-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Af5jy2keWI4+W00zn6b0xn0vw8AE8XrRD4I9NCMC8IXe0PvRK6omk/yLbE7/s92q TXElOu2zzNbjrhtTRq4Y7w== 0000063908-97-000007.txt : 19970329 0000063908-97-000007.hdr.sgml : 19970329 ACCESSION NUMBER: 0000063908-97-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCDONALDS CORP CENTRAL INDEX KEY: 0000063908 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 362361282 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05231 FILM NUMBER: 97566767 BUSINESS ADDRESS: STREET 1: ONE MCDONALD'S PLZ CITY: OAK BROOK STATE: IL ZIP: 60521 BUSINESS PHONE: 7085753000 10-K 1 MCDONALD'S CORPORATION 10-K REPORT 1 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 EX-10 2 DEFERRED INCOME PLAN EXHIBIT 10F McDONALD'S CORPORATION DEFERRED INCOME PLAN (As Amended and Restated Effective as of January 1, 1997) Section 1 Introduction 1.1 The Plan and Effective Date. The McDonald's Corporation Deferred Income Plan, formerly known as the McDonald's Corporation Deferred Incentive Plan, ("Plan") was established November 1, 1993. The Plan was amended and restated effective September 1, 1994 and was subsequently amended by the first amendment thereof effective as of February 1, 1996 and the second amendment thereof effective as of August 15, 1996 (the "previous Plan document"). The "effective date" of the amendment and restatement of the Plan as set forth herein is January 1, 1997 and applies to deferral elections made by Participants with respect to amount which would otherwise be paid in 1997. Amounts deferred prior to September 1, 1996 will continue to be credited with rates of return in accordance with the terms of the previous Plan document until January 1, 1997. 1.2 Purpose. McDonald's Corporation ("McDonald's" or the "Company") has established the Plan for its officers, regional managers, and certain expatriate international country heads to retain and attract highly qualified personnel by offering the benefits of a non-qualified, unfunded plan of deferred compensation. The Company may also allow other subsidiaries or affiliates to adopt the Plan in accordance with Section 7. 1.3 Administration. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee shall have the powers set forth in the Plan and the power to interpret its provisions. Any decisions of the Committee shall be final and binding on all persons with regard to the Plan. The Committee may delegate its authority hereunder to an officer or officers of the Company. Section 2 Participation and Deferral Elections 2.1 Eligibility and Participation. Subject to the conditions and limitations of the Plan, all officers and regional managers of the Company and international country heads who are on United States payroll and who are identified as eligible by the Committee shall be eligible to participate in the Plan ("Eligible Employees"). Any Eligible Employee who makes a Deferral Election as described in Section 2.2 below shall become a participant in the Plan ("Participant") and shall remain a Participant until the entire balance of the Participant's Deferral Accounts (defined in Section 4.1 below) is distributed. 2.2 Deferral Elections. Any Eligible Employee may make a Deferral Election to defer receipt of all or any portion of his or her incentive under the McDonald's Target Incentive Plan ("TIP") for a calendar year. Any Eligible Employee may also make an election to defer up to 50% of his or her base salary for the following calendar year. Any Eligible Employee who is one of the five highest compensated officers of the Company (ranked by the total of base pay and the target incentive under TIP for the current year) may also elect to defer up to 90% of his or her base salary for the following calendar year. 2.3 Rules for Deferral Elections. Deferral Elections shall be made in accordance with the rules set forth below: (a) All Deferral Elections must be in writing on such forms as the Committee may prescribe and must be returned to the Committee no later than the date specified by the Committee. In no event will the return date specified by the Committee be later than the end of the year that precedes the year that the amount deferred would otherwise be made available to such Eligible Employee. (b) An individual shall be eligible to make a Deferral Election only if he or she is an Eligible Employee on the date specified by the Committee for the return of Deferral Election forms. (c) If an Eligible Employee terminates employment in the same calendar year in which he or she makes a Deferral Election, that Deferral Election will be null and void and no deferral will be made. (d) Amounts will be deferred to the "Payment Date" specified by the Eligible Employee in the Deferral Election and payments will commence within 30 days following the Payment Date in accordance with Section 5.1. The Payment Date specified must be no earlier than the March 31st of the calendar year following the