SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ___)
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Only (as permitted by Rule 14a-6(e)(2))
McDonald's Corporation
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[GRAPHIC]
McDonald's Corporation
2002 Annual Meeting Notice
Proxy Statement
2001 Financial Information
Financial Information
includes:
Management's discussion
and analysis
Consolidated financial
statements
Notes to consolidated
financial statements
Contents
2 Notice of 2002 Annual Shareholders' Meeting
3 Proxy Statement
22 Appendix A. Audit Committee Charter
24 Appendix B. Executive Officers
25 2001 Financial Information
27 11-year summary
28 Management's discussion and analysis
41 Consolidated statement of income
42 Consolidated balance sheet
43 Consolidated statement of cash flows
44 Consolidated statement of shareholders' equity
45 Notes to consolidated financial statements
54 Quarterly results (unaudited)
55 Management's report
55 Report of independent auditors
56 Information about attending the Annual Meeting
1
Notice of
McDonald's Corporation
2002 Annual
Shareholders' Meeting
and
Proxy Statement
To McDonald's Corporation shareholders:
McDonald's Corporation will hold its 2002 Annual Shareholders' Meeting on
Thursday, May 23, 2002, at 10:30 a.m. Central Time, in the Prairie Ballroom at
The Lodge at McDonald's Office Campus, Oak Brook, Illinois. The registration
desk will open at 9:00 a.m.
At the meeting, shareholders will be asked to:
1. Elect four Directors to serve until our 2005 Annual Shareholders' Meeting;
2. Approve the appointment of independent auditors for 2002;
3. Act on two shareholder proposals, if presented; and
4. Transact other business properly presented at the meeting.
Shareholders are cordially invited to attend the Annual Meeting. If you are
unable to attend the meeting in person, you may watch a live webcast by going to
www.mcdonalds.com/corporate/investor and clicking "Latest Investor Webcast"
which appears below the stock quote. (A replay of the Annual Meeting also will
be available for a limited time.)
Your Board of Directors recommends that you vote FOR all nominees for Directors,
FOR the approval of our auditors and AGAINST the shareholder proposals. Your
vote is important.
Please consider the issues presented in our Proxy Statement and vote your shares
as promptly as possible.
By order of the Board of Directors,
/s/ Gloria Santona
Gloria Santona
Secretary
Oak Brook, Illinois
April 5, 2002
Proxy statement
3
General information
Record date and voting at the Annual Meeting
--------------------------------------------------------------------------------
Shareholders owning McDonald's common stock at the close of business on March
25, 2002 (the record date), may vote at the 2002 Annual Meeting. On that date,
1,271,963,721 shares of common stock were outstanding. Each share is entitled to
one vote on each matter to be voted upon at the Annual Meeting.
Most shareholders have a choice of voting over the Internet, by telephone or
by using a traditional proxy card. Refer to your proxy or voting instruction
card to see which options are available to you and how to use them.
The Internet and telephone voting procedures are designed to authenticate
shareholders' identities and to confirm that their instructions have been
properly recorded.
If you properly sign and return your proxy card or complete your proxy via
the telephone or the Internet, your shares will be voted as you direct. If you
sign and return your proxy but do not specify how you want your shares voted,
they will be voted FOR the election of all nominees for Director as set forth
under "Election of Directors," FOR the approval of auditors and AGAINST the
shareholder proposals. You may change your vote at any time before the Annual
Meeting by submitting written notice to the Corporate Secretary, by submitting a
later-dated and properly executed proxy (including by means of a telephone or
Internet vote) or by voting in person at the Annual Meeting.
All votes cast at this year's Annual Meeting will be tabulated by EquiServe
Trust Company, N.A. (EquiServe), which has been appointed independent inspector
of election. EquiServe will determine whether or not a quorum is present. With
respect to the election of Directors, EquiServe will treat votes withheld as
shares present for purposes of determining a quorum. Directors are elected by a
plurality vote, so the four nominees named on page 4 of the Proxy Statement
receiving the greatest number of votes will be elected. Withheld votes will not
affect the outcome of the election. With respect to the approval of auditors,
the shareholder proposals or any other matter properly brought before the
meeting, EquiServe will treat abstentions as shares present for purposes of
determining a quorum. Since a majority of the shares represented at the meeting
and entitled to vote is required for approval of these matters, abstentions will
have the effect of a vote against approval.
Under New York Stock Exchange rules, the proposals to elect Directors and
approve the appointment of independent auditors are considered "discretionary"
items. This means that brokerage firms may vote in their discretion on these
matters on behalf of clients who have not furnished voting instructions at least
fifteen days before the date of the Annual Meeting.
In contrast, the two shareholder proposals described in the Proxy Statement
are "nondiscretionary" items. This means that brokerage firms that have not
received voting instructions from their clients on these matters may not vote on
these proposals. These "broker non-votes" will not be considered in determining
the number of votes necessary for approval, and, therefore, will have no effect
on the outcome of the vote for these proposals.
We do not know of any other matters to be presented or acted upon at the
meeting. If any other matter properly comes before the meeting, the shares
represented by proxies will be voted in accordance with the judgment of the
person or persons voting those shares.
Proxy solicitation
--------------------------------------------------------------------------------
The 2002 Proxy Statement and form of proxy were mailed to shareholders beginning
on or about April 5, 2002 in connection with the solicitation of proxies by the
Board of Directors to be used at the 2002 Annual Meeting.
The cost of soliciting proxies will be paid by the Company. The Company has
retained Innisfree M&A Incorporated to aid in the solicitation at a fee
estimated to be $15,000 plus reasonable out-of-pocket expenses. Proxies may also
be solicited by employees and Directors of the Company by mail, by telephone, by
fax, by e-mail or in person.
Confidential voting
--------------------------------------------------------------------------------
It is the Company's policy to protect the confidentiality of shareholder votes
throughout the voting process. In this regard, your vote will not be disclosed
to the Company, its Directors, officers or employees, except to meet legal
requirements or to assert or defend claims for or against the Company or except
in those limited circumstances where (1) a proxy solicitation is contested; (2)
you write comments on a proxy card; or (3) you authorize disclosure. The
inspector of election has been and will remain independent of the Company.
Nothing in this policy prohibits you from disclosing the nature of your vote
to the Company, its Directors, officers or employees, or impairs voluntary
communication between you and the Company, nor does this policy prevent the
Company from ascertaining which shareholders have voted or from making efforts
to encourage shareholders to vote.
4
Proxy statement
ITEM 1. Election of Directors
The Board of Directors is currently divided into three classes, each having
three-year terms that expire in successive years. Directors elected at this
year's Annual Meeting will hold office for a three-year term expiring in 2005.
Nominees
--------------------------------------------------------------------------------
The nominees for Director are: Hall Adams, Jr., Edward A. Brennan, Terry L.
Savage and Fred L. Turner.
The Board of Directors expects all nominees to be available for election. If
any of them should become unavailable to serve as a Director for any reason
prior to the Annual Meeting, the Board may substitute another person as a
nominee. In that case, your shares will be voted for that other person.
Your shares will be voted according to your instructions. If you properly
submit your proxy but do not provide voting instructions, your shares will be
voted FOR the election of the four nominees named above. The four nominees who
receive the most votes will be elected.
The Board of Directors recommends that shareholders vote FOR all four
nominees.
Biographical information
--------------------------------------------------------------------------------
Hall Adams, Jr. Nominee. Retired Chief Executive Officer of Leo Burnett & Co.,
Inc. Director of Moody's Corporation and Sears, Roebuck and Co. Class of 2002.
Age: 68. Director since 1993.
Edward A. Brennan Nominee. Retired Chairman, President and Chief Executive
Officer of Sears, Roebuck and Co. Director of The Allstate Corporation, AMR
Corporation, Exelon Corporation, Minnesota Mining and Manufacturing Company and
Morgan Stanley Dean Witter & Co. Nominated for the class of 2005. Age: 68.
James R. Cantalupo Vice Chairman, Emeritus and President, Emeritus. Mr.
Cantalupo previously held the following positions at McDonald's Corporation:
Vice Chairman and President, December 1999 to December 2001; Vice Chairman and
Chairman and Chief Executive Officer of McDonald's International, August 1998 to
December 1999; and President and Chief Executive Officer, McDonald's
International, January 1992 to August 1998. Director of Illinois Tool Works,
Inc., International Flavors & Fragrances Inc., Rohm and Haas Company and Sears,
Roebuck & Co. Class of 2003. Age: 58. Director since 1987. In May of last year,
Mr. Cantalupo announced plans to retire in 2002. Effective January 1, 2002, he
was named to emeritus status and is no longer an Executive Officer. He plans to
leave the Board of Directors effective April 30, 2002 and begin his transition
employment under the Company's Executive Retention Plan on May 1, 2002. See page
21 of the Proxy Statement.
Jack M. Greenberg Chairman and Chief Executive Officer since May 1999. Mr.
Greenberg previously held the following positions at McDonald's Corporation:
President and Chief Executive Officer, August 1998 to May 1999; and Vice
Chairman and Chairman and Chief Executive Officer, McDonald's U.S.A., July 1997
to August 1998. Director of Abbott Laboratories and The Allstate Corporation.
Class of 2004. Age: 59. Director since 1982.
Enrique Hernandez, Jr. Chairman and Chief Executive Officer of Inter-Con
Security Systems, Inc., a provider of high-end security and facility support
services to government, utilities and industrial customers. Director of
Nordstrom, Inc., Tribune Company and Washington Mutual, Inc. Class of 2003.
Age: 46. Director since 1996.
Jeanne P. Jackson Formerly Chief Executive Officer of Walmart.com, a subsidiary
of Wal-Mart Stores, Inc., discount retailers, from March 2000 to January 2002.
From May 1995 to March 2000, President and Chief Executive Officer of Banana
Republic, a Gap Inc. brand. In November 1998, Ms. Jackson also had
responsibility for the Gap Inc. Direct Division. Director of NIKE, Inc. Class of
2003. Age: 50. Director since 1999.
Donald G. Lubin Partner of the law firm of Sonnenschein Nath & Rosenthal, which
provides legal services to the Company on a regular basis. Director of Molex
Incorporated. Class of 2004. Age: 68. Director since 1967.
Proxy statement
5
[PHOTO]
Adams, Nominee
[PHOTO]
Brennan, Nominee
[PHOTO]
Cantalupo
[PHOTO]
Greenberg
[PHOTO]
Hernandez
[PHOTO]
Jackson
[PHOTO]
Lubin
[PHOTO]
Massey
[PHOTO]
McKenna
[PHOTO]
Quinlan
[PHOTO]
Savage, Nominee
[PHOTO]
Stone
[PHOTO]
Thurston
[PHOTO]
Turner, Nominee
Walter E. Massey President of Morehouse College since 1995. Director of Bank of
America Corporation, BP Amoco p.l.c. and Motorola, Inc. Class of 2004. Age: 63.
Director since 1998.
Andrew J. McKenna Chairman and Chief Executive Officer of Schwarz Paper Company,
a printer, converter, producer and distributor of packaging and promotional
materials. Director of Aon Corporation, Click Commerce, Inc., Skyline
Corporation and Tribune Company. Class of 2003. Age: 72. Director since 1991.
Michael R. Quinlan Employee Director. Mr. Quinlan previously held the following
positions at McDonald's Corporation: Chairman of the Executive Committee, May
1999 to December 2001; Chairman, August 1998 to August 1999; and Chairman and
Chief Executive Officer, March 1990 to August 1998. Director of The Dun &
Bradstreet Corporation, The May Department Stores Company and Warren Resources
Inc. Class of 2003. Age: 57. Director since 1979.
Terry L. Savage Nominee. Financial journalist, author and President of Terry
Savage Productions, Ltd., which provides speeches, columns and videos on
personal finance for corporate and association meetings, publications and
national television programs, and networks including CNN, NBC and PBS. Director
of Pennzoil-Quaker State Company. Class of 2002. Age: 57. Director since 1990.
Roger W. Stone Chairman and Chief Executive Officer of Box USA Group, Inc.,
corrugated box manufacturer, since July 2000. Retired President and Chief
Executive Officer of Smurfit-Stone Container Corporation, a multinational paper
company primarily producing and selling pulp, paper and packaging products.
Prior to 1999, Chairman, President and Chief Executive Officer of Stone
Container Corporation. Director of Autoliv Inc. Class of 2003. Age: 67. Director
since 1989.
Robert N. Thurston Business consultant. Class of 2004. Age: 69. Director since
1974.
Fred L. Turner Nominee. Senior Chairman since 1990. Director of Aon Corporation,
Baxter International Inc. and W.W. Grainger, Inc. Class of 2002. Age: 69.
Director since 1968.
Senior Directors
--------------------------------------------------------------------------------
To benefit from the counsel and experience of members of the Board who retire
from service, the Board of Directors created a class of outside advisory
directors to be designated as Senior Directors. Senior Directors may attend
Board meetings in an advisory capacity and meetings of the committees on which
they served at their retirement, but do not have voting rights. They serve a
one-year term which is subject to renewal at the invitation of the Board. The
two Senior Directors are expected to serve until the 2003 Annual Meeting of
Shareholders.
Gordon C. Gray Chairman, since November 2000, of Integris Metals Inc., a metals
products supplier and wholly owned subsidiary of BHP Billiton, an international
mining and metals business. Previously, Chairman of Rio Algom Limited, a
Canadian mining company and metals distributor. Director of Abitibi-Consolidated
Inc. and Rio Algom Limited. Age: 74. Mr. Gray retired from the Board at the 2001
Annual Meeting after having served as a Director since 1982. Previously, Mr.
Gray served as a director of McDonald's Restaurants of Canada Limited.
Donald R. Keough Chairman of Allen & Company Incorporated, investment bankers,
since April 1993. Advisor to the Board of Directors of The Coca-Cola Company
from October 2000 to the present and from April 1993 to April 1998. Director of
Convera Corporation, The Washington Post Company and USA Networks, Inc. Age: 75.
Mr. Keough retired from the Board at the 2001 Annual Meeting after having served
as a Director since 1993.
6
Proxy statement
Stock ownership
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The following table shows the common stock ownership of the named individuals
and the group as of February 1, 2002, except as indicated below. The Company
does not believe there is any person or group who owned as of February 1, 2002,
more than 5% of the outstanding common stock. Directors, Nominees and Executive
Officers as a group have sole voting and investment power over shares of common
stock except for 3,008 shares held jointly with spouses, 8,997 shares held by
members of their immediate families and 503,412 shares held in trust or in a
partnership, over which they share voting and investment power. No Director,
Nominee or Executive Officer owns more than 1.0% of the common stock
outstanding. Directors, Nominees and Executive Officers as a group owned
(directly and through benefit plans) approximately 1.0%.
-------------------------------------------------------------------------------------------
Common Stock
stock equivalents
Name (a,b,c,d) (e) Total
===========================================================================================
Hall Adams, Jr. 17,000 6,902 23,902
Edward A. Brennan, Nominee (f) 2,500 0 2,500
James R. Cantalupo 3,024,682 18 3,024,700
Alan D. Feldman (g) 838,268 20,225 858,493
Jack M. Greenberg 2,906,492 34,368 2,940,860
Enrique Hernandez, Jr. 17,400 10,714 28,114
Jeanne P. Jackson 5,250 5,563 10,813
Donald G. Lubin 70,754 38,056 108,810
Walter E. Massey 7,000 4,574 11,574
Andrew J. McKenna 43,640 38,616 82,256
Michael R. Quinlan 5,413,042 243,686 5,656,728
Terry L. Savage 16,000 41,165 57,165
James A. Skinner 793,448 31,727 825,175
Stanley R. Stein 476,574 0 476,574
Roger W. Stone 18,666 50,064 68,730
Robert N. Thurston 103,148 54,461 157,609
Fred L. Turner 1,453,158 18,605 1,471,763
Directors, Nominees and
Executive Officers as a group
(the Group)(21 persons) 16,003,654 604,950 16,608,604
-------------------------------------------------------------------------------------------
(a) Beneficial ownership of shares that are owned by members of their
immediate families directly or through trusts is disclaimed as follows:
Directors Lubin, 374; McKenna, 640; Quinlan, 1,400; and the Group, 2,414.
(b) Excludes 48,000 shares held by Mr. McKenna as Trustee of the Schwarz
Profit Sharing Trust.
(c) Includes unallocated shares held in the Profit Sharing and Savings Plan
as follows: Messrs. Cantalupo, 3,343; Feldman, 2,558; Greenberg, 4,008; Quinlan,
79,771; Skinner, 14,176; Stein, 3,282; Turner, 17,931; and the Group, 136,671.
(d) Includes shares that could be purchased by exercise of stock options on
or within 60 days after February 1, 2002 under the Company's option plans as
follows: Directors Adams, 13,000; Cantalupo, 2,725,731; Greenberg, 2,610,000;
Hernandez, 9,000; Jackson, 3,000; Lubin, 13,000; Massey, 7,000; McKenna, 13,000;
Quinlan, 4,420,000; Savage, 13,000; Stone, 10,666; Thurston, 13,000; Turner,
635,000; Messrs. Feldman, 827,250; Skinner, 616,347; Stein, 422,564; and the
Group, 13,070,549.
(e) Includes common stock equivalents credited under the Supplemental Profit
Sharing and Savings Plan accounts of the Executive Officers and common stock
equivalents credited to outside Directors under the Directors' Stock Plan.
(f) Share ownership as of March 25, 2002.
(g) Mr. Feldman resigned from the Company effective March 1, 2002. Upon his
resignation, all but one of his stock option grants became exercisable and will
remain exercisable for five years.
Stock ownership guidelines
--------------------------------------------------------------------------------
In 1997, McDonald's set minimum stock ownership guidelines for outside
Directors. Each Director is expected to acquire, within a five-year period after
becoming a Director, common stock or common stock equivalent units equal in
value to at least five times the annual retainer and hold such amount of stock
throughout his or her term.
Additional information concerning the Board of Directors
Board committees
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The Audit Committee reviews the performance, and recommends to the Board the
selection and retention, of the Company's independent auditors. The Audit
Committee reviews with the internal audit service providers and the independent
auditors the overall scope and results of their respective audits, the internal
accounting and financial controls and the steps management has taken to monitor
and control the Company's major risk exposure. All members of the Audit
Committee are "independent" as this term is defined in the New York Stock
Exchange Listing Standards. Members of the Committee are Directors Hernandez
(Chairman), Massey and Stone. Mr. Lubin has served as secretary in a nonvoting
capacity. In 2001, the Audit Committee met 10 times, including meeting to review
the Company's quarterly financial results prior to their public issuance.
The Compensation Committee evaluates the performance of the Company's Chief
Executive Officer and recommends his compensation to the Board annually; reviews
and approves senior management's compensation; establishes compensation
guidelines for all other officers; and recommends to the Board the compensation
paid to outside Directors. The Committee administers the Company's incentive
compensation and stock option plans and develops compensation policies. Members
of the Committee are Directors Thurston (Chairman), Adams, Jackson and Savage.
In 2001, the Compensation Committee met nine times.
Proxy statement
7
The Nominating and Corporate Governance Committee sets criteria for Board
membership; searches for and screens candidates to fill Board vacancies;
recommends appropriate candidates for election each year and, in this regard,
evaluates individual Director performance; assesses overall Board performance;
considers issues regarding Board composition and size; and evaluates the
Company's corporate governance process. Members of the Committee are Directors
McKenna (Chairman), Lubin, Savage and Stone. In 2001, the Committee met three
times. Shareholders can nominate Director candidates for consideration by
writing to the Committee c/o the Corporate Secretary at McDonald's Plaza, Oak
Brook, Illinois 60523 and providing the candidate's name, biographical data and
qualifications.
The Corporate Responsibility Committee acts in an advisory capacity to the
Company's management with respect to policies and strategies that affect the
Company's role as a socially responsible organization, including, but not
limited to, issues pertaining to health and safety, the environment, employee
opportunities, consumers and the communities in which the Company does business.
Members of the Committee are Directors Massey (Chairman), Adams, Jackson,
McKenna and Thurston. In 2001, the Committee met two times.
The Board also has an Executive Committee and a Finance Committee. The
Executive Committee may exercise most Board powers during the period between
Board meetings. The Finance Committee acts in an advisory capacity to management
and the Board on financial matters, including investments and acquisitions, as
may from time to time be referred to it by the Board or management.
Compensation of the Board
--------------------------------------------------------------------------------
In 2001, each outside Director received an annual retainer of $35,000 plus a
$2,000 fee for each Board meeting attended, a $1,000 fee for each committee
meeting attended and a $1,000 fee for each executive session attended which was
not held in conjunction with a Board meeting. The chairman of each committee
also received an additional annual retainer of $10,000. Directors can defer
their retainer and fees in the form of common stock equivalent units under the
Company's Directors' Stock Plan. Deferred amounts are credited to an account,
which is adjusted to reflect dividends as well as gains or losses, as if
invested in common stock. Each outside Director also receives a credit of
$17,500 to his or her Directors' Stock Plan account at the end of each full year
of service, up to a maximum of 10 years. Deferred amounts are generally paid in
cash after the Director retires from the Board but can be deferred further at
the option of the Director. Outside Directors may participate in a program
similar to the Matching Gift Program, which is available to the Company's
full-time U.S. employees. Charitable donations to qualifying organizations will
be matched up to a maximum of $15,000 per calendar year per outside Director.
In May 2001, each outside Director received a stock option to purchase 3,000
shares of common stock. All options vest in equal annual installments over three
years, have a 10-year life and permit the holder to purchase shares at their
fair market value on the date of grant. For 2002, the Compensation Committee
approved an increase in the annual stock option grant to 5,000 shares.
In 2001, Directors Lubin and Thurston received the use of corporate vehicles
valued at $10,865 and $3,250, respectively.
Responsibilities of the Board
--------------------------------------------------------------------------------
In 2001, the Board met nine times. Its primary responsibilities are:
Evaluating the performance of the Company and its executive management;
Reviewing and, where appropriate, approving fundamental operating,
financial and other corporate strategies as well as major plans and objectives;
Providing advice to the Chief Executive Officer and executive management;
Overseeing management to ensure that the Company's assets are safeguarded
and business is conducted in compliance with laws and regulations; and
Evaluating the overall effectiveness of the Board as well as selecting and
recommending to shareholders an appropriate slate of candidates for election to
the Board.
Corporate governance guidelines
--------------------------------------------------------------------------------
The Board's corporate governance guidelines incorporate principles by which the
Board has been operating for many years. Among other things, the guidelines
provide that:
A majority of Directors should come from outside the Company and
independence and diversity of background are important in the selection of new
candidates. The Board selects candidates and extends invitations to join the
Board.
Only outside Directors may serve on the Audit, Compensation, and Nominating
and Corporate Governance Committees.
Outside Directors have primary responsibility for matters relating to the
selection and succession of the Chief Executive Officer and the compensation of
executive management. The Chief Executive Officer receives a performance review
conducted annually by the Chairman of the Compensation Committee after the
Committee Chairman consults with the outside Directors.
Outside Directors meet alone with the Chief Executive Officer at most Board
meetings, and at least once each year, evaluate the performance of executive
management and discuss matters of succession planning and management development
with the Chief Executive Officer.
8
Proxy statement
Outside Directors meet without members of management at least twice each
year.
The Board meets on a bimonthly basis. The agenda is set by the Chairman and
Chief Executive Officer, and Directors may suggest items for inclusion.
Information about the Company's business, performance and prospects, as well as
information regarding recommendations for action by the Board, are made
available to the Board within a reasonable period before each meeting.
Throughout the year, Directors review the Company's strategic plans and
evaluate the impact of such plans on the Company's performance and on the value
of shareholders' interests.
The Nominating and Corporate Governance Committee annually evaluates the
performance and effectiveness of the Board and recommends appropriate changes
for consideration by the entire Board.
The Board of Directors has adopted a retirement policy for its members. A
Director is expected to retire on the date of the Annual Meeting of Shareholders
immediately following his or her 73rd birthday. In accordance with this policy,
Mr. McKenna is expected to retire as a member of the Board of Directors at the
2003 Annual Meeting.
The Board of Directors adopted retirement guidelines affecting the Offices
of Chairman of the Board and Chief Executive Officer. These guidelines provide
that any person holding the Office of Chief Executive Officer effective
commencing in 1999, shall retire from the Board of Directors at the same time
that his or her service as CEO ends, unless that person is also Chairman of the
Board, in which event that person shall retire from the Board at the time that
his or her service as Chairman ends, but no later than age 73.
Directors have access to the System's* management around the world.
*"System" refers to McDonald's employees, franchisees and suppliers.
Compensation Committee report on executive compensation
Dear fellow shareholders:
--------------------------------------------------------------------------------
PHILOSOPHY
Our Committee approves executive compensation, establishes compensation
guidelines for corporate officers and administers the Company's stock option and
other incentive plans. The Company's executive compensation program is designed
to attract, motivate, reward and retain the best people for achieving our vision
to be the world's best quick-service restaurant experience. Our goal is to
motivate top performance within a high-performance, people-focused culture.
Since we believe that our stakeholders are best served by running the
Company with a long-term perspective, while delivering consistently good annual
results, the Company's executive compensation program is designed to link
compensation to both short- and long-term performance.
We believe that the Company's executives will more effectively pursue the
interests of McDonald's shareholders, whose interests they are charged with
enhancing, if they are shareholders themselves. Accordingly, we focus our
executives' attention on managing McDonald's as owners of the business by
encouraging officers to have significant stock ownership in the Company.
Consistent with this philosophy, we instituted minimum ownership requirements
for all officers. The minimum levels of ownership range from one to five times
base salary. Our Profit Sharing and Savings Plan and stock option plans are
designed to facilitate this share ownership by our executives.
During 2001, the Committee renewed its focus on how compensation programs
can be used to promote leadership behaviors and to reinforce succession plans
and executive development strategies. These plans and strategies are designed to
identify future leaders and their developmental needs, maximize the talents of
our employees and motivate them to achieve their full potential.
EXECUTIVE COMPENSATION
We believe that executive compensation should be competitive with
high-performing companies and alternative careers within the McDonald's System
(i.e., careers as a franchisee or supplier) in order to motivate and retain the
talent needed to produce superior results. The Committee's determinations are
also guided in part by the increasingly competitive demand in the market for
talented executives who have the skills and expertise required to lead a large,
dynamic global business. In this regard, our Committee conducts an overall
review of compensation annually.
Proxy statement
9
The process we use to establish compensation is not purely a mechanical one.
We review information supplied by independent consultants to determine the
competitiveness of McDonald's total compensation package with that of a peer
group. The peer group, which we use for compensation comparison purposes,
consists of most of the companies comprising the Dow Jones Industrial Average.
We believe that these major corporations are most likely to compete with
McDonald's for executive talent. In addition to reviewing competitive pay
information, we also review five- and 10-year shareholder returns for the
Company and the peer group illustrated in the graphs set forth on page 14 of the
Proxy Statement.
The Committee believes that special management talents and sensitivities are
required to balance the unique relationships between and among the Company, its
employees, franchisees, suppliers, customers and many constituencies. Therefore,
we go beyond a simple evaluation of competitive compensation information and the
Company's financial results in making compensation decisions. In this regard,
the Company's executive compensation practices are designed to reinforce our
Brand Promise--to deliver an exceptional McDonald's eating experience to every
customer, every time. Inherent in this Brand Promise is our People Promise to
value our employees, their growth, and their contributions, since we recognize
that satisfying our employees is critical to delivering exceptional customer
service and achieving our financial goals. Therefore, we also consider
qualitative factors, which we believe contribute significantly to building
McDonald's global brand and reputation for social responsibility, thereby
optimizing shareholder value over the long term.
