##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 11, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission file number 1-14893 (PEPSI BOTTLING GROUP LOGO) THE PEPSI BOTTLING GROUP, INC.  Delaware
    
    13-4038356(State or other jurisdiction of
employer incorporation or organization)
    
    (I.R.S.
Identification No.)
 One Pepsi Way, Somers, New York
    
    10589(Address of principal executive offices)
    
    (Zip Code)
 914-767-6000
(Registrants telephone number, including area code) N/A
(Former name, former address and former fiscal year, if changed since last report.) 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 is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). YES þ NO o Number of shares of Common
Stock outstanding as of July 14, 2005:
243,580,265




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The Pepsi Bottling Group, Inc.Index Page No.Part I
    
    
    
    
    
    Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Statements of Operations -
12 and 24 weeks ended June 11, 2005 and June 12, 2004
    
    
    2Condensed Consolidated Statements of Cash Flows -
24 weeks ended June 11, 2005 and June 12, 2004
    
    
    3Condensed Consolidated Balance Sheets -
June 11, 2005 and December 25, 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5-12Item 2.
    
    Managements Financial Review
    
    
    13-20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21Part II
    
    
    
    
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22-23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 6.
    
    Exhibits
    
    
    25EX-10.1: FORM OF DIRECTOR INDEMNIFICATION AGREEMENTEX-10.4: SETTLEMENT AGREEMENTEX-11.1: COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHAREEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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PART I  FINANCIAL INFORMATION 
 Item 1. 
 The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Operations
in millions, except per share amounts, unaudited 12
Weeks Ended
    
    

24
Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June11,
2005
    
    

12,
2004
    
    

11,
2005
    
    

12,
2004Net revenues
    
    $
    2,862
    
    
    $
    2,675
    
    
    $
    5,009
    
    
    $
    4,742Cost of sales
    
    
    1,495
    
    
    
    1,378
    
    
    
    2,611
    
    
    
    2,429Gross profit
    
    
    1,367
    
    
    
    1,297
    
    
    
    2,398
    
    
    
    2,313Selling, delivery and administrative expenses
    
    
    1,064
    
    
    
    1,011
    
    
    
    1,975
    
    
    
    1,890Operating income
    
    
    303
    
    
    
    286
    
    
    
    423
    
    
    
    423Interest expense, net
    
    
    58
    
    
    
    53
    
    
    
    113
    
    
    
    108Other non-operating expenses, net
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    2Minority interest
    
    
    17
    
    
    
    15
    
    
    
    23
    
    
    
    21Income before income taxes
    
    
    227
    
    
    
    216
    
    
    
    286
    
    
    
    292Income tax expense
    
    
    79
    
    
    
    74
    
    
    
    99
    
    
    
    100Net income
    
    $
    148
    
    
    $
    142
    
    
    $
    187
    
    
    $
    192Basic earnings per share
    
    $
    0.61
    
    
    $
    0.55
    
    
    $
    0.76
    
    
    $
    0.74Weighted-average shares outstanding
    
    
    245
    
    
    
    258
    
    
    
    246
    
    
    
    259Diluted earnings per share
    
    $
    0.59
    
    
    $
    0.53
    
    
    $
    0.74
    
    
    $
    0.72Weighted-average shares outstanding
    
    
    252
    
    
    
    267
    
    
    
    253
    
    
    
    268
 See accompanying notes to Condensed Consolidated Financial Statements. 2




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The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited 24
Weeks EndedJune
    
    
    June11,
2005
    
    

12,
2004Cash
Flows  OperationsNet income
    
    $
    187
    
    
    $
    192Adjustments to reconcile net income to net cash provided by operations:Depreciation
    
    
    274
    
    
    
    258Amortization
    
    
    7
    
    
    
    6Deferred income taxes
    
    
    5
    
    
    
    31Other non-cash charges and credits, net
    
    
    137
    
    
    
    122Changes in operating working capital, excluding effects of acquisitions:Accounts receivable, net
    
    
    (288
    )
    
    
    (242
    )Inventories
    
    
    (92
    )
    
    
    (126
    )Prepaid expenses and other current assets
    
    
    (44
    )
    
    
    (8
    )Accounts payable and other current liabilities
    
    
    30
    
    
    
    121Income taxes payable
    
    
    22
    
    
    
    30Net change in operating working capital
    
    
    (372
    )
    
    
    (225
    )Pension contributions
    
    
    (20
    )
    
    
    (51
    )Other, net
    
    
    (32
    )
    
    
    (20
    )Net Cash Provided by Operations
    
    
    186
    
    
    
    313Cash
Flows  InvestmentsCapital expenditures
    
    
    (271
    )
    
    
    (270
    )Sale of investment in a non-controlled entity/(Acquisitions of bottlers)
    
    
    5
    
    
    
    (7
    )Proceeds from sale of property, plant and equipment
    
    
    12
    
    
    
    5Net Cash Used for Investments
    
    
    (254
    )
    
    
    (272
    )Cash
Flows  FinancingShort-term
borrowings  three months or less, net
    
    
    178
    
    
    
    200Proceeds from long-term debt
    
    
    37
    
    
    
    17Payments of long-term debt
    
    
    (6
    )
    
    
    (1,008
    )Dividends paid
    
    
    (25
    )
    
    
    (5
    )Proceeds from exercise of stock options
    
    
    30
    
    
    
    65Purchases of treasury stock
    
    
    (244
    )
    
    
    (298
    )Net Cash Used for Financing
    
    
    (30
    )
    
    
    (1,029
    )Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    1
    
    
    
    (2
    )Net Decrease in Cash and Cash Equivalents
    
    
    (97
    )
    
    
    (990
    )Cash and
Cash Equivalents  Beginning of Period
    
    
    305
    
    
    
    1,235Cash and
Cash Equivalents  End of Period
    
    $
    208
    
    
    $
    245Supplemental Cash Flow InformationNet third-party interest paid
    
    $
    122
    
    
    $
    130Income taxes paid
    
    $
    72
    
    
    $
    39
 See accompanying notes to
Condensed Consolidated Financial Statements. 3




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The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts (Unaudited)June
    
    
    December11, 2005
    
    
    25, 2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    208
    
    
    $
    305Accounts receivable, net of allowances of $58 at June 11, 2005 and
$61 at December 25, 2004
    
    
    1,323
    
    
    
    1,054Inventories
    
    
    515
    
    
    
    427Prepaid expenses and other current assets
    
    
    313
    
    
    
    253Total Current Assets
    
    
    2,359
    
    
    
    2,039Property, plant and equipment, net
    
    
    3,550
    
    
    
    3,581Other intangible assets, net
    
    
    3,637
    
    
    
