Sustainability Report Our Values in Action

Transcription

1 Sustainability Report Our Values in Action Planet Environmental Stewardship People Social Responsibility Profit Economic Prosperity

2 SUSTAINABILITY REPORT Table Of Contents Vision and Strategy... 3 Letter from the Chairman... 3 Letter from the Chairman of Sustainability Task Force... 5 Our Sustainability Vision... 6 Our Mission, Values and Guiding Principles... 6 Mission... 6 Values... 7 Guiding Principles... 7 Profile... 9 Our Business... 9 Our Constituencies Our Sustainability Journey Governance Structure and Management Systems Our Governance Structure Board of Directors Committee Purposes Business Risks Executive Compensation Code of Conduct PepsiCo Values Shareholder Communication Stakeholder Engagement Our Management Systems External Charters Trade and Professional Groups and Standards Approach to Managing Impacts of Our Operations Changes in Operations Standards of Performance Performance Indicators Economic Our Economic Performance Sales and Major Markets Costs and Expenses Sales Terms Uses of Cash Retained Earnings Infrastructure Development Our Economic Contributions Our Community Support and Charitable Contributions PepsiCo Foundation Community Affairs In-Kind Donations

3 Performance Indicators: Environment Our Environmental Commitment Our Environmental Approach Our Environmental Programs Our Environmental Impacts Agricultural Materials Packaging Energy Water Air Emissions Waste Transportation Supply Chain Performance Indicators: Social Our Employee Policies and Programs Diversity and Inclusion Associate Numbers Safety Benefits HIV/AIDS Training Human Rights...44 Our Business Policies and Programs Bribery and Corruption Political Contributions Commitment to Competition Our Consumer Policies and Programs Health and Wellness Product Safety and Labeling Consumer Relations Policies and Procedures Consumer Privacy Advertising Contact Information Global Reporting Initiative (GRI) Index Report Boundaries: This report covers Our last report covered Our report includes PepsiCo operations that are both owned and operated by us. In the United States and in some countries, independent franchise bottlers manufacture and distribute beverage products. Our three largest bottlers are The Pepsi Bottling Group, PepsiAmericas and Pepsi Bottling Ventures. Our ownership of each of these bottlers is less than 50% and since we do not control these bottlers, we do not consolidate their results or include their information in this report. 2

4 Vision and Strategy Letter from the Chairman Dear Friends: Welcome to PepsiCo s third corporate responsibility report. We re pleased to share our progress with you and to update you on our journey so far. PepsiCo is among the world s largest consumer products companies focused on convenient foods and beverages. We re proud our products are some of the world s best known brands and they are enjoyed by billions of people around the world every day. Our products are recognized for their quality, taste and value, and increasingly, for their contribution to healthier diets. PepsiCo today is focused on five strategic initiatives that we believe drive growth and ensure our future. These areas are inherent to how we Steve Reinemund, Chairman and operate our day-to-day business of making, Chief Executive Officer, PepsiCo marketing and distributing our brands. Not coincidentally, we believe they support our sustainability as a company. Values Our Value Statement articulates PepsiCo s character. We are committed to living by our Values and putting them into action in everything we do. Our Values Sustained Growth, Empowered People, Responsibility and Trust provide the foundation for how we operate and empower our people to do the right thing. We believe this is the only way to grow. Health and Wellness We recognize there is an obesity crisis in North America and increasingly in other parts of the world. As a food and beverage company, we re committed to being part of the solution to addressing this situation. For us, this means offering healthier product choices, making them widely available and marketing them effectively. It also means going beyond our products and addressing the issue of energy balance by encouraging and promoting healthy, active lifestyles. Diversity and Inclusion For decades we have been convinced that building a diverse and inclusive culture is critical to our continued success. We believe we can better serve the broadest customer and consumer base possible by having diverse employees and suppliers. We also recognize that representation alone isn t the sole objective, so we are all committed to fostering an inclusive culture where everyone can contribute at their fullest potential. Sustainability We are actively putting our vision of Making Tomorrow Better Than Today into action by addressing our economic, environmental and social impacts in a very specific, principle-based fashion. Our goal is to grow our profits and people without destroying our natural resources or polluting our planet, and by contributing to society as a good and responsible corporate citizen. 3

5 Power of One We are working to make the whole of PepsiCo stronger than the sum of its parts. Our Power of One initiative means we will be able to work faster and smarter to meet the needs of our customers, consumers, employees and other stakeholders. It encompasses how we coordinate our activities most effectively and efficiently with retailers and other customers, and technical aspects of our operations such as Business Process Transformation, which will put us all on one technological platform. It also involves a dedicated mindset to work together more seamlessly in everything we do. These five priorities define PepsiCo today. I m proud of our progress in putting them into action while living by our principles and vision. Most of all, I m proud of all our associates who are addressing these critical areas every day. There is no question that much more remains to be done and there will be challenges ahead. But we remain committed to the journey. I applaud our team for what has been achieved and look forward to reporting to you on our continued progress and results. Sincerely, Steve Reinemund Chairman and Chief Executive Officer PepsiCo 4

6 Letter from the Chairman of Sustainability Task Force Dear Stakeholders, In 2004, when PepsiCo Chairman and Chief Executive Officer Steve Reinemund asked for volunteers to serve on the Sustainability Task Force, more than 30 senior leaders representing every division and function in the company stepped forward. This group of top executives was formed to focus on defining our sustainability vision, priorities and agenda. It is my honor to serve as the Chair of PepsiCo s Sustainability Task Force. The Sustainability Task Force includes the operational heads of each division as well as representatives from the legal, communications, financial reporting and treasury functions. Together, we defined and refined PepsiCo s Sustainability Vision, committing PepsiCo to make Tomorrow better than Today. One of the Task Force s first priorities was to voluntarily adopt the Global Reporting Initiative. When we closely scrutinized our Steven Y. Gold, Sustainability Task Force, Senior Vice President, Supply Chain, PepsiCo performance against the Global Reporting Initiative it was clear our greatest opportunity existed in establishing an industry leading environmental program. As a result, in 2004 the Sustainability Task Force focused on PepsiCo s environmental principles, programs and metrics. When I now look back at what we have accomplished in two short years, I see solid progress. I also recognize we have a long way to go. Key accomplishments over the last year for the Sustainability Task Force include: establishing company-wide targets for energy and water; piloting new methods to establish company-wide baselines; establishing a PepsiCo-wide Environmental Policy and developing a Sustainability Capital model to ensure our sustainability investments are considered in major capital investment decisions. In addition to fully implementing these accomplishments, ahead of us lay such challenges as creating a lasting PepsiCo Sustainability governance system, coordinating our work with customers and suppliers and adopting review principals for our efforts. We look forward to updating you on our progress and working with you to achieve our vision. Cordially, Steven Y. Gold Sustainability Task Force, Senior Vice President, Supply Chain - PepsiCo 5

7 Our Sustainability Vision PepsiCo s responsibility is to continually improve all aspects of the world in which we operate environment, social, economic creating a better tomorrow than today. Tomorrow > Today We believe Sustainability lives at the intersection of public and corporate interest. It encompasses citizenship and corporate social responsibility, which are about doing the right things for society and for the business. It encompasses the health of the Company, which is about fulfilling our mission of creating financial rewards and growth. We have articulated what we stand for and the core values we are committed to support. Our Mission, Values and Guiding Principles Mission We aspire to make PepsiCo the world s premier consumer products company, focused on convenient foods and beverages. We seek to produce healthy financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive to act with honesty, openness, fairness and integrity. The behaviors that will help us achieve our mission are articulated in our Values Statement. 6

8 Values Our commitment is to deliver sustained growth, through empowered people, acting with responsibility and building trust. Here s what this means: Sustained Growth is fundamental to motivating and measuring our success. Our quest for sustained growth stimulates innovation, places a value on results, and helps us understand whether actions today will contribute to our future. It is about growth of people and company performance. It prioritizes making a difference and getting things done. Empowered People means we have the freedom to act and think in ways that we feel will get the job done, while being consistent with the processes that ensure proper governance and being mindful of the rest of the company s needs. Responsibility and Trust form the foundation for healthy growth. It s about earning the confidence that other people place in us as individuals and as a company. Our responsibility means we take personal and corporate ownership for all we do, to be good stewards of the resources entrusted to us. We build trust between ourselves and others by walking the talk and being committed to succeeding together. Guiding Principles This is how we carry out our commitment. We must always strive to: Care for customers, consumers and the world we live in. We are driven by an intense, competitive spirit in the marketplace, but we direct this spirit toward solutions that achieve a win for each of our constituents as well as a win for us. Our success depends on a thorough understanding of our customers, consumers and communities. Caring means going the extra mile. Essentially, this is a spirit of growing rather than taking. Sell only products we can be proud of. The test of our standards is that we must be able to personally endorse our products without reservation and consume them ourselves. This principle extends to every part of the business, from the purchasing of ingredients to the point where our products reach the consumer s hands. Speak with truth and candor. We speak up, telling the whole picture, not just what is convenient to achieving individual goals. In addition to being clear, honest and accurate, we take responsibility to ensure our communications are understood. Balance short term and long term. We make decisions that hold both short-term and long-term risks and benefits in balance over time. Without this balance, we cannot achieve the goal of sustainable growth. Win with diversity and inclusion. We leverage a work environment that embraces people with diverse traits and different ways of thinking. This leads to innovation, the ability to identify new market opportunities, all of which help develop new products 7

9 and drives our ability to sustain our commitments to growth through empowered people. Respect others and succeed together. This company is built on individual excellence and personal accountability, but no one can achieve our goals by acting alone. We need great people who also have the capability of working together, whether in structured teams or informal collaboration. Mutual success is absolutely dependent on treating everyone who touches the business with respect, inside and outside the company. A spirit of fun, our respect for others and the value we put on teamwork make us a company people enjoy being a part of, and this enables us to deliver world-class performance. 8

