We are a Delaware limited liability company. Our principal place of business is 110 N. Carpenter Street, Chicago, Illinois, 60607. We currently do business under the name of McDonald’s USA, LLC. Our agents for service of process are disclosed in Exhibit N. We are a wholly-owned subsidiary of our parent and predecessor, McDonald’s Corporation, a Delaware corporation. Our predecessor’s principal place of business is 110 N. Carpenter Street, Chicago, Illinois, 60607. Our predecessor currently does not offer franchises. Neither we nor our predecessor have ever offered franchises in any other line of business.
In certain limited cases, we may also grant franchises with leases that include the business facilities. We call these Business Facilities Lease (“BFL”) franchises. A BFL is a special arrangement that we may offer when certain economic and other factors exist. The term of a BFL is usually 3 years. Under a BFL, you may have a conditional option to purchase certain restaurant assets after the first year and extend the franchise for up to 20 years after the beginning of the term. In this disclosure document, the word “restaurant” refers to each McDonald’s restaurant business location generally, regardless of whether it is franchised as a traditional restaurant, Satellite, STO, STR, or BFL (unless otherwise provided). In 1955, our predecessor, McDonald’s Corporation, began granting franchises to individuals for the operation of McDonald’s restaurants. In 1960, our predecessor began forming and granting franchises to McOpCo companies for the operation of McDonald’s restaurants. In 2004, our predecessor formed us as a subsidiary and in 2005, as part of a global company alignment, transferred to us a majority of the assets used in its U.S. business, including its interests in the McOpCo companies and the franchises for McDonald’s restaurants in the U.S. In 2007, restaurants in Puerto Rico and the Virgin Islands operated by McOpCo companies were sold to, and a master franchise to offer and sell franchises in Puerto Rico and the Virgin Islands was granted to, LatAm, LLC, a Delaware limited liability company, which is not an affiliate of McDonald’s.
We develop, operate, franchise, and service a system of restaurants that prepare, assemble, package, and sell a limited menu of value-priced foods under the McDonald’s System in the U.S. The “McDonald’s System” is a concept of restaurant operations that includes, among other things, certain rights in trademarks, manuals, and other confidential business information; operational, real estate, and marketing information; and the expertise and continuing information that we provide. All McDonald’s restaurant businesses in the U.S. are operated under franchise agreements and are owned by franchisees who are independent third parties or by our wholly-owned subsidiaries (“McOpCo companies”). Currently, about 95% of all U.S. restaurants are franchised to independent franchisees and about 5% are franchised to McOpCo companies. McDonald’s restaurants offer the public a high standard of quality and uniformity in food, service, and decor. McDonald’s restaurants are located in freestanding buildings, storefronts, food courts, and other locations that are appropriate to McDonald’s image. A grant of a McDonald’s franchise authorizes you to operate a McDonald’s restaurant business at a specific location and to use the McDonald’s System in the operation of that restaurant business for a specific period of time, usually 20 years. We also grant franchises for McDonald’s restaurant businesses located in retail stores such as Walmart. We call these satellite (“Satellite”) locations. McDonald’s restaurants located in strip centers, airports, universities, shopping malls, hospitals, and other diverse locations may also be Satellites. Satellites may serve a scaled-down menu of a traditional McDonald’s restaurant and, in some cases, will also serve non-McDonald’s trademarked products. The term of the franchise for a Satellite depends on its location.
All franchisees pay a $45,000 lump sum initial franchise fee on the opening of the restaurant, except for: (a) the McOpCo companies, which do not pay any initial franchise fee; (b) franchisees of locations having 10 years or less of real estate tenure will pay a prorated initial franchise fee based on the term of the franchise; (c) in situations where we and a franchisee mutually agree on a term of 10 years or less, after considering such factors as the restaurant location and its business potential, franchisees will pay a prorated initial franchise fee based on the term of the franchise; (d) franchisees who rebuild or relocate their restaurants will pay the initial franchise fee less a credit for a portion of the previously paid initial franchise fee, on the earlier of the first of the month after the seventh year after the opening of the rebuilt or relocated restaurant, or the end of the previous franchise term (see Item 7, note 1); (e) franchisees of Satellite locations, who are required to pay a $500 initial franchise fee upon opening of the Satellite (except franchisees of Walmart locations, who pay no initial franchise fee) and an annual fee (see Item 6); (f) franchisees of STO and STR locations pay a $22,500 lump sum initial franchise fee; and (g) franchisees who have an option to purchase assets under a BFL pay the $45,000 initial franchise fee when they exercise the option. The entire initial franchise fee will be refunded if the restaurant construction is not completed within 1 year of the date the Franchise Agreement is signed. There are no refunds under other circumstances.