At this point in time, base salary paid to the officers named in the Summary
Compensation Table on page 11 of the Proxy Statement approximates the middle of
this peer group's range, while annual and long-term incentives paid to such
officers are below the median.
Financial targets under the annual and long-term incentive plans are
established using results in constant currency, which exclude the effect of
foreign currency translation on reported results, because the Committee believes
that reflects the most accurate representation of true business performance.
ANNUAL CASH COMPENSATION
Annual cash compensation for senior management, as for all employees, consists
of base salary and a variable, at-risk incentive under the Target Incentive Plan
(TIP).
Our Committee annually establishes an executive's base salary through our
evaluation of the executive's level of responsibility and individual
performance, considered in light of competitive pay practices. We gauge
individual performance in: developing and executing corporate strategies;
leading and developing people; initiating and managing change; balancing the
many relationships within the McDonald's System; and contributing to programs
which positively impact the Company's performance.
In early 2001, the Committee approved base salary increases for executives,
including Mr. Greenberg, that were competitive with our peer group. However, as
discussed in the 2001 Financial Information section of this document, 2001 was a
difficult and challenging year for McDonald's. Our business was greatly impacted
by many external forces as well as internal factors resulting in disappointing
performance. Consequently, no base salary merit increases were granted to any of
the Company's officers in 2002.
Under TIP, each employee is assigned a target incentive at the beginning of
the year (the greater the individual's responsibility, the higher the percentage
of target incentive to salary). Target incentives paid to executives are
initially adjusted by financial performance factors for the Company or the
particular geographic area led by that executive. In each case, an individual
performance factor is then applied and, in certain cases, a team performance
measure may also be applied.
In 2001, target incentives for U.S. executives were initially adjusted by a
performance factor measured by U.S. operating income and economic profit as well
as U.S. owner/ operator cash flow, customer satisfaction and employee
commitment. TIP awards for executives responsible for the Company's European
geographic segment were adjusted by a performance factor measured by that
segment's operating income and return on total assets as well as employee
turnover, customer satisfaction and the accomplishment of key initiatives
related to rebuilding the public's perception of European beef safety and
related to the Euro currency conversion. TIP awards for executives responsible
for other geographic areas were adjusted by a performance factor measured by the
operating income and return on assets for their respective areas; and in certain
of these geographic areas, the following measures were also considered: customer
and employee satisfaction, restaurant openings, increases in comparable
transaction counts and other non-financial initiatives designed to enhance our
Brand.
In 2001, target incentives for corporate executives, including Mr.
Greenberg, were adjusted by a performance factor that included an average of the
performance factors for each of the geographic areas and a factor based on the
accomplishment of additional initiatives designed to achieve key global
strategies. These strategies include being the best employer in each community
around the world, achieving operational excellence for our customers, providing
enduring profitable growth and achieving general and administrative expense
targets.
Based heavily on the Company's failure to achieve its financial targets, the
Committee awarded annual incentive awards for 2001 that were substantially below
target. The Summary Compensation Table on page 11 of the Proxy Statement lists
for 2001 the awards for the named Executive Officers.
10
Proxy statement
LONG-TERM INCENTIVES
Long-term incentives consist of stock options and cash awards under a long-term
incentive plan (LTIP). These awards serve to focus executive attention on the
long-term performance of the business and comprise a significant portion of
total compensation for senior management consistent with our increased emphasis
on the risk-reward element of executive compensation.
Options. Options have proven to be an effective means of linking executive
pay with the creation of shareholder wealth, since an optionee will benefit only
if McDonald's stock price increases. Options granted to executives typically
have a life of 10 years, vest over periods of four years to seven years and have
an exercise price equal to the fair market value of the common stock on the
grant date. In establishing guidelines for the size of stock option awards, we
consider the following criteria (in order of importance): level of
responsibility, achievement of plan objectives and the implementation of key
strategies. Individual awards to members of senior management are made within
these guidelines, dependent primarily upon current individual performance and on
the potential for positively influencing future results.
In addition to our annual grant, our Committee approved a special one-time
Chairman's Challenge stock option grant in 2001. This performance-based
incentive focuses on significantly increasing McDonald's core restaurant
business operating income by the end of 2003. If the Company meets an aggressive
performance goal for our core restaurant operating income, the options will
retain their original 10-year term. Otherwise, they will expire on June 30,
2004, five months after vesting. In order to overcome our business challenges
and achieve our defined performance goal, the entire Company will need to focus
on successfully executing our three worldwide strategies--to be the best
employer for our people, to deliver operational excellence to our customers and
to achieve enduring profitable growth. In addition, this will entail focusing on
building customer counts and comparable sales with outstanding Quality, Service,
Cleanliness and Value (QSC&V). Achieving this goal also will require our
reinforced commitment to controlling general and administrative expenses.
Long-term incentive plan. Under this plan, officers receive cash awards
based on achieving corporate performance targets over three-year performance
cycles. Cash awards vary if minimum, target or maximum predetermined performance
goals are achieved at the end of the cycle. No payout occurs unless the Company
achieves certain threshold performance objectives. As a pay-for-performance
plan, the LTIP is intended to motivate and reward executives by directly linking
the amount of the cash bonus to specific long-term financial goals. Specific
measurements are chosen each year for each successive three-year cycle. For the
2001-2003 cycle, the Committee established consolidated global performance
measurements applicable to all officers, which include compound growth in
earnings per share and return on equity.
Based on the Company's disappointing financial performance over the
1999-2001 cycle, no amounts were paid in 2002 for this cycle.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Greenberg participates in the compensation programs described throughout
this report and, consistent with our compensation philosophy, at-risk
compensation related to performance represents the predominant portion of Mr.
Greenberg's total compensation package. Amounts paid and granted under these
programs are disclosed in the compensation tables beginning on page 11 of the
Proxy Statement. The Committee approved Mr. Greenberg's compensation in view of
the unusual leadership skills required to successfully manage the unique and
complex relationships between and among the Company, its employees, franchisees,
suppliers and many worldwide constituencies. Following a thorough annual review
of the Company's leadership team and the many initiatives that are in place to
grow the business and increase shareholder value, the Board of Directors has
asked Jack Greenberg to commit to continuing as McDonald's Chief Executive
Officer for at least three more years, and he agreed to do so. On April 1, 2002,
Mr. Greenberg was awarded an incentive payment of $1,200,000 under TIP based on
his strong leadership in the face of our current business challenges but also
reflecting the Company's performance in 2001 as described in this report.
POLICY WITH RESPECT TO THE $1 MILLION DEDUCTION LIMIT
Section 162(m) of the Internal Revenue Code of 1986 generally limits the tax
deductibility of annual compensation paid to certain officers to $1 million. Our
Committee is obligated to recognize and reward performance that increases
shareholder value and will exercise its discretion in determining whether or not
to conform the Company's executive compensation plans to the approach provided
for in the Code. Assuming continued deferral of compensation by certain
officers, we expect that substantially all compensation will qualify as a
tax-deductible expense.
Respectfully submitted,
The Compensation Committee
/s/ Robert N. Thurston
Robert N. Thurston
Chairman
/s/ Jeanne P. Jackson
Jeanne P. Jackson
/s/ Hall Adams, Jr.
Hall Adams, Jr.
/s/ Terry L. Savage
Terry L. Savage
Proxy statement
11
Summary compensation table
--------------------------------------------------------------------------------
The following table summarizes the total compensation earned by or paid for
services rendered in all capacities to the Chief Executive Officer and four
other most highly compensated Executive Officers in 2001 (Named Officers).
Executive Officers are designated by the Board of Directors.
Long-term compensation
-----------------------------------
Awards Payouts
---------------------- --------
Restricted Securities LTIP* All other
Annual compensation stock underlying payouts compensation
--------------------------
Name and principal position Year Salary($) Bonus($) awards($) options(#) ($) ($)(a)
====================================================================================================================================
Jack M. Greenberg 2001 $1,374,840 $1,200,000 0 675,000 $ 0 $257,398
Chairman and Chief Executive Officer 2000 1,274,250 1,263,797 0 490,000 130,253 320,044
1999 1,150,996 1,585,500 0 500,000 318,014 360,193
James A. Skinner 2001 661,493 482,000 0 250,000 0 97,510
President and Chief Operating Officer, 2000 508,650 322,191 0 106,193 39,375 98,467
McDonald's Worldwide Restaurant Group 1999 476,586 358,307 0 100,000 0 116,301
Stanley R. Stein 2001 511,281 323,000 0 108,900 0 82,198
Executive Vice President, 2000 477,500 320,043 0 72,600 35,000 92,054
Worldwide Human Resources 1999 446,659 331,847 0 75,000 82,058 110,909
James R. Cantalupo (b) 2001 1,115,054 674,000 0 300,000 0 181,951
Vice Chairman, Emeritus and 2000 1,052,500 733,228 0 364,461 94,071 225,972
President, Emeritus 1999 981,624 951,300 0 350,000 0 288,340
Alan D. Feldman (c) 2001 737,545 0 0 350,000 0 121,537
Formerly, President-Chief Operating Officer, 2000 687,500 534,240 0 294,000 32,375 139,551
McDonald's-the Americas 1999 581,624 588,788 0 300,000 115,946 151,370
====================================================================================================================================
*Long-Term Incentive Plan
(a) These amounts represent matching contributions and allocations by the
Company to the Profit Sharing and Savings Plan and related Supplemental Profit
Sharing and Savings Plan and premiums on group term life insurance. For 2001,
the amounts in each category were as follows: Messrs. Greenberg, $75,938,
$166,959 and $14,501; Skinner, $24,370, $66,178 and $6,962; Stein, $16,474,
$60,052 and $5,672; Cantalupo, $10,268, $159,874 and $11,809; and Feldman,
$69,446, $49,179, and $2,912. Amounts that have been included with respect to
the Supplemental Profit Sharing and Savings Plan represent the Company's
obligation to pay such amounts to participants.
(b) Formerly Vice Chairman and President, McDonald's Corporation. In
connection with Mr. Cantalupo's announced retirement plans, effective January 1,
2002, he was named to emeritus status and accordingly is no longer an Executive
Officer. Mr. Cantalupo is expected to begin his transition employment under the
terms of the Company's Executive Retention Plan on May 1, 2002. See page 21 of
the Proxy Statement.
(c) Mr. Feldman resigned from the Company effective March 1, 2002. He will
receive severance payments and other benefits under the Company's Executive
Retention Plan as described on page 21 of the Proxy Statement.
12
Proxy statement
Stock options
--------------------------------------------------------------------------------
Options have an exercise price equal to the fair market value of a share of
common stock on the grant date, a 10-year life, and vest in installments over
periods of four to seven years. The Company's stock option plans provide for
accelerated vesting upon death, change in control, disability and retirement.
The Compensation Committee has general authority to accelerate, extend or
otherwise modify benefits under stock option grants. Subject to the approval of
the Compensation Committee, options may be transferred to certain permissible
transferees, including immediate family members, for no consideration.
The following table shows how much the Named Officers may eventually realize
in future dollars under two hypothetical situations: if the stock gains 5% or
10% in value per year, compounded over the 10-year life of the options. These
are assumed rates of appreciation and are not intended to forecast future
appreciation of the common stock. Also included in this table is the increase in
value to all common shareholders using the same assumed rates of appreciation.
For a perspective, in 10 years one share of common stock valued at $29.43 on
February 2, 2001 would be worth $47.94 assuming the hypothetical 5% compounded
growth rate, or $76.35 assuming the hypothetical 10% compounded growth rate.
Another way to look at this is to express these amounts in today's dollars
by applying a present value approach to the hypothetical appreciation rates.
These results are shown in the last two columns of the table.
STOCK OPTION GRANTS IN 2001
-----------------------------------------------------------------------------------------------------------------------------------
Individual grants
--------------------------------------------
Number of % of total Potential realizable value at Present value at assumed
securities options assumed annual rates of stock price rates of stock price
underlying granted to Exercise appreciation for option term (a) appreciation (a,b)
options employees price Expiration ----------------------------------- ---------------------------
Name granted (#) in 2001 $/Sh date 5% 10% 5% 10%
===================================================================================================================================
Jack M. Greenberg 450,000 1.19% $29.43 2/2/11 $ 8,328,766 $ 21,106,728 $ 4,655,129 $ 11,797,011
225,000 0.60% $28.90 7/30/11(c) 4,089,387 10,363,310 2,259,931 5,727,108
James A. Skinner 150,000 0.40% $29.43 2/2/11 2,776,255 7,035,576 1,551,710 3,932,337
100,000 0.26% $28.90 7/30/11(c) 1,817,505 4,605,916 1,004,414 2,545,381
Stanley R. Stein 72,600 0.19% $29.43 2/2/11 1,343,708 3,405,219 751,028 1,903,251
36,300 0.10% $28.90 7/30/11(c) 659,754 1,671,947 364,602 923,973
James R. Cantalupo 300,000 0.79% $29.43 2/2/11 5,552,511 14,071,152 3,103,500 7,864,674
Alan D. Feldman 250,000 0.66% $29.43 2/2/11(d) 4,627,092 11,725,960 2,586,183 6,553,895
100,000 0.26% $28.90 7/30/11(e) 1,817,505 4,605,916 1,004,414 2,545,381
-----------------------------------------------------------------------------------------------------------------------------------
Increase in value to all
common shareholders(f) $23.9 billion $60.5 billion $13.3 billion $33.8 billion
===================================================================================================================================
(a) Calculated over a 10-year period representing the life of the options.
(b) Calculated assuming an investment in a 10-year, zero coupon U.S.
Treasury note made at the time the options were granted (5.99% on February 2,
2001 and 6.11% on July 30, 2001).
(c) These options will become fully exercisable, or vest, on January 31,
2004. If certain performance targets are met, the options will remain
exercisable for 10 years from the date of grant. If the targets are not met, the
options will expire on June 30, 2004, and any unexercised options outstanding on
that date will be forfeited.
(d) Upon Mr. Feldman's resignation, these options became exercisable and
will remain exercisable for five years from the date of his resignation.
(e) This grant was forfeited upon Mr. Feldman's resignation. The original
terms of this performance-based grant are described in footnote (c) to this
table.
(f) Calculated using a common stock price of $29.43, the closing market
price on February 2, 2001, which is the exercise price of the most substantial
portion of the options granted in 2001, and the total weighted average number of
common shares outstanding for 2001.
Proxy statement
13
Aggregated option exercises in 2001 and fiscal year-end option values
--------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Number of securities Value of unexercised
underlying unexercised in-the-money
Shares acquired options at 12/31/01 options at 12/31/01
on exercise Value realized (#) (b,c) ($) (d)
Name (#) ($) (a) Exercisable/unexercisable Exercisable/unexercisable
================================================================================================================
Jack M. Greenberg 150,000 $2,800,225 2,190,000/2,768,000 $13,698,688/$1,768,623
James A. Skinner 60,400 1,148,585 513,549/ 517,644 3,698,239/ 350,985
Stanley R. Stein 0 0 336,636/ 306,100 2,572,123/ 275,280
James R. Cantalupo 348,000 6,300,423 2,374,616/1,728,845 13,280,221/ 1,699,648
Alan D. Feldman 0 0 645,000/ 981,000 1,764,793/ 654,998
----------------------------------------------------------------------------------------------------------------
(a) Calculated by subtracting the exercise price from the market value of
the common stock on the exercise date, then multiplying by the number of shares
exercised. All values are on a pretax basis.
(b) The securities underlying the options are shares of common stock.
(c) The option term was extended three years for substantially all employee
optionees, including the Named Officers, for those options granted between May
1, 1999 and December 31, 2000 and having an exercise price greater than $28.90.
(d) Calculated using the market value of the common stock at December 31,
2001 ($26.47 per share) less the option exercise price multiplied by the number
of exercisable or unexercisable option shares, as the case may be. All values
are on a pretax basis.
Long-term incentives
--------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLANS--AWARDS IN 2001 (TO BE PAID IN APRIL 2004)
----------------------------------------------------------------------------------------------------------------
Performance Estimated future payouts under
or other period non-stock price-based plans (a)
until maturation -----------------------------------
Number of units or payout Threshold Target Maximum
Name (#) (a) ($) ($) ($)
================================================================================================================
Jack M. Greenberg 649,500 1/1/01 to 12/31/03 $ 81,188 $ 649,500 $ 2,435,625
James A. Skinner 180,985 1/1/01 to 12/31/03 22,623 180,985 678,694
Stanley R. Stein 157,625 1/1/01 to 12/31/03 19,703 157,625 591,094
James R. Cantalupo (b) 481,500 1/1/01 to 12/31/03 60,188 481,500 1,805,625
Alan D. Feldman (c) 262,500 1/1/01 to 12/31/03 32,813 262,500 984,375
----------------------------------------------------------------------------------------------------------------
(a) Awards are in the form of a cash incentive, based on achievement of
performance goals set at the beginning of each performance cycle. Actual awards
are based on the achievement of these goals and a percentage of the individual's
base salary at the start of the performance cycle. No payout occurs unless the
Company achieves certain threshold performance objectives. For the 2001-2003
cycle, the Committee established consolidated global performance measurements
applicable to all officers that include compound growth in earnings per share
and return on equity. A participant must be an employee at the end of the
performance period to receive an award. However, if a participant dies, retires
or becomes disabled prior to the end of the performance period, an award would
be prorated based on the portion of the performance period he or she was an
employee.
(b) Mr. Cantalupo will be eligible to receive payouts for any cycles
completed during his period of employment under the terms of the Executive
Retention Plan. See page 21 of the Proxy Statement.
(c) Mr. Feldman resigned from the Company effective March 1, 2002. He will
not be eligible to receive payouts under the terms of this Plan, but will
receive certain benefits under the Executive Retention Plan. See page 21 of the
Proxy Statement.
14
Proxy statement
Stock performance graphs
The following performance graphs compare the performance of the Company's common
stock to the Standard & Poor's 500 Stock Index (S&P 500 Index) and to the
performance of the companies comprising the Dow Jones Industrial Average (DJIA
companies). The graphs assume that the value of the investment in the Company's
common stock, the S&P 500 Index and the DJIA companies was $100 at December 31,
1996 for the five-year graph, and at December 31, 1991 for the 10-year graph,
and that all dividends were reinvested.
At least annually, we consider which companies comprise a readily
identifiable investment peer group. Given the unique nature of our business, we
have consistently concluded that no one group of companies stands out.
For instance, McDonald's is included in published restaurant indices.
However, unlike most other companies included in these indices, which have no or
limited international operations, McDonald's does business in 121 countries. For
added perspective, a substantial portion of our operating income comes from
outside the U.S. In addition, by virtue of our size, McDonald's inclusion in
those indices tends to skew the results. Hence, we believe that such a
comparison would not be meaningful.
On the other hand, our capitalization, trading volume and importance in an
industry that is vital to the U.S. economy have resulted in McDonald's inclusion
in the Dow Jones Industrial Average since 1985.
Thus, in the absence of any readily identifiable peer group for McDonald's,
we believe that use of the DJIA companies as the group for comparison is
appropriate. Like McDonald's, many DJIA companies generate meaningful sales and
revenues outside the U.S., and some manage global brands. Also, investors who
are looking for an investment in blue chip stocks often look at the Dow Jones
Industrial Average as a benchmark.
The two performance graphs that follow show McDonald's cumulative total
shareholder returns (i.e., price appreciation and reinvestment of dividends)
relative to the S&P 500 Index and the DJIA companies (including McDonald's) for
the five- and 10-year periods ended December 31, 2001. Returns shown are for
years ended December 31, and for the DJIA companies, returns are weighted for
market capitalization as of the beginning of each year. Such returns will vary
from that of the Dow Jones Industrial Average Index, which is not weighted by
market capitalization and may be composed of different companies during the
period under consideration.
For added perspective, the returns of the DJIA companies shown in the
performance graphs were considerably higher for the cumulative periods
presented, than that of the Dow Jones Industrial Average Index.
COMPARISON OF FIVE-YEAR CUMULATIVE
TOTAL SHAREHOLDER RETURNS
[CHART]
96 97 98 99 00 01
--------------------------------------------------------------------------------
McDonald's $100 106 171 181 153 121
S&P 500 Index $100 133 171 208 189 166
DJIA companies $100 135 184 238 202 198
COMPARISON OF 10-YEAR CUMULATIVE
TOTAL SHAREHOLDER RETURNS
[CHART]
91 92 93 94 95 96 97 98 99 00 01
--------------------------------------------------------------------------------
McDonald's $100 129 153 158 245 248 263 425 448 381 299
S&P 500 Index $100 108 118 120 165 203 271 348 421 383 338
DJIA companies $100 107 113 121 173 229 308 421 545 462 452
Source: Standard & Poor's IMS
Proxy statement
15
ITEM 2. Approval of auditors
The Board is asking shareholders to approve Ernst & Young LLP as auditors for
2002. Ernst & Young LLP audited the Company's financial statements for 2001. A
representative of that firm will be present at the Annual Meeting and will have
an opportunity to make a statement and answer questions.
The Board recommends that shareholders vote FOR the appointment of Ernst &
Young LLP as auditors for 2002 as proposed in this Item 2.
Audit fees
--------------------------------------------------------------------------------
The following table presents fees billed for professional services rendered for
the audit of the Company's annual financial statements for 2001 and fees billed
for other services rendered by Ernst & Young LLP for 2001:
IN MILLIONS
================================================================================
Audit fees $ 2.7
--------------------------------------------------------------------------------
Financial information systems design and implementation fees 0
--------------------------------------------------------------------------------
All other fees:
Audit-related fees $ 4.0
Non-audit fees, primarily expatriate and other tax services 1.8
--------------------------------------------------------------------------------
Total all other fees $ 5.8
--------------------------------------------------------------------------------
Audit Committee report
Dear fellow shareholders:
--------------------------------------------------------------------------------
The Audit Committee is composed of three Directors, each of whom meets the
independence and experience requirements of the New York Stock Exchange. The
Committee acts under a written charter adopted by the Board of Directors, which
is reviewed annually and revised as appropriate. The Board most recently amended
the charter, which is included as Appendix A on page 22, in March 2002.
Management is primarily responsible for the Company's financial statements
and the reporting process, including the systems of internal controls. Ernst &
Young LLP, the Company's independent accountants, is responsible for performing
an independent audit of the Company's consolidated financial statements in
accordance with generally accepted accounting principles (GAAP) and for issuing
a report on those statements. The Committee oversees the financial reporting
process and internal control system on behalf of the Board of Directors. The
Committee met 10 times during 2001. The Committee also met regularly with Ernst
& Young and representatives of the internal audit function, with and without
management present.
In the course of fulfilling its oversight responsibilities, the Committee
reviewed and discussed the audited financial statements with management and
Ernst & Young. This review included a discussion of:
.. the reasonableness of significant financial reporting issues and
judgments made in connection with the preparation of the Company's
financial statements, including the quality (and not just the
acceptability) of the Company's accounting principles;
.. the clarity and completeness of financial disclosures;
.. the adequacy of internal controls that could significantly affect the
Company's financial statements;
.. items that could be accounted for using alternate GAAP methods; and
.. the potential effects of regulatory and accounting initiatives, as well as
off-balance-sheet structures, on the Company's financial statements.
The Committee discussed with Ernst & Young other matters required to be
discussed with the auditors under Statement on Auditing Standards No.61, as
amended by Statement on Auditing Standards No.90 (communication with audit
committees). The Committee also received, reviewed and discussed with Ernst &
Young their written disclosures required by Independence Standards Board
16
Proxy statement
Standard No.1, (independence discussions with audit committees). In this regard,
among other things, the Committee reviewed Ernst & Young's independence from the
Company and its management, and in doing so, adopted policies regarding the
provision of non-audit services by the independent auditor and the hiring of
employees of the independent auditing firm.
The Committee recommended to the Board of Directors the selection of Ernst
& Young as the Company's independent auditors. In addition, the Committee:
.. reviewed the scope of and overall plans for the annual audit and the
internal audit program;
.. reviewed fees for all services provided by Ernst & Young;
.. consulted with management and Ernst & Young regarding risk management;
.. reviewed the adequacy of certain financial policies;
.. considered Ernst & Young's quality control procedures;
.. on a quarterly basis, reviewed the Company's financial results prior to
their public issuance; and
.. reviewed significant legal developments.
Based on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001 for filing with the Securities and Exchange Commission.
Respectfully submitted,
The Audit Committee
/s/ Enrique Hernandez, Jr.
Enrique Hernandez, Jr.
Chairman
/s/ Walter E. Massey
Walter E. Massey
/s/ Roger W. Stone
Roger W. Stone
ITEM 3. Shareholder proposal relating to the China Business Principles
Management has been advised that John Harrington on behalf of his daughter,
Brianna Harrington, intends to present the following proposal at the Annual
Meeting. The address and share ownership of the proponent will be furnished to
any person upon oral or written request to the Company's Investor Relations
Service Center at 1-630-623-7428, or McDonald's Plaza, Oak Brook, Illinois
60523. The Board recommends a vote AGAINST this proposal.
Introduction and the Board's position
--------------------------------------------------------------------------------
McDonald's has a well-respected and well-recognized record and reputation for
business honesty and integrity, and everyone at McDonald's shares a commitment
to high standards of behavior and performance on issues of social
responsibility. These values and principles serve as the cornerstone of
McDonald's success. McDonald's is concerned about the protection of human rights
in China as well as elsewhere in the world.
We believe our existing policies and practices in this regard in many ways
surpass those raised in this proposal.
Being a good corporate citizen begins with the way we treat our people. One
of our key strategies is to be the best employer for our people in each
community around the world. We are committed to creating an environment that
values and respects employees, recognizes and rewards their performance, and
provides meaningful growth opportunities. In this regard, we have adopted a
comprehensive set of principles and policies for all McDonald's employees
worldwide, including China, which addresses the employment issues raised in the
proposal.
We expect suppliers to the McDonald's System to share similar values and act
accordingly. In fact, we continually work with our suppliers to help them
address issues and improve their facilities in China and elsewhere around the
world.
Further, in 1997, McDonald's established its Code of Conduct for Suppliers.
The Code describes how we expect them, as well as their suppliers who work on
McDonald's business, to treat their employees. Compliance with this Code is
required of all suppliers and is the responsibility of each individual supplier.
McDonald's will refuse to approve or do business with those who do not uphold,
in action as well as words, the same principles. Supplier facilities in China
are subject to regular review by external third parties and audit firms. In
addition, McDonald's reserves the right to conduct and has conducted periodic,
unannounced inspections of suppliers' facilities and business practices to
verify compliance with the Code.
Proxy statement
17
McDonald's also believes that it has a special responsibility to protect the
environment for future generations and realizes in today's world, a business
leader must also be an environmental leader. The Company expects environmental
leadership from its suppliers as well. Our environmental commitment and behavior
is guided by strong principles designed to promote a healthy environment. These
longstanding principles address the environmental concerns outlined in the
proposal.
Furthermore, this proposal is substantially identical to the proposal
submitted by John Harrington on behalf of his daughter, Brianna Harrington, at
last year's Annual Meeting, where it was rejected overwhelmingly by the
Company's shareholders.
