ITEM 1. BUSINESS
1. General
Kerr Group, Inc. (the "Registrant"), a Delaware corporation which was founded in 1903, currently operates in two business segments: the Plastic Products segment and the Consumer Products segment.
Operations in the Plastic Products segment include the manufacture and sale of a variety of plastic products, including child- resistant closures, tamper-evident closures, prescription packaging products, jars, other closures and containers and the sale of glass prescription products (the "Plastic Products Business"). Operations in the Consumer Products segment include the manufacture and sale of caps and lids and the sale of glass jars and a line of pickling spice and pectin products for home canning (the "Home Canning Supplies Business"), which together with the sale of other related products, including iced tea tumblers and beverage mugs, constitutes the "Consumer Products Business." The Plastic Products Business and the Consumer Products Business are referred to herein as "Continuing Businesses".
a. Principal Products and Markets; Sales and Customers
The Plastic Products segment accounted for approximately 77% of the Registrant's total net sales in 1993. Plastic closures of the Plastic Products Segment are sold to customers in the pharmaceutical, food, distilled spirits, toiletries and cosmetics and household chemical industries. Plastic and glass prescription products are sold to drug wholesalers, drug chains and independent pharmacists. Plastic bottles and jars are sold to customers in the pharmaceutical and toiletries and cosmetics industries. Plastic products are sold nationally, principally by the Registrant's sales force.
The Consumer Products Business accounted for approximately 23% of the Registrant's total net sales in 1993. The Home Canning Supplies Business represents substantially all of the Consumer Products Business. The Consumer Products Business sells its products primarily through food brokers to grocery retailers, food wholesalers and mass merchandisers.
No customer accounted for more than 10% of the Registrant's net sales in 1993.
b. Competition
Competition in the markets in which the Plastic Products Business operates is highly fragmented and the Registrant has a number of large competitors with respect to its Plastic Products Business who compete for sales on the basis of price, service and quality of product. The Registrant believes that it is one of the three largest manufacturers of child-resistant plastic closures. The Registrant has one major competitor in the prescription products business, who has substantially larger market share than the Registrant. The Registrant also believes it is the largest manufacturer of plastic closures incorporating a tamper-evident feature for the liquor market and that it is one of the leading suppliers of single and double walled jars to the personal care and cosmetic markets.
The Registrant's one major competitor in the Home Canning Supplies Business is Alltrista Corporation. The Registrant believes it has a significant share of the market for home canning caps, lids and jars.
c. Backlog
The Registrant does not believe that recorded sales backlog is a significant factor in its business.
d. Raw Materials and Supplies; Fuel and Energy Matters
The primary raw materials used by the Registrant's Plastic Products Business are resins. The Registrant has historically been able to obtain adequate supplies of these items from a number of sources. However, since resins are derived from petroleum or fossil fuel, shortages of petroleum or fossil fuel could affect the supply of resins. From time to time, the Registrant has experienced increases in the cost of resins. To the extent that the Registrant is unable to reflect such price increases in the price for products manufactured by it, increases in the cost of resins could have a significant impact on the
results of the Registrant's operations. Currently, a majority of the sales of Plastic Products are made pursuant to agreements that provide for increases in the cost of resin to be passed on to the customer.
The Registrant purchases glass jars for its Home Canning Business from a single supplier under a multi-year contract. The Registrant believes that it could obtain adequate supplies of glass jars from alternate sources at reasonable prices if its current supply was interrupted. In addition to glass jars, the primary raw material used by the Registrant's Home Canning Supplies Business in the manufacture of its caps and lids is tin-plate. During 1993, the Registrant was able to obtain adequate supplies of these items from a number of sources.
e. Product Development, Engineering, Patents and Licensing
The Registrant carries on a product development and engineering program with respect to its Plastic Products Business. Expenditures for such programs during the years ended December 31, 1993, 1992 and 1991 were approximately $2,000,000, $1,400,000 and $1,300,000, respectively.
Although the Registrant owns a number of United States patents, including patents for its tamper-evident closures and certain of its child-resistant closures, it is of the opinion that no one or combination of these patents is of material importance to its business. The Registrant has granted licenses on some of its patents, although the income from these sources is not material.
f. Environmental Matters; Legislation
Several states have enacted recycling laws which require consumers to recycle certain items including containers. These mandatory recycling laws are not expected to have an adverse effect on the Registrant's business.
The Registrant is subject to laws and regulations governing the protection of the environment, disposal of waste, discharges into water and emissions into the atmosphere. The Registrant's expenditures for environmental control equipment in each of the last three years have not been material and the standards required by such regulations have not significantly affected the Registrant's operations.
g. Employees
As of December 31, 1993, the Registrant had approximately 1,100 employees, of which approximately 280 were office, supervisory and sales personnel.
h. Seasonality
The Registrant's sales and earnings are usually higher in the second and third calendar quarters and lower in the first and fourth calendar quarters. Most of the sales by the Home Canning Supplies Business occur in the second and third calendar quarters. In addition, substantially all returns of home canning supplies occur in the fourth calendar quarter of each year. Because of the foregoing factors, the Registrant generally records a low level of profitability in the first and fourth calendar quarters. Demand for home canning supplies is adversely affected by poor crop growing conditions, such as occurred in 1993.
The Registrant's Home Canning Supplies Business normally manufactures its inventory of caps and lids in anticipation of expected orders, and, consistent with practice followed in the industry, grants extended payment terms to home canning customers and accepts the return of unsold home canning merchandise in the fourth calendar quarter of each year.
i. Working Capital
In general, the working capital practices followed by the Registrant are typical of the businesses in which it operates. The seasonal nature of the Registrant's Home Canning Supplies Business requires periodic short-term borrowing by the Registrant.
As of December 31, 1993, the Registrant had two unsecured $6,000,000 lines of credit with two banks to provide for the seasonal working capital needs of the Company. One of the lines of credit is committed through October 28, 1994 with borrowings to bear interest at either the prime rate of the lender or, alternatively, Eurodollar rate plus 2%. In addition, a facility fee of 0.5% per annum is charged on the unused amount of the commitment. The other line of credit is committed through September 30, 1994 with borrowings to bear interest at the prime rate of the lender. A facility fee of 0.75% per annum is charged on the total amount of this commitment. The lines of credit provide the Registrant with a source of working capital which the
Registrant believes will be sufficient to meet its anticipated needs.
2. The Discontinued Businesses
a. The Metal Crown Business
On December 11, 1992, the Registrant sold substantially all of its assets (the "Sale of the Metal Crown Assets") relating to the manufacture and sale of metal crowns for beer and beverage bottles (the "Metal Crown Business") to Crown Cork & Seal Company, Inc. ("Crown Cork") pursuant to the terms of an asset purchase agreement for approximately $7,200,000 in cash. Included among the assets of the Metal Crown Business sold to Crown Cork were essentially all of the assets of the Registrant's Arlington, Texas plant. The Sale of the Metal Crown Assets was more fully described in the Registrant's Current Report on Form 8-K dated December 11, 1992 filed with the Securities and Exchange Commission.
As a result of the Sale of the Metal Crown Assets, the Registrant no longer operates its Metal Crown Business.
b. The Commercial Glass Container Business
On February 28, 1992, the Registrant consummated the sale of substantially all of its assets (the "Sale of the Glass Container Assets") relating to the manufacture and sale of glass containers (the "Commercial Glass Container Business") to Ball Corporation pursuant to the terms of an asset purchase agreement for approximately $68,000,000 in cash. The Sale of the Glass Container Assets was more fully described in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (the "1991 10-K").
As a result of the Sale of the Glass Container Assets, the Registrant no longer operates its Commercial Glass Container Business.
3. Segment Information
The Registrant's 1993 Annual Report to Stockholders contains on pages 29 and 30 additional financial information regarding each of the Registrant's two industry segments for each of the last three fiscal years required by Item 1 and such information is incorporated herein by reference. The Registrant's 1993 Annual Report to Stockholders contains on
pages 34 through 36 Management's Discussion and Analysis of Financial Condition and Results of Operations and such information is incorporated herein by reference.
ITEM 2.

ITEM 2. PROPERTIES
The Registrant's manufacturing activities with respect to its Continuing Businesses are conducted at the five facilities described in the following table.
