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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
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 1-5231
McDONALD'S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2361282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
McDonald's Plaza
Oak Brook, Illinois 60523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 623-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
- --------------------------------------------------------------------------------
Common stock, $.01 par value New York Stock Exchange
Chicago Stock Exchange
8-7/8% Debentures due 2011 New York Stock Exchange
7-3/8% Notes due 2002 New York Stock Exchange
6-3/4% Notes due 2003 New York Stock Exchange
7-3/8% Debentures due 2033 New York Stock Exchange
6-5/8% Notes due 2005 New York Stock Exchange
7.05% Debentures due 2025 New York Stock Exchange
7-1/2% Subordinated Deferrable Interest
Debentures due 2036 New York Stock Exchange
7-1/2% Subordinated Deferrable Interest
Debentures due 2037 New York Stock Exchange
7.31% Subordinated Deferrable Interest
Debentures due 2027 New York Stock Exchange
6-3/8% Debentures due 2028 New York Stock Exchange
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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.[ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant is $50,334,959,192 and the number of shares of common stock
outstanding is 1,349,816,028 as of January 31, 2000.
Documents incorporated by reference. Part III of this 10-K incorporates
information by reference from the registrant's 2000 definitive proxy statement
which will be filed no later than 120 days after December 31, 1999.
Part I
Item 1. Business
McDonald's Corporation, the registrant, together with its subsidiaries, is
referred to herein as the "Company".
(a) General development of business
There have been no significant changes to the Company's corporate structure
during 1999, or material changes in the Company's method of conducting business.
(b) Financial information about industry segments
Industry segment data for the years ended December 31, 1999, 1998 and 1997 is
included in Part II, Item 8, page 25 of this Form 10-K.
(c) Narrative description of business
General
The Company develops, operates, franchises and services a worldwide system of
restaurants that prepare, assemble, package and sell a limited menu of value-
priced foods. All restaurants are operated by the Company or, under the terms of
franchise arrangements, by franchisees who are independent third parties, or by
affiliates operating under joint-venture agreements between the Company and
local businesspeople.
The Company operates primarily in the quick-service hamburger restaurant
business. Beginning in 1999, the Company also operates other restaurant
concepts: Aroma Cafe', a small chain of coffeehouses serving prepared sandwiches
and pastries in the UK; Chipotle Mexican Grill, a fresh-mex grill located in the
United States serving gourmet burritos and tacos; and Donatos Pizza, a
restaurant business located in the United States that sells pizza, subs and
salads. Since McDonald's restaurant business comprises virtually all of the
Company's consolidated operating results, this narrative primarily relates to
McDonald's restaurant business.
The Company's franchising program for McDonald's restaurants is designed to
assure consistency and quality. The Company is selective in granting franchises
and is not in the practice of franchising to investor groups or passive
investors. Under the conventional franchise arrangement, franchisees supply
capital--initially, by purchasing equipment, signs, seating and decor, and over
the long term, by reinvesting in the business. The Company shares the investment
by owning or leasing the land and building. Beginning in 1998, the Company
generally provides franchisees in the United States the option to own new
restaurant buildings. Franchisees contribute to the Company's revenues through
payment of rent and service fees based upon a percent of sales, with specified
minimum payments. The conventional franchise arrangement typically lasts 20
years and franchising practices are generally consistent throughout the world.
Further discussion regarding site selection is included in Part I, Item 2, page
4 of this Form 10-K.
Training begins at the McDonald's restaurant with one-on-one instruction and
videotapes. Aspiring restaurant managers progress through a development program
of classes in management and basic and intermediate operations, as well as
learning computer skills. Assistant managers are eligible to attend the advanced
operations and management class at one of the six Hamburger University (H.U.)
campuses in Australia, Brazil, England, Germany, Japan or the U.S. The
curriculum at H.U. concentrates on skills and practices essential to driving the
Company's strategies of delivering customer satisfaction and increasing market
share.
McDonald's global brand is well-known. Marketing and promotional activities are
designed to nurture this brand image and differentiate the Company from
competitors by focusing on value, taste and customer satisfaction. Funding for
promotions is generally handled at the local restaurant level; funding for
regional and national efforts is generally handled through advertising
cooperatives. Franchised, Company-operated and affiliated restaurants throughout
the world make voluntary contributions to cooperatives that purchase media.
Production costs for certain advertising efforts are borne by the Company.
Products
McDonald's restaurants offer a substantially uniform menu consisting of
hamburgers and cheeseburgers, including the Big Mac and Quarter Pounder with
Cheese, the Filet-O-Fish, several chicken sandwiches, french fries, Chicken
McNuggets, salads, milk shakes, McFlurries, sundaes and cones, pies, cookies and
soft drinks and other beverages. In addition, the restaurants sell a variety of
other products during limited promotional time periods. McDonald's restaurants
operating in the United States and certain international markets are open during
breakfast hours and offer a full or limited breakfast menu including the Egg
McMuffin and the Sausage McMuffin with Egg sandwiches, hotcakes and sausage,
three varieties of biscuit sandwiches, bagel sandwiches and Apple-Bran muffins.
The Company tests new products on an ongoing basis.
The Company, its franchisees and affiliates purchase McDonald's food products
and packaging from numerous independent suppliers. Quality specifications for
both raw and cooked food products are established and strictly enforced.
Alternative sources of these items are generally available. Quality assurance
labs in the U.S., Europe and Asia/Pacific work to ensure that the Company's high
standards are consistently met. The quality assurance process involves ongoing
testing and on-site inspections of suppliers' facilities. Independently owned
and operated distribution centers distribute products and supplies to most
McDonald's restaurants. The restaurants then prepare, assemble and package these
products using specially designed production techniques and equipment to obtain
uniform standards of quality.
2
Food preparation
During 1999 the Company completed the installation of its Made For You food
preparation system in virtually all McDonald's restaurants in the United States
and Canada. Made For You is based on a just-in-time production philosophy where
each sandwich is made to order. Through advances in equipment and technology,
the new system aims to provide customers with fresher, better-tasting food. In
addition, the new system can support future growth through product development
because it can more easily accommodate an expanded menu.
Trademarks and patents
The Company has registered trademarks and service marks, some of which,
including "McDonald's", "Ronald McDonald" and other related marks, are of
material importance to the Company's business. The Company also has certain
patents on restaurant equipment which, while valuable, are not material to its
business.
Seasonal operations
The Company does not consider its operations to be seasonal to any material
degree.
Working capital practices
Information about the Company's working capital practices is incorporated herein
by reference to Management's discussion and analysis of financial condition and
results of operations for the years ended December 31, 1999, 1998 and 1997 in
Part II, Item 7, pages 7 through 17, and the Consolidated statement of cash
flows for the years ended December 31, 1999, 1998 and 1997 in Part II, Item 8,
page 21 of this Form 10-K.
Customers
The Company's business is not dependent upon a single customer or small group
of customers.
Backlog
Company-operated restaurants have no backlog orders.
Government contracts
No material portion of the business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the U.S. government.
Competition
McDonald's restaurants compete with international, national, regional, and local
retailers of food products. The Company competes on the basis of price,
convenience and service and by offering quality food products. The Company's
competition in the broadest perspective includes restaurants, quick-service
eating establishments, pizza parlors, coffee shops, street vendors, convenience
food stores, delicatessens, and supermarkets.
In the U.S., the quick service restaurant business consists of about
465,000 restaurants that generate nearly $261 billion in annual sales.
McDonald's accounts for about 2.7% of those restaurants and approximately 7.3%
of those sales. No reasonable estimate can be made of the number of competitors
outside the U.S.; however, the Company's business in foreign markets continues
to grow.
Research and development
The Company operates research and development facilities in Illinois. While
research and development activities are important to the Company's business,
these expenditures are not material. Independent suppliers also conduct research
activities for the benefit of the McDonald's System, which includes franchisees
and suppliers, as well as McDonald's, its subsidiaries and joint ventures.
Environmental matters
The Company is not aware of any federal, state or local environmental laws or
regulations that will materially affect its earnings or competitive position, or
result in material capital expenditures; however, the Company cannot predict the
effect on its operations of possible future environmental legislation or
regulations. During 1999, there were no material capital expenditures for
environmental control facilities and no such material expenditures are
anticipated.
Number of employees
During 1999, the Company's average number of employees worldwide, including
Company-operated restaurant employees, was approximately 314,000. This includes
McDonald's restaurants as well as other restaurant concepts operated by the
Company.
(d) Financial information about foreign and domestic operations
Financial information about foreign and domestic markets is incorporated herein
by reference to Management's discussion and analysis of financial condition and
results of operations in Part II, Item 7, pages 7 through 17 and Segment and
geographic information in Part II, Item 8, page 25 of this Form 10-K.
3
Item 2. Properties
The Company identifies and develops sites that offer convenience to customers
and provide for long-term sales and profit potential. To assess potential, the
Company analyzes traffic and walking patterns, census data, school enrollments
and other relevant data. The Company's experience and access to advanced
technology aids in evaluating this information. The Company generally owns or
secures long-term land and building leases for restaurant sites, which ensures
long-term occupancy rights and helps control related costs. Restaurant
profitability for both the Company and franchisees is important; therefore,
ongoing efforts are made to control average development costs through
construction and design efficiencies, standardization and by leveraging the
Company's global sourcing system. Additional information about the Company's
properties is included in Management's discussion and analysis of financial
condition and results of operations in Part II, Item 7, pages 7 through 17 and
in Financial statements and supplementary data in Part II, Item 8, pages 18
through 32 of this Form 10-K.
Item 3. Legal proceedings
The Company has pending a number of lawsuits which have been filed from time to
time in various jurisdictions. These lawsuits cover a broad variety of
allegations spanning the Company's entire business. The following is a brief
description of the more significant of these categories of lawsuits. In
addition, the Company is subject to various federal, state and local regulations
that impact various aspects of its business, as discussed below. The Company
does not believe that any such claims, lawsuits or regulations, will have a
material adverse effect on its financial condition or results of operations.
Franchising
A substantial number of McDonald's restaurants are franchised to independent
businesspeople operating under arrangements with the Company. In the course of
the franchise relationship, occasional disputes arise between the Company and
its franchisees relating to a broad range of subjects including, without
limitation, quality, service and cleanliness issues, contentions regarding
grants or terminations of franchises, franchisee claims for additional
franchises or rewrites of franchises, and delinquent payments. Additionally, on
occasion, disputes arise between the Company and individuals who claim they
should have been granted a McDonald's franchise.
Suppliers
The Company purchases food, paper and related items from numerous independent
suppliers throughout the world. These suppliers are required to meet and
maintain the Company's standards and specifications. On occasion, disputes arise
between the Company and its suppliers on a number of issues including, by way of
example, compliance with product specifications and the Company's business
relationship with suppliers. Additionally, on occasion disputes arise on a
number of issues between the Company and individuals or entities who claim that
they should be (or should have been) granted the opportunity to supply products
or services to McDonald's restaurants.
Employees
Thousands of persons are employed by the Company and in restaurants owned and
operated by subsidiaries of the Company. In addition, thousands of persons, from
time to time, seek employment in such restaurants. In the ordinary course of
business, disputes arise regarding hiring, firing and promotion practices.
Customers
McDonald's restaurants serve a large cross-section of the public and in the
course of serving so many people, disputes arise as to products, service,
accidents and other matters typical of an extensive restaurant business such as
that of the Company.
Intellectual property
The Company has registered trademarks and service marks, some of which are of
material importance to the Company's business. The Company also has certain
patents on restaurant equipment, which while valuable, are not material to its
business. From time to time, the Company may become involved in litigation to
defend and protect its use of its intellectual property.
Government regulations
Local, state and federal governments have adopted laws and regulations involving
various aspects of the restaurant business, including, but not limited to,
franchising, health, safety, environment, zoning and employment. The Company
does not believe that it is in violation of any existing statutory or
administrative rules, but it cannot predict the effect on its operations from
the promulgation of additional requirements in the future.
Item 4. Submission of matters to a vote of shareholders
None
4
Executive Officers of the registrant
All of the executive officers of the Company as of March 1, 2000 are shown
below. Unless otherwise indicated, each of the executive officers has been
continuously employed by the Company for at least five years and has a term of
office until the May 2000 Board of Directors' meeting.
- -------------------------------------------------------------------
Number Number
of years of years
Date of with in present
Name and office birth Company position
- -------------------------------------------------------------------
Claire H. Babrowski 7/25/57 22 1
Executive Vice President
James R. Cantalupo 11/14/43 25 *
Vice Chairman and President
Michael L. Conley 3/28/48 25 3
Executive Vice President
and Chief Financial Officer
Alan D. Feldman 3/6/52 5 1
President--McDonald's USA
Jack M. Greenberg 9/28/42 18 *
Chairman and
Chief Executive Officer
Jeffrey B. Kindler (1) 5/13/55 4 2
Executive Vice President,
Corporate General Counsel
Christopher Pieszko 12/2/55 21 2
Senior Vice President and
Corporate Controller
Michael R. Quinlan 12/9/44 36 *
Chairman of the
Executive Committee
James A. Skinner 10/25/44 29 2
President--Europe Group
Stanley R. Stein 4/17/42 25 2
Executive Vice President
Fred L. Turner 1/6/33 43 10
Senior Chairman
- -------------------------------------------------------------------
* Less than one year in current position.
(1) Mr. Kindler joined the Company in 1996 as Senior Vice President, General
Counsel. He assumed his current position in 1997. Prior thereto, Mr.
Kindler served as Vice President, Senior Counsel of General Electric
Company.
Part II
Item 5. Market for registrant's common equity and related shareholder matters
The Company's common stock trades under the symbol MCD and is listed on the
following stock exchanges in the United States: New York and Chicago.
The following table sets forth the common stock price range on the New York
Stock Exchange composite tape and dividends declared per common share.
- -----------------------------------------------------------------
1999 1998
----------------------- ------------------------
Dividend Dividend
per per
common common
Quarter High Low share High Low share
- -----------------------------------------------------------------
First 47 3/8 35 15/16 .04875 30 1/8 22 5/16 .04125
Second 47 1/16 37 3/4 .04875 35 28 9/16 .04500
Third 45 1/4 38 15/16 .04875 37 1/2 26 3/4 .04500
Fourth 49 9/16 38 5/16 .04875 39 3/4 28 1/8 .04500
- -----------------------------------------------------------------
Year 49 9/16 35 15/16 .19500 39 3/4 22 5/16 .17625
- -----------------------------------------------------------------
The approximate number of shareholders of record and beneficial owners of
the Company's common stock as of January 31, 2000 was estimated to be 899,100.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchase. Accordingly, the common stock dividend
yield is modest. However, the Company has paid dividends on common stock for 24
consecutive years through 1999 and has increased the dividend amount at least
once every year. Additional dividend increases will be considered after
reviewing returns to shareholders, profitability expectations and financing
needs. In November 1999, the Company announced that it intends to pay cash
dividends on an annual, instead of quarterly, basis beginning in 2000. Future
dividends declared at the discretion of the Company's Board of Directors will be
paid annually in December.
