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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 001-03344
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SARA LEE CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 36-2089049
(State of incorporation) (I.R.S. Employer Identification
No.)
THREE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60602-4260
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number including area code: (312) 726-2600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $1.33 1/3 par value The Chicago Stock Exchange
The New York Stock Exchange
The Pacific Exchange
Amsterdam Stock Exchange
The Bourse (Paris)
The Swiss Exchange
The Stock Exchange (London)
Preferred Stock Purchase Rights The Chicago Stock Exchange
The New York Stock Exchange
The Pacific Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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Indicate by check mark whether the registrant (1) has filed all required
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of September 1, 1998, the aggregate market value of the voting and
non-voting common equity (based upon the closing price per share of Common Stock
on the New York Stock Exchange on such date) held by non-affiliates of the
registrant was approximately $21.4 billion.
On September 1, 1998, the registrant had outstanding 458,598,930 shares of
common stock, par value $1.33 1/3 per share, which is the registrant's only
class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement, dated September 21, 1998, are
incorporated by reference into Items 10-12 of Part III.
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PART I
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. Sara Lee has operations in more than 40 countries and
markets branded products in more than 140 countries. It was organized in
Baltimore, Maryland in 1939 as the C.D. Kenny Company and adopted its current
name in 1985.
Sara Lee's mission is to continue to build leadership brands in consumer
packaged goods categories. Sara Lee currently has 32 "megabrands", defined as a
brand with sales of more than $100 million. While Sara Lee's mission has
remained unchanged over the years, in fiscal 1998 Sara Lee embarked on a program
designed to reshape the Corporation to enable the Corporation to produce higher
returns on a smaller asset base. Sara Lee's decision to undertake the program
was prompted by fundamental changes in the economic environment in which it
operates. Historically, Sara Lee has manufactured the branded consumer products
it markets. The Corporation's strategy was to vertically integrate the
manufacturing processes into the business in order to assure a readily available
product source that met quality standards. In recent years, alternative sources
of competitively priced manufactured products have increased and excess
manufacturing capacity has developed in the markets for certain of the
Corporation's products. These competitive sources have allowed the Corporation
to purchase needed commodities from a number of suppliers at prices which are
less than, or equal to, prior manufacturing costs. These forces also create
opportunities for Sara Lee to build stockholder value and Sara Lee intends to
take advantage of these opportunities by focusing Sara Lee's energies on
knowledge-based skills that will characterize successful companies of the
future.
Sara Lee announced its new strategic direction on September 15, 1997. The
program is intended to more tightly focus Sara Lee's business activity and make
Sara Lee more competitive. The goal of the program is to create an organization
that is less vertically integrated (by divesting, to the extent practical and
possible, operating assets), owns fewer fixed assets and uses knowledge-based
skills to develop and market products. Sara Lee has coined the term
"de-verticalization" to describe this process. Sara Lee has also committed to
repurchase $3 billion of the Corporation's common stock by the end of fiscal
year 2000. As of August 31, 1998, Sara Lee had completed the repurchase of
approximately 29 million shares at a total cost of $1.6 billion. In connection
with Sara Lee's adoption of a new strategic focus, Sara Lee also restructured
its worldwide operations. The restructuring resulted in an after-tax charge
$1.625 billion in the second quarter of fiscal 1998. The planned restructuring
activities include the disposition of 116 manufacturing and distribution
facilities. The restructuring charge was related primarily to the sale and write
down of assets that Sara Lee has determined it does not need to own in order to
fulfill its primary mission of building brands on a global basis. Of the total
after-tax provision, 89% or approximately $1.45 billion is non-cash and 11%, or
approximately $176 million, will require cash outflows. The restructuring is
discussed in greater detail in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
In fiscal 1998, Sara Lee renamed three lines of business. Sara Lee Foods
replaces Packaged Meats and Bakery; Coffee and Tea replaces Coffee and Grocery;
and Branded Apparel replaces Personal Products. Household and Body Care remains
the same. A fifth line of business, Foodservice, which was previously a part of
Packaged Meats and Bakery, has been added.
1
SARA LEE FOODS
Sara Lee Packaged Meats had sales of $4.3 billion in fiscal 1998, holding a
leading position in the $25 billion U.S. packaged meats industry. Sara Lee
Packaged Meats is the world's number one packaged meats company, with brands
marketed in the United States, Mexico, Europe (where it is the leading packaged
meats company) and Asia. In response to consumer demand for healthful products
and on-the-go meal solutions, Sara Lee Packaged Meats continued to focus on
convenient and "better-for-you" products, including reduced-fat and low-calorie
products during fiscal 1998. This focus, combined with lower commodity prices
throughout the year, enabled Sara Lee Packaged Meats to grow sales and profits
to record levels, excluding the restructuring charge. Worldwide unit volumes
increased 2%, driven primarily by new products and product innovations designed
to meet consumer demand for convenience and variety. During fiscal 1998, a
number of Sara Lee's packaged meats companies, such as Hillshire Farm, Bil Mar
Foods and Bessin Foods introduced new reduced-fat and "better-for-you" products.
Nearly one-third of Sara Lee's retail meat sales are generated by reduced-fat
and low-calorie products. Sara Lee Packaged Meats also expanded its line of
convenient, easy to cook products in fiscal 1998.
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
1998, Sara Lee Bakery had sales of $1.1 billion. Worldwide unit volumes,
excluding acquisitions, were comparable to fiscal 1997 levels. Worldwide, the
Bakery markets its products through multiple channels of distribution, including
retail, bakery-deli and foodservice. During fiscal 1998, Sara Lee Bakery
continued to pursue growth and expansion opportunities in international markets.
Currently, approximately 40% of total Bakery sales are generated outside the
U.S. In fiscal 1998, Sara Lee acquired Grand Metropolitan's frozen and chilled
cakes business. This acquisition, combined with Sara Lee's fiscal 1997
acquisition of Finnegan's Famous Cakes, enabled Sara Lee Bakery to increase its
product offerings in the United Kingdom under the Sara Lee name. In India, the
acquisition of the NUTRINE brand will serve as an introduction into this
developing Bakery market. Sara Lee Bakery also introduced and expanded its
distribution of a number of new products, including new ambient and chilled
products. In response to consumer demand, in fiscal 1998, Sara Lee also expanded
the number of products with microwaveability, smaller or single-serving sizes
and added convenience.
COFFEE AND TEA
Sara Lee Coffee and Tea reported sales of $2.8 billion in fiscal 1998, down
0.3% from the prior year. Operating income, excluding the restructuring charge,
fell 2.5% to $429 million. These results were impacted by the strength of the
U.S. dollar relative to European currencies. Excluding the effects of currency,
sales and operating income for Coffee and Tea grew 9%.
Sara Lee maintained a leading position in the $15 billion European roasted
coffee category in fiscal 1998, on the strength of its well-known coffee brands,
including DOUWE EGBERTS, MAISON DU CAFE, MARCILLA and MERRILD. Sara Lee Coffee
and Tea also continued to lead in the out-of-home coffee segment in Europe and
the United States. The out-of-home business provides coffee, tea, juices and
equipment to foodservice customers such as restaurants, schools, businesses, and
hospitals in 50 countries. Unit volumes for roasted coffee declined 7% during
fiscal 1998, reflecting the impact of higher green coffee costs which resulted
in increased consumer prices throughout most of the year.
New geographic markets, expanded channels of distribution and innovative
product development remain the principal tools of growth for Sara Lee's coffee
business. In fiscal 1998, Sara Lee entered the South American market with the
acquisition of the Brazilian coffee company Cafe do Ponto, which has the number
two position in Brazil. New product development for Sara Lee Coffee and Tea
emphasizes regional taste preferences and growing demand for premium, specialty
and convenience products. Sara Lee also continued to expand its coffee store
concept in fiscal 1998, opening three JACQMOTTE STORE coffee shops in Belgium
and the Netherlands. In early fiscal 1999, Sara Lee sold its cut and pipe
tobacco business to Imperial Tobacco Group Plc, a major tobacco company based in
the United Kingdom.
2
HOUSEHOLD AND BODY CARE
Household and Body Care is Sara Lee's most global line of business and
includes Sara Lee's leading Household and Body Care products as well as a Direct
Selling division. In fiscal 1998, Household and Body Care reported sales of $2.0
billion, up 8.7% from the prior year. Operating income, excluding the
restructuring charge, was $252 million, up 10.4% from the prior year. The
strength of the U.S. dollar relative to foreign currencies negatively affected
reported results for fiscal 1998. Excluding the effect of currency, sales grew
20% and operating income grew 23%. In early fiscal 1999, Sara Lee Household and
Body Care announced several de-verticalization transactions. Included were plant
and equipment sales and other actions expected to generate cash of $200 million
by the end of fiscal 2000.
Sara Lee Household and Body Care is comprised of four core categories --
shoe care, body care, insecticides and air fresheners. In fiscal 1998, Household
and Body Care continued to grow and posted increased sales and profits on the
strength of all four categories. KIWI remained the world's top name in shoe care
in fiscal 1998. The brand is marketed in 122 countries. Product developments in
Sara Lee's shoe care business continued in fiscal 1998 with the introductions of
a Kiwi "low-gloss" shoe shine and several variations of shining and cleaning
products. Sara Lee continues to be a leader in Europe with its body care
products marketed under the SANEX, DUSCHDAS, BADEDAS, RADOX and DELIAL brands.
In the body care category, body care products under the SANEX brand were
launched in France, Italy, Indonesia, Denmark, Portugal and the Netherlands and
relaunched in South Africa. In fiscal 1998, sales of air fresheners grew
significantly and the insecticide business also posted strong results.
Sara Lee's Direct Selling division distributes cosmetics, fragrances,
jewelry, toiletries and apparel products directly to consumers' doors in 15
countries. Through acquisitions and internal growth, Direct Selling now has more
than 750,000 independent sales representatives worldwide. Direct Selling, with
businesses in Mexico, Indonesia, the Philippines, South Africa, China and
Uruguay, was bolstered in fiscal 1998 by the acquisition of the Australian
direct selling business Nutri-Metics International, which has operations in 15
countries. House of Fuller, with more than 235,000 independent sales
representatives, is the number-two direct seller in Mexico. In Asia, House of
Sara Lee expanded product offerings for consumers in Indonesia and the
Philippines.
FOODSERVICE
Sara Lee's Foodservice business, PYA/Monarch, maintained its position as the
leading foodservice distributor in the southeastern United States and the
fourth-largest full-line foodservice company in the nation. During fiscal 1998,
PYA/Monarch enjoyed strong sales and profit growth. Fiscal 1998 sales were $2.6
billion, up 8.9% from the prior year. Operating income was $90 million,
excluding the restructuring charge, up 9.4% from the prior year. Excluding
acquisitions, unit volumes increased 7%. PYA/Monarch continues to focus on cost
control, geographic expansion and increasing unit volumes. During fiscal 1998,
PYA/Monarch continued its strategy of growth through warehouse expansion,
enabling it to respond quickly and cost effectively to the demands of large
speciality customers, such as restaurant chains. Several centers were expanded
in fiscal 1998, including a 123,000 square-foot increase in Charlotte, N.C. In
fiscal 1998, PYA/Monarch acquired the Tennessee-based Kesterson Companies,
allowing expansion into the important markets of Nashville, Memphis and western
Kentucky.
BRANDED APPAREL
Sara Lee Branded Apparel is comprised of Sara Lee's Intimates, Knit
Products, Legwear and Accessories businesses. In fiscal 1998, sales for Branded
Apparel declined 2.2% to $7.3 billion. Operating income, excluding the
restructuring charge, fell 3.5% to $734 million.
Sara Lee Intimates recorded increased sales and operating income in fiscal
1998 through product innovations and design advancements that strengthened its
core brands, including BALI, DIM, HANES HER WAY, JUST MY SIZE, PLAYTEX and
WONDERBRA. Unit volumes for Sara Lee's intimate apparel business increased
3
7%, excluding acquisitions. In fiscal 1998, Sara Lee maintained its number-one
position in the intimate apparel category in North America. It also expanded its
presence in key European and Asian markets. During fiscal 1998, Sara Lee's
Worldwide Intimates business introduced a number of new products that offer
innovations in comfort and design. Playtex introduced the EIGHTEEN HOUR POSTURE
BRA and Bali launched the BEYOND SEAMLESS line, featuring a proprietary STRETCH
PERFECT fiberfill lining, and a SMOOTH FINISH collection of cotton-lined bras.
Wonderbra launched the RIVIERA line of European-inspired bras and Hanes Her Way
introduced a collection of performance sports bras under the new HANES SPORT
brand. Under the DIM brand in Europe, Sara Lee introduced the PULPY intimate
apparel line. In early fiscal 1999, Sara Lee acquired The Strouse, Adler
Company, a 137 year old maker of shapewear and specialty bras.
Sara Lee Knit Products significantly altered its operating model as part of
Sara Lee's overall de-verticalization program in fiscal 1998. The most
significant development for Sara Lee Knit Products was the divestment of nine
yarn and textile facilities. One additional facility was divested in early
fiscal 1999. In connection with the divestment of these facilities, Sara Lee
Knit Products entered into a supply agreement with the purchaser of the
facilities to provide Sara Lee with yarn and textile products. These actions
allow Sara Lee Knit Products to focus more of its resources toward developing
and marketing new products and establishing its brands in new categories. This
focus is intended to further Sara Lee's strategy of growing its Knit Products
megabrands, including its leading HANES, HANES HER WAY, CHAMPION, DIM, JUST MY
SIZE, RINBROS, ABANDERADO and PRINCESA brands. In fiscal 1998, Sara Lee's HANES
and HANES HER WAY megabrands had sales of $2.2 billion. During the fiscal year,
Sara Lee extended the HANES brand to babywear. Sara Lee also continued to expand
in the children's and toddlers' category with its KIDSWEAR line. Sara Lee also
launched a line of products under the HANES SPORT label in fiscal 1998, as an
initiative to attract new consumers. The HANES SPORT line emphasizes
fashionable, sports-inspired apparel. Also in fiscal 1998, the HANES and HANES
HER WAY megabrand was extended into a new category--loungewear. HANES sleepwear
for boys and girls was also launched in fiscal 1998. Despite significant growth
in Europe, Sara Lee's Champion business posted lower results in fiscal 1998 due
to significant competition in the sports apparel category. Champion is focusing
on improving product quality, customer service and distribution, and cost-
efficiency. Worldwide unit volumes for Knit Products grew 6% in fiscal 1998.
Sara Lee Legwear posted lower sales in fiscal 1998 due to a continuing
global decline in the sheer hosiery category. However, operating income and
returns improved, due to improvements in productivity and a simplified product
mix. Worldwide Legwear unit volumes declined 3%, reflecting a 7% decline in
sheer hosiery, partially offset by an 11% increase in socks.
Sara Lee continues to be the U.S. leader in the sheer hosiery category with
its leading HANES, L'EGGS, DONNA KARAN and DKNY brands. Sara Lee is also the
U.S. leader in the socks category. In fiscal 1998, Sara Lee continued to
emphasize higher-margin products and additional product offerings for casual
wear. Sara Lee's European hosiery business, which includes the BELLINDA, DIM,
ELBEO, FILODORO, NUR DIE, PHILIPPE MATIGNON and PRETTY POLLY brands, also
continued to emphasize high-margin, value-added products in fiscal 1998. Sara
Lee also expanded geographically in fiscal 1998 by introducing FILODORO and
PHILIPPE MATIGNON hosiery products in Spain. In Europe, Sara Lee is also growing
its hosiery brands through strategic acquisitions. In fiscal 1998 Sara Lee
acquired the EDOO brand in Austria. To further growth in Western Europe, Sara
Lee also introduced a new retail concept that brings together Sara Lee's
hosiery, intimate apparel and knit product brands. The stores market only Sara
Lee brands. Six stores are slated to open in fiscal 1999 in Italy and Spain.
Sara Lee Accessories consists of Sara Lee's Coach division, which markets
fine leathergoods, apparel and related accessories. In fiscal 1998, Coach posted
lower sales, principally due to market conditions in Asia. To improve sales and
profitability, Coach is focusing on its core branded leathergoods and continuing
to respond to rapidly changing fashion trends by developing new products.
