pepsi bottling AR_2005

Annual Report

2005

Number of Plants: 46 49 95

Number of Distribution Centers: 264 282 546

Number of Employees: 33,000 33,900 66,900

Percentage of Volume: 61% 39% 100%

U.S. Outside the U.S. Total

The Pepsi Bottling Group, Inc. is the worlds largest manufacturer, seller and distributor of carbonated and non-carbonated Pepsi-Cola beverages.

Trademark Mountain Dew

Trademark Pepsi

Aquafina

Other PepsiCo brands

Dr Pepper

Sierra MistOther Non-PepsiCo brandsLiptonSoBeTropicanaFrappuccino

Aqua Minerale

Other Non-PepsiCo brandsLipton

MirindaIVIFiestaFrukoYedigunTamek

Trademark Pepsi7Up

KAS

AquafinaTropicana

Other PepsiCo brands

Mexico Brand Mix*Trademark Pepsi

U.S. / Canada Brand Mix*

Europe Brand Mix*

7UpMirindaManzanita Sol

Squirt

Garci CrespoOther PepsiCo brandsOther Non-PepsiCo brands

Electropura

*Percent of total 2005 regional volume

PBG S&P 500

1

$ in millions, except per share data 2005 2004 2003

Net Revenues: $11,885 $10,906 $10,265

Operating Income: $ 1,023 $ 976 $ 956

Diluted EPS: $ 1.86 $ 1.73 $ 1.50

Pro Forma Diluted EPS:1 $ 1.86 $ 1.73 $ 1.56

Net Cash Provided by Operations: $ 1,219 $ 1,222 $ 1,075

Capital Expenditures: $ (715 $ (688 $ (635

Net Cash Provided by Operations,

less Capital Expenditures: $ 504 $ 534 $ 440

Fiscal year 2003 Diluted EPS of $1.50 was adjusted by adding $0.04 for the impact of a Canadian tax law change and $0.02 for the cumulativeeffect of change in accounting principle (impact of adoption of EITF 02-16). For additional information on the impact of EITF Issue No. 02-16,see page 57. For additional information on the Canadian tax law change, see page 68.

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)) )

Chairmans LetterPage 2

Full Speed AheadPage 4

Board of DirectorsPage 14

Corporate OfficersPage 15

Glossary of TermsPage 16

Form 10-KPage 17

Pro Forma Diluted Earnings Per Share$2.00

$1.75

$1.50

$1.25

$1.00

$0.75

$0.50

$0.25

$0.00 2005

$1.86$1.73

$1.56

20042003

Stock Price Performance

95

100

110

4th Qtr 2004

The performance graph above compares the cumulative total return of PBGs common stock to the S&P Stock Index on a calendar quarter basis.*

*

105

4th Qtr 20051st Qtr 2005 2nd Qtr 2005 3rd Qtr 2005

Dear PBG Shareholders,At PBG, speed is essential. Its embedded in our values. Its integral to our culture. Itcomes from understanding that every daypresents hundreds of thousands of chancesto win a new customer or satisfy an exist-ing customer. And PBG people know thoseopportunities become wins for the supplierwho moves the fastest to exceed cus-tomer and consumer desires. Full speedahead describes our approach to achievingour short-term goals and to developing ourlong-range plans.

In 2005, our business improved by everyfinancial measure a testament to ouremployees ability to focus and move forward. Although we faced significant costincreases in raw materials and fuel thatexerted pressure on our bottom line, westill delivered strong results. We believethat our ability to do so is evidence of ourstrength, our skill and our speed anunbeatable combination in the marketplaceand in our workplace.

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The Numbers: We Delivered in 2005 Topline growth was well-balancedbetween volume and net revenue per caseacross all our major territories

Adjusted operating profit growth was four percent*

Operating free cash flow (net cash provided by operations less capital spend-ing) was $504 million

More than $550 million was returned toshareholders through dividends and sharere-purchases

Stock price growth was six percent double the performance of the S&P 500

Topline Growth a True Balancing ActIn 2005, both our constant territory volumeand reported net revenue per case grew a healthy four percent worldwide. TheUnited States made a great showing anddelivered two percent volume gains andthree percent net revenue per case gains.

In 2005, we were everywhere consumerswere. Again this year we capitalized onconsumer interest in health and wellness,with a great variety of low and no-calorieentries. Our Diet CSD portfolio was upthree percent at year end, and TrademarkAquafina saw gains of more than 30 percent, helped by the addition of AquafinaFlavorSplash. Other non-carbonated beverages were up nine percent, and our Lipton trademark performed extremely

well with a product platform that incorpo-rates premium, popular and value products.In the energy category we posted double-digit gains. And we continued to capitalizeon the shift to flavored CSDs with our popular Tropicana Twister line. Our packageofferings addressed portion sizes, portabil-ity and varying price points. We rolled out a 12-ounce bottled multipack Fridgemate for both Aquafina and CSDs and we alsolaunched half-liter 12 packs for non-carbs.

While consumers still do most of theirshopping for beverages in foodstores, theiron the go lifestyles dictate that they shopin many other locations as well, and weremoving with them in club stores andmass merchandisers, in dollar stores and in foodservice. In 2005, we made gainsacross the board in these growth channels.

In Canada, we posted our most balancedtopline growth in the past five years. Wegrew our cold drink business by more thantwo percent, fueled by innovation in bothproducts and promotions. And we built onour share leadership with our three corebrands Pepsi, Diet Pepsi and 7UP.

In Mexico, our volume grew five percent,lifted by our water business, which showedvery strong growth. Jug water was up 11 percent, helped in part by the addition of home delivery, and our bottled water,EPura, continued to attract consumers withits new brand and positioning, and was up 13 percent at year end. In Mexico City,we faced increased competitive activityfrom low-cost flavor brands. As the yeardrew to a close, we took a number of pricing and package-size actions to

enable us to regain our footing. We sell 75 percent of our carbonated soft drinksoutside of the metropolitan area of MexicoCity, and that part of our business grew two percent. Overall in Mexico, our CSDgrowth was down one percent on a physical case basis, up one percent on an eight-ounce basis.

Europe turned in strong overall toplineresults. In Spain, we had challenges from a soft pricing environment and heightenedcompetitive activity in major retailers.These factors led to profit erosion in thatcountry. This was mitigated by solid performances in Russia and Turkey, which generated growth by focusing on the Pepsitrademark and our non-carb portfolio. Inthose countries, we spent considerabletime and energy ensuring that our go tomarket approach was at its most effective.In Russia, we converted more routes todirect store delivery, and in Turkey, we continued to consolidate third-party distributors and migrate selling activities to our own employees. These changes are enabling us to have more control of the point of sale and to provide better customer service.

Investing for GrowthIn 2005, we concentrated $48 million ofstrategic investments on key productivityinitiatives, including restructuring in Europe,I/T enhancements, and the most importantarea the launch and rollout of our newservice initiative, Customer Connect. Thiseffort is designed to address our customersmost pressing issues by minimizing out of stocks, providing service as scheduled,

improving weekend service and ensuringquick resolution of any issues that mayarise. Customer Connect involves new technologies and new processes that willstrengthen the impact of our customer service across the business in the U.S. and Canada.

We were honored in April when we received recognition from our largest customer, Wal-Mart. They chose us asBottler of the Year from among all thedistributors of soft drinks, water, beer, wine,liquor and other beverage categories thatserve their business. We expect thatCustomer Connect will help us strengthenour partnerships and service levels with all our customers, and look forward tobringing its full power to bear in 2006.

Continued Emphasis on DiversityWe continue to focus on the multi-culturalmarkets in PBG and the best way to ensurethat our products, promotions and serviceresonate with different audiences.Borrowing on the significant equity wevebuilt with Manzanita Sol, Pepsis apple-flavored carbonated soft drink in Mexico, in September, we introduced the product to all of our U.S. markets with significantLatino populations. This is a good exampleof our ongoing work to appeal to an important and growing segment of the U.S. population.

We also emphasize the importance ofstaffing with diversity across our organiza-tion, from the Board of Directors to thefrontline, and we continue to makeprogress. In 2005, we received recognitionfrom two important publications, Black

Enterprise and Diversity Inc., acknowledg-ing our efforts and our results. Diversity Inc.ranked PBG 14th among the top 50 companies in the U.S. for diversity, andBlack Enterprise chose PBG as one of the30 best companies for diversity in its inaugural listing.

A New Chief Operating OfficerEric Foss, who has been in the Pepsi system for more than 20 years, assumedthe position of Chief Operating Officer,adding corporate strategy, worldwide manufacturing operations and informationtechnology to his ongoing responsibility for our businesses in the U.S. and Canada.Eric is a great partner for me and a big reason for PBGs continuing success.

The Future is BrightIn 2006, we are poised for another strongyear. We expect to begin realizing the benefits of our investments in CustomerConnect in the U.S. and Canada. We alsoplan to continue improvements in our go-to-market restructuring and cost productivityefforts in Europe. We will move forwardwith the actions we are taking in MexicoCity to make us more competitive. At PBG,a bias toward action is built into our DNA.We intend to move full speed ahead as always, to capitalize on the advantagesof our category, our capability and our commitment to deliver another year of outstanding results for our shareholders, for our customers and for all our employees.

