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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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 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 $53,373,541,566 and the number of shares of common stock
outstanding is 1,357,952,498 as of January 31, 1999 (the number of shares has
been restated to reflect the two-for-one stock split effected in March 1999).
Documents incorporated by reference. Part III of this 10-K incorporates
information by reference from the registrant's 1999 definitive proxy statement
which will be filed no later than 120 days after December 31, 1998.
- --------------------------------------------------------------------------------
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 1998, 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, 1998, 1997 and 1996 is
included in Part II, Item 8, page 23 of this Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
General
The Company develops, operates, franchises and services a worldwide system of
restaurants which prepare, assemble, package and sell a limited menu of value-
priced foods. These 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's franchising program 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 or royalties 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 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 the U.S., Germany, England, Japan, Brazil or Australia. 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.
The Company'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 handled at the local restaurant level; funding for regional and
national efforts is handled through advertising cooperatives. Franchised,
Company-operated and affiliated restaurants throughout the world make voluntary
contributions to cooperatives which purchase media. Production costs for certain
advertising efforts are borne by the Company. The Company and affiliated
entities also market food products, in a few instances, under brand names
other than McDonald's well-known global brand.
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 and Apple-Bran muffins. The Company tests
new products on an ongoing basis.
The Company, its franchisees and affiliates purchase 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 the 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
The Company introduced the Made For You food preparation system in 1998 and
plans to have it integrated into virtually all restaurants in the United States
and Canada by the end of 1999. Made For You is based on a just-in-time
production philosophy where each sandwich is made only when it is needed.
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, 1998, 1997 and 1996 in
Part II, Item 7, pages 7 through 15, and the Consolidated statement of cash
flows for the years ended December 31, 1998, 1997 and 1996 in Part II, Item 8,
page 19 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 463,000
restaurants that generate nearly $247 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 which 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 1998, there were no material capital expenditures for
environmental control facilities and no such material expenditures are
anticipated.
Number of employees
During 1998, the Company's average number of employees worldwide, including
Company-operated restaurant employees, was approximately 284,000.
(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 15 and Segment and
geographic information in Part II, Item 8, page 23 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. McDonald's generally owns or
secures long-term land and building leases for restaurant sites, which ensures
long-term tenure 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 15 and in Financial statements
and supplementary data in Part II, Item 8, pages 17 through 28 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.
Suppliers
The Company and its affiliates and subsidiaries do not supply, with minor
exceptions outside the United States, food, paper, or related items to any
McDonald's restaurants. The Company relies upon independent suppliers that are
required to meet and maintain the Company's standards and specifications. There
are a number of such suppliers worldwide and 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 McDonald'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.
Trademarks
McDonald's has registered trademarks and service marks, some of which are of
material importance to the Company's business. From time to time, the Company
may become involved in litigation to defend and protect its use of such
registered marks.
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.
4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
All of the executive officers of McDonald's Corporation as of March 1, 1999 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 1999 Board of Directors' meeting.
- ----------------------------------------------------------------
Number of
Number of years in
Date of years with present
Name and office birth Company position
- ----------------------------------------------------------------
Claire H. Babrowski 7/25/57 21 *
Executive Vice President
Robert M. Beavers, Jr. 1/27/44 35 5
Senior Vice President
James R. Cantalupo 11/14/43 24 *
Vice Chairman; Chairman, and
Chief Executive Officer--
McDonald's International
Michael L. Conley 3/28/48 24 2
Executive Vice President
and Chief Financial Officer
Alan D. Feldman (1) 3/6/52 4 *
President--McDonald's USA
Jack M. Greenberg 9/28/42 17 *
President and
Chief Executive Officer
Jeffrey B. Kindler (2) 5/13/55 3 1
Executive Vice President,
Corporate General Counsel
Christopher Pieszko 12/2/55 20 1
Senior Vice President and
Corporate Controller
Michael R. Quinlan 12/9/44 35 9
Chairman of the Board
James A. Skinner 10/25/44 28 1
President--Europe Group
Stanley R. Stein 4/17/42 24 1
Executive Vice President
Fred L. Turner 1/6/33 42 9
Senior Chairman
- -----------------------------------------------------------------
*Less than one year in current position.
(1) Mr. Feldman joined the Company in 1994 as Corporate Vice President and was
promoted to Division President in 1997. He assumed his current position in
1998. Prior thereto, Mr. Feldman served as Senior Vice President and Chief
Financial Officer of Pizza Hut, Inc.
(2) 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. On January
26, 1999, the Board of Directors declared a two-for-one stock split of the
Company's common stock, effected in the form of a stock dividend paid on March
5, 1999. All references to the number of common shares, per common share amounts
and market prices have been restated to give retroactive effect to the stock
split for all periods presented.
The following table sets forth the common stock price range on the New York
Stock Exchange composite tape and dividends declared per common share.
1998 1997
- -------------------------------------------------------------------------
Dividend Dividend
per per
common common
Quarter High Low share High Low share
- -------------------------------------------------------------------------
First 30 1/8 22 5/16 .04125 24 11/16 21 1/4 .03750
Second 35 28 9/16 .04500 27 7/16 23 3/8 .04125
Third 37 1/2 26 3/4 .04500 27 3/8 22 7/8 .04125
Fourth 39 3/4 28 1/8 .04500 24 13/16 21 1/16 .04125
- --------------------------------------------------------------------------
Year 39 3/4 22 5/16 .17625 27 7/16 21 1/16 .16125
- --------------------------------------------------------------------------
The approximate number of shareholders of record and beneficial owners of the
Company's common stock as of January 31, 1999 was estimated to be 888,600.
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 92 consecutive quarterly
dividends on common stock through first quarter 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.
5
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
11-YEAR SUMMARY 1998 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Systemwide sales $ 35,979 33,638 31,812 29,914 25,987 23,587 21,885
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees $ 22,330 20,863 19,969 19,123 17,146 15,756 14,474
Operated by the Company $ 8,895 8,136 7,571 6,863 5,793 5,157 5,103
Operated by affiliates $ 4,754 4,639 4,272 3,928 3,048 2,674 2,308
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 12,421 11,409 10,687 9,795 8,321 7,408 7,133
Operating income $ 2,762/(1)/ 2,808 2,633 2,601 2,241 1,984 1,862
Income before provision
for income taxes $ 2,307/(1)/ 2,407 2,251 2,169 1,887 1,676 1,448
Net income $ 1,550/(1)/ 1,642 1,573 1,427 1,224 1,083 959
- --------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations $ 2,766 2,442 2,461 2,296 1,926 1,680 1,426
Capital expenditures $ 1,879 2,111 2,375 2,064 1,539 1,317 1,087
Treasury stock purchases $ 1,162 765 605 321 500 628 92
- --------------------------------------------------------------------------------------------------------------------------------
Financial position at year end
Net property and equipment $ 16,042 14,961 14,352 12,811 11,328 10,081 9,597
Total assets $ 19,784 18,242 17,386 15,415 13,592 12,035 11,681
Total debt $ 7,043 6,463 5,523 4,836 4,351 3,713 3,857
Total shareholders' equity $ 9,465 8,852 8,718 7,861 6,885 6,274 5,892
- --------------------------------------------------------------------------------------------------------------------------------
Per common share/(2)/
Net income $ 1.14/(1)/ 1.17 1.11 .99 .84 .73 .65
Net income-diluted $ 1.10/(1)/ 1.15 1.08 .97 .82 .71 .63
Dividends declared $ .18 .16 .15 .13 .12 .11 .10
Market price at year end $ 38 7/16 23 7/8 22 11/16 22 9/16 14 5/8 14 1/4 12 3/16
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants at year end 24,800 23,132 21,022 18,380 15,950 14,163 13,093
Systemwide restaurants by type
Operated by franchisees 15,281 14,265 13,428 12,217 10,965 9,933 9,237
Operated by the Company 5,512 5,000 4,357 3,816 3,238 2,746 2,551
Operated by affiliates 4,007 3,867 3,237 2,347 1,747 1,484 1,305
- --------------------------------------------------------------------------------------------------------------------------------
Number of countries at year end 114 109 101 89 79 70 65
- --------------------------------------------------------------------------------------------------------------------------------
Number of shareholders at year end
(in thousands) 888.2 880.2 904.6 769.7 609.2 464.5 398.3
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
11-YEAR SUMMARY 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Systemwide sales 19,928 18,759 17,333 16,064
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees 12,959 12,017 11,219 10,424
Operated by the Company 4,908 5,019 4,601 4,196
Operated by affiliates 2,061 1,723 1,513 1,444
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 6,695 6,640 6,066 5,521
Operating income 1,679 1,596 1,438 1,288
Income before provision
for income taxes 1,299 1,246 1,157 1,046
Net income 860 802 727 646
- --------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 1,423 1,301 1,246 1,177
Capital expenditures 1,129 1,571 1,555 1,321
Treasury stock purchases 117 157 497 136
- --------------------------------------------------------------------------------------------------------------------------------
Financial position at year end
Net property and equipment 9,559 9,047 7,758 6,800
Total assets 11,349 10,668 9,175 8,159
Total debt 4,615 4,792 4,036 3,269
Total shareholders' equity 4,835 4,182 3,550 3,413
- --------------------------------------------------------------------------------------------------------------------------------
Per common share/(2)/
Net income .59 .55 .49 .43
Net income-diluted .57 .54 .48 .42
Dividends declared .09 .09 .08 .07
Market price at year end 9 1/2 7 1/4 8 5/8 6
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants at year end 12,418 11,803 11,162 10,513
Systemwide restaurants by type
Operated by franchisees 8,735 8,131 7,573 7,110
Operated by the Company 2,547 2,643 2,691 2,600
Operated by affiliates 1,136 1,029 898 803
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Number of countries at year end 59 53 51 50
- --------------------------------------------------------------------------------------------------------------------------------
Number of shareholders at year end
(in thousands) 371.7 362.6 330.5 168.6
- --------------------------------------------------------------------------------------------------------------------------------
(1) Includes $162 million of Made For You costs and $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).
(2) Restated for two-for-one stock split in March 1999.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
- --------------------------------------------------------------------------------
In this report, all per share amounts have been restated to reflect the two-for-
one stock split in March 1999. In addition, 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.
