McDonaldโs Corporation is an American operator and franchisor of fast food restaurants represented worldwide and the biggest fast food company in the world.
1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 -------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report.) 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 --- --- 688,016,711 --------------------------------- (Number of shares of common stock outstanding as of June 30, 1997)
2 McDONALD'S CORPORATION ---------------------- INDEX ----- Page Reference Part I. Financial Information Item 1 - Financial Statements Condensed consolidated balance sheet, June 30, 1997 (unaudited) and December 31, 1996 3 Condensed consolidated statement of income (unaudited), six months and second quarters ended June 30, 1997 and 1996 4 Condensed consolidated statement of cash flows (unaudited), six months and second quarters ended June 30, 1997 and 1996 5 Financial comments (unaudited) 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. Other Information Item 4 - Submission of Matters to a Vote of Security Holders 17 Item 6 - Exhibits and Reports on Form 8-K 17 (a) Exhibits The exhibits listed in the accompanying Exhibit Index are filed as part of this report 17 (b) Reports on Form 8-K 21 Signature 22
3 PART I. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements ----------------------------- <TABLE> CONDENSED CONSOLIDATED BALANCE SHEET <CAPTION> (unaudited) In millions June 30, 1997 December 31, 1996 --------------------------------------------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and equivalents $ 302.2 $ 329.9 Accounts receivable 454.2 467.1 Notes receivable 16.9 28.3 Inventories, at cost, not in excess of market 61.6 69.6 Prepaid expenses and other current assets 242.0 207.6 --------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,076.9 1,102.5 --------------------------------------------------------------------------- OTHER ASSETS AND DEFERRED CHARGES 1,267.2 1,184.4 --------------------------------------------------------------------------- PROPERTY AND EQUIPMENT Property and equipment, at cost 19,359.2 19,133.9 Accumulated depreciation and amortization (4,932.9) (4,781.8) --------------------------------------------------------------------------- NET PROPERTY AND EQUIPMENT 14,426.3 14,352.1 --------------------------------------------------------------------------- INTANGIBLE ASSETS-NET 791.6 747.0 --------------------------------------------------------------------------- TOTAL ASSETS $17,562.0 $17,386.0 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 1,058.5 $ 597.8 Accounts payable 503.5 638.0 Income taxes 2.8 22.5 Other taxes 137.1 136.7 Accrued interest 101.3 121.7 Other accrued liabilities 623.3 523.1 Current maturities of long-term debt 51.3 95.5 --------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,477.8 2,135.3 --------------------------------------------------------------------------- LONG-TERM DEBT 4,632.8 4,830.1 OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 613.3 726.5 DEFERRED INCOME TAXES 1,002.1 975.9 COMMON EQUITY PUT OPTIONS 75.7
SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized - 165.0 million shares; issued - 7.2 thousand shares 358.0 358.0 Common stock, $.01 par; authorized - 3.5 billion shares; issued - 830.3 million shares 8.3 8.3 Additional paid-in capital 639.7 574.2 Guarantee of ESOP notes (193.2) (193.2) Retained earnings 11,833.7 11,173.0 Foreign currency translation adjustment (328.1) (175.1) --------------------------------------------------------------------------- 12,318.4 11,745.2 --------------------------------------------------------------------------- Common stock in treasury, at cost; 142.3 and 135.7 million shares (3,558.1) (3,027.0) --------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 8,760.3 8,718.2 --------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,562.0 $17,386.0 =========================================================================== See accompanying Financial comments. /TABLE
4 <TABLE> CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) <CAPTION> In millions, except Six Months Ended Quarters Ended per common share data June 30 June 30 1997 1996 1997 1996 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES Sales by Company-operated restaurants $3,867.3 $3,599.6 $2,014.1 $1,885.8 Revenues from franchised and affiliated restaurants 1,582.9 1,491.5 818.5 779.3 ------------------------------------------------------------------------------- TOTAL REVENUES 5,450.2 5,091.1 2,832.6 2,665.1 ------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Company-operated restaurants 3,167.2 2,942.4 1,640.1 1,523.1 Franchised restaurants- occupancy expenses 299.4 277.9 151.1 140.7 General, administrative and selling expenses 681.2 637.5 347.2 326.3 Other operating (income) expense-net (55.3) (41.3) (49.3) (37.1) ------------------------------------------------------------------------------- TOTAL OPERATING COSTS AND EXPENSES 4,092.5 3,816.5 2,089.1 1,953.0 ------------------------------------------------------------------------------- OPERATING INCOME 1,357.7 1,274.6 743.5 712.1 ------------------------------------------------------------------------------- Interest expense 176.2 167.6 86.2 82.8 Nonoperating (income) expense-net 22.7 29.4 14.2 3.8 ------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 1,158.8 1,077.6 643.1 625.5 ------------------------------------------------------------------------------- Provision for income taxes 376.1 355.6 204.9 205.1 ------------------------------------------------------------------------------- NET INCOME $ 782.7 $ 722.0 $ 438.2 $ 420.4 =============================================================================== NET INCOME PER COMMON SHARE $ 1.11 $ 1.01 $ .63 $ .59 ------------------------------------------------------------------------------- DIVIDENDS PER COMMON SHARE $ .1575 $ .1425 $ .0825 $ .0750 ------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 690.7 699.8 689.7 699.1 ------------------------------------------------------------------------------- See accompanying Financial comments. /TABLE
5 <TABLE> CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <CAPTION> Six Months Ended Quarters Ended June 30 June 30 In millions 1997 1996 1997 1996 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> OPERATING ACTIVITIES Net income $ 782.7 $ 722.0 $ 438.2 $ 420.4 Adjustments to reconcile to cash provided by operations Depreciation and amortization 386.6 371.6 194.7 185.0 Changes in operating working capital items (152.9) (94.0) (167.3) (68.0) Other (40.6) 21.2 (21.7) 9.1 ------------------------------------------------------------------------------- CASH PROVIDED BY OPERATIONS 975.8 1,020.8 443.9 546.5 ------------------------------------------------------------------------------- INVESTING ACTIVITIES Property and equipment expenditures (956.9) (984.5) (502.5) (517.4) Purchases and sales of restaurant businesses and sales of other property 37.9 17.4 14.9 12.8 Other (62.5) (86.7) (4.6) (55.0) ------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (981.5) (1,053.8) (492.2) (559.6) ------------------------------------------------------------------------------- FINANCING ACTIVITIES Notes payable and long-term financing issuances and repayments 496.0 312.8 260.9 140.9 Treasury stock purchases (470.4) (239.5) (174.0) (99.5) Common and preferred stock dividends (122.5) (112.0) (63.8) (58.5) Other 74.9 82.6 27.6 46.4 ------------------------------------------------------------------------------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (22.0) 43.9 50.7 29.3 ------------------------------------------------------------------------------- CASH AND EQUIVALENTS INCREASE (DECREASE) (27.7) 10.9 2.4 16.2 ------------------------------------------------------------------------------- Cash and equivalents at beginning of period 329.9 334.8 299.8 329.5 ------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF PERIOD $ 302.2 $ 345.7 $ 302.2 $ 345.7 =============================================================================== See accompanying Financial comments. /TABLE
6 FINANCIAL COMMENTS (UNAUDITED) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company's 1996 Annual Report to Shareholders. In the opinion of the Company, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter and the six months ended June 30, 1997 do not necessarily indicate the results that may be expected for the full year. The results of operations of restaurant businesses purchased and sold were not material to the condensed consolidated financial statements for periods prior to purchase and sale. NET INCOME PER COMMON SHARE Net income per common share was computed using net income, reduced by preferred stock cash dividends of $6.9 million for the second quarters of 1997 and 1996 and $13.8 for the six months ended June 30, 1997 and 1996. Adjusted net income was divided by the weighted average shares of common stock outstanding: 689.7 and 699.1 million for the second quarters ended June 30, 1997 and 1996, and 690.7 and 699.8 million for the six months ended June 30, 1997 and 1996, respectively. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, (SFAS 128), which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods to disclose diluted net income per common share in addition to its current basic net income per common share. Pro forma diluted net income per common share amounts, calculated in accordance with SFAS 128, were $0.61 and $0.58 for the second quarters ended June 30, 1997 and 1996, and $1.09 and $0.98 for the six months ended June 30, 1997 and 1996, respectively. ASSET IMPAIRMENT In first quarter 1996, the Company recorded a $16 million pre-tax charge to other operating (income) expense, equivalent to 2 cents per common share, related to restaurant sites in Mexico. COMMON EQUITY PUT OPTIONS In first quarter 1997, the Company sold 1.0 million common equity put options which expired unexercised in May 1997. During second quarter 1997 an additional 1.5 million common equity put options were sold which are exercisable in August 1997. At June 30, 1997, the $75.7 million exercise price of these options was classified in common equity put options, and the related offset was recorded in common stock in treasury, net of premiums received.
