<PAGE>
================================================================================
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 for the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 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 60523
(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:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
- ------------------------------------------- ------------------------------
<S> <C>
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
6-3/4% Notes due 2003 New York Stock Exchange
7-3/8% Debentures due 2033 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
7.31% Subordinated Deferrable Interest
Debentures due 2027 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 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 $32,223,113,320 and the number of shares of common stock
outstanding is 685,853,427 as of January 31, 1998.
Documents incorporated by reference. Part III of this 10-K incorporates
information by reference from the registrant's 1998 definitive proxy statement
which will be filed no later than 120 days after December 31, 1997.
================================================================================
<PAGE>
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
In 1997, the Company reorganized its United States business into five
geographic divisions, each led by a newly appointed divisional president and
management team. The reorganization was designed to place management decision-
making and accountability closer to the Company's customers, restaurants and
franchisees.
There have been no other significant changes to the Company's corporate
structure during 1997, 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, 1997, 1996 and 1995
is included in Part II, Item 8, page 20 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 or royalties based upon a
percent of sales, with specified minimum payments. The conventional franchise
arrangement typically lasts 20 years and franchising practices are generally
consistent throughout the world. Further discussion regarding site selection
is included in Part I, Item 2, page 4 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 management and basic and intermediate operations.
Assistant managers are eligible to attend the advanced operations and
management class at one of the five Hamburger University (H.U.) campuses in
the U.S., Germany, England, Japan or Australia. The curriculum at H.U.
concentrates on skills and practices essential to delivering customer
satisfaction and running a restaurant business.
The Company's global brand is well-known. Marketing and promotional
activities are designed to nurture this brand image and differentiate the
Company from competitors by focusing on value, 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.
2
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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 Filet-O-Fish, Grilled Chicken Deluxe
and Crispy 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.
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, 1997, 1996 and 1995 in Part II, Item 7, pages 15 through
19, and Part II, Item 8, page 23 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
3
<PAGE>
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 445,000 restaurants generate nearly $244 billion in
annual sales. McDonald's accounts for about 2.8% of those restaurants and
approximately 7.0% of those sales. No reasonable estimate can be made of the
number of competitors outside the U.S.; however, the Company's business in
foreign markets continues to grow.
Research and development
The Company operates research and development facilities in Illinois. While
research and development activities are important to the Company's business,
these expenditures are not material. Independent suppliers also conduct
research activities for the benefit of the McDonald's System, which includes
franchisees and suppliers, as well as McDonald's, its subsidiaries and joint
ventures.
Environmental matters
The Company is not aware of any federal, state or local environmental laws
or regulations which will materially affect its earnings or competitive
position, or result in material capital expenditures; however, the Company
cannot predict the effect on its operations of possible future environmental
legislation or regulations. During 1997, there were no material capital
expenditures for environmental control facilities and no such material
expenditures are anticipated.
Number of employees
During 1997, the Company's average number of employees worldwide, including
company-operated restaurant employees, was approximately 267,000.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information about foreign and domestic markets is incorporated
herein by reference from Management's Discussion and Analysis and Segment and
Geographic Information in Part II, Item 7, pages 8 through 19 and Part II,
Item 8, page 30, 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 8 through 19 and
Part II, Item 8, pages 22, 23, 25, 26, 28, 29 and 31 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.
4
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The Company does not believe that any such claims or lawsuits will have a
material adverse effect on its financial condition or results of operations.
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 the United States, food, paper, or related items to any
McDonald's restaurants. The Company relies upon independent suppliers which
are required to meet and maintain the Company's standards and specifications.
There are a number of such suppliers worldwide and on occasion disputes arise
between the Company and its suppliers on a number of issues including, by way
of example, compliance with product specifications and McDonald's business
relationship with suppliers.
EMPLOYEES
Thousands of persons are employed by the Company and in restaurants owned
and operated by subsidiaries of the Company. In addition, thousands of
persons, from time to time, seek employment in such restaurants. In the
ordinary course of business, disputes arise regarding hiring, firing and
promotion practices.
CUSTOMERS
McDonald's restaurants serve a large cross-section of the public and in the
course of serving so many people, disputes arise as to products, service,
accidents and other matters typical of an extensive restaurant business such
as that of the Company.
TRADEMARKS
McDonald's has registered trademarks and service marks, some of which are of
material importance to the Company's business. From time to time, the Company
may become involved in litigation to defend and protect its use of such
registered marks.
GOVERNMENT REGULATIONS
Local, state and federal governments have adopted laws and regulations
involving various aspects of the restaurant business, including, but not
limited to, franchising, health, environment, zoning and employment. The
Company does not believe that it is in violation of any existing statutory or
administrative rules, but it cannot predict the effect on its operations from
promulgation of additional requirements in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
5
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EXECUTIVE OFFICERS OF THE REGISTRANT
All of the executive officers of McDonald's Corporation as of March 1, 1998
are shown below. Unless otherwise indicated, 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 1998 Board of Directors' meeting.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF YEARS IN
DATE OF YEARS WITH PRESENT
NAME OFFICE BIRTH COMPANY POSITION
---- ------------------------------------------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Robert M. Beavers, Jr... Senior Vice President 1/27/44 34 4
James R. Cantalupo...... President and Chief Executive Officer-- 11/14/43 23 6
McDonald's International
John S. Charlesworth.... Division President 5/30/46 23 *
Winston B. Christiansen. Executive Vice President 7/31/47 27 2
Michael L. Conley....... Executive Vice President and Chief 3/28/48 23 1
Financial Officer
Kevin E. Dunn........... Division President 1/6/53 23 *
Alan D. Feldman(1)...... Division President 3/6/52 3 *
Jack M. Greenberg....... Vice Chairman, Chairman and Chief 9/28/42 16 *
Executive Officer--McDonald's USA
Jeffrey B. Kindler(2)... Executive Vice President, Corporate 5/13/55 2 *
General Counsel
Debra A. Koenig......... Division President 6/30/52 21 *
Christopher Pieszko..... Senior Vice President, Corporate Controller 12/2/55 19 *
Michael R. Quinlan...... Chairman, Chief Executive Officer 12/9/44 34 8
Michael J. Roberts...... Division President 10/20/50 20 *
James A. Skinner........ President--Europe Group 10/25/44 27 *
Stanley R. Stein........ Executive Vice President 4/17/42 23 *
Fred L. Turner.......... Senior Chairman 1/6/33 41 8
</TABLE>
- --------
*Less than one year in current position.
(1) Mr. Feldman joined the Company in 1994 as Corporate Vice President. He
assumed his current position in 1997. Prior thereto, Mr. Feldman served as
Senior Vice President and Chief Financial Officer of Pizza Hut, Inc.
(2) Mr. Kindler joined the Company in 1996 as Senior Vice President, General
Counsel. He assumed his current position in 1997. Prior thereto, Mr.
Kindler served as Vice President, Senior Counsel of General Electric
Company.
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.
6
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
DIVIDEND PER DIVIDEND PER
QUARTER HIGH LOW COMMON SHARE HIGH LOW COMMON SHARE
------- ------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
First................. 49 3/8 42 1/2 .0750 54 1/4 42 1/2 .0675
Second................ 54 7/8 46 3/4 .0825 50 3/8 45 3/8 .0750
Third................. 54 3/4 45 3/4 .0825 49 41 .0750
Fourth................ 49 5/8 42 1/8 .0825 49 3/8 43 3/4 .0750
------ ------ ----- ------ ------ -----
Year.................. 54 7/8 42 1/8 .3225 54 1/4 41 .2925
====== ====== ===== ====== ====== =====
</TABLE>
The approximate number of shareholders of record and beneficial owners of
the Company's common stock as of January 31, 1998 was estimated to be 976,000.
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 88 consecutive quarterly dividends on
common stock through March 30, 1998, has increased the per share amount 23
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.
ITEM 6. SELECTED FINANCIAL DATA
11-YEAR SUMMARY
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA AND AVERAGE RESTAURANT
SALES)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Systemwide sales........ $33,638 31,812 29,914 25,987 23,587 21,885 19,928 18,759 17,333 16,064 14,330
Systemwide sales by type
Operated by
franchisees........... $20,863 19,969 19,123 17,146 15,756 14,474 12,959 12,017 11,219 10,424 9,452
Operated by the
Company............... $ 8,136 7,571 6,863 5,793 5,157 5,103 4,908 5,019 4,601 4,196 3,667
Operated by affiliates. $ 4,639 4,272 3,928 3,048 2,674 2,308 2,061 1,723 1,513 1,444 1,211
Average sales by
Systemwide restaurants
(in thousands)......... $ 1,592 1,708 1,844 1,800 1,768 1,733 1,658 1,649 1,621 1,596 1,502
Total revenues.......... $11,409 10,687 9,795 8,321 7,408 7,133 6,695 6,640 6,066 5,521 4,853
Revenues from franchised
and affiliated
restaurants............ $ 3,272 3,116 2,931 2,528 2,251 2,031 1,787 1,621 1,465 1,325 1,186
Operating income........ $ 2,808 2,633 2,601 2,241 1,984 1,862 1,679 1,596 1,438 1,288 1,160
Income before provision
for income taxes....... $ 2,407 2,251 2,169 1,887 1,676 1,448 1,299 1,246 1,157 1,046 959
Net income.............. $ 1,643 1,573 1,427 1,224 1,083 959 860 802 727 646 549(1)
Cash provided by
operations............. $ 2,442 2,461 2,296 1,926 1,680 1,426 1,423 1,301 1,246 1,177 1,051
Capital expenditures.... $ 2,111 2,375 2,064 1,539 1,317 1,087 1,129 1,571 1,555 1,321 1,027
Treasury stock
purchases.............. $ 765 605 321 500 628 92 117 157 497 136 143
Financial position at
year end
Net property and
equipment............. $14,961 14,352 12,811 11,328 10,081 9,597 9,559 9,047 7,758 6,800 5,820
Total assets........... $18,242 17,386 15,415 13,592 12,035 11,681 11,349 10,668 9,175 8,159 6,982
Total debt............. $ 6,463 5,523 4,836 4,351 3,713 3,857 4,615 4,792 4,036 3,269 2,784
Total shareholders'
equity................ $ 8,852 8,718 7,861 6,885 6,274 5,892 4,835 4,182 3,550 3,413 2,917
Per common share
Net income(2).......... $ 2.35 2.21 1.97 1.68 1.45 1.30 1.17 1.10 .97 .86 .72(1)
Net income--diluted(2). $ 2.29 2.16 1.93 1.63 1.42 1.27 1.14 1.07 .96 .85 .71(1)
Dividends declared..... $ .32 .29 .26 .23 .21 .20 .18 .17 .15 .14 .12
Market price at year
end................... $47 3/4 45 3/8 45 1/8 29 1/4 28 1/2 24 3/8 19 14 1/2 17 1/4 12 11
Systemwide restaurants
at year end............ 23,132 21,022 18,380 15,950 14,163 13,093 12,418 11,803 11,162 10,513 9,911
Systemwide restaurants
by type Operated by
franchisees........... 14,265 13,428 12,217 10,965 9,933 9,237 8,735 8,131 7,573 7,110 6,760
Operated by the
Company............... 5,000 4,357 3,816 3,238 2,746 2,551 2,547 2,643 2,691 2,600 2,399
Operated by affiliates. 3,867 3,237 2,347 1,747 1,484 1,305 1,136 1,029 898 803 752
Number of countries at
year end............... 109 101 89 79 70 65 59 53 51 50 47
</TABLE>
- --------
(1) Before the cumulative prior years' benefit from the change in accounting
for income taxes.
(2) Net income per common share data is presented in conformity with SFAS 128.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
- -------------------------------------------------------------------------------
The following table presents the changes in the Company's operating results
for the years ended 1997 and 1996.
CHANGES IN OPERATING RESULTS FROM PRIOR YEAR
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------- -------------------
AMOUNT % AMOUNT %
------------ -------- ------------ --------
(DOLLARS IN MILLIONS, EXCEPT
PER COMMON SHARE DATA)
<S> <C> <C> <C> <C>
Systemwide sales............ $ 1,826 6 $ 1,898 6
----------- -------- ----------- --------
Revenues
Sales by Company-operated
restaurants.............. $ 566 7 $ 707 10
Revenues from franchised
and affiliated
restaurants.............. 156 5 185 6
----------- -------- ----------- --------
Total revenues.......... 722 7 892 9
----------- -------- ----------- --------
Operating costs and expenses
Company-operated
restaurants.............. 486 8 616 11
Franchised restaurants.... 44 8 55 11
Selling, general and
administrative expenses.. 84 6 130 11
Other operating (income)
expense--net (68) n/m 60 n/m
----------- -------- ----------- --------
Total operating costs
and expenses........... 546 7 861 12
----------- -------- ----------- --------
Operating income*........... 176 7 31 1
----------- -------- ----------- --------
Interest expense............ 22 6 2 1
Nonoperating (income)
expense--net (2) n/m (53) n/m
----------- -------- ----------- --------
Income before provision for
income taxes............... 156 7 82 4
----------- -------- ----------- --------
Provision for income taxes.. 86 13 (63) (9)
----------- -------- ----------- --------
Net income.................. $ 70 4 $ 145 10
=========== ======== =========== ========
Net income per common share. $ .14 6 $ .24 12
Net income per common
share--diluted............. .13 6 .23 12
</TABLE>
- --------
* Excluding the 1996 asset impairment and special charges discussed on page
13, 1997 and 1996 operating income would have increased $88 million or 3%,
and $119 million or 5%, respectively.
n/m=not meaningful
RESTAURANTS
McDonald's continues to invest in the future through prudent and strategic
expansion. In 1997, the Company added 2,110 restaurants Systemwide, compared
with 2,642 in 1996 and 2,430 in 1995. In 1998, the Company plans to add a
similar number of restaurants as were added in 1997, with a continued emphasis
on full-menu traditional restaurants primarily in international locations.
<TABLE>
<CAPTION>
1997 1996 1995 TEN YEARS AGO
------ ------ ------ -------------
<S> <C> <C> <C> <C>
U.S.................................... 12,380 12,094 11,368 7,567
Europe................................. 3,886 3,283 2,595 753
Asia/Pacific........................... 4,456 3,633 2,735 951
Latin America.......................... 1,091 837 665 99
Other.................................. 1,319 1,175 1,017 541
------ ------ ------ -----
Systemwide restaurants................. 23,132 21,022 18,380 9,911
====== ====== ====== =====
</TABLE>
8
<PAGE>
The U.S. expansion rate declined in 1997 partly due to the previously
announced satellite restaurant closings. Additionally, U.S. traditional
restaurant expansion slowed due to a more stringent selection process.
Asia/Pacific's percent of total restaurants has grown primarily due to
Japan's significant expansion. Japan added 433 restaurants in 1997, 522 in
1996 and 313 in 1995, representing about 20% of Systemwide restaurants opened
in 1997 and 1996, and 13% in 1995. About two-thirds of Japan's restaurant
additions are smaller and have lower average development costs and lower
average sales volumes than traditional restaurants. Therefore, these additions
affect unit growth more than sales growth.