5
Item 6. Selected financial data
- ----------------------------------------------------------------------------------------------------------------------------------
11-year summary
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per
share data) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------------
Systemwide sales $ 38,491 35,979 33,638 31,812 29,914 25,987 23,587 21,885 19,928 18,759 17,333
- ----------------------------------------------------------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees $ 23,830 22,330 20,863 19,969 19,123 17,146 15,756 14,474 12,959 12,017 11,219
Operated by the Company $ 9,512 8,895 8,136 7,571 6,863 5,793 5,157 5,103 4,908 5,019 4,601
Operated by affiliates $ 5,149 4,754 4,639 4,272 3,928 3,048 2,674 2,308 2,061 1,723 1,513
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 13,259 12,421 11,409 10,687 9,795 8,321 7,408 7,133 6,695 6,640 6,066
Operating income $ 3,320 2,762(1) 2,808 2,633 2,601 2,241 1,984 1,862 1,679 1,596 1,438
Income before provision
for income taxes $ 2,884 2,307(1) 2,407 2,251 2,169 1,887 1,676 1,448 1,299 1,246 1,157
Net income $ 1,948 1,550(1) 1,642 1,573 1,427 1,224 1,083 959 860 802 727
- ----------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations $ 3,009 2,766 2,442 2,461 2,296 1,926 1,680 1,426 1,423 1,301 1,246
Capital expenditures $ 1,868 1,879 2,111 2,375 2,064 1,539 1,317 1,087 1,129 1,571 1,555
Free cash flow $ 1,141 887 331 86 232 387 363 339 294 (270) (309)
Treasury stock purchases $ 933 1,162 765 605 321 500 628 92 117 157 497
- ----------------------------------------------------------------------------------------------------------------------------------
Financial position at year end
Net property and equipment $ 16,324 16,042 14,961 14,352 12,811 11,328 10,081 9,597 9,559 9,047 7,758
Total assets $ 20,983 19,784 18,242 17,386 15,415 13,592 12,035 11,681 11,349 10,668 9,175
Total debt $ 7,252 7,043 6,463 5,523 4,836 4,351 3,713 3,857 4,615 4,792 4,036
Total shareholders' equity $ 9,639 9,465 8,852 8,718 7,861 6,885 6,274 5,892 4,835 4,182 3,550
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share
Net income $ 1.44 1.14(1) 1.17 1.11 .99 .84 .73 .65 .59 .55 .49
Net income--diluted $ 1.39 1.10(1) 1.15 1.08 .97 .82 .71 .63 .57 .54 .48
Dividends declared $ .20 .18 .16 .15 .13 .12 .11 .10 .09 .09 .08
Market price at year end $40 5/16 38 7/16 23 7/8 22 11/16 22 9/16 14 5/8 14 1/4 12 3/16 9 1/2 7 1/4 8 5/8
- ----------------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants at year end 26,806 24,818 23,132 21,022 18,380 15,950 14,163 13,093 12,418 11,803 11,162
Systemwide restaurants by type
Operated by franchisees 16,265 15,281 14,265 13,428 12,217 10,965 9,933 9,237 8,735 8,131 7,573
Operated by the Company 6,213 5,525 5,000 4,357 3,816 3,238 2,746 2,551 2,547 2,643 2,691
Operated by affiliates 4,328 4,012 3,867 3,237 2,347 1,747 1,484 1,305 1,136 1,029 898
- ----------------------------------------------------------------------------------------------------------------------------------
Number of countries at year end 118 114 109 101 89 79 70 65 59 53 51
- ----------------------------------------------------------------------------------------------------------------------------------
Number of shareholders at year end
(in thousands) 899.5 888.2 880.2 904.6 769.7 609.2 464.5 398.3 371.7 362.6 330.5
==================================================================================================================================
(1) Including $162 million of Made For You costs and the $160 million special
charge related to the home office productivity initiative for a pre-tax
total of $322 million ($219 million after tax or $0.16 per share).
6
Item 7. Management's discussion and analysis of financial condition and results
of operations
Consolidated operating results
- ------------------------------------------------------------------------------------------------------------------------------------
Operating results
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- --------
Percent Percent
increase/ increase/
(Dollars in millions, except per share data) Amount (decrease) Amount (decrease) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Systemwide sales $38,491 7% $35,979 7% $33,638
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Sales by Company-operated restaurants $ 9,512 7% $ 8,895 9% $ 8,136
Revenues from franchised and affiliated restaurants 3,747 6 3,526 8 3,273
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 13,259 7 12,421 9 11,409
- ------------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Company-operated restaurants 7,829 8 7,261 9 6,650
Franchised restaurants 738 9 678 10 614
Selling, general and administrative expenses 1,477 1 1,458 1,451
Other operating (income) expense (124) nm (60) nm (114)
Made For You costs 19 nm 162 nm
Special charge nm 160 nm
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 9,939 3 9,659 12 8,601
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income(1) 3,320 20 2,762 (2) 2,808
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 396 (4) 414 14 364
Nonoperating (income) expense 40 (2) 41 11 37
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes(1) 2,884 25 2,307 (4) 2,407
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes(1) 936 24 757 (1) 765
- ------------------------------------------------------------------------------------------------------------------------------------
Net income(1) $ 1,948 26% $ 1,550 (6)% $ 1,642
====================================================================================================================================
Net income per common share(1) $ 1.44 26% $ 1.14 (3)% $ 1.17
Net income per common share-diluted(1) 1.39 26 1.10 (4) 1.15
====================================================================================================================================
(1) The 1998 results include $162 million of Made For You costs and the $160
million special charge discussed on page 12, for a pre-tax total of $322
million ($219 million after tax or $0.16 per share).
nm Not meaningful
The following table presents the growth rates for reported results; results
adjusted for 1998 Made For You costs and the 1998 special charge; and the
adjusted results on a constant currency basis. All information in constant
currencies excludes the effect of foreign currency translation on reported
results, except for hyperinflationary economies, such as Russia, whose
functional currency is the U.S. Dollar.
Constant currency operating results
- --------------------------------------------------------------------------------
1999 1998
----------------------------------------- -----------------------------------------
Percent increase/(decrease) Percent increase/(decrease)
----------------------------------------- -----------------------------------------
As Constant As Constant
reported Adjusted(1) currency(1,2) reported Adjusted(1) currency(1,2)
- ------------------------------------------------------------------------------------------------------------------------------------
Systemwide sales 7% 7% 8% 7% 7% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 7 7 10 9 9 12
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 20 8 10 (2) 10 12
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 26 10 13 (6) 8 10
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per common share 26 11 13 (3) 11 14
Net income per common share--diluted 26 10 13 (4) 10 12
====================================================================================================================================
(1) Excluding 1998 Made For You costs and the 1998 special charge.
(2) Excluding the effect of foreign currency translation.
7
In 1999, net income and diluted net income per common share increased 10% (13%
for both in constant currencies), excluding 1998 Made For You costs and the 1998
special charge. In 1998, net income increased 8% and diluted net income per
common share increased 10% (10% and 12% in constant currencies, respectively),
excluding 1998 Made For You costs and the 1998 special charge. Including these
items, reported net income and diluted net income per common share both
increased 26% in 1999 and decreased 6% and 4%, respectively, in 1998. The spread
between the percent change in net income and net income per common share in 1998
was primarily due to the absence of preferred dividends, since we retired our
remaining Series E Preferred Stock in December 1997.
The primary currencies negatively affecting reported results in 1999 were
the Brazilian Real, the British Pound Sterling and the Euro, partly offset by
the stronger Australian Dollar, Japanese Yen and Southeast Asian currencies. In
1998, the Australian Dollar, Brazilian Real, Canadian Dollar, Japanese Yen and
to a lesser extent, the Euro-based currencies, negatively affected reported
results.
Nature of business
McDonald's operates primarily in the quick-service hamburger restaurant
business. Beginning in 1999, the Company also operates other restaurant
concepts: Aroma Cafe, Chipotle Mexican Grill and Donatos Pizza. Collectively
these three businesses are referred to as "Other Brands." Throughout this
discussion, Other Brands financial information is included in the Other segment,
except where specifically noted.
In December 1999, the Company announced its intention to acquire certain
assets related to the Boston Market brand. The transaction is expected to close
in mid-2000.
Systemwide sales
Systemwide sales include sales by all restaurants, whether operated by the
Company, by franchisees or by affiliates operating under joint-venture
agreements. We continue to focus on increasing market share through expansion
and comparable sales increases with an emphasis on increasing customer
satisfaction through quality, service, cleanliness and value. Constant currency
sales increases in 1999 and 1998 were primarily due to restaurant expansion and
positive comparable sales.
In 1999, the stronger Japanese Yen had a greater positive currency
translation effect on sales compared with revenues. This is due to our affiliate
structure in Japan. Under this structure, we record a royalty in revenues based
on a percentage of Japan's sales, whereas all of Japan's sales are included in
Systemwide sales. For this reason, 1999 Systemwide sales were less negatively
affected by foreign currency translation than were revenues.
In 1999, 1998 and 1997, more than 80% of Systemwide sales were in the
following eight markets--Australia, Brazil, Canada, France, Germany, Japan, the
U.K. and the U.S. (referred to as the major markets).
In the U.S. and Europe, expansion and positive comparable sales drove sales
increases in 1999 and 1998. In the U.S., successful promotions combined with
local market initiatives and new product introductions contributed to the
increases in both years. In Europe, successful promotions and value campaigns in
France, Germany, Spain and the U.K. drove the increases in both years. Europe's
results were dampened in 1999 by the difficult economic conditions in Russia.
In Asia/Pacific, the 1999 and 1998 constant currency sales increases were
driven by expansion, partly offset by negative comparable sales. In 1999, China,
South Korea and the Southeast Asian markets were the primary contributors to the
increase. In addition, expansion in Japan and positive comparable sales in
Australia contributed to the increase.
In Latin America, expansion drove the 1999 constant currency sales
increase, which was partly offset by negative comparable sales. Expansion in
Brazil and positive double-digit comparable sales in Mexico and Venezuela helped
drive the increase. In 1998, sales increased due to expansion and positive
comparable sales.
In the Other segment, Canada's positive comparable sales in both years
drove the constant currency sales increases. Also, the addition of Other Brands
contributed $91 million to the 1999 sales increase.
Systemwide sales
========================================================================================================================
1999 1998 1997
------------------------------- -------------------------------- -------
Percent increase/ Percent increase/
(decrease) (decrease)
---------------------- ----------------------
As Constant As Constant
(Dollars in millions) Amount reported currency/(1)/ Amount reported currency/(1)/ Amount
- ------------------------------------------------------------------------------------------------------------------------
U.S. $19,006 5% na $18,123 6% na $17,125
Europe 9,557 7 12% 8,909 14 15% 7,835
Asia/Pacific 6,436 15 6 5,579 (1) 12 5,616
Latin America 1,665 (5) 15 1,761 17 22 1,511
Other 1,827 14 15 1,607 4 10 1,551
- ------------------------------------------------------------------------------------------------------------------------
Total $38,491 7% 8% $35,979 7% 10% $33,638
========================================================================================================================
(1) Excluding the effect of foreign currency translation.
na Not applicable
8
Average annual sales per restaurant(1)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- ------
Percent increase/ Percent increase/
(decrease) (decrease)
--------------------- ---------------------
As Constant As Constant
(Dollars in thousands) Amount reported currency/(2)/ Amount reported currency(2) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
U.S.
Traditional $ 1,625 3% na $ 1,584 4% na $ 1,523
Satellite 473 3 na 459 3 na 445
Outside the U.S.
Traditional 1,725 (4) (2)% 1,801 (8) (3)% 1,966
Satellite 483 7 (2) 450 (2) 6 457
====================================================================================================================================
(1) McDonald's restaurants in operation at least 13 consecutive months.
(2) Excluding the effect of foreign currency translation.
na Not applicable
Average sales are affected by several factors: comparable sales and the size,
location and number of new restaurants. The number of new restaurants affects
average sales as new restaurants historically have taken a few years to reach
long-term volumes. In addition, over the last several years we have opened more
restaurants in lower density areas outside the U.S. and in countries with lower
average sales volumes. For these reasons, our focus is primarily on sales-to-
investment ratios on individual sites and building comparable sales, rather than
on average sales.
In 1999 and 1998, positive comparable sales drove the increases in U.S.
average annual sales per restaurant. Outside the U.S., the decreases in average
annual sales per traditional restaurant on a constant currency basis were due to
the significant number of new restaurants added. In 1999 and 1998, average
annual sales volumes of existing restaurants (restaurants opened more than 25
months) increased over the prior year on a constant currency basis.
In 1999, average annual sales for satellite restaurants located in Brazil,
Canada and Japan, which comprise substantially all satellites outside the U.S.,
declined slightly in constant currencies, primarily due to an increase in the
number of satellites in Brazil, which serve only desserts. Satellite restaurants
generally have significantly lower development costs and sales volumes than
traditional restaurants. The utilization of these small, often limited-menu
restaurants has allowed profitable expansion into areas that would otherwise not
have been feasible.
Average annual sales per new restaurant (1)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- ------
Percent increase/ Percent increase/
(decrease) (decrease)
----------------------- ------------------------
As Constant As Constant
(Dollars in thousands) Amount reported currency/(2)/ Amount reported currency/(2)/ Amount
- ------------------------------------------------------------------------------------------------------------------------------------
U.S.
Traditional $ 1,473 11% na $ 1,332 8% na $ 1,237
Outside the U.S.
Traditional 1,345 (1) 2% 1,357 (5) 1% 1,431
Satellite 446 - (9) 446 (2) 6 453
====================================================================================================================================
(1) McDonald's restaurants in operation at least 13 months but not more than 25
months.
(2) Excluding the effect of foreign currency translation.
na Not applicable
9
In 1999 and 1998, the increases in average sales per new U.S. traditional
restaurant were due to selective expansion in higher volume locations and the
development of larger facilities that support higher average sales. On a
constant currency basis, the average annual sales for new traditional
restaurants outside the U.S. increased 2% in 1999 and 1% in 1998. In 1999,
average annual sales for new satellite restaurants outside the U.S. decreased 9%
in constant currencies, primarily due to proportionally more satellites in
Brazil.
Total revenues
Total revenues include sales by Company-operated restaurants and fees from
restaurants operated by franchisees and affiliates. These fees include rent,
service fees and royalties that are based on a percent of sales with specified
minimum payments along with initial fees. Fees vary by type of site and
investment by the Company, and also according to local business conditions.
These fees, along with occupancy and operating rights, are stipulated in
franchise agreements that generally have 20-year terms.
Revenues grow as new restaurants are added and as sales build in existing
restaurants. Menu price changes also affect revenues and sales, but it is
impractical to quantify their impact because of different pricing structures,
new products, promotions and product-mix variations among restaurants and
markets.
On a constant currency basis, total revenues increased at a higher rate than
sales in 1999 and 1998, due to the higher unit growth rate of Company-operated
restaurants relative to Systemwide restaurants. In both years, this was
primarily due to expansion in Europe and the consolidation of several affiliate
markets due to an increase in ownership.
U.S. revenues increased $225 million in 1999 and $265 million in 1998 and
accounted for almost 40% of consolidated revenues in both years. The revenue
growth in both years was primarily due to positive comparable sales and
expansion.
Europe's reported revenues grew $458 million in 1999 and $535 million in
1998 and accounted for more than 35% of consolidated revenues in both years. On
a constant currency basis, Europe's revenues increased $657 million in 1999 and
$560 million in 1998. The increases in both years were driven by expansion and
positive comparable sales for the segment and strong sales performances in
France, Germany and the U.K. In addition, the 1999 increase benefited from the
consolidation of Sweden for financial reporting purposes.