Shareholder proposal
--------------------------------------------------------------------------------
WHEREAS: our company's business practices in China respect human and labor
rights of workers. The eleven principles below were designed to commit a company
to a widely accepted and thorough set of human and labor rights standards for
China. They were defined by the International Labor Organization and the United
Nations Covenants on Economic, Social and Cultural Rights, and Civil, and
Political Rights. They have been signed by the Chinese government and China's
national laws.
(1) No goods or products produced within our company's facilities or those
of suppliers shall be manufactured by bonded labor, forced labor, within prison
camps or as part of reform-through-labor or reeducation-through-labor programs.
(2) Our facilities and suppliers shall adhere to wages that meet workers'
basic needs, fair and decent working hours, and at a minimum, to the wage and
hour guidelines provided by China's national labor laws.
(3) Our facilities and suppliers shall prohibit the use of corporal
punishment, any physical, sexual or verbal abuse or harassment of workers.
(4) Our facilities and suppliers shall use production methods that do not
negatively affect the worker's occupational safety and health.
(5) Our facilities and suppliers shall not call on police or military to
enter their premises to prevent workers from exercising their rights.
(6) We shall undertake to promote the following freedoms among our employees
and the employees of our suppliers: freedom of association and assembly,
including the rights to form unions and bargain collectively; freedom of
expression, and freedom from arbitrary arrest or detention.
(7) Company employees and those of our suppliers shall not face
discrimination in hiring, remuneration or promotion based on age, gender,
marital status, pregnancy, ethnicity or region of origin.
(8) Company employees and those of our suppliers shall not face
discrimination in hiring, remuneration or promotion based on labor, political or
religious activity, or on involvement in demonstrations, past records of arrests
or internal exile for peaceful protest, or membership in organizations committed
to non-violent social or political change.
(9) Our facilities and suppliers shall use environmentally responsible
methods of production that have minimum adverse impact on land, air and water
quality.
(10) Our facilities and suppliers shall prohibit child labor, at a minimum
comply with guidelines on minimum age for employment within China's national
labor laws.
(11) We will issue annual statements to the Human Rights for Workers in
China Working Group detailing our efforts to uphold these principles and to
promote these basic freedoms.
RESOLVED: Stockholders request the Board of Directors to make all possible
lawful efforts to implement and/or increase activity on each of the principles
named above in the People's Republic of China.
SUPPORTING STATEMENT: As U.S. companies import more goods, consumer and
shareholder concern is growing about working conditions in China that fall below
basic standards of fair and humane treatment. We hope that our company can prove
to be a leader in its industry and embrace these principles.
Recommendation of the Board
--------------------------------------------------------------------------------
For the reasons stated in the Board's position above, the Board of Directors
does not believe that the adoption of this proposal is necessary and recommends
a vote AGAINST this shareholder proposal.
18
Proxy statement
ITEM 4. Shareholder proposal relating to the review of the Company's animal
welfare standards
People for the Ethical Treatment of Animals (PETA) and Trillium Asset Management
advised the Company that they intend to present a shareholder proposal at the
Annual Meeting. The addresses and the share ownership of the proponents will be
furnished to any shareholder upon request to the Company's Investor Relations
Service Center at 1-630-623-7428, or McDonald's Plaza, Oak Brook, Illinois
60523. The Board recommends a vote AGAINST this proposal.
Introduction and the Board's position
--------------------------------------------------------------------------------
McDonald's typically does not own, raise or transport animals, but we are strong
advocates of good animal handling practices and seek to achieve humane treatment
of animals by purchasing our meat products from suppliers who maintain high
animal welfare standards. We believe that by purchasing meat products from these
suppliers, we can provide safer, high-quality food products to our customers,
and at the same time facilitate the humane treatment of animals.
We have a track record of leadership in animal welfare. For example, we
have developed McDonald's Animal Welfare Guiding Principles and have established
the McDonald's Animal Welfare Council to provide leadership in the animal
welfare area and in our commitment to animal welfare.
To ensure that our suppliers meet McDonald's animal welfare objectives, we
adopted the McDonald's Animal Welfare Guiding Principles (Guiding Principles).
The Guiding Principles express our commitment to the raising, transportation and
slaughter of animals in a manner that is free of cruelty, abuse and neglect.
The Guiding Principles are applicable to all suppliers (i.e., all suppliers
from which the Company purchases product) on a worldwide basis. As explained on
our website, the principles were developed to "help guide further development of
animal welfare programs throughout McDonald's global supply chain."
As stated in the Guiding Principles, the Company, together with its outside
experts, works with its suppliers to develop systems to monitor and assess the
effectiveness of suppliers' animal handling practices. Our program is growing,
and over the past five years we have made significant progress in our program to
monitor and assess the effectiveness of suppliers' handling practices. We
operate in 121 countries, and it is a tremendous task to monitor every supplier
in every country immediately. We are making progress. We are continually
improving and evolving these systems.
We have a global abattoir (e.g., slaughterhouse) audit program that we
developed with the assistance of Dr. Temple Grandin, the leading global
authority on animal welfare issues. We have worked with Dr. Grandin to train and
educate our global supply chain management team and our suppliers about animal
welfare science and animal behavior. Her work for the Company is international
in scope and is detailed on the Company's website. She has visited McDonald's
supply chain management and suppliers in the United States, Australia and
Europe. Since 1999, many audits have been completed in abattoir facilities,
including facilities in North America, Latin America, Europe and Asia/Pacific.
Our commitment, leadership and results are well established, recognized,
and global. Further, we already report to shareholders about our animal welfare
program on our website at www.mcdonalds.com.
Shareholder proposal
--------------------------------------------------------------------------------
RESOLVED: Shareholders request that the Board of Directors issue a
report to shareholders by October 2002, prepared at reasonable cost and
omitting proprietary information, reviewing McDonald's animal welfare
standards with the view to adopting and enforcing consistent animal
welfare standards internationally.
SUPPORTING STATEMENT: Our company's public policy and practices toward
the welfare of farm animals, as currently implemented in the United
States and United Kingdom, make McDonald's a corporate leader in those
countries.
.. In the U.S., our company has prohibited some abuses and details these
improvements on our company's website, which includes this statement:
"McDonald's believes that the humane treatment of animals is an
integral part of our world class supplier system. Therefore, we buy all
our beef, pork and poultry products from suppliers who maintain the
highest standards and share McDonald's commitment to animal welfare."
.. In the U.K., McDonald's has gone further, prohibiting battery cages for
hens and gestation crates for pigs. McDonald's stamps the RSPCA's "Freedom Food"
logo on its products that contain eggs, and in an October 2001 advertisement,
our company declares that it "Has established a comprehensive set of animal
welfare standards for suppliers...Has independent food safety auditing systems
for all beef, pork, and chicken abattoirs..."
.. Approximately one-half of our company's 29,000 restaurants are not in the
U.S., U.K., or Australia. Some standards implemented in the U.K. apply
exclusively in that country, where fewer than one-twentieth of McDonald's
restaurants operate.
Proxy statement
19
We feel our company risks harm to its good reputation and image if it buys from
suppliers engaged in such abuse of animals.
.. Our chief competitors, Burger King and Wendy's, have adopted standards
similar to our U.S. standards, and apply these standards internationally.
(Burger King Press Release, June 28, 2001; USA Today, June 29, 2001;
personal communication with Denny Lynch, Wendy's vice-president for public
affairs and Dr. Temple Grandin, McDonald's and Wendy's chief animal welfare
advisor).
.. Bob Langert, McDonald's Senior Director for Community Affairs, has
stated that: "No longer are extremists driving the debate. Mainstream
consumers are the primary force."
.. Newspapers and television stations around the world have reported
extensively on animal welfare campaigns and our company's animal welfare
standards.
.. Animal rights activists have not targeted our company in any concerted
way since McDonald's adopted guidelines and enforced them more than one
year ago.
Consequently, we urge our company to continue to protect and enhance
its good reputation and business by ensuring that its suppliers
worldwide meet the highest standards for the humane treatment of farm
animals.
Recommendation of the Board
--------------------------------------------------------------------------------
For the reasons stated in the Board's position above, the Board of
Directors recommends a vote AGAINST this shareholder proposal.
Other information
Certain relationships and related transactions
--------------------------------------------------------------------------------
Based on information available to the Company, in 2001, the Company and its
subsidiaries purchased approximately $1.2 million worth of paper and other
printed products (principally tray liners, french fry bags and pan liners) from
Schwarz Paper Company, and purchased approximately $3.9 million worth of
products (principally premiums and gift items) and services related to the
production of point of sale materials from Integrated Merchandising Systems, LLC
(IMS), a subsidiary of Schwarz and Group II Communications, Inc. Mr. McKenna is
Chairman and Chief Executive Officer, as well as a 69% shareholder, of Schwarz
and a 43% shareholder of Group II. Effective September 30, 2001, Schwarz and
Group II sold IMS. The Company believes that these purchases were made on terms
at least as favorable as would have been available from other parties and
intends to continue its dealings with Schwarz in 2002 on similar terms.
In 2001, as part of its ongoing share repurchase program, the Company
purchased shares of common stock at the New York Stock Exchange closing price on
the date of purchase, from Directors and Executive Officers in the following
amounts: James R. Cantalupo, $755,801; and Jack M. Greenberg, $705,050. Mr.
Cantalupo acquired these shares through the exercise of stock options for
$200,744 within two years prior to their sales.
Shareholder proposals for the 2003 Annual Meeting
--------------------------------------------------------------------------------
The Corporate Secretary must receive shareholder proposals no later than
December 6, 2002, to be considered for inclusion in the Company's 2003 proxy
materials. Additionally, the Company's advance notice by-law provisions require
that any shareholder proposal to be presented from the floor of the 2003 Annual
Meeting must be received by the Corporate Secretary, at the Company's principal
executive offices, not less than 90 days nor more than 120 days prior to the
first anniversary of the previous year's Annual Meeting. Also, such proposal
must be, under law, an appropriate subject for shareholder action in order to be
brought before the meeting.
Change of control employment agreements
--------------------------------------------------------------------------------
The Board has authorized the Company to enter into change of control employment
agreements with 18 key executives, including Mr. Greenberg, Mr. Skinner and Mr.
Stein. These agreements provide that upon a change of control of the Company the
executives will be entitled to the benefits
20
Proxy statement
described below. An executive who also participates in the Executive Retention
Plan will be required to elect to receive severance benefits under either the
Executive Retention Plan or these change of control agreements.
Subject to exceptions specified in the agreements, a change of control will
be deemed to occur if: a person or group acquires 20% or more of the Company's
outstanding common stock or voting securities; the members of the Company's
Board on the date of the agreements (and certain subsequent new Board members
approved in a described manner by the persons who were members on the date of
the agreement) cease to constitute at least a majority of the Board as a result
of an actual or threatened election contest; there is a merger or other business
combination involving the Company, or a disposition of all or substantially all
of the assets of the Company; or the shareholders of the Company approve a
liquidation or dissolution of the Company.
BENEFITS UPON A CHANGE OF CONTROL
The agreements provide generally that, during the three-year period following a
change of control, (i) the executive's position and authority may not be
reduced, (ii) the executive's place of work may not be relocated by more than 30
miles, (iii) the executive's base salary may not be reduced, (iv) the
executive's annual bonus opportunity may not be reduced and the annual bonus
paid will not be less than the target annual bonus, and (vi) the executive will
continue to participate in employee benefit plans on terms not less favorable
than before the change of control. In addition, within 30 days after a change of
control, the Company will pay to each executive a prorated portion of that
executive's annual bonus and of each outstanding LTIP award (both computed at
the target levels) for the partial year or LTIP period prior to the change of
control.
TERMINATION FOR "GOOD REASON"
The Company's failure to provide any of the benefits described above following a
change of control will allow the executive to terminate his or her employment
for "good reason" at any time during the three-year period following a change of
control. The executive also may terminate his or her employment for good reason
if, during the three-year period following a change of control: (i) there is a
material adverse change in the executive's position or other terms of
employment; (ii) the Company materially breaches the executive's agreement;
(iii) the Company attempts to terminate the executive for cause without
following requirements set forth in the executive's agreement; or (iv) a
successor entity fails to assume the executive's agreement. In addition, the
executive may terminate his or her employment for any reason, or no reason at
all, during the 30-day period commencing on the first anniversary of a change of
control and receive full severance benefits as if the executive had terminated
for good reason.
SEVERANCE BENEFITS UPON TERMINATION FOR GOOD REASON OR WITHOUT CAUSE
If the executive terminates his or her employment for good reason or is
terminated by the Company without cause (as defined in the agreement) at any
time during the three-year period following a change of control, then, in
addition to the executive's entitlement to receive accrued but unpaid salary,
bonus, deferred compensation and other benefit amounts due at the time of such
termination, the executive will be entitled to the following severance benefits,
subject to the executive executing of a noncompetition, non-solicitation,
confidentiality and release agreement: a lump-sum cash payment equal to three
times the sum of the executive's base salary, annual bonus (computed at the
target level) and contribution under the Company's defined contribution plan; a
pro-rata portion of the annual bonus (computed at the target level) for the year
of termination; continued medical and life insurance benefits, as well as fringe
and other benefits, for three years after the termination; and a lump-sum cash
payment for any sabbatical leave that has been earned but not yet taken. In
addition, for purposes of determining the executive's eligibility for any
available post-retirement medical benefits, the executive will be treated as
having three additional years of service and being three years older.
SEVERANCE BENEFITS UPON TERMINATION FOR OTHER REASONS
In the case of the death or disability of an executive during the three-year
period immediately following a change of control, the executive will be entitled
to receive accrued but unpaid salary, bonus, deferred compensation and other
benefit amounts due at the time of such death or disability at levels provided
to his or her peer employees and at least as favorable as those in place
immediately prior to the change of control.
If (i) the Company terminates an executive for cause following a change of
control, (ii) an executive voluntarily terminates employment without good reason
following a change of control, or (iii) an executive who is otherwise eligible
to receive severance benefits fails to execute the non-competition and release
agreement, then that executive will receive only a lump-sum payment of accrued
but unpaid salary, bonus, deferred compensation and other benefit amounts due at
the time of the termination.
TAXES
Subject to limitations specified in the agreements, the Company will reimburse
an executive on an after-tax (grossed-up) basis for any "parachute" excise taxes
incurred by that executive because of any payments or other amounts under the
agreement or otherwise provided which are considered to be contingent upon a
change of control.
Proxy statement
21
TERM OF THE AGREEMENTS
The agreements have an initial term of three years. However, one year after the
date of the agreements, they are automatically extended in order to perpetually
retain a two-year term until terminated by the Company with a minimum of two
years' notice.
Executive retention plan
--------------------------------------------------------------------------------
The Company maintains a retention plan under which specified executives,
including all of the Named Officers, become entitled to certain benefits if they
remain employed by the Company as an Executive Officer for a specified
"retention period" (until April 2003 for Mr. Greenberg, April 2001 for Mr.
Cantalupo and September 2001 for the remaining executives). To receive these
benefits, the executive (other than Mr. Greenberg and Mr. Cantalupo) must be at
least 62 years of age or have a designated successor who has been approved by
the Chief Executive Officer. In addition, the executive must comply with a
covenant not to compete, a covenant not to solicit employees, and a
nondisclosure covenant, and must execute a release of claims.
To qualify for benefits under the retention plan, an executive must devote
substantially all of his or her normal business time and efforts to the business
of the Company during a "transition period" that begins after the expiration of
the retention period and continues for the lesser of 18 months or a number of
months equal to the executive's total years of service. During the transition
period, the executive is entitled to receive: (i) base salary at the highest
rate received by the executive before the transition period, (ii) an annual
incentive for any calendar year or years that end during the transition period
and a prorated incentive for any partial year during the period (both computed
at the target levels), and (iii) payouts for any LTIP cycles completed during
the period (computed at the target levels).
For a period of five years following the transition period, the executive
must devote such time to the business of the Company as the Company may
reasonably request. During this "continued employment period," the executive is
entitled to receive: (i) base salary at a rate equal to 25% of the base salary
paid during the transition period (50% in the case of Mr. Greenberg and 35% in
the case of Mr. Cantalupo), and (ii) payouts for any LTIP cycles completed
during the period (computed at the target levels). Executives will not receive
annual incentives during the continued employment period.
During both the transition period and the continued employment period, the
executive will continue to participate in employee benefit plans, but will not
be eligible to receive additional stock option grants or LTIP grants. Stock
options granted prior to the commencement of the transition period, however,
will continue to vest and become exercisable in accordance with their original
terms.
If either Mr. Greenberg or Mr. Cantalupo terminates his employment for "good
reason" (as defined in the plan) at any time during the retention period or the
transition period, he will be entitled to the following severance benefits,
subject to the execution of a release, noncompetition and nondisclosure
agreement: (i) accrued but unpaid base salary and incentive (computed at the
target level), (ii) an amount equal to the present value of salary and bonus
(computed at the target level) that would have been payable to the executive
during the remainder of his transition period and the present value of salary
that would have been payable to the executive during the remainder of his
continued employment period, and (iii) an amount equal to the estimated value of
the executive's health and welfare benefits for the remainder of the transition
and continued employment periods. Mr. Greenberg and Mr. Cantalupo would also
receive five years of accelerated vesting and exercisability for stock options.
The same severance benefits also are available to any participating executive
(including Mr. Greenberg and Mr. Cantalupo) whose employment is terminated by
the Company for any reason other than death, disability or "cause" (as defined
in the plan).
The plan is in effect until the later of October 1, 2004, or two years after
the Company gives notice to all participating executives of its intention to
terminate the plan.
Effective January 1, 2002, Mr. Cantalupo was named to emeritus status.
Beginning May 2002, Mr. Cantalupo is expected to begin his transition period
pursuant to the terms of the Executive Retention Plan and will receive benefits
thereunder.
Effective March 1, 2002, Mr. Feldman resigned from the Company. In exchange
for a confidentiality and non-competition agreement and release required
thereunder, Mr. Feldman will receive severance benefits under the Executive
Retention Plan described above (including amounts reflective of salary,
incentives and other benefits). Mr. Feldman's severance benefits total $3
million, of which $2.6 million will be paid to him within 60 days of his
resignation, and the balance of $400,000 will be paid on or by January 31, 2003.
Upon his resignation, Mr. Feldman's stock options became exercisable and will
remain exercisable for five years from the date of his resignation, except for
his July 2001 grant that was forfeited.
22
Proxy statement
Appendix A. McDonald's Corporation Audit Committee Charter
I. STATEMENT OF POLICY
The Audit Committee will provide assistance to the Board of Directors in
fulfilling its oversight responsibility relating to the Company's financial
statements and the financial reporting process, the systems of internal
accounting and financial controls, the internal audit services function, the
annual independent audit of the Company's financial statements, compliance by
the Company with legal and regulatory requirements, and evaluation of enterprise
risk issues. In so doing, it is the responsibility of the Committee to maintain
free and open communication among the Committee, independent auditors, the
internal audit service providers and management of the Company.
II. ORGANIZATION
A. Charter. At least annually, the charter will be reviewed and reassessed by
the Committee and any proposed changes will be submitted to the Board of
Directors for approval.
B. Members. The members of the Committee shall be appointed by the Board of
Directors and shall be comprised of at least three Directors, who meet the
independence and experience requirements of the New York Stock Exchange. The
Board of Directors also shall designate a Committee Chairperson.
C. Meetings. In order to discharge its responsibilities, the Committee shall
each year establish a schedule of meetings; additional meetings may be scheduled
as required.
D. Agenda, Minutes and Reports. An agenda, together with materials relating to
the subject matter of each meeting, shall be sent to members of the Committee
prior to each meeting. Minutes for all meetings of the Committee shall be
prepared to document the Committee's discharge of its responsibilities. The
minutes shall be circulated in draft form to all Committee members to ensure an
accurate final record, shall be approved at a subsequent meeting of the
Committee and shall be distributed periodically to the full Board of Directors.
The Committee shall make regular reports to the Board.
E. Access to Records, Consultants and Others. In discharging its oversight role,
the Committee may:
.. investigate any matter brought to its attention with full access to all
books, records, facilities and personnel of the Company;
.. retain outside legal, accounting or other consultants to advise the
Committee; and
.. request any officer or employee of the Company, the Company's outside
counsel, internal audit service providers or independent auditors to attend
a meeting of the Committee or to meet with any members of, or
consultants to, the Committee.
The Committee shall also ensure that sufficient opportunity exists for its
members to meet separately with the independent auditors and/or the head of
internal audit without management present; to meet separately with management
without the independent auditors and/or the head of internal audit present; and
to meet in private with only the Committee members present.
III. RESPONSIBILITIES
The Committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately accountable to
the Board and the Audit Committee, as representatives of the Company's
shareholders. While the Committee has the responsibilities and powers set forth
in this Charter, it is not the duty of the Committee to plan or conduct audits
or to determine that the Company's financial statements are complete and
accurate and are in accordance with generally accepted accounting principles.
This is the responsibility of management and the independent auditors. Nor is it
the duty of the Committee to conduct investigations, to resolve disagreements,
if any, between management and the independent auditors or to assure compliance
with the laws and regulations and the Company's Standards of Business Conduct.
The following shall be the principal responsibilities of the Audit
Committee:
The Committee shall have the ultimate authority and responsibility to evaluate
and, where appropriate, to recommend to the Board that the independent auditors
be replaced.
The Committee shall receive periodic reports from the independent auditor as
required by the Independence Standards Board regarding the auditor's
independence, discuss such reports with the auditor, and if so determined by the
Committee, recommend that the Board take appropriate action to satisfy itself of
the independence of the auditor. Annually, the Committee will review the
performance, and recommend to the Board the selection of the Company's
independent auditors, which selection may be subject to shareholders' approval,
as determined by the Board.
The Committee shall discuss with the internal audit service providers and the
independent auditors the overall scope and plans for their respective audits,
including the adequacy of staffing. Also, the Committee will discuss with
management, the internal audit service providers and the independent auditors
the Company's major risk exposures, the adequacy and effectiveness of the
accounting and financial controls, and the steps management has taken to monitor
and control such exposures and manage legal compliance programs.
Proxy statement
23
The Committee shall approve the fees paid to the independent auditors and if the
internal audit services are out-sourced, the Committee shall also approve the
fees paid to the internal audit service providers.
The Committee shall annually review the experience and qualifications of the
senior members of the independent auditor team and the quality control
procedures of the independent auditors.
The Committee shall approve guidelines for the retention of the independent
auditors for any non-audit service and the fee for such service.
The Committee shall approve guidelines for the Company's hiring of employees of
the independent auditors.
Prior to the release of quarterly earnings, available Committee members shall
review and discuss the quarterly financial statements with management and the
independent auditors and will discuss any other matters required to be
communicated to the Committee by the independent auditors under generally
accepted auditing standards. A quorum of Committee members shall not be required
to conduct these reviews.
The Committee shall review with management and the independent auditors the
financial statements to be included in the Company's Annual Report on Form 10-K
(or the annual report to shareholders if distributed prior to the filing of Form
10-K), including their judgment about the quality, not just acceptability, of
accounting principles, the reasonableness of significant judgments, the clarity
of the disclosures in the financial statements and the adequacy of internal
controls. Also, the Committee will discuss the results of the annual audit and
any other matters required to be communicated to the Committee by the
independent auditors under generally accepted auditing standards including
matters required to be discussed by Statement on Auditing Standards No.61, as
amended by Statement on Auditing Standards No.90. The Committee may discuss with
the national office of the independent auditors issues on which it was consulted
by the Company's audit team and matters of audit quality and consistency. Based
upon such review and discussion, the Audit Committee shall make a determination
whether to recommend to the Board that the audited financial statements be
included in the Company's Form 10-K.
The Committee shall review with the independent auditor any problems or
difficulties the auditor may have encountered and any management letter provided
by the auditor and the Company's response to that letter. Such review should
include any difficulties encountered in the course of the audit work, including
any restrictions on the scope of activities or access to required information,
and any disagreements with management regarding generally accepted accounting
principles and other matters.
The Committee shall prepare the report required by the Securities and Exchange
Commission's rules to be included in the Company's annual proxy statement.
The Committee shall review with management and the independent auditors the
effect of regulatory and accounting initiatives as well as any off-balance-sheet
structures on the Company's financial statements.
The Committee shall review with management and the independent auditors any
correspondence with regulators or governmental agencies and any employee
complaints or published reports that raise material issues regarding the
Company's financial statements, accounting policies and compliance with the
Company's Standards of Business Conduct.
The Committee shall review annually a summary of the Company's dealings with
Directors and with firms that employ Directors.
The Committee shall review annually a summary of employees' compliance with the
Company's Standards of Business Conduct.
The Committee shall approve the initial grant of franchise(s) to a Company
officer or a former Company officer. The Committee shall also approve the
purchase of restaurants from a franchisee who immediately thereafter becomes a
Company officer.
The Committee shall meet periodically with the General Counsel and other
appropriate legal staff of the Company to review material legal affairs of the
Company.
The Committee shall also carry out such other duties that may be delegated to it
by the Board of Directors from time to time.
Approved by the Audit Committee
Date: March 20, 2002
Approved by the Board of Directors
Date: March 21, 2002
24
Proxy statement
Appendix B. Executive Officers
The following list sets forth the names of our Executive Officers, their current
ages and their positions.
Jack M. Greenberg
Age: 59. Chairman and Chief Executive Officer.
Mats Lederhausen
Age: 39. Executive Vice President, Strategy and Business Development.
Matthew H. Paull
Age: 50. Executive Vice President, Chief Financial Officer.
David M. Pojman
Age: 42. Senior Vice President, Controller.
Gloria Santona
Age: 51. Senior Vice President, General Counsel and Secretary.
James A. Skinner
Age: 57. President and Chief Operating Officer--McDonald's Worldwide
Restaurant Group.
Stanley R. Stein
Age: 59. Executive Vice President, Worldwide Human Resources.
Fred L. Turner
Age: 69. Senior Chairman.
25
2001 Financial Information
11-year summary
Management's discussion and analysis*
Consolidated financial statements
Notes to consolidated financial statements
Quarterly results (unaudited)
Management's report
Report of independent auditors
* Management's discussion and analysis is excerpted from our 2001 Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission
on March 25, 2002.