The Lancaster, Pennsylvania and Ahoskie, North Carolina facilities are owned by the Registrant. The Chicago, Illinois; Jackson, Tennessee and the Santa Fe Springs, California facilities are leased by the Registrant.
The Registrant's principal executive offices are located at 1840 Century Park East, Los Angeles, California 90067, in approximately 26,000 square feet of leased space. In addition, the Registrant rents three area sales offices and one warehouse.
During 1994, the Registrant will relocate its home canning cap and lid manufacturing operations from Chicago, Illinois to a new, leased 168,000 square foot manufacturing
facility in Jackson, Tennessee and permanently cease operations in its leased facility in Chicago.
In the opinion of the Registrant's management, its manufacturing facilities are suitable and adequate for the purposes for which they are being used.
The Registrant owns land and buildings used in connection with a former glass container manufacturing plant that are being held for sale. In addition, pursuant to a sublease dated January 6, 1992, Fluidmaster, Inc., a California corporation, subleases a 28,000 square foot manufacturing facility located in Santa Fe Springs, California from a wholly-owned subsidiary of the Registrant. Prior to 1992, the Registrant manufactured custom molded plastic parts at this facility.
In 1993, the Registrant's plastic products manufacturing facilities operated at approximately 83% of capacity, and the home canning cap and lid manufacturing facility operated at approximately 76% of capacity.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
As the Registrant reported in its Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, in February 1986, the Registrant was advised by the United States Environmental Protection Agency ("EPA") that Phoenix Closures, Inc. ("Phoenix") was one of several companies which disposed of wastes at the American Chemical Services ("ACS") site located near Griffith, Indiana. The EPA indicated that the wastes were disposed of by Phoenix's Chicago plant between 1955 and 1975. The Registrant has advised the EPA that it did not lease the Chicago plant during the period from 1955 to 1975. The Registrant has also advised Phoenix of its responsibilities with respect to environmental matters, including the environmental matters at the ACS site, under the lease relating to the Chicago plant.
As the Registrant reported in its Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, in March 1986, the Registrant and other parties were designated by the EPA as potentially responsible parties ("PRPs") responsible for the cleanup of certain hazardous wastes that have been disposed of at the Wayne Waste Oil ("WWO") site located near Columbia City, Indiana. In October 1986, the Registrant and other PRPs entered into a Consent Order with the EPA which allowed the PRPs to
complete a Remedial Investigation and Feasibility Study ("RI/FS") for the WWO site. In March 1990, the EPA issued a Record of Decision ("ROD") for the site. The ROD documents the EPA's cleanup plan for the site, which includes capping the former municipal landfill, groundwater extraction and treatment, and soil vapor extraction. On July 20, 1992, a Consent Decree between the EPA and the PRPs at the site was entered in the United States District Court for the Northern District of Indiana, captioned United States v. Active Products Corp., No.-00247. Based upon the Registrant's percentage share of the total amount of wastes disposed of at the WWO site, the Registrant estimates its share of the costs under the Consent Decree will be approximately $109,000. A reserve has been established for such costs.
As the Registrant reported in its Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, on April 12, 1990, the State of New Jersey, Department of Environmental Protection and Energy ("NJDEPE"), filed a lawsuit in the United States District Court for the District of New Jersey against the Registrant, among others, entitled State of New Jersey, Department of Environmental Protection v. Gloucester Environmental Management Services, Inc., et al., No. 84-0152 (D.N.J.). The suit alleges that the Registrant was a "generator" of hazardous wastes and other hazardous substances which were disposed of at the Gloucester Environmental Management Services, Inc. ("GEMS") facility in the Township of Gloucester. The suit seeks cleanup costs, compensatory and treble damages, and a declaration that the Registrant and others are responsible for NJDEPE's past and future response costs at the GEMS site. On March 27, 1990, NJDEPE issued a Directive to the Registrant and other parties pursuant to the New Jersey Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq. Pursuant to the Directive, the Registrant and other parties have been ordered to undertake the second phase of remedial action at the site, including the construction and operation of a groundwater treatment system and operation of the remedial action performed in the first phase, and to reimburse NJDEPE's alleged past and future response costs. The estimated cost of second phase remedial action related to the GEMS site is approximately $20 million. The amount that the NJDEPE is seeking as reimbursement for past costs and damages is approximately $10 million. Notwithstanding the issuance of the Directive by the NJDEPE, the Registrant believes that it has no material liability with respect to the GEMS site because the only reason it has been named as a defendant (there are over 550 named defendants) is that a transporter that was used by the Registrant
is known to have disposed of waste at the site. However, there is no evidence that any waste disposed of at the site by such transporter was waste of the Registrant and the Registrant has a motion for summary judgment pending in which it seeks dismissal from the case on these grounds. If such motion is granted, the Registrant would have a good faith basis to not comply with the Directive. The Registrant does not believe that any of its waste was disposed of at the site. One of the Registrant's insurance carriers has agreed to defend the current lawsuit and has funded the Registrant's participation in settlement efforts, which may result in the Registrant's dismissal from the lawsuit for a payment of approximately $100,000. Participation in the settlement will not be considered an admission of liability for the disposal of waste at the site. A reserve has been established for such costs.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions and offices held, and a brief account of the business experience during the past five years of each executive officer of the Registrant.
Business Experience
Roger W. Norian has served in an executive capacity with the Registrant for more than the past five years.
Norman N. Broadhurst joined the Registrant in 1988 as Senior Vice President, General Manager, Consumer Products. Prior to that time he was President and Chief Operating Officer of the Famous Amos Chocolate Chip Cookie Corporation and Vice President, Marketing, Beatrice Companies, Inc.
Robert S. Reeves has served in an executive capacity with the Registrant for more than the past five years.
D. Gordon Strickland has served in an executive capacity with the Registrant for more than the past five years.
J. Stephen Grassbaugh has served in an executive capacity with the Registrant for more than the past five years.
John F. Thelen joined the Registrant in 1993 as Vice President, Employee Relations. Prior to that time he was Vice President, Compensation, Benefits and Human Resource Information Systems of Mattel, Inc.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's Annual Report to Stockholders for the year ended December 31, 1993, contains on page 12 the information required by Item 5 of Form 10-K and such information is incorporated herein by this reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1993, contains on pages 32 and 33 the information required by Item 6 of Form 10-K and such information is incorporated herein by this reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1993, contains on pages 34 through 36 the information required by Item 7 of Form 10-K and such information is incorporated herein by this reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1993, contains on pages 12 through 31 the information required by Item 8 of Form 10-K and such information is incorporated herein by this reference.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by Item 10 of Form 10-K is included in a separate item captioned "Executive Officers of the Registrant" in Part I of this Form 10-K. With respect to reports required to be filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 regarding the Registrant's common stock, par value $.50 per share, the Registrant believes that, based solely on a review by the Registrant of copies of such reports received by it, during its fiscal year 1993, all filing requirements of Section 16(a) with respect to its common stock were complied with.
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 26, 1994 contains on pages 2 through 6 the remaining information required by Item 10 of Form 10-K and such information is incorporated herein by this reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 26, 1994 contains on pages 7 through 10 the information required by Item 11 of Form 10-K, and such information is incorporated herein by this reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 26, 1994 contains on pages 2 through 4 the information required by Item 12 of Form 10-K, and such information is incorporated herein by this reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 26, 1994 contains on page 12 the information required by Item 13 of Form 10-K, and such information is incorporated herein by this reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. (i) Financial Statements
The Financial Statements and related financial data contained in the Registrant's Annual Report to Stockholders for the year ended December 31, 1993, on pages 13 through 33 thereof and the Independent Auditors' Report on page 12 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1993, are incorporated herein by reference. With the exception of information specifically incorporated by reference, however, the Registrant's Annual Report to Stockholders for the year ended December 31, 1993 is not to be deemed filed as a part of this report.
Consolidated Financial Statements:
Consolidated Statements of Earnings (Loss) for the years ended December 31, 1993, 1992 and 1991.
Consolidated Balance Sheets as of December 31, 1993 and 1992.
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991.
Consolidated Statements of Common Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991.
Notes to Consolidated Financial Statements.
In addition to such Consolidated Financial Statements and Independent Auditors' Report, the following are included herein:
Independent Auditors' Report on Supporting Schedules, page 21.