Product introductions in fiscal 1998 included the COACH NEO COLLECTION, a
mixed-materials product featuring a customized lightweight modern fabric trimmed
in glove leather, and the TRIBECA SERIES of updated classic handbags and
accessories. In a licensing agreement with the Movado Group, Coach launched its
first watch collection. Through a
4
partnership with Motorola, a leather phone case for Motorola's StarTAC Wearable
Phone Series was introduced. In fiscal 1998, Coach opened five full-price and
eight factory stores in the United States, bringing the total number of retail
stores to 162. Internationally, Coach operates in more than 150 locations. In
fiscal 1998, Coach renovated 15 of its stores in Asia.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Sara Lee's businesses are classified into five industry segments: Sara Lee
Foods, Coffee and Tea, Household and Body Care, Foodservice, and Branded
Apparel. The financial information about Sara Lee's industry segments can be
found on page F-25 of this Report.
(C) NARRATIVE DESCRIPTION OF BUSINESS
SARA LEE FOODS
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 AOSTE, JUSTIN
BRIDOU and COCHONOU in France, STEGEMAN 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.
AXA Alimentos owns Kir Alimentos S. de R.L. de C.V., and Zwanenberg de Mexico,
S.A. de C.V., which are leading processed meats companies in Mexico. Sara Lee is
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 fell in fiscal 1998. 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 business 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.
Sara Lee Packaged Meats 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 frozen and fresh pies, cheesecakes, pound
cakes and bagels. 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.
5
Competition in this business is keen, with a large number of participants.
Sara Lee seeks to maintain and enhance a leading position in the industry
through superior quality and value, 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.
COFFEE AND TEA
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. Green coffee
experienced significant cost volatility in fiscal 1997 and green coffee prices
rose substantially in fiscal 1998. 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, reduce the negative effect
of price increases through careful inventory management, cost cutting, and
higher prices for its coffee products. Primarily due to higher retail prices
driven by higher green coffee costs, unit volumes declined for Sara Lee coffee
brands in fiscal 1998 in most European markets.
The Coffee and Tea 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.
The Coffee and Tea business has accounted for 10% or more of Sara Lee's
consolidated revenues during the past three fiscal years.
HOUSEHOLD AND BODY CARE
Household and Body Care is composed of four 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; insecticides -- sold
internationally under the CATCH, BLOOM, VAPONA and RIDSECT brand names; and air
fresheners -- led by the AMBI-PUR brand. 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
6
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, jewelry, toiletries and apparel products -- 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
Japan, Australia, 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.
FOODSERVICE
Sara Lee Foodservice is conducted principally under the PYA/Monarch name.
PYA/Monarch is 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. Sara Lee Foodservice accounted for 10% or more of
Sara Lee's consolidated revenues during the past three fiscal years.
BRANDED APPAREL
The Branded Apparel line of business includes the Intimates, Knit Products,
Legwear and Accessories businesses.
Sara Lee Intimates 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 Intimates strengthened its position as the leader in the North American
intimates category during the 1998 fiscal year. Sara Lee has the leading dollar
share of the $4.1 billion U.S. bra category. 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 1998 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 Knit Products 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 is the leader 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
has the leading position in men's and boys' underwear in Mexico.
7
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 and a number of major university
sports teams.
The principal raw material in this product category is cotton. Sara Lee
currently believes there is 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 Legwear is the leader in the hosiery category 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.
Sara Lee Legwear 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 in the United States 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.
Sara Lee Legwear 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 outside the United States),
to supermarkets, warehouse clubs, discount chains and convenience stores for
brands like L'EGGS and some DIM products aimed at the price-conscious consumer.
Legwear products are also distributed through catalog sales and Sara Lee stores.
The legwear business has accounted for 10% or more of Sara Lee's consolidated
revenues during each of the past three fiscal years.
The legwear business is very competitive in both the United States and
Europe and worldwide demand for hosiery products has declined over at least the
last three years. 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.
Sara Lee Accessories involves the manufacture and marketing of premium
leather products, apparel and related accessories under the COACH brand. Coach
products are sold through department stores, catalog sales and Sara Lee stores.
Coach operates 162 retail stores in the United States and 150 stores located
outside the United States.
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.
8
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 which would have a
material adverse effect on Sara Lee's consolidated results of operations,
financial position or cash flows. 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 Foods experiences 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
fiscal quarter, driven principally by holiday buying. Sara Lee Branded Apparel,
particularly Coach and Knit Products, generally experience increased demand
during the second fiscal quarter as a result of "back to school" purchases and
the holiday season. The European hosiery business is somewhat seasonal in
nature, unlike the United States 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 consolidated, results of operations, financial
position or cash flows. Sara Lee has an ongoing 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 139,000 employees worldwide.
9
(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 Tea and Household and Body Care
divisions of Sara Lee, as well as Sara Lee's foreign bakery operations.
The foreign operations of Sara Lee Foods Packaged Meats line of business are
conducted through Sara Lee Processed Meats (Europe) B.V., the Aoste Group and
Imperial Meat Products N.V., while the foreign operations of Sara Lee Bakery are
conducted through Kitchens of Sara Lee U.K. Ltd., Sara Lee Bakery (Australia)
Pty Ltd. and Brossard France S.A.
Coffee and Tea 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 Kft., Harris/DE Pty. Ltd., Balirny Douwe Egberts A.S. and
Douwe Egberts Coffee Systems Nederland B.V.
Household and Body Care is conducted by subsidiaries in over forty
countries, principally Sara Lee/ DE, Kiwi Brands Pty. Ltd., Kiwi France S.N.C.,
Kortman Intradal B.V., A/S Blumoller, Sara Lee/DE Espana S.A., Sara Lee
Household and Body Care U.K. Ltd., Sara Lee/DE Italy S.p.A., and Sara Lee/DE
Deutschland GmbH and House of Fuller S.A. de C.V.
Branded Apparel includes numerous foreign businesses, including Dim S.A.,
Grupo Sans, a division of Sara Lee/DE Espana S.A., Sara Lee Personal Products,
S.p.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 Maglificio Bellia S.p.A.
The financial information about foreign and domestic operations can be found
on page F-26 of this Report.
10
Item 2. Properties.
Sara Lee operates 278 food processing and consumer product manufacturing
plants, each containing more than 20,000 square feet in building area, in 25
states and 39 foreign countries. Sara Lee owns 215 and leases 63 of these
plants. It also operates 132 warehouses containing more than 20,000 square feet
in building area in 19 states and 25 foreign countries. Of these warehouses, 61
are owned and 71 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.
APPROXIMATE
BUILDING AREA
INDUSTRY SEGMENT AND IN
DIVISION OR SUBSIDIARY LOCATION SQUARE FEET
- ---------------------------------------------------- ------------------------------------------ ---------------
SARA LEE FOODS
Aoste............................................... Aoste, France 743,000
Aoste............................................... Maclas, France 387,000
Aoste............................................... Peyrolles, France 374,000
Aoste............................................... St. Symphorien, France 303,000
Bil Mar Foods....................................... Zeeland, Michigan 577,000
Bryan Foods, Inc.................................... West Point, Mississippi 769,000
Hillshire Farm & Kahn's............................. Alexandria, Kentucky 325,000
Hillshire Farm & Kahn's............................. Cincinnati, Ohio 563,000
Hillshire Farm & Kahn's............................. New London, Wisconsin 565,000
Kitchens of Sara Lee................................ Bridlington, England 285,000
Sara Lee Bakery..................................... New Hampton, Iowa 294,000
Sara Lee Bakery..................................... Tarboro, North Carolina 346,000
Sara Lee Bakery..................................... Traverse City, Michigan 295,000
Sara Lee Processed Meats (Europe) B.V............... Rio Maior, Portugal 348,000
Sara Lee Processed Meats (Europe) B.V............... Miralcamp, Spain 260,000
COFFEE AND TEA
Douwe Egberts Van Nelle Tabaksmaatschappij B.V...... Rotterdam, the Netherlands 605,000
Koninklijke Douwe Egberts B.V....................... Joure, the Netherlands 1,094,000
Koninklijke Douwe Egberts B.V....................... Utrecht, the Netherlands 577,000
Koninklijke Douwe Egberts B.V....................... Zaandam, the Netherlands 367,000
Van Nelle International B.V......................... Joure, the Netherlands 301,000*
HOUSEHOLD AND BODY CARE
Bama Polska......................................... Polska, Poland 260,754
Kiwi Brands......................................... Douglassville, Pennsylvania 290,000
Kiwi Brands Pty. Ltd................................ Clayton, Australia 313,000
Sara Lee/DE Espana S.A.............................. Santiga, Spain 284,000*
Sara Lee/DE Germany................................. Dusseldorf, Germany 333,000*
Sara Lee Household & Body Care U.K. Limited......... Slough, England 318,000
FOODSERVICE
PYA/Monarch, Inc.................................... Charlotte, North Carolina 415,000
PYA/Monarch, Inc.................................... Bloomington, Indiana 321,000
PYA/Monarch, Inc.................................... Lexington, South Carolina 364,000
PYA/Monarch, Inc.................................... Montgomery, Alabama 276,000
11
APPROXIMATE
BUILDING AREA
INDUSTRY SEGMENT AND IN
DIVISION OR SUBSIDIARY LOCATION SQUARE FEET
- ---------------------------------------------------- ------------------------------------------ ---------------
BRANDED APPAREL
Canadelle Limited Partnership....................... Montreal, Canada 289,000
Champion Products, Inc.............................. Laurel Hill, North Carolina 368,000
Champion Products, Inc.............................. Dunn, North Carolina 289,000
Coach Leatherware................................... Jacksonville, Florida 357,000*
Dim, S.A............................................ Autun, France 328,000
Filodoro Calze SpA.................................. Casalmoro, Italy 343,000
Filodoro Calze SpA.................................. Casalmoro, Italy 251,000
L'eggs Products..................................... Clarksville, Arkansas 321,000
L'eggs Products..................................... Rockingham, North Carolina 440,000
Playtex Apparel, Inc................................ Dover, Delaware 424,000
Sara Lee Direct..................................... Rural Hall, North Carolina 598,000*
Sara Lee Hosiery.................................... East Rockingham, North Carolina 330,000*
Sara Lee Hosiery.................................... Winston-Salem, North Carolina 770,000
Sara Lee Hosiery.................................... Darlington, South Carolina 287,000
Sara Lee Knit Products.............................. Martinsville, Virginia 704,000*
Sara Lee Knit Products.............................. Rural Hall, North Carolina 986,000
Sara Lee Knit Products.............................. Winston-Salem, North Carolina 568,000
Sara Lee Knit Products.............................. Winston-Salem, North Carolina 395,000
Sara Lee Sock Company............................... Kernersville, North Carolina 340,000
Vatter GmbH......................................... Rheine, Germany 549,000
- ------------
* These facilities are leased; the remainder are owned by Sara Lee.
Item 3. Legal Proceedings.
Sara Lee is a party to various pending legal proceedings and claims. Some of
the proceedings and claims against Sara Lee are for alleged environmental
contamination, and arise under the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund"). CERCLA imposes
liability, regardless of fault, on certain classes of parties that are
considered to be responsible for contamination at a site. Although any one party
can be held responsible for all the costs of investigation and cleanup, those
costs are usually allocated among parties based on a variety of factors, such as
the amount of waste each contributed to the site. Although the outcome of the
pending legal proceedings, including Superfund claims, 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
consolidated results of operations, financial position or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
12
PART II
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, 1998, Sara Lee had approximately
84,696 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 F-28 of this Report.
Item 6. Selected Financial Data.
Financial information for Sara Lee for the five fiscal years ended June 27,
1998, is set forth on pages F-2 and F-3 of this Report. Such information should
be read in conjunction with the consolidated Financial Statements and related
Notes to Financial Statements on pages F-4 through F-28 of this Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This discussion and analysis of results of operations, financial condition
and risk management should be read in conjunction with the General Development
of Business on pages 1 through 5, Narrative Description of Business on pages 5
through 9, and the Consolidated Financial Statements and related Notes to
Financial Statements on pages F-4 through F-28 of this Report.
RESULTS OF OPERATIONS
1998 RESTRUCTURING
In the second quarter of fiscal 1998, the Corporation provided for the cost
of restructuring its worldwide operations. The planned restructuring activities
include the disposition of 116 manufacturing and distribution facilities -- 86
facilities are owned and 30 are leased. This restructuring provision reduced
income before income taxes, net income and basic earnings per share in 1998 by
$2,040 million, $1,625 million and $3.46 per share, respectively. The 1998
pretax income of the Corporation's industry segments includes the following
restructuring charges: Sara Lee Foods -- $208 million; Coffee and Tea -- $71
million; Household and Body Care -- $185 million; Foodservice -- $2 million; and
Branded Apparel -- $1,574 million.
Of the total pretax charge for restructuring, $899 million relates to
anticipated losses associated with the disposal of manufacturing and
distribution facilities. Substantially all of these facilities were acquired
through a series of business combinations and capital expenditures made between
1988 and 1994. The gross book value of the manufacturing and distribution assets
to be disposed of was $2,312 million. $830 million of the restructuring charge
relates to goodwill associated with the disposition of the remaining assets from
various business combinations in the period from 1988 through 1992. The gross
book value of the goodwill being disposed of was $1,136 million. The remainder
of the charge consists of $219 million for pension and social costs associated
with the facility disposals; $47 million for anticipated costs to close and
dispose of idled facilities; and $45 million for anticipated losses on the
disposal of certain equity and cost method investments. Of the total after-tax
provision, 89% is non-cash and 11% will require cash outflows.
Management's decision to restructure its worldwide manufacturing and
distribution operations resulted from a change in the Corporation's strategic
direction, which was precipitated by fundamental changes in the economic
environment in which it operates. Historically, the Corporation has manufactured
the branded consumer products it markets. The Corporation's strategy was to
vertically integrate the manufacturing processes into the business in order to
assure a readily available product source that met quality standards.
Contributing factors to this situation included trade barriers associated with
apparel products that limited the utilization of product sourcing options
outside the United States. In addition, alternative sources for other products
were not generally considered reliable or cost efficient.
13
In recent years, several significant external economic factors have caused
the Corporation to modify its strategy. As the global economy has grown and
trade barriers have fallen, alternative sources of competitively priced
manufactured products have increased. In addition, business entities all over
the world have become increasingly specialized and efficient by focusing on core
competencies such as manufacturing, distribution and marketing. Since many of
the corporation's manufacturing processes do not involve proprietary or
sophisticated technology, a number of efficient and reliable third-party
suppliers have grown in this economic environment.
Secondly, the Corporation has historically operated in a highly
decentralized manner. A large number of discrete profit centers have been
maintained with each entity having separate manufacturing, distribution and
administrative functions for the branded products it markets. The Corporation
has numerous business entities in each segment producing comparable and, in some
cases, competing products under varying brand names. The elimination of certain
of these assets will result in a more efficient combined operation. Finally,
excess manufacturing capacity has developed in the markets for certain of the
Corporation's products. Lower worldwide demand for products such as sheer
hosiery, as well as competitive pressures from other manufacturers, are causal
factors. A substantial portion of the total restructuring charge is to eliminate
excess manufacturing and distribution capacity and thereby improve the long-term
profitability of the Corporation.
In the past year, two significant competitors in the branded apparel
business have also announced plans to close a substantial portion of their
productive capacity for competitive reasons. This, along with the economic
factors that resulted in the restructuring plan, have depressed the prices for
the manufacturing assets to be disposed. The estimated net realizable values for
the assets being disposed are responsible for the $1,729 million loss associated
with long-lived assets.
The current competitive environment has allowed the Corporation to purchase
needed commodities from a number of suppliers at prices which are less than, or
equal to, prior manufacturing costs. Such purchases are generally made under
short-term contracts that are cancelable without penalty by either party upon
less than six months notice. The Corporation anticipates that it will be able to
continue sourcing needed commodities in this manner.
