and the number of displays in any given outlet. In locations where our products are purchased for immediate consumption, marketing efforts are aimed, not only at securing the account, but also on providing equipment that facilitates the sale of cold beverages, such as vending machines, coolers and fountain equipment.

 

Package mix is an important consideration in the development of our marketing plans. Although some packages are more expensive to produce and distribute, in certain channels those packages may have higher average selling prices. For example, a packaged product that is sold cold for immediate consumption generally has better margins than a product that is sold to take home. This cold drink channel includes vending machines and coolers. We own a majority of the vending machines used to dispense our products. We refurbish a majority of our existing cold drink equipment in our refurbishment center in the U.S. The refurbishment of CEE equipment is performed by third-party vendors.

 

In the U.S., we distribute directly to a majority of customers in our licensed territories through a direct store distribution system. Our sales force is key to our selling efforts as it continually interacts with our customers to promote and sell our products. We operate a call center, Pepsi Connect, in Fargo, North Dakota, to enable us to provide the level of service our customers require in a manner that is cost effective. We utilize Next Generation, a pre-sell system, that allows sales managers to call accounts in advance to determine how much product and promotional material to deliver. In fiscal year 2007, we realigned our organization in the U.S. from a sales organization based on geography to one built around customer channels. This structure enables us to dedicate more resources and sales support to channels and customers that are growing and helps us to align more directly with the way our customers do business. We also have ongoing supply chain initiatives, such as Customer Optimization to the Third Power, or CO³, that streamline processes and allow us to quickly adapt to changing markets.

 

In the U.S., the direct store distribution system is used for all packaged goods and certain fountain accounts. We have the exclusive right to sell and deliver fountain syrup to local customers in our territories. We have a number of sales people who are responsible for calling on prospective fountain accounts, developing relationships, selling products and interacting with customers on an ongoing basis. We also manufacture and distribute fountain products and provide fountain equipment service to PepsiCo customers in certain of our territories in accordance with various agreements with PepsiCo.

 

In our international markets, we use both direct store distribution systems and third-party distributors. In these less developed markets, small retail outlets represent a large percentage of the market. However, with the emergence of larger, more sophisticated retailers in CEE, the percentage of total soft drinks sold to supermarkets and other larger accounts is increasing. In order to optimize the infrastructure in CEE, we use an

alternative sales and distribution strategy in which third-party distributors are utilized in certain locations in an effort to reduce delivery costs and expand our points of distribution.

 

Franchise Agreements

 

We conduct our business primarily under franchise agreements with PepsiCo. These agreements give us the exclusive right in specified territories to manufacture, package, sell and distribute PepsiCo beverages, and to use the related PepsiCo tradenames and trademarks. These agreements require us, among other things, to purchase concentrates for the beverages solely from PepsiCo, at prices established by PepsiCo, to use only PepsiCo authorized containers, packages and labeling, and to diligently promote the sale and distribution of PepsiCo beverages. We also have similar agreements with other brand owners such as Dr Pepper Snapple Group, Inc.

 

Set forth below is a summary of our Master Bottling Agreement with PepsiCo, pursuant to which we manufacture, package, sell and distribute cola and non-cola beverages in the U.S. and in certain countries outside the U.S. In addition, we have similar arrangements with other companies whose brands we produce and distribute. Generally, the franchise agreements exist in perpetuity and contain operating and marketing commitments and conditions for termination. Also set forth below is a summary of our Master Fountain Syrup Agreement with PepsiCo, pursuant to which we manufacture, sell and distribute fountain syrup for PepsiCo beverages.

 

Master Bottling Agreement.  The Master Bottling Agreement (the “Bottling Agreement”) under which we manufacture, package, sell and distribute cola and non-cola beverages bearing the Pepsi-Cola and Pepsi trademarks was entered into in November 2000. The Bottling Agreement gives us the exclusive and perpetual right to distribute cola beverages for sale in specified territories in authorized containers, with the exception of Romania. In Romania, our agreement has certain performance measures that, if exceeded, enable the agreement to automatically renew. The Bottling Agreement provides that we will purchase our entire requirements of concentrates for cola beverages from PepsiCo at prices, and on terms and conditions, determined from time to time by PepsiCo. PepsiCo has no rights under the Bottling Agreement with respect to the prices at which we sell our products. PepsiCo may determine from time to time what types of containers we are authorized to use.

 

Under the Bottling Agreement, we are obligated to:

 

 

The Bottling Agreement requires that we meet with PepsiCo on an annual basis to discuss the business plan for the following three years. At these meetings, we are obligated to present the plans necessary to perform the duties required under the Bottling Agreement. These include marketing, management, advertising and financial plans.

The 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. If that occurs, we will be obligated to manufacture, package, sell and distribute 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 Bottling Agreement also imposes requirements with respect to the use of PepsiCo’s trademarks, authorized containers, packaging and labeling.

 

PepsiCo can terminate the Bottling Agreement if any of the following occur:

 

 

We are prohibited from assigning, transferring or pledging the Bottling Agreement without PepsiCo’s prior consent.

 

Master Fountain Syrup Agreement.  The Master Fountain Syrup Agreement (the “Syrup Agreement”) grants us the exclusive right to manufacture, sell and distribute fountain syrup to local customers in our territories. The Syrup Agreement also grants us the right 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 Syrup Agreement, we have the exclusive right to service fountain equipment for all of the national account customers within our territories. The Syrup Agreement provides that the determination of whether an account is local or national is at the sole discretion of PepsiCo.

 

The Syrup Agreement contains provisions that are similar to those contained in the Bottling Agreement with respect to pricing, territorial restrictions with respect to local customers and national customers electing direct store delivery only, planning, quality control, transfer restrictions and related matters. The Syrup Agreement, which we entered into in November 2000, had an initial term of five years and was automatically renewed for an additional five-year period in November 2005 on the same terms and conditions. The Syrup Agreement is automatically renewable for additional five-year periods unless PepsiCo terminates it for cause. PepsiCo has the right to terminate the Syrup Agreement without cause at any time upon 24 months’ notice. If PepsiCo terminates the Syrup Agreement without cause, PepsiCo is required to pay us the fair market value of our rights thereunder. The Syrup Agreement will terminate if PepsiCo terminates the Bottling Agreement.

 

Advertising

 

We obtain the benefits of national advertising campaigns conducted by PepsiCo and the other beverage companies whose products we sell. We supplement PepsiCo’s national ad campaigns by purchasing advertising in our local markets, including the use of television, radio, print and billboards. We also make extensive use of in-store, point-of-sale displays to reinforce national and local advertising and to stimulate demand.

Raw Materials and Manufacturing

 

Expenditures for concentrates constitute our largest individual raw material cost. We buy various soft drink concentrates from PepsiCo and other soft drink companies and mix them with other ingredients in our plants, including water, carbon dioxide and sweeteners. Artificial sweeteners are included in the concentrates we purchase for diet soft drinks. Additionally, we buy juice concentrates for our Sandora, Sadochok and Toma juice brands.

 

In addition to concentrates, we purchase sweeteners, glass and PET bottles, aluminum cans, closures, paperboard cartons, bag-in-box packages, syrup containers, other packaging materials and carbon dioxide. We purchase raw materials and supplies, other than concentrates, from multiple suppliers. PepsiCo acts as our agent for the purchase of several such raw materials (see “Related Party Transactions” in Item 7 and Note 21 to the Consolidated Financial Statements for further discussion of PepsiCo’s procurement services).

 

A portion of our contractual cost of cans, PET bottles and sweeteners is subject to price fluctuations based on commodity price changes in aluminum, PET resin, corn and sugar. We may enter into firm price commitments for future purchases of commodities that enable us to establish a fixed purchase price within a defined time period. We may also use derivative financial instruments to hedge the price risk associated with anticipated purchases of certain raw materials and the underlying commodities associated with them.

 

The inability of suppliers to deliver concentrates or other products to us could adversely affect operating results. None of the raw materials or supplies in use is currently in short supply, although factors outside of our control could adversely impact the future availability of these supplies.

 

Seasonality

 

Sales of our products are seasonal, with the second and third quarters generating higher net sales than the first and fourth quarters. Approximately 54 percent of our net sales in fiscal year 2009 were generated during the second and third quarters. Net sales in our CEE operations tend to be more seasonal and sensitive to weather conditions than our U.S. operations.

 

Competition

 

The carbonated soft drink and the non-carbonated beverage markets are highly competitive. Our principal competitors are bottlers who produce, package, sell and distribute Coca-Cola products. Additionally, in both the carbonated soft drink and non-carbonated beverage markets, we also compete with bottlers and distributors of nationally advertised and marketed products, bottlers and distributors of regionally advertised and marketed products, and bottlers of private label products sold in chain stores. The industry competes primarily on the basis of advertising to create brand awareness, price and price promotions, retail space management, customer service, consumer points of access, new products, packaging innovations and distribution methods. We believe that brand recognition is a primary factor affecting our competitive position.

 

Employees

 

We employed approximately 18,700 people worldwide as of the end of fiscal year 2009. This included approximately 12,100 employees in our U.S. operations and approximately 6,600 employees in our CEE operations. Employment levels are subject to seasonal variations. We are a party to collective bargaining agreements covering approximately 5,000 employees in the U.S. Nine agreements covering approximately 460 employees will be renegotiated in 2010. We regard our employee relations as generally satisfactory.

 

Government Regulation

 

Our operations and properties are subject to regulation by various federal, state and local governmental entities and agencies in the U.S., as well as foreign governmental entities. As a producer of beverage products, we are subject to production, packaging, quality, labeling and distribution standards in each of the countries where we have operations including, in the U.S., those of the Federal Food, Drug and Cosmetic Act. In the U.S., we are also subject to the Soft Drink Interbrand Competition Act, which permits us to retain 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 territories in which we operate. The operations of our production and distribution facilities are subject to various federal, state and local environmental laws and workplace regulations both in the U.S. and abroad. These laws and regulations include, in the U.S., the Occupational Safety and Health Act, the Unfair Labor Standards Act, the Clean Air Act, the Clean Water Act and laws relating to the maintenance of fuel storage tanks. We believe that our current legal and environmental compliance programs adequately address these areas and that we are in substantial compliance with applicable laws and regulations.