John T. CahillChairman of the Board andChief Executive Officer

*See non-GAAP measurements and adjusted results in Items That Affect Historical or Future Comparability on page 32.

t the core of PBGs business are the products wesell some of the worlds best-known brands thatspan virtually every liquid refreshment beveragecategory. Pepsi-Cola, a household name and still our biggest seller, is the kingpin of an ever-expanding family of favorites. Sierra Mist celebrated its third birthday in 2005 as our national lemon-lime soda, and Mountain Dewremained the favorite neon with a commanding

Near right: Aquafina is the leading national bottled water in the U.S., growing more than 30 percent in 2005.

Far right: With its big, established trademark, the line of Tropicana juice drinks has been a strong player for PBG in this fast-growing category.

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Bulk Driver Sonny Armijo putsMountain Dew in its place amongour core brands in this super-market beverage aisle. OriginalMountain Dew gained momentumin 2005, with Diet Dew growing at more than eight percent for the year.

lead across channels. Internationally, our carbon-ated portfolio includes 7Up, KAS and Mirinda,along with numerous regional favorites.

PBGs non-carbonated brand mix is rich and bringsus a great marketplace advantage. In the U.S., weboast the leading national bottled water brand,Aquafina, while in Russia, our Aqua Mineralewater is a powerhouse brand and a strong growthengine. In Mexico, we sell the leading jug water,Electropura, along with EPura bottled water.Tropicana juice drinks, in year two as part of thePepsi family, have added one of the most recog-nized and trusted trademarks to our lineup. Ourbottled Lipton teas are top sellers in the U.S., andlead their category in Russia,Turkey and Greece.Starbucks Frappuccino holds its place as the out-right leader in U.S. ready-to-drink coffee bever-ages, dominating the category. Among healthyrefreshment beverages, SoBe with its growinglist of varieties remains a standout brand.

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The brands we sell are built to move fromPepsiCos research and development, to the plantswhere we produce them, to the hundreds of thousands of locations worldwide where we sell,deliver and display them. Weve watched thesebrands move into the lives and hearts of our consumers at meal time, play time and in theworkplace. In 2005 they did so at a healthy pace,telling us, our shareholders and our customersthat were moving in the right direction.

hrough their purchasing patterns, consumers have made it very clear they want greater beveragevariety and options that suit their lifestyles andtastes. With an ever-expanding product portfolioand the powerful system to bring it to market, PBG is ideally positioned to satisfy the needs of an evolving marketplace.

Carbonated beverages are still the largest portionof our sales, with wide appeal across cultures andgenerations. To keep that category top of mind forconsumers, we brought numerous cola line exten-sions to market in 2005. In the U.S. and Canada,we introduced Pepsi Lime and its diet version and relaunched regular and Diet Wild Cherry Pepsiwith a new look and taste. In Russia, consumerswere treated to Pepsi Ice Cream and PepsiCappuccino, and in Mexico, Pepsi Fire and PepsiClear. Mountain Dew spawned MDX a first-of-its-kind drink that straddles both the energy andsoda categories. Tropicana Twister, a fruit-flavoredsoda, was launched nationwide in the U.S. in 2005, fueled by its popular trademark.

As health and wellness trends build, PBG capturedsales in virtually every related category. Weenhanced our bottled water selection in the U.S.and Canada with Aquafina FlavorSplash. In Mexico,we introduced Aguas Frescas and EPura Essentialsflavored waters, in addition to Sunlight low-caloriebeverages. Responding to the growing popularity

of tea and news of its health benefits, we addedmore flavors to our Lipton lineup, and offered ourbrewed tea products in a convenient 20-ounceplastic bottle and 1/2-liter multi-packs. Russia ran with the new Lipton Red an energy teathat helped double the brands volume in 2005. To our selection of energy drinks the fastest-growing and a highly profitable beverage category we added SoBe NoFear, which quickly becameour number one energy brand.

The amount of innovation we bring to our customers each year and the speed at which we do it clearly distinguish PBG. While were keeping pace with consumers, were clearly setting the pace for our industry.

Upper left: It was another year of double-digit water growth in Mexico. Our EPura bottled watergrew 13 percent, while Electropura jug water was up 11 percent versus 2004.

Far left: PBG introduced Tropicana juices to theRussia market in 2004, and the brand has continued to thrive there, growing by more than 70 percent in 2005.

Left: To capitalize on the growth of non-carbonatedbeverages in Mexico, PBG introduced Aguas Frescasflavored waters and Sunlight low-calorie drinks, inaddition to other new entries.

PBG is well-positioned to capitalizeon the worldwide energy drink phenomenon. In 2005 more SoBeAdrenaline Rush was sold in Russiathan in any other country outsidethe U.S.

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he hallmarks of PBGs direct store delivery (DSD)system are speed, flexibility and reach all criticalfactors in bringing new products to market, addingaccounts to our base and meeting increasing volume demands.

Introducing a new product overnight oncedeemed an exceptional feat of logistics is now awell-coordinated routine for PBGs manufacturing,sales and distribution teams. In 2005, we rollednearly 100 new products and packages into the

U.S. and Canada markets, and many in our othergeographies, as well. With our DSD system comesPBGs own team of merchandisers, who build thehigh-impact displays that stop shoppers in theirtracks a time and resource saver for customers.

In our international markets, DSD brings a tremen-dous advantage to our business. Few companieshave both the agility to access up and down thestreet outlets in urban markets, and the power tohandle the size and pace of the rapidly growingmodern trade. In Russia, Spain, Greece and Turkey,we serve thousands of traditional outlets and anexpanding network of superstores, through a combination of DSD and third-party contractors tailored to each market.

T

Far left: We continued to expand DSD capability in areas of Russia where the demand and economics were appropriate. In 2005, the numberof DSD accounts in Russia grew by more than 10 percent. PBG delivers both beverages and Frito-Lay brand snacks to many of those customers.

Above: Bulk Driver Corey Diaz offloads product for her customer - arriving at the time her customer expected his delivery.

Overall, in 2005 our plants operatedat their highest quality levels ever several of them ranking among thebest in the worldwide Pepsi system.

Because DSD gives PBG control of every stepalong the supply chain, we can offer our customers quality assurance from production tofinal delivery. In 2005, PBGs plants once againexceeded their previous years performance. Wewere able to meet the growing volume and speeddemands of our business, while turning in ourbest-ever levels of product quality.

Timing may be everything, but only when it bringsthe promise of excellence with it. Fortunately forour customers and consumers, we meet theneed for both.

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s shoppers spend more time away from home and more money in emerging channels, PBG goeswhere the growth is. In the U.S., that means torestaurants, supercenters, the travel and leisure category, and club and dollar stores. In 2005, oursales in these non-measured channels substan-tially outpaced those in traditional retail outlets.

The foodservice channel is particularly important tothe beverage business. Today, more food dollars in the U.S. and Canada are already spent on away-from-home meals. We want the drinks thataccompany those meals to be ours. As a result, PBGhas re-energized its foodservice team with a focuson pursuing restaurants, workplaces, campuses andleisure locations. In 2005, we achieved solid growthin every one of those categories, and set the stagefor a promising 2006. By leveraging the advantagesof our broad product portfolio and our customerservice agenda, we secured a number of new contracts including Hershey Entertainment andResorts, the University of Florida and RutgersUniversity, Quiznos Sub shops and a renewal withthe Dallas Fort Worth Airport.

The increasing consumer diversity in our largestmarket, the U.S., also generates new selling oppor-tunities. Our multi-cultural advertising, promotionalmaterials and products, such as Manzanita Sol, an apple-flavored soda and a mainstay of ourMexico portfolio, have helped PBG gain access to the fastest-growing ethnic groups in the neighborhood markets and outlets they prefer.

In Mexico, PBG added more than 10,000 new cus-tomers to our account base across the traditional,up and down the street businesses and the modern trade, and grew our base of cold drinkequipment by nearly 10 percent. And in Russia, our sales force secured new access points and posted growth across all channels, led by double-digit increases in modern trade and kiosk sales.

The Russian team gained substantial space insome of the biggest and fastest-growing retailers,including the Ramstore and Magnit chains.

Gaining distribution points for our products willalways be paramount for PBG because we knowthat every shelf, display, cooler, vendor or fountainwe win leads to refreshment when andwhere its needed.

Top Right: Manzanita Sol, a flavored soda onceoffered only in our Mexico market, is now availablein markets in the U.S. with a large number of Latinos,including Phoenix, Arizona.

Bottom right: A young consumer finds his beverage of choice Aquafina in this local sports center,where he and his teammates can choose from thebroad variety in the bank of PBG vending machines.

PBG added home delivery ofElectropura jug water to more than250 delivery routes in Mexico City,growing the brand's household penetration by offering conven-ience to consumers.

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Above: Merchandiser Stacey Lowdermilk replenishes the beverage aisle with enough product to avoid an out of stock occurrence in her retail account.

