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<SEC-DOCUMENT>0000950131-99-001938.txt : 19990402
<SEC-HEADER>0000950131-99-001938.hdr.sgml : 19990402
ACCESSION NUMBER: 0000950131-99-001938
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990331
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MCDONALDS CORP
CENTRAL INDEX KEY: 0000063908
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812]
IRS NUMBER: 362361282
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-05231
FILM NUMBER: 99579930
BUSINESS ADDRESS:
STREET 1: ONE MCDONALD'S PLZ
CITY: OAK BROOK
STATE: IL
ZIP: 60523
BUSINESS PHONE: 6306233000
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10K
<TEXT>
<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, 1998
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>
Title of each class Name of each exchange
on which registered
---------------------------------------------------------------------------------------
<S> <C>
Common stock, $.01 par value New York Stock Exchange
Chicago 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
7-1/2% Subordinated Deferrable Interest Debentures due 2036 New York Stock Exchange
7-1/2% Subordinated Deferrable Interest Debentures due 2037 New York Stock Exchange
7.31% Subordinated Deferrable Interest Debentures due 2027 New York Stock Exchange
6-3/8% Debentures due 2028 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 $53,373,541,566 and the number of shares of common stock
outstanding is 1,357,952,498 as of January 31, 1999 (the number of shares has
been restated to reflect the two-for-one stock split effected in March 1999).
Documents incorporated by reference. Part III of this 10-K incorporates
information by reference from the registrant's 1999 definitive proxy statement
which will be filed no later than 120 days after December 31, 1998.
- --------------------------------------------------------------------------------
<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
There have been no significant changes to the Company's corporate structure
during 1998, or 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, 1998, 1997 and 1996 is
included in Part II, Item 8, page 23 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. Beginning in 1998, the Company generally provides
franchisees in the United States the option to own new restaurant buildings.
Franchisees 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, as well as learning
computer skills. Assistant managers are eligible to attend the advanced
operations and management class at one of the six Hamburger University (H.U.)
campuses in the U.S., Germany, England, Japan, Brazil or Australia. The
curriculum at H.U. concentrates on skills and practices essential to driving the
Company's strategies of delivering customer satisfaction and increasing market
share.
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. The Company and affiliated
entities also market food products, in a few instances, under brand names
other than McDonald's well-known global brand.
Products
McDonald's restaurants offer a substantially uniform menu consisting of
hamburgers and cheeseburgers, including the Big Mac and Quarter Pounder with
Cheese, the Filet-O-Fish, several chicken sandwiches, french fries, Chicken
McNuggets, salads, milk shakes, McFlurries, sundaes and cones, pies, cookies and
soft drinks and other beverages. In addition, the restaurants sell a variety of
other products during limited promotional time periods. McDonald's restaurants
operating in the United States and certain international markets are open during
breakfast hours and offer a full or limited 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. 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.
2
<PAGE>
Food preparation
The Company introduced the Made For You food preparation system in 1998 and
plans to have it integrated into virtually all restaurants in the United States
and Canada by the end of 1999. Made For You is based on a just-in-time
production philosophy where each sandwich is made only when it is needed.
Through advances in equipment and technology, the new system aims to provide
customers with fresher, better-tasting food. In addition, the new system can
support future growth through product development because it can more easily
accommodate an expanded menu.
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 financial condition and
results of operations for the years ended December 31, 1998, 1997 and 1996 in
Part II, Item 7, pages 7 through 15, and the Consolidated statement of cash
flows for the years ended December 31, 1998, 1997 and 1996 in Part II, Item 8,
page 19 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,
convenience and service and by offering quality food products. The Company's
competition in the broadest perspective includes restaurants, quick-service
eating establishments, pizza parlors, coffee shops, street vendors, convenience
food stores, delicatessens, and supermarkets.
In the U.S., the quick service restaurant business consists of about 463,000
restaurants that generate nearly $247 billion in annual sales. McDonald's
accounts for about 2.7% of those restaurants and approximately 7.3% 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 1998, there were no material capital expenditures for
environmental control facilities and no such material expenditures are
anticipated.
Number of employees
During 1998, the Company's average number of employees worldwide, including
Company-operated restaurant employees, was approximately 284,000.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information about foreign and domestic markets is incorporated herein
by reference to Management's discussion and analysis of financial condition and
results of operations in Part II, Item 7, pages 7 through 15 and Segment and
geographic information in Part II, Item 8, page 23 of this Form 10-K.
3
<PAGE>
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. McDonald's generally owns or
secures long-term land and building leases for restaurant sites, which ensures
long-term tenure and helps control related costs. Restaurant profitability for
both the Company and franchisees is important; therefore, ongoing efforts are
made to control 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 of financial condition and results of
operations in Part II, Item 7, pages 7 through 15 and in Financial statements
and supplementary data in Part II, Item 8, pages 17 through 28 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. In
addition, the Company is subject to various federal, state and local regulations
that impact various aspects of its business, as discussed below. The Company
does not believe that any such claims, lawsuits or regulations, 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 that 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. Additionally, on occasion disputes arise on a
number of issues between the Company and individuals or entities who claim that
they should be (or should have been) granted the opportunity to supply products
or services to McDonald's restaurants.
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, safety, 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
the promulgation of additional requirements in the future.
4
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
All of the executive officers of McDonald's Corporation as of March 1, 1999 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 1999 Board of Directors' meeting.
- ----------------------------------------------------------------
Number of
Number of years in
Date of years with present
Name and office birth Company position
- ----------------------------------------------------------------
Claire H. Babrowski 7/25/57 21 *
Executive Vice President
Robert M. Beavers, Jr. 1/27/44 35 5
Senior Vice President
James R. Cantalupo 11/14/43 24 *
Vice Chairman; Chairman, and
Chief Executive Officer--
McDonald's International
Michael L. Conley 3/28/48 24 2
Executive Vice President
and Chief Financial Officer
Alan D. Feldman (1) 3/6/52 4 *
President--McDonald's USA
Jack M. Greenberg 9/28/42 17 *
President and
Chief Executive Officer
Jeffrey B. Kindler (2) 5/13/55 3 1
Executive Vice President,
Corporate General Counsel
Christopher Pieszko 12/2/55 20 1
Senior Vice President and
Corporate Controller
Michael R. Quinlan 12/9/44 35 9
Chairman of the Board
James A. Skinner 10/25/44 28 1
President--Europe Group
Stanley R. Stein 4/17/42 24 1
Executive Vice President
Fred L. Turner 1/6/33 42 9
Senior Chairman
- -----------------------------------------------------------------
*Less than one year in current position.
(1) Mr. Feldman joined the Company in 1994 as Corporate Vice President and was
promoted to Division President in 1997. He assumed his current position in
1998. 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.
<PAGE>
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. On January
26, 1999, the Board of Directors declared a two-for-one stock split of the
Company's common stock, effected in the form of a stock dividend paid on March
5, 1999. All references to the number of common shares, per common share amounts
and market prices have been restated to give retroactive effect to the stock
split for all periods presented.
The following table sets forth the common stock price range on the New York
Stock Exchange composite tape and dividends declared per common share.
1998 1997
- -------------------------------------------------------------------------
Dividend Dividend
per per
common common
Quarter High Low share High Low share
- -------------------------------------------------------------------------
First 30 1/8 22 5/16 .04125 24 11/16 21 1/4 .03750
Second 35 28 9/16 .04500 27 7/16 23 3/8 .04125
Third 37 1/2 26 3/4 .04500 27 3/8 22 7/8 .04125
Fourth 39 3/4 28 1/8 .04500 24 13/16 21 1/16 .04125
- --------------------------------------------------------------------------
Year 39 3/4 22 5/16 .17625 27 7/16 21 1/16 .16125
- --------------------------------------------------------------------------
The approximate number of shareholders of record and beneficial owners of the
Company's common stock as of January 31, 1999 was estimated to be 888,600.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchase. Accordingly, the common stock dividend
yield is modest. However, the Company has paid 92 consecutive quarterly
dividends on common stock through first quarter 1999 and has increased the
dividend amount at least once every year. Additional dividend increases will be
considered after reviewing returns to shareholders, profitability expectations
and financing needs.
