##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934For the quarterly period ended September 30, 2006o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ___to ___
 001-15019
 PEPSIAMERICAS, INC.
  Delaware
    
    13-6167838(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)4000 Dain Rauscher Plaza, 60 South Sixth StreetMinneapolis, Minnesota
    
    55402(Address of principal executive offices)
    
    (Zip Code)
  (Registrants telephone number, including area code)
  þ o
  þ o o
  o þ




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##### 



PEPSIAMERICAS, INC.
FORM 10-Q
THIRD QUARTER 2006
 TABLE OF CONTENTS
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Statements of Income
    
    
    2Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Cash Flows
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About
Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    33PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    34Item 1A.
    
    Risk Factors
    
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    34SIGNATURE
    
    
    35EXHIBIT INDEX
    
    
    36Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PEPSIAMERICAS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in millions, except per share data)
 Third Quarter
    
    
    First Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    1,064.2
    
    
    $
    982.9
    
    
    $
    2,977.9
    
    
    $
    2,831.7Cost of goods sold
    
    
    630.6
    
    
    
    569.8
    
    
    
    1,767.0
    
    
    
    1,637.5Gross profit
    
    
    433.6
    
    
    
    413.1
    
    
    
    1,210.9
    
    
    
    1,194.2Selling, delivery and administrative expenses
    
    
    323.6
    
    
    
    293.6
    
    
    
    928.5
    
    
    
    890.5Fructose settlement income
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    15.1Special charges, net
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    2.5Operating income
    
    
    110.0
    
    
    
    121.3
    
    
    
    280.2
    
    
    
    316.3Interest expense, net
    
    
    27.0
    
    
    
    22.3
    
    
    
    74.5
    
    
    
    67.5Other expense, net
    
    
    0.1
    
    
    
    1.9
    
    
    
    4.0
    
    
    
    3.3Income before income taxes and equity in net earnings of
nonconsolidated companies
    
    
    82.9
    
    
    
    97.1
    
    
    
    201.7
    
    
    
    245.5Income taxes
    
    
    30.0
    
    
    
    36.6
    
    
    
    75.1
    
    
    
    91.6Equity in net earnings of nonconsolidated companies
    
    
    0.2
    
    
    
    3.2
    
    
    
    5.6
    
    
    
    3.2Net income
    
    $
    53.1
    
    
    $
    63.7
    
    
    $
    132.2
    
    
    $
    157.1Weighted average common shares:Basic
    
    
    126.6
    
    
    
    134.2
    
    
    
    128.2
    
    
    
    135.7Incremental effect of stock options and awards
    
    
    1.8
    
    
    
    2.5
    
    
    
    2.0
    
    
    
    2.4Diluted
    
    
    128.4
    
    
    
    136.7
    
    
    
    130.2
    
    
    
    138.1Earnings per share:Basic
    
    $
    0.42
    
    
    $
    0.47
    
    
    $
    1.03
    
    
    $
    1.16Diluted
    
    
    0.41
    
    
    
    0.47
    
    
    
    1.02
    
    
    
    1.14Cash dividends declared per share
    
    $
    0.125
    
    
    $
    0.085
    
    
    $
    0.375
    
    
    $
    0.255
  2




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PEPSIAMERICAS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in millions)
 End of
    
    
    End ofThird Quarter
    
    
    Fiscal Year2006
    
    
    2005ASSETS:Current assets:Cash and cash equivalents
    
    $
    154.4
    
    
    $
    116.0Receivables, net
    
    
    294.2
    
    
    
    213.8Inventories:Raw materials and supplies
    
    
    94.5
    
    
    
    88.2Finished goods
    
    
    139.3
    
    
    
    106.0Total inventories
    
    
    233.8
    
    
    
    194.2Other current assets
    
    
    75.9
    
    
    
    74.2Total current assets
    
    
    758.3
    
    
    
    598.2Property and equipment
    
    
    2,534.0
    
    
    
    2,387.0Accumulated depreciation
    
    
    (1,402.5
    )
    
    
    (1,272.9
    )Net property and equipment
    
    
    1,131.5
    
    
    
    1,114.1Goodwill
    
    
    2,019.6
    
    
    
    1,859.0Intangible assets, net
    
    
    302.7
    
    
    
    301.1Other assets
    
    
    120.4
    
    
    
    181.4Total assets
    
    $
    4,332.5
    
    
    $
    4,053.8LIABILITIES AND SHAREHOLDERS EQUITY:Current liabilities:Short-term debt, including current maturities of long-term debt
    
    $
    287.8
    
    
    $
    290.4Payables
    
    
    249.7
    
    
    
    208.4Other current liabilities
    
    
    228.2
    
    
    
    223.2Total current liabilities
    
    
    765.7
    
    
    
    722.0Long-term debt
    
    
    1,541.7
    
    
    
    1,285.9Deferred income taxes
    
    
    243.7
    
    
    
    245.1Other liabilities
    
    
    226.9
    
    
    
    231.5Total liabilities
    
    
    2,778.0
    
    
    
    2,484.5Shareholders equity:Preferred stock ($0.01 par value, 12.5 million shares authorized; no shares issued)
    
    
    
    
    
    
    Common stock ($0.01 par value, 350 million shares authorized; 137.6 million shares
issued - 2006 and 2005)
    
    
    1,279.4
    
    
    
    1,267.1Retained income
    
    
    515.4
    
    
    
    432.0Unearned stock-based compensation
    
    
    
    
    
    
    (16.5
    )Accumulated other comprehensive loss
    
    
    (11.7
    )
    
    
    (25.1
    )Treasury stock, at cost (10.7 million shares - 2006 and 4.6 million shares - 2005)
    
    
    (228.6
    )
    
    
    (88.2
    )Total shareholders equity
    
    
    1,554.5
    
    
    
    1,569.3Total liabilities and shareholders equity
    
    $
    4,332.5
    
    
    $
    4,053.8
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PEPSIAMERICAS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
 First Nine Months2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Income from continuing operations
    
    $
    132.2
    
    
    $
    157.1Adjustments to reconcile to net cash provided by
operating activities of continuing operations:Depreciation and amortization
    
    
    146.2
    
    
    
    139.8Deferred income taxes
    
    
    3.5
    
    
    
    (3.8
    )Special charges, net
    
    
    2.2
    
    
    
    2.5Cash outlays related to special charges
    
    
    (2.0
    )
    
    
    (1.2
    )Loss on extinguishment of debt
    
    
    
    
    
    
    5.6Pension contributions
    
    
    (10.0
    )
    
    
    (6.7
    )Gain on sale of investment
    
    
    (0.9
    )
    
    
    Equity in net earnings of nonconsolidated companies
    
    
    (5.6
    )
    
    
    (3.2
    )Excess tax benefits from shared-based payment arrangements
    
    
    (6.4
    )
    
    
    Other
    
    
    14.8
    
    
    
    21.7Changes in assets and liabilities, exclusive of acquisitions:Increase in receivables
    
    
    (62.7
    )
    
    
    (17.5
    )Increase in inventories
    
    
    (25.0
    )
    
    
    (18.1
    )Increase in payables
    
    
    15.6
    
    
    
    1.3Net change in other assets and liabilities
    
    
    25.1
    
    
    
    34.5Net cash provided by operating activities of continuing operations
    
    
    227.0
    
    
    
    312.0CASH FLOWS FROM INVESTING ACTIVITIES:Franchises and companies acquired, net of cash acquired
    
