MCDONALDS CORP (MCD Annual Report – March 23, 2001

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March 23, 2001

MCDONALDS CORP (MCD)
Annual Report (SEC form 10-K)

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 U.K. and the U.S. 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: Aroma Cafi, Boston Market, Chipotle Mexican Grill and Donatos Pizza. Collectively these four businesses are referred to as "Other Brands." Throughout this discussion, Other Brands’ financial information is included in the Other segment.

In February 2001, the Company acquired a minority interest in U.K.-based Pret A Manger, which is a quick-service food concept that serves mainly sandwiches, snacks and drinks during lunchtime.

Consolidated operating results

Operating results
2000 1999 1998
DOLLARS IN MILLIONS, Increase/ Increase/
EXCEPT PER SHARE DATA Amount (decrease) Amount (decrease) Amount
Systemwide sales $ 40,181 4 % $ 38,491 7 % $ 35,979
Revenues
Sales by Company-
operated restaurants $ 10,467 10 % $ 9,512 7 % $ 8,895
Revenues from franchised
and affiliated restaurants 3,776 1 3,747 6 3,526
Total revenues 14,243 7 13,259 7 12,421
Operating costs
and expenses
Company-operated
restaurants 8,750 12 7,829 8 7,261
Franchised restaurants 772 5 738 9 678
Selling, general &
administrative expenses 1,587 7 1,477 1 1,458
Other operating income, net (196 ) nm (124 ) nm (60 )
Made For You costs — nm 19 nm 162
Special charge — nm — nm 160
Total operating costs
and expenses 10,913 10 9,939 3 9,659
Operating income (1) 3,330 — 3,320 20 2,762
Interest expense 430 8 396 (4 ) 414
Nonoperating expense, net 18 nm 40 (2 ) 41
Income before provision
for income taxes (1) 2,882 — 2,884 25 2,307
Provision for income taxes (1) 905 (3 ) 936 24 757
Net income (1) $ 1,977 2 % $ 1,948 26 % $ 1,550
Net income
per common share (1) $ 1.49 3 % $ 1.44 26 % $ 1.14
Net income
per common share–
diluted (1) 1.46 5 1.39 26 1.10

(1) The 1998 results include $162 million of Made For You costs and the $160 million special charge for a pretax total of $322 million ($219 million
after tax or $0.16 per share). See discussion on pages 24 and 25.
nm Not meaningful.

The following table presents the 2000 growth rates for reported and constant currency results as well as the 1999 growth rates for reported results, results adjusted for 1998 Made For You costs and the 1998 special charge, and the adjusted results on a constant currency basis. All information in constant currencies excludes the effect of foreign currency translation on reported results, except for hyperinflationary economies, such as Russia, whose functional currency is the U.S. Dollar.

Constant currency operating results
2000 1999
Increase Increase
As Constant As Constant
reported currency (1) reported Adjusted (2) currency (1,2)
Systemwide sales 4 % 7 % 7 % 7 % 8 %
Revenues 7 12 7 7 10
Operating income — 5 20 8 10
Net income 2 6 26 10 13
Net income per
common share 3 8 26 11 13
Net income per
common share–diluted 5 10 26 10 13

(1 ) Excludes the effect of foreign currency translation on reported results. (2 ) Excludes 1998 Made For You costs and the 1998 special charge.

The primary currencies negatively affecting reported results in 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, partly offset by the stronger Japanese Yen. In 1999, the reported results were negatively affected primarily by the Brazilian Real, the Euro and the British Pound, partly offset by the stronger Japanese Yen, Australian Dollar and Southeast Asian currencies.

In 2000 and 1999, the stronger Japanese Yen had a greater positive currency translation effect on sales compared with revenues. This is due to our affiliate structure in Japan. Under this structure, we record a royalty in revenues based on a percent of Japan’s sales, whereas all of Japan’s sales are included in Systemwide sales. For this reason, growth rates for Systemwide sales in both years were less negatively affected by foreign currency translation than were revenues.

Systemwide sales

For the first time, Systemwide sales exceeded $40 billion, increasing 7% in constant currencies in 2000. Systemwide sales include sales by all restaurants, whether operated by the Company, by franchisees or by affiliates operating under joint-venture agreements. We continue to focus on increasing market share through positive comparable sales and strategic restaurant development, with an emphasis on improving customer satisfaction through quality, service, cleanliness and value. Constant currency sales increases in 2000 and 1999 were due to restaurant expansion and positive comparable sales.

Systemwide sales
2000 1999 1998
Increase/(decrease) Increase/(decrease)
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency Amount reported currency Amount
(1) (1)
U.S. $ 19,573 3 % na $ 19,006 5 % na $ 18,123
Europe 9,293 (3 ) 9 % 9,557 7 12 % 8,909
Asia/Pacific 7,051 10 9 6,436 15 6 5,579
Latin America 1,790 7 9 1,665 (5 ) 15 1,761
Other (2) 2,474 35 36 1,827 14 15 1,607
Total $ 40,181 4 % 7 % $ 38,491 7 % 8 % $ 35,979

(1) Excludes the effect of foreign currency translation on reported results. (2) Includes Systemwide sales for Other Brands of $605 million in 2000 and
$91 million in 1999.
na Not applicable.

In the U.S. and Europe, expansion and positive comparable sales drove sales increases in 2000 and 1999. In the U.S., successful promotions combined with local market initiatives and new product introductions contributed to the increases in both years. The primary contributors to Europe’s constant currency sales growth in both years were France, Italy, Spain and the U.K. In addition, Germany’s sales increased in both 2000 and 1999. Europe’s results were dampened in 2000 by the decline in consumer confidence regarding the safety of the beef supply in certain European markets, which began in the fourth quarter and is expected to continue in the near term. In 1999, Europe’s results were affected by the difficult economic conditions in Russia.

In Asia/Pacific, expansion drove the 2000 and 1999 constant currency sales increases. Comparable sales were flat in 2000 and negative in 1999. Double-digit comparable sales growth in China also contributed to the sales increase in 2000. These results were partly offset by weak consumer spending in Australia due to the goods and services tax introduced in July 2000, and this negative impact is expected to continue in the first half of 2001. In 1999, China, South Korea and the Southeast Asian markets were the primary contributors to the increase.

In Latin America, the 2000 and 1999 constant currency sales increases were driven by expansion, partly offset by negative comparable sales. Strong positive comparable sales in Mexico helped drive the increases in both years. In addition, 1999 benefited from double-digit positive comparable sales in Venezuela. Weak consumer spending continued to negatively affect most markets in this segment in both years.

In the Other segment, the constant currency sales increases for 2000 and 1999 were primarily driven by the addition of Other Brands, as well as positive comparable sales in Canada.

Average annual salesMcDonald’s restaurants
2000 1999 1998
Increase/ Increase/
(decrease) (decrease)
Constant Constant
DOLLARS IN THOUSANDS Amount currency (2) Amount currency (2) Amount
Per restaurant (1)
Traditional:
U.S. $ 1,647 1 % $ 1,625 3 % $ 1,584
Europe 1,851 (2 ) 2,130 — 2,227
Asia/Pacific 1,420 (2 ) 1,446 (7 ) 1,433
Latin America 1,333 (7 ) 1,464 (5 ) 1,890
Canada, Middle East
& Africa 1,336 1 1,326 — 1,340
Satellite:
U.S. $ 536 9 % $ 490 7 % $ 459
Outside the U.S.(3,4) 598 2 561 2 490
Per new restaurant (5)

Traditional:
U.S. $ 1,570 7 % $ 1,473 11 % $ 1,332
Europe 1,430 (4 ) 1,673 3 1,700
Asia/Pacific 1,219 6 1,131 3 1,009
Latin America 1,030 (9 ) 1,152 (12 ) 1,634
Canada, Middle East
& Africa 911 (11 ) 1,045 15 943
Satellite: (6)
Outside the U.S. (3,4) $ 649 8 % $ 574 — $ 504

(1 ) McDonald’s restaurants in operation at least 13 consecutive months. (2 ) Excludes the effect of foreign currency translation on reported results. (3 ) Prior years have been restated to exclude dessert-only kiosks. (4 ) Represents satellite restaurants located in Canada and Japan, which comprise
substantially all satellites outside the U.S.
(5 ) McDonald’s restaurants in operation at least 13 consecutive months but not
more than 25 months.
(6 ) Excludes U.S. because the Company is not currently opening a significant
number of satellite restaurants in the U.S.

Average sales in constant currencies are affected by comparable sales as well as the size, location and number of new restaurants. In 2000 and 1999, positive comparable sales primarily drove the increases in U.S. average annual sales per traditional restaurant. In segments outside the U.S., the decreases in average annual sales per traditional restaurant on a constant currency basis were primarily due to the significant number of new restaurants added.

The number of new restaurants affects average sales as new restaurants historically have taken a few years to reach long-term volumes. In addition, over the last several years we have opened more restaurants outside the U.S. in lower density areas and in countries with lower average sales volumes and correspondingly lower average development costs.

