Pepsi Bottling Group (PBG)

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

 

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

 

We receive a tax deduction for certain stock option exercises when the options are exercised, generally for the excess of the stock price when the options are exercised over the exercise price of the options. Additionally, we receive a tax deduction for restricted stock units equal to the fair market value of PBG’s stock at the date of conversion to PBG stock. Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from equity awards as operating cash inflows in the Consolidated Statements of Cash Flows. SFAS 123R requires the benefits of tax deductions in excess of the grant-date fair value for these equity awards to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. For the year ended December 29, 2007, we recognized $29 million in tax benefits from the exercise of equity awards in the Consolidated Statements of Cash Flows, of which $14 million was recorded as excess tax benefits as an increase in cash from financing with the remaining being recorded in cash from operations.

 

As of December 29, 2007, there was approximately $70 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the incentive plans. That cost is expected to be recognized over a weighted-average period of 1.8 years.

 

 

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

 

Shares available for future issuance to employees and Directors
under existing plans were 8.7 million at December 29,
2007.

 

The fair value of PBG stock options was estimated at the date of
grant using the Black-Scholes-Merton option-valuation model. The
table below outlines the weighted-average assumptions for
options granted during years ended December 29, 2007,
December 30, 2006 and December 31, 2005:

 

 

The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with an
equivalent remaining

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

 

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

 

We receive a tax deduction for certain stock option exercises
when the options are exercised, generally for the excess of the
stock price when the options are exercised over the exercise
price of the options. Additionally, we receive a tax deduction
for restricted stock units equal to the fair market value of
PBG’s stock at the date of conversion to PBG stock. Prior
to the adoption of SFAS 123R, the Company presented all tax
benefits resulting from equity awards as operating cash inflows
in the Consolidated Statements of Cash Flows. SFAS 123R
requires the benefits of tax deductions in excess of the
grant-date fair value for these equity awards to be classified
as financing cash inflows rather than operating cash inflows, on
a prospective basis. For the year ended December 29, 2007,
we recognized $29 million in tax benefits from the exercise
of equity awards in the Consolidated Statements of Cash Flows,
of which $14 million was recorded as excess tax benefits as
an increase in cash from financing with the remaining being
recorded in cash from operations.

 

As of December 29, 2007, there was approximately
$70 million of total unrecognized compensation cost related
to nonvested
share-based
compensation arrangements granted under the incentive plans.
That cost is expected to be recognized over a weighted-average
period of 1.8 years.