    
    (88.5
    )
    
    
    (354.6
    )Capital investments
    
    
    (127.7
    )
    
    
    (98.4
    )Purchase of equity investment
    
    
    
    
    
    
    (51.0
    )Proceeds from the sale of investment
    
    
    0.9
    
    
    
    Proceeds from sales of property
    
    
    6.8
    
    
    
    3.4Net cash used in investing activities
    
    
    (208.5
    )
    
    
    (500.6
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings of short-term debt
    
    
    84.6
    
    
    
    52.9Proceeds from issuance of long-term debt
    
    
    247.4
    
    
    
    793.3Repayment of long-term debt
    
    
    (134.7
    )
    
    
    (457.0
    )Treasury stock purchases
    
    
    (150.7
    )
    
    
    (196.1
    )Excess tax benefits from share-based payment arrangements
    
    
    6.4
    
    
    
    Issuance of common stock
    
    
    23.0
    
    
    
    59.6Cash dividends
    
    
    (43.3
    )
    
    
    (23.6
    )Net cash provided by financing activities
    
    
    32.7
    
    
    
    229.1Net operating cash flows used in discontinued operations
    
    
    (11.5
    )
    
    
    (6.9
    )Effects of exchange rate changes on cash and cash equivalents
    
    
    (1.3
    )
    
    
    1.3Change in cash and cash equivalents
    
    
    38.4
    
    
    
    34.9Cash and cash equivalents at beginning of fiscal year
    
    
    116.0
    
    
    
    74.9Cash and cash equivalents at end of third quarter
    
    $
    154.4
    
    
    $
    109.8
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PEPSIAMERICAS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1.
    
    Significant Accounting PoliciesQuarterly reporting.The Condensed Consolidated Financial Statements included herein have
been prepared by PepsiAmericas, Inc. (referred to herein as PepsiAmericas, we, our and
us) without audit. Certain information and disclosures normally included in financial
statements prepared in accordance with United States generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission, although we believe that the disclosures are adequate to make the
information presented not misleading. The year-end Condensed Consolidated Balance Sheet data
was derived from audited financial statements, but does not include all disclosures required
by United States generally accepted accounting principles. These Condensed Consolidated
Financial Statements should be read in conjunction with the financial statements and notes
thereto included in our Annual Report on Form 10-K for the fiscal year 2005. In the opinion
of management, the information furnished herein reflects all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair statement of results for the interim
periods presented.Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December
31st. Our 2005 fiscal year contained 52 weeks and ended December 31, 2005. Our
third quarter and first nine months of 2006 and 2005 were based on the thirteen and
thirty-nine weeks ended September 30, 2006 and October 1, 2005, respectively. Due to
the timing of the receipt of available financial information from Quadrant-Amroq Bottling
Company Limited (QABCL), we record results from such operations on a one-month lag basis.
Our business is seasonal; accordingly, the operating results and cash flow from operations of
any individual quarter may not be indicative of a full years results.Earnings per share.Basic earnings per share is based upon the weighted-average number of
common shares outstanding. Diluted earnings per share includes dilutive common stock
equivalents, using the treasury stock method.The following options and restricted stock awards were not included in the computation of
diluted earnings per share because they were antidilutive:
 Third Quarter
    
    
    First Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Shares under options outstanding
    
    
    1,338,700
    
    
    
    471,410
    
    
    
    
    
    
    
    471,410Weighted-average exercise price per share
    
    $
    22.63
    
    
    $
    24.79
    
    
    $
    
    
    
    $
    24.79Shares under nonvested restricted stock awards
    
    
    
    
    
    
    
    
    
    
    941,956
    
    
    
    12,500Weighted-average grant date fair value per share
    
    $
    
    
    
    $
    
    
    
    $
    24.31
    
    
    $
    24.83
 Reclassifications.Certain amounts in the prior period Condensed Consolidated Financial
Statements have been reclassified to conform to the current years presentation.Recently Issued Accounting Pronouncements.In September 2006, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements, which establishes a framework for reporting fair value and expands
disclosures about fair value measurements. SFAS No. 157 becomes effective beginning in the
first quarter of 2007. We are currently evaluating the impact SFAS No. 157 will have on our
Consolidated Financial Statements.In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans. We will be required to fully recognize the funded
status associated with our defined benefit plans. We will also be required to measure our
plans assets and liabilities as of the end of our
fiscal year instead of our current measurement date of September 30. The recognition
provisions of SFAS No. 158 will be effective as of the end of fiscal year 2006. The
measurement date provisions will be effective as of the end of fiscal year 2008. We
anticipate that the impact of adopting SFAS No. 158 will reduce total assets by approximately
$45 million and reduce total liabilities by approximately $35 million, resulting in a
reduction of shareholders equity of approximately $10 million with no impact to the
Consolidated Statements of Income or Cash Flows. We do not anticipate that the impact of the
measurement date provisions will have a material impact on our Consolidated Financial
Statements.
 5




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In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, to address diversity in practice in
quantifying financial statement misstatements. SAB No. 108 requires that we quantify
misstatements based on their impact on each of our financial statements and related
disclosures. SAB No. 108 is effective as of the end of fiscal year 2006, allowing a one-time
transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for
errors that were not previously deemed material, but are material under the guidance in SAB
No. 108. We are currently evaluating the impact SAB No. 108 will have on our Consolidated
Financial Statements upon adoption.In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 provides guidance
regarding the financial statement recognition and measurement of a tax position either taken
or expected to be taken in a tax return. It requires the recognition of a tax position if it
is more likely than not that position would be sustained during an examination based on the
technical merits of the position. The provisions of FIN 48 are effective as of the beginning
of fiscal year 2007. We are currently evaluating the impact FIN 48 will have on the
Consolidated Financial Statements upon adoption.2.
    
    Special ChargesIn the first nine months of 2006 and 2005, we recorded special charges in Central Europe of
$2.2 million and $2.5 million, respectively. These special charges related to a reduction in
the workforce, primarily for severance costs and related benefits.The following table summarizes activity associated with the special charges (in millions):
 Beginning of
    
    
    Special
    
    
    Application
    
    
    
    
    
    
    End of theFiscal Year
    
    
    Charges,
    
    
    of Special
    
    
    Other
    
    
    Third Quarter2006
    
    
    Net
    
    
    Charges
    
    
    Adjustments
    
    
    of 2006Employee related costs
    
    $
    
    
    
    $
    2.0
    
    
    $
    (1.9
    )
    
    $
    
    
    
    $
    0.1Lease terminations and
other costs
    
    
    
    
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    0.1Asset write-downs
    
    
    
    
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    
    
    
    
    Total accrued liabilities
    
    $
    
    
    
    $
    2.2
    
    
    $
    (2.1
    )
    
    $
    0.1
    
    
    $
    0.2
 The total accrued liabilities remaining at the end of the third quarter of 2006 were comprised of deferred severance payments and
certain employee benefits, lease obligations and other costs. We expect the remaining special charge liability of $0.2 million to be
paid using cash from operations during the next twelve months; accordingly, such amounts are classified as Other current
liabilities in the Condensed Consolidated Balance Sheet.3.
    
    Interest Expense, NetInterest expense, net was comprised of the following (in millions):
 Third Quarter
    
    
    First Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Interest expense
    
    $
    27.9
    
    
    $
    22.8
    
    
    $
    77.5
    
    
    $
    70.4Interest income
    
    
    (0.9
    )
    
    
    (0.5
    )
    
    
    (3.0
    )
    
    
    (2.9
    )Interest expense, net
    
    $
    27.0
    
    
    $
    22.3
    
    
    $
    74.5
    
    
    $
    67.5
 6




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4.
    