    3,639Goodwill
    
    
    1,424
    
    
    
    1,416Other assets
    
    
    109
    
    
    
    118Total Assets
    
    $
    11,079
    
    
    $
    10,793LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable and other current liabilities
    
    $
    1,457
    
    
    $
    1,373Short-term borrowings
    
    
    328
    
    
    
    155Current maturities of long-term debt
    
    
    90
    
    
    
    53Total Current Liabilities
    
    
    1,875
    
    
    
    1,581Long-term debt
    
    
    4,479
    
    
    
    4,489Other liabilities
    
    
    960
    
    
    
    914Deferred income taxes
    
    
    1,401
    
    
    
    1,415Minority interest
    
    
    468
    
    
    
    445Total Liabilities
    
    
    9,183
    
    
    
    8,844Shareholders EquityCommon stock, par value $0.01 per share:authorized 900 shares, issued 310 shares
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    1,714
    
    
    
    1,719Retained earnings
    
    
    2,043
    
    
    
    1,887Accumulated other comprehensive loss
    
    
    (320
    )
    
    
    (315
    )Deferred compensation
    
    
    
    
    
    
    (1
    )Treasury stock: 67 shares and 61 shares at June 11, 2005 and
December 25, 2004,
respectively, at cost
    
    
    (1,544
    )
    
    
    (1,344
    )Total Shareholders Equity
    
    
    1,896
    
    
    
    1,949Total Liabilities and Shareholders Equity
    
    $
    11,079
    
    
    $
    10,793
 See accompanying notes to Condensed Consolidated Financial Statements. 4




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Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions, except per share amounts Note 1  Basis of Presentation The Pepsi Bottling Group, Inc. (PBG or the Company) is the worlds largest manufacturer,
seller and distributor of Pepsi-Cola beverages. We have the exclusive right to manufacture, sell
and distribute Pepsi-Cola beverages in all or a portion of the United States, Mexico, Canada and
Europe, which consists of operations in Spain, Greece, Russia and Turkey. When used in these
Condensed Consolidated Financial Statements, PBG, we, our and us each refers to The Pepsi
Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC (Bottling LLC), our principal
operating subsidiary. At June 11, 2005, PepsiCo, Inc. (PepsiCo) owned 102,211,358 shares of our common stock,
consisting of 102,111,358 shares of common stock and 100,000 shares of Class B common stock. All
shares of Class B common stock that have been authorized have been issued to PepsiCo. At June 11,
2005, PepsiCo owned approximately 42.1% of our outstanding common stock and 100% of our outstanding
Class B common stock, together representing 47.5% of the voting power of all classes of our voting
stock. In addition, PepsiCo owns approximately 6.8% of the equity of Bottling LLC. We fully
consolidate the results of Bottling LLC and present PepsiCos share as minority interest in our
Condensed Consolidated Financial Statements. The accompanying Condensed Consolidated Balance Sheet at June 11, 2005, the Condensed
Consolidated Statements of Operations for the 12 weeks and 24 weeks ended June 11, 2005 and June
12, 2004 and the Condensed Consolidated Statements of Cash Flows for the 24 weeks ended June 11,
2005 and June 12, 2004 have not been audited, but have been prepared in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to
make estimates and assumptions that affect reported amounts of assets, liabilities, revenues,
expenses and disclosure of contingent assets and liabilities. Actual results could differ from
these estimates.These Condensed Consolidated Financial Statements should be read in
conjunction with the audited consolidated financial statements for the fiscal year ended December
25, 2004, as presented in our Annual Report on Form 10-K. In the opinion of management, this
interim information includes all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation. Our U.S. and Canadian operations report using a fiscal year that consists of fifty-two
weeks, ending on the last Saturday in December. Every five or six years a fifty-third week is
added. Fiscal year 2004 consisted of fifty-two weeks. In 2005, our fiscal year consists of
fifty-three weeks (the additional week is added to the fourth quarter). Our remaining countries
report using a calendar-year basis. Accordingly, we recognize our quarterly business results as
outlined below: Quarter
    
    U.S. & Canada
    
    Mexico & EuropeFirst Quarter
    
    12 weeks
    
    January and FebruarySecond Quarter
    
    12 weeks
    
    March, April and MayThird Quarter
    
    12 weeks
    
    June, July and AugustFourth Quarter
    
    16 weeks/17 weeks (FY 2005)
    
    September, October,November and December
 5




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Note 2  Seasonality of Business The results for the second quarter are not necessarily indicative of the results that may be
expected for the full year because of business seasonality. The seasonality of our operating
results arises from higher sales in the second and third quarters versus the first and fourth
quarters of the year, combined with the impact of fixed costs, such as depreciation and interest,
which are not significantly impacted by business seasonality. From a cash flow perspective, the
majority of our cash flow from operations is generated in the third and fourth quarters. Note 3  New Accounting Standards SFAS No. 123R In December 2004, the Financial Accounting Standards Board (FASB) issued a revised Statement
of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123R). Among its
provisions, SFAS 123R will require us to measure the value of employee services in exchange for an
award of equity instruments based on the grant-date fair value of the award and to recognize the
cost over the requisite service period. SFAS 123R becomes effective for us beginning in the first
quarter of 2006. We are currently evaluating the impact of this proposed standard on our
Consolidated Financial Statements. FASB Staff Position No. FAS 109-1 In December 2004, the FASB issued Staff Position No. FAS 109-1 (FSP 109-1), Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004. FSP 109-1 clarifies SFAS No. 109s
guidance that applies to the new tax deduction for qualified domestic production activities. We
have adopted the standard at the beginning of 2005. This standard did not have a material impact
to our Consolidated Financial Statements. FASB Staff Position No. FAS 109-2 In December 2004, the FASB issued Staff Position No. FAS 109-2 (FSP 109-2), Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004. FSP 109-2 provides that an enterprise is allowed time beyond the financial
reporting period of enactment to evaluate the effect of the new tax law on its plan for applying
SFAS No. 109. We are evaluating whether to repatriate our undistributed foreign earnings in 2005. FASB Interpretation No. 47 In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations, that requires an entity to recognize a liability for a conditional
asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47
clarifies that the term Conditional Asset Retirement Obligation refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the entity. FIN 47 also
clarifies when an entity would have sufficient information to reasonably estimate the fair value of
an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. We are currently evaluating the impact of this standard on our
Consolidated Financial Statements. 6