5
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
11-YEAR SUMMARY 1998 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Systemwide sales $ 35,979 33,638 31,812 29,914 25,987 23,587 21,885
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees $ 22,330 20,863 19,969 19,123 17,146 15,756 14,474
Operated by the Company $ 8,895 8,136 7,571 6,863 5,793 5,157 5,103
Operated by affiliates $ 4,754 4,639 4,272 3,928 3,048 2,674 2,308
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 12,421 11,409 10,687 9,795 8,321 7,408 7,133
Operating income $ 2,762/(1)/ 2,808 2,633 2,601 2,241 1,984 1,862
Income before provision
for income taxes $ 2,307/(1)/ 2,407 2,251 2,169 1,887 1,676 1,448
Net income $ 1,550/(1)/ 1,642 1,573 1,427 1,224 1,083 959
- --------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations $ 2,766 2,442 2,461 2,296 1,926 1,680 1,426
Capital expenditures $ 1,879 2,111 2,375 2,064 1,539 1,317 1,087
Treasury stock purchases $ 1,162 765 605 321 500 628 92
- --------------------------------------------------------------------------------------------------------------------------------
Financial position at year end
Net property and equipment $ 16,042 14,961 14,352 12,811 11,328 10,081 9,597
Total assets $ 19,784 18,242 17,386 15,415 13,592 12,035 11,681
Total debt $ 7,043 6,463 5,523 4,836 4,351 3,713 3,857
Total shareholders' equity $ 9,465 8,852 8,718 7,861 6,885 6,274 5,892
- --------------------------------------------------------------------------------------------------------------------------------
Per common share/(2)/
Net income $ 1.14/(1)/ 1.17 1.11 .99 .84 .73 .65
Net income-diluted $ 1.10/(1)/ 1.15 1.08 .97 .82 .71 .63
Dividends declared $ .18 .16 .15 .13 .12 .11 .10
Market price at year end $ 38 7/16 23 7/8 22 11/16 22 9/16 14 5/8 14 1/4 12 3/16
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants at year end 24,800 23,132 21,022 18,380 15,950 14,163 13,093
Systemwide restaurants by type
Operated by franchisees 15,281 14,265 13,428 12,217 10,965 9,933 9,237
Operated by the Company 5,512 5,000 4,357 3,816 3,238 2,746 2,551
Operated by affiliates 4,007 3,867 3,237 2,347 1,747 1,484 1,305
- --------------------------------------------------------------------------------------------------------------------------------
Number of countries at year end 114 109 101 89 79 70 65
- --------------------------------------------------------------------------------------------------------------------------------
Number of shareholders at year end
(in thousands) 888.2 880.2 904.6 769.7 609.2 464.5 398.3
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
11-YEAR SUMMARY 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C>
Systemwide sales 19,928 18,759 17,333 16,064
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide sales by type
Operated by franchisees 12,959 12,017 11,219 10,424
Operated by the Company 4,908 5,019 4,601 4,196
Operated by affiliates 2,061 1,723 1,513 1,444
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 6,695 6,640 6,066 5,521
Operating income 1,679 1,596 1,438 1,288
Income before provision
for income taxes 1,299 1,246 1,157 1,046
Net income 860 802 727 646
- --------------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 1,423 1,301 1,246 1,177
Capital expenditures 1,129 1,571 1,555 1,321
Treasury stock purchases 117 157 497 136
- --------------------------------------------------------------------------------------------------------------------------------
Financial position at year end
Net property and equipment 9,559 9,047 7,758 6,800
Total assets 11,349 10,668 9,175 8,159
Total debt 4,615 4,792 4,036 3,269
Total shareholders' equity 4,835 4,182 3,550 3,413
- --------------------------------------------------------------------------------------------------------------------------------
Per common share/(2)/
Net income .59 .55 .49 .43
Net income-diluted .57 .54 .48 .42
Dividends declared .09 .09 .08 .07
Market price at year end 9 1/2 7 1/4 8 5/8 6
- --------------------------------------------------------------------------------------------------------------------------------
Systemwide restaurants at year end 12,418 11,803 11,162 10,513
Systemwide restaurants by type
Operated by franchisees 8,735 8,131 7,573 7,110
Operated by the Company 2,547 2,643 2,691 2,600
Operated by affiliates 1,136 1,029 898 803
- --------------------------------------------------------------------------------------------------------------------------------
Number of countries at year end 59 53 51 50
- --------------------------------------------------------------------------------------------------------------------------------
Number of shareholders at year end
(in thousands) 371.7 362.6 330.5 168.6
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $162 million of Made For You costs and $160 million special charge
related to the home office productivity initiative for a pre-tax total of
$322 million ($219 million after tax or $0.16 per share).
(2) Restated for two-for-one stock split in March 1999.
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
- --------------------------------------------------------------------------------
In this report, all per share amounts have been restated to reflect the two-for-
one stock split in March 1999. In addition, all information in constant
currencies excludes the effect of foreign currency translation on reported
results, except for hyperinflationary economies, such as Russia, whose
functional currency is the U.S. dollar.
OPERATING RESULTS
- --------------------------------------------------------------------------------
1998 1997 1996
%
(Dollars in millions, Increase/ %
except per share data) Amount (decrease) Amount Increase Amount
- --------------------------------------------------------------------------------
SYSTEMWIDE SALES $35,979 7 $33,638 6 $31,812
- --------------------------------------------------------------------------------
REVENUES
Sales by Company-
operated restaurants $ 8,895 9 $ 8,136 7 $ 7,571
Revenues from
franchised and affiliated
restaurants 3,526 8 3,273 5 3,116
- --------------------------------------------------------------------------------
TOTAL REVENUES 12,421 9 11,409 7 10,687
- --------------------------------------------------------------------------------
OPERATING COSTS
AND EXPENSES
Company-operated
restaurants 7,261 9 6,650 8 6,163
Franchised restaurants 678 10 614 8 570
Selling, general and
administrative expenses 1,458 - 1,451 6 1,367
Made For You costs 162 n/m - - -
Special charges 160 n/m - n/m 72
Other operating (income)
expense (60) n/m (114) n/m (118)
- --------------------------------------------------------------------------------
TOTAL OPERATING
COSTS AND
EXPENSES 9,659 12 8,601 7 8,054
- --------------------------------------------------------------------------------
OPERATING INCOME/(1)/ 2,762 (2) 2,808 7 2,633
- --------------------------------------------------------------------------------
Interest expense 414 14 364 6 343
Nonoperating (income)
expense 41 n/m 37 n/m 39
- --------------------------------------------------------------------------------
INCOME BEFORE
PROVISION
FOR INCOME TAXES/(1)/ 2,307 (4) 2,407 7 2,251
- --------------------------------------------------------------------------------
Provision for income
taxes/(1)/ 757 (1) 765 13 678
- --------------------------------------------------------------------------------
NET INCOME/(1)/ $ 1,550 (6) $ 1,642 4 $ 1,573
================================================================================
NET INCOME PER
COMMON SHARE/(1)/ $ 1.14 (3) $ 1.17 5 $ 1.11
NET INCOME PER
COMMON SHARE-
DILUTED/(1)/ 1.10 (4) 1.15 6 1.08
- --------------------------------------------------------------------------------
(1) The 1998 results include $162 million of Made For You costs and the $160
million special charge, discussed on page 24, for a pre-tax total of $322
million ($219 million after tax or $0.16 per share). The 1996 results
include the $72 million pre-tax special charge and a $50 million tax benefit
resulting from certain international transactions, discussed on pages 24 and
26.
n/m=not meaningful
OPERATING RESULTS (EXCLUDING MADE FOR YOU COSTS AND SPECIAL CHARGES)
- --------------------------------------------------------------------------------
1998 1997 1996
(Dollars in millions, % %
except per share data) Amount Increase Amount Increase Amount
- --------------------------------------------------------------------------------
OPERATING INCOME $3,084 10 $2,808 4 $2,705
- --------------------------------------------------------------------------------
NET INCOME $1,769 8 $1,642 4 $1,573
================================================================================
Net income per
common share $ 1.30 11 $ 1.17 5 $ 1.11
Net income per
common share-
diluted 1.26 10 1.15 6 1.08
- --------------------------------------------------------------------------------
The spreads between the percent change in net income and net income per common
share reflected the positive effects of share repurchases and the absence of
preferred dividends in 1998, due to the retirement of our remaining Series E
Preferred Stock in December 1997, and lower preferred dividends in 1997 compared
with the prior year.
The following table presents the reported and constant currency results for
1998 and 1997, excluding Made For You costs and special charges:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
As reported In constant currency
(Dollars in billions, except ----------------------- --------------------------
per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Systemwide sales $36.0 7% $33.6 6% $37.0 10% $35.0 10%
Revenues 12.4 9 11.4 7 12.8 12 11.8 11
Operating income 3.1 10 2.8 4 3.2 12 2.9 8
Net income 1.8 8 1.6 4 1.8 10 1.7 8
Net income per
common share 1.30 11 1.17 5 1.33 14 1.21 9
Net income per
common share-diluted 1.26 10 1.15 6 1.29 12 1.19 10
- --------------------------------------------------------------------------------------
</TABLE>
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 through expansion, and customer satisfaction
through quality, service, cleanliness and value continue as key strategic
initiatives to build sales. Sales increases in 1998 and 1997 were primarily due
to restaurant expansion and positive comparable sales (measured on a constant
currency basis), partly offset by weaker foreign currencies. At the end of 1998,
86% of Systemwide sales were in the following 11 markets--Australia, Brazil,
Canada, England, France, Germany, Hong Kong, Japan, the Netherlands, Taiwan and
the U.S. (major markets based on operating income). This is down slightly from
87% in 1997.