[GRAPHIC]
11-year summary
27
DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
====================================================================================================================================
Franchised sales $ 24,838 24,463 23,830 22,330 20,863 19,969 19,123 17,146 15,756 14,474 12,959
Company-operated sales $ 11,040 10,467 9,512 8,895 8,136 7,571 6,863 5,793 5,157 5,103 4,908
Affiliated sales $ 4,752 5,251 5,149 4,754 4,639 4,272 3,928 3,048 2,674 2,308 2,061
------------------------------------------------------------------------------------------------------------------------------------
Total Systemwide sales $ 40,630 40,181 38,491 35,979 33,638 31,812 29,914 25,987 23,587 21,885 19,928
------------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 14,870 14,243 13,259 12,421 11,409 10,687 9,795 8,321 7,408 7,133 6,695
Operating income $ 2,697/(1)/ 3,330 3,320 2,762/(3)/ 2,808 2,633 2,601 2,241 1,984 1,862 1,679
Income before taxes $ 2,330/(2)/ 2,882 2,884 2,307/(3)/ 2,407 2,251 2,169 1,887 1,676 1,448 1,299
Net income $ 1,637/(2)/ 1,977 1,948 1,550/(3)/ 1,642 1,573 1,427 1,224 1,083 959 860
------------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations $ 2,688 2,751 3,009 2,766 2,442 2,461 2,296 1,926 1,680 1,426 1,423
Capital expenditures $ 1,906 1,945 1,868 1,879 2,111 2,375 2,064 1,539 1,317 1,087 1,129
Free cash flow $ 782 806 1,141 887 331 86 232 387 363 339 294
Treasury stock purchases $ 1,090 2,002 933 1,162 765 605 321 500 628 92 117
------------------------------------------------------------------------------------------------------------------------------------
Financial position
at year end
Total assets $ 22,535 21,684 20,983 19,784 18,242 17,386 15,415 13,592 12,035 11,681 11,349
Total debt $ 8,918 8,474 7,252 7,043 6,463 5,523 4,836 4,351 3,713 3,857 4,615
Total shareholders'
equity $ 9,488 9,204 9,639 9,465 8,852 8,718 7,861 6,885 6,274 5,892 4,835
Shares outstanding IN
MILLIONS 1,280.7 1,304.9 1,350.8 1,356.2 1,371.4 1,389.2 1,399.5 1,387.4 1,414.7 1,454.1 1,434.5
------------------------------------------------------------------------------------------------------------------------------------
Per common share
Net income $ 1.27/(2)/ 1.49 1.44 1.14/(3)/ 1.17 1.11 .99 .84 .73 .65 .59
Net income-diluted $ 1.25/(2)/ 1.46 1.39 1.10/(3)/ 1.15 1.08 .97 .82 .71 .63 .57
Dividends declared $ .23 .22 .20 .18 .16 .15 .13 .12 .11 .10 .09
Market price at
year end $ 26.47 34.00 40.31 38.41 23.88 22.69 22.56 14.63 14.25 12.19 9.50
------------------------------------------------------------------------------------------------------------------------------------
Franchised restaurants 17,395 16,795 15,949 15,086 14,197 13,374 12,186 10,944 9,918 9,237 8,735
Company-operated restaurants 8,378 7,652 6,059 5,433 4,887 4,294 3,783 3,216 2,733 2,551 2,547
Affiliated restaurants 4,320 4,260 4,301 3,994 3,844 3,216 2,330 1,739 1,476 1,305 1,136
------------------------------------------------------------------------------------------------------------------------------------
Total Systemwide
restaurants 30,093 28,707 26,309 24,513 22,928 20,884 18,299 15,899 14,127 13,093 12,418
------------------------------------------------------------------------------------------------------------------------------------
/(1)/ Includes $378 million of pretax special operating charges primarily
related to the U.S. business reorganization and other global change
initiatives, and the closing of 163 underperforming restaurants in
international markets discussed on page 29.
/(2)/ Includes the $378 million of pretax special operating charges noted above
and $125 million of net pretax special nonoperating income items primarily
related to a gain on the initial public offering of McDonald's Japan, for
a net pretax expense of $253 million ($143 million after tax or $0.11 per
share). Net income also reflects an effective tax rate of 29.8 percent,
primarily due to the one-time benefit of tax law changes in certain
international markets ($147 million). See page 29 for further details.
/(3)/ Includes $162 million of Made For You costs and the $160 million special
charge related to the home office productivity initiative for a pretax
total of $322 million ($219 million after tax or $0.16 per share).
Management's discussion and analysis of financial condition
and results of operations
Nature of business
--------------------------------------------------------------------------------
The Company operates in the food service industry and primarily operates
quick-service restaurant businesses under the McDonald's brand. Approximately
80% of McDonald's restaurants and more than 80% of the Systemwide sales of
McDonald's restaurants are in eight markets: Australia, Brazil, Canada, France,
Germany, Japan, the United Kingdom and the United States. Throughout this
discussion, McDonald's restaurant businesses in these eight markets collectively
are referred to as "major markets."
To capture additional meal occasions, the Company also operates other
restaurant concepts under its Partner Brands: Aroma Cafe, Boston Market,
Chipotle and Donatos Pizzeria. In addition, the Company has a minority ownership
in Pret A Manger. In fourth quarter of 2001, the Company approved a plan to
dispose of its Aroma Cafe business in the U.K., and expects to complete the sale
in the first half of 2002.
The segments presented in all tables and related discussion reflect the
Company's current management structure. Previously, McDonald's restaurant
operations in Canada, the Middle East and Africa, as well as the Partner Brands
were included in the Other segment. The new APMEA segment includes results for
McDonald's restaurant operations in Asia/Pacific, the Middle East and Africa,
while Canada and the Partner Brands are now presented as individual operating
segments. In addition, U.S. and Corporate selling, general & administrative
expenses reflect a realignment of certain home office departments'
responsibilities, for all years presented.
Consolidated operating results
=================================================================================================================================
---------------------------------------------------------------------------------------------------------------------------------
Operating results
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------- -------------------------------- -------
DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA Amount Increase/(decrease) Amount Increase/(decrease) Amount
===================================================================================================================================
Systemwide sales $40,630 1% $40,181 4% $38,491
===================================================================================================================================
Revenues
Sales by Company-operated restaurants $11,041 5% $10,467 10% $ 9,512
Revenues from franchised and affiliated
restaurants 3,829 1 3,776 1 3,747
-----------------------------------------------------------------------------------------------------------------------------------
Total revenues 14,870 4 14,243 7 13,259
-----------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Company-operated restaurants 9,454 8 8,750 12 7,829
Franchised restaurants 800 4 772 5 738
Selling, general & administrative expenses 1,662 5 1,587 7 1,477
Special charge-global change initiatives 200 nm - - -
Other operating (income) expense, net 57 nm (196) nm (105)
-----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 12,173 12 10,913 10 9,939
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 2,697 (19) 3,330 - 3,320
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense 452 5 430 8 396
McDonald's Japan IPO gain (137) nm - - -
Nonoperating expense, net 52 nm 18 nm 40
-----------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 2,330 (19) 2,882 - 2,884
-----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 693 (23) 905 (3) 936
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,637 (17)% $ 1,977 2% $ 1,948
===================================================================================================================================
Net income per common share $ 1.27 (15)% $ 1.49 3% $ 1.44
Net income per common share-diluted 1.25 (14) 1.46 5 1.39
===================================================================================================================================
nm Not meaningful.
Management's discussion and analysis
29
The following table presents the 2001 growth rates for reported results, results
adjusted for the special items noted below, and the adjusted results on a
constant currency basis. In addition, the table includes the 2000 growth rates
for reported and constant currency results. All information in constant
currencies excludes the effect of foreign currency translation on reported
results, except for hyperinflationary economies, such as Russia, whose
functional currency is the U.S. Dollar. Constant currency results are calculated
by translating the current year results at prior year monthly average exchange
rates.
--------------------------------------------------------------------------------
Key highlights
--------------------------------------------------------------------------------
2001 2000
Increase (decrease) Increase
-------------------------------- ---------------------
Adjusted
As constant As Constant
reported(1) Adjusted(2) currency(2,3) reported currency(3)
================================================================================
Systemwide sales 1% 1% 4% 4% 7%
--------------------------------------------------------------------------------
Revenues 4 4 8 7 12
--------------------------------------------------------------------------------
Operating income (19) (8) (5) -- 5
--------------------------------------------------------------------------------
Net income (17) (10) (8) 2 6
--------------------------------------------------------------------------------
Net income per
common share (15) (7) (5) 3 8
--------------------------------------------------------------------------------
Net income per
common share-
diluted (14) (7) (5) 5 10
================================================================================
(1) The reported effective tax rate was 29.8%, primarily due to the one-time
benefit of tax law changes in certain international markets ($147 million).
(2) Adjusted operating income of $3.1 billion and adjusted net income of $1.8
billion exclude the following special items:
Operating income:
. $200 million of charges ($136 million after tax) related to the U.S.
business reorganization and other global change initiatives discussed
on page 33.
. $91 million of charges ($69 million after tax) related to the closing
of 163 underperforming restaurants in international markets.
. $25 million of charges ($17 million after tax) primarily related to
unrecoverable costs incurred in connection with the theft of
promotional game pieces and the related termination of a supplier
discussed on page 34.
. $24 million asset impairment charge (pre and after tax) in Turkey.
. $20 million charge ($14 million after tax) related to the anticipated
disposition of Aroma Cafe in the U.K.
. $18 million of charges ($12 million after tax) primarily related to
the write-off of certain technology costs.
Nonoperating income:
. $137 million gain (pre and after tax) on the initial public offering
of McDonald's Japan.
. $12 million of charges ($8 million after tax) primarily related to the
write-off of a corporate investment.
(3) Excludes the effect of foreign currency translation on reported results.
The primary currencies negatively affecting reported results in 2001 and
2000 were the Euro, which is the currency in 12 of our European markets
including France and Germany, the British Pound and the Australian Dollar. In
addition, the Japanese Yen and Canadian Dollar negatively impacted reported
results in 2001, while the Japanese Yen positively impacted reported results in
2000.
SYSTEMWIDE SALES
Systemwide sales include sales by all restaurants, whether operated by the
Company, by franchisees or by affiliates operating under joint-venture
agreements. We continue to focus on growing market share by increasing
comparable sales with an emphasis on improving customer satisfaction through
Quality, Service, Cleanliness and Value as well as strategic restaurant
development. Restaurant expansion, partly offset by negative comparable sales,
drove the constant currency sales increase in 2001, while restaurant expansion
along with positive comparable sales drove the increase in 2000.
--------------------------------------------------------------------------------
Systemwide sales
--------------------------------------------------------------------------------
2001 2000 1999
-------------------------- -------------------------- -------
Increase/(decrease) Increase/(decrease)
------------------- -------------------
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency(1) Amount reported currency(1) Amount
============================================================================================
U.S. $20,051 2% na $19,573 3% na $19,006
Europe 9,412 1 5% 9,293 (3) 9% 9,557
APMEA 7,010 (6) 3 7,477 10 9 6,826
Latin America 1,733 (3) 6 1,790 7 9 1,665
Canada 1,447 -- 5 1,443 7 7 1,346
Partner Brands 977 61 62 605 nm nm 91
--------------------------------------------------------------------------------------------
Total $40,630 1% 4% $40,181 4% 7% $38,491
============================================================================================
(1) Excludes the effect of foreign currency translation on reported results.
na Not applicable.
nm Not meaningful.
In all segments, the constant currency sales increases in 2001 and 2000
were primarily driven by expansion.
In the U.S., comparable sales were slightly positive in 2001 and positive
in 2000. The introduction of the New Tastes Menu in early 2001 and successful
promotions and new product introductions in 2000, combined with local market
initiatives in both years, contributed to the increases.
In Europe, comparable sales were negative in 2001 and positive in 2000. The
primary contributors to Europe's constant currency sales growth in both years
were France and the U.K. In addition, the Netherlands and Russia delivered
strong performances in 2001, while results in 2000 also benefited from increases
in Germany, Italy and Spain. Despite the Company's outstanding quality and
safety record, Europe's results in both years were negatively impacted by
consumer confidence issues regarding the European beef supply. However, the
impact lessened as we progressed through 2001, and we do not expect the negative
impact from these issues to be significant going forward.
In APMEA, comparable sales were negative in 2001 and slightly negative in
2000. Sales in 2001 were impacted by weak economic conditions in Japan, Taiwan
and Turkey and weak consumer spending in Australia, which also impacted the
second half of 2000. Beginning in the fourth quarter of 2001, sales were also
dampened by consumer confidence issues regarding the Japanese beef supply,
30
Management's discussion and analysis
despite the fact that McDonald's Japan does not use Japanese beef. Although we
are proactively communicating our strong beef safety and quality messages, we
expect Japan's results in the near term to continue to be negatively affected by
these consumer concerns. Positive comparable sales in China contributed to this
segment's total constant currency sales increases in both years.
In Latin America, comparable sales were negative in 2001 and 2000 as weak
economic conditions affected most markets in this segment. Positive comparable
sales in Mexico and Venezuela helped drive this segment's total constant
currency sales increases in both years.
We expect the weak economic conditions in many Asian, Middle Eastern and
Latin American markets to continue in the near term.
In Canada, comparable sales were positive in 2001 and 2000. Canada's value
program combined with drive-thru initiatives, extended hours and new product
introductions drove the increases in both years.
The sales increases in the Partner Brands in 2001 and 2000 were primarily
due to the acquisition of Boston Market in second quarter 2000. Expansion of
Chipotle along with strong comparable sales at Chipotle and Boston Market also
helped drive the increases in both years.
--------------------------------------------------------------------------------
Average annual sales--McDonald's restaurants
--------------------------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------
Increase/ Increase/
(decrease) (decrease)
---------- ----------
Constant Constant
DOLLARS IN THOUSANDS Amount currency(2) Amount currency(2) Amount
=====================================================================================
Per restaurant(1)
-------------------------------------------------------------------------------------
Traditional:
-------------------------------------------------------------------------------------
U.S. $1,650 -- $1,647 1% $1,625
Europe 1,722 (4)% 1,851 (2) 2,130
APMEA 1,190 (5) 1,376 (2) 1,411
Latin America 1,154 (5) 1,333 (7) 1,464
Canada 1,469 -- 1,530 6 1,451
-------------------------------------------------------------------------------------
Satellite:
U.S. $ 546 2% $ 536 9% $ 490
Outside the U.S.(3) 533 (1) 598 2 561
=====================================================================================
Per new restaurant(4)
-------------------------------------------------------------------------------------
Traditional:
U.S. $1,550 (1)% $1,570 7% $1,473
Europe 1,304 (6) 1,430 (4) 1,673
APMEA 984 (6) 1,143 2 1,110
Latin America 888 (5) 1,030 (9) 1,152
Canada 1,144 (7) 1,278 5 1,218
-------------------------------------------------------------------------------------
Satellite:(5)
Outside the U.S.(3) $ 591 2% $ 649 8% $ 574
=====================================================================================
(1) McDonald's restaurants in operation at least 13 consecutive months.
(2) Excludes the effect of foreign currency translation on reported results.
(3) Represents satellite restaurants located in Canada and Japan, which
comprise substantially all satellites outside the U.S.
(4) McDonald's restaurants in operation at least 13 consecutive months but not
more than 25 months.
(5) Excludes U.S. because the Company did not open a significant number of
satellite restaurants in the U.S.
Average sales per restaurant in constant currencies are affected by
comparable sales as well as the size, location and number of new restaurants.
The number of new restaurants affects average sales because new restaurants
typically take a few years to reach long-term sales volumes. In addition, over
the last several years more restaurants outside the U.S. have opened in
lower-density areas and in countries with lower average sales volumes and
correspondingly lower average development costs.
In 2001, average annual sales per traditional restaurant were relatively
flat for the U.S. and Canada in constant currencies. In the other segments,
average annual sales per traditional restaurant declined in constant currencies
due to negative comparable sales and the significant number of new restaurants
added, partly offset by the benefit of closing 163 underperforming restaurants.
In 2000, positive comparable sales in the U.S. and Canada drove their increases
in average annual sales per traditional restaurant. In the other segments, the
declines were mainly due to new restaurant development.
Satellite restaurants generally have significantly lower development costs
and sales volumes than traditional restaurants. The use of these small,
limited-menu restaurants has allowed profitable expansion into areas that
otherwise would not have been feasible. In 2001 and 2000, average annual sales
for satellite restaurants increased in the U.S. partly due to the closing of
certain low-volume satellites. Outside the U.S., average annual sales for
satellite restaurants declined slightly in constant currencies in 2001 primarily
due to negative comparable sales in Japan, after increasing in 2000 primarily
due to higher sales volumes for openings in Japan.
In 2001, average sales for new traditional restaurants in the U.S. remained
at about $1.6 million as we continued our selective expansion in higher volume
locations with the development of larger facilities that support higher average
sales. In segments outside the U.S., average sales for new traditional
restaurants in constant currencies declined due to a higher proportion of
openings in lower volume markets such as South Korea and Mexico and lower sales
volumes for new traditional restaurants opened in Germany, Italy, the U.K.,
Japan, Argentina and Canada. The lower volumes in Germany, Italy and Japan were
partly due to the consumer confidence issues regarding the beef supply.
In 2000, average sales for new traditional restaurants in the U.S. increased
due to selective expansion and the development of larger facilities. In Europe
and Latin America, average sales for new traditional restaurants in constant
currencies decreased due to a higher proportion of openings in lower volume
markets. In APMEA, average sales for new traditional restaurants increased due
to higher sales volumes in China and a higher proportion of openings in higher
volume markets such as Japan.
Management's discussion and analysis
31
TOTAL REVENUES
Total revenues include sales by Company-operated restaurants and fees from
restaurants operated by franchisees and affiliates. These fees include rent,
service fees and royalties that are based on a percent of sales with specified
minimum payments along with initial fees. Fees vary by type of site and
investment by the Company and also according to local business conditions. These
fees, along with occupancy and operating rights, are stipulated in franchise
agreements that generally have 20-year terms.
Revenues grow as new restaurants are added and as sales build in existing
restaurants. Menu price changes also affect revenues and sales, but it is
impractical to quantify their impact because of different pricing structures,
new products, promotions and product-mix variations among restaurants and
markets.
Revenues
2001 2000 1999
------------------------------ --------------------------------- -------
Increase/(decrease) Increase/(decrease)
------------------- -------------------
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency(1) Amount reported currency(1) Amount
========================================================================================================
U.S. $ 5,396 3% na $ 5,259 3% na $ 5,093
Europe 4,752 - 4% 4,754 (3) 7% 4,925
APMEA 2,203 5 12 2,102 9 11 1,928
Latin America 971 2 12 949 40 41 680
Canada 608 (1) 3 615 7 7 576
Partner Brands 940 67 67 564 nm nm 57
--------------------------------------------------------------------------------------------------------
Total $14,870 4% 8% $14,243 7% 12% $13,259
--------------------------------------------------------------------------------------------------------
(1) Excludes the effect of foreign currency translation on reported results.
na Not applicable.
nm Not meaningful.
On a constant currency basis, total revenues increased at a higher rate than
sales in 2001 primarily due to the second quarter 2000 acquisition of Boston
Market restaurants, which are all Company-operated, and the restructuring of our
ownership in the Philippines, effective July 1, 2001. As a result of the
restructuring, most of our restaurants in the Philippines are now
Company-operated rather than franchised. In addition, revenues benefited from an
increase in the royalty percent received from our Japanese affiliate, effective
January 1, 2001. In 2000, total revenues increased at a higher rate than sales
due the acquisition of Boston Market and the acquisition of Donatos in third
quarter 1999 as well as the consolidation of Argentina and Indonesia for
financial reporting purposes in 2000.
OPERATING INCOME
Consolidated operating income decreased 19% in 2001 and was relatively flat in
2000 compared with 1999. Excluding the special items noted in the footnote to
the table on page 29, adjusted operating income decreased 5% in constant
currencies in 2001. Adjusted operating income decreased in 2001 primarily due to
lower combined operating margin dollars and lower other operating income along
with higher selling, general & administrative expenses. In constant currencies,
operating income increased 5% in 2000, primarily due to higher combined
operating margin dollars and higher other operating income, partly offset by
higher selling, general & administrative expenses.
Operating income from the major markets accounted for more than 90% of
consolidated operating income in 2001, 2000 and 1999.
--------------------------------------------------------------------------------
Operating income
--------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------- ---------------------------- -------
Increase/(decrease) Increase/(decrease)
------------------------------------- -------------------
Adjusted
DOLLARS IN As Constant constant As Constant
MILLIONS Amount reported currency/(1)/ currency/(1,2)/ Amount reported currency/(1)/ Amount
========================================================================================================================
U.S. $ 1,622 (10)% na - $1,795 7% na $1,679
Europe 1,063 (10) (7)% (3)% 1,180 (6) 6% 1,257
APMEA 325 (28) (20) (10) 451 4 5 433
Latin America 11 (89) (91) (46) 103 (23) (23) 133
Canada 124 (2) 2 10 126 12 11 113
Partner Brands (66) (61) (62) (1) (41) nm nm (7)
Corporate (382) (35) na (22) (284) 1 na (288)
------------------------------------------------------------------------------------------------------------------------
Total $ $2,697 (19)% (17)% (5)% $3,330 -% 5% $3,320
------------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of foreign currency translation on reported results.
(2) Excludes the special items noted in the footnote to the table on page 29 and
quantified below.
na Not applicable.
nm Not meaningful.
U.S. operating income for 2001 included $181 million of special charges,
primarily related to the U.S. business reorganization and costs incurred in
connection with the theft of promotional game pieces and related termination of
a supplier discussed on page 34. U.S. operating income accounted for over 50% of
consolidated operating income in 2001, 2000 and 1999. Excluding the special
charges, U.S. adjusted operating income was relatively flat in 2001 compared
with an increase of $116 million or 7% in 2000. The increase in 2000 was due to
higher combined operating margin dollars and higher other operating income.
Europe's operating income for 2001 included $46 million of special charges
related to the closing of 50 underper-forming restaurants across Europe and
global change initiatives. Europe's operating income accounted for more than 35%
of consolidated operating income in 2001, 2000 and 1999. Excluding the special
charges, Europe's adjusted operating income decreased 3% in 2001 and increased
6% in 2000 in constant currencies. In both years, consumer confidence issues
regarding the European beef supply negatively impacted results. This segment's
results in 2001 benefited from strong performances in France and Russia. The
increase in 2000 was primarily driven by strong operating results in France,
Italy and Spain. France, Germany and the U.K. accounted for about 75% of
Europe's operating income in 2001, 2000 and 1999.
APMEA's operating income for 2001 included $42 million of special charges,
primarily related to the closing of 50 underperforming restaurants, mainly in
Malaysia and the Philippines, and the asset impairment charge in
32
Management's discussion and analysis
Turkey. Excluding the special charges, APMEA's adjusted operating income
decreased 10% in 2001 and increased 5% in 2000 in constant currencies. In 2001,
strong results in China, the increase in the royalty percent received from our
affiliate in Japan and a gain on the sale of real estate in Singapore were more
than offset by weak operating results in Australia, Japan, Taiwan and Turkey.
The increase in 2000 was driven primarily by Japan, which benefited from the
partial sale of its ownership in Toys `R' Us Japan, as well as strong results in
China and South Korea. Results in both years were negatively affected by the
introduction of the goods and services tax in Australia in July 2000. Australia
and Japan accounted for more than 60% of APMEA's operating income in 2001, 2000
and 1999.
Latin America's operating income for 2001 included $40 million of special
charges related to the closing of 58 underperforming restaurants, primarily in
Brazil and Puerto Rico, and global change initiatives. Excluding the special
charges, Latin America's adjusted operating income decreased 46% in 2001 and 23%
in 2000 in constant currencies. Results in both years were negatively impacted
by the continuing difficult economic conditions experienced by most markets in
the segment. Brazil accounted for more than 55% of Latin America's operating
income in each of the past three years.
Canada's operating income for 2001 included $10 million of special charges
related to the closing of five under-performing restaurants and to global change
initiatives.
Operating income for the Partner Brands in 2001 included special charges of
$20 million related to the anticipated disposal of Aroma Cafe and $5 million
related to global change initiatives.
Results in the Corporate segment included $34 million of special charges
related to global change initiatives and the write-off of certain technology
costs. Excluding the special charges, the adjusted decrease in the Corporate
segment of 22% in 2001 was primarily due to increased spending on future
restaurant-related technology improvements.
As a result of continuing economic weakness in Latin America and Turkey, the
Company expects to record a non-cash charge of approximately $45 million (pre
and after tax) related to the impairment of assets in Latin America and closing
of underperforming restaurants in Turkey in first quarter 2002.
OPERATING MARGINS
Operating margin information and discussions relate to McDonald's restaurants
only and exclude Partner Brands.
Company-operated margins
Company-operated margin dollars are equal to sales by Company-operated
restaurants less the operating costs of these restaurants. Company-operated
margin dollars declined $145 million in 2001 and $4 million in 2000. In constant
currencies, Company-operated margin dollars declined $96 million or 6% in 2001,
compared with an increase of $73 million or 4% in 2000. The 2001 constant
currency decrease was primarily due to negative comparable sales, partly offset
by expansion, while the 2000 constant currency increase was due to expansion and
positive comparable sales.
Company-operated margins were 15.1% of sales in 2001, 16.9% in 2000 and
17.7% in 1999. Operating cost trends as a percent of sales were as follows: food
& paper costs as well as occupancy & other operating expenses increased in 2001
and 2000; payroll costs increased in 2001 and were flat in 2000.
-------------------------------------------------------------------------------
Company-operated margins--McDonald's restaurants
-------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
===============================================================================
U.S. $ 501 $ 521 $ 516
Europe 626 683 743
APMEA 240 296 274
Latin America 83 95 70
Canada 75 75 71
-------------------------------------------------------------------------------
Total $1,525 $1,670 $1,674
-------------------------------------------------------------------------------
PERCENT OF SALES
-------------------------------------------------------------------------------
U.S. 16.0% 17.0% 17.5%
Europe 16.8 18.3 19.2
APMEA 12.4 15.9 16.4
Latin America 10.1 12.4 14.1
Canada 15.6 15.4 15.7
-------------------------------------------------------------------------------
Total 15.1% 16.9% 17.7%
-------------------------------------------------------------------------------
In the U.S., food & paper costs were lower as a percent of sales in 2001 and
2000, while payroll costs and occupancy & other expenses were higher in both
years.
Europe's Company-operated margins as a percent of sales declined in 2001,
primarily due to higher payroll costs and negative comparable sales. In 2000,
Europe's Company-operated margin percent declined as all costs increased as a
percent of sales.
In APMEA, negative comparable sales in 2001 and slightly negative comparable
sales in 2000 affected Company-operated margins as a percent of sales. In 2001,
the change in restaurant classification in the Philippines also contributed to
APMEA's margin decline because its Company-operated margins were lower than the
average for the segment.
In Latin America, the margin declines were due to difficult economic
conditions in most markets and negative comparable sales in both years.
Franchised margins
Franchised margin dollars are equal to revenues from franchised and affiliated
restaurants less the Company's occupancy costs (rent and depreciation)
associated with those sites. Franchised margin dollars represented more than 60%
of the combined operating margins in 2001, 2000 and 1999. Franchised margin
dollars increased $26 million in 2001, compared with a $6 million decline in
2000. In constant currencies, the franchised margin dollars increased $91
million or 3% in 2001 and $119 million or 4% in 2000, primarily driven by the
increase in the Japan royalty percent effective January 1, 2001, as well as
expansion in both years and positive comparable sales in 2000.
Management's discussion and analysis
33
-------------------------------------------------------------------------------
Franchised margins--McDonald's restaurants
-------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
===============================================================================
U.S. $1,799 $1,765 $1,730
Europe 792 802 828
APMEA 229 199 211
Latin America 103 135 144
Canada 105 101 95
-------------------------------------------------------------------------------
Total $3,028 $3,002 $3,008
-------------------------------------------------------------------------------
PERCENT OF REVENUES
-------------------------------------------------------------------------------
U.S. 79.7% 80.4% 81.0%
Europe 77.2 78.3 79.0
APMEA 86.2 81.5 82.3
Latin America 68.4 73.0 77.5
Canada 80.4 80.2 79.9
-------------------------------------------------------------------------------
Total 79.1% 79.5% 80.3%
-------------------------------------------------------------------------------
The declines in the consolidated franchised margin percent in 2001 and 2000
reflected higher occupancy costs due to an increased number of leased sites in
all geographic segments. Our strategy of leasing a higher proportion of new
sites over the past few years has reduced initial capital requirements and
related interest expense. However, as anticipated, franchised margins as a
percent of applicable revenues have been negatively impacted because financing
costs implicit in the lease are included in rent expense, which affects these
margins. For owned sites, financing costs are reflected in interest expense,
which does not affect these margins.
