Item 1. Business
(A) GENERAL DEVELOPMENT OF BUSINESS
Sara Lee Corporation ("Sara Lee") 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.
In fiscal 1995, the main focus of Sara Lee's two industry segments, Packaged Foods and Packaged Consumer Products, was 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 1995, Sara Lee spent nearly $1.7 billion to retain and grow the equity its brands have with customers, and to support its stable of value-added, high-margin products. This amount represents an increase of 11.8% over fiscal 1994.
During fiscal 1995, Sara Lee continued to implement its worldwide restructuring program, which was announced in the latter part of fiscal 1994. As part of the restructuring, 42 manufacturing and distribution facilities were closed and 6,029 employees were terminated during fiscal 1995. Sara Lee anticipates that the restructuring will be substantially completed by the close of calendar year 1996.
SARA LEE PACKAGED FOODS SARA LEE PACKAGED MEATS AND BAKERY
Sara Lee Packaged Meats continued to introduce new food products during fiscal 1995, 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 1995, including Ball Park Fat Free Classics, Kahn's Fat Free Franks and Bryan Fat Free Juicy Jumbos. Jimmy Dean Foods introduced Tastefuls! packaged meals, consisting of two small submarine sandwiches, potato chips and cookies.
In fiscal 1995, Sara Lee pursued its objectives of building brands and increasing business outside the United States through its acquisition of Imperial Meats Group, Belgium's largest packaged meats producer. The company's Imperial, Cornby, and Marcassou brands are sold in Belgium, France, Germany and the Netherlands.
Sara Lee Bakery introduced, and/or expanded its distribution of, a number of new products. In fiscal 1995, Sara Lee added a collection of sweet goods to its fresh-baked line, including Danish, pound cakes, iced cakes, muffins, doughnuts, cookies and pies. Sara Lee Chocolate Chip Cheesecake, Strawberry Swirl Pound Cake, Breakfast Quick Breads, several flavors of reduced-fat, no-sugar-added fruit pies and reduced-fat muffins were new frozen product introductions. In addition, Sara Lee Bakery's foodservice unit introduced a variety of mini-muffins and homestyle cakes.
Sara Lee Foodservice's business, PYA/Monarch, strengthened its position as the leading foodservice distributor in the southeastern United States and the third-largest full-line foodservice company in the nation with the acquisition of the remaining outstanding shares of Virginia-based Consolidated Foodservice Companies.
SARA LEE COFFEE AND GROCERY
During fiscal 1995, the Coffee and Grocery line of business introduced new items to meet growing consumer demand for premium and specialty products, including Marcilla Mocca coffee in Spain, an assortment of roasted coffees under the Moccona label in Australia, and Merrild Gourmet coffee, sold as whole beans that are ground at the point of sale, in Denmark. For the out-of-the-home market, Superior Coffee introduced an Instant Cappuccino beverage. The Cafitesse system of coffee serving equipment was introduced in Europe, and Piazza D'Oro espresso was introduced in Australia. Sara Lee also acquired an interest in the Bravo coffee company in Greece in fiscal 1995.
Green coffee costs fluctuated severely during fiscal 1995, principally due to unfavorable weather conditions and economic and social instability in several coffee-producing nations. In Brazil, for example, two frosts in a single winter season -- the first such occurrence on record -- were followed by severe drought. These extraordinary events in the green coffee market led to higher retail prices and reduced consumption in fiscal 1995. Sara Lee's retail coffee operations managed price changes on a market-by-market basis in an effort to protect margins and profits. Modest declines in market share were reported in the Netherlands, Belgium, Denmark, the Czech Republic and the United Kingdom for fiscal 1995, while market share remained stable in France and Australia, and improved slightly in Spain and Hungary. Primarily due to the effect of high green coffee costs on consumer buying habits, unit volumes for retail and out-of-home roasted coffee were down 8% for fiscal 1995, excluding the effect of acquisitions.
New tea products were launched during the fiscal year. In the Netherlands, major product introductions under the Pickwick brand were Pickwick Framboos fruit tea and Pickwick Seasons variety packs. Pickwick Regelli breakfast tea was introduced in Hungary. To supply growing Russian and Eastern European markets, capacity was expanded at Pickwick's Budapest production facility.
