O Pepsi Co Beverages North America example essay topic

Form 10-K PEPSICO INC - PEP Filed: February 28, 2005 (period: December 25, 2004) Annual report which provides a comprehensive overview of the company for the past year Table of Contents PART IItem 1. Business 1 PART IItem 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4.

Submission of Matters to a Vote of Security Holders PART tem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis Item 7 a. Quantitative and Qualitative Disclosures About Market Risk Item 8.

Financial Statements and Supplementary Data Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9 A. Controls and Procedures Item 9 B. Other Information PART tem 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matt Item 13. Certain Relationships and Related Transactions Item 14.

Principal Accountant Fees and Services PART Iitem 15. Exhibits and Financial Statement SchedulesSIGNATURESITEM 14 (a) (3) T'ac@ EX-10.20 (Material contracts) EX-10.21 (Material contracts) EX-12 (Statement regarding computation of ratios) EX-21 (Subsidiaries of the registrant) EX-23 (Consents of experts and counsel) EX-24 (Power of attorney) EX-31 (Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002) EX-32 (Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002) UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KFOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 25, 2004 ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-1183 PEPSICO, INC. (Exact Name of Registrant as Specified in Its Charter) North Carolina 13-1584302 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 700 Anderson Hill Road, Purchase, New York 10577 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code 914-253-2000 Securities registered pursuant to Section 12 (b) of the Securities Exchange Act of 1934: Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value 1-2/3 cents per share New York and Chicago Stock Exchanges Securities registered pursuant to Section 12 (g) of the Securities Exchange Act of 1934: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12 b-2). Yes No o The number of shares of Pepsi Co Common Stock outstanding as of February 18, 2005 was 1,678,172,035. The aggregate market value of Pepsi Co Common Stock held by non affiliates of Pepsi Co as of June 12, 2004, the last day of business of our most recently completed second fiscal quarter, was $93,273,528,587.

Documents of Which Portions Are Incorporated by Reference Parts of Form 10-K into Which Portion of Documents Are Incorporated Proxy Statement for Pepsi Co's May 4, 2005 Annual Meeting of Shareholders Pepsi Co, Inc. Form 10-K Annual Report For the Fiscal Year Ended December 25, 2004 Table of Contents PART I Item 1. Business 1 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4.

Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 10 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7 a. Quantitative and Qualitative Disclosures About Market Risk 93 Item 8.

Financial Statements and Supplementary Data 93 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 93 Item 9 A. Controls and Procedures 93 Item 9 B. Other Information 94 PART Item 10. Directors and Executive Officers of the Registrant 94 Item 11. Executive Compensation 94 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters 95 Item 13. Certain Relationships and Related Transactions 97 Item 14.

Principal Accountant Fees and Services 97 PART IV Item 15. Exhibits and Financial Statement Schedules 98 ii PART IItem 1. Business PepsiCo, Inc. was incorporated in Delaware in 1919 and was reincorporated in North Carolina in 1986. When used in this report, the terms "we", us", our" and the "Company" mean Pepsi Co and its divisions and subsidiaries. Our Divisions We are a leading, global snack and beverage company.

We manufacture, market and sell a variety of salty, convenient, sweet and grain-based snacks, carbonated and noncarbonated beverages and foods. We are organized in four divisions: o Frito-Lay North America, o Pepsi Co Beverages North America, o Pepsi Co International, and o Quaker Foods North America. Our North American divisions operate in the United States and Canada. Our international divisions operate in over 200 countries, with our largest operations in Mexico and the United Kingdom. Financial information concerning our divisions and geographic areas is presented in Note 1 to our consolidated financial statements and additional information concerning our division operations, customers and distribution network is presented under the heading "Our Business" contained in "Item 7. Management's Discussion and Analysis".

Frito-Lay North America Frito-Lay North America (FLNA) manufactures or uses contract manufacturers, markets, sells and distributes branded snacks. These snacks include Lay's potato chips, Doritos flavored tortilla chips, Tostitos tortilla chips, Cheetos cheese flavored snacks, Fritos corn chips, Ruffles potato chips, branded dips, Rold Gold pretzels, Quaker Chewy granola bars, Sun Chips multi grain snacks, Munchies snack mix, Grandma's cookies, Lay's Stax potato crisps, Quaker Fruit & Oatmeal bars, Quaker Quakes corn and rice snacks, Cracker Jack candy coated popcorn, and Go Snacks. FLNA branded products are sold to independent distributors and retailers. FLNA's net revenue was $9.6 billion in 2004, $9.1 billion in 2003 and $8.6 billion in 2002 and approximated 33% of our total division net revenue in 2004 and 34% of our total division net revenue in each of 2003 and 2002.1 Pepsi Co Beverages North AmericaPepsiCo Beverages North America (PBNA) manufactures or uses contract manufacturers, markets and sells beverage concentrates, fountain syrups and finished goods, under various beverage brands, including Pepsi, Mountain Dew, Gatorade, Tropicana Pure Premium, Sierra Mist, Mug, Tropicana Juice Drinks, Propel, So Be, Slice, Dole, Tropicana Twister, and Tropicana Season's Best. PBNA also manufactures, markets and sells ready-to-drink tea and coffee products through joint ventures with Lipton and Starbucks. In addition, PBNA licenses the Aquafina water brand to its bottlers and markets this brand.

PBNA sells concentrate and finished goods for some of these brands to bottlers licensed by us, and some of these branded products are sold directly by us to independent distributors and retailers. The franchise bottlers sell our brands as finished goods to independent distributors and retailers. PBNA's net revenue was $8.3 billion in 2004, $7.7 billion in 2003 and $7.2 billion in 2002 and approximated 28% of our total division net revenue in 2004 and 29% of our total division net revenue in each of 2003 and 2002. Pepsi Co InternationalPepsiCo International (PI) manufactures through consolidated businesses as well as through non controlled affiliates, a number of leading salty and sweet snack brands including Gamesa and Sabritas in Mexico, Walkers in the United Kingdom, and Smith's in Australia.