At the end of 1997, 85% of Systemwide restaurants were in the following 11
markets--Australia, Brazil, Canada, England, France, Germany, Hong Kong,
Japan, the Netherlands, Taiwan and the U.S. (major markets). This compares
with 88% for 1996. In 1997, 64% of restaurant additions were in these major
markets, and we anticipate a similar percent for 1998. New and emerging
markets like China, the Philippines, and the Africa/Middle East and Central
Europe regions are expected to represent a greater percent of restaurant
additions. Additionally, rapid expansion is expected to continue in Latin
America.
<TABLE>
<CAPTION>
1997 1996 1995 TEN YEARS AGO
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Operated by franchisees................ 14,265 13,428 12,217 6,760
Operated by the Company................ 5,000 4,357 3,816 2,399
Operated by affiliates................. 3,867 3,237 2,347 752
------ ------ ------ -----
Systemwide restaurants................. 23,132 21,022 18,380 9,911
====== ====== ====== =====
</TABLE>
Franchisees and affiliates operated 78% of restaurants at year-end 1997.
That percentage has remained relatively constant over the past three years.
About 80% of Company-operated restaurants and 90% of franchised restaurants
were located in the major markets in 1997. Restaurants operated by affiliates
were principally located in Argentina, Japan, Malaysia, the Philippines and
the U.S.
Most of the satellite restaurants in operation were in Japan and the U.S.
SYSTEMWIDE SALES
Systemwide sales include sales by all restaurants, whether operated by the
Company, by franchisees or by affiliates operating under joint-venture
agreements. Increasing market share and customer satisfaction through
expansion, quality, service, cleanliness and value continue to be key
strategic initiatives to build sales. Sales increases in 1997 and 1996 were
primarily due to restaurant expansion worldwide, partly offset by weaker
foreign currencies and, in 1996, negative comparable sales on a constant
currency basis. In 1997, 87% of Systemwide sales were in the major markets,
compared with 88% in 1996.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
U.S............................................... $17,125 $16,370 $15,905
Europe............................................ 7,835 7,377 6,685
Asia/Pacific...................................... 5,616 5,349 4,835
Latin America..................................... 1,511 1,273 1,129
Other............................................. 1,551 1,443 1,360
------- ------- -------
Systemwide sales.................................. $33,638 $31,812 $29,914
======= ======= =======
</TABLE>
9
<PAGE>
In the U.S., sales increased primarily due to restaurant expansion. Despite
a continuing competitive environment, comparable sales increased in 1997
reflecting successful marketing and promotions, including Chicken McNuggets,
Monopoly and Teenie Beanie Babies, offset in part by disappointing results
from Campaign 55. Comparable sales decreased in 1996 reflecting an extremely
competitive U.S. operating environment.
In Europe, sales increases in 1997 were driven by expansion and higher
constant currency comparable sales in England, Italy, the Netherlands and
Spain. The 1996 acquisition of about 80 Burghy restaurants supported Italy's
impressive sales growth. In addition, although the economy was weak in France,
our constant currency comparable sales increased in 1997. These results were
partly offset by lower comparable sales in Germany where economic conditions
were also weak.
In Asia/Pacific, the Philippines and Taiwan had strong sales increases in
1997, driven by Extra Value Meal marketing campaigns and restaurant expansion,
despite difficult economic conditions in the latter part of the year.
Brazil contributed one-third of Latin America's total sales growth in 1997,
due to accelerated expansion. Higher constant currency comparable sales and
expansion were the primary drivers of significant sales growth in Argentina,
Mexico, Puerto Rico and Venezuela.
Sales by Company-operated restaurants grew at a higher rate than Systemwide
sales in 1997 and 1996, primarily due to the higher unit growth rate of
Company-operated restaurants outside the U.S. relative to Systemwide
restaurants. In addition, the weakening Japanese Yen had a significant
negative effect on our Japanese affiliate's sales, which dampened Systemwide
sales growth.
<TABLE>
<CAPTION>
1997 1996 1995 TEN YEARS AGO
------- ------- ------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operated by franchisees............. $20,863 $19,969 $19,123 $ 9,452
Operated by the Company............. 8,136 7,571 6,863 3,667
Operated by affiliates.............. 4,639 4,272 3,928 1,211
------- ------- ------- -------
Systemwide sales.................... $33,638 $31,812 $29,914 $14,330
======= ======= ======= =======
</TABLE>
While U.S. comparable sales were slightly positive in 1997, average annual
sales at U.S. restaurants in operation at least 13 consecutive months declined
slightly to $1,425,000. Average sales are affected by several factors:
comparable sales, the size of new restaurants and the expansion rate.
Expansion affects average sales as new restaurants historically have taken
about four years to reach long-term volumes.
While international constant currency comparable sales declined only
slightly in 1997, average annual sales at restaurants in operation at least 13
consecutive months decreased $327,000 to $1,830,000. Nearly half of this
decline was due to foreign currency translation. An additional 30% was due to
more satellite restaurants which typically have significantly lower sales
volumes than traditional restaurants. Finally, average sales have trended
lower as we have accelerated expansion and opened more restaurants in lower
density areas and countries with lower average sales. Generally, our
investment costs are lower for restaurants with lower sales volumes.
TOTAL REVENUES
Total revenues include sales by Company-operated restaurants and fees from
restaurants operated by franchisees and affiliates. These fees include rent,
service fees and royalties that are based on a percent of sales with specified
minimum payments along with initial fees. Fees vary by type of site and
investment by the Company, and also according to local business conditions.
These fees, along with occupancy and operating rights, are stipulated in
franchise agreements that generally have 20-year terms.
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 impact because of different pricing structures,
new products, promotions and product mix variations among restaurants and
markets.
10
<PAGE>
Revenues increased at a faster rate than Systemwide sales in 1997 and 1996.
This was primarily due to the weakening Japanese Yen, which negatively
affected sales more than revenues due to our affiliate structure in Japan, and
the higher growth rate in Company-operated versus franchised restaurants.
U.S. operating results
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues
Sales by Company-operated
restaurants................... $2,691 $2,776 $2,725 $2,550 $2,420
Revenues from franchised and
affiliated restaurants........ 1,912 1,814 1,749 1,606 1,511
------ ------ ------ ------ ------
Total revenues............... 4,603 4,590 4,474 4,156 3,931
------ ------ ------ ------ ------
Operating costs and expenses
Company-operated restaurants... 2,246 2,317 2,244 2,066 1,977
Franchised restaurants......... 361 334 304 270 247
Selling, general and
administrative expenses....... 788 740 682 628 569
Other operating (income) ex-
pense--net.................... (3) 55* (8) (25) (18)
------ ------ ------ ------ ------
Total operating costs and
expenses.................... 3,392 3,446* 3,222 2,939 2,775
------ ------ ------ ------ ------
U.S. operating income............ $1,211 $1,144* $1,252 $1,217 $1,156
====== ====== ====== ====== ======
</TABLE>
- --------
*Includes the $72 million special charge.
U.S. revenues increased $13 million in 1997 and $116 million in 1996. The
slower revenue growth in 1997 was primarily because the number of U.S.
Company-operated restaurants decreased over the past year, while the number of
franchised and affiliated restaurants increased. Lower initial fees resulting
from fewer openings also contributed to the slower revenue growth.
In 1997, Europe accounted for 34% of consolidated revenues. This region's
revenues grew $318 million in 1997, compared with growth of $391 million in
1996. In 1997, the growth was primarily driven by strong sales in England,
Italy and Russia.
Asia/Pacific's revenues grew $250 million and $262 million in 1997 and 1996,
respectively. In 1997, the consolidation of Singapore, due to increased
ownership, along with continued strong results in Taiwan, helped to advance
revenues. Difficult economic conditions in certain markets during the latter
half of 1997 dampened this increase.
Latin America's revenues grew $114 million in 1997 and $89 million in 1996.
The 1997 growth was primarily due to accelerated expansion in Brazil and
Chile's ownership change from an affiliate to a wholly-owned subsidiary.
11
<PAGE>
Operating results outside the U.S.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues
Sales by Company-operated
restaurants.................. $5,445 $4,795 $4,139 $3,242 $2,737
Revenues from franchised and
affiliated restaurants....... 1,361 1,301 1,182 923 740
------ ------ ------ ------ ------
Total revenues.............. 6,806 6,096 5,321 4,165 3,477
------ ------ ------ ------ ------
Operating costs and expenses
Company-operated restaurants.. 4,404 3,846 3,304 2,579 2,188
Franchised restaurants........ 253 236 211 165 133
Selling, general and adminis-
trative expenses............. 601 574 507 408 335
Other operating (income) ex-
pense--net................... (111) (101)* (98) (59) (44)
------ ------ ------ ------ ------
Total operating costs and
expenses................... 5,147 4,555* 3,924 3,093 2,612
------ ------ ------ ------ ------
Operating income outside the
U.S............................ $1,659 $1,541* $1,397 $1,072 $ 865
====== ====== ====== ====== ======
</TABLE>
- --------
*Includes the $16 million asset impairment charge.
COMPANY-OPERATED MARGINS
Company-operated margins equal sales by Company-operated restaurants less
the operating costs of these restaurants. Consolidated Company-operated
margins were 18.3% of sales in 1997, 18.6% in 1996 and 19.2% in 1995.
Operating cost trends as a percent of sales were as follows: food & paper
costs increased in 1997 and decreased in 1996; payroll costs decreased in 1997
and were relatively flat in 1996; and occupancy & other operating costs
increased in both years.
U.S. Company-operated margins were 16.5% of sales in 1997 and 1996, and
17.7% in 1995. Stable margins as a percent of sales in 1997 reflected higher
food & paper costs related primarily to the Deluxe Line, lower payroll costs
related to enhanced labor efficiencies and lower occupancy & other operating
costs. The decline in the margin as a percent of sales in 1996 was driven by
higher payroll costs, primarily due to increases in average hourly rates, and
higher occupancy & other operating costs, partly offset by lower food & paper
costs.
Outside the U.S., Company-operated margins were 19.1% of sales in 1997,
compared with 19.8% in 1996 and 20.2% in 1995. In 1997, increases in food &
paper costs as well as occupancy & other operating costs as a percent of sales
offset a decrease in payroll costs. The decline in the 1996 margin as a
percent of sales was due to an increase in occupancy & other operating costs,
while food & paper costs and payroll costs were flat.
FRANCHISED MARGINS
Franchised margin dollars equal revenues from franchised and affiliated
restaurants less the Company's occupancy costs (rent and depreciation)
associated with these sites. Franchised margin dollars represented about two-
thirds of the combined operating margin in both 1997 and 1996.
Consolidated franchised margins were 81.2% of applicable revenues in 1997,
81.7% in 1996 and 82.4% in 1995. Franchised margins in the U.S. were 81.1% of
revenues in 1997, 81.6% in 1996 and 82.6% in 1995. Outside the U.S.,
franchised margins were 81.4% of revenues in 1997, 81.8% in 1996 and 82.1% in
1995.
12
<PAGE>
Franchised margins as a percent of applicable revenues declined in 1997 and
in 1996, primarily due to a higher proportion of leased sites. For leased
sites, financing costs implicit in the lease are included in rent expense,
which affects these margins; for owned sites, financing costs are reflected in
interest expense, which does not affect these margins. The 1997 decline in the
U.S. franchised margin also reflected lower initial fees resulting from fewer
openings, and rent adjustments.
Franchised margins include revenues from restaurants operating under
business facilities lease arrangements, net of the Company's expenses for
these sites. Under these arrangements, the Company leases the businesses,
including equipment, to franchisees who have options to purchase the
businesses. Higher fees are charged, but margin percentages 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 729 restaurants
operating under such arrangements at year-end 1997, compared with 627 in 1996
and 491 in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Increases in selling, general and administrative expenses in 1997 and 1996
were primarily due to strategic global spending to support value initiatives,
execution strategies and restaurant development, offset in part by weaker
foreign currencies. The spending included continued investment in developing
countries and support of special marketing efforts and new food initiatives in
the U.S. While expenses have been relatively constant as a percent of
Systemwide sales at 4.3% in 1997 and 1996, and 4.1% in 1995, our goal is to
reduce expenses as a percent of sales.
OTHER OPERATING (INCOME) EXPENSE--NET
Other operating (income) expense--net 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 food
service business.
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. These transactions are
an integral part of our franchising business 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 due to restaurant closings, relocations and other transactions.
The increase in other operating income in 1997 was principally due to the
1996 $16 million asset impairment charge related to certain restaurant sites
in Mexico and the 1996 $72 million special charge. The special charge 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.
Equity in earnings of unconsolidated affiliates declined in 1997 and 1996
due to the weakening Japanese Yen and increased ownership of certain foreign
markets, changing their classification from affiliates to majority or wholly-
owned subsidiaries. Additionally in 1997, gains on sales of restaurant
businesses were lower, whereas in 1996, they were higher than the previous
year. Lower provisions for property dispositions increased other operating
income in 1996, compared with 1995.
13
<PAGE>
OPERATING INCOME
Operating income increased $176 million or 7% to $2.8 billion in 1997, and
$31 million or 1% to $2.6 billion in 1996. Excluding the 1996 asset impairment
and special charges, operating income increased 3% in 1997 and 5% in 1996. The
increases in 1997 and 1996 were due to higher combined operating margin
dollars, offset in part by weaker foreign currencies, higher selling, general
and administrative expenses, and in 1997, lower gains on sales of restaurant
businesses.
In 1997, 92% of operating income was from the major markets, compared with
94% in 1996.
U.S. operating income rose $67 million or 6% in 1997 and decreased $108
million or 9% in 1996. Excluding the 1996 special charge, U.S. operating
income was flat in 1997 and decreased 3% in 1996. In 1997, higher U.S.
franchised margin dollars were offset by lower Company-operated margin dollars
and higher selling, general and administrative expenses. In 1996, higher U.S.
franchised margin dollars only partly offset lower Company-operated margin
dollars and higher selling, general and administrative expenses.
Outside the U.S., operating income rose $118 million or 8% in 1997 and $144
million or 10% in 1996. This growth was driven by higher combined operating
margin dollars resulting from expansion in 1997 and 1996. In both years,
weaker foreign currencies and higher selling, general and administrative
expenses partly offset these increases. In 1997, the Deutsche Mark, French
Franc and Japanese Yen were the primary currencies affecting reported results.
Additionally, 1996 results were negatively impacted by the $16 million asset
impairment charge related to certain restaurant sites in Mexico.
In 1997, Europe accounted for 36% of consolidated operating income. Europe's
operating income grew $54 million in 1997 and $115 million in 1996. Weaker
currencies offset this region's operating income increase in 1997 by 9% or $82
million, and by 4% or $30 million in 1996. Strong operating results in
England, Italy, Spain and Sweden, as well as in France in the last half of the
year, drove the increase in operating income in 1997. Difficult economies,
primarily in Germany, contributed to the decline in the growth rate in 1997.
England, France and Germany accounted for 77% of Europe's operating income in
1997, compared with 80% in 1996.
Asia/Pacific's operating income grew $14 million in 1997 and $46 million in
1996. Weaker currencies offset this region's operating income increase in 1997
by 7% or $24 million, and by 2% or $5 million in 1996. Difficult economic
conditions in many of the markets during the second half of the year
contributed to the decline in growth in 1997. This was partly offset by strong
operating results in Taiwan and the Philippines, and the change in ownership
of our Singapore operations. Australia, Hong Kong, Japan and Taiwan
contributed about 90% of Asia/Pacific's operating income in both years.
