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<TYPE>10-K
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<FILENAME>d10k.txt
<DESCRIPTION>FORM 10-K
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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 30, 2001
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:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
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<S> <C>
Common Stock, $.01 par value per share The Chicago Stock Exchange
The New York Stock Exchange
The Pacific Exchange
Euronext Amsterdam Stock Market N.V.
Euronext Paris S.A. Stock Market
The Swiss Exchange
The Stock Exchange (London)
Preferred Stock Purchase The Chicago Stock Exchange
Rights The New York Stock Exchange
The Pacific Exchange
</TABLE>
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. [X] Yes [_] 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 August 31, 2001, 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 $17.2 billion.
On August 31, 2001, the registrant had outstanding 783,488,307 shares of
common stock, par value $.01 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, 2001, are
incorporated by reference into Items 10-13 of Part III.
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PART I
Item 1. Business
(a) GENERAL DEVELOPMENT OF BUSINESS
Sara Lee Corporation is a global manufacturer and marketer of brand name
products for consumers throughout the world. With headquarters in Chicago,
Sara Lee has operations in 58 countries and markets branded consumer products
in over 180 countries. The corporation was organized in Baltimore, Maryland in
1939 as the C.D. Kenny Company and adopted its current name in 1985.
Sara Lee's primary purpose is to create long-term shareholder value. To
further its purpose, on May 30, 2000 the corporation initiated reshaping plans
to streamline its business portfolio and organizational structure by focusing
on three major global businesses--Food and Beverage, Intimates and Underwear,
and Household Products. Sara Lee's mission is to continue to build leadership
brands in each of these three global businesses and to own the number-one or
number-two brand in each category in which it competes. Since the May 2000
announcement, the corporation has divested non-core businesses, begun a major
reorganization within the U.S. meats and the U.S. and European Intimates and
Underwear businesses, and increased spending on technology.
During fiscal 2001, the corporation's management approved plans to dispose
of 17 businesses, and 10 of these transactions had been completed by the end
of fiscal 2001. The dispositions of the remaining seven businesses that have
been approved by management are expected to be completed by December 2001. In
addition, Sara Lee completed the dispositions of two businesses--Coach, Inc.
and PYA/Monarch, Inc.--that are valuable companies but that did not fit within
Sara Lee's narrowed business focus of manufacturing and marketing basic,
repeat-purchase, branded items and were determined to be more valuable apart
from Sara Lee. PYA/Monarch was sold in December 2000 for a purchase price of
approximately $1.6 billion. The Coach disposition was completed during fiscal
2001 in two steps. In October 2000, Coach completed an initial public offering
of 19.5% of its common stock. In April 2001, Sara Lee's ownership of 80.5% of
Coach's common stock was split-off to existing Sara Lee stockholders in
exchange for approximately 41 million shares of Sara Lee common stock. As a
result of the Coach disposition, Sara Lee recognized a tax-free gain of $967
million.
One component of the corporation's reshaping initiative is to complete
strategic acquisitions that can provide increased scale for existing Sara Lee
businesses and platforms for growth into new markets. In July 2001, Sara Lee
announced that it had entered into an agreement to acquire The Earthgrains
Company, one of the largest fresh bread companies in the United States with
fiscal 2001 sales of approximately $2.6 billion. The purchase price was
approximately $1.9 billion in cash plus the assumption of approximately $957
million of Earthgrains' outstanding debt. The transaction, which was
structured as a cash tender offer for all of Earthgrains' common stock at a
price of $40.25 per share, was completed in August 2001. Following the
completion of the tender offer, Earthgrains was merged with a wholly-owned
subsidiary of Sara Lee. Earthgrains' operations were combined with Sara Lee's
existing bakery business to form the Sara Lee Bakery Group.
During fiscal 2001, Sara Lee continued to repurchase shares of its common
stock pursuant to a stock repurchase program implemented in 1997. The
corporation repurchased common stock with a value of $643 million in fiscal
2001, $1.0 billion in fiscal 2000 and $1.3 billion in fiscal 1999. In June
2001, Sara Lee's Board of Directors approved an increase in the number of
shares the corporation was authorized to repurchase under its ongoing stock
repurchase program, resulting in a total remaining purchase authorization of
25 million shares at the end of fiscal 2001.
Sara Lee has announced changes in its senior management and director ranks.
When he turns 65 on October 5, 2001, John H. Bryan will retire as Chairman of
the Board of Directors and C. Steven McMillan, who currently is Chief
Executive Officer and President, will assume the additional position of
Chairman. In addition, two directors of the corporation, Frans Andriessen and
Duane Burnham, are retiring from the Board of Directors in October 2001.
Messrs. Andriessen and Burnham have served as directors of Sara Lee for a
combined 18 years.
Sara Lee's fiscal year ends on the Saturday closest to June 30. Fiscal
years 2001 and 2000 contained 52 weeks, while fiscal year 1999 was a 53-week
year.
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Sara Lee organizes its businesses into three major global business
segments--Food and Beverage, Intimates and Underwear, and Household Products.
For financial reporting purposes, Sara Lee's businesses are divided into four
industry segments--Sara Lee Foods, Beverage, Household Products and Intimates
and Underwear. The corporation's products and services include fresh and
frozen baked goods, processed meats, coffee and tea, beverage systems,
intimate apparel, underwear, activewear, legwear and other apparel, and
personal, household and shoe care products.
Sara Lee Food and Beverage
Food and Beverage's primary focus is packaged meats, bakery products and
coffee and tea beverages. The Sara Lee Foods business consists of packaged
meats (82% of the division's total sales in fiscal 2001) and baked goods (18%
of the division's total sales in fiscal 2001). In fiscal 2001, Sara Lee Foods
reported sales of $5.1 billion, which is the same as the prior year. Operating
income for this division, excluding unusual items, decreased 2% from the prior
year to $363 million. Operating income is defined as income from continuing
operations before income taxes, interest, corporate unallocated expenses, and
amortization of goodwill and trademarks. Unusual items consist of charges
relating to Sara Lee's divestiture of the PYA/Monarch and Coach businesses,
the divestiture of certain other businesses that have limited growth potential
and low returns, and Sara Lee's exit from certain high-cost manufacturing,
distribution and administrative activities. Sara Lee's Beverage business,
which primarily consists of coffee and tea products, reported fiscal year 2001
sales of $2.9 billion, an increase of 2% over the prior year. Operating income
for Sara Lee Beverage, excluding unusual items, increased 3% from the prior
year to $485 million in fiscal year 2001. On a constant-currency basis,
Beverage sales increased 9% and operating income increased 11% from fiscal
2000. Approximately half of Sara Lee Beverage sales in fiscal 2001 were
generated in Europe and, as a result, the strength of the dollar against the
euro adversely affected the business's reported results.
As part of Sara Lee's broad reshaping plan, the U.S. Foods business
launched a major reorganization effort to streamline operations, boost
profitability, leverage its major brands and increase growth. The U.S. Foods
business was reorganized into two new business units--one to focus on the
retail channel and one to focus on the foodservice channel. The corporation
also has begun to centralize functions relating to the management of its
supply chain, such as procurement and distribution, to achieve greater
efficiencies. In addition, Sara Lee Foods plans to increase its marketing,
advertising and promotional spending on its largest, most powerful names. For
example, management believes that the Sara Lee brand, one of the food
industry's best-known brands, has significant room for expansion in its
current market segments and for growth in new product categories within the
deli meats and premium breads markets. Sara Lee's acquisition of The
Earthgrains Company supports this strategy by providing new categories for the
Sara Lee name, such as fresh bread, and by providing greater distribution
capabilities to support brand growth.
Sara Lee believes it is the world's largest packaged meats company. Sara
Lee holds the number-two retail position in the $11 billion U.S. packaged
meats industry, holding a leading position in the key categories of hot dogs,
corn dogs, smoked sausage, breakfast sausage, cocktail links and breakfast
sandwiches. Sara Lee also has the largest packaged meats business in Europe
and holds a leading position in Mexico. During fiscal year 2001, sales and
profits of Sara Lee Meats--Europe were adversely impacted by a series of
animal safety issues in the European meat industry. Consumer demand fell and
commodity prices increased. Management believes, however, that Sara Lee
remains well positioned for future growth due to its strong, leading brands,
such as Aoste, and its well-developed operations base.
During fiscal 2001, Sara Lee continued to emphasize innovation, and
launched several new meat products. For example, Jimmy Dean Fresh Taste. Fast!
products, which were introduced in response to consumer demand for greater
convenience, include a line of premium, precooked breakfast goods that are the
first of their kind in the marketplace. Jimmy Dean also successfully launched
a beef jerky snack to expand the brand into this fast-growing category. In
addition, a new program was created for products sold at the deli counter.
This program, which is called the "Red Wave" to leverage Sara Lee's well-known
red logo, presents a comprehensive selection of Sara Lee products, including
newly introduced presliced deli meats and cheeses, condiments and super-
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premium breads. The goal of this program is to increase the number of grocers
selling these items, as well as to expand the Sara Lee brand into the deli
category and increase the number of Sara Lee products available within each
store.
During fiscal 2001, Sara Lee's bakery business also continued to leverage
the Sara Lee brand name in the dessert category with the introduction of a new
flavor--brownie bites--in its popular Sara Lee line. Sara Lee's acquisition of
The Earthgrains Company, in combination with Sara Lee's existing bakery
business, will create a $3.4 billion bakery business with significant
opportunities for expanding the Sara Lee name into the fresh bakery
businesses, particularly by utilizing Earthgrains' direct-store delivery
system to merchandise Sara Lee branded products.
Sara Lee's Beverage business includes retail and foodservice coffee and tea
sales in major markets around the world. The corporation holds a leading
position in coffee in Brazil, many European countries and in the U.S.
foodservice market. In the U.S. retail coffee market, Sara Lee holds the
number-three position, and ranks number-one or number-two in tea in many
European countries. Sara Lee believes that its leadership strength is
attributable to well-known coffee brands, including Douwe Egberts, Maison du
Cafe, Marcilla, Merrild, Hills Bros, Chock full o' Nuts, Superior Coffee, Cafe
do Ponto, Pilao and Caboclo.
Sara Lee Beverage's strategy for growth is to continue to build strong
local brands, capitalizing on the corporation's ability to understand and meet
consumer taste and quality preferences in each of its markets. In addition,
Sara Lee strives to introduce innovative, value-added products that allow
premium pricing, such as Senseo crema. This next-generation in-home
coffeemaker was introduced in early 2001 by Douwe Egberts and Phillips
Electronics in the Netherlands. It has a patented brewing system to provide
customers with one or two cups of superior-quality fresh coffee in less than a
minute, using proprietary filter packets filled with Douwe Egberts coffee.
During fiscal 2001, Douwe Egberts continued its international advance in
liquid coffee systems with the launch of the Cafitesse 2000 line. Cafitesse is
Sara Lee's proprietary coffee system that uses a liquid coffee concentrate.
Sara Lee also introduced the Contenta line, a version of Cafitesse aimed at
small offices, in Australia, Italy, Japan, Norway, Sweden and the United
Kingdom. In addition to the coffee systems lines, Sara Lee launched a number
of other products to take advantage of local consumer preferences.
Growth in Sara Lee's tea business was driven mainly by the introduction of
new products and flavors, especially in the premium-priced, specialty tea
segment. Sara Lee continues to hold leading positions in several segments of
the European tea market with its Pickwick, Hornimans and Sir Morton brands.
Superior Coffee also markets an iced tea brand, Paradise, in the U.S.
foodservice market. During fiscal 2001, Sara Lee capitalized on increased
demand for green, herbal and fruit teas by launching Pickwick Orange &
Peppermint and Pickwick Elderflower in Denmark, and a range of fruit and
herbal teas called Pickwick Fruit & Kruid in the Netherlands.
Intimates and Underwear
Sara Lee's Intimates and Underwear business, which is one of the largest
apparel businesses in the world, focuses on basic, branded "innerwear"
products--intimates, underwear and legwear. Sara Lee holds leading share
positions in intimate apparel, underwear and legwear in North America, Europe
and several Latin American countries with a portfolio of well-known brands
including Hanes, Hanes Her Way, Playtex, L'eggs, Dim, Bali, Just My Size,
Wonderbra and Lovable. In fiscal 2001, Intimates and Underwear reported sales
of $7.8 billion, an increase of 2% from the prior year. Operating income was
$844 million in fiscal 2001, excluding unusual items, unchanged from the prior
year. Base business unit volumes declined 1%, excluding acquisitions. By
product line, the company's global intimate apparel operations experienced
increased sales and profits during fiscal 2001, and the U.S. sock business
continued to grow.
The Intimates and Underwear business implemented several strategic
initiatives during fiscal 2001, which included exiting non-core or
underperforming businesses, introducing innovative products, investing in key
brands, increasing productivity and leveraging scale. The reshaping initiative
Sara Lee announced in May 2000 called for a stronger focus on basic, branded,
non-fashion, repeat-purchase items. This directive led the corporation to exit
businesses that are inconsistent with this strategy, including Coach, Champion
Europe, Champion U.S. Bookstore and Sara Lee Apparel Australasia, and to
dispose of excess textile and fabric capacity
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in Europe. The corporation also exited licenses or brands that it believed
were underperforming or had limited growth potential. Another component of the
reshaping initiative was the establishment by the North American and European
Intimate Apparel businesses of a worldwide sourcing and design infrastructure.
Sara Lee continues to lead the U.S. bra market, with a 26.3% dollar share.
Product innovation helped the corporation produce share gains during fiscal
2001. Sara Lee introduced the Playtex Only You bra, which utilizes a unique
construction of fabrics and support underwires that are glued together to
provide comfort, support and a completely smooth appearance. In addition, the
Hanes Her Way brand launched Body Creations, a body-enhancing bra line that
utilizes a cutting-edge material of stretch foam cups and stretch-to-fit
technology. Sara Lee also introduced innovative new products in Europe. The
corporation's European Playtex Stylis and Affinity brands combine comfort and
attractiveness, as well as updated fabrics and colors, in new underwire bras
that delivered 14% unit volume growth for the Playtex brand. Wonderbra unit
volume also grew 14%, which the corporation attributes to the brand's new
adjustable-cleavage push-up bra. During fiscal 2001, Sara Lee Intimates also
focused on operational efficiency. The corporation has begun consolidating
manufacturing and administrative functions at Bali and Playtex, streamlining
manufacturing capacity, and integrating Far East sourcing operations with Sara
Lee Branded Apparel Europe.
Sara Lee's U.S. underwear business was adversely impacted by a weak retail
market and intense price competition during fiscal 2001. Sara Lee underwear
responded to these challenges by investing more resources in the Hanes and
Hanes Her Way brands, including increased advertising and limited retail
promotions. Men's and boys' unit share grew to 36.2%, driven in part by heavy
television advertising featuring sports superstar Michael Jordan for Hanes
boxers and briefs. Women's and girls' underwear unit share grew to 36.2%,
benefiting from investment in new products. For example, Hanes Her Way
introduced Hanes Her Way Cotton Seamless panties in fiscal 2001. Sara Lee
supported the launch with a print advertising campaign and special promotions.
During fiscal 2001, Sara Lee Sock Company's unit sales increased by 6% and
its leading unit share position increased to 16.3%. These increases were aided
by strong retail space increases and were supported by increased investment in
advertising and new products. In addition, new legwear products were
introduced by Hanes Her Way to address specific consumer needs. Hidden
Comfort, for example, offers special silhouettes created for low-cut sneakers,
and Cotton Comfort is designed to be worn with sandals.
Sara Lee's Hosiery business also introduced relevant value-added products,
such as Hanes Silk Reflections Toeless, which leverages the trend to open-toe
shoes and sandals, and L'eggs Care hosiery products that incorporate aloe vera
lotion to smooth and invigorate the legs. The business continued to improve
productivity during fiscal 2001, with higher-quality yields and increased
knitting efficiency. Sara Lee Hosiery's strategy of optimizing distribution
led the corporation to introduce Hanes branded hosiery lines in both Nordstrom
and Sears stores in fiscal 2001.
Sara Lee's Activewear business is a leading producer and marketer of basic
fleece, T-shirts and sportshirts across multiple distribution channels.
Activewear consists of three divisions: Casualwear, Hanes Printables and
Champion Activewear. During fiscal 2001, Sara Lee's Casualwear business
continued to grow its leading branded positions with mass merchants in the
fleece and T-shirt categories using the Hanes, Hanes Her Way, Just My Size,
and licensed Starter brands. Hanes Printables maintained its leading unit
share in the embellishable activewear wholesale market despite a dramatic
slowdown in industry shipments caused by the slowing U.S. economy. During
fiscal 2001, the Hanes Beefy-T shirt, the leading T-shirt in the embellishment
industry, celebrated its 25th anniversary. More than one billion Hanes Beefy-T
shirts have been sold over the last 25 years. Product innovation also
contributed to increased sales of the Hanes and Hanes Her Way fleece offerings
during fiscal 2001. The business focused on delivering simple, but important,
value-added features that previously had been unavailable in the mass-
merchandise channel. These features include pockets for men's and boys' fleece
pants and fleece products contoured to fit women's shapes. As a result, Sara
Lee's fleece sales grew more than 15% during fiscal 2001.
Household Products
Household Products is Sara Lee's most global line of business. It includes
Sara Lee's leading household and personal products as well as its Direct
Selling division. In fiscal 2001, Household Products reported sales of
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$2.1 billion, a decrease of 3% from the prior year. Operating income for
fiscal 2001 declined 3% from the prior year to $345 million, excluding unusual
items. Approximately 55% of Household Products' fiscal 2001 sales were
generated in Europe. As a result, the strengthening of the U.S. dollar
relative to foreign currencies, particularly in Europe, reduced both reported
sales and operating income by 9.3%. However, base-business unit sales for
Household Products' four core product categories--shoe care, body care,
insecticides and air fresheners--increased 4% from the prior year.
Sara Lee Household Products markets branded products around the world.
Household Products attributes its fiscal 2001 results to its consistent focus
on its four core product categories, product innovation, creative marketing
and geographic expansion. One of the highlights of fiscal 2001 in the body
care category was the creative marketing opportunity provided by the Sanex WTA
Tour tennis sponsorship that started in January 2000. The Sanex WTA Tour is
one of the world's premier professional sports contests for women, with more
than 1,000 players competing for $50 million in prize money at 64 events in 33
countries worldwide. In fiscal 2001, the link between Sanex and women's tennis
was further strengthened by signing tennis star Martina Hingis as a
spokesperson for the brand, and by becoming the title sponsor of the Sanex
Championships, the season-ending tournament in Munich where the world's top 16
ranked tennis players compete.
Sara Lee markets its body care products under the Sanex, Duschdas, Badedas,
Radox, Delial and Monsavon brands. At the end of fiscal 2001, Sara Lee held a
number one position in the bath and shower products category in Europe, and
also held leading positions in air fresheners and insecticides. Additionally,
through its global Kiwi brand, the corporation has a leading position in the
shoe care category worldwide. Sara Lee continues to introduce new Kiwi
products to maintain its brand strength. In fiscal 2001, Sara Lee continued
the international rollout of Kiwi Instant Wax Shine, a self-shining shoe care
product in a unique ergonomic package. Another shoe care innovation is Kiwi
Express, a unique sponge with a shoe cream reservoir that shines shoes easily
and quickly.