Further, PI manufactures or uses contract manufacturers, markets and sells many Quaker brand snacks. PI also manufactures, markets and sells beverage concentrates, fountain syrups and finished goods under the brands Pepsi, 7 UP, Mirinda, Mountain Dew, Gatorade and Tropicana. These brands are sold to franchise bottlers, independent distributors and retailers. However, in certain markets, PI operates its own bottling plants and distribution facilities. PI also licenses the Aquafina water brand to certain of its franchise bottlers. PI's net revenue was $9.9 billion in 2004, $8.7 billion in 2003 and $7.7 billion in 2002 and approximated 34% of our total division net revenue in 2004 and 32% of our total division net revenue in each of 2003 and 2002.

Quaker Foods North America Quaker Foods North America (QFNA) manufactures or uses contract manufacturers, markets and sells cereals, rice, pasta and other branded products. QFNA's products include Quaker oatmeal, Aunt Jemima mixes and syrups, Quaker grits, Cap'n Crunch and Life ready-to-eat cereals, Rice-A-Roni, Pasta Roni and Near East side dishes. These branded products are sold to independent distributors and retailers. QFNA's net revenue was $1.5 billion in 2004, 2003 and 2002 and approximated 5% of our total division net revenue in each of those years. Our Distribution Network Our products are brought to market through direct-store-delivery, broker-warehouse and food service and vending distribution networks. The distribution system used depends on 2 customer needs, product characteristics, and local trade practices.

These distribution systems are described under the heading "Our Business" contained in "Item 7. Ingredients and Other Supplies The principal ingredients we use in our food and beverage businesses are almonds, aspartame, cocoa, corn, corn sweeteners, flavorings, flour, juice and juice concentrates, oats, oranges, grapefruits and other fruits, potatoes, rice, seasonings, sugar, vegetable and essential oils and wheat. Our key packaging materials include P.E.T. resin used for plastic bottles, film packaging used for snack foods and cardboard. Fuel and natural gas are also important commodities due to their use in our plants and in the trucks delivering our products. These products are purchased mainly in the open market. We employ specialists to secure adequate supplies of many of these items and have not experienced any significant continuous shortages.

The prices we pay for such items are subject to fluctuation. When prices increase, we may or may not pass on such increases to our customers. When we have decided to pass along price increases in the past, we have done so successfully. However, there is no assurance that we will be able to do so in the future. Our Brands We own numerous valuable trademarks which are essential to our worldwide businesses, including Allegro, AMP, Aquafina, Aunt Jemima, Cap'n Crunch, Cheetos, Cracker Jack, Diet Pepsi, Doritos, Frito-Lay, Fritos, Gamesa, Gatorade, Golden Grain, Grandma's, Lay's, Life, Mirinda, Mountain Dew, Mountain Dew Code Red, Mug, Near East, Pasta Roni, Pepsi, Pepsi Max, Pepsi One, Pepsi Twist, Pepsi-Cola, Propel, Quaker, Quaker Chewy, Quaker Quakes, Rice-A-Roni, Rold Gold, Ruffles, Sabritas, 7 UP and Diet 7 UP (outside the United States), Sierra Mist, Slice, Smith's, Snack a Jacks, So Be, Sun Chips, Tostitos, Tropicana, Tropicana Pure Premium, Tropicana Season's Best, Tropicana Twister, Walkers, Wild Cherry Pepsi and Wot sits. Trademarks remain valid so long as they are used properly for identification purposes, and we emphasize correct use of our trademarks.

We have authorized, through licensing arrangements, the use of many of our trademarks in such contexts as snack food joint ventures and beverage bottling appointments. In addition, we license the use of our trademarks on promotional items for the primary purpose of enhancing brand awareness. We either own or have licenses to use a number of patents which relate to some of our products, their packaging, the processes for their production and the design and operation of various equipment used in our businesses. Some of these patents are licensed to others. Seasonality Our beverage and food divisions are subject to seasonal variations. Our beverage sales are higher during the warmer months and certain food sales are higher in the cooler months.

Weekly sales are generally highest in the third quarter due to seasonal and 3 holiday-related patterns. However, taken as a whole, seasonality does not have a material impact on our business. Our Customers Our customers include franchise bottlers and independent distributors and retailers. We normally grant our bottlers exclusive contracts to sell and manufacture certain beverage products bearing our trademarks within a specific geographic area. These arrangements specify the amount to be paid by our bottlers for concentrate and full goods and for Aquafina royalties, as well as the manufacturing process required for product quality. Sales to Wal-Mart Stores, Inc. represent approximately 11% of our total net revenue.

Retail consolidation has increased the importance of major customers and further consolidation is expected. Our top five retail customers currently represent approximately 27% of our 2004 North American net revenue, with Wal-Mart representing approximately 14%. In addition, sales to The Pepsi Bottling Group (PBG) represent approximately 10% of our total net revenue. See Note 8 to our consolidated financial statements for more information on our anchor bottlers. Our Competition Our businesses operate in highly competitive markets. We compete against global, regional and private label manufacturers on the basis of price, quality, product variety and effective distribution.

Success in this competitive environment is primarily achieved through effective promotion of existing products and the introduction of new products. We believe that the strength of our brands, innovation and marketing, coupled with the quality of our products and flexibility of our distribution network, allow us to compete effectively. Frito-Lay holds a significant leadership market position in the snack industry worldwide and faces local and regional competitors as well as national and global snack competitors on issues related to price, quality, variety and distribution. In the beverage industry, The Coca-Cola Company is our primary competitor.