Latin America's operating income increased $37 million in 1997 and decreased
$3 million in 1996, excluding the $16 million asset impairment charge for
Mexico in 1996. Continued expansion of the restaurant base, as well as an
increase in constant currency comparable sales, drove improved results across
this segment.
INTEREST EXPENSE
Higher average debt levels, partly offset by weaker foreign currencies and
lower average interest rates, accounted for the 1997 and 1996 increases in
interest expense.
NONOPERATING (INCOME) EXPENSE--NET
Nonoperating (income) expense--net includes interest income, gains and
losses related to other investments and financings, and miscellaneous income
and expense. In 1997, interest income and translation gains were lower than in
1996. In 1996, translation gains were higher than in 1995. Additionally, this
category included losses of $22 million in 1996 and $60 million in 1995
associated with the reduction of the carrying value of the Company's
investment in Discovery Zone common stock to zero.
14
<PAGE>
PROVISION FOR INCOME TAXES
The effective income tax rate was 31.8% for 1997, compared with 30.1% for
1996 and 34.2% for 1995. A $50 million tax benefit resulting from certain
international transactions was primarily responsible for the unusually low
rate in 1996. The Company expects its 1998 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 $451 million in 1997 and $305 million in 1996.
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 increased 4% in 1997, while net income per common share and net
income per common share on a diluted basis increased 6%. In 1996, net income
increased 10%, while net income per common share and net income per common
share on a diluted basis increased 12%. The spread between the percent
increases in net income and net income per common share in each year reflected
the positive effects of share repurchases and lower preferred dividends
compared with the prior year.
IMPACT OF CHANGING FOREIGN CURRENCIES
The following table presents the reported results for 1997 and 1996 compared
with those results translated at the respective prior year rates:
<TABLE>
<CAPTION>
AS REPORTED AS ADJUSTED
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN BILLIONS, EXCEPT PER COMMON
SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Systemwide sales................. $33.6 6% $31.8 6% $35.0 10% $32.4 8%
Revenues......................... 11.4 7 10.7 9 11.8 11 10.8 10
Operating income................. 2.8 7 2.6 1 2.9 11 2.7 3
Net income....................... 1.6 4 1.6 10 1.7 8 1.6 11
Net income per common share...... 2.35 6 2.21 12 2.43 10 2.23 13
Net income per common share--
diluted......................... 2.29 6 2.16 12 2.37 10 2.17 13
</TABLE>
- -------------------------------------------------------------------------------
FINANCIAL POSITION AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
TOTAL ASSETS AND CAPITAL EXPENDITURES
Total assets grew $856 million or 5% in 1997, and $2 billion or 13% in 1996.
In 1997 and 1996, 81% of consolidated assets were located in our major markets
excluding our affiliate Japan. Net property and equipment rose $609 million in
1997 and represented 82% of total assets at year end.
Capital expenditures decreased $264 million or 11% in 1997, reflecting fewer
restaurant additions combined with weaker foreign currencies. In 1997,
approximately 73% of capital expenditures was invested in our major markets
excluding Japan, compared with 78% in 1996. U.S. capital expenditures declined
$300 million in 1997, while capital expenditures outside the U.S. increased
slightly. In 1997, 72% of capital expenditures was invested in markets outside
the U.S., compared with 63% in 1996 and 56% in 1995.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New restaurants................... $ 1,531 $ 1,799 $ 1,550 $ 1,181 $ 925
Existing restaurants.............. 433 350 355 211 211
Other properties.................. 147 226 159 147 181
------- ------- ------- ------- -------
Capital expenditures.............. $ 2,111 $ 2,375 $ 2,064 $ 1,539 $ 1,317
======= ======= ======= ======= =======
Total assets.................. $18,242 $17,386 $15,415 $13,592 $12,035
======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
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. The increase in capital expenditures
for existing restaurants in 1997 was primarily due to additional remodels and
rebuilds of certain older restaurants.
Other properties primarily included expenditures for office buildings and
related computer equipment and furnishings.
In the U.S., average development costs for traditional restaurants, which
include land, building and equipment costs, increased in 1997 to $1,290,000,
compared with $1,176,000 in 1996 and $1,151,000 in 1995. The increases were
primarily due to higher site development and preparation costs.
Average development costs for traditional restaurants in our major markets
outside the U.S., excluding Japan, were approximately $1.8 million in 1997.
Average costs vary widely by market depending on the types of restaurants
built and the real estate and construction costs within each market. These
costs are managed through the use of smaller restaurants in some countries,
construction and design efficiencies, standardization and global sourcing.
The Company intends to continue managing development costs relative to sales
volumes through greater economies of scale globally and through co-branded oil
locations, primarily in the U.S. Our objective is to profitably expand,
consistent with our goal of increasing market share, and achieve greater
marketwide presence throughout the world. Accordingly, the Company will
continue to investigate opportunities to employ capital in its U.S. business
most effectively. The trend in the U.S. is to lease more sites. Outside the
U.S., property is purchased when legally and economically feasible; otherwise,
long-term leases are used. Including affiliates, total real estate ownership
was 45% and 48% at year-end 1997 and 1996, respectively.
Capital expenditures made by affiliates--which were not included in
consolidated amounts--were approximately $360 million in 1997, compared with
$410 million in 1996. The decrease was partly due to weaker foreign currencies
and our increased ownership in Chile and Singapore, converting them from
affiliates to majority or wholly-owned subsidiaries. Expansion in Argentina,
Japan, Korea, the Philippines and Sweden continued to drive affiliate capital
expenditures.
CASH PROVIDED BY OPERATIONS
The Company generates significant cash from operations and has substantial
borrowing capacity to meet its operating and discretionary spending
requirements. Free cash flow grew to $331 million in 1997, compared with $86
million in 1996. Cash provided by operations decreased slightly in 1997,
primarily due to the one time refund of U.S. franchisee security deposits of
approximately $110 million. Excluding the effect of the refunds, cash provided
by operations increased $91 million or 4%. 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 1997 for the seventh
consecutive year and is expected to more than cover capital expenditures over
the next several years.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash provided by operations...... $2,442 $2,461 $2,296 $1,926 $1,680
Free cash flow................... 331 86 233 388 363
Cash provided by operations as a
percent of capital expenditures. 116% 104% 111% 125% 128%
Cash provided by operations as a
percent of average total debt... 41 48 49 48 44
</TABLE>
16
<PAGE>
In addition to its free cash flow, the Company can meet short-term needs
through commercial paper borrowings and line of credit agreements.
Accordingly, the Company maintains a relatively low current ratio--.38 at
year-end 1997.
FINANCINGS AND MARKET RISK
The Company is exposed to the impact of interest rate changes and foreign
currency fluctuations. McDonald's strives to minimize these risks by financing
with debt in the currencies in which assets are denominated and employing
established policies and procedures to manage this exposure. See pages 25 and
26 for additional information.
The Company uses major capital markets and various techniques to meet its
financing requirements and reduce interest expense. 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. We also manage the level of fixed-rate debt to take advantage of
changes in interest rates.
The Company uses foreign currency debt to hedge intercompany financings and
long-term investments in foreign subsidiaries and affiliates. This reduces the
impact of fluctuating foreign currencies on net income and shareholders'
equity. Total foreign-denominated debt, including the effects of currency
exchange agreements, was $5.0 billion and $4.9 billion at year-end 1997 and
1996, respectively.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(AS A PERCENT)
<S> <C> <C> <C> <C> <C>
Fixed-rate debt as a percent of total debt...... 49% 68% 67% 64% 77%
Weighted-average annual interest rate of total
debt........................................... 6.8 7.1 7.9 8.4 9.1
Foreign currency-denominated debt as a percent
of total debt.................................. 80 90 89 92 86
Total debt as a percent of total capitalization
(total debt and total shareholders' equity).... 42 39 38 39 37
</TABLE>
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 obtaining financing or refinancing
existing debt. At year-end 1997, the Company and its subsidiaries had $1.5
billion available under committed line of credit agreements and $1.0 billion
under shelf registrations for future debt issuance. In January 1998, the
Company issued $150 million Debentures at 6.38% due 2028 and $200 million
Medium Term Notes at 5.95% due 2008 under the shelf registrations.
The Company manages its debt portfolio in response to changes in interest
rates and foreign currency rates 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 derivatives
for trading purposes. All exchange agreements are over-the-counter
instruments.
The Company actively hedges selected currencies to minimize the effect of
fluctuating foreign currencies on reported results and to minimize the cash
exposure of foreign currency royalty and other payments received in the U.S.
In addition, where practical, McDonald's restaurants purchase goods and
services 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 1997 and 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:
17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1997 1996
---- ----
(IN
MILLIONS
OF U.S.
DOLLARS)
<S> <C> <C>
British Pounds Sterling........................................ $590 $394
Canadian Dollars............................................... 528 393
Australian Dollars............................................. 298 309
Brazilian Reais*............................................... 281
French Francs.................................................. 194 179
Hong Kong Dollars.............................................. 144 112
Austrian Schillings............................................ 91 88
</TABLE>
- --------
* Brazil was considered a hyperinflationary market at December 31, 1996.
The Company prepared sensitivity analyses of its financial instruments to
determine the impact of hypothetical changes in interest rates and foreign
currency exchange rates on the Company's results of operations, cash flows and
the fair value of its financial instruments. The interest rate analysis
assumed a one percentage point adverse change in interest rates on all
financial instruments but did not consider the effects of the reduced level of
economic activity that could exist in such an environment. The foreign
currency rate analysis assumed that each foreign currency rate would change by
10% in the same direction relative to the U.S. Dollar on all financial
instruments; however, the analysis did not include the potential impact on
sales levels or local currency prices or the effect of fluctuating currencies
on the Company's anticipated foreign currency royalties and other payments
received in the U.S. Based on the results of these analyses of the Company's
financial instruments, neither a one percentage point adverse change in
interest rates from year-end 1997 levels nor a 10% adverse change in foreign
currency rates from year-end 1997 levels would materially affect the Company's
results of operations, cash flows or the fair value of its financial
instruments.
TOTAL SHAREHOLDERS' EQUITY
Total shareholders' equity rose $133 million or 2% in 1997, and represented
49% of total assets at year end. Weaker foreign currencies decreased
shareholders' equity by $295 million in 1997.
One way to enhance common shareholder value is by using free cash flow and
debt capacity to repurchase shares. Since 1987, the Company has invested $3.8
billion to buy back 146 million shares at an average price of approximately
$26, while maintaining a strong equity base. At year-end 1997, the Company
held 145 million shares in treasury with a market value of $6.9 billion.
In January 1996, the Company announced plans to repurchase $2.0 billion of
its common stock by year-end 1998. As of year-end 1997, we had purchased $1.2
billion of this amount, including 16.2 million shares for $765 million in
1997. The Company repurchased a total of $605 million of its common stock in
1996, $206 million of which completed our previous share repurchase program.
RETURNS
Operating income is used to compute return on average assets, while net
income less preferred stock dividends (net of applicable taxes) is used to
calculate return on average common equity. Month-end balances are used to
compute both average assets and average common equity.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(AS A PERCENT)
<S> <C> <C> <C> <C> <C>
Return on average assets................... 16.0% 16.3%* 17.9% 17.6% 17.0%
Return on average common equity............ 19.0 19.5 19.9 19.4 19.0
</TABLE>
- --------
*Includes the $72 million special charge.
18
<PAGE>
Return on assets declined in 1997, as the increase in average assets
outpaced the growth in operating income. Return on common equity also declined
in 1997, as the increase in average equity exceeded net income growth.
- -------------------------------------------------------------------------------
OTHER MATTERS
- -------------------------------------------------------------------------------
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 with inflation, mitigating the effect on reported
results.
YEAR 2000
Many computer systems and applications currently use two digits to define
the applicable year. As a result, date-sensitive systems may recognize the
year 2000 as 1900 or not at all, which could cause miscalculations or system
failures.
The Company has assessed its computerized systems to determine their ability
to correctly identify the year 2000 and is devoting the necessary internal and
external resources to replace, upgrade or modify all significant systems which
do not correctly identify the year 2000. We anticipate that all of our systems
will be year 2000 compliant well before the end of 1999. In addition, the
Company has determined the extent to which its operations may be affected by
the compliance efforts of its significant suppliers and is taking the
necessary steps to minimize problems.