In the air freshener and insecticide businesses, sales were increased by
introducing new uses for existing products and expanding into new markets. In
air fresheners, the Ambi Pur brand was introduced into the U.S. market through
the launch in fiscal 2001 of Ambi Pur LiquiFresh liquid toilet bowl
cleaner/air freshener. Expanding its line of electric air fresheners in the
Netherlands, Sara Lee introduced Ambi Pur Purity, a product that provides a
light fragrance when plugged into an electrical outlet. Sara Lee strengthened
its leading market position in the insecticide category in Europe with several
new product introductions, including a new anti-bug coil to protect consumers
from insects outdoors that is marketed under the Bloom, Catch and Spira brand
names in Spain, France and Italy, respectively.
Sara Lee's Direct Selling businesses distribute cosmetics, fragrances,
jewelry, toiletries, apparel products and nutritional supplements directly to
consumers. Sara Lee has an independent sales force of 800,000 people, which
makes it one of the largest direct selling companies worldwide. In fiscal
2001, Sara Lee increased the number of independent representatives who sell
company products directly to consumers to 800,000 from 700,000 the year
before. Growth in this business was supported by expansion of the distributor
base and the introduction of new products. Additionally, the use of new
technology, including a Web site for independent representatives to order
products online, enabled the Direct Selling businesses to accept and deliver
orders to consumers more easily and quickly.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Sara Lee's businesses are classified into four industry segments: Sara Lee
Foods, Beverage, Household Products, and Intimates and Underwear. The
financial information about Sara Lee's industry segments can be found on page
F-29 of this Report.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
Sara Lee Food and Beverage
The Sara Lee Foods business consists of packaged meats and baked goods.
Sara Lee Packaged Meats processes and sells pork, poultry and beef products to
supermarkets, warehouse clubs, national chains and institutions throughout the
world, with emphasis on the United States, Europe and Mexico. Sara Lee
believes it is one of the largest processed meats companies in the world.
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,
Jimmy Dean, Kahn's, State Fair, Sara Lee and Galileo. Sara Lee's more
prominent European brands include Aoste, Justin Bridou and Cochonou in France,
Stegeman in the Netherlands, 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 also holds an equity investment
in Johnsonville Sausage Company, a leading manufacturer of premium fresh
sausage products in the United States.
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. Prices for hogs, which are a primary raw material for
Sara Lee's packaged meat products, increased significantly in fiscal 2001.
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.
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 a lesser 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 Group produces a wide variety of fresh and frozen baked and
specialty items. Its core products are bread, specialty breads, bagels, frozen
and fresh pies, pound cakes, cheesecakes, danishes and specialty dessert
"bites." These products are sold through supermarkets, foodservice
distributors, bakery-deli and direct channels throughout the United States,
Mexico and Australia. 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 supports. 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.
In August 2001, Sara Lee completed the acquisition of The Earthgrains
Company, one of the largest fresh bread companies in the United States with
fiscal 2001 sales of approximately $2.6 billion. This business was combined
with Sara Lee's existing bakery operations and was renamed Sara Lee Bakery
Group. Management believes that Sara Lee's acquisition of Earthgrains offers
significant opportunities to expand the Sara Lee name in the fresh bread
category and also provides greater distribution capabilities to support brand
growth.
Competition in this business is strong, 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 Group 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.
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Sara Lee's Beverage business includes retail and food service coffee and
tea sales in major markets around the world. It has a significant presence in
such countries as the Netherlands, Belgium, France, Denmark, Spain, United
Kingdom, Hungary, United States, Australia and Brazil. While Douwe Egberts is
its European flagship brand, its other premium European coffee brands include
Maison du Cafe, Marcilla and Merrild in Europe, and Cafe do Ponto, Pilao and
Caboclo in South America. Sara Lee's Pickwick brand is an important brand in
the European tea market. Key brands within the United States include Chock
full o'Nuts, Chase & Sanborn, Hills Bros and Superior. Tea brands include
Hornimans, Pickwick, Suenos de Oro in Spain and the Paradise iced tea brand in
the United States foodservice market.
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 advantage 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 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. In
fiscal 2001, green coffee prices declined, which resulted in lower prices to
customers. Sara Lee anticipates that green coffee prices will continue to be
affected by uncertainties over the availability of future supplies. Sara Lee
mitigates the effect of fluctuating green coffee prices through careful
inventory management and hedging strategies.
The Beverage 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.
Sara Lee's Food and Beverage business has accounted for 10% or more of Sara
Lee's consolidated revenues during the past three fiscal years.
Intimates and Underwear
The Intimates and Underwear line of business markets a portfolio of apparel
brands in the intimates, underwear and legwear product categories. Bras,
panties and shapewear are marketed under such labels as Bali, Hanes Her Way,
Playtex, Wonderbra and Just My Size in North America, and Playtex, Berlei and
Dim in Europe. Sara Lee is the leader in the North American intimates
category.
Distribution channels for intimate apparel range from department and
specialty stores for such premium brands as Bali 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 very 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.
Sara Lee's underwear business sources, manufactures and distributes men's,
women's and children's underwear 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 and discount
chains. Principal brands in the underwear category include Champion, Hanes,
Hanes Her Way and Rinbros in North America, and Abanderado, Princesa,
Champion, Hanes, Dim and Unno 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,
Spain and Italy.
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The corporation's activewear business sources, manufacturers and
distributes basic fleece, T-shirts, sportshirts and other jersey products for
casualwear. Activewear is marketed under Sara Lee's Hanes and Champion lines
and is marketed and sold across multiple distribution channels.
The principal raw materials in this product category are cotton yarn and
cotton-based textiles. Sara Lee currently believes there is an adequate supply
of cotton from a variety of sources. There are also numerous manufacturing
sources for these products.
Sara Lee sells legwear in countries throughout the world. Sara Lee is a
leader in the legwear catagory in North America and is the leader in the
hosiery category in North America and Western Europe. Sara Lee's products
consist of a wide variety of branded, packaged consumer products, including
pantyhose, stockings, combination panty and pantyhose garments, tights, knee-
highs and socks. These products are sold in the United States under such brand
names as Hanes, Hanes Her Way, L'eggs, Just My Size, Champion, Donna Karan and
DKNY (the last two being licensed), and abroad under such labels as Dim,
Pretty Polly, Elbeo, Nur Die, Bellinda, Filodoro and Philippe Matignon.
Sara Lee hosiery and 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 also is distributed through catalog sales
and Sara Lee stores.
The sheer hosiery business is very competitive in both the United States
and Europe and worldwide demand for sheer hosiery products has declined over
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 and function. 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--and manufacturing sources for
the products in this category are readily available to Sara Lee.
Sara Lee's Intimates and Underwear business has accounted for 10% or more
of Sara Lee's consolidated revenues during each of the past three fiscal
years.
Household Products
Household Products 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, Badedas, Radox and Monsavon;
insecticides--sold internationally under the Catch, Goodknight, Vapona and
Ridsect brand names; and air fresheners--led by the Ambi Pur brand. Body care
items and insecticides are marketed principally in Europe as well as into the
Asia-Pacific and Latin America markets. These products are sold through a
variety of retail channels including supermarkets. This is a very competitive
business and Sara Lee seeks to maintain a competitive advantage by offering
its customers superior quality and value.
Sara Lee's Direct Selling business, which is part of Household Products,
distributes a wide range of products--cosmetics, fragrances, jewelry,
toiletries, apparel and nutritional supplements--through a network of
independent sales representatives. The Direct Selling division has an
independent sales force of 800,000 representatives, which makes it one of the
largest direct selling companies worldwide. Sara Lee Direct Selling includes
the Nutrimetics business in Australia, the House of Fuller business in Mexico
and Argentina, 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, China and Uruguay.
Sara Lee's Household Products business has accounted for 10% or more of
Sara Lee's consolidated revenues during each of the past three fiscal years.
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Trademarks
Sara Lee is the owner of over 30,000 trademark registrations and
applications in over 180 countries. Sara Lee's trademarks are among its most
valuable assets as it pursues its strategy of building brands globally.
Customers
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
these individual customers. Although no single customer accounts for 10% or
more of Sara Lee's consolidated revenues, the loss of one of our major
retailer or supermarket chain customers could have a material adverse effect
on one or more of our business segments.
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. Intimates and Underwear generally experience increased demand during
the second fiscal quarter as a result of "back to school" purchases. The
hosiery business is somewhat seasonal in nature 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 employees approximately 141,500 worldwide.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Sara Lee's foreign operations are conducted primarily through wholly or
partially owned subsidiaries incorporated outside the United States. Sara
Lee's principal foreign subsidiary is Sara Lee/DE N.V., a Netherlands limited
liability company headquartered in Utrecht, the Netherlands ("Sara Lee/DE").
Sara Lee/DE has responsibility for managing the Beverage and Household
Products divisions of Sara Lee.
The foreign operations of Sara Lee's Packaged Meats line of business are
conducted through Sara Lee Meats Europe B.V., the Aoste Group and Imperial
Meat Products N.V., and Nobre, while the foreign operations of Sara Lee Bakery
are conducted through Sara Lee Bakery (Australia) Pty Ltd.
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Beverage's operations are 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 Products' operations are 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.
Intimates and Underwear 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., Sara Lee Personal Products
GmbH, the Filodoro Group, Sara Lee Hosiery, S.A. de C.V., Rinbros, S.A. de
C.V., Courtaulds Textiles and Sol y Oro Group.
The financial information about foreign and domestic operations can be
found on page F-31 of this Report.
Item 2. Properties
Sara Lee's corporate headquarters are located in leased facilities in
Chicago, Illinois. In addition, Sara Lee operates food processing, consumer
product manufacturing, warehouse, office and retail facilities throughout the
world, of which almost half are located in the United States. Sara Lee's Food
and Beverage segment owns or leases significant properties in 10 states and in
France, Brazil, the Netherlands and Portugal; the Intimates and Underwear
business owns or leases significant properties in 7 states and in Canada,
France, Italy, Germany, Mexico, Puerto Rico and the United Kingdom; and the
Household Products segment owns or leases significant properties in Australia,
Germany, the Philippines, Poland, Spain and the United Kingdom. The
corporation owns most of its significant facilities and leases the remaining
facilities. Management believes that Sara Lee's facilities are maintained in
good condition and are generally suitable, adequate and of sufficient capacity
to support Sara Lee's current business operations.
Item 3. Legal Proceedings
As described in prior filings, on December 22, 1998, the corporation
announced the recall of specific production lots of packaged meat products
produced at its Zeeland, Michigan facility between July 1, 1998 and the date
of the recall. This action was taken as a result of concerns that the
specified products may contain Listeria bacteria that can pose a health
hazard. Various lawsuits, including individual and class actions, were filed
against the Corporation relating to the recall. The vast majority of these
lawsuits, including the class actions, have been resolved. Management believes
that none of these claims has had or will have a material adverse effect on
its consolidated results of operations, financial position or cash flows. In
addition, the Food Safety Inspection Service and the Department of
Agriculture, Office of the Inspector General, conducted an investigation into
the circumstances that led to this voluntary recall. On June 22, 2001, the
United States Attorney for the Western District of Michigan and Sara Lee
reached a complete resolution of the federal government's investigation. Under
the agreement with the government, Sara Lee entered a plea of guilty to
producing and distributing adulterated meat and poultry, which is a
misdemeanor, agreed to pay a fine of $200,000 and agreed to underwrite
important new food safety research projects by funding a $3 million grant to
Michigan State University.
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,
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cannot be determined with certainty, Sara Lee believes that the final outcomes
should not have a material adverse effect on the corporation's consolidated
results of operations, financial position or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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 August 31, 2001, Sara Lee had approximately
78,000 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-32 of this Report.
Item 6. Selected Financial Data
Financial information for Sara Lee for the five fiscal years ended June 30,
2001 is set forth on page F-2 of this Report. Such information should be read
in conjunction with the Consolidated Financial Statements and related Notes to
Financial Statements on pages F-3 through F-32 of this Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion and analysis of the corporation's results of operations,
financial position and risk management activities should be read in
conjunction with the General Development of Business on pages 1 through 5, the
Narrative Description of Business on pages 6 through 9 and the Consolidated
Financial Statements and related notes thereto contained on pages F-1 through
F-32 of this report. The corporation's fiscal year ends on the Saturday
closest to June 30. Fiscal years 2001 and 2000 were 52-week years, and fiscal
1999 was a 53-week year. Unless otherwise stated, reference to years relate to
fiscal years.
Consolidated Results of Operations--2001 Compared With 2000
Unusual Items Affecting Comparability - In May 2000, a program to reshape the
business activities of the corporation was announced. The primary objectives
of this program were to: 1) divest PYA/Monarch, a domestic foodservice
business, and focus on the global operations in the Sara Lee Foods, Beverage,
Intimates and Underwear and Household Products segments; 2) divest the Coach
accessories business and focus the Intimates and Underwear segment around
operations that market basic, non-fashion, repeat purchase branded items; 3)
divest certain other businesses that have limited growth opportunities and low
returns; and 4) improve the competitive structure of the corporation by
exiting certain high-cost manufacturing, distribution and administrative
activities. During 2001, a substantial number of these actions were completed.
The recognition of these events in the consolidated financial statements
increased income from continuing operations in 2001 by $467 million and net
income by $1.1 billion. Diluted earnings per share in 2001 excluding these
items is $1.36 and including these items is $2.65. For purposes of discussing
the consolidated results of operations and segment performance in 2001 as
compared with 2000, these items are defined as unusual items. A discussion of
each item follows:
PYA/Monarch Divestiture - In December 2000, the corporation sold its PYA/Monarch
foodservice distribution business and received cash proceeds of $1,559
million. The disposition resulted in a gain before income taxes of $1,126
million and an after-tax gain of $638 million, or $.75 of diluted earnings per
share. The PYA/Monarch foodservice operation constituted a reportable segment
of the corporation, and as a result, this gain has been recognized in the
discontinued operations section of the accompanying consolidated financial
statements.
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Divestiture of Coach Business - A tax-free gain of $967 million, or $1.13 of
diluted earnings per share, was recognized on the disposition of the Coach
business in 2001. This disposition took place in two steps. In October 2000,
the corporation's Coach subsidiary completed an initial public offering of
19.5% of its common stock. Cash proceeds of $122 million were received and a
tax-free gain of $105 million was recognized upon completion of the offering.
In April 2001, the second step of the disposition was completed when the
corporation's remaining 80.5% ownership interest in Coach was exchanged with
third parties for 41.4 million shares of Sara Lee common stock. The market
value of the Coach shares disposed of was $998 million, and an $862 million
gain was recognized on this tax-free transaction.
Other Business Dispositions - During 2001, the corporation's management approved
plans to dispose of 17 businesses with limited growth opportunities and low
returns. At the end of 2001, the disposition of 10 of these businesses had
been completed, and the disposition of the remaining businesses is expected to
be completed by December 2001. These actions resulted in a pretax charge of
$341 million and a reduction in net income of $352 million, or $.41 of diluted
earnings per share. Of the total pretax charge, $236 million relates to the 10
transactions that were closed in 2001 and $105 million is the estimated loss
on transactions that are anticipated to close in 2002. The $341 million charge
is included in the "business dispositions and other charges" line of the
consolidated statement of income and reduced operating income in the
corporation's business segments as follows: Intimates and Underwear--$246
million: Sara Lee Foods--$93 million: and Beverage--$2 million. These 17
businesses had an operating loss of $7 million in 2001 and an operating profit
of $2 million in 2000. Sales recognized by these operations were $670 million
in 2001 and $925 million in 2000. The net assets of businesses awaiting sale
are displayed on the "net assets of businesses held for sale" line of the
consolidated balance sheets. See the unusual items note to the consolidated
financial statements for a more complete description of these business
dispositions.
Other Charges - During 2001, the corporation's management approved plans to
terminate a number of employees and exit certain manufacturing, distribution
and administrative activities within a twelve-month period. These actions
resulted in a pretax charge of $213 million and a reduction in net income of
$148 million, or $.17 of diluted earnings per share. Of the $213 million
charge, $187 million is included in the "business dispositions and other
charges" line of the consolidated statement of income.
The remaining $26 million relates to anticipated losses on the exit of
certain licensed apparel products and is displayed in the "cost of sales--
product line exit costs" line of the consolidated statement of income. $210
million of the charge is directly attributable to the corporation's business
segments, and $3 million is related to the corporate headquarters. Business
segment operating income was reduced as follows: Intimates and Underwear--$165
million; Sara Lee Foods--$36 million; Beverage--$6 million; and Household
Products-- $3 million. The $213 million charge consists of the following:
. $124 million of the charge is for the cost of severance and other
employee benefits associated with the termination of 13,200 specifically
identified employees. Of this total, 12,301 individuals are employed in
the Intimates and Underwear operations.
. $38 million of the charge is for anticipated losses on the disposal of
real estate and equipment at nine owned facilities and the disposal of
equipment at a number of leased facilities. The charge primarily relates
to the planned exit of Intimates and Underwear manufacturing facilities
in the United States, Mexico and Europe; two domestic meat processing
plants; and a Beverage facility in Europe. As of June 30, 2001, four of
the nine owned facilities had been closed, and all actions contemplated
by the exit plan are expected to be completed within twelve months of the
related charge. The carrying value of the property and equipment awaiting
sale at June 30, 2001 is $26 million.
. $23 million of the charge is related to non-cancelable lease payments on
26 leased facilities that are being exited. As of June 30, 2001, nine of
the leased facilities had been exited.
. $28 million of the charge resulted from the decision to terminate product
licensing agreements and exit related manufacturing operations. Of the
$28 million charge, $26 million is for anticipated losses on the
disposition of inventory related to manufacturing operations exited and
$2 million is for payments to cancel third-party licensing arrangements.
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Of the $213 million charge, $150 million will require the use of cash and
$63 million is a non-cash component. The corporation expects to fund the cash
costs of this charge from internal sources and proceeds generated from the
sale of non-core businesses. These actions are expected to generate savings of
$141 million in 2003. A more complete description of the 2001 exit activities
is contained in the unusual items note to the consolidated financial
statements.
Additional exit activities, which have not been finalized or approved by
management at this time, are expected to be recognized in the first half of
2002.
Continuing Operations - Consolidated net sales increased 1.3% to $17.7 billion
from $17.5 billion in 2000. Businesses acquire net of businesses sold
subsequent to the start of 2000 increase reported sales by 4.8%. The
strengthening of the U.S. dollar in relation to key foreign currencies,
including the euro, had the effect of reducing reported sales by 4.1%. Thus,
on a comparable basis, excluding the impact of acquisitions, dispositions and
changes in foreign currency exchange rates, sales increased 0.6%. Comparable
sales growth in Sara Lee Foods and Household Products contributed to this
increase; the Beverage and Intimates and Underwear segments reported net sales
declines for the year.
The gross profit margin, excluding unusual items, was 42.2% in 2001,
compared with 42.3% in 2000. Lower gross profit margin in the Intimates and
Underwear business offset improved gross profit margins in the corporation's
other business segments.