Schedules for the three years ended December 31, 1993:
All other Schedules have been omitted as inapplicable, or not required, or because the required information is included in the Consolidated Financial Statements or the notes thereto.
(ii) Exhibits
The Registrant has no additional long-term debt instruments in which the total amount of securities authorized
under any instrument exceeds 10% of total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such long-term debt instrument upon the request of the Securities and Exchange Commission.
b. Reports on Form 8-K
On October 19, 1993, the Registrant filed a Form 8-K Current Report announcing its intention to call for redemption on December 15, 1993 all of the Registrant's outstanding 13% Subordinated Notes Due December 15, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KERR GROUP, INC.
By: Roger W. Norian ------------------------------- Roger W. Norian, Chairman President and Chief Executive Officer
Dated: March 29, 1994 Los Angeles, California
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of Kerr Group, Inc.:
Under date of February 23, 1994, we reported on the consolidated balance sheets of Kerr Group, Inc. as of December 31, 1993 and 1992, and the related consolidated statements of earnings (loss), common stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the 1993 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related supplementary financial statement schedules as listed in Item 14a(i). These supplementary financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these supplementary financial statement schedules based on our audits.
In our opinion, such supplementary financial statement schedules, when considered in relation to the basic consolidated financial statement taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick
Los Angeles, California February 23, 1994
SCHEDULE II
KERR GROUP, INC.
Amounts Receivable From Related Parties and Underwriters, Promoters and Employees Other Than Related Parties
Three years ended December 31, 1993 (in thousands)
(a) Includes both note receivable and related accrued interest. The loan accrued interest at an annual rate of 9.23%. On February 28, 1992, $400,000 of remaining principal and $128,319 of related accrued interest was forgiven by the Registrant.
(b) Consists of two loans dated January 16, 1990 and June 11, 1991 in the original amount of $30,000 and $100,000, respectively, and related accrued interest. The principal of the loan dated January 16, 1990 is to be paid in six equal annual installments in 1991 through 1996, however, on January 1, 1992, $15,000 of principal was forgiven by the Registrant. This loan bears interest at 6% annually and accrued interest is paid annually. The principal and related accrued interest of the loan dated June 11, 1990 is to be paid in 1996. This loan bears interest at 7.76% per annum.
SCHEDULE V
KERR GROUP, INC.
Property, Plant and Equipment
Three years ended December 31, 1993 (in thousands)
1.) Amounts for property, plant and equipment presented in the table above are related to continuing operations only. Property, plant and equipment associated with the Commercial Glass Container Business and Metal Crown Business of the Registrant in 1991 and 1992 has been reported as a component of net non-current assets related to discontinued operations in the Registrant's Consolidated Balance Sheets.
2.) As to Column E, which is omitted, the answers are "None".
SCHEDULE VI
KERR GROUP, INC.
Accumulated Depreciation and Amortization of Property, Plant and Equipment
Three years ended December 31, 1993 (in thousands)
1.) Amounts for accumulated depreciation and amortization of property, plant and equipment presented in the table above are related to continuing operations only. Accumulated depreciation and amortization of property, plant and equipment associated with the Commercial Glass Container Business and Metal Crown Business of the Registrant in 1991 and 1992 has been reported as a component of net non- current assets related to discontinued operations in the Registrant's Consolidated Balance Sheets.
2.) See note 1 of notes to Consolidated Financial Statements for description of the Registrant's depreciation policy.
3.) As to Column E, which is omitted, the answers are "None".
SCHEDULE VIII
KERR GROUP, INC.
Valuation and Qualifying Accounts
Three years ended December 31, 1993 (in thousands)
Note: Allowance for doubtful accounts presented in the table above is related to continuing operations only. Allowance for doubtful accounts associated with the Commercial Glass Container Business and Metal Crown Business of the Registrant in 1991 and 1992 has been reported as a component of net current assets related to discontinued operations in the Registrant's Consolidated Balance Sheets.
(a) These deductions represent uncollectible amounts charged against the reserve.
SCHEDULE X
KERR GROUP, INC.
Supplementary Income Statement Information
Three years ended December 31, 1993 (in thousands)
Note: Income statement information presented in the table above are for the Registrant's continuing operations.
* Less than 1% of annual net sales from continuing operations.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
KERR GROUP, INC.
FORM 10-K for year ended December 31, 1993
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K


Item 1. Business
McDonald's Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company".
(a) General development of business
There have been no significant changes to the Company's corporate structure during 1993, nor material changes in the Company's method of conducting business.
(b) Financial information about industry segments
Industry segment data for the years ended December 31, 1993, 1992 and 1991 is included in Part II, item 8, pages 33 and 41 of this Form 10-K.
(c) Narrative description of business
General
The Company develops, operates, franchises and services a worldwide system of restaurants which prepare, assemble, package and sell a limited menu of value-priced foods. These restaurants are operated by the Company or, under the terms of franchise arrangements, by franchisees who are independent third parties, or by affiliates operating under joint-venture agreements between the Company and local businesspeople.
The Company's franchising program assures consistency and quality. The Company is selective in granting franchises and is not in the practice of franchising to investor groups or passive investors. Under the conventional franchise arrangement, franchisees supply capital - initially, by purchasing equipment, signs, seating, and decor, and over the long term, by reinvesting in the business. The Company shares the investment by owning or leasing the land and building; franchisees then contribute to the Company's revenues through payment of rent and service fees based upon a percent of sales, with specified minimum payments. Generally, the conventional franchise arrangement lasts 20 years and franchising practices are consistent throughout the world. Further discussion regarding site selection is included in Part 1, item 2, page 6 of this Form 10-K.
Training begins at the restaurant with one-on-one instruction and videotapes. Aspiring restaurant managers progress through a development program of classes in basic and intermediate operations, management and equipment. Assistant managers are eligible to attend the advanced operations and management class at one of the five Hamburger University (H.U.) campuses in the U.S., Germany, England, Japan or Australia. The curriculum at H.U. concentrates on skills and practices essential to delivering customer satisfaction and running a restaurant business.
The Company's global brand is well-known. Marketing and promotional activities are designed to nurture this brand image and differentiate the Company from competitors by focusing on value and customer satisfaction. Funding for promotions is handled at the local restaurant level; funding for regional and national efforts is handled through advertising cooperatives. Franchised, Company-operated and affiliated restaurants throughout the world make voluntary contributions to cooperatives which purchase media. Production costs for certain advertising efforts are borne by the Company.
Products
McDonald's restaurants offer a substantially uniform menu consisting of hamburgers and cheeseburgers, including the Big Mac and Quarter Pounder with Cheese sandwiches, the Filet-O-Fish, McGrilled Chicken and McChicken sandwiches, french fries, Chicken McNuggets, salads, low fat shakes, sundaes and cones made with low fat frozen yogurt, pies, cookies and a limited number of soft drinks and other beverages. In addition, the restaurants sell a variety of products during limited promotional time periods. McDonald's restaurants operating in the United States are open during breakfast hours and offer a full breakfast menu including the Egg McMuffin and the Sausage McMuffin with Egg sandwiches, hotcakes and sausage; three varieties of biscuit sandwiches; Apple-Bran muffins; and cereals. McDonald's restaurants in many countries around the world offer many of these same products as well as other products and limited breakfast menus. The Company tests new products on an ongoing basis.
The Company, its franchisees and affiliates purchase food products and packaging from numerous independent suppliers. Quality specifications for both raw and cooked food products are established and strictly enforced. Alternative sources of these items are generally available. Quality assurance labs in the U.S., Europe and the Pacific work to ensure that the Company's high standards are consistently met. The quality assurance process involves ongoing testing and on-site inspections of suppliers' facilities. Independently owned and operated distribution centers distribute products and supplies to most McDonald's restaurants. The restaurants then prepare, assemble and package these products using specially designed production techniques and equipment to obtain uniform standards of quality.
Trademarks and patents
The Company has registered trademarks and service marks, some of which, including "McDonald's", "Ronald McDonald" and other related marks, are of material importance to the Company's business. The Company also has certain patents on restaurant equipment which, while valuable, are not material to its business.
Seasonal operations
The Company does not consider its operations to be seasonal to any material degree.
