##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Fiscal Year Ended December 31, 2005
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (No Fee Required)
 For the transition period from _________to _________
 Commission
file number 1-14893
 The Pepsi Bottling Group, Inc.
  Incorporated in Delaware
    
    13-4038356(State or other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification No.)One Pepsi WaySomers, New York
    
    10589(Address of Principal Executive Offices)
    
    (Zip code)
 (914) 767-6000
 
 Securities registered pursuant to Section 12(b) of the Act:
 Name of Each ExchangeTitle of Each Class
    
    on Which RegisteredCommon Stock, par value $.01 per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.     Yes þ No o
 Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the
Act.     Yes o No þ
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form
10-K . o
 Indicated by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See
definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
 Large accelerated
filer þ Accelerated
filer o Non-accelerated filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
 The number of shares of Capital Stock of The Pepsi Bottling Group, Inc. outstanding as of
February 15, 2006 was 237,237,138. The aggregate market value of The Pepsi Bottling Group, Inc.
Capital Stock held by non-affiliates of The Pepsi Bottling Group, Inc. as of June 11, 2005 was
$4,053,664,844.
 Documents of Which Portions
    
    Parts of Form 10-K into
Which Portion of DocumentsAre Incorporated by Reference
    

Are IncorporatedProxy Statement for The Pepsi Bottling
Group, Inc. May 24, 2006 Annual Meeting
of Shareholders
    
    III




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of ShareholdersPART IIItem 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of PBGItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESINDEX TO EXHIBITS    Table of Contents  
 PART I
 
 Item 1. Business
 Introduction
  http://www.pbg.com
 Principal Products
 Pepsi-Cola Diet Pepsi Mountain Dew Aquafina, Lipton Brisk, Sierra Mist, Diet Mountain Dew, Tropicana Juice Drinks, SoBe, Starbucks Frappuccino. I up, Kas, Aqua Minerale, Mirinda Manzanita sol. Dr pepper Squirt lectropura pura arci Crespo
  1




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Raw Materials and Other Supplies
   Patents, Trademarks and Licenses
 Pepsi-Cola Diet Pepsi Mountain Dew Aquafina,
Lipton Brisk, Sierra Mist, Diet Mountain Dew, Tropicana Juice Drinks, SoBe, Starbucks Frappuccino. I   up, Kas, Aqua Minerale, Mirinda Manzanita Sol. Dr Pepper Squirt lectropura pura arci Crespo
   Terms of the Master Bottling Agreement. Pepsi-Cola Pepsi
  (1)
    
    maintain such plant and equipment, staff, and distribution facilities and vending
equipment that are capable of manufacturing, packaging and distributing the cola beverages
in sufficient quantities to fully meet the demand for these beverages in our territories;(2)
    
    undertake adequate quality control measures prescribed by PepsiCo;(3)
    
    push vigorously the sale of the cola beverages in our territories;(4)
    
    increase and fully meet the demand for the cola beverages in our territories;
 2




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(5)
    
    use all approved means and spend such funds on advertising and other forms of
marketing beverages as may be reasonably required to push vigorously the sale of cola
beverages in our territories; and(6)
    
    maintain such financial capacity as may be reasonably necessary to assure performance
under the Master Bottling Agreement by us.
      Pepsi-Cola
  Pepsi
 3




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##### Table of Contents



Pepsi
  (1)
    
    our insolvency, bankruptcy, dissolution, receivership or the like;(2)
    
    any disposition of any voting securities of one of our bottling subsidiaries or
substantially all of our bottling assets without the consent of PepsiCo;(3)
    
    our entry into any business other than the business of manufacturing, selling
or distributing non-alcoholic beverages or any business which is directly related and
incidental to such beverage business; and(4)
    
    any material breach under the contract that remains uncured for 120 days after
notice by PepsiCo.
    Terms of the Non-Cola Bottling Agreements. Mountain Dew,
Aquafina, Sierra Mist, Diet Mountain Dew, Mug Mountain Dew Code
Red Slice
 Terms of Certain Distribution Agreements. Amp Dole SoBe Gatorade Tropicana Juice Drinks Tropicana
Juices
 Terms of the Master Syrup Agreement.
 4




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Terms of Other U.S. Bottling Agreements. Dr Pepper, Schweppes, Canada Dry, Hawaiian Punch Squirt, Lipton Brisk Liptons Iced Tea,  Starbucks Frappuccino
 Terms of the Country Specific Bottling Agreements.
 Seasonality
  Competition
  5




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ivi
  Governmental Regulation Applicable to PBG
   Bottle and Can Legislation
     6




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Soft Drink Excise Tax Legislation
    Trade Regulation
  School Sales Legislation; Industry Guidelines
  California Carcinogen and Reproductive Toxin Legislation
  7




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Mexican Water Regulation
  Employees
  Financial Information on Industry Segments and Geographic Areas
  8




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We may not be able to respond successfully to consumer trends related to carbonated and
non-carbonated beverages.
  We may not be able to respond successfully to the demands of our largest customers.
  We may not be able to compete successfully within the highly competitive carbonated and
non-carbonated beverage markets.
  Because we depend upon PepsiCo to provide us with concentrate, certain funding and various
services, changes in our relationship with PepsiCo could adversely affect our business and
financial results.
    Our business requires a significant supply of raw materials, the limited availability or increased
costs of which could adversely affect our business and financial results.
  9




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PepsiCos equity ownership of PBG could affect matters concerning us.
  We may have potential conflicts of interest with PepsiCo, which could result in PepsiCos
objectives being favored over our objectives.
    Our acquisition strategy may be limited by our ability to successfully integrate acquired
businesses into ours or our failure to realize our expected return on acquired businesses.
  Our success depends on key members of our management, the loss of whom could disrupt our business
operations.
  If we are unable to fund our substantial capital requirements, it could cause us to reduce our
planned capital expenditures and could result in a material adverse effect on our business and
financial results.
  10




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Our substantial indebtedness could adversely affect our financial health.
  Our foreign operations are subject to social, political and economic risks and may be adversely
affected by foreign currency fluctuations.
  We may incur material losses and costs as a result of product liability claims that may be brought
against us or any product recalls we have to make.
  Newly adopted governmental regulations could increase our costs or liabilities or impact the sale
of our products.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   11




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Item 3. Legal Proceedings
    
 Item 4. Submission of Matters to a Vote of Shareholders
  Executive Officers of the Registrant
   John T. Cahill ,
 Alfred H. Drewes
 12




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Eric J. Foss
 Yiannis Petrides
 Steven M. Rapp
 Rogelio Rebolledo
 Gary K. Wandschneider
 
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
  13




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2005
    
    High
    
    
    LowFirst Quarter
    
    $
    29.13
    
    
    $
    26.00Second Quarter
    
    $
    30.04
    
    
    $
    26.95Third Quarter
    
    $
    30.20
    
    
    $
    27.77Fourth Quarter
    
    $
    30.35
    
    
    $
    26.66
 2004
    
    High
    
    
    LowFirst Quarter
    
    $
    29.99
    
    
    $
    23.75Second Quarter
    
    $
    30.69
    
    
    $
    27.60Third Quarter
    
    $
    31.40
    
    
    $
    26.00Fourth Quarter
    
    $
    29.46
    
    
    $
    25.70
   Quarter
    
    2005
    
    
    20041
    
    $
    .05
    
    
    $
    .012
    
    $
    .08
    
    
    $
    .053
    
    $
    .08
    
    
    $
    .054
    
    $
    .08
    
    
    $
    .05Total
    
    $
    .29
    
    
    $
    .16
 14




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Total Number ofShares (or Units)
    
    Maximum Number (orTotal Number of
    
    
    
    
    
    Purchased as Part
    
    Approximate Dollar Value) ofShares
    
    Average Price Paid
    
    of Publicly
    
    Shares (or Units) that May(or Units)
    
    per Share (or
    
    Announced Plans or
    
    Yet Be Purchased Under thePeriod
    
    Purchased1
    
    Unit)2
    
    Programs3
    
    Plans or Programs3Period 10 09/04/05-10/01/05
    
    
    2,029,100
    
    
    $
    27.99
    
    
    
    2,029,100
    
    
    
    27,332,000Period 11
10/02/05-10/29/05
    
    
    2,127,100
    
    
    $
    27.88
    
    
    
    2,127,100
    
    
    
    25,204,900Period 12
10/30/05-11/26/05
    
    
    665,000
    
    
    $
    28.71
    
    
    
    665,000
    
    
    
    24,539,900Period 13
11/27/05-12/31/05
    
    
    517,300
    
    
    $
    29.59
    
    
    
    517,300
    
    
    
    24,022,600Total
    
    
    5,338,500
    
    
    $
    28.19
    
    
    
    5,338,500
 
 1
    
    Shares have only been repurchased through publicly announced programs.2
    
    Average share price excludes brokerage fees.3
    
    The PBG Board has authorized the repurchase of shares of PBG
Common Stock on the open market and through negotiated transactions as follows: Number of SharesAuthorized to beDate Share Repurchase Programs were 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
December 31, 2005
    
    
    125,000,000
  15




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Item 6. Selected Financial Data
 SELECTED FINANCIAL AND OPERATING DATA
 in millions, except per share dataFiscal years ended
    
    2005(1)
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Statement of Operations Data:Net revenues
    
    $
    11,885
    
    
    $
    10,906
    
    
    $
    10,265
    
    
    $
    9,216
    
    
    $
    8,443Cost of sales
    
    
    6,253
    
    
    
    5,656
    
    
    
    5,215
    
    
    
    5,001
    
    
    
    4,580Gross profit
    
    
    5,632
    
    
    
    5,250
    
    
    
    5,050
    
    
    
    4,215
    
    
    
    3,863Selling, delivery and administrative expenses
    
    
    4,609
    
    
    
    4,274
    
    
    
    4,094
    
    
    
    3,317
    
    
    
    3,187Operating income
    
    
    1,023
    
    
    
    976
    
    
    
    956
    
    
    
    898
    
    
    
    676Interest expense, net
    
    
    250
    
    
    
    230
    
    
    
    239
    
    
    
    191
    
    
    
    194Other non-operating expenses, net
    
    
    1
    
    
    
    1
    
    
    
    7
    
    
    
    7
    
    
    
    Minority interest
    
    
    59
    
    
    
    56
    
    
    
    50
    
    
    
    51
    
    
    
    41Income before income taxes
    
    
    713
    
    
    
    689
    
    
    
    660
    
    
    
    649
    
    
    
    441Income tax expense (2)(3)(4)
    
    
    247
    
    
    
    232
    
    
    
    238
    
    
    
    221
    
    
    
    136Income before cumulative effect of change in
accounting principle
    
    
    466
    
    
    
    457
    
    
    
    422
    
    
    
    428
    
    
    
    305Cumulative effect of change in accounting
principle, net of tax and minority interest
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Net income
    
    $
    466
    
    
    $
    457
    
    
    $
    416
    
    
    $
    428
    
    
    $
    305Per Share Data:(5)Basic earnings per share
    
    $
    1.91
    
    
    $
    1.79
    
    
    $
    1.54
    
    
    $
    1.52
    
    
    $
    1.07Diluted earnings per share
    
    $
    1.86
    
    
    $
    1.73
    
    
    $
    1.50
    
    
    $
    1.46
    
    
    $
    1.03Cash dividends declared per share
    
    $
    0.29
    
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.04Weighted-average basic shares outstanding
    
    
    243
    
    
    
    255
    
    
    
    270
    
    
    
    282
    
    
    
    286Weighted-average
diluted shares outstanding
    
    
    250
    
    
    
    263
    
    
    
    277
    
    
    
    293
    
    
    
    296Other Financial Data:Cash provided by operations (6)
    
    $
    1,219
    
    
    $
    1,222
    
    
    $
    1,075
    
    
    $
    1,009
    
    
    $
    874Capital expenditures
    
    $
    (715
    )
    
    $
    (688)
    
    
    $
    (635
    )
    
    $
    (618
    )
    
    $
    (585
    )Balance Sheet Data (at period end):Total assets (6)
    
    $
    11,524
    
    
    $
    10,937
    
    
    $
    11,655
    
    
    $
    10,142
    
    
    $
    7,942Long-term debt
    
    $
    3,939
    
    
    $
    4,489
    
    
    $
    4,493
    
    
    $
    4,539
    
    
    $
    3,285Minority interest
    
    $
    496
    
    
    $
    445
    
    
    $
    396
    
    
    $
    348
    
    
    $
    319Accumulated other comprehensive loss
    
    $
    (262
    )
    
    $
    (315
    )
    
    $
    (380
    )
    
    $
    (468
    )
    
    $
    (370
    )Shareholders equity
    
    $
    2,043
    
    
    $
    1,949
    
    
    $
    1,881
    
    
    $
    1,824
    
    
    $
    1,601
 
 (1)
    
    Our fiscal year 2005 results included an extra week of
activity. The pre-tax income generated
from the extra week was spent back in strategic initiatives within our selling, delivery and
administrative expenses. The
53rd week
had no impact on our net income or diluted
earnings per share.(2)
    
    Fiscal year 2001 includes Canada tax law change expense of $25 million.(3)
    
