PepsiCo Annual Report 2006

FY2006 Annual Report · PepsiCo

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2006

PERFORMANCE
WITH PURPOSE

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We believe Performance — achieving
financial results — matters most
when it is combined with Purpose —
improving people’s lives.

Financial Highlights

PepsiCo, Inc. and Subsidiaries
($ in millions except per share amounts; all per share amounts assume dilution)

Net Revenue
Total: $35,137

Division Operating Profit
Total: $7,172

PepsiCo
International
37%

Quaker Foods
North America

PepsiCo
International
27%

Quaker Foods
North America

PepsiCo
Beverages
North America
27%

Frito-Lay
North America
31%

PepsiCo
Beverages
North America
29%

Frito-Lay
North America
36%

Summary of Operations
Total net revenue
Division operating profit(b)
Total operating profit
Net income(c)
Earnings per share(c)

2006

2005 % Chg(a)

$35,137
$7,172
$6,439
$5,065
$3.00

$32,562
$6,710
$5,922
$4,536
$2.66

8
7
9
12
13

Other Data
Management operating cash flow(d)
Net cash provided by
operating activities

Capital spending
Common share repurchases
Dividends paid
Long-term debt

$4,065

$4,204

(3)

$6,084
$2,068
$3,000
$1,854
$2,550

$5,852
$1,736
$3,012
$1,642
$2,313

4
19
–
13
10

(a) Percentage changes above and in text are based on unrounded amounts.
(b) Excludes corporate unallocated expenses. See page 82 for a reconciliation to the most directly

comparable financial measure in accordance with GAAP.

(c) In 2006, excludes restructuring and impairment charges and certain tax items. In 2005, excludes
the impact of the American Jobs Creation Act (AJCA) tax charge, the 53rd week and restructuring
charges. See page 82 for a reconciliation to the most directly comparable financial measure in
accordance with GAAP.

(d) Includes the impact of net capital spending. Also, see “Our Liquidity and Capital Resources” in

Management’s Discussion and Analysis.

Contents
1
PepsiCo at a Glance . . . . . . . . . . . . . . . . . . . . . .
2
Letter to Shareholders . . . . . . . . . . . . . . . . . . . .
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Corporate Officers and Principal Divisions . . . . 22
PepsiCo Board of Directors . . . . . . . . . . . . . . . . 23
Advisory Boards

African American Advisory Board . . . . . . . . . 24
Latino/Hispanic Advisory Board . . . . . . . . . . . 25
Blue Ribbon Health and Wellness

Advisory Board . . . . . . . . . . . . . . . . . . . . . . . 26

Financial Review
Management’s Discussion and Analysis and

Consolidated Financial Statements . . . . . . . . 27
Our Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Our Critical Accounting Policies . . . . . . . . . . . . 37
Our Financial Results . . . . . . . . . . . . . . . . . . . . . 44
Consolidated Statement of Income . . . . . . . . . . 54
Consolidated Statement of Cash Flows . . . . . . . 55
Consolidated Balance Sheet . . . . . . . . . . . . . . . 56
Consolidated Statement of Common

Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . 57
Notes to Consolidated Financial Statements . . 58
Management’s Responsibility for

Financial Reporting . . . . . . . . . . . . . . . . . . . . . 78

Management’s Report on Internal Control

over Financial Reporting . . . . . . . . . . . . . . . . . 79

Report of Independent Registered

Public Accounting Firm . . . . . . . . . . . . . . . . . . 80
Selected Financial Data . . . . . . . . . . . . . . . . . . . 81
Reconciliation of GAAP and

Non-GAAP Information . . . . . . . . . . . . . . . . . . 82
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Primary Websites
PepsiCo, Inc. — www.pepsico.com

Frito-Lay North America — www.fritolay.com

Pepsi-Cola North America — www.pepsiworld.com

Tropicana North America — www.tropicana.com

Quaker Foods — www.quakeroats.com

Gatorade — www.gatorade.com

Smart Spot — www.smartspot.com

Walkers — www.walkers.co.uk

Sabritas — www.sabritas.com.mx

Gamesa — www.gamesa.com.mx

Frito-Lay Canada — www.fritolay.ca

When market or market share are referred to in this
report, the markets and share are defined by the
sources of the information, primarily Information
Resources, Inc. and ACNielsen. The Measured
Channel Information excludes Wal*Mart, as
Wal*Mart does not report volume to these services.

Common Stock Information

Shareholder Information

Stock Trading Symbol — PEP
Stock Exchange Listings
The New York Stock Exchange is the principal market for
PepsiCo common stock, which is also listed on the
Amsterdam, Chicago and Swiss Stock Exchanges.

Shareholders
At year-end 2006, there were approximately 190,000
shareholders of record.

Dividend Policy
We target an annual dividend payout of approximately
45% of prior year’s net income from continuing opera-
tions. Dividends are usually declared in January, May, July
and November and paid at the end of March, June and
September and the beginning of January. The dividend
record dates for these payments are March 9, and, subject
to approval of the Board of Directors, expected to be
June 8, September 7 and December 7, 2007. We have
paid quarterly cash dividends since 1965.

Cash Dividends Declared
Per Share (In $)

1.16

1.01

.850

.595

.630

Stock Performance

PepsiCo was formed through the 1965 merger of Pepsi-Cola
Company and Frito-Lay, Inc. A $1,000 investment in our
stock made on December 31, 2001 was worth about
$1,393 on December 31, 2006, assuming the reinvestment
of dividends into PepsiCo stock. This performance
represents a compounded annual growth rate of 7%.

The closing price for a share of PepsiCo common stock
on the New York Stock Exchange was the price as reported
by Bloomberg for the years ending 2002-2006. Past
performance is not necessarily indicative of future returns
on investments in PepsiCo common stock.

Year-end Market Price of Stock
Based on calendar year-end (In $)

Annual Meeting
The Annual Meeting of Shareholders will be held at
Frito-Lay Corporate Headquarters, 7701 Legacy Drive,
Plano, Texas, on Wednesday, May 2, 2007, at 9 a.m. local
time. Proxies for the meeting will be solicited by an
independent proxy solicitor. This Annual Report is not
part of the proxy solicitation.

Inquiries Regarding Your Stock Holdings
Registered Shareholders (shares held by you in
your name) should address communications concerning
transfers, statements, dividend payments, address changes,
lost certificates and other administrative matters to:

The Bank of New York
Shareholder Services Department
P.O. Box 11258
Church Street Station
New York, NY 10286-1258
Telephone: 800-226-0083

212-815-3700 (Outside the U.S.)

E-mail: shareowners@bankofny.com
Website: www.stockbny.com
or
Manager Shareholder Relations
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577
Telephone: 914-253-3055

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

SharePower Participants (employees with
SharePower options) should address all questions regard-
ing your account, outstanding options or shares received
through option exercises to:

Merrill Lynch/SharePower
Stock Option Unit
1600 Merrill Lynch Drive
Mail Stop 06-02-SOP
Pennington, NJ 08534
Telephone: 800-637-6713 (U.S., Puerto Rico

and Canada)
609-818-8800 (all other locations)

In all correspondence, please provide your account number
(for U.S. citizens, this is your Social Security number), your
address, your telephone number and mention PepsiCo
SharePower. For telephone inquiries, please have a copy of
your most recent statement available.

Employee Benefit Plan Participants
PepsiCo 401(k) Plan & PepsiCo Stock Purchase Program

The PepsiCo Savings & Retirement Center at Fidelity
P.O. Box 770003
Cincinnati, OH 45277-0065
Telephone: 800-632-2014
(Overseas: Dial your country’s AT&T Access Number
+800-632-2014. In the U.S., access numbers are avail-
able by calling 800-331-1140. From anywhere in the
world, access numbers are available online at
www.att.com/traveler.)
Website: www.netbenefits.fidelity.com

PepsiCo Stock Purchase Program – for Canadian employees:
Fidelity Stock Plan Services

P.O. Box 5000
Cincinnati, OH 45273-8398
Telephone: 800-544-0275
Website: www.iStockPlan.com/ESPP

Please have a copy of your most recent statement
available when calling with inquiries.

If using overnight or certified mail send to:

Fidelity Investments
100 Crosby Parkway
Mail Zone KC1F-L
Covington, KY 41015

Shareholder Services

BuyDIRECT Plan
Interested investors can make their initial purchase directly
through The Bank of New York, transfer agent for PepsiCo,
and Administrator for the Plan. A brochure detailing the
Plan is available on our website www.pepsico.com or from
our transfer agent:

The Bank of New York
PepsiCo Plan
Church Street Station
P.O. Box 1958
Newark, NJ 07101-9774
Telephone: 800-226-0083
212-815-3700 (Outside the U.S.)
Website: www.stockbny.com
E-mail: shareowners@bankofny.com

Other services include dividend reinvestment, optional
cash investments by electronic funds transfer or check
drawn on a U.S. bank, sale of shares, online account
access, and electronic delivery of shareholder materials.

Financial and Other Information
PepsiCo’s 2007 quarterly earnings releases are expected
to be issued the weeks of April 23, July 23, October 8,
2007, and February 4, 2008.

Copies of PepsiCo’s SEC reports, earnings and other
financial releases, corporate news and additional company
information are available on our website www.pepsico.com.

Our CEO and CFO Certifications required under

Sarbanes-Oxley Section 302 were filed as an exhibit to our
Form 10-K filed on February 20, 2007. Our 2006 Domestic
Company Section 303A CEO Certification was filed with
the New York Stock Exchange (NYSE).

If you have questions regarding PepsiCo’s financial

performance contact:

Jamie Caulfield
Vice President, Investor Relations
PepsiCo, Inc.
Purchase, NY 10577
Telephone: 914-253-3035

Independent Auditors

KPMG LLP
345 Park Avenue
New York, NY 10154-0102
Telephone: 212-758-9700

Corporate Headquarters

PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577
Telephone: 914-253-2000

PepsiCo Website: www.pepsico.com

PepsiCo’s Annual Report contains many of the valuable trademarks owned and/or used by PepsiCo and its subsidiaries and affiliates in the United States and internationally to distinguish products
and services of outstanding quality. America On the Move™ is an initiative of the nonprofit organization, The Partnership to Promote Healthy Eating and Active Living (The Partnership:
www.americaonthemove.org). Komen Race for the Cure is an initiative of the National Volunteer Recognition Program.

Design: Eisenman Associates. Cover concept: Sondra Greenspan, Arcanna, Inc. Cover illustrations: 3DI Studio. Printing: L.P. Thebault. Photography: Stephen Wilkes, Ben Rosenthal, Grover Sterling,
Steve Bonini, Kayte Deioma, PhotoBureau. Special thanks to Starbucks.

This report is entirely recyclable. The cover and editorial pages are printed on Sterling Ultra Recycled Cover and Sterling Ultra Recycled Dull Text. That paper was manufactured by NewPage with
wood procurement certified by the Sustainable Forestry Initiative®. The financial pages are printed on Plainfield Smooth Opaque Text. That paper was manufactured by Domtar Inc., using sustainable
energy sources and wood procurement practices certified by the Forest Stewardship Council©.

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PepsiCo at a Glance
Frito-Lay
North America

($ in Millions)

PepsiCo Beverages
North America

PepsiCo
International

Quaker Foods
North America

FLNA

12000

10000

$9,560

$10,844

$10,322

8000

6000

4000

2000

2004

2005
FLNA

2006

$2,529 $2,615

2500

$2,389

2000

1500

1000

500

2 0 0 6 V o l u m e G r o w t h

PBNA

Snacks

Beverages

N e t R e v e n u e

$12,959

$9,146

$9,565

$8,313

12000

$11,376

$9,862

10000

8000

6000

4000

2000

2004

2005
PBNA

2006

2004

2006

2005
PI

O p e r a t i n g P r o f i t

12000

10000

8000

6000

4000

2000

2500

QFNA

4000

2000

$1,526

$1,718 $1,769

2004

2005
QFNA

2006

2000

$1,911

$2,037 $2,055

1500

1000

500

$1,948

$1,607

$1,323

2000

1500

1000

500

2000

1500

1000

500

$475

$537

$554

2004

2005
FLNA

2006

2004

2006

2005
PBNA

2004

2006

2005
PI

2004

2005
QFNA

2006

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Dear Shareholders:

Generating healthy financial returns and making important strides in
responsible corporate citizenship, PepsiCo delivered a very strong 2006:

•Volume grew 5.5%.

•Net revenue grew 8%.

•Division operating profit grew 7%.*

•Earnings per share grew 13%.*

•Total return to shareholders was 8%.

•Return on invested capital was 26%.*

•Cash flow from operations was $6.1 billion and management

operating cash flow was $4.1 billion.**

Indra Nooyi
Chairman Elect and Chief Executive Officer

Steve Reinemund
Executive Chairman and Chairman of the Board

These financial results tell only part of the PepsiCo story. As
we achieve success with profitable growth, we’re continuously
giving back to the communities we serve, delivering what we
call Performance with Purpose.

This annual report shows just how we’re achieving the balance

years, your company has led the industry with over 8% top
line growth, double-digit EPS growth and approximately
$26 billion in operating cash flow. During this period, we’ve
returned approximately $20 billion to you, our shareholders.
What allows us to deliver these kinds of consistent results?

between providing you with solid returns on your investments
and working to create a defining corporation for the new
millennium — one that strives to do better by doing better.
Importantly, PepsiCo’s business performance in 2006 is
consistent with very strong performance over the last several
years and — we believe — evidence of our ability to continue
delivering strong results going forward. Over the last five

It’s an ideal match of PepsiCo people, capabilities and great
brands with opportunity. Specifically, this includes our structural
advantages, capability advantages and our unique people
culture. For example:

• We sit squarely in the sweet spot of the Food and

Beverage space — convenience.

• We have a big global reach — with tremendous opportunity

2006 Scorecard

5.5%

Volume

Net Revenue

Division
Operating Profit*

26%

13%

Earnings Per
Share*

Total Return to
Shareholders

Return on
Invested Capital*

* See page 82.
** See page 53.

for continued growth.

• Our go-to-market systems provide us with a mosaic of

distribution arms that reach everywhere we operate cost
effectively and with great efficiency and speed — ensuring
our products are always available.

• We have demonstrated that we have the strategic acuity
to spot shifting consumer interests, such as the move to
non-carbonated beverages and the increasing focus on
health and wellness.

• We know how to build a brand’s personality and leverage
our mega-brands, not only into line extensions but also
into entirely new platforms.

• We have a track record of success in acquiring attractive
tuck-in businesses and then integrating them quickly
and efficiently.

• Our people provide an overwhelming advantage. They

are passionate about what they do and pride themselves
on results. Add to this the diversity we cultivate and the
personal ownership our associates take in the business,
and you have a sense of our unique culture.

We, and all our associates across the globe, believe PepsiCo

is delivering more than just financial performance. We are a

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company with an increasingly deep sense of awareness
of the world around us and the needs of its inhabitants.
We believe this is a company with a heart, and recognize
the role leading companies like ours play in society. It
inspires us to focus on delivering Performance with
Purpose — something we intend to continue doing.

Human Sustainability
It’s not about growing a business for the next quarter or
the next year. It’s about growing a business profitably for
the long term.

We believe we can do this in ways directly related to

our business, beginning with our products. We have a
fundamental belief that humans need to be nourished in
multiple dimensions — ranging from simple treats to
healthier eats.

We call this human sustainability, and we’re continuously
transforming our portfolio of products to meet consumer
needs. We’ve improved the nutritional profiles of our
global, flagship brands by changing to healthier oils,
reducing sugar and sodium content, and by expanding
the range of products we offer. This includes products
ranging from indulgences — or treats — to good-for-you
products that offer functional benefits like hydration or
heart health.

In fact, our products that can contribute to healthier
lifestyles — what we call “Smart Spot” eligible products
— represented over two-thirds of our growth in North
America in 2006. These products meet authoritative
nutrition statements set by the National Academy of
Sciences and the U.S. Food and Drug Administration
or provide other functional benefits. And we’ve set a
goal of deriving 50% of all our U.S. revenues with
Smart Spot eligible products by 2010.

We’re supplementing our portfolio transformation
with efforts to educate consumers about the importance
of active lifestyles and nutritional balance. We’ve
committed to helping them understand that, along
with the calories they put in their bodies, they must
ensure they’re burning calories as well.

And we’re proactively collaborating with policy
makers to help consumers live healthier lives. In 2006,
PepsiCo worked with the Clinton Foundation, the
American Heart Association and its partners in the
American Beverage Association to develop policies for
selling beverages in U.S. schools, and followed up with a

Earnings Per Share*

$3.00

$2.66

$2.32

Management Operating
Cash Flow **
$ in Millions

$4,204 $4,065

$3,705

A Very Special Thanks
In 2007, we celebrate a lifetime of leadership for a very prominent
member of the PepsiCo family. Earning his place in PepsiCo
history as a world-class Chairman and Chief Executive Officer,
Steve Reinemund is leaving a legacy of growth through his
work in transforming our portfolio to address health and
wellness consumer needs, building a diverse and inclusive
environment for our people and driving the company’s Power
of One capabilities. And as he’s done each of these, he’s
reinforced a culture committed to driving business results the
right way: connected to clearly articulated values. It was under
Steve’s leadership that PepsiCo defined our Values, so we now
have a common commitment and understanding of the principles
that guide us. He’s been an excellent partner and superb mentor,
as well as a great friend. We will all miss him when he steps
down as Chairman in May, along with three other directors who
are retiring. Each has made a lasting contribution to our success.

Steve Reinemund
Steve began his career with PepsiCo in 1984 at Pizza Hut,
which was then part of our restaurant division. He served as
Chief Executive Officer there before going on to lead Frito-Lay
North America and then our worldwide snack operations. He
moved to headquarters as PepsiCo’s President and Chief
Operating Officer in 1999, and then served as Chairman and
Chief Executive Officer from 2001 to 2006. During this time,
he increased PepsiCo revenues by more than $11 billion, and
net income and earnings per share more than doubled. In the
process, the annual dividend doubled and the company’s
market capitalization surpassed $100 billion.

Board of Directors
Retiring this year are three members of the Board of Directors
who have been with us a total of 46 years combined: Bob Allen,
John Akers and Frank Thomas. Bob served on our Board for 17
years, and since 2000 he has been Presiding Director. He set a
high standard for this critical new role with his firm and steady
direction. John joined our Board 16 years ago and was Chair of
our Compensation Committee and a continuous source of sage
advice. Frank provided 13 years of service and was a chief
contributor to our business strategies and people planning, and
was an invaluable source of counsel to all of us. Each of these
individuals has provided excellent counsel and perspective and
has given us the full value of his experience. We shall miss them
greatly. We’re pleased to have the depth of experience of
Sharon Rockefeller, who will become Presiding Director.

In addition, we announced in February that Cynthia Trudell left
our Board to become PepsiCo’s Senior Vice President and Chief
Personnel Officer, a role she has already assumed. We thank her
for her years of service on the Board and look forward to her
continued contributions to PepsiCo as she uses her experience
to drive our business growth while motivating, developing and
caring for the employees who make our businesses successful.

2004

2005

2006

2004

2005

2006

* See page 82.
** See page 53.

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similar agreement for snacks in U.S. schools. In fact, PepsiCo is
the only company to have participated in the development of
both policies.

We are introducing health and wellness programs in
markets around the world. And in countries such as Mexico,
the United Kingdom and Brazil, we’ve established advisory
boards to help guide our efforts.

No matter where we are, the safety and integrity of our

products is our single highest priority. It’s our duty as a
responsible company. People buy our brands because they
know they can count on consistent quality — every time. We
follow very rigorous standards of safety and quality. Our
standards are equally rigorous in New York, London and Beijing
as they are wherever else we operate. We stand behind each
and every product we sell.

Environmental Sustainability
The second way PepsiCo can give back to the global community
it serves is through its work with environmental sustainability.
By fully understanding our environmental impact, we can find
ways to conserve and replenish the planet’s natural resources.
In doing what’s right for the business, we can do what’s right
for the global community.

PepsiCo has focused its environmental sustainability efforts
on water, energy and packaging — areas where we can make
the biggest impact. Reducing waste water, establishing rainwater
collection capabilities, using more recyclable materials in our
packaging and using alternative energy sources are just a few
of the priorities we’ve set for ourselves. Success with each of
them translates into financial benefits for the business.

Our accountability as a global corporate citizen extends to
other social issues as well. We’ve established programs to help
our associates and communities combat HIV/AIDS. Our associates
are volunteering in our communities, and PepsiCo continually
responds to calls for humanitarian aid.

Talent Sustainability
The third area of sustainability that we’ve chosen to focus
on is talent sustainability — reflecting our belief that people
hold the key to PepsiCo’s success. Our company is known to
many as an academy company, a place where people grow
and business leaders develop. We are also committed to
building a work environment where all of our associates can
achieve a better quality of life and know that, as a business,
we cherish them.

The transitions we announced this year, starting with the
CEO and including several other senior executive roles, show
that we are not only committed to developing and retaining
deep bench strength, but that we’re equally passionate about
ensuring seamless transitions. And while we certainly weren’t
looking for external recognition, BusinessWeek bestowed its
2006 ”smoothest handover” honors to PepsiCo, saying, ”…the
transition in October from Steven S Reinemund to Indra K.
Nooyi at the $33 billion PepsiCo was noticeably angst-free.”
Whether it’s managing transitions or running the business
day-to-day, PepsiCo’s culture is renowned for its “can-do” spirit,
something we consider part of our DNA. Look no further than
the marketplace challenges of any year to see our level of
commitment to getting the job done. In 2006, whether it was
skyrocketing fruit costs, or ever-increasing competitive activity
in categories or markets across the globe, our people proved
they’re among the world’s best.

Our focus on people has never been more critical; the
global competition for talent intensifies each year, and the
companies that win will be those that provide the most
opportunity for personal and professional growth.

We firmly believe that PepsiCo’s commitment to diversity
and inclusion is creating that kind of environment. To attract
and retain the best and brightest, we’re working harder than
ever to ensure our culture grows in its inclusive nature — that
it becomes known as a premier place to work because every
associate can bring his or her whole self to work. When that
happens, we unleash the power of our people on innovative
solutions that will grow your company.

Looking ahead, our work plan is clear: we have a mandate
to deliver Performance with Purpose. We’re well positioned to
deliver financial performance, consistent with our guidance, and
to do it with the goals of nourishing consumers, replenishing
the environment in which we operate and cherishing our
people. Our capabilities and strategies to deliver on this priority
are highlighted in the pages that follow.

While we have much more to do, we’re making progress
on delivering on our commitment to Purpose and are proud
to share details with you in this publication. As a result of our
efforts, the Dow Jones Sustainability North American Index —
an investment fund comprised of North American companies
that excel in managing economic, environmental and social
results — added PepsiCo to its list in 2006.

Our True North — Our Values
Of course, guiding our people and our culture is a set of values
that helps ensure we achieve all results with integrity — the
right way. We want PepsiCo to continue to be viewed as a
high-integrity company, and we recognize and reward leaders
who deliver results in ways that are consistent with our True
North — our Values.

Since PepsiCo was formed in 1965, each of the company’s
leaders — beginning with Don Kendall, and including Wayne
Calloway and Roger Enrico — has been passionately committed
to operating a business with integrity, one that delivers
strong, sustainable financial returns.

As we have co-authored PepsiCo’s strategy over the last
several years, and conclude our own CEO transition, above all
we share an equally passionate commitment to our Values
and to running a business that does better by doing better,
achieving financial results while addressing environmental
and social needs.

It’s a legacy we both intend to leave. And we believe
there’s no better, more honorable, or more strategic way to
grow your company.

Steve Reinemund
Executive Chairman and
Chairman of the Board

Indra Nooyi
Chairman Elect and
Chief Executive Officer

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Questions & Answers
Our Chairman and President & Chief Executive Officer Perspective

U.S. Category Leaders

The questions below reflect key questions shareholders often ask about our businesses,
and are followed by joint responses from our Chairman, Steve Reinemund, and our
President and Chief Executive Officer, Indra Nooyi.

#2
Carbonated
Soft Drinks

Q: PepsiCo’s product categories and
their impact on health continues to
capture media, consumer and regulatory
focus. How is PepsiCo’s portfolio faring
in this environment?
A: As the transformation of PepsiCo’s
portfolio continues, we’re able to add more
choices for consumers to meet their needs
for products that can contribute to healthier
lifestyles, and we’re proud of each and every
choice we offer.

Our efforts are galvanized by three
imperatives: continue making our fun-for-
you products more nutritious, develop new
products that address the needs of the entire
food pyramid, and try to ensure consumers
never have to trade off nutrition and taste.
The range of product choices we offer
grows each year, as we develop or acquire
new products or platforms that range from
indulgent to good-for-you. At the same time,
we’re improving the nutritional profiles of our
larger, core brands. For example, changing
cooking oils to sunflower oil for both Lay’s
and Ruffles potato chips at FLNA and
Walkers crisps in the United Kingdom
reduces the saturated fat in these products
without sacrificing taste. And we’re working
on developing new sweeteners and adding
more nutritious ingredients to our products
— such as fiber to foods and beverages and
omega-3 fatty acids to juices.

Our portfolio of more nutritious choices is
working well in this environment, evidenced
by over two-thirds of our North America top
line growth in 2006 being driven by products
that are PepsiCo Smart Spot eligible —
meaning they meet authoritative nutritional
statements developed by the National
Academy of Sciences or the U.S. Food and
Drug Administration.

Q: What, specifically, is PepsiCo doing
to address regulatory pressures relating
to health concerns across the globe?
A: On the regulatory and policy side, we’re
firm believers in engaging a range of public
and private experts to come to workable
solutions on such things as how and where
our products are sold and marketed. We’re
actively engaged with policy and thought
leaders, as well as food and beverage industry
leaders, to reach decisions on steps we can

take to support consumers in their quest for
healthier lifestyles. This includes insights
from PepsiCo’s Blue Ribbon Advisory Board, a
group of leading health and wellness experts
and third-party advisors from across the
globe, as well as our Ethnic Advisory Boards
who have provided insights relating to multi-
cultural consumers.

Most recently, PepsiCo’s work in the
United States with the Clinton Foundation,
the American Heart Association and the
beverage industry, are examples of working
proactively to set policies that put the right
kinds of products in the right locations — in
this case, schools. We’re working in our
international markets in much the same way.
An advantaged portfolio of good- and
better-for-you products — products that are
Smart Spot eligible — has provided, and will
continue to provide, growth opportunities at
what we call the intersection of business and
public interests.

Q: How are you approaching innovation
as a means to growth?
A: Innovation demands that we constantly
look around the next corner to ensure we’re
providing products that our consumers and
retail customers want. We have a relentless
focus on innovation, as new products
consistently deliver 15% to 20% of our total
growth. In 2006 alone, our North American
businesses introduced new products that
totaled greater than $1 billion in retail sales.
More strategically said, we’re focused on
game-changing innovation. Clearly, we need
to keep our existing big brands fresh while
developing products and venturing into
new categories.

Through a disciplined approach to innova-
tion, we’ve developed a very strong pipeline
for 2007 and beyond, including new products
like Flat Earth vegetable and fruit crisps from
Frito-Lay, and new beverage entries such as
Izze, a sparkling beverage made with 70%
fruit juice, and Naked Juice, a line of all
natural juices and juice smoothies, acquired
in January 2007. And we’ll expand on our
successes, such as introducing Baked Walkers
crisps in the United Kingdom.

As the lifeblood of any successful consumer

products company, we expect innovation
will continue to be a key tool for growth at
PepsiCo going forward.

#1
Sports Drink

#1
PET Water
Brand
(non-jug)

#1
Chilled Juices
& Juice
Drinks

#1
Enhanced
Water
Brand

#1
Ready-to-
Drink
Coffee

#1
Ready-to-
Drink
Tea

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U.S. Category Leaders

#1
Potato
Chips

#1
Tortilla
Chips

#1
Corn Chips

Multigrain
Snack

Extruded
Snack

Pretzels

Q: How are you addressing rising
input costs in your businesses?
A: Structural inflation is a reality we
believe will persist over the next few years.
Agricultural commodities, energy and certain
metals are in a period of protracted inflation
that’s unlikely to moderate until supply
catches up.

Fortunately, over the years we’ve demon-
strated the resilience of the PepsiCo portfolio
to navigate through these headwinds
successfully. And we are confident we will
find innovative solutions to cover rising input
costs. It will mean pulling all available levers
to address inflation, as we’ve always done,
such as finding new productivity, strategically
hedging our input costs, and executing
prudent and judicious pricing.

Q: How are you addressing the
carbonated soft drink (CSD) category
decline in North America?
A: Rejuvenating the CSD category requires
us to deliver new products, new packaging
and new benefits to re-engage consumers.
2007 has one of the strongest line-ups of
CSD innovation we’ve had in many years. In
essence, we plan to build a new category for
us of “sparkling” beverages.

Whether it’s through Izze sparkling bever-
ages, our new Jazz line, increased distribution
of Pepsi Max throughout our system, new
“choreography” packaging for Pepsi, or
other new product and packaging news for
Diet Pepsi, Mountain Dew and Sierra Mist,
we believe we’ve got an impressive lineup
ready for the marketplace. And we’re
supporting our new products as we continue
to support our established core brands.

Looking ahead, we have increased our
investment in truly breakthrough innovations
to come, like new sweeteners that we
believe hold the power to restoring CSD
category growth.

Q: You have had good success
promoting senior executives from within
the company. What are you doing to
ensure you maintain a strong bench and
good succession planning?
A: We announced a number of senior exec-
utive changes this year, ranging from CEO
to senior executive talent of our operating
divisions. Because of the deep bench strength,
we were able to provide opportunities to
current PepsiCo executives — ensuring
smooth transitions and tapping into literally
hundreds of years’ worth of experience
within the company.

If anything, this series of moves underscores

the importance of continuously building
bench strength in our management group.
We continue to place a high priority on
sustaining our pool of executive talent, and
we clearly understand that in the global
competition for talent our people planning
processes must be world class.

Q: How will Indra Nooyi’s appointment
to CEO change PepsiCo’s strategic focus
or priorities?
A: Our transition of the CEO role is as
seamless a transition as any PepsiCo has
ever done, largely reflecting the fact that we
have co-authored the strategies the company
is pursuing.

There are no major new strategies that
have been put into place since the transition
took effect in October of 2006, and we
continue to aggressively pursue those
strategies that have been driving the
company’s growth.

Q: How will PepsiCo’s work with
diversity and inclusion, and its work
with corporate social responsibility
and corporate governance evolve under
new leadership?
A: Our commitment to diversity and inclu-
sion as a means to drive our growth remains
steadfast. We continue to see the impact of
our efforts in our business results, as consumer
product offerings, promotions and customer
programming benefit from the diverse
and inclusive workforce and environment
we’re building.

Our focus on corporate responsibility has
always been strong and will even be stronger
as we contribute to societal growth and help
address societal problems. Some would say
we have a moral and social obligation.
Others would say it’s simply good business.
Either way, we have a major role to play.

Similarly for corporate governance, we

continue to find ways to strengthen our
approach, our tools and our reporting in the
name of transparency for our shareholders
and the range of constituents who track our
business. For example, in 2006, PepsiCo
participated in a pilot program at the SEC
to test a new electronic filing system.

These kinds of priorities, which tie directly
to our commitment to responsible corporate
citizenship, will remain front and center.

267419_L01_P02_07.v3.qxd 3/3/07 11:42 PM Page 7

Juice fruit beverages (acquired January 2, 2007).
Each acquisition gives us a new opportunity
for growth, whether through new product
categories or greater reach into emerging
retail channels.

Internationally, we completed the acquisi-

tions of Duyvis nuts in the Netherlands and
Star Foods snacks in Poland, as well as
Bluebird snacks in New Zealand in early
2007. Here again, each provides opportunity
for growth through new geographies and
new product lines internationally.

Before any acquisition is made, we apply
a disciplined approach to evaluating returns
on the investment within a reasonable period
and focus on ensuring these businesses add
profitable growth to PepsiCo. We feel very
good about these acquisitions, and their
integration is proceeding well.

Going forward, you can expect us to
continue acting on our stated strategy of
smaller, tuck-in acquisitions as a means to
help us grow.

Q: What’s the next big Power of
One frontier?
A: Our Power of One initiatives — those
directed at accelerating growth for PepsiCo
and our retailers through the power of
the entire PepsiCo portfolio — are most
definitely moving to a new level.

In 2006, we conducted “Innovation
Summits” with our customers to share a
holistic view of how shopping and eating
habits are fragmenting. Using the insights
from these summits, we’ve worked with
our retail partners and tailored our product
offerings — by account — to maximize
the potential of our categories and boost
performance and results.

But our partnerships with customers go

beyond top-line driving initiatives. We’ve
expanded it to include end-to-end supply
chain efficiencies. We are refreshing our
selling and merchandising activities and
critically reviewing all touch points with our
customers to eliminate inefficiencies like
out-of-stocks and reduce “pain points,” if
any. This initiative extends beyond PepsiCo
to include our bottling partners — members
of the extended PepsiCo family who work
hand in hand with us on all of our initiatives.

U.S. Category Leaders

#1
Hot Cereal

#1
Grits

#1
Brand
Pancake
Syrup

#1
Rice Side
Dish

#2
Pancake
Mix

Q: Where is PepsiCo in its investment
in business process transformation, and
specifically its SAP implementation?
A: Business Process Transformation (BPT) is
a multi-year transformation effort to simplify
and synchronize our business processes and
tools into one common platform.

In 2006, we began implementing SAP. We
streamlined our indirect procurement system
across our U.S. divisions, and for Quaker,
Tropicana and Gatorade, we also streamlined
customer orders, implemented a more efficient
system for assessing and tracking capital
expenditures and advertising and marketing
spending, and provided common demand
forecasting capability.

The project has an attractive business case
including both IT cost savings and operating
productivity. Additionally, we expect benefits
from increased business information.

Q: International has been a big
contributor to PepsiCo’s growth over
the past few years. How do you plan to
sustain this growth?
A: PepsiCo International continues to be
the growth engine for the company —
delivering on our expectations to grow at
about twice the rate of our North American
businesses. Growth internationally across a
wide range of markets is strong.

We believe the strong growth achieved
by our PepsiCo International business in 2006
reflects the work of a world-class management
team, years of investment, and the imple-
mentation of a deliberate strategy to create
scale in key international markets that will
deliver profitable growth.

The portfolio of international markets
continues to broaden and strengthen as we
deliver exciting new products, tailored to
local tastes, to consumers in approximately
200 countries. And in developing and
emerging markets in particular, growth in
per capita GDP levels continues to generate
increased demand for our products.

Q: PepsiCo made a number of
acquisitions in 2006 — both in North
America and internationally. How is
the integration of these businesses
going? And what kinds of mergers and
acquisitions activity can we expect to
see going forward?
A: Our North American acquisitions within
the last year included Stacy’s bagel and pita
chips, Izze carbonated beverages and Naked

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Superior performance starts with a wide selection of
powerful brands and the capability to build more of them.

267419_L01_P08_15.v2.qxd 3/4/07 1:01 AM Page 9

Performance

PepsiCo has a history of delivering strong financial performance. We strive to increase
revenues, market share, volume, profits and earnings per share, while reducing costs
and improving productivity. This, in turn, leads to strong returns for our shareholders.
Our success in 2006 made PepsiCo the second–largest food and beverage company
in the world. We believe our performance is the result of our unique competitive
strengths: our structural and capability advantages, supported by a culture that is
uniquely our own.

Our Structural Advantages
Our structural advantages reflect a presence in convenience categories that is both wide and
deep — with global operations that reach approximately 200 snack and beverage markets and
an unmatched portfolio of leading brands. Combined with our flexible, multiple go-to-market
systems, these structural advantages provide us with a solid base for growth.

PepsiCo
estimated
worldwide
retail sales:
$92 billion.*

Convenience
As consumers’ lives become
more time-starved, demand
for products that offer conven-
ience continues to grow. This
“sweet spot” of convenience
features categories that have
been outgrowing the overall
food and beverage sector over
the past several years.

Our innovation pipeline is
being stoked to leverage our
growing presence in these
categories. Products such as
Quaker Oatmeal-to-Go bars
mean more people can enjoy
a heart-healthy breakfast.
With Tropicana FruitWise, a
line of fruit strips and bars
made from real fruit and

juice, we offer consumers a
delicious and portable way to
eat one to two servings of
fruit per item. Starting in
2007, consumers can choose
our breakthrough line of Flat
Earth fruit and vegetable
crisps as a convenient snack
option that provides a half
serving of fruits or vegetables
per ounce.