In the United States, The Coca-Cola Company has a slightly larger share of carbonated soft drink consumption, while we have a larger share for chilled juices and isotonic's. We also face many local value brand competitors in the United States. Internationally, The Coca-Cola Company has a significant market share advantage for carbonated beverages. In addition, internationally we compete with strong local carbonated beverage brands in many countries.

We believe that the strength of our brands, innovation and marketing coupled with the quality of our products and flexibility of our distribution network, enable us to compete effectively. 4 The information in the charts above is based on Information Resources, Inc. and A.C. Nielsen Corporation reports that exclude Wal-Mart, as Wal-Mart does not report data to these services. Regulatory Environment The conduct of our businesses, and the production, distribution, sale, advertising, labeling, safety, transportation and use of many of our products, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as to foreign laws and regulations administered by government entities and agencies in markets where we operate. It is our policy to follow the laws and regulations around the world that apply to our businesses. In the United States, we are required to comply with federal laws, such as the Food, Drug and Cosmetic Act, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Motor Carrier Safety Act, laws governing equal employment opportunity and various other federal, state and local statutes and regulations. In many jurisdictions, compliance with competition laws is of special importance to us due to our competitive position in those jurisdictions.

We rely on legal, operational and environmental compliance programs, as well as local in-house and outside counsel, to guide our businesses in complying with applicable laws and regulations of the countries in which we do business. The cost of compliance with foreign laws does not have a material financial impact on our international operations. 5 Employees As of December 25, 2004, we employed, subject to seasonal variations, approximately 153,000 people worldwide, including approximately 60,000 people employed within the United States. We believe that relations with our employees are generally good. Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge on our internet website at web as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission. Item 2.

Properties We own our corporate headquarters building in Purchase, New York. Leases of plants in North America generally are on a long-term basis, expiring at various times, with options to renew for additional periods. Most international plants are leased for varying and usually shorter periods, with or without renewal options. We believe that our properties are in good operating condition and are suitable for the purposes for which they are being used. Frito-Lay North America Frito-Lay North America (FLNA) owns or leases approximately 50 food manufacturing and processing plants and approximately 1,700 warehouses, distribution centers and offices, including its headquarters building and a research facility in Plano, Texas.

Pepsi Co Beverages North AmericaPepsiCo Beverages North America (PBNA) owns or leases approximately 44 plants and production processing facilities and approximately 43 warehouses, distribution centers and offices, including its headquarters building in downtown Chicago, Illinois. Licensed bottlers in which we have an ownership interest own or lease approximately 70 bottling plants. Pepsi Co InternationalPepsiCo International (PI) owns or leases approximately 175 plants and approximately 1,500 warehouses, distribution centers and offices. PI is headquartered in the corporate facility in Purchase, NY.

6 Quaker Foods North America Quaker Foods North America (QFNA) owns or leases approximately 20 manufacturing plants and 1 warehouse in North America. QFNA is headquartered in the same facility with PBNA in downtown Chicago, Illinois. Shared Properties Frito-Lay North America and Quaker Foods North America share approximately 7 plants and 4 distribution centers, warehouses and officers. FLNA, PBNA and QFNA share approximately 7 plants and 14 distribution centers, warehouses and offices in North America, including a research and development laboratory in Barrington, Illinois. Item 3. Legal Proceedings We are party to a variety of legal proceedings arising in the normal course of business, including the matters discussed below.

While the results of proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our consolidated financial statements, results of operations or cash flows. On April 30, 2004, we announced that Frito-Lay and Pepsi-Cola Company received notification from the Securities and Exchange Commission (the "SEC") indicating that the SEC staff was proposing to recommend that the SEC bring a civil action alleging that a non-executive employee at Pepsi-Cola and another at Frito-Lay signed documents in early 2001 prepared by Kmart acknowledging payments in the amount of $3 million from Pepsi-Cola and $2.8 million from Frito-Lay. Kmart allegedly used these documents to prematurely recognize the $3 million and $2.8 million in revenue. Frito-Lay and Pepsi-Cola have cooperated fully with this investigation and provided written responses to the SEC staff notices setting forth the factual and legal bases for their belief that no enforcement actions should be brought against Frito-Lay or Pepsi-Cola.

On November 5, 2003, we announced that Frito-Lay received notification from the SEC staff indicating that the staff was considering recommending that the SEC bring a civil injunctive action against Frito-Lay and one of its non-executive sales employees who signed documents requested by The Fleming Companies in 2001-2002 involving payments of $400,000, which Fleming allegedly used to accelerate its revenue recognition. On December 28, 2004, the SEC staff notified Frito-Lay that it does not intend to recommend an enforcement action against Frito-Lay in connection with the Fleming matter. Based on an internal review of the Kmart and Fleming matters, no officers of Pepsi Co, Pepsi-Cola or Frito-Lay are involved. None of these matters involves any allegations regarding Pepsi Co's accounting for its transactions with Kmart or The Fleming Companies or Pepsi Co's financial statements.

7 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Our Executive Officers The following is a list of names, ages and background of our current executive officers: Steven S Reinemund, 56, has been Pepsi Co's Chairman and Chief Executive Officer since May 2001. He was elected a director of Pepsi Co in 1996 and before assuming his current position, served as President and Chief Operating Officer from September 1999 until May 2001. Mr. Reinemund began his career with Pepsi Co in 1984 as a senior operating officer of Pizza Hut, Inc.

