ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Sara Lee Corporation ("Sara Lee" or the "Corporation") is a global manufacturer and marketer of high-quality, brand-name products for consumers throughout the world. It was incorporated in Baltimore, Maryland in 1939 as the C.D. Kenney Company and adopted its current name in 1985.
For the past five years, the main focus of Sara Lee has been to continue to build brand equity and improve returns. These objectives were pursued through the introduction of new products, the expansion of existing products into new markets, and a significant commitment to marketing support in order to build leadership brands. In fiscal 1996, Sara Lee spent $1.8 billion to retain and grow the equity its brands have with customers, and to support its stable of value-added, high-margin products in its four industry segments, Packaged Meats and Bakery, Coffee and Grocery, Household and Body Care and Personal Products. This amount represents an increase of 9.8% over fiscal 1995.
During fiscal 1996, Sara Lee continued to implement its worldwide restructuring program, which was announced in the latter part of fiscal 1994. As of June 29, 1996, Sara Lee had closed 91 manufacturing and distribution facilities, terminated 9,422 employees and substantially completed the planned restructuring.
SARA LEE PACKAGED MEATS AND BAKERY
Sara Lee Packaged Meats continued its focus on high-margin, value-added products in fiscal year 1996. On a worldwide basis, unit volumes decreased 1%, although sales and profits increased. Sara Lee continued to introduce new food products during fiscal 1996, with an emphasis on "better-for-you" products and convenience foods. Several Sara Lee meat brands introduced no-fat or reduced-fat products in fiscal 1996 as well as an increased selection of convenience products. Reduced-fat products now account for more than 30% of Sara Lee's retail meat sales.
In fiscal 1997, Sara Lee pursued its objectives of building brands and increasing business outside the United States through its acquisition of Aoste, a leading processed meats company in France and one of Europe's largest processed meats producers. The company manufactures processed meats under the major brand names of AOSTE, JUSTIN BRIDOU and COCHONOU. As a result of the acquisition, Sara Lee is the largest processed meats company in the world.
Sara Lee Bakery maintained its leadership position as the top frozen baked goods brand in the United States, the United Kingdom and Australia in fiscal 1996. Sara Lee Bakery also introduced and/or expanded its distribution of a number of new products. In fiscal 1996, worldwide unit volume, excluding acquisitions, declined 1% for the fiscal year, reflecting weak frozen bakery industry trends. In fiscal 1996, Sara Lee expanded its fresh-baked line, added several value-added variations of core frozen products and continued to test-market a line of single-serve snacks. Sara Lee fresh baked items now account for 25% of total Bakery revenues in its core markets. The products are sold in approximately one-third of U.S. markets. In fiscal 1997, the Bakery launched four new reduced-fat versions of some of its most popular fresh baked goods: Sara Lee Reduced Fat Original Cheesecake, Apple Pie, Cheese Coffee Cake and Regular Pound Cake. In addition, Sara Lee Bakery's foodservice unit introduced a variety of new products, including a line of premium desserts.
Sara Lee Foodservice's business, PYA/Monarch, strengthened its position as the leading foodservice distributor in the southeastern United States and the fourth-largest full-line foodservice company in the nation with the acquisition of Bass & Swaggerty, a Florida-based foodservice distributor in fiscal 1997. Sara Lee continues to focus on low-cost production, customer service and increasing unit volumes.
SARA LEE COFFEE AND GROCERY
During fiscal 1996, the Coffee and Grocery line of business introduced new items to meet growing consumer demand for premium and specialty products, including DOUWE EGBERTS ICED COFFEE in the Netherlands and Spain. For the out-of-the-home market, Coffee and Grocery introduced an advanced version of the CAFITESSE system of coffee serving. Sara Lee also acquired the sweeteners and low-calorie food lines of Bayer AG in Germany. The acquisition includes NATREEN and NATRENA tabletop sweetners. Sara Lee has the largest market share in roasted coffee products in four European markets and leading positions in a number of other countries.
Green coffee costs followed a downward trend in fiscal 1996 and consumer prices, in turn, moderated leading to increased sales volumes.
New tea products were launched during the fiscal year. In the Netherlands, major product introductions under the PICKWICK brand were PICKWICK TRADITIONS tea, the traditional black tea blends for restaurants and hotels. PICKWICK Fresh Tea was also made available in the Netherlands. Despite limited consumer purchasing power in Russia, PICKWICK sales continue to grow as distribution is expanded.
SARA LEE HOUSEHOLD AND BODY CARE
Sara Lee Household and Body Care continued to grow and posted increased sales and profits for fiscal 1996 on the strength of its growing core businesses in shoe care, body care and insecticides and its direct selling business. Product developments in Sara Lee's shoe care business continued in fiscal 1996, with the introduction of shoe accessories, such as inner soles and laces, as well as cleaning products for nontraditional footwear. The Company's shoe care business in China increased its sales over the previous year.
Sara Lee is also a market leader in Europe in the body care category, with bath and shower, baby care and toiletry products marketed under the SANEX, DUSCHDAS, RADOX, BADEDAS, ZWITSAL, WILLIAMS, BRYLCREEM, FISSAN and PRODERM brands. In fiscal 1996, Sara Lee also acquired the DELIAL, SATINA and QUENTY brands from Bayer AG.
Sara Lee's Direct Selling business in its largest market, Mexico, was negatively affected by economic instability in Mexico. Nevertheless, House of Fuller increased the number of sales representatives to 200,000 and expanded product offerings and promotional activities. Sara Lee's direct selling business expanded into China and Uruguay during fiscal 1996.
SARA LEE PERSONAL PRODUCTS
Sara Lee Intimates grew worldwide unit volumes 3% launching new styles and brand extensions in its BALI, DIM, HANES HER WAY, JUST MY SIZE, PLAYTEX and WONDERBRA brands. During fiscal 1996, Sara Lee maintained its number-one position in the intimate apparel markets in the United States, Canada and Mexico. In early fiscal 1997, Sara Lee acquired Lovable Italiano in Italy, which will expand Sara Lee's presence in intimate apparel in Europe, where DIM, PLAYTEX, WONDERBRA and ROSY are already well-established intimate apparel brands.
Sara Lee Accessories opened its Pacific Rim COACH flagship store in Waikiki. Coach also introduced the new BERKELEY line in fiscal 1996 and a limited introduction of COACH footwear for men and women. During fiscal 1997, COACH men's apparel will be introduced on a limited basis in COACH stores. Sara Lee also continued to relaunch Mark Cross, a premium leather goods company.
Sara Lee Knit Products focused on value-added products and cost-effective manufacturing and sourcing in fiscal 1996. In fiscal 1996, Sara Lee captured the number-one market position for U.S. men's and boys' underwear. Volume gains in worldwide activewear and flat or declining volumes for some categories of underwear resulted in flat volumes on a worldwide basis. In the U.S. women's and girls' panties category,
HANES HER WAY and other Sara Lee brands maintained their number-one position. Sara Lee's strategic focus for the U.S. underwear market is the development of new, value-added products. This includes an expanded array of boxer-brief styles and fashion underwear for men and more upscale panty styles for women.
In fiscal 1996, Sara Lee took major steps to broaden its reach beyond the mass merchandise channel via new licensing agreements. Principal among them was an agreement for a Polo/Ralph Lauren collection of men's and women's underwear and loungewear, to be sold in department stores beginning in the second half of fiscal 1997. Sara Lee's worldwide activewear business posted increased unit volumes for the 1996 fiscal year.
For all apparel categories, Sara Lee capitalized on its partnership agreement with the 1996 Olympic Games to strengthen the equity of both the Hanes and Champion brands.
Sara Lee Hosiery continued to respond to changing market forces in the hosiery area during fiscal 1996 through the introduction of shaping and toning products, new colors and textures, increased durability and special occasion hosiery. The global market for sheer hosiery continued to exhibit weakness, and unit volumes fell 9%. However, profits for Sara Lee's worldwide sheer hosiery business increased. In the United States, Sara Lee Hosiery continued to decrease production capacity and improve inventory flow to maximize efficiencies, returns and profitability. In Europe, Sara Lee continued to reduce manufacturing overhead and excess sheer hosiery capacity.