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SFAS No. 151 In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage). In addition, this statement
requires that allocation of fixed production overheads to the costs of conversion be based on
normal capacity of production facilities. SFAS 151 is effective for the first annual reporting
period beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material
impact on our Consolidated Financial Statements. Note 4  Stock-Based Employee Compensation We measure stock-based compensation expense using the intrinsic value method in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and its related interpretations. Accordingly, compensation expense for stock option
grants to our employees is measured as the excess of the quoted market price of common stock at the
grant date over the amount the employee must pay for the stock. Our policy is to grant stock
options at fair value on the date of grant. As allowed by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, we have elected to continue to apply the intrinsic-value
based method of accounting described above, and have adopted the disclosure requirements of SFAS
No. 123, Accounting for Stock-Based Compensation. If we had measured compensation cost for the
stock awards granted to our employees under the fair-value based method prescribed by SFAS No. 123,
net income would have been changed to the pro forma amounts set forth below: 12
Weeks Ended
    
    

24
Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June11,
2005
    
    

12,
2004
    
    

11,
2005
    
    

12,
2004Net income:As reported
    
    $
    148
    
    
    $
    142
    
    
    $
    187
    
    
    $
    192Add: Total stock-based
employee compensation included in reported
net income, net of
taxes and
minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Less: Total stock-based
employee compensation
determined under fair-value
based method for all awards,
net of taxes and minority
interest
    
    
    (10
    )
    
    
    (9
    )
    
    
    (21
    )
    
    
    (19
    )Pro forma
    
    $
    138
    
    
    $
    133
    
    
    $
    166
    
    
    $
    174Earnings per share:Basic  as reported
    
    $
    0.61
    
    
    $
    0.55
    
    
    $
    0.76
    
    
    $
    0.74Basic  pro forma
    
    $
    0.56
    
    
    $
    0.52
    
    
    $
    0.67
    
    
    $
    0.67Diluted  as reported
    
    $
    0.59
    
    
    $
    0.53
    
    
    $
    0.74
    
    
    $
    0.72Diluted  pro forma
    
    $
    0.54
    
    
    $
    0.50
    
    
    $
    0.65
    
    
    $
    0.64
 Pro forma compensation cost measured for stock options granted to employees is amortized using
a straight-line basis over the vesting period, which is typically three years. The fair value of PBG stock options used to compute pro forma net income disclosures was
estimated on the date of grant using the Black-Scholes-Merton option-pricing model. 7




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Note 5  Inventories June
    
    
    December11,
2005
    
    

25,
2004Raw materials and supplies
    
    $
    193
    
    
    $
    159Finished goods
    
    
    322
    
    
    
    268$
    515
    
    
    $
    427
 Note 6  Property, plant and equipment, net June
    
    
    December11,
2005
    
    

25,
2004Land
    
    $
    265
    
    
    $
    257Buildings and improvements
    
    
    1,273
    
    
    
    1,263Manufacturing and distribution equipment
    
    
    3,324
    
    
    
    3,289Marketing equipment
    
    
    2,282
    
    
    
    2,237Other
    
    
    176
    
    
    
    1777,320
    
    
    
    7,223Accumulated depreciation
    
    
    (3,770
    )
    
    
    (3,642
    )$
    3,550
    
    
    $
    3,581
 Note 7  Other intangible assets, net and Goodwill June
    
    
    December11,
2005
    
    

25,
2004Intangibles subject to amortization:Gross carrying amount:Customer relationships and lists
    
    $
    52
    
    
    $
    46Franchise/distribution rights
    
    
    45
    
    
    
    44Other identified intangibles
    
    
    27
    
    
    
    30124
    
    
    
    120Accumulated amortization:Customer relationships and lists
    
    
    (8
    )
    
    
    (6
    )Franchise/distribution rights
    
    
    (18
    )
    
    
    (15
    )Other identified intangibles
    
    
    (16
    )
    
    
    (16
    )(42
    )
    
    
    (37
    )Intangibles subject to amortization, net
    
    
    82
    
    
    
    83Intangibles not subject to amortization:Carrying amount:Franchise rights
    
    
    2,948
    
    
    
    2,958Distribution rights
    
    
    295
    
    
    
    288Trademarks
    
    
    214
    
    
    
    208Other identified intangibles
    
    
    98
    
    
    
    102Intangibles not subject to amortization
    
    
    3,555
    
    
    
    3,556Total other intangible assets, net
    
    $
    3,637
    
    
    $
    3,639Goodwill
    
    $
    1,424
    
    
    $
    1,416
 8




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Goodwill increased by approximately $8 million in 2005 due to purchase price allocations of $5
million related to a recent acquisition and the impact from foreign currency translation of $3
million. For intangible assets subject to amortization, we calculate amortization expense
over the period we expect to receive economic benefit. Total amortization expense was $7 million
and $6 million for the twenty-four weeks ended June 11, 2005 and June 12, 2004. The
weighted-average amortization period for each category of intangible assets and its estimated
aggregate amortization expense expected to be recognized over the next five years are as follows: Weighted-
    
    Estimated Aggregate Amortization Expense to be IncurredAverageAmortizationPeriod
    
    Balance of
    
    Fiscal Year Ending2005
    
    2006
    
    2007
    
    2008
    
    2009Customer
relationships and
lists
    
    18 years
    
    $
    2
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3Franchise/distribution
rights
    
    7 years
    
    $
    4
    
    
    $
    5
    
    
    $
    3
    
    
    $
    2
    
    
    $
    2Other identified
intangibles
    
    7 years
    
    $
    2
    
    
    $
    3
    
    
    $
    3
    
    
    $
    2
    
    
    $
    1
 Note 8  Pension and Postretirement Medical Benefit Plans Pension Benefits Our U.S. employees participate in noncontributory defined benefit pension plans, which cover
substantially all full-time salaried employees, as well as most hourly employees. Benefits
generally are based on years of service and compensation, or stated amounts for each year of
service. All of our qualified plans are funded and contributions are made in amounts not less than
the minimum statutory funding requirements and not more than the maximum amount that can be
deducted for U.S. income tax purposes. Our net pension expense for the defined benefit plans for
our operations outside the U.S. was not significant and is not included in the tables presented
below. Nearly all of our U.S. employees are also eligible to participate in our 401(k) savings plans,
which are voluntary defined contribution plans. We make matching contributions to the 401(k)
savings plans on behalf of participants eligible to receive such contributions. If a participant
has one or more but less than 10 years of eligible service, our match will equal $0.50 for each
dollar the participant elects to defer up to 4% of the participants pay. If the participant has
10 or more years of eligible service, our match will equal $1.00 for each dollar the participant
elects to defer up to 4% of the participants pay. 9




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Components of our U.S. pension expense for the twelve weeks and twenty-four weeks ended June
11, 2005 and June 12, 2004 are as follows: 12
Weeks Ended
    
    

24
Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June11,
2005
    
    

12,
2004
    
    

11,
2005
    
    

12,
2004Service cost
    
    $
    10
    
    
    $
    10
    
    
    $
    21
    
    
    $
    20Interest cost
    
    
    18
    
    
    