He became President and Chief Executive Officer of Pizza Hut in 1986, and President and Chief Executive Officer of Pizza Hut Worldwide in 1991. In 1992, Mr. Reinemund became President and Chief Executive Officer of Frito-Lay, Inc., and Chairman and Chief Executive Officer of the Frito-Lay Company in 1996. Mr. Reinemund is also a director of Johnson & Johnson. Peter A. Bridgman, 52, has been our Senior Vice President and Controller since August 2000. Mr. Bridgman began his career with Pepsi Co at Pepsi-Cola International in 1985 and became Chief Financial Officer for Central Europe in 1990. He became Senior Vice President and Controller for Pepsi-Cola North America in 1992 and Senior Vice President and Controller for The Pepsi Bottling Group, Inc. in 1999.

Matthew M. McKenna, 54, has been our Senior Vice President of Finance since August 2001. Mr. McKenna began his career at Pepsi Co as Vice President, Taxes in 1993. In 1998, he became Senior Vice President, Taxes and served as Senior Vice President and Treasurer from 1998 until 2001. Prior to joining Pepsi Co, he was a partner with the law firm of Winthrop, Stimson, Putnam & Roberts in New York.

Mr. McKenna is also a director of Pepsi Americas, Inc. and a member of the Management Committee of Pepsi Bottling Ventures LLC. Margaret D. Moore, 57, is our Senior Vice President, Human Resources, a position she assumed at the end of 1999. From November 1998 to December 1999, she was Senior Vice President and Treasurer of The Pepsi Bottling Group, Inc. (PBG). Prior to joining PBG, Ms. Moore spent 25 years with Pepsi Co in a number of senior financial and human resources positions.

Ms. Moore is also a director of PBG. Indra K. Nooyi, 49, was elected to Pepsi Co's Board and became President and Chief Financial Officer in May 2001, after serving as Senior Vice President and Chief Financial Officer since February 2000. Ms. Nooyi also served as Senior Vice President, Strategic Planning and Senior Vice President, Corporate Strategy and Development from 1994 until 2000. Prior to joining Pepsi Co, Ms. Nooyi spent four years as Senior Vice President of Strategy, Planning and Strategic Marketing for Area Brown Boeri, Inc.

She was also Vice President and Director of Corporate Strategy and Planning at Motorola, Inc. Ms. Nooyi is also a director of Motorola, Inc. 8 Lionel L. Nowell, 50, has been our Senior Vice President and Treasurer since August 2001. Mr. Nowell joined Pepsi Co as Senior Vice President and Controller in 1999 and then became Senior Vice President and Chief Financial Officer of The Pepsi Bottling Group. Prior to joining Pepsi Co, he was Senior Vice President, Strategy and Business Development for RJR Nabisco, Inc. From 1991 to 1998, he served as Chief Financial Officer of Pillsbury North America, and its Pillsbury Foodservice and Hagen Days units, serving as Vice President and Controller of the Pillsbury Company, Vice President of Food and International Retailing Audit, and Director of Internal Audit.

Gary M. Rodkin, 52, was appointed Chairman and Chief Executive Officer of Pepsi Co Beverages and Foods North America in February 2003. Mr. Rodkin became President and Chief Executive Officer of Pepsi Co Beverages and Foods North America in 2002. He served as President and Chief Executive Officer of Pepsi-Cola North America from 1999 to 2002. Mr. Rodkin was President of Tropicana North America from 1995 to 1998, and became President and Chief Executive Officer of Tropicana when Pepsi Co acquired it in 1998.

Irene B. Rosenfeld, 51, was appointed Chairman and Chief Executive Officer of Frito-Lay, Inc. in September 2004. Prior to joining Pepsi Co, Ms. Rosenfeld served as President of Kraft Foods North American Businesses. During her career at Kraft, she also served as Group Vice President responsible for Kraft's North American manufacturing, distribution, procurement, R&D and information systems and also served as President of Kraft Canada and Kraft Mexico. Prior to that, Ms. Rosenfeld served in various senior management positions with Kraft since joining in 1981. Larry D. Thompson, 59, became Pepsi Co's Senior Vice President, Government Affairs, General Counsel and Secretary in November 2004.

Prior to joining Pepsi Co, Mr. Thompson served as a Senior Fellow with the Brookings Institution in Washington, D.C. and served as Deputy Attorney General in the U.S. Department of Justice. In 2002, he was named to lead the National Security Coordination Council and was also named by President Bush to head the Corporate Fraud Task Force. In April 2000, Mr. Thompson was selected by Congress to chair the bipartisan Judicial Review Commission on Foreign Asset Control. Prior to his government career, he was a partner in the law firm of King & Spalding, a position he held from 1986 to 2001. Michael D. White, 53, was appointed Chairman and Chief Executive Officer of Pepsi Co International in February 2003, after serving as President and Chief Executive Officer of Frito-Lay's Europe / Africa/Middle East division since 2000. From 1998 to 2000, Mr. White was Senior Vice President and Chief Financial Officer of Pepsi Co.

Mr. White has also served as Executive Vice President and Chief Financial Officer of Pepsi Co Foods International and Chief Financial Officer of Frito-Lay North America. He joined Frito-Lay in 1990 as Vice President of Planning. Executive officers are elected by our Board of Directors, and their terms of office continue until the next annual meeting of the Board or until their successors are elected and have qualified. There are no family relationships among our executive officers. 9 PART tem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Trading Symbol - PEP Stock Exchange Listings - The New York Stock Exchange is the principal market for our Common Stock, which is also listed on the Amsterdam, Chicago, Swiss and Tokyo Stock Exchanges.

