Preferred cost revenue ratio 0.8 cost 5900

THE ANNUAL REPORT

SPECIMEN FINANCIAL STATEMENTS:

PepsiCo, Inc.

Appendix A

The financial information herein is reprinted with permission from the PepsiCo, Inc. 2005 Annual Report. The complete financial statements are available through a link at the book’s companion website.

Once each year a corporation communicates to its stockholders and other interested parties by issuing a complete set of audited financial statements.The annual report, as this communication is called, summarizes the financial results of the company’s oper- ations for the year and its plans for the future.Many annual reports are attractive,mul- ticolored, glossy public relations pieces, containing pictures of corporate officers and directors as well as photos and descriptions of new products and new buildings. Yet the basic function of every annual report is to report financial information, almost all of which is a product of the corporation’s accounting system.

The content and organization of corporate annual reports have become fairly standardized. Excluding the public relations part of the report (pictures, products, etc.), the following are the traditional financial portions of the annual report:

FINANCIAL HIGHLIGHTS Companies usually present the financial highlights section inside the front cover of the annual report or on its first two pages. This section generally reports the total or per share amounts for five to ten financial items for the current year and one or more previous years. Financial items from the income statement and the balance sheet that typically are presented are sales, income from continuing operations, net income, net income per share, net cash provided by operating activities, dividends per common share, and the amount of capital expenditures.The financial highlights section from PepsiCo’s Annual Report is shown on page A-2.

A1

• Financial Highlights • Letter to the Stockholders • Management’s Discussion and

Analysis • Financial Statements • Notes to the Financial Statements

• Management’s Report on Internal Control

• Management Certification of Financial Statements

• Auditor’s Report • Supplementary Financial Information

In this appendix we illustrate current financial reporting with a comprehensive set of corporate financial statements that are prepared in accordance with gener- ally accepted accounting principles and audited by an international independent certified public accounting firm.We are grateful for permission to use the actual fi- nancial statements and other accompanying financial information from the annual report of a large, publicly held company, PepsiCo, Inc.

LETTER TO THE STOCKHOLDERS

A2 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Nearly every annual report contains a letter to the stockholders from the chairman of the board or the president, or both. This letter typically discusses the company’s accomplishments during the past year and highlights significant events such as mergers and acquisitions, new products, operating achievements, business philoso- phy, changes in officers or directors, financing commitments, expansion plans, and

2005 2004 % Chg(a)

Summary of Operations

Total net revenue $32,562 $29,261 11

Division operating profit $6,710 $6,098 10

Total operating profit $5,922 $5,259 13

Net income(b) $4,536 $4,004 13

Earnings per share(b) $2.66 $2.32 15

Other Data

Management operating cash flow(c) $4,204 $3,705 13

Net cash provided by

operating activities $5,852 $5,054 16

Capital spending $1,736 $1,387 25

Common share repurchases $3,012 $3,028 (0.5)

Dividends paid $1,642 $1,329 24

Long-term debt $2,313 $2,397 (3.5) (a) Percentage changes above and in text are based on unrounded amounts.

(b) In 2005, excludes the impact of AJCA tax charge, the 53rd week and restructuring charges. In 2004, excludes certain prior year tax benefits, and restructuring and impairment charges. See page 76 for reconciliation to net income and earnings per share on a GAAP basis.

(c) Includes the impact of net capital spending. Also, see “Our Liquidity, Capital Resources and Financial Position” in Management’s Discussion and Analysis.

PepsiCo International

PepsiCo Beverages North America

Frito-Lay North America

Quaker Foods North America35% 5%

32%28%

24%

38%

8%

30%

PepsiCo International

PepsiCo Beverages North America

Frito-Lay North America

Quaker Foods North America

Division Operating Profit Total: $6,710

Net Revenue Total: $32,562

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

Financial Statements and Accompanying Notes A3

MANAGEMENT’S DISCUSSION AND ANALYSIS The management’s discussion and analysis (MD&A) section covers three financial aspects of a company: its results of operations, its ability to pay near-term obliga- tions, and its ability to fund operations and expansion. Management must highlight favorable or unfavorable trends and identity significant events and uncertainties that affect these three factors. This discussion obviously involves a number of sub- jective estimates and opinions. In its MD&A section, PepsiCo breaks its discussion into three major headings: Our Business, Our Critical Accounting Policies, and Our Financial Results. PepsiCo’s MD&A section is 22 pages long. You can access that section at www.wiley.com/college/weygandt.

future prospects. The letter to the stockholders is signed by Steve Reinemund, Chairman of the Board and Chief Executive Officer, of PepsiCo.

Only a short summary of the letter is provided below. The full letter can be accessed at the book’s companion website at www.wiley.com/college/weygandt.

FINANCIAL STATEMENTS AND ACCOMPANYING NOTES

The standard set of financial statements consists of: (1) a comparative income statement for 3 years, (2) a comparative statement of cash flows for 3 years, (3) a comparative balance sheet for 2 years, (4) a statement of stockholders’ equity for 3 years, and (5) a set of accompanying notes that are considered an integral part of the financial statements. The auditor’s report, unless stated otherwise, covers the financial statements and the accompanying notes. PepsiCo’s financial state- ments and accompanying notes plus supplementary data and analyses follow.

Consolidated Statement of Income PepsiCo, Inc. and Subsidiaries Fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003

(in millions except per share amounts) 2005 2004 2003

Net Revenue........................................................................................................................... $32,562 $29,261 $26,971

Cost of sales........................................................................................................................... 14,176 12,674 11,691 Selling, general and administrative expenses ........................................................................ 12,314 11,031 10,148 Amortization of intangible assets ........................................................................................... 150 147 145 Restructuring and impairment charges.................................................................................. – 150 147 Merger-related costs............................................................................................................... – – 59

Operating Profit ..................................................................................................................... 5,922 5,259 4,781

Bottling equity income............................................................................................................ 557 380 323 Interest expense...................................................................................................................... (256) (167) (163) Interest income....................................................................................................................... 159 74 51

Income from Continuing Operations before Income Taxes ................................................. 6,382 5,546 4,992

Provision for Income Taxes................................................................................................... 2,304 1,372 1,424

Income from Continuing Operations..................................................................................... 4,078 4,174 3,568

Tax Benefit from Discontinued Operations ........................................................................... – 38 –

Net Income ............................................................................................................................ $ 4,078 $ 4,212 $ 3,568

Net Income per Common Share — Basic Continuing operations ....................................................................................................... $2.43 $2.45 $2.07 Discontinued operations.................................................................................................... – 0.02 –

Total .................................................................................................................................. $2.43 $2.47 $2.07

Net Income per Common Share — Diluted Continuing operations ....................................................................................................... $2.39 $2.41 $2.05 Discontinued operations.................................................................................................... – 0.02 –

Total .................................................................................................................................. $2.39 $2.44* $2.05

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

2003 2004 2005

2003 2004 2005 2003 2004 2005

2003 2004 2005

$2.05

$2.41

$32,562

$26,971 $29,261

$5,922

$4,781 $5,259

$3,568

$4,174 $4,078

$2.39

Net Revenue Operating Profit

Net Income per Common Share — Continuing OperationsIncome from Continuing Operations

A4 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Consolidated Statement of Cash Flows PepsiCo, Inc. and Subsidiaries Fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003

(in millions) 2005 2004 2003 Operating Activities Net income................................................................................................................................. $ 4,078 $ 4,212 $ 3,568 Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization ............................................................................................. 1,308 1,264 1,221 Stock-based compensation expense..................................................................................... 311 368 407 Restructuring and impairment charges ............................................................................... – 150 147 Cash payments for merger-related costs and restructuring charges ................................... (22) (92) (109) Tax benefit from discontinued operations............................................................................. – (38) – Pension and retiree medical plan contributions ................................................................... (877) (534) (605) Pension and retiree medical plan expenses.......................................................................... 464 395 277 Bottling equity income, net of dividends .............................................................................. (411) (297) (276) Deferred income taxes and other tax charges and credits ................................................... 440 (203) (286) Merger-related costs............................................................................................................. – – 59 Other non-cash charges and credits, net ............................................................................. 145 166 101 Changes in operating working capital, excluding effects of acquisitions and divestitures