OPERATING RESULTS
- --------------------------------------------------------------------------------
1998 1997 1996
%
(Dollars in millions, Increase/ %
except per share data) Amount (decrease) Amount Increase Amount
- --------------------------------------------------------------------------------
SYSTEMWIDE SALES $35,979 7 $33,638 6 $31,812
- --------------------------------------------------------------------------------
REVENUES
Sales by Company-
operated restaurants $ 8,895 9 $ 8,136 7 $ 7,571
Revenues from
franchised and affiliated
restaurants 3,526 8 3,273 5 3,116
- --------------------------------------------------------------------------------
TOTAL REVENUES 12,421 9 11,409 7 10,687
- --------------------------------------------------------------------------------
OPERATING COSTS
AND EXPENSES
Company-operated
restaurants 7,261 9 6,650 8 6,163
Franchised restaurants 678 10 614 8 570
Selling, general and
administrative expenses 1,458 - 1,451 6 1,367
Made For You costs 162 n/m - - -
Special charges 160 n/m - n/m 72
Other operating (income)
expense (60) n/m (114) n/m (118)
- --------------------------------------------------------------------------------
TOTAL OPERATING
COSTS AND
EXPENSES 9,659 12 8,601 7 8,054
- --------------------------------------------------------------------------------
OPERATING INCOME/(1)/ 2,762 (2) 2,808 7 2,633
- --------------------------------------------------------------------------------
Interest expense 414 14 364 6 343
Nonoperating (income)
expense 41 n/m 37 n/m 39
- --------------------------------------------------------------------------------
INCOME BEFORE
PROVISION
FOR INCOME TAXES/(1)/ 2,307 (4) 2,407 7 2,251
- --------------------------------------------------------------------------------
Provision for income
taxes/(1)/ 757 (1) 765 13 678
- --------------------------------------------------------------------------------
NET INCOME/(1)/ $ 1,550 (6) $ 1,642 4 $ 1,573
================================================================================
NET INCOME PER
COMMON SHARE/(1)/ $ 1.14 (3) $ 1.17 5 $ 1.11
NET INCOME PER
COMMON SHARE-
DILUTED/(1)/ 1.10 (4) 1.15 6 1.08
- --------------------------------------------------------------------------------
(1) The 1998 results include $162 million of Made For You costs and the $160
million special charge, discussed on page 24, for a pre-tax total of $322
million ($219 million after tax or $0.16 per share). The 1996 results
include the $72 million pre-tax special charge and a $50 million tax benefit
resulting from certain international transactions, discussed on pages 24 and
26.
n/m=not meaningful
OPERATING RESULTS (EXCLUDING MADE FOR YOU COSTS AND SPECIAL CHARGES)
- --------------------------------------------------------------------------------
1998 1997 1996
(Dollars in millions, % %
except per share data) Amount Increase Amount Increase Amount
- --------------------------------------------------------------------------------
OPERATING INCOME $3,084 10 $2,808 4 $2,705
- --------------------------------------------------------------------------------
NET INCOME $1,769 8 $1,642 4 $1,573
================================================================================
Net income per
common share $ 1.30 11 $ 1.17 5 $ 1.11
Net income per
common share-
diluted 1.26 10 1.15 6 1.08
- --------------------------------------------------------------------------------
The spreads between the percent change in net income and net income per common
share reflected the positive effects of share repurchases and the absence of
preferred dividends in 1998, due to the retirement of our remaining Series E
Preferred Stock in December 1997, and lower preferred dividends in 1997 compared
with the prior year.
The following table presents the reported and constant currency results for
1998 and 1997, excluding Made For You costs and special charges:
- --------------------------------------------------------------------------------------
As reported In constant currency
(Dollars in billions, except ----------------------- --------------------------
per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------
Systemwide sales $36.0 7% $33.6 6% $37.0 10% $35.0 10%
Revenues 12.4 9 11.4 7 12.8 12 11.8 11
Operating income 3.1 10 2.8 4 3.2 12 2.9 8
Net income 1.8 8 1.6 4 1.8 10 1.7 8
Net income per
common share 1.30 11 1.17 5 1.33 14 1.21 9
Net income per
common share-diluted 1.26 10 1.15 6 1.29 12 1.19 10
- --------------------------------------------------------------------------------------
SYSTEMWIDE SALES
Systemwide sales include sales by all restaurants, whether operated by the
Company, by franchisees or by affiliates operating under joint-venture
agreements. Increasing market share through expansion, and customer satisfaction
through quality, service, cleanliness and value continue as key strategic
initiatives to build sales. Sales increases in 1998 and 1997 were primarily due
to restaurant expansion and positive comparable sales (measured on a constant
currency basis), partly offset by weaker foreign currencies. At the end of 1998,
86% of Systemwide sales were in the following 11 markets--Australia, Brazil,
Canada, England, France, Germany, Hong Kong, Japan, the Netherlands, Taiwan and
the U.S. (major markets based on operating income). This is down slightly from
87% in 1997.
Sales increases in the U.S., Europe and Latin America were driven by expansion
and positive comparable sales in 1998 and 1997. In the U.S., successful
Monopoly, Teenie Beanie Babies, Get Back With Big Mac and Disney promotions,
combined with local market initiatives, contributed to the 1998 increase. In
Europe, performances benefited from value campaigns and successful promotions in
England, France and Germany. Europe's results were reduced by the difficult
economic conditions in Russia in the last half of 1998. In Latin America,
Argentina and Brazil accounted for approximately half of this segment's total
sales growth in both years, mainly due to expansion.
7
In Asia/Pacific, sales decreased in 1998 due to weaker foreign currencies and
negative comparable sales. Excluding the translation effect of weaker foreign
currencies, Japan realized strong sales growth despite experiencing its most
difficult economy in decades. In addition, Australia's sales improved due to
positive comparable sales in the last half of the year. Difficult economic
conditions in Southeast Asia, which began in the latter part of 1997 and
continued throughout 1998, negatively impacted consumer spending. In 1997, sales
increased primarily due to expansion.
- --------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. $18,123 $17,125 $16,370 $15,905 $14,941
Europe 8,909 7,835 7,377 6,685 5,211
Asia/Pacific 5,579 5,616 5,349 4,835 3,795
Latin America 1,761 1,511 1,273 1,129 794
Other 1,607 1,551 1,443 1,360 1,246
- --------------------------------------------------------------------------------
Systemwide sales $35,979 $33,638 $31,812 $29,914 $25,987
================================================================================
Sales by Company-operated restaurants grew at a higher rate than Systemwide
sales in 1998 and 1997, primarily due to the higher unit growth rate of Company-
operated restaurants outside the U.S. relative to Systemwide restaurants. In
addition, the weakened Japanese Yen had a significant negative effect on our
Japanese affiliate's sales, which reduced Systemwide sales growth.
AVERAGE ANNUAL SALES PER RESTAURANT/(1)/
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S.
Traditional $1,584 $1,523 $1,530
Satellite 459 445 425
Outside the U.S.
Traditional 1,801 1,966 2,262
Satellite 450 457 488
- --------------------------------------------------------------------------------
(1) Restaurants in operation at least 13 consecutive months
Average sales are affected by several factors: comparable sales and the size
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 and countries with lower average sales
volumes. For these reasons, our focus is primarily on sales-to-investment ratios
and building comparable sales, rather than on average sales.
In 1998, positive comparable sales drove the increases in U.S. average annual
sales per restaurant. Outside the U.S., foreign currency translation accounted
for approximately half of the decreases in average annual sales in both 1998 and
1997. In addition, the significant number of new restaurants outside the U.S.
negatively impacted the averages.
AVERAGE ANNUAL SALES PER NEW RESTAURANT/(1)/
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S.
Traditional $1,332 $1,237 $1,206
Outside the U.S.
Traditional 1,357 1,431 1,710
Satellite 446 453 517
- --------------------------------------------------------------------------------
(1) Restaurants in operation at least 13 months but not more than 25 months
In 1998 and 1997, the increases in sales per new U.S. traditional restaurant
were due to a more selective expansion strategy. In addition, in 1998, larger
facilities supported higher average sales. The decreases in sales per new
restaurant outside the U.S. in 1998 and 1997 were due to foreign currency
translation and expansion. Excluding foreign currency translation, the 1998
average annual sales for new international traditional and satellite restaurants
increased to $1,439,000 and $479,000, respectively. Satellite restaurants
generally have significantly lower development costs and sales volumes than
traditional restaurants. Average annual sales per new traditional restaurant in
major markets outside the U.S., excluding Japan, were approximately $1.7 million
in 1998 and 1997.
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.
Revenues increased at a faster rate than Systemwide sales in 1998 and 1997.
This was primarily due to the weakened Japanese Yen, which negatively affected
sales more than revenues due to our affiliate structure in Japan, and the higher
unit growth rate of Company-operated restaurants outside the U.S. relative to
Systemwide restaurants.
U.S. revenues increased $265 million in 1998 and $13 million in 1997. The
increased revenue growth in 1998 was primarily due to strong sales performance
for both Company-operated and franchised restaurants driven by positive
comparable sales and expansion. Lower initial fees resulting from fewer openings
partly offset the increase in revenues. The slower revenue growth in 1997 was
primarily because the number of U.S. Company-operated restaurants decreased
compared with the prior year, while the number of franchised and affiliated
restaurants increased. Lower initial fees also contributed to the slower revenue
growth in 1997.
8
U.S. OPERATING RESULTS
(EXCLUDING MADE FOR YOU COSTS AND SPECIAL CHARGES)
- -------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated
restaurants $2,829 $2,691 $2,776 $2,725 $2,550
Revenues from franchised
and affiliated restaurants 2,039 1,912 1,814 1,749 1,606
- -------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,868 4,603 4,590 4,474 4,156
- -------------------------------------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated restaurants 2,338 2,246 2,317 2,244 2,066
Franchised restaurants 389 361 334 304 270
Selling, general and
administrative expenses 750 788 740 682 628
Other operating (income)
expense 25 (3) (17) (8) (25)
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES/(1)/ 3,502 3,392 3,374 3,222 2,939
- -------------------------------------------------------------------------------------------------
U.S. OPERATING INCOME/(1)/ $1,366 $1,211 $1,216 $1,252 $1,217
=================================================================================================
(1) The 1998 results exclude $162 million of Made For You costs and the $160
million special charge for a pre-tax total of $322 million. The 1996
results exclude the $72 million pre-tax special charge.
Europe accounted for 36% of consolidated revenues in 1998 and 34% in 1997.
This region's revenues grew $535 million and $318 million in 1998 and 1997,
respectively. The increases were driven by strong sales in England, France and
Germany in 1998 and in England, Italy and Russia in 1997.
Asia/Pacific's revenues grew $110 million in 1998, compared with growth of
$250 million in 1997. In constant currencies, these increases were $341 million
in 1998 and $318 million in 1997. Due to an increase in ownership, several
affiliate markets were consolidated for financial reporting purposes in 1998.
This contributed to the revenue increase. The consolidation of Singapore in
1997, along with Taiwan's strong results, helped to advance 1997 revenues.
Difficult economic conditions in Southeast Asia, which began in the latter part
of 1997 and continued throughout 1998, dampened revenue growth in both years.
OPERATING RESULTS OUTSIDE THE U.S.