Shareholders - At December 25, 2004, there were approximately 209,000 shareholders of record. Dividends - We target an annual dividend payout of approximately 45% of prior year's net income from continuing operations. Dividends are usually declared in January, May, July and November and paid at the end of March, June and September and the beginning of January. The dividend record dates for these payments are, subject to approval of the Board of Directors, expected to be March 11, June 10, September 9, and December 9, 2005. We have paid quarterly cash dividends since 1965. The quarterly dividends declared in 2004 and 2003 are contained in our Selected Financial Data.

Stock Prices - The composite quarterly high, low and closing prices for Pepsi Co Common Stock for each fiscal quarter of 2004 and 2003 are contained in our Selected Financial Data. Selected Financial Data Selected Financial Data is included on page 88.11 Item 7. Management's Discussion and Analysis OUR BUSINESS Our Operations 14 Our Chairman and CEO Perspective 16 Our Customers 23 Our Distribution Network 24 Our Competition 24 Other Relationships 25 Our Business Risks 25 OUR CRITICAL ACCOUNTING POLICIES Revenue Recognition 30 Brand and Goodwill Valuations 31 Income Tax Expense and Accruals 32 Stock-Based Compensation Expense 33 Pension and Retiree Medical Plans 36 OUR FINANCIAL RESULTS Items Affecting Comparability 39 Results of Continuing Operations - Consolidated Review 40 Results of Continuing Operations - Division Review 45 Frito-Lay North America 45 Pepsi Co Beverages North America 46 Pepsi Co International 48 Quaker Foods North America 49 Our Liquidity, Capital Resources and Financial Position 50 Future Outlook 5312 Consolidated Statement of Income 54 Consolidated Statement of Cash Flows 55 Consolidated Balance Sheet 57 Consolidated Statement of Common Shareholders' Equity 58 Notes to Consolidated Financial Statements Note 1 - Basis of Presentation and Our Divisions 59 Note 2 - Our Significant Accounting Policies 62 Note 3 - Impairment and Restructuring Charges and Merger-Related Costs 64 Note 4 - Property, Plant and Equipment and Intangible Assets 65 Note 5 - Income Taxes 67 Note 6 - Stock-Based Compensation 69 Note 7 - Pension, Retiree Medical and Savings Plans 71 Note 8 - Non controlled Bottling Affiliates 75 Note 9 - Debt Obligations and Commitments 77 Note 10 - Risk Management 79 None 11 - Net Income per Common Share from Continuing Operations 81 Note 12 - Preferred and Common Stock 82 Note 13 - Accumulated Other Comprehensive Loss 83 Note 14 - Supplemental Financial Information 83 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING 85 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 87 SELECTED FINANCIAL DATA 88 FIVE-YEAR SUMMARY 90 GLOSSARY 9113 Our discussion and analysis is an integral part of understanding our financial results. Definitions of key terms can be found in the glossary on page 91.

Tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts. OUR BUSINESS Our Operations We are a leading, global snack and beverage company.

Net revenue and operating profit contributions to growth from each of our divisions in 2004 are as follows: Our North American divisions operate in the United States (U.S.) and Canada. Additional information concerning our divisions and geographic areas is presented in Note 1. 14 Pepsi Co Beverages North AmericaPepsiCo Beverages North America (PBNA) manufactures or uses contract manufacturers, markets and sells beverage concentrates, fountain syrups and finished goods, under various beverage brands including Pepsi, Mountain Dew, Gatorade, Tropicana Pure Premium, Sierra Mist, Mug, Tropicana juice drinks, Propel, So Be, Slice, Dole, Tropicana Twister and Tropicana Season's Best. PBNA's volume reflects sales to its independent distributors and retailers, and the sales of beverages bearing our trademarks that franchise bottlers have reported as sold to independent distributors and retailers. PI also manufactures, markets and sells beverage concentrates, fountain syrups and finished goods under the brands Pepsi, 7 UP, Mirinda, Gatorade, Mountain Dew and Tropicana. PI reports two measures of volume.

Snack volume is reported on a system-wide basis, which includes our own volume and the volume sold by our non controlled affiliates. Beverage volume reflects company-owned and franchise bottler sales of beverages bearing our trademarks to independent distributors and retailers. 15 Our Chairman and CEO Perspective The questions below reflect those commonly asked by our shareholders, and are followed by answers from our Chairman and CEO, Steve Reinemund. How will you sustain growth? By taking our competitive strengths, and investing in them to create longer-term value.

That may sound a bit simplistic, but here's what I mean. Pepsi Co has three key advantages: 1. big, muscular brands, 2. the proven ability to innovate and create differentiated products, and 3. powerful go-to-market systems. What makes this all work are the extraordinarily talented, dedicated people at Pepsi Co. When we take those competitive advantages, and invest in them with dollars generated from top-line growth and cost saving initiatives, we sustain a value cycle for our shareholders. In essence, investing in innovation fuels the building of our brands; this in turn drives top-line growth. Dollars from that top-line growth are strategically reinvested back into new products and other innovation, along with cost savings projects, and thus the cycle continues.

Your cycle of reinvestment relies on your ability to grow brands. Are Pepsi Co's brands up to the challenge? Yes. With 16 brands that each generate over a billion dollars of retail sales annually, and many more moving in that direction, we have big "global icon" brands that sit squarely in the sweet spot of convenience. We constantly differentiate those brands in the marketplace by what we do with ingredients and nutrition science, product packaging and processing.

And, we create points of difference with marketplace solutions in our retail environment, exciting the consumers who ultimately buy our products. We have more of these icon brands than any other food and beverage company in the world, and we continue to add new products to the portfolio through internal innovations combined with smaller, tuck-in acquisitions with our international businesses. How do you invest in, and differentiate, Pepsi Co's brands? We invest in many ways, including advertising and merchandising.