As of the close of fiscal 1998, facilities representing 49% of the estimated
loss have been sold or closed. The Corporation expects to complete the
restructuring by the year 2000, and it is anticipated that the remaining costs
of the plan will be funded from internal sources and available borrowings.
Operating costs in fiscal 1998 were lowered by $61 million, primarily as a
result of lower plant overhead and amortization expense. The Corporation expects
the restructuring plan to generate increased savings in subsequent years,
growing to an annual savings of approximately $200 million in 2001. 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 page F-19.
CONSOLIDATED RESULTS -- 1998 COMPARED WITH 1997
Net sales increased 1.4% to $20.0 billion in 1998, from $19.7 billion in
1997. Businesses acquired net of businesses sold subsequent to the start of 1997
increased net sales by 2.2%. The strengthening of the U.S. dollar relative to
foreign currencies had the effect of reducing sales by 4.4%. Thus, on a
comparable basis, sales increased 3.6%. Comparable sales growth was
approximately 8% in the Foodservice, Coffee and Tea, and Household and Body Care
business segments. Comparable sales growth in the Branded Apparel segment was
2.4%, while Sara Lee Foods' sales were essentially the same as the prior year
after excluding the impacts of acquisitions, dispositions and foreign currency
movements.
The gross profit margin was 38.4% in 1998, compared with 37.8% in 1997.
Higher gross margins in the Corporation's Sara Lee Foods, Foodservice, Household
and Body Care and Branded Apparel segments more than offset gross margin
declines in Coffee and Tea. Operating income (pretax earnings before
14
interest and corporate expenses) increased $38 million, or 2.0%, excluding the
restructuring charge. Businesses acquired net of businesses sold subsequent to
the start of 1997 increased operating income by 1.9%. The strengthening of the
U.S. dollar relative to foreign currencies had the effect of reducing operating
income by 5.5%. Thus, on a comparable basis, operating income increased 5.6%.
The benefits associated with the 1998 restructuring had a significant impact on
the improvement in operating income.
Net interest expense was $176 million in 1998, compared with $159 million in
1997. The higher interest expense was attributable to higher average total
borrowings during the year offset in part by the strengthening of the U.S.
dollar relative to foreign currencies. Unallocated corporate expenses, which are
costs not directly attributable to specific segment operations, decreased in
1998. The strengthening of the U.S. dollar relative to foreign currencies
reduced foreign-denominated minority interest expense and also had a positive
impact on the hedging of foreign currency movements. In addition, 1997 corporate
unallocated expenses were negatively impacted by expenses associated with
certain sold companies.
The effective tax rate, excluding the restructuring charge, was 31.0% in
1998 as compared to 32.0% in 1997. The reduction in the tax rate was
attributable primarily to increased earnings in certain foreign jurisdictions
that had lower tax rates than the United States. Including the 1998
restructuring, the Corporation recognized a pretax loss of $443 million and a
tax provision of $80 million. The 20.4% effective tax rate associated with the
$2,040 million pretax restructuring charge was attributable primarily to the
$830 million nondeductible goodwill component.
Excluding the 1998 restructuring charge, net income increased 9.3% to $1,102
million, and basic earnings per share increased 13.2% to $2.32. Basic earnings
per share, excluding the restructuring charge, increased at a rate in excess of
net income primarily because of fewer shares outstanding during the period and
lower preferred dividends. Including the restructuring charge, the corporation
recognized a net loss of $523 million or $1.14 per share.
For the year ended June 27, 1998, approximately 2% of the Corporation's
sales and 1% of the pretax profits, excluding the restructuring charge, were
derived from Asia. The recent financial problems in the area have not had a
material impact on the consolidated results of the Corporation.
CONSOLIDATED RESULTS -- 1997 COMPARED WITH 1996
Net sales increased 6.0% to $19.7 billion in 1997, from $18.6 billion in
1996. Businesses acquired net of businesses sold subsequent to the start of 1996
increased net sales by approximately 6.0%. The strengthening of the U.S. dollar
relative to foreign currencies had the effect of reducing sales growth by
approximately 2.3%. Thus, on a comparable basis, sales increased 2.3%.
Comparable sales growth by segment was approximately 7% in Foodservice, 3% in
Sara Lee Foods and Household and Body Care, 2% in Coffee and Tea, and 1% in
Branded Apparel.
The gross profit margin was 37.8% in 1997, compared to 38.4% in 1996. The
reduction in 1997 was attributable primarily to lower margins in the
corporation's Branded Apparel segment, offset in part by improved margins in
Coffee and Tea, and Household and Body Care. Operating income increased 6.2%.
Businesses acquired net of businesses sold subsequent to the start of 1996
increased operating income by 2.9%. The strengthening of the U.S. dollar
relative to foreign currencies had the effect of reducing operating income by
3.3%. Thus, on a comparable basis, operating income increased 6.6%.
Net interest expense was $159 million in 1997, compared with $173 million in
1996. The lower interest expense was attributable to lower average interest
rates and average borrowings. Unallocated corporate expenses increased 8.3% over
1996. This increase is due to higher administrative costs and expenses
associated with certain sold companies, offset by positive impacts of hedging
foreign currency movements.
The effective tax rate was 32.0% in 1997, compared with 33.5% in 1996. The
reduction in the tax rate was attributable primarily to increased earnings in
foreign jurisdictions that had lower tax rates than the United States.
15
Net income for 1997 increased 10.1% to $1.0 billion and basic earnings per
share increased 10.8% to $2.05. The higher percentage increase in basic earnings
per share to net income was attributable primarily to lower preferred dividends.
OPERATING RESULTS BY BUSINESS SEGMENT -- 1998 COMPARED WITH 1997
During the fourth quarter of 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). The adoption of SFAS 131
requires the presentation of descriptive information about reportable segments
that is consistent with that made available to the management of the Corporation
to assess performance. As a result of this change, the Corporation will report
segment performance on an after-tax basis and will separately report information
on its Foodservice operations. In determining the net income of each segment,
the Corporation's net interest expense is allocated based upon the average
invested capital in each business, and effective tax rates are determined for
each business segment. Comparative segment information is presented on page
F-25.
The following comments regarding business segment performance exclude the
restructuring charge discussed above.
Net sales in the Sara Lee Foods segment increased in 1998 by 1.6%, while
operating income increased 11.3%. The improved level of profitability was
largely due to lower hog costs; new product activity focusing on higher-margin
"better-for-you" and convenience items; and the benefits associated with the
restructuring. Excluding the impact of acquisitions and changes in foreign
currencies, Sara Lee Foods sales approximated 1997 levels while operating income
increased 11.9%. Unit volumes for worldwide Packaged Meats rose 2%, led by gains
in key categories such as hot dogs, sausage products, ham, bacon and breakfast
sandwiches. Worldwide unit volumes for Sara Lee Bakery were flat for the full
year. All unit volume comparisons exclude acquisitions. Interest expense
allocated to the Sara Lee Foods segment increased $6 million. This business had
a higher share of the invested capital of the Corporation and consolidated net
interest increased over 1997 levels. Net income grew to $252 million, an
increase of 9.1%.
Coffee and Tea sales and operating income declined 0.3% and 2.5%,
respectively, in 1998. These results reflect the impact of a stronger U.S.
dollar relative to European currencies. Excluding the impact of acquisitions and
changes in foreign currencies, Coffee and Tea sales and operating income
increased by approximately 8.0%. Unit volumes for retail and out-of-home roasted
coffee declined 7%, reflecting higher green coffee costs and increased consumer
prices throughout most of the year. Performance was aided by a continued
emphasis on operating efficiencies. Interest expense allocated to the Coffee and
Tea segment increased $4 million, primarily as a result of this business having
a higher share of the invested capital of the Corporation. Net income declined
to $285 million, or 2.0%.
Net sales in the Household and Body Care segment increased 8.7%, while
operating income increased 10.4%. These results were also significantly affected
by the impact of the stronger U.S. dollar relative to foreign currencies during
the year. Excluding the impact of acquisitions and changes in foreign
currencies, Household and Body Care sales and operating income increased by 7.7%
and 18.9%, respectively. The Household and Body Care segment has four core
categories: shoe care, body care, insecticides and air fresheners. Unit sales
for these four product lines, excluding acquisitions, grew 11% for the year. The
profit growth is attributable primarily to strong gross margin improvement,
significant market share gains and new product introductions. The direct selling
component of this segment reported increased sales and profits principally on
the contributions of operations in Mexico and the Australian company
Nutri-Metics International, acquired in 1998. Interest expense allocated to the
Household and Body Care segment increased $7 million. This business had a higher
share of the invested capital of the Corporation and consolidated net interest
increased over 1997 levels. Net income increased 9.0% to $142 million.
Foodservice operations produced sales growth of 8.9% and operating income
growth of 9.4%. Excluding acquisitions, sales and operating income grew 7.7% and
9.1%, respectively. Foodservice unit
16
volumes increased 7% for the year, excluding acquisitions. The improved sales
and profits were attributable largely to a continued focus on low-cost
production and geographic expansion throughout the South, Midwest and Eastern
portions of the United States. Interest allocated to this segment increased
slightly, and net income grew 8.7% to $52 million.
Sales and operating income of the Branded Apparel segment declined 2.2% and
3.5%, respectively. Excluding the impact of acquisitions, dispositions and
changes in foreign currencies, sales increased 2.4% while operating income
declined 3.5%. The Corporation's worldwide Intimate Apparel business had
increased sales and operating income in 1998 as a result of product innovations
and design advancements that strengthened its core brands. Unit volumes
increased 7%, excluding acquisitions, with growth in both North America and
Europe. Worldwide unit volumes for Knit Products grew 6% led by gains in
underwear and activewear. Knit Products operating income declined slightly as a
result of the impact of the stronger dollar, competitive pricing pressures and
lower results by the Champion business. Due to a continuing global decline in
the sheer hosiery market, the worldwide Legwear business had lower sales in
1998. However, profits improved as the Corporation streamlined manufacturing,
boosted productivity and simplified its product mix. Worldwide Legwear unit
volumes declined 3% reflecting a 7% decline in sheer hosiery, partially offset
by an 11% increase in socks. The Coach leatherware business had lower sales and
operating income in 1998 as a result of difficult market conditions in Asia.
Interest allocated to this segment declined slightly as a result of this
business having a lower share of the invested capital of the Corporation. The
effective tax rate of the Branded Apparel segment declined as a result of
increased earnings in foreign jurisdictions that had lower tax rates than the
United States and a lower amount of nondeductible goodwill amortization. Net
income increased 0.3% to $484 million.
OPERATING RESULTS BY BUSINESS SEGMENT -- 1997 COMPARED WITH 1996
Net sales and operating income in the Sara Lee Foods segment increased in
1997 by 21.1% and 12.9%, respectively, largely due to the acquisition of the
European processed meats company, Aoste. Excluding the impact of acquisitions
and changes in foreign currencies, Sara Lee Foods sales and operating income
increased by 2.6%. Unit volumes for worldwide Packaged Meats were flat for the
fiscal year, reflecting higher commodity costs that affected retail prices for
most products. Worldwide unit volumes for the Bakery business declined 5% for
the full year, reflecting a soft U.S. retail environment for frozen baked goods.
All unit volume comparisons exclude acquisitions. Interest expense allocated to
the Sara Lee Foods segment increased by $3 million, primarily as a result of
this business having a higher share of the invested capital of the Corporation.
Net income increased 11.5% to $232 million.
Net sales in the Coffee and Tea segment decreased 2.9% while operating
income increased 2.9%. These results reflect the negative impact of a stronger
U.S. dollar relative to European currencies. Excluding the impact of
acquisitions and changes in foreign currencies, Coffee and Tea sales and
operating income increased in 1997 by 2.1% and 11.7%, respectively. Operating
margins improved as a result of lower coffee costs in the first half of the
year, improved operating efficiencies and increased sales of higher-margin
products. Unit volumes for roasted coffee increased 3%. Interest expense
allocated to this business segment declined 8.7% and net income increased 6.2%
to $290 million.
Net sales in the Household and Body Care segment increased 0.3% while
operating income increased 6.4%. Results benefited from increased profitability
within several Household and Body Care categories including shoe care, body care
and direct selling. Excluding the impact of acquisitions and changes in foreign
currencies, Household and Body Care sales and operating income increased in 1997
by 3.0% and 10.4%, respectively. Net income increased 11.0% as a result of a
lower effective tax rate.
Foodservice sales and operating income increased 7.8% and 12.1%,
respectively. Excluding the impact of acquisitions, sales grew at 6.7% and
operating income grew at 12.2%. Foodservice unit volumes increased 4% for the
full year, and selling, general and administrative costs declined as a percent
of sales. Net income increased 16.1% over the prior year as interest expense and
the effective tax rate declined.
17
During 1997, Branded Apparel sales and operating income increased 1.5% and
4.4%, respectively. The improvement in segment profitability was attributable
primarily to incremental savings from the 1994 restructuring and lower LIFO
inventory provisions. Unit volumes for Branded Apparel's major product
categories increased 3% for the year. Excluding the impact of acquisitions and
changes in foreign currencies, Branded Apparel sales and operating income
increased 0.9% and 3.8%, respectively. During the year, the Branded Apparel
segment had a lower share of the invested capital of the Corporation and this,
along with lower borrowing costs, reduced the interest allocated to this
business by 13.7%. The effective tax rate attributable to the Branded Apparel
business declined as a result of increased earnings in foreign jurisdictions
that had lower tax rates than the United States. Net income increased 10.7% over
the prior year to $483 million.
FINANCIAL POSITION
Net cash provided from operating activities was $1.9 billion in 1998, $1.6
billion in 1997 and $1.3 billion in 1996. Excluding the 1998 restructuring
charge, which was primarily non-cash, net income increased and working capital
management improved substantially in fiscal 1998. Higher profitability and lower
working capital requirements were also responsible for the improved 1997
operating cash flow results.
Net cash used in investment activities was $275 million in 1998, $1.0
billion in 1997 and $693 million in 1996. Cash received for businesses and
property sold in 1998 was $418 million in excess of that received in 1997. In
addition, cash outflows for business acquisitions and capital expenditures
declined $354 million from 1997 levels. The lower level of cash used for
investment activities reflects the Corporation's decision to pursue a new
strategic direction and the related restructuring plan.
During 1998, the Corporation acquired several companies for an aggregate
purchase price of $393 million in cash and $10 million of common stock. The
principal acquisitions were Nutri-Metics International Holding Pty. Ltd., an
Australian manufacturer and direct marketer of skin care products and
toiletries; Cafe do Ponto, S.A., a Brazilian manufacturer and retailer of
roasted and ground coffee; and Hornimans, a tea and sweetener distributor in
Spain. The Corporation also divested the production facilities and related
working capital of its yarn and textile manufacturing business. A loss was
recognized on the disposition of the manufacturing facilities in connection with
the 1998 restructuring, and the related working capital was sold for its net
book value.
In the fourth quarter of fiscal 1998, the corporation announced plans to
sell its international cut tobacco business, Douwe Egberts Van Nelle Tobacco, to
Imperial Tobacco Group PLC, a major tobacco company based in the United Kingdom.
Cash proceeds of $391 million were received in July 1998. Additional cash
payments may be received beginning in fiscal 2004; however, these payments are
dependent upon significant contingencies related to the ongoing operation of the
sold business. Receipt of these contingent payments is not assured.
During 1997, the Corporation acquired several companies for an aggregate
purchase price of $674 million in cash and $18 million of common stock. The
principal acquisitions were Aoste, a European manufacturer of processed meat
products; Lovable Italiana S.p.A., an intimate apparel company; and Brossard
France S.A., a French manufacturer and marketer of bakery products. The
Corporation also divested a minority ownership position in JP Foodservice, a
domestic distributor of food products, and a controlling interest in Aris
Isotoner, a manufacturer of gloves and accessories. No material gain or loss was
recognized on these divestments.
Capital expenditures were $474 million in 1998 as compared to $547 million
in 1997 and $542 million in 1996. The Corporation expects 1999 capital
expenditures to be in the range of $400 million to $500 million. The 1999
expenditures will be funded by internal sources and available borrowing
capacity. The corporation retains substantial flexibility to adjust its spending
levels in order to act upon other opportunities, including share repurchases and
business acquisitions.
