Net Revenues $7,982 $7,505 $7,041Operating Income(2) $ 590 $ 396 $ 277EBITDA(2) $1,061 $ 901 $ 721EPS(2)(3) $ 1.53 $ 0.71 $ 0.17Operating Free Cash Flow(4) $ 273 $ 161 $ 125Return On Invested Capital 7.6% 6.0% 5.0%

(1)Our 2000 results were impacted by a change in estimated useful lives of certain categories of assets and the inclusion of an extra week in our fiscal year.The favorable impact from the change in asset lives increased EPS by $0.26,and the extraweek in fiscal year 2000 increased EPS by $0.05.

(2)Excludes the impact of unusual impairment and other charges and credits.

(3)Fiscal years 1999 and 1998 reflect the initial public offering of 100 million shares of common stock on March 31,1999,as if the shares were outstanding during the entire periods presented.

(4)Operating Free Cash Flow is defined as net cash provided by operations less net cash used for investments, excluding cash used for acquisitions of bottlers.

$ in millions, except per share data 2000 1999 1998

Dear Fellow Shareholder,

elling soda is an exciting pro p o s i t i o n .

That excitement can come from the

launch of a new brand, as you feel quick

success and the glimmer of a pro m i s i n g

f u t u re. Sometimes the rush of adre n a l i n e

comes from bri n ging new focus to an

e s t a blished brand. Or when you prov i d e

great serv i c e, become more pro d u c t ive

or develop new capability. S a t i s fa c t i o n

also comes from delive ring on what yo u

p ro m i s e d . The year 2000 at The Pe p s i

Bottling Group was a memorable one

for all these re a s o n s . In this, our second

year as a public company, we continu e d

to build on the strong foundation we

e s t a blished in 1999.This ye a r ’s story

is about pro fit a b i l i t y, our people and

their capability, and most import a n t l y,

i t ’s all about grow t h .

We once again delive red outstanding

re s u l t s , and the market rewa rded our

c o n s i s t e n c y. Our stock grew more than

140 percent in 2000, and was one of the

top perform e rs on the New York Stock

E x c h a n g e. In a sea of ‘ n ew economy ’

c o m p a n i e s , it was re f reshing to note

that in 2000, our internal mantra of

“ We Sell Soda” translated externally

to “ We Deliver Return s .”

E a rnings Before Intere s t ,Ta xe s ,D e p re -

ciation and A m o rtization (EBITDA )

grew 18 percent for the ye a r, led by

solid net reve nue per case growth of

6 percent in the United States and

c o n t i nued strong international per-

f o rm a n c e.We generated $273 million

in operating free cash flow for the ye a r,

L E T T E R T O S H A R E H O L D E R S

F I N A N C I A L H I G H L I G H T S

(1)

1

up $112 million from last ye a r ’s re s u l t s .

We more than doubled our earnings per

s h a re for the year to $1.53, and our re t u rn

on invested capital continued its move

u p wa rd , finishing the year at 7.6 perc e n t .

This was 1.6 points higher than 1999,

a c h i eving our weighted average cost of

capital well ahead of our ori ginal plans.

A key driver behind these results wa s

c o n t i nuing our progress in improv i n g

the take-home economics of our bu s i-

n e s s .Two - t h i rds of our business comes

f rom sales in this segment. Plain and

s i m p l e, we must get the pricing element

of this equation right in order to achieve

s u c c e s s .The only way to do that was

to increase our pricing in our largest

t a ke-home channel, s u p e rm a r ke t s , in a

way that provides good value for our

c o n s u m e rs and a pro fit a ble re t u rn for

our inve s t o rs .We began this effort in

1999 and continued it in 2000, r a i s i n g

U. S. net price per case by about 5 perc e n t .

E n s u ring continuing cold drink grow t h

remained a key area of emphasis. In

2 0 0 0 , we added more than 140,000

cold drink equipment placements in

the U. S. and Canada.

On a constant terri t o ry basis, our pri c i n g

i n c re a s e s , cold drink growth and stro n g

i n t e rnational volume growth of 7 per-

cent resulted in worldwide vo l u m e

growth of 1 percent and healthy net

reve nue growth of more than 4 perc e n t .

We expect that the increasing vo l u m e

momentum we established in the fourt h

q u a rter will continue to pick up steam

in 2001.

Another important lever impacting

our overall results is controlling cost.

In 2000, we did this, all while achiev i n g

n ew re c o rds in product quality and

consumer satisfa c t i o n .We improved the

number of cases we produce per hour

with the introduction of several new

high-speed bottle lines.We we re able

to hold transportation costs per case in

the U. S. fla t , despite fuel incre a s e s , by

i n c reasing the payload our vehicles carry.

These are just two examples of what

o c c u rs in some of the 400 locations

a c ross our system, as our teams look for

n ew ways to increase their pro d u c t iv i t y,

extend the life of our assets and re d u c e

c o s t s .Those important efforts are

c o n t i nuing in 2001.

The capability of our organization grew

by leaps and bounds in 2000.We have a

f ront-line wo r k f o rce of smart ,d e d i c a t e d ,

h a rd working people and we made signif-

icant investments in them.We also gave

our front-line superv i s o rs the tools and

the skills they needed to lead their teams.

We launched one standardized method

of selling and ensured it was unders t o o d

and used effectively by our sales forc e.

And we went back to school this ye a r,

re c ruiting many talented new employe e s

off college campuses to make sure PBG’s

l e a d e rs of tomorrow are learning our

business today.

As re m a r k a ble as this ye a r ’s results we re,

I feel that the future holds even more

p ro m i s e. Our category, liquid re f re s h-

ment beve r a g e s , is expected to grow at

a 4 percent rate, which in comparison

to other packaged goods, is ve ry healthy.

No other company is in a better

position to capitalize on that trajectory.

So our biggest challenge is to ensure

we get at least our fair share of that

c a t e g o ry grow t h .

We have all the necessary elements to

s u c c e e d ,b e ginning with our brands. I n

2 0 0 0 , we brought new excitement to

Brand Pepsi by re-launching the Pe p s i

Challenge across our system, which we

will continue in 2001. In flavo rs , we

i n c reased the activity and visibility of

Mountain Dew, Mug Root Beer,

Orange Slice,Wild Cherry Pepsi and

Lipton Bri s k .We launched a new

l e m o n - l i m e, S i e rra Mist.A n d , in the

non-carbonated segment of our bu s i n e s s ,

our powerhouse brand, A q u a fin a , has

a l ready become the number one playe r

in the water category. T h e re is a big

o p p o rtunity to take advantage of this

lead and move into a commanding

2

p o s i t i o n , and we are focused on doing

just that. In the single-serve juice dri n k

c a t e g o ry, Pe p s i ’s Fru i t Works is coming

on stro n g .

With the switch to Dole juices at the

b e ginning of 2001, we see signific a n t

growth possibilities for both juices and

juice dri n k s .We also hold almost a

90 market share in the re a d y-to-d ri n k

coffee marke t , with our Frappuccino

p roduct from Starbu c k s .

B eyond our brand port f o l i o, we are

blessed with many other assets. O u r

s t rong culture is framed by a simple

mission statement that emphasizes the

i m p o rtance of winning each day, i n

eve ry market and with eve ry customer.

We are improving the business with

n ew tools and technology that add to

our efficiency and pro d u c t iv i t y. O u r

p a rt n e rship with PepsiCo grows stro n g e r

each day. We depend on each other

and we work together to enhance our

mutual progre s s . I believe our prove n

ability to execute in the marketplace

is second to none. Our capability to

succeed begins with the commitment

and dedication of our front line, a n d

ends with our senior management

team and Board of Dire c t o rs , whose

e x p e rience and will to win are an

u n b e a t a ble combination.

Because of the health of this bu s i n e s s

and all we ’ve accomplished, i t ’s time to

p ave the way for a new generation of

l e a d e rship for PBG. In Ja nu a ry of 2001,

with the full support of our Board of

D i re c t o rs , I announced that we intend

to elect John Cahill, our President and

Chief Operating Offic e r, as PBG’s new

Chief Exe c u t ive Officer later this ye a r.

I will continue on as Chairm a n ,w i t h

John as my part n e r, just as he has been

since the launch of our company. Jo h n

has the intelligence, the experience and

the discipline to continue moving this

business forwa rd . He stands, with the

rest of our strong team of senior leaders ,

our talented employees and me, ready

to guide PBG’s continuing success, a n d

yo u rs .As you turn the pages of this ye a r ’s

a n nual re p o rt , I hope you’ll feel the

c o n fidence that I feel about The Pe p s i

Bottling Gro u p.We are growing – and

all signs point to unlimited prospects for

the future.

Craig We a t h e r u p

C h a i rman & Chief Exe c u t i ve Offic e r

3

We are...

4

U n s t o p p a b l e

C l e a rC o n s i s t e n t

The year 2000marked the begin-ning of PBG’s pushto make A q u a fin athe leading water in the take-homes e g m e n t . E fforts included the strate-gic placement ofA q u a fina displaysnear likely pairings with pro d u c e,p re p a red salads and health foods.

G R O W T H I N O U R S E G M E N T S

he year 2000 was undoubtedly one o f

strong fin a n c i a l g r o w t h for PBG,

the result of improvements in the basic

economics of our business. But the year

w a sa l s o marked by substantial progress

in our marketplace execution, presence

and distribution, marketing and selling ca-

p a b i l i t y, and customer service.

We have demonstrated that we are

consistent, confident, determined,

focused, progressive, consumer-s a v vy. . .

and so much more. Going forward, these

are the qualities that will enable PBG to

continue adding great value

to the brands we carry. They are

the attributes that will ensure our

future growth.

ith two - t h i rds of our volume sold

as take-home product – that is, p ro d u c t

sold for future consumption – the

c o rn e rstone of our business is in

f o o d s t o re s ,s u p e rm a r kets and mass-

m e rchandise outlets.These markets are

d y n a m i c, d r awing household shoppers

who are more conve n i e n c e - d riven and

health-conscious than eve r, and who

face an increasing number of beve r a g e

options eve ry time they shop.The good

n ews is that the PBG lineup offers a

b everage to suit nearly eve ry soft dri n k

need and pre f e re n c e.

E ven better news is that among the

nu m e rous types of beverages we offer,

in 2000, PBG moved on two part i c u-

larly strong fronts to foster growth

in the U. S. t a ke-home segment:

bottled water and flavor carbonated

soft drinks (CSDs).

A water-tight strategy

PBG sales in 2000 confirmed what

i n d u s t ry re s e a rch has told us: t o d ay ’s

c o n s u m e rs show a grow i n g

p re f e rence for non-

carbonated soft

d ri n k s .T h ey are

m o re likely than eve r

to select juices and juice

d ri n k s , re a d y - t o - d rink teas and coffees,

and bottled water – to consume on the

run and at home.And by fa r, the fa s t e s t

growing non-carbonated category in

the U. S. is wa t e r,

which has grow n

on average almost

11 percent

a n nually over the

past three ye a rs ,

nearly five times

the rate of the

overall liquid re f re s h m e n t b everage

i n d u s t ry in the same time peri o d .

With A q u a fina already the leading

bottled water brand in the cold dri n k

segment of our bu s i n e s s , a top pri o ri t y

for PBG in 2000 was to build gre a t e r

brand presence for A q u a fina in take -

home outlets.

The placement of thousands ofA q u a fina end-c a pdisplays – many of which were c e n t e red around an A q u a fina cooler– helped buildbrand presence for our water in supermarkets andm a ss-m e rc h a n d i s eo u t l e t s.

T W

5Flavor CSD: non-cola carbonated soft drinks that are fruit-flavored, such as cherry, orange, lemon-lime and root beer.

Mass merchandiser: a moderate-sized general merchandiser carrying health and beauty itemsand a limited grocery selection, often at dis-counted prices.

Take-home: products sold for at-home or future c o n s u m p t i o n .

U . S . consumption of bottled water is

projected to increaseby gallons per

person by 2010.10

6

The launch ofSierra Mist, Pe p s i ’snew lemon-l i m ep ro d u c t , gives PBGa strong player inthe lemon-limesegment – which isthe largest of theCSD fla v o r s. T h eSierra Mist launchwas swift and complete – a virtual“o v e rn i g ht” blitz in more than two-t h i rds of PBG’s U. S. m a r k e t s.

We are...

SWIFTSMOOTHSYSTEMATIC

G R O W T H I N O U R S E G M E N T S

We made the brand more visible

and ava i l a ble by placing thousands of

end-cap displays and incremental

f ree-standing “Cool Blue” r a c k s

t h roughout our large format outlets –

w h e re consumers are likely to purc h a s e

wa t e r, on store peri m e t e rs and near

p roduce and health pro d u c t s .We

e s t a blished beverage aisle standards to

i n c rease A q u a fin a ’s presence in the

water section, adding a 24-ounce

multi-pack to the shelve s . And we

c a p t u red thirs t y

s h o p p e rs by in-

stalling thousands

of A q u a fina

checklane

m e rc h a n d i s e rs

and dedicated

A q u a fina ve n d i n g

m a c h i n e s .

Our focus on the take-home segment

yielded almost 30 percent growth for

A q u a fina in just our U. S. f o o d s t o re

a c c o u n t s .

“ Wa t e r, wa t e r

eve ry w h e re ”

will continue to

be our direction

for 2001.A n d

we ’re confid e n t

that in PBG

m a r ke t s ,t h e

brand that will

be eve ry w h e re

will be A q u a fin a .

A lemon-lime debut

While non-carbonated beverage grow t h

is climbing, carbonated soft drinks

remain the largest overall beverage cate-

g o ry, c o m p rising more than 80 perc e n t

of the total liquid re f reshment beve r a g e

i n d u s t ry. CSDs are a household staple

in the U. S. ,h ave continued to grow

over the past several ye a rs , and still

m a ke up more than 70 percent of

t a ke-home beverage vo l u m e.

One of the biggest opportunities in the

CSD category is in the largest flavo r

s e g m e n t ,l e m o n - l i m e. Lemon-lime has

been re s p o n s i ble for almost 15 perc e n t

of CSD growth over the last four ye a rs ,

and is expected to grow substantially

over the next five.

We are now positioned to capitalize on

lemon-lime volume growth with the

addition in 2000 of the

n ew Sierra Mist brand

to our product

p o rt f o l i o, in the

m a r kets where we do not

bottle 7Up. The opportunity for

S i e rra Mist is particularly strong in our

t a ke-home segment, w h e re the potential

volume payoff for lemon-lime growth

is subs t a n t i a l .

In a triumphant distri bution and

m e rchandising feat that only a

Lisa Rice,M e rc h a n d i s e r,N o r f o l k , VA .

Lisa is re s p o n s i b l efor merc h a n d i s i n gfive major largeformat accounts–in which she has grown volume s u b s t a n t i a l l y.Because of her e ff o r t s, her ac-counts containm o re occasion-based merc h a n d i s-ing racks than inany of the others t o res in the Norfolk market.

7

Over the past two years,PBG has made its take-home beverages readily available and moreconvenient to p u rc h a s e, t h ro u g hthe placement of displays andracks on the s t o re perimeter,and strategic m e rchandising to create visible“meal solutions”for consumers.

1, 0 0 0 , 0 0 0More than

cases of Sierra Mist were sold in the fir s t

week of the l a u n c h .

Large format: refers to accounts that are large chain foodstores, mass merchandisers, chaindrug stores, club stores and military bases.

Checklane merchandiser (CLM): cold equipmentdesigned for use in supermarket and foodstore checkout lanes.

End-cap display: a prominent display of soft drink products at the end of an aisle.

We are...

8

Mountain Dew is the top-s e l l i n g20-ounce beveragein convenience o u t l e t s. I t ’s alsoone of the mostpopular beverageson the slopes.

P B G ’s Grand J u n c t i o n ,C o l o r a d oMarket Unit, w h i c hserves some of thetop ski resorts in the U. S. i n c l u d i n gVail and Bre c k e n-ridge (picture dh e re ) , leverages the power of thebrand with theMountain Dew Vertical Challenge,a PBG-s p o n s o re dski race in which consumers race for fre e.

G R O W T H I N O U R S E G M E N T S

h a n dful of companies in the wo r l d

could accomplish, on October 14,

PBG stocked store shelves and display s ,

c o o l e rs and cold vaults in thousands

of accounts with Sierra Mist.

The effect was dramatic: m a s s ive Sierr a

Mist two-liter and multi-pack lobby

d i s p l ay s ,s u rrounded by new point-of-

p u rchase materi a l s , sprang up ove rn i g h t .

PBG gave the new product pro m i n e n c e

by immediately placing it among our

c o re brand lineup.The new green bottle

was so swiftly integrated into end-c a p s

and beverage aisles, that it had the

m a r ketplace presence of an establ i s h e d

brand on Day One of the ro l l - o u t .

Sampling and local promotional eve n t s

i n t roduced the new brand and cre a t e d

i n t e rest and excitement.

By ye a r - e n d ,

S i e rra Mist made

i n roads in heav y

flavor marke t s

such as Southern

C a l i f o rnia –

w h e re we gained

w i d e s p read

d i s t ri bution of

our key packages and captured the

m a r ket share we expected.

Watch for an approaching cold front

C o m p rising the other third of our

business in 2000 was the cold dri n k

s e g m e n t , the most pro fit a ble area of our

bu s i n e s s . For the second consecutive

ye a r, we allocated about half of

our capital spending for equipment

to support our cold drink growth –

adding more

than 140,000

net placements

of vending

m a c h i n e s ,c o o l e rs

and checklane

m e rc h a n d i s e rs

in the U. S.

and Canada.

Of our existing

p l a c e m e n t s ,

the growth of

20-o u n c e, f u l l -

s e rvice ve n d i n g

sales played a big

role in enhancing

our pro fit margin in 2000.The pro fit

on the 20-ounce bottle is signific a n t l y

higher than cans, and the package is

growing in popularity with consumers .

As we work to shift our product mix to

contain more of that package, we will

c o n t i nue to grow our pro fit a b i l i t y.

To capitalize on the growing trend

t owa rd convenience purchases and

on-t he-go consumption, we continu e d

to expand our reach beyo n d

the traditional cold

d rink ve nues such as

C o nvenience and

Gas (C&G) stores and

independent business stores (IBS).

I n c reased placements in superm a r ke t s ,

mass merc h a n d i s e rs and dru g s t o res have

resulted in double-d i git growth of our

cold single-s e rve sales in those channels

ve rsus 1999.