Accounts and notes receivable........................................................................................ (272) (130) (220) Inventories ...................................................................................................................... (132) (100) (49) Prepaid expenses and other current assets .................................................................... (56) (31) 23 Accounts payable and other current liabilities................................................................ 188 216 (11) Income taxes payable...................................................................................................... 609 (268) 182

Net change in operating working capital.............................................................................. 337 (313) (75) Other..................................................................................................................................... 79 (24) (101)

Net Cash Provided by Operating Activities .............................................................................. 5,852 5,054 4,328

Investing Activities Snack Ventures Europe (SVE) minority interest acquisition ....................................................... (750) – – Capital spending ....................................................................................................................... (1,736) (1,387) (1,345) Sales of property, plant and equipment..................................................................................... 88 38 49 Other acquisitions and investments in noncontrolled affiliates ................................................ (345) (64) (71) Cash proceeds from sale of PBG stock ...................................................................................... 214 – – Divestitures................................................................................................................................ 3 52 46 Short-term investments, by original maturity

More than three months — purchases ................................................................................ (83) (44) (38) More than three months — maturities ................................................................................ 84 38 28 Three months or less, net ..................................................................................................... (992) (963) (940)

Net Cash Used for Investing Activities..................................................................................... (3,517) (2,330) (2,271)

Financing Activities Proceeds from issuances of long-term debt .............................................................................. 25 504 52 Payments of long-term debt ...................................................................................................... (177) (512) (641) Short-term borrowings, by original maturity

More than three months — proceeds................................................................................... 332 153 88 More than three months — payments ................................................................................. (85) (160) (115) Three months or less, net ..................................................................................................... 1,601 1,119 40

Cash dividends paid .................................................................................................................. (1,642) (1,329) (1,070) Share repurchases — common ................................................................................................. (3,012) (3,028) (1,929) Share repurchases — preferred ................................................................................................ (19) (27) (16) Proceeds from exercises of stock options................................................................................... 1,099 965 689

Net Cash Used for Financing Activities.................................................................................... (1,878) (2,315) (2,902)

Effect of exchange rate changes on cash and cash equivalents ............................................... (21) 51 27

Net Increase/(Decrease) in Cash and Cash Equivalents ......................................................... 436 460 (818) Cash and Cash Equivalents, Beginning of Year ....................................................................... 1,280 820 1,638

Cash and Cash Equivalents, End of Year ................................................................................. $ 1,716 $ 1,280 $ 820

See accompanying notes to consolidated financial statements.

Financial Statements and Accompanying Notes A5

A6 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Consolidated Balance Sheet PepsiCo, Inc. and Subsidiaries December 31, 2005 and December 25, 2004

(in millions except per share amounts) 2005 2004

ASSETS

Current Assets

Cash and cash equivalents................................................................................................................................... $ 1,716 $ 1,280

Short-term investments ........................................................................................................................................ 3,166 2,165

4,882 3,445 Accounts and notes receivable, net....................................................................................................................... 3,261 2,999

Inventories............................................................................................................................................................. 1,693 1,541

Prepaid expenses and other current assets........................................................................................................... 618 654

Total Current Assets ....................................................................................................................................... 10,454 8,639

Property, Plant and Equipment, net .................................................................................................................... 8,681 8,149

Amortizable Intangible Assets, net ...................................................................................................................... 530 598

Goodwill................................................................................................................................................................. 4,088 3,909

Other nonamortizable intangible assets................................................................................................................ 1,086 933

Nonamortizable Intangible Assets.................................................................................................................. 5,174 4,842

Investments in Noncontrolled Affiliates .............................................................................................................. 3,485 3,284

Other Assets ......................................................................................................................................................... 3,403 2,475

Total Assets................................................................................................................................................ $31,727 $27,987

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Short-term obligations .......................................................................................................................................... $ 2,889 $ 1,054

Accounts payable and other current liabilities...................................................................................................... 5,971 5,599

Income taxes payable ............................................................................................................................................ 546 99

Total Current Liabilities .................................................................................................................................. 9,406 6,752

Long-Term Debt Obligations................................................................................................................................. 2,313 2,397

Other Liabilities .................................................................................................................................................... 4,323 4,099

Deferred Income Taxes ........................................................................................................................................ 1,434 1,216

Total Liabilities................................................................................................................................................ 17,476 14,464 Commitments and Contingencies

Preferred Stock, no par value ............................................................................................................................. 41 41

Repurchased Preferred Stock ............................................................................................................................. (110) (90)

Common Shareholders’ Equity

Common stock, par value 1 2/3¢ per share (issued 1,782 shares)....................................................................... 30 30

Capital in excess of par value............................................................................................................................... 614 618 Retained earnings ................................................................................................................................................. 21,116 18,730 Accumulated other comprehensive loss ................................................................................................................ (1,053) (886)

20,707 18,492

Less: repurchased common stock, at cost (126 and 103 shares, respectively) ................................................... (6,387) (4,920)

Total Common Shareholders’ Equity .............................................................................................................. 14,320 13,572

Total Liabilities and Shareholders’ Equity ................................................................................................ $31,727 $27,987

See accompanying notes to consolidated financial statements.

Financial Statements and Accompanying Notes A7

Consolidated Statement of Common Shareholders’ Equity PepsiCo, Inc. and Subsidiaries Fiscal years ended December 31, 2005, December 25, 2004 and December 27, 2003

(in millions) 2005 2004 2003 Shares Amount Shares Amount Shares Amount

Common Stock 1,782 $ 30 1,782 $ 30 1,782 $ 30

Capital in Excess of Par Value Balance, beginning of year........................................... 618 548 207 Stock-based compensation expense............................. 311 368 407 Stock option exercises(a) ............................................... (315) (298) (66)

Balance, end of year..................................................... 614 618 548

Retained Earnings Balance, beginning of year........................................... 18,730 15,961 13,489 Net income ................................................................... 4,078 4,212 3,568 Cash dividends declared — common .......................... (1,684) (1,438) (1,082) Cash dividends declared — preferred ......................... (3) (3) (3) Cash dividends declared — RSUs ............................... (5) (2) – Other ............................................................................ – – (11)

Balance, end of year..................................................... 21,116 18,730 15,961

Accumulated Other Comprehensive Loss Balance, beginning of year .......................................... (886) (1,267) (1,672) Currency translation adjustment.................................. (251) 401 410 Cash flow hedges, net of tax:

Net derivative gains/(losses) .................................. 54 (16) (11) Reclassification of (gains)/losses to net income .... (8) 9 (1)

Minimum pension liability adjustment, net of tax ............................................................... 16 (19) 7

Unrealized gain on securities, net of tax ...................... 24 6 1 Other ............................................................................ (2) – (1)

Balance, end of year..................................................... (1,053) (886) (1,267)

Repurchased Common Stock Balance, beginning of year........................................... (103) (4,920) (77) (3,376) (60) (2,524) Share repurchases........................................................ (54) (2,995) (58) (2,994) (43) (1,946) Stock option exercises .................................................. 31 1,523 32 1,434 26 1,096 Other ............................................................................ – 5 – 16 – (2)

Balance, end of year..................................................... (126) (6,387) (103) (4,920) (77) (3,376)

Total Common Shareholders’ Equity ................................ $14,320 $13,572 $11,896

2005 2004 2003 Comprehensive Income

Net income .................................................................. $4,078 $4,212 $3,568 Currency translation adjustment.................................. (251) 401 410 Cash flow hedges, net of tax ........................................ 46 (7) (12) Minimum pension liability adjustment, net of tax ....... 16 (19) 7 Unrealized gain on securities, net of tax ...................... 24 6 1 Other ............................................................................ (2) – (1)

Total Comprehensive Income........................................... $3,911 $4,593 $3,973

(a) Includes total tax benefit of $125 million in 2005, $183 million in 2004 and $340 million in 2003. See accompanying notes to consolidated financial statements.

A8 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Our financial statements include the con- solidated accounts of PepsiCo, Inc. and the affiliates that we control. In addition, we include our share of the results of cer- tain 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 noncon- trolled bottling 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. In 2005, bot- tling equity income includes $126 million of pre-tax gains on our sales of PBG stock. See Note 8 for additional information on our noncontrolled bottling affiliates. Our share of other noncontrolled affiliates is included in division operating profit. Intercompany balances and transactions are eliminated. In 2005, we had an addi- tional 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.