18
During 1998, cash of $1,650 million was used for financing activities. Cash
expended for the purchase of the Corporation's common stock totaled $1,500
million. In addition, the Corporation used $200 million to redeem preferred
stock and $447 million to pay dividends. Net borrowings provided $411 million of
cash in 1998. During 1997, cash of $468 million was used for financing
activities. $393 million was expended for the purchase of the Corporation's
common stock and was largely offset by net additional borrowings of $362
million. Dividend payments in 1997 totaled $430 million. For fiscal 1998,
operating cash flow was 56.8% of average total debt as compared to 49.3% in
1997. The corporation's stated objective is to maintain a ratio of operating
cash flow to average total debt of at least 40% over time.
YEAR 2000 COMPLIANCE
In January 1996, the Corporation initiated a program to address the Year
2000 issues that affect its operations. Essentially, the Year 2000 problem
consists of computer applications using only the last two digits to refer to a
year rather than all four digits. As a result, these applications could fail or
create erroneous results if they recognize "00" as the year 1900 rather than the
year 2000. The aforementioned program is designed to identify and correct these
problems.
The program has been developed with the help of independent consultants and
consists of various steps of evaluation and remediation in the affected areas of
the Corporation. These areas include order, production, distribution and
financial systems. In addition, all third parties with whom there is systems
interaction, including outsourced services, and customers and suppliers, are
being surveyed to determine Year 2000 compliance or the need for remediation
efforts. As of the end of fiscal 1998, approximately 40% of the Corporation's
worldwide systems were Year 2000-compliant with the remaining areas targeted for
compliance by the end of fiscal 1999. The total cost of this project is
estimated to be $50 million, of which approximately one-half has been expensed.
These costs have not had, nor are expected to have, a material effect on the
Corporation's financial position, results of operations or cash flows in any of
the years in which spending has or will occur. This expectation assumes that the
Corporation will not be obligated to incur significant Year 2000 related costs
on behalf of its customers or suppliers.
In the event that the efforts of this program do not address all potential
systems problems, the Corporation is currently developing contingency plans to
ensure that it will be able to operate the critical areas of its business. This
process includes developing alternative plans to engage in business activities
with customers and suppliers should they not be Year 2000-compliant. These plans
will continue to be monitored for completion as we approach the year 2000.
FORWARD-LOOKING INFORMATION
From time to time, in written reports and oral statements, the Corporation
discusses its expectations regarding future performance. For example, such
"forward-looking statements" are contained in the 1998 Annual Report in the
Chairman's Letter to Stockholders (pages 17-18); President's Letter (page 21);
Operations Review (pages 22-35); and the Financial Performance and Financial
Review, including Management's Discussion and Analysis (pages 36-45). These
forward-looking statements are based on currently available competitive,
financial and economic data and management's views and assumptions regarding
future events. Such forward-looking statements are inherently uncertain, and
investors must recognize that actual results may differ materially from those
expressed or implied in the forward-looking statements. Consequently, the
Corporation wishes to caution readers not to place undue reliance on any
forward-looking statements. Among the factors that could impact the
Corporation's ability to achieve its stated goals are the following: (i) the
Corporation's ability to realize forecasted savings, as well as improvements in
productivity and efficiency, from its restructuring program; (ii) significant
competitive activity, including advertising, promotional and price competition,
and changes in consumer demand for the Corporation's products; (iii)
fluctuations in the cost and availability of various raw materials; (iv)
inherent risks in the marketplace associated with new product introductions,
including uncertainties about trade and consumer acceptance; (v) the
Corporation's ability to successfully integrate acquisitions into its existing
operations
19
and the availability of new acquisitions, joint ventures and alliance
opportunities that build stockholder value; and (vi) the Corporation's ability,
and our suppliers' and customers' ability, to adequately address the "Year 2000"
computer issue. In addition, the Corporation's results may also be affected by
general factors, such as economic conditions and political developments in the
markets where the Corporation competes, including changes in currency exchange
rates, interest and inflation rates, accounting standards, taxes, and laws and
regulations generally affecting our businesses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
RISK MANAGEMENT
The Corporation is exposed to market risk from changes in interest rates,
foreign exchange rates and commodity prices. To modify the risk from these
interest rate, foreign currency exchange rate and commodity price fluctuations,
the Corporation enters into various hedging transactions that have been
authorized pursuant to the corporation's policies and procedures. The
Corporation does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives.
FOREIGN EXCHANGE
The Corporation uses primarily foreign currency forward contracts to hedge
its exposure from adverse changes in foreign exchange rates. The Corporation's
exposure to foreign exchange rates exists primarily with the Dutch guilder,
French franc, Italian lira, Spanish peseta and British pound against the U.S.
dollar. Hedging is accomplished through the use of financial instruments as the
gain or loss on the hedging instrument offsets the gain or loss on an asset,
liability or a basis adjustment to a firm commitment. Hedging of anticipated
transactions is accomplished with financial instruments as the gain or loss on
the hedge occurs on or near the maturity date of the anticipated transactions.
INTEREST RATES
The Corporation uses interest rate swaps to modify its exposure to interest
rate movements and to reduce borrowing costs. The Corporation's net exposure to
interest rate risk consists of floating rate instruments that are benchmarked to
U.S. and European short-term money market interest rates. Interest rate risk
management is accomplished through the use of swaps to create synthetic debt
instruments.
COMMODITIES
The Corporation is a purchaser of certain commodities such as beef, pork,
cotton, coffee, wheat, corn, soybean and corn oils, and sugar. The Corporation
generally buys these commodities based upon market prices that are established
with the vendor as part of the purchase process. The Corporation does not use
significant levels of commodity financial instruments to hedge commodity prices
due to a high correlation between the commodity cost and the ultimate selling
price of the Corporation's products.
RISK MANAGEMENT ACTIVITIES
The Corporation maintains risk management control systems to monitor the
foreign exchange, interest rate and commodity risks, and the Corporation's
offsetting hedge positions. The risk management control system uses analytical
techniques including market value, sensitivity analysis and value at risk
estimations.
VALUE AT RISK
The value at risk estimations are intended to measure the maximum amount the
Corporation could lose from adverse market movements in interest rates and
foreign exchange rates, given a specified confidence level, over a given period
of time. Loss is defined in the value at risk estimation as fair-market
20
value loss. As a result, foreign exchange gains or losses that are charged
directly to translation adjustments in common stockholders' equity are included
in this estimate. The value at risk estimation utilizes historical interest
rates and foreign exchange rates from the past year to estimate the volatility
and correlation of these rates in the future. The model uses the
variance-covariance statistical modeling technique and includes all
interest-rate sensitive debt and swaps, foreign exchange hedges and their
corresponding underlying exposures. The estimated value at risk amounts shown
below represent the potential loss the Corporation could incur from adverse
changes in either interest rates or foreign exchange rates for a one-day period.
The average value at risk represents the simple average of the quarterly amounts
for the past year. These amounts are not significant compared with the equity,
historical earnings trend or daily change in market capitalization of the
Corporation.
TIME CONFIDENCE
VALUE AT RISK AMOUNTS AMOUNTS AVERAGE INTERVAL LEVEL
- --------------------------------------- ------- ------- -------- ----------
(DOLLARS IN MILLIONS)
Interest rates......................... $ 4.8 $ 4.6 1 day 95%
Foreign exchange....................... 13.6 13.0 1 day 95
SENSITIVITY ANALYSIS
For commodity derivative instruments held, the Corporation utilizes a
sensitivity analysis technique to evaluate the effect that changes in the market
value of commodities will have on the Corporation's commodity derivative
instruments. This analysis includes the commodity derivative instruments and,
thereby, does not consider the underlying exposure. At year-end, the potential
change in fair value of commodity derivative instruments, assuming a 10% change
in the underlying commodity price, was $2.9 million. This amount is not
significant compared with the earnings and equity of the Corporation.
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. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
21
PART III
Item 10. Directors and Executive Officers of Sara Lee.
The following is a list of all current executive officers of Sara Lee
Corporation.
AGE AT FIRST
OCTOBER 29, ELECTED AN
NAME 1998 OFFICES AND POSITIONS HELD OFFICER
- ----------------------- ----------- ---------------------------------------- ----------
John H. Bryan.......... 62 Chairman of the Board, Chief Executive 3/28/74
Officer and Director
C. Steven McMillan..... 52 President, Chief Operating Officer and 3/31/83
Director
Frank L. Meysman....... 46 Executive Vice President and Director 3/31/94
James R. Carlson....... 56 Senior Vice President 7/1/93
Gary C. Grom........... 51 Senior Vice President -- Human Resources 10/25/90
Janet Langford Kelly... 40 Senior Vice President, Secretary and 1/26/95
General Counsel
Mark J. McCarville..... 52 Senior Vice President -- Corporate 6/24/82
Development
Judith A. Sprieser..... 45 Senior Vice President and Chief 11/1/94
Financial Officer
Gerald W. Evans........ 39 Vice President 3/26/98
- ------------
There are no family relationships between any of the above-named executive
officers.
Each of the executive officers listed above has served Sara Lee or its
subsidiaries in various executive capacities for the past five years except
Janet Langford Kelly. Before joining Sara Lee, Ms. Kelly was a partner in the
Chicago office of Sidley & Austin.
For information with respect to the directors of Sara Lee, see "Election of
Directors" contained in the Proxy Statement, which is incorporated herein by
reference.
The information set forth in the Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by
reference.
Item 11. Executive Compensation.
The information set forth in the Proxy Statement under the captions
"Director Compensation" and "Executive Compensation," 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
in the Proxy Statement are not incorporated by reference. The information set
forth in the second paragraph under Item 13 below is also incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) No person or "group" (as that term is used in Section 13(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. As of September 1, 1998,
State Street Bank & Trust Company of Boston, as trustee ("Trustee") of the Sara
Lee Corporation Employee Stock Ownership Plan ("ESOP"), held in trust 4,126,299
shares (100% of the outstanding shares) of Sara Lee's Employee Stock Ownership
Plan Convertible Preferred Stock ("ESOP Stock"), of which 1,714,146 shares (42%)
were allocated to participant accounts and 2,412,153 shares (58%) were
unallocated shares. Each ESOP participant is entitled to direct the Trustee how
to vote the
22
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 5.132 votes. Each share
of ESOP Stock is convertible into four shares of Sara Lee common stock.
(b) Security ownership by management as contained in the Proxy Statement
under the caption "Sara Lee Common Stock and ESOP Stock Ownership by Directors
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. Certain Relationships and Related Transactions.
During fiscal 1998, 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. Messrs. Minow and Jordan served as directors of Sara
Lee during the 1998 fiscal year.
During fiscal 1998, various Sara Lee subsidiaries spent approximately $3.5
million to purchase truck trailers, parts and related services from Great Dane
Limited Partnership, a partnership in which James S. Crown and members of his
immediate family have an interest. Mr. Crown served as a director of Sara Lee
for a portion of the 1998 fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
PAGE
----
(a) 1. FINANCIAL STATEMENTS
Report of Independent Public Accountants........................... F-1
Consolidated Statements of Income -- Years ended June 29, 1996,
June 28, 1997 and June 27, 1998.................................... F-4
Consolidated Balance Sheets -- June 29, 1996, June 28, 1997 and
June 27, 1998...................................................... F-5
Consolidated Statements of Common Stockholders' Equity -- Balances
at June 29, 1996, June 28, 1997 and June 27, 1998.................. F-7
Consolidated Statements of Cash Flows -- Years ended June 29, 1996,
June 28, 1997 and June 27, 1998.................................... F-8
Notes to Financial Statements...................................... F-9
PAGE
----
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants........................... F-29
Schedule II -- Valuation and Qualifying Accounts................... F-30
23
3. EXHIBITS INCORPORATION BY REFERENCE
------------------------------
(3a) Charter Exhibit 4.1 to Registration
Statement No. 33-35760 on Form
S-8 dated July 6, 1990,
Exhibit 4.2 to Registration
Statement No. 33-37575 on Form
S-8 dated November 1, 1990 and
Exhibit 3(a) to Report on Form
10-K for Fiscal Year ended
July 2, 1994.
(3b) Bylaws Exhibit 3(b) to Report on Form
10-K for Fiscal Year ended
June 29, 1996
(4) Sara Lee, by signing this Report, agrees to furnish the Securities and
Exchange Commission, upon its request, a copy of any instrument which
defines the rights of holders of long-term debt of Sara Lee and all of its
subsidiaries for which consolidated or unconsolidated financial statements
are required to be filed, and which authorizes a total amount of
securities not in excess of 10% of the total assets of Sara Lee and its
subsidiaries on a consolidated basis.
(10) 1. 1979 Stock Option Plan, as Exhibit 10(1) to Report on
amended Form 10-K for Fiscal Year
ended July 1, 1995
2. 1981 Stock Option Plan, as Exhibit 10(11) to Report on
amended Form 10-K for Fiscal Year
ended July 1, 1989
3. 1988 Non-Qualified Stock Exhibit 10(3) to Report on
Option Plan, as amended Form 10-K for Fiscal Year
ended July 1, 1995
4. 1989 Incentive Stock Plan, Exhibit 10(4) to Report on
as amended Form 10-K for Fiscal Year
ended June 28, 1997
5. Supplemental Benefit Plan, Exhibit 10(5) to Report on
as amended Form 10-K for Fiscal Year
ended June 28, 1997
6. Performance-Based Annual Appendix A to Proxy Statement
Incentive Plan dated September 20, 1995
7. 1995 Long-Term Incentive Exhibit 10(16) to Report on
Stock Plan, as amended Form 10-K for Fiscal Year
ended June 28, 1997
8. 1995 Non-Employee Director
Stock Plan, as amended
9. 1998 Long-Term Incentive Appendix A to Proxy Statement
Stock Plan dated September 21, 1998
10. Accelerated Growth Exhibit 10(12) to Report on
Incentive Plan Fiscal Years Form 10-K for Fiscal Year
1990-1994 ended June 30, 1990
11. 1991 Non-Qualified Exhibit 10(15) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Base Salary) ended June 29, 1991
12. 1992 Non-Qualified Exhibit 10(15) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Base Salary) ended June 27, 1992
13. FY '93 Non-Qualified Exhibit 10(16) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Annual Bonus) ended June 27, 1992
14. 1993 Non-Qualified Exhibit 10(19) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Base Salary) ended July 3, 1993
24
EXHIBITS INCORPORATION BY REFERENCE
------------------------------
15. FY '94 Non-Qualified Exhibit 10(20) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Annual Bonus) ended July 3, 1993
16. 1994 Non-Qualified Exhibit 10(14) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Base Salary) ended July 2, 1994
17. FY '95 Non-Qualified Exhibit 10(15) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Annual Bonus) ended July 2, 1994
18. Non-Qualified Deferred
Compensation Plan (Annual
Bonus), as amended
19. Non-Qualified Deferred
Compensation Plan for
Outside Directors, as
amended
20. FY 1996-98 Long Term Exhibit 10(20) to Report on
Performance Incentive Plan Form 10-K for Fiscal Year
ended June 29, 1996
21. FY 1997-99 Long Term Exhibit 10(21) to Report on
Performance Incentive Plan Form 10-K for Fiscal Year
ended June 29, 1996
22. FY 1998-00 Long Term
Performance Incentive Plan
23. Non-Qualified Estate Exhibit 10(17) to Report on
Builder Deferred Form 10-K for Fiscal Year
Compensation Plan ended June 29, 1985
24. Severance Policy for Exhibit 10(23) to Report on
Corporate Officers, as Form 10-K for Fiscal Year
amended ended June 28, 1997
25. Employment Agreement, Exhibit 10(24) to Report on
dated January 1, 1996, Form 10-K for Fiscal Year
between Sara Lee ended June 28, 1997
Corporation and Frank L.
Meysman
26. Employment Agreement, Exhibit 10(25) to Report on
dated January 1, 1996, Form 10-K for Fiscal Year
between Sara Lee/ DE N.V. ended June 28, 1997
and Frank L. Meysman and
attachments (translated
from Dutch)
27. Restricted Share Unit
Agreement dated April 29,
1998 between Sara Lee
Corporation and Frank L.