Far left: PBG Checker Raymond Cane certifies a pallet of product for 100 percent accuracy before it is loaded for delivery, ensuring our drivers arrive with the right stock and generate a correct invoice.

n 2005, we laid the foundation for big improve-ments in customer service that provide our salesforce more time to sell and serve their accounts

I

Early results of these investments in technology,processes and people show we are on track tomeet our goals: to have our products in the storeand our sales reps with our customers at the timethey are needed. Because when it comes to thebeverage business, being there for the sale is what counts.

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Across our U.S. grocery accounts, in 2005 we again demonstrated our in-store executional excellence by outperforming our chief competitor with total inventory on display. Here, Aaron Spencer, CustomerRepresentative, updates a customer about the performance of Pepsi Lime in his store.

and will ultimately contribute to our growth. All of these efforts are geared toward ensuring ourproducts are in stock at all times so that our customers and we never miss an opportunity to quench a thirst or complete a meal.

Our service work included the launch of proprietaryhandheld computer software to help our sales teamcreate more accurate orders. By using historicalsales data and anticipating marketplace conditions,the new application decreases the occurrence ofout of stocks, the number one issue for our customers. Processes and tools introduced into ourU.S. warehouses in 2005 enable more accurate pallet-building, ensuring that what our customersordered is exactly what is delivered and billed. We committed to stringent parameters and tightertimeframes for delivering equipment and respond-ing to customer issues, so we dont lose a customer or a sale to a competitor.

Nearly all of PBGs U.S. employees in 2005 wereeducated about the most critical needs of our customers and how superior service can become a competitive advantage for PBG. Our Canadianemployees will go through the same trainingprocess in 2006.

Linda G. Alvarado, 53, was elected to PBGsBoard in March 1999. She is the President and Chief Executive Officer of AlvaradoConstruction, Inc., a general contracting firmspecializing in commercial, industrial, environ-mental and heavy engineering projects, a position she assumed in 1976. Ms. Alvarado is also a director of Pitney Bowes, Inc., Qwest Communications International, Inc.,Lennox International and 3M Company.

Ira D. Hall, 61, was elected to PBGs Board in March 2003. From 2002 until his retirementin late 2004, Mr. Hall was President and Chief Executive Officer of Utendahl CapitalManagement, LP. From 1999 to 2001, Mr. Hallwas Treasurer of Texaco Inc. and GeneralManager, Alliance Management for Texaco Inc.from 1998 to1999. Mr. Hall is also a director of Ameriprise Financial, Inc., Praxair, Inc. andThe Reynolds and Reynolds Company.

Blythe J. McGarvie, 49, was elected to PBGs Board in March 2002. She is President of Leadership for International Finance, a private consulting firm providing leadershipseminars for corporate and academic groups.From 1999 to December 2002, Ms. McGarviewas Executive Vice President and Chief

Financial Officer of BIC Group. From 1994 to1999, she served as Senior Vice President andChief Financial Officer of Hannaford Bros. Co.Ms. McGarvie is a Certified Public Accountantand is a director of Accenture Ltd., LafargeNorth America, Inc. and The St. Paul TravelersCompanies, Inc.

Barry H. Beracha, 64, was elected to PBGsBoard in March 1999. Prior to his retirement in June 2003, Mr. Beracha most recently servedas an Executive Vice President of Sara LeeCorporation and Chief Executive Officer of Sara Lee Bakery Group since August 2001.Mr. Beracha was the Chairman of the Boardand Chief Executive Officer of The EarthgrainsCompany from 1993 to August 2001. Mr.Beracha is also a director of McCormick & Co.,Inc. and Chairman of the Board of Trustees of St. Louis University.

Thomas H. Kean, 70, was elected to PBGsBoard in March 1999. Mr. Kean heads THKConsulting, LLC, a private consulting firm.Previously, Mr. Kean served as the President of Drew University from 1990 to 2005 and was the Governor of the State of New Jerseyfrom 1982 to 1990. Mr. Kean is also a directorof Amerada Hess Corporation, AramarkCorporation, CIT Group, Inc., Franklin

Resources, Inc. and UnitedHealth Group, Inc. He was also Chairman of The NationalCommission on Terrorist Attacks Upon theUnited States.

Rogelio Rebolledo, 61, was elected to PBGs Board in May 2004 and was appointedPresident and Chief Executive Officer of PBGMexico in January 2004. From 2000 to 2003,Mr. Rebolledo was President and ChiefExecutive Officer of Frito-Lay International(FLI), a subsidiary of PepsiCo, Inc., operatingin Latin America, Asia Pacific, Australia,Europe, the Middle East and Africa. In May2006, he will become a director of ApplebeesInternational, Inc.

Susan D. Kronick, 54, was elected to PBGsBoard in March 1999. Ms. Kronick became Vice Chairman of Federated Department Storesin February 2003. Previously, she had beenGroup President of Federated DepartmentStores since April 2001. From 1997 to 2001,Ms. Kronick was the Chairman and ChiefExecutive Officer of Burdines, a division ofFederated Department Stores.

John T. Cahill, 48, was elected to PBGs Boardin January 1999 and became Chairman of theBoard in January 2003. He has been PBGsChief Executive Officer since September 2001.Previously, Mr. Cahill served as President andChief Operating Officer of PBG. He served asPBGs Executive Vice President and ChiefFinancial Officer from 1998 to August 2000prior to becoming President and ChiefOperating Officer in August 2000. Mr. Cahill is also a director of the Colgate-PalmoliveCompany.

John A. Quelch, 54, was elected to PBGsBoard in January 2005. Mr. Quelch has beenSenior Associate Dean and Lincoln FileneProfessor of Business Administration at Harvard Business School since 2001. From 1998to 2001, Mr. Quelch was Dean of the LondonBusiness School. Prior to that, he was anAssistant Professor, an Associate Professor anda full Professor of Business Administration atHarvard Business School from 1979 to 1998.Mr. Quelch is also a Director of WPP Group plcand Inverness Medical Innovations, Inc.

Margaret D. Moore, 58, was elected to PBGsBoard in January 2001. Ms. Moore is SeniorVice President, Human Resources of PepsiCo, a position she assumed at the end of 1999.From November 1998 to December 1999, shewas Senior Vice President and Treasurer ofPBG. Prior to joining PBG, Ms. Moore spent 25 years with PepsiCo in a number of seniorfinancial and human resources positions.

Clay G. Small, 56, was elected to PBGs Boardin May 2002. Mr. Small is Senior Vice Presidentand Managing Attorney of PepsiCo, Inc. From1997 to February 2004, he was Senior VicePresident and General Counsel of Frito-Lay, Inc.,a subsidiary of PepsiCo. Mr. Small joinedPepsiCo as an attorney in 1981. He served asVice President and Division Counsel of thePepsi-Cola Company from 1983 to 1987 andSenior Vice President and General Counsel of Pizza Hut, Inc. from 1987 to 1997.

From left to right:

Committees:1 Nominating and Corporate Governance Committee2 Audit and Affiliated Transactions Committee3 Compensation and Management Development Committee

1,3

14 15

2,3

2,3

2,3

1,3

2,3

1,3

John L. BerisfordSenior Vice President ofHuman Resources17 years

Neal A. BronzoSenior Vice President andChief Information Officer15 years

John T. CahillChairman and Chief Executive Officer16 years

Alfred H. DrewesSenior Vice President and Chief Financial Officer24 years

Andrea L. ForsterVice President and Controller18 years

Eric J. FossChief Operating Officer23 years

Robert C. KingPresident, North American Field Operations16 years

Yiannis PetridesPresident, PBG Europe18 years

Steven M. RappSenior Vice President,General Counsel and Secretary19 years

Rogelio RebolledoPresident and Chief Executive Officer, PBG Mexico30 years

Gary K. WandschneiderExecutive Vice PresidentWorldwide Operations24 years

Bulk delivery:Products are pre-ordered through a sales representative and then distributed to large format outlets by a driver assigned to those accounts.

Channel:Refers to either cold drink or take-home

Cold drink:Cold products sold in retail and food-service accounts, and that carry the highest profit margins

Constant territory:PBGs fiscal year ends on the last Saturday in December and, as a result, a 53rd weekwas added to the fiscal year 2005. Fiscal2006 has 52 weeks. Constant territory calculations assume a 52-week year and all significant acquisitions made in the prioryear were made at the beginning of that year.These calculations exclude all significantacquisitions made in the current year.