Selling, general and administrative (SG&A) expenses increased 3.5% from the
prior year due principally to a 3.7% increase in media, advertising and
promotion spending. When measured as a percentage of sales, SG&A expenses were
33.0% in 2001, compared with 32.4% in 2000.
Operating income is defined as income from continuing operations before
income taxes, interest, corporate unallocated expenses, and amortization of
goodwill and trademarks. Operating income, excluding the unusual items,
decreased $4 million, or 0.2%, in 2001 from 2000. Businesses acquired net of
businesses sold subsequent to the start of 2000 increased operating income by
4.2%. Changes in foreign currency exchange rates had the effect of reducing
operating income by 4.6%. As a result, on a comparable basis, excluding the
impact of business acquisitions, dispositions, changes in foreign currency
exchange rates and unusual items, operating income increased 0.2% in the year.
Lower gross profit margins and increased SG&A spending offset sales increases
and resulted in the decline in reported operating income. Operating income
including unusual items increased 20.1% versus the comparable period of the
prior year.
Net interest expense increased $4 million to $180 million during 2001, due
to higher average interest rates compared with the prior year. Unallocated
corporate expenses which are costs not directly attributable to specific
business segment operations, increased to $231 million in 2001. Higher
corporate office and minority interest expense in the current year long with
favorable currency movements in the prior year were responsible for the
increase in the unallocated corporate expenses. Goodwill and trademark
amortization increased $20 million to $191 million as a result of business
acquisitions completed over the past year.
Income from continuing operations before income taxes, excluding unusual
items, decreased 8.2% in 2001. The effective tax rate decreased from 26.1% to
21.0% of pretax income from continuing operations during the year, as a result
of increased earnings in certain foreign jurisdictions that had lower tax
rates. Income from continuing operations, excluding unusual items, decreased
1.9%, while income from continuing operations per diluted share increased to
$1.33, or 4.7%, in 2001, due to fewer average shares outstanding during the
period. Including the unusual items, income from continuing operations
increased 38.4% and diluted earnings per share increased 47.2% to $1.87 in
2001.
Discontinued Operations - On December 4, 2000, the corporation completed the
sale of the PYA/Monarch foodservice operation. The operating results of this
business are included in discontinued operations until the date of
disposition. These results contributed pretax income of $42 million and after-
tax income of $25 million, or $.03 per diluted share, during 2001.
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Consolidated Net Income - Excluding the unusual items, net income declined 4.9%,
from $1,222 million in 2000 to $l,161 million in 2001. Diluted earnings per
share increased 1.5% to $1.36 in 2001 due to fewer average shares outstanding
during the period. Including the unusual items, net income was $2,266 million,
an increase of 85.5%, and diluted earnings per share increase 97.8% to $2.65.
Operating Results by Continuing Business Segment--2001 Compared With 2000
The following discussion comparing 2001 business segment performance with
2000 excludes the unusual items as defined above.
Net sales in the Sara Lee Foods segment declined 0.1% in 2001. The
strengthening of the U.S. dollar in relation to foreign currencies decreased
reported sales by 2.6%, and business dispositions, net of acquisitions
completed subsequent to the start of 2000, also decreased sales by 0.4%.
Excluding the impact of changes in foreign currency, acquisitions and
dispositions, comparable sales in the Sara Lee Foods segment increased 2.9%.
During 2001, the corporation completed the disposition of its Bakery
operations in Europe and India; Argal, a Spanish meat business; and Ozark
Salad, a domestic prepared salad business. Excluding acquisitions and divested
businesses, Packaged Meats unit volumes decreased 1%. Increased sales of
branded meat products in the United States were offset by weak unit volumes in
Europe resulting from higher commodity costs and animal safety concerns.
Excluding divested businesses, unit sales for Bakery operations declined 2%.
Operating income in Sara Lee Foods decreased 2.0% in 2001. The
strengthening of the U.S. dollar in relation to foreign currencies decreased
reported operating income by 2.0%, and business dispositions net of
acquisitions completed subsequent to the start of 2000 increased operating
income by 4.4%. Excluding the impact of changes in foreign currency,
acquisitions and dispositions, comparable operating income in this segment
declined 4.4%. Increased media, advertising and promotion spending offset
improved gross margins in the meats and bakery operations.
Net sales in the Beverage segment increased 2.2% in 2001. Businesses
acquired subsequent to the start of 2000 increased reported sales by 11.4%.
The strengthening of the U.S. dollar in relation to foreign currencies
decreased reported sales by 6.6%. Thus, excluding acquisitions and changes in
foreign currency, sales decreased 2.6%, reflecting base business unit sales
declines and the negative impact of lower commodity coffee costs during the
year, which resulted in lower prices to customers. Excluding acquisitions,
unit volumes for roasted coffee and coffee concentrates, the segment's primary
business, decreased 2%. Unit volumes grew 30% including sales contributed from
recently acquired coffee businesses.
Operating income for the Beverage segment increased 2.8% in 2001.
Businesses acquired subsequent to the start of 2000 increased operating income
by 6.9%. The strengthening of the U.S. dollar in 2001 decreased reported
operating income by 8.6%. Thus, on a comparable basis, operating income
increased 4.5% from 2000. The increase reflects an improved gross profit
margin offset in part by higher media, advertising and promotion spending in
relation to 2000.
Net sales in the Household Products segment declined 3.1% and operating
income decreased 2.9%, reflecting the impact of foreign currencies on this
segment in 2001. The strengthening of the U.S. dollar relative to foreign
currencies, particularly in Europe, reduced both reported sales and operating
income by 9.3%. Excluding the impact of acquisitions and changes in foreign
currencies, sales and operating income in Household Products increased 6.1%
and 6.3%, respectively. Total unit volumes for this segment's four core
categories --shoe care, body care, insecticides and air fresheners--increased
4% in 2001.
Intimates and Underwear net sales of $7.8 billion increased 2.2% over the
prior year. Businesses acquired net of businesses sold subsequent to the start
of 2000 increased reported sales by 7.3%, while the impact of exchange rate
changes resulting from the strengthening of the U.S. dollar in 2001 reduced
reported sales by 2.6%. As a result, on a comparable basis, sales decreased
2.5%. Operating income was unchanged in 2001, reflecting a decline in the
segment's gross profit margin, due largely to significant competitive
pressures in several basic
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apparel retail sectors and an increase in media, advertising and promotion
spending. Businesses acquired net of businesses sold subsequent to the start
of 2000 increased operating income by 4.2%, and the impact of exchange rate
changes resulting from the strengthening of the U.S. dollar reduced operating
income by 1.6%. Thus, on a comparable basis, excluding the impacts of
acquisitions, dispositions and changes in foreign currencies, operating income
decreased 2.6%. The sales and operating income performance of this segment
include the results of the disposed businesses (Coach, Champion Europe and the
Australasian Intimates and Underwear business) until the date of disposition.
Had these disposed businesses been excluded from both 2001 and 2000 results,
reported net sales would have risen 5.3% and reported operating income would
have fallen 4.1%. Intimate apparel unit sales increased 14% in 2001 including
acquisitions, and increased 2% excluding unit sales volumes contributed from
recent acquisitions. Worldwide Knit Products unit sales, including
acquisitions, increased 1% in relation to 2000, combining a 7% increase in
activewear volumes and a 2% decline in the underwear category. Excluding the
impact of recent acquisitions, Knit Products volumes declined 2%. Unit volumes
for Worldwide Legwear were unchanged including acquisitions, reflecting a 9%
increase in sock unit sales and a 9% decline in sheer hosiery volumes. Legwear
volumes declined 4% excluding acquisitions.
Consolidated Results of Operations--2000 Compared With 1999
Unusual Items Affecting Comparability - In 1999, the corporation recognized a
gain on the disposition of its international tobacco operations and a charge
related to the recall of certain meat products. The net impact of these two
events increased 1999 income from continuing operations and net income by $47
million. Diluted earnings per share in 1999 excluding these two items was
$1.21 and including these two items was $1.26. For purposes of discussing the
consolidated results of operations and segment performance in 2000 as compared
to 1999 these items are defined as unusual items. A summary of each item
follows:
Divestiture of Tobacco Business - In the first week of 1999, the corporation
disposed of certain assets related to its international tobacco operation. The
corporation received cash proceeds of $386 million upon closing the
transaction, had an investment in the net assets of the business of $249
million and recognize a pretax gain of $137 million in 1999. The gain on this
sale increased 1999 income by $97 million, or $.10 of diluted earnings per
share.
Product Recall - In December 1998, the corporation announced that it was
recalling specific production lots of hot dogs and other packaged meat
products that could contain Listeria bacteria. The estimated cost of this
action was recognized in the second quarter of 1999 and reduced 1999 income
from continuing operations before income taxes, income from continuing
operations and income from continuing operations per common share--diluted by
$76 million, $50 million and $.05 per share, respectively. The recall charge
recognized the estimated costs associated with the return and destruction of
affected products sold through retail grocery stores and selected foodservice
channels in the United States, the destruction of affected inventory in the
corporation's Zeeland, Michigan facility, and liabilities incurred as a result
of these actions. Substantially all of the product and inventory subject to
recall was subsequently destroyed. The actual cost of the inventory destroyed
and related disposition costs were consistent with prior estimates.
Continuing Operations - Net sales increased 1.4% to $17.5 billion in 2000 from
$17.3 billion in 1999. Businesses acquired net of businesses sold subsequent
to the start of 1999 increased net sales by 4.7%. The strengthening of the
U.S. dollar in relation to foreign currencies during the year had the effect
of reducing reported sales by 3.4%. The strength of the U.S. dollar in
relation to most European currencies, including those of several European
Union member countries whose currency exchange rates were previously fixed
with the euro, was offset in part by the strength of the currencies in Japan,
Mexico, Canada and Indonesia. Since 1999 was a 53-week year, prior-year
results reflect the impact of an additional week of reported sales. On a
comparable basis, excluding the impact of acquisitions, dispositions, foreign
currency exchange rate changes and the additional week included in the fourth
quarter of 1999, sales increased 1.9% over the prior year. Comparable sales
growth in Household Products and Intimates and Underwear contributed to this
increase: Sara Lee Foods and Beverage reported sales declines of 0.5% and
0.4%, respectively, on a comparable basis.
15
<PAGE>
The gross profit margin was 42.3% in 2000, compared with 42.8% in 1999.
Higher gross profit margins in Sara Lee's Beverage and Household Products
segments, which were favorably impacted by improved sales volumes during the
year, were offset by lower gross profit margins in Sara Lee Foods. Intimates
and Underwear segment gross profit margins were down slightly from the prior
year as well. The gross profit margin decline in Sara Lee Foods resulted from
lower unit volumes in both the Packaged Meats and Bakery operations, and
increased costs in the Packaged Meats business caused by significantly higher
commodity costs, and the continuing effects during much of the year from the
December 1998 product recall.
SG&A expenses decreased 1.3% from the prior year, or 0.8% when measured on
a percentage of sales basis. The lower level of SG&A expenses in 2000 was
attributable to continuing benefits from completed restructuring actions,
lower corporate and administrative overhead, and reduced levels of advertising
and promotion spending.
Excluding the unusual items, operating income increased $31 million, or
1.5% in 2000. Businesses acquired net of businesses sold subsequent to the
start of 1999 increased operating income by 2.2%. The strengthening of the
U.S. dollar relative to foreign currencies had the effect of reducing
operating income by 3.2%. Prior-year results reflect the impact of an
additional week in the fourth quarter of 1999. Thus, on a comparable basis,
excluding the impact of business acquisitions, dispositions, changes in
foreign currency exchange rates and 1999's 53rd week, operating income
increased 4.4%, reflecting improvements on a comparable basis in all business
segments except Sara Lee Foods, which declined significantly in relation to
the prior year.
Net interest expense increased to $176 million in 2000, compared with $141
million in 1999. This increase was the result of higher average outstanding
debt levels required to support acquisitions and the corporation's share
repurchase activities during the year. Unallocated corporate expenses, which
are costs not directly attributable to specific business segment operations,
decreased to $127 million, principally as a result of decreased corporate
office administration costs and lower expenses associated with incentive
compensation and benefit plans.
The following comparisons exclude the impact of the unusual items
recognized in 1999. Income from continuing operations before income taxes of
$1.6 billion increased 3.8% during 2000. The effective tax rate decreased from
28.2% to 26.1% of pretax income from continuing operations, resulting
primarily from increased earnings in certain foreign jurisdictions with lower
tax rate. Income from continuing operations increased 6.9% to $1.2 billion,
while income from continuing operations per diluted share increased 11.4% to
$1.27 per share. Diluted earnings per share increased at a rate in excess of
income from continuing operations because of fewer average shares and
exercisable stock options outstanding during the year. Including the unusual
items, income from continuing operations and related diluted earnings per
share increased 2.4% and 6.7%, respectively.
Discontinued Operations - Net sales of the PYA/Monarch foodservice segment were
$2,903 million in 2000 and $2,742 million in 1999, an increase of 5.9%. Pretax
income of this segment increased 5.7% from $101 million in 1999 to $107
million in 2000. Income from the discontinued PYA/Monarch operation increased
5.5%, from $60 million in 1999 to $64 million in 2000.
Consolidated Net Income - Excluding the impact of unusual items, net income
increased 6.9%, from $1,144 million in 1999 to $1,222 million in 2000, while
diluted earnings per share increased 10.7% to $1.34. Diluted earnings per
share increased at a rate in excess of net income because of fewer average
shares and exercisable stock options outstanding during the year. Including
the impact of unusual items, net income increased 2.6% in 2000 while diluted
earnings per share increased 6.3%.
Operating Results by Continuing Business Segment--2000 Compared With 1999
The following discussion comparing 2000 business segment performance with
1999 excludes the unusual items noted above.
Net sales in the Sara Lee Foods segment declined 3.1% in 2000, largely due
to unit volume declines in both the Packaged Meats and Bakery operations.
Sales were negatively affected during much of the year by the impact
16
<PAGE>
of the business disruption caused by the December 1998 recall of certain
packaged meat products produced at the corporation's plant in Zeeland,
Michigan. Excluding the impact of acquisitions, dispositions, changes in
foreign currencies and the 53rd week in 1999, segment sales decreased 0.5%.
Packaged Meats unit volumes were down 5% excluding acquisitions and the impact
of the 53rd week in 1999, reflecting declines in both the U.S. and European
markets. Worldwide unit sales for Sara Lee Bakery declined 9%, as the impact
of the 53rd week in 1999 was offset by acquisitions completed during the year.
Volume declines in the U.S. bakery-deli category coupled with declines in
Europe contributed to the unit sales decrease during the year. Including
acquisitions, Packaged Meats unit volumes declined 5%.
Operating income in the Sara Lee Foods segment declined 21.7% in 2000. This
decline reflects higher costs in the packaged meats businesses caused by
significantly higher commodity costs, the continuing effects during much of
the year from the December 1998 product recall and the profit impacts of lower
sales volumes in both the Packaged Meats and Bakery operations. On a
comparable basis, excluding the impact of acquisitions, dispositions, changes
in foreign currencies and 1999's 53rd week, segment operating income declined
19.6%.
Net sales in Sara Lee's Beverage segment increased 7.6%. Businesses
acquired subsequent to the start of the prior fiscal year contributed
significantly to segment results, increasing reported sales in 2000 by 17.1%.
The strengthening of the U.S. dollar in relation to key European currencies
decreased reported sales by 7.3%. On a comparable basis, excluding the impact
of acquisitions, currency exchange rate changes and the 53rd week in 1999,
sales decreased 0.4%. Net sales were negatively impacted by significantly
lower commodity coffee costs in 2000, which resulted in lower prices to
customers during much of the year. Excluding acquisitions and the 1999 53rd
week impact, unit volumes for roasted coffee and coffee concentrates, the
segment's primary business, increased 1% as consumers reacted favorably to
product offerings and lower coffee prices. Unit volumes grew 26% including
sales contributed from recently acquired businesses.
Operating income for the Beverage segment increased 9.0%, reflecting the
profit impact of higher segment sales volumes and the benefits from lower
commodity costs during the year. Changes in foreign currency exchange rates
had the effect of reducing operating income in the Beverage segment by 7.8%.
Excluding the impact of acquisitions, changes in foreign currencies and the
53rd week in 1999, operating income increased 11.0%.
Net sales and operating income in the Household Products segment increased
2.8% and 8.3%, respectively. The strengthening of the U.S. dollar in relation
to foreign currencies, particularly in Europe, reduced reported sales and
operating income by 5.8% and 5.4%, respectively. Sales and operating income
contributed from recently completed acquisitions largely offset the impact of
1999's 53rd week. As a result, excluding the impact of acquisitions,
dispositions, changes in foreign currencies and the 53rd week in 1999,
Household Products segment sales and operating income increased 8.9% and
14.3%, respectively. Excluding acquisitions and the 53rd week impact, unit
volumes for this segment's four core categories--shoe care, body care,
insecticides and air fresheners--increased 10%. Unit volumes contributed from
acquisitions made during the year offset the impact of 1999's 53rd week.
Intimates and Underwear net sales improved 2.1%, while operating income
increased 8.7% to $844 million. Excluding the impact of acquisitions,
dispositions, changes in foreign currencies and 1999's 53rd week, sales
increased 2.7% and operating income increased 11.2%. Unit volumes for
Worldwide Legwear declined 4%, combining a 6% increase in sock unit sales with
an 8% decline in sheer hosiery volumes, reflecting the continuing decline in
the global sheer hosiery market. Unaffected by acquisitions during the year,
sock unit volumes increased 8% and sheer hosiery unit sales declined 6%,
excluding the impact, of 1999's 53rd week. Worldwide Knit Products unit sales
improved 6%, including unit gains of 9% in the underwear and 6% in the
activewear categories. On a comparable basis, excluding acquisitions and the
1999 53rd week impact, Knit Products unit volumes increased 8%. Intimate
Apparel unit sales increased 6%, with strength in both the United States and
Europe. Excluding the impact of acquisitions and 1999's 53rd week, unit sales
improved 8%. The Coach accessories business reported improved unit volumes,
sales and operating income during the year, reflecting growth in both the
direct-to-consumer and wholesale channels. Intimates and Underwear segment
operating income was favorably impacted during the year by the restructuring
program initiated in 1998.
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<PAGE>
Financial Position
Net cash provided by operating activities was $1,496 million in 2001,
$1,540 million in 2000 and $1,603 million in 1999. Net cash from operations in
2001 was negatively impacted by a number of factors. First, the PYA/Monarch
foodservice business, which generated $84 million of cash from operations in
2000, used $24 million of cash in the period prior to its disposition. Second,
a number of the other operating units disposed of in 2001 generated lower
levels of operating cash flow than in 2000. Finally, the reshaping activities
taking place in 2001 required the use of cash. The net reduction in operating
cash flows in 2000 was primarily the result of increased receivable and
inventory levels in comparison with the prior year, which offset cash
generated by improved earnings during the year.