Meysman
28. Stockholder Rights Exhibit 4.1 to Report on Form
Agreement, dated as of 8-K dated May 15, 1998
March 26, 1998 between Sara
Lee Corporation and First
Chicago Trust Company of
New York, as rights agent
(12) 1. Computation of Ratio of
Earnings to Fixed Charges
25
EXHIBITS INCORPORATION BY REFERENCE
------------------------------
2. Computation of Ratio of
Earnings to Fixed Charges
and Preferred Stock
Dividend Requirements
(21) List of Subsidiaries
(23) Consent of Arthur Andersen
LLP
(24) Powers of Attorney
(27) Financial Data Schedules
(b) REPORTS ON FORM 8-K A report on Form 8-K dated May 15, 1998 was
filed during the last quarter of the period
covered by this report. The report on Form 8-K
related to the renewal of the Corporation's
Stockholder Rights Plan.
26
SIGNATURES
Pursuant to the requirements of Section 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 23, 1998
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 23, 1998.
SIGNATURE CAPACITY
- ------------------------------ --------------------------
/s/ JOHN H. BRYAN Chairman of the Board,
- ------------------------------ Chief Executive Officer
John H. Bryan and Director
/s/ C. STEVEN MCMILLAN
- ------------------------------ President, Chief Operating
C. Steven McMillan Officer and Director
/s/ FRANK L. MEYSMAN
- ------------------------------ Executive Vice President
Frank L. Meysman and Director
/s/ JUDITH A. SPRIESER
- ------------------------------ Senior Vice President and
Judith A. Sprieser Chief Financial Officer
/s/ WAYNE R. SZYPULSKI
- ------------------------------ Vice President and
Wayne R. Szypulski Controller
*
- ------------------------------ Director
Paul A. Allaire
*
- ------------------------------ Director
Frans H.J.J. Andriessen
*
- ------------------------------ Director
Duane L. Burnham
*
- ------------------------------ Director
Charles W. Coker
*
- ------------------------------ Director
James S. Crown
27
SIGNATURE CAPACITY
- ------------------------------ --------------------------
*
- ------------------------------ Director
Willie D. Davis
*
- ------------------------------ Director
Allen F. Jacobson
*
- ------------------------------ Director
Vernon E. Jordan, Jr.
*
- ------------------------------ Director
James L. Ketelsen
*
- ------------------------------ Director
Hans B. van Liemt
*
- ------------------------------ Director
Joan D. Manley
*
- ------------------------------ Director
Newton N. Minow
*
- ------------------------------ Director
Sir Arvi H. Parbo A.C.
*
- ------------------------------ Director
Rozanne L. Ridgway
*
- ------------------------------ Director
Richard L. Thomas
*
- ------------------------------ Director
John D. Zeglis
*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.
By: /s/ JANET LANGFORD KELLY
-----------------------------------------
Janet Langford Kelly
AS ATTORNEY-IN-FACT
28
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 27, 1998, June
28, 1997, and June 29, 1996, and the related consolidated statements of income,
common stockholders' equity, and cash flows for each of the three years in the
period ended June 27, 1998. 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 27, 1998, June 28, 1997, and June 29,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended June 27, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
July 27, 1998
F-1
SARA LEE CORPORATION AND SUBSIDIARIES
FINANCIAL SUMMARY
COMPOUND YEARS ENDED
GROWTH RATE ----------------------
------------------------ JUNE 27, JUNE 28,
5 YEARS 10 YEARS 1998(1) 1997
----------- ----------- ---------- ----------
(DOLLARS IN MILLIONS
EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Net sales............................................................. 6.5% 6.7% $ 20,011 $ 19,734
Operating (loss) income............................................... NM NM (97) 1,905
(Loss) income before income taxes..................................... NM NM (443) 1,484
Net (loss) income..................................................... NM NM (523) 1,009
Effective tax rate.................................................... -- -- 18.0% 32.0%
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total assets.......................................................... 0.2% 8.2% $ 10,989 $ 12,953
Total debt............................................................ 4.8 11.8 3,077 2,664
Operating cash flow to average total debt (6)......................... -- -- 56.8% 49.3%
Return on invested capital (7)........................................ -- -- 17.5% 16.0%
- ------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE (8)..................................................
Net (loss) income -- basic............................................ NM NM $ (1.14) $ 2.05
Average shares outstanding (in millions).......................... (0.5)% 0.6% 469 480
Net (loss) income -- diluted.......................................... NM NM (1.14) 1.97
Average shares outstanding (in millions).......................... (1.5) 0.5 469 502
Dividends (9)......................................................... 10.0 12.0 .90 .82
Book value at year-end................................................ (11.6) 1.0 3.94 8.91
Market value at year-end.............................................. 18.5 19.9 56.63 42.06
- ------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Net cash from operating activities.................................... 17.9% 10.2% $ 1,935 $ 1,552
Depreciation.......................................................... 2.2 8.0 427 483
Amortization of intangibles........................................... 6.4 13.6 191 197
Capital expenditures.................................................. (8.2) 0.6 474 547
Media advertising expense............................................. 0.4 4.7 401 414
Total advertising and promotion expense............................... 6.3 9.4 1,972 1,937
Common stockholders of record......................................... -- -- 85,100 88,800
Number of employees................................................... -- -- 139,100 141,000
- ------------------------------------------------------------------------------------------------------------------------
(1) In 1998, a restructuring provision reduced operating income and income
before income taxes by $2,040 and net income by $1,625.
(2) 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.
(3) 53-week year.
(4) 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.
(5) 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.
(6) Average total debt includes total balance sheet debt, imputed lease
liabilities and auction preferred stock.
(7) Excludes unusual items.
(8) Restated for the 2-for-1 stock splits in fiscal 1993 and 1990.
(9) Fiscal 1992 includes a $.12 special dividend.
NM = not meaningful
THE NOTES TO FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL SUMMARY.
F-2
SARA LEE CORPORATION AND SUBSIDIARIES
FINANCIAL SUMMARY
YEARS ENDED
--------------------------------------------------------------------------------------
JUNE 29, JULY 1, JULY 2, JULY 3, JUNE 27, JUNE 29, JUNE 30, JULY 1,
1996 1995 1994(2) 1993(3) 1992(4) 1991 1990 1989(5)
--------- --------- --------- --------- --------- --------- --------- ---------
RESULTS OF OPERATIONS
Net sales................................ $ 18,624 $ 17,719 $ 15,536 $ 14,580 $ 13,243 $ 12,381 $ 11,606 $ 11,718
Operating (loss) income.................. 1,793 1,596 632 1,307 1,207 1,085 938 847
(Loss) income before income taxes........ 1,378 1,219 389 1,082 1,174 830 713 639
Net (loss) income........................ 916 804 199 704 761 535 470 410
Effective tax rate....................... 33.5% 34.1% 39.9% 34.9% 35.2% 35.5% 34.1% 35.8%
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total assets............................. $ 12,602 $ 12,431 $ 11,665 $ 10,862 $ 9,989 $ 8,122 $ 7,636 $ 6,523
Total debt............................... 2,296 2,597 2,859 2,433 1,780 1,772 1,866 1,799
Operating cash flow to average total debt
(6).................................... 41.4% 40.6% 25.8% 31.7% 42.1% 37.3% 25.6% 27.9%
Return on invested capital (7)........... 15.0% 14.6% 12.6% 12.7% 13.3% 13.8% 14.3% 15.3%
- ---------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE (8)
Net (loss) income -- basic............... $ 1.85 $ 1.63 $ .37 $ 1.41 $ 1.55 $ 1.08 $ .96 $ .89
Average shares outstanding (in
millions).......................... 482 478 477 481 471 461 457 448
Net (loss) income -- diluted............. 1.78 1.57 .36 1.36 1.50 1.05 .94 .88
Average shares outstanding (in
millions).......................... 503 498 498 506 496 486 480 454
Dividends (9)............................ .74 .67 .63 .56 .61 .46 .41 .35
Book value at year-end................... 8.91 8.20 6.92 7.31 7.05 5.48 4.97 4.21
Market value at year-end................. 32.50 28.50 20.63 24.25 24.81 20.19 14.56 13.47
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Net cash from operating activities....... $ 1,304 $ 1,373 $ 839 $ 850 $ 976 $ 875 $ 582 $ 493
Depreciation............................. 454 436 414 383 354 302 268 215
Amortization of intangibles.............. 180 170 154 139 118 92 83 65
Capital expenditures..................... 542 480 628 728 509 522 595 541
Media advertising expense................ 444 422 371 392 325 288 313 303
Total advertising and promotion
expense................................ 1,838 1,675 1,498 1,455 1,294 1,067 1,013 925
Common stockholders of record............ 91,300 93,400 95,600 88,100 75,400 69,400 64,800 56,500
Number of employees...................... 135,300 149,100 145,900 138,000 128,000 113,400 107,800 101,800
- ---------------------------------------------------------------------------------------------------------------------------------
JULY 2,
1988(3)
---------
RESULTS OF OPERATIONS
Net sales................................ $ 10,424
Operating (loss) income.................. 753
(Loss) income before income taxes........ 513
Net (loss) income........................ 325
Effective tax rate....................... 36.7%
- -----------------------------------------
FINANCIAL POSITION
Total assets............................. $ 5,012
Total debt............................... 1,013
Operating cash flow to average total debt
(6).................................... 60.6%
Return on invested capital (7)........... 15.1%
- -----------------------------------------
PER COMMON SHARE (8)
Net (loss) income -- basic............... $ .72
Average shares outstanding (in
millions).......................... 442
Net (loss) income -- diluted............. .71
Average shares outstanding (in
millions).......................... 447
Dividends (9)............................ .29
Book value at year-end................... 3.56
Market value at year-end................. 9.22
- -----------------------------------------
OTHER INFORMATION
Net cash from operating activities....... $ 732
Depreciation............................. 198
Amortization of intangibles.............. 53
Capital expenditures..................... 449
Media advertising expense................ 253
Total advertising and promotion
expense................................ 801
Common stockholders of record............ 52,400
Number of employees...................... 85,700
- -----------------------------------------
(1) In 1998, a restructuring provision reduced operating income and income
before income taxes by $2,040 and net income by $1,625.
(2) 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.
(3) 53-week year.
(4) 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.
(5) 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.
(6) Average total debt includes total balance sheet debt, imputed lease
liabilities and auction preferred stock.
(7) Excludes unusual items.
(8) Restated for the 2-for-1 stock splits in fiscal 1993 and 1990.
(9) Fiscal 1992 includes a $.12 special dividend.
NM = not meaningful
THE NOTES TO FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL SUMMARY.
F-3
SARA LEE CORPORATION AND SUBSIDIAIRIES
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS EXCEPT PER SHARE DATA)
YEARS ENDED
-------------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
--------- --------- ---------
NET SALES..................................................................... $ 20,011 $ 19,734 $ 18,624
--------- --------- ---------
Cost of sales................................................................. 12,331 12,267 11,470
Selling, general and administrative expenses.................................. 5,907 5,824 5,603
Interest expense.............................................................. 224 202 228
Interest income............................................................... (48) (43) (55)
Restructuring charge.......................................................... 2,040 -- --
--------- --------- ---------
20,454 18,250 17,246
--------- --------- ---------
(Loss) income before income taxes............................................. (443) 1,484 1,378
Income taxes.................................................................. 80 475 462
--------- --------- ---------
NET (LOSS) INCOME............................................................. (523) 1,009 916
Preferred dividends, net of tax............................................... (14) (26) (27)
--------- --------- ---------
Net (loss) income available for common stockholders........................... $ (537) $ 983 $ 889
--------- --------- ---------
--------- --------- ---------
NET (LOSS) INCOME PER COMMON SHARE -- BASIC................................... $ (1.14) $ 2.05 $ 1.85
--------- --------- ---------
--------- --------- ---------
Average shares outstanding.................................................. 469 480 482
--------- --------- ---------
--------- --------- ---------
NET (LOSS) INCOME PER COMMON SHARE -- DILUTED................................. $ (1.14) $ 1.97 $ 1.78
--------- --------- ---------
--------- --------- ---------
Average shares outstanding.................................................. 469 502 503
--------- --------- ---------
--------- --------- ---------
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
STATEMENTS.
F-4
SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
--------- --------- ---------
ASSETS
Cash and equivalents......................................................... $ 273 $ 272 $ 243
Trade accounts receivable, less allowances of $205 in 1998 and 1997 and $197
in 1996.................................................................... 1,800 1,841 1,728
Inventories
Finished goods............................................................. 1,809 1,803 1,802
Work in process............................................................ 443 497 381
Materials and supplies..................................................... 630 673 624
--------- --------- ---------
2,882 2,973 2,807
Other current assets......................................................... 265 305 303
--------- --------- ---------
Total current assets......................................................... 5,220 5,391 5,081
--------- --------- ---------
Trademarks and other assets.................................................. 501 536 636
Property
Land....................................................................... 126 126 132
Buildings and improvements................................................. 1,895 2,008 1,924
Machinery and equipment.................................................... 2,742 3,777 3,657
Construction in progress................................................... 184 293 263
--------- --------- ---------
4,947 6,204 5,976
Accumulated depreciation................................................... 2,857 3,125 2,969
--------- --------- ---------
Property, net................................................................ 2,090 3,079 3,007
Intangible assets, net....................................................... 3,178 3,947 3,878
--------- --------- ---------
$ 10,989 $ 12,953 $ 12,602
--------- --------- ---------
--------- --------- ---------
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
BALANCE SHEETS.
F-5
SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.................................................................. $ 586 $ 476 $ 319
Accounts payable............................................................... 2,003 1,703 1,592
Accrued liabilities
Payroll and employee benefits................................................ 684 701 702
Advertising and promotion.................................................... 338 337 290
Taxes other than payroll and income.......................................... 223 189 207
Income taxes................................................................. 159 119 101
Other........................................................................ 1,519 1,236 1,296
Current maturities of long-term debt........................................... 221 255 135
--------- --------- ---------
Total current liabilities...................................................... 5,733 5,016 4,642
--------- --------- ---------
Long-term debt................................................................. 2,270 1,933 1,842
Deferred income taxes.......................................................... 22 416 333
Other liabilities.............................................................. 538 543 604
Minority interest in subsidiaries.............................................. 560 523 523
Preferred stock (authorized 13,500,000 shares; no par value)
Auction: Issued and outstanding -- 2,000 shares in 1997 and 3,000 shares in
1996; redeemable at $100,000 per share..................................... -- 200 300
ESOP convertible: Issued and outstanding -- 4,208,297 shares in 1998,
4,328,597 shares in 1997 and 4,468,303 shares in 1996...................... 305 314 324
Unearned deferred compensation............................................... (255) (272) (286)
Common stockholders' equity
Common stock: (authorized 600,000,000 shares; $1.33 1/3 par value) Issued and
outstanding -- 460,664,857 shares in 1998, 480,277,317 shares in 1997 and
485,054,554 shares in 1996................................................. 614 640 646
Capital surplus.............................................................. -- -- 141
Retained earnings............................................................ 2,036 4,274 3,783
Translation adjustments...................................................... (784) (618) (227)
Unearned restricted stock issued for future services......................... (50) (16) (23)
--------- --------- ---------
Total common stockholders' equity.............................................. 1,816 4,280 4,320
--------- --------- ---------
$ 10,989 $ 12,953 $ 12,602
--------- --------- ---------
--------- --------- ---------
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
STATEMENTS.