PBG products a re among thebiggest pro fit drivers for smallformat accounts.H e re, brands Pe p s iand Mountain Dewa re executed in a“blue door/gre e nd o o r ” set – inwhich they are allocated space in proportion tos a l e s, to drivemaximum pro fit s.

George Ty l e r,M e rc h a n d i s i n gM a n a g e r,P h i l a d e l p h i a , PA .

George deals withabout 20 small for-mat accounts andmanages 25 driverdeliveries daily.He has played amajor role in PBG’ssuccess in SouthP h i l l y, and is knownby his co-workersand his customersfor his pro f e s s i o n-alism and sense of urgency in re-solving customer i s s u e s. The key to his success? “I don’t lose focus that the customer is whyw e ’re here,” h es a y s. “That is always foremost in my mind.”

9

A cold,s i n g l e - s e r ve soda is the most frequently

purchased consumableitem in a conve n i e n c e

s t o r e .

Cold drink: cold products sold in retail and on-premise channels, which typically carry thehighest profit margins.

Full-service vending: PBG places and stocks the vending machine, paying a commission tothe account on the machine’s sales.

Channel: outlets that are similar in size, and that b u y, merchandise and sell soft drinks in similar ways.

We are...

1 0

satisfying

consumer-savvy

reliable

For the third consecutive year,PBG placed wellover 100,000 i n c remental piecesof cold drinkequipment acro s sthe U. S. a n dC a n a d a , putting our pro d u c t sw h e re thirsty consumers needthem most – suchas on this SouthB e a c h , M i a m ib o a rd w a l k .

N eve rt h e l e s s , a significant amount of

our cold drink sales do occur in small

f o rmat accounts – C&G and IBS

outlets up and down the street – where

we face increasing competition for ve ry

limited and premium space in the cold

vault and near the re gi s t e r.

Our products are among the biggest

p ro fit drive rs for small format accounts,

and in 2000 we aggre s s ively purs u e d

the space that is pro p o rtionate to those

p ro fit s .We reset thousands of cold

va u l t s , gained miles of additional shelf

s p a c e, and placed tens of thousands of

re gi s t er-a rea

c o o l e rs and ice

c h e s t s .We are

a rmed with a

compelling selling

p l a t f o rm to win

the battle for

i n c remental cold

s p a c e : in the U. S. ,

the brands we sell

a re the market

l e a d e rs in the

small form a t

c h a n n e l ,h a n d s

d ow n .M o u n t a i n

D ew and Pepsi are still the top two

b e st-selling 20-ounce beverages re s p e c-

t ive l y.The leading water is A q u a fin a ,

and the best-selling re a dy-to-d rink tea

and coffee are Lipton and Frappuccino,

re s p e c t ive l y. Then there is Fru i t Wo r k s ,

still a re l a t ive l y

n ew juice dri n k ,

but emerging as a

potential marke t

l e a d e r.The brand

grew more than 300 percent ve rs u s

1 9 9 9 ,d riven largely by increased

d i s t ri bution and strong

consumer re s p o n s e.

With the juice dri n k

c a t e g o ry growing at a

h e a l t hy rate in the U. S. ,

we expect Fru i t Works to be a

rising star in the coming ye a rs .

G R O W T H I N O U R S E G M E N T S

In the Little Havana section of Miami, F l o r i d a ,Pepsi products a re an integral part of the dailygame of dominoes.

Antonio Rivodo,P re-Sell Repre s e n-t a t i v e, M i a m i , F L .

In the two yearsAntonio has beenwith PBG, he has made quite an impact on the Miami market andon his colleaguesby consistentlyout-performing his goals. A n t o-n i o ’s 2000 re s u l t sincluded overallvolume growth in the double d i g i t s, and 100p e rcent distribu-tion of A q u a fin aand FruitWorks in his large format accounts.

11

The placement of re g i s t e r- a re ac o o l e r s, such asthis one in a localMiami gro c e r ys t o re chain, h e l p sPBG capture impulse sales.

PBG now has more than

pieces of cold drinkequipment across North A m e r i c a .

1, 0 0 0 , 0 0 0

Small format: convenience stores, gas stations and independent business store accounts.

Independent business store (IBS): n on-c h a i n ,small independent foodstore.

Cold vault: refrigerated units housing an assortment of beverages for consumer purchase; typically found in Convenience and Gas stores.

We a r e . . .

12

A “new and i m p ro v e d ” Pepsi C h a l l e n g e, c o n -ducted across P BG’s U. S. markets over the summer,b rought renewed excitement and i n t e rest to brand Pe p s i .T h eC h a l l e n g ewas conducted at special events,such as this Massachusetts rock concert,and at the re t a i ls t o re level.

G R O W I N G O U R M A R K E T P L A C E P R E S E N C E

The PBG promise

While Pe p s i C o

ow n st h et r a d e m a r k s

on the products

we make and sell,

by building Pepsi

m a r ketplace

p re s e n c e, PBG

p l ays a big part

in delive ring what

those trademarks

p ro m i s e :e x c i t e m e n t ,i n n ova t i o n ,f u n ,

quality and thirst-quenching satisfa c t i o n .

That is a big promise to ke e p. It means

implementing national and local

p rograms tailored to individual marke t s

and accounts, e s t a blishing PBG affil i a-

tions with community re s o u rces and

eve n t s , and linking our business to

p re s t i gious sports centers ,p ro f e s s i o n a l

teams and cultural institutions.

In 2000, national Pe p si-Cola progr a m s

such as “Choose Your Music” and

“ E a t ,D ri n k , and Be Scary,” f e a t u ring

popular cartoon dog Scooby - D o oT M,

and the re s u rrection of the Pepsi Chal-

lenge helped us keep our core CSDs

“ t op-of-m i n d ” for consumers .

The Pepsi Challenge, in part i c u l a r,

helped reignite excitement around the

1 0 2 - year-old cola brand.This time, t h e

revamped taste-test pitted both Pepsi

ve rsus Coke, and Pepsi ONE ve rs u s

Diet Coke. A c ross the nation, the re s u l t s

p roved Pepsi brands to be the pre f e rred

p ro d u c t s .And in the pro c e s s , the

Pepsi Challenge provided excitement

in stores and at major events across the

c o u n t ry. In 2001 we plan to work

with The Pe p si-Cola Company to

e x p a n d the

Pepsi Challenge,

s t a rting earlier

in the ye a r,

running it in

m o re marke t s ,

and developing

it into an even more powerful re t a i l

m e rchandising eve n t .

W h a t ’s in a name?

P restige pro p e rties – high-pro file

e n t e rtainment ve nu e s ,p ro f e s s i o n a l

s p o rts teams and arenas – offer a mu l t i -

faceted platform to reach consumers .

T h ey help drive local sales through

the prominent visibility of the brands,

t h rough the excitement of our pro d u c t s ’

close association with these pro p e rt i e s ,

and through the design

of exclusive,

c ro ss-p romotions

in conjunction

with local re t a i l e rs .

Execution of national Pepsi p ro m o t i o n s,such as this s u m m e r t i m e“Choose Your M u s ic” p ro g r a m ,helped PBG i n c rease our totalnumber of pro d u c tdisplays – one key to capturingi n c remental con-sumer purc h a s e s.PBG increased its total number of foodstore displays by 11p e rcent in 2000.

1 3

The “ E a t ,D r i n k , and BeS c a r y ”H a l l o w e e np ro m o t i o n ,featuring cartoondog Scooby-D ooT M, was a joint program that c ro s s -m e rchandised Pepsi beverageswith Frito-L ay®

salty snacks.

The majority of the people who

took the Pepsi Challenge over the summerof 2000 preferred

Pe p s i .

National promotions: promotions developed byPepsi-Cola USA executed across PBG mar-kets, often customized to individual accounts’n e e d s .

The Pepsi Challenge: a “blind” taste-test in which consumers are offered both Pepsi andCoke, and express their taste preference.

Merchandising event: an event conducted in a retail outlet to create interest and excitement,and to draw consumers to purchase a particularp r o d u c t .

We are...

1 4

The Pepsi Center,home to the Col-orado Av a l a n c h eand the DenverN u g g e t s, is aPe p si-linked p restige pro p e r t ythat has put Pe p s iin the fore f ront of the Denver c o m m u n i t y. As thecenterpiece for n u m e rous cro ss-p romotions withselected Denver-a rea re t a i l e r s,The Pepsi Centerhas helped drive i n c reased beveragesales for both PBG and our local retail partners.

G R O W I N G O U R M A R K E T P L A C E P R E S E N C E

One example is our affiliation with T h e

Pepsi Center, home to the Colorado

Avalanche and the Denver Nuggets,

a relationship we have used to drive

brand re c ognition and sales. E x c l u s ive

c ro s s - p romotions involving PBG, T h e

Pepsi Center and the largest Denve r -

a rea foodstore chain, King Soopers ,

h ave increased PBG’s community pre s-

ence and driven sales for both PBG and

our retail part n e r.

In 2000, P B G

sales in King

S o o p e rs experi-

enced ve ry stro n g

growth ve rs u s

p rior ye a r. Sales

of our 20-ounce

package in King

S o o p e rs grew

almost 100 per-

cent ve rsus 1999,

d riven by the

placement of

c u s t om-d e s i g n e d

c o o l e rs and

vending machines

b e a ring Pe p s i

Center gr a p h i c s .

The year 2000 brought some additional

big names to the PBG team, i n c l u d i n g

the Detroit T i g e rs ; the Pittsburgh

P i r a t e s ; the Experience Music Pro j e c t

and The Space Needle in Seattle; t h e

Space Center in Houston, the largest

t o u rist attraction in Te x a s ; Le Fo ru m

Pepsi in Montréal, C a n a d a ;

and the hottest

restaurant pro p e rty in

M o s c ow, the Starlite

Diner – to name a few.

Craig Bro w n ,Customer R e p re s e n t a t i v e,G re e l e y, C O.

C r a i g, a six-yearPepsi veteran, is a top-performer in his market.He is known forthe outstandingcustomer service that enables himto consistently exceed his salest a r g e t s. True tof o r m , Craig sur-passed his plan for volume gro w t hin his accounts in2 0 0 0 , and for thefifth year, e a rn e dhis market unit’sTop Gun Aw a rd ,which re c o g n i z e soutstanding jobp e r f o r m a n c e.

A PBG drivermakes his way to one of the mountain lodges ofthe Bre c k e n r i d g e,Colorado ski re s o r t ,an exclusive Pepsi account.

1 5

The total number of PBG

foodstore displays g r ew by more than

versus 1999.11 %

Cross-promotions: marketing programs designed to promote sales of two or more prod-ucts with similar target consumer groups.

Cold drink equipment: includes coolers, icec h e s t s ,vending machines and fountain equipment.

Prestige properties: h i gh-p r o file venues such as professional arenas and tourist attractions.

We are...

1 6

M O T I V A T E D F O C U S E D F A R - R E A C H I N G

Th rough morew i d e s p read distrib-ution in 2000, P B Gachieved re c o rdvolume levels in Russia,dramatically exceeding expec-t a t i o n s. H e re, aPBG truck passesThe Kremlin enroute to a delivery.

G R O W I N G O U R M A R K E T P L A C E P R E S E N C E

Russia: a promising frontier

N ow h e re has the power of marke t p l a c e

p resence been more evident than in

our Russia marke t .T h rough more

w i d e s p read distri bu t i o n

in 2000, PBG achieve d

re c o rd sales vo l u m e

for Pepsi products in

R u s s i a . In fa c t , vo l u m e

m o re than doubled ve rsus 1999,

exceeding levels that preceded the

1998 ru ble deva l u a t i o n .

Big account wins, including the largest

Russian airline,A e ro F l o t , added to our

m a r ketplace pre s e n c e, and to our sales

vo l u m e. So did the expansion of

our popular “ value line” of beve r a g e s ,

m a r keted under the Fiesta brand.

Getting our products “on the stre e t ,”

in outdoor kiosks and high-t r a f fic are a s

such as historic Old Arbat Stre e t ,

also played a part .The co-d i s t ri bution

of Pepsi and

F ri t o - L ay®

p roducts in Russia

has prov i d e d

e c o n o m i e s

of scale in distri -

bution and helped

both product lines

gain access to

m o re accounts

t h rough “ t h e

Power of One”

Pe p s i / F ri t o - L ay®

m e rchandising stre n g t h .

Per capita consumption of bottled wa t e r

is also rising at a vigorous rate in Russia,

positioning Aqua Minerale, the Pe p s i

water brand and the leading wa t e r

t h e re, for tremendous volume grow t h .

In 2000,we expanded the Aqua

Minerale line by launching a “ s t i l l ”

ve rs i o n , which will help PBG capture

our share of that consumption.

The tremendous growth potential

of the Russian market is becoming a

reality for PBG. Our results in Russia

a re well ahead of where we pre d i c t e d

we would now be, at the time of

P B G ’s initial public offering in 1999.

We will continue to grow our bu s i n e s s

t h e re, gaining

m o m e n t u m

t h rough incre a s e d

d i s t ri bution and

availability of

our pro d u c t s .

In 2000, R u s s i a ’slargest airline,A e roFlot RussianI n t e rnational A i r l i n e, c o n v e r t e dto exclusive Pe p s ibeverage service.The company carries about fiv emillion passengersa year on a fleet of 70 planes.

Stanislav Novikov,Territory Sales M a n a g e r, M o s c o w.

Stanislav has con-sistently achievedoutstanding salesg rowth in his terri-t o r y, even during the most diffic u l teconomic times inR u s s i a . He incre a s e dhis number of PBG customers in Moscow from 500 to more than 1,600during his thre eyears on the job.His new customersinclude all three domestic airports in his territory –which are now Pe p s iexclusive accounts.

1 7

P B G volume in Russia

g r ew more than

ye a r- ove r- ye a rin 2000.

100%

“Power of One”: refers to the purchasing and marketing power achieved by the teaming of multiple products within the PepsiCo portfolio.

Per capita consumption: average number of bever-age servings (usually measured as 8-ounce servings) consumed per person in a market or territory.

Value line: a group of products sold at an everyday low price aimed at the value-conscious c o n s u m e r.

We are...

1 8

e f fic i e n t

The installation of a high-s p e e dfiller in theM e s q u i t e, Te x a splant doubled thefilling capacity to 1,000 bottles per minute, w h i l etaking up less floor space. It also re q u i res s i g n i ficantly lesstime for linec h a n ge-o v e r s.

R E I N V E S T I N G F O R G R O W T H

Investing in organizational capability

Our fro nt-line sales team is undoubt-

edly our most powerful marke t p l a c e

f o rc e. In 2000, we continued to re i nve s t

in growing the capability of our fie l d

sales and marketing organization.We

staffed a new field marketing leaders h i p

function – professionals across our

N o rth A m e rica Business Units

who will ensure that our marke t i n g

p rograms are executed to achieve

m a x i mum results in our local marke t s .

In 2000, we launched an updated sales

training progr a m ,“ P.E . P.S.I . ,” to give

our front line a uniform , fa ct-based

a p p roach for selling our products and

e q u i p m e n t .A n d , an ongoing sales and

m a r keting video seri e s ,i n t roduced in

1 9 9 9 ,c o n t i nues to be issued to more

than 15,000 sales people on a monthly

b a s i s , focusing them on the specific

m a r ketplace pri o rities for a four-we e k

p e ri o d .

O p e r a t i o n s

With yearly volume of more than

one billion cases moving through the

PBG worldwide manu fa c t u ring system,

we are continually looking for oppor-

tunities to improve efficiency and

p ro d u c t iv i t y, i nvesting in technolog y

w h e re we will see the best re t u rn .

For example, the installation of a high-

speed filler in the Mesquite,Texas plant

was an inve s t m e n t

that doubled

bottling capacity

t o 1,000 bottles

per minu t e, a n d

i m p roved the time

re q u i red to change products on the line.

In 2000, a key area of investment wa s

in Pepsi Dire c t , our centralized call

center for on-p remise sales and serv i c e,

which handled nearly a billion dollars

in sales this ye a r. We also invested in

Computer

Telephone

I n t e gration

t e c h n o l og y, a n d

installed Call

Center Sales

s o f t wa re to

better train our

sales agents.

C o m b i n e d ,t h e s e

i nvestments en-

a ble Pepsi Dire c t

re p re s e n t a t ives to

p rovide higher

quality customer

s e rvice and

maximize the distri bution of our most

p ro fit a ble pro d u c t s .

The impact of Pepsi

D i rect improve m e n t s

on our sales and

d e l ive ry system has been

overwhelmingly positive.With the

Me s q u i t e, Te x a sBottle Line Te a m ,f rom left to right:Rocky Rogers,M e c h a n i c ;Dempsey Crabtre e,De-Palletizer O p e r a t o r; S h a ro nE d w a rd s, Filler O p e r a t o r; J i m m yH a r r i s, Pa c k a g i n gA rea Operator;Angie Fields, C h i e fE fficiency Offic e r.

This high-per-f o r ming team is capable of runningtwo bottling lines s i m u l t a n e o u s l ywithout losing e ffic i e n c y. To-g e t h e r, they keepthe high-s p e e dfiller in Mesquiterunning smoothly,and have gre a t l yi n c reased thecases per hourtheir lines pro d u c e.

A monthly video series focusesP B G ’s fro nt-l i n es a l e s f o rce on s p e c i fic market-place priorities for a four-week p e r i o d .

1 9

Pepsi Directaccounts grew their20-ounce vo l u m e

by more than 2 5 %

On-premise: outlets where consumers buy softdrinks for immediate consumption at or nearthe point of sale.

Front line: members of the PBG sales team who have daily, face-to-face contact with customers.

Filler: plant equipment that dispenses productinto bottles and cans.

We are...

2 0

Yo u t h f u l

C o o l

Progressive

The establishmentof school partner-ships is one way to reach the next generation of c o n s u m e r s. T h ePBG portfolio offers students a varietyof alternative beverages includingA q u a fina water andF r u i t Works juiced r i n k s, in additionto carbonated soft drinks.

o n - p remise sales call already conducted

over the phone, our route drive rs

can complete their delive ries more

e f fic i e n t l y, gaining more than 20

p e rcent in pro d u c t ivity – the equiva l e n t

of adding three stops

per day to their ro u t e s ,

t h e re by reducing ro u t e

d e l ive ry costs.