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Direct store delivery:Distribution system by which products are sold, delivered and merchandised by PBG employees

Energy drinks:Functional drinks containing unique energizing formulations that satisfy the consumer's need for an energy boost

Foodservice accounts:Outlets where consumers buy single-serve soft drinks for immediate consumption, usually to complement an away-from-home meal

Household penetration:The percentage of households in a definedmarket that has purchased a particular branded item

Large format:Accounts that are large chain foodstores,supercenters, mass merchandisers, chain drug stores, club stores and military bases

Modern trade:Refers to the growing international network of new, contemporary-style outlets,including supermarkets, large chain storesand hypermarkets, as opposed to small, independently owned shops

Non-measured channels:Channels for which syndicated sales and share performance data are not readily available

Out of stocks:Products missing or absent anywhere along our supply chain, and ultimately from the store shelf

Take-home:Unchilled products sold for at-home or future consumption

Third-party distributor:A separate company hired to distribute products to selected outlets

Corporate HeadquartersThe Pepsi Bottling Group, Inc.1 Pepsi WaySomers, NY 10589914.767.6000

Transfer AgentFor services regarding your account such as change of address, replacement of lost stock certificates or dividend checks, direct deposit of dividends or change in registered ownership, contact:

The Bank of New YorkShareholder Services DepartmentP.O. Box 11258Church Street StationNew York, NY 10286-1258

Telephone: 800.432.0140E-mail: [email protected]: http://www.stockbny.comOrThe Pepsi Bottling Group, Inc.Shareholder Relations Coordinator1 Pepsi WaySomers, NY 10589Telephone: 914.767.6339

In all correspondence or telephone inquiries, please mentionPBG, your name as printed on your stock certificate, yourSocial Security number, your address and telephone number.

Direct Purchase and Sales PlanThe BuyDIRECT Plan, administered by The Bank of New York, provides existing shareholders and interested first-timeinvestors a direct, convenient and affordable alternative forbuying and selling PBG shares. Contact The Bank of New Yorkfor an enrollment form and brochure that describes the planfully. For BuyDIRECT Plan enrollment and other shareholderinquiries:

The Pepsi Bottling Group, Inc.c/o The Bank of New YorkP.O. Box 11019New York, NY 10286-1019Telephone: 800.432.0140

Stock Exchange ListingCommon shares (symbol: PBG) are traded on the New YorkStock Exchange.

CertificationsThe certifications of our Chief Executive Officer and Chief Financial Officer, as required by section 302 of theSarbanes-Oxley Act, are included as exhibits to PBGs 2005 Annual Report on Form 10-K filed with the SEC. PBGsubmitted its annual certification regarding corporate governance listing standards to the New York StockExchange after its 2005 Annual Meeting of Shareholders.

Independent Public AccountantsDeloitte & Touche LLPTwo World Financial CenterNew York, NY 10281-1414

Annual MeetingThe annual meeting of shareholders will be held at10:00 a.m., Wednesday, May 24, 2006, at PBG headquartersin Somers, New York.

Investor RelationsPBGs 2006 quarterly releases are expected to be issuedthe weeks of April 18, July 11 and October 3, 2006, andJanuary 30, 2007.

Earnings and other financial results, corporate news and other company information are available on PBGs website: http://www.pbg.com

Investors desiring further information about PBG shouldcontact the Investor Relations department at corporateheadquarters at 914.767.6339.

Institutional investors should contact Mary Winn Settino at914.767.7216.

This publication contains many of the valuable trademarksowned and used by PepsiCo. Inc. and its subsidiaries and affiliates in the United States and internationally.

17

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KMu Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2005or

M 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.(Exact name of Registrant as Specified in its Charter)

Incorporated in Delaware 13-4038356(State or other Jurisdiction of Incorporation or organization) (I.R.S. Employer Identification No.)

One Pepsi Way, Somers, New York 10589(Address of Principal Executive Offices) (Zip code)

Registrants telephone number, including area code: (914) 767-6000

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

Title of Each Class Name of Each Exchange on Which Registered

Common 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 Mu No M

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 M No Mu

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange 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 Mu No M

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. M

Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See defini-tion of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filer Mu Accelerated filer M Non-accelerated filer M

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes M No Mu

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 Are Incorporated by Reference Parts of Form 10-K into Which Portion of Documents Are Incorporated

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

18

Table of Contents The Pepsi Bottling Group, Inc.Annual Report 2005

PART I

Item 1. Business 19Item 1A.Risk Factors 24Item 1B. Unresolved Staff Comments 27Item 2. Properties 27Item 3. Legal Proceedings 27Item 4. Submission of Matters to a Vote of Shareholders 27

PART II

Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 29

Item 6. Selected Financial Data 30Item 7. Managements Discussion and Analysis of

Financial Condition and Results of Operations 31Item 7A.Quantitative and Qualitative Disclosures

About Market Risk 75Item 8. Financial Statements and Supplementary Data 75Item 9. Changes in and Disagreements With

Accountants on Accounting and Financial Disclosure 75

Item 9A.Controls and Procedures 75Item 9B. Other Information 76

PART III

Item 10. Directors and Executive Officers of PBG 77Item 11. Executive Compensation 77Item 12. Security Ownership of Certain Beneficial

Owners and Management and Related Stockholder Matters 77

Item 13. Certain Relationships and Related Transactions 78Item 14. Principal Accountant Fees and Services 78

PART IV

Item 15. Exhibits and Financial Statement Schedules 78

SIGNATURES 79

INDEX TO EXHIBITS 82

19

PART I The Pepsi Bottling Group, Inc.Annual Report 2005

ITEM 1. BUSINESS

Introduction

The Pepsi Bottling Group, Inc. (PBG) was incorporated inDelaware in January, 1999, as a wholly owned subsidiary ofPepsiCo, Inc. (PepsiCo) to effect the separation of most ofPepsiCos company-owned bottling businesses. PBG became apublicly traded company on March 31, 1999. As of January 27,2006 PepsiCos ownership represented 41.3% of the outstandingcommon stock and 100% of the outstanding Class B commonstock, together representing 46.9% of the voting power of allclasses of PBGs voting stock. PepsiCo also owned approximately6.7% of the equity interest of Bottling Group, LLC, PBGs principaloperating subsidiary, as of January 27, 2006. We refer to our publicly traded common stock as Common Stock and, togetherwith our Class B common stock, as our Capital Stock. Whenused in this Report, PBG, we, us and our each refers toThe Pepsi Bottling Group, Inc. and, where appropriate, to BottlingGroup, LLC, which we also refer to as Bottling LLC.

We maintain a website at http://www.pbg.com. We make avail-able, free of charge, through the Investor Relations FinancialInformation SEC filings section of our website, our annual reporton Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K, and any amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of1934, as amended, as soon as reasonably practicable after suchreports are electronically filed with, or furnished to, the Securitiesand Exchange Commission (the SEC). Additionally, we have madeavailable, free of charge, the following governance materials on our website at http://www.pbg.com under Investor Relations Company Information Corporate Governance: Certificate ofIncorporation, Bylaws, Corporate Governance Principles andPractices, Worldwide Code of Conduct (including any amendmentthereto), Director Independence Policy, the Audit and AffiliatedTransactions Committee Charter, the Compensation andManagement Development Committee Charter, the Nominatingand Corporate Governance Committee Charter and the DisclosureCommittee Charter. These governance materials are available inprint, free of charge, to any PBG shareholder upon request.

Principal Products

PBG is the worlds largest manufacturer, seller and distributor ofPepsi-Cola beverages. The beverages sold by us include PEPSI-COLA,DIET PEPSI, MOUNTAIN DEW, AQUAFINA, LIPTON BRISK, SIERRAMIST, DIET MOUNTAIN DEW, TROPICANA JUICE DRINKS, SOBE,and STARBUCKS FRAPPUCCINO. In addition to the foregoing, thebeverages we sell outside the U.S. include 7 UP, KAS, AQUAMINERALE, MIRINDA and MANZANITA SOL. In some of ourterritories, we have the right to manufacture, sell and distribute

soft drink products of companies other than PepsiCo, includingDR PEPPER and SQUIRT. We also have the right in some of our territories to manufacture, sell and distribute beverages undertrademarks that we own, including ELECTROPURA, EPURA andGARCI CRESPO.

We have the exclusive right to manufacture, sell and distributePepsi-Cola beverages in all or a portion of 41 states and theDistrict of Columbia in the U.S., nine Canadian provinces, Spain,Greece, Russia, Turkey and all or a portion of 23 states in Mexico.In 2005, approximately 71% of our net revenues were generated in the United States, 10% of our net revenues were generated inMexico and the remaining 19% of our net revenues were generatedin Canada, Spain, Greece, Russia and Turkey. In 2005, worldwidesales of our products to two of our customers accounted forapproximately 10% of our net revenues. We have an extensivedirect store distribution system in the United States, Mexico andCanada. In Russia, Spain, Greece and Turkey, we use a combinationof direct store distribution and distribution through wholesalers,depending on local marketplace considerations.

Raw Materials and Other Supplies

We purchase the concentrates to manufacture Pepsi-Cola beverages and other beverage products from PepsiCo and otherbeverage companies.

In addition to concentrates, we purchase sweeteners, glass andplastic bottles, cans, closures, syrup containers, other packagingmaterials, carbon dioxide and some finished goods. We generallypurchase our raw materials, other than concentrates, from multiplesuppliers. PepsiCo acts as our agent for the purchase of such rawmaterials in the United States and Canada and, with respect tosome of our raw materials, in certain of our international markets.The Pepsi beverage agreements, as described below, provide that,with respect to the beverage products of PepsiCo, all authorizedcontainers, closures, cases, cartons and other packages and labelsmay be purchased only from manufacturers approved by PepsiCo.There are no materials or supplies used by PBG that are currently in short supply. The supply or cost of specific materials could beadversely affected by various factors, including price changes,strikes, weather conditions and governmental controls.