Net cash generated from investing activities during 2001 was $1,065
million, while net cash used in investing activities was $1,296 million in
2000 and $192 million in 1999. This increase in cash in 2001 resulted from
management's focus on disposing of certain non-core businesses, generating
proceeds of $1,819 million. These proceeds, in conjunction with management's
decision to finance a larger portion of the capital needs of the corporation
with long-term debt, resulted in the repayment of virtually all of the short-
term debt at the end of 2001. The repayment of the short-term debt in
conjunction with the business dispositions reduced the corporation's current
liabilities to $5.0 billion at the end of 2001, as compared with $6.8 billion
in the prior year.
As of July 1, 2000, the corporation's current liabilities exceeded current
assets by $785 million. This working capital deficit resulted from the
corporation's emphasis on the management of trade receivables, payables and
inventories, as well as the decision to finance a portion of its capital needs
with short-term debt.
The increase in cash used for investment activities in 2000 as compared to
1999 is the result of a $621 million increase in cash expenditures for
purchases of businesses and property and equipment, and lower proceeds from
the disposition of businesses and assets versus the prior year. The
corporation received $570 million of cash from the disposition of businesses
and investments, and the sale of assets in 1999. These proceeds relate
primarily to the sale during the first quarter of the international tobacco
business, which resulted in the receipt of $386 million of cash proceeds, and
sales of assets as part of the ongoing program to reduce the level of assets
deployed in the business.
During 2001, the corporation acquired several companies for an aggregate
purchase price of $300 million. The principal acquisitors were Cafe Pilao
Caboclo Ltda., a Brazilian manufacturer and marketer of roasted coffee;
Amando, a European processed meat manufacturer; and Zorba, a Brazilian apparel
manufacturer.
During 2000, the corporation acquired several companies and made certain
equity method investments for an aggregate purchase price of $1 billion, which
consisted of $743 million in cash and $257 million in stock. The principal
acquisitions were Chock full o'Nuts Corporation, a roaster, packer and
marketer of coffee in the United States; the North American coffee business of
Nestle S.A., which includes the roasted and ground coffee products sold under
the Hills Bros, MJB and Chase & Sanborn brands; Outer Banks Inc., a
manufacturer, marketer and distributor of knitted sport shirts; and Courtaulds
Textiles plc, a European producer, marketer and distributor of private-label
and branded apparel and fabrics based in the United Kingdom. The corporation
also acquired a minority interest in Johnsonville Sausage, a domestic
manufacturer and marketer of fresh meat products.
During 1999, the corporation acquired several companies for an aggregate
purchase price of $234 million in cash and $9 million in common stock. The
principal acquisitions were Continental Coffee, a domestic manufacturer,
marketer and distributor of roasted and ground coffee, and Monsavon, a
European marketer and distributor of personal body care products.
Under the corporation's ongoing stock repurchase plan, the corporation
repurchased common stock with a value of $643 million in 2001, $1.0 billion in
2000 and $1.3 billion in 1999. Since 1998, the corporation has repurchased
common stock with a total value of approximately $4.5 billion. On June 27,
2001, the corporation's board of directors voted to increase the number of
shares of common stock authorized for repurchase, resulting
18
<PAGE>
in a total remaining purchase authorization at the end of 2001 of 25 million
shares. Using cash proceeds from business dispositions and issuances of long-
term debt during 2001, the corporation repaid a net $1.9 billion of short-term
debt. During 2000, $1,245 million of net cash was received from long- and
short-term borrowing, while in 1999, net cash of $187 million was received.
Cash dividends increased to $486 million in 2001, compared with $485 million
in 2000 and $464 million in 1999.
As described in the subsequent event discussion below and in the notes to
the consolidated financial statements, the corporation has acquired The
Earthgrains Company (Earthgrains) for a cash purchase price of approximately
$1.9 billion plus the assumption of approximately $957 million of Earthgrains'
outstanding debt. Subsequent to year-end, in connection with completing this
acquisition, the corporation increased the size of its short-term credit
facilities to provide funding for both acquisitions and operations. The
corporation has numerous credit facilities available, including ongoing
revolving credit agreements totaling $3.82 billion, after the subsequent year-
end increase. Management considers these facilities sufficient to satisfy its
operating requirements. The initial funding of the Earthgrains acquisition was
completed with cash on hand and short-term debt, a portion of which management
intends to refinance on a long-term basis.
Subsequent Event
In July 2001, the corporation announced that it had entered into an
agreement to acquire Earthgrains, a fresh packaged bread and refrigerated
dough business in the United States and Europe. Under the terms of the
agreement, the corporation made a cash tender offer for all of Earthgrains'
common stock at $40.25 per share, or approximately $1.9 billion, plus the
assumption of Earthgrains' outstanding long-term debt of approximately $957
million. On August 7, 2001, upon the completion of the initial tender offer
period, the corporation acquired Earthgrains when approximately 93% of the
outstanding Earthgrains' shares were tendered and accepted by the corporation.
Following the completion of the tender offer period, Earthgrains was merged
into a subsidiary of Sara Lee.
Euro
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies (legacy
currencies) and one new common currency--the euro. The transition period for
the introduction of the euro extends through June 2002. Beginning January
2002, new euro-denominated bills and coins will be issued. In conjunction with
the conversion process to the euro, the corporation has taken steps to convert
its information technology systems to handle the new currency, prepared for
maintaining accounting, tax and other business records in the new currency and
is continuing to evaluate the ability of all significant vendors and customers
to accurately convert to the euro. Currently, the introduction and use of the
euro has not had a material effect on the corporation's foreign operations,
foreign exchange practices, or hedging and cash management activities. While
the corporation will continue to evaluate the impact of the euro over time,
based on currently available information, the corporation does not believe
that the introduction of the euro currency will have a material adverse impact
on its consolidated financial condition, cash flows or results of operations.
Issued But Not Yet Effective Accounting Standards
Following is a discussion of recently issued accounting standards that the
corporation will be required to adopt in a future period.
Business Combinations Accounting Standards - In June 2001, the Financial
Accounting Standards Board (FASB) issued Statements of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." The provisions of SFAS 141 apply to all business
acquisitions initiated after June 30, 2001, and the corporation will adopt the
provisions of SFAS 142 as of July 1, 2001. These pronouncements reflect a
fundamentally different approach to accounting for business combinations,
goodwill and other intangible assets than is currently required. Upon
adoption, the subsequent accounting for these items will change in the
following significant respects:
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. All business combinations will be accounted for by the purchase method.
. Intangibles acquired in a business combination are to be recognized apart
from goodwill if they either arise from contractual or other legal rights
or if the intangible is capable of being separated from the acquired
business and sold, licensed or transferred. Intangibles such as
trademarks, customer lists, customer contracts and relationships,
employment contracts, and licensing and royalty agreements meet these
recognition criteria and will need to be measured, and separately
classified apart from goodwill on the balance sheet for acquisitions
initiated after June 30, 2001. Previously recognized intangibles that do
not meet the criteria will need to be reclassified as goodwill.
. Accounting standards in place through June 30, 2001 concluded that
goodwill and all other intangible assets were wasting assets (that is,
finite lived) and thus the amounts assigned to them should be amortized
in determining net income. SFAS 142 does not presume that those assets
are wasting assets. Instead, goodwill and intangible assets that have
indefinite useful lives will not be amortized. Intangible assets that
have finite useful lives will continue to be amortized over their useful
lives.
. SFAS 142 sets forth a number of pertinent factors to be considered in
establishing a useful life of intangibles that differs from prior
guidelines. These factors include product life cycles, market competitive
and other economic trends, as well as the level of maintenance required
to obtain future cash flows. The useful lives of all intangible assets as
of July 1, 2001 will need to be reassessed using these criteria, and
future amortization will be based on these lives.
. Both goodwill and intangibles will need to be tested for impairment at
least annually using the specific guidance and criteria set out in SFAS
142. In the first interim period after adoption, an impairment test will
need to be performed using the guidance provided by this Statement.
All business combinations recognized in the attached consolidated financial
statements have been accounted for using the purchase method. The primary
intangible assets recognized by the corporation in connection with prior
business combinations have been trademarks associated with acquired brands. Of
the $207 million of amortization recognized in 2001, $97 million relates to
goodwill associated with business combinations and equity method investments;
$95 million relates to trademarks purchased or acquired in connection with
business combinations; and $15 million relates to purchased intangibles
unrelated to business combinations. No further amortization of goodwill will
be recognized in 2002 under the provisions of SFAS 142. The corporation is
currently evaluating the useful lives of its individual trademarks in
accordance with the provisions of SFAS 142. Under the provisions of these new
accounting requirements, certain trademarks will be classified as having an
infinite life and will not be amortized and the useful lives of other
trademarks will be adjusted to comply with the requirements of this new
standard.
Accounting for Sales Incentives -- Over the past year, the Emerging Issues Task
Force (EITF) of the FASB has reached conclusions on a number of issues
relating to the measurement, recognition and income statement classification
of a number of items that can be broadly characterized as sales incentives or
promotions. Set out below is a summary of each of those pronouncements which
the corporation must adopt in 2002.
. EITF Issue 00-14, "Accounting for Certain Sales Incentives"--This issue
addresses the recognition, measurement and income statement
classification of sales incentives voluntarily offered by a vendor
without charge to customers such as discounts, coupons, rebates and free
products or services. The corporation's current procedures regarding the
recognition and measurement of these types of sales incentives are in
substantial compliance with this statement. The consensus reached by the
EITF does however require that any cash sales incentives be recognized as
a reduction to revenue and any incentives involving free products must be
classified as cost of sales on the consolidated statement of income. The
corporation's current policy is to classify many of the sales incentives
in the selling, general and administrative expenses caption of the
consolidated statement of income. This statement will be adopted by the
corporation in the third quarter of 2002 and will likely result in the
reclassification of certain amounts within the consolidated statement of
income. The amount of this reclassification is currently being measured.
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. EITF Issue 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor Products"--This issue
addresses the income statement classification of a number of common
incentives offered to businesses that purchase products from the
corporation and then sell those products to third parties. The incentives
include payments made to retailers to obtain space on store shelves;
agreements to reimburse a retailer for a portion of the cost of product
advertising; and agreements to reimburse retailers for shortfalls in the
selling price of the corporation's products. The consensus does not
modify the policies followed by the corporation in the recognition or
measurement of these incentives, but it does require that these
incentives be presented in the income statement as a reduction of
revenue. The corporation's current policy is to classify certain of these
incentives in the selling, general and administrative expenses caption of
the consolidated statement of income. This statement will be adopted by
the corporation in the third quarter of 2002 and will likely result in
the reclassification of certain amounts within the consolidated statement
of income. The amount of this reclassification is currently being
measured.
Forward-Looking Information
From time to time, in oral statements and written reports, the corporation
discusses its expectations regarding future performance by making certain
"forward-looking statements." For example, such forward-looking statements are
contained in this Report on Form 10-K. 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 actual results may differ
materially from those expressed or implied herein. Consequently, the
corporation wishes to caution readers not to place undue reliance on any
forward-looking statements. Among the factors that could affect the
corporation's ability to achieve its stated goals are the following:
(i) impacts on reported earnings from fluctuations in foreign currency
exchange rates--particularly the euro--given the corporation's significant
concentration of business in Western Europe; (ii) significant competitive
activity, including advertising, promotional and price competition, and
changes in consumer demand for the corporation's products; (iii) inherent
risks in the marketplace associated with new product introductions, including
uncertainties about trade and consumer acceptance; (iv) the corporation's
ability to successfully integrate acquisitions, particularly Earthgrains, into
its existing operations and the availability of new acquisitions, joint
ventures and alliance opportunities that build stockholder value; (v) the
financial impact of the corporation's decision to dispose of certain non-core
business units; (vi) fluctuations in the cost and availability of various raw
materials; (vii) the effect on future revenues and expenses in the
corporation's Packaged Meats business resulting from the foot-and-mouth viral
disease in parts of Europe; (viii) the corporation's ability to complete
transactions anticipated in its business reshaping programs; and (ix) the
corporation's ability to realize forecasted savings, as well as improvements
in productivity and efficiency from its business reshaping programs. In
addition, the corporation's results may also be affected by general factors,
such as economic conditions, political developments, interest and inflation
rates, accounting standards, taxes, and laws and regulations in markets where
the corporation competes.
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 and
option contracts to hedge its exposure from adverse changes in foreign
exchange rates. The corporation's exposure to foreign exchange rates exists
primarily with the European euro, Mexican peso, Canadian dollar and British
pound against the U.S.
21
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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, a 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
modify interest payments under these instruments.
Commodities - The corporation is a purchaser of certain commodities such as
beef, pork, coffee, wheat, corn, butter, 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 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 amount 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.
<TABLE>
<CAPTION>
Value at risks amounts Time Confidence
dollars in millions Amounts Average Interval Level
------------------- ------- ------- -------- ----------
<S> <C> <C> <C> <C>
Interest rates........................... $6.3 $5.8 1 day 95
Foreign exchange......................... 9.9 6.0 1 day 95
</TABLE>
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 $4.5 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.
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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.
<TABLE>
<CAPTION>
First
Elected
Age at an
Name October 25, 2001 Offices and Positions Held Officer
---- ---------------- -------------------------- --------
<S> <C> <C> <C>
John H. Bryan........... 65 Chairman of the Board 3/28/74
C. Steven McMillan...... 55 President, Chief Executive Officer 3/31/83
and Director
Cary D. McMillan........ 43 Executive Vice President, Chief Financial 11/10/99
and Administrative Officer and Director
Frank L. Meysman........ 49 Executive Vice President and Director 6/26/92
Paul J. Lustig.......... 51 Executive Vice President 7/1/93
William A. Geoppinger... 62 Executive Vice President 10/31/00
Barry A. Beracha........ 59 Executive Vice President 8/30/01
Lee A. Chaden........... 59 Senior Vice President--Human Resources 10/25/90
Roderick A. Palmore..... 49 Senior Vice President, General Counsel 3/28/96
and Secretary
Mark J. McCarville...... 55 Senior Vice President--Corporate 6/24/82
Finance
Janet E. Bergman........ 42 Senior Vice President--Investor Relations 3/29/01
and Corporate Affairs
Ann E. Ziegler.......... 43 Senior Vice President--Corporate 10/26/00
Development
Wayne R. Szypulski...... 50 Senior Vice President and Controller 6/28/01
</TABLE>
--------
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
Cary D. McMillan and Barry H. Beracha. Before joining Sara Lee in 1999, Mr.
Cary McMillan was a partner of the international accounting firm of Arthur
Andersen LLP, most recently serving as the managing partner of its Chicago
office. Barry H. Beracha joined Sara Lee when Sara Lee acquired The
Earthgrains Company on August 8, 2001. From March 1996 until Sara Lee's
acquisition of Earthgrains, Mr. Beracha served as Chairman of the Board and
Chief Executive Officer of Earthgrains. Prior thereto, Mr. Beracha served as a
Vice President and Group Executive of Anheuser-Busch Companies, Inc.
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.
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 herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The information set forth in the Proxy Statement under the caption
"Sara Lee Stock Ownership by Certain Beneficial Owners" is incorporated herein
by reference.
(b) Security ownership by management as contained in the Proxy Statement
under the caption "Sara Lee Stock Ownership by Directors and Executive
Officers" is incorporated herein by reference.
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<PAGE>
(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
The information set forth in the Proxy Statement under the captions
"Compensation Committee Interlocks and Insider Participation" and "Employment
and Consulting Agreements" is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) 1. Financial Statements
Report of Independent Public Accountants............................... F-1
Consolidated Statements of Income -- Years ended July 3, 1999, July 1,
2000 and June 30, 2001................................................ F-3
Consolidated Balance Sheets-- July 3, 1999, July 1, 2000 and June 30,
2001.................................................................. F-4
Consolidated Statements of Common Stockholders' Equity-- For the period
June 27, 1998 to June 30, 2001........................................ F-6
Consolidated Statements of Cash Flows -- Years ended July 3, 1999, July
1, 2000 and June 30, 2001............................................. F-7
Notes to Financial Statements.......................................... F-8
(a) 2. Financial Statement Schedules
Report of Independent Public Accountants............................... F-33
Schedule II - Valuation and Qualifying Accounts........................ F-34
</TABLE>
<TABLE>
<S> <C>
(a) 3. Exhibits
</TABLE>
A list of exhibits to this Report is set forth in the Exhibit Index
appearing elsewhere in this Report and is incorporated herein by reference.
(b)Reports on Form 8-K
On the dates indicated, Sara Lee filed the following Current Reports on
Form 8-K with the Securities and Exchange Commission:
1. Current Report on Form 8-K filed on August 16, 2000 to disclose, under
Item 5 of the Report, a press release issued on August 16, 2000
regarding Sara Lee's sale of its PYA/Monarch, Inc. subsidiary;
2. Current Report on Form 8-K filed on December 19, 2000 to disclose, under
Item 2 of the Report, the completion of Sara Lee's disposition of all of
the outstanding common stock of its PYA/Monarch, Inc. subsidiary to JP
Foodservice Distributors, Inc., a wholly-owned subsidiary of Koninklijke
Ahold N.V.;
3. Current Report on Form 8-K filed on August 21, 2001, and amended Report
on Form 8-K/A filed on September 4, 2001, to disclose, under Item 2 of
the Report, information regarding Sara Lee's tender offer for all of the
outstanding shares of common stock of The Earthgrains Company;
4. Current Report on Form 8-K filed on September 4, 2001 to disclose, under
Item 5 of the Report, Sara Lee's audited consolidated financial
statements as of and for the fiscal year ended June 30, 2001,
Management's Discussion and Analysis of Financial Condition and Results
of Operations related thereto and the report of Sara Lee's independent
accountants, Arthur Andersen LLP; and
5. Current Report on Form 8-K filed on September 24, 2001 to file several
exhibits under Item 7 relating to Sara Lee's public issuance of notes.
24
<PAGE>
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 26, 2001
SARA LEE CORPORATION
/s/ Roderick A. Palmore
By: _________________________________
Roderick A. Palmore Senior Vice
President, General Counsel And
Secretary
Pursuant to the requirements of the Securities 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 26, 2001.
<TABLE>
<CAPTION>
Signature Title
--------- -------
<S> <C>
/s/ John H. Bryan Chairman of the Board
___________________________________________
John H. Bryan
/s/ C. Steven McMillan President, Chief Executive Officer and
___________________________________________ Director
C. Steven McMillan
*/s/ Frank L. Meysman Executive Vice President and Director
___________________________________________
Frank L. Meysman
/s/ Cary D. McMillan Executive Vice President, Chief Financial
___________________________________________ and Administrative Officer and Director
Cary D. McMillan
/s/ Wayne R. Szypulski Senior Vice President and Controller
___________________________________________
Wayne R. Szypulski
*/s/ Paul A. Allaire Director
___________________________________________
Paul A. Allaire
*/s/ Frans H.J.J. Andriessen Director
___________________________________________
Frans H.J.J. Andriessen
*/s/ Duane L. Burnham Director
___________________________________________
Duane L. Burnham
*/s/ Charles W. Coker Director
___________________________________________
Charles W. Coker
*/s/ James S. Crown Director
___________________________________________
James S. Crown
*/s/ Willie D. Davis Director
___________________________________________
Willie D. Davis
*/s/ Vernon E. Jordan, Jr. Director
___________________________________________
Vernon E. Jordan, Jr.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -------
<S> <C>
*/s/ James L. Ketelsen Director
___________________________________________
James L. Ketelsen
*/s/ Hans B. van Liemt Director
___________________________________________
Hans B. van Liemt
*/s/ Joan D. Manley Director
___________________________________________
Joan D. Manley
*/s/ Rozanne L. Ridgway Director
___________________________________________
Rozanne L. Ridgway
*/s/ Richard L. Thomas Director
___________________________________________
Richard L. Thomas
*/s/ John D. Zeglis Director
___________________________________________
John D. Zeglis
</TABLE>
--------
* By Roderick A. Palmore as Attorney-in-Fact pursuant to Powers of Attorney
executed by the directors listed above, which Powers of Attorney have been
filed with the Securities and Exchange Commission.