Based on current information, the costs of addressing the year 2000 issue
have not and are not expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements are included in this 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 the success of operating initiatives and advertising and
promotional efforts and changes in: global and local business and economic
conditions; currency exchange and interest rates; food, labor and other
operating costs; political or economic instability in local markets;
competition; consumer preferences, spending patterns and demographic trends;
availability and cost of land and construction; legislation and governmental
regulation; and accounting policies and practices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are included in
Part II, Item 7, pages 17 and 18 of this Form 10-K.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Consolidated statement of income for each of the three years in the
period ended December 31, 1997...................................... 21
Consolidated balance sheet at December 31, 1997 and 1996............. 22
Consolidated statement of cash flows for each of the three years in
the period ended December 31, 1997.................................. 23
Consolidated statement of shareholders' equity for each of the three
years in the period ended December 31, 1997......................... 24
Notes to consolidated financial statements (Financial comments)...... 25-37
Quarterly results (unaudited)........................................ 38
Management's report.................................................. 39
Report of independent auditors....................................... 40
</TABLE>
20
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- --------
(IN MILLIONS, EXCEPT
PER COMMON SHARE DATA)
<S> <C> <C> <C>
Revenues
Sales by Company-operated restaurants........ $ 8,136.5 $ 7,570.7 $6,863.5
Revenues from franchised and affiliated
restaurants................................. 3,272.3 3,115.8 2,931.0
--------- --------- --------
Total revenues........................... 11,408.8 10,686.5 9,794.5
--------- --------- --------
Operating costs and expenses
Company-operated restaurants
Food and packaging......................... 2,772.6 2,546.6 2,319.4
Payroll and other employee benefits........ 2,025.1 1,909.8 1,730.9
Occupancy and other operating expenses..... 1,851.9 1,706.8 1,497.4
--------- --------- --------
6,649.6 6,163.2 5,547.7
--------- --------- --------
Franchised restaurants--occupancy expenses... 613.9 570.1 514.9
Selling, general and administrative expenses. 1,450.5 1,366.4 1,236.3
Other operating (income) expense--net........ (113.5) (45.8) (105.7)
--------- --------- --------
Total operating costs and expenses....... 8,600.5 8,053.9 7,193.2
--------- --------- --------
Operating income............................... 2,808.3 2,632.6 2,601.3
--------- --------- --------
Interest expense--net of capitalized interest
of $22.7, $22.2 and $22.5................... 364.4 342.5 340.2
Nonoperating (income) expense--net........... 36.6 39.1 92.0
--------- --------- --------
Income before provision for income taxes....... 2,407.3 2,251.0 2,169.1
--------- --------- --------
Provision for income taxes..................... 764.8 678.4 741.8
--------- --------- --------
Net income..................................... $ 1,642.5 $ 1,572.6 $1,427.3
========= ========= ========
Net income per common share.................... $ 2.35 $ 2.21 $ 1.97
Net income per common share--diluted........... 2.29 2.16 1.93
Dividends per common share..................... $ .32 $ .29 $ .26
Weighted average shares........................ 689.3 698.2 701.5
Weighted average shares--diluted............... 705.1 716.6 717.7
</TABLE>
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
21
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN MILLIONS,
EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents................................... $ 341.4 $ 329.9
Accounts and notes receivable.......................... 483.5 495.4
Inventories, at cost, not in excess of market.......... 70.5 69.6
Prepaid expenses and other current assets.............. 246.9 207.6
--------- ---------
Total current assets................................. 1,142.3 1,102.5
--------- ---------
Other assets
Notes receivable due after one year.................... 67.0 85.3
Investments in and advances to affiliates.............. 634.8 694.0
Intangible assets--net................................. 827.5 747.0
Miscellaneous.......................................... 608.5 405.1
--------- ---------
Total other assets................................... 2,137.8 1,931.4
--------- ---------
Property and equipment
Property and equipment, at cost........................ 20,088.2 19,133.9
Accumulated depreciation and amortization.............. (5,126.8) (4,781.8)
--------- ---------
Net property and equipment........................... 14,961.4 14,352.1
--------- ---------
Total assets......................................... $18,241.5 $17,386.0
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable.......................................... $ 1,293.8 $ 597.8
Accounts payable....................................... 650.6 638.0
Income taxes........................................... 52.5 22.5
Other taxes............................................ 148.5 136.7
Accrued interest....................................... 107.1 121.7
Other accrued liabilities.............................. 396.4 523.1
Current maturities of long-term debt................... 335.6 95.5
--------- ---------
Total current liabilities............................ 2,984.5 2,135.3
--------- ---------
Long-term debt........................................... 4,834.1 4,830.1
Other long-term liabilities and minority interests....... 427.5 726.5
Deferred income taxes.................................... 1,063.5 975.9
Common equity put options................................ 80.3
Shareholders' equity
Preferred stock, no par value; authorized--165.0
million shares; issued, 1997--none; 1996--7.2
thousand.............................................. 358.0
Common stock--$.01 par value; authorized--3.5 billion
shares; issued--830.3 million......................... 8.3 8.3
Additional paid-in capital............................. 699.2 574.2
Guarantee of ESOP Notes................................ (171.3) (193.2)
Retained earnings...................................... 12,569.0 11,173.0
Accumulated other comprehensive income................. (470.5) (175.1)
Common stock in treasury, at cost; 144.6 and 135.7
million shares........................................ (3,783.1) (3,027.0)
--------- ---------
Total shareholders' equity........................... 8,851.6 8,718.2
--------- ---------
Total liabilities and shareholders' equity........... $18,241.5 $17,386.0
========= =========
</TABLE>
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
22
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Operating activities
Net income.................................. $ 1,642.5 $ 1,572.6 $ 1,427.3
Adjustments to reconcile to cash provided by
operations
Depreciation and amortization............. 793.8 742.9 709.0
Deferred income taxes..................... (1.1) 32.9 (4.2)
Changes in operating working capital items
Accounts receivable increase............ (57.6) (77.5) (49.5)
Inventories, prepaid expenses and other
current assets increase................ (34.5) (18.7) (20.4)
Accounts payable increase............... 52.8 44.5 52.6
Taxes and other liabilities increase.... 221.9 121.4 171.3
Refund of U.S. franchisee security
deposits................................. (109.6)
Other..................................... (65.9) 42.9 10.1
--------- --------- ---------
Cash provided by operations........... 2,442.3 2,461.0 2,296.2
--------- --------- ---------
Investing activities
Property and equipment expenditures......... (2,111.2) (2,375.3) (2,063.7)
Purchases of restaurant businesses.......... (113.6) (137.7) (110.1)
Sales of restaurant businesses.............. 149.5 198.8 151.6
Property sales.............................. 26.9 35.5 66.2
Other....................................... (168.8) (291.6) (153.0)
--------- --------- ---------
Cash used for investing activities.... (2,217.2) (2,570.3) (2,109.0)
--------- --------- ---------
Financing activities
Net short-term borrowings (repayments)...... 1,097.4 228.8 (272.9)
Long-term financing issuances............... 1,037.9 1,391.8 1,250.2
Long-term financing repayments.............. (1,133.8) (841.3) (532.2)
Treasury stock purchases.................... (755.1) (599.9) (314.5)
Common and preferred stock dividends........ (247.7) (232.0) (226.5)
Series E preferred stock redemption......... (358.0)
Other....................................... 145.7 157.0 63.6
--------- --------- ---------
Cash provided by (used for) financing
activities........................... (213.6) 104.4 (32.3)
--------- --------- ---------
Cash and equivalents increase (decrease)...... 11.5 (4.9) 154.9
--------- --------- ---------
Cash and equivalents at beginning of year..... 329.9 334.8 179.9
--------- --------- ---------
Cash and equivalents at end of year........... $ 341.4 $ 329.9 $ 334.8
========= ========= =========
Supplemental cash flow disclosures
Interest paid............................... $ 401.7 $ 369.0 $ 331.0
Income taxes paid........................... $ 650.8 $ 558.1 $ 667.6
</TABLE>
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
23
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ACCUMULATED COMMON STOCK IN
ISSUED* ISSUED ADDITIONAL GUARANTEE OTHER TREASURY TOTAL
--------- ------------- PAID-IN OF ESOP RETAINED COMPREHENSIVE ----------------- SHAREHOLDERS'
AMOUNT SHARES AMOUNT CAPITAL NOTES EARNINGS INCOME SHARES AMOUNT EQUITY
--------- ------ ------ ---------- --------- --------- ------------- ------ --------- -------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1994........... $ 674.2 830.3 $ 92.3 $286.0 $(234.4) $ 8,625.9 $(114.9) (136.6) $(2,443.7) $6,885.4
------- ----- ------ ------ ------- --------- ------- ------ --------- --------
Net income...... 1,427.3 1,427.3
Translation
adjustments
(including
taxes of $9.0). 27.8 27.8
--------
Comprehensive
income......... 1,455.1
Common stock
cash dividends
($.26 per
share)......... (181.4) (181.4)
Preferred stock
cash dividends
(per share:
$1.01 for
Series B, $1.16
for Series C
and $1.93 for
Series E
depositary
share; net of
tax benefits of
$1.6).......... (40.5) (40.5)
Preferred stock
conversion..... (316.2) 25.3 8.8 144.6 (146.3)
ESOP Notes
payment........ 19.0 19.0
Treasury stock
acquisitions... (8.8) (321.0) (321.0)
Common equity
put options
expiration..... 56.2 56.2
Stock option
exercises and
other
(including tax
benefits of
$42.2)......... 76.1 1.2 6.0 57.5 134.8
------- ----- ------ ------ ------- --------- ------- ------ --------- --------
Balance at
December 31,
1995........... 358.0 830.3 92.3 387.4 (214.2) 9,831.3 (87.1) (130.6) (2,506.4) 7,861.3
------- ----- ------ ------ ------- --------- ------- ------ --------- --------
Net income...... 1,572.6 1,572.6
Translation
adjustments
(including tax
benefits of
$50.6)......... (88.0) (88.0)
--------
Comprehensive
income......... 1,484.6
Common stock
cash dividends
($.29 per
share)......... (203.3) (203.3)
Preferred stock
cash dividends
($1.93 per
Series E
depositary
share)......... (27.6) (27.6)
Conversion to
$.01 par value
stock.......... (84.0) 84.0
ESOP Notes
payment........ 20.2 20.2
Treasury stock
acquisitions... (12.9) (604.8) (604.8)
Stock option
exercises and
other
(including tax
benefits of
$86.4)......... 102.8 0.8 7.8 84.2 187.8
------- ----- ------ ------ ------- --------- ------- ------ --------- --------
Balance at
December 31,
1996........... 358.0 830.3 8.3 574.2 (193.2) 11,173.0 (175.1) (135.7) (3,027.0) 8,718.2
------- ----- ------ ------ ------- --------- ------- ------ --------- --------
Net income...... 1,642.5 1,642.5
Translation
adjustments
(including tax
benefits of
$104.0)........ (295.4) (295.4)
--------
Comprehensive
income......... 1,347.1
Common stock
cash dividends
($.32 per
share)......... (221.2) (221.2)
Preferred stock
cash dividends
($1.93 per
Series E
depositary
share)......... (25.3) (25.3)
ESOP Notes
payment........ 21.4 21.4
Treasury stock
acquisitions... (16.2) (765.0) (765.0)
Common equity
put options
issuance....... (80.3) (80.3)
Series E
preferred stock
redemption..... (358.0) (358.0)
Stock option
exercises and
other
(including tax
benefits of
$79.2)......... 125.0 0.5 7.3 89.2 214.7
------- ----- ------ ------ ------- --------- ------- ------ --------- --------
Balance at
December 31,
1997........... $ 0.0 830.3 $ 8.3 $699.2 $(171.3) $12,569.0 $(470.5) (144.6) $(3,783.1) $8,851.6
======= ===== ====== ====== ======= ========= ======= ====== ========= ========
</TABLE>
- -------
*At December 31, 1996 and 1995, 7.2 thousand shares were outstanding. These
shares were redeemed in 1997.
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
24
<PAGE>
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 in selling, general and administrative
expenses were (in millions): 1997-$548.7; 1996-$503.3; 1995-$431.0.
STOCK OPTIONS
The Company accounts for stock options as prescribed by APB Opinion No. 25
and includes pro forma information in the Stock options footnote, as permitted
by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, with depreciation and
amortization provided using 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 using the straight-line method over an average
life of about 30 years.
FINANCIAL INSTRUMENTS
The Company uses derivatives to manage risk, 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 translation adjustments from gains and losses on
hedges of long-term investments are recorded in shareholders' equity as other
comprehensive income. 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.
25
<PAGE>
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 exchange agreements 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) which are effective as hedges of anticipated foreign currency
royalty and other payments received in the U.S. The premiums paid for these
options are amortized over the option life. Any realized gains on exercised
options are deferred and recognized 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 royalty and other payments received from
affiliates and subsidiaries. These contracts are marked to market with the
resulting gains or losses recorded in nonoperating (income) expense--net.
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 another 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.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement
requires the Company to recognize impairment losses 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 is based on projected undiscounted future cash flows. The adoption of
this standard in 1996 resulted in a $16.0 million pre-tax charge to operating
income related to certain restaurant sites in Mexico.
NET INCOME PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, Earnings per Share. This
statement requires the Company to disclose diluted net income per common
share, which includes the dilutive effect of stock options, in addition to
previously reported basic net income per common share. All net income per
share amounts have been presented to conform to the SFAS 128 requirements.
COMPREHENSIVE INCOME
In 1997, the Company adopted SFAS No. 130, Reporting Comprehensive Income.
This statement establishes rules for the reporting of comprehensive income and
its components. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated
Statement of Shareholders' Equity. The adoption of SFAS 130 had no impact on
total shareholders' equity. Prior year financial statements have been
reclassified to conform to the SFAS 130 requirements.
SEGMENT DISCLOSURES
In 1997, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers.
26
<PAGE>
OTHER OPERATING (INCOME) EXPENSE--NET
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Gains on sales of restaurant businesses........ $ (59.0) $(85.2) $ (63.9)
Equity in earnings of unconsolidated
affiliates.................................... (72.8) (76.8) (96.5)
Net losses from property dispositions.......... 29.1 41.1 49.2
Other--net..................................... (10.8) 3.1 5.5
Special charge................................. 72.0
------- ------ -------
Other operating (income) expense--net.......... $(113.5) $(45.8) $(105.7)
======= ====== =======
</TABLE>
Net losses from property dispositions in 1996 included $16.0 million for
certain restaurant sites in Mexico, upon the adoption of SFAS 121. The special
charge of $72.0 million 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.
EMPLOYEE BENEFIT PLANS
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. Plan assets and contributions made by McDESOP participants can be
invested in McDonald's common stock or among several other investment
alternatives. The LESOP and Company contributions to McDESOP are invested in
McDonald's common stock.
Executives, staff and restaurant managers participate in profit-sharing
contributions and shares released under the LESOP, based on their
compensation. The profit-sharing contribution is discretionary, and the
Company determines the amount each year. Total U.S. costs for the above
program were (in millions):
1997-$57.6; 1996-$59.9; 1995-$55.8.
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): 1997-$34.1; 1996-$30.6; 1995-$26.6.
Other postretirement benefits and postemployment benefits were immaterial.
INCOME TAXES
Income before provision for income taxes, classified by source of income,
was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
U.S. and Corporate.......................... $1,004.6 $ 933.9 $1,026.2
Outside the U.S............................. 1,402.7 1,317.1 1,142.9
-------- -------- --------
Income before provision for income taxes.... $2,407.3 $2,251.0 $2,169.1
======== ======== ========
The provision for income taxes, classified by the timing and location of
payment, was as follows:
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
U.S. federal................................ $ 336.3 $ 260.0 $ 363.7
U.S. state.................................. 66.0 49.4 60.5
Outside the U.S............................. 363.6 336.1 321.8
-------- -------- --------
Current tax provision..................... 765.9 645.5 746.0
-------- -------- --------
U.S. federal................................ 2.5 (13.2) (17.6)
U.S. state.................................. 13.5 1.6 (3.9)
Outside the U.S............................. (17.1) 44.5 17.3
-------- -------- --------
Deferred tax provision.................... (1.1) 32.9 (4.2)
-------- -------- --------
Provision for income taxes.................. $ 764.8 $ 678.4 $ 741.8
======== ======== ========
</TABLE>
27
<PAGE>
Net deferred tax liabilities consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
(IN MILLIONS)
<S> <C> <C>
Property and equipment basis differences............... $1,033.1 $ 986.2
Other.................................................. 426.0 236.7
-------- -------
Total deferred tax liabilities..................... 1,459.1 1,222.9
-------- -------
Deferred tax assets before valuation allowance......... (493.1) (348.5)
Valuation allowance.................................... 41.7 43.2
-------- -------
Net deferred tax liabilities(1)........................ $1,007.7 $ 917.6
======== =======
</TABLE>
- --------
(1) Net of current tax assets (in millions): 1997-$55.8; 1996-$58.3.
The statutory U.S. federal income tax rate reconciles to the effective
income tax rates as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate................. 35.0% 35.0% 35.0%
State income taxes, net of related federal income tax
benefit............................................... 2.1 1.5 1.7
Benefits and taxes related to foreign operations....... (5.2) (6.8) (2.9)
Other--net............................................. (.1) .4 .4
---- ---- ----
Effective income tax rates............................. 31.8% 30.1% 34.2%
==== ==== ====
</TABLE>
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 $1.8 billion at December 31, 1997, and
consisted primarily of undistributed earnings considered permanently invested
in the businesses. Determination of the deferred income tax liability on these
unremitted earnings is not practicable, since such liability, if any, is
dependent on circumstances existing when remittance occurs.