SARA LEE PACKAGED CONSUMER PRODUCTS
SARA LEE PERSONAL PRODUCTS
Sara Lee Intimates introduced new features and products and increased the profitability of its bra, panty and shapewear business in fiscal 1995. North American manufacturing operations faced capacity constraints primarily as a result of the national introduction of the Wonderbra brand in fiscal 1995. Playtex launched a minimizer bra with comfort straps for full-busted women in fiscal 1995. In Europe, Sara Lee introduced a line of coordinating bras and panties under the Liabel brand in Italy.
Sara Lee formed the Sara Lee Bodywear Group in fiscal 1995 to manufacture and market exercise wear and activewear under the Champion Jogbra, Body Force and Hanes Her Way names. The group also acquired the license for Spalding Bodywear and will market sports-inspired bodywear under the Spalding name.
Sara Lee Accessories opened 17 new Coach retail stores in the United States, including a flagship location in New York City. The major new Coach product introduction of 1995 was the Sonoma Collection, a line of nubuc and natural grain leather handbags, backpacks, wallets and belts. Mark Cross, a premium leather goods company, reintroduced its handbags, business cases and executive accessories into department stores, and resumed its catalog business. Also in fiscal 1995, Aris Isotoner expanded its line of slippers. Aris Isotoner posted weak results in fiscal 1995, due in part to warmer than normal winter temperatures.
Sara Lee Knit Products focused on value-added products and cost-effective manufacturing and sourcing in fiscal 1995. In the U.S. women's and girls' panties category, Hanes Her Way and other Sara Lee brands increased their leading market position. The increase in Sara Lee's share of the girls' panties market was partially a result of increased distribution and new licensed character agreements. In fiscal 1995, Hanes underwear was introduced in Brazil and Venezuela.
In fiscal 1995, Sara Lee Knit Products became the master licensee to manufacture sports apparel bearing the Spalding name. Hanes Licensed Products, which markets licensed college and professional sportswear, was negatively affected by labor strikes in professional sports. In the retail fleece business, Sara Lee reduced excess capacity.
For all apparel categories, Sara Lee began to capitalize on its unique partnership agreement with the 1996 Olympic Games -- the first agreement of its kind to combine Games sponsorship, product licensing and U.S. Team outfitting. An agreement with Warner Brothers and the United States Olympic Committee led to the introduction of Warner Brothers' familiar Looney Tunes characters on Hanes T-shirts to be used in creative apparel relating to the Olympics.
Sara Lee Hosiery continued to respond to changing market forces in the hosiery area during fiscal 1995 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 7% as Sara Lee eliminated low-margin items from its product line. 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.
L'eggs launched Smooth Silhouettes, a Body Contouring product in fiscal 1995. Hanes introduced its own Body Contouring product, Smooth Illusions, in fiscal 1995, with strong advertising support and a "tag" line of "Liposuction without surgery." Under its licensed designer brand Donna Karan, Sara Lee introduced The Nudes hosiery, an ultrasheer product offering colors to complement a wide array of skin tones. In Mexico, Sara Lee introduced Hanes Her Way hosiery in fiscal 1995. In Europe, Sara Lee introduced several new hosiery products under the Dim brand, including Teint de Soleil, extra-sheer hosiery for warm weather, and Ventre Plat, the first hosiery with tummy control to be introduced in Europe. Pretty Polly introduced Legworks hosiery, which offers thigh and tummy control, in the United Kingdom.
In fiscal 1995, Sara Lee introduced the Silk Reflections Casual collection of tights, trouser socks and casual socks in North America, contributing to strong growth in unit and dollar sales of tights and opaque legwear.
SARA LEE HOUSEHOLD AND PERSONAL CARE
Sara Lee Household and Personal Care continued to grow through the introduction of new products and entry into new markets. Geographic expansion of Sara Lee's shoe care business continued in fiscal 1995, with the introduction of Kiwi products in China, Mexico and Hungary. Also in fiscal 1995, Sara Lee acquired the rights to market Brylcreem products for men in Indonesia.