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. We also made certain reclassifications on our Consolidated Statement of Income in the fourth quarter of 2005 from cost of sales to selling, general and administrative expenses in connection with our BPT initiative. These reclassifications resulted in reductions to cost of sales of $556 million through the third quarter of 2005, $732 million in the full year 2004 and $688 million in the full year 2003, with corresponding increases to selling, general and administrative expenses in those periods. These reclassifi- cations had no net impact on operating profit and have been made to all periods presented for comparability.

The preparation of our consolidated financial statements in conformity with generally accepted accounting principles 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 determin- ing, among other items, sales incentives accruals, future cash flows associated with impairment testing for perpetual brands and goodwill, useful lives for intangible assets, tax reserves, stock-based compen- sation and pension and retiree medical accruals. 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 reclassifica- tions were made to prior years’ amounts to conform to the 2005 presentation.

We manufacture or use contract manufac- turers, market and sell a variety of salty, sweet and grain-based snacks, carbonated and non-carbonated beverages, and foods through our North American and interna- tional business divisions. Our North American divisions include the United States and Canada. The accounting poli- cies 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 expense, as described in the unaudited information in “Our Critical Accounting Policies.” Additionally, begin-

ning in the fourth quarter of 2005, we began centrally 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 com- modity price risk and were not entered into for speculative purposes. Such derivatives are marked to market with the resulting gains and losses recognized as a compo- nent of corporate unallocated expense. These gains and losses are 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 Chairman and Chief Executive Officer evaluates our divisions. Division results exclude certain Corporate-initiated restruc- turing and impairment charges, merger- related costs and divested businesses. For additional unaudited information on our divisions, see “Our Operations” in Management’s Discussion and Analysis.

Notes to Consolidated Financial Statements Note 1 — Basis of Presentation and Our Divisions

Our Divisions

Basis of Presentation

Financial Statements and Accompanying Notes A9

2005 2004 2003 2005 2004 2003 Net Revenue Operating Profit

FLNA...................................................................... $10,322 $ 9,560 $ 9,091 $2,529 $2,389 $2,242 PBNA..................................................................... 9,146 8,313 7,733 2,037 1,911 1,690 PI ......................................................................... 11,376 9,862 8,678 1,607 1,323 1,061 QFNA ..................................................................... 1,718 1,526 1,467 537 475 470 Total division ........................................................ 32,562 29,261 26,969 6,710 6,098 5,463 Divested businesses ............................................. – – 2 – – 26 Corporate .............................................................. – – – (788) (689) (502)

32,562 29,261 26,971 5,922 5,409 4,987 Restructuring and impairment charges................ – – – – (150) (147) Merger-related costs ............................................. – – – – – (59) Total...................................................................... $32,562 $29,261 $26,971 $5,922 $5,259 $4,781

Divested Businesses During 2003, we sold our Quaker Foods North America Mission pasta business. The results of this business are reported as divested businesses.

Corporate Corporate includes costs of our corporate headquarters, centrally managed initia- tives, such as our BPT initiative, unallo- cated insurance and benefit programs, foreign exchange transaction gains and losses, and certain commodity derivative

gains and losses, as well as profit-in-inven- tory elimination adjustments for our non- controlled bottling affiliates and certain other items.

Restructuring and Impairment Charges and Merger-Related Costs — See Note 3.

QFNA 5%

FLNA 32%

PBNA 28%

PI 35%

Division Net Revenue

QFNA 8%

FLNA 38%

PBNA 30%

PI 24%

Division Operating Profit

Frito-Lay North America

(FLNA)

Quaker Foods North America

(QFNA)

PepsiCo Beverages

North America (PBNA)

PepsiCo International

(PI)

A10 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Other Division Information 2005 2004 2003 2005 2004 2003

Total Assets Capital Spending FLNA $ 5,948 $ 5,476 $ 5,332 $ 512 $ 469 $ 426 PBNA 6,316 6,048 5,856 320 265 332 PI 9,983 8,921 8,109 667 537 521 QFNA 989 978 995 31 33 32 Total division 23,236 21,423 20,292 1,530 1,304 1,311 Corporate(a) 5,331 3,569 2,384 206 83 34 Investments in bottling affiliates 3,160 2,995 2,651 – – –

$31,727 $27,987 $25,327 $1,736 $1,387 $1,345

(a) Corporate assets consist principally of cash and cash equivalents, short-term investments, and property, plant and equipment.

2005 2004 2003 2005 2004 2003 Amortization of Depreciation and

Intangible Assets Other Amortization FLNA $ 3 $ 3 $ 3 $ 419 $ 420 $ 416 PBNA 76 75 75 264 258 245 PI 71 68 66 420 382 350 QFNA – 1 1 34 36 36 Total division 150 147 145 1,137 1,096 1,047 Corporate – – – 21 21 29

$150 $147 $145 $1,158 $1,117 $1,076

2005 2004 2003 2005 2004 2003 Net Revenue(a) Long-Lived Assets(b)

U.S. $19,937 $18,329 $17,377 $10,723 $10,212 $ 9,907 Mexico 3,095 2,724 2,642 902 878 869 United Kingdom 1,821 1,692 1,510 1,715 1,896 1,724 Canada 1,509 1,309 1,147 582 548 508 All other countries 6,200 5,207 4,295 3,948 3,339 3,123

$32,562 $29,261 $26,971 $17,870 $16,873 $16,131

(a) Represents net revenue from businesses operating in these countries.

(b) Long-lived assets represent net property, plant and equipment, nonamortizable and net amortizable intangible assets and investments in noncontrolled affiliates. These assets are reported in the country where they are primarily used.

FLNA 19%

PBNA 20%

PI 31%

QFNA 3%

Other 27%

Total Assets QFNA 2%

FLNA 30%

PBNA 18%

PI 38%

Other 12%

Capital Spending

Canada 4%

United States 61%

Mexico 10%

United Kingdom 6%

Other 19%

Net Revenue

Canada 3%

United States 60%

Mexico 5%

United Kingdom 10%

Other 22%

Long-Lived Assets

Financial Statements and Accompanying Notes A11

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 policy for direct-store- delivery (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 warehouse distrib- uted products is to replace damaged and out-of-date products. Based on our histori- cal 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 policy 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. Wal-Mart represents approxi- mately 9% of our net revenue, including concentrate sales to our bottlers which are used in finished goods sold by them to Wal-Mart; and PBG represents approxi- mately 10%. We have not experienced credit issues with these customers.

Sales Incentives and Other Marketplace Spending We offer sales incentives and discounts through various programs to our customers and consumers. Sales incentives and dis- counts are accounted for as a reduction of revenue and totaled $8.9 billion in 2005, $7.8 billion in 2004 and $7.1 billion in 2003. While most of these incentive arrangements have terms of no more than one year, certain arrangements extend beyond one year. For example, fountain pouring rights may extend up to 15 years. Costs incurred to obtain these arrange- ments are recognized over the contract period and the remaining balances of $321 million at December 31, 2005 and $337 million at December 25, 2004 are included in current assets and other assets in our Consolidated 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 marketing activities and is reported as selling, general and administrative expenses. Advertising expenses were $1.8 billion in 2005, $1.7 billion in 2004 and $1.6 billion in 2003. 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 $202 mil-

lion and $137 million at year-end 2005 and 2004, respectively, are classified as prepaid expenses in our Consolidated Balance Sheet.

Distribution Costs Distribution costs, including the costs of shipping and handling activities, are reported as selling, general and administra- tive expenses. Shipping and handling expenses were $4.1 billion in 2005, $3.9 billion in 2004 and $3.6 billion in 2003.

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 developing or obtaining computer software for internal use. Capitalized software costs are included in property, plant and equipment on our Consolidated Balance Sheet and amortized on a straight-line basis over the estimated useful lives of the software, which gener- ally do not exceed 5 years. Net capitalized software and development costs were $327 million at December 31, 2005 and $181 million at December 25, 2004.

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 recognize lia- bilities for contingencies and commitments when a loss is probable and estimable. For additional information on our commit- ments, see Note 9.

Other Significant Accounting Policies Our other significant accounting policies 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. There have been no new accounting

pronouncements issued or effective during 2005 that have had, or are expected to have, a material impact on our consoli- dated financial statements.

Note 2 — Our Significant Accounting Policies

A12 Appendix A Specimen Financial Statements: PepsiCo, Inc.