 

Environmental Matters

 

Current Operations.  We maintain compliance with federal, state and local laws and regulations relating to materials used in production and to the discharge of wastes, and other laws and regulations relating to the protection of the environment. The capital costs of such management and compliance, including the modification of existing plants and the installation of new manufacturing processes, are not material to our continuing operations.

 

We are defendants in lawsuits that arise in the ordinary course of business, none of which is expected to have a material adverse effect on our financial condition, although amounts recorded in any given period could be material to the results of operations or cash flows for that period.

 

Discontinued Operations — Remediation.  Under the agreement pursuant to which we sold our subsidiaries, Abex Corporation and Pneumo Abex Corporation (collectively, “Pneumo Abex”), in 1988 and a subsequent settlement agreement entered into in September 1991, we have assumed indemnification obligations for certain environmental liabilities of Pneumo Abex, after any insurance recoveries. Pneumo Abex has been and is subject to a number of environmental cleanup proceedings, including responsibilities under the Comprehensive Environmental Response, Compensation and Liability Act and other related federal and state laws regarding release or disposal of wastes at on-site and off-site locations. In some proceedings, federal, state and local government agencies are involved and other major corporations have been named as potentially responsible parties. Pneumo Abex is also subject to private claims and lawsuits for remediation of properties previously owned by Pneumo Abex and its subsidiaries.

 

There is an inherent uncertainty in assessing the total cost to investigate and remediate a given site. This is because of the evolving and varying nature of the remediation and allocation process. Any assessment of expenses is more speculative in an early stage of remediation and is dependent upon a number of variables beyond the control of any party. Furthermore, there are often timing considerations, in that a portion of the expense incurred by Pneumo Abex, and any resulting obligation of ours to indemnify Pneumo Abex, may not occur for a number of years.

 

In fiscal year 2001, we investigated the use of insurance products to mitigate risks related to our indemnification obligations under the 1988 agreement, as amended. We oversaw a comprehensive review of the former facilities operated or impacted by Pneumo Abex. Advances in the techniques of retrospective risk evaluation and increased experience (and therefore available data) at our former facilities made this comprehensive review possible. The review was completed in fiscal year 2001 and was updated in fiscal year 2005.

 

As of the end of fiscal years 2009 and 2008, we had accrued $30.4 million and $36.1 million, respectively, to cover potential indemnification obligations. Of the total amount accrued, $11.9 million was recorded in “Payables and other current liabilities” on the Consolidated Balance Sheets representing estimates of the amounts to be spent during the next twelve months. This indemnification obligation includes costs associated with several sites in various stages of remediation or negotiations. At the present time, the most significant remaining indemnification obligation is associated with the Willits site, as discussed below, while no other single site has significant estimated remaining costs associated with it. The amounts exclude possible insurance recoveries and are determined on an undiscounted cash flow basis. The estimated indemnification liabilities include expenses for the investigation and remediation of identified sites, payments to third parties

for claims and expenses (including product liability), administrative expenses, and the expenses of on-going evaluations and litigation. We expect a significant portion of the accrued liabilities will be spent during the next several years.

 

Included in our indemnification obligations is financial exposure related to certain remedial actions required at a facility that manufactured hydraulic and related equipment in Willits, California. Various chemicals and metals contaminate this site. A final consent decree was issued in August 1997 and subsequently amended in December 2000 and 2006 in the case of the People of the State of California and the City of Willits, California v. Remco Hydraulics, Inc. The final consent decree established a trust (the “Willits Trust”) which is obligated to investigate and clean up this site. We are currently funding the Willits Trust and the investigation and interim remediation costs on a year-to-year basis as required in the final amended consent decree. We have accrued $8.1 million as of the end of fiscal year 2009 for future remediation and trust administration costs, with the majority of this amount expected to be spent over the next several years.

 

Although we have certain indemnification obligations for environmental liabilities at a number of sites other than the site discussed above, including Superfund sites, it is not anticipated that additional expense at any specific site will have a material effect on us. At some sites, the volumetric contribution for which we have an obligation has been estimated and other large, financially viable parties are responsible for substantial portions of the remainder. In our opinion, based upon information currently available, the ultimate resolution of these claims and litigation, including potential environmental exposures, and considering amounts already accrued, should not have a material effect on our financial condition, although amounts recorded in a given period could be material to our results of operations or cash flows for that period.

 

Discontinued Operations — Insurance.  During fiscal year 2002, as part of a comprehensive program concerning environmental liabilities related to the former Whitman Corporation subsidiaries, we purchased new insurance coverage related to the sites previously owned and operated or impacted by Pneumo Abex and its subsidiaries. In addition, a trust, which was established in 2000 with the proceeds from an insurance settlement (the “Trust”), purchased and funded insurance coverage for remedial and other costs (“Finite Funding”) related to the sites previously owned and operated or impacted by Pneumo Abex and its subsidiaries.

 

Essentially all of the assets of the Trust were expended by the Trust in connection with the purchase of the insurance coverage, the Finite Funding and related expenses. These actions were taken to fund remediation and related costs associated with the sites previously owned and operated or impacted by Pneumo Abex and its subsidiaries and to protect against additional future costs in excess of our self-insured retention. The original amount of self-insured retention (the amount we must pay before the insurance carrier is obligated to begin payments) was $114.0 million of which $65.1 million has been eroded, leaving a remaining self-insured retention of $48.9 million as of the end of fiscal year 2009. The estimated range of aggregate exposure related only to the remediation costs of such environmental liabilities is approximately $16 million to $26 million. We had accrued $17.6 million as of the end of fiscal year 2009 for remediation costs, which is our best estimate of the contingent liabilities related to these environmental matters. The Finite Funding may be used to pay a portion of the $17.6 million and thus reduces our future cash obligations. Amounts recorded in our Consolidated Balance Sheets related to Finite Funding were $7.6 million as of the end of fiscal year 2009 and $9.9 million as of the end of fiscal year 2008 and were recorded in “Other assets,” net of $4.2 million recorded in “Other current assets” as of the end of each respective period.

 

Discontinued Operations — Product Liability and Toxic Tort Claims.  We also have certain indemnification obligations related to product liability and toxic tort claims that might emanate out of the 1988 agreement with Pneumo Abex. Other companies not owned by or associated with us also are responsible to Pneumo Abex for the financial burden of all asbestos product liability claims filed against Pneumo Abex after a certain date in 1998, except for certain claims indemnified by us.

 

Four lawsuits have been filed in California, which name several defendants including certain of our prior subsidiaries. The lawsuits allege that we and our former subsidiaries are liable for personal injury and/or property damage resulting from environmental contamination at the Willits facility. The plaintiffs in the lawsuits are seeking an unspecified amount of damages, punitive damages, injunctive relief and medical

monitoring damages. On June 18, 2009, the Court dismissed all remaining Avila claims. In July 2009, 592 plaintiffs appealed various Court orders. There are currently 590 plaintiffs with appeals that are pending. We will actively oppose these appeals, and we are actively defending these lawsuits. At this time, we do not believe these lawsuits are material to our business or financial condition.

 

As of the end of fiscal years 2009 and 2008, we had accrued $5.3 million and $5.1 million, respectively, related to product liability. These accruals primarily relate to probable asbestos claim settlements and legal defense costs. We also have additional amounts accrued for legal and other costs associated with currently open claims and their related costs. These amounts are included in the total liabilities of $30.4 million accrued as of the end of fiscal year 2009. In addition to the known and probable asbestos claims, we may be subject to additional asbestos claims that are possible for which no reserve had been established as of the end of fiscal year 2009. These additional reasonably possible claims are primarily asbestos-related and the aggregate exposure related to these possible claims is estimated to be in the range of $4 million to $17 million. These amounts are undiscounted and do not reflect any insurance recoveries that we will pursue from insurers for these claims.

 

Certain Litigation Matters

 

Following the public announcement, on April 20, 2009, of PepsiCo’s proposals on April 19, 2009 to acquire the outstanding shares of PAS common stock that it did not already own for $11.64 in cash and 0.223 shares of PepsiCo common stock per share of PAS common stock and to acquire the outstanding shares of The Pepsi Bottling Group, Inc. (“PBG”) common stock that it did not already own for $14.75 in cash and 0.283 shares of PepsiCo common stock per share of PBG common stock, several putative stockholder class action complaints challenging the proposals were filed against various combinations of PepsiCo, PAS, PBG, and the individual members of the boards of directors of PAS and PBG. One of these complaints was amended following the public announcement of the merger agreements to include allegations concerning one of the proposed mergers.

 

Delaware Court of Chancery

 

Beginning on April 22, 2009, eight putative stockholder class action complaints challenging the April 19 proposals were filed against various combinations of PepsiCo, PAS and PBG and the individual members of the boards of directors of PAS and PBG in the Court of Chancery of the State of Delaware. The complaints alleged, among other things, that the defendants had breached or would breach their fiduciary duties owed to the public stockholders of PAS and PBG in connection with the April 19 proposals. On June 5, 2009, the Court of Chancery entered orders consolidating the actions relating to PepsiCo’s proposal to acquire PAS under the caption In re PepsiAmericas, Inc. Shareholders Litigation (C.A. No. 4530-VCS) (the “Consolidated Delaware PAS Action”), consolidating the actions relating to PepsiCo’s proposal to acquire PBG under the caption In re The Pepsi Bottling Group, Inc., Shareholders Litigation (C.A. No. 4526-VCS) (the “Consolidated Delaware PBG Action”), appointing co-lead counsel and co-lead plaintiffs in each consolidated action, and providing for coordination between the two consolidated actions.