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Land................................................ $ 3,592.2 $ 3,566.0
Buildings and improvements on owned land............ 7,289.7 7,038.3
Buildings and improvements on leased land........... 6,168.3 5,735.5
Equipment, signs and seating........................ 2,345.1 2,148.4
Other............................................... 692.9 645.7
--------- ---------
Total property and equipment.................... 20,088.2 19,133.9
--------- ---------
Accumulated depreciation and amortization........... (5,126.8) (4,781.8)
--------- ---------
Net property and equipment.......................... $14,961.4 $14,352.1
========= =========
</TABLE>
Depreciation and amortization expense was (in millions): 1997-$726.4; 1996-
$673.4; 1995-$619.9. Contractual obligations for the acquisition and
construction of property totaled approximately $175.0 million at December 31,
1997.
LEASING ARRANGEMENTS
At December 31, 1997, the Company was lessee at 4,152 restaurant locations
through ground leases (the Company leases land and owns buildings) and at
5,257 restaurant locations through improved leases (the Company leases land
and buildings). Lease terms for most restaurants are generally for 20 to 25
years and, in
28
<PAGE>
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 including 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:
<TABLE>
<CAPTION>
RESTAURANT OTHER TOTAL
---------- ------ --------
(IN MILLIONS)
<S> <C> <C> <C>
1998........................................... $ 512.3 $ 46.5 $ 558.8
1999........................................... 494.4 39.5 533.9
2000........................................... 478.5 31.4 509.9
2001........................................... 460.9 26.8 487.7
2002........................................... 442.7 22.2 464.9
Thereafter..................................... 4,059.3 131.1 4,190.4
-------- ------ --------
Total minimum payments..................... $6,448.1 $297.5 $6,745.6
======== ====== ========
</TABLE>
Rent expense was (in millions): 1997-$641.2; 1996-581.6; 1995-$497.6. These
amounts included percent rents in excess of minimum rents (in millions): 1997-
$99.4; 1996-$91.4; 1995-$73.5.
29
<PAGE>
SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates exclusively in the food service industry. Substantially
all revenues result from the sale of menu products at restaurants operated by
the Company, franchisees or affiliates. The Company's reportable segments are
based on geographic area. All intercompany revenues and expenses are
eliminated in computing revenues and operating income. Operating income
includes the Company's share of operating results of affiliates after interest
expense. These amounts are also after income taxes for affiliates outside the
U.S. Royalties and other payments received from subsidiaries outside the U.S.
were (in millions): 1997-$470.6;
1996-$419.0; 1995-$358.4.
The corporate component of operating income represents corporate selling,
general and administrative expenses. Corporate assets include corporate cash,
investments, asset portions of financing instruments, deferred tax assets and
certain intangibles.
The Other segment includes Canada, Africa and the Middle East.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
U.S......................... $ 4,602.7 $ 4,590.3 $ 4,473.9
Europe...................... 3,931.5 3,613.8 3,223.1
Asia/Pacific................ 1,522.8 1,272.8 1,010.8
Latin America............... 709.2 595.7 506.9
Other....................... 642.6 613.9 579.8
--------- --------- ---------
Total revenues.......... $11,408.8 $10,686.5 $ 9,794.5
========= ========= =========
U.S......................... $ 404.0 $ 396.0 $ 380.0
Europe...................... 229.2 213.4 215.4
Asia/Pacific................ 82.8 66.4 57.2
Latin America............... 35.4 29.1 18.9
Other....................... 42.4 38.0 37.5
--------- --------- ---------
Total depreciation and
amortization........... $ 793.8 $ 742.9 $ 709.0
========= ========= =========
U.S......................... $ 1,210.8 $ 1,144.0 $ 1,252.4
Europe...................... 1,007.2 953.8 839.1
Asia/Pacific................ 369.1 355.1 308.8
Latin America............... 166.5 113.7 132.7
Other....................... 116.3 118.0 116.5
Corporate................... (61.6) (52.0) (48.2)
--------- --------- ---------
Total operating income.. $ 2,808.3 $ 2,632.6 $ 2,601.3
========= ========= =========
U.S......................... $ 7,753.4 $ 7,553.5 $ 7,040.2
Europe...................... 6,005.4 5,925.3 5,023.2
Asia/Pacific................ 2,125.6 2,111.8 1,815.5
Latin America............... 1,177.8 900.3 812.5
Other....................... 661.6 622.8 554.6
Corporate................... 517.7 272.3 168.6
--------- --------- ---------
Total assets............ $18,241.5 $17,386.0 $15,414.6
========= ========= =========
U.S......................... $ 584.0 $ 882.9 $ 910.0
Europe...................... 929.5 945.8 780.6
Asia/Pacific................ 277.3 283.1 183.1
Latin America............... 227.9 172.5 131.5
Other....................... 92.5 91.0 58.5
--------- --------- ---------
Total capital
expenditures........... $ 2,111.2 $ 2,375.3 $ 2,063.7
========= ========= =========
</TABLE>
30
<PAGE>
Total long-lived assets, primarily property and equipment and intangibles
were (in millions):
1997-$16,706.1; 1996-$16,069.8; 1995-$14,271.9; U.S.: 1997-$7,530.7; 1996-
$7,234.3; 1995-$6,769.5.
FRANCHISE ARRANGEMENTS
Franchise arrangements include a lease and a license and generally provide
for payment of initial fees, as well as continuing rent, service fees and
royalties 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 and maintenance. In addition, franchisees
outside the U.S. pay 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.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rents................................. $1,369.7 $1,350.7 $1,230.0
Percent rent and service fees................. 1,836.3 1,689.7 1,638.4
Initial fees.................................. 66.3 75.4 62.6
-------- -------- --------
Revenues from franchised and affiliated
restaurants.................................. $3,272.3 $3,115.8 $2,931.0
======== ======== ========
</TABLE>
Future minimum rent payments due to the Company under franchise arrangements
are:
<TABLE>
<CAPTION>
OWNED SITES LEASED SITES TOTAL
----------- ------------ ---------
(IN MILLIONS)
<S> <C> <C> <C>
1998................................... $ 854.0 $ 609.6 $ 1,463.6
1999................................... 839.3 603.8 1,443.1
2000................................... 825.4 592.9 1,418.3
2001................................... 809.8 582.1 1,391.9
2002................................... 794.0 609.1 1,403.1
Thereafter............................. 7,218.4 5,382.1 12,600.5
--------- -------- ---------
Total minimum payments............. $11,340.9 $8,379.6 $19,720.5
========= ======== =========
</TABLE>
At December 31, 1997, net property and equipment under franchise
arrangements totaled $8.1 billion (including land of $2.5 billion) after
deducting accumulated depreciation and amortization of $2.6 billion.
31
<PAGE>
DEBT FINANCING
LINE OF CREDIT AGREEMENTS
The Company has several line of credit agreements with various banks: a
$675.0 million line which expires on April 19, 2002, with fees of .06% per
annum on the total commitment; a $25.0 million line with a renewable term of
364 days and fees of .07% per annum on the total commitment; and $800.0
million in additional short-term lines expiring in the first half of 1998 with
fees of .04% per annum on the total commitments. All agreements remained
unused at December 31, 1997. 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 $667.1 million at December 31, 1997; 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
6.2% and 6.4% at December 31, 1997 and 1996, respectively.
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 expire through 2004 and relate primarily
to the exchange of British Pounds Sterling, French Francs, Deutsche Marks and
Japanese Yen. 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 Company also has entered into interest-rate exchange agreements
which expire through 2011 and relate primarily to U.S. Dollars, British Pounds
Sterling and French Francs. 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, 1997, 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. $237.9 million. The
unamortized premium related to these currency options was $2.2 million and
there were no related deferred gains recorded as of year end. Short-term
forward foreign exchange contracts outstanding at December 31, 1997 (primarily
French Francs, Deutsche Marks and Australian Dollars) had a U.S. Dollar
equivalent of $85.3 million.
GUARANTEES
The Company has guaranteed and included in total debt at December 31, 1997,
$118.4 million of 7.3% ESOP Notes Series A and $63.8 million of 7.0% 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 has
also guaranteed certain affiliate loans totaling $238.3 million at December
31, 1997.
32
<PAGE>
FAIR VALUES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
CARRYING AMOUNT FAIR VALUE
--------------- ----------
(IN MILLIONS)
<S> <C> <C>
Liabilities
Debt......................................... $5,108.2 $5,304.8
Notes payable................................ 1,293.8 1,293.8
Foreign currency exchange agreements(1)...... 61.5 57.1
Interest-rate exchange agreements(2)......... 18.5
-------- --------
Total liabilities.......................... 6,463.5 6,674.2
-------- --------
Assets
Foreign currency exchange agreements(1)...... 236.0 158.3
-------- --------
Net debt....................................... $6,227.5 $6,515.9
======== ========
Purchased foreign currency options............. $ 2.2 $ 7.6
======== ========
</TABLE>
- --------
(1) Combined notional amount equivalent to U.S. $2.1 billion.
(2) Notional amount equivalent to U.S. $2.4 billion.
The carrying amounts for cash and equivalents, notes receivable and short-
term forward foreign exchange contracts 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.
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, 1997.
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 effects of currency and
interest-rate exchange agreements.
33
<PAGE>
DEBT OBLIGATIONS
<TABLE>
<CAPTION>
INTEREST
RATES (1)
DECEMBER AMOUNTS OUTSTANDING
31 DECEMBER 31 AGGREGATE MATURITIES BY CURRENCY FOR 1997 BALANCES
MATURITY ---------- -------------------- -------------------------------------------------------
DATES 1997 1996 1997 1996 1998 1999 2000 2001 2002 THEREAFTER
--------- ---- ---- --------- --------- -------- ------- ------ ------- -------- ----------
(IN MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed--original
issue(2)............. 7.2% 7.2% $ 2,487.6 $ 2,610.8
Fixed--converted via
exchange
agreements(3)........ 6.1 6.0 (1,869.7) (2,249.6)
Floating.............. 5.6 5.6 646.5 206.4
--------- --------- -------- ------- ------ ------- -------- --------
Total U.S. Dollars. 1998-2037 1,264.4 567.6 $ 240.1 $(240.4) $ 55.3 $(303.3) $ (32.6) $1,545.3
--------- --------- -------- ------- ------ ------- -------- --------
Fixed................. 8.2 7.2 475.0 940.5
Floating.............. 4.1 3.9 497.8 136.4
--------- --------- -------- ------- ------ ------- -------- --------
Total French
Francs............ 1998-2006 972.8 1,076.9 202.1 154.5 63.7 84.2 117.1 351.2
--------- --------- -------- ------- ------ ------- -------- --------
Fixed................. 5.8 5.7 361.8 737.6
Floating.............. 4.0 3.8 582.6 390.2
--------- --------- -------- ------- ------ ------- -------- --------
Total Deutsche
Marks............. 1998-2007 944.4 1,127.8 417.6 166.9 120.8 126.3 56.9 55.9
--------- --------- -------- ------- ------ ------- -------- --------
Fixed................. 9.2 9.9 541.2 304.4
Floating.............. 6.5 6.2 255.3 256.4
--------- --------- -------- ------- ------ ------- -------- --------
Total British
Pounds Sterling... 1998-2005 796.5 560.8 442.8 90.8 74.3 24.7 163.9
--------- --------- -------- ------- ------ ------- -------- --------
Fixed................. 3.9 4.5 343.6 387.2
Floating.............. 0.6 0.8 203.0 51.8
--------- --------- -------- ------- ------ ------- -------- --------
Total Japanese Yen. 1998-2023 546.6 439.0 95.7 46.0 38.3 99.6 76.6 190.4
--------- --------- -------- ------- ------ ------- -------- --------
Fixed................. 9.4 9.4 114.7 141.7
Floating.............. 5.1 6.7 124.2 94.0
--------- --------- -------- ------- ------ ------- -------- --------
Total Australian
Dollars........... 1998-2003 238.9 235.7 233.5 1.5 3.4 0.3 0.1 0.1
--------- --------- -------- ------- ------ ------- -------- --------
Fixed................. 10.9 9.4 1.5 56.5
Floating.............. 4.1 3.1 215.6 73.0
--------- --------- -------- ------- ------ ------- -------- --------
Total Canadian
Dollars........... 1998-2021 217.1 129.5 14.9 0.2 0.2 (71.1) 272.2 0.7
--------- --------- -------- ------- ------ ------- -------- --------
Fixed................. 8.0 7.3 573.0 780.2
Floating.............. 6.8 7.6 673.8 560.8
--------- --------- -------- ------- ------ ------- -------- --------
Total other
currencies(4)..... 1998-2016 1,246.8 1,341.0 616.6 174.0 142.3 144.6 52.6 116.7
--------- --------- -------- ------- ------ ------- -------- --------
Debt obligations
including the net
effects of currency
and interest-rate
exchange agreements.. 6,227.5 5,478.3 2,263.3 302.7 514.8 154.9 567.6 2,424.2
Short-term 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)........ 236.0 45.1 41.1 67.6 30.0 48.0 21.1 28.2
--------- --------- -------- ------- ------ ------- -------- --------
Total debt
obligations....... $ 6,463.5 $ 5,523.4 $1,629.4 $ 370.3 $544.8 $ 202.9 $1,263.7 $2,452.4
========= ========= ======== ======= ====== ======= ======== ========
</TABLE>
- -------
(1) Weighted-average effective rate, computed on a semi-annual basis.
(2) Includes $500 million of debentures with maturities in 2027, 2036 and 2037
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 net effects of these and other exchange agreements.
(4) Consists of debt obligations denominated in 24 other foreign currencies.
34
<PAGE>
STOCK OPTIONS
At December 31, 1997, the Company had three stock-based compensation plans,
two for employees and one for non-employee directors. Options to purchase
common stock are granted at 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, beginning a year from the date of the grant, and expiring 10
years from the grant date. At December 31, 1997, the number of shares of
common stock reserved for issuance under the plans was 90.0 million, including
11.8 million available for future grants.
A summary of the status of the Company's plans as of December 31, 1997, 1996
and 1995, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(IN EXERCISE (IN EXERCISE (IN EXERCISE
OPTIONS MILLIONS) PRICE MILLIONS) PRICE MILLIONS) PRICE
------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 72.7 $29.46 68.1 $23.86 62.3 $21.02
Granted................. 15.1 47.06 15.0 49.14 13.7 33.24
Exercised............... (7.2) 19.25 (7.8) 17.75 (6.0) 15.76
Forfeited............... (2.4) 35.55 (2.6) 32.31 (1.9) 24.55
---- ------ ---- ------ ---- ------
Outstanding at end of
year................... 78.2 $33.58 72.7 $29.46 68.1 $23.86
==== ====== ==== ====== ==== ======
Options exercisable at
end of year............ 30.2 26.7 24.4
==== ==== ====
</TABLE>
Options granted each year were about 2% of average common shares outstanding
for 1997, 1996 and 1995, respectively, representing grants to approximately
11,000, 10,300 and 8,500 employees in those three years. When stock options
are exercised, shares are issued from treasury stock.