    16
    
    
    
    35
    
    
    
    32Expected return on plan assets
    
    
    (21
    )
    
    
    (19
    )
    
    
    (42
    )
    
    
    (38
    )Amortization of prior service cost
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    3Amortization of net loss
    
    
    7
    
    
    
    5
    
    
    
    14
    
    
    
    11Net pension expense for the defined benefit plans
    
    
    15
    
    
    
    14
    
    
    
    31
    
    
    
    28Defined contribution plans expense
    
    
    4
    
    
    
    5
    
    
    
    8
    
    
    
    10Total U.S. pension expense recognized in the
Condensed Consolidated Statements of Operations
    
    $
    19
    
    
    $
    19
    
    
    $
    39
    
    
    $
    38
 As of June 11, 2005, we have contributed $20 million to our U.S. pension plans in 2005. Postretirement Medical Benefits Our postretirement medical plans provide medical and life insurance benefits principally to
U.S. retirees and their dependents. Employees are eligible for benefits if they meet age and
service requirements and qualify for retirement benefits. The plans are not funded and since 1993
have included retiree cost sharing. Components of our U.S. postretirement benefits expense for the twelve and twenty-four weeks
ended June 11, 2005 and June 12, 2004 are as follows: 12
Weeks Ended
    
    

24
Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June11,
2005
    
    

12,
2004
    
    

11,
2005
    
    

12,
2004Service cost
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    2Interest cost
    
    
    5
    
    
    
    4
    
    
    
    10
    
    
    
    9Amortization of net loss
    
    
    2
    
    
    
    1
    
    
    
    3
    
    
    
    2U.S. postretirement
benefits expense
recognized in the
Condensed Consolidated
Statements of Operations
    
    $
    8
    
    
    $
    6
    
    
    $
    15
    
    
    $
    13
 On May 19, 2004, the FASB issued Staff Position No. FAS 106-2 to provide guidance relating
to the prescription drug subsidy provided by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Act). The prescription drug benefits currently provided to all our
Medicare eligible retirees would be considered actuarially equivalent to the benefit provided under
the Act based on the recently issued guidance by the Centers for Medicare & Medicaid Services. The
result of the guidance doesnt change the estimated effect of the Act disclosed in our previously
issued 2004 year end financials as we intend to share a portion of the subsidy with our retirees. 10




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##### Table of Contents



Note 9  Geographic Data We operate in one industry, carbonated soft drinks and other ready-to-drink beverages. We
conduct business in all or a portion of the United States, Mexico, Canada, Spain, Greece, Russia
and Turkey. Net Revenues 12
Weeks Ended
    
    

24
Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June11,
2005
    
    

12,
2004
    
    

11,
2005
    
    

12,
2004U.S
    
    $
    1,995
    
    
    $
    1,909
    
    
    $
    3,683
    
    
    $
    3,535Mexico
    
    
    299
    
    
    
    276
    
    
    
    452
    
    
    
    434Other countries
    
    
    568
    
    
    
    490
    
    
    
    874
    
    
    
    773$
    2,862
    
    
    $
    2,675
    
    
    $
    5,009
    
    
    $
    4,742
 Long-Lived Assets June
    
    

December11,
2005
    
    

25,
2004U.S.

    
    $
    5,849
    

    
    $
    5,875Mexico
    
    
    1,455
    
    
    
    1,435Other countries
    
    
    1,416
    
    
    
    1,444$
    8,720
    
    
    $
    8,754
 Note 10  Comprehensive Income 12
Weeks Ended
    
    

24
Weeks EndedJune
    
    
    June
    
    
    June
    
    
    June11,
2005
    
    

12,
2004
    
    

11,
2005
    
    

12,
2004Net income
    
    $
    148
    
    
    $
    142
    
    
    $
    187
    
    
    $
    192Net currency translation adjustment
    
    
    (16
    )
    
    
    (59
    )
    
    
    (3
    )
    
    
    (57
    )Cash flow
hedge adjustment(a)(b)
    
    
    (1
    )
    
    
    (4
    )
    
    
    (2
    )
    
    
    (3
    )Comprehensive income
    
    $
    131
    
    
    $
    79
    
    
    $
    182
    
    
    $
    132
 
 (a)
    
    Net of minority interest and taxes of $0 million and $4 million for the 12 weeks ended June 11, 2005 and June 12, 2004, respectively.(b)
    
    Net of minority interest and taxes of $1 million and $3 million for the 24 weeks ended June 11, 2005 and June 12, 2004, respectively. Note 11  Contingencies We are subject to various claims and contingencies related to lawsuits, taxes and
environmental and other matters arising out of the normal course of business. We believe that the
ultimate liability arising from such claims or contingencies, if any, in excess of amounts already
recognized is not likely to have a material adverse effect on our results of operations, financial
condition or liquidity. Note 12  Subsequent Event In 1995, a class action suit was filed against three of our suppliers for price fixing on the
sale of high fructose corn syrup during the years between 1991 and 1995. During 2004, these
suppliers settled the respective charges. The settlement amount was allocated to each class action
recipient based on the proportion of its purchases of high fructose corn syrup from these suppliers
during the period 1991 through 1995 to the total of such purchases by all class action recipients.
From 1991 to 1995, we were still part of PepsiCo. On June 28, 2005, PBG and PepsiCo entered into a
settlement agreement under which we will receive 45.8% of the settlement proceeds attributable to
current 11




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##### Table of Contents



PBG bottling operations that were previously owned by PepsiCo (the PepsiCo Recovery).
Subsequent to the end of the second quarter, the court overseeing the lawsuit approved payment of
90% of claim awards, including the PepsiCo Recovery. In connection with this partial payment of
the PepsiCo Recovery and in accordance with our agreement with PepsiCo, PBG received $21 million.
PBG also received an additional $3 million as a result of certain other claims we had submitted,
which are unrelated to the bottling operations previously owned by PepsiCo. These amounts will be
recognized in the third quarter of 2005. We currently intend to utilize settlement proceeds to
fund long-term, strategic productivity initiatives. In addition, during the month of July 2005, we signed a Letter of Intent to acquire
Pepsi-Cola Bottling Company of Charlotte (North Carolina), the ninth largest Pepsi bottler in the
United States. The deal is expected to close during the fourth quarter of 2005. 12