    Income TaxesThe effective income tax rate, which is income tax expense expressed as a percentage of income
before income taxes, was 37.2 percent for the first nine months of 2006, compared to 37.3
percent in the first nine months of 2005. The effective income tax rate was favorably
impacted by the mix of our international operations. In addition, we recorded a $0.9 million
benefit in the second quarter of 2005 due to a state income tax law change in Ohio.5.
    
    Comprehensive IncomeComprehensive income was as follows (in millions):
 Third Quarter
    
    
    First Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    53.1
    
    
    $
    63.7
    
    
    $
    132.2
    
    
    $
    157.1Foreign currency translation adjustment
    
    
    5.3
    
    
    
    2.6
    
    
    
    13.4
    
    
    
    (21.3
    )Net unrealized investment and hedging gains
(losses)
    
    
    3.3
    
    
    
    0.3
    
    
    
    
    
    
    
    (10.7
    )Comprehensive income
    
    $
    61.7
    
    
    $
    66.6
    
    
    $
    145.6
    
    
    $
    125.1
 Net unrealized investment and hedging gains (losses) are presented net of income tax expense of $2.0 million and $0.2
million in the third quarter of 2006 and 2005, respectively, and net of income tax benefit of $6.5 million in the first
nine months of 2005.6.
    
    Goodwill and Intangible AssetsThe changes in the carrying value of goodwill by geographic segment for the first nine months
of 2006 were as follows (in millions):
 CentralU.S.
    
    
    Europe
    
    
    Caribbean
    
    
    TotalBalance at beginning of fiscal year 2006
    
    $
    1,821.3
    
    
    $
    21.2
    
    
    $
    16.5
    
    
    $
    1,859.0Acquisitions
    
    
    7.7
    
    
    
    148.8
    
    
    
    
    
    
    
    156.5Purchase accounting adjustments
    
    
    0.2
    
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.1
    )Foreign currency translation adjustment
    
    
    
    
    
    
    4.2
    
    
    
    
    
    
    
    4.2Balance at end of third quarter of 2006
    
    $
    1,829.2
    
    
    $
    174.2
    
    
    $
    16.2
    
    
    $
    2,019.6
 7




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Intangible asset balances were as follows (in millions):
 End of Third
    
    
    End of FiscalQuarter of 2006
    
    
    Year 2005Intangible assets subject to amortizationGross carrying amountFranchise and distribution agreements
    
    $
    3.3
    
    
    $
    3.6Customer relationships and lists
    
    
    8.0
    
    
    
    8.0Other
    
    
    2.9
    
    
    
    0.5Total
    
    $
    14.2
    
    
    $
    12.1Accumulated amortizationFranchise and distribution agreements
    
    $
    (0.8
    )
    
    $
    (1.0
    )Customer relationships and lists
    
    
    (1.2
    )
    
    
    (0.7
    )Other
    
    
    (0.5
    )
    
    
    (0.3
    )Total
    
    $
    (2.5
    )
    
    $
    (2.0
    )Intangible assets subject to amortization, net
    
    $
    11.7
    
    
    $
    10.1Intangible assets not subject to amortization:Franchise and distribution agreements
    
    $
    288.5
    
    
    $
    288.5Pension intangible assets
    
    
    2.5
    
    
    
    2.5Intangible assets not subject to amortization
    
    $
    291.0
    
    
    $
    291.0Total intangible assets, net
    
    $
    302.7
    
    
    $
    301.1
  Total amortization expense was $0.3 million and $0.1 million in the third quarter of 2006 and 2005,
respectively. Total amortization expense was $0.9 million and $0.2 million in the first nine months of 2006 and
2005, respectively.In the first nine months of 2006, we acquired the remaining 51 percent interest in QABCL, resulting in an
allocation of $148.8 million to goodwill. This preliminary allocation included the goodwill that was associated
with the first step of the acquisition completed in fiscal year 2005. This initial investment was
recorded under the equity method in accordance with APB Opinion No. 18, The Equity Method of Accounting for
Investment in Common Stock, and this amount was previously recorded in Other assets on the Condensed
Consolidated Balance Sheet. We are in the process of valuing the assets and liabilities acquired in connection
with the acquisition. We anticipate that the valuation will be completed in the first quarter of 2007.During the first nine months of 2006, we acquired Ardea Beverage Co., resulting in an allocation of $7.7
million to goodwill and $2.4 million to other intangibles. The process of valuing the assets, liabilities and
intangibles acquired in connection with the Ardea acquisition was completed in the second quarter of 2006.The decrease in gross carrying amount of franchise and distribution agreements and related accumulated
amortization since the end of fiscal year 2005 reflected the write-off of fully amortized franchise rights for
products we no longer distribute.7.
    
    AcquisitionsOn July 3, 2006, we acquired the remaining 51 percent of the outstanding stock of QABCL for
$81.9 million, net of $17.0 million cash acquired. We acquired $55.4 million of debt as part
of the acquisition. QABCL is a holding company that, through subsidiaries, produces, sells
and distributes Pepsi and other beverages throughout Romania with distribution rights in
Moldova. On June 16, 2005, we had initially acquired 49 percent of the outstanding stock of
QABCL for $51.0 million. The increased purchase price for the remainder of QABCL was due to
the improved operating performance subsequent to the initial acquisition of our 49 percent
minority interest. Due to the timing of the receipt of available financial information from
QABCL, we record results from such operations on a one-month lag basis. Equity in net
earnings of nonconsolidated companies was $0.2 million in the third quarter of 2006 and $3.2
million in the third quarter of 2005. Equity in net earnings of nonconsolidated companies was
$5.6 million in the first nine months of 2006 compared to $3.2 million in the first nine
months of 2005.
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On January 23, 2006, we completed the acquisition of Ardea Beverage Co., the maker of the
airforce Nutrisoda line of soft drinks.During the first nine months of 2005, we completed the acquisition of the capital stock of
Central Investment Corporation (CIC) and the capital stock of FM Vending. CIC had bottling
operations in southeast Florida and central Ohio, and was the seventh largest Pepsi bottler in
the U.S.The results of operations for the acquisitions described above are included in the Condensed
Consolidated Statements of Income since the date of acquisition. These acquisitions are not
material to our consolidated results of operations; therefore, pro forma financial information
is not included in this note.8.
    
    DebtIn the first nine months of 2006, we repaid the remaining outstanding principal of $134.7
million of the 6.5 percent notes and 5.95 percent notes, both due February 2006. We had
$237.5 million of commercial paper borrowings at the end of the third quarter of 2006,
compared to $141.5 million at the end of fiscal year 2005. The increase in commercial paper
borrowings was primarily due to funding maturing debt.In May 2006, we issued $250 million of notes with a
coupon rate of 5.625 percent due May 2011. Net
proceeds from this transaction were $247.4 million, which reflected the discount reduction of
$1.0 million and debt issuance costs of $1.6 million. A portion of the proceeds from the
issuance was used to repay our commercial paper and other general obligations. The notes were
issued from our automatic shelf registration statement filed May 16, 2006 (the Registration
Statement). Under the Registration Statement, additional debt securities may be offered.
The debt securities are unsecured, senior debt obligations and rank equally with all of our
other unsecured and unsubordinated indebtedness.On June 6, 2006, we entered into a new five-year, $600 million unsecured revolving credit
facility. The facility is for general corporate purposes, including commercial paper
backstop. It replaces our previous five-year, $500 million credit facility on substantially
similar terms. During the first nine months of 2006, there were no
borrowings made on the revolving credit facility.9.
    