Pepsi Direct customers benefited fro m

m o re efficient delive ry schedules and

f ewer out-of-stock issues. R eve nue in

Pepsi Direct accounts led the PBG

system with more than five perc e n t

s a m e - s t o re growth ye a r - ove r - ye a r.

Those same accounts grew their

20-ounce vo l u m e, our most pro fit a bl e

p a c k a g e, by more than 25 perc e n t .

PBG Goes

to School

Perhaps no area

of investment is

as critical to our

business as our

e f f o rts to engage new soft drink con-

s u m e rs ,p a rticularly the next generation.

One way to reach this market is

t h rough school part n e rs h i p s , in which

we make our products ava i l a ble to

s t u d e n t s , while providing schools with

needed financial re s o u rc e s .R eve nu e

generated by these part n e rships has

funded scholars h i p s , athletic progr a m s ,

and other student-focused progr a m s .

P B G ’s we ll-rounded product port f o l i o,

which offers the brands that teens

p re f e r, a l o n g

with a va riety

of best-selling

a l t e rn a t ives to

c a r b o n a t e d

d ri n k s , such as

A q u a fina and

F ru i t Wo r k s ,h a s

helped us form

successful school

p a rt n e rs h i p s .S o

has our history

of strong com-

munity re l a t i o n s

and youth

a c t ivity sponsors h i p s . In 2000, s c h o o l

p a rt n e rships gave us the opportunity

to reach an additional 800,000 of

our younger consumers , while helping

to support the educational objectives of

their schools.

Soda in the City

The wave of the future is not solely in

our schools. In 2000, PBG targeted U. S.

urban community development as a key

i nve s t m e n t , aiming to be the pre f e rre d

b everage supplier to urban re t a i l e rs and

c o n s u m e rs .O ver the next decade, u r b a n

and ethnic consumers will contri bu t e

most of the population growth in the

top ten U. S.m a r ke t s , posing a long-

t e rm growth opportunity that we began

to systematically pursue in 2000.

R e c ognizing that urban consumers

and business ow n e rs – who span

ethnic backgrounds and generations –

h ave distinct lifestyles and beve r a g e

p re f e re n c e s , PBG embarked on a

f o rmal program to better meet their

needs and tastes. It included re s e a rch

PBG customerre p re s e n t a t i v e sd o n ’t just delivers o d a : they arecompany am-bassadors who collectively re p resent PBG in thousands ofcustomer interac-tions every week.

2 1

Jennifer Stenson,Key Account M a n a g e r,J a c k s o n v i l l e, F L .

A 14-year veteranof the Pepsi s y s t e m ,J e n n i f e rknows what ittakes to grow vol-ume in her food-s t o re accounts:i n - s t o re execution,solid categorymanagement anddiligent perfor-mance tracking. I n2 0 0 0 , J e n n i f e rg rew volume morethan six percent in her accounts,and gained almosttwo share points in her market –while getting thetargeted price i n c re a s e s.

We reached an additional

students through school partnerships in

2 0 0 0 .

8 0 0 , 0 0 0

Alternative beverages: n on-carbonated beverages with a broad product range, includ-ing water, teas, juices and “sports drinks.”

Category management: development of the optimum marketing strategy to maximize cate-gory sales and profit a b i l i t y.

Out-of-stock: refers to shelf space or vendors lacking product.

R E I N V E S T I N G F O R G R O W T H

We are...

2 2

In addition to c a reful attention tobeverage categorym a n a g e m e n t , P B G ’surban marketing e fforts include installation ofawnings and murals like this one in Hamtramck –the most ethnically diverse section of Detro i t .T h e s eexterior enhance-m e n t s both brightenthe neighborhoodand increase brand aware n e s s.Said one Detro i tp a s s e r b y, “This isPepsi town.”

on ethnic consumer shopping pattern s

and the dynamics of urban bu s i n e s s ;

c o m munity relations planning; the de-

velopment of marketing tools designed

to enhance urban commu n i t i e s ; and a

targeted adve rtising strategy. U l t i m a t e l y,

our efforts are all about cultivating

customer relationships and helping local

businesses – many of which are “ m o m

and pop” operations – thrive.

In 2000,we tested our urban marketing

p rogram in a handful of cities, i n c l u d i n g

D e t roit and parts

of Los A n g e l e s .

Our efforts

p roved successful

for PBG, bu s i n e s s

ow n e rs and the

c o m munity as

a whole.

In inner-city Detro i t , for example, t h e

i n d ividual stores where we implemented

our urban marke t i n g

p rogram grew Pe p s i

volume more than

50 perc e n t , and

reve nue nearly 70 perc e n t

on ave r a g e, ve rsus 1999.On a bro a d e r

s c a l e, the two city zones targeted for

urban development realized ave r a g e

Pepsi volume growth of about 80 per-

cent since the progr a m ’s inception.

D ow n t own consumers we re more like l y

to find the

b everages they

p re f e rre d , and

the city’s stre e t s

we re bri g h t e n e d

by bright bl u e

Pepsi aw n i n g s

and colorful

neon signage.

Urban marke t i n g

gives PBG not

just the chance to

grow our own bu s i n e s s , but to enhance

and contri bute to the communities in

which we operate – two reasons why

PBG has targeted 13 additional major

urban centers for future deve l o p m e n t .

Another powerful, profitable year is be-

hind us, but even more promising

things are ahead. We have the insights,

strategies and executional capability

to capitalize on the opportunities

of the new millennium. We are

swift, bold, fiercely competitive...

and unstoppable.

Jesse Pe t e r s o n ,P re-Sell Repre s e n-t a t i v e, D e t ro i t , M I .

Jesse handles thebeverage needs of small format accounts thro u g h-out the Hamtramcksection of Detro i t .As part of PBG’surban marketinge fforts in 2000,Jesse grew bottleand can volume inhis urban territoryby more than 50 perc e n t .S a y sJ e s s e, “My goal isto at least doublethe results I hadthe year before.Anything after that is gravy.”

The American E u ropean Market,a Detroit gro c e r youtlet targeted for urban marketing,g rew Pepsi revenue almost 70 perc e n tand volume nearly60 percent in 2 0 0 0 . PBG Key Account ManagerChris Zebari (left),and store owner Gina Sinadinovskia re pleased with the re s u l t s.

In the Detroit stores targeted for

urban marke t i n g , Pepsi volume grew more

than versus 1999.

50%

Pre-sell: sales system in which the retail outlet is contacted to obtain an order in advance of delivery.

Urban marketing: development of marketing and mer-chandising plans and tools designed specifically to grow sales and brand presence in city communities.

“Mom and Pop”store: small, independently owned foodstore/grocery retailer often run by a family.

R E I N V E S T I N G F O R G R O W T H

24

B O A R D O F D I R E C T O R S

From left to right:Thomas W. Jones , 51, was elected to PBG’sBoard in March 1999.Mr. Jones is the Chairmanand CEO, Global Investment Management andPrivate Banking Group, for Citigroup. He also isthe Co-Chairman and CEO of SSB Citi AssetManagement Group, a position he assumed inOctober 1998.

John T. Cahill , 43, was elected to PBG’s Boardin January 1999.He is our President and ChiefOperating Officer and has been designated tosucceed Mr.Weatherup as PBG’s Chief ExecutiveOfficer in late 2001.Mr Cahill served as our Executive Vice President and Chief Financial Officer prior to becoming President and ChiefOperating Officer.

Susan D. Kronick , 49, was elected to PBG’sBoard in March 1999.She has been Chairmanand CEO of Burdines,a division of FederatedDepartment Stores,since June 1997.Prior to thatshe was President of Federated’s Rich’s/Lazarus/Goldsmith’s division from 1993 to 1997.

From left to right:Barry H. Beracha , 59, was elected to PBG’sBoard in March 1999.He has been the Chairmanof the Board and CEO ofThe Earthgrains Company since 1993.Earthgrains was formerly part of Anheuser-Busch Companies,whereMr. Beracha served from 1967 to 1996.

Craig E. Weatherup , 55, was elected to PBG’sBoard in January 1999.He has been Chairman of the Board and CEO of PBG since March 1999.

Karl M. von der Heyden , 64,was elected to PBG’s Board in March 1999.Mr. von der Heydenrecently retired from both the PBG Board andPepsiCo, Inc. He had been Vice Chairman ofPepsiCo, Inc. since September 1996.

Margaret D. Moore , 53,(not pictured) was elected to PBG’s Board in January 2001, replacingMr. von der Heyden.Ms.Moore has been Senior Vice President of Human Resources of PepsiCo since the end of 1999.Prior to that,she was PBG’s Senior Vice President and Treasurer.

From left to right:Robert F. Sharpe, Jr ., 49, was elected to PBG’sBoard in March 1999.He is the Senior Vice President,Public Affairs,General Counsel andSecretary of PepsiCo.

Thomas H. Kean , 65, was elected to PBG’sBoard in March 1999.Mr. Kean has been thePresident of Drew University since 1990 and was the Governor of the State of New Jerseyfrom 1982 to 1990.

Linda G. Alvarado , 48, was elected to PBG’sBoard in March 1999.She is the President andCEO of Alvarado Construction,Inc.,a generalcontracting firm specializing in commercial,industrial,environmental and heavy engineeringprojects,a position she assumed in 1976.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Pepsi Bott ling Group, Inc. Annual Report 2000

M A N A G E M E N T ’ S F I N A N C I A L R E V I E W

OV E RV I E W

In 2000,our second year as an independent public company,The Pepsi Bottling Group, Inc. (collectively referred to as“PBG,”“we,”“our”and “us”) has made substantial progresstowards our key objectives – improving the economics of ourtake-home business, aggressively growing our high-margincold drink volume and sharply improving our internationalbusiness. Specifically, our efforts in these areas have gener-ated the following outstanding results:

• We delivered 16% constant territory EBITDA grow th in 2000.

• We increased our return on invested capital by 1.6 percent-age points to 7.6% in 2000.

• We delivered $1.53 in diluted earnings per share, anincrease of $0.82 over 1999 after adjusting 1999 for thenumber of shares outstanding to reflect our initial publicof fering and excluding unusual charges and credits. Dilutedearnings per share in 2000 included a $0.26 favorableimpact from a change in the estimated useful lives of cer-tain categories of assets and a $0.05 favorable impact fromthe inclusion of an additional week in our 2000 fiscal year.

• We generated $273 million of operating free cash flow in2000, an improvement of $112 million over the prior year.

The following discussion and analysis covers the key driversbehind our success in 2000 and is broken down into fivemajor sections. The first two sections provide an overviewand focus on items that affect the comparability of historicalor future results. The next two sections provide an analysisof our results of operations and liquidity and financial condi-tion. The last section contains a discussion of our marketrisks and cautionary statements. The discussion and analysisthroughout management’s financial review should be readin conjunction with the Consolidated Financial Statementsand the related accompanying notes.

Constant Te rri t o ry

We believe that constant territory performance results are themost appropriate indicators of operating trends and perfor-mance, particularly in light of our stated intention of ac quiringadditional bottling territories ,and are consistent with industrypractice. Constant territory operating results are derived byad justing current year results to exclude significant currentyear ac quisitions and ad justing prior year results to include theresults of significant prior year ac quisitions as if they had

TABLE OF CONTENTS

25 Management’s Financial Review

29 Consolidated Statements of Operations

33 Consolidated Statements of Cash Flows

34 Consolidated Balance Sheets

38 Consolidated Statements of Changes inShareholders’ Equity

39 Notes to Consolidated Financial Statements

52 Management’s Responsibility forFinancial Statements

53 Report of Independent Auditors

54 Selected Financial and Operating Data

55 Directors and Officers

56 Shareholder Information

2 5

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Initial Public Offeri n g

PBG was incorporated in Delaware in January 1999 and,prior to our formation, we were an operating unit of PepsiCo,Inc. (“PepsiCo”). We became a public company through aninitial public of fering on March 31,1999. Our initial publicof fering consisted of 100,000,000 shares of common stocksold to the public, equivalent to 65% of our outstandingcommon stock, leaving PepsiCo the owner of the remaining35% of outstanding common stock. PepsiCo’s ownership hasincreased to 37.8% of our outstanding common stock atDecember 30,2000 as a result of net repurchases of approxi-mately 10 million shares under our share repurchaseprogram,which began in October 1999. PepsiCo also owns100% of our outstanding Class B common stock, togetherrepresenting 46.0% of the voting power of all classes of ourvoting stock. In addition, PepsiCo owns 7.1% of the equity ofBottling Group,LLC, our principal operating subsidiary, giv-ing PepsiCo economic ownership of 42.2% of our combinedoperations at December 30,2000. We fully consolidate theresults of Bottling Group, LLC and present PepsiCo’s share asminority interest in our Consolidated Financial Statements.

For the periods prior to our initial public of fering we pre-pared our Consolidated Financial Statements as a “carve-out”from the financial statements of PepsiCo using the historicalresults of operations and assets and liabilities of our business.Certain costs reflected in the Consolidated FinancialStatements may not necessarily be indicative of the costs thatwe would have incurred had we operated as an independent,stand-alone entity for all per iods presented. These costsinclude an allocation of PepsiCo’s corporate overhead andinterest expense, and income taxes:

•• We included corporate overhead related to PepsiCo’scorporate administrative functions based on a specific iden-tification of PepsiCo’s administrative costs relating to thebottling operations and , to the ex tent that such identificationwas not practicable, based upon the percentage of our rev-enues to PepsiCo’s consolidated net revenues. These costsare included in selling, delivery and administrative expensesin our Consolidated Statements of Operations.

•• We allocated $3.3 billion of PepsiCo’s debt to our businessand charged interest expense on this debt using PepsiCo’sweighted-average interest rate. Once we issued $3.3 billionof third-party debt in the first quarter of 1999,our actualinterest rates were used to determine interest expense forthe remainder of the year.

The Pepsi Bottl ing Group, Inc.

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occurred on the first day of the prior fiscal year. In addition ,2000 constant territory results exclude the impact from anadditional week in our fiscal year (“53rd week ” ),w hich occursevery five or six years as our fiscal year ends on the lastSaturday in Decem ber. Constant territory results also excludeany unusual impairment and other charges and credits .

Use of EBITDA

EBITDA,which is computed as operating income plus thesum of depreciation and amortization, is a key indicatormanagement and the industry use to evaluate operatingperformance. It is not, however, required under generallyaccepted accounting principles and should not be consideredan alternative to measurements required by GAAP such asnet income or cash flows. In addition,EBITDA excludes theimpact of the non-cash portion of the unusual impairmentand other charges and credits discussed on the next page andin Note 4 to the Consolidated Financial Statements.

ITEMS T H AT AFFECT HISTORICAL OR

FUTURE COMPA R A B I L I T Y

Asset Live s

At the beginning of fiscal year 2000,we changed theestimated useful lives of certain categories of assets primarilyto reflect the success of our preventive maintenance programsin extending the useful lives of these assets.The changes,which are detailed in Note 3 to the Consolidated FinancialStatements, lowered total depreciation cost by approximately$69 million,or $0.26 per diluted share.

Fiscal Ye a r

Our fiscal year ends on the last Saturday in December and, asa result,a 53rd week is added every five or six years. Fiscal year2000 consisted of 53 weeks while fiscal years 1999 and 1998consisted of 52 weeks. The following table illustrates theapproximate dollars and percentage points of growth that theextra week contributed to our 2000 operating results:

Percentagedollars in millions, except per share amounts Dollars Points

Volume N/A 2Net Revenues $ 113 2EBITDA $ 14 2Diluted Earnings per Share $0.05 5

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• We reflected income tax expense in the ConsolidatedFinancial Statements as if we had actually filed a separateincome tax return.

The amounts, by year, of the historical allocations describedabove are as follows:

dollars in millions 1999* 1998

Corporate overhead expense $ 3 $ 40Interest expense $28 $210PepsiCo’s weighted-average interest rate 5.8% 6.4%*Prior to our initial public of fering.

U nusual Impairment and Other Charges and Cre d i t s

Our operating results were affected by the following unusualcharges and credits in 1999 and 1998:

dollars in millions 1999 1998*

Non-cash compensation charge $ 45 $ —Vacation policy change (53) —Asset impairment and restructur ing charges (8) 222

$(16) $222

After minority interest and income taxes $ (9) $218*Does not include the tax settlement with the Internal Revenue Service discussedon this page.

Non-cash Compensation Charge

In connection with the completion of our initial publicof fering, PepsiCo vested substantially all non-vested PepsiCostock options held by our employees. As a result, we incurreda $45 million non-cash compensation charge in the secondquarter of 1999,equal to the dif ference between the marketprice of the PepsiCo capital stock and the exercise price ofthese options at the vesting date.

Va c ation Po l i cy Change

As a result of changes to our employee benefit and compen-sation plans in 1999, employees now earn vacation timeevenly throughout the year based upon service rendered.Previously, employees were fully vested at the beginning ofeach year. As a result of this change, we reversed an accrualof $53 million into income in 1999.

Asset Impairment and Restru c t u ring Charge s

In the fourth quarter of 1998,we recorded $222 million ofcharges relating to the following:

• A charge of $212 million for asset impairment of $194 mil-lion and other charges of $18 million related to restructuringour Russian operations .

• A charge of $10 million for employee-related and other costs ,mainly relocation and severance, resulting from the separationof Pepsi -Cola bottling and concentrate organizations .

In the fourth quarter of 19 9 9 ,$8 million of the remaining1998 restructuring reserves was reversed into income, as actualcosts incurred to renegotiate manufacturing and leasing contracts in Russia and to reduce the num ber of employeeswere less than the amounts originally estimated .

Tax Settlement with the Internal Reve nue Serv i c e

In 19 9 8 ,we settled a dispute with the Internal RevenueService regarding the deducti b ility of the amortization ofac quired franchise rights , resulting in a $46 million tax benefit .

Comparability of our operating results may also be af fectedby the following:Concentrate Supply

We buy concentrate, the critical flavor ingredient for ourproducts, from PepsiCo, its affiliates and other brand ownerswho are the sole authorized suppliers. Concentrate prices aretypically determined annually.

In Feb ruary 2000,Pepsi Co announced an increase of approx i-mately 7% in the price of U. S. concentrate. Pepsi Co has recentlyannounced a further increase of approx imately 3%,effectiveFeb ruary 2001. A mounts paid or payable to Pepsi Co and itsaffiliates for concentrate were $1,507 million ,$ 1 , 4 18 millionand $1,283 million in 2000,1999 and 19 9 8 , respectively.