Patents, Trademarks and Licenses

Our portfolio of beverage products includes some of the best recognized trademarks in the world and includes PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW, AQUAFINA, LIPTON BRISK, SIERRAMIST, DIET MOUNTAIN DEW, TROPICANA JUICE DRINKS, SOBE,and STARBUCKS FRAPPUCCINO. In addition to the foregoing, thebeverages we sell outside the U.S. include 7 UP, KAS, AQUAMINERALE, MIRINDA and MANZANITA SOL. In some of our

20

PART I (continued) The Pepsi Bottling Group, Inc.Annual Report 2005

territories, we have the right to manufacture, sell and distributebeverage products of companies other than PepsiCo, includingDR PEPPER and SQUIRT. We also have the right in some of our territories to manufacture, sell and distribute beverages undertrademarks that we own, including ELECTROPURA, EPURA andGARCI CRESPO. The majority of our volume is derived from brandslicensed from PepsiCo or PepsiCo joint ventures.

We conduct our business primarily under agreements withPepsiCo. These agreements give us the exclusive right to market,distribute, and produce beverage products of PepsiCo in authorizedcontainers in specified territories.

Set forth below is a description of the Pepsi beverage agreementsand other bottling agreements to which we are a party.

Terms of the Master Bottling Agreement. The Master BottlingAgreement under which we manufacture, package, sell and dis-tribute the cola beverages bearing the PEPSI-COLA and PEPSItrademarks in the U.S. was entered into in March of 1999. TheMaster Bottling Agreement gives us the exclusive and perpetualright to distribute cola beverages for sale in specified territories inauthorized containers of the nature currently used by us. TheMaster Bottling Agreement provides that we will purchase ourentire requirements of concentrates for the cola beverages fromPepsiCo at prices, and on terms and conditions, determined fromtime to time by PepsiCo. PepsiCo may determine from time to timewhat types of containers to authorize for use by us. PepsiCo has no rights under the Master Bottling Agreement with respect to the prices at which we sell our products.

Under the Master Bottling Agreement we are obligated to:

(1) maintain such plant and equipment, staff, and distribution facilities and vending equipment that are capable of manu-facturing, 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 prescribedby PepsiCo;

(3) push vigorously the sale of the cola beverages in our territories;

(4) increase and fully meet the demand for the cola beverages inour territories;

(5) use all approved means and spend such funds on advertisingand other forms of marketing beverages as may be reasonablyrequired to push vigorously the sale of cola beverages in ourterritories; and

(6) maintain such financial capacity as may be reasonably necessary to assure performance under the Master BottlingAgreement by us.

The Master Bottling Agreement requires us to meet annually withPepsiCo to discuss plans for the ensuing year and the followingtwo years. At such meetings, we are obligated to present plansthat set out in reasonable detail our marketing plan, our manage-ment plan and advertising plan with respect to the cola beveragesfor the year. We must also present a financial plan showing thatwe have the financial capacity to perform our duties and obligationsunder the Master Bottling Agreement for that year, as well assales, marketing, advertising and capital expenditure plans for thetwo years following such year. PepsiCo has the right to approvesuch plans, which approval shall not be unreasonably withheld. In 2005, PepsiCo approved our plans.

If we carry out our annual plan in all material respects, we will bedeemed to have satisfied our obligations to push vigorously thesale of the cola beverages, increase and fully meet the demand forthe cola beverages in our territories and maintain the financialcapacity required under the Master Bottling Agreement. Failure topresent a plan or carry out approved plans in all material respectswould constitute an event of default that, if not cured within120 days of notice of the failure, would give PepsiCo the right to terminate the Master Bottling Agreement.

If we present a plan that PepsiCo does not approve, such failureshall constitute a primary consideration for determining whetherwe have satisfied our obligations to maintain our financial capacity,push vigorously the sale of the cola beverages and increase andfully meet the demand for the cola beverages in our territories.

If we fail to carry out our annual plan in all material respects in anysegment of our territory, whether defined geographically or by typeof market or outlet, and if such failure is not cured within six monthsof notice of the failure, PepsiCo may reduce the territory coveredby the Master Bottling Agreement by eliminating the territory,market or outlet with respect to which such failure has occurred.

PepsiCo has no obligation to participate with us in advertising and marketing spending, but it may contribute to such expendituresand undertake independent advertising and marketing activities,as well as cooperative advertising and sales promotion programsthat would require our cooperation and support. Although PepsiCohas advised us that it intends to continue to provide cooperativeadvertising funds, it is not obligated to do so under the MasterBottling Agreement.

The Master Bottling Agreement provides that PepsiCo may in itssole discretion reformulate any of the cola beverages or discon-tinue them, with some limitations, so long as all cola beverages

21

The Pepsi Bottling Group, Inc.Annual Report 2005

are not discontinued. PepsiCo may also introduce new beveragesunder the PEPSI-COLA trademarks or any modification thereof.When that occurs, we are obligated to manufacture, package, distribute and sell such new beverages with the same obligationsas then exist with respect to other cola beverages. We are prohibitedfrom producing or handling cola products, other than those ofPepsiCo, or products or packages that imitate, infringe or causeconfusion with the products, containers or trademarks of PepsiCo.The Master Bottling Agreement also imposes requirements withrespect to the use of PepsiCos trademarks, authorized containers,packaging and labeling.

If we acquire control, directly or indirectly, of any bottler of colabeverages, we must cause the acquired bottler to amend its bottling appointments for the cola beverages to conform to theterms of the Master Bottling Agreement.

Under the Master Bottling Agreement, PepsiCo has agreed not towithhold approval for any acquisition of rights to manufacture andsell PEPSI trademarked cola beverages within a specific area currently representing approximately 11.3% of PepsiCos U.S. bottling system in terms of volume if we have successfully negotiated the acquisition and, in PepsiCos reasonable judgment,satisfactorily performed our obligations under the Master BottlingAgreement. We have agreed not to acquire or attempt to acquire any rights to manufacture and sell PEPSI trademarked cola beveragesoutside of that specific area without PepsiCos prior written approval.

The Master Bottling Agreement is perpetual, but may be terminatedby PepsiCo in the event of our default. Events of default include:

(1) our insolvency, bankruptcy, dissolution, receivership or the like;

(2) any disposition of any voting securities of one of our bottlingsubsidiaries or substantially all of our bottling assets withoutthe consent of PepsiCo;

(3) our entry into any business other than the business of manu-facturing, selling or distributing non-alcoholic beverages or any business which is directly related and incidental to suchbeverage business; and

(4) any material breach under the contract that remains uncured for120 days after notice by PepsiCo.

An event of default will also occur if any person or affiliated groupacquires any contract, option, conversion privilege, or other rightto acquire, directly or indirectly, beneficial ownership of more than15% of any class or series of our voting securities without the consent of PepsiCo. As of February 15, 2006, to our knowledge, no shareholder of PBG, other than PepsiCo, held more than 10.2%of our Common Stock.

We are prohibited from assigning, transferring or pledging the Master Bottling Agreement, or any interest therein, whether voluntarily, or by operation of law, including by merger or liquidation,without the prior consent of PepsiCo.

The Master Bottling Agreement was entered into by us in the context of our separation from PepsiCo and, therefore, its provisionswere not the result of arms-length negotiations. Consequently, theagreement contains provisions that are less favorable to us thanthe exclusive bottling appointments for cola beverages currently in effect for independent bottlers in the United States.

Terms of the Non-Cola Bottling Agreements. The beverageproducts covered by the non-cola bottling agreements are bever-ages licensed to us by PepsiCo, consisting of MOUNTAIN DEW,AQUAFINA, SIERRA MIST, DIET MOUNTAIN DEW, MUG root beerand cream soda, MOUNTAIN DEW CODE RED and SLICE. The non-cola bottling agreements contain provisions that are similar to those contained in the Master Bottling Agreement with respectto pricing, territorial restrictions, authorized containers, planning,quality control, transfer restrictions, term and related matters. Ournon-cola bottling agreements will terminate if PepsiCo terminatesour Master Bottling Agreement. The exclusivity provisions contained in the non-cola bottling agreements would prevent usfrom manufacturing, selling or distributing beverage productswhich imitate, infringe upon, or cause confusion with, the beverageproducts covered by the non-cola bottling agreements. PepsiComay also elect to discontinue the manufacture, sale or distributionof a non-cola beverage and terminate the applicable non-cola bottling agreement upon six months notice to us.

Terms of Certain Distribution Agreements. We also haveagreements with PepsiCo granting us exclusive rights to distributeAMP and DOLE in all of our territories and SOBE in certain specifiedterritories. The distribution agreements contain provisions generallysimilar to those in the Master Bottling Agreement as to use oftrademarks, trade names, approved containers and labels and causesfor termination. We also have the right to sell and distributeGATORADE in Spain, Greece and Russia and in certain limitedchannels of distribution in the U.S. and Canada. Some of these beverage agreements have limited terms and, in most instances,prohibit us from dealing in similar beverage products. We are alsocurrently distributing TROPICANA JUICE DRINKS in the United Statesand Canada and TROPICANA JUICES in Russia and Spain.

