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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (fee required) for the fiscal year ended
December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (no fee required) for the
transition period from to
Commission File Number 1-5231
McDONALD'S CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2361282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
McDonald's Plaza
Oak Brook, Illinois 60521
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 623-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
-------------------------- -----------------------
Common stock, $.01 par value New York Stock Exchange
Chicago Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
8-7/8% Debentures due 2011 New York Stock Exchange
7-3/8% Notes due 2002 New York Stock Exchange
Depositary Shares representing 7.72%
Cumulative Preferred Stock, Series E New York Stock Exchange
6-3/4% Notes due 2003 New York Stock Exchange
7-3/8% Debentures due 2033 New York Stock Exchange
8.35% Subordinated Deferrable Interest
Debentures due 2025 New York Stock Exchange
6-5/8% Notes due 2005 New York Stock Exchange
7.05% Debentures due 2025 New York Stock Exchange
7.5% Subordinated Deferrable Interest
Debentures due 2036 New York Stock Exchange
7.5% Subordinated Deferrable Interest
Debentures due 2037 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
-----
(Title of Class)
2
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates
of the registrant is $31,395,219,219 and the number of shares of
common stock outstanding is 691,919,332 as of January 31, 1997.
Documents incorporated by reference. Part III of this 10-K
incorporates information by reference from the registrant's definitive
proxy statement which will be filed no later than 120 days after
December 31, 1996.
3
PART I
Item 1. Business
McDonald's Corporation, the registrant, together with its
subsidiaries, is referred to herein as the "Company".
(a) General development of business
There have been no significant changes to the Company's
corporate structure during 1996, nor material changes in the Company's
method of conducting business.
(b) Financial information about industry segments
Industry segment data for the years ended December 31, 1996,
1995 and 1994 is included in Part II, item 8, page of this
Form 10-K.
(c) Narrative description of business
General
The Company develops, operates, franchises and services a
worldwide system of restaurants which prepare, assemble, package and
sell a limited menu of value-priced foods. These restaurants are
operated by the Company or, under the terms of franchise arrangements,
by franchisees who are independent third parties, or by affiliates
operating under joint-venture agreements between the Company and local
businesspeople.
The Company's franchising program is designed to assure
consistency and quality. The Company is selective in granting
franchises and is not in the practice of franchising to investor
groups or passive investors. Under the conventional franchise
arrangement, franchisees supply capital - initially, by purchasing
equipment, signs, seating, and decor, and over the long term, by
reinvesting in the business. The Company shares the investment by
owning or leasing the land and building; franchisees then contribute
to the Company's revenues through payment of rent and service fees
based upon a percent of sales, with specified minimum payments.
Generally, the conventional franchise arrangement lasts 20 years and
franchising practices are consistent throughout the world. Further
discussion regarding site selection is included in Part I, item 2,
page of this Form 10-K.
Training begins at the restaurant with one-on-one instruction
and videotapes. Aspiring restaurant managers progress through a
development program of classes in basic and intermediate operations,
management and equipment. Assistant managers are eligible to attend
the advanced operations and management class at one of the five
Hamburger University (H.U.) campuses in the U.S., Germany, England,
Japan or Australia. The curriculum at H.U. concentrates on skills and
practices essential to delivering customer satisfaction and running a
restaurant business.
4
The Company's global brand is well-known. Marketing and
promotional activities are designed to nurture this brand image and
differentiate the Company from competitors by focusing on value, taste
and customer satisfaction. Funding for promotions is handled at the
local restaurant level; funding for regional and national efforts is
handled through advertising cooperatives. Franchised, Company-
operated and affiliated restaurants throughout the world make
voluntary contributions to cooperatives which purchase media.
Production costs for certain advertising efforts are borne by the
Company.
Products
McDonald's restaurants offer a substantially uniform menu
consisting of hamburgers and cheeseburgers, including the Big Mac,
Quarter Pounder with Cheese and Arch Deluxe sandwiches, the Fish Filet
Deluxe, Grilled Chicken Deluxe and Cripsy Chicken Deluxe, french
fries, Chicken McNuggets, salads, milk shakes, sundaes and cones,
pies, cookies and a limited number of soft drinks and other beverages.
In addition, the restaurants sell a variety of products during limited
promotional time periods. McDonald's restaurants operating in the
United States are open during breakfast hours and offer a full
breakfast menu including the Egg McMuffin and the Sausage McMuffin
with Egg sandwiches, hotcakes and sausage; three varieties of biscuit
sandwiches; and Apple-Bran muffins. McDonald's restaurants in many
countries around the world offer many of these same products as well
as other products and limited breakfast menus. The Company tests new
products on an ongoing basis.
The Company, its franchisees and affiliates purchase food
products and packaging from numerous independent suppliers. Quality
specifications for both raw and cooked food products are established
and strictly enforced. Alternative sources of these items are
generally available. Quality assurance labs in the U.S., Europe and
the Pacific work to ensure that the Company's high standards are
consistently met. The quality assurance process involves ongoing
testing and on-site inspections of suppliers' facilities.
Independently owned and operated distribution centers distribute
products and supplies to most McDonald's restaurants. The restaurants
then prepare, assemble and package these products using specially
designed production techniques and equipment to obtain uniform
standards of quality.
Trademarks and patents
The Company has registered trademarks and service marks, some
of which, including "McDonald's", "Ronald McDonald" and other related
marks, are of material importance to the Company's business. The
Company also has certain patents on restaurant equipment which, while
valuable, are not material to its business.
Seasonal operations
The Company does not consider its operations to be seasonal to
any material degree.
5
Working capital practices
Information about the Company's working capital practices is
incorporated herein by reference to Management's Discussion and
Analysis of the Company's financial position and the consolidated
statement of cash flows for the years ended December 31, 1996, 1995
and 1994 in Part II, item 7, pages through , and Part II, item 8,
page of this Form 10-K.
Customers
The Company's business is not dependent upon a single customer
or small group of customers.
Backlog
Company-operated restaurants have no backlog orders.
Government contracts
No material portion of the business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election
of the U.S. government.
Competition
McDonald's restaurants compete with international, national,
regional, and local retailers of food products. The Company competes
on the basis of price and service and by offering quality food
products. The Company's competition in the broadest perspective
includes restaurants, quick-service eating establishments, pizza
parlors, coffee shops, street vendors, convenience food stores,
delicatessens, and supermarket freezers.
In the U.S., about 424,000 restaurants generate nearly $238
billion in annual sales. McDonald's accounts for about 2.7% of those
restaurants and approximately 6.9% of those sales. No reasonable
estimate can be made of the number of competitors outside of the U.S.;
however, the Company's business in foreign markets continues to grow.
Research and development
The Company operates research and development facilities in
Illinois. While research and development activities are important to
the Company's business, these expenditures are not material.
Independent suppliers also conduct research activities for the benefit
of the McDonald's System, which includes franchisees and suppliers, as
well as McDonald's, its subsidiaries and joint ventures.
6
Environmental matters
The Company is not aware of any federal, state or local
environmental laws or regulations which will materially affect its
earnings or competitive position, or result in material capital
expenditures; however, the Company cannot predict the effect on its
operations of possible future environmental legislation or
regulations. During 1996, there were no material capital expenditures
for environmental control facilities and no such material expenditures
are anticipated.
Number of employees
During 1996, the Company's average number of employees
worldwide, including company-operated restaurant employees, was
approximately 237,000.
(d) Financial information about foreign and domestic operations
Financial information about foreign and domestic markets is
incorporated herein by reference from Selected Financial Data,
Management's Discussion and Analysis and Segment and Geographic
Information in Part II, item 6, page , Part II, item 7, pages
through and Part II, item 8, page , respectively, of this Form
10-K.
Item 2. Properties
The Company identifies and develops sites that offer
convenience to customers and provide for long-term sales and profit
potential. To assess potential, the Company analyzes traffic and
walking patterns, census data, school enrollments and other relevant
data. The Company's experience and access to advanced technology aids
in evaluating this information. In order to ensure long-term
occupancy and control of the related costs, the Company owns
restaurant sites and buildings or secures long-term leases.
Restaurant profitability for both the Company and franchisees is
important; therefore, ongoing efforts are made to lower average
development costs through construction and design efficiencies,
standardization and by leveraging the Company's global sourcing
system. Additional information about the Company's properties is
included in Management's Discussion and Analysis and the related
financial statements and footnotes in Part II, item 7, pages
through and Part II, item 8, pages respectively, of this
Form 10-K.
Item 3. Legal Proceedings
The Company has pending a number of lawsuits which have been
filed from time to time in various jurisdictions. These lawsuits cover
a broad variety of allegations spanning the Company's entire business.
The following is a brief description of the more significant of these
categories of lawsuits and government regulations. The Company does
not believe that any such claims or lawsuits will have a material
adverse affect on its financial condition or results of operations.
7
Franchising
A substantial number of McDonald's restaurants are franchised
to independent businesspeople operating under arrangements with the
Company. In the course of the franchise relationship, occasional
disputes arise between the Company and its franchisees relating to a
broad range of subjects including, without limitation, quality,
service and cleanliness issues, contentions regarding grants or
terminations of franchises, franchisee claims for additional
franchises or rewrites of franchises, and delinquent payments.
Suppliers
The Company and its affiliates and subsidiaries do not supply,
with minor exceptions outside of the United States, food, paper, or
related items to any McDonald's restaurants. The Company relies upon
independent suppliers which are required to meet and maintain the
Company's standards and specifications. There are a number of such
suppliers worldwide and on occasion disputes arise between the Company
and its suppliers on a number of issues including, by way of example,
compliance with product specifications and McDonald's business
relationship with suppliers.
Employees
Thousands of persons are employed by the Company and in
restaurants owned and operated by subsidiaries of the Company. In
addition, thousands of persons, from time to time, seek employment in
such restaurants. In the ordinary course of business, disputes arise
regarding hiring, firing and promotion practices.
Customers
McDonald's restaurants serve a large cross-section of the
public and in the course of serving so many people, disputes arise as
to products, service, accidents and other matters typical of an
extensive restaurant business such as that of the Company.
Trademarks
McDonald's has registered trademarks and service marks, some of
which are of material importance to the Company's business. From time
to time, the Company may become involved in litigation to defend and
protect its use of such registered marks.
Government Regulations
Local, state and federal governments have adopted laws and
regulations involving various aspects of the restaurant business,
including, but not limited to, franchising, health, environment,
zoning and employment. The Company does not believe that it is in
violation of any existing statutory or administrative rules, but it
cannot predict the effect on its operations from promulgation of
additional requirements in the future.
8
Item 4. Submission of Matters to a Vote of Shareholders
None.
Executive Officers of the Registrant
All of the executive officers of McDonald's Corporation as of
March 1, 1997 are shown below. Each of the executive officers has been
continuously employed by the Company for at least five years and has a
term of office until the May 1997 Board of Directors' meeting.
Number
Number of
of years
years in
Date of with present
Name Office Birth Company position
--------------------- --------------------- -------- ------- --------
Robert M. Beavers, Jr. Senior Vice President 01/27/44 33 3
James R. Cantalupo President and 11/14/43 22 5
Chief Executive
Officer-International
Winston B.
Christiansen Executive Vice President 07/31/47 26 1
Michael L. Conley Executive Vice President 03/28/48 22 0
and Chief Financial
Officer
Thomas S. Dentice Executive Vice President 01/12/39 31 12
Robert J. Doran Executive Vice President 07/17/46 30 1
USA
Patrick J. Flynn Executive Vice President 05/01/42 35 9
Thomas W. Glasgow, Jr. Executive Vice President, 02/17/47 28 5
Chief Operations Officer
Jack M. Greenberg Vice Chairman, 09/28/42 15 0
Chairman - USA
Michael R. Quinlan Chairman, Chief 12/09/44 33 7
Executive Officer
Edward H. Rensi President and Chief 08/15/44 31 5
Executive Officer-U.S.A.
Paul D. Schrage Senior Executive Vice 02/25/35 29 12
President, Chief
Marketing Officer
James A. Skinner Executive Vice President- 10/25/44 26 1
International
Fred L. Turner Senior Chairman 01/06/33 40 7
Shelby Yastrow Executive Vice President 11/03/35 19 1
/TABLE
9
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
The Company's common stock trades under the symbol MCD and is
listed on the following stock exchanges in the United States: New
York and Chicago.
The following table sets forth the common stock price range on
the New York Stock Exchange composite tape and dividends declared per
common share.
-------------------------------------------------------------------------
Quarter 1996 1995
-------------------------------------------------------------------------
Dividend Per Dividend Per
High Low Common Share High Low Common Share
-------------------------------------------------------------------------
First 54 1/4 42 1/2 .0675 35 3/4 28 5/8 .0600
Second 50 3/8 45 3/8 .0750 39 1/4 33 3/4 .0675
Third 49 41 .0750 41 1/2 35 7/8 .0675
Fourth 49 3/8 43 3/4 .0750 48 37 3/4 .0675
-------------------------------------------------------------------------
Year 54 1/4 41 .2925 48 28 5/8 .2625
-------------------------------------------------------------------------
The approximate number of shareholders of record and beneficial
owners of the Company's common stock as of January 31, 1997 was
estimated to be 925,000.
Given the Company's returns on equity and assets, the Company's
management believes it is prudent to reinvest a significant portion of
earnings back into the business. The Company has paid 84 consecutive
quarterly dividends on common stock through March 28, 1997, has
increased the per share amount 22 times since the first dividend was
paid in 1976, and has increased the dividend amount every year.
Additional dividend increases will be considered after reviewing
returns to shareholders, profitability expectations and financing
needs.