    Financial InstrumentsWe use derivative financial instruments to reduce our exposure to adverse fluctuations in
commodity prices, foreign currency transactions and interest rates. These financial
instruments are over-the-counter instruments and were designated at their inception as
hedges of underlying exposures. We do not use derivative financial instruments for
speculative or trading purposes.Cash Flow Hedges.We enter into derivative financial instruments to hedge against volatility
in future cash flows on anticipated aluminum purchases and diesel fuel purchases, the prices
of which are indexed to their respective market prices. We consider these hedges to be highly
effective, because of the high correlation between the commodity prices and our contractual
costs. There were no significant changes in our derivative financial instrument positions for
aluminum and bulk diesel fuel in the first nine months of 2006.In anticipation of a long-term debt issuance, we had entered into treasury rate lock
instruments and a forward starting swap instrument. We accounted for these treasury rate
locks and forward starting swap as cash flow hedges, as each hedged against the variability of
interest payments attributable to changes in interest rates on the forecasted issuance of
fixed-rate debt. These treasury rate locks and forward starting swap were considered highly
effective in eliminating the variability of cash flows associated with the forecasted debt
issuance.
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The following table summarizes the net derivative gains or losses deferred in Accumulated
other comprehensive loss and reclassified to earnings in the first nine months of 2006 and
2005 (in millions):
 First Nine
    
    
    First NineMonths 2006
    
    
    Months 2005Unrealized (losses) gains on derivatives at beginning of fiscal year
    
    $
    (2.4
    )
    
    $
    1.2Deferral of net derivative losses in accumulated other
comprehensive loss
    
    
    (0.5
    )
    
    
    (6.5
    )Reclassification of net derivative (gains) losses
to income
    
    
    (0.4
    )
    
    
    4.9Unrealized losses on derivatives at end of third quarter
    
    $
    (3.3
    )
    
    $
    (0.4
    )
 Fair Value Hedges.Periodically, we enter into
interest rate swap contracts to convert a portion of our fixed rate debt to floating rate debt, with the objective of
reducing overall borrowing costs. We account for these swaps as fair value hedges,
since they hedge against the change in fair value of fixed rate debt resulting from
fluctuations in interest rates. In the third quarter of 2004, we terminated all
outstanding interest rate swap contracts and received $14.4 million for the fair
value of the interest rate swap contracts. Amounts included in the cumulative fair
value adjustment to long-term debt will be reclassified into earnings commensurate
with the recognition of the related interest expense. At the end of the third
quarter of 2006 and the end of fiscal year 2005, the cumulative fair value
adjustments to long-term debt were $6.8 million and $8.7 million, respectively.Amounts recorded for all derivatives on the Condensed Consolidated Balance Sheets were as
follows (in millions):
 End of Third
    
    
    End of FiscalQuarter 2006
    
    
    Year 2005Unrealized gains:Commodities
    
    $
    0.2
    
    
    $
    1.4Interest rate instruments
    
    
    8.9
    
    
    
    11.1Unrealized losses:Commodities
    
    $
    (0.7
    )
    
    $
    (0.1
    )Interest rate instruments
    
    
    (7.0
    )
    
    
    (7.7
    )
 Net Investment Hedges.We use foreign currency forward contracts as net investment
hedges of long-term investments in the corresponding foreign currency. Hedges that meet the
effectiveness requirements are accounted for under net investment hedging rules. At the end
of the third quarter of 2006, net losses of $1.0 million arising from effective hedges of net
investments have been reflected in cumulative foreign currency translation in Accumulated
other comprehensive loss on the Condensed Consolidated Balance Sheet.10.
    
    Pension and Other Postretirement Benefit PlansNet periodic pension cost for the third quarter and first nine months of 2006 and 2005
included the following components (in millions):
 Third Quarter
    
    
    First Nine Months2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    0.9
    
    
    $
    0.9
    
    
    $
    2.8
    
    
    $
    2.5Interest cost
    
    
    2.5
    
    
    
    2.4
    
    
    
    7.6
    
    
    
    7.2Expected return on plan assets
    
    
    (3.5
    )
    
    
    (2.9
    )
    
    
    (10.4
    )
    
    
    (8.8
    )Amortization of prior service cost
    
    
    0.1
    
    
    
    
    
    
    
    0.2
    
    
    
    Amortization of net loss
    
    
    1.0
    
    
    
    0.5
    
    
    
    2.9
    
    
    
    1.7Net periodic pension cost
    
    $
    1.0
    
    
    $
    0.9
    
    
    $
    3.1
    
    
    $
    2.6
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During the first nine months of 2006, we have contributed $10.0 million to the plans.
Although we do not expect to make any additional contributions in the remainder of fiscal year
2006, we will continue to evaluate our funding requirements and will fund to levels deemed
necessary for the plans.11.
    
    Share-Based CompensationOur 2000 Stock Incentive Plan (the 2000 Plan), originally approved by shareholders in fiscal
year 2000, provides for granting incentive stock options, nonqualified stock options, related
stock appreciation rights (SARs), restricted stock awards, performance awards or any
combination of the foregoing. Generally, outstanding nonqualified stock options are
exercisable during a ten-year period beginning one to three years after the date of grant.
The exercise price of all options is equal to the fair market value on the date of grant. We
generally use shares from treasury to satisfy option exercises. There are no outstanding
stock appreciation rights under the 2000 Plan at the end of the third quarter of 2006.Restricted stock awards are granted to key members of our U.S. and Caribbean management teams
and members of our Board of Directors under the 2000 Plan. Beginning with shares granted in
fiscal year 2004, restricted stock awards granted to employees vest in their entirety on the
third anniversary of the award. Restricted stock awards granted to employees before 2004 vest
ratably on an annual basis over a three-year period. Employees must complete the requisite
service period in order for their awards to vest. Restricted stock awards granted to
directors vest immediately upon grant. Pursuant to the terms of such awards, directors may
not sell such stock while they serve on the Board of Directors. Dividends are paid to the
holders of restricted stock awards either at the dividend payment date or upon vesting,
depending on the terms of the restricted stock award. We have a policy of using shares from
treasury to satisfy restricted stock award vesting. We measure the fair value of restricted
stock based upon the market price of the underlying common stock at the date of grant.Restricted stock units are granted to key members of our Central Europe management team. The
restricted stock units are payable to these employees in cash upon vesting at the prevailing
market value of PepsiAmericas common stock plus accrued dividends. Restricted stock units
vest after three years, equal to the employees requisite service period. We measure the fair
value of the restricted stock unit award liability based upon the market price of the
underlying common stock at the date of grant and each subsequent reporting date.Under the 2000 Plan, 14,000,000 shares were originally reserved for share-based awards. As of
the end of the third quarter of 2006, there were 5,009,551 shares available for future grants.Our Stock Incentive Plan (the 1982 Plan), originally established and approved by the
shareholders in 1982, has been subsequently amended from time to time, most recently in 1999
when the shareholders approved an allocation of additional shares to this plan. The types of
awards and terms of the 1982 Plan are similar to the 2000 Plan. There are no outstanding stock
appreciation rights under the 1982 Plan as of the end of the third quarter of 2006.Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), Share-Based
Payment. We adopted using the modified prospective method as provided by SFAS No. 123(R).
Accordingly, financial statement amounts for the prior periods presented in this Quarterly
Report on Form 10-Q have not been restated.Changes in options outstanding are summarized as follows:
 Range of
    