Bottler Incentive s

PepsiCo and other brand owners provide us with variousforms of marketing support. The level of this support isnegotiated annually and can be increased or decreased at thediscretion of the brand owners.This marketing support isintended to cover a variety of programs and initiatives,including direct marketplace support, capital equipmentfunding and shared media and advertising support. Directmarketplace support is primarily funding by PepsiCo and

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other brand owners of sales discounts and similar programs,and is recorded as an adjustment to net revenues. Capitalequipment funding is designed to support the purchase andplacement of marketing equipment and is recorded as areduction to selling,delivery and administrative expenses.Shared media and advertising support is recorded as a reduction to advertising and marketing expense withinselling, delivery and administrative expenses.

The total bottler incentives we received from PepsiCo andother brand owners were $566 million,$563 million and$536 million for 2000,1999 and 1998,respectively. Of theseamounts, we recorded $277 million,$263 million and$247 million for 2000,1999 and 1998,respectively, in netrevenues, and the remainder as a reduction of selling, deliveryand administrative expenses. The amount of our bottlerincentives received from PepsiCo was more than 90% ofour total bottler incentives in each of the three years, withthe balance received from the other brand owners.

Our Investment in Russia

In recent years ,we have invested in Russia to build in f ra-structure and to fund start- up manufacturing and distri butioncosts . D uring the first half of 19 9 8 , our volumes were growingat approx imately 50% over 1997 levels . However, followingthe August 1998 devaluation of the ruble, we ex perienced asignificant drop in demand , resulting in lower net revenuesand increased operating losses . As a result of the economic crisis and the under- utilization of assets , we incurred a chargeof $212 million in the fourth quarter of 1998 to write downour assets and reduce our fixed -cost structure.

The economic conditions in 2000 and 1999 have been morestable,with 2000 volumes and revenues exceeding levelsachieved immediately prior to the devaluation. We havefocused on developing alternative means of leveraging ourexisting asset base while significantly reducing costs. In thisregard, we have increased distribution of Frito-Lay® snackproducts,which we began in 1999, throughout all of Russia,except Moscow. We have also grown our value brandbeverage business (Fiesta), which was introduced in 1999,and increased distribution of our water products.

We anticipate that our Russian operations will continue toincur losses and require cash to fund operations for at leastthe fiscal year 2001. However, capital requirements will beminimal because our existing inf rastructure is adequate forcurrent operations. Cash requirements for investing activitiesand to fund operations were $17 million,$45 million and$156 million in 2000,1999 and 1998, respectively. Volume inRussia accounted for 2%,1% a nd 2% of our total volume in2000, 1999 and 1998, respectively. We will continue toreview our Russian operations on a regular basis and toconsider changes in our distribution systems and otheroperations as circumstances dictate.

E m p l oyee Benefit Plan Change s

We made several changes to our employee benefit plans thattook effect in fiscal year 2000. The changes were made toour vacation policy, pension and retiree medical plans andincluded some benefit enhancements as well as cost contain-ment provisions. These changes did not have a significantimpact on our financial results in 2000.

In 1999,our Board of Directors approved a matchingcompany contribution to our 401(k) plan, that began in2000. The match is dependent upon the employee’s contri-bution and years of service. The fiscal year 2000 matchingcompany contribution was approximately $15 million.

In the fourth quarter of 1999 we recognized a $16 millioncompensation charge related to full -year 1999 performance.T his ex pense was one- time in nature and was for the benefit of our management employees , reflecting our success ful operating results as well as providing certain incentive-related features .

The Pepsi Bottling Group,Inc. Annual Report 2000

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C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S

Fiscal years ended December 30,2000, December 25,1999 and December 26, 1998

in millions, except per share data 2000 1999 1998

Net Reve nu e s $7,982 $7,505 $7,041Cost of sales 4,405 4,296 4,181G ross Pro fit 3,577 3,209 2,860Selling, delivery and administrative expenses 2,987 2,813 2,583Unusual impairment and other charges and credits — (16) 222Operating Income 590 412 55Interest expense, net 192 202 221Foreign currency loss 1 1 26Minority interest 33 21 —Income (Loss) Before Income Ta xe s 364 188 (192)Income tax expense (benefit) 135 70 (46)Net Income (Loss) $ 229 $ 118 $ (146)

Basic Earnings (Loss) Per Share $ 1.55 $ 0.92 $ (2.65)Weighted-Average Shares Outstanding 147 128 55Diluted Earnings (Loss) Per Share $ 1.53 $ 0.92 $ (2.65)Weighted-Average Shares Outstanding 149 128 55See accompanying notes to Consolidated Financial Statements.

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M A N A G E M E N T ’ S F I N A N C I A L R E V I E W

R E S U LTS OF OPERAT I O N S

Fiscal 2000 vs.1999* Fiscal 1999 vs.1998*

Constant ConstantReported Territory Reported Territory

Change Change Change Change

EBITDA 18% 16% 25% 13%Volume 3% 1% 4% 0%Net Revenue per Case 3% 3% 3% 3%* Fiscal year 2000 consisted of 53 weeks while fiscal years 1999 and 1998 consisted

of 52 weeks.

E B I T DA

Reported EBITDA was $1,061 million in 2000, representingan 18% increase over 1999,with the 53rd week contributingapproximately 2 percentage points of the growth. Constantterritory EBITDA was 16% higher than 1999 driven bycontinued pricing improvements in our take-home segment,mix shifts to higher-margin cold drink volume, favorablecost of sales trends and improved results outside the U.S.,particularly in Russia.

Reported EBITDA was $901 million in 1999, representinga 25% increase over 1998. On a constant territory basis,EBITDA growth of 13% was driven by a strong pricingenvironment particularly in the U.S. take-home segment,solid volume growth in our higher-margin cold drinksegment and reduced operating losses in Russia.

Vo l u me

Our reported worldwide raw case volume grew 3% in 2000,with the 53rd week contributing approximately 2 percentagepoints of the growth. Worldwide constant territory volumegrew 1% in 2000 with flat volume growth from our U.S.operations and 7% growth from our operations outside theU.S. In the U.S., volume results reflected growth in our colddrink segment and the favorable impact of the launch ofSierra Mist in the fourth quarter of 2000,offset by declines inour take-home business. Our cold drink trends reflect oursuccessful placement of additional cold drink equipment inthe U.S. Take-home volume remained lower for the yearreflecting the effect of our price increases in that segment.Our volume growth outside the U.S. was led by Russia wherewe have reestablished brand Pepsi, introduced our own lineof value brand beverage products (Fiesta) and continued toincrease distribution of our water products. Partially offset-ting the growth in Russia were volume declines in Canadaresulting from significant take-home price increases in thatcountry. Raw case volume is defined as physical cases sold,regardless of the volume contained in those cases.

Our worldwide raw case volume grew 4% on a reported basisin 1999,and was flat on a constant territory basis. In the U.S.,constant territory volume improved 1% as growth in ourcold drink segment was offset by declines in the take-homebusiness as we raised prices in the take-home segment.Outside the U.S., our constant territory volumes declined3%, driven by the continued impact of the economicconditions in Russia that began to deteriorate in August 1998with the devaluation of the ruble, partially off set by improvedvolumes in Spain and Canada.

Net Reve nu e s

Reported net revenues were $7,982 million in 2000,a 6%increase over the prior year, with the 53rd week contributingapproximately 2 percentage points of the growth. On a constant territory basis, worldwide net revenues grew morethan 4%,driven by a 1% volume increase and a 3% increasein net revenue per case. Constant territory net revenue percase growth was driven by the U.S., which grew 6%, reflect-ing higher pricing, particularly in our take-home segment,and an increased mix of higher-revenue cold drink volume.These results were partially of fset by account level invest-ment spending aimed at sustainable Aquafina and cold drinkinventory gains in the marketplace. Outside the U.S.,constant territory net revenues were down 1%, reflectinga 7% increase in volume offset by an 8% decrease in netrevenue per case. Excluding the negative impact fromcurrency translations, net revenue per case decreased 1% outside the U.S. and increased 4% worldwide.

On a reported basis, net revenues were $7,505 million in1999, representing a 7% increase over 1998. On a constantterritory basis, net revenues increased 3%,with increases inthe U.S. offsetting a revenue decline outside the UnitedStates. U.S. constant territory growth of 4% was driven bya 1% increase in volume and a 3% increase in net revenueper case. The net revenue per case increase reflects strongpricing, led by advances in the take-home segment and anincreased mix of higher-revenue cold drink volume. Volumedeclines partially offset the revenue impact of higher take-home pr icing. Outside the U.S., revenue declines of 5% weredriven by the impact of the August 1998 ruble devaluationin Russia. On a worldwide basis, constant territory netrevenue per case was up 3%.

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Cost of Sales

Cost of sales increased $109 million , or 3% in 2000,with the5 3rd week contri buting approx imately 2 percentage points ofthe grow th . On a per case basis , cost of sales was essentiallyflat in 2000. I ncluded in current year costs are the favorableimpacts from the change in our estimated useful lives ofmanufacturing assets ,w hich totaled $34 million in 2000 andan approx imate 1 percentage point favorable impact f rom cur-rency translations . E xcluding the ef fects of the change in assetlives and currency translations , cost of sales on a per case basiswas more than 1% higher, as higher U. S. concentrate costswere partially off set by favorable packaging and sweetenercosts , favorable country mix and efficiencies in production .

Cost of sales increased $115 million, or 3% in 1999,but wasessentially flat on a per case basis as higher concentrate priceswere offset by lower packaging costs and the favorable ef fectof renegotiating our raw material contracts in Russia to aruble denomination instead of U.S. dollars.

S e l l i n g ,D e l ive ry and A d m i n i s t r a t ive Expenses

Selling, delivery and administrative expenses increased$174 million, or 6% in 2000,with the 53rd week contributingapproximately 1 percentage point of the growth. Included inselling, delivery and administrative expenses are the favorableimpacts from the change in estimated useful lives of certainselling and delivery assets,which lowered depreciationexpense by $35 million, and currency translations,whichlowered selling,delivery and administrative expense growthby approximately 1 percentage point in 2000. Excludingthe effects of the change in asset lives, currency translationsand the inclusion of the 53rd week, selling, delivery andadministrative expenses were approximately 7% higher in2000. Driving this increase were higher selling and deliverycosts primarily reflecting our significant investment inour U.S. cold dr ink infrastructure that began in 1999 andcontinued through 2000. Additional headcount, deliveryroutes and depreciation expense resulted from this initiative.In addition, higher performance-related compensation costscontributed to the cost growth. Growth in administrativecosts associated with the company matching contributionfor our new 401(k) plan in 2000 was of fset by a one-time,$16 million compensation charge in 1999.

Selling, delivery and administrative expenses grew $230 mil-lion,or 9% in 1999,driven by acquisitions and higher sellingand delivery costs,which resulted from our significant invest-ment in our U. S. and Canadian cold drink in frastructure.Higher advertising and marketing spending was of fset byreduced operating costs in Russia, as our cost structure bene-fited from our fourth quarter 1998 restructuring actions.Ad ministrative costs were impacted by increased performance-related compensation due to our stronger operating results in1999 compared to 1998 including a $16 million one-timecompensation charge,which was related to full-year 1999performance. Excluding the impact of performance-relatedcompensation, our administrative costs were relatively flatyear-over-year.

I n t e rest Expense, net

Net interest expense decreased by $10 million to $192 mil-lion in 2000,due primarily to increased interest incomeconsistent with our increase in cash and cash equivalents in2000 and reduced levels of debt outside the U.S.

Net interest expense decreased by $19 million to $202 mil-lion in 1999,due primarily to a lower average interest rate onour $3.3 billion of long-term debt. Our average interest ratedecreased from 6.4% in 1998,when we used PepsiCo’s aver-age interest rate, to 6.1% in 1999 when we issued our owndebt in the first quarter. Our lower 1999 interest rates reflectmarket conditions at the time we issued our debt. In addition,we had reduced levels of external debt outside the U.S.

Fo reign Currency Losses

Our foreign currency losses primarily arise from ouroperations in Russia. Since Russia is considered a highly infla-tionary economy for accounting purposes,we are required toremeasure the net monetary assets of our Russian operationsin U.S. dollars and reflect any resulting gain or loss in theConsolidated Statements of Operations. The August 1998devaluation of the Russian ruble resulted in significant for-eign currency losses in 1998. In 2000 and 1999, foreigncurrency losses have been minimized due to a more stableruble exchange rate.

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M i n o rity Intere s t

Minority interest represents PepsiCo’s 7.1% ownership inour principal operating subsidiary, Bottling Group,LLC. Theincreased minority interest expense in 2000 reflects higherBottling Group,LLC earnings in 2000.

Income Tax Expense (Benefit )

Our full-year effective tax rate for 2000 was 37.0%,com-pared to 37.4% in 1999. Our ef fective tax rate, excludingunusual impairment and other charges and credits,wouldhave been 37.0% and 38.0% in 2000 and 1999, respectively.The one point decrease is primarily due to the reducedimpact of fixed non-deductible expenses on higher pre-taxincome in 2000, partially offset by the decreased favorableimpact of our foreign results.

Our full-year effective tax rate in 1999 was an expense of37.4% compared with a benefit of 24.0% in 1998. In 1999,the impact of non-deductible goodwill and other expenses onthe effective tax rate was offset in part by lower ef fective taxrates in our markets outside the U.S., and by higher overallpre-tax income. In 1998,we settled a dispute with theInternal Revenue Service regarding the deductibility of theamortization of acquired franchise rights, resulting in a$46 million tax benefit in the fourth quarter. Also in 1998,our effective tax rate was increased due to the unusualcharges relating to the Russia restructuring and assetwrite-of fs for which we did not recognize a tax benefit.Our effective tax rate, excluding the unusual impairmentand other charges and credits,would have been 38.0% and0.9% in 1999 and 1998, respectively.

E a rnings Per Shareshares in millions 2 0 0 0 1999 1998

Basic earnings (loss) per share onreported net income (loss) $ 1 . 5 5 $0.92 $(2.65)

Average shares outstanding 1 4 7 128 55Diluted earnings (loss) per share on

reported net income (loss) $ 1 . 5 3 $0.92 $(2.65)Average shares outstanding 1 4 9 128 55

D i l u t i o n

Diluted earnings per share reflect the potential dilution thatcould occur if stock options from our stock compensationplan were exercised and converted into common stock thatwould then participate in net income. Our significant shareprice improvement during 2000 has resulted in $0.02 pershare of dilution.

Ave rage Shares Outstanding

The increase in shares outstanding over the last three yearsreflects our initial public of fering in March of 1999 and ourshare repurchase program. In 1999, immediately precedingour initial public offering, and in 1998 we had 55 millionshares of common stock outstanding. In connection with theof fering,we sold 100 million shares of common stock to thepublic. Since our initial public of fering, shares outstandingreflect the ef fect of our share repurchase program,whichbegan in October 1999 when our Board of Directorsauthorized the repurchase of up to 10 million shares of ourcommon stock. In the second quarter of 2000,our Board ofD irectors authorized the repurchase of an additional 5 millionshares . Net share repurchases were approx imately 5 million in both 2000 and 1999, respectively.

Pro Fo rma Earnings per Share

The table below sets forth earnings per share adjusted for theinitial public of fering and the impact of our unusual impair-ment and other charges and credits as previously discussed.In 1999,we assumed 155 million shares were outstandingfrom the beginning of the year and further adjusted sharesoutstanding for our share repurchase program. Similarly,the 1998 diluted earnings per share amounts in the tablebelow have been adjusted assuming 155 million shareshad been outstanding for the entire fiscal year.

shares in millions 2 0 0 0* 1999 1998

Diluted earnings (loss) per shareon reported net income (loss) $ 1 . 5 3 $ 0.76 $ (0.94)

Unusual impairment and othercharges and credits — (0.05) 1.41

Tax settlement — — (0.30)

Adjusted diluted earnings per share $ 1 . 5 3 $ 0.71 $ 0.17

Assumed diluted sharesoutstanding 1 4 9 155 155

*Includes the favorable impacts from the change in asset lives of $0.26 andthe addition of the 53rd week of $0.05. See Note 3 to the ConsolidatedFinancial Statements.

The Pepsi Bottling Group, Inc. Annual Report 2000

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C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S

Fiscal years ended December 30,2000, December 25,1999 and December 26, 1998

dollars in millions 2000 1999 1998

Cash Flows – OperationsNet income (loss) $ 229 $ 118 $ (146)Adjustments to reconcile net income (loss) to net cash provided by operations:

Depreciation 340 374 351Amortization 131 131 121Non-cash unusual impairment and other charges and credits — (32) 194Non-cash portion of tax settlement — — (46)Deferred income taxes — (27) 47Other non-cash charges and credits, net 176 141 88Changes in operating working capital, excluding effects of acquisitions:

Accounts receivable 13 (42) 46Inventories 11 3 (25)Prepaid expenses and other current assets (97) 4 8Accounts payable and other current liabilities 28 48 (13)

Net change in operating working capital (45) 13 16Net Cash Provided by Operations 831 718 625Cash Flows – Inve s t m e n t sCapital expenditures (515) (560) (507)Acquisitions of bottlers (26) (176) (546)Sales of property, plant and equipment 9 22 31Other, net (52) (19) (24)Net Cash Used for Inve s t m e n t s (584) (733) (1,046)Cash Flows – FinancingShort-term borrowings – three months or less 12 (58) 52Proceeds from third-party debt — 3,260 50Replacement of PepsiCo allocated debt — (3,300) —Net proceeds from initial public offering — 2,208 —Payments of third-party debt (9) (90) (72)Minority interest distribution (3) — —Dividends paid (12) (6) —Treasury stock transactions, net (103) (90) —Increase (decrease) in advances from PepsiCo — (1,750) 340Net Cash (Used for) Provided by Financing (115) 174 370E ffect of Exchange Rate Changes on Cash and Cash Equivalents (4) (5) 1Net Increase (Decrease) in Cash and Cash Equiva l e n t s 128 154 (50)Cash and Cash Equivalents – Beginning of Year 190 36 86Cash and Cash Equivalents – End of Ye a r $ 318 $ 190 $ 36

Supplemental Cash Flow Inform a t i o nNon -Cash Investing and Financing Activities :

Liabilities incurred and/or assumed in conjunction with acquisitions of bottlers $ 9 $ 65 $ 161

See accompanying notes to Consolidated Financial Statements.