In 2001, franchised margins as a percent of applicable revenues decreased in
Europe and Latin America partly due to rent assistance provided to franchisees
in certain markets and negative comparable sales. We expect to continue
providing rent assistance in certain Latin American markets in 2002. The
franchised margin percent in APMEA increased for 2001 and decreased in 2000. The
2001 increase was primarily due to an increase in the royalty percent received
from our Japanese affiliate and the restructuring of the Philippines' operations
that resulted in the reclassification of franchised margins that were lower than
the average for the segment. In 2000, our purchase of a majority interest in
certain affiliate markets in both APMEA and Latin America shifted revenues from
franchised and affiliated restaurants to Company-operated restaurants, which
contributed to the reduction in the franchised restaurant margin percents.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Consolidated selling, general & administrative expenses increased 5% in 2001 and
7% in 2000 (7% and 11% in constant currencies). Selling, general &
administrative expenses as a percent of sales were 4.1% in 2001, 4.0% in 2000
and 3.8% in 1999. The increase in 2001 was partly due to increased spending on
future restaurant-related technology improvements in the Corporate segment and
higher selling, general & administrative expenses for the Partner Brands. The
increase in 2000 was primarily due to spending to support the development of
Partner Brands and the consolidation of Argentina and Indonesia for financial
reporting purposes. Selling, general & administrative expenses in both years
benefited from weaker foreign currencies and lower expense for performance-based
incentive compensation.
As a result of the global change initiatives described below, the Company
expects ongoing annual selling, general & administrative savings of about $100
million in 2002, compared with what otherwise would have been spent.
--------------------------------------------------------------------------------
Selling, general & administrative expenses
--------------------------------------------------------------------------------
2001 2000 1999
-------------------------------- -------------------------------- -------
Increase/(decrease) Increase/(decrease)
------------------ ------------------
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency/(1)/ Amount reported currency/(1)/ Amount
======================================================================================================================
U.S. $ 563 1% na $ 559 - na $ 559
Europe 328 (2) 1% 336 (3)% 8% 348
APMEA 152 2 9 149 10 16 135
Latin America 126 5 14 120 45 45 83
Canada 51 (6) (2) 54 4 4 52
Partner Brands 102 20 20 85 nm nm 12
Corporate 340 20 na 284 (1) na 288
----------------------------------------------------------------------------------------------------------------------
Total $1,662 5% 7% $1,587 7% 11% $1,477
----------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of foreign currency translation on reported results.
na Not applicable.
nm Not meaningful.
Corporate expenses consist of home office support costs in areas such as
facilities, finance, human resources, information technology, legal, supply
chain management and training.
SPECIAL CHARGE--GLOBAL CHANGE INITIATIVES
In fourth quarter 2001, the Company recorded a $200 million pretax special
charge ($136 million after tax) related to strategic changes and ongoing
restaurant initiatives in the U.S. and certain international markets. The
changes and initiatives are designed to improve the customer experience and grow
McDonald's global business. The changes in the U.S. included streamlining
operations by reducing the number of regions and divisions, enabling the Company
to combine staff functions and improve efficiency. In addition, the U.S.
business introduced a variety of initiatives designed to improve the restaurant
experience including accelerated operations training, restaurant simplification,
incentives for outstanding restaurant operations and an enhanced national
restaurant evaluation system.
In connection with these initiatives, the Company eliminated approximately
850 positions, consisting of 700 positions in the U.S., primarily in the
divisions and regions, and 150 positions in international markets.
The special charge consisted of $114 million of severance and other
employee-related costs; $69 million of lease cancellation and other costs
related to the closing of region and division facilities; and $17 million of
other cash costs, primarily consisting of payments made to facilitate a timely
and smooth change of ownership from franchisees who have had a history of
financial difficulty and consequently were unable to deliver the level of
operational excellence needed to succeed in the future.
34
Management's discussion and analysis
Of the original $200 million pretax special charge, the remaining accrual of
approximately $126 million at year-end 2001 primarily related to employee
severance and lease payments for facilities that have been closed and was
included in other accrued liabilities in the Consolidated balance sheet.
Employee severance is paid in installments over a period of up to one year after
termination, and the remaining lease payments for facilities that have been
closed will be paid through 2010. No significant adjustments have been made to
the original plan approved by management. The Company expects to use cash
provided by operations to fund the remaining employee severance and lease
obligations.
OTHER OPERATING (INCOME) EXPENSE, NET
Other operating (income) expense includes gains on sales of restaurant
businesses, equity in earnings of unconsolidated affiliates, restaurant closing
and asset impairment charges, and other transactions related to franchising and
the food service business.
--------------------------------------------------------------------------------
Other operating (income) expense, net
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
===============================================================================
Gains on sales of restaurant businesses $ (112) $ (87) $ (75)
Equity in earnings of unconsolidated affiliates (62) (121) (138)
Charges for underperforming restaurant closings 91 - -
Asset impairment charges 44 - -
Other, net 96 12 108
-------------------------------------------------------------------------------
Total $ 57 $(196) $(105)
-------------------------------------------------------------------------------
Gains on sales of restaurant businesses include gains from sales of
Company-operated restaurants as well as gains from exercises of purchase options
by franchisees with business facilities lease arrangements (arrangements where
the Company leases the businesses, including equipment, to franchisees who have
options to purchase the businesses). The Company's purchases and sales of
businesses with its franchisees and affiliates are aimed at achieving an optimal
ownership mix in each market. Resulting gains or losses are recorded in
operating income because the transactions are an integral part of our business.
Equity in earnings of unconsolidated affiliates--businesses in which the
Company actively participates but does not control--is reported after interest
expense and income taxes, except for U.S. restaurant partnerships, which are
reported before income taxes. The decrease in 2001 was due to weaker results in
Japan, the increase in Japan's royalty expense and a weaker Japanese Yen.
Although the increase in royalty expense reduced McDonald's equity in earnings
for Japan, it was more than offset by the royalty benefit McDonald's received in
franchised revenues. In 1999, equity in earnings of unconsolidated affiliates
included a $21 million gain from the sale of real estate in a U.S. partnership.
The Company recorded $91 million of pretax charges ($69 million after tax)
in 2001 related to the closing of 163 underperforming restaurants in
international markets. The losses on these closed restaurants were recognized in
the period the restaurant ceased operations, and the charges primarily consisted
of asset write-offs and lease termination costs.
The asset impairment charges in 2001 consisted of a $24 million charge (pre
and after tax) as a result of an assessment of the ongoing impact of significant
currency devaluation on McDonald's cash flows in Turkey and a pre-tax charge of
$20 million ($14 million after tax) related to the anticipated sale of Aroma
Cafe, which we expect to be completed in the first half of 2002.
Other expense for 2001 included a pretax charge of $25 million ($17 million
after tax) in the U.S., primarily related to unrecoverable costs incurred in
connection with the theft of winning game pieces from the Company's Monopoly and
certain other promotional games over an extended period of time, and the related
termination of the supplier of the game pieces. Fifty-one people (none of whom
were Company employees) were subsequently indicted on conspiracy and mail fraud
charges. In 2001, the Company also recorded a pretax charge of $17 million ($12
million after tax), primarily related to the write-off of certain technology
costs in the Corporate segment. Other expense for 1999 included the write-off of
$24 million ($16 million after tax) of software not used in the business.
INTEREST EXPENSE
Interest expense increased in 2001 and 2000 due to higher average debt levels,
partly offset by weaker foreign currencies in both years and lower average
interest rates in 2001. Average debt levels were higher in both years because
the Company used its available credit capacity to repurchase shares of its
common stock. Based on current interest rates, we anticipate interest expense
will decline in 2002.
McDONALD'S JAPAN INITIAL PUBLIC OFFERING (IPO) GAIN
In third quarter 2001, McDonald's Japan, the Company's largest market in the
APMEA segment, completed an IPO of 12 million shares at an offering price of
4,300 Yen per share ($34.77 per share). The Company owns 50% of McDonald's Japan
while the Company's partner Den Fujita and his family own approximately 26% and
continue to be involved in the business. The Company recorded a $137 million
gain (pre and after tax) in nonoperating income to reflect an increase in the
carrying value of its investment as a result of the cash proceeds from the IPO
received by McDonald's Japan.
NONOPERATING EXPENSE, NET
Nonoperating expense includes miscellaneous income and expense items such as
interest income, minority interests, and gains and losses related to other
investments, financings and translation. Results in 2001 included the write-off
of a corporate investment, the write-off of a financing
Management's discussion and analysis
35
receivable from a supplier in Latin America and minority interest expense
related to the sale of real estate in Singapore, partly offset by translation
gains. Results in 2000 reflected lower minority interest expense and lower
translation losses than 1999 and a gain related to the sale of a partial
ownership interest in a majority-owned international subsidiary.
PROVISION FOR INCOME TAXES
The effective income tax rate was 29.8% in 2001, 31.4% in 2000 and 32.5% in
1999. The lower effective income tax rate in 2001 was primarily due to the
one-time benefit of tax law changes in certain international markets. Also
contributing to the decrease in the income tax rate was the Japan IPO gain,
partly offset by certain restaurant closing charges and the Turkey asset
impairment charge, none of which were tax-affected for financial reporting
purposes. The decrease in the income tax rate in 2000 was the result of a tax
benefit resulting from an international transaction. The Company expects its
2002 effective income tax rate to be approximately 32.0% to 33.0%.
Consolidated net deferred tax liabilities included tax assets, net of
valuation allowance, of $720 million in 2001 and $523 million in 2000.
Substantially all of the net tax assets arose in the U.S. and other profitable
markets.
NET INCOME AND NET INCOME PER COMMON SHARE
In 2001, net income decreased 17%, and diluted net income per common share
decreased 14%. Excluding the special items noted in the footnote to the table on
page 29, net income decreased 8%, and diluted net income per common share
decreased 5% in constant currencies. In 2000, net income increased 2%, and
diluted net income per common share increased 5%. On a constant currency basis,
these increases were 6% and 10%. The spread between the percent change in net
income and diluted net income per common share for both years was due to lower
weighted average shares outstanding as a result of shares repurchased and a less
dilutive effect from stock options.
Cash flows
--------------------------------------------------------------------------------
The Company generates significant cash from operations and has substantial
credit capacity to fund operating and discretionary spending. Cash from
operations totaled $2.7 billion in 2001 and, although slightly lower than the
amount in 2000, exceeded capital expenditures for the eleventh consecutive year.
In 2000, cash from operations totaled $2.8 billion. This amount was less than in
1999, primarily due to higher income tax payments in 2000 as a result of both
lower tax benefits related to stock option exercises and higher gains on the
termination of foreign currency exchange agreements. Cash provided by
operations, along with borrowings and other sources of cash, is used for capital
expenditures, share repurchases, dividends and debt repayments.
--------------------------------------------------------------------------------
Cash provided by operations
--------------------------------------------------------------------------------
DOLLARS IN MILLIONS 2001 2000 1999
===============================================================================
Cash provided by operations $ 2,688 $ 2,751 $ 3,009
Free cash flow/(1)/ 782 806 1,141
Cash provided by operations
as a percent of capital expenditures 141% 141% 161%
Cash provided by operations
as a percent of average total debt 31 35 42
-------------------------------------------------------------------------------
(1) Cash provided by operations less capital expenditures.
In addition to its free cash flow, the Company can meet short-term funding
needs through commercial paper borrowings and line of credit agreements.
Accordingly, the Company strategically and purposefully maintains a relatively
low current ratio, which was .81 at year-end 2001.
CAPITAL EXPENDITURES AND
RESTAURANT DEVELOPMENT
Capital expenditures decreased $39 million or 2% in 2001 and increased $77
million or 4% in 2000. Capital expenditures for McDonald's restaurants in 2001,
2000 and 1999 reflected our strategy of leasing a higher proportion of new sites
and the U.S. building program, which gives franchisees the option to own new
restaurant buildings. About 80% of new and rebuilt U.S. traditional franchised
and affiliated restaurant buildings in 2001 and 2000 are owned by franchisees
and affiliates. The decrease in capital expenditures in 2001 was primarily due
to lower spending in Europe and Latin America and weaker foreign currencies,
partly offset by additional expenditures for Partner Brands and McDonald's
restaurant business in the U.S. and China. Capital expenditures in 2000
increased due to higher spending for Partner Brands and the consolidation of
Argentina and Indonesia, partly offset by weaker foreign currencies.
Approximately 60% of capital expenditures was invested in major markets
excluding Japan in 2001, 2000 and 1999 (Japan is accounted for under the equity
method, and accordingly, its capital expenditures are not included in
consolidated amounts). Capital expenditures in markets outside the U.S.
accounted for about 65% of total expenditures in 2001 and about 70% in 2000 and
1999.
The Company's expenditures for new restaurants in the U.S. are lower than
they would have been as a result of the leasing strategy and the U.S. building
program. For new franchised and affiliated restaurants, which represent about
85% of U.S. restaurants, the Company generally incurs no capital expenditures.
However, the Company maintains long-term occupancy rights for the land and
receives related rental income.
While the Company no longer makes significant expenditures on new sites in
the U.S., we continue to focus on the System's average development costs (land,
building and equipment) to ensure an appropriate return on investment for the
System. Average development costs for new traditional restaurants in the U.S.
System were $1.7 million in 2001, $1.6 million in 2000 and $1.5 million in 1999.
The
36
Management's discussion and analysis
increases were primarily due to the construction of larger facilities designed
to support higher average sales volumes.
Certain of the land the Company leases in the U.S. is leased from System
Capital Corporation (SCC). The Company and six other unaffiliated companies that
supply the McDonald's System are equal owners of SCC. No employees of SCC are
employees of the seven shareholders. The Company's investment in SCC is
accounted for on the cost basis. SCC's purpose is to provide funding to
McDonald's franchisees, suppliers to the McDonald's System and McDonald's
Corporation and to build equity within SCC that will benefit the McDonald's
System. Its function is similar to that of a cooperative. SCC's primary
operating activities include (1) providing loans to qualifying U.S. franchisees
to purchase existing restaurant businesses as well as finance equipment,
buildings and working capital, (2) contracting for construction of restaurant
buildings and selling them to U.S. franchisees, (3) purchasing accounts
receivable and financing inventory and other needs of eligible suppliers and
distributors, and (4) acquiring and leasing land to McDonald's Corporation for
new restaurants, primarily in the U.S. The Company's commitments under these
leases are included in operating lease commitments on pages 39 and 50 and total
approximately $14 million annually based on current interest rates.
SCC funds itself in the capital markets on an independent basis. Moody's,
Standard & Poor's and Fitch periodically review SCC, including reviews of key
performance indicators and asset quality. These rating agencies currently rate
SCC's funding subsidiary's commercial paper A-1, P-1 and F1; and its long-term
debt Aa2, AA and AA, respectively. SCC competes with other lenders who provide
similar financing to franchisees and suppliers.
SCC is not permitted to hold McDonald's stock, and McDonald's has no
commitments or guarantees that provide for the potential issuance of its stock
to SCC. SCC does not engage in speculative derivative activities, and SCC does
not hedge McDonald's positions. In addition, no McDonald's employee is permitted
to invest in SCC.
--------------------------------------------------------------------------------
Capital expenditures
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
New restaurants $ 1,198 $ 1,308 $ 1,231
Existing restaurants/(1)/ 571 507 515
Other properties/(2)/ 137 130 122
--------------------------------------------------------------------------------
Total $ 1,906 $ 1,945 $ 1,868
================================================================================
Total assets $22,535 $21,684 $20,983
================================================================================
(1) Includes technology to improve service and food quality and enhancements to
older facilities in order to achieve higher levels of customer satisfaction.
(2) Primarily for computer equipment and furnishings for office buildings.
Average development costs outside the U.S. vary widely by market depending
on the types of restaurants built and the real estate and construction costs
within each market. These costs, which include land, buildings and equipment
owned by the Company, are managed through the use of optimally sized
restaurants, construction and design efficiencies, standardization and global
sourcing. In addition, foreign currency fluctuations affect average development
costs.
Average development costs for new traditional restaurants in major markets
outside the U.S. excluding Japan were approximately $1.5 million in 2001, $1.6
million in 2000 and $1.8 million in 1999. Average annual sales for new
traditional restaurants in the same markets were about $1.4 million in 2001,
$1.5 million in 2000 and $1.7 million in 1999. Average development costs for new
satellite restaurants located in Canada and Japan, which comprise more than 90%
of the satellites outside the U.S., were about $200,000 (excluding lease costs)
in 2001, 2000 and 1999. The use of these small, limited-menu restaurants, for
which the land and building generally are leased, has allowed expansion into
areas that otherwise would not have been feasible.
The Company and its affiliates owned 38% of the land for its restaurant
sites at year-end 2001 and 40% at year-end 2000.
Capital expenditures by affiliates, which were not included in consolidated
amounts, were about $181 million in 2001, $204 million in 2000 and $259 million
in 1999. The decrease in 2000 was primarily due to the consolidation of
Argentina in 2000.
--------------------------------------------------------------------------------
Systemwide restaurants at year end/(1)/
--------------------------------------------------------------------------------
2001 2000 1999
================================================================================
U.S. 13,099 12,804 12,629
Europe 5,794 5,460 4,943
APMEA 7,321 6,771 6,097
Latin America 1,581 1,510 1,299
Canada 1,223 1,154 1,125
Partner Brands 1,075 1,008 216
--------------------------------------------------------------------------------
Total 30,093 28,707 26,309
================================================================================
(1) Includes satellite units at December 31, 2001, 2000 and 1999 as follows:
U.S.--1,004, 999, 1,048; Europe--63, 46, 44; APMEA (primarily Japan)--1,879,
1,681, 1,354; Latin America--46, 45, 41; and Canada--307, 280, 259.
McDonald's continues to focus on managing capital outlays effectively
through selective expansion. In 2001, the Company added 1,319 McDonald's
restaurants Systemwide, compared with 1,606 in 2000 and 1,598 in 1999. In
addition, the Company added 67 restaurants in 2001 operated by Partner Brands,
compared with 792 restaurants in 2000, 707 of which were the result of the
Boston Market acquisition. In 2002, the Company expects to add 1,300 to 1,400
McDonald's restaurants and open 100 to 150 new Partner Brands' restaurants.
In 2001, more than 60% of McDonald's restaurant additions was in the major
markets, and we anticipate a similar percent for 2002. Almost 50% of
Company-operated restaurants and nearly 85% of franchised restaurants were
located in the major markets at the end of 2001. Franchisees and affiliates
operated 74% of McDonald's restaurants at year-end 2001. Partner Brands'
restaurants are primarily Company-operated.
Management's discussion and analysis
37
SHARE REPURCHASES AND DIVIDENDS
The Company uses free cash flow and credit capacity to repurchase shares, as we
believe this enhances shareholder value. During 2001, the Company purchased 36.1
million shares for approximately $1.1 billion. Cumulative share purchases over
the past five years totaled $6.0 billion or 187.4 million shares. In 2002, the
Company began purchasing shares under a new $5.0 billion share repurchase
program announced in October 2001. We expect to purchase shares under this
program over the next four years, depending on free cash flow.
To reduce the overall cost of treasury stock purchases, the Company sells
common equity put options in connection with its share repurchase program and
receives premiums for these options. The Company sold 12.2 million common equity
put options in 2001 and 16.8 million in 2000 and received premiums of $32
million in 2001 and $56 million in 2000. These premiums were reflected in
shareholders' equity as a reduction of the cost of treasury stock purchased. At
December 31, 2001, 12.2 million common equity put options were outstanding, of
which 3.0 million were exercised in February 2002 at a cost of $87 million. The
remaining options expire at various dates through November 2002, with exercise
prices between $26.37 and $30.23.
During 2001, the Company also entered into equity forward contracts in
connection with its share repurchase program. The equity forward contracts,
totaling $151 million for 5.5 million shares, settled in March 2002 at an
average price of $27.41 per share.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchases. Accordingly, the common stock dividend
yield is modest. However, the Company has paid dividends on common stock for 26
consecutive years and has increased the dividend amount every year. Additional
dividend increases will be considered after reviewing returns to shareholders,
profitability expectations and financing needs. Cash dividends are declared and
paid on an annual basis. As in the past, future dividends will be declared at
the discretion of the Board of Directors.
Financial position and capital resources
--------------------------------------------------------------------------------
TOTAL ASSETS AND RETURNS
Total assets grew by $851 million or 4% in 2001 and $700 million or 3% in 2000.
At year-end 2001 and 2000, more than 60% of consolidated assets was located in
the major markets excluding Japan. Net property and equipment rose $242 million
in 2001 and represented 77% of total assets at year end.
Operating income is used to compute return on average assets, while net
income is used to calculate return on average common equity. Month-end balances
are used to compute both average assets and average common equity.
-------------------------------------------------------------------------------
Returns on assets and equity
-------------------------------------------------------------------------------
2001/(1)/ 2000 1999
===============================================================================
Return on average assets 14.1% 15.9% 16.6%
Return on average common equity 19.1 21.6 20.8
===============================================================================
(1) Excludes the special items noted in footnote 2 to the table on page 29.
Including the special items, return on average assets was 12.3% and return
on average common equity was 17.5%.
Both return on average assets and return on average common equity declined
in 2001, primarily due to lower operating income as a result of consumer
confidence issues regarding the European beef supply and weak operating results
in APMEA and Latin America previously discussed. In general, returns benefited
from the Company's continued focus on more efficient capital deployment. This
included a more prudent site selection process, leasing a higher proportion of
new sites, the U.S. building program and the use of free cash flow for share
repurchases. In 2000, return on average common equity benefited from an increase
in the average amount of common equity put options outstanding compared with
1999, which reduced average common equity.
FINANCINGS AND MARKET RISK
The Company generally borrows on a long-term basis and is exposed to the impact
of interest-rate changes and foreign currency fluctuations. In managing the
impact of these changes, the Company uses interest-rate exchange agreements and
finances in the currencies in which assets are denominated. All derivatives used
to minimize these risks were recorded at fair value in the Company's
Consolidated balance sheet at December 31, 2001, and totaled $213 million in
miscellaneous other assets and $134 million in other long-term liabilities. See
summary of significant accounting policies related to financial instruments on
pages 46-47 for additional information regarding their use and the impact of
SFAS No.133 regarding derivatives.
The Company uses major capital markets, bank financings and derivatives to
meet its financing requirements and reduce interest expense. For example,
foreign currency exchange agreements in conjunction with borrowings help obtain
desired currencies at attractive rates and maturities. Interest-rate exchange
agreements effectively convert fixed-rate to floating-rate debt, or vice versa.
The Company also manages the level of fixed-rate debt to take advantage of
changes in interest rates.
The Company uses foreign currency debt and derivatives to hedge certain
foreign currency royalties, intercompany financings and long-term investments in
foreign subsidiaries and affiliates. This reduces the impact of fluctuating
foreign currencies on net income and shareholders' equity. Total foreign
currency denominated debt, including the effects of foreign currency exchange
agreements, was $5.0 billion and $5.1 billion at year-end 2001 and 2000,
respectively.
38
Management's discussion and analysis
The Company does not have significant exposure to any individual
counterparty and has master agreements that contain netting arrangements.
Certain of these agreements also require each party to post collateral if credit
ratings fall below, or aggregate exposures exceed, certain contractual limits.
At December 31, 2001, neither the Company nor its counterparties was required to
post collateral for any obligation.
-------------------------------------------------------------------------------
Debt highlights/(1)/
-------------------------------------------------------------------------------
2001 2000 1999
===============================================================================
Fixed-rate debt as a percent of total debt 45% 58% 70%
Weighted-average annual interest rate
of total debt 5.4 5.8 5.9
Foreign currency-denominated debt as a
percent of total debt 57 60 76
Total debt as a percent of total capitalization
(total debt and total shareholders' equity) 48 48 43
===============================================================================
(1) All percentages are as of December 31, except for the weighted-average
annual interest rate, which is for the year.
Moody's, Standard & Poor's and Fitch currently rate McDonald's debt Aa3, A+
and AA, respectively. A strong rating is important to the Company because of its
global development plans. The Company has not experienced, and does not expect
to experience, difficulty in obtaining financing or in refinancing existing
debt. Certain of the Company's debt obligations contain cross-default provisions
and restrictions on Company and subsidiary mortgages and the long-term debt of
certain subsidiaries. There are no provisions in the Company's debt obligations
that would accelerate repayment of debt as a result of a change in credit
ratings.
At year-end 2001, the Company had $1.3 billion available under committed
line of credit agreements (see debt financing note on page 50) as well as $1.2
billion under a U.S. shelf registration and $1.1 billion under a Euro
Medium-Term Notes program for future debt issuance. In early 2002, the Company
issued $450 million of Medium-Term Notes ($150 million at a rate of 4.15% due
2005 and $300 million at a rate of 5.75% due 2012) under the U.S. shelf
registration to pay down commercial paper. At the time of these issuances, the
Company entered into interest-rate exchange agreements to convert fixed-rate
interest payments on the debt to a floating-rate based on LIBOR. Also in early
2002, the Company redeemed $50 million of 6.0% Medium-Term Notes originally due
2008. The notes were redeemed at 100% of principal plus accrued interest.
The Company manages its debt portfolio in response to changes in interest
rates and foreign currency rates by periodically retiring, redeeming and
repurchasing debt, terminating exchange agreements and using derivatives. The
Company does not use derivatives with a level of complexity or with a risk
higher than the exposures to be hedged and does not hold or issue derivatives
for trading purposes. All exchange agreements are over-the-counter instruments.
The Company actively hedges selected currencies to minimize the cash
exposure of foreign currency royalty and other payments received in the U.S. In
addition, where practical, McDonald's restaurants purchase goods and services in
local currencies resulting in natural hedges, and the Company typically finances
in local currencies, creating economic hedges.
The Company's exposure is diversified among a broad basket of currencies.