7 Item 2. Management's Discussion And Analysis Of Financial Condition -------------------------------------------------------------------- And Results Of Operations ------------------------- <TABLE> INCREASES (DECREASES) IN OPERATING RESULTS OVER 1996 <CAPTION> Dollars in millions, except Six Months Quarter per common share data Ended June 30 Ended June 30 ------------------------------------------------------------------------- <S> <C> <C> <C> <C> SYSTEMWIDE SALES $1,066.7 7% $543.1 7% ------------------------------------------------------------------------- REVENUES Sales by Company-operated restaurants $ 267.7 7% $128.3 7% Revenues from franchised and affiliated restaurants 91.4 6 39.2 5 ------------------------------------------------------------------------- TOTAL REVENUES 359.1 7 167.5 6 ------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Company-operated restaurants 224.8 8 117.0 8 Franchised restaurants- occupancy costs 21.5 8 10.4 7 General, administrative and selling expenses 43.7 7 20.9 6 Other operating (income) expense-net (14.0) N/M (12.2) N/M ------------------------------------------------------------------------- TOTAL OPERATING COSTS AND EXPENSES 276.0 7 136.1 7 ------------------------------------------------------------------------- OPERATING INCOME 83.1 7 31.4 4 ------------------------------------------------------------------------- Interest expense 8.6 5 3.4 4 Nonoperating (income) expense-net (6.7) N/M 10.4 N/M ------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 81.2 8 17.6 3 ------------------------------------------------------------------------- Provision for income taxes 20.5 6 (0.2) 0 ------------------------------------------------------------------------- NET INCOME $ 60.7 8% $ 17.8 4% ========================================================================= NET INCOME PER COMMON SHARE $ .10 10% $ .04 7% ------------------------------------------------------------------------- (N/M) Not meaningful /TABLE
8 CONSOLIDATED OPERATING RESULTS Net income per common share and net income increased 10 and eight percent, respectively, for the six months, and seven and four percent, respectively, for the quarter. Changing foreign currencies significantly reduced reported results for the six months and quarter. Excluding the $16 non-cash million charge for the adoption of SFAS 121 in first quarter 1996 and foreign currency impact, net income per common share and net income would have increased 11 and 10 percent for the six months, respectively. For the quarter, net income per common share and net income would have increased 10 and eight percent, respectively, excluding foreign currency impact. During the quarter, the Company repurchased four million shares of common stock for approximately $200 million, bringing total share repurchase for the six months to 10.7 million shares for about $500 million. Fewer shares outstanding resulted in higher increases in net income per common share compared with the increases in net income. Systemwide sales represent sales by Company-operated, franchised and affiliated restaurants. Total revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees and affiliates. These fees are based upon a percent of sales with specified minimum payments. On a global basis, the increases in sales and revenues for both periods were due to expansion, offset in part by weaker foreign currencies. The unusually low number of net U.S. restaurant additions in both periods was primarily due to a greater number of restaurant closings, particularly satellite restaurant closings previously announced. ---------------------------------------------------------------------- RESTAURANT ADDITIONS Six Months Ended Quarters Ended June 30 June 30 1997 1996 1997 1996 ---------------------------------------------------------------------- U.S. 84 313 74 184 Outside the U.S. 677 570 433 383 ---------------------------------------------------------------------- Total restaurant additions 761 883 507 567 ---------------------------------------------------------------------- RESTAURANTS UNDER CONSTRUCTION At June 30 1997 1996 ---------------------------------------------------------------------- U.S. 78 153 Outside the U.S. 359 389 ---------------------------------------------------------------------- Total restaurants under construction 437 542 ----------------------------------------------------------------------