    Fiscal year 2003 includes Canada tax law change expense of $11 million.(4)
    
    Fiscal year 2004 includes Mexico tax law change benefit of $26 million and international tax
restructuring charge of $30 million.(5)
    
    Reflects the 2001 two-for-one stock split.(6)
    
    Certain reclassifications were made in our Consolidated Financial Statements to prior year amounts to
conform to the 2005 presentation. 16




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 MANAGEMENTS FINANCIAL REVIEW
Tabular dollars in millions, except per share data
 OVERVIEW
   
 Pepsi-Cola Diet Pepsi, Mountain Dew Aquafina, Lipton Brisk, Sierra Mist, Diet Mountain Dew, Tropicana Juice Drinks, SoBe Starbucks Frappuccino. 7 UP Kas, Aqua Minerale, Mirinda Manzanita
Sol Dr Pepper Squirt. Electropura, EPura Garci Crespo
    17




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
    
    Items that affect historical or future comparability
    
    Financial performance summary
    
    Critical accounting policies
    
    Related party transactions
    
    Results of operations
    
    Liquidity and financial condition and
    
    Market risks and cautionary statements.
 .
 18




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ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY
 High
Fructose Corn Syrup (HFCS) Settlement
  53 rd Week
 rd rd
 Strategic Spending Initiatives
 rd
 Non-GAAP Measurements and Adjusted Results
 rd
 19




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Spending(in millions, except per share data)
    
    Reported
    
    

HFCS
Settlement
    
    

53rdWeek
    
    
    Initiatives
    
    
    Adjusted Results *Revenue
    
    $
    11,885
    
    
    $
    0
    
    
    $
    (139
    )
    
    $
    0
    
    
    $
    11,746Cost of sales
    
    
    6,253
    
    
    
    0
    
    
    
    (72
    )
    
    
    0
    
    
    
    6,181Gross profit
    
    
    5,632
    
    
    
    0
    
    
    
    (67
    )
    
    
    0
    
    
    
    5,565Selling, delivery
and administrative
expenses
    
    
    4,609
    
    
    
    29
    
    
    
    (43
    )
    
    
    (48
    )
    
    
    4,547Operating
income/(loss)
    
    
    1,023
    
    
    
    (29
    )
    
    
    (24
    )
    
    
    48
    
    
    
    1,018Interest expense, net
    
    
    250
    
    
    
    0
    
    
    
    (5
    )
    
    
    0
    
    
    
    245Other
non-operating expense,
net
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1Minority interest
    
    
    59
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    3
    
    
    
    59Income before taxes
    
    
    713
    
    
    
    (27
    )
    
    
    (18
    )
    
    
    45
    
    
    
    713Income taxes
    
    
    247
    
    
    
    (9
    )
    
    
    (6
    )
    
    
    15
    
    
    
    247Net income
    
    $
    466
    
    
    $
    (18
    )
    
    $
    (12
    )
    
    $
    30
    
    
    $
    466Diluted EPS
    
    $
    1.86
    
    
    $
    (0.07
    )
    
    $
    (0.05
    )
    
    $
    0.12
    
    
    $
    1.86
 Operating
Income Growth Rates
    
    FY 2005Reported Operating Income
    
    
    5
    %HFCS Settlement
    
    
    (3
    %)53rd Week Impact
    
    
    (2
    %)Strategic Spending Initiatives
    
    
    4
    %Adjusted Operating Income *
    
    
    4
    %
 
 *
    
    See Non-GAAP Measurements and Adjusted Results for further information. 20




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FINANCIAL PERFORMANCE SUMMARY
 (in millions, except per share data)
    
    December
    
    
    December
    
    
    Fiscal Year31, 2005
    
    
    25, 2004
    
    
    % ChangeNet revenues
    
    $
    11,885
    
    
    $
    10,906
    
    
    
    9
    %Gross profit
    
    $
    5,632
    
    
    $
    5,250
    
    
    
    7
    %Operating income
    
    $
    1,023
    
    
    $
    976
    
    
    
    5
    %Net income
    
    $
    466
    
    
    $
    457
    
    
    
    2
    %Diluted earnings per share
    
    $
    1.86
    
    
    $
    1.73
    
    
    
    7
    %
 rd
 rd rd
 rd
 rd
   21




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rd
 rd
  2006 Outlook
 rd
 rd rd
 rd
 Impact of
    
    
    
    
    
    
    Adjusted ForecastedForecasted 2006 vs.
    
    
    53rd
    
    
    
    
    
    
    2006 vs. 20052005 growth
    
    
    week in 2005
    
    
    Impact of SFAS 123R
    
    
    growth *Worldwide Volume
    
    
    2%
    
    
    1
    %
    
    
    
    
    
    
    
    3%U.S. Volume
    
    Flat to 1%
    
    1
    %
    
    
    
    
    
    
    1% to 2%Worldwide Operating
Income (in dollars)
    
    (2%) to (4%)
    
    
    
    
    
    7
    %
    
    
    3% to 5%
 22




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Full-YearForecasted 2006
    
    
    
    
    
    
    Adjusted Full-YearResults
    
    
    Impact of SFAS 123R
    
    

Forecasted Results*Worldwide SD&A (in
millions)
    
    $4,807 - $4,858
    
    
    $
    (70)
    
    
    $4,737 - $4,788Diluted Earnings Per Share
    
     $ 1.76 to $1.84
    
    
    $
    0.18
    
    
    $ 1.94 to $2.02
 
 *
    
    See Non-GAAP Measurements and Adjusted Results in Items that Affect Historical or Future
Comparability for further information.      23




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CRITICAL ACCOUNTING POLICIES
  Allowance
for Doubtful Accounts
    Allowance for DoubtfulAccounts2005
    
    
    2004
    
    
    2003Beginning of the year
    
    $
    61
    
    
    $
    72
    
    
    $
    67Bad debt expense
    
    
    3
    
    
    
    (5
    )
    
    
    12Accounts written off
    
    
    (12
    )
    
    
    (7
    )
    
    
    (8
    )Foreign currency translation
    
    
    (1
    )
    
    
    1
    
    
    
    1End of the year
    
    $
    51
    
    
    $
    61
    
    
    $
    72
 Recoverability
of Goodwill and Intangible Assets with Indefinite Lives
   24




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Pension
and Postretirement Medical Benefit Plans
   25




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Key Assumptions
 th
   Pension and Postretirement Medical Plans Accounting
   Pension
    
    2006
    
    
    2005Discount rate
    
    
    5.80
    %
    
    
    6.15
    %Expected return on plan assets (net of administrative expenses)
    
    
    8.50
    %
    
    
    8.50
    %Rate of compensation increase
    
    
    3.53
    %
    
    
    3.60
    %
 Postretirement
    
    2006
    
    
    2005Discount rate
    
    
    5.55
    %
    
    
    6.15
    %Rate of compensation increase
    
    
    3.53
    %
    
    
    3.60
    %Health care cost trend rate
    
    
    9.00
    %
    
    
    10.00
    %
  
    
    A decrease in our weighted-average discount rate for our pension and postretirement
medical expense from 6.15 percent and 6.15 percent to 5.80 percent and 5.55 percent,
respectively, reflecting declines in the
 26




---



##### Table of Contents



yields of long-term corporate bonds comprising
the yield curve. This change in assumption will increase our 2006 defined benefit pension
and postretirement medical expense by approximately $12 million.
    
    Certain benefit plan enhancements and demographic changes will increase our 2006
defined benefit pension and postretirement medical expense by approximately $7 million.
 Sensitivity Analysis
  2005
    
    2004
    
    2003Expected return on plan assets (net of administrative expenses)
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %Actual return on plan assets (net of administrative expenses)
    
    
    13.33
    %
    
    
    11.61
    %
    
    
    19.79
    %
  
    
    Discount rate  A 25-basis point change in the discount rate would increase or decrease
the expense for our pension and postretirement medical benefit plans in 2006 by
approximately $9 million.
    
    Expected return on plan assets  A 25-basis point change in the expected return on plan
assets would increase or decrease the expense for our pension plans in 2006 by approximately
$3 million. The postretirement medical benefit plans have no expected return on plan assets
as they are funded from the general assets of the Company as the payments come due.
  Casualty
Insurance Costs 
  Income
Taxes
  27




---



##### Table of Contents



RELATED PARTY TRANSACTIONS
    28




---



##### Table of Contents



2005
    
    
    2004
    
    
    2003Net revenues:Bottler incentives (a)
    
    $
    51
    
    
    $
    22
    
    
    $
    21Cost of sales:Purchases of concentrate and finished products,
and Aquafina royalty fees (b)
    
    $
    (2,993
    )
    
    $
    (2,741
    )
    
    $
    (2,527
    )Bottler incentives (a)
    
    
    559
    
    
    
    522
    
    
    
    527Manufacturing and distribution service reimbursements (c)
    
    
    
    
    
    
    
    
    
    
    6$
    (2,434
    )
    
    $
    (2,219
    )
    
    $
    (1,994
    )Selling, delivery and administrative expenses:Bottler incentives (a)
    
    $
    78
    
    
    $
    82
    
    
    $
    98Fountain service fee (d)
    
    
    183
    
    
    
    180
    
    
    
    200Frito-Lay purchases (e)
    
    
    (144
    )
    
    
    (75
    )
    
    
    (51
    )Shared services (f):Shared services expense
    
    
    (69
    )
    
    
    (68
    )
    
    
    (72
    )Shared services revenue
    
    
    8
    
    
    
    10
    
    
    
    10Net shared services
    
    
    (61
    )
    
    
    (58
    )
    
    
    (62
    )HFCS (h)
    
    
    23
    
    
    
    
    
    
    
    $
    79
    
    
    $
    129
    
    
    $
    185Income tax benefit (g)
    
    $
    3
    
    
    $
    17
    
    
    $
    7
 (a) Bottler Incentives and Other Arrangements 
 (b) Purchase of Concentrate and Finished Product 
 (c) Manufacturing
and Distribution Service Reimbursements 
 (d) Fountain
Service Fee
 29




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##### Table of Contents



(e) Frito-Lay Purchases  .
 (f) Shared
Services
 (g) Income
Tax Benefit
 (h) High Fructose Corn Syrup (HFCS) Settlement  
   RESULTS
OF OPERATIONS  2005
 Volume
 Fiscal Year EndedDecember 31, 2005 vs.December 25, 2004World-
    
    
    
    
    
    Outsidewide
    
    U.S.
    
    the U.S.Base volume
    
    
    3
    %
    
    
    2
    %
    
    
    5
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %Impact of 53rd week
    
    
    1
    %
    
    
    2
    %
    
    
    1
    %Total Volume Change
    
    
    5
    %
    
    
    5
    %
    
    
    6
    %
  rd
 30




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##### Table of Contents



Aquafina Aquafina
Flavor Splash, Starbucks . Pepsi Pepsi Lime, Wild Cherry Pepsi,
 rd
 Pepsi Aqua
Minerale Tropicana Juice, Lipton Iced Tea rd Pepsi Yedigun
  Net Revenues
 Fiscal Year EndedDecember 31, 2005 vs.December 25, 2004World-
    
    
    
    
    
    Outsidewide
    
    U.S.
    
    the U.S.Volume impact
    
    
    3
    %
    
    
    2
    %
    
    
    5
    %Net price per case impact
(rate/mix)
    
    
    3
    %
    
    
    3
    %
    
    
    2
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Currency
translation
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %Impact of 53rd
week
    
    
    1
    %
    
    
    2
    %
    
    
    0
    %Total Net Revenues Change
    
    
    9
    %
    
    
    8
    %
    
    
    12
    %
 rd
 rd
  31




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##### Table of Contents



Cost of Sales
 Fiscal Year EndedDecember 31, 2005 vs.December 25, 2004World-
    
    
    
    
    
    Outsidewide
    
    U.S.
    
    the U.S.Volume impact
    
    
    4
    %
    
    
    2
    %
    
    
    5
    %Cost per case impact
    
    
    4
    %
    
    
    4
    %
    
    
    4
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Currency translation
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %Impact of 53rd week
    
    
    1
    %
    
    
    2
    %
    
    
    0
    %Total Cost of Sales Change
    
    
    11
    %
    
    
    9
    %
    
    
    14
    %
 rd
 rd
  Selling, Delivery and Administrative Expenses
 Fiscal Year EndedDecember 31, 2005 vs.December 25, 2004World-
    
    
    
    
    
    Outsidewide
    
    U.S.
    
    the U.S.Cost impact
    
    
    5
    %
    
    
    4
    %
    
    
    5
    %HFCS Settlement
    
    
    (1
    )%
    
    
    (1
    )%
    
    
    0
    %Strategic Spending
Initiatives
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Acquisitions
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Currency translation
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %Impact of 53rd
week
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %Total SD&A Change
    
    
    8
    %
    
    
    6
    %
    
    
    11
    %
 rd rd
 32




---



##### Table of Contents



rd
 Squirt
 Net Interest Expense
 rd
 Minority Interest
  Income Tax Expense
  Earnings Per Share
 Shares in millions
    
    2005
    
    2004
    
    2003Basic earnings per share on reported net income
    
    $
    1.91
    
    
    $
    1.79
    
    
    $
    1.54Basic weighted-average shares outstanding
    
    
    243
    
    
    