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##### Table of Contents



Item 2.Managements Financial Review
Tabular dollars in millions, except per share data OVERVIEW The Pepsi Bottling Group, Inc. (PBG or the Company) is the worlds largest manufacturer,
seller and distributor of Pepsi-Cola beverages. We have the exclusive right to manufacture, sell
and distribute Pepsi-Cola beverages in all or a portion of the United States, Mexico, Canada and
Europe, which consists of operations in Spain, Greece, Russia and Turkey. When used in these
Condensed Consolidated Financial Statements, PBG, we, our and us each refers to The Pepsi
Bottling Group, Inc. and, where appropriate, to Bottling Group, LLC (Bottling LLC), our principal
operating subsidiary. Managements Financial Review should be read in conjunction with the accompanying unaudited
financial statements and our Annual Report on Form 10-K for the fiscal year ended December 25,
2004, which include additional information about our accounting policies, practices and the
transactions that underlie our financial results. FINANCIAL PERFORMANCE SUMMARY 12 Weeks Ended
    
    
    24 Weeks EndedJune
    
    
    June
    
    
    %
    
    
    June
    
    
    June
    
    
    %11, 2005
    
    
    12, 2004
    
    
    Change
    
    
    11, 2005
    
    
    12, 2004
    
    
    ChangeNet revenues
    
    $
    2,862
    
    
    $
    2,675
    
    
    
    7
    %
    
    $
    5,009
    
    
    $
    4,742
    
    
    
    6
    %Gross profit
    
    
    1,367
    
    
    
    1,297
    
    
    
    5
    %
    
    
    2,398
    
    
    
    2,313
    
    
    
    4
    %Operating income
    
    
    303
    
    
    
    286
    
    
    
    6
    %
    
    
    423
    
    
    
    423
    
    
    
    0
    %Net income
    
    
    148
    
    
    
    142
    
    
    
    4
    %
    
    
    187
    
    
    
    192
    
    
    
    (3
    )%Diluted earnings
per share
    
    $
    0.59
    
    
    $
    0.53
    
    
    
    11
    %
    
    $
    0.74
    
    
    $
    0.72
    
    
    
    3
    %
 For the second quarter, diluted earnings per share increased 11% to $0.59 and operating
income grew 6% to $303 million, reflecting revenue growth across all of our businesses. Our
revenue growth was driven both by volume and net revenue per case improvements. Excluding the impact of acquisitions, worldwide volume increased 3% in the second quarter,
reflecting strong volume growth in Mexico and Europe and a 1% increase in the U.S. and Canada. Worldwide net revenue per case grew 3% in the second quarter, which includes a 1% favorable
impact from foreign currency translation. In the U.S., net revenue per case increased by 3%. Our
pricing actions in the U.S. have continued to hold in the marketplace, with rate increases
contributing 75% of this growth and the remainder of growth coming from the mix of products we
sell. Cost of sales per case for the quarter increased 5%, due to the continuing pressure on raw
material costs for packaging and sweeteners. A percentage point of this growth was attributable to 13




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##### Table of Contents



the negative impact of foreign currency translation. Our strong revenue growth, which
leveraged both rate and mix strategies, helped mitigate the cost of sales impact to our bottom
line. Outlook In 2005, our fiscal year will include a 53rd week, while fiscal year 2004 consisted
of 52 weeks. Our U.S. and Canadian operations report on a fiscal year that consists of 52 weeks,
ending on the last Saturday in December. Every five or six years a 53rd week is added.
Our other countries report on a calendar-year basis. In order to provide comparable guidance for
2005, we have excluded the impact of the 53rd week from our outlook. The table and the
2005 outlook discussion below provide pro forma disclosure by excluding the projected impact of the
53rd week in 2005: Pro forma Forecasted2005 versus 2004
    
    Impact of
    
    Forecasted 2005growth
    
    53rd week
    
    versus 2004 growthWorldwide Volume
    
    2% to 3%
    
    1%
    
    3% to 4%United States Volume
    
    Flat to 1%
    
    1%
    
    1% to 2%Operating Income
    
    3% to 5%
    
    1%
    
    4% to 6%
 Pro forma Full-Year
    
    
    
    Full-YearForecasted 2005
    
    Impact of
    
    Forecasted 2005Results
    
    53rdweek
    
    ResultsDiluted Earnings Per Share
    
    $1.82 to $1.88
    
    $0.02 to $0.03
    
    $1.84 to $1.91
 Based on our strong results in the first half of the year, we have raised our pro forma
full-year 2005 operating income growth expectations to a range of 3% to 5%, excluding the impact of
the 53rd week. Correspondingly, we are also raising our pro forma full-year diluted
earnings per share to $1.82 to $1.88, excluding the impact of the 53rd week. We
currently intend to reinvest the additional profit from the 53rd week in long-term,
strategic productivity initiatives. Pro forma worldwide volume is expected to increase 2% to 3% for the full year of 2005 versus
2004, excluding the impact of the 53rd week. In the U.S., pro forma volume is expected
to be flat to up 1% for the full year, excluding the impact of the 53rd week. We expect to increase our worldwide net revenue per case by approximately 3%, which reflects a
3% increase in the United States. One of the provisions of the American Jobs Creation Act of 2004 allows for special tax breaks
for the repatriation of earnings from foreign subsidiaries. We are currently evaluating whether to
repatriate our undistributed foreign earnings in 2005. 14




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##### Table of Contents



Volume 12 Weeks Ended
    
    
    24 Weeks EndedJune 11, 2005 vs.
    
    
    June 11, 2005 vs.June 12, 2004
    
    
    June 12, 2004World-
    
    
    
    
    
    
    Outside
    
    
    World-
    
    
    
    
    
    
    Outsidewide
    
    
    U.S.
    
    
    the U.S.
    
    
    wide
    
    
    U.S.
    
    
    the U.S.Base volume
    
    
    3
    %
    
    
    1
    %
    
    
    7
    %
    
    
    2
    %
    
    
    0
    %
    
    
    4
    %Acquisitions
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %Total volume
change
    
    
    4
    %
    
    
    1
    %
    
    
    7
    %
    
    
    2
    %
    
    
    1
    %
    
    
    5
    %
 Excluding the impact of acquisitions, worldwide physical case volume increased 3% in the
second quarter and 2% in the first twenty-four weeks of 2005, when compared with similar periods of
2004. The increase in volume for the quarter and on a year-to-date basis was driven by strong
growth in Europe and an improved performance in Mexico. In the U.S., our reported volume increased by 1% in the second quarter due to growth in the
cold-drink channel, fueled primarily by our food service business and innovation. As consumers
continue to seek a greater variety of beverages, we have seen impressive growth in our
non-carbonated beverage portfolios, driven by double-digit growth in Aquafinaand solid
results from Aquafina SplashandLipton Iced Tea. For the quarter and on a
year-to-date basis, total carbonated soft drink volume in the U.S. was down approximately 3%,
driven primarily by declines in brand Pepsi. These declines were partially offset by the
introduction of Pepsi Limeand Tropicana Twister, which contributed two
percentage points to total volume growth in the second quarter. In Europe, volume grew 9% in the second quarter and 7% on a year-to-date basis driven by a
strong performance in both Russia and Turkey. In Russia, volume growth in the second quarter was
17% versus the prior year driven by strong sales of brand Pepsi, Aqua Minerale, Tropicana juiceand Lipton Iced Tea. In Turkey, volume increased 9% in the second quarter versus the
prior year due to double-digit volume growth primarily from brand Pepsi. In Mexico, volume increased 8% in the second quarter and 6% on a year-to-date basis driven by
strong jug and bottled water sales. In the second quarter, jugs increased 15% and bottled water
increased 20% versus the prior year. Additionally, we have seen our attention to innovation and
execution drive a 1% increase in our carbonated soft drink volume in the second quarter versus the
prior year. In Canada, volume increased 1% for the second quarter versus the prior year. Volume trends in
Canada were similar to those in the U.S., with increases in cold drink and a slight improvement in
take home during the second quarter. 15