I'd say innovation is the most option. Innovation lives at the core of any successful consumer products company. Our organization is structured to capture consumer insights, and customer - or retailer - insights as well. Strategically, we look at innovation in three 16 ways, or types. "Type A" innovation is what we call "close-in" - ideas like new flavors of existing products". Type B" innovation is represented in new products delivering additional benefits or meeting specific consumer preferences, but generally within existing brands.

For example, Tostitos Scoops tortilla chips, Lay's Stax potato crisps or Tropicana Light 'n Healthy beverages are products more incremental to the business than Type A". Type C" innovation is focused on new platforms, like delivering chilled products directly to the store; or entirely new products, like new Quaker Milk Chillers and Tropicana Fruit Integrity, which delivers a fruit serving in a new, fun snack format. These products are mostly incremental, and we " ve centralized our research and development for this kind of innovation so we can put our resources into developing really big ideas. Our goal is to incorporate more Type B and Type C innovation into our pipeline.

In this way, we may have fewer new products every year, but more of our new product revenues will be incremental. This has already been happening at Frito-Lay, with products like Lay's Stax potato crisps. On the beverage side, we are finding that "in-and-out" products - those with limited time availability - can create a lot of excitement and incremental volume over a set time period. These products are relatively easy to develop, and we work closely with our bottling partners on the right timing. For example, in 2004, we introduced Mountain Dew Pitch Black just as Mountain Dew Live Wire was winding down. Then, we introduced Pepsi Holiday Spice for the year-end holiday season.

These all contribute to differentiating our brands. You talked about innovation in terms of brands. Are you innovating in other ways? We " re innovating in ways that go beyond traditional brand ideas. For example, we look at health and wellness as an opportunity to be an active part of the solution. We " ve improved the healthfulness of our existing products by taking important steps like eliminating trans fats in our Frito-Lay chips, reducing saturated fats in Walkers crisps and reducing sugar in some food and beverage products in the United States and other markets.

We " ve also developed new products that deliver more powerful health benefits, like Quaker Take Heart Oatmeal, which can help reduce cholesterol and help maintain healthy blood pressure - two important factors for heart health. The Tropicana Pure Premium line of fortified orange juices is another great example. And we strengthened the Quaker snack line with products like new soy crisps, and new or improved bar products. In 2005, we " ll grow our beverage portfolio with innovation in diet carbonated soft drinks. We " ll also add a new line of Gatorade Endurance Formula and Aquafina flavored waters in carbonated and non-carbonated varieties. With snacks, we " re relaunching Light versions of our chips with reduced calories and fat.

17 As an umbrella logo that applies to more than 100 products in our portfolio, we " ve developed a new Smart Spot trademark in the United States and Canada. The Smart Spot symbol helps consumers find our products that can contribute to healthier lifestyles. The Smart Spot program is based on authoritative statements from the U.S. Food and Drug Administration (FDA) and the National Academy of Sciences (NAS). Smart Spot products are the fastest growing part of our North American product portfolio, with revenue growth approximately double that of our fun-for-you products.

This strategic marketplace solution exists at the intersection of public interest and business interests, and we intend to continue capturing growth through health and wellness solutions that address energy balance. You " ve said Pepsi Co's health and wellness initiatives are based on the concept of "energy balance". What do you mean by this? Energy balance challenges consumers to look at calories consumed, as well as calories burned, through physical activity and exercise.

We " re investing in solutions that address both. We " ve committed to achieving more than half of our new product revenues from Smart Spot products in North America, and our projections show we " ll significantly surpass that goal. We " re also stepping up efforts in our new product pipeline to capture this opportunity in markets around the world. On the physical activity front, we believe we can be part of the solution as well. For example, we " re the national presenting sponsor for America on the Move, a national initiative designed to help Americans achieve energy balance by taking 2,000 more steps a day and reducing calories by 100 each day. It's been proven to work, and can help almost anyone get started making simple changes to achieve a healthier lifestyle.

We " re also funding other efforts that range from activity-based initiatives with the YMCA, to research-based programming, like the partnership Gatorade has with the University of North Carolina's School of Public Health to understand what can help prevent childhood obesity. With the emphasis on Smart Spot, how will you balance investments in the larger, fun-for-you portfolio? Our goal is to offer a balanced and broad Pepsi Co portfolio with a range of great-tasting product choices. While our better-for-you product portfolio is growing at an impressive clip, we also know that it's critical to drive growth in our flagship, heritage brands that comprise our fun-for-you portfolio. For example, within Frito-Lay's core salty portfolio, we focused on Tostitos with an entirely new logo and packaging, and an aggressive "on-shelf" strategy to drive visibility and growth for this venerable billion-dollar brand.

We " re improving Doritos Nacho Cheesier tortilla chips and making Doritos Black Pepper Jack tortilla chips a permanent addition to our line. On the beverage side of the business, we have aggressive plans for our trademark Pepsi, Mountain Dew and Sierra Mist brands that demonstrate we remain committed to growing these larger, legacy businesses as well. 18 In the past, you " ve talked about the power of Frito-Lay's direct-store-delivery (DSD) system differentiating Frito-Lay in the marketplace. Now, you seem to be taking a new approach with a 50% increase in media spending that is being partially funded by the plant consolidations. Is there a change in strategy? Frito-Lay's well-known brands feature great taste and really appeal to consumers.

The power of the company's virtually unrivaled distribution system has enabled us to differentiate these products in the marketplace, and rely to a lesser extent on high-impact marketing and advertising. With an explosion of convenient foods choices in the categories where Frito-Lay competes, we need to communicate even more aggressively to strengthen our bond with consumers and highlight our choices for snacking occasions in order to continue growing our top line. Historically, there has been a focus on your North America business. How does the international market figure into your growth targets? The growth and expansion of our international businesses are vital. Pepsi Co International became our largest division - by revenues - in 2004.