year in which the deferred amounts would otherwise have been paid and must be either: (i) The 15th or last day of a specified month (but not December 31) of a specified year in the future (the "Specific Year Payment Date") or (ii) the March 31 following the year in which the Participant terminates employment (the "Employment Termination Payment Date"). If a Participant terminates employment and has one or more Specific Year Payment Dates that would occur after the Employment Termination Payment Date, all amounts deferred to those Specific Year Payment Date(s) shall automatically be accelerated and payment with commence on the Employment Termination Payment Date. Participant McDESOP Equalization Amounts and Company Profit Sharing Equalization Credits described in Section 3 shall be deferred to the Participant's Employment Termination Payment Date, even though a Participant has elected a Specific Year Payment Date for the remainder of his or her deferral. Deferral elections made prior to September 1, 1996 shall be deferred to the date specified in the deferral election in accordance with the terms of the Plan prior to January 1, 1997. Section 3 Equalization for McDonald's Corporation Profit Sharing Program 3.1 Equalization to Adjust for Participant 401(k) McDESOP Contributions. Amounts deferred under this Plan are not considered compensation for the McDonald's Corporation Profit Sharing Program (the "Profit Sharing Program") or for the related non-qualified plans: the McDonald's 1989 Executive Compensation Plan, the McDonald's Supplemental Employee Benefit Equalization Plan and the McDonald's Profit Sharing Program Equalization Plan (the "McCAP/McEqual Plans"). The McDESOP portion of the Profit Sharing Program allows participants to contribute a percentage of their compensation as Section 401(k) contributions. Therefore, Eligible Employees who are Profit Sharing Program participants and make Deferral Elections under this Plan shall automatically have a portion of the amount deferred set aside until the Participant's Termination Payment Date to adjust for the fact McDESOP Section 401(k) contributions cannot be made to the Profit Sharing Program or the related non-qualified plans for deferred amounts (the "Participant McDESOP Equalization Amount"). The Participant McDESOP Equalization Amount shall be based on the amount that would have been contributed by the Participant under the McDESOP portion of the Profit Sharing Program and the related non-qualified plans if the deferral had not occurred. 3.2 Company Profit Sharing Equalization Credits. Amounts deferred under this Plan are not considered aas compensation under the Profit Sharing McEqual Plans. Therefore, amounts deferred under this Plan shall be credited with an amount equal to the Company contribution that the Participant would have received under the Profit Sharing Program and/or McCAP/McEqual Plans if such deferral had not occurred ("Company Profit Sharing Equalization Credit"). If a Participant is not eligible to participate in the Profit Sharing Program or McCAP/McEqual Plans, or is not eligible to receive a Company contribution under such plans with respect to a deferred amount, no Company Profit Sharing Equalization Credit will be made. 3.3 Rules for Profit Sharing Equalization Amounts. Equalization amounts under Sections 3.1 and 3.2 above (collectively referred to as "Equalization Amounts") shall be deferred until the Participant's Employment Termination Payment Date and cannot be withdrawn under Section 5.3. Equalization Amounts will become part of the Participant's Deferral Account and will be credited with earnings as part of that Deferral Account as described in Section 4.1. Section 4 Deferral Accounts 4.1 Deferral Accounts. A bookkeeping account shall be established in the Participant's name ("Deferral Account"). Each Participant's deferral account may be further divided into: (a) amounts deferred pursuant to that year's Deferral Election and earnings thereon, (b) Company Profit Sharing Equalization Credits associated with that year's Deferral Election and earnings thereon; and (c) Participant 401(k) McDESOP Equalization amounts associated with that year's Deferral Election and earnings thereon. The Committee may also authorize other divisions or subaccounts of the deferral accounts as may be necessary to reflect the terms of the plan as amended from time to time. Amounts deferred pursuant to a Deferral Election shall be credited to the Deferral Account as of the date the Participant would otherwise have received the deferred amounts in the absence of a Deferral Election. Any Equalization Amounts shall be credited to the Deferral Account as of the date the amount would have been allocated under the Profit Sharing Program or the McCAP/McEqual Plans if the deferral had not occurred. 