Sara Lee introduced an array of value-added products designed for comfort, contouring, beauty and durability in fiscal 1996. Hanes' fiscal 1996 launch of RESILIENCE hosiery was the Corporation's most successful to date. L'eggs hosiery also introduced the RELIANCE line in fiscal 1996. The licensed DONNA KARAN and DKNY designer brands have performed well. In Europe, Sara Lee introduced several new hosiery products including JAMBES FINES ET LEGERES ("slim and fit legs") under the DIM brand and FILODORO SLIM UP and PHILIPPE MATIGNON ALL DAY-UP hosiery in Italy.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Sara Lee's businesses are classified into four industry segments: Packaged Meats and Bakery, Coffee and Grocery, Household and Body Care and Personal Products. The financial information about Sara Lee's industry segments can be found on page of this Report.
(C) NARRATIVE DESCRIPTION OF BUSINESS
SARA LEE PACKAGED MEATS AND BAKERY
Sara Lee Packaged Meats processes and sells pork, poultry and beef products to supermarkets, warehouse clubs, national chains and institutions throughout the United States, Europe and Mexico. Sales are transacted through Sara Lee's own sales force, brokers and institutional buyers. Some of the more prominent brands in the United States within this category include BALL PARK, BEST'S KOSHER, BRYAN, HILLSHIRE FARM, HYGRADE, JIMMY DEAN, KAHN'S, MR. TURKEY, SARA LEE and SINAI 48. Sara Lee's more prominent European brands include STEGEMANN in the Netherlands, ARGAL in Spain and NOBRE in Portugal. Sara Lee has a 49.9% interest in AXA Alimentos, S.A. de C.V., which owns Kir Alimentos S.A. de C.V., a leading processed meats company in Mexico. In fiscal 1997, Sara Lee acquired Aoste, a leading processed meats company in France and one of Europe's largest processed meats producers. Aoste markets processed meats under the brand names of AOSTE, JUSTIN BRIDOU and COCHONOU. The Aoste acquisition will make Sara Lee the largest processed meats company in the world.
The products offered by this line of business include smoked sausage, bacon, hot dogs, breakfast sausage, breakfast sandwiches, premium deli and luncheon meats, ham, turkey, and packaged lunch combinations. The ingredients -- pork, turkey and beef -- are purchased by Sara Lee from a variety of sources.
The prices of these raw materials fluctuate, depending primarily on supply and demand. Meat commodity costs rose in fiscal 1996. Because of the range of sources from which these raw materials are available, Sara Lee believes that it will continue to have access to adequate supplies.
The Packaged Meats category is highly competitive, with an emphasis on product quality, price, advertising and promotion, and customer service. Sara Lee's competitors include international, national, regional and local companies. The Packaged Meats category has accounted for 10% or more of Sara Lee's consolidated revenues during the past three fiscal years. Sara Lee believes it is one of the three industry leaders in the United States.
Most of Sara Lee's Packaged Meats operations are regulated by the U.S. Department of Agriculture, whose focus is the quality, sanitation and safety of meat products, and, to some extent, by state and local government agencies. Sara Lee's Packaged Meats operations in Europe and Mexico are regulated by local authorities.
Sara Lee Bakery produces a wide variety of fresh and frozen baked and specialty items. Its core products are pies, cheesecakes, pound cakes and Danish pastries. These products are sold through supermarkets, foodservice distributors, bakery-deli and direct channels throughout the United States, United Kingdom, France, Mexico, Australia and numerous Asia-Pacific countries. Sales are transacted through Sara Lee's sales force and independent wholesalers and distributors. The key ingredients for these products -- butter, milk, sugar, fruits, eggs and flour -- are purchased from suppliers at prices that are subject to such influences as supply and demand, weather, and government price controls. Because of the number of sources from which such raw materials are generally available, Sara Lee believes it will continue to have access to adequate supplies.
Competition in this category is keen, with a large number of participants. Sara Lee seeks to maintain and enhance a leading position in the industry through marketing efforts that are designed to reinforce and build brand recognition, and through superior customer service.
In the United States, Sara Lee Bakery products are subject to regulation by the Food and Drug Administration, the federal agency charged with, among other things, enforcing laws pertaining to food processing, content and labeling, and to a lesser extent, by state and local government agencies.
Sara Lee Foodservice's business is conducted principally under the PYA/Monarch name. With the acquisition of Bass & Swaggerty, a Florida based foodservice distributor in fiscal 1997, PYA/Monarch strengthened its position as the leading foodservice distributor in the southeastern United States. PYA/ Monarch is the fourth largest full-line foodservice company in the nation. This business distributes dry, refrigerated and frozen foods, paper supplies and foodservice equipment to institutional and commercial foodservice customers.
The institutional foodservice distribution industry is highly competitive, with price and service being the major means by which Sara Lee Foodservice competes. This line of business generates lower margins on sales dollars than Sara Lee's other businesses. The foodservice business acounted for 10% or more of Sara Lee's consolidated revenues during fiscal years 1995 and 1996.
SARA LEE COFFEE AND GROCERY
Sara Lee believes it is one of the top four coffee roasters in the world, and one of the top three in the European market. It has a significant presence in such countries as the Netherlands, Belgium, France, Denmark, Spain and Australia, and has established positions in Central and Eastern Europe through acquisitions and expanded sales efforts. While DOUWE EGBERTS is its European flagship brand, its other premium European coffee brands include MAISON DU CAFE, MARCILLA and MERRILD. Sara Lee's PICKWICK brand, an important brand in the European tea market, is expanding its current lines in an effort to appeal to younger consumers and has entered the Russian and Eastern European markets.
This is a very competitive business with the other participants consisting primarily of other large multi-national companies. Sara Lee seeks to maintain a competitive edge by offering its customers superior quality and value.
Sara Lee is also a significant competitor in the out-of-home coffee service business. Its Douwe Egberts Coffee Systems business provides coffee and dispensing equipment in Europe, while its Superior Coffee and Foods business provides similar products and services in the United States.
The significant cost item in the production of coffee products is the price of green coffee, which varies depending on such factors as weather (which affects the quality and quantity of available supplies), consumer demand, the political climate in the producing nations, unilateral pricing policies of producing nations, speculation on the commodities market, and the relative valuations and fluctuations of the currencies of producer versus consumer countries. These factors also generally affect Sara Lee's competitors. Uncertainty over the availability of supplies resulted in extreme volatility in the price of green coffee in fiscal 1995, leading to the highest prices in recent years. In fiscal 1996, green coffee prices declined. Sara Lee anticipates that green coffee prices will continue to be affected due to uncertainty over the availability of future supplies. Sara Lee has and expects to continue to offset the negative effect of price increases through careful inventory management, cost cutting, and higher prices for its coffee products. Primarily due to the effect of lower green coffee costs on consumer buying habits, unit volume gains were posted for Sara Lee coffee brands in most European markets.
The Sara Lee Coffee and Grocery line of business also manufactures rice products under the LASSIE brand in the Netherlands, snack and nut products under the DUYVIS, FELIX and BENENUTS brands in the Netherlands, Belgium and France, and cut and pipe tobacco under the Amphora, Drum and Van Nelle brands in Europe.
The Sara Lee Coffee and Grocery business has accounted for 10% or more of Sara Lee's consolidated revenues during the past three fiscal years.
SARA LEE HOUSEHOLD AND BODY CARE
Sara Lee Household and Body Care is composed of three primary core categories: shoe care -- led by a worldwide line of Kiwi products; body care items -- led by the SANEX brand, but also including DUSCHDAS and BADEDAS and baby care products sold under the ZWITSAL, FISSAN and PRODERM names; and insecticides -- sold internationally under the CATCH, BLOOM, VAPONA and RIDSECT brand names. AMBI-PUR air fresheners, ZENDIUM and PRODENT oral care products, and BIOTEX and NEUTRAL specialty detergents are also important categories for Sara Lee. Body care items and insecticides are marketed principally in Europe as well as into the Asia-Pacific and Latin America markets. These products are sold through a variety of retail channels including supermarkets. These are very competitive businesses. Sara Lee seeks to maintain a competitive advantage by offering its customers superior quality and value.