/s/ Roderick A. Palmore
By: _________________________________
Roderick A. Palmore
As Attorney-in-Fact
26
<PAGE>
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 30, 2001,
July 1, 2000, and July 3, 1999, and the related consolidated statements of
income, common stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 2001. 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 auditing standards generally
accepted in the United States. 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 30, 2001, July 1, 2000, and July 3,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
July 27, 2001
F-1
<PAGE>
Sara Lee Corporation and Subsidiaries
FINANCIAL SUMMARY
(dollars in millions except per share data)
<TABLE>
<CAPTION>
Years ended
-------------------------------------------------
June 30, July 1, July 3, June 27, June 28,
2001(1) 2000 1999(2,4) 1998(3) 1997
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Results of Operations
Continuing Operations
Net sales................... $ 17,747 $ 17,511 $ 17,270 $ 17,426 $ 17,361
Operating income (loss)(5).. 2,453 2,041 2,071 (28) 1,990
Income (loss) before income
taxes...................... 1,851 1,567 1,570 (531) 1,401
Income (loss)............... 1,603 1,158 1,131 (575) 960
Effective tax rate.......... 13.4% 26.1% 28.0% 8.2% 31.5%
Income (loss) per common
share
Basic....................... 1.94 1.31 1.24 (.63) .97
Diluted..................... 1.87 1.27 1.19 (.63) .94
Net income (loss)............ 2,266 1,222 1,191 (523) 1,009
Net income (loss) per common
share
Basic....................... 2.75 1.38 1.31 (.57) 1.02
Diluted..................... 2.65 1.34 1.26 (.57) .99
---------------------------------------------------------------------------------
Financial Position
Total assets................. $ 10,167 $ 11,611 $ 10,292 $ 10,784 $ 12,775
Total debt................... 3,221 4,683 3,344 3,061 2,663
Operating cash flow to total
debt(6)..................... 42.0% 29.8% 41.4% 55.0% 47.0%
Return on invested
capital(7).................. 23.9% 24.2% 21.3% 17.5% 16.0%
---------------------------------------------------------------------------------
Per Common Share(8)
Dividends.................... $ .57 $ .53 $ .49 $ .45 $ .41
Book value at year-end....... 1.43 1.46 1.43 1.97 4.46
Market value at year-end..... 18.94 19.31 22.50 28.31 21.03
Shares used in the
determination of net income
per share
Basic (in millions)......... 819 875 903 939 959
Diluted (in millions)....... 854 912 944 939 1,004
---------------------------------------------------------------------------------
Other Information
Cash flow--Net cash from
operating activities........ $ 1,496 $ 1,540 $ 1,603 $ 1,935 $ 1,552
Depreciation................. 392 402 352 409 470
Amortization of intangibles.. 207 200 181 186 193
Capital expenditures......... 532 647 535 474 547
Media advertising expense.... 347 391 414 401 414
Total advertising and
promotion expense........... 2,069 1,997 2,010 1,970 1,936
Common stockholders of
record...................... 78,400 82,600 83,300 85,100 88,800
Number of employees.......... 141,500 154,200 133,900 134,800 137,100
---------------------------------------------------------------------------------
</TABLE>
(1) In 2001, the gain on the disposal of Coach of $967, net of the business
dispositions and other charges of $554, had the following impacts on
continuing operations--income before income taxes and income increased
$413 and $467, respectively. Including the after-tax gain on the sale of
PYA/Monarch of $638, recorded as discontinued operations, and the previous
items, net income increased $1,105.
(2) In 1999, the gain on the sale of the tobacco business of $137, net of the
product recall charge of $76, had the following impacts on continuing
operations--income before income taxes and income increased $61 and $47,
respectively. Net income increased $47 as a result of these items.
(3) In 1998, a restructuring provision had the following impacts on continuing
operations--income before income taxes and income were reduced by $2,038
and $1,624, respectively. Net income was reduced by $1,625 as a result of
the restructuring.
(4) 53-week year.
(5) Operating income (loss) is reconciled to income from continuing operations
in the business segment information note to the consolidated financial
statements.
(6) Net cash flow from operating activities as a percentage of total balance
sheet debt, imputed lease liabilities and auction preferred stock.
(7) The numerator in the Return on Invested Capital (ROIC) computation
consists of net income, plus after-tax interest, amortization and the cash
generated or used from the change in deferred taxes. The denominator in
the ROIC computation consists of the average of total assets less
payables, accruals and investments in associated companies for the year.
(8) Restated for the 2-for-1 stock split in 1999.
The Notes to Financial Statements should be read in conjunction with the
Financial Summary.
F-2
<PAGE>
Sara Lee Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions except per share data)
<TABLE>
<CAPTION>
Years ended
-------------------------
June
30, July 1, July 3,
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Continuing Operations
Net sales........................................... $17,747 $17,511 $17,270
------- ------- -------
Cost of sales...................................... 10,264 10,100 9,879
Cost of sales--product line exit costs............. 26 -- --
Selling, general and administrative expenses....... 5,865 5,668 5,741
Interest expense................................... 270 252 237
Interest income.................................... (90) (76) (96)
Unusual items
Gain on disposal of Coach business................ (967) -- --
Business dispositions and other charges........... 528 -- (137)
Product recall charge............................. -- -- 76
------- ------- -------
15,896 15,944 15,700
------- ------- -------
Income from continuing operations before income
taxes............................................. 1,851 1,567 1,570
Income taxes....................................... 248 409 439
------- ------- -------
Income from Continuing Operations................... 1,603 1,158 1,131
Discontinued Operations
Income from discontinued operations, net of income
taxes............................................. 25 64 60
Gain on disposal of discontinued operations, net of
income taxes...................................... 638 -- --
------- ------- -------
Net Income.......................................... $ 2,266 $ 1,222 $ 1,191
======= ======= =======
Income from Continuing Operations per Share of
Common Stock
Basic.............................................. $ 1.94 $ 1.31 $ 1.24
======= ======= =======
Diluted............................................ $ 1.87 $ 1.27 $ 1.19
======= ======= =======
Net Income per Share of Common Stock
Basic.............................................. $ 2.75 $ 1.38 $ 1.31
======= ======= =======
Diluted............................................ $ 2.65 $ 1.34 $ 1.26
======= ======= =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-3
<PAGE>
Sara Lee Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share data)
<TABLE>
<CAPTION>
June
30, July 1, July 3,
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Assets
Cash and equivalents.................................. $ 548 $ 314 $ 279
Trade accounts receivable, less allowances of $157 in
2001, $195 in 2000 and $193 in 1999.................. 1,538 1,764 1,611
Inventories
Finished goods....................................... 1,715 1,941 1,602
Work in process...................................... 454 529 470
Materials and supplies............................... 413 481 463
------- ------- -------
2,582 2,951 2,535
Other current assets.................................. 321 382 294
Net assets of businesses held for sale................ 94 563 315
------- ------- -------
Total current assets.................................. 5,083 5,974 5,034
------- ------- -------
Other non-current assets.............................. 304 470 326
Property
Land................................................. 98 99 94
Buildings and improvements........................... 1,646 1,745 1,613
Machinery and equipment.............................. 2,891 3,188 2,756
Construction in progress............................. 266 330 260
------- ------- -------
4,901 5,362 4,723
Accumulated depreciation............................. 2,755 3,043 2,699
------- ------- -------
Property, net......................................... 2,146 2,319 2,024
Trademarks and other identifiable intangibles, net.... 1,097 1,090 1,022
Goodwill, net......................................... 1,537 1,758 1,886
------- ------- -------
$10,167 $11,611 $10,292
======= ======= =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
balance sheets.
F-4
<PAGE>
Sara Lee Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share data)
<TABLE>
<CAPTION>
June
30, July 1, July 3,
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
Notes payable....................................... $ 101 $ 2,054 $ 1,116
Accounts payable.................................... 1,505 1,762 1,645
Accrued liabilities
Payroll and employee benefits...................... 812 928 779
Advertising and promotion.......................... 343 421 386
Taxes other than payroll and income................ 84 104 89
Income taxes....................................... 423 55 45
Other.............................................. 1,210 1,054 1,320
Current maturities of long-term debt................ 480 381 336
------- ------- -------
Total current liabilities........................... 4,958 6,759 5,716
------- ------- -------
Long-term debt...................................... 2,640 2,248 1,892
Deferred income taxes............................... 244 148 71
Other liabilities................................... 563 581 701
Minority interest in subsidiaries................... 625 616 613
Preferred stock (authorized 13,500,000 shares; no
par value)
ESOP convertible: Issued and outstanding--3,289,979
shares in 2001, 3,481,017 shares in 2000 and
3,654,073 shares in 1999.......................... 238 252 265
Unearned deferred compensation..................... (223) (227) (232)
Common stockholders' equity
Common stock: (authorized 1,200,000,000 shares;
$.01 par value)
Issued and outstanding--781,964,060 shares in
2001, 846,330,749 shares in 2000 and 883,782,525
shares in 1999.................................... 8 8 9
Capital surplus.................................... -- -- 508
Retained earnings.................................. 2,635 2,393 1,760
Accumulated other comprehensive loss............... (1,521) (1,146) (1,006)
Unearned restricted stock issued for future
services.......................................... -- (21) (5)
------- ------- -------
Total common stockholders' equity................... 1,122 1,234 1,266
------- ------- -------
$10,167 $11,611 $10,292
======= ======= =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
balance sheets.
F-5
<PAGE>
Sara Lee Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(dollars in millions)
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Common Capital Retained Restricted Comprehensive Comprehensive
Total Stock Surplus Earnings Stock Income (Loss) Income (Loss)
------ ------ ------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at June 27,
1998................... $1,816 $ 614 $ -- $2,036 $(50) $ (784)
Net income.............. 1,191 -- -- 1,191 -- -- $1,191
Translation adjustments,
net of tax of $(51).... (161) -- -- -- -- (161) (161)
Unrealized gains on
securities, net of
tax.................... 1 -- -- -- -- 1 1
Minimum pension
liability, net of tax
of $32................. (62) -- -- -- -- (62) (62)
------
Comprehensive income.... $ 969
======
Cash dividends.......... (464) -- -- (464) -- --
Stock issuances
(cancelations)
Business acquisitions.. 9 -- 9 -- -- --
Stock option and
benefit plans......... 111 4 107 -- -- --
Restricted stock, less
amortization of $28... (15) -- (60) -- 45 --
Tax benefit related to
incentive stock
options................ 66 -- 66 -- -- --
Reacquired shares....... (1,279) (13) (864) (402) -- --
Two-for-one stock
split.................. -- 609 -- (609) -- --
Par value change........ -- (1,208) 1,208 -- -- --
ESOP tax benefit,
redemptions and other.. 53 3 42 8 -- --
-------------------------------------------------------------------------------------------------
Balances at July 3,
1999................... 1,266 9 508 1,760 (5) (1,006)
Net income.............. 1,222 -- -- 1,222 -- -- $1,222
Translation adjustments,
net of tax of $(75).... (181) -- -- -- -- (181) (181)
Unrealized losses on
securities, net of
tax.................... (1) -- -- -- -- (1) (1)
Minimum pension
liability, net of tax
of $(22)............... 42 -- -- -- -- 42 42
------
Comprehensive income.... $1,082
======
Cash dividends.......... (485) -- -- (485) -- --
Stock issuances
(cancelations)
Business acquisitions.. 257 -- 257 -- -- --
Stock option and
benefit plans......... 84 -- 84 -- -- --
Restricted stock, less
amortization of $26... (28) -- (12) -- (16) --
Tax benefit related to
incentive stock
options................ 65 -- 65 -- -- --
Reacquired shares....... (1,032) (1) (919) (112) -- --
ESOP tax benefit,
redemptions and other.. 25 -- 17 8 -- --
-------------------------------------------------------------------------------------------------
Balances at July 1,
2000................... 1,234 8 -- 2,393 (21) (1,146)
Net income.............. 2,266 -- -- 2,266 -- -- $2,266
Translation adjustments,
net of tax of $98...... (263) -- -- -- -- (263) (263)
Minimum pension
liability, net of tax
of $58................. (107) -- -- -- -- (107) (107)
Transition adjustment
related to change in
accounting for
derivative instruments
and hedging activities,
net of tax of $3....... 6 -- -- -- -- 6 6
Net unrealized loss on
qualifying cash flow
hedges................. (11) -- -- -- -- (11) (11)
------
Comprehensive income.... $1,891
======
Cash dividends.......... (486) -- -- (486) -- --
Stock issuances
(cancelations)
Stock option and
benefit plans......... 104 -- 104 -- -- --
Restricted stock....... (13) -- -- (34) 21 --
Tax benefit related to
incentive stock
options................ 10 -- 10 -- -- --
Reacquired shares--
repurchases............ (643) -- (129) (514) -- --
Exchange offer for Coach
common stock........... (998) -- -- (998) -- --
ESOP tax benefit,
redemptions and other.. 23 -- 15 8 -- --
-------------------------------------------------------------------------------------------------
Balances at June 30,
2001................... $1,122 $ 8 $ -- $2,635 $ -- $(1,521)
====== ====== ===== ====== ==== =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-6
<PAGE>
Sara Lee Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
Years ended
--------------------------
June 30, July 1, July 3,
2001 2000 1999
-------- ------- -------
<S> <C> <C> <C>
Operating Activities
Income from continuing operations................... $ 1,603 $ 1,158 $ 1,131
Adjustments for non-cash charges included in income
from continuing operations
Depreciation....................................... 392 402 352
Amortization of intangibles........................ 207 200 181
Unusual items
Gain on disposal of Coach business................ (967) -- --
Business dispositions and other charges........... 554 -- (137)
Product recall charge............................. -- -- 76
Increase in deferred taxes......................... 88 48 29
Other non-cash credits, net........................ (62) (38) (35)
Changes in current assets and liabilities, net of
businesses acquired and sold
Decrease (increase) in trade accounts receivable.. 42 (116) (21)
Decrease (increase) in inventories................ 25 (152) 112
(Increase) in other current assets................ (11) (47) (60)
(Decrease) in accounts payable.................... (133) (56) (50)
(Decrease) increase in accrued liabilities........ (218) 57 (29)
------- ------- -------
Net cash from operating activities--continuing
operations........................................ 1,520 1,456 1,549
Operating cash flows (used by) from discontinued
operations........................................ (24) 84 54
------- ------- -------
Net cash from operating activities................. 1,496 1,540 1,603
------- ------- -------
Investment Activities
Purchases of property and equipment................. (532) (647) (535)
Acquisitions of businesses and investments.......... (300) (743) (234)
Dispositions of businesses and investments.......... 1,819 21 412
Sales of assets..................................... 65 64 158
Other............................................... 13 9 7
------- ------- -------
Net cash from (used in) investment activities...... 1,065 (1,296) (192)
------- ------- -------
Financing Activities
Issuances of common stock........................... 104 84 111
Purchases of common stock........................... (643) (1,032) (1,279)
Issuance of equity securities by subsidiary......... -- -- 50
Borrowings of long-term debt........................ 1,023 725 20
Repayments of long-term debt........................ (390) (502) (284)
Short-term (repayments) borrowings, net............. (1,914) 1,022 451
Payments of dividends............................... (486) (485) (464)
------- ------- -------
Net cash used in financing activities.............. (2,306) (188) (1,395)
------- ------- -------
Effect of changes in foreign exchange rates on
cash............................................... (21) (21) (10)
------- ------- -------
Increase in cash and equivalents.................... 234 35 6
Cash and equivalents at beginning of year........... 314 279 273
------- ------- -------
Cash and equivalents at end of year................. $ 548 $ 314 $ 279
======= ======= =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-7
<PAGE>
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. Certain
prior-year amounts have been reclassified to conform with the current-year
presentation. These reclassifications had no impact on previously reported
results of operations or total stockholders' equity.
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 consolidated statements of income from the date of acquisition. Gains
and losses resulting from the issuance of common stock by a subsidiary of the
corporation are recognized in earnings in the period realized.
Fiscal Year
The corporation's fiscal year ends on the Saturday closest to June 30.
Fiscal years 2001 and 2000 were 52-week years, and fiscal year 1999 was a 53-
week year. Unless otherwise stated, references to years relate to fiscal
years.
Foreign Operations
Foreign-currency-denominated assets and liabilities are translated into
U.S. dollars at the exchange rates existing at the respective balance sheet
dates. Translation adjustments resulting from fluctuations in exchange rates
are recorded as a separate component of other comprehensive income within
common stockholders' equity. Income and expense items are translated at the
average exchange rates during the respective periods.
Business Acquisitions and Dispositions
All business acquisitions in 2001, 2000 and 1999 have been accounted for
using the purchase method. Cash and the fair value of other assets distributed
and securities issued unconditionally and amounts of contingent consideration
that are determinable at the date of acquisition are included in determining
the cost of an acquired business and recorded at that date. Consideration that
is issued or is issuable at the expiration of a contingency period or that is
held in escrow pending the outcome of a contingency is not recorded as a
liability or shown as an outstanding security unless the outcome of the
contingency is determinable beyond a reasonable doubt.
Gains on business dispositions are recognized when the transactions close
and the amounts are realized. Losses on business dispositions are realized
when the losses are probable and measurable. In measuring gains or losses on
the disposition of a business, the consideration received is measured as the
amount of cash and the fair value of other assets received and securities
transferred unconditionally and amounts of contingent consideration that are
determinable at the date of disposition.
Substantially all consideration associated with business acquisitions and
dispositions recognized in 2001, 2000 and 1999 involved the receipt or payment
of cash or shares of the corporation's common stock. These amounts are
disclosed in the consolidated statements of stockholders' equity and the
consolidated statements of cash flows.
F-8
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method for 94% of the corporation's
inventories at June 30, 2001 and by the last-in, first-out (LIFO) method for
the remainder. Had the FIFO method been used for the valuation of all
inventories, the book value of this asset would have been higher by $7 at June
30, 2001, $12 at July 1, 2000 and $1 at July 3, 1999.
Property
Property is stated at cost, and depreciation is computed principally using
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. Repairs and maintenance costs are charged to expense. Upon
sale or disposition of the asset, the cost and related accumulated
depreciation are removed from the accounts.
Trademarks and Other Identified Intangibles
Trademarks arising from acquired businesses are amortized on a straight-
line basis over the periods of expected benefit, which range from 5 years to
40 years. Accumulated amortization of intangible assets amounted to $555 at
June 30, 2001, $508 at July 1, 2000 and $402 at July 3, 1999.