Reported revenues in Asia/Pacific increased $199 million in 1999 and $110
million in 1998. On a constant currency basis, these revenues increased $146
million and $341 million in 1999 and 1998, respectively. The increase in 1999
was driven primarily by strong sales in China and South Korea. Positive
comparable sales in Australia also contributed to the increase. The increase in
1998 was primarily due to the consolidation of several affiliate markets as a
result of an increase in ownership.
Latin America's reported revenues declined $134 million in 1999 compared
with an increase of $105 million in 1998. The reported decline in 1999 was
primarily due to the currency devaluation in Brazil that occurred in early 1999,
and the resultant difficult economic conditions in several markets. In constant
currencies, Latin America's revenues increased $77 million in 1999 and $158
million in 1998. Positive comparable sales in Mexico and Venezuela, along with
expansion in Brazil, contributed to the constant currency increase in 1999. The
increase in 1998 was primarily due to expansion in Brazil and positive
comparable sales for this segment.
Operating margins
Operating margin information and discussions relate to McDonald's restaurant
business only and exclude Other Brands.
Company-operated margins
Company-operated margin dollars are equal to sales by Company-operated
restaurants less the operating costs of these restaurants. Company-operated
margin dollars increased $40 million or 2% in 1999 and $148 million or 10% in
1998. In constant currencies, the increases were $88 million or 5% in 1999 and
$194 million or 13% in 1998. The increases were primarily driven by expansion.
Company-operated margins were 17.7% of sales in 1999, 18.4% in 1998 and
18.3% in 1997. Operating cost trends as a percent of sales were as follows: food
& paper costs were flat in 1999 and decreased in 1998; payroll costs increased
in 1999 and were flat in 1998; and occupancy & other operating costs increased
in both years.
Company-operated margins(1)
- --------------------------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------
U.S. $ 516 $ 490 $ 445
Europe 743 703 615
Asia/Pacific 267 242 231
Latin America 70 118 116
Other 78 81 79
- --------------------------------------------------------------------------------------------
Total $1,674 $1,634 $1,486
============================================================================================
(Percent of sales)
- --------------------------------------------------------------------------------------------
U.S. 17.5% 17.3% 16.5%
Europe 19.2 20.0 19.9
Asia/Pacific 16.6 16.9 17.8
Latin America 14.1 19.1 21.3
Other 14.9 16.0 15.6
- --------------------------------------------------------------------------------------------
Total 17.7% 18.4% 18.3%
=+==========================================================================================
(1) Relates to McDonald's restaurant business only and excludes Other Brands.
U.S. Company-operated margins increased as a percent of sales in 1999 due to
lower food & paper costs as a result of less waste (partly due to the
implementation of our Made For You food preparation system) and lower commodity
costs, as well as lower occupancy & other operating costs. These cost reductions
were partly offset by higher payroll costs, due to an increase in
10
average hourly rates. U.S. Company-operated margins as a percent of sales in
1998 reflected lower food & paper costs, primarily due to lower commodity costs,
and higher payroll costs, due to increased average hourly rates.
Europe's Company-operated margins as a percent of sales declined in 1999 as
payroll costs increased, food & paper costs decreased, and occupancy & other
operating expenses were flat. The difficult economic conditions in Russia
accounted for more than half of the decline in Europe's margin percent from
1998.
In Asia/Pacific and Latin America, Company-operated margins declined as a
percent of sales in 1999 and 1998. The September 1999 earthquake in Taiwan
resulted in a temporary reduction in consumer spending. In addition, a difficult
comparison to strong 1998 promotions in Hong Kong contributed to Asia/Pacific's
1999 decline. In Latin America, the margin declines were due to difficult
economic conditions in several markets and negative comparable sales in 1999.
While Brazil was the primary contributor to the decline in both years, its
margin trends improved during the second half of 1999 compared with the first
half of the year. In 1998, weaker foreign currencies in both Asia/Pacific and
Latin America lowered margins as food & paper costs were negatively affected in
markets where we import products.
Franchised margins
Franchised margin dollars are equal to revenues from franchised and affiliated
restaurants less the Company's occupancy costs (rent and depreciation)
associated with these sites. Franchised margin dollars represented more than 60%
of the combined operating margins in 1999, 1998 and 1997. Franchised margin
dollars increased $160 million or 6% in 1999 and $189 million or 7% in 1998. In
constant currencies, the increases were $220 million or 8% in 1999 and $247
million or 9% in 1998. The increases were primarily driven by expansion and
positive comparable sales.
Franchised margins(1)
- -------------------------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------
U.S. $1,730 $1,650 $1,551
Europe 828 758 673
Asia/Pacific 187 173 197
Latin America 144 155 129
Other 119 112 109
- -------------------------------------------------------------------------------------------
Total $3,008 $2,848 $2,659
============================================================================================
(Percent of revenues)
- --------------------------------------------------------------------------------------------
U.S. 81.0% 80.9% 81.1%
Europe 79.0 80.0 80.2
Asia/Pacific 83.6 84.3 88.0
Latin America 77.5 79.7 79.6
Other 78.5 80.2 80.8
- --------------------------------------------------------------------------------------------
Total 80.3% 80.8% 81.2%
============================================================================================
(1) Relates to McDonald's restaurant business only and excludes Other Brands.
Franchised margins were 80.3% of applicable revenues in 1999, 80.8% in 1998
and 81.2% in 1997. The declines in consolidated margin percents reflected higher
occupancy costs due to an increased number of leased sites in all geographic
segments. Our strategy of leasing a higher proportion of new sites over the past
few years has reduced initial capital requirements and related interest expense,
resulting in higher returns on capital invested. However, as anticipated,
franchised margins as a percent of applicable revenues have been negatively
impacted because financing costs implicit in the lease are included in rent
expense, which affects these margins; for owned sites, financing costs are
reflected in interest expense, which does not affect these margins. The higher
occupancy costs were partly offset by positive comparable sales in 1999 and
1998.
Also, our purchase of a majority interest in several affiliate markets in
1999 and 1998 shifted revenues from franchised and affiliated restaurants to
Company-operated restaurants, reducing the franchised restaurant margin percents
outside the U.S. This was the primary cause for the decline in Europe's margin
percent in 1999 and in Asia/Pacific's margin percent in 1998.
Selling, general and administrative expenses
Consolidated selling, general and administrative expenses increased 1% in 1999
while decreasing to 3.8% of sales from 4.1% of sales in 1998 and 4.3% of sales
in 1997. The increase in 1999 was due to the consolidation of Sweden for
financial reporting purposes, spending to support McDonald's restaurant
development and the addition of Other Brands. U.S. selling, general and
administrative expenses decreased due to savings realized from the home office
productivity initiative. In 1998, consolidated selling, general and
administrative expenses were flat, due to lower advertising costs and home
office productivity savings in the U.S. offsetting increased spending to support
international restaurant development.
As a result of the home office productivity initiative, the Company expects
to save about $100 million of selling, general and administrative expenses
annually in 2000 and thereafter. About two-thirds of these savings were realized
through 1999.
Other operating income and expense
Other operating income and expense includes gains on sales of restaurant
businesses, equity in earnings of unconsolidated affiliates, net gains or losses
from property dispositions and other transactions related to the food service
business.
Other operating income and expense
- ----------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- ----------------------------------------------------------------
Gains on sales of restaurant businesses $ 75 $ 61 $ 59
Equity in earnings of unconsolidated
affiliates 138 89 73
Net losses from property dispositions (71) (71) (29)
Other (18) (19) 11
- ----------------------------------------------------------------
Total $ 124 $ 60 $ 114
================================================================
Made For You costs $ (19) $(162)
Special charge $(160)
================================================================
11
Gains on sales of restaurant businesses include gains from sales of Company-
operated restaurants as well as gains from exercises of purchase options by
franchisees with business facilities lease arrangements (arrangements where the
Company leases the businesses, including equipment, to owner/operators who have
options to purchase the businesses). The Company's purchases and sales of
businesses with its franchisees and affiliates are aimed at achieving an optimal
ownership mix in each market. These transactions are an integral part of our
franchising business and resulting gains are recorded in operating income.
Equity in earnings of unconsolidated affiliates--businesses in which the Company
actively participates, but does not control--is reported after interest expense
and income taxes, except for U.S. restaurant partnerships, which are reported
before income taxes. Net gains or losses from property dispositions result from
disposals of properties due to restaurant closings, relocations and other
transactions.
Equity in earnings from unconsolidated affiliates in 1999 included a $21
million gain from the sale of real estate in a U.S. partnership. Results in
Japan, which benefited from a lower effective tax rate and the stronger Japanese
Yen, also contributed to the increase. Net losses from property dispositions
reflected the write-off of $24 million of software not used in the business in
1999 and a higher number of restaurant closings in 1998.
Made For You costs
During 1999, the Company completed the installation of the new Made For You food
preparation system in virtually all restaurants in the U.S. and Canada. Through
advances in equipment and technology, the new system allows us to serve fresher,
better-tasting food at the speed of McDonald's. The system also supports future
growth through product development because it can more easily accommodate an
expanded menu. As part of the plan to introduce this system, the Company
provided financial incentives during 1999 and 1998 of up to $12,500 per
restaurant to owner/operators to defray the cost of equipment made obsolete as a
result of converting to the new system. The Company also made additional
payments in special cases where the conversion to Made For You was more
extensive.
The Company incurred $19 million of Made For You costs in 1999 and $162
million in 1998, primarily consisting of incentive payments made to
owner/operators as well as accelerated depreciation on equipment replaced in
Company-operated restaurants.
Special charge
In second quarter 1998, the Company recorded a $160 million pre-tax special
charge related to the Company's home office productivity initiative. The
productivity plan was designed to improve staff alignment, focus and
productivity and reduce ongoing selling, general and administrative expenses. As
a result, the Company reduced home office staffing by approximately 500
positions, consolidated certain home office facilities and reduced other
expenditures in a variety of areas. The special charge was comprised of $86
million of employee severance and outplacement costs, $41 million of lease
cancellation and other facilities-related costs, $18 million of costs for the
write-off of technology investments made obsolete as a result of the
productivity initiative, and $15 million of other cash payments made in 1998.
The initiatives identified in the home office productivity plan were
completed as of December 31, 1999, and no significant adjustments were made to
the original plan. The remaining liability, primarily related to employee
severance paid in semi-monthly installments over a period up to one year after
termination, was approximately $31 million at December 31, 1999.
Operating income
Operating income increased $236 million or 8% to $3.3 billion in 1999 and $276
million or 10% to $3.1 billion in 1998, excluding 1998 Made For You costs and
the 1998 special charge. In constant currencies, these increases were $303
million or 10% in 1999 and $347 million or 12% in 1998. The increases in 1999
and 1998 were primarily due to higher combined operating margin dollars. Higher
other operating income also contributed to the increase in 1999. Including 1998
Made For You costs and the 1998 special charge, reported operating income
increased 20% in 1999 and decreased 2% in 1998.
Operating income from the major markets accounted for more than 85% of
consolidated operating income in 1999, 1998 and 1997, excluding 1998 Made For
You costs and the 1998 special charge.
12
Operating income(1)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------- -------------------------------- ------
Percent increase/ Percent increase/
(decrease) (decrease)
------------------------- ----------------------
As Constant As Constant
(Dollars in millions) Amount reported currency(2) Amount reported currency(2) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. $1,472 46% 11%(3) $1,006(4) (15) % 13%(3) $1,180
Europe 1,203 8 13 1,115 13 14 989
Asia/Pacific 404 18 10 344 (5) 8 362
Latin America 128 (29) (8) 181 11 17 163
Other 113 (3) (2) 116 2 8 114
- ------------------------------------------------------------------------------------------------------------------------------------
Total $3,320 20% 10%(3) $2,762(4) (2) % 12%(3) $2,808
====================================================================================================================================
(1) For financial reporting purposes, corporate selling, general and administrative expenses (costs related to home office support
of the Company's global business) were allocated to the various geographic segments, beginning in 1999. Prior year amounts
have been restated to conform to this presentation.
(2) Excluding the effect of foreign currency translation.
(3) Excluding 1998 Made For You costs and the 1998 special charge.
(4) Including Made For You costs of $162 million and the special charge of $160 million, for a total of $322 million.
U.S. operating income increased $144 million or 11% in 1999 and $148 million or
13% in 1998, accounting for over 40% of consolidated operating income in both
years, adjusted for 1998 Made For You costs and the 1998 special charge. The
increases in both years were due to higher combined operating margin dollars and
lower selling, general and administrative expenses. Higher other operating
income also contributed to the 1999 increase. Including 1998 Made For You costs
and the 1998 special charge, U.S. operating income increased $466 million or 46%
in 1999 and decreased $174 million or 15% in 1998.
Europe's operating income grew $88 million or 8% in 1999 compared with $126
million or 13% in 1998, accounting for over 35% of consolidated adjusted
operating income in both years. In constant currencies, these increases were 13%
in 1999 and 14% in 1998. Strong operating results in France, Germany, Spain and
the U.K. drove the increases in operating income in both years. In addition,
Europe's operating income growth in 1999 benefited from the consolidation of
Sweden, due to our purchase of majority ownership. The economic difficulties in
Russia dampened this segment's operating results in both years. France, Germany
and the U.K. accounted for about 80% of Europe's operating income in 1999, 1998
and 1997.
Asia/Pacific's operating income increased $60 million or 18% in 1999 compared
with a decrease of $18 million or 5% in 1998. On a constant currency basis, this
segment's operating income increased 10% and 8% in 1999 and 1998, respectively.
The increase in 1999 was driven primarily by Japan, which benefited from a lower
effective tax rate, and strong results in South Korea. In addition, improved
results in several Southeast Asian markets contributed to the increase. The
September 1999 earthquake in Taiwan caused a temporary reduction in consumer
spending and tempered the segment's results. In 1998, Hong Kong and Japan were
the primary contributors to the constant currency increase. Australia and Japan
contributed about two-thirds of Asia/Pacific's operating income in 1999, 1998
and 1997.
Latin America's operating income declined $53 million or 29% in 1999 compared
with an increase of $18 million or 11% in 1998. On a constant currency basis,
this segment's operating income decreased 8% in 1999 and increased 17% in 1998.
Results in 1999 were negatively impacted by the difficult economic conditions
experienced by several markets in the segment. Partly offsetting the decrease
were the strong performances in Mexico and Venezuela. While Brazil's results
have improved since the first half of 1999, it is still experiencing the
negative effects of the currency devaluation that occurred in early 1999.
Expansion and positive comparable sales drove improved results across this
segment in 1998. Brazil has accounted for approximately 70% of Latin America's
operating income in constant currencies in each of the past three years.
13
Interest expense
Interest expense decreased in 1999 due to lower average interest rates and
weaker foreign currencies, partly offset by higher average debt levels. In 1998,
higher average debt levels more than offset the weaker foreign currencies and
lower average interest rates, causing an increase in interest expense. Lower
average interest rates in both years were partly due to the Company's use of
interest rate exchange agreements.
Nonoperating (income) expense
Nonoperating (income) expense includes miscellaneous income and expense items
such as interest income, minority interests and gains and losses related to
other investments, financings and translation. Results in 1999 reflected lower
translation losses than 1998. Results in 1997 reflected translation gains.
Provision for income taxes
The effective income tax rate was 32.5% for 1999, compared with 32.8% for 1998
and 31.8% for 1997. The Company expects its 2000 effective income tax rate to be
about 32.0%.