Sara Lee Direct Selling distributes a wide range of products -- cosmetics, fragrances, toiletries, personal products and jewelry -- through a network of independent sales representatives. This method of reaching the consumer has been particularly successful at the House of Fuller business in Mexico, the House of Sara Lee businesses in Indonesia and the Philippines, and the Avroy Shlain business in South Africa. Sara Lee also operates direct selling organizations in China and Uruguay. While this segment is very fragmented, Sara Lee believes it has an important position in many product lines in those countries in which it competes.
SARA LEE PERSONAL PRODUCTS
The Personal Products line of business, which is headquartered in Winston-Salem, North Carolina, includes the Intimates, Accessories, Knit Products and Hosiery business groups.
Sara Lee Intimates' business includes bras, panties and shapewear. These are manufactured and distributed under such labels as BALI, HANES HER WAY, PLAYTEX, WONDERBRA and DAISYFRESH in North America,
and PLAYTEX and DIM in Europe. Sara Lee holds a leading position in the Mexican bra market through its PLAYTEX and HANES HER WAY brand and continued to build market share in Canada during fiscal 1996 through its PLAYTEX, WONDERBRA, DAISYFRESH and HANES HER WAY brands.
Distribution channels for intimate apparel range from department and specialty stores for such premium brands as BALI, and some PLAYTEX products, to warehouse clubs and mass-merchandise outlets for some of the value-priced brands. Sales are effected through Sara Lee's sales force.
The intimate apparel market is a competitive one based on consumer brand loyalty. Sara Lee endeavors to maintain its competitive edge through marketing and promotional efforts, and by offering consumers value through a superior combination of quality and price.
Sara Lee Accessories' business involves the manufacture and marketing of premium leather products through its Coach division, under the COACH and MARK CROSS brands, and the manufacture and marketing of men's and women's gloves, slippers and knitwear through its Aris Isotoner division under the ARIS and ISOTONER brands. Coach and Mark Cross products are sold through department stores, catalog sales and Sara Lee stores while Aris Isotoner products are sold primarily to department stores. Coach now operates approximately 141 stores in the United States and 147 stores located outside the United States.
Sara Lee Knit Products' business involves the manufacture and distribution of men's, women's and children's underwear and activewear (T-shirts, fleecewear and other jersey products for casualwear) in North America, South and Central America, Europe and the Asia-Pacific countries. These products are sold through Sara Lee's sales force to department stores, mass merchandisers, discount chains and the screen print trade. Principal brands in this category include CHAMPION, HANES, HANES HER WAY and RINBROS in North America, and ABANDERADO, PRINCESA, CHAMPION, HANES and DIM in Europe. Sara Lee believes that it has the leading market share in both the women's and girls' panties category in the United States, and in the heavily branded category of men's and boys' underwear in the United States, and the leading position in men's and boys' underwear in Mexico.
Activewear is marketed under Sara Lee's HANES and CHAMPION lines. In addition to targeting the public activewear market, Champion also manufactures and markets authentic uniforms and practicewear for professional and amateur athletic teams, including such organizations as the National Basketball Association, the National Football League, the Olympics and a number of major university sports teams.
The principal raw material in this product category is cotton. Sara Lee currently believes it has access to an adequate supply of cotton from a variety of sources.
The knit products business is highly competitive, with products relying on brand recognition, quality, price and loyalty. Sara Lee competes by offering superior value, making use of low-cost sourcing, marketing activities and utilizing its megabranding strategy. The megabrands strategy entails marketing various products through common packaging, promotion and advertising. The Knit Products business has accounted for 10% or more of Sara Lee's consolidated revenues during each of the past three fiscal years.
Sara Lee Hosiery is the market leader in hosiery markets in North America, Western Europe, Australia, New Zealand and South Africa. It also continues to establish operations in various Asia-Pacific countries, placing it in a strategic position to capitalize on developing markets in that area.
Hosiery products consist of a wide variety of branded, packaged consumer products, including pantyhose, stockings, combination panty and pantyhose garments, tights, knee-highs and socks, many of which are available in both sheer and opaque styles. These products are sold domestically under such brand names as HANES, L'EGGS, DONNA KARAN and DKNY (the last two being licensed), and abroad under such labels as DIM, PRETTY POLLY, ELBEO, NUR DIE, BELLINDA, FILODORO, PHILIPPE MATIGNON and OMERO. Sara Lee is the largest sock manufacturer in the United States.
Hosiery products are sold by Sara Lee's sales force in channels ranging from department and specialty stores (for premium brands such as HANES, DONNA KARAN and DKNY in the United States, and DIM abroad), to supermarkets, warehouse clubs, discount chains and convenience stores for brands like L'EGGS and some
DIM products aimed at the price-conscious consumer. Hosiery products are also distributed through catalog sales and Sara Lee stores. The hosiery business has accounted for 10% or more of Sara Lee's consolidated revenues during each of the past three fiscal years.
The hosiery business is very competitive in both the United States and Europe. In the United States, Sara Lee's major competitors are other hosiery companies, and the primary methods of competition are quality, value, function, and, with respect to L'eggs products, service and distribution. In Europe, where most of Sara Lee's competitors are small companies who compete in the unbranded sector of the market, the primary focus is on quality.
Raw materials -- nylon, spandex, and cotton -- for the products in this category are readily available to Sara Lee from a variety of sources.
TRADEMARKS
Sara Lee is the owner of over 30,000 trademark registrations and applications in over 140 countries. Sara Lee's trademarks are among its most valuable assets as it pursues its strategy of building brands globally.
CUSTOMERS
None of Sara Lee's business segments or lines of business is dependent upon a single customer or a small number of customers, the loss of whom would have a material adverse effect on Sara Lee's consolidated operations. Sara Lee considers major mass retailers and supermarket chains in both the United States and Europe to be significant customers across one or more product categories, and it has developed specific approaches to working with individual customers.
SEASONALITY
Sara Lee's Packaged Meats and Bakery businesses experience some seasonality. Sara Lee Packaged Meats' sales tend to be higher in the fourth fiscal quarter due to increased demand associated with the onset of the outdoor barbecuing season and various holidays. Sara Lee Bakery experiences increased demand for its products during the second quarter, driven principally by holiday buying. Sara Lee Personal Products, particulary Accessories and Knit Products, generally experience increased demand during the second quarter as a result of "back to school" purchases and the holiday season. The European hosiery business is somewhat seasonal in nature, unlike the domestic hosiery business, and tends to experience a reduced demand in the summer months.
ENVIRONMENTAL MATTERS
Sara Lee is subject to a number of federal, state and local statutes, rules, regulations and ordinances in the United States and other countries relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment ("Environmental Laws").
While Sara Lee expects to make capital and other expenditures in compliance with Environmental Laws, it does not anticipate that such compliance will have a material adverse effect on its capital expenditures, earnings or competitive position. Sara Lee has implemented a program to monitor compliance with Environmental Laws and is continually examining its methods of operation and product packaging to reduce its use of natural resources.
EMPLOYEES
Sara Lee has approximately 135,300 employees worldwide.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Sara Lee's foreign operations are conducted primarily through wholly- or partially-owned subsidiaries incorporated outside the United States. Sara Lee's principal foreign subsidiary is Sara Lee/DE N.V., a Netherlands limited liability company headquartered in Utrecht, the Netherlands ("Sara Lee/DE"). Sara Lee indirectly owns a 100% interest in Sara Lee/DE, 41% in the form of voting shares and 59% in the form of depository receipts issued by the independent Stichting Administratiekantoor Douwe Egberts Sara Lee. Sara Lee/DE has responsibility for managing the Coffee and Grocery and Household and Body Care divisions of Sara Lee.
The foreign operations of the Packaged Meats line of business are conducted through Sara Lee Processed Meats (Europe) B.V., while the foreign operations of Sara Lee Bakery are conducted through Kitchens of Sara Lee U.K. Ltd. and Kitchens of Sara Lee (Australia) Pty. Ltd.
The Coffee and Grocery line of business is conducted by a number of subsidiaries, principally European, including Sara Lee/DE, Douwe Egberts Nederland B.V., Douwe Egberts France S.A., Douwe Egberts Espana S.A., Merrild Kaffe A/S, Douwe Egberts N.V., Compack Douwe Egberts Rt., Harris/DE Pty. Ltd., Balirny Douwe Egberts A.S. and Douwe Egberts Coffee Systems Nederland B.V.