- -------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated
restaurants $6,066 $5,445 $4,795 $4,139 $3,242
Revenues from franchised
and affiliated restaurants 1,487 1,361 1,301 1,182 923
- -------------------------------------------------------------------------------------------------
TOTAL REVENUES 7,553 6,806 6,096 5,321 4,165
- -------------------------------------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated restaurants 4,923 4,404 3,846 3,304 2,579
Franchised restaurants 289 253 236 211 165
Selling, general and
administrative expenses 632 601 574 507 408
Other operating (income)
expense (85) (111) (101) (98) (59)
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES 5,759 5,147 4,555 3,924 3,093
- -------------------------------------------------------------------------------------------------
OPERATING INCOME
OUTSIDE THE U.S. $1,794 $1,659 $1,541 $1,397 $1,072
=================================================================================================
Latin America's revenues grew $105 million in 1998 and $114 million in 1997.
Growth in both years was primarily due to expansion in Brazil and positive
comparable sales for the segment.
COMPANY-OPERATED MARGINS
Company-operated margin dollars are equal to sales by Company-operated
restaurants less the operating costs of these restaurants. Consolidated Company-
operated margin dollars increased $148 million or 10% in 1998 and $78 million or
6% in 1997. The increases were primarily driven by expansion, partly offset by
weaker foreign currencies. In addition, positive comparable sales contributed to
the increase in 1998.
Consolidated Company-operated margins were 18.4% of sales in 1998, 18.3% in
1997 and 18.6% in 1996. Operating cost trends as a percent of sales were as
follows: food & paper costs decreased in 1998 and increased in 1997; payroll
costs were flat in 1998 and decreased in 1997; and occupancy & other operating
costs increased in both years.
U.S. Company-operated margins were 17.3% of sales in 1998 and 16.5% in 1997
and 1996. Increased margins as a percent of sales in 1998 were driven by lower
food & paper costs related primarily to decreased commodity costs, partly offset
by higher payroll costs related to an increase in average hourly rates.
Occupancy & other operating costs were flat. U.S. Company-operated margins as a
percent of sales in 1997 reflected higher food & paper costs related primarily
to the Deluxe Line, lower payroll costs related to labor efficiencies and lower
occupancy & other operating costs.
Company-operated margins outside the U.S. were 18.8% of sales in 1998,
compared with 19.1% in 1997 and 19.8% in 1996. In 1998, increases in occupancy &
other operating costs as a percent of sales were the primary cause of the margin
decline as payroll costs and food & paper costs were flat as a percent of sales.
The decline in the 1997 margin as a percent of sales was due to increases in
food & paper costs as well as occupancy & other operating costs, partly offset
by a decrease in payroll costs. Weaker foreign currencies put pressure on
margins outside the U.S. in both 1998 and 1997, as food & paper costs were
negatively affected in those markets where we imported 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 both 1998 and 1997. Consolidated franchised
margin dollars increased $189 million or 7% in 1998 and $113 million or 4% in
1997. The increases were primarily driven by expansion, partly offset by weaker
foreign currencies. In addition, positive comparable sales contributed to the
increase in 1998.
9
Consolidated franchised margins were 80.8% of applicable revenues in 1998,
81.2% in 1997 and 81.7% in 1996. Franchised margins in the U.S. were 80.9% of
revenues in 1998, 81.1% in 1997 and 81.6% in 1996. Outside the U.S., franchised
margins were 80.6% of revenues in 1998, 81.4% in 1997 and 81.8% in 1996.
The 1998 and 1997 declines reflected a higher proportion of leased sites, and
in the U.S. also reflected lower initial fees resulting from fewer openings. By
leasing a higher proportion of new sites over the past few years, we have
reduced initial capital requirements, but negatively affected franchised margins
as a percent of applicable revenues. This is 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. Also, our decision to increase our ownership in several affiliate
markets in 1998 and 1997 shifted revenues from franchised and affiliated
restaurants to Company-operated restaurants, reducing the franchised restaurant
margins outside the U.S.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses were relatively flat
in 1998 and decreased to 4.1% of sales from 4.3% of sales in 1997 and 1996. In
1998, U.S. selling, general and administrative expenses decreased primarily due
to lower advertising costs and savings realized from the home office
productivity initiative, partly offset by higher performance-based incentive
compensation. Outside the U.S., selling, general and administrative expenses
increased, due to support of restaurant development and to a lesser extent, from
the consolidation of several affiliate markets for financial reporting purposes,
partly offset by weaker foreign currencies. In 1997, consolidated selling,
general and administrative expenses increased primarily due to continued
investment in developing countries and the support of special marketing efforts
and new food initiatives in the U.S., partly offset by weaker foreign
currencies.
As a result of the home office productivity initiative, the Company expects to
save about $100 million of selling, general and administrative expenses per
year, beginning in 2000, with about two-thirds of the annual savings expected to
be realized by the end of 1999. About $15 million of these savings were realized
in 1998.
MADE FOR YOU COSTS
In 1998, the Company announced the introduction of Made For You, a new food
preparation system that is expected to be installed in virtually all restaurants
in the U.S. and Canada by the end of 1999. 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. The Company
is providing financial incentives 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 is also making additional payments in
special cases where the conversion to Made For You is more extensive.
In 1998, the Company incurred $162 million in Made For You costs, which
primarily consisted of nonrefundable incentive payments made to owner/operators
as well as accelerated depreciation on equipment being replaced in Company-
operated restaurants. The Company expects the total costs related to the
implementation of Made For You to approximate $190 million. The remaining costs
are expected to be incurred by the end of 1999, and are comprised of about $15
million of incentive payments and $15 million of accelerated depreciation.
SPECIAL CHARGES
In second quarter 1998, the Company recorded a $160 million pre-tax special
charge related to the results of the Company's home office productivity
initiative. This initiative is designed to improve staff alignment, focus and
productivity and reduce ongoing selling, general and administrative expenses. As
a result, the Company is reducing home office staffing by approximately 525
positions, consolidating certain home office facilities and reducing 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 capitalized technology made obsolete as a result of the
productivity initiative, and $15.1 million of other cash payments made in 1998.
Employee severance is paid in semi-monthly installments over a period of up to
one year after termination.
As of December 31, 1998, the Company had reduced home office staffing by
approximately 400 positions and expects the remaining positions to be eliminated
by year-end 1999. The remaining accrual, primarily related to employee
severance, was approximately $105 million at December 31, 1998. No significant
adjustments have been made to the original plan approved by management in second
quarter 1998. The Company expects to use cash provided by operations to fund the
remaining severance payments and other cash costs related to the productivity
initiative.
In 1996, the Company recorded a $72 million pre-tax special charge related
primarily to plans to strengthen the U.S. business and reduce ongoing costs by
closing low-volume U.S. satellite restaurants, outsourcing excess property
management and implementing other cost efficiencies. The actions required by
this plan were completed in 1997 and resulted in no significant adjustments to
the original cost estimate.
10
OTHER OPERATING (INCOME) EXPENSE
Other operating (income) 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.
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 the Company
actively participates in, 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.
Other operating (income) expense decreased in 1998, primarily due to higher
provisions for property dispositions that reflected an increased number of
restaurant closings. These expenses were partly offset by higher gains on sales
of restaurant businesses and increased equity in earnings of unconsolidated
affiliates, due to strong performances in Japan and the U.S. The slight decline
in other operating (income) expense in 1997 was primarily due to lower equity in
earnings of unconsolidated affiliates and lower gains on sales of restaurant
businesses, partly offset by lower provisions for property dispositions.
OPERATING INCOME
Excluding Made For You costs and the special charges, operating income increased
$276 million or 10% to $3.1 billion in 1998, and $103 million or 4% to $2.8
billion in 1997. In constant currencies, these increases were 12% in 1998 and 8%
in 1997. The increases in 1998 and 1997 were primarily due to higher combined
operating margin dollars, partly offset by weaker foreign currencies and lower
other operating (income) expense. In addition, higher selling, general and
administrative expenses negatively affected the 1997 increase. Including Made
For You costs and the special charges, operating income decreased 2% in 1998 and
increased 7% in 1997.
Operating income in 1998 and 1997 from the major markets accounted for 92% of
total operating income, excluding 1998 Made For You costs and the special
charge.
U.S. operating income rose $155 million or 13% in 1998 and was flat in 1997,
excluding Made For You costs and special charges. In 1998, higher U.S. combined
operating margin dollars and lower selling, general and administrative expenses
were offset in part by lower other operating (income) expense. In 1997, higher
U.S. franchised margin dollars were offset by lower Company-operated margin
dollars and higher selling, general and administrative expenses. Including Made
For You costs and special charges, U.S. operating income decreased $167 million
or 14% in 1998 and increased $67 million or 6% in 1997.
Outside the U.S., operating income rose $135 million or 8% in 1998 and $118
million or 8% in 1997. In constant currencies, these increases were 12% in 1998
and 15% in 1997. This growth was driven by higher combined operating margin
dollars resulting from expansion in both years and slightly positive comparable
sales in 1998. In both years, weaker foreign currencies and higher selling,
general and administrative expenses partly offset these increases. In 1998, the
Australian Dollar, Brazilian Real, Canadian Dollar, Japanese Yen and Russian
Ruble, as well as the Southeast Asian currencies, were the primary currencies
negatively affecting results.
Europe accounted for 41% and 36% of consolidated operating income in 1998 and
1997, respectively. Europe's operating income grew $133 million in 1998 compared
with $54 million in 1997. Weaker currencies offset this region's operating
income increase in 1998 by only 1% or $6 million, and by 9% or $82 million in
1997. Strong operating results in England, France, Germany, Italy and Spain
drove the increase in operating income in 1998. The region's results were
negatively affected by the difficult economic conditions in Russia, which are
expected to continue in 1999. England, France and Germany accounted for 77% of
Europe's operating income in both 1998 and 1997.
Asia/Pacific's operating income declined $18 million in 1998 compared with an
increase of $14 million in 1997. The decline in 1998 was primarily due to weaker
foreign currencies. On a constant currency basis, Asia/Pacific's operating
income would have increased $29 million in 1998 and $38 million in 1997. In
1998, Japan and Hong Kong had strong operating results despite the difficult
economic conditions that were experienced by much of the region beginning in the
latter part of 1997 and continuing throughout 1998. In addition, this segment
benefited in both years from the financial reporting consolidation of several
affiliate markets. Australia, Hong Kong, Japan and Taiwan contributed about 90%
of Asia/ Pacific's operating income in both years.
Latin America's operating income increased $18 million in 1998 and $53 million
in 1997. Argentina, Brazil and Venezuela led this region's increase in 1998.
Continued expansion and positive comparable sales drove improved results across
this segment in 1998 and 1997. Brazil accounted for about 70% of Latin America's
operating income in both years. The recent economic turmoil in Brazil is
expected to negatively impact operating results in 1999. The Latin America
segment represented 7% of consolidated operating income in 1998.
