McDonald’s Corporation

2003 Financial Report

™
 CONTENTS
1 11-year summary
2 Management’s discussion and analysis
17 Consolidated statement of income
18 Consolidated balance sheet
19 Consolidated statement of cash flows
20 Consolidated statement of shareholders’ equity
21 Notes to consolidated financial statements
32 Quarterly results (unaudited)
33 Management’s report
33 Report of independent auditors

McDONALD’S ANNUAL REPORT

ON FORM 10-K
Shareholders may obtain a copy of the
Company’s 2003 Annual Report to the
Securities and Exchange Commission
(SEC) on Form 10-K by going to the
investor section of McDonald’s website
at www.mcdonalds.com, by going to
the SEC’s website at www.sec.gov or
by calling us at 1-630-623-7428. This
information is also available at no
charge by sending a request to the
Company’s Investor Relations Service
Center, Department 300, Kroc Drive,
Oak Brook, Illinois 60523.

HOME OFFICE
McDonald’s Corporation
McDonald’s Plaza
Oak Brook IL 60523
1-630-623-3000
www.mcdonalds.com

The following trademarks used herein

are property of McDonald’s Corporation
and its affiliates: Boston Market;
i’m lovin’ it; Made For you: McDonald’s;
McGriddles; mcdonalds.com.

Printed on recycled paper with

10% post-consumer content.
© 2004 McDonald’s Corporation
McD 03-4286
11-YEAR SUMMARY

DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

Company-operated sales $12,795 11,500 11,041 10,467 9,512 8,895 8,136 7,571 6,863 5,793 5,157
Franchised and
affiliated revenues $ 4,345 3,906 3,829 3,776 3,747 3,526 3,273 3,116 2,932 2,528 2,251
Total revenues $17,140 15,406 14,870 14,243 13,259 12,421 11,409 10,687 9,795 8,321 7,408
Operating income $ 2,832(1) 2,113(2) 2,697(3) 3,330 3,320 2,762(4) 2,808 2,633 2,601 2,241 1,984
Income before taxes
and cumulative effect
of accounting changes $ 2,346(1) 1,662(2) 2,330(3) 2,882 2,884 2,307(4) 2,407 2,251 2,169 1,887 1,676
Net income $ 1,471(1,5) 893(2,6) 1,637(3) 1,977 1,948 1,550(4) 1,642 1,573 1,427 1,224 1,083
Cash provided by
operations $ 3,269 2,890 2,688 2,751 3,009 2,766 2,442 2,461 2,296 1,926 1,680
Capital expenditures $ 1,307 2,004 1,906 1,945 1,868 1,879 2,111 2,375 2,064 1,539 1,317
Treasury stock
purchases $ 439 687 1,090 2,002 933 1,162 765 605 321 500 628
Financial position
at year end:
Total assets $25,525 23,971 22,535 21,684 20,983 19,784 18,242 17,386 15,415 13,592 12,035
Total debt $ 9,731 9,979 8,918 8,474 7,252 7,043 6,463 5,523 4,836 4,351 3,713
Total shareholders’
equity $11,982 10,281 9,488 9,204 9,639 9,465 8,852 8,718 7,861 6,885 6,274
Shares outstanding
In millions 1,262 1,268 1,281 1,305 1,351 1,356 1,371 1,389 1,400 1,387 1,415
Per common share:
Net income–basic $ 1.16(1,5) .70(2,6) 1.27(3) 1.49 1.44 1.14(4) 1.17 1.11 .99 .84 .73
Net income–diluted $ 1.15(1,5) .70(2,6) 1.25(3) 1.46 1.39 1.10(4) 1.15 1.08 .97 .82 .71
Dividends declared $ .40 .24 .23 .22 .20 .18 .16 .15 .13 .12 .11
Market price at
year end $ 24.83 16.08 26.47 34.00 40.31 38.41 23.88 22.69 22.56 14.63 14.25
Company-operated
restaurants 8,959 9,000 8,378 7,652 6,059 5,433 4,887 4,294 3,783 3,216 2,733
Franchised restaurants 18,132 17,864 17,395 16,795 15,949 15,086 14,197 13,374 12,186 10,944 9,918
Affiliated restaurants 4,038 4,244 4,320 4,260 4,301 3,994 3,844 3,216 2,330 1,739 1,476
Total Systemwide
restaurants 31,129 31,108 30,093 28,707 26,309 24,513 22,928 20,884 18,299 15,899 14,127
Franchised and
affiliated sales (7) $33,137 30,026 29,590 29,714 28,979 27,084 25,502 24,241 23,051 20,194 18,430
(1) Includes pretax charges (substantially all noncash) of $408 million ($323 million after tax or $0.25 per share) primarily related to the disposition of certain
non-McDonald’s brands and asset/goodwill impairment. See other operating expense, net note to the consolidated financial statements for further details.
(2) Includes pretax charges of $853 million ($700 million after tax or $0.55 per share) primarily related to restructuring certain international markets and
eliminating positions, restaurant closings/asset impairment and the write-off of technology costs. (The cash portion of these charges was approximately
$100 million after tax.) See other operating expense, net note to the consolidated financial statements for further details.
(3) Includes pretax operating charges of $378 million primarily related to the U.S. business reorganization and other global change initiatives, and restaurant
closings/asset impairment as well as net pretax nonoperating income of $125 million primarily related to a gain on the initial public offering of McDonald’s
Japan, for a total pretax expense of $253 million ($143 million after tax or $0.11 per share). (The cash portion of this net expense was approximately
$100 million after tax.) See other operating expense, net note to the consolidated financial statements for further details. Net income also reflects an
effective tax rate of 29.8 percent, primarily due to the benefit of tax law changes in certain international markets ($147 million).
(4) Includes pretax charges of $322 million ($219 million after tax or $0.16 per share) consisting of $162 million of Made For You costs and $160 million
related to a home office productivity initiative.
(5) Includes a $37 million after-tax charge ($0.03 per share) to reflect the cumulative effect of the adoption of SFAS No. 143 “Accounting for Asset Retirement
Obligations,” which requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time the
obligations are incurred. See summary of significant accounting policies note to the consolidated financial statements for further details.
(6) Includes a $99 million after-tax charge ($0.08 per share–basic and $0.07 per share–diluted) to reflect the cumulative effect of the adoption of SFAS No. 142
“Goodwill and Other Intangible Assets,” which eliminates the amortization of goodwill and instead subjects it to annual impairment tests. See summary
of significant accounting policies note to the consolidated financial statements for further details. Adjusted for the nonamortization provisions of
SFAS No.142, net income per common share would have been $0.02 higher in 2001 and 2000 and $0.01 higher in 1996-1999.
(7) While franchised and affiliated sales are not recorded as revenues by the Company, management believes they are important in understanding the Company’s
financial performance because these sales are the basis on which the Company calculates and records franchised and affiliated revenues and are
indicative of the financial health of the franchisee base.

McDonald’s Corporation 1
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

period in the prior year for all Systemwide restaurants in

OVERVIEW operation at least thirteen months. Constant currency
results exclude the effects of foreign currency translation
DESCRIPTION OF THE BUSINESS
and are calculated by translating current year results at
The Company primarily operates and franchises McDonald’s
prior year average exchange rates. Management reviews
restaurants. In addition, the Company operates certain non-
and analyzes business results in constant currencies and
McDonald’s brands that are not material to the Company’s
bases certain compensation plans on these results because
overall results. Of the more than 30,000 McDonald’s restau-
the Company believes they better represent the underlying
rants in over 100 countries, more than 8,000 are operated
business trends.
by the Company, approximately 18,000 are operated by
franchisees and about 4,000 are operated by affiliates under STRATEGIC DIRECTION AND 2003 FINANCIAL PERFORMANCE
license agreements. Regardless of who operates the restau- In 2001 and 2002, the Company’s results reflected a focus
rant, the Company generally owns the land and building or on growth through adding new restaurants, with associated
secures long-term leases for restaurant sites. This ensures high levels of capital expenditures and increasing levels
long-term occupancy rights and helps control related costs. of debt financing. This strategy, combined with challenging
Revenues consist of sales by Company-operated restau- economic conditions and increased competition in certain
rants and fees from restaurants operated by franchisees key markets, adversely affected results and returns on
and affiliates. These fees primarily include rent, service fees investment.
and/or royalties that are based on a percent of sales, with In 2003, the Company introduced a comprehensive
specified minimum rent payments. Fees vary by type of revitalization plan to increase McDonald’s relevance to
site, investment by the Company and local business condi- today’s consumers as well as improve our financial disci-
tions. These fees, along with occupancy and operating pline. We redefined our strategy to emphasize growth
rights, are stipulated in franchise agreements that generally through adding more customers to existing restaurants.
have 20-year terms. In line with this, we took a more disciplined approach to
We manage the business based on geographic segments: capital allocation and put a greater emphasis on controlling
United States; Europe; Asia/Pacific, the Middle East and expenses. We aligned the System around our customer-
Africa (APMEA); Latin America and Canada. In addition, focused Plan to Win, designed to deliver operational excel-
throughout this report we present a segment entitled “Other” lence and leadership marketing. This Plan contains aggres-
that includes non-McDonald’s brands. The U.S. and Europe sive goals and measures for success based on the five drivers
segments account for approximately 70% of total revenues. of exceptional customer experiences—people, products,
France, Germany and the United Kingdom account for place, price and promotion.
about 65% of Europe’s revenues; Australia, China and Japan Our near-term goal was to fortify the foundation of our
(a 50%-owned affiliate accounted for under the equity business. Our long-term goal is to create a differentiated
method) account for about 45% of APMEA’s revenues; and customer experience —one that builds brand loyalty —and
Brazil accounts for about 40% of Latin America’s revenues. enables us to deliver attractive top- and bottom-line growth
These seven markets along with the U.S. and Canada are and returns on a sustained basis. For 2005 and beyond,
referred to as “major markets” throughout this report and McDonald’s is targeting annual Systemwide sales and rev-
comprise approximately 70% of total revenues. enue growth of 3 percent to 5 percent, annual operating
In analyzing business trends, management considers a income growth of 6 percent to 7 percent and annual returns
variety of performance and financial measures including on incremental invested capital in the high teens. (Return
Systemwide sales growth, comparable sales growth and on incremental invested capital is the change in operating
Company-operated margins. Systemwide sales include sales income plus depreciation divided by the change in gross
by all restaurants, whether operated by the Company, by assets.) These targets exclude the impact of foreign currency
franchisees or by affiliates. While sales by franchisees and translation.
affiliates are not recorded as revenues by the Company, We made significant progress in 2003 in operational
management believes the information is important in excellence and leadership marketing. We improved our core
understanding the Company’s financial performance because menu and added several successful new products. We used
they are the basis on which the Company calculates and more consistent, rigorous measurements such as evaluations
records franchised and affiliated revenues and are indicative by Company personnel, independent mystery shoppers
of the financial health of our franchisee base. Comparable and customer research to evaluate restaurant performance.
sales are a key performance indicator used within the retail Using this information, along with enhanced training and
industry and are indicative of acceptance of the Company’s other processes, we have strengthened our operations.
initiatives as well as local economic and consumer trends. We have expanded our everyday value offerings, attracting
Increases or decreases in comparable sales represent the more customer visits. We began to create more relevant
percent change in constant currency sales from the same

2 McDonald’s Corporation
restaurant environments by updating, rebuilding and relo- OUTLOOK FOR 2004
cating some of our restaurants. We also introduced our first We expect 2004 to be a year of ongoing progress in opera-
global marketing strategy, embodied by the “i’m lovin’ it” tional excellence, leadership marketing and key financial
theme, which emphasizes more contemporary music and metrics. We will continue to focus our revitalization efforts
images and is connecting with both our customers and our on improving our customers’ experiences by providing better
employees. service, enhancing food taste, menu variety and value offer-
From a financial perspective, our results also improved ings, and creating more relevant marketing. While we are
in 2003. In concert with the Company’s strategic shift to confident in our plans for 2004, we also are conscious of
emphasize growth from existing restaurants, management the challenges we face. For example, we must continue to
is focusing in particular on comparable sales and Company- deliver solid results in the U.S., a very competitive market-
operated margin trends, both of which gained momentum place, despite sequentially more difficult sales comparisons.
during the year. Performance in the U.S. was impressive, We believe that the combination of initiatives that benefited
with robust annual comparable sales and margin increases. our U.S. business in 2003 will continue to create positive
In Europe, while comparable sales were slightly negative momentum in 2004.
for the year, they improved sequentially each quarter, as Outside the U.S., some key markets must increase cus-
did Company-operated margins, compared with the prior tomer relevance, while others have economic challenges.
year. APMEA’s comparable sales and Company-operated We believe that we are in a better position to overcome
margins declined for the year, but both showed significant these issues today than we have been for some time. Our
improvement in the second half. plan is to leverage successes in the U.S. and other markets
As part of the Company’s revitalization plan, we elimi- like Australia—such as more relevant menus, strong value
nated projects not directly affecting our customers’ experi- platforms, creative marketing and better restaurant-level
ence and narrowed non-McDonald’s brand activities. These execution—to improve results in additional markets
actions along with the write down of a portion of our around the world.
goodwill and restaurant assets resulted in the Company
While the Company does not provide specific guidance
recording $408 million of pretax charges (primarily
on earnings per share, the following information is provided
noncash) in 2003.
to assist in analyzing the Company’s results.
Highlights from the year included: > Changes in constant currency Systemwide sales are driven

Comparable sales increased 2.4%, a significant improve- by restaurant unit expansion and changes in comparable
ment over the 2.1% decline in 2002. sales. The Company expects net restaurant additions to
add approximately one percentage point to sales and

Consolidated revenues increased 11% to a new record
high of $17 billion. Excluding the positive impact of operating income growth in 2004 (in constant currencies).
currency translation, revenues increased 6%. Most of this anticipated growth will result from restau-
rants opened in 2003. The Company does not provide spe-

Systemwide sales increased 11%. Excluding the positive cific guidance on changes in comparable sales. However,
impact of currency translation, Systemwide sales
as a perspective, assuming no change in cost structure
increased 5%.
a one percentage point increase in U.S. comparable sales

Net income per common share totaled $1.15, compared would impact annual earnings per share by about 2 cents.
with $0.70 in 2002. Similarly, an increase of one percentage point in Europe’s

Company-operated margins as a percent of sales comparable sales would impact annual earnings per
improved 10 basis points, progressing toward our goal share by about 1.5 cents.
of increasing margins by 35 basis points per year > The Company expects full year 2004 selling, general
beginning in 2005. & administrative expenses to be relatively flat to up

Cash from operations increased $400 million to $3.3 bil- slightly in constant currencies and to decline as a
lion, primarily driven by higher sales at existing restau- percent of revenues and Systemwide sales, compared
rants and stronger foreign currencies. with 2003. However, due to the timing of certain expenses,
the Company expects selling, general & administrative

Capital expenditures were reduced by $700 million to
$1.3 billion. expenses to increase in the first half of 2004 and to
decline in the second half, compared with 2003.

Debt pay-down totaled approximately $900 million.
> A significant part of the Company’s operating income is

The annual dividend increased 70% to more than from outside the U.S., and more than 70% of its total debt
$500 million.
is denominated in foreign currencies. Accordingly, earn-

Share repurchases totaled about $440 million. ings are affected by changes in foreign currency exchange
rates, particularly the Euro and the British Pound.
If the Euro and the British Pound both move 10% in
the same direction (compared with 2003 average rates),

McDonald’s Corporation 3
 the Company's annual earnings per share would change > The Company expects capital expenditures for 2004
by about 5 cents to 6 cents. In 2003, foreign currency to be approximately $1.5 billion to $1.6 billion.
translation benefited earnings per share by 7 cents. > The Company expects to return about $1 billion to
> For 2004, the Company expects its net debt principal shareholders through dividends and share repurchases
repayments to be approximately $400 million to $700 mil- in 2004.
lion. However, despite lower average debt balances, the A number of factors can affect our business, including
Company expects interest expense to be relatively flat effectiveness of operating initiatives and changes in global
compared with 2003 due to stronger foreign currencies. and local business and economic conditions. These and
> The Company expects the effective income tax rate other risks are noted in the Forward-looking statements at
for 2004 to be between 32.5% and 33.5%. the end of Management’s discussion and analysis.