Consolidated net deferred tax liabilities included tax assets, net of
valuation allowance, of $557 million in 1999 and $516 million in 1998.
Substantially all of the tax assets arose in the U.S. and other profitable
markets, and a majority of them are expected to be realized in future U.S.
income tax returns.
Restaurants
McDonald's continues to focus on managing capital outlays more effectively
through prudent and selective expansion. In 1999, the Company added 1,790
McDonald's restaurants Systemwide, compared with 1,668 in 1998 and 2,110 in
1997. In 2000, the Company expects to add between 1,800 and 1,900 McDonald's
restaurants, with a continued emphasis on traditional restaurants primarily in
locations outside the U.S. Restaurant additions for Other Brands are anticipated
to be between 160 and 180 in 2000.
In the U.S., a more selective restaurant development process reduced gross
openings in 1999 and 1998 compared with 1997. Also in 1998, more low-volume
satellites were closed, further reducing net additions.
Asia/Pacific's percent of total restaurants has grown primarily due to
Japan's significant expansion. Japan added 406 restaurants in 1999 and 415 in
1998, representing more than 20% of restaurant additions in both years.
Approximately 50% of Japan's restaurant additions in 1999 and about 60% in 1998
were satellites. These units have significantly lower development costs and
sales volumes, compared with traditional restaurants. Therefore, these additions
contribute significantly more to unit growth than sales growth.
Approximately 80% of Systemwide restaurants were in the major markets at the
end of both 1999 and 1998. In 1999, 55% of restaurant additions were in these
major markets, and we anticipate a similar percent for 2000. Longer term, China,
Italy, Mexico, South Korea and Spain, which together represented more than 10%
of McDonald's additions in 1999, are expected to represent a growing proportion
of restaurant additions.
Systemwide restaurants
- -------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------
U.S. 12,629 12,472 12,380
Europe 4,943 4,421 3,886
Asia/Pacific 5,655 5,055 4,456
Latin America 1,789 1,405 1,091
Other 1,790 1,465 1,319
- -------------------------------------------------------------------------
Total 26,806 24,818 23,132
=========================================================================
Almost 65% of Company-operated restaurants and nearly 85% of franchised
restaurants were located in the major markets at the end of 1999. Franchisees
and affiliates operated 77% of restaurants at year-end 1999. That percentage has
remained relatively constant over the past three years.
Satellite units at December 31, 1999 were as follows: U.S.--1,048; Europe--
44; Asia/Pacific (primarily Japan)--1,351; Latin America (primarily Brazil)--
532; and Other (primarily Canada)--269.
Financial position and capital resources
- ----------------------------------------
Total assets and capital expenditures
Total assets grew $1.2 billion or 6% in 1999 and $1.5 billion or 8% in 1998. At
year-end 1999 and 1998, about 70% of consolidated assets were located in our
major markets excluding our affiliate in Japan. Net property and equipment rose
$283 million in 1999 and represented 78% of total assets at year end.
Capital expenditures decreased $11 million or 1% in 1999 and decreased $232
million or 11% in 1998, reflecting our strategy of leasing a higher proportion
of new sites; the U.S. new building program that gives owner/operators the
option to own new restaurant facilities; weaker foreign currencies; and in 1998,
fewer restaurant additions. Capital expenditures in 1999 included increased
capital outlays for existing U.S. Company-operated restaurants related to
implementation of the new Made For You food preparation system, and spending to
update and refresh existing U.S. restaurants. More than 85% of qualifying new
and rebuilt U.S. traditional restaurant buildings opened in 1999 are owned by
owner/operators. In addition, the Company leased the land for over 90% of new
U.S. traditional restaurants opened in 1999. The new building program, combined
with our decision to lease more land, saved the Company approximately $230
million in capital outlays in 1999.
More than 70% of capital expenditures was invested in markets outside the
U.S. in 1999, 1998 and 1997, and more than 65% was invested in our major markets
excluding Japan in all three years.
14
Capital expenditures
- --------------------------------------------------
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------
New restaurants $ 1,231 $ 1,357 $ 1,531
Existing restaurants 515 398 433
Other properties 122 124 147
- --------------------------------------------------
Total $ 1,868 $ 1,879 $ 2,111
==================================================
Total assets $20,983 $19,784 $18,242
==================================================
Expenditures for existing restaurants were made to achieve higher levels of
customer satisfaction, including technology to improve service and food quality
such as the Made For You food preparation system in the U.S. and Canada, and to
enhance older facilities. Other properties primarily included expenditures for
office buildings and related computer equipment and furnishings.
The Company's expenditures for new restaurants in the U.S. were minimal as a
result of the building and leasing programs previously discussed. For new
franchised and affiliated restaurants, which represent about 85% of all U.S.
restaurants, the Company generally incurs no capital expenditures. However, the
Company still has long-term occupancy rights for the land and receives related
rental income. For new Company-operated restaurants, the Company generally
leases the land and owns the restaurant building and equipment.
Average development costs outside the U.S. vary widely by market depending
on the types of restaurants built and the real estate and construction costs
within each market. These costs, which include land, buildings and equipment
owned by the Company, are managed through the use of right-sized restaurants,
construction and design efficiencies, standardization and global sourcing. In
addition, foreign currency fluctuations affect average development costs,
especially in those markets where construction materials cannot be obtained
locally.
Average development costs for traditional restaurants in major markets
outside the U.S., excluding our Japan affiliate, were approximately $1.8 million
in 1999, $1.9 million in 1998 and $1.8 million in 1997. Average annual sales per
new traditional restaurant for the same markets were approximately $1.7 million
in 1999, $1.8 million in 1998 and $1.7 million in 1997. Average development
costs for satellite restaurants located in Brazil, Canada and Japan were
approximately $200,000 in each of the last three years. The utilization of these
small, often limited-menu restaurants has allowed expansion into areas that
would otherwise not have been feasible.
Including affiliates, total land ownership was 42% and 44% of total
restaurant sites at year-end 1999 and 1998, respectively.
Capital expenditures by affiliates, which were not included in consolidated
amounts, were approximately $259 million in 1999, compared with $295 million in
1998. The decrease was primarily due to increased ownership in Sweden, partly
offset by stronger foreign currencies, primarily the Japanese Yen.
Cash provided by operations
The Company generates significant cash from operations and has substantial
borrowing capacity to meet its operating and discretionary spending
requirements. Free cash flow (cash from operations less capital expenditures)
increased 29% to $1.14 billion in 1999, compared with $887 million in 1998. Cash
provided by operations was reduced by approximately $135 million of Made For You
incentive payments in 1998 and $110 million of U.S. franchisee security deposit
refunds in 1997. Cash provided by operations, along with other sources of cash
such as borrowings, was used for capital expenditures, share repurchase,
dividends and debt repayments.
Cash provided by operations
- -------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- -------------------------------------------------------------
Cash provided by operations $3,009 $2,766 $2,442
Free cash flow 1,141 887 331
Cash provided by operations as a
percent of capital expenditures 161% 147% 116%
Cash provided by operations as a
percent of average total debt 42 41 41
=============================================================
In addition to its free cash flow, the Company can meet short-term needs
through commercial paper borrowings and line of credit agreements. Accordingly,
the Company strategically and purposefully maintains a relatively low current
ratio--.48 at year-end 1999.
Financings and market risk
The Company is exposed to the impact of interest-rate changes and foreign
currency fluctuations. McDonald's strives to minimize these risks by employing
established risk management policies and procedures and by financing with debt
in the currencies in which assets are denominated. See summary of significant
accounting policies on page 23 for additional information regarding our use of
financial instruments and the impact of the new accounting standard on
derivatives.
The Company uses major capital markets and various techniques to meet its
financing requirements and reduce interest expense. For example, currency
exchange agreements in conjunction with borrowings help obtain desired
currencies at attractive rates and maturities. Interest-rate exchange agreements
effectively convert fixed-rate to floating-rate debt, or vice versa. The Company
also manages the level of fixed-rate debt to take advantage of changes in
interest rates.
The Company uses foreign currency debt and derivatives to hedge certain
foreign currency royalties, intercompany financings and long-term investments in
foreign subsidiaries and affiliates. This reduces the impact of fluctuating
foreign currencies on net income and shareholders' equity. The high proportion
of foreign-dominated debt has lessened the impact of recently rising U.S.
interest rates. Total foreign-denominated debt, including the effects of
currency exchange agreements, was $5.3 billion and $5.2 billion at year-end 1999
and 1998, respectively.
15
Debt highlights
- ----------------------------------------------------------------------
(As a percent) 1999 1998 1997
- ----------------------------------------------------------------------
Fixed-rate debt as a percent of total debt 70% 67% 49%
Weighted-average annual interest rate
of total debt 5.9 6.6 6.8
Foreign currency-denominated debt
as a percent of total debt 76 75 80
Total debt as a percent of total capitalization
(total debt and total shareholders' equity) 43 43 42
======================================================================
Moody's and Standard & Poor's have rated McDonald's debt Aa2 and AA,
respectively, since 1982. Duff & Phelps began rating the debt in 1990 and
currently rates it AA+. A strong rating is important to the Company because of
its global development plans. The Company has not experienced, and does not
expect to experience, difficulty in obtaining financing or refinancing existing
debt. At year-end 1999, the Company and its subsidiaries had $1.5 billion
available under committed line of credit agreements and $1.1 billion under shelf
registrations for future debt issuance. In early 2000, the Company reduced the
amount available under committed line of credit agreements to $1.0 billion and
issued British Pounds Sterling Medium-Term Notes under one of the shelf
registrations, in the equivalent of $200 million at a rate of 6.38%, due 2020.
The Company manages its debt portfolio in response to changes in interest
rates and foreign currency rates by periodically retiring, redeeming and
repurchasing debt, terminating exchange agreements and using derivatives. The
Company does not use derivatives with a level of complexity or with a risk
higher than the exposures to be hedged and does not hold or issue derivatives
for trading purposes. All exchange agreements are over-the-counter instruments.
The Company actively hedges selected currencies to minimize the effect of
fluctuating foreign currencies on reported results and to minimize the cash
exposure of foreign currency royalty and other payments received in the U.S. In
addition, where practical, McDonald's restaurants purchase goods and services in
local currencies resulting in natural hedges, and the Company typically finances
in local currencies, creating economic hedges.
The Company's exposure is diversified among a broad basket of currencies. At
year-end 1999 and 1998, assets in hyperinflationary markets were principally
financed in U.S. Dollars. The Company's largest net asset exposures (defined as
foreign currency assets less foreign currency liabilities) at year end were as
follows:
Foreign currency exposures
- --------------------------------------------------------------------------
(In millions of U.S. Dollars) 1999 1998
- --------------------------------------------------------------------------
Euro-based currencies $1,059 $1,072
Canadian Dollars 797 749
British Pounds Sterling 669(1) 447
Australian Dollars 394 322
Brazilian Reais 124 302
Hong Kong Dollars 100 80
==========================================================================
(1) Does not reflect the $200 million debt issuance in February 2000.
The Company prepared sensitivity analyses of its financial instruments to
determine the impact of hypothetical changes in interest rates and foreign
currency exchange rates on the Company's results of operations, cash flows and
the fair value of its financial instruments. The interest-rate analysis assumed
a one percentage point adverse change in interest rates on all financial
instruments but did not consider the effects of the reduced level of economic
activity that could exist in such an environment. The foreign currency rate
analysis assumed that each foreign currency rate would change by 10% in the same
direction relative to the U.S. Dollar on all financial instruments; however, the
analysis did not include the potential impact on sales levels or local currency
prices or the effect of fluctuating currencies on the Company's anticipated
foreign currency royalties and other payments received in the U.S. Based on the
results of these analyses of the Company's financial instruments, neither a one
percentage point adverse change in interest rates from year-end 1999 levels nor
a 10% adverse change in foreign currency rates from year-end 1999 levels would
materially affect the Company's results of operations, cash flows or the fair
value of its financial instruments.
Total shareholders' equity
The Company uses free cash flow and debt capacity to repurchase shares, as we
believe this enhances shareholder value. Over the past 10 years, the Company has
invested $5.3 billion to buy back 264 million shares at an average price of
approximately $20, while maintaining a strong equity base. At year-end 1999, the
Company held 310 million shares in treasury with a market value of $12.5
billion.
In September 1998, the Company announced plans to repurchase $3.5 billion of
its common stock by year-end 2001. Between September 1998 and December 1999, we
purchased 34.4 million shares for approximately $1.3 billion, including 24.2
million shares for $933 million in 1999. The Company sells common equity put
options in connection with our share repurchase program and receives premiums
for these options, which reduce the overall cost of treasury stock purchases.
During 1999, the Company sold 27.0 million common equity put options, of which
17.5 million were outstanding at December 31, 1999. Premiums received of $97.5
million in 1999 were reflected in shareholders' equity as a reduction of the
cost of treasury stock purchased. During February 2000, 3.4 million common
equity put options were exercised for $137.5 million. The remaining options
expire at various dates through February 2001, with exercise prices between
$39.92 and $44.03.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchase. Accordingly, the common stock dividend
yield is modest. However, the Company has paid dividends on our common stock for
24 consecutive years through 1999 and has increased the dividend amount at least
once every year. Future dividend increases will be considered after reviewing
returns to shareholders, profitability expectations and financing needs. In
16
November 1999, the Company announced that it intends to pay cash dividends on an
annual, instead of quarterly, basis beginning in 2000. Future dividends declared
at the discretion of the Company's Board of Directors will be paid annually in
December.
Returns
Operating income is used to compute return on average assets, while net income
less preferred stock dividends (if applicable) is used to calculate return on
average common equity. Month-end balances are used to compute both average
assets and average common equity.
Returns on assets and equity
- --------------------------------------------------------------------------------
(As a percent) 1999 1998/(1)/ 1997
- --------------------------------------------------------------------------------
Return on average assets 16.6% 16.4% 16.0%
Return on average common equity 20.8 19.5 19.0
================================================================================
(1) Excluding Made For You costs and the special charge. Including Made For You
costs and the special charge, return on average assets was 14.7% and return
on average common equity was 17.1%.
The increases in the 1999 and 1998 returns were due to strong operating
results, enhanced by the Company's continued focus on more efficient capital
deployment. This included a more selective site selection process, the U.S. new
building program that began in 1998 and the use of free cash flow for share
repurchase. Also contributing to the increase in the 1999 return on average
common equity was the significant increase in the amount of common equity put
options entered into during the year, which reduced average common equity.
Other matters
- --------------------------------------------------------------------------------
Effects of changing prices--inflation
The Company has demonstrated an ability to manage inflationary cost increases
effectively. This is because of rapid inventory turnover, the ability to adjust
prices, cost controls and substantial property holdings--many of which are at
fixed costs and partly financed by debt made cheaper by inflation. In
hyperinflationary markets, menu board prices are typically adjusted to keep pace
with inflation, mitigating the effect on reported results.
Year 2000
In 1999, the Company completed all necessary modifications, testing and
replacements of significant systems to become Year 2000 compliant. As a result
of the efforts undertaken, the Company experienced no major disruptions in
significant information technology and noninformation technology systems and
believes those systems successfully responded to the Year 2000 date change. In
addition, the Company did not experience any significant operational or
financial difficulties resulting from Year 2000 issues related to
owner/operators or third-party service providers. The Company will continue to
monitor its computer applications throughout the year to ensure that any latent
Year 2000 matters that may arise are addressed promptly. The Year 2000 costs
incurred by the Company did not have a material impact on the Company's
financial position, results of operations or cash flows.