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December 30,2000 and December 25, 1999

in millions, except per share data 2000 1999

ASSETS

C u rrent A s s e t sCash and cash equivalents $ 318 $ 190Accounts receivable, less allowance of $42 and $48 in 2000 and 1999, respectively 796 832Inventories 281 293Prepaid expenses and other current assets 189 183

Total Current A s s e t s 1,584 1,498Property,plant and equipment, net 2,358 2,218Intangible assets, net 3,694 3,819Other assets 100 89

Total A s s e t s $7,736 $7,624

LIABILITIES AND SHAREHOLDERS’ EQUITY

C u rrent Liab i l i t i e sAccounts payable and other current liabilities $ 941 $ 929Short-term borrowings 26 23

Total Current Liab i l i t i e s 967 952Long-term debt 3,271 3,268Other liabilities 474 385Deferred income taxes 1,072 1,178Minority interest 306 278

Total Liab i l i t i e s 6,090 6,061S h a re h o l d e rs ’E q u i t yCommon stock, par value $.01 per share:

authorized 300 shares, issued 155 shares 2 2Additional paid-in capital 1,736 1,736Retained earnings 355 138Accumulated other comprehensive loss (254) (223)Treasury stock: 10 shares and 5 shares in 2000 and 1999, respectively (193) (90)

Total Share h o l d e rs ’E q u i t y 1,646 1,563Total Liabilities and Share h o l d e rs ’E q u i t y $7,736 $7,624

See accompanying notes to Consolidated Financial Statements.

The Pepsi Bottling Group,Inc. Annual Report 2000

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LIQUIDITY AND FINANCIAL CONDITION

Liquidity and Capital Resourc e s

Liquidity Prior to our Separation from PepsiCo and our

Initial Public Offe ri n g

We financed our capital investments and acquisitions throughcash flow from operations and advances from PepsiCo priorto our separation from PepsiCo and our initial public offer-ing. Under PepsiCo’s centralized cash management system,PepsiCo deposited sufficient cash in our bank accounts tomeet our daily obligations, and withdrew excess funds fromthose accounts. These transactions are included in increase(decrease) in advances from PepsiCo in our ConsolidatedStatements of Cash Flows.

Liquidity After our Initial Public Offe ri n g

Subsequent to our initial public offering, we have financedour capital investments and acquisitions primarily throughcash flow from operations. We believe that our futurecash flow from operations and borrowing capacity will besufficient to fund capital expenditures, acquisitions, dividendsand other working capital requirements.

Financing Tr a n s a c t i o n s

On February 9,1999, $1.3 billion of 55⁄8% senior notes and$1.0 billion of 53⁄8% senior notes were issued by BottlingGroup, LLC and are guaranteed by PepsiCo. On March 8,1999, we issued $1 billion of 7% senior notes,which areguaranteed by Bottling Group, LLC. During the secondquarter of 1999,we executed an interest rate swap converting3% of our fixed-rate debt to floating-rate debt.

On March 31, 1999, we offered 100,000,000 shares of PBGcommon stock for sale to the public in an underwritten ini-tial public of fering generating $2.2 billion of net proceeds.

The proceeds from the above financing transactions wereused to repay obligations to PepsiCo and fund acquisitions.

In April 1999,we entered into a $500 million commercialpaper program that is supported by a credit facility. Thecredit facility consists of two $250 million components, oneof which expires in May 2001 and the other of which expiresin April 2004. There were no borrowings outstanding underthis program at December 30,2000 or December 25,1999.

Capital Expenditure s

We have incurred and will require capital for ongoinginfrastructure, including acquisitions and investments indeveloping market opportunities.

• Our business requires substantial infrastructure investmentsto maintain our existing level of operations and to fundinvestments targeted at growing our business. Capital inf ra-structure expenditures totaled $515 million,$560 millionand $507 million during 2000,1999 and 1998, respectively.We believe that capital infrastructure spending willcontinue to be significant, driven by our investments inthe cold drink segment and capacity needs.

• We intend to continue to pursue acquisitions of indepen-dent PepsiCo bottlers in the U.S. and Canada, particularlyin territories contiguous to our own. These acquisitionswill enable us to provide better service to our large retailcustomers, as well as to reduce costs through economiesof scale. We also plan to evaluate international ac quisitionopportunities as they become available. Cash spending onacquisitions was $26 million,$176 million and $546 millionin 2000,1999 and 1998, respectively.

Cash Flow s

Fiscal 2000 Compared to Fiscal 1999

Operating free cash flow grew $112 million, or 70%, f rom$161 million in 1999 to $273 million in 2000. Operating freecash flow is defined as net cash provided by operations lessnet cash used for investments, excluding cash used for theacquisitions of bottlers.

Net cash provided by operating activities increased $113 mil-lion to $831 million in 2000 driven by strong EBITDAgrowth partially of fset by the timing of casualty insurancepayments in 2000,which significantly contributed to ourunfavorable change in operating working capital.

Net cash used by investments decreased by $149 millionfrom $733 million in 1999 to $584 million in 2000,primarily due to acquisition spending,which was$150 million lower in 2000. Capital expenditures decreasedby $45 million, or 8%, as increases in the U.S. associatedwith our cold drink strategy were offset by decreasesoutside the U.S.

The Pepsi Bott ling Group,Inc. Annual Report 2000

M A N A G E M E N T ’ S F I N A N C I A L R E V I E W

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Net cash (used for) provided by financing decreased from asource of cash of $174 million in 1999 to a use of cash of$115 million in 2000. This decrease resulted from net cashreceived from IPO activities in 1999 coupled with anincrease of $13 million of share repurchases in 2000.

Fiscal 1999 Compared to Fiscal 1998

Operating free cash flow in 1999 grew $36 million, or 29%,to $161 million.

Net cash provided by operations in 1999 improved to$718 million from $625 million in 1998,due primarily tostrong growth in EBITDA and favorable working capitalcash flows resulting from the timing of cash payments andour continued focus on working capital management.

Net cash used for investments was $733 million in 1999compared to $1,046 million in 1998. In 1999,$176 m illionwas utilized for the acquisition of bottlers in the U.S., Canadaand Russia, compared to $546 million in 1998. In addition,we continued to invest heavily in cold drink equipment inthe U.S. and Canada, resulting in increased capital spendingfrom $507 million in 1998 to $560 million in 1999.

Net cash provided by financing decreased by $196 millionfrom $370 million to $174 million during 1999,mainly dueto the net pay-down of $58 million of short-term borrowingsin 1999,the payment in the first quarter of 1999 of long-termborrowings in Russia and $90 million of share repurchases inthe fourth quarter of 1999. Net IPO proceeds of $2.2 billionand proceeds from the issuance of third-party debt of$3.3 billion were used to repay obligations to PepsiCo andfund acquisitions.

MARKET RISKS AND CAU T I O N A RY STAT E M E N T S

Q u a n t i t a t ive and Qualitative Disclosures

about Market Risk

We are exposed to various market risks including commodityprices, interest rates on our debt and foreign currencyexchange rates.

Commodity Price Risk

We are subject to market risks with respect to commoditiesbecause our ability to recover increased costs through higherpricing may be limited by the competitive environment inwhich we operate.

We use futures contracts and options on futures in thenormal course of business to hedge anticipated purchasesof certain raw materials and fuel used in our operations.Currently we have various contracts outstanding foraluminum and oil purchases in 2001,which establish ourpurchase price within defined ranges.

Interest Rate Risk

We manage our interest rate exposure on our external debtusing financial instruments. We currently have an interestrate swap converting 3% of our fixed-rate debt to floating-rate debt.

Foreign Curr e n cy Exch a n ge Rate Risk

Operating in international markets involves ex posure tomovements in currency exchange rates . Currency exchangerate movements ty pically also affect economic grow th ,in flation , interest rates , govern ment actions and other factors .T hese changes can cause us to ad just our financing and operating strategies . T he discussion below of changes in currency exchange rates does not incorporate these othereconomic factors . For example, the sensitivity analysis presented in the foreign currency discussion below does nottake into account the possi b ility that the impact of anexchange rate movement may or may not be off set by theimpact of changes in other categories .

Operations outside the U.S. constitute approximately 15% of our net revenues. As currency exchange rates change,translation of the statements of operations of our businessesoutside the U.S. into U.S. dollars affects year-over-yearcomparability. We have not hedged currency risks becausecash flows from international operations have generally beenreinvested locally, nor historically have we entered intohedges to minimize the volatility of reported earnings. Weestimate that a 10% change in foreign exchange rates wouldaffect reported operating income by less than $15 million.

The Pepsi Bottling Group,Inc.

M A N A G E M E N T ’ S F I N A N C I A L R E V I E W

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Foreign currency gains and losses reflect translation gains andlosses arising from the re-measurement into U.S. dollars ofthe net monetary assets of businesses in highly inflationarycountries and transaction gains and losses. Russia is consid-ered a highly inflationary economy for accounting purposesand all foreign currency gains and losses are included in theConsolidated Statements of Operations.

The table below presents information on contractsoutstanding at December 30,2000:

N o t i o n a l C a rry i n g Fa i rdollars in millions A m o u n t A m o u n t Va l u e

Commodity futures contracts $ 1 0 9 $ — $ 3Commodity options 4 4 8 5 6Interest rate swap 1 0 0 — —

The table below presents information on contractsoutstanding at December 25,1999:

Notional Carrying Fairdollars in millions Amount Amount Value

Commodity futures contracts $ 91 $ — $ 6Commodity options 6 1 1 12Interest rate swap 10 0 — ( 2 )

E u ro

On January 1, 1999, eleven member countries of theEuropean Union established fixed conversion rates betweenexisting currencies and one common currency, the Euro.Beginning in January 2002, new Euro-denominated billsand coins will be issued, and existing currencies will be with-drawn from circulation. Spain is one of the original membercountries that instituted the Euro and, in June 2000,Greecealso elected to institute the Euro ef fective January 1,2001.We have established plans to address the issues raised by theE uro currency conversion . T hese issues include, among others ,the need to adapt computer and financial systems, businessprocesses and equip ment such as vending machines to accom-modate Euro-denominated transactions and the impact ofone common currency on cross-border pricing. Sincefinancial systems and processes currently accommodate

multiple currencies, we do not expect the system and equip-ment conversion costs to be material. Due to numerousuncertainties, we cannot reasonably estimate the long-termef fects one common currency may have on pricing, costs andthe resulting impact, if any,on our financial condition orresults of operations.

C a u t i o n a ry Statements

Except for the historical information and discussions con-tained herein, statements contained in this annual report onForm 10-K may constitute forward-looking statements asdefined by the Private Securities Litigation Reform Act of1995. These forward-looking statements are based on cur-rently available competitive, financial and economic data andPBG’s operating plans. These statements involve a number ofrisks, uncertainties and other factors that could cause actualresults to be materially different. Among the events anduncertainties that could adversely af fect future periods arelower-than-expected net pricing resulting from marketplacecompetition, material changes from expectations in the costof raw materials and ingredients, an inability to achieve theexpected timing for returns on cold drink equipment andrelated infrastructure expenditures, material changes inexpected levels of marketing support payments from PepsiCo,an inability to meet projections for performance innewly acquired territories, unexpected costs associatedwith conversion to the common European currency andunfavorable interest rate and currency fluctuations.

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Fiscal years ended December 30,2000, December 25,1999 and December 26, 1998Accumulated

Other Compre-Addit ional Compre- hensive

Common Paid-In Retained hensive Treasury Income/in millions Stock Capital Earnings Loss Stock Total (Loss)

Balance at December 27, 1 9 9 7 $ — $ — $ — $(184) $ — $ (184)Comprehensive loss:

Net loss — — — — — — $ (146)Currency translation adjustment — — — (35) — (35) (35)Minimum pension liability adjustment — — — (19) — (19) (19)

Total comprehensive loss $ (200)

Balance at December 26, 1 9 9 8 — — — (238) — (238)Comprehensive income:

Net loss before IPO — — — — — — $ (29)Net income after IPO — — 147 — — 147 147Currency translation adjustment — — — (4) — (4) (4)Minimum pension liability adjustment — — — 19 — 19 19

Total comprehensive income $ 133

Initial public offering: 100 shares net ofsettlement of advances from PepsiCo 2 1,736 — — — 1,738

Treasury stock transactions, net:5 shares — — — — (90) (90)Cash dividends declared on common stock — — (9) — — (9)Balance at December 25, 1 9 9 9 2 1,736 138 (223) (90) 1,563Comprehensive income:

Net income — — 229 — — 229 $ 229Currency translation adjustment — — — (31) — (31) (31)

Total comprehensive income $ 198

Treasury stock transactions, net:5 shares — — — — (103) (103)Cash dividends declared on common stock — — (12) — — (12)Balance at December 30, 2 0 0 0 $ 2 $1,736 $355 $(254) $(193) $1,646

See accompanying notes to Consolidated Financial Statements.

The Pepsi Bottling Group, Inc. Annual Report 2000

C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y

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Note 1: Basis of Pre s e n t a t i o n

T he Pepsi Bottling Group, I nc. ( “ PBG”) consists of bottlingoperations located in the United States ,Canada , Spain ,Greeceand Russia .T hese bottling operations manufacture, sell and dis-tri bute Pepsi -Cola beverages including Pepsi -Cola ,D iet Pepsi ,Mountain Dew and other brands of carbonated soft drinks andready- to-drink beverages . Approx imately 90% of PB G ’s 2000net revenues were derived from the sale of Pepsi -Cola beverages .References to PBG th roughout these Consolidated FinancialStatements are made using the first-person notations of “ we,”“our ”and “ us .”

Prior to our formation ,we were an operating unit of Pepsi Co,I nc. ( “ Pepsi Co ” ). On March 31,19 9 9 ,we offered 10 0 , 0 0 0 , 0 0 0shares of PBG com mon stock for sale at $23 per share in aninitial public offering generating $2,208 million in net pro-ceeds . T hese proceeds were used to fund ac quisitions andrepay obligations to Pepsi Co. Subse quent to the of fering ,Pepsi Co owned and continues to own 55,005,679 shares ofcom mon stock , consisting of 54,917 , 3 2 9 shares of com monstock and 88,350 shares of Class B com mon stock . Pepsi Co’sownership at Decem ber 30, 2000 represents 37.8% of the out-standing com mon stock and 100% of the outstanding Class Bcom mon stock , together representing 46.0% of the votingpower of all classes of our voting stock . Pepsi Co also owns7.1% of the equity of Bottling Group, LLC, our principaloperating subsidiary, giving Pepsi Co economic ownership of 42.2% of our com b ined operations at Decem ber 3 0 ,2 0 0 0 .

T he com mon shares and Class B com mon shares are substan-tially identical ,except for voting rights . Holders of our com monstock are entitled to one vote per share and holders of ourC lass B com mon stock are entitled to 250 votes per share. E achshare of Class B com mon stock held by Pepsi Co is , at Pepsi Co’soption ,converti ble into one share of com mon stock . Holders ofour com mon stock and holders of our Class B com mon stockshare equally on a per share basis in any dividend distri butions .

T he accompanying Consolidated Financial Statements includein formation that has been presented on a “carve- out ”basis forthe periods prior to our initial public offering .T his in formationincludes the historical results of operations and assets and liab ilities directly related to PB G, and has been prepared fromPepsi Co’s historical accounting records . Certain estimates ,assumptions and allocations were made in determining suchfinancial statement in formation .T herefore, these ConsolidatedF inancial Statements may not necessarily be indicative of theresults of operations ,financial position or cash flows that would

have ex isted had we been a separate, independent company fromthe first day of all periods presented .

Note 2: S u m m a ry of Significant Accounting Po l i c i e s

The preparation of our consolidated financial statements inconformity with generally accepted accounting principlesrequires us to make estimates and assumptions that af fectreported amounts of assets, liabilities, revenues, expenses anddisclosure of contingent assets and liabilities. Actual resultscould dif fer from these estimates.

Basis of Consolidation T he accounts of all of our wholly andmajority- owned subsidiaries are included in the accompany-ing Consolidated Financial Statements . We have eliminatedintercompany accounts and transactions in consolidation .

Fiscal Year Our fiscal year ends on the last Saturday inDecember and, as a result, a 5 3rd week is added every five orsix years. Fiscal year 2000 consisted of 53 weeks while fiscalyears 1999 and 1998 consisted of 52 weeks.

R e ve nue Recognition We recognize revenue when goods are delivered to customers . Sales terms do not allow a right of return unless product f resh ness dat ing has ex pired .Reserves for returned product were $3 million at fiscal year-end 2000 and $2 million at fiscal years ended 1999 and 19 9 8 , respectively.

A dve rtising and Marketing Costs We are involved in a variety of programs to promote our products . We includeadvertising and marketing costs in selling , delivery and ad min-istrative ex penses and ex pense such costs in the year incurred .Advertising and marketing costs were $350 million , $342 mil-lion and $293 million in 2000, 1999 and 19 9 8 , respectively.

Bottler Incentives PepsiCo and other brand owners, at theirsole discretion, provide us with various forms of marketingsupport.This marketing support is intended to cover a varietyof programs and initiatives, including direct marketplacesupport, capital equipment funding and shared media andadvertising support. Based on the objective of the programsand initiatives, we record marketing support as an adjustmentto net revenues or as a reduction of selling, delivery andadministrative expenses. Direct marketplace support is pri-marily funding by PepsiCo and other brand owners of salesdiscounts and similar programs and is recorded as an adjust-ment to net revenues. Capital equipment funding is designedto support the purchase and placement of marketing equip ment

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The Pepsi Bott ling Group, Inc. Annual Report 2000

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Tabular dollars in millions, except per share data

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and is recorded as a reduction of selling,delivery and admin-istrative expenses. Shared media and advertising support isrecorded as a reduction to advertising and marketing expensewithin selling, delivery and administrative expenses.Thereare no conditions or other requirements that could result in arepayment of marketing support received.

The total bottler incentives we received from PepsiCo andother brand owners were $566 million,$563 m illion and$536 million for 2000,1999 and 1998, respectively. Of theseamounts, we recorded $277 million,$263 million and$247 million for 2000,1999 and 1998,respectively, in net rev-enues, and the remainder as a reduction of selling, deliveryand administrative expenses. The amount of our bottlerincentives received from PepsiCo was more than 90% of ourbottler incentives in each of the three years, with the balancereceived from the other brand owners.

