1
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 (fee required) for the fiscal year ended
December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (no fee required) 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 60521
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (708) 575-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
-------------------------- -----------------------
Common stock, no par value New York Stock Exchange
Chicago Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
9-3/4% Notes due 1999 New York Stock Exchange
9-3/8% Notes due 1997 New York Stock Exchange
8-7/8% Debentures due 2011 New York Stock Exchange
7-3/8% Notes due 2002 New York Stock Exchange
Depositary Shares representing 7.72%
Cumulative Preferred Stock, Series E New York Stock Exchange
6-3/4% Notes due 2003 New York Stock Exchange
7-3/8% Notes due 2033 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
--- ---
2
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) 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 $22,868,486,192 and the number of shares of
common stock outstanding is 694,054,537 as of January 31, 1995.
Documents incorporated by reference. Part III of this 10-K
incorporates information by reference from the registrant's definitive
proxy statement which will be filed no later than 120 days after
December 31, 1994.
3
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 1994, nor 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, 1994,
1993 and 1992 is included in Part II, item 8, page 42 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 assures 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; franchisees then contribute to the Company's revenues
through payment of rent and service fees based upon a percent of
sales, with specified minimum payments. Generally, the conventional
franchise arrangement lasts 20 years and franchising practices are
consistent throughout the world. Further discussion regarding site
selection is included in Part 1, item 2, page 6 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 basic and intermediate operations,
management and equipment. Assistant managers are eligible to attend
the advanced operations and management class at one of the five
Hamburger University (H.U.) campuses in the U.S., Germany, England,
Japan or Australia. The curriculum at H.U. concentrates on skills and
practices essential to delivering customer satisfaction and running a
restaurant business.
4
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.
Products
McDonald's restaurants offer a substantially uniform menu
consisting of hamburgers and cheeseburgers, including the Big Mac and
Quarter Pounder with Cheese sandwiches, the Filet-O-Fish, McGrilled
Chicken and McChicken sandwiches, french fries, Chicken McNuggets,
salads, shakes, sundaes and cones made with low fat frozen yogurt,
pies, cookies and a limited number of soft drinks and other beverages.
In addition, the restaurants sell a variety of products during limited
promotional time periods. McDonald's restaurants operating in the
United States are open during breakfast hours and offer a full
breakfast menu including the Egg McMuffin and the Sausage McMuffin
with Egg sandwiches, hotcakes and sausage; three varieties of biscuit
sandwiches; Apple-Bran muffins; and cereals. McDonald's restaurants in
many countries around the world offer many of these same products as
well as other products and limited breakfast menus. 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.
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.
5
Working capital practices
Information about the Company's working capital practices is
incorporated herein by reference to Management's Discussion and
Analysis of the Company's financial position and the consolidated
statement of cash flows for the years ended December 31, 1994, 1993
and 1992 in Part II, item 7, pages 26 through 29, and Part II, item 8
page 35 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 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 supermarket freezers.
In the U.S., about 378,000 restaurants generate nearly $224
billion in annual sales. McDonald's accounts for about 2.6% of those
restaurants and approximately 6.7% of those sales. No reasonable
estimate can be made of the number of competitors outside of 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.
6
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 1994, there were no material capital expenditures
for environmental control facilities and no such material expenditures
are anticipated.
Number of employees
During 1994, the Company's average number of employees
worldwide was approximately 183,000.
(d) Financial information about foreign and domestic operations
Financial information about foreign and domestic markets is
incorporated herein by reference from Selected Financial Data,
Management's Discussion and Analysis and Segment and Geographic
Information in Part II, item 6, page 10, Part II, item 7, pages 11
through 29 and Part II, item 8, page 42, respectively, of this Form
10-K.
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. In order to control occupancy costs
and rights, the Company owns restaurant sites and buildings where
feasible and where it is not practical, secures long-term leases.
Restaurant profitability for both the Company and franchisees is
important; therefore, ongoing efforts are made to lower 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 and the related
financial statements with footnotes in Part II, item 7, pages 11
through 29 and Part II, item 8, pages 34, 35, 37, 39, 43, 48 and 49,
respectively, 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 and government regulations. The Company does
not believe that any such claims or lawsuits will have a material
adverse affect on its financial condition or results of operations.
7
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 of the United States, food, paper, or
related items to any McDonald's restaurants. The Company relies upon
independent suppliers which 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.
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, 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 promulgation of
additional requirements in the future.
8
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, 1995 are shown below. 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 1995 Board of Directors' meeting.
Number
Number of
of years
years in
Date of with present
Name Office Birth Company position
--------------------- --------------------- -------- ------- --------
Robert M. Beavers, Jr. Senior Vice President 01/27/44 31 1
James R. Cantalupo President and 11/14/43 20 3
Chief Executive
Officer-International
Michael L. Conley Senior Vice President, 03/28/48 21 4
Controller
Thomas S. Dentice Executive Vice President 01/12/39 29 10
Patrick J. Flynn Executive Vice President 05/01/42 33 7
Thomas W. Glasgow, Jr. Executive Vice President, 02/17/47 26 3
Chief Operations Officer
Jack M. Greenberg Vice Chairman, Chief 09/28/42 13 3
Financial Officer
Michael R. Quinlan Chairman, Chief 12/09/44 31 5
Executive Officer
Edward H. Rensi President and Chief 08/15/44 29 3
Executive Officer-U.S.A.
Paul D. Schrage Senior Executive Vice 02/25/35 27 10
President, Chief
Marketing Officer
Fred L. Turner Senior Chairman 01/06/33 38 5
/TABLE
9
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
The Company's common stock trades under the symbol MCD and is
listed on the following stock exchanges in the United States: New
York and Chicago.
The following table sets forth the common stock price range on
the New York Stock Exchange composite tape and dividends declared per
common share. Prices and dividends have been adjusted to reflect the
two-for-one common stock split effected in the form of a stock
dividend in June, 1994.
-------------------------------------------------------------------------
Quarter 1994 1993
-------------------------------------------------------------------------
Dividend Per Dividend Per
High Low Common Share High Low Common Share
-------------------------------------------------------------------------
First 31 1/4 27 1/4 .0538 27 1/8 23 3/8 .0500
Second 31 3/8 27 5/8 .0600 26 3/4 22 3/4 .0538
Third 29 3/4 25 5/8 .0600 27 3/4 24 1/8 .0538
Fourth 29 7/8 25 7/8 .0600 29 l/2 25 5/8 .0538
-------------------------------------------------------------------------
Year 31 3/8 25 5/8 .2338 29 1/2 22 3/4 .2114
-------------------------------------------------------------------------
The approximate number of shareholders of record and beneficial
owners of the Company's common stock as of January 31, 1995 was
estimated to be 537,000.
Given the Company's returns on equity and assets, the Company's
management believes it is prudent to reinvest a significant portion of
earnings back into the business. The Company has paid 76 consecutive
quarterly dividends on common stock through March 29, 1995, has
increased the per share amount 20 times since the first dividend was
paid in 1976, and has increased the dividend amount every year.
Additional dividend increases will be considered after reviewing
returns to shareholders, profitability expectations and financing
needs.
10
Item 6. Selected Financial Data
11-YEAR SUMMARY
(Dollars rounded to millions, except per common share data and average restaurant sales)
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
------------------------------------------------------------------------------------------------------------------------------
Systemwide sales $25,987 23,587 21,885 19,928 18,759 17,333 16,064 14,330 12,432 11,001 10,007
U.S. $14,941 14,186 13,243 12,519 12,252 12,012 11,380 10,576 9,534 8,843 8,071
Outside of the U.S. $11,046 9,401 8,642 7,409 6,507 5,321 4,684 3,754 2,898 2,158 1,936
Systemwide sales by type
Operated by franchisees $17,146 15,756 14,474 12,959 12,017 11,219 10,424 9,452 8,422 7,612 6,914
Operated by the Company $ 5,793 5,157 5,103 4,908 5,019 4,601 4,196 3,667 3,106 2,770 2,538
Operated by affiliates $ 3,048 2,674 2,308 2,061 1,723 1,513 1,444 1,211 904 619 555
Average sales by
restaurants open at least
one year, in thousands $ 1,800 1,768 1,733 1,658 1,649 1,621 1,596 1,502 1,369 1,296 1,264
Revenues from franchised
restaurants $ 2,528 2,251 2,031 1,787 1,621 1,465 1,325 1,186 1,037 924 828
Total revenues $ 8,321 7,408 7,133 6,695 6,640 6,066 5,521 4,853 4,143 3,694 3,366
Operating income $ 2,241 1,984 1,862 1,679 1,596 1,438 1,288 1,160 983 905 812
Income before provision
for income taxes $ 1,887 1,676 1,448 1,299 1,246 1,157 1,046 959 848 782 707
Net income $ 1,224 1,083 959 860 802 727 646 549 * 480 433 389
Cash provided by
operations $ 1,926 1,680 1,426 1,423 1,301 1,246 1,177 1,051 852 813 701
Financial position at year end
Net property and
equipment $11,328 10,081 9,597 9,559 9,047 7,758 6,800 5,820 4,878 4,164 3,521
Total assets $13,592 12,035 11,681 11,349 10,668 9,175 8,159 6,982 5,969 5,043 4,230
Long-term debt $ 2,935 3,489 3,176 4,267 4,429 3,902 3,111 2,685 2,131 1,638 1,268
Total shareholders'
equity $ 6,885 6,274 5,892 4,835 4,182 3,550 3,413 2,917 2,506 2,245 2,009
Per common share**
Net income $ 1.68 1.45 1.30 1.17 1.10 .97 .86 .72 * .62 .55 .49
Dividends declared $ .23 .21 .20 .18 .17 .15 .14 .12 .11 .10 .08
Total shareholders'
equity at year end $ 9.20 8.12 7.39 6.73 5.82 4.90 4.55 3.86 3.22 2.84 2.47
Market price at
year end $29 1/4 28 1/2 24 3/8 19 14 1/2 17 1/4 12 11 10 1/8 9 5 3/4
Systemwide restaurants
at year end 15,205 13,993 13,093 12,418 11,803 11,162 10,513 9,911 9,410 8,901 8,304
Operated by franchisees 10,458 9,832 9,237 8,735 8,131 7,573 7,110 6,760 6,406 6,150 5,724
Operated by the Company 3,083 2,699 2,551 2,547 2,643 2,691 2,600 2,399 2,301 2,165 2,053
Operated by affiliates 1,664 1,462 1,305 1,136 1,029 898 803 752 703 586 527
U.S. 9,744 9,283 8,959 8,764 8,576 8,270 7,907 7,567 7,272 6,972 6,595
Outside of the U.S. 5,461 4,710 4,134 3,654 3,227 2,892 2,606 2,344 2,138 1,929 1,709
Number of countries at
year end 79 70 65 59 53 51 50 47 46 42 36
* Before the cumulative prior years' benefit from the change in accounting for income taxes.
**Restated for two-for-one common stock split in June 1994.
/TABLE
11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
CONSOLIDATED OPERATING RESULTS
-----------------------------------------------------------------------
INCREASES (DECREASES) IN OPERATING RESULTS OVER PRIOR YEAR
-----------------------------------------------------------------------
(Dollars rounded to millions, 1994 1993
except per common share data) Amount % Amount %
-----------------------------------------------------------------------
SYSTEMWIDE SALES $2,401 10% $1,702 8%
-----------------------------------------------------------------------
REVENUES
Sales by Company-operated
restaurants $ 636 12 $ 55 1
Revenues from franchised
restaurants 277 12 220 11
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TOTAL REVENUES 913 12 275 4
-----------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants 481 12 38 1
Franchised restaurants 55 14 32 9
General, administrative
and selling expenses 142 15 81 9
Other operating (income)
expense--net (22) 35 2 (3)
-----------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES 656 12 153 3
-----------------------------------------------------------------------
OPERATING INCOME 257 13 122 7
-----------------------------------------------------------------------
Interest expense (10) (3) (58) (15)
Nonoperating income
(expense)--net (56) NM 48 NM
-----------------------------------------------------------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 211 13 228 16
-----------------------------------------------------------------------
Provision for income taxes 69 12 104 21
-----------------------------------------------------------------------
NET INCOME $ 142 13 $ 124 13
=======================================================================
NET INCOME PER COMMON SHARE* $ .23 16 $ .16 12
-----------------------------------------------------------------------
NM - Not Meaningful
* Restated for two-for-one common stock split in June 1994.