Euro conversion
On January 1, 1999, 11 member countries of the European Union established fixed
conversion rates between their existing currencies ("legacy currencies") and one
common currency, the Euro. The Euro is trading on currency exchanges and may be
used in certain transactions such as electronic payments. Beginning in January
2002, new Euro-denominated notes and coins will be issued, and legacy currencies
will be withdrawn from circulation. The conversion to the Euro has eliminated
currency exchange rate risk for transactions between the member countries, which
for McDonald's primarily consist of payments to suppliers. In addition, as we
use foreign-denominated debt and derivatives to meet our financing requirements
and to minimize our foreign currency risks, certain of these financial
instruments are denominated in Euros.
McDonald's has restaurants located in all member countries and has been
preparing for the introduction of the Euro for the past several years. The
Company is currently addressing the issues involved with the new currency, which
include converting information technology systems, recalculating currency risk,
recalibrating derivatives and other financial instruments and revising processes
for preparing accounting and taxation records. Based on the work to date, the
Company does not believe the Euro conversion will have a significant impact on
its financial position, results of operations or cash flows.
Forward-looking statements
Certain forward-looking statements are included in this report. They use such
words as "may," "will," "expect," "believe," "plan" and other similar
terminology. These statements reflect management's current expectations and
involve a number of risks and uncertainties. Actual results could differ
materially due to the success of operating initiatives and advertising and
promotional efforts, the effects of the Euro conversion, as well as changes in:
global and local business and economic conditions; currency exchange and
interest rates; food, labor and other operating costs; political or economic
instability in local markets; competition; consumer preferences, spending
patterns and demographic trends; availability and cost of land and construction;
legislation and governmental regulation; and accounting policies and practices.
Item 7A. Quantitative and qualitative disclosures about market risk
Quantitative and qualitative disclosures about market risk are included in Part
II, Item 7, pages 15 and 16 of this Form 10-K.
17
Item 8. Financial statements and supplementary data
Index to consolidated financial statements
- -------------------------------------------------------------------------------------------------------------------------
Page reference
- -------------------------------------------------------------------------------------------------------------------------
Consolidated statement of income for each of the three years in the period ended December 31, 1999 19
Consolidated balance sheet at December 31, 1999 and 1998 20
Consolidated statement of cash flows for each of the three years in the period ended December 31, 1999 21
Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1999 22
Notes to consolidated financial statements (Financial comments) 23-30
Quarterly results (unaudited) 31
Management's Report 32
Audit Committee's Report 32
Report of Independent Auditors 32
=========================================================================================================================
18
Consolidated statement of income
- -----------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) Years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues
Sales by Company-operated restaurants $ 9,512.5 $ 8,894.9 $ 8,136.5
Revenues from franchised and affiliated restaurants 3,746.8 3,526.5 3,272.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 13,259.3 12,421.4 11,408.8
- -----------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Food and packaging 3,204.6 2,997.4 2,772.6
Payroll and employee benefits 2,418.3 2,220.3 2,025.1
Occupancy and other operating expenses 2,206.7 2,043.9 1,851.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total Company-operated restaurant expenses 7,829.6 7,261.6 6,649.6
- -----------------------------------------------------------------------------------------------------------------------------------
Franchised restaurants--occupancy expenses 737.7 678.0 613.9
Selling, general and administrative expenses 1,477.6 1,458.5 1,450.5
Other operating (income) expense (124.1) (60.2) (113.5)
Made For You costs 18.9 161.6
Special charge 160.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 9,939.7 9,659.5 8,600.5
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 3,319.6 2,761.9 2,808.3
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense--net of capitalized interest of $14.3, $17.9 and $22.7 396.3 413.8 364.4
Nonoperating (income) expense 39.2 40.7 36.6
- -----------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 2,884.1 2,307.4 2,407.3
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 936.2 757.3 764.8
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,947.9 $ 1,550.1 $ 1,642.5
===================================================================================================================================
Net income per common share $ 1.44 $ 1.14 $ 1.17
Net income per common share--diluted 1.39 1.10 1.15
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends per common share $ .20 $ .18 $ .16
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares 1,355.3 1,365.3 1,378.7
Weighted-average shares--diluted 1,404.2 1,405.7 1,410.2
===================================================================================================================================
The accompanying financial comments are an integral part of the consolidated
financial statements.
19
Consolidated balance sheet
(In millions, except per share data) December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 419.5 $ 299.2
Accounts and notes receivable 708.1 609.4
Inventories, at cost, not in excess of market 82.7 77.3
Prepaid expenses and other current assets 362.0 323.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,572.3 1,309.4
- ------------------------------------------------------------------------------------------------------------------------------------
Other assets
Investments in and advances to affiliates 1,002.2 854.1
Intangible assets--net 1,261.8 973.1
Miscellaneous 822.4 606.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total other assets 3,086.4 2,433.4
- ------------------------------------------------------------------------------------------------------------------------------------
Property and equipment
Property and equipment, at cost 22,450.8 21,758.0
Accumulated depreciation and amortization (6,126.3) (5,716.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Net property and equipment 16,324.5 16,041.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $20,983.2 $19,784.4
====================================================================================================================================
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 1,073.1 $ 686.8
Accounts payable 585.7 621.3
Income taxes 117.2 94.2
Other taxes 160.1 143.5
Accrued interest 131.4 132.3
Other accrued liabilities 660.0 651.0
Current maturities of long-term debt 546.8 168.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,274.3 2,497.1
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt 5,632.4 6,188.6
Other long-term liabilities and minority interests 538.4 492.6
Deferred income taxes 1,173.6 1,081.9
Common equity put options 725.4 59.5
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock, no par value; authorized--165.0 million shares; issued--none
Common stock, $.01 par value; authorized--3.5 billion shares; issued--1,660.6 million 16.6 16.6
Additional paid-in capital 1,288.3 989.2
Unearned ESOP compensation (133.3) (148.7)
Retained earnings 15,562.8 13,879.6
Accumulated other comprehensive income (886.8) (522.5)
Common stock in treasury, at cost; 309.8 and 304.4 million shares (6,208.5) (4,749.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 9,639.1 9,464.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $20,983.2 $19,784.4
====================================================================================================================================
The accompanying financial comments are an integral part of the consolidated
financial statements.
20
Consolidated statement of cash flows
- --------------------------------------------------------------------------------------------------------------------------
(In millions) Years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 1,947.9 $ 1,550.1 $ 1,642.5
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 956.3 881.1 793.8
Deferred income taxes 52.9 35.4 (1.1)
Changes in operating working capital items
Accounts receivable (81.9) (29.9) (57.6)
Inventories, prepaid expenses and other current assets (47.7) (18.1) (34.5)
Accounts payable (23.9) (12.7) 52.8
Taxes and other liabilities 270.4 337.5 221.9
Refund of U.S. franchisee security deposits (109.6)
Other (65.1) 22.9 (65.9)
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 3,008.9 2,766.3 2,442.3
- --------------------------------------------------------------------------------------------------------------------------
Investing activities
Property and equipment expenditures (1,867.8) (1,879.3) (2,111.2)
Purchases of restaurant businesses (340.7) (131.0) (235.9)
Sales of restaurant businesses 241.5 149.0 149.5
Property sales 20.9 42.5 26.9
Other (315.7) (129.4) (46.5)
- --------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (2,261.8) (1,948.2) (2,217.2)
- --------------------------------------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) 116.7 (604.2) 1,097.4
Long-term financing issuances 902.5 1,461.5 1,037.9
Long-term financing repayments (682.8) (594.9) (1,133.8)
Treasury stock purchases (891.5) (1,089.8) (755.1)
Common and preferred stock dividends (264.7) (240.5) (247.7)
Series E preferred stock redemption (358.0)
Other 193.0 207.6 145.7
- --------------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (626.8) (860.3) (213.6)
- --------------------------------------------------------------------------------------------------------------------------
Cash and equivalents increase (decrease) 120.3 (42.2) 11.5
- --------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of year 299.2 341.4 329.9
- --------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 419.5 $ 299.2 $ 341.4
==========================================================================================================================
Supplemental cash flow disclosures
Interest paid $ 411.5 $ 406.5 $ 401.7
Income taxes paid 642.2 545.9 650.8
==========================================================================================================================
The accompanying financial comments are an integral part of the consolidated
financial statements.
21
Consolidated statement of shareholders' equity
- --------------------------------------------------------------------------------
Common
stock issued Additional Unearned
Preferred ------------------ paid-in ESOP Retained
(In millions, except per share data) stock issued/(1)/ Shares Amount capital compensation earnings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $358.0 1,660.6 $16.6 $ 565.9 $(193.2) $11,173.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,642.5
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $104.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash dividends
($.16 per share) (221.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock cash dividends
($1.93 per Series E depositary share) (25.3)
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 21.4
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchases
- ------------------------------------------------------------------------------------------------------------------------------------
Common equity put options issuance
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock redemption (358.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $79.2) 125.0 0.5
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 0.0 1,660.6 16.6 690.9 (171.3) 12,569.0
====================================================================================================================================
Net income 1,550.1
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including tax benefits of $84.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash dividends
($.18 per share) (239.5)
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 22.5
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchases
- ------------------------------------------------------------------------------------------------------------------------------------
Common equity put options issuance
and expiration, net
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $154.0) 298.3 0.1
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 0.0 1,660.6 16.6 989.2 (148.7) 13,879.6
====================================================================================================================================
Net income 1,947.9
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $53.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash dividends
($.20 per share) (264.7)
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 15.8
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchases
- ------------------------------------------------------------------------------------------------------------------------------------
Common equity put options issuance
and expiration, net
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $185.3) 299.1 (0.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 0.0 1,660.6 $16.6 $1,288.3 $ (133.3) $15,562.8
====================================================================================================================================
Accumulated Common stock
other in treasury Total
comprehensive ------------------ shareholders'
(In millions, except per share data) income Shares Amount equity
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $(175.1) (271.4) $(3,027.0) $ 8,718.2
- -------------------------------------------------------------------------------------------------------
Net income 1,642.5
- -------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $104.0) (295.4) (295.4)
- -------------------------------------------------------------------------------------------------------
Comprehensive income 1,347.1
- -------------------------------------------------------------------------------------------------------
Common stock cash dividends
($.16 per share) (221.2)
- -------------------------------------------------------------------------------------------------------
Preferred stock cash dividends
($1.93 per Series E depositary share) (25.3)
- -------------------------------------------------------------------------------------------------------
ESOP loan payment 21.4
- -------------------------------------------------------------------------------------------------------
Treasury stock purchases (32.4) (765.0) (765.0)
- -------------------------------------------------------------------------------------------------------
Common equity put options issuance (80.3) (80.3)
- -------------------------------------------------------------------------------------------------------
Preferred stock redemption (358.0)
- -------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $79.2) 14.6 89.2 214.7
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (470.5) (289.2) (3,783.1) 8,851.6
=======================================================================================================
Net income 1,550.1
- -------------------------------------------------------------------------------------------------------
Translation adjustments
(including tax benefits of $84.2) (52.0) (52.0)
- -------------------------------------------------------------------------------------------------------
Comprehensive income 1,498.1
- -------------------------------------------------------------------------------------------------------
Common stock cash dividends
($.18 per share) (239.5)
- -------------------------------------------------------------------------------------------------------
ESOP loan payment 22.5
- -------------------------------------------------------------------------------------------------------
Treasury stock purchases (38.0) (1,161.9) (1,161.9)
- -------------------------------------------------------------------------------------------------------
Common equity put options issuance
and expiration, net 20.8 20.8
- -------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $154.0) 22.8 174.7 473.1
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (522.5) (304.4) (4,749.5) 9,464.7
=======================================================================================================
Net income 1,947.9
- -------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $53.5) (364.3) (364.3)
- -------------------------------------------------------------------------------------------------------
Comprehensive income 1,583.6
- -------------------------------------------------------------------------------------------------------
Common stock cash dividends
($.20 per share) (264.7)
- -------------------------------------------------------------------------------------------------------
ESOP loan payment 15.8
- -------------------------------------------------------------------------------------------------------
Treasury stock purchases (24.2) (932.7) (932.7)
- -------------------------------------------------------------------------------------------------------
Common equity put options issuance
and expiration, net (665.9) (665.9)
- -------------------------------------------------------------------------------------------------------
Stock option exercises and other
(including tax benefits of $185.3) 18.8 139.6 438.3
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $(886.8) (309.8) $(6,208.5) $ 9,639.1
=======================================================================================================
(1) At December 31, 1996, 7.2 thousand shares were outstanding. These shares
were redeemed in 1997.
The accompanying financial comments are an integral part of the consolidated
financial statements.
Financial comments
Summary of significant accounting policies
Nature of business
The Company develops, operates, franchises and services a worldwide system of
restaurants that prepare, assemble, package and sell a limited menu of value-
priced foods. McDonald's operates primarily in the quick-service hamburger
restaurant business. Beginning in 1999, the Company also operates other
restaurant concepts: Aroma Cafe', Chipotle Mexican Grill and Donatos Pizza.
All restaurants are operated by the Company or, under the terms of
franchise arrangements, by franchisees who are independent third parties, or by
affiliates operating under joint-venture agreements between the Company and
local business people.
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Investments in affiliates owned 50% or less are accounted for
by the equity method.
Estimates in financial statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign currency translation
The functional currency of substantially all operations outside the U.S. is the
respective local currency, except for hyperinflationary countries, where it is
the U.S. Dollar.
Advertising costs
Production costs for radio and television advertising are expensed when the
commercials are initially aired. Advertising expenses included in costs of
Company-operated restaurants and in selling, general and administrative expenses
were (in millions): 1999--$522.9; 1998--$486.3; 1997--$548.7.
Stock-based compensation
The Company accounts for stock options as prescribed by Accounting Principles
Board Opinion No. 25 and includes pro forma information in the stock options
footnote, as provided by Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation.
Property and equipment
Property and equipment are stated at cost, with depreciation and amortization
provided using the straight-line method over the following estimated useful
lives: buildings--up to 40 years; leasehold improvements--lesser of useful lives
of assets or lease terms including option periods; and equipment--three to 12
years.
Intangible assets
Intangible assets, primarily representing the excess of cost over the net
tangible assets of acquired restaurant businesses, are amortized using the
straight-line method over an average life of about 30 years.
Financial instruments
The Company uses derivatives to manage risk, not for trading purposes. Non-U.S.
Dollar financing transactions generally are effective as hedges of either long-
term investments in or intercompany loans to foreign subsidiaries and
affiliates. Foreign currency translation adjustments from gains and losses on
hedges of long-term investments are recorded in shareholders' equity as other
comprehensive income. Gains and losses related to hedges of intercompany loans
offset the gains and losses on intercompany loans and are recorded in
nonoperating (income) expense.
Interest-rate exchange agreements are designated and effective to modify
the Company's interest-rate exposures. Net interest is accrued as either
interest receivable or payable with the offset recorded in interest expense.
Gains or losses from the early termination of interest-rate exchange agreements
are amortized as an adjustment to interest expense over the shorter of the
remaining life of the interest-rate agreement or the underlying debt being
hedged.
The Company purchases foreign currency options (with little or no initial
intrinsic value) that are effective as hedges of anticipated foreign currency
royalty and other payments received in the U.S. The premiums paid for these
options are amortized over the option life and are recorded as nonoperating
expense. Any realized gains on exercised options are deferred and recognized in
the period in which the related royalty or other payment is received.