2005 Restructuring Charges In the fourth quarter of 2005, we incurred a charge of $83 million ($55 million after- tax or $0.03 per share) in conjunction with actions taken to reduce costs in our opera- tions, principally through headcount reduc- tions. Of this charge, $34 million related to FLNA, $21 million to PBNA, $16 million to PI and $12 million to Corporate (recorded in corporate unallocated expenses). Most of this charge related to the termination of approximately 700 employees. We expect the substantial portion of the cash payments related to this charge to be paid in 2006.

2004 and 2003 Restructuring and Impairment Charges In the fourth quarter of 2004, we incurred a charge of $150 million ($96 million after-tax or $0.06 per share) in conjunc- tion with the consolidation of FLNA’s manufacturing network as part of its ongo- ing productivity program. Of this charge,

$93 million related to asset impairment, primarily reflecting the closure of four U.S. plants. Production from these plants was redeployed 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. Through December 31, 2005, we have paid $47 million and incurred non-cash charges of $10 million, leaving substantially no accrual.

In the fourth quarter of 2003, we incurred a charge of $147 million ($100 million after-tax or $0.06 per share) in conjunction with actions taken to streamline our North American divisions and PepsiCo International. These actions were taken to increase focus and eliminate redundancies at PBNA and PI and to improve the efficiency of the supply chain

at FLNA. Of this charge, $81 million related to asset impairment, reflecting $57 million for the closure of a snack plant in Kentucky, the retirement of snack manufacturing lines in Maryland and Arkansas and $24 million for the closure of a PBNA office building in Florida. The remaining $66 million included employee- related costs of $54 million and facility and other exit costs of $12 million. Employee-related costs primarily reflect the termination costs for approximately 850 sales, distribution, manufacturing, research and marketing employees. As of December 31, 2005, all terminations had occurred and substantially no accrual remains.

Merger-Related Costs In connection with the Quaker merger in 2001, we recognized merger-related costs of $59 million ($42 million after-tax or $0.02 per share) in 2003.

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 2005 foreign exchange rates, is expected to be $152 million in 2006, $35 million in 2007, $35 million in 2008, $34 mil- lion in 2009 and $33 million in 2010.

Depreciable and amortizable assets are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. In these circumstances, if an evaluation of the undiscounted cash flows indicates impair- ment, 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 circumstances have occurred which indicate the need for revi- sion. For additional unaudited information on our amortizable brand policies, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.

Note 3 — Restructuring and Impairment Charges and Merger-Related Costs

Note 4 — Property, Plant and Equipment and Intangible Assets

Average Useful Life 2005 2004 2003 Property, plant and equipment, net Land and improvements 10 – 30 yrs. $ 685 $ 646 Buildings and improvements 20 – 44 3,736 3,605 Machinery and equipment,

including fleet and software 5 – 15 11,658 10,950 Construction in progress 1,066 729

17,145 15,930 Accumulated depreciation (8,464) (7,781)

$ 8,681 $ 8,149

Depreciation expense $1,103 $1,062 $1,020

Amortizable intangible assets, net Brands 5 – 40 $1,054 $1,008 Other identifiable intangibles 3 – 15 257 225

1,311 1,233 Accumulated amortization (781) (635)

$ 530 $ 598

Amortization expense $150 $147 $145

Financial Statements and Accompanying Notes A13

Nonamortizable Intangible Assets Perpetual brands and goodwill are assessed for impairment at least annually to ensure that discounted future cash flows continue to exceed the related book value. A perpetual brand is impaired if its book value exceeds its fair value. Goodwill is evaluated for impairment if the book value of its reporting unit exceeds its fair value. A reporting unit can be a division or business within a division. If the fair value of an evaluated asset is less than its book value, the asset is written down based on its discounted future cash flows to fair value. No impairment charges resulted from the required impairment evaluations. The change in the book value of nonamortizable intangible assets is as follows:

Balance, Translation Balance, Translation Balance, Beginning 2004 Acquisition and Other End of 2004 Acquisition and Other End of 2005

Frito-Lay North America Goodwill $ 130 $ – $ 8 $ 138 $ – $ 7 $ 145 PepsiCo Beverages North America Goodwill 2,157 – 4 2,161 – 3 2,164 Brands 59 – – 59 – – 59

2,216 – 4 2,220 – 3 2,223 PepsiCo International Goodwill 1,334 29 72 1,435 278 (109) 1,604 Brands 808 – 61 869 263 (106) 1,026

2,142 29 133 2,304 541 (215) 2,630 Quaker Foods North America Goodwill 175 – – 175 – – 175 Corporate Pension intangible 2 – 3 5 – (4) 1 Total goodwill 3,796 29 84 3,909 278 (99) 4,088 Total brands 867 – 61 928 263 (106) 1,085 Total pension intangible 2 – 3 5 – (4) 1

$4,665 $29 $148 $ 4,842 $541 $(209) $5,174

A14 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Note 5 — Income Taxes

2005 2004 2003 Income before income taxes — continuing operations U.S. ................................................................................................................................................... $3,175 $2,946 $3,267 Foreign.............................................................................................................................................. 3,207 2,600 1,725

$6,382 $5,546 $4,992

Provision for income taxes — continuing operations Current: U.S. Federal....................................................................................................................... $1,638 $1,030 $1,326

Foreign .............................................................................................................................. 426 256 341 State ................................................................................................................................. 118 69 80

2,182 1,355 1,747 Deferred: U.S. Federal ....................................................................................................................... 137 11 (274)

Foreign .............................................................................................................................. (26) 5 (47) State ................................................................................................................................. 11 1 (2)

122 17 (323) $2,304 $1,372 $1,424

Tax rate reconciliation — continuing operations U.S. Federal statutory tax rate .......................................................................................................... 35.0% 35.0% 35.0% State income tax, net of U.S. Federal tax benefit.............................................................................. 1.4 0.8 1.0 Taxes on AJCA repatriation................................................................................................................ 7.0 – – Lower taxes on foreign results .......................................................................................................... (6.5) (5.4) (5.5) Settlement of prior years’ audit ........................................................................................................ – (4.8) (2.2) Other, net.......................................................................................................................................... (0.8) (0.9) 0.2 Annual tax rate ................................................................................................................................. 36.1% 24.7% 28.5%

Deferred tax liabilities Investments in noncontrolled affiliates ............................................................................................ $ 993 $ 850 Property, plant and equipment ......................................................................................................... 772 857 Pension benefits ............................................................................................................................... 863 669 Intangible assets other than nondeductible goodwill ....................................................................... 135 153 Zero coupon notes ............................................................................................................................ 35 46 Other................................................................................................................................................. 169 157 Gross deferred tax liabilities............................................................................................................. 2,967 2,732 Deferred tax assets Net carryforwards ............................................................................................................................. 608 666 Stock-based compensation............................................................................................................... 426 402 Retiree medical benefits................................................................................................................... 400 402 Other employee-related benefits....................................................................................................... 342 379 Other................................................................................................................................................. 520 460 Gross deferred tax assets ................................................................................................................. 2,296 2,309 Valuation allowances........................................................................................................................ (532) (564) Deferred tax assets, net.................................................................................................................... 1,764 1,745 Net deferred tax liabilities ................................................................................................................ $1,203 $ 987

Deferred taxes included within: Prepaid expenses and other current assets.................................................................................. $231 $229 Deferred income taxes .................................................................................................................. $1,434 $1,216

Analysis of valuation allowances Balance, beginning of year............................................................................................................... $564 $438 $487

(Benefit)/provision........................................................................................................................ (28) 118 (52) Other (deductions)/additions........................................................................................................ (4) 8 3

Balance, end of year......................................................................................................................... $532 $564 $438

Financial Statements and Accompanying Notes A15

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 $5.1 billion at year-end 2005 are being carried forward in a number of foreign and state jurisdictions where we are permitted to use tax operating losses from prior peri- ods to reduce future taxable income. These operating losses will expire as follows: $0.1 billion in 2006, $4.1 billion between 2007 and 2025 and $0.9 billion may be carried forward indefinitely. In addition, certain tax credits generated in prior peri- ods of approximately $39.4 million are available 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 deduction or credit.