Sales increases in the U.S., Europe and Latin America were driven by expansion
and positive comparable sales in 1998 and 1997. In the U.S., successful
Monopoly, Teenie Beanie Babies, Get Back With Big Mac and Disney promotions,
combined with local market initiatives, contributed to the 1998 increase. In
Europe, performances benefited from value campaigns and successful promotions in
England, France and Germany. Europe's results were reduced by the difficult
economic conditions in Russia in the last half of 1998. In Latin America,
Argentina and Brazil accounted for approximately half of this segment's total
sales growth in both years, mainly due to expansion.
7
<PAGE>
In Asia/Pacific, sales decreased in 1998 due to weaker foreign currencies and
negative comparable sales. Excluding the translation effect of weaker foreign
currencies, Japan realized strong sales growth despite experiencing its most
difficult economy in decades. In addition, Australia's sales improved due to
positive comparable sales in the last half of the year. Difficult economic
conditions in Southeast Asia, which began in the latter part of 1997 and
continued throughout 1998, negatively impacted consumer spending. In 1997, sales
increased primarily due to expansion.
- --------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. $18,123 $17,125 $16,370 $15,905 $14,941
Europe 8,909 7,835 7,377 6,685 5,211
Asia/Pacific 5,579 5,616 5,349 4,835 3,795
Latin America 1,761 1,511 1,273 1,129 794
Other 1,607 1,551 1,443 1,360 1,246
- --------------------------------------------------------------------------------
Systemwide sales $35,979 $33,638 $31,812 $29,914 $25,987
================================================================================
Sales by Company-operated restaurants grew at a higher rate than Systemwide
sales in 1998 and 1997, primarily due to the higher unit growth rate of Company-
operated restaurants outside the U.S. relative to Systemwide restaurants. In
addition, the weakened Japanese Yen had a significant negative effect on our
Japanese affiliate's sales, which reduced Systemwide sales growth.
AVERAGE ANNUAL SALES PER RESTAURANT/(1)/
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S.
Traditional $1,584 $1,523 $1,530
Satellite 459 445 425
Outside the U.S.
Traditional 1,801 1,966 2,262
Satellite 450 457 488
- --------------------------------------------------------------------------------
(1) Restaurants in operation at least 13 consecutive months
Average sales are affected by several factors: comparable sales and the size
and number of new restaurants. The number of new restaurants affects average
sales as new restaurants historically have taken a few years to reach long-term
volumes. In addition, over the last several years we have opened more
restaurants in lower density areas and countries with lower average sales
volumes. For these reasons, our focus is primarily on sales-to-investment ratios
and building comparable sales, rather than on average sales.
In 1998, positive comparable sales drove the increases in U.S. average annual
sales per restaurant. Outside the U.S., foreign currency translation accounted
for approximately half of the decreases in average annual sales in both 1998 and
1997. In addition, the significant number of new restaurants outside the U.S.
negatively impacted the averages.
AVERAGE ANNUAL SALES PER NEW RESTAURANT/(1)/
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S.
Traditional $1,332 $1,237 $1,206
Outside the U.S.
Traditional 1,357 1,431 1,710
Satellite 446 453 517
- --------------------------------------------------------------------------------
(1) Restaurants in operation at least 13 months but not more than 25 months
In 1998 and 1997, the increases in sales per new U.S. traditional restaurant
were due to a more selective expansion strategy. In addition, in 1998, larger
facilities supported higher average sales. The decreases in sales per new
restaurant outside the U.S. in 1998 and 1997 were due to foreign currency
translation and expansion. Excluding foreign currency translation, the 1998
average annual sales for new international traditional and satellite restaurants
increased to $1,439,000 and $479,000, respectively. Satellite restaurants
generally have significantly lower development costs and sales volumes than
traditional restaurants. Average annual sales per new traditional restaurant in
major markets outside the U.S., excluding Japan, were approximately $1.7 million
in 1998 and 1997.
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.
Revenues increased at a faster rate than Systemwide sales in 1998 and 1997.
This was primarily due to the weakened Japanese Yen, which negatively affected
sales more than revenues due to our affiliate structure in Japan, and the higher
unit growth rate of Company-operated restaurants outside the U.S. relative to
Systemwide restaurants.
U.S. revenues increased $265 million in 1998 and $13 million in 1997. The
increased revenue growth in 1998 was primarily due to strong sales performance
for both Company-operated and franchised restaurants driven by positive
comparable sales and expansion. Lower initial fees resulting from fewer openings
partly offset the increase in revenues. The slower revenue growth in 1997 was
primarily because the number of U.S. Company-operated restaurants decreased
compared with the prior year, while the number of franchised and affiliated
restaurants increased. Lower initial fees also contributed to the slower revenue
growth in 1997.
8
<PAGE>
<TABLE>
<CAPTION>
U.S. OPERATING RESULTS
(EXCLUDING MADE FOR YOU COSTS AND SPECIAL CHARGES)
- -------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Sales by Company-operated
restaurants $2,829 $2,691 $2,776 $2,725 $2,550
Revenues from franchised
and affiliated restaurants 2,039 1,912 1,814 1,749 1,606
- -------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,868 4,603 4,590 4,474 4,156
- -------------------------------------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated restaurants 2,338 2,246 2,317 2,244 2,066
Franchised restaurants 389 361 334 304 270
Selling, general and
administrative expenses 750 788 740 682 628
Other operating (income)
expense 25 (3) (17) (8) (25)
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES/(1)/ 3,502 3,392 3,374 3,222 2,939
- -------------------------------------------------------------------------------------------------
U.S. OPERATING INCOME/(1)/ $1,366 $1,211 $1,216 $1,252 $1,217
=================================================================================================
</TABLE>
(1) The 1998 results exclude $162 million of Made For You costs and the $160
million special charge for a pre-tax total of $322 million. The 1996
results exclude the $72 million pre-tax special charge.
Europe accounted for 36% of consolidated revenues in 1998 and 34% in 1997.
This region's revenues grew $535 million and $318 million in 1998 and 1997,
respectively. The increases were driven by strong sales in England, France and
Germany in 1998 and in England, Italy and Russia in 1997.
Asia/Pacific's revenues grew $110 million in 1998, compared with growth of
$250 million in 1997. In constant currencies, these increases were $341 million
in 1998 and $318 million in 1997. Due to an increase in ownership, several
affiliate markets were consolidated for financial reporting purposes in 1998.
This contributed to the revenue increase. The consolidation of Singapore in
1997, along with Taiwan's strong results, helped to advance 1997 revenues.
Difficult economic conditions in Southeast Asia, which began in the latter part
of 1997 and continued throughout 1998, dampened revenue growth in both years.
<TABLE>
<CAPTION>
OPERATING RESULTS OUTSIDE THE U.S.
- -------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Sales by Company-operated
restaurants $6,066 $5,445 $4,795 $4,139 $3,242
Revenues from franchised
and affiliated restaurants 1,487 1,361 1,301 1,182 923
- -------------------------------------------------------------------------------------------------
TOTAL REVENUES 7,553 6,806 6,096 5,321 4,165
- -------------------------------------------------------------------------------------------------
OPERATING COSTS AND
EXPENSES
Company-operated restaurants 4,923 4,404 3,846 3,304 2,579
Franchised restaurants 289 253 236 211 165
Selling, general and
administrative expenses 632 601 574 507 408
Other operating (income)
expense (85) (111) (101) (98) (59)
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS
AND EXPENSES 5,759 5,147 4,555 3,924 3,093
- -------------------------------------------------------------------------------------------------
OPERATING INCOME
OUTSIDE THE U.S. $1,794 $1,659 $1,541 $1,397 $1,072
=================================================================================================
</TABLE>
Latin America's revenues grew $105 million in 1998 and $114 million in 1997.
Growth in both years was primarily due to expansion in Brazil and positive
comparable sales for the segment.
COMPANY-OPERATED MARGINS
Company-operated margin dollars are equal to sales by Company-operated
restaurants less the operating costs of these restaurants. Consolidated Company-
operated margin dollars increased $148 million or 10% in 1998 and $78 million or
6% in 1997. The increases were primarily driven by expansion, partly offset by
weaker foreign currencies. In addition, positive comparable sales contributed to
the increase in 1998.