S t o ck-Based Employee Compensation We measure stock-based compensation expense in accordance with AccountingPrinciples Board Opinion 25,“Accounting for Stock Issuedto Employees,” and its related interpretations. Accordingly,compensation expense for stock option grants to PBGemployees is measured as the excess of the quoted marketprice of common stock at the grant date over the amount theemployee must pay for the stock. Our policy is to grant stockoptions at fair value on the date of grant.

Cash Equivalents Cash equivalents represent funds we havetemporarily invested with original maturities not exceedingthree months.

I n ve n t o ries We value our inventories at the lower of cost com-puted on the first- in ,first- out method or net realizable value.

P r o p e rt y, Plant and Equipment We state property, plant andequipment (“PP&E”) at cost, except for PP&E that has beenimpaired, for which we write down the carrying amount toestimated fair-market value,which then becomes the newcost basis.

I n t a n g i ble Assets Intangible assets include both franchiserights and goodwill arising from the allocation of the pur-chase price of businesses acquired. Goodwill represents theresidual purchase price after allocation to all identifiable netassets. Franchise rights and goodwill are evaluated at the dateof acquisition and amortized on a straight-line basis overtheir estimated useful lives,which in most cases is from20 to 40 years.

R e c ove rability of Long-Lived Assets We review all long-lived assets, including intangible assets,when facts andcircumstances indicate that the carrying value of the assetmay not be recoverable. When necessary, we write down animpaired asset to its estimated fair value based on the bestinformation available. Estimated fair value is generallybased on either appraised value or measured by discountingestimated future cash flows. Considerable managementjudgment is necessary to estimate discounted future cashflows. Accordingly, actual results could vary significantlyfrom such estimates.

M i n o rity Interest PBG and PepsiCo contributed bottlingbusinesses and assets used in the bottling businesses toBottling Group, LLC, our principal operating subsidiary, inconnection with the formation of Bottling Group,LLC. As aresult of the contribution of these assets, PBG owns 92.9% ofBottling Group,LLC and PepsiCo owns the remaining 7.1%.Accordingly, the Consolidated Financial Statements reflectPepsiCo’s share of consolidated net income of Bottling Group,LLC as minority interest in our Consolidated Statementsof Operations, and PepsiCo’s share of consolidated net assetsof Bottling Group, LLC as minority interest in ourConsolidated Balance Sheets.

Tr e a s u ry Stock We record the repurchase of shares of ourcommon stock at cost and classify these shares as treasurystock within shareholders’ equity. Repurchased shares areincluded in our authorized shares but not included in ourshares outstanding. We record shares reissued using an aver-age cost. In the second quarter of 2000 the Board of Directorsauthorized the repurchase of 5 million shares of commonstock, increasing the cumulative amount of shares that canbe repurchased from 10 million shares,which our Board ofDirectors authorized in 1999, to 15 million shares. We madenet repurchases of approximately 5 million shares for$103 million in 2000 and approximately 5 million sharesfor $90 million in 1999.

Financial Instruments and Risk Management We usefutures contracts and options on futures to hedge against therisk of adverse movements in the price of certain commodi-ties and fuel used in our operations. In order to qualify fordeferral hedge accounting of unrealized gains and losses, suchinstruments must be designated and effective as a hedge of ananticipated transaction. Changes in the value of instrumentsthat we use to hedge commodity prices are highly correlatedto the changes in the value of the purchased commodity.

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The Pepsi Bottl ing Group, Inc.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Tabular dollars in millions, except per share data

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We review the correlation and ef fectiveness of these financialinstruments on a periodic basis. Gains and losses on futurescontracts that are designated and effective as hedges of futurecommodity purchases are deferred and included in the costof the related raw materials when purchased. Financialinstruments that do not meet the cr iteria for hedge account-ing treatment are marked-to-market with the resultingunrealized gain or loss recorded as other income and expensewithin selling, delivery and administrative expenses. Realizedgains and losses that result from the early termination offinancial instruments used for hedging purposes are deferredand expensed when the anticipated transaction actuallyoccurs. Premiums paid for the purchase of options on futuresare recorded as a prepaid expense in the Consolidated BalanceSheets and are amortized over the duration of the contract.

From time to time, we utilize interest rate swaps to hedgeour exposure to fluctuations in interest rates. The interestdifferential to be paid or received on an interest rate swap isrecognized as an adjustment to interest expense as the dif fer-ential occurs.The interest differential not yet settled in cashis reflected in the accompanying Consolidated Balance Sheetsas a receivable or payable within the appropriate current assetor liability captions. If we terminate an interest rate swapposition, the gain or loss realized upon termination would bedeferred and amortized to interest expense over the remain-ing term of the underlying debt instrument it was intendedto modif y, or would be recognized immediately if theunderlying debt instrument was settled prior to maturity.

We use prepaid forward contracts for the purchase of PBGcommon stock to hedge the portion of our deferred compen-sation costs which are based on our stock price. The forwardcontracts are reflected in our Consolidated Balance Sheetsat fair value as a prepaid ex pense and changes in fair value of these contracts are reflected as interest expense in ourConsolidated Statements of Operations.

Shipping and Handling Costs We record shipping andhandling costs within selling, delivery and administrativeexpenses. Such costs totaled $925 million,$915 millionand $882 million in 2000,1999 and 1998, respectively.

Foreign Curr e n cy Gains and Losses We translate the bal-ance sheets of our foreign subsidiaries that do not operate inhigh ly in flationary economies at the exchange rates in effectat the balance sheet date, w hile we translate the statements

of operations at the average rates of exchange during the year.T he resulting translation ad justments of our foreign subsidiariesare recorded directly to accumulated other comprehensiveloss . Foreign currency gains and losses reflect translation gainsand losses arising from the re- measurement into U. S. dollarsof the net monetary assets of businesses in high ly in flationarycountries and transaction gains and losses . Russia is considereda high ly in flationary economy for accounting purposes and we include all foreign currency gains and losses in theConsolidated Statements of Operations .

New Accounting Standards In June 1998, the FinancialAccounting Standards Board (FASB) issued Statement ofFinancial Accounting Standard 133,“Accounting forDerivative Instruments and Hedging Activities.”This state-ment establishes accounting and reporting standards forhedging activities and derivative instruments, includingcertain derivative instruments embedded in other contracts,which are collectively referred to as derivatives. It requiresthat an entity recognize all derivatives as either assets orliabilities in the statement of financial position and measurethose instruments at fair value.

In July 19 9 9 , the FASB issued Statement of FinancialAccounting Standard 13 7 , delaying the implementation ofS FAS 133 for one year. S FAS 133 will now be ef fective for ourfirst quarter of fiscal year 2001. In June 2000, the FASB issuedStatement of Financial Accounting Standard 13 8 ,amendingthe accounting and reporting standards of SFAS 13 3 .

We will implement the accounting and reporting standards of SFAS 13 3 , as amended by SFAS 13 8 , on the first day of fiscalyear 2001. T he adoption of these pronouncements will resultin an increase in assets of less than $10 million and a corre-sponding decrease in accumulated other comprehensive loss .

E a rnings Per Share We compute basic earnings per shareby dividing net income by the weighted-average number ofcommon shares outstanding for the period. Diluted earningsper share reflect the potential dilution that could occur ifsecurities or other contracts to issue common stock wereexercised and converted into common stock that would thenparticipate in net income.

R e c l a s s i fic ations Certain reclassifications were made in ourconsolidated financial statements to 1999 and 1998 amountsto conform with the 2000 presentation.

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Note 3: C o m p a r ability of Results

Asset Lives At the beginning of fiscal year 2000,we changedthe estimated useful lives of certain categories of assets pri-marily to reflect the success of our preventive maintenanceprograms in extending the useful lives of these assets.Thechanges,which are detailed in the table below, lowered totaldepreciation expense by approximately $69 million,equiva-lent to $0.26 per diluted share.

Estimated Useful Live s

in ye a r s 2 0 0 0 1999

Manufacturing equipment 1 5 10Heavy fleet 1 0 8Fountain dispensing equipment 7 5Small specialty coolers and specialty

marketing equipment 3 5 to 7

Fiscal Year Fiscal year 2000 consisted of 53 weeks whilefiscal years 1999 and 1998 consisted of 52 weeks. The extraweek in 2000 contributed approximately $0.05 of additionaldiluted earnings per share to our 2000 operating results.

Initial Public Offe ri n g For the periods prior to our initialpublic of fering, our Consolidated Financial Statements havebeen“carved-out” from the financial statements of PepsiCousing the historical results of operations and assets and liabili-ties of our business. The Consolidated Financial Statementsreflect certain costs that may not necessarily be indicativeof the costs we would have incurred had we operated as anindependent, stand-alone entity for all periods presented.These costs include an allocation of PepsiCo’s corporateoverhead and interest expense, and income taxes.

• We included corporate overhead related to PepsiCo’scorporate administrative functions based on a specific iden-tification of PepsiCo’s administrative costs relating to thebottling operations and, to the extent that such identifica-tion was not practicable, based upon the percentage of ourrevenues to PepsiCo’s consolidated net revenues.These costsare included in selling, delivery and administrative expensesin our Consolidated Statements of Operations.

• We allocated $3.3 billion of PepsiCo’s debt to our business.We charged interest expense on this debt using PepsiCo’sweighted-average interest rate. Once we issued $3.3 billionof third-party debt in the first quarter of 1999,our actualinterest rates were used to determine interest expense forthe remainder of the year.

• We reflected income taxes in our Consolidated FinancialStatements as if we had actually filed a separate incometax return.

The amounts, by year, of the historical allocations describedabove are as follows:

1999* 1998

Corporate overhead expense $ 3 $ 40Interest expense $28 $210PepsiCo’s weighted-average interest rate 5.8% 6.4%*Prior to our initial public of fering.

In addition, our historical capital structure is not repre-sentative of our current structure due to our initial publicof fering. In 1999, immediately preceding the of fering,and in 1998,we had 55,000,000 shares of common stockoutstanding. In connection with the of fering,we sold100,000,000 shares to the public.

Note 4: U nusual Impairment and

Other Charges and Cre d i t s

1999 1998*

Non-cash compensation charge $ 45 $ —Vacation policy change (53) —Asset impairment and

restructuring charges (8) 222

$(16) $222

After minority interest andincome taxes $ (9) $218

*Does not include the tax settlement with the Internal Revenue Service discussedon the next page.

The 1999 unusual items comprise the following:

• In connection with the completion of our initial publicof fering, PepsiCo vested substantially all non-vestedPepsiCo stock options held by PBG employees. As a result,we incurred a $45 million non-cash compensation chargein the second quarter, equal to the dif ference between themarket price of the PepsiCo capital stock and the exerciseprice of these options at the vesting date.

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The Pepsi Bottling Group,Inc.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Tabular dollars in millions, except per share data

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Note 5: I nve n t o ri e s

2000 1999

Raw materials and supplies $107 $110Finished goods 174 183

$281 $293

Note 6: P ro p e rt y, Plant and Equipment, n e t

2 0 0 0 1999

Land $ 1 4 5 $ 145Buildings and improvements 9 0 3 852Manufacturing and distribution equipment 2 , 1 8 6 2,112Marketing equipment 1 , 7 4 5 1,596Other 8 9 84

5 , 0 6 8 4,789Accumulated depreciation ( 2 , 7 1 0 ) (2,571)

$ 2,358 $ 2,218

We calculate depreciation on a straight-line basis over theestimated lives of the assets as follows:

Buildings and improvements 20-33 yearsManufacturing equipment 15 yearsDistribution equipment 5-10 yearsMarketing equipment 3-7 years

Note 7: I n t a n gible A s s e t s ,n e t

2 0 0 0 1999

Franchise rights and otheridentifiable intangibles $ 3,557 $ 3,565

Goodwill 1 , 5 9 1 1,582

5 , 1 4 8 5,147Accumulated amortization ( 1 , 4 5 4 ) (1,328)

$ 3,694 $ 3,819

Identifiable intangi ble assets arise principally from the alloca-tion of the purchase price of businesses ac quired , and consistprimarily of territorial f ranchise rights . Our franchise rightsare ty pically perpetual in duration , sub ject to compliance withthe underlying f ranchise agreement . We assign amounts tosuch identifiable intangi bles based on their estimated fairvalue at the date of ac quisition . Good will represents the resid-ual purchase price after allocation to all identifiable net assets .

• Employees now earn vacation time evenly throughout theyear based upon service rendered. Previously, employeeswere fully vested for the current year at the beginning ofeach year. As a result of this change,we reversed an accrualof $53 million into income.

• In the fourth quarter, $8 million of the remaining 1998restructuring reserve was reversed into income, as actualcosts incurred to renegotiate manufacturing and leasingcontracts in Russia and to reduce the number of employeeswere less than the amounts originally estimated.

The 1998 unusual items comprise the following:

• A fourth-quarter charge of $212 million for asset impair-ment of $194 million and other charges of $18 millionrelated to the restructuring of our Russian bottling opera-tions. The economic turmoil in Russia,which accompaniedthe devaluation of the ruble in August 1998,had an adverseimpact on our operations. Consequently, in the fourthquarter we experienced a significant drop in demand,resulting in lower net revenues and increased operatinglosses. Additionally, since net revenues in Russia are denom-inated in rubles,whereas a substantial portion of costs andexpenses at that time were denominated in U.S. dollars,our operating margins were further eroded. In response tothese conditions,we reduced our cost structure primarilythrough closing four of our 26 distribution facilities, rene-gotiating manufacturing and leasing contracts and reducingthe number of employees, primarily in sales and operations,from approximately 4,500 to 2,000. We also evaluatedthe resulting impairment of long-lived assets, triggered bythe reduction in utilization of assets caused by the lowerdemand, the adverse change in the business climate and theexpected continuation of operating losses and cash deficitsin that market. The impairment charge reduced the netbook value of these assets from $ 2 4 5 million to $51 million ,their estimated fair market value based primarily on valuespaid for similar assets in Russia .

A fourth-quarter charge of $10 million for employee-related and other costs, mainly relocation and severance,resulting from the separation of Pepsi-Cola NorthAmerica’s concentrate and bottling organizations.

• We recognized an income tax benefit of $46 million in thefourth quarter of 1998 upon the settlement of a disputedclaim with the Internal Revenue Service relating to thededucti b ility of the amortization of ac quired franchise rights .

4 3

Annual Report 2000

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In April 19 9 9 ,we entered into a $500 million com mercialpaper program that is supported by a credit facility. T he creditfacility consists of two $250 million components , one of w hich ex pires in May 2001 and the other of which ex pires inApril 2 0 0 4 . T here were no borrowings outstanding under thisprogram at Decem ber 30, 2000 or Decem ber 25,19 9 9 .

We have available short- term bank credit lines of approx i-mately $135 million and $121 million at Decem ber 30, 2 0 0 0and Decem ber 25,19 9 9 , respectively. T hese lines are used tosupport general operating needs of our business outside theU. S. T he weighted - average interest rate of these lines of creditoutstanding at Decem ber 30, 2 0 0 0 ,Decem ber 25,1999 andDecem ber 26,1998 was 8.9%, 12.0% and 8.7%, respectively.

A mounts paid to third parties for interest were $202 million ,$ 108 million and $20 million in 2000, 1999 and 19 9 8 ,respectively. In 1999 and 19 9 8 , allocated interest ex pense was deemed to have been paid to Pepsi Co, in cash , in theperiod in which the cost was incurred .

Note 10: L e a s e s

We have noncancellable commitments under both capitaland long-term operating leases. Capital and operating leasecommitments expire at various dates through 2023. Mostleases require payment of related executory costs,whichinclude property taxes, maintenance and insurance.

Our future minimum commitments under noncancellableleases are set forth below:

Commitments

Capital Operating

2001 $ — $ 262002 — 212003 — 122004 — 92005 — 8Later years 3 60

$ 3 $136

At December 30,2000, the present value of minimum pay-ments under capital leases was $1 million, after deducting$2 million for imputed interest. Our rental expense was$42 million,$55 million and $45 million for 2000,1999 and1998, respectively.

Note 8: Accounts Payable and

Other Current Liab i l i t i e s

2 0 0 0 1999

Accounts payable $344 $334Accrued compensation and benefits 1 4 7 147Trade incentives 2 0 6 201Accrued interest 7 1 69Other current liabilities 1 7 3 178

$ 9 4 1 $929

Note 9: S h o rt - t e rm Borrowings

and Long-term Deb t

2 0 0 0 1999

Short-term borrowingsCurrent maturities of long-term debt $ 1 $ 10Borrowings under lines of credit 2 5 13

$ 2 6 $ 23

Long-term debt55⁄8% senior notes due 2009 $ 1 , 3 0 0 $1,30053⁄8% senior notes due 2004 1 , 0 0 0 1,0007% senior notes due 2029 1 , 0 0 0 1,000Other 6 15

3 , 3 0 6 3,315Less: Unamortized discount 3 4 37

Current maturities of long-term debt 1 10

$ 3 , 2 7 1 $3,268

Maturities of long - term debt as of Decem ber 30, 2000 are2 0 0 1 : $1 million ,2 0 0 2 :$ 0 ,2 0 0 3 :$ 0 ,2 0 0 4 : $1,000 million ,2 0 0 5 : $0 and thereafter, $2,305 million .

T he $1.3 billion of 55⁄8% senior notes and the $1.0 billion of53⁄8% senior notes were issued on Feb ruary 9, 19 9 9 , by our subsidiary Bottling Group, LLC and are guaranteed by Pepsi Co.We issued the $1.0 billion of 7% senior notes ,w hich are guar-anteed by Bottling Group,LLC, on March 8, 19 9 9 . D uring the second quarter of 1999 we executed an interest rate swapconverting 3% of our fixed -rate debt to floating -rate deb t .

We allocated $3.3 billion of Pepsi Co’s long - term debt in ourfinancial statements prior to issuing the senior notes referred toabove. Our interest ex pense includes the related allocatedinterest ex pense of $28 million in 1999 and $210 million in19 9 8 , and is based on Pepsi Co’s weighted - average interest rateof 5.8% and 6.4% in 1999 and 19 9 8 , respectively.