Goodwill
The excess of the cost of purchased companies over the fair value of the
companies' assets and liabilities at the date of acquisition is amortized on a
straight-line basis over the periods of expected benefit, which range from 5
years to 40 years. Accumulated amortization of goodwill amounted to $609 at
June 30, 2001, $611 at July 1, 2000 and $645 at July 3, 1999.
Long-lived Assets
Long-lived assets include primarily property, identifiable intangible
assets and goodwill. Long-lived assets being retained for use are periodically
reviewed for impairment by comparing the carrying value of the assets with
their estimated future undiscounted cash flows. If it is determined that an
impairment loss has occurred, the loss is recognized during the period in
which the loss was incurred. An impairment loss is calculated as the
difference between the carrying value of the assets and the present value of
estimated future net cash flows or comparable market values, giving
consideration to recent operating performance.
Long-lived assets that are to be disposed of are reported at the lower of
carrying value or fair value less costs to sell. Reductions in carrying value
are recognized in the period in which management commits to a plan to dispose
of the assets.
Financial Instruments
The corporation uses financial instruments, including forward exchange,
option, futures and swap contracts, to manage its exposures 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 or cost to the corporation. The corporation does not use
derivatives for trading purposes and is not a party to leveraged
F-9
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
derivatives. On the date a derivative contract is entered into, the
corporation designates the derivative as one of the following types of hedging
instruments and accounts for the derivative as follows:
Fair Value Hedge
A hedge of a recognized asset or liability or an unrecognized firm
commitment is declared as a fair value hedge. For fair value hedges, both the
effective and ineffective portions of the changes in the fair value of the
derivative, along with the gain or loss on the hedged item that is
attributable to the hedged risk, are recorded in earnings and reported in the
consolidated statements of income on the same line as the hedged item.
Cash Flow Hedge
A hedge of a forecasted transaction or of the variability of cash flows to
be received or paid related to a recognized asset or liability is declared as
a cash flow hedge. The effective portion of the change in the fair value of a
derivative that is declared as a cash flow hedge is recorded in accumulated
other comprehensive income. When the hedged item impacts the income statement,
the gain or loss included in accumulated other comprehensive income is
reported on the same line in the consolidated statements of income as the
hedged item. In addition, both the fair value of changes excluded from the
corporation's effectiveness assessments and the ineffective portion of the
changes in the fair value of derivatives used as cash flow hedges are reported
in selling, general and administrative expenses in the consolidated statements
of income.
Net Investment Hedge
A hedge of a net investment in a foreign operation is declared as a net
investment hedge. The effective portion of the change in the fair value of
derivatives, based upon spot rates, used as a net investment hedge of a
foreign operation is recorded in the cumulative translation adjustment account
within stockholders' equity. The ineffective portion of the change in the fair
value of a derivative or non-derivative instrument designated as a net
investment hedge is recorded in either selling, general and administrative
expenses, or interest expense if the hedging instrument is a swap, in the
consolidated statements of income.
Natural Hedge
A derivative used as a natural hedging instrument whose change in fair
value is recognized to act as an economic hedge against changes in the values
of the hedged item is declared as a natural hedge. For derivatives designated
as natural hedges, changes in fair value are reported in earnings in the
selling, general and administrative expenses line of the consolidated
statements of income.
The corporation formally documents its hedge relationships, including
identification of the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the hedge
transaction. Derivatives are recorded in the consolidated balance sheets at
fair value in other assets and other liabilities. This process includes
linking derivatives that are designated as hedges of specific assets,
liabilities, firm commitments or forecasted transactions. The corporation also
formally assesses, both at inception and at least quarterly thereafter,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in either the fair value or cash flows of the
hedged item. If it is determined that a derivative ceases to be a highly
effective hedge, or if the anticipated transaction is no longer likely to
occur, the corporation discontinues hedge accounting, and any deferred gains
or losses are recorded in selling, general and administrative expenses.
F-10
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
Non-U.S.-dollar financing transactions are accounted for as net investment
hedges when the hedged item is a long-term investment in the corresponding
foreign currency. Forward exchange contracts are recorded as natural hedges
when the hedged item is a recorded asset or liability that is revalued in each
accounting period, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52.
Revenue Recognition
The corporation recognizes revenue when title and risk of loss pass to the
customer. Appropriate provisions are made at the time of sale for
uncollectible accounts.
Advertising
Advertising costs, which include media advertising and production costs,
are expensed in the period in which the advertising first takes place.
Advertising costs were $347 in 2001, $391 in 2000 and $414 in 1999.
Stock-based Compensation
Employee stock options are accounted for under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB No. 25). APB No. 25 requires the use of the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price
of the stock at grant over the amount an employee must pay to acquire the
stock. The corporation makes pro forma disclosures of net earnings and
earnings per share as if the fair-value-based method of accounting had been
applied as required by SFAS No. 123, "Accounting for Stock-Based
Compensation."
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based upon enacted tax
laws and rates. Federal income taxes are provided on that portion of the
income of foreign subsidiaries that is expected to be remitted to the United
States and be taxable.
COMMON STOCK
Changes in outstanding common shares for the past three years were:
<TABLE>
<CAPTION>
2001 2000 1999
------- ------- -------
(Shares in thousands)
<S> <C> <C> <C>
Beginning balances.............................. 846,331 883,783 460,665
Stock issuances (cancelations):
Stock option and benefit plans................. 7,248 5,467 6,431
Business acquisitions.......................... 25 10,209 257
Restricted stock plans......................... (1,279) (152) (2,431)
Two-for-one stock split......................... -- -- 456,628
Reacquired shares:
Stock purchased................................ (30,692) (54,714) (40,582)
Exchange offer for Coach common stock.......... (41,402) -- --
ESOP share redemption........................... 1,684 1,615 2,694
Other........................................... 49 123 121
------- ------- -------
Ending balances................................. 781,964 846,331 883,783
======= ======= =======
</TABLE>
F-11
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
Effective December 1, 1998, the corporation declared a two-for-one stock
split in the form of a 100% stock dividend. Common stock dividends and
dividend per share amounts declared were $468 and $.57 in 2001, $465 and $.53
in 2000, and $444 and $.49 in 1999, respectively.
In October 1998, the stockholders of the corporation approved an amendment
to the corporation's charter to reduce the par value of each share of common
stock from $1.33 to $.01.
STOCK-BASED COMPENSATION
The corporation has various stock option, employee stock purchase and stock
award plans.
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. Options can generally be
exercised over a maximum term of 10 years. Options generally vest ratably over
three years.
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 the
replacement option 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:
<TABLE>
<CAPTION>
2001 2000 1999
--------- --------- ---------
<S> <C> <C> <C>
Expected lives............................... 3.0 years 4.3 years 3.2 years
Risk-free interest rate...................... 5.4% 6.2% 5.1%
Expected volatility.......................... 33.6% 28.6% 25.0%
Dividend yield............................... 2.8% 2.6% 1.9%
</TABLE>
F-12
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
A summary of the changes in stock options outstanding under the
corporation's option plans during the years ended June 30, 2001, July 1, 2000
and July 3, 1999 is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------- --------
(Shares in
thousands)
<S> <C> <C>
Outstanding at June 27, 1998............................. 61,098 $19.64
Granted................................................. 17,172 25.56
Exercised............................................... (13,085) 17.63
Canceled/Expired........................................ (2,982) 21.71
------- ------
Outstanding at July 3, 1999.............................. 62,203 21.52
Granted................................................. 37,780 18.24
Exercised............................................... (4,639) 16.76
Canceled/Expired........................................ (5,739) 22.82
------- ------
Outstanding at July 1, 2000.............................. 89,605 20.32
Granted................................................. 5,411 21.68
Exercised............................................... (8,532) 17.71
Canceled/Expired........................................ (8,496) 21.04
------- ------
Outstanding at June 30, 2001............................. 77,988 $20.62
======= ======
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 2001:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at June 30, Contractual Exercise at June 30, Exercise
Range of Exercise Prices 2001 Life (Yrs.) Price 2001 Price
------------------------ ----------- ----------- -------- ----------- --------
(Shares in thousands)
<S> <C> <C> <C> <C> <C>
$11.41-$18.71........... 26,866 7.6 $15.61 11,919 $15.38
18.72- 22.65........... 19,844 5.3 20.47 17,462 20.55
22.66- 31.60........... 31,278 5.5 25.01 22,976 25.71
------------------------ ------ --- ------ ------ ------
$11.41-$31.60........... 77,988 6.2 $20.62 52,357 $21.64
======================== ====== === ====== ====== ======
</TABLE>
At July 1, 2000 and July 3, 1999, the number of options exercisable was
40,932 and 31,283, respectively, with weighted average exercise prices of
$21.73 and $21.50, respectively. Options available for future grant at the end
of 2001, 2000 and 1999 were 52,736, 46,945 and 49,937, respectively. The
weighted average fair value of individual options granted during 2001, 2000
and 1999 was $4.65, $3.95 and $4.68, 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 2,155,261, 2,711,644 and 2,275,606 shares to employees in
2001, 2000 and 1999, respectively. Pro forma compensation expense is
calculated for the fair value of the employees' purchase rights using the
Black-Scholes model. Assumptions include an expected life of 1/4 of a year and
weighted average risk-free interest rates of 5.4% in both 2001 and 2000 and
4.6% in 1999. Other underlying assumptions are consistent with those used for
the corporation's stock option plans described above.
F-13
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
Under APB No. 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 No.
123, the pro forma net income and per share net income for 2001, 2000 and 1999
would have been as follows:
<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Net income........................................... $2,205 $1,139 $1,118
Net income per share--basic.......................... 2.68 1.29 1.23
Net income per share--diluted........................ 2.59 1.25 1.19
</TABLE>
Stock Unit Awards
Beginning in 1999, restricted stock units (RSUs) were granted to certain
employees to incent performance and retention over periods ranging from two to
three years. Upon the achievement of defined goals, the RSUs are converted
into shares of the corporation's common stock on a one-for-one basis and
issued to the employees. Awards granted in 2001, 2000 and 1999 were 184,888
units, 3,502,220 units and 655,000 units, respectively. The fair value of the
stock unit awards on the date of grant in 2001, 2000 and 1999 was $4, $62 and
$16, respectively. As a result of a change in the corporation's compensation
system, no further awards are anticipated in future years. Compensation
expense for these plans in 2001, 2000 and 1999 was $34, $20 and $8,
respectively.
PREFERRED STOCK
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 eight
shares of the corporation's common stock and is entitled to 10.264 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. ESOP dividends
and dividend per share amounts declared were $18 and $5.4375 per share in 2001
and $20 and $5.4375 per share in both 2000 and 1999. 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, are 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 Emerging Issues Task Force (EITF) Opinion 89-8.
During 1999, the ESOP extended its debt service through a loan program from
the corporation. As a result of this program, the allocation of preferred
shares and the related recognition of compensation expense has been extended
up to 2030. The ESOP loan reflected in long-term debt was not affected by this
action.
ESOP-related expenses amounted to $6 in 2001, $17 in 2000 and less than $1
in 1999. Payments to the ESOP were $51 in 2001, $48 in 2000 and $45 in 1999.
Principal and interest payments by the ESOP totaled $39 and $12 in 2001, $33
and $15 in 2000, and $27 and $18 in 1999, 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
F-14
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
and payment of the exercise price, common stock with a value 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 the Euribor inter-bank
borrowing rate, which averaged 5.2%, 3.6% and 3.9% for 2001, 2000 and 1999,
respectively. 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. In the event of this put, the corporation's preferred stock would have
a nominal value of $295 with a dividend rate to be set based upon market
factors at the time of issuance. The subsidiary may call the securities at any
time.
Minority interest in subsidiaries also includes preferred equity securities
issued by a domestic subsidiary of the corporation. The amount of these
securities was $250 for 2001, 2000 and 1999. The securities provide the holder
a rate of return based upon the LIBOR interest rate plus 0.425%, are
redeemable in 2005 and may be called at any time by the subsidiary. The
weighted average inter-bank borrowing rate was 6.3%, 6.2% and 5.7% for 2001,
2000 and 1999, respectively. The subsidiary has the option of redeeming the
securities with either cash, debt or shares of common stock of the corporation
with a value of $250.
EARNINGS PER SHARE
Net income per share--basic is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Net income per share--diluted reflects the
dilution that could occur if options or other contracts to issue common stock
were exercised or converted into common stock. Effective December 1, 1998, the
corporation declared a two-for-one stock split in the form of a 100% stock
dividend. Prior periods have been restated to reflect this split.
Options to purchase 33.1 million shares at June 30, 2001, 34.1 million
shares at July 1, 2000 and 9.0 million shares at July 3, 1999 were not
included in the computation of diluted earnings per share because the exercise
price of these options was greater than the average market price of the
corporation's outstanding common stock.
F-15
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
The following is a reconciliation of net income to net income per share --
basic and diluted for the years ended June 30, 2001, July 1, 2000 and July 3,
1999:
<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
(shares in millions)
<S> <C> <C> <C>
Income from continuing operations...................... $1,603 $1,158 $1,131
Income from discontinued operations and gain on
disposal of discontinued operations, net of income
taxes................................................. 663 64 60
------ ------ ------
Net income............................................. 2,266 1,222 1,191
Less dividends on preferred stocks, net of tax
benefits.............................................. (11) (12) (12)
------ ------ ------
Income applicable to common stockholders -- basic...... 2,255 1,210 1,179
Adjustment for assumed conversion of ESOP shares....... 9 9 8
------ ------ ------
Income applicable to common stockholders -- diluted.... $2,264 $1,219 $1,187
====== ====== ======
Average shares outstanding -- basic.................... 819 875 903
Dilutive effect of stock option and stock award plans.. 9 9 12
Dilutive effect of ESOP plan........................... 26 28 29
------ ------ ------
Dilutive shares outstanding............................ 854 912 944
====== ====== ======
Income from continuing operations per share -- basic... $ 1.94 $ 1.31 $ 1.24
====== ====== ======
Income from discontinued operations per share --
basic................................................. $ .81 $ .07 $ .07
====== ====== ======
Net income per share -- basic.......................... $ 2.75 $ 1.38 $ 1.31
====== ====== ======
Income from continuing operations per share --
diluted............................................... $ 1.87 $ 1.27 $ 1.19
====== ====== ======
Income from discontinued operations per share --
diluted............................................... $ .78 $ .07 $ .06
====== ====== ======
Net income per share -- diluted........................ $ 2.65 $ 1.34 $ 1.26
====== ====== ======
</TABLE>
F-16
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
LONG-TERM DEBT
The composition of the corporation's long-term debt is summarized in the
following table:
<TABLE>
<CAPTION>
Interest
Rate Range Maturity 2001 2000 1999
----------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
U.S. dollar obligations:
ESOP debt................... 5.73-8.18% 2002-2004 $ 126 $ 165 $ 197
Notes and debentures........ 4.35-8.36 2002-2010 1,064 1,179 1,206
Revenue bonds............... 2.80-3.90 2002-2024 50 50 60
Zero coupon notes........... 10.00-14.25 2014-2015 27 24 22
Various other obligations... -- 10 13
------ ------ ------
1,267 1,428 1,498
------ ------ ------
Foreign currency obligations:
European euro............... 4.63-6.13 2002-2008 1,759 991 574
British pound............... -- -- -- 100 --
Swiss franc................. -- -- -- -- 81
Various other obligations... 94 110 75
------ ------ ------
1,853 1,201 730
------ ------ ------
Total long-term debt................ 3,120 2,629 2,228
Less current maturities............. 480 381 336
------ ------ ------
$2,640 $2,248 $1,892
====== ====== ======
</TABLE>
The ESOP debt is guaranteed by the corporation.
The zero coupon notes are net of unamortized discounts of $97 in 2001, $100
in 2000 and $102 in 1999. Principal payments of $19 and $105 are due in 2014
and 2015, respectively.
Payments required on long-term debt during the years ending in 2002 through
2006 are $480, $637, $360, $543 and $148, respectively.
The corporation made cash interest payments of $251, $249 and $242 in 2001,
2000 and 1999, respectively.
Rental expense under operating leases was $201 in 2001, $204 in 2000 and
$201 in 1999. Future minimum annual fixed rentals required during the years
ending in 2002 through 2006 under non-cancelable operating leases having an
original term of more than one year are $99, $83, $64, $53 and $46,
respectively. The aggregate obligation subsequent to 2006 is $104.
The corporation is contingently liable for long-term leases on properties
operated by others. The minimum annual rentals under these leases average
approximately $25 for the years ending in 2002 through 2006. The aggregate
obligation subsequent to 2006 is $75.
CREDIT FACILITIES
The corporation has numerous credit facilities available, including ongoing
revolving credit agreements totaling $1.82 billion that had a weighted average
annual fee of 0.06% as of June 30, 2001. Subsequent to 2001, the corporation
increased the size of its credit facilities to $3.82 billion in anticipation
of completing the acquisition of The Earthgrains Company that is described in
the subsequent event note to the consolidated
F-17
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
financial statements. These agreements support commercial paper borrowings and
other financial instruments. Selected data on the corporation's short-term
obligations follow:
<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Maximum period-end borrowings........................... $2,577 $2,726 $1,844
Average borrowings during the year...................... 1,573 2,102 1,473
Weighted average interest rate during the year.......... 6.0% 4.9% 4.3%
Weighted average interest rate at year-end.............. 5.6 6.1 4.8
</TABLE>
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 of these
matters should not have a material effect on the corporation's results of
operations or financial position.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
On July 2, 2000, the corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. In accordance with
the provisions of SFAS No. 133, the corporation recorded a transition
adjustment upon adoption of the standard to recognize its derivative
instruments at fair value, to recognize the ineffective portion of cash flow
hedges and to recognize the difference (attributable to the hedged risks)
between the carrying values and fair values of related hedged assets and
liabilities. The effect of this transition adjustment was to increase reported
income in the year by approximately $1. The corporation also recorded a
transition adjustment of approximately $6 in accumulated other comprehensive
income to recognize previously deferred net gains on derivatives designated as
cash flow hedges and a net increase in net assets of approximately $7.
Interest Rate and Currency Swaps
To manage interest rate risk, the corporation has entered into interest
rate swaps that effectively fix the interest payments of certain floating-rate
debt instruments. Interest rate swap agreements are accounted for as cash flow
hedges. The fair value of interest rate and currency swaps is based on quotes
from swap dealers.
<TABLE>
<CAPTION>
Weighted Average
Interest Rates(2)
Notional ---------------------
Principal(1) Receive Pay
------------ ---------- --------
<S> <C> <C> <C>
Interest Rate Swaps
2000 Receive variable -- pay fixed....... $385 5.9% 5.4%
Receive fixed -- pay variable........ 100 7.1 6.6
1999 Receive variable -- pay fixed....... 516 4.0 4.5
Currency Swaps
2001 Receive fixed -- pay fixed........... $ 8 13.6% 4.0%
2000 Receive variable -- pay variable..... 9 6.6 4.1
1999 Receive fixed -- pay fixed........... 360 6.1 3.4
</TABLE>
--------
(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.