The average per share cost of treasury stock issued for option exercises
was: 1997-$12.93; 1996-$13.07; 1995-$9.56. 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
generated $207.8 million of tax benefits for the Company during the three
years ended December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OF OPTIONS CONTRACTUAL EXERCISE OF OPTIONS EXERCISE
EXERCISE PRICES (IN MILLIONS) LIFE (IN YEARS) PRICE (IN MILLIONS) PRICE
--------------- ------------- --------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$11 to 15............... 6.8 2.1 $14.36 6.8 $14.36
16 to 22............... 12.6 4.2 19.52 8.5 19.58
23 to 36............... 30.3 6.4 30.07 11.2 29.36
37 to 52............... 28.5 9.0 48.10 3.7 49.05
---- --- ------ ---- ------
$11 to 52............... 78.2 6.6 $33.58 30.2 $25.67
==== === ====== ==== ======
</TABLE>
Pro forma net income and net income per common share were determined as if
the Company had accounted for its employee stock options under the fair value
method of SFAS 123 and are presented in the table below:
35
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income--pro forma (in millions)........... $1,589.3 $1,538.3 $1,414.0
Net income per common share--pro forma
Basic..................................... 2.27 2.16 1.95
Diluted................................... 2.22 2.11 1.91
Weighted-average fair value of options
granted...................................... 16.80 16.88 13.07
</TABLE>
For 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. The model was designed to
estimate the fair value of exchange-traded 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield................................. .65% .65% .65%
Expected stock price volatility......................... 21.3% 19.4% 20.9%
Risk-free interest rate................................. 6.61% 6.14% 7.39%
Expected life of options (in years)..................... 7 7 7
</TABLE>
36
<PAGE>
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 applicable 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.
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 was equal to 2,000 depositary shares and was entitled to
one vote under certain circumstances. In 1995, the Company completed an
exchange of depositary shares equaling 2,600 shares of this preferred stock
for subordinated debt securities and repurchased depositary shares equaling
approximately 250 shares. The Company redeemed the remaining Series E shares
for cash in December 1997.
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. In 1992 and 1995, this preferred stock was
converted into a total of 15.1 million common shares.
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 was recorded as an adjustment to
additional paid-in capital and common stock.
COMMON EQUITY PUT OPTIONS
In 1997, the Company sold 5.3 million common equity put options, of which
1.8 million options were outstanding at December 31, 1997. The options expire
at various dates through May 1998. At December 31, 1997, the $80.3 million
exercise price of these outstanding options was classified in common equity
put options, and the related offset was recorded in common stock in treasury,
net of premiums received.
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, 1997, 2.1 million shares of the Series A Junior Participating Preferred
Stock were reserved for issuance under this plan.
37
<PAGE>
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------------ ------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Systemwide sales........ $8,530.4 $8,284.5 $8,799.7 $8,286.1 $8,475.1 $7,932.0 $7,833.1 $7,309.5
-------- -------- -------- -------- -------- -------- -------- --------
Revenues
Sales by Company-
operated restaurants. $2,110.7 $2,005.5 $2,158.5 $1,965.6 $2,014.1 $1,885.8 $1,853.2 $1,713.8
Revenues from
franchised and
affiliated
restaurants.......... 841.9 816.1 847.5 808.2 818.5 779.3 764.4 712.2
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues...... 2,952.6 2,821.6 3,006.0 2,773.8 2,832.6 2,665.1 2,617.6 2,426.0
-------- -------- -------- -------- -------- -------- -------- --------
Operating costs and
expenses Company-
operated restaurants. 1,726.3 1,638.7 1,756.1 1,582.1 1,640.1 1,523.1 1,527.1 1,419.3
Franchised
restaurants.......... 160.6 150.0 153.9 142.2 151.1 140.7 148.3 137.2
Selling, general and
administrative
expenses............. 393.8 381.0 375.5 347.9 347.2 326.3 334.0 311.2
Other operating
(income) expense--
net.................. (23.3) 37.9(1) (34.9) (42.4) (49.3) (37.1) (6.0) (4.2)
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
costs and expenses. 2,257.4 2,207.6 2,250.6 2,029.8 2,089.1 1,953.0 2,003.4 1,863.5
-------- -------- -------- -------- -------- -------- -------- --------
Operating income........ 695.2 614.0 755.4 744.0 743.5 712.1 614.2 562.5
-------- -------- -------- -------- -------- -------- -------- --------
Interest expense........ 94.1 90.2 94.1 84.7 86.2 82.8 90.0 84.8
Nonoperating (income)
expense--net........... 11.7 0.3 2.2 9.4 14.2 3.8 8.5 25.6
-------- -------- -------- -------- -------- -------- -------- --------
Income before provision
for income taxes....... 589.4 523.5 659.1 649.9 643.1 625.5 515.7 452.1
-------- -------- -------- -------- -------- -------- -------- --------
Provision for income
taxes.................. 178.5 113.5(2) 210.2 209.3 204.9 205.1 171.2 150.5
-------- -------- -------- -------- -------- -------- -------- --------
Net income.............. $ 410.9 $ 410.0 $ 448.9 $ 440.6 $ 438.2 $ 420.4 $ 344.5 $ 301.6
======== ======== ======== ======== ======== ======== ======== ========
Net income per common
share (3).............. $ .59 $ .58 $ .64 $ .62 $ .63 $ .59 $ .49 $ .42
Net income per common
share--diluted (3)..... .58 .57 .63 .61 .61 .58 .48 .41
Dividends per common
share.................. $ .0825 $ .0750 $ .0825 $ .0750 $ .0825 $ .0750 $ .0750 $ .0675
Weighted average shares. 687.6 695.5 688.5 697.8 689.7 699.1 691.6 700.5
Weighted average
shares--diluted........ 701.8 712.4 704.4 715.6 707.3 718.0 707.5 721.1
</TABLE>
- -------
(1) Includes the $72 million special charge.
(2) Includes a $50 million tax benefit as a result of certain international
transactions.
(3) Net income per common share data is presented in conformity with SFAS 128.
38
<PAGE>
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 high standards of proper business practices throughout the world.
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, 1997, 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 herein.
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 22, 1998
39
<PAGE>
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 22, 1998
40
<PAGE>
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, 1997.
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, 1997.
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, 1997.
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, 1997.
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.
41
<PAGE>
MCDONALD'S CORPORATION
EXHIBIT INDEX
(ITEM 14)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
DESCRIPTION
-----------
<S> <C>
(3) Restated Certificate of Incorporation, effective as of December 29, 1997,
incorporated herein by reference from Form 8-K dated January 5, 1998. By-
Laws, effective as of December 19, 1997, incorporated herein by reference
from Form 8-K dated January 5, 1998.
(4) Instruments defining the rights of security holders, including Indentures
(A):
(a) Senior Debt Securities Indenture dated as of October 19, 1996
incorporated herein by reference from Exhibit 4(a) of Form S-3
Registration Statement (File No. 333-14141).
(i) 6 3/8% Debentures due January 8, 2028. Supplemental Indenture No. 1
dated as of January 8, 1998, incorporated herein by reference from
Exhibit (4)(a) of Form 8-K dated January 5, 1998.
(b) 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 October 18,
1996.
(ii) 7 1/2% Subordinated Deferrable Interest Debentures due 2037.
Supplemental Indenture No. 2 dated as of January 14, 1997,
incorporated herein by reference from Exhibit (4)(b) of Form 8-K dated
January 9, 1997.
(iii) 7.31% Subordinated Deferrable Interest Debentures due 2027.
Supplemental Indenture No. 3 dated September 24, 1997, incorporated
herein by reference from Exhibit (4)(b) of Form 8-K dated September
19, 1997.
(c) Debt Securities. Indenture dated as of March 1, 1987 incorporated herein
by reference from Exhibit 4(a) of Form S-3 Registration Statement (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 (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 (File No. 33-42642), dated September 10, 1991.
(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.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
DESCRIPTION
-----------
<S> <C>
(ix) Medium-Term Notes, Series E, due from nine months (U.S. Issue)/184 days
(Euro Issue) to 60 years from the Date of Issue. Supplemental Indenture
No. 22 incorporated herein by reference from Exhibit 4(b) of Form S-3
Registration Statement (File No. 33-60939), dated July 13, 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.
(d) 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.
(e) 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.
(f) Form of Supplemental Indenture No. 2 dated as of April 1, 1991,
supplemental to the Indenture between McDonald's Matching and Deferred
Stock Ownership Trust, McDonald's Corporation and Pittsburgh National Bank
in connection with SEC Registration Statement Nos. 33-28684 and 33-28684-
01, incorporated herein by reference from Exhibit (4)(c) of Form 8-K dated
March 22, 1991.
(10) Material Contracts
(a) Directors' Stock Plan, as amended and restated, incorporated by reference
from Exhibit 10(a) of Form 10-Q for the quarter ended September 30, 1997.*
(b) Profit Sharing Program, as amended and restated, incorporated herein by
reference from Form 10-K for the year ended December 31, 1995.*
(i) Amendment No. 1 incorporated by reference from Form 10-Q for the quarter
ended June 30, 1997.
(ii) Amendment No. 2 incorporated by reference from Form 10-Q for the
quarter ended June 30, 1997.
(iii) Amendment No. 3 incorporated by reference from Form 10-Q for the
quarter ended June 30, 1997.
(iv) Amendment No. 4 filed herewith.
(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, as amended and restated, incorporated
by reference from Exhibit 10(e) of Form 10-Q for the quarter ended June
30, 1997.
(f) McDonald's Corporation Deferred Income Plan, as amended and restated,
incorporated by reference from Exhibit 10(f) of Form 10-Q for the quarter
ended September 30, 1997.*
(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.*
(h) Employment Agreement, incorporated by reference from Exhibit 10 (h) of
Form 10-Q for the quarter ended September 30, 1997.*
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
DESCRIPTION
-----------
<S> <C>
(11) Statement re: Computation of per share earnings.
(12) Statement re: Computation of ratios.
(21) Subsidiaries of the registrant.
(23) Consent of independent auditors.
(27.1) Financial Data Schedule
(27.2) Restated Financial Data Schedule
(99) Press Release dated March 26, 1998--McDonald's Announces Strategic
Initiatives
</TABLE>
- --------
* 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.
(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 30, 1998.
<TABLE>
<CAPTION>
DATE OF ITEM FINANCIAL STATEMENTS
REPORT NUMBER REQUIRED TO BE FILED
-------- ------ --------------------
<S> <C> <C>
10/17/97 Item 7 No
1/05/98 Item 5 No
2/10/98 Item 7 No
</TABLE>
44
<PAGE>
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)
Michael L. Conley
By___________________________________
Michael L. Conley
Executive Vice President and
Chief Financial Officer
March 30, 1998
Date: _______________________________
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 30TH DAY OF MARCH, 1998:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Hall Adams, Jr. Director
___________________________________________
Hall Adams, Jr.
Robert M. Beavers, Jr. Senior Vice President and Director
___________________________________________
Robert M. Beavers, Jr.
James R. Cantalupo President and Chief Executive Officer--
___________________________________________ McDonald's International and Director
James R. Cantalupo
Gordon C. Gray Director
___________________________________________
Gordon C. Gray
Jack M. Greenberg Vice Chairman, Chairman and Chief Executive
___________________________________________ Officer--McDonald's U.S.A. and Director
Jack M. Greenberg
Enrique Hernandez, Jr. Director
___________________________________________
Enrique Hernandez, Jr.
Donald R. Keough Director
___________________________________________
Donald R. Keough
Donald G. Lubin Director
___________________________________________
Donald G. Lubin
Andrew J. McKenna Director
___________________________________________
Andrew J. McKenna
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Michael R. Quinlan Chairman, Chief Executive Officer and
___________________________________________ Director
Michael R. Quinlan
Terry L. Savage Director
___________________________________________
Terry L. Savage
Roger W. Stone Director
___________________________________________
Roger W. Stone
Robert N. Thurston Director
___________________________________________
Robert N. Thurston
Fred L. Turner Senior Chairman and Director
___________________________________________
Fred L. Turner
B. Blair Vedder, Jr. Director
___________________________________________
B. Blair Vedder, Jr.
Michael L. Conley Executive Vice President and Chief
___________________________________________ Financial Officer
Michael L. Conley
Christopher Pieszko Senior Vice President and Corporate
___________________________________________ Controller
Christopher Pieszko
</TABLE>
46
<PAGE>
Exhibit 10(b)
FOURTH AMENDMENT TO THE
MCDONALD'S CORPORATION
PROFIT SHARING PROGRAM
The McDonald's Corporation Profit Sharing Program (the "Program"), as
amended and restated effective January 1, 1996, is hereby amended, effective
January 1, 1997, except as otherwise specifically provided herein, as follows:
I
The following shall be added to Section 1.30 at the end thereof:
(d) In lieu of determining which individuals are Highly Compensated
Employees as provided in Section 1.30(a) for the Plan Year beginning in 1997,
the Committee may elect to consider as Highly Compensated each Participant who
performs services as an employee for an Employer, Commonly Controlled Entity or
member of an Affiliated Service Group during the Plan Year and who, during the
Plan Year;
(1) was at any time a Five Percent Owner; and
(2) received Considered Compensation in excess of $80,000 for 1997.
II
Effective July 1, 1997, the following paragraph (5) shall be added to
Section 1.31(b):
(5) Each restaurant management and staff employee who became an
employee of Restaurant Acquisition Corp., McDonald's Corporation or an
other Employer on February 14, 1997 as a result of the Roy Roger's
acquisition ("Acquisition Employees") shall be credited with Hours of
Service for each calendar year during which he was employed by Hardee's
Food Systems, Inc. ("Hardee's") or a member of a controlled group with
Hardee's. In determining the Hours of Service to be credited to Acquisition
Employees, the Plan Administrator shall rely on available information and,
as necessary, shall make good faith estimates based upon available
information and records. Such service shall be credited to each Acquisition
Employee effective July 1, 1997.
III
Section 4.1(c) shall be deleted and replaced by the following:
(c) Required Actual Contribution Percentage Test and Adjustment. The
Average ACP for the group of Highly Compensated Employees for a Plan Year
shall bear a relationship to the Average ACP for all Non-highly Compensated
Employees for the
<PAGE>
preceding Plan Year for Plan Years beginning in 1997 and thereafter, which
meets either of the following tests ("Required ACP Test"):
(1) The Average ACP for the preceding Plan Year for Plan Years
beginning in 1997 and thereafter for the group of Participants who are
Non-highly Compensated Employees multiplied by 1.25 is greater than or
equal to the Average ACP for the Plan Year for the Highly Compensated
Employees; or
(2) The excess of the Average ACP for the Plan Year for the
group of Highly Compensated Employees who are Active Participants over
the Average ACP for the preceding Plan Year for Plan Years beginning
in 1997 and thereafter of all Non-highly Compensated Employees who are
Active Participants is not more than 2 percentage points, and the
Average ACP for the Plan Year for the group of Highly Compensated
Employees who are Active Participants is not more than the Average ACP
for the preceding Plan Year for Plan Years beginning in 1997 and
thereafter of all Non-highly Compensated Employees who are Active
Participants multiplied by 2.
For Plan Years beginning in 1998 and thereafter, the above Required
ACP Test may be applied by using the Average ACP for Non-highly Compensated
Employees for the current Plan Year if the Committee so elects: provided
that once made such an election may not be changed except as provided by
the Secretary of the Treasury.