F-6
SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS EXCEPT SHARE DATA)
UNEARNED
COMMON CAPITAL RETAINED TRANSLATION RESTRICTED
TOTAL STOCK SURPLUS EARNINGS ADJUSTMENTS STOCK
--------- ----------- ----------- ----------- ------------- -------------
BALANCES AT JULY 1, 1995........................ $ 3,939 $ 640 $ 67 $ 3,252 $ 3 $ (23)
Net income...................................... 916 -- -- 916 -- --
Cash dividends
Common ($.74 per share)....................... (358) -- -- (358) -- --
Auction preferred ($4,219.00 per share)....... (13) -- -- (13) -- --
ESOP convertible preferred ($5.4375 per
share)...................................... (24) -- -- (24) -- --
Stock issuances
Business acquisitions......................... 55 3 52 -- -- --
Stock option and benefit plans................ 93 6 87 -- -- --
Restricted stock, less amortization of $13.... 13 1 17 -- -- (5)
Reacquired shares............................... (103) (4) (99) -- -- --
Translation adjustments......................... (230) -- -- -- (230) --
ESOP tax benefit................................ 10 -- -- 10 -- --
ESOP share redemption........................... 7 -- 7 -- -- --
Other........................................... 15 -- 10 -- -- 5
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT JUNE 29, 1996....................... 4,320 646 141 3,783 (227) (23)
Net income...................................... 1,009 -- -- 1,009 -- --
Cash dividends
Common ($.82 per share)....................... (394) -- -- (394) -- --
Auction preferred ($4,000.93 per share)....... (12) -- -- (12) -- --
ESOP convertible preferred ($5.4375 per
share)...................................... (24) -- -- (24) -- --
Stock issuances
Business acquisitions......................... 18 1 17 -- -- --
Stock option and benefit plans................ 93 6 87 -- -- --
Restricted stock, less amortization of $19.... 19 -- 13 -- -- 6
Reacquired shares............................... (393) (14) (281) (98) -- --
Translation adjustments......................... (391) -- -- -- (391) --
ESOP tax benefit................................ 10 -- -- 10 -- --
ESOP share redemption........................... 10 1 9 -- -- --
Other........................................... 15 -- 14 -- -- 1
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT JUNE 28, 1997....................... 4,280 640 -- 4,274 (618) (16)
Net loss........................................ (523) -- -- (523) -- --
Cash dividends
Common ($.90 per share)....................... (423) -- -- (423) -- --
Auction preferred ($458.00 per share)......... (1) -- -- (1) -- --
ESOP convertible preferred ($5.4375 per
share)...................................... (23) -- -- (23) -- --
Stock issuances
Business acquisitions......................... 10 -- 10 -- -- --
Stock option and benefit plans................ 86 8 78 -- -- --
Restricted stock, less amortization of $42.... 34 1 67 -- -- (34)
Reacquired shares............................... (1,500) (36) (186) (1,278) -- --
Translation adjustments......................... (166) -- -- -- (166) --
ESOP tax benefit................................ 10 -- -- 10 -- --
ESOP share redemption........................... 9 1 8 -- -- --
Other........................................... 23 -- 23 -- -- --
--------- ----- ----- ----------- ----- ---
BALANCES AT JUNE 27, 1998....................... $ 1,816 $ 614 $ -- $ 2,036 $ (784) $ (50)
--------- ----- ----- ----------- ----- ---
--------- ----- ----- ----------- ----- ---
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
STATEMENTS.
F-7
SARA LEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEARS ENDED
-----------------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
--------- ----------- -----------
OPERATING ACTIVITIES
Net (loss) income......................................................... $ (523) $ 1,009 $ 916
Adjustments for noncash charges included in net (loss) income
Depreciation............................................................ 427 483 454
Amortization of intangibles............................................. 191 197 180
Restructuring charge.................................................... 2,040 -- --
(Decrease) increase in deferred taxes................................... (405) 40 31
Other noncash credits, net.............................................. (5) (56) (77)
Changes in current assets and liabilities, net of businesses acquired
and sold
Decrease (increase) in trade accounts receivable...................... 6 (66) (138)
(Increase) in inventories............................................. (27) (129) (83)
Decrease (increase) in other current assets........................... 34 17 (63)
Increase in accounts payable.......................................... 20 59 95
Increase (decrease) in accrued liabilities............................ 177 (2) (11)
--------- ----------- -----------
Net cash from operating activities...................................... 1,935 1,552 1,304
--------- ----------- -----------
INVESTMENT ACTIVITIES
Purchases of property and equipment....................................... (474) (547) (542)
Acquisitions of businesses................................................ (393) (674) (216)
Dispositions of investments and businesses................................ 451 114 12
Sales of property......................................................... 140 59 49
Other..................................................................... 1 6 4
--------- ----------- -----------
Net cash used in investment activities.................................. (275) (1,042) (693)
--------- ----------- -----------
FINANCING ACTIVITIES
Issuances of common stock................................................. 86 93 93
Purchases of common stock................................................. (1,500) (393) (103)
Redemption of preferred stock............................................. (200) (100) --
Borrowings of long-term debt.............................................. 594 495 354
Repayments of long-term debt.............................................. (296) (252) (369)
Short-term borrowings (repayments), net................................... 113 119 (135)
Payments of dividends..................................................... (447) (430) (395)
--------- ----------- -----------
Net cash used in financing activities................................... (1,650) (468) (555)
--------- ----------- -----------
Effect of changes in foreign exchange rates on cash....................... (9) (13) (15)
--------- ----------- -----------
Increase in cash and equivalents.......................................... 1 29 41
Cash and equivalents at beginning of year................................. 272 243 202
--------- ----------- -----------
Cash and equivalents at end of year....................................... $ 273 $ 272 $ 243
--------- ----------- -----------
--------- ----------- -----------
THE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
STATEMENTS.
F-8
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 $861 at June 27, 1998, $896 at
June 28, 1997 and $811 at June 29, 1996.
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 1998, approximately 19% at
last-in, first-out [LIFO] and the remainder at first-in, first-out [FIFO]) or
market. Inventories recorded at LIFO were approximately $8 at June 27, 1998, $32
at June 28, 1997 and $36 at June 29, 1996, 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.
F-9
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) (Continued)
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 to manage its exposure to
movements in interest rates, foreign exchange rates and commodity prices. The
use of these financial instruments modifies the exposure of these risks with the
intent to reduce the risk to the Corporation. The Corporation does not use
financial instruments for trading purposes, nor is it a party to leveraged
derivatives.
FINANCING TRANSACTIONS
Non-U.S. dollar financing transactions are generally effective as hedges of
long-term investments in the corresponding currency. Foreign currency gains or
losses on the hedges of long-term investments are recorded in the translation
adjustments component of common stockholders' equity with the offset recorded as
an adjustment to the non-U.S. dollar financing liability.
INTEREST RATE AGREEMENTS
Interest rate exchange agreements, defined as swaps, and caps and floors,
are effective at creating synthetic instruments and thereby modifying the
corporation's interest rate exposures. The Corporation enters into interest rate
exchange agreements to create synthetic instruments. Net interest is accrued as
either interest receivable or payable with the offset recorded in interest
expense. Any premium paid is amortized over the life of the agreement.
FORWARD EXCHANGE CONTRACTS
The Corporation uses primarily short-term forward exchange contracts for
hedging purposes to reduce the effects of adverse foreign exchange rate
movements. The contracts that effectively meet the risk reduction and
correlation criteria, as measured on a currency-by-currency basis, are accounted
for using hedge accounting. Under this method, the change in fair value of
forward contracts that hedge firm commitments is deferred and recognized as part
of the related foreign currency transactions as they occur. Firm commitments
include the purchases of inventory, capitalized assets or expenses of the
Corporation. The change in fair value of any forward contract that is not
effective as a hedge of the firm commitment is included in selling, general and
administrative expenses and other accrued liabilities.
Forward contracts that hedge the currency exposure on nonpermanent
intercompany loans are also accounted for using hedge accounting if the contract
meets the risk reduction and correlation criteria, as measured on a
currency-by-currency basis. Under hedge accounting, these contracts are valued
at current spot rates on a monthly basis, and the change in value is recognized
currently and included, along with any amortization of forward points over the
life of the contract, in selling, general and administrative expenses. Any
foreign exchange gain or loss on the underlying intercompany loan is also
included in selling, general and administrative expenses. Changes in the value
of forward contracts related to anticipated purchases and sales are marked to
market through selling, general and administrative expenses on a monthly basis.
F-10
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
If, subsequent to entering into a hedge transaction with forward contracts,
the underlying transaction is no longer likely to occur, the hedge position is
removed and any gain or loss is included in selling, general and administrative
expenses.
COMMODITIES
The Corporation uses commodity futures and purchased options for hedging
purposes to reduce the effect of changing commodity prices. The contracts that
effectively meet the risk reduction and correlation criteria, as measured on a
commodity-by-commodity basis, are recorded using hedge accounting. Effectiveness
is measured based upon high correlation between commodity gains and losses on
the futures contract and those on the firm commitment. Under hedge accounting,
the gain or loss on the hedge is deferred and recorded as a component of the
underlying inventory purchase. Gains and losses on hedges that are terminated
prior to the execution of the inventory purchase are recorded in inventory until
the inventory is sold.
STOCK-BASED COMPENSATION
The Corporation accounts for stock options using Accounting Principles Board
Opinion No. 25 (APB 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.
COMMON STOCK
Changes in outstanding common shares for the past three years were:
1998 1997 1996
------- ------- -------
(SHARES IN THOUSANDS)
Beginning balances................................... 480,277 485,055 480,656
Stock issuances:
Stock option and benefit plans..................... 6,008 4,566 4,438
Restricted stock plans............................. 833 88 394
Business acquisitions.............................. 176 549 2,567
Stock purchased/retired.............................. (27,174) (10,609) (3,375)
ESOP share redemption................................ 462 560 457
Other................................................ 83 68 (82)
------- ------- -------
Ending balances...................................... 460,665 480,277 485,055
------- ------- -------
------- ------- -------
F-11
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
PREFERRED STOCK
During 1998, the Corporation redeemed the remaining non-voting auction
preferred stock. The shares were redeemed at face value, and no gain or loss was
recognized.
The dividend rate for each of the series of auction preferred stock was
established through a Dutch auction conducted by an agent of the Corporation.
Auctions were held six out of every seven weeks with the dividend rate for one
of the series set at each auction.
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 5.132 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.
ESOP-related expenses amounted to $16 in 1998 and $13 in 1997 and 1996.
Payments to the ESOP were $45 in 1998, $43 in 1997 and $41 in 1996. Principal
and interest payments by the ESOP amounted to $23 and $22 in 1998, $19 and $24
in 1997 and $16 and $25 in 1996, respectively.
The Corporation has a Preferred Stock Purchase Rights Plan. The Rights are
exercisable 10 days after certain events involving the acquisition of 15% or
more of the Corporation's outstanding common stock or the commencement of a
tender or exchange offer for at least 15% 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, upon exercise and payment of the
exercise price, common stock equal to twice the exercise price of the Right. The
initial exercise price of a Right is $215, subject to adjustment. There are
6,000,000 shares of preferred stock reserved for issuance upon exercise of the
Rights.
MINORITY INTEREST IN SUBSIDIARIES
Minority interest in subsidiaries consists primarily 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.
Minority interest in subsidiaries 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 2004 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.
$200 of the minority interest in subsidiaries consists of preferred equity
securities issued by a domestic subsidiary of the Corporation. The securities
provide the holder a rate of return based upon a specified inter-bank borrowing
rate, are redeemable in 2005 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.
F-12
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
STOCK-BASED COMPENSATION
The Corporation has various stock award and stock option plans, and an
employee stock purchase plan. Under the stock award and stock option plans, the
Corporation is authorized to grant up to 25 million shares of common stock.
Under the employee stock purchase plan, the Corporation is authorized to sell
and issue up to 60 million shares of common stock to its full-time employees.
The Corporation applies APB 25 and related interpretations in accounting for
its stock-based compensation plans. During 1997, the Corporation adopted
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," which requires pro forma disclosures regarding the
Corporation's plans.
STOCK AWARDS
Stock awards are restricted as to disposition and subject to forfeiture
until the Corporation achieves certain financial goals. Performance goals
typically extend over three years. All restricted stock awards entitle the
participant to full voting rights and dividends that are escrowed until the
participant receives the shares. Upon the issuance of restricted shares,
unearned compensation is recognized and is amortized over the performance
period.
STOCK OPTIONS
The exercise price of each stock option equals 100% of the market price of
the Corporation's stock on the date of grant and generally has a maximum term of
10 years. Options generally vest ratably over three years. During 1998, the
Corporation instituted a broad-based stock option incentive program that granted
approximately 5 million options to essentially all full-time employees.
Under certain stock option plans, an active employee may 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 is 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. Replacement
stock options generally vest six months from the grant date.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model and the following weighted average
assumptions:
1998 1997 1996
--------- --------- ---------
Expected lives................................. 3.6 years 2.9 years 2.8 years
Risk-free interest rate........................ 6.0% 6.1% 5.9%
Expected volatility............................ 22.4% 22.9% 24.3%
Dividend yield................................. 2.0% 2.2% 2.4%
F-13
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
A summary of the changes in the Corporation's option plans during the years
ended June 27, 1998, June 28, 1997 and June 29, 1996 is presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------
(SHARES IN
THOUSANDS)
Outstanding at July 1, 1995................................... 15,947 $24.26
Granted..................................................... 7,658 29.07
Exercised................................................... (5,733) 25.63
Canceled/Expired............................................ (446) 26.57
------ --------
Outstanding at June 29, 1996.................................. 17,426 25.86
Granted..................................................... 8,328 34.31
Exercised................................................... (5,943) 26.87
Canceled/Expired............................................ (560) 27.81
------ --------
Outstanding at June 28, 1997.................................. 19,251 29.14
Granted..................................................... 21,141 44.60
Exercised................................................... (9,088) 30.35
Canceled/Expired............................................ (755) 37.37
------ --------
Outstanding at June 27, 1998.................................. 30,549 $39.28
------ --------
------ --------
The following table summarizes information about stock options outstanding
at June 27, 1998:
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AT JUNE 27, CONTRACTUAL EXERCISE AT JUNE 27, EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE (YRS.) PRICE 1998 PRICE
- ---------------------------------------------------- ----------- --------------- ----------- ----------- -----------
(SHARES IN THOUSANDS)
$11.27-$32.06....................................... 9,361 6.2 $ 28.34 5,462 $ 26.65
32.07- 41.06....................................... 16,067 8.6 40.77 2,125 39.25
41.07- 63.19....................................... 5,121 4.9 54.59 3,406 52.30
--
----------- ----------- ----------- -----------
$11.27-$63.19....................................... 30,549 7.2 $ 39.28 10,993 $ 37.03
--
--
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
At June 28, 1997 and June 29, 1996 the number of options exercisable were
9,614 and 8,961, respectively, with weighted average exercise prices of $27.37
and $24.90, respectively. Options available for future grant at the end of 1998,
1997 and 1996 were 14,848, 18,853 and 24,388, respectively. The weighted average
fair value of individual options granted during 1998, 1997 and 1996 was $8.55,
$5.75 and $4.87, respectively.
EMPLOYEE STOCK PURCHASE PLAN (ESPP)
The ESPP permits full-time employees to purchase a limited number of shares
of the Corporation's common stock at 85% of market value. Under the plan, the
Corporation sold 1,151,556, 1,541,592 and 1,794,552 shares to employees in 1998,
1997 and 1996, respectively. Pro forma compensation expense is calculated for
the fair value of the employee's purchase rights using the Black-Scholes model.
Assumptions include an expected life of 1/4 of a year, weighted average
risk-free interest rates of 5.2%, 5.1% and 5.0%
F-14
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
in 1998, 1997 and 1996, respectively, and other assumptions that are consistent
with those used for the Corporation's stock option plans described above.
Under APB 25, no compensation cost is recognized for stock options and
replacement stock options under the various stock-based compensation plans and
shares purchased under the ESPP. Had compensation cost for the Corporation's
grants for stock-based compensation been determined consistent with SFAS 123,
the pro forma net (loss) income and per share net (loss) income for 1998, 1997
and 1996 would have been as follows:
1998 1997 1996
------ ----- -----
Net (loss) income......................................... $ (599) $ 981 $ 897
Net (loss) income per share -- basic...................... (1.31) 1.99 1.81
Net (loss) income per share -- diluted.................... (1.31) 1.92 1.74
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1996,
and additional awards in future years are anticipated.