Sanex Sun Care tanning lotions and sunblockers were introduced in the Netherlands during the fiscal year. Also in the Netherlands, Sanex toothpaste debuted. In Spain, the Sanex brand was extended to a line of new shaving creams and aftershaves under the Sanex for Men label. Duschdas Milk & Silk bath and shower foam was introduced in Germany, while Badedas for Kids soap was launched in the Netherlands. The Ambi-Pur electrical diffuser air freshener, introduced in five European markets in fiscal 1994, was extended to Belgium, the United Kingdom and Hungary. The Ambi-Pur Neutraliser air freshener debuted in the Netherlands and Italy. In the oral care line, Prodent Sensitive and Prodent Baking Soda toothpastes were made available in the Netherlands.
Sara Lee's Direct Selling business in Mexico, House of Fuller, suffered the negative impact of the peso's devaluation on sales in Mexico. House of Fuller has nevertheless expanded its product offerings, particularly in the area of apparel products and, in fiscal 1995, House of Fuller began selling Playtex intimate apparel.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Sara Lee's businesses are classified into two industry segments: Sara Lee Packaged Foods and Sara Lee Packaged Consumer 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 FOODS
Sara Lee's Packaged Foods segment is comprised of Sara Lee Packaged Meats and Bakery, and Sara Lee Coffee and Grocery.
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 1995, Sara Lee acquired Imperial Meats Group, Belgium's largest packaged meats producer. The company's Imperial, Cornby and Marcassou brands are sold in Belgium, France, Germany and the Netherlands.
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. 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. 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 the remaining outstanding shares of Virginia-based Consolidated Foodservice Companies in fiscal 1995, PYA/Monarch strengthened its position as the leading foodservice distributor in the southeastern United States and became the third 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.
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 is entering 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. At the end of fiscal 1994, and the beginning of fiscal 1995, Brazil, the world's largest coffee producer, suffered two major frosts, followed by a drought, that negatively affected crop output in fiscal 1995. 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. 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 higher green coffee costs on consumer buying habits, unit volumes for retail and out-of-home roasted coffee were down 8% for fiscal 1995, excluding the effect of acquisitions.
The Sara Lee Coffee and Grocery line of business also manufactures rice products under the Lassie brand in the Netherlands, and snack and nut products under the Duyvis, Felix and Benenuts brands in the Netherlands, Belgium and France, respectively.
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 PACKAGED CONSUMER PRODUCTS
Sara Lee's Packaged Consumer Products segment is divided into two lines of business: Personal Products and Household and Personal Care.
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 1995 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. Aris Isotoner products are sold primarily to department stores, while Coach and Mark Cross products are sold through department stores, catalog sales and Sara Lee stores. Coach and Mark Cross now operate approximately 120 stores in 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 the women's and girls' panties category in the United States, the second largest share 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, utilizing its megabranding strategy -- marketing various products through common packaging, promotion and advertising, increased marketing activity, and low-cost sourcing. 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. The European hosiery business is somewhat seasonal in nature in contrast to the domestic business.
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.
HOUSEHOLD AND PERSONAL CARE
Sara Lee's Household and Personal Care line of business includes 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.
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. 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.
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.
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 149,000 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. The foreign operations of the Packaged Meats line of business within the Packaged Foods segment are conducted through Sara Lee Processed Meats (Europe) B.V., while the Sara Lee Bakery business includes Kitchens of Sara Lee U.K. Ltd. and Kitchens of Sara Lee (Australia) Pty. Ltd. The Coffee and Grocery line of business within the Packaged Foods segment is conducted by a number of
subsidiaries, principally European, including 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 Personal Products line of business within the Packaged Consumer Products segment includes numerous foreign businesses, including Dim S.A., Grupo Sans S. A., Sara Lee Personal Products (Australia) Pty. Ltd., Pretty Polly Ltd., Vatter GmbH, the Filodoro Group, Manufacturas Mallorca, S.A. de C.V., Rinbros, S.A. de C.V., and a 60% interest in Maglificio Bellia S.p.A.