INTEREST EXPENSE
Higher average debt levels, partly offset by weaker foreign currencies and lower
average interest rates, accounted for the 1998 and 1997 increases in interest
expense.
- --------------------------------------------------------------------------------
11
NONOPERATING (INCOME) EXPENSE
Nonoperating (income) expense includes miscellaneous income and expense items
such as interest income and gains and losses related to other investments,
financings and translation. Results in 1998 reflected translation losses
compared with translation gains in 1997, while in 1997 interest income and
translation gains were lower than in 1996.
PROVISION FOR INCOME TAXES
The effective income tax rate was 32.8% for 1998, compared with 31.8% for 1997
and 30.1% for 1996. A $50 million tax benefit resulting from certain
international transactions was primarily responsible for the unusually low tax
rate in 1996. The Company expects its 1999 effective income tax rate to be in
the range of 32.5% to 33.5%.
Consolidated net deferred tax liabilities included tax assets, net of
valuation allowance, of $516 million in 1998 and $451 million in 1997.
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 strategic expansion. In 1998, the Company added 1,668
restaurants Systemwide, compared with 2,110 in 1997 and 2,642 in 1996. In 1999,
the Company expects to add about 1,750 restaurants, with a continued emphasis on
traditional restaurants primarily in locations outside the U.S.
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. 12,472 12,380 12,094 11,368 10,238
Europe 4,421 3,886 3,283 2,595 2,159
Asia/Pacific 5,055 4,456 3,633 2,735 2,168
Latin America 1,405 1,091 837 665 505
Other 1,447 1,319 1,175 1,017 880
- --------------------------------------------------------------------------------
Systemwide restaurants 24,800 23,132 21,022 18,380 15,950
================================================================================
The U.S. net additions declined in 1998 and 1997, primarily due to the closing
of low-volume satellite locations and a more stringent restaurant selection
process.
Asia/Pacific's percent of total restaurants has grown primarily due to Japan's
significant expansion. Japan added 415 restaurants in 1998, 433 in 1997 and 522
in 1996, representing 25% of Systemwide restaurant additions in 1998 and about
20% in 1997 and 1996. Approximately 60% of Japan's restaurant additions in 1998
and 1997, and about 70% in 1996, were satellites. Therefore, these additions
affected unit growth more than sales growth.
At the end of 1998, 84% of Systemwide restaurants were in the major markets,
compared with 85% in 1997. In 1998, 65% of restaurant additions were in these
major markets, and we anticipate a similar percent for 1999. Longer term,
markets like China, Italy and Mexico are expected to represent a growing
proportion of restaurant additions.
More than 75% of Company-operated restaurants and more than 85% of franchised
restaurants were located in the major markets in 1998. Franchisees and
affiliates operated 78% of restaurants at year-end 1998. That percentage has
remained relatively constant over the past three years.
FINANCIAL POSITION AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
TOTAL ASSETS AND CAPITAL EXPENDITURES
Total assets grew $1.5 billion or 8% in 1998 and $856 million or 5% in 1997. In
1998 and 1997, about 80% of consolidated assets were located in our major
markets excluding our affiliate in Japan. Net property and equipment rose $1.1
billion in 1998 and represented 81% of total assets at year end.
Capital expenditures decreased $232 million or 11% in 1998 and decreased $264
million or 11% in 1997, reflecting fewer restaurant additions, the new building
program in the U.S. in 1998 that gave owner/operators the option to own new
restaurant facilities, and more leased sites, combined with weaker foreign
currencies.
U.S. capital expenditures declined $139 million or 24% in 1998 and declined
$300 million or 34% in 1997, primarily due to a more selective expansion
strategy and the new building program. About 70% of the qualifying new
traditional restaurant buildings opened in 1998 are owned by owner/operators. In
addition, the Company leased the land for over 90% of the new traditional
restaurants opened in the U.S. in 1998. These programs saved the Company
approximately $155 million in capital outlays in 1998.
Capital expenditures outside the U.S. decreased $93 million or 6%, due to
fewer restaurant additions and weaker foreign currencies in 1998. Capital
expenditures outside the U.S. increased slightly in 1997.
In 1998, 76% of capital expenditures was invested in markets outside the U.S.,
compared with 72% in 1997 and 63% in 1996. Approximately 70% was invested in our
major markets excluding Japan in 1998, compared with 73% in 1997 and 78% in
1996.
- --------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
New restaurants $ 1,357 $ 1,531 $ 1,799 $ 1,550 $ 1,181
Existing restaurants 398 433 350 355 211
Other properties 124 147 226 159 147
- --------------------------------------------------------------------------------
Capital expenditures $ 1,879 $ 2,111 $ 2,375 $ 2,064 $ 1,539
================================================================================
Total assets $19,784 $18,242 $17,386 $15,415 $13,592
- --------------------------------------------------------------------------------
Expenditures for existing restaurants were made to achieve higher levels of
customer satisfaction, including technology to improve service and food quality,
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 programs previously discussed. However, we continue to focus on
the System's average development costs (land, building and equipment) to ensure
an appropriate return on investment for the System.
- --------------------------------------------------------------------------------
12
Average development costs for the U.S. System were $1.4 million in 1998 and
$1.3 million in 1997. The increase was primarily due to the construction of
larger facilities to support higher average sales volumes.
Average development costs for traditional restaurants in our major markets
outside the U.S., excluding Japan, were approximately $1.8 million in both 1998
and 1997. Average development costs vary widely by market depending on the types
of restaurants built and the real estate and construction costs within each
market. These costs are managed through the use of right-sized restaurants,
construction and design efficiencies, standardization and global sourcing.
Average development costs for satellite restaurants located in Brazil, Canada
and Japan, which comprise over 90% of all satellites outside the U.S., were
approximately $200,000 in both 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 44% and 45% of total restaurant
sites at year-end 1998 and 1997, respectively.
Capital expenditures by affiliates, which were not included in consolidated
amounts, were approximately $295 million in 1998, compared with $360 million in
1997. The decrease was primarily due to increased ownership in the Philippines,
South Korea and Thailand, which converted them from affiliates to majority-owned
subsidiaries in 1998, and to a lesser extent, weaker foreign currencies.
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)
grew to $887 million in 1998, compared with $331 million in 1997. Cash provided
by operations was reduced by approximately $135 million of Made For You
incentive payments made 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. The Company generated positive free cash flow in
1998 for the eighth consecutive year. This trend is expected to continue. In
1998, operations outside the U.S. generated positive free cash flow for the
first time in our history, and this is expected to continue into the foreseeable
future.
- --------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Cash provided by operations $2,766 $2,442 $2,461 $2,296 $1,926
Free cash flow 887 331 86 232 387
Cash provided by operations
as a percent of capital
expenditures 147% 116% 104% 111% 125%
Cash provided by operations
as a percent of average
total debt 41 41 48 49 48
- --------------------------------------------------------------------------------
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 maintains a relatively low current ratio--.52 at year-
end 1998.
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 financing
with debt in the currencies in which assets are denominated and employing
established policies and procedures to manage this exposure. See Summary of
significant accounting policies on page 21 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 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. Total foreign-denominated debt, including the effects of
currency exchange agreements, was $5.2 billion and $5.0 billion at year-end 1998
and 1997, respectively.
- --------------------------------------------------------------------------------
(As a percent) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Fixed-rate debt as a
percent of total debt 67% 49% 68% 67% 64%
Weighted-average annual
interest rate of total debt 6.6 6.8 7.1 7.9 8.4
Foreign currency-denominated
debt as a percent of total debt 75 80 90 89 92
Total debt as a percent of total
capitalization (total debt and
total shareholders' equity) 43 42 39 38 39
- --------------------------------------------------------------------------------
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+. These strong ratings are important to the Company
because of global development plans. The Company has not experienced, nor does
it expect to experience, difficulty in obtaining financing or refinancing
existing debt. At year-end 1998, the Company and its subsidiaries had $1.5
billion available under committed line of credit agreements, $1.0 billion under
a Euro medium-term note program and $.9 billion under shelf registrations for
future debt issuance.
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. Gains
of approximately $24 million, related to the early termination of interest-
- --------------------------------------------------------------------------------
12
rate exchange agreements in 1998, were deferred and are being amortized as an
adjustment to interest expense over various periods through 2002. 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 1998 and 1997, 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) were as follows:
- --------------------------------------------------------------------------------
(In millions of U.S. Dollars) December 31, 1998 1997
- --------------------------------------------------------------------------------
Canadian Dollars $749 $ 528
Deutsche Marks 456 88
British Pounds Sterling 447 590
Australian Dollars 322 298
Brazilian Reais 302 281
French Francs 196 194
Austrian Schillings 116 91
Japanese Yen 116 37
- --------------------------------------------------------------------------------
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 1998 levels nor
a 10% adverse change in foreign currency rates from year-end 1998 levels would
materially affect the Company's results of operations, cash flows or the fair
value of its financial instruments.
TOTAL SHAREHOLDERS' EQUITY
Total shareholders' equity rose $613 million or 7% in 1998, and represented 48%
of total assets at year end. Weaker foreign currencies decreased shareholders'
equity by $52 million in 1998.
The Company uses free cash flow and debt capacity to repurchase shares because
we believe this enhances shareholder value. Over the past 10 years, the Company
has invested $4.8 billion to buy back 306 million shares at an average price of
approximately $16, while maintaining a strong equity base. At year-end 1998, the
Company held 304 million shares in treasury with a market value of $11.7
billion.
In September 1998, the Company announced plans to repurchase $3.5 billion of
its common stock by year-end 2001. During the third quarter 1998, the Company
completed its $2 billion, three-year share repurchase program begun in 1996. In
1998, the Company repurchased a total of 38 million shares for nearly $1.2
billion, $320 million of which related to the new $3.5 billion program. The
Company uses common equity put options in connection with its share repurchase
program. In 1998, the Company sold 7.3 million common equity put options, of
which 1.0 million options were outstanding at December 31, 1998. These options
expired unexercised in February 1999.
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 92 consecutive quarterly
dividends on common stock through first quarter 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.
RETURNS
Operating income is used to compute return on average assets, while net income
less preferred stock dividends (net of tax) is used to calculate return on
average common equity. Month-end balances are used to compute both average
assets and average common equity.
- --------------------------------------------------------------------------------
(As a percent) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Return on average assets/(1)/ 16.4% 16.0% 16.8% 17.9% 17.6%
Return on average common
equity/(1)/ 19.5 19.0 19.5 19.9 19.4
- --------------------------------------------------------------------------------
(1) Computed excluding Made For You costs and special charges. Including Made
For You costs and special charges, return on average assets was 14.7% in
1998 and 16.3% in 1996; return on average common equity was 17.1% in 1998.