9 ------------------------------------------------------------------------- CONSOLIDATED OPERATING MARGINS Six Months Ended Quarters Ended June 30 June 30 1997 1996 1997 1996 ------------------------------------------------------------------------- In millions of dollars Company-operated $ 700.1 $ 657.2 $ 374.0 $ 362.7 Franchised 1,283.5 1,213.6 667.4 638.6 Combined operating margins $1,983.6 $1,870.8 $1,041.4 $1,001.3 As a percent of sales/revenues Company-operated 18.1 18.3 18.6 19.2 Franchised 81.1 81.4 81.5 81.9 ------------------------------------------------------------------------- Company-operated margins as a percent of sales were about flat for the six months and lower for the quarter. As a percent of sales, food & paper costs increased, while payroll costs decreased for both periods. Occupancy & other operating costs as a percent of sales increased slightly for the six months and decreased slightly for the quarter. Franchised margin dollars comprised about two-thirds of the combined operating margins, the same as in the prior year. While franchised margins as a percent of applicable revenues decreased slightly for both periods, franchised margin dollars increased six percent for the six months and five percent for the quarter. The increases in general, administrative & selling expenses were primarily due to strategic global spending to support the Convenience, Value and Execution Strategies, including costs associated with expansion outside the U.S. and continued investment in developing countries, offset in part by weaker foreign currencies. Other operating (income) expense--net is composed of transactions related to franchising and the foodservice business. Gains on sales of restaurant businesses were lower since fewer restaurants were sold. The other category reflected lower expense for both periods. This was primarily due to lower provisions for property dispositions in 1997 for the quarter, and for the six months, the $16 million charge for the adoption of SFAS 121 in first quarter 1996. ------------------------------------------------------------------------ OTHER OPERATING (INCOME) Six Months Ended Quarters Ended EXPENSE-NET June 30 June 30 In millions of dollars 1997 1996 1997 1996 ------------------------------------------------------------------------ Gains on sales of restaurant businesses $(27.6) $(42.3) $(20.0) $(33.3) Equity in earnings of unconsolidated affiliates (33.2) (34.4) (17.3) (15.9) Other (income) expense 5.5 35.4 (12.0) 12.1 ------------------------------------------------------------------------ Other operating (income) expense--net $(55.3) $(41.3) $(49.3) $(37.1) ========================================================================
10 Consolidated operating income increased $83 million or seven percent and $31 million or four percent for the six months and quarter, respectively. The increases reflected higher combined operating margin dollars and other operating income, offset in part by higher general, administrative & selling expenses and weaker foreign currencies. Higher interest expense in both periods reflected higher debt levels, offset in part by lower average interest rates and weaker foreign currencies. Nonoperating (income) expense reflected translation losses in both periods of 1997 compared with translation gains in 1996, and in the six months ended June 30, 1996, losses associated with the reduction of the carrying value of the Company's investment in Discovery Zone common stock to zero. The effective income tax rate was 32.5 and 31.9 percent for the six months and quarter of 1997, respectively, compared with 33.0 and 32.8 percent for the corresponding periods of 1996. For the year 1997, the Company expects the effective tax rate to be in the range of 32.0 to 32.5 percent. OPERATING RESULTS OUTSIDE THE U.S. The sales increases outside the U.S. for both periods were driven primarily by expansion, offset in part by weaker foreign currencies. Comparable sales in constant currencies increased slightly for the quarter and decreased slightly for the six months. If exchange rates had remained at 1996 levels, sales outside the U.S. would have increased 18 and 16 percent for the quarter and six months, respectively. Severe weather in Europe in the first quarter and weak economies in both periods negatively affected