CONSOLIDATED OPERATING RESULTS

Operating results
2003 2002 2001
DOLLARS IN MILLIONS, Increase/ Increase/
EXCEPT PER SHARE DATA Amount (decrease) Amount (decrease) Amount

Revenues
Sales by Company-operated restaurants $12,795 11% $11,500 4% $11,041
Revenues from franchised and affiliated restaurants 4,345 11 3,906 2 3,829
Total revenues 17,140 11 15,406 4 14,870
Operating costs and expenses
Company-operated restaurants 11,006 11 9,907 5 9,454
Franchised restaurants 938 12 840 5 800
Selling, general & administrative expenses 1,833 7 1,713 3 1,662
Other operating expense, net 531 (36) 833 nm 257
Total operating costs and expenses 14,308 8 13,293 9 12,173
Operating income 2,832 34 2,113 (22) 2,697
Interest expense 388 4 374 (17) 452
McDonald’s Japan IPO gain nm (137)
Nonoperating expense, net 98 27 77 48 52
Income before provision for income taxes and
cumulative effect of accounting changes 2,346 41 1,662 (29) 2,330
Provision for income taxes 838 25 670 (3) 693
Income before cumulative effect of accounting changes 1,508 52 992 (39) 1,637
Cumulative effect of accounting changes, net of tax (37) nm (99) nm
Net income $ 1,471 65% $ 893 (45)% $ 1,637

Per common share–diluted:

Income before cumulative effect of accounting changes $ 1.18 53% $ .77 (38)% $ 1.25
Cumulative effect of accounting changes (.03) nm (.07) nm
Net income $ 1.15 64% $ .70 (44)% $ 1.25

nm Not meaningful.

STRATEGIC ACTIONS
In 2003, the Company eliminated projects not directly impact- In 2002, the Company initiated actions designed to opti-
ing its customers’ experience, narrowed its non-McDonald’s mize restaurant operations and improve the business. They
brand activities, aligned its System around a single action included the restructuring of certain international markets,
plan (Plan to Win), and reestablished McDonald’s marketing the closing of a significant number of underperforming
leadership through the introduction of its first ever global restaurants, the decision to terminate a long-term technology
brand strategy embodied by the “i’m lovin’ it” theme. These project, and the consolidation of certain home office facili-
actions were consistent with management's strategy of ties and elimination of positions to control costs, streamline
concentrating the Company’s capital and resources on the operations and reallocate resources.
best near-term opportunities and avoiding those that distract
from restaurant-level execution.

4 McDonald’s Corporation
 In 2001, the Company also implemented structural gain in 2001), and charges resulting from annual goodwill
changes and restaurant initiatives, primarily in the U.S. and asset impairment testing. McDonald’s management
The changes included streamlining operations by reducing does not include these items when reviewing business
the number of U.S. regions and divisions, enabling the performance trends because they do not believe these items
Company to combine staff functions and improve efficiency. are indicative of expected ongoing results.
The Company recorded charges associated with certain of On a pretax basis, the Company recorded $408 million of
the above actions as “special items.” Special items generally special charges in 2003, $853 million of special charges in
represent actions or transactions related to the implementa- 2002 and $253 million of special items in 2001. All special
tion of strategic initiatives of the Company, items that are items were recorded in other operating expense, except as
unusual or infrequent in nature (such as the dispositions of noted in the discussion that follows.
certain non-McDonald’s brands in 2003 and the Japan IPO

Special items–expense/(income)
Pretax After tax(2) Per common share–diluted
IN MILLIONS, EXCEPT PER SHARE DATA 2003 2002 2001 2003 2002 2001 2003 2002 2001

Restructuring $272 $267 $ 200 $183 $244 $ 136 $.14 $.19 $ .11
Restaurant closings/asset impairment 136 402 135 140 336 107 .11 .26 .08
Other 184 55 120 37 .10 .03
McDonald’s Japan IPO gain (137) (137) (.11)
Total special items(1) $408 $853 $ 253 $323 $700 $ 143 $.25 $.55 $ .11

(1) See other operating expense, net note to the consolidated financial statements for a summary of the activity in the related liabilities. The Company
expects to use cash provided by operations to fund the remaining employee severance and lease obligations associated with the special charges.
(2) Certain special items were not tax-effected.

Restructuring In 2001, the Company recorded $200 million of pretax

In 2003, the Company recorded $272 million of pretax restructuring charges related to initiatives designed to
charges consisting of: $237 million related to the loss on improve the restaurant experience, primarily in the U.S.
the sale of Donatos Pizzeria, the closing of all Donatos and These initiatives included streamlining operations by
Boston Market restaurants outside the U.S. and the exit of reducing the number of regions and divisions, enabling
a domestic joint venture with Fazoli’s; and $35 million the Company to combine staff functions and improve
related to revitalization plan actions of McDonald’s Japan, efficiency. In connection with these initiatives, the Company
including headcount reductions, the closing of Pret A Manger eliminated approximately 850 positions (700 in the U.S.,
stores in Japan, and the early termination of a long-term primarily in the divisions and regions, and 150 in interna-
management services agreement. tional markets).
In 2002, the Company recorded $267 million of net
Restaurant closings/asset impairment
pretax charges consisting of: $201 million related to the
In 2003, the Company recorded $136 million of net pretax
anticipated transfer of ownership in five countries in the
charges consisting of: $148 million primarily related to
Middle East and Latin America to developmental licensees
asset/goodwill impairment, mainly in Latin America;
and ceasing operations in two countries in Latin America;
$30 million for about 50 restaurant closings associated with
$81 million primarily related to eliminating approximately
strategic actions in Latin America; and a $42 million favor-
600 positions (about half of which were in the U.S. and
able adjustment to the 2002 charge for restaurant closings,
half of which were in international markets), reallocating
primarily due to about 85 fewer closings than originally
resources and consolidating certain home office facilities to
anticipated. The lower closings were primarily due to
control costs; and a $15 million favorable adjustment to the
management’s reassessment of the plans as a result of the
2001 restructuring charge due to lower employee-related
new strategic direction of the Company.
costs than originally anticipated. Under the developmental
In 2002, the Company recorded $402 million of pretax
license business structure, which the Company successfully
charges consisting of: $302 million related to management's
employs in about 30 markets outside the U.S. (approximately
decision to close 751 underperforming restaurants primarily
400 restaurants), the licensee owns the business, including
in the U.S. and Japan; and $100 million primarily related
the real estate interest. While the Company generally does
to the impairment of assets for certain existing restaurants
not have any capital invested in these markets, it receives
in Europe and Latin America. Most of the restaurants
a royalty based on a percent of sales.
identified for closing had negative cash flows and/or very
low annual sales volumes. Also, in many cases they would
have required significant capital investment to remain
financially viable.

McDonald’s Corporation 5
 In 2001, the Company recorded $135 million of pretax Systemwide cost over several years was expected to be
charges consisting of: $91 million related to the closing of more than $1 billion.
163 underperforming restaurants in international markets; a In 2001, the Company recorded $55 million of pretax
$24 million asset impairment charge in Turkey; and $20 mil- charges consisting of: $18 million primarily related to the
lion related to the disposition of Aroma Café in the U.K. write-off of certain technology costs; $12 million (recorded
Although restaurant closings occur each year, these in nonoperating expense) primarily related to the write-off
restaurant closing charges in each year were identified as of a corporate investment; and $25 million primarily related
“special charges” because they were the result of separate to the unrecoverable costs incurred in connection with the
intensive reviews by management in conjunction with theft of winning game pieces from the Company's Monopoly
other strategic actions. and certain other promotional games over an extended
period of time, and the related termination of the supplier
Other
of the game pieces. Fifty individuals (none of whom were
In 2002, the Company recorded $184 million of pretax
Company employees) were convicted of conspiracy and/or
charges consisting of: $170 million primarily related to the
mail fraud charges.
write-off of software development costs as a result of man-
agement's decision to terminate a long-term technology McDonald's Japan IPO gain
project; and $14 million primarily related to the write-off In 2001, McDonald's Japan, the Company’s 50%-owned
of receivables and inventory in Venezuela as a result of the affiliate, completed an IPO of 12 million shares. The Company
temporary closure of all McDonald's restaurants due to a recorded a $137 million gain (pre and after tax) in nonoper-
national strike. Although the terminated technology project ating income to reflect an increase in the carrying value
was expected to deliver long-term benefits, it was no longer of its investment as a result of the cash proceeds from the
viewed as the best use of capital, as the anticipated IPO received by McDonald's Japan.

IMPACT OF FOREIGN CURRENCIES ON REPORTED RESULTS

While changing foreign currencies affect reported results, major currencies, primarily the Euro. In 2002, foreign
McDonald's lessens exposures, where practical, by financing currency translation had a minimal impact on revenues as
in local currencies, hedging certain foreign-denominated the stronger Euro and British Pound were offset by weaker
cash flows, and by purchasing goods and services in local Latin American currencies (primarily the Argentine Peso,
currencies. Brazilian Real and Venezuelan Bolivar). Operating income
In 2003, foreign currency translation had a positive in 2002 was positively impacted by foreign currency
impact on consolidated revenues, operating income and translation primarily due to the stronger Euro and British
earnings per share due to the strengthening of several Pound.

Impact of foreign currency translation on reported results

Currency translation
Reported amount benefit (loss)
IN MILLIONS, EXCEPT PER SHARE DATA 2003 2002 2001 2003 2002 2001

Revenues $17,140 $15,406 $14,870 $886 $ 15 $(457)

Company-operated margins(1) 1,695 1,513 1,525 101 29 (49)
Franchised margins(1) 3,405 3,064 3,028 195 39 (65)
Selling, general & administrative expenses 1,833 1,713 1,662 (68) 8 35
Operating income 2,832 2,113 2,697 189 90 (78)
Income before cumulative effect of accounting changes 1,508 992 1,637 89 42 (50)
Net income 1,471 893 1,637 89 42 (50)
Per common share–diluted:
Income before cumulative effect of accounting changes 1.18 .77 1.25 .07 .03 (.04)
Net income 1.15 .70 1.25 .07 .04 (.04)

(1) Includes McDonald’s restaurants only.

6 McDonald’s Corporation
REVENUES
Consolidated revenue growth in 2003 was driven by stronger foreign currencies and a strong performance in the U.S.
In 2002, consolidated revenue growth was driven by expansion and a higher percentage of Company-operated restaurants
compared with 2001.
Revenues
Increase (decrease)
Amount Increase (decrease) excluding currency translation
DOLLARS IN MILLIONS 2003 2002 2001 2003 2002 2003 2002

Company-operated sales:
U.S. $ 3,594 $ 3,172 $ 3,139 13% 1% 13% 1%
Europe 4,498 3,982 3,727 13 7 – 2
APMEA 2,158 2,115 1,938 2 9 (3) 8
Latin America 774 696 821 11 (15) 20 12
Canada 632 505 478 25 6 11 7
Other 1,139 1,030 938 11 10 10 10
Total $12,795 $11,500 $11,041 11% 4% 6% 4%

Franchised and affiliated revenues:

U.S. $ 2,445 $ 2,251 $ 2,257 9% – 9% –
Europe 1,377 1,154 1,025 19 13% 1 6%
APMEA 289 253 265 14 (5) – (6)
Latin America 85 118 150 (28) (21) (20) (8)
Canada 146 128 130 14 (2) 1 –
Other 3 2 2 33 – 33 –
Total $ 4,345 $ 3,906 $ 3,829 11% 2% 5% 1%

Total revenues:
U.S. $ 6,039 $ 5,423 $ 5,396 11% 1% 11% 1%
Europe 5,875 5,136 4,752 14 8 – 3
APMEA 2,447 2,368 2,203 3 7 (3) 7
Latin America 859 814 971 6 (16) 14 9
Canada 778 633 608 23 4 9 6
Other 1,142 1,032 940 11 10 11 10
Total $17,140 $15,406 $14,870 11% 4% 6% 4%

In the U.S., ongoing menu, service and value initiatives In 2003 and 2002, APMEA’s revenues benefited from
drove the increase in revenues in 2003 as the U.S. achieved positive comparable sales in Australia and expansion in
its highest annual comparable sales increase since 1987. China. Revenues were negatively affected in 2003 by weak
These initiatives included the introduction of premium results in Hong Kong, South Korea and Taiwan, compounded
salads and McGriddles breakfast sandwiches, the Dollar by consumer concerns about Severe Acute Respiratory
Menu, extended hours, a heightened focus on operations, Syndrome (SARS) in several markets in the first half of
more disciplined measurements and a new marketing the year. In addition, Japan had negative comparable sales
direction. Results also reflected improvement in the U.S. for 2003 and 2002, although the market’s performance
economy in 2003. In 2002, revenues increased slightly due improved in the fourth quarter of 2003. In 2002, revenues
to restaurant expansion. Results in 2002, in part, reflected reflected a benefit from the restructuring of our ownership
the overall slowdown in the restaurant industry and in the Philippines, effective July 2001, that resulted in
increased competition. the reclassification of franchised restaurants to Company-
In 2003 and 2002, Europe’s revenues reflected strong operated.
performance in Russia driven by expansion and positive In Latin America, revenues in 2003 increased in constant
comparable sales, along with expansion in France. These currencies primarily due to a higher percentage of Company-
results were partly offset by weak results in the U.K. and operated restaurants. The increase in revenues in 2002 was
Germany, although Germany’s performance improved in primarily due to positive comparable sales in Brazil and
the second half of 2003. expansion in Mexico.

McDonald’s Corporation 7
 The following tables present Systemwide sales growth rates and the increase or decrease in comparable sales.
Systemwide sales Comparable sales–McDonald’s restaurants
Increase (decrease) Increase (decrease)
Increase (decrease) excluding currency translation
2003 2002 2001
2003 2002 2001 2003 2002 2001
U.S. 6.4% (1.5)% 0.1%
U.S. 9% 1% 2% 9% 1% 2% Europe (0.9) 1.0 (1.4)
Europe 18 11 1 2 5 5 APMEA (4.2) (8.5) (4.8)
APMEA 6 (3) (6) (2) (3) 3 Latin America 2.3 1.0 (3.9)
Latin America (4) (17) (3) 4 4 6 Canada – (2.5) 1.3
Canada 17 1 – 4 2 5
Total 2.4% (2.1)% (1.3)%
Other 10 9 61 10 9 62
Total 11% 2% 1% 5% 2% 4%

OPERATING INCOME
Consolidated operating income in 2003 included higher dollars, higher selling, general & administrative expenses
combined operating margin dollars, higher selling, general and a net loss from our Japanese affiliate compared with
& administrative expenses and lower gains on sales of earnings in 2001. In all three years, the Company recorded
restaurant businesses compared with 2002. Operating special charges that are included in these results.
income in 2002 included higher combined operating margin

Operating income
Increase (decrease)
Amount Increase (decrease) excluding currency translation
DOLLARS IN MILLIONS 2003 2002 2001 2003 2002 2003 2002

U.S. $1,982 $1,673 $1,622 18% 3% 18% 3%

Europe 1,339 1,022 1,063 31 (4) 13 (8)
APMEA 226 64 325 nm (80) nm (81)
Latin America (171) (133) 11 (28) nm (7) nm
Canada 163 125 124 30 1 15 3
Other (295) (66) (66) nm – nm –
Corporate (412) (572) (382) 28 (50) 28 (50)
Total $2,832 $2,113 $2,697 34% (22)% 25% (25)%

nm Not meaningful.