10
Item 6. Selected Financial Data
11-YEAR SUMMARY
(Dollars rounded to millions, except per common share data and average restaurant sales)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------
Systemwide sales $31,812 29,914 25,987 23,587 21,885 19,928 18,759 17,333 16,064 14,330 12,432
U.S. $16,370 15,905 14,941 14,186 13,243 12,519 12,252 12,012 11,380 10,576 9,534
Outside the U.S. $15,442 14,009 11,046 9,401 8,642 7,409 6,507 5,321 4,684 3,754 2,898
Systemwide sales by type
Operated by franchisees $19,969 19,123 17,146 15,756 14,474 12,959 12,017 11,219 10,424 9,452 8,422
Operated by the Company $ 7,571 6,863 5,793 5,157 5,103 4,908 5,019 4,601 4,196 3,667 3,106
Operated by affiliates $ 4,272 3,928 3,048 2,674 2,308 2,061 1,723 1,513 1,444 1,211 904
Average sales by
Systemwide restaurants
(in thousands) $ 1,708 1,844 1,800 1,768 1,733 1,658 1,649 1,621 1,596 1,502 1,369
Total revenues $10,687 9,795 8,321 7,408 7,133 6,695 6,640 6,066 5,521 4,853 4,143
Revenues from franchised
and affiliated restaurants $ 3,116 2,931 2,528 2,251 2,031 1,787 1,621 1,465 1,325 1,186 1,037
Operating income $ 2,633 2,601 2,241 1,984 1,862 1,679 1,596 1,438 1,288 1,160 983
Income before provision
for income taxes $ 2,251 2,169 1,887 1,676 1,448 1,299 1,246 1,157 1,046 959 848
Net income $ 1,573 1,427 1,224 1,083 959 860 802 727 646 549 * 480
Cash provided by
operations $ 2,461 2,296 1,926 1,680 1,426 1,423 1,301 1,246 1,177 1,051 852
Capital expenditures $ 2,375 2,064 1,539 1,317 1,087 1,129 1,571 1,555 1,321 1,027 942
Treasury stock purchases $ 605 321 500 628 92 117 157 497 136 143 209
Financial position at year end
Net property and
equipment $14,352 12,811 11,328 10,081 9,597 9,559 9,047 7,758 6,800 5,820 4,878
Total assets $17,386 15,415 13,592 12,035 11,681 11,349 10,668 9,175 8,159 6,982 5,969
Total debt $ 5,523 4,836 4,351 3,713 3,857 4,615 4,792 4,036 3,269 2,784 2,321
Total shareholders'
equity $ 8,718 7,861 6,885 6,274 5,892 4,835 4,182 3,550 3,413 2,917 2,506
Per common share
Net income $ 2.21 1.97 1.68 1.45 1.30 1.17 1.10 .97 .86 72 * .62
Dividends declared $ .29 .26 .23 .21 .20 .18 .17 .15 .14 .12 .11
Market price at
year end $45 3/8 45 1/8 29 1/4 28 1/2 24 3/8 19 14 1/2 17 1/4 12 11 10 1/8
Systemwide restaurants
at year end 21,022 18,380 15,950 14,163 13,093 12,418 11,803 11,162 10,513 9,911 9,410
U.S. 12,094 11,368 10,238 9,397 8,959 8,764 8,576 8,270 7,907 7,567 7,272
Outside the U.S. 8,928 7,012 5,712 4,766 4,134 3,654 3,227 2,892 2,606 2,344 2,138
Systemwide restaurants by type
Operated by franchisees 13,428 12,217 10,965 9,933 9,237 8,735 8,131 7,573 7,110 6,760 6,406
Operated by the Company 4,357 3,816 3,238 2,746 2,551 2,547 2,643 2,691 2,600 2,399 2,301
Operated by affiliates 3,237 2,347 1,747 1,484 1,305 1,136 1,029 898 803 752 703
Number of countries at
year end 101 89 79 70 65 59 53 51 50 47 46
* Before the cumulative prior years' benefit from the change in accounting for income taxes.
/TABLE
11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
-----------------------------------------------------------------------
SYSTEMWIDE SALES AND RESTAURANTS
Systemwide sales include sales by all restaurants, whether operated by
the Company, by franchisees or by affiliates operating under joint-
venture agreements. Sales increases in 1996 and 1995 were primarily
due to restaurant expansion worldwide. In 1996, sales were affected
adversely by negative U.S. comparable sales and weaker foreign
currencies. In 1995, sales benefited from stronger foreign currencies
and higher comparable sales. Sales by Company-operated restaurants
grew at a higher rate than Systemwide sales in 1996 and 1995. This
was because both expansion and comparable sales at Company-operated
restaurants increased at a higher rate than at Systemwide restaurants.
------------------------------------------------------------------
(In millions) 1996 1995 1994
------------------------------------------------------------------
U.S. $16,369.6 $15,905.2 $14,941.0
Europe/Africa/Middle
East/India 7,546.1 6,807.7 5,271.2
Asia/Pacific 5,347.5 4,834.8 3,794.8
Canada 1,276.3 1,236.8 1,186.1
Latin America 1,272.6 1,129.4 794.3
------------------------------------------------------------------
Total Systemwide sales $31,812.1 $29,913.9 $25,987.4
==================================================================
Expansion continued at an accelerated pace in 1996 as 2,642
restaurants were added Systemwide (1,995 traditional and 647
satellites). This compares with 2,430 in 1995 (1,604 traditional and
826 satellites), and 1,787 in 1994 (1,212 traditional and 575
satellites). Systemwide restaurants opened during the year
contributed $1.4 billion to Systemwide sales in 1996, $1.2 billion in
1995 and $.9 billion in 1994.
McDonald's plans to add between 2,400 and 2,800 restaurants in
1997, with a greater emphasis on full-menu traditional restaurants and
international locations than in 1996.
12
TOTAL REVENUES
Total revenues include sales by Company-operated restaurants and fees
from restaurants operated by franchisees and affiliates. These fees
are based on a percent of sales with specified minimum payments. The
minimum fee includes both a rent and service fee that amount to about
12.5% of sales for new U.S. franchise arrangements, compared with
about 12.0% prior to 1994. Fees vary by type of site and investment
required by the Company, and also according to local business
conditions outside the U.S. These fees, along with occupancy and
operating rights, are stipulated in franchise agreements that
generally have 20-year terms. Accordingly, these fees provide a
stable, predictable revenue flow to the Company.
Revenues grow as new restaurants are added and as sales build in
existing restaurants. Menu price changes also affect revenues and
sales, but it is impractical to quantify their Systemwide impact
because of different pricing structures, new products, promotions and
product mix variations among restaurants and markets.
Total revenues for 1996 and 1995 increased due to strong global
operating results and an increase in Company-operated restaurants
through expansion and changes in ownership. Negative U.S. comparable
sales and weaker foreign currencies had an adverse impact on 1996
revenues, while positive comparable sales and stronger foreign
currencies contributed to the 1995 increase.
In 1996, 63% of sales by Company-operated restaurants and 42% of
revenues from franchised and affiliated restaurants were generated
outside the U.S., up from 60% and 40%, respectively, in 1995.
13
-----------------------------------------------------------------------
CHANGES IN OPERATING RESULTS FROM PRIOR YEAR
-----------------------------------------------------------------------
1996 1995
(Dollars rounded to millions, Increase(decrease) Increase(decrease)
except per common share data) Amount % Amount %
-----------------------------------------------------------------------
SYSTEMWIDE SALES $1,898 6 $3,927 15
-----------------------------------------------------------------------
REVENUES
Sales by Company-operated
restaurants $ 707 10 $1,071 18
Revenues from franchised and
affiliated restaurants 185 6 403 16
-----------------------------------------------------------------------
TOTAL REVENUES 892 9 1,474 18
-----------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants 616 11 903 19
Franchised restaurants 55 11 80 18
General, administrative
and selling expenses 130 11 153 14
Other operating (income)
expense-net 60 (57) (22) 26
-----------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES 861 12 1,114 18
-----------------------------------------------------------------------
OPERATING INCOME* 31 1 360 16
-----------------------------------------------------------------------
Interest expense 2 1 34 11
Nonoperating income
(expense)-net 53 (58) (43) 88
-----------------------------------------------------------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 82 4 283 15
-----------------------------------------------------------------------
Provision for income taxes (63) (9) 80 12
-----------------------------------------------------------------------
NET INCOME $ 145 10 $ 203 17
=======================================================================
NET INCOME PER COMMON SHARE $ .24 12 $ .29 17
-----------------------------------------------------------------------
* Excluding SFAS 121 and special charges, 1996 operating income would
have increased $119 million, or 5%.
14
RESTAURANT MARGINS
Margins for Company-operated restaurants were 18.6% of sales in 1996,
compared with 19.2% in 1995 and 19.8% in 1994. As a percent of 1996
and 1995 sales, occupancy and other operating costs increased; payroll
costs remained relatively flat; and food and paper costs declined in
1996 and increased in 1995.
Franchised restaurant margin dollars made up about two-thirds of
the combined operating margins in both 1996 and 1995. Franchised
margins were 81.7% of applicable 1996 revenues, down from 82.4% in
1995 and 82.8% in 1994. The decreases for both years were partly due
to a higher proportion of leased sites. For leased sites, financing
costs are included in rent expense, which affects margins; for owned
sites, financing costs are reflected in interest expense. The 1996
decrease was also partly attributable to negative U.S. comparable
sales.
Franchised margins include revenues and expenses from restaurants
operating under business facilities lease arrangements. Under these
arrangements, the Company leases the businesses, including equipment,
to franchisees who have options to purchase the businesses. Higher
fees are charged but margins are generally lower because of equipment
depreciation. The Company is compensated for lower margins by the
subsequent gains realized from the exercise of purchase options,
accounted for as other operating income. There were 627 restaurants
operating under such arrangements at year-end 1996, compared with 491
in 1995 and 484 in 1994. The majority of these were outside the U.S.
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
Increases in 1996 and 1995 were primarily due to strategic global
investments supporting the Convenience, Value and Execution
Strategies. These investments included costs associated with
accelerated expansion, continued investment in developing countries
and new U.S. food initiatives. Weaker foreign currencies reduced 1996
expenses slightly, while stronger foreign currencies increased 1995
expenses. These expenses have been relatively constant as a percent
of Systemwide sales at 4.3% in 1996, 4.1% in 1995 and 4.2% in 1994.
Corporate general, administrative and selling expenses not
allocated to geographic business segments were $52 million in 1996 and
$48 million in both 1995 and 1994.
OTHER OPERATING (INCOME) EXPENSE-NET
This category includes gains on sales of restaurant businesses, equity
in earnings of unconsolidated affiliates, net gains or losses from
property dispositions and other transactions related to the
foodservice business. The decline in other operating income in 1996
was principally due to the $72 million special charge related
primarily to plans to strengthen the U.S. business and reduce ongoing
costs, and the $16 million charge related to the adoption of Statement
of Financial Accounting Standard No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of (SFAS 121). Other operating income was positively
affected by higher gains on sales of restaurant businesses and lower
provisions for property dispositions, partly offset by lower income
from affiliates. Income from affiliates declined in 1996, despite
stronger operating results, principally due to a weaker Japanese Yen.
The 1995 other operating income increase was due to higher income from
affiliates, principally Japan, partly offset by higher losses on
property dispositions.
15
Gains on sales of restaurant businesses include gains from sales of
Company-operated restaurants, as well as gains from exercises of
purchase options by franchisees with business facilities lease
arrangements. The Company's purchase and sale of businesses with its
franchisees and affiliates is aimed at achieving an optimal ownership
mix in each market. As an integral part of our franchising business,
these transactions and resulting gains are recorded in operating
income.
Equity in earnings of unconsolidated affiliates - businesses the
Company actively participates in, but does not control - is reported
after interest expense and income taxes, except for U.S. restaurant
partnerships, which are reported before income taxes.
Net gains or losses from property dispositions result from
disposals of properties no longer needed due to restaurant closings,
relocations and other transactions.
OPERATING INCOME
Operating income of $2.6 billion was negatively affected by the $72
million special charge and the $16 million SFAS 121 charge. Excluding
these charges, operating income would have increased 5% in 1996, due
to higher combined operating margin dollars and higher other operating
income, partly offset by higher general, administrative and selling
expenses and weaker foreign currencies. The 1995 increase reflected
higher combined operating margin dollars and stronger foreign
currencies, partly offset by higher general, administrative and
selling expenses.
INTEREST EXPENSE
Higher average debt levels, partly offset by lower average interest
rates, accounted for the 1996 and 1995 increases. Weaker foreign
currencies reduced the increase in 1996, while stronger foreign
currencies contributed to the increase in 1995.
NONOPERATING INCOME (EXPENSE)-NET
The decrease in this category - which includes interest income, gains
and losses related to investments and financings, and miscellaneous
income and expense - reflected lower losses in 1996 associated with
the Company's investment in Discovery Zone common stock. Losses of
$22 million in 1996 reduced the carrying value of this investment to
zero, compared with losses of $60 million in 1995. The decrease in
expense also reflected foreign currency translation gains in 1996,
compared with translation losses in 1995. The 1995 increase in
expense also included higher charges associated with minority
interests, partly offset by higher interest income and lower
translation losses.
16
PROVISION FOR INCOME TAXES
The effective income tax rate was 30.1% for 1996, compared with 34.2%
for 1995 and 35.1% for 1994. A $50 million tax benefit resulting from
certain international transactions was primarily responsible for the
unusually low rate in 1996. Excluding this benefit, the 1996
effective income tax rate would have been 32.4%, reflecting lower
taxes related to foreign operations. The Company expects its 1997
effective income tax rate to be in the range of 32.5% to 33.5%.
Consolidated net deferred tax liabilities included tax assets, net
of valuation allowance, of $305 million in 1996 and $308 million in
1995. Substantially all of the tax assets arose in the U.S. and other
profitable markets, and a majority of them are expected to be realized
in future U.S. income tax returns.
NET INCOME AND NET INCOME PER COMMON SHARE
Net income and net income per common share increased 10% and 12%,
respectively, in 1996 and 17% each in 1995. Excluding the charge for
the adoption of SFAS 121, net income and net income per common share
increased 11% and 13% in 1996. The spread between the percent
increase in net income and net income per common share in 1996
reflected the impact of share repurchase as well as lower preferred
stock dividends. Lower dividends were due to the conversion of 11
million shares of Series B and C preferred stock into 8.7 million
shares of common stock in 1995, which offset the impact of share
repurchase in 1995.
IMPACT OF CHANGING FOREIGN CURRENCIES
While changes in foreign currency values affect reported results, the
Company reduces short-term cash exposures by financing and purchasing
goods and services in local currencies and by hedging foreign currency
cash flows. Systemwide sales, revenues, operating income and net
income were lower because of weaker foreign currencies in 1996, and
benefited from stronger foreign currencies in 1995.
If exchange rates had remained at 1995 levels, results would have
been as follows:
-----------------------------------------------------------------------
(Dollars in billions) As reported As adjusted
-----------------------------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------------------
Systemwide sales $31.8 6% $29.9 15% $32.4 8% $29.1 12%
Revenues 10.7 9 9.8 18 10.8 10 9.5 15
Operating income 2.6 1 2.6 16 2.7 3 2.5 12
Net income 1.6 10 1.4 17 1.6 11 1.4 13
-----------------------------------------------------------------------
17
------------------------------------------------------------------------
U.S. OPERATIONS
------------------------------------------------------------------------
SALES
Restaurant expansion was primarily responsible for increasing sales in
1996 and 1995. Comparable sales were positive in 1995 and negative in
1996, reflecting an extremely competitive U.S. operating environment,
and at times, severe weather and difficult comparisons.
------------------------------------------------------------------------
Five Ten
years years
(In millions) 1996 1995 1994 ago ago
------------------------------------------------------------------------
Operated by franchisees $12,663 $12,474 $11,965 $ 9,873 $7,332
Operated by the Company 2,776 2,725 2,550 2,410 2,115
Operated by affiliates 931 706 426 236 87
------------------------------------------------------------------------
U.S. sales $16,370 $15,905 $14,941 $12,519 $9,534
========================================================================
Average annual sales at U.S. restaurants in operation at least 13
consecutive months were $1,439,000 in 1996 and $1,538,000 in 1995.