EARNINGS PER SHARE
At the end of the second quarter of 1998, the Corporation adopted SFAS No.
128, "Earnings Per Share," which requires the reporting of both basic and
diluted earnings per share. Net income per share -- basic is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Net income per share -- diluted
reflects the potential dilution that could occur if options or other contracts
to issue common stock were exercised or converted into common stock. Prior
periods have been restated to reflect the new standard.
The following is a reconciliation of net income to net income per share --
basic and diluted for the years ended June 27, 1998, June 28, 1997 and June 29,
1996:
1998 1997 1996
------ ------ -----
(SHARES IN MILLIONS)
Net (loss) income........................................ $ (523) $1,009 $ 916
Less dividends on preferred stocks, net of tax
benefits............................................... (14) (26) (27)
------ ------ -----
(Loss) income applicable to common shareholders --
basic.................................................. (537) 983 889
Adjustment for assumed conversion of ESOP shares......... -- 8 8
------ ------ -----
(Loss) income applicable to common shareholders --
diluted................................................ $ (537) $ 991 $ 897
------ ------ -----
------ ------ -----
Average shares outstanding -- basic...................... 469 480 482
Dilutive effect of stock option and stock award plans.... -- 5 3
Dilutive effect of ESOP plan............................. -- 17 18
------ ------ -----
Diluted shares outstanding............................... 469 502 503
------ ------ -----
------ ------ -----
Net (loss) income per share -- basic..................... $(1.14) $ 2.05 $1.85
------ ------ -----
------ ------ -----
Net (loss) income per share -- diluted................... $(1.14) $ 1.97 $1.78
------ ------ -----
------ ------ -----
F-15
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-, French franc- and
Swiss franc-denominated investments and French franc-denominated intercompany
loans. The weighted average maturities of interest rate and currency swaps as of
June 27, 1998 were 0.9 years and 1.0 years, respectively.
WEIGHTED
AVERAGE
INTEREST
RATES(2)
NOTIONAL -------------
PRINCIPAL(1) RECEIVE PAY
------------ ------- ---
INTEREST RATE SWAPS
1998 Receive variable -- pay fixed................. $199 4.4% 4.7%
1997 Receive variable -- pay fixed................. 98 4.1 4.4
Receive fixed -- pay variable................. 25 7.1 5.4
1996 Receive fixed -- pay variable................. 25 7.1 5.3
CURRENCY SWAPS
1998 Receive fixed -- pay fixed.................... $259 6.4% 3.9%
1997 Receive fixed -- pay fixed.................... 259 6.4 4.1
1996 Receive fixed -- pay fixed.................... 85 8.0 5.8
- ------------
(1) The notional principal is the amount used for the calculation of interest
payments that 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 $99, 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.
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
F-16
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
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.
BOUGHT (SOLD)
-------------------
FOREIGN CURRENCY 1998 1997 1996
- ------------------------------------------------------------ ----- ----- -----
French franc................................................ $ 121 $ (44) $ 125
Italian lira................................................ (424) (402) (287)
Spanish peseta.............................................. (57) (69) (40)
Dutch guilder............................................... (659) (191) (194)
German mark................................................. (56) (65) 50
Other....................................................... (208) (183) (263)
At June 27, 1998, 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 material losses,
because of these control procedures.
Trade accounts receivable due from highly leveraged customers were $72 at
June 27, 1998, $64 at June 28, 1997 and $53 at June 29, 1996. 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 $30 at June 27, 1998, $24 at June 28, 1997 and $29 at June 29,
1996. 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 27, 1998, June 28, 1997 and June 29, 1996. The fair values of the
remaining financial instruments recognized on the Consolidated Balance Sheets of
the corporation at the respective year-end were:
1998 1997 1996
------ ------ ------
Long-term debt, including current portion............... $2,593 $2,258 $1,993
ESOP convertible preferred stock........................ 972 751 615
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
F-17
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
borrowing arrangements. The fair value of the ESOP preferred stock 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 27, 1998, June 28, 1997 and June
29, 1996. The fair value of these instruments was not material to the financial
position of the Corporation.
LONG-TERM DEBT
INTEREST RATE
RANGE MATURITY 1998 1997 1996
------------------ ----------- --------- --------- ---------
U.S. dollar
obligations: ESOP debt........................... 5.73-8.18% 2004 $ 253 $ 276 $ 295
Notes and debentures................ 4.75-8.37 1999-2008 1,271 1,038 1,330
Revenue bonds....................... 3.55-5.70 2002-2024 60 55 46
Zero coupon notes................... 10.00-14.25 2014-2015 19 17 15
Various other obligations........... 4 4 4
--------- --------- ---------
1,607 1,390 1,690
--------- --------- ---------
Foreign currency
obligations: Swiss franc......................... 4.01-4.02 2000 83 71 --
Dutch guilder....................... 4.17-4.75 2000-2002 148 355 235
French franc........................ 3.46-5.00 1999-2004 562 305 --
Various other obligations........... 91 67 52
--------- --------- ---------
884 798 287
--------- --------- ---------
Total long-term
debt............. 2,491 2,188 1,977
Less current
maturities....... 221 255 135
--------- --------- ---------
$ 2,270 $ 1,933 $ 1,842
--------- --------- ---------
--------- --------- ---------
The ESOP debt is guaranteed by the Corporation.
The zero coupon notes are net of unamortized discounts of $105 in 1998, $107
in 1997 and $109 in 1996. Principal payments of $19 and $105 are due in 2014 and
2015, respectively.
Payments required on long-term debt during the years ending in 1999 through
2003 are $221, $338, $212, $472 and $210, respectively.
The Corporation made cash interest payments of $219, $202 and $236 in 1998,
1997 and 1996, respectively.
Rental expense under operating leases amounted to approximately $204 in
1998, $214 in 1997 and $222 in 1996. Future minimum annual fixed rentals
required during the years ending in 1999 through 2003 under noncancelable
operating leases having an original term of more than one year are $130, $107,
$92, $81 and $72, respectively. The aggregate obligation subsequent to 2003 is
$119.
F-18
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
The Corporation is contingently liable for long-term leases on properties
operated by others. The minimum annual rentals under these leases average
approximately $4 for the years ending in 1999-2003 and $1 in 2004-2008. Amounts
thereafter are not material.
CREDIT FACILITIES
The Corporation has numerous credit facilities available, including
revolving credit agreements totaling $1,620 that had an annual fee of 0.05% as
of June 27, 1998. These agreements support commercial paper borrowings. Selected
data on the Corporation's short-term obligations follow:
1998 1997 1996
------ ------ ------
Maximum period-end borrowings........................... $1,895 $1,735 $1,709
Average borrowings during the year...................... 1,482 1,502 1,532
Weighted average interest rate during the year.......... 4.7% 4.8% 6.1%
Weighted average interest rate at year-end.............. 5.5 5.7 6.6
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:
WRITEDOWN OF RECOGNITION OF
LONG-LIVED CURTAILMENT
ASSETS TO LOSS AND
ORIGINAL NET SPECIAL FOREIGN RESTRUCTURING
RESTRUCTURING REALIZABLE TERMINATION CASH EXCHANGE RESERVES AS OF
RESERVES VALUE BENEFITS PAYMENTS IMPACTS JUNE 27, 1998
------------- ------------ --------------- ----------- ------------- ---------------
Anticipated losses associated
with disposal of long-lived
assets....................... $ 1,729 $ (1,729) $ -- $ -- $ -- $ --
Pension and social costs....... 219 -- (39) (20) -- 160
Anticipated expenditures to
close and dispose of idled
facilities -- includes
noncancelable lease
obligations.................. 47 -- -- (8) -- 39
Anticipated loss associated
with the disposal of equity
and cost method
investments.................. 45 (45) -- -- -- --
------ ------------ --- --- --- -----
2,040 (1,774) (39) (28) -- 199
Foreign exchange impacts....... -- -- -- -- (5) (5)
------ ------------ --- --- --- -----
Total restructuring reserves... $ 2,040 $ (1,774) $ (39) $ (28) $ (5) $ 194
------ ------------ --- --- --- -----
------ ------------ --- --- --- -----
F-19
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
In the second quarter of 1998, the Corporation provided for the cost of
restructuring its worldwide operations. The planned restructuring activities
include the disposition of 116 manufacturing and distribution facilities -- 86
facilities are owned and 30 are leased. This restructuring provision reduced
income before income taxes, net income and net income per common share -- basic
in 1998 by $2,040, $1,625 and $3.46 per share, respectively. The 1998 pretax
income includes charges for restructuring as follows: Branded Apparel -- $1,574;
Sara Lee Foods -- $208; Household and Body Care -- $185; Coffee and Tea -- $71;
and Foodservice -- $2.
Through June 27, 1998, 14 manufacturing and distribution facilities have
been sold and 26 additional facilities have been closed. These facilities
comprise 49% of the anticipated loss included in the restructuring charge.
Operating costs were lowered in 1998 by $61, primarily as a result of lower
plant overhead and amortization expense. Restructuring actions are expected to
be completed by 2000, and the corporation expects to fund the costs of the plan
from internal sources and available borrowing capacity.
ACQUISITIONS AND DIVESTMENTS
During 1998, the Corporation acquired several companies for an aggregate
purchase price of $393 in cash and $10 of common stock. The principal
acquisitions were Nutri-Metics International Holding Pty. Ltd., an Australian
manufacturer and direct marketer of skin care products and toiletries; Cafe do
Ponto, S.A., a Brazilian manufacturer and retailer of roasted and ground coffee;
and Hornimans, a tea and sweetener distributor in Spain. The Corporation also
divested the production facilities and related working capital of its yarn and
textile manufacturing business. A loss was recognized on the disposition of the
manufacturing facilities in connection with the 1998 restructuring, and the
related working capital was sold for its net book value.
In the fourth quarter of fiscal 1998, the Corporation announced plans to
sell its international cut tobacco business, Douwe Egberts Van Nelle Tobacco, to
Imperial Tobacco Group PLC, a major tobacco company based in the United Kingdom.
Cash proceeds of $391 were received in July 1998. Additional cash payments may
be received beginning in 2004; however, these payments are dependent upon
significant contingencies related to the ongoing operation of the sold business.
Receipt of these contingent payments is not assured.
During 1997, the Corporation acquired several companies for an aggregate
purchase price of $674 in cash and $18 of common stock. The principal
acquisitions were Aoste, a European manufacturer of processed meat products;
Lovable Italiana S.p.A., an Italian intimate apparel company; and Brossard
France S.A., a French manufacturer and marketer of bakery products. The
Corporation also divested a minority ownership position in JP Foodservice, a
domestic distributor of food products, and a controlling interest in Aris
Isotoner, a manufacturer of gloves and accessories. No material gain or loss was
recognized on these 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. In addition, common stock having a
value of $55 was issued as consideration for the Consolidated Foodservice
Companies acquisition.
F-20
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
RETIREMENT PLANS
The Corporation has noncontributory defined benefit plans covering certain
of its domestic employees. The benefits under these plans are based primarily 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, and corporate and
government debt securities.
The components of the defined benefit plan expenses were:
1998 1997 1996
----- ----- -----
Benefits earned by employees................................ $ 63 $ 64 $ 58
Interest on projected benefit obligations................... 124 120 120
Actual investment return on plan assets..................... (444) (214) (312)
Net amortization and deferral............................... 292 67 182
----- ----- -----
Net pension expense......................................... $ 35 $ 37 $ 48
----- ----- -----
----- ----- -----
The reduction in the 1997 defined benefit plan expense is attributable
primarily to higher asset returns and the strengthening of the U.S. dollar
relative to foreign currencies.
The funded status of defined benefit plans at the respective year-end was:
1998 1997 1996
------ ------ ------
Fair market value of plan assets........................ $2,306 $1,956 $1,854
------ ------ ------
Actuarial present value of benefits for services
rendered:
Accumulated benefits based on salaries to date:
Vested.............................................. 2,051 1,558 1,505
Nonvested........................................... 68 64 55
Additional benefits based on estimated future salary
levels.............................................. 178 164 154
------ ------ ------
Projected benefit obligations......................... 2,297 1,786 1,714
------ ------ ------
Excess of plan assets over projected benefit
obligations........................................... 9 170 140
Unamortized net transitional asset...................... (4) (10) (12)
Unrecognized net loss (gain)............................ 85 (21) (24)
Unrecognized prior service cost......................... 99 52 66
------ ------ ------
Prepaid pension asset recognized on the Consolidated
Balance Sheets........................................ $ 189 $ 191 $ 170
------ ------ ------
------ ------ ------
Net pension expense is determined using assumptions as of the beginning of
each year. Funded status is determined using assumptions as of the end of each
year. The weighted average assumptions at the respective year-end were:
1998 1997 1996
---- ---- ----
Discount rate........................................... 6.0% 7.2% 7.3%
Rate of compensation increase........................... 4.7 4.7 4.7
Long-term rate of return on plan assets................. 8.1 8.3 8.3
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
F-21
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
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:
1998 1997 1996
---- ---- ----
Benefits earned by employees................................. $ 5 $ 5 $ 5
Interest on projected benefit obligations.................... 12 12 13
Net amortization and deferral................................ -- 1 1
---- ---- ----
Net postretirement benefit expense........................... $17 $18 $19
---- ---- ----
---- ---- ----
The status of postretirement benefit plans at the respective year-end was:
1998 1997 1996
---- ---- ----
Actuarial present value of benefits for services rendered:
Retirees................................................... $112 $102 $101
Fully eligible active participants......................... 31 16 16
Other active participants.................................. 61 60 56
---- ---- ----
Accumulated postretirement benefit obligations............... 204 178 173
Fair market value of plan assets............................. 2 2 2
---- ---- ----
Accumulated postretirement benefit obligations in excess of
plan assets................................................ 202 176 171
Unrecognized net transitional asset.......................... 3 3 --
Unrecognized net (loss) gain................................. (9) 19 17
Unrecognized prior service cost.............................. 2 2 --
---- ---- ----
Postretirement benefit obligations recognized on the
Consolidated Balance Sheets................................ $198 $200 $188
---- ---- ----
---- ---- ----
Discount rate................................................ 6.3% 7.2% 7.2%
---- ---- ----
---- ---- ----
The assumed health care cost trend rate was 12% for 1998, decreasing to 8%
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 1 percentage point in each year would increase the accumulated postretirement
benefit obligation as of June 27, 1998 by 13% and the postretirement benefit
expense for 1998 by 16%.