Forward foreign exchange contracts are also used to mitigate exposure on
foreign currency royalty and other payments received from affiliates and
subsidiaries. These contracts are marked to market with the resulting gains or
losses recorded in nonoperating (income) expense. In addition, forward foreign
exchange contracts are used to hedge long-term investments in foreign
subsidiaries and affiliates. These contracts are marked to market with the
resulting gains or losses recorded in shareholders' equity as other
comprehensive income.
23
If a hedged item matures or is extinguished, or if a hedged anticipated
royalty or other payment is no longer probable, the associated derivative is
marked to market with the resulting gain or loss recognized immediately. The
derivative is then redesignated as a hedge of another item or terminated.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, subsequently
amended by SFAS No. 137, which is required to be adopted in years beginning
after June 15, 2000. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged item
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The Company expects to adopt the new Statement
effective January 1, 2001. Management does not anticipate that the adoption will
have a material effect on the Company's results of operations or financial
position.
Common equity put options
During 1999, 1998 and 1997, the Company sold 27.0 million, 7.3 million and 5.3
million common equity put options, respectively, in connection with its share
repurchase program. Premiums received are recorded in shareholders' equity as a
reduction of the cost of treasury stock purchased and were $97.5 million in
1999, $20.5 million in 1998 and $8.1 million in 1997. At December 31, 1999, 17.5
million common equity put options were outstanding. The options expire at
various dates through February 2001 at exercise prices between $39.63 and
$44.03. At December 31, 1999, the $725.4 million total exercise price of these
outstanding options was classified in common equity put options, and the related
offset was recorded in common stock in treasury, net of the premiums received.
Per common share information
Diluted net income per common share is calculated using net income divided by
weighted average shares on a diluted basis. Net income used in the computation
was reduced by preferred stock cash dividends of $25.3 million in 1997. The
Company retired its remaining Series E Preferred Stock in December 1997.
Weighted average shares on a diluted basis included weighted average shares
outstanding plus the dilutive effect of stock options, calculated using the
treasury stock method, of 48.9 million shares in 1999, 40.4 million shares in
1998 and 31.5 million shares in 1997.
Statement of cash flows
The Company considers short-term, highly liquid investments to be cash
equivalents. The impact of fluctuating foreign currencies on cash and
equivalents was not material.
Made For You costs
During 1999, the Company completed the installation of the new Made For You food
preparation system in virtually all restaurants in the U.S. and Canada. As part
of the plan to introduce this system, the Company provided financial incentives
during 1999 and 1998 of up to $12,500 per restaurant to owner/operators to
defray the cost of equipment made obsolete as a result of converting to the new
system. The Company also made additional payments in special cases where the
conversion to Made For You was more extensive.
The Company incurred $18.9 million of Made For You costs in 1999 and $161.6
million in 1998, primarily consisting of incentive payments made to
owner/operators as well as accelerated depreciation on equipment replaced in
Company-operated restaurants.
Special charge
In second quarter 1998, the Company recorded a $160.0 million pre-tax special
charge related to the Company's home office productivity initiative. The
productivity plan was designed to improve staff alignment, focus and
productivity, and reduce ongoing selling, general and administrative expenses.
As a result, the Company reduced home office staffing by approximately 500
positions, consolidated certain home office facilities and reduced other
expenditures in a variety of areas. The special charge was comprised of $85.8
million of employee severance and outplacement costs, $40.8 million of lease
cancellation and other facilities-related costs, $18.3 million of costs for the
write-off of technology investments made obsolete as a result of the
productivity initiative and $15.1 million of other cash payments made in 1998.
The initiatives identified in the home office productivity plan were completed
as of December 31, 1999, and no significant adjustments were made to the
original plan. The remaining liability, primarily related to employee severance
paid in semi-monthly installments over a period up to one year after
termination, was approximately $31.1 million at December 31, 1999, and is
included in other accrued liabilities in the consolidated balance sheet.
Franchise arrangements
Individual franchise arrangements generally include a lease and a license and
provide for payment of initial fees, as well as continuing rent and service fees
to the Company, based upon a percentage of sales with minimum rent payments.
McDonald's franchisees are granted the right to operate a restaurant using the
McDonald's system as well as the use of a restaurant facility, generally for a
period of 20 years. Franchisees pay related occupancy costs including property
taxes, insurance and maintenance. Beginning in 1998, franchisees in the U.S.
generally have the option to own new restaurant facilities while leasing the
land from McDonald's. In addition, franchisees outside the U.S. pay a
refundable, noninterest-bearing security deposit. Foreign affiliates pay a
royalty to the Company based upon a percentage of sales.
24
The results of operations of restaurant businesses purchased and sold in
transactions with franchisees and affiliates were not material to the
consolidated financial statements for periods prior to purchase and sale.
- -------------------------------------------------------------------------------
(In millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Minimum rents $1,473.8 $1,440.9 $1,369.7
Percent rent and service fees 2,208.8 2,026.9 1,836.3
Initial fees 64.2 58.7 66.3
- -------------------------------------------------------------------------------
Revenues from franchised
and affiliated restaurants $3,746.8 $3,526.5 $3,272.3
===============================================================================
Future minimum rent payments due to the Company under existing franchise
arrangements are:
- -------------------------------------------------------------------------------
(In millions) Owned sites Leased sites Total
- -------------------------------------------------------------------------------
2000 $ 918.8 $ 683.2 $ 1,602.0
2001 905.0 674.7 1,579.7
2002 890.8 663.9 1,554.7
2003 872.0 650.4 1,522.4
2004 854.4 635.7 1,490.1
Thereafter 7,292.6 5,761.2 13,053.8
- -------------------------------------------------------------------------------
Total minimum payments $11,733.6 $9,069.1 $20,802.7
===============================================================================
At December 31, 1999, net property and equipment under franchise
arrangements totaled $8.7 billion (including land of $2.6 billion) after
deducting accumulated depreciation and amortization of $3.1 billion.
Segment and geographic information
The Company operates exclusively in the food service industry. Substantially all
revenues result from the sale of menu products at restaurants operated by the
Company, franchisees or affiliates. The Company's reportable segments are based
on geographic area. All intercompany revenues and expenses are eliminated in
computing revenues and operating income. Operating income includes the Company's
share of operating results of affiliates after interest expense. These amounts
are also after income taxes for affiliates outside the U.S. Royalties and other
payments received from subsidiaries outside the U.S. were (in millions):
1999-$568.3; 1998-$526.0; 1997-$470.6.
Corporate assets include corporate cash, investments, asset portions of
financing instruments, deferred tax assets and certain intangibles.
The Other segment includes McDonald's restaurant business operations in
Canada, Africa and the Middle East as well as Other Brands: Aroma Cafe',
Chipotle Mexican Grill and Donatos Pizza.
- --------------------------------------------------------------------------------
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
U.S. $ 5,093.0 $ 4,868.1 $ 4,602.7
Europe 4,924.9 4,466.7 3,931.5
Asia/Pacific 1,832.3 1,633.2 1,522.8
Latin America 680.3 814.7 709.2
Other 728.8 638.7 642.6
- --------------------------------------------------------------------------------
Total revenues $13,259.3 $12,421.4 $11,408.8
================================================================================
U.S. $ 1,471.7 $ 1,005.8(1) $ 1,180.0
Europe 1,203.4 1,115.6 988.6
Asia/Pacific 404.3 343.9 362.2
Latin America 127.5 180.8 163.4
Other 112.7 115.8 114.1
- --------------------------------------------------------------------------------
Total operating income $ 3,319.6 $ 2,761.9(1) $ 2,808.3
================================================================================
U.S. $ 8,025.5 $ 7,795.4 $ 7,753.4
Europe 6,966.8 6,932.1 6,005.4
Asia/Pacific 2,828.2 2,659.7 2,125.6
Latin America 1,477.5 1,339.6 1,177.8
Other 979.3 678.7 661.6
Corporate 705.9 378.9 517.7
- --------------------------------------------------------------------------------
Total assets $20,983.2 $19,784.4 $18,241.5
================================================================================
U.S. $ 472.1 $ 445.5 $ 584.0
Europe 881.8 870.2 929.5
Asia/Pacific 188.4 224.0 277.3
Latin America 213.2 236.8 227.9
Other 112.3 102.8 92.5
- --------------------------------------------------------------------------------
Total capital expenditures $ 1,867.8 $ 1,879.3 $ 2,111.2
================================================================================
U.S. $ 444.5 $ 432.3 $ 404.0
Europe 305.2 268.0 229.2
Asia/Pacific 114.9 97.3 82.8
Latin America 45.5 42.9 35.4
Other 46.2 40.6 42.4
- --------------------------------------------------------------------------------
Total depreciation and
amortization $ 956.3 $ 881.1 $ 793.8
================================================================================
(1) Includes $161.6 million of Made For You costs and $160.0 million special
charge related to the home office productivity initiative.
Total long-lived assets, primarily property and equipment and intangibles,
were (in millions): Consolidated 1999-$19,082.8; 1998-$18,244.4; 1997-$16,706.1.
U.S. 1999-$7,984.9; 1998-$7,533.2; 1997-$7,530.7.
Income taxes
Income before provision for income taxes, classified by source of income, was as
follows:
- -----------------------------------------------------------------------
(In millions) 1999 1998 1997
- -----------------------------------------------------------------------
U.S. $1,222.2 $ 804.3 $1,004.6
Outside the U.S. 1,661.9 1,503.1 1,402.7
- -----------------------------------------------------------------------
Income before provision for
income taxes $2,884.1 $2,307.4 $2,407.3
=======================================================================
----------------------
25
The provision for income taxes, classified by the timing and location of
payment, was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. federal $ 347.4 $ 267.8 $ 336.3
U.S. state 68.9 71.4 66.0
Outside the U.S. 467.0 382.7 363.6
- ------------------------------------------------------------------------------------------------------------------------------------
Current tax provision 883.3 721.9 765.9
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. federal 31.3 32.8 2.5
U.S. state 12.3 (6.9) 13.5
Outside the U.S. 9.3 9.5 (17.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax provision (benefit) 52.9 35.4 (1.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 936.2 $ 757.3 $ 764.8
====================================================================================================================================
Net deferred tax liabilities consisted of:
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Property and equipment basis differences $1,200.0 $1,121.5
Other 396.3 355.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 1,596.3 1,476.7
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets before valuation allowance(1) (658.7) (561.8)
Valuation allowance 101.9 45.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities(2) $1,039.5 $ 960.4
====================================================================================================================================
(1) Includes tax effects of loss carryforwards (in millions): 1999--$118.3;
1998--$67.1 and foreign tax credit carryforwards: 1999--$70.2; 1998--$38.5.
(2) Net of current tax assets included in prepaid expenses and other current
assets in the consolidated balance sheet (in millions): 1999--$134.1;
1998--$121.5.
The statutory U.S. federal income tax rate reconciles to the effective
income tax rates as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related
federal income tax benefit 1.8 1.8 2.1
Benefits and taxes related to
foreign operations (4.4) (3.3) (5.2)
Other-net .1 (.7) (.1)
- --------------------------------------------------------------------------------
Effective income tax rates 32.5% 32.8% 31.8%
================================================================================
Deferred U.S. income taxes have not been provided on basis differences
related to investments in certain foreign subsidiaries and affiliates. These
basis differences were approximately $2.4 billion at December 31, 1999, and
consisted primarily of undistributed earnings considered permanently invested in
the businesses. Determination of the deferred income tax liability on these
unremitted earnings is not practicable since such liability, if any, is
dependent on circumstances existing if and when remittance occurs.
Debt financing
Line of credit agreements
At December 31, 1999, the Company had several line of credit agreements
with various banks totaling $1.5 billion, all of which remained unused at year-
end 1999. Subsequent to year end, the Company renegotiated the line of credit
agreements as follows: a $500.0 million line expiring in February 2005 with fees
of .06% per annum on the total commitment; a $25.0 million line with a renewable
term of 364 days and fees of .07% per annum on the total commitment; and a
$500.0 million short-term line with a renewable term of 364 days and fees of
.04% per annum on the total commitment. Borrowings under the agreements bear
interest at one of several specified floating rates selected by the Company at
the time of borrowing. In addition, certain subsidiaries outside the U.S. had
unused lines of credit totaling $699.3 million at December 31, 1999; these were
principally short term and denominated in various currencies at local market
rates of interest. The weighted-average interest rate of short-term borrowings,
composed of U.S. Dollar and Euro commercial paper and foreign currency bank line
borrowings, was 6.1% at December 31, 1999 and 6.2% at December 31, 1998.
Exchange agreements
The Company has entered into agreements for the exchange of various
currencies, certain of which also provide for the periodic exchange of interest
payments. These agreements expire through 2008 and relate primarily to the
exchange of Euro-based currencies, Japanese Yen and British Pounds Sterling. The
notional principal is equal to the amount of foreign currency or U.S. Dollar
principal exchanged at maturity and is used to calculate interest payments that
are exchanged over the life of the transaction. The Company has also entered
into interest-rate exchange agreements that expire through 2011 and relate
primarily to U.S. Dollars, Euro-based currencies and Australian Dollars. The net
value of each exchange agreement based on its current spot rate was classified
as an asset or liability. Net interest is accrued as either interest receivable
or payable, with the offset recorded in interest expense.
26
The counterparties to these agreements consist of a diverse group of financial
institutions. The Company continually monitors its positions and the credit
ratings of its counterparties, and adjusts positions as appropriate. The Company
does not have significant exposure to any individual counterparty and has
entered into master agreements that contain netting arrangements. The Company's
policy regarding agreements with certain counterparties is to require collateral
in the event credit ratings fall below A- or in the event that aggregate
exposures exceed certain limits as defined by contract. At December 31, 1999, no
collateral was required of counterparties and the Company was not required to
collateralize any of its obligations.
At December 31, 1999, the Company had purchased foreign currency options
outstanding (primarily Euro-based currencies, British Pounds Sterling and
Japanese Yen) with a notional amount equivalent to U.S. $193.9 million. The
unamortized premium related to these currency options was $2.7 million and there
were no related deferred gains recorded as of year end. Forward foreign exchange
contracts outstanding at December 31, 1999 (primarily British Pounds Sterling,
Hong Kong Dollars and Australian Dollars) had a U.S. Dollar equivalent of $398.3
million.
Fair values
- --------------------------------------------------------------------------------
December 31, 1999
------------------
Carrying Fair
(In millions) amount value
- --------------------------------------------------------------------------------
Liabilities
Debt $6,011.3 $6,048.4
Notes payable 1,073.1 1,073.1
Foreign currency exchange agreements(1) 167.9 191.5
Interest-rate exchange agreements(2) 8.7
- --------------------------------------------------------------------------------
Total liabilities 7,252.3 7,321.7
- --------------------------------------------------------------------------------
Assets
Foreign currency exchange agreements(1) 205.5 151.0
- --------------------------------------------------------------------------------
Net debt $7,046.8 $7,170.7
================================================================================
(1) Gross notional amount equivalent to U.S. $2.5 billion.
(2) Notional amount equivalent to U.S. $1.3 billion.
The carrying amounts for cash and equivalents, notes receivable, purchased
foreign currency options and forward foreign exchange contracts approximated
fair value. No fair value was provided for noninterest-bearing security deposits
by franchisees as these deposits are an integral part of the overall franchise
arrangements.