Working capital practices
Information about the Company's working capital practices is incorporated herein by reference to Management's Discussion and Analysis of the Company's financial position and the consolidated statement of cash flows for the years ended December 31, 1993, 1992 and 1991 in Part II, item 7, pages 26 through 28, and Part II, item 8 page 35 of this Form 10-K.
Customers
The Company's business is not dependent upon a single customer or small group of customers.
Backlog
Company-operated restaurants have no backlog orders.
Government contracts
No material portion of the business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.
Competition
McDonald's restaurants compete with international, national, regional, and local retailers of food products. The Company competes on the basis of price and service and by offering quality food products. The Company's competition in the broadest perspective includes restaurants, quick-service eating establishments, pizza parlors, coffee shops, street vendors, convenience food stores, delicatessens, and supermarket freezers.
In the U.S., about 372,000 restaurants generate nearly $213 billion in annual sales. McDonald's accounts for about 2.5% of those restaurants and approximately 6.7% of those sales. No reasonable estimate can be made of the number of competitors outside of the U.S.; however, the Company's business in foreign markets continues to grow.
Research and development
The Company operates research and development facilities in Illinois. While research and development activities are important to the Company's business, these expenditures are not material. Independent suppliers also conduct research activities for the benefit of the McDonald's System, which includes franchisees and suppliers, as well as McDonald's, its subsidiaries and joint ventures.
Environmental matters
The Company is not aware of any federal, state or local environmental laws or regulations which will materially affect its earnings or competitive position, or result in material capital expenditures; however, the Company cannot predict the effect on its operations of possible future environmental legislation or regulations. During 1993, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.
Number of employees
During 1993, the Company's average number of employees was approximately 167,000.
(d) Financial information about foreign and domestic operations
Financial information about foreign and domestic markets is incorporated herein by reference from selected Financial Data, Management's Discussion and Analysis and Segment and Geographic Information in Part II, item 6, page 10, Part II, item 7, pages 11 through 29 and Part II, item 8, page 41, respectively, of this Form 10-K.
Item 2.

Item 2. Properties
The Company identifies and develops sites that offer convenience to customers and provide for long-term sales and profit potential. To assess potential, the Company analyzes traffic and walking patterns, census data, school enrollments and other relevant data. The Company's experience and access to advanced technology aids in evaluating this information. In order to control occupancy costs and rights, the Company owns restaurant sites and buildings where feasible and where it is not practical, secures long-term leases. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to lower average development costs through construction and design efficiencies and by leveraging the Company's global sourcing system. Additional information about the Company's properties is incorporated herein by reference to Management's Discussion and Analysis and the related financial statements with footnotes in Part II, item 7, pages 11 through 29 and Part II, item 8, pages 34, 35, 37, 38, 42, 46 and 47, respectively, of this Form 10-K.
Item 3.

Item 3. Legal Proceedings
The Company has pending a number of lawsuits which have been filed from time to time in various jurisdictions. These lawsuits cover a broad variety of allegations spanning the Company's entire business. The following is a brief description of the more significant of these categories of lawsuits and government regulations.
Franchising
A substantial number of McDonald's restaurants are franchised to independent businesspeople operating under arrangements with the Company. In the course of the franchise relationship, occasional disputes arise between the Company and its franchisees relating to a broad range of subjects including, without limitation, quality, service and cleanliness issues, contentions regarding grants or terminations of franchises, franchisee claims for additional franchises or rewrites of franchises, and delinquent payments.
Suppliers
The Company and its affiliates and subsidiaries do not supply, with minor exceptions outside of the United States, food, paper, or related items to any McDonald's restaurants. The Company relies upon independent suppliers which are required to meet and maintain the Company's standards and specifications. There are a number of such suppliers worldwide and on occasion disputes arise between the Company and its suppliers on a number of issues including, by way of example, compliance with product specifications and McDonald's business relationship with suppliers.
Employees
Thousands of persons are employed by the Company and in restaurants owned and operated by subsidiaries of the Company. In addition, thousands of persons, from time to time, seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, firing and promotion practices.
Customers
McDonald's restaurants serve a large cross-section of the public and in the course of serving so many people, disputes arise as to products, service, accidents and other matters typical of an extensive restaurant business such as that of the Company.
Trademarks
McDonald's has registered trademarks and service marks, some of which are of material importance to the Company's business. From time to time, the Company may become involved in litigation to defend and protect its use of such registered marks.
Government Regulations
Local, state and federal governments have adopted laws and regulations involving various aspects of the restaurant business, including, but not limited to, franchising, health, environment, zoning and employment. The Company does not believe that it is in violation of any existing statutory or administrative rules, but it cannot predict the effect on its operations from promulgation of additional requirements in the future.
Item 4.

Item 4. Submission of Matters to a Vote of Shareholders None.
Executive Officers of the Registrant
All of the executive officers of McDonald's Corporation as of March 1, 1994 are shown below. Each of the executive officers has been continuously employed by the Company for at least five years and has a term of office until the May 1994 Board of Directors' meeting.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock trades under the symbol MCD and is listed on the following stock exchanges in the United States: New York, Chicago and Pacific.
The common stock price range on the New York Stock Exchange composite tape has been as follows:
--------------------------------------------------------- Quarter 1993 1992 --------------------------------------------------------- First $54 1/4 - 46 3/4 $45 - 38 3/8 Second $53 1/2 - 45 1/2 $47 1/2 - 39 3/8 Third $55 5/8 - 48 1/4 $47 1/4 - 41 1/8 Fourth $59 1/8 - 51 1/4 $50 3/8 - 40 7/8 --------------------------------------------------------- Year $59 1/8 - 45 1/2 $50 3/8 - 38 3/8 ---------------------------------------------------------
The approximate number of shareholders of record and beneficial owners of the Company's common stock as of December 31, 1993 was estimated to be 459,000.
Given the Company's returns on equity and assets, the Company's management believes it is prudent to reinvest a significant portion of earnings back into the business. The Company has paid 72 consecutive quarterly dividends on common stock and has increased the per share amount 19 times since the first dividend was paid in 1976. Additional dividend increases will be considered after reviewing returns to shareholders, profitability expectations and financing needs.
Dividends per common share for the years ended December 31, 1993 and 1992 are incorporated herein by reference from Part II, item 8, page 33.
Item 6.

Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Reference ---------
Management's Report 31
Report of independent auditors 32
Consolidated statement of income for each of the three years in the period ended December 31, 1993 33
Consolidated balance sheet at December 31, 1993 and 1992 34
Consolidated statement of cash flows for each of the three years in the period ended December 31, 1993 35
Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1993 36
Notes to consolidated financial statements (Financial comments) 37-50
Quarterly Results (unaudited) 51
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the consolidated financial statements and Financial Comments appearing in this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and include certain amounts based on management's best estimates and judgments. Other financial information presented in the annual report is consistent with the financial statements. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded, and that transactions are executed as authorized and are recorded and reported properly. This system of controls is based upon written policies and procedures, appropriate divisions of responsibility and authority, careful selection and training of personnel and utilization of an internal audit program. Policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that business practices throughout the world are to be conducted in a manner which is above reproach. Ernst & Young, independent auditors, has audited the Company's financial statements and their report is presented herein. The Board of Directors has an Audit Committee composed entirely of outside Directors. Ernst & Young has direct access to the Audit Committee and periodically meets with the Committee to discuss accounting, auditing and financial reporting matters.
McDONALD'S CORPORATION Oak Brook, Illinois January 27, 1994
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders McDonald's Corporation Oak Brook, Illinois
We have audited the accompanying consolidated balance sheet of McDonald's Corporation as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of McDonald's Corporation management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McDonald's Corporation at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG Chicago, Illinois January 27, 1994
MCDONALD'S CORPORATION FINANCIAL COMMENTS
-------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------- CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Investments in 50% or less owned affiliates are carried at equity in the companies' net assets.
FOREIGN CURRENCY TRANSLATION The functional currency of each operation outside of the U.S., except for those located in hyperinflationary countries, is the respective local currency.
INCOME TAXES In 1992, the Company adopted Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. The effects were not material, as the Company had previously adopted Statement No. 96.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost with depreciation and amortization provided on the straight-line method over the following estimated useful lives: buildings--up to 40 years; leasehold improvements--lesser of useful lives of assets or lease terms including option periods; and equipment--3 to 12 years.