Consolidated Company-operated margins were 18.4% of sales in 1998, 18.3% in
1997 and 18.6% in 1996. Operating cost trends as a percent of sales were as
follows: food & paper costs decreased in 1998 and increased in 1997; payroll
costs were flat in 1998 and decreased in 1997; and occupancy & other operating
costs increased in both years.
U.S. Company-operated margins were 17.3% of sales in 1998 and 16.5% in 1997
and 1996. Increased margins as a percent of sales in 1998 were driven by lower
food & paper costs related primarily to decreased commodity costs, partly offset
by higher payroll costs related to an increase in average hourly rates.
Occupancy & other operating costs were flat. U.S. Company-operated margins as a
percent of sales in 1997 reflected higher food & paper costs related primarily
to the Deluxe Line, lower payroll costs related to labor efficiencies and lower
occupancy & other operating costs.
Company-operated margins outside the U.S. were 18.8% of sales in 1998,
compared with 19.1% in 1997 and 19.8% in 1996. In 1998, increases in occupancy &
other operating costs as a percent of sales were the primary cause of the margin
decline as payroll costs and food & paper costs were flat as a percent of sales.
The decline in the 1997 margin as a percent of sales was due to increases in
food & paper costs as well as occupancy & other operating costs, partly offset
by a decrease in payroll costs. Weaker foreign currencies put pressure on
margins outside the U.S. in both 1998 and 1997, as food & paper costs were
negatively affected in those markets where we imported products.
FRANCHISED MARGINS
Franchised margin dollars are equal to revenues from franchised and affiliated
restaurants less the Company's occupancy costs (rent and depreciation)
associated with these sites. Franchised margin dollars represented more than 60%
of the combined operating margins in both 1998 and 1997. Consolidated franchised
margin dollars increased $189 million or 7% in 1998 and $113 million or 4% in
1997. The increases were primarily driven by expansion, partly offset by weaker
foreign currencies. In addition, positive comparable sales contributed to the
increase in 1998.
9
<PAGE>
Consolidated franchised margins were 80.8% of applicable revenues in 1998,
81.2% in 1997 and 81.7% in 1996. Franchised margins in the U.S. were 80.9% of
revenues in 1998, 81.1% in 1997 and 81.6% in 1996. Outside the U.S., franchised
margins were 80.6% of revenues in 1998, 81.4% in 1997 and 81.8% in 1996.
The 1998 and 1997 declines reflected a higher proportion of leased sites, and
in the U.S. also reflected lower initial fees resulting from fewer openings. By
leasing a higher proportion of new sites over the past few years, we have
reduced initial capital requirements, but negatively affected franchised margins
as a percent of applicable revenues. This is because 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. Also, our decision to increase our ownership in several affiliate
markets in 1998 and 1997 shifted revenues from franchised and affiliated
restaurants to Company-operated restaurants, reducing the franchised restaurant
margins outside the U.S.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses were relatively flat
in 1998 and decreased to 4.1% of sales from 4.3% of sales in 1997 and 1996. In
1998, U.S. selling, general and administrative expenses decreased primarily due
to lower advertising costs and savings realized from the home office
productivity initiative, partly offset by higher performance-based incentive
compensation. Outside the U.S., selling, general and administrative expenses
increased, due to support of restaurant development and to a lesser extent, from
the consolidation of several affiliate markets for financial reporting purposes,
partly offset by weaker foreign currencies. In 1997, consolidated selling,
general and administrative expenses increased primarily due to continued
investment in developing countries and the support of special marketing efforts
and new food initiatives in the U.S., partly offset by weaker foreign
currencies.
As a result of the home office productivity initiative, the Company expects to
save about $100 million of selling, general and administrative expenses per
year, beginning in 2000, with about two-thirds of the annual savings expected to
be realized by the end of 1999. About $15 million of these savings were realized
in 1998.
MADE FOR YOU COSTS
In 1998, the Company announced the introduction of Made For You, a new food
preparation system that is expected to be installed in virtually all restaurants
in the U.S. and Canada by the end of 1999. Through advances in equipment and
technology, the new system allows us to serve fresher, better-tasting food at
the speed of McDonald's. The system also supports future growth through product
development because it can more easily accommodate an expanded menu. The Company
is providing financial incentives of up to $12,500 per restaurant to
owner/operators to defray the cost of equipment made obsolete as a result of
converting to the new system. The Company is also making additional payments in
special cases where the conversion to Made For You is more extensive.
In 1998, the Company incurred $162 million in Made For You costs, which
primarily consisted of nonrefundable incentive payments made to owner/operators
as well as accelerated depreciation on equipment being replaced in Company-
operated restaurants. The Company expects the total costs related to the
implementation of Made For You to approximate $190 million. The remaining costs
are expected to be incurred by the end of 1999, and are comprised of about $15
million of incentive payments and $15 million of accelerated depreciation.
SPECIAL CHARGES
In second quarter 1998, the Company recorded a $160 million pre-tax special
charge related to the results of the Company's home office productivity
initiative. This initiative is designed to improve staff alignment, focus and
productivity and reduce ongoing selling, general and administrative expenses. As
a result, the Company is reducing home office staffing by approximately 525
positions, consolidating certain home office facilities and reducing other
expenditures in a variety of areas. The special charge was comprised of $85.8
million of employee severance and outplacement costs, $40.8 million of lease
cancellation and other facilities-related costs, $18.3 million of costs for the
write-off of capitalized technology made obsolete as a result of the
productivity initiative, and $15.1 million of other cash payments made in 1998.
Employee severance is paid in semi-monthly installments over a period of up to
one year after termination.
As of December 31, 1998, the Company had reduced home office staffing by
approximately 400 positions and expects the remaining positions to be eliminated
by year-end 1999. The remaining accrual, primarily related to employee
severance, was approximately $105 million at December 31, 1998. No significant
adjustments have been made to the original plan approved by management in second
quarter 1998. The Company expects to use cash provided by operations to fund the
remaining severance payments and other cash costs related to the productivity
initiative.
In 1996, the Company recorded a $72 million pre-tax special charge related
primarily to plans to strengthen the U.S. business and reduce ongoing costs by
closing low-volume U.S. satellite restaurants, outsourcing excess property
management and implementing other cost efficiencies. The actions required by
this plan were completed in 1997 and resulted in no significant adjustments to
the original cost estimate.
10
<PAGE>
OTHER OPERATING (INCOME) EXPENSE
Other operating (income) expense 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 (arrangements where the
Company leases the businesses, including equipment, to owner/operators who have
options to purchase the businesses). The Company's purchases and sales of
businesses with its franchisees and affiliates are 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.
Other operating (income) expense decreased in 1998, primarily due to higher
provisions for property dispositions that reflected an increased number of
restaurant closings. These expenses were partly offset by higher gains on sales
of restaurant businesses and increased equity in earnings of unconsolidated
affiliates, due to strong performances in Japan and the U.S. The slight decline
in other operating (income) expense in 1997 was primarily due to lower equity in
earnings of unconsolidated affiliates and lower gains on sales of restaurant
businesses, partly offset by lower provisions for property dispositions.
OPERATING INCOME
Excluding Made For You costs and the special charges, operating income increased
$276 million or 10% to $3.1 billion in 1998, and $103 million or 4% to $2.8
billion in 1997. In constant currencies, these increases were 12% in 1998 and 8%
in 1997. The increases in 1998 and 1997 were primarily due to higher combined
operating margin dollars, partly offset by weaker foreign currencies and lower
other operating (income) expense. In addition, higher selling, general and
administrative expenses negatively affected the 1997 increase. Including Made
For You costs and the special charges, operating income decreased 2% in 1998 and
increased 7% in 1997.
Operating income in 1998 and 1997 from the major markets accounted for 92% of
total operating income, excluding 1998 Made For You costs and the special
charge.
U.S. operating income rose $155 million or 13% in 1998 and was flat in 1997,
excluding Made For You costs and special charges. In 1998, higher U.S. combined
operating margin dollars and lower selling, general and administrative expenses
were offset in part by lower other operating (income) expense. In 1997, higher
U.S. franchised margin dollars were offset by lower Company-operated margin
dollars and higher selling, general and administrative expenses. Including Made
For You costs and special charges, U.S. operating income decreased $167 million
or 14% in 1998 and increased $67 million or 6% in 1997.
Outside the U.S., operating income rose $135 million or 8% in 1998 and $118
million or 8% in 1997. In constant currencies, these increases were 12% in 1998
and 15% in 1997. This growth was driven by higher combined operating margin
dollars resulting from expansion in both years and slightly positive comparable
sales in 1998. In both years, weaker foreign currencies and higher selling,
general and administrative expenses partly offset these increases. In 1998, the
Australian Dollar, Brazilian Real, Canadian Dollar, Japanese Yen and Russian
Ruble, as well as the Southeast Asian currencies, were the primary currencies
negatively affecting results.