The increases in the 1998 returns are due to strong operating results,
enhanced by the Company's continued focus on more efficient capital deployment.
This included the closing of a number of low-volume satellite restaurants, a
more stringent site selection process, the new building program in the U.S. and
the use of free cash flow for share repurchase.
14
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
The Company has assessed its computerized systems to determine their ability to
correctly identify the Year 2000 and is devoting the necessary internal and
external resources to replace, upgrade or modify all significant systems which
do not correctly identify the Year 2000. Substantially all necessary
modifications and testing of the Company's significant systems have been
completed. The last necessary replacement of a significant system is expected to
be completed in third quarter 1999.
In addition, the Company has determined the extent to which its operations may
be affected by the compliance efforts of its significant suppliers and is taking
the necessary steps to minimize potential problems. The Company has implemented
a Systemwide supply chain compliance monitoring program, which encompasses
supplier risk assessment and compliance validation for significant suppliers.
Management does not expect Year 2000 issues relating to internal systems and
suppliers to pose significant operational or financial difficulties for the
Company; however, in the unlikely event McDonald's or a significant number of
its key suppliers are unable to resolve an issue in a timely manner, such
matters could have a material impact on the Company's results of operations. In
addition, failures related to Year 2000 issues by providers of infrastructure
services could have a material adverse effect on results of operations.
Contingency plans are being developed, to the extent feasible, to address
unexpected Year 2000 issues that might arise either internally, within the
supply chain or by infrastructure service providers. These plans are expected to
be completed well before the end of 1999.
Modification and testing costs are expensed as incurred, while the costs of
new systems are capitalized. The Company expects its total costs related to
modification and testing as well as costs associated with supply chain risk
assessment and contingency planning to be less than $35 million, of which
approximately $23 million was incurred through December 31, 1998. In addition,
the Company expects to capitalize approximately $55 million of costs for ongoing
development of significant new systems that are replacing non-Year 2000
compliant systems. About $40 million of these costs were capitalized at Decem-
ber 31, 1998. The total Year 2000 costs have not and are not expected to have a
material adverse impact on the Company's financial position, results of
operations or cash flows.
All Year 2000 statements contained herein are designated as "Year 2000
Readiness Disclosures" pursuant to the Year 2000 Information and Readiness
Disclosure Act of 1998.
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 now 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 the Company, primarily consist of payments to suppliers. In
addition, as the Company uses foreign-denominated debt and derivatives to meet
its financing requirements and to minimize its foreign currency risks, certain
of these financial instruments will be redenominated into Euros.
The Company 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
the Company's 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, advertising and
promotional efforts, Year 2000 compliance efforts and Euro conversion efforts,
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 13 and 14 of this Form 10-K.
- --------------------------------------------------------------------------------
15
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, 1998 17
Consolidated balance sheet at December 31, 1998 and 1997 18
Consolidated statement of cash flows for each of the three years in the period ended December 31, 1998 19
Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1998 20
Notes to consolidated financial statements (Financial comments) 21-28
Quarterly results (unaudited) 29
Management's report 30
Audit Committee's report 30
Report of independent auditors 30
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16
CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $ 8,894.9 $ 8,136.5 $ 7,570.7
Revenues from franchised and affiliated restaurants 3,526.5 3,272.3 3,115.8
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 12,421.4 11,408.8 10,686.5
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants
Food and packaging 2,997.4 2,772.6 2,546.6
Payroll and employee benefits 2,220.3 2,025.1 1,909.8
Occupancy and other operating expenses 2,043.9 1,851.9 1,706.8
- ------------------------------------------------------------------------------------------------------------------------------------
7,261.6 6,649.6 6,163.2
- ------------------------------------------------------------------------------------------------------------------------------------
Franchised restaurants--occupancy expenses 678.0 613.9 570.1
Selling, general and administrative expenses 1,458.5 1,450.5 1,366.4
Made For You costs 161.6
Special charges 160.0 72.0
Other operating (income) expense (60.2) (113.5) (117.8)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 9,659.5 8,600.5 8,053.9
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,761.9 2,808.3 2,632.6
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense--net of capitalized interest of $17.9, $22.7 and $22.2 413.8 364.4 342.5
Nonoperating (income) expense 40.7 36.6 39.1
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,307.4 2,407.3 2,251.0
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 757.3 764.8 678.4
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,550.1 $ 1,642.5 $ 1,572.6
====================================================================================================================================
NET INCOME PER COMMON SHARE $ 1.14 $ 1.17 $ 1.11
NET INCOME PER COMMON SHARE--DILUTED 1.10 1.15 1.08
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .18 $ .16 $ .15
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES 1,365.3 1,378.7 1,396.4
WEIGHTED-AVERAGE SHARES--DILUTED 1,405.7 1,410.2 1,433.3
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
- --------------------------------------------------------------------------------
17
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 299.2 $ 341.4
Accounts and notes receivable 609.4 483.5
Inventories, at cost, not in excess of market 77.3 70.5
Prepaid expenses and other current assets 323.5 246.9
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,309.4 1,142.3
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Notes receivable due after one year 67.9 67.0
Investments in and advances to affiliates 854.1 634.8
Intangible assets--net 973.1 827.5
Miscellaneous 538.3 608.5
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 2,433.4 2,137.8
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment, at cost 21,758.0 20,088.2
Accumulated depreciation and amortization (5,716.4) (5,126.8)
- ------------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 16,041.6 14,961.4
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $19,784.4 $18,241.5
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 686.8 $ 1,293.8
Accounts payable 621.3 650.6
Income taxes 94.2 52.5
Other taxes 143.5 148.5
Accrued interest 132.3 107.1
Other accrued liabilities 651.0 396.4
Current maturities of long-term debt 168.0 335.6
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,497.1 2,984.5
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 6,188.6 4,834.1
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 492.6 427.5
DEFERRED INCOME TAXES 1,081.9 1,063.5
COMMON EQUITY PUT OPTIONS 59.5 80.3
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 989.2 690.9
Guarantee of ESOP Notes (148.7) (171.3)
Retained earnings 13,879.6 12,569.0
Accumulated other comprehensive income (522.5) (470.5)
Common stock in treasury, at cost; 304.4 and 289.2 million shares (4,749.5) (3,783.1)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,464.7 8,851.6
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,784.4 $18,241.5
====================================================================================================================================
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
18
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,550.1 $ 1,642.5 $ 1,572.6
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 881.1 793.8 742.9
Deferred income taxes 35.4 (1.1) 32.9
Changes in operating working capital items
Accounts receivable (29.9) (57.6) (77.5)
Inventories, prepaid expenses and other current assets (18.1) (34.5) (18.7)
Accounts payable (12.7) 52.8 44.5
Taxes and other liabilities 337.5 221.9 121.4
Refund of U.S. franchisee security deposits (109.6)
Other 22.9 (65.9) 42.9
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS 2,766.3 2,442.3 2,461.0
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment expenditures (1,879.3) (2,111.2) (2,375.3)
Purchases of restaurant businesses (118.4) (113.6) (137.7)
Sales of restaurant businesses 149.0 149.5 198.8
Property sales 42.5 26.9 35.5
Other (142.0) (168.8) (291.6)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (1,948.2) (2,217.2) (2,570.3)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net short-term borrowings (repayments) (604.2) 1,097.4 228.8
Long-term financing issuances 1,461.5 1,037.9 1,391.8
Long-term financing repayments (594.9) (1,133.8) (841.3)
Treasury stock purchases (1,089.8) (755.1) (599.9)
Common and preferred stock dividends (240.5) (247.7) (232.0)
Series E preferred stock redemption (358.0)
Other 207.6 145.7 157.0
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (860.3) (213.6) 104.4
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS INCREASE (DECREASE) (42.2) 11.5 (4.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of year 341.4 329.9 334.8
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 299.2 $ 341.4 $ 329.9
====================================================================================================================================
Supplemental cash flow disclosures
Interest paid $ 406.5 $ 401.7 $ 369.0
Income taxes paid $ 545.9 $ 650.8 $ 558.1
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
19
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
(In millions, except per Preferred stock issued Additional Guarantee other Common Stock
stock --------------- paid-in of ESOP Retained comprehensive in treasury
share data) issued* Shares Amount capital Notes Earnings income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 358.0 1,660.6 $184.6 $295.1 $(214.2) $9,831.3 $ (87.1) $(261.2) $(2,506.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,572.6
- -----------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $50.6) (88.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.15 per share) (203.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (27.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Conversion to $.01 par
value stock (168.0) 168.0
- -----------------------------------------------------------------------------------------------------------------------------------
ESOP Notes payment 20.2
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock acquisitions (25.8) (604.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$86.4) 102.8 0.8 15.6 84.2
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 358.0 1,660.6 16.6 565.9 (193.2) 11,173.0 (175.1) (271.4) (3,027.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,642.5
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $104.0) (295.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.16 per share) (221.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (25.3)
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP Notes payment 21.4
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock acquisitions (32.4) (765.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Common equity put options issuance (80.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock redemption (358.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$79.2) 125.0 0.5 14.6 89.2
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 0.0 1,660.6 16.6 690.9 (171.3) 12,569.0 (470.5) (289.2) (3,783.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,550.1
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including tax benefits of
$84.2) (52.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.18 per share) (239.5)
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP Notes payment 22.5
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock acquisitions (38.0) (1,161.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Common equity put options
issuance and expiration, net 20.8
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$154.0) 298.3 0.1 22.8 174.7
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 0.0 1,660.6 $16.6 $989.2 $(148.7) $13,879.6 $ (522.5) (304.4) $(4,749.5)
====================================================================================================================================
Total
shareholders'
equity
- -----------------------------------------------------------------------
Balance at December 31, 1995 $ 7,861.3
- -----------------------------------------------------------------------
Net income 1,572.6
- -----------------------------------------------------------------------
Translation adjustments
(including taxes of $50.6) (88.0)
- -----------------------------------------------------------------------
Comprehensive income 1,484.6
- -----------------------------------------------------------------------
Common stock cash
dividends ($.15 per share) (203.3)
- -----------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (27.6)
- -----------------------------------------------------------------------
Conversion to $.01 par
value stock
- -----------------------------------------------------------------------
ESOP Notes payment 20.2
- -----------------------------------------------------------------------
Treasury stock acquisitions (604.8)
- -----------------------------------------------------------------------
Stock option exercises
and other (including tax benefits
of $86.4) 187.8
- -----------------------------------------------------------------------
Balance at December 31, 1996 8,718.2
- -----------------------------------------------------------------------
Net income 1,642.5
- -----------------------------------------------------------------------
Translation adjustments
(including taxes of $104.0) (295.4)
- -----------------------------------------------------------------------
Comprehensive income 1,347.1
- -----------------------------------------------------------------------
Common stock cash
dividends ($.16 per share) (221.2)
- -----------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (25.3)
- -----------------------------------------------------------------------
ESOP Notes payment 21.4
- -----------------------------------------------------------------------
Treasury stock acquisitions (765.0)
- -----------------------------------------------------------------------
Common equity put options
issuance (80.3)
- -----------------------------------------------------------------------
Preferred stock redemption (358.0)
- -----------------------------------------------------------------------
Stock option exercises and
other (including tax benefits
of $79.2) 214.7
- -----------------------------------------------------------------------
Balance at December 31, 1997 8,851.6
- -----------------------------------------------------------------------
Net income 1,550.1
- -----------------------------------------------------------------------
Translation adjustments (in-
cluding tax benefits of $84.2) (52.0)
- -----------------------------------------------------------------------
Comprehensive income 1,498.1
- -----------------------------------------------------------------------
Common stock cash
dividends ($.18 per share) (239.5)
- -----------------------------------------------------------------------
ESOP Notes payment 22.5
- -----------------------------------------------------------------------
Treasury stock acquisitions (1,161.9)
- -----------------------------------------------------------------------
Common equity put options
issuance and expiration, net 20.8
- -----------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$154.0) 473.1
- -----------------------------------------------------------------------
Balance at December 31, 1998 $ 9,464.7
=======================================================================
* At December 31, 1996 and 1995, 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.