The Household and Body Care line of business is conducted by subsidiaries in over forty countries, principally Sara Lee/DE, Kiwi Brands Pty. Ltd., Kiwi France S.A., Kortman Intradal B.V., A/S Blumoller, Sara Lee/DE Espana S.A., Sara Lee Household and Personal Care U.K. Ltd., and Sara Lee/DE Italy S.p.A.
The Personal Products line of business includes numerous foreign businesses, including Dim S.A., Grupo Sans, a division of Sara Lee/DE Espana S.A., Sara Lee Personal Products (Australia) Pty. Ltd., Pretty Polly, a division of Sara Lee UK Holdings Ltd., Vatter GmbH, the Filodoro Group, Sara Lee Hosiery, S.A. de C.V., Rinbros, S.A. de C.V., and a 60% interest in Maglificio Bellia S.p.A.
The financial information about foreign and domestic operations can be found on page of this Report.
Item 2.
Item 2. Properties.
Sara Lee operates 283 food processing and consumer product manufacturing plants, each containing more than 20,000 square feet in building area, in 27 states and 37 foreign countries. Sara Lee owns 220 and leases 63 of these plants. It also operates 126 warehouses containing more than 20,000 square feet in building area in 19 states and 22 foreign countries. Of these warehouses, 58 are owned and 68 are leased. The following table identifies the plants and warehouses presently owned or leased by Sara Lee that contain at least 250,000 square feet in building area.
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* These facilities are leased; the remainder are owned by Sara Lee.
Item 3.
Item 3. Legal Proceedings.
As a result of environmental audits of its facilities undertaken by Sara Lee pursuant to a consent agreement entered into between Sara Lee and the U.S. Environmental Protection Agency ("EPA"), Sara Lee disclosed to the EPA various alleged violations of certain notification and reporting regulations under various federal environmental statutes. The EPA initially calculated that the stipulated penalties for these alleged notification and reporting violations totalled approximately $2.46 million. Sara Lee is contesting the EPA's calculation of the amount of the stipulated penalties and is negotiating a settlement with the EPA with respect to these alleged violations.
In addition to the foregoing, Sara Lee is a party to various pending legal proceedings and claims. Although the outcome of such matters cannot be determined with certainty, Sara Lee's General Counsel and management are of the opinion that the final outcomes should not have a material adverse effect on Sara Lee's results of operations or financial position.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
EXECUTIVE OFFICERS OF SARA LEE
Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on October 31, 1996 (the "Proxy Statement").
The following is a list of names and ages of all current executive officers of Sara Lee indicating positions and offices with Sara Lee held by each such person. All such persons have been elected by, and hold office at the pleasure of, the Board of Directors. No person other than those listed below has been chosen to become an executive officer of Sara Lee.
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* Mr. Lustig assumed the duties of an executive officer (as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended) of Sara Lee as of December 11, 1995.
There are no family relationships between any of the above-named executive officers and directors.
Each of the executive officers listed above has served Sara Lee or its subsidiaries in various executive capacities for the past five years except Donald J. Franceschini and Janet Langford Kelly.
Prior to his election, Mr. Franceschini served in various executive capacities at Playtex Apparel, Inc. prior to its acquisition by Sara Lee. Before joining Sara Lee, Ms. Kelly was a partner in the Chicago office of Sidley & Austin.
PART II
Item 5.
Item 5. Market for Sara Lee's Common Equity and Related Stockholder Matters.
Sara Lee's securities are traded on the exchanges listed on the cover page of this Form 10-K Report. As of September 1, 1996, Sara Lee had approximately 91,500 holders of record of its Common Stock. Information about the high and low sales prices for each full quarterly period and the amount of cash dividends declared on Sara Lee's Common Stock during the past three fiscal years is set forth on page of this Report.
Item 6.
Item 6. Selected Financial Data.
The requisite financial information for Sara Lee for the five fiscal years ending June 29, 1996, is set forth on pages and of this Report. Such information should be read in conjunction with the consolidated Financial Statements and related Notes to Financial Statements on pages through of this Report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This discussion and analysis of financial condition and results of operations should be read in conjunction with the General Development of Business on pages 1 through 3, Narrative Description of Business on pages 3 through 7, and the consolidated Financial Statements and related Notes to Financial Statements on pages through of this Report.
RESULTS OF OPERATIONS
Net sales increased 5.1% to $18.6 billion in 1996, from $17.7 billion in 1995 and $15.5 billion in 1994. Business acquisitions and improved product mix were the primary contributing factors in the 1996 increase. The increase in 1995 was due to higher unit volumes and improved product mix, as well as the strengthening of foreign currencies relative to the U.S. dollar and business acquisitions. Excluding the effects of foreign currencies and acquisitions and dispositions, sales dollars increased 3% in 1996 and 6% in 1995.
The gross profit margin was 38.4% in 1996, compared with 37.8% in 1995 and 37.6% in 1994. The increase in 1996 was attributable to improved margins in the Corporation's Personal Products and Coffee and Grocery operations, offset in part by lower margins in the Packaged Meats and Bakery operations. Improved margins in the Corporation's Personal Products and Packaged Meats and Bakery operations, offset in part by lower Coffee and Grocery margins, generated the increase in 1995.
In the fourth quarter of 1994, the Corporation provided for the cost of restructuring its worldwide operations, which reduced 1994 income before income taxes, net income and net income per common share by $732 million, $495 million and $1.03, respectively. The 1994 operating income (pretax earnings before interest and corporate expense) included charges for restructuring as follows: Personal Products-$630 million; Household and Body Care-$55 million; Coffee and Grocery-$25 million; and Packaged Meats and Bakery-$22 million.
The planned restructuring activities included the closure of 94 manufacturing and distribution facilities and the severance of 9,900 employees. As of June 29, 1996, the Corporation had closed 91 manufacturing and distribution facilities, terminated 9,422 employees and substantially completed the planned restructuring actions. The restructuring reserve is analyzed in the Restructuring Provision note to the financial statements on page. Of the total provision of $732 million, non-cash charges of $304 million related to the excess of the net book value of plants to be closed and businesses to be sold over the estimated sales proceeds. The balance of the restructuring provision primarily represented cash outflows. As of June 29, 1996, the Corporation has continuing obligations associated with the disposal of closed facilities of $57 million and continuing severance benefits due to individuals impacted by the restructuring of $38 million. These obligations are classified as current liabilities.
As a result of the restructuring, operating costs were lowered by $169 million and $89 million in 1996 and 1995, respectively. These savings primarily resulted from lower plant overhead and labor costs. The Corporation expects the restructuring plan to generate increasing savings in subsequent years, growing to an annual savings of approximately $250 million in 1998. Savings from the planned actions have been and will be used for both business-building initiatives and profit improvement.
Operating income increased 12.3% to $1.8 billion in 1996 from $1.6 billion in 1995, with each of the Corporation's business segments reporting increases in excess of 10%. Packaged Meats and Bakery operating income increased 10.2%, primarily as a result of business acquisitions offset in part by lower gross margins and lower unit sales volumes. Operating income in the Coffee and Grocery segment increased 14.2% over 1995 as a result of improved gross margins, higher unit sales volumes, the strengthening of foreign currencies relative to the U.S. dollar and acquisitions. The 10.8% increase in the income of the Corporation's Personal Products businesses largely was due to improved gross margins resulting from a continued emphasis on sales of high-margin, value-added products in each of the segment's worldwide businesses and the impact of the 1994 restructuring. The Household and Body Care segment operating income increased 18.5% in 1996 as a result of improved gross margins and sales, offset in part by the weakening of the Mexican peso relative to the U.S. dollar. Excluding the effects of acquisitions and fluctuations in foreign exchange rates, the Corporation's total operating income increased 10% as compared to 1995.