Terms of the Master Syrup Agreement. The Master SyrupAgreement grants us the exclusive right to manufacture, sell anddistribute fountain syrup to local customers in our territories. The Master Syrup Agreement also grants us the right to act as a manufacturing and delivery agent for national accounts within our territories that specifically request direct delivery without using a middleman. In addition, PepsiCo may appoint us to manufacture

22


and deliver fountain syrup to national accounts that elect deliverythrough independent distributors. Under the Master SyrupAgreement, we have the exclusive right to service fountain equipment for all of the national account customers within our territories. The Master Syrup Agreement provides that the determination of whether an account is local or national is at the sole discretion of PepsiCo.

The Master Syrup Agreement contains provisions that are similarto those contained in the Master Bottling Agreement with respectto concentrate pricing, territorial restrictions with respect to localcustomers and national customers electing direct-to-store deliveryonly, planning, quality control, transfer restrictions and relatedmatters. The Master Syrup Agreement had an initial term offive years which expired in 2004 and was renewed for an additionalfive-year period. The Master Syrup Agreement will automaticallyrenew for additional five-year periods, unless PepsiCo terminatesit for cause. PepsiCo has the right to terminate the Master SyrupAgreement without cause at any time upon twenty-four monthsnotice. In the event PepsiCo terminates the Master SyrupAgreement without cause, PepsiCo is required to pay us the fairmarket value of our rights thereunder.

Our Master Syrup Agreement will terminate if PepsiCo terminatesour Master Bottling Agreement.

Terms of Other U.S. Bottling Agreements. The bottling agreements between us and other licensors of beverage products,including Cadbury Schweppes plc for DR PEPPER, SCHWEPPES,CANADA DRY, HAWAIIAN PUNCH and SQUIRT, the Pepsi/LiptonTea Partnership for LIPTON BRISK and LIPTONS ICED TEA, and theNorth American Coffee Partnership for STARBUCKS FRAPPUCCINO,contain provisions generally similar to those in the Master BottlingAgreement as to use of trademarks, trade names, approved containersand labels, sales of imitations and causes for termination. Some of these beverage agreements have limited terms and, in mostinstances, prohibit us from dealing in similar beverage products.

Terms of the Country-Specific Bottling Agreements. Thecountry-specific bottling agreements contain provisions generallysimilar to those contained in the Master Bottling Agreement andthe non-cola bottling agreements and, in Canada, the MasterSyrup Agreement with respect to authorized containers, planning,quality control, transfer restrictions, term, causes for terminationand related matters. These bottling agreements differ from theMaster Bottling Agreement because, except for Canada, they includeboth fountain syrup and non-fountain beverages. Certain of thesebottling agreements contain provisions that have been modified to reflect the laws and regulations of the applicable country. Forexample, the bottling agreements in Spain do not contain a restriction on the sale and shipment of Pepsi-Cola beverages intoour territory by others in response to unsolicited orders. In

addition, in Mexico and Turkey we are restricted in our ability to manufacture, sell and distribute beverages sold under non-PepsiCo trademarks.

Seasonality

Our peak season is the warm summer months beginning in Mayand ending in September. More than 65% of our operating incomeis typically earned during the second and third quarters. More than80% of cash flow from operations is typically generated in thethird and fourth quarters.

Competition

The carbonated soft drink market and the non-carbonated beverage market are highly competitive. Our competitors in these markets include bottlers and distributors of nationally advertisedand marketed products, bottlers and distributors of regionallyadvertised and marketed products, as well as bottlers of privatelabel soft drinks sold in chain stores. Among our major competitorsare bottlers that distribute products from The Coca-Cola Companyincluding Coca-Cola Enterprises Inc., Coca-Cola Hellenic BottlingCompany S.A., Coca-Cola FEMSA S.A. de C.V. and Coca-ColaBottling Co. Consolidated. Our market share for carbonated softdrinks sold under trademarks owned by PepsiCo in our U.S. territories ranges from approximately 21% to approximately 37%.Our market share for carbonated soft drinks sold under trademarksowned by PepsiCo for each country, outside the U.S., in which wedo business is as follows: Canada 38%; Russia 25%; Turkey 19%;Spain 12% and Greece 9% (including market share for our IVIbrand). In addition, market share for our territories and the territories of other Pepsi bottlers in Mexico is 13% for carbonatedsoft drinks sold under trademarks owned by PepsiCo. All marketshare figures are based on generally available data published by third parties. Actions by our major competitors and others in thebeverage industry, as well as the general economic environment,could have an impact on our future market share.

We compete primarily on the basis of advertising and marketingprograms to create brand awareness, price and promotions, retailspace management, customer service, consumer points of access,new products, packaging innovations and distribution methods.We believe that brand recognition, market place pricing, consumervalue, customer service, availability and consumer and customergoodwill are primary factors affecting our competitive position.

Governmental Regulation Applicable to PBG

Our operations and properties are subject to regulation by variousfederal, state and local governmental entities and agencies in theUnited States as well as foreign governmental entities and agencies in Canada, Spain, Greece, Russia, Turkey and Mexico.

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As a producer of food products, we are subject to production,packaging, quality, labeling and distribution standards in each of the countries where we have operations, including, in theUnited States, those of the Federal Food, Drug and Cosmetic Actand the Public Health Security and Bioterrorism Preparedness andResponse Act. The operations of our production and distributionfacilities are subject to laws and regulations relating to the protection of our employees health and safety and the environmentin the countries in which we do business. In the United States, we are subject to the laws and regulations of various governmentalentities, including the Department of Labor, the EnvironmentalProtection Agency and the Department of Transportation, and variousfederal, state and local occupational, labor and employment andenvironmental laws. These laws and regulations include theOccupational Safety and Health Act, the Clean Air Act, the CleanWater Act, the Resource Conservation and Recovery Act, theComprehensive Environmental Response, Compensation andLiability Act, the Superfund Amendments and Reauthorization Act, the Federal Motor Carrier Safety Act and the Fair LaborStandards Act.

We believe that our current legal, operational and environmentalcompliance programs are adequate and that we are in substantialcompliance with applicable laws and regulations of the countriesin which we do business. We do not anticipate making any materialexpenditures in connection with environmental remediation andcompliance. However, compliance with, or any violation of, futurelaws or regulations could require material expenditures by us or otherwise have a material adverse effect on our business, financial condition or results of operations.

Bottle and Can Legislation Legislation has been enacted in certain states and Canadian provinces where we operate that generally prohibits the sale of certain beverages in non-refillablecontainers unless a deposit or levy is charged for the container.These include California, Connecticut, Delaware, Hawaii, Iowa,Maine, Massachusetts, Michigan, New York, Oregon, WestVirginia, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island and Quebec.

Massachusetts and Michigan have statutes that require us to pay all or a portion of unclaimed container deposits to the stateand Hawaii and California impose a levy on beverage containers tofund a waste recovery system.

In addition to the Canadian deposit legislation described above,Ontario, Canada currently has a regulation requiring that at least 30% of all soft drinks sold in Ontario be bottled inrefillable containers.

The European Commission issued a packaging and packing wastedirective that was incorporated into the national legislation ofmost member states. This has resulted in targets being set for therecovery and recycling of household, commercial and industrialpackaging waste and imposes substantial responsibilities uponbottlers and retailers for implementation. Similar legislation hasbeen enacted in Turkey.

Mexico adopted legislation regulating the disposal of solid wasteproducts. In response to this legislation, PBG Mexico maintainsagreements with local and federal Mexican governmental authori-ties as well as with civil associations, which require PBG Mexico,and other participating bottlers, to provide for collection and recycling of certain minimum amounts of plastic bottles.

We are not aware of similar material legislation being enacted in any other areas served by us. We are unable to predict, however,whether such legislation will be enacted or what impact its enactment would have on our business, financial condition orresults of operations.

Soft Drink Excise Tax Legislation Specific soft drink excisetaxes have been in place in certain states for several years. The states in which we operate that currently impose such a taxare West Virginia and Arkansas and, with respect to fountainsyrup only, Washington. In Mexico, there are excise taxes on any sweetened beverage products produced without sugar, including our diet soft drinks and imported beverages that are not sweetened with sugar.

Value-added taxes on soft drinks vary in our territories located inCanada, Spain, Greece, Russia, Turkey and Mexico, but are consistent with the value-added tax rate for other consumer products. In addition, there is a special consumption tax applicableto cola products in Turkey. In Mexico, bottled water in containersover 10.1 liters are exempt from value-added tax, and PBGobtained a tax exemption for containers holding less than10.1 liters of water.

We are not aware of any material soft drink taxes that have been enacted in any other market served by us. We are unable to predict, however, whether such legislation will be enacted or what impact its enactment would have on our business, financialcondition or results of operations.

Trade Regulation As a manufacturer, seller and distributor ofbottled and canned soft drink products of PepsiCo and other softdrink manufacturers in exclusive territories in the United Statesand internationally, we are subject to antitrust and competitionlaws. Under the Soft Drink Interbrand Competition Act, soft drink

24


bottlers operating in the United States, such as us, may have anexclusive right to manufacture, distribute and sell a soft drinkproduct in a geographic territory if the soft drink product is in substantial and effective competition with other products of thesame class in the same market or markets. We believe that thereis such substantial and effective competition in each of the exclusive geographic territories in which we operate.