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##### Table of Contents



Net Revenues 12 Weeks Ended
    
    
    24 Weeks EndedJune 11, 2005 vs.
    
    
    June 11, 2005 vs.June 12, 2004
    
    
    June 12, 2004World-
    
    
    
    
    
    
    Outside
    
    
    World-
    
    
    
    
    
    
    Outsidewide
    
    
    U.S.
    
    
    the U.S.
    
    
    wide
    
    
    U.S.
    
    
    the U.S.Volume impact
    
    
    3
    %
    
    
    1
    %
    
    
    7
    %
    
    
    2
    %
    
    
    0
    %
    
    
    4
    %Net price per case impact (rate/mix)
    
    
    2
    %
    
    
    3
    %
    
    
    1
    %
    
    
    2
    %
    
    
    3
    %
    
    
    1
    %Currency translations
    
    
    1
    %
    
    
    0
    %
    
    
    5
    %
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Total Net Revenues change
    
    
    7
    %
    
    
    5
    %
    
    
    13
    %
    
    
    6
    %
    
    
    4
    %
    
    
    10
    %
 Worldwide net revenues were $2.9 billion for the second quarter and $5.0 billion for the first
twenty-four weeks in 2005, increasing 7% and 6% respectively, over similar periods in 2004. The
increases in worldwide net revenues for the quarter and on a year-to-date basis were driven
primarily by improvements in volume and growth in net price per case. The favorable impact of
foreign currency translation and net revenue from our prior year acquisitions contributed a
percentage point each to our worldwide growth in both the second quarter and year-to-date periods. In the U.S., net revenues increased 5% in the second quarter and 4% for the first twenty-four
weeks of 2005, when compared with the similar periods of 2004. The increases in net revenues in the
U.S. for the quarter and on a year-to-date basis were driven primarily by growth in net price per
case. The 3% increase in net price per case in the U.S. for the quarter and on a year-to-date
basis was due to a combination of rate increases and mix benefits. Rate increases drove 75% of
this growth. Net revenues outside the U.S. grew approximately 13% in the second quarter and 10% for the
first twenty-four weeks of 2005. The increases in net revenues outside the U.S. for the quarter
and on a year-to-date basis were driven primarily by volume growth and the favorable impact of
foreign currency translation. In Mexico, net price per case decreased for both the quarter and on
a year-to-date basis, when compared to similar periods in 2004. These declines were driven
primarily by a volume mix shift into bottled water and jugs, which carries a lower net price per
case. In the second quarter, approximately 70% of our net revenues was generated in the U.S., 10% of
our net revenues was generated in Mexico and the remaining 20% was generated outside the U.S. and
Mexico. On a year-to-date basis, approximately 74% of our net revenues was generated in the U.S.,
9% of our net revenues was generated in Mexico and the remaining 17% was generated outside the U.S.
and Mexico. 16




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##### Table of Contents



Cost of Sales 12 Weeks Ended
    
    
    24 Weeks EndedJune 11, 2005 vs.
    
    
    June 11, 2005 vs.June 12, 2004
    
    
    June 12, 2004World-
    
    
    
    
    
    
    Outside
    
    
    World-
    
    
    
    
    
    
    Outsidewide
    
    
    U.S.
    
    
    the U.S.
    
    
    wide
    
    
    U.S.
    
    
    the U.S.Volume impact
    
    
    3
    %
    
    
    1
    %
    
    
    7
    %
    
    
    2
    %
    
    
    0
    %
    
    
    4
    %Costs per case impact
    
    
    3
    %
    
    
    4
    %
    
    
    3
    %
    
    
    4
    %
    
    
    5
    %
    
    
    3
    %Currency translation
    
    
    1
    %
    
    
    0
    %
    
    
    5
    %
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %Total Cost of Sales change
    
    
    8
    %
    
    
    6
    %
    
    
    15
    %
    
    
    7
    %
    
    
    6
    %
    
    
    12
    %
 Worldwide cost of sales were $1.5 billion in the second quarter and $2.6 billion for the first
twenty-four weeks of 2005, increasing 8% and 7% respectively, over similar periods in 2004. The
growth in cost of sales on a quarter and year-to-date basis was driven primarily by volume and
costs per case increases, coupled with the negative impact of foreign currency translation in
Canada and Europe. In the U.S., cost of sales grew 6% in both the second quarter and on a year-to-date basis,
mostly due to increases in costs per case. As we expected, we continued to face pricing pressure
from raw material costs, primarily driven by higher packaging costs. Cost of sales outside the U.S. grew approximately 15% in the second quarter and 12% for the
first twenty-four weeks of 2005, reflecting strong volume growth, the negative impact of foreign
currency translation and cost per case increases. Costs per case increases outside the U.S. were
driven primarily by growth in packaging and sweetener costs in Europe. Selling, Delivery and Administrative Expenses 12 Weeks Ended
    
    
    24 Weeks EndedJune 11, 2005 vs.
    
    
    June 11, 2005 vs.June 12, 2004
    
    
    June 12, 2004World-
    
    
    
    
    
    
    Outside
    
    
    World-
    
    
    
    
    
    
    Outsidewide
    
    
    U.S.
    
    
    the U.S.
    
    
    wide
    
    
    U.S.
    