10 Profile Our Business PepsiCo, Inc. is among the world s leading consumer product companies with 2005 net revenues of more than $32 billion and total operating profit of $5.9 billion. PepsiCo manufactures and markets snack foods in North America through our Frito-Lay division (32% of revenues); beverages in North America through PepsiCo Beverages North America (28% of revenues); beverages and snacks outside North America through PepsiCo International (35% of revenues); and cereals and rice products through Quaker Foods North America (5% of revenues). We offer great tasting convenient foods and beverages to consumers. Our principal brands include Frito-Lay, Pepsi-Cola, Tropicana, Gatorade and Quaker. We manufacture, market and sell more than 500 products that serve the needs of consumers of all ages in more than 200 countries. Our products offer fun and refreshment and many can contribute to good health and nutrition. Our largest brands include Pepsi-Cola, Diet Pepsi, Mountain Dew, Gatorade thirst quencher, Lay s potato chips, Doritos tortilla chips, Tropicana Pure Premium orange juice, 7UP (outside the United States), Cheetos cheese flavored snacks, Quaker cereals, Aquafina bottled water, Ruffles potato chips, Mirinda carbonated soft drinks, ready-to-drink Lipton teas, Tostitos tortilla chips, Sierra Mist carbonated soft drinks and Fritos corn chips. Many of these brands are known around the world. As part of our Smart Spot initiative, we offer a growing number of products that can contribute to healthier lifestyles. These products may be healthy, such as oatmeal, or may have been reformulated to offer lower sugar or fats, or may have added ingredients that deliver health benefits, such as calcium. The Smart Spot eligible products are based on authoritative statements from the U.S. Food and Drug Administration (FDA) and the National Academy of Sciences (NAS). In 2005, revenues from Smart Spot eligible products grew at two-and-one-half times the rate of the rest of our portfolio. We see the growing interest in health and wellness as an opportunity and we re committed to providing consumers with the products they want. We distribute our products to customers through a variety of distribution methods including direct-store-delivery, broker-warehouse delivery and foodservice and vending distribution networks. Our customers include large supermarkets and small grocery stores, warehouse and club stores, mass merchandisers, convenience and gas station stores, drug stores and other retail outlets as well as restaurants and foodservice and vending operations. We manufacture the majority of our products, sourcing from both independent and contract farmers, processing and packaging in our own plants. With respect to soft drinks, we provide concentrate to bottlers who manufacture and distribute our brands. In the United States, these bottlers are independently owned and operate under franchise agreements. 9

11 PepsiCo is a publicly-listed, widely-held company, trading as PEP. Our common stock is traded principally on the New York Stock Exchange. PepsiCo is also listed on the Amsterdam, Chicago and Swiss Stock Exchanges. At year-end 2005, there were approximately 197,500 shareholders of record. PepsiCo is organized into four divisions: Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International and Quaker Foods North America. During 2005, we acquired several companies that fit with our portfolio including: Full ownership of Snack Ventures Europe, Europe s largest snack food company with operations in Holland, France, Spain, Portugal, Greece, the Baltics, Hungary and Russia; Star Foods in Poland; Sakata, the market leader in rice snacks in Australia; and Punica Getränke GmbH, a leading maker of fruit juices and juice drinks in Germany. Our largest markets are the United States, Mexico, the United Kingdom and Canada. Our roots go back more than 100 years to the creation of Pepsi-Cola by New Bern, N.C. druggist Caleb Bradham and his founding of the Company in Frito-Lay was founded by Herman W. Lay in He started the H.W. Lay Company to distribute potato chips and merged with The Frito Company in 1961 to form Frito- Lay. PepsiCo was formed in 1965 through the merger of the Pepsi-Cola Company and Frito-Lay. Tropicana was started by Anthony Rossi, who pioneered a pasteurization process for orange juice. It became a part of PepsiCo in Gatorade, which was created in 1965, became a part of the Quaker Oats Company in The Quaker Oats Company, which dates back to 1901 when several American pioneers in oat milling came together to incorporate, became a part of PepsiCo in For a list of major products see For more information on Health & Wellness and Smart Spot see and For a list of subsidiaries of PepsiCo, Inc. see Exhibit 21 of PepsiCo's 2005 Form 10-K For information on our accounting definitions see "Our Critical Accounting Policies" in PepsiCo's 2005 Annual Report. For additional information on PepsiCo structure and distribution systems see PepsiCo's 2005 Annual Report and PepsiCo's 2005 Form 10-K. For information on "Our Critical Accounting Policies" see PepsiCo's 2005 Annual Report and PepsiCo's 2005 Form 10-K. 10

12 Our Constituencies We interact with many stakeholders. Our Investors We strive to provide investors a reasonable return on their investment, based on consistent growth in the marketplace and consistent financial results. We take a long-term view and make appropriate investments to strengthen our brands, develop our capabilities and pursue new opportunities. We seek healthy, year-over-year growth, and report our financial results honestly, transparently and timely. Our Employees Our employees are the greatest factor in our success. Their hard work, dedication and resourcefulness enable PepsiCo to compete effectively, serve the needs of customers and deliver the results our investors expect. We are committed to providing a work environment that allows our employees to achieve professional growth and personal fulfillment. Our Customers, Partners and Suppliers We work with our retail customers, franchise bottlers, joint-venture partners and suppliers to ensure that our partnerships appropriately balance the interests of all parties. Our retail customers are the supermarkets, grocery stores, mass merchandisers, club stores, drug stores, gas stations, convenience stores, restaurants, foodservice outlets, vending machine operators and others who carry our products and make them directly available to consumers. We provide our products as well as marketing support that contribute to their growth, profit and positive cash flow. Our bottlers and other business partners manufacture many of our products. We provide certain needed ingredients and supplies as well as quality assurance and technical assistance. We conduct our business to allow both our partners and PepsiCo to earn a reasonable return and grow together. Our suppliers provide us with the goods and services needed in our business. We buy goods and services at competitive prices, allowing both our suppliers and PepsiCo to make a reasonable profit. We seek efficient suppliers with whom we can work and grow as long-term partners. We especially seek suppliers that are owned by minorities and women. Our Consumers We offer consumers great tasting products that provide outstanding quality, convenience and value. Each year, we invest in innovation to better serve consumer wants and needs through new products and packaging. We continually expand our distribution network to make our products more widely available. And we work relentlessly to improve productivity so we can offer affordable products to a broad range of consumers. Our Communities We recognize our responsibility to be a contributing member of our communities, both on a global and local level. We operate our businesses 11

13 responsibly and seek to be a positive force. We support our communities through our businesses, by contributing to not-for-profit groups and by working with organizations dedicated to improving the lives of people. Our Stakeholders We touch the lives of many people through our businesses. We welcome honest discussion with individuals, groups, and advocates who represent community, environmental and social interests. Issues of concern brought to the attention of PepsiCo will be considered with a view toward our businesses and sphere of influence. We have advisory groups that focus on health and wellness, African- Americans and Latino/Hispanic issues. Our Sustainability Journey Sustainability Timeline Key Milestones Legacy Programs PepsiCo Headquarters in Purchase opened to public to visit sculpture gardens and grounds PepsiCo Foundation formed Code of Conduct introduced Community Affairs has active sponsorship programs Diversity focus and African American Advisory Board formed Divisions operate environmental programs Speak Up hotline introduced Corporate Governance policies developed Advertising policies developed Latino/Hispanic Advisory Board formed Environmental Task Force formed to share best practices Member Global Business Coalition on HIV/AIDS Established packaging goal of 10% recycled content Voluntarily adopted Global Reporting Initiative (GRI) guidelines Health & Wellness Advisory Board formed Worldwide HIV/AIDS policy adopted Sustainability Task Force formed Sustainability Vision Tomorrow>Today defined Member World Business Council on Sustainable Development 12

14 Smart Spot introduced Values Statement adopted HealthRoads introduced Sustainability Capital Expenditure filter created Metrics for water and energy developed Environmental management system established Human Rights policy adopted Political contributions policy adopted Charitable Contributions policy and details provided Environmental policy adopted Return the Warmth - environmentally oriented customer/consumer program implemented 13

15 Governance Structure and Management Systems Our Governance Structure PepsiCo was founded in 1965 on a handshake between Donald M. Kendall, president and chief executive officer of Pepsi-Cola, and Herman W. Lay, chairman and chief executive officer of Frito-Lay. Trust has been a cornerstone of PepsiCo since the merger of these two companies. Today we pursue that goal as vigorously as ever. PepsiCo Board of Directors Seated, left to right, Victor J. Dzau, M.D., Sharon Percy Rockefeller, Steven S Reinemund, Franklin A. Thomas, Robert E. Allen. Standing, left to right, Arthur C. Martinez, Indra K. Nooyi, John F. Akers, Alberto Ibargüen, Ray L. Hunt, Cynthia M. Trudell, Daniel Vasella, James J. Schiro, Dina Dublon.Missing is Michael D. White. Board of Directors PepsiCo s business strategy and affairs are overseen by our Board of Directors. Our Board of Directors has three standing Committees: Nominating and Corporate Governance, Audit and Compensation. Our Board of Directors has 12 independent outside directors and three inside directors. Members of the Board are kept informed of the Company s business through discussions with the chairman and chief executive officer and with other key members of management, by reviewing materials provided to them, by visiting the Company s facilities and customers, and by participating in Board and Committee meetings. For more information see x.cfm and /index.cfm Committee Purposes The purpose of the Nominating and Corporate Governance Committee is to: 14