 

On June 19, 2009, co-lead plaintiffs in the Consolidated Delaware PAS Action filed a verified consolidated class action complaint. The complaint seeks, among other things, damages and declaratory, injunctive, and other equitable relief alleging, among other things, that the defendants have breached or will breach their fiduciary duties owed to the public stockholders of PAS, that the April 19 proposals and the transactions contemplated thereunder were not entirely fair to the public stockholders, that PepsiCo retaliated against PAS and PBG for rejecting the April 19 proposals, that certain provisions of the certificate of incorporation of PAS are invalid and/or inapplicable to the April 19 proposals and the proposed mergers, and that PepsiCo’s pursuit of its acquisition of PAS violates the Second Amended and Restated Shareholder Agreement by and between PAS and PepsiCo, dated September 6, 2005 (the “PAS Shareholder Agreement”). Also on June 19, 2009, the co-lead plaintiffs in the Consolidated Delaware PBG Action filed a verified consolidated class action complaint. The complaint seeks, among other things, damages and declaratory, injunctive, and other equitable relief alleging, among other things, that the defendants have breached or will breach their fiduciary duties owed to the public stockholders of PBG, that the April 19 proposals and the

transactions contemplated thereunder were not entirely fair to the public stockholders, that PepsiCo had retaliated or would retaliate against PAS and PBG for rejecting the April 19 proposals, and that certain provisions of the certificate of incorporation of PBG are invalid and/or inapplicable to the April 19 proposals and the proposed mergers. On July 23, 2009, co-lead plaintiffs in the Consolidated Delaware PBG Action and the Consolidated Delaware PAS Action filed separate motions for partial summary judgment concerning their allegations relating to the certificates of incorporation of PBG and PAS and the PAS Shareholder Agreement.

 

On August 31, 2009, the Court of Chancery entered a Stipulation and Order Governing the Protection and Exchange of Confidential Information in each of the Consolidated Delaware PAS Action and the Consolidated Delaware PBG Action. Shortly thereafter, defendants began producing documents to co-lead plaintiffs in these actions. On November 20, 2009, the parties to the Consolidated Delaware PAS Action and to the Consolidated Delaware PBG Action entered into the Stipulation and Agreement of Compromise, Settlement, and Release described below.

 

Minnesota State Court

 

Beginning on April 20, 2009, three putative stockholder class action complaints challenging the April 19 proposals were filed against PepsiCo, PAS, and PAS’ board of directors in the District Court of the State of Minnesota, County of Hennepin. The complaints seek, among other things, damages and declaratory, injunctive, and other equitable relief alleging, among other things, that the defendants have breached or will breach their fiduciary duties owed to the public stockholders, that PepsiCo possessed material, non-public information concerning PAS, and that the April 19 proposals and the transactions contemplated thereunder were not entirely fair to the public stockholders. On June 24, 2009, the parties to the three Minnesota actions entered into a stipulation consolidating and staying the Minnesota actions in favor of the Consolidated Delaware PAS Action. On June 29, 2009, the court entered an order consolidating and staying the Minnesota actions pending resolution of the Consolidated Delaware PAS Action.

 

On September 23, 2009, one of the plaintiffs in the Minnesota actions filed a notice of dismissal voluntarily dismissing the action captioned Leone v. PepsiAmericas, Inc. (No. 27-CV-099196). On November 20, 2009, the parties to the two remaining Minnesota actions entered into the Stipulation and Agreement of Compromise, Settlement, and Release described below.

 

New York State Court

 

Westchester County Actions

 

Beginning on April 29, 2009, two putative stockholder class action complaints challenging the April 19 proposals were filed against various combinations of PepsiCo, PAS, PBG, and the members of PBG’s board of directors in the Supreme Court of the State of New York, County of Westchester. The complaints seek, among other things, damages and declaratory, injunctive, and other equitable relief alleging, among other things, that the defendants have breached or will breach their fiduciary duties owed to the public stockholders of PAS and PBG, that the April 19 proposals and the transactions contemplated thereunder were not entirely fair to the public stockholders of PAS and PBG, and that the defensive measures implemented by PBG were not being used to maximize stockholder value. On June 8, 2009, the defendants filed motions to dismiss or stay the actions in favor of the previously filed actions pending in the Delaware Court of Chancery.

 

On October 19, 2009, the parties to the two Westchester County actions entered into a stipulation staying the Westchester County actions in favor of the Consolidated Delaware PAS Action and the Consolidated Delaware PBG Action. On October 21, 2009, the court entered an order staying the two Westchester County actions pending resolution of the Consolidated Delaware PAS Action and the Consolidated Delaware PBG Action. On November 20, 2009, the parties to the two Westchester County actions entered into the Stipulation and Agreement of Compromise, Settlement, and Release described below.

 

New York County Action

 

On May 8, 2009, a putative stockholder class action complaint was filed against PBG and the members of PBG’s board of directors other than John C. Compton and Cynthia M. Trudell in the Supreme Court of the

State of New York, County of New York. The complaint alleged that the defendants had breached their fiduciary duties owed to the public stockholders of PBG by depriving those stockholders of the full and fair value of their shares by failing to accept PepsiCo’s April 19 proposal to acquire PBG or to negotiate with PepsiCo after that proposal was made and by adopting certain defensive measures. On June 8, 2009, the defendants moved to dismiss or to stay this action in favor of the previously filed actions pending in the Delaware Court of Chancery. The plaintiff failed to file a timely opposition to the motion. On August 10, 2009, the plaintiff filed an amended class action complaint, adding as defendants PepsiCo, Mr. Compton, and Ms. Trudell. The amended complaint seeks, among other things, damages and declaratory, injunctive, and other equitable relief alleging, among other things, that the defendants have breached or will breach their fiduciary duties owed to the public stockholders of PBG and that the proposed PBG merger is not entirely fair to the public stockholders. On August 27, 2009 the defendants again moved to dismiss or stay this action in favor of the previously filed actions pending in the Delaware Court of Chancery.

 

On October 2, 2009, the parties to this action entered into a stipulation providing that this action should be voluntarily stayed for 45 days while plaintiff’s counsel conferred with co-lead counsel in the Consolidated Delaware PBG Action and that the defendants’ motion to dismiss or stay should be adjourned during the voluntary stay. Also on October 2, 2009, the court entered an order staying the New York County action for 45 days while plaintiff’s counsel conferred with co-lead counsel in the Consolidated Delaware PBG Action. On November 20, 2009, the parties to the New York County action entered into the Stipulation and Agreement of Compromise, Settlement, and Release described below. On December 2, 2009, the court entered an order staying the New York County action pending resolution of the Consolidated Delaware PBG Action.

 

Settlement of Stockholder Litigation

 

On November 20, 2009, the parties to the Consolidated Delaware PAS Action and the Consolidated Delaware PBG Action, as well as the parties to the two actions pending in the District Court of the State of Minnesota and to the three actions pending in the Supreme Court of the State of New York, entered into a Stipulation and Agreement of Compromise, Settlement, and Release (the “Settlement Stipulation”) to resolve all of these actions.

 

Pursuant to the Settlement Stipulation, and in exchange for the releases described below, defendants have taken or will take the following actions: (1) PepsiCo, PAS, and PBG have included and will continue to include co-lead counsel in the disclosure process (including providing them with the opportunities to review and comment on drafts of the preliminary and final proxy statements/prospectuses before they were or are filed with the Securities and Exchange Commission); (2) PepsiCo agreed to reduce the termination fee set forth in the PAS merger agreement from $71.6 million to $50 million; (3) PepsiCo agreed to reduce the termination fee set forth in the PBG merger agreement from $165.3 million to $115 million; (4) PepsiCo agreed to shorten the termination fee tail set forth in the PAS merger agreement from 12 months to 6 months; and (5) PepsiCo agreed to shorten the termination fee tail set forth in the PBG merger agreement from 12 months to 6 months. The settlement is conditioned on satisfaction by co-lead counsel that the disclosures made in connection with the PAS merger and the PBG merger are not materially omissive or misleading.

 

Pursuant to the Settlement Stipulation, the Consolidated Delaware PAS Action and the Consolidated Delaware PBG Action will be dismissed with prejudice on the merits, the plaintiffs in the Minnesota and New York actions will voluntarily dismiss those actions with prejudice, and all defendants will be released from any and all claims relating to, among other things, the PAS merger, the PBG merger, the PAS merger agreement, the PBG merger agreement, and any disclosures made in connection therewith. The Settlement Stipulation is subject to customary conditions, including consummation of both the PAS merger and the PBG merger, completion of certain confirmatory discovery, class certification, and final approval by the Court of Chancery of the State of Delaware following notice to the stockholders of PAS and PBG. On December 2, 2009, the Court of Chancery entered an order setting forth the schedule and procedures for notice to the stockholders of PAS and PBG and the court’s review of the settlement. The Court of Chancery scheduled a hearing for April 12, 2010, at which the court will consider the fairness, reasonableness, and adequacy of the settlement.

The settlement will not affect the form or amount of the consideration to be received by PAS stockholders in the PAS merger or by PBG stockholders in the PBG merger.

 

The defendants have denied and continue to deny any wrongdoing or liability with respect to all claims, events, and transactions complained of in the aforementioned litigation or that they have engaged in any wrongdoing. The defendants have entered into the Settlement Stipulation to eliminate the uncertainty, burden, risk, expense, and distraction of further litigation.

 

Executive Officers of the Registrant

 

Our executive officers and their ages as of February 16, 2010 were as follows:

 

 

Each executive officer has been appointed to serve until his or her successor is duly appointed or his or her earlier removal or resignation from office. There are no familial relationships between any director or executive officer. The following is a brief description of the business background of each of our executive officers.

 

Mr. Pohlad became Chief Executive Officer of PepsiAmericas in November 2000, was named Vice Chairman in January 2001 and became Chairman of the Board in January 2002. From 1987 to present, Mr. Pohlad has also served as President of Pohlad Companies.

 

Mr. Keiser was named President and Chief Operating Officer in January 2002 with responsibilities for the global operations of PepsiAmericas.

 

Mr. Ware was named Executive Vice President and Chief Financial Officer in March 2005. From January 2003 to March 2005, Mr. Ware had served as Senior Vice President, Planning and Corporate Development.

 

Mr. Durkin was named Executive Vice President, U.S. in March 2005. Prior to this role, Mr. Durkin served as Chief Financial Officer of PepsiAmericas since 2000. Mr. Durkin also serves on the Board of Directors of The Schwan Food Company, Inc. and Mesaba Aviation, Inc.