    
    the U.S.Cost
impact
    
    
    3
    %
    
    
    2
    %
    
    
    4
    %
    
    
    3
    %
    
    
    2
    %
    
    
    4
    %Currency
translation
    
    
    1
    %
    
    
    0
    %
    
    
    5
    %
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Total SD&A
change
    
    
    5
    %
    
    
    3
    %
    
    
    9
    %
    
    
    5
    %
    
    
    3
    %
    
    
    9
    %
 17




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##### Table of Contents



Selling, delivery and administrative expenses were $1.1 billion in the second quarter and $2.0
billion for the first twenty-four weeks of 2005, a 5% increase over similar periods in 2004. In the
U.S., the increase in selling, delivery and administrative expenses for the quarter and on a
year-to-date basis resulted from increased depreciation expenses and higher benefit and fuel costs,
partially offset by productivity initiatives. The increases in selling, delivery and
administrative expenses outside the U.S. for the quarter and on a year-to-date basis were due
primarily to the negative impact of foreign currency translation and higher volume in Europe.
These increases were partially offset by the results of productivity initiatives put in place in
Mexico. Operating Income Operating income was $303 million in the second quarter, a 6% increase over the similar period
in 2004. Growth in operating income for the quarter was driven primarily by Mexico nearly doubling
their profit over the prior year and a solid increase in the United States. In the U.S., growth in
operating income was driven by strong revenue growth, partially offset by higher raw material
costs. Growth in operating income in Mexico was due to growth in volume and cost savings driven by
productivity initiatives. On a year-to-date basis operating income was flat due primarily to volume softness in the
first quarter and higher raw material costs versus the prior year. In
the U.S., operating income
increased primarily due to revenue growth, partially offset by higher raw material costs. Outside
the U.S., operating income declined on a year-to-date basis, due primarily to higher raw material
and operating costs in Europe. Interest Expense, net Interest expense, net increased by $5 million both in the second quarter and for the first
twenty-four weeks of 2005, when compared with similar periods of 2004, largely due to higher
effective interest rates on our long-term debt. Income Tax Expense Our effective tax rate for the twenty-four weeks ended 2005 and 2004 was 34.6% and 34.3%,
respectively. The increase in the effective tax rate is primarily due
to a mix shift in
pre-tax income in jurisdictions with higher effective tax rates. Liquidity and Financial Condition Cash Flows Net cash from operations decreased by $127 million to $186 million in the first half of 2005.
Decreases in net cash provided by operations were driven by a decrease in working capital due to
the timing of certain disbursements, higher incentive compensation payouts and the expiration of
certain tax incentives. Net cash used for investments decreased by $18 million to $254 million in the first half of
2005, due to higher proceeds from the sale of property, plant and equipment, coupled with the sale
of an investment in a non-controlled entity. Net cash used for financing decreased by $999 million to $30 million in the first half of 2005
driven primarily by the repayment of our $1.0 billion note in February 2004 and lower purchases of
treasury stock, partially offset by higher dividends and lower proceeds from the exercise of stock
options. 18




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##### Table of Contents



For the full year in 2005, we expect to generate net cash provided by operations of about $1.2
billion. In addition, we expect capital expenditures to be between $675 million and $725 million. Liquidity and Capital Resources We believe that our future cash flows from operations and borrowing capacity will be
sufficient to fund capital expenditures, acquisitions, dividends and working capital requirements
for the foreseeable future. We have a $500 million commercial paper program in the U.S. that is supported by a credit
facility, which is guaranteed by Bottling LLC and expires in April 2009. We had $180 million and
$115 million outstanding in commercial paper at June 11, 2005 and June 12, 2004, respectively. At
December 25, 2004 we had $78 million in outstanding commercial paper. Due to the nature of our business, we require insurance coverage for certain casualty risks.
Given the rapidly increasing costs associated with obtaining third-party insurance coverage for our
casualty risks in the U.S., we moved to a self-insurance program in 2002. In 2005, we are
self-insured for workers compensation and automobile risks for occurrences up to $10 million, and
product and general liability risks for occurrences up to $5 million. For losses exceeding these
self-insurance thresholds, we purchase casualty insurance from a third-party provider. Contractual Obligations As of June 11, 2005, there have been no material changes outside the normal course of business
in the contractual obligations disclosed in Item 7 to our Annual Report on Form 10-K for the fiscal
year ended December 25, 2004, under the caption Contractual Obligations. 19




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Cautionary Statements Except for the historical information and discussions contained herein, statements contained
in this Form 10-Q may constitute forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on currently available
competitive, financial and economic data and our operating plans. These statements involve a number
of risks, uncertainties and other factors that could cause actual results to be materially
different. Among the events and uncertainties that could adversely affect future periods are:  
    
    changes in our relationship with PepsiCo that could have a material adverse effect on our long-term and short-term
business and financial results;
    
    restrictions imposed by PepsiCo on our raw material suppliers that could increase our costs;
    
    material changes from expectations in the cost of raw materials and ingredients;
    
    decreased demand for our product resulting from changes in consumers preferences;
    
    an inability to achieve volume growth through product and packaging initiatives;
    
    impact of competitive activities on our business;
    
    impact of customer consolidations on our business;
    
    an inability to achieve cost savings;
    
    material changes in capital investment for infrastructure and an inability to achieve the expected timing for
returns on cold-drink equipment and related infrastructure expenditures;
    
    material changes in expected levels of bottler incentive payments from PepsiCo;
    
    changes in product category consumption;
    
    unfavorable weather conditions in our markets;
    
    unforeseen economic and political changes;
    
    possible recalls of our products;
    
    an inability to meet projections for performance in newly acquired territories;
    
    failure or inability to comply with laws and regulations;
    
    changes in laws and regulations governing the manufacture and sale of food and beverages, including restrictions on
the sale of carbonated soft drinks in schools;
    
    changes in laws and regulations governing the environment, transportation, employee safety, labor and government
contracts;
    
    changes in accounting standards and taxation requirements (including unfavorable outcomes from audits performed by
various tax authorities);
    
    changes in our debt ratings;
    
    material changes in expected interest and currency exchange rates and unfavorable market performance of our pension
plan assets;
    
    interruptions of operations due to labor disagreements;
    
    loss of business from a significant customer; and
    
    limitations on the availability of water or obtaining water rights. 20




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Item 3.Quantitative and Qualitative Disclosures About Market Risk The overall risks to our international businesses include changes in foreign governmental
policies and other political or economic developments. These developments may lead to new product
pricing, tax or other policies and monetary fluctuations, which may adversely impact our business.
In addition, our results of operations and the value of our foreign assets are affected by
fluctuations in foreign currency exchange rates. Foreign currency gains and losses reflect
transaction gains and losses as well as translation gains and losses arising from the
re-measurement into U.S. dollars of the net monetary assets of businesses in highly inflationary
countries. There have been no material changes to our market risks as disclosed in Item 7 to our
Annual Report on Form 10-K for the year ended December 25, 2004. 
 Item 4.Controls and Procedures PBGs management carried out an evaluation, as required by Rule 13a-15(b) of the Securities
Exchange Act of 1934 (the Exchange Act), with the participation of our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as
of the end of our last fiscal quarter. Based upon this evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that our disclosure controls and procedures were effective,
as of the end of the period covered by this Quarterly Report on Form 10-Q, in timely alerting them
to material information relating to PBG and its consolidated subsidiaries required to be included
in our Exchange Act reports filed with the SEC. In addition, PBGs management carried out an evaluation, as required by Rule 13a-15(d) of the
Exchange Act, with the participation of our Chief Executive Officer and our Chief Financial
Officer, of changes in PBGs internal control over financial reporting. Based on this evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that there were no changes in
our internal control over financial reporting that occurred during our last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. 21