The Household and Personal Care line of business within the Packaged Consumer Products segment is composed of subsidiaries in over forty countries. The principal subsidiaries are 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 financial information about foreign and domestic operations can be found on page of this Report.
Item 2.
Item 2. Properties.
Sara Lee operates 289 food processing and consumer product manufacturing plants, each containing more than 20,000 square feet in building area, in 27 states and 35 foreign countries. Sara Lee owns 221 and leases 68 of these plants. It also operates 135 warehouses containing more than 20,000 square feet in building area in 18 states and 20 foreign countries. Of these warehouses, 57 are owned and 78 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.
- --------------- * These facilities are leased; the remainder are owned by Sara Lee.
** Facilities have been closed as part of 1994 restructuring and are awaiting sale. See pages through of this Report for a description of the restructuring.
*** Facilities have been closed and are awaiting sale.
Item 3.
Item 3. Legal Proceedings.
In September 1994, Sara Lee and the State of Wisconsin stipulated and agreed that (i) Sara Lee would pay $200,000 into an escrow fund established at the conclusion of the bankruptcy proceedings of Peck Foods Corporation ("Peck"), a former subsidiary of Sara Lee sold in 1988, in connection with certain allegations that Peck had violated hazardous spill remediation laws, and (ii) judgment in the amount of $218,400, including a penalty assessment, would be entered against Sara Lee in connection with certain allegations that Peck had illegally discharged wastewater in violation of water pollution control laws. The current owners of Peck have reimbursed Sara Lee for approximately $318,000 of these costs.
In addition to the foregoing, Sara Lee 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, 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 26, 1995 (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.
- --------------- * Mr. Heid and Mr. Meysman assumed the duties of executive officers (as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended) of Sara Lee as of September 26, 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, Joseph E. Heid 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 in December 1992, Mr. Heid was President of Guiness America, Inc., a marketer and producer of distilled beverages. Ms. Kelly was a partner in the Chicago office of Sidley & Austin from June 1991 until her election and prior thereto was an associate at 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, 1995, Sara Lee had approximately 93,200 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 July 1, 1995, 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 14.1% to $17.7 billion in 1995, from $15.5 billion in 1994, and $14.6 billion in 1993. 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. Business acquisitions and unit volume growth, offset in part by the weakening of foreign currencies relative to the U.S. dollar, were the primary contributing factors in the 1994 increase. Excluding the effects of foreign currencies and acquisitions and dispositions, sales dollars increased 6% in 1995 and 3% in 1994.
The gross profit margin was 37.8% in 1995, compared with 37.6% in 1994 and 38.0% in 1993. 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. The decrease in 1994 was attributable to margin declines in the European hosiery and knit products businesses, offset in part by improved margins in the Household and Personal Care and Packaged Meats and Bakery operations.
On June 6, 1994, the corporation announced a restructuring of its worldwide operations that will ultimately result in the closure of 94 manufacturing and distribution facilities and the severance of 9,900 employees. This restructuring reduced 1994 operating income (pretax earnings before interest and corporate expenses), net income and primary earnings per share by $732 million, $495 million and $1.03, respectively. The 1994 operating income included charges for restructuring as follows: Personal Products -- $630 million; Household and Personal Care -- $55 million; Coffee and Grocery -- $25 million; and Packaged Meats and Bakery -- $22 million.
Of the total provision of $732 million, non-cash charges of $304 million represent 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 represents cash outflows. During fiscal 1995, cash payments totaled $173 million. Restructuring actions are expected to be substantially completed by the close of 1996 and the corporation expects to fund the remaining costs of the plan from internal sources and available borrowings.
During 1995, 42 manufacturing and distribution facilities were closed and 6,029 employees terminated. Operating costs were lowered in 1995 by $89 million, 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 million in 1998. Savings from the planned actions will be
used for both business-building initiatives and profit improvement. The restructuring reserve is analyzed in greater detail in the Restructuring Provision note to the financial statements on pages and.