results. ---------------------------------------------------------------------- OPERATING RESULTS OUTSIDE Six Months Ended Quarters Ended THE U.S. June 30 June 30 1997 1996 1997 1996 ---------------------------------------------------------------------- Percent increase SALES As reported 9 10 11 5 Excluding foreign currency impact 16 15 18 12 REVENUES As reported 13 15 14 11 Excluding foreign currency impact 17 17 19 15 OPERATING INCOME As reported 12 8 10 7 Excluding foreign currency impact 17 10 15 11 Excluding SFAS 121 charge and foreign currency impact 15 13 15 11 As a percent of sales/revenues Company-operated margins 18.7 19.2 19.0 19.8 Franchised margins 81.2 81.1 81.7 81.2 ----------------------------------------------------------------------
11 Revenues increased at a faster rate than sales in both periods. This was primarily due to the weakening Japanese Yen, which had a greater effect on sales than revenues due to our affiliate structure in Japan, and the higher growth rate in Company-operated versus franchised restaurants. Of the larger international markets, the following had strong sales and operating income growth for both periods of 1997: the Philippines and Taiwan in Asia/Pacific; England, Italy, Spain, Sweden and Switzerland in Europe; and Mexico in Latin America. Our operations in Canada were negatively affected by increased competition and low consumer spending due to high unemployment; weak economies also negatively affected our operations in France and Germany, although France improved in the second quarter. The increases in operating income outside the U.S. in both periods were driven by higher Company-operated and franchised margin dollars, and increases in other operating income. Weaker foreign currencies and higher general, administrative & selling expenses necessary to fund expansion and continued investment in developing countries partly offset these increases. Company-operated margins as a percent of sales declined in both periods. As a percent of sales, increases in food & paper costs and occupancy & other operating costs were offset in part by decreases in payroll costs. Franchised margins as a percent of revenues were relatively flat in the six months and up for the quarter.
12 IMPACT OF FOREIGN CURRENCIES ON REPORTED RESULTS While changing foreign currencies affect reported results, McDonald's lessens exposures by primarily purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign- denominated cash flows. The weakening of the Japanese Yen and Deutsche Mark were the primary foreign currency changes that negatively affected results in both periods. The following table illustrates what 1997 results would have been if exchange rates had remained at 1996 levels compared with reported results. -------------------------------------------------------------------------- FOREIGN CURRENCY IMPACT ON WORLDWIDE RESULTS -------------------------------------------------------------------------- Dollars in millions except per common share data -------------------------------------------------------------------------- Increase -------------------------------------------------------------------------- Adjusted Reported Change Adjusted Reported -------------------------------------------------------------------------- Six months ended June 30, 1997 -------------------------------------------------------------------------- Systemwide sales $16,810.4 $16,308.2 $502.2 10% 7% Operating income 1,395.3 1,357.7 37.6 9 7 Net income 803.8 782.7 21.1 11 8 Net income per common share 1.14 1.11 .03 13 10 -------------------------------------------------------------------------- Quarter ended June 30, 1997 -------------------------------------------------------------------------- Systemwide sales $8,737.9 $8,475.1 $262.8 10% 7% Operating income 762.0 743.5 18.5 7 4 Net income 453.1 438.2 14.9 8 4 Net income per common share .65 .63 .02 10 7 -------------------------------------------------------------------------- U.S. OPERATING RESULTS U.S. sales increased in both periods due to restaurant expansion (497 restaurants were added in the 12 months ended June 30, 1997). U.S. comparable sales were slightly positive for the six months and slightly negative for the quarter. This performance reflected successful marketing and promotions including Monopoly, Chicken McNuggets and Teenie Beanie Babies and disappointing results from the price component of Campaign 55.