Undistributed International Earnings The AJCA created a one-time incentive for U.S. corporations to repatriate undistrib- uted international earnings by providing an

85% dividends received deduction. As approved by our Board of Directors in July 2005, we repatriated approximately $7.5 billion in earnings previously consid- ered indefinitely reinvested outside the U.S. in the fourth quarter of 2005. In 2005, we recorded income tax expense of $460 mil- lion associated with this repatriation. Other than the earnings repatriated, we intend to continue to reinvest earnings outside the U.S. for the foreseeable future and, there- fore, have not recognized any U.S. tax expense on these earnings. At December 31, 2005, we had approximately $7.5 bil- lion of undistributed international earnings.

Reserves A number of years may elapse before a par- ticular 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. During 2004, we recognized $266 million of tax benefits related to the favorable resolu- tion of certain open tax issues. In addition, in 2004, we recognized a tax benefit of $38 million upon agreement with the IRS on an open issue related to our discontinued restaurant operations. At the end of 2003,

we entered into agreements with the IRS for open years through 1997. These agreements resulted in a tax benefit of $109 million in the fourth quarter of 2003. As part of these agreements, we also resolved the treatment of certain other issues related to future tax years.

The IRS has initiated their audits of our tax returns for the years 1998 through 2002. Our tax returns subsequent to 2002 have not yet been examined. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our reserves reflect the probable outcome of known tax contin- gencies. Settlement of any particular issue would usually require the use of cash. Favorable resolution would be recognized 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 in the balance sheet within other liabilities (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 information on the impact of the resolution of open tax issues, see “Other Consolidated Results.”

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. Employees at all levels participate in our stock-based compensa- tion program. In addition, members of our Board of Directors participate in our stock- based compensation program in connec- tion with their service on our Board. Stock options and RSUs are granted to employ- ees under the shareholder-approved 2003 Long-Term Incentive Plan (LTIP), our only active stock-based plan. Stock-based compensation expense was $311 million in 2005, $368 million in 2004 and $407 million in 2003. Related income tax benefits recognized in earnings were $87 million in 2005, $103 million in 2004 and $114 million in 2003. At year- end 2005, 51 million shares were avail- able for future executive and SharePower grants. For additional unaudited informa-

tion on our stock-based compensation pro- gram, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.

SharePower Grants SharePower options are awarded under our LTIP to all eligible employees, based on job level or classification, and in the case of international employees, tenure as well. All stock option grants have an exercise price equal to the fair market value of our common stock on the day of grant and generally have a 10-year term with vesting after three years.

Executive Grants All senior management and certain middle management are eligible for executive grants under our LTIP. All stock option grants have an exercise price equal to the fair market value of our common stock on the day of grant and generally have a 10-year term with vesting after three years. There have been no reductions to the exer-

cise price of previously issued awards, and any repricing of awards would require approval of our shareholders.

Beginning in 2004, executives who are awarded long-term incentives based on their performance are offered the choice of stock options or 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 restricted stock unit can be settled in a share of our stock after the vesting period. Executives who elect RSUs receive one RSU for every four stock options that would have otherwise been granted. Senior offi- cers do not have a choice and are granted 50% stock options and 50% RSUs. Vesting of RSU awards for senior officers is contingent upon the achievement of pre-established performance targets. We granted 3 million RSUs in both 2005 and 2004 with weighted-average intrinsic val- ues of $53.83 and $47.28, respectively.

Note 6 — Stock-Based Compensation

A16 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Method of Accounting and Our Assumptions We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock-based compensation expense at the date of grant. We adopted SFAS 123R, Share-Based Payment, under the modified prospective method in the first quarter of 2006. We do not expect our adoption of SFAS 123R to materially impact our financial statements.

Our weighted-average Black-Scholes fair value assumptions include:

2005 2004 2003 Expected life 6 yrs. 6 yrs. 6 yrs. Risk free interest rate 3.8% 3.3% 3.1% Expected volatility 23% 26% 27% Expected dividend yield 1.8% 1.8% 1.15%

Our Stock Option Activity(a)

2005 2004 2003 Options Average Price(b) Options Average Price(b) Options Average Price(b)

Outstanding at beginning of year 174,261 $40.05 198,173 $38.12 190,432 $36.45 Granted 12,328 53.82 14,137 47.47 41,630 39.89 Exercised (30,945) 35.40 (31,614) 30.57 (25,833) 26.74 Forfeited/expired (5,495) 43.31 (6,435) 43.82 (8,056) 43.56

Outstanding at end of year 150,149 42.03 174,261 40.05 198,173 38.12

Exercisable at end of year 89,652 40.52 94,643 36.41 97,663 32.56

Stock options outstanding and exercisable at December 31, 2005(a)

Options Outstanding Options Exercisable Range of Exercise Price Options Average Price(b) Average Life(c) Options Average Price(b) Average Life(c)

$14.40 to $21.54 905 $20.01 3.56 yrs. 905 $20.01 3.56 yrs. $23.00 to $33.75 14,559 30.46 3.07 14,398 30.50 3.05 $34.00 to $43.50 82,410 39.44 5.34 48,921 39.19 4.10 $43.75 to $56.75 52,275 49.77 7.17 25,428 49.48 6.09

150,149 42.03 5.67 89,652 40.52 4.45 (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.

Our RSU Activity(a)

2005 2004 Average Average Intrinsic Average Intrinsic Average

RSUs Value(b) Life(c) RSUs Value(b) Life(c)

Outstanding at beginning of year 2,922 $47.30 – $ – Granted 3,097 53.83 3,077 47.28 Converted (91) 48.73 (18) 47.25 Forfeited/expired (259) 50.51 (137) 47.25

Outstanding at end of year 5,669 50.70 1.8 yrs. 2,922 47.30 2.2 yrs. (a) RSUs are in thousands.

(b) Weighted-average intrinsic value.

(c) Weighted-average contractual life remaining.

Other stock-based compensation data

Stock Options RSUs 2005 2004 2003 2005 2004

Weighted-average fair value of options granted $13.45 $12.04 $11.21 Total intrinsic value of options/RSUs exercised/converted(a) $632,603 $667,001 $466,719 $4,974 $914 Total intrinsic value of options/RSUs outstanding(a) $2,553,594 $2,062,153 $1,641,505 $334,931 $151,760 Total intrinsic value of options exercisable(a) $1,662,198 $1,464,926 $1,348,658 (a) In thousands.

At December 31, 2005, there was $315 million of total unrecognized compensation cost related to nonvested share-based compensation grants. This unrecognized compensation is expected to be recognized over a weighted-average period of 1.6 years.

Financial Statements and Accompanying Notes A17

Our pension plans cover full-time employ- ees in the U.S. and certain international employees. Benefits are determined based on either years of service or a combination of years of service and earnings. U.S. 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 specified dollar amounts, which vary based upon years of service, with retirees contributing 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. The cost or benefit of plan changes that increase or decrease benefits for prior employee service (prior service cost) is included in expense on a straight-line basis over the average remaining service period of employees expected to receive benefits.

The Medicare Act was signed into law in December 2003 and we applied the provi- sions of the Medicare Act to our plans in 2005 and 2004. The Medicare Act provides a subsidy for sponsors of retiree medical plans who offer drug benefits equivalent to those provided under Medicare. As a result of the Medicare Act,

our 2005 and 2004 retiree medical costs were $11 million and $7 million lower, respectively, and our 2005 and 2004 lia- bilities were reduced by $136 million and $80 million, respectively. We expect our 2006 retiree medical costs to be approxi- mately $18 million lower than they other- wise would have been as a result of the Medicare Act.

For additional unaudited information on our pension and retiree medical plans and related accounting policies and assump- tions, see “Our Critical Accounting Policies” in Management’s Discussion and Analysis.