Operating income, excluding the restructuring charge, increased 18.5% in the Packaged Foods segment, while the Packaged Consumer Products segment increased 15.6% from 1994 results. The increase in the Packaged Foods segment is primarily attributable to business acquisitions, the strengthening of foreign currencies relative to the U.S. dollar and cost controls. The increased results in the Packaged Consumer Products segment were primarily attributable to the improved profitability of the worldwide hosiery, knit products and intimates businesses. Business acquisitions and the strengthening of foreign currencies relative to the U.S. dollar also contributed to the improved results of the Packaged Consumer Products segment. Excluding the restructuring charge and the effects of acquisitions and fluctuations in foreign exchange rates, operating income increased 7% in 1995, and in 1994 was virtually unchanged from 1993.
Net interest expense was $185 million in 1995, compared with $145 million in 1994 and $82 million in 1993. The 1995 increase was largely due to higher interest rates, while the increase in 1994 interest expense was a result of increased financing needs for acquisitions and capital expenditures.
Unallocated corporate expenses are costs not directly attributable to specific segment operations. Unallocated corporate expenses were $192 million in 1995, $98 million in 1994 and $143 million in 1993. Unallocated corporate expenses in 1995 were negatively impacted by the costs of hedging foreign currency movements and expenses associated with minority interests in subsidiaries. In 1993, unallocated corporate expenses were greater than in 1994 because of costs of hedging foreign currency movements and higher administrative expenses.
The effective tax rate was 34.1% in 1995, 39.9% in 1994 and 34.9% in 1993. Excluding the impact of unusual items in 1994, the effective tax rate was 35.0%. The reduction of the tax rate from 35.0% in 1994 to 34.1% in 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.
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. In 1994, net income decreased 71.8% to $199 million and primary earnings per share decreased 73.6% to $.37. Excluding the effects of the restructuring charge and the cumulative effect of the accounting change, net income and primary earnings per share in 1994 increased 3.5% and 5.0%, respectively.
During 1995, the corporation acquired several companies for an aggregate purchase price of $168 million in cash. The principal acquisitions were in the Packaged Meats and Bakery segment, and included the remaining outstanding shares of Consolidated Foodservice Companies, a domestic foodservice distribution business, and the Imperial Meats Group, a European manufacturer and distributor of processed meats.
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 Personal Care), Kiwi Brands (Pty.) Ltd. and subsidiaries (Household and Personal Care and Personal Products), and Maglificio Bellia S.p.A. (Personal Products).
During 1993, the corporation acquired several companies for an aggregate purchase price of $352 million in cash and the issuance of common stock having a market value of $69 million. The principal acquisitions were BP Nutrition's Consumer Food Group (Packaged Meats and Bakery) and the Filodoro Group (Personal Products).
These transactions are discussed in greater detail in the Acquisitions and Divestments note to the financial statements on page.
During the past three years, the general rate of inflation has averaged 2%. Additionally, approximately 35% 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 $1.4 billion in 1995 as compared to $839 million in 1994. The favorable 1995 results were due to improved gross margins, operating efficiencies resulting in part from the 1994 restructuring, and improved working capital management. Net cash provided from operating activities in 1994 was approximately the same as in 1993.
Net cash used in investment activities was $517 million in 1995, $937 million in 1994 and $967 million in 1993. Lower capital expenditures and business acquisition costs were the primary reasons for the reduced 1995 cash use. Capital expenditures were $480 million in 1995, $628 million in 1994 and $728 million in 1993. 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 fiscal 1996 capital expenditures to approximate $600 million. The 1996 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.
During 1995, cash of $853 million was used for financing activities, primarily 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. During 1993, cash of $248 million was provided from financing activities, primarily through the utilization of available short-term debt capacity. As of July 1, 1995, the total-debt-to-total-capital ratio decreased to 33.8% from 38.9% at July 2, 1994. 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 page 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 11 through 19, under the caption "Executive Compensation," and on pages 19 through 21, 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, 1995, State Street Bank & Trust Company of Boston, as trustee ("Trustee") of the Sara Lee Corporation Employee Stock Ownership Plan ("ESOP"), held in trust 4,514,427 shares (100% of the outstanding shares) of Sara Lee's Employee Stock Ownership Plan Convertible Preferred Stock ("ESOP Stock"), of which 1,168,043 shares (25.87%) were allocated to participant accounts and 3,346,384 shares (74.13%) were unallocated shares, and 9,517 shares of Sara Lee Common Stock (less than 1% of the outstanding shares of Common Stock), all of which were allocated to participant accounts. 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 1995, Sara Lee paid fees for legal services performed by the law firm of Sidley & Austin, to which Newton N. Minow is 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 investment banking services to The First National Bank of Chicago, of which Richard L. Thomas is Chairman of the Board and Chief Executive Officer. 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.