8 McDonald’s Corporation
 The following table presents the special charges included in operating income by segment for 2003, 2002 and 2001.
Special charges
IN MILLIONS U.S. Europe APMEA Latin America Canada Other Corporate Consolidated

2003
Restructuring $ 35 $237 $272
Restaurant closings/asset impairment(1) $ (11) $ (20) 20 $109 $ (1) 29 $ 10 136
Total (11) (20) 55 109 (1) 266 10 408
Currency translation benefit (loss) 3 (5) (20) (11) (33)
Total excluding currency translation $ (11) $ (17) $ 50 $ 89 $ (1) $255 $ 10 $375

2002
Restructuring $ 25 $ 9 $141 $ 66 $ 2 $ 3 $ 21 $267
Restaurant closings/asset impairment 74 135 81 62 4 31 15 402
Other 4 14 4 162 184
Total 99 148 222 142 10 34 198 853
Currency translation benefit (loss) (17) (3) 23 3
Total excluding currency translation $ 99 $131 $219 $165 $10 $ 34 $198 $856

2001
Restructuring $156 $ 7 $ 3 $ 3 $ 6 $ 5 $ 20 $200
Restaurant closings/asset impairment 39 35 37 4 20 135
Other 25 4 14 43
Total 181 46 42 40 10 25 34 378
Currency translation benefit (loss) (1) 1 6 6
Total excluding currency translation $181 $ 45 $ 43 $ 46 $10 $ 25 $ 34 $384

(1) Bracketed amounts resulted from favorable adjustments to 2002 charges primarily due to fewer than anticipated restaurant closings.

In 2003, U.S. operating income included higher combined APMEA’s constant currency results in 2003 reflected
operating margin dollars, higher selling, general & adminis- strong results in Australia. However, weak results in most
trative expenses and higher other operating expenses other markets, compounded by concerns about SARS in
(excluding special charges). U.S. operating income in 2002 certain markets, negatively impacted the segment. In 2002,
included lower combined operating margin dollars, lower strong results in Australia were more than offset by weak
selling, general & administrative expenses and lower other results in Japan and Hong Kong.
operating income (excluding special charges). Latin America’s operating income in constant currencies
Europe’s constant currency results in 2003 and 2002 significantly declined in both 2003 and 2002 due to the
benefited from strong performances in France and Russia. continuing difficult economic conditions experienced by
However, difficult economic conditions in Germany and several key markets in the segment. In addition, Latin
weak results in the U.K. negatively impacted results in both America's results for both years were negatively impacted
years. Despite the difficult economic conditions, Germany’s by higher provisions for uncollectible receivables. The
performance improved in the second half of 2003. Company is currently in litigation with about one-third
of the franchisees in Brazil, which is negatively impacting
the Company’s results in Latin America. We expect this
to continue in the near term.

McDonald’s Corporation 9
OPERATING MARGINS Franchised margins
Operating margin information and discussions relate to Franchised margin dollars represent revenues from fran-
McDonald’s restaurants only and exclude non-McDonald’s chised and affiliated restaurants less the Company's occu-
brands. pancy costs (rent and depreciation) associated with those
sites. Franchised margin dollars represented more than
Company-operated margins
65% of the combined operating margins in 2003, 2002 and
Company-operated margin dollars represent sales by
2001. Franchised margin dollars increased $341 million or
Company-operated restaurants less the operating costs of
11% (5% in constant currencies) in 2003 and $36 million
these restaurants. Company-operated margin dollars
or 1% (flat in constant currencies) in 2002.
increased $182 million or 12% (5% in constant currencies)
in 2003 and declined $12 million or 1% (3% in constant Franchised margins–McDonald’s restaurants
currencies) in 2002. The constant currency increase in 2003 IN MILLIONS 2003 2002 2001

was primarily due to strong comparable sales in the U.S. U.S. $1,945 $1,781 $1,799
The constant currency decrease in 2002 was primarily due Europe 1,044 885 792
to negative comparable sales and higher labor rates, partly APMEA 248 217 229
offset by restaurant expansion. Latin America 54 79 103
Company-operated margins–McDonald’s restaurants Canada 114 102 105

IN MILLIONS 2003 2002 2001 Total $3,405 $3,064 $3,028

U.S. $ 635 $ 507 $ 501 PERCENT OF REVENUES

Europe 708 631 626 U.S. 79.5% 79.1% 79.7%
APMEA 213 239 240 Europe 75.8 76.7 77.2
Latin America 47 66 83 APMEA 85.6 85.8 86.2
Canada 92 70 75 Latin America 64.3 66.9 68.4
Total $1,695 $1,513 $1,525 Canada 78.2 79.2 80.4

PERCENT OF SALES
Total 78.4% 78.5% 79.1%

U.S. 17.7% 16.0% 16.0%

Europe 15.7 15.9 16.8 The consolidated franchised margin percent declined
APMEA 9.9 11.3 12.4 slightly in 2003 as positive comparable sales were offset by
Latin America 6.1 9.4 10.1 higher occupancy costs, due in part to an increased propor-
Canada 14.6 13.7 15.6 tion of leased sites. The decline in the consolidated fran-
Total 14.5% 14.4% 15.1% chised margin percent in 2002 reflected negative compara-
ble sales, higher rent assistance to franchisees primarily
Operating cost trends as a percent of sales were as follows: in the U.S. and Europe, and higher occupancy costs, due
food & paper costs decreased in 2003 and 2002, payroll in part to an increased proportion of leased sites.
costs were flat in 2003 and increased in 2002, and occupancy
& other operating expenses increased in both years. SELLING, GENERAL & ADMINISTRATIVE EXPENSES
The U.S. Company-operated margin percent increased in Consolidated selling, general & administrative expenses
2003 primarily due to positive comparable sales and lower increased 7% in 2003 and 3% in 2002 (3% and 4% in con-
payroll as a percent of sales due to improved productivity stant currencies). The constant currency increase in 2003
and lower wage inflation. Higher commodity costs partly was primarily due to higher performance-based incentive
offset these trends. In 2002, the U.S. Company-operated compensation, as well as severance and other costs associated
margin percent benefited from the elimination of goodwill with the strategic decision to reduce restaurant openings.
amortization and a lower advertising contribution rate, while The constant currency increase in 2002 was primarily due
weak comparable sales and higher labor costs negatively to higher spending on technology in the Corporate segment,
impacted the margin. higher advertising expenses in the U.S. primarily related to
In 2003, Europe’s Company-operated margin percent the introduction of the Dollar Menu, and higher expenses
reflected weak performance in the U.K. (which has the for non-McDonald’s brands.
largest number of Company-operated restaurants in Europe),
partly offset by improved margin performance in Germany
and France. In 2002, Europe's Company-operated margin
percent reflected higher labor costs and an increase in occu-
pancy & other operating expenses.

10 McDonald’s Corporation
 Selling, general & administrative expenses as a percent and 2001. Management believes that analyzing selling,
of revenues declined to 10.7% in 2003 compared with general & administrative expenses as a percent of Systemwide
11.1% in 2002 and 11.2% in 2001, and selling, general sales as well as revenues is meaningful because these costs
& administrative expenses as a percent of Systemwide sales are incurred to support Systemwide restaurants.
declined to 4.0% in 2003 compared with 4.1% in 2002

Selling, general & administrative expenses

Increase (decrease)
Amount Increase (decrease) excluding currency translation
DOLLARS IN MILLIONS 2003 2002 2001 2003 2002 2003 2002

U.S. $ 567 $ 558 $ 563 2% (1)% 2% (1)%

Europe 424 359 328 18 9 2 4
APMEA 173 158 152 10 4 2 3
Latin America 102 102 126 – (19) 8 3
Canada 54 49 51 9 (3) (3) (2)
Other 115 114 102 1 13 – 12
Corporate(1) 398 373 340 7 10 7 10
Total $1,833 $1,713 $1,662 7% 3% 3% 4%

(1) Corporate expenses consist of home office support costs in areas such as facilities, finance, human resources, information technology, legal,
marketing, supply chain management and training.

OTHER OPERATING EXPENSE, NET primarily due to strong results in the U.S. The decrease
in 2002 was due to a net loss from our Japanese affiliate
Other operating (income) expense, net
compared with earnings in 2001.
DOLLARS IN MILLIONS 2003 2002 2001
Other expense
Gains on sales
of restaurant businesses $ (55) $(114) $(112)
Other expense in 2003 reflected higher losses on asset
Equity in earnings dispositions, higher provisions for uncollectible receivables
of unconsolidated affiliates (37) (24) (63) (primarily in Latin America), and costs in the U.S. related
Special charges (1) 408 853 378 to sites that will no longer be developed as a result of
Other expense 215 118 54 management’s decision to significantly reduce capital
Total $531 $ 833 $ 257 expenditures. Other expense in 2002 reflected payments to
U.S. owner/operators to facilitate the introduction of a new
(1) See other operating expense, net note to the consolidated financial
statements for a discussion of the special charges and a summary front counter service system and higher provisions for
of the activity in the related liabilities. uncollectible receivables (primarily in Europe and Latin
America), partly offset by a benefit from the elimination of
goodwill amortization. The Company expects lower other
Gains on sales of restaurant businesses
expense in 2004 compared with 2003.
Gains on sales of restaurant businesses include gains from
sales of Company-operated restaurants as well as gains from
INTEREST EXPENSE
exercises of purchase options by franchisees with business
Interest expense increased in 2003 due to stronger foreign
facilities lease arrangements (arrangements where the
currencies, partly offset by lower average debt levels and
Company leases the businesses, including equipment, to
interest rates. Interest expense decreased in 2002 due to
franchisees who have options to purchase the businesses).
lower average interest rates, partly offset by higher average
The Company's purchases and sales of businesses with its
debt levels and stronger foreign currencies.
franchisees and affiliates are aimed at achieving an optimal
ownership mix in each market. Resulting gains or losses
NONOPERATING EXPENSE, NET
are recorded in operating income because the transactions
Nonoperating expense includes miscellaneous income
are a recurring part of our business. The Company expects
and expense items such as interest income, minority inter-
lower gains on sales of restaurant businesses in 2004
ests, and gains and losses related to other investments,
compared with 2003.
financings and foreign currency translation. Nonoperating
Equity in earnings of unconsolidated affiliates expense in 2003 reflected an $11 million loss on the early
Equity in earnings of unconsolidated affiliates—businesses extinguishment of $200 million of debt as well as higher
in which the Company actively participates but does not foreign currency translation losses compared with 2002.
control—is reported after interest expense and income Nonoperating expense in 2002 reflected higher minority
taxes, except for U.S. restaurant partnerships, which are interest expense and foreign currency translation losses
reported before income taxes. The increase in 2003 was in 2002 compared with foreign currency translation gains

McDonald’s Corporation 11
in 2001. In addition, nonoperating expense in 2001 included In addition to its cash provided by operations, the Company
$12 million primarily related to the write-off of a corporate can meet short-term funding needs through commercial
investment as well as minority interest expense related to paper borrowings and line of credit agreements. Accordingly,
the sale of real estate in Singapore. the Company purposefully maintains a relatively low
current ratio, which was .76 at year-end 2003.
PROVISION FOR INCOME TAXES
The following table presents the reported effective income RESTAURANT DEVELOPMENT AND CAPITAL EXPENDITURES
tax rates as well as the effective income tax rates before As a result of the Company strategically shifting its focus
special items. from adding new restaurants to building sales at existing
restaurants, the Company significantly reduced capital
2003 2002 2001
expenditures and restaurant openings in 2003 compared
Reported effective income tax rates 35.7% 40.3% 29.8% with 2002 and 2001.
Impact of special items(1) (2.2) (7.6) 1.3 In 2003, the Company opened 513 traditional McDonald's
Effective income tax rates before restaurants and 319 satellite restaurants (small, limited-
special items 33.5% 32.7% 31.1%
menu restaurants for which the land and building are
(1) Certain special items were not tax-effected. generally leased), and closed 486 traditional restaurants
and 184 satellite restaurants. In 2002, the Company opened
The 2001 effective income tax rate reflected a benefit 1,247 traditional McDonald's restaurants and 392 satellite
from the impact of tax law changes in certain international restaurants, and closed 474 traditional restaurants and
markets. 158 satellite restaurants. About 65% of McDonald's restau-
Consolidated net deferred tax liabilities included tax rant additions occurred in the major markets in 2003.
assets, net of valuation allowance, of $1,032 million in 2003 Systemwide restaurants at year end (1)
and $867 million in 2002. Substantially all of the net tax 2003 2002 2001
assets arose in the U.S. and other profitable markets.
U.S. 13,609 13,491 13,099
Europe 6,186 6,070 5,794
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
APMEA 7,475 7,555 7,321
Effective January 1, 2003, the Company adopted SFAS
Latin America 1,578 1,605 1,581
No.143, Accounting for Asset Retirement Obligations, which
Canada 1,339 1,304 1,223
requires legal obligations associated with the retirement of Other 942 1,083 1,075
long-lived assets to be recognized at their fair value at the
Total 31,129 31,108 30,093
time that the obligations are incurred. Effective January 1,
2002, the Company adopted SFAS No. 142, Goodwill and (1) Includes satellite units at December 31, 2003, 2002 and 2001 as
Other Intangible Assets, which eliminates the amortization follows: U.S.–1,307, 1,159, 1,004; Europe–150, 102, 63; APMEA
(primarily Japan)–1,841, 1,923, 1,879; Latin America–20, 19, 46;
of goodwill and instead subjects it to annual impairment and Canada–350, 330, 307.
tests. See summary of significant accounting policies note to
the consolidated financial statements for further discussion. In 2004, the Company expects to open about 550 tradi-
tional McDonald’s restaurants and 300 satellite restaurants
and close about 300 traditional restaurants and 100 satellite
CASH FLOWS restaurants.
Approximately 60% of Company-operated restaurants
The Company generates significant cash from operations and and more than 85% of franchised restaurants were located
has substantial credit capacity to fund operating and discre- in the major markets at the end of 2003. Franchisees and
tionary spending. Cash from operations totaled $3.3 billion affiliates operated 73% of McDonald's restaurants at year-
and exceeded capital expenditures by $2.0 billion in 2003, end 2003. Non-McDonald's brand restaurants are primarily
while cash from operations totaled $2.9 billion and exceeded Company-operated.
capital expenditures by $0.9 billion in 2002. Cash provided Capital expenditures decreased $697 million or 35% in
by operations, along with borrowings and other sources 2003 and increased $98 million or 5% in 2002. The decrease
of cash, is used for capital expenditures, debt repayments, in capital expenditures in 2003 was primarily due to lower
dividends and share repurchases. restaurant openings, consistent with our shift in strategic
Cash provided by operations focus, partly offset by stronger foreign currencies (foreign
DOLLARS IN MILLIONS 2003 2002 2001
currency translation increased capital expenditures by
$73 million). The increase in 2002 was primarily due to
Cash provided by operations $3,269 $2,890 $2,688 higher spending in the U.S. and Canada, partly offset by
Cash provided by operations as lower capital expenditures for new restaurants in Latin
a percent of capital expenditures 250% 144% 141%
America. Capital expenditures for McDonald's restaurants

12 McDonald’s Corporation
in 2003, 2002 and 2001 reflected the leasing of a higher SHARE REPURCHASES AND DIVIDENDS
proportion of new sites and a program that gave U.S. fran- During 2003, the Company acquired 18.9 million shares
chisees the option to purchase new restaurant buildings. of McDonald's stock for approximately $439 million under
During 2003, the Company began to phase out the option a $5.0 billion share repurchase program authorized in 2001.
for U.S. franchisees to purchase new restaurant buildings. Through 2003, 39.0 million shares for $975 million have
Consequently, the Company is currently purchasing most been repurchased under this program.
buildings and, as a result, collects additional rent from The Company has paid dividends on its common stock
the franchisees. for 28 consecutive years and has increased the dividend
Capital expenditures invested in major markets excluding amount every year. In 2003, the Company declared a 70%
Japan represented approximately 70% of the total in 2003 increase in the annual dividend to $504 million, reflecting
and 2002 and 60% in 2001. Japan is accounted for under the Company’s confidence in the ongoing strength and
the equity method, and accordingly its capital expenditures reliability of its cash flow, the positive results from its
are not included in consolidated amounts. revitalization efforts and favorable changes in the U.S. tax
Capital expenditures law. As in the past, future dividends will be considered
after reviewing returns to shareholders, profitability expec-
IN MILLIONS 2003 2002 2001
tations and financing needs and will be declared at the
New restaurants $ 617 $ 1,161 $ 1,198 discretion of the Board of Directors. Cash dividends are
Existing restaurants(1) 564 659 571 declared and paid on an annual basis.
Other properties(2) 126 184 137
Total $ 1,307 $ 2,004 $ 1,906