Our growing beverage
portfolio offers consumers
choices from regular and diet
carbonated soft drinks to
ready-to-drink teas and
coffee, waters, sports drinks,
energy drinks, and juices
and juice drinks — all in a
variety of sizes for home or
on-the-go enjoyment.

Global Operations
We are the largest savory
snack food business and the
largest sports drink producer
in the world. Our size gives us
distinct advantages. No matter
where consumers live or
travel in the world, we’re
working hard to ensure our
brands are available. Our
reach provides a competitive
edge when introducing new
products and distributing our
brands. Retailers are eager
to stock our products because
they know our brands provide
quality, variety, great taste and
move quickly off the shelves.

We have U.S. category
leadership positions — either
first or second position — in
18 categories of snacks, bever-
ages and foods. In beverages
— including carbonated plus
non-carbonated — we have
the leading market share in
the United States.

PepsiCo International has
delivered consistent growth
over the last three years, with
18 businesses now generating
revenues of at least $200
million. We have a solid share
of snacks in major markets
such as Mexico, the United
Kingdom, Brazil, Australia,
India and Russia. In developing
markets, such as China, Pepsi

*Includes estimated retail sales of all PepsiCo products, including those sold by our partners and franchised bottlers.

Top Branded Food and Beverage Manufacturers
$ Net Sales in Billions
Food and beverage sales, excludes food ingredients, pet and agricultural products.
Includes fruit and dairy.

Nestlé

PepsiCo

Kraft Foods

Unilever

Coca-Cola

Groupe Danone

Cadbury Schweppes

Diageo

Anheuser-Busch

General Mills

0
PepsiCo is the world’s second largest food and beverage company.

Cumulative Total Shareholder Return
% Return on PepsiCo stock investment, the S&P 500 and the S&P Average of Industry Groups.

150

125

100

PepsiCo Inc.
S&P 500®
S&P® Average of Industry Groups

12/2001

12/2002

12/2003

12/2004

12/2005

12/2006

Shareholders purchasing PepsiCo stock at the end of 2001 and
holding it to the end of 2006 received a higher cumulative return than
the returns of the S&P 500 and our industry group.

267419_L01_P08_15.v3.qxd 3/5/07 11:20 PM Page 10

is the leading soft drink, and
we have also introduced
many of our popular snacks
such as Lay’s potato chips.
And we’re just getting
started. We’re establishing
our big, muscular brands in
new markets every year. We
now offer Gatorade sports
drinks in 42 markets, and we
are expanding into more. We
sell Tropicana juice and juice
drinks in 27 markets, and we
see near-term opportunity to
introduce these products into
many other markets. We also
offer Lipton tea brands in
many markets, with great
potential to further expand.
As we achieve scale in

global markets, we are
introducing our Power of
One initiatives — which
integrate business planning,
merchandising and promotions
and focused customer teams
across all our brands. For
example, in Asia, Brazil, Russia
and Mexico, we are working
with our retail customers
to create promotions and
improve productivity across
our portfolio.

Big Brands
We have 17 mega-brands,
each of which delivers retail
sales of at least $1 billion.
Five of them generate retail
sales of more than $5 billion
each. These brands are big —
and we continually foster
their growth. Importantly, we
have another 16 brands that
generate retail sales between
$250 million and $1 billion —
and another 14 brands that
generate sales between $100
and $250 million. Our brands’
size and popularity give us
the confidence to introduce
new flavors and launch
entirely new varieties with
trusted brand names that
deliver consistently great taste.

Distribution Systems
Our delivery — or “go-to-
market” — systems provide a
strong competitive advantage.
With optimum efficiency,
we can deliver to retailers
and other customers who
sell our products, virtually
wherever they are and
however they want.

U.S. Convenient Food and
Beverage Sales
% Total Dollar Sales Snacks and Beverages

U.S. Convenient Foods
% Retail Sales in Measured Channels.
Includes chips, pretzels, ready-to-eat pop-
corn, crackers, dips, snack nuts/seeds,
meat snacks, bars, cookies, candy, sweet
and other snacks.

Kraft Foods
7%

PepsiCo
25%

Coca-Cola
11%

All Others
57%

Procter &
Gamble
1%
Master
Foods
5%
General
Mills
2%

Kellogg
6%

Hershey
9%

PepsiCo
21%

Private
Label
7%

Kraft Foods
12%

PepsiCo is the leading convenient
food and beverage company in
the United States.

Frito-Lay is the leading convenient
snack food business in measured
channels in the United States.

We offer consumers an increasingly wide choice of products for
every occasion.

Our most powerful

distribution system is direct-
store-delivery (DSD), where
PepsiCo associates deliver our
products to stores and place
them on the shelves. Direct-
store-delivery allows us to
create maximum appeal and
visibility for our brands and

support in-store promotions.
DSD works well for popular
products we restock often,
because it allows us to distrib-
ute new products quickly.

Our DSD system reaches

hundreds of thousands of
retail outlets this way, from
neighborhood convenience

PepsiCo International Beverage Volume Growth by Region
% System Volume by Region

Europe/Middle East/Africa

Asia

Latin America

Others
37%

PepsiCo International Snack Volume Growth by Region
% System Volume by Region

Europe/Middle East/Africa

Asia

Latin America

PepsiCo International beverages and snacks generated volume growth
across all regions.

267419_L01_P08_15.v2.qxd 3/4/07 12:02 AM Page 11

stores to large-format super-
markets. The Frito-Lay North
America team services nearly
440,000 retail outlets weekly.
We handle less perishable
products — including Gatorade
sports drinks, shelf-stable
Tropicana juices and Quaker
products — through our
warehouse distribution
system. We deliver Tropicana
Pure Premium juices using
either a refrigerated ware-
house system or chilled
direct-store-delivery system.
The success of these
systems can be measured in
many ways. For example,
seven of the 15 largest brands
sold in U.S. supermarkets are
PepsiCo brands. No other
company can make this claim.
Our distribution systems
are part of one of the world’s
most powerful supply chains.
Worldwide, we own or lease
nearly 300 factories, operate
more than 3,000 distribution
centers, and employ nearly
70,000 salespeople working
to ensure our products are
available, merchandised and
sold in engaging ways every
hour of every day.

Our Capability Advantages
Our capability advantages include the strategic acuity
necessary to anticipate consumer needs and innovate to fulfill
them. Early on, we anticipated consumers moving from
carbonated soft drinks to non-carbonated beverages, and we
broadened our beverage portfolio to capture new growth in
the non-carbonated segment. Similarly, we were among the
first food and beverage companies to anticipate increased
consumer interest in health and wellness and to recognize
that we could help consumers live healthier lifestyles. Along
with knowing our customers, we know our brands and how
to build and market them. Add to this our demonstrated
ability to pinpoint, acquire and integrate businesses — both
big and small — and we believe our capability advantages
will continue contributing to our strong performance.

Strategic Acuity — Move
to Non-Carbonated
Beverages
Carbonated beverages remain
the most popular beverage
category, with some 95% of
U.S. households purchasing
them. However, non-carbon-
ated beverages represent a
fast-growing category — a
place where consumers are
migrating. Today, in the
United States and Canada,
non-carbonated beverages,
which are 38% of our volume,
generate 69% of our revenue.

We recognized the need to

broaden our portfolio early
on and moved to extend our
presence in non-carbonated
beverages in 1992, when we
formed a partnership with
Thomas J. Lipton Co. to sell
ready-to-drink tea brands. In
1994, we introduced Aquafina
bottled water, and we also
began a strategic partnership
with Starbucks to market
ready-to-drink coffee. We
acquired Tropicana in 1998
and we expanded the Dole
brand. We added SoBe, the
producer of several varieties
of tea and energy drinks, in
2001. Active thirst leaders,
Gatorade Thirst Quencher
sports drinks and Propel
Fitness Water, became a part
of our beverage business
when we merged with
Quaker in 2001. In 2006, we
announced our alliance with
Ocean Spray to market, bot-
tle and distribute single-serve
cranberry juice products and
other product innovations.
Now we’ve defined a
new category within our
beverage portfolio — sparkling

Gatorade Thirst Quencher is among our biggest brands and is being
introduced in markets around the globe.

PepsiCo International
Snack Volume
% System Volume by Region

Asia
11%

Latin America
51%

Europe/
Middle East/Africa
38%

PepsiCo has the largest snack
business in the world.

PepsiCo International
Beverage Volume
% System Volume by Region
Includes Pepsi-Cola, 7UP, Gatorade,
Tropicana and other beverages.

Europe/
Middle East/Africa
45%

Asia
26%

Latin America
29%

Our beverage portfolio is well-
positioned to take advantage
of rising consumption in
developing markets.

PepsiCo International
Net Revenues
% Net Revenues

Snacks and Foods
70%

Beverages
30%

The major share of PepsiCo
International revenues are
generated by snacks and foods.

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beverages — and we added a
premium brand to help us
capture the growth: Izze
Beverage Co. Acquired in
2006, Izze is a maker of all-
natural sparkling fruit juices.
To extend our lead in non-

carbonated beverages, we
recently completed the
acquisition of Naked Juice, a
premium juice producer in the
United States whose portfolio
includes fruit juices and
smoothies made without
added sugars or preservatives.
Internationally, we have a

variety of non-carbonated
products including Tropicana,
Gatorade and Lipton products,
plus local juices such as
Copella fruit juices and PJ
Smoothies in the United
Kingdom, and Punica, a
leading German maker of
fruit juices and juice drinks,
acquired in 2005. A huge

opportunity awaits us in the
world of non-carbonated
beverages, as we currently
account for less than 2% of
an international non-carbon-
ated beverage industry that
we estimate to be about $70
billion and growing.

Strategic Acuity —
Health and Wellness
Providing consumers with
choices has long been a part
of our mindset. We introduced
Diet Pepsi in 1964 and Reduced
Fat Ruffles in the mid 80s. We
have historically supported
active lifestyles as well.
Throughout the world, PepsiCo
is a frequent sponsor of
sports and active lifestyles
through our marketing and
our charitable donations.

Our increasing commitment

to health and wellness is
reflected in the transformation
of our portfolio, such as
through our acquisitions of
Tropicana and Quaker. That

Our goal is to make our products available wherever there are hungry
or thirsty people.

PepsiCo offers a variety of products that are delicious and nutritious.

We are pioneers in offering

consumers smart choices. In
2004, we introduced the
Smart Spot symbol in the
United States, a first-of-its-
kind designation that helps
consumers identify PepsiCo
products that can contribute
to healthier lifestyles. Products
with the Smart Spot symbol
meet nutrition criteria based
on authoritative statements
from the U.S. Food and
Drug Administration and the
National Academy of Sciences
or provide other functional
benefits. More than 40% of
our revenues in the United
States and Canada come
from products that are Smart
Spot eligible.

commitment is behind our
creation of a Blue Ribbon
Health and Wellness Advisory
Board, a group that provides
expert advice on a variety of
initiatives including new
products, nutrition news and
exercise programs. And it has
driven our work to improve
the nutritional profile of our
existing product lines. In
2003, long before concerns
about trans fats became the
subject of mainstream media,
PepsiCo removed trans fats
from Doritos, Cheetos and
Tostitos in the United States
and Canada, by converting to
corn oil — a vegetable oil
high in good fats, mono- and
polyunsaturated fatty acids.
In 2006, we changed the oils
in our Lay’s and Ruffles brand
potato chips in the United
States and internationally in
Walkers crisps, moving to
sunflower oil, which is lower
in saturated fat.

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We have a growing portfolio

of brands marketed interna-
tionally that provide a clear
nutrition or health benefit —
what we call “Good for You.”
In Mexico, for example, we
are pioneering new technol-
ogy to help preserve healthy
nutrients in our products. A
current example is a baked
potato stick called Nutritas,
which includes vegetables and
is produced by microwave
cooking, steaming and slow
baking. We’ve introduced
baked snacks in Mexico and
the United Kingdom and will
continue to offer more
choices across the world.
Throughout 2006, we
continued adding products
that fit into healthier lifestyles.
At the start of the year, we
acquired Stacy’s Pita Chip
Company, a U.S.-based
premium natural-snacks com-
pany. In the water category,

we introduced SoBe Life Water,
a line of vitamin-enhanced
water beverages. At Frito-Lay,
we launched Tostitos Multigrain
to bring wholesome grains to
one of America’s favorite
tortilla chip brands, and we
introduced Baked! Cheetos
and Doritos snacks in our line
of 100-Calorie Mini Bites, to
take the guesswork out of
portion control. We introduced
whole grain side dishes as
part of our Rice-A-Roni brand.
We are addressing the needs
of serious athletes as well, with
research-proven performance
beverages like Gatorade
Endurance Formula. And this
momentum has continued into
2007, with the introduction of
Gatorade AM Thirst Quencher,
with flavors that appeal to
morning exercisers.

Brand Building
Brand building is about
extending a brand’s image. And
we are adept at connecting
local preferences to our
global brands, resulting in
overall growth.

Take Lay’s as an example:
we’ve expanded it worldwide,
tailoring it to local palates.
We start with the well-known
“banner sun” brand, and we
cultivate the brand across our
international markets —
capitalizing on iconic names
in their own right like Walkers
in the United Kingdom, Sabritas
in Mexico, and Matutano in
Spain, among others.

Then we extend the brand

with flavors and seasonings
geared to local tastes — chilies
in Latin America, beef and
ketchup in Europe, and prawn
in Asia, for example. Next, we
branch into entirely new vari-

ations, such as Lay’s Artesanas
and Lay’s Mediterraneas
made with olive oil. We offer
different kinds of chips, like
hard-bite kettle style chips
and, more recently, natural
and organic varieties.

We apply the same process

to our other snack and
beverage brands. The room
for growth is huge.

Recent examples of our
brand building prowess from
our beverage portfolio
include our 2006 U.S. intro-
duction of Jazz from Diet
Pepsi, a low-calorie, indulgent
cola available in two flavors:
Black Cherry French Vanilla
and Strawberries & Cream.
We launched Pepsi Limón in
Peru, and in Argentina we
introduce 7UP H2OH!, a drink
that bridges carbonated
water drinks with flavored
water. In the United States,

U.S. PepsiCo Beverage
Distribution Channels
% Volume

Frito-Lay North America
Distribution Channels
% Volume

Largest PepsiCo Brands
Estimated Worldwide Retail Sales $ in Billions

Pepsi-Cola

Convenience/
Gas/Chilled DSD/
Other Small Format
17%

Mass
Merchandiser/
Supercenters/
Club/Drug/Other
23%

Restaurant/
Foodservice/
Vending
27%

Grocery
33%

Canada
8%

Other 8%

Convenience
11%

Supermarket/
Grocery 37%

Mass Merchandiser/
Warehouse/
Club 27%

Foodservice/
Vending 9%

Gatorade Thirst Quencher
Mountain Dew (diet and regular)
Diet Pepsi

Lay’s Potato Chips

Doritos Tortilla Chips

Tropicana Pure Premium Orange Juice

Cheetos Cheese Flavored Snacks

Aquafina Bottled Water

7UP (outside U.S.)

Lipton Teas
Quaker Cereals

Ruffles Potato Chips
Mirinda

Tostitos Tortilla Chips

Sierra Mist (diet and regular)
Fritos Corn Chips

Frito-Lay North America distributes
to nearly 440,000 retail outlets
each week.

PepsiCo has 17 mega-brands that generate $1 billion or more
each in annual retail sales.

PepsiCo beverages are distributed
by a powerful go-to-market system
that includes company-owned
operations, independently-owned
franchised bottlers and warehouse
delivery systems.

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in Poland, Bluebird Foods
in New Zealand and Duyvis
nuts in the Netherlands
and Belgium.

We are disciplined buyers,

with a rigorous process for
due diligence to ensure that
any potential acquisition
makes complete sense from
both a business and culture
standpoint. As diligent
integrators, we have a special
understanding of the entre-
preneurial nature of smaller
“tuck-in” acquisitions and
exercise a thoughtful
approach to helping these
new businesses preserve and
build upon their unique
capabilities, such as the high
level of involvement Stacy’s
has with its consumers. We
not only sign the deals, but
we are committed to making
them work.

and bold flavor. We reformu-
lated Diet Mountain Dew
and gave consumers a taste
during the largest single-day
sampling event in Pepsi history.
Similarly, we kicked off the
biggest marketing campaign
for Cheetos in the brand’s
history. And keep your eyes
on Fritos corn chips as we
celebrate the brand’s 75th
anniversary in 2007 with
special retro packaging.

Mergers and
Acquisitions
Our people have the skills to
pinpoint, acquire and seam-
lessly integrate businesses —
big and small. This has
enabled us to successfully add
large companies, like Quaker
and Tropicana, and regularly
add smaller “tuck-in” deals
that enhance and expand our
existing operations. These
include our recent acquisitions
of Izze Beverage Co., Naked
Juice, and Stacy’s Pita Chip
Company in the United
States, as well as Star Foods

PepsiCo Beverages North
America Carbonated
Soft Drink Volume vs.
Non-Carbonated Soft
Drink Volume

Non-Carbonated
Soft Drinks
38%

Carbonated Soft Drinks
62%

Carbonated soft drinks
generate the largest volumes.

PepsiCo Beverages North
America Carbonated
Soft Drink Revenue vs.
Non-Carbonated Soft
Drink Revenue

Carbonated
Soft Drinks
31%

Non-Carbonated
Soft Drinks
69%

Non-carbonated beverages
generate the largest revenue.

we’ve recently extended
Aquafina with vitamin-
fortified Aquafina Alive, and
we’re now offering Tropicana
Organics and Tropicana
Essentials, juices with omega-
3’s, the fatty acids known for
helping to promote heart
health. Our Propel enhanced
water brand, which was
among the first entries into
the enhanced water category,
continues to meet consumer
desires for more healthful
options through brand
extensions like Propel Calcium.
Through our North American
Coffee Partnership with
Starbucks, we introduced
Starbucks Iced Coffee as well
as Strawberries and Crème
Frappuccino and Starbucks
DoubleShot Light.

Creating new products is

not the only way we build
brands. We are experts at
capturing consumer attention
with our brands. In 2006, we
solidified Pepsi’s popularity
among music fans when
Grammy award-winning artist
Mariah Carey wrote and
recorded original ringtones for
the Pepsi Cool Tones and
Motorola Phones promotion.
In international markets, a
Pepsi advertising campaign
included an engaging theme
song called “DaDaDa” that
caught on by connecting
soccer fans around the world.
We give our brands special
attention. For example, in 2006
we unveiled new packaging
and a new logo for Doritos
tortilla chips to communicate
the brand’s powerful crunch

Quaker Oatmeal and Tropicana Pure Premium are important brands in
our health and wellness portfolio of products.

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Our products are known by trusted brand names in each region of the world, such as Sabritas in Mexico.

U.S. Liquid Refreshment
Beverage Market Share
% Volume in Measured Channels

Other
19%

PepsiCo
26%

Private Label
14%

Nestlé
8%

Coca-Cola
23%

Cadbury
Schweppes
10%

PepsiCo has the leading
share of the liquid refreshment
beverage market.

Our Unique Culture
PepsiCo’s most important advantage resides in our people and the way we operate. We
work hard to recruit, train, develop and — most of all — retain a diverse team of the best
and brightest. We emphasize results, personal ownership and operational excellence.

PepsiCo Net Revenues from
Smart Spot Eligible Products
U.S. and Canada
% Net Revenue

Our People
Our people represent
PepsiCo’s ultimate competitive
advantage. Diversity and
inclusion are fundamental to
our success. We recognize
that a diverse workforce and
a diverse supplier base help
us understand and meet the
needs of our diverse consumer
base. An inclusive atmosphere
allows everyone to contribute
fully, generating new ideas
and driving innovation.

Our “ownership culture”
empowers our associates. We
are a big company that thinks
like a small enterprise. Our
associates fundamentally see
their jobs as finding solutions
for customers and consumers

and doing what it takes to
exceed their expectations.
Most of all, we share a

set of PepsiCo Values —
represented in a commitment
to deliver sustained growth
through empowered people,
operating with responsibility
and building trust.

The Way We Operate
We make, move and sell millions
of products every day, which
is why day-to-day operational
excellence is so critical.

Our Business Process
Transformation (BPT) is
simplifying and accelerating
the speed of our information
technology processes. Our
goal is to make it easier for
our retail and other customers
to do business with us. For

example, the BPT efforts will
help us provide one invoice
to our customers, rather than
multiple invoices from our
various businesses.

PepsiCo’s Power of One
initiatives continue to bring
new efficiencies to our
relationships with customers.
For example, through
“Innovation Summits” with
our customers, we deepen our
understanding of their needs
and can build on the benefits
we bring, with both our
products and delivery systems
across the entire supply chain.

Smart Spot
43%

Non-Smart Spot
57%

A wide variety of PepsiCo
products carry the Smart Spot
symbol to identify choices that can
contribute to healthier lifestyles.

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In 2006, PepsiCo associate volunteers and KABOOM, a
not–for–profit organization, built 12 playgrounds in inner cities
to encourage children to be more physically active.

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Purpose

Today’s consumers increasingly view their spending decisions as a way to make a
difference in the world. They want to see their values reflected in the products they buy
and their communities strengthened by the businesses they support. At PepsiCo, we
believe we are in a perfect position to meet these needs. We strive to do better by doing
better. In delivering on this commitment, we’ve identified three areas where we believe
we can have the most impact: human sustainability, environmental sustainability and
talent sustainability.

Human Sustainability
People need to be nourished in many ways, ranging from what they eat to how they live. We
call this human sustainability, and the areas where we can make the greatest difference are
through the products we offer consumers and through our efforts to encourage consumers to
adopt more active lifestyles. As we pursue these priorities, we tap into the deep expertise and
counsel of our Blue Ribbon Health and Wellness Advisory Board, established to help us
address health and wellness opportunities.

Products
In the United States, our Smart
Spot symbol makes it easier for
consumers to identify our
products that are nutritious,
can contribute fiber, vitamins
or other important nutrients,
or are reduced in fat, sugar or
sodium. Products with the
Smart Spot symbol meet
nutrition criteria based on
authoritative statements
from the U.S. Food and Drug
Administration and the
National Academy of Sciences
or provide other functional
benefits. Today, more than 250
of our products carry the Smart
Spot symbol. On the front
panel of the product packaging

consumers see the green
Smart Spot symbol that says
“Smart Choices Made Easy.”
And on the back of the pack-
aging we describe what makes
each product a better choice.
As new technologies and
ingredients become available,
we’re committed to making
our core products better
choices. For example, Frito-Lay
North America’s Ruffles and
Lay’s potato chips and Walkers
United Kingdom’s snacks
reduced the saturated fat in
their leading potato crisp and
chip brands by switching to
sunflower oil, which delivers
improved nutrition without
sacrificing taste.

The PepsiCo Smart Spot symbol helps consumers select products such
as Baked! Cheetos, which are lower in calories.

Active Lifestyles
We’re committed to helping
consumers fight obesity and live
healthier lives by supporting
programs that help them
engage in more active lifestyles.
Among the programs we’re
proud to sponsor is America
On the Move (AOM), a national
effort in the United States
dedicated to helping
individuals, families and
communities make positive
changes in their health and
quality of life. AOM recom-
mends making small changes,
such as walking 2,000 more
steps and consuming 100
fewer calories per day, as
a way for consumers to
incorporate healthy habits
into their everyday lives and
avoid weight gain. The
African American and Latino
communities face some of the
greatest health risks. That’s
why in partnership with the
National Urban League and
the National Council of La Raza,
we're using the messages
and methods of AOM to
promote healthier living
among these constituencies.

We believe it is important to
develop the habit of exercising
early in life so we have many
programs for young people. In
the United States, our alliance
with the YMCA, the largest
provider of fitness programs, is
expected to reach more than

Our Mission
We aspire to make PepsiCo
the world’s premier consumer
products company, focused on
convenient foods and
beverages. We seek to produce
healthy financial rewards for
investors as we provide
opportunities for growth and
enrichment to our employees,
our business partners and the
communities in which we
operate. And in everything
we do, we strive to act with
honesty, openness, fairness
and integrity.

nine million youths. We have
programs on the local level
as well. For example, in
Chicago through the Chicago
Communities in Schools and
the Consortium to Lower
Obesity in Chicago Children
(CLOCC) we are collaborating
on an effort to pilot, test and
deliver a health promotion
program in six Chicago
communities and schools.

Outside the United States,
we support initiatives such as
the Gatorade Schools program
in Brazil, which encourages
good nutrition and physical
activity. In Mexico, we support
a program to construct recre-
ational areas in indigenous
shelters in order to promote
sports in these communities.

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School Programs
We recognize the critical
importance of helping children
learn to make healthy food
choices. In 2006, PepsiCo was
the only company to be part
of two historic agreements —
one for beverages and one
for snacks — to provide schools
in the United States with
products that can contribute
to healthier lifestyles.

Through our partnership

with the Alliance for a
Healthier Generation — a
joint initiative of the William
J. Clinton Foundation and the
American Heart Association
— we will offer U.S. schools
products that meet specific
nutritional guidelines. Under
the beverage guidelines, we
no longer will offer full-calorie
soft drinks, juice drinks or
teas in any K-12 schools, and
we’ll limit the calories and
portion sizes of beverages,
including sports drinks and
juices. On the snacks side,
we helped set the first-ever
voluntary guidelines for what
will be offered in U.S. schools.
Both agreements represent a

breakthrough step to adopt
a practical policy for snack,
food and beverage offerings
in U.S. schools.

Marketing
We have begun to enlist our
products in promoting key
issues. Through the North
American Coffee Partnership,
our joint venture with
Starbucks Coffee Company,
we entered into an agreement
to increase distribution of
Ethos Water to retail stores in
the United States. For each
bottle of Ethos Water that is
sold, a $0.05 donation is
made to help children and
their communities around the
world get access to clean
drinking water.

Frito-Lay’s SunChips

brand sponsored the Komen
Race for the Cure National
Volunteer Recognition
Program in the United States.
The partnership included
SunChips’ “Crunch for the
Cure” pink bags, with part of
the proceeds going to the
Susan G. Komen Breast Cancer
Foundation to support the
fight against breast cancer.

Through our North American Coffee Partnership, our joint venture
with Starbucks, PepsiCo is working to increase distribution of Ethos
Water, which will donate $0.05 for every bottle sold to help children
around the world get clean drinking water.

Environmental Sustainability
Environmental sustainability means replenishing resources we
use — on our planet and in the communities we serve. We have
defined our focus areas to be water, packaging and energy. In
our communities we are supporting the fight against HIV/AIDS
as well as other philanthropic and volunteer activities.

Water
Our water program goals
begin with making sure our
practices are responsible. We
work closely with governments,
municipalities and technical
experts when locating our
facilities to ensure adequate
quantity and quality of water
supply. We have programs
to reduce our use of water
and reuse water whenever
possible. Gatorade, for exam-
ple, is reducing its water use
by installing waterless rinsing
systems to clean its bottles.
We are focused on finding
new opportunities to save
water. For example, across
Frito-Lay North America our
water conservation initiatives
have reduced the quantity of
water used in processing
snack chips by more than one-
third since 1999.

Where water shortages are

an issue, we recognize our
responsibility to help make

sure the communities in
which we operate have access
to sufficient water. For
example, in India, PepsiCo is
supporting The Energy and
Resources Institute (TERI) to
help improve water processes
and management. These
projects include an evaluation
of water resources and
preparation of area-wide
management plans, including
the rejuvenation of traditional
water systems.

The PepsiCo Foundation is

working with the China
Women’s Development
Foundation on a research
initiative to expand availability
of safe drinking water for the
people of Western and Central
China. PepsiCo China’s work
with the Mothers’ Water Cellar
Project has already brought
water to thousands of families
in remote locations by building
water storage wells and the
capability to harvest rainwater.

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Programs with the National Council of La Raza and the National
Urban League encourage physical activity and healthier eating and
address health concerns of African American and Latino consumers.

For decades, our snack food

operations have recovered
starch released in the potato
chip making process. In 2006,
our United Kingdom snack
food operation received
government approval for a
process that creates food-
grade level starch, much
of which can be used in our
own products.

Recycling is a way of life at
PepsiCo. The Frito-Lay direct-
store-delivery system enables
our associates to recover
delivery cartons after use. A
typical carton makes about six
trips, eliminating some 60
billion pounds of solid waste a
year. We helped found the
National Recycling Partnership,
an initiative to increase recy-
cling across the United States.
And we have supported Keep
America Beautiful’s (KAB) Great
American Cleanup, the nation’s
largest voluntary clean-up
program, since its inception.
In 2006, Pepsi-Cola North
America partnered with Sam’s
Club and KAB in an innova-
tive program called “Return
the Warmth.” KAB helped

We begin with our
operations. For example, in
the United States today a
20-ounce Gatorade Thirst
Quencher bottle weighs
10% less and uses 70% less
packaging to deliver the
product than the same
size bottle sold in 1998.
Tropicana re-engineered the
way it delivers apple juice
concentrate in the United
States. Its move to recyclable
“flexi” bags eliminated nearly
43,000 steel drums annually.

A Pepsi-Cola North America program with Keep America Beautiful
and Sam’s Club encouraged recycling by providing grants to schools
that recycled the most beverage containers and donating fleece
jackets made with recycled plastic to needy children in the community.

Our Ethos Water distribu-

tion agreement has a goal
of contributing at least $10
million by the end of 2010
to help children and their
communities around the world
get clean drinking water. Our
support of The Safe Water
Network, a not-for-profit
organization we helped estab-
lish, is focused on developing
and deploying new affordable
water purification technology
to provide safe water to
communities in need.

We also share our water
expertise. In India, for example,
we’ve shown farmers tech-
niques that save water by
directly seeding rice paddies,
rather than growing the rice
through highly water-intensive
conventional seeding.

Packaging
We are committed to reducing,
reusing and recycling our pack-
aging and waste. To help us
achieve our goals, we have
established a Sustainable
Packaging Team. Its objectives
include developing alternative
packaging material technolo-
gies and supporting responsible
disposal practices.

Selected 2006
Environmental Honors

(cid:2) PepsiCo China: four
awards for Mothers’
Water Cellar Project.

(cid:2) PepsiCo: Vision for

America Award from Keep
America Beautiful.

(cid:2) Frito-Lay North America:

Energy Star Partner of the
Year from the Environmental
Protection Agency (EPA)
and the Department of
Energy (DOE).

(cid:2) Frito-Lay San Antonio, Texas:

WaterSaver Award.
(cid:2) Frito-Lay California:

Bakersfield and Modesto
facilities won the state
WRAP award for outstand-
ing performance in reducing
solid waste.

communities recycle more
than 36 million beverage
bottles. Sam’s Clubs provided
school grants, as well as
fleece jackets made with
recycled plastic, for needy
children in the area.

Helping to reduce waste is

just as important in our
markets outside the United
States. In India, for example,
we convert packaging film
waste to boards, building and
furniture material.

Energy
In 2006, Frito-Lay was
recognized by the United States
Environmental Protection
Agency (EPA) and the U.S.
Department of Energy (DOE)
for energy conservation.
The EPA and DOE conferred
Partner-of-The-Year in Energy
Management to Frito-Lay
North America for its
voluntary efforts to reduce
greenhouse gas emissions
through energy efficiency.
At Tropicana we reduced

our electricity demand by
eliminating some refrigeration

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and instead storing juice
blends in aseptic tanks at
above freezing temperatures.
The operation also co-gener-
ates power and heat to meet
most of our on-site electricity
needs. Three of our Gatorade
plants capture and reuse
biogas, a by-product of water
treatment operations, as
boiler fuel.

One way we are reducing
greenhouse gas emissions is
by using alternative power

more and more. For example,
in Cupar, Scotland, our Quaker
oat mill is using electricity
from 100% renewable sources.
And at our Frito-Lay plant in
Modesto, California, we’re
building a production line in
which nearly three-quarters
of the heat needed to
produce SunChips brand
multigrain snacks will come
from solar thermal energy.
Our focus extends to the
pages you are reading. This

PepsiCo water programs reach into communities to help address water
shortages. In India, programs are bringing water to drought stricken
areas and developing water management programs in areas where
monsoons are common.

Sustainability Time Line

1999 Frito-Lay North America
begins formal resource
conservation program.

2004 Sustainability Task
Force formed.

2005 Environmental Management

2001 PepsiCo Environmental Task

System developed.

2006 Dow Jones Sustainability

Index North America names
PepsiCo to list.

Force formed.

2002 Carbonated beverage
packaging goal of 10%
recycled content in
Pepsi-Cola North
America adopted.

2003 Global Reporting Initiative
Guidelines adopted.

In-kind donations include
food and beverages donated
to food banks. Our commu-
nity outreach programs
include community service
weeks. During our 2006
Global Week of Community
Service, more than 1,000
associates provided volunteer
work in their communities in
the United States, Mexico and
South Africa. In Mexico City,
for example, Sabritas associ-
ates repaired the “Casa de los
Niños de Palo Solo,” a health
development center serving
approximately 260 children.

Our associates are active in

their communities in innova-
tive ways. In Brazil, an Elma
Chips truck has been turned
into a roving library for
children. In Vietnam, through
the Poor Patient’s Association,
our associates help economi-
cally disadvantaged people
receive medical care. In Egypt
and Lebanon, our businesses
support scholarships to help
young people continue
their education.

In India, we’re promoting

seaweed farming as a local
employment opportunity for
women in remote coastal
communities, who would
otherwise have to travel
great distances to find work.

2006 Contribution Summary

PepsiCo
Foundation

Corporate
Contributions

Divisions

$21.9 Million

5.2 Million

4.2 Million

Estimated In-Kind
Donations

Total

27.2 Million

$58.5 Million

annual report was made with
recycled paper and “Green
Power,” which means that the
power used in the creation of
some of the paper was not
from fossil fuel.

HIV/AIDS
HIV/AIDS poses a major threat
in many places where we
operate, especially in high
risk countries such as South
Africa, India, Russia, China
and Thailand. Our global
HIV/AIDS policy provides a
template to help fight the
pandemic, and our associates
have joined in the fight. For
example, in South Africa our
Simba associates serve as Peer
Educators in the community.

Contributions and
Community Service
Through the PepsiCo
Foundation, and our corporate
and divisional contributions,
we provide financial support
for not-for-profit organizations
across the globe. Focus areas
include health and wellness,
diversity and inclusion, the
environment, employee
community engagement and
humanitarian aid in the event
of disaster. Groups looking for
support can apply on-line at
www.pepsico.com.

Selected 2006 Community
and Sustainability Honors

(cid:2) International Corporate
Courage Award: AIDS
Responsibility Project (ARP).
(cid:2) Gamesa — Quaker, Mexico:

Empresa Socialmente
Responsible.

(cid:2) 100 Best Corporate

Citizens from Business
Ethics magazine.

(cid:2) America’s Most-Admired

Companies from
FORTUNE magazine.
(cid:2) Dow Jones Sustainability
Index North America.

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Talent Sustainability
Our approximately 168,000 PepsiCo associates around the
world are the reason for our success. Recruiting, training and
retaining our associates and building a culture of equality,
diversity and inclusion allow us to achieve Talent
Sustainability and demonstrate to our associates that we
cherish them.

Associates
Our commitment to our
associates is formalized in our
Human Rights Policy which
was introduced in 2006. Our
goal is to make PepsiCo the
company that hires, develops
and retains the best people
— irrespective of race,
color, creed, gender or
lifestyle orientation.

There are many ways we
are making this a reality —
ranging from how we train,
reward and compensate our
associates to our robust and
historic diversity and inclusion
programs. Company programs
help associates manage their
careers, train for advancement,
increase their knowledge and
skills, and participate in lifestyle
and personal development
opportunities. HealthRoads,
offered in North America, is a
health benefits program that
promotes healthier lifestyles
for our associates and their
families through information,
online tools and personalized

wellness coaching. Our
SharePower program provides
stock options to associates
around the world and
encourages them to act like
owners of the company.