F-22
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
INCOME TAXES
The provisions for income taxes computed by applying the U.S. statutory rate
to income before taxes as reconciled to the actual provisions were:
1998 1997 1996
---------------- --------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------ -------
(Loss) income before provision for income taxes:
United States.............................................................. $(1,091) (246.4)% $ 742 50.0% $ 638 46.3%
Foreign.................................................................... 648 146.4 742 50.0 740 53.7
------- ------- ------ ------- ------ -------
$ (443) (100.0)% $1,484 100.0% $1,378 100.0%
------- ------- ------ ------- ------ -------
------- ------- ------ ------- ------ -------
Tax (benefit) expense at U.S. statutory rate................................. $ (155) (35.0)% $ 519 35.0% $ 482 35.0%
State taxes, net of federal benefit.......................................... 9 2.0 13 .9 15 1.1
Difference between U.S. and foreign rates.................................... (76) (17.1) (85) (5.7) (68) (5.0)
Nondeductible amortization................................................... 351 79.3 62 4.2 54 3.9
Other, net................................................................... (49) (11.2) (34) (2.4) (21) (1.5)
------- ------- ------ ------- ------ -------
Taxes at effective worldwide tax rates....................................... $ 80 18.0% $ 475 32.0% $ 462 33.5%
------- ------- ------ ------- ------ -------
------- ------- ------ ------- ------ -------
Current and deferred tax provisions (benefits) were:
1998 1997 1996
------------------------ ------------------------ ------------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
----------- ----------- ----------- ----------- ----------- -----------
United States........................................ $ 142 $ (286) $ 169 $ 12 $ 166 $ 25
Foreign.............................................. 329 (118) 245 28 237 10
State................................................ 14 (1) 21 -- 28 (4)
----- ----- ----- --- ----- ---
$ 485 $ (405) $ 435 $ 40 $ 431 $ 31
----- ----- ----- --- ----- ---
----- ----- ----- --- ----- ---
Following are the components of the deferred tax (benefits) provisions
occurring as a result of transactions being reported in different years for
financial and tax reporting:
1998 1997 1996
----- ---- ----
Depreciation................................................. $ (3) $ (2) $ 22
Inventory valuation methods.................................. 6 37 (35)
Nondeductible reserves....................................... (405) 53 77
Other, net................................................... (3) (48) (33)
----- ---- ----
$(405) $ 40 $ 31
----- ---- ----
----- ---- ----
Cash payments for income taxes............................... $ 288 $340 $224
----- ---- ----
----- ---- ----
F-23
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:
1998 1997 1996
----- ----- -----
Deferred tax (assets) liabilities:
Restructuring reserves................................... $ (68) $ -- $ (89)
Reserves not deductible until paid....................... (287) (295) (253)
Pension, postretirement and other employee benefits...... (12) (42) (35)
Net operating loss and other tax carryforwards........... (15) (1) (2)
Property, plant and equipment............................ (4) 309 298
Other.................................................... (60) (12) --
----- ----- -----
Net deferred tax (assets).................................. $(446) $ (41) $ (81)
----- ----- -----
----- ----- -----
F-24
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 5 through 9. During the fourth quarter of 1998,
the Corporation adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). The adoption of SFAS 131 requires the presentation of descriptive
information about reportable segments which is consistent with that made
available to the management of the Corporation to assess performance. As a
result of this change, the Corporation now reports segment performance on an
after-tax basis and separately reports information on its Foodservice
operations. In determining the net income of each segment of the Corporation,
interest expense is allocated based upon the average invested capital in each
business, and effective tax rates are determined for each business segment. The
Foodservice business was previously included in a reportable segment which
included the Corporation's packaged meats and bakery businesses. The packaged
meats and bakery businesses are now presented in the Sara Lee Foods segment.
HOUSEHOLD
SARA LEE COFFEE AND AND BODY BRANDED INTER-
FOODS TEA CARE FOODSERVICE APPAREL CORPORATE SEGMENT
----------- ----------- ----------- ----------- ----------- ----------- -----------
1998
Sales(1)........................... $ 5,441 $ 2,806 $ 2,003 $ 2,585 $ 7,317 $ -- $ (141)
Operating income (loss)(2)......... 230 358 67 88 (840) (170) --
Net interest....................... (30) (16) (31) (7) (92) -- --
Pretax income (loss)............... 200 342 36 81 (932) (170) --
Net income (loss)(3)............... 119 239 (22) 51 (797) (113) --
Assets............................. 2,157 1,434 2,053 519 4,627 199(4) --
Depreciation and
amortization...................... 146 87 88 23 251 23 --
Additions to long-lived assets..... 257 187 328 52 169 3 --
- ------------------------------------------------------------------------------------------------------------------------------
1997
Sales(1)........................... $ 5,357 $ 2,813 $ 1,843 $ 2,372 $ 7,482 $ -- $ (133)
Operating income................... 394 440 228 82 761 (262) --
Net interest....................... (24) (12) (24) (5) (94) -- --
Pretax income...................... 370 428 204 77 667 (262) --
Net income......................... 232 290 130 48 483 (174) --
Assets............................. 2,295 1,921 1,530 454 6,471 282(4) --
Depreciation and
amortization...................... 150 90 78 17 326 19 --
Additions to long-lived assets..... 674 107 85 45 401 4 --
- ------------------------------------------------------------------------------------------------------------------------------
1996
Sales(1)........................... $ 4,422 $ 2,896 $ 1,837 $ 2,201 $ 7,370 $ -- $ (102)
Operating income................... 349 428 214 73 729 (242) --
Net interest....................... (21) (13) (24) (6) (109) -- --
Pretax income...................... 328 415 190 67 620 (242) --
Net income......................... 207 273 118 41 436 (159) --
Assets............................. 1,629 2,033 1,571 416 6,635 318(4) --
Depreciation and
amortization...................... 118 86 78 17 312 23 --
Additions to long-lived assets..... 157 188 141 25 279 13 --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL
---------
1998
Sales(1)........................... $ 20,011
Operating income (loss)(2)......... (267)
Net interest....................... (176)
Pretax income (loss)............... (443)
Net income (loss)(3)............... (523)
Assets............................. 10,989
Depreciation and
amortization...................... 618
Additions to long-lived assets..... 996
- -----------------------------------
1997
Sales(1)........................... $ 19,734
Operating income................... 1,643
Net interest....................... (159)
Pretax income...................... 1,484
Net income......................... 1,009
Assets............................. 12,953
Depreciation and
amortization...................... 680
Additions to long-lived assets..... 1,316
- -----------------------------------
1996
Sales(1)........................... $ 18,624
Operating income................... 1,551
Net interest....................... (173)
Pretax income...................... 1,378
Net income......................... 916
Assets............................. 12,602
Depreciation and
amortization...................... 634
Additions to long-lived assets..... 803
- -----------------------------------
(1) Includes sales between segments. Such sales are at transfer prices that are
equivalent to market value.
(2) Includes provisions for restructuring reported in the 1998 Consolidated
Statement of Income as follows: Sara Lee Foods $208; Coffee and Tea $71;
Household and Body Care $185; Foodservice $2; and Branded Apparel $1,574.
(3) Includes provisions for restructuring, net of tax, reported in the 1998
Consolidated Statement of Income as follows: Sara Lee Foods $133; Coffee and
Tea $46; Household and Body Care $164; Foodservice $1; and Branded Apparel
$1,281.
(4) Principally cash and equivalents, certain fixed assets and certain other
noncurrent assets.
F-25
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
GEOGRAPHIC AREA INFORMATION
UNITED
STATES FRANCE NETHERLANDS OTHER TOTAL
--------- --------- ----------- --------- ---------
1998
Sales...................................................... $ 11,849 $ 1,724 $ 1,311 $ 5,127 $ 20,011
Long-lived assets.......................................... 2,452 500 1,246 1,349 5,547
- --------------------------------------------------------------------------------------------------------------------
1997
Sales...................................................... $ 11,497 $ 1,764 $ 1,340 $ 5,133 $ 19,734
Long-lived assets.......................................... 4,158 526 1,240 1,439 7,363
- --------------------------------------------------------------------------------------------------------------------
1996
Sales...................................................... $ 11,244 $ 1,008 $ 1,400 $ 4,972 $ 18,624
Long-lived assets.......................................... 4,191 137 1,370 1,517 7,215
- --------------------------------------------------------------------------------------------------------------------
F-26
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement will be
effective for the Corporation in 1999 and will establish accounting standards
for costs incurred in the development or implementation of computer software.
These new standards will require the capitalization of certain software
implementation costs relating to software developed and implemented for the
Corporation's use. These costs are currently not capitalized by the Corporation.
The effect of this change is not expected to have a significant effect on the
Corporation's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes new accounting and
reporting standards for derivative instruments. This statement will become
effective for the Corporation in 2000. Currently, the Corporation is assessing
the effect this statement will have on the consolidated financial position and
results of operations.
F-27
SARA LEE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
QUARTERLY FINANCIAL DATA
(UNAUDITED)
QUARTER
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
1998
Net sales.................................................................. $ 4,893 $ 5,279 $ 4,736 $ 5,103
Gross profit............................................................... 1,819 2,020 1,832 2,009
Net income (loss).......................................................... 225 (1,278) 227 303
Per common share:
Net income (loss) -- basic............................................... .46 (2.71) .48 .65
Net income (loss) -- diluted............................................. .44 (2.71) .46 .62
Cash dividends declared.................................................. .21 .23 .23 .23
Market price -- high..................................................... 52.25 57.00 62.31 63.63
-- low........................................................ 39.00 47.50 53.19 56.44
-- close...................................................... 51.31 56.56 61.88 56.63
- -----------------------------------------------------------------------------------------------------------------------
1997
Net sales.................................................................. $ 4,886 $ 5,269 $ 4,649 $ 4,930
Gross profit............................................................... 1,809 2,020 1,757 1,881
Net income................................................................. 206 317 206 280
Per common share:
Net income -- basic...................................................... .41 .65 .42 .57
Net income -- diluted.................................................... .40 .62 .40 .55
Cash dividends declared.................................................. .19 .21 .21 .21
Market price -- high..................................................... 35.88 40.50 43.38 43.38
-- low........................................................ 30.00 35.13 36.50 39.13
-- close...................................................... 35.75 38.38 42.25 42.06
- -----------------------------------------------------------------------------------------------------------------------
1996
Net sales.................................................................. $ 4,656 $ 4,898 $ 4,443 $ 4,627
Gross profit............................................................... 1,725 1,878 1,719 1,832
Net income................................................................. 186 283 188 259
Per common share:
Net income -- basic...................................................... .37 .58 .37 .53
Net income -- diluted.................................................... .36 .55 .36 .51
Cash dividends declared.................................................. .17 .19 .19 .19
Market price -- high..................................................... 30.38 33.75 35.50 33.88
-- low........................................................ 26.88 28.88 29.88 30.25
-- close...................................................... 29.75 32.00 32.88 32.50
- -----------------------------------------------------------------------------------------------------------------------
F-28
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 27, 1998. 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 27, 1998.
F-29
SCHEDULE II
SARA LEE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 29, 1996, JUNE 28, 1997 AND JUNE 27, 1998
(IN MILLIONS)
PROVISION
CHARGED WRITE-OFFS
BALANCE AT TO COSTS (1)/ OTHER BALANCE
BEGINNING AND ALLOWANCES ADDITIONS AT END
OF YEAR EXPENSES TAKEN (DEDUCTIONS) OF YEAR
------------- ----------- ----------- --------------- -----------
FOR THE YEAR ENDED JUNE 29, 1996:
Allowances for bad debts............................ $ 127 $ 34 $ (35) $ (5) $ 121
Other receivable allowances......................... 65 113 (105) 3 76
----- ----- ----- --- -----
Total............................................. $ 192 $ 147 $ (140) $ (2) $ 197
----- ----- ----- --- -----
----- ----- ----- --- -----
FOR THE YEAR ENDED JUNE 28, 1997:
Allowances for bad debts............................ $ 121 $ 29 $ (28) $ 10 $ 132
Other receivable allowances......................... 76 108 (111) -- 73
----- ----- ----- --- -----
Total............................................. $ 197 $ 137 $ (139) $ 10 $ 205
----- ----- ----- --- -----
----- ----- ----- --- -----
FOR THE YEAR ENDED JUNE 27, 1998:
Allowances for bad debts............................ $ 132 $ 33 $ (28) $ (1) $ 136
Other receivable allowances......................... 73 86 (83) (7) 69
----- ----- ----- --- -----
Total............................................. $ 205 $ 119 $ (111) $ (8) $ 205
----- ----- ----- --- -----
----- ----- ----- --- -----
- ------------
(1) Net of collections on accounts previously written off.
F-30
EXHIBIT INDEX
3. EXHIBITS INCORPORATION BY REFERENCE
------------------------------
(3a) Charter Exhibit 4.1 to Registration
Statement No. 33-35760 on Form
S-8 dated July 6, 1990,
Exhibit 4.2 to Registration
Statement No. 33-37575 on Form
S-8 dated November 1, 1990 and
Exhibit 3(a) to Report on Form
10-K for Fiscal Year ended
July 2, 1994.
(3b) Bylaws Exhibit 3(b) to Report on Form
10-K for Fiscal Year ended
June 29, 1996
(4) Sara Lee, by signing this Report, agrees to furnish the Securities and
Exchange Commission, upon its request, a copy of any instrument which
defines the rights of holders of long-term debt of Sara Lee and all of its
subsidiaries for which consolidated or unconsolidated financial statements
are required to be filed, and which authorizes a total amount of
securities not in excess of 10% of the total assets of Sara Lee and its
subsidiaries on a consolidated basis.
(10) 1. 1979 Stock Option Plan, as Exhibit 10(1) to Report on
amended Form 10-K for Fiscal Year
ended July 1, 1995
2. 1981 Stock Option Plan, as Exhibit 10(11) to Report on
amended Form 10-K for Fiscal Year
ended July 1, 1989
3. 1988 Non-Qualified Stock Exhibit 10(3) to Report on
Option Plan, as amended Form 10-K for Fiscal Year
ended July 1, 1995
4. 1989 Incentive Stock Plan, Exhibit 10(4) to Report on
as amended Form 10-K for Fiscal Year
ended June 28, 1997
5. Supplemental Benefit Plan, Exhibit 10(5) to Report on
as amended Form 10-K for Fiscal Year
ended June 28, 1997
6. Performance-Based Annual Appendix A to Proxy Statement
Incentive Plan dated September 20, 1995
7. 1995 Long-Term Incentive Exhibit 10(16) to Report on
Stock Plan, as amended Form 10-K for Fiscal Year
ended June 28, 1997
8. 1995 Non-Employee Director
Stock Plan, as amended
9. 1998 Long-Term Incentive Appendix A to Proxy Statement
Stock Plan dated September 21, 1998
10. Accelerated Growth Exhibit 10(12) to Report on
Incentive Plan Fiscal Years Form 10-K for Fiscal Year
1990-1994 ended June 30, 1990
11. 1991 Non-Qualified Exhibit 10(15) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Base Salary) ended June 29, 1991
12. 1992 Non-Qualified Exhibit 10(15) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Base Salary) ended June 27, 1992
13. FY '93 Non-Qualified Exhibit 10(16) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Annual Bonus) ended June 27, 1992
14. 1993 Non-Qualified Exhibit 10(19) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Base Salary) ended July 3, 1993
15. FY '94 Non-Qualified Exhibit 10(20) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Annual Bonus) ended July 3, 1993
16. 1994 Non-Qualified Exhibit 10(14) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Base Salary) ended July 2, 1994
EXHIBITS INCORPORATION BY REFERENCE
------------------------------
17. FY '95 Non-Qualified Exhibit 10(15) to Report on
Deferred Compensation Plan Form 10-K for Fiscal Year
(Annual Bonus) ended July 2, 1994
18. Non-Qualified Deferred
Compensation Plan (Annual
Bonus)
19. Non-Qualified Deferred
Compensation Plan for
Outside Directors, as
amended
20. FY 1996-98 Long Term Exhibit 10(20) to Report on
Performance Incentive Plan Form 10-K for Fiscal Year
ended June 29, 1996
21. FY 1997-99 Long Term Exhibit 10(21) to Report on
Performance Incentive Plan Form 10-K for Fiscal Year
ended June 29, 1996
22. FY 1998-00 Long Term
Performance Incentive Plan
23. Non-Qualified Estate Exhibit 10(17) to Report on
Builder Deferred Form 10-K for Fiscal Year
Compensation Plan ended June 29, 1985
24. Severance Policy for Exhibit 10(23) to Report on
Corporate Officers, as Form 10-K for Fiscal Year
amended ended June 28, 1997
25. Employment Agreement, Exhibit 10(24) to Report on
dated January 1, 1996, Form 10-K for Fiscal Year
between Sara Lee ended June 28, 1997
Corporation and Frank L.
Meysman
26. Employment Agreement, Exhibit 10(25) to Report on
dated January 1, 1996, Form 10-K for Fiscal Year
between Sara Lee/ DE N.V. ended June 28, 1997
and Frank L. Meysman and
attachments (translated
from Dutch)
27. Restricted Share Unit
Agreement dated April 29,
1998 between Sara Lee
Corporation and Frank L.
Meysman
28. Stockholder Rights Exhibit 4.1 to Report on Form
Agreement, dated as of 8-K for dated May 15, 1998
March 26, 1998 between Sara
Lee Corporation and First
Chicago Trust Company of
New York, as rights agent
(12) 1. Computation of Ratio of
Earnings to Fixed Charges
2. Computation of Ratio of
Earnings to Fixed Charges
and Preferred Stock
Dividend Requirements
(21) List of Subsidiaries
(23) Consent of Arthur Andersen
LLP
(24) Powers of Attorney
(27) Financial Data Schedules