    255
    
    
    
    270Diluted earnings per share on reported net income
    
    $
    1.86
    
    
    $
    1.73
    
    
    $
    1.50Diluted weighted-average shares outstanding
    
    
    250
    
    
    
    263
    
    
    
    277
 Dilution
  Diluted Weighted-Average Shares Outstanding
  33




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##### Table of Contents



RESULTS
OF OPERATIONS  2004
 Volume
 52 Weeks EndedDecember 25, 2004 vs.December 27, 2003World-
    
    
    
    
    
    Outsidewide
    
    U.S.
    
    the U.S.Base volume
    
    
    2
    %
    
    
    2
    %
    
    
    3
    %Acquisitions
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %Total Volume Change
    
    
    3
    %
    
    
    2
    %
    
    
    4
    %
  Pepsi Pepsi Pepsi Twist Tropicana Juice Drinks Aquafina
 Tropicana Juice Lipton Iced Tea Pepsi Aquafina
  Net Revenues
 52 Weeks EndedDecember 25, 2004 vs.December 27, 2003World-
    
    
    
    
    
    Outsidewide
    
    U.S.
    
    the U.S.Volume impact
    
    
    2
    %
    
    
    2
    %
    
    
    3
    %Net price per case impact
(rate/mix)
    
    
    3
    %
    
    
    3
    %
    
    
    1
    %Acquisitions
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %Currency
translation
    
    
    1
    %
    
    
    0
    %
    
    
    3
    %Total Net Revenues Change
    
    
    6
    %
    
    
    5
    %
    
    
    8
    %
  34




---



##### Table of Contents



Cost of Sales
 52 Weeks EndedDecember 25, 2004 vs.December 27, 2003World-
    
    
    
    
    
    Outsidewide
    
    U.S.
    
    the U.S.Volume impact
    
    
    2
    %
    
    
    2
    %
    
    
    3
    %Cost per case impact
    
    
    5
    %
    
    
    5
    %
    
    
    4
    %Acquisitions
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %Currency translation
    
    
    1
    %
    
    
    0
    %
    
    
    3
    %Total Cost of Sales Change
    
    
    8
    %
    
    
    7
    %
    
    
    11
    %
    Selling, Delivery and Administrative Expenses
 52 Weeks EndedDecember 25, 2004 vs.December 27, 2003World-
    
    
    
    
    
    Outsidewide
    
    U.S.
    
    the U.S.Cost impact
    
    
    3
    %
    
    
    4
    %
    
    
    3
    %Acquisitions
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %Currency translation
    
    
    1
    %
    
    
    0
    %
    
    
    2
    %Total SD&A Change
    
    
    4
    %
    
    
    4
    %
    
    
    6
    %
  35




---



##### Table of Contents



Squirt
 Net Interest Expense
  Minority Interest
  Income Tax Expense
  
    
    Tax reserves  During 2004, we adjusted previously established liabilities for tax
exposures due largely to the settlement of certain international tax audits. The
adjustment of these liabilities resulted in an $8 million (or $0.02 per diluted share) tax
benefit for the year.
    
    International tax structure change  In December 2004, we initiated a reorganization of
our international tax structure to allow for more efficient cash mobilization and to reduce
potential future tax costs. This reorganization triggered a $30 million tax charge ($0.11
per diluted share) in the fourth quarter.
    
    Mexico tax rate change  In December 2004, legislation was enacted changing the Mexican
statutory income tax rate. This rate change decreased our net deferred tax liabilities and
resulted in a $26 million ($0.09 per diluted share) tax benefit in the fourth quarter.
 LIQUIDITY AND FINANCIAL CONDITION
 Cash Flows
 Fiscal 2005 Compared with Fiscal 2004
    36




---



##### Table of Contents



Fiscal 2004 Compared with Fiscal 2003
    Liquidity and Capital Resources
     
    
    Our debt to capitalization ratio should not be greater than .75 on the last day of a
fiscal quarter when PepsiCo Inc.s ratings are A- by S&P and A3 by Moodys or higher. Debt
is defined as total long-term and short-term debt plus accrued interest plus total standby
letters of credit and other guarantees less cash and cash equivalents not in excess of $500
million. Capitalization is defined as debt plus shareholders equity plus minority interest
excluding the impact of the cumulative translation adjustment.
    
    Our debt to EBITDA ratio should not be greater than five on the last day of a fiscal
quarter when PepsiCo Inc.s ratings are less than A- by S&P or A3 by Moodys. EBITDA is
defined as the last four quarters of earnings before depreciation, amortization, net
interest expense, income taxes, minority interest, net other non-operating expenses and
extraordinary items.
    
    New secured debt should not be greater than 10 percent of Bottling Group, LLCs net
tangible assets. Net tangible assets are defined as total assets less current liabilities
and net intangible assets.
 .
  37




---



##### Table of Contents



Contractual Obligations
  Payments Due by PeriodLess than 1
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-term debt obligations (1)
    
    $
    4,556
    
    
    $
    593
    
    
    $
    13
    
    
    $
    1,300
    
    
    $
    2,650Capital lease obligations (2)
    
    
    5
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    3Operating leases (2)
    
    
    230
    
    
    
    50
    
    
    
    73
    
    
    
    43
    
    
    
    64Interest obligations (3)
    
    
    2,521
    
    
    
    245
    
    
    
    450
    
    
    
    332
    
    
    
    1,494Purchase obligations:Raw material obligations (4)
    
    
    212
    
    
    
    84
    
    
    
    120
    
    
    
    8
    
    
    
    Capital expenditure
obligations (5)
    
    
    58
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    Other obligations (6)
    
    
    362
    
    
    
    171
    
    
    
    100
    
    
    
    37
    
    
    
    54Other long-term liabilities (7)
    
    
    38
    
    
    
    8
    
    
    
    13
    
    
    
    8
    
    
    
    9Total
    
    $
    7,982
    
    
    $
    1,210
    
    
    $
    770
    
    
    $
    1,728
    
    
    $
    4,274
 
 (1)
    
    See Note 9 in Notes to Consolidated Financial Statements for additional information relating
to our long-term debt obligations.(2)
    
    See Note 10 in Notes to Consolidated Financial Statements for additional information relating
to our lease obligations.(3)
    
    Represents interest payment obligations related to our long-term fixed-rate debt as specified
in the applicable debt agreements. Additionally, a portion of our long-term debt has
variable interest rates due to either existing swap agreements or interest arrangements. We
estimated our variable interest payment obligations by using the interest rate forward curve.(4)
    
    Represents obligations to purchase raw materials pursuant to contracts entered into by
PepsiCo on our behalf and international agreements to purchase raw materials.(5)
    
    Represents commitments to suppliers under capital expenditure related contracts or purchase
orders.(6)
    
    Represents non-cancelable agreements that specify fixed or minimum quantities, price
arrangements and timing of payments. Also includes agreements that provide for termination
penalty clauses.(7)
    
    Primarily relates to contractual obligations associated with non-compete contracts that
resulted from business acquisitions. The table excludes other long-term liabilities included
in our Consolidated Financial Statements, such as pension, postretirement and other
non-contractual obligations. See Note 12 in Notes to Consolidated Financial Statements for a
discussion of our future pension and postretirement contributions and corresponding expected
benefit payments for years 2006 through 2015. Off-Balance Sheet Arrangements
  Capital Expenditures
  Acquisitions
   38




---



##### Table of Contents




    
    Gaseosas, S.A. de C.V. of Mexicali, Mexico in March
    
    Seltzer and Rydholm, Inc. of Auburn, Maine in October
    
    Phil Gaudreault et Fils Ltee of Quebec, Canada in November
    
    Bebidas Purificada, S.A. de C.V. of Juarez, Mexico in November
  SoBe
  MARKET RISKS AND CAUTIONARY STATEMENTS
 Quantitative and Qualitative Disclosures about Market Risk
    Commodity Price Risk
  39




---



##### Table of Contents



Interest Rate Risk
  Foreign Currency Exchange Rate Risk
      Unfunded Deferred Compensation Liability
    40




---



##### Table of Contents



Cautionary Statements
  
    
    changes in our relationship with PepsiCo that could have a material adverse effect on our long-term and short-term
business and financial results;
 
    
    material changes in expected levels of bottler incentive payments from PepsiCo;
 
    
    restrictions imposed by PepsiCo on our raw material suppliers that could increase our costs;
 
    
    material changes from expectations in the cost or availability of raw materials, ingredients or packaging materials;
 
    
    limitations on the availability of water or obtaining water rights;
 
    
    an inability to achieve cost savings;
 
    
    material changes in capital investment for infrastructure and an inability to achieve the expected timing for returns
on cold-drink equipment and related infrastructure expenditures;
 
    
    decreased demand for our product resulting from changes in consumers preferences;
 
    
    an inability to achieve volume growth through product and packaging initiatives;
 
    
    impact of competitive activities on our business;
 
    
    impact of customer consolidations on our business;
 
    
    changes in product category consumption;
 
    
    unfavorable weather conditions in our markets;
 
    
    an inability to meet projections for performance in newly acquired territories;
 
    
    loss of business from a significant customer;
 
    
    failure or inability to comply with laws and regulations;
 
    
    changes in laws, regulations and industry guidelines governing the manufacture and sale of food and beverages,
including restrictions on the sale of carbonated soft drinks in schools;
 
    
    litigation, other claims and negative publicity relating to alleged unhealthy properties of soft drinks;
 
    
    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);
 
    
    unforeseen economic and political changes;
 
    
    possible recalls of our products;
 
    
    interruptions of operations due to labor disagreements;
 
    
    changes in our debt ratings;
 
    
    material changes in expected interest and currency exchange rates and unfavorable market performance of our pension
plan assets; and
 
    
    an inability to achieve strategic business plan targets that could result in an intangible asset impairment charge.
 41




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##### Table of Contents



The Pepsi Bottling Group, Inc.
Consolidated Statements of Operations
 Fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003
 2005
    
    
    2004
    
    
    2003Net Revenues
    
    $
    11,885
    
    
    $
    10,906
    
    
    $
    10,265Cost of sales
    
    
    6,253
    
    
    
    5,656
    
    
    
    5,215Gross Profit
    
    
    5,632
    
    
    
    5,250
    
    
    
    5,050Selling, delivery and administrative expenses
    
    
    4,609
    
    
    
    4,274
    
    
    
    4,094Operating Income
    
    
    1,023
    
    
    
    976
    
    
    
    956Interest expense, net
    
    
    250
    
    
    
    230
    
    
    
    239Other non-operating expenses, net
    
    
    1
    
    
    
    1
    
    
    
    7Minority interest
    
    
    59
    
    
    
    56
    
    
    
    50Income Before Income Taxes
    
    
    713
    
    
    
    689
    
    
    
    660Income tax expense
    
    
    247
    
    
    
    232
    
    
    
    238Income Before Cumulative Effect of Change in
Accounting Principle
    
    
    466
    
    
    
    457
    
    
    
    422Cumulative effect of change in accounting
principle, net of tax and minority interest
    
    
    
    
    
    
    
    
    
    
    6Net Income
    
    $
    466
    
    
    $
    457
    
    
    $
    416Basic Earnings Per Share Before Cumulative
Effect of Change in Accounting
Principle
    
    $
    1.91
    
    
    $
    1.79
    
    
    $
    1.56Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    0.02Basic Earnings Per Share
    
    $
    1.91
    
    
    $
    1.79
    
    
    $
    1.54Weighted-average shares
outstanding
    
    
    243
    
    
    
    255
    
    
    
    270Diluted Earnings Per Share Before Cumulative
Effect of Change in Accounting
Principle
    
    $
    1.86
    
    
    $
    1.73
    
    
    $
    1.52Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    0.02Diluted Earnings Per
Share
    
    $
    1.86
    
    
    $
    1.73
    
    
    $
    1.50Weighted-average shares outstanding
    
    
    250
    
    
    
    263
    
    
    
    277
  42




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##### Table of Contents



The Pepsi Bottling Group, Inc.
Consolidated Statements of Cash Flows
 Fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003
 2005
    
    
    2004
    
    
    2003Cash FlowsOperationsNet income
    
    $
    466
    
    
    $
    457
    
    
    $
    416Adjustments to reconcile net income to net cash provided by operations:Depreciation
    
    
    615
    
    
    
    580
    
    
    
    556Amortization
    
    
    15
    
    
    
    13
    
    
    
    12Deferred income taxes
    
    
    (65
    )
    
    
    31
    
    
    
    125Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    6Other non-cash charges and credits:Defined benefit pension and postretirement expenses
    
    
    109
    
    
    
    88
    
    
    
    77Minority interest expense
    
    
    59
    
    
    
    56
    
    
    
    50Casualty self-insurance expense
    
    
    85
    
    
    
    93
    
    
    
    97Other non-cash charges and credits
    
    
    84
    
    
    
    61
    
    
    
    79Net other non-cash charges and credits
    
    
    337
    
    
    
    298
    
    
    
    303Changes in operating working capital, excluding effects of acquisitions:Accounts receivable, net
    
    
    7
    
    
    
    (53
    )
    
    
    (23
    )Inventories
    
    
    (29
    )
    
    
    (38
    )
    