In 2000 and 1999, average sales for new U.S. traditional restaurants increased due to selective expansion in higher volume locations and the development of larger facilities that support higher average sales. In 2000, average sales for new traditional restaurants in Europe and Latin America declined due to a higher proportion of openings in lower volume markets such as Italy and Poland, and Chile and Mexico, respectively. Asia/Pacific’s average sales for new traditional restaurants increased in 2000 due to higher sales volumes for openings in China and a higher proportion of openings in higher volume markets such as Japan. Average sales for new traditional restaurants in the Canada, Middle East & Africa grouping declined due to a higher proportion of openings in Saudi Arabia and lower sales volumes for openings in South Africa.

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 would otherwise not have been feasible. In 2000, average annual sales for satellite restaurants increased in the U.S. partly due to the closing of certain low-volume satellites and increased outside the U.S. primarily due to higher sales volumes for openings in Japan.

For an added perspective, on a consolidated basis, 2000 and 1999 average annual sales of restaurants opened more than 25 months increased over the prior year in constant currencies.

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
2000 1999 1998
Increase/(decrease) Increase/(decrease)
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency Amount reported currency Amount
(1) (1)
U.S. $ 5,259 3 % na $ 5,093 5 % na $ 4,868
Europe 4,754 (3 ) 7 % 4,925 10 15 % 4,467
Asia/Pacific 1,987 8 11 1,832 12 9 1,633
Latin America 949 40 41 680 (16 ) 10 814
Other (2) 1,294 78 79 729 14 15 639
Total $ 14,243 7 % 12 % $ 13,259 7 % 10 % $ 12,421

(1) Excludes the effect of foreign currency translation on reported results. (2) Includes revenues for Other Brands of $564 million in 2000 and $57 million
in 1999.
na Not applicable.

On a constant currency basis, total revenues increased at a higher rate than sales in 2000 due to the addition of Other Brands, which are primarily Company-operated, as well as the consolidation of Argentina and Indonesia for financial reporting purposes. In 1999, total revenues increased at a greater rate than sales due to the higher unit growth rate of Company-operated restaurants relative to Systemwide restaurants, primarily in Europe, and the consolidation of Sweden.

Operating income

Operating income increased $10 million in 2000 and $236 million in 1999, excluding 1998 Made For You costs and the 1998 special charge. In constant currencies, these increases were $161 million or 5% in 2000 and $303 million or 10% in 1999. The constant currency increases in 2000 and 1999 were primarily due to higher combined operating margin dollars and other operating income, partly offset by higher selling, general & administrative expenses. Including 1998 Made For You costs and the 1998 special charge, reported operating income increased 20% in 1999.

Operating income from the major markets accounted for more than 90% of consolidated operating income in 2000, 1999 and 1998, excluding 1998 Made For You costs and the 1998 special charge.

Operating income
2000 1999 1998
Increase/(decrease) Increase/(decrease)
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency Amount reported currency Amount
(1) (1)
U.S. $ 1,773 7 % na $ 1,653 38 % 8% (2) $ 1,202 (3)
Europe 1,180 (6 ) 6 % 1,257 8 12 1,167
Asia/Pacific 442 5 6 422 17 10 360
Latin America 103 (23 ) (23 ) 133 (30 ) (9 ) 189
Other (2) 94 (20 ) (20 ) 117 (3 ) (2 ) 120
Corporate (262 ) — na (262 ) 5 na (276 )
Total $ 3,330 — 5 % $ 3,320 20 % 10% (2) $ 2,762 (3)

(1) Excludes the effect of foreign currency translation on reported results. (2) Excludes 1998 Made For You costs and the 1998 special charge. (3) Includes Made For You costs of $162 million and the special charge of
$160 million for a total of $322 million.
(4) Includes operating losses for Other Brands of $41 million in 2000 and
$7 million in 1999.
na Not applicable.

Segment operating income has been restated to break out corporate general & administrative expenses to be consistent with the way management currently evaluates segment performance. The majority of these costs were previously included in the U.S. segment.

U.S. operating income increased $120 million or 7% in 2000 and $129 million or 8% in 1999, excluding 1998 Made For You costs and the 1998 special charge, and accounted for about 50% of consolidated operating income in both years. The increases in both years were due to higher combined operating margin dollars, lower selling, general & administrative expenses and higher other operating income. Including 1998 Made For You costs and the 1998 special charge, U.S. operating income increased $451 million or 38% in 1999. Prior to the restatement to break out corporate general & administrative expenses, U.S. operating income increased 9% in 2000 and 11% in 1999, excluding 1998 Made For You costs and the 1998 special charge.

Europe’s operating income increased 6% in 2000 and 12% in 1999 in constant currencies, accounting for more than 35% of consolidated operating income in both years. The increase in 2000 was primarily driven by strong operating results in France, Italy and Spain. In 1999, Europe’s operating income growth benefited from the consolidation of Sweden, as well as strong results in France, Germany, Spain and the U.K. Europe’s results were dampened in 2000 by the decline in consumer confidence regarding the safety of the beef supply in certain European markets, which began in the fourth quarter, and in 1999 by the difficult economic conditions in Russia. France, Germany and the U.K. accounted for about 75% of Europe’s operating income in 2000, 1999 and 1998.

Asia/Pacific’s operating income increased 6% in 2000 and 10% in 1999 in constant currencies. The increases in both years were driven primarily by Japan, which benefited from the partial sale of its ownership in Toys `R’ Us Japan in 2000 and a lower effective tax rate in 1999, as well as strong results in China and South Korea. In addition, Taiwan contributed to the increase in 2000 but tempered the segment’s results in 1999, due to the effect of the September 1999 earthquake. Results in 2000 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 Asia/Pacific’s operating income in 2000, 1999 and 1998. Beginning January 1, 2001, this segment will benefit from an increase in the royalty percent received from our Japanese affiliate.

Latin America’s operating income decreased 23% in 2000 and 9% in 1999 in constant currencies. Results in both years were negatively impacted by the difficult economic conditions experienced by most markets in the segment. Partly offsetting the decreases were strong performances in Mexico and Venezuela in both years, as well as the consolidation of Argentina in 2000. Brazil accounted for more than 55% of Latin America’s operating income in each of the past three years.

Corporate general & administrative expenses benefited in 2000, 1999 and 1998 from savings resulting from the home office productivity initiative.

Operating margins

Operating margin information and discussions relate to McDonald’s restaurants only and exclude Other Brands.

Company-operated margins

Company-operated margin dollars are equal to sales by Company-operated restaurants less the operating costs of these restaurants. Company-operated margin dollars declined $4 million in 2000, compared with a $40 million increase in 1999. In constant currencies, Company-operated margin dollars increased $73 million or 4% in 2000 and $88 million or 5% in 1999. The constant currency increases were primarily driven by expansion and positive comparable sales.

Company-operated margins were 16.9% of sales in 2000, 17.7% in 1999 and 18.4% in 1998. Operating cost trends as a percent of sales were as follows: food & paper costs increased in 2000 and were flat in 1999; payroll costs were flat in 2000 and increased in 1999; and occupancy & other operating expenses increased in both years.

Company-operated marginsMcDonald’s restaurants
IN MILLIONS 2000 1999 1998
U.S. $ 521 $ 516 $ 490
Europe 683 743 703
Asia/Pacific 289 267 242
Latin America 95 70 118
Canada, Middle East & Africa 82 78 81
Total $ 1,670 $ 1,674 $ 1,634
PERCENT OF SALES
U.S. 17.0 % 17.5 % 17.3 %
Europe 18.3 19.2 20.0
Asia/Pacific 16.2 16.6 16.9
Latin America 12.4 14.1 19.1
Canada, Middle East & Africa 14.5 14.9 16.0
Total 16.9 % 17.7 % 18.4 %

In the U.S., food & paper costs were lower as a percent of sales in 2000 and 1999, primarily due to less waste (partly as a result of the implementation of our Made For You food preparation system), and payroll costs were higher in both years as a result of higher average hourly rates. Occupancy & other operating expenses were higher in 2000 than 1999 and lower in 1999 than 1998.

Europe’s Company-operated margin percent declined in 2000 as all costs increased as a percent of sales. The difficult economic conditions in Russia accounted for more than half of the decline in Europe’s margin percent in 1999.

In Asia/Pacific, weak comparable sales in both years negatively affected Company-operated margins as a percent of sales. The September 1999 earthquake in Taiwan, as well as a difficult comparison due to strong 1998 promotions in Hong Kong contributed to Asia/Pacific’s 1999 decline. In Latin America, the margin percent 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 2000, 1999 and 1998. Franchised margin dollars declined $6 million in 2000, compared with a $160 million increase in 1999. In constant currencies, franchised margin dollars increased $119 million or 4% in 2000 and $220 million or 8% in 1999, primarily driven by expansion and positive comparable sales.

Franchised marginsMcDonald’s restaurants
IN MILLIONS 2000 1999 1998
U.S. $ 1,765 $ 1,730 $ 1,650
Europe 802 828 758
Asia/Pacific 173 187 173
Latin America 135 144 155
Canada, Middle East & Africa 127 119 112
Total $ 3,002 $ 3,008 $ 2,848
PERCENT OF REVENUES
U.S. 80.4 % 81.0 % 80.9 %
Europe 78.3 79.0 80.0
Asia/Pacific 82.7 83.6 84.3
Latin America 73.0 77.5 79.7
Canada, Middle East & Africa 78.9 78.5 80.2
Total 79.5 % 80.3 % 80.8 %

The declines in the consolidated margin percent in 2000 and 1999 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. The higher occupancy costs were partly offset by positive comparable sales in 2000 and 1999.