    
    Weighted-AverageOptions
    
    Shares
    
    
    Exercise Prices
    
    
    Exercise PriceBalance, beginning of fiscal year 2006
    
    
    6,941,495
    
    
    $
    10.81 - $22.63
    
    
    $
    16.57Exercised
    
    
    (1,548,438
    )
        

    10.81 -   22.63
    
        
    14.86Forfeited
    
    
    (16,357
    )
    
    
    12.01 -   22.63
        
    
    17.24Balance, end of third quarter of 2006
    
    
    5,376,700
    
    
    
    10.81 -   22.63
    
    
    
    17.06Exercisable, end of third quarter of 2006
    
    
    4,957,675
    
    
    
    10.81 -   22.63
    
    
    
    16.90
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The Black-Scholes model was used to estimate the grant date fair values of options.
There were no options granted during the first nine months of 2006 and 2005. We recorded $0.5
million ($0.3 million net of tax) and $1.9 million ($1.2 million net of tax) of compensation
expense related to options in Sales, delivery and administrative expenses in the Condensed
Consolidated Statements of Income in the third quarter and first nine months of 2006,
respectively. The total intrinsic value of options exercised during the third quarter of 2006
and 2005 was $2.2 million and $4.2 million, respectively, and during the first nine months of
2006 and 2005 was $12.9 million and $26.1 million, respectively. The total intrinsic value of
fully vested options and options expected to vest as of the end of the third quarter of 2006
was $23.7 million.The following table summarizes information regarding stock options outstanding and exercisable
at the end of the third quarter of 2006:
 Options Outstanding
    
    
    Options ExercisableWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Range of
    
    Options
    
    
    Remaining Life
    
    
    Average
    
    
    Options
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    (in years)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$10.81 - $12.75
    
    
    1,783,431
    
    
    
    5.1
    
    
    $
    12.30
    
    
    
    1,783,431
    
    
    $
    12.3014.37 -   18.06
    
    
    1,041,758
    
    
    
    2.8
    
    
    
    15.78
    
    
    
    1,041,758
    
    
    
    15.7818.48 -   22.63
    
    
    2,551,511
    
    
    
    4.3
    
    
    
    20.91
    
    
    
    2,132,486
    
    
    
    21.30Total Options
    
    
    5,376,700
    
    
    
    4.3
    
    
    
    17.06
    
    
    
    4,957,675
    
    
    
    16.90
 Changes in nonvested restricted stock awards are summarized as follows:
 Weighted-AverageRange of Grant-Date
    
    
    Grant-Date FairNonvested Shares
    
    Shares
    
    
    Fair Value
    
    
    ValueNonvested at the beginning of fiscal year
2006
    
    
    1,645,292
    
    
    $
    12.01 - $24.83
    
    
    $
    19.15Granted
    
    
    970,877
    
    
    
    24.31
    
    
    
    24.31Vested
    
    
    (404,776
    )
    
    
    12.01 -   24.31
    
    
    
    12.54Forfeited
    
    
    (35,997
    )
    
    
    18.92 -   24.31
    
    
    
    21.96Nonvested at the end of the third quarter
2006
    
    
    2,175,396
    
    
    
    18.92 -   24.83
    
    
    
    22.64
 The weighted-average fair value (at the date of grant) for restricted stock awards granted in the first nine months of
2006 and 2005 was $24.31 and $22.55, respectively. We did not grant any restricted stock awards in the third quarter of 2006
or 2005. We recognized compensation expense of $3.9 million ($2.4 million net of tax) and $2.6 million ($1.6 million net of
tax) in the third quarter of 2006 and 2005, respectively, and $10.6 million ($6.6 million net of tax) and $7.8 million ($4.9
million net of tax) in the first nine months of 2006 and 2005, respectively, related to restricted stock award grants. The
fair value of restricted stock awards that vested during the first nine months of 2006 and 2005 was $9.3 million and $12.0
million, respectively. No restricted stock awards vested in the third quarter of 2006 or 2005.In February 2006, we granted 72,900 restricted stock units at a weighted average fair value of $24.31 on the date of grant to
key members of management. In the first nine months of 2005, we granted 78,440 restricted stock units at a weighted-average
fair value of $22.52 on the date of grant. We recognized compensation expense of $0.2 million and $0.1 million in the third
quarter of 2006 and 2005, respectively, and we recognized compensation expense of $0.7 million and $0.4 million in the first
nine months of 2006 and 2005, respectively, related to restricted stock unit grants. There are currently 144,090 restricted
stock units outstanding, and no restricted stock units vested during the first nine months of 2006 or 2005.Upon the adoption of SFAS No. 123(R), cash retained as a result of excess tax benefits relating to stock-based compensation is
presented in cash flows from financing activities on the Condensed Consolidated Statement of Cash Flows. Previously, cash
retained as a result of excess tax benefits was presented in cash flows from operating activities. Tax benefits resulting from
stock-based compensation deductions in excess of amounts reported for financial reporting purposes were $0.8 million and $6.4
million during the third quarter and first nine months of 2006, respectively.At the end of the third quarter of 2006, there was $28.5 million of total unrecognized compensation cost, net of estimated
forfeitures of $2.8 million, related to nonvested stock-based compensation arrangements. This compensation cost is expected to
be recognized over the next 1.9 years.
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In periods prior to the adoption of SFAS No. 123(R), we used the intrinsic value method of accounting for our stock-based
compensation under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. No
stock-based employee compensation cost for options was reflected in net income, as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant. Compensation expense for restricted stock
awards and restricted stock units was reflected in net income, and this expense was recognized ratably over the awards vesting
period. The following table illustrates the effect on net income and earnings per share had compensation expense been
recognized based upon the estimated fair value on the grant date of the awards in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure
(in millions, except per share data):
 Third
    
    
    FirstQuarter
    
    
    Nine Months2005
    
    
    2005Net income, as reported
    
    $
    63.7
    
    
    $
    157.1Add: Total stock-based compensation expense included in net income as
reported, net of tax
    
    
    1.6
    
    
    
    4.9Deduct: Total stock-based compensation expense determined under fair value
method for all options and    restricted stock awards, net of tax
    
    
    (2.2
    )
    
    
    (6.8
    )Pro forma net income
    
    $
    63.1
    
    
    $
    155.2Basic:
    
    As reported
    
    $
    0.47
    
    
    $
    1.16Pro forma
    
    $
    0.47
    
    
    $
    1.14Diluted:
    
    As reported
    
    $
    0.47
    
    
    $
    1.14Pro forma
    
    $
    0.46
    
    
    $
    1.12
 12.
    
    Supplemental Cash Flow InformationNet cash provided by operating activities reflected cash payments and receipts for interest
and income taxes as follows (in millions):
 First Nine Months2006
    
    
    2005Interest paid
    
    $
    74.0
    
    
    $
    69.8Interest received
    
    
    3.0
    
    
    
    3.1Income taxes paid, net of refunds
    
    
    63.5
    
    
    
    54.2
 Income taxes paid, net of refunds includes $12.8 million of tax refunds received in the
first nine months of 2005 relating to the utilization of a portion of our net operating loss
carryforwards for tax returns filed through fiscal year 2002.13.
    