In 1995, operating income increased 17.0% from the prior year after excluding the impact of the restructuring from 1994 results. Packaged Meats and Bakery operating income was 12.6% higher in 1995 as compared to 1994, primarily as a result of acquisitions, improved gross margins and higher sales volumes in base businesses. The Coffee and Grocery increase of 25.2% largely resulted from the strengthening of foreign currencies relative to the U.S. dollar, offset in part by lower unit sales volumes. The 17.6% increase in 1995 Personal Products operating income as compared to 1994 was primarily due to improved gross margins and unit sales volumes as well as the impact of acquisitions and the 1994 restructuring. Household and Body Care operating income increased 8.9% in 1995, largely as a result of sales increases and the strengthening of foreign currencies relative to the U.S. dollar. Excluding the effects of acquisitions, fluctuations in foreign exchange rates and the 1994 restructuring charge, the Corporation's operating income increased 7% in 1995.
Net interest expense was $173 million in 1996, compared with $185 million in 1995 and $145 million in 1994. The lower interest expense in 1996 was primarily due to lower average borrowings and lower average interest rates during the year. The increase in 1995 over 1994 was largely due to higher interest rates.
Unallocated corporate expenses are costs not directly attributable to specific segment operations and were $242 million in 1996, $192 million in 1995 and $98 million in 1994. Unallocated corporate expenses in both 1996 and 1995 were negatively impacted by the costs of hedging foreign currency movements, expenses associated with minority interests in subsidiaries and higher administrative costs.
The effective tax rate was 33.5% in 1996, 34.1% in 1995 and 39.9% in 1994. Excluding the impact of unusual items in 1994, the effective tax rate was 35.0%. The reduction of the tax rate in 1996 and 1995 was primarily due to increased earnings in certain foreign jurisdictions that have lower tax rates than the United States.
In fiscal 1994, the Corporation adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The cumulative effect of this mandated accounting change was a one-time charge of $35 million, or $.07 per share.
1996 net income increased 14.0% to $916 million, and primary earnings per share increased 13.0% to $1.83. The lower percentage increase in earnings per share compared to net income is primarily attributable to higher shares outstanding. Excluding the effects of the 1994 restructuring charge and the cumulative effect of the accounting change, 1995 net income increased 10.3% to $804 million, and earnings per share increased 10.2% to $1.62.
During 1996, the Corporation acquired several companies for an aggregate purchase price of $216 million in cash. The principal acquisition was the European skin care and sweetener businesses of Bayer AG. Subsequent to the close of 1996, the Corporation acquired Aoste, a European manufacturer and marketer of processed meat products, for $500 million in cash.
During 1995, the Corporation acquired several companies for an aggregate purchase price of $168 million in cash. The principal acquisition was the Imperial Meats Group, a European manufacturer and distributor of processed meats. Also during 1995, the Corporation acquired the remaining outstanding shares of Consolidated Foodservice Companies, a domestic foodservice distribution business (Packaged Meats and Bakery). Common stock having a value of $55 million was issued in July 1995 as consideration for the Consolidated Foodservice Companies acquisition.
During 1994, the Corporation acquired several companies for an aggregate purchase price of $412 million in cash. The principal acquisitions were the European personal care businesses of SmithKline Beecham (Household and Body Care), Kiwi Brands (Pty.) Ltd. and subsidiaries (Household and Body Care and Personal Products), and Maglificio Bellia S.p.A. (Personal Products).
No material divestments were made in the last three years.
During the past three years, the general rate of inflation has averaged 2%. Additionally, approximately 30% of the Corporation's inventories are valued on the last-in, first-out basis. As a result, much of the current cost of production is reflected in operating results and not retained as a component of inventory.
FINANCIAL POSITION
Net cash provided from operating activities was $1.3 billion in 1996 as compared to $1.4 billion in 1995 and $839 million in 1994. The 1996 results were impacted by increased year-end working capital requirements. Average short-term borrowings used to finance working capital requirements were, however, lower than in 1995. The favorable 1995 results in comparison to 1994 were due in part to improved gross margins, operating efficiencies resulting in part from the 1994 restructuring, and improved working capital management.
Net cash used in investment activities was $693 million in 1996, $517 million in 1995 and $937 million in 1994. Higher capital expenditures and business acquisitions were the primary reasons for the increased 1996 cash use. Capital expenditures were $542 million in 1996, $480 million in 1995 and $628 million in 1994. A significant portion of these expenditures was for the reduction of manufacturing and distribution costs, and for expansion of capacity to meet internal growth. The Corporation expects 1997 capital expenditures to approximate $550 million. The 1997 expenditures will be funded from internal sources and available borrowing capacity. The Corporation retains substantial flexibility to adjust its spending levels in order to act upon other opportunities, including business acquisitions and stock repurchases.
During 1996, cash of $555 million was used for financing activities, primarily to repay $150 million of debt and pay dividends of $395 million. During 1995, cash of $853 million was used for financing activities, principally to repay $459 million of debt and pay dividends of $358 million. During 1994, cash of $42 million was used in financing activities. In 1994, a domestic subsidiary of the Corporation issued $200 million of equity securities, the proceeds of which were used to purchase shares of the Corporation's common stock. As of June 29, 1996, the total-debt-to-total-capital ratio decreased to 29.6% from 33.8% at July 1, 1995. The current capital structure is within the Corporation's objective of maintaining a total-debt-to-total-capital ratio of no more than 40% over time, and provides sufficient financial flexibility to pursue business opportunities.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The consolidated Financial Statements and related Notes to Financial Statements of Sara Lee identified in the Index to Financial Statements appearing under Item 14, Exhibits, Financial Statement Schedules and Reports on Form 8-K, are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of Sara Lee.
For information with respect to the executive officers of Sara Lee, see "Executive Officers of Sara Lee" on pages 10 and 11 of this Report. For information with respect to the directors of Sara Lee, see "Election of Directors" on pages 2 through 8 of the Proxy Statement, which is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation.
The information set forth in the Proxy Statement on pages 12 through 21, under the caption "Executive Compensation," and on pages 21 and 22, under the caption "Retirement Plans," is incorporated herein by reference; provided, however, that the Report of the Compensation and Employee Benefits Committee on Executive Compensation and the Performance Graph contained therein is specifically excluded and shall not be deemed so incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) No person or "group" (as that term is used in Section 3(d)(3) of the Securities Exchange Act of 1934) is known by Sara Lee to beneficially own more than 5% of any class of Sara Lee's voting securities, except that, as of September 1, 1996, State Street Bank & Trust Company of Boston, as trustee ("Trustee") of the Sara Lee Corporation Employee Stock Ownership Plan ("ESOP"), held in trust 4,396,280 shares (100% of the outstanding shares) of Sara Lee's Employee Stock Ownership Plan Convertible Preferred Stock ("ESOP Stock"), of which 1,343,615 shares (30.56%) were allocated to participant accounts and 3,052,665 shares (69.44%) were unallocated shares. Each ESOP participant is entitled to direct the Trustee how to vote the shares allocated to such participant's account, as well as a proportionate share of unallocated or unvoted shares. The ESOP Stock votes as a class with the Common Stock and each share of ESOP Stock is entitled to 5.133 votes. Each share of ESOP Stock is convertible into four shares of Sara Lee Common Stock.
(b) Security ownership by management as outlined on page 9 of the Proxy Statement under the caption "Ownership of Common Stock and ESOP Stock by Directors, Nominees and Executive Officers" is incorporated herein by reference.
(c) There are no arrangements known to Sara Lee the operation of which may at a subsequent date result in a change in control of Sara Lee.
Item 13.
Item 13. Certain Relationships and Related Transactions.
During fiscal 1996, Sara Lee paid fees for legal services performed by the law firm of Sidley & Austin, to which Newton N. Minow is of counsel, and the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P., of which Vernon E. Jordan, Jr. is a senior partner. Sara Lee paid fees for banking services to an affiliate of First Chicago NBD Corporation, of which Richard L. Thomas is the Retired Chairman. Each of the above individuals is a director of Sara Lee.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, Sara Lee Corporation has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
September 24, 1996
SARA LEE CORPORATION
By: /s/ JANET LANGFORD KELLY -------------------------------------- Janet Langford Kelly Senior Vice President, Secretary and General Counsel
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Sara Lee Corporation and in the capacities indicated on September 24, 1996.
*By Janet Langford Kelly as Attorney-in-Fact pursuant to Powers of Attorney executed by the directors listed above, which Powers of Attorney have been filed with the Securities and Exchange Commission.