Europe accounted for 41% and 36% of consolidated operating income in 1998 and
1997, respectively. Europe's operating income grew $133 million in 1998 compared
with $54 million in 1997. Weaker currencies offset this region's operating
income increase in 1998 by only 1% or $6 million, and by 9% or $82 million in
1997. Strong operating results in England, France, Germany, Italy and Spain
drove the increase in operating income in 1998. The region's results were
negatively affected by the difficult economic conditions in Russia, which are
expected to continue in 1999. England, France and Germany accounted for 77% of
Europe's operating income in both 1998 and 1997.
Asia/Pacific's operating income declined $18 million in 1998 compared with an
increase of $14 million in 1997. The decline in 1998 was primarily due to weaker
foreign currencies. On a constant currency basis, Asia/Pacific's operating
income would have increased $29 million in 1998 and $38 million in 1997. In
1998, Japan and Hong Kong had strong operating results despite the difficult
economic conditions that were experienced by much of the region beginning in the
latter part of 1997 and continuing throughout 1998. In addition, this segment
benefited in both years from the financial reporting consolidation of several
affiliate markets. Australia, Hong Kong, Japan and Taiwan contributed about 90%
of Asia/ Pacific's operating income in both years.
Latin America's operating income increased $18 million in 1998 and $53 million
in 1997. Argentina, Brazil and Venezuela led this region's increase in 1998.
Continued expansion and positive comparable sales drove improved results across
this segment in 1998 and 1997. Brazil accounted for about 70% of Latin America's
operating income in both years. The recent economic turmoil in Brazil is
expected to negatively impact operating results in 1999. The Latin America
segment represented 7% of consolidated operating income in 1998.
INTEREST EXPENSE
Higher average debt levels, partly offset by weaker foreign currencies and lower
average interest rates, accounted for the 1998 and 1997 increases in interest
expense.
- --------------------------------------------------------------------------------
11
<PAGE>
NONOPERATING (INCOME) EXPENSE
Nonoperating (income) expense includes miscellaneous income and expense items
such as interest income and gains and losses related to other investments,
financings and translation. Results in 1998 reflected translation losses
compared with translation gains in 1997, while in 1997 interest income and
translation gains were lower than in 1996.
PROVISION FOR INCOME TAXES
The effective income tax rate was 32.8% for 1998, compared with 31.8% for 1997
and 30.1% for 1996. A $50 million tax benefit resulting from certain
international transactions was primarily responsible for the unusually low tax
rate in 1996. The Company expects its 1999 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 $516 million in 1998 and $451 million in 1997.
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.
RESTAURANTS
McDonald's continues to focus on managing capital outlays more effectively
through prudent and strategic expansion. In 1998, the Company added 1,668
restaurants Systemwide, compared with 2,110 in 1997 and 2,642 in 1996. In 1999,
the Company expects to add about 1,750 restaurants, with a continued emphasis on
traditional restaurants primarily in locations outside the U.S.
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. 12,472 12,380 12,094 11,368 10,238
Europe 4,421 3,886 3,283 2,595 2,159
Asia/Pacific 5,055 4,456 3,633 2,735 2,168
Latin America 1,405 1,091 837 665 505
Other 1,447 1,319 1,175 1,017 880
- --------------------------------------------------------------------------------
Systemwide restaurants 24,800 23,132 21,022 18,380 15,950
================================================================================
The U.S. net additions declined in 1998 and 1997, primarily due to the closing
of low-volume satellite locations and a more stringent restaurant selection
process.
Asia/Pacific's percent of total restaurants has grown primarily due to Japan's
significant expansion. Japan added 415 restaurants in 1998, 433 in 1997 and 522
in 1996, representing 25% of Systemwide restaurant additions in 1998 and about
20% in 1997 and 1996. Approximately 60% of Japan's restaurant additions in 1998
and 1997, and about 70% in 1996, were satellites. Therefore, these additions
affected unit growth more than sales growth.
At the end of 1998, 84% of Systemwide restaurants were in the major markets,
compared with 85% in 1997. In 1998, 65% of restaurant additions were in these
major markets, and we anticipate a similar percent for 1999. Longer term,
markets like China, Italy and Mexico are expected to represent a growing
proportion of restaurant additions.
More than 75% of Company-operated restaurants and more than 85% of franchised
restaurants were located in the major markets in 1998. Franchisees and
affiliates operated 78% of restaurants at year-end 1998. That percentage has
remained relatively constant over the past three years.
FINANCIAL POSITION AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
TOTAL ASSETS AND CAPITAL EXPENDITURES
Total assets grew $1.5 billion or 8% in 1998 and $856 million or 5% in 1997. In
1998 and 1997, about 80% of consolidated assets were located in our major
markets excluding our affiliate in Japan. Net property and equipment rose $1.1
billion in 1998 and represented 81% of total assets at year end.
Capital expenditures decreased $232 million or 11% in 1998 and decreased $264
million or 11% in 1997, reflecting fewer restaurant additions, the new building
program in the U.S. in 1998 that gave owner/operators the option to own new
restaurant facilities, and more leased sites, combined with weaker foreign
currencies.
U.S. capital expenditures declined $139 million or 24% in 1998 and declined
$300 million or 34% in 1997, primarily due to a more selective expansion
strategy and the new building program. About 70% of the qualifying new
traditional restaurant buildings opened in 1998 are owned by owner/operators. In
addition, the Company leased the land for over 90% of the new traditional
restaurants opened in the U.S. in 1998. These programs saved the Company
approximately $155 million in capital outlays in 1998.
Capital expenditures outside the U.S. decreased $93 million or 6%, due to
fewer restaurant additions and weaker foreign currencies in 1998. Capital
expenditures outside the U.S. increased slightly in 1997.
In 1998, 76% of capital expenditures was invested in markets outside the U.S.,
compared with 72% in 1997 and 63% in 1996. Approximately 70% was invested in our
major markets excluding Japan in 1998, compared with 73% in 1997 and 78% in
1996.
- --------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
New restaurants $ 1,357 $ 1,531 $ 1,799 $ 1,550 $ 1,181
Existing restaurants 398 433 350 355 211
Other properties 124 147 226 159 147
- --------------------------------------------------------------------------------
Capital expenditures $ 1,879 $ 2,111 $ 2,375 $ 2,064 $ 1,539
================================================================================
Total assets $19,784 $18,242 $17,386 $15,415 $13,592
- --------------------------------------------------------------------------------
Expenditures for existing restaurants were made to achieve higher levels of
customer satisfaction, including technology to improve service and food quality,
and to enhance older facilities. Other properties primarily included
expenditures for office buildings and related computer equipment and
furnishings.
The Company's expenditures for new restaurants in the U.S. were minimal as a
result of the programs previously discussed. However, we continue to focus on
the System's average development costs (land, building and equipment) to ensure
an appropriate return on investment for the System.
- --------------------------------------------------------------------------------
12
<PAGE>
Average development costs for the U.S. System were $1.4 million in 1998 and
$1.3 million in 1997. The increase was primarily due to the construction of
larger facilities to support higher average sales volumes.
Average development costs for traditional restaurants in our major markets
outside the U.S., excluding Japan, were approximately $1.8 million in both 1998
and 1997. Average development 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 right-sized restaurants,
construction and design efficiencies, standardization and global sourcing.
Average development costs for satellite restaurants located in Brazil, Canada
and Japan, which comprise over 90% of all satellites outside the U.S., were
approximately $200,000 in both years. The utilization of these small, often
limited-menu restaurants has allowed expansion into areas that would otherwise
not have been feasible.
Including affiliates, total land ownership was 44% and 45% of total restaurant
sites at year-end 1998 and 1997, respectively.
Capital expenditures by affiliates, which were not included in consolidated
amounts, were approximately $295 million in 1998, compared with $360 million in
1997. The decrease was primarily due to increased ownership in the Philippines,
South Korea and Thailand, which converted them from affiliates to majority-owned
subsidiaries in 1998, and to a lesser extent, weaker foreign currencies.
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 (cash from operations less capital expenditures)
grew to $887 million in 1998, compared with $331 million in 1997. Cash provided
by operations was reduced by approximately $135 million of Made For You
incentive payments made in 1998 and $110 million of U.S. franchisee security
deposit refunds in 1997. Cash provided by operations, along with other sources
of cash such as borrowings, was used for capital expenditures, share repurchase,
dividends and debt repayments. The Company generated positive free cash flow in
1998 for the eighth consecutive year. This trend is expected to continue. In
1998, operations outside the U.S. generated positive free cash flow for the
first time in our history, and this is expected to continue into the foreseeable
future.