School Sales Legislation; Industry Guidelines In 2004,Congress passed the Child Nutrition Act which requires school districts to implement a school wellness policy by July 2006. As of December 2005, several school districts in PBGs bottling territories have imposed restrictions on soft drink sales in schools.Additionally, several states have enacted restrictions on soft drinksales in schools. Members of the American Beverage Associationhave endorsed a school vending policy (the ABA Policy) that limits the types of beverages sold in elementary, middle and highschools. Also, the beverage associations in the European Unionand various provinces in Canada have recently issued guidelinesrelating to the sale of beverages in schools. PBG intends to fullycomply with the ABA Policy and these guidelines.

California Carcinogen and Reproductive Toxin LegislationA California law requires that any person who exposes another to a carcinogen or a reproductive toxin must provide a warning tothat effect. Because the law does not define quantitative thresh-olds below which a warning is not required, virtually all manufac-turers of food products are confronted with the possibility ofhaving to provide warnings due to the presence of trace amountsof defined substances. Regulations implementing the law exemptmanufacturers from providing the required warning if it can bedemonstrated that the defined substances occur naturally in theproduct or are present in municipal water used to manufacture the product. We have assessed the impact of the law and itsimplementing regulations on our beverage products and have concluded that none of our products currently requires a warningunder the law. We cannot predict whether or to what extent foodindustry efforts to minimize the laws impact on food products willsucceed. We also cannot predict what impact, either in terms ofdirect costs or diminished sales, imposition of the law may have.

Mexican Water Regulation In Mexico, we pump water from our own wells and we purchase water directly from municipalwater companies pursuant to concessions obtained from theMexican government on a plant-by-plant basis. The concessionsare generally for 10-year terms and can generally be renewed byus prior to expiration with minimal cost and effort. Our concessionsmay be terminated if, among other things, (a) we use materially

more water than permitted by the concession, (b) we use materiallyless water than required by the concession, (c) we fail to pay forthe rights for water usage or (d) we carry out, without governmentauthorization, any material construction on or improvement to, our wells. Our concessions generally satisfy our current waterrequirements and we believe that we are generally in compliancein all material respects with the terms of our existing concessions.

Employees

As of December 31, 2005, we employed approximately66,900 workers, of whom approximately 33,000 were employed in the United States. Approximately 8,900 of our workers in theUnited States are union members and approximately 17,300 of our workers outside the United States are union members. We consider relations with our employees to be good and have not experienced significant interruptions of operations due to labor disagreements.

Financial Information on Industry Segments and Geographic Areas

See Note 15 to PBGs Consolidated Financial Statements includedin Item 7 below.

ITEM 1A. RISK FACTORS

Our business and operations entail a variety of risks and uncer-tainties, including those described below.

We may not be able to respond successfully to consumertrends related to carbonated and non-carbonated beverages.

Consumers are seeking increased variety in their beverages, and there is a growing interest among the public regarding health and wellness issues. This interest has resulted in a decline in consumer demand for full-calorie carbonated soft drinks and anincrease in consumer demand for products associated with healthand wellness, such as water, reduced calorie carbonated softdrinks and certain non-carbonated beverages. Because we relymainly on PepsiCo to provide us with the products that we sell, ifPepsiCo fails to develop innovative products that respond to theseand other consumer trends this could put us at a competitive disadvantage in the marketplace and adversely affect our businessand financial results.

25


We may not be able to respond successfully to the demandsof our largest customers.

Our retail customers are consolidating, leaving fewer customerswith greater overall purchasing power. In addition, two of our customers together comprise approximately 10% of our annualworldwide sales. Because we do not operate in all markets inwhich these customers operate, we must rely on PepsiCo andother PepsiCo bottlers to service such customers outside of ourmarkets. Our inability, or the inability of PepsiCo and PepsiCo bottlers as a whole, to meet the product, packaging and servicedemands of our largest customers could lead to a loss or decreasein business from such customers and have a material adverseeffect on our business and financial results.

We may not be able to compete successfully within the highly competitive carbonated and non-carbonated beverage markets.

The carbonated and non-carbonated beverage markets are bothhighly competitive. Competitive pressures in our markets couldcause us to reduce prices or forego price increases required to off-set increased costs of raw materials and fuel, increase capitaland other expenditures, or lose market share, any of which couldhave a material adverse effect on our business and financial results.

Because we depend upon PepsiCo to provide us with concentrate, certain funding and various services, changesin our relationship with PepsiCo could adversely affect our business and financial results.

We conduct our business primarily under beverage agreementswith PepsiCo. If our beverage agreements with PepsiCo are terminated for any reason, it would have a material adverse effecton our business and financial results. These agreements providethat we must purchase all of the concentrate for such beverages atprices and on other terms which are set by PepsiCo in its sole discretion. Any significant concentrate price increases could materially affect our business and financial results.

PepsiCo has also traditionally provided bottler incentives and funding to its bottling operations. PepsiCo does not have to maintain or continue these incentives or funding. Termination or decreases in bottler incentives or funding levels could materiallyaffect our business and financial results.

Under our shared services agreement, we obtain various servicesfrom PepsiCo, including procurement of raw materials and certainadministrative services. If any of the services under the sharedservices agreement was terminated, we would have to obtainsuch services on our own. This could result in a disruption of suchservices, and we might not be able to obtain these services on

terms, including cost, that are as favorable as those we receivethrough PepsiCo.

Our business requires a significant supply of raw materials,the limited availability or increased costs of which couldadversely affect our business and financial results.

The production of our beverage products is highly dependent oncertain raw materials. In particular, we require significant amountsof aluminum and plastic bottle components, such as resin. We also require access to significant amounts of water. Any sustainedinterruption in the supply of raw materials or any significantincrease in their prices could have a material adverse effect on our business and financial results.

PepsiCos equity ownership of PBG could affect matters concerning us.

As of January 27, 2006, PepsiCo owned approximately 46.9% ofthe combined voting power of our voting stock (with the balanceowned by the public). PepsiCo will be able to significantly affectthe outcome of PBGs stockholder votes, thereby affecting mattersconcerning us.

We may have potential conflicts of interest with PepsiCo,which could result in PepsiCos objectives being favoredover our objectives.

Our past and ongoing relationship with PepsiCo could give rise to conflicts of interests. In addition, two members of our Board ofDirectors and one of the three Managing Members of BottlingGroup LLC, our primary operating subsidiary, are Senior VicePresidents of PepsiCo, a situation which may create conflictsof interest.

These potential conflicts include balancing the objectives ofincreasing sales volume of PepsiCo beverages and maintaining orincreasing our profitability. Other possible conflicts could relate to the nature, quality and pricing of services or products providedto us by PepsiCo or by us to PepsiCo.

Conflicts could also arise in the context of our potential acquisitionof bottling territories and/or assets from PepsiCo or other independent PepsiCo bottlers. Under our Master BottlingAgreement, we must obtain PepsiCos approval to acquire anyindependent PepsiCo bottler. PepsiCo has agreed not to withholdapproval for any acquisition within agreed upon U.S. territories ifwe have successfully negotiated the acquisition and, in PepsiCosreasonable judgment, satisfactorily performed our obligationsunder the master bottling agreement. We have agreed not toattempt to acquire any independent PepsiCo bottler outside ofthose agreed-upon territories without PepsiCos prior written approval.

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Our acquisition strategy may be limited by our ability to successfully integrate acquired businesses into ours or ourfailure to realize our expected return on acquired businesses.

We intend to continue to pursue acquisitions of bottling assets andterritories from PepsiCos independent bottlers. The success of our acquisition strategy may be limited because of unforeseencosts and complexities. We may not be able to acquire, integratesuccessfully or manage profitably additional businesses withoutsubstantial costs, delays or other difficulties. Unforeseen costs andcomplexities may also prevent us from realizing our expected rateof return on an acquired business. Any of the foregoing could havea material adverse effect on our business and financial results.

Our success depends on key members of our management, the loss of whom could disrupt our business operations.

Our success depends largely on the efforts and abilities of keymanagement employees. Key management employees are not parties to employment agreements with us. The loss of the servicesof key personnel could have a material adverse effect on our business and financial results.

If we are unable to fund our substantial capital requirements,it could cause us to reduce our planned capital expendituresand could result in a material adverse effect on our businessand financial results.

We require substantial capital expenditures to implement ourbusiness plans. If we do not have sufficient funds or if we areunable to obtain financing in the amounts desired or on acceptableterms, we may have to reduce our planned capital expenditures,which could have a material adverse effect on our business andfinancial results.

Our substantial indebtedness could adversely affect our financial health.