/s/ JANET LANGFORD KELLY -------------------------------------- Janet Langford Kelly AS ATTORNEY-IN-FACT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders, SARA LEE CORPORATION:
We have audited the accompanying consolidated balance sheets of SARA LEE CORPORATION (a Maryland corporation) AND SUBSIDIARIES as of June 29, 1996, July 1, 1995, and July 2, 1994, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended June 29, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sara Lee Corporation and Subsidiaries as of June 29, 1996, July 1, 1995, and July 2, 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 29, 1996, in conformity with generally accepted accounting principles.
As explained in the Notes to Financial Statements, the Corporation adopted the requirements of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," effective July 4, 1993.
/s/ Arthur Andersen LLP
Chicago, Illinois, July 29, 1996.
SARA LEE CORPORATION AND SUBSIDIARIES FINANCIAL SUMMARY
(1) In 1994, a restructuring provision reduced operating income and income before income taxes by $732 and net income by $495. In addition, in 1994, the cumulative effect of adopting a mandated change in the method of accounting for income taxes reduced net income by $35.
(2) 53-week year.
(3) Fiscal 1992 income before income taxes includes a $412 gain on sale of business offset by a $190 restructuring provision. These transactions increased net income by $140.
(4) Fiscal 1989 income before income taxes includes an $87 gain on sales of businesses offset by a $55 restructuring provision. These transactions increased net income by $11.
(5) Restated for the 2-for-1 stock splits in fiscal 1993, 1990 and 1987.
(6) Fiscal 1992 includes a $.12 special dividend.
THE NOTES TO FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL SUMMARY.
SARA LEE CORPORATION AND SUBSIDIARIES FINANCIAL SUMMARY
(1) In 1994, a restructuring provision reduced operating income and income before income taxes by $732 and net income by $495. In addition, in 1994, the cumulative effect of adopting a mandated change in the method of accounting for income taxes reduced net income by $35.
(2) 53-week year.
(3) Fiscal 1992 income before income taxes includes a $412 gain on sale of business offset by a $190 restructuring provision. These transactions increased net income by $140.
(4) Fiscal 1989 income before income taxes includes an $87 gain on sales of businesses offset by a $55 restructuring provision. These transactions increased net income by $11.
(5) Restated for the 2-for-1 stock splits in fiscal 1993, 1990 and 1987.
(6) Fiscal 1992 includes a $.12 special dividend.
THE NOTES TO FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL SUMMARY.
SARA LEE CORPORATION AND SUBSIDIAIRIES CONSOLIDATED STATEMENTS OF INCOME
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
SARA LEE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
SARA LEE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
SARA LEE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
SARA LEE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include all majority-owned subsidiaries. All significant intercompany transactions of consolidated subsidiaries are eliminated. Acquisitions recorded as purchases are included in the income statement from the date of acquisition.
FISCAL YEAR
The Corporation's fiscal year ends on the Saturday closest to June 30. Unless otherwise stated, references to years relate to 52-week fiscal years.
INTANGIBLE ASSETS
The excess of cost over the fair market value of tangible net assets and trademarks of acquired businesses is amortized on a straight-line basis over the periods of expected benefit, which range from 10 years to 40 years. Accumulated amortization of intangible assets amounted to $811 at June 29, 1996, $710 at July 1, 1995 and $572 at July 2, 1994. Subsequent to its acquisition, the Corporation continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of an intangible asset may warrant revision or that the remaining balance of an intangible asset may not be recoverable. When factors indicate that an intangible asset should be evaluated for possible impairment, the Corporation uses an estimate of the related business' undiscounted future cash flows over the remaining life of the asset in measuring whether the intangible asset is recoverable.
INVENTORY VALUATION
Inventories are valued at the lower of cost (in 1996, approximately 30% at last-in, first-out [LIFO] and the remainder at first-in, first-out [FIFO]) or market. Inventories recorded at LIFO were approximately $36 at June 29, 1996, $18 at July 1, 1995 and $24 at July 2, 1994, lower than if they had been valued at FIFO. Inventory cost includes material and conversion costs.
PROPERTY
Property is stated at cost, and depreciation is computed using principally the straight-line method at annual rates of 2% to 20% for buildings and improvements, and 4% to 33% for machinery and equipment. Additions and improvements that substantially extend the useful life of a particular asset and interest costs incurred during the construction period of major properties are capitalized. Repair and maintenance costs are charged to expense. Upon sale, the cost and related accumulated depreciation are removed from the accounts.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
FOREIGN OPERATIONS
Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the balance sheet date. Translation adjustments resulting from fluctuations in the exchange rates are recorded as a separate component of common stockholders' equity. Income and expense items are translated at the average exchange rates during the respective periods.
FINANCIAL INSTRUMENTS
The Corporation uses financial instruments in its management of foreign currency and interest rate exposures. Financial instruments are not held or issued for trading purposes. Non-U.S. dollar financing transactions generally are effective as hedges of long-term investments or intercompany loans in the corresponding currency. Foreign currency gains and losses on the hedges of long-term investments are recorded as foreign currency translation adjustments included in stockholders' equity. Gains and losses related to hedges of intercompany loans offset the gains and losses on intercompany loans and are recorded in net income. Interest rate exchange agreements are effective at modifying the Corporation's interest rate exposures. Net interest is accrued as either interest receivable or payable with the offset recorded in interest expense. The Corporation also uses short-term forward exchange contracts for hedging purposes. Realized and unrealized gains and losses on these instruments are deferred and recorded in the carrying amount of the related hedged asset, liability or firm commitment.
NET INCOME PER COMMON SHARE
Primary net income per common share is based on the average number of common shares outstanding and common share equivalents and net income reduced for preferred dividends, net of the tax benefits related to the ESOP convertible preferred stock dividends. The fully diluted net income per share calculation assumes conversion of the ESOP convertible preferred stock into common stock and further adjusts net income for the additional ESOP compensation expense, net of tax benefits, resulting from the assumed replacement of the ESOP convertible preferred stock dividends with common stock dividends.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The Corporation will continue to measure compensation cost using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25.
INCOME TAXES
Income taxes are provided on the income reported in the financial statements, regardless of when such taxes are payable. U.S. income taxes are provided on undistributed earnings of foreign subsidiaries that are intended to be remitted to the Corporation. If the permanently reinvested earnings of foreign subsidiaries were remitted, the U.S. income taxes due under current tax law would not be material.
ADVERTISING
The costs of advertising are generally expensed in the year in which the advertising first takes place.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
COMMON STOCK
Under the Corporation's stock option plans, executive employees may be granted options to purchase common stock at the market value on the date of grant. Under the Corporation's nonqualified stock option plans, an active employee will receive a replacement stock option equal to the number of shares surrendered upon a stock-for-stock exercise. The exercise price of the replacement option will be 100% of the market value at the date of exercise of the original option and will remain exercisable for the remaining term of the original option.
At June 29, 1996, 24,388,491 common shares were available for granting; options had been granted on 17,426,115 shares at prices ranging from $8.30 to $35.31 per share. During 1996, options on 7,658,091 shares were granted at prices ranging from $27.44 to $35.31; options for 5,733,231 shares were exercised at prices ranging from $8.30 to $31.94; and options for 445,889 shares expired or were canceled. Options exercisable at year-end were: 1996--8,961,360; 1995--10,111,475; and 1994--9,548,858.
Employees may purchase up to twenty-five thousand dollars market value of common stock annually at 85% of the market value. At June 29, 1996, 8,278,065 shares of common stock were available for issuance under this stock purchase plan.
The Corporation has restricted stock plans that provide for awards of common stock to executive employees, subject to forfeiture if employment terminates prior to the end of prescribed periods. The market value of shares awarded under the plans is recorded as unearned compensation. The unearned amounts are amortized to compensation expense over the periods the restrictions lapse.
Changes in outstanding common shares for the past three years were:
PREFERRED STOCK
Six series of 500 shares each of nonvoting auction preferred stock are outstanding. Dividends are cumulative and are determined every 49 days through specific auction procedures.