- --------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Cash provided by operations $2,766 $2,442 $2,461 $2,296 $1,926
Free cash flow 887 331 86 232 387
Cash provided by operations
as a percent of capital
expenditures 147% 116% 104% 111% 125%
Cash provided by operations
as a percent of average
total debt 41 41 48 49 48
- --------------------------------------------------------------------------------
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 strategically maintains a relatively low current ratio--.52 at year-
end 1998.
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 Summary of
significant accounting policies on page 21 for additional information regarding
our use of financial instruments and the impact of the new accounting standard
on derivatives.
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. The Company
also manages the level of fixed-rate debt to take advantage of changes in
interest rates.
The Company uses foreign currency debt and derivatives 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 $5.2 billion and $5.0 billion at year-end 1998
and 1997, respectively.
- --------------------------------------------------------------------------------
(As a percent) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Fixed-rate debt as a
percent of total debt 67% 49% 68% 67% 64%
Weighted-average annual
interest rate of total debt 6.6 6.8 7.1 7.9 8.4
Foreign currency-denominated
debt as a percent of total debt 75 80 90 89 92
Total debt as a percent of total
capitalization (total debt and
total shareholders' equity) 43 42 39 38 39
- --------------------------------------------------------------------------------
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 global development plans. The Company has not experienced, nor does
it expect to experience, difficulty in obtaining financing or refinancing
existing debt. At year-end 1998, the Company and its subsidiaries had $1.5
billion available under committed line of credit agreements, $1.0 billion under
a Euro medium-term note program and $.9 billion under shelf registrations for
future debt issuance.
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. Gains
of approximately $24 million, related to the early termination of interest-
- --------------------------------------------------------------------------------
12
<PAGE>
rate exchange agreements in 1998, were deferred and are being amortized as an
adjustment to interest expense over various periods through 2002. 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 1998 and 1997, assets in hyperinflationary markets were principally
financed in U.S. Dollars. The Company's largest net asset exposures (defined as
foreign currency assets less foreign currency liabilities) were as follows:
- --------------------------------------------------------------------------------
(In millions of U.S. Dollars) December 31, 1998 1997
- --------------------------------------------------------------------------------
Canadian Dollars $749 $ 528
Deutsche Marks 456 88
British Pounds Sterling 447 590
Australian Dollars 322 298
Brazilian Reais 302 281
French Francs 196 194
Austrian Schillings 116 91
Japanese Yen 116 37
- --------------------------------------------------------------------------------
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 1998 levels nor
a 10% adverse change in foreign currency rates from year-end 1998 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 $613 million or 7% in 1998, and represented 48%
of total assets at year end. Weaker foreign currencies decreased shareholders'
equity by $52 million in 1998.
The Company uses free cash flow and debt capacity to repurchase shares because
we believe this enhances shareholder value. Over the past 10 years, the Company
has invested $4.8 billion to buy back 306 million shares at an average price of
approximately $16, while maintaining a strong equity base. At year-end 1998, the
Company held 304 million shares in treasury with a market value of $11.7
billion.
In September 1998, the Company announced plans to repurchase $3.5 billion of
its common stock by year-end 2001. During the third quarter 1998, the Company
completed its $2 billion, three-year share repurchase program begun in 1996. In
1998, the Company repurchased a total of 38 million shares for nearly $1.2
billion, $320 million of which related to the new $3.5 billion program. The
Company uses common equity put options in connection with its share repurchase
program. In 1998, the Company sold 7.3 million common equity put options, of
which 1.0 million options were outstanding at December 31, 1998. These options
expired unexercised in February 1999.
Given the Company's returns on equity and assets, management believes it is
prudent to reinvest a significant portion of earnings back into the business and
use free cash flow for share repurchase. Accordingly, the common stock dividend
yield is modest. However, the Company has paid 92 consecutive quarterly
dividends on common stock through first quarter 1999 and has increased the
dividend amount at least once every year. Additional dividend increases will be
considered after reviewing returns to shareholders, profitability expectations
and financing needs.
RETURNS
Operating income is used to compute return on average assets, while net income
less preferred stock dividends (net of tax) is used to calculate return on
average common equity. Month-end balances are used to compute both average
assets and average common equity.
- --------------------------------------------------------------------------------
(As a percent) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Return on average assets/(1)/ 16.4% 16.0% 16.8% 17.9% 17.6%
Return on average common
equity/(1)/ 19.5 19.0 19.5 19.9 19.4
- --------------------------------------------------------------------------------
(1) Computed excluding Made For You costs and special charges. Including Made
For You costs and special charges, return on average assets was 14.7% in
1998 and 16.3% in 1996; return on average common equity was 17.1% in 1998.
The increases in the 1998 returns are due to strong operating results,
enhanced by the Company's continued focus on more efficient capital deployment.
This included the closing of a number of low-volume satellite restaurants, a
more stringent site selection process, the new building program in the U.S. and
the use of free cash flow for share repurchase.
14
<PAGE>
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
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. Substantially all necessary
modifications and testing of the Company's significant systems have been
completed. The last necessary replacement of a significant system is expected to
be completed in third quarter 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 potential problems. The Company has implemented
a Systemwide supply chain compliance monitoring program, which encompasses
supplier risk assessment and compliance validation for significant suppliers.
Management does not expect Year 2000 issues relating to internal systems and
suppliers to pose significant operational or financial difficulties for the
Company; however, in the unlikely event McDonald's or a significant number of
its key suppliers are unable to resolve an issue in a timely manner, such
matters could have a material impact on the Company's results of operations. In
addition, failures related to Year 2000 issues by providers of infrastructure
services could have a material adverse effect on results of operations.
Contingency plans are being developed, to the extent feasible, to address
unexpected Year 2000 issues that might arise either internally, within the
supply chain or by infrastructure service providers. These plans are expected to
be completed well before the end of 1999.
Modification and testing costs are expensed as incurred, while the costs of
new systems are capitalized. The Company expects its total costs related to
modification and testing as well as costs associated with supply chain risk
assessment and contingency planning to be less than $35 million, of which
approximately $23 million was incurred through December 31, 1998. In addition,
the Company expects to capitalize approximately $55 million of costs for ongoing
development of significant new systems that are replacing non-Year 2000
compliant systems. About $40 million of these costs were capitalized at Decem-
ber 31, 1998. The total Year 2000 costs have not and are not expected to have a
material adverse impact on the Company's financial position, results of
operations or cash flows.
All Year 2000 statements contained herein are designated as "Year 2000
Readiness Disclosures" pursuant to the Year 2000 Information and Readiness
Disclosure Act of 1998.
EURO CONVERSION
On January 1, 1999, 11 member countries of the European Union established fixed
conversion rates between their existing currencies ("legacy currencies") and one
common currency, the Euro. The Euro is now trading on currency exchanges and may
be used in certain transactions such as electronic payments. Beginning in
January 2002, new Euro-denominated notes and coins will be issued, and legacy
currencies will be withdrawn from circulation. The conversion to the Euro has
eliminated currency exchange rate risk for transactions between the member
countries, which for the Company, primarily consist of payments to suppliers. In
addition, as the Company uses foreign-denominated debt and derivatives to meet
its financing requirements and to minimize its foreign currency risks, certain
of these financial instruments will be redenominated into Euros.
The Company has restaurants located in all member countries and has been
preparing for the introduction of the Euro for the past several years. The
Company is currently addressing the issues involved with the new currency, which
include converting information technology systems, recalculating currency risk,
recalibrating derivatives and other financial instruments and revising processes
for preparing accounting and taxation records. Based on the work to date, the
Company does not believe the Euro conversion will have a significant 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, advertising and
promotional efforts, Year 2000 compliance efforts and Euro conversion efforts,
as well as 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 13 and 14 of this Form 10-K.