20
FINANCIAL COMMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
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 generally accepted
accounting principles 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): 1998-$486.3; 1997-$548.7; 1996-$503.3.
STOCK-BASED COMPENSATION
The Company accounts for stock options as prescribed by APB 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 franchise rights reacquired from franchisees and
affiliates, 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.
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, which is required
to be adopted in years beginning after June 15, 1999. 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, 2000. Management does not anticipate that
the adoption will have a material effect on the Company's results of operations
or financial position.
- --------------------------------------------------------------------------------
21
PER COMMON SHARE INFORMATION
Income used in the computation of per common share information was reduced by
preferred stock cash dividends (net of applicable tax benefits) of $25.3 million
in 1997 and $27.6 million in 1996. The Company retired its remaining Series E
Preferred Stock in December 1997. Diluted net income per common share includes
the dilutive effect of stock options.
On January 26, 1999, the Board of Directors declared a two-for-one stock split
of the Company's common stock, effected in the form of a stock dividend paid on
March 5, 1999. As a result of this action, 830.3 million shares were issued to
shareholders of record as of February 12, 1999. Par value of the stock remains
at $.01 per share and accordingly, $8.3 million were transferred from additional
paid-in capital to common stock. All references to the number of common shares
and per common share amounts have been restated to give retroactive effect to
the stock split for all periods presented.
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.
OTHER OPERATING (INCOME) EXPENSE
- -----------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
Gains on sales of restaurant businesses $ (60.7) $ (59.0) $ (85.2)
Equity in earnings of unconsolidated affiliates (88.7) (72.8) (76.8)
Net losses from property dispositions 71.1 29.1 41.1
Other 18.1 (10.8) 3.1
- -----------------------------------------------------------------------------------------------
Other operating (income) expense $ (60.2) $(113.5) $(117.8)
===============================================================================================
Made For You costs $ 161.6
Special charges $ 160.0 $ 72.0
- -----------------------------------------------------------------------------------------------
OTHER OPERATING (INCOME) EXPENSE
Net losses from property dispositions in 1996 included $16.0 million for certain
restaurant sites in Mexico, upon the adoption of SFAS No. 121, and in 1998
reflected an increased number of restaurant closings.
MADE FOR YOU COSTS
In 1998, the Company announced the introduction of Made For You, a new food
preparation system that is expected to be installed in virtually all restaurants
in the U.S. and Canada by the end of 1999. As part of the plan to introduce this
system, the Company is providing financial incentives 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 is making additional
payments in special cases where the conversion to Made For You is more
extensive.
In 1998, the Company incurred $161.6 million in Made For You costs, which
primarily consisted of nonrefundable incentive payments made to owner/operators
as well as accelerated depreciation on equipment being replaced in Company-
operated restaurants.
SPECIAL CHARGES
In second quarter 1998, the Company recorded a $160.0 million pre-tax special
charge related to the Company's home office productivity initiative. This
initiative is designed to improve staff alignment, focus and productivity and
reduce ongoing selling, general and administrative expenses. As a result, the
Company is reducing home office staffing by approximately 525 positions,
consolidating certain home office facilities and reducing 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
capitalized technology made obsolete as a result of the productivity initiative,
and $15.1 million of other cash payments made in 1998. Employee severance is
paid in semi-monthly installments over a period of up to one year after
termination.
As of December 31, 1998, the Company had reduced home office staffing by
approximately 400 positions and expects the remaining positions to be eliminated
by year-end 1999. The remaining accrual, primarily related to employee
severance, was approximately $105 million at December 31, 1998 and is included
in Other accrued liabilities in the Consolidated Balance Sheet. No significant
adjustments have been made to the original plan approved by management in second
quarter 1998.
In 1996, the Company recorded a $72.0 million pre-tax special charge related
primarily to plans to strengthen the U.S. business and reduce ongoing costs by
closing certain low-volume U.S. satellite restaurants, outsourcing excess
property management and implementing other cost efficiencies. The actions
required by this plan were completed in 1997 and resulted in no significant
adjustments to the original cost estimate.
FRANCHISE ARRANGEMENTS
- -----------------------------------------------------------------------------
Franchise arrangements generally include a lease and a license and provide for
payment of initial fees, as well as continuing rent, service fees and royalties
to the Company, based upon a percentage of sales with minimum rent payments.
Franchisees are granted the right to operate a McDonald's 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. The results of operations of
restaurant businesses purchased and sold in transactions with franchisees and
affiliates
22
were not material to the consolidated financial statements for periods
prior to purchase and sale.
- ------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------
Minimum rents $ 1,440.9 $1,369.7 $ 1,350.7
Percent rent and service fees 2,026.9 1,836.3 1,689.7
Initial fees 58.7 66.3 75.4
- ------------------------------------------------------------------------------
Revenues from franchised
and affiliated restaurants $ 3,526.5 $3,272.3 $ 3,115.8
==============================================================================
Future minimum rent payments due to the Company under franchise arrangements
are:
- ------------------------------------------------------------------------------
(In millions) Owned sites Leased sites Total
- ------------------------------------------------------------------------------
1999 $ 905.0 $ 670.6 $ 1,575.6
2000 887.8 660.3 1,548.1
2001 872.2 651.6 1,523.8
2002 854.1 638.0 1,492.1
2003 835.8 625.4 1,461.2
Thereafter 7,412.1 5,774.0 13,186.1
- -------------------------------------------------------------------------------
Total minimum payments $11,767.0 $9,019.9 $20,786.9
===============================================================================
At December 31, 1998, net property and equipment under franchise arrangements
totaled $8.7 billion (including land of $2.6 billion) after deducting
accumulated depreciation and amortization of $2.9 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): 1998-$526.0; 1997-$470.6; 1996-$419.0.
The corporate component of operating income represents corporate selling,
general and administrative expenses. Corporate assets include corporate cash,
investments, asset portions of financing instruments, deferred tax assets and
certain intangibles.
The Other segment includes Canada, Africa and the Middle East.
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S. $ 4,868.1 $ 4,602.7 $4,590.3
Europe 4,466.7 3,931.5 3,613.8
Asia/Pacific 1,633.2 1,522.8 1,272.8
Latin America 814.7 709.2 595.7
Other 638.7 642.6 613.9
- -------------------------------------------------------------------------------
Total revenues $12,421.4 $11,408.8 $10,686.5
===============================================================================
U.S. $ 432.3 $ 404.0 $ 396.0
Europe 268.0 229.2 213.4
Asia/Pacific 97.3 82.8 66.4
Latin America 42.9 35.4 29.1
Other 40.6 42.4 38.0
- -------------------------------------------------------------------------------
Total depreciation and
amortization $ 881.1 $ 793.8 $ 742.9
===============================================================================
U.S. $ 1,043.9/(1)/ $1,210.8 $1,144.0/(2)/
Europe $ 1,139.8 1,007.2 953.8
Asia/Pacific 351.4 369.1 355.1
Latin America 184.7 166.5 113.7
Other 118.2 116.3 118.0
Corporate (76.1) (61.6) (52.0)
- -------------------------------------------------------------------------------
Total operating income $ 2,761.9/(1)/ $2,808.3 $2,632.6/(2)/
==============================================================================
U.S. $ 7,795.4 $7,753.4 $7,553.5
Europe 6,932.1 6,005.4 5,925.3
Asia/Pacific 2,659.7 2,125.6 2,111.8
Latin America 1,339.6 1,177.8 900.3
Other 678.7 661.6 622.8
Corporate 378.9 517.7 272.3
- ------------------------------------------------------------------------------
Total assets $ 19,784.4 $18,241.5 $17,386.0
==============================================================================
U.S. $ 445.5 $ 584.0 $ 882.9
Europe 870.2 929.5 945.8
Asia/Pacific 224.0 277.3 283.1
Latin America 236.8 227.9 172.5
Other 102.8 92.5 91.0
- -------------------------------------------------------------------------------
Total capital expenditures $ 1,879.3 $ 2,111.2 $ 2,375.3
===============================================================================
(1) Includes $161.6 million of Made For You costs and $160.0 million
special charge related to the home office productivity initiative.
(2) Includes $72.0 million special charge related primarily to plans to
strengthen the U.S. business and reduce ongoing costs.
Total long-lived assets, primarily property and equipment and intangibles, were
(in millions): Consolidated 1998-$18,244.4; 1997-$16,706.1; 1996-$16,069.8. U.S.
1998-$7,533.2; 1997-$7,530.7; 1996-$7,234.3.
INCOME TAXES
- -------------------------------------------------------------------------------
Income before provision for income taxes, classified by source of income, was as
follows:
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------
U.S. and Corporate $ 804.3 $1,004.6 $ 933.9
Outside the U.S. 1,503.1 1,402.7 1,317.1
- ------------------------------------------------------------------------------
Income before provision for income taxes $2,307.4 $2,407.3 $2,251.0
==============================================================================
23
The provision for income taxes, classified by the timing and location of
payment, was as follows:
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
U.S. federal $267.8 $336.3 $260.0
U.S. state 71.4 66.0 49.4
Outside the U.S. 382.7 363.6 336.1
- -------------------------------------------------------------------------------
Current tax provision 721.9 765.9 645.5
- -------------------------------------------------------------------------------
U.S. federal 32.8 2.5 (13.2)
U.S. state (6.9) 13.5 1.6
Outside the U.S. 9.5 (17.1) 44.5
- -------------------------------------------------------------------------------
Deferred tax provision (benefit) 35.4 (1.1) 32.9
- -------------------------------------------------------------------------------
Provision for income taxes $757.3 $764.8 $678.4
===============================================================================
Net deferred tax liabilities consisted of:
- -------------------------------------------------------------------------------
(In millions) December 31, 1998 1997
- -------------------------------------------------------------------------------
Property and equipment basis differences $1,121.5 $1,033.1
Other 355.2 426.0
- -------------------------------------------------------------------------------
Total deferred tax liabilities 1,476.7 1,459.1
- -------------------------------------------------------------------------------
Deferred tax assets before
valuation allowance/(1)/ (561.8) (493.1)
Valuation allowance 45.5 41.7
- -------------------------------------------------------------------------------
Net deferred tax liabilities/(2)/ $ 960.4 $1,007.7
===============================================================================
(1) Includes tax effects of loss carryforwards (in millions): 1998-$67.1; 1997-
$51.9 and foreign tax credit carryforwards: 1998-$38.5; 1997-$109.9.