Average sales declined due to lower average sales for new, smaller
restaurants (including satellites) and lower sales at existing
restaurants. Unit expansion also affects average sales as new
restaurants take about four years to reach long-term volumes. The
Company believes that average sales will continue to be affected by
expansion into smaller, lower-cost sites which profitably support
lower average volumes.
RESTAURANTS
There were 726 restaurants added in the U.S. in 1996 (542 traditional
and 184 satellites), compared with 1,130 in 1995 (597 traditional and
533 satellites), and 188 (all traditional) five years ago. The U.S.
accounted for 27% of Systemwide restaurants opened in 1996, compared
with 47% in 1995 and 31% five years ago. The 1996 decrease is
consistent with our decision to reduce our focus on satellites and
open fewer total restaurants in the U.S.
------------------------------------------------------------------------
Five Ten
years years
1996 1995 1994 ago ago
------------------------------------------------------------------------
Operated by franchisees 9,467 8,950 8,222 7,149 5,549
Operated by the Company 1,847 1,836 1,640 1,446 1,623
Operated by affiliates 780 582 376 169 100
------------------------------------------------------------------------
Total U.S. restaurants 12,094 11,368 10,238 8,764 7,272
========================================================================
18
The percent of U.S. restaurants operated by franchisees and
affiliates has remained relatively constant over the past five years
and was 85% at year-end 1996.
OPERATING RESULTS
------------------------------------------------------------------------
(In millions) 1996 1995 1994 1993 1992
------------------------------------------------------------------------
REVENUES
Sales by Company-
operated restaurants $2,776 $2,725 $2,550 $2,420 $2,353
Revenues from franchised
and affiliated
restaurants 1,814 1,749 1,606 1,511 1,396
------------------------------------------------------------------------
TOTAL REVENUES 4,590 4,474 4,156 3,931 3,749
------------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated
restaurants 2,317 2,244 2,066 1,977 1,920
Franchised restaurants 334 304 270 247 235
General, administrative
and selling expenses 740 682 628 569 507
Other operating (income)
expense-net 55* (8) (25) (18) (13)
------------------------------------------------------------------------
TOTAL OPERATING
COSTS AND EXPENSES 3,446* 3,222 2,939 2,775 2,649
------------------------------------------------------------------------
U.S. OPERATING INCOME $1,144* $1,252 $1,217 $1,156 $1,100
========================================================================
*Included the $72 million special charge designed to strengthen the
U.S. business and reduce ongoing costs.
Expansion favorably affected U.S. revenues in 1996 and 1995, as did
positive comparable sales in 1995.
U.S. Company-operated margins decreased $23 million in 1996 and $3
million in 1995, as lower comparable sales and higher costs more than
offset the positive impact of an expanded Company-operated store base
for a majority of the period. These margins were 16.5% of sales in
1996, compared with 17.7% in 1995 and 19.0% in 1994. Higher payroll
costs as a percent of sales, primarily due to increases in average
hourly rates, pushed margins lower in 1996 and 1995. Higher promotion
costs as a percent of sales also had a negative impact on 1996
margins. Lower food and paper costs benefited margins in both 1996
and 1995.
U.S. franchised margins increased $36 million, or 2%, in 1996 and
$109 million, or 8%, in 1995, driven by expansion. These margins were
81.6% of applicable revenues in 1996, compared with 82.6% in 1995 and
83.2% in 1994. Franchised margins as a percent of revenues declined
in 1996 and 1995 because the increase in rent expense, resulting from
the growth in leased sites, outpaced the growth in franchised
revenues. In addition, 1996 margins were affected by negative
comparable sales.
19
Cost pressures on margins are expected to continue in 1997;
therefore, our ability to maintain both Company-operated and
franchised margins as a percent of applicable revenues will depend
largely on our success in building comparable sales.
U.S. operating income decreased $108 million, or 9%, in 1996 and
rose $35 million, or 3%, in 1995. The 1996 decrease was principally
due to the $72 million special charge related primarily to plans to
strengthen the U.S. business and reduce ongoing costs. The charge
covered closing approximately 115 low-volume U.S. satellite
restaurants, replacing certain restaurant equipment, outsourcing
excess property management and implementing other cost efficiencies.
Without the special charge, U.S. operating income would have decreased
3% in 1996. This decrease primarily reflected lower Company-operated
margin dollars and higher general, administrative and selling
expenses. These expenses included higher employee costs and
expenditures to support our Convenience, Value and Execution
Strategies, partly offset by higher franchised margin dollars. The
1995 increase was due to higher combined restaurant margins, partly
offset by higher general, administrative and selling expenses.
Operating income included $396 million of depreciation and
amortization in 1996, compared with $380 million in 1995 and $366
million in 1994.
In 1997, McDonald's focus will be to increase sales at existing
restaurants through aggressive marketing, a national value initiative,
improved food taste, better service and improved facilities.
ASSETS AND CAPITAL EXPENDITURES
U.S. assets increased $514 million, or 7%, in 1996 and $547 million,
or 8%, in 1995. These increases were due to expansion and increased
reinvestment in existing restaurants since 1994.
-------------------------------------------------------------------------
(In millions) 1996 1995 1994 1993 1992
-------------------------------------------------------------------------
New restaurants $ 559 $ 602 $ 472 $ 332 $ 196
Existing restaurants 212 213 125 122 125
Other properties 128 104 113 130 76
-------------------------------------------------------------------------
U.S. capital expenditures $ 899 $ 919 $ 710 $ 584 $ 397
=========================================================================
U.S. assets $7,554 $7,040 $6,493 $6,200 $5,995
-------------------------------------------------------------------------
U.S. capital expenditures decreased $20 million, or 2%, in 1996,
compared with an increase of $209 million, or 30%, in 1995. These
amounts excluded initial investments in equipment, signs, seating and
decor, as well as ongoing reinvestment expenditures made by
franchisees. New restaurant expenditures decreased $43 million, or
7%, as a result of fewer restaurant additions.
20
Expenditures for existing restaurants were made to achieve higher
levels of customer satisfaction, implement technology to improve
service and food quality, and enhance older facilities. In 1996,
strategic reinvestment to build sales included $37 million for indoor
Ronald's Playplaces and $27 million for rebuilding restaurants to
adjust to changing demographics, traffic patterns and market
opportunities. Over the past five years, the Company has invested $83
million to replace older buildings with new, lower-cost, more-
efficient restaurants.
Other properties primarily included expenditures for office
buildings and related furnishings.
U.S. average development costs for traditional restaurants
increased slightly in 1996 to $1,176,000, compared with $1,151,000 in
1995 and $1,095,000 in 1994. The increases were primarily due to
higher site development and preparation costs. Average development
costs have decreased $227,000, or 16%, from 1991 levels. Construction
efficiencies and a shift toward smaller, lower-cost building designs
since 1991 have contributed to this decrease.
The Company intends to further control development costs through
standardization, global sourcing, greater economies of scale and co-
branded oil locations. Our objective is to profitably expand into
more locations, consistent with our goal of increasing market share
with greater marketwide presence throughout the world.
The Company generally purchases new properties or enters into
long-term leases with purchase options. This ensures long-term
occupancy and control of related costs. The Company owned 61% of its
U.S. sites at year-end 1996, compared with 62% at year-end 1995.
21
----------------------------------------------------------------------
OPERATIONS OUTSIDE THE U.S.
----------------------------------------------------------------------
SALES
Increasing market share and customer satisfaction through expansion
and value continue to be key strategic initiatives to build sales
outside the U.S. These sales rose 10% in 1996 and 27% in 1995.
Increases were primarily due to aggressive expansion beginning in 1995
and were achieved despite difficult economic conditions in several of
the largest markets in both years. Weaker foreign currencies and
comparisons to exceptional 1995 performances in certain markets
reduced the 1996 increase. Positive comparable sales and stronger
foreign currencies contributed to the 1995 increase.
Revenues increased at a faster rate than sales in 1996 and 1995.
This is primarily because the weakening Japanese Yen had a greater
effect on sales than on revenues and unit growth rates were higher for
Company-operated restaurants than franchised restaurants.
----------------------------------------------------------------------
Five Ten
years years
(In millions) 1996 1995 1994 ago ago
----------------------------------------------------------------------
Operated by franchisees $ 7,307 $ 6,648 $ 5,182 $3,085 $1,090
Operated by the Company 4,795 4,139 3,242 2,499 991
Operated by affiliates 3,341 3,222 2,622 1,825 817
----------------------------------------------------------------------
Sales outside the U.S. $15,443 $14,009 $11,046 $7,409 $2,898
======================================================================
In Asia/Pacific, strong sales increases in Australia, Hong Kong,
Japan and New Zealand were driven by Extra Value Meal marketing
campaigns and rapid restaurant expansion in 1996.
In Europe, restaurant expansion and value continued to support
sales growth in England, the Netherlands, Spain and Sweden in 1996.
Our restaurant base in Italy nearly tripled with the acquisition of
about 80 Burghy restaurants in mid-1996.
In Latin America, Brazil's sales growth returned to a more normal
level in 1996, as the economy began to stabilize following tremendous
sales growth in 1995, spurred by the mid-1994 economic reforms. We
are encouraged by Mexico's recent operating results despite its weak
economy.
Canada's 1996 sales growth continued to be hampered by slow
economic growth and decreased consumer retail spending.
Average annual sales at restaurants outside the U.S. in operation
for at least 13 consecutive months were $2,157,000 in 1996 and
$2,422,000 in 1995. This decrease is due to several factors. First,
expansion in our largest markets is occurring in smaller cities and
less-populated areas where smaller, less-costly buildings support
lower average sales volumes. Second, weaker foreign currencies
contributed about $100,000 to the decline in 1996 average sales,
whereas stronger foreign currencies increased the 1995 average.
Additionally, the high unit expansion rate also affects average sales
as new restaurants generally open at lower average volumes and build
business over time.
22
RESTAURANTS
During the past five years, 61% of Systemwide restaurant additions
have been outside the U.S. In both 1996 and 1995, 55% of restaurants
outside the U.S. were in the seven largest markets - Australia,
Brazil, Canada, England, France, Germany and Japan. In 1997, the
seven largest markets are anticipated to open slightly more than 50%
of the restaurants outside the U.S., while new and developing markets
like Central Europe, China and the Middle East are expected to
continue to represent a growing percent of restaurant growth.
In 1996, Japan added 522 restaurants (155 traditional and 367
satellites), representing 27% of restaurants opened outside the U.S.
Japan's aggressive and profitable expansion was supported by reduced
restaurant development costs achieved through standardization of
building designs, utilization of smaller buildings and expansion into
less populated areas.
----------------------------------------------------------------------
Five Ten
years years
1996 1995 1994 ago ago
----------------------------------------------------------------------
Operated by franchisees 3,961 3,267 2,743 1,586 857
Operated by the Company 2,510 1,980 1,598 1,101 678
Operated by affiliates 2,457 1,765 1,371 967 603
----------------------------------------------------------------------
Total restaurants
outside the U.S. 8,928 7,012 5,712 3,654 2,138
======================================================================
Restaurants outside the U.S. represented 58% of Systemwide Company-
operated restaurants and 29% of Systemwide franchised restaurants at
year-end 1996. Approximately 65% of Company-operated restaurants
outside the U.S. were in Australia, Brazil, Canada, England, Germany
and Taiwan. About 66% of franchised restaurants outside the U.S. were
operated in Australia, Canada, England, Germany, France, Japan and the
Netherlands. Restaurants operated by affiliates were principally
located in Japan and other Asian countries.
Most of the satellite restaurants operated outside the U.S. were in
Japan, Canada and Brazil.
23
OPERATING RESULTS
-----------------------------------------------------------------------
(In millions) 1996 1995 1994 1993 1992
-----------------------------------------------------------------------
REVENUES
Sales by Company-
operated restaurants $4,795 $4,139 $3,242 $2,737 $2,750
Revenues from
franchised and
affiliated restaurants 1,301 1,182 923 740 634
-----------------------------------------------------------------------
TOTAL REVENUES 6,096 5,321 4,165 3,477 3,384
-----------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated
restaurants 3,846 3,304 2,579 2,188 2,206
Franchised restaurants 236 211 165 133 114
General, administrative
and selling expenses 574 507 408 335 320
Other operating (income)
expense-net (101)* (98) (59) (44) (51)
-----------------------------------------------------------------------
TOTAL OPERATING
COSTS AND EXPENSES 4,555* 3,924 3,093 2,612 2,589
-----------------------------------------------------------------------
OPERATING INCOME
OUTSIDE THE U.S. $1,541* $1,397 $1,072 $ 865 $ 795
=======================================================================
*Included the $16 million SFAS 121 charge.
Operating income growth in 1996 and 1995 was driven by higher
combined operating margin dollars resulting from expansion in both
years, and in 1995, higher sales at existing restaurants. The
increases in 1996 were partly offset by a $16 million charge for the
adoption of SFAS 121 related to restaurant sites in Mexico, and weaker
foreign currencies, primarily the Japanese Yen and Deutsche Mark.
Operating income growth benefited from stronger foreign currencies in
1995.
The seven largest markets accounted for about 80% of total
operating income outside the U.S. in 1996. They also contributed 56%
to growth of operating income outside the U.S., compared with 89% in
1995. Accelerating operating income growth in developing markets and
weak economies in France and Germany were the primary reasons the
seven largest markets contributed a smaller percent of the operating
income growth in 1996 compared with 1995.
Operations outside the U.S. continue to contribute a growing
percent to consolidated results.
24
Operations outside the U.S. as a percent of consolidated results
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------
Systemwide sales 49% 47% 43% 40% 39%
Total revenues 57 54 50 47 47
Operating income 59 54 48 44 43
Operating margins
Company-operated 67 63 58 55 56
Franchised 42 40 36 32 31
Systemwide restaurants 42 38 36 34 32
Assets 55 53 51 47 45
Capital expenditures 63 55 54 56 65
---------------------------------------------------------------------
Company-operated margins increased $114 million, or 14%, in 1996.
Company-operated margins accounted for 80% of the operating income
increase in 1996 and 53% in 1995. Company-operated margin growth
accounted for a larger portion of the 1996 operating income increase
than in 1995, due to a decline in 1996 general, administrative and
selling expense growth, the $16 million SFAS 121 charge and a decline
in other operating income growth in 1996. The seven largest markets
contributed about 74% to Company-operated margins outside the U.S. and
accounted for 59% of the increase over 1995.
Company-operated margins as a percent of sales declined slightly in
1996 to 19.8%, compared with 20.2% in 1995 and 20.5% in 1994. The
declines in the 1996 and 1995 margins partly resulted from strategic
decisions in many markets to use incremental margin dollars gained
through sales growth and cost efficiencies to deliver value to
customers. This helped drive market share and customer satisfaction
in the major markets in 1996.
Franchised margins grew $94 million, or 10%, in 1996, primarily due
to expansion. Franchised margins as a percent of applicable revenues
were 81.8% in 1996, compared with 82.1% in both 1995 and 1994.