- --------------------------------------------------------------------------------
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Page
reference
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Consolidated statement of income for each of the three years in the period ended December 31, 1998 17
Consolidated balance sheet at December 31, 1998 and 1997 18
Consolidated statement of cash flows for each of the three years in the period ended December 31, 1998 19
Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 1998 20
Notes to consolidated financial statements (Financial comments) 21-28
Quarterly results (unaudited) 29
Management's report 30
Audit Committee's report 30
Report of independent auditors 30
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Sales by Company-operated restaurants $ 8,894.9 $ 8,136.5 $ 7,570.7
Revenues from franchised and affiliated restaurants 3,526.5 3,272.3 3,115.8
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 12,421.4 11,408.8 10,686.5
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Company-operated restaurants
Food and packaging 2,997.4 2,772.6 2,546.6
Payroll and employee benefits 2,220.3 2,025.1 1,909.8
Occupancy and other operating expenses 2,043.9 1,851.9 1,706.8
- ------------------------------------------------------------------------------------------------------------------------------------
7,261.6 6,649.6 6,163.2
- ------------------------------------------------------------------------------------------------------------------------------------
Franchised restaurants--occupancy expenses 678.0 613.9 570.1
Selling, general and administrative expenses 1,458.5 1,450.5 1,366.4
Made For You costs 161.6
Special charges 160.0 72.0
Other operating (income) expense (60.2) (113.5) (117.8)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 9,659.5 8,600.5 8,053.9
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,761.9 2,808.3 2,632.6
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense--net of capitalized interest of $17.9, $22.7 and $22.2 413.8 364.4 342.5
Nonoperating (income) expense 40.7 36.6 39.1
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,307.4 2,407.3 2,251.0
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 757.3 764.8 678.4
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,550.1 $ 1,642.5 $ 1,572.6
====================================================================================================================================
NET INCOME PER COMMON SHARE $ 1.14 $ 1.17 $ 1.11
NET INCOME PER COMMON SHARE--DILUTED 1.10 1.15 1.08
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .18 $ .16 $ .15
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES 1,365.3 1,378.7 1,396.4
WEIGHTED-AVERAGE SHARES--DILUTED 1,405.7 1,410.2 1,433.3
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
- --------------------------------------------------------------------------------
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 299.2 $ 341.4
Accounts and notes receivable 609.4 483.5
Inventories, at cost, not in excess of market 77.3 70.5
Prepaid expenses and other current assets 323.5 246.9
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,309.4 1,142.3
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Notes receivable due after one year 67.9 67.0
Investments in and advances to affiliates 854.1 634.8
Intangible assets--net 973.1 827.5
Miscellaneous 538.3 608.5
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 2,433.4 2,137.8
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment, at cost 21,758.0 20,088.2
Accumulated depreciation and amortization (5,716.4) (5,126.8)
- ------------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 16,041.6 14,961.4
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $19,784.4 $18,241.5
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 686.8 $ 1,293.8
Accounts payable 621.3 650.6
Income taxes 94.2 52.5
Other taxes 143.5 148.5
Accrued interest 132.3 107.1
Other accrued liabilities 651.0 396.4
Current maturities of long-term debt 168.0 335.6
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,497.1 2,984.5
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 6,188.6 4,834.1
OTHER LONG-TERM LIABILITIES AND MINORITY INTERESTS 492.6 427.5
DEFERRED INCOME TAXES 1,081.9 1,063.5
COMMON EQUITY PUT OPTIONS 59.5 80.3
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized--165.0 million shares; issued--none
Common stock, $.01 par value; authorized--3.5 billion shares; issued--1,660.6 million 16.6 16.6
Additional paid-in capital 989.2 690.9
Guarantee of ESOP Notes (148.7) (171.3)
Retained earnings 13,879.6 12,569.0
Accumulated other comprehensive income (522.5) (470.5)
Common stock in treasury, at cost; 304.4 and 289.2 million shares (4,749.5) (3,783.1)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 9,464.7 8,851.6
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,784.4 $18,241.5
====================================================================================================================================
</TABLE>
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,550.1 $ 1,642.5 $ 1,572.6
Adjustments to reconcile to cash provided by operations
Depreciation and amortization 881.1 793.8 742.9
Deferred income taxes 35.4 (1.1) 32.9
Changes in operating working capital items
Accounts receivable (29.9) (57.6) (77.5)
Inventories, prepaid expenses and other current assets (18.1) (34.5) (18.7)
Accounts payable (12.7) 52.8 44.5
Taxes and other liabilities 337.5 221.9 121.4
Refund of U.S. franchisee security deposits (109.6)
Other 22.9 (65.9) 42.9
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS 2,766.3 2,442.3 2,461.0
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property and equipment expenditures (1,879.3) (2,111.2) (2,375.3)
Purchases of restaurant businesses (118.4) (113.6) (137.7)
Sales of restaurant businesses 149.0 149.5 198.8
Property sales 42.5 26.9 35.5
Other (142.0) (168.8) (291.6)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (1,948.2) (2,217.2) (2,570.3)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net short-term borrowings (repayments) (604.2) 1,097.4 228.8
Long-term financing issuances 1,461.5 1,037.9 1,391.8
Long-term financing repayments (594.9) (1,133.8) (841.3)
Treasury stock purchases (1,089.8) (755.1) (599.9)
Common and preferred stock dividends (240.5) (247.7) (232.0)
Series E preferred stock redemption (358.0)
Other 207.6 145.7 157.0
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (860.3) (213.6) 104.4
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS INCREASE (DECREASE) (42.2) 11.5 (4.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at beginning of year 341.4 329.9 334.8
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 299.2 $ 341.4 $ 329.9
====================================================================================================================================
Supplemental cash flow disclosures
Interest paid $ 406.5 $ 401.7 $ 369.0
Income taxes paid $ 545.9 $ 650.8 $ 558.1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Financial Comments are an integral part of the consolidated
financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
(In millions, except per Preferred stock issued Additional Guarantee other Common Stock
stock --------------- paid-in of ESOP Retained comprehensive in treasury
share data) issued* Shares Amount capital Notes Earnings income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 358.0 1,660.6 $184.6 $295.1 $(214.2) $9,831.3 $ (87.1) $(261.2) $(2,506.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,572.6
- -----------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $50.6) (88.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.15 per share) (203.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (27.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Conversion to $.01 par
value stock (168.0) 168.0
- -----------------------------------------------------------------------------------------------------------------------------------
ESOP Notes payment 20.2
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock acquisitions (25.8) (604.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$86.4) 102.8 0.8 15.6 84.2
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 358.0 1,660.6 16.6 565.9 (193.2) 11,173.0 (175.1) (271.4) (3,027.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,642.5
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including taxes of $104.0) (295.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.16 per share) (221.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (25.3)
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP Notes payment 21.4
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock acquisitions (32.4) (765.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Common equity put options issuance (80.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock redemption (358.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$79.2) 125.0 0.5 14.6 89.2
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 0.0 1,660.6 16.6 690.9 (171.3) 12,569.0 (470.5) (289.2) (3,783.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,550.1
- ------------------------------------------------------------------------------------------------------------------------------------
Translation adjustments
(including tax benefits of
$84.2) (52.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock cash
dividends ($.18 per share) (239.5)
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP Notes payment 22.5
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock acquisitions (38.0) (1,161.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Common equity put options
issuance and expiration, net 20.8
- ------------------------------------------------------------------------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$154.0) 298.3 0.1 22.8 174.7
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 0.0 1,660.6 $16.6 $989.2 $(148.7) $13,879.6 $ (522.5) (304.4) $(4,749.5)
====================================================================================================================================
<CAPTION>
Total
shareholders'
equity
- -----------------------------------------------------------------------
<S> <C>
Balance at December 31, 1995 $ 7,861.3
- -----------------------------------------------------------------------
Net income 1,572.6
- -----------------------------------------------------------------------
Translation adjustments
(including taxes of $50.6) (88.0)
- -----------------------------------------------------------------------
Comprehensive income 1,484.6
- -----------------------------------------------------------------------
Common stock cash
dividends ($.15 per share) (203.3)
- -----------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (27.6)
- -----------------------------------------------------------------------
Conversion to $.01 par
value stock
- -----------------------------------------------------------------------
ESOP Notes payment 20.2
- -----------------------------------------------------------------------
Treasury stock acquisitions (604.8)
- -----------------------------------------------------------------------
Stock option exercises
and other (including tax benefits
of $86.4) 187.8
- -----------------------------------------------------------------------
Balance at December 31, 1996 8,718.2
- -----------------------------------------------------------------------
Net income 1,642.5
- -----------------------------------------------------------------------
Translation adjustments
(including taxes of $104.0) (295.4)
- -----------------------------------------------------------------------
Comprehensive income 1,347.1
- -----------------------------------------------------------------------
Common stock cash
dividends ($.16 per share) (221.2)
- -----------------------------------------------------------------------
Preferred stock cash
dividends ($1.93 per Series E
depositary share) (25.3)
- -----------------------------------------------------------------------
ESOP Notes payment 21.4
- -----------------------------------------------------------------------
Treasury stock acquisitions (765.0)
- -----------------------------------------------------------------------
Common equity put options
issuance (80.3)
- -----------------------------------------------------------------------
Preferred stock redemption (358.0)
- -----------------------------------------------------------------------
Stock option exercises and
other (including tax benefits
of $79.2) 214.7
- -----------------------------------------------------------------------
Balance at December 31, 1997 8,851.6
- -----------------------------------------------------------------------
Net income 1,550.1
- -----------------------------------------------------------------------
Translation adjustments (in-
cluding tax benefits of $84.2) (52.0)
- -----------------------------------------------------------------------
Comprehensive income 1,498.1
- -----------------------------------------------------------------------
Common stock cash
dividends ($.18 per share) (239.5)
- -----------------------------------------------------------------------
ESOP Notes payment 22.5
- -----------------------------------------------------------------------
Treasury stock acquisitions (1,161.9)
- -----------------------------------------------------------------------
Common equity put options
issuance and expiration, net 20.8
- -----------------------------------------------------------------------
Stock option exercises
and other (including tax benefits of
$154.0) 473.1
- -----------------------------------------------------------------------
Balance at December 31, 1998 $ 9,464.7
=======================================================================
</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.