At year-end 2001 and 2000, assets in hyperinflationary markets were principally
financed in U.S. Dollars. The Company's largest net asset exposures (defined as
foreign currency assets less foreign currency liabilities) at year end were as
follows:
-------------------------------------------------------------------------------
Foreign currency exposures
-------------------------------------------------------------------------------
IN MILLIONS OF U.S. DOLLARS 2001 2000
===============================================================================
Euro $1,251 $1,185
British Pounds Sterling 786 638
Canadian Dollars 738 763
Australian Dollars 516 329
Brazilian Reais 490 491
===============================================================================
The Company prepared sensitivity analyses of its financial instruments to
determine the impact of hypothetical changes in interest rates and foreign
currency exchange rates on the Company's results of operations, cash flows and
the fair value of its financial instruments. The interest-rate analysis assumed
a one percentage point adverse change in interest rates on all financial
instruments but did not consider the effects of the reduced level of economic
activity that could exist in such an environment. The foreign currency rate
analysis assumed that each foreign currency rate would change by 10% in the same
direction relative to the U.S. Dollar on all financial instruments; however, the
analysis did not include the potential impact on sales levels or local currency
prices or the effect of fluctuating currencies on the Company's anticipated
foreign currency royalties and other payments received in the U.S. Based on the
results of these analyses of the Company's financial instruments, neither a one
percentage point adverse change in interest rates from 2001 levels nor a 10%
adverse change in foreign currency rates from 2001 levels would materially
affect the Company's results of operations, cash flows or the fair value of its
financial instruments.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has long-term contractual obligations primarily in the form of lease
and debt obligations. In addition, the Company has long-term contractual revenue
and cash flow streams that relate to its franchise arrangements. Cash provided
by operations (including cash provided by these franchise arrangements) along
with our borrowing capacity and other sources of cash will be used to satisfy
the obligations. The following table summarizes the Company's contractual
obligations and their aggregate maturities as well as future minimum contractual
rent payments due to the Company under existing franchise arrangements as of
December 31, 2001 (see discussions of cash flows, financial position and capital
resources in
Management's discussion and analysis
39
Management's discussion and analysis as well as the Notes to the consolidated
financial statements for further details):
--------------------------------------------------------------------------------
Contractual cash flows
--------------------------------------------------------------------------------
Outflows Inflows
----------------------------- ----------------------
Operating Debt Minimum rent under
IN MILLIONS leases obligations/(1)/ franchise arrangements
================================================================================
2002 $ 841 $ 363 $ 1,669
2003 815 796 1,651
2004 779 1,621 1,624
2005 722 1,072 1,576
2006 690 844 1,532
Thereafter 6,069 4,128 13,368
--------------------------------------------------------------------------------
Total $9,916 $8,824 $21,420
================================================================================
(1) The maturities reflect reclassifications of short-term obligations to
long-term obligations of $750 million in 2004 and $500 million in 2007 as
they are supported by long-term line of credit agreements. Debt obligations
do not include $94 million of fair value adjustments recorded as a result
of SFAS No.133, Accounting for Derivative Instruments and Hedging
Activities.
In addition to long-term obligations, the Company had certain other
commitments at December 31, 2001. In connection with its share repurchase
program, the Company had 12.2 million common equity put options outstanding at
December 31, 2001, with a total exercise price of $350 million, of which 3.0
million were exercised in February 2002 at a cost of $87 million. The remaining
options expire at various dates through November 2002 with exercise prices
between $26.37 and $30.23. In addition, the Company entered into equity forward
contracts, in connection with its share repurchase program, totaling $151
million for 5.5 million shares that settled in March 2002. The Company also
guaranteed certain affiliate and other loans totaling $148 million.
Other matters
--------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures. On an ongoing basis,
the Company evaluates its estimates and judgments based on historical experience
and various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
The Company annually reviews its financial reporting and disclosure
practices and accounting policies to ensure that its financial reporting and
disclosures provide accurate and transparent information relative to the current
economic and business environment. The Company believes that of its significant
accounting policies (see summary of significant accounting policies more fully
described on pages 45-47), the following policies involve a higher degree of
judgment and/or complexity.
Property and equipment
Property and equipment are depreciated or amortized over their useful lives
based on management's estimates of the period over which the assets will
generate revenue. The Company periodically reviews these lives relative to
physical factors, economic factors and industry trends.
Asset impairment
In assessing the recoverability of the Company's fixed assets, goodwill and
other non-current assets, the Company considers changes in economic conditions
and makes assumptions regarding estimated future cash flows and other factors.
If these estimates or their related assumptions change in the future, the
Company may be required to record impairment charges.
Restructuring and litigation accruals
In 2001, the Company recorded a $200 million pretax special charge related to
strategic changes and ongoing restaurant initiatives in the U.S. and certain
international markets. The accrual recorded included estimates pertaining to
employee termination costs and remaining lease obligations for closed
facilities. Although we do not anticipate significant changes, the actual costs
may differ from these estimates.
From time to time, the Company is subject to proceedings, lawsuits and
other claims primarily related to franchisees, suppliers, employees, customers
and competitors. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of accrual required, if any, for these
contingencies is made after careful analysis of each matter. The required
accrual may change in the future due to new developments in each matter or
changes in approach such as a change in settlement strategy in dealing with
these matters. The Company does not believe that any such matter will have a
material adverse effect on its financial condition or results of operations.
Financial instruments
The Company's derivatives are recorded in the Consolidated balance sheet at fair
value. Fair value is estimated using various pricing models or discounted cash
flow analyses that incorporate quoted market prices. The use of different
pricing models or assumptions could produce different results.
Income taxes
The Company records a valuation allowance to reduce its deferred tax assets if
it is more likely than not that some portion or all of the deferred assets will
not be realized. While the Company has considered future taxable income and
ongoing feasible tax strategies in assessing the need for the valuation
allowance, if these estimates and assumptions change in the future, the Company
may be required to adjust its valuation allowance. This could result in a charge
to, or an increase in, income in the period such determination is made.
40
Management's discussion and analysis
Deferred U.S. income taxes have not been recorded for basis differences
totaling $2.7 billion related to investments in certain foreign subsidiaries or
affiliates. The basis differences consist primarily of undistributed earnings
considered permanently invested in the businesses. If management's intentions
change in the future, deferred taxes may need to be provided.
In addition, the Company operates within multiple taxing jurisdictions and
is subject to audit in these jurisdictions. The Company records accruals for the
estimated outcomes of these audits, and the accruals may change in the future
due to new developments in each matter.
NEW ACCOUNTING STANDARDS
Goodwill
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, effective for acquisitions initiated on or after July 1,
2001, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations. SFAS
No. 142 indicates that goodwill (and intangible assets deemed to have indefinite
lives) will no longer be amortized but will be subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives.
The Company began applying the new rules on accounting for goodwill and
other intangible assets January 1, 2002. Application of the nonamortization
provisions of SFAS No. 142 would have increased 2001 net income by approximately
$30 million ($0.02 per share) and is expected to result in a similar increase in
2002. The Company is performing the first of required goodwill impairment tests
as of January 1, 2002, and expects to record a non-cash charge of about $100
million after tax ($0.08 per share), primarily in certain Latin American
markets. The impairment charge required to be recognized upon adoption of SFAS
No. 142 will be reflected as the cumulative effect of a change in accounting
principle in the first quarter of 2002.
Long-lived assets
In August 2001, the Financial Accounting Standards Board issued SFAS No.144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which provides
additional guidance on the financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company adopted the new rules as of
January 1, 2002, and the adoption will not have a material effect on the
Company's results of operations or financial position.
EFFECTS OF CHANGING PRICES--INFLATION
The Company has demonstrated an ability to manage inflationary cost increases
effectively. This is because of rapid inventory turnover, the ability to adjust
menu prices, cost controls and substantial property holdings--many of which are
at fixed costs and partly financed by debt made less expensive by inflation. In
hyperinflationary markets, menu board prices typically are adjusted to keep pace
with inflation, mitigating the effect on reported results.
EURO CONVERSION
Twelve member countries of the European Union have established fixed conversion
rates between their existing currencies ("legacy currencies") and one common
currency, the Euro. Since January 1, 2002, the new Euro-denominated notes and
coins are in circulation, and legacy currencies have been withdrawn from
circulation. The Company has restaurants located in all member countries, and
the conversion to the Euro has eliminated currency exchange rate risk for
transactions among the member countries, which for the Company primarily
consists of payments to suppliers. In addition, because the Company uses
foreign-denominated debt and derivatives to meet its financing requirements and
to reduce its foreign currency risks, certain of these financial instruments are
denominated in Euro. The Company successfully addressed all issues involved with
converting to the new currency, and the conversion did not have a significant
impact on its financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements are included in this report. They use such
words as "may," "will," "expect," "believe," "plan" and other similar
terminology. These statements reflect management's current expectations
regarding future events and operating performance and speak only as of March 25,
2002, unless otherwise noted. These forward-looking statements involve a number
of risks and uncertainties. The following are some of the factors that could
cause actual results to differ materially from those expressed in or underlying
our forward-looking statements: the effectiveness of operating initiatives and
advertising and promotional efforts as well as changes in: global and local
business and economic conditions; currency exchange and interest rates; food,
labor and other operating costs; political or economic instability in local
markets; competition; consumer preferences, spending patterns and demographic
trends; legislation and governmental regulation; and accounting policies and
practices. The foregoing list of important factors is not exclusive.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Consolidated statement of income
41
IN MILLIONS, EXCEPT PER SHARE DATA Years ended December 31, 2001 2000 1999
===================================================================================================================
Revenues
Sales by Company-operated restaurants $11,040.7 $10,467.0 $ 9,512.5
Revenues from franchised and affiliated restaurants 3,829.3 3,776.0 3,746.8
-------------------------------------------------------------------------------------------------------------------
Total revenues 14,870.0 14,243.0 13,259.3
-------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Food and packaging 3,802.1 3,557.1 3,204.6
Payroll and employee benefits 2,901.2 2,690.2 2,418.3
Occupancy and other operating expenses 2,750.4 2,502.8 2,206.7
-------------------------------------------------------------------------------------------------------------------
Total Company-operated restaurant expenses 9,453.7 8,750.1 7,829.6
-------------------------------------------------------------------------------------------------------------------
Franchised restaurants-occupancy expenses 800.2 772.3 737.7
Selling, general & administrative expenses 1,661.7 1,587.3 1,477.6
Special charge-global change initiatives 200.0
Other operating (income) expense, net 57.4 (196.4) (105.2)
-------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 12,173.0 10,913.3 9,939.7
-------------------------------------------------------------------------------------------------------------------
Operating income 2,697.0 3,329.7 3,319.6
-------------------------------------------------------------------------------------------------------------------
Interest expense-net of capitalized interest of $15.2, $16.3 and $14.3 452.4 429.9 396.3
McDonald's Japan IPO gain (137.1)
Nonoperating expense, net 52.0 17.5 39.2
-------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 2,329.7 2,882.3 2,884.1
-------------------------------------------------------------------------------------------------------------------
Provision for income taxes 693.1 905.0 936.2
-------------------------------------------------------------------------------------------------------------------
Net income $ 1,636.6 $ 1,977.3 $ 1,947.9
===================================================================================================================
Net income per common share $ 1.27 $ 1.49 $ 1.44
Net income per common share-diluted $ 1.25 $ 1.46 $ 1.39
-------------------------------------------------------------------------------------------------------------------
Dividends per common share $ .23 $ .22 $ .20
-------------------------------------------------------------------------------------------------------------------
Weighted-average shares 1,289.7 1,323.2 1,355.3
Weighted-average shares-diluted 1,309.3 1,356.5 1,404.2
===================================================================================================================
See notes to consolidated financial statements.
Consolidated balance sheet
IN MILLIONS, EXCEPT PER SHARE DATA December 31, 2001 2000
==========================================================================================================
Assets
Current assets
Cash and equivalents $ 418.1 $ 421.7
Accounts and notes receivable 881.9 796.5
Inventories, at cost, not in excess of market 105.5 99.3
Prepaid expenses and other current assets 413.8 344.9
----------------------------------------------------------------------------------------------------------
Total current assets 1,819.3 1,662.4
----------------------------------------------------------------------------------------------------------
Other assets
Investments in and advances to affiliates 990.2 824.2
Goodwill, net 1,419.8 1,278.2
Miscellaneous 1,015.7 871.1
----------------------------------------------------------------------------------------------------------
Total other assets 3,425.7 2,973.5
----------------------------------------------------------------------------------------------------------
Property and equipment
Property and equipment, at cost 24,106.0 23,569.0
Accumulated depreciation and amortization (6,816.5) (6,521.4)
----------------------------------------------------------------------------------------------------------
Net property and equipment 17,289.5 17,047.6
----------------------------------------------------------------------------------------------------------
Total assets $22,534.5 $21,683.5
----------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 184.9 $ 275.5
Accounts payable 689.5 684.9
Income taxes 20.4 92.2
Other taxes 180.4 195.5
Accrued interest 170.6 149.9
Other accrued liabilities 824.9 608.4
Current maturities of long-term debt 177.6 354.5
----------------------------------------------------------------------------------------------------------
Total current liabilities 2,248.3 2,360.9
----------------------------------------------------------------------------------------------------------
Long-term debt 8,555.5 7,843.9
Other long-term liabilities and minority interests 629.3 489.5
Deferred income taxes 1,112.2 1,084.9
Common equity put options and forward contracts 500.8 699.9
Shareholders' equity
Preferred stock, no par value; authorized-165.0 million shares; issued-none
Common stock, $.01 par value; authorized-3.5 billion shares;
issued-1,660.6 million shares 16.6 16.6
Additional paid-in capital 1,591.2 1,441.8
Unearned ESOP compensation (106.7) (115.0)
Retained earnings 18,608.3 17,259.4
Accumulated other comprehensive income (1,708.8) (1,287.3)
Common stock in treasury, at cost; 379.9 and 355.7 million shares (8,912.2) (8,111.1)
----------------------------------------------------------------------------------------------------------
Total shareholders' equity 9,488.4 9,204.4
----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $22,534.5 $21,683.5
==========================================================================================================
See notes to consolidated financial statements.
Consolidated statement of cash flows
43
IN MILLIONS Years ended December 31, 2001 2000 1999
=====================================================================================================================
Operating activities
Net income $ 1,636.6 $ 1,977.3 $ 1,947.9
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 1,086.3 1,010.7 956.3
Deferred income taxes (87.6) 60.5 52.9
Changes in operating working capital items
Accounts receivable (104.7) (67.2) (81.9)
Inventories, prepaid expenses and other current assets (62.9) (29.6) (47.7)
Accounts payable 10.2 89.7 (23.9)
Taxes and other liabilities 160.0 (45.8) 270.4
Other 50.4 (244.1) (65.1)
---------------------------------------------------------------------------------------------------------------------
Cash provided by operations 2,688.3 2,751.5 3,008.9
---------------------------------------------------------------------------------------------------------------------
Investing activities
Property and equipment expenditures (1,906.2) (1,945.1) (1,867.8)
Purchases of restaurant businesses (331.6) (425.5) (340.7)
Sales of restaurant businesses and property 375.9 302.8 262.4
Other (206.3) (144.8) (315.7)
---------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (2,068.2) (2,212.6) (2,261.8)
---------------------------------------------------------------------------------------------------------------------
Financing activities
Net short-term borrowings (repayments) (248.0) 59.1 116.7
Long-term financing issuances 1,694.7 2,381.3 902.5
Long-term financing repayments (919.4) (761.9) (682.8)
Treasury stock purchases (1,068.1) (2,023.4) (891.5)
Common stock dividends (287.7) (280.7) (264.7)
Other 204.8 88.9 193.0
---------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (623.7) (536.7) (626.8)
---------------------------------------------------------------------------------------------------------------------
Cash and equivalents increase (decrease) (3.6) 2.2 120.3
---------------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of year 421.7 419.5 299.2
---------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 418.1 $ 421.7 $ 419.5
=====================================================================================================================
Supplemental cash flow disclosures
Interest paid $ 446.9 $ 469.7 $ 411.5
Income taxes paid 773.8 854.2 642.2
=====================================================================================================================
See notes to consolidated financial statements.
Consolidated statement of shareholders' equity
Accumulated other
comprehensive income
Common stock Addi- Unearned ------------------------ Common stock Total
IN MILLIONS, issued tional ESOP Deferred Foreign in treasury share-
---------------- paid-in compen- Retained hedging currency -------------------- holders'
EXCEPT PER SHARE DATA Shares Amount capital sation earnings adjustment translation Shares Amount equity
===================================================================================================================================
Balance at
December 31, 1998 1,660.6 $16.6 $ 989.2 $(148.7) $13,879.6 $ -- $ (522.5) (304.4) $(4,749.5) $9,464.7
-----------------------------------------------------------------------------------------------------------------------------------
Net income 1,947.9 1,947.9
-----------------------------------------------------------------------------------------------------------------------------------
Translation
adjustments (including
taxes of $53.5) (364.3) (364.3)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 1,583.6
-----------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.20 per
share) (264.7) (264.7)
-----------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 15.8 15.8
-----------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchases (24.2) (932.7) (932.7)
-----------------------------------------------------------------------------------------------------------------------------------
Common equity put
option issuances and
expirations, net (665.9) (665.9)
-----------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including
tax benefits of $185.3) 299.1 (0.4) 18.8 139.6 438.3
-----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 1,660.6 16.6 1,288.3 (133.3) 15,562.8 -- (886.8) (309.8) (6,208.5) 9,639.1
===================================================================================================================================
Net income 1,977.3 1,977.3
-----------------------------------------------------------------------------------------------------------------------------------
Translation
adjustments (including
taxes of $65.1) (400.5) (400.5)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 1,576.8
-----------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.22 per
share) (280.7) (280.7)
-----------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 20.1 20.1
-----------------------------------------------------------------------------------------------------------------------------------
Treasury stock
purchases (56.7) (2,002.2) (2,002.2)
-----------------------------------------------------------------------------------------------------------------------------------
Common equity put
option issuances and
expirations, net 25.5 25.5
-----------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including
tax benefits of $80.3) 153.5 (1.8) 10.8 74.1 225.8
-----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2000 1,660.6 16.6 1,441.8 (115.0) 17,259.4 -- (1,287.3) (355.7) (8,111.1) 9,204.4
===================================================================================================================================
Net income 1,636.6 1,636.6
-----------------------------------------------------------------------------------------------------------------------------------
Translation
adjustments (including
taxes of $65.7) (412.2) (412.2)
-----------------------------------------------------------------------------------------------------------------------------------
SFAS No.133 transition
adjustment (including
tax benefits of $9.2) (17.0) (17.0)
-----------------------------------------------------------------------------------------------------------------------------------
Fair value
adjustments--cash flow
hedges (including taxes
of $1.4) 7.7 7.7
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 1,215.1
-----------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.23 per
share) (287.7) (287.7)
-----------------------------------------------------------------------------------------------------------------------------------
ESOP loan payment 8.0 8.0
-----------------------------------------------------------------------------------------------------------------------------------
Treasury stock
purchases (36.1) (1,090.2) (1,090.2)
-----------------------------------------------------------------------------------------------------------------------------------
Common equity put
option issuances and
expirations, net and
forward contracts 199.2 199.2
-----------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including
tax benefits of $70.0) 149.4 0.3 11.9 89.9 239.6
-----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2001 1,660.6 $16.6 $1,591.2 $(106.7) $18,608.3 $ (9.3) $(1,699.5) (379.9) $(8,912.2) $9,488.4
===================================================================================================================================
See notes to consolidated financial statements.
Notes to consolidated financial statements
45
Summary of significant accounting policies
--------------------------------------------------------------------------------
NATURE OF BUSINESS
The Company operates in the food service industry and primarily operates
quick-service restaurant businesses under the McDonald's brand. To capture
additional meal occasions, the Company operates other restaurant concepts under
its Partner Brands: Aroma Cafe, Boston Market, Chipotle and Donatos Pizzeria. In
addition, the Company has a minority ownership in Pret A Manger. In fourth
quarter 2001, the Company approved a plan to dispose of its Aroma Cafe business
in the U.K. and expects to complete the sale in the first half of 2002.
All restaurants are operated by the Company or, under the terms of franchise
arrangements, by franchisees who are independent entrepreneurs, or by affiliates
operating under joint-venture agreements between the Company and local business
people.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Substantially all investments in affiliates owned 50% or less
are accounted for by the equity method.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Sales by Company-operated restaurants are recognized on a cash basis. Revenues
from franchised and affiliated restaurants include continuing rent and service
fees as well as initial fees. Continuing fees are recognized in the period
earned. Initial fees are recognized upon opening of a restaurant, which is when
the Company has performed substantially all initial services required by the
franchise arrangement.
FOREIGN CURRENCY TRANSLATION
The functional currency of substantially all operations outside the U.S. is the
respective local currency, except for a small number of countries with
hyperinflationary economies, where the functional currency is the U.S. Dollar.
ADVERTISING COSTS
Production costs for radio and television advertising, which are primarily in
the U.S., are expensed when the commercials are initially aired. Advertising
expenses included in costs of Company-operated restaurants and in selling,
general & administrative expenses were (in millions): 2001-$600.9; 2000-$595.3;
1999-$522.9.
STOCK-BASED COMPENSATION
The Company accounts for stock options as prescribed by Accounting Principles
Board Opinion No. 25 and includes pro forma information in the stock options
note, as provided by Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and amortization
provided using the straight-line method over the following estimated useful
lives: buildings-up to 40 years; leasehold improvements-the lesser of useful
lives of assets or lease terms including option periods; and equipment-three to
12 years.
GOODWILL
Goodwill represents the excess of cost over the value of net tangible assets of
acquired restaurant businesses and, for acquisitions prior to July 1, 2001, is
amortized using the straight-line method over an average life of about 30 years.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, effective for acquisitions initiated on or after July 1,
2001, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations. SFAS
No. 142 indicates that goodwill (and intangible assets deemed to have indefinite
lives) will no longer be amortized but will be subject to annual impairment
tests. Other intangible assets will continue to be amortized over their useful
lives.
The Company began applying the new rules on accounting for goodwill and
other intangible assets January 1, 2002. Application of the nonamortization
provisions of SFAS No. 142 would have increased 2001 net income by approximately
$30 million ($0.02 per share) and is expected to result in a similar increase in
2002.
In the first quarter of 2002, the Company is performing the first of
required goodwill impairment tests as of January 1, 2002. The impairment test
compares the fair value of a reporting unit, generally based on discounted cash
flows, with its carrying amount including goodwill (we have defined reporting
units as each individual country for McDonald's restaurant business and each
individual Partner Brand). If the carrying amount of a reporting unit exceeds
its fair value, an impairment loss is measured as the difference between the
fair value of reporting unit goodwill and the carrying amount of the goodwill.
Based on the Company's preliminary analysis, the Company expects to record a
non-cash goodwill impairment charge of about $100 million after tax ($0.08 per
share), primarily in certain Latin American markets. Any impairment
46
Notes to consolidated financial statements
that is required to be recognized when adopting SFAS No. 142 will be reflected
as the cumulative effect of a change in accounting principle in the first
quarter of 2002.
LONG-LIVED ASSETS
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
reviewing McDonald's restaurant assets for potential impairment, assets are
grouped together at a television market level in the U.S. and at a country level
for each of the international markets. For Partner Brands, assets are grouped by
each individual brand. If an indicator of impairment (e.g., negative operating
cash flows for the most recent calendar year) exists for any grouping of assets,
an estimate of undiscounted future cash flows produced by each restaurant within
the asset grouping is compared to its carrying value. If a restaurant is
determined to be impaired, the loss is measured by the excess of the carrying
amount of the restaurant over its fair value as determined by an estimate of
discounted future cash flows.
Losses on assets held for disposal are recognized when management has
approved and committed to a plan to dispose of the assets, and the assets are
available for disposal. Generally, such losses relate to either restaurants that
have closed and ceased operations or businesses that are available for sale.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
provides additional guidance on the financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company will adopt the new
rules as of January 1, 2002, and the adoption will not have a material effect on
the Company's results of operations or financial position.
FINANCIAL INSTRUMENTS
The Company generally borrows on a long-term basis and is exposed to the impact
of interest-rate changes and foreign currency fluctuations. In managing the
impact of these changes, the Company uses interest-rate exchange agreements and
finances in the currencies in which assets are denominated. The Company uses
foreign currency denominated debt and derivatives to hedge foreign currency
royalties, intercompany financings and long-term investments in foreign
subsidiaries and affiliates. This reduces the impact of fluctuating foreign
currencies on net income and shareholders' equity. The Company does not use
derivatives with a level of complexity or with a risk higher than the exposures
to be hedged and does not hold or issue derivatives for trading purposes.
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 did not have significant exposure to any individual counterparty at
December 31, 2001 and has master agreements that contain netting arrangements.
Certain of these agreements also require each party to post collateral if credit
ratings fall below, or aggregate exposures exceed, certain contractual limits.
At December 31, 2001, neither the Company nor its counterparties was required to
post collateral for any obligation.
Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 requires
companies to recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. SFAS No. 133 also requires companies to designate
all derivatives that qualify as hedging instruments as either fair value hedges,
cash flow hedges or hedges of net investments in foreign operations. This
designation is based upon the exposure being hedged.
The Company recorded a transition adjustment at January 1, 2001 related to
cash flow hedges, which reduced accumulated other comprehensive income in
shareholders' equity by $17.0 million, after tax. This adjustment was primarily
related to interest-rate exchange agreements used to lock in long-term borrowing
rates. The cumulative effect of adopting SFAS No. 133 at January 1, 2001 was not
material to the Company's statement of income.
All derivatives, primarily interest-rate exchange agreements and foreign
currency exchange agreements, were classified in the Company's Consolidated
balance sheet at December 31, 2001 as either miscellaneous other assets or other
long-term liabilities (excluding accrued interest) and totaled $212.6 million
and $134.2 million, respectively.
Fair value hedges
The Company enters into fair value hedges to reduce the exposure to changes in
the fair value of an asset or a liability, or an identified portion thereof,
which is attributable to a particular risk. The types of fair value hedges the
Company enters into include: (1) interest-rate exchange agreements to convert a
portion of its fixed-rate debt to floating-rate debt and (2) foreign currency
exchange agreements for the exchange of various currencies and interest rates.
The foreign currency exchange agreements are entered into to hedge the currency
risk associated with debt and intercompany loans denominated in foreign
currencies, and essentially result in floating-rate assets or liabilities
denominated in U.S. Dollars or appropriate functional currencies.
For fair value hedges, the gains or losses on derivatives as well as the
offsetting gains or losses on the related hedged items are recognized in current
earnings. During the year ended December 31, 2001, there was no significant
impact to the Company's earnings related to the ineffective portion of fair
value hedging instruments.
Cash flow hedges
The Company enters into cash flow hedges to mitigate the exposure to variability
in expected future cash flows attributable to a particular risk. The types of
cash flow hedges
Notes to consolidated financial statements
47
the Company enters into include: (1) interest-rate exchange agreements that
effectively convert a portion of floating-rate debt to fixed-rate debt and are
designed to reduce the impact of interest-rate changes on future interest
expense, (2) forward foreign exchange contracts and foreign currency options
that are designed to protect against the reduction in value of forecasted
foreign currency cash flows such as royalties and other payments denominated in
foreign currencies, and (3) foreign currency exchange agreements for the
exchange of various currencies and interest rates. The foreign currency exchange
agreements are entered into to hedge the currency risk associated with debt and
intercompany loans denominated in foreign currencies, and essentially result in
fixed-rate assets or liabilities denominated in U.S. Dollars or appropriate
functional currencies.
For cash flow hedges, the effective portion of the gains or losses on
derivatives is reported in the deferred hedging adjustment component of
accumulated other comprehensive income in shareholders' equity and reclassified
into earnings in the same period or periods in which the hedged transaction
affects earnings. The remaining gain or loss in excess of the cumulative change
in the present value of future cash flows of the hedged item, if any, is
recognized in current earnings during the period of change. During the year
ended December 31, 2001, there was no significant impact to the Company's
earnings related to the ineffective portion of cash flow hedging instruments.
Subsequent to the transition adjustment recorded at January 1, 2001, the
Company recorded increases to the deferred hedging adjustment component of
accumulated other comprehensive income in shareholders' equity of $7.7 million,
after tax, related to cash flow hedges during the year ended December 31, 2001.