The Company believes it can maintain or improve both Company-
operated and franchised margins as a percent of applicable revenues in
1997, by continuing to increase sales and revenues while lowering
average operating and development costs.
The 1996 and 1995 increases in general, administrative and selling
expenses were caused principally by additional employee costs to fund
accelerated expansion and continued investment in developing markets.
Other operating income - composed of transactions related to
franchising and the foodservice business - was relatively flat in
1996, compared with 1995. Strong 1996 operating results from
affiliates, principally Japan, were offset by the weaker Japanese Yen.
Also, gains on sales of restaurant businesses were higher in 1996
compared with 1995. The $16 million SFAS 121 charge in 1996 reduced
the other operating income increase compared with 1995. In 1995,
other operating income increased primarily due to higher income from
affiliates.
25
If exchange rates had remained at 1995 levels, results would have been
as follows:
-----------------------------------------------------------------------
(Dollars in billions) As reported As adjusted
-----------------------------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------------------
Sales outside
the U.S. $15.4 10% $14.0 27% $16.1 15% $13.2 19%
Operating income
outside the U.S. 1.5 10 1.4 30 1.6 13 1.3 22
-----------------------------------------------------------------------
In 1996, the Europe/Africa/Middle East/India segment accounted for
60% of revenues and 63% of operating income outside the U.S. The
growth in revenues and operating income was $405 and $111 million,
respectively, in 1996, compared with growth of $650 and $195 million,
respectively, in 1995. Weaker currencies partly offset this region's
operating income increase over 1995 by 3%, or $29 million, compared
with 1995, when stronger currencies helped operating income growth by
11%, or $77 million. The decline from 1995 was also due to soft
economies in France and Germany. This was partly offset by strong
operating results in England and a slight benefit due to Russia's
ownership change from an affiliate to a majority-owned subsidiary in
March 1996. England, France and Germany accounted for 79% of this
segment's operating income in 1996, compared with 83% in 1995.
Asia/Pacific revenues grew $262 and $280 million in 1996 and 1995,
respectively, and operating income increased $48 and $76 million,
respectively, in the same two years. Weaker currencies partly offset
this region's operating income increase over 1995 by 2%, or
$5 million, compared with 1995, when stronger currencies helped
operating income growth by 5%, or $12 million. Despite strong
operating results from our Asian affiliates, 1996 operating income
growth was also adversely affected by nonrecurring income recognized
in 1995. Australia, Hong Kong, Japan and Taiwan contributed 84% of
this segment's operating income, compared with 86% in 1995.
Excluding the impact of the weaker Yen, Japan had significant
operating income growth in 1996. Australia and Hong Kong also
experienced strong local currency operating income growth in 1996,
primarily because of higher sales at existing restaurants generated by
aggressive value campaigns and accelerated expansion programs.
Latin American revenues grew $89 million in 1996 and $223 million
in 1995, while operating income decreased $19 million in 1996 and
increased $57 million in 1995. The 1996 operating income decrease was
primarily due to the $16 million SFAS 121 charge for Mexico. Mexico's
operating results were also negatively affected by its weakened
economy. Brazil's operating income growth slowed as the market faced
tough comparisons in the first half of 1996 due to tremendous sales
and operating income growth in 1995. Despite this, Brazil produced
strong sales and operating income increases in 1996, primarily due to
expanding its restaurant base by about 39% in 1996 and 25% in 1995.
Canadian revenues increased $20 million in 1996 and $2 million in
1995, while operating income increased $4 million in 1996 and
decreased $2 million in 1995. The 1996 operating income growth was
primarily due to new restaurant growth of 10% and a decrease in
general, administrative and selling expenses. This was partly offset
by a sales decline at existing restaurants due to the slow economy.
26
ASSETS AND CAPITAL EXPENDITURES
Assets outside the U.S. rose $1.4 billion, or 17%, in 1996 due to
expansion, partly offset by weaker foreign currencies. In 1996, 59%
of these assets were located in our six largest majority-owned
markets - Australia, Brazil, Canada, England, France and Germany -
compared with 61% in 1995.
-----------------------------------------------------------------------
(In millions) 1996 1995 1994 1993 1992
-----------------------------------------------------------------------
New restaurants $1,273 $ 941 $ 723 $ 609 $ 603
Existing restaurants 153 142 87 94 91
Other properties 81 55 34 55 47
-----------------------------------------------------------------------
Capital expenditures
outside the U.S. $1,507 $1,138 $ 844 $ 758 $ 741
=======================================================================
Assets outside the
U.S. $9,560 $8,206 $6,909 $5,650 $5,271
-----------------------------------------------------------------------
In the past five years, nearly $5 billion has been invested outside
the U.S. Capital expenditures outside the U.S. rose $369 million, or
32%, in 1996, reflecting rapid expansion in all geographic segments.
In 1996, approximately 57% of capital expenditures outside the U.S.
were invested in the six largest majority-owned markets, compared with
60% in 1995.
Average development costs in the six largest majority-owned markets
were slightly more than one and a half times the U.S. average in 1996.
These investments generally accommodate higher sales volumes than in
the U.S. While there is a range of costs and average sales levels
among markets, generally, average development costs have continued to
decline. For example, in Europe, average development costs for the
three largest markets declined 13% from 1995 to nearly double the U.S.
average. Costs are declining because of construction and design
efficiencies, standardization, global sourcing and a shift to smaller
restaurants in some markets.
Expenditures for existing restaurants included dining room remodels
to achieve increased levels of customer satisfaction and technology
upgrades to improve service and food taste. The majority of these
expenditures were in Europe, Australia and Canada.
Various laws and regulations make property acquisition and
ownership difficult in certain markets. Property is purchased when
legally and economically feasible; otherwise, long-term leases are
used. In addition, certain markets have laws and customs that offer
stronger tenancy rights than are available in the U.S. The Company
owned 36% of sites outside the U.S. at year-end 1996, compared with
39% in 1995. Including affiliates, real estate ownership was 29% and
31% at year-end 1996 and 1995, respectively.
Capital expenditures made by affiliates - which were not included
in consolidated amounts - were approximately $410 million in 1996,
compared with $258 million in 1995. The 1996 increase was primarily
used to fund rapid expansion in Japan, Argentina, Sweden, the
Philippines and Singapore.
27
-----------------------------------------------------------------------
FINANCIAL POSITION
-----------------------------------------------------------------------
TOTAL ASSETS AND CAPITAL EXPENDITURES
Total assets grew approximately $2 billion, or 13%, in 1996. Net
property and equipment represented 83% of total assets and rose $1.5
billion. Capital expenditures increased $349 million, or 17%, in
1996, reflecting increased expansion and reinvestment in existing
restaurants, partly offset by weaker foreign currencies.
CASH PROVIDED BY OPERATIONS
The Company believes that cash-flow measures are meaningful indicators
of growth and financial strength. Cash provided by operations has
grown steadily over the past five years and increased $165 million, or
7%, in 1996 and $370 million, or 19%, in 1995. Cash provided by
operations, along with other sources of cash such as borrowings, was
used principally for capital expenditures, debt repayments, share
repurchase and dividends. Cash provided by operations exceeded
capital expenditures in 1996 for the sixth consecutive year, and is
expected to cover substantially all capital expenditures over the next
several years.
While cash generated is more than cash required, the Company also
has the ability to meet short-term needs through commercial paper
borrowings and line of credit agreements. Accordingly, the current
ratio of .52 at year-end 1996 has been purposefully maintained at a
relatively low level.
-----------------------------------------------------------------------
(Dollars in millions) 1996 1995 1994 1993 1992
-----------------------------------------------------------------------
Cash provided by operations $2,461 $2,296 $1,926 $1,680 $1,426
Cash provided by operations
less capital expenditures $ 86 $ 233 $ 388 $ 363 $ 339
Cash provided by operations
as a percent of capital
expenditures 104 111 125 128 131
Cash provided by operations
as a percent of average
total debt 48 49 48 44 33
-----------------------------------------------------------------------
28
FINANCINGS
The Company strives to minimize interest expense and the impact of
fluctuating foreign currencies while maintaining its capacity to fund
increased growth. To do that, the Company generally finances long-
term assets with long-term debt in the currencies in which the assets
are denominated, while taking advantage of changing foreign currencies
and interest rates when appropriate.
The Company has used major capital markets as well as a variety of
techniques to meet its financing requirements and reduce interest
expense over the years. For example, currency exchange agreements in
conjunction with borrowings help obtain desired currencies at
attractive rates and maturities. Interest-rate exchange agreements
effectively convert fixed-rate to floating-rate debt, or vice versa.
Foreign currency debt has been used to lessen the impact of
fluctuating foreign currencies on net income and shareholders' equity
by designating these borrowings as hedges of intercompany financings
or the Company's long-term investments in its foreign subsidiaries and
affiliates. Total foreign-denominated debt, including the effects of
currency exchange agreements, was $4.9 and $4.3 billion at year-end
1996 and 1995, respectively.
-----------------------------------------------------------------------
(As a percent) 1996 1995 1994 1993 1992
-----------------------------------------------------------------------
Fixed-rate debt as a percent
of total debt 68% 67% 64% 77% 75%
Weighted-average annual
interest rate 7.1 7.9 8.4 9.1 9.3
Foreign currency-denominated
debt as a percent of total
debt 90 89 92 86 72
Total debt as a percent of
total capitalization (total
debt and total shareholders'
equity) 39 38 39 37 40
-----------------------------------------------------------------------
The Company manages its debt portfolio in response to changes in
interest rates and foreign currencies by periodically retiring,
redeeming and repurchasing debt; terminating exchange agreements; and
using derivatives. The Company does not use derivatives with a level
of complexity or with a risk higher than the exposures to be hedged
and does not hold or issue financial instruments for trading purposes.
All exchange agreements are over-the-counter instruments.
29
To minimize the effect of fluctuating foreign currencies on
reported results, the Company actively hedges selected currencies,
primarily to minimize the cash exposure of foreign currency royalty
and other payments received in the U.S. In addition, McDonald's
restaurants purchase goods and services primarily in local currencies
resulting in natural hedges, and the Company typically finances in
local currencies, creating economic hedges. The Company's exposure is
diversified among a broad basket of currencies. At year-end 1996,
assets in hyperinflationary markets were principally financed in U.S.
Dollars. The Company's largest net asset exposures (defined as
foreign currency assets less foreign currency liabilities) were as
follows:
----------------------------------------------------------------------
(In millions of U.S. Dollars) December 31, 1996 1995
----------------------------------------------------------------------
British Pounds Sterling $394 $356
Canadian Dollars 393 361
Australian Dollars 309 240
French Francs 179 198
Hong Kong Dollars 112 115
Austrian Schillings 88 106
Belgian Francs 71 53
----------------------------------------------------------------------
Moody's and Standard & Poor's have rated McDonald's debt Aa2 and
AA, respectively, since 1982. Duff & Phelps began rating the debt in
1990 and currently rates it AA+. These strong ratings are important
to the Company because of our global development plans. The Company
has not experienced, nor does it expect to experience, difficulty in
obtaining financing or in refinancing existing debt. At year-end
1996, the Company and its subsidiaries had $1.2 billion available
under line of credit agreements and $1.5 billion under shelf
registrations for future debt issuance.
TOTAL SHAREHOLDERS' EQUITY
Total shareholders' equity rose $857 million, or 11%, in 1996,
representing 50% of total assets at year-end. Weaker foreign
currencies decreased shareholders' equity by $88 million in 1996.
One way to enhance common shareholder value is by using excess cash
flow and debt capacity to repurchase shares. The Company has
repurchased $3.2 billion of its common stock, representing 142 million
shares, over the past 10 years while maintaining a strong equity base
for future expansion. At year-end 1996, the market value of shares
recorded as common stock in treasury was $6.2 billion, compared with a
cost of $3.0 billion.
In January 1996, the Company announced plans to repurchase $2.0
billion of its common stock by year-end 1998. In 1996, about 13
million shares were repurchased for $605 million ($206 million of
which completed our $1.0 billion three-year common share repurchase
program announced in January 1994). The Company repurchased
approximately $321 million of its common stock in 1995.
30
RETURNS
Operating income is used to compute return on average assets, while
net income less preferred stock dividends (net of tax) is used to
calculate return on average common equity. Month-end balances are
used to compute both average assets and average common equity.
----------------------------------------------------------------------
(As a percent) 1996 1995 1994 1993 1992
----------------------------------------------------------------------
Return on average assets 16.7%* 17.9% 17.6% 17.0% 16.4%
Return on average common
equity 19.5 19.9 19.4 19.0 18.2
----------------------------------------------------------------------
*Excluded the $72 million special charge.
Return on assets declined in 1996, as the increase in assets
outpaced the growth in operating income. Return on average assets was
16.3% for 1996 when the impact of the $72 million special charge was
included. Return on common equity also declined in 1996, as the
increase in equity exceeded net income growth.
EFFECTS OF CHANGING PRICES-INFLATION
The Company has demonstrated an ability to manage inflationary cost
increases effectively. This is because of rapid inventory turnover,
the ability to adjust prices, cost controls and substantial property
holdings - many of which are at fixed costs and partly financed by
debt made cheaper by inflation. In hyperinflationary markets, menu
board prices are typically adjusted to keep pace, mitigating the
effect on reported results.
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements are included in this annual
report. They use such words as ``may,'' ``will,'' ``expect,''
"believe,'' ``plan'' and other similar terminology. These
statements reflect management's current expectations and involve a
number of risks and uncertainties. Actual results could differ
materially due to changes in: global and local business and economic
conditions; legislation and governmental regulation; competition;
success of operating initiatives and advertising and promotional
efforts; food, labor and other operating costs; availability and cost
of land and construction; adoption of new or changes in accounting
policies and practices; consumer preferences, spending patterns and
demographic trends; political or economic instability in local
markets; and currency exchange rates.