12
SYSTEMWIDE SALES AND RESTAURANTS
Systemwide sales are comprised of sales by restaurants operated by the
Company, franchisees and affiliates operating under joint-venture
agreements between McDonald's and local businesspeople. The 1994
increase was due to expansion, higher sales at existing restaurants
and stronger foreign currencies, negatively affected in part by severe
weather conditions worldwide in early 1994. The 1993 increase was due
to expansion and higher sales at existing restaurants, offset in part
by weaker foreign currencies and one less day in 1993 since 1992 was a
leap year. Sales by Company-operated restaurants grew at a faster rate
than Systemwide sales in 1994 because Company-operated expansion
advanced at a faster rate than Systemwide expansion. Sales by Company-
operated restaurants grew at a slower rate than Systemwide sales in
1993 because weaker foreign currencies had a greater impact on sales
by Company-operated restaurants than on Systemwide sales, and because
of a greater number of franchised restaurants resulting from
expansion.
Average sales by restaurants open at least one year (excluding
satellites) were $1,800,000 in 1994, $32,000 above 1993. Average sales
in both the U.S. and outside of the U.S. improved through the emphasis
on value and customer satisfaction.
Expansion continued at an accelerated pace as 1,212 restaurants
(excluding satellites) were added in 1994, compared with 900 in 1993
and 675 in 1992. Restaurants opened during the year (excluding
satellites) contributed $799 million to Systemwide sales in 1994, $572
million in 1993 and $478 million in 1992. McDonald's plans to add
between 1,200 and 1,500 restaurants (excluding satellites) around the
world in 1995 and in each of the next several years. The mix of net
additions remains at one-third in the U.S. and two-thirds outside of
the U.S.
Our global expansion plan also includes satellites -- foodservice
facilities that leverage the infrastructure of existing restaurants by
using their storage capability and inventory, and by drawing on their
management talent and labor pool. During 1994, 575 satellites were
added around the world; we expect to open approximately 1,000
satellites in 1995. The consolidated financial statements reflect the
operating results of satellites on the same basis as traditional
restaurants; the results of satellites operated by the Company are
included in sales by and costs of Company-operated restaurants, while
those operated by franchisees are included in revenues from and costs
of franchised restaurants. Satellites in operation contributed $150
million to Systemwide sales in 1994. The operating results of
satellites were immaterial to consolidated operating results.
TOTAL REVENUES
Total revenues consist of sales by Company-operated restaurants, and
fees from restaurants operated by franchisees and affiliates based
upon a percent of sales with specified minimum payments. The minimum
fee is comprised of both a rent and service fee amount at a combined
rate of approximately 12.5% of sales for new U.S. franchise
arrangements. Prior to 1994 and since 1987, the minimum fee generally
was a combined 12.0% for both rent and service fees. Higher fees are
charged for sites that require a higher investment on the part of the
Company. Fees paid by franchisees outside of the U.S. vary according
13
to local business conditions. These fees, together with occupancy and
operating rights, are stipulated in franchise arrangements that
generally have 20-year terms, and provide a stable, predictable
revenue flow to the Company.
Revenues grow as locations are added and as sales build in existing
locations. Menu price adjustments affect revenues as well as sales;
however, due to different pricing structures, new products,
promotions, and product mix variations among markets, it is
impractical to quantify the impact of menu price adjustments for the
System as a whole.
The rate of increase in total revenues in 1994 was greater than the
rate of increase in Systemwide sales due to strong global operating
results and an increase in the Company-operated restaurant base
through expansion and changes in ownership. The rate of increase in
total revenues in 1993 was lower than the rate of increase in
Systemwide sales due to weaker foreign currencies which had a greater
impact on revenues than on Systemwide sales, and because of a greater
number of franchised restaurants resulting from expansion.
Growth rates in sales by Company-operated restaurants and revenues
from franchised restaurants varied in 1993 because of expansion and
changes in ownership and because sales by Company-operated restaurants
were impacted to a greater degree by changing foreign currencies than
were revenues. In 1994, about 56% of sales by Company-operated
restaurants and 37% of revenues from franchised restaurants were
outside of the U.S., compared with 53% and 33%, respectively, in 1993.
RESTAURANT MARGINS
Company-operated margins were 19.8% of sales in 1994, compared with
19.2% in 1993 and 19.1% in 1992. In 1994, as a percent of sales, food
and paper, and occupancy and other operating costs declined, while
payroll costs increased. In 1993, as a percent of sales, food and
paper costs rose, while occupancy, other operating and payroll costs
declined.
Franchised margins comprised about two-thirds of the combined
operating margins. Consolidated franchised margins were 82.8% of
applicable revenues in 1994, compared with 83.1% in 1993 and 82.8% in
1992. The 1994 decrease reflected a higher proportion of leased sites
resulting from accelerated expansion and satellite development, as
financing costs embedded in operating leases were included in rent
expense which does not occur if a site is owned.
Franchised margins include revenues and expenses associated with
restaurants operating under business facilities lease arrangements.
Under these arrangements, the Company leases the businesses --
including equipment -- to franchisees who have options to purchase the
businesses. While higher fees are charged under these arrangements,
margins are generally lower because of equipment depreciation. When
these purchase options are exercised, resulting gains compensate the
Company for lower margins prior to exercise and are included in other
operating (income) expense--net. At year-end 1994, 476 restaurants
were operating under such arrangements, compared with 544 and 583 at
year-end 1993 and 1992, respectively.
14
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
The 1994 increase was primarily due to strategic global investment
spending to support expansion and value, and a one-time, noncash $15
million charge related to the early implementation of a new accounting
rule regarding the timing of expensing advertising production costs.
The 1993 increase was primarily due to higher employee costs
associated with expansion and key priorities, partially offset by
weaker foreign currencies. These expenses as a percent of Systemwide
sales have remained relatively constant over the past five years, and
were 4.2% in 1994 and 4.0% in 1993.
OTHER OPERATING (INCOME) EXPENSE--NET
This category is comprised of transactions which relate to franchising
and the foodservice business such as gains on sales of restaurant
businesses, equity in earnings of unconsolidated affiliates, and net
gains or losses from property dispositions. The 1994 income increase
reflected higher gains on sales of restaurant businesses and higher
income from affiliates, offset in part by higher losses on property
dispositions. The 1993 and 1992 amounts were relatively constant,
reflecting greater income from affiliates and gains on sales of
restaurant businesses in 1993, and by the favorable settlement of a
sales tax case in Brazil in 1992.
Gains on sales of restaurant businesses include gains from
exercises of purchase options by franchisees operating under business
facilities lease arrangements and from sales of Company-operated
restaurants. As a franchisor, McDonald's purchases and sells
businesses in transactions with franchisees and affiliates in an
ongoing effort to achieve the optimal ownership mix in each market.
These transactions and resulting gains are integral to franchising and
as such, are appropriately recorded in operating income.
Equity in earnings of unconsolidated affiliates is reported after
interest expense and income taxes, except for U.S. partnerships which
are reported before income taxes. The Company actively participates
in, but does not control, these businesses.
Net gains or losses from property dispositions result from
disposals of excess properties through closings, relocations and other
transactions.
OPERATING INCOME
The 1994 and 1993 increases reflected higher combined operating
margins, partially offset by higher general, administrative and
selling expenses. Additionally, 1994 was positively impacted by higher
other operating income and stronger foreign currencies, while 1993 was
negatively impacted by weaker foreign currencies.
INTEREST EXPENSE
The 1994 decrease was primarily due to lower average interest rates,
partially offset by higher debt levels and stronger foreign
currencies. The 1993 decrease was primarily due to lower average debt
balances, lower average interest rates and weaker foreign currencies.
15
NONOPERATING INCOME (EXPENSE)--NET
This category includes interest income, gains and losses related to
investments and financings, as well as miscellaneous income and
expense. Higher translation losses, principally from Mexico and
Brazil, losses on investments and higher minority interest charges
impacted 1994. Also contributing to the year-over-year change were
gains on debt extinguishments and higher interest income in 1993. The
1993 increase reflected $9 million in gains related to debt
extinguishments in 1993 and $29 million in charges related to various
early redemptions of high-coupon, U.S. Dollar debt in 1992.
PROVISION FOR INCOME TAXES
The effective tax rate was 35.1% in 1994, compared with 35.4% in 1993
and 33.8% in 1992. The 1993 increase was primarily the result of new
U.S. tax legislation enacted that year, which negatively impacted the
provision by approximately $20 million. Of this amount, nearly $14
million was attributable to a one-time, noncash revaluation of
deferred tax liabilities. The Company expects its 1995 effective
income tax rate to be between 35.0% and 35.5%.
Consolidated net deferred tax liabilities included tax assets of
$233 million in 1994, net of valuation allowance, and $148 million in
1993. Substantially all of the tax assets arose in the U.S. and other
profitable markets, the majority of which is expected to be realized
in future U.S. income tax returns.
NET INCOME AND NET INCOME PER COMMON SHARE
Net income and net income per common share increased 13% and 16%,
respectively, in 1994. The spreads between the percent increases in
net income and net income per common share reflected the impact of
share repurchase. Net income and net income per common share increased
13% and 12%, respectively, in 1993. These increases were negatively
affected by weaker foreign currencies and new U.S. tax legislation.
16
IMPACT OF CHANGING FOREIGN CURRENCIES
Changing foreign currencies affect reported results. McDonald's
lessens short-term cash exposures principally by purchasing goods and
services in local currencies, financing in local currencies and
hedging foreign-denominated cash flows. In 1994, stronger foreign
currencies positively contributed to operating income, but their
impact on interest expense and higher translation losses in Latin
America more than offset this benefit, resulting in a reduction in net
income. Weaker foreign currencies had a significant negative impact on
1993 results. Further discussion of our management of changing foreign
currencies is on pages 26 through 29 in the commentary on financings
and total shareholders' equity.
-----------------------------------------------------------------------
(Dollars in millions) As reported As adjusted*
-----------------------------------------------------------------------
1994
-----------------------------------------------------------------------
Systemwide sales $25,987 10% $25,715 9%
Revenues 8,321 12 8,268 12
Operating income 2,241 13 2,226 12
Net income 1,224 13 1,233 14
-----------------------------------------------------------------------
1993
-----------------------------------------------------------------------
Systemwide sales 23,587 8 23,993 10
Revenues 7,408 4 7,721 8
Operating income 1,984 7 2,051 10
Net income 1,083 13 1,114 16
-----------------------------------------------------------------------
*If exchange rates remained constant year-over-year.
17
------------------------------------------------------------------------
U.S. OPERATIONS
------------------------------------------------------------------------
SALES
The 1994 and 1993 increases were due to expansion and higher sales at
existing restaurants. Positive comparable sales were achieved in 1994
through an emphasis on value and customer satisfaction in the form of
Extra Value Meals, Happy Meals and the three-tier value program; as
well as through promotions run during the year in the form of the NBA
cup highlighting large sandwiches, the Flintstones movie tie-in
featuring the McRib Grand Poobah Meal and a set of four Bedrock mugs,
the Dream Team II collector cup, the Music Event offering four artist
collections with the purchase of a large sandwich or Extra Value Meal,
and the Holiday Video offering of four videotapes.
------------------------------------------------------------------------
Five Ten
years years
(In millions of dollars) 1994 1993 1992 ago ago
------------------------------------------------------------------------
Operated by franchisees $11,965 $11,435 $10,615 $ 9,077 $6,166
Operated by the Company 2,550 2,420 2,353 2,728 1,856
Operated by affiliates 426 331 275 207 49
------------------------------------------------------------------------
U.S. sales $14,941 $14,186 $13,243 $12,012 $8,071
========================================================================
RESTAURANTS
There were 461 restaurants added in the U.S. in 1994, representing 38%
of Systemwide additions, compared with 324 and 36% in 1993, and 363
and 56% five years ago. In addition, 494 U.S. satellites were
operating at year-end 1994, compared with 114 at year-end 1993.
McDonald's expects to maintain the current level of U.S. expansion in
1995 and in each of the next several years by adding between 400 and
500 restaurants each year, exclusive of satellites.
------------------------------------------------------------------------
Five Ten
years years
1994 1993 1992 ago ago
------------------------------------------------------------------------
Operated by franchisees 7,849 7,628 7,375 6,374 5,073
Operated by the Company 1,546 1,433 1,395 1,751 1,481
Operated by affiliates 349 222 189 145 41
------------------------------------------------------------------------
U.S. restaurants 9,744 9,283 8,959 8,270 6,595
========================================================================
18
Restaurants operated by franchisees and affiliates represented 84%
of U.S. restaurants at year-end 1994, compared with 85% at year-end
1993 and 79% five years ago. During the period 1989 through 1991, the
Company franchised certain restaurants it previously operated because
entrepreneurial owners with an equity stake in the business improved
operations, sales and profits as well as consolidated profits. Since
1990, we have continued to make operational improvements and reduce
operating and development costs; as a result, over the past several
years, our base of restaurants has grown at a faster rate.