Also, our purchase of a majority interest in certain affiliate markets in 2000 and 1999 shifted revenues from franchised and affiliated restaurants to Company-operated restaurants, reducing the franchised restaurant margin percents in both Asia/Pacific and Latin America in 2000 and Europe in 1999.

Selling, general & administrative expenses

Consolidated selling, general & administrative expenses increased 7% in 2000 and 1% in 1999. Selling, general & administrative expenses as a percent of sales were 4.0% in 2000, 3.8% in 1999 and 4.1% in 1998. The increase in 2000 was primarily due to spending to support the development of Other Brands and the consolidation of Argentina and Indonesia. Excluding Other Brands and the consolidations, selling, general & administrative expenses increased 1% in 2000. Selling, general & administrative expenses in 2000 benefited from weaker foreign currencies and lower expense for performance-based incentive compensation. The increase in 1999 primarily was due to the consolidation of Sweden and the addition of Other Brands, partly offset by weaker foreign currencies. U.S. selling, general & administrative expenses decreased in both 2000 and 1999 due to savings resulting from the home office productivity initiative. As a result of the initiative, which benefited both the U.S. and corporate segments, the Company reached its goal of saving about $100 million annually beginning in 2000.

Selling, general & administrative expenses
2000 1999 1998
Increase/(decrease) Increase/(decrease)
DOLLARS IN As Constant As Constant
MILLIONS Amount reported currency (1) Amount reported currency Amount
(1)
U.S. $ 581 (1 )% na $ 584 (2 )% na $ 593
Europe 336 (3 ) 8 % 348 6 11 % 328
Asia/Pacific 127 9 13 117 9 7 107
Latin America 120 45 45 83 (2 ) 22 85
Other (2) 161 94 96 83 20 21 69
Corporate 262 — na 262 (5 ) na 276
Total $ 1,587 7 % 11 % $ 1,477 1 % 4 % $ 1,458

(1) Excludes the effect of foreign currency translation on reported results. (2) Includes selling, general & administrative expenses for Other Brands of
$85 million in 2000 and $12 million in 1999.
na Not applicable.

Selling, general & administrative expenses have been restated to break out corporate expenses from the operating segments. Corporate expenses are composed of home office support costs in areas such as facilities, finance, human resources, information technology, legal, supply chain management and training.

Other operating income, net

Other operating income includes gains on sales of restaurant businesses, equity in earnings of unconsolidated affiliates, net gains or losses from property dispositions and other transactions related to franchising and the food service business.

Other operating income, net
IN MILLIONS 2000 1999 1998
Gains on sales of restaurant businesses $ 87 $ 75 $ 61
Equity in earnings of unconsolidated affiliates 121 138 89
Net losses from property dispositions — (71 ) (71 )
Other (12 ) (18 ) (19 )
Total $ 196 $ 124 $ 60

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. These transactions are an integral part of our business and resulting gains are recorded in operating income. Equity in earnings of unconsolidated affiliatesbusinesses in which the Company actively participates, but does not controlis reported after interest expense and income taxes, except for U.S. restaurant partnerships, which are reported before income taxes. Net losses from property dispositions result from disposals of properties due to restaurant closings, relocations and other transactions.

Equity in earnings from unconsolidated affiliates in 1999 included a $21 million gain from the sale of real estate in a U.S. partnership. Net losses from property dispositions reflected the write-off of $24 million of software in 1999 and a high number of restaurant closings in 1998.

Made For You costs and the special charge related to the 1998 home office productivity initiative are discussed on pages 24 and 25.

Interest expense

Interest expense increased in 2000 due to higher average debt levels, partly offset by weaker foreign currencies. In 1999, interest expense decreased due to lower average interest rates and weaker foreign currencies, partly offset by higher average debt levels. Average debt levels were higher in both years because of the Company using available credit capacity to fund share repurchases.

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 2000 reflected lower minority interest expense, lower translation losses and a gain related to the sale of a partial ownership interest in a majority-owned subsidiary outside the U.S.

Provision for income taxes

The effective income tax rate was 31.4% for 2000, compared with 32.5% for 1999 and 32.8% for 1998. 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 2001 effective income tax rate to be between 32.0% and 33.0%.

Consolidated net deferred tax liabilities included tax assets, net of valuation allowance, of $523 million in 2000 and $557 million in 1999. Substantially all of the tax assets arose in the U.S. and other profitable markets, and a majority of them are expected to be realized in future U.S. income tax returns.

Net income and net income per common share

In 2000, net income increased $29 million or 2% and diluted net income per common share increased $.07 or 5%. On a constant currency basis, these increases were $122 million or 6% and $.14 or 10%, respectively. The spread between the percent increase in net income and net income per common share was due to lower weighted-average shares outstanding as a result of shares repurchased and a less dilutive effect from stock options. In 1999, net income and diluted net income per common share increased 10% (13% for both in constant currencies), excluding 1998 Made For You costs and the 1998 special charge. Including these items, reported net income and diluted net income per common share both increased 26% in 1999.

Cash flows

The Company generates significant cash from operations and has substantial credit capacity to fund operating and discretionary spending. Cash from operations totaled $2.8 billion in 2000 and exceeded capital expenditures for the tenth consecutive year. This amount was less than in 1999, primarily due to higher income tax payments as a result of lower tax benefits related to stock option exercises and higher tax gains on the termination of foreign currency exchange agreements. Higher gains on sales of restaurant businesses and property also reduced cash provided by operations, but generated about $40 million of additional cash from investing activities. In 1998, cash provided by operations was reduced by approximately $135 million of Made For You incentive payments. 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 2000 1999 1998
Cash provided by operations $ 2,751 $ 3,009 $ 2,766
Free cash flow (1) 806 1,141 887
Cash provided by operations
as a percent of capital expenditures 141 % 161 % 147 %
Cash provided by operations
as a percent of average total debt 35 42 41

(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 .70 at year-end 2000.

Capital expenditures and restaurant development

Capital expenditures increased $77 million or 4% in 2000 and decreased $11 million or 1% in 1999. The increase in 2000 was due to higher spending for Other Brands and the consolidation of Argentina and Indonesia, partly offset by weaker foreign currencies. Capital expenditures for McDonald’s restaurants in 2000 and 1999 reflect 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. Capital expenditures in 1999 included increased capital outlays for existing U.S. Company-operated restaurants related to implementation of the Made For You food preparation system and spending to update and refresh existing U.S. restaurants. About 90% of qualifying new and rebuilt U.S. traditional restaurant buildings developed in 2000 are owned by franchisees. In addition, the Company leased the land for substantially all new U.S. traditional restaurants opened in 2000. The U.S. building program, which began in 1998, combined with our decision to lease more land saved the Company approximately $285 million in capital outlays in 2000 and $230 million in 1999.

More than 60% of capital expenditures was invested in major markets excluding Japan in 2000, 1999 and 1998. Approximately 70% of capital expenditures was invested in markets outside the U.S. in all three years.

Capital expenditures
IN MILLIONS 2000 1999 1998
New restaurants $ 1,308 $ 1,231 $ 1,357
Existing restaurants 507 515 398
Other properties 130 122 124
Total $ 1,945 $ 1,868 $ 1,879
Total assets $ 21,684 $ 20,983 $ 19,784

Expenditures for existing restaurants, including technology to improve service and food quality and enhancements to older facilities, were made to achieve higher levels of customer satisfaction. Expenditures for other properties primarily were for computer equipment and furnishings for office buildings.

The Company’s expenditures for new restaurants in the U.S. were minimal as a result of the building and leasing programs previously discussed. For new franchised and affiliated restaurants, which represent about 85% of 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. For new Company-operated restaurants, the Company generally leases the land and owns the restaurant building and equipment.

Average development costs outside the U.S. vary widely by market depending on the types of restaurants built and the real estate and construction costs within each market. These costs, which include land, buildings and equipment owned by the Company, are managed through the use of optimally sized restaurants, construction and design efficiencies, standardization and global sourcing. In addition, foreign currency fluctuations affect average development costs, especially in those markets where construction materials cannot be obtained locally.

Average development costs for new traditional restaurants in major markets outside the U.S. excluding Japan were approximately $1.6 million in 2000, $1.8 million in 1999 and $1.9 million in 1998. Average annual sales for new traditional restaurants for the same markets were approximately $1.5 million in 2000, $1.7 million in 1999 and $1.8 million in 1998. Both development costs and sales were impacted by weaker foreign currencies. 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 approximately $200,000 in 2000, 1999 and 1998. The use of these small, limited-menu restaurants, for which the land and building generally are leased, has allowed expansion into areas that would otherwise not have been feasible.

Including affiliates, total land ownership was 40% and 42% of total restaurant sites at year-end 2000 and 1999, respectively.

Capital expenditures by affiliates, which were not included in consolidated amounts, were approximately $204 million in 2000, compared with $259 million in 1999. The decrease was primarily due to the consolidation of Argentina in 2000.