31
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reference
---------
Consolidated statement of income
for each of the three years in the
period ended December 31, 1996 32
Consolidated balance sheet
at December 31, 1996 and 1995 33
Consolidated statement of cash flows
for each of the three years in the
period ended December 31, 1996 34
Consolidated statement of shareholders'
equity for each of the three years in
the period ended December 31, 1996 35
Notes to consolidated financial statements
(Financial comments) 36 - 53
Quarterly results (unaudited) 54
Management's report 55
Report of independent auditors 56
32
CONSOLIDATED STATEMENT OF INCOME
--------------------------------------------------------------------------
(In millions of dollars, except per common share data)
Years ended December 31, 1996 1995 1994
--------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $ 7,570.7 $6,863.5 $5,792.6
Revenues from franchised and affiliated
restaurants 3,115.8 2,931.0 2,528.2
--------------------------------------------------------------------------
TOTAL REVENUES 10,686.5 9,794.5 8,320.8
--------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants
Food and packaging 2,546.6 2,319.4 1,934.2
Payroll and other employee benefits 1,909.8 1,730.9 1,459.1
Occupancy and other operating expenses 1,706.8 1,497.4 1,251.7
--------------------------------------------------------------------------
6,163.2 5,547.7 4,645.0
--------------------------------------------------------------------------
Franchised restaurants-occupancy expenses 570.1 514.9 435.5
General, administrative and selling expenses 1,366.4 1,236.3 1,083.0
Other operating (income) expense-net (45.8) (105.7) (83.9)
--------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 8,053.9 7,193.2 6,079.6
--------------------------------------------------------------------------
OPERATING INCOME 2,632.6 2,601.3 2,241.2
--------------------------------------------------------------------------
Interest expense-net of capitalized interest
of $22.2, $22.5 and $20.6 342.5 340.2 305.7
Nonoperating income (expense)-net (39.1) (92.0) (48.9)
--------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,251.0 2,169.1 1,886.6
--------------------------------------------------------------------------
Provision for income taxes 678.4 741.8 662.2
--------------------------------------------------------------------------
NET INCOME $ 1,572.6 $1,427.3 $1,224.4
==========================================================================
NET INCOME PER COMMON SHARE $ 2.21 $ 1.97 $ 1.68
--------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .29 $ .26 $ .23
--------------------------------------------------------------------------
The accompanying Financial Comments are an integral part of the
consolidated financial statements.
/TABLE
33
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------
(In millions) December 31, 1996 1995
--------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 329.9 $ 334.8
Accounts receivable 467.1 377.3
Notes receivable 28.3 36.3
Inventories, at cost, not in excess of market 69.6 58.0
Prepaid expenses and other current assets 207.6 149.4
--------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,102.5 955.8
--------------------------------------------------------------------
OTHER ASSETS AND DEFERRED CHARGES
Notes receivable due after one year 85.3 98.5
Investments in and advances to affiliates 694.0 656.9
Miscellaneous 405.1 357.3
--------------------------------------------------------------------
TOTAL OTHER ASSETS AND DEFERRED CHARGES 1,184.4 1,112.7
--------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment, at cost 19,133.9 17,137.6
Accumulated depreciation and amortization (4,781.8) (4,326.3)
--------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 14,352.1 12,811.3
--------------------------------------------------------------------
INTANGIBLE ASSETS-NET 747.0 534.8
--------------------------------------------------------------------
TOTAL ASSETS $17,386.0 $15,414.6
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 597.8 $ 413.0
Accounts payable 638.0 564.3
Income taxes 22.5 55.4
Other taxes 136.7 127.1
Accrued interest 121.7 117.4
Other accrued liabilities 523.1 352.5
Current maturities of long-term debt 95.5 165.2
--------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,135.3 1,794.9
--------------------------------------------------------------------
LONG-TERM DEBT 4,830.1 4,257.8
OTHER LONG-TERM LIABILITIES AND
MINORITY INTERESTS 726.5 664.7
DEFERRED INCOME TAXES 975.9 835.9
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
authorized-165.0 million shares;
issued-7.2 thousand 358.0 358.0
Common stock, 1996-$.01 par value;
1995-no par value; authorized,
1996-3.5 billion shares;
1995-1.25 billion shares;
issued-830.3 million 8.3 92.3
Additional paid-in capital 574.2 387.4
Guarantee of ESOP Notes (193.2) (214.2)
Retained earnings 11,173.0 9,831.3
Foreign currency translation adjustment (175.1) (87.1)
--------------------------------------------------------------------
11,745.2 10,367.7
--------------------------------------------------------------------
Common stock in treasury, at cost;
135.7 and 130.6 million shares (3,027.0) (2,506.4)
--------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 8,718.2 7,861.3
--------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,386.0 $15,414.6
====================================================================
The accompanying Financial Comments are an integral part of the
consolidated financial statements.
/TABLE
34
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------
(In millions)
Years ended December 31, 1996 1995 1994
--------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,572.6 $1,427.3 $1,224.4
Adjustments to reconcile to cash
provided by operations
Depreciation and amortization 742.9 709.0 628.6
Deferred income taxes 32.9 (4.2) (5.6)
Changes in operating working capital items
Accounts receivable increase (77.5) (49.5) (51.6)
Inventories, prepaid expenses and other
current assets increase (18.7) (20.4) (15.0)
Accounts payable increase 44.5 52.6 105.4
Accrued interest increase (decrease) 5.0 13.0 (25.5)
Taxes and other liabilities increase 116.4 158.3 95.2
Other-net 42.9 10.1 (29.7)
--------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS 2,461.0 2,296.2 1,926.2
--------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment expenditures (2,375.3) (2,063.7) (1,538.6)
Purchases of restaurant businesses (137.7) (110.1) (133.8)
Sales of restaurant businesses 198.8 151.6 151.5
Property sales 35.5 66.2 66.0
Notes receivable additions (36.4) (33.4) (15.1)
Notes receivable reductions 59.2 31.5 56.7
Other (314.4) (151.1) (92.6)
--------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (2,570.3) (2,109.0) (1,505.9)
--------------------------------------------------------------------------
FINANCING ACTIVITIES
Net short-term borrowings (repayments) 228.8 (272.9) 521.7
Long-term financing issuances 1,391.8 1,250.2 260.9
Long-term financing repayments (841.3) (532.2) (536.9)
Treasury stock purchases (599.9) (314.5) (495.6)
Common and preferred stock dividends (232.0) (226.5) (215.7)
Other 157.0 63.6 39.4
--------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 104.4 (32.3) (426.2)
--------------------------------------------------------------------------
CASH AND EQUIVALENTS INCREASE (DECREASE) (4.9) 154.9 (5.9)
--------------------------------------------------------------------------
Cash and equivalents at beginning of year 334.8 179.9 185.8
--------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 329.9 $ 334.8 $ 179.9
==========================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 369.0 $ 331.0 $ 323.9
Income taxes paid $ 558.1 $ 667.6 $ 621.8
--------------------------------------------------------------------------
The accompanying Financial Comments are an integral part of the
consolidated financial statements.
/TABLE
35
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In millions, except per share data)
Foreign
Preferred Common Additional Guarantee currency Common stock
stock issued stock issued paid-in of Retained translation in treasury
-------------- -------------- -----------
Shares Amount Shares Amount capital ESOP Notes earnings adjustment Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 11.4 $677.3 830.3 $92.3 $256.7 $(253.6) $7,612.6 $(192.2) (123.0) $(1,919.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 1,224.4
Common stock cash dividends
($.23 per share) (163.9)
Preferred stock cash dividends
(per share: $1.01 for Series B,
$1.16 for Series C and $3,860 for
Series E), (net of tax benefits
of $3.7) (47.2)
Preferred stock conversion (.2) (3.1) .5 .2 2.6
ESOP Notes payment 17.5
Treasury stock acquisitions (17.6) (499.8)
Translation adjustments
(including taxes of $50.8) 77.3
Common equity put options
issuance (54.6)
Stock option exercises and
other (including tax benefits
of $20.3) 28.8 1.7 3.8 27.1
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 11.2 674.2 830.3 92.3 286.0 (234.4) 8,625.9 (114.9) (136.6) (2,443.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 1,427.3
Common stock cash dividends
($.26 per share) (181.4)
Preferred stock cash dividends
(per share: $1.01 for Series B,
$1.16 for Series C and $3,860
for Series E), (net of tax
benefits of $1.6) (40.5)
Preferred stock conversion (11.2) (316.2) 25.3 8.8 144.6
ESOP Notes payment 19.0
Treasury stock acquisitions (8.8) (321.0)
Translation adjustments
(including taxes of $9.0) 27.8
Common equity put options
expiration 56.2
Stock option exercises and other
(including tax benefits of $42.2) 76.1 1.2 6.0 57.5
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 0.0* 358.0 830.3 92.3 387.4 (214.2) 9,831.3 (87.1) (130.6) (2,506.4)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 1,572.6
Common stock cash dividends
($.29 per share) (203.3)
Preferred stock cash dividends
(per share: $3,860 for Series E) (27.6)
Conversion to $.01 par value stock (84.0) 84.0
ESOP Notes payment 20.2
Treasury stock acquisitions (12.9) (604.8)
Translation adjustments
(including taxes of $50.6) (88.0)
Stock option exercises and other
(including tax benefits of $86.4) 102.8 0.8 7.8 84.2
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 0.0* $358.0 830.3 $ 8.3 $574.2 $(193.2) $11,173.0 $(175.1) (135.7) $(3,027.0)
==================================================================================================================================
* At December 31, 1996 and 1995, 7.2 thousand shares were outstanding.
The accompanying Financial Comments are an integral part of the consolidated financial statements.
/TABLE
36
FINANCIAL COMMENTS
--------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Investments in affiliates owned 50% or
less are accounted for by the equity method.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency of substantially all operations outside the
U.S. is the respective local currency, except for hyperinflationary
countries where it is the U.S. Dollar.
ADVERTISING COSTS
Production costs for radio and television advertising are expensed
when the commercials are initially aired. Advertising expenses
included in costs of Company-operated restaurants and general,
administrative and selling expenses were (in millions): 1996 -
$503.3; 1995 - $431.0; 1994 - $385.6.
STOCK-BASED COMPENSATION
The Company accounts for stock options as prescribed by APB Opinion
No. 25 and included pro forma information in the Stock options
footnote, as permitted by Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based Compensation (SFAS 123).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and
amortization provided on the straight-line method over the following
estimated useful lives: buildings - up to 40 years; leasehold
improvements - lesser of useful lives of assets or lease terms
including option periods; and equipment - three to 12 years.
INTANGIBLE ASSETS
Intangible assets, primarily franchise rights reacquired from
franchisees and affiliates, are amortized on the straight-line method
over an average life of about 30 years.
37
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In the first quarter 1996, the Company adopted Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121).
This statement requires impairment losses be recognized for long-lived
assets, whether these assets are held for disposal or continue to be
used in operations, when indicators of impairment are present and the
fair value of assets are estimated to be less than carrying amounts.
The fair value of assets was based on projected future cash flows.
The adoption of this standard in 1996 resulted in a $16 million pre-
tax charge to operating income, equivalent to 2 cents per common
share, related to restaurant sites in Mexico.
FINANCIAL INSTRUMENTS
The Company uses derivatives to manage risk, but not for trading
purposes. Non-U.S. Dollar financing transactions generally are
effective as hedges of either long-term investments in or intercompany
loans to foreign subsidiaries and affiliates. Foreign currency gains
and losses on hedges of long-term investments are recorded in
shareholders' equity as foreign currency translation adjustments.
Gains and losses related to hedges of intercompany loans offset the
gains and losses on intercompany loans and are recorded in
nonoperating income (expense)-net.
Interest-rate exchange agreements are designated and effective to
modify the Company's interest-rate exposures. Net interest is accrued
as either interest receivable or payable with the offset recorded in
interest expense. Gains or losses from the early termination of
interest-rate swaps are amortized as an adjustment to interest expense
over the shorter of the remaining life of the swap or the underlying
debt being hedged.
The Company purchases foreign currency options (with little or no
initial intrinsic value) to hedge anticipated foreign currency royalty
and other payments received in the U.S. The premiums paid for these
options are amortized over the option life and are recorded as
nonoperating expense. Any realized gains on exercised options are
deferred and recognized as nonoperating income in the period in which
the related royalty or other payment is received.
Short-term forward foreign exchange contracts are also used to
mitigate exposure on foreign currency cash flows received from
affiliates and subsidiaries. These contracts are marked to market
with the resulting gains or losses recorded in nonoperating income
(expense)-net. Gains and losses associated with these forward
contracts have not been material.
If a hedged item matures or is extinguished, or if a hedged
anticipated royalty or other payment is no longer probable, the
associated derivative is marked to market with the resulting gain or
loss recognized immediately. The derivative is then redesignated as a
hedge of some other item or terminated.
STATEMENT OF CASH FLOWS
The Company considers short-term, highly liquid investments to be cash
equivalents. The impact of fluctuating foreign currencies on cash and
equivalents was not material.
38
----------------------------------------------------------------------
SEGMENT AND GEOGRAPHIC INFORMATION
----------------------------------------------------------------------
The Company operates exclusively in the foodservice industry.
Substantially all revenues result from the sale of menu products at
restaurants operated by the Company, franchisees or affiliates.
Operating income includes the Company's share of operating results of
affiliates. All intercompany revenues and expenses are eliminated in
computing revenues and operating income. Fees received from
subsidiaries outside the U.S. were (in millions): 1996-$419.0; 1995-
$358.4; 1994-$268.9.
The corporate component of operating income represents corporate
general, administrative and selling expenses. Corporate assets
include corporate cash, investments, asset portions of financing
instruments and certain intangibles.
----------------------------------------------------------------------
(In millions) 1996 1995 1994
----------------------------------------------------------------------
U.S. $ 4,590.3 $ 4,473.9 $ 4,155.5
Europe/Africa/Middle East/India 3,660.3 3,255.1 2,604.7
Asia/Pacific 1,272.7 1,010.8 730.7
Latin America 595.7 506.9 283.8
Canada 567.5 547.8 546.1
----------------------------------------------------------------------
Total revenues $10,686.5 $ 9,794.5 $ 8,320.8
======================================================================
U.S. $ 1,144.0 $ 1,252.4 $ 1,216.7
Europe/Africa/Middle East/India 951.3 840.3 645.8
Asia/Pacific 357.2 309.6 233.5
Latin America 113.7 132.7 76.0
Canada 118.4 114.5 116.8
Corporate (52.0) (48.2) (47.6)
----------------------------------------------------------------------
Total operating income $ 2,632.6 $ 2,601.3 $ 2,241.2
======================================================================
U.S. $ 7,553.5 $ 7,040.2 $ 6,492.7
Europe/Africa/Middle East/India 6,011.9 5,069.2 4,257.5
Asia/Pacific 2,108.4 1,813.6 1,547.7
Latin America 900.3 812.5 616.4
Canada 539.6 510.5 487.6
Corporate 272.3 168.6 190.0
----------------------------------------------------------------------
Total assets $17,386.0 $15,414.6 $13,591.9
======================================================================
39
----------------------------------------------------------------------
OTHER OPERATING (INCOME) EXPENSE--NET
----------------------------------------------------------------------
(In millions) 1996 1995 1994
----------------------------------------------------------------------
Gains on sales of restaurant businesses $(85.2) $ (63.9) $(67.1)
Equity in earnings of unconsolidated
affiliates (76.8) (96.5) (47.0)
Net losses from property dispositions 41.1 49.2 20.0
Special charge 72.0
Other-net 3.1 5.5 10.2
----------------------------------------------------------------------
Other operating (income) expense-net $(45.8) $(105.7) $(83.9)
======================================================================
Net losses from property dispositions in 1996 included the $16.0
million charge for restaurant sites in Mexico, upon the adoption of
SFAS 121.
A special charge of $72.0 million was recorded in 1996 related
primarily to plans to strengthen the U.S. business and reduce ongoing
costs by closing approximately 115 low-volume U.S. satellite
restaurants, replacing certain restaurant equipment, outsourcing
excess property management and implementing other cost efficiencies.