OPERATING RESULTS
------------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992 1991 1990
------------------------------------------------------------------------
REVENUES
Sales by Company-
operated restaurants $2,550 $2,420 $2,353 $2,410 $2,655
Revenues from
franchised restaurants 1,606 1,511 1,396 1,300 1,216
------------------------------------------------------------------------
TOTAL REVENUES 4,156 3,931 3,749 3,710 3,871
------------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated
restaurants 2,066 1,977 1,920 2,000 2,221
Franchised restaurants 270 247 235 217 202
General, administrative
and selling expenses 714 638 566 549 511
Other operating (income)
expense--net (25) (18) (13) (56) (49)
------------------------------------------------------------------------
TOTAL OPERATING
COSTS AND EXPENSES 3,025 2,844 2,708 2,710 2,885
------------------------------------------------------------------------
U.S. OPERATING INCOME $1,131 $1,087 $1,041 $1,000 $ 986
========================================================================
U.S. revenues were positively impacted by strong sales and expansion
in 1994 and 1993, and negatively affected in 1992, 1991 and 1990 by
the franchising of certain Company-operated restaurant businesses.
U.S. Company-operated margins increased $42 million or 9% in 1994,
reflecting sales improvement and growth in the number of Company-
operated restaurants. These margins were 19.0% of sales in 1994,
compared with 18.3% in 1993 and 18.4% in 1992. In 1994, the margin
benefited from lower commodity costs and improvements in processing
for beef. U.S. franchised margins rose $71 million or 6% in 1994.
These margins were 83.2% of applicable revenues in 1994, compared with
83.6% in 1993 and 83.2% in 1992. Franchised margins as a percent of
revenues decreased in 1994 because rent expense grew at a faster rate
than revenues, resulting from a higher proportion of leased openings.
While it is difficult to assess potential effects of federal and
state legislation in the U.S. that may impact the industry, the
Company believes it can maintain operating margins within the
historical range of the past ten years by continuing to build sales
and reduce costs.
19
U.S. operating income rose $43 million or 4% in 1994, and was 50% of
consolidated operating income, compared with 55% in 1993. The 1994 and
1993 increases resulted primarily from higher combined operating
margins, partially offset by higher general, administrative and
selling expenses in the form of higher employee costs, other
expenditures to support our global strategies and a one-time $12
million charge related to the implementation of the new accounting
rule for advertising costs in 1994. Without this charge, U.S.
operating income would have grown by 5% in 1994. Operating income
included $366 million of depreciation and amortization in 1994,
compared with $348 million in 1993 and $330 million in 1992.
While the U.S. market remains highly competitive, McDonald's is
confident of continued growth through a greater emphasis on value and
customer satisfaction, and through expansion.
ASSETS AND CAPITAL EXPENDITURES
-------------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------
New restaurants $ 472 $ 332 $ 196 $ 214 $ 446
Existing restaurants 125 122 125 151 249
Other properties 113 130 76 45 51
-------------------------------------------------------------------------
U.S. capital expenditures $ 710 $ 584 $ 397 $ 410 $ 746
=========================================================================
U.S. assets $6,683 $6,385 $6,410 $6,154 $6,060
-------------------------------------------------------------------------
U.S. assets increased $297 million or 5% in 1994, driven by higher
expenditures for restaurant property and buildings resulting from
expansion. At year-end 1994, 49% of consolidated assets were located
in the U.S., compared with 53% at year-end 1993. Capital expenditures
rose $126 million or 22% in 1994, and represented 46% of consolidated
capital expenditures, compared with 55% five years ago. These amounts
excluded expenditures made by franchisees such as their initial
investments in equipment, signs, seating and decor, as well as long-
term, ongoing reinvestment in their businesses. New restaurant
expenditures grew $140 million or 42% because of accelerated
expansion, tempered by lower average development costs, and included
$41 million related to satellite development.
Expenditures for existing restaurants included modifications to
achieve higher levels of customer satisfaction and implementation of
technology to improve service and food quality. The decline since 1990
reflected cost reduction efforts and aggressive reinvestment in prior
years. Rebuilding and relocating restaurants has generated additional
sales, reflecting our ability to adjust to changing demographics,
traffic patterns and market opportunities. More than $40 million were
spent for these investments in 1994, and $249 million over the past
five years.
20
-------------------------------------------------------------------------
(In thousands of dollars) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------
Land $ 317 $ 328 $ 361 $ 433 $ 433
Building 483 482 515 608 720
Equipment 295 317 361 362 403
-------------------------------------------------------------------------
U.S. average
development costs $1,095 $1,127 $1,237 $1,403 $1,556
=========================================================================
Average development costs have steadily decreased since 1990 due to
efforts to optimize building designs and standardize development.
Average land costs declined as a result of the increase in low-cost
building designs, which utilize smaller land parcels. Average building
costs remained relatively flat reflecting the benefits of these
building designs and construction efficiencies. Low-cost building
designs comprised nearly 83% of 1994 openings compared with 80% in
1993. Average equipment costs decreased due to standardization and
global sourcing. McDonald's intends to pursue ongoing development cost
reductions by taking further advantage of standardization, global
sourcing and economies of scale.
These lower-cost, lower-volume building designs allow us to
profitably expand into more locations. This is consistent with
McDonald's goal of increasing market share with greater marketwide
presence around the world.
The Company continues to emphasize restaurant property ownership,
because real estate ownership yields long-term benefits, including the
ability to fix occupancy costs. However, most satellites are leased
locations. In addition to purchasing new properties, the Company
acquires previously leased properties and owned 69% of U.S. sites at
year-end 1994, the same as five years ago.
21
----------------------------------------------------------------------
OPERATIONS OUTSIDE OF THE U.S.
----------------------------------------------------------------------
SALES
Sales outside of the U.S. rose 18% in 1994 due to expansion, higher
sales at existing restaurants as comparable sales on a local currency
basis were positive, and stronger foreign currencies. The 1993
increase was negatively impacted by weaker foreign currencies, most
notably the European currencies, as well as the Canadian and
Australian Dollars. Strong operating results have been achieved in the
past several years despite weak economies in several countries,
particularly Canada, England and Japan.
----------------------------------------------------------------------
Five Ten
years years
(In millions of dollars) 1994 1993 1992 ago ago
----------------------------------------------------------------------
Operated by franchisees $ 5,182 $4,321 $3,859 $2,142 $ 748
Operated by the Company 3,242 2,737 2,750 1,873 682
Operated by affiliates 2,622 2,343 2,033 1,306 506
----------------------------------------------------------------------
Sales outside of the U.S. $11,046 $9,401 $8,642 $5,321 $1,936
======================================================================
Although many European economies were weak over the past 18 months,
McDonald's markets generally performed well. Throughout 1994,
comparable sales in France and Germany were not as strong as in prior
years because of the economy, unusually hot weather in the summer, and
World Cup Soccer. Yet, growth and profitability in both markets were
very good. Pacific sales were strong with the exception of our joint
venture in Japan, which has been affected by a weak economy.
Transaction counts and profits were up in Japan, but sales trends had
not fundamentally improved. Business in Canada continued to improve,
despite a weak economy. Latin American economies have been weak, but
our business there has been quite good, particularly in Brazil, since
the mid-year economic reforms. Results in Mexico in 1994 were
impacted by the continuing sluggish economy and in December, by the
devaluation of the Mexican peso. We expect this impact to continue
into 1995.
In 1994, many markets delivered excellent sales growth on a local
currency basis: Argentina, Australia, Austria, Belgium, Brazil,
Canada, Denmark, England, Finland, France, Germany, Hong Kong,
Hungary, Ireland, Italy, Malaysia, Netherlands, New Zealand, Norway,
Panama, Philippines, Puerto Rico, Scotland, Singapore, South Korea,
Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey and Wales.
RESTAURANTS
During the past five years, 66% of Systemwide additions have been
outside of the U.S. Of the 751 restaurants added in 1994, 51% were in
the six largest markets, compared with 54% in 1993 and 57% in 1992.
This continued relative decline is indicative of the growing
importance of emerging markets. McDonald's expects to boost expansion
outside of the U.S. in 1995 and in each of the next several years by
adding between 800 and 1,000 restaurants, exclusive of satellites.
22
----------------------------------------------------------------------
Five Ten
years years
1994 1993 1992 ago ago
----------------------------------------------------------------------
Operated by franchisees 2,609 2,204 1,862 1,199 651
Operated by the Company 1,537 1,266 1,156 940 572
Operated by affiliates 1,315 1,240 1,116 753 486
----------------------------------------------------------------------
Restaurants outside of
the U.S. 5,461 4,710 4,134 2,892 1,709
======================================================================
About 79% of Company-operated restaurants outside of the U.S. were
in England, Canada, Germany, Australia, Taiwan, Hong Kong and France.
About 68% of franchised restaurants outside of the U.S. were in
Canada, Germany, Australia, France, Japan and the Netherlands. About
65% of the restaurants operated by affiliates were located in Japan.
OPERATING RESULTS
-----------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992 1991 1990
-----------------------------------------------------------------------
REVENUES
Sales by Company-
operated restaurants $3,242 $2,737 $2,750 $2,499 $2,364
Revenues from
franchised restaurants 923 740 634 486 405
-----------------------------------------------------------------------
TOTAL REVENUES 4,165 3,477 3,384 2,985 2,769
-----------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated
restaurants 2,579 2,188 2,206 2,029 1,915
Franchised restaurants 165 133 114 90 77
General, administrative
and selling expenses 369 303 295 246 213
Other operating (income)
expense--net (59) (44) (51) (58) (46)
-----------------------------------------------------------------------
TOTAL OPERATING
COSTS AND EXPENSES 3,054 2,580 2,564 2,307 2,159
-----------------------------------------------------------------------
OPERATING INCOME
OUTSIDE OF THE U.S. $1,111 $ 897 $ 820 $ 678 $ 610
=======================================================================
The 1994 and 1993 revenue and operating income increases reflected
expansion and higher combined operating margins, partially offset by
higher general, administrative and selling expenses. Changing foreign
currencies had a positive effect in 1994 and a negative effect in
1993; higher other operating income helped 1994.
Company-operated margins remained strong, increasing $114 million or
21% in 1994. These margins improved to 20.5% of sales in 1994,
compared with 20.1% in 1993 and 19.8% in 1992. Franchised margins grew
$151 million or 25% in 1994. These margins were 82.1% of applicable
revenues in 1994, compared with 82.0% in 1993 and 82.1% in 1992.
23
The 1994 and 1993 increases in general, administrative and selling
expenses were primarily due to higher employee costs associated with
expansion.
The 1994 increase in other operating income was primarily due to
gains on sales of restaurant businesses, greater affiliate earnings
from Japan and other markets, and gains resulting from property
dispositions. Other operating income decreased in 1993 due to the
favorable settlement of a sales tax case in Brazil in 1992, offset
somewhat by 1993 increases in gains on sales of restaurant businesses
and greater affiliate earnings.
Operations outside of the U.S. continued to contribute greater
amounts to consolidated results as shown below:
---------------------------------------------------------------------
(As a percent of consolidated) 1994 1993 1992 1991 1990
---------------------------------------------------------------------
Systemwide sales 43 40 39 37 35
Total revenues 50 47 47 45 42
Operating income 50 45 44 40 38
Operating margins
Company-operated 58 55 56 53 51
Franchised 36 32 31 27 24
Systemwide restaurants 36 34 32 29 27
Assets 51 47 45 46 43
---------------------------------------------------------------------
The Europe/Africa/Middle East segment accounted for 63% of revenues
and 61% of operating income outside of the U.S. in 1994, growing $369
and $124 million, respectively. Germany, England and France accounted
for 82% of this segment's operating income, compared with 85% in 1993.
The 1994 increases were primarily due to strong operating results in
these countries, as well as many emerging markets. The 1993 increases
were primarily due to strong operating results in Germany and France,
as well as many emerging markets, offset by weaker foreign currencies;
England's operating income was significantly impacted by the weaker
currency.
Asia/Pacific revenues grew $236 million and operating income
increased $52 million in 1994; 87% of operating income was contributed
by Australia, Japan, Hong Kong and Taiwan. The 1994 and 1993 increases
were attributable to expansion and developing economies in many
markets, with the exception of our affiliate in Japan which continued
to suffer from a weak economy. The change in ownership of Taiwan from
an affiliate to a wholly-owned subsidiary was also a benefit in 1994.
24
Canadian revenues decreased $12 million in 1994 due to the negative
impact of the weaker currency; revenues would have increased $21
million in 1994 if the exchange rate had remained at its 1993 level.
Operating income increased $6 million because of lower operating costs
and higher gains on sales of restaurant businesses, partially offset
by the weaker currency.