 

Mr. Rogers was named Executive Vice President, International in September 2004. Prior to this appointment, he served as Executive Vice President/General Manager of Central Europe since August 2000.

 

Mr. Hulbert was named Executive Vice President, Worldwide Supply Chain in January 2008. Prior to this appointment, he served as Senior Vice President, Supply Chain since December 2000.

 

Ms. Sample was named Executive Vice President, Human Resources in January 2008. Prior to this appointment, she served as Senior Vice President, Human Resources since May 2001.

 

Mr. Johnsen was named Senior Vice President and Chief Information Officer in March 2005. From July 2001 to February 2005, he served as Vice President and Chief Information Officer. From November 1997 to June 2001, he served as Chief of Information Technology.

 

Mr. Gorman was named Senior Vice President and Controller in January 2008. Prior to this appointment, he served as Vice President and Controller since May 2003, and Vice President, Planning and Reporting from August 1999 to May 2003.

Mr. Stark was named Vice President and Treasurer in July 2002. Prior to his appointment, Mr. Stark served as Assistant Treasurer since August 1998.

 

 

The following are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these risk factors could cause our actual results to differ materially from those expressed in any forward-looking statement. The risks we have highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected. We caution you to keep in mind these risk factors and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this report.

 

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, may need to pay a termination fee under the merger agreement and our stock price may decline.

 

We have entered into a merger agreement with PepsiCo and Metro, dated August 3, 2009, pursuant to which our company 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, as of the effective time of the merger, each outstanding share of PepsiAmericas common stock that is not owned by PepsiCo or any of its subsidiaries or held by our company as treasury stock will be converted into the right to receive, at the holder’s election, either 0.5022 shares of common stock of PepsiCo or $28.50 in cash, without interest, subject to proration provisions which provide that an aggregate 50 percent of the outstanding PepsiAmericas common stock will be converted into the right to receive common stock of PepsiCo and an aggregate 50 percent of the outstanding PepsiAmericas common stock will be converted into the right to receive cash. We hope to close the merger by the end of February 2010, subject to regulatory approval and the satisfaction or waiver of other customary closing conditions.

 

Each share of PepsiAmericas common stock held by our company as treasury stock, held by PepsiCo or held by Metro, in each case immediately prior to the effective time of the merger, will be canceled, and no payment will be made with respect to them. Each share of PepsiAmericas common stock owned by any subsidiary of PepsiCo other than Metro immediately prior to the effective time of the merger will automatically be converted into the right to receive 0.5022 of a share of PepsiCo common stock.

 

The announcement of the pending merger, 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) the absence of certain legal impediments to the consummation of the pending merger, (ii) 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 its respective obligations under the merger agreement, and (iii) the non-occurrence of a Material Adverse Effect (as defined in the merger agreement) on our company or PepsiCo. In addition, PepsiCo’s obligation to consummate the merger is subject to the satisfaction of certain conditions to the consummation of the PBG merger, to the extent they relate to antitrust and competition laws.

 

If the merger agreement is terminated under certain circumstances, such as if our Board of Directors recommends to our shareholders an acquisition proposal made by a third party, or materially breaches its obligations under the merger agreement, then we would be required to pay PepsiCo a termination fee of $50 million.

We cannot predict whether the closing conditions for the pending merger set forth in the merger agreement will be satisfied. As a result, there can be no assurance 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 as more fully described in Item 1 and Note 19 to the Consolidated Financial Statements. Although the parties have entered into a settlement stipulation to resolve these actions, the Court of Chancery must consider the fairness, reasonableness, and adequacy of the settlement. Further action in connection with these lawsuits or any future lawsuits may be time-consuming and expensive.

 

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

 

Our operating results may fluctuate based on changes in marketplace conditions, especially customer and competitor consolidation; changes in consumer preferences, including our consumers’ shift from carbonated soft drinks to non-carbonated beverages; and unfavorable weather conditions in the territories in which we operate.

 

We face intense competition in the carbonated soft drink market and the non-carbonated beverage market and are impacted by both customer and competitor consolidation. Our response to marketplace competition and retailer consolidations may result in lower than expected net pricing of our products. Retail consolidation has increased the importance of our major customers and further consolidation is expected. In addition, competitive pressures may cause channel and product mix to shift from more profitable channels and packages and adversely affect our overall pricing. Our efforts to improve pricing may result in lower than expected volumes. Changes in net pricing and volume could have an adverse effect on our business, results of operations and financial condition.

 

Health and wellness trends have decreased demand for sugared carbonated soft drinks and shifted interest to diet soft drinks and non-carbonated beverages. In the U.S., carbonated soft drink volume, which represented approximately 82 percent of our volume mix, declined 2 percent and 3 percent in fiscal years 2009 and 2008, respectively. In response to changes in consumers’ preferences, we have increased our emphasis on diet carbonated soft drinks and non-carbonated beverages, including Aquafina, SoBe, Tropicana juice drinks, Lipton Iced Tea, and energy drinks. Our business could be adversely impacted by a significant decline in sales of sugared carbonated soft drinks and our inability to offset that decline with sales of diet soft drinks and non-carbonated beverages. Because we rely mainly on PepsiCo to provide us with the products that we sell, if PepsiCo fails to develop innovative products that respond to these and other consumer trends, this could put us at a competitive disadvantage in the marketplace and adversely affect our business and financial results.

 

Our business could also be adversely affected by other consumer trends, such as consumer health concerns about obesity, product attributes and ingredients. Consumer preferences may change due to a variety of factors, including the aging of the general population, changes in social trends, changes in travel, vacation or leisure activity patterns or worsening economic conditions.

 

Additionally, our business is highly seasonal and unfavorable weather conditions in our markets may impact sales volume. Sales volumes in our CEE operations tend to be more sensitive to weather conditions than our U.S. operations.

 

Our business may be adversely impacted by unfavorable global and local economic, political and regulatory developments or other risks in the countries in which we operate.

 

Our operations are affected by local and global economic environments, including inflation, recession and currency volatility. Political and regulatory changes, some of which may be disruptive, can interfere with our supply chain, our customers, our distributors and our activities in a particular location. Volatility in global

macroeconomic conditions has had a negative impact on our business results. If this volatility continues to persist into the future, the fair value of our goodwill and intangible assets could be adversely impacted.

 

An increase in the price of raw materials, natural gas and fuel or a decrease in the availability of raw materials, natural gas and fuel could adversely affect our financial condition. Disruption of our supply chain also could have an adverse effect on our business, financial condition and operating results.

 

Increases in the price of ingredients, packaging materials, other raw materials, natural gas and fuel could adversely impact our earnings and financial condition if we are unable to pass along these higher costs to our customers. The inability of suppliers to deliver concentrate, raw materials, other ingredients and products to us could also adversely affect operating results. The inability of our suppliers to meet our requirements could result in short-term shortages until alternative sources of supply could be located. In particular, we require significant amounts of aluminum cans and PET bottle containers to support our requirements. Failure of our suppliers to meet our purchase requirements could reduce our profitability. In addition, we also require access to significant amounts of water. Any sustained interruption in the supply of these materials or any significant increase in their prices could have a material adverse effect on our business and financial results.

 

Energy prices, including the price of natural gas, gasoline and diesel fuel, are cost drivers for our business. Sustained high energy or commodity prices could negatively impact our operating results and demand for our products. Events such as natural disasters could impact the supply of fuel and could impact the timely delivery of our products to our customers.

 

Our ability to make, move and sell products is critical to our success. Damage or disruption to our supply chain, including our manufacturing or distribution capabilities, due to weather, natural disaster, fire or explosion, terrorism, pandemic, strikes or other reasons could impair our ability to manufacture, package, sell and distribute our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, as well as require additional resources to restore our supply chain.

 

The successful operation of our business depends upon our relationship with PepsiCo, including its level of advertising, bottler incentives and brand innovation. We may also have conflicts of interest with PepsiCo.

 

We operate under various bottling agreements with PepsiCo that allow us to manufacture, package, sell and distribute carbonated and non-carbonated beverages. Our inability to comply with the terms and conditions established in these agreements could result in termination of bottling agreements which would have a material adverse impact on our short-term and long-term business. These agreements provide that we must purchase all of the concentrates for PepsiCo beverages at prices and on terms which are set by PepsiCo in its sole discretion. Any significant concentrate price increases could materially affect our business and financial results.

 

PepsiCo’s advertising campaigns and their effectiveness, bottler incentives provided by PepsiCo, and PepsiCo’s brand innovation directly impact our operations. Bottler incentives cover a variety of initiatives to support volume and market share growth. The level of support is negotiated regularly and can be increased or decreased at the discretion of PepsiCo. PepsiCo is under no obligation to continue past levels of support in the future. Material changes in expected levels of bottler incentive payments and other support arrangements could adversely affect future results of operations. Furthermore, if the sales volume of sugared carbonated soft drinks continues to decline, our sales volume growth will increasingly depend on product innovation by PepsiCo. Even if PepsiCo maintains a robust pipeline of new products, we may be unable to achieve volume growth through product and packaging initiatives.

 

PepsiCo also provides procurement services for certain raw materials which result in rebates from vendors as a result of procurement volume. Cost of goods sold may be negatively impacted if we are unable to maintain targeted volume levels to secure such anticipated rebates or if PepsiCo no longer provides this service on our behalf.

Our relationship with PepsiCo could give rise to 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 from PepsiCo or by us to PepsiCo.

 

In addition, under our Master Bottling Agreement, we must obtain PepsiCo’s approval to acquire any independent PepsiCo 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.

 

As of the end of fiscal year 2009, PepsiCo beneficially owned approximately 43 percent of our common stock. As a result, PepsiCo is able to significantly affect the outcome of our shareholder votes, thereby affecting matters concerning us.

 

A negative change in our credit rating or the availability of capital could impact borrowing costs and financial results.

 

We depend, in part, upon the issuance of unsecured debt to fund our operations and contractual commitments. A number of factors could cause us to incur increased borrowing costs and to have greater difficulty accessing public and private markets for unsecured debt. These factors include the global capital market environment and outlook, our financial performance and outlook, and our credit ratings as determined primarily by rating agencies. It is possible that our other sources of funds, including available cash, bank facilities and cash flow from operations, may not provide adequate liquidity to fund our operations and contractual commitments.