Diversity and Inclusion
To attract and retain the best
people, we seek to create a
diverse and inclusive culture
where everyone has equal
opportunity to contribute
and to succeed. We have
several initiatives to help us
in this area. Our Diversity and
Inclusion Governance Council,
formed in 2005, is a cross-
divisional, cross-functional
group composed of internal
and external thought leaders.
Its mission is to raise the bar
on diversity and inclusion.
Our Ethnic Advisory Boards
provide counsel and advice
on business issues ranging
from marketing our brands to
supporting our employees.
Outside North America
we have a growing number

Associates like Israel Perez, a Frito-Lay route sales representative in the
New York City area, are the reason for PepsiCo’s success.

Spending with U.S.
minority–owned and
women–owned suppliers
surpassed $1 billion for
the first time.

of programs to promote
diversity and inclusion and
support employees. In the
United Kingdom and Ireland
Times, for example, we were
rated as one of the ”Top 50
Places Where Women Want
to Work.“

Our focus on diversity is
equally strong in our procure-
ment processes. We have
teams dedicated to increasing
the diversity of our supplier
base. In 2006, for the
first time, we surpassed
$1 billion in purchases from
U.S. minority-owned and
women-owned suppliers.

For more information, read our
sustainability report, visit the
Corporate Citizenship section and
see our environmental programs
in action at www.pepsico.com.

Selected 2006 Diversity and Inclusion Honors

U.S. Diversity and Inclusion Statistics

(cid:2) America’s Top Corporations for Women’s Business Enterprises:
Women’s Business Enterprise National Council (WBENC).

(cid:2) Top 50 Companies for Diversity: Diversity, Inc.
(cid:2) 40 Best Companies for Diversity: Black Enterprise.
(cid:2) National Association of Asian American Professionals
Convention: NAAAP Convention Excellence award.

(cid:2) Latina Style magazine: The 50 Best Companies for Latinas to

Work for in the U.S.

(cid:2) Hispanic Business magazine: Top 50 Companies for Hispanics.
(cid:2) United Kingdom and Ireland Times: Top 50 Places Where Women

Want to Work.

(cid:2) PepsiCo scores 100% on the Corporate Equality Index.

Board of Directors
Senior Executives
Executives
All Managers
All Employees
At year-end we had approximately 168,000 associates worldwide.

14
23
2,165
12,903
62,251

Total Women
3
4
696
3,919
15,169

% Minority
4
21
6
17
422
32
30
2,903
18,573
24

%
29
26
19
22
30

Our Board of Directors is pictured on page 23. Our Senior Executives
include Corporate and Division Officers based in the United States.
The list appears on page 22. Beginning this year, we are including
Professionals in the All Managers category to better capture our
executive talent pool.

267419_L01_P22_26.v3.qxd 3/5/07 11:09 PM Page 22

Corporate Officers and Principal Divisions

Executive Offices PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577
914-253-2000

PepsiCo North America
700 Anderson Hill Road
Purchase, NY 10577
914-253-2000

Co–founder of PepsiCo

Donald M. Kendall
Over 55 years of PepsiCo experience.

Corporate Officers

Steven S Reinemund
Executive Chairman and Chairman of the Board of Directors
58. 22 years.

Indra K. Nooyi
Chairman Elect and Chief Executive Officer
51. 13 years.

Mitch Adamek
Senior Vice President and Chief
Procurement Officer
45. 17 years.

Peter A. Bridgman
Senior Vice President and
Controller
54. 21 years.

Richard Goodman
Chief Financial Officer
58. 13 years.

Wahid Hamid
Senior Vice President, Corporate
Strategy and Development
48. Less than one year.

Hugh F. Johnston
Executive Vice President,
Operations
45. 19 years.

Antonio Lucio
Chief Health and Wellness
Innovation Officer
47. 11 years.

Tod J. MacKenzie
Senior Vice President,
Corporate Communications
49. 19 years.

Matthew M. McKenna
Senior Vice President, Finance
56. 13 years.

Margaret D. Moore
Senior Vice President,
Human Resources
59. 33 years.

Lionel L. Nowell III
Senior Vice President
and Treasurer
52. 15 years.

Ronald C. Parker
Senior Vice President,
Human Resources,
PepsiCo North America
and Senior Vice President,
Global Diversity, PepsiCo
53. 24 years.

Clay G. Small
Senior Vice President,
Managing Attorney
57. 25 years.

Larry D. Thompson
Senior Vice President,
Government Affairs
General Counsel and Secretary
61. 2 years.

Cynthia M. Trudell
Senior Vice President and Chief
Personnel Officer
53. Less than one year.

Michael D. White
Chief Executive Officer,
PepsiCo International
and Vice Chairman, PepsiCo
55. 17 years.

John C. Compton
Chief Executive Officer
45. 23 years.

Division Officers
Frito-Lay North America
7701 Legacy Drive
Plano, TX 75024
972-334-7000

Albert P. Carey
President and Chief Executive Officer
55. 25 years.

Pepsi-Cola North America
700 Anderson Hill Road
Purchase, NY 10577
914-253-2000

Dawn Hudson
President and Chief Executive Officer
49. 10 years.

PepsiCo International
700 Anderson Hill Road
Purchase, NY 10577
914-253-2000

QTG (Quaker Foods/
Tropicana/Gatorade)
QTG Plaza
555 West Monroe Street
Chicago, IL 60661
312-821-1000

Charles I. Maniscalco
President and Chief Executive Officer
53. 26 years.

PepsiCo Sales
700 Anderson Hill Road
Purchase, NY 10577
914-253-2000

Tom Greco
President,
Sales
48. 20 years.

Michael D. White
Chief Executive Officer, PepsiCo International and Vice Chairman, PepsiCo

Division Officers
PepsiCo Asia
20th Floor
Caroline Center
28 Yun Ping Road
Causeway Bay
Hong Kong
852-2839-0288

Ron McEachern
President
54. 22 years.

PepsiCo Europe
50, rue du Rhône
CH – 124 Geneva
Switzerland
41-22-818-6900

Zein Abdalla
President
47. 11 years.

PepsiCo Latin America
Region Foods &
Beverages
Av. Lázaro Cárdenas 2404 Pte.
Col. Residencial San Agustín
Garza García, NL
66270
Mexico
52-81-8399-5151

Sabritas & Gatorade
Bosques de Duraznos No. 67
Col. Bosques de las Lomas
11700 Mexico D.F.
Mexico
52-55-2582-3000

Pedro Padierna
President
56. 19 years.

Salvador Alva
President
56. 23 years.

PepsiCo Middle
East & Africa
Khalid Ibn Al Waleed Road
Bank of Fujairah Building,
3rd Floor
PO Box 11330
Dubai
United Arab Emirates
971-4-397-1666

Saad Abdul–Latif
President
53. 25 years.

PepsiCo United
Kingdom
1600 Arlington Business Park
Theale, Reading
Berkshire
RG7 4SA UK
44-118-930-6666

Salman Amin
President
47. 11 years.

PepsiCo International
Commercial
700 Anderson Hill Road
Purchase, NY 10577
914-253-2000

Massimo d’Amore
Executive Vice President
51. 12 years.

267419_L01_P22_26.v3.qxd 3/5/07 11:07 PM Page 23

PepsiCo Board of Directors

Back row, left to right: Robert E. Allen, John F. Akers, Victor J. Dzau, M. D., Sharon Percy Rockefeller, Daniel Vasella.
Second row, left to right: Franklin A. Thomas, Alberto Ibargüen, Michael D. White, Ray L. Hunt, Arthur C. Martinez.
Front row, left to right: Steven S Reinemund, Dina Dublon, James J. Schiro, Indra K. Nooyi.

PepsiCo Board of Directors

John F. Akers
Former Chairman of the Board and
Chief Executive Officer,
International Business Machines
Corporation
72. Elected 1991.

Robert E. Allen
Former Chairman of the Board and
Chief Executive Officer,
AT&T Corp.
72. Elected 1990.

Dina Dublon
Consultant,
Former Executive Vice President and
Chief Financial Officer,
JPMorgan Chase & Co.
53. Elected 2005.

Victor J. Dzau, M.D.
Chancellor for Health Affairs, Duke
University and President & CEO, Duke
University Health Systems
61. Elected 2005.

Arthur C. Martinez
Former Chairman of the Board,
President and Chief Executive Officer,
Sears, Roebuck and Co.
67. Elected 1999.

Ray L. Hunt
Chief Executive Officer,
Hunt Oil Company, and
Chairman, Chief Executive Officer
and President
Hunt Consolidated, Inc.
63. Elected 1996.

Alberto Ibargüen
President and Chief
Executive Officer,
John S. and James L. Knight
Foundation
63. Elected 2005.

Indra K. Nooyi
Chairman Elect and
Chief Executive Officer,
PepsiCo
51. Elected 2001.

Steven S Reinemund
Executive Chairman,
and Chairman of the Board
of Directors,
PepsiCo
58. Elected 1996.

Sharon Percy Rockefeller
President and Chief
Executive Officer,
WETA Public Stations
62. Elected 1986.

James J. Schiro
Chief Executive Officer,
Zurich Financial Services
61. Elected 2003.

Franklin A. Thomas
Consultant,
The Study Group
72. Elected 1994.

Daniel Vasella
Chairman of the Board and
Chief Executive Officer,
Novartis AG
53. Elected 2002.

Michael D. White
Chief Executive Officer,
PepsiCo International
and Vice Chairman of PepsiCo
55. Elected 2006.

PepsiCo announced on Feb. 5, 2007, the election of Indra K. Nooyi as Chairman of the
Board, effective when current Chairman Steven S Reinemund retires on May 2, 2007.
Listings include age and year elected a PepsiCo director.

267419_L01_P22_26.v4.qxd 3/6/07 8:54 AM Page 24

Ethnic Advisory Boards

Our Ethnic Advisory Boards provide management with external viewpoints on issues related to
diversity and inclusion, especially in the marketplace.

Board membership is established for external individuals
based on their diverse backgrounds, experiences and points of
view. These boards provide counsel and advice on a range of
business areas including:

• Marketing to targeted communities.
• Building alliances with retailers.
• Creating products for a more diverse consumer base.
• Developing a more diverse supplier base and other

business relationships.

Back row, left to right: Kweisi Mfume, Keith Clinkscales, Roderick D. Gillum, Reverend Al Sharpton, Earl G. Graves, Jr., Robert Holland,
Jerri DeVard, Warren M. Thompson.
Front row, left to right: Darlene Williamson, Ph.D., Ray M. Robinson, Reverend Dr. W. Franklyn Richardson, Glenda McNeal, Amy Hilliard,
Earl G. Graves, Sr., Dawn Hudson, Benaree Pratt Wiley, Johnny F. Johnson, Clarence Avant.

African American Advisory Board

Clarence Avant
Chairman,
Interior Music
Joined 1999.

Keith Clinkscales
Senior Vice President and
General Manager,
ESPN Publishing
Joined 1999.

Jerri DeVard
Former Senior Vice President, Brand
Management and Marketing
Communications,
Verizon Communications
Joined 2002.

Roderick D. Gillum
Vice President, Corporate
Responsibility and Diversity,
General Motors
Joined 2005.

Earl G. Graves, Sr.
Chairman and Publisher,
Earl G. Graves Ltd.
Black Enterprise Magazine
Joined 1999.
Chairman of the Advisory Board

Earl G. Graves, Jr.
President and
Chief Executive Officer,
Black Enterprise Magazine
Joined 2006.

Amy Hilliard
President and Chief
Executive Officer,
The Hilliard Group &
The ComfortCake Co.
Joined 1999.

Robert Holland
Partner,
Williams Capital
Joined 1999.

Dawn Hudson
President and
Chief Executive Officer,
Pepsi-Cola North America
Joined 1999.

Johnny F. Johnson
Chief Executive Officer,
KA Management
Joined 1999.

Glenda McNeal
Senior Vice President Global
Partnerships, American Express
Joined 1999.

Kweisi Mfume
Former President and
Chief Executive Officer,
National Association for the
Advancement of Colored
People (NAACP)
Joined 2005.

Reverend Dr. W. Franklyn
Richardson
Senior Minister,
Grace Baptist Church
Joined 1999.

Ray M. Robinson
President,
East Lake Golf
Joined 1999.

Reverend Al Sharpton
President,
National Action Network
Joined 1999.

Warren M. Thompson
Chairman and
Chief Executive Officer,
Thompson Hospitality
Corporation, Inc.
Joined 2002.

Benaree Pratt Wiley
Retired President and
Chief Executive Officer,
The Partnership
Joined 2002.

Darlene Williamson, Ph.D.
Former President and
Chief Executive Officer,
Performax Consulting Services
Joined 1999.

267419_L01_P22_26.v2.qxd 3/4/07 12:26 AM Page 25

• Promoting PepsiCo’s diversity and inclusion efforts.
• Recommending diverse talent for open positions.
• Encouraging the expansion of diversity representation

among PepsiCo employees.

• Providing a perspective on diversity and inclusion

issues or questions.

Our African American Advisory Board was formed in 1999. The
Latino/Hispanic Advisory Board was established in 2000. Our
Canada business convened an Asian Advisory Council in 2006.

We welcome Earl Graves, Jr. to the African American
Advisory Board. We regret the passing of our esteemed
member, Darwin Davis, Sr., who served the board since 1999.

To our Latino/Hispanic Advisory Board, we welcome

Cid Wilson.

Left to right: Isabel Valdés, Cid Wilson, Carlos H. Arce, Ph.D., Deborah Rosado Shaw, Raúl Yzaguirre, Albert P. Carey, Raquel Malo,
Douglas X. Patiño, Ph.D., Maria Contreras-Sweet, Carlos A. Saladrigas, Victor Arias, Jr., Ricardo R. Fernández, Ph.D., Gilbert Aranza

Latino/Hispanic Advisory Board

Gilbert Aranza
President,
Star Concessions
The MultiRestaurant Group
Joined 2000.

Carlos H. Arce, Ph.D.
President and Founder,
NuStats
Joined 2000.

Victor Arias, Jr.
Partner,
Heidrick & Struggles
Joined 2000.

Albert P. Carey
President and Chief Executive Officer,
Frito-Lay North America
Joined 2006.

Ricardo R. Fernández, Ph.D.
President,
Lehman College,
The City University of New York
Joined 2003.

Raquel Malo
Senior Vice President,
High Performance Nutrition,
Human Performance Institute
Joined 2004.

Douglas X. Patiño, Ph.D.
Vice Chancellor Emeritus and
Professor,
California State University
Joined 2000.

Carlos A. Saladrigas
Chairman,
Premier American Bank
Joined 2003.

Deborah Rosado Shaw
Partner,
Multi-ethnic Success Ventures, LLC
Joined 2000.

Maria Contreras-Sweet
Chairwoman,
Proamerica Bank
Joined 2005.

Isabel Valdés
Consultant, Author, Public Speaker
Joined 2001.

Cid Wilson
Director of Equity Research,
Kevin Dann and Partners, LLC
Joined 2006.

Raúl Yzaguirre
Presidential Professor,
Center for Community Development
and Civil Rights
Arizona State University
Joined 2000.
Chairman of the Advisory Board

267419_L01_P22_26.v3.qxd 3/5/07 11:03 PM Page 26

Blue Ribbon Health and Wellness Advisory Board

PepsiCo’s Blue Ribbon Health and Wellness Advisory Board provides advice and expertise
on a variety of health and wellness initiatives.

The initiatives include:

• Improving the healthfulness of our existing products.
• Evaluating our efforts to develop new better-for-you and

good-for-you products.

• Providing access to resources that promote health and

encourage active lifestyles.

• Identifying emerging opportunities in the area of health

and wellness.

• Connecting us to thought leaders and policy makers in

the area of health and wellness.

Some of our international businesses are seeking advice in a
similar manner. For example, our Brazilian business has
created the PepsiCo Panel of Experts. We welcome Dr. William
Sears to our Board this year.

Front row, left to right: Brock H. Leach, Kristy F. Woods, M.D., M.P.H., James O. Hill, Ph.D., Gro Harlem Brundtland, M.D., Susan Love, M.D.
Second row, left to right: David Heber, M.D., Ph.D., Pamela Peeke, M.D., M.P. H., Antonio Lucio (PepsiCo), Antonia Demas, Ph.D.,
Mario Maranhão, M.D., Janet Taylor, M.D.
Back row, left to right: Kenneth Cooper, M.D., M.P.H., Fernando M. Treviño, Ph.D., M.P.H., James B. Hunt, Jr., Dean Ornish, M.D.
Ambassador Thomas Foley, David A. Kessler, M.D., J.D., Samuel Ward Casscells, M.D., William Sears, M.D.

Gro Harlem Brundtland, M.D.
Former Director-General
World Health Organization,
United Nations
Former Prime Minister, Norway
Joined 2004.

Ambassador Thomas Foley
Akin Gump Strauss Hauer & Feld, LLP
Former Speaker of the U.S. House of
Representatives and Former U.S.
Ambassador to Japan
Joined 2003.

Brock H. Leach
Seminary Student &
Community Volunteer
PepsiCo Chief Innovation and Health &
Wellness Officer, Retired
Joined 2003.

William Sears, M.D.
Associate Clinical Professor
of Pediatrics
University of California, Irvine,
School of Medicine
Joined 2006.

Samuel Ward Casscells, M.D.
John Edward Tyson Distinguished
Professor of Medicine & Public Health
and Vice President for Biotechnology
The University of Texas Health &
Science Center at Houston
Joined 2003.

Kenneth H. Cooper, M.D.,
M.P.H.
President & Founder
The Cooper Aerobics Center
Joined 2003.

Antonia Demas, Ph.D.
Director
Food Studies Institute
Joined 2003.

David Heber, M.D., Ph.D.
Professor of Medicine & Public Health
Director, UCLA Center for
Human Nutrition
Joined 2003.

James O. Hill, Ph.D.
Professor of Pediatrics & Medicine
University of Colorado Health
Sciences Center
Founder, America On the Move
Joined 2003.

Governor James B. Hunt, Jr.
Former Governor of North Carolina
Joined 2003.

David A. Kessler, M.D., J.D.
Dean, School of Medicine
Vice Chancellor for Medical Affairs
University of California, San Francisco
Joined 2003.

Susan Love, M.D.
President and Medical Director
Dr. Susan Love Research Foundation
Joined 2003.

Janet E. Taylor, M.D.
Clinical Instructor of Psychiatry
Columbia University
Joined 2004.

Mario Maranhão, M.D.
Former President
World Heart Federation
Joined 2004.

Dean Ornish, M.D.
Founder & Director
Preventive Medicine Research
Institute (PMRI)
Joined 2003.
Chairman of the Advisory Board

Pamela Peeke, M.D., M.P.H.
Assistant Professor of Medicine
University of Maryland School
of Medicine
Joined 2003.

Fernando M. Treviño, Ph.D.,
M.P.H.
Professor and Founding Dean of the
School of Public Health
University of North Texas
Joined 2004.

Kristy F. Woods, M.D.,
M.P.H.
Former Director, Maya Angelou Center
Wake Forest University
Joined 2005.

267419_L01_P27_81.v2.qxd 2/28/07 4:07 PM Page 27

Management’s Discussion and Analysis

OUR BUSINESS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our Operations .................................................................... 28

Note 1 — Basis of Presentation and Our Divisions ........... 58

Our Customers ..................................................................... 29

Note 2 — Our Signiﬁcant Accounting Policies ................. 60

Our Distribution Network ................................................... 30

Note 3 — Restructuring and Impairment Charges ........... 62

Our Competition.................................................................. 30

Note 4 — Property, Plant and Equipment and

Other Relationships ............................................................. 30

Our Business Risks................................................................ 31

OUR CRITICAL ACCOUNTING POLICIES

Revenue Recognition .......................................................... 37

Brand and Goodwill Valuations .......................................... 38

Income Tax Expense and Accruals....................................... 39

Stock-Based Compensation Expense................................... 40

Intangible Assets ............................................ 62

Note 5 — Income Taxes ..................................................... 64

Note 6 — Stock-Based Compensation .............................. 65

Note 7 — Pension, Retiree Medical and Savings Plans..... 67

Note 8 — Noncontrolled Bottling Affiliates ..................... 71

Note 9 — Debt Obligations and Commitments................ 72

Note 10 — Risk Management ............................................. 73

Note 11 — Net Income per Common Share from

Pension and Retiree Medical Plans ..................................... 42

Continuing Operations .................................. 75

OUR FINANCIAL RESULTS

Items Affecting Comparability ............................................ 44

Results of Continuing Operations —

Note 12 — Preferred and Common Stock .......................... 76

Note 13 — Accumulated Other Comprehensive Loss......... 76

Note 14 — Supplemental Financial Information................ 77

Consolidated Review........................................................ 45

MANAGEMENT’S RESPONSIBILITY FOR

Results of Continuing Operations — Division Review........ 47

Frito-Lay North America .................................................. 48

PepsiCo Beverages North America................................... 49

FINANCIAL REPORTING .................................................... 78

MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING.......................................... 79

REPORT OF INDEPENDENT REGISTERED PUBLIC

PepsiCo International....................................................... 50

ACCOUNTING FIRM.......................................................... 80

Quaker Foods North America .......................................... 51

SELECTED FINANCIAL DATA ................................................ 81

Our Liquidity and Capital Resources. .................................. 52

RECONCILIATION OF GAAP AND NON-GAAP

CONSOLIDATED STATEMENT OF INCOME .......................... 54

CONSOLIDATED STATEMENT OF CASH FLOWS.................. 55

CONSOLIDATED BALANCE SHEET....................................... 56

CONSOLIDATED STATEMENT OF COMMON

SHAREHOLDERS’ EQUITY ................................................ 57

INFORMATION.................................................................. 82

GLOSSARY ........................................................................... 82

267419_L01_P27_81.v2.qxd 2/28/07 4:07 PM Page 28

Our Business

Our discussion and analysis is an integral part of understanding our financial results. Definitions of key terms
can be found in the glossary on page 82. Tabular dollars are presented in millions, except per share amounts.
All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on
unrounded amounts. Percentage changes are based on unrounded amounts.

Our Operations

We are a leading global snack and
beverage company. We manufacture,
market and sell a variety of salty, conve-
nient, sweet and grain-based snacks,
carbonated and non-carbonated bever-
ages and foods. We are organized into
four divisions:

popcorn, Chester’s fries, Stacy’s pita
chips and Quaker Fruit & Oatmeal bars.
FLNA branded products are sold to
independent distributors and retailers.

PepsiCo Beverages North America
PepsiCo Beverages North America
(PBNA) manufactures or uses contract

Our Divisions
• Frito-Lay North America (FLNA)
• PepsiCo Beverages North America (PBNA)
• PepsiCo International (PI)
• Quaker Foods North America (QFNA)

PepsiCo International
PepsiCo International (PI) manufactures
through consolidated businesses as well
as through noncontrolled affiliates, a
number of leading salty and sweet snack
brands including Lay’s, Walkers,
Cheetos, Doritos, Ruffles, Gamesa and
Sabritas. Further, PI manufactures or
uses contract manufacturers, markets
and sells many Quaker brand snacks. PI
also manufactures, markets and sells
beverage concentrates, fountain syrups
and ﬁnished goods under the brands
Pepsi, 7UP, Mirinda, Gatorade, Tropicana
and Mountain Dew. These brands are
sold to authorized bottlers, independent
distributors and retailers. However, in
certain markets, PI operates its own bot-
tling plants and distribution facilities. PI
also licenses the Aquaﬁna water brand
to certain of its authorized bottlers. PI
reports two measures of volume. Snack
volume is reported on a system-wide
basis, which includes our own volume
and the volume sold by our
noncontrolled affiliates. Beverage
volume reﬂects Company-owned and
authorized bottler sales of beverages
bearing our trademarks to independent
distributors and retailers.

Quaker Foods North America
Quaker Foods North America (QFNA)
manufactures or uses contract manufac-
turers, markets and sells cereals, rice,
pasta and other branded products.
QFNA’s products include Quaker
oatmeal, Aunt Jemima mixes and
syrups, Cap’n Crunch cereal, Quaker
grits, Life cereal, Rice-A-Roni, Pasta Roni
and Near East side dishes. These
branded products are sold to indepen-
dent distributors and retailers.

manufacturers, mar-
kets and sells
beverage
concentrates, foun-
tain syrups and
ﬁnished goods,
under various bever-
age brands including
Pepsi, Mountain
Dew, Gatorade,

Tropicana Pure Premium, Lipton, Sierra
Mist, Tropicana juice drinks, Propel,
Dole and SoBe. PBNA also manufactures
or uses contract manufacturers, markets
and sells ready-to-drink tea, coffee and
water products through joint ventures
with Unilever (under the Lipton brand
name) and Starbucks. In addition, PBNA
licenses the Aquaﬁna water brand to its
bottlers and markets this brand. PBNA
sells concentrate and ﬁnished goods for
some of these brands to authorized
bottlers, and some of these branded
products are sold directly by us to inde-
pendent distributors and retailers. The
bottlers sell our brands as ﬁnished
goods to independent distributors and
retailers. PBNA’s volume reﬂects sales to
its independent distributors and retail-
ers, as well as the sales of beverages
bearing our trademarks that bottlers
have reported as sold to independent
distributors and retailers.

Our North American divisions oper-

ate in the United States and Canada.
Our international division operates in
approximately 200 countries, with our
largest operations in Mexico and the
United Kingdom. Additional informa-
tion concerning our divisions and
geographic areas is presented in Note 1.

Frito-Lay North America
Frito-Lay North America (FLNA) manu-
factures or uses contract manufacturers,
markets, sells and distributes branded
snacks. These snacks include Lay’s
potato chips, Doritos tortilla chips,
Tostitos tortilla chips, Cheetos cheese
ﬂavored snacks, Fritos corn chips,
branded dips, Ruffles potato chips,
Quaker Chewy granola bars, SunChips
multigrain snacks, Rold Gold pretzels,
Santitas tortilla chips, Frito-Lay nuts,
Grandma's cookies, Munchies snack
mix, Gamesa cookies, Lay’s Stax potato
crisps, Funyuns onion ﬂavored rings,
Quaker Quakes corn and rice snacks,
Miss Vickie’s potato chips, branded
crackers, Quaker snack mix, Smartfood

267419_L01_P27_81.v4.qxd 3/5/07 10:11 PM Page 29

Our Customers

Our customers include authorized
bottlers and independent distributors,
including foodservice distributors, and
retailers. We normally grant our bot-
tlers exclusive contracts to sell and
manufacture certain beverage products
bearing our trademarks within a spe-
ciﬁc geographic area. These
arrangements specify the amount to be
paid by our bottlers for concentrate,
ﬁnished goods and Aquaﬁna royalties,
as well as the manufacturing process
required for product quality.

Since we do not sell directly to the

consumer, we rely on and provide
ﬁnancial incentives to our customers to
assist in the distribution and promotion
of our products. For our independent
distributors and retailers, these incen-
tives include volume-based rebates,
product placement fees, promotions
and displays. For our bottlers, these
incentives are referred to as bottler
funding and are negotiated annually
with each bottler to support a variety of
trade and consumer programs, such as
consumer incentives, advertising sup-
port, new product support, and
vending and cooler equipment place-
ment. Consumer incentives include
coupons, pricing discounts and promo-
tions, such as sweepstakes and other
promotional offers. Advertising support
is directed at advertising programs and
supporting bottler media. New product

support includes targeted consumer
and retailer incentives and direct mar-
ketplace support, such as
point-of-purchase materials, product
placement fees, media and advertising.
Vending and cooler equipment place-
ment programs support the acquisition
and placement of vending machines
and cooler equipment. The nature and
type of programs vary annually. The
level of bottler funding is at our
discretion because these incentives
are not required by the terms of our
bottling contracts.

Since we do not sell directly to
the consumer, we rely on and
provide financial incentives to
our customers to assist in the
distribution and promotion of
our products.

Retail consolidation continues to
increase the importance of major cus-
tomers. In 2006, sales to Wal-Mart
represented approximately 9% of our
total net revenue; and our top ﬁve retail
customers represented approximately
26% of our 2006 North American net
revenue, with Wal-Mart representing
approximately 13%. These percentages
include concentrate sales to our bottlers
which are used in ﬁnished goods sold

by them to these retailers. In addition,
sales to The Pepsi Bottling Group (PBG)
represented approximately 10% of our
total net revenue. See “Our Related
Party Bottlers” and Note 8 for more
information on our anchor bottlers.

Our Related Party Bottlers
We have ownership interests in certain
of our bottlers. Our ownership is less
than 50%, and since we do not control
these bottlers, we do not consolidate
their results. We include our share of
their net income based on our percent-
age of economic ownership in our
income statement as bottling equity
income. We have designated three
related party bottlers, PBG,
PepsiAmericas, Inc. (PAS) and Pepsi
Bottling Ventures LLC (PBV), as our
anchor bottlers. Our anchor bottlers
distribute approximately 60% of our
North American beverage volume and
approximately 18% of our international
beverage volume. Our anchor bottlers
participate in the bottler funding pro-
grams described above. Approximately
8% of our total 2006 sales incentives are
related to these bottlers. See Note 8 for
additional information on these related
parties and related party commitments
and guarantees.

267419_L01_P27_81.v4.qxd 3/5/07 10:17 PM Page 30

Our Distribution Network

Our products are brought to market
through direct-store-delivery, broker-
warehouse and foodservice and
vending distribution networks. The dis-
tribution system used depends on
customer needs, product characteristics
and local trade practices.

Direct-Store-Delivery
We, our bottlers and our distributors
operate direct-store-delivery systems that
deliver snacks and beverages directly to
retail stores where the products are
merchandised by our employees or our

bottlers. Direct-store-delivery enables us
to merchandise with maximum visibility
and appeal. Direct-store-delivery is
especially well-suited to products that
are restocked often and respond to
in-store promotion and merchandising.

Broker-Warehouse
Some of our products are delivered
from our manufacturing plants and
warehouses to customer warehouses
and retail stores. These less costly sys-
tems generally work best for products
that are less fragile and perishable,

have lower turnover, and are less likely
to be impulse purchases.

Foodservice and Vending
Our foodservice and vending sales force
distributes snacks, foods and beverages
to third-party foodservice and vending
distributors and operators. Our foodser-
vice and vending sales force also
distributes certain beverages through
our bottlers. This distribution system
supplies our products to schools,
businesses, stadiums, restaurants and
similar locations.

Our Competition

Our businesses operate in highly com-
petitive markets. We compete against
global, regional, local and private label
manufacturers on the basis of price,
quality, product variety and distribution.
In measured channels, our chief bever-
age competitor, The Coca-Cola
Company, has a slightly larger share of
carbonated soft drink (CSD) consump-
tion in the U.S., while we have a larger
share of chilled juices and isotonics. In
addition, The Coca-Cola Company main-
tains a signiﬁcant CSD share advantage
in many markets outside North

Other Relationships

America. Further, our snack brands hold
signiﬁcant leadership positions in the

We believe that the strength of our
brands, innovation and marketing,
coupled with the quality of our
products and ﬂexibility of our
distribution network, allow us to
compete effectively.

snack industry worldwide. Our snack
brands face local and regional competi-

tors, as well as national and global
snack competitors, and compete on
issues related to price, quality, product
variety and distribution. Success in this
competitive environment is dependent
on effective promotion of existing
products and the introduction of new
products. We believe that the strength
of our brands, innovation and market-
ing, coupled with the quality of our
products and ﬂexibility of our
distribution network, allow us to
compete effectively.

Certain members of our Board of
Directors also serve on the boards of cer-
tain vendors and customers. Those
Board members do not participate in
our vendor selection and negotiations
nor in our customer negotiations. Our

transactions with these vendors and
customers are in the normal course of
business and are consistent with terms
negotiated with other vendors and cus-
tomers. In addition, certain of our
employees serve on the boards of our

anchor bottlers and other affiliated
companies and do not receive
incremental compensation for their
Board services.

267419_L01_P27_81.v2.qxd 2/28/07 4:07 PM Page 31

Our Business Risks

We are subject to risks in the normal course of business due to adverse
developments with respect to:

• product demand,

• our reputation,

• information technology,

• supply chain,

• retail consolidation, the loss of major customers

and failure to maintain good relationships with our
bottling partners,

• global, economic, environmental and political conditions,

• the regulatory environment,

• workforce retention and outsourcing,

• raw materials and other supplies,

• competition, and

• market risks.

Demand for our products may be
adversely affected by changes in
consumer preferences and tastes
or if we are unable to innovate or
market our products effectively.

We are a consumer products company
operating in highly competitive markets
and rely on continued demand for our
products. To generate revenues and
proﬁts, we must sell products that
appeal to our customers and to
consumers. Any signiﬁcant changes in
consumer preferences and any inability
on our part to anticipate and
react to such changes could
result in reduced demand for
our products and erosion of
our competitive and ﬁnancial
position. Our success depends
on our ability to respond to
consumer trends, such as con-
sumer health concerns about
obesity, product attributes and
ingredients. In addition, changes in
product category consumption or con-
sumer demographics could result in
reduced demand for our products.
Consumer preferences may shift due to

a variety of factors, including the aging
of the general population, changes in
social trends, changes in travel, vacation
or leisure activity patterns, weather,
negative publicity resulting from regu-
latory action or litigation against
companies in the industry, or a down-
turn in economic conditions. Any of
these changes may reduce consumers’
willingness to purchase our products.

Our continued success is also depen-

dent on our product innovation,
including maintaining a robust pipeline
of new products, and the effectiveness

Our continued success is dependent on our
product innovation, including maintaining a
robust pipeline of new products, and the
effectiveness of our advertising campaigns
and marketing programs.

of our advertising campaigns and mar-
keting programs. There can be no
assurance as to our continued ability
either to develop and launch successful
new products or variants of existing
products, or to effectively execute

advertising campaigns and marketing
programs. In addition, both the launch
and ongoing success of new products
and advertising campaigns are inherently
uncertain, especially as to their appeal to
consumers. Our failure to successfully
launch new products could decrease
demand for our existing products by
negatively affecting consumer percep-
tion of existing brands, as well as result
in inventory write-offs and other costs.

Any damage to our reputation
could have an adverse effect on our
business, ﬁnancial condition and
results of operations.

Maintaining a good reputation globally
is critical to selling our branded
products. If we fail to maintain high
standards for product quality, safety

Maintaining a good reputation
globally is critical to selling our
branded products.

and integrity, our reputation could be
jeopardized. Adverse publicity about
these types of concerns or the incidence
of product contamination or tamper-
ing, whether or not valid, may reduce
demand for our products or cause pro-
duction and delivery disruptions. If any
of our products becomes unﬁt for con-
sumption, misbranded or causes injury,
we may have to engage in a product
recall and/or be subject to liability. A
widespread product recall or a
signiﬁcant product liability judg-
ment could cause our products
to be unavailable for a period of
time, which could further reduce
consumer demand and brand
equity. Failure to maintain high
ethical, social and environmental
standards for all of our opera-

tions and activities or adverse publicity
regarding our responses to health con-
cerns, our environmental impacts,
including agricultural materials, pack-
aging, energy and water use and waste
management, or other sustainability

267419_L01_P27_81.v4.qxd 3/5/07 10:19 PM Page 32

programs to our customers could
reduce our ability to secure adequate
shelf space at our retailers and adversely
affect our ﬁnancial performance.

Retail consolidation continues to
increase the importance of major cus-
tomers. Sales to Wal-Mart represent
approximately 9% of our total net rev-
enue; and our top ﬁve retail customers
currently represent approximately 26%

We must maintain mutually
beneficial relationships with
our key customers, including
our retailers and bottling
partners, to effectively
compete.

of our 2006 North American net
revenue, with Wal-Mart representing
approximately 13%. These percentages
include concentrate sales to our bottlers
which are used in ﬁnished goods sold
by them to these retailers. Loss of any
of our key customers, including Wal-
Mart, could have an adverse effect on
our business, ﬁnancial condition and
results of operations.

Furthermore, if we are unable to
provide an appropriate mix of incen-
tives to our bottlers through a
combination of advertising and market-
ing support, they may take actions that,
while maximizing their own short-term
proﬁt, may be detrimental to us or our
brands. Such actions could have an
adverse effect on our proﬁtability. See
“Our Customers,” “Our Related Party
Bottlers” and Note 8 to our
consolidated ﬁnancial statements for
more information on our customers,
including our anchor bottlers.

issues, could also jeopardize our reputa-
tion. Failure to comply with local laws
and regulations, to maintain an effec-
tive system of internal controls or to
provide accurate and timely ﬁnancial
statement information could also hurt
our reputation. Damage to our reputa-
tion or loss of consumer conﬁdence in
our products for any of these reasons
could have a material adverse effect on
our business, ﬁnancial condition
and results of operations, as well as
require additional resources to rebuild
our reputation.