16 1. Identify and recommend to the Board for election and appointment of qualified candidates for membership on the Board and the committees of the Board. 2. Develop and recommend to the Board corporate governance principles and the Code of Worldwide Business Conduct applicable to the Company and its consolidated subsidiaries, and monitor compliance with all such principles and policies. 3. Propose a slate of candidates for election as directors at each Annual Meeting. 4. Develop and monitor succession plans for the members of the Board, the members of the Committees of the Board, and the Chair of the Committees of the Board. For more information see ecommitteecharter/index.cfm The purpose of the Audit Committee is to assist the Board s oversight of: 1. The quality and integrity of the Company s financial statements and its related internal controls over financial reporting. 2. The Company s compliance with legal and regulatory requirements. 3. The independent auditor's qualifications and independence. 4. The performance of the Company s internal audit function and the independent auditors. For more information see: er/index.cfm The purpose of the Compensation Committee is to: 1. Oversee and make recommendations for policies of the Company relating to compensation of the Company s executives. 2. Report on executive compensation polices and programs for inclusion in the Company s proxy statement. 3. Oversee the development and implementation of succession plans for the Chief Executive Officer and other key executives. For more information see: teecharter/index.cfm Director Nomination Process The Nominating and Corporate Governance Committee does not solicit director nominations, but will consider recommendations for director nominees made by shareholders, if the individuals recommended meet certain minimum Board membership criteria. As set forth in the Company s Corporate Governance Guidelines when seeking candidates for the Board of Directors, the Nominating and Corporate Governance Committee will generally look for individuals who have displayed high ethical standards and sound business judgment. The Committee s assessment of Board candidates also includes consideration of: (i) relevant knowledge and diversity of background and experience in areas including business, finance and accounting, technology, marketing, international business and 15

17 government; (ii) Personal qualities of leadership, character, judgment and whether the candidate possesses a reputation in the community at large of integrity, trust, respect, competence and adherence to the highest ethical standards; (iii) Roles and contributions valuable to the business community and (iv) Whether the candidate is free of conflicts and has the time required for preparation, participation and attendance at all meetings. Shareholder recommendations should be sent to the Secretary of PepsiCo and must include detailed background regarding the suggested candidate that demonstrates how the individual meets the minimum Board membership criteria described above. Nominations received by the Secretary of the Company from shareholders are reviewed by the Chairman of the Nominating and Corporate Governance Committee to determine whether the candidate possesses the minimum qualifications described above and if so, whether the candidate s expertise and particular set of skills and background fit the current needs of the Board. If the candidate meets the requirements for a current vacancy on the Board, the submission materials are reviewed by the Nominating and Corporate Governance Committee and are responded to by the Chairman of the committee or his designee. The process for reviewing and evaluating candidates submitted by shareholders is designed to ensure that the Board includes members with diverse backgrounds, skills and experience, including appropriate financial and other expertise relevant to the business of the Company. The process for evaluation of candidates submitted by non-shareholders is handled similarly. Disclosure Committee This committee, comprised of senior officers of the Company, is responsible for assisting the senior executives in fulfilling their responsibility for oversight of the accuracy and timeliness of the disclosures made by the Company. Independent Auditors We have always limited the amount of non-audit services provided by our independent auditors. In 2002, we adopted a formal policy that prohibits our external auditors from providing any tax or non-audit services that are not an extension or do not enhance the efficiency of the audit or audit-related services. We will not hire anyone from our independent audit firm who has worked on our audit in the past two years. Exercise and Hold Policy Under our policy revised in 2002, certain employees and directors may trade PepsiCo stock only during specific limited time periods. Furthermore, senior executives and director s annual option exercises for cash are limited to 20% of vested gains. Any proceeds in excess of this limit must be held in PepsiCo shares for at least one year after the date of exercise. Stock Ownership Guidelines Stock ownership guidelines clearly align the interest of management, directors and shareholders. Senior executives and directors are required to own multiples of their salary in PepsiCo stock. Open Communication To promote high ethical standards across a global organization, we ensure that employees have clear lines of communication to report potential issues. We have a telephone hotline called Speak Up for this purpose. It is accessible from around the world at no charge to employees. To further ensure an open 16

18 communication environment, employees may remain anonymous. The availability of the Speak Up line is communicated across PepsiCo. Types of incidents that may be reported through the Speak Up line include, but are not limited to: Employee mistreatment Discrimination, including sexual harassment Product tampering Substance abuse Falsifying company records Accounting irregularities Questionable business practices Fraud or theft Criminal conduct Impermissible gifts Safety hazards For more information on Speak Up visit For more information about Corporate Governance, including PepsiCo Bylaws, Amended and Restated Articles of Incorporation, Audit Committee Charter, Nominating and Corporate Governance Committee Charter and Compensation Committee Charter, visit the Corporate Governance section under the investor tab on our website: also Corporate Governance Ratings Independent organizations rate companies on the quality of their corporate governance. For the sixth consecutive time, PepsiCo scored a 10 out of 10 rating from Governance Metrics International in Institutional Shareholder Services in 2005 reported that PepsiCo outperformed 97.1% of the S&P 500 companies and 98.1% of the food, beverage and tobacco companies with respect to corporate governance. Business Risks PepsiCo is subject to risks in the normal course of business due to adverse developments with respect to: product demand, our reputation, information technology, supply chain, retail consolidation and the loss of major customers, global economic and environmental conditions, the regulatory environment, workforce retention, raw materials and energy, competition, and market risks. Our risk management process is intended to ensure that risks are taken knowingly and purposefully. As such, we leverage an integrated risk management framework to identify, assess, prioritize, manage, monitor and communicate risks across the Company. This framework includes: PepsiCo Executive Risk Council (PERC), comprised of a cross-functional geographically diverse, senior management group which identifies, assesses, prioritizes and addresses primarily strategic and reputation risks. 17

19 Division Risk Committees (DRCs), comprised of cross-functional senior management teams which meet regularly each year to identify, assess, prioritize and address division-specific operating risks. PepsiCo s Risk Management Office, which manages the overall process, provides ongoing guidance, tools and analytical support to the PERC and the DRCs, identifies and assesses potential risks, and facilitates ongoing communication between the parties, as well as to PepsiCo s Audit Committee. PepsiCo Corporate Audit, which confirms the ongoing effectiveness of the risk management framework through periodic audit and review procedures. In 2005, we continued our effort to drive risk mitigation focus to where risks can be most efficiently and effectively managed and reinforced ownership and accountability for risk management within the business. Some highlights include: With respect to product demand, we continued to focus on the development of products that respond to consumer trends, such as consumer health concerns about obesity, product attributes and ingredients, including reformulating products to lower sugar, fats, and sodium; adding ingredients that deliver health benefits; and expanding our offering of portion-controlled packages. Smart Spot eligible products continued to be the fastest growing part of our North American product portfolio. We continued to focus on marketing our products in ways that promote healthier lifestyles. We helped create and endorsed the American Beverage Association s new schools policy, which defines the types of products that may be sold in schools. We actively promoted healthy energy balance through our national sponsorship of America On the Move, a program designed to help families take simple steps to maintain a healthy energy balance. We enhanced the coordination of our Division-led product integrity efforts through the creation of the PepsiCo Product Integrity Council (PPIC), a cross-functional forum to share leading practices and confer about areas of potential risk. We continued to enhance our internal IT infrastructure, by consolidating and updating technology and retiring older technology, as well as improving our information security capabilities. We continued implementation of our BPT initiative, which we believe will enable us to remain in step with the changing needs of our customers. Overall BPT project governance is provided through steering committees headed by senior executives and a team is in place to drive effective risk management and quality processes and to build an internal control environment compliant with the Sarbanes-Oxley Act. We continue to assess our capability to mitigate potential business disruptions and evaluate an integrated approach to business disruption management, including disaster recovery, crisis management, and business continuity. We established a compliance and ethics leadership structure, appointing a Senior Vice President, Deputy General Counsel who is focusing on business practices and compliance, prioritizing projects to enhance the effectiveness of our compliance and ethics program, including developing a multilingual Code of Conduct training program that was rolled out in We have implemented human resource programs which focus on diversity and inclusion, leadership development, succession planning, and employee worklife flexibility, and are aimed at hiring, developing, and retaining our talented and motivated workforce. 18

20 For more discussion of our business and market risks see PepsiCo's 2005 Annual Report, Our Business Risks pages Executive Compensation The Compensation Committee of the Board of Directors is composed entirely of independent members of the Board. The Committee oversees PepsiCo s compensation and stock-based programs and establishes the principles and strategies that guide the design of compensation plans and benefit programs for all employees within PepsiCo. The Committee makes recommendations to the Board regarding the compensation of PepsiCo s executive officers. The Board approves all compensation actions regarding the Chief Executive Officer and all other executive officers. The Committee continuously evaluates PepsiCo s plans and programs against current and emerging competitive practices, legal and regulatory developments and corporate governance trends. Utilizing input from independent outside advisors that report directly to the Committee, the Committee evaluates PepsiCo s financial performance relative to peer companies and reviews data showing all components of compensation and benefits provided to the executive officers. In 2005, the review provided assurance that PepsiCo s executive compensation was appropriately aligned with PepsiCo s financial performance, and that the programs should continue to support the attraction and retention of talent necessary to maintain the long history of strong sales growth, profitability and shareholder returns. For more information see the Compensation Committee Report section in PepsiCo s 2006 Proxy Statement. 19

21 Code of Conduct Since 1976, PepsiCo has had a Code of Conduct that applies to every associate. The Code covers many aspects of our business and is distributed or made available globally to our entire workforce annually. The Code of Conduct, is available on-line in multiple languages. Specific employees, including management and any individual with access to sensitive information or in a position to purchase goods and services, are required to complete mandatory web-based training on our Code of Conduct and to certify their compliance with the Code. In February 2006, we highlighted our Code by designating the month as Code of Conduct Month and featuring the Code in a variety of communications across our entire enterprise. Our Code of Conduct includes sections on: PepsiCo s Mission Respect for Our Employees/Diversity Customers, Suppliers and Competitors Outside Consultants Global Relations Business Gifts and Payments Health and Safety Environment Political and Community Activities and Contributions Conflicts of Interest Insider Trading and Proprietary Information Accounts and Record Keeping Protection and Proper Use of Company Assets Reporting Code of Conduct and Other Ethics Issues Responsibility for Compliance. Visit: PepsiCo Values PepsiCo Values, presented earlier in this report, are communicated across the Company, including by training and regular communications regarding our Values and Guiding Principles. Shareholder Communication To facilitate communications with our shareholders, we provide a telephone number, mailing address and electronic link to contact our Board of Directors. These may be found under Contact the Board of Directors/Audit Committee in the Corporate Governance section of our website. In the annual proxy statement, distributed to all 20