Total assets $25,525 $23,971 $22,535 FINANCIAL POSITION AND CAPITAL RESOURCES

(1) Includes technology to improve service and food quality and TOTAL ASSETS AND RETURNS
enhancements to facilities to achieve higher levels of customer Total assets grew by $1.6 billion or 6% in 2003 and $1.4 bil-
satisfaction.
lion or 6% in 2002. Changes in foreign currency exchange
(2) Primarily computer equipment and furnishings for office buildings.
rates increased total assets by approximately $1.9 billion in
2003 and $785 million in 2002. At year-end 2003 and 2002,
Capital expenditures for new restaurants decreased approximately 65% of consolidated assets was located in
$544 million or 47% in 2003 because the Company opened the major markets excluding Japan. Net property and equip-
fewer restaurants and concentrated new restaurant invest- ment rose $1.3 billion in 2003 and represented 78% of total
ments in markets with acceptable returns or opportunities assets at year end.
for long-term growth. While capital expenditures for existing Operating income is used to compute return on average
restaurants decreased in 2003, they increased as a percent- assets, while income before the cumulative effect of
age of total capital spending. This is due to the Company's accounting changes is used to calculate return on average
focus on growing sales at existing restaurants including common equity. Month-end balances are used to compute
reinvestment initiatives such as restaurant reimaging in both average assets and average common equity.
several markets around the world, including the U.S.
Returns on assets and equity
Average development costs vary widely by market
depending on the types of restaurants built and the real 2003 2002 2001

estate and construction costs within each market. These Return on average assets 11.4% 9.2% 12.3%
costs, which include land, buildings and equipment owned Return on average common equity 13.3 9.8 17.5
by the Company, are managed through the use of optimally
sized restaurants, construction and design efficiencies, Special charges reduced return on average assets by
standardization and global sourcing. In addition, foreign 1.4 percentage points in 2003, 3.6 percentage points in 2002
currency fluctuations affect average development costs. In and 1.8 percentage points in 2001. In addition, these charges
2004, the Company is targeting eleven consolidated markets, reduced return on average common equity by 2.8 percentage
including the U.S., for opening ten or more restaurants. points in 2003, 7.0 percentage points in 2002 and 1.6 per-
Although the Company is not responsible for all costs on centage points in 2001. In 2003, return on average assets
every restaurant opened, in 2003 total development costs and return on average common equity both began to stabi-
(consisting of land, buildings and equipment) for new lize due to strong operating results in the U.S., partly offset
traditional McDonald's restaurants averaged approximately by continued weak operating results in most markets in
$1.8 million in the U.S. and approximately $1.7 million in APMEA and Latin America. In 2002, return on average assets
the ten markets outside the U.S. and return on average common equity both declined, pri-
The Company and its affiliates owned about 37% of the marily due to weak operating results in APMEA and Latin
land and 60% of the buildings for its restaurants at year-end America. During 2004, the Company will continue to con-
2003 and 2002. centrate McDonald’s restaurant openings and new capital
invested in markets with acceptable returns or opportunities
for long-term growth.

McDonald’s Corporation 13
FINANCINGS AND MARKET RISK statements) as well as $1.6 billion under a U.S. shelf regis-
The Company generally borrows on a long-term basis and tration and $607 million under a Euro Medium-Term Notes
is exposed to the impact of interest rate changes and foreign program for future debt issuance.
currency fluctuations. Debt obligations at December 31, The Company uses major capital markets, bank financings
2003 totaled $9.7 billion compared with $10.0 billion at and derivatives to meet its financing requirements and
December 31, 2002. The net decrease in 2003 was due to net reduce interest expense. The Company manages its debt
payments ($892 million) and SFAS No. 133 noncash fair portfolio in response to changes in interest rates and foreign
value adjustments ($44 million), partly offset by the impact currency rates by periodically retiring, redeeming and
of changes in exchange rates on foreign currency denomi- repurchasing debt, terminating exchange agreements and
nated debt ($686 million). using derivatives. The Company does not use derivatives
Debt highlights (1) with a level of complexity or with a risk higher than the
exposures to be hedged and does not hold or issue deriva-
2003 2002 2001
tives for trading purposes. All exchange agreements are
Fixed-rate debt as a percent over-the-counter instruments.
of total debt (2,3) 62% 62% 45%
In managing the impact of interest rate changes and for-
Weighted-average annual
interest rate of total debt 4.1 4.1 5.4 eign currency fluctuations, the Company uses interest rate
Foreign currency-denominated debt exchange agreements and finances in the currencies in
as a percent of total debt (2,3) 71 64 57 which assets are denominated. All derivatives were recorded
Total debt as a percent of at fair value in the Company's Consolidated balance sheet at
total capitalization (total debt
and total shareholders’ equity) (2) 44 48 48 December 31, 2003 and 2002 as follows: miscellaneous other
Cash provided by operations assets–$102 million and $134 million; other long-term lia-
as a percent of total debt (2) 35 30 30 bilities (excluding interest)–$136 million and $39 million;
(1) All percentages are as of December 31, except for the weighted-
and accrued payroll and other liabilities–$29 million and
average annual interest rate, which is for the year. $24 million. See summary of significant accounting policies
(2) Based on debt obligations before the effect of SFAS No. 133 fair note to the consolidated financial statements related to finan-
value adjustments. cial instruments for additional information regarding their
(3) Includes the effect of interest rate and foreign currency exchange
use and the impact of SFAS No.133 regarding derivatives.
agreements.
The Company uses foreign currency debt and derivatives
Moody’s, Standard & Poor’s and Fitch currently rate to hedge the foreign currency risk associated with certain
McDonald’s commercial paper P-1, A-1 and F1; and its long- royalties, intercompany financings and long-term invest-
term debt A2, A and A, respectively. Historically the Company ments in foreign subsidiaries and affiliates. This reduces
has not experienced difficulty in obtaining financing or refi- the impact of fluctuating foreign currencies on cash flows
nancing existing debt. The Company’s key metrics for moni- and shareholders’ equity. Total foreign currency denominated
toring its credit structure are shown in the preceding table. debt, including the effects of foreign currency exchange
While the Company targets these metrics for ease of focus, it agreements, was $6.8 billion at year-end 2003 and $6.2 bil-
also looks at similar credit ratios that incorporate capitalized lion at year-end 2002. In addition, where practical, McDonald’s
operating leases to estimate total adjusted debt using a multi- restaurants purchase goods and services in local currencies
ple of eight times rent expense after considering certain resulting in natural hedges.
adjustments to more accurately reflect its total aggregate The Company does not have significant exposure to any
lease commitments. These adjustments include: excluding individual counterparty and has master agreements that
percent rents in excess of minimum rents; excluding certain contain netting arrangements. Certain of these agreements
Company-operated restaurant lease agreements outside the also require each party to post collateral if credit ratings fall
U.S. that are cancelable with minimal penalties (representing below, or aggregate exposures exceed, certain contractual
approximately 20% of Company-operated restaurant leases limits. At December 31, 2003, the Company was required to
outside the U.S., based on the Company’s estimate); capital- post collateral of $11.6 million, and at December 31, 2002,
izing non-restaurant leases using a multiple of three times collateral of $2.2 million was posted by a counterparty.
rent expense; and reducing total rent expense by approxi- The Company’s net asset exposure is diversified among a
mately half of the annual minimum rent payments due to broad basket of currencies. The Company’s largest net asset
the Company from franchisees operating on leased sites. exposures (defined as foreign currency assets less foreign
Certain of the Company’s debt obligations contain cross- currency liabilities) at year end were as follows:
acceleration provisions and restrictions on Company and Foreign currency net asset exposures
subsidiary mortgages and the long-term debt of certain IN MILLIONS OF U.S. DOLLARS 2003 2002
subsidiaries. There are no provisions in the Company's debt
obligations that would accelerate repayment of debt as Euro $1,922 $1,536
a result of a change in credit ratings or a material adverse Canadian Dollars 1,086 808
Australian Dollars 781 620
change in the Company’s business. The Company has
British Pounds Sterling 741 700
$1.3 billion available under committed line of credit agree-
Brazilian Reais 365 385
ments (see debt financing note to the consolidated financial
14 McDonald’s Corporation
 The Company prepared sensitivity analyses of its finan- The Company maintains a nonqualified, unfunded
cial instruments to determine the impact of hypothetical Supplemental Plan that allows participants to make tax-
changes in interest rates and foreign currency exchange rates deferred contributions and receive Company-provided
on the Company’s results of operations, cash flows and the allocations that cannot be made under the Profit Sharing
fair value of its financial instruments. The interest rate and Savings Plan because of Internal Revenue Service limi-
analysis assumed a one percentage point adverse change in tations. The investment alternatives and returns in the
interest rates on all financial instruments but did not con- Supplemental Plan are based on certain market-rate invest-
sider the effects of the reduced level of economic activity that ment alternatives under the Profit Sharing and Savings
could exist in such an environment. The foreign currency Plan. Total liabilities under the Supplemental Plan were
rate analysis assumed that each foreign currency rate would $329 million at December 31, 2003 and $297 million at
change by 10% in the same direction relative to the U.S. December 31, 2002, and were included in other long-term
Dollar on all financial instruments; however, the analysis liabilities in the Consolidated balance sheet.
did not include the potential impact on sales levels or local In addition to long-term obligations, the Company
currency prices or the effect of fluctuating currencies on the had guaranteed certain affiliate and other loans totaling
Company’s anticipated foreign currency royalties and other $89 million at December 31, 2003.
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 OTHER MATTERS
2003 levels nor a 10% adverse change in foreign currency
rates from 2003 levels would materially affect the Company’s CRITICAL ACCOUNTING POLICIES AND ESTIMATES
results of operations, cash flows or the fair value of its Management's discussion and analysis of financial condi-
financial instruments. tion and results of operations is based upon the Company's
consolidated financial statements, which have been pre-
CONTRACTUAL OBLIGATIONS AND COMMITMENTS pared in accordance with accounting principles generally
The Company has long-term contractual obligations primar- accepted in the U.S. The preparation of these financial
ily in the form of lease obligations (related to both Company- statements requires the Company to make estimates and
operated and franchised restaurants) and debt obligations. judgments that affect the reported amounts of assets, liabili-
In addition, the Company has long-term revenue and cash ties, revenues and expenses as well as related disclosures.
flow streams that relate to its franchise arrangements. Cash On an ongoing basis, the Company evaluates its estimates
provided by operations (including cash provided by these and judgments based on historical experience and various
franchise arrangements) along with the Company’s borrow- other factors that are believed to be reasonable under the
ing capacity and other sources of cash will be used to satisfy circumstances. Actual results may differ from these estimates
the obligations. The following table summarizes the Company’s under different assumptions or conditions.
contractual obligations and their aggregate maturities as well The Company reviews its financial reporting and disclo-
as future minimum rent payments due to the Company sure practices and accounting policies quarterly to ensure
under existing franchise arrangements as of December 31, that they provide accurate and transparent information
2003. (See discussions of cash flows, financial position and relative to the current economic and business environment.
capital resources as well as the Notes to the December 31, The Company believes that of its significant accounting
2003 consolidated financial statements for further details.) policies the following involve a higher degree of judgment
Contractual cash Contractual cash and/or complexity.
outflows inflows
Operating Debt Minimum rent under Property and equipment
IN MILLIONS leases obligations (1) franchise arrangements Property and equipment are depreciated or amortized on
2004 $ 998 $ 388 $ 1,804 a straight-line basis over their useful lives based on manage-
2005 939 1,371 1,761 ment's estimates of the period over which the assets will
2006 877 1,941 1,715 generate revenue. The useful lives are estimated based on
2007 815 667 1,663 historical experience with similar assets, taking into account
2008 758 851 1,611 anticipated technological or other changes. The Company
Thereafter 6,531 4,191 12,987 periodically reviews these lives relative to physical factors,
Total $10,918 $9,409 $21,541 economic factors and industry trends. If there are changes
in the planned use of property and equipment or if techno-
(1) The maturities reflect reclassifications of short-term obligations
to long-term obligations of $750 million in 2006 and $500 million logical changes occur more rapidly than anticipated, the
thereafter, as they are supported by long-term line of credit useful lives assigned to these assets may need to be short-
agreements. Debt obligations do not include $321 million of ened, resulting in the recognition of increased depreciation
SFAS No. 133 noncash fair value adjustments.
and amortization expense in future periods.

McDonald’s Corporation 15
Long-lived assets Deferred U.S. income taxes have not been recorded for
Long-lived assets (including goodwill) are reviewed for basis differences totaling $4.2 billion related to investments
impairment annually in the fourth quarter and whenever in certain foreign subsidiaries or affiliates. The basis differ-
events or changes in circumstances indicate that the carrying ences consist primarily of undistributed earnings considered
amount of an asset may not be recoverable. In assessing the permanently invested in the businesses. If management's
recoverability of the Company's long-lived assets, the intentions change in the future, deferred taxes may need
Company considers changes in economic conditions and to be provided.
makes assumptions regarding estimated future cash flows In addition, the Company operates within multiple taxing
and other factors. (The biggest assumption impacting jurisdictions and is subject to audit in these jurisdictions.
estimated future cash flows is the estimated change in The Company records accruals for the estimated outcomes
comparable sales.) Estimates of future cash flows are highly of these audits, and the accruals may change in the future
subjective judgments based on the Company's experience due to new developments in each matter.
and knowledge of operations. These estimates can be
significantly impacted by many factors including changes EFFECTS OF CHANGING PRICES—INFLATION
in global and local business and economic conditions, The Company has demonstrated an ability to manage infla-
operating costs, inflation, competition, and consumer and tionary cost increases effectively. This is because of rapid
demographic trends. If the Company's estimates or underly- inventory turnover, the ability to adjust menu prices, cost
ing assumptions change in the future, the Company may controls and substantial property holdings—many of which
be required to record impairment charges. are at fixed costs and partly financed by debt made less
expensive by inflation.
Restructuring and litigation accruals
The Company has recorded charges related to restructuring
FORWARD-LOOKING STATEMENTS
markets, closing restaurants, eliminating positions and
Certain forward-looking statements are included in this
other strategic changes. The accruals recorded included
report. They use such words as "may," "will," "expect,"
estimates pertaining to employee termination costs, number
"believe," "plan" and other similar terminology. These state-
of restaurants to be closed and remaining lease obligations
ments reflect management's current expectations regarding
for closed facilities. Although the Company does not antici-
future events and operating performance and speak only
pate significant changes, the actual costs may differ from
as of March 5, 2004. These forward-looking statements
these estimates.
involve a number of risks and uncertainties. The following
From time to time, the Company is subject to proceedings,
are some of the factors that could cause actual results to
lawsuits and other claims related to franchisees, suppliers,
differ materially from those expressed in or underlying our
employees, customers, competitors and intellectual property.
forward-looking statements: effectiveness of operating ini-
The Company is required to assess the likelihood of any
tiatives; success in advertising and promotional efforts;
adverse judgments or outcomes to these matters as well as
changes in global and local business and economic condi-
potential ranges of probable losses. A determination of the
tions, including their impact on consumer confidence;
amount of accrual required, if any, for these contingencies
fluctuations in currency exchange and interest rates; food,
is made after careful analysis of each matter. The required
labor and other operating costs; political or economic insta-
accrual may change in the future due to new developments
bility in local markets, including the effects of war and
in each matter or changes in approach such as a change
terrorist activities; competition, including pricing and
in settlement strategy in dealing with these matters. The
marketing initiatives and new product offerings by the
Company does not believe that any such matter will have
Company's competitors; consumer preferences or percep-
a material adverse effect on its financial condition or
tions concerning the Company's product offerings; spending
results of operations.
patterns and demographic trends; availability of qualified
Income taxes restaurant personnel; severe weather conditions; existence
The Company records a valuation allowance to reduce its of positive or negative publicity regarding the Company
deferred tax assets if it is more likely than not that some or its industry generally; effects of legal claims; cost and
portion or all of the deferred assets will not be realized. deployment of capital; changes in future effective tax rates;
While the Company has considered future taxable income changes in governmental regulations; and changes in
and ongoing prudent and feasible tax strategies in assessing applicable accounting policies and practices. The foregoing
the need for the valuation allowance, if these estimates and list of important factors is not all-inclusive.
assumptions change in the future, the Company may be The Company undertakes no obligation to publicly
required to adjust its valuation allowance. This could result update or revise any forward-looking statements, whether
in a charge to, or an increase in, income in the period such as a result of new information, future events or otherwise.
determination is made.