Latin American revenues grew $95 million, while operating income
increased $32 million in 1994. The 1994 increases in revenues and
operating income were primarily a function of expansion, as well as a
strengthening of the Brazilian market since the mid-year economic
reforms. However, operating income in Mexico was down because of the
economy and peso devaluation. The 1993 increase in revenues was
primarily a function of expansion, while the decrease in operating
income reflected the favorable settlement of a sales tax case in
Brazil in 1992, partially offset by better results in Argentina in
1993. Brazil was also affected by a weak economy in 1993 and 1992.
ASSETS AND CAPITAL EXPENDITURES
Assets outside of the U.S. rose $1.3 billion or 22% in 1994 due to
expansion and stronger foreign currencies. At year-end 1994, about 51%
of consolidated assets were located outside of the U.S.; 60% of these
assets were located in England, Germany, France, Australia and Canada.
-----------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992 1991 1990
-----------------------------------------------------------------------
New restaurants $ 723 $ 609 $ 603 $ 612 $ 639
Existing restaurants 87 94 91 94 126
Other properties 34 55 47 39 74
-----------------------------------------------------------------------
Capital expenditures
outside of the U.S. $ 844 $ 758 $ 741 $ 745 $ 839
=======================================================================
Assets outside of
the U.S. $6,909 $5,650 $5,271 $5,195 $4,608
-----------------------------------------------------------------------
In the past five years, nearly $3.9 billion were invested outside
of the U.S.; in 1994, capital expenditures rose in all geographic
segments. Approximately 70% of capital expenditures outside of the
U.S. were invested in Europe -- principally in Germany, France and
England.
In general, average development costs for new restaurants for the
five largest, majority-owned markets -- Australia, Canada, England,
France and Germany -- were nearly double the U.S. average; such costs
accommodate higher sales volumes and transaction counts. Since 1991,
average development costs have decreased due to construction and
design efficiencies, standardization, global sourcing and changes in
the mix of openings.
These lower-cost, lower-volume building designs allow us to
profitably expand into more locations. This is consistent with
McDonald's goal of increasing market share with greater marketwide
presence around the world.
25
Expenditures for existing restaurants included seating and decor
upgrades, and equipment required for new products and operating
efficiencies. The majority of these expenditures were in Europe.
Expenditures for other properties were principally for office
facilities.
As in the U.S., business outside of the U.S. emphasizes restaurant
property ownership. However, various laws and regulations make
property acquisition and ownership much more difficult than in the
U.S. Ownership is obtained when practical; otherwise, long-term leases
are a viable alternative. In addition, certain markets have laws and
customs that offer stronger tenancy rights than are available in the
U.S. The Company and affiliates owned 36% of sites outside of the U.S.
at year-end 1994, compared with 35% five years ago.
Capital expenditures made by affiliates -- which were not included
in consolidated amounts -- were $203 million in 1994, compared with
$207 million in 1993. The majority of 1994 expenditures were for
development in Japan, Argentina, Sweden and Singapore.
26
-----------------------------------------------------------------------
FINANCIAL POSITION
-----------------------------------------------------------------------
TOTAL ASSETS AND CAPITAL EXPENDITURES
Total assets grew approximately $1.6 billion or 13% in 1994; net
property and equipment represented 83% of total assets and rose $1.2
billion. Capital expenditures increased $213 million or 16%,
reflecting higher expansion, partially offset by lower average
development costs and stronger foreign currencies.
CASH PROVIDED BY OPERATIONS
Cash provided by operations increased $246 million or 15% in 1994.
Together with other sources of cash such as borrowings, cash provided
by operations was used principally for capital expenditures, debt
repayments, share repurchase and dividends. For the fourth straight
year, cash provided by operations exceeded capital expenditures.
While cash generated is significant relative to cash required, the
Company also has the ability to meet short-term needs through
commercial paper borrowings and line of credit agreements.
Accordingly, a relatively low current ratio has been purposefully
maintained; it was .30 at year-end 1994.
The Company believes that cash flow measures are meaningful
indicators of growth and financial strength, when evaluated in the
context of absolute dollars, uses and consistency. Over the past five
years, cash flow coverage has improved significantly. Cash provided by
operations is expected to cover capital expenditures over the next
several years, even as expansion continues to accelerate.
-----------------------------------------------------------------------
(Dollars in millions) 1994 1993 1992 1991 1990
-----------------------------------------------------------------------
Cash provided by
operations $1,926 $1,680 $1,426 $1,423 $1,301
Cash provided by operations
less capital expenditures $ 388 $ 363 $ 339 $ 294 $ (270)
Cash provided by operations
as a percent of capital
expenditures 125 128 131 126 83
Cash provided by operations
as a percent of average
total debt 48 44 33 31 29
-----------------------------------------------------------------------
FINANCINGS
The Company strives to minimize interest expense and the impact of
changing foreign currencies while maintaining the capacity to meet
increasing growth requirements. To accomplish these objectives,
McDonald's generally finances long-term assets with long-term debt in
the currencies in which the assets are denominated, while remaining
flexible to take advantage of changing foreign currencies and interest
rates.
27
Over the years, major capital markets and various techniques have
been utilized to meet financing requirements and reduce interest
expense. Currency exchange agreements have been employed in
conjunction with borrowings to obtain desired currencies at attractive
rates. Interest-rate exchange agreements have been used to effectively
convert fixed-rate to floating-rate debt, or vice versa. Foreign-
denominated debt has been used to lessen the impact of changing
foreign currencies on net income and shareholders' equity. Total
foreign-denominated debt, including the effects of currency exchange
agreements, was $4.0 and $3.1 billion at year-end 1994 and 1993,
respectively.
-----------------------------------------------------------------------
1994 1993 1992 1991 1990
-----------------------------------------------------------------------
Fixed-rate debt as a percent
of total debt at year end 64 77 75 78 78
Weighted average annual
interest rate 8.4 9.1 9.3 9.4 9.4
Foreign-denominated debt
as a percent of total debt
at year end 92 86 72 61 60
Total debt as a percent of
total capitalization (total
debt and total shareholders'
equity) 39 37 40 49 53
-----------------------------------------------------------------------
The Company manages its debt portfolio in order to respond to
changes in interest rates and foreign currencies and accordingly,
periodically retires, redeems, and repurchases debt; terminates
exchange agreements; and uses derivatives. While changing foreign
currencies affect reported results, the Company actively hedges seven
foreign currencies -- Japanese Yen, Deutsche Mark, French Franc,
British Pound Sterling, Australian Dollar, Canadian Dollar and Swiss
Franc -- to minimize the cash exposure of royalty and other payments
received in the U.S. in local currencies.
28
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 financial instruments for trading purposes; all exchange
agreements are over-the-counter instruments. McDonald's restaurants
also primarily purchase goods and services in local currencies
resulting in natural hedges. McDonald's typically finances in local
currencies creating economic hedges; and the Company's exposure is
diversified within a basket of currencies, as opposed to one or
several. The Company's largest net asset exposures (defined as total
assets less foreign-denominated liabilities) by foreign currency were
as follows:
----------------------------------------------------------------------
(In millions of dollars) December 31, 1994 1993
----------------------------------------------------------------------
British Pounds Sterling $330 $324
Canadian Dollars 311 276
Australian Dollars 212 152
French Francs 99 81
Austrian Schillings 84 63
----------------------------------------------------------------------
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+. At the present time, these strong
ratings are important to us in the context of our global development
plans. The Company has not experienced, nor does it expect to
experience, difficulty in obtaining financing or in refinancing
existing debt. At year-end 1994, the Company and its subsidiaries had
$1.7 billion available under line of credit agreements and $585
million under previously filed shelf registrations available for
future debt issuance.
Although McDonald's prefers to own real estate, leases are an
alternative financing method. As in the past, some new properties will
be leased. Such leases frequently include renewal and/or purchase
options. In the past five years, McDonald's has leased properties
related to 40% of U.S. openings (excluding satellites) and 64% of
openings outside of the U.S. (excluding satellites).
Since 1990, the Company has improved its balance sheet by reducing
leverage while simultaneously increasing expansion and repurchasing
shares.
TOTAL SHAREHOLDERS' EQUITY
Total shareholders' equity rose $611 million or 10% in 1994,
representing 51% of total assets at year-end 1994. One technique used
to enhance common shareholder value is to repurchase shares with our
excess cash flow or debt capacity, while maintaining a strong equity
base for future expansion. At year-end 1994, the market value of
shares repurchased and recorded as common stock in treasury was
$4.0 billion, compared to their cost of $2.4 billion.
29
In conjunction with efforts to enhance common shareholder value,
the Company repurchased about $500 million of its common stock in
1994, representing half of the three-year $1.0 billion program
announced in January 1994. In 1993, the Company completed a $700
million common share repurchase program begun in 1992. In 1992, in
order to lower the cost of equity capital, the Company issued $500
million of Series E 7.72% Cumulative Preferred Stock; at the same
time, the Board of Directors authorized a $500 million common share
repurchase program. Subsequently, the Board authorized an additional
$200 million expenditure for share repurchase in 1993.
Stronger foreign currencies added $77 million to shareholders'
equity in 1994. At year-end 1994, foreign-denominated assets not
entirely financed with related foreign-denominated debt were
principally located in England, Canada, Australia, France and Austria.
At year-end 1994, assets in hyperinflationary markets and in Mexico
were principally financed in U.S. Dollars.
RETURNS
Return on average assets is computed using operating income. Net
income, less preferred stock dividends (net of tax in 1994, 1993 and
1992), is used to calculate return on average common equity. Month-end
balances are used to compute both average assets and average common
equity.
----------------------------------------------------------------------
1994 1993 1992 1991 1990
----------------------------------------------------------------------
Return on average assets 17.6 17.0 16.4 15.7 16.3
Return on average common
equity 19.4 19.0 18.2 19.1 20.7
----------------------------------------------------------------------
The improvements in return on average assets since 1991 reflected
better global operating results and a slower rate of asset growth. The
1994 and 1993 improvements in return on average common equity
reflected higher levels of share repurchase, whereas declines in 1992
and 1991 resulted from lower levels of share repurchase as excess cash
flow was used to reduce debt.
EFFECTS OF CHANGING PRICES--INFLATION
McDonald's has demonstrated an ability to manage inflationary cost
increases effectively. Rapid inventory turnover, ability to adjust
prices, cost controls and substantial property holdings -- many of
which are at fixed costs and partially financed by debt made cheaper
by inflation -- have enabled McDonald's to mitigate the effects of
inflation. In hyperinflationary markets, menu board prices typically
are adjusted to keep pace, thereby mitigating the effect on reported
results.
30
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reference
---------
Management's report 31
Report of independent auditors 32
Consolidated statement of income
for each of the three years in the
period ended December 31, 1994 33
Consolidated balance sheet
at December 31, 1994 and 1993 34
Consolidated statement of cash flows
for each of the three years in the
period ended December 31, 1994 35
Consolidated statement of shareholders'
equity for each of the three years in
the period ended December 31, 1994 36
Notes to consolidated financial statements
(Financial comments) 37-54
Quarterly results (unaudited) 55
31
MANAGEMENT'S REPORT
Management is responsible for the preparation, integrity and fair
presentation of the consolidated financial statements and Financial
Comments appearing in this annual report. The financial statements
were prepared in accordance with generally accepted accounting
principles and include certain amounts based on management's judgment
and best estimates. Other financial information presented in the
annual report is consistent with the financial statements.
The Company maintains a system of internal control 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 which 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 the highest ethical standards and that
business practices throughout the world are to be conducted in a
manner which is above reproach.
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
that at December 31, 1994, it maintained 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.
The Board of Directors, operating through its Audit Committee
composed entirely of outside Directors, provides oversight to the
financial reporting process. Ernst & Young LLP has independent access
to the Audit Committee and periodically meets with the Committee to
discuss accounting, auditing and financial reporting matters.