The convertible preferred stock sold to the Corporation's Employee Stock Ownership Plan (ESOP) is redeemable at the option of the Corporation at any time after December 15, 2001. Each share is currently convertible into four shares of the Corporation's common stock and is entitled to 5.133 votes. This stock has a 7.5% annual dividend rate, payable semiannually, and has a liquidation value of $72.50 plus accrued but unpaid dividends. The purchase of the preferred stock by the ESOP was funded with notes guaranteed by the Corporation. The loan is included in long-term debt and is offset in the Corporation's Consolidated Balance Sheets under the caption Unearned Deferred Compensation. Each year, the Corporation makes contributions that, with the dividends on the preferred stock held by the ESOP, will be used to pay loan interest and
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
principal. Shares are allocated to participants based upon the ratio of the current year's debt service to the sum of the total principal and interest payments over the life of the loan. Plan expense is recognized in accordance with methods prescribed by the FASB.
ESOP-related expenses amounted to $13 in 1996, $12 in 1995 and $11 in 1994. Payments to the ESOP were $41 in 1996, and $38 in 1995 and 1994. Principal and interest payments by the ESOP amounted to $16 and $25 in 1996, $12 and $26 in 1995, and $11 and $27 in 1994.
The Corporation has a Preferred Stock Purchase Rights Plan. The Rights are exercisable 10 days after certain events involving the acquisition of 20% or more of the Corporation's outstanding common stock or the commencement of a tender or exchange offer for at least 25% of the common stock. Upon the occurrence of such an event, each Right, unless redeemed by the board of directors, entitles the holder to receive common stock equal to twice the exercise price of the Right. The exercise price is $140 multiplied by the number of preferred shares held. There are 3,000,000 shares of preferred stock reserved for issuance upon exercise of the Rights.
The Corporation redeemed for cash its cumulative convertible adjustable preferred stock on July 26, 1993 for $30.
MINORITY INTEREST IN SUBSIDIARIES
Minority interest in subsidiaries primarily consists of preferred equity securities issued by subsidiaries of the Corporation. No gain or loss was recognized as a result of the issuance of these securities and the Corporation owned substantially all of the voting equity of the subsidiaries both before and after the transactions.
In 1994, a domestic subsidiary of the Corporation issued $200 of preferred equity securities. The securities provide the holder a rate of return based upon a specified inter-bank borrowing rate, are redeemable in 1998 and may be called at any time by the subsidiary. The subsidiary has the option of redeeming the securities with either cash, debt or equity of the Corporation. The subsidiary used the cash proceeds received to purchase the common stock of the Corporation on the open market.
Minority interest in subsidiaries also includes $295 of preferred equity securities issued by a wholly owned foreign subsidiary of the Corporation. The securities provide a rate of return based upon specified inter-bank borrowing rates. The securities are redeemable in 1997 in exchange for common shares of the issuer, which may then be put to the Corporation for preferred stock. The subsidiary may call the securities at any time.
ACQUISITIONS AND DIVESTMENTS
During 1996, the Corporation acquired several companies for an aggregate purchase price of $216 in cash. The principal acquisition was the European skin care and sweetener businesses of Bayer AG. Subsequent to the close of 1996, the Corporation acquired Aoste, a European manufacturer of processed meat products, for $500 in cash.
During 1995, the Corporation acquired several companies for an aggregate purchase price of $168 in cash. The principal acquisition was the Imperial Meats Group, a European manufacturer and distributor of processed meats. Also during 1995, the Corporation acquired the remaining outstanding shares of Consolidated Foodservice Companies, a domestic foodservice distribution business. Common stock having a value of $55 was issued in July 1995 as consideration for the Consolidated Foodservice Companies acquisition.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
During 1994, the Corporation acquired several companies for an aggregate purchase price of $412 in cash. The principal acquisitions were the European personal care businesses of SmithKline Beecham; Kiwi Brands (Pty.) Ltd. and subsidiaries, a group of South African companies that manufacture and market personal care products and hosiery; and Maglificio Bellia S.p.A., a manufacturer and marketer of intimate apparel in Italy.
No material divestments were made during the last three years.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
INTEREST RATE AND CURRENCY SWAPS
To manage interest rate and foreign exchange risk and to lower its cost of borrowing, the Corporation has entered into interest rate and currency swaps. The currency swaps effectively hedge long-term Dutch guilder- and Swiss franc-denominated investments and French franc-denominated intercompany loans. The weighted average maturities of interest rate and currency swaps as of June 29, 1996 were 11.2 years and 3.4 years, respectively.
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(1) The notional principal is the amount used for the calculation of interest payments which are exchanged over the life of the swap transaction and is equal to the amount of foreign currency or dollar principal exchanged at maturity.
(2) The weighted average interest rates are as of the respective balance sheet dates.
The Corporation has entered into an interest rate collar to hedge fluctuations in Dutch interest rates. The Dutch guilder-denominated collar has a notional principal of $117, a cap of 7.0% and a floor of 3.5%.
FORWARD EXCHANGE CONTRACTS
The Corporation uses forward exchange contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions, firm third-party product sourcing commitments and other known foreign currency exposures.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
The table below summarizes by major currency the contractual amounts of the Corporation's forward exchange contracts in U.S. dollars. The bought amounts represent the net U.S. dollar equivalent of commitments to purchase foreign currencies, and the sold amounts represent the net U.S. dollar equivalent of commitments to sell foreign currencies. The foreign currency amounts have been translated into a U.S. dollar equivalent value using the exchange rate at the reporting date. Forward exchange contracts mature at the anticipated cash requirement date of the hedged transaction, generally within one year.
At June 29, 1996, the deferred unrealized gains and losses on forward exchange contracts were not material to the financial position of the Corporation.
CONCENTRATIONS OF CREDIT RISK
A large number of major international financial institutions are counterparties to the Corporation's financial instruments. The Corporation enters into financial instrument agreements only with those counterparties meeting very stringent credit standards, limiting the amount of agreements or contracts it enters into with any one party and, where legally available, executing master netting agreements. These positions are continuously monitored. While the Corporation may be exposed to credit losses in the event of nonperformance by these counterparties, it does not anticipate losses, because of these control procedures.
Trade accounts receivable due from highly leveraged customers were $53 at June 29, 1996, $49 at July 1, 1995 and $52 at July 2, 1994. The financial position of these businesses has been considered in determining allowances for doubtful accounts.
GUARANTEES
The Corporation had third-party guarantees outstanding, aggregating approximately $29 at June 29, 1996, $31 at July 1, 1995 and $28 at July 2, 1994. These guarantees relate primarily to financial arrangements to support various suppliers of the Corporation, and are secured by the inventory and fixed assets of suppliers.
FAIR VALUES
The carrying amounts of cash and equivalents, trade receivables, notes payable, accounts payable, and auction preferred stock approximated fair value as of June 29, 1996, July 1, 1995 and July 2, 1994. The fair values of the remaining financial instruments recognized on the Consolidated Balance Sheets of the Corporation at the respective year-end were:
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
The fair value of the Corporation's long-term debt, including the current portion, is estimated using discounted cash flows based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the ESOP preferred shares is based upon the contracted conversion into the Corporation's common stock. The fair value of the Corporation's interest rate swaps, currency swaps, forward exchange contracts and interest rate collar approximate their carrying value in the financial statements as of June 29, 1996, July 1, 1995 and July 2, 1994. The fair value of these instruments was not material to the financial position of the Corporation.
LONG-TERM DEBT
The ESOP debt is guaranteed by the Corporation.
The zero coupon notes are net of unamortized discounts of $109 in 1996, $110 in 1995 and $112 in 1994. Principal payments of $19 and $105 are due in 2014 and 2015, respectively.
Payments required on long-term debt during the years ending in 1997 through 2001 are $135, $285, $209, $232 and $273, respectively. The Corporation made cash interest payments of $236, $236 and $203 in 1996, 1995 and 1994, respectively.
Rental expense under operating leases amounted to approximately $222 in 1996 and 1995 and $207 in 1994. Future minimum annual fixed rentals required during the years ending in 1997 through 2001 under noncancelable operating leases having an original term of more than one year are $119, $97, $81, $69 and $62, respectively. The aggregate obligation subsequent to 2001 is $133.
