This past year was particularly significant for our company. We completed another big chapter in our journey to transform PepsiCo into the premier consumer products company, by focusing on making this the very best convenient food and beverage enterprise in the world. The landmark merger with The Quaker Oats Company in August positions us to accelerate and sustain our future growth. The year was also outstanding because our entire family of businesses performed well despite the distractions that a big merger typically creates.

On a comparable basis:

• Every division produced higher revenue and operating profit.
• Earnings per share and segment operating profit grew at double-digit rates every quarter, for the second year in a row.
• Return on invested capital improved nearly 100 basis points to 26%.
• Operating cash flow was a very robust $2.9 billion — after capital expenditures, other investments and a $421 million contribution to our pension plan.
• Our balance sheet remained strong, as net debt declined 21% to $1.4 billion.
• We returned $2.7 billion to shareholders in dividends and share repurchases.

Driving these important financial results was a team of more than 140,000 highly talented and committed people across the globe. While many other companies struggled in 2001, it was inspiring to see the people of PepsiCo and Quaker stand as one remarkable team. The fact that they succeeded in bringing together two great companies and delivering outstanding results in the marketplace makes me feel very good about our future.

Our achievements in 2001 are a testament to our employees' focus and determination — and their wealth of experience. Our top 150 executives average more than 15 years of tenure with us.

In a very tough year for stocks, ours outperformed our industry and the broader markets. PepsiCo shares held on to the 40% gain they made in 2000. Although we are disappointed that our stock closed 2001 essentially unchanged, we realize that the Dow Jones Industrial Average declined 7%, the S&P 500 declined 13% and the S&P Beverage Index declined 15%.

Growth and Integrity

The 2001 results also tell me that people across this company recognize that the single biggest reason for the merger is growth.

Growth, after all, is what PepsiCo is about. It always has been. Growth is important. But equally important is how you get there.

Growth and integrity have gone together around here for as long as I can remember. And I will do everything in my power to ensure that continues.

In fact, we've literally designed PepsiCo so we can fulfill our ambitions for growth without ever having to cut corners, compromise our integrity or otherwise violate the sacred trust placed in PepsiCo by our shareholders, our employees and so many others.

Those kids flexing their muscles on our cover reflect our effort to transform PepsiCo into a company capable of generating healthy growth in revenue, profit and market share — for many years.

That's why our cover says "Built to Grow."

It starts with a laser focus on "convenience." Convenient, easy-to-consume products are the fastest-growing part of the global food and beverage industry. Around the world, people are spending hundreds of billions of dollars each year on foods and drinks that fit their busy lifestyles. And they're spending more each year.

It's a vast opportunity.

It's also an area we know very well. We've been making and selling convenient products for decades. In that time we've become the leader in convenient foods and drinks in the United States.

Far more exciting, we're better equipped than any other company I know for continued success in this big, expanding worldwide market.

I say that because, in my view, PepsiCo has a unique culture reflecting a combination of strengths that no one else can match:

• Superior Brands
• Exceptional Value
• Unbeatable Quality
• Unrivaled Service
• Creative Innovation
• Great People

Superior Brand Portfolio

History shows that a truly outstanding brand, carefully nurtured, can drive healthy growth for many years — maybe forever.

So rather than try to manage a large number of small brands, we've built a highly focused portfolio offering many of the world's best-loved foods and beverages — muscular brands with enduring appeal.

Our portfolio includes 15 brands that each generate more than $1 billion in annual retail sales. That's more than any other food and beverage company.

Our portfolio also is remarkably well balanced. The appeal of our brands spans every time of the day, every consumer age group and every demographic category. Our brands also serve a wide range of consumer needs, from fun and indulgence to health and nutrition.

With time-starved consumers hungry for convenience, our brand lineup gives us boundless opportunities, around the clock, even in our most developed markets. In the United States, for example, we've captured only about a quarter of the morning convenient eating and drinking occasions. And the fact is, in any part of the day, we have lots of room to grow.

The addition of Quaker brought us two powerful brands: Quaker and Gatorade. Both brands are icons, well known by consumers and very well regarded. They also provide us with two more platforms for growth, giving us license to move into new territories.

Chairman's Letter continued -->