13 ---------------------------------------------------------------------- U.S. OPERATING RESULTS Six Months Ended Quarters Ended June 30 June 30 1997 1996 1997 1996 ---------------------------------------------------------------------- Percent increase/(decrease) Sales 5 3 3 3 Revenues 0 4 (3) 4 Operating income 1 (1) (2) 0 ---------------------------------------------------------------------- As a percent of sales/revenues Company-operated margins 16.9 16.8 17.7 18.3 Franchised margins 81.0 81.5 81.4 82.4 ---------------------------------------------------------------------- U.S. sales increased at a faster rate than revenues primarily because the number of U.S. franchised and affiliated restaurants increased over the past year while the number of Company-operated restaurants decreased. U.S. operating income increased slightly for the six months and decreased slightly for the quarter. This performance reflected lower Company-operated margin dollars and higher general, administrative & selling expenses, offset in part by higher franchised margin dollars, and for the quarter, lower other operating expenses. Company-operated margins as a percent of sales remained relatively flat for the six months and declined for the quarter. Cost trends as a percent of sales follow: food & paper costs increased while payroll and occupancy & other operating expenses decreased for the six months; for the quarter, food & paper and payroll costs increased while occupancy & other operating expenses decreased. Franchised margins as a percent of revenues declined for both periods. These declines reflected slower revenue growth as a result of flat to negative comparable sales and rent adjustments. The margins were also negatively affected by higher occupancy costs, primarily rent expense, driven by an increase in the number of leased sites. FINANCIAL POSITION Cash provided by operations for the six months ended June 30, 1997 decreased 4%. Together with other sources of cash such as borrowings, cash provided by operations was used primarily for capital expenditures, debt repayments, share repurchases and dividends. The consolidated capital expenditure decrease of 3% for the six months ended June 30, resulted from a 30% decrease in U.S. capital expenditures offsetting a 14% capital expenditure increase from outside the U.S. Based on input from local management, the Company has revised its plan and expects to add about 2,400 restaurants globally, with more than 80% being outside the U.S.
14 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 changes in global and local business and economic conditions; legislation and governmental regulation; competition; success of operating initiatives and advertising and promotional efforts; food, labor and other operating costs; availability and cost of land and construction; accounting policies and practices; consumer preferences, spending patterns and demographic trends; political or economic instability in local markets; and currency exchange rates.
15 <TABLE> SIX MONTHS AND SECOND QUARTER HIGHLIGHTS <CAPTION> OPERATING RESULTS --------------------------------------------------------------------------- Dollars in millions, except Six Months Ended Quarters Ended per common share data June 30 June 30 1997 1996 1997 1996 --------------------------------------------------------------------------- <S> <C> <C> <C> <C> Systemwide sales $16,308.2 $15,241.5 $8,475.1 $7,932.0 --------------------------------------------------------------------------- U.S. sales 8,409.3 8,001.6 4,420.4 4,278.8 Operated by franchisees 6,516.4 6,190.1 3,423.2 3,305.4 Operated by the Company 1,336.6 1,381.5 698.8 741.5 Operated by affiliates 556.3 430.0 298.4 231.9 --------------------------------------------------------------------------- Sales outside the U.S. 7,898.9 7,239.9 4,054.7 3,653.2 Operated by franchisees 3,645.5 3,435.2 1,874.6 1,748.9 Operated by the Company 2,530.7 2,218.1 1,315.3 1,144.3 Operated by affiliates 1,722.7 1,586.6 864.8 760.0 --------------------------------------------------------------------------- Total revenues 5,450.2 5,091.1 2,832.6 2,665.1 U.S. 2,262.1 2,264.0 1,178.2 1,211.0 Outside the U.S. 3,188.1 2,827.1 1,654.4 1,454.1 --------------------------------------------------------------------------- Operating income 1,357.7 1,274.6 743.5 712.1 U.S. 611.4 605.2 340.2 346.0 Outside the U.S. 772.9 691.5 416.8 377.3 Corporate G&A (26.6) (22.1) (13.5) (11.2) --------------------------------------------------------------------------- Income before provision for income taxes 1,158.8 1,077.6 643.1 625.5 Net income 782.7 722.0 438.2 420.4 Net income per common share 1.11 1.01 .63 .59 --------------------------------------------------------------------------- Cash provided by operations 975.8 1,020.8 443.9 546.5 --------------------------------------------------------------------------- Total assets 17,562.0 16,021.4 Total shareholders' equity 8,760.3 8,319.1 --------------------------------------------------------------------------- /TABLE