The fair values of the debt, notes payable obligations, the currency and
interest-rate exchange agreements and the foreign currency options were
estimated using various pricing models or discounted cash flow analyses that
incorporated quoted market prices. The Company has no current plans to retire a
significant amount of its debt prior to maturity. Given the market value of its
common stock and its significant real estate holdings, the Company believes that
the fair value of its total assets was substantially higher than the carrying
value at December 31, 1999.
ESOP loans and guarantees
The Company has guaranteed and included in total debt at December 31, 1999,
$26.8 million of Notes issued by the Leveraged Employee Stock Ownership Plan
(ESOP) with payments through 2006. In addition, during 1999 the Company borrowed
$133.0 million that was subsequently loaned to the ESOP and used to repay
existing ESOP notes previously guaranteed by the Company. Borrowings related to
the ESOP are reflected as long-term debt with a corresponding reduction of
shareholders' equity (unearned ESOP compensation). The ESOP is repaying the
loans and interest through 2018 using Company contributions and dividends from
its McDonald's common stock holdings. As the principal amount of the borrowings
is repaid, the debt and the unearned ESOP compensation are being reduced.
The Company also has guaranteed certain affiliate loans totaling $178.2
million at December 31, 1999.
27
Debt obligations
The Company has incurred debt obligations through public and private offerings
and bank loans. The terms of most debt obligations contain restrictions on
Company and subsidiary mortgages and long-term debt of certain subsidiaries.
Under certain agreements, the Company has the option to retire debt prior to
maturity, either at par or at a premium over par. The following table summarizes
these debt obligations, including the effects of currency and interest-rate
exchange agreements.
Debt obligations
- ------------------------------------------------------------------------------------------
Interest rates(1) Amounts outstanding
December 31 December 31
------------------ -------------------
(In millions of U.S. Dollars) Maturity dates 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
Fixed--original issue(2) 6.9% 6.9% $3,008.1 $3,452.6
Fixed--converted via
exchange agreements(3) 6.2 6.3 (1,773.1) (2,072.7)
Floating 6.7 5.3 470.7 357.2
- ------------------------------------------------------------------------------------------
Total U.S. Dollars 2000-2037 1,705.7 1,737.1
- ------------------------------------------------------------------------------------------
Fixed 5.6 6.2 1,941.2 1,771.6
Floating 3.6 4.0 609.4 849.9
- ------------------------------------------------------------------------------------------
Total Euro-based currencies 2000-2009 2,550.6 2,621.5
- ------------------------------------------------------------------------------------------
Fixed 7.6 7.7 596.5 529.4
Floating 6.0 5.6 145.9 212.3
- ------------------------------------------------------------------------------------------
Total British Pounds Sterling 2000-2008 742.4 741.7
- ------------------------------------------------------------------------------------------
Fixed 5.4 7.9 228.4 157.4
Floating 4.8 2.1 15.6 137.9
- ------------------------------------------------------------------------------------------
Total other European
currencies(4) 2000-2004 244.0 295.3
- ------------------------------------------------------------------------------------------
Fixed 3.5 3.8 488.1 387.5
Floating 0.1 0.5 298.5 322.5
- ------------------------------------------------------------------------------------------
Total Japanese Yen 2000-2023 786.6 710.0
- ------------------------------------------------------------------------------------------
Fixed 8.1 8.8 415.0 393.2
Floating 6.4 6.8 503.0 337.6
- ------------------------------------------------------------------------------------------
Total other Asia/Pacific
currencies(5) 2000-2010 918.0 730.8
- ------------------------------------------------------------------------------------------
Fixed 6.9 7.4 13.2 9.3
Floating 5.2 8.9 86.3 84.3
- ------------------------------------------------------------------------------------------
Total other currencies 2000-2021 99.5 93.6
- ------------------------------------------------------------------------------------------
Debt obligations including the net
effects of currency and
interest-rate exchange agreements 7,046.8 6,930.0
- ------------------------------------------------------------------------------------------
Short-term obligations supported by
long-term line of credit agreement
- ------------------------------------------------------------------------------------------
Net asset positions of currency
exchange agreements (included
in miscellaneous other assets) 205.5 113.4
- ------------------------------------------------------------------------------------------
Total debt obligations $7,252.3 $7,043.4
==========================================================================================
(1) Weighted-average effective rate, computed on a semiannual basis.
(2) Includes $500 million of debentures with maturities in 2027, 2036 and 2037,
which are subordinated to senior debt and which provide for the ability to
defer interest payments up to five years under certain conditions.
(3) A portion of U.S. Dollar fixed-rate debt effectively has been converted
into other currencies and/or into floating-rate debt through the use of
exchange agreements. The rates shown reflect the fixed rate on the
receivable portion of the exchange agreements. All other obligations in
this table reflect the net effects of these and other exchange agreements.
(4) Primarily consists of Swiss Francs.
(5) Primarily consists of Australian Dollars and New Taiwan Dollars.
Debt obligations
- -----------------------------------------------------------------------------------------------------------
Aggregate maturities for 1999 balances
------------------------------------------------------------------------
(In millions of U.S. Dollars) 2000 2001 2002 2003 2004 Thereafter
- -----------------------------------------------------------------------------------------------------------
Fixed--original issue(2)
Fixed--converted via
exchange agreements(3)
Floating
- -----------------------------------------------------------------------------------------------------------
Total U.S. Dollars $ 301.8 $(305.3) $(286.9) $(127.3) $ (24.7) $2,148.1
- -----------------------------------------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------------------------------------
Total Euro-based currencies 515.9 315.3 232.5 294.3 358.7 833.9
- -----------------------------------------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------------------------------------
Total British Pounds Sterling 234.7 24.2 160.6 322.9
- -----------------------------------------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------------------------------------
Total other European
currencies(4) 99.0 50.8 37.0 8.1 49.1
- -----------------------------------------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------------------------------------
Total Japanese Yen 97.9 176.2 146.8 93.9 77.3 194.5
- -----------------------------------------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------------------------------------
Total other Asia/Pacific
currencies(5) 741.1 46.3 25.5 40.4 54.8 9.9
- -----------------------------------------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------------------------------------
Total other currencies 88.9 2.7 4.5 1.0 0.5 1.9
- -----------------------------------------------------------------------------------------------------------
Debt obligations including the net
effects of currency and
interest-rate exchange agreements 2,079.3 286.0 183.6 471.0 515.7 3,511.2
- -----------------------------------------------------------------------------------------------------------
Short-term obligations supported by
long-term line of credit agreement (500.0) 500.0
- -----------------------------------------------------------------------------------------------------------
Net asset positions of currency
exchange agreements (included
in miscellaneous other assets) 40.6 54.7 32.5 32.1 34.8 10.8
- -----------------------------------------------------------------------------------------------------------
Total debt obligations $ 1,619.9 $ 340.7 $ 216.1 $ 503.1 $ 550.5 $4,022.0
===========================================================================================================
28
Leasing arrangements
At December 31, 1999, the Company was lessee at 5,468 restaurant locations
through ground leases (the Company leases the land and the Company or franchisee
owns the building) and at 6,239 restaurant locations through improved leases
(the Company leases land and buildings). Lease terms for most restaurants are
generally for 20 to 25 years and, in many cases, provide for rent escalations
and renewal options, with certain leases providing purchase options. For most
locations, the Company is obligated for the related occupancy costs including
property taxes, insurance and maintenance. In addition, the Company is lessee
under noncancelable leases covering offices and vehicles.
Future minimum payments required under existing operating leases with initial
terms of one year or more are:
- ---------------------------------------------------------------------------
(In millions) Restaurant Other Total
- ---------------------------------------------------------------------------
2000 $ 620.2 $ 61.3 $ 681.5
2001 608.1 49.9 658.0
2002 588.5 41.5 630.0
2003 565.7 34.8 600.5
2004 542.0 29.4 571.4
Thereafter 5,052.3 169.6 5,221.9
- ---------------------------------------------------------------------------
Total minimum payments $7,976.8 $386.5 $8,363.3
===========================================================================
Rent expense was (in millions): 1999-$796.3; 1998-$723.0; 1997-$641.2. These
amounts included percent rents in excess of minimum rents (in millions): 1999-
$117.1; 1998-$116.7; 1997-$99.4.
Property and equipment
- ------------------------------------------------------------------------------
(In millions) December 31, 1999 1998
- ------------------------------------------------------------------------------
Land $ 3,838.6 $ 3,812.1
Buildings and improvements on owned land 7,953.6 7,665.8
Buildings and improvements on leased land 7,076.6 6,910.4
Equipment, signs and seating 2,906.6 2,728.8
Other 675.4 640.9
- ------------------------------------------------------------------------------
22,450.8 21,758.0
- ------------------------------------------------------------------------------
Accumulated depreciation and amortization (6,126.3) (5,716.4
- ------------------------------------------------------------------------------
Net property and equipment $16,324.5 $16,041.6
==============================================================================
Depreciation and amortization expense was (in millions): 1999--$858.1;
1998-$808.0; 1997-$726.4.
Employee benefit plans
The Company's benefits program for U.S. employees includes profit sharing,
401(k) (McDESOP) and leveraged employee stock ownership (ESOP) features. McDESOP
allows participants to make contributions that are partly matched from shares
released under the ESOP. Plan assets and contributions made by McDESOP
participants can be invested in McDonald's common stock or among several other
investment alternatives. The Company allocations under McDESOP and ESOP are
generally invested in McDonald's common stock.
Executives, staff and restaurant managers participate in profit sharing
contributions and shares released under the ESOP, based on their compensation.
The profit sharing contribution is discretionary, and the Company determines the
amount each year. Total U.S. costs for the above program were (in millions):
1999-$49.4; 1998-$63.3; 1997-$57.6.
Certain subsidiaries outside the U.S. also offer profit sharing, stock
purchase or other similar benefit plans. Total plan costs outside the U.S. were
(in millions): 1999-$37.2; 1998-$37.5; 1997-$34.1.
Other postretirement benefits and postemployment benefits, excluding severance
benefits related to the 1998 home office productivity initiative, were
immaterial.
Stock options
At December 31, 1999, the Company had three stock-based compensation plans, two
for employees and one for non-employee directors. Options to purchase common
stock are granted at the fair market value of the stock on the date of grant.
Therefore, no compensation cost has been recognized in the consolidated
financial statements for these plans.
Substantially all of the options become exercisable in four equal
installments, beginning a year from the date of the grant, and expiring 10 years
from the grant date. At December 31, 1999, the number of shares of common stock
reserved for issuance under the plans was 178.1 million, including 13.4 million
available for future grants.
29
A summary of the status of the Company's plans as of December 31, 1999, 1998
and 1997, and changes during the years then ended, is presented in the following
table.
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- ------------------------------
Shares Weighted-average Shares Weighted-average Shares Weighted-average
Options (in millions) exercise price (in millions) exercise price (in millions) exercise price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 164.0 $19.32 156.3 $16.79 145.5 $14.73
Granted 25.4 40.35 33.7 25.90 30.2 23.53
Exercised (18.8) 13.89 (22.8) 12.00 (14.6) 9.63
Forfeited (5.9) 18.01 (3.2) 21.06 (4.8) 17.78
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 164.7 $23.06 164.0 $19.32 156.3 $16.79
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 69.4 64.4 60.5
====================================================================================================================================
Options granted each year were 1.9%, 2.5% and 2.2% of average common shares
outstanding for 1999, 1998 and 1997, representing grants to approximately
11,600, 11,500 and 11,000 employees in those three years. When stock options are
exercised, shares are issued from treasury stock.
The average per share cost of treasury stock issued for option exercises was:
1999--$7.38; 1998--$7.00; 1997--$6.47. The average option exercise price has
consistently exceeded the average cost of treasury stock issued for option
exercises because the Company prefunds the program through share repurchase. As
a result, stock option exercises have generated additional capital, since cash
received from employees has exceeded the Company's average acquisition cost of
treasury stock. In addition, stock option exercises resulted in $418.5 million
of tax benefits for the Company during the three years ended December 31, 1999.
The following table presents information related to options outstanding and
options exercisable at December 31, 1999, based on ranges of exercise prices.
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999
--------------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
-------------------------------------------------------------- ---------------------------------------
Number Weighted-average Number
of options remaining contractual life Weighted-average of options Weighted-average
Range of exercise prices (in millions) (in years) exercise price (in millions) exercise price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 7 to 9 7.6 1.4 $ 7.87 7.6 $ 7.87
10 to 15 36.1 3.6 13.43 28.1 13.23
16 to 23 43.3 6.4 20.60 15.1 19.55
24 to 34 53.1 7.5 25.67 18.5 25.37
35 to 46 24.6 9.5 40.58 0.1 40.52
- ------------------------------------------------------------------------------------------------------------------------------------
$ 7 to 46 164.7 6.4 $23.06 69.4 $17.30
====================================================================================================================================
Pro forma net income and net income per common share were determined as if the
Company had accounted for its employee stock options under the fair value method
of SFAS No. 123. For pro forma disclosures, the options' estimated fair value
was amortized over their expected seven-year life. SFAS No. 123 does not apply
to grants before 1995. As a result, the pro forma disclosures do not include a
full seven years of grants, and therefore, may not be indicative of anticipated
future disclosures. The fair value for these options was estimated at the date
of grant using an option pricing model. The model was designed to estimate the
fair value of exchange-traded options which, unlike employee stock options, can
be traded at any time and are fully transferable. In addition, such models
require the input of highly subjective assumptions, including the expected
volatility of the stock price. Therefore, in management's opinion, the existing
models do not provide a reliable single measure of the value of employee stock
options. The following tables present the pro forma disclosures and the
weighted-average assumptions used to estimate the fair value of these options:
- --------------------------------------------------------------------------------
Pro forma disclosures 1999 1998 1997
- --------------------------------------------------------------------------------
Net income--pro forma (in millions) $1,844.0 $1,474.0 $1,589.3
Net income per common share--pro forma:
Basic 1.36 1.08 1.13
Diluted 1.31 1.05 1.11
Weighted-average fair value
per option granted 14.06 8.75 8.41
================================================================================
- --------------------------------------------------------------------------------
Assumptions 1999 1998 1997
- --------------------------------------------------------------------------------
Expected dividend yield .65% .65% .65%
Expected stock price volatility 22.9% 18.0% 18.1%
Risk-free interest rate 5.72% 5.56% 6.61%
Expected life of options (in years) 7 7 7
================================================================================
30
Quarterly results (unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Quarters ended Quarters ended Quarters ended Quarters ended
December 31 September 30 June 30 March 31
------------------- -------------------- ------------------- ---------------------
(In millions, except per
share data) 1999 1998 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Systemwide sales $9,749.7 $9,316.0 $ 9,997.8 $9,246.2 $9,920.4 $9,247.6 $8,822.8 $8,169.7
- --------------------------------------------------------------------------------------------------------------------------
Revenues
Sales by Company-operated
restaurants $2,424.9 $2,304.5 $ 2,474.4 $2,305.7 $2,434.1 $2,270.4 $2,179.1 $2,014.3
Revenues from franchised
and affiliated restaurants 948.0 916.2 969.8 909.3 973.0 910.4 856.0 790.6
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 3,372.9 3,220.7 3,444.2 3,215.0 3,407.1 3,180.8 3,035.1 2,804.9
- --------------------------------------------------------------------------------------------------------------------------
Company-operated margin 414.1 418.2 458.8 437.5 448.9 426.7 361.1 350.9
Franchised margin 756.3 734.8 783.0 737.3 792.6 743.9 677.2 632.5
Operating income(1) 816.8 637.2 907.7 835.2 883.5 646.8(2) 711.6 642.7
Net income(1) $ 486.2 $ 348.5 $ 540.9 $ 482.2 $ 518.1 $ 357.2(2) $ 402.7 $ 362.2
- --------------------------------------------------------------------------------------------------------------------------
Net income per common share(1) $ .36 $ .26 $ .40 $ .35 $ .38 $ .26(2) $ .30 $ .26
Net income per common
share-diluted(1) .35 .25 .39 .34 .37 .25(2) .29 .26
- --------------------------------------------------------------------------------------------------------------------------
Dividends per common share $ .04875 $ .04500 $ .04875 $ .04500 $ .04875 $ .04500 $ .04875 $ .04125
- --------------------------------------------------------------------------------------------------------------------------
Weighted-average shares 1,353.3 1,354.3 1,354.7 1,362.1 1,355.5 1,372.1 1,357.3 1,372.8
Weighted-average shares-diluted 1,401.4 1,399.1 1,403.1 1,404.7 1,405.6 1,415.1 1,409.2 1,403.9
==========================================================================================================================
Market price per common share
High $49 9/16 $39 3/4 $45 1/4 $ 37 1/2 $47 1/16 $35 $47 3/8 $30 1/8
Low 38 5/16 28 1/8 38 15/16 26 3/4 37 3/4 28 9/16 35 15/16 22 5/16
Close 40 5/16 38 7/16 43 1/4 29 7/8 41 1/8 34 1/2 45 5/16 30
==========================================================================================================================
(1) Includes Made For You costs in 1998 of $5.0 million ($3.4 million after
tax) in second quarter; $10.6 million ($7.1 million after tax or
$0.01 per share) in third quarter; and $146.0 million ($98.6 million after
tax or $0.07 per share) in fourth quarter.