    Environmental and Other Commitments and ContingenciesCurrent Operations.We maintain compliance with federal, state and local laws and regulations
relating to materials used in production and to the discharge or emission 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.We participate in a number of trustee-managed multi-employer pension and health and welfare
plans for employees covered under collective bargaining agreements. Several factors,
including unfavorable
investment performance, changes in demographics and increased benefits to participants could
result in potential funding deficiencies, which could cause us to make higher future
contributions to these plans.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.
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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. The insurance
carriers required that we employ an outside consultant to perform 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 consultants review was
completed in fiscal year 2001 and was updated in the fourth quarter of 2005. We have recorded
our best estimate of our probable liability under our indemnification obligations using this
consultants review and the assistance of other professionals.At the end of the third quarter of 2006, we had $63.7 million accrued to cover potential
indemnification obligations, compared to $87.5 million recorded at the end of fiscal year
2005. This indemnification obligation includes costs associated with approximately 20 sites
in various stages of remediation. 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. Of the total
amount accrued, $27.8 million was classified as a current liability at the end of the third
quarter of 2006 and $30.5 million at the end of fiscal year 2005. 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 and toxic tort claims), administrative expenses, and the expenses of on-going
evaluations and litigation. We expect a significant portion of the accrued liabilities will
be resolved during the next 10 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. In August 1997, a final
consent decree was issued in the case of the People of the State of California and the City of
Willits, California v. Remco Hydraulics, Inc. This final consent decree was amended in
December 2000 and established a trust which is obligated to investigate and clean up this
site. We are currently funding the investigation and interim remediation costs on a
year-to-year basis according to the final consent decree. We have accrued $22.8 million for
future remediation and trust administration costs, with the majority of this amount 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 the second quarter of 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 insurance coverage and funded coverage for remedial and other costs (Finite
Funding) related to the sites previously owned and operated or impacted by Pneumo Abex and
its subsidiaries.
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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
have been 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 $41.5 million has been eroded, leaving a remaining
self-insured retention of $72.5 million at the end of the third quarter of 2006. The
estimated range of aggregate exposure related only to the remediation costs of such
environmental liabilities is approximately $31 million to $50 million. We had accrued $31.4
million at the end of the third quarter of 2006 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 $31.4 million and thus reduces our future cash
obligations. Amounts recorded in our Condensed Consolidated Balance Sheets related to Finite
Funding were $14.2 million and $19.6 million at the end of the third quarter of 2006 and the
end of fiscal year 2005, respectively, and are recorded in Other assets, net of $3.5 million
and $5.4 million recorded in Other current assets, at the end of the third quarter of 2006
and the end of fiscal year 2005, respectively.In addition, we had recorded other receivables of $7.9 million and $11.4 million at the end of
the third quarter of 2006 and at the end of fiscal year 2005, respectively, for future
probable amounts to be received from insurance companies and other responsible parties. These
amounts were recorded in Other assets in the Condensed Consolidated Balance Sheets as of the
end of each respective period. Of this total, no portion of the receivable was reflected as
current at the end of the third quarter of 2006 or at the end of fiscal year 2005.On May 31, 2005, Cooper Industries, LLC (Cooper) filed and later served a lawsuit against
us, Pneumo Abex, LLC, and the Trustee of the Trust (the Trustee), captioned Cooper
Industries, LLC v. PepsiAmericas, Inc., et al., Case No. 05 CH 9214 (Cook Cty. Cir. Ct.).
The claims involve the Trust and insurance policy described above. Cooper asserts that it was
entitled to access the $34 million that previously was in the Trust and used to purchase the
insurance policy. Cooper claims that Trust funds should have been distributed for underlying
Pneumo Abex asbestos claims indemnified by Cooper. Cooper complains that it was deprived of
access to money in the Trust because of the Trustees decision to use the Trust funds to
purchase the insurance policy described above. Pneumo Abex, LLC, the corporate successor to
our prior subsidiary, has been dismissed from the suit.During the second quarter of 2006, the Trustees motion to dismiss was granted and three
counts against us based on Coopers claims against the Trust were dismissed with prejudice as
were all counts against the Trustee on the grounds that Cooper lacks standing to pursue its
claims because it is not a beneficiary under the Trust. We then filed a separate motion to
dismiss the remaining counts against us. Our motion was granted during the third quarter of
2006 and all remaining counts against us were dismissed with prejudice. Cooper subsequently
filed a notice of appeal with regard to all rulings by the court dismissing the counts against
us and the Trustee. Briefing of Coopers appeal is expected to take place during the first or
second quarter of 2007.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. The sites and product liability and toxic tort
claims included in the aggregate accrued liabilities we have recorded are described more fully
in our Annual Report on Form 10-K for the fiscal year 2005. No significant changes in the
status of those sites or claims occurred and we were not notified of any significant new sites
or claims during the first nine months of 2006.14.
    
    Segment ReportingWe operate in one industry located in three geographic areas  the U.S., Central
Europe and the Caribbean. We operate in 19 states in the U.S. Outside the U.S., we operate
in Poland, Hungary, the Czech Republic, Republic of Slovakia, Romania, Puerto Rico, Jamaica,
the Bahamas and Trinidad and Tobago. We have distribution rights and distribute in Moldova,
Barbados, Estonia, Latvia and Lithuania. Net sales and operating income from the QABCL
acquisition since the date QABCL was consolidated are included in the Central Europe
geographic segment in the table below.
 15




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The following tables present net sales and operating income of our geographic segments for the
third quarter and first nine months of 2006 and 2005 (in millions):
 Third QuarterNet Sales
    
    
    Operating Income2006
    
    
    2005
    
    
    2006
    
    
    2005U.S.
    
    $
    841.5
    
    
    $
    822.8
    
    
    $
    90.1
    
    
    $
    111.5Central Europe
    
    
    157.2
    
    
    
    99.6
    
    
    
    18.0
    
    
    
    7.8Caribbean
    
    
    65.5
    
    
    
    60.5
    
    
    
    1.9
    
    
    
    2.0Total
    
    $
    1,064.2
    
    
    $
    982.9
    
    
    $
    110.0
    
    
    $
    121.3
 First Nine MonthsNet Sales
    
    
    Operating Income2006
    
    
    2005
    
    
    2006
    
    
    2005U.S.
    
    $
    2,462.0
    
    
    $
    2,397.4
    
    
    $
    263.7
    
    
    $
    311.3Central Europe
    
    
    337.5
    
    
    
    266.7
    
    
    
    14.7
    
    
    
    3.6Caribbean
    
    
    178.4
    
    
    
    167.6
    
    
    
    1.8
    
    
    
    1.4Total
    
    $
    2,977.9
    
    
    $
    2,831.7
    
    
    $
    280.2
    
    
    $
    316.3
 15.
    