McDONALD'S CORPORATION
Oak Brook, Illinois
January 26, 1995
32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
McDonald's Corporation
Oak Brook, Illinois
We have audited the accompanying consolidated balance sheet of
McDonald's Corporation and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1994. 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 and subsidiaries at December 31, 1994 and
1993, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 26, 1995
33
McDONALD'S CORPORATION
CONSOLIDATED STATEMENT OF INCOME
--------------------------------------------------------------------------
(In millions of dollars, except per common share data)
Years ended December 31, 1994 1993 1992
--------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $5,792.6 $5,157.2 $5,102.5
Revenues from franchised restaurants 2,528.2 2,250.9 2,030.8
--------------------------------------------------------------------------
TOTAL REVENUES 8,320.8 7,408.1 7,133.3
--------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants
Food and packaging 1,934.2 1,735.1 1,688.8
Payroll and other employee benefits 1,459.1 1,291.2 1,281.4
Occupancy and other operating expenses 1,251.7 1,138.3 1,156.3
--------------------------------------------------------------------------
4,645.0 4,164.6 4,126.5
--------------------------------------------------------------------------
Franchised restaurants--occupancy expenses 435.5 380.4 348.6
General, administrative and selling expenses 1,083.0 941.1 860.6
Other operating (income) expense--net (83.9) (62.0) (64.0)
--------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 6,079.6 5,424.1 5,271.7
--------------------------------------------------------------------------
OPERATING INCOME 2,241.2 1,984.0 1,861.6
--------------------------------------------------------------------------
Interest expense--net of capitalized interest
of $20.6, $20.0 and $19.5 305.7 316.1 373.6
Nonoperating income (expense)--net (48.9) 7.8 (39.9)
--------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,886.6 1,675.7 1,448.1
--------------------------------------------------------------------------
Provision for income taxes 662.2 593.2 489.5
--------------------------------------------------------------------------
NET INCOME $1,224.4 $1,082.5 $ 958.6
==========================================================================
NET INCOME PER COMMON SHARE $ 1.68 $ 1.45 $ 1.30
--------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .23 $ .21 $ .20
--------------------------------------------------------------------------
The accompanying Financial Comments are an integral part of the
consolidated financial statements.
/TABLE
34
McDONALD'S CORPORATION
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------
(In millions of dollars) December 31, 1994 1993
--------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $179.9 $185.8
Accounts receivable 348.1 287.0
Notes receivable 31.2 27.6
Inventories, at cost, not in excess of market 50.5 43.5
Prepaid expenses and other current assets 131.0 118.9
--------------------------------------------------------------------
TOTAL CURRENT ASSETS 740.7 662.8
--------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES
Notes receivable due after one year 80.0 90.0
Investments in and advances to affiliates 579.3 446.7
Miscellaneous 380.4 338.6
--------------------------------------------------------------------
TOTAL OTHER ASSETS AND DEFERRED CHARGES 1,039.7 875.3
--------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment, at cost 15,184.6 13,459.0
Accumulated depreciation and amortization (3,856.2) (3,377.6)
--------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 11,328.4 10,081.4
--------------------------------------------------------------------
INTANGIBLE ASSETS--NET 483.1 415.7
--------------------------------------------------------------------
TOTAL ASSETS $13,591.9 $12,035.2
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $1,046.9 $193.3
Accounts payable 509.4 395.7
Income taxes 25.0 56.0
Other taxes 102.1 90.2
Accrued interest 107.7 132.9
Other accrued liabilities 291.9 203.9
Current maturities of long-term debt 368.3 30.0
--------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,451.3 1,102.0
--------------------------------------------------------------------
LONG-TERM DEBT 2,935.4 3,489.4
OTHER LONG-TERM LIABILITIES AND
MINORITY INTERESTS 422.8 334.4
DEFERRED INCOME TAXES 840.8 835.3
COMMON EQUITY PUT OPTIONS 56.2
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
authorized--165.0 million shares;
issued--11.2 and 11.4 million 674.2 677.3
Common stock, no par value;
authorized--1.25 billion shares;
issued--830.3 million 92.3 92.3
Additional paid-in capital 286.0 256.7
Guarantee of ESOP Notes (234.4) (253.6)
Retained earnings 8,625.9 7,612.6
Foreign currency translation adjustment (114.9) (192.2)
--------------------------------------------------------------------
9,329.1 8,193.1
--------------------------------------------------------------------
Common stock in treasury, at cost;
136.6 and 123.0 million shares (2,443.7) (1,919.0)
--------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 6,885.4 6,274.1
--------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,591.9 $12,035.2
====================================================================
The accompanying Financial Comments are an integral part of the
consolidated financial statements.
/TABLE
35
McDONALD'S CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------
(In millions of dollars)
Years ended December 31, 1994 1993 1992
--------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $1,224.4 $1,082.5 $958.6
Adjustments to reconcile to cash
provided by operations
Depreciation and amortization 628.6 568.4 554.9
Deferred income taxes (5.6) 52.4 22.4
Changes in operating working capital items
Accounts receivable increase (51.6) (48.3) (29.1)
Inventories, prepaid expenses and other
current assets (increase) decrease (15.0) (9.6) 2.2
Accounts payable increase 105.4 45.4 .8
Accrued interest decrease (25.5) (5.1) (27.4)
Taxes and other liabilities increase
(decrease) 95.2 26.5 (68.2)
Other--net (29.7) (32.4) 11.7
--------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS 1,926.2 1,679.8 1,425.9
--------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment expenditures (1,538.6) (1,316.9) (1,086.9)
Sales of restaurant businesses 151.5 114.2 124.5
Purchases of restaurant businesses (133.8) (64.2) (64.1)
Notes receivable additions (15.1) (33.1) (31.8)
Property sales 66.0 61.6 52.2
Notes receivable reductions 56.7 75.7 78.5
Other (92.6) (55.3) (71.1)
--------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (1,505.9) (1,218.0) (998.7)
--------------------------------------------------------------------------
FINANCING ACTIVITIES
Net short-term borrowings 521.7 (8.9) 17.0
Long-term financing issuances 260.9 1,241.0 509.5
Long-term financing repayments (536.9) (1,185.9) (1,041.5)
Treasury stock purchases (495.6) (620.1) (79.7)
Preferred stock issuances 484.9
Common and preferred stock dividends (215.7) (201.2) (160.5)
Other 39.4 62.6 59.4
--------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES (426.2) (712.5) (210.9)
--------------------------------------------------------------------------
CASH AND EQUIVALENTS INCREASE (DECREASE) (5.9) (250.7) 216.3
--------------------------------------------------------------------------
Cash and equivalents at beginning of year 185.8 436.5 220.2
--------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $179.9 $185.8 $436.5
==========================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $323.9 $312.2 $395.7
Income taxes paid $621.8 $521.7 $531.6
--------------------------------------------------------------------------
The accompanying Financial Comments are an integral part of the
consolidated financial statements.
/TABLE
36
McDONALD'S CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars and shares in millions, except per share data)
Foreign
Preferred Common Additional Guarantee currency Common stock
stock issued stock issued paid-in of Retained translation in treasury
Shares Amount Shares Amount capital ESOP Notes earnings adjustment Shares Amount
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 19.8 $298.2 830.3 $92.3 $155.8 $(286.7) $5,925.2 $32.3 (113.1) $(1,382.0)
----------------------------------------------------------------------------------------------------------------------------------
Net income 958.6
Common stock cash dividends
($.20 per share) (141.8)
Preferred stock cash dividends
($1.01 for Series B, $1.16 for
Series C and $.16 for Series
E depositary share), (net of
tax benefits of $6.4) (14.7)
Preferred stock issuance 500.0 (15.1)
Preferred stock conversion (8.2) (118.0) 22.9 6.4 95.1
ESOP Notes payment 12.6
Treasury stock acquisitions (3.8) (92.3)
Translation adjustments
(including taxes of $21.2) (159.7)
Common equity put options
issuance (91.5)
Stock option exercises and
other (including tax benefits
of $29.7) 50.5 2.8 7.2 47.9
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 11.6 680.2 830.3 92.3 214.1 (271.3) 6,727.3 (127.4) (103.3) (1,422.8)
----------------------------------------------------------------------------------------------------------------------------------
Net income 1,082.5
Common stock cash dividends
($.21 per share) (150.3)
Preferred stock cash dividends
($1.01 for Series B, $1.16 for
Series C and $1.93 for Series
E depositary share), (net of
tax benefits of $4.1) (46.9)
Preferred stock conversion (.2) (2.9) .5 .2 2.4
ESOP Notes payment 15.5
Treasury stock acquisitions (25.0) (627.7)
Translation adjustments
(including taxes of $1.6) (64.8)
Common equity put options
expiration 94.0
Stock option exercises and other
(including tax benefits of
$23.0) 42.1 2.2 5.1 35.1
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 11.4 677.3 830.3 92.3 256.7 (253.6) 7,612.6 (192.2) (123.0) (1,919.0)
----------------------------------------------------------------------------------------------------------------------------------
Net income 1,224.4
Common stock cash dividends
($.23 per share) (163.9)
Preferred stock cash dividends
($1.01 for Series B, $1.16 for
Series C and $1.93 for Series
E depositary share), (net of
tax benefits of $3.7) (47.2)
Preferred stock conversion (.2) (3.1) .5 .2 2.6
ESOP Notes payment 17.5
Treasury stock acquisitions (17.6) (499.8)
Translation adjustments
(including taxes of $50.8) 77.3
Common equity put options
issuance (54.6)
Stock option exercises and other
(including tax benefits of
$20.3) 28.8 1.7 3.8 27.1
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 11.2 $674.2 830.3 $92.3 $286.0 $(234.4) $8,625.9 $(114.9) (136.6) $(2,443.7)
==================================================================================================================================
The accompanying Financial Comments are an integral part of the consolidated financial statements.
/TABLE
37
MCDONALD'S CORPORATION FINANCIAL COMMENTS
--------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Investments in 50% or less owned
affiliates are carried at equity in the companies' net assets.
FOREIGN CURRENCY TRANSLATION
The functional currency of each operation outside of the U.S. is the
respective local currency, except for hyperinflationary countries
where it is the U.S. Dollar.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and
amortization provided on 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--3 to 12 years.
INTANGIBLE ASSETS
Intangible assets consist primarily of franchise rights reacquired
from franchisees and affiliates, and are amortized on the straight-
line method over an average life of 30 years.
ADVERTISING COSTS
In the fourth quarter of 1994, the Company adopted the American
Institute of Certified Public Accountants' Statement of Position 93-7,
Reporting on Advertising Costs. Under its provisions, the Company
expenses production costs of radio and television ads as of the date
the commercials are initially aired. As a result, the Company recorded
a one-time, noncash $15.0 million charge to general, administrative
and selling expenses in the fourth quarter. Advertising expenses
included in costs of Company-operated restaurants and general,
administrative and selling expenses were (in millions): 1994--$385.6;
1993--$353.8; 1992--$355.7.
38
FINANCIAL INSTRUMENTS
The Company utilizes derivatives in managing risk, but not for trading
purposes. Non-U.S. Dollar financing transactions generally are
effective as hedges of long-term investments or intercompany loans in
the corresponding currency. Foreign currency gains and losses on the
hedges of long-term investments are recorded as foreign currency
translation adjustment included in shareholders' equity. 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. The Company also uses short-term
forward foreign exchange contracts to hedge future foreign-denominated
royalty cash flows and other payments received in the U.S. from
foreign subsidiaries and affiliates. Gains and losses associated with
these contracts are deferred and amortized over the twelve-month
period being hedged.
The carrying amounts for cash and equivalents and notes receivable
approximated fair value. For noninterest-bearing security deposits by
franchisees, no fair value was provided as these deposits are an
integral part of the overall franchise arrangements.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with short-term
maturity dates to be cash equivalents. The impact of changing foreign
currencies on cash and equivalents was not material.
39
----------------------------------------------------------------------
NUMBER OF LOCATIONS IN OPERATION
----------------------------------------------------------------------
December 31, 1994 1993 1992 1991
----------------------------------------------------------------------
Operated by franchisees 9,982 9,288 8,654 8,151
Operated under business
facilities lease arrangements 476 544 583 584
Operated by the Company 3,083 2,699 2,551 2,547
Operated by 50% or less
owned affiliates 1,664 1,462 1,305 1,136
----------------------------------------------------------------------
Systemwide restaurants
(excluding satellites) 15,205 13,993 13,093 12,418
======================================================================
Franchisees operating under business facilities lease arrangements
have options to purchase the businesses. The results of operations of
restaurant businesses purchased and sold in transactions with
franchisees and affiliates were not material to the consolidated
financial statements for periods prior to purchase and sale. In 1994,
due to increased ownership, the Company consolidated affiliates in
Taiwan, South Korea, Turkey and China, which increased total assets
and liabilities by approximately $205.0 million.
----------------------------------------------------------------------
December 31, 1994 1993
----------------------------------------------------------------------
U.S. 494 114
Outside of the U.S. 251 56
----------------------------------------------------------------------
Systemwide satellites 745 170
======================================================================
Satellite foodservice facilities are points of distribution which
leverage the infrastructure of existing restaurants by using their
storage capability and inventory, and by drawing on their management
talent and labor pool.