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PART II  OTHER INFORMATION 
 Item 1.Legal Proceedings At the end of the fourth quarter of 2004 and during the first half of 2005, we received
Notices of Violation (NOVs) and Orders For Compliance from the Environmental Protection Agency,
Region 9, relating to operations at four bottling plants in California and one in Hawaii. The NOVs
allege that we violated our permits and the Clean Water Act as a result of certain events relating
to waste water discharge and storm water run-off. We believe monetary sanctions may be sought in
connection with one or more of these NOVs. We further believe that neither the sanctions nor the
remediation costs associated with these NOVs will be material to the Companys business or
financial condition. 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds PBG Purchases of Equity Securities In the second quarter of 2005, we repurchased approximately 4 million shares of PBG common
stock. Since the inception of our share repurchase program in October 1999, we have repurchased 92
million shares of PBG common stock. Our share repurchases for the second quarter of 2005, are as
follows: Total Number of
Shares
    
    Maximum Number of
SharesTotal Number
    
    
    
    Purchased as Part of
    
    that May Yet Be
Purchasedof Shares
    
    Average Price
    
    Publicly Announced
Plans
    
    Under the PlansPeriod
    

Purchased1
    

Paid
per
Share2
    

or
Programs3
    

or
Programs3Period 4
03/20/05-04/16/05
    
    
    1,173,800
    
    
    $
    27.65
    
    
    
    1,173,800
    
    
    
    35,935,700Period 5
4/17/05-05/14/05
    
    
    1,019,800
    
    
    $
    28.47
    
    
    
    1,019,800
    
    
    
    34,915,900Period 6
05/15/05-06/11/05
    
    
    2,273,600
    
    
    $
    28.57
    
    
    
    2,273,600
    
    
    
    32,642,300Total
    
    
    4,467,200
    
    
    $
    28.31
    
    
    
    4,467,200
 
 1
 2 Average share price excludes brokerage fees. 22




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3 The PBG Board has authorized the repurchase of shares of common stock on the open market and through negotiated transactions as follows: Number of SharesAuthorized to beDate
Share Repurchase Program was Publicly Announced
    

RepurchasedOctober 14, 1999
    
    
    20,000,000July 13, 2000
    
    
    10,000,000July 11, 2001
    
    
    20,000,000May 28, 2003
    
    
    25,000,000March 25, 2004
    
    
    25,000,000March 24, 2005
    
    
    25,000,000Total shares authorized to be repurchased as of June 11, 2005
    
    
    125,000,000
 Unless terminated by resolution of the PBG Board, each share repurchase program expires when we have
repurchased all shares authorized for repurchase thereunder. 23




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Item 4. Submission of Matters to a Vote of Security Holders  (a)
    
    The Annual Meeting of Shareholders of PBG was held on May 25, 2005.(b)
    
    The names of all directors are set forth below. The proxies for the meeting were
solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934.
There were no solicitations in opposition to the nominees as listed in the proxy and all
such nominees were elected.(c)
    
    A brief description of each matter voted on and the approximate number of votes cast
are as follows: Number of Votes (millions)Withheld/
    
    BrokerDescription of Proposals
    
    For
    
    Against
    
    Abstain
    
    Non-Votes1)
    
    Election of Directors:Linda G. Alvarado
    
    232
    
    N/A
    
    16
    
    N/ABarry H. Beracha
    
    232
    
    N/A
    
    16
    
    N/AJohn T. Cahill
    
    242
    
    N/A
    
    6
    
    N/AIra D. Hall
    
    234
    
    N/A
    
    14
    
    N/AThomas H. Kean
    
    236
    
    N/A
    
    12
    
    N/ASusan D. Kronick
    
    234
    
    N/A
    
    14
    
    N/ABlythe J. McGarvie
    
    233
    
    N/A
    
    15
    
    N/AMargaret D. Moore
    
    242
    
    N/A
    
    6
    
    N/AJohn A. Quelch
    
    239
    
    N/A
    
    9
    
    N/ARogelio Rebolledo
    
    240
    
    N/A
    
    8
    
    N/AClay G. Small
    
    242
    
    N/A
    
    6
    
    N/A2)
    
    Approval of the PBG 2005Executive IncentiveCompensation Plan:
    
    240
    
    7
    
    1
    
    N/A3)
    
    An Amendment to the PBG2004 Long-Term IncentivePlan:
    
    155
    
    83
    
    1
    
    9
 24




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Item 6. Exhibits Exhibit No.10.1
    
    Form of Director Indemnification Agreement10.2
    
    PBG 2005 Executive Incentive Compensation Plan which is
incorporated herein by reference to Exhibit A to PBGs Proxy
Statement for the 2005 Annual Meeting of Shareholders (the
Proxy Statement)10.3
    
    PBG 2004 Long-Term Incentive Plan as amended and restated,
effective May 25, 2005, which is incorporated herein by
reference to Exhibit B to the Proxy Statement10.4
    
    Settlement Agreement between Bottling Group, LLC and PepsiCo,
Inc., dated June 28, 200511.1
    
    Computation of Basic and Diluted Earnings Per Share31.1
    
    Certification by the Chief Executive Officer pursuant to
Section 302 of the SarbanesOxley Act of 200231.2
    
    Certification by the Chief Financial Officer pursuant to
Section 302 of the SarbanesOxley Act of 200232.1
    
    Certification by the Chief Executive Officer pursuant to
Section 906 of the Sarbanes Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes Oxley Act of 200299.1
    
    Financial statements of Bottling LLC, which are incorporated
herein by reference to Bottling LLCs Quarterly Report on Form
10-Q for the quarter ended June 11, 2005, as required by the
SEC as a result of Bottling LLCs guarantee of up to
$1,000,000,000 aggregate principal amount of our 7% Senior
Notes due in 2029.
 25




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. THE PEPSI BOTTLING GROUP, INC.
       
       
       (Registrant)Date: July 19, 2005
    /s/ Andrea L. ForsterAndrea L. ForsterVice President and ControllerDate: July 19, 2005
    /s/ Alfred H. DrewesAlfred H. DrewesSenior Vice President and
Chief Financial Officer 26