If we are not able to build and
sustain proper information
technology infrastructure, our
business could suffer.

We depend on information technology
as an enabler to improve the effective-
ness of our operations and to interface
with our customers, as well as to main-
tain ﬁnancial accuracy and efficiency. If
we do not allocate and effectively man-
age the resources necessary to build
and sustain the proper technology
infrastructure, we could be subject to
transaction errors, processing inefficien-
cies, the loss of customers, business
disruptions, or the loss of or damage
to intellectual property through
security breach.

We have embarked on a multi-year
Business Process Transformation (BPT)
initiative that includes the delivery of
an SAP enterprise resource planning
application, as well as the migration to
common business processes across our
operations. There can be no certainty
that these programs will deliver the
expected beneﬁts. The failure to deliver
our goals may impact our ability to
(1) process transactions accurately and
efficiently and (2) remain in step with
the changing needs of the trade, which
could result in the loss of customers. In
addition, the failure to either deliver
the application on time, or anticipate
the necessary readiness and training
needs, could lead to business disruption
and loss of customers and revenue.

Our information systems could also
be penetrated by outside parties intent
on extracting information, corrupting

information or disrupting business
processes. Such unauthorized access
could disrupt our business and could
result in the loss of assets.

Disruption of our supply chain
could have an adverse effect on our
business, ﬁnancial condition and
results of operations.

Our ability and that of our suppliers,
business partners, including bottlers,
contract manufacturers, independent
distributors and retailers, to make,
move and sell products is critical to our
success. Damage or disruption to our or
their manufacturing or distribution
capabilities due to weather, natural dis-
aster, ﬁre or explosion, terrorism,
pandemics such as avian ﬂu, strikes or
other reasons, could impair our ability
to manufacture or sell our products.
Failure to take adequate steps to miti-
gate the likelihood or potential impact
of such events, or to effectively manage
such events if they occur, could
adversely affect our business, ﬁnancial
condition and results of operations, as
well as require additional resources to
restore our supply chain.

Trade consolidation, the loss of any
key customer, or failure to maintain
good relationships with our bottling
partners could adversely affect our
ﬁnancial performance.

We must maintain mutually beneﬁcial
relationships with our key customers,
including our retailers and bottling
partners, to effectively compete. There
is a greater concentration of our cus-
tomer base around the world generally
due to the continued consolidation of
retail trade. As retail ownership
becomes more concentrated, retailers
demand lower pricing and increased
promotional programs. Further, as
larger retailers increase utilization of
their own distribution networks and
private label brands, the competitive
advantages we derive from our go-to-
market systems and brand equity may
be eroded. Failure to appropriately
respond to these trends or to offer
effective sales incentives and marketing

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 33

Our business may be adversely
impacted by unfavorable economic
or environmental conditions or
political or other developments
and risks in the countries in which
we operate.

Unfavorable global economic or envi-
ronmental changes, political conditions
or other developments may result in
business disruption, supply constraints,
foreign currency devaluation, inﬂation,
deﬂation or decreased demand. Un-
stable economic and political conditions
or civil unrest in the countries in which
we operate could have adverse impacts
on our business results or ﬁnancial con-
dition. Our operations outside of the
U.S. accounted for 41% and 36% of our
net revenue and operating proﬁt,
respectively, for the year ended
December 30, 2006. Our continued suc-
cess depends on our ability to broaden
and strengthen our presence in emerg-
ing markets, such as Brazil, Russia, India
and China, and to create scale in key
international markets.

Regulatory decisions and changes in
the legal and regulatory environment
could increase our costs and liabilities
or limit our business activities.

The conduct of our businesses, and the
production, distribution, sale, advertis-
ing, labeling, safety, transportation and
use of many of our products, are subject
to various laws and regulations adminis-
tered by federal, state and local
governmental agencies in the United
States, as well as to foreign laws and
regulations administered by
government entities and agencies in
markets in which we operate. These
laws and regulations may change,
sometimes dramatically, as a result of
political, economic or social events.
Such regulatory environment changes
include changes in food and drug laws,
laws related to advertising and decep-
tive marketing practices, accounting
standards, taxation requirements, com-
petition laws and environmental laws,
including laws relating to the regula-
tion of water rights and treatment.
Changes in laws, regulations or govern-
mental policy and the related

interpretations may alter the environ-
ment in which we do business and,
therefore, may impact our results or
increase our costs or liabilities.

In particular, governmental bodies in

jurisdictions where we operate may
impose new labeling, product or pro-
duction requirements, or other
restrictions. For example, Proposition 65
in California requires that a warning be
given for any product that exposes con-
sumers to a substance listed by the state
as having been found to cause cancer or
birth defects. If we were required to
label any of our products or place warn-
ings in locations where our products are
sold in California under Proposition 65,

Our operations outside of the U.S.
accounted for 41% and 36% of our net
revenue and operating profit,
respectively, for the year ended
December 30, 2006.

ating results could be adversely affected
by increased costs due to increased
competition for employees, higher
employee turnover or increased
employee beneﬁt costs. Any unplanned
turnover could deplete our institutional
knowledge base and erode our compet-
itive advantage.

In addition, we have outsourced cer-

tain information technology support
services and administrative functions,
such as payroll processing and beneﬁt
plan administration, to third-party ser-
vice providers and may outsource other
functions in the future to achieve cost
savings and efficiencies. If the service
providers that we outsource these func-
tions to do not perform
effectively we may not be able
to achieve the expected cost
savings and may have to incur
additional costs to correct
errors made by such service
providers. Depending on the
function involved, such errors
may also lead to business dis-

sales of those products could suffer not
only in California but elsewhere as a
result of the adverse publicity.

In many jurisdictions, compliance

with competition laws is of special
importance to us due to our competi-
tive position in those jurisdictions.
Regulatory authorities under whose
laws we operate may also have enforce-
ment powers that can subject us to
actions such as product recall, seizure of
products or other sanctions, which
could have an adverse effect on our
sales or damage our reputation.

If we are unable to hire or retain
key employees or outsource certain
functions effectively, it could have a
negative impact on our business.

Our continued growth requires us to
develop our leadership bench and to
implement programs, such as our long-
term incentive program, designed to
retain talent. However, there is no
assurance that we will continue to be
able to hire or retain key employees.
We compete to hire new employees,
and then must train them and develop
their skills and competencies. Our oper-

ruption, processing inefficiencies or the
loss of or damage to intellectual prop-
erty through security breach, or harm
employee morale.

Our operating results may be
adversely affected by increased
costs, disruption of supply or
shortages of raw materials and
other supplies.

We and our business partners use vari-
ous raw materials and other supplies in
our business, including aspartame,
cocoa, corn, corn sweeteners,
ﬂavorings, ﬂour, grapefruits and other
fruits, juice and juice concentrates, oats,
oranges, potatoes, rice, seasonings,
sucralose, sugar, vegetable and essential
oils, and wheat. Our key packaging
materials include aluminum used for
cans, PET resin used for plastic bottles,
ﬁlm packaging used for snack foods,
and cardboard. Fuel and natural gas are
also important commodities due to
their use in our plants and in the trucks
delivering our products. Some of these
raw materials and supplies are available
from a limited number of suppliers. We
are exposed to the market risks arising

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 34

from adverse changes in commodity
prices, affecting the cost of our raw
materials and energy. The raw materials
and energy which we use for the pro-
duction of our products are largely
commodities that are subject to price
volatility and ﬂuctuations in availability
caused by changes in global supply and
demand, weather conditions, agricul-
tural uncertainty or governmental
controls. We purchase these materials
and energy mainly in the open market.
If commodity price changes result in
unexpected increases in raw materials
and energy costs, we may not be able
to increase our prices to offset these
increased costs without suffering
reduced volume, revenue and operat-
ing income.

Our proﬁtability may also be
adversely impacted due to water
scarcity and regulation. Water is a lim-
ited resource in many parts of the
world. As demand for water continues
to increase, we and our business part-

ners may face disruption of supply or
increased costs to obtain the water
needed to produce our products.

Our business could suffer if we are
unable to compete effectively.

Our businesses operate in highly com-
petitive markets. We compete against
global, regional and private label
manufacturers on the basis of price,
quality, product variety and effective
distribution. Increased competition
and anticipated actions by our competi-
tors could lead to downward pressure
on prices and/or a decline in our mar-
ket share, either of which could
adversely affect our results. See “Our
Competition” for more information
about our competitors.

Forward-Looking and Cautionary
Statements
We discuss expectations regarding
our future performance, such as our
business outlook, in our annual and
quarterly reports, press releases, and
other written and oral statements.
These “forward-looking statements”
are based on currently available
competitive, ﬁnancial and economic
data and our operating plans. They
are inherently uncertain, and investors
must recognize that events could turn
out to be signiﬁcantly different from
our expectations. We undertake no
obligation to update any forward-look-
ing statement. The above discussion of
risks is by no means all inclusive but is
designed to highlight what we believe
are important factors to consider when
evaluating our trends and future results.

Market Risks

We are exposed to the market risks arising from adverse changes in:

• commodity prices, affecting the cost of our raw materials

and energy,

• foreign exchange rates,

• interest rates,

• stock prices, and

• discount rates affecting the measurement of our pension

and retiree medical liabilities.

In the normal course of business, we
manage these risks through a variety of
strategies, including productivity initia-
tives, global purchasing programs and
hedging strategies. Ongoing productiv-
ity initiatives involve the identiﬁcation
and effective implementation of mean-
ingful cost saving opportunities or
efficiencies. Our global purchasing pro-
grams include ﬁxed-price purchase
orders and pricing agreements. Our
hedging strategies include the use of
derivatives. Certain derivatives are des-

ignated as either cash ﬂow or fair value
hedges and qualify for hedge account-
ing treatment, while others do not
qualify and are marked to market
through earnings. We do not use deriv-
ative instruments for trading or
speculative purposes, and we limit our
exposure to individual counterparties to
manage credit risk. The fair value of our
derivatives ﬂuctuates based on market
rates and prices. The sensitivity of our
derivatives to these market ﬂuctuations
is discussed below. See Note 10 for fur-

ther discussion of these derivatives and
our hedging policies. See “Our Critical
Accounting Policies” for a discussion of
the exposure of our pension plan assets
and pension and retiree medical liabili-
ties to risks related to stock prices and
discount rates.

Inﬂationary, deﬂationary and

recessionary conditions impacting these
market risks also impact the demand
for and pricing of our products.

Commodity Prices
Our open commodity derivative
contracts that qualify for hedge
accounting had a face value of
$55 million at December 30, 2006 and
$89 million at December 31, 2005. The
open derivative contracts that qualify
for hedge accounting resulted in net
unrealized gains of less than $1 million
at December 30, 2006 and $39 million
at December 31, 2005. We estimate that
a 10% decline in commodity prices
would have reduced our unrealized
gains on open contracts to $2 million of
unrealized losses in 2006 and $35 mil-
lion of unrealized gains in 2005.

267419_L01_P27_81.v4.qxd 3/5/07 10:20 PM Page 35

Our open commodity derivative con-

tracts that do not qualify for hedge
accounting had a face value of
$196 million at December 30, 2006 and
$129 million at December 31, 2005. The
open derivative contracts that do not
qualify for hedge accounting resulted in
net losses of $28 million in 2006 and
$3 million in 2005. We estimate that a
10% decline in commodity prices would
have increased our net losses on open
contracts to $31 million in 2006 and
$4 million in 2005.

We expect to be able to continue to

reduce the impact of increases in our
raw material and energy costs through
our hedging strategies and ongoing
productivity initiatives.

Foreign Exchange
Financial statements of foreign
subsidiaries are translated into U.S. dol-
lars using period-end exchange rates for
assets and liabilities and weighted-aver-
age exchange rates for revenues and
expenses. Adjustments resulting from
translating net assets are reported as a
separate component of accumulated
other comprehensive loss within share-
holders’ equity under the caption
currency translation adjustment.

Our operations outside of the U.S.
generate approximately 40% of our net
revenue, with Mexico, the United
Kingdom and Canada comprising
approximately 20% of our net revenue.
As a result, we are exposed to foreign
currency risks, including unforeseen
economic changes and political unrest.
During 2006, net favorable foreign cur-
rency, primarily due to appreciation in
the Canadian dollar and Brazilian real,

We do not use derivative
instruments for trading or
speculative purposes.

contributed almost 1 percentage point
to net revenue growth. Currency
declines which are not offset could
adversely impact our future results.

Exchange rate gains or losses related
to foreign currency transactions are rec-
ognized as transaction gains or losses in
our income statement as incurred. We

may enter into derivatives to manage
our exposure to foreign currency trans-
action risk. Our foreign currency
derivatives had a total face value of
$1.0 billion at December 30, 2006 and
$1.1 billion at December 31, 2005. The
contracts that qualify for hedge
accounting resulted in net unrealized
losses of $6 million at December 30,
2006 and $9 million at December 31,
2005. We estimate that an unfavorable
10% change in the exchange rates
would have resulted in unrealized losses
of $86 million in 2006 and $81 million in
2005. The contracts not meeting the
criteria for hedge accounting resulted
in net losses of $10 million in 2006 and
net gains of $14 million in 2005. All
losses and gains were offset by changes
in the underlying hedged items, result-
ing in no net impact on earnings.

Interest Rates
We centrally manage our debt and
investment portfolios considering
investment opportunities and risks, tax
consequences and overall ﬁnancing
strategies. We may use interest rate and
cross currency interest rate swaps to
manage our overall interest expense
and foreign exchange risk. These instru-
ments effectively change the interest
rate and currency of speciﬁc debt
issuances. These swaps are entered into
concurrently with the issuance of the
debt that they are intended to modify.
The notional amount, interest payment
and maturity date of the swaps match
the principal, interest payment and
maturity date of the related debt. Our
counterparty credit risk is considered
low because these swaps are entered
into only with strong creditworthy
counterparties, are generally settled on
a net basis and are of relatively short
duration.

Assuming year-end 2006 and 2005
variable rate debt and investment lev-
els, a 1-percentage-point increase in
interest rates would have decreased net
interest expense by $10 million in 2006
and $8 million in 2005.

Stock Prices
A portion of our deferred compensa-
tion liability is tied to certain market
indices and our stock price. We manage
these market risks with mutual fund

investments and prepaid forward con-
tracts for the purchase of our stock. The
combined gains or losses on these
investments are substantially offset by
changes in our deferred compensation
liability.

Our Approach to Managing Risks
The achievement of our strategic and
operating objectives will necessarily
involve taking risks. Our risk manage-
ment process is intended to ensure that
risks are taken knowingly and purpose-
fully. As such, we leverage an
integrated risk management
framework to identify, assess, prioritize,
manage, monitor and communicate
risks across the Company. This frame-
work includes:

• the PepsiCo Executive Risk Council

(PERC), comprised of a cross-
functional, geographically diverse,
senior management group which
identiﬁes, assesses, prioritizes and
addresses strategic and reputational
risks;

• Division Risk Committees (DRCs),

comprised of cross-functional senior
management teams which meet reg-
ularly each year to identify, assess,
prioritize and address division-speciﬁc
operating risks;

• PepsiCo’s Risk Management Office,

which manages the overall risk man-
agement process, provides ongoing
guidance, tools and analytical support
to the PERC and the DRCs, identiﬁes
and assesses potential risks, and facili-
tates ongoing communication
between the parties, as well as to
PepsiCo’s Audit Committee and Board
of Directors; and

• PepsiCo Corporate Audit, which con-

ﬁrms the ongoing effectiveness of the
risk management framework through
periodic audit and review procedures.

In 2006, we continued to focus our
mitigation efforts where it was deter-
mined that actions were necessary and
appropriate to further reduce PepsiCo’s
exposure to risks, integrating those
efforts in our businesses’ operating
plans and budgets, where accountabil-

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 36

ity is assigned and performance mea-
sured. Some highlights include:

• To address certain risks related to the
demand for our products, such as
consumer health concerns about
product attributes and ingredients,
we continued to focus on the devel-
opment of products that respond to
consumer trends, including formulat-
ing products to lower sugar, fats, and
sodium and adding ingredients and
new products that can deliver nutri-
tional beneﬁts. For example, at FLNA
we introduced a new portion control
line of 100-calorie offerings, and we
also switched to NuSun sunﬂower oil,
an oil containing 90% mono- and
polyunsaturated fats and less
saturated fat than most other cook-
ing oils, for our Lay’s and Ruffles
potato chips. Internationally, we
reduced the amount of saturated fats
in our Walkers crisps in the United
Kingdom by 70% and the amount of
salt by 25%. Beyond providing more
nutritious product choices, and in an
effort to help address the growing
concerns regarding childhood obesity
trends in the U.S., we joined with the
Alliance for a Healthier Generation —
a joint initiative of the William J.
Clinton Foundation and the American
Heart Association — to set voluntary
beverage guidelines for U.S. schools
that limit portion sizes and establish
voluntary guidelines for snacks and
side items in U.S. schools.

• To help ensure that we maintain our
reputation for providing safe conve-
nient foods and beverages, we
enhanced the coordination of our
division-led product integrity efforts
through the PepsiCo Product Integrity
Council (PPIC), a cross-functional
forum to share leading practices and
confer about areas of potential risk.
Through the PPIC, we completed a
third-party review of our food safety
and food security programs which
helped identify opportunities to bet-
ter leverage internal best practices
across all of our businesses.
Furthermore, we enhanced our prod-
uct sampling and testing protocols.

application systems by upgrading our
networks and updating or retiring
older infrastructure and systems. We
signed a multi-year managed services
contract to consolidate PI’s technol-
ogy infrastructure into three data
centers and another multi-year ser-
vices contract to provide and manage
PI’s data network. The data center
services will provide full system and
data protection and backup and
recovery capabilities, and the data
network services will enhance
security and provide 24x7x365
monitoring and response capabilities.
We expect to fully implement both of
these service contracts over the next
three years.

We continued to focus on
leveraging diversity and
inclusion, ensuring we have the
talent base necessary to lead
our growing businesses.

• With respect to our BPT initiative, we
continue to build on our learnings
and incorporate these into the met-
rics used to monitor the project.
Speciﬁc actions taken this year
include revising the overall project
structure, project resources and time-
lines. We also continue to invest in
process and control resources to build
a more automated control environ-
ment that remains compliant with the
Sarbanes-Oxley Act.

• To address supply chain risks, we

continued to assess our capability to
mitigate potential business
disruptions and increased the coordi-
nation of our efforts across IT disaster
recovery, crisis management and busi-
ness continuity. Having recognized
the potentially signiﬁcant impact of a
pandemic such as avian inﬂuenza on
our employees and our business, we
formed a cross-functional, cross-divi-
sional Pandemic Planning Team that
worked to develop strategies and
tactics to mitigate that impact.

• Against a challenging trade environ-

• We continued to enhance our infor-

mation technology infrastructure and

ment, we continued to work to
ensure consistent and equitable trade

practices across our customers, to
deliver value-added product innova-
tion and differentiation, to achieve
the most effective trade spend across
customers and channels through pro-
ductivity programs, and to more
effectively communicate to our cus-
tomers the economic advantages of
our direct-store-delivery (DSD) system.

• To address risks relating to legal and
regulatory issues, we have launched
an enhanced PepsiCo Code of
Conduct training program in multiple
languages. We also improved the
functionality of our employee hotline
to better enable reporting of compli-
ance and ethics concerns and
enhanced our process for handling
reported incidents and ensuring
appropriate corrective action.
Furthermore, we completed environ-
mental and health & safety audits
that will help focus our mitigation
efforts in these areas going forward.

• As part of our ongoing efforts to

maintain a talented workforce, we
continued to focus on leveraging
diversity and inclusion, designing the
right organizational model to meet
our business needs and ensuring we
have the talent base necessary to lead
our growing businesses. Tactically, we
worked to expand the breadth and
depth of our succession plans and
reinforced our focus on managing
our people through an increased
emphasis on people development as
part of our performance manage-
ment process.

• To manage our risks related to raw
materials, we continued to reduce
our input cost volatility across our
total portfolio by employing various
hedging strategies where appropriate
and as market opportunities arose.
We also continued to utilize our scale
to achieve maximum value across our
commodity portfolio and to ensure
adequate supply. In addition, we have
developed strategic global supplier
solutions to help minimize volatility.

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 37

Our Critical Accounting Policies

Our critical accounting policies arise in
conjunction with the following:

An appreciation of our critical accounting policies is
necessary to understand our financial results. These
policies may require management to make difficult
and subjective judgments regarding uncertainties,
and as a result, such estimates may significantly impact
our financial results. The precision of these estimates and
the likelihood of future changes depend on a number of
underlying variables and a range of possible outcomes.
Other than our accounting for pension plans, our critical
accounting policies do not involve the choice between
alternative methods of accounting. We applied our
critical accounting policies and estimation methods consistently in all material respects, and for all periods
presented, and have discussed these policies with our Audit Committee.

• stock-based compensation expense, and

• pension and retiree medical plans.

• income tax expense and accruals,

• brand and goodwill valuations,

• revenue recognition,

In connection with our ongoing BPT initiative, we aligned certain accounting policies across our divisions
in 2005. We conformed our methodology for calculating our bad debt reserves and modified our policy for
recognizing revenue for products shipped to customers by third–party carriers. Additionally, we conformed
our method of accounting for certain costs, primarily warehouse and freight. These changes reduced our net
revenue by $36 million and our operating profit by $60 million in 2005.

Revenue Recognition

Our products are sold for cash or on
credit terms. Our credit terms, which
are established in accordance with local
and industry practices, typically require
payment within 30 days of delivery in
the U.S., and generally within 30 to 90
days internationally, and may allow dis-
counts for early payment. We recognize
revenue upon shipment or delivery to
our customers based on written sales
terms that do not allow for a right of
return. However, our policy for DSD and
chilled products is to remove and
replace damaged and out-of-date prod-
ucts from store shelves to ensure that
consumers receive the product quality
and freshness they expect. Similarly,
our policy for warehouse-distributed
products is to replace damaged and
out-of-date products. Based on our his-
torical experience with this practice, we
have reserved for anticipated damaged
and out-of-date products. Our bottlers
have a similar replacement policy
and are responsible for the products
they distribute.

Our policy is to provide customers
with product when needed. In fact, our
commitment to freshness and product
dating serves to regulate the quantity of
product shipped or delivered. In addition,
DSD products are placed on the shelf by
our employees with customer shelf
space limiting the quantity of product.
For product delivered through our
other distribution networks, customer
inventory levels are monitored.

Our credit terms typically
require payment within 30 days
of delivery in the U.S., and
generally within 30 to 90 days
internationally.

As discussed in “Our Customers,” we

offer sales incentives and discounts
through various programs to customers
and consumers. Sales incentives and dis-
counts are accounted for as a reduction
of revenue and totaled $10.1 billion in

2006, $8.9 billion in 2005 and $7.8 bil-
lion in 2004. Sales incentives include
payments to customers for performing
merchandising activities on our behalf,
such as payments for in-store displays,
payments to gain distribution of new
products, payments for shelf space and
discounts to promote lower retail prices.
A number of our sales incentives, such as
bottler funding and customer volume
rebates, are based on annual targets,
and accruals are established during the
year for the expected payout. These
accruals are based on contract terms and
our historical experience with similar
programs and require management
judgment with respect to estimating
customer participation and performance
levels. Differences between estimated
expense and actual incentive costs are
normally insigniﬁcant and are
recognized in earnings in the period
such differences are determined. The
terms of most of our incentive arrange-
ments do not exceed a year, and
therefore do not require highly uncer-

267419_L01_P27_81.v4.qxd 3/5/07 11:14 PM Page 38

tain long-term estimates. For interim
reporting, we estimate total annual
sales incentives for most of our prog-
rams and record a pro rata share in
proportion to revenue. Certain arrange-
ments, such as fountain pouring rights,
may extend beyond one year. The costs
incurred to obtain incentive arrange-
ments are recognized over no longer

than the contract period as a reduction
of revenue, and the remaining balances
of $297 million at year-end 2006 and
$321 million at year-end 2005 are
included in current assets and other
assets on our balance sheet.

We estimate and reserve for our bad
debt exposure based on our experience
with past due accounts. In 2005, our

method of determining the reserves
was conformed across our divisions in
connection with our BPT initiative, as
discussed above. Bad debt expense is
classiﬁed within selling, general
and administrative expenses in our
income statement.

Brand and Goodwill Valuations

We sell products under a number of
brand names, many of which were
developed by us. The brand develop-
ment costs are expensed as incurred.
We also purchase brands and goodwill
in acquisitions. Upon acquisition, the
purchase price is ﬁrst allocated to iden-
tiﬁable assets and liabilities, including
brands, based on estimated fair value,
with any remaining purchase price
recorded as goodwill.

We believe that a brand has an

indeﬁnite life if it has signiﬁcant market
share in a stable macroeconomic envi-
ronment and a history of strong
revenue and cash ﬂow performance
that we expect to continue for the fore-
seeable future. If these perpetual brand
criteria are not met, brands are amor-
tized over their expected useful lives,
which generally range from ﬁve to 40
years. Determining the expected life of
a brand requires considerable manage-
ment judgment and is based on an
evaluation of a number of factors,
including the competitive environment,
market share, brand history and the
macroeconomic environment of the
countries in which the brand is sold.
Perpetual brands and goodwill,
including the goodwill that is part of
our noncontrolled bottling investment
balances, are not amortized. Perpetual
brands and goodwill are assessed for
impairment at least annually. If the car-
rying amount of a perpetual brand
exceeds its fair value, as determined

by its discounted cash ﬂows, an
impairment loss is recognized in an
amount equal to that excess. Goodwill
is evaluated using a two-step impair-
ment test at the reporting unit level. A
reporting unit can be a division or busi-
ness within a division. The ﬁrst step
compares the book value of a reporting
unit, including goodwill, with its fair
value, as determined by its discounted
cash ﬂows. If the book value of a
reporting unit exceeds its fair value, we
complete the second step to determine
the amount of goodwill impairment
loss that we should record. In the sec-
ond step, we determine an implied fair

We did not recognize any
impairment charges for
perpetual brands or goodwill in
the years presented.

value of the reporting unit’s goodwill
by allocating the fair value of the
reporting unit to all of the assets and
liabilities other than goodwill (including
any unrecognized intangible assets).
The amount of impairment loss is equal
to the excess of the book value of the
goodwill over the implied fair value of
that goodwill.

Amortizable brands are only evalu-
ated for impairment upon a signiﬁcant
change in the operating or macroeco-

nomic environment. If an evaluation of
the undiscounted future cash ﬂows
indicates impairment, the asset is writ-
ten down to its estimated fair value,
which is based on its discounted future
cash ﬂows.

Considerable management judgment

is necessary to evaluate the impact of
operating and macroeconomic changes
and to estimate future cash ﬂows.
Assumptions used in our impairment
evaluations, such as forecasted growth
rates and our cost of capital, are based
on the best available market informa-
tion and are consistent with our internal
forecasts and operating plans. These
assumptions could be adversely
impacted by certain of the risks
discussed in “Our Business Risks.”
We did not recognize any

impairment charges for perpetual
brands or goodwill in the years
presented. As of December 30, 2006, we
had $5.8 billion of perpetual brands
and goodwill, of which approximately
65% related to Tropicana and Walkers.

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 39

vested outside the U.S. and recorded
income tax expense of $460 million
related to this repatriation. Other than
the earnings repatriated, we intend to
continue to reinvest earnings outside
the U.S. for the foreseeable future and,
therefore, have not recognized any U.S.
tax expense on these earnings. At
December 30, 2006, we had approxi-
mately $10.8 billion of undistributed
international earnings.

In 2006, our annual tax rate was
19.3% compared to 36.1% in 2005 as
discussed in “Other Consolidated
Results.” The tax rate in 2006 decreased
16.8 percentage points primarily reﬂect-
ing the 2006 Tax Adjustments, the
absence of the 2005 AJCA tax charge
and the resolution of certain state
income tax audits in the current year. In
2007, our annual tax rate is expected to
be 27.7%, primarily reﬂecting the
absence of the 2006 Tax Adjustments.

Income Tax Expense and Accruals

Our annual tax rate is based on our
income, statutory tax rates and tax
planning opportunities available to us
in the various jurisdictions in which we
operate. Signiﬁcant judgment is
required in determining our annual tax
rate and in evaluating our tax positions.
We establish reserves when, despite our
belief that our tax return positions are
fully supportable, we believe that cer-
tain positions are subject to challenge
and that we may not succeed. We
adjust these reserves, as well as the
related interest, in light of changing
facts and circumstances, such as the
progress of a tax audit. See Note 5 for
additional information regarding our
tax reserves.

An estimated effective tax rate for a
year is applied to our quarterly operat-
ing results. In the event there is a
signiﬁcant or unusual item recognized
in our quarterly operating results, the
tax attributable to that item is
separately calculated and recorded at
the same time as that item. We consider
the tax beneﬁts from the resolution of
prior year tax matters to be such items.
In 2006, we recognized non-cash tax
beneﬁts of $602 million (the “2006 Tax
Adjustments”), substantially all of
which related to the Internal Revenue
Service’s (IRS) examination of our con-
solidated income tax returns for the
years 1998 through 2002. The IRS issued
a Revenue Agent’s Report (RAR), and
we are in agreement with their conclu-
sion, except for one matter which we
continue to dispute. The agreed adjust-
ments relate to transfer pricing and
various other transactions, including
certain acquisitions, the public offering

of PBG, as well as the restructuring of
our international snack foods
operations during that audit period.

Tax law requires items to be included
in our tax returns at different times than
the items are reﬂected in our ﬁnancial
statements. As a result, our annual tax
rate reﬂected in our ﬁnancial state-
ments is different than that reported in
our tax returns (our cash tax rate). Some
of these differences are permanent,
such as expenses that are not deductible
in our tax return, and some differences
reverse over time, such as depreciation
expense. These temporary differences
create deferred tax assets and liabilities.
Deferred tax assets generally represent
items that can be used as a tax deduc-
tion or credit in our tax returns in future
years for which we have already
recorded the tax beneﬁt in our income
statement. We establish valuation
allowances for our deferred tax assets
when we believe expected future tax-
able income is not likely to support the
use of a deduction or credit in that tax
jurisdiction. Deferred tax liabilities gen-
erally represent tax expense recognized
in our ﬁnancial statements for which
payment has been deferred, or expense
for which we have already taken a
deduction in our tax return but have not
yet recognized as expense in our ﬁnan-
cial statements.

The American Jobs Creation Act of
2004 (AJCA) created a one-time incen-
tive for U.S. corporations to repatriate
undistributed international earnings by
providing an 85% dividends received
deduction. In 2005, we repatriated
approximately $7.5 billion in earnings
previously considered indeﬁnitely rein-

267419_L01_P27_81.v4.qxd 3/5/07 11:16 PM Page 40

Stock–Based Compensation Expense

for senior officers is contingent upon
the achievement of pre-established per-
formance targets.

We also continued, as we have since
1989, to grant an annual award of stock
options to all eligible employees, based
on job level or classiﬁcation, under our
broad-based stock option program,
SharePower. SharePower awards gener-
ally have a 10-year term and vest over
three years.

Method of Accounting
We account for our employee stock
options, which include grants under
our executive program and broad-
based SharePower program, under the
fair value method of accounting using
a Black-Scholes valuation model to
measure stock option expense at the
date of grant. All stock grants have an
exercise price equal to the fair market
value of our common stock on the date
of grant. The fair value of stock option
grants is amortized to expense over the
vesting period.

recognized in excess of tax beneﬁts pre-
viously established upon grant are
reported as a ﬁnancing cash inﬂow.
Prior to adoption, such excess tax bene-
ﬁts were reported as an operating
cash inﬂow.

Our divisions are held accountable
for stock-based compensation expense
and, therefore, this expense is allocated
to our divisions as an incremental
employee compensation cost. The allo-
cation of stock-based compensation
expense in 2006 was approximately
28% to FLNA, 19% to PBNA, 32% to PI,
4% to QFNA and 17% to corporate
unallocated expenses. The expense
allocated to our divisions excludes any
impact of changes in our Black-Scholes
assumptions during the year which
reﬂect market conditions over which
division management has no control.
Therefore, any variances between allo-
cated expense and our actual expense
are recognized in corporate
unallocated expenses.

On January 1, 2006, we adopted SFAS 123R,
Share-Based Payment. Since we had previously
accounted for our stock-based compensation
under the fair value method, our adoption did
not significantly impact our financial position or
our results of operations.

On January 1, 2006, we adopted
Statement of Financial Accounting
Standards (SFAS) 123R, Share-Based
Payment, under the modiﬁed prospec-
tive method. Since we had previously
accounted for our stock-based compen-
sation plans under the fair value
provisions of SFAS 123, our adoption did
not signiﬁcantly impact our ﬁnancial
position or our results of operations.
Under SFAS 123R, actual tax beneﬁts

We believe that we will achieve our
best results if our employees act and are
rewarded as business owners. There-
fore, we believe stock ownership and
stock-based incentive awards are the
best way to align the interests of
employees with those of our sharehold-
ers. A majority of our employees
participate in our stock-based compen-
sation programs. Stock option grants
are made at the current stock price,
meaning each employee’s exercise price
is equivalent to our stock price on the
date of grant. Employees must gener-
ally provide three additional years of
service to earn the grant, referred to as
the vesting period. Our options gener-
ally have a 10-year term, which means
our employees would have up to seven
years after the vesting period to elect to
pay the exercise price to purchase one
share of our stock for each option exer-
cised. Employees beneﬁt from stock
options to the extent our stock price
appreciates above the exercise price
after vesting and during the term of
the grant. There have been no reduc-
tions to the exercise price of previously
issued awards, and any repricing of
awards would require approval of
our shareholders.

Executives who are awarded long-

term incentives based on their
performance are offered the choice of
stock options or restricted stock units
(RSUs). Executives who elect RSUs
receive one RSU for every four stock
options that would have otherwise
been granted. Senior officers do not
have a choice and are granted 50%
stock options and 50% RSUs. RSU
expense is based on the fair value of
PepsiCo stock on the date of grant and
is amortized over the vesting period,
generally three years. Each RSU is set-
tled in a share of our stock after the
vesting period. Vesting of RSU awards

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 41

Our Assumptions
Our Black-Scholes model estimates the expected value our employees will
receive from the options based on a number of assumptions, such as interest
rates, employee exercises, our stock price and dividend yield. Our weighted-
average fair value assumptions include:

Estimated 2007

Expected life
Risk free interest rate
Expected volatility
Expected dividend yield

6 yrs.
5.7%
18%
1.9%

2006

6 yrs.
4.5%
18%
1.9%

2005

6 yrs.
3.8%
23%
1.8%

2004

6 yrs.
3.3%
26%
1.8%

2007 Estimated Expense and Sensitivity of Assumptions
Our stock-based compensation expense, including RSUs, is as follows:

Stock-based compensation expense

$271

Estimated 2007

2006

$270

2005

$311

If we assumed a 100-basis-point change in the following assumptions, our estimated
2007 stock-based compensation expense would increase/(decrease) as follows:

100-Basis-Point Increase 100-Basis-Point Decrease

Risk free interest rate
Expected volatility
Expected dividend yield

$6
$1
$(9)

$(6)
$(1)
$10

The expected life is a signiﬁcant
assumption as it determines the period
for which the risk free interest rate,
volatility and dividend yield must be
applied. The expected life is the period
over which our employee groups are
expected to hold their options. It is
based on our historical experience with
similar grants. The risk free interest rate
is based on the expected U.S. Treasury
rate over the expected life. Volatility
reﬂects movements in our stock price
over the most recent historical period
equivalent to the expected life.
Dividend yield is estimated over the
expected life based on our stated divi-
dend policy and forecasts of net income,
share repurchases and stock price.

If the expected life were assumed to
be one year longer, our estimated 2007
stock-based compensation expense
would increase by $7 million. If the
expected life were assumed to be one
year shorter, our estimated 2007 stock-
based compensation expense would
decrease by $8 million. As noted, chang-
ing the assumed expected life impacts
all of the Black-Scholes valuation
assumptions as the risk free interest
rate, expected volatility and expected
dividend yield are estimated over the
expected life.