16 McDonald’s Corporation
CONSOLIDATED STATEMENT OF INCOME

IN MILLIONS, EXCEPT PER SHARE DATA Years ended December 31, 2003 2002 2001

REVENUES
Sales by Company-operated restaurants $12,795.4 $11,499.6 $11,040.7
Revenues from franchised and affiliated restaurants 4,345.1 3,906.1 3,829.3
Total revenues 17,140.5 15,405.7 14,870.0

OPERATING COSTS AND EXPENSES

Company-operated restaurant expenses
Food & paper 4,314.8 3,917.4 3,802.1
Payroll & employee benefits 3,411.4 3,078.2 2,901.2
Occupancy & other operating expenses 3,279.8 2,911.0 2,750.4
Franchised restaurants–occupancy expenses 937.7 840.1 800.2
Selling, general & administrative expenses 1,833.0 1,712.8 1,661.7
Other operating expense, net 531.6 833.3 257.4
Total operating costs and expenses 14,308.3 13,292.8 12,173.0
Operating income 2,832.2 2,112.9 2,697.0
Interest expense–net of capitalized interest of $7.8, $14.3 and $15.2 388.0 374.1 452.4
McDonald’s Japan IPO gain (137.1)
Nonoperating expense, net 97.8 76.7 52.0
Income before provision for income taxes and
cumulative effect of accounting changes 2,346.4 1,662.1 2,329.7
Provision for income taxes 838.2 670.0 693.1
Income before cumulative effect of accounting changes 1,508.2 992.1 1,636.6
Cumulative effect of accounting changes, net of tax benefits of $9.4 and $17.6 (36.8) (98.6)
Net income $ 1,471.4 $ 893.5 $ 1,636.6
Per common share–basic:
Income before cumulative effect of accounting changes $ 1.19 $ .78 $ 1.27
Cumulative effect of accounting changes (.03) (.08)
Net income $ 1.16 $ .70 $ 1.27
Per common share–diluted:
Income before cumulative effect of accounting changes $ 1.18 $ .77 $ 1.25
Cumulative effect of accounting changes (.03) (.07)
Net income $ 1.15 $ .70 $ 1.25
Dividends per common share $ .40 $ .24 $ .23
Weighted-average shares outstanding–basic 1,269.8 1,273.1 1,289.7
Weighted-average shares outstanding–diluted 1,276.5 1,281.5 1,309.3

See notes to consolidated financial statements.

McDonald’s Corporation 17
CONSOLIDATED BALANCE SHEET

IN MILLIONS, EXCEPT PER SHARE DATA December 31, 2003 2002

ASSETS
Current assets
Cash and equivalents $ 492.8 $ 330.4
Accounts and notes receivable 734.5 855.3
Inventories, at cost, not in excess of market 129.4 111.7
Prepaid expenses and other current assets 528.7 418.0
Total current assets 1,885.4 1,715.4
Other assets
Investments in and advances to affiliates 1,089.6 1,037.7
Goodwill, net 1,665.1 1,558.5
Miscellaneous 960.3 1,075.5
Total other assets 3,715.0 3,671.7
Property and equipment
Property and equipment, at cost 28,740.2 26,218.6
Accumulated depreciation and amortization (8,815.5) (7,635.2)
Net property and equipment 19,924.7 18,583.4
Total assets $25,525.1 $23,970.5

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable $ 577.4 $ 635.8
Income taxes 71.5 16.3
Other taxes 222.0 191.8
Accrued interest 193.1 199.4
Accrued restructuring and restaurant closing costs 115.7 328.5
Accrued payroll and other liabilities 918.1 774.7
Current maturities of long-term debt 388.0 275.8
Total current liabilities 2,485.8 2,422.3
Long-term debt 9,342.5 9,703.6
Other long-term liabilities and minority interests 699.8 560.0
Deferred income taxes 1,015.1 1,003.7
Shareholders’ equity
Preferred stock, no par value; authorized–165.0 million shares; issued–none
Common stock, $.01 par value; authorized–3.5 billion shares;
issued–1,660.6 million shares 16.6 16.6
Additional paid-in capital 1,837.5 1,747.3
Unearned ESOP compensation (90.5) (98.4)
Retained earnings 20,172.3 19,204.4
Accumulated other comprehensive income (loss) (635.5) (1,601.3)
Common stock in treasury, at cost; 398.7 and 392.4 million shares (9,318.5) (8,987.7)
Total shareholders’ equity 11,981.9 10,280.9
Total liabilities and shareholders’ equity $25,525.1 $23,970.5

See notes to consolidated financial statements.

18 McDonald’s Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS

IN MILLIONS Years ended December 31, 2003 2002 2001

Operating activities
Net income $ 1,471.4 $ 893.5 $ 1,636.6
Adjustments to reconcile to cash provided by operations
Cumulative effect of accounting changes 36.8 98.6
Depreciation and amortization 1,148.2 1,050.8 1,086.3
Deferred income taxes 181.4 (44.6) (87.6)
Changes in working capital items
Accounts receivable 64.0 1.6 (104.7)
Inventories, prepaid expenses and other current assets (30.2) (38.1) (62.9)
Accounts payable (77.6) (11.2) 10.2
Taxes and other accrued liabilities (147.2) 448.0 270.4
Other (including noncash portion of special items) 622.0 491.5 (60.0)
Cash provided by operations 3,268.8 2,890.1 2,688.3
Investing activities
Property and equipment expenditures (1,307.4) (2,003.8) (1,906.2)
Purchases of restaurant businesses (375.8) (548.4) (331.6)
Sales of restaurant businesses and property 390.6 369.5 375.9
Other (77.0) (283.9) (206.3)
Cash used for investing activities (1,369.6) (2,466.6) (2,068.2)
Financing activities
Net short-term repayments (533.5) (606.8) (248.0)
Long-term financing issuances 398.1 1,502.6 1,694.7
Long-term financing repayments (756.2) (750.3) (919.4)
Treasury stock purchases (391.0) (670.2) (1,068.1)
Common stock dividends (503.5) (297.4) (287.7)
Other 49.3 310.9 204.8
Cash used for financing activities (1,736.8) (511.2) (623.7)
Cash and equivalents increase (decrease) 162.4 (87.7) (3.6)
Cash and equivalents at beginning of year 330.4 418.1 421.7
Cash and equivalents at end of year $ 492.8 $ 330.4 $ 418.1
Supplemental cash flow disclosures
Interest paid $ 426.9 $ 359.7 $ 446.9
Income taxes paid 608.5 572.2 773.8

See notes to consolidated financial statements.

McDonald’s Corporation 19
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Accumulated other
Unearned comprehensive income (loss)
Common stock Additional ESOP Deferred Foreign Common stock Total
IN MILLIONS, issued paid-in compen- Retained hedging currency in treasury shareholders’
EXCEPT PER SHARE DATA Shares Amount capital sation earnings adjustment translation Shares Amount equity

Balance at December 31, 2000 1,660.6 $16.6 $1,441.8 $(115.0) $17,259.4 $ – $(1,287.3) (355.7) $(8,111.1) $ 9,204.4
Net income 1,636.6 1,636.6
Translation adjustments
(including taxes of $65.7) (412.2) (412.2)
SFAS No.133 transition adjustment
(including tax benefits of $9.2) (17.0) (17.0)
Fair value adjustments–cash flow
hedges (including taxes of $1.4) 7.7 7.7
Comprehensive income 1,215.1
Common stock cash dividends
($.23 per share) (287.7) (287.7)
ESOP loan payment 8.0 8.0
Treasury stock purchases (36.1) (1,090.2) (1,090.2)
Common equity put option
issuances and expirations, net
and forward contracts 199.2 199.2
Stock option exercises and other
(including tax benefits of $70.0) 149.4 0.3 11.9 89.9 239.6
Balance at December 31, 2001 1,660.6 16.6 1,591.2 (106.7) 18,608.3 (9.3) (1,699.5) (379.9) (8,912.2) 9,488.4

Net income 893.5 893.5

Translation adjustments
(including tax benefits of $150.5) 106.7 106.7
Fair value adjustments–cash flow
hedges (including tax benefits of $3.5) 0.8 0.8
Comprehensive income 1,001.0
Common stock cash dividends
($.24 per share) (297.4) (297.4)
ESOP loan payment 7.4 7.4
Treasury stock purchases (25.6) (686.9) (686.9)
Common equity put option
expirations and forward
contracts settled 500.8 500.8
Stock option exercises and other
(including tax benefits of $61.3) 156.1 0.9 13.1 110.6 267.6
Balance at December 31, 2002 1,660.6 16.6 1,747.3 (98.4) 19,204.4 (8.5) (1,592.8) (392.4) (8,987.7) 10,280.9

Net income 1,471.4 1,471.4

Translation adjustments
(including tax benefits of $203.2) 957.8 957.8
Fair value adjustments–cash flow
hedges (including taxes of $1.6) 8.0 8.0
Comprehensive income 2,437.2
Common stock cash dividends
($.40 per share) (503.5) (503.5)
ESOP loan payment 7.2 7.2
Treasury stock purchases (18.9) (438.7) (438.7)
Stock option exercises and other
(including tax benefits of $20.5) 90.2 0.7 12.6 107.9 198.8
Balance at December 31, 2003 1,660.6 $16.6 $1,837.5 $ (90.5) $20,172.3 $ (0.5) $ (635.0) (398.7) $(9,318.5) $11,981.9

See notes to consolidated financial statements.

20 McDonald’s Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

in selling, general & administrative expenses were (in mil-

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES lions): 2003–$113.1; 2002–$115.3; 2001–$79.4. In addition,
significant advertising costs are incurred by franchisees
NATURE OF BUSINESS
through advertising cooperatives in individual markets.
The Company primarily operates and franchises McDonald’s
restaurants in the food service industry. The Company also STOCK-BASED COMPENSATION
operates Boston Market and Chipotle Mexican Grill in the The Company accounts for all stock-based compensation
U.S. and has a minority ownership in U.K.-based Pret A as prescribed by Accounting Principles Board Opinion
Manger. In December 2003, the Company sold its Donatos No. 25. The Company discloses pro forma net income and
Pizzeria business. net income per common share, as provided by Statement
All restaurants are operated either by the Company, by of Financial Accounting Standards (SFAS) No. 123, as
independent entrepreneurs under the terms of franchise amended by SFAS No. 148, Accounting for Stock-Based
arrangements (franchisees), or by affiliates operating under Compensation.
license agreements. The pro forma information was determined as if the
CONSOLIDATION Company had accounted for its employee stock options
The consolidated financial statements include the accounts under the fair value method of SFAS No. 123. The fair value
of the Company and its subsidiaries. Substantially all of these options was estimated at the date of grant using an
investments in affiliates owned 50% or less (primarily option pricing model. The model was designed to estimate
McDonald’s Japan) are accounted for by the equity method. the fair value of exchange-traded options that, unlike
employee stock options, can be traded at any time and are
ESTIMATES IN FINANCIAL STATEMENTS fully transferable. In addition, such models require the input
The preparation of financial statements in conformity with of highly subjective assumptions including the expected
accounting principles generally accepted in the U.S. requires volatility of the stock price. For pro forma disclosures, the
management to make estimates and assumptions that affect options’ estimated fair value was amortized over their
the amounts reported in the financial statements and vesting period. The following tables present the pro forma
accompanying notes. Actual results could differ from those disclosures and the weighted-average assumptions used
estimates. to estimate the fair value of these options.
REVENUE RECOGNITION Pro forma disclosures
The Company’s revenues consist of sales by Company- IN MILLIONS, EXCEPT PER SHARE DATA 2003 2002 2001
operated restaurants and fees from restaurants operated by
franchisees and affiliates. Sales by Company-operated As reported–net income $1,471.4 $ 893.5 $1,636.6
restaurants are recognized on a cash basis. Fees from fran- Add: Total stock-based employee
compensation included in
chised and affiliated restaurants include continuing rent reported net income, net of
and service fees, initial fees and royalties received from related tax effects 4.4 – –
foreign affiliates and developmental licensees. Continuing Deduct: Total stock-based
employee compensation expense
fees and royalties are recognized in the period earned. determined under fair value
Initial fees are recognized upon opening of a restaurant, method for all awards, net of
which is when the Company has performed substantially related tax effects (224.1) (251.7) (210.0)
all initial services required by the franchise arrangement. Pro forma–net income $1,251.7 $ 641.8 $1,426.6

FOREIGN CURRENCY TRANSLATION Net income per share:

The functional currency of substantially all operations As reported–basic $ 1.16 $ .70 $ 1.27
outside the U.S. is the respective local currency, except Pro forma–basic $ .99 $ .50 $ 1.11
for a small number of countries with hyperinflationary As reported–diluted $ 1.15 $ .70 $ 1.25
economies, where the functional currency is the U.S. Dollar. Pro forma–diluted $ .98 $ .50 $ 1.10

ADVERTISING COSTS Weighted-average assumptions

Advertising costs included in costs of Company-operated 2003 2002 2001
restaurants primarily consist of contributions to advertising
cooperatives and were (in millions): 2003–$596.7; Expected dividend yield .75% .75% .65%
2002–$532.3; 2001–$521.5. Production costs for radio and Expected stock price volatility 28.1% 27.5% 25.7%
Risk-free interest rate 3.46% 5.25% 5.03%
television advertising, primarily in the U.S., are expensed
Expected life of options IN YEARS 7 7 7
when the commercials are initially aired. These production
Fair value per option granted $ 5.09 $ 10.88 $ 9.93
costs as well as other marketing-related expenses included

McDonald’s Corporation 21
PROPERTY AND EQUIPMENT would have increased net income by approximately
Property and equipment are stated at cost, with depreciation $30 million ($0.02 per share).
and amortization provided using the straight-line method Under SFAS No. 142, goodwill is generally assigned to
over the following estimated useful lives: buildings–up to the reporting units expected to benefit from the synergies of
40 years; leasehold improvements–the lesser of useful lives the combination. If a Company-operated restaurant is sold
of assets or lease terms including option periods; and within 24 months of acquisition, the goodwill associated
equipment–three to 12 years. with the acquisition is written off in its entirety. If a restau-
rant is sold beyond 24 months from the acquisition, the
GOODWILL amount of goodwill written off is based on the relative fair
Goodwill represents the excess of cost over the net tangible value of the business sold compared to the portion of the
assets of acquired restaurant businesses. The Company’s reporting unit (defined as each individual country for
goodwill primarily consists of amounts paid in excess of McDonald’s restaurant business as well as each individual
net tangible assets for purchases of McDonald’s restaurants non-McDonald’s brand) that will be retained.
from franchisees and ownership increases in international The annual goodwill impairment test compares the fair
subsidiaries or affiliates. value of a reporting unit, generally based on discounted
In 2001, the Financial Accounting Standards Board future cash flows, with its carrying amount including good-
issued SFAS No. 141, Business Combinations, and No. 142, will. If the carrying amount of a reporting unit exceeds its
Goodwill and Other Intangible Assets. SFAS No.141 requires fair value, an impairment loss is measured as the difference
that the purchase method of accounting be used for all busi- between the fair value of the reporting unit’s goodwill and
ness combinations initiated after June 30, 2001 and includes the carrying amount of goodwill.
guidance on the initial recognition and measurement of The Company performed the initial required goodwill
goodwill and other intangible assets arising from business impairment test as of January 1, 2002 and recorded a noncash
combinations. SFAS No. 142, effective January 1, 2002, charge of $98.6 million after tax ($0.07 per diluted share)
eliminates the amortization of goodwill (and intangible for the cumulative effect of this accounting change. The
assets deemed to have indefinite lives) and instead subjects impaired goodwill resulted primarily from businesses in
it to annual impairment tests. Other intangible assets con- Argentina, Uruguay and other markets in Latin America
tinue to be amortized over their useful lives. Application and the Middle East, where economies had weakened
of the nonamortization provisions of SFAS No. 142 in 2001 significantly in recent years.

The following table presents the 2003 activity in goodwill by segment.