44

The Pepsi Bottl ing Group, Inc.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Tabular dollars in millions, except per share data

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amounts of $557 million and $152 million outstanding,respectively. These notional amounts do not representamounts exchanged by the parties and thus are not a measureof our exposure; rather, they are used as the basis to calculatethe amounts due under the agreements.

Interest Rate Risk Prior to our initial public of fering,we had minimal external interest rate risk to manage.Subsequent to the offering, as interest rate risk has grown, wehave begun to manage interest rate exposure through the useof an interest rate swap, which converted 3% of our fixed-ratedebt to floating-rate debt. Credit risk from the swap agree-ment is dependent both on the movement in interest ratesand the possibility of non-payment by the swap counterparty.We mitigate credit risk by only entering into swap agree-ments with high credit-quality counterparties and by nettingswap payments within each contract. The notional amount,interest payment and maturity date of the swap matches thenotional amount, interest payment and maturity date of therelated debt and, accordingly, any market risk or opportunityassociated with this swap is fully of fset by the oppositemarket impact on the related debt.

Other Risks At December 30,2000, we had equity derivativecontracts with financial institutions with a notional amountof $10 million. These prepaid futures contracts are for thepurchase of PBG common stock and are used to hedge theportion of our deferred compensation costs which are basedon our stock price. These contracts are marked-to-marketwith changes in fair value recognized as interest expensein our Consolidated Statements of Operations. The changein fair value of these contracts was not significant in 2000.The fair value of these contracts totaled $10 million atDecember 30,2000 a nd was recorded in prepaid expenses andother current assets in our Consolidated Balance Sheets.

Note 12: Pension and Po s t re t i rement Benefit Plans

Pension Benefits Our U. S. employees participate in non-contri butory defined benefit pension plans ,w hich coversubstantially all full - time salaried employees , as well as mosthourly employees . B enefits generally are based on years ofservice and compensation , or stated amounts for each year ofservice. A ll of our qualified plans are funded and contri bu-tions are made in amounts not less than minimum statutoryfunding re quirements and not more than the max imumamount that can be deducted for U. S. income tax purposes .Our net pension ex pense for the defined benefit pension plansfor our operations outside the U. S. was not significant .

Note 11: Financial Instruments and

Risk Manage m e n t

As of December 30,2000,our use of derivative instrumentswas limited to interest rate swaps, and futures and optionscontracts entered into with financial institutions. Our corpo-rate policy prohibits the use of derivative instruments fortrading or speculative purposes, and we have procedures inplace to monitor and control their use.

The table below presents information on derivative contractsoutstanding at December 30,2000:

N o t i o n a l C a rry i n g Fa i rA m o u n t A m o u n t Va l u e

Commodity futures contracts $ 1 0 9 $ — $ 3Commodity options 4 4 8 5 6Interest rate swap 1 0 0 — —Equity futures contracts 1 0 1 0 1 0

The table below presents information on derivative contractsoutstanding at December 25,1999:

Notional Carrying FairAmount Amount Value

Commodity futures contracts $ 91 $ — $ 6Commodity options 61 1 12Interest rate swap 100 — (2)

Fair Value Financial assets with carrying values approximat-ing fair value include cash and cash equivalents and tradeaccounts receivable. Financial liabilities with carrying valuesapproximating fair value include accounts payable and otheraccrued liabilities and short-term debt. The carrying valueof these financial assets and liabilities approximates fairvalue due to the short maturity of our financial assets andliabilities, and since interest rates approximate fair valuefor short-term debt.

Long-term debt at December 30,2000 has a carrying valueand fair value of $3.3 billion and $3.2 billion, respectively.

Commodity Price Risk We use futures contracts and optionson futures in the normal course of business to hedge antici-pated purchases of certain raw materials and fuel used in ouroperations .

Deferred gains and losses at year-end 2000 and 1999,as wellas gains and losses recognized as part of cost of sales in 2000,1999 and 1998,were not significant. At year-end 2000 and1999,we had commodity contracts involving notional

4 5

Annual Report 2000

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Changes in the fair value of assets:

Pension Postretirement

2 0 0 0 1999 2 0 0 0 1999

Fair value atbeginning of year $597 $ 541 $ — $ —

Actual return on plan assets 96 85 — —Employer contributions 16 — 12 11Benefit payments (40) (38) (12) (11)Acquisitions and other (4) 9 — —

Fair value at end of year $665 $ 597 $ — $ —

Selected information for the plans with accumulated benefitobligations in excess of plan assets:

Pension Postretirement

2 0 0 0 1999 2 0 0 0 1999

Projected benefit obligation $ 3 1 $ 32 $ 2 1 2 $206Accumulated benefit

obligation 1 4 12 2 1 2 206Fair value of plan assets — — — —

Funded status recognized on the Consolidated Balance Sheets :

Pension Postretirement

2 0 0 0 1999 2 0 0 0 1999

Funded status at end of year $ 1 $(50) $ ( 2 1 2 ) $(206)Unrecognized prior

service cost 3 1 33 ( 2 1 ) (17)Unrecognized (gain)/loss ( 7 3 ) (14) 4 5 35Unrecognized special

termination benefits ( 1 ) (2) — —Fourth quarter employer

contributions 1 0 — 7 3

Net amounts recognized $ ( 3 2 ) $(33) $ ( 1 8 1 ) $(185)

Net amounts recognized in the Consolidated Balance Sheets:

Pension Postretirement

2 0 0 0 1999 2 0 0 0 1999

Prepaid benefit costs $ 31 $ 18 $ — $ —Accrued benefit liability ( 6 3 ) (51) ( 1 8 1 ) (185)

Net amounts recognized $ ( 3 2 ) $(33) $ ( 1 8 1 ) $(185)

Postretirement Benefits Our postretirement plans providemedical and life insurance benefits principally to U.S. retireesand their dependents. Employees are eligible for benefits ifthey meet age and service requirements and qualify forretirement benefits. The plans are not funded and since 1993have included retiree cost sharing.

Components of net periodic benefit costs:

Pension

2 0 0 0 1999 1998

Service cost $ 27 $ 30 $ 24Interest cost 4 9 42 37Expected return on plan assets ( 5 6 ) (49) (45)Amortization of transition asset — — (2)Amortization of net loss — 4 —Amortization of prior

service amendments 5 5 4

Net periodic benefit costs 2 5 32 18Settlement loss — — 1

Net periodic benefit costsincluding settlements $ 25 $ 32 $ 19

Components of net periodic benefit costs:

Postretirement

2 0 0 0 1999 1998

Service cost $ 3 $ 4 $ 4Interest cost 1 4 12 12Amortization of net loss 1 — —Amortization of prior

service amendments ( 6 ) (5) (5)

Net periodic benefit costs $ 1 2 $11 $11

We amortize prior service costs on a straight-line basis overthe average remaining service period of employees expectedto receive benefits.

Changes in the benefit obligation:

Pension Postretirement

2 0 0 0 1999 2 0 0 0 1999

Obligation atbeginning of year $ 6 4 7 $648 $ 2 0 6 $187

Service cost 2 7 30 3 4Interest cost 4 9 42 1 4 12Plan amendments 4 3 ( 1 0 ) —Actuarial (gain)/loss ( 1 9 ) (57) 1 1 14Benefit payments ( 4 0 ) (38) ( 1 2 ) (11)Acquisitions and other ( 4 ) 19 — —

Obligation at end of year $ 6 6 4 $647 $ 2 1 2 $2064 6

The Pepsi Bottling Group,Inc.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Tabular dollars in millions, except per share data

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The weighted-average assumptions used to compute theabove information are set forth below:

Pension

2 0 0 0 1999 1998

Discount rate for benefit obligation 7 . 8 % 7.8% 6.8%Expected return on plan assets 1 0 . 0 % 10.0% 10.0%Rate of compensation increase 4 . 6 % 4.3% 4.8%

Postretirement

2 0 0 0 1999 1998

Discount rate for benefit obligation 7 . 8 % 7.8% 6.9%

Components of Pension Assets The pension plan assets areprincipally invested in stocks and bonds.

Health Care Cost Trend Rates We have assumed an averageincrease of 5.9% in 2001 in the cost of postretirement med-ical benefits for employees who retired before cost sharingwas introduced. This average increase is then projected todecline gradually to 5.5% in 2005 and thereafter.

Assumed health care cost trend rates have a significant ef fecton the amounts reported for postretirement medical plans.A one-percentage point change in assumed health care costswould have the following ef fects:

1% 1%Increase Decrease

Effect on total fiscal year 2000 serviceand interest cost components $1 $(1)

Ef fect on the fiscal year 2000 accumulatedpostretirement benefit obligation 5 (5)

Other Employee Benefit Plans We made several changes to our employee benefit plans that took ef fect in fiscal year2 0 0 0 . T he changes were made to our vacation polic y,pension and retiree medical plans and included some benefiten hancements as well as cost contain ment provisions . T hesechanges did not have a significant impact on our financialresults in 2000.

In 1999,our Board of Directors approved a matching com-pany contribution to our 401(k) plan,which began in 2000.The match is dependent upon the employee’s contributionand years of service. Fiscal year 2000 matching companycontributions were approximately $15 million.

In the fourth quarter of 1999,we contributed $16 millionto a defined contribution plan as a one-time payment for thebenefit of management employees.The amount was based onfull-year 1999 performance and included other incentive-related features.

Note 13: E m p l oyee Stock Option Plans

Under our long-term incentive plan, stock options are issuedto middle and senior management employees and varyaccording to salary and level within PBG. Options grantedin 2000 had exercise prices ranging from $18.75 per share to$31.75 per share, expire in 10 years and become exercisable25% after the first year, 25% af ter the second year and theremainder after the third year. Options granted in 1999 hadexercise prices ranging from $19.25 per share to $23 pershare and,with the exception of our chairman’s options, areexercisable af ter three years and expire in 10 years. Ourchairman’s 1999 options are exercisable ratably over the threeyears following our initial public offering date.

In conjunction with our initial public of fering,we issueda one-time founders’ grant of options to all full-time non-management employees in 1999 to purchase 100 shares ofPBG stock. These options have an exercise price equal to theinitial public of fering price of $23 per share, are exercisableafter three years, and expire in 10 years.

In connection with the completion of our initial publicof fering, PepsiCo vested substantially all non-vested PepsiCostock options held by PBG employees . As a result , we incurreda $45 million non-cash compensation charge in the secondquarter of 1999,equal to the difference between the marketprice of the PepsiCo capital stock and the exercise price ofthese options at the vesting date.

4 7

Annual Report 2000

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The following table summarizes option activity during 2000:

We i g h t e d - Ave r a geOptions in millions O p t i o n s E xe rcise Pri c e

Outstanding at beginning of year 1 1 . 2 $ 2 2 . 9 8Granted 6 . 6 1 9 . 1 3Exercised ( 0 . 1 ) 2 1 . 0 5Forfeited ( 1 . 1 ) 2 2 . 3 9

Outstanding at end of year 1 6 . 6 $ 2 1 . 5 0

Exercisable at end of year 0 . 9 $ 2 2 . 2 2

Weighted-average fair value ofoptions granted dur ing the year $ 9 . 3 5

The following table summarizes option activity during 1999:

Weighted-AverageOptions in millions Options Exercise Price

Outstanding at beginning of year — $ —Granted 12.1 22.98Exercised — —Forfeited (0.9) 23.00

Outstanding at end of year 11.2 $22.98

Exercisable at end of year — $ —

Weighted-average fair value ofoptions granted dur ing the year $10.29

The following table summarizes stock options outstandingat December 30,2000:

Options in millions

We i g h t e d - Ave r a geR e m a i n i n g

Contractual We i g h t e d - Ave r a geRange of Exercise Price O p t i o n s Life (in ye a rs ) E xe rcise Pri c e

$18.75–$22.99 6 . 2 8 . 9 9 $ 1 8 . 7 7$23.00-$31.75 1 0 . 4 8 . 0 2 2 3 . 1 2

1 6 . 6 8 . 3 8 $ 2 1 . 5 0

The following table summarizes stock options exercisableat December 30,2000:

Options in millions

We i g h t e d - Ave r a geRange of Exercise Price O p t i o n s E xe rcise Pri c e

$18.75–$22.99 0 . 2 $ 1 8 . 7 5$23.00-$31.75 0 . 7 2 3 . 0 0

0 . 9 $ 2 2 . 2 2

We adopted the disclosure provisions of Statement of FinancialAccounting Standard 12 3 ,“ Accounting for Stock -BasedCompensation ,”but continue to measure stock -based compen-sation cost in accordance with the Accounting Principles BoardOpinion 25 and its related interpretations . If we had measuredcompensation cost for the stock options granted to our employ-ees under the fair value based method prescri bed by SFAS 12 3 ,net income would have been changed to the pro formaamounts set forth below :

2 0 0 0 19 9 9

Net Income Reported $ 229 $ 118Pro forma 2 0 4 10 2

D iluted Earnings per ShareReported $ 1 . 5 3 $ 0 . 9 2Pro forma 1 . 3 7 0 . 7 9

T he fair value of PBG stock options used to compute pro formanet income disclosures was estimated on the date of grant usingthe Black -Scholes option -pricing model based on the followingweighted - average assumptions :

2 0 0 0 19 9 9

Risk -free interest rate 6 . 7 % 5 . 8 %E x pected life 7 ye a rs 7 yearsE x pected volatility 3 5 % 3 0 %E x pected dividend yield 0 . 4 3 % 0 . 3 5 %

Note 14: Income Ta xe s

T he details of our income tax provision are set forth below :

2 0 0 0 19 9 9 19 9 8

Current : Federal $ 1 0 7 $ 79 $ ( 8 4 )Foreign 1 ( 1 ) 4State 2 7 19 ( 13 )

1 3 5 9 7 ( 9 3 )

Deferred : Federal 7 ( 17 ) 4 5Foreign — — ( 5 )State ( 7 ) ( 10 ) 7

— ( 2 7 ) 4 7

$ 1 3 5 $ 70 $ ( 4 6 )

4 8

The Pepsi Bottling Group, Inc.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Tabular dollars in millions, except per share data

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Our U. S. and foreign income (loss) before income taxes is setforth below :

2 0 0 0 19 9 9 19 9 8

U. S. $ 3 1 8 $ 18 8 $ 116Foreign 4 6 — (308)

$ 3 6 4 $ 18 8 $ ( 19 2 )

Our reconciliation of income taxes calculated at the U. S. federalstatutory rate to our provision for income taxes is set forth below :

2 0 0 0 19 9 9 19 9 8

I ncome taxes computed at the U. S. federal statutory rate 3 5 . 0 % 3 5 . 0 % ( 3 5 . 0 ) %

State income tax ,net of federal tax benefit 3 . 2 3 . 2 —

I mpact of foreign results ( 7 . 5 ) ( 9 . 1 ) ( 12 . 2 )Good will and other

nondeducti ble ex penses 5 . 1 7 . 8 7 . 5U. S. franchise rights tax settlement — — ( 2 4 . 0 )Unusual impairment and

other charges and credits — ( 0 . 6 ) 3 8 . 7Other,net 1 . 2 1 . 1 1 . 0

Total effective income tax rate 3 7 . 0 % 3 7 . 4 % ( 2 4 . 0 ) %

The details of our 2000 and 1999 deferred tax liabilities(assets) are set forth below:

2 0 0 0 19 9 9

I ntangi ble assets and property,plant and equip ment $ 1 , 0 9 8 $ 1 , 2 3 1

Other 9 6 9 0

Gross deferred tax liab ilities 1 , 1 9 4 1 , 3 2 1

Net operating loss carry forwards ( 1 3 9 ) ( 13 2 )E mployee benefit obligations ( 1 1 2 ) ( 1 16 )Bad deb ts ( 1 5 ) ( 2 1 )Various liab ilities and other ( 7 0 ) ( 1 18 )

Gross deferred tax assets ( 3 3 6 ) ( 3 8 7 )Deferred tax asset valuation allowance 1 4 8 14 7

Net deferred tax assets ( 1 8 8) ( 2 4 0 )

Net deferred tax liab ility $ 1 , 0 0 6 $ 1 , 0 8 1

I ncluded in :Prepaid ex penses and other current assets $ ( 6 6 ) $ ( 9 7 )Deferred income taxes 1 , 0 7 2 1 , 17 8

$ 1 , 0 0 6 $ 1 , 0 8 1

We have net operating loss carry forwards totaling $402 millionat Decem ber 30,2 0 0 0 ,w hich are available to reduce future taxesin the U. S.,Spain ,Greece and Russia . Of these carry forwards ,$40 million ex pire in 2001 and $362 million ex pire at varioustimes between 2002 and 2019 . We have established a full valuation allowance for the net operating loss carry forwardsattri butable to Spain ,Greece and Russia based upon our pro jec-tion that these losses will more li kely than not ex pire beforethey can be used . In addition , at Decem ber 30,2000 we have a tax credit carry forward in the U. S. of $7 million with anindefinite carry forward period .

Deferred taxes are not recognized for temporary dif ferencesrelated to investments in foreign subsidiar ies that are essen-tially permanent in duration. Determination of the amountof unrecognized deferred taxes related to these investments isnot practicable.

Our valuation allowances ,w hich reduce deferred tax assetsto an amount that will more li kely than not be realized ,have increased by $1 million and $12 million in 2000 and19 9 9 , respectively.

I ncome taxes receivable were $12 million and $0 at Decem ber3 0 , 2000 and Decem ber 25, 19 9 9 , respectively. Such amountsare recorded within prepaid ex penses and other current assetsin our Consolidated Balance Sheets . A mounts paid to tax ingauthorities for income taxes were $147 million and $111 million in 2000 and 19 9 9 , respectively. In 1998 our allocable share of income taxes was deemed to have been paid to Pepsi Co, in cash , in the period in which the cost was incurred .

4 9

Annual Report 2000

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Note 15: G e ographic Data

We operate in one industry,carbonated soft drinks and otherready- to-drink beverages . We conduct business in 41 states andthe District of Colum b ia in the U. S. Outside the U. S.,we conductbusiness in eight Canadian provinces ,Spain ,Greece and Russia .