If the Required ACP Test for a Plan Year is not met and, if the
Company does not elect to make Special Section 401(k) Employer
Contributions or to count Participant Elected Contributions for purposes of
the Required ACP test with respect to the Plan Year sufficient to result in
the Required ACP test being passed, then the Committee shall reduce
Employer Matching Contributions and Forfeitures (which for this purpose
shall include any Participant Elected Contributions counted in the Required
ACP Test) that Active Participants who are Highly Compensated Employees for
the Plan Year (or a portion of such Active Participants) may defer in the
following steps:
Step 1: The Committee shall first determine the dollar amount of the
reductions which would have to be made to the Employer Matching
Contributions and Forfeitures of Highly Compensated Employees who are
Active Participants for the Plan Year in order that the Average ACP of the
Highly Compensated Employees would not exceed both the amounts permitted in
Sections 4.1(c)(1) and (c)(2). Such amount shall be calculated by first
determining the dollar amount by which the Employer Matching Contributions
and Forfeitures of the Highly Compensated Employees who have the highest
Actual Contribution Percentage would have to be reduced until the first to
occur of: (i) such Employees' Actual Contribution Percentage, after the
reductions made under Section 5.2(b), would become tied with the Actual
Contribution Percentage of one or more other Highly Compensated Employees
or (ii) the Average ACP of all of the Highly Compensated Employees, as
recalculated after the reductions made under this Step 1, no longer would
exceed the amounts permitted in both Sections 4.1(c)(1) and (c)(2). Then,
-2-
<PAGE>
unless the Average ACP of the Highly Compensated Employees, as recalculated
after the reductions made under this Step 1, no longer exceeds the amounts
permitted in both Sections 4.1(c)(1) and (c)(2), the reduction process
shall be repeated by determining the dollar amount of reductions which
would have to be made to the Employer Matching Contributions and
Forfeitures of the group of Highly Compensated Employees who after all
prior reductions made in this Step 1 would have the highest Actual
Contribution Percentage until the first to occur of: (iii) the Actual
Contribution Percentage, after the prior reductions made in this Step 1, of
each person in such group becomes tied with that of one or more other
Highly Compensated Employees or (iv) the Average ACP of all of the Highly
Compensated Employees, after the prior reductions, no longer would exceed
the amounts permitted in both Sections 4.1(c)(1) and (c)(2). This process
is repeated until the Average ACP of all of the Highly Compensated
Employees, after all reductions, would no longer exceed the amounts
permitted in both Sections 4.1(c)(1) and (c)(2).
Step 2. Next, the Committee shall determine the total dollar amount of
reductions to the Employer Matching Contributions and Forfeitures
calculated under Step 1 ("Total Excess Contributions").
Step 3. Finally, the Committee shall reduce the Employer Matching
Contributions and Forfeitures of the Highly Compensated Employees with the
highest dollar amount of Employer Matching Contributions and Forfeitures by
the lesser of the amount which either: (i) causes such Highly Compensated
Employees' Employer Matching Contributions and Forfeitures to equal the
dollar amount of the Employer Matching Contributions and Forfeitures of the
Highly Compensated Employees with the next highest dollar amount of
Employer Matching Contributions and Forfeitures or (ii) reduces the Highly
Compensated Employee's Employer Matching Contributions and Forfeitures by
the Total Excess Contributions. Then, unless the total amount of reductions
made to Highly Compensated Employees' Employer Matching Contributions and
Forfeitures under this Step 3 equals the amount of Total Excess
Contributions, the reduction process shall be repeated by reducing the
Employer Matching Contributions and Forfeitures of the group of Highly
Compensated Employees with the highest dollar amount of Employer Matching
Contributions and Forfeitures, after the prior reductions made in this Step
3, by the lesser of the amount which either: (iii) causes such Highly
Compensated Employees' Employer Matching Contributions and Forfeitures made
in this Step 3 to equal the dollar amount of the Employer Matching
Contributions and Forfeitures of other Highly Compensated Employees with
the next highest dollar amount of Employer Matching Contributions and
Forfeitures or (iv) causes total reductions to equal the Total Excess
Contributions. This process is repeated with each successive group of
Highly Compensated Employees with the highest dollar amount, after the
prior reductions of the Employer Matching Contributions and Forfeitures
made under this Step 3 until the total reductions equal the Total Excess
Contributions.
The Committee shall reduce and distribute Employer Matching
Contributions and Forfeitures equal to the Total Excess Contributions for
the Plan Year and any income, gains or losses attributable thereto, as
determined in accordance with Section 5.3, to
-3-
<PAGE>
Highly Compensated Employees as determined in Step 3 after the end of the
Plan Year with respect to which such reduced Employer Matching
Contributions and Forfeitures were made.
If any Employer Matching Contributions are reduced hereunder, such
reduced amounts shall become a Forfeiture and shall be allocated to other
Participants' Employer Matching Contribution Accounts in proportion to the
Employer Matching Contributions and any Forfeitures allocated to such
accounts pursuant to Sections 7.2(a) and (b).
IV
Section 5.2(e) is hereby deleted and replaced by the following:
(e) Required ADP Test. The Average ADP for eligible Highly
Compensated Employees for the Plan Year bears a relationship to the Average
ADP for all Non-highly Compensated Employees for the preceding Plan Year
for Plan Years beginning in 1997 and thereafter, which meets either of the
following tests ("Required ADP Test"):
(1) The Average ADP for the preceding Plan Year for the group of
Active Participants who are Non-highly Compensated Employees
multiplied by 1.25 is greater than or equal to the Average ADP for the
Plan Year for the Highly Compensated Employees; or
(2) The excess of the Average ADP for the Plan Year for the
group of Highly Compensated Employees who are Active Participants over
the Average ADP for the preceding Plan Year of all Non-highly
Compensated Employees who are Active Participants is not more than 2
percentage points, and the Average ADP for the Plan Year for the group
of Highly Compensated Employees who are Active Participants is not
more than the Average ADP for the preceding Plan Year of all Non-
highly Compensated Employees who are Active Participants multiplied by
2.
For Plan Years beginning in 1998 and thereafter, the above Required
ADP Test may be applied by using the Average ADP for Non-highly Compensated
Employees for the current Plan Year if the Committee so elects; provided
that once made such an election may not be changed except as provided by
the Secretary of the Treasury.
If the Required ADP Test for a Plan Year is not met and, if the
Company does not elect to make Special Section 401(k) Employer
Contributions or to count Employer Matching Contributions and Forfeitures
for purposes of the ADP test with respect to the Plan Year sufficient to
result in the Required ADP Test being passed, then the Committee shall
reduce Participant Elected Contributions (which for this purpose shall
include any Employer Matching Contributions and Forfeitures counted in the
Required ADP Test) and any Employer Matching Contributions and Forfeitures
allocated with respect to reduced Participant Elected Contributions that
Active Participants who are Highly Compensated
-4-
<PAGE>
Employees for the Plan Year (or a portion of such Active Participants) may
defer in the following steps:
Step 1: The Committee shall first determine the dollar amount of the
reductions which would have to be made to the Participant Elected
Contributions of Highly Compensated Employees who are Active Participants
for the Plan Year in order that the Average ADP of the Highly Compensated
Employees would not exceed the amounts permitted in both Sections 5.1(e)(1)
and (e)(2). Such amount shall be calculated by first determining the dollar
amount by which the Participant Elected Contributions of Highly Compensated
Employees who have the highest Actual Deferral Percentage would have to be
reduced until the first to occur of: (i) such Employees' Actual Deferral
Percentage, after the reductions under Section 5.2(b), would become tied
with the Actual Deferral Percentage of one or more other Highly Compensated
Employees or (ii) the Average ADP of all of the Highly Compensated
Employees, as recalculated after the prior reductions under Section 5.2(b),
no longer would exceed the amounts permitted in both Sections 5.1(e)(1) and
(e)(2). Then, unless the recalculated Average ADP of the Highly Compensated
Employees no longer exceeds the amounts permitted in both Sections
5.1(e)(1) and (e)(2), the reduction process shall be repeated by
determining the amount of reductions which would have to be made to the
Participant Elected Contributions of Highly Compensated Employees who after
all prior reductions would have the highest Actual Deferral Percentage
until the first to occur of: (iii) the Actual Deferral Percentage, after
the prior reductions under Sections 5.2(b), 4.2(c) and this Step 1, of each
person in such group becomes tied with that of one or more other Highly
Compensated Employees or (iv) the Average ADP of all of the Highly
Compensated Employees, after the prior reductions, no longer would exceed
the amounts permitted in both Sections 5.1(e)(1) and (e)(2). This process
is repeated until the Average ADP of all of the Highly Compensated
Employees, after all reductions, would no longer exceed the amounts
permitted in both Sections 5.1(e)(1) and (e)(2).
Step 2. Determine the total dollar amount of reductions to the
Participant Elected Contributions calculated under Step 1 ("Total Excess
Deferrals").
Step 3. The Participant Elected Contributions (which for this purpose
shall include any other contributions counted for purposes of calculating
the Required ADP Test) of the Highly Compensated Employees with the highest
dollar amount of Participant Elected Contributions shall be reduced by the
lesser of the dollar amount which either (i) causes such Highly Compensated
Employees' Participant Elected Contributions to equal the dollar amount of
the Participant Elected Contributions of the Highly Compensated Employees
with the next highest dollar amount of Participant Elected Contributions or
(ii) reduces the Highly Compensated Employee's Participant Elected
Contributions by the Total Excess Contributions. Then, unless the total
amount of reductions made to Highly Compensated Employees' Participant
Elected Contributions under this Step 3 equals the amount of the Total
Excess Deferrals, the reduction process shall be repeated by reducing the
Participant Elected Contributions of the group of Highly Compensated
Employees with the highest dollar amount of Participant Elected
Contributions, after the prior
-5-
<PAGE>
reductions made in this Step 3, by the lesser of the amount which either:
(iii) causes such Highly Compensated Employees' Participant Elected
Contributions after reductions made in Section 5.2(b) and made in this Step
3 to equal the dollar amount of the Participant Elected Contributions of
the Highly Compensated Employees with the next highest dollar amount of
Participant Elected Contributions or (iv) causes total reductions to equal
the Total Excess Contributions. This process is repeated with each
successive group of Highly Compensated Employees with the highest dollar
amount, after the prior reductions, of the Participant Elected
Contributions until the total reductions made under this Step 3 equal the
Total Excess Contributions.
The Committee shall reduce and distribute the Total Excess Deferrals
for the Plan Year and any income, gains or losses attributable thereto, as
determined in accordance with Section 5.3, to Highly Compensated Employees
as determined under Step 3 after the end of the Plan Year with respect to
which such reduced Participant Elected Contributions were made.
If Employer Matching Contributions and any Forfeitures allocated with
respect to Participants' Participant Elected Contributions are included in
calculating the Average ADP for a Plan Year, any such contributions reduced
hereunder shall be distributed to Participants in the same manner as
Participant Elected Contributions are distributed (including any income
allocable thereto). If Employer Matching Contributions and any Forfeitures
allocated with respect to Participants' Participant Elected Contributions
are not included in calculating the Average ADP for the Plan Year, any
amount of Employer Matching Contributions and any Forfeitures allocated
therewith which are reduced hereunder because such contributions were
originally allocated with respect to Participant Elected Matched
Contributions which are reduced to meet the above tests shall become a
Forfeiture and shall be allocated to other Participants' Employer Matching
Contribution Accounts in proportion to the Employer Matching Contributions
and any Forfeitures allocated therewith to such accounts pursuant to
Sections 7.2(a) and (b).
V
Effective January 1, 1998, Section 10.8 shall be amended to read as
follows:
10.8 Investment Election with Regard to a Participant's Profit Sharing,
Diversification, Investment Savings and Rollover Accounts. Once each month
effective the first day of the next calendar month (or on such more frequent
basis as the Committee shall permit), each Participant shall have the right to
elect, on such forms and in accordance with such rules and procedures as the
Committee may from time to time provide, to have each of (a) his Profit Sharing
Account (including any amounts which have previously been invested in the Profit
Sharing McDonald's Common Stock Fund pursuant to Section 10.7) and his
Diversification Accounts, if any, (b) his Investment Savings Account, or (c) his
Rollover Account invested in the Diversified Stock Fund, the Money Market Fund,
the Profit Sharing McDonald's Common Stock Fund, the Insurance Contract Fund,
the Multi-Asset Fund or other similar fund designated from time to time by the
Committee or in any combination of them; provided that amounts which have been
invested in the
-6-
<PAGE>
Profit Sharing McDonald's Common Stock Fund in accordance with Section 10.7
shall remain invested in the Profit Sharing McDonald's Common Stock Fund until a
new investment election made by the Participant in accordance with this Section
10.8 is effective.
If a Participant makes a Leveraged ESOP Diversification Election,
Participant Elected Contribution Account Diversification Election, or McDESOP
Diversification Election in accordance with Section 10.10, his Diversification
Account, if any, shall be invested in accordance with his Profit Sharing Account
investment election in effect at the time his diversification election is
effective or in accordance with Section 10.9(a) if no such investment election
is in effect and shall be invested in accordance with any subsequently effective
Investment Election as provided above. The Participant's election as to the
percentage of his Profit Sharing Account and Diversification Account to be
invested in each Investment Fund, shall be made in increments of 10 percent
(10%) up to 100 percent (100%). A Participant may elect to invest as much as
100% of his Profit Sharing Account and Diversification Account in the Profit
Sharing McDonald's Common Stock Fund. Subject to Section 10.7, a Participant's
investment election shall be effective until his next investment election is
effective.
VI
Section 10.10(b) is hereby amended to read as follows:
(b) Diversification of McDESOP Contributions.
(1) Future Participant Elected Contributions. Effective before
January 1, 1998, a Participant may make an election ("McDESOP Future
Contribution Diversification Election") with respect to his future
Participant Elected Contributions to have up to 100 percent of the
amount of such contributions, in increments of 5 percent, credited to
his McDESOP Diversification Account. Once a Participant has made such
a McDESOP Future Contribution Diversification Election, he may, with
respect to periods before January 1, 1998, change his election with
respect to future Participant Elected Contributions, subject to
Section 10.11, but each such change shall only effect Participant
Elected Contributions made to the Program after the date the election
is effective and before the date a new McDESOP Future Contribution
Diversification Election becomes effective. Effective January 1, 1998,
no further McDESOP Future Contribution Diversification Elections may
be made. However, any such elections which are in effect on January 1,
1998 shall remain in effect until the Participant makes a Participant
Elected Contribution Account Diversification Election as provided in
Section 10.10(b)(2).
(2) Participant Elected Contributions Accounts. Effective on or
after January 1, 1998, a Participant may make an election
("Participant Elected Contribution Account Diversification Election")
with respect to the amount in his Participant Elected Contribution
Account (including his Participant Elected Contributions and the
earnings credited thereon in the Participant's McDESOP
-7-
<PAGE>
Diversification Account) to have up to 100 percent of such total
amount on the Valuation Date on which the diversification occurs, in
increments of 5 percent, credited to his McDESOP Diversification
Account. A Participant may make a Participant Elected Contribution
Account Diversification Election with respect to his Participant
Elected Contribution Account (including his Participant Elected
Contributions and the earnings credited thereon to the Participant's
McDESOP Diversification Account) in accordance with such rules and
procedures as the Committee shall from time to time establish.