    
    4Prepaid expenses and other current assets
    
    
    1
    
    
    
    (16
    )
    
    
    7Accounts payable and other current liabilities
    
    
    4
    
    
    
    98
    
    
    
    (82
    )Income taxes payable
    
    
    77
    
    
    
    30
    
    
    
    (2
    )Net change in operating working capital
    
    
    60
    
    
    
    21
    
    
    
    (96
    )Casualty insurance payments
    
    
    (66
    )
    
    
    (53
    )
    
    
    (40
    )Pension contributions
    
    
    (77
    )
    
    
    (83
    )
    
    
    (162
    )Other, net
    
    
    (66
    )
    
    
    (42
    )
    
    
    (45
    )Net Cash Provided by Operations
    
    
    1,219
    
    
    
    1,222
    
    
    
    1,075Cash FlowsInvestmentsCapital expenditures
    
    
    (715
    )
    
    
    (688
    )
    
    
    (635
    )Acquisitions of bottlers, net of cash acquired
    
    
    (155
    )
    
    
    (96
    )
    
    
    (100
    )Proceeds from sale of property, plant and equipment
    
    
    29
    
    
    
    22
    
    
    
    10Other investing activities, net
    
    
    (1
    )
    
    
    
    
    
    
    Net Cash Used for Investments
    
    
    (842
    )
    
    
    (762
    )
    
    
    (725
    )Cash FlowsFinancingShort-term borrowings, netthree months or less
    
    
    274
    
    
    
    104
    
    
    
    8Proceeds from issuances of long-term debt
    
    
    36
    
    
    
    23
    
    
    
    1,141Payments of long-term debt
    
    
    (36
    )
    
    
    (1,014
    )
    
    
    (30
    )Minority interest distribution
    
    
    (12
    )
    
    
    (13
    )
    
    
    (7
    )Dividends paid
    
    
    (64
    )
    
    
    (31
    )
    
    
    (11
    )Proceeds from exercise of stock options
    
    
    109
    
    
    
    118
    
    
    
    35Purchases of treasury stock
    
    
    (490
    )
    
    
    (582
    )
    
    
    (483
    )Net Cash (Used for)/Provided by Financing
    
    
    (183
    )
    
    
    (1,395
    )
    
    
    653Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    3
    
    
    
    5
    
    
    
    10Net Increase/(Decrease) in Cash and Cash Equivalents
    
    
    197
    
    
    
    (930
    )
    
    
    1,013Cash and Cash EquivalentsBeginning of Year
    
    
    305
    
    
    
    1,235
    
    
    
    222Cash and Cash EquivalentsEnd of Year
    
    $
    502
    
    
    $
    305
    
    
    $
    1,235Supplemental Cash Flow InformationNon-Cash Investing and Financing Activities:Liabilities incurred and/or assumed in conjunction with
acquisitions of bottlers
    
    $
    22
    
    
    $
    20
    
    
    $
    146Change in accounts payable related to capital expenditures
    
    $
    (6
    )
    
    $
    29
    
    
    $
    9
  43




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##### Table of Contents



The Pepsi Bottling Group, Inc.
Consolidated Balance Sheets
 December 31, 2005 and December 25, 2004
 2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    502
    
    
    $
    305Accounts receivable, less allowance of $51 in 2005 and $61 in 2004
    
    
    1,186
    
    
    
    1,204Inventories
    
    
    458
    
    
    
    427Prepaid expenses and other current assets
    
    
    266
    
    
    
    247Total Current Assets
    
    
    2,412
    
    
    
    2,183Property, plant and equipment, net
    
    
    3,649
    
    
    
    3,581Other intangible assets, net
    
    
    3,814
    
    
    
    3,639Goodwill
    
    
    1,516
    
    
    
    1,416Other assets
    
    
    133
    
    
    
    118Total Assets
    
    $
    11,524
    
    
    $
    10,937LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable and other current liabilities
    
    $
    1,583
    
    
    $
    1,517Short-term borrowings
    
    
    426
    
    
    
    155Current maturities of long-term debt
    
    
    589
    
    
    
    53Total Current Liabilities
    
    
    2,598
    
    
    
    1,725Long-term debt
    
    
    3,939
    
    
    
    4,489Other liabilities
    
    
    1,027
    
    
    
    914Deferred income taxes
    
    
    1,421
    
    
    
    1,415Minority interest
    
    
    496
    
    
    
    445Total Liabilities
    
    
    9,481
    
    
    
    8,988Shareholders EquityCommon stock, par value $0.01 per share:authorized 900 shares, issued 310 shares
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    1,709
    
    
    
    1,719Retained earnings
    
    
    2,283
    
    
    
    1,887Accumulated other comprehensive loss
    
    
    (262
    )
    
    
    (315
    )Deferred compensation
    
    
    (14
    )
    
    
    (1
    )Treasury stock: 71 shares and 61 shares in 2005 and 2004, respectively, at cost
    
    
    (1,676
    )
    
    
    (1,344
    )Total Shareholders Equity
    
    
    2,043
    
    
    
    1,949Total Liabilities and Shareholders Equity
    
    $
    11,524
    
    
    $
    10,937
  44




---



##### Table of Contents



The Pepsi Bottling Group, Inc.
Consolidated Statements of Changes in Shareholders Equity
Fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003
 Accumu-latedOtherAdditional
    
    
    Deferred
    
    
    
    
    
    
    Compre-
    
    
    
    
    
    
    
    
    
    
    Compre-Common
    
    
    Paid-In
    
    
    Compen-
    
    
    Retained
    
    
    hensive
    
    
    Treasury
    
    
    
    
    
    
    hensivein millions, except per share data
    
    Stock
    
    
    Capital
    
    
    sation
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    Total
    
    
    IncomeBalance at December 28, 2002
    
    $
    3
    
    
    $
    1,750
    
    
    $
    
    
    
    $
    1,066
    
    
    $
    (468
    )
    
    $
    (527
    )
    
    $
    1,824Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416
    
    
    
    
    
    
    
    
    
    
    
    416
    
    
    $
    416Net currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    90
    
    
    
    90Cash flow hedge adjustment (net of tax
and minority interest of $13)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    18
    
    
    
    18Minimum pension liability
adjustment (net of tax and
minority interest of $14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    504Stock option exercises: 3 shares
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    35Tax benefit
 stock option exercises
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Purchase of treasury stock: 23 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (483
    )
    
    
    (483
    )Stock compensation
    
    
    
    
    
    
    8
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Cash dividends declared on common stock
(per share: $0.04)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )Balance at December 27, 2003
    
    
    3
    
    
    
    1,743
    
    
    
    (4
    )
    
    
    1,471
    
    
    
    (380
    )
    
    
    (952
    )
    
    
    1,881Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    457
    
    
    
    
    
    
    
    
    
    
    
    457
    
    
    $
    457Net currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    84
    
    
    
    84Cash flow hedge adjustment (net of
tax and minority interest of $2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Minimum pension liability
adjustment (net of tax and
minority interest of $13)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )
    
    
    (16
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    522Stock option exercises: 9 shares
    
    
    
    
    
    
    (72
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    118Tax benefit
 stock option exercises
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Purchase of treasury stock: 21 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (582
    )
    
    
    (582
    )Stock compensation
    
    
    
    
    
    
    (3
    )
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends declared on common stock
(per share: $0.16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    
    
    
    
    (41
    )Balance at December 25, 2004
    
    
    3
    
    
    
    1,719
    
    
    
    (1
    )
    
    
    1,887
    
    
    
    (315
    )
    
    
    (1,344
    )
    
    
    1,949Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    $
    466Net currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    65
    
    
    
    65Cash flow hedge adjustment (net of
tax and minority interest of $5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Minimum pension liability
adjustment (net of tax and
minority interest of $3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    519Stock option exercises: 7 shares
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    109Tax benefit
 stock option exercises
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Purchase of treasury stock: 17 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (490
    )
    
    
    (490
    )Stock compensation
    
    
    
    
    
    
    16
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Cash dividends declared on common
stock (per share: $0.29)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    (70
    )Balance at December 31, 2005
    
    $
    3
    
    
    $
    1,709
    
    
    $
    (14
    )
    
    $
    2,283
    
    
    $
    (262
    )
    
    $
    (1,676
    )
    
    $
    2,043
  45




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Note 1Basis of Presentation
      Note 2Summary of Significant Accounting Policies
 Basis of Consolidation
 Fiscal Year
 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
 Revenue Recognition
  46




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##### Table of Contents



Advertising and Marketing Costs
 Bottler Incentives
 
    
    Direct marketplace support represents PepsiCos and other brand owners agreed-upon funding to
assist us in offering sales and promotional discounts to retailers and is generally recorded as
an adjustment to cost of sales. If the direct marketplace support is a reimbursement for a
specific, incremental and identifiable program, the funding is recorded as an adjustment to net
revenues.
 
    
    Advertising support represents agreed-upon funding to assist us for the cost of media time
and promotional materials and is generally recorded as an adjustment to cost of sales.
Advertising support that represents reimbursement for a specific, incremental and identifiable
media cost, is recorded as a reduction to advertising and marketing expenses within selling,
delivery and administrative expenses.
  Fiscal Year Ended2005
    
    
    2004
    
    
    2003Net revenues
    
    $
    51
    
    
    $
    22
    
    
    $
    21Cost of sales
    
    
    604
    
    
    
    559
    
    
    
    561Selling, delivery and administrative expenses
    
    
    79
    
    
    
    84
    
    
    
    108Total bottler incentives
    
    $
    734
    
    
    $
    665
    
    
    $
    690
 Shipping and Handling Costs
 Foreign Currency Gains and Losses
 47




---



##### Table of Contents



Pension and Postretirement Medical Benefit Plans 
  Income Taxes
  Earnings Per Share
 Cash Equivalents
 Allowance for Doubtful Accounts 
 Inventories
 Property, Plant and Equipment
 Goodwill and Other Intangible Assets, net 
   48




---



##### Table of Contents



Casualty
Insurance Costs 
 Minority Interest
 Treasury Stock
 Financial Instruments and Risk Management
    Stock-Based Employee Compensation
 49




---



##### Table of Contents



Fiscal Year Ended2005
    
    
    2004
    
    
    2003Net income:As reported
    
    $
    466
    
    
    $
    457
    
    
    $
    416Add: Total stock-based employee compensation expense
included in reported net income, net of taxes and
minority interest
    
    
    1
    
    
    
    
    
    
    
    2Less: Total stock-based employee compensation expense
determined
under fair value-based method for all awards,
net of taxes and minority interest
    
    
    (43
    )
    
    
    (37
    )
    
    
    (42
    )Pro forma
    
    $
    424
    
    
    $
    420
    
    
    $
    376Earnings per share:Basic  as reported
    
    $
    1.91
    
    
    $
    1.79
    
    
    $
    1.54Basic  pro forma
    
    $
    1.74
    
    
    $
    1.64
    
    
    $
    1.39Diluted  as reported
    
    $
    1.86
    
    
    $
    1.73
    
    
    $
    1.50Diluted  pro forma
    
    $
    1.68
    
    
    $
    1.59
    
    
    $
    1.35
   2005
    
    2004
    
    2003Risk-free interest rate
    
    
    4.1
    %
    
    
    3.2
    %
    
    
    2.9
    %Expected life
    
    5.8 years
    
    6.0 years
    
    6.0 yearsExpected volatility
    
    
    28
    %
    
    
    35
    %
    
    
    37
    %Expected dividend yield
    
    
    1.10
    %
    
    
    0.68
    %
    
    
    0.17
    %
 SFAS No. 123R
   50




---



##### Table of Contents



Commitments and Contingencies 
 New Accounting Standards
 SFAS No. 123R
  FASB Staff Position No. FAS 109-1
 Accounting for Income Taxes
 FASB Staff Position No. FAS 109-2
  FASB Interpretation No. 47
  SFAS No. 151
  Emerging
Issues Task Force (EITF) Issue No. 02-16 Accounting
by a Customer (including a Reseller) for Certain Consideration
Received from a Vendor
  51




---



##### Table of Contents



Fiscal Year EndedDecember
    
    December
    
    December31, 2005
    
    25, 2004
    
    27, 2003Net income:As reported
    
    $
    466
    
    
    $
    457
    
    
    $
    416Pro forma
    
    $
    466
    
    
    $
    457
    
    
    $
    422Earnings per share:Basic  as reported
    
    $
    1.91
    
    
    $
    1.79
    
    
    $
    1.54Basic  pro forma
    
    $
    1.91
    
    
    $
    1.79
    
    
    $
    1.56Diluted  as reported
    
    $
    1.86
    
    
    $
    1.73
    
    
    $
    1.50Diluted  pro forma
    
    $
    1.86
    
    
    $
    1.73
    
    
    $
    1.52
 Note 3Inventories
 2005
    
    
    2004Raw materials and supplies
    
    $
    173
    
    
    $
    159Finished goods
    
    
    285
    
    
    
    268$
    458
    
    
    $
    427
 Note 4Prepaid Expenses and Other Current Assets
 2005
    
    
    2004Prepaid expenses
    
    $
    214
    
    
    $
    198Other assets
    
    
    52
    
    
    