(2) Net of current tax assets included in Prepaid expenses and other current
assets in the Consolidated Balance Sheet (in millions):1998-$121.5; 1997-
$55.8.
The statutory U.S. federal income tax rate reconciles to the effective
income tax rates as follows:
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
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 2.1 1.5
Benefits and taxes related to foreign operations (3.3) (5.2) (6.8)
Other-net (.7) (.1) .4
- -------------------------------------------------------------------------------
Effective income tax rates 32.8% 31.8% 30.1%
===============================================================================
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 $2.2 billion at December 31, 1998, 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
The Company has several line of credit agreements with various banks: a $975.0
million line expiring on February 27, 2003, 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 expiring in the first half of 1999 with fees of .04% per annum on the total
commitment. All agreements remained unused at December 31, 1998. 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 $452.4 million
at December 31, 1998; 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 commercial paper and foreign
currency bank line borrowings, was 6.2% at December 31, 1998 and 1997.
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
Deutsche Marks, French Francs, 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, British Pounds Sterling and Dutch Guilders. 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.
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
current 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 limits as defined by contract. At December 31, 1998,
no collateral was required of counterparties, nor was the Company required to
collateralize any of its obligations.
24
At December 31, 1998, the Company had purchased foreign currency options
outstanding (primarily Deutsche Marks, British Pounds Sterling and French
Francs) with a notional amount equivalent to U.S. $115.8 million. The
unamortized premium related to these currency options was $2.0 million and there
were no related deferred gains recorded as of year end. Forward foreign exchange
contracts outstanding at December 31, 1998 (primarily British Pounds Sterling,
Hong Kong Dollars and Italian Lira) had a U.S. Dollar equivalent of $1,037.9
million.
GUARANTEES
The Company has guaranteed and included in total debt at December 31, 1998,
$102.9 million of 7.2% ESOP Notes Series A and $56.8 million of 7.1% ESOP Notes
Series B issued by the Leveraged Employee Stock Ownership Plan with payments
through 2004 and 2006, respectively. The Company has agreed to repurchase the
notes upon the occurrence of certain events. The Company also has guaranteed
certain affiliate loans totaling $285.3 million at December 31, 1998.
FAIR VALUES
- -------------------------------------------------------------------------------
December 31, 1998
(In millions) Carrying amount Fair value
- -------------------------------------------------------------------------------
Liabilities
Debt $6,249.7 $6,581.8
Notes payable 686.8 686.8
Foreign currency exchange agreements/(1)/ 106.9 120.1
Interest-rate exchange agreements/(2)/ 20.8
- -------------------------------------------------------------------------------
Total liabilities 7,043.4 7,409.5
- -------------------------------------------------------------------------------
Assets
Foreign currency exchange agreements/(1)/ 113.4 40.6
- --------------------------------------------------------------------------------
Net debt $6,930.0 $7,368.9
================================================================================
(1) Combined notional amount equivalent to U.S. $2.9 billion.
(2) Notional amount equivalent to U.S. $1.7 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 value of the debt, notes payable obligations (excluding capital
leases) and the currency and interest-rate exchange agreements 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 total assets was substantially higher than their carrying value at
December 31, 1998.
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.
25
DEBT OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rates/(1)/ Amounts outstanding Aggregate maturities by
December 31 December 31 currency for 1998 balances
(In millions of U.S. Maturity ------------------- -------------------- -----------------------------------
Dollars) dates 1998 1997 1998 1997 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed-original issue/(2)/ 6.9% 7.2% $3,452.6 $2,487.6
Fixed-converted via
exchange agreements/(3)/ 6.3 6.1 (2,072.7) (1,869.7)
Floating 5.3 5.6 357.2 646.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total U.S. Dollars 1999-2037 1,737.1 1,264.4 $ 235.5 $(210.5) $(302.5) $(61.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed 6.2 7.2 1,771.6 1,107.7
Floating 4.0 4.3 849.9 1,422.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total Euro-based
currencies 1999-2007 2,621.5 2,529.8 606.3 467.8 342.1 267.1
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed 7.7 9.2 529.4 541.2
Floating 5.6 6.5 212.3 255.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total British Pounds
Sterling 1999-2008 741.7 796.5 129.4 91.2 24.9
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed 7.9 7.8 157.4 120.3
Floating 2.1 6.0 137.9 107.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total other
European
currencies/(4)/ 1999-2003 295.3 227.4 165.2 76.0 15.6
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed 3.8 3.9 387.5 343.6
Floating 0.5 0.6 322.5 203.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Japanese Yen 1999-2023 710.0 546.6 53.0 88.4 159.0 79.5
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed 8.8 9.1 393.2 286.5
Floating 6.8 7.8 337.6 344.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total other
Asia/Pacific
currencies/(5)/ 1999-2008 730.8 631.0 582.1 20.1 23.9 25.9
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed 7.4 9.5 9.3 11.5
Floating 8.9 4.6 84.3 220.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total other currencies 1999-2021 93.6 231.8 19.5 65.8 0.5 0.4
- -----------------------------------------------------------------------------------------------------------------------------------
Debt obligations including the
net effects of currency and interest-rate
exchange agreements 6,930.0 6,227.5 1,791.0 598.8 238.6 336.0
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term obligations
supported by long-term
line of credit agreement (975.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset positions of currency exchange
agreements (included in miscellaneous
other assets) 113.4 236.0 38.8 11.0 22.1 10.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt obligations $ 7,043.4 $ 6,463.5 $ 854.8 $ 609.8 $260.7 $346.6
===================================================================================================================================
- -----------------------------------------------------------------------------
(In millions of U.S. Dollars) 2003 Thereafter
- -----------------------------------------------------------------------------
Fixed-original issue/(2)/
Fixed-converted via
exchange agreements/(3)/
Floating
- -----------------------------------------------------------------------------
Total U.S. Dollars $ (78.1) $2,154.5
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total Euro-based
currencies 311.0 627.2
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total British Pounds
Sterling 164.7 331.5
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total other
European 38.5
currencies/(4)/
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total Japanese Yen 84.8 245.3
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total other
Asia/Pacific
currencies/(5)/ 44.4 34.4
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total other currencies 5.1 2.3
- -----------------------------------------------------------------------------
Debt obligations including the
net effects of currency and interest-rate
exchange agreements 570.4 3,395.2
- -----------------------------------------------------------------------------
Short-term obligations
supported by long-term
line of credit agreement 975.0
- -----------------------------------------------------------------------------
Net asset positions of currency exchange
agreements (included in miscellaneous
other assets) 9.7 21.2
- -----------------------------------------------------------------------------
Total debt obligations $1,555.1 $3,416.4
=============================================================================
(1) Weighted-average effective rate, computed on a semi-annual 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.
26
LEASING ARRANGEMENTS
At December 31, 1998, the Company was lessee at 4,734 restaurant locations
through ground leases (the Company leases the land and the Company or franchisee
owns the building) and at 5,714 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 operating leases with initial terms of
one year or more are:
- --------------------------------------------------------------------------------
(In millions) Restaurant Other Total
- --------------------------------------------------------------------------------
1999 $ 570.4 $ 54.8 $ 625.2
2000 553.6 44.4 598.0
2001 539.9 37.5 577.4
2002 519.1 30.6 549.7
2003 494.9 26.5 521.4
Thereafter 4,688.0 152.3 4,840.3
- --------------------------------------------------------------------------------
Total minimum payments $ 7,365.9 $346.1 $7,712.0
================================================================================
Rent expense was (in millions): 1998-$723.0; 1997-$641.2; 1996-$581.6. These
amounts included percent rents in excess of minimum rents (in millions): 1998-
$116.7; 1997-$99.4; 1996-$91.4.
PROPERTY AND EQUIPMENT
- --------------------------------------------------------------------------------
(In millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
Land $ 3,812.1 $ 3,592.2
Buildings and improvements on owned land 7,665.8 7,289.7
Buildings and improvements on leased land 6,910.4 6,168.3
Equipment, signs and seating 2,728.8 2,345.1
Other 640.9 692.9
- --------------------------------------------------------------------------------
21,758.0 20,088.2
- --------------------------------------------------------------------------------
Accumulated depreciation and amortization (5,716.4) (5,126.8)
- --------------------------------------------------------------------------------
Net property and equipment $ 16,041.6 $ 14,961.4
================================================================================
Depreciation and amortization expense was (in millions): 1998-$808.0; 1997-
$726.4; 1996-$673.4.
EMPLOYEE BENEFIT PLANS
The Company's benefits program for U.S. employees includes profit sharing,
401(k) (McDESOP) and leveraged employee stock ownership (LESOP) features.
McDESOP allows participants to make contributions that are partly matched by the
Company. Plan assets and contributions made by McDESOP participants can be
invested in McDonald's common stock or among several other investment
alternatives. The LESOP and Company contributions to McDESOP are invested in
McDonald's common stock.
Executives, staff and restaurant managers participate in profit sharing
contributions, McDESOP and shares released under the LESOP, 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): 1998-$63.3; 1997-$57.6; 1996-$59.9.
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): 1998-$37.5; 1997-$34.1; 1996-$30.6.
Other postretirement benefits and postemployment benefits, excluding severance
benefits related to the home office productivity initiative, were immaterial.
STOCK OPTIONS
At December 31, 1998, the Company had three stock option 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 expire 10 years
from the grant date. At December 31, 1998, the number of shares of common stock
reserved for issuance under the plans was 187.0 million, including 23.0 million
available for future grants.
A summary of the status of the Company's plans as of December 31, 1998, 1997
and 1996, and changes during the years then ended is presented in the following
table.