INTANGIBLE ASSETS Intangible assets consist primarily of franchise rights reacquired from franchisees and affiliates, and are amortized on the straight- line method over an average life of 29 years.
FINANCIAL INSTRUMENTS Non-U.S. Dollar financing transactions generally are effective as hedges of long-term investments in the corresponding currency. Interest-rate exchange agreements are designated and generally are effective as hedges of the Company's interest-rate exposures. The carrying amounts for cash and equivalents and notes receivable approximated fair value. For noninterest-bearing security deposits by franchisees, no fair value was provided as these deposits are an integral part of the overall franchise arrangements.
STATEMENT OF CASH FLOWS The Company considers all highly liquid investments with short-term maturity dates to be cash equivalents. The impact of changing foreign currencies on cash and equivalents was not material.
---------------------------------------------------------------------- NUMBER OF RESTAURANTS IN OPERATION ---------------------------------------------------------------------- 1993 1992 1991 1990 ---------------------------------------------------------------------- Operated by franchisees 9,288 8,654 8,151 7,578 Operated under business facilities lease arrangements 544 583 584 553 Operated by the Company 2,699 2,551 2,547 2,643 Operated by 50% or less owned affiliates 1,462 1,305 1,136 1,029 ---------------------------------------------------------------------- Systemwide restaurants 13,993 13,093 12,418 11,803 ====================================================================== Franchisees operating under business facilities lease arrangements have options to purchase the businesses. The results of operations of restaurant businesses purchased and sold in transactions with franchisees and affiliates were not material to the consolidated financial statements for periods prior to purchase and sale.
---------------------------------------------------------------------- OTHER OPERATING (INCOME) EXPENSE--NET ---------------------------------------------------------------------- (In millions of dollars) 1993 1992 1991 ---------------------------------------------------------------------- Gains on sales of restaurant businesses $(48.2) $(43.1) $ (64.0) Equity in earnings of unconsolidated affiliates (34.6) (29.5) (57.5) Net losses from property dispositions 15.5 18.1 9.9 Other--net 5.3 (9.5) (2.2) ---------------------------------------------------------------------- Other operating (income) expense--net $(62.0) $(64.0) $(113.8) ====================================================================== Gains on sales of restaurant businesses are recognized as income when the sales are consummated and other stipulated conditions are met. Proceeds from certain sales of restaurant businesses and property include notes receivable.
--------------------------------------------------------------------- INCOME TAXES --------------------------------------------------------------------- Income before provision for income taxes and the provision for income taxes, classified by source of income, were as follows: --------------------------------------------------------------------- (In millions of dollars) 1993 1992 1991 --------------------------------------------------------------------- U.S. $ 986.0 $ 873.3 $ 847.3 Outside of the U.S. 689.7 574.8 452.1 --------------------------------------------------------------------- Income before provision for income taxes $1,675.7 $1,448.1 $1,299.4 ===================================================================== U.S. $ 391.9 $ 316.8 $ 312.6 Outside of the U.S. 201.3 172.7 127.2 --------------------------------------------------------------------- Provision for income taxes $ 593.2 $ 489.5 $ 439.8 =====================================================================
Income before provision for income taxes outside of the U.S. and the related provision for income taxes reflect fees received in the U.S. from operations outside of the U.S. Income before provision for income taxes in the U.S. and the related provision for income taxes reflect interest received in the U.S. from operations outside of the U.S. The provision for income taxes, classified by the timing and location of payment, consisted of:
------------------------------------------------------------------------- (In millions of dollars) 1993 1992 1991 ------------------------------------------------------------------------- Current U.S. federal $331.6 $256.8 $230.8 U.S. state 62.0 56.3 45.3 Outside of the U.S. 147.2 154.0 99.0 ------------------------------------------------------------------------- 540.8 467.1 375.1 ------------------------------------------------------------------------- Deferred U.S. federal 21.9 (10.3) 46.9 U.S. state 3.4 4.0 8.2 Outside of the U.S. 27.1 28.7 9.6 ------------------------------------------------------------------------- 52.4 22.4 64.7 ------------------------------------------------------------------------- Provision for income taxes $593.2 $489.5 $439.8 =========================================================================
Included in the 1993 deferred tax provision were $14.0 million attributable to a one-time, noncash revaluation of deferred tax liabilities resulting from the increase in the statutory U.S. federal income tax rate. Net deferred tax liabilities were comprised of:
------------------------------------------------------------------------- (In millions of dollars) December 31, 1993 1992 ------------------------------------------------------------------------- Property and equipment basis differences $786.1 $738.2 Other 175.4 154.8 ------------------------------------------------------------------------- Total deferred tax liabilities 961.5 893.0 ------------------------------------------------------------------------- Deferred tax assets before valuation allowance (1) (192.8) (183.8) Valuation allowance 44.5 35.7 ------------------------------------------------------------------------- Net deferred tax liabilities (2) $813.2 $744.9 ========================================================================= (1) Includes loss carryforwards: 1993--$46.7 million; 1992--$44.4 million. (2) Net of assets recorded in current income taxes: 1993--$22.1 million; 1992--$3.7 million.
Reconciliations of the statutory U.S. federal income tax rates to the effective income tax rates are shown in the following table.
-------------------------------------------------------------------- 1993 1992 1991 -------------------------------------------------------------------- Statutory federal income tax rates 35.0% 34.0% 34.0% State income taxes, net of related federal income tax benefit 2.5 2.7 2.7 Other (2.1) (2.9) (2.9) -------------------------------------------------------------------- Effective income tax rates 35.4% 33.8% 33.8% ====================================================================
U.S. income and foreign withholding taxes have not been provided on $760.8 million of undistributed earnings of certain subsidiaries and affiliates outside of the U.S. at December 31, 1993. These earnings are considered to be permanently invested in the businesses and, under the tax laws, are not subject to taxes until distributed as dividends. If these earnings were not considered permanently invested, no additional taxes would be provided due to the overall higher tax rates in markets outside of the U.S. and the ability to recover withholding taxes as foreign tax credits in the U.S.
---------------------------------------------------------------------- SEGMENT AND GEOGRAPHIC INFORMATION ---------------------------------------------------------------------- The Company operates exclusively in the foodservice industry. Substantially all revenues result from the sale of menu products at restaurants operated by the Company, franchisees or affiliates. Operating income includes the Company's share of operating results of affiliates. All intercompany revenues and expenses are eliminated in computing revenues and operating income. Fees received in the U.S. from subsidiaries outside of the U.S. were: 1993--$202.8 million; 1992--$187.8 million; 1991--$153.1 million.
---------------------------------------------------------------------- (In millions of dollars) 1993 1992 1991 ---------------------------------------------------------------------- U.S. $3,931.2 $3,749.4 $3,710.2 Europe/Africa/Middle East 2,235.9 2,187.0 1,806.0 Canada 557.8 595.1 629.5 Asia/Pacific 494.4 434.6 392.5 Latin America 188.8 167.2 156.8 ---------------------------------------------------------------------- Total revenues $7,408.1 $7,133.3 $6,695.0 ======================================================================
U.S. $1,087.1 $1,041.6 $1,000.4 Europe/Africa/Middle East 547.5 484.0 361.3 Canada 111.2 113.5 120.7 Asia/Pacific 190.6 163.2 157.2 Latin America 47.6 59.3 38.9 ---------------------------------------------------------------------- Operating income $1,984.0 1,861.6 1,678.5 ======================================================================
U.S. $6,385.4 $6,410.6 $6,154.3 Europe/Africa/Middle East 3,473.2 3,290.9 3,316.1 Canada 562.5 587.4 618.2 Asia/Pacific 1,103.2 980.3 925.0 Latin America 510.9 412.0 335.5 ---------------------------------------------------------------------- Total assets $12,035.2 $11,681.2 $11,349.1 ======================================================================
------------------------------------------------------------------------ PROPERTY AND EQUIPMENT ------------------------------------------------------------------------ (In millions of dollars) December 31, 1993 1992 ------------------------------------------------------------------------ Land $2,587.2 $2,440.0 Buildings and improvements on owned land 5,209.4 4,906.0 Buildings and improvements on leased land 3,673.0 3,423.7 Equipment, signs and seating 1,545.4 1,467.2 Other 444.0 421.1 ------------------------------------------------------------------------ 13,459.0 12,658.0 ------------------------------------------------------------------------ Accumulated depreciation and amortization (3,377.6) (3,060.6) ------------------------------------------------------------------------ Net property and equipment $10,081.4 $9,597.4 ========================================================================
Depreciation and amortization were: 1993--$492.8 million; 1992--$492.9 million; 1991--$456.9 million. Contractual obligations for the acquisition and construction of property amounted to $193.1 million at December 31, 1993.