-------------------------------------------------------------------------
PROFIT SHARING PROGRAM
-------------------------------------------------------------------------
The Company's program for U.S. employees includes profit sharing,
401(k) (McDESOP) and leveraged employee stock ownership (LESOP)
features. McDESOP allows participants to make contributions which are
partly matched by the Company. Profit sharing assets and
contributions made by McDESOP participants can be invested in
McDonald's common stock or among several other investment
alternatives. Company contributions to McDESOP are invested in
McDonald's common stock. Due to the conversion of all remaining
preferred shares in 1995, the LESOP is now invested only in McDonald's
common stock.
Executives, staff and restaurant managers participate in profit
sharing contributions and shares released under the LESOP, based on
participant's compensation. The profit sharing contribution is
discretionary, and the Company determines the amount each year. The
LESOP contribution is based on the loan payments necessary to amortize
the debt incurred to acquire the stock. Shares held by the LESOP are
allocated to participants as the loan is repaid. Dividends on shares
held by the LESOP are used to service the debt, and shares are
released to participants to replace the dividends on shares that have
been allocated to them. LESOP costs shown in the following table were
based upon the cash paid for loan payments less these dividends.
40
-------------------------------------------------------------------------
(In millions) 1996 1995 1994
-------------------------------------------------------------------------
Profit sharing $11.6 $14.2 $15.2
LESOP 34.2 29.9 25.4
McDESOP 14.1 11.7 9.5
-------------------------------------------------------------------------
U.S. program costs $59.9 $55.8 $50.1
=========================================================================
Certain subsidiaries outside the U.S. also offer profit sharing,
stock purchase or other similar benefit plans. Total plan costs
outside the U.S. were (in millions): 1996 - $30.6; 1995 - $26.6;
1994 - $18.1.
Other postretirement benefits and postemployment benefits were
immaterial.
---------------------------------------------------------------------
INCOME TAXES
---------------------------------------------------------------------
Income before provision for income taxes, classified by source of
income, was as follows:
---------------------------------------------------------------------
(In millions) 1996 1995 1994
---------------------------------------------------------------------
U.S. and Corporate $ 933.9 $1,026.2 $1,084.9
Outside the U.S. 1,317.1 1,142.9 801.7
---------------------------------------------------------------------
Income before provision for
income taxes $2,251.0 $2,169.1 $1,886.6
=====================================================================
The provision for income taxes, classified by the timing and
location of payment, was as follows:
---------------------------------------------------------------------
(In millions) 1996 1995 1994
---------------------------------------------------------------------
U.S. federal $260.0 $363.7 $379.3
U.S. state 49.4 60.5 71.1
Outside the U.S. 336.1 321.8 217.4
---------------------------------------------------------------------
Current tax provision 645.5 746.0 667.8
---------------------------------------------------------------------
U.S. federal (13.2) (17.6) (21.2)
U.S. state 1.6 (3.9) (3.0)
Outside the U.S. 44.5 17.3 18.6
---------------------------------------------------------------------
Deferred tax provision 32.9 (4.2) (5.6)
---------------------------------------------------------------------
Provision for income taxes $678.4 $741.8 $662.2
=====================================================================
41
Net deferred tax liabilities consisted of:
-------------------------------------------------------------------------
(In millions) December 31, 1996 1995
-------------------------------------------------------------------------
Property and equipment basis differences $ 986.2 $ 898.6
Other 236.7 197.8
-------------------------------------------------------------------------
Total deferred tax liabilities 1,222.9 1,096.4
-------------------------------------------------------------------------
Deferred tax assets before
valuation allowance (1) (348.5) (360.5)
Valuation allowance 43.2 52.7
-------------------------------------------------------------------------
Net deferred tax liabilities (2) $ 917.6 $ 788.6
=========================================================================
(1) Includes tax effects of loss carryforwards (in millions): 1996-
$56.6; 1995-$56.1.
(2) Net of current tax assets (in millions): 1996-$58.3; 1995-$47.3.
The statutory U.S. federal income tax rate reconciles to the
effective income tax rates as follows:
-------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related
federal income tax benefit 1.5 1.7 2.3
Benefits and taxes related to
foreign operations (6.8) (2.9) (2.7)
Other .4 .4 .5
-------------------------------------------------------------------------
Effective income tax rates 30.1% 34.2% 35.1%
=========================================================================
Deferred U.S. income taxes have not been provided on basis differences
related to investments in certain foreign subsidiaries and affiliates.
These basis differences were approximately $1.4 billion at December 31,
1996, and consisted primarily of undistributed earnings considered
permanently invested in the businesses. The tax liability, if any, on
these undistributed earnings depends on circumstances existing when
remittance occurs. Since the Company does not anticipate distributing
these earnings in the foreseeable future, it is not practicable to
determine the amount of tax liability, if any, if these earnings were
not considered permanently invested.
42
------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
------------------------------------------------------------------------
(In millions) December 31, 1996 1995
------------------------------------------------------------------------
Land $ 3,566.0 $ 3,251.5
Buildings and improvements on owned land 7,038.3 6,419.7
Buildings and improvements on leased land 5,735.5 4,986.3
Equipment, signs and seating 2,148.4 1,942.3
Other 645.7 537.8
------------------------------------------------------------------------
19,133.9 17,137.6
------------------------------------------------------------------------
Accumulated depreciation and amortization (4,781.8) (4,326.3)
------------------------------------------------------------------------
Net property and equipment $14,352.1 $12,811.3
========================================================================
Depreciation and amortization was (in millions): 1996-$673.4; 1995-
$619.9; 1994-$550.5. Contractual obligations for the acquisition and
construction of property totaled $261.0 million at December 31, 1996.
43
-------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS
-------------------------------------------------------------------
(In millions) December 31, 1996 1995
-------------------------------------------------------------------
Security deposits by franchisees $160.8 $155.0
Preferred stock issued by subsidiaries 453.8 400.6
Minority interests in consolidated
subsidiaries 34.9 33.2
Other 77.0 75.9
-------------------------------------------------------------------
Other long-term liabilities and minority
interests $726.5 $664.7
===================================================================
One subsidiary issued preferred stock as follows: 150 million British
Pounds Sterling of Series C, D and E at an average rate of 7.04% in
1995; 25 million British Pounds Sterling of 5.42% Series B in 1994;
and 50 million British Pounds Sterling of 5.91% Series A in 1993. The
combined series was valued at U.S. $385.3 million at December 31,
1996. Unless redeemed at the Company's option, each series must be
redeemed five years from the date of issuance. The preferred stock of
another subsidiary had a dividend rate of 8.76% (adjusted annually)
and was valued at U.S. $68.5 million at December 31, 1996. This stock
is redeemable at the option of the holder.
Included in other was the $100 per share redemption value of
181,868 shares of 5% Series D Preferred Stock. This stock carries one
vote per share and must be redeemed on the occurrence of specified
events.
44
---------------------------------------------------------------------
LEASING ARRANGEMENTS
---------------------------------------------------------------------
At December 31, 1996, the Company was lessee at 3,513 locations
through ground leases (the Company leases land and owns buildings) and
at 4,862 locations through improved leases (the Company leases land
and buildings). Lease terms for most restaurants are generally for 20
to 25 years and, in many cases, provide for rent escalations and
renewal options with certain leases providing purchase options. For
most locations, the Company is obligated for the related occupancy
costs which include property taxes, insurance and maintenance. In
addition, the Company is lessee under noncancelable leases covering
offices and vehicles.
Future minimum payments required under operating leases with
initial terms of one year or more are:
---------------------------------------------------------------------
(In millions) Restaurant Other Total
---------------------------------------------------------------------
1997 $ 471.3 $ 44.5 $ 515.8
1998 460.3 39.4 499.7
1999 439.9 32.0 471.9
2000 421.4 26.6 448.0
2001 404.7 22.9 427.6
Thereafter 3,859.1 139.1 3,998.2
---------------------------------------------------------------------
Total minimum payments $6,056.7 $304.5 $6,361.2
=====================================================================
Rent expense was (in millions): 1996 - $581.6; 1995 - $497.6;
1994 - $394.4. These amounts included percent rents in excess of
minimum rents (in millions): 1996 - $91.4; 1995 - $73.5;
1994 - $40.3.
45
----------------------------------------------------------------------
FRANCHISE ARRANGEMENTS
----------------------------------------------------------------------
Franchise arrangements include a lease and a license and generally
provide for initial fees, as well as continuing rent and service fee
payments to the Company, based upon a percent of sales with minimum
rent payments. Franchisees are granted the right to operate a
McDonald's restaurant using the McDonald's system as well as the use
of a restaurant facility generally for a period of 20 years.
Franchisees pay related occupancy costs including property taxes,
insurance, maintenance and a refundable, noninterest-bearing security
deposit. The results of operations of restaurant businesses purchased
and sold in transactions with franchisees and affiliates were not
material to the consolidated financial statements for periods prior to
purchase and sale.
----------------------------------------------------------------------
(In millions) 1996 1995 1994
----------------------------------------------------------------------
Owned sites $ 802.6 $ 708.6 $ 633.4
Leased sites 548.1 521.4 446.0
----------------------------------------------------------------------
Minimum rents 1,350.7 1,230.0 1,079.4
----------------------------------------------------------------------
Percent rent and service fees 1,689.7 1,638.4 1,411.8
Initial fees 75.4 62.6 37.0
----------------------------------------------------------------------
Revenues from franchised and
affiliated restaurants $3,115.8 $2,931.0 $2,528.2
======================================================================
Future minimum rent payments due to the Company under franchise
arrangements are:
----------------------------------------------------------------------
Owned Leased
(In millions) sites sites Total
----------------------------------------------------------------------
1997 $ 993.8 $ 536.3 $ 1,530.1
1998 1,005.1 541.2 1,546.3
1999 988.3 533.8 1,522.1
2000 969.2 520.8 1,490.0
2001 963.3 514.3 1,477.6
Thereafter 9,242.2 4,881.9 14,124.1
----------------------------------------------------------------------
Total minimum payments $14,161.9 $7,528.3 $21,690.2
======================================================================
At December 31, 1996, net property and equipment under franchise
arrangements totaled $8.1 billion (including land of $2.5 billion)
after deducting accumulated depreciation and amortization of $2.5
billion.
46
------------------------------------------------------------------------
DEBT FINANCING
------------------------------------------------------------------------
LINE OF CREDIT AGREEMENTS
The Company has a line of credit agreement for $675.0 million with
various banks which expires on April 19, 2001. Accordingly, $675.0
million of notes maturing within one year have been reclassified as
long-term debt. Fees are .06% per annum on the total commitment. The
Company has an additional $25.0 million line of credit agreement with
various banks with a renewable term of 364 days and fees of .07% per
annum on the total commitment. Both agreements remained unused at
December 31, 1996. Borrowings under the agreements bear interest at
one of several specified floating rates selected by the Company at the
time of borrowing. In addition, certain subsidiaries outside the U.S.
had unused lines of credit totaling $454.2 million at December 31,
1996; these were principally short-term and denominated in various
currencies at local market rates of interest. The weighted-average
interest rate of short-term borrowings, composed of commercial paper
and foreign currency bank line borrowings, was 6.4% at December 31,
1996, and 1995.
EXCHANGE AGREEMENTS
The Company has entered into agreements for the exchange of various
currencies, certain of which also provide for the periodic exchange of
interest payments. These agreements, and other interest-rate exchange
agreements, expire through 2008. Such currency exchange agreements
had a notional amount equivalent to U.S. $2.6 billion at December 31,
1996, and related primarily to the exchange of French Francs, Deutsche
Marks and Swiss Francs. The notional principal is the amount used to
calculate interest payments which are exchanged over the life of the
swap transaction and is equal to the amount of foreign currency or
U.S. Dollar principal exchanged at maturity. The interest-rate
exchange agreements (primarily U.S. Dollars, British Pounds Sterling
and Deutsche Marks) had a notional amount equivalent to U.S.
$1.9 billion at December 31, 1996. The net value of each exchange
agreement based on its current spot rate was classified as an asset or
liability, and any related interest income was netted against interest
expense.
The counterparties to these agreements consist of a diverse group
of financial institutions. The Company continually monitors its
positions and the credit ratings of its counterparties, and adjusts
positions as appropriate. The Company does not have significant
exposure to any individual counterparty and has entered into master
agreements that contain netting arrangements.
At December 31, 1996, the Company had purchased foreign currency
options outstanding (primarily British Pounds Sterling, Deutsche Marks
and Swiss Francs) with a notional amount equivalent to U.S. $180.9
million. The unamortized premium related to these currency options
was $2.8 million and there were no related deferred gains recorded as
of year end. Short-term forward foreign exchange contracts
outstanding at December 31, 1996 (primarily Deutsche Marks, Japanese
Yen and Swiss Francs) had a U.S. Dollar equivalent of $33.7 million.
47
GUARANTEES
The Company has guaranteed and included in total debt at December 31,
1996, $133.0 million of 7.4% ESOP Notes Series A and $70.6 million of
7.1% ESOP Notes Series B issued by the Leveraged Employee Stock
Ownership Plan with payments through 2004 and 2006, respectively. The
Company has agreed to repurchase the notes upon the occurrence of
certain events. The Company also has guaranteed certain affiliate
loans totaling $138.6 million at December 31, 1996.
FAIR VALUES
----------------------------------------------------------------------
December 31, 1996
(In millions) Carrying amount Fair value
----------------------------------------------------------------------
Liabilities
Debt $4,804.1 $4,930.7
Notes payable 597.8 597.8
Foreign currency exchange agreements (1) 121.5 198.9
Interest-rate exchange agreements (2) 9.0
----------------------------------------------------------------------
Total liabilities 5,523.4 5,736.4
----------------------------------------------------------------------
Assets
Foreign currency exchange agreements (1) 45.1 4.1
----------------------------------------------------------------------
Net debt $5,478.3 $5,732.3
======================================================================
Purchased foreign currency options $ 2.8 $ 7.1
----------------------------------------------------------------------
(1) Combined notional amount equivalent to U.S. $2.6 billion.
(2) Notional amount equivalent to U.S. $1.9 billion.
The carrying amounts for cash and equivalents and notes receivable
approximated fair value. No fair value was provided for noninterest-
bearing security deposits by franchisees as these deposits are an
integral part of the overall franchise arrangements.
Short-term forward foreign exchange contracts were recorded at
their fair value of $33.7 million at December 31, 1996. The fair
value of the debt and notes payable obligations (excluding capital
leases), the currency and interest-rate exchange agreements and the
foreign currency options was estimated using quoted market prices,
various pricing models or discounted cash flow analyses. The Company
has no current plans to retire a significant amount of its debt prior
to maturity. Given the market value of its common stock and its
significant real estate holdings, the Company believes that the fair
value of total assets was higher than their carrying value at
December 31, 1996.