Pension Retiree Medical 2005 2004 2003 2005 2004 2003 2005 2004 2003

U.S. International Weighted-average assumptions Liability discount rate........................................................ 5.7% 6.1% 6.1% 5.1% 6.1% 6.1% 5.7% 6.1% 6.1% Expense discount rate........................................................ 6.1% 6.1% 6.7% 6.1% 6.1% 6.4% 6.1% 6.1% 6.7% Expected return on plan assets ......................................... 7.8% 7.8% 8.3% 8.0% 8.0% 8.0% – – – Rate of compensation increases........................................ 4.4% 4.5% 4.5% 4.1% 3.9% 3.8% – – –

Components of benefit expense Service cost....................................................................... $ 213 $ 193 $ 153 $ 32 $ 27 $ 24 $ 40 $ 38 $ 33 Interest cost...................................................................... 296 271 245 55 47 39 78 72 73 Expected return on plan assets ........................................ (344) (325) (305) (69) (65) (54) – – – Amortization of prior service cost/(benefit)....................... 3 6 6 1 1 – (11) (8) (3) Amortization of experience loss......................................... 106 81 44 15 9 5 26 19 13 Benefit expense................................................................. 274 226 143 34 19 14 133 121 116 Settlement/curtailment loss ............................................. – 4 – – 1 – – – – Special termination benefits............................................. 21 19 4 – 1 – 2 4 – Total .................................................................................. $ 295 $ 249 $ 147 $ 34 $ 21 $ 14 $135 $125 $116

Note 7 — Pension, Retiree Medical and Savings Plans

A18 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Pension Retiree Medical 2005 2004 2005 2004 2005 2004

U.S. International Change in projected benefit liability Liability at beginning of year $4,968 $4,456 $ 952 $758 $1,319 $1,264 Service cost 213 193 32 27 40 38 Interest cost 296 271 55 47 78 72 Plan amendments – (17) 3 1 (8) (41) Participant contributions – – 10 9 – – Experience loss/(gain) 517 261 203 73 (45) 58 Benefit payments (241) (205) (28) (29) (74) (76) Settlement/curtailment loss – (9) – (2) – – Special termination benefits 21 18 – 1 2 4 Foreign currency adjustment – – (68) 67 – – Other (3) – 104 – – – Liability at end of year $5,771 $4,968 $1,263 $952 $1,312 $1,319

Liability at end of year for service to date $4,783 $4,164 $1,047 $779

Change in fair value of plan assets Fair value at beginning of year $4,152 $3,558 $ 838 $687 $ – $ – Actual return on plan assets 477 392 142 77 – – Employer contributions/funding 699 416 104 37 74 76 Participant contributions – – 10 9 – – Benefit payments (241) (205) (28) (29) (74) (76) Settlement/curtailment loss – (9) – (2) – – Foreign currency adjustment – – (61) 59 – – Other (1) – 94 – – – Fair value at end of year $5,086 $4,152 $1,099 $838 $ – $ –

Funded status as recognized in our Consolidated Balance Sheet Funded status at end of year $ (685) $ (817) $(164) $(113) $(1,312) $(1,319) Unrecognized prior service cost/(benefit) 5 9 17 13 (113) (116) Unrecognized experience loss 2,288 2,013 474 380 402 473 Fourth quarter benefit payments 5 5 4 7 19 19 Net amounts recognized $1,613 $1,210 $ 331 $ 287 $(1,004) $ (943)

Net amounts as recognized in our Consolidated Balance Sheet Other assets $2,068 $1,572 $367 $294 $ – $ – Intangible assets – – 1 5 – – Other liabilities (479) (387) (41) (37) (1,004) (943) Accumulated other comprehensive loss 24 25 4 25 – – Net amounts recognized $1,613 $1,210 $331 $287 $(1,004) $(943)

Components of increase in unrecognized experience loss Decrease in discount rate $ 365 $ – $194 $ 4 $ 61 $ – Employee-related assumption changes 57 196 2 65 – 109 Liability-related experience different from assumptions 95 65 7 4 (54) 31 Actual asset return different from expected return (133) (67) (73) (12) – – Amortization of losses (106) (81) (15) (9) (26) (19) Other, including foreign currency adjustments

and 2003 Medicare Act (3) (5) (22) 26 (52) (82) Total $ 275 $108 $ 93 $ 78 $(71) $ 39

Selected information for plans with liability for service to date in excess of plan assets Liability for service to date $(374) $(320) $(65) $(191) $(1,312) $(1,319) Projected benefit liability $(815) $(685) $(84) $(227) $(1,312) $(1,319) Fair value of plan assets $8 $11 $33 $161 $– $–

Of the total projected pension benefit liability at year-end 2005, $765 million relates to plans that we do not fund because the funding of such plans does not receive favorable tax treatment.

Financial Statements and Accompanying Notes A19

Savings Plans Our U.S. employees are eligible to partici- pate in 401(k) savings plans, which are voluntary defined contribution plans. The

plans are designed to help employees accumulate additional savings for retire- ment. We make matching contributions on a portion of eligible pay based on years of

service. In 2005 and 2004, our matching contributions were $52 million and $35 million, respectively.

Future Benefit Payments Our estimated future benefit payments are as follows:

2006 2007 2008 2009 2010 2011-15 Pension $235 $255 $275 $300 $330 $2,215 Retiree medical $85 $90 $90 $95 $100 $545

These future benefits to beneficiaries include payments from both funded and unfunded pension plans.

Pension Assets The expected return on pension plan assets is based on our historical experi- ence, our pension plan investment guide- lines, 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 guidelines are established based upon an evaluation 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’ ben- efit 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 target

allocation and actual pension plan asset allocations for the plan years 2005 and 2004, are below.

Pension assets include approximately 5.5 million shares of PepsiCo common stock with a market value of $311 million in 2005, and 5.5 million shares with a market value of $267 million in 2004. Our investment policy limits the investment in PepsiCo stock at the time of investment to 10% of the fair value of plan assets.

1% Increase 1% Decrease 2005 service and interest cost components $3 $(2) 2005 benefit liability $38 $(33)

Actual Allocation Asset Category Target Allocation 2005 2004

Equity securities 60% 60% 60% Debt securities 40% 39% 39% Other, primarily cash – 1% 1% Total 100% 100% 100%

Our most significant noncontrolled bottling affiliates are PBG and PAS. Approximately 10% of our net revenue in 2005, 2004 and 2003 reflects sales to PBG.

The Pepsi Bottling Group In addition to approximately 41% and 42% of PBG’s outstanding common stock that we own at year-end 2005 and 2004, respectively, we own 100% of PBG’s class B common stock and approximately 7% of the equity of Bottling Group, LLC, PBG’s

principal operating subsidiary. This gives us economic ownership of approximately 45% and 46% of PBG’s combined opera- tions at year-end 2005 and 2004, respec- tively. In 2005, bottling equity income includes $126 million of pre-tax gains on our sales of PBG stock.

Note 8 — Noncontrolled Bottling Affiliates

Retiree Medical Cost Trend Rates An average increase of 10% in the cost of covered retiree medical benefits is assumed for 2006. This average increase is then projected to decline gradually to

5% in 2010 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:

A20 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Such amounts are settled on terms consistent with other trade receivables and payables. See Note 9 regarding our guaran- tee of certain PBG debt.

In addition, we coordinate, on an aggre- gate basis, the negotiation and purchase of sweeteners and other raw materials

requirements for certain of our bottlers with suppliers. Once we have negotiated the contracts, the bottlers 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 nonpay- ment by our bottlers, but we consider this exposure to be remote.

2005 2004 2003 Net revenue $4,633 $ 4,170 $3,699 Selling, general and administrative expenses $143 $114 $128 Accounts and notes receivable $178 $157 Accounts payable and other current liabilities $117 $95

Our investment in PBG, which includes the related goodwill, was $400 million and $321 million higher than our ownership interest in their net assets at year-end 2005 and 2004, respectively. Based upon the quoted closing price of PBG shares at year-end 2005 and 2004, the calculated market value of our shares in PBG, exclud- ing our investment in Bottling Group, LLC, exceeded our investment balance by approximately $1.5 billion and $1.7 billion, respectively.