Systemwide restaurants (1)
2000 1999 1998
U.S. 12,804 12,629 12,472
Europe 5,460 4,943 4,421
Asia/Pacific 6,260 5,654 5,055
Latin America 1,510 1,299 1,100
Other:
Canada, Middle East & Africa 1,665 1,568 1,447
Other Brands 1,008 216 18
Total 28,707 26,309 24,513

(1) Adjusted to exclude dessert-only kiosks, primarily located in Latin America, as follows: 600 in 2000, 497 in 1999 and
305 in 1998.

McDonald’s continues to focus on managing capital outlays more effectively through selective expansion. In 2000, the Company added 1,606 McDonald’s restaurants Systemwide, compared with 1,598 in 1999 and 1,567 in 1998. In addition, the Company added 792 restaurants in 2000 operated by Other Brands, 707 of which were the result of the Boston Market acquisition. In 2001, the Company expects to add 1,600 to 1,700 restaurants, including 1,500 to 1,600 McDonald’s restaurants, with continued emphasis on traditional restaurants located primarily outside the U.S.

In 2000, 55% of McDonald’s restaurant additions were in the major markets, and we anticipate a similar percent for 2001. In the future, China, Italy, Mexico, South Korea and Spain, which together represented more than 15% of McDonald’s additions in 2000, are expected to represent a growing proportion of McDonald’s restaurant additions.

Almost 55% of Company-operated restaurants and nearly 85% of franchised restaurants were located in the major markets at the end of 2000. Franchisees and affiliates operated 76% of McDonald’s restaurants at year-end 2000. Other Brands’ restaurants were primarily Company-operated.

Satellite restaurants at December 31, 2000, 1999 and 1998 were as follows: U.S.999, 1,048, 1,090; Europe46, 44, 46; Asia/Pacific (primarily Japan)1,670, 1,350, 1,134; Latin America45, 41, 41; and Other (primarily Canada)291, 263, 237.

Share repurchases and dividends

The Company uses free cash flow and credit capacity to repurchase shares, as we believe this enhances shareholder value. At year-end 2000, the Company held approximately 356 million shares in treasury with a historical cost of $8.1 billion, but a market value of $12.1 billion.

In April 2000, the Company announced a $1 billion increase to its three-year share repurchase program, bringing the total program to $4.5 billion through 2001. The Company purchased approximately $2 billion or 56.7 million shares in 2000, which brought cumulative purchases under the program to $3.3 billion or 91.1 million shares. The Company expects to purchase the remaining $1.2 billion under the program in 2001.

In order 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. During 2000, the Company sold 16.8 million common equity put options and received premiums of $56 million, which were reflected in shareholders’ equity as a reduction of the cost of treasury stock purchased. At December 31, 2000, 21 million common equity put options were outstanding. During February 2001, 4.2 million common equity put options were exercised for $175 million. The remaining options expire at various dates through November 2001, with exercise prices between $30.11 and $32.26.

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 25 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. Beginning in 2000, cash dividends are declared and paid on an annual, instead of quarterly, 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 $700 million or 3% in 2000 and $1.2 billion or 6% in 1999. At year-end 2000 and 1999, more than 65% of consolidated assets were located in the major markets excluding Japan. Net property and equipment rose $723 million in 2000 and represented 79% 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
2000 1999 1998(1)
Return on average assets 15.9 % 16.6 % 16.4 %
Return on average common equity 21.6 20.8 19.5

(1) Excludes Made For You costs and the special charge. Including Made For You costs and the special charge, return on
average assets was 14.7% and return on average common equity was 17.1%.

In 2000, return on average assets declined primarily due to lower returns in emerging markets, which require substantial investment in infrastructure to support rapid restaurant growth, as well as investing in Other Brands. 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 that began in 1998, and the use of free cash flow for share repurchases. Also contributing to the increases in return on average common equity in 2000 and 1999 were increases in the average amount of common equity put options outstanding, which reduced average common equity.

Financings and market risk

The Company is exposed to the impact of interest-rate changes and foreign currency fluctuations. McDonald’s strives to minimize these risks by employing established risk management policies and procedures and by financing with debt in the currencies in which assets are denominated. See summary of significant accounting policies on page 22 for additional information regarding the use of financial instruments and the impact of new accounting rules on derivatives.

The Company uses global capital markets along with various techniques 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. Accordingly, foreign currency-denominated debt as a percent of total debt fluctuates based on market conditions. 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 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 $5.1 billion and $5.3 billion at year-end 2000 and 1999, respectively.

Debt highlights
2000 1999 1998
Fixed-rate debt as a percent of total debt 58 % 70 % 67 %
Weighted-average annual interest rate of total debt 5.8 5.9 6.6
Foreign currency-denominated debt as a percent of total debt 60 76 75
Total debt as a percent of total capitalization (total debt and total shareholders’ equity) 48 43 43

Moody’s and Standard & Poor’s have rated McDonald’s debt Aa2 and AA, respectively, since 1982. Fitch (formerly Duff & Phelps) began rating our debt in 1990 and currently rates it AA. A strong rating is important to the Company’s global development plans. The Company has not experienced, and does not expect to experience, difficulty in obtaining financing or refinancing existing debt. At year-end 2000, the Company and its subsidiaries had $1.9 billion available under committed line of credit agreements and $561 million under shelf registrations for future debt issuance. In early 2001, the Company reduced the amount available under committed line of credit agreements to $1.5 billion.

The Company manages its debt portfolio to mitigate the impact of changes in global 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 reduce the effect of fluctuating foreign currencies on reported results and to minimize the cash exposure of foreign currency royalty and other payments received in the U.S. In addition, where practical, McDonald’s restaurants purchase goods and services in local currencies, resulting in natural hedges, and the Company typically finances in local currencies, creating economic hedges.

The Company’s exposure is diversified among a broad basket of currencies. At year-end 2000 and 1999, 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 2000 1999
Euro $1,185 $1,059
Canadian Dollars 763 797
British Pounds Sterling 638 669
Australian Dollars 329 394
Mexican Pesos 157 141
Brazilian Reais 115 124

The Company prepared sensitivity analyses of its financial instruments to determine the impact of hypothetical changes in interest rates and foreign currency exchange rates on the Company’s results of operations, cash flows and the fair value of its financial instruments. The interest-rate analysis assumed a one percentage point adverse change in interest rates on all financial instruments but did not consider the effects of the reduced level of economic activity that could exist in such an environment. The foreign currency rate analysis assumed that each foreign currency rate would change by 10% in the same direction relative to the U.S. Dollar on all financial instruments. However, the analysis did not include the potential impact on sales levels or local currency prices or the effect of fluctuating currencies on the Company’s anticipated foreign currency royalties and other payments received in the U.S. Based on the results of these analyses of the Company’s financial instruments, neither a one percentage point adverse change in interest rates from year-end 2000 levels nor a 10% adverse change in foreign currency rates from year-end 2000 levels would materially affect the Company’s results of operations, cash flows or the fair value of its financial instruments.

Other matters

Effects of changing pricesinflation

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 holdingsmany 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. The Euro is traded on currency exchanges and may be used in certain transactions, such as electronic payments. Beginning in January 2002, new Euro-denominated notes and coins will be issued, and legacy currencies will be withdrawn from circulation. The conversion to the Euro has eliminated currency exchange rate risk for transactions between the member countries, which for McDonald’s primarily consists of payments to suppliers. In addition, as we use foreign currency-denominated debt and derivatives to meet financing requirements and to minimize foreign currency risks, certain of these financial instruments are denominated in Euro.

McDonald’s has restaurants located in all member countries and has been preparing for the introduction of the Euro for the past several years. The Company currently is addressing the issues involved with the new currency, which include converting information technology systems, recalculating currency risk, recalibrating derivatives and other financial instruments, and revising processes for preparing accounting and taxation records. Based on the work to date, the Company does not believe the Euro conversion will have a significant impact on its financial position, results of operations or cash flows.

Forward-looking statements

Certain forward-looking statements are included in this report. They use such words as "may," "will," "expect," "believe," "plan" and other similar terminology. These statements reflect management’s current expectations regarding future events and operating performance and speak only as of the date of this report. 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, the effects of the Euro conversion, as well as changes in: global and local business and economic conditions; currency exchange (particularly the Euro) 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.

Item 7A. Quantitative and qualitative disclosures about market risk

Quantitative and qualitative disclosures about market risk are included in Part II, Item 7, pages 15 and 16 of this Form
10-K.