----------------------------------------------------------------------
OTHER OPERATING (INCOME) EXPENSE--NET
----------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992
----------------------------------------------------------------------
Gains on sales of restaurant businesses $(67.1) $(48.2) $(43.1)
Equity in earnings of unconsolidated
affiliates (47.0) (34.6) (29.5)
Net losses from property dispositions 20.0 15.5 18.1
Other--net 10.2 5.3 (9.5)
----------------------------------------------------------------------
Other operating (income) expense--net $(83.9) $(62.0) $(64.0)
======================================================================
Gains on sales of restaurant businesses are recognized as income when
the sales are consummated and other stipulated conditions are met.
Proceeds from certain sales of restaurant businesses and property
include notes receivable.
40
---------------------------------------------------------------------
INCOME TAXES
---------------------------------------------------------------------
Income before provision for income taxes and the provision for income
taxes, classified by source of income, were as follows:
---------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992
---------------------------------------------------------------------
U.S. $1,046.4 $ 986.0 $ 873.3
Outside of the U.S. 840.2 689.7 574.8
---------------------------------------------------------------------
Income before provision for
income taxes $1,886.6 $1,675.7 $1,448.1
=====================================================================
U.S. $ 396.2 $ 391.9 $ 316.8
Outside of the U.S. 266.0 201.3 172.7
---------------------------------------------------------------------
Provision for income taxes $ 662.2 $ 593.2 $ 489.5
=====================================================================
Income before provision for income taxes outside of the U.S. and the
related provision for income taxes reflect fees received in the U.S.
from operations outside of the U.S. Income before provision for income
taxes in the U.S. and the related provision for income taxes reflect
interest received in the U.S. from operations outside of the U.S.
The provision for income taxes, classified by the timing and location
of payment, consisted of:
---------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992
---------------------------------------------------------------------
Current
U.S. federal $379.3 $331.6 $256.8
U.S. state 71.1 62.0 56.3
Outside of the U.S. 217.4 147.2 154.0
---------------------------------------------------------------------
667.8 540.8 467.1
---------------------------------------------------------------------
Deferred
U.S. federal (21.2) 21.9 (10.3)
U.S. state (3.0) 3.4 4.0
Outside of the U.S. 18.6 27.1 28.7
---------------------------------------------------------------------
(5.6) 52.4 22.4
---------------------------------------------------------------------
Provision for income taxes $662.2 $593.2 $489.5
=====================================================================
41
Included in the 1993 deferred tax provision were $14.0 million
attributable to a one-time, noncash revaluation of deferred tax
liabilities resulting from the increase in the statutory U.S. federal
income tax rate.
Net deferred tax liabilities consisted of:
-------------------------------------------------------------------------
(In millions of dollars) December 31, 1994 1993
-------------------------------------------------------------------------
Property and equipment basis differences $ 852.8 $ 786.1
Other 178.3 175.4
-------------------------------------------------------------------------
Total deferred tax liabilities 1,031.1 961.5
-------------------------------------------------------------------------
Deferred tax assets before
valuation allowance (1) (274.7) (192.8)
Valuation allowance 41.4 44.5
-------------------------------------------------------------------------
Net deferred tax liabilities (2) $ 797.8 $ 813.2
=========================================================================
(1) Includes loss carryforwards (in millions): 1994--$45.1; 1993--
$46.7.
(2) Net of assets recorded in current income taxes (in millions):
1994--$43.0; 1993--$22.1.
Reconciliations of the statutory U.S. federal income tax rates to
the effective income tax rates were as follows:
-------------------------------------------------------------------------
1994 1993 1992
-------------------------------------------------------------------------
Statutory U.S. federal income tax rates 35.0% 35.0% 34.0%
State income taxes, net of related
federal income tax benefit 2.3 2.5 2.7
Other (2.2) (2.1) (2.9)
-------------------------------------------------------------------------
Effective income tax rates 35.1% 35.4% 33.8%
=========================================================================
Deferred U.S. income taxes have not been provided on basis differences
related to investments in certain foreign subsidiaries and affiliates.
These basis differences were approximately $675.0 million at December
31, 1994, and consisted primarily of undistributed earnings which are
considered to be permanently invested in the businesses. If these
earnings were not considered permanently invested, no additional taxes
would be provided due to the overall higher tax rates in markets outside
of the U.S. and the ability to recover withholding taxes as foreign tax
credits in the U.S.
42
----------------------------------------------------------------------
SEGMENT AND GEOGRAPHIC INFORMATION
----------------------------------------------------------------------
The Company operates exclusively in the foodservice industry.
Substantially all revenues result from the sale of menu products at
restaurants operated by the Company, franchisees or affiliates.
Operating income includes the Company's share of operating results of
affiliates. All intercompany revenues and expenses are eliminated in
computing revenues and operating income. Fees received in the U.S.
from subsidiaries outside of the U.S. were (in millions): 1994--
$268.9; 1993--$202.8; 1992--$187.8.
----------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992
----------------------------------------------------------------------
U.S. $ 4,155.5 $ 3,931.2 $ 3,749.4
Europe/Africa/Middle East 2,604.7 2,235.9 2,187.0
Asia/Pacific 730.7 494.4 434.6
Canada 546.1 557.8 595.1
Latin America 283.8 188.8 167.2
----------------------------------------------------------------------
Total revenues $ 8,320.8 $ 7,408.1 $ 7,133.3
======================================================================
U.S. $ 1,130.5 $ 1,087.1 $ 1,041.6
Europe/Africa/Middle East 671.9 547.5 484.0
Asia/Pacific 242.9 190.6 163.2
Canada 116.8 111.2 113.5
Latin America 79.1 47.6 59.3
----------------------------------------------------------------------
Operating income $ 2,241.2 $ 1,984.0 $ 1,861.6
======================================================================
U.S. $ 6,682.7 $ 6,385.4 $ 6,410.6
Europe/Africa/Middle East 4,257.5 3,473.2 3,290.9
Asia/Pacific 1,547.7 1,103.2 980.3
Canada 487.6 562.5 587.4
Latin America 616.4 510.9 412.0
----------------------------------------------------------------------
Total assets $13,591.9 $12,035.2 $11,681.2
======================================================================
43
------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
------------------------------------------------------------------------
(In millions of dollars) December 31, 1994 1993
------------------------------------------------------------------------
Land $ 2,950.1 $ 2,587.2
Buildings and improvements on owned land 5,814.7 5,209.4
Buildings and improvements on leased land 4,211.2 3,673.0
Equipment, signs and seating 1,727.8 1,545.4
Other 480.8 444.0
------------------------------------------------------------------------
15,184.6 13,459.0
------------------------------------------------------------------------
Accumulated depreciation and amortization (3,856.2) (3,377.6)
------------------------------------------------------------------------
Net property and equipment $11,328.4 $10,081.4
========================================================================
Depreciation and amortization were (in millions): 1994--$550.5; 1993--
$492.8; 1992--$492.9. Contractual obligations for the acquisition and
construction of property amounted to $241.2 million at December 31,
1994.
------------------------------------------------------------------------
DEBT FINANCING
------------------------------------------------------------------------
LINE OF CREDIT AGREEMENTS
The Company has a line of credit agreement for $700.0 million, which
remained unused at December 31, 1994, and which may be renewed on an
annual basis unless the participating banks notify the Company four
days prior to the renewal period. Prior to July 20, 1994, the
agreement could not be terminated without 18 months notice and
supported the classification of certain notes maturing within one year
as long-term debt. Each borrowing under the current agreement bears
interest at one of several specified floating rates to be selected by
the Company at the time of borrowing. The agreement provides for fees
of .07% per annum on the unused portion of the commitment. In
addition, certain subsidiaries outside of the U.S. had unused lines of
credit totaling $1.0 billion at December 31, 1994; these were
principally short-term and denominated in various currencies at local
market rates of interest. The weighted average interest rates of
short-term borrowings, comprised of commercial paper and foreign-
denominated bank line borrowings, were 6.8% and 8.1% at December 31,
1994, and 1993, respectively.
44
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, as well as additional interest-
rate exchange agreements, expire through 2003. The interest-rate
exchange agreements had a notional amount with a U.S. Dollar
equivalent of $1.3 billion at December 31, 1994, and were denominated
primarily in U.S. Dollars, British Pounds Sterling, French Francs,
Deutsche Marks and Japanese Yen. The net value of each exchange
agreement was classified as an asset or liability based on its
carrying amount, and any related interest income was netted against
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 a significant
exposure to any individual counterparty, and has entered into master
agreements that contain netting arrangements.
The Company also had short-term forward foreign exchange contracts
outstanding at December 31, 1994, with a U.S. Dollar equivalent of
$65.2 million in various currencies, primarily payable in French
Francs, Deutsche Marks, British Pounds Sterling and Japanese Yen. The
deferred loss related to the short-term hedging program was $1.7
million at December 31, 1994.
GUARANTEES
Included in total debt at December 31, 1994, were $159.5 million of
7.5% ESOP Notes Series A and $83.3 million of 7.2% ESOP Notes Series B
issued by the Leveraged Employee Stock Ownership Plan (LESOP), with
payments through 2004 and 2006, respectively, which are guaranteed by
the Company. Interest rates on the notes were adjusted in 1994 due to
refinancing of certain sinking fund payments. The Company has agreed
to repurchase the notes upon the occurrence of certain events.
The Company also has guaranteed certain foreign affiliate loans
totaling $66.9 million at December 31, 1994. The Company also was a
general partner in 70 domestic partnerships with total assets of
$287.0 million and total liabilities of $141.3 million at December 31,
1994.
45
FAIR VALUES
----------------------------------------------------------------------
December 31, 1994
(In millions of dollars) Carrying amount Fair value
----------------------------------------------------------------------
Liabilities
Debt $3,116.8 $3,050.9
Notes payable 1,046.9 1,046.9
Foreign currency exchange agreements 186.9 225.5
Interest-rate exchange agreements 35.6
----------------------------------------------------------------------
Total liabilities 4,350.6 4,358.9
----------------------------------------------------------------------
Assets
Foreign currency exchange agreements 37.5 18.5
----------------------------------------------------------------------
Net debt $4,313.1 $4,340.4
======================================================================
The carrying amounts for short-term forward foreign exchange contracts
approximated fair value at December 31, 1994. The fair value of the
debt obligations (excluding capital leases) and of the currency and
interest-rate exchange agreements was estimated using quoted market
prices, various pricing models or discounted cash flow analyses. 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 higher than their carrying value at
December 31, 1994.