PepsiAmericas At year-end 2005 and 2004, we owned approximately 43% and 41% of PepsiAmericas, respectively, and their summarized financial information is as follows:

2005 2004 2003 Current assets $ 598 $ 530 Noncurrent assets 3,456 3,000

Total assets $4,054 $3,530

Current liabilities $ 722 $ 521 Noncurrent liabilities 1,763 1,386

Total liabilities $2,485 $1,907

Our investment $968 $924

Net revenue $3,726 $3,345 $3,237 Gross profit $1,562 $1,423 $1,360 Operating profit $393 $340 $316 Net income $195 $182 $158

PBG’s summarized financial information is as follows:

2005 2004 2003 Current assets $ 2,412 $ 2,183 Noncurrent assets 9,112 8,754

Total assets $11,524 $10,937 Current liabilities $2,598 $1,725 Noncurrent liabilities 6,387 6,818 Minority interest 496 445

Total liabilities $9,481 $8,988

Our investment $1,738 $1,594

Net revenue $11,885 $10,906 $10,265 Gross profit $5,632 $5,250 $5,050 Operating profit $1,023 $976 $956 Net income $466 $457 $416

Related Party Transactions Our significant related party transactions involve our noncontrolled bottling affiliates. We sell concentrate to these affiliates, which is used in the production of carbon- ated soft drinks and non-carbonated bever-

ages. We also sell certain finished goods to these affiliates and we receive royalties 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. These transactions with our bottling affiliates are reflected in our consolidated financial statements as follows:

Our investment in PAS, which includes the related goodwill, was $292 million and $253 million higher than our owner- ship interest in their net assets at year-end 2005 and 2004, respectively. Based upon the quoted closing price of PAS shares at year-end 2005 and 2004, the calculated market value of our shares in PepsiAmericas exceeded our investment balance by approximately $364 million and $277 million, respectively.

In January 2005, PAS acquired a regional bottler, Central Investment Corporation. The table above includes the results of Central Investment Corporation from the transaction date forward.

Financial Statements and Accompanying Notes A21

Note 9 — Debt Obligations and Commitments

Short-term borrowings are reclassified to long-term when we have the intent and ability, through the existence of the unused lines of credit, to refinance these borrow- ings on a long-term basis. At year-end 2005, we maintained $2.1 billion in corporate lines of credit subject to normal banking terms and conditions. These credit facilities support short-term debt issuances and remained unused as of December 31, 2005. Of the $2.1 billion, $1.35 billion expires in May 2006 with the remaining $750 million expiring in June 2009.

In addition, $181 million of our debt was outstanding on various lines of credit maintained for our international divisions.

These lines of credit are subject to normal banking terms and conditions and are committed to the extent of our borrowings.

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 vari- able weighted-average interest rate that we pay is linked to LIBOR and is subject to change. The notional amount of the inter- est rate swaps outstanding at December 31, 2005 and December 25, 2004 was $500 million. The terms of the interest rate swaps match the terms of the debt they modify. The swaps mature in 2007.

At December 31, 2005, approximately 78% of total debt, after the impact of the associated interest rate swaps, was exposed to variable interest rates, compared to 67% at December 25, 2004. In addition to vari- able rate long-term debt, all debt with matu- rities 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 unrecognized gain related to this swap was less than $1 million at December 31, 2005, resulting in a U.S. dollar liability of $50 million. At December 25, 2004, the unrecognized loss related to this swap was $3 million, resulting in a U.S. dollar liability of $53 million. We have also entered into cross currency interest rate swaps to hedge the currency exposure on U.S. dollar denominated intercompany debt of $125 million. The terms of the swaps match the terms of the debt they modify. The swaps mature over the next two years. The net unrecognized gain related to these swaps was $5 million at December 31, 2005. The net unrecog- nized loss related to these swaps was less than $1 million at December 25, 2004.

2005 2004 Short-term debt obligations Current maturities of long-term debt $ 143 $ 160 Commercial paper (3.3% and 1.6%) 3,140 1,287 Other borrowings (7.4% and 6.6%) 356 357 Amounts reclassified to long-term debt (750) (750)

$2,889 $1,054

Long-term debt obligations Short-term borrowings, reclassified $ 750 $ 750 Notes due 2006-2026 (5.4% and 4.7%) 1,161 1,274 Zero coupon notes, $475 million due 2006-2012 (13.4%) 312 321 Other, due 2006-2014 (6.3% and 6.2%) 233 212

2,456 2,557 Less: current maturities of long-term debt obligations (143) (160)

$2,313 $2,397

The interest rates in the above table reflect weighted-average rates as of year-end.

Long-Term Contractual Commitments

Payments Due by Period Total 2006 2007-2008 2009-2010 2011 and beyond Long-term debt obligations(a) .......................................................... $2,313 $ – $1,052 $ 876 $ 385 Operating leases ............................................................................. 769 187 253 132 197 Purchasing commitments(b) ............................................................ 4,533 1,169 1,630 775 959 Marketing commitments.................................................................. 1,487 412 438 381 256 Other commitments......................................................................... 99 82 10 6 1

$9,201 $1,850 $3,383 $2,170 $1,798

(a) Excludes current maturities of long-term debt of $143 million which are classified within current liabilities.

(b) Includes approximately $13 million of long-term commitments which are reflected in other liabilities in our Consolidated Balance Sheet.

The above table reflects non-cancelable commitments as of December 31, 2005 based on year-end foreign exchange rates.

A22 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Most long-term contractual commit- ments, except for our long-term debt obligations, are not recorded in our Consolidated Balance Sheet. Non-cance- lable operating leases primarily represent building leases. Non-cancelable purchasing commitments are primarily for oranges and orange juices to be used for our Tropicana brand beverages. Non-cancelable marketing commitments primarily are for sports marketing and with our fountain customers. 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

obligations 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, noncontrolled affiliates or third parties. However, certain guarantees were necessary 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 $28 million of YUM! Brands, Inc. (YUM) outstanding obligations, primarily

property leases, through 2020. The terms of our Bottling Group, LLC debt guarantee are intended to preserve the 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 signifi- cantly changed. Our guarantees of certain obligations ensured YUM’s continued use of certain properties. These guarantees would require our cash payment if YUM failed to perform under these lease obligations.

See “Our Liquidity, Capital Resources and Financial Position” 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 derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while oth- ers 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 transac- tions are limited to an underlying exposure. As a result, any change in the value of our derivative instruments would be substan- tially offset 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 instrument 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 market 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 limit our exposure to individual counterparties 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 limited 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 fluctua- tions related to a portion of our anticipated commodity purchases, primarily for natural gas and diesel fuel. For those derivatives that are designated as cash flow hedges,

any ineffectiveness is recorded immedi- ately. However, our commodity cash flow hedges have not had any significant inef- fectiveness 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 reclas- sify gains of $24 million related to cash flow hedges from accumulated other comprehensive loss into net income.

Foreign Exchange Our operations outside of the U.S. generate over a third of our net revenue of which Mexico, the United Kingdom and Canada comprise nearly 20%. 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 on these hedges has not been material.

Interest Rates We centrally manage our debt and invest- ment 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 instruments effectively change the interest rate and currency of specific debt issuances. These swaps are entered into

Note 10 — Risk Management

Financial Statements and Accompanying Notes A23

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 creditworthy counterparties, are settled on a net basis and are of relatively short duration.

Stock Prices The portion of our deferred compensation 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 in our Consolidated Balance Sheet at fair value. The fair value of our derivative instru- ments is generally based on quoted market prices. Book and fair values of our derivative and financial instruments are as follows:

2005 2004 Book Value Fair Value Book Value Fair Value

Assets Cash and cash equivalents(a) .................................................................................. $1,716 $1,716 $1,280 $1,280 Short-term investments(b) ........................................................................................ $3,166 $3,166 $2,165 $2,165 Forward exchange contracts(c) ................................................................................. $19 $19 $8 $8 Commodity contracts(d) ............................................................................................ $41 $41 $7 $7 Prepaid forward contract(e) ...................................................................................... $107 $107 $120 $120 Cross currency interest rate swaps(f) ....................................................................... $6 $6 $– $– Liabilities Forward exchange contracts(c) ................................................................................. $15 $15 $35 $35 Commodity contracts(d) ............................................................................................ $3 $3 $8 $8 Debt obligations....................................................................................................... $5,202 $5,378 $3,451 $3,676 Interest rate swaps(g)............................................................................................... $9 $9 $1 $1 Cross currency interest rate swaps(f) ...................................................................... $– $– $3 $3 Included in our Consolidated Balance Sheet under the captions noted above or as indicated below. In addition, derivatives are designated as accounting hedges unless otherwise noted below.

(a) Book value approximates fair value due to the short maturity.

(b) Principally short-term time deposits and includes $124 million at December 31, 2005 and $118 million at December 25, 2004 of mutual fund investments used to manage a portion of market risk arising from our deferred compensation liability.

(c) 2005 asset includes $14 million related to derivatives not designated as accounting hedges. Assets are reported within current assets and other assets and liabilities are reported within current liabilities and other liabilities.