    49$
    266
    
    
    $
    247
 Note 5Accounts Receivable
 2005
    
    
    2004Trade accounts receivable
    
    $
    1,018
    
    
    $
    1,056Allowance for doubtful accounts
    
    
    (51
    )
    
    
    (61
    )Accounts receivable from PepsiCo
    
    
    143
    
    
    
    150Other receivables
    
    
    76
    
    
    
    59$
    1,186
    
    
    $
    1,204
 Note 6Property, Plant and Equipment, net
 2005
    
    
    2004Land
    
    $
    277
    
    
    $
    257Buildings and improvements
    
    
    1,299
    
    
    
    1,263Manufacturing and distribution equipment
    
    
    3,425
    
    
    
    3,289Marketing equipment
    
    
    2,334
    
    
    
    2,237Other
    
    
    177
    
    
    
    1777,512
    
    
    
    7,223Accumulated depreciation
    
    
    (3,863
    )
    
    
    (3,642
    )$
    3,649
    
    
    $
    3,581
 52




---



##### Table of Contents



Buildings and improvements
    
    20-33 yearsManufacturing and distribution equipment
    
    2-15 yearsMarketing equipment
    
    3-7 years
 Note 7Other Intangible Assets, net and Goodwill
 2005
    
    
    2004Intangibles subject to amortization:Gross carrying amount:Customer relationships and lists
    
    $
    53
    
    
    $
    46Franchise/distribution rights
    
    
    46
    
    
    
    44Other identified intangibles
    
    
    39
    
    
    
    30138
    
    
    
    120Accumulated amortization:Customer relationships and lists
    
    
    (9
    )
    
    
    (6
    )Franchise/distribution rights
    
    
    (22
    )
    
    
    (15
    )Other identified intangibles
    
    
    (18
    )
    
    
    (16
    )(49
    )
    
    
    (37
    )Intangibles subject to amortization, net
    
    
    89
    
    
    
    83Intangibles not subject to amortization:Carrying amount:Franchise rights
    
    
    3,093
    
    
    
    2,958Distribution rights
    
    
    302
    
    
    
    288Trademarks
    
    
    218
    
    
    
    208Other identified intangibles
    
    
    112
    
    
    
    102Intangibles not subject to amortization
    
    
    3,725
    
    
    
    3,556Total other intangible assets, net
    
    $
    3,814
    
    
    $
    3,639Goodwill
    
    $
    1,516
    
    
    $
    1,416
  OtherIntangibleGoodwill
    
    
    Assets, net
    
    
    TotalBalance at December 25,
2004
    
    $
    1,416
    
    
    $
    3,639
    
    
    $
    5,055Purchase price
allocations relating
to recent
acquisitions
    
    
    72
    
    
    
    127
    
    
    
    199Impact of foreign
currency
translation
    
    
    28
    
    
    
    49
    
    
    
    77Increase in pension
asset
    
    
    
    
    
    
    14
    
    
    
    14Amortization of
intangible
assets
    
    
    
    
    
    
    (15
    )
    
    
    (15
    )Balance at December 31,
2005
    
    $
    1,516
    
    
    $
    3,814
    
    
    $
    5,330
 53




---



##### Table of Contents



OtherIntangibleGoodwill
    
    
    Assets, net
    
    
    TotalBalance at December 27,
2003
    
    $
    1,386
    
    
    $
    3,562
    
    
    $
    4,948Purchase price
allocations relating
to recent
acquisitions
    
    
    9
    
    
    
    65
    
    
    
    74Impact of foreign
currency
translation
    
    
    21
    
    
    
    31
    
    
    
    52Intangible asset
impairment
charge
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Increase in pension
asset
    
    
    
    
    
    
    3
    
    
    
    3Amortization of
intangible
assets
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Balance at December 25,
2004
    
    $
    1,416
    
    
    $
    3,639
    
    
    $
    5,055
 Squirt Squirt Squirt Squirt Squirt Squirt Squirt Squirt
 Squirt Squirt Squirt
  Weighted-
    
    
    Estimated Aggregate Amortization Expense to be IncurredAverageAmortizationPeriod
    
    
    Fiscal Year Ending2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Customer relationships and
lists
    
    18 years
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3Franchise/distribution rights
    
    7  years
    
    $
    5
    
    
    $
    3
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2Other identified intangibles
    
    8  years
    
    $
    5
    
    
    $
    4
    
    
    $
    3
    
    
    $
    2
    
    
    $
    1
 54




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##### Table of Contents



Note 8Accounts Payable and Other Current Liabilities
 2005
    
    
    2004Accounts payable
    
    $
    501
    
    
    $
    493Trade incentives
    
    
    185
    
    
    
    201Accrued compensation and benefits
    
    
    211
    
    
    
    222Other accrued taxes
    
    
    123
    
    
    
    117Accrued interest
    
    
    65
    
    
    
    60Accounts payable to PepsiCo
    
    
    176
    
    
    
    144Other current liabilities
    
    
    322
    
    
    
    280$
    1,583
    
    
    $
    1,517
 Note 9Short-term Borrowings and Long-term Debt
 2005
    
    
    2004Short-term borrowingsCurrent maturities of long-term debt
    
    $
    594
    
    
    $
    53SFAS No. 133 adjustment (1)
    
    
    (4
    )
    
    
    Unamortized discount, net
    
    
    (1
    )
    
    
    Current maturities of long-term debt, net
    
    
    589
    
    
    
    53Other short-term borrowings
    
    
    426
    
    
    
    155$
    1,015
    
    
    $
    208Long-term debt2.45% (3.28% effective rate) (2) senior notes due 2006
    
    $
    500
    
    
    $
    5005.63% (5.68% effective rate) (2) senior notes due 2009
    
    
    1,300
    
    
    
    1,3004.63% (4.57% effective rate) senior notes due 2012
    
    
    1,000
    
    
    
    1,0005.00% (5.15% effective rate) senior notes due 2013
    
    
    400
    
    
    
    4004.13% (4.35% effective rate) senior notes due 2015
    
    
    250
    
    
    
    2507.00% (7.10% effective rate) senior notes due 2029
    
    
    1,000
    
    
    
    1,000Other (average rate 4.31%)
    
    
    111
    
    
    
    1094,561
    
    
    
    4,559SFAS No. 133 adjustment (1)
    
    
    (19
    )
    
    
    (4
    )Unamortized discount, net
    
    
    (14
    )
    
    
    (13
    )Current maturities of long-term debt, net
    
    
    (589
    )
    
    
    (53
    )$
    3,939
    
    
    $
    4,489
 
 (1)
    
    In accordance with the requirements of SFAS No. 133, the portion of our fixed-rate
debt obligations that is hedged is reflected in our Consolidated Balance Sheets as an amount equal
to the sum of the debts carrying value plus a SFAS No. 133 fair value adjustment representing
changes recorded in the fair value of the hedged debt obligations attributable to movements in
market interest rates.(2)
    
    Effective interest rates include the impact of the gain/loss realized on swap
instruments and represent the rates that were achieved in 2005.    55




---



##### Table of Contents




    
    Our debt to capitalization ratio should not be greater than .75 on the last day of a
fiscal quarter when PepsiCo Inc.s ratings are A- by S&P and A3 by Moodys or higher. Debt
is defined as total long-term and short-term debt plus accrued interest plus total standby
letters of credit and other guarantees less cash and cash equivalents not in excess of $500
million. Capitalization is defined as debt plus shareholders equity plus minority
interest, excluding the impact of the cumulative translation adjustment.
    
    Our debt to EBITDA ratio should not be greater than five on the last day of a fiscal
quarter when PepsiCo Inc.s ratings are less than A- by S&P or A3 by Moodys. EBITDA is
defined as the last four quarters of earnings before depreciation, amortization, net
interest expense, income taxes, minority interest, net other non-operating expenses and
extraordinary items.
    
    New secured debt should not be greater than 10 percent of Bottling Group, LLCs net
tangible assets. Net tangible assets are defined as total assets less current liabilities
and net intangible assets.
 .
    Note 10Leases
   56




---



##### Table of Contents



LeasesFuture Minimum Rental Payments
    
    Capital
    
    
    Operating2006
    
    $
    1
    
    
    $
    502007
    
    
    1
    
    
    
    422008
    
    
    
    
    
    
    312009
    
    
    
    
    
    
    242010
    
    
    
    
    
    
    19Thereafter
    
    
    3
    
    
    
    64Total
    
    $
    5
    
    
    $
    230
  Rental Expense
    
    2005
    
    
    2004
    
    
    2003Minimum rentals
    
    $
    90
    
    
    $
    77
    
    
    $
    71Sublease rental income
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Total
    
    $
    88
    
    
    $
    75
    
    
    $
    69
 Note 11Financial Instruments and Risk Management
 Cash Flow Hedges 
     Before
    
    
    
    
    
    
    
    
    
    
    Net ofMinority
    
    
    
    
    
    
    
    
    
    
    MinorityInterest
    
    
    
    
    
    
    
    
    
    
    Interestand
    
    
    Minority
    
    
    
    
    
    
    andYear ended December 31, 2005
    
    Taxes
    
    
    Interest
    
    
    Taxes
    
    
    TaxesAccumulated net gains as of December 25, 2004
    
    $
    17
    
    
    $
    (1
    )
    
    $
    (6
    )
    
    $
    10Net changes in the fair value of cash flow hedges
    
    
    5
    
    
    
    
    
    
    
    (2
    )
    
    
    3Net gains reclassified from AOCL into earnings
    
    
    (17
    )
    
    
    1
    
    
    
    6
    
    
    
    (10
    )Accumulated net gains as of December 31, 2005
    
    $
    5
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    3
 57




---



##### Table of Contents



Before
    
    
    
    
    
    
    
    
    
    
    Net ofMinority
    
    
    
    
    
    
    
    
    
    
    MinorityInterest
    
    
    
    
    
    
    
    
    
    
    Interestand
    
    
    Minority
    
    
    
    
    
    
    andYear ended December 25, 2004
    
    Taxes
    
    
    Interest
    
    
    Taxes
    
    
    TaxesAccumulated net gains as of December 27, 2003
    
    $
    22
    
    
    $
    (1
    )
    
    $
    (8
    )
    
    $
    13Net changes in the fair value of cash flow hedges
    
    
    29
    
    
    
    (2
    )
    
    
    (10
    )
    
    
    17Net gains reclassified from AOCL into earnings
    
    
    (34
    )
    
    
    2
    
    
    
    12
    
    
    
    (20
    )Accumulated net gains as of December 25, 2004
    
    $
    17
    
    
    $
    (1
    )
    
    $
    (6
    )
    
    $
    10
  Fair
Value Hedges
 Unfunded
Deferred Compensation Liability
   Other
Financial Assets and Liabilities
  58




---



##### Table of Contents



Note 12Pension and Postretirement Medical Benefit Plans
 Pension Benefits
   PensionComponents of U.S. pension expense:
    
    2005
    
    
    2004
    
    
    2003Service cost
    
    $
    46
    
    
    $
    43
    
    
    $
    37Interest cost
    
    
    75
    
    
    
    69
    
    
    
    63Expected
return on plan assets  (income)
    
    
    (90
    )
    
    
    (83
    )
    
    
    (67
    )Amortization of prior service amendments
    
    
    7
    
    
    
    7
    
    
    
    6Amortization of net loss
    
    
    30
    
    
    
    25
    
    
    
    13Special termination benefits
    
    
    9
    
    
    
    
    
    
    
    Net pension expense for the defined benefit plans
    
    $
    77
    
    
    $
    61
    
    
    $
    52Defined contribution plans expense
    
    $
    20
    
    
    $
    19
    
    
    $
    19Total pension expense recognized in the
Consolidated Statements of Operations
    
    $
    97
    
    
    $
    80
    
    
    $
    71
 Postretirement Medical Benefits
  PostretirementComponents of U.S. postretirement benefits expense:
    
    2005
    
    
    2004
    
    
    2003Service cost
    
    $
    3
    
    
    $
    4
    
    
    $
    3Interest cost
    
    
    22
    
    
    
    18
    
    
    
    19Amortization of net loss
    
    
    8
    
    
    
    6
    
    
    
    5Amortization of prior service amendments
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )Net postretirement benefits expense recognized
in the Consolidated Statements of Operations
    
    $
    32
    
    
    $
    27
    
    
    $
    25
 59




---



##### Table of Contents



Changes in the Projected Benefit Obligations
 Pension
    
    
    Postretirement2005
    
    
    2004
    
    
    2005
    
    
    2004Obligation at beginning of year
    
    $
    1,252
    
    
    $
    1,129
    
    
    $
    379
    
    
    $
    312Service cost
    
    
    46
    
    
    
    43
    
    
    
    3
    
    
    
    4Interest cost
    
    
    75
    
    
    
    69
    
    
    
    22
    
    
    
    18Plan amendments
    
    
    21
    
    
    
    11
    
    
    
    8
    
    
    
    Actuarial (gain)/loss
    
    
    91
    
    
    
    48
    
    
    
    (1
    )
    
    
    19Benefit payments
    
    
    (54
    )
    
    
    (46
    )
    
    
    (27
    )
    
    
    (22
    )Special
termination benefits
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    LTD medical merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62Gain due to Medicare subsidy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )Transfers
    