(2) Includes $160.0 million special charge related to the home office
productivity initiative ($110.0 million after tax or $0.08 per share).
31
Management's Report
Management is responsible for the preparation, integrity and fair presentation
of the consolidated financial statements and financial comments appearing in
this annual report. The financial statements were prepared in accordance with
generally accepted accounting principles and include certain amounts based on
management's judgment and best estimates. Other financial information presented
in the annual report is consistent with the financial statements.
The Company maintains a system of internal controls over financial reporting
including safeguarding of assets against unauthorized acquisition, use or
disposition, which is designed to provide reasonable assurance to the Company's
management and Board of Directors regarding the preparation of reliable
published financial statements and asset safeguarding. The system includes a
documented organizational structure and appropriate division of
responsibilities; established policies and procedures that are communicated
throughout the Company; careful selection, training and development of our
people; and utilization of an internal audit program. Policies and procedures
prescribe that the Company and all employees are to maintain high standards of
proper business practices throughout the world.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation and safeguarding of assets. Furthermore, the effectiveness of an
internal control system can change with circumstances. The Company believes it
maintains an effective system of internal control over financial reporting and
safeguarding of assets against unauthorized acquisition, use or disposition.
The consolidated financial statements have been audited by independent
auditors, Ernst & Young LLP, who were given unrestricted access to all financial
records and related data. The audit report of Ernst & Young LLP is presented
herein.
McDONALD'S CORPORATION
January 26, 2000
Audit Committee's Report
The Audit Committee is responsible for overseeing the financial reporting
process, financial policies and internal controls on behalf of the Board of
Directors. In this regard, it helps to ensure the independence of the Company's
auditors, the integrity of management and the adequacy of disclosure to
shareholders. Representatives of the internal audit function, independent
auditors and financial management each have unrestricted access to the Committee
and each periodically meet privately with the Committee.
In conformity with its charter, in 1999, among other things, the Committee
recommended the selection of the Company's independent auditors to the Board of
Directors; reviewed the scope and fees for the annual audit and the internal
audit program; reviewed fees for nonaudit services provided by the independent
auditors; reviewed the annual financial statements and the results of the annual
audit with financial management and the independent auditors; consulted with
financial management and the independent auditors regarding risk management;
reviewed the adequacy of certain financial policies and internal controls; and
reviewed significant legal developments.
The Audit Committee, which met six times during 1999, is comprised of five
independent Directors: Gordon C. Gray, Chairman, Enrique Hernandez, Jr., Walter
E. Massey, Roger W. Stone and B. Blair Vedder, Jr. Donald G. Lubin serves as
secretary in a nonvoting capacity.
In December 1999, the New York Stock Exchange, Securities and Exchange
Commission and Auditing Standards Board adopted new rules intended to improve
disclosure relating to the composition and practices of audit committees and to
enhance the reliability and credibility of financial statements. The rules must
be implemented at various dates throughout 2000 and 2001. The Audit Committee is
taking steps to comply on a timely basis with these rules.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF McDONALD'S CORPORATION
January 26, 2000
Report of Independent Auditors
The Board of Directors and Shareholders
McDonald's Corporation
We have audited the accompanying consolidated balance sheet of McDonald's
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of McDonald's Corporation management. Our responsibility is to
express an opinion on these 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 financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McDonald's
Corporation at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
January 26, 2000
32
Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure
None.
Part III
Item 10. Directors and Executive Officers of the registrant
Information regarding directors is incorporated herein by reference from the
Company's definitive proxy statement which will be filed no later than 120 days
after December 31, 1999.
Information regarding all of the Company's executive officers is included in
Part I, Item 4, page 5 of this Form 10-K.
Item 11. Executive compensation
Incorporated herein by reference from the Company's definitive proxy statement
which will be filed no later than 120 days after December 31, 1999.
Item 12. Security ownership of certain beneficial owners and management
Incorporated herein by reference from the Company's definitive proxy statement
which will be filed no later than 120 days after December 31, 1999.
Item 13. Certain relationships and related transactions
Incorporated herein by reference from the Company's definitive proxy statement
which will be filed no later than 120 days after December 31, 1999.
Part IV
Item 14. Financial statement schedules, exhibits, and reports on Form 8-K
(a) 1. Financial statements:
Consolidated financial statements filed as part of this report are listed under
Part II, Item 8, pages 19 through 22 of this Form 10-K.
2. Financial statement schedules:
No schedules are required because either the required information is not present
or is not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the consolidated financial
statements or the notes thereto.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed for the last quarter covered by
this report, and subsequently up to March 28, 2000.
- -------------------------------------------------------
Date of Item Financial statements
report number required to be filed
- -------------------------------------------------------
10/21/99 Item 7 No
12/16/99 Item 7 No
1/26/00 Item 7 No
- -------------------------------------------------------
(c) Exhibits:
The exhibits listed in the accompanying index are filed as part of this report.
33
McDonald's Corporation Exhibit Index (Item 14)
Exhibit Number/Description
- --------------------------------------------------------------------------------
(3) Restated Certificate of Incorporation, effective as of March 24, 1998,
incorporated herein by reference from Form 8-K dated April 17, 1998.
By-Laws, effective as of July 8, 1998, incorporated herein by reference
from Form 10-Q for the quarter ended June 30, 1998.
(4) Instruments defining the rights of security holders, including Indentures
(A):
(a) Senior Debt Securities Indenture dated as of October 19, 1996
incorporated herein by reference from Exhibit 4(a) of Form S-3
Registration Statement (File No. 333-14141).
(i) 6-3/8% Debentures due January 8, 2028. Supplemental Indenture
No. 1 dated as of January 8, 1998, incorporated herein by
reference from Exhibit (4)(a) of Form 8-K dated January 5,
1998.
(ii) 5.90% REset Put Securities due 2011. Supplemental Indenture No.
2 dated as of May 11, 1998, incorporated herein by reference
from Exhibit 4(a) of Form 8-K dated May 6, 1998.
(iii) 6% REset Put Securities due 2012. Supplemental Indenture No. 3
dated as of June 23, 1998, incorporated herein by reference
from Exhibit 4(a) of Form 8-K dated June 18, 1998.
(iv) Medium-Term Notes, Series F, due from 1 year to 60 years from
the Date of Issue. Supplemental Indenture No. 4 incorporated
herein by reference from Exhibit (4) (c) of Form S-3
Registration Statement (File No. 333-59145), dated July 15,
1998.
(b) Subordinated Debt Securities Indenture dated as of October 18, 1996,
incorporated herein by reference from Form 8-K dated October 18, 1996.
(i) 7-1/2% Subordinated Deferrable Interest Debentures due 2036.
Supplemental Indenture No. 1 dated as of November 5, 1996,
incorporated herein by reference from Exhibit (4)(b) of Form
8-K dated October 18, 1996.
(ii) 7-1/2% Subordinated Deferrable Interest Debentures due 2037.
Supplemental Indenture No. 2 dated as of January 14, 1997,
incorporated herein by reference from Exhibit (4)(b) of Form 8-
K dated January 9, 1997.
(iii) 7.31% Subordinated Deferrable Interest Debentures due 2027.
Supplemental Indenture No. 3 dated September 24, 1997,
incorporated herein by reference from Exhibit (4)(b) of Form
8-K dated September 19, 1997.
(c) Debt Securities. Indenture dated as of March 1, 1987 incorporated
herein by reference from Exhibit 4(a) of Form S-3 Registration
Statement (File No. 33-12364).
(i) Medium-Term Notes, Series B, due from nine months to 30 years
from Date of Issue. Supplemental Indenture No. 12 incorporated
herein by reference from Exhibit (4) of Form 8-K dated August
18, 1989 and Forms of Medium-Term Notes, Series B, incorporated
herein by reference from Exhibit (4)(b) of Form 8-K dated
September 14, 1989.
(ii) Medium-Term Notes, Series C, due from nine months to 30 years
from Date of Issue. Form of Supplemental Indenture No. 15
incorporated herein by reference from Exhibit 4(b) of Form S-3
Registration Statement (File No. 33-34762), dated May 14, 1990.
(iii) Medium-Term Notes, Series C, due from nine months (U.S.
Issue)/184 days (Euro Issue) to 30 years from Date of Issue.
Amended and restated Supplemental Indenture No. 16 incorporated
herein by reference from Exhibit (4) of Form 10-Q for the
period ended March 31, 1991.
(iv) 8-7/8% Debentures due 2011. Supplemental Indenture No. 17
incorporated herein by reference from Exhibit (4) of Form 8-K
dated April 22, 1991.
(v) Medium-Term Notes, Series D, due from nine months (U.S.
Issue)/184 days (Euro Issue) to 60 years from Date of Issue.
Supplemental Indenture No. 18 incorporated herein by reference
from Exhibit 4(b) of Form S-3 Registration Statement (File No.
33-42642), dated September 10, 1991.
34
Exhibit Number/Description
- --------------------------------------------------------------------------------
(vi) 6-3/4% Notes due February 15, 2003. Form of Supplemental
Indenture No. 20 incorporated herein by reference from Exhibit
(4) of Form 8-K dated March 1, 1993.
(vii) 7-3/8% Debentures due July 15, 2033. Form of Supplemental
Indenture No. 21 incorporated herein by reference from Exhibit
(4)(a) of Form 8-K dated July 15, 1993.
(viii) Medium-Term Notes, Series E, due from nine months (U.S. Issue)/
184 days (Euro Issue) to 60 years from the Date of Issue.
Supplemental Indenture No. 22 incorporated herein by reference
from Exhibit 4(b) of Form S-3 Registration Statement (File No.
33-60939), dated July 13, 1995.
(ix) 6-5/8% Notes due September 1, 2005. Form of Supplemental
Indenture No. 23 incorporated herein by reference from Exhibit
(4)(a) of Form 8-K dated September 5, 1995.
(x) 7.05% Debentures due 2025. Form of Supplemental Indenture No.
24 incorporated herein by reference from Exhibit (4)(a) of Form
8-K dated November 13, 1995.
(10) Material Contracts
(a) Directors' Stock Plan, as amended and restated, incorporated herein by
reference from Exhibit 10(a) of Form 10-Q for the quarter ended
September 30, 1997.*
(b) Profit Sharing Program, as amended and restated, filed herewith.*
(c) McDonald's Supplemental Employee Benefit Equalization Plan, McDonald's
Profit Sharing Program Equalization Plan and McDonald's 1989
Equalization Plan, as amended and restated, incorporated herein by
reference from Form 10-K for the year ended December 31, 1995.*
(d) 1975 Stock Ownership Option Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the quarter ended
June 30, 1999.*
(e) 1992 Stock Ownership Incentive Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the quarter ended
June 30, 1999.*
(f) McDonald's Corporation Deferred Income Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the quarter ended
September 30, 1999.*
(g) Non-Employee Director Stock Option Plan, incorporated herein by
reference from Form 10-Q for the quarter ended September 30, 1999.*
(h) Executive Retention Plan, incorporated herein by reference from Form
10-K for the year ended December 31, 1998.*
(12) Statement re: Computation of Ratios
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(27) Financial Data Schedule
- --------------------------------------------------------------------------------
* Denotes compensatory plan.
(A) Other instruments defining the rights of holders of long-term debt of the
registrant and all of its subsidiaries for which consolidated financial
statements are required to be filed and which are not required to be
registered with the Securities and Exchange Commission, are not included
herein as the securities authorized under these instruments, individually,
do not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis. An agreement to furnish a copy of any
such instruments to the Securities and Exchange Commission upon request has
been filed with the Commission.
35
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
McDonald's Corporation
(Registrant)
/S/ Michael L. Conley
- ---------------------------------
By Michael L. Conley
Executive Vice President and Chief Financial Officer
March 28, 2000
- ---------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the 28th day of March, 2000:
Signature, Title
/S/ Hall Adams, Jr.
- ---------------------------------
Hall Adams, Jr.
Director
/S/ James R. Cantalupo
- ---------------------------------
James R. Cantalupo
Vice Chairman and President and Director
/S/ Gordon C. Gray
- ---------------------------------
Gordon C. Gray
Director
/S/ Jack M. Greenberg
- ---------------------------------
Jack M. Greenberg
Chairman and Chief Executive Officer and Director
/S/ Enrique Hernandez, Jr.
- ---------------------------------
Enrique Hernandez, Jr.
Director
/S/ Jeanne P. Jackson
- ---------------------------------
Jeanne P. Jackson
Director
/S/ Donald R. Keough
- ---------------------------------
Donald R. Keough
Director
/S/ Donald G. Lubin
- ---------------------------------
Donald G. Lubin
Director
/S/ Walter E. Massey
- ---------------------------------
Walter E. Massey
Director
/S/ Andrew J. McKenna
- ---------------------------------
Andrew J. McKenna
Director
/S/ Michael R. Quinlan
- ---------------------------------
Michael R. Quinlan
Chairman of the Executive Committee and Director
/S/ Terry L. Savage
- ---------------------------------
Terry L. Savage
Director
/S/ Roger W. Stone
- ---------------------------------
Roger W. Stone
Director
/S/ Robert N. Thurston
- ---------------------------------
Robert N. Thurston
Director
/S/ Fred L. Turner
- ---------------------------------
Fred L. Turner
Senior Chairman and Director
/S/ B. Blair Vedder, Jr.
- ---------------------------------
B. Blair Vedder, Jr.
Director
/S/ Michael L. Conley
- ---------------------------------
Michael L. Conley
Executive Vice President and Chief Financial Officer
/S/ Christopher Pieszko
- ---------------------------------
Christopher Pieszko
Senior Vice President and Corporate Controller
36