F-18
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
Forward Exchange, Futures and Option Contracts
The corporation uses forward exchange and option contracts to reduce the
effect of fluctuating foreign currencies on short-term foreign-currency-
denominated intercompany transactions, third-party product sourcing
transactions, foreign-denominated investments and other known foreign currency
exposures. Gains and losses on the derivative are intended to offset losses
and gains on the hedged transaction in an effort to reduce the earnings
volatility resulting from fluctuating foreign currency exchange rates. The
principal currencies hedged by the corporation include the European euro,
Mexican peso, Canadian dollar and British pound.
The corporation uses futures contracts to hedge commodity price risk. The
principal commodities hedged by the corporation include hogs, beef, wheat,
butter and corn.
The following table summarizes by major currency the contractual amounts of
the corporation's forward exchange contracts in U.S. dollars. The bought
amounts represent the net U.S.-dollar-equivalent of commitments to purchase
foreign currencies, and the sold amounts represent the net U.S.-dollar-
equivalent of commitments to sell foreign currencies. The foreign currency
amounts have been translated into a U.S.-dollar-equivalent value using the
exchange rate at the reporting date. Forward exchange contracts mature at the
anticipated cash requirement date of the hedged transaction, generally within
one year.
<TABLE>
<CAPTION>
Foreign Currency--Bought (Sold) 2001(1) 2000(1) 1999(1)
------------------------------- ------- ------- -------
<S> <C> <C> <C>
European euro.......................................... $ 412 $ 297 $(665)
British pound.......................................... (101) (115) (123)
Canadian dollar........................................ (92) (71) (84)
Other.................................................. (134) (51) (244)
</TABLE>
--------
(1) Forward contracts denominated in European legacy currencies have been
translated into European euros.
The corporation held foreign exchange option contracts to reduce the
foreign exchange fluctuations on anticipated purchase transactions. The
following table summarizes the notional amount of option contracts to buy
foreign currency, in U.S. dollars:
<TABLE>
<CAPTION>
Foreign Currency--Bought 2001 2000
------------------------ ---- ----
<S> <C> <C>
European euro........................................................ $12 $260
Mexican pesos........................................................ 33 --
</TABLE>
As of July 2, 2000 and June 30, 2001, the net accumulated derivative gain
in accumulated other comprehensive income was $6 and the net derivative loss
was $5, respectively. During the year ended June 30, 2001, $18 of accumulated
net derivative gains was deferred in accumulated other comprehensive income
related to cash flow hedges and $29 of accumulated net derivative gains was
reclassified out of accumulated other comprehensive income into earnings. At
June 30, 2001, the maximum maturity date of any cash flow hedge was two years,
excluding any forward exchange, option or swap contracts related to the
payment of variable interest on existing financial instruments. The
corporation expects to reclassify into earnings during the next 12 months net
losses from accumulated other comprehensive income of approximately $12, at
the time the underlying hedged transactions are realized.
During the year ended June 30, 2001, $2 of net losses related to cash flow
hedge ineffectiveness and $2 related to derivative losses excluded from the
assessment of effectiveness was recorded in the consolidated statements of
income. Other disclosures related to fair value hedge ineffectiveness, fair
value gains and losses excluded from the assessment of hedge ineffectiveness,
and gains or losses resulting from the disqualification of hedge accounting
have been omitted due to the insignificance of these amounts.
F-19
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
Non-U.S.-Dollar Financing Transactions
The corporation uses non-U.S.-dollar financing transactions as net
investment hedges of long-term investments in the corresponding foreign
currency. Hedges that meet the effectiveness requirements are accounted for
under net investment hedging rules. For the year ended June 30, 2001, net
gains of $186 arising from effective hedges of net investments have been
reflected in the cumulative translation adjustment account within
stockholders' equity.
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 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 $69 at
June 30, 2001, $62 at July 1, 2000 and $58 at July 3, 1999. 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 $14 at June 30, 2001, $14 at July 1, 2000 and $17 at July 3,
1999. These guarantees relate primarily to financial arrangements to support
various suppliers of the corporation and are secured by the inventory and
fixed assets of the suppliers.
Fair Values
The carrying amounts of cash and equivalents, trade receivables, notes
payable and accounts payable approximated fair value as of June 30, 2001, July
1, 2000 and July 3, 1999. The fair values of the remaining financial
instruments recognized on the consolidated balance sheets of the corporation
at the respective year-ends were:
<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Long-term debt, including current portion................ $3,098 $2,654 $2,315
ESOP convertible preferred stock......................... 508 514 694
Interest rate swaps...................................... -- 6 3
Currency swaps........................................... -- 1 12
Foreign currency forwards................................ (20) 13 60
Foreign currency options................................. (1) 8 --
</TABLE>
The fair value of the corporation's long-term debt, including the current
portion, is estimated using discounted cash flows based on the corporation's
current incremental borrowing rates for similar types of borrowing
arrangements. The fair value of the ESOP preferred stock is based on the
contracted conversion into the corporation's common stock. The fair value of
interest rate and currency swaps is based on quotes from swap dealers. The
fair value of foreign currency forwards and options is based upon currency
forward rates obtained from third-party institutions.
F-20
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
UNUSUAL ITEMS
PYA/Monarch Disposition
In December 2000, the corporation sold its PYA/Monarch foodservice
distribution business and received cash proceeds of $1,559. The disposition
resulted in a gain before income taxes of $1,126 and an after-tax gain of
$638, or $.75 of diluted earnings per share. The PYA/Monarch foodservice
operation constituted a reportable segment of the corporation, and as a
result, this gain has been recognized in the discontinued operations section
of the accompanying consolidated financial statements.
Gain on Disposal of Coach Business
A tax-free gain of $967, or $1.13 of diluted earnings per share, was
recognized on the disposition of the Coach business in 2001. This disposition
took place in two steps. In October 2000, the corporation's Coach subsidiary
completed an initial public offering of 19.5% (8,487,000 shares) of its common
stock. Cash proceeds of $122 were received and a tax-free gain of $105 was
recognized upon completion of the offering. In April 2001, the second step of
the disposition was completed when the corporation's remaining 80.5%
(35,026,333 shares) ownership interest in Coach was exchanged with third
parties for 41,402,285 shares of Sara Lee common stock. The market value of
the Coach shares disposed of was $998, and an $862 gain was recognized on this
tax-free transaction.
Other Business Dispositions
During 2001, the corporation's management approved plans to dispose of 17
non-core businesses. At the end of 2001, the disposition of 10 of these
businesses had been completed, and the corporation expects to complete the
disposition of the remaining businesses by December 2001. These actions
resulted in a pretax charge of $341 and a reduction in net income of $352, or
$.41 of diluted earnings per share. Of the total pretax charge, $236 relates
to the 10 transactions that were closed in 2001 and $105 is the estimated loss
on transactions that are anticipated to close in 2002. The $341 charge is
included in the "business dispositions and other charges" line of the
consolidated statement of income and reduced operating income in the
corporation's business segments as follows: Intimates and Underwear -- $246;
Sara Lee Foods -- $93; and Beverage -- $2. These 17 businesses had an
operating loss of $7 in 2001 and an operating profit of $2 in 2000. Sales
recognized by these operations were $670 in 2001 and $925 in 2000.
Cash proceeds of $120 were received for the 10 business dispositions
completed in 2001. Businesses disposed in 2001 included Argal, a Spanish meat
business; Ozark Salad, a domestic prepared salad business; the Champion
apparel business in Europe and a portion of the domestic Champion business;
Bakery operations in Europe and India; and certain intimate apparel businesses
in Australasia and Europe.
Business dispositions expected to close in 2002 include the Liabel intimate
apparel business in Europe; Bakery and textile manufacturing operations in
China; and a number of businesses that supply textile products to the domestic
and European intimate apparel industry. The $105 estimated loss on the
disposition of these businesses is the difference between the estimated
selling price and the corporation's investment in these operations as of June
30, 2001. The estimated selling prices were based upon submitted bids and
discussions with prospective buyers, as well as input from investment bankers
retained by the corporation. The net assets of businesses awaiting sale are
displayed on the "net assets of businesses held for sale" line of the
consolidated balance sheets.
In the first week of 1999, the corporation disposed of certain assets
related to its international tobacco operations. The corporation received cash
proceeds of $386 upon closing the transaction, had an investment in
F-21
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
the net assets of the business of $249 and recognized a pretax gain of $137 in
1999. The gain on this sale increased 1999 income from continuing operations
by $97, or $.10 of diluted earnings per share.
Other Charges
During 2001, the corporation's management approved plans to terminate a
number of employees and exit certain manufacturing, distribution and
administrative activities within a 12-month period. These actions resulted in
a pretax charge of $213 and a reduction in net income of $148, or $.17 of
diluted earnings per share. Of the $213 charge, $187 is included in the
"business dispositions and other charges" line of the consolidated statement
of income. The remaining $26 relates to anticipated losses on the exit of
certain licensed products and is displayed in the "cost of sales -- product
line exit costs" line of the consolidated statement of income. $210 of the
charge is directly attributable to the corporation's business segments, and $3
is related to the corporate headquarters. Business segment operating income
was reduced as follows: Intimates and Underwear -- $165; Sara Lee Foods --
$36; Beverage -- $6; and Household Products -- $3. The $213 charge consists
of the following:
. $124 of the charge is for the cost of severance and other employee
benefits associated with the termination of 13,200 employees. The
specific location of these employees and the status of the planned
actions as of June 30, 2001 are summarized in a table contained in this
note.
. $38 of the charge is for anticipated losses on the disposal of real
estate and equipment at nine owned facilities and the disposal of
equipment at a number of leased facilities. The loss recognized is the
difference between the estimated selling price and the carrying value of
the assets held for sale. Selling prices were estimated based upon third-
party appraisals of real estate held for sale and the corporation's prior
experience with comparable equipment disposals. The charge primarily
relates to the planned exit of Intimates and Underwear manufacturing
facilities in the United States, Mexico and Europe; two domestic meat
processing plants; and a Beverage facility in Europe. As of June 30,
2001, four of the nine owned facilities had been closed, and all actions
contemplated by the exit plan are expected to be completed within 12
months of the related charge. The carrying value of the property and
equipment awaiting sale at June 30, 2001 is $26.
. $23 of the charge is related to non-cancelable lease payments on 26
leased facilities that are being exited. The charge is the difference
between the non-cancelable lease obligation after the facility is exited
and the estimated sublease income that will be received. As of June 30,
2001, nine of the leased facilities had been exited.
. $28 of the charge resulted from the decision to terminate product
licensing agreements and exit related manufacturing operations. Of the
$28 charge, $26 is for anticipated losses on the disposition of inventory
related to manufacturing operations exited and $2 is for payments to
cancel third-party licensing arrangements. The loss recognized on the
disposition of inventory is the difference between the estimated net
realizable value of the inventory and the related carrying value. Net
realizable values were based upon the corporation's prior experience with
the disposition of similar types of product.
F-22
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
The following table summarizes the charges taken for the approved exit
plans and the related activity through June 30, 2001:
<TABLE>
<CAPTION>
Write-down of Accrued Exit
Assets to Costs as of
Exit Costs Net Realizable Cash June 30,
Recognized Value Payments 2001
---------- -------------- -------- ------------
<S> <C> <C> <C> <C>
Employee termination and other
benefits...................... $124 $ -- $(29) $ 95
Expected losses on disposal of
inventories................... 26 (26) -- --
Expected losses on disposal of
property and equipment and
other related costs........... 38 (37) (1) --
Other exit costs -- includes
non-cancelable lease and other
contractual obligations....... 25 -- (3) 22
---- ---- ---- ----
Total exit costs............... $213 $(63) $(33) $117
==== ==== ==== ====
</TABLE>
Of the $213 charge, $150 will require the use of cash and $63 is a non-cash
component. The corporation expects to fund the cash costs of this charge from
internal sources and proceeds generated from the sale of non-core businesses.
The following table summarizes the planned employee terminations by
location and business segment, and the status of those actions as of the end
of 2001:
<TABLE>
<CAPTION>
Intimates As of
Sara Lee Household and June 30,
Foods Beverage Products Underwear Corporate 2001
-------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
United States........... 504 -- -- 1,445 21 1,970
Canada.................. -- -- -- 101 -- 101
Puerto Rico, Mexico and
Latin America.......... 17 -- -- 8,633 -- 8,650
Europe.................. 237 72 -- 1,627 -- 1,936
Asia and Africa......... -- -- 48 495 -- 543
--- --- --- ------ --- ------
758 72 48 12,301 21 13,200
=== === === ====== === ======
As of June 30, 2001:
Actions completed...... 328 -- 48 4,074 8 4,458
Actions remaining...... 430 72 -- 8,227 13 8,742
--- --- --- ------ --- ------
758 72 48 12,301 21 13,200
=== === === ====== === ======
</TABLE>
Product Recall
On December 22, 1998, the corporation announced that it was recalling
specific production lots of hot dogs and other packaged meat products that
could contain Listeria bacteria. The estimated cost of this action was
recognized in the second quarter of 1999 and reduced 1999 income from
continuing operations before income taxes, income from continuing operations
and income from continuing operations per common share -- diluted by $76, $50
and $.05 per share, respectively. The recall charge recognized the estimated
costs associated with the return and destruction of affected products sold
through retail grocery stores and selected foodservice channels in the United
States, the destruction of affected inventory in the corporation's Zeeland,
Michigan facility, and liabilities incurred as a result of these actions.
Substantially all of the product and inventory subject to the recall was
subsequently destroyed. The actual costs of the inventory destroyed and
related disposition costs were consistent with prior estimates.
F-23
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
ACQUISITIONS
During 2001, the corporation acquired several businesses for an aggregate
purchase price of $300. The principal acquisitions were Cafe Pilaio Caboclo
Ltda., a Brazilian manufacturer and marketer of roasted coffee; Amando, a
European processed meat manufacturer; and Zorba, a Brazilian apparel
manufacturer. The businesses acquired in 2001 generated sales of $247 and
contributions to pretax income were not significant.
During 2000, the corporation acquired several businesses and certain equity
method investments for an aggregate purchase price of $1 billion, consisting
of $743 of cash and $257 of common stock. The principal acquisitions were
Chock full o'Nuts Corporation, a domestic roaster, packer and marketer of
coffee; the North American coffee business of Nestle S.A., which includes the
Hills Bros, MJB and Chase & Sanborn brands; Outer Banks Inc., a manufacturer,
marketer and distributor of knitted sport shirts; and Courtaulds Textiles plc,
a European producer, marketer and distributor of private-label and branded
apparel products. The corporation also acquired a minority interest in
Johnsonville Sausage, a domestic manufacturer and marketer of fresh meat
products.
During 1999, the corporation acquired several companies for an aggregate
purchase price of $234 in cash and $9 of common stock. The principal
acquisitions were Continental Coffee, a domestic manufacturer, marketer and
distributor of roasted and ground coffee; and Monsavon, a European marketer
and distributor of personal body care products.
SUBSEQUENT EVENT
In July 2001, the corporation announced that it had entered into an
agreement to acquire The Earthgrains Company (Earthgrains), a fresh packaged
bread and refrigerated dough business in the United States and Europe. Under
the terms of the agreement, the corporation made a cash tender offer for all
of Earthgrains' common stock at $40.25 per share, or approximately $1.9
billion, plus the assumption of Earthgrains' outstanding long-term debt of
approximately $957. On August 7, 2001, upon the completion of the initial
tender offer period, the corporation acquired Earthgrains when approximately
93% of the outstanding Earthgrains shares were tendered and accepted by the
corporation. Following the completion of the tender offer period, Earthgrains
was merged into a subsidiary of Sara Lee.
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 employee benefit plans of the corporation's foreign subsidiaries have
provisions consistent with local practices.