DEBT OBLIGATIONS
The Company has incurred debt obligations principally through various
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 gross effects of currency and
interest-rate exchange agreements:
46
DEBT OBLIGATIONS
Interest rates (1) Amounts outstanding
Maturity December 31 December 31 Aggregate maturities by currency for 1994 balances
dates 1994 1993 1994 1993 1995 1996 1997 1998 1999 Thereafter
(In millions of U.S. Dollars)
---------------------------------------------------------------------------------------------------------------------------------
Fixed-original issue 8.2% 8.5% $1,647.0 $1,790.6
Fixed-converted via
exchange agreements (2) 5.7 5.6 (1,483.6) (1,449.0)
Floating 4.5 3.0 167.3 163.2
---------------------------------------------------------------------------------------------------------------------------------
Total U.S. Dollars 1995-2033 330.7 504.8 $644.9 $(363.1) $(72.4) $(400.4) $9.9 $511.8
---------------------------------------------------------------------------------------------------------------------------------
Fixed 8.3 8.9 527.2 447.1
Floating 6.0 6.7 292.3 168.6
---------------------------------------------------------------------------------------------------------------------------------
Total French Francs 1995-2003 819.5 615.7 150.3 59.6 56.6 93.8 138.6` 320.6
---------------------------------------------------------------------------------------------------------------------------------
Fixed 6.4 6.3 440.7 423.1
Floating 5.4 6.9 339.5 116.7
---------------------------------------------------------------------------------------------------------------------------------
Total Deutsche Marks 1995-2007 780.2 539.8 168.0 138.5 116.2 259.6 32.3 65.6
---------------------------------------------------------------------------------------------------------------------------------
Fixed 10.4 9.8 464.9 498.6
Floating 6.1 5.4 197.2 178.0
---------------------------------------------------------------------------------------------------------------------------------
Total British Pounds
Sterling 1995-2003 662.1 676.6 32.0 170.7 15.6 77.6 31.3 334.9
---------------------------------------------------------------------------------------------------------------------------------
Fixed 4.3 4.3 375.8 357.7
Floating 2.0 135.5
---------------------------------------------------------------------------------------------------------------------------------
Total Japanese Yen 1996-2023 511.3 357.7 210.8 100.4 200.1
---------------------------------------------------------------------------------------------------------------------------------
Fixed 11.1 12.0 113.3 117.3
Floating 7.4 5.0 106.3 61.0
---------------------------------------------------------------------------------------------------------------------------------
Total Australian
Dollars 1995-2000 219.6 178.3 84.1 65.9 1.0 67.2 .9 .5
---------------------------------------------------------------------------------------------------------------------------------
Fixed 6.4 7.7 149.9 71.7
Floating 5.7 6.2 26.6 22.6
---------------------------------------------------------------------------------------------------------------------------------
Total Netherland
Guilders 1995-1999 176.5 94.3 49.6 77.8 49.1
---------------------------------------------------------------------------------------------------------------------------------
Fixed 11.8 11.6 114.5 166.9
Floating 6.0 4.5 39.3 50.3
---------------------------------------------------------------------------------------------------------------------------------
Total Canadian Dollars 1995-2021 153.8 217.2 80.6 71.5 .2 .2 .3 1.0
---------------------------------------------------------------------------------------------------------------------------------
Fixed 8.1 8.6 97.0 118.4
Floating 6.4 4.1 37.6 21.0
---------------------------------------------------------------------------------------------------------------------------------
Total Hong Kong
Dollars 1995-2008 134.6 139.4 44.1 6.5 25.9 12.9 6.4 38.8
---------------------------------------------------------------------------------------------------------------------------------
Fixed 8.0 41.0
Floating 8.2 69.6
---------------------------------------------------------------------------------------------------------------------------------
Total New Taiwan
Dollars (3) 1995-2001 110.6 22.4 26.6 17.0 13.2 8.6 22.8
---------------------------------------------------------------------------------------------------------------------------------
Fixed 7.5 8.0 289.5 231.6
Floating 12.1 13.6 124.7 48.5
---------------------------------------------------------------------------------------------------------------------------------
Total other currencies 1995-2016 414.2 280.1 135.5 47.6 4.8 99.3 48.5 78.5
---------------------------------------------------------------------------------------------------------------------------------
Debt obligations
including the net effects
of currency and interest-
rate exchange agreements 4,313.1 3,603.9 1,411.5 434.6 265.3 301.2 325.9 1,574.6
---------------------------------------------------------------------------------------------------------------------------------
Net asset positions of
currency exchange
agreements (included in
miscellaneous other
assets) 37.5 108.8 3.7 12.5 .1 7.1 2.5 11.6
---------------------------------------------------------------------------------------------------------------------------------
Total debt obligations $4,350.6 $3,712.7 $1,415.2 $447.1 $265.4 $308.3 $328.4 $1,586.2
=================================================================================================================================
(1) Weighted average effective rate, computed on a semi-annual basis.
(2) 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 reflected the fixed rate on the receivable portion
of the exchange agreements. All other obligations in this table reflected the
gross effects of these and other exchange agreements.
(3) In 1994, due to an increase in ownership, the Company consolidated its Taiwan
affiliate.
/TABLE
47
-------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS
-------------------------------------------------------------------
(In millions of dollars) December 31, 1994 1993
-------------------------------------------------------------------
Security deposits by franchisees $141.2 $121.4
Preferred interests in consolidated
subsidiaries 162.4 106.7
Minority interests in consolidated
subsidiaries 50.3 38.2
Other 68.9 68.1
-------------------------------------------------------------------
Other long-term liabilities and minority
interests $422.8 $334.4
===================================================================
A Company subsidiary issued 25 million British Pounds Sterling of
5.42% Series B Preferred Stock in 1994, and 50 million British Pounds
Sterling of 5.91% Series A Preferred Stock in 1993. Unless redeemed at
the Company's option, each series of preferred stock must be redeemed
five years from the date of issuance. These combined preferred
interests were valued at U.S. $117.4 million at December 31, 1994.
Also, another subsidiary issued additional preferred stock in 1994 and
1993. All of the preferred stock of this subsidiary has a dividend
rate adjusted annually (7.5% at December 31, 1994) and is redeemable
at the option of the holder at a current redemption price totaling
$45.0 million. Each of these issues was reflected in preferred
interests in consolidated subsidiaries.
Included in other was the $100.00 per share redemption value of
181,868 shares of 5% Series D Preferred Stock. This stock, which
carries one vote per share, must be redeemed on the occurrence of
specified events.
48
---------------------------------------------------------------------
LEASING ARRANGEMENTS
---------------------------------------------------------------------
At December 31, 1994, the Company was lessee at 2,553 locations under
ground leases (the Company leases land and constructs and owns
buildings) and at 3,268 locations under improved leases (lessor owns
land and buildings). Land and building lease terms for most
traditional restaurants are generally for 20 to 25 years and, in many
cases, provide for rent escalations and one or more five-year renewal
options with certain leases providing purchase options. Most
satellites operate under improved leases which are generally of a
shorter term and include primarily percentage rent payments only. For
most locations, the Company is obligated for the related occupancy
costs which include 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 after December 31, 1994, are:
---------------------------------------------------------------------
(In millions of dollars) Restaurant Other Total
---------------------------------------------------------------------
1995 $ 335.3 $ 39.8 $ 375.1
1996 330.6 36.5 367.1
1997 318.7 32.9 351.6
1998 301.7 28.6 330.3
1999 283.9 24.3 308.2
Thereafter 2,776.8 171.2 2,948.0
---------------------------------------------------------------------
Total minimum payments $4,347.0 $333.3 $4,680.3
=====================================================================
Rent expense was (in millions): 1994--$394.4; 1993--$339.0; 1992--
$320.2. Included in these amounts were percentage rents based on sales
by the related restaurants in excess of minimum rents stipulated in
certain lease agreements (in millions): 1994 $40.3; 1993--$29.0;
1992--$26.1.
49
----------------------------------------------------------------------
FRANCHISE ARRANGEMENTS
----------------------------------------------------------------------
Franchise arrangements, with franchisees who operate throughout the
U.S. and in most countries around the world, generally provide for
initial fees and continuing payments to the Company based upon a
percentage of sales, with minimum rent payments. Among other things,
franchisees are provided the use of restaurant facilities, generally
for a period of 20 years. They are required to pay related occupancy
costs which include property taxes, insurance, maintenance and a
refundable, noninterest-bearing security deposit. On a limited basis,
the Company accepts notes from franchisees, which generally are
secured by interests in restaurant equipment and franchises.
----------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992
----------------------------------------------------------------------
Minimum rents
Owned sites $ 633.4 $ 573.6 $ 538.7
Leased sites 446.0 381.7 353.3
----------------------------------------------------------------------
1,079.4 955.3 892.0
----------------------------------------------------------------------
Percentage fees 1,411.8 1,272.1 1,120.6
Initial fees 37.0 23.5 18.2
----------------------------------------------------------------------
Revenues from franchised restaurants $2,528.2 $2,250.9 $2,030.8
======================================================================
Future minimum payments to the Company, based on minimum rents
specified under franchise arrangements, after December 31, 1994, are:
----------------------------------------------------------------------
Owned Leased
(In millions of dollars) sites sites Total
----------------------------------------------------------------------
1995 $ 721.7 $ 410.4 $ 1,132.1
1996 708.6 446.5 1,155.1
1997 693.0 444.8 1,137.8
1998 677.0 432.7 1,109.7
1999 662.3 421.0 1,083.3
Thereafter 6,368.1 4,029.9 10,398.0
----------------------------------------------------------------------
Total minimum payments $9,830.7 $6,185.3 $16,016.0
======================================================================
At December 31, 1994, net property and equipment under franchise
arrangements totaled $6.6 billion (including land of $2.0 billion),
after deducting accumulated depreciation and amortization of $1.9
billion.
50
-------------------------------------------------------------------------
PROFIT SHARING PROGRAM
-------------------------------------------------------------------------
The Company has a program for U.S. employees which includes profit
sharing, 401(k) (McDESOP), and leveraged employee stock ownership
features. Profit sharing assets can be invested in McDonald's common
stock or among several other investment alternatives. McDESOP allows
employees to invest in McDonald's common stock by making contributions
which are partially matched by the Company. LESOP is invested in both
McDonald's convertible preferred and common stock.
Staff, executives and restaurant managers share in profit sharing
contributions; shares are released under the LESOP based on
participants' compensation. The profit sharing contribution is
discretionary, and the amount is determined by the Company each year.
The LESOP contribution is based on the loan payments necessary to
amortize the debt initially incurred to acquire the convertible
preferred stock, some of which has been converted to common stock.
Shares held by the LESOP are allocated to participants as the loan is
repaid. Dividends on shares held by the LESOP are used to service the
debt, and shares are released to participants in order to replace the
dividends on shares that have been allocated to them.
LESOP costs shown in the following table were based upon the cash
paid for loan payments less these dividends.
-------------------------------------------------------------------------
(In millions of dollars) 1994 1993 1992
-------------------------------------------------------------------------
Profit sharing $16.1 $13.5 $14.3
LESOP 26.3 25.5 19.6
McDESOP 10.1 8.1 4.9
-------------------------------------------------------------------------
U.S. program costs $52.5 $47.1 $38.8
=========================================================================
Assuming conversion of the preferred stock to common stock, at
December 31, 1994, 4.4 million and 10.7 million shares would have been
allocated and unallocated, respectively; no shares were committed to
be released.
Certain subsidiaries outside of the U.S. also offer profit sharing,
stock purchase or other similar benefit plans. Total plan costs
outside of the U.S. were (in millions): 1994--$15.7; 1993--$13.0;
1992--$14.0.
The Company does not provide any other postretirement benefits, and
postemployment benefits were immaterial.
51
-------------------------------------------------------------------------
STOCK OPTIONS
-------------------------------------------------------------------------
Under the 1992 Stock Ownership Incentive and the 1975 Stock Ownership
Option Plans, options to purchase common stock are granted at prices
not less than fair market value of the stock on date of grant.
Substantially all of these options become exercisable in four equal
biennial installments, commencing one year from date of grant, and
expiring ten years from date of grant. At December 31, 1994, 79.0
million shares of common stock were reserved for issuance under both
plans.
-------------------------------------------------------------------------
(In millions, except per common share data) 1994 1993 1992
-------------------------------------------------------------------------
Options outstanding at January 1 55.1 50.3 47.4
Options granted 13.6 12.0 11.6
Options exercised (4.1) (5.3) (7.5)
Options forfeited (2.3) (1.9) (1.2)
-------------------------------------------------------------------------
Options outstanding at December 31 62.3 55.1 50.3
=========================================================================
Options exercisable at December 31 21.4 17.6 15.4
Common shares reserved for future
grants at December 31 16.7 28.0 38.2
Option prices per common share
Exercised during the year $5 TO $26 $4 to $24 $4 to $22
Outstanding at year end $7 TO $30 $5 to $28 $4 to $24
-------------------------------------------------------------------------
During the past several years, the Financial Accounting Standards
Board has been considering the appropriate accounting for stock
options, and in December 1994, decided to work towards improving
disclosures about stock-based awards. Pending the resolution of this
issue, the following table provides additional information regarding
the Company's option program. The Company surveyed its institutional
investors regarding the appropriate disclosures for stock-based
awards, and the content contained herein reflects the information
which they considered to be of value.
The potential dilution of common shares outstanding upon exercise
of stock options represents the number of common shares issuable upon
exercise less the number of common shares that could be repurchased
with proceeds from the exercise based upon the respective December 31
prices of the Company's common stock. As such, this potential dilution
was 1.6%, 1.8% and 1.7% at year-end 1994, 1993 and 1992, respectively.
Options outstanding at December 31, 1994, had an average life of 7.4
years if held to their expiration date; options are generally
exercised prior to their expiration date.
52
-------------------------------------------------------------------------
(Shares in millions) 1994 1993 1992
-------------------------------------------------------------------------
Common shares outstanding
at year end 693.7 707.3 727.0
Potential dilution of common shares
outstanding from option exercises 11.4 12.6 12.2
Average option exercise price $12.14 $11.01 $ 9.68
Average cost of treasury stock issued
for option exercises $ 7.05 $ 6.65 $ 6.55
-------------------------------------------------------------------------
As shown above, the average option exercise price has consistently
exceeded the average cost of treasury stock issued for option
exercises because of the Company's practice of prefunding the program
through share repurchase. As a result, stock option exercises have
generated additional capital, as cash received from employees has
exceeded the Company's average acquisition cost of treasury stock.
Options granted during each year were 1.9%, 1.7% and 1.6% of
average common shares outstanding for 1994, 1993 and 1992,
respectively. Stock options were granted to approximately 6,600, 5,800
and 5,700 employees in 1994, 1993 and 1992, respectively. Shares are
issued from treasury stock to employees upon exercise of stock
options.