22 shareholders, PepsiCo reminds shareholders that the Board of Directors has established a process for contacting the Board, a committee of the Board, or an individual member of the Board. All communications sent to the Board are reviewed by the PepsiCo Corporate Law Department. Certain communications will be sent to the Chair of the relevant Board committee or an individual Board member, as applicable. Concerns relating to PepsiCo s accounting, internal accounting controls or auditing matters will be referred to members of the Audit Committee as appropriate. For more information visit: Stakeholder Engagement PepsiCo actively listens to stakeholders and acts on recommendations considered appropriate and where we can make a difference. Our major stakeholders have been described in the section called Our Constituencies. They include investors; associates; customers, partners and suppliers; consumers; the communities where we operate, and individuals, groups and advocates who represent community, environmental and social interests. Here are some examples of stakeholder engagement: Investors We regularly conduct web-based quarterly conference calls to provide updates to analysts and investors, and we broadcast our annual shareholder meeting on our website. Associates We ask associates to respond to an Organizational Health survey every other year. Topics include benefits, working conditions, compensation, career development, diversity and inclusion initiatives, community activities and many others. The results of the survey are shared with associates and action plans to address issues are developed and made a part of performance goals. We have active employee networks for our employees, including networks for African-Americans, Latinos, Asian, Women, Gay/Lesbian/Bisexual/Transgender (GLBT) and our newest group, Enable, for individuals with different abilities. Our most senior level executives reporting to our chief executive officer are responsible for sponsoring various groups across PepsiCo, including our employee networks and White Males and Women of Color. We have a daily e-newsletter which offers associates the opportunity to ask questions. We conduct meetings during which employees are given the opportunity to ask questions and are updated on topics including the business and our priorities. Customers, Partners and Suppliers We have dedicated teams for our customers, partners and suppliers and interact with them on a regular basis. We have a team dedicated to Supplier Diversity, including working with our women and minority suppliers to build their capabilities and business with PepsiCo. Our website includes information on our women and minority supplier diversity program. See: Consumers We have 800 numbers where consumers can call with questions or comments. The call center numbers are included on our product packaging. We 21

23 provide a number of websites where consumers can get information about our brands, including nutritional content and answers to other questions. These websites can be found by clicking on the company icons on pepsico.com. Communities Our Ethnic Advisory Boards provide counsel and advice on a wide range of business areas including: Marketing to targeted communities. Building alliances with retailers. Creating products for a more diverse consumer base. Developing a more diverse supplier base and other business relationships. Promoting PepsiCo s diversity and inclusion efforts. Recommending diverse talent for employment opportunities. Encouraging the expansion of diverse representation among PepsiCo employees. Providing a perspective on diversity and inclusion issues or questions. Our African-American Advisory Board was formed in Our Latino/Hispanic Advisory Board was formed in Some of our businesses outside the United States are forming similar boards. Our Canada business has convened an Asian Advisory Board. For the members of our Advisory Boards see our PepsiCo's 2005 Annual Report For more information on Community Affairs visit Representatives of Community, Environmental and Social Interest including Shareholders -- During 2005, we interacted with several groups representing community, environmental and social interests. We consulted with shareholders to discuss water, HIV/AIDS, political contributions, charitable contributions and recycling. We updated shareholder groups on areas of interest. In the area of political contributions, following discussions, we developed a political contributions policy and agreed to post a list of our political contributions on our website. As a result of discussions with shareholders, we agreed to provide more information on our charitable contributions policies and procedures and to post a list of our donations on our website. Although some of this work was already in progress, the shareholders provided additional insight and suggestions that we are implementing. We met with shareholders regarding recycling and updated them on the success of reaching our goal of including 10% recycled content in Pepsi-Cola plastic bottles. We had previously committed to reaching this goal by the end of When we received a letter from Greenpeace regarding an opportunity to participate in an initiative committed to eliminating hydroflurocarbons from refrigeration equipment, we accepted the opportunity after reviewing our programs and technology goals. For information on our political donations visit: For information on our charitable contributions visit For information on HIV/AIDS visit: 22

24 Our Management Systems External Charters In addition to voluntarily adopting the Global Reporting Initiative guidelines, we have joined in or endorsed external efforts related to specific goals. A partial list includes: World Business Council on Sustainable Development (WBCSD) The WBCSD is a coalition of approximately 170 international companies united by a shared commitment to sustainable development. PepsiCo joined in Global Business Coalition (GBC) on HIV/AIDS The GBC is an alliance of international companies dedicated to combating the HIV/AIDS epidemic. The Committee to Encourage Corporate Philanthropy (CECP) -- CECP is the only international forum of business chief executive officers and chairpersons pursing a mission exclusively focused on corporate philanthropy. CECP s mission is to lead the business community in raising the level and quality of corporate philanthropy. Children s Advertising Review Unit (CARU) PepsiCo is part of this strategic alliance through the National Advertising Review Council that evaluates child-directed advertising and promotional material in all media to advance truthfulness, accuracy and consistency, employing both self-regulatory guidelines and applicable laws for children s advertising. Family-Friendly Programming Forum PepsiCo is part of a group of advertisers who have taken positive steps to increase family-friendly programming choices on television. Sullivan Principles -- The goal of the Principles is to support economic, social and political justice by companies where they do business, to support human rights, and to encourage equal opportunity at all levels of employment. Trade and Professional Groups and Standards PepsiCo and its various businesses belong to a wide variety of trade, professional, environmental and community groups. These are sometimes local and specific to the business. We are members of food and beverage industry associations in the United States such as the American Beverage Association (ABA) and the Snack Food Association. In international markets, we are members of many other groups such as Con México (Association of top consumer goods industries in Mexico), AIJN European Association of the Industries of Juices & Nectars, International Council of Beverage Associations (ICBA), CEREAL European Breakfast Cereals Association, the European Food & Drink Federation (CIAA) among many others. We are members of groups dedicated to addressing environmental issues. Examples include Air and Waste Management Association, Alliance to Save 23

25 Energy, EUROPEN, European Organization for Packaging and the Environment, Keep America Beautiful, the Sustainable Packaging Coalition and the National Safety Council. - Beverage Packaging Environmental Council (BPEC) is a U.S. beverage industry group committed to increasing beverage container recycling rates. - Energy Star is the U.S. Environmental Protection Agency Program focused on improving energy performance. In 2006, Frito-Lay North America was recognized as an Energy Star Partner of the Year for Leadership in Energy Management. - In Mexico, Sabritas is a founding partner of SUSTENTA, a philanthropic group in Mexico committed to the betterment of solid waste management. - Frito-Lay North America has joined the U.S. Environmental Protection Agency (EPA) Climate Leaders and SmartWay Transport Partnership programs. Climate Leaders is a government-industry program focused on voluntary reduction of greenhouse gases from industrial operations. SmartWay Transport Partnership members are committed to promoting greater energy efficiency and air quality within the freight transport business. We are members of groups dedicated to product quality and safety, including American Industrial Hygiene Association and American Society of Safety Engineers, and we follow WHO Guidelines for Drinking Water Quality. We are members of groups dedicated to helping people improve their health. These include: - America On the Move A national initiative to help people improve their health through simple changes in diet and exercise. - The American Council on Fitness and Nutrition PepsiCo is a founding member. - PepsiCo Group-Mexico, in association with Activate Foundation, launched a program to foster healthy lifestyle habits among Mexican children. We are members of organizations dedicated to industry research, for example, International Life Science Institute (ILSI) and the International Society of Beverage Technologists (ISBT). We are members of organizations dedicated to improving the quality of life in our communities, for example in Mexico we are part of the Communication Council Association board, a group promoting a productive, united and just society. We are members of organizations focused on increasing supplier diversity, such as the National Minority Supplier Development Council and local chapters. Approach to Managing Impacts of Our Operations Minimization and Optimization PepsiCo s approach to sustainability includes both minimization and optimization efforts. We re committed both to reducing our impacts and seeking ways to reach optimal solutions. This means we will embark on projects to reduce our use of 24

26 resources, such as energy conservation, and we ll seek projects that create additional resources, such as the use of renewable energy sources. Capital Expenditure Filter In 2005, we began a project to define sustainability criteria and to ensure that sustainability issues are formally considered in all our major capital expenditure proposals. We piloted the filter on two projects: A new Gatorade plant in Virginia and a new warehouse in Arizona. The filter proved to be a valuable tool in helping us identify potential environmental impacts such as watershed protection, green building design opportunities and renewable energy use. Changes in Operations During the fourth quarter, PepsiCo announced it would record a restructuring charge to reduce costs in some of its operations. The action was taken to put PepsiCo in a position to deal more effectively with continued cost pressures expected in In total, approximately 700 PepsiCo associates were affected. The action did not have any impact on our frontline associates. Frito-Lay was the division most impacted. Frito-Lay streamlined its organization to enable the Company to reinvest in business initiatives that will strengthen its leadership position and create capabilities for continued growth. Standards of Performance PepsiCo facilities in Leicester, United Kingdom and Spain have received ISO certification. Frito-Lay distribution center in Rochester, N.Y was certified by the U.S. Green Building Council and granted LEED (Leadership in Energy and Environmental Design) Gold status. In the United States, four of Tropicana s facilities and 26 of our Frito-Lay facilities have received Star certification in the OSHA Voluntary Protection Plan and are evaluated for safety. 25

27 Performance Indicators Economic Our Economic Performance The following should be read in conjunction with Management's Discussion and Analysis and Consolidated Financial Statements included in PepsiCo's 2005 annual report on Form 10-K. Sales and Major Markets PepsiCo net sales were $32,562 million in Our major markets are the United States, Mexico, United Kingdom and Canada. In 2005, PepsiCo's net revenue increased 11%, reflecting across all divisions, increased volume, favorable effective net pricing, and net favorable foreign currency movements. Volume gains contributed 6 percentage points. The United States represented 61% of net revenue; Mexico was 10%; United Kingdom was 6%, Canada was 4%; with all other countries generating 19%. Costs and Expenses Our cost of sales was $14,176 million in Our selling, general and administrative expenses were $12,314 million. Substantially all of our pension plans are fully funded on an Accumulated Benefit Obligation (ABO) basis. Sales Terms Our policy is to provide customers with product when needed. Our sales terms do not allow for a right of return. However, our policy for direct-store-delivery and chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, our policy for warehouse distributed products is to replace damaged and out-of-date products. Based on our historical experience with this practice, we have reserved for anticipated damaged and out-of-date products. Our bottlers have a similar replacement policy and are responsible for the products they distribute. For more information see PepsiCo's 2005 Annual Report: Uses of Cash Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating, investing and financing needs. In 2005, our Capital Spending was $1,736 million. Our Common Share repurchases were $3,012 million. Dividends paid totaled $1,642 million and we repaid long-term debt of $177 million. 26