DEBT OBLIGATIONS
The Company has incurred debt obligations principally through public
and private offerings and bank loans. The terms of most debt
obligations contain restrictions on Company and subsidiary mortgages
and long-term debt of certain subsidiaries. Under certain agreements,
the Company has the option to retire debt prior to maturity, either at
par or at a premium over par. The following table summarizes these
debt obligations, including the gross effects of currency and
interest-rate exchange agreements.
48
DEBT OBLIGATIONS
Interest rates (1) Amounts outstanding
Maturity December 31 December 31 Aggregate maturities by currency for 1996 balances
dates 1996 1995 1996 1995 1997 1998 1999 2000 2001 Thereafter
(In millions of U.S. Dollars)
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed-original issue(2) 7.2% 7.5% $2,610.8 $2,172.6
Fixed-converted via
exchange agreements(3) 6.0 5.9 (2,249.6) (1,844.2)
Floating 5.6 5.5 206.4 216.5
- ---------------------------------------------------------------------------------------------------------------------------------
Total U.S. Dollars 1997-2036 567.6 544.9 $14.8 $(319.7) $(321.9) $288.8 $(301.6) $1,207.2
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 5.7 6.0 737.6 552.7
Floating 3.8 4.4 390.2 376.6
- ---------------------------------------------------------------------------------------------------------------------------------
Total Deutsche Marks 1997-2007 1,127.8 929.3 295.8 268.6 211.1 139.2 147.9 65.2
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 7.2 7.8 940.5 727.3
Floating 3.9 5.8 136.4 177.4
- ---------------------------------------------------------------------------------------------------------------------------------
Total French Francs 1997-2006 1,076.9 904.7 102.2 156.8 177.9 39.2 98.3 502.5
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 9.9 9.3 304.4 382.3
Floating 6.2 6.2 256.4 121.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total British Pounds
Sterling 1997-2003 560.8 503.4 170.8 23.2 94.2 77.1 195.5
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 4.5 4.4 387.2 409.5
Floating 0.8 0.6 51.8 130.5
- ---------------------------------------------------------------------------------------------------------------------------------
Total Japanese Yen 1997-2023 439.0 540.0 86.3 51.8 43.2 43.2 214.5
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 9.4 11.0 141.7 113.8
Floating 6.7 7.6 94.0 100.5
- ---------------------------------------------------------------------------------------------------------------------------------
Total Australian Dollars 1997-2000 235.7 214.3 159.1 70.8 1.7 4.1
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 5.3 6.2 185.1 136.9
Floating 3.2 4.2 36.4 32.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total Netherland Guilders 1997-2001 221.5 169.1 13.4 100.5 25.7 28.7 53.2
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 8.7 99.8
Floating 8.4 12.4 47.8 3.8
- ---------------------------------------------------------------------------------------------------------------------------------
Total Italian Lira 1997-2003 147.6 3.8 47.7 50.1 49.8
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 8.3 8.5 61.8 43.9
Floating 6.1 7.9 85.7 65.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total New Taiwan Dollars 1997-2003 147.5 109.2 85.7 3.6 14.5 7.3 36.4
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 9.4 9.0 56.5 130.3
Floating 3.1 6.0 73.0 22.0
- ---------------------------------------------------------------------------------------------------------------------------------
Total Canadian Dollars 1997-2021 129.5 152.3 55.0 0.2 73.2 0.2 0.1 0.8
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 4.6 4.7 68.7 81.1
Floating 1.7 2.3 60.1 30.4
- ---------------------------------------------------------------------------------------------------------------------------------
Total Swiss Francs 1997-2000 128.8 111.5 7.8 29.9 26.1 65.0
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 9.0 9.5 101.4 63.5
Floating 7.2 11.3 22.2 39.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total Spanish Pesetas 1998-2003 123.6 102.6 81.9 41.7
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 8.3 8.7 45.2 77.6
Floating 6.1 6.6 55.9 40.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total Hong Kong Dollars 1997-2008 101.1 117.7 52.4 17.6 11.2 11.1 2.4 6.4
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed 8.0 8.4 218.2 161.7
Floating 10.4 10.9 252.7 230.9
- ---------------------------------------------------------------------------------------------------------------------------------
Total other currencies (4) 1997-2016 470.9 392.6 276.0 33.6 78.8 12.5 56.9 13.1
- ---------------------------------------------------------------------------------------------------------------------------------
Debt obligations
including the net effects
of currency and interest-
rate exchange agreements 5,478.3 4,795.4 1,367.0 463.4 339.2 740.7 234.9 2,333.1
- ---------------------------------------------------------------------------------------------------------------------------------
Obligations supported by
long-term line of credit
agreement (675.0) 675.0
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset positions of
currency exchange
agreements (included in
miscellaneous other
assets) 45.1 40.6 1.3 5.9 21.8 6.4 7.3 2.4
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt obligations $5,523.4 $4,836.0 $693.3 $469.3 $361.0 $747.1 $917.2 $2,335.5
=================================================================================================================================
(1) Weighted-average effective rate, computed on a semi-annual basis.
(2) Includes $333.5 million of debentures with maturities in 2025 and 2036 which are
subordinated to senior debt and which provide for the ability to defer interest
payments up to five years under certain conditions.
(3) A portion of U.S. Dollar fixed-rate debt effectively has been converted into
other currencies and/or into floating-rate debt through the use of exchange
agreements. The rates shown reflect the fixed rate on the receivable portion of
the exchange agreements. All other obligations in this table reflect the gross
effects of these and other exchange agreements.
(4) Consists of debt obligations denominated in 18 other foreign currencies.
/TABLE
PAGE 49
-------------------------------------------------------------------------
STOCK OPTIONS
-------------------------------------------------------------------------
At December 31, 1996, the Company had three stock-based compensation
plans, two for employees and one for non-employee directors, accounted
for under APB Opinion No. 25. Options to purchase common stock are
granted at prices not less than the fair market value of the stock on
date of grant. Therefore, no compensation cost has been recognized in
the consolidated financial statements for these plans.
Substantially all of the options become exercisable in four equal
installments, every two years, beginning a year from the date of the
grant, and expiring 10 years from the grant date. At December 31,
1996, the number of shares of common stock reserved for issuance under
the two employee plans was 97.3 million, including 24.6 million
available for future grants.
A summary of the status of the Company's plans as of December 31,
1996, 1995 and 1994, and changes during the years ending on those
dates is presented below:
-------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
Options (in millions) price (in millions) price (in millions) price
-------------------------------------------------------------------------
Outstanding at
beginning of
year 68.1 $23.86 62.3 $21.02 55.1 $18.16
Granted 15.0 49.14 13.7 33.24 13.6 29.90
Exercised (7.8) 17.75 (6.0) 15.76 (4.1) 12.14
Forfeited (2.6) 32.31 (1.9) 24.55 (2.3) 18.72
-------------------------------------------------------------------------
Outstanding at
end of year 72.7 $29.46 68.1 $23.86 62.3 $21.02
=========================================================================
Options exercisable
at end of year 26.7 24.4 21.4
-------------------------------------------------------------------------
Options granted each year were about 2% of average common shares
outstanding for 1996, 1995 and 1994, respectively, representing grants
to approximately 10,300, 8,500 and 7,700 employees in those three
years. When stock options are exercised, shares are issued from
treasury stock.
Pro forma net income and net income per common share in the table
below was determined as if the Company had accounted for its employee
stock options under the fair value method of SFAS 123.
-------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------------
Net income - pro forma (in millions) $1,538.3 $1,414.0
Net income per common share - pro forma 2.16 1.95
Weighted-average fair value of options granted 16.88 13.07
-------------------------------------------------------------------------
PAGE 50
For the pro forma disclosures, the options' estimated fair value
was amortized over their expected seven-year life. These pro forma
amounts are not indicative of anticipated future disclosures because
SFAS 123 does not apply to grants before 1995. Therefore, the pro
forma disclosures do not include a full seven years of grants. The
fair value for these options was estimated at the date of grant using
an option pricing model which was designed to estimate the fair value
of options which, unlike employee stock options, can be traded at any
time and are fully transferable. In addition, such models require the
input of highly subjective assumptions, including the expected
volatility of the stock price. Therefore, in management's opinion,
the existing models do not provide a reliable single measure of the
value of employee stock options. The following weighted-average
assumptions were used to estimate the fair value of these options.
-------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------------
Expected dividend yield .65% .65%
Expected stock price volatility 19.4% 20.9%
Risk-free interest rate 6.14% 7.39%
Expected life of options (in years) 7 7
-------------------------------------------------------------------------
The following table shows the potential dilution of common shares
outstanding from stock option exercises, assuming all options
outstanding and in-the-money at year end are exercised. The
calculation assumes that shares issued upon exercise are partly offset
by shares purchased with proceeds from the exercise, based on the
December 31 price of the Company's common stock each year.
-------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------
Common shares outstanding
at year end (in millions) 694.6 699.8 693.7
Potential dilution of common shares
outstanding from option exercises
(in millions) 18.4 20.4 11.4
Potential dilution as a percent of shares
outstanding at year end 2.6% 2.9% 1.6%
Average option exercise price $17.75 $15.76 $12.14
Average cost of treasury stock issued
for option exercises $ 7.65 $ 7.16 $ 7.05
-------------------------------------------------------------------------
As shown above, the average option exercise price has consistently
exceeded the average cost of treasury stock issued for option
exercises. This is because the Company prefunds the program through
share repurchase. Thus, stock option exercises have generated
additional capital, since cash received from employees has exceeded
the Company's average acquisition cost of treasury stock. In
addition, stock option exercises have generated $148.9 million of tax
benefits for the Company during the three years ended December 31,
1996.
PAGE 51
----------------------------------------------------------------------
December 31, 1996
----------------------------------------------------------------------
Options outstanding Options exercisable
----------------------------------------------------------------------
Weighted-
average
remaining Weighted- Weighted-
Range of Number contractual average Number average
exercise of options life exercise of options exercise
prices (in millions) (in years) price (in millions) price
----------------------------------------------------------------------
$11 to 15 10.3 2.8 $13.91 8.7 $13.70
16 to 22 14.6 5.2 19.51 8.1 18.76
24 to 36 33.2 7.4 30.03 9.8 29.21
37 to 52 14.6 9.5 49.11 0.1 39.21
----------------------------------------------------------------------
$11 to 52 72.7 6.7 $29.46 26.7 $21.04
======================================================================
PAGE 52
----------------------------------------------------------------------
CAPITAL STOCK
----------------------------------------------------------------------
PER COMMON SHARE INFORMATION
Income used in the computation of per common share information was
reduced by preferred stock cash dividends (net of tax benefits). In
1995, income was also reduced by $3.9 million for the one-time effect
of the Company's exchange of its Series E 7.72% Cumulative Preferred
Stock for subordinated debt securities, and by an additional $.4
million for the effect of the Company's repurchase of additional
Series E preferred stock. Adjusted net income was divided by the
weighted-average shares of common stock outstanding during each year
(in millions): 1996 - 698.2; 1995 - 701.5; 1994 - 701.8. Including
the effect of potentially dilutive securities, fully diluted earnings
per common share amounts and increases were: 1996 - $2.16, 13%; 1995 -
$1.92, 18%; 1994 - $1.63, 16%.
PREFERRED STOCK
In December 1992, the Company issued $500.0 million of Series E 7.72%
Cumulative Preferred Stock with a liquidation preference of $50,000
per share. One preferred share is equal to 2,000 depository shares.
Each preferred share is entitled to one vote under certain
circumstances, and is redeemable at the option of the Company
beginning on December 3, 1997, at its liquidation value plus accrued
dividends. In 1995, the Company completed an exchange of depositary
shares equalling 2,600 shares of this preferred stock for subordinated
debt securities and repurchased depositary shares equalling
approximately 250 shares.
In September 1989 and April 1991, respectively, the Company sold
$200.0 million of Series B and $100.0 million of Series C ESOP
Convertible Preferred Stock to the LESOP. The LESOP financed the
purchase by issuing notes guaranteed by the Company and included in
long-term debt, with an offsetting reduction in shareholders' equity.
Each preferred share had a liquidation preference of $14.375 and
$16.5625, respectively, and was convertible to a minimum of .7692 and
.8 common share (conversion rate), respectively. Upon termination of
employment, employees were guaranteed a minimum value payable in
common shares equal to the greater of the conversion rate; the fair
market value of their preferred shares; or the liquidation preference
plus accrued dividends, not to exceed one common share. Each preferred
share was entitled to one vote and was redeemable at the option of the
Company. In 1992, 8.2 million Series B shares were converted into 6.4
million common shares. During 1995, the remaining 5.2 million Series
B shares and 5.8 million Series C shares were converted into 8.7
million common shares.
PAGE 53
CHANGE IN PAR VALUE
In May 1996, Company shareholders approved an increase in the number
of authorized shares of Common Stock from 1.25 billion with no par
value to 3.5 billion with $.01 par value. The change in par value did
not affect any of the existing rights of shareholders and has been
recorded as an adjustment to additional paid-in capital and common
stock.
SHAREHOLDER RIGHTS PLAN
In December 1988, the Company declared a dividend of one Preferred
Share Purchase Right (Right) on each outstanding share of common
stock. Under certain conditions, each Right may be exercised to
purchase one four-hundredth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $62.50 (which
may be adjusted under certain circumstances). The Right is
transferable apart from the common stock 10 days following a public
announcement that a person or group has acquired beneficial ownership
of 20% or more of the outstanding common shares, or 10 business days
following the commencement or announcement of an intention to make a
tender or exchange offer resulting in beneficial ownership by a person
or group exceeding the threshold. The threshold may be reduced by the
Board of Directors to as low as 10%.
Once the threshold has been exceeded, or if the Company is acquired
in a merger or other business combination transaction, each Right will
entitle the holder, other than such person or group, to purchase at
the then current exercise price, stock of the Company or the acquiring
company having a market value of twice the exercise price.
Each Right is nonvoting and expires on December 28, 1998, unless
redeemed by the Company, at a price of $.0025, at any time prior to
the public announcement that a person or group has exceeded the
threshold. At December 31, 1996, 2.1 million shares of the Series A
Junior Participating Preferred Stock were reserved for issuance under
this plan.