4.2 Investment Elections and Earnings Credits. Prior to January 1, 1997, amounts deferred under the Plan shall continue to be credited with the rate of return under the investment options and procedures set forth in the Plan as in effect prior to that date. Effective on and after January 1, 1997, each Participant in the Plan shall make an investment election, as described below, and such election shall apply to the entire amount credited to the Participant's Deferral Accounts under the Plan. However, Section 16 Insiders, as defined in Section 5.5 of the Plan may not make investment elections involving McDonald's Common Stock. (For further details concerning these restrictions, see Section 5.5 of the Plan.) Participants who terminated employment prior to January 1, 1997, may file a new investment election in accordance with the provisions of this Section 4.2 effective on and after January 1, 1997, but if no new investment election is filed, Deferral Accounts for these participants will continue to be invested in accordance with the investment elections made prior to January 1, 1997. A Participant may change his investment election effective as of the first day of any month up to a maximum of four such investment elections each calendar year. All investment elections shall be made by filing an investment election form with the Committee at such time and in such manner as the Committee may specify. Investment elections may be split between the following equivalent rates of return in increments of 10%, provided that the percentages specified must total 100%. (a) a rate of return based upon the McDonald's Common Stock Fund under the Profit Sharing Program, after adjustment for expenses ("McDonald's Common Stock" equivalent); (b) a rate of return based upon the Insurance Contract Fund under the Profit Sharing Program, after adjustment for expenses ("Insurance Contract" equivalent); (c) a rate of return based upon the Diversified Stock Fund under the Profit Sharing Program, after adjustment for expenses ("Diversified Stock" equivalent); (d) a rate of return based upon the Multi-Asset Fund under the Profit Sharing Program, after adjustment for expenses ("Multi- Asset" equivalent); and (e) a rate of return based upon the Money Market Fund under the Profit Sharing Program, after adjustment for expenses ("Money Market" equivalent). If a Participant who is employed fails to make an investment election, amounts shall be credited with the same rate of return as amounts for which no investment election is received under the Profit Sharing component of the McDonald's Corporation Profit Sharing Program. (Currently, this is the Money Market equivalent rate of return.) All investment elections will continue in effect for all Participants until the Participant files a new investment election. As of the 15th day (or if the fifteenth day of the month is not a business day, the next previous business day) and the last business day of each calendar month, or such additional dates as the Committee shall specify ("Valuation Date"), each Deferral Account shall be credited with earnings, gains and losses equal to the amount the Deferral Account would have earned, gained or lost, since the prior Valuation Date. 4.3 Vesting. A Participant shall be fully vested at all times in the balance of his or her Deferral Account. Section 5 Payment of Benefits 5.1 Time and Method of Payment. Payments to a Participant, or the Participant's beneficiary if the Participant is deceased, shall automatically be paid in a lump sum within 30 days following the Payment Date, unless the Participant or the Participant's beneficiary files a written installment distribution election on or before December 31 of the calendar year preceding the Payment Date. An installment distribution election shall apply to all payments for that Payment Date and shall specify the period of years (up to a maximum of 15 years) over which payments are to be made and shall also specify whether installments are to be made quarterly or annually. Installment payments shall be made in substantially equal installments over the installment period specified and shall commence within 30 days after the Payment Date. Each installment payment shall be computed by dividing the balance of the Deferral Account(s) that is to be paid in installments by the number of payments remaining in the installment period. Once an installment election is filed for a Payment Date, it cannot be revoked. However, because the method of payment described above is more flexible, Deferral Elections made in 1993 which specified a five year installment payment shall be null and void, and shall be paid in a lump sum, unless the Participant or the Participant's beneficiary files a written installment election prior to December 31 of the calendar year preceding the Payment Date. 5.2 Form of Payment. All payments shall be made in cash. However, a Participant who has eleted a McDonald's Common Stock based return may elect to receive payment in the form of shares of McDonald's Common Stock