16 <TABLE> RESTAURANTS <CAPTION> ------------------------------------------------------------------------- At June 30, 1997 1996 ------------------------------------------------------------------------- <S> <C> <C> Systemwide restaurants 21,783 19,263 ------------------------------------------------------------------------- U.S. 12,178 11,681 Operated by franchisees 9,537 9,167 Operated by the Company 1,795 1,852 Operated by affiliates 846 662 ------------------------------------------------------------------------- Outside the U.S. 9,605 7,582 Operated by franchisees 4,166 3,479 Operated by the Company 2,714 2,170 Operated by affiliates 2,725 1,933 ------------------------------------------------------------------------- /TABLE
17 PART II Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ (a) The Annual Meeting of Shareholders was held on May 22, 1997. (b) Not Applicable. (c) At the Annual Meeting of Shareholders, the shareholders voted to elect five directors to serve until the 2000 Annual Meeting of Shareholders. Each nominee was elected by a vote of the shareholders as follows: Director For Withheld -------- --- -------- James R. Cantalupo 574,618,708 9,169,071 Enrique Hernandez, Jr. 575,408,278 8,379,501 Donald R. Keough 575,296,545 8,491,234 Michael R. Quinlan 574,178,696 9,609,083 B. Blair Vedder 575,317,329 8,470,450 (d) Not Applicable. Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) - Exhibits -------------- Exhibit Number Description -------------- ----------- (3) Corrected Restated Certificate of Incorporation effective as of December 13, 1996 incorporated by reference from Form 8-K dated January 9, 1997 and By-Laws effective as of July 15, 1997 filed herewith. (4) Instruments defining the rights of security holders, including indentures (A): (a) Debt Securities. Indenture dated as of March 1, 1987 incorporated herein by reference from Exhibit 4(a) of Form S-3 Registration Statement, SEC file no. 33-12364. (i) Medium-Term Notes, Series B, due from nine months to 30 years from Date of Issue. Supplemental Indenture No. 12 incorporated herein by reference from Exhibit (4) of Form 8-K dated August 18, 1989 and Forms of Medium-Term Notes, Series B, incorporated herein by reference from Exhibit (4)(b) of Form 8-K dated September 14, 1989.
18 Exhibit Number Description -------------- ----------- (ii) Medium-Term Notes, Series C, due from nine months to 30 years from Date of Issue. Form of Supplemental Indenture No. 15 incorporated herein by reference from Exhibit 4(b) of Form S-3 Registration Statement, SEC file no. 33-34762 dated May 14, 1990. (iii) Medium-Term Notes, Series C, due from nine months (U.S. Issue)/184 days (Euro Issue) to 30 years from Date of Issue. Amended and restated Supplemental Indenture No. 16 incorporated herein by reference from Exhibit (4) of Form 10-Q for the period ended March 31, 1991. (iv) 8-7/8% Debentures due 2011. Supplemental Indenture No. 17 incorporated herein by reference from Exhibit (4) of Form 8-K dated April 22, 1991. (v) Medium-Term Notes, Series D, due from nine months (U.S. Issue)/184 days (Euro Issue) to 60 years from Date of Issue. Supplemental Indenture No. 18 incorporated herein by reference from Exhibit 4(b) of Form S-3 Registration Statement, SEC file no. 33-42642 dated September 10, 1991. (vi) 7-3/8% Notes due July 15, 2002. Form of Supplemental Indenture No. 19 incorporated herein by reference from Exhibit (4) of Form 8-K dated July 10, 1992. (vii) 6-3/4% Notes due February 15, 2003. Form of Supplemental Indenture No. 20 incorporated herein by reference from Exhibit (4) of Form 8-K dated March 1, 1993. (viii)7-3/8% Debentures due July 15, 2033. Form of Supplemental Indenture No. 21 incorporated herein by reference from Exhibit (4)(a)of Form 8-K dated July 15, 1993. (ix) Medium-Term Notes, Series E, due from nine months to 60 years from date of issue. Form of Supplemental Indenture No. 22, incorporated herein by reference from Exhibit (4) of Form 10-Q for the period ended June 30, 1995. (x) 6-5/8% Notes due September 1, 2005. Form of Supplemental Indenture No. 23 incorporated herein by reference from Exhibit 4(a) of Form 8-K dated September 5, 1995.