28 For more information see PepsiCo's 2005 Annual Report: Retained Earnings Our retained earnings increased 13% in 2005, from $18,730 million to $21,116 million. Infrastructure Development Business Process Transformation (BPT) is a comprehensive effort to drive efficiencies at PepsiCo and fuel our future growth. It includes efforts to leverage key business functions to take advantage of our scale. It includes moving to a common set of processes that underlie key activities and supporting these activities with common technology applications. It also includes linking our information systems so that data will flow seamlessly from one function to another. Our Economic Contributions We make economic contributions in the following ways: Shareholders We provide shareholders with a strong return on their investments. In 2005, we paid $1.6 billion in dividends and provided shareholders with a 15% return, which is stock appreciation plus dividends reinvested. Associates We directly employ approximately 157,000 people. Our customers and business partners, such as franchised bottlers and licensees, employ tens of thousands of additional people as they manufacture and distribute our brands. Retailers We create income and profit for our customers, which means jobs and opportunities in millions of retail establishments around the world. Our brands generated an estimated $85 billion in retail sales during 2005, and they are among the most profitable brands that retailers carry. Suppliers In 2005, we purchased more than $10 billion in supplies, services and raw materials. These purchases help to support hundreds of thousands of additional jobs in many communities. Goods and services from women owned and minority-owned businesses accounted for $921 million in We have a robust Supplier Diversity program. Our chairman and chief executive officer serves as chairman of the National Minority Supplier Development Council (NMSDC). Supplier Diversity Recognitions New York Urban League award for Corporate Citizenship, including hiring, supplier relations and philanthropic practices. Women s Business Enterprise National Council: "America s Top corporations for Women s Business Enterprise." 27

29 For more information visit the Supplier Diversity section of our website: Governments Our businesses have a positive impact on the economies of the countries and localities in which we operate by generating billions of dollars of revenue for governments through taxes paid directly by PepsiCo and indirectly by PepsiCo's employees, investors, commercial partners and suppliers. In 2005, PepsiCo paid $1.3 billion in income taxes worldwide. In addition to corporate income taxes, PepsiCo paid hundreds of millions of dollars in payroll, property, transaction-based and other miscellaneous taxes worldwide. These tax payments make an important contribution to the countries and communities in which PepsiCo has a presence. Technology We share expertise and technologies that provide important benefits to communities and countries. In emerging markets such as India and China, our agricultural development programs have significantly improved crop yields for local farmers. For example, in China, we share knowledge about potato farming with the Chinese Ministry of Agriculture and we have established an advanced potato research laboratory. In India, we are using our knowledge to improve the water supply for the Kerala area. Our Community Support and Charitable Contributions As a corporate citizen, PepsiCo, Inc. and its companies have a long and proud history of supporting communities in which they do business. We give to nonprofit community groups and initiatives through the PepsiCo Foundation, Corporate Contributions, PepsiCo Community Affairs and our various operating divisions. We encourage employees to volunteer. Additionally, we provide gifts-in-kind, support community and nonprofit events, conventions and journals and sponsor meetings. Contribution Summary $ in Millions PepsiCo Foundation: 21.6 Corporate Contributions: 4.3 Divisions: 3.7 Estimated In-Kind Donations*: 20.8 Total: $50.4 *In-kind donations include food, beverages, equipment and services and are estimated at cost to PepsiCo. PepsiCo Foundation Since 1965, the PepsiCo Foundation has invested in leading programs and critical causes that have strengthened communities. The PepsiCo Foundation focuses its grant making in the following areas: Health and Wellness 28

30 Diversity and Inclusion Environment Employee Engagement The PepsiCo Foundation also provides assistance for humanitarian aid and recovery efforts following major disasters. Health and Wellness The Foundation's mission in Health and Wellness is to advance the knowledge about how to encourage healthy lifestyles and effect positive behavior change. Initiatives of particular interest are those which address one or more of the following focus areas: Community Activation Minority Communities Health Professionals The Corporate Charitable Contribution Fund supports these objectives as well. include: Examples of 2005 PepsiCo Foundation and Corporate Charitable Contribution Fund initiative National Urban League National Council of La Raza Healthy Steps Initiative Promoviendo una Buena Alimentacion y Mayor Actividad Fisica para una Mejor Salud Women s Sports Foundation "GoGirlGo!" Hispanic Girls Initiative Preventative Medicine Research Institute (PMRI) Fundaci?n Activate V Activa2 The YMCA Diversity and Inclusion The PepsiCo Foundation's mission in Diversity and Inclusion is to support education and community organizations which advance opportunities, especially for young people, to further their education and advance economic mobility. PepsiCo and the PepsiCo Foundation provide support to a select number of colleges and universities which provide opportunities for individuals of all backgrounds to gain leadership skills and experience. Programs at the high school level with an emphasis on skill development for students of color and students from low-income households also receive charitable support. The Foundation also supports organizations which help foster the environment for minority-owned and women-owned businesses. Examples include: National Council of La Rasa - ESCALERA - Taking Steps to Success Cornell University Summer Scholars Program 29

31 University of Massachusetts at Amherst - PepsiCo Foundation PH.D. Minority Fellowship in Health and Wellness Enterprising Peepul Project - United Kingdom Diamond Scholars Women s Business Enterprise National Council National Minority Supplier Development Council University of Texas at Austin - LeaderShape Institute Hampton University - Leadership Institute William H. Harvey Endowed Chair in Management Environment The Foundation's mission around the Environment is to advance the knowledge and methods of water resource management which are sustainable and positively impact both quantity and quality of water supply. Examples include: China Women s Development Foundation V Water Cellars for Mothers The Energy and Resources Institute (TERI) V India Water Project Employee Community Engagement The PepsiCo Foundation has a long history of encouraging employee involvement in the community through non-profit groups. The Foundation's commitment to encourage the personal contributions and volunteer leadership of PepsiCo associates continues today through the Foundation's Matching Gifts program, support for United Way Campaigns, and Community Service Days. The PepsiCo Foundation matches employee gifts to nonprofit organizations through a Matching Gifts program and United Way. In 2005, Matching Gifts totaled $4.1 million and United Way $1.8 million. Grants are made to nonprofit groups where employees volunteer. In 2005, the PepsiCo Foundation donated $0.3 million in support of the PepsiCo Employee Community Service Days initiative. The grant provided 1100 Employees the opportunity to participate in community service days in New York, Illinois, Dallas and Mexico. City Year brings together young adults, ages 17-24, from diverse ethnic, cultural, and socioeconomic backgrounds for a demanding year of full-time community service, leadership development, and civic engagement. The young adults at City Year lead PepsiCo employees in employee community service days to give back to the community and provide opportunities for teambuilding. Since 1981, the PepsiCo Foundation has awarded more than $36 million in college scholarships to children of employees around the world. Humanitarian Aid The PepsiCo Foundation and PepsiCo committed $2.0 million in disaster relief related to the tsunami in Southeast Asia and $2.1 million in relief directed to victims of Hurricane Katrina. The PepsiCo Foundation and PepsiCo committed $2.0 million in relief for Pakistan earthquake victims. For descriptions of these programs, a complete listing of PepsiCo Foundation donations and for more information visit our website at 30

32 Community Affairs PepsiCo's Community Affairs is an integral part of the way we do business. We are currently active in these areas: Health and Wellness We participate in conferences, events and volunteer activities to increase awareness of PepsiCo's commitment to health and wellness in ethnic communities, along with awareness of our Smart Spot symbol and S.M.A.R.T. and other activity programs. We form partnerships with community-based organizations to encourage active lifestyles. We have key partnerships with The National Council of LaRaza and The National Urban League. We work together to promote the mission of America On the Move. Diversity and Inclusion We create awareness of PepsiCo's goals of recruiting diverse associates by representing PepsiCo at national recruiting conferences, such as the National Black MBA Associations, Inc. and National Society of Hispanic MBAs. We provide leadership and support PepsiCo's commitment to increase procurement from minority-owned and women-owned businesses. We participate in events and conference where we seek first and second tier suppliers. We provide support for events and initiatives of the following groups: U.S. Pan Asian American Chamber of Commerce (USPACC), National Minority Supplier Development Council (NMSDC), U.S. Hispanic Chamber of Commerce (USHCC), Women's Business Enterprise National Council (WBENC), and Women Minority Business Enterprise (WMBE). Government and Legislative Agendas In partnership with the Black Caucus and the Hispanic Caucuses, we build community awareness of PepsiCo's health and wellness commitment and program initiatives. We initiate and participate in panels and workshops with the goal of creating understanding and awareness of our commitment to health and wellness. Corporate Social Responsibility Employee involvement - We sponsor and participate in a wide variety of local and national activities through employee involvement. Examples include: Principal s Retreat Los Angeles Urban League Gala Multicultural Health and Wellness Partnership Communications Careers for Latinos Junior Achievement United Negro College Fund Greater Chicago Food Depository and other food banks Chicago Cares Teach for America Chinese American Service League Take Stock in Children March of Dimes WalkAmerica Susan G. Komen Race for the Cure Employee Community Service Week - Each year, PepsiCo volunteers participate in a community project, using paid time to help local groups. For example, more than 750 associates throughout the organization spent a week volunteering with 31