by filing a written request with the Committee prior to December 31 of the calendar year preceding the Payment Date. 5.3 Early Withdrawals and Acceleration of Installment Payments. A Participant shall have the right to withdraw in cash any portion of the balance of his or her Deferral Accounts (except for the Equalization Amounts of the Participant's Deferral Accounts under Sections 4.1(b) and (c) and amounts which were not withdrawable under the terms of the Plan prior to September 1, 1994) at any time prior to the applicable Payment Date, subject to the Committee's consent and a 10% forfeiture penalty on the amount requested. A Participant who is receiving installment payments may accelerate payment of any unpaid amount, subject to the Committee's consent and 10% forfeiture penalty on the amount accelerated. The withdrawal or accelerated installment (reduced by the 10% forfeiture penalty) shall be paid within 30 days of the Valuation Date next following the date the election to withdraw or accelerate payments is approved by the Committee. Withdrawals and accelerated installments shall be made first from the earliest maturing Deferral Account and shall be taken pro rata from the investment rate equivalents elected by the Participant. Withdrawals shall be subject to such procedures as the Committee shall establish from time to time. 5.4 Withholding of Taxes. The Company shall withhold any applicable Federal, state or local income tax from payments due under the Plan in accordance with such procedures as the Company may establish. Generally, any Social Security taxes, including the Medicare portion of such taxes, shall be withheld and paid at the time incentive payments under the Target Incentive Plan or base salary payments would otherwise have been paid to the Participant. The Company shall also withhold any other employment taxes as necessary to comply with applicable laws. 5.5 Limitations For Section 16 Insiders. A "Section 16 Insider" shall include any Participant who has been deemed to be subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") by the Board of Directors of the Company. Notwithstanding any provision of the Plan to the contrary, the Deferral Account of each Section 16 Insider is subject to the following limitations: (a) An Eligible Employee who is a Section 16 Insider at the time he or she makes a Deferral Election may elect a McDonald's Common Stock based return and at the same time must also specify the Payment Date and whether the payment will be in a lump sum or the specific installment period that will apply. The election of a McDonald's Common Stock based return is irrevocable and cannot be changed by an investment election at a later date. A Participant who is a Section 16 Insider may not make a withdrawal or accelerate installments under Section 5.3 of any Deferral Account(s) that are credited with a McDonald's Common Stock based return. Section 16 Insiders who elect a McDonald's Common Stock based return and a form of payment will not be able to change those elections, even if the Plan is amended at a later date to provide increased flexibility. (b) A Section 16 Insider who elects to invest in McDonald's Common Stock based return shall also elect, at the time the deferral is made, whether the distribution will be paid in cash or in the form of McDonald's Common Stock. This provision applies only to deferral elections made on and after August 15, 1996. Amounts deferred under all deferral elections made prior to August 15, 1996 will be paid in cash. However, for these cash distributions only, to the extent that a Section 16 Insider uses the cash distribution to purchase shares of McDonald's Common Stock on the open market in one or more transactions within seven months after the date such amounts are distributed, the Company shall reimburse the Section 16 Insider for all reasonable brokerage fees and other transaction costs incurred in connection with such purchases upon presentation of satisfactory evidence thereof not later than 60 days after the date of each transaction. (c) If any Participant becomes a Section 16 Insider after making a Deferral Election under the Plan, any Deferral Account that is being credited with a McDonald's Common Stock based return shall automatically be converted to any non-McDonald's Common Stock based investment return specified by the Participant on an investment election form as of the Valuation Date immediately preceding the date the Participant is designated a Section 16 Insider by the Board of Directors. This automatic change to non-McDonald's Common Stock based returns will be made to preserve the Participant's right to make investment choices for investment options that do not involve McDonald's Common Stock, make early withdrawals and elect accelerated installments under Section 5.3. (d) Elections to invest in McDonald's Common Stock based returns can be made by Section 16 Insiders only at