------------------------------------------------------------------------ DEBT FINANCING ------------------------------------------------------------------------ LINE OF CREDIT AGREEMENTS The Company has a long-term line of credit agreement for $700.0 million, which remained unused at December 31, 1993, and which continues indefinitely unless terminated by the participating banks upon advance notice of at least 18 months. Each borrowing under the agreement bears interest at one of several specified floating rates, to be selected by the Company at the time of borrowing. The agreement provides for fees of .15 of 1% per annum on the unused portion of the commitment. In addition, certain subsidiaries outside of the U.S. had unused lines of credit totaling $1.0 billion at December 31, 1993; these were principally short-term and denominated in various currencies at local market rates of interest.
EXCHANGE AGREEMENTS The Company uses derivatives and has entered into agreements for the exchange of various currencies. Certain of these agreements also provide for the periodic exchange of interest payments. These agreements, as well as additional interest-rate exchange agreements, expire through 2003 and provide for an effective right of offset; therefore, the related receivable and liability are offset in the financial statements. The counterparties to these exchange 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 also had short-term forward foreign exchange contracts outstanding at December 31, 1993, with a U.S. Dollar equivalent of $83.4 million in various currencies, primarily the Japanese Yen, Deutsche Mark and British Pound Sterling.
AGGREGATE MATURITIES Included in the 1995 maturities are $700.0 million of notes maturing within one year, as 1995 is the earliest time at which the banks can terminate the line of credit agreement, which supports the classification in long-term debt. Under certain agreements, the Company has the option to retire debt prior to maturity, either at par or at a premium over par. During 1993, $264.5 million was retired prior to maturity.
GUARANTEES Included in total debt at December 31, 1993, were $171.3 million of 7.60% ESOP Notes Series A and $89.0 million of 7.23% ESOP Notes Series B issued by the Leveraged Employee Stock Ownership Plan (LESOP), with payments through 2004 and 2006, respectively, which are guaranteed by the Company. Interest rates on the notes were adjusted due to U.S. tax law changes in 1993. The Company has agreed to repurchase the notes upon the occurrence of certain events. The Company also has guaranteed certain foreign affiliate loans of $154.7 million at December 31, 1993. The Company also was a general partner in 48 domestic partnerships with total assets of $174.3 million and total liabilities of $95.8 million at December 31, 1993.
FAIR VALUES The carrying amounts for notes payable and short-term forward foreign exchange contracts approximated fair value at December 31, 1993. The fair value of the remaining debt obligations (excluding capital leases), including the net effects of currency and interest-rate exchange agreements, was estimated using quoted market prices, various pricing models or discounted cash flow analyses. At December 31, 1993, the fair value of these obligations, which were primarily used to finance property and equipment, was $3.7 billion, compared to a carrying value of $3.4 billion. The Company currently has no plans to retire any of these obligations prior to maturity. The Company believes that the fair value of total assets is higher than their carrying value.
DEBT OBLIGATIONS
------------------------------------------------------------------- OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS ------------------------------------------------------------------- (In millions of dollars) December 31, 1993 1992 ------------------------------------------------------------------- Security deposits by franchisees $121.4 $116.6 Preferred interests in consolidated subsidiaries 106.7 12.8 Minority interests in consolidated subsidiaries 38.2 32.1 Other 68.1 63.7 ------------------------------------------------------------------- Other long-term liabilities and minority interests $334.4 $225.2 ===================================================================
In 1993, a Company subsidiary issued 50 million British Pounds Sterling (U.S. $74.0 million at December 31, 1993) of 5.91% Series A Preferred Stock which, unless redeemed earlier at the Company's option, must be redeemed on February 19, 1998. Also, another subsidiary issued additional preferred stock. All of the preferred stock of this subsidiary has a dividend rate adjusted annually (8.2% at December 31, 1993) and is redeemable at the option of the holder at a current redemption price of $32.7 million. Both of these issues were reflected in preferred interests in consolidated subsidiaries. Included in other was the $100.00 per share redemption value of 181,868 shares of 5% Series D Preferred Stock issued in connection with the Company's 1991 increase in ownership of its Hawaii affiliate. This stock, which carries one vote per share, must be redeemed on the occurrence of specified events.
--------------------------------------------------------------------- LEASING ARRANGEMENTS --------------------------------------------------------------------- At December 31, 1993, the Company was lessee at 2,294 restaurant locations under ground leases (the Company leases land and constructs and owns buildings) and at 2,305 locations under improved leases (lessor owns land and buildings). Land and building lease terms are generally for 20 to 25 years and, in many cases, provide for rent escalations and one or more five-year renewal options with certain leases providing purchase options. The Company is generally obligated for the related occupancy costs that include property taxes, insurance and maintenance. In addition, the Company is lessee under noncancelable leases covering offices and vehicles. Future minimum payments required under operating leases with initial terms of one year or more after December 31, 1993, are:
------------------------------------------------------------ (In millions of dollars) Restaurant Other Total ------------------------------------------------------------ 1994 $ 277.0 $ 34.7 $ 311.7 1995 266.7 33.3 300.0 1996 255.7 31.5 287.2 1997 242.4 28.4 270.8 1998 227.2 25.8 253.0 Thereafter 2,334.1 165.0 2,499.1 ------------------------------------------------------------ Total minimum payments $3,603.1 $318.7 $3,921.8 ============================================================
Rent expense was: 1993--$339.0 million; 1992--$320.2 million; 1991-$283.6 million. Included in these amounts were percentage rents based on sales by the related restaurants in excess of minimum rents stipulated in certain lease agreements: 1993--$29.0 million; 1992--$26.1 million; 1991--$26.3 million.
---------------------------------------------------------------------- FRANCHISE ARRANGEMENTS ---------------------------------------------------------------------- Franchise arrangements, with franchisees who operate in various geographic locations, generally provide for initial fees and continuing payments to the Company based upon a percentage of sales, with minimum rent payments. Among other things, franchisees are provided the use of restaurant facilities, generally for a period of 20 years. They are required to pay related occupancy costs that include property taxes, insurance, maintenance and a refundable, noninterest-bearing security deposit. On a limited basis, the Company receives notes from franchisees. Generally the notes are secured by interests in restaurant equipment and franchises.
---------------------------------------------------------------------- (In millions of dollars) 1993 1992 1991 ---------------------------------------------------------------------- Minimum rents Owned sites $ 573.6 $ 538.7 $ 494.5 Leased sites 381.7 353.3 303.7 ---------------------------------------------------------------------- 955.3 892.0 798.2 ---------------------------------------------------------------------- Percentage fees 1,272.1 1,120.6 970.4 Initial fees 23.5 18.2 17.9 ---------------------------------------------------------------------- Revenues from franchised restaurants $2,250.9 $2,030.8 $1,786.5 ======================================================================
Future minimum payments based on minimum rents specified under franchise arrangements after December 31, 1993, are:
---------------------------------------------------------------------- Owned Leased (In millions of dollars) sites sites Total ---------------------------------------------------------------------- 1994 $ 618.4 $ 404.7 $ 1,023.1 1995 607.4 390.3 997.7 1996 593.2 375.9 969.1 1997 579.5 365.2 944.7 1998 567.3 353.2 920.5 Thereafter 5,309.1 3,406.6 8,715.7 ---------------------------------------------------------------------- Total minimum payments $8,274.9 $5,295.9 $13,570.8 ======================================================================
At December 31, 1993, net property and equipment under franchise arrangements totaled $5.9 billion (including land of $1.8 billion), after deducting accumulated depreciation and amortization of $1.7 billion.