    
    (1
    )
    
    
    (2
    )
    
    
    
    
    
    
    Obligation at end of year
    
    $
    1,439
    
    
    $
    1,252
    
    
    $
    384
    
    
    $
    379
 Changes in the Fair Value of Assets
 Pension
    
    
    Postretirement2005
    
    
    2004
    
    
    2005
    
    
    2004Fair value at beginning of year
    
    $
    1,025
    
    
    $
    809
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    135
    
    
    
    101
    
    
    
    
    
    
    
    Transfers
    
    
    (1
    )
    
    
    (2
    )
    
    
    
    
    
    
    Employer contributions
    
    
    44
    
    
    
    163
    
    
    
    27
    
    
    
    22Benefit payments
    
    
    (54
    )
    
    
    (46
    )
    
    
    (27
    )
    
    
    (22
    )Fair value at end of year
    
    $
    1,149
    
    
    $
    1,025
    
    
    $
    
    
    
    $
    
 Additional Plan Information
 Pension
    
    
    Postretirement2005
    
    
    2004
    
    
    2005
    
    
    2004Projected benefit obligation
    
    $
    1,439
    
    
    $
    1,252
    
    
    $
    384
    
    
    $
    379Accumulated benefit obligation
    
    $
    1,330
    
    
    $
    1,150
    
    
    $
    384
    
    
    $
    379Fair value of plan assets (1)
    
    $
    1,190
    
    
    $
    1,033
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Includes fourth quarter employer contributions.  Funded Status Recognized on the Consolidated Balance Sheets
 Pension
    
    
    Postretirement2005
    
    
    2004
    
    
    2005
    
    
    2004Funded status at end of year
    
    $
    (290
    )
    
    $
    (227
    )
    
    $
    (384
    )
    
    $
    (379
    )Unrecognized prior service cost
    
    
    64
    
    
    
    50
    
    
    
    2
    
    
    
    (6
    )Unrecognized loss
    
    
    474
    
    
    
    458
    
    
    
    137
    
    
    
    145Fourth quarter employer contribution
    
    
    41
    
    
    
    8
    
    
    
    6
    
    
    
    8Net amounts recognized
    
    $
    289
    
    
    $
    289
    
    
    $
    (239
    )
    
    $
    (232
    )
 60




---



##### Table of Contents



Net Amounts Recognized in the Consolidated Balance Sheets
 Pension
    
    
    Postretirement2005
    
    
    2004
    
    
    2005
    
    
    2004Other liabilities
    
    $
    (158
    )
    
    $
    (136
    )
    
    $
    (239
    )
    
    $
    (232
    )Intangible assets
    
    
    64
    
    
    
    50
    
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    383
    
    
    
    375
    
    
    
    
    
    
    
    Net amounts recognized
    
    $
    289
    
    
    $
    289
    
    
    $
    (239
    )
    
    $
    (232
    )Increase in minimum liability
included in accumulated other
comprehensive loss in Shareholders
Equity
    
    $
    8
    
    
    $
    29
    
    
    $
    
    
    
    $
    
  Assumptions
  Pension
    
    
    Postretirement2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Discount rate
    
    
    6.15
    %
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    6.15
    %
    
    
    6.25
    %
    
    
    6.75
    %Expected return on plan assets (1)
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ARate of compensation increase
    
    
    3.60
    %
    
    
    4.20
    %
    
    
    4.34
    %
    
    
    3.60
    %
    
    
    4.20
    %
    
    
    4.34
    %
 
 (1)
    
    Expected return on plan assets is presented after administration expenses.  Pension
    
    
    Postretirement2005
    
    
    2004
    
    
    2005
    
    
    2004Discount rate
    
    
    5.80
    %
    
    
    6.15
    %
    
    
    5.55
    %
    
    
    6.15
    %Rate of compensation increase
    
    
    3.53
    %
    
    
    3.60
    %
    
    
    3.53
    %
    
    
    3.60
    %
  Funding and Plan Assets
 Asset Category
    
    Allocation PercentageTarget
    
    
    Actual
    
    
    Actual2006
    
    
    2005
    
    
    2004Equity securities
    
    
    75
    %
    
    
    76
    %
    
    
    75
    %Debt securities
    
    
    25
    %
    
    
    24
    %
    
    
    25
    %
 61




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##### Table of Contents



Health Care Cost Trend Rates
   1%
    
    
    1%Increase
    
    
    DecreaseEffect on total fiscal year 2005 service and interest cost components
    
    $
    1
    
    
    $
    (1
    )Effect on the fiscal year 2005 accumulated postretirement benefit obligation
    
    $
    7
    
    
    $
    (7
    )
     Pension and Postretirement Cash Flow
  Employer Contributions to U.S. Plans
    
    Pension
    
    

Postretirement2004
    
    $
    81
    
    
    $
    222005
    
    $
    77
    
    
    $
    272006 (expected)
    
    $
    56
    
    
    $
    28
 62




---



##### Table of Contents



Expected Benefit Payments
  Pension
    
    PostretirementIncluding
    
    ExcludingMedicare
    
    MedicareExpected Benefit Payments
    
    
    
    
    
    Subsidy
    
    Subsidy2006
    
    $
    55
    
    
    $
    27
    
    
    $
    282007
    
    $
    60
    
    
    $
    26
    
    
    $
    272008
    
    $
    65
    
    
    $
    26
    
    
    $
    282009
    
    $
    69
    
    
    $
    27
    
    
    $
    282010
    
    $
    75
    
    
    $
    27
    
    
    $
    282011 to 2015
    
    $
    483
    
    
    $
    136
    
    
    $
    142
 Note 13Stock-Based Compensation Plans
   Restricted Stock and Restricted Stock Units
    Restricted Stock
    
    
    Restricted Stock UnitsGranted
    
    
    Weighted
    
    
    
    
    
    
    Granted
    
    
    Weighted
    
    
    Outstandingduring the
    
    
    -Average
    
    
    Outstanding
    
    
    during the
    
    
    -Average
    
    
    at yearyear
    
    
    Grant Price
    
    
    at year end
    
    
    year
    
    
    Grant Price
    
    
    end2005
    
    
    
    
    
    
    
    
    
    
    352,000
    
    
    
    538,000
    
    
    $
    28.12
    
    
    
    567,0002004
    
    
    45,000
    
    
    $
    24.25
    
    
    
    394,000
    
    
    
    3,000
    
    
    $
    30.25
    
    
    
    29,0002003
    
    
    350,000
    
    
    $
    23.48
    
    
    
    350,000
    
    
    
    1,000
    
    
    $
    18.25
    
    
    
    26,000
 63




---



##### Table of Contents



Stock Options
   Weighted-AverageExerciseOptions in millions
    
    Options
    
    
    PriceOutstanding at beginning of year
    
    
    38.4
    
    
    $
    20.35Granted
    
    
    7.9
    
    
    $
    28.24Exercised
    
    
    (6.8
    )
    
    $
    15.93Forfeited
    
    
    (1.4
    )
    
    $
    26.61Outstanding at end of year
    
    
    38.1
    
    
    $
    22.54Exercisable at end of year
    
    
    22.7
    
    
    $
    19.08Weighted-average fair value of options granted during the year
    
    
    
    
    
    $
    8.68
  Weighted-AverageExerciseOptions in millions
    
    Options
    
    
    PriceOutstanding at beginning of year
    
    
    41.3
    
    
    $
    17.19Granted
    
    
    7.1
    
    
    $
    29.54Exercised
    
    
    (9.3
    )
    
    $
    12.86Forfeited
    
    
    (0.7
    )
    
    $
    25.38Outstanding at end of year
    
    
    38.4
    
    
    $
    20.35Exercisable at end of year
    
    
    23.4
    
    
    $
    16.43Weighted-average fair value of options granted during the year
    
    
    
    
    
    $
    10.81
  Weighted-AverageExerciseOptions in millions
    
    Options
    
    
    PriceOutstanding at beginning of year
    
    
    37.4
    
    
    $
    15.53Granted
    
    
    8.1
    
    
    $
    23.27Exercised
    
    
    (3.1
    )
    
    $
    11.27Forfeited
    
    
    (1.1
    )
    
    $
    22.44Outstanding at end of year
    
    
    41.3
    
    
    $
    17.19Exercisable at end of year
    
    
    26.9
    
    
    $
    13.93Weighted-average fair value of options granted during the year
    
    
    
    
    
    $
    9.29
 64




---



##### Table of Contents



Options Outstanding
    
    
    Options ExercisableOptions in millionsWeighted-Average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Price
    
    Options
    
    
    Life In Years
    
    
    Price
    
    
    Options
    
    
    Price$9.38-$11.49
    
    
    3.1
    
    
    
    4.25
    
    
    $
    9.39
    
    
    
    3.1
    
    
    $
    9.39$11.50-$15.88
    
    
    4.9
    
    
    
    3.36
    
    
    $
    11.75
    
    
    
    4.9
    
    
    $
    11.75$15.89-$22.50
    
    
    5.9
    
    
    
    5.37
    
    
    $
    20.52
    
    
    
    5.7
    
    
    $
    20.57$22.51-$28.24
    
    
    10.6
    
    
    
    6.90
    
    
    $
    24.38
    
    
    
    7.4
    
    
    $
    24.57$28.25-$30.25
    
    
    13.6
    
    
    
    8.78
    
    
    $
    28.85
    
    
    
    1.6
    
    
    $
    29.5138.1
    
    
    
    6.66
    
    
    $
    22.54
    
    
    
    22.7
    
    
    $
    19.08
 Note 14Income Taxes
  2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    238
    
    
    $
    135
    
    
    $
    93Foreign
    
    
    26
    
    
    
    35
    
    
    
    12State
    
    
    26
    
    
    
    17
    
    
    
    8290
    
    
    
    187
    
    
    
    113Deferred:Federal
    
    
    (36
    )
    
    
    54
    
    
    
    74Foreign
    
    
    (19
    )
    
    
    (22
    )
    
    
    26State
    
    
    (10
    )
    
    
    9
    
    
    
    14(65
    )
    
    
    41
    
    
    
    114225
    
    
    
    228
    
    
    
    227International legal entity/debt restructuring reserves
    
    
    22
    
    
    
    30
    
    
    
    International tax rate change (benefit)/expense
    
    
    
    
    
    
    (26
    )
    
    
    11247
    
    
    
    232
    
    
    
    238Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (1
    )$
    247
    
    
    $
    232
    
    
    $
    237
  
    
    Valuation allowances  In the fourth quarter, we reversed valuation allowances resulting
in a $27 million tax benefit. These reversals were due in part to improved profitability
trends in Russia and a change to the Russia tax law that enables us to use a greater amount
of our Russian NOLs. Additionally, the implementation of U.S. legal
entity restructuring
contributed to the remainder of the valuation allowance reversal.
 65




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##### Table of Contents




    
    International legal entity/debt restructuring  In the fourth quarter, we completed the
reorganization of our international legal entity and debt structure to allow for more
efficient cash mobilization, to reduce taxable foreign exchange risks and to reduce
potential future tax costs. This reorganization resulted in a $22 million tax charge.
  
    
    International tax structure change  In December 2004, we initiated a reorganization of
our international tax structure to allow for more efficient cash mobilization and to reduce
future tax costs. This reorganization triggered a $30 million tax charge in the fourth
quarter, of which $14 million was recorded as part of our current provision and $16 million
was recorded in our deferred tax provision.
 
    
    Mexico tax rate change  In December 2004, legislation was enacted changing the Mexican
statutory income tax rate. This rate change decreased our net deferred tax liabilities and
resulted in a $26 million tax benefit in the fourth quarter.
 
    
    Tax reserves  During 2004, we adjusted previously established liabilities for tax
exposures due largely to the settlement of certain international tax audits. The
adjustment of these liabilities resulted in an $8 million tax benefit for the year.
   2005
    
    
    2004
    
    
    2003U.S.
    