the time the deferral election is made. Investment elections which would result in a transfer into the McDonald's Common Stock based return at a later date are not permitted for Section 16 Insiders. In addition, the Committee may take such other actions as are necessary so that transactions by Section 16 Insiders do not result in liability under Section 16(b) of the Exchange Act. 5.6 Beneficiary. A Participant shall have the right to name a beneficiary or beneficiaries who shall receive the balance of a Participant's Deferral Account in the event of the Participant's death prior to the payment of his or her entire Deferral Account. If no beneficiary is named by a Participant or if he or she survives all of the named beneficiaries, the Deferral Account shall be paid to the same beneficiary or beneficiaries to which the Deferral Account would have been paid if it were in the Participant's Profit Sharing Fund Account under the Profit Sharing Program as of the date of the Participant's death. To be effective, any beneficiary designation shall be filed in writing with the Committee. A Participant may revoke an existing beneficiary designation by filing another written beneficiary designation with the Committee. The latest beneficiary designation received by the Committee shall be controlling. Section 6 Miscellaneous 6.1 Funding. Benefits payable under the Plan to any Participant shall be paid directly by the Company. The Company shall not be required to fund, or otherwise segregate assets to be used for payment of benefits under the Plan. While the Company may, in the discretion of the Committee, make investments (a) in shares of McDonald's Common Stock through open market purchases or (b) in other investments in amounts equal or unequal to amounts payable hereunder, the Company shall not be under any obligation to make such investments and any such investment shallll rremain an asset of the Company subject to the claims of its general creeditors. Notwithstanding the foregoing, the Company may maaiintain one or more trusts ("Trust") to hold assets to be used for payment of benefits under the Plan. Any payments by a Trust of benefits provided to a Participant under the Plan shall be considered payment by the Company and shall discharge the Company of any further liability under the Plan for such payments. 6.2 Account Statements. The Company shall provide Participants with statements of the balance of their Deferral Accounts under the Plan at least annually. The Committee may, in their discretion, also issue statements as of the March 31, June 30, September 30 and December 31 Valuation Dates. 6.3 Employment Rights. Establishment of the Plan shall not be construed to give any Eligible Employee the right to be retained in the Company's service or to any benefits not specifically provided by the Plan. 6.4 Interests Not Transferable. Except as to withholding of any tax under the laws of the United States or any state or locality and the provisions of Section 5.6, no benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or other legal process, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefits, whether currently or thereafter payable, shall be void. No person shall, in any manner, be liable for or subject to the debts or liabilities of any person entitled to such benefits. If any person shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise encumber benefits under the Plan, or if by any reason of the Participant's bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under the Plan, then the Company, in its discretion, may terminate the interest in any such benefits of the person entitled thereto under the Plan and hold or apply them to or for the benefit of such person entitled thereto under the Plan or such individual's spouse, children or other dependents, or any of them, in such manner as the Company may deem proper. 6.5 Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of the amounts of the Deferral Accounts of a Participant that cannot be distributed because of the Committee's inability, after a reasonable search, to locate a Participant or the Participant's beneficiary, as applicable, within a period of two (2) years after the Payment Date upon which the payment of benefits become due. Unclaimed amounts shall be forfeited at the end of such two-year period. Penalties charged for withdrawals under Section 5.3 shall also be forfeited in the year in which the penalty is charged. These forfeitures will reduce the obligations of the Company under the Plan. After an unclaimed amount has been forfeited, the Participant or beneficiary, as applicable, shall have no further right to the Participant's Deferral Account. 6.6 Controlling Law. The law of Illinois, except its law with respect to choice of law, shall be controlling in all matters relating to the Plan to the extent not preempted by ERISA. 