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 29, 1995
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 29, 1995.
*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 July 1, 1995, July 2, 1994, and July 3, 1993, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended July 1, 1995. 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 July 1, 1995, July 2, 1994, and July 3, 1993, and the results of their operations and their cash flows for each of the three years in the period ended July 1, 1995 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 31, 1995.
SARA LEE CORPORATION AND SUBSIDIARIES
FINANCIAL SUMMARY
The Notes to Financial Statements should be read in conjunction with the Financial Summary.
SARA LEE CORPORATION AND SUBSIDIARIES
FINANCIAL SUMMARY
The Notes to Financial Statements should be read in conjunction with the Financial Summary.
SARA LEE CORPORATION AND SUBSIDIARIES
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
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.
INVESTMENTS IN ASSOCIATED COMPANIES
Investments in associated companies consist of minority positions in several companies whose activities are similar to those of the corporation's operating divisions. The equity method of accounting is used when the corporation's ownership exceeds 20% and it exercises significant influence over the investee. Other minority positions are recorded at cost.
FISCAL YEAR
The corporation's fiscal year ends on the Saturday closest to June 30. Fiscal 1995 and 1994 were 52-week years, while 1993 was a 53-week year. Unless otherwise stated, references to years relate to 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 $710 at July 1, 1995, $572 at July 2, 1994 and $457 at July 3, 1993.
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 1995, approximately 35% at last-in, first-out [LIFO] and the remainder at first-in, first-out [FIFO]) or market. Inventories recorded at LIFO were approximately $18 at July 1, 1995, $24 at July 2, 1994 and $38 at July 3, 1993, 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 company 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.
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.
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.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
At July 1, 1995, 3,428,746 common shares were available for granting; options had been granted on 15,947,144 shares at prices ranging from $8.30 to $31.94 per share. During 1995, options on 4,798,160 shares were granted at prices ranging from $19.63 to $28.68; options for 1,403,375 shares were exercised at prices ranging from $5.38 to $28.07; and options for 466,051 shares expired or were canceled. Options exercisable at year-end were: 1995-10,111,475; 1994-9,548,858; and 1993-10,425,115.
Employees may purchase up to twenty-five thousand dollars market value of common stock annually at 85% of the market value. At July 1, 1995, 10,044,613 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.
Effective December 1, 1992, the corporation declared a two-for-one stock split in the form of a 100% stock dividend.
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 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.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
ESOP-related expenses amounted to $12 in 1995, $11 in 1994, and $11 in 1993. Payments to the ESOP were $38 in 1995, $38 in 1994 and $35 in 1993. Principal and interest payments by the ESOP amounted to $12 and $26 in 1995, $11 and $27 in 1994, and $7 and $28 in 1993.
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 1995, the corporation acquired several companies for an aggregate purchase price of $168 in cash. The principal acquisitions were the remaining outstanding shares of the Consolidated Foodservice Companies, a domestic foodservice distribution business, and the Imperial Meats Group, a European manufacturer and distributor of processed meats.
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.
During 1993, the corporation acquired several companies for an aggregate purchase price of $352 in cash and the issuance of 1,924,411 shares of common stock having a market value of $69. The principal acquisitions were BP Nutrition's Consumer Food Group, a manufacturer and marketer of packaged meat products in Europe, and the Filodoro Group, a manufacturer and marketer of hosiery in Italy.
No material divestments were made during the last three years.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
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 July 1, 1995 were 2.6 years and 1.2 years, respectively.
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.