Based on interest rates and foreign currency exchange rates at December 31,
2001, no significant amount of deferred hedging adjustments, after tax, included
in accumulated other comprehensive income in shareholders' equity at December
31, 2001, will be recognized in earnings in 2002 as the underlying hedged
transactions are realized. The maximum maturity date of any cash flow hedge of
forecasted transactions at December 31, 2001 was 15 months, excluding
instruments hedging forecasted payments of variable interest on existing
financial instruments that have various maturity dates through 2011.
Hedges of net investments in foreign operations
The Company uses forward foreign exchange contracts and foreign currency
denominated debt to hedge its investments in certain foreign subsidiaries and
affiliates. Realized and unrealized translation adjustments from these hedges
are included in shareholders' equity in the foreign currency translation
component of accumulated other comprehensive income and offset translation
adjustments on the underlying net assets of foreign subsidiaries and affiliates,
which also are recorded in accumulated other comprehensive income.
During the year ended December 31, 2001, the Company recorded increases in
translation adjustments in accumulated other comprehensive income of $168.5
million, after tax, related primarily to foreign currency denominated debt
designated as hedges of net investments.
COMMON EQUITY PUT OPTIONS AND FORWARD CONTRACTS
During 2001, 2000 and 1999, the Company sold 12.2 million, 16.8 million and 27.0
million common equity put options, respectively, in connection with its share
repurchase program. Premiums received are recorded in shareholders' equity as a
reduction of the cost of treasury stock purchased and were $31.8 million in
2001, $56.0 million in 2000 and $97.5 million in 1999. At December 31, 2001,
12.2 million common equity put options were outstanding. The options expire at
various dates through November 2002 at exercise prices between $26.37 and
$30.23. At December 31, 2001, the $350.0 million total exercise price of these
outstanding options was classified in common equity put options and forward
contracts in the Consolidated balance sheet, and the related offset was recorded
in common stock in treasury, net of the premiums received.
During 2001, the Company also entered into equity forward contracts in
connection with its share repurchase program. The forward contracts, for 5.5
million shares, settle in March 2002 and have an average purchase price of
$27.41. At December 31, 2001, the $150.8 million total purchase price of these
outstanding forward contracts was classified in common equity put options and
forward contracts, and the related offset was recorded in common stock in
treasury.
SALES OF STOCK BY SUBSIDIARIES AND AFFILIATES
As permitted by Staff Accounting Bulletin No. 51 issued by the Securities and
Exchange Commission, when a subsidiary or affiliate sells unissued shares in a
public offering, the Company records an adjustment to reflect an increase or
decrease in the carrying value of its investment and a resulting gain or loss in
nonoperating (income) expense.
PER COMMON SHARE INFORMATION
Diluted net income per common share is calculated using net income divided by
diluted weighted-average shares. Diluted weighted-average shares include
weighted-average shares outstanding plus the dilutive effect of stock options,
calculated using the treasury stock method. The dilutive effect of stock options
was (in millions of shares): 2001-19.6; 2000-33.3; 1999-48.9. Stock options that
were not included in dilutive weighted-average shares because they would have
been antidilutive were (in millions of shares): 2001-83.1; 2000-49.2; 1999-9.9.
The dilutive effect of common equity put options and forward contracts was not
significant.
STATEMENT OF CASH FLOWS
The Company considers short-term, highly liquid investments to be cash
equivalents. The impact of fluctuating foreign currencies on cash and
equivalents was not material.
48
Notes to consolidated financial statements
Other operating (income) expense, net
---------------------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
=============================================================================================
Gains on sales of restaurant
businesses $ (112.4) $ (86.9) $ (75.0)
Equity in earnings of unconsolidated
affiliates (61.5) (120.9) (138.3)
Charges for underperforming
restaurant closings 91.2
Asset impairment charges 44.0
Other, net 96.1 11.4 108.1
---------------------------------------------------------------------------------------------
Other operating (income)
expense, net $ 57.4 $(196.4) $(105.2)
---------------------------------------------------------------------------------------------
CHARGES FOR UNDERPERFORMING RESTAURANT CLOSINGS
In third and fourth quarters 2001, the Company recorded $91.2 million of pretax
charges ($68.8 million after tax) related to the closing of 163 underperforming
restaurants in international markets. The charges primarily consist of asset
write-offs and lease termination payments.
ASSET IMPAIRMENT CHARGES
In second quarter 2001, the Company recorded a $24.0 million asset impairment
charge (pre and after tax) due to an assessment of the ongoing impact of
significant currency devaluation on McDonald's cash flows in Turkey.
In fourth quarter 2001, the Company recorded a pretax charge of $20.0
million ($13.6 million after tax) related to the anticipated disposal of Aroma
Cafe in the U.K.
OTHER, NET
Other, net includes miscellaneous operating income and expense items including
net gains or losses from property dispositions, provisions for bad debts and
other transactions related to franchising and the food service business.
In third quarter 2001, the Company recorded a pretax charge of $17.4 million
($12.0 million after tax) primarily related to the write-off of certain
technology costs in the Corporate segment.
In fourth quarter 2001, the Company recorded a pretax charge of $25.0
million ($17.0 million after tax) in the U.S. primarily related to unrecoverable
costs incurred in connection with the theft of winning game pieces from the
Company's Monopoly and certain other promotional games over an extended period
of time, and the related termination of the supplier of the game pieces.
Fifty-one people (none of whom were Company employees) were subsequently
indicted on conspiracy and mail fraud charges.
In 1999, the Company wrote off $24.0 million ($16.3 million after tax) of
software not used in the business.
Special charge-global change initiatives
In fourth quarter 2001, the Company recorded a $200.0 million pretax special
charge ($136.1 million after tax) related to strategic changes and ongoing
restaurant initiatives in the U.S. and certain international markets. The
changes and initiatives are designed to improve the customer experience and grow
McDonald's global business. The changes in the U.S. included streamlining
operations by reducing the number of regions and divisions, enabling the Company
to combine staff functions and improve efficiency. In addition, the U.S.
business introduced a variety of initiatives designed to improve the restaurant
experience including accelerated operations training, restaurant simplification,
incentives for outstanding restaurant operations and an enhanced national
restaurant evaluation system.
In connection with these initiatives, the Company eliminated approximately
850 positions, consisting of 700 positions in the U.S., primarily in the
divisions and regions, and 150 positions in international markets.
The special charge consisted of $114.4 million of severance and other
employee-related costs; $68.8 million of lease cancellation and other costs
related to the closing of region and division facilities; and $16.8 million of
other cash costs, primarily consisting of payments made to facilitate a timely
and smooth change of ownership from franchisees who have had a history of
financial difficulty and consequently were unable to deliver the level of
operational excellence needed to succeed in the future.
Of the original $200.0 million pretax special charge, the remaining accrual
of approximately $126.0 million at year-end 2001 primarily related to employee
severance and lease payments for facilities that have been closed and was
included in other accrued liabilities in the Consolidated balance sheet.
Employee severance is paid in installments over a period of up to one year after
termination, and the remaining lease payments for facilities that have been
closed will be paid through 2010. No significant adjustments have been made to
the original plan approved by management.
McDonald's Japan initial public offering (IPO) gain
--------------------------------------------------------------------------------
In third quarter 2001, McDonald's Japan, the Company's largest market in the
Asia/Pacific, Middle East and Africa segment, completed an IPO of 12 million
shares at an offering price of 4,300 Yen per share ($34.77 per share). The
Company owns 50% of McDonald's Japan while the Company's partner Den Fujita and
his family now own approximately 26% and continue to be involved in the
business. The Company recorded a $137.1 million gain (pre and after tax) in
nonoperating income to reflect an increase in the carrying value of its
investment as a result of the cash proceeds from the IPO received by McDonald's
Japan.
Franchise arrangements
--------------------------------------------------------------------------------
Individual franchise arrangements generally include a lease and a license and
provide for payment of initial fees as well as continuing rent and service fees
to the Company based upon a percent of sales, with minimum rent payments.
McDonald's franchisees are granted the right to operate a restaurant using the
McDonald's system and, in certain cases, the use of a restaurant facility,
generally for a period of 20 years. Franchisees pay related occupancy costs
including property taxes, insurance and maintenance. Franchisees in the U.S.
generally have the option to own
Notes to consolidated financial statements
49
new restaurant buildings, while leasing the land from McDonald's. In addition,
franchisees outside the U.S. generally pay a refundable, noninterest-bearing
security deposit. Foreign affiliates pay a royalty to the Company based upon a
percent of sales.
The results of operations of restaurant businesses purchased and sold in
transactions with franchisees, affiliates and others were not material to the
consolidated financial statements for periods prior to purchase and sale.
Revenues from franchised and affiliated restaurants consisted of:
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
Minimum rents $ 1,477.9 $ 1,465.3 $ 1,473.8
Percent rent and service fees 2,290.2 2,247.0 2,208.8
Initial fees 61.2 63.7 64.2
--------------------------------------------------------------------------------
Revenues from franchised
and affiliated restaurants $ 3,829.3 $ 3,776.0 $ 3,746.8
================================================================================
Future minimum rent payments due to the Company under existing franchise
arrangements are:
--------------------------------------------------------------------------------
Owned Leased
IN MILLIONS sites sites Total
================================================================================
2002 $ 948.7 $ 707.5 $ 1,656.2
2003 935.9 701.4 1,637.3
2004 920.3 689.3 1,609.6
2005 895.7 666.7 1,562.4
2006 870.8 647.2 1,518.0
Thereafter 7,384.0 5,771.9 13,155.9
--------------------------------------------------------------------------------
Total minimum payments $ 11,955.4 $ 9,184.0 $ 21,139.4
================================================================================
At December 31, 2001, net property and equipment under franchise
arrangements totaled $9.0 billion (including land of $2.7 billion) after
deducting accumulated depreciation and amortization of $3.4 billion.
Income taxes
--------------------------------------------------------------------------------
Income before provision for income taxes, classified by source of income, was as
follows:
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
U.S. $ 958.2 $ 1,280.6 $ 1,222.2
Outside the U.S. 1,371.5 1,601.7 1,661.9
--------------------------------------------------------------------------------
Income before provision for
income taxes $ 2,329.7 $ 2,882.3 $ 2,884.1
================================================================================
The provision for income taxes, classified by the timing and location of
payment, was as follows:
--------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
================================================================================
U.S. federal $ 357.3 $ 361.1 $ 347.4
U.S. state 59.7 77.0 68.9
Outside the U.S. 363.7 406.4 467.0
--------------------------------------------------------------------------------
Current tax provision 780.7 844.5 883.3
--------------------------------------------------------------------------------
U.S. federal 57.7 75.2 31.3
U.S. state 4.3 9.5 12.3
Outside the U.S. (149.6) (24.2) 9.3
--------------------------------------------------------------------------------
Deferred tax provision/(1)/ (87.6) 60.5 52.9
--------------------------------------------------------------------------------
Provision for income taxes $ 693.1 $ 905.0 $ 936.2
================================================================================
(1) Includes the one-time benefit of tax law changes in certain international
markets: 2001-$(147.3) million; amounts in 2000 and 1999 were not
significant.
Net deferred tax liabilities consisted of:
--------------------------------------------------------------------------------
IN MILLIONS December 31, 2001 2000
================================================================================
Property and equipment basis differences $ 1,304.4 $ 1,202.6
Other 429.9 353.3
--------------------------------------------------------------------------------
Total deferred tax liabilities 1,734.3 1,555.9
--------------------------------------------------------------------------------
Deferred tax assets before valuation allowance/(1)/ (899.9) (646.9)
Valuation allowance 180.1 124.0
--------------------------------------------------------------------------------
Net deferred tax liabilities/(2)/ $ 1,014.5 $ 1,033.0
================================================================================
(1) Includes tax effects of loss carryforwards (in millions): 2001-$166.0;
2000-$129.4, and foreign tax credit carryforwards: 2001-$21.6; 2000-$41.2.
(2) Net of current tax assets included in prepaid expenses and other current
assets in the Consolidated balance sheet (in millions): 2001-$97.7;
2000-$51.9.
The statutory U.S. federal income tax rate reconciled to the effective
income tax rates as follows:
--------------------------------------------------------------------------------
2001 2000 1999
================================================================================
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related
federal income tax benefit 1.8 1.9 1.8
Benefits and taxes related to
foreign operations/(1)/ (7.8) (4.8) (4.4)
Other, net .8 (.7) .1
--------------------------------------------------------------------------------
Effective income tax rates 29.8% 31.4% 32.5%
================================================================================
(1) Includes the one-time benefit of tax law changes.
Deferred U.S. income taxes have not been recorded for basis differences
related to investments in certain foreign subsidiaries and affiliates. These
basis differences were approximately $2.7 billion at December 31, 2001, and
consisted primarily of undistributed earnings considered permanently invested in
the businesses. Determination of the deferred income tax liability on these
unremitted earnings is not practicable because such liability, if any, is
dependent on circumstances existing if and when remittance occurs.
Segment and geographic information
--------------------------------------------------------------------------------
The Company operates in the food service industry. Substantially all revenues
result from the sale of menu products at restaurants operated by the Company,
franchisees or affiliates. All intercompany revenues and expenses are
eliminated in computing revenues and operating income. Operating income includes
the Company's share of operating results of affiliates after interest expense
and income taxes, except for U.S. affiliates, which are reported before income
taxes. Royalties and other payments received from subsidiaries outside the U.S.
were (in millions): 2001-$607.7; 2000-$603.6; 1999-$568.3.
Segment information reflects the Company's current management structure.
The new APMEA segment includes results for McDonald's restaurant operations in
Asia/Pacific, the Middle East and Africa. The Partner Brands segment includes
results for Aroma Cafe, Boston Market, Chipotle, Donatos and Pret A Manger. In
addition, U.S. and Corporate selling, general & administrative expenses have
been
50
Notes to consolidated financial statements
restated to reflect a realignment of certain home office departments'
responsibilities.
Corporate general & administrative expenses are included in the corporate
segment of operating income and consist of home office support costs in areas
such as facilities, finance, human resources, information technology, legal,
supply chain management and training. Corporate assets include corporate cash
and equivalents, asset portions of financing instruments, home office facilities
and deferred tax assets.
---------------------------------------------------------------------------------------
IN MILLIONS 2001 2000 1999
=======================================================================================
U.S. $ 5,395.6 $ 5,259.1 $ 5,093.0
Europe 4,751.8 4,753.9 4,924.9
APMEA 2,203.3 2,101.8 1,928.8
Latin America 971.3 949.3 680.3
Canada 608.1 615.1 575.6
Partner Brands 939.9 563.8 56.7
---------------------------------------------------------------------------------------
Total revenues $ 14,870.0 $ 14,243.0 $ 13,259.3
=======================================================================================
U.S. $ 1,622.5 $ 1,795.7 $ 1,678.6
Europe 1,063.2 1,180.1 1,256.5
APMEA 325.0 451.2 433.5
Latin America 10.9 102.3 133.0
Canada 123.7 126.3 113.3
Partner Brands (66.5) (41.5) (7.5)
Corporate (381.8) (284.4) (287.8)
---------------------------------------------------------------------------------------
Total operating income $ 2,697.0(1) $ 3,329.7 $ 3,319.6
=======================================================================================
U.S. $ 8,213.7 $ 7,798.1 $ 7,607.4
Europe 7,139.1 7,083.7 6,966.8
APMEA 3,144.5 2,983.4 3,030.5
Latin America 1,898.3 1,855.6 1,477.5
Canada 574.2 552.0 573.6
Partner Brands 637.1 450.7 203.2
Corporate 927.6 960.0 1,124.2
---------------------------------------------------------------------------------------
Total assets $ 22,534.5 $ 21,683.5 $ 20,983.2
=======================================================================================
U.S. $ 545.9 $ 468.6 $ 426.4
Europe 635.8 797.6 881.8
APMEA 275.7 253.5 221.3
Latin America 197.5 245.7 213.2
Canada 80.4 52.5 63.0
Partner Brands 153.3 79.6 16.4
Corporate 17.6 47.6 45.7
---------------------------------------------------------------------------------------
Total capital expenditures $ 1,906.2 $ 1,945.1 $ 1,867.8
=======================================================================================
U.S. $ 449.9 $ 417.6 $ 399.7
Europe 313.7 296.5 305.2
APMEA 133.2 129.8 123.5
Latin America 79.3 69.4 45.5
Canada 32.9 34.9 35.3
Partner Brands 36.8 16.6 2.3
Corporate 40.5 45.9 44.8
---------------------------------------------------------------------------------------
Total depreciation and amortization $ 1,086.3 $ 1,010.7 $ 956.3
=======================================================================================
(1) Includes $377.6 million of pretax special charges (U.S.-$181.0;
Europe-$45.8; APMEA-$41.5; Latin America-$40.4; Canada-$9.8; Partner
Brands-$24.9 and Corporate-$34.2) primarily related to the U.S. business
reorganization and other global change initiatives, the closing of 163
underperforming restaurants in international markets and asset impairment
charges. See other operating (income) expense, net and special
charge-global change initiatives notes for further discussion.
Total long-lived assets, primarily property and equipment and goodwill,
were (in millions)--Consolidated: 2001-$20,355.3; 2000-$19,798.3;
1999-$19,082.8. U.S. based: 2001-$8,670.4; 2000-$8,373.2; 1999-$7,984.9.
Leasing arrangements
--------------------------------------------------------------------------------
At December 31, 2001, the Company was lessee at 6,866 restaurant locations
through ground leases (the Company leases the land and the Company or franchisee
owns the building) and at 7,089 restaurant locations through improved leases
(the Company leases land and buildings). Lease terms for most restaurants are
generally for 20 to 25 years and, in many cases, provide for rent escalations
and renewal options, with certain leases providing purchase options. For most
locations, the Company is obligated for the related occupancy costs including
property taxes, insurance and maintenance. In addition, the Company is lessee
under noncancelable leases covering offices and vehicles.
Future minimum payments required under existing operating leases with
initial terms of one year or more are:
--------------------------------------------------------------------------------
IN MILLIONS Restaurant Other Total
================================================================================
2002 $ 772.3 $ 69.1 $ 841.4
2003 756.8 57.7 814.5
2004 731.1 48.2 779.3
2005 681.1 41.1 722.2
2006 653.5 36.4 689.9
Thereafter 5,901.6 166.8 6,068.4
--------------------------------------------------------------------------------
Total minimum payments $ 9,496.4 $ 419.3 $ 9,915.7
================================================================================
Rent expense was (in millions): 2001-$958.6; 2000-$886.4; 1999-$796.3.
These amounts included percent rents in excess of minimum rents (in millions):
2001-$119.6; 2000-$133.0; 1999-$117.1.
Debt financing
--------------------------------------------------------------------------------
LINE OF CREDIT AGREEMENTS
At December 31, 2001, the Company had several line of credit agreements with
various banks totaling $1.3 billion, all of which remained unused at year-end
2001. Subsequent to year end, the Company renegotiated these line of credit
agreements as follows: a $750.0 million line expiring in 2003 with a term of 364
days and fees of .045% per annum on the total commitment, with a feature that
allows the Company to convert the borrowings to a one-year term loan at any time
prior to expiration; a $500.0 million line expiring in February 2007 with fees
of .065% per annum on the total commitment; and a $25.0 million line expiring in
2003 with a term of 364 days and fees of .07% per annum on the total commitment.
Borrowings under the agreements bear interest at one of several specified
floating rates selected by the Company at the time of borrowing. In addition,
certain subsidiaries outside the U.S. had unused lines of credit totaling $785.3
million at December 31, 2001; these were principally short term and denominated
in various currencies at local market rates of interest.
Notes to consolidated financial statements
51
The weighted-average interest rate of short-term borrowings, consisting of U.S.
Dollar and Euro commercial paper and foreign currency bank line borrowings, was
3.4% at December 31, 2001 and 6.9% at December 31, 2000.
FAIR VALUES
At December 31, 2001, the fair value of the Company's debt and notes payable
obligations was estimated at $9.1 billion, compared to a carrying amount of $8.9
billion. This fair value was estimated using various pricing models or
discounted cash flow analyses that incorporated quoted market prices. The
Company has no current plans to retire a significant amount of its debt prior to
maturity.
The carrying amounts for both cash and equivalents and notes receivable
approximate fair value. Foreign currency and interest-rate exchange agreements,
foreign currency options and forward foreign exchange contracts were recorded in
the Consolidated balance sheet at fair value estimated using various pricing
models or discounted cash flow analyses that incorporated quoted market prices.
No fair value was estimated for noninterest-bearing security deposits by
franchisees, because these deposits are an integral part of the overall
franchise arrangements. Given the market value of its common stock and its
significant real estate holdings, the Company believes that the fair value of
its total assets was substantially higher than the carrying value at December
31, 2001.
ESOP LOANS AND OTHER GUARANTEES
The Company has guaranteed and included in total debt at December 31, 2001 $26.8
million of Notes issued by the Leveraged Employee Stock Ownership Plan (ESOP)
with payments through 2006. Borrowings related to the ESOP at December 31, 2001,
which include $89.1 million of loans from the Company to the ESOP and the $26.8
million of Notes guaranteed by the Company, are reflected as long-term debt with
a corresponding reduction of shareholders' equity (unearned ESOP compensation).
The ESOP is repaying the loans and interest through 2018 using Company
contributions and dividends from its McDonald's common stock holdings. As the
principal amount of the borrowings is repaid, the debt and the unearned ESOP
compensation are being reduced.
The Company also has guaranteed certain affiliate and other loans totaling
$148.0 million at December 31, 2001.
DEBT OBLIGATIONS
The Company has incurred debt obligations principally through public and private
offerings and bank loans. There are no provisions in the Company's debt
obligations that would accelerate repayment of debt as a result of a change in
credit ratings. Certain of the Company's debt obligations contain cross-default
provisions and restrictions on Company and subsidiary mortgages and the
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 the Company's debt obligations (the
interest rates reflected in the table include the effects of interest-rate and
foreign currency exchange agreements):
------------------------------------------------------------------------------------------
Interest rates/(1)/ Amounts outstanding
December 31 December 31
Maturity ----------- -----------------------
IN MILLIONS OF U.S. DOLLARS dates 2001 2000 2001 2000
==========================================================================================
Fixed-original issue/(2)/ 6.2% 6.8% $ 3,293.8 $ 2,793.2
Fixed-converted via
exchange agreements/(3)/ 5.3 6.1 (1,829.9) (351.5)
Floating 2.3 6.6 2,364.8 914.1
------------------------------------------------------------------------------------------
Total U.S. Dollars 2002-2033 3,828.7 3,355.8
------------------------------------------------------------------------------------------
Fixed 5.7 5.7 629.7 679.1
Floating 3.5 4.8 1,724.9 1,609.6
------------------------------------------------------------------------------------------
Total Euro 2002-2015 2,354.6 2,288.7
------------------------------------------------------------------------------------------
Fixed 6.1 6.2 698.8 524.6
Floating 5.6 7.2 150.3 233.3
------------------------------------------------------------------------------------------
Total British Pounds
Sterling 2002-2021 849.1 757.9
------------------------------------------------------------------------------------------
Fixed 4.5 5.5 276.9 346.5
Floating 6.2 6.7 58.9 25.7
------------------------------------------------------------------------------------------
Total other European
currencies/(4)/ 2002-2006 335.8 372.2
------------------------------------------------------------------------------------------
Fixed 2.3 2.7 584.0 589.0
Floating 0.1 0.5 227.9 262.4
------------------------------------------------------------------------------------------
Total Japanese Yen 2005-2030 811.9 851.4
------------------------------------------------------------------------------------------
Fixed 7.1 8.6 317.6 322.0
Floating 6.2 7.6 300.0 453.5
------------------------------------------------------------------------------------------
Total other Asia/Pacific
currencies/(5)/ 2002-2006 617.6 775.5
------------------------------------------------------------------------------------------
Fixed 5.8 5.6 3.2 4.1
Floating 15.5 12.8 23.2 68.3
------------------------------------------------------------------------------------------
Total other currencies 2002-2021 26.4 72.4
------------------------------------------------------------------------------------------
Debt obligations before fair
value adjustments/(6)/ 8,824.1 8,473.9
------------------------------------------------------------------------------------------
Fair value adjustments/(7)/ 93.9
------------------------------------------------------------------------------------------
Total debt obligations $ 8,918.0 $ 8,473.9
==========================================================================================
(1) Weighted-average effective rate, computed on a semiannual basis.
(2) Includes $150 million of debentures that mature in 2027 ($500 million of
debentures in 2000), which are subordinated to senior debt and provide for
the ability to defer interest payments up to five years under certain
conditions.
(3) A portion of U.S. Dollar fixed-rate debt effectively has been converted
into other currencies and/or into floating-rate debt through the use of
exchange agreements. The rates shown reflect the fixed rate on the
receivable portion of the exchange agreements. All other obligations in
this table reflect the net effects of these and other interest-rate
exchange agreements.
(4) Primarily consists of Swiss Francs, Swedish Kronor and Danish Kroner in
2001 (Swiss Francs in 2000).
(5) Primarily consists of Korean Won, Chinese Renminbi and New Taiwanese
Dollars in 2001 (Australian Dollars and New Taiwanese Dollars in 2000).
(6) Aggregate maturities for debt balances at December 31, 2001, before fair
value adjustments, were as follows: 2002-$362.5; 2003-$796.4;
2004-$1,621.6; 2005-$1,072.0; 2006-$843.9; and thereafter-$4,127.7. These
amounts include reclassifications of short-term obligations to long-term
obligations of $750.0 in 2004 and $500.0 in 2007 as they are supported by
long-term line of credit agreements discussed on page 50.
(7) Effective January 1, 2001, the Company adopted SFAS 133. As a result, debt
obligations are adjusted to fair value to the extent of related hedging
instruments. The related hedging instruments are also recorded at fair
value in either miscellaneous other assets or long-term liabilities.
52
Notes to consolidated financial statements
Property and equipment
--------------------------------------------------------------------------------
Net property and equipment consisted of:
--------------------------------------------------------------------------------
IN MILLIONS December 31, 2001 2000
================================================================================
Land $ 3,975.6 $ 3,932.7
Buildings and improvements on owned land 8,127.0 8,250.0
Buildings and improvements on leased land 8,020.2 7,513.3
Equipment, signs and seating 3,371.7 3,172.2
Other 611.5 700.8
--------------------------------------------------------------------------------
24,106.0 23,569.0
--------------------------------------------------------------------------------
Accumulated depreciation and amortization (6,816.5) (6,521.4)
--------------------------------------------------------------------------------
Net property and equipment $ 17,289.5 $ 17,047.6
================================================================================
Depreciation and amortization expense was (in millions): 2001-$945.6;
2000-$900.9; 1999-$858.1.
Employee benefit plans
--------------------------------------------------------------------------------
The Company's Profit Sharing and Savings Plan for U.S.-based employees includes
profit sharing, 401(k) and leveraged employee stock ownership (ESOP) features.
The 401(k) feature allows participants to make pretax contributions that are
partly matched from shares released under the ESOP. McDonald's executives, staff
and restaurant managers participate in additional ESOP allocations and profit
sharing contributions, based on their compensation. The profit sharing
contribution is discretionary, and the Company determines the amount each year.