 

Because our international operations are conducted under multiple local currencies, our operating results experience foreign currency fluctuations.

 

Our international operations are exposed to foreign exchange rate fluctuations resulting from foreign currency transactions and translation of the operations’ financial results from local currency into U.S. dollars upon consolidation. As exchange rates vary, revenue, capital spending and other operating results, when translated, may differ materially from expectations.

 

The cost to remediate environmental concerns associated with previously owned subsidiaries could be materially different than our estimates.

 

We are subject to federal and state requirements for protection of the environment, including those for the remediation of contaminated sites related to certain previously owned subsidiaries. We routinely assess our environmental exposure, including obligations and commitments for remediation of contaminated sites and assessments of ranges and probabilities of recoveries from other potentially responsible parties, including insurance providers. Due to the regulatory complexities and risk of unidentified contaminants on our former properties, the potential exists for remediation costs to be materially different from the costs we have estimated.

 

We cannot predict the outcome of legal proceedings and an adverse determination could negatively impact our financial results, nor can we predict the nature or outcome of future legal proceedings.

 

The nature of operations of certain previously owned subsidiaries exposes us to the potential for various claims and litigation related to, among other things, personal injury and asbestos product liability claims. The nature of assets we currently own and operate exposes us to the potential for various claims and litigation related to, among other things, personal injury and property damage. The resolution of outstanding claims and assessments may be materially different than what we have estimated.

 

In addition, litigation or other claims based on alleged unhealthful properties of soft drinks could be filed against us and would require our management to devote significant time and resources to dealing with such claims. While we would not believe such claims to be meritorious, any such claims would be accompanied by

unfavorable publicity that could adversely affect the sales of certain of our products. Our failure to abide by laws, orders or other legal commitments could subject us to fines, penalties or other damages, including costs associated with recalling products. We could be required to recall products if they become contaminated or damaged.

 

Increases in the cost of compliance with applicable regulations, including those governing the production, packaging, quality, labeling and distribution of beverage products, could negatively impact our financial results.

 

Our operations and properties are subject to various federal, state and local laws and regulations, including those governing the production, packaging, quality, labeling and distribution of beverage products, environmental laws, competition laws, taxes and accounting standards. We are also subject to the jurisdiction of regulatory agencies of foreign countries. New laws or regulations or changes in existing laws or regulations could negatively impact our financial results by restricting our ability to distribute products in certain venues or through higher operating costs to achieve compliance.

 

Changes in tax laws or in the tax status of our international operations could increase our tax liability and negatively impact our financial results.

 

We are subject to federal, state and local taxes in the U.S. and various foreign jurisdictions. As a result, our effective tax rate could be adversely affected by changes in the mix of earnings in the U.S. and foreign countries with differing statutory tax rates, legislative changes impacting statutory tax rates, including the impact on recorded deferred tax assets and liabilities, changes in tax laws or material audit assessments. In addition, deferred tax balances reflect the benefit of net operating loss carryforwards, the realization of which will depend upon generating future taxable income in the corresponding tax jurisdiction.

 

A strike or work stoppage by our union employees, which represent approximately one-fourth of our workforce, could disrupt our business.

 

Approximately 27 percent of our employees are covered by collective bargaining agreements with higher representation in the U.S. at approximately 41 percent of our employee base. These agreements expire at various dates, including some in fiscal year 2010. 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 fully implement future operational changes to enhance our efficiency.

 

We may be adversely affected by our ability to successfully consummate acquisitions or integrate acquired businesses.

 

We may be unable to consummate, successfully integrate and manage acquired businesses without substantial costs, delay or difficulties.

 

Technology failures could disrupt our operations and negatively impact our business.

 

We rely on information technology systems to process, transmit and store electronic information. If we do not effectively manage our information technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, and business disruptions.

 

 

None.

 

 

Our U.S. manufacturing facilities include ten owned and one leased combination bottling/canning plants, four owned bottling plants and two owned canning plants. International manufacturing facilities include four

owned plants in Ukraine; three owned plants in Romania; two owned plants each in Poland, Hungary, and the Czech Republic. The total manufacturing area is approximately 3.2 million square feet. In addition, we operate 128 distribution facilities in the U.S. and 48 distribution facilities in CEE. Seventy-six of the distribution facilities are leased and almost six percent of our U.S. production is from one leased domestic plant. We believe all facilities are adequately equipped and maintained and capacity is sufficient for our current needs. We currently operate a fleet of approximately 4,900 vehicles in the U.S. and approximately 2,100 vehicles internationally to service and support our distribution system. In addition, we own and lease various industrial and commercial real estate properties in the U.S.

 

 

From approximately 1945 to 1995, various entities owned and operated a facility that manufactured hydraulic equipment in Willits, California. The plant site was contaminated by various chemicals and metals. On August 23, 1999, an action entitled Donna M. Avila, et al. v. Willits Environmental Remediation Trust, Remco Hydraulics, Inc., M-C Industries, Inc., Pneumo Abex Corporation and Whitman Corporation, Case No. C99-3941 CAL, was filed in U.S. District Court for the Northern District of California. On January 16, 2001, a second lawsuit, entitled Pamela Jo Arlich, et al. v. Willits Environmental Remediation Trust, et al., Case No. C 01 0266 SI, against essentially the same defendants was filed in the same court. The same defendants were served with a third lawsuit, entitled Nickerman v. Remco Hydraulics, on April 3, 2006. These three lawsuits were consolidated (Avila/Arlich/Nickerman) before the same judge in the U.S. District Court for the Northern District of California. In these lawsuits, individual plaintiffs claim that PepsiAmericas is liable for personal injury and/or property damage resulting from environmental contamination at the facility. There were over 1,000 claims filed in the three lawsuits. The Court dismissed a large portion of the claims; and in 2006 and 2008 we settled a significant number of the claims. There were 12 claims remaining from these lawsuits as of the end of fiscal year 2008. On June 18, 2009, the Court dismissed all remaining Avila/Arlich/Nickerman claims. In July 2009, 592 plaintiffs appealed various Court orders. There are currently 590 plaintiffs with appeals that are pending. On May 30, 2008, a fourth lawsuit with 30 plaintiffs, entitled Whitlock, et al. v. PepsiAmericas, et al., Case No. 3:2008cv02742 was filed. This lawsuit is based on the same claims as the prior three lawsuits. There are currently 27 plaintiffs. We will actively oppose these appeals, and we are actively defending these lawsuits. At this time, we do not believe these lawsuits are material to our business or financial condition.

 

We and our subsidiaries are defendants in other lawsuits in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our financial condition, although amounts recorded in any given period could be material to the results of operations or cash flows for that period.

 

See also “Environmental Matters” and “Certain Litigation Matters” in Item 1 and Note 19 to the Consolidated Financial Statements for further discussion.

 

 

Not applicable.

 

 

Our common stock is listed and traded on the New York Stock Exchange under the stock trading symbol “PAS.” The table below sets forth the reported high and low sales prices as reported for New York Stock Exchange Composite Transactions for our common stock and indicates our dividends declared for each quarterly period for the fiscal years 2009 and 2008.

 

Performance Graph

 

The following performance graph compares the performance of PepsiAmericas common stock to the MidCap 400 Index and to an index of peer companies selected by us, the Bottling Group Index (“BGI”). The BGI consists of The Pepsi Bottling Group, Inc., Coca-Cola Enterprises, Inc., Coca-Cola Bottling Company Consolidated, Coca-Cola FEMSA S.A.B. de C.V. ADRs and Coca-Cola Hellenic Bottling Company S.A. ADRs. The graph assumes the return on $100 invested on January 2, 2005 until January 2, 2010. The returns of each member of the BGI are weighted by market capitalization and include the subsequent reinvestment of dividends into the respective stock.

 

 

 

The closing price of our common stock on January 2, 2010 was $29.26 per share.

 

Shareholders

 

There were 7,775 shareholders of record of our common stock as of February 16, 2010.

Share Repurchase Program

 

We did not repurchase shares of PepsiAmericas common stock in the fourth quarter of 2009. Our share repurchase program activity for each of the three months and the quarter ended January 2, 2010 was as follows:

 

 

 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

 

The following table presents summary operating results and other information of PepsiAmericas and should be read along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, the Consolidated Financial Statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. Amounts are presented in millions, except per share and employee data.

 

The following items were recorded during the periods presented:

 

In fiscal year 2009:

 

 

In fiscal year 2008:

 

 

In fiscal year 2007:

 

 

In fiscal year 2006:

 

 

In fiscal year 2005:

 

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains certain forward-looking statements of expected future developments, as defined in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this Annual Report on Form 10-K refers to our expectations regarding continuing operating improvement and other matters. These forward-looking statements reflect our expectations and are based on currently available data; however, actual results are subject to future risks and uncertainties, which could materially affect actual performance. Risks and uncertainties that could affect such performance include, but are not limited to, the following: the outcome of, or developments concerning, our pending merger with PepsiCo, Inc. (“PepsiCo”); competition, including product and pricing pressures; changing trends in consumer tastes; changes in our relationship and/or support programs with PepsiCo and other brand owners; market acceptance of new product and package offerings; weather conditions; cost and availability of raw materials; changing legislation, including tax laws; cost and outcome of environmental claims; availability and cost of capital including changes in our debt ratings; labor and employee benefit costs; unfavorable foreign currency rate fluctuations; cost and outcome of legal proceedings; integration of acquisitions; failure of information technology systems; and general economic, business, regulatory and political conditions in the countries and territories where we operate. See “Risk Factors” in Item 1A for additional information.

 

These events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

Executive Overview

 

What We Do

 

We manufacture, distribute, and market a broad portfolio of beverage products in the U.S. and Central and Eastern Europe (“CEE”). We sell a variety of brands that we bottle under franchise agreements with various brand owners, the majority with PepsiCo or PepsiCo joint ventures. In some territories, we manufacture, package, sell and distribute our own brands, such as Sandora, Sadochok and Toma. We also distribute snack foods in certain markets. We serve a significant portion of 19 states throughout the central region of the U.S. In CEE, we serve Ukraine, Poland, Romania, Hungary, the Czech Republic and Slovakia, with distribution rights in Moldova, Estonia, Latvia and Lithuania. In addition, we have an equity investment in Agrima JSC (“Agrima”), which produces, sells and distributes PepsiCo products and other beverages in Bulgaria.