Typically, no financing arrangements are offered by McDonald’s. As part of the Franchise Agreement, McDonald’s issues an Operator’s Lease for each site owned or leased by McDonald’s. The Operator’s Lease is a standard commercial lease under which you pay rent to McDonald’s for use of the premises. The Operator’s Lease does not contain any financing terms. For BFL franchises, the Operator’s Lease provides for the lease of the restaurant’s business facilities as well as the premises. The BFL arrangement does not contain any financing terms but may provide a conditional option for you to purchase certain restaurant assets from us for a lump sum (see Item 6). In that case, a BFL Rider which contains the option is attached to the Franchise Agreement. The BFL Rider is attached as Exhibit F, and the Operator’s Lease is attached as Exhibit G. Our predecessor may, at its discretion, guarantee loans made by a third party lender, Bank of America, N.A., a National Banking Association (the “Lender”), to franchisees for remodeling existing restaurants, working capital, refinancing existing restaurant loans, acquiring restaurant businesses, purchasing restaurant assets by exercising the option under a BFL Rider, and for other reasons approved by McDonald’s. The Lender will prepare all the necessary documents and will handle the processing, payments, customer service, and collections according to standards developed by us. Our predecessor will provide a guarantee to the Lender for these obligations and in return will receive a guarantee fee (currently equal to 1.25% of average outstanding balance) in consideration for the risks and costs associated with the guaranteed loans. The rate on these loans will typically be 1 month LIBOR plus 2.50% per annum for floating rate loans which may be prepaid with no penalty. As of January 31, 2019, 1 month LIBOR was 2.51%. Loans typically will be for a maximum term of 3 years with a 7-year amortization and will be secured by restaurant equipment, seating, signage, decor, and inventory. The loan amount will vary depending on the purpose for which the loan is to be used. A personal guarantee from the franchisee and his or her spouse will be required and, should a legal dispute arise, the franchisee agrees to waive the right to a jury trial and agrees not to consolidate the action with others. A default on these loans will be considered a default under the Franchise Agreement, and the franchisee will be required to sign an Operator Assistance Program Agreement with us (see Exhibit M). As part of the Operator Assistance Program Agreement, the franchisee agrees to waive all claims against McDonald’s. As of January 31, 2019, the annual percentage rate (APR) was 5.01%. All loan participants will be required to permit electronic debiting of accounts for payment. The financing documents are typically a Promissory Note, Security Agreement, Authorization for ACH Drafting of Loan Payments, and Operator Assistance Program Agreement similar to the documents in Exhibit M.
Of the approximately 11,761 domestic traditional McDonald’s restaurants opened at least 1 year as of December 31, 2018, approximately 79% had annual sales volumes in excess of $2,200,000; approximately 69% had annual sales volumes in excess of $2,400,000; and approximately 58% had annual sales volumes in excess of $2,600,000. The average annual sales volume of domestic traditional McDonald’s restaurants open at least 1 year as of December 31, 2018, was $2,857,000 during 2018. The highest and lowest annual sales volume in 2018 for these domestic traditional McDonald’s restaurants was $12,457,000 and $557,000, respectively. The median annual sales volume of domestic traditional McDonald’s restaurants open at least 1 year as of December 31, 2018, was $2,764,000 during 2018. Of the approximately 11,153 domestic traditional franchised McDonald’s restaurants opened at least 1 year as of December 31, 2018, approximately 77% had annual sales volumes in excess of $2,200,000; approximately 67% had annual sales volumes in excess of $2,400,000; and approximately 56% had annual sales volumes in excess of $2,600,000. The average annual sales volume of domestic traditional franchised McDonald’s restaurants open at least 1 year as of December 31, 2018, was $2,815,000 during 2018. The highest and lowest annual sales volume in 2018 for these domestic traditional McDonald’s restaurants was $12,457,000 and $557,000, respectively. The median annual sales volume of domestic traditional franchised McDonald’s restaurants open at least 1 year as of December 31, 2018, was $2,721,000 during 2018. Of the approximately 608 domestic traditional McOpCo restaurants opened at least 1 year as of December 31, 2018, approximately 99% had annual sales volumes in excess of $2,200,000; approximately 98% had annual sales volumes in excess of $2,400,000; and approximately 96% had annual sales volumes in excess of $2,600,000. The average annual sales volume of domestic traditional McOpCo restaurants open at least 1 year as of December 31, 2018, was $3,627,000 during 2018. The highest and lowest annual sales volume in 2018 for these domestic traditional McOpCo restaurants was $7,565,000 and $1,949,000, respectively. The median annual sales volume of domestic traditional McOpCo restaurants open at least 1 year as of December 31, 2018, was $3,517,000 during 2018. The pro forma statements included below show annual sales volumes of $2,200,000, $2,400,000, and $2,600,000. These pro forma statements have been derived from independent franchisee traditional restaurant financial statements to provide information relevant to a prospective franchisee (see Note 1). Specific assumptions used in the presentation of these pro forma statements are indicated above and below each statement. The pro forma statements are based upon a total of 9,886 independent franchisee traditional restaurants open and operated by a franchisee for at least 1 year and do not include restaurants operated by McOpCo companies, Satellites or the domestic traditional franchised restaurants that changed owners in 2018 and for which we had complete financial statements. A franchisee’s individual financial results may differ from the results stated in the pro forma statements for the reasons described in this item or for other reasons. Substantiation of the data used in preparing the earnings claims, including computations of all actual or average profit or earnings, will be made available to prospective franchisees upon reasonable request. It is anticipated that the information reported in these pro forma statements reflects the operating results before occupancy costs for independent franchisee restaurants open for at least 1 year. However, the operating income before occupancy cost figures appearing below should not be construed as the financial results or “profit” before occupancy costs which might be experienced by a franchisee with a similar sales volume or an indication that any particular sales volume will be obtained. An individual franchisee is likely to experience operating expense variations including, but not limited to, general insurance, legal and accounting fees, labor costs, and store management benefits (life and health insurance, etc.). Additionally, market conditions, operational and management methods employed by a franchisee, different geographic areas of the country, and menu price variations may significantly affect operating results. The nature of these variables makes it difficult to estimate the financial results for any particular franchisee or location.