19 Exhibit Number Description -------------- ----------- (xi) 7.05% Debentures due 2025. Form of Supplemental Indenture No. 24 incorporated herein by reference from Exhibit (4)(a) of Form 8-K dated November 13, 1995. (b) Form of Deposit Agreement dated as of November 25, 1992 by and between McDonald's Corporation, First Chicago Trust Company of New York, as Depositary, and the Holders from time to time of the Depositary Receipts. (c) Rights Agreement dated as of December 13, 1988 between McDonald's Corporation and The First National Bank of Chicago, incorporated herein by reference from Exhibit 1 of Form 8-K dated December 23, 1988. (i) Amendment No. 1 to Rights Agreement incorporated herein by reference from Exhibit 1 of Form 8-K dated May 25, 1989. (ii) Amendment No. 2 to Rights Agreement incorporated herein by reference from Exhibit 1 of Form 8-K dated July 25, 1990. (d) Indenture and Supplemental Indenture No. 1 dated as of September 8, 1989, between McDonald's Matching and Deferred Stock Ownership Trust, McDonald's Corporation and Pittsburgh National Bank in connection with SEC Registration Statement Nos. 33-28684 and 33-28684-01, incorporated herein by reference from Exhibit (4)(a) of Form 8-K dated September 14, 1989. (e) Form of Supplemental Indenture No. 2 dated as of April 1, 1991, supplemental to the Indenture between McDonald's Matching and Deferred Stock Ownership Trust, McDonald's Corporation and Pittsburgh National Bank in connection with SEC Registration Statement Nos. 33-28684 and 33-28684-01, incorporated herein by reference from Exhibit (4)(c) of Form 8-K dated March 22, 1991. (f) 8.35% Subordinated Deferrable Interest Debentures due 2025. Indenture incorporated herein by reference from Exhibit 99.1 of Schedule 13E-4/A Amendment No. 2 dated July 14, 1995. (g) Senior Debt Securities Indenture dated as of October 19, 1996, incorporated herein by reference from Exhibit 4(a) of Form S-3 Registration Statement, SEC File No. 333-14141.
20 Exhibit Number Description -------------- ----------- (h) Subordinated Debt Securities Indenture dated as of October 18, 1996, incorporated herein by reference from Form 8-K dated October 18, 1996. (i) 7 1/2% Subordinated Deferrable Interest Debentures due 2036. Supplemental Indenture No. 1 dated as of November 5, 1996, incorporated herein by reference from Exhibit 4(b) of Form 8-K dated as of October 18, 1996. (ii) 7 1/2% Subordinated Deferrable Interest Debentures due 2037. Supplemental Indenture No. 2 dated as of November 5, 1996, incorporated herein by reference from Form 8-K dated January 9, 1997. (10) Material Contracts (a) Directors' Stock Plan, as amended and restated, incorporated herein by reference from Form 10-K for the year ended December 31, 1994.* (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 filed herewith. (ii) Amendment No. 2 filed herewith. (iii) Amendment No. 3 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, filed herewith. (f) McDonald's Corporation Deferred Income Plan, as amended and restated, incorporated herein by reference from Form 10-K for the year ended December 31, 1996.* (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.*
21 Exhibit Number Description -------------- ----------- (11) Statement re: Computation of per share earnings. (12) Statement re: Computation of ratios. (27) Financial Data Schedule -------------------- * Denotes compensatory plan. (A) Other instruments defining the rights of holders of long-term 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. (b) 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 August 12, 1997. Financial Statements Date of Report Item Number Required to be Filed -------------- ----------- -------------------- April 17, 1997 Item 7 No July 9, 1997 Item 7 No July 17, 1997 Item 7 No
22 Signature ----------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McDONALD'S CORPORATION (Registrant) By /s/ Michael L. Conley ----------------- (Signature) Michael L. Conley Executive Vice President, Chief Financial Officer August 12, 1997 ------------------ (Date)