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 42

Pension and Retiree Medical Plans

Our pension plans cover full-time
employees in the U.S. and certain inter-
national employees. Beneﬁts are
determined based on either years of
service or a combination of years of ser-
vice and earnings. U.S. and Canada
retirees are also eligible for medical and
life insurance beneﬁts (retiree medical)
if they meet age and service
requirements. Generally, our share of
retiree medical costs is capped at speci-
ﬁed dollar amounts that vary based
upon years of service, with retirees con-
tributing the remainder of the cost.

assumptions to estimate the amount of
the beneﬁts that employees earn while
working, as well as the present value of
those beneﬁts. Annual pension and
retiree medical expense amounts are
principally based on four components:
1) the value of beneﬁts earned by
employees for working during the year
(service cost), 2) increase in the liability
due to the passage of time (interest
cost), and 3) other gains and losses as
discussed below, reduced by 4) expect-
ed return on plan assets for our
funded plans.

On December 30, 2006, we adopted

Signiﬁcant assumptions used to mea-

SFAS 158, Employers’ Accounting for
Deﬁned Beneﬁt Pension and Other
Postretirement Plans — an amendment
of FASB Statements No. 87, 88, 106, and
132(R) (SFAS 158). SFAS 158 requires
that we recognize the overfunded or
underfunded status of our pension and
retiree medical plans (our Plans) as an
asset or liability on our December 30,
2006 balance sheet. Subsequent
changes in the funded status will be
recognized in comprehensive income in
the year in which they occur. SFAS 158
also requires that, beginning in 2008,
our assumptions used to measure our
annual pension and retiree medical
expenses be determined as of the bal-
ance sheet date, and all plan assets and
liabilities be reported as of that date.
Currently, the assumptions used to mea-
sure our annual
pension and retiree
medical expenses are
determined as of
September 30 (mea-
surement date) and
all plan assets and
liabilities are gener-
ally reported as of that date. In
accordance with SFAS 158, prior year
amounts have not been adjusted. For
further information regarding the impact
of our adoption of SFAS 158, see Note 7.

Our Assumptions
The determination of pension and
retiree medical plan obligations and
related expenses requires the use of

sure our annual pension and retiree
medical expenses include:
• the interest rate used to determine

the present value of liabilities
(discount rate);

• certain employee-related factors,
such as turnover, retirement age
and mortality;

• for pension expense, the expected

return on assets in our funded plans
and the rate of salary increases for
plans where beneﬁts are based on
earnings; and

• for retiree medical expense, health

care cost trend rates.

Our assumptions reﬂect our historical

experience and management’s best
judgment regarding future expectations.
Due to the signiﬁcant management

SFAS 158 requires that we recognize the
overfunded or underfunded status of our pension
and retiree medical plans as an asset or liability
on our December 30, 2006 balance sheet.

judgment involved, our assumptions
could have a material impact on the
measurement of our pension and
retiree medical beneﬁt expenses
and obligations.

At each measurement date, the dis-
count rate is based on interest rates for
high-quality, long-term corporate debt
securities with maturities comparable to
those of our liabilities. In the U.S., we

use the Moody’s Aa Corporate Index
yield and adjust for differences
between the average duration of the
bonds in this Index and the average
duration of our beneﬁt liabilities, based
upon a published index.

The expected return on pension plan

assets is based on our historical experi-
ence, our pension plan investment
strategy and our expectations for long-
term rates of return. Our pension plan
investment strategy is reviewed annu-
ally and is established based upon plan
liabilities, an evaluation of market con-
ditions, tolerance for risk, and cash
requirements for beneﬁt payments. We
use a third-party advisor to assist us in
determining our investment allocation
and modeling our long-term rate of
return assumptions. Our current invest-
ment allocation target for our U.S.
plans is 60% in equity securities, with
the balance in ﬁxed income securities.
Our expected long-term rate of return
on U.S. plan assets is 7.8%, reﬂecting
estimated long-term rates of return of
9.3% from equity securities and 5.8%
from ﬁxed income securities. We use a
market-related value method that rec-
ognizes each year’s asset gain or loss
over a ﬁve-year period. Therefore, it
takes ﬁve years for the gain or loss from
any one year to be fully included in the
other gains and losses calculation
described below.

Other gains and losses resulting from

actual experience differing from our
assumptions and from changes in our
assumptions are also determined at
each measurement date. If this net
accumulated gain or loss exceeds 10%
of the greater of plan assets or liabili-
ties, a portion of the net gain or loss is
included in expense for the following
year. The cost or beneﬁt of plan
changes that increase or decrease bene-
ﬁts for prior employee service (prior
service cost/(credit)) is included in earn-
ings on a straight-line basis over the
average remaining service period of
those employees expected to beneﬁt,
which is approximately 11 years for
pension expense and approximately
13 years for retiree medical.

267419_L01_P27_81.v5.qxd 3/6/07 2:55 PM Page 43

Weighted-average assumptions for pension and retiree medical expenses are
as follows:

Pension

Expense discount rate
Expected rate of return on plan assets
Expected rate of salary increases

Retiree medical

Expense discount rate
Current health care cost trend rate

2007

2006

2005

5.7%
7.7%
4.5%

5.8%
9.0%

5.6%
7.7%
4.4%

5.7%
10.0%

6.1%
7.8%
4.3%

6.1%
11.0%

Future Expense
The estimated changes in pension and retiree medical expense are as follows:

Pension Retiree Medical

2006 expense
Increase in discount rate
(Decrease)/Increase in experience loss amortization
Impact of contributions
Other
2007 estimated expense

$417
(15)
(1)
(2)
(3)
$396

$127
(2)
1
–
4
$130

Pension and retiree medical service
costs, measured at a ﬁxed discount rate
but including the effect of demographic
assumption changes, as well as the
effects of gains and losses due to demo-
graphics, are reﬂected in division results
for North American employees. Division
results also include interest costs, mea-
sured at a ﬁxed discount rate, for
retiree medical plans. Interest costs for
the pension plans, measured at a ﬁxed
discount rate, and the effect of changes
in discount rates, gains and losses other
than those due to demographics, pen-
sion asset returns and the impact of
pension funding are all reﬂected in cor-
porate unallocated expenses.

Based on our current assumptions,
which reﬂect our prior experience, cur-
rent plan provisions and expectations for
future experience, we expect our pension
expense to decrease slightly in 2008,
declining to approximately $360 million
by 2012 as unrealized losses are amor-
tized. If our assumptions and our plan
provisions for retiree medical costs
remain unchanged and our experience
mirrors these assumptions, we expect our
annual retiree medical expense beyond
2007 to approximate $130 million.

Sensitivity of Assumptions
A decrease in the discount rate or in the
expected rate of return assumptions

would increase pension expense. The
estimated impact of a 25-basis-point
decrease in the discount rate on 2007
pension expense is an increase of
approximately $37 million. The
estimated impact on 2007 pension
expense of a 25-basis-point decrease in
the expected rate of return is an
increase of approximately $16 million.
See Note 7 regarding the sensitivity
of our retiree medical cost assumptions.

Future Funding
We make contributions to pension
trusts maintained to provide plan bene-
ﬁts for certain pension plans. These
contributions are made in accordance
with applicable tax regulations that
provide for current tax deductions for
our contributions, and taxation to the
employee only upon receipt of plan
beneﬁts. Generally, we do not fund our
pension plans when our contributions
would not be currently deductible.

Our pension contributions for 2006

were $59 million, all of which were
non-discretionary. In 2007, we expect to
make contributions of up to $150 mil-
lion with up to $75 million expected to
be discretionary. Our cash payments for
retiree medical are estimated to be
approximately $85 million in 2007. As
our retiree medical plans are not
subject to regulatory funding require-
ments, we fund these plans on a
pay-as-you-go basis. For estimated
future beneﬁt payments, including our
pay-as-you-go payments as well as
those from trusts, see Note 7.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting

In September 2006, the SEC issued Staff
Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements
when Quantifying Misstatements in
Current Year Financial Statements (SAB
108), to address diversity in practice in
quantifying ﬁnancial statement
misstatements. SAB 108 requires that
we quantify misstatements based on
their impact on each of our ﬁnancial
statements and related disclosures. On
December 30, 2006, we adopted SAB
108. Our adoption of SAB 108 did not
impact our ﬁnancial statements.

Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for
Uncertainty in Income Taxes—an inter-
pretation of FASB Statement No. 109
(FIN 48), which clariﬁes the accounting
for uncertainty in tax positions. FIN 48
requires that we recognize in our ﬁnan-
cial statements, the impact of a tax
position, if that position is more likely
than not of being sustained on audit,
based on the technical merits of the
position. The provisions of FIN 48 are
effective as of the beginning of our
2007 ﬁscal year, with the cumulative
effect of the change in accounting prin-

ciple recorded as an adjustment to
opening retained earnings. We do not
expect our adoption of FIN 48 to materi-
ally impact our ﬁnancial statements.

In September 2006, the FASB issued

SFAS 157, Fair Value Measurements
(SFAS 157), which deﬁnes fair value,
establishes a framework for measuring
fair value, and expands disclosures about
fair value measurements. The provisions
of SFAS 157 are effective as of the begin-
ning of our 2008 ﬁscal year. We are
currently evaluating the impact
of adopting SFAS 157 on our
ﬁnancial statements.

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 44

Our Financial Results

Items Affecting Comparability

The year-over-year comparisons of our ﬁnancial results are affected by the following items:

2006

2005

Net revenue

53rd week........................................................................................................................................

–

$418

Operating proﬁt

2006 restructuring and impairment charges .................................................................................
53rd week........................................................................................................................................
2005 restructuring charges .............................................................................................................

Net income

2006 restructuring and impairment charges .................................................................................
2006 Tax Adjustments .....................................................................................................................
PepsiCo share of PBG tax settlement .............................................................................................
AJCA tax charge ..............................................................................................................................
53rd week........................................................................................................................................
2005 restructuring charges .............................................................................................................

Net income per common share — diluted

For the items affecting our 2004 results, see Notes 3 and 5, as well as our 2005 Annual Report.

$(67)
–
–

$(43)
$602
$18
–
–
–

$(0.03)
$0.36
$0.01
–
–
–

–
$75
$(83)

–
–
–
$(460)
$57
$(55)

–
–
–
$(0.27)
$0.03
$(0.03)

53rd week
In 2005, we had an additional week of
results (53rd week). Our ﬁscal year ends
on the last Saturday of each December,
resulting in an additional week of
results every ﬁve or six years.

2006 Restructuring and
Impairment Charges
In 2006, we incurred a charge of
$67 million in conjunction with consoli-
dating the manufacturing network at
FLNA by closing two plants in the U.S.,
and rationalizing other assets, to
increase manufacturing productivity
and supply chain efficiencies.

2005 Restructuring Charges
In 2005, we incurred restructuring
charges of $83 million to reduce costs in
our operations, principally through
headcount reductions.

2006 Tax Adjustments
In 2006, we recognized non-cash tax
beneﬁts of $602 million, substantially
all of which related to the IRS’s exami-
nation of our consolidated tax returns
for the years 1998 through 2002.

PepsiCo Share of PBG Tax Settlement
In 2006, the IRS concluded its examina-
tion of PBG’s consolidated income tax
returns for the years 1999 through 2000
(PBG’s Tax Settlement). Consequently, a

non-cash beneﬁt of $21 million was
included in bottling equity income as
part of recording our share of PBG’s
ﬁnancial results.

AJCA Tax Charge
In 2005, we repatriated approximately
$7.5 billion in earnings previously con-
sidered indeﬁnitely reinvested outside
the U.S. in connection with the AJCA
and recorded income tax expense of
$460 million related to this repatriation.

267419_L01_P27_81.v4.qxd 3/6/07 7:13 AM Page 45

Results of Continuing Operations — Consolidated Review

In the discussions of net revenue and
operating profit below, effective net
pricing reflects the year–over–year
impact of discrete pricing actions,
sales incentive activities and mix
resulting from selling varying
products in different package sizes
and in different countries.

Servings
Since our divisions each use different
measures of physical unit volume (i.e.,
kilos, gallons, pounds and case sales), a
common servings metric is necessary to
reﬂect our consolidated physical unit
volume. Our divisions’ physical volume
measures are converted into servings
based on U.S. Food and Drug
Administration guidelines for single-
serving sizes of our products.

In 2006, total servings increased
5.5% over the prior year, as servings for
beverages worldwide grew over 6%
and servings for snacks worldwide grew
5%. All of our divisions positively con-
tributed to the total servings growth. In
2005, total servings increased 7% com-
pared to 2004, as servings for beverages
worldwide grew over 7% and servings
for snacks worldwide grew 6%.

Net Revenue and Operating Profit

2006
Net revenue increased 8% primarily
reﬂecting higher volume and positive
effective net pricing across all divisions.
The volume gains and the effective net
pricing each contributed 3 percentage
points to net revenue growth. Acquisi-
tions contributed 1 percentage point
and foreign exchange contributed
almost 1 percentage point to net rev-
enue growth. The absence of the prior
year’s additional week reduced net rev-
enue by over 1 percentage point and
reduced volume growth by almost
1 percentage point.

Total operating proﬁt increased 9%

and margin increased 0.1 percentage
points. The operating proﬁt gains reﬂect
the net revenue growth, partially offset
by the impact of higher raw material
and energy costs across all divisions. The
absence of the prior year’s additional
week reduced operating proﬁt growth
by over 1 percentage point.

2005
Net revenue increased 11% reﬂecting,
across all divisions, increased volume,
favorable effective net pricing and net
favorable foreign currency movements.
The volume gains contributed 6 percent-
age points, the effective net pricing
contributed 3 percentage points and
the net favorable foreign currency
movements contributed over 1 percent-
age point. The 53rd week contributed
over 1 percentage point to revenue
growth and almost 1 percentage point
to volume growth.

Change

Total net revenue
Operating proﬁt

FLNA
PBNA
PI
QFNA
Corporate unallocated
Restructuring and

impairment charges

Total operating proﬁt
Total operating
proﬁt margin

2006

2005

2004

2006

2005

$35,137

$32,562

$29,261

8% 11%

$2,615
2,055
1,948
554
(733)

$2,529
2,037
1,607
537
(788)

$2,389
1,911
1,323
475
(689)

–
$6,439

–
$5,922

(150)
$5,259

3%
1%

6%
7%
21% 21%
3% 13%
(7)% 14%

9% 13%

18.3%

18.2%

18.0%

0.1

0.2

Total operating proﬁt increased 13%

and margin increased 0.2 percentage
points. The operating proﬁt gains pri-
marily reﬂect leverage from the revenue
growth, partially offset by higher sell-
ing and distribution (S&D) expenses and
increased cost of sales, largely due to
higher raw materials, energy and S&D
labor costs, as well as higher advertising
and marketing expenses. Total operat-
ing proﬁt margin also beneﬁted from a
favorable comparison to prior year
restructuring and impairment charges.
The additional week in 2005 contributed
over 1 percentage point to total operat-
ing proﬁt growth.

Corporate Unallocated Expenses
Corporate unallocated expenses include
the costs of our corporate headquar-
ters, centrally-managed initiatives, such

as our BPT initiative in North America,
unallocated insurance and beneﬁt pro-
grams, foreign exchange transaction
gains and losses, and certain commodity
derivative gains and losses, as well as
proﬁt-in-inventory elimination adjust-
ments for our noncontrolled bottling
affiliates and certain other items.
In 2006, corporate unallocated

expenses decreased $55 million primar-
ily reﬂecting the absence of a
non-recurring charge of $55 million in
the prior year to conform our method
of accounting across all divisions, pri-
marily for warehouse and freight costs.
Higher costs associated with our BPT
initiative of $35 million, as well as the
unfavorable comparison to the prior
year’s $25 million gain in connection
with the settlement of a class action

267419_L01_P27_81.v3.qxd 3/2/07 4:35 PM Page 46

lawsuit related to our purchases of high
fructose corn syrup from 1991 to 1995,
were offset by the favorable impact of
certain other corporate items.

In 2005, corporate unallocated
expenses increased 14%. This increase
primarily reﬂects higher costs associated
with our BPT initiative which
contributed 7 percentage points,

increased support behind health and
wellness and innovation initiatives
which contributed 5 percentage points,
and Corporate departmental expenses
and restructuring charges which each
contributed 2 percentage points to the
increase. In 2005, items of a non-recur-
ring nature included charges of
$55 million to conform our method of

accounting across all divisions, primarily
for warehouse and freight costs, and a
gain of $25 million in connection with
the settlement of a class action lawsuit
related to our purchases of high fruc-
tose corn syrup from 1991 to 1995. In
2004, we recorded a charge of $50 mil-
lion for the settlement of a contractual
dispute with a former business partner.

Other Consolidated Results

Bottling equity income includes our
share of the net income or loss of our
noncontrolled bottling affiliates as
described in “Our Customers.” Our
interest in these bottling investments
may change from time to time. Any
gains or losses from these changes, as
well as other transactions related to our
bottling investments, are also included
on a pre-tax basis. We continue to sell
shares of PBG stock to reduce our own-
ership to the level at the time of PBG’s
initial public offering, since our owner-
ship has increased as a result of PBG’s
share repurchase program. We sold
10.0 million and 7.5 million shares of
PBG stock in 2006 and 2005,
respectively. The resulting lower owner-
ship percentage reduces the equity
income from PBG that we recognize.

2006
Bottling equity income increased 11%
primarily reﬂecting a $186 million pre-
tax gain on our sale of PBG stock, which
compared favorably to a $126 million
pre-tax gain in the prior year. The non-
cash gain of $21 million from our share
of PBG’s Tax Settlement was fully offset
by lower equity income from our
anchor bottlers in the current year,
primarily resulting from the impact of
their respective adoptions of SFAS 123R
in 2006.

Net interest expense decreased 33%

primarily reﬂecting higher average
rates on our investments and lower
debt balances, partially offset by lower
investment balances and the impact of
higher average rates on our borrowings.

Change

2006

2005

2004

2006

2005

$616
$(66)
19.3%

$557
$(97)
36.1%

$380
$(93)
24.7%

11% 46%
(33)% 4%

Bottling equity income
Interest expense, net
Annual tax rate
Net income — continuing

operations

$5,642

$4,078

$4,174

38% (2)%

Net income per common
share — continuing
operations — diluted

$3.34

$2.39

$2.41

40% (1)%

The tax rate decreased 16.8 percent-

age points compared to prior year
primarily reﬂecting the 2006 Tax
Adjustments, the absence of the 2005
AJCA tax charge and the resolution of
certain state income tax audits in the
current year.

Net income increased 38% and the
related net income per share increased
40%. These increases primarily reﬂect
the 2006 Tax Settlement, the absence of
the AJCA tax charge and our solid oper-
ating proﬁt growth.

2005
Bottling equity income increased 46%
reﬂecting $126 million of pre-tax gains
on our sales of PBG stock, as well as
stronger bottler results.

Net interest expense increased 4%

reﬂecting the impact of higher debt
levels, substantially offset by higher
investment rates and cash balances.

The tax rate increased 11.4 percent-
age points reﬂecting the $460 million
AJCA tax charge, as well as the absence

of income tax beneﬁts of $266 million
recorded in 2004 related to a reduction
in foreign tax accruals following the
resolution of certain open tax items
with foreign tax authorities and a
refund claim related to prior U.S. tax
settlements. This increase was partially
offset by increased international proﬁt
which is taxed at a lower rate.

Net income from continuing opera-
tions decreased 2% and the related net
income per common share from contin-
uing operations decreased 1%. These
decreases reﬂect the impact of the tax
items discussed above, partially offset
by our operating proﬁt growth,
increased bottling equity income, which
includes the gain on our PBG stock sale,
the impact of the 53rd week, a favor-
able comparison to prior year
restructuring and impairment charges,
and for net income per share, the
impact of our share repurchases.

267419_L01_P27_81.v4.qxd 3/6/07 7:19 AM Page 47

Results of Continuing Operations — Division Review

The results and discussions below are based on how our Chief Executive Officer monitors the performance
of our divisions. For additional information on these items and our divisions, see Note 1.

FLNA

Net Revenue, 2006 ............................................................ $10,844
Net Revenue, 2005............................................................. $10,322
% Impact of:
Volume ...............................................................................
Effective net pricing ..........................................................
Foreign exchange ..............................................................
Acquisitions/divestitures....................................................
% Change(b) ........................................................................

1%
3
0.5
0.5

PBNA

$9,565
$9,146

$12,959
$11,376

QFNA

$1,769
$1,718

Total

$35,137
$32,562

3%(a)
1
–
–
5%

6%(a)
4
1
3
14%

1%
2
1
–
3%

3%
3
1
1
8%

FLNA

Net Revenue, 2005............................................................. $10,322
Net Revenue, 2004.............................................................
$9,560
% Impact of:
Volume ...............................................................................
Effective net pricing ..........................................................
Foreign exchange ..............................................................
Acquisitions/divestitures....................................................
% Change(b) ........................................................................

4.5%
3
0.5
–
8%

PBNA

$9,146
$8,313

$11,376
$9,862

QFNA

$1,718
$1,526

Total

$32,562
$29,261

4%(a)
5
–
–
10%

8%(a)

2.5
3
2
15%

9%
3
1
–
13%

6%
3
1
0.5
11%

(a) For beverages sold to our bottlers, volume growth is based on our concentrate shipments and equivalents.
(b) Amounts may not sum due to rounding.

267419_L01_P27_81.v4.qxd 3/5/07 11:26 PM Page 48

Frito–Lay North America

Net revenue
Operating proﬁt

2006

2005

$10,844
$2,615

$10,322
$2,529

2004

$9,560
$2,389

% Change

2006

2005

5
3

8
6

2006
Net revenue grew 5% reﬂecting volume
growth of 1% and positive effective net
pricing due to salty snack pricing
actions and favorable mix. Pound vol-
ume grew primarily due to double-digit
growth in SunChips, Multipack and
Quaker Rice Cakes. These volume gains

In 2006, FLNA volume grew
primarily due to double-digit
growth in SunChips, Multipack
and Quaker Rice Cakes.

closure of two plants and rationaliza-
tion of other manufacturing assets. The
absence of the prior year’s additional
week, which reduced operating proﬁt
growth by 2 percentage points, was
largely offset by the impact of restruc-
turing charges in the prior year to
reduce costs in our operations, princi-
pally through headcount reductions.

Smart Spot eligible products repre-

sented approximately 15% of net
revenue. These products experienced
double-digit revenue growth, while the
balance of the portfolio had low-single-
digit revenue growth.

volume growth of 1%. Other macro
snacks products revenue beneﬁted from
favorable mix. The additional week
contributed 2 percentage points to vol-
ume and net revenue growth.

Operating proﬁt grew 6% reﬂecting
positive effective net pricing actions and
volume growth. This growth was offset
by higher S&D costs resulting from
increased labor and beneﬁt charges and
fuel costs; higher cost of sales, driven by
raw materials, natural gas and freight;
and increased advertising and market-
ing costs. Operating proﬁt was also

2005
Net revenue grew 8%
reﬂecting volume
growth of 4.5% and
positive effective net
pricing driven by salty
snack pricing actions and favorable mix
on both salty and convenience foods
products. Pound volume grew primarily
due to mid-single-digit growth in trade-
mark Lay’s potato chips,
high-single-digit growth in salty trade-
mark Tostitos, double-digit growth in
Santitas, mid-single-digit growth in
trademark Cheetos, high-single-digit
growth in Dips and Fritos, and double-
digit growth in SunChips. These gains
were partially offset by the discontinu-
ance of Toastables and Doritos Rollitos.
Overall, salty snacks revenue grew 8%
with volume growth of 5%, and other
macro snacks revenue grew 13% with

FLNA’s Smart Spot eligible products
experienced double-digit revenue growth in
both 2006 and 2005.

negatively impacted by more than
1 percentage point as a result of fourth
quarter charges to reduce costs in our
operations, principally through head-
count reductions. The additional week
contributed 2 percentage points to
operating proﬁt growth.

Smart Spot eligible products repre-

sented approximately 13% of net
revenue. These products experienced
double-digit revenue growth, while
the balance of the portfolio had high-
single-digit revenue growth.

were partially offset by low-single-digit
declines in trademark Lay’s and Doritos.
Overall, salty snacks revenue grew 5%
with volume growth of 1%, and other
macro snacks revenue grew 9% with
volume growth of 6%. The Stacy’s Pita
Chip Company acquisition contributed
approximately 0.5 percentage points to
both revenue and volume growth. The
absence of the prior year’s additional
week reduced volume and net revenue
growth by 2 percentage points.

Operating proﬁt grew 3% reﬂecting

the net revenue growth. This growth
was partially offset by higher commod-
ity costs, primarily cooking oil and
energy. Operating proﬁt was also nega-
tively impacted by almost 3 percentage
points as a result of a fourth quarter
charge for the consolidation of the
manufacturing network, including the

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 49

PepsiCo Beverages North America

2006

$9,565
$2,055

2005

$9,146
$2,037

2004

$8,313
$1,911

% Change

2006

2005

5
1

10
7

Net revenue
Operating proﬁt

2006
Bottler case sales (BCS) volume grew
4%. The volume increase was driven by
a 14% increase in non-carbonated bev-
erages, partially offset by a 2% decline
in CSDs. The non-carbonated portfolio
performance was driven by double-digit
growth in trademark Aquaﬁna,
Gatorade, Lipton ready-to-drink teas,
Tropicana juice drinks and Propel.
Tropicana Pure Premium experienced a
low-single-digit decline in volume. The
decline in CSDs reﬂects a low-single-
digit decline in trademark Pepsi,
partially offset by a mid-single-digit

In 2006, Smart Spot eligible
products grew to over 70% of
PBNA’s total net revenue.

increase in trademark Sierra Mist and a
low-single-digit increase in trademark
Mountain Dew. Across the brands, reg-
ular CSDs experienced a low-single-digit
decline and diet CSDs declined slightly.
The additional week in 2005 had no sig-
niﬁcant impact on volume growth as
bottler volume is reported based on a
calendar month.

Net revenue grew 5%. Positive mix

contributed to the revenue growth,
reﬂecting the strength of non-carbon-
ated beverages. Price increases taken in
2006, primarily on concentrate,
Tropicana Pure Premium and fountain,
were offset by overall higher trade
spending. The absence of the prior
year’s additional week reduced net rev-
enue growth by 1 percentage point.

Operating proﬁt increased 1% pri-

marily reﬂecting the net revenue
growth and lower advertising and mar-
keting expenses. Higher raw material
costs, primarily oranges, increased sup-
ply chain costs in Gatorade and higher
energy costs substantially offset the

operating proﬁt increase. Total market-
place spending for the year increased,
reﬂecting a shift from advertising and
marketing spending to trade spending.
Additionally, the impact of more-favor-
able settlements of trade spending
accruals in 2005 was mostly offset by a
favorable insurance settlement of
$29 million in 2006. The absence of the
prior year’s additional week, which
reduced operating proﬁt growth by
1 percentage point, was fully offset by
the impact of charges taken in the
fourth quarter of 2005 to reduce costs
in our operations, principally through
headcount reductions.

Smart Spot eligible products repre-
sented over 70% of net revenue. These
products experienced high-single-digit
revenue growth, while the balance of
the portfolio declined in the low-single-
digit range.

2005
Net revenue grew 10% and BCS volume
grew 4%. The volume increase was
driven by a 16% increase in non-carbon-
ated beverages, partially offset by a 1%
decline in CSDs. Within non-carbonated
beverages, Gatorade, trademark
Aquaﬁna, Tropicana juice drinks, Propel
and SoBe all experienced double-digit
growth. Above average
summer temperatures
across the country, as well
as the launch of new prod-
ucts such as Aquaﬁna
FlavorSplash and Gatorade
Lemonade earlier in the
year, drove Gatorade and
trademark Aquaﬁna growth. Tropicana
Pure Premium experienced a low-single-
digit decline resulting from price
increases taken in the ﬁrst quarter. The
decline in CSDs reﬂects low-single-digit
declines in trademark Pepsi and trade-
mark Mountain Dew, slightly offset by
low-single-digit growth in Sierra Mist.

Across the brands, a low-single-digit
decline in regular CSDs was partially
offset by low-single-digit growth in diet
CSDs. The additional week in 2005 had
no signiﬁcant impact on volume growth
as bottler volume is reported based on
a calendar month.

Net revenue also beneﬁted from

5 percentage points of favorable
effective net pricing, reﬂecting the con-
tinued migration from CSDs to
non-carbonated beverages and price
increases taken in the ﬁrst quarter,
primarily on concentrate and Tropicana
Pure Premium, partially offset by
increased trade spending in 2005. The
additional week in 2005 contributed
1 percentage point to net revenue
growth.

Operating proﬁt increased nearly
7%, primarily reﬂecting net revenue
growth. This increase was partially off-
set by higher raw material, energy and
transportation costs, as well as
increased advertising and marketing
expenses. The additional week in 2005
contributed 1 percentage point to oper-
ating proﬁt growth and was fully offset
by a 1-percentage-point decline related
to charges taken in 2005 to reduce costs
in our operations, principally through
headcount reductions.

Aquafina, Gatorade, Tropicana juice drinks
and Propel all experienced double-digit
volume growth in both 2006 and 2005.

Smart Spot eligible products repre-

sented almost 70% of net revenue.
These products experienced double-
digit revenue growth, while the
balance of the portfolio grew in the low-
single-digit range.

267419_L01_P27_81.v4.qxd 3/5/07 11:29 PM Page 50

PepsiCo International

Net revenue
Operating proﬁt

2006
International snacks volume grew 9%,
reﬂecting double-digit growth in Russia,
Turkey, Egypt and India, and single-digit
growth at Sabritas in Mexico. Overall, the
Europe, Middle East & Africa region grew
17%, the Latin America region grew
2.5% and the Asia Paciﬁc region grew
12%. Acquisitions of two businesses in
Europe in 2006 increased the Europe,
Middle East & Africa region volume
growth by nearly 6 percentage points.
The acquisition of a business in Australia
increased the Asia Paciﬁc region volume
growth by 1 percentage point. In
aggregate, acquisitions contributed
2 percentage points to the reported total
PepsiCo International snack volume
growth rate. The absence of the prior
year’s additional week reduced the
growth rate by 1 percentage point.

Beverage volume grew 9%, reﬂecting

broad-based increases led by double-
digit growth in the Middle East, China,
Argentina, Russia and Venezuela. The

International snack volume and
beverage volume each grew 9%
in 2006.

Europe, Middle East & Africa region grew
11%, the Asia Paciﬁc region grew 9%
and the Latin America region grew 7%.
Acquisitions contributed 1 percentage
point to the Europe, Middle East & Africa
region volume growth rate and
contributed slightly to the reported total
PepsiCo International beverage volume
growth rate. CSDs grew at a high-single-
digit rate while non-carbonated
beverages grew at a double-digit rate.

Net revenue grew 14%, primarily as a
result of the broad-based volume growth
and favorable effective net pricing. The
net impact of acquisitions and
divestitures contributed nearly 3 percent-
age points to net revenue growth.

2006

2005

$12,959
$1,948

$11,376
$1,607

2004

$9,862
$1,323

% Change

2006

2005

14
21

15
21

Foreign currency contributed 1 percent-
age point of growth. The absence of the
prior year’s additional week reduced net
revenue growth by 1 percentage point.
Operating proﬁt grew 21%, driven
primarily by the net revenue growth,
partially offset by increased raw material
and energy costs. The net impact of
acquisitions and divestitures had no
impact on the growth rate. Foreign
currency contributed 1 percentage point
of growth. The absence of the prior
year's additional week, which reduced
the operating proﬁt growth rate by
1 percentage point, was fully offset by
the impact of charges taken in 2005 to
reduce costs in our operations and
rationalize capacity.

2005
International snacks volume grew 7%,
reﬂecting growth of 11% in the Europe,
Middle East & Africa region, 5% in the
Latin America region and 6% in the Asia
Paciﬁc region. Acquisition and divestiture
activity, principally the divestiture in 2004
of our interest in a South Korea joint ven-
ture, reduced Asia Paciﬁc region volume
by 11 percentage points. The acquisition
of a business in Romania late in 2004
increased the Europe, Middle East &
Africa region volume growth by 3 per-
centage points. Cumulatively, our
divestiture and acquisition activities did
not impact the reported total PepsiCo
International snack volume growth rate.
The overall gains reﬂected mid-single-
digit growth at Sabritas in Mexico,
double-digit growth in India, Turkey,
Russia, Australia and China, partially off-
set by a low-single-digit decline at
Walkers in the United Kingdom. The
decline at Walkers is due principally to
marketplace pressures. The additional
week contributed 1 percentage point to
international snack volume growth.

Beverage volume grew 11%, reﬂect-
ing growth of 14% in the Europe, Middle
East & Africa region, 11% in the Asia

Paciﬁc region and 6% in the Latin
America region. Acquisitions had no sig-
niﬁcant impact on the reported total
PepsiCo International beverage volume
growth rate. Broad-based increases were
led by double-digit growth in the Middle
East, China, Argentina, Venezuela and
Russia. Carbonated soft drinks and non-
carbonated beverages both grew at a
double-digit rate. The additional week
had no impact on beverage volume
growth as volume is reported based on a
calendar month.

Net revenue grew 15%, primarily as a
result of the broad-based volume growth
and favorable effective net pricing.
Foreign currency contributed almost
3 percentage points of growth reﬂecting
the favorable Mexican peso and Brazilian
real, partially offset by the unfavorable
British pound. Acquisitions and divesti-
tures contributed almost 2 percentage
points of growth. The additional week
contributed 1 percentage point to rev-
enue growth. Cumulatively, the impact of
foreign currency, acquisitions and divesti-
tures, and the additional week on net
revenue was 5 percentage points.

Operating proﬁt grew 21% driven

largely by the broad-based volume
growth and favorable effective net pric-
ing, partially offset by increased energy
and raw material costs. Foreign currency
contributed 4 percentage points of
growth based on the favorable Mexican
peso and Brazilian real. The net favorable
impact from acquisition and divestiture
activity, primarily the acquisition of
General Mills’ minority interest in Snack
Ventures Europe in the ﬁrst quarter of
2005, contributed 2 percentage points of
growth. The additional week contributed
1 percentage point to operating proﬁt
growth which was fully offset by a 1-per-
centage-point decline in operating proﬁt
growth related to fourth quarter charges
to reduce costs in our operations and
rationalize capacity.

267419_L01_P27_81.v5.qxd 3/6/07 2:55 PM Page 51

Quaker Foods North America

2006

$1,769
$554

2005

$1,718
$537

2004

$1,526
$475

% Change

2006

2005

3
3

13
13

approximately 2 percentage points to
both net revenue and volume growth.
Operating proﬁt increased 13%
reﬂecting the net revenue growth. This
growth was partially offset by higher
advertising and marketing costs behind
programs for core brands and innova-
tion, as well as an unfavorable cost of
sales comparison primarily due to

In 2006 and 2005, Smart Spot eligible products
represented over half of QFNA’s total net revenue.

Net revenue
Operating proﬁt

2006
Net revenue grew 3% and volume
increased 1%. The volume increase
reﬂects mid-single-digit growth in
Oatmeal, high-single-digit growth in
Life cereal and low-single-digit growth
in Cap’n Crunch cereal. These increases
were partially offset by a low-single-
digit decline in Aunt Jemima syrup and
mix and a mid-single-digit decline in
Rice-A-Roni. Net revenue growth was
also driven by favorable effective net
pricing, which contributed almost 2 per-
centage points to net revenue growth,
and favorable Canadian foreign
exchange rates which contributed
almost 1 percentage point. The absence
of the prior year’s additional week
reduced both net revenue and
volume growth by approximately
2 percentage points.

Operating proﬁt increased 3%
primarily reﬂecting the net revenue
growth. Increased cost of sales, primar-
ily driven by higher raw material and
energy costs, were largely offset by
lower advertising and marketing
expenses. The absence of the prior year’s
additional week reduced operating
proﬁt growth by approximately 2 points.

Smart Spot eligible products repre-

sented approximately 55% of net
revenue and had mid-single-digit net
revenue growth. The balance of the
portfolio experienced a low-single-digit
decline. The absence of the prior year’s
additional week negatively impacted
these results.