We have a substantial amount of indebtedness, which requires usto dedicate a substantial portion of our cash flow from operationsto payments on our debt. This could limit our flexibility in planningfor, or reacting to, changes in our business and place us at a competitive disadvantage compared to competitors that have lessdebt. Our indebtedness also exposes us to interest rate fluctuations,because the interest on some of our indebtedness is at variable

rates, and makes us vulnerable to general adverse economic andindustry conditions. All of the above could make it more difficult forus, or make us unable, to satisfy our obligations with respect to allor a portion of such indebtedness and could limit our ability toobtain additional financing for future working capital expenditures,strategic acquisitions and other general corporate requirements.

Our foreign operations are subject to social, political and economic risks and may be adversely affected by foreign currency fluctuations.

In the fiscal year ended December 31, 2005, approximately 29% of our net revenues were generated in territories outside the United States. Social, economic and political conditions in ourinternational markets may adversely affect our business and financial results. The overall risks to our international businessesinclude changes in foreign governmental policies and other politicalor economic developments. These developments may lead to newproduct pricing, tax or other policies and monetary fluctuationswhich may adversely impact our business and financial results. In addition, our results of operations and the value of our foreignassets are affected by fluctuations in foreign currency exchange rates.

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.

We may be liable if the consumption of any of our products causesinjury or illness. We also may be required to recall products if theybecome contaminated or are damaged or mislabeled. A significantproduct liability or other product-related legal judgment against usor a widespread recall of our products could have a materialadverse effect on our business and financial results.

Newly adopted governmental regulations could increase our costs or liabilities or impact the sale of our products.

Our operations and properties are subject to regulation by variousfederal, state and local government entities and agencies as wellas foreign governmental entities. Such regulations relate to, amongother things, food and drug laws, environmental laws, competitionlaws, taxes, and accounting standards. We cannot assure you thatwe have been or will at all times be in compliance with all regulatoryrequirements or that we will not incur material costs or liabilities in connection with existing or new regulatory requirements.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

As of December 31, 2005, we operated 95 soft drink productionfacilities worldwide, of which 86 were owned and 7 were leased.In addition, one facility used for the manufacture of soft drinkpackaging materials was operated by a PBG joint venture in Turkeyand one facility used for can manufacturing was operated by aPBG joint venture in Ayer, Massachusetts. Of our 546 distributionfacilities, 335 are owned and 211 are leased. We believe that ourbottling, canning and syrup filling lines and our distribution facilitiesare sufficient to meet present needs. We also lease headquartersoffice space in Somers, New York.

We also own or lease and operate approximately 41,000 vehicles,including delivery trucks, delivery and transport tractors and trailersand other trucks and vans used in the sale and distribution of oursoft drink products. We also own more than 2 million coolers, softdrink dispensing fountains and vending machines.

With a few exceptions, leases of plants in the United States and Canada are on a long-term basis, expiring at various times,with options to renew for additional periods. Most internationalplants are leased for varying and usually shorter periods, with or without renewal options. We believe that our properties are in good operating condition and are adequate to serve our current operational needs.

ITEM 3. LEGAL PROCEEDINGS

From time to time we are a party to various litigation proceedingsarising in the ordinary course of our business, none of which, in theopinion of management, is likely to have a material adverse effecton our financial condition or results of operations, including thefollowing proceeding:

At the end of the fourth quarter of 2004 and during the firstthree quarters of 2005, we received Notices of Violation (NOVs)and Orders For Compliance from the Environmental ProtectionAgency, Region 9 (EPA), relating to operations at four bottlingplants in California and one in Hawaii. The NOVs allege that weviolated our permits and the Clean Water Act as a result of certainevents relating to waste water discharge and storm water run-off.

We have been cooperating with the authorities in their investigationof these matters, including responding to various documentrequests pertaining to our plants in California and each of ourplants in Arizona and Hawaii. In August 2005, we met with representatives of the EPA to discuss the circumstances giving riseto the NOVs and our responses. We believe monetary sanctionsmay be sought in connection with one or more of the NOVs. Wefurther believe that neither the sanctions nor the remediation costsassociated with these NOVs will be material to the Companysresults of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

None.

Executive Officers of the Registrant

Executive officers are elected by our Board of Directors, and theirterms of office continue until the next annual meeting of the Boardor until their successors are elected and have been qualified.There are no family relationships among our executive officers.

Set forth below is information pertaining to our executive officerswho held office as of February 15, 2006:

John T. Cahill, 48, is our Chairman of the Board and ChiefExecutive Officer. He has been our Chairman of the Board sinceJanuary 2003 and Chief Executive Officer since September 2001.Previously, Mr. Cahill served as our President and Chief OperatingOfficer from August 2000 to September 2001. Mr. Cahill has beena member of our Board of Directors since January 1999 and servedas our Executive Vice President and Chief Financial Officer prior to becoming President and Chief Operating Officer in August 2000.He was Executive Vice President and Chief Financial Officer of thePepsi-Cola Company from April 1998 until November 1998. Prior to that, Mr. Cahill was Senior Vice President and Treasurer ofPepsiCo, having been appointed to that position in April 1997. In1996, he became Senior Vice President and Chief Financial Officerof Pepsi-Cola North America. Mr. Cahill joined PepsiCo in 1989where he held several other senior financial positions through1996. Mr. Cahill is also a director of the Colgate-Palmolive Company.

Alfred H. Drewes, 50, is our Senior Vice President and ChiefFinancial Officer. Appointed to this position in June 2001, Mr.Drewes previously served as Senior Vice President and ChiefFinancial Officer of Pepsi-Cola International (PCI). Mr. Drewesjoined PepsiCo in 1982 as a financial analyst in New Jersey.

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During the next nine years, he rose through increasingly responsi-ble finance positions within Pepsi-Cola North America in fieldoperations and headquarters. In 1991, Mr. Drewes joined PCI asVice President of Manufacturing Operations, with responsibility for the global concentrate supply organization. In 1994, he wasappointed Vice President of Business Planning and New BusinessDevelopment and, in 1996, relocated to London as the VicePresident and Chief Financial Officer of the Europe and Sub-SaharanAfrica Business Unit of PCI.

Eric J. Foss, 47, is our Chief Operating Officer. Previously, Mr.Foss was President of PBG North America from September 2001 to September 2005. Prior to that, Mr. Foss was the Executive VicePresident and General Manager of PBG North America fromAugust 2000 to September 2001. From October 1999 untilAugust 2000, he served as our Senior Vice President, U.S. Salesand Field Operations, and prior to that, he was our Senior VicePresident, Sales and Field Marketing, since March 1999. Mr. Fossjoined Pepsi-Cola Company in 1982 and has held a variety of otherfield and headquarters-based sales, marketing and general management positions. From 1994 to 1996, Mr. Foss was GeneralManager of Pepsi-Cola North Americas Great West Business Unit.In 1996, Mr. Foss was named General Manager for the CentralEurope Region for Pepsi-Cola International, a position he held untiljoining PBG in March 1999. Mr. Foss is also a director of UnitedDominion Realty Trust, Inc.

Yiannis Petrides, 47, is the President of PBG Europe. He wasappointed to this position in June 2000, with responsibilities for our operations in Spain, Greece, Turkey and Russia. Prior to that, Mr. Petrides served as Business Unit General Manager for PBG inSpain and Greece. Mr. Petrides joined PepsiCo in 1987 in the inter-national beverage division. In 1993, he was named GeneralManager of Frito-Lays Greek operation with additional responsibilityfor the Balkan countries. In 1995, Mr. Petrides was appointedBusiness Unit General Manager for Pepsi Beverages Internationalsbottling operation in Spain.

Steven M. Rapp, 52, is our Senior Vice President, GeneralCounsel and Secretary. Appointed to this position in January 2005,Mr. Rapp previously served as Vice President, Deputy GeneralCounsel and Assistant Secretary from 1999 through 2004.Mr. Rapp joined PepsiCo as a corporate attorney in 1986 and wasappointed Division Counsel of Pepsi-Cola Company in 1994.

Rogelio Rebolledo, 61, was appointed President and ChiefExecutive Officer of PBG Mexico in January 2004 and elected toPBGs Board in May 2004. From 2000 to 2003, Mr. Rebolledo wasPresident and Chief Executive Officer of Frito-Lay International(FLI), a subsidiary of PepsiCo, Inc., operating in Latin America,Asia Pacific, Australia, Europe, Middle East and Africa. From 1997to 2000, Mr. Rebolledo was the President of the Latin America/Asia Pacific region for FLI. Mr. Rebolledo joined PepsiCo, Inc. in1976 and held several senior positions including serving asPresident and Chief Executive Officer of the Latin America Regionof PepsiCo Foods International (PFI) and President of theSabritas, Gamesa, Brazil and Spain PFI operations. Mr. Rebolledowas elected to serve as a director of Applebees International, Inc.beginning in May 2006.

Gary K. Wandschneider, 53, was appointed Executive VicePresident, Worldwide Operations in September 2005. Prior to that,Mr. Wandschneider was our Senior Vice President of Operations, aposition he held since 1997. From 1994 to 1997, Mr. Wandschneiderserved as Vice President of Manufacturing and Logistics. In 1992,he was appointed General Manager for PBGs Texoma BusinessUnit. Mr. Wandschneider joined Pepsi-Cola North America in 1982 as a Production Manager. He worked in a variety of manufacturing and oper

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