    Related Party TransactionsWe are a licensed producer and distributor of PepsiCo branded carbonated and non-carbonated
soft drinks and other non-alcoholic beverages in the U.S., Central Europe and the Caribbean.
We operate under exclusive franchise agreements with soft drink concentrate producers,
including master bottling and fountain syrup agreements with PepsiCo, Inc. (PepsiCo) for
the manufacture, packaging, sale and distribution of PepsiCo branded products. The franchise
agreements exist in perpetuity and contain operating and marketing commitments and conditions
for termination. As of the end of the third quarter of 2006, PepsiCo beneficially owned
approximately 44 percent of PepsiAmericas outstanding common stock.We purchase concentrate from PepsiCo to be used in the production of PepsiCo branded
carbonated soft drinks and other non-alcoholic beverages. PepsiCo also provides us with
various forms of bottler incentives (marketing support programs) to promote Pepsis brands.
These bottler incentives cover a variety of initiatives, including direct marketplace, shared
media and advertising, to support volume and market share growth. There are no conditions or
requirements that could result in the repayment of any support payments we have received.We manufacture and distribute fountain products and provide fountain equipment service to
PepsiCo customers in certain territories in accordance with various agreements. There are
other products that we produce and/or distribute through various arrangements with PepsiCo or
partners of PepsiCo. We also purchase finished beverage products from PepsiCo and certain of
its affiliates including tea, concentrate and finished beverage products from a Pepsi/Lipton
partnership and a Pepsi/Starbucks partnership.PepsiCo provides various procurement services under a shared services agreement. Under such
agreement, PepsiCo negotiates with various suppliers the cost of certain raw materials by
entering into raw material contracts on our behalf. PepsiCo also collects and remits to us
certain rebates from the various suppliers related to our procurement volume. In addition,
PepsiCo acts as our agent for the execution of derivative contracts associated with certain
anticipated raw material purchases.We have an existing arrangement with a subsidiary of the Pohlad Companies related to the joint
ownership of an aircraft. This transaction is not material to our Condensed Consolidated
Financial Statements. Robert C. Pohlad, our Chairman and Chief Executive Officer, is the
President and owner of approximately 33 percent of the capital stock of Pohlad Companies.See additional discussion of our related party transactions in our Annual Report on Form 10-K
for the fiscal year 2005.
 16




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##### Table of Contents



16.
    
    Subsequent EventOn October 25, 2006, we publicly announced a plan to strategically realign our U.S. business
to further strengthen our customer focused go-to-market strategy. The U.S. operations will be
aligned by customer and channel with dedicated functional support teams to better service our
customers and foster mutual growth and our plan is to put this new structure in place at the
beginning of 2007. We expect to incur certain charges related to severance and other
termination costs with the majority of the charge recorded in the fourth quarter of 2006 with
the remainder of the charge recorded in fiscal year 2007. We are unable to make an estimate
of the anticipated charge at this time.
 17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 CRITICAL ACCOUNTING POLICIES
  Recoverability of Goodwill and Intangible Assets with Indefinite Lives.
    Environmental Liabilities.
 Income Taxes.
  18




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Casualty Insurance Costs.
  19




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RESULTS OF OPERATIONS
2006 THIRD QUARTER COMPARED WITH 2005 THIRD QUARTER
 BUSINESS OVERVIEW
  volume Constant territory Net
pricing Cost of goods sold per unit
 Seasonality
  Items Impacting Comparability
 Acquisition
   Fructose Settlement
  20




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Special Charges
  Financial Results
   2006 Outlook
  RESULTS OF OPERATIONS
 Volume
  As reported
    
    2006
    
    2005U.S.
    
    
    0.6
    %
    
    
    7.9
    %Central Europe
    
    
    50.5
    %
    
    
    4.3
    %Caribbean
    
    
    3.8
    %
    
    
    (0.4
    %)Worldwide
    
    
    9.0
    %
    
    
    6.7
    %
 Constant territory
    
    2006
    
    2005U.S.
    
    
    0.6
    %
    
    
    0.4
    %Central Europe
    
    
    13.1
    %
    
    
    4.3
    %Caribbean
    
    
    3.8
    %
    
    
    (0.4
    %)Worldwide
    
    
    2.8
    %
    
    
    1.0
    %
   21




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##### Table of Contents



Net Sales
  Net Sales
    
    2006
    
    
    2005
    
    
    ChangeU.S.
    
    $
    841.5
    
    
    $
    822.8
    
    
    
    2.3
    %Central Europe
    
    
    157.2
    
    
    
    99.6
    
    
    
    57.8
    %Caribbean
    
    
    65.5
    
    
    
    60.5
    
    
    
    8.3
    %Worldwide
    
    $
    1,064.2
    
    
    $
    982.9
    
    
    
    8.3
    %Net
Pricing Growthas reported
    
    2006
    
    
    2005U.S.
    
    
    1.3
    %
    
    
    3.2
    %Central Europe
    
    
    8.3
    %
    
    
    2.5
    %Caribbean
    
    
    4.6
    %
    
    
    6.2
    %Worldwide
    
    
    (0.2
    %)
    
    
    3.6
    %Net
Pricing Growthconstant territory
    
    2006
    
    
    2005U.S.
    
    
    1.3
    %
    
    
    3.4
    %Central Europe
    
    
    8.5
    %
    
    
    2.5
    %Caribbean
    
    
    4.6
    %
    
    
    6.2
    %Worldwide
    
    
    1.5
    %
    
    
    3.3
    %
    22




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Cost of Goods Sold
  Cost of Goods Sold
    
    2006
    
    
    2005
    
    
    ChangeU.S.
    
    $
    490.8
    
    
    $
    467.1
    
    
    
    5.1
    %Central Europe
    
    
    91.5
    
    
    
    58.6
    
    
    
    56.1
    %Caribbean
    
    
    48.3
    
    
    
    44.1
    
    
    
    9.5
    %Worldwide
    
    $
    630.6
    
    
    $
    569.8
    
    
    
    10.7
    %Cost
of Goods Sold per Unit Increaseas reported
    
    2006
    
    
    2005U.S.
    
    
    4.0
    %
    
    
    3.3
    %Central Europe
    
    
    7.2
    %
    
    
    6.8
    %Caribbean
    
    
    7.2
    %
    
    
    3.6
    %Worldwide
    
    
    2.2
    %
    
    
    3.8
    %Cost
of Goods Sold per Unit Increaseconstant territory
    
    2006
    
    
    2005U.S.
    
    
    4.0
    %
    
    
    3.7
    %Central Europe
    
    
    8.2
    %
    
    
    6.8
    %Caribbean
    
    
    7.2
    %
    
    
    3.6
    %Worldwide
    
    
    4.1
    %
    
    
    3.8
    %
     23




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Selling, Delivery and Administrative Expenses
  SD&A Expenses
    
    2006
    
    
    2005
    
    
    ChangeU.S.
    
    $
    260.6
    
    
    $
    246.0
    
    
    
    5.9
    %Central Europe
    
    
    47.7
    
    
    
    33.2
    
    
    
    43.7
    %Caribbean
    
    
    15.3
    
    
    
    14.4
    
    
    
    6.3
    %Worldwide
    
    $
    323.6
    
    
    $
    293.6
    
    
    
    10.2
    %SD&A as Percent of Net Sales
    
    2006
    
    
    2005U.S.
    
    
    31.0
    %
    
    
    29.9
    %Central Europe
    
    
    30.3
    %
    
    
    33.3
    %Caribbean
    
    
    23.4
    %
    
    
    23.8
    %Worldwide
    
    
    30.4
    %
    
    
    29.9
    %
     Operating Income
  2006
    
    
    2005
    
    
    ChangeU.S.
    
    $
    90.1
    
    
    $
    111.5
    
    
    
    (19.2
    %)Central Europe
    
    
    18.0
    
    
    
    7.8
    
    
    
    130.8
    %Caribbean
    
    
    1.9
    
    
    
    2.0
    
    
    
    (5.0
    %)Worldwide
    
    $
    110.0
    
    
    $
    121.3
    
    
    
    (9.3
    %)
    24




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Interest Expense and Other Expenses
   Income Taxes
  Net Income
  RESULTS OF OPERATIONS
2006 FIRST NINE MONTHS COMPARED WITH 2005 FIRST NINE MONTHS
 Volume
  As reported
    
    2006
    
    2005U.S.
    