IN MILLIONS U.S. Europe APMEA(1) Latin America Canada Other(2) Consolidated

Balance at December 31, 2002 $676.3 $406.3 $178.1 $ 97.3 $56.3 $144.2 $1,558.5
Net restaurant purchases (sales) 56.7 19.6 16.7 24.6 21.4 (0.4) 138.6
Ownership increases in subsidiaries/affiliates 9.7 11.1 2.9 23.7
Impairment charges (23.3) (74.9) (98.2)
Sale of business (95.8) (95.8)
Currency translation 75.1 29.0 15.3 18.9 138.3
Balance at December 31, 2003 $733.0 $510.7 $211.6 $ 62.3 $96.6 $ 50.9 $1,665.1

(1) APMEA represents Asia/Pacific, the Middle East and Africa.

(2) Other represents non-McDonald’s brands.

LONG-LIVED ASSETS
In accordance with SFAS No. 144, Accounting for the cash flows produced by each individual restaurant within
Impairment or Disposal of Long-Lived Assets, long-lived the asset grouping is compared to its carrying value. If an
assets are reviewed for impairment annually in the fourth asset is determined to be impaired, the loss is measured by
quarter and whenever events or changes in circumstances the excess of the carrying amount of the asset over its fair
indicate that the carrying amount of an asset may not be value as determined by an estimate of discounted future
recoverable. For purposes of annually reviewing McDonald’s cash flows.
restaurant assets for potential impairment, assets are initially Losses on assets held for disposal are recognized when
grouped together at a television market level in the U.S. and management has approved and committed to a plan to dis-
at a country level for each of the international markets. If an pose of the assets, and the assets are available for disposal.
indicator of impairment (e.g., negative operating cash flows Generally, such losses relate to either restaurants that have
for the most recent trailing twelve-month period) exists for closed and ceased operations or businesses or restaurants
any grouping of assets, an estimate of undiscounted future that are available for sale.

22 McDonald’s Corporation
FINANCIAL INSTRUMENTS The foreign currency exchange agreements are entered into
The Company generally borrows on a long-term basis and is to hedge the currency risk associated with debt and inter-
exposed to the impact of interest rate changes and foreign company loans denominated in foreign currencies, and
currency fluctuations. The Company uses foreign currency essentially result in floating-rate assets or liabilities denomi-
denominated debt and derivative instruments to manage the nated in U.S. Dollars or appropriate functional currencies.
impact of these changes. The Company does not use deriva- For fair value hedges, the gains or losses on derivatives
tives with a level of complexity or with a risk higher than as well as the offsetting gains or losses on the related
the exposures to be hedged and does not hold or issue hedged items are recognized in current earnings.
derivatives for trading purposes.
Cash flow hedges
The counterparties to these agreements consist of a diverse
The Company enters into cash flow hedges to reduce the
group of financial institutions. The Company continually
exposure to variability in certain expected future cash
monitors its positions and the credit ratings of its counter-
flows. The types of cash flow hedges the Company enters
parties and adjusts positions as appropriate. The Company
into include: (1) interest rate exchange agreements that effec-
did not have significant exposure to any individual counter-
tively convert a portion of floating-rate debt to fixed-rate
party at December 31, 2003 and has master agreements that
debt and are designed to reduce the impact of interest rate
contain netting arrangements. Certain of these agreements
changes on future interest expense, (2) forward foreign
also require each party to post collateral if credit ratings fall
exchange contracts and foreign currency options that are
below or aggregate exposures exceed certain contractual
designed to protect against the reduction in value of fore-
limits. At December 31, 2003, the Company was required to
casted foreign currency cash flows such as royalties and
post collateral of $11.6 million, and at December 31, 2002,
other payments denominated in foreign currencies, and
collateral of $2.2 million was posted by a counterparty.
(3) foreign currency exchange agreements for the exchange
Effective January 1, 2001, the Company adopted SFAS
of various currencies and interest rates. The foreign currency
No. 133, Accounting for Derivative Instruments and Hedging
exchange agreements hedge the currency risk associated
Activities, as amended. SFAS No. 133 requires companies to
with debt and intercompany loans denominated in foreign
recognize all derivatives as either assets or liabilities in the
currencies, and essentially result in fixed-rate assets or
balance sheet at fair value. SFAS No. 133 also requires com-
liabilities denominated in U.S. Dollars or appropriate
panies to designate all derivatives that qualify as hedging
functional currencies.
instruments as either fair value hedges, cash flow hedges or
For cash flow hedges, the effective portion of the gains
hedges of net investments in foreign operations. This desig-
or losses on derivatives is reported in the deferred hedging
nation is based upon the exposure being hedged.
adjustment component of accumulated other comprehen-
The Company recorded a transition adjustment at
sive income in shareholders' equity and reclassified into
January 1, 2001 related to cash flow hedges, which reduced
earnings in the same period or periods in which the hedged
accumulated other comprehensive income in shareholders'
transaction affects earnings. The remaining gain or loss in
equity by $17.0 million, after tax. This adjustment was pri-
excess of the cumulative change in the present value of
marily related to interest rate exchange agreements used to
future cash flows of the hedged item, if any, is recognized
lock in long-term borrowing rates. The cumulative effect of
in earnings during the period of change.
adopting SFAS No. 133 at January 1, 2001 was not material
The Company recorded net increases to the deferred
to the Company's Consolidated statement of income.
hedging adjustment component of accumulated other com-
All derivatives, primarily interest rate exchange agree-
prehensive income in shareholders’ equity of $8.0 million,
ments and foreign currency exchange agreements, were
$0.8 million and $7.7 million, after tax, related to cash flow
classified in the Company's Consolidated balance sheet at
hedges during the years ended December 31, 2003, 2002
December 31, 2003 and 2002 respectively, as follows:
and 2001, respectively. Based on interest rates and foreign
miscellaneous other assets–$102.4 million and $133.9 mil-
currency exchange rates at December 31, 2003, no signifi-
lion; other long-term liabilities (excluding accrued interest)–
cant amount of deferred hedging adjustments, after tax,
$135.5 million and $39.2 million; and accrued payroll and
included in accumulated other comprehensive income in
other liabilities–$29.2 million and $23.8 million.
shareholders' equity at December 31, 2003 will be recog-
There was no significant impact to the Company’s earn-
nized in earnings in 2004 as the underlying hedged transac-
ings related to the ineffective portion of any hedging instru-
tions are realized. The maximum maturity date of any cash
ments for the three years ended December 31, 2003.
flow hedge of forecasted transactions at December 31, 2003
Fair value hedges was 24 months, excluding instruments hedging forecasted
The Company enters into fair value hedges to reduce the payments of variable interest on existing financial instru-
exposure to changes in the fair values of certain assets or ments that have various maturity dates through 2015.
liabilities. The types of fair value hedges the Company
enters into include: (1) interest rate exchange agreements
to convert a portion of its fixed-rate debt to floating-rate
debt and (2) foreign currency exchange agreements for
the exchange of various currencies and interest rates.

McDonald’s Corporation 23
Hedges of net investments in foreign operations SALES OF STOCK BY SUBSIDIARIES AND AFFILIATES
The Company uses forward foreign exchange contracts and As permitted by Staff Accounting Bulletin No. 51 issued
foreign currency denominated debt to hedge its investments by the Securities and Exchange Commission, when a sub-
in certain foreign subsidiaries and affiliates. Realized and sidiary or affiliate sells unissued shares in a public offering,
unrealized translation adjustments from these hedges are the Company records an adjustment to reflect an increase
included in shareholders' equity in the foreign currency or decrease in the carrying value of its investment and a
translation component of accumulated other comprehensive resulting nonoperating gain or loss.
income and offset translation adjustments on the underlying
net assets of foreign subsidiaries and affiliates, which also PER COMMON SHARE INFORMATION
are recorded in accumulated other comprehensive income. Diluted net income per common share is calculated using
During the year ended December 31, 2003, the Company net income divided by diluted weighted-average shares.
recorded a decrease in translation adjustments in accumu- Diluted weighted-average shares include weighted-average
lated other comprehensive income of $378.1 million after tax shares outstanding plus the dilutive effect of stock options,
(included in the net increase of $957.8 million of translation calculated using the treasury stock method. The dilutive
adjustments in the Consolidated statement of shareholders’ effect of stock options was (in millions of shares): 2003–6.7;
equity), related primarily to foreign currency denominated 2002–8.4; 2001–19.6. Stock options that were not included
debt designated as hedges of net investments. During the in diluted weighted-average shares because they would have
year ended December 31, 2002, the Company recorded a been antidilutive were (in millions of shares): 2003–159.1;
decrease in translation adjustments in accumulated other 2002–148.0; 2001–83.1. The dilutive effect of common equity
comprehensive income of $312.0 million after tax related put options and forward contracts in 2001 was not significant.
to hedges of net investments, while during the year ended
December 31, 2001, the Company recorded an increase in STATEMENT OF CASH FLOWS
translation adjustments of $168.5 million after tax related The Company considers short-term, highly liquid invest-
to hedges of net investments. ments to be cash equivalents. The impact of fluctuating for-
eign currencies on cash and equivalents was not material.
ASSET RETIREMENT OBLIGATIONS
In 2001, the FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations, effective January 1, 2003. The
OTHER OPERATING EXPENSE, NET
Statement requires legal obligations associated with the
retirement of long-lived assets to be recognized at their fair
IN MILLIONS 2003 2002 2001
value at the time that the obligations are incurred. Upon
initial recognition of a liability, the cost is capitalized as part Gains on sales of restaurant
of the related long-lived asset and allocated to expense over businesses $ (54.5) $(113.6) $(112.4)
the useful life of the asset. In first quarter 2003, the Company Equity in earnings of
unconsolidated affiliates (36.9) (24.1) (62.7)
recorded a noncash charge of $36.8 million after tax ($0.03
Other expense 215.4 117.8 54.9
per diluted share) related to lease obligations in certain
Special charges:
international markets to reflect the cumulative effect of this
Restructuring 272.1 266.9 200.0
accounting change. There is not a material effect to the Restaurant closings/asset
Company’s ongoing results of operations or financial position. impairment 135.5 402.4 135.2
Other 183.9 42.4
COMMON EQUITY PUT OPTIONS AND FORWARD CONTRACTS Total special charges 407.6 853.2 377.6
During 2001, the Company sold 12.2 million common equi- Other operating expense, net $531.6 $ 833.3 $ 257.4
ty put options in connection with its share repurchase pro-
gram. Premiums received of $31.8 million were recorded in
shareholders’ equity as a reduction of the cost of treasury OTHER EXPENSE
stock purchased. In 2002, 10.1 million common equity put Other expense primarily consists of gains or losses on excess
options were exercised and 2.1 million options expired property dispositions and provisions for uncollectible
unexercised, while 21.0 million options were exercised in receivables.
2001. The total amount paid to acquire these shares as a
result of the options being exercised was $286 million in RESTRUCTURING
2002 and $700 million in 2001. No common equity put In 2003, the $272.1 million of charges consisted of:
options were sold in either 2003 or 2002; therefore, at $237.0 million related to the loss on the sale of Donatos
December 31, 2003 and 2002, there were no common equity Pizzeria, the closing of Donatos and Boston Market restau-
put options outstanding. rants outside the U.S. and the exit of a domestic joint
During 2001, the Company also entered into equity venture with Fazoli’s; and $35.1 million related to the revital-
forward contracts in connection with its share repurchase ization plan actions of McDonald’s Japan, including head-
program. The forward contracts for 5.5 million shares settled count reductions, the closing of Pret A Manger stores in
in March 2002. No additional equity forward contracts were Japan, and the early termination of a long-term management
entered into subsequent to March 2002. services agreement.

24 McDonald’s Corporation
 In 2002, the $266.9 million of net charges consisted of: In 2002, the $402.4 million of charges consisted of:
$201.4 million related to the anticipated transfer of owner- $302.3 million related to management’s decision to close
ship in five countries in the Middle East and Latin America 751 underperforming restaurants primarily in the U.S.
to developmental licensees and ceasing operations in two and Japan; and $100.1 million primarily related to the
countries in Latin America; $80.5 million primarily related impairment of assets for certain existing restaurants in
to eliminating approximately 600 positions (about half of Europe and Latin America.
which were in the U.S. and half of which were in interna- In 2001, the $135.2 million of charges consisted of:
tional markets), reallocating resources and consolidating $91.2 million related to the closing of 163 underperforming
certain home office facilities to control costs; and a $15.0 restaurants in international markets; a $24.0 million asset
million favorable adjustment to the 2001 restructuring impairment charge in Turkey; and $20.0 million related to
charge due to lower employee-related costs than originally the disposition of Aroma Café in the U.K.
anticipated.
In 2001, the $200.0 million of restructuring charges OTHER
related to initiatives designed to improve the restaurant In 2002, the $183.9 million of charges consisted of:
experience, primarily in the U.S. These initiatives included $170.0 million primarily related to the write-off of software
streamlining operations by reducing the number of regions development costs as a result of management’s decision
and divisions, enabling the Company to combine staff to terminate a long-term technology project; and $13.9 mil-
functions and improve efficiency. In connection with lion related to the write-off of receivables and inventory
these initiatives, the Company eliminated approximately in Venezuela as a result of the temporary closure of all
850 positions (700 in the U.S., primarily in the divisions McDonald’s restaurants due to a national strike.
and regions, and 150 in international markets). In 2001, the $42.4 million of charges consisted of:
$17.4 million primarily related to the write-off of certain
RESTAURANT CLOSINGS/ASSET IMPAIRMENT technology costs; and $25.0 million primarily related to the
In 2003, the $135.5 million of net charges consisted of: unrecoverable costs incurred in connection with the theft
$147.7 million primarily related to asset/goodwill impair- of winning game pieces from the Company’s Monopoly
ment, mainly in Latin America; $29.6 million for about and certain other promotional games over an extended
50 restaurant closings associated with strategic actions in period of time, and the related termination of the supplier
Latin America; and a $41.8 million favorable adjustment of the game pieces. Fifty individuals (none of whom were
to the 2002 charge for restaurant closings, primarily due to Company employees) were convicted of conspiracy and/or
about 85 fewer closings than originally anticipated. mail fraud charges.

The following table presents the activity included in accrued restructuring and restaurant closing costs in the
Consolidated balance sheet.
Liability at Liability at Liability at
2001 activity 2002 activity 2003 activity
Dec 31, Dec 31, Dec 31,
IN MILLIONS Provision Cash Noncash 2001 Provision Cash Noncash 2002 Provision Cash Noncash 2003

Restructuring:
Asset write-offs $ 10.0 $ (10.0) – $141.7 $(141.7) – $249.5 $(249.5) –
Employee-related costs 114.4 $(34.6) $ 79.8 40.9 $(48.4) $ 72.3 $ (34.0) $ 38.3
Lease termination and other 75.6 (29.4) 46.2 84.3 (27.2) 103.3 22.6 (47.1) (35.1) 43.7
200.0 (64.0) (10.0) 126.0 266.9 (75.6) (141.7) 175.6 272.1 (81.1) (284.6) 82.0
Restaurant closings/asset
impairment:
Asset write-offs 119.0 (119.0) – 282.3 (282.3) – 144.4 (144.4) –
Lease termination and other 16.2 (5.1) 11.1 120.1 (2.8) 128.4 (8.9) (85.8) 33.7
135.2 (5.1) (119.0) 11.1 402.4 (2.8) (282.3) 128.4 135.5 (85.8) (144.4) 33.7
Other:
Asset write-offs 17.4 (17.4) – 164.4 (164.4) – –
Other 25.0 (17.9) 7.1 19.5 (2.1) 24.5 (24.5) –
42.4 (17.9) (17.4) 7.1 183.9 (2.1) (164.4) 24.5 (24.5) –
Total accrued restructuring
and restaurant closing costs $377.6 $(87.0) $(146.4) $144.2 $853.2 $(80.5) $(588.4) $328.5 $407.6 $(191.4) $(429.0) $115.7

Employee severance is generally paid in installments over a period of up to one year after termination, and the
remaining lease payments for closed facilities will be paid over the next several years.