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
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
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 July 1, 1995, 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 $49 at July 1, 1995, $52 at July 2, 1994 and $41 at July 3, 1993. 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 $31 at July 1, 1995, $28 at July 2, 1994 and $22 at July 3, 1993. 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 shares approximated fair value as of July 1, 1995, July 2, 1994 and July 3, 1993. The fair values of the remaining financial instruments recognized on the Consolidated Balance Sheets of the corporation at the respective year-end were:
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.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
The fair value of the corporation's interest rate swaps, currency swaps, and forward exchange contracts approximate their carrying value in the financial statements as of July 1, 1995, July 2, 1994 and July 3, 1993. 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 $110 in 1995, $112 in 1994 and $113 in 1993. Principal payments of $19 and $105 are due in 2014 and 2015, respectively.
Payments required on long-term debt during the years ending in 1996 through 2000 are $221, $132, $419, $86 and $241, respectively.
The corporation made cash interest payments of $236, $203, and $161 in 1995, 1994 and 1993, respectively.
Rental expense under operating leases amounted to approximately $222 in 1995, $207 in 1994 and $182 in 1993. Future minimum annual fixed rentals required during the years ending in 1996 through 2000 under noncancelable operating leases having an original term of more than one year are $113, $95, $81, $68 and $62, respectively. The aggregate obligation subsequent to 2000 is $137.
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 1996-2000 and $2 in 2001-2005. Amounts thereafter are not material.
CREDIT FACILITIES
The corporation has numerous credit facilities available, including revolving credit agreements totaling $1,920 that had an annual fee of 0.07% as of July 1, 1995. These agreements support commercial paper
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
borrowings. Subsequent to July 1, 1995 the corporation reduced its revolving credit facility to $1,635 in anticipation of lower borrowing needs. 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:
In the fourth quarter of 1994, the corporation provided for the cost of restructuring its worldwide operations, which will result in the closure of 94 manufacturing and distribution facilities and the severance of 9,900 employees. The restructuring provision reduced 1994 income before income taxes, net income and net
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
income per common share by $732, $495 and $1.03, respectively. As of July 2, 1994, no material actions contemplated in the restructuring plan had taken place.
During 1995, 42 manufacturing and distribution facilities were closed and 6,029 employees terminated. Operating costs were lowered in 1995 by $89, 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. As of July 1, 1995, $166 of the remaining reserves were classified as current liabilities and $76 as noncurrent.
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:
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.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
The status of defined benefit plans at the respective year-end was:
Weighted average rates used in determining net pension expense and related obligations for defined benefit plans were:
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. 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 as of the start of 1994, the accumulated benefit obligation for domestic employees had been accrued.
The corporation provides health care and life insurance benefits to certain domestic 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:
The domestic postretirement benefit expense was $18 in 1993.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
The status of domestic postretirement benefit plans at the respective year-end was:
Actuarial assumptions used to determine the accumulated postretirement benefit obligation include a discount rate of 7.75% for 1995 and 1994. The assumed health care cost trend rate was 14% for 1995, 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 July 1, 1995 by 10% and the post-retirement benefit expense for 1995 by 12%.
Employees outside the United States are covered principally by government-sponsored plans, and the cost of company-provided plans is not material. The corporation is required to adopt SFAS 106 for its plans outside the United States in 1996.
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.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
The provisions for income taxes computed by applying the U.S. statutory rate to income before taxes as reconciled to the actual provisions were:
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:
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
The deferred tax (assets) liabilities at the respective year-end were as follows:
INDUSTRY SEGMENT INFORMATION
The corporation's business segments are described in the Narrative Description of Business on pages 3 through 7.
Industry segment sales and operating income applicable to businesses sold prior to July 1, 1995 were not material.
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
GEOGRAPHIC AREA INFORMATION
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in millions except per share data)
QUARTERLY FINANCIAL DATA (unaudited)
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 31, 1995. 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 31, 1995.
SCHEDULE II
SARA LEE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JULY 3, 1993, JULY 2, 1994, AND JULY 1, 1995 (IN MILLIONS)
EXHIBIT INDEX