33 community-based organizations such as the Martin Luther King, Jr. Center in New Rochelle, NY and the Emmanuel Children's Mission in Mt. Vernon, NY. The volunteers painted, landscaped and led children's activities. For more information on PepsiCo Community Affairs visit In-Kind Donations PepsiCo provides in-kind donations for many nonprofit organizations. The largest program is America's Second Harvest and its network of food banks. Additional inkind donations of product, premiums, equipment, printing, meeting space and other services are also made. Citizenship Awards The Mexican Center for Philanthropy has named Sabritas, our snack business in Mexico, as a "Socially Responsible Business." PepsiCo was awarded the Corporate Citizenship Award by the National Puerto Rican Coalition for its commitment to the Puerto Rican community. 32

34 Performance Indicators: Environment Our Environmental Commitment PepsiCo is committed to being an environmentally responsible corporate citizen. We are committed to minimizing the impact of our businesses on the environment with methods that are socially responsible, scientifically based and economically sound. We encourage conservation, recycling and energy use programs that promote clean air and water and reduce landfill. Our policy is to comply with requirements of all applicable laws and regulations. In the absence of specific laws and regulations, our goal is to apply prudent environmental management practices, manage environmental risks and operate responsibly. The following discussion includes highlights of our philosophy and of 2005 activities. For more information, including our Environmental Policy, see Our Environmental Approach Historically, each of our operating units established and maintained independent environmental management systems. In 2001, we created our Environmental Task Force representing all our operating units to address environmental issues on a company-wide basis and share best practices. In 2003, we adopted the Global Reporting Initiative guidelines. In 2004, we established our Sustainability Task Force to oversee our environmental progress. In 2005, we began reviewing and revising our EMS framework to ensure that we have rigorous procedures for managing our environmental impacts, appropriate for diverse businesses. A critical step is to establish and track environmental metrics across the Company. In 2005, we developed company-wide metrics for measuring performance in energy and water use that will be introduced across the Company. The goal of PepsiCo's metric initiative is to provide accurate, reliable data that provides business value and drives environmental improvements. Our Environmental Programs Frito-Lay North America (FLNA) has a well-established Environmental Management System. FLNA has staffed professionals to maintain and develop environmental policies within its corporate operations as well as internally trained volunteers on facility "Green Teams." Through the "Green Team" program, nearly 16,000 manufacturing associates have been trained to improve their environmental awareness. Quaker, Tropicana and Gatorade (QTG) facilities have a health, safety and environment (HSE) management system in place. The HSE system is geared to prevent employee injuries and adverse environmental impacts at QTG facilities. The risk-based HSE process standardizes identification, evaluation and control of HSE risks and opportunities throughout the supply chain operations. Additional 33

35 programming includes training, information management, audit as well as leadership and commitment expectations. Pepsi-Cola North America (PCNA) sells concentrate to bottlers licensed by PepsiCo. Pepsi-Cola supports the Environmental Protection Agency's (EPA) hierarchy of reduce, reuse and recycle. PepsiCo International (PI) includes both snack and beverage businesses. Our beverage business includes franchise and company-owned operations. Our snack and food businesses include company-owned and non-controlled affiliates. PI is making strides around the world to improve its environmental policies and programs. The international division is currently standardizing the collection of water and energy metrics across all company-owned beverage and snacks facilities, and working toward communication and implementation of the PepsiCo EMS framework. PepsiCo's international operations have worked with local governments to improve environmental conditions in the areas in which we operate. Our major beverage concentrate production facilities in Ireland had received ISO certification. In our Central European beverage business, we have created a three-year environmental program with the goal of achieving ISO certification for all our facilities. Our Environmental Impacts PepsiCo's overall approach to sustainability includes both minimization and optimization efforts. We're committed both to reducing our impacts and seeking ways to reach optimal solutions. Our environmental impacts include agricultural materials and packaging, energy and water use, emissions, waste management, transportation and our supply chain. The following discussion includes some highlights: Agricultural Materials We encourage the application of sound agricultural practices with our suppliers and focus on efficient use of agricultural products. Tropicana minimizes landfill waste by using every part of the orange as well as its by-products after the juice is extracted. The Quaker Foods plant in Cedar Rapids, Iowa, provides oat hulls to the University of Iowa as a renewable biomass fuel source for the college s power plant. 34

36 Packaging PepsiCo fully supports the EPA hierarchy: Reduce, Reuse, Recycle. For example: Reduce: PepsiCo has reduced the weight of our beverage packaging significantly and uses nearly 60% less packaging now than in 1990 to deliver the same amount of soft drinks. Reuse: The average aluminum cans contain approximately 41% previously used aluminum materials. Glass bottles contain between 25%-35% of previously used material. Frito-Lay route sales employees return empty cartons from stores to our plants for reuse or recycling. Delivery boxes are used an average of six to seven times. Recycle: While beverage containers are the most recycled consumer packaging in the United States, we recognize that recovery rates need to increase. We helped found a new organization, the Beverage Packaging Environmental Council (BPEC), to increase beverage container recycling rates. Recycled Content Goal In 2002, PepsiCo committed to include 10% recycled content in our carbonated soft drink plastic bottles in the U.S. by Thanks to our bottlers, PepsiCo met that goal on schedule. We re committed to making a difference in encouraging recycling and we re doing it in innovative ways. For example, in 2006 in support of Keep America Beautiful s Great American Cleanup program, SAM S CLUB teamed up with Pepsi-Cola North America s Aquafina water brand to Return the Warmth to local communities through a large scale recycling program. Energy Our businesses focus on reducing energy consumption and increasing efficiency of energy use. As of the end of 2005, Frito-Lay has reduced its fuels consumption by approximately 21% and electric consumption by approximately 18% per pound of product since In 2005, QTG reduced its overall energy usage 16% per production unit at manufacturing facilities from a 2004 baseline. We are also engaged in renewable energy projects. In 2004, Frito-Lay completed construction on three photovoltaic generation projects at distribution centers in California. Our Fort Pierce, FL Tropicana plant entered into an agreement in 2005 with Saint Lucie County landfill to use the landfill's by-product methane gas as fuel to supplement the plant's energy needs. 35

37 Water Water is a key sustainability priority for our Company. We work closely with governments, municipalities and technical experts everywhere we do business to make sure that our water practices are responsible. Over the years, we have voluntarily developed many programs to reduce, reuse and recycle water, and that commitment is stronger than ever. We also work proactively to improve water supplies in communities where quality or quantity is a problem. And we readily donate water when disaster strikes. Every PepsiCo division is engaged in water projects. In Europe and Asia, we harvest rainwater to help restore aquifers. In countries like India, where water shortages can be severe, we are building community infrastructure to help meet needs. In Kerala, India, for example, Pepsi-Cola increased the water supply for that drought-stricken community by digging new wells. In the United States, our conservation efforts include reducing our use of water through conservation techniques, using recycled water for plant maintenance and beneficially using wastewater to irrigate crops used for animal feed. Gatorade is installing state-of-the-art high speed lines with advanced air rinsing of empty Gatorade bottles. This technology significantly reduces water use in Gatorade production facilities. During 2005, QTG reduced water at manufacturing facilities 7% per production unit from a 2004 baseline. Frito-Lay water reductions per pound of product are down more than 31% from a 1999 baseline. PepsiCo is also working with India's Energy and Resources Institute (TERI) to create sustainable state-of-the-art water resources management processes that improve communities. In China, The PepsiCo Foundation is partnering with China Women's Development Foundation (CWDF) which is part of the All China Women's Federation on a research and development initiative designed to expand availability of safe drinking water for the people of Western and Central China. When the tsunami hit Southeast Asia in December 2004, PepsiCo India was a "first responder," reaching many of the most badly hit areas within 36 hours of the devastation. They provided help in establishing water purification systems and in sanitizing many community wells that had become contaminated. PepsiCo beverage operations subscribe to the American Beverage Association Beverage Industry Water Resources Policy, announced in This includes a commitment to sound water resources management outlined in four guiding principles: 1. Conservation 2. Watershed Protection 3. Accountability 36

38 4. Innovation We are a part of the Safe Water Network, a not-for-profit organization established to develop and deploy new economically viable water purification technology to provide safe water to neglected populations a critical global issue impacting more than 1 billion people. Air Emissions Our facilities primarily burn natural gas, which produces lower emissions of air pollutants than other fuels. All Pepsi-Cola vending machines, fountain equipment and cooler display units in North America have been converted to non-chloroflurocarbon (CFC) refrigerants. We are joining with other industry members and Greenpeace to work toward units that are hydroflurocarbon (HFC) free as well. More than 96% of all new purchases of refrigerated sales and marketing equipment use HFC free insulation, with a goal of reaching 100% by end of Frito-Lay has joined the U.S. Environmental Protection Agency (EPA) Climate Leaders program. This is a government-industry program focused on voluntary reduction of greenhouse gases from industrial operations. In the United Kingdom, as part of the Kyoto Treaty, we are part of the Climate Change Levy with carbon emission targets. Waste In India, through an innovative partnership, PepsiCo has begun working with Exnora International and the Women's Self Help Groups, both non-governmental groups, and the Pammmal Municipality on a collaborative venture to establish an infrastructure to manage household solid waste. Each year, Frito-Lay recovers millions of pounds of starch, significantly reducing the waste load discharged to wastewater treatment facilities, as well as generating a valuable byproduct. The recovered starch is ultimately sold to industrial manufacturers. High-speed bottle filling equipment creates less spillage during filling operations, and therefore reduces the biological oxygen demand (BOD) in wastewater. Gatorade installed this technology at our facility in Kissimmee, Florida in Installations are underway at two other locations in Transportation In 2004, Frito-Lay was awarded a grant from the Texas Commission on Environmental Quality to develop and test hybrid electric delivery trucks that will reduce air pollution and fuel consumption. The vehicles will be ready for road testing in Texas in mid Sabritas, our Mexican snack food business, has converted many of its distribution vehicles to burn liquid propane gas. This reduces carbon and nitrogen emissions. 37