McDonald’s Corporation 25
McDONALD’S JAPAN INITIAL PUBLIC OFFERING LEASING ARRANGEMENTS
(IPO) GAIN
At December 31, 2003, the Company was lessee at 6,781
In 2001, McDonald’s Japan, the Company’s 50%-owned restaurant locations through ground leases (the Company
affiliate, completed an IPO of 12 million shares. The Company leases the land and the Company or franchisee owns the
recorded a $137.1 million gain (pre and after tax) in nonop- building) and at 8,070 restaurant locations through improved
erating income to reflect an increase in the carrying value leases (the Company leases land and buildings). Lease
of its investment as a result of the cash proceeds from the terms for most restaurants are generally for 20 to 25 years
IPO received by McDonald’s Japan. 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
FRANCHISE ARRANGEMENTS occupancy costs including property taxes, insurance and
maintenance. However, for franchised sites, the Company
Individual franchise arrangements generally include a lease requires the franchisees to pay these costs. In addition, the
and a license and provide for payment of initial fees, as Company is lessee under noncancelable leases covering cer-
well as continuing rent and service fees to the Company tain offices and vehicles.
based upon a percent of sales with minimum rent payments. Future minimum payments required under existing
McDonald’s franchisees are granted the right to operate a operating leases with initial terms of one year or more are:
restaurant using the McDonald's system and, in most cases,
IN MILLIONS Restaurant Other Total
the use of a restaurant facility, generally for a period of
20 years. Franchisees pay related occupancy costs including 2004 $ 930.9 $ 67.1 $ 998.0
property taxes, insurance and maintenance. In addition, 2005 884.5 55.0 939.5
franchisees outside the U.S. generally pay a refundable, 2006 831.2 45.4 876.6
2007 777.0 37.7 814.7
noninterest-bearing security deposit. Foreign affiliates and
2008 725.9 31.8 757.7
developmental licensees pay a royalty to the Company
Thereafter 6,358.8 172.7 6,531.5
based upon a percent of sales.
Total minimum payments $10,508.3 $409.7 $10,918.0
The results of operations of restaurant businesses pur-
chased and sold in transactions with franchisees, affiliates
The following table provides detail of rent expense:
and others were not material to the consolidated financial
statements for periods prior to purchase and sale. IN MILLIONS 2003 2002 2001
Revenues from franchised and affiliated restaurants con-
Company-operated restaurants:
sisted of: U.S. $ 136.9 $ 124.0 $115.5
IN MILLIONS 2003 2002 2001 Outside the U.S. 398.4 358.4 326.1
Total $ 535.3 $ 482.4 $441.6
Minimum rents $1,600.3 $1,479.9 $1,477.9
Percent rent and service fees 2,701.8 2,375.1 2,290.2 Franchised restaurants:
Initial fees 43.0 51.1 61.2 U.S. $ 279.6 $ 254.4 $239.7
Outside the U.S. 250.7 210.9 195.2
Revenues from franchised and
affiliated restaurants $4,345.1 $3,906.1 $3,829.3 Total $ 530.3 $ 465.3 $434.9
Other 87.3 84.8 82.1
Future minimum rent payments due to the Company Total rent expense $1,152.9 $1,032.5 $958.6
under existing franchise arrangements are:
IN MILLIONS Owned sites Leased sites Total Rent expense included percent rents in excess of mini-
mum rents (in millions) as follows—Company-operated
2004 $ 1,035.6 $ 768.5 $ 1,804.1 restaurants: 2003–$73.2; 2002–$64.1; 2001–$57.6.
2005 1,014.5 746.5 1,761.0
Franchised restaurants: 2003–$80.3; 2002–$67.2;
2006 990.1 724.4 1,714.5
2001–$62.0.
2007 958.5 705.0 1,663.5
2008 926.1 684.8 1,610.9
Thereafter 7,495.4 5,491.3 12,986.7
Total minimum payments $12,420.2 $9,120.5 $21,540.7

At December 31, 2003, net property and equipment under

franchise arrangements totaled $10.4 billion (including land
of $3.0 billion) after deducting accumulated depreciation
and amortization of $4.5 billion.

26 McDonald’s Corporation
 The statutory U.S. federal income tax rate reconciles to
INCOME TAXES the effective income tax rates as follows:
Income before provision for income taxes and cumulative 2003 2002 2001

effect of accounting changes, classified by source of income, Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
was as follows: State income taxes, net of related
federal income tax benefit 2.3 2.2 2.1
IN MILLIONS 2003 2002 2001
Benefits and taxes related to
U.S. $1,150.8 $ 876.3 $ 958.2 foreign operations(1) (2.7) (6.3) (6.5)
Outside the U.S. 1,195.6 785.8 1,371.5 Special items(2) 2.5 8.7 (1.6)
Other, net (1.4) .7 .8
Income before provision for
income taxes and cumulative Effective income tax rates 35.7% 40.3% 29.8%
effect of accounting changes $2,346.4 $1,662.1 $2,329.7
(1) Includes the benefit of tax law changes.
The provision for income taxes, classified by the timing (2) Includes impact of special items, certain of which were not
tax-effected.
and location of payment, was as follows:
IN MILLIONS 2003 2002 2001 Deferred U.S. income taxes have not been recorded for
basis differences related to investments in certain foreign
U.S. federal $177.9 $307.0 $357.3
U.S. state 58.8 54.6 59.7 subsidiaries and affiliates. These basis differences were
Outside the U.S. 420.1 353.0 363.7 approximately $4.2 billion at December 31, 2003 and
Current tax provision 656.8 714.6 780.7
consisted primarily of undistributed earnings considered
permanently invested in the businesses. Determination of
U.S. federal 180.1 (47.4) 57.7
the deferred income tax liability on these unremitted
U.S. state 12.6 (7.6) 4.3
Outside the U.S. (11.3) 10.4 (149.6) earnings is not practicable because such liability, if any,
is dependent on circumstances existing if and when
Deferred tax provision (benefit)(1) 181.4 (44.6) (87.6)
remittance occurs.
Provision for income taxes $838.2 $670.0 $693.1

(1) Includes the benefit of tax law changes in certain international

markets of $147.3 million in 2001. Amounts in 2003 and 2002 were
not significant. SEGMENT AND GEOGRAPHIC INFORMATION

Net deferred tax liabilities consisted of: The Company operates in the food service industry. Revenues
consist of sales by Company-operated restaurants and fees
IN MILLIONS December 31, 2003 2002
from restaurants operated by franchisees and affiliates. Fees
Property and equipment $ 1,447.5 $ 1,316.3 from franchised and affiliated restaurants include continu-
Other 424.2 448.4 ing rent and service fees, initial fees, and royalties received
Total deferred tax liabilities 1,871.7 1,764.7 from foreign affiliates and developmental licensees. All
Intangible assets (236.2) (199.7) intercompany revenues and expenses are eliminated in
Operating loss carryforwards (228.1) (186.1) computing revenues and operating income. Operating
Employee benefit plans (123.2) (129.7) income includes the Company’s share of operating results
Property and equipment (132.5) (89.4) of affiliates after interest expense and income taxes, except
Capital loss carryforwards (197.0) (88.0) for U.S. affiliates, which are reported before income taxes.
Unrealized foreign exchange losses (280.6) (109.4) Royalties and other payments received from subsidiaries
Foreign tax credit carryforwards (86.9) (45.0)
outside the U.S. were (in millions): 2003–$684.5;
Other (230.5) (341.5)
2002–$644.1; 2001–$607.7.
Total deferred tax assets before
valuation allowance (1,515.0) (1,188.8)
Corporate general & administrative expenses are included
in the corporate segment of operating income and consist of
Valuation allowance 483.2 322.1
home office support costs in areas such as facilities, finance,
Net deferred tax liabilities(1) $ 839.9 $ 898.0
human resources, information technology, legal, marketing,
(1) Net of current tax assets included in prepaid expenses and other supply chain management and training. Corporate assets
current assets in the Consolidated balance sheet (in millions): include corporate cash and equivalents, asset portions of
2003–$175.2; 2002–$105.7.
financing instruments, home office facilities and deferred
tax assets.

McDonald’s Corporation 27
 Total long-lived assets, primarily property and equipment,
IN MILLIONS 2003 2002 2001
were (in millions)—Consolidated: 2003–$23,405.9;
U.S. $ 6,039.3 $ 5,422.7 $ 5,395.6 2002–$21,976.6; 2001–$20,355.3. U.S. based: 2003–$9,069.0;
Europe 5,874.9 5,136.0 4,751.8 2002–$9,254.3; 2001–$8,670.4.
APMEA 2,447.6 2,367.7 2,203.3
Latin America 858.8 813.9 971.3
Canada 777.9 633.6 608.1
Other 1,142.0 1,031.8 939.9 DEBT FINANCING
Total revenues $17,140.5 $15,405.7 $14,870.0
LINE OF CREDIT AGREEMENTS
U.S. $ 1,982.1 $ 1,673.3 $ 1,622.5 At December 31, 2003, the Company had several line of
Europe 1,339.1 1,021.8 1,063.2 credit agreements with various banks totaling $1.3 billion,
APMEA 226.3 64.3 325.0 all of which remained unused. Subsequent to year end,
Latin America (170.9) (133.4) 10.9 the Company renegotiated the line of credit agreements as
Canada 163.2 125.4 123.7 follows: $750.0 million of lines expiring in 2005 with a
Other (295.1) (66.8) (66.5) term of 364 days and fees based on current credit ratings
Corporate (412.5) (571.7) (381.8)
of .06% per annum on the total commitment, with a feature
Total operating income $ 2,832.2(1) $ 2,112.9(2) $ 2,697.0(3) that allows the Company to convert the borrowings to a
U.S. $ 8,549.2 $ 8,687.4 $ 8,288.4 one-year loan at expiration; and a $500.0 million line expir-
Europe 9,461.7 8,310.6 7,139.1 ing in 2009 with fees based on current credit ratings of .08%
APMEA 3,591.8 3,332.0 3,144.5 per annum on the total commitment. Fees and interest
Latin America 1,412.1 1,425.3 1,898.3 rates on these lines are based on the Company’s long-term
Canada 876.4 703.2 574.2 credit rating assigned by Moody’s and Standard and Poor’s.
Other 574.8 780.4 637.1 The new agreements no longer require the Company to
Corporate 1,059.1 731.6 852.9 maintain a minimum net worth. In addition, certain sub-
Total assets $25,525.1 $23,970.5 $22,534.5 sidiaries outside the U.S. had unused lines of credit totaling
U.S. $ 482.4 $ 752.7 $ 552.3 $789.3 million at December 31, 2003; these were principally
Europe 404.8 579.4 635.8 short term and denominated in various currencies at local
APMEA 122.1 230.4 275.7 market rates of interest.
Latin America 78.4 119.9 197.5 The weighted-average interest rate of short-term borrow-
Canada 63.9 111.6 80.4 ings was 4.3% at December 31, 2003 (based on $341.1 mil-
Other 132.8 190.4 153.3 lion of foreign currency bank line borrowings) and 3.4% at
Corporate 23.0 19.4 11.2 December 31, 2002 (based on $257.9 million of commercial
Total capital expenditures $ 1,307.4 $ 2,003.8 $ 1,906.2 paper and $614.5 million of foreign currency bank line
U.S. $ 395.1 $ 383.4 $ 425.0
borrowings).
Europe 382.4 334.9 313.7
APMEA 156.5 141.7 133.2 FAIR VALUES
Latin America 64.3 59.6 79.3 At December 31, 2003, the fair value of the Company’s
Canada 46.7 35.6 32.9 debt obligations was estimated at $10.2 billion, compared
Other 53.1 40.3 36.8 to a carrying amount of $9.7 billion. This fair value was
Corporate 50.1 55.3 65.4 estimated using various pricing models or discounted cash
Total depreciation and flow analyses that incorporated quoted market prices. The
amortization $ 1,148.2 $ 1,050.8 $ 1,086.3 Company has no current plans to retire a significant amount
of its debt prior to maturity.
(1) Includes $407.6 million of special charges (adjustments) (U.S.–($11.4);
Europe–($20.0); APMEA–$54.9; Latin America–$108.9; Canada–($1.2); The carrying amounts for both cash and equivalents and
Other–$266.1; and Corporate–$10.3) primarily related to the disposi- notes receivable approximate fair value. Foreign currency
tion of certain non-McDonald’s brands and asset/goodwill impair- and interest rate exchange agreements, foreign currency
ment. See other operating expense, net note for further discussion.
options and forward foreign exchange contracts were recorded
(2) Includes $853.2 million of special charges (U.S.–$99.2; Europe–$147.8;
APMEA–$222.3; Latin America–$142.3; Canada–$9.7; Other–$34.0; in the Consolidated balance sheet at fair value estimated
and Corporate–$197.9) primarily related to restructuring markets using various pricing models or discounted cash flow
and eliminating positions, restaurant closings/asset impairment analyses that incorporated quoted market prices. No fair
and the write-off of technology costs. See other operating expense,
net note for further discussion. value was estimated for noninterest-bearing security deposits
(3) Includes $377.6 million of special charges (U.S.–$181.0; Europe–$45.8; by franchisees, because these deposits are an integral part
APMEA–$41.5; Latin America–$40.4; Canada–$9.8; Other–$24.9; of the overall franchise arrangements.
and Corporate–$34.2) primarily related to the U.S. business
reorganization and other global change initiatives, and restaurant
closings/asset impairment. See other operating expense, net note
for further discussion.

28 McDonald’s Corporation
DEBT OBLIGATIONS (4) Primarily consists of Swiss Francs, Swedish Kronor and Danish
The Company has incurred debt obligations principally Kroner.

through public and private offerings and bank loans. (5) Primarily consists of Korean Won, Chinese Renminbi, Hong Kong
Dollars, Australian Dollars and Singapore Dollars.
There are no provisions in the Company’s debt obligations
(6) Aggregate maturities for 2003 debt obligations before fair value
that would accelerate repayment of debt as a result of a adjustments were as follows (in millions): 2004–$388.0; 2005–$1,371.6;
change in credit ratings or a material adverse change in the 2006–$1,941.0; 2007–$666.7; 2008–$851.0; thereafter–$4,191.0. These
Company’s business. Certain of the Company’s debt obliga- amounts include reclassifications of short-term obligations to long-term
obligations of $750.0 million in 2006 and $500.0 million thereafter
tions contain cross-acceleration provisions, and restrictions as they are supported by long-term line of credit agreements.
on Company and subsidiary mortgages and the long-term (7) SFAS No. 133 requires that the underlying items in fair value
debt of certain subsidiaries. Under certain agreements, the hedges, in this case debt obligations, be recorded at fair value. The
Company has the option to retire debt prior to maturity, related hedging instrument is also recorded at fair value in either
miscellaneous other assets or other long-term liabilities. A portion
either at par or at a premium over par. ($131.1 million) of the adjustments at December 31, 2003 related to
The following table summarizes the Company’s debt interest rate exchange agreements that were terminated in December
obligations. (Interest rates reflected in the table include the 2002 and will amortize as a reduction of interest expense over the
remaining life of the debt.
effects of interest rate and foreign currency exchange
(8) Includes current maturities of long-term debt and long-term debt
agreements.) included in the Consolidated balance sheet. The decrease in debt
obligations from December 31, 2002 to December 31, 2003 was due
Amounts to net repayments ($891.6 million) and SFAS No. 133 noncash fair
Interest rates(1) outstanding
December 31 December 31
value adjustments ($43.6 million), partly offset by the impact of
IN MILLIONS OF Maturity changes in exchange rates on foreign currency denominated debt
U.S. DOLLARS dates 2003 2002 2003 2002 ($686.3 million).
Fixed-original issue (2) 5.0% 5.2% $ 3,615.5 $3,659.4
Fixed-converted via ESOP LOANS AND OTHER GUARANTEES
exchange agreements (3) 4.6 5.2 (1,503.6) (995.4) At December 31, 2003, the Company has guaranteed and
Floating .8 1.3 643.2 793.1 included in total debt $15.4 million of Notes issued by the
Total U.S. Dollars 2004-2028 2,755.1 3,457.1 Leveraged Employee Stock Ownership Plan (ESOP) with
Fixed 4.3 5.5 895.5 677.8 payments through 2006. Borrowings related to the ESOP at
Floating 2.0 3.1 2,217.4 1,954.7 December 31, 2003, which include $85.9 million of loans
Total Euro 2004-2013 3,112.9 2,632.5 from the Company to the ESOP and the $15.4 million of
Fixed 6.0 6.2 1,256.2 1,152.6 Notes guaranteed by the Company, are reflected as long-term
Floating 2.2 5.5 2.5 186.1 debt with a corresponding reduction of shareholders’ equity
Total British (unearned ESOP compensation). The ESOP is repaying
Pounds Sterling 2005-2032 1,258.7 1,338.7 the loans and interest through 2018 using Company contri-
Fixed 6.1 6.2 131.6 156.0 butions and dividends from its McDonald’s common stock
Floating .8 1.9 250.1 237.3 holdings. As the principal amount of the borrowings is
Total other repaid, the debt and the unearned ESOP compensation are
European being reduced.
currencies (4) 2004-2007 381.7 393.3
The Company also has guaranteed certain affiliate and
Total Japanese other loans totaling $88.8 million at December 31, 2003.
Yen–fixed 2004-2030 1.9 1.9 1,028.1 900.4
These guarantees are contingent commitments generally
Fixed 6.4 7.2 383.4 459.0
issued by the Company to support borrowing arrangements
Floating 4.2 4.8 489.4 433.6
of certain U.S. partnerships and franchisees, and certain
Total other
affiliates. The terms of the guarantees vary and are equal
currencies (5) 2004-2016 872.8 892.6
to the remaining term of the related debt. At December 31,
Debt obligations
before fair value 2003, there was no carrying value for obligations under these
adjustments (6) 9,409.3 9,614.6 guarantees in the Company’s Consolidated balance sheet.
Fair value
adjustments (7) 321.2 364.8
Total debt EMPLOYEE BENEFIT PLANS
obligations (8) $ 9,730.5 $9,979.4

(1) Weighted-average effective rate, computed on a semiannual basis. The Company’s Profit Sharing and Savings Plan for U.S.-
(2) Includes $150 million of debentures that mature in 2027, which based employees includes profit sharing, 401(k) and lever-
are subordinated to senior debt and provide for the ability to defer aged employee stock ownership (ESOP) features. The 401(k)
interest payments up to five years under certain conditions. feature allows participants to make pretax contributions
(3) A portion of U.S. Dollar fixed-rate debt effectively has been that are partly matched from shares released under the ESOP.
converted into other currencies and/or into floating-rate debt through
the use of exchange agreements. The rates shown reflect the fixed McDonald’s executives, staff and restaurant managers
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.