Item 8. Financial statements and supplementary data

Index to consolidated financial statements
Page
reference
Consolidated statement of income for each of the three years in the period ended December 31, 2000 18
Consolidated balance sheet at December 31, 2000 and 1999 19
Consolidated statement of cash flows for each of the three years in the period ended December 31, 2000 20
Consolidated statement of shareholders’ equity for each of the three years in the period ended December 21
31, 2000
Notes to consolidated financial statements (Financial comments) 22-28
Quarterly results (unaudited) 28
Management’s report 29
Report of independent auditors 29

Consolidated statement of income

IN MILLIONS, EXCEPT PER SHARE DATA Years ended December 31, 1999 1998
2000
Revenues
Sales by Company-operated restaurants $10,467.0 $ 9,512.5 $ 8,894.9
Revenues from franchised and affiliated restaurants 3,776.0 3,746.8 3,526.5
Total revenues 14,243.0 13,259.3 12,421.4
Operating costs and expenses
Food and packaging 3,557.1 3,204.6 2,997.4
Payroll and employee benefits 2,690.2 2,418.3 2,220.3
Occupancy and other operating expenses 2,502.8 2,206.7 2,043.9
Total Company-operated restaurant expenses 8,750.1 7,829.6 7,261.6
Franchised restaurants–occupancy expenses 772.3 737.7 678.0
Selling, general & administrative expenses 1,587.3 1,477.6 1,458.5
Other operating income, net (196.4 ) (124.1 ) (60.2 )
Made For You costs 18.9 161.6
Special charge 160.0
Total operating costs and expenses 10,913.3 9,939.7 9,659.5
Operating income 3,329.7 3,319.6 2,761.9
Interest expense, net of capitalized interest of $16.3, 429.9 396.3 413.8
$14.3 and $17.9
Nonoperating expense, net 17.5 39.2 40.7
Income before provision for income taxes 2,882.3 2,884.1 2,307.4

Provision for income taxes 905.0 936.2 757.3
Net income $ 1,977.3 $ 1,947.9 $ 1,550.1
Net income per common share $ 1.49 $ 1.44 $ 1.14
Net income per common share–diluted 1.46 1.39 1.10
Dividends per common share $ .22 $ .20 $ .18
Weighted-average shares 1,323.2 1,355.3 1,365.3
Weighted-average shares–diluted 1,356.5 1,404.2 1,405.7

The accompanying financial comments are an integral part of the consolidated financial statements.

Consolidated balance sheet

IN MILLIONS, EXCEPT PER SHARE DATA December 31, 2000 1999
Assets
Current assets
Cash and equivalents $ 421.7 $ 419.5
Accounts and notes receivable 796.5 708.1
Inventories, at cost, not in excess of market 99.3 82.7
Prepaid expenses and other current assets 344.9 362.0
Total current assets 1,662.4 1,572.3
Other assets
Investments in and advances to affiliates 824.2 1,002.2
Intangible assets, net 1,443.4 1,261.8
Miscellaneous 705.9 822.4
Total other assets 2,973.5 3,086.4
Property and equipment
Property and equipment, at cost 23,569.0 22,450.8
Accumulated depreciation and amortization (6,521.4 ) (6,126.3 )
Net property and equipment 17,047.6 16,324.5
Total assets $21,683.5 $20,983.2
Liabilities and shareholders’ equity
Current liabilities
Notes payable $ 275.5 $ 1,073.1
Accounts payable 684.9 585.7
Income taxes 92.2 117.2
Other taxes 195.5 160.1
Accrued interest 149.9 131.4
Other accrued liabilities 608.4 660.0
Current maturities of long-term debt 354.5 546.8
Total current liabilities 2,360.9 3,274.3
Long-term debt 7,843.9 5,632.4
Other long-term liabilities and minority interests 489.5 538.4
Deferred income taxes 1,084.9 1,173.6
Common equity put options 699.9 725.4
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 16.6 16.6
million shares
Additional paid-in capital 1,441.8 1,288.3
Unearned ESOP compensation (115.0 ) (133.3 )
Retained earnings 17,259.4 15,562.8
Accumulated other comprehensive income (1,287.3 ) (886.8 )
Common stock in treasury, at cost; 355.7 and 309.8 million shares (8,111.1 ) (6,208.5 )
Total shareholders’ equity 9,204.4 9,639.1
Total liabilities and shareholders’ equity $21,683.5 $20,983.2

The accompanying financial comments are an integral part of the consolidated financial statements.

Consolidated statement of cash flows

IN MILLIONS Years ended December 31, 1999 1998
2000
Operating activities
Net income $ 1,977.3 $ 1,947.9 $ 1,550.1
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 1,010.7 956.3 881.1
Deferred income taxes 60.5 52.9 35.4
Changes in operating working capital items
Accounts receivable (67.2 ) (81.9 ) (29.9 )
Inventories, prepaid expenses and other current (29.6 ) (47.7 ) (18.1 )
assets
Accounts payable 89.7 (23.9 ) (12.7 )
Taxes and other liabilities (45.8 ) 270.4 337.5
Other (244.1 ) (65.1 ) 22.9
Cash provided by operations 2,751.5 3,008.9 2,766.3
Investing activities
Property and equipment expenditures (1,945.1 ) (1,867.8 ) (1,879.3 )
Purchases of restaurant businesses (425.5 ) (340.7 ) (131.0 )
Sales of restaurant businesses and property 302.8 262.4 191.5
Other (144.8 ) (315.7 ) (129.4 )
Cash used for investing activities (2,212.6 ) (2,261.8 ) (1,948.2 )
Financing activities
Net short-term borrowings (repayments) 59.1 116.7 (604.2 )
Long-term financing issuances 2,381.3 902.5 1,461.5
Long-term financing repayments (761.9 ) (682.8 ) (594.9 )
Treasury stock purchases (2,023.4 ) (891.5 ) (1,089.8 )
Common stock dividends (280.7 ) (264.7 ) (239.5 )
Other 88.9 193.0 206.6
Cash used for financing activities (536.7 ) (626.8 ) (860.3 )
Cash and equivalents increase (decrease) 2.2 120.3 (42.2 )
Cash and equivalents at beginning of year 419.5 299.2 341.4
Cash and equivalents at end of year $ 421.7 $ 419.5 $ 299.2
Supplemental cash flow disclosures
Interest paid $ 469.7 $ 411.5 $ 406.5
Income taxes paid 854.2 642.2 545.9

The accompanying financial comments are an integral part of the consolidated financial statements.

Consolidated statement of shareholders’ equity

Common Accumulated Common stock
stock issued Additional Unearned other in treasury Total
paid-in ESOP Retained comprehensive shareholders’
IN MILLIONS, Shares Amount capital compensation earnings income Shares Amount equity
EXCEPT PER SHARE
DATA
Balance at 1,660.6 $ 16.6 $ 690.9 $ (171.3 ) $ 12,569.0 $ (470.5 ) (289.2 ) $ (3,783.1 ) $ 8,851.6
December 31,
1997
Net income 1,550.1 1,550.1
Translation
adjustments
(including tax (52.0 ) (52.0 )
benefits of
$84.2)
Comprehensive 1,498.1
income
Common stock
cash dividends
($.18 per share) (239.5 ) (239.5 )
ESOP loan 22.5 22.5
payment
Treasury stock (38.0 ) (1,161.9 ) (1,161.9 )
purchases

Common equity
put option
issuances and 20.8 20.8
expirations, net
Stock option
exercises and
other
(including tax 298.3 0.1 22.8 174.7 473.1
benefits of
$154.0)
Balance at 1,660.6 16.6 989.2 (148.7 ) 13,879.6 (522.5 ) (304.4 ) (4,749.5 ) 9,464.7
December 31,
1998
Net income 1,947.9 1,947.9
Translation
adjustments
(including taxes (364.3 ) (364.3 )
of $53.5)
Comprehensive 1,583.6
income
Common stock
cash dividends
($.20 per share) (264.7 ) (264.7 )
ESOP loan 15.8 15.8
payment
Treasury stock (24.2 ) (932.7 ) (932.7 )
purchases
Common equity
put option
issuances and (665.9 ) (665.9 )
expirations, net
Stock option
exercises and
other
(including tax 299.1 (0.4 ) 18.8 139.6 438.3
benefits of
$185.3)
Balance at 1,660.6 16.6 1,288.3 (133.3 ) 15,562.8 (886.8 ) (309.8 ) (6,208.5 ) 9,639.1
December 31,
1999
Net income 1,977.3 1,977.3
Translation
adjustments
(including taxes (400.5 ) (400.5 )
of $65.1)
Comprehensive 1,576.8
income
Common stock
cash dividends
($.22 per share) (280.7 ) (280.7 )
ESOP loan 20.1 20.1
payment
Treasury stock (56.7 ) (2,002.2 ) (2,002.2 )
purchases
Common equity
put option
issuances and 25.5 25.5
expirations, net
Stock option
exercises and
other
(including tax 153.5 (1.8 ) 10.8 74.1 225.8
benefits of
$80.3)
Balance at 1,660.6 $ 16.6 $ 1,441.8 $ (115.0 ) $ 17,259.4 $ (1,287.3 ) (355.7 ) $ (8,111.1 ) $ 9,204.4
December 31,
2000

The accompanying financial comments are an integral part of the consolidated financial statements.

Financial comments

Summary of significant accounting policies

Nature of business

The Company operates in the food service industry and primarily operates quick-service restaurant businesses under the McDonald’s brand. In addition, the Company operates other restaurant concepts: Aroma Cafi, Boston Market, Chipotle Mexican Grill and Donatos Pizza.

All restaurants are operated by the Company or, under the terms of franchise arrangements, by franchisees who are independent 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.

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): 2000$595.3; 1999$522.9; 1998$486.3.

Stock-based compensation

The Company accounts for stock options as prescribed by Accounting Principles Board Opinion No. 25 and includes pro forma information in the stock options footnote, as provided by Statement of Financial Accounting Standards (SFAS) No.123, Accounting for Stock-Based Compensation.