53
----------------------------------------------------------------------
CAPITAL STOCK
----------------------------------------------------------------------
STOCK SPLITS
On May 27, 1994, the Board of Directors approved two-for-one stock
splits to be effected in the form of stock dividends to be distributed
on June 24, 1994, to common and Series B and C Preferred shareholders
of record as of June 7, 1994. All common and Series B and C ESOP
Convertible Preferred Stock information appearing in the accompanying
consolidated financial statements and Financial Comments has been
restated to give retroactive effect to the stock splits, including the
transfer of an appropriate amount to common stock from additional
paid-in capital.
PER COMMON SHARE INFORMATION
Income used in the computation of per common share information was
reduced by preferred stock cash dividends (net of tax) and divided by
the weighted average shares of common stock outstanding during each
year (in millions): 1994--701.8; 1993--711.8; 1992--726.5. The effect
of potentially dilutive securities was not material.
PREFERRED STOCK
In December 1992, the Company issued $500.0 million of Series E 7.72%
Cumulative Preferred Stock; 10,000 preferred shares are equivalent to
20.0 million depositary shares having a liquidation preference of
$25.00 per depositary share. Each preferred share is entitled to one
vote under certain circumstances and is redeemable at the option of
the Company beginning on December 3, 1997, at its liquidation
preference plus accrued and unpaid dividends.
In September 1989 and April 1991, the Company sold $200.0 million
of Series B and $100.0 million of Series C ESOP Convertible Preferred
Stock to the LESOP. The LESOP financed the purchase by issuing notes
which are guaranteed by the Company and are included in long-term
debt, with an offsetting reduction in shareholders' equity. Each
preferred share has a liquidation preference of $14.375 and $16.5625,
respectively, and is convertible into a minimum of .7692 and .8 common
share (conversion rate), respectively. Upon termination of employment,
employees are guaranteed a minimum value payable in common shares
equal to the greater of the conversion rate; the fair market value of
their preferred shares; or the liquidation preference plus accrued
dividends, not to exceed one common share. Each preferred share is
entitled to one vote and currently is redeemable at the option of the
Company. In 1992, 8.2 million Series B shares were converted into 6.4
million common shares.
54
COMMON EQUITY PUT OPTIONS
In June 1994, the Company sold 2.0 million common equity put options
which were exercised in November 1994. During November and December
1994, the Company sold an additional 2.0 million common equity put
options which expired unexercised in the first quarter of 1995. At
December 31, 1994, the $56.2 million exercise price of these options
was classified in common equity put options, and the related offset
was recorded in common stock in treasury, net of premiums received.
In April 1993, the Company sold 1.0 million common equity put
options which expired unexercised in July 1993. In December 1992, the
Company sold 2.0 million common equity put options which expired
unexercised in April 1993. At December 31, 1992, the $94.0 million
exercise price of these 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 Preferred
Share Purchase Right (Right) on each outstanding share of common
stock. Under certain conditions, each Right may be exercised to
purchase one four-hundredth of a share of Series A Junior
Participating Preferred Stock (the economic equivalent of one common
share) at an exercise price of $62.50 (which may be adjusted under
certain circumstances), and is transferable apart from the common
stock ten days following a public announcement that a person or group
has acquired beneficial ownership of 20% or more of the outstanding
common shares (which threshold may be reduced by the Board of
Directors to as low as 10%), or ten business days following the
commencement or announcement of an intention to make a tender or
exchange offer resulting in beneficial ownership by a person or group
exceeding the threshold.
Once the threshold has been exceeded, or if the Company is acquired
in a merger or other business combination transaction, each Right will
entitle the holder, other than such person or group, 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.
Each Right is nonvoting and expires on December 28, 1998, unless
redeemed by the Company, at a price of $.0025, at any time prior to
the public announcement that a person or group has exceeded the
threshold. At December 31, 1994, 2.1 million shares of the Series A
Junior Participating Preferred Stock were reserved for issuance under
this plan.
55
QUARTERLY RESULTS (UNAUDITED)
(In millions of dollars, except per common share data)
---------------------------------------------------------------------------------------------------------------------------------
Quarters ended December 31 September 30 June 30 March 31
1994 1993 1994 1993 1994 1993 1994 1993
---------------------------------------------------------------------------------------------------------------------------------
SYSTEMWIDE SALES $6,964.0 $6,145.7 $6,944.0 $6,247.2 $6,370.2 $5,958.9 $5,709.2 $5,235.1
REVENUES
Sales by Company-operated
restaurants $1,586.8 $1,345.2 $1,551.8 $1,351.1 $1,409.3 $1,307.6 $1,244.7 $1,153.3
Revenues from franchised
restaurants 683.3 586.7 673.6 593.2 620.0 570.2 551.3 500.8
---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,270.1 1,931.9 2,225.4 1,944.3 2,029.3 1,877.8 1,796.0 1,654.1
---------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants 1,267.7 1,085.3 1,231.3 1,076.9 1,128.6 1,049.5 1,017.4 952.9
Franchised restaurants 117.8 100.3 111.7 95.7 105.6 93.6 100.4 90.8
General, administrative
and selling expenses 309.4 256.2 277.1 234.6 257.0 232.5 239.5 217.8
Other operating (income)
expense--net (0.6) 3.5 (32.6) (31.1) (30.3) (15.6) (20.4) (18.8)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES 1,694.3 1,445.3 1,587.5 1,376.1 1,460.9 1,360.0 1,336.9 1,242.7
---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 575.8 486.6 637.9 568.2 568.4 517.8 459.1 411.4
---------------------------------------------------------------------------------------------------------------------------------
Interest expense 80.1 78.7 80.2 75.7 73.6 82.4 71.8 79.3
Nonoperating income
(expense)--net (24.1) (4.9) (16.6) 7.2 1.7 4.3 (9.9) 1.2
---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 471.6 403.0 541.1 499.7 496.5 439.7 377.4 333.3
---------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 162.7 138.5 191.3 188.8 174.2 150.9 134.0 115.0
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $308.9 $264.5 $349.8 $310.9 $322.3 $288.8 $243.4 $218.3
=================================================================================================================================
NET INCOME PER COMMON SHARE $ .43 $ .36 $ .48 $ .42 $ .44 $ .39 $ .33 $ .29
---------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .06 $ .05 3/8 $ .06 $ .05 3/8 $ .06 $ .05 3/8 $ .05 3/8 $ .05
---------------------------------------------------------------------------------------------------------------------------------
/TABLE
56
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, 1994.
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, 1994.
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, 1994.
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, 1994.
PART IV
Item 14. Exhibits, Financial Statement Schedules, 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 additional 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.
3. Exhibits:
The exhibits listed in the accompanying index are filed
as part of this report.
57
McDonald's Corporation
Exhibit Index
(Item 14)
Exhibit Number Description
-------------- -----------
(3) Restated Certificate of Incorporation and By-Laws, dated as
of November 15, 1994, attached hereto as an Exhibit.
(4) Instruments defining the rights of security holders,
including indentures (A):
(a) Debt Securities. Indenture dated as of March 1, 1987
incorporated herein by reference from Exhibit 4(a) of
Form S-3 Registration Statement, SEC file no. 33-12364.
(i) Supplemental Indenture No. 5 incorporated herein
by reference from Exhibit (4) of Form 8-K dated
January 23, 1989.
(ii) 9-3/4% Notes due 1999. Supplemental Indenture
No. 6 incorporated herein by reference from
Exhibit (4) of Form 8-K dated January 23, 1989.
(iii) 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.
(iv) 9-3/8% Notes due 1997. Form of Supplemental
Indenture No. 14 incorporated herein by
reference from Exhibit (4) of Form 10-K for the
year ended December 31, 1989.
(v) 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, SEC file
no. 33-34762 dated May 14, 1990.
(vi) 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.
(vii) 8-7/8% Debentures due 2011. Supplemental
Indenture No. 17 incorporated herein by
reference from Exhibit (4) of Form 8-K dated
April 22, 1991.
58
(viii)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, SEC file no. 33-42642
dated September 10, 1991.
(ix) 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.
(x) 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.
(xi) 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.
(b) Form of Deposit Agreement dated as of November 25, 1992
by and between McDonald's Corporation, First Chicago
Trust Company of New York, as Depositary, and the
Holders from time to time of the Depositary Receipts.
(c) Rights Agreement dated as of December 13, 1988 between
McDonald's Corporation and The First National Bank of
Chicago, incorporated herein by reference from Exhibit
1 of Form 8-K dated December 23, 1988.
(i) Amendment No. 1 to Rights Agreement incorporated
herein by reference from Exhibit 1 of Form 8-K
dated May 25, 1989.
(ii) Amendment No. 2 to Rights Agreement incorporated
herein by reference from Exhibit 1 of Form 8-K
dated July 25, 1990.
(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.
59
Exhibit Number Description
-------------- -----------
(10) Material Contracts
(a) Directors' Stock Plan, as amended and restated,
attached hereto as an Exhibit.*
(b) Profit Sharing Program, as amended and restated, attached
hereto as an Exhibit.*
(c) McDonald's Supplemental Employee Benefit Equalization
Plan, McDonald's Profit Sharing Program Equalization Plan
and McDonald's 1989 Equalization Plan, incorporated by
reference from Form 10-K/A dated May 4, 1993, Amendment
No. 1 to Form 10-K for the year ended December 31, 1992*.
(i) Amendment No. 1 to McDonald's 1989 Equalization
Plan, incorporated herein by reference from Form
10-Q for the period ended June 30, 1993.
(ii) Amendment No. 2 to McDonald's 1989 Equalization
Plan, incorporated herein by reference from Form
10-K for the year ended December 31, 1993.
(iii)Amendment No. 1 to McDonald's Supplemental
Employee Benefit Equalization Plan, incorporated
herein by reference from Form 10-K for the year
ended December 31, 1993.
(iv) Amendment No. 2 to McDonald's Supplemental
Employee Equalization Plan, incorporated herein
by reference from Form 10-K for the year ended
December 31, 1993.
(d) 1975 Stock Ownership Option Plan, incorporated herein
by reference from Exhibit (10)(d) of Form 10-K for the
year ended December 31, 1992*.
(e) Stock Sharing Plan, as amended and restated, attached
hereto as an Exhibit.*
(f) 1992 Stock Ownership Incentive Plan, incorporated
herein by reference from exhibit pages 20-34 of
McDonald's 1992 Proxy Statement and Notice of 1992
Annual Meeting of Shareholders dated April 10, 1992*.
(g) McDonald's Corporation Deferred Incentive Plan, as
amended and restated, attached hereto as an Exhibit.*
60
Exhibit Number Description
-------------- -----------
(11) Statement re: Computation of per share earnings.
(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.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the last quarter
covered by this report, and subsequently up to March 29, 1995.
61
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)
By Jack M. Greenberg
----------------------
Jack M. Greenberg
Vice Chairman,
Chief Financial Officer
Date March 29, 1995
----------------------
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 and on the dates
indicated:
Signature Title Date
--------- ----- ----
Hall Adams, Jr.
------------------------- Director March 29, 1995
Hall Adams, Jr.
Robert M. Beavers, Jr.
------------------------- Senior Vice President March 29, 1995
Robert M. Beavers, Jr. and Director
James R. Cantalupo
------------------------- President and Chief Executive March 29, 1995
James R. Cantalupo Officer-International and
Director
Michael L. Conley
------------------------- Senior Vice President, March 29, 1995
Michael L. Conley Controller
Gordon C. Gray
------------------------- Director March 29, 1995
Gordon C. Gray
Jack M. Greenberg
------------------------- Vice Chairman, March 29, 1995
Jack M. Greenberg Chief Financial Officer
and Director
62
Signature Title Date
--------- ----- ----
Donald R. Keough
------------------------- Director March 29, 1995
Donald R. Keough
Donald G. Lubin
------------------------- Director March 29, 1995
Donald G. Lubin
Andrew J. McKenna
------------------------- Director March 29, 1995
Andrew J. McKenna
Michael R. Quinlan
------------------------- Chairman, Chief Executive March 22, 1995
Michael R. Quinlan Officer and Director
Edward H. Rensi
------------------------- President and Chief Executive March 22, 1995
Edward H. Rensi Officer-U.S.A. and Director
Terry L. Savage
------------------------- Director March 29, 1995
Terry L. Savage
Paul D. Schrage
------------------------- Senior Executive Vice March 25, 1995
Paul D. Schrage President, Chief Marketing
Officer and Director
Ballard F. Smith
------------------------- Director March 22, 1995
Ballard F. Smith
------------------------- Director
Roger W. Stone
Robert N. Thurston
------------------------- Director March 29, 1995
Robert N. Thurston
Fred L. Turner
------------------------- Senior Chairman and Director March 29, 1995
Fred L. Turner
B. Blair Vedder, Jr.
------------------------- Director March 29, 1995
B. Blair Vedder, Jr.