Once a Participant has made a Participant Elected Contribution
Account Diversification Election which selects a percentage of
diversification which is higher than the percentage of the
Participant's Participant Elected Contribution Account which has been
transferred to the Participant's McDESOP Diversification Account, a
transfer shall be made, as of the Valuation Date with respect to which
such election is effective, to his McDESOP Diversification Account to
achieve the percentage of diversification elected with respect to his
Participant Elected Contribution Account (including his Participant
Elected Contributions and the earnings thereon credited to the
Participant's McDESOP Diversification Account) and, thereafter, the
elected percentage of his future Participant Elected Contributions
shall be transferred to his McDESOP Diversification Account, subject
to Section 10.11.
However, if a Participant makes a Participant Elected
Contribution Account Diversification Election which selects a
percentage of diversification which is equal to or less than the
percentage of the Participant's Participant Elected Contribution
Account which is credited to the Participant's McDESOP Diversification
Account, no transfer shall be made from the McDESOP Diversification
Account to the portion of the Participant's Participant Elected
Contribution Account held in the McDESOP Trust. In addition, future
Participant Elected Contributions shall be credited to the
Participant's McDESOP Diversification Account in the percentage of
diversification elected only after the percentage of the Participant's
Participant Elected Contributions (including his Participant Elected
Contributions and the earnings thereon credited to his McDESOP
Diversification Account) which is credited to his McDESOP
Diversification Account is reduced to the diversification percentage
elected by the Participant.
If a Participant makes a McDESOP Diversification Election, such
election, as from time to time in effect, shall thereafter control the
amount of diversification in the Participant's McDESOP Accounts and
any election made under this Section 10.10(b) shall have no effect
after the date of his first McDESOP Diversification Election.
-8-
<PAGE>
VII
Effective September 1, 1997, Sections 11.2(g), (h) and (i) are hereby
amended to read as follows:
(g) McDESOP Accounts. A Participant's vested balances in his
Participant Elected Contribution Account, Employer Matching Contribution
Account and McDESOP Diversification Account shall be distributed in cash
unless the Participant (or his Beneficiary) elects, at such time and in
accordance with such procedures as the Committee shall from time to time
permit, with respect to the portions of such accounts invested in
McDonald's common stock, whether held in the Profit Sharing McDonald's
Common Stock Fund or the McDESOP McDonald's Common Stock Fund, to receive a
distribution in shares of McDonald's common stock.
(h) Leveraged ESOP Accounts. A Participant's vested balances in his
Leveraged ESOP Accounts and his Leveraged ESOP Diversification Account
shall be distributed in cash unless the Participant (or his Beneficiary)
elects, at such time and in accordance with such procedures as the
Committee shall from time to time permit, with respect to the portions of
such accounts invested in Company Stock, whether held in the Profit Sharing
McDonald's Common Stock Fund or the Leveraged ESOP portion of the Trust to
receive a distribution in shares of McDonald's common stock.
(i) Stock Sharing Accounts. A Participant's vested balances in his
Stock Sharing Accounts shall be distributed in cash unless the Participant
(or his Beneficiary) elects, at such time and in accordance with such
procedures as the Committee shall from time to time permit, with respect to
the portions of such accounts invested in McDonald's common stock to
receive a distribution in shares of McDonald's common stock.
VIII
Effective January 1, 1998, Sections 11.1, 11.11 and 11.13 shall be amended
to substitute $5,000 for $3,500 or $3,500 each place it appears therein.
IX
Except as amended herein the Program as previously amended shall remain in
full force and effect.
-9-
<PAGE>
Executed in multiple originals this 19th day of December, 1997.
McDONALD'S CORPORATION
By: Stanley R. Stein
----------------------------------
Its: Executive Vice President
----------------------------------
By: Carleton D. Pearl
----------------------------------
Its: Senior Vice President and Treasurer
-----------------------------------
-10-
<PAGE>
Exhibit 11
MCDONALD'S CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Dollars and shares in millions, except per common share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Net income $1,642.5 $1,572.6 $1,427.3
Preferred stock dividends (net of applicable tax benefits) (25.3) (27.6) (40.5)
--------------------------------------
Net income available after preferred stock dividends (A) 1,617.2 1,545.0 1,386.8
Effect of preferred stock exchange (B) -- -- (4.3)
Common stock dividends on assumed conversion of preferred stock -- -- 0.6
--------------------------------------
Net income available to common shareholders $1,617.2 $1,545.0 $1,383.1
======================================
Weighted average number of common shares outstanding during the period (A) 689.3 698.2 701.5
Additional shares related to potentially dilutive stock options 15.8 18.4 16.2
--------------------------------------
Weighted average common shares - diluted 705.1 716.6 717.7
======================================
Net income per common share - diluted (C) $ 2.29 $ 2.16 $ 1.93
======================================
</TABLE>
- ---------------
(A) Refer to Consolidated Statement of Income and Financial Comments on pages
21 and 25 from Part II, Item 8 of this 1997 10-K for information concerning
the computation of Net income per common share.
(B) The 1995 period includes $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.
(C) Net income per common share data for all periods has been presented in
conformity with SFAS 128.
<PAGE>
Exhibit 12
MCDONALD'S CORPORATION
STATEMENT RE: COMPUTATION OF RATIOS
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
EARNINGS AVAILABLE FOR FIXED CHARGES
<S> <C> <C> <C> <C> <C>
- - Income before provision for income taxes $2,407.3 $2,251.0 $2,169.1 $1,886.6 $1,675.7
- - 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 28.3 39.6 19.6 6.6 6.9
- - Provision for income taxes of 50% owned
affiliates included in consolidated income
before provision for income taxes 69.0 73.2 73.3 34.9 34.2
- - Portion of rent charges (after reduction
for rental income from subleased
properties) considered to be representative
of interest factors* 145.9 130.9 103.8 83.4 71.6
- - Interest expense, amortization of debt
discount and issuance costs, and
depreciation of capitalized interest* 424.8 392.2 388.8 346.0 358.0
----------------------------------------------------------------------
$3,075.3 $2,886.9 $2,754.6 $2,357.5 $2,146.4
======================================================================
FIXED CHARGES
- - Portion of rent charges (after reduction
for rental income from subleased
properties) considered to be representative
of interest factors* $ 145.9 $ 130.9 $ 103.8 $ 83.4 $ 71.6
- - Interest expense, amortization of debt
discount and issuance costs, and fixed
charges related to redeemable preferred
stock* 426.1 410.4 403.4 343.9 349.3
- - Capitalized interest* 23.7 23.5 22.8 21.0 20.7
----------------------------------------------------------------------
$ 595.7 $ 564.8 $ 530.0 $ 448.3 $ 441.6
======================================================================
RATIO OF EARNINGS TO FIXED CHARGES 5.16 5.11 5.20 5.26 4.86
======================================================================
</TABLE>
* Includes amounts of the Registrant and its majority-owned subsidiaries, and
one-half of the amounts of 50% owned affiliates.
<PAGE>
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 Property Company Limited (Delaware)
McDonald's Restaurant Operations, Inc. (Delaware)
McDonald's System of France, Inc. (Delaware)
McDonald's Sistemas de Espana, Inc. (Delaware)
Restaurant Realty of Mexico, Inc. (Delaware)
FOREIGN SUBSIDIARIES
McDonald's Australia Limited (Australia)
McDonald's Properties (Australia) Pty., Ltd. (Australia)
Restco Comercio de Alimentos Ltda. (Brazil-Sao Paulo)
McDonald's Restaurants of Canada Limited (Canada)
McDonald's Danmark A/S (Denmark)
McDonald's Restaurants Limited (England)
McDonald's France, S.A. (France)
McDonald's GmbH (Germany)
McDonald's Immobilien GmbH (Germany)
McDonald's Restaurants Limited (Hong Kong)
Italian Restaurant Financing S.R.L. (Italy)
MDC Inmobiliaria de Mexico S.A. de C.V. (Mexico)
McDonald's Nederland B.V. (Netherlands)
McDonald's LLC (Russia)
McDonald's Restaurants (Swisse) S.A. (Switzerland)
McDonald's Restaurants (Taiwan) Co., Ltd. (Taiwan)
_______________________
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.
<PAGE>
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 22, 1998, 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, 1997:
<TABLE>
<CAPTION>
Commission File No.
--------------------------------------
Form S-8 Form S-3
--------------------------------------
<S> <C> <C>
33-09267 33-00001
33-24958 33-42642
33-49817 33-50695
33-50701 33-64873
33-58840 33-60939
333-03409 333-14141
333-25899
</TABLE>
ERNST & YOUNG LLP
Chicago, Illinois
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 341
<SECURITIES> 0
<RECEIVABLES> 484
<ALLOWANCES> 0
<INVENTORY> 71
<CURRENT-ASSETS> 1,142
<PP&E> 20,088
<DEPRECIATION> 5,127
<TOTAL-ASSETS> 18,242
<CURRENT-LIABILITIES> 2,985
<BONDS> 4,834
0
0
<COMMON> 8
<OTHER-SE> 12,626
<TOTAL-LIABILITY-AND-EQUITY> 18,242
<SALES> 8,137
<TOTAL-REVENUES> 11,409
<CGS> 6,650
<TOTAL-COSTS> 7,264
<OTHER-EXPENSES> (114)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 364
<INCOME-PRETAX> 2,407
<INCOME-TAX> 765
<INCOME-CONTINUING> 1,643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,643
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.29
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 335
<SECURITIES> 0
<RECEIVABLES> 414
<ALLOWANCES> 0
<INVENTORY> 58
<CURRENT-ASSETS> 956
<PP&E> 17,137
<DEPRECIATION> 4,326
<TOTAL-ASSETS> 15,415
<CURRENT-LIABILITIES> 1,795
<BONDS> 4,258
0
358
<COMMON> 92
<OTHER-SE> 9,918
<TOTAL-LIABILITY-AND-EQUITY> 15,415
<SALES> 6,864
<TOTAL-REVENUES> 9,795
<CGS> 5,548
<TOTAL-COSTS> 6,062
<OTHER-EXPENSES> (106)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 340
<INCOME-PRETAX> 2,169
<INCOME-TAX> 742
<INCOME-CONTINUING> 1,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,427
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.93
<FN>
Note: Restatement reflected herein is the result of reclassification to prior
period's financial statements to conform to current period presentation.
</FN>
</TABLE>
<PAGE>
Exhibit 99
- --------------------------------------------------------------------------------
Investor Release
- --------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE FOR MORE INFORMATION CONTACT:
--------------------- -----------------------------
03/26/98 Investors: Mary Healy, 630-623-6429
Media: Chuck Ebeling, 630-623-6150
McDONALD'S ANNOUNCES STRATEGIC INITIATIVES
------------------------------------------
OAK BROOK, IL -- McDonald's Corporation today announced important initiatives to
improve restaurant operations, enhance returns and reduce expenses. These
initiatives include the introduction of a new food preparation system in all
U.S. restaurants; a new financing approach to increase returns on new U.S.
restaurants for owner/operators and the Company; and plans to improve home
office staff alignment, focus and productivity, and to reduce selling, general
and administrative expenses.
Michael R. Quinlan, Chairman and Chief Executive Officer, said, "We are focused
on increasing shareholder value by growing sales and operating income, managing
capital and costs effectively, and using free cash flow and debt capacity to
fund ongoing share repurchases. Innovation has always played a key role in
McDonald's long-term success. These initiatives are examples of how we continue
to innovate and change to improve our customers' experience, motivate and reward
our owner/operators and strengthen shareholder returns. These changes are
significant and necessary for future growth.
Innovative Food Preparation
"Our extensive menu in the U.S. has created a challenge and an opportunity to
innovate food preparation. We are pleased to announce our new food preparation
system called 'Made for You' which through advances in equipment and technology
allows us to serve hotter and fresher food . . . at the speed of McDonald's. We
expect all U.S. McDonald's restaurants will be using 'Made for You' by the end
of next year.
<PAGE>
"This new system will deliver substantial benefits to customers as well as the
McDonald's System. The most important benefit to customers will be fresher,
hotter food . . . served fast. Restaurant managers and crew will benefit from
an easy-to-use system that takes the stress and guesswork out of delivering
great-tasting food. Owner/operators will benefit from reduced operating costs
as well as more satisfied customers and employees. Test results indicate food
cost savings of .2% to 1.4% of sales. Some restaurants also improved crew
satisfaction and reduced crew turnover, a significant benefit in the tight U.S.
labor market. Our 'Made for You' system also supports future growth through
product development because it can more easily accommodate an expanded menu.
"The average investment per traditional restaurant to implement the new system
is estimated to be approximately $25,000 or less. To underscore our commitment
to 'Made for You', we are prepared to provide financial incentives to McDonald's
owner/operators of up to $12,500 per traditional restaurant to defray the cost
of equipment made obsolete as a result of conversion to this new system. We may
also share additional costs in special cases where the conversion is more
extensive.
"We expect the final plan for the introduction of 'Made for You' to the U.S.
System to be approved in the second quarter and anticipate that a special charge
to operating income of approximately $170-$190 million will be recorded in the
second quarter 1998.
Innovative Restaurant Financing
"Through an innovative financing approach, we are offering owner/operators an
opportunity to lower their occupancy costs for new U.S. restaurants by buying
the restaurant building. Under this approach, we expect an owner/operator's
annual cash flow will increase by $15,000 per restaurant on average in the first
year, thereby increasing the value of their restaurant business. We also expect
this program to increase the Company's returns on new restaurants. We will
offer a similar program for U.S. restaurant relocations and rebuilds. We
estimate the Company's U.S. annual capital spending will be approximately $150 -
$200 million less under this new approach.
<PAGE>
Improving Productivity
"Last year we reorganized our U.S. business by creating five U.S. divisions.
These divisional staffs, each led by a president, are directly focused on and
accountable for field operations. We are very pleased with the results of the
U.S. reorganization, which after only nine months has already brought increased
field-based focus on customer satisfaction. To continue our progress, we plan
to better align and streamline our home office functions to increase
productivity and provide more focused support for our field organization.
"We have appointed an internal management team, assisted by a consulting firm,
to undertake a comprehensive study of home office spending to determine
alignment, productivity and cost reduction opportunities. We expect to conclude
this study within the second quarter 1998, at which time we will quantify
anticipated ongoing savings and record any related charge for one-time costs."
Jack M. Greenberg, Vice Chairman, Chairman and Chief Executive Officer U.S.A.,
said, "Our vision is to make McDonald's America's Best Fast Food Restaurant
Experience. These initiatives are part of ongoing efforts to achieve this
vision. Our goal is to be the best quick-service restaurant for customers, the
best place to work for employees and the best place to invest time and money for
franchisees and shareholders."
McDonald's is the largest and best-known global food service retailer, with more
than 23,000 restaurants in 109 countries and territories. On any day, even as
the market leader, McDonald's serves less than one percent of the world's
population. The Company plans to expand its leadership position through
convenience, superior value and excellent operations.
Forward-Looking Statements
Certain forward-looking statements are included in this release. 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 the success of business and operating initiatives including
those discussed in this release; and changes in business and economic
conditions; food, labor and other operating costs; consumer preferences,
spending patterns and demographic trends; availability and cost of land and
construction; accounting policies and practices and legislation and governmental
regulation.