Property and equipment

Property and equipment are stated at cost, with depreciation and amortization provided using the straight-line method over the following estimated useful lives: buildingsup to 40 years; leasehold improvementsthe lesser of useful lives of assets or lease terms including option periods; and equipmentthree to 12 years.

Intangible assets

Intangible assets consist primarily of goodwill, which represents the excess of cost over the net tangible assets of acquired restaurant businesses. Intangible assets are amortized using the straight-line method over an average life of about 30 years.

Financial instruments

The Company uses derivatives to manage risk, not for trading purposes. Non-U.S. Dollar financing transactions generally are effective as hedges of either long-term investments in, or intercompany loans to, foreign subsidiaries and affiliates. Foreign currency translation adjustments from gains and losses on hedges of long-term investments are recorded in shareholders’ equity as other comprehensive income. Gains and losses related to hedges of intercompany loans offset the gains and losses on intercompany loans and are recorded in nonoperating expense, net.

Interest-rate exchange agreements are designated and effective to modify the Company’s interest-rate exposures. Net interest is accrued as either interest receivable or payable, with the offset recorded in interest expense. Gains or losses from the early termination of interest-rate exchange agreements are amortized as an adjustment to interest expense over the shorter of the remaining life of the interest-rate agreement or the underlying debt being hedged.

The Company purchases foreign currency options (with little or no initial intrinsic value) that are effective as hedges of anticipated foreign currency royalty and other payments received in the U.S. The premiums paid for these options are amortized over the option life and are recorded as nonoperating expense. Any realized gains on exercised options are deferred and recognized in the period in which the related royalty or other payment is received.

Forward foreign exchange contracts are also used to mitigate exposure on foreign currency royalty and other payments received from affiliates and subsidiaries. These contracts are marked to market with the resulting gains or losses recorded in nonoperating expense, net. In addition, forward foreign exchange contracts are used to hedge long-term investments in foreign subsidiaries and affiliates. These contracts are marked to market with the resulting gains or losses recorded in shareholders’ equity as other comprehensive income.

If a hedged item matures or is extinguished, or if a hedged anticipated royalty or other payment is no longer probable, the associated derivative is marked to market with the resulting gain or loss recognized immediately. The derivative is then redesignated as a hedge of another item or terminated.

In June 1998, the Financial Accounting Standards Board issued SFAS No.133, Accounting for Derivative Instruments and Hedging Activities, subsequently amended by SFAS Nos.137 and 138, which is required to be adopted in years beginning after June 15, 2000. The new rules will require the Company to recognize all derivatives on the balance sheet at fair value. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged item through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company will adopt the new rules effective January 1, 2001, and they will not have a material effect on the Company’s results of operations or financial position.

Common equity put options

During 2000, 1999 and 1998, the Company sold 16.8 million, 27.0 million and 7.3 million common equity put options, respectively, in connection with its share repurchase program. Premiums received are recorded in shareholders’ equity as a reduction of the cost of treasury stock purchased and were $56.0 million in 2000, $97.5 million in 1999 and $20.5 million in 1998. At December 31, 2000, 21.0 million common equity put options were outstanding. The options expire at various dates through November 2001 at exercise prices between $30.11 and $41.98. At December 31, 2000, the $699.9 million total exercise price of these outstanding options was classified in common equity put options, and the related offset was recorded in common stock in treasury, net of the premiums received.

Per common share information

Diluted net income per common share is calculated using net income divided by 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): 200033.3; 199948.9; 199840.4.

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.

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. The Company’s reportable segments are based on geographic area. All intercompany revenues and expenses are eliminated in computing revenues and operating income. Operating income includes the Company’s share of operating results of affiliates after interest expense 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): 2000$603.6; 1999$568.3; 1998$526.0.

The Other segment includes McDonald’s restaurant operations in Canada, the Middle East and Africa as well as results from Aroma Cafi, Boston Market, Chipotle Mexican Grill and Donatos Pizza.

Segment operating income has been restated for all years presented to break out corporate general & administrative expenses from the operating segments to be consistent with the way segment performance currently is evaluated by Company management. Corporate general & administrative expenses are now included as the corporate segment of operating income. These expenses are composed of home office support costs in areas such as facilities, finance, human resources, information technology, legal, supply chain management and training.

Corporate and U.S. segment assets, capital expenditures and depreciation and amortization also have been restated to conform to the new presentation. Corporate assets include corporate cash, investments, asset portions of financing instruments, home office facilities, deferred tax assets and certain intangibles.

IN MILLIONS 2000 1999 1998
U.S. $ 5,259.1 $ 5,093.0 $ 4,868.1
Europe 4,753.9 4,924.9 4,466.7
Asia/Pacific 1,987.0 1,832.3 1,633.2
Latin America 949.3 680.3 814.7
Other 1,293.7 728.8 638.7
Total revenues $ 14,243.0 $ 13,259.3 $ 12,421.4
U.S. $ 1,773.1 $ 1,653.3 $ 1,201.4 (1)
Europe 1,180.1 1,256.5 1,167.5
Asia/Pacific 441.9 421.9 359.9
Latin America 102.3 133.0 189.2
Other 94.1 117.4 120.3
Corporate (261.8 ) (262.5 ) (276.4 )
Total operating income $ 3,329.7 $ 3,319.6 $ 2,761.9 (1)
U.S. $ 7,876.7 $ 7,674.3 $ 7,397.8
Europe 7,083.7 6,966.8 6,932.1
Asia/Pacific 2,789.7 2,828.2 2,659.7
Latin America 1,855.6 1,477.5 1,339.6
Other 1,069.3 979.3 678.7
Corporate 1,008.5 1,057.1 776.5
Total assets $ 21,683.5 $ 20,983.2 $ 19,784.4
U.S. $ 468.6 $ 426.4 $ 392.4
Europe 797.6 881.8 870.2
Asia/Pacific 224.4 188.4 224.0
Latin America 245.7 213.2 236.8
Other 161.2 112.3 102.8
Corporate 47.6 45.7 53.1
Total capital expenditures $ 1,945.1 $ 1,867.8 $ 1,879.3
U.S. $ 417.6 $ 399.7 $ 375.9
Europe 296.5 305.2 268.0
Asia/Pacific 120.5 114.9 97.3
Latin America 69.4 45.5 42.9
Other 60.8 46.2 40.6
Corporate 45.9 44.8 56.4
Total depreciation and amortization $ 1,010.7 $ 956.3 $ 881.1

(1 ) Includes $161.6 million of Made For Your costs and the $160.0 million special
charge related to the home office productivity initiative.

Total long-lived assets, primarily property and equipment and intangibles, were (in millions): Consolidated2000$19,798.3; 1999$19,082.8; 1998$18,244.4. U.S. based2000$8,373.2; 1999$7,984.9; 1998$7,533.2.

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 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.

IN MILLIONS 2000 1999 1998
Minimum rents $ 1,465.3 $ 1,473.8 $ 1,440.9
Percent rent and service fees 2,247.0 2,208.8 2,026.9
Initial fees 63.7 64.2 58.7
Revenues from franchised
and affiliated restaurants $ 3,776.0 $ 3,746.8 $ 3,526.5

Future minimum rent payments due to the Company under existing franchise arrangements are:

Owned Leased
IN MILLIONS sites sites Total
2001 $ 927.5 $ 697.8 $ 1,625.3
2002 918.1 688.6 1,606.7
2003 902.2 675.9 1,578.1
2004 884.0 661.0 1,545.0
2005 861.0 640.0 1,501.0
Thereafter 7,284.7 5,682.6 12,967.3
Total minimum payments $ 11,777.5 $ 9,045.9 $ 20,823.4

At December 31, 2000, net property and equipment under franchise arrangements totaled $8.9 billion (including land of $2.7 billion) after deducting accumulated depreciation and amortization of $3.3 billion.

Income taxes

Income before provision for income taxes, classified by source of income, was as follows:

IN MILLIONS 2000 1999 1998
U.S. $ 1,280.6 $ 1,222.2 $ 804.3
Outside the U.S. 1,601.7 1,661.9 1,503.1
Income before provision for income taxes $ 2,882.3 $ 2,884.1 $ 2,307.4

The provision for income taxes, classified by the timing and location of payment, was as follows:

IN MILLIONS 2000 1999 1998
U.S. federal $ 361.1 $ 347.4 $ 267.8
U.S. state 77.0 68.9 71.4
Outside the U.S. 406.4 467.0 382.7
Current tax provision 844.5 883.3 721.9
U.S. federal 75.2 31.3 32.8
U.S. state 9.5 12.3 (6.9 )
Outside the U.S. (24.2 ) 9.3 9.5
Deferred tax provision 60.5 52.9 35.4
Provision for income taxes $ 905.0 $ 936.2 $ 757.3

Net deferred tax liabilities consisted of:

IN MILLIONS December 31, 1999
2000
Property and equipment basis differences $ 1,202.6 $ 1,200.0
Other 353.3 396.3
Total deferred tax liabilities 1,555.9 1,596.3
Deferred tax assets before valuation allowance(1) (646.9 ) (658.7 )
Valuation allowance 124.0 101.9
Net deferred tax liabilities(2) $ 1,033.0 $ 1,039.5

(1 ) Includes tax effects of loss carryforwards (in millions): 2000$129.4;
1999–$118.3, and foreign tax credit carryforwards: 2000–$41.2; 1999–$70.2.
(2 ) Net of current tax assets included in prepaid expenses and other current assets
in the consolidated balance sheet (in millions): 2000–$51.9; 1999–$134.1.