6.7 Action by the Company. Except as otherwise specifically provided herein, any action required of or permitted by the Company under the Plan shall be by resolution of the Board of Directors of the Company or by action of any member of the Committee or person(s) authorized by resolution of the Board of Directors of the Company. Section 7 Employer Participation 7.1 Adoption of Plan. Any subsidiary or affiliate of the Company ("Employer") may, with the approval of the Committee and under such terms and conditions as the Committee may prescribe, adopt the corresponding portions of the Plan by resolution of its board of directors. The Committee may amend the Plan as necessary or desirable to reflect the adoption of the Plan by an Employer, provided however, that an adopting Employer shall not have the authority to amend or terminate the Plan under Section 8. 7.2 Withdrawal from the Plan by Employer. Any such Employer shall have the right, at any time, upon the approval of and under such conditions as may be provided by the Committee, to withdraw from the Plan by delivering to the Committee written notice of its election so to withdraw. Upon receipt of such notice by the Committee, the portion of the Deferral Accounts of Participants and beneficiaries attributable to credits made while the Participants were employees of such withdrawing Employer, plus any net earnings, gains and losses or such credits, shall be distributed from the Trust at the direction of the Committee in cash at such time or times as the Committee, in its sole discretion, may deem to be in the best interest of such employees and their beneficiaries. To the extent the amounts held in the Trust for the benefit of such Participants and beneficiaries are not sufficient to satisfy the Employer's obligation to such Participants and their beneficiaries accrued on account of their employment with the Employer, the remaining amount necessary to satisfy such obligation shall be an obligation of the Employer, and the Company shall have no further obligation to such Participants and beneficiaries with respect to such amounts. Section 8 Amendment and Termination The Company intends the Plan to be permanent, but reserves the right at any time by action of its Board of Directors or by the Committee (in accordance with the restrictions in the following sentence) to modify, amend or terminate the Plan, provided however, that any amendment or termination of the Plan shall not reduce or eliminate any Deferral Account accrued through the date of such amendment or termination. The Committee shall have the same authority to adopt amendments to the Plan as the Board of Directors of the Company in the following circumstances: (a) to adopt amendments to the Plan which the Committee determines are necessary or desirable for the Plan to comply with or to obtain benefits or advantages under the provisions of applicable law, regulations or rulings or requirements of the Internal Revenue Service or other governmental administrative agency or changes in such law, regulations, rulings or requirements; and (b) to adopt any other procedural or cosmetic amendment that the Committee determines to be necessary or desirable that does not materially change benefits to Participants or their beneficiaries or materially increase the Company's or adopting Employers' credits to the Plan. The Committee shall provide notice of amendments adopted by the Committee to the Board of Directors of the Company on a timely basis. Executed in multiple originals this 30th day of September, 1996. McDONALD'S CORPORATION /s/ Stanley R. Stein ------------------------------- By: Stanley R. Stein Title: Senior Vice President EX-11 3 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 McDONALD'S CORPORATION STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (Dollars and shares in millions, except per common share data)
Year ended December 31, 1996 1995 1994 ---- ---- ---- Net Income $1,572.6 $1,427.3 $1,224.4 Preferred stock dividends (net of tax benefits) (27.6) (40.5) (47.2) -------- -------- -------- Net income available after preferred stock dividends (A) 1,545.0 1,386.8 1,177.2 Effect of preferred stock exchange* 0.0 (4.3) 0.0 Common stock dividends on assumed conversion of preferred stock 0.0 0.6 1.2 -------- -------- -------- Net income available to common shareholders $1,545.0 $1,383.1 $1,178.4 ======== ======== ======== Weighted average number of common shares outstanding during the period (A) 698.2 701.5 701.8 Additional shares related to potentially dilutive securities 18.4 20.5 20.5 -------- -------- -------- Adjusted weighted average common shares 716.6 722.0 722.3 ======== ======== ======== Fully diluted net income per common share $2.16 $1.92 $1.63 ======== ======== ======== Increase in fully diluted net income per common share over prior year 13% 18% 16% ======== ======== ======== --------------------- * The 1995 period include $3.9 million for the one-time effect of the Company's exchange of Series E Cumulative Preferred Stock for subordinated debt securities completed in June, 1995, and an additional .4 million for the effect of the Company's repurchase of additional Series E preferred stock in the third quarter. (A) Refer to Consolidated statement of income and Financial comments on pages 32 and 36 from Part II, item 8 of this 1996 10-K for information concerning the computation of Net income per common share. /TABLE EX-12 4 COMPUTATION OF RATIOS Exhibit 12 McDONALD'S CORPORATION STATEMENT RE: COMPUTATION OF RATIOS (Dollars in Millions)