39 A pilot program using on-board GPS tracking system will provide Frito-Lay with more efficient route engineering, thus reducing total system mileage, emissions and fuel use. The pilot system was in operation on approximately 100 Frito-Lay delivery trucks in the Dallas, Texas area by end of Supply Chain Our goal is to encourage and involve our supply chain in addressing environmental issues. In the United States, our suppliers certify that 100 percent of the paper products supplied to PepsiCo come from certified tree-managed farms. In 2005, the PepsiCo annual report was printed on paper certified by the SmartWood Program of the Rainforest Alliance. The paper was manufactured using selfgenerated "Green Power," saving approximately 227 M-KWH of power. Pepsi-Cola works with PET producers and reclaimers in support of collecting and recycling PET soft drink bottles. The industry has awarded grants to perform research on developing new products made from recycled plastic and soft drink bottles. Today, all post-consumer PET plastic that is recovered is used to make new containers, fiberfill for sleeping bags and coats, fabric, carpets, auto parts, film and more. In India, we have worked with manufacturers of PET resin and the Indian trade association of PET manufacturers to initiate a reverse supply chain and refining technology for used PET bottles. Our snack businesses in Europe and India recycle packaging waste into plastic pellets or briquettes that are used to create non-food products such as flowerpots and furniture. Environmental Awards Frito-Lay North America: EPA Energy Star Partner of the Year Award for Leadership in Energy Management. Frito-Lay distribution center in Rochester, NY is certified by the U.S. Green Building Council and granted LEED (Leadership in Energy and Environmental Designs) Gold Status. California Waste Reduction Award Program (WRAP) recognized Frito-Lay's Kern and Modesto facilities for the eighth consecutive year. In addition, the Frito-Lay Modesto plant was recognized as a "Top 10 WRAP of the Year Winner." For more information on our Environmental programs visit 38

40 Performance Indicators: Social Our Employee Policies and Programs Diversity and Inclusion African American Advisory Board Seated, left to right: Ray M. Robinson, Benaree Pratt Wiley, Earl G. Graves, Sr., Dawn Hudson, Keith Clinkscales. Standing, left to right: Kweisi Mfume, Amy Hilliard, Warren M. Thompson, Jerri DeVard, Glenda McNeal, John Compton, Johnny F. Johnson, Roderick D. Gillum, Darlene Williamson, Ph.D., Robert Holland, Reverend Dr. Franklyn Richardson, Darwin N. Davis, Sr.(deceased April 16, 2006), Clarence Avant, Reverend Al Sharpton. PepsiCo approaches diversity and inclusion as a fundamental strategic priority. We believe our leadership in this area gives us an opportunity to drive our growth and gain a competitive advantage. The business rationale is clear: Minority populations are growing faster than the population overall. Each year, racial and ethnic minorities constitute a greater share of our potential consumers, employees and retail customers. To attract and retain the brightest, most capable people, we must create a diverse and inclusive culture where everyone feels they have equal opportunity to succeed and grow - regardless of gender, race, ethnicity, religion or sexual orientation. We set goals for improving the representation of women and people of color within our workforce and we link executive compensation to the achievement of these goals as part of their performance objectives. We have active employee networks for our various groups. Starting in 2005, each of our employee groups is represented at the most senior levels by an executive reporting to our chief executive officer. Our U.S. groups include African-Americans, Latinos, Asian, Women, Women of Color, White Males, Gay/Lesbian/Bisexual/Transgender (GLBT) and our newest group, "Enable," for individuals with different abilities. All employees participate in inclusion training sessions. Our Harvey C. Russell Inclusion Award was introduced in 2003 to recognize outstanding achievement in support of PepsiCo's diversity and inclusion efforts. 39

41 Latino/Hispanic Advisory Board Seated, left to right, Gilbert Aranza, Irene Rosenfeld, (left June 2006) Raúl Yzaguirre, Maria Contreras-Sweet, Carlos H. Arce, Ph.D. Standing, left to right; Victor Arias, Jr., Carlos A. Saladrigas, Deborah Rosado Shaw, Isabel Valdés, Ricardo R. Fernández, Ph.D., Douglas X. Patiño, Ph.D., Raquel Malo. Our African-American and Latino/Hispanic Ethnic Advisory Boards have provided excellent counsel on a broad range of social, cultural and business issues, including marketing, hiring, benefits and diversity. Our Canada business recently convened an Asian Advisory Board. For more information, visit our diversity site: Diversity Awards Hispanic Magazine names PepsiCo one of the "100 Companies Providing the Most Opportunity for Hispanics." The National Association for Female Executives (NAFE) names PepsiCo among the "NAFE 2005 Top 30 Companies for Executive Women." Latina Style Magazine, a national magazine for the contemporary Hispanic woman, selected PepsiCo as one of the Latina Style 50 Best Companies. New York Urban League Honors PepsiCo for Diversity recognizing corporations for corporate citizenry, hiring, supplier relations and philanthropic practices. DiversityInc's Fifth Annual Top 50 Companies for Diversity Survey, PepsiCo ranks as No. 4 overall. PepsiCo is No. 1 for African Americans, No. 1 for Latinos, No. 2 for Recruitment & Retention, No. 4 for Asian Americans, No. 5 for GLBT Employees, No. 8 for Supplier Diversity. PepsiCo receives the Corporate Achievement Award from the University of Maryland's Smith School of Business for its efforts to foster a diverse corporate culture. The Texas Diversity Council recognizes Frito-Lay with the "Best-in-Class Diversity and Inclusion Practices" award, which recognizes companies that attract, select, develop and maintain diversified and qualified talent in order to complete in a diversified workplace. PepsiCo "Celebrating Us" week held in Purchase, NY wins top prize in Profile in Diversity Journal's International Innovation in Diversity Awards. PepsiCo and PBG Named to Black Enterprise 30 Best Companies for Diversity list. Fortune names PepsiCo a top employer for minorities. 40

42 PepsiCo scores 100% on the Human Rights 2005 Corporate Equality Index. PepsiCo is named to the Top 100 Diversity Employers list by Black Collegian magazine. Fortune names PepsiCo among the Top Employers for Women. U.S. Diversity and Inclusion Statistics Total Women % Minority % Board of Directors Senior Executives Executives 2, All Managers 7,130 1, , All Employees 60,634 16, , In 2005, we increased the percentage of our women managers by one point and our minority managers by two points. Our international operations also made significant progress in achieving diversity goals with the number of women in executive positions increasing by nearly 3% in Associate Numbers (Appoximate at year-end 2005) United States: 62,000 International: 95,000 Total: 157,000 Differences in U.S. Equal Employment Opportunity employee numbers vs. U.S. Associate Numbers are due to timing of when the data was collected in Additionally, Associate Numbers include Puerto Rico employees. Safety Our Code of Conduct includes a commitment to provide safe and healthy workplaces. It is our goal to design, construct and maintain our operating facilities in a manner to protect our people and physical resources. In the United States, our corporate commitment to providing safe and healthy workplaces is combined with training and monitoring. At FLNA, each manufacturing and distribution center has a safety manager who is responsible for safety. At Quaker, Tropicana and Gatorade, dedicated health and safety professional lead comprehensive risk management programs focused on preventing workplace illnesses and injuries. 41

43 Benefits In the United States, we offer a full range of health care, savings and retirement benefits. Our health and welfare benefits include medical, dental, vision, prescription drug, mental health, life and accident insurance, disability and flexible spending accounts. We also offer commuter reimbursement, group legal benefits, tuition reimbursement, adoption assistance, Employee Assistance Program, child care referral and resources, smoking cessation programs and family and medical leaves. In 2004, we introduced HealthRoads, a wellness benefit for employees and their families. HealthRoads provides information, resources and tools, as well as financial incentives, to encourage employees and their families to live healthier lifestyles. Domestic partners who meet certain eligibility requirements may be covered under these benefits. There is a formal procedure for appeals related to PepsiCo employee benefit claims. This information is provided along with benefit details. Financial benefits include company-funded pension plans, a 401(k) Plan with a company match, the PepsiCo Stock Purchase Program and SharePower, a broadbased stock option program. SharePower was introduced in 1989 and is a global program that offers eligible employees stock options that may be exercised after a vesting period. We believe SharePower clearly reflects a culture that places a high priority on ownership. Our various headquarters offer on-site fitness centers and wellness classes. We offer lifestyle benefits such as employee credit unions offering on-site banking and other amenities. HIV/AIDS HIV/AIDS poses an increasingly overwhelming health risk to human society. PepsiCo has recognized the importance of joining the fight against HIV/AIDS. In 2002, PepsiCo's South Africa snack food operation, Simba, adopted a formal HIV/AIDS policy. That same year, PepsiCo joined the Global Business Coalition (GBC), a not-for-profit group dedicated to fighting HIV/AIDS and related diseases by providing information, counsel and sharing best practices. And also that same year, PepsiCo established an internal task force on HIV/AIDS to address the issue in our businesses. In addition to South Africa, the task force identified priority countries where there is a high or rising prevalence and where we have major businesses: India, China and Russia. 42

44 In 2004, in consultation with interested shareholders, PepsiCo prepared a report on the known impact of HIV/AIDS on our businesses in the identified countries. PepsiCo had also developed our PepsiCo Worldwide HIV/AIDS policy. We made a great deal of progress in 2005 as we developed and implemented workplace programs in the four key countries: South Africa, India, Russia and India. Thailand volunteered to join the first tier efforts. In 2005, we announced our global HIV/AIDS policy and communicated it across PepsiCo. In South Africa, we launched a direct AIDS intervention program which includes full treatment coverage for all employees and spouses. In India, we have begun awareness and prevention education. In Russia, we established a formal partnership with Transatlantic Partners Against AIDS, updated our medical programs and reached agreement with a new medical insurance provider to consult with employees on HIV/AIDS related issues. Thailand has programs for training employees and now has an on-site nurse to provide daily counseling on HIV/AIDS. Thailand also has an active community service program, including donating to Orphans of HIV/AIDS Parents Project. Our Thailand partners have been recognized for their work with a "Certificate of Gold Level" from the AIDS Response Standard Organization, sponsored by the Ministry of Labor. China was chosen as a pilot site for developing a replicable integrated health care program. We have developed a methodology that can be applied to other countries and regions when developing HIV programs. For more information, visit our HIV/AIDS site at: HIV/AIDS Award AIDS Response Standard Organization: PepsiCo Thailand, Certificate of Gold Level. Training Employee training is year round at PepsiCo. Training covers a large number of areas including: on-boarding for new employees, job-specific training, skill improvement training, career management, diversity and inclusion training, Values and Code of Conduct training, lifestyle and personal development courses and health and wellness information. Associates are regularly updated on the business through forums and town halls, increasingly available on the web. On-Boarding - New associates are introduced to the company and receive information in a variety of areas, including an overview of the Company, history, career information and benefit information. Job Training - Associates receive specific job training as required, including attending professional conferences to enhance their skills. 43