 

In the first six months of 2009, we manufactured and distributed beverage products in the Caribbean, including Puerto Rico, Jamaica and Trinidad and Tobago, with distribution rights in the Bahamas and Barbados. On July 3, 2009, we formed a strategic joint venture with The Central America Beverage Corporation (“CABCORP”) to combine our Caribbean operations, excluding the Bahamas, with CABCORP’s Central American operations, including Guatemala, Honduras, El Salvador and Nicaragua. We own an 18 percent interest in the CABCORP joint venture.

 

We have entered into a merger agreement with PepsiCo and Pepsi-Cola Metropolitan Bottling Company, Inc., a wholly owned subsidiary of PepsiCo (“Metro”), dated August 3, 2009, pursuant to which our company 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 PepsiAmericas common stock it does not already own for the price of $28.50 in cash or 0.5022 shares of PepsiCo common stock, subject to proration provisions which provide that an aggregate 50 percent of the outstanding PepsiAmericas common stock will be converted into the right to receive common stock of PepsiCo and an aggregate 50 percent of the outstanding PepsiAmericas common stock will be converted into

the right to receive cash. We hope to close the merger by the end of February 2010, subject to regulatory approval and the satisfaction or waiver of other customary closing conditions.

 

Results of Operations

 

In the discussion of our results of operations below, the number of bottle and can cases sold is referred to as volume. Constant territory refers to the results of operations excluding the non-comparable territories year-over-year. For fiscal year 2009 comparisons, this excluded the last six months of the Caribbean operating results in fiscal year 2008, as we deconsolidated our Caribbean business at the end of the second quarter of 2009. For fiscal year 2008 comparisons, this excluded the first eight months and the first sixteen days of September for Sandora LLC (“Sandora”), as we consolidated Sandora operating results starting in mid-September 2007. Net pricing is net sales divided by the number of cases and gallons sold for our core businesses, which include bottles and cans (including bottle and can volume from vending equipment sales), foodservice and export sales. Changes in net pricing include the impact of sales price (or rate) changes, as well as the impact of foreign currency and brand, package and geographic mix. Net pricing and reported volume amounts exclude contract, commissary, and vending (other than bottles and cans) transactions. Contract sales represent sales of manufactured product to other franchise bottlers and typically decline as excess manufacturing capacity is utilized. Net pricing and volume also exclude activity associated with snack food products. Cost of goods sold per unit is the cost of goods sold for our core businesses, excluding the impact of unrealized gains or losses on derivatives not designated as hedging instruments, divided by the related number of cases and gallons sold. Changes in cost of goods sold per unit include the impact of cost changes, as well as the impact of foreign currency and brand, package and geographic mix.

 

Fiscal Year 2009 Key Financial Results

 

 

 

Our Focus in Fiscal Year 2009

 

Worldwide.  For fiscal year 2009, diluted earnings per share of $1.46 declined 18 percent compared to the prior year due to significant foreign currency pressures and volume declines as global economic conditions remained difficult. Our disciplined pricing strategy, brand portfolio expansion initiatives and productivity improvements helped offset the volume softness and higher raw material costs to drive year over year operating profit growth on a currency neutral basis. Our organization continued its focus on cash flow and drove improvements in working capital.

 

U.S. operations.  Changing consumer demand and higher raw material costs continued to challenge our U.S. business. Carbonated soft drink volume declined 2 percent, an improvement from the prior year rate of decline as we benefited from a renewed focus on core brands and an expanded product portfolio. Our single-serve business was down 5 percent due to declines in the foodservice channel, reflecting the difficult economic environment. Non-carbonated beverage volume declined 10 percent driven by lower volumes in Aquafina take-home package and teas. Despite the economic pressures, operating profits grew 2.2 percent over prior year due to higher net pricing, productivity initiatives and cost management. Our most significant productivity initiative, Customer Optimization to the Third Power, or CO³, drove improvements in forecasting accuracy, miles driven and the level of out-of-stocks, and resulted in lower SD&A expenses.

 

International operations.  Foreign currency headwinds and difficult economic conditions, particularly in emerging markets, drove CEE operating profits down 71.8 percent compared to prior year. Volumes were lower by 12.8 percent, reflecting double digit volume declines in Romania and Ukraine. We executed disciplined pricing strategies and productivity initiatives to help mitigate the impact of foreign currency and lower volumes. Despite these challenges, we believe there are opportunities in the CEE markets. We expanded our water presence in several markets, added flavored carbonated soft drinks in Ukraine, and continued our “feet on the street” sales force initiative to drive new distribution. In addition, we continued to invest in capacity, with a new plant in Romania and new carbonated soft drink lines in Ukraine.

 

The above overview should not be considered by itself in determining full disclosure and should be read in conjunction with the other sections of this Annual Report on Form 10-K.

 

Items Impacting Comparability

 

Intangible Assets Impairment

 

In fiscal year 2009, we recorded a $17.4 million impairment charge ($7.9 million net of taxes and noncontrolling interests) on our Sandora and Sadochok brands. This non-cash charge resulted from our determination that the carrying amount of these indefinite life intangible assets exceeded their fair value.

 

Special Charges and Adjustments

 

In fiscal year 2009, we recorded special charges totaling $11.1 million. In CEE, we recorded special charges of $9.8 million related to the restructuring of our Hungary operations, primarily for severance, fixed asset impairments and lease termination costs. We also recorded $1.3 million of special charges, net of recoveries, in the Caribbean and the U.S. related to restructuring costs.

 

In fiscal year 2008, we recorded special charges and adjustments totaling $23.0 million. We recorded special charges of $16.8 million. In the Caribbean, we recorded $9.0 million of special charges, which consisted of severance and impairment charges that included a $2.9 million impairment charge related to an intangible asset and a $3.0 million impairment of fixed assets. As a result of various realignment initiatives, we recorded special charges of $4.1 million in the U.S. and $1.3 million in CEE related to severance, fixed

asset impairment and lease termination costs. We also recorded a legal contingency of $2.4 million in our CEE operations.

 

In fiscal year 2008, we determined that we had improperly accounted for certain U.S. employee benefit obligations in prior years. Accordingly, we recorded an out-of-period accounting adjustment of $6.2 million to increase the benefit obligation as of the end of fiscal year 2008. This adjustment was recorded as an increase in “Payables and other current liabilities” in the Consolidated Balance Sheet.

 

In fiscal year 2007, we recorded special charges of $6.3 million. In the U.S., we recorded $4.8 million of special charges primarily related to severance and relocation costs associated with our strategic realignment to further strengthen our customer focused go-to-market strategy. In CEE, we recorded special charges of $1.5 million related to lease termination costs in Hungary and associated severance costs.

 

PepsiCo Merger Fees

 

We have entered into a merger agreement with PepsiCo, dated August 3, 2009, whereby PepsiAmericas will merge with and into a wholly owned subsidiary of PepsiCo, subject to regulatory approval and the satisfaction or waiver of other customary closing conditions. In fiscal year 2009, we recorded $6.1 million of fees associated with the pending merger with PepsiCo in “SD&A expenses” in our U.S. geographic segment. In connection with this merger transaction, we have retained certain external advisors and expect to incur aggregate fees of approximately $30 million.

 

Non-operating Assets Impairment

 

In fiscal year 2009, we recorded a $4.9 million write-down of non-operating assets in the U.S. in “SD&A expenses.”

 

Loss from Multi-Employer Pension Plans

 

In fiscal year 2009, we recorded a $3.4 million loss related to our decision to exit a multi-employer pension plan in the U.S. in “SD&A expenses.”

 

Loss from Deconsolidation of Business

 

On July 3, 2009, we formed a strategic joint venture with CABCORP to combine PepsiAmericas’ Caribbean operations, excluding the Bahamas, with CABCORP’s Central American operations. Upon execution of the joint venture agreement, we deconsolidated our Caribbean business resulting in a non-cash loss of $25.8 million ($23.0 million net of taxes). This loss included the recognition of deferred losses associated with cumulative translation adjustments of $19.2 million and unrecognized pension losses of $6.5 million, which were previously included in accumulated other comprehensive loss.

 

Beginning in the third quarter of 2009, earnings from the strategic joint venture with CABCORP are recorded in “Equity in net earnings (loss) of nonconsolidated companies” on the Consolidated Statements of Income and operating results for the Bahamas are included in our U.S. geographic segment. Due to the timing of the receipt of available financial information, we record equity in net earnings from the joint venture on a one-month lag basis.

 

Marketable Securities Impairment

 

In fiscal years 2009 and 2007, we recorded other-than-temporary impairment losses of $2.1 million and $4.0 million, respectively, to write-off an equity security, Northfield Laboratories, Inc., that was classified as available-for-sale on our Consolidated Balance Sheets. The losses were recorded in “Other expense, net.”

 

Gain from Interest Rate Swap Termination

 

In fiscal year 2009, we recognized a gain of $33.0 million ($20.9 million net of taxes) from the termination of an interest rate swap based on our determination that interest payments associated with a

forecasted debt issuance for which the interest rate swap was designated was probable not to occur. The gain was recorded in “Interest expense, net.”

 

Gain on Sale of Non-Core Property

 

In fiscal year 2007, we recorded a gain of $10.2 million related to the sale of non-core property, which consisted of railcars and locomotives. The gain was recorded in “Other expense, net.”