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- ------------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
Options (in millions) price (in millions) price (in millions) price
- -------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 156.3 $16.79 145.5 $14.73 136.2 $11.93
Granted 33.7 25.90 30.2 23.53 30.0 24.57
Exercised (22.8) 12.00 (14.6) 9.63 (15.6) 8.88
Forfeited (3.2) 21.06 (4.8) 17.78 (5.1) 16.16
- -------------------------------------------------------------------------------------------------------
Outstanding at
end of year 164.0 $19.32 156.3 $16.79 145.5 $14.73
=======================================================================================================
Options exercisable
at end of year 64.4 60.5 53.3
- -------------------------------------------------------------------------------------------------------
Options granted each year were about 2% of average common shares outstanding
for 1998, 1997 and 1996, representing grants to approximately 11,500, 11,000 and
10,300 employees in those three years. When stock options are exercised, shares
are issued from treasury stock.
27
The average per share cost of treasury stock issued for option exercises was:
1998-$7.00; 1997-$6.47; 1996-$6.53. The average option exercise price has
consistently exceeded the average cost of treasury stock issued for option
exercises. This is because the Company prefunds the program through share
repurchase. Thus, 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 $319.6 million of tax benefits for the Company during the three years ended
December 31, 1998.
- --------------------------------------------------------------------------------------------------
December 31, 1998
- --------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
--------------------------------------------- ----------------------------
Weighted-
average Weighted- Weighted-
Number remaining average Number average
Range of of options contractual exercise of options exercise
exercise prices (in millions) life (in years) price (in millions) price
- --------------------------------------------------------------------------------------------------
$ 7 to 9 14.3 2.2 $ 7.77 14.3 $ 7.77
10 to 15 44.6 4.6 13.38 26.5 13.14
16 to 23 45.9 7.4 20.45 16.0 19.38
24 to 34 59.2 8.5 25.69 7.6 24.75
- --------------------------------------------------------------------------------------------------
$ 7 to 34 164.0 6.6 $ 19.32 64.4 $ 14.87
==================================================================================================
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 and are presented in the table below.
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net income-pro forma (in millions) $ 1,474.0 $1,589.3 $ 1,538.3
Net income per common share-pro forma
Basic 1.08 1.13 1.08
Diluted 1.05 1.11 1.05
Weighted-average fair value per option granted 8.75 8.41 8.44
- --------------------------------------------------------------------------------
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. Therefore, the pro forma disclosures in the table above 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 weighted-average assumptions were used to
estimate the fair value of these options:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield .65% .65% .65%
Expected stock price volatility 18.0% 18.1% 18.2%
Risk-free interest rate 5.56% 6.61% 6.14%
Expected life of options (in years) 7 7 7
- --------------------------------------------------------------------------------
CAPITAL STOCK
CHANGE IN PAR VALUE
In May 1996, Company shareholders approved an increase in the number of
authorized shares of Common Stock from 1.25 billion with no par value to 3.5
billion with $.01 par value. The change in par value did not affect any of the
existing rights of shareholders and was recorded as an adjustment to additional
paid-in capital and common stock.
COMMON EQUITY PUT OPTIONS
At December 31, 1997, 1.8 million common equity put options were outstanding,
all of which expired unexercised in 1998. In 1998, the Company sold 7.3 million
common equity put options, of which 1.0 million options were outstanding at
December 31, 1998. The options expire at various dates through February 1999. At
December 31, 1998, the $59.5 million 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 premiums received.
SHAREHOLDER RIGHTS PLAN
In December 1988, the Company declared a dividend of one nonvoting Preferred
Share Purchase Right (Right) on each outstanding share of common stock. Under
certain conditions related to a potential change in control of the Company, each
Right entitled certain holders to purchase at the then current exercise price,
stock of the Company or the acquiring company having a market value of twice the
exercise price. All Rights expired on December 28, 1998.
28
QUARTERLY RESULTS (unaudited)
- -----------------------------------------------------------------------------------------------------------
Quarters ended December 31 September 30
(In millions, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------
SYSTEMWIDE SALES $ 9,316.0 $ 8,530.4 $ 9,246.2 $ 8,799.7
- -----------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $ 2,304.5 $ 2,110.7 $ 2,305.7 $ 2,158.5
Revenues from franchised and affiliated
restaurants 916.2 841.9 909.3 847.5
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,220.7 2,952.6 3,215.0 3,006.0
- -----------------------------------------------------------------------------------------------------------
COMPANY-OPERATED MARGIN 418.2 384.4 437.5 402.4
FRANCHISED MARGIN 734.8 681.3 737.3 693.6
OPERATING INCOME/(1)/ 637.2 695.2 835.2 755.4
NET INCOME/(1)/ $ 348.5 $ 410.9 $ 482.2 $ 448.9
===========================================================================================================
NET INCOME PER COMMON SHARE/(1)(3)/ $ .26 $ .30 $ .35 $ .32
NET INCOME PER COMMON
SHARE--DILUTED/(1)(3)/ .25 .29 .34 .31
- -----------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE/(3)/ $ .04500 $ .04125 $ .04500 $ .04125
- -----------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES/(3)/ 1,354.3 1,375.3 1,362.1 1,377.0
WEIGHTED-AVERAGE SHARES--DILUTED/(3)/ 1,399.1 1,403.6 1,404.7 1,408.9
- -----------------------------------------------------------------------------------------------------------
MARKET PRICE PER COMMON SHARE/(3)/
High $ 39 3/4 $ 24 13/16 $ 37 1/2 $ 27 3/8
Low 28 1/8 21 1/16 26 3/4 22 7/8
Close 38 7/16 23 7/8 29 7/8 23 13/16
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
June 30 March 31
(In millions, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
SYSTEMWIDE SALES $ 9,247.6 $ 8,475.1 $ 8,169.7 $ 7,833.1
- -----------------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $ 2,270.4 $ 2,014.1 $ 2,014.3 $ 1,853.2
Revenues from franchised and affiliated
restaurants 910.4 818.5 790.6 764.4
- -----------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,180.8 2,832.6 2,804.9 2,617.6
- -----------------------------------------------------------------------------------------------------------------
COMPANY-OPERATED MARGIN 426.7 374.0 350.9 326.1
FRANCHISED MARGIN 743.9 667.4 632.5 616.1
OPERATING INCOME/(1)/ 646.8/(2)/ 743.5 642.7 614.2
NET INCOME/(1)/ $ 357.2/(2)/ $ 438.2 $ 362.2 $ 344.5
=================================================================================================================
NET INCOME PER COMMON SHARE/(1)(3)/ $ .26/(2)/ $ .31 $ .26 $ .24
NET INCOME PER COMMON
SHARE--DILUTED/(1)(3)/ .25/(2)/ .30 .26 .24
- -----------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE/(3)/ $ .04500 $ .04125 $ .04125 $ .03750
- -----------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES/(3)/ 1,372.1 1,379.5 1,372.8 1,383.2
WEIGHTED-AVERAGE SHARES--DILUTED/(3)/ 1,415.1 1,414.6 1,403.9 1,415.0
- -----------------------------------------------------------------------------------------------------------------
MARKET PRICE PER COMMON SHARE/(3)/
High $ 35 $ 27 7/16 $ 30 1/8 $ 24 11/16
Low 28 9/16 23 3/8 22 5/16 21 1/4
Close 34 1/2 24 3/16 30 23 5/8
- -----------------------------------------------------------------------------------------------------------------
(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).
(3) Restated for two-for-one stock split in March 1999.
29
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 such 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, 1999
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 1998, 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 non-audit 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 five times during 1998, is comprised of three
independent Directors: Gordon C. Gray, Chairman, Walter E. Massey and B. Blair
Vedder, Jr. Donald G. Lubin serves as secretary in a non-voting capacity.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
OF McDONALD'S CORPORATION
January 26, 1999
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, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 26, 1999
30
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, 1998.
Information regarding all of the Company's executive officers is included in
Part I.
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, 1998.
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, 1998.
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, 1998.
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 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 30, 1999.
- --------------------------------------------------------------------------------
Date of Item Financial statements
report number required to be filed
- --------------------------------------------------------------------------------
10/19/98 Item 7 No
1/26/99 Item 7 No
- --------------------------------------------------------------------------------
(c) Exhibits:
The exhibits listed in the accompanying index are filed as part of this report.
31
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 ref-erence 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. 3312364).
(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 refer-ence 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.
(vi) 7-3/8% Notes due July 15, 2002. Form of Supplemental Indenture
No. 19 incorporated herein by reference from Exhibit (4) of
Form 8-K dated July 10, 1992.
(vii) 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.
(viii) 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.
32
EXHIBIT NUMBER/DESCRIPTION
(ix) 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.
(x) 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.
(xi) 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.
(d) Indenture and Supplemental Indenture No. 1 dated as of September 8,
1989, between McDonald's Matching and Deferred Stock Ownership Trust,
McDonald's Corporation and Pittsburgh National Bank in connection with
SEC Registration Statement Nos. 33-28684 and 33-28684-01, incorporated
herein by reference from Exhibit (4)(a) of Form 8-K dated September
14, 1989.
(e) Form of Supplemental Indenture No. 2 dated as of April 1, 1991,
supplemental to the Indenture between McDonald's Matching and Deferred
Stock Ownership Trust, McDonald's Corporation and Pittsburgh National
Bank in connection with SEC Registration Statement Nos. 33-28684 and
33-28684-01, incorporated herein by reference from Exhibit (4)(c) of
Form 8-K dated March 22, 1991.
(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
March 31, 1998.*
(e) 1992 Stock Ownership Incentive Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the quarter ended
March 31, 1998.*
(f) McDonald's Corporation Deferred Income Plan, as amended and restated,
filed herewith.*
(g) Non-Employee Director Stock Option Plan, incorporated herein by
reference from Exhibit A on pages 25-28 of McDonald's 1995 Proxy
Statement and Notice of 1995 Annual Meeting of Shareholders dated
April 12, 1995.*
(h) Executive Retention Plan, filed herewith.*
(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.
33
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 30, 1999
- --------------------------------------------------------
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 30th day of March, 1999:
SIGNATURE, TITLE
/s/ Hall Adams, Jr.
- --------------------------------------------------------
Hall Adams, Jr.
Director
- --------------------------------------------------------
James R. Cantalupo
Vice Chairman; Chairman, and Chief Executive Officer--
McDonald's International and Director
/s/ Gordon C. Gray
- --------------------------------------------------------
Gordon C. Gray
Director
/s/ Jack M. Greenberg
- --------------------------------------------------------
Jack M. Greenberg
President and Chief Executive Officer and Director
- --------------------------------------------------------
Enrique Hernandez, Jr.
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
- --------------------------------------------------------
Michael R. Quinlan
Chairman of the Board
/s/ Terry L. Savage
- --------------------------------------------------------
Terry L. Savage
Director
/s/ Roger W. Stone
- --------------------------------------------------------
Roger W. Stone
Director
/s/ Robert N. Thurston
- --------------------------------------------------------
Robert N. Thurston
Director
- --------------------------------------------------------
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
34