F-24
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
The components of the defined benefit plan expenses were:
<TABLE>
<CAPTION>
2001 2000 1999
----- ----- -----
<S> <C> <C> <C>
Components of defined benefit net periodic benefit cost
Service cost............................................. $ 92 $ 85 $ 87
Interest cost............................................ 179 134 139
Expected return on assets................................ (235) (183) (193)
Amortization of
Net initial asset....................................... (3) (3) (4)
Prior service cost...................................... 9 9 7
Net actuarial loss...................................... 2 6 8
----- ----- -----
Net periodic benefit cost................................. $ 44 $ 48 $ 44
===== ===== =====
</TABLE>
The funded status of defined benefit plans at the respective year-ends was:
<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
<S> <C> <C> <C>
Projected benefit obligation
Beginning of year.................................... $2,928 $2,326 $2,297
Service cost......................................... 92 85 87
Interest cost........................................ 179 134 139
Plan amendments...................................... 2 6 15
Acquisitions/dispositions............................ 10 619 (43)
Benefits paid........................................ (141) (104) (99)
Participant contributions............................ 1 2 1
Actuarial loss (gain)................................ 37 (45) (17)
Foreign exchange..................................... (151) (95) (54)
------ ------ ------
End of year.......................................... $2,957 $2,928 $2,326
------ ------ ------
Fair value of plan assets
Beginning of year.................................... $3,007 $2,238 $2,306
Actual return on plan assets......................... (55) 248 96
Employer contributions............................... 56 24 22
Participant contributions............................ 1 2 1
Benefits paid........................................ (141) (104) (99)
Acquisitions/dispositions............................ (1) 708 (31)
Foreign exchange..................................... (166) (109) (57)
------ ------ ------
End of year.......................................... $2,701 $3,007 $2,238
------ ------ ------
Funded status......................................... $ (256) $ 79 $ (88)
Unrecognized
Prior service cost................................... 59 70 77
Net actuarial loss................................... 350 50 173
Net initial liability (asset)........................ 4 2 (1)
------ ------ ------
Prepaid benefit cost recognized....................... $ 157 $ 201 $ 161
------ ------ ------
Amounts recognized on the consolidated balance sheets
Noncurrent benefit liability......................... $ (38) $ -- $ (132)
Other noncurrent assets.............................. -- 171 199
Accumulated other comprehensive income............... 195 30 94
------ ------ ------
Prepaid benefit cost recognized....................... $ 157 $ 201 $ 161
====== ====== ======
</TABLE>
F-25
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
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-ends were:
<TABLE>
<CAPTION>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................ 6.1% 6.2% 5.9%
Rate of compensation increase............................ 4.9 4.9 4.7
Long-term rate of return on plan assets.................. 8.0 8.2 8.4
</TABLE>
The corporation provides health care and life insurance benefits to certain
retired employees and their covered dependents and beneficiaries. Generally,
employees who have attained age 55 and who have rendered 10 years of service
are eligible for these postretirement benefits. Certain retirees are required
to contribute to plans in order to maintain coverage. The components of the
expense for these plans were:
<TABLE>
<CAPTION>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Components of defined benefit net periodic benefit cost
Service cost............................................. $ 4 $ 6 $ 6
Interest cost............................................ 11 12 13
Net amortization and deferral............................ 1 1 2
--- --- ---
Net periodic benefit cost................................. $16 $19 $21
=== === ===
</TABLE>
The funded status of postretirement benefit plans at the respective year-
ends was:
<TABLE>
<CAPTION>
2001 2000 1999
----- ----- -----
<S> <C> <C> <C>
Accumulated postretirement benefit obligation
Beginning of year.................................. $ 181 $ 196 $ 204
Service cost....................................... 4 6 6
Interest cost...................................... 11 12 13
Net benefit paid................................... (14) (14) (12)
Actuarial loss (gain).............................. 2 (17) (13)
Foreign exchange................................... (4) (2) (2)
----- ----- -----
End of year........................................ $ 180 $ 181 $ 196
----- ----- -----
Fair value of plan assets........................... $ 2 $ 2 $ 2
----- ----- -----
Funded status....................................... $(178) $(179) $(194)
Unrecognized
Prior service cost................................. (2) (2) (2)
Net actuarial (gain)............................... (28) (26) (7)
Net initial asset.................................. (6) (5) (4)
----- ----- -----
Net accrued benefit liability recognized on the
consolidated balance sheets........................ $(214) $(212) $(207)
----- ----- -----
Weighted average discount rate...................... 6.5% 6.5% 6.3%
===== ===== =====
</TABLE>
The assumed health care cost trend rate is 8% for 2001, decreasing to 7% in
fiscal 2002 and remaining at that level thereafter. These trend rates reflect
the corporation's prior experience and management's expectation
F-26
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
that future rates will decline. Assumed health care cost trend rates impact
the amounts reported for health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One One
Percentage Percentage
Point Point
Increase Decrease
---------- ----------
<S> <C> <C>
Effect on total service and interest components.... $ 2 $ (1)
Effect on postretirement benefit obligation........ 15 (11)
</TABLE>
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:
<TABLE>
<CAPTION>
2001 2000 1999
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations before provision
for income taxes
United States............... $1,079 58.3% $ 975 62.2% $ 679 43.3%
Foreign..................... 772 41.7 592 37.8 891 56.7
------ ----- ------ ---- ------ -----
$1,851 100.0% $1,567 100.0% $1,570 100.0%
====== ===== ====== ==== ====== =====
Tax expense at U.S. statutory
rate........................ $ 648 35.0% $ 548 35.0% $ 550 35.0%
State taxes, net of federal
benefit..................... 9 0.5 16 1.0 12 0.8
Difference between U.S. and
foreign rates............... (169) (9.2) (77) (4.9) (106) (6.7)
Gain on disposal of Coach
business.................... (338) (18.3) -- -- -- --
Business dispositions and
other charges............... 140 7.6 -- -- -- --
Nondeductible amortization... 50 2.7 50 3.2 48 3.0
Other, net................... (92) (4.9) (128) (8.2) (65) (4.1)
------ ----- ------ ---- ------ -----
Taxes at effective worldwide
tax rates................... $ 248 13.4% $ 409 26.1% $ 439 28.0%
====== ===== ====== ==== ====== =====
</TABLE>
Current and deferred tax provisions (benefits) were:
<TABLE>
<CAPTION>
2001 2000 1999
---------------- ---------------- ----------------
Current Deferred Current Deferred Current Deferred
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
United States................ $(12) $29 $ 99 $36 $117 $46
Foreign...................... 169 48 241 8 237 20
State........................ 3 11 21 4 56 (37)
---- --- ---- --- ---- ---
$160 $88 $361 $48 $410 $29
==== === ==== === ==== ===
</TABLE>
F-27
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
Following are the components of the deferred tax provisions (benefits)
occurring as a result of transactions being reported in different years for
financial and tax reporting:
<TABLE>
<CAPTION>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Depreciation............................................. $ 11 $(39) $(73)
Inventory valuation methods.............................. 22 (23) (27)
Nondeductible reserves................................... 31 17 101
Other, net............................................... 24 93 28
---- ---- ----
$ 88 $ 48 $ 29
---- ---- ----
Cash payments for income taxes........................... $259 $245 $321
==== ==== ====
</TABLE>
The deferred tax (assets) liabilities at the respective year-ends were as
follows:
<TABLE>
<CAPTION>
2001 2000 1999
----- ----- -----
<S> <C> <C> <C>
Deferred tax (assets) liabilities
Reserves not deductible until paid.................. $(325) $(435) $(470)
Intangibles......................................... 232 186 200
Restructuring reserves.............................. (52) (11) (22)
Net operating loss and other tax carryforwards...... (86) (37) (15)
Property, plant and equipment....................... (60) (55) 4
Other............................................... (8) 23 (96)
----- ----- -----
Net deferred tax (assets)............................ $(299) $(329) $(399)
===== ===== =====
</TABLE>
At June 30, 2001, applicable U.S. federal income taxes and foreign
withholding taxes have not been provided on the accumulated earnings of
foreign subsidiaries that are expected to be permanently reinvested. If these
earnings had not been permanently reinvested, deferred taxes of between $425
and $475 would have been recognized in the consolidated financial statements.
F-28
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
BUSINESS SEGMENT INFORMATION
The corporation's business segments are described under Item 1 -- Business
on pages 1 through 10.
<TABLE>
<CAPTION>
2001 2000 1999
------- ------- -------
<S> <C> <C> <C>
Sales(1)
Sara Lee Foods................................ $ 5,081 $ 5,088 $ 5,249
Beverage...................................... 2,889 2,827 2,627
Household Products............................ 2,088 2,154 2,095
Intimates and Underwear....................... 7,767 7,598 7,440
------- ------- -------
17,825 17,667 17,411
Intersegment.................................. (78) (156) (141)
------- ------- -------
Total........................................ $17,747 $17,511 $17,270
======= ======= =======
Operating Income
Sara Lee Foods................................ $ 234(3) $ 370 $ 397(5)
Beverage...................................... 477(3) 472 570(6)
Household Products............................ 342(3) 355 328
Intimates and Underwear....................... 1,400(3,4) 844 776
------- ------- -------
Total operating companies income............. 2,453 2,041 2,071
------- ------- -------
Amortization of goodwill and trademarks....... (191) (171) (163)
General corporate expenses.................... (231)(3) (127) (197)
------- ------- -------
Total operating income....................... 2,031 1,743 1,711
Net interest expense.......................... (180) (176) (141)
------- ------- -------
Income from continuing operations before
income taxes................................ $ 1,851 $ 1,567 $ 1,570
======= ======= =======
</TABLE>
F-29
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
<TABLE>
<CAPTION>
2001 2000 1999(2)
------- ------- -------
<S> <C> <C> <C>
Assets
Sara Lee Foods......................................... $ 2,037 $ 2,310 $ 2,173
Beverage............................................... 1,669 1,967 1,187
Household Products..................................... 1,750 1,464 1,839
Intimates and Underwear................................ 4,372 4,902 4,642
------- ------- -------
9,828 10,643 9,841
Other(7,8)............................................. 339 968 451
------- ------- -------
Total assets.......................................... $10,167 $11,611 $10,292
------- ------- -------
Depreciation
Sara Lee Foods......................................... $ 129 $ 119 $ 98
Beverage............................................... 77 81 69
Household Products..................................... 30 31 31
Intimates and Underwear................................ 149 154 141
------- ------- -------
385 385 339
Other.................................................. 7 17 13
------- ------- -------
Total depreciation.................................... $ 392 $ 402 $ 352
------- ------- -------
Additions to Long-lived Assets
Sara Lee Foods......................................... $ 185 $ 316 $ 193
Beverage............................................... 331 399 171
Household Products..................................... 51 76 129
Intimates and Underwear................................ 234 386 231
------- ------- -------
801 1,177 724
Other.................................................. 24 18 2
------- ------- -------
Total additions to long-lived assets.................. $ 825 $ 1,195 $ 726
======= ======= =======
</TABLE>
--------
(1) Includes sales between segments. Such sales are at transfer prices that
are equivalent to market value.
(2) 53-week year.
(3) Includes provisions for business dispositions and other charges reported
in the 2001 consolidated statement of income which reduced operating
income by: Sara Lee Foods $129; Beverage $8; Household Products $3;
Intimates and Underwear $411; and Corporate Office $3.
(4) Includes the gain on the disposal of the Coach business of $967.
(5) Includes the product recall charge which reduced operating income by $76.
(6) Includes the gain on sale of the tobacco operations which increased
operating income by $137.
(7) Principally cash and equivalents, certain fixed assets and certain other
noncurrent assets.
(8) Includes net assets of businesses held for sale of $94 in 2001, $563 in
2000 and $315 in 1999.
F-30
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
GEOGRAPHIC AREA INFORMATION
<TABLE>
<CAPTION>
United
States France Netherlands Other Total
------- ------ ----------- ------ -------
<S> <C> <C> <C> <C> <C>
2001
Sales................................. $10,131 $1,351 $ 969 $5,296 $17,747
Long-lived assets..................... 2,631 375 740 1,091 4,837
--------------------------------------------------------------------------------
2000
Sales................................. $ 9,979 $1,534 $1,021 $4,977 $17,511
Long-lived assets..................... 2,796 472 876 1,076 5,220
--------------------------------------------------------------------------------
1999
Sales................................. $ 9,413 $1,681 $1,069 $5,107 $17,270
Long-lived assets..................... 2,230 515 1,043 1,215 5,003
--------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE>
Sara Lee Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS (Continued)
(dollars in millions except per share data)
QUARTERLY FINANCIAL DATA
(unaudited)
<TABLE>
<CAPTION>
Quarter
------------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
2001
Continuing operations
Net sales............................. $4,455 $4,757 $4,308 $4,227
Gross profit.......................... 1,855 2,015(2) 1,797 1,790(6)
Income................................. 238 151(3) 241(5) 973(7)
Income per common share -- basic....... .28 .18(3) .29(5) 1.24(7)
Income per common share -- diluted..... .27 .17(3) .28(5) 1.19(7)
Net income............................. 254 798(4) 241(5) 973(7)
Per common share
Net income -- basic................... .30 .96(4) .29(5) 1.24(7)
Net income -- diluted................. .29 .92(4) .28(5) 1.19(7)
Cash dividends declared................ .135 .145 .145 .145
Market price -- high................... 20.81 25.31 24.75 23.25
-- low........................... 17.44 19.00 20.20 18.26
-- close......................... 20.31 24.56 21.58 18.94
--------------------------------------------------------------------------------
2000
Continuing operations
Net sales............................. $4,239 $4,634 $4,175 $4,463
Gross profit.......................... 1,784 2,018 1,768 1,841
Income................................. 241 375 249 293
Income per common share -- basic....... .27 .42 .28 .33
Income per common share -- diluted..... .26 .40 .27 .33
Net income............................. 258 389 262 313
Per common share
Net income -- basic................... .29 .44 .30 .36
Net income -- diluted................. .28 .42 .29 .35
Cash dividends declared................ .125 .135 .135 .135
Market price -- high................... 24.44 27.50 22.00 19.44
-- low............................ 21.19 21.06 13.38 14.56
-- close.......................... 22.94 22.06 18.00 19.31
--------------------------------------------------------------------------------
1999
Continuing operations
Net sales............................. $4,192 $4,626 $4,011 $4,441
Gross profit.......................... 1,742 2,011 1,746 1,892
Income................................. 324(8) 308(9) 233 266
Income per common share -- basic....... .35(8) .34(9) .25 .30
Income per common share -- diluted..... .34(8) .32(9) .24 .29
Net income............................. 338(8) 322(9) 245 286
Per common share(1)
Net income -- basic................... .37(8) .35(9) .27 .32
Net income -- diluted................. .35(8) .34(9) .26 .31
Cash dividends declared................ .115 .125 .125 .125
Market price -- high................... 29.59 30.81 29.88 26.31
-- low............................. 22.16 26.13 23.50 21.50
-- close........................... 27.25 29.50 26.13 22.50
--------------------------------------------------------------------------------
</TABLE>
(1) Restated for the 2-for-1 stock split in 1999.
(2) Includes cost of sales--product line exit costs of $24.
(3) Includes gain from the initial public offering of Coach of $105 and
business dispositions and other charges of $317, or a reduction of $.25
per share basic and diluted.
(4) Includes gain from the initial public offering of Coach of $105, gain on
the sale of PYA/Monarch of $638 and business dispositions and other
charges of $317, or an increase of $.52 per share--basic, $.48 per share--
diluted.
(5) Includes income from business dispositions and other charges of $5, or an
increase of $.01 per share basic and diluted.
(6) Includes cost of sales--product line exit costs of $2.
(7) Includes gain on the disposal of the Coach business of $862 and business
dispositions and other charges of $188, or an increase of $.86 per share--
basic, $.82 per share--diluted.
(8) Includes gain on sale of business of $97, or $.11 per share--basic, $.10
per share--diluted.
(9) Includes product recall charge of $50, or $.06 per share--basic, $.05 per
share--diluted.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Management of Sara Lee Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Sara Lee
Corporation included in this Form 10-K, and have issued our report thereon
dated July 27, 2001. 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, 2001
F-33
<PAGE>
SCHEDULE II
Sara Lee Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended July 3, 1999, July 1, 2000 and June 30, 2001
<TABLE>
<CAPTION>
Provision
Charged Write-offs
Balance at to Costs (1)/ Other Balance
Beginning and Allowances Additions at End
of Year Expenses Taken (Deductions) of Year
---------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
For the Year Ended July 3,
1999:
Allowances for bad
debts.................. $127 $ 37 $ (39) $ (5) $120
Other receivables
allowances (2)......... 69 131 (123) (4) 73
---- ---- ----- ---- ----
Total................. $196 $168 $(162) $ (9) $193
==== ==== ===== ==== ====
For the Year Ended July 1,
2000:
Allowances for bad
debts.................. $120 $ 31 $ (41) $ (5) $105
Other receivables
allowances............. 73 69 (65) 13 90
---- ---- ----- ---- ----
Total................. $193 $100 $(106) $ 8 $195
==== ==== ===== ==== ====
For the Year Ended June
30, 2001:
Allowances for bad
debts.................. $105 $ 27 $ (25) $(20) $ 87
Other receivables
allowances............. 90 79 (79) (20) 70
---- ---- ----- ---- ----
Total................. $195 $106 $(104) $(40) $157
==== ==== ===== ==== ====
</TABLE>
--------
(1) Net of collections on accounts previously written off.
(2) Includes a $37 million provision and subsequent write-off of receivables
associated with the returns and destruction of meat products subject to a
product recall.
F-34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
3. Exhibits
Incorporation by Reference
--------------------------
<C> <S> <C>
(3a) 1. 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
2. Articles of Amendment Exhibit 3(a)2 to Report on Form 10-K
to Charter for Fiscal Year ended July 3, 1999
3. Articles Exhibit 3(a) to Report on Form 10-K
Supplementary for Fiscal Year ended July 3, 1999
(3b) Bylaws Exhibit 3(b) to Report on Form 10-K
for Fiscal Year ended July 1, 2000
(4) 1. Stockholder Rights Exhibit 4.1 to Report on Form 8-K
Agreement, dated as dated May 15, 1998
of March 26, 1998
between Sara Lee
Corporation and First
Chicago Trust
Company of New York,
as rights agent.
2. Form of Floating Rate Exhibit 4.1 to Current Report on Form 8-K
Note due 2003 dated September 24, 2001
3. Form of 6 1/4% Notes Exhibit 4.2 to Current Report on Form 8-K
due 2011 dated September 24, 2001
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. 1981 Stock Option Exhibit 10(11) to Report on Form 10-K
Plan, as for Fiscal Year ended July 1, 1989
amended
*2. 1988 Non-Qualified Exhibit 10(3) to Report on Form 10-K
Stock Option for Fiscal Year ended July 1, 1995
Plan, as amended
*3. 1989 Incentive Exhibit 10(4) to Report on Form 10-K
Stock Plan, as for Fiscal Year ended June 28, 1997
amended
*4. Supplemental Exhibit 10(5) to Report on Form 10-K
Benefit Plan, as for Fiscal Year ended June 28, 1997
amended
*5. Performance-Based Exhibit A to Proxy Statement dated
Annual September 20, 1995
Incentive Plan
*6. 1995 Long-Term Exhibit 10(16) to Report on Form 10-K
Incentive Stock for Fiscal Year ended June 28, 1997
Plan, as amended
*7. 1995 Non-Employee Exhibit 10(8) to Report on Form 10-K
Director for Fiscal Year ended July 3, 1999
Stock Plan, as
amended
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Incorporation by Reference
--------------------------
<C> <S> <C>
*8. 1998 Long-Term Exhibit A to Proxy Statement dated
Incentive Stock September 21, 1998
Plan
*9. 1999 Non-Employee Exhibit A to Proxy Statement dated
Director September 20, 1999
Stock Plan
*10. Non-Qualified Exhibit 10(19) to Report on Form 10-K
Deferred for Fiscal Year ended June 27, 1999
Compensation Plan for
Outside
Directors, as amended
*11. Executive Deferred Exhibit 10(12) to Report on Form 10-K
Compensation for Fiscal Year ended July 3, 1999
Plan
*12. Second Amendment to Exhibit 10(13) to Report on Form 10-K
Executive for Fiscal Year ended July 1, 2000
Deferred Compensation
Plan
*13. FY 1999-01 Long Exhibit 10(15) to Report on Form 10-K
Term for Fiscal Year ended July 3, 1999
Performance Incentive
Plan
*14. FY 2000-02 Long
Term
Performance Incentive
Plan
*15. FY 2001-03 Long Exhibit 10.1 to Report on Form 10-Q
Term for quarterly period ended September 30,
Performance Incentive 2000
Plan
*16. Non-Qualified Exhibit 10(17) to Report on Form 10-K
Estate Builder for Fiscal Year ended June 29, 1985
Deferred Compensation
Plan
*17. Severance Policy Exhibit 10(23) to Report on Form 10-K
for Corporate for Fiscal Year ended June 28, 1997
Officers, as amended
*18. Employment Exhibit 10(24) to Report on Form 10-K
Agreement, dated for Fiscal Year ended June 28, 1997
January 1, 1996,
between Sara
Lee Corporation and
Frank L.
Meysman
*19. Employment Exhibit 10(25) to Report on Form 10-K
Agreement, dated for Fiscal Year ended June 28, 1997
January 1, 1996,
between Sara
Lee/DE N.V. and Frank
L.
Meysman and
attachments
(translated from
Dutch)
*20. Restricted Share Exhibit 10(27) to Report on Form 10-K
Unit Agreement for Fiscal Year ended June 27, 1998
dated April 29, 1998
between Sara
Lee Corporation and
Frank L.
Meysman
*21. Consulting and Exhibit 10(21) to Report on Form 10-K
Retirement for Fiscal Year ended July 1, 2000.
Agreement dated
February 25,
2000 between Sara Lee
Corporation and John
H. Bryan
22. Agreement and Plan Exhibit 2.1 to Current Report on Form 8-K
of Merger, dated as dated August 8, 2001
of June 29, 2001, by
and among Sara Lee
Corporation, SLC
Acquisition Corp. and
The Earthgrains
Company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Incorporation by Reference
--------------------------
<C> <S> <C>
(12) 1. Computation of Ratio Exhibit 2.1 to Current Report on Form 8-K
of Earnings to Fixed dated August 8, 2001
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
</TABLE>
--------
*Management compensatory plan or arrangement required to be filed as an exhibit
to this Form 10-K.
</TEXT>
</DOCUMENT>