 

53rd Week in Fiscal Year 2008

 

Our fiscal year ends on the Saturday closest to December 31, and as a result, a 53rd week is added every five or six years. Fiscal year 2008 consisted of 53 weeks while fiscal years 2009 and 2007 each consisted of 52 weeks. Our CEE operations are based on a calendar year ending December 31 and, therefore, are not impacted by the 53rd week. Various estimates and assumptions were made to quantify the impact of the additional week of operations. The table below summarizes the estimated impact of the 53rd week on fiscal year 2008 (in millions):

 

 

Acquisitions

 

In fiscal year 2007, we formed a joint venture with PepsiCo to acquire an interest in Sandora, the leading juice company in Ukraine. Under the terms of the joint venture agreement, we hold a 60 percent interest and PepsiCo holds the remaining 40 percent interest. In August 2007, the joint venture acquired 80 percent of Sandora. In November 2007, the joint venture completed the acquisition of the remaining 20 percent interest. Beginning in September 2007, we fully consolidated the results of operations of the joint venture and report the noncontrolling interest in our Consolidated Financial Statements. Due to the timing of the receipt of available financial information, we record results on a one-month lag basis.

 

In the third quarter of 2007, we purchased a 20 percent interest in a joint venture that owns Agrima. Agrima produces, sells and distributes PepsiCo products and other beverages throughout Bulgaria. Due to the timing of the receipt of available financial information, we record results in “Equity in net earnings (loss) of nonconsolidated companies” on a one-quarter lag basis.

Operating Results — 2009 compared with 2008

 

Volume.  Sales volume (decline) growth for fiscal years 2009 and 2008 were as follows:

 

 

 

In fiscal year 2009, worldwide volume declined 10.1 percent, with constant territory volume declines across all our geographic segments driven by difficult economic conditions. Additionally, the deconsolidation of the Caribbean business reduced worldwide volume by 2.2 percentage points.

 

Volume in the U.S. declined 5 percent in fiscal year 2009 compared to fiscal year 2008. The lapping of the 53rd week contributed an estimated 1.4 percentage points to the volume decline. Carbonated soft drink volume decreased 2 percent compared to the prior year period. This decline was an improvement from the prior year rate of decline as we benefited from a renewed focus on core brands and an expanded product portfolio. Non-carbonated soft drinks decreased 10 percent, which reflected a continued decline in the low margin Aquafina take-home package and teas. Single-serve volume grew in the retail channel while softness in the foodservice channel drove overall single-serve volume down 5 percent in fiscal year 2009. Foodservice represents approximately 40 percent of our single-serve business.

 

Volume in CEE declined 12.8 percent in fiscal year 2009 compared to fiscal year 2008, reflecting continued category softness as a result of difficult economic conditions, particularly in our emerging markets. Additionally, volume was adversely impacted by softness in the third-party distributor business in Romania and the export business in Ukraine. Volume in Poland grew modestly, reflecting a more stable economic environment and the benefits from our “feet on the street” sales force initiative that helped drive new distribution outlets.

 

Volume in the Caribbean declined 58.2 percent in fiscal year 2009 compared to the same period last year. The deconsolidation of the Caribbean business reduced volume by 42.3 percentage points. The remaining decrease was driven mainly by a weaker economy and competitive pressures in Puerto Rico.

Net Sales.  Net sales and net pricing statistics for fiscal years 2009 and 2008 were as follows (dollar amounts in millions):

 

 

 

 

 

 

Net sales decreased $515.9 million, or 10.4 percent, to $4,421.3 million in fiscal year 2009 compared to $4,937.2 million in fiscal year 2008. The decrease was mainly attributable to the unfavorable impact of foreign currency, which was responsible for 5.9 percentage points of the decline, and a decrease in volume. Strong pricing in all geographies drove net pricing on a currency neutral basis up 5.6 percent, helping to mitigate the impact of lower volumes, higher raw material costs and foreign currency headwinds.

 

Net sales in the U.S. for fiscal year 2009 decreased $24.7 million, or 0.7 percent, to $3,405.2 million from $3,429.9 million in the prior year. The decrease was due to the lapping of the 53^rd week, which we estimate contributed $48.5 million in net sales in fiscal year 2008, and lower volumes. Net pricing grew 4.1 percent, driven mainly by rate increases to cover higher raw material costs.

 

Net sales in CEE for fiscal year 2009 decreased $345.7 million, or 27.4 percent, to $915.2 million from $1,260.9 million in fiscal year 2008. Foreign currency contributed 21.5 percentage points of the decrease, with the remaining decrease primarily attributed to lower volume associated with difficult economic conditions. This decrease was offset partly by an increase in net pricing of 7.7 percent on a currency neutral basis, driven by increases in rate and a positive contribution from package mix.

 

Net sales in the Caribbean decreased $145.5 million, or 59.1 percent in fiscal year 2009 to $100.9 million from $246.4 million in fiscal year 2008. The deconsolidation of the Caribbean business reduced net sales by 43.5 percentage points. The remaining decrease in net sales reflected a decline in constant territory volume and the unfavorable impact of foreign currency.

Cost of Goods Sold.  Cost of goods sold and cost of goods sold per unit statistics for fiscal years 2009 and 2008 were as follows (dollar amounts in millions):

 

 

 

 

 

 

Cost of goods sold decreased $301.2 million, or 10.2 percent, to $2,654.4 million in fiscal year 2009 from $2,955.6 million in the prior year. The decrease was driven mainly by the decline in volume, favorable impact of foreign currency, and the deconsolidation of the Caribbean business. These decreases were partially offset by higher raw material costs in the U.S. and Caribbean. Cost of goods sold per unit on a currency neutral basis increased 3.7 percent in fiscal year 2009 compared to the same period in 2008.

 

In the U.S., cost of goods sold decreased $5.2 million, or 0.3 percent, to $2,010.2 million in fiscal year 2009 from $2,015.4 million in the prior year. The decrease was mainly driven by lower volume and lapping of the 53^rd week, partly offset by a cost of goods sold per unit increase of 4.6 percent due mainly to higher raw material costs.

 

In CEE, cost of goods sold decreased $186.8 million, or 24.7 percent, to $568.8 million in fiscal year 2009 compared to $755.6 million in the prior year. Foreign currency contributed 12.3 percentage points to the decrease in cost of goods sold, with the remaining decrease primarily attributed to a decline in volume. There was no change in the cost of goods sold per unit on a currency neutral basis in fiscal year 2009 compared to fiscal year 2008. Lower juice concentrate and packaging material costs offset increases in other raw material costs.

 

In the Caribbean, cost of goods sold decreased $109.2 million, or 59.2 percent, to $75.4 million in fiscal year 2009 compared to $184.6 million in fiscal year 2008. The deconsolidation of the Caribbean business reduced cost of goods sold by 42.8 percentage points. The remaining decrease in cost of goods sold was driven by a decline in constant territory volume and the favorable impact of foreign currency.

Selling, Delivery and Administrative Expenses.  SD&A expenses and SD&A expense statistics for fiscal years 2009 and 2008 were as follows (dollar amounts in millions):

 

 

 

 

In fiscal year 2009, SD&A expenses decreased $127.9 million, or 8.6 percent, to $1,357.5 million from $1,485.4 million in the prior year. Foreign currency reduced SD&A expenses by 3.8 percentage points in fiscal year 2009. The deconsolidation of the Caribbean business reduced SD&A expenses by 1.8 percentage points. The remainder of the decrease in SD&A expense was primarily a result of the company’s global productivity and cost containment initiatives, as well as the impact of lower volumes.

 

In the U.S., SD&A expenses decreased $16.3 million, or 1.5 percent, to $1,054.1 million in fiscal year 2009 compared to $1,070.4 million in the prior year. The lapping of the 53^rd week in fiscal year 2008 drove an estimated 1.1 percentage points of the decline in SD&A expenses. The remainder of the decrease was due mainly to the impact of our productivity and cost containment initiatives and lower fuel costs, as well as the impact of lower volumes. These cost savings offset the $6.1 million of fees associated with the PepsiCo merger, $4.9 million write-down of non-operating assets and $3.4 million loss from multi-employer pension plans included in SD&A expenses in fiscal year 2009. As a percentage of net sales, SD&A expenses decreased to 31.0 percent compared to 31.2 percent in fiscal year 2008.

 

In CEE, SD&A expenses decreased $77.6 million, or 21.8 percent, to $278.0 million in fiscal year 2009 compared to $355.6 million in the prior year. Foreign currency contributed 14.8 percentage points to the decrease. The remaining decrease was mainly due to lower volume, the impact of our productivity and restructuring initiatives and lower advertising costs. As a percentage of net sales, SD&A expenses increased to 30.4 percent compared to 28.2 percent in fiscal year 2008 primarily driven by volume declines in fiscal year 2009.

 

In the Caribbean, SD&A expenses decreased $34.0 million, or 57.2 percent, to $25.4 million in fiscal year 2009 from $59.4 million in the prior year. The deconsolidation of the Caribbean business reduced SD&A expenses by 42.4 percentage points. The remaining decrease reflected the impact of foreign currency, lower constant territory volume and the benefits from the restructuring of the business.

Operating Income (Loss).  Operating income (loss) for fiscal years 2009 and 2008 was as follows (dollar amounts in millions):

 

 

 

Operating income decreased $92.3 million, or 19.5 percent, to $380.9 million in fiscal year 2009 compared to $473.2 million in fiscal year 2008, reflecting the negative impact from foreign currency and the difficult global economic conditions, particularly in our emerging markets in CEE.

 

Operating income in the U.S. increased $7.3 million, or 2.2 percent, to $341.1 million in fiscal year 2009 from $333.8 million in fiscal year 2008. The increase was primarily due to lower costs driven by our productivity and cost containment initiatives, as well as higher net pricing. These factors helped offset volume declines, higher raw material costs, losses related to the multi-employer pension plans, impairment of non-operating assets and fees associated with the pending PepsiCo merger, as well as the lapping of the 53^rd week.

 

Operating income in CEE decreased $104.8 million, or 71.8 percent, to $41.2 million in fiscal year 2009 from $146.0 million in the prior year. The decline in operating performance was mainly due to the negative impact of foreign currency, a decrease in volume, an intangible assets impairment charge of $17.4 million related to our Sandora and Sadochok brands and special charges of $9.8 million related to the restructuring of our Hungary operations.

 

The operating loss in the Caribbean was $1.4 million in fiscal year 2009, compared to $6.6 million in the prior year. The improvement in operating results was mainly due to a decrease in special charges of $7.5 million in fiscal year 2009 as compared with fiscal year 2008.