    $
    588
    
    
    $
    550
    
    
    $
    533Foreign
    
    
    125
    
    
    
    139
    
    
    
    127Income before income taxes and
cumulative effect of change in
accounting
principle
    
    $
    713
    
    
    $
    689
    
    
    $
    660Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    (7)$
    713
    
    
    $
    689
    
    
    $
    653
  2005
    
    
    2004
    
    
    2003Income taxes computed at the U.S. federal statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net of federal tax benefit
    
    
    2.1
    
    
    
    2.2
    
    
    
    1.9Impact of foreign results
    
    
    (4.4
    )
    
    
    (10.4
    )
    
    
    (11.4
    )Change in valuation allowances, net
    
    
    (6.0
    )
    
    
    3.4
    
    
    
    5.6Nondeductible expenses
    
    
    1.8
    
    
    
    2.1
    
    
    
    1.9Qualified domestic production activity deduction
    
    
    (0.9
    )
    
    
    
    
    
    
    International tax audit settlements, net
    
    
    
    
    
    
    (1.2
    )
    
    
    Other, net
    
    
    4.1
    
    
    
    2.0
    
    
    
    1.431.7
    
    
    
    33.1
    
    
    
    34.4International legal entity/debt restructuring reserves
    
    
    3.0
    
    
    
    4.3
    
    
    
    International rate change (benefit)/expense
    
    
    
    
    
    
    (3.7
    )
    
    
    1.7Total effective income tax rate before cumulative effect of
change in accounting principle
    
    
    34.7
    %
    
    
    33.7
    %
    
    
    36.1
    %Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.2Total effective income tax rate
    
    
    34.7
    %
    
    
    33.7
    %
    
    
    36.3
    %
 66




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##### Table of Contents



2005
    
    
    2004Intangible assets and property, plant and equipment
    
    $
    1,627
    
    
    $
    1,575Other
    
    
    94
    
    
    
    112Gross deferred tax liabilities
    
    
    1,721
    
    
    
    1,687Net operating loss carryforwards
    
    
    (291
    )
    
    
    (356
    )Employee benefit obligations
    
    
    (196
    )
    
    
    (179
    )Bad debts
    
    
    (16
    )
    
    
    (17
    )Various liabilities and other
    
    
    (83
    )
    
    
    (91
    )Gross deferred tax assets
    
    
    (586
    )
    
    
    (643
    )Deferred tax asset valuation allowance
    
    
    228
    
    
    
    320Net deferred tax assets
    
    
    (358
    )
    
    
    (323
    )Net deferred tax liability
    
    $
    1,363
    
    
    $
    1,364Consolidated Balance Sheets ClassificationPrepaid expenses and other current assets
    
    $
    (61
    )
    
    $
    (51
    )Other assets
    
    
    (14
    )
    
    
    Accounts payable and other current liabilities
    
    
    17
    
    
    
    Deferred income taxes
    
    
    1,421
    
    
    
    1,415$
    1,363
    
    
    $
    1,364
       67




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##### Table of Contents



Note 15Geographic Data
  Net Revenues2005
    
    
    2004
    
    
    2003U.S.
    
    $
    8,438
    
    
    $
    7,818
    
    
    $
    7,406Mexico
    
    
    1,177
    
    
    
    1,071
    
    
    
    1,105Other countries
    
    
    2,270
    
    
    
    2,017
    
    
    
    1,754$
    11,885
    
    
    $
    10,906
    
    
    $
    10,265
 Long-Lived Assets2005
    
    
    2004U.S.
    
    $
    6,129
    
    
    $
    5,875Mexico
    
    
    1,478
    
    
    
    1,435Other countries
    
    
    1,505
    
    
    
    1,444$
    9,112
    
    
    $
    8,754
 Note 16Related Party Transactions
  (1)
    
    The master bottling agreement for cola beverages bearing the Pepsi-Cola and
Pepsi trademarks in the United States; master bottling agreements and
distribution agreements for non-cola products in the United States; and a master fountain
syrup agreement in the United States;(2)
    
    Agreements similar to the master bottling agreement and the non-cola agreements for
each country in which we operate, including Canada, Spain, Russia, Greece, Turkey and
Mexico, as well as a fountain syrup agreement for Canada, similar to the master syrup
agreement;(3)
    
    A shared services agreement where we obtain various services from PepsiCo, which
includes services for information technology maintenance and the procurement of raw
materials. We also provide services to PepsiCo, including facility and credit and
collection support. The amounts paid or received under this contract are equal to the
actual costs incurred by the company providing the service; and(4)
    
    Transition agreements that provide certain indemnities to the parties, and provide for
the allocation of tax and other assets, liabilities and obligations arising from periods
prior to the initial public offering. Under our tax separation agreement, PepsiCo maintains
full control and absolute discretion for any combined or consolidated tax filings for tax
periods ended on or before the date of our initial public offering.
  68




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Net revenues:Bottler incentives (a)
    
    $
    51
    
    
    $
    22
    
    
    $
    21Cost of sales:Purchases of concentrate and finished products,
and Aquafina royalty fees (b)
    
    $
    (2,993
    )
    
    $
    (2,741
    )
    
    $
    (2,527
    )Bottler incentives (a)
    
    
    559
    
    
    
    522
    
    
    
    527Manufacturing and distribution service reimbursements (c)
    
    
    
    
    
    
    
    
    
    
    6$
    (2,434
    )
    
    $
    (2,219
    )
    
    $
    (1,994
    )Selling, delivery and administrative expenses:Bottler incentives (a)
    
    $
    78
    
    
    $
    82
    
    
    $
    98Fountain service fee (d)
    
    
    183
    
    
    
    180
    
    
    
    200Frito-Lay purchases (e)
    
    
    (144
    )
    
    
    (75
    )
    
    
    (51
    )Shared services (f):Shared services expense
    
    
    (69
    )
    
    
    (68
    )
    
    
    (72
    )Shared services revenue
    
    
    8
    
    
    
    10
    
    
    
    10Net shared services
    
    
    (61
    )
    
    
    (58
    )
    
    
    (62
    )HFCS (h)
    
    
    23
    
    
    
    
    
    
    
    $
    79
    
    
    $
    129
    
    
    $
    185Income tax
benefit (g)
    
    $
    3
    
    
    $
    17
    
    
    $
    7
 (a) Bottler Incentives and Other Arrangements 
 (b) Purchase of Concentrate and Finished Product 
 (c) Manufacturing
and Distribution Service Reimbursements 
 (d) Fountain
Service Fee
 69




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##### Table of Contents



(e) Frito-Lay Purchases 
 (f) Shared
Services
 (g) Income
Tax Benefit
 (h) High
Fructose Corn Syrup (HFCS) Settlement  
  SoBe
    Note 17Contingencies
  70




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##### Table of Contents



Note 18Acquisitions
    
    
    Gaseosas, S.A. de C.V. of Mexicali, Mexico in March
    
    Seltzer and Rydholm, Inc. of Auburn, Maine in October
    
    Phil Gaudreault et Fils Ltee of Quebec, Canada in November
    
    Bebidas Purificada, S.A. de C.V. of Juarez, Mexico in November
  SoBe
 Note
19  Accumulated Other Comprehensive Loss
  2005
    
    
    2004
    
    
    2003Net currency translation adjustment
    
    $
    (46
    )
    
    $
    (111
    )
    
    $
    (195
    )Cash flow hedge adjustment (1)
    
    
    3
    
    
    
    10
    
    
    
    13Minimum pension liability adjustment (2)
    
    
    (219
    )
    
    
    (214
    )
    
    
    (198
    )Accumulated other comprehensive loss
    
    $
    (262
    )
    
    $
    (315
    )
    
    $
    (380
    )
 
 (1)
    
    Net of minority interest and taxes of $(2) million in 2005, $(7) million in 2004 and
$(9) million in 2003.(2)
    
    Net of minority interest and taxes of $164 million in 2005, $161 million in 2004
and $148 million in 2003. 71




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##### Table of Contents



Note 20Computation of Basic and Diluted Earnings Per Share
  2005
    
    
    2004
    
    
    2003Number of shares on which basic earnings
per share are based:Weighted-average outstanding during period
    
    
    243,461
    
    
    
    255,061
    
    
    
    269,933Add  Incremental shares under stock
compensation plans
    
    
    6,752
    
    
    
    8,423
    
    
    
    6,986Number of shares on which diluted
earnings per share are based:
    
    
    250,213
    
    
    
    263,484
    
    
    
    276,919Basic and diluted net income applicable to
common shareholders
    
    $
    466
    
    
    $
    457
    
    
    $
    416Basic earnings per share
    
    $
    1.91
    
    
    $
    1.79
    
    
    $
    1.54Diluted earnings per share
    
    $
    1.86
    
    
    $
    1.73
    
    
    $
    1.50
  Note 21Selected Quarterly Financial Data (unaudited)
 First
    
    
    Second
    
    
    Third
    
    
    Fourth2005
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Full YearNet revenues
    
    $
    2,147
    
    
    $
    2,862
    
    
    $
    3,214
    
    
    $
    3,662
    
    
    $
    11,885Gross profit
    
    
    1,031
    
    
    
    1,367
    
    
    
    1,519
    
    
    
    1,715
    
    
    
    5,632Operating income
    
    
    120
    
    
    
    303
    
    
    
    393
    
    
    
    207
    
    
    
    1,023Net income
    
    
    39
    
    
    
    148
    
    
    
    205
    
    
    
    74
    
    
    
    466
 First
    
    
    Second
    
    
    Third
    
    
    Fourth2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter (1),(2)
    
    
    Full YearNet revenues
    
    $
    2,067
    
    
    $
    2,675
    
    
    $
    2,934
    
    
    $
    3,230
    
    
    $
    10,906Gross profit
    
    
    1,016
    
    
    
    1,297
    
    
    
    1,412
    
    
    
    1,525
    
    
    
    5,250Operating income
    
    
    137
    
    
    
    286
    
    
    
    357
    
    
    
    196
    
    
    
    976Net income
    
    
    50
    
    
    
    142
    
    
    
    191
    
    
    
    74
    
    
    
    457
 
 (1)
    
    Includes Mexico tax law change benefit of $26 million and international tax
restructuring charge of $30 million.(2)
    
    Includes a $9 million non-cash impairment charge ($6 million net of tax and
minority interest) relating to our re-evaluation of the fair value of our franchise licensing agreement for the Squirt
trademark in Mexico. 72




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 73




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 74




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 8. Financial Statements and Supplementary Data
   
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
     75




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       
 76




---



##### Table of Contents



Changes in Internal Controls
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of PBG
 www.pbg.com
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  77




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##### Table of Contents



Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected inPlan Category
    
    and rights
    
    
    and rights
    
    

column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    35,754,810
    (1)
    
    
    22.81
    
    
    
    15, 941,667Equity compensation
plans not approved
by security holders
    
    
    2,877,834
    (2)
    
    
    14.77
    
    
    
    0
    (3)Total
    
    
    38,632,644
    
    
    
    22.21
    
    
    
    15,941,667
 
 (1)
    
    The securities reflected in this category are authorized for issuance (a) upon exercise of
awards granted under the Directors Stock Plan and the 2004 Long-Term Incentive Plan and (b)
upon exercise of awards granted prior to May 26, 2004 under the following PBG plans: (i) 1999
Long-Term Incentive Plan; (ii) 2000 Long-Term Incentive Plan and (iii) 2002 Long-Term
Incentive Plan. Effective May 26, 2004, no securities were available for future issuance under
the 1999 Long-Term Incentive Plan, the 2000 Long-Term Incentive Plan, or the 2002 Long- Term
Incentive Plan.(2)
    
    The securities reflected in this category are authorized for issuance upon exercise of awards
granted prior to May 26, 2004 under the PBG Stock Incentive Plan (the SIP). Effective May
26, 2004, no securities were available for future issuance under the SIP.(3)
    
    The 2004 Long-Term Incentive Plan and the Directors Stock Plan, both of which have been
approved by shareholders, are the only equity compensation plans that provide securities
remaining available for future issuance.  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  78




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
         79




---



##### Table of Contents



PageIndependent Auditors Report on Schedule (Deloitte & Touche LLP)
    
    
    F-2Independent Auditors Report on Schedule and Consent (KPMG LLP)
    
    
    F-3Schedule II  Valuation and Qualifying Accounts for the fiscal years endedDecember 31, 2005, December 25, 2004 and December 27, 2003
    
    
    F-4
   80




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##### Table of Contents



SIGNATURES
   The Pepsi Bottling Group, Inc.By:
    
    /s/ John T. CahillJohn T. CahillChairman and Chief Executive Officer
  SIGNATURE
    
    TITLE
    
    DATE/s/ John T. Cahill

John T. Cahill
    
    Chairman of the Board and
Chief Executive Officer
    
    February 23, 2006/s/ Alfred H. Drewes

Alfred H. Drewes
    
    Senior Vice President and
Chief Financial Officer
(Principal Financial
Officer)
    
    February 23, 2006/s/ Andrea L. Forster

Andrea L. Forster
    
    Vice President and
Controller (Principal
Accounting Officer)
    
    February 23, 2006/s/ Linda G. Alvarado

Linda G. Alvarado
    
    Director
    
    February 23, 2006/s/ Barry H. Beracha

Barry H. Beracha
    
    Director
    
    February 23, 2006/s/ Ira D. Hall

Ira D. Hall
    
    Director
    
    February 23, 2006/s/ Thomas H. Kean

Thomas H. Kean
    
    Director
    
    February 23, 2006/s/ Susan D. Kronick

Susan D. Kronick
    
    Director
    
    February 23, 2006/s/ Blythe J. McGarvie

Blythe J. McGarvie
    
    Director
    
    February 23, 2006/s/ Margaret D. Moore

Margaret D. Moore
    
    Director
    
    February 23, 2006/s/ John A. Quelch

John A. Quelch
    
    Director
    
    February 23, 2006
 S-1




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##### Table of Contents



SIGNATURE
    
    TITLE
    
    DATE/s/ Rogelio Rebolledo

Rogelio Rebolledo
    
    Director
    
    February 23, 2006/s/ Clay G. Small

Clay G. Small
    
    Director
    
    February 23, 2006
 S-2




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##### Table of Contents



INDEX TO FINANCIAL STATEMENT SCHEDULES
 PageIndependent Auditors Report on Schedule (Deloitte & Touche LLP)
    
    
    F-2Independent Auditors Report on Schedule and Consent (KPMG LLP)
    