(d) 2005 asset includes $2 million related to derivatives not designated as accounting hedges and the liability relates entirely to derivatives not designated as accounting hedges. 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 and liability included in long-term debt.

(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 $47 million at December 31, 2005 and $46 million at December 25, 2004 based on an external estimate of the cost to us of transferring the liability to an independent financial institution. See Note 9 for additional information on our guarantees.

Basic net income per common share is net income available to common shareholders divided by the weighted average of com- mon 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 3.0 million shares in 2005, 7.0 million shares in 2004 and 49.0 million shares in 2003 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 $53.77 in 2005, $52.88 in 2004 and $48.27 in 2003.

Note 11 — Net Income per Common Share from Continuing Operations

A24 Appendix A Specimen Financial Statements: PepsiCo, Inc.

Comprehensive income is a measure of income which includes both net income and other comprehensive income or loss. Other comprehensive loss results from items deferred on the balance sheet in shareholders’ equity. Other comprehensive (loss)/income was $(167) million in 2005, $381 million in 2004, and $405 million in 2003. The accumulated balances for each component of other comprehensive loss were as follows:

2005 2004 2003 Currency translation adjustment $ (971) $(720) $(1,121) Cash flow hedges, net of tax(a) 27 (19) (12) Minimum pension liability adjustment(b) (138) (154) (135) Unrealized gain on securities, net of tax 31 7 1 Other (2) – – Accumulated other comprehensive loss $(1,053) $(886) $(1,267)

(a) Includes net commodity gains of $55 million in 2005. Also includes no impact in 2005, $6 million gain in 2004 and $8 million gain in 2003 for our share of our equity investees’ accumulated derivative activity. Deferred gains/(losses) reclassified into earnings were $8 million in 2005, $(10) million in 2004 and no impact in 2003.

(b) Net of taxes of $72 million in 2005, $77 million in 2004 and $67 million in 2003. Also, includes $120 million in 2005, $121 million in 2004 and $110 million in 2003 for our share of our equity investees’ minimum pension liability adjustments.

As of December 31, 2005 and December 25, 2004, there were 3.6 billion shares of common stock and 3 million shares of convertible preferred stock authorized. The preferred stock was issued only for an employee stock ownership plan (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 2005 and

2004, there were 803,953 preferred shares issued and 354,853 and 424,853 shares outstanding, respectively. 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.

As of December 31, 2005, 0.3 million outstanding shares of preferred stock with a fair value of $104 million and 17 million

shares of common stock were held in the accounts of ESOP participants. As of December 25, 2004, 0.4 million outstand- ing shares of preferred stock with a fair value of $110 million and 18 million shares of common stock were held in the accounts of ESOP participants. Quaker made the final award to its ESOP plan in June 2001.

Note 12 — Preferred and Common Stock

2005 2004 2003 Income Shares(a) Income Shares(a) Income Shares(a)

Net income $4,078 $4,174 $3,568 Preferred shares:

Dividends (2) (3) (3) Redemption premium (16) (22) (12)

Net income available for common shareholders $4,060 1,669 $4,149 1,696 $3,553 1,718

Basic net income per common share $2.43 $2.45 $2.07

Net income available for common shareholders $4,060 1,669 $4,149 1,696 $3,553 1,718 Dilutive securities:

Stock options and RSUs – 35 – 31 – 17 ESOP convertible preferred stock 18 2 24 2 15 3 Unvested stock awards – – – – – 1

Diluted $4,078 1,706 $4,173 1,729 $3,568 1,739

Diluted net income per common share $2.39 $2.41 $2.05

(a) Weighted-average common shares outstanding.

2005 2004 2003 Shares Amount Shares Amount Shares Amount

Preferred stock 0.8 $41 0.8 $41 0.8 $41

Repurchased preferred stock Balance, beginning of year 0.4 $ 90 0.3 $63 0.2 $48

Redemptions 0.1 19 0.1 27 0.1 15 Balance, end of year 0.5 $110* 0.4 $90 0.3 $63

*Does not sum due to rounding.

Note 13 — Accumulated Other Comprehensive Loss

The computations of basic and diluted net income per common share from continuing operations are as follows:

Financial Statements and Accompanying Notes A25

2005 2004 2003 Accounts receivable Trade receivables ..................................................... $2,718 $2,505 Other receivables ..................................................... 618 591

3,336 3,096 Allowance, beginning of year ................................... 97 105 $116

Net amounts (credited)/charged to expense ........ (1) 18 32 Deductions(a) ........................................................ (22) (25) (43) Other(b) ................................................................. 1 (1) –

Allowance, end of year ............................................. 75 97 $105 Net receivables ........................................................ $3,261 $2,999

Inventory(c)

Raw materials.......................................................... $ 738 $ 665 Work-in-process ....................................................... 112 156 Finished goods ......................................................... 843 720

$1,693 $1,541

Accounts payable and other current liabilities Accounts payable ..................................................... $1,799 $1,731 Accrued marketplace spending................................ 1,383 1,285 Accrued compensation and benefits ........................ 1,062 961 Dividends payable.................................................... 431 387 Insurance accruals .................................................. 136 131 Other current liabilities............................................ 1,160 1,104

$5,971 $5,599

Other liabilities Reserves for income taxes........................................ $1,884 $1,567 Other ........................................................................ 2,439 2,532

$4,323 $4,099

Other supplemental information Rent expense............................................................ $228 $245 $231 Interest paid ............................................................ $213 $137 $147 Income taxes paid, net of refunds............................ $1,258 $1,833 $1,530 Acquisitions(d)

Fair value of assets acquired............................... $ 1,089 $ 78 $178 Cash paid and debt issued.................................. (1,096) (64) (71) SVE minority interest eliminated.......................... 216 – – Liabilities assumed.............................................. $ 209 $ 14 $107

(a) Includes accounts written off.

(b) Includes collections of previously written-off accounts and currency translation effects.

(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 17% in 2005 and 15% in 2004 of the inventory cost was computed using the LIFO method. The differences between LIFO and FIFO methods of valuing these inventories were not material.

(d) 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.

Note 14 — Supplemental Financial Information

A26 Appendix A Specimen Financial Statements: PepsiCo, Inc.

ADDITIONAL INFORMATION In addition to the financial statements and accompanying notes, companies are re- quired to provide a report on internal control over financial reporting and to have an auditor’s report on the financial statements. In addition, PepsiCo has provided a report indicating that financial reporting is management’s responsibility. Finally, PepsiCo also provides selected financial data it believes is useful.The two required reports are further explained below.

Management’s Report on Internal Control over Financial Reporting The Sarbanes-Oxley Act of 2002 requires managers of publicly traded companies to establish and maintain systems of internal control over the company’s financial reporting processes. In addition, management must express its responsibility for fi- nancial reporting, and it must provide certifications regarding the accuracy of the financial statements.

Auditor’s Report All publicly held corporations, as well as many other enterprises and organizations engage the services of independent certified public accountants for the purpose of obtaining an objective, expert report on their financial statements. Based on a comprehensive examination of the company’s accounting system, accounting records, and the financial statements, the outside CPA issues the auditor’s report.

The standard auditor’s report identifies who and what was audited and indi- cates the responsibilities of management and the auditor relative to the financial statements. It states that the audit was conducted in accordance with generally ac- cepted auditing standards and discusses the nature and limitations of the audit. It then expresses an informed opinion as to (1) the fairness of the financial state- ments and (2) their conformity with generally accepted accounting principles. It also expresses an opinion regarding the effectiveness of the company’s internal controls. All of this additional information for PepsiCo is provided on the follow- ing pages.

Additional Information A27

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 objectivity 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 understand- able 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 reason- able assurance that transactions are executed as authorized and accurately recorded; that assets are safeguarded; and that accounting records are sufficiently reliable to permit the prepara- tion of financial statements that conform in all material respects with accounting principles generally accepted in the U.S. We maintain 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, summa- rized and reported within the specified time periods. We monitor these internal controls through self-assessments and an ongoing program of internal audits. Our internal controls 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 diligent Board that meets the required standards for independence, and we welcome the Board’s oversight as a representative of our shareholders. Our

Audit Committee comprises independent directors with the financial literacy, 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. In 2005, we named a senior compliance officer to lead and coordinate our compliance policies and practices.