 

Interest Expense, Net and Other Expense, Net.  Interest expense, net decreased $45.5 million in fiscal year 2009 to $65.6 million, compared to $111.1 million in fiscal year 2008. During fiscal year 2009, we received $33.0 million from the termination of an interest rate swap and recorded the gain in interest expense, net. The remaining decrease was mainly due to lower interest rates on floating rate debt.

 

We recorded other expense, net, of $13.9 million in fiscal year 2009 compared to $7.9 million reported in fiscal year 2008. Foreign currency transaction losses were $4.8 million in fiscal year 2009 compared to foreign currency transaction gains of $0.5 million in the prior year. In fiscal year 2009, we also recorded an other-than-temporary loss of $2.1 million to write-off our remaining investment in an equity security, Northfield Laboratories, Inc., that was classified as available-for-sale.

 

Income Taxes.  The effective income tax rate, which is income tax expense expressed as a percentage of income from continuing operations before income taxes and equity in net earnings (loss) of nonconsolidated companies, was 36.0 percent in fiscal year 2009, compared to 30.4 percent in fiscal year 2008. The higher tax rate was due primarily to the impact of the deconsolidation of our Caribbean business and a change in the geographic mix of earnings and the associated varying statutory tax rates.

Equity in Net Earnings (Loss) of Nonconsolidated Companies.  Equity in net earnings (loss) of nonconsolidated companies consists of our 18 percent interest in a joint venture with CABCORP, which was formed in fiscal year 2009, and our 20 percent interest in a joint venture that owns Agrima in Bulgaria. Equity in net earnings of nonconsolidated companies was $1.4 million in fiscal year 2009, compared to equity in net loss of nonconsolidated companies of $1.1 million in fiscal year 2008.

 

Loss from Discontinued Operations.  In fiscal year 2008, we recorded a charge of $15.0 million ($9.2 million net of taxes) related to revised estimates for the cost of environmental remediation, legal and related administrative costs.

 

Net Income.  Net income consists of income attributable to both PepsiAmericas, Inc. and noncontrolling interests. Net income decreased $58.4 million to $177.7 million in fiscal year 2009, compared to $236.1 million in fiscal year 2008. The discussion of our operating results, included above, and the $25.8 million ($23.0 million net of taxes) non-cash loss from the deconsolidation of our Caribbean business explain the decrease in net income.

 

Net (Loss) Income Attributable to Noncontrolling Interests.  We fully consolidated the operating results of Sandora and the Bahamas in our Consolidated Statements of Income. Net (loss) income attributable to noncontrolling interests represented 40 percent of Sandora results and 30 percent of the Bahamas results. Net loss attributable to noncontrolling interests was $3.5 million in fiscal year 2009 compared to net income attributable to noncontrolling interests of $9.7 million in fiscal year 2008, primarily reflecting the lower operating results from the Sandora business, including the intangible assets impairment charge recorded in fiscal year 2009.

 

Net Income Attributable to PepsiAmericas, Inc.  Net income attributable to PepsiAmericas, Inc. decreased $45.2 million to $181.2 million in fiscal year 2009, compared to $226.4 million in fiscal year 2008. The discussion of our operating results, included above, explains the decrease in net income attributable to PepsiAmericas, Inc.

 

Operating Results — 2008 compared with 2007

 

Volume.  Sales volume growth (decline) for fiscal years 2008 and 2007 were as follows:

 

 

 

In fiscal year 2008, worldwide volume increased 6.8 percent compared to the prior year. The increase in worldwide volume was primarily due to the incremental impact of acquisitions and constant territory growth in CEE, partly offset by volume declines in the U.S. and the Caribbean.

 

Volume in the U.S. declined 2.7 percent in fiscal year 2008 compared to fiscal year 2007 due, in part, to a decline in carbonated soft drink volume of 3 percent. Single-serve volume declined 4 percent due mainly to softness in the foodservice and convenience and gas channels. The non-carbonated beverage category declined 8 percent, driven by a 15 percent volume decline in Aquafina due primarily to declines in take-home package

and an 11 percent decline in the tea category. The decrease in volume was partly offset by the 53rd week estimated contribution of 1.4 percentage points.

 

Volume in CEE increased 34.7 percent in fiscal year 2008 compared to fiscal year 2007. The increase was primarily due to the Sandora acquisition, which contributed 32.1 percentage points of the increase. The remaining growth in CEE was led by high single-digit growth in Romania and mid single-digit growth in Poland.

 

Volume in the Caribbean declined 3.9 percent in fiscal year 2008 compared to fiscal year 2007, driven mainly by a weaker economy and competitive pressures in Puerto Rico, partly offset by volume growth in Jamaica together with the 53rd week estimated contribution of 2.0 percentage points.

 

Net Sales.  Net sales and net pricing statistics for fiscal years 2008 and 2007 were as follows (dollar amounts in millions):

 

 

 

 

 

 

Net sales increased $457.7 million, or 10.2 percent, to $4,937.2 million in fiscal year 2008 compared to $4,479.5 million in fiscal year 2007. The increase was mainly attributable to acquisitions, worldwide increases in net pricing on a currency neutral basis, the favorable impact of foreign currency and the impact of the 53rd week, partly offset by volume declines.

 

Net sales in the U.S. in fiscal year 2008 increased $45.0 million, or 1.3 percent, to $3,429.9 million from $3,384.9 million in fiscal year 2007. The increase in net sales was primarily due to a 4.1 percent increase in net pricing primarily driven by rate increases to cover higher raw material costs, partly offset by a decline in volume. The 53rd week contributed an estimated 1.4 percentage points of the increase.

 

Net sales in CEE in fiscal year 2008 increased $411.5 million, or 48.4 percent, to $1,260.9 million from $849.4 million in fiscal year 2007. The increase was primarily due to acquisitions, which contributed

32.3 percentage points of the increase. Foreign currency contributed 9.4 percentage points to the increase in net sales. The remaining increase in net sales was due to volume growth, partly offset by a decline in non-core sales. Net pricing increased 6.0 percent on a currency neutral basis, driven by rate increases and product mix.

 

Net sales in the Caribbean increased $1.2 million, or 0.5 percent, in fiscal year 2008 to $246.4 million from $245.2 million in fiscal year 2007. The increase was a result of an increase in net pricing of 4.6 percent and the 53rd week, which contributed an estimated 1.7 percentage points to net sales. The increase in net sales was partly offset by a volume decline of 3.9 percent.

 

Cost of Goods Sold.  Cost of goods sold and cost of goods sold per unit statistics for fiscal years 2008 and 2007 were as follows (dollar amounts in millions):

 

 

 

 

 

 

Cost of goods sold increased $299.4 million, or 11.3 percent, to $2,955.6 million in fiscal year 2008 from $2,656.2 million in fiscal year 2007. This increase was driven primarily by acquisitions, higher raw material costs and the negative impact of foreign currency. The 53rd week contributed an estimated 1.2 percentage points of the increase. Cost of goods sold per unit increased 5.3 percent during fiscal year 2008 compared to fiscal year 2007.

 

In the U.S., cost of goods sold increased $33.4 million, or 1.7 percent, to $2,015.4 million in fiscal year 2008 from $1,982.0 million in the prior year. Cost of goods sold per unit increased 4.4 percent in the U.S., primarily due to higher raw material costs, as well as the impact of mix, partly offset by a decline in volume. The 53rd week contributed an estimated 1.4 percentage points of the increase.

 

In CEE, cost of goods sold increased $264.2 million, or 53.8 percent, to $755.6 million in fiscal year 2008, compared to $491.4 million in the prior year. The increase was primarily due to acquisitions, which contributed 41.1 percentage points of the increase, while the impact of foreign currency contributed

6.9 percentage points to the increase in cost of goods sold. Cost of goods sold per unit increased 5.4 percent on a currency neutral basis in fiscal year 2008 compared to fiscal year 2007 due to higher raw material costs.

 

In the Caribbean, cost of goods sold increased $1.8 million, or 1.0 percent, to $184.6 million in fiscal year 2008, compared to $182.8 million in fiscal year 2007. The increase was mainly driven by an increase in cost of goods sold per unit of 4.9 percent, attributable to higher raw material and energy costs. The 53rd week contributed an estimated 1.8 percentage points of the increase.

 

Selling, Delivery and Administrative Expenses.  SD&A expenses and SD&A expense statistics for fiscal years 2008 and 2007 were as follows (dollar amounts in millions):

 

 

 

 

In fiscal year 2008, SD&A expenses increased $104.5 million, or 7.6 percent, to $1,485.4 million from $1,380.9 million in fiscal year 2007. As a percentage of net sales, SD&A expenses decreased to 30.1 percent during the fiscal year 2008, compared to 30.8 percent in fiscal year 2007, caused by the impact of acquisitions and effective cost management.

 

In the U.S., SD&A expenses increased $9.2 million, or 0.9 percent, to $1,070.4 million in fiscal year 2008, compared to $1,061.2 million in the prior year. SD&A expenses increased during fiscal year 2008 due to an increase in fuel costs, partly offset by favorable compensation and benefit expenses and the impact of productivity initiatives. The 53rd week contributed an estimated 1.1 percentage points of the increase.

 

In CEE, SD&A expenses increased $94.3 million, or 36.1 percent, to $355.6 million from $261.3 million in the prior year. Acquisitions contributed 16.0 percentage points of the increase and foreign currency contributed 11.1 percent. As a percentage of net sales, SD&A expense improved to 28.2 percent compared to 30.8 percent during fiscal year 2007, primarily due to lower overall operating costs for Sandora as compared to the other markets in CEE.

 

In the Caribbean, SD&A expenses increased $1.0 million, or 1.7 percent, to $59.4 million in fiscal year 2008 from $58.4 million in the prior year. The 53rd week contributed an estimated 1.5 percentage points of this increase. SD&A expenses as a percentage of net sales of 24.1 percent in fiscal year 2008 was comparable to the prior year results.

Operating Income (Loss).  Operating income (loss) for fiscal years 2008 and 2007 was as follows (dollar amounts in millions):