    
    0.9
    %
    
    
    7.5
    %Central Europe
    
    
    24.0
    %
    
    
    2.8
    %Caribbean
    
    
    1.1
    %
    
    
    8.5
    %Worldwide
    
    
    4.3
    %
    
    
    6.8
    %
 Constant territory
    
    2006
    
    2005U.S.
    
    
    0.9
    %
    
    
    0.2
    %Central Europe
    
    
    9.7
    %
    
    
    2.8
    %Caribbean
    
    
    1.1
    %
    
    
    8.5
    %Worldwide
    
    
    2.2
    %
    
    
    1.1
    %
   25




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Net Sales
  Net Sales
    
    2006
    
    
    2005
    
    
    ChangeU.S.
    
    $
    2,462.0
    
    
    $
    2,397.4
    
    
    
    2.7
    %Central Europe
    
    
    337.5
    
    
    
    266.7
    
    
    
    26.5
    %Caribbean
    
    
    178.4
    
    
    
    167.6
    
    
    
    6.4
    %Worldwide
    
    $
    2,977.9
    
    
    $
    2,831.7
    
    
    
    5.2
    %Net Pricing Growth-as reported
    
    2006
    
    
    2005U.S.
    
    
    1.3
    %
    
    
    3.4
    %Central Europe
    
    
    4.0
    %
    
    
    7.4
    %Caribbean
    
    
    5.5
    %
    
    
    3.8
    %Worldwide
    
    
    0.7
    %
    
    
    4.1
    %Net Pricing Growth-constant territory
    
    2006
    
    
    2005U.S.
    
    
    1.3
    %
    
    
    3.5
    %Central Europe
    
    
    3.8
    %
    
    
    7.4
    %Caribbean
    
    
    5.5
    %
    
    
    3.8
    %Worldwide
    
    
    1.3
    %
    
    
    3.8
    %
    26




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Cost of Goods Sold
  Cost of Goods Sold
    
    2006
    
    
    2005
    
    
    ChangeU.S.
    
    $
    1,432.7
    
    
    $
    1,352.1
    
    
    
    6.0
    %Central Europe
    
    
    201.8
    
    
    
    161.3
    
    
    
    25.1
    %Caribbean
    
    
    132.5
    
    
    
    124.1
    
    
    
    6.8
    %Worldwide
    
    $
    1,767.0
    
    
    $
    1,637.5
    
    
    
    7.9
    %Cost of Goods Sold per Unit Increase-as reported
    
    2006
    
    
    2005U.S.
    
    
    4.3
    %
    
    
    3.1
    %Central Europe
    
    
    2.7
    %
    
    
    14.9
    %Caribbean
    
    
    6.5
    %
    
    
    4.6
    %Worldwide
    
    
    3.3
    %
    
    
    4.5
    %Cost of Goods Sold per Unit Increase-constant territory
    
    2006
    
    
    2005U.S.
    
    
    4.3
    %
    
    
    2.9
    %Central Europe
    
    
    3.2
    %
    
    
    14.9
    %Caribbean
    
    
    6.5
    %
    
    
    4.6
    %Worldwide
    
    
    4.0
    %
    
    
    4.2
    %
     27




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Selling, Delivery and Administrative Expenses
  SD&A Expenses
    
    2006
    
    
    2005
    
    
    ChangeU.S.
    
    $
    765.6
    
    
    $
    749.1
    
    
    
    2.2
    %Central Europe
    
    
    118.8
    
    
    
    99.3
    
    
    
    19.6
    %Caribbean
    
    
    44.1
    
    
    
    42.1
    
    
    
    4.8
    %Worldwide
    
    $
    928.5
    
    
    $
    890.5
    
    
    
    4.3
    %SD&A as Percent of Net Sales
    
    2006
    
    
    2005U.S.
    
    
    31.1
    %
    
    
    31.2
    %Central Europe
    
    
    35.2
    %
    
    
    37.2
    %Caribbean
    
    
    24.7
    %
    
    
    25.1
    %Worldwide
    
    
    31.2
    %
    
    
    31.4
    %
     Operating Income
  2006
    
    
    2005
    
    
    ChangeU.S.
    
    $
    263.7
    
    
    $
    311.3
    
    
    
    (15.3
    %)Central Europe
    
    
    14.7
    
    
    
    3.6
    
    
    
    308.3
    %Caribbean
    
    
    1.8
    
    
    
    1.4
    
    
    
    28.6
    %Worldwide
    
    $
    280.2
    
    
    $
    316.3
    
    
    
    (11.4
    %)
 28




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##### Table of Contents



Interest Expense and Other Expenses
   Income Taxes
  Net Income
  LIQUIDITY AND CAPITAL RESOURCES
 Operating Activities.
 29




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Investing Activities.
  Financing Activities.
      30




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##### Table of Contents



Discontinued operations.
  RELATED PARTY TRANSACTIONS
       31




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Commodity Prices
  Interest Rates
  Currency Exchange Rates
   32




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Item 4. Controls and Procedures
 Disclosure Controls and Procedures
   Internal Control over Financial Reporting
   33




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Not applicable.(b)
    
    Not applicable.(c)
    
    Our share repurchase program activity for each of the three months and the quarter
ended September 30, 2006 was as follows:
 Total Number of
    
    
    Maximum NumberTotal
    
    
    Average
    
    
    Shares Purchased
    
    
    of Shares that MayNumber of
    
    
    Price
    
    
    as Part of Publicly
    
    
    Yet Be PurchasedShares
    
    
    Paid per
    
    
    Announced Plans
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    Programs (1)July 2  July 29, 2006
    
    
    
    
    
    $
    
    
    
    
    30,165,500
    
    
    
    9,834,500July 30
 August 26, 2006
    
    
    
    
    
    
    
    
    
    
    30,165,500
    
    
    
    9,834,500August 27  September 30, 2006
    
    
    
    
    
    
    
    
    
    
    30,165,500
    
    
    
    9,834,500For the Quarter Ended
September 30, 2006
    
    
    
    
    
    $
    
 
 (1)
    
    On July 21, 2005, we announced that our Board of Directors authorized the
repurchase of 20 million additional shares under a previously authorized repurchase
program. This repurchase authorization does not have a scheduled expiration date. 
 Item 5. Other Information
 (a)
    
    Item 8.01. Other Events. On November 2, 2006, our Board of Directors declared a
dividend of $0.125 per share on PepsiAmericas common stock. The dividend is payable
January 2, 2007 to shareholders of record on December 15, 2006. Our Board of Directors
reviews the dividend policy on a quarterly basis.(b)
    
    Not applicable.
 
 Item 6. Exhibits
 See Exhibit Index.
 34




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SIGNATURE
  PEPSIAMERICAS, INC.Date: November 3, 2006
    By:
    /s/ ALEXANDER H. WAREAlexander H. WareExecutive Vice President and
Chief Financial Officer
(As Chief Accounting Officer and DulyAuthorized Officer of PepsiAmericas, Inc.) 35




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EXHIBIT INDEX
 31.1
    
    Chief Executive Officer Certification pursuant to Exchange Act
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Chief Financial Officer Certification pursuant to Exchange Act
Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 36