---------------------------------------------------------------------- PROFIT SHARING PROGRAM ---------------------------------------------------------------------- The Company has a program for U.S. employees which includes profit sharing, 401(k) (McDESOP), and leveraged employee stock ownership features. McDESOP allows employees to invest in McDonald's common stock by making contributions that are partially matched by the Company. Assets of the profit sharing plan can be invested in McDonald's common stock, or among several other alternatives. Certain subsidiaries outside of the U.S. also offer profit sharing, stock purchase or other similar benefit plans. Total U.S. program costs were: 1993--$47.1 million; 1992--$38.8 million; 1991--$46.4 million. Total plan costs outside of the U.S. were: 1993--$13.0 million; 1992-- $14.0 million; 1991--$9.8 million. The Company does not provide any other postretirement benefits, and postemployment benefits were immaterial.
---------------------------------------------------------------------- STOCK OPTIONS ---------------------------------------------------------------------- Under the 1992 Stock Ownership Incentive and the 1975 Stock Ownership Option Plans, options to purchase common stock are granted at prices not less than fair market value of the stock on date of grant. Substantially all of these options become exercisable in four equal biennial installments, commencing one year from date of grant, and expire ten years from date of grant. At December 31, 1993, 41.5 million shares of common stock were reserved for issuance under both plans.
----------------------------------------------------------------------- (In millions, except per common share data) 1993 1992 1991 ----------------------------------------------------------------------- Options outstanding at January 1 25.1 23.7 21.6 Options granted 6.0 5.8 5.5 Options exercised (2.7) (3.8) (2.6) Options forfeited (.9) (.6) (.8) ----------------------------------------------------------------------- Options outstanding at December 31 27.5 25.1 23.7 ======================================================================= Options exercisable at December 31 8.8 7.7 7.8 Common shares reserved for future grants at December 31 14.0 19.1 6.3 Option prices per common share Exercised during the year $ 9 to $48 $9 to $45 $6 to $34 Outstanding at year end $10 to $56 $9 to $48 $9 to $34 -----------------------------------------------------------------------
---------------------------------------------------------------------- CAPITAL STOCK ---------------------------------------------------------------------- PER COMMON SHARE INFORMATION Income used in the computation of per common share information was reduced by preferred stock cash dividends (net of tax benefits in 1993 and 1992) and divided by the weighted average shares of common stock outstanding during each year: 1993--355.9 million; 1992--363.2 million; 1991--358.1 million. The effect of potentially dilutive securities was not material.
PREFERRED STOCK In December 1992, the Company issued $500.0 million of Series E 7.72% Cumulative Preferred Stock; 10,000 preferred shares are equivalent to 20.0 million depositary shares having a liquidation preference of $25.00 per depositary share. Each preferred share is entitled to one vote under certain circumstances, and is redeemable at the option of the Company beginning on December 3, 1997, at its liquidation preference plus accrued and unpaid dividends. In September 1989 and April 1991, the Company sold $200.0 million of Series B and $100.0 million of Series C ESOP Convertible Preferred Stock, respectively, to the LESOP. The LESOP financed the purchase by issuing notes that are guaranteed by the Company and are included in long-term debt, with an offsetting reduction in shareholders' equity. Each preferred share has a liquidation preference of $28.75 and $33.125, respectively, and is convertible into a minimum of .7692 and .8 common share (conversion rate), respectively. Upon termination, employees are guaranteed a minimum value payable in common shares equal to the greater of the conversion rate; the fair market value of their preferred shares; or the liquidation preference plus accrued dividends, not to exceed one common share. Each preferred share is entitled to one vote and is redeemable at the option of the Company three years after issuance and, under certain circumstances, is redeemable prior to that date. In 1992, 4.1 million Series B shares were converted into 3.2 million common shares.
COMMON EQUITY PUT OPTIONS In December 1992, the Company sold 2.0 million common equity put options. At December 31, 1992, the $94.0 million exercise price of these options was classified in common equity put options and the related offset was recorded in common stock in treasury, net of premiums received. In April 1993, these options expired unexercised. In April 1993, the Company also sold 1.0 million common equity put options which expired unexercised in July 1993.
SHAREHOLDER RIGHTS PLAN In December 1988, the Company declared a dividend of one Preferred Share Purchase Right (Right) on each outstanding share of common stock. Under certain conditions, each Right may be exercised to purchase one two-hundredth of a share of Series A Junior Participating Preferred Stock (the economic equivalent of one common share) at an exercise price of $125.00 (which may be adjusted under certain circumstances), and is transferable apart from the common stock ten days following a public announcement that a person or group has acquired beneficial ownership of 20% or more of the outstanding common shares, or ten business days following the commencement or announcement of an intention to make a tender or exchange offer, resulting in beneficial ownership by a person or group of 20% or more of the outstanding common shares. If a person or group acquires 20% or more of the outstanding common shares, or if the Company is acquired in a merger or other business combination transaction, each Right will entitle the holder, other than such person or group, to purchase at the then current exercise price, stock of the Company or the acquiring company having a market value of twice the exercise price. Each Right is nonvoting and expires on December 28, 1998, unless redeemed by the Company, at a price of $.005, at any time prior to the public announcement that a person or group has acquired beneficial ownership of 20% or more of the outstanding common shares. At December 31, 1993, 2.1 million shares of the Series A Junior Participating Preferred Stock were reserved for issuance under this plan.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
Information regarding directors is incorporated herein by reference from the Company's definitive proxy statement which will be filed no later than 120 days after December 31, 1993.
On December 1, 1993, Donald R. Keough, Chairman of Allen & Company, Inc., was appointed to the Company's Board of Directors.
Information regarding all of the Company's executive officers is included in Part I.
Item 11.

Item 11. Executive Compensation
Incorporated herein by reference from the Company's definitive proxy statement which will be filed no later than 120 days after December 31, 1993.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from the Company's definitive proxy statement which will be filed no later than 120 days after December 31, 1993.
Item 13.

Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference from the Company's definitive proxy statement which will be filed no later than 120 days after December 31, 1993.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial statements Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K. 2. Financial statement schedules The financial schedules listed in the accompanying index to consolidated financial statement schedules are filed as part of this report. 3. Exhibits
(3) Restated Certificate of Incorporation, dated as of February 2, 1993, incorporated herein by reference from Exhibit (3) of Form 10-K dated December 31, 1992. By-laws incorporated herein by reference from Exhibit 3 of Form 10-K dated December 31, 1991.
(4) Instruments defining the rights of security holders, including indentures (A):
(a) Debt Securities. Indenture dated as of March 1, 1987 incorporated herein by reference from Exhibit 4(a) of Form S-3 Registration Statement, SEC file no. 33-12364.
(i) Supplemental Indenture No. 5 incorporated herein by reference from Exhibit (4) of Form 8-K dated January 23, 1989.
(ii) 9-3/4% Notes due 1999. Supplemental Indenture No. 6 incorporated herein by reference from Exhibit (4) of Form 8-K dated January 23, 1989.
(iii) Medium-Term Notes, Series B, due from nine months to 30 years from Date of Issue. Supplemental Indenture No. 12 incorporated herein by reference from Exhibit (4) of Form 8-K dated August 18, 1989 and Forms of Medium-Term Notes, Series B, incorporated herein by reference from Exhibit (4)(b) of Form 8-K dated September 14, 1989.
(iv) 9-3/8% Notes due 1997. Form of Supplemental Indenture No. 14 incorporated herein by reference from Exhibit (4) of Form 10-K for the year ended December 31, 1989.
(v) Medium-Term Notes, Series C, due from nine months to 30 years from Date of Issue. Form of Supplemental Indenture No. 15 incorporated herein by reference from Exhibit 4(b) of Form S-3 Registration Statement, SEC file no. 33-34762 dated May 14, 1990.
(vi) Medium-Term Notes, Series C, due from nine months/184 days to 30 years from Date of Issue. Amended and restated Supplemental Indenture No. 16 incorporated herein by reference from Exhibit (4) of Form 10-Q for the period ended March 31, 1991.
(vii) 8-7/8% Debentures due 2011. Supplemental Indenture No. 17 incorporated herein by reference from Exhibit (4) of Form 8-K dated April 22, 1991.