Participant 401(k) contributions, profit sharing contributions and any
related earnings can be invested in McDonald's common stock or among several
other investment alternatives. The Company's matching contributions and ESOP
allocations are generally invested in McDonald's common stock. Beginning in
first quarter 2002, the Company's matching contributions can be invested in
McDonald's common stock or among the other investment alternatives.
In addition, the Company maintains a nonqualified, unfunded Supplemental
Plan that allows participants to make tax-deferred contributions and receive
Company-provided allocations that cannot be made under the Profit Sharing and
Savings Plan because of Internal Revenue Service limitations. The investment
alternatives in the Supplemental Plan include certain of the same investments as
the Profit Sharing and Savings Plan. Total liabilities under the Supplemental
Plan were $301.1 million at December 31, 2001 and $288.8 million at December 31,
2000, and were included in other long-term liabilities in the Consolidated
balance sheet.
The Company has entered into derivative contracts to hedge the changes in
these liabilities. At December 31, 2001, derivatives with a fair value of $68.2
million indexed to the Company's stock and $18.5 million indexed to certain
market indices were included in miscellaneous other assets in the Consolidated
balance sheet. All changes in Plan liabilities and in the fair value of the
derivatives are recorded in selling, general & administrative expenses. Changes
in fair value of the derivatives indexed to the Company's stock are recorded in
the income statement because the contracts provide the counterparty with a
choice of cash settlement or settlement in shares.
Total U.S. costs for the Profit Sharing and Savings Plan, including
nonqualified benefits and related hedging activities, were (in millions):
2001-$54.6; 2000-$49.6; 1999-$49.4.
Certain subsidiaries outside the U.S. also offer profit sharing, stock
purchase or other similar benefit plans. Total plan costs outside the U.S. were
(in millions): 2001-$39.7; 2000-$38.1; 1999-$37.2.
Other postretirement benefits and postemployment benefits, excluding
severance benefits related to the global change initiatives, were immaterial.
Stock options
--------------------------------------------------------------------------------
At December 31, 2001, the Company had five stock-based compensation plans for
employees and nonemployee directors. Options to purchase common stock are
granted at the fair market value of the stock on the date of grant. Therefore,
no compensation cost has been recognized in the consolidated financial
statements for these plans.
Substantially all of the options become exercisable in four equal
installments, beginning a year from the date of the grant, and expire 10 years
from the grant date. In 2001, the Board of Directors approved a three-year
extension to the term of 44.2 million options granted between May 1, 1999 and
December 31, 2000 with an exercise price greater than $28.90. Because the market
value of the stock was less than the exercise price of the options at the time
of extension, no compensation expense was required to be recorded.
Also in 2001, the Board of Directors approved a special grant of 11.9
million options at a price of $28.90 as an incentive to meet an operating income
performance goal for calendar year 2003. The options vest on January 31, 2004,
and if the performance goal is met, the options will retain their original
10-year term; otherwise, they will expire on June 30, 2004.
Notes to consolidated financial statements
53
At December 31, 2001, the number of shares of common stock reserved for
issuance under the plans was 263.5 million including 70.6 million available for
future grants. A summary of the status of the Company's plans as of December 31,
2001, 2000 and 1999, and changes during the years then ended, is presented in
the following table.
2001 2000 1999
----------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
Options IN MILLIONS price IN MILLIONS price IN MILLIONS price
=========================================================================================================
Outstanding at
beginning of year 175.8 $25.34 164.7 $23.06 164.0 $19.32
Granted(1) 38.6 29.37 26.5 35.16 25.4 40.35
Exercised (11.9) 13.70 (10.8) 13.68 (18.8) 13.89
Forfeited (9.6) 29.03 (4.6) 27.81 (5.9) 18.01
---------------------------------------------------------------------------------------------------------
Outstanding at
end of year 192.9 $26.65 175.8 $25.34 164.7 $23.06
---------------------------------------------------------------------------------------------------------
Exercisable at
end of year 98.2 79.3 69.4
---------------------------------------------------------------------------------------------------------
(1) Includes the special grant in 2001 of 11.9 million options discussed on
page 52.
Options granted each year were 3.0%, 2.0% and 1.9% of weighted average
common shares outstanding for 2001, 2000 and 1999, representing grants to
approximately 15,100, 14,100 and 12,700 employees in those three years.
When stock options are exercised, shares are issued from treasury stock.
The average per share cost of treasury stock issued for option exercises over
the last three years was $7.29, while the average option exercise price over
this period was $13.79. In addition, stock option exercises resulted in $335.6
million of tax benefits for the Company during the three years ended December
31, 2001.
The following table presents information related to options outstanding and
options exercisable at December 31, 2001, based on ranges of exercise prices.
---------------------------------------------------------------------------------------
December 31, 2001
---------------------------------------------------------------------------------------
Options outstanding Options exercisable
----------------------------------------- ------------------------
Weighted-
average
remaining Weighted- Weighted-
Range of Number contractual average Number average
exercise of options life exercise of options exercise
prices IN MILLIONS IN YEARS price IN MILLIONS price
=======================================================================================
10 to 15 26.9 1.7 $13.58 26.9 $13.56
16 to 23 36.1 4.4 20.64 22.3 20.05
24 to 34 83.6 7.2 27.25 29.9 25.64
35 to 46 46.3 10.6 37.85 19.1 38.60
---------------------------------------------------------------------------------------
10 to 46 192.9 6.7 $26.65 98.2 $23.60
---------------------------------------------------------------------------------------
Pro forma net income and net income per common share were determined as if
the Company had accounted for its employee stock options under the fair value
method of SFAS No.123. For pro forma disclosures, the options' estimated fair
value was amortized over their expected seven-year life. SFAS No.123 does not
apply to grants before 1995. As a result, the pro forma disclosures for 2000 and
1999 do not include a full seven years of grants and, therefore, may not be
indicative of anticipated future disclosures. The fair value for these options
was estimated at the date of grant using an option pricing model. The model was
designed to estimate the fair value of exchange-traded options that, unlike
employee stock options, can be traded at any time and are fully transferable. In
addition, such models require the input of highly subjective assumptions
including the expected volatility of the stock price. Therefore, in management's
opinion, the existing models do not provide a reliable single measure of the
value of employee stock options. The following tables present the pro forma
disclosures and the weighted-average assumptions used to estimate the fair value
of these options:
---------------------------------------------------------------------------------------------
Pro forma disclosures 2001 2000 1999
=============================================================================================
Net income-pro forma IN MILLIONS $1,481.8 $1,842.4 $1,844.0
Net income per common share-
pro forma
Basic 1.15 1.39 1.36
Diluted 1.13 1.36 1.31
Weighted-average fair value
per option granted 10.66 14.11 14.06
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Assumptions 2001 2000 1999
---------------------------------------------------------------------------------------------
Expected dividend yield .65% .65% .65%
Expected stock price volatility 29.9% 38.8% 22.9%
Risk-free interest rate 5.03% 6.39% 5.72%
Expected life of options IN YEARS 7 7 7
---------------------------------------------------------------------------------------------
Quarterly results (unaudited)
Quarters ended Quarters ended Quarters ended Quarters ended
December 31 September 30 June 30 March 31
------------------------------------------------------------------------------------------------------------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA 2001 2000 2001 2000 2001 2000 2001 2000
====================================================================================================================================
Systemwide sales $10,112.7 $9,924.5 $10,629.2 $10,512.4 $10,238.8 $10,237.6 $9,649.7 $9,506.7
------------------------------------------------------------------------------------------------------------------------------------
Revenues
Sales by Company-operated restaurants $ 2,811.4 $2,676.6 $ 2,876.9 $ 2,768.5 $ 2,738.2 $ 2,582.0 $2,614.2 $2,439.9
Revenues from franchised
and affiliated restaurants 960.1 913.0 1,002.4 980.5 969.3 978.6 897.5 903.9
------------------------------------------------------------------------------------------------------------------------------------
Total revenues 3,771.5 3,589.6 3,879.3 3,749.0 3,707.5 3,560.6 3,511.7 3,343.8
------------------------------------------------------------------------------------------------------------------------------------
Company-operated margin 383.5 404.2 436.1 470.9 396.6 435.0 370.8 406.8
Franchised margin 758.1 721.1 799.0 788.5 771.4 784.0 700.6 710.1
Operating income 482.7/(1)/ 774.0 746.6/(2)/ 910.8 772.5/(4)/ 876.3 695.2 768.6
Net income $ 271.9/(1)/ $ 452.0 $ 545.5/(3)/ $ 548.5 $ 440.9/(4)/ $ 525.9 $ 378.3 $ 450.9
------------------------------------------------------------------------------------------------------------------------------------
Net income per common share $ .21/(1)/ $ .35 $ .42/(3)/ $ .42 $ .34/(4)/ $ .40 $ .29 $ .34
Net income per common share-diluted .21/(1)/ .34 .42/(3)/ .41 .34/(4)/ .39 .29 .33
------------------------------------------------------------------------------------------------------------------------------------
Dividends per common share $ .225 $ -- $ -- $ .215 -- $ -- -- $ --
-----------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares 1,282.7 1,307.0 1,286.1 1,315.6 1,289.7 1,327.1 1,300.7 1,343.4
Weighted-average shares-diluted 1,299.3 1,335.8 1,305.8 1,346.0 1,311.1 1,365.5 1,325.3 1,383.8
------------------------------------------------------------------------------------------------------------------------------------
High $ 30.10 $ 34.50 $ 31.00 $ 34.25 $ 30.96 $ 39.94 $ 35.06 $ 43.63
Low 25.00 27.56 26.00 26.38 25.39 31.00 24.75 29.81
Close 26.47 34.00 27.14 30.19 27.06 32.94 26.55 37.38
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes the following pretax special charges totaling $0.13 of expense per
share:
. $200.0 million ($136.1 million after tax) related to the U.S. business
reorganization and global change initiatives.
. $25.0 million ($17.0 million after tax) related to unrecoverable costs
incurred in connection with the theft of promotional game pieces and the
related termination of a supplier.
. $20.0 million ($13.6 million after tax) related to the anticipated
disposition of Aroma Cafe in the U.K.
. $7.1 million ($4.8 million after tax) related to the closing of an
additional nine underperforming restaurants in international markets.
(2) Includes $101.5 million of pretax special charges ($76.0 million after tax)
related primarily to the closing of 154 underperforming restaurants in
international markets and the write-off of certain technology costs.
(3) In addition to the $101.5 million of pretax special charges noted in (2)
above, includes $137.1 million gain (pre and after tax) on the initial
public offering of McDonald's Japan and $12.4 million of pretax special
charges ($8.1 million after tax) primarily related to the write-off of a
corporate investment (totaling $0.04 of income per share).
(4) Includes $24.0 million asset impairment charge (pre and after tax or $0.02
per share) in Turkey.
55
Management's report
Management is responsible for the preparation, integrity and fair presentation
of the consolidated financial statements and financial comments. The financial
statements were prepared in accordance with accounting principles generally
accepted in the U.S. and include certain amounts based on management's judgment
and best estimates. Other financial information presented is consistent with the
financial statements.
The Company maintains a system of internal controls over financial
reporting including safeguarding of assets against unauthorized acquisition, use
or disposition, which is designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the preparation of
reliable published financial statements and asset safeguarding. The system
includes a documented organizational structure and appropriate division of
responsibilities; established policies and procedures that are communicated
throughout the Company; careful selection, training, and development of our
people; and utilization of an internal audit program. Policies and procedures
prescribe that the Company and all employees are to maintain high standards of
proper business practices throughout the world.
There are inherent limitations to 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
it maintains an effective system of internal control over financial reporting
and safeguarding of assets against unauthorized acquisition, use or disposition.
The consolidated financial statements have been audited by independent
auditors, Ernst & Young LLP, who were given unrestricted access to all financial
records and related data. The audit report of Ernst & Young LLP is presented
herein.
The Board of Directors, operating through its Audit Committee composed
entirely of independent Directors, provides oversight to the financial reporting
process. Ernst & Young LLP has unrestricted access to the Audit Committee and
regularly meets with the Committee to discuss accounting, auditing and financial
reporting matters.
McDONALD'S CORPORATION
January 24, 2002
Report of independent auditors
The Board of Directors and Shareholders
McDonald's Corporation
We have audited the accompanying Consolidated balance sheet of McDonald's
Corporation as of December 31, 2001 and 2000, and the related Consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of McDonald's Corporation management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the U.S. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of McDonald's
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the U.S.
As discussed in the Notes to the consolidated financial statements,
effective January 1, 2001, the Company changed its method for accounting for
derivative financial instruments to conform with SFAS No.133, Accounting for
Derivative Instruments and Hedging Activities.
ERNST & YOUNG LLP
Chicago, Illinois
January 24, 2002
Information about attending the Annual Meeting
Date
Thursday, May 23, 2002
Time
10:30 a.m.,Central Time
Place
Prairie Ballroom
The Lodge
McDonald's Office Campus
Oak Brook, Illinois 60523
Webcast
You may watch a live webcast of the Annual Meeting and submit questions via
e-mail by going to www.mcdonalds.com/corporate/investor and clicking "Latest
Investor Webcast" which appears below the stock quote. (A replay of the Annual
Meeting also will be available for a limited time.)
If you plan to attend
Please bring the bottom portion of your proxy card or your brokerage statement
reflecting your McDonald's holdings as proof of share ownership. Seating in the
Prairie Ballroom is very limited and admission tickets will be given to
shareholders at the registration desk on a first-come, first-served basis.
Overflow rooms at The Lodge and Hamburger University will be available for
viewing the meeting. Registration desk will open at 9:00 a.m.
Also, to help ensure the security of those attending the meeting, all bags
will be subject to inspection.
Parking
Parking is available on campus.
Directions
From downtown Chicago
I-290 west (Eisenhower Expressway) to I-88 west (to Aurora). Exit I-88 at Cermak
Road/22nd Street (first exit immediately after York Road tollbooth). At Cermak
Road/22nd Street (stoplight), turn right. Go two stoplights to Jorie Boulevard,
turn right. Go three stoplights to Kroc Drive, turn left. At stop sign, Ronald
Lane, turn left. The Lodge is on left, parking is on right.
From I-294 (south suburbs)
I-294 north to I-88 west (to Aurora). Exit I-88 at Cermak Road/22nd Street
(first exit immediately after York Road tollbooth). At Cermak Road/22nd Street
(stoplight), turn right. Go two stoplights to Jorie Boulevard, turn right. Go
three stoplights to Kroc Drive, turn left. At stop sign, Ronald Lane, turn left.
The Lodge is on left, parking is on right.
From O'Hare Airport/I-294 (north suburbs)
I-294 south to I-88 west (to Aurora). Exit I-88 at Cermak Road/22nd Street
(first exit immediately after York Road tollbooth). At Cermak Road/22nd Street
(stoplight), turn right. Go two stoplights to Jorie Boulevard, turn right. Go
three stoplights to Kroc Drive, turn left. At stop sign, Ronald Lane, turn left.
The Lodge is on left, parking is on right.
From I-355 North or South or I-88 (west suburbs)
From either direction, take I-88 east (to Chicago). Exit at Midwest Road and
turn left (stoplight). Take Midwest Road to 31st Street (stoplight), turn left.
Take 31st Street to Jorie Boulevard (stoplight), turn left. Take Jorie Boulevard
to Kroc Drive (two stoplights), turn right. At stop sign, Ronald Lane, turn
left. The Lodge is on left, parking is on right.
[MAP]
McDonald's Annual Report on Form 10-K
--------------------------------------------------------------------------------
Shareholders may obtain a copy of the Company's 2001 Annual Report to the
Securities and Exchange Commission ("SEC") on Form 10-K by going to the investor
section of McDonald's website at www.mcdonalds.com, by going to the SEC's
website at www.sec.gov or by calling us at 1-630-623-7428. This information is
also available at no charge by sending a request to the Company's Investor
Relations Service Center, McDonald's Plaza, Oak Brook, Illinois 60523.
Home office
--------------------------------------------------------------------------------
McDonald's Corporation
McDonald's Plaza
Oak Brook IL
60523 1-630-623-3000
www.mcdonalds.com
Aroma, Boston Market, Chipotle, Donatos, Donatos Pizzeria, Made For You,
McDonald's, the McDonald's Golden Arches logo, Pret A Manger and
www.mcdonalds.com are trademarks owned by McDonald's Corporation and affiliates.
Cover photo: Joe DeNatale
Page 26 photo: Susan Kinast
Printed on recycled paper with
30% post-consumer content.
(C)2002 McDonald's Corporation
McD 02-4188
[Logo of McDonald's Corporation]
I (we), revoking any proxy previously given, appoint Jack M. Greenberg and
Gloria Santona, or either of them, as proxies with full powers of substitution
to vote all shares the undersigned is entitled to vote at the McDonald's
Corporation 2002 Annual Shareholders' Meeting, or any adjournment thereof, and
authorize each to vote at his or her discretion on any other matter that may
properly come before the meeting.
This proxy is solicited on behalf of the Board of Directors of McDonald's
Corporation. The Board of Directors recommends a vote FOR all nominees for
Director, FOR the approval of auditors, AGAINST the shareholder proposal on the
China Principles and AGAINST the shareholder proposal on animal welfare
standards. If this signed card contains no specific voting instructions, my
(our) shares will be voted with the Board's recommendations.
--------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR items 1 and 2.
--------------------------------------------------------------------------------
1. Election of Directors: WITHHOLD
FOR ALL FROM ALL
01. Hall Adams, Jr.
02. Edward A. Brennan [_] [_]
03. Terry L. Savage
04. Fred L. Turner
For all, except vote withheld from the following nominee(s)
-----------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of auditors [_] [_] [_]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Board of Directors recommends a vote AGAINST items 3 and 4.
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
3. Shareholder proposal on
the China Principles [_] [_] [_]
4. Shareholder proposal on
animal welfare standards [_] [_] [_]
Please sign as your name(s) appear(s) above and return this proxy promptly. If
signing for a corporation or partnership, or as agent, attorney or fiduciary,
indicate the capacity in which you are signing. If you attend the meeting and
decide to vote by ballot, such vote will supersede this proxy.
x
-------------------------------------------------------------
x Date: , 2002
-------------------------------------------------------------
\/ Please detach the Proxy from the Proxy Voting Instructions before mailing. \/
[_] Do not mail me future Annual Reports because another household member
receives one.
[_] Comments are on reverse side.
[Logo of McDonald's Coporation]
Annual Meeting Information and Proxy Voting Instructions
Dear Shareholder:
McDonald's 2002 Annual Shareholders' Meeting will be held at 10:30 a.m. Central
Time on Thursday, May 23, 2002, in the Prairie Ballroom at The Lodge on
McDonald's Office Campus in Oak Brook, Illinois. If you are unable to attend the
meeting, you can watch a live webcast and submit questions via e-mail by going
to www.mcdonalds.com/corporate/investor and selecting Latest Investor Webcast. A
replay of the meeting will also be available for a limited time.
Prior to the Annual Meeting, please consider the issues discussed in the Proxy
Statement and exercise your right to vote using one of the following methods:
Internet voting: www.eproxyvote.com/mcd
Phone voting: 877-PRX-VOTE (877-779-8683) from the U.S./Canada, or 201-536-8073
from other countries.
Voting by mail: complete, date, sign, detach and mail the above Proxy in the
enclosed envelope.
Your proxy covers the voting of shares of McDonald's Corporation Common Stock
that you are entitled to vote or for which you may direct the voting.
If voting by phone or via the Internet, the voter control number in the box
above is necessary to verify your authority to vote. A phone or Internet vote
authorizes the named proxies in the same manner as if you marked, signed and
returned the proxy card. If you choose to vote your shares by phone or Internet,
there is no need to mail your proxy card.
Your vote is important. Thank you for voting!
[Logo of McDonald's Corporation]
McDonald's E-Delivers
Don't wait for the mail -- sign up to receive future annual meeting materials
online when you vote via the Internet or sign up anytime at
www.econsent.com/mcd. As soon as the materials are available, we will send you
an e-mail with information on how to access the summary annual report, proxy
materials, annual financial information and the Internet voting site -- it's
fast, convenient and helps McDonald's control costs.
Online Investor Services at www.mcdonalds.equiserve.com
Direct investing in McDonald's stock is fast and convenient using online
services at EquiServe, McDonald's stock transfer agent and MCDirect Shares plan
administrator.
You can open a MCDirect Shares account or execute transactions in your existing
account at www.mcdonalds.equiserve.com. In addition, account information
including balances, transaction history, share sales, direct deposit of
dividends, stock price, as well as registration and name changes and account
consolidations can be obtained online 24 hours a day, seven days a week on this
secure website.
Comments:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Thank you for sharing your comments. Please note that by sharing your comments,
you are waiving confidential voting. Although we are unable to personally
respond to every proxy card comment, be assured that your remarks will help us
learn how to better serve you.
[Logo of McDonald's Corporation] McDonald's Annual Meeting Information
The Prairie Ballroom at The Lodge
McDonald's Office Campus - Oak Brook, Illinois
Thursday, May 23, 2002, 10:30 a.m.
Admission
Please bring this tear-off portion of your proxy card or other proof of share
ownership to the annual meeting to obtain an admission ticket. Seating in the
Prairie Ballroom is limited; however, overflow rooms will be available for
viewing the meeting. Admission to the Prairie Ballroom will be provided to
shareholders on a first come, first serve basis. Also, to help ensure the
security of those attending the meeting, please be aware that all bags will be
subject to inspection.
Parking
Parking is available on campus.
Directions
A map and directions to the meeting are available:
.. In the McDonald's Corporation Annual Meeting Notice, Proxy Statement & 2001
Financial Information
.. On the investor section of our website:
www.mcdonalds.com/corporate/investor
.. Via fax-back at 630-623-0172
Unable to attend McDonald's 2002 Annual Meeting in person?
Watch a live webcast and submit questions via e-mail by going to
www.mcdonalds.com/corporate/investor and selecting Latest Investor Webcast.
A replay of the meeting also will be available for a limited time.
[Logo of McDonald's Corporation]
Information for McDonald's Employees Only
If you wish to vote all of your shares, including shares in the McDonald's
Corporation Profit Sharing and Savings Plan, in the same manner as shares held
outside the Plan, you do NOT need to complete the section below. Simply follow
the voting instructions on the front of this card.
The Board of Directors recommends a vote FOR all nominees for Director, FOR the
approval of auditors, AGAINST the shareholder proposal on the China Principles
and AGAINST the shareholder proposal on animal welfare standards.
------------------------------------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR items 1 and 2.
PLAN SHARES OWNED PLAN SHARES NOT YET CREDITED OR UNVOTED
1. Election of Directors: -------------------------- ----------------------------------------------
WITHHOLD WITHHOLD
01. Hall Adams, Jr. FOR ALL FROM ALL FOR ALL FROM ALL
02. Edward A. Brennan
03. Terry L. Savage ------- -------- -------- --------
04. Fred L. Turner
For all, except vote withheld For all, except vote withheld
from the following nominee(s) from the following nominee(s)
----------------------------- -----------------------------
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
2. Approval of auditors
--- --- --- --- --- ---
------------------------------------------------------------------------------------------------------------
The Board of Directors recommends a vote AGAINST items 3 and 4.
3. Shareholder proposal on the China Principles
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
--- --- --- --- --- ---
4. Shareholder proposal on animal welfare standards
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
--- --- --- --- --- ---
------------------------------------------------------------------------------------------------------------
Thank you for sharing your comments. Although we are unable to personally
respond to every proxy card comment, be assured that your remarks will help us
learn how to better serve you.
Comments:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[Logo of McDonald's Corporation]
Profit Sharing and Savings Plan Voting Instructions
Your vote on the front of this proxy card directs the trustees of the McDonald's
Corporation Profit Sharing and Savings Plan to vote the McDonald's shares
credited to your accounts under the Plan. When you vote these shares, you should
consider your long-term best interests as a Plan participant.
In addition, you are also directing the trustees to vote shares held in the Plan
that have not been voted by other participants and shares that have not yet been
credited to participants' accounts. When you direct the vote of these shares,
you have a special responsibility to consider the long-term best interests of
other participants.
If you want to vote the Plan shares you own or the shares you are voting for
other participants differently from your shares held outside the Plan, do not
vote by phone or Internet. Instead, complete the front of the proxy card and
check the "comment" box, then mark your voting direction for Plan shares above
and return the proxy card in the enclosed envelope.
Your directions to vote shares held in the McDonald's Corporation Profit Sharing
and Savings Plan will be kept confidential by EquiServe Trust Company, N.A., the
independent inspector of election.
[Logo of McDonald's] YOUR VOTE IS IMPORTANT.
PLEASE SIGN AND RETURN THIS CARD.
Please sign as your name(s) appear(s) above and return this proxy promptly. If
signing for a corporation or partnership, or as agent, attorney or fiduciary,
indicate the capacity in which you are signing. If you attend the meeting and
decide to vote by ballot, such vote will supersede this proxy.
x
------------------------------------------------------------------
x Date: , 2002
------------------------------------------------------------------
--------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR items 1 and 2.
--------------------------------------------------------------------------------
WITHHOLD
1. Election of Directors FOR ALL FROM ALL
01. Hall Adams, Jr., 02. Edward A. Brennan, [_] [_]
03. Terry L. Savage, 04. Fred L. Turner
For all, except vote withheld from the following nominee(s)
-----------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of auditors [_] [_] [_]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Board of Directors recommends a vote AGAINST items 3 and 4.
--------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
3. Shareholder proposal on
the China Principles [_] [_] [_]
5. Shareholder proposal on animal
welfare standards [_] [_] [_]
--------------------------------------------------------------------------------
[Logo of McDonald's]
PROXY AND VOTING INSTRUCTION CARD
This proxy is solicited on behalf of the Board of Directors of McDonald's
Corporation.
McDONALD'S CORPORATION
McDonald's Plaza
Oak Brook, IL 60523
Dear Shareholder:
McDonald's 2002 Annual Shareholders' Meeting will be held at 10:30 a.m.
Central Time on Thursday, May 23, 2002, in the Prairie Ballroom at The Lodge on
McDonald`s Office Campus in Oak Brook, Illinois. If you plan to attend, please
bring your bank or broker statement evidencing your beneficial ownership of
McDonald's stock for admission to the meeting. Seating in the Prairie Ballroom
is limited; however, overflow rooms will be available for viewing the meeting.
Admission to the Prairie Ballroom will be provided to shareholders on a first
come, first serve basis. Please refer to McDonald's Corporation Annual Meeting
Notice, Proxy Statement and 2001 Financial Information or visit the investor
section of www.mcdonalds.com for more information, including a map and
directions to the meeting.
If you are unable to attend the meeting in person, you can watch a live
webcast and submit questions via e-mail by going to
www.mcdonalds.com/corporate/investor and selecting Latest Investor Webcast. A
replay of the meeting also will be available for a limited time.
Your vote is important. Thank you for voting!
I (we), revoking any proxy previously given, appoint Jack M. Greenberg and
Gloria Santona, or either of them, as proxies with full powers of substitution
to vote all shares that I am (we are) entitled to vote at the McDonald's
Corporation 2002 Annual Shareholders' Meeting, or any adjournment thereof, and
authorize each to vote at his or her discretion on any other matter that may
properly come before the meeting. If this signed card contains no specific
voting instructions, my (our) shares will be voted FOR all nominees for
Director, FOR the approval of auditors, AGAINST the shareholder proposal on the
China Principles and AGAINST the shareholder proposal on animal welfare
standards.