54
QUARTERLY RESULTS (UNAUDITED)
(In millions, except per common share data)
- ---------------------------------------------------------------------------------------------------------------------------------
Quarters ended December 31 September 30 June 30 March 31
1996 1995 1996 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
SYSTEMWIDE SALES $8,284.5 $7,734.4 $8,286.1 $7,866.6 $7,932.0 $7,641.3 $7,309.5 $6,671.6
REVENUES
Sales by Company-operated
restaurants $2,005.5 $1,812.2 $1,965.6 $1,811.9 $1,885.8 $1,727.8 $1,713.8 $1,511.6
Revenues from franchised
and affiliated restaurants 816.1 773.3 808.2 768.2 779.3 739.8 712.2 649.7
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,821.6 2,585.5 2,773.8 2,580.1 2,665.1 2,467.6 2,426.0 2,161.3
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants 1,638.7 1,476.8 1,582.1 1,448.0 1,523.1 1,389.7 1,419.3 1,233.2
Franchised restaurants 150.0 137.2 142.2 131.7 140.7 127.8 137.2 118.2
General, administrative
and selling expenses 381.0 341.4 347.9 314.1 326.3 305.4 311.2 275.4
Other operating (income)
expense-net 37.9* (16.0) (42.4) (35.8) (37.1) (41.7) (4.2) (12.2)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES 2,207.6 1,939.4 2,029.8 1,858.0 1,953.0 1,781.2 1,863.5 1,614.6
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 614.0 646.1 744.0 722.1 712.1 686.4 562.5 546.7
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense 90.2 87.7 84.7 86.1 82.8 85.4 84.8 81.0
Nonoperating income
(expense)-net (0.3) (18.8) (9.4) (26.5) (3.8) (16.1) (25.6) (30.6)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 523.5 539.6 649.9 609.5 625.5 584.9 452.1 435.1
- ---------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 113.5** 172.8 209.3 209.4 205.1 205.2 150.5 154.4
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 410.0 $ 366.8 $ 440.6 $ 400.1 $ 420.4 $ 379.7 $ 301.6 $ 280.7
=================================================================================================================================
NET INCOME PER COMMON SHARE $ .58 $ .51 $ .62 $ .56 $ .59 $ .52 $ .42 $ .39
- ---------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $.07 1/2 $.06 3/4 $.07 1/2 $.06 3/4 $.07 1/2 $.06 3/4 $.06 3/4 $ .06
- ---------------------------------------------------------------------------------------------------------------------------------
* Included the $72 million special charge
** Included a $50 million tax benefit as a result of certain international transactions.
/TABLE
55
MANAGEMENT'S REPORT
Management is responsible for the preparation, integrity and fair
presentation of the consolidated financial statements and Financial
Comments appearing in this annual report. The financial statements
were prepared in accordance with generally accepted accounting
principles and include certain amounts based on management's judgment
and best estimates. Other financial information presented in the
annual report is consistent with the financial statements.
The Company maintains a system of internal control over financial
reporting including safeguarding of assets against unauthorized
acquisition, use or disposition, which is designed to provide
reasonable assurance to the Company's management and Board of
Directors regarding the preparation of reliable published financial
statements and such asset safeguarding. The system includes a
documented organizational structure and appropriate division of
responsibilities; established policies and procedures which are
communicated throughout the Company; careful selection, training, and
development of our people; and utilization of an internal audit
program. Policies and procedures prescribe that the Company and all
employees are to maintain the highest ethical standards and that
business practices throughout the world are to be conducted in a
manner which is above reproach.
There are inherent limitations in the effectiveness of any system
of internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an
effective internal control system can provide only reasonable
assurance with respect to financial statement preparation and
safeguarding of assets. Furthermore, the effectiveness of an internal
control system can change with circumstances. The Company believes
that at December 31, 1996, it maintained an effective system of
internal control over financial reporting and safeguarding of assets
against unauthorized acquisition, use or disposition.
The consolidated financial statements have been audited by
independent auditors, Ernst & Young LLP, who were given unrestricted
access to all financial records and related data. The audit report of
Ernst & Young LLP is presented below.
The Board of Directors, operating through its Audit Committee
composed entirely of independent Directors, provides oversight to the
financial reporting process. Ernst & Young LLP has independent access
to the Audit Committee and periodically meets with the Committee to
discuss accounting, auditing and financial reporting matters.
McDONALD'S CORPORATION
Oak Brook, Illinois
January 23, 1997
56
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
McDonald's Corporation
Oak Brook, Illinois
We have audited the accompanying consolidated balance sheet of
McDonald's Corporation as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of
McDonald's Corporation management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of McDonald's Corporation at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 23, 1997
57
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors is incorporated herein by
reference from the Company's definitive proxy statement which will be
filed no later than 120 days after December 31, 1996.
Information regarding all of the Company's executive officers
is included in Part I.
Item 11. Executive Compensation
Incorporated herein by reference from the Company's definitive
proxy statement which will be filed no later than 120 days after
December 31, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Incorporated herein by reference from the Company's definitive
proxy statement which will be filed no later than 120 days after
December 31, 1996.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference from the Company's definitive
proxy statement which will be filed no later than 120 days after
December 31, 1996.
PART IV
Item 14. Financial Statement Schedules, Exhibits, and Reports on
Form 8-K
(a) 1. Financial statements:
Consolidated financial statements filed as part of this
report are listed under Part II, Item 8 of this Form
10-K.
2. Financial statement schedules:
No schedules are required because either the required
information is not present or is not present in amounts
sufficient to require submission of the schedule, or
because the information required is included in the
consolidated financial statements or the notes thereto.
(b) Exhibits:
The exhibits listed in the accompanying index are filed
as part of this report.
58
McDonald's Corporation
Exhibit Index
(Item 14)
Exhibit Number Description
-------------- -----------
(3) Corrected Restated Certificate of Incorporation effective as
of December 13, 1996 and By-Laws effective of January 21,
1997, incorporated by reference from Form 8-K dated
January 9, 1997.
(4) Instruments defining the rights of security holders,
including indentures (A):
(a) Debt Securities. Indenture dated as of March 1, 1987
incorporated herein by reference from Exhibit 4(a) of
Form S-3 Registration Statement, SEC file no. 33-12364.
(i) Medium-Term Notes, Series B, due from nine
months to 30 years from Date of Issue.
Supplemental Indenture No. 12 incorporated
herein by reference from Exhibit (4) of Form 8-K
dated August 18, 1989 and Forms of Medium-Term
Notes, Series B, incorporated herein by
reference from Exhibit (4)(b) of Form 8-K dated
September 14, 1989.
(ii) Medium-Term Notes, Series C, due from nine
months to 30 years from Date of Issue. Form of
Supplemental Indenture No. 15 incorporated
herein by reference from Exhibit 4(b) of
Form S-3 Registration Statement, SEC file
no. 33-34762 dated May 14, 1990.
(iii) Medium-Term Notes, Series C, due from nine
months (U.S. Issue)/184 days (Euro Issue) to 30
years from Date of Issue. Amended and restated
Supplemental Indenture No. 16 incorporated
herein by reference from Exhibit (4) of Form
10-Q for the period ended March 31, 1991.
(iv) 8-7/8% Debentures due 2011. Supplemental
Indenture No. 17 incorporated herein by
reference from Exhibit (4) of Form 8-K dated
April 22, 1991.
(v) Medium-Term Notes, Series D, due from nine
months (U.S. Issue)/184 days (Euro Issue) to 60
years from Date of Issue. Supplemental
Indenture No. 18 incorporated herein by
reference from Exhibit 4(b) of Form S-3
Registration Statement, SEC file no. 33-42642
dated September 10, 1991.
59
Exhibit Number Description
-------------- -----------
(vi) 7-3/8% Notes due July 15, 2002. Form of
Supplemental Indenture No. 19 incorporated
herein by reference from Exhibit (4) of Form 8-K
dated July 10, 1992.
(vii) 6-3/4% Notes due February 15, 2003. Form of
Supplemental Indenture No. 20 incorporated
herein by reference from Exhibit (4) of Form 8-K
dated March 1, 1993.
(viii)7-3/8% Debentures due July 15, 2033. Form of
Supplemental Indenture No. 21 incorporated
herein by reference from Exhibit (4)(a)of
Form 8-K dated July 15, 1993.
(ix) Medium-Term Notes, Series E, due from nine
months to 60 years from date of issue. Form of
Supplemental Indenture No. 22, incorporated
herein by reference from Exhibit (4) of Form
10-Q for the period ended June 30, 1995.
(x) 6-5/8% Notes due September 1, 2005. Form of
Supplemental Indenture No. 23 incorporated
herein by reference from Exhibit 4(a) of Form
8-K dated September 5, 1995.
(xi) 7.05% Debentures due 2025. Form of Supplemental
Indenture No. 24 incorporated herein by
reference from Exhibit (4)(a) of Form 8-K dated
November 13, 1995.
(b) Form of Deposit Agreement dated as of November 25, 1992
by and between McDonald's Corporation, First Chicago
Trust Company of New York, as Depositary, and the
Holders from time to time of the Depositary Receipts.
(c) Rights Agreement dated as of December 13, 1988 between
McDonald's Corporation and The First National Bank of
Chicago, incorporated herein by reference from Exhibit
1 of Form 8-K dated December 23, 1988.
(i) Amendment No. 1 to Rights Agreement incorporated
herein by reference from Exhibit 1 of Form 8-K
dated May 25, 1989.
(ii) Amendment No. 2 to Rights Agreement incorporated
herein by reference from Exhibit 1 of Form 8-K
dated July 25, 1990.
60
Exhibit Number Description
-------------- -----------
(d) Indenture and Supplemental Indenture No. 1 dated as of
September 8, 1989, between McDonald's Matching and
Deferred Stock Ownership Trust, McDonald's Corporation
and Pittsburgh National Bank in connection with SEC
Registration Statement Nos. 33-28684 and 33-28684-01,
incorporated herein by reference from Exhibit (4)(a) of
Form 8-K dated September 14, 1989.
(e) Form of Supplemental Indenture No. 2 dated as of
April 1, 1991, supplemental to the Indenture between
McDonald's Matching and Deferred Stock Ownership Trust,
McDonald's Corporation and Pittsburgh National Bank in
connection with SEC Registration Statement Nos.
33-28684 and 33-28684-01, incorporated herein by
reference from Exhibit (4)(c) of Form 8-K dated
March 22, 1991.
(f) 8.35% Subordinated Deferrable Interest Debentures due
2025. Indenture incorporated herein by reference from
Exhibit 99.1 of Schedule 13E-4/A Amendment No. 2 dated
July 14, 1995.
(g) Senior Debt Securities Indenture dated as of
October 19, 1996, incorporated herein by reference from
Exhibit 4(a) of Form S-3 Registration Statement, SEC
File No. 333-14141.
(h) Subordinated Debt Securities Indenture dated as of
October 18, 1996, incorporated herein by reference from
Form 8-K dated October 18, 1996.
(i) 7 1/2% Subordinated Deferrable Interest Debentures
due 2036. Supplemental Indenture No. 1 dated as
of November 5, 1996, incorporated herein by
reference from Exhibit 4(b) of Form 8-K dated as
of October 18, 1996.
(ii) 7 1/2% Subordinated Deferrable Interest Debentures
due 2037. Supplemental Indenture No. 2 dated as
of November 5, 1996, incorporated herein by
reference from Form 8-K dated January 9, 1997.
(10) Material Contracts
(a) Directors' Stock Plan, as amended and restated,
incorporated herein by reference from Form 10-K for the
year ended December 31, 1994.*
61
Exhibit Number Description
-------------- -----------
(b) Profit Sharing Program, as amended and restated,
incorporated herein by reference from Form 10-K for the
year ended December 31, 1995.*
(c) McDonald's Supplemental Employee Benefit Equalization
Plan, McDonald's Profit Sharing Program Equalization Plan
and McDonald's 1989 Equalization Plan, as amended and
restated, incorporated herein by reference from Form 10-K
for the year ended December 31, 1995.*
(d) 1975 Stock Ownership Option Plan as amended and
restated, incorporated herein by reference from
Exhibit (10)(d) of Form 10-Q for the quarter ended
March 31, 1996*.
(e) 1992 Stock Ownership Incentive Plan, incorporated
herein by reference from Exhibit B on pages 29-41 of
McDonald's 1995 Proxy Statement and Notice of 1995
Annual Meeting of Shareholders dated April 12, 1995*.
(f) McDonald's Corporation Deferred Income Plan, as amended
and restated, attached hereto as an Exhibit.*
(g) Non-Employee Director Stock Option Plan, incorporated
by reference from Exhibit A on pages 25-28 of
McDonald's 1995 Proxy Statement and Notice of 1995
Annual Meeting of Shareholders dated April 12, 1995.*
(11) Statement re: Computation of per share earnings.
(12) Statement re: Computation of ratios.
(21) Subsidiaries of the registrant.
(23) Consent of independent auditors.
(27) Financial Data Schedule
--------------------
* Denotes compensatory plan.
Other instruments defining the rights of holders of long-term debt
of the registrant and all of its subsidiaries for which consolidated
financial statements are required to be filed and which are not
required to be registered with the Securities and Exchange
Commission, are not included herein as the securities authorized
under these instruments, individually, do not exceed 10% of the
total assets of the registrant and its subsidiaries on a
consolidated basis. An agreement to furnish a copy of any such
instruments to the Securities and Exchange Commission upon request
has been filed with the Commission.
62
(c) Reports on Form 8-K
The following reports on Form 8-K were filed for the last quarter
covered by this report, and subsequently up to March 28, 1997.
Financial Statements
Date of Report Item Number Required to be Filed
-------------- ----------- --------------------
12/11/96 Item 7 No
01/09/97 Item 5 No
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
McDONALD'S CORPORATION
(Registrant)
By /s/ Michael L. Conley
----------------------
Michael L. Conley
Executive Vice President and
Chief Financial Officer
Date March 28, 1997
----------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities on the 28th day of
March, 1997:
Signature Title
--------- -----
------------------------- Director
Hall Adams, Jr.
/s/ Robert M. Beavers, Jr.
------------------------- Senior Vice President
Robert M. Beavers, Jr. and Director
/s/ James R. Cantalupo
------------------------- President and Chief Executive
James R. Cantalupo Officer-International and
Director
/s/ Gordon C. Gray
------------------------- Director
Gordon C. Gray
/s/ Jack M. Greenberg
------------------------- Vice Chairman, Chairman-U.S.A.
Jack M. Greenberg and Director
64
Signature Title
--------- -----
/s/ Donald R. Keough
------------------------- Director
Donald R. Keough
------------------------- Director
Donald G. Lubin
------------------------- Director
Andrew J. McKenna
/s/ Michael R. Quinlan
------------------------- Chairman, Chief Executive
Michael R. Quinlan Officer and Director
/s/ Edward H. Rensi
------------------------- President and Chief Executive
Edward H. Rensi Officer-U.S.A. and Director
/s/ Terry L. Savage
------------------------- Director
Terry L. Savage
/s/ Paul D. Schrage
------------------------- Senior Executive Vice
Paul D. Schrage President, Chief Marketing
Officer and Director
/s/ Ballard F. Smith
------------------------- Director
Ballard F. Smith
------------------------- Director
Roger W. Stone
------------------------- Director
Robert N. Thurston
/s/ Fred L. Turner
------------------------- Senior Chairman and Director
Fred L. Turner
65
Signature Title
--------- -----
/s/ B. Blair Vedder, Jr.
------------------------- Director
B. Blair Vedder, Jr.
/s/ Michael L. Conley
------------------------- Executive Vice President,
Michael L. Conley Chief Financial Officer and
Director
------------------------- Director
Enrique Hernandez, Jr.
/s/ Christopher Pieszko
------------------------- Vice President and Controller
Christopher Pieszko