2005
Net revenue
increased 13% and
volume increased
9%. The volume
increase reﬂects
double-digit
growth in Oatmeal, Aunt Jemima syrup
and mix, Rice-A-Roni and Pasta Roni, as
well as high-single-digit growth in
Cap’n Crunch cereal and mid-single-
digit growth in Life cereal. Higher
effective net pricing contributed nearly
3 percentage points of growth reﬂect-
ing favorable product mix, the
settlement of prior year trade spending
accruals and price increases on ready-to-
eat cereals taken in the third quarter of
2004. Favorable Canadian exchange
rates contributed nearly 1 percentage
point to net revenue growth. The addi-
tional week in 2005 contributed

higher energy and raw material costs in
the latter part of 2005. The additional
week in 2005 contributed approximately
2 percentage points to operating
proﬁt growth.

Smart Spot eligible products

reprsented approximately half of net
revenue and had double-digit revenue
growth. The balance of the portfolio
also experienced double-digit
revenue growth.

267419_L01_P27_81.v2.qxd 2/28/07 8:19 PM Page 52

Our Liquidity and Capital Resources

Our strong cash–generating capability and financial
condition give us ready access to capital markets
throughout the world. Our principal source of liquidity
is our operating cash flow. This cash–generating
capability is one of our fundamental strengths and
provides us with substantial financial flexibility in
meeting operating, investing and financing needs. In
addition, we have revolving credit facilities that are
further discussed in Note 9. Our cash provided from
operating activities is somewhat impacted by
seasonality. Working capital needs are impacted by
weekly sales, which are generally highest in the third
quarter due to seasonal and holiday–related sales
patterns, and generally lowest in the first quarter.

2006 Cash Utilization
Other, net
$223
Short-term investments
$2,017

Cash proceeds
from sale of PBG stock
$318

Stock option exercises
$1,194

Operating activities
$6,084

Long-term debt
$106
Acquisitions
$522

Dividends
$1,854

Capital spending
$2,068

Share repurchases
$3,010

Short-term borrowings
$2,341

Operating Activities
In 2006, our operations provided
$6.1 billion of cash compared to
$5.9 billion in the prior year. The
increase primarily reﬂects our solid busi-
ness results. Our operating cash ﬂow in
2006 also reﬂects increased net tax
payments over the prior year of
$897 million, which included $420 mil-
lion related to our repatriation of
international cash in 2005 in connection
with the AJCA, substantially offset by
reductions in pension plan
contributions over the prior year of
$744 million.

Investing Activities
In 2006, we used $194 million for our
investing activities. Capital spending of
$2.1 billion and acquisitions of $522 mil-
lion were mostly offset by net sales of
short-term investments of $2.0 billion
and proceeds from our sale of PBG
stock of $318 million. The increase in
capital spending over the prior year pri-
marily reﬂects increased investments at
PI and in our North American Gatorade
business, as well as increased support
behind our ongoing BPT initiative. In
2005, we used $3.5 billion, primarily
reﬂecting capital spending of $1.7 bil-
lion, acquisitions of $1.1 billion,
primarily the $750 million acquisition of
General Mills’ minority interest in Snack
Ventures Europe, and net purchases of

Source of Cash

Use of Cash

short-term investments of $1.0 billion.
These amounts were partially offset by
the proceeds from our sale of PBG stock
of $214 million.

In the ﬁrst quarter of 2007, we com-

pleted our acquisition of Naked Juice
Company which was funded with exist-
ing domestic cash. This acquisition will
be included in the ﬁrst quarter of 2007
as an investing activity in our
Condensed Consolidated Statement of
Cash Flows.

We anticipate net capital spending of
approximately $2.6 billion in 2007, which
is expected to be within our net capital
spending target of approximately 5%
to 7% of net revenue in each of the
next few years. Planned capital spend-
ing in 2007 includes increased
investments at PI, particularly in the
developing and emerging markets, and
additional investments in manufactur-
ing capacity to support our North
American Gatorade business as well as
other non-carbonated beverage busi-
nesses. New capital projects are
evaluated on a case-by-case basis and
must meet certain payback and internal
rate of return targets.

Financing Activities
In 2006, we used $6.0 billion for our
ﬁnancing activities, primarily reﬂecting
the return of operating cash ﬂow to our

shareholders through common share
repurchases of $3.0 billion and dividend
payments of $1.9 billion. Net repay-
ments of short-term borrowings of
$2.3 billion were partially offset by stock
option proceeds of $1.2 billion. In 2005,
we used $1.9 billion for our ﬁnancing
activities, primarily reﬂecting share
repurchases of $3.0 billion and dividend
payments of $1.6 billion, partially offset
by net proceeds from short-term bor-
rowings of $1.8 billion and stock option
proceeds of $1.1 billion.

On May 3, 2006, our Board of
Directors authorized and publicly
announced our new $8.5 billion repur-
chase program, which expires on June
30, 2009. Since inception of the new
program, we have repurchased $1.1 bil-
lion of shares, leaving $7.4 billion of
remaining authorization. We have his-
torically repurchased signiﬁcantly more
shares each year than we have issued
under our stock-based compensation
plans, with average net annual repur-
chases of 1.4% of outstanding shares
for the last ﬁve years. We target an
annual dividend payout of approxi-
mately 45% of prior year’s net income
from continuing operations. Annually,
we review our capital structure with our
Board, including our dividend policy
and share repurchase activity.

267419_L01_P27_81.v2.qxd 2/28/07 8:19 PM Page 53

2005 Cash Utilization

2004 Cash Utilization

Other, net
$70

Short-term borrowings
$1,848

Cash proceeds
from sale of PBG stock
$214
Stock option exercises
$1,099

Operating activities
$5,852

Other, net
$69

Stock option exercises
$965

Short-term borrowings
$1,112

Long-term debt
$152

Acquisitions
$1,095

Dividends
$1,642

Short-term investments
$991

Capital spending
$1,736

Operating activities
$5,054

Share repurchases
$3,031

Short-term
investments
$969

Dividends
$1,329

Capital spending
$1,387

Share repurchases
$3,055

Source of Cash

Use of Cash

Source of Cash

Use of Cash

2006

2005

2004

Net cash provided by operating activities

Capital spending
Sales of property, plant and equipment

Management operating cash ﬂow

$ 6,084
(2,068)
49
$ 4,065

$ 5,852
(1,736)
88
$ 4,204

$ 5,054
(1,387)
38
$ 3,705

Management Operating Cash Flow
We focus on management operating
cash ﬂow as a key element in achieving
maximum shareholder value, and it is
the primary measure we use to monitor
cash ﬂow performance. However, it is
not a measure provided by accounting
principles generally accepted in the U.S.
Since net capital spending is essential to
our product innovation initiatives and
maintaining our operational capabili-
ties, we believe that it is a recurring and
necessary use of cash. As such, we
believe investors should also consider
net capital spending when evaluating
our cash from operating activities. The
table above reconciles the net cash pro-
vided by operating activities as
reﬂected in our Consolidated Statement
of Cash Flows to our management oper-
ating cash ﬂow. Management
operating cash ﬂow was used primarily
to repurchase shares and pay dividends.
We expect to continue to return
approximately all of our management
operating cash ﬂow to our shareholders

through dividends and share
repurchases. However, see “Our
Business Risks” for certain factors that
may impact our operating cash ﬂows.

Credit Ratings
Our debt ratings of Aa3 from Moody’s
and A+ from Standard & Poor’s
contribute to our ability to access global
capital markets. We have maintained
strong investment grade ratings for
over a decade. Each rating is considered
strong investment grade and is in the
ﬁrst quartile of their respective ranking
systems. These ratings also reﬂect the
impact of our anchor bottlers’ cash
ﬂows and debt.

Credit Facilities and Long-Term
Contractual Commitments
See Note 9 for a description of our
credit facilities and long-term contrac-
tual commitments.

Off-Balance-Sheet Arrangements
It is not our business practice to enter
into off-balance-sheet arrangements,
other than in the normal course of
business, nor is it our policy to issue
guarantees to our bottlers, non-
controlled affiliates or third parties.
However, certain guarantees were nec-
essary to facilitate the separation of our
bottling and restaurant operations
from us. At year-end 2006, we believe it
is remote that these guarantees would
require any cash payment. We do not
enter into off-balance-sheet trans-
actions speciﬁcally structured to provide
income or tax beneﬁts or to avoid
recognizing or disclosing assets or
liabilities. See Note 9 for a description
of our off-balance-sheet arrangements.

267419_L01_P27_81.v2.qxd 2/28/07 4:08 PM Page 54

Consolidated Statement of Income

PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004

(in millions except per share amounts)

2006

2005

2004

Net Revenue..................................................................................................................

$35,137

$32,562

$29,261

Cost of sales...................................................................................................................
Selling, general and administrative expenses .............................................................
Amortization of intangible assets................................................................................
Restructuring and impairment charges .......................................................................

Operating Proﬁt............................................................................................................

Bottling equity income .................................................................................................
Interest expense ............................................................................................................
Interest income .............................................................................................................

Income from Continuing Operations before Income Taxes .......................................

Provision for Income Taxes ..........................................................................................

Income from Continuing Operations ..........................................................................

Tax Beneﬁt from Discontinued Operations ................................................................

15,762
12,774
162
–

6,439

616
(239)
173

6,989

1,347

5,642

–

14,176
12,314
150
–

5,922

557
(256)
159

6,382

2,304

4,078

–

12,674
11,031
147
150

5,259

380
(167)
74

5,546

1,372

4,174

Net Income ....................................................................................................................

$ 5,642

$ 4,078

$ 4,212

Net Income per Common Share — Basic

Continuing operations .............................................................................................
Discontinued operations..........................................................................................

Total ..........................................................................................................................

Net Income per Common Share — Diluted

Total ..........................................................................................................................

$3.42
–

$3.42

$3.34
–

$3.34

$2.43
–

$2.43

$2.39
–

$2.39

$2.45
0.02

$2.47

$2.41
0.02

$2.44*

* Based on unrounded amounts.
See accompanying notes to consolidated ﬁnancial statements.

Net Revenue

Operating Proﬁt

$32,562

$35,137

$29,261

$5,922

$6,439

$5,259

2004

2005

2006

2004

2005

2006

Income from Continuing Operations

Net Income per Common Share — Continuing Operations

$5,642

$3.34

$4,174

$4,078

$2.41

$2.39

2004

2005

2006

2004

2005

2006

267419_L01_P27_81.v4.qxd 3/6/07 9:18 AM Page 55

Consolidated Statement of Cash Flows

PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004
(in millions)

2006

2005

2004

Operating Activities
Net income ....................................................................................................................
Depreciation and amortization....................................................................................
Stock-based compensation expense ............................................................................
Excess tax beneﬁts from share-based payment arrangements ..................................
Restructuring and impairment charges .......................................................................
Cash payments for merger-related costs and restructuring charges .........................
Tax beneﬁt from discontinued operations..................................................................
Pension and retiree medical plan contributions .........................................................
Pension and retiree medical plan expenses ................................................................
Bottling equity income, net of dividends....................................................................
Deferred income taxes and other tax charges and credits.........................................
Other non-cash charges and credits, net.....................................................................
Change in accounts and notes receivable ...................................................................
Change in inventories...................................................................................................
Change in prepaid expenses and other current assets ...............................................
Change in accounts payable and other current liabilities..........................................
Change in income taxes payable .................................................................................
Other, net .....................................................................................................................
Net Cash Provided by Operating Activities ................................................................
Investing Activities
Snack Ventures Europe (SVE) minority interest acquisition .......................................
Capital spending ...........................................................................................................
Sales of property, plant and equipment......................................................................
Investment in ﬁnance assets.........................................................................................
Other acquisitions and investments in noncontrolled affiliates ................................
Cash proceeds from sale of PBG stock .........................................................................
Divestitures....................................................................................................................
Short-term investments, by original maturity

More than three months — purchases ...................................................................
More than three months — maturities...................................................................
Three months or less, net.........................................................................................
Net Cash Used for Investing Activities........................................................................
Financing Activities
Proceeds from issuances of long-term debt ................................................................
Payments of long-term debt ........................................................................................
Short-term borrowings, by original maturity

More than three months — proceeds.....................................................................
More than three months — payments....................................................................
Three months or less, net.........................................................................................
Cash dividends paid ......................................................................................................
Share repurchases — common .....................................................................................
Share repurchases — preferred....................................................................................
Proceeds from exercises of stock options ....................................................................
Excess tax beneﬁts from share-based payment arrangements ..................................
Net Cash Used for Financing Activities .......................................................................
Effect of exchange rate changes on cash and cash equivalents ................................
Net (Decrease)/Increase in Cash and Cash Equivalents..............................................
Cash and Cash Equivalents, Beginning of Year ..........................................................
Cash and Cash Equivalents, End of Year .....................................................................
See accompanying notes to consolidated ﬁnancial statements.

$ 5,642
1,406
270
(134)
–
–
–
(131)
544
(479)
(510)
32
(330)
(186)
(37)
223
(295)
69
6,084

–
(2,068)
49
(25)
(522)
318
37

(29)
25
2,021
(194)

51
(157)

185
(358)
(2,168)
(1,854)
(3,000)
(10)
1,194
134
(5,983)
28
(65)
1,716
$ 1,651

$ 4,078
1,308
311
–
–
(22)
–
(877)
464
(411)
440
145
(272)
(132)
(56)
188
609
79
5,852

(750)
(1,736)
88
–
(345)
214
3

(83)
84
(992)
(3,517)

25
(177)

332
(85)
1,601
(1,642)
(3,012)
(19)
1,099
–
(1,878)
(21)
436
1,280
$ 1,716

$ 4,212
1,264
368
–
150
(92)
(38)
(534)
395
(297)
(203)
166
(130)
(100)
(31)
216
(268)
(24)
5,054

–
(1,387)
38
–
(64)
–
52

(44)
38
(963)
(2,330)

504
(512)

153
(160)
1,119
(1,329)
(3,028)
(27)
965
–
(2,315)
51
460
820
$ 1,280

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 56

Consolidated Balance Sheet

PepsiCo, Inc. and Subsidiaries
December 30, 2006 and December 31, 2005

(in millions except per share amounts)

ASSETS

Current Assets

2006

2005

Cash and cash equivalents .................................................................................................................

$ 1,651

$ 1,716

Short-term investments ......................................................................................................................

Accounts and notes receivable, net...................................................................................................

Inventories ..........................................................................................................................................

Prepaid expenses and other current assets .......................................................................................

Total Current Assets.......................................................................................................................

Property, Plant and Equipment, net..................................................................................................

Amortizable Intangible Assets, net...................................................................................................

Goodwill ..............................................................................................................................................

Other nonamortizable intangible assets...........................................................................................

Nonamortizable Intangible Assets ...............................................................................................

Investments in Noncontrolled Affiliates...........................................................................................

Other Assets .......................................................................................................................................

1,171

3,725

1,926

657

9,130

9,687

637

4,594

1,212

5,806

3,690

980

3,166

3,261

1,693

618

10,454

8,681

530

4,088

1,086

5,174

3,485

3,403

Total Assets................................................................................................................................

$29,930

$31,727

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Short-term obligations .......................................................................................................................

274

$ 2,889

Accounts payable and other current liabilities .................................................................................

Income taxes payable .........................................................................................................................

Total Current Liabilities .................................................................................................................

Long-Term Debt Obligations .............................................................................................................

Other Liabilities ..................................................................................................................................

Deferred Income Taxes.......................................................................................................................

6,496

6,860

2,550

4,624

528

5,971

546

9,406

2,313

4,323

1,434

Total Liabilities ...............................................................................................................................

14,562

17,476

Commitments and Contingencies

Preferred Stock, no par value ............................................................................................................

Repurchased Preferred Stock.............................................................................................................

(120)

(110)

Common Shareholders’ Equity

Common stock, par value 1 2/3¢ per share (issued 1,782 shares) ....................................................

Capital in excess of par value.............................................................................................................

Retained earnings...............................................................................................................................

Accumulated other comprehensive loss............................................................................................

Less: repurchased common stock, at cost (144 and 126 shares, respectively) .................................

Total Common Shareholders’ Equity ............................................................................................

584

24,837

(2,246)

23,205

(7,758)

15,447

614

21,116

(1,053)

20,707

(6,387)

14,320

Total Liabilities and Shareholders’ Equity ...............................................................................

$29,930

$31,727

See accompanying notes to consolidated ﬁnancial statements.

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 57

Consolidated Statement of
Common Shareholders’ Equity

PepsiCo, Inc. and Subsidiaries
Fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004

(in millions)

Shares Amount

Common Stock ................................................................. 1,782
Capital in Excess of Par Value

1,782

2006

2005

2004

Balance, beginning of year .........................................

Stock-based compensation expense...........................

Stock option exercises(a) ..............................................

Balance, end of year....................................................

Retained Earnings

Balance, beginning of year .........................................

Net income...................................................................

Cash dividends declared — common..........................

Cash dividends declared — preferred ........................

Cash dividends declared — RSUs ................................

614

270

(300)

584

21,116

5,642

(1,912)

(1)

(8)

Balance, end of year....................................................

24,837

Accumulated Other Comprehensive Loss

Balance, beginning of year .........................................

Currency translation adjustment ................................

Cash ﬂow hedges, net of tax:

Net derivative (losses)/gains ...................................

Reclassiﬁcation of (gains)/losses to net income ....

Unamortized pension and retiree medical, net of tax..

Minimum pension liability adjustment, net of tax....

Unrealized gain on securities, net of tax ...................

Other ............................................................................

(1,053)

465

(18)

(5)

(1,782)

138

–

Balance, end of year....................................................

(2,246)

Repurchased Common Stock

Balance, beginning of year .........................................

(126)

Share repurchases........................................................

(49)

Stock option exercises .................................................

Other ............................................................................

–

(6,387)

(3,000)

1,619

(103)

(54)

–

618

311

(315)

614

18,730

4,078

(1,684)

(3)

(5)

21,116

(886)

(251)

(8)

–

(2)

(1,053)

(4,920)

(2,995)

1,523

548

368

(298)

618

15,961

4,212

(1,438)

(3)

(2)

18,730

(1,267)

401

(16)

–

(19)

–

(886)

(77)

(58)

–

(3,376)

(2,994)

1,434

Balance, end of year....................................................
Total Common Shareholders’ Equity ..............................

Comprehensive Income

Net income...................................................................

Currency translation adjustment ................................

Cash ﬂow hedges, net of tax ......................................

Minimum pension liability adjustment, net of tax.......

Unrealized gain on securities, net of tax ...................

Other ............................................................................
Total Comprehensive Income ..........................................

(144)

(7,758)

(126)

(6,387)

(103)

(4,920)

$15,447

2006

$5,642

465

(23)

–

$14,320

2005

$4,078

(251)

(2)

$13,572

2004

$4,212

401

(7)

(19)

–

$6,098

$3,911

$4,593

(a) Includes total tax beneﬁts of $130 million in 2006, $125 million in 2005 and $183 million in 2004.
See accompanying notes to consolidated ﬁnancial statements.

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 58

Notes to Consolidated Financial Statements

Note 1 — Basis of Presentation and Our Divisions

Basis of Presentation
Our ﬁnancial statements include the
consolidated accounts of PepsiCo, Inc.
and the affiliates that we control. In
addition, we include our share of the
results of certain other affiliates based
on our economic ownership interest. We
do not control these other affiliates, as
our ownership in these other affiliates is
generally less than 50%. Our share of
the net income of noncontrolled bot-
tling affiliates is reported in our income
statement as bottling equity income.
Bottling equity income also includes any
changes in our ownership interests of
these affiliates. Bottling equity income
includes $186 million and $126 million
of pre-tax gains on our sales of PBG
stock in 2006 and 2005, respectively. See
Note 8 for additional information on
our signiﬁcant noncontrolled bottling
affiliates. Intercompany balances and
transactions are eliminated. In 2005, we
had an additional week of results (53rd
week). Our ﬁscal year ends on the last
Saturday of each December, resulting in
an additional week of results every ﬁve
or six years.

Our Divisions

We manufacture or use contract manu-
facturers, market and sell a variety of
salty, sweet and grain-based snacks, car-
bonated and non-carbonated
beverages, and foods through our
North American and international busi-
ness divisions. Our North American
divisions include the United States and
Canada. The accounting policies for the
divisions are the same as those
described in Note 2, except for certain
allocation methodologies for stock-
based compensation expense and
pension and retiree medical expenses,
as described in the unaudited informa-
tion in “Our Critical Accounting
Policies.” Additionally, beginning in the

In connection with our ongoing BPT

initiative, we aligned certain account-
ing policies across our divisions in 2005.
We conformed our methodology for
calculating our bad debt reserves and
modiﬁed our policy for recognizing rev-
enue for products shipped to customers
by third-party carriers. Additionally, we
conformed our method of accounting
for certain costs, primarily warehouse
and freight. These changes reduced our
net revenue by $36 million and our
operating proﬁt by $60 million in 2005.
Raw materials, direct labor and plant

overhead, as well as purchasing and
receiving costs, costs directly related to
production planning, inspection costs
and raw material handling facilities, are
included in cost of sales. The costs of
moving, storing and delivering ﬁnished
product are included in selling, general
and administrative expenses.

The preparation of our consolidated
ﬁnancial statements in conformity with
generally accepted accounting princi-
ples requires us to make estimates and
assumptions that affect reported

amounts of assets, liabilities, revenues,
expenses and disclosure of contingent
assets and liabilities. Estimates are used
in determining, among other items, sales
incentives accruals, tax reserves, stock-
based compensation, pension and
retiree medical accruals, useful lives for
intangible assets, and future cash ﬂows
associated with impairment testing for
perpetual brands, goodwill and other
long-lived assets. Actual results could
differ from these estimates.

See “Our Divisions” below and for
additional unaudited information on
items affecting the comparability of our
consolidated results, see “Items
Affecting Comparability” in
Management’s Discussion and Analysis.
Tabular dollars are in millions, except

per share amounts. All per share
amounts reﬂect common per share
amounts, assume dilution unless noted,
and are based on unrounded amounts.
Certain reclassiﬁcations were made to
prior years’ amounts to conform to the
2006 presentation.

fourth quarter of 2005, we began cen-
trally managing commodity derivatives
on behalf of our divisions. Certain of
the commodity derivatives, primarily
those related to the purchase of energy
for use by our divisions, do not qualify
for hedge accounting treatment. These
derivatives hedge underlying commod-
ity price risk and were not entered into
for speculative purposes. Such deriva-
tives are marked to market with the
resulting gains and losses recognized in
corporate unallocated expenses. These
gains and losses are subsequently
reﬂected in division results when the
divisions take delivery of the underlying
commodity. Therefore, division results

reﬂect the contract purchase price of
the energy or other commodities.

Division results are based on how our

President and Chief Executive Officer
assesses the performance of and reallo-
cates resources to our divisions. Division
results exclude certain Corporate-initi-
ated restructuring and impairment
charges. For additional unaudited infor-
mation on our divisions, see “Our
Operations” in Management’s
Discussion and Analysis.

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 59

Frito-Lay
North America
(FLNA)

PepsiCo
Beverages
North America
(PBNA)

PepsiCo
International
(PI)

Quaker Foods
North America
(QFNA)

FLNA
PBNA
PI
QFNA
Total division
Corporate

Restructuring and impairment charges
Total

Net Revenue

Operating Proﬁt

2006

2005

2004

2006

2005

2004

$10,844
9,565
12,959
1,769
35,137
–
35,137
–
$35,137

$10,322
9,146
11,376
1,718
32,562
–
32,562
–
$32,562

$ 9,560
8,313
9,862
1,526
29,261
–
29,261
–
$29,261

$2,615
2,055
1,948
554
7,172
(733)
6,439
–
$6,439

$2,529
2,037
1,607
537
6,710
(788)
5,922
–
$5,922

$2,389
1,911
1,323
475
6,098
(689)
5,409
(150)
$5,259

Net Revenue

QFNA
5%

Division Operating Proﬁt

PI
37%

FLNA
31%

PBNA
27%

QFNA
8%

PI
27%

FLNA
36%

PBNA
29%

Corporate
Corporate includes costs of our corpo-
rate headquarters, centrally-managed
initiatives, such as our BPT initiative in
North America, unallocated insurance
and beneﬁt programs, foreign
exchange transaction gains and losses,
and certain commodity derivative gains
and losses, as well as proﬁt-in-inventory
elimination adjustments for our non-
controlled bottling affiliates and certain
other items.

Restructuring and Impairment
Charges — See Note 3.

Other Division Information

FLNA
PBNA
PI
QFNA
Total division
Corporate (a)
Investments in bottling affiliates

Total Assets

Capital Spending

2006

2005

2004

2006

2005

2004

$ 5,969
6,567
11,274
1,003
24,813
1,739
3,378
$29,930

$ 5,948
6,316
9,983
989
23,236
5,331
3,160
$31,727

$ 5,476
6,048
8,921
978
21,423
3,569
2,995
$27,987

$ 499
492
835
31
1,857
211
–
$2,068

$ 512
320
667
31
1,530
206
–
$1,736

$ 469
265
537
33
1,304
83
–
$1,387

(a) Corporate assets consist principally of cash and cash equivalents, short-term investments, and property, plant and equipment.

267419_L01_P27_81.v9.qxd 3/8/07 11:17 AM Page 60

Total Assets

Capital Spending

Net Revenue

Other
17%

FLNA
20%

QFNA
3%

QFNA
2%

Corporate
10%

PI
38%

PBNA
22%

PI
40%

FLNA
24%

PBNA
24%

Other
22%

Canada
5%

United States
59%

United
Kingdom
5%

Mexico
9%

Amortization of
Intangible Assets

Depreciation and
Other Amortization

Long-Lived Assets

2006

2005

2004

2006

2005

2004

FLNA
PBNA
PI
QFNA
Total division
Corporate

9
77
76
–
162
–
$162

3
76
71
–
150
–
$150

$ 3
75
68
1
147
–
$147

$ 432 $ 419 $ 420
258
382
36
1,096
21
$1,244 $1,158 $1,117

264
420
34
1,137
21

282
478
33
1,225
19

Canada
3%

Other
24%

United
Kingdom
10%

Mexico
5%

United States
58%

Net Revenue(a)

Long-Lived Assets(b)

2006

2005

2004

2006

2005

2004

U.S.
Mexico
United Kingdom
Canada
All other countries

$20,788 $19,937 $18,329
2,724
1,692
1,309
5,207
$35,137 $32,562 $29,261

3,095
1,821
1,509
6,200

3,228
1,839
1,702
7,580

$11,515 $10,723 $10,212
878
1,896
548
3,339
$19,820 $17,870 $16,873

996
1,995
589
4,725

902
1,715
582
3,948

(a) Represents net revenue from businesses operating in these countries.
(b) Long-lived assets represent property, plant and equipment, nonamortizable intangible assets,

amortizable intangible assets, and investments in noncontrolled affiliates. These assets are reported
in the country where they are primarily used.

Note 2 — Our Significant Accounting Policies

Revenue Recognition
We recognize revenue upon shipment
or delivery to our customers based on
written sales terms that do not allow
for a right of return. However, our pol-
icy for DSD and chilled products is to
remove and replace damaged and out-
of-date products from store shelves to
ensure that our consumers receive the
product quality and freshness that they
expect. Similarly, our policy for ware-

house-distributed products is to replace
damaged and out-of-date products.
Based on our historical experience with
this practice, we have reserved for
anticipated damaged and out-of-date
products. For additional unaudited
information on our revenue recognition
and related policies, including our pol-
icy on bad debts, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis. We are exposed

to concentration of credit risk by our
customers, Wal-Mart and PBG. In 2006,
Wal-Mart represented approximately
9% of our total net revenue, including
concentrate sales to our bottlers which
are used in ﬁnished goods sold by them
to Wal-Mart; and PBG represented
approximately 10%. We have
not experienced credit issues with
these customers.

267419_L01_P27_81.v4.qxd 3/6/07 9:19 AM Page 61

Sales Incentives and Other
Marketplace Spending
We offer sales incentives and discounts
through various programs to our cus-
tomers and consumers. Sales incentives
and discounts are accounted for as a
reduction of revenue and totaled
$10.1 billion in 2006, $8.9 billion in 2005
and $7.8 billion in 2004. While most of
these incentive arrangements have
terms of no more than one year, certain
arrangements, such as fountain pouring
rights, extend beyond one year. Costs
incurred to obtain these arrangements
are recognized over no longer than the
contract period and the remaining bal-
ances of $297 million at December 30,
2006 and $321 million at December 31,
2005 are included in current assets and
other assets on our balance sheet. For
additional unaudited information on
our sales incentives, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.

Other marketplace spending includes

the costs of advertising and other mar-
keting activities and is reported as
selling, general and administrative
expenses. Advertising expenses were
$1.7 billion in 2006, $1.8 billion in 2005
and $1.7 billion in 2004. Deferred
advertising costs are not expensed until
the year ﬁrst used and consist of:
• media and personal service

prepayments,

• promotional materials in inventory, and
• production costs of future media

advertising.
Deferred advertising costs of

$171 million and $202 million at year-
end 2006 and 2005, respectively, are
classiﬁed as prepaid expenses on our
balance sheet.

Distribution Costs
Distribution costs, including the costs of
shipping and handling activities, are
reported as selling, general and adminis-
trative expenses. Shipping and handling
expenses were $4.6 billion in 2006,
$4.1 billion in 2005 and $3.9 billion
in 2004.

Cash Equivalents
Cash equivalents are investments with
original maturities of three months or
less which we do not intend to rollover
beyond three months.

Software Costs
We capitalize certain computer
software and software development
costs incurred in connection with devel-
oping or obtaining computer software
for internal use. Capitalized software
costs are included in property, plant
and equipment on our balance sheet
and amortized on a straight-line
basis when placed into service over the
estimated useful lives of the software,
which approximate ﬁve to seven
years. Net capitalized software and
development costs were $537 million
at December 30, 2006 and $327 million
at December 31, 2005.

Commitments and Contingencies
We are subject to various claims and
contingencies related to lawsuits, taxes
and environmental matters, as well as
commitments under contractual and
other commercial obligations. We rec-
ognize liabilities for contingencies and
commitments when a loss is probable
and estimable. For additional informa-
tion on our commitments, see Note 9.

Research and Development
We engage in a variety of research and
development activities. These activities
principally involve the development of
new products, improvement in the
quality of existing products, improve-
ment and modernization of production
processes, and the development and
implementation of new technologies to
enhance the quality and value of both
current and proposed product lines.
Research and development costs were
$344 million in 2006 and $340 million in
2005 and are reported as selling, gen-
eral and administrative expenses.

Other Signiﬁcant Accounting Policies
Our other signiﬁcant accounting poli-
cies are disclosed as follows:
• Property, Plant and Equipment and
Intangible Assets — Note 4 and, for
additional unaudited information on
brands and goodwill, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.

• Income Taxes — Note 5 and, for addi-
tional unaudited information, see
“Our Critical Accounting Policies” in
Management’s Discussion and Analysis.

• Stock-Based Compensation Expense —
Note 6 and, for additional unaudited
information, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.

• Pension, Retiree Medical and Savings
Plans — Note 7 and, for additional
unaudited information, see “Our
Critical Accounting Policies” in
Management’s Discussion and Analysis.
• Risk Management — Note 10 and, for
additional unaudited information, see
“Our Business Risks” in Management’s
Discussion and Analysis.

Recent Accounting Pronouncements
As further discussed in Note 6, we
adopted SFAS 123R on January 1, 2006.
As further discussed in Note 7, we
adopted SFAS 158 on December 30, 2006.
In September 2006, the SEC issued
SAB 108 to address diversity in practice
in quantifying ﬁnancial statement mis-
statements. SAB 108 requires that we
quantify misstatements based on their
impact on each of our ﬁnancial state-
ments and related disclosures. On
December 30, 2006, we adopted SAB
108. Our adoption of SAB 108 did not
impact our ﬁnancial statements.

In July 2006, the FASB issued FIN 48
which clariﬁes the accounting for uncer-
tainty in tax positions. FIN 48 requires
that we recognize in our ﬁnancial state-
ments, the impact of a tax position, if
that position is more likely than not of
being sustained on audit, based on the
technical merits of the position. The
provisions of FIN 48 are effective as of
the beginning of our 2007 ﬁscal year,
with the cumulative effect of the
change in accounting principle
recorded as an adjustment to opening
retained earnings. We do not expect
our adoption of FIN 48 to materially
impact our ﬁnancial statements.

In September 2006, the FASB issued

SFAS 157 which deﬁnes fair value,
establishes a framework for measuring
fair value, and expands disclosures
about fair value measurements. The
provisions of SFAS 157 are effective
as of the beginning of our 2008 ﬁscal
year. We are currently evaluating the
impact of adopting SFAS 157 on our
ﬁnancial statements.

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 62

Note 3 — Restructuring and Impairment Charges

2006 Restructuring and
Impairment Charges
In 2006, we incurred a charge of $67 mil-
lion ($43 million after-tax or $0.03 per
share) in conjunction with consolidating
the manufacturing network at FLNA by
closing two plants in the U.S., and ratio-
nalizing other assets, to increase
manufacturing productivity and supply
chain efficiencies. The charge was com-
prised of $43 million of asset
impairments, $14 million of severance
and other employee costs and $10 million
of other costs. Employee-related costs
primarily reﬂect the termination costs for
approximately 380 employees. We expect
all of the cash payments related to this
charge to be paid by the end of 2007.

2005 Restructuring Charges
In 2005, we incurred a charge of $83 mil-
lion ($55 million after-tax or $0.03 per
share) in conjunction with actions taken
to reduce costs in our operations, princi-
pally through headcount reductions. Of
this charge, $34 million related to FLNA,
$21 million to PBNA, $16 million to PI
and $12 million to Corporate. Most of
this charge related to the termination
of approximately 700 employees. As of
December 30, 2006, all terminations
had occurred and substantially no
accrual remains.

2004 Restructuring and
Impairment Charges
In 2004, we incurred a charge of $150
million ($96 million after-tax or $0.06 per

share) in conjunction with the consolida-
tion of FLNA’s manufacturing network as
part of its ongoing productivity
program. Of this charge, $93 million
related to asset impairments, primarily
reﬂecting the closure of four U.S. plants.
Production from these plants was rede-
ployed to other FLNA facilities in the U.S.
The remaining $57 million included
employee-related costs of $29 million,
contract termination costs of $8 million
and other exit costs of $20 million.
Employee-related costs primarily reﬂect
the termination costs for approximately
700 employees. As of December 30,
2006, all terminations had occurred and
substantially no accrual remains.

Note 4 — Property, Plant and Equipment and Intangible Assets

Average Useful Life

2006

2005

2004

Property, plant and equipment, net
Land and improvements
Buildings and improvements
Machinery and equipment, including ﬂeet and software
Construction in progress

10 – 30 yrs.
20 – 44
5 – 15

Accumulated depreciation

Depreciation expense
Amortizable intangible assets, net
Brands
Other identiﬁable intangibles

Accumulated amortization

Amortization expense

5 – 40
3 – 15

756
4,095
12,768
1,439
19,058
(9,371)
$ 9,687
$1,182

$1,288
290
1,578
(941)
$ 637
$162

685
3,736
11,658
1,066
17,145
(8,464)
$ 8,681
$1,103

$1,054
257
1,311
(781)
$ 530
$150

$1,062

$147

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 63

Depreciation and amortization are
recognized on a straight-line basis over
an asset’s estimated useful life. Land is
not depreciated and construction in
progress is not depreciated until ready
for service. Amortization of intangible
assets for each of the next ﬁve years,
based on average 2006 foreign
exchange rates, is expected to be
$49 million in 2007, $49 million in 2008,
$47 million in 2009, $46 million in 2010
and $44 million in 2011.

Depreciable and amortizable assets

are only evaluated for impairment
upon a signiﬁcant change in the operat-
ing or macroeconomic environment. In
these circumstances, if an evaluation of
the undiscounted cash ﬂows indicates
impairment, the asset is written down
to its estimated fair value, which is
based on discounted future cash ﬂows.

Useful lives are periodically evaluated
to determine whether events or circum-
stances have occurred which indicate
the need for revision. For additional
unaudited information on our amortiz-
able brand policies, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.