While the year was extraordinary, for the longer term we believe that we can grow our international business at about twice the rate of growth for the United States into the foreseeable future. We " re confident because we have clear leadership of the global snack category, and significantly lower per capita consumption outside the United States. Our volumes are increasing in every region, and we " re demonstrating we can capture opportunities by customizing our snack products to meet local tastes and packaging preferences. For example, in Thailand, we " ve introduced Nori Seaweed Lay's potato chips, and in China, we " ve captured new "office snacking" opportunities through a new pull-out tray with Lay's Stax potato crisps. On the beverage side, we have a disciplined, focused growth strategy that includes carbonated and non-carbonated brands. We " ve introduced flavor innovations tailored to our markets, new consumer-friendly packaging, and enjoyed great success with high-impact advertising and music and sports marketing.

Overlaying our flexible portfolio, we have global productivity programs in ever increasing scale, and a diverse, talented and experienced team from the front line to senior management. All these elements combine to give us great confidence in our international business and its ability to fire on all cylinders. Returning to the question about sustainable growth, you included powerful go-to-market systems as a competitive advantage. What do you mean? Pepsi Co arguably has the most diverse set of distribution systems of any consumer product company, including direct store delivery (DSD) at Frito-Lay and our bottling partners, warehouse delivery for Quaker products, and warehouse delivery and chilled DSD at Tropicana.

19 The reach and scale of these systems provide considerable cost efficiency and system effectiveness in driving value. Our systems deliver product freshness and quality for the consumer, generate cash flow for our retail customers, and provide economic value for Pepsi Co. Our products respond very well to merchandising, and need to be replenished often because they sell so quickly. By having our DSD associates deliver products and stock the shelves themselves, we save retailers money by doing this labor for them, and help make sure our products are fresh, available and displayed to our advantage. You " ve referenced Pepsi Co's Power of One as a competitive capability. Can you provide some examples of the advantages that Power of One offers retailers?

Our Power of One really speaks to our ability to use all of Pepsi Co's products, services and talents for the advantage of our retail partners. Whether it's a joint promotion between Pepsi and Frito-Lay for Super Bowl Sunday, a "breakfast bundling" opportunity with Quaker and Tropicana brands, creating a shared service unit to support our businesses in Mexico or combining our products that contribute to healthier lifestyles under the Smart Spot banner, the idea is to combine the strength of our brands and businesses to develop customized solutions for customers. This, in turn, drives incremental growth for them, and for us. We view this as a key strategic growth driver, and will continue to invest in such things as integrated customer teams, research into consumer insights, and creating customized retail solutions to drive growth. Retail volume growth seems to be slowing in some channels, such as supermarkets, and accelerating in large-format and discount channels.

How is that trend affecting Pepsi Co? It's obviously important for us to be well-represented in all channels. Like all consumer product companies, we have benefited from the growth of mass merchandisers, clubs and dollar stores. At the same time, we " re just as committed to working closely with our supermarket partners to help them grow. The consolidation of retailers has made our Power of One initiative increasingly important.

We can approach these retailers as a powerful partner in supporting their growth objectives. Ultimately, we need to ensure that we have the right products, package sizes, and price points in each channel so that we can maximize growth in each. Pricing is a key element of our mix. Consumers demand value, which especially means low prices, so we can't depend on price increases for revenue growth. That's why our focus on innovation, commitment to improving product mix, and the priority on delivering customized retail solutions are key to the growth of Pepsi Co and our retail customers. 20 How do you ensure you can deliver on all the priorities required by brand and product investment, and go-to-market systems?

In a word, it's about people - our ultimate and truest source of competitive advantage. We continue to invest in our people as well. One of the strengths Wall Street has noticed about Pepsi Co is our ability to grow talent from within the company - particularly bench strength for our most senior team. I think this reflects a number of our "people priorities". For starters, we " re passionate about developing leaders. That's why we provide the training, tools and experiences that give us many options when it comes to preparing leaders for tomorrow.

But developing this kind of bench strength demands a comprehensive view of people. That's why we have a focus on diversity and inclusion as a strategic lever to drive the business. As a leading consumer products company, we strive to recruit a diverse workforce to assist us in serving our diverse consumer base. That's diversity. Equally important, we must ensure we " re creating and sustaining an environment that allows everyone to contribute at his or her maximum potential in order for the best ideas to come forward - and that's inclusion. We hold our leaders accountable - and reward them - on their ability to create and sustain a diverse and inclusive workforce at Pepsi Co.

We " re seeing progress. In the last two years, we " ve put 11,000 associates through a first level of diversity and inclusion training and more than 6,000 associates through a second level of inclusion training. Our ongoing internal measurement of how associates observe diverse and inclusive behavior in management shows we " re moving the dial as well. I know that our 2004 growth benefited from our diversity and inclusion efforts.

Product flavor ideas, promotions and advertising benefited from the views of the entire spectrum of our associates. Our successes reinforce that we are on the right track, and we remain committed to this strategic priority as a key growth driver. We know that diversity and inclusion is a journey - in fact, a marathon - and we " ll continue investing in the journey to reap its utmost benefits. With your focus on diversity and inclusion, brand building, and go-to-market capabilities, how will you fund everything? Some of the investment comes from top-line growth, and some of it comes from productivity initiatives around the world. Whether in supply chain manufacturing, procurement of goods and services, or more efficient trade and media spending, at any given time Pepsi Co has hundreds of productivity programs under way.

21 We view these efforts to control costs as critical fuel for brand building and innovation work, which leads to top-line growth that we can use to fund further productivity projects. That's the value creation cycle I mentioned earlier, and it provides flexibility for us to meet our stated double-digit earnings goals. At the same time, it allows us to return cash to shareholders through our share buyback program and dividend payments, which Pepsi Co's Board of Directors increased by 44% in 2004. What is "Business Process Transformation" (BPT) and how does it contribute to the business?