Year Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- EARNINGS AVAILABLE FOR FIXED CHARGES - Income before provision for income taxes $2,251.0 $2,169.1 $1,886.6 $1,675.7 $1,448.1 - Minority interest in operating results of majority-owned subsidiaries, including fixed charges related to redeemable preferred stock, less equity in undistributed operating results of less-than-50% owned affiliates 39.6 19.6 6.6 6.9 5.3 - Provision for income taxes of 50% owned affiliates included in consolidated income before provision for income taxes 73.2 73.3 34.9 34.2 29.4 - Portion of rent charges (after reduction for rental income from subleased properties) considered to be representative of interest factors* 130.9 103.8 83.4 71.6 70.1 - Interest expense, amortization of debt discount and issuance costs, and depreciation of capitalized interest* 392.2 388.8 346.0 358.0 413.8 ----------------------------------------------------------- $2,886.9 $2,754.6 $2,357.5 $2,146.4 $1,966.7 =========================================================== FIXED CHARGES - Portion of rent charges (after reduction for rental income from subleased properties) considered to be representative of interest factors* $130.9 $103.8 $83.4 $71.6 $70.1 - Interest expense, amortization of debt discount and issuance costs, and fixed charges related to redeemable preferred stock* 410.4 403.4 343.9 349.3 405.4 - Capitalized interest* 23.5 22.8 21.0 20.7 20.5 ----------------------------------------------------------- $564.8 $530.0 $448.3 $441.6 $496.0 =========================================================== RATIO OF EARNINGS TO FIXED CHARGES 5.11 5.20 5.26 4.86 3.96 =========================================================== *Includes amounts of the Registrant and its majority-owned subsidiaries, and one-half of the amounts of 50%-owned affiliates. /TABLE EX-21 5 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 MCDONALD'S CORPORATION SUBSIDIARIES OF THE REGISTRANT NAME OF SUBSIDIARY (STATE OR COUNTRY OF INCORPORATION) DOMESTIC SUBSIDIARIES McDonald's Australian Property Corporation (Delaware) McDonald's Deutschland, Inc. (Delaware) McDonald's Development Italy, Inc. (Delaware) McDonald's Restaurant Operations, Inc. (Delaware) McDonald's Property Company Limited (Delaware) McDonald's System of France, Inc. (Delaware) McDonald's Systems of Espana, Inc. (Delaware) Restaurant Realty of Mexico, Inc. (Delaware) FOREIGN SUBSIDIARIES McDonald's Restaurants of Canada Limited (Canada) McDonald's Australia Limited (Australia) McDonald's Properties (Australia) Pty., Ltd. (Australia) McDonald's Immobilien GmbH (Germany) McDonald's GmbH (Germany) McDonald's Restaurants Limited (England) McDonald's France, S.A. (France) McDonald's Development Italia S.p.A. (Italy) Italian Restaurant Financing S.R.L. (Italy) McDonald's Restaurants Limited (Hong Kong) McDonald's Nederland B.V. (Netherlands) McDonald's Restaurants Co., Ltd. (Taiwan) McDonald's Restaurants (Swisse) S.A. (Switzerland) Restco Comercio de Alimentos Ltda. (Brazil-Sao Paulo) Realco Comercio de Alimentos Ltda. (Brazil-Rio de Janeiro) MDC Inmobiliaria de Mexico S.A. de C.V. (Mexico) _______________________ The names of certain subsidiaries have been omitted as follows: (a) 48 wholly-owned subsidiaries of the Company, each of which operates one or more McDonald's restaurants within the United States. (b) Additional subsidiaries, including some foreign, other than those mentioned in (a), because considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. EX-23 6 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of McDonald's Corporation and in the related prospectuses of our report dated January 23, 1997, with respect to the consolidated financial statements of McDonald's Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1996: Commission File No. ----------------------------------- Form S-8 Form S-3 ----------------------------------- 33-09267 33-00001 33-24958 33-42642 33-49817 33-50695 33-50701 33-64873 33-58840 33-60939 333-03409 333-14141 /s/ ERNST & YOUNG LLP Chicago, Illinois March 28, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 Exhibit 27 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 330 0 495 0 70 1,103 19,134 4,782 17,386 2,135 4,830 0 358 8 11,379 17,386 7,571 10,687 6,163 6,733 (46) 0 343 2,251 678 1,573 0 0 0 1,573 2.21 0
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