Net Sales

In 2001, comparable net sales increased 7%. This increase is primarily due to volume gains and higher effective net pricing of worldwide snacks and worldwide beverages, as well as the acquisition of South Beach Beverage Company, LLC (SoBe). These gains were partially offset by a net unfavorable foreign currency impact. The SoBe acquisition enhanced comparable net sales growth by nearly 1 percentage point and the unfavorable foreign currency impact, primarily in Brazil and Europe, reduced comparable net sales growth by more than 1 percentage point.

In 2000, comparable net sales increased 8%. This increase is primarily due to volume gains and higher effective net pricing of worldwide snacks, Pepsi-Cola North America and PepsiCo Beverages International. These increases were partially offset by a net unfavorable foreign currency impact, primarily in Europe, which reduced comparable net sales growth by 1 percentage point. The fifty-third week enhanced reported net sales growth by 1 percentage point.

Volume
Servings are based on U.S. Food and Drug Administration guidelines for single-serving sizes of our products.

Total servings increased 4% in 2001 compared to 2000 primarily due to contributions from our international divisions and Pepsi-Cola North America.

Total servings increased 5% in 2000 compared to 1999 driven by our international divisions, as well as contributions from Frito-Lay North America and Gatorade/Tropicana North America.

Operating Profit and Margin

In 2001, comparable operating profit margin increased 0.7 percentage points primarily reflecting the favorable margin impact of higher effective net pricing and increased volume. These improvements were partially offset by the margin impact of increased advertising and marketing and general and administrative expenses.

In 2000, comparable operating profit margin increased 0.8 percentage points primarily reflecting the favorable margin impact of higher effective net pricing and increased volume. These improvements were partially offset by the margin impact of increases in selling and distribution expenses, primarily in Frito-Lay International, advertising and marketing and general and administrative expenses.

Bottling Equity Income and Transaction Gains and Losses
Bottling equity income and transaction gains and losses includes our share of the net earnings or losses from our bottling equity investments. From time to time, we may increase or dispose of particular bottling investments. Any gains or losses from disposals, as well as other transactions related to our bottling investments, are also reflected on a pre-tax basis in equity income and transaction gains and losses.

In 2001, comparable net bottling equity income and transaction gains and losses increased 28% to $160 million, primarily reflecting the strong performance of PBG. Results for 2001 also include a gain of $59 million from the sale of approximately 2 million shares of PBG stock and a net credit of $23 million related to the resolution of issues for which a prior year accrual was established in connection with the creation of our anchor bottler system. These increases were offset by impairment charges of $62 million related to certain international bottling investments, primarily our equity investment in Turkey, reflecting a major currency devaluation and adverse macroeconomic conditions. Additionally, $27 million for our share of a charge recorded by PepsiAmericas for environmental liabilities relating to discontinued operations is included in our share of the net earnings from our bottling equity investments in 2001.

In 2000, comparable net bottling equity income and transaction gains and losses increased 51% to $125 million. Our share of net earnings from our bottling equity investments includes $18 million from the favorable impact of an accounting change by PBG. In addition, results for 2000 include our share of charges related to restructuring actions in certain other bottling affiliates and the net loss from changes in our equity ownership interests. The fifty-third week in 2000 enhanced reported net bottling equity income and transaction gains and losses by $5 million.

In 1999, reported bottling equity income and transaction gains and losses includes a gain on bottling transactions of $1.0 billion ($270 million after-tax or $0.15 per share) relating to the second quarter PBG and Whitman bottling transactions. The PBG transaction resulted in a pre-tax gain of $1.0 billion ($476 million after-tax or $0.26 per share). The majority of the taxes are expected to be deferred indefinitely. The Whitman transaction resulted in an after-tax loss to us of $206 million or $0.11 per share. The 1999 PepCom transaction was accounted for as a nonmonetary exchange for book purposes. However, a portion of the transaction was taxable which resulted in income tax expense of $25 million or $0.01 per share. The 1999 Pohlad transaction was structured as a fair value exchange with no resulting gain or loss. Further, 1999 bottling equity income and transaction gains and losses reflects $83 million for the equity income of our previously consolidated bottling operations from the applicable transaction closing dates and the equity income or loss of other unconsolidated bottling affiliates for the second, third and fourth quarters.

Interest Expense, net

Reported and comparable interest income in 2001 includes a loss on investments used to economically hedge a portion of our deferred compensation liability. Reported interest income in 2000 and 1999 includes gains or losses from the equity derivative contracts used to hedge a portion of our deferred compensation liability. These equity derivative gains or losses are now classified in selling, general and administrative expenses in connection with the 2001 adoption of the accounting standard on derivative instruments. Comparable interest income for 2000 and 1999 reflects this reclassification. The fifty-third week increased reported net interest expense in 2000 by $3 million.

In 2001, comparable net interest expense declined 25%. Interest expense declined primarily as a result of significantly lower average debt levels. Interest income remained nearly flat as the increase from higher average investment balances was offset by lower average interest rates and a loss on the investments hedging a portion of our deferred compensation liability.

In 2000, comparable net interest expense declined 29%. Interest expense declined reflecting significantly lower average debt levels, partially offset by higher average interest rates. Lower average debt levels reflect the third quarter 1999 repayment of borrowings used to finance the Tropicana acquisition and the absence of the financing related to PBG. Interest income declined primarily due to lower average investment balances.

Provision for Income Taxes

In 2001, the comparable effective tax rate decreased 0.7 percentage points primarily due to lower taxes on foreign results. The reported effective tax rate increased 1.5 percentage points primarily due to limited tax benefits associated with merger-related costs recognized during the year.

In 2000, the comparable effective tax rate remained nearly flat. The reported effective tax rate decreased 9 percentage points primarily as a result of the 1999 bottling transactions.

Net Income and Net Income Per Common Share - Assuming Dilution

In 2001, comparable net income increased 15% and the related net income per common share increased 14%. These increases primarily reflect increased operating profit, lower net interest expense and a lower effective tax rate.

In 2000, comparable net income increased 17% and the related net income per common share increased 18% reflecting higher operating profit and lower net interest expense. The increase in net income per common share also reflects the benefit from a 1.4% reduction in average shares outstanding.

Management's Discussion and Analysis continued -->