Commodity Prices
We are subject to market risk with respect to the cost of commodities because our ability to recover increased costs through higher pricing may be limited by the competitive environment in which we operate. We use futures contracts to hedge fluctuations in prices of a portion of anticipated commodity purchases, primarily oil, corn, fuel and juice concentrates. We had commodity futures positions of $145 million at December 25, 1999 and $105 million at December 26, 1998. Unrealized losses on net commodity futures positions were $6 million at December 25, 1999 and $9 million at December 26, 1998. We estimate that a 10% decline in commodity prices would have increased the 1999 unrealized losses by $14 million and the 1998 unrealized losses by $9 million.

Foreign Exchange Risks
Operating in international markets involves exposure to volatile movements in foreign exchange rates. The economic impact of foreign exchange rate movements on us is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, can cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.

International operations constitute about 19% of our 1999 and 19% of our 1998 consolidated operating profit, excluding asset impairment and restructuring charges. As foreign exchange rates change, translation of the income statements of our international businesses into U.S. dollars affects year-over-year comparability of operating results. We do not generally hedge translation risks because cash flows from international operations are generally reinvested locally. We do not enter into hedges to minimize volatility of reported earnings because we do not believe it is justified by the exposure or the cost.

Changes in foreign exchange rates that would have the largest impact on translating our international operating profit for 1999 include the Mexican peso, British pound, EURO and Canadian dollar. We estimate that a 10% change in foreign exchange rates would impact operating profit by approximately $60 million in 1999 and $51 million in 1998. This represents 10% of our non-U.S. operating profit after adjusting for asset impairment and restructuring charges. We believe that this quantitative measure has inherent limitations, as discussed in the first paragraph of this section. Further, the sensitivity analysis disregards the possibility that rates can move in opposite directions and that gains from one country may or may not be offset by losses from another country.

Foreign exchange gains and losses reflect transaction gains and losses and also translation gains and losses arising from the remeasurement into U.S. dollars of the net monetary assets of businesses in highly inflationary countries. Transaction gains and losses arise from monetary assets and liabilities denominated in currencies other than a business unit's functional currency. There were net foreign exchange losses of $10 million in 1999, $53 million in 1998 and $16 million in 1997. The decrease in net foreign exchange losses in 1999 resulted primarily from the impact in 1998 of unfavorable macro-economic conditions, primarily in Russia and Asia Pacific.

In 1998, the economic turmoil in Russia which accompanied the devaluation of the ruble had an adverse impact on our operations. Consequently, we experienced a significant drop in demand, resulting in lower net sales and increased operating losses. Also, since net bottling sales in Russia were denominated in rubles, whereas a substantial portion of our related costs and expenses were denominated in U.S. dollars, bottling operating margins were further eroded. In response to these conditions, we reduced our cost structure primarily by closing facilities, renegotiating manufacturing contracts and reducing the number of employees. We also wrote down our long-lived bottling assets to give effect to the resulting impairment. See "Asset Impairment and Restructuring Charges" on page 15.

On January 1, 1999, 11 of 15 member countries of the European Union fixed conversion rates between their existing currencies (legacy currencies) and one common currency Ð the EURO. The EURO trades on currency exchanges and may be used in business transactions. Conversion to the EURO eliminated currency exchange rate risk between the member countries. Beginning in January 2002, new EURO-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. Our operating subsidiaries affected by the EURO conversion have established plans to address the issues raised by the EURO currency conversion. These issues include, among others, the need to adapt computer and financial systems, business processes and equipment, such as vending machines, to accommodate EURO-denominated transactions and the impact of one common currency on pricing. Since financial systems and processes currently accommodate multiple currencies, the plans contemplate conversion by the middle of 2001 if not already addressed in conjunction with other system or process initiatives. We do not expect the system and equipment conversion costs to be material. Due to numerous uncertainties, we cannot reasonably estimate the long-term effects one common currency will have on pricing and the resulting impact, if any, on financial condition or results of operations.

Interest Rates
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies.

We use interest rate and currency swaps to effectively change the interest rate and currency of specific debt issuances, with the objective of reducing our overall borrowing costs. These swaps are entered into concurrently with the issuance of the debt that they are intended to modify. The notional amount, interest payment and maturity dates of the swaps match the principal, interest payment and maturity dates of the related debt. Accordingly, any market risk or opportunity associated with these swaps is offset by the opposite market impact on the related debt.

Our investment portfolios primarily consist of cash equivalents and short-term marketable securities. Accordingly, the carrying amounts approximate market value. It is our practice to hold these investments to maturity.

Assuming year-end 1999 and 1998 variable rate debt and investment levels, a one-point increase in interest rates would have increased net interest expense by $13 million in 1999 and $64 million in 1998. The change in this impact from 1998 resulted from decreased variable rate debt levels and increased variable rate investment levels at year-end 1999. This sensitivity analysis does not take into account existing interest rate swaps.

Year 2000
To date, neither we nor our franchise bottlers have experienced major disruptions related to the Year 2000 date change. In addition, we are not aware of significant Year 2000 disruptions impacting our customers or suppliers. We will continue to monitor our critical systems over the next several months but do not anticipate a significant impact as a result of the Year 2000 date change.

Incremental costs directly related to Year 2000 issues for new PepsiCo totaled $110 million from 1998 to 2000. Approximately 26% of the total estimated spending represents costs to repair systems while approximately 53% represents costs to replace and rewrite software. Excluded from the estimated incremental costs for new PepsiCo for the three-year period are approximately $29 million of internal recurring costs related to our Year 2000 efforts.