The Corporation is contingently liable for long-term leases on properties operated by others. The minimum annual rentals under these leases average approximately $5 for the years ending in 1997-2001 and $2 in 2002-2006. Amounts thereafter are not material.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
CREDIT FACILITIES
The Corporation has numerous credit facilities available, including revolving credit agreements totaling $1,635 that had an annual fee of 0.06% as of June 29, 1996. These agreements support commercial paper borrowings. Selected data on the Corporation's short-term obligations follow:
CONTINGENCIES
The Corporation is a party to several pending legal proceedings and claims, and environmental actions by governmental agencies. Although the outcome of such items cannot be determined with certainty, the Corporation's general counsel and management are of the opinion that the final outcome should not have a material effect on the Corporation's results of operations or financial position.
RESTRUCTURING PROVISION
The composition of the Corporation's restructuring reserves is as follows:
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
In the fourth quarter of 1994, the Corporation provided for the cost of restructuring its worldwide operations, which reduced 1994 income before income taxes, net income and net income per common share by $732, $495 and $1.03, respectively. The planned restructuring activities included the closure of 94 manufacturing and distribution facilities and the severance of 9,900 employees. As of June 29, 1996, the Corporation had closed 91 manufacturing and distribution facilities, terminated 9,422 employees and substantially completed the planned restructuring actions. The remaining restructuring reserves are anticipated to be utilized for the payment of obligations relating to closed facilities and continuing severance benefits due to individuals impacted by the restructuring. These reserves are classified as current liabilities. Operating costs were lowered in 1996 and 1995 by $169 and $89, respectively, primarily as a result of lower plant overhead and labor costs. The Corporation expects the restructuring plan to generate increasing savings in subsequent years, growing to an annual savings of approximately $250 in 1998. Savings from the planned actions will be used both for business-building initiatives and profit improvement.
RETIREMENT PLANS
The Corporation has noncontributory defined benefit plans covering certain of its domestic employees. The benefits under these plans are primarily based on years of service and compensation levels. The plans are funded in conformity with the requirements of applicable government regulations. The plans' assets consist principally of marketable equity securities, corporate and government debt securities and real estate. The Corporation's foreign subsidiaries have plans for employees consistent with local practices. The Corporation also sponsors defined contribution pension plans at several of its subsidiaries. Contributions are determined as a percent of each covered employee's salary. Certain employees are covered by union-sponsored, collectively bargained, multi-employer pension plans. Contributions are determined in accordance with the provisions of negotiated labor contracts and generally are based on the number of hours worked. The annual pension expense for all plans was:
The components of the defined benefit plan expenses were:
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
The increase in the 1995 defined benefit plan expense is primarily attributable to lower asset returns, the strengthening of foreign currencies relative to the U.S. dollar, and benefit increases in certain foreign plans. The status of defined benefit plans at the respective year-end was:
1996 1995 1994 ------ ------ ------ Fair market value of plan assets.................. $1,854 $1,592 $1,420 ------ ------ ------ Actuarial present value of benefits for services rendered: Accumulated benefits based on salaries to date: Vested........................................ 1,505 1,281 1,144 Nonvested..................................... 55 47 38 Additional benefits based on estimated future salary levels.................................. 154 204 217 ------ ------ ------ Projected benefit obligations................... 1,714 1,532 1,399 ------ ------ ------ Excess of plan assets over projected benefit obligations...................................... 140 60 21 Unamortized net transitional asset................ (12) (17) (26) Unrecognized net gain............................. (24) (3) (8) Unrecognized prior service cost................... 66 81 88 ------ ------ ------ Prepaid pension asset recognized on the Consolidated Balance Sheets...................... $ 170 $ 121 $ 75 ------ ------ ------ ------ ------ ------
Weighted average rates used in determining net pension expense and related obligations for defined benefit plans were:
1996 1995 1994 ---- ---- ---- Discount rate............................................. 7.3% 7.5% 7.5% Rate of compensation increase............................. 4.7 5.2 5.2 Long-term rate of return on plan assets................... 8.3 8.3 8.3
The Corporation adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" (SFAS 106), for its domestic retiree benefit plans in 1994 and for retiree benefit plans outside the United States in 1996. Under SFAS 106, the Corporation accrues the estimated cost of retiree health care and life insurance benefits during the employees' active service periods. The Corporation's previous method of accounting for postretirement benefits other than pensions was similar to that required by SFAS 106, and the accumulated benefit obligation for these plans was accrued prior to the required adoption of SFAS 106. The accumulated benefit obligation for retiree benefit plans outside the United States was $24 as of June 29, 1996. The Corporation provides health care and life insurance benefits to certain retired employees, their covered dependents and beneficiaries. Generally, employees who have attained age 55 and who have rendered 10 years of service are eligible for these postretirement benefits. Certain retirees are required to contribute to plans in order to maintain coverage. The components of the expense for these plans were:
1996 1995 1994 ---- ---- ---- Benefits earned by employees................................ $ 5 $ 5 $ 4 Interest on projected benefit obligations................... 13 11 11 Net amortization and deferral............................... 1 -- -- ---- ---- ---- Net postretirement benefit expense.......................... $19 $16 $15 ---- ---- ---- ---- ---- ----
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
The status of postretirement benefit plans at the respective year-end was:
The assumed health care cost trend rate was 13% for 1996, decreasing to 7% by the year 2002 and remaining at that level thereafter. These trend rates reflect the Corporation's prior experience and management's expectation that future rates will decline. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 29, 1996 by 10% and the postretirement benefit expense for 1996 by 12%.
INCOME TAXES
Effective July 4, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The cumulative effect as of July 4, 1993 of adopting SFAS 109 was a one-time charge of $35, or $.07 per share, primarily due to adjusting deferred taxes from historical to current rates. Financial statements for years prior to 1994 have not been restated to reflect the adoption of this standard. The provisions for income taxes computed by applying the U.S. statutory rate to income before taxes as reconciled to the actual provisions were:
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
Current and deferred tax provisions were:
Following are the components of the deferred tax provisions occurring as a result of transactions being reported in different years for financial and tax reporting:
The deferred tax (assets) liabilities at the respective year-end were as follows:
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
INDUSTRY SEGMENT INFORMATION
The Corporation's business segments are described in the Narrative Description of Business on pages 3 through 7.
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(1) Includes sales between segments. Such sales are at transfer prices that are equivalent to market value.
(2) Includes net interest expense of $173 in 1996, $185 in 1995 and $145 in 1994 incurred primarily in the United States to finance and support consolidated operations.
(3) Principally cash and equivalents, certain fixed assets and certain other noncurrent assets.
(4) Includes provisions for restructuring reported in the 1994 Consolidated Statement of Income, as follows: Packaged Meats and Bakery $22; Coffee and Grocery $25; Household and Body Care $55; and Personal Products $630.
Industry segment sales and operating income applicable to businesses sold prior to June 29, 1996 were not material.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
GEOGRAPHIC AREA INFORMATION
(1) Includes sales between geographic areas. Such sales are at transfer prices that are equivalent to market value.
(2) Includes net interest expense of $173 in 1996, $185 in 1995 and $145 in 1994 incurred primarily in the United States to finance and support consolidated operations.
(3) The tangible net assets of foreign operations included in the accompanying Consolidated Balance Sheets were $1,123 at June 29, 1996, $892 at July 1, 1995 and $594 at July 2, 1994.
(4) Principally cash and equivalents, certain fixed assets and certain other noncurrent assets.
(5) Includes provisions for restructuring reported in the 1994 Consolidated Statement of Income, as follows: United States $483; Western/Central Europe $200; Asia-Pacific/Latin America $42; and Other $7.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
QUARTERLY FINANCIAL DATA (UNAUDITED)
(1) Includes cumulative effect of accounting change of $35, or $.07 per share.
(2) Includes provision for restructuring of $495, or $1.03 per share.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Management of SARA LEE CORPORATION:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Sara Lee Corporation included in this Form 10-K, and have issued our report thereon dated July 29, 1996. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental schedule II is the responsibility of the Corporation's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This supplemental schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois, July 29, 1996
SCHEDULE II SARA LEE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JULY 2, 1994, JULY 1, 1995 AND JUNE 29, 1996 (IN MILLIONS)
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(1) Net of collections on accounts previously written off.
EXHIBIT INDEX