Business Process Transformation (BPT) is the comprehensive effort to drive efficiencies at Pepsi Co, and fuel our future growth. It includes efforts to physically consolidate, or hard wire, key business functions to take advantage of our scale. It also includes moving to a common set of processes that underlie our key activities, and supporting these activities with common technology applications. And finally, it's about linking our systems so that data will flow seamlessly from system to system. Our SAP installation - the computer system that will link all of Pepsi Co's systems and processes - is the linchpin for these efforts.

A special project team has started implementing this multi-year BPT effort. While obviously requiring funding, this is exactly the kind of initiative which is designed to yield efficiencies that we can reinvest back into our business for many years to come. Once BPT is fully implemented, we " ll have flexibility in everything we do. We " ll be able to more easily change any product through better control of our supply chain. We " ll have even greater accuracy in our operations, removing the need for checking and rechecking. We " ll also achieve efficiencies and consistency by delivering lower costs through common processes and expanded IT capabilities, delivered through one face to the customer.

We " ll have end-to-end, real-time visibility to data that allows us to use information as a true strategic tool. And finally, with a common IT platform, we " ll be able to more quickly expand to take on new businesses seamlessly. Pepsi Co has a lot to accomplish. How do you balance current and future needs without compromising anything?

Here again, it ultimately comes down to people and the values they hold. In last year's annual report, our theme was "Growth and Trust". We emphasized the importance of growth in the right way - as a responsible corporate citizen. Our focus remains centered on behaving in this way.

For example, we continue to make progress with our efforts in environmental management and sustainability. I encourage shareholders, once again, to read the Corporate Social Responsibility Report in this publication. But it's also important to understand that we continue to spend a considerable amount of time and energy reinforcing the Pepsi Co Values that will get us growth the right way for our future. We 22 remain steadfast in our commitment to sustained growth, through empowered people, acting with responsibility and building trust. When you think about it, we " re lining up what we do best and investing in those capabilities to drive value today and into our future. And we " re doing it in a responsible way.

Our shareholders demand this kind of responsible growth and should expect nothing less, just like all of us at Pepsi Co. We grant our bottlers exclusive contracts to sell and manufacture certain beverage products bearing our trademarks within a specific geographic area. Since we do not sell directly to the consumer, we rely on and provide financial incentives to our customers to assist in the distribution and promotion of our products. For our independent distributors and retailers, these incentives include volume-based rebates, product placement fees, promotions and displays. For our bottlers, these incentives are referred to as bottler funding and are negotiated annually with each bottler to support a variety of trade and consumer programs, such as consumer incentives, advertising support, new product support, and vending and cooler equipment placement. Consumer incentives include coupons, pricing discounts and promotions, such as sweepstakes and other promotional offers.

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

See "Our Related Party Bottlers" and Note 8 for more information on our anchor bottlers. Our Related Party Bottlers We have ownership interests in certain of our bottlers. Our ownership is less than 50% and since we do not control these bottlers, we do not consolidate their results. We include our share of their net income based on our percentage of economic ownership in our income statement as bottling equity income. We have designated three related 23 party bottlers, PBG, Pepsi Americas, Inc.

(PAS) and Pepsi Bottling Ventures LLC (PBG), as our anchor bottlers. Our anchor bottlers distribute approximately 65% of our North American beverage volume and approximately 20% of our international beverage volume. Our anchor bottlers participate in the bottler funding programs described above. Approximately 12% of our total 2004 sales incentives related to these bottlers. See Note 8 for additional information on these related parties and related party commitments and guarantees. The distribution system used depends on customer needs, product characteristics, and local trade practices.

Direct-Store-Delivery We and our bottlers operate direct-store-delivery systems that deliver snacks and beverages directly to retail stores where the products are merchandised by our employees or our bottlers. Direct-store-delivery enables us to merchandise with maximum visibility and appeal. Direct-store-delivery is especially well-suited to products that are restocked often and respond to in-store promotion and merchandising. Broker-Warehouse Some of our products are delivered from our warehouses to customer warehouses and retail stores.

These less costly systems generally work best for products that are less fragile and perishable, have lower turnover, and are less likely to be impulse purchases. Foodservice and Vending Our food service and vending sales force distributes snacks, foods and beverages to third-party food service and vending distributors and operators, and for certain beverages, distributes through our bottlers. This distribution system supplies our products to schools, businesses, stadiums, restaurants and similar locations. Our chief beverage competitor, The Coca-Cola Company, has a slightly larger share of CSD consumption in the United States, while we have a larger share of chilled juices and isotonic's.

In addition, The Coca-Cola Company maintains a significant CSD share advantage in many markets outside North America. Further, our snack brands hold significant leadership positions in the snack industry worldwide and face local and regional competitors, as well as national and global snack competitors, on issues related to price, quality, variety and distribution. Success in this competitive environment is dependent on effective promotion of existing products and the 24 introduction of new products. Other Relationships Certain members of our Board of Directors also serve on the boards of certain vendors and customers.

Those Board members do not participate in our vendor selection and negotiations nor in our customer negotiations. Our transactions with these vendors and customers are in the normal course of business and are consistent with terms negotiated with other vendors and customers. In addition, certain of our employees serve on the boards of our anchor bottlers and other affiliated companies and do not receive incremental compensation for their Board services. Our Business Risks Our Approach to Managing Risks We are subject to risks in the normal course of business due to adverse developments affecting: o our reputation; o information technology; o product demand and retail consolidation; o global economic conditions; o regulator.