Nonamortizable Intangible Assets
Perpetual brands and goodwill are
assessed for impairment at least annu-
ally. If the carrying amount of a
perpetual brand exceeds its fair value,
as determined by its discounted cash
ﬂows, an impairment loss is recognized
in an amount equal to that excess.
Goodwill is evaluated using a two-step
impairment test at the reporting unit
level. A reporting unit can be a division
or business within a division. The ﬁrst
step compares the book value of a

reporting unit, including goodwill, with
its fair value, as determined by its dis-
counted cash ﬂows. If the book value of
a reporting unit exceeds its fair value,
we complete the second step to deter-
mine the amount of goodwill
impairment loss that we should record.
In the second step, we determine an
implied fair value of the reporting unit’s
goodwill by allocating the fair value of
the reporting unit to all of the assets
and liabilities other than goodwill
(including any unrecognized intangible
assets). The amount of impairment loss
is equal to the excess of the book value
of the goodwill over the implied fair
value of that goodwill. No impairment
charges resulted from the required
impairment evaluations. The change in
the book value of nonamortizable
intangible assets is as follows:

Balance,

Beginning 2005 Acquisitions

Translation
Balance,
and Other End of 2005

Acquisitions

Balance,
Translation
and Other End of 2006

Frito-Lay North America
Goodwill
PepsiCo Beverages
North America

Goodwill
Brands

PepsiCo International
Goodwill
Brands

Quaker Foods

North America

Goodwill
Corporate
Pension intangible
Total goodwill
Total brands
Total pension intangible

$ 138

–

$ 145

$139

–

$ 284

2,161
59
2,220

1,435
869
2,304

–
–
–

278
263
541

3
–
3

(109)
(106)
(215)

2,164
59
2,223

1,604
1,026
2,630

39
–
39

183
–
183

–
–
–

145
127
272

2,203
59
2,262

1,932
1,153
3,085

175

–

175

–

175

5
3,909
928
5
$4,842

–
278
263
–
$541

(4)
(99)
(106)
(4)
$(209)

1
4,088
1,085
1
$5,174

–
361
–
–
$361

(1)
145
127
(1)
$271

–
4,594
1,212
–
$5,806

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 64

Note 5 — Income Taxes

Income before income taxes — continuing operations
U.S. .............................................................................................................................
Foreign .......................................................................................................................

Provision for income taxes — continuing operations
Current: U.S. Federal ..............................................................................................
Foreign .....................................................................................................
State .........................................................................................................

Deferred: U.S. Federal ..............................................................................................
Foreign .....................................................................................................
State .........................................................................................................

Tax rate reconciliation — continuing operations
U.S. Federal statutory tax rate ..................................................................................
State income tax, net of U.S. Federal tax beneﬁt....................................................
Taxes on AJCA repatriation .......................................................................................
Lower taxes on foreign results..................................................................................
Settlement of prior years’ audit................................................................................
2006 Tax Adjustments................................................................................................
Other, net ...................................................................................................................
Annual tax rate ..........................................................................................................
Deferred tax liabilities
Investments in noncontrolled affiliates....................................................................
Property, plant and equipment.................................................................................
Pension beneﬁts.........................................................................................................
Intangible assets other than nondeductible goodwill ............................................
Zero coupon notes.....................................................................................................
Other ..........................................................................................................................
Gross deferred tax liabilities .....................................................................................
Deferred tax assets
Net carryforwards ......................................................................................................
Stock-based compensation........................................................................................
Retiree medical beneﬁts............................................................................................
Other employee-related beneﬁts .............................................................................
Pension beneﬁts.........................................................................................................
Other ..........................................................................................................................
Gross deferred tax assets...........................................................................................
Valuation allowances.................................................................................................
Deferred tax assets, net.............................................................................................
Net deferred tax liabilities ........................................................................................
Deferred taxes included within:
Assets:

2006

2005

2004

$2,946
2,600
$5,546

$1,030
256
69
1,355
11
5
1
17
$1,372

35.0%
0.8
–
(5.4)
(4.8)
–
(0.9)
24.7%

$ 3,844
3,145
$ 6,989

$ 776
569
56
1,401
(31)
(16)
(7)
(54)
$ 1,347

35.0%
0.5
–
(6.5)
–
(8.6)
(1.1)
19.3%

$ 1,103
784
–
169
27
221
2,304

667
443
541
342
38
592
2,623
(624)
1,999
$ 305

$3,175
3,207
$6,382

$1,638
426
118
2,182
137
(26)
11
122
$2,304

35.0%
1.4
7.0
(6.5)
–
–
(0.8)
36.1%

$ 993
772
863
135
35
169
2,967

608
426
400
342
–
520
2,296
(532)
1,764
$1,203

Prepaid expenses and other current assets...........................................................

$223

$231

Liabilities:

Deferred income taxes ...........................................................................................

$528

$1,434

Analysis of valuation allowances
Balance, beginning of year .......................................................................................
Provision/(beneﬁt) ..................................................................................................
Other additions/(deductions).................................................................................
Balance, end of year ..................................................................................................

$532
71
21
$624

$564
(28)
(4)
$532

$438
118
8
$564

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 65

For additional unaudited information
on our income tax policies, including
our reserves for income taxes, see “Our
Critical Accounting Policies” in
Management’s Discussion and Analysis.

Carryforwards, Credits and
Allowances
Operating loss carryforwards totaling
$6.1 billion at year-end 2006 are being
carried forward in a number of foreign
and state jurisdictions where we are
permitted to use tax operating losses
from prior periods to reduce future tax-
able income. These operating losses will
expire as follows: $0.2 billion in 2007,
$5.0 billion between 2008 and 2026 and
$0.9 billion may be carried forward
indeﬁnitely. In addition, certain tax
credits generated in prior periods of
approximately $33.9 million are avail-
able to reduce certain foreign tax
liabilities through 2011. We establish
valuation allowances for our deferred
tax assets when the amount of
expected future taxable income is not
likely to support the use of the deduc-
tion or credit.

Undistributed International Earnings
The AJCA created a one-time incentive
for U.S. corporations to repatriate
undistributed international earnings by
providing an 85% dividends received
deduction. In 2005, we repatriated
approximately $7.5 billion in earnings
previously considered indeﬁnitely rein-

Reserves
A number of years may elapse before a
particular matter, for which we have
established a reserve, is audited and
ﬁnally resolved. The number of years
with open tax audits varies depending
on the tax jurisdiction. In 2006, we rec-
ognized non-cash tax beneﬁts of
$602 million, substantially all of which
related to the IRS’s examination of our
consolidated income tax returns for the
years 1998 through 2002. The IRS issued
a Revenue Agent’s Report (RAR), and
we are in agreement with their conclu-
sion, except for one matter which we
continue to dispute. The agreed adjust-
ments relate to transfer pricing and
various other transactions, including
certain acquisitions, the public offering
of PBG, as well as the restructuring of
our international snack foods
operations during that audit period.
During 2004, we recognized $266 mil-
lion of tax beneﬁts related to the

favorable resolution of certain previ-
ously open tax issues. In addition, in
2004, we recognized a tax beneﬁt of
$38 million upon agreement with the
IRS on a previously open issue related to
our discontinued restaurant operations.
The IRS has initiated their audits of

our tax returns for the years 2003
through 2005. While it is often difficult
to predict the ﬁnal outcome or the tim-
ing of resolution of any particular tax
matter, we believe that our reserves
reﬂect the probable outcome of known
tax contingencies. We adjust these
reserves, as well as the related interest,
in light of changing facts and circum-
stances. Settlement of any particular
issue would usually require the use of
cash. Favorable resolution would be rec-
ognized as a reduction to our annual
tax rate in the year of resolution. Our
tax reserves, covering all federal, state
and foreign jurisdictions, are presented
on our balance sheet within other liabil-
ities (see Note 14), except for any
amounts relating to items we expect to
pay in the coming year which are
included in current income taxes
payable. For further unaudited infor-
mation on the impact of the resolution
of open tax issues, see “Other
Consolidated Results.”

As further discussed in Note 2, we
will adopt FIN 48 as of the beginning of
our 2007 ﬁscal year.

Note 6 — Stock–Based Compensation

Our stock-based compensation program
is a broad-based program designed to
attract and retain employees while also
aligning employees’ interests with the
interests of our shareholders. A majority
of our employees participate in our
stock-based compensation programs. In
addition, members of our Board of
Directors participate in our stock-based
compensation program in connection
with their service on our Board. Stock
options and RSUs are granted to
employees under the shareholder-
approved 2003 Long-Term Incentive
Plan (LTIP), our only active stock-based
plan. Stock-based compensation

expense was $270 million in 2006,
$311 million in 2005 and $368 million in
2004. Related income tax beneﬁts rec-
ognized in earnings were $80 million in
2006, $87 million in 2005 and $103 mil-
lion in 2004. Stock-based compensation
cost capitalized in connection with our
BPT initiative was $3 million in 2006,
$4 million in 2005 and none in 2004. At
year-end 2006, 36 million shares were
available for future stock-based com-
pensation grants. For additional
unaudited information on our stock-
based compensation program, see “Our
Critical Accounting Policies” in
Management’s Discussion and Analysis.

Method of Accounting and
Our Assumptions
We account for our employee stock
options, which include grants under our
executive program and broad-based
SharePower program, under the fair
value method of accounting using a
Black-Scholes valuation model to mea-
sure stock option expense at the date of
grant. All stock option grants have an
exercise price equal to the fair market
value of our common stock on the date
of grant and generally have a 10-year
term. The fair value of stock option
grants is amortized to expense over the
vesting period, generally three years.

267419_L01_P27_81.v4.qxd 3/6/07 9:20 AM Page 66

Executives who are awarded long-term
incentives based on their performance
are offered the choice of stock options or
RSUs. Executives who elect RSUs receive
one RSU for every four stock options that
would have otherwise been granted.
Senior officers do not have a choice and
are granted 50% stock options and 50%
RSUs. RSU expense is based on the fair
value of PepsiCo stock on the date of
grant and is amortized over the vesting
period, generally three years. Each RSU is

settled in a share of our stock after the
vesting period. Vesting of RSU awards for
senior officers is contingent upon the
achievement of pre-established perfor-
mance targets. There have been no
reductions to the exercise price of previ-
ously issued awards, and any repricing of
awards would require approval of our
shareholders.

On January 1, 2006, we adopted SFAS

123R under the modiﬁed prospective
method. Since we had previously

accounted for our stock-based compensa-
tion plans under the fair value provisions
of SFAS 123, our adoption did not signiﬁ-
cantly impact our ﬁnancial position or
our results of operations. Under SFAS
123R, actual tax beneﬁts recognized in
excess of tax beneﬁts previously estab-
lished upon grant are reported as a
ﬁnancing cash inﬂow. Prior to adoption,
such excess tax beneﬁts were reported as
an operating cash inﬂow.

Our weighted-average Black-Scholes fair value assumptions are as follows:

Expected life
Risk free interest rate
Expected volatility
Expected dividend yield

2006

6 yrs.
4.5%
18%
1.9%

2005

6 yrs.
3.8%
23%
1.8%

2004

6 yrs.
3.3%
26%
1.8%

A summary of our stock-based compensation activity for the year ended December 30, 2006 is presented below:

Our Stock Option Activity

Outstanding at January 1, 2006

Granted
Exercised
Forfeited/expired

Outstanding at December 30, 2006
Exercisable at December 30, 2006

Options (a)

Average

Price (b)

Average
Life
(years) (c)

Aggregate
Intrinsic

Value (d)

150,149
12,519
(31,056)
(3,863)
127,749
91,381

$42.03
57.72
38.61
49.06
$44.24
$41.02

5.46
4.42

$2,339,562
$1,967,843

(a) Options are in thousands and include options previously granted under Quaker plans. No additional options or shares may be granted under the Quaker plans.
(b) Weighted-average exercise price.
(c) Weighted-average contractual life remaining.
(d) In thousands.

Average
Intrinsic

RSUs (a)

Value (b)

Average
Life
(years) (c)

Aggregate
Intrinsic

Value (d)

5,669
2,992
(183)
(593)
7,885

$50.70
58.22
50.00
53.17
$53.38

1.38

$493,201

Our RSU Activity

Outstanding at January 1, 2006

Granted
Converted
Forfeited/expired

Outstanding at December 30, 2006

(a) RSUs are in thousands.
(b) Weighted-average intrinsic value at grant date.
(c) Weighted-average contractual life remaining.
(d) In thousands.

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 67

Other Stock-Based Compensation Data

2006

2005

2004

Stock Options
Weighted-average fair value of options granted
Total intrinsic value of options exercised(a)
RSUs
Total number of RSUs granted(a)
Weighted-average intrinsic value of RSUs granted
Total intrinsic value of RSUs converted(a)

(a) In thousands.

$12.81
$686,242

2,992
$58.22
$10,934

$13.45
$632,603

3,097
$53.83
$4,974

$12.04
$667,001

3,077
$47.28
$914

At December 30, 2006, there was $301 million of total unrecognized compensation cost related to nonvested share-based com-
pensation grants. This unrecognized compensation is expected to be recognized over a weighted-average period of 1.5 years.

Note 7 — Pension, Retiree Medical and Savings Plans

Our pension plans cover full-time
employees in the U.S. and certain inter-
national employees. Beneﬁts are
determined based on either years of
service or a combination of years of ser-
vice and earnings. U.S. and Canada
retirees are also eligible for medical and
life insurance beneﬁts (retiree medical)
if they meet age and service
requirements. Generally, our share of
retiree medical costs is capped at speci-
ﬁed dollar amounts, which vary based
upon years of service, with retirees con-
tributing the remainder of the costs.
We use a September 30 measurement
date and all plan assets and liabilities
are generally reported as of that date.

Other gains and losses resulting from

actual experience differing from our

assumptions and from changes in our
assumptions are also determined at
each measurement date. If this net
accumulated gain or loss exceeds 10%
of the greater of plan assets or liabili-
ties, a portion of the net gain or loss is
included in expense for the following
year. The cost or beneﬁt of plan
changes that increase or decrease
beneﬁts for prior employee service
(prior service cost/(credit)) is included in
earnings on a straight-line basis over
the average remaining service period of
those expected to beneﬁt, which is
approximately 11 years for pension
expense and approximately 13 years for
retiree medical.

On December 30, 2006, we adopted
SFAS 158 which requires that we recog-

nize the overfunded or underfunded
status of our Plans as an asset or liability
on our December 30, 2006 balance
sheet. Subsequent changes in the
funded status will be recognized
through comprehensive income in the
year in which they occur. SFAS 158 also
requires that, beginning in 2008, our
assumptions used to measure our
annual pension and retiree medical
expenses be determined as of the bal-
ance sheet date, and all plan assets and
liabilities be reported as of that date. In
accordance with SFAS 158, prior year
amounts have not been adjusted.

The following illustrates the incre-
mental effect of applying SFAS 158 on
individual line items on our balance
sheet as of December 30, 2006:

Before
Application
of SFAS 158

Adjustments

After
Application
of SFAS 158

Other nonamortizable intangible assets
Other assets
Total assets
Accounts payable and other current liabilities
Other liabilities
Deferred income taxes
Total liabilities
Accumulated other comprehensive loss
Total common shareholders’ equity

$1,229
$2,979
$31,946
$6,475
$4,127
$1,419
$14,935
$603
$17,090

$(17)
$(1,999)
$(2,016)
$21
$497
$(891)
$(373)
$1,643
$(1,643)

$1,212
$980
$29,930
$6,496
$4,624
$528
$14,562
$2,246
$15,447

267419_L01_P27_81.v8.qxd 3/8/07 12:13 AM Page 68

Pension

Retiree Medical

2006

2005

2006

2005

2006

2005

U.S.

International

$4,152
477
699
–
(241)
–
–
(1)
$5,086

$5,086
513
19
–
(233)
(7)
–
–
$5,378

$4,968
213
296
–
–
517
(241)
–
21
–
(3)
$5,771

$5,771
245
319
11
–
(163)
(233)
(7)
4
–
–
$5,947

Change in projected beneﬁt liability
Liability at beginning of year
Service cost
Interest cost
Plan amendments
Participant contributions
Experience (gain)/loss
Beneﬁt payments
Settlement/curtailment loss
Special termination beneﬁts
Foreign currency adjustment
Other
Liability at end of year
Change in fair value of plan assets
Fair value at beginning of year
Actual return on plan assets
Employer contributions/funding
Participant contributions
Beneﬁt payments
Settlement/curtailment loss
Foreign currency adjustment
Other
Fair value at end of year
Reconciliation of funded status
Funded status
Adjustment for fourth quarter contributions
Unrecognized prior service cost/(credit)
Unrecognized experience loss
Net amount recognized
Amounts recognized
Other assets
Intangible assets
Other current liabilities
Other liabilities
Minimum pension liability
Net amount recognized
Amounts included in accumulated other comprehensive loss (pre-tax)
Net loss
Prior service cost/(credit)
Minimum pension liability
Total
Components of the (decrease)/increase in net loss
Change in discount rate
Employee-related assumption changes
Liability-related experience different

$2,068
–
–
(479)
24
$1,613

$ 185
–
(19)
(729)
–
$ (563)

$ (685)
5
5
2,288
$1,613

$(569)
6
–
–
$(563)

$1,836
13
–
$1,849

$ –
–
24
$ 24

$ (123)
(45)

$ 365
57

from assumptions

Actual asset return different from

expected return

Amortization of losses
Other, including foreign currency adjustments

and 2003 Medicare Act

Total

(122)
(164)

(3)
$ (452)

(133)
(106)

(3)
$(275)

$1,263
52
68
8
12
20
(38)
(6)
–
126
6
$1,511

$1,099
112
30
12
(38)
–
116
(1)
$1,330

$(181)
13
–
–
$(168)

6
–
(2)
(172)
–
$(168)

$ 475
24
–
$ 499

$ 2
6

(30)
(29)

46
$ 1

Liability at end of year for service to date

$4,998

$4,783

$1,239

$ 952
32
55
3
10
203
(28)
–
–
(68)
104
$1,263

$ 838
142
104
10
(28)
–
(61)
94
$1,099

$(164)
4
17
474
$ 331

$367
1
–
(41)
4
$331

$ –
–
4
$ 4

$194
2

(73)
(15)

(22)
$ 93

$1,047

$1,312
46
72
–
–
(34)
(75)
–
1
–
48
$1,370

$ –
–
75
–
(75)
–
–
–
$ –

$(1,370)
16
–
–
$(1,354)

–
–
(84)
(1,270)
–
$(1,354)

$ 364
(101)
–
$ 263

$ (30)
–

(4)

–
(21)

17
$ (38)

$1,319
40
78
(8)
–
(45)
(74)
–
2
–
–
$1,312

$ –
–
74
–
(74)
–
–
–
$ –

$(1,312)
19
(113)
402
$(1,004)

–
–
–
(1,004)
–
$(1,004)

$ –
–
–
$ –

$ 61
–

(54)

–
(26)

(52)
$ (71)

267419_L01_P27_81.v4.qxd 3/6/07 9:20 AM Page 69

Components of beneﬁt expense are as follows:

Pension

Retiree Medical

2006

2005

2004

2006

2005

2004

2006

2005

2004

Components of beneﬁt expense
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost/(credit)
Amortization of net loss

Settlement/curtailment loss
Special termination beneﬁts
Total

U.S.

$ 213
296
(344)
3
106
274
–
21
$ 295

$ 193
271
(325)
6
81
226
4
19
$ 249

International

$ 52
68
(81)
2
29
70
–
–
$ 70

$ 32
55
(69)
1
15
34
–
–
$ 34

$ 27
47
(65)
1
9
19
1
1
$ 21

$ 46
72
–
(13)
21
126
–
1
$127

$ 40
78
–
(11)
26
133
–
2
$135

$ 38
72
–
(8)
19
121
–
4
$125

$ 245
319
(391)
3
164
340
3
4
$ 347

The estimated amounts to be amortized from accumulated other comprehensive loss into beneﬁt expense in 2007 for our
pension and retiree medical plans are as follows:

Net loss
Prior service cost/(credit)
Total

Pension

Retiree Medical

U.S.

$136
5
$141

International

$29
3
$32

$ 18
(13)
$ 5

The following table provides the weighted-average assumptions used to determine projected beneﬁt liability and beneﬁt
expense for our pension and retiree medical plans:

Pension

Retiree Medical

2006

2005

2004

2006

2005

2004

2006

2005

2004

U.S.

International

Weighted average assumptions
Liability discount rate
Expense discount rate
Expected return on plan assets
Rate of salary increases

5.8% 5.7% 6.1%
5.7% 6.1% 6.1%
7.8% 7.8% 7.8%
4.5% 4.4% 4.5%

5.2% 5.1% 6.1%
5.1% 6.1% 6.1%
7.3% 8.0% 8.0%
3.9% 4.1% 3.9%

5.8% 5.7% 6.1%
5.7% 6.1% 6.1%
–
–

–
–

The following table provides selected information about plans with liability for service to date and total beneﬁt liability in
excess of plan assets:

Pension

Retiree Medical

2006

2005

2006

2005

2006

2005

U.S.

International

Selected information for plans with liability
for service to date in excess of plan assets

Liability for service to date
Fair value of plan assets
Selected information for plans with

beneﬁt liability in excess of plan assets

$(387)
$1

$(374)
$8

$(286)
$237

$(65)
$33

Beneﬁt liability
Fair value of plan assets

$(754)
$1

$(2,690)
$1,758

$(1,387)
$1,200

$(1,158)
$985

$(1,370)
–

$(1,312)
–

Of the total projected pension beneﬁt liability at year-end 2006, $701 million relates to plans that we do not fund
because the funding of such plans does not receive favorable tax treatment.

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 70

Future Beneﬁt Payments and Funding
Our estimated future beneﬁt payments are as follows:

Pension
Retiree medical*

2007

$265
$90

2008

$285
$95

2009

$310
$100

2010

$345
$100

2011

$375
$105

2012-16

$2,490
$595

*Expected future beneﬁt payments for our retiree medical plans do not reﬂect any estimated subsidies expected to be received under the Medicare Act.

Subsidies are expected to be approximately $5 million for each of the years from 2007 through 2011 and approximately $40 million for 2012 through 2016.

These future beneﬁts to beneﬁciaries

include payments from both funded
and unfunded pension plans.

In 2007, we expect to make pension
contributions of up to $150 million with
up to $75 million expected to be discre-
tionary. Our cash payments for retiree
medical are estimated to be approxi-
mately $85 million in 2007.

Pension Assets
The expected return on pension plan
assets is based on our historical experi-
ence, our pension plan investment
strategy and our expectations for long-
term rates of return. We use a
market-related value method that

recognizes each year’s asset gain or loss
over a ﬁve-year period. Therefore, it
takes ﬁve years for the gain or loss from
any one year to be fully included in the
value of pension plan assets that is used
to calculate the expected return. Our
pension plan investment strategy is
reviewed annually and is established
based upon plan liabilities, an evalua-
tion of market conditions, tolerance for
risk, and cash requirements for beneﬁt
payments. Our investment objective is
to ensure that funds are available to
meet the plans’ beneﬁt obligations
when they are due. Our investment
strategy is to prudently invest plan
assets in high-quality and diversiﬁed

equity and debt securities to achieve
our long-term return expectation. Our
investment policy also permits the use
of derivative instruments to enhance
the overall return of the portfolio. We
use a third-party advisor to assist us in
determining our investment allocation
and modeling our long-term rate of
return assumptions. Our expected long-
term rate of return on U.S. plan assets is
7.8%, reﬂecting estimated long-term
rates of return of 9.3% from equity
securities and 5.8% from ﬁxed income
securities. Our target allocation and
actual pension plan asset allocations for
the plan years 2006 and 2005 are
as follows:

Asset Category

Target Allocation

Actual Allocation
2006

2005

Equity securities
Debt securities
Other, primarily cash
Total

60%
40%
–
100%

61%
39%
–
100%

60%
39%
1%
100%

Pension assets include 5.5 million
shares of PepsiCo common stock with a
market value of $358 million in 2006,
and 5.5 million shares with a market
value of $311 million in 2005. Our invest-
ment policy limits the investment in
PepsiCo stock at the time of investment
to 10% of the fair value of plan assets.

Retiree Medical Cost Trend Rates
An average increase of 9% in the cost
of covered retiree medical beneﬁts is
assumed for 2007. This average increase
is then projected to decline gradually to
5% in 2011 and thereafter. These
assumed health care cost trend rates
have an impact on the retiree medical

plan expense and liability. However,
the cap on our share of retiree medical
costs limits the impact. A 1-percentage-
point change in the assumed health
care trend rate would have the
following effects:

2006 service and interest cost components
2006 beneﬁt liability

$4
$42

$(3)
$(36)

1% Increase

1% Decrease

Savings Plan
Our U.S. employees are eligible to partic-
ipate in 401(k) savings plans, which are
voluntary deﬁned contribution plans.
The plans are designed to help employ-
ees accumulate additional savings for

retirement. We make matching contribu-
tions on a portion of eligible pay based
on years of service. In 2006 and 2005, our
matching contributions were $56 million
and $52 million, respectively.

For additional unaudited information
on our pension and retiree medical plans
and related accounting policies and
assumptions, see “Our Critical
Accounting Policies” in Management’s
Discussion and Analysis.

267419_L01_P27_81.v5.qxd 3/6/07 2:57 PM Page 71

Note 8 — Noncontrolled Bottling Affiliates

Our most signiﬁcant noncontrolled bot-
tling affiliates are PBG and PAS.
Approximately 10% of our total net
revenue in 2006, 2005 and 2004 reﬂects
sales to PBG.

The Pepsi Bottling Group
In addition to approximately 38% and
41% of PBG’s outstanding common

stock that we own at year-end 2006 and
2005, respectively, we own 100% of
PBG’s class B common stock and approx-
imately 7% of the equity of Bottling
Group, LLC, PBG’s principal operating
subsidiary. This gives us economic own-
ership of approximately 43% and 45%
of PBG’s combined operations at year-

PBG’s summarized ﬁnancial information is as follows:

2006

2005

2004

Current assets
Noncurrent assets

Total assets
Current liabilities
Noncurrent liabilities
Minority interest
Total liabilities

Our investment
Net revenue
Gross proﬁt
Operating proﬁt
Net income

$ 2,749
9,178
$11,927
$2,051
7,252
540
$9,843
$1,842
$12,730
$5,920
$1,017
$522

$ 2,412
9,112
$11,524
$2,598
6,387
496
$9,481
$1,738
$11,885
$5,632
$1,023
$466

$10,906
$5,250
$976
$457

PepsiAmericas
At year-end 2006 and 2005, we owned approximately 44% and 43% of
PepsiAmericas, respectively, and their summarized ﬁnancial information is as follows:

Current assets
Noncurrent assets

Total assets
Current liabilities
Noncurrent liabilities

Total liabilities

Our investment
Net revenue
Gross proﬁt
Operating proﬁt
Net income

2006

$ 675
3,532
$4,207
$ 694
1,909
$2,603
$1,028
$3,972
$1,608
$356
$158

2005

$ 598
3,456
$4,054
$ 722
1,763
$2,485
$968
$3,726
$1,562
$393
$195

2004

$3,345
$1,423
$340
$182

end 2006 and 2005, respectively.
Bottling equity income includes
$186 million and $126 million of pre-
tax gains on our sales of PBG stock in
2006 and 2005, respectively.

Our investment in PBG, which
includes the related goodwill, was
$500 million and $400 million higher
than our ownership interest in their
net assets at year-end 2006 and 2005,
respectively. Based upon the quoted
closing price of PBG shares at year-end
2006 and 2005, the calculated market
value of our shares in PBG, excluding
our investment in Bottling Group, LLC,
exceeded our investment balance by
approximately $1.4 billion and
$1.5 billion, respectively.

Our investment in PAS, which
includes the related goodwill, was
$316 million and $292 million higher
than our ownership interest in their net
assets at year-end 2006 and 2005,
respectively. Based upon the quoted
closing price of PAS shares at year-end
2006 and 2005, the calculated market
value of our shares in PepsiAmericas
exceeded our investment balance by
approximately $173 million and
$364 million, respectively.

In January 2005, PAS acquired a
regional bottler, Central Investment
Corporation. The table includes the
results of Central Investment
Corporation from the transaction
date forward.

Related Party Transactions
Our signiﬁcant related party transactions
involve our noncontrolled bottling affil-
iates. We sell concentrate to these
affiliates, which they use in the produc-

tion of CSDs and non-carbonated bever-
ages. We also sell certain ﬁnished goods
to these affiliates and we receive royal-
ties for the use of our trademarks for
certain products. Sales of concentrate

and ﬁnished goods are reported net of
bottler funding. For further unaudited
information on these bottlers, see “Our
Customers” in Management’s Discussion
and Analysis.

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 72

These transactions with our bottling affiliates are reﬂected in our consolidated
ﬁnancial statements as follows:

2006

2005

2004

Net revenue
Selling, general and administrative expenses
Accounts and notes receivable
Accounts payable and other current liabilities

$4,837
$87
$175
$62

$4,633
$143
$178
$117

$4,170
$114

Such amounts are settled on terms
consistent with other trade receivables
and payables. See Note 9 regarding our
guarantee of certain PBG debt.

In addition, we coordinate, on an
aggregate basis, the negotiation and
purchase of sweeteners and other raw
materials requirements for certain of

Note 9 — Debt Obligations and Commitments

Short-term debt obligations
Current maturities of long-term debt
Commercial paper (5.3% and 3.3%)
Other borrowings (7.3% and 7.4%)
Amounts reclassiﬁed to long-term debt

Long-term debt obligations
Short-term borrowings, reclassiﬁed
Notes due 2007-2026 (6.0% and 5.4%)
Zero coupon notes, $425 million due 2007-2012 (13.4%)
Other, due 2007-2016 (6.1% and 6.3%)

Less: current maturities of long-term debt obligations

2006

2005

605
792
377
(1,500)
274

$1,500
1,148
299
208
$3,155
(605)
$2,550

$ 143
3,140
356
(750)
$2,889

$ 750
1,161
312
233
2,456
(143)
$2,313

The interest rates in the above table reﬂect weighted-average rates at year-end.

In the second quarter of 2006, we
entered into a new unsecured revolving
credit agreement which enables us to
borrow up to $1.5 billion subject to cus-
tomary terms and conditions. Funds
borrowed under this agreement may be
used for general corporate purposes,
including supporting our outstanding
commercial paper issuances. The agree-
ment terminates in May 2011 and
replaces our previous $2.1 billion of
credit facilities. As of December 30,
2006, we have reclassiﬁed $1.5 billion of
short-term debt to long-term based on
our intent and ability to reﬁnance on a
long-term basis.

In addition, $394 million of our debt
related to borrowings from various lines
of credit maintained for our international
divisions. These lines of credit are subject
to normal banking terms and conditions

and are fully committed to the extent
of our borrowings.

In the third quarter of 2006, we
entered into a U.S. $2.5 billion euro
medium term note program. Under the
program, we may issue unsecured notes
under mutually agreed upon terms with
the purchasers of the notes. Proceeds
from any issuance of notes may be used
for general corporate purposes, except
as otherwise speciﬁed in the related
prospectus. As of December 30, 2006,
we have no outstanding notes under
the program.

Interest Rate Swaps
We entered into interest rate swaps in
2004 to effectively convert the interest
rate of a speciﬁc debt issuance from a
ﬁxed rate of 3.2% to a variable rate.
The variable weighted-average interest
rate that we pay is linked to LIBOR and
is subject to change. The notional

our bottlers with suppliers. Once we
have negotiated the contracts, the bot-
tlers order and take delivery directly
from the supplier and pay the suppliers
directly. Consequently, these
transactions are not reﬂected in our
consolidated ﬁnancial statements. As
the contracting party, we could be liable
to these suppliers in the event of any
nonpayment by our bottlers, but we
consider this exposure to be remote.

amount of the interest rate swaps out-
standing at December 30, 2006 and
December 31, 2005 was $500 million.
The terms of the interest rate swaps
match the terms of the debt they mod-
ify. The swaps mature in May 2007.
At December 30, 2006, approxi-
mately 63% of total debt, after the
impact of the related interest rate
swaps, was exposed to variable interest
rates, compared to 78% at December
31, 2005. In addition to variable rate
long-term debt, all debt with maturities
of less than one year is categorized as
variable for purposes of this measure.

Cross Currency Interest Rate Swaps
In 2004, we entered into a cross
currency interest rate swap to hedge
the currency exposure on U.S. dollar
denominated debt of $50 million held
by a foreign affiliate. The terms of this
swap match the terms of the debt it
modiﬁes. The swap matures in 2008.
The unrealized gain related to this swap
was less than $1 million at December
30, 2006 and December 31, 2005,
resulting in a U.S. dollar liability of
$50 million. We have also entered into
cross currency interest rate swaps to
hedge the currency exposure on U.S.
dollar denominated intercompany debt
of $95 million at December 30, 2006
and $125 million at December 31, 2005.
The terms of the swaps match the terms
of the debt they modify. The swaps
mature in 2007. The net unrealized loss
related to these swaps was less than
$1 million at December 30, 2006 and
the net unrealized gain related to
these swaps was $5 million at
December 31, 2005.

267419_L01_P27_81.v3.qxd 3/2/07 4:36 PM Page 73

Long-Term Contractual Commitments
Payments Due by Period

Long-term debt obligations(a)
Interest on debt obligations(b)
Operating leases
Purchasing commitments
Marketing commitments
Other commitments

Total

$1,050
295
922
5,205
1,199
279
$8,950

2007

2008-2009

2010-2011 2012 and beyond

–
50
231
1,357
287
229
$2,154

$ 583
57
302
2,216
453
43
$3,654

$ 125
43
176
871
332
5
$1,552

$ 342
145
213
761
127
2
$ 1,590

(a) Excludes current maturities of long-term debt of $605 million which are classiﬁed within current liabilities, as well as short-term borrowings reclassiﬁed

as long-term debt of $1,500 million.

(b) Interest payments on ﬂoating-rate debt are estimated using interest rates effective as of December 30, 2006.
The above table reﬂects non-cancelable commitments as of December 30, 2006 based on year-end foreign exchange rates.

Most long-term contractual commit-

ments, except for our long-term debt
obligations, are not recorded on our
balance sheet. Non-cancelable operating
leases primarily represent building leases.
Non-cancelable purchasing commit-
ments are primarily for oranges and
orange juice, cooking oil and packaging
materials. Non-cancelable marketing
commitments primarily are for sports
marketing. Bottler funding is not
reﬂected in our long-term contractual
commitments as it is negotiated on an
annual basis. See Note 7 regarding
our pension and retiree medical obliga-
tions and discussion below regarding
our commitments to noncontrolled
bottling affiliates and former restaurant
operations.

Off-Balance-Sheet Arrangements
It is not our business practice to enter
into off-balance-sheet arrangements,
other than in the normal course of
business, nor is it our policy to issue
guarantees to our bottlers, non-
controlled affiliates or third parties.
However, certain guarantees were nec-
essary to facilitate the separation of
our bottling and restaurant operations
from us. In connection with these
transactions, we have guaranteed
$2.3 billion of Bottling Group, LLC’s
long-term debt through 2012 and
$23 million of YUM! Brands, Inc.’s
(YUM) outstanding obligations, primar-
ily property leases, through 2020. The
terms of our Bottling Group, LLC debt
guarantee are intended to preserve the

Note 10 — Risk Management

structure of PBG’s separation from us
and our payment obligation would be
triggered if Bottling Group, LLC failed
to perform under these debt
obligations or the structure signiﬁcantly
changed. Our guarantees of certain
obligations ensured YUM’s continued
use of certain properties. These guaran-
tees would require our cash payment if
YUM failed to perform under these
lease obligations.

See “Our Liquidity and Capital

Resources” in Management’s Discussion
and Analysis for further unaudited
information on our borrowings.

We are exposed to the risk of loss
arising from adverse changes in:
• commodity prices, affecting the cost
of our raw materials and energy,

• foreign exchange risks,
• interest rates,
• stock prices, and
• discount rates affecting the measure-

ment of our pension and retiree
medical liabilities.

In the normal course of business, we
manage these risks through a variety of
strategies, including the use of deriva-
tives. Certain derivatives are designated
as either cash ﬂow or fair value hedges
and qualify for hedge accounting treat-
ment, while others do not qualify and
are marked to market through

earnings. See “Our Business Risks” in
Management’s Discussion and Analysis
for further unaudited information on
our business risks.

For cash ﬂow hedges, changes in fair
value are deferred in accumulated other
comprehensive loss within shareholders’
equity until the underlying hedged
item is recognized in net income. For
fair value hedges, changes in fair value
are recognized immediately in earnings,
consistent with the underlying hedged
item. Hedging transactions are limited
to an underlying exposure. As a result,
any change in the value of our derivative
instruments would be substantially off-
set by an opposite change in the value of
the underlying hedged items. Hedging
ineffectiveness and a net earnings

impact occur when the change in the
value of the hedge does not offset the
change in the value of the underlying
hedged item. If the derivative instru-
ment is terminated, we continue to
defer the related gain or loss and include
it as a component of the cost of the
underlying hedged item. Upon determi-
nation that the underlying hedged item
will not be part of an actual transaction,
we recognize the related gain or loss in
net income in that period.