Net Revenues

2 0 0 0 19 9 9 19 9 8

U. S. $ 6 , 8 3 0 $ 6 , 3 5 2 $ 5 , 8 8 6Other countries 1 , 1 5 2 1 , 15 3 1 , 15 5

$ 7 , 9 8 2 $ 7 , 5 0 5 $ 7 , 0 4 1

L ong -L ived Assets

2 0 0 0 19 9 9 19 9 8

U. S. $ 5 , 1 9 2 $ 5 , 13 9 $ 5 , 0 2 4Other countries 9 6 0 987 9 8 0

$ 6 , 1 5 2 $ 6 , 12 6 $ 6 , 0 0 4

Note 16: Relationship with Pe p s i C o

At the time of the initial public offering we entered into a num ber of agreements with Pepsi Co. T he most significant agree-ments that govern our relationship with Pepsi Co consist of :

(1) the master bottling agreement for cola beverages bearingthe “ Pepsi -Cola ”and “ Pepsi ” trademark , including Pepsi ,D iet Pepsi and Pepsi ONE in the United States ; bottling anddistri bution agreements for non -cola products in the UnitedStates , including Mountain Dew ; and a master fountainsy rup agreement in the United States ;

(2) agreements similar to the master bottling agreement and thenon -cola agreements for each specific country, includingCanada ,Spain ,Greece and Russia ,as well as a fountain sy rupagreement similar to the master sy rup agreement for Canada ;

(3) a shared services agreement whereby Pepsi Co provides uswith certain ad ministrative support , including procurementof raw materials , transaction processing , such as accountspayable and credit and collection , certain tax and treasuryservices , and in formation tech nology maintenance and systems develop ment .B eginning in 19 9 8 , a Pepsi Co affiliate has provided casualty insurance to us ;and

(4) transition agreements that provide certain indem nities to the parties , and provide for the allocation of tax and otherassets ,liab ilities and obligations arising from periods prior tothe initial public offering . Under our tax separation agree-ment ,Pepsi Co maintains full control and absolute discretionfor any com b ined or consolidated tax filings for tax periods

ending on or before the initial public offering . Pepsi Co hascontractually agreed to act in good faith with respect to alltax audit matters affecting us . In addition ,Pepsi Co has agreedto use their best efforts to settle all joint interests in any com-mon audit issue on a basis consistent with prior practice.

We purchase concentrate from Pepsi Co that is used in the production of carbonated soft drinks and other ready- to-drinkbeverages . We also produce or distri bute other products andpurchase finished goods and concentrate th rough variousarrangements with Pepsi Co or Pepsi Co joint ventures . We reflectsuch purchases in cost of sales .

We share a business ob jective with Pepsi Co of increasing theavailab ility and consumption of Pepsi -Cola beverages . Accord-ingly,Pepsi Co provides us with various forms of marketingsupport to promote its beverages .T his support covers a varietyof initiatives , including marketplace support ,marketing pro-grams , capital equip ment investment and shared media ex pense.Based on the ob jective of the programs and initiatives ,werecord marketing support as an ad justment to net revenues or as a reduction of selling , delivery and ad ministrative ex pense.

We manufacture and distri bute fountain products and providefountain equip ment service to Pepsi Co customers in some ter-ritories in accordance with the Pepsi beverage agreements .We pay a royalty fee to Pepsi Co for the Aquafina trademark .

T he Consolidated Statements of Operations include the follow-ing income (ex pense) amounts as a result of transactions withPepsi Co and its affiliates :

2 0 0 0 19 9 9 19 9 8

Net revenues $ 2 4 4 $ 2 3 6 $ 2 2 8Cost of sales ( 1 , 6 2 6 ) ( 1 , 4 8 8 ) ( 1 , 3 9 6 )Selling ,delivery and

ad ministrative ex penses 2 6 6 2 8 5 2 6 0

We are not re quired to pay any minimum fees to Pepsi Co,norare we obligated to Pepsi Co under any minimum purchasere quirements .T here are no conditions or re quirements thatcould result in the repay ment of any marketing support pay-ments received by us from Pepsi Co.

With respect to Pepsi Co’s 7.1% ownership of Bottling Group,LLC,Bottling Group,LLC guarantees that to the ex tent there isavailable cash , it will distri bute pro rata to Pepsi Co and PB Gsufficient cash such that aggregate cash distri buted to PBG willenable us to pay income taxes and interest on our $1 b illion 7% senior notes due 2029.

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The Pepsi Bottling Group, Inc.

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Tabular dollars in millions, except per share data

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Net amounts receivable from Pepsi Co and its affiliates were$ 8 million and $5 million at Decem ber 30, 2000 andDecem ber 2 5 , 19 9 9 , respectively. Such amounts are recordedwithin accounts receivable in our Consolidated Balance Sheets .

Note 17: C o n t i n ge n c i e s

We are sub ject to various claims and contingencies related tolawsuits , taxes ,environ mental and other matters arising out ofthe normal course of business . We believe that the ultimate lia-b ility arising from such claims or contingencies , if any, in excessof amounts al ready recognized is not li kely to have a materialadverse effect on our results of operations ,financial conditionor liquidity.

Note 18: A c q u i s i t i o n s

D uring 2000 and 19 9 9 ,we ac quired the exclusive right to man-ufacture, sell and distri bute Pepsi -Cola beverages from severalindependent Pepsi Co franchise bottlers .T hese ac quisitionswere accounted for by the purchase method . D uring 2000,weac quired two territories in Canada for an aggregate purchaseprice of $26 million in cash . D uring 19 9 9 ,we ac quired fourterritories in the U. S.,one in Canada and one in Russia for anaggregate purchase price of $185 million in cash and assumeddeb t .T he aggregate purchase price exceeded the fair value ofnet tangi ble assets ac quired , including the resulting tax ef fect ,by approx imately $14 million and $174 million in 2000 and19 9 9 , respectively. T he excess was recorded in intangi ble assets .

Note 19: Computation of Basic and Diluted Earn i n g s

(Loss) Per Share

shares in thousands 2 0 0 0 19 9 9 19 9 8

Num ber of shares on which basic earnings (loss) per share is based :

Average outstanding during period 1 4 7 , 1 4 7 12 8 , 4 2 6 5 5 , 0 0 0Add – Incremental shares under

stock compensation plans 2 , 1 8 8 — —

Num ber of shares on which diluted earnings (loss) per share is based 1 4 9 , 3 3 5 12 8 , 4 2 6 5 5 , 0 0 0

Basic and diluted net income (loss) applicable to com mon shareholders $ 229 $ 118 $ (14 6 )

Basic earnings (loss) per share $ 1 . 5 5 $ 0 . 9 2 $ ( 2 . 6 5 )D iluted earnings (loss) per share $ 1 . 5 3 $ 0 . 9 2 $ ( 2 . 6 5 )

D iluted earnings per share reflect the potential dilution thatcould occur if the stock options from our stock compensationplan were exercised and converted into com mon stock thatwould then participate in net income. Our significant shareprice improvement during 2000 has resulted in $0.02 per shareof dilution in 2000.

In October 19 9 9 , our Board of Directors authorized the repur-chase of up to 10 million shares of our com mon stock . In Juneof 2000, our Board of Directors authorized the repurchase of anadditional 5 million shares of our com mon stock . We made netrepurchases of approx imately 5 million shares in both 2000 and 19 9 9 , respectively.

Note 20: Selected Quart e r l y Financial Data (unaudited)

F i rs t S e c o n d T h i rd Fo u rt h F u l l2 0 0 0(1) Q u a rt e r Q u a rt e r Q u a rt e r Q u a rt e r Ye a r

Net reve nu e s $ 1 , 5 4 5 $ 1 , 9 1 3 $ 2 , 1 2 5 $ 2 , 3 9 9 $ 7 , 9 8 2G ross pro fit 7 0 0 8 8 0 9 6 2 1 , 0 3 5 3 , 5 7 7Operating income 7 5 1 9 1 2 5 6 6 8 5 9 0Net income 1 7 8 5 1 2 3 4 2 2 9

F irst Second T hird Fourth19 9 9 Quarter Quarter Quarter Quarter Full Year

Net revenues $ 1 , 4 5 2 $ 1 , 8 3 1 $ 2 , 0 3 6 $ 2 , 18 6 $ 7 , 5 0 5Gross profit 6 17 7 8 5 8 7 4 9 3 3 3 , 2 0 9Operating income 4 2 9 2(2) 2 0 5 7 3(3) 4 12Net income (loss) ( 3 ) 2 0 9 2 9 1 18(1) Our 2000 results were impacted by a change in estimated useful lives of certain categories of assets .T he favorable impact of this change in asset lives increased net income

by $8 million in the first quarter, $ 10 million in the second quarter, $9 million in the third quarter, $ 12 million in the fourth quarter and $39 million for the full year.

(2) Includes a $45 million non -cash compensation charge ($29 million after tax ).

( 3) I ncludes $61 million of income for vacat ion policy changes and restructur ing accrual reversal ($38 million after tax ).

T he first , second and third quarters of each year consisted of 12 weeks ,w hile the fourth quarter consisted of 17 weeks in 2000 and 16 weeks in 19 9 9 .T he ex tra week infiscal year 2000 contr i buted $7 million of additional net income to our fourth quarter and fiscal year 2000 results .

See Note 4 of the Consolidated Financial Statements for further in format ion regarding unusual impairment and other charges and credits included in the table above.

51

Annual Report 2000

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To Our Shareholders:

We are responsible for the preparation, integrity and fair pre-sentation of the Consolidated Financial Statements, relatednotes and other information included in this annual report.The Consolidated Financial Statements were prepared inaccordance with accounting principles generally accepted inthe United States of America and include certain amountsbased upon our estimates and assumptions, as required. Otherfinancial information presented in the annual report isderived from the Consolidated Financial Statements.

We maintain a system of internal control over financialreporting, designed to provide reasonable assurance as to thereliability of the Consolidated Financial Statements, as wellas to safeguard assets from unauthorized use or disposition.The system is supported by formal policies and procedures,including an active Code of Conduct program intended toensure employees adhere to the highest standards of personaland professional integrity. Our internal audit function moni-tors and reports on the adequacy of and compliance with theinternal control system, and appropriate actions are taken toaddress significant control deficiencies and other opportuni-ties for improving the system as they are identified.

The Consolidated Financial Statements have been auditedand reported on by our independent auditors,KPMG LLP,who were given free access to all financial records and relateddata, including minutes of the meetings of the Board ofDirectors and Committees of the Board. We believe thatmanagement representations made to the independentauditors were valid and appropriate.

The Audit Committee of the Board of Directors,which iscomposed solely of outside directors, provides oversight toour financial reporting process and our controls to safeguardassets through per iodic meetings with our independentauditors, internal auditors and management. Both ourindependent auditors and internal auditors have free accessto the Audit Committee.

Although no cost-ef fective internal control system willpreclude all errors and irregularities, we believe our controlsas of December 30,2000 provide reasonable assurance thatour assets are safeguarded.

Lionel L. Nowell IIIExecutiveVice President and Chief Financial Officer

Andrea L. ForsterVice President and Controller

The Pepsi Bottl ing Group, Inc. Annual Report 2000

M A N A G E M E N T ’ S R E S P O N S I B I L I T Y F O R F I N A N C I A L S T A T E M E N T S

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The Board of Directors and Shareholder sThe Pepsi Bottling Group , Inc.:

We have audited the accompanying Consolidated BalanceSheets of The Pepsi Bottling Group, Inc. as of December 30,2000 and December 25,1999, and the related ConsolidatedStatements of Operations, Cash Flows and Changes inShareholders’ Equity for each of the fiscal years in the three-year period ended December 30,2000. These ConsolidatedFinancial Statements are the responsibility of managementof The Pepsi Bottling Group, Inc. Our responsibility is toexpress an opinion on these Consolidated FinancialStatements based on our audits.

We conducted our audits in accordance with auditing stan-dards generally accepted in the United States of America.Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financialstatements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and

significant estimates made by management, as well as evalu-ating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the Consolidated Financial Statementsreferred to above present fairly, in all material respects, thefinancial position of The Pepsi Bottling Group, Inc. as ofDecember 30,2000 a nd December 25,1999, and the resultsof its operations and its cash flows for each of the fiscal yearsin the three-year period ended December 30,2000, inconformity with accounting pr inciples generally acceptedin the United States of America.

New York, New YorkJanuary 30,2001

The Pepsi Bott ling Group,Inc. Annual Report 2000

R E P O R T O F I N D E P E N D E N T A U D I T O R S

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Fiscal years endedin millions, except per share data 2000(1) 1999 1998 1997 1996 1995

Statement of Operations Data:Net revenues $7,982 $7,505 $7,041 $6,592 $6,603 $6,393Cost of sales 4,405 4,296 4,181 3,832 3,844 3,771Gross profit 3,577 3,209 2,860 2,760 2,759 2,622Selling, delivery and administrative expenses 2,987 2,813 2,583 2,425 2,392 2,273Unusual impairment and other charges and credits(2) — (16) 222 — — —Operating income 590 412 55 335 367 349Interest expense, net 192 202 221 222 225 239Foreign currency loss (gain) 1 1 26 (2) 4 —Minority interest 33 21 — — — —Income (loss) before income taxes 364 188 (192) 115 138 110Income tax expense (benefit)(3) 135 70 (46) 56 89 71Net income (loss) $ 229 $ 118 $ (146) $ 59 $ 49 $ 39

Per Share Data:Basic earnings (loss) per share $ 1.55 $ 0.92 $ (2.65) $ 1.07 $ 0.89 $ 0.71Diluted earnings (loss) per share $ 1.53 $ 0.92 $ (2.65) $ 1.07 $ 0.89 $ 0.71Cash dividend per share $ 0.08 $ 0.06 — — — —Weighted-average basic shares outstanding 147 128 55 55 55 55Weighted-average diluted shares outstanding 149 128 55 55 55 55

Other Financial Data:EBITDA(4) $1,061 $ 901 $ 721 $ 774 $ 792 $ 767Cash provided by operations 831 718 625 548 451 431Capital expenditures (515) (560) (507) (472) (418) (358)

Balance Sheet Data (at period end):Total assets $7,736 $7,624 $7,322 $7,188 $7,052 $7,082Long-term debt:

Allocation of PepsiCo long-term debt — — 3,300 3,300 3,300 3,300Due to third parties 3,271 3,268 61 96 127 131

Total long-term debt 3,271 3,268 3,361 3,396 3,427 3,431Minority interest 306 278 — — — —Advances from PepsiCo — — 1,605 1,403 1,162 1,251Accumulated other comprehensive loss (254) (223) (238) (184) (102) (66)Shareholders’ equity (deficit) 1,646 1,563 (238) (184) (102) (66)(1) Our fiscal year 2000 results were impacted by a change in estimated useful lives of certain categories of assets and the inclusion of an ex tra week in our fiscal year. T he favor-

able impact of the change in asset lives increased net income by $39 million , or $0.26 per share, and the ex tra week increased net income by $7 million , or $0.05 per share.

(2) Unusual impairment and other charges and credits comprises the following:• $45 million non-cash compensation charge in the second quarter of 1999.• $53 million vacation accrual reversal in the fourth quarter of 1999.• $8 million restructuring reserve reversal in the fourth quarter of 1999.• $222 million charge related to the restructuring of our Russian bott ling operations and the separat ion of Pepsi-Cola North America’s concentrate and bottling organi-

zations in the fourth quarter of 1998.

(3) 1998 includes a $46 million income tax benefit in the fourth quarter for the settlement of a disputed cla im with the Internal Revenue Service relating to the deduct ibil-ity of the amortization of acquired franchise rights.

(4) Excludes the non-cash component of unusual impairment and other charges and credits.

The Pepsi Bottling Group, Inc. Annual Report 2000

S E L E C T E D F I N A N C I A L A N D O P E R A T I N G D A T A

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John T. C a h i l l

President and Chief Operating OfficerCEO Designate11 years

R o b e rt W. C a m e ro n

Business Unit General Manager,Texoma15 years

L . Kev i n C ox

Senior Vice President and Chief Personnel Officer11 years

S h awn E. D u n n

Senior Vice President, Finance10 years

A n d rea L. Fo rs t e r

Vice President and Controller13 years

E ric J. Fo s s

ExecutiveVice President and General Manager,PBG North America18 years

C h ristopher D. F u rm a n

Business Unit General Manager,Southern California14 years

Scott J. G i l l e s by

Business Unit General Manager,Central19 years

James Ke ow n

Business Unit General Manager, Southeast25 years

R o b e rt C. K i n g

Vice President,National Sales and Field Marketing11 years

H a rrald F. K ro e ke r

Business Unit General Manager, Mid-Atlantic15 years

Linda A .Ku g a

President,PBG Canada19 years

C h ristopher S. L a n g h o f f

Vice President and Treasurer11 years

Pamela C. M c G u i re

Senior Vice President,General Counsel and Secretary23 years

Lionel L. N owell III

ExecutiveVice President and Chief Financial Officer9 years

Yiannis Pe t ri d e s

President,PBG Europe13 years

E ric W. R e i n h a rd

Business Unit General Manager,Great West17 years

William L. R o b i n s o n

Business Unit General Manager, Pacific Northwest16 years

B a rry J. S h e a

Business Unit General Manager, Russia24 years

Pa u l T. S n e l l

Business Unit General Manager, Northeast24 years

G a ry K.Wa n d s c h n e i d e r

Senior Vice President,Operations19 years

Craig E.We a t h e ru p

Chairman and Chief Executive Officer26 years

The Pepsi Bottling Group, Inc. Annual Report 2000

D I R E C T O R S A N D O F F I C E R S

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C o rporate Headquart e rs

The Pepsi Bottling Group , Inc .1 Pepsi WaySomers, New York 10589914.767.6000

A n nual Meeting

The next annual meeting of shareholders will be held at10:00 a.m., Wednesday, May 23,2001, at PBG headquartersin Somers, New York.

Transfer A ge n t

For services regarding your account such as change ofaddress, replacement of lost certificates or dividend checksor change in registered ownership, contact:

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

Telephone: 800.432.0140E-mail: shareowner-svcs@bankofny.comWebsite: http://stock.bankofny.com

Or

The Pepsi Bottling Group , Inc .Shareholder Relations Coordinator1 Pepsi WaySomers, New York 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.

I nvestor Relations

PBG’s 2001 quarterly releases are expected to be issuedthe weeks of April 23, July 16 and October 8,2001 andJanuary 28,2002.

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

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

Stock Exchange Listing

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

Independent Public A c c o u n t a n t s

KPMG LLP345 Park AvenueNew York, New York 10154

Printed on recycled paper.

The Pepsi Bottling Group, Inc. Annual Report 2000

S H A R E H O L D E R I N F O R M A T I O N

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