    
    F-3Schedule II  Valuation and Qualifying Accounts for the fiscal years ended December 31, 2005,
December 25, 2004 and December 27, 2003
    
    
    F-4
 F-1




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##### Table of Contents



F-2




---



##### Table of Contents



Report and Consent of Independent Registered Public Accounting Firm
 
      F-3




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##### Table of Contents



ForeignBalance At Beginning
    
    Charged to Cost and
    
    
    
    
    
    Accounts Written
    
    Currency
    
    Balance At End OfOf Period
    
    Expenses
    
    Acquisitions
    
    Off
    
    Translation
    
    PeriodDescriptionFiscal Year
Ended
December 31, 2005Allowance
for losses
on trade
accounts
receivable
    
    $
    61
    
    
    $
    3
    
    
    $
    
    
    
    $
    (12
    )
    
    $
    (1
    )
    
    $
    51Fiscal Year
Ended
December 25, 2004Allowance
for losses
on trade
accounts
receivable
    
    $
    72
    
    
    $
    (5
    )
    
    $
    
    
    
    $
    (7
    )
    
    $
    1
    
    
    $
    61Fiscal Year
Ended
December 27, 2003Allowance
for losses
on trade
accounts
receivable
    
    $
    67
    
    
    $
    12
    
    
    $
    
    
    
    $
    (8
    )
    
    $
    1
    
    
    $
    72
 F-4




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##### Table of Contents



INDEX TO EXHIBITS
 EXHIBIT
 3.1
    
    Articles of Incorporation of The Pepsi Bottling Group, Inc. (PBG), which are incorporated
herein by reference to Exhibit 3.1 to PBGs Registration Statement on Form S-1 (Registration
No. 333-70291).3.2
    
    By-Laws of PBG, which are incorporated herein by reference to Exhibit 3.2 to PBGs
Registration Statement on Form S-1 (Registration No. 333-70291).3.3
    
    Amendment to Articles of Incorporation of PBG, which is incorporated herein by reference to
Exhibit 3.3 to PBGs Registration Statement on Form S-1 (Registration No. 333-70291).3.4
    
    Amendment to Articles of Incorporation of PBG dated as of November 27, 2001, which is
incorporated herein by reference to Exhibit 3.4 to PBGs Annual Report on Form 10-K for the
year ended December 29, 2001.4.1
    
    Form of common stock certificate, which is incorporated herein by reference to Exhibit 4 to
PBGs Registration Statement on Form S-1 (Registration No. 333-70291).4.2
    
    Indenture dated as of February 8, 1999 among Pepsi Bottling Holdings, Inc., PepsiCo, Inc., as
Guarantor, and The Chase Manhattan Bank, as trustee, relating to $1,000,000,000 5 3/8% Senior
Notes due 2004 and $1,300,000,000 5 5/8% Senior Notes due 2009, which is incorporated herein
by reference to Exhibit 10.9 to PBGs Registration Statement on Form S-1 (Registration No.
333-70291).4.3
    
    First Supplemental Indenture dated as of February 8, 1999 among Pepsi Bottling Holdings,
Inc., Bottling Group, LLC, PepsiCo, Inc. and The Chase Manhattan Bank, as trustee,
supplementing the Indenture dated as of February 8, 1999 among Pepsi Bottling Holdings, Inc.,
PepsiCo, Inc. and The Chase Manhattan Bank, as trustee, which is incorporated herein by
reference to Exhibit 10.10 to PBGs Registration Statement on Form S-1 (Registration No.
333-70291).4.4
    
    Indenture, dated as of March 8, 1999, by and among PBG, as obligor, Bottling Group, LLC, as
guarantor, and The Chase Manhattan Bank, as trustee, relating to $1,000,000,000 7% Series B
Senior Notes due 2029, which is incorporated herein by reference to Exhibit 10.14 to PBGs
Registration Statement on Form S-1 (Registration No. 333-70291).4.5
    
    U.S. $500,000,000 5-Year Credit Agreement dated as of April 28, 2004 among The
Pepsi Bottling Group Inc., Bottling Group, LLC, JP Morgan Chase Bank as Agent, Banc of
America Securities LLC and Citigroup Global Markets Inc., as Joint Lead Arrangers and
Book Managers and Bank of America, N.A., Citicorp USA, Inc., Credit Suisse First Boston and
Deutsche Bank Securities Inc., as Syndication Agents, which is incorporated herein by
reference to Exhibit 4.1 to PBGs Quarterly Report on Form 10-Q for the quarter ended June 12,
2004.4.6
    
    Indenture, dated as of November 15, 2002, among Bottling Group, LLC, PepsiCo, Inc., as
Guarantor, and JPMorgan Chase Bank, as Trustee, relating to $1 Billion 4- 5/8 % Senior
Notes due November 15, 2012, which is incorporated herein by reference
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to Exhibit 4.8 to PBGs Annual Report on Form 10-K for the year ended December 28,
2002.4.7
    
    Registration Rights Agreement, dated as of November 7, 2002 relating to the $1 Billion
4- 5/8 % Senior Notes due November 15, 2012, which is incorporated herein by reference
to Exhibit 4.9 to PBGs Annual Report on Form 10-K for the year ended December 28, 2002.4.8
    
    Indenture, dated as of June 10, 2003 by and between Bottling Group, LLC, as Obligor, and
JPMorgan Chase Bank, as Trustee, relating to $250,000,000 4- 1/8 % Senior Notes due
June 15, 2015, which is incorporated herein by reference to Exhibit 4.1 to Bottling Group,
LLCs registration statement on Form S-4 (Registration No. 333-106285).4.9
    
    Registration Rights Agreement dated June 10, 2003 by and among Bottling Group, LLC, J.P.
Morgan Securities Inc., Lehman Brothers Inc., Banc of America Securities LLC, Citigroup Global
Markets Inc, Credit Suisse First Boston LLC, Deutsche Bank Securities Inc., Blaylock &
Partners, L.P. and Fleet Securities, Inc, relating to $250,000,000 4- 1/8 % Senior
Notes due June 15, 2015, which is incorporated herein by reference to Exhibit 4.3 to Bottling
Group, LLCs registration statement on Form S-4 (Registration No. 333-106285).4.10
    
    Indenture, dated as of October 1, 2003, by and between Bottling Group, LLC, as Obligor, and
JPMorgan Chase Bank, as Trustee, which is incorporated herein by reference to Exhibit 4.1 to
Bottling Group, LLCs Form 8-K dated October 3, 2003.4.11
    
    Form of Note for the $500,000,000 2.45% Senior Notes due October 16, 2006, which is
incorporated herein by reference to Exhibit 4.2 to Bottling Group, LLCs Form 8-K dated
October 3, 2003.4.12
    
    Form of Note for the $400,000,000 5.00% Senior Notes due November 15, 2013, which is
incorporated herein by reference to Exhibit 4.1 to Bottling Group, LLCs Form 8-K dated
November 13, 2003.10.1
    
    Form of Master Bottling Agreement, which is incorporated herein by reference to Exhibit 10.1
to PBGs Registration Statement on Form S-1 (Registration No. 333-70291).10.2
    
    Form of Master Syrup Agreement, which is incorporated herein by reference to Exhibit 10.2 to
PBGs Registration Statement on Form S-1 (Registration No. 333-70291).10.3
    
    Form of Non-Cola Bottling Agreement, which is incorporated herein by reference to Exhibit
10.3 to PBGs Registration Statement on Form S-1 (Registration No. 333-70291).10.4
    
    Form of Separation Agreement, which is incorporated herein by reference to Exhibit 10.4 to
PBGs Registration Statement on Form S-1 (Registration No. 333-70291).10.5
    
    Form of Shared Services Agreement, which is incorporated herein by reference to Exhibit 10.5
to PBGs Registration Statement on Form S-1 (Registration No. 333-70291).
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##### Table of Contents



10.6
    
    Form of Tax Separation Agreement, which is incorporated herein by reference to Exhibit 10.6
to PBGs Registration Statement on Form S-1 (Registration No. 333-70291).10.7
    
    Form of Employee Programs Agreement, which is incorporated herein by reference to Exhibit
10.7 to PBGs Registration Statement on Form S-1 (Registration No. 333-70291).10.8
    
    PBG Executive Income Deferral Plan, which is incorporated herein by reference to Exhibit 10.8
to PBGs Annual Report on Form 10-K for the year ended December 25, 1999.10.9
    
    PBG 1999 Long-Term Incentive Plan, which is incorporated herein by reference to Exhibit 10.9
to PBGs Annual Report on Form 10-K for the year ended December 25, 1999.10.10
    
    PBG Directors Stock Plan, which is incorporated herein by reference to Exhibit 10.10 to
PBGs Annual Report on Form 10-K for the year ended December 25, 1999.10.11
    
    PBG Stock Incentive Plan, which is incorporated herein by reference to Exhibit 10.11 to
PBGs Annual Report on Form 10-K for the year ended December 25, 1999.10.12
    
    Amended PBG Executive Income Deferral Program, which is incorporated herein by reference to
Exhibit 10.12 to PBGs Annual Report on Form 10-K for the year ended December 30, 2000.10.13
    
    PBG Long Term Incentive Plan, which is incorporated herein by reference to Exhibit 10.13 to
PBGs Annual Report on Form 10-K for the year ended December 30, 2000.10.14
    
    PBG Directors Stock Plan, which is incorporated by reference to Exhibit 10.14. to PBGs
Annual Report on Form 10-K for the year ended December 29, 2001.10.15
    
    Amendment No. 1 to the PBG Directors Stock Plan, which is incorporated herein by reference
to Exhibit 10 to PBGs Quarterly Report on Form 10-Q for the quarter ended June 14, 2003.10.16
    
    2002 PBG Long-Term Incentive Plan, which is incorporated by reference to Exhibit 10.15. to
PBGs Annual Report on Form 10-K for the year ended December 28, 2002.10.17
    
    Form of Mexican Master Bottling Agreement, which is incorporated by reference to Exhibit
10.16. to PBGs Annual Report on Form 10-K for the year ended December 28, 2002.10.18
    
    PBG 2004 Long-Term Incentive Plan which is incorporated herein by reference to Appendix B to
PBGs Proxy Statement for the 2004 Annual Meeting of Shareholders.10.19
    
    Form of Employee Restricted Stock Agreement under the PBG 2004 Long-Term Incentive Plan,
which is incorporated herein by reference to Exhibit 10.1 to PBGs Quarterly Report on Form
10-Q for the quarter ended September 4, 2004.
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##### Table of Contents



10.20
    
    Form of Employee Stock Option Agreement under the PBG 2004 Long-Term Incentive Plan, which
is incorporated herein by reference to Exhibit 10.2 to PBGs Quarterly Report on Form 10-Q for
the quarter ended September 4, 2004.10.21
    
    Form of Non-Employee Director Annual Stock Option Agreement under the PBG Directors Stock
Plan which is incorporated herein by reference to Exhibit 10.3 to PBGs Quarterly Report on
Form 10-Q for the quarter ended September 4, 2004.10.22
    
    Form of Non-Employee Director Restricted Stock Agreement under the PBG Directors Stock
Plan, which is incorporated herein by reference to Exhibit 10.4 to PBGs Quarterly Report on
Form 10-Q for the quarter ended September 4, 2004.10.23
    
    PBG Executive Incentive Compensation Plan which is incorporated herein by reference
to Exhibit B to PBGs Proxy Statement for the 2000 Annual Meeting of Shareholders.10.24
    
    Summary of the material terms of the PBG Executive Incentive Compensation Plan, which is
incorporated herein by reference to Exhibit 10.6 to PBGs Quarterly Report on Form 10-Q for
the quarter ended September 4, 2004.10.25
    
    Description of the compensation paid by PBG to its non-management directors which is
incorporated herein by reference to the Directors Compensation section in PBGs Proxy
Statement for the 2004 Annual Meeting of Shareholders, as updated by the Form 8-K filed on
January 31, 2005.10.26
    
    Form of Director Indemnification, which is incorporated herein by reference to Exhibit 10.1
to PBGs Quarterly Report on Form 10-Q for the quarter ended June 11, 2005.10.27
    
    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).10.28
    
    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 Statement.10.29
    
    Settlement Agreement between Bottling Group, LLC and PepsiCo, Inc. dated June 28, 2005,
which is incorporated herein by reference to Exhibit 10.4 to PBGs Quarterly Report on Form
10-Q for the quarter ended June 11, 2005.10.30
    
    Form of Employee Restricted Stock Unit Agreement which is incorporated herein by reference
to Exhibit 10.1 to PBGs Quarterly Report on Form 10-Q for the quarter ended September 3,
2005.10.31*
    
    Amended and Restated PBG Directors Stock Plan.10.32*
    
    Form of Non-Employee Director Restricted Stock Unit Agreement under the Amended and Restated
PBG Directors Stock Plan.
 
 12*
    
    Statement re Computation of Ratios. E-4




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21*
    
    Subsidiaries of PBG.23.1*
    
    Report and Consent of KPMG LLP.23.2*
    
    Consent of Deloitte & Touche LLP24*
    
    Copy of Power of Attorney.31.1*
    
    Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2*
    
    Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1*
    
    Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.2*
    
    Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 
 *
    
    Filed herewith E-5