We also use derivatives that do not
qualify for hedge accounting treatment.
We account for such derivatives at mar-
ket value with the resulting gains and
losses reﬂected in our income statement.
We do not use derivative instruments for
trading or speculative purposes, and we

267419_L01_P27_81.v2.qxd 2/28/07 4:09 PM Page 74

limit our exposure to individual counter-
parties to manage credit risk.

Commodity Prices
We are subject to commodity price risk
because our ability to recover increased
costs through higher pricing may be lim-
ited in the competitive environment in
which we operate. This risk is managed
through the use of ﬁxed-price purchase
orders, pricing agreements, geographic
diversity and derivatives. We use deriva-
tives, with terms of no more than two
years, to economically hedge price ﬂuctu-
ations related to a portion of our
anticipated commodity purchases, pri-
marily for natural gas and diesel fuel. For
those derivatives that qualify for hedge
accounting, any ineffectiveness is
recorded immediately. However, such
commodity cash ﬂow hedges have not
had any signiﬁcant ineffectiveness for all
periods presented. We classify both the
earnings and cash ﬂow impact from
these derivatives consistent with the
underlying hedged item. During the next
12 months, we expect to reclassify net
gains of $1 million related to cash ﬂow
hedges from accumulated other compre-
hensive loss into net income. Derivatives

used to hedge commodity price risks that
do not qualify for hedge accounting are
marked to market each period and
reﬂected in our income statement.

Foreign Exchange
Our operations outside of the U.S. gener-
ate approximately 40% of our net
revenue, with Mexico, the United
Kingdom and Canada comprising
approximately 20% of our net revenue.
As a result, we are exposed to foreign
currency risks from unforeseen economic
changes and political unrest. On
occasion, we enter into hedges, primarily
forward contracts with terms of no more
than two years, to reduce the effect of
foreign exchange rates. Ineffectiveness of
these hedges has not been material.

Interest Rates
We centrally manage our debt and
investment portfolios considering invest-
ment opportunities and risks, tax
consequences and overall ﬁnancing
strategies. We may use interest rate and
cross currency interest rate swaps to man-
age our overall interest expense and
foreign exchange risk. These instruments
effectively change the interest rate and
currency of speciﬁc debt issuances. These

swaps are entered into concurrently with
the issuance of the debt that they are
intended to modify. The notional
amount, interest payment and maturity
date of the swaps match the principal,
interest payment and maturity date of
the related debt. These swaps are
entered into only with strong creditwor-
thy counterparties, are settled on a net
basis and are of relatively short duration.

Stock Prices
The portion of our deferred compensa-
tion liability that is based on certain
market indices and on our stock price is
subject to market risk. We hold mutual
fund investments and prepaid forward
contracts to manage this risk. Changes in
the fair value of these investments and
contracts are recognized immediately in
earnings and are offset by changes in
the related compensation liability.

Fair Value
All derivative instruments are
recognized on our balance sheet at fair
value. The fair value of our derivative
instruments is generally based on
quoted market prices. Book and fair
values of our derivative and ﬁnancial
instruments are as follows:

2006

2005

Book Value

Fair Value

Book Value

Fair Value

$1,651
$1,171
$8
$2
$73
$1

Assets
Cash and cash equivalents(a)
Short-term investments(b)
Forward exchange contracts(c)
Commodity contracts(d)
Prepaid forward contracts(e)
Cross currency interest rate swaps(f)
Liabilities
Forward exchange contracts(c)
$15
Commodity contracts(d)
$3
$5,378
Debt obligations
Interest rate swaps(g)
$9
The above items are included on our balance sheet under the captions noted or as indicated below. In addition, derivatives qualify for hedge accounting unless
otherwise noted below.
(a) Book value approximates fair value due to the short maturity.
(b) Principally short-term time deposits and includes $145 million at December 30, 2006 and $124 million at December 31, 2005 of mutual fund investments used

$1,716
$3,166
$19
$41
$107
$6

$1,651
$1,171
$8
$2
$73
$1

$15
$3
$5,202
$9

$24
$29
$2,824
$4

$24
$29
$2,955
$4

to manage a portion of market risk arising from our deferred compensation liability.

(c) The 2006 liability includes $10 million related to derivatives that do not qualify for hedge accounting and the 2005 asset includes $14 million related to derivatives that
do not qualify for hedge accounting. Assets are reported within current assets and other assets and liabilities are reported within current liabilities and other liabilities.

(d) The 2006 liability includes $28 million related to derivatives that do not qualify for hedge accounting. The 2005 asset includes $2 million related to derivatives
that do not qualify for hedge accounting and the liability relates entirely to derivatives that do not qualify for hedge accounting. Assets are reported within
current assets and other assets and liabilities are reported within current liabilities and other liabilities.

(e) Included in current assets and other assets.
(f) Asset included within other assets.
(g) Reported in other liabilities.

This table excludes guarantees, including our guarantee of $2.3 billion of Bottling Group, LLC’s long-term debt. The guarantee had
a fair value of $35 million at December 30, 2006 and $47 million at December 31, 2005 based on a third-party estimate of the cost
to us of transferring the liability to an independent ﬁnancial institution. See Note 9 for additional information on our guarantees.

267419_L01_P27_81.v4.qxd 3/6/07 9:20 AM Page 75

Note 11 — Net Income per Common Share from Continuing Operations

Basic net income per common share is
net income available to common share-
holders divided by the weighted
average of common shares outstanding
during the period. Diluted net income
per common share is calculated using
the weighted average of common
shares outstanding adjusted to include

the effect that would occur if in-the-
money employee stock options were
exercised and RSUs and preferred
shares were converted into common
shares. Options to purchase 0.1 million
shares in 2006, 3.0 million shares in
2005 and 7.0 million shares in 2004
were not included in the calculation of

diluted earnings per common share
because these options were out-of-the-
money. Out-of-the-money options had
average exercise prices of $65.24 in
2006, $53.77 in 2005 and $52.88 in 2004.

The computations of basic and diluted net income per common share from continuing operations are as follows:
2004

2005

2006

Net income
Preferred shares:

Dividends
Redemption premium
Net income available for
common shareholders

Basic net income per common share
Net income available for
common shareholders

Dilutive securities:

Stock options and RSUs
ESOP convertible preferred stock

Diluted
Diluted net income per common share

(a) Weighted-average common shares outstanding.

Income

$5,642

(2)
(9)

$5,631
$3.42

Shares(a)

Income

Shares(a)

Income

Shares(a)

$4,078

(2)
(16)

$4,060
$2.43

1,649

$4,174

(3)
(22)

$4,149
$2.45

1,669

1,696

$5,631

1,649

$4,060

1,669

$4,149

1,696

–
11
$5,642
$3.34

36
2
1,687

–
18
$4,078
$2.39

35
2
1,706

–
24
$4,173
$2.41

31
2
1,729

267419_L01_P27_81.v5.qxd 3/6/07 2:57 PM Page 76

Note 12 — Preferred and Common Stock

As of December 30, 2006 and December
31, 2005, there were 3.6 billion shares
of common stock and 3 million shares
of convertible preferred stock autho-
rized. The preferred stock was issued
only for an ESOP established by Quaker
and these shares are redeemable for
common stock by the ESOP participants.
The preferred stock accrues dividends at
an annual rate of $5.46 per share. At
year-end 2006 and 2005, there were

803,953 preferred shares issued and
320,853 and 354,853 shares outstand-
ing, respectively. The outstanding
preferred shares had a fair value of
$100 million as of December 30, 2006
and $104 million as of December 31,
2005. Each share is convertible at the
option of the holder into 4.9625 shares
of common stock. The preferred shares
may be called by us upon written notice
at $78 per share plus accrued and

unpaid dividends. There were 17 million
shares of common stock held in the
accounts of ESOP participants as of
December 30, 2006 and December 31,
2005. Quaker made the ﬁnal award to
its ESOP plan in June 2001.

Preferred stock
Repurchased preferred stock
Balance, beginning of year

Redemptions

Balance, end of year

*Does not sum due to rounding.

2006

2005

2004

Amount

0.8

0.5
–
0.5

$41

$110
10
$120

0.8

0.4
0.1
0.5

$41

$ 90
19
$110*

0.8

0.3
0.1
0.4

$41

$63
27
$90

Note 13 — Accumulated Other Comprehensive Loss

Comprehensive income is a measure of
income which includes both net income
and other comprehensive income or
loss. Other comprehensive income or
loss results from items deferred from

recognition into our income statement.
Accumulated other comprehensive loss
is separately presented on our balance
sheet as part of common shareholders’
equity. Other comprehensive

income/(loss) was $456 million in 2006,
$(167) million in 2005 and $381 million
in 2004. The accumulated balances for
each component of other comprehen-
sive loss were as follows:

2006

2005

Currency translation adjustment
Cash ﬂow hedges, net of tax(a)
Unamortized pension and retiree

medical, net of tax(b)

Minimum pension liability adjustment(c)
Unrealized gain on securities, net of tax
Other
Accumulated other comprehensive loss

$ (506)
4

(1,782)
–
40
(2)
$(2,246)

$ (971)
27

–
(138)
31
(2)
$(1,053)

2004

$(720)
(19)

–
(154)
7
–
$(886)

(a) Includes $3 million gain in 2006, no impact in 2005 and $6 million gain in 2004 for our share of our

equity investees’ accumulated derivative activity.

(b) Net of taxes of $964 million in 2006.
(c) Net of taxes of $72 million in 2005 and $77 million in 2004. Also includes $120 million in 2005 and
$121 million in 2004 for our share of our equity investees’ minimum pension liability adjustments.

267419_L01_P27_81.v4.qxd 3/6/07 9:21 AM Page 77

Note 14 — Supplemental Financial Information

2006

2005

2004

Accounts receivable
Trade receivables
Other receivables

Allowance, beginning of year

Net amounts charged/(credited) to expense
Deductions(a)
Other(b)

Allowance, end of year
Net receivables
Inventories(c)
Raw materials
Work-in-process
Finished goods

$3,147
642
3,789
75
10
(27)
6
64
$3,725

$ 860
140
926
$1,926

$2,718
618
3,336
97
(1)
(22)
1
75
$3,261

$ 738
112
843
$1,693

$105
18
(25)
(1)
$ 97

(a) Includes accounts written off.
(b) Includes currency translation effects and other adjustments.
(c) Inventories are valued at the lower of cost or market. Cost is determined using the average, ﬁrst-in,
ﬁrst-out (FIFO) or last-in, ﬁrst-out (LIFO) methods. Approximately 19% in 2006 and 17% in 2005 of the
inventory cost was computed using the LIFO method. The differences between LIFO and FIFO methods
of valuing these inventories were not material.

2006

2005

2004

Other assets
Non-current notes and accounts receivable
Deferred marketplace spending
Unallocated purchase price for

recent acquisitions

Pension plans
Other

Accounts payable and other current liabilities
Accounts payable
Accrued marketplace spending
Accrued compensation and beneﬁts
Dividends payable
Other current liabilities

Other liabilities
Reserves for income taxes
Other

Other supplemental information
Rent expense
Interest paid
Income taxes paid, net of refunds
Acquisitions(a)

$149
232

196
197
206
$980

$ 2,102
1,444
1,143
492
1,315
$ 6,496

$1,435
3,189
$4,624

$291
$215
$2,155

$ 186
281

256
2,440
240
$3,403

$1,799
1,383
1,062
431
1,296
$5,971

$1,884
2,439
$4,323

$228
$213
$1,258

$245
$137
$1,833

Fair value of assets acquired
Cash paid and debt issued
SVE minority interest eliminated
Liabilities assumed

$ 78
(64)
–
$ 14
(a) In 2005, these amounts include the impact of our acquisition of General Mills, Inc.’s 40.5% ownership
interest in SVE for $750 million. The excess of our purchase price over the fair value of net assets
acquired is $250 million and is included in goodwill. We also reacquired rights to distribute global
brands for $263 million which is included in other nonamortizable intangible assets.

$ 1,089
(1,096)
216
209

$ 678
(522)
–
$ 156

267419_L01_P27_81.v4.qxd 3/6/07 10:22 AM Page 78

Management’s Responsibility for Financial Reporting

To Our Shareholders:
At PepsiCo, our actions — the actions of all our associates —
are governed by our Worldwide Code of Conduct. This code
is clearly aligned with our stated values — a commitment to
sustained growth, through empowered people, operating
with responsibility and building trust. Both the code and our
core values enable us to operate with integrity — both within
the letter and the spirit of the law. Our code of conduct is
reinforced consistently at all levels and in all countries. We
have maintained strong governance policies and practices for
many years.

The management of PepsiCo is responsible for the objec-
tivity and integrity of our consolidated ﬁnancial statements.
The Audit Committee of the Board of Directors has engaged
independent registered public accounting ﬁrm, KPMG LLP, to
audit our consolidated ﬁnancial statements and they have
expressed an unqualiﬁed opinion.

We are committed to providing timely, accurate and
understandable information to investors. Our commitment
encompasses the following:

Maintaining strong controls over ﬁnancial reporting. Our
system of internal control is based on the control criteria
framework of the Committee of Sponsoring Organizations of
the Treadway Commission published in their report titled,
Internal Control — Integrated Framework. The system is
designed to provide reasonable assurance that transactions
are executed as authorized and accurately recorded; that
assets are safeguarded; and that accounting records are suffi-
ciently reliable to permit the preparation of ﬁnancial
statements that conform in all material respects with
accounting principles generally accepted in the U.S. We main-
tain disclosure controls and procedures designed to ensure
that information required to be disclosed in reports under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the speciﬁed time periods.
We monitor these internal controls through self-assessments
and an ongoing program of internal audits. Our internal con-
trols are reinforced through our Worldwide Code of Conduct,
which sets forth our commitment to conduct business with
integrity, and within both the letter and the spirit of the law.

Exerting rigorous oversight of the business. We continuously
review our business results and strategies. This encompasses
ﬁnancial discipline in our strategic and daily business
decisions. Our Executive Committee is actively involved —
from understanding strategies and alternatives to reviewing
key initiatives and ﬁnancial performance. The intent is to
ensure we remain objective in our assessments, constructively
challenge our approach to potential business opportunities
and issues, and monitor results and controls.

Engaging strong and effective Corporate Governance from
our Board of Directors. We have an active, capable and dili-
gent Board that meets the required standards for
independence, and we welcome the Board’s oversight as a
representative of our shareholders. Our Audit Committee is
comprised of independent directors with the ﬁnancial liter-
acy, knowledge and experience to provide appropriate
oversight. We review our critical accounting policies, ﬁnancial
reporting and internal control matters with them and
encourage their direct communication with KPMG LLP, with
our General Auditor, and with our General Counsel. We also
have a senior compliance officer to lead and coordinate our
compliance policies and practices.

Providing investors with ﬁnancial results that are complete,
transparent and understandable. The consolidated ﬁnancial
statements and ﬁnancial information included in this report
are the responsibility of management. This includes prepar-
ing the ﬁnancial statements in accordance with accounting
principles generally accepted in the U.S., which require esti-
mates based on management’s best judgment.

PepsiCo has a strong history of doing what’s right. We real-
ize that great companies are built on trust, strong ethical
standards and principles. Our ﬁnancial results are delivered
from that culture of accountability, and we take responsibil-
ity for the quality and accuracy of our ﬁnancial reporting.

Peter A. Bridgman
Senior Vice President and Controller

Richard Goodman
Chief Financial Officer

Indra K. Nooyi
President and Chief Executive Officer

267419_L01_P27_81.v2.qxd 2/28/07 2:57 PM Page 79

Management’s Report on Internal Control over Financial Reporting

To Our Shareholders:
Our management is responsible for establishing and main-
taining adequate internal control over ﬁnancial reporting,
as such term is deﬁned in Rule 13a-15(f) of the Exchange Act.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over ﬁnancial reporting
based upon the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that eval-
uation, our management concluded that our internal control
over ﬁnancial reporting is effective as of December 30, 2006.
KPMG LLP, an independent registered public accounting

ﬁrm, has audited the consolidated ﬁnancial statements
included in this Annual Report and, as part of their audit, has
issued their attestation report, included herein, (1) on our
management’s assessment of the effectiveness of our internal
controls over ﬁnancial reporting and (2) on the effectiveness
of our internal control over ﬁnancial reporting.

During our fourth ﬁscal quarter of 2006, we began migrat-

ing certain of our ﬁnancial processing systems to SAP
software. This software implementation is part of our ongo-
ing Business Process Transformation initiative, and we plan to
continue implementing such software throughout other
parts of our businesses over the course of the next few years.
In connection with the SAP implementation, we are modify-
ing the design and documentation of our internal control
processes and procedures relating to the new software.

Except as described above, there were no changes in our
internal control over ﬁnancial reporting that have materially
affected, or are reasonably likely to materially affect, our
internal control over ﬁnancial reporting during our fourth
ﬁscal quarter of 2006.

Peter A. Bridgman
Senior Vice President and Controller

Richard Goodman
Chief Financial Officer

Indra K. Nooyi
President and Chief Executive Officer

267419_L01_P27_81.v2.qxd 2/28/07 4:10 PM Page 80

Report of Independent Registered Public Accounting Firm

statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the
company are being made only in accordance with authoriza-
tions of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposi-
tion of the company’s assets that could have a material effect
on the ﬁnancial statements.

Because of its inherent limitations, internal control over
ﬁnancial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inade-
quate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated ﬁnancial statements
referred to above present fairly, in all material respects, the
ﬁnancial position of PepsiCo, Inc. and Subsidiaries as of
December 30, 2006 and December 31, 2005, and the results of
their operations and their cash ﬂows for each of the years in
the three-year period ended December 30, 2006, in confor-
mity with United States generally accepted accounting
principles. Also, in our opinion, management’s assessment
that PepsiCo, Inc. maintained effective internal control over
ﬁnancial reporting as of December 30, 2006, is fairly stated,
in all material respects, based on criteria established in
Internal Control — Integrated Framework issued by COSO.
Furthermore, in our opinion, PepsiCo, Inc. maintained, in all
material respects, effective internal control over ﬁnancial
reporting as of December 30, 2006, based on criteria estab-
lished in Internal Control — Integrated Framework issued
by COSO.

As discussed in Note 7 to the consolidated ﬁnancial state-
ments, PepsiCo, Inc. and Subsidiaries adopted the provisions
of FASB Statement No. 158, “Employers’ Accounting for
Deﬁned Beneﬁt Pension and Other Postretirement Plans —
an amendment to FASB Statements No. 87, 88, 106 and
132(R),” as of December 30, 2006.

KPMG LLP
New York, New York
February 16, 2007

Board of Directors and Shareholders PepsiCo, Inc.:
We have audited the accompanying Consolidated Balance
Sheet of PepsiCo, Inc. and Subsidiaries as of December 30,
2006 and December 31, 2005 and the related Consolidated
Statements of Income, Cash Flows and Common
Shareholders’ Equity for each of the years in the three-year
period ended December 30, 2006. We have also audited man-
agement’s assessment, included in Management’s Report on
Internal Control over Financial Reporting that PepsiCo, Inc.
and Subsidiaries maintained effective internal control over
ﬁnancial reporting as of December 30, 2006, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). PepsiCo, Inc.’s management is
responsible for these consolidated ﬁnancial statements, for
maintaining effective internal control over ﬁnancial report-
ing, and for its assessment of the effectiveness of internal
control over ﬁnancial reporting. Our responsibility is to
express an opinion on these consolidated ﬁnancial
statements, an opinion on management’s assessment, and an
opinion on the effectiveness of PepsiCo, Inc.’s internal control
over ﬁnancial reporting based on our audits.

We conducted our audits in accordance with the standards

of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the con-
solidated ﬁnancial statements are free of material
misstatement and whether effective internal control over
ﬁnancial reporting was maintained in all material respects.
Our audit of the consolidated ﬁnancial statements included
examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated ﬁnancial statements,
assessing the accounting principles used and signiﬁcant esti-
mates made by management, and evaluating the overall
ﬁnancial statement presentation. Our audit of internal control
over ﬁnancial reporting included obtaining an understanding
of internal control over ﬁnancial reporting, evaluating man-
agement’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the cir-
cumstances. We believe that our audits provide a reasonable
basis for our opinions.

A company’s internal control over ﬁnancial reporting is a
process designed to provide reasonable assurance regarding
the reliability of ﬁnancial reporting and the preparation of
ﬁnancial statements for external purposes in accordance with
generally accepted accounting principles. A company’s inter-
nal control over ﬁnancial reporting includes those policies
and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reﬂect
the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of ﬁnancial

267419_L01_P27_81.v2.qxd 2/28/07 4:10 PM Page 81

Selected Financial Data (in millions except per share amounts, unaudited)

Quarterly

First

Fourth
Quarter Quarter Quarter Quarter

Second

Third

–

$468

$1,019
$912

$4,790
$4,383

$4,026
$3,715

$8,950
$8,184

$8,599
$7,697

$7,205
$6,585

Net revenue
2006
2005
Gross proﬁt
2006
$4,920
$4,669
2005
2006 restructuring and impairment charges(a)
2006
–
–
2005 restructuring charges(a)
–
2005
2006 Tax Adjustments(b)
2006
–
AJCA tax charge(c)
2005
Net income
2006
2005
Net income per common share — basic
$0.61
2006
2005
$0.54
Net income per common share — diluted
$0.60
2006
2005
$0.53
Cash dividends declared per common share
$0.26
2006
2005
$0.23
2006 stock price per share(d)
High
Low
Close
2005 stock price per share(d)
High
Low
Close

$55.71
$51.34
$52.62

$57.20
$51.78
$55.52

$61.19
$56.51
$59.70

$60.55
$56.00
$59.34

$56.73
$52.07
$54.65

$65.99
$58.65
$64.73

$1,358
$1,194

$1,481
$864

$0.82
$0.71

$0.90
$0.52

$0.80
$0.70

$0.30
$0.26

$0.88
$0.51

$0.30
$0.26

$10,383
$10,096

$5,639
$5,619

$67

$83

$(602)

$(8)

$1,784
$1,108

$1.09
$0.66

$1.06
$0.65

$0.30
$0.26

$65.99
$61.15
$62.55

$60.34
$53.55
$59.08

The ﬁrst, second, and third quarters consist of 12 weeks and the fourth
quarter consists of 16 weeks in 2006 and 17 weeks in 2005.

(a) The 2006 restructuring and impairment charges were $67 million

($43 million or $0.03 per share after-tax). The 2005 restructuring charges
were $83 million ($55 million or $0.03 per share after-tax). See Note 3.

(b) Represents non-cash tax beneﬁts in connection with the 2006 Tax

Adjustments. See Note 5.

ings in connection with the AJCA. See Note 5.

(d) Represents the composite high and low sales price and quarterly closing

prices for one share of PepsiCo common stock.

Five-Year Summary

2006

2005

2004

Net revenue
Income from continuing

operations

Net income
Income per common share —
basic, continuing operations
Income per common share —

$35,137 $32,562 $29,261

$5,642
$5,642

$4,078
$4,078

$4,174
$4,212

$3.42

$2.43

$2.45

diluted, continuing operations $3.34

$2.39

$2.41

Cash dividends declared
per common share

Total assets
Long-term debt
Return on invested capital(a)

$1.16

$1.01

$0.85
$29,930 $31,727 $27,987
$2,550
$2,397
$2,313
30.4% 22.7% 27.4%

Five-Year Summary (Cont.)

2003

2002

Net revenue
Net income
Income per common share — basic
Income per common share — diluted
Cash dividends declared per

common share

Total assets
Long-term debt
Return on invested capital(a)

$26,971 $25,112
$3,000
$1.69
$1.68

$3,568
$2.07
$2.05

$0.63

$0.595
$25,327 $23,474
$2,187
$1,702
27.5% 25.7%

(a) Return on invested capital is deﬁned as adjusted net income divided by

the sum of average shareholders’ equity and average total debt. Adjusted
net income is deﬁned as net income plus net interest expense after-tax.
Net interest expense after-tax was $72 million in 2006, $62 million in 2005,
$60 million in 2004, $72 million in 2003 and $93 million in 2002.

• Includes restructuring and impairment charges of:

Pre-tax

After-tax

Per share

2006

2005

2004

2003

$67

$43

$83

$55

$0.03

$150

$96

$0.06

$147

$100

$0.06

• Includes Quaker merger-related costs of:

Pre-tax

After-tax

Per share

2003

2002

$59

$42

$0.02

$224

$190

$0.11

• In 2006, we recognized non-cash tax beneﬁts of $602 million ($0.36 per

share) in connection with the 2006 Tax Adjustments. In 2005, we recorded
income tax expense of $460 million ($0.27 per share) related to our repatria-
tion of earnings in connection with the AJCA. In 2004, we reached agree-
ment with the IRS for an open issue related to our discontinued restaurant
operations which resulted in a tax beneﬁt of $38 million ($0.02 per share).
• On December 30, 2006, we adopted SFAS 158 which reduced total assets
by $2,016 million, total common shareholders’ equity by $1,643 million
and total liabilities by $373 million.

• The 2005 ﬁscal year consisted of ﬁfty-three weeks compared to ﬁfty-two

weeks in our normal ﬁscal year. The 53rd week increased 2005 net
revenue by an estimated $418 million and net income by an estimated
$57 million ($0.03 per share).

267419_L01_P82.v5.qxd 3/6/07 4:11 PM Page 1

Reconciliation of GAAP and Non–GAAP Information

The ﬁnancial measures listed below are not measures deﬁned
by generally accepted accounting principles. However, we
believe investors should consider these measures as they are
more indicative of our ongoing performance. Speciﬁcally,
investors should consider the following:
• Our 2006 and 2005 division operating proﬁt and our 2006

division operating proﬁt growth;

• Our 2006 net income without the impact of the 2006 Tax

Adjustments, our share of PBG’s tax settlement and restructur-
ing and impairment charges; our 2005 net income without the
impact of the AJCA tax charge, restructuring charges and the
extra week in 2005; and our 2006 net income growth without
the impact of the aforementioned items;

• Our 2006 diluted EPS without the impact of the 2006 Tax

Adjustments, our share of PBG’s tax settlement and restructur-
ing and impairment charges; our 2005 diluted EPS without the
impact of the AJCA tax charge, restructuring charges and the
extra week in 2005; our 2006 diluted EPS growth without the
impact of the aforementioned items; and our 2004 diluted
EPS without the impact of restructuring and impairment
charges and certain tax beneﬁts; and

• Our 2006 return on invested capital (ROIC) without the impact
of the 2006 Tax Adjustments, our adoption of SFAS 158, the
AJCA tax charge, restructuring and impairment charges and
the extra week in 2005.

Net Income Reconciliation

2006

2005

Growth

Reported Net Income

2006 Tax Adjustments

PepsiCo Share of PBG Tax Settlement

AJCA Tax Charge

Extra Week

Restructuring and Impairment Charges

$5,642

$4,078

38%

(602)

(18)

–

–
43

–

460

(57)

Net Income Excluding above Items

$5,065

$4,536

12%

Diluted EPS Reconciliation

Reported Diluted EPS

2006 Tax Adjustments

PepsiCo Share of PBG Tax

Settlement

AJCA Tax Charge

Extra Week

Restructuring and Impairment

Charges

2004 Tax Beneﬁts

Diluted EPS Excluding above Items

2006

2006
2005 Growth 2004

$3.34

$2.39

(0.36)

(0.01)

–

0.27

(0.03)

40% $2.44
–

–

0.03

–
$3.00

–

$2.66

0.06

(0.18)
13% $2.32

Operating Proﬁt Reconciliation

2006

2005

Growth

ROIC Reconciliation

2006

Total PepsiCo Reported

Operating Proﬁt

$6,439

$5,922

Corporate Unallocated

PepsiCo Total Division

733

788

Operating Proﬁt

$7,172

$6,710

Reported ROIC
2006 Tax Adjustments
SFAS 158 Adoption
AJCA Tax Charge
ROIC Excluding above Items
* Does not sum due to rounding. Additionally, the impact on ROIC of the 2006
and 2005 restructuring and impairment charges and the extra week in 2005
rounds to zero.

30%
(3)
(1)
(1)
26%*

Glossary

Anchor bottlers: The Pepsi Bottling Group
(PBG), PepsiAmericas (PAS) and Pepsi Bottling
Ventures (PBV).

Bottler: customers to whom we have granted
exclusive contracts to sell and manufacture cer-
tain beverage products bearing our trademarks
within a speciﬁc geographical area.

Bottler Case Sales (BCS): measure of physical
beverage volume sold from our bottlers to
independent distributors and retailers.

Bottler funding: ﬁnancial incentives we give to
our bottlers to assist in the distribution and
promotion of our beverage products.

Business Process Transformation (BPT): our com-
prehensive multi-year effort to drive efficiencies.
It includes efforts to consolidate, or integrate, key
business functions to take advantage of our scale.
It also includes moving to a common set of
processes that underlie our key activities, and
supporting them with a common technology
application. And ﬁnally, it includes our SAP
installation, the computer system that will link all
of our systems and processes.

Concentrate Shipments and Equivalents (CSE):
measure of our physical beverage volume sold to
our customers. This measure is reported on our
ﬁscal year basis.

Consumers: people who eat and drink
our products.

Customers: authorized bottlers and independent
distributors and retailers.

CSD: carbonated soft drinks.

Derivatives: ﬁnancial instruments that we use to
manage our risk arising from changes in com-
modity prices, interest rates, foreign exchange
rates and stock prices.

Direct-Store-Delivery (DSD): delivery system used
by us and our bottlers to deliver snacks and bev-
erages directly to retail stores where our products
are merchandised.

Effective net pricing: reﬂects the year-over-year
impact of discrete pricing actions, sales incentive
activities and mix resulting from selling varying
products in different package sizes and in
different countries.

Management operating cash ﬂow: net cash
provided by operating activities less capital
spending plus sales of property, plant and
equipment. It is our primary measure used to
monitor cash ﬂow performance.

Marketplace spending: sales incentives offered
through various programs to our customers and
consumers (trade spending), as well as advertising
and other marketing activities.

Servings: common metric reﬂecting our consoli-
dated physical unit volume. Our divisions’ physical
unit measures are converted into servings based
on U.S. Food and Drug Administration guidelines
for single-serving sizes of our products.

Smart Spot: our initiative that helps consumers
ﬁnd our products that can contribute to
healthier lifestyles.

Transaction gains and losses: the impact on our
consolidated ﬁnancial statements of exchange
rate changes arising from speciﬁc transactions.

Translation adjustments: the impact of the
conversion of our foreign affiliates’ ﬁnancial
statements to U.S. dollars for the purpose of
consolidating our ﬁnancial statements.

267419_L01_CRVS.v3 3/5/07 6:16 PM Page 2

We believe Performance — achieving
financial results — matters most
when it is combined with Purpose —
improving people’s lives.

Financial Highlights

PepsiCo, Inc. and Subsidiaries
($ in millions except per share amounts; all per share amounts assume dilution)

Net Revenue
Total: $35,137

Division Operating Profit
Total: $7,172

PepsiCo
International
37%

Quaker Foods
North America

PepsiCo
International
27%

Quaker Foods
North America

PepsiCo
Beverages
North America
27%

Frito-Lay
North America
31%

PepsiCo
Beverages
North America
29%

Frito-Lay
North America
36%

Summary of Operations
Total net revenue
Division operating profit(b)
Total operating profit
Net income(c)
Earnings per share(c)

2006

2005 % Chg(a)

$35,137
$7,172
$6,439
$5,065
$3.00

$32,562
$6,710
$5,922
$4,536
$2.66

8
7
9
12
13

Other Data
Management operating cash flow(d)
Net cash provided by
operating activities

Capital spending
Common share repurchases
Dividends paid
Long-term debt

$4,065

$4,204

(3)

$6,084
$2,068
$3,000
$1,854
$2,550

$5,852
$1,736
$3,012
$1,642
$2,313

4
19
–
13
10

(a) Percentage changes above and in text are based on unrounded amounts.
(b) Excludes corporate unallocated expenses. See page 82 for a reconciliation to the most directly

comparable financial measure in accordance with GAAP.

(d) Includes the impact of net capital spending. Also, see “Our Liquidity and Capital Resources” in

Management’s Discussion and Analysis.

African American Advisory Board . . . . . . . . . 24
Latino/Hispanic Advisory Board . . . . . . . . . . . 25
Blue Ribbon Health and Wellness

Advisory Board . . . . . . . . . . . . . . . . . . . . . . . 26

Financial Review
Management’s Discussion and Analysis and

Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . 57
Notes to Consolidated Financial Statements . . 58
Management’s Responsibility for

Financial Reporting . . . . . . . . . . . . . . . . . . . . . 78

Management’s Report on Internal Control

over Financial Reporting . . . . . . . . . . . . . . . . . 79

Report of Independent Registered

Public Accounting Firm . . . . . . . . . . . . . . . . . . 80
Selected Financial Data . . . . . . . . . . . . . . . . . . . 81
Reconciliation of GAAP and

Non-GAAP Information . . . . . . . . . . . . . . . . . . 82
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Primary Websites
PepsiCo, Inc. — www.pepsico.com

Frito-Lay North America — www.fritolay.com

Pepsi-Cola North America — www.pepsiworld.com

Tropicana North America — www.tropicana.com

Quaker Foods — www.quakeroats.com

Gatorade — www.gatorade.com

Smart Spot — www.smartspot.com

Walkers — www.walkers.co.uk

Sabritas — www.sabritas.com.mx

Gamesa — www.gamesa.com.mx

Frito-Lay Canada — www.fritolay.ca

Common Stock Information

Shareholder Information

Shareholders
At year-end 2006, there were approximately 190,000
shareholders of record.

Cash Dividends Declared
Per Share (In $)

1.16

1.01

.850

.595

.630

Stock Performance

Year-end Market Price of Stock
Based on calendar year-end (In $)

The Bank of New York
Shareholder Services Department
P.O. Box 11258
Church Street Station
New York, NY 10286-1258
Telephone: 800-226-0083

212-815-3700 (Outside the U.S.)

E-mail: shareowners@bankofny.com
Website: www.stockbny.com
or
Manager Shareholder Relations
PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577
Telephone: 914-253-3055

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

SharePower Participants (employees with
SharePower options) should address all questions regard-
ing your account, outstanding options or shares received
through option exercises to:

Merrill Lynch/SharePower
Stock Option Unit
1600 Merrill Lynch Drive
Mail Stop 06-02-SOP
Pennington, NJ 08534
Telephone: 800-637-6713 (U.S., Puerto Rico

and Canada)
609-818-8800 (all other locations)

Employee Benefit Plan Participants
PepsiCo 401(k) Plan & PepsiCo Stock Purchase Program

PepsiCo Stock Purchase Program – for Canadian employees:
Fidelity Stock Plan Services

P.O. Box 5000
Cincinnati, OH 45273-8398
Telephone: 800-544-0275
Website: www.iStockPlan.com/ESPP

Please have a copy of your most recent statement
available when calling with inquiries.

If using overnight or certified mail send to:

Fidelity Investments
100 Crosby Parkway
Mail Zone KC1F-L
Covington, KY 41015

Shareholder Services

Financial and Other Information
PepsiCo’s 2007 quarterly earnings releases are expected
to be issued the weeks of April 23, July 23, October 8,
2007, and February 4, 2008.

Copies of PepsiCo’s SEC reports, earnings and other
financial releases, corporate news and additional company
information are available on our website www.pepsico.com.

Our CEO and CFO Certifications required under

If you have questions regarding PepsiCo’s financial

performance contact:

Jamie Caulfield
Vice President, Investor Relations
PepsiCo, Inc.
Purchase, NY 10577
Telephone: 914-253-3035

Independent Auditors

KPMG LLP
345 Park Avenue
New York, NY 10154-0102
Telephone: 212-758-9700

Corporate Headquarters

PepsiCo, Inc.
700 Anderson Hill Road
Purchase, NY 10577
Telephone: 914-253-2000

PepsiCo Website: www.pepsico.com

267419_L01_CRVS.v2 3/3/07 11:30 PM Page 1

2006

PERFORMANCE
WITH PURPOSE