45 Skill Improvement Training - PepsiCo offers associates opportunities to improve their skills through a variety of training opportunities, including a week-long focus on training during which associates can select from courses in everything from learning to prepare a PowerPoint presentation to balancing home and work. Career Management - PepsiCo has a very robust program for helping associates manage their careers. Elements include a guide for career growth tailored to PepsiCo, as well as guides focused on specific functions. Our year-long proprietary process includes objective setting, performance and development reviews, development action plans, mid-year reviews and 360 degree evaluations, all supported by training and materials. Executive leadership training focuses on helping high potential managers learn to be more effective leaders and gain a broader perspective of our business. Diversity and Inclusion Training - PepsiCo supports its commitment to fostering a diverse and inclusive workplace with training. Associates move through Level 1, 2 and 3 training specifically developed for PepsiCo. Values and Code of Conduct Training - PepsiCo is providing interactive training in its Values to associates worldwide. This training is mandatory and uses an interactive approach to share and discuss PepsiCo's overall mission and values. PepsiCo has also provided interactive training on its Code of Conduct. In 2006, approximately 25,000 associates around the world completed mandatory Code of Conduct training. Lifestyle and Personal Development- PepsiCo offers associates the opportunity to hear speakers on a variety of topics and to participate in workshops of special interests. Examples include speakers on market trends and workshops on family issues. Health and Wellness Information - PepsiCo sponsors employee wellness fairs which include the distribution of health information and speakers on topics relating to health and wellness. Human Rights PepsiCo Values include a commitment to respect others, inside and outside the Company, which is consistent with our value of treating people with dignity. Our commitment to employees includes a work environment that is free from all forms of discrimination, including sexual and other forms of harassment, and to fostering a work environment where people feel comfortable and respected. PepsiCo's Code of Conduct requires all employees to follow local employment laws and regulations, including child labor laws and treatment of employees. In order to bolster this historic commitment, in 2006 PepsiCo adopted our Human Rights Policy which states: PepsiCo Human Rights Workplace Policy PepsiCo respects the dignity of our workers in the workplace and we work to ensure our associates' rights to personal security, a safe, clean and healthful workplace, and freedom from harassment or abuse of any kind. We deal fairly and honestly with our associates regarding wages, benefits and other 44

46 conditions of employment, and recognize our associates' right to freedom of association. We do not use compulsory or child labor. We do not tolerate discrimination and work to ensure equal opportunity for all associates. We comply with all applicable laws, regulations, and other employment standards, wherever we operate or work. We encourage our partners, suppliers, contractors and vendors to support these policies and we place substantial value on working with others who share our commitment to human rights. /index.cfm Human Rights Training Training is provided throughout PepsiCo on our Code of Conduct and Speak Up hotline. We encourage employees to report issues such as discrimination, harassment and mistreatment of employees. In addition, in the United States, PepsiCo is providing inclusion training to associates, including all managers. During this training, we explore the human rights intrinsic to all and the importance of sustaining an inclusive culture. Reporting Issues and Speak Up The employee grievance system includes employee and manager communications, intervention by human resources generalists, and the Speak Up Line. All associates can use Speak Up as a method to raise any issue. We regularly report significant Code of Conduct and Speak Up issues to the Audit Committee of the Board of Directors. Speak Up is a 24-hour, tollfree, hotline available to report any suspected violation of the Code of Conduct, PepsiCo's Values or the law. Callers can be anonymous. Speak Up calls are received by a third-party vendor - not a PepsiCo employee - to ensure anonymity. All calls are free to employees and contractors. The toll-free numbers and an explanation of Speak Up are provided on the PepsiCo intranet, on posters and in PepsiCo's Worldwide Code of Conduct. The Code of Conduct includes PepsiCo's policy prohibiting retaliation against employees and contractors who raise grievances. PepsiCo has had a Speak Up program since 1999 when it was introduced at Frito-Lay North America. In 2001, the Speak Up program was introduced to other employees in the United States. The Speak Up program was extended to international employees in In 2005, we improved international telephone access to the program and established a secure, anonymous website for reporting issues via the internet. Information on Speak Up is included in training for the Code of Conduct. 45

47 Our Business Policies and Programs Bribery and Corruption Our business decisions are made on merit. Our Code of Conduct prohibits employees from giving or offering anything of value to government officials to influence a discretionary decision and does not allow employees to give gifts or entertainment unless permitted by applicable law and division policies. Our Code also requires that we observe the most stringent standards in keeping of financial records and accounts. The PepsiCo Law Department provides periodic training to associates with respect to anti-bribery laws and other compliance related matters. Political Contributions PepsiCo believes that both as a Company and as individuals it is important to be engaged in the public policy and political arena. PepsiCo has always disclosed information on how we are spending resources for political purposes as required by law and regulation. In 2005, PepsiCo developed a Political Contributions Policy that provides shareholders with details on the policies, procedures and criteria used in connection with all political contributions. In addition, we are now providing details of PepsiCo political contributions on our website. Shareholders were involved in discussions leading to the development of this policy. For more information including a list of donations, visit butionspolicy/index.cfm Commitment to Competition Our commitment to fair competition and the importance of compliance with laws prohibiting restraint of trade, predatory economic activities and other anticompetitive business practices are communicated to associates through the PepsiCo Worldwide Code of Conduct and the specific competition policies maintained by our divisions. In addition, our competition policies are communicated and compliance training accomplished at the division level using a variety of means, including regular presentations to sales personnel in the field and at headquarters, incorporation in sales training materials, and through frequent attorney consultation on specific issues. 46

48 Our Consumer Policies and Programs Health and Wellness Blue Ribbon Health and Wellness Advisory Board Front row, left to right: Kristy F. Woods, M.D., M.P.H., Gro Brundtland, M.D., Antonia Demas, Ph.D., David Heber, M.D., Ph.D., Dean Ornish, M.D., Ph.D.,Samuel Ward Casscells, III, M.D., Brock Leach, Susan Love, M.D. Second row, left to right: Janet E. Taylor, M.D., James Hill, Ph.D. Back row, left to right: Kenneth Cooper, M.D., M.P.H., Mario Maranhão, M.D., George Graham, Ph.D., Pamela Peeke, M.D., M.P.H., Fernando Trevino, Ph.D., M.P.H., Kenneth Gladish, Ph.D., David Kessler, M.D., J.D., Ambassador Thomas S. Foley, Governor James B. Hunt, Jr. PepsiCo recognizes that health and wellness is one of our most critical opportunities for growth. As a food and beverage company, we are committed to making a positive contribution to the diets and lifestyles of our consumers. Our goal is to provide consumers with the products they want and enjoy and to provide choices to meet a broad variety of needs. We also recognize that consumers have an increasing need and desire for foods and beverages that make it easier and more enjoyable for them to lead healthier lives. We are committed to actively promoting health and wellness in ways that serve the public interest and contribute to our growth. We focus on two broad areas: 1. Providing product choices that contribute to healthier lifestyles. 2. Encouraging healthier lifestyles. To advise us in our health and wellness efforts, PepsiCo has enlisted the help of the most renowned experts in the field of medicine and education. We are particularly indebted to Dr. Ken Cooper of the Cooper Aerobics Center, and Dr. Dean Ornish of the Preventive Medicine Research Institute. Under their leadership, PepsiCo has formed a Blue Ribbon Advisory Board. The Board includes some of the most respected wellness professionals in the world today. Board members have provided valuable insight into how we can address the issues and opportunities before us. For details on members of our Blue Ribbon Health and Wellness Advisory Board see and the PepsiCo's 2005 Annual Report. 47

49 Providing Product Choices PepsiCo has offered healthy product choices for years. In 2004, we took a major step and introduced Smart Spot. The Smart Spot symbol designed to help U.S. consumers identify PepsiCo food and beverage choices that contribute to healthier lifestyles. The Smart Spot designation appears on products that include Quaker oatmeal, Tropicana juices, Baked Lays, Diet Pepsi and Gatorade. For more information on criteria see: For a list of products see: PepsiCo healthy product choice initiatives include: Products with the Smart Spot symbol meet nutrition criteria based on authoritative statements from the National Academy of Sciences and the U.S. Food and Drug Administration (FDA). These criteria define limits for fat, including saturated and trans fats - sugar and sodium. More than 300 PepsiCo products meet the Smart Spot product criteria. For a complete list of Smart Spot products visit smartspot.com. In 1997, Quaker Oats petitioned for and received from the U.S. Food and Drug Administration (FDA) the first food-specific health claim granted by the FDA. The claim provides that the soluble fiber from oats can help reduce heart disease risk. Scores of Quaker-branded oat-based products qualify for and make this health claim. In 2003, Frito-Lay completed a full conversion from partially hydrogenated to nonhydrogenated cooking oils, virtually eliminating trans fatty acids from all Frito-Lay snack chips. Frito-Lay was the first company to include trans fat information on the nutrition labeling of its packaging - prior to the U.S. Food and Drug Administration ruling requiring the inclusion of this information by January In 2006, PepsiCo was part of a voluntary, pro-active and collaborative move involving the U.S. beverage industry and government and health officials in taking steps to adopt a practical school vending policy in America. PepsiCo partnered with the American Heart Association and the William J. Clinton Foundation. Called the Alliance for a Healthier Generation (AGH), its goal is to develop model school wellness programs, take a comprehensive approach to fitness, health and nutrition and teaching students how to adopt healthier, more active lifestyles. As a first step, Pepsi-Cola North America adopted a revised school policy in which beverage companies: 48