(viii)Medium-Term Notes, Series D, due from nine months/184 days to 60 years from Date of Issue. Supplemental Indenture No. 18 incorporated herein by reference from Exhibit 4(b) of Form S-3 Registration Statement, SEC file no. 33-42642 dated September 10, 1991.
(ix) 7-3/8% Notes due July 15, 2002. Form of Supplemental Indenture No. 19 incorporated herein by reference from Exhibit (4) of Form 8-K dated July 10, 1992.
(x) 6-3/4% Notes due February 15, 2003. Form of Supplemental Indenture No. 20 incorporated herein by reference from Exhibit (4) of Form 8-K dated March 1, 1993.
(xi) 7-3/8% Debentures due July 15, 2033. Form of Supplemental Indenture No. 21 incorporated herein by reference from Exhibit (4)(a)of Form 8-K dated July 15, 1993.
(b) Form of Deposit Agreement dated as of November 25, 1992 by and between McDonald's Corporation, First Chicago Trust Company of New York, as Depositary, and the Holders from time to time of the Depositary Receipts.
(c) Rights Agreement dated as of December 13, 1988 between McDonald's Corporation and The First National Bank of Chicago, incorporated herein by reference from Exhibit 1 of Form 8-K dated December 23, 1988.
(i) Amendment No. 1 to Rights Agreement incorporated herein by reference from Exhibit 1 of Form 8-K dated May 25, 1989.
(ii) Amendment No. 2 to Rights Agreement incorporated herein by reference from Exhibit 1 of Form 8-K dated July 25, 1990.
(d) Indenture and Supplemental Indenture No. 1 dated as of September 8, 1989, between McDonald's Matching and Deferred Stock Ownership Trust, McDonald's Corporation and Pittsburgh National Bank in connection with SEC Registration Statement Nos. 33-28684 and 33-28684-01, incorporated herein by reference from Exhibit (4)(a) of Form 8-K dated September 14, 1989.
(e) Form of Supplemental Indenture No. 2 dated as of April 1, 1991, supplemental to the Indenture between McDonald's Matching and Deferred Stock Ownership Trust, McDonald's Corporation and Pittsburgh National Bank in connection with SEC Registration Statement Nos. 33-28684 and 33-28684-01, incorporated herein by reference from Exhibit (4)(c) of Form 8-K dated March 22, 1991.
(10) Material Contracts
(a) Material contract between McDonald's Corporation and Joan B. Kroc, incorporated herein by reference from Exhibit (10) of Form 10-K for the year ended December 31, 1984.
(b) Director's Deferred Compensation Plan, incorporated herein by reference from Exhibit (10)(b)of Form 10-K for the year ended December 31, 1992*.
(c) Profit Sharing Program, as amended, McDonald's Supplemental Employee Benefit Equalization Plan, McDonald's Profit Sharing Program Equalization Plan and McDonald's 1989 Equalization Plan, incorporated by reference from Form 10-K/A dated May 4, 1993, Amendment No. 1 to Form 10-K for the year ended December 31, 1992*.
(i) Amendment No. 1 to McDonald's 1989 Equalization Plan, incorporated herein by reference from Form 10-Q for the period ended June 30, 1993.
(ii) Amendment No. 2 to McDonald's 1989 Equalization Plan, attached hereto as an Exhibit.
(iii)Amendment No. 1 to McDonald's Supplemental Employee Benefit Equalization Plan, attached hereto as an Exhibit.
(iv) Amendment No. 2 to McDonald's Supplemental Employee Equalization Plan, attached hereto as an Exhibit.
(v) Amendment No. 5 to the Profit Sharing Program, as amended, attached hereto as an Exhibit.
Amendment No. 6 to the Profit Sharing Program, as (vi) amended, attached hereto as an Exhibit.
(d) 1975 Stock Ownership Option Plan, incorporated herein by reference from Exhibit (10)(d) of Form 10-K for the year ended December 31, 1992*.
(e) Stock Sharing Plan, incorporated herein by reference from Exhibit (10)(e) of Form 10-K for the year ended December 31, 1992*.
(f) 1992 Stock Ownership Incentive Plan, incorporated herein by reference from exhibit pages 20-34 of McDonald's 1992 Proxy Statement and Notice of 1992 Annual Meeting of Shareholders dated April 10, 1992*.
(g) McDonald's Corporation Deferred Incentive Plan, incorporated herein by reference from Exhibit(10) of Form 10-Q for the period ended September 30, 1993*.
(11) Statement re: Computation of per share earnings.
(12) Statement re: Computation of ratios.
(21) Subsidiaries of the registrant.
(23) Consent of independent auditors.
-------------------- * Denotes compensatory plan.
(A) Other instruments defining the rights of holders of long-term debt of the registrant and all of its subsidiaries for which consolidated financial statements are required to be filed and which are not required to be registered with the Securities and Exchange Commission, are not included herein as the securities authorized under these instruments, individually, do not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. An agreement to furnish a copy of any such instruments to the Securities and Exchange Commission upon request has been filed with the Commission.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed for the last quarter covered by this report, and subsequently up to March 29, 1994.
Financial Statements Date of Report Item Number required to be filed -------------- ----------- -------------------- November 22, 1993 Item 7 No January 18, 1994 Item 7 No
McDONALD'S CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(Item 14)
(a) The following documents are filed as part of this report:
Page 1. Financial Statement Schedules Reference
Report of Independent Auditors 58
Consolidated schedules for the years ended December 31, 1993, 1992 and 1991:
V - Property and equipment 59
VI - Accumulated depreciation and amortization of property and equipment 60
IX - Short-term borrowings 62
X - Supplementary income statement information 63
Consolidated schedule at December 31, 1993:
VII - Guarantees of securities of other issuers 61
All other schedules have been omitted as the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of McDonald's Corporation as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated January 27, 1994 (included elsewhere in this Annual Report on Form 10-K). Our audits also included the consolidated financial statement schedules of McDonald's Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, the consolidated financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Ernst & Young
Chicago, Illinois January 27, 1994
McDonald's Corporation Exhibit Index (Item 14)
Amendment No. 2 to McDonald's 1989 Equalization Plan
Amendment No. 1 to McDonald's Supplemental Employee Benefit Equalization Plan
Amendment No. 2 to McDonald's Supplemental Employee Benefit Equalization Plan
Amendment No. 5 to the Profit Sharing Program
Amendment No. 6 to the Profit Sharing Program
Statement re: Computation of per share earnings
Statement re: Computation of ratios
Subsidiaries of the registrant
Consent of independent auditors
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
McDONALD'S CORPORATION (Registrant) By Jack M. Greenberg ---------------------- Jack M. Greenberg Vice Chairman, Chief Financial Officer March 29, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ----
------------------------- Director Hall Adams, Jr.
Robert M. Beavers, Jr. ------------------------- Senior Vice President March 29, 1994 Robert M. Beavers, Jr. and Director
James R. Cantalupo ------------------------- President and Chief Executive March 29, 1994 James R. Cantalupo Officer-International and Director
Michael L. Conley ------------------------- Senior Vice President, March 29, 1994 Michael L. Conley Controller
Gordon C. Gray ------------------------- Director March 29, 1994 Gordon C. Gray
Jack M. Greenberg ------------------------- Vice Chairman, March 29, 1994 Jack M. Greenberg Chief Financial Officer and Director
------------------------- Director Donald R. Keough
Signature Title Date --------- ----- ----
Donald G. Lubin ------------------------- Director March 29, 1994 Donald G. Lubin
------------------------- Director Andrew J. McKenna
Michael R. Quinlan ------------------------- Chairman, Chief Executive March 29, 1994 Michael R. Quinlan Officer and Director
Edward H. Rensi ------------------------- President and Chief Executive March 29, 1994 Edward H. Rensi Officer-U.S.A. and Director
------------------------- Director Terry Savage
Paul D. Schrage ------------------------- Senior Executive Vice March 29, 1994 Paul D. Schrage President, Chief Marketing Officer and Director
------------------------- Director Ballard F. Smith
------------------------- Director Roger W. Stone
Robert N. Thurston ------------------------- Director March 29, 1994 Robert N. Thurston
Fred L. Turner ------------------------- Senior Chairman and Director March 29, 1994 Fred L. Turner
B. Blair Vedder, Jr. ------------------------- Director March 29, 1994 B. Blair Vedder, Jr.