McDonald’s Corporation 29
participate in any additional ESOP allocations and profit
sharing contributions, based on their compensation. The PROPERTY AND EQUIPMENT
profit sharing contribution is discretionary, and the Company
Net property and equipment consisted of:
determines the amount each year.
Effective March 31, 2003, all contributions and related IN MILLIONS December 31, 2003 2002
earnings can be invested among several investment alterna-
Land $ 4,483.0 $ 4,169.6
tives, including McDonald’s common stock, in accordance Buildings and improvements on owned land 9,693.4 8,747.2
with each participant’s elections. Prior to March 31, 2003, Buildings and improvements on leased land 9,792.1 8,872.5
ESOP allocations and earnings were generally invested in Equipment, signs and seating 4,090.5 3,765.1
McDonald’s common stock and all other contributions and Other 681.2 664.2
related earnings could be invested among several invest- 28,740.2 26,218.6
ment alternatives, including McDonald’s common stock. Accumulated depreciation and amortization (8,815.5) (7,635.2)
In addition, the Company maintains a nonqualified,
Net property and equipment $19,924.7 $18,583.4
unfunded Supplemental Plan that allows participants to make
tax-deferred contributions and receive Company-provided Depreciation and amortization expense was (in millions):
allocations that cannot be made under the Profit Sharing and 2003–$1,113.3; 2002–$971.1; 2001–$945.6.
Savings Plan because of Internal Revenue Service limitations.
The investment alternatives in the Supplemental Plan are
based on certain of the market-rate investment alternatives
STOCK-BASED COMPENSATION
under the Profit Sharing and Savings Plan. Total liabilities
under the Supplemental Plan were $329.3 million at At December 31, 2003, the Company had five stock-based
December 31, 2003 and $297.3 million at December 31, compensation plans for employees and nonemployee direc-
2002 and were included in other long-term liabilities in tors that authorize the granting of various equity-based
the Consolidated balance sheet. incentives including stock options, restricted stock and
The Company has entered into derivative contracts to restricted stock units. The number of shares of common
hedge market-driven changes in certain of the Supplemental stock reserved for issuance under the plans was 206.0 mil-
Plan liabilities. At December 31, 2003, derivatives with a lion at December 31, 2003, including 11.8 million available
fair value of $51.6 million indexed to the Company’s stock for future grants.
and $49.4 million indexed to certain market indices were
included in miscellaneous other assets in the Consolidated STOCK OPTIONS
balance sheet. All changes in Plan liabilities and in the fair Options to purchase common stock are granted at the fair
value of the derivatives are recorded in selling, general & market value of the stock on the date of grant. Therefore, no
administrative expenses. Changes in fair value of the deriv- compensation cost has been recognized in the Consolidated
atives indexed to the Company’s stock are recorded in the statement of income for these stock options. Substantially
income statement because the contracts provide the coun- all of the options become exercisable in four equal install-
terparty with a choice to settle in cash or shares. ments, beginning a year from the date of the grant, and
Total U.S. costs for the Profit Sharing and Savings Plan, generally expire 10 years from the grant date. Approximately
including nonqualified benefits and related hedging 44 million options granted between May 1, 1999 and
activities, were (in millions): 2003–$60.3; 2002–$50.1; December 31, 2000 expire 13 years from the date of grant.
2001–$54.6. In 2001, the Board of Directors approved a special grant
Certain subsidiaries outside the U.S. also offer profit of 11.9 million options at a price of $28.90 as an incentive
sharing, stock purchase or other similar benefit plans. Total to meet an operating income performance goal for calendar
plan costs outside the U.S. were (in millions): 2003–$43.9; year 2003. The options vested on January 31, 2004 and
2002–$36.8; 2001–$39.7. expire on June 30, 2004, rather than June 30, 2011, because
Other postretirement benefits and postemployment the Company did not meet the performance goal.
benefits, excluding severance benefits related to the 2002
and 2001 restructuring charges, were immaterial.

30 McDonald’s Corporation
 A summary of the status of the Company’s stock option
plans as of December 31, 2003, 2002 and 2001, and changes
during the years then ended, is presented in the following
table.
2003 2002 2001
Weighted- Weighted- Weighted-
Shares average Shares average Shares average
IN exercise IN exercise IN exercise
Options MILLIONS price MILLIONS price MILLIONS price

Outstanding at
beginning of year 198.9 $27.57 192.9 $26.65 175.8 $25.34
Granted 23.6 14.96 26.3 28.26 38.6(1) 29.37
Exercised (12.6) 15.19 (13.1) 14.91 (11.9) 13.70
Forfeited (15.7) 27.07 (7.2) 29.22 (9.6) 29.03
Outstanding at
end of year 194.2 $26.90 198.9 $27.57 192.9 $26.65

Exercisable at
end of year 122.9 110.9 98.2

(1) Includes the special grant of 11.9 million options.

Options granted each year were 1.9%, 2.1% and 3.0%
of weighted-average common shares outstanding for 2003,
2002 and 2001, representing grants to approximately 14,300,
13,900 and 15,100 employees in those three years.
The following table presents information related to
options outstanding and options exercisable at December 31,
2003 based on ranges of exercise prices.
December 31, 2003
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

$12 to 22 41.0 5.7 $15.49 17.8 $16.08

23 to 27 56.8 3.4 24.95 47.8 24.92
28 to 34 54.3 6.4 29.12 19.6 29.31
35 to 46 42.1 8.4 37.81 37.7 38.11
$12 to 46 194.2 5.8 $26.90 122.9 $28.38

RESTRICTED STOCK UNITS

In March 2003, the Company granted 1.8 million restricted
stock units (RSUs) at a price of $14.31. The RSUs generally
vest 100% at the end of three years and are payable in either
shares of common stock or cash, at the Company’s option.
Compensation expense related to the RSUs (calculated as
the number of RSUs granted multiplied by the grant price)
is amortized over the vesting period in selling, general &
administrative expenses in the Consolidated statement
of income.

McDonald’s Corporation 31
Quarterly results (unaudited)

Quarters ended Quarters ended Quarters ended Quarters ended

December 31 September 30 June 30 March 31

In millions, except per share data 2003 2002 2003 2002 2003 2002 2003 2002

Revenues
Sales by Company-operated
restaurants $3,398.4 $2,932.8 $3,351.2 $3,019.3 $3,189.7 $2,869.0 $2,856.1 $2,678.5
Revenues from franchised and
affiliated restaurants 1,157.0 966.4 1,153.4 1,027.7 1,091.1 993.1 943.6 918.9
Total revenues 4,555.4 3,899.2 4,504.6 4,047.0 4,280.8 3,862.1 3,799.7 3,597.4
Company-operated margin 486.4 374.5 510.6 434.5 445.7 415.1 346.7 368.9
Franchised margin 909.6 749.2 917.4 813.5 860.1 787.1 720.3 716.2
Operating income (loss) 367.5 (1) (203.4) (2) 963.9 829.8 826.2 845.2 674.6 641.3 (3)
Income (loss) before cumulative
effect of accounting changes $ 125.7 (1) $ (343.8) (2) $ 547.4 $ 486.7 $ 470.9 $ 497.5 $ 364.2 $ 351.7 (3)
Cumulative effect of accounting
changes, net of tax (36.8) (98.6)
Net income (loss) $ 125.7 (1) $ (343.8) (2) $ 547.4 $ 486.7 $ 470.9 $ 497.5 $ 327.4 $ 253.1 (3)

Per common share–basic:

Income (loss) before cumulative
effect of accounting changes $ .10 (1) $ (.27) (2) $ .43 $ .38 $ .37 $ .39 $ .29 $ .28 (3)
Cumulative effect of accounting
changes (.03) (.08)
Net income (loss) $ .10 (1) $ (.27) (2) $ .43 $ .38 $ .37 $ .39 $ .26 $ .20 (3)
Per common share–diluted:
Income (loss) before cumulative
effect of accounting changes $ .10 (1) $ (.27) (2) $ .43 $ .38 $ .37 $ .39 $ .29 $ .27 (3)
Cumulative effect of accounting
changes (.03) (.07)
Net income (loss) $ .10 (1) $ (.27) (2) $ .43 $ .38 $ .37 $ .39 $ .26 $ .20 (3)
Dividends declared per common share $ – $ .235 $ .40 $ – $ – $ – $ – $ –
Weighted-average shares–basic 1,266.2 1,268.8 1,271.5 1,273.1 1,272.5 1,273.2 1,269.6 1,277.2
Weighted-average shares–diluted 1,277.9 1,268.8 1,281.0 1,280.5 1,277.5 1,290.6 1,270.3 1,292.7
Market price per common share
High $ 27.01 $ 19.95 $ 24.37 $ 28.62 $ 22.95 $ 30.72 $ 17.38 $ 29.06
Low 23.01 15.17 20.40 17.42 13.88 27.00 12.12 25.38
Close 24.83 16.08 23.54 17.66 22.06 28.45 14.46 27.75

(1) Includes the following net charges totaling $0.25 per share:
> $272.1 million ($183.2 million after tax) related to the disposition of certain non-McDonald’s brands and the revitalization plan actions
of our Japanese affiliate.
> $135.5 million ($140.0 million after tax) primarily related to asset/goodwill impairment mainly in Latin America, restaurant closings
associated with strategic actions in Latin America and a favorable adjustment to the 2002 charge for restaurant closings, primarily due to
about 85 fewer closings than originally anticipated.
(2) Includes the following charges totaling $0.52 per share:
> $266.9 million ($243.6 million after tax) primarily related to the anticipated transfer of ownership in five countries in the Middle East and
Latin America, ceasing operations in two countries in Latin America and eliminating positions, reallocating resources and consolidating
certain home office facilities to control costs.
> $359.4 million ($292.8 million after tax) consisting of $292.2 million related to management’s decision to close 719 underperforming
restaurants primarily in the U.S. and Japan, and $67.2 million primarily related to the impairment of assets for certain existing restaurants
in Europe and Latin America.
> $183.9 million ($120.5 million after tax) consisting of $170.0 million related to management’s decision to terminate a long-term technology
project, and $13.9 million related to the write-off of receivables and inventory in Venezuela as a result of the temporary closure of all
McDonald’s restaurants due to a national strike.
(3) Includes $43.0 million of asset impairment charges (pre and after tax or $0.03 per share), primarily related to the impairment of assets in
existing restaurants in Chile and other Latin American markets and the closing of 32 underperforming restaurants in Turkey.

32 McDonald’s Corporation
MANAGEMENT'S REPORT REPORT OF INDEPENDENT AUDITORS

Management is responsible for the preparation, integrity THE BOARD OF DIRECTORS AND SHAREHOLDERS
and fair presentation of the consolidated financial state- McDONALD'S CORPORATION
ments and notes to the consolidated financial statements. We have audited the accompanying Consolidated balance
The financial statements were prepared in accordance with sheets of McDonald's Corporation as of December 31, 2003
accounting principles generally accepted in the U.S. and and 2002, and the related Consolidated statements of
include certain amounts based on management's judgment income, shareholders' equity and cash flows for each of the
and best estimates. Other financial information presented three years in the period ended December 31, 2003. These
is consistent with the financial statements. financial statements are the responsibility of McDonald's
The Company maintains a system of internal control Corporation management. Our responsibility is to express
over financial reporting including safeguarding of assets an opinion on these financial statements based on our
against unauthorized acquisition, use or disposition, which audits.
is designed to provide reasonable assurance to the We conducted our audits in accordance with auditing
Company's management and Board of Directors regarding standards generally accepted in the U.S. Those standards
the preparation of reliable published financial statements require that we plan and perform the audit to obtain reason-
and asset safeguarding. The system includes a documented able assurance about whether the financial statements are
organizational structure and appropriate division of respon- free of material misstatement. An audit includes examining,
sibilities; established policies and procedures that are on a test basis, evidence supporting the amounts and dis-
communicated throughout the Company; careful selection, closures in the financial statements. An audit also includes
training and development of our people; and utilization assessing the accounting principles used and significant
of an internal audit program. Policies and procedures estimates made by management, as well as evaluating the
prescribe that the Company and all employees are to main- overall financial statement presentation. We believe that our
tain high standards of proper business practices throughout audits provide a reasonable basis for our opinion.
the world. In our opinion, the financial statements referred to
There are inherent limitations to the effectiveness of above present fairly, in all material respects, the consolidated
any system of internal control, including the possibility of financial position of McDonald's Corporation at December 31,
human error and the circumvention or overriding of con- 2003 and 2002, and the consolidated results of its opera-
trols. Accordingly, even an effective internal control system tions and its cash flows for each of the three years in the
can provide only reasonable assurance with respect to period ended December 31, 2003, in conformity with
financial statement preparation and safeguarding of assets. accounting principles generally accepted in the U.S.
Furthermore, the effectiveness of an internal control system As discussed in the Notes to the consolidated financial
can change with circumstances. The Company believes statements, effective January 1, 2003, the Company changed
that it maintains an effective system of internal control its method for accounting for asset retirement obligations
over financial reporting and safeguarding of assets against to conform with SFAS No. 143, Accounting for Asset
unauthorized acquisition, use or disposition. Retirement Obligations. Effective January 1, 2002, the
The consolidated financial statements have been audited Company changed its method for accounting for goodwill
by independent auditors, Ernst & Young LLP, who were to conform with SFAS No. 142, Goodwill and Other
given unrestricted access to all financial records and related Intangible Assets.
data. The audit report of Ernst & Young LLP is presented
herein. ERNST & YOUNG LLP
The Board of Directors, operating through its Audit Chicago, Illinois
Committee composed entirely of independent Directors, January 26, 2004
oversees the financial reporting process. Ernst & Young LLP
has unrestricted access to the Audit Committee and regularly
meets with the Committee to discuss accounting, auditing
and financial reporting matters.

McDONALD’S CORPORATION
January 26, 2004

McDonald’s Corporation 33
McDonald’s Corporation
McDonald’s Plaza
Oak Brook IL 60523

www.mcdonalds.com