The statutory U.S. federal income tax rate reconciled to the effective income tax rates as follows:

2000 1999 1998
Statutory U.S. federal income tax rate 35.0 % 35.0 % 35.0 %
State income taxes, net of related
federal income tax benefit 1.9 1.8 1.8
Benefits and taxes related to
foreign operations (4.8 ) (4.4 ) (3.3 )
Other, net (.7 ) .1 (.7 )
Effective income tax rates 31.4 % 32.5 % 32.8 %

Deferred U.S. income taxes have not been provided on basis differences related to investments in certain foreign subsidiaries and affiliates. These basis differences were approximately $2.5 billion at December 31, 2000, and consisted primarily of undistributed earnings considered permanently invested in the businesses. Determination of the deferred income tax liability on these unremitted earnings is not practicable since such liability, if any, is dependent on circumstances existing if and when remittance occurs.

Made For You costs

During 1999, the Company completed the installation of the Made For You food preparation system in virtually all restaurants in the U.S. and Canada. As part of the plan to introduce this system, the Company provided financial incentives during 1999 and 1998 of up to $12,500 per restaurant to franchisees to defray the cost of equipment made obsolete as a result of converting to the new system. The Company also made additional payments in special cases where the conversion to Made For You was more extensive.

The Company incurred $18.9 million of Made For You costs in 1999 and $161.6 million in 1998, primarily consisting of incentive payments made to franchisees as well as accelerated depreciation on equipment replaced in Company-operated restaurants.

Special charge

In 1998, the Company recorded a $160.0 million pretax special charge related to the Company’s home office productivity initiative. The productivity plan was designed to improve staff alignment, focus and productivity and to reduce ongoing selling, general & administrative expenses in both the U.S. and corporate segments. As a result, the Company reduced home office staffing by approximately 500 positions, consolidated certain home office facilities and reduced other expenditures in a variety of areas. The special charge was composed of $85.8 million of employee severance and outplacement costs, $40.8 million of lease cancellation and other facilities-related costs, $18.3 million of costs for the write-off of technology investments made obsolete as a result of the productivity initiative and $15.1 million of other cash payments made in 1998. The initiatives identified in the home office productivity plan were completed as of December 31, 1999, and no significant adjustments were made to the original plan.

Debt financing

Line of credit agreements

At December 31, 2000, the Company had several line of credit agreements with various banks totaling $1.9 billion, all of which remained unused at year-end 2000. Subsequent to year end, the Company reduced these line of credit agreements to $1.5 billion, consisting of the following: a $750.0 million line with a renewable term of 364 days and fees of .04% 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 2006 with fees of .06% per annum on the total commitment; $250.0 million in lines expiring during 2001 and fees of .04% per annum on the total commitment; and a $25.0 million line with a renewable 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 $751.4 million at December 31, 2000; these were principally short term and denominated in various currencies at local market rates of interest. The weighted-average interest rate of short-term borrowings, composed of U.S. Dollar and Euro commercial paper and foreign currency bank-line borrowings, was 6.9% at December 31, 2000 and 6.1% at December 31, 1999.

Exchange agreements

The Company has entered into agreements for the exchange of various currencies, certain of which also provide for the periodic exchange of interest payments. These agreements expire through 2005 and relate primarily to the exchange of Euro. The notional principal is equal to the amount of foreign currency or U.S. Dollar principal exchanged at maturity and is used to calculate interest payments that are exchanged over the life of the agreement. The Company has also entered into interest-rate exchange agreements that expire through 2012 and relate primarily to Euro, U.S. Dollars and Japanese Yen. The net value of each exchange agreement based on its current spot rate was classified as an asset or liability. Net interest is accrued as either interest receivable or payable, with the offset recorded in interest expense.

The counterparties to these agreements consist of a diverse group of financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties, and adjusts positions as appropriate. The Company does not have significant exposure to any individual counterparty and has entered into master agreements that contain netting arrangements. The Company’s policy regarding agreements with certain counterparties is to require collateral in the event credit ratings fall below A- or in the event that aggregate exposures exceed certain limits as defined by contract. At December 31, 2000, no collateral was required of counterparties and the Company was not required to collateralize any of its obligations.

At December 31, 2000, the Company had purchased foreign currency options outstanding (primarily Euro, Japanese Yen and British Pounds Sterling) with a notional amount equivalent to $453.0 million. The unamortized premium related to these foreign currency options was $10.6 million, and there were no related deferred gains recorded as of year end. Forward foreign exchange contracts outstanding at December 31, 2000 (primarily British Pounds Sterling, Hong Kong Dollars and Euro) had a U.S. Dollar equivalent of $781.8 million.

Fair values
December 31, 2000
IN MILLIONS Carrying amount Fair value
Liabilities
Debt $8,154.7 $8,344.0
Notes payable 275.5 275.5
Foreign currency exchange agreements (1) 43.7 45.6
Total liabilities 8,473.9 8,665.1
Assets
Foreign currency exchange agreements (1) 39.6 39.2
Interest-rate exchange agreements (2) 16.3
Net debt $8,434.3 $8,609.6
Purchased foreign currency options $ 10.6 $ 16.9

(1) Gross notional amount equivalent to $462.6 million. (2) Notional amount equivalent to $2.9 billion.

The carrying amounts for cash and equivalents, notes receivable and forward foreign exchange contracts approximated fair value. No fair value was provided for noninterest-bearing security deposits by franchisees as these deposits are an integral part of the overall franchise arrangements.

The fair values of debt, notes payable obligations, foreign currency and interest-rate exchange agreements and foreign currency options were estimated using various pricing models or discounted cash flow analyses that incorporated quoted market prices. The Company has no current plans to retire a significant amount of its debt prior to maturity. Given the market value of its common stock and its significant real estate holdings, the Company believes that the fair value of its total assets was substantially higher than the carrying value at December 31, 2000.

ESOP loans and other guarantees

The Company has guaranteed and included in total debt at December 31, 2000, $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, 2000, which include $97.1 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 loans totaling $150.1 million at December 31, 2000.

Debt obligations

The Company has incurred debt obligations through public and private offerings and bank loans. The terms of most debt obligations contain restrictions on Company and subsidiary mortgages and long-term debt of certain subsidiaries. Under certain agreements, the Company has the option to retire debt prior to maturity, either at par or at a premium over par. The following table summarizes these debt obligations, including the effects of foreign currency and interest-rate exchange agreements.

Interest Amounts outstanding
rates(1)
December 31 December 31 Aggregate maturities for 2000 balances
Maturity
IN MILLIONS OF dates 2000 1999 2000 1999 2001 2002 2003 2004 2005 Thereafter
U.S. DOLLARS
Fixed–original 6.8 % 6.9 % $2,793.5 $3,008.1
issue(2)
Fixed–converted
via
exchange 6.1 6.2 (351.5 ) (1,773.1 )
agreements(3)
Floating 6.6 6.7 914.1 470.7
Total 2001–2037 3,356.1 1,705.7 $ 635.1 $ 87.6 $ 43.9 $100.4 $ 292.1 $2,197.0
U.S. Dollars
Fixed 5.7 5.6 654.4 1,941.2

Floating 4.8 3.6 1,609.6 609.4
Total Euro 2001–2012 2,264.0 2,550.6 417.4 42.9 135.3 334.7 282.5 1,051.2
Fixed 6.2 7.6 524.6 596.5
Floating 7.2 6.0 233.3 145.9
Total British 2001–2020 757.9 742.4 39.0 45.1 148.7 223.4 301.7
Pounds Sterling
Fixed 5.5 5.4 337.3 228.4
Floating 6.7 4.8 25.7 15.6
Total other 2001–2005 363.0 244.0 69.4 35.2 38.6 12.7 207.1
European
currencies(4)
Fixed 2.7 3.5 589.0 488.1
Floating 0.5 0.1 262.4 298.5
Total 2001–2030 851.4 786.6 43.7 130.1 677.6
Japanese Yen
Fixed 8.6 8.1 316.0 415.0
Floating 7.6 6.4 453.5 503.0
Total other 2001–2011 769.5 918.0 626.4 13.9 90.5 32.3 6.4
Asia/Pacific
currencies(5)
Fixed 16.0 6.9 42.2 13.2
Floating 7.3 5.2 30.2 86.3
Total other 2001–2021 72.4 99.5 43.7 12.9 8.6 4.8 0.5 1.9
currencies
Debt obligations
including the
net
effects of
foreign currency
and
interest-rate 8,434.3 7,046.8 1,874.7 237.6 465.6 484.9 1,135.7 4,235.8
exchange
agreements
Short-term
obligations
supported by
long-term line (1,250.0 ) 750.0 500.0
of credit
agreements
Net asset
positions of
foreign currency
exchange
agreements
(included in
miscellaneous 39.6 205.5 5.3 5.9 5.9 22.1 0.4
other assets)
Total debt $8,473.9 $7,252.3 $ 630.0 $243.5 $1,221.5 $507.0 $1,136.1 $4,735.8
obligations

(1 ) Weighted-average effective rate, computed on a semiannual basis. (2 ) Includes $500 million of debentures with maturities in 2027, 2036 and 2037, which are subordinated to senior debt
and which provide for the ability to
defer interest payments up to five years under certain conditions.
(3 ) A portion of U.S. Dollar fixed-rate debt effectively has been converted into other currencies and/or into
floating-rate debt through the use of exchange
agreements. The rates shown reflect the fixed rate on the receivable portion of the exchange agreements. All other
obligations in this table reflect the
net effects of these and other exchange agreements.
(4 ) Primarily consists of Swiss Francs.
(5 ) Primarily consists of Australian Dollars and New Taiwan Dollars.

Leasing arrangements

At December 31, 2000, the Company was lessee at 6,055 restaurant locations through ground leases (the Company leases the land and the Company or franchisee owns the building) and at 6,984 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
2001 $ 748.3 $ 63.3 $ 811.6
2002 735.3 55.1 790.4
2003 705.8 46.4 752.2
2004 676.2 38.9 715.1
2005 623.5 34.8 658.3
Thereafter 6,018.7 221.0 6,239.7
Total minimum payments $ 9,507.8 $ 459.5 $ 9,967.3

Rent expense was (in millions): 2000$886.4; 1999$796.3; 1998$723.0. These amounts included percent rents in excess of minimum rents (in millions): 2000$133.0; 1999$117.1; 1998$116.7.

Property and equipment

IN MILLIONS December 31, 2000 1999
Land $ 3,932.7 $ 3,838.6
Buildings and improvements on owned land 8,250.0 7,953.6
Buildings and improvements on leased land 7,513.3 7,076.6
Equipment, signs and seating 3,172.2 2,906.6
Other 700.8 675.4
23,569.0 22,450.8
Accumulated depreciation and amortization (6,521.4 ) (6,126.3 )
Net property and equipment $ 17,047.6 $ 16,324.5

Depreciation and amortization expense was (in millions): 2000$900.9; 1999$858.1; 1998$808.0.

Employee benefit plans

The Company’s Profit Sharing Program 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. 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 six other investment alternatives. The Company’s matching contributions and ESOP allocations are generally invested in McDonald’s common stock.

Total U.S. costs for the Profit Sharing Program, including related nonqualified benefits, were (in millions): 2000$49.6; 1999$49.4; 1998$63.3.

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): 2000$38.1; 1999$37.2; 1998$37.5.

Other postretirement benefits and postemployment benefits, excluding severance benefits related to the 1998 home office productivity initiative, were immaterial.

Stock options

At December 31, 2000, the Company had three stock-based compensation plans, two for employees and one for 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. At December 31, 2000, the number of shares of common stock reserved for issuance under the plans was 185.3 million, including 9.5 million shares available for future grants.

A summary of the status of the Company’s plans as of December 31, 2000, 1999 and 1998, and changes during the years then ended, is presented in the following table.

2000 1999 1998
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 164.7 $ 23.06 164.0 $ 19.32 156.3 $ 16.79
Granted 26.5 35.16 25.4 40.35 33.7 25.90
Exercised (10.8 ) 13.68 (18.8 ) 13.89 (22.8 ) 12.00
Forfeited (4.6 ) 27.81 (5.9 ) 18.01 (3.2 ) 21.06
Outstanding at
end of year 175.8 $ 25.34 164.7 $ 23.06 164.0 $ 19.32
Options
exercisable at
end of year 79.3 69.4 64.4

Options granted each year were 2.0%, 1.9% and 2.5% of weighted-average common shares outstanding for 2000, 1999 and 1998, representing grants to approximately 14,100, 12,700 and 11,500 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 about $7.00. The average option exercise price has consistently exceeded the average cost of treasury stock issued for option exercises because the Company prefunds the program through share repurchases. As a result, stock option exercises have generated additional capital, since cash received from employees has exceeded the Company’s average acquisition cost of treasury stock. In addition, stock option exercises resulted in $419.6 million of tax benefits for the Company during the three years ended December 31, 2000. The following table presents information related to options outstanding and options exercisable at December 31, 2000, based on ranges of exercise prices.

December 31, 2000
Options outstanding Options exercisable
Weighted-
average
remaining Weighted- Weighted-
Range Number contractual average Number average
of exercise of options life exercise of options exercise
prices IN MILLIONS IN YEARS price IN MILLIONS price
$ 7 to 9 3.8 0.8 $ 8.02 3.8 $ 8.02
10 to 15 32.1 2.6 13.48 27.9 13.26
16 to 23 37.1 5.4 20.40 22.2 19.75
24 to 34 53.7 6.5 25.59 19.1 25.26
35 to 46 49.1 8.9 37.86 6.3 40.44
$ 7 to 46 175.8 6.1 $ 25.34 79.3 $ 19.86

Pro forma net income and net income per common share were determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No.123. For pro forma disclosures, the options’ estimated fair value was amortized over their expected seven-year life. SFAS No.123 does not apply to grants before 1995. As a result, the pro forma disclosures do not include a full seven years of grants, and therefore, may not be indicative of anticipated future disclosures. The fair value for these options was estimated at the date of grant using an option pricing model. The model was designed to estimate the fair value of exchange-traded options 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 2000 1999 1998
Net income–pro forma IN MILLIONS $ 1,842.4 $ 1,844.0 $ 1,474.0
Net income per common share–
pro forma
Basic 1.39 1.36 1.08
Diluted 1.36 1.31 1.05
Weighted-average fair value
per option granted 14.11 14.06 8.75
Assumptions 2000 1999 1998
Expected dividend yield .65 % .65 % .65 %
Expected stock price volatility 38.8 % 22.9 % 18.0 %
Risk-free interest rate 6.39 % 5.72 % 5.56 %
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 2000 1999 2000 1999 2000 1999 2000 1999
SHARE DATA
Systemwide sales $ 9,924.5 $ 9,749.7 $ 10,512.4 $ 9,997.8 $ 10,237.6 $ 9,920.4 $ 9,506.7 $ 8,822.8
Revenues
Sales by $ 2,676.6 $ 2,424.9 $ 2,768.5 $ 2,474.4 $ 2,582.0 $ 2,434.1 $ 2,439.9 $ 2,179.1
Company-operated
restaurants
Revenues from franchised
and affiliated 913.0 948.0 980.5 969.8 978.6 973.0 903.9 856.0
restaurants
Total revenues 3,589.6 3,372.9 3,749.0 3,444.2 3,560.6 3,407.1 3,343.8 3,035.1
Company-operated margin 404.2 414.1 470.9 458.8 435.0 448.9 406.8 361.1
Franchised margin 721.1 756.3 788.5 783.0 784.0 792.6 710.1 677.2
Operating income 774.0 816.8 910.8 907.7 876.3 883.5 768.6 711.6
Net income $ 452.0 $ 486.2 $ 548.5 $ 540.9 $ 525.9 $ 518.1 $ 450.9 $ 402.7
Net income per common $ .35 $ .36 $ .42 $ .40 $ .40 $ .38 $ .34 $ .30
share
Net income per common .34 .35 .41 .39 .39 .37 .33 .29
share–diluted
Dividends per common $ — $ .04875 $ .215 $ .04875 $ — $ .04875 $ — $ .04875
share (1)
Weighted-average shares 1,307.0 1,353.3 1,315.6 1,354.7 1,327.1 1,355.5 1,343.4 1,357.3
Weighted-average 1,335.8 1,401.4 1,346.0 1,403.1 1,365.5 1,405.6 1,383.8 1,409.2
shares–diluted
Market price per common
share
High $ 34.50 $ 49.56 $ 34.25 $ 45.25 $ 39.94 $ 47.06 $ 43.63 $ 47.38
Low 27.56 38.31 26.38 38.94 31.00 37.75 29.81 35.94
Close 34.00 40.31 30.19 43.25 32.94 41.13 37.38 45.31

(1) Beginning in 2000, dividends are declared and paid on an annual, rather than quarterly, basis. The annual dividend
amount for 1999 was $ .195.

Management’s report

Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements and financial comments appearing in this annual report. The financial statements were prepared in accordance with accounting principles generally accepted in the U.S. and include certain amounts based on management’s judgment and best estimates. Other financial information presented in the annual report is consistent with the financial statements.

The Company maintains a system of internal controls over financial reporting, including safeguarding of assets against unauthorized acquisition, use or disposition, which is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation of reliable published financial statements and asset safeguarding. The system includes a documented organizational structure and appropriate division of responsibilities; established policies and procedures that are communicated throughout the Company; careful selection, training and development of our people; and utilization of an internal audit program. Policies and procedures prescribe that the Company and all employees are to maintain high standards of proper business practices throughout the world.

There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation and safeguarding of assets. Furthermore, the effectiveness of an internal control system can change with circumstances. The Company believes 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 periodically meets with the Committee to discuss accounting, auditing and financial reporting matters.

McDONALD’S CORPORATION January 24, 2001

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, 2000 and 1999, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the U.S.