20
<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): 1998-$486.3; 1997-$548.7; 1996-$503.3.
STOCK-BASED COMPENSATION
The Company accounts for stock options as prescribed by APB Opinion No. 25 and
includes pro forma information in the Stock options footnote, as provided 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.
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 interest-rate agreement or the underlying debt being hedged.
The Company purchases foreign currency options (with little or no initial
intrinsic value) that 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 and are recorded as nonoperating
expense. Any realized gains on exercised options are deferred and recognized in
the period in which the related royalty or other payment is received.
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. In addition, forward foreign
exchange contracts are used to hedge long-term investments in foreign
subsidiaries and affiliates. These contracts are marked to market with the
resulting gains or losses recorded in shareholders' equity as other
comprehensive income.
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value. If
the derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the change in fair value
of the hedged item through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The Company expects to adopt
the new Statement effective January 1, 2000. Management does not anticipate that
the adoption will have a material effect on the Company's results of operations
or financial position.
- --------------------------------------------------------------------------------
21
<PAGE>
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) of $25.3 million
in 1997 and $27.6 million in 1996. The Company retired its remaining Series E
Preferred Stock in December 1997. Diluted net income per common share includes
the dilutive effect of stock options.
On January 26, 1999, the Board of Directors declared a two-for-one stock split
of the Company's common stock, effected in the form of a stock dividend paid on
March 5, 1999. As a result of this action, 830.3 million shares were issued to
shareholders of record as of February 12, 1999. Par value of the stock remains
at $.01 per share and accordingly, $8.3 million were transferred from additional
paid-in capital to common stock. All references to the number of common shares
and per common share amounts have been restated to give retroactive effect to
the stock split for all periods presented.
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.
<TABLE>
<CAPTION>
OTHER OPERATING (INCOME) EXPENSE
- -----------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gains on sales of restaurant businesses $ (60.7) $ (59.0) $ (85.2)
Equity in earnings of unconsolidated affiliates (88.7) (72.8) (76.8)
Net losses from property dispositions 71.1 29.1 41.1
Other 18.1 (10.8) 3.1
- -----------------------------------------------------------------------------------------------
Other operating (income) expense $ (60.2) $(113.5) $(117.8)
===============================================================================================
Made For You costs $ 161.6
Special charges $ 160.0 $ 72.0
- -----------------------------------------------------------------------------------------------
</TABLE>
OTHER OPERATING (INCOME) EXPENSE
Net losses from property dispositions in 1996 included $16.0 million for certain
restaurant sites in Mexico, upon the adoption of SFAS No. 121, and in 1998
reflected an increased number of restaurant closings.
MADE FOR YOU COSTS
In 1998, the Company announced the introduction of Made For You, a new food
preparation system that is expected to be installed in virtually all restaurants
in the U.S. and Canada by the end of 1999. As part of the plan to introduce this
system, the Company is providing financial incentives of up to $12,500 per
restaurant to owner/operators to defray the cost of equipment made obsolete as a
result of converting to the new system. The Company also is making additional
payments in special cases where the conversion to Made For You is more
extensive.
In 1998, the Company incurred $161.6 million in Made For You costs, which
primarily consisted of nonrefundable incentive payments made to owner/operators
as well as accelerated depreciation on equipment being replaced in Company-
operated restaurants.
SPECIAL CHARGES
In second quarter 1998, the Company recorded a $160.0 million pre-tax special
charge related to the Company's home office productivity initiative. This
initiative is designed to improve staff alignment, focus and productivity and
reduce ongoing selling, general and administrative expenses. As a result, the
Company is reducing home office staffing by approximately 525 positions,
consolidating certain home office facilities and reducing other expenditures in
a variety of areas. The special charge was comprised of $85.8 million of
employee severance and outplacement costs, $40.8 million of lease cancellation
and other facilities-related costs, $18.3 million of costs for the write-off of
capitalized technology made obsolete as a result of the productivity initiative,
and $15.1 million of other cash payments made in 1998. Employee severance is
paid in semi-monthly installments over a period of up to one year after
termination.
As of December 31, 1998, the Company had reduced home office staffing by
approximately 400 positions and expects the remaining positions to be eliminated
by year-end 1999. The remaining accrual, primarily related to employee
severance, was approximately $105 million at December 31, 1998 and is included
in Other accrued liabilities in the Consolidated Balance Sheet. No significant
adjustments have been made to the original plan approved by management in second
quarter 1998.
In 1996, the Company recorded a $72.0 million pre-tax special charge related
primarily to plans to strengthen the U.S. business and reduce ongoing costs by
closing certain low-volume U.S. satellite restaurants, outsourcing excess
property management and implementing other cost efficiencies. The actions
required by this plan were completed in 1997 and resulted in no significant
adjustments to the original cost estimate.
FRANCHISE ARRANGEMENTS
- -----------------------------------------------------------------------------
Franchise arrangements generally include a lease and a license and provide for
payment of initial fees, as well as continuing rent, service fees and royalties
to the Company, based upon a percentage 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. Beginning in 1998, franchisees in the U.S.
generally have the option to own new restaurant facilities while leasing the
land from McDonald's. 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
22
<PAGE>
were not material to the consolidated financial statements for periods
prior to purchase and sale.
- ------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------
Minimum rents $ 1,440.9 $1,369.7 $ 1,350.7
Percent rent and service fees 2,026.9 1,836.3 1,689.7
Initial fees 58.7 66.3 75.4
- ------------------------------------------------------------------------------
Revenues from franchised
and affiliated restaurants $ 3,526.5 $3,272.3 $ 3,115.8
==============================================================================
Future minimum rent payments due to the Company under franchise arrangements
are:
- ------------------------------------------------------------------------------
(In millions) Owned sites Leased sites Total
- ------------------------------------------------------------------------------
1999 $ 905.0 $ 670.6 $ 1,575.6
2000 887.8 660.3 1,548.1
2001 872.2 651.6 1,523.8
2002 854.1 638.0 1,492.1
2003 835.8 625.4 1,461.2
Thereafter 7,412.1 5,774.0 13,186.1
- -------------------------------------------------------------------------------
Total minimum payments $11,767.0 $9,019.9 $20,786.9
===============================================================================
At December 31, 1998, net property and equipment under franchise arrangements
totaled $8.7 billion (including land of $2.6 billion) after deducting
accumulated depreciation and amortization of $2.9 billion.
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): 1998-$526.0; 1997-$470.6; 1996-$419.0.
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.
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
U.S. $ 4,868.1 $ 4,602.7 $4,590.3
Europe 4,466.7 3,931.5 3,613.8
Asia/Pacific 1,633.2 1,522.8 1,272.8
Latin America 814.7 709.2 595.7
Other 638.7 642.6 613.9
- -------------------------------------------------------------------------------
Total revenues $12,421.4 $11,408.8 $10,686.5
===============================================================================
U.S. $ 432.3 $ 404.0 $ 396.0
Europe 268.0 229.2 213.4
Asia/Pacific 97.3 82.8 66.4
Latin America 42.9 35.4 29.1
Other 40.6 42.4 38.0
- -------------------------------------------------------------------------------
Total depreciation and
amortization $ 881.1 $ 793.8 $ 742.9
===============================================================================
U.S. $ 1,043.9/(1)/ $1,210.8 $1,144.0/(2)/
Europe $ 1,139.8 1,007.2 953.8
Asia/Pacific 351.4 369.1 355.1
Latin America 184.7 166.5 113.7
Other 118.2 116.3 118.0
Corporate (76.1) (61.6) (52.0)
- -------------------------------------------------------------------------------
Total operating income $ 2,761.9/(1)/ $2,808.3 $2,632.6/(2)/
==============================================================================
U.S. $ 7,795.4 $7,753.4 $7,553.5
Europe 6,932.1 6,005.4 5,925.3
Asia/Pacific 2,659.7 2,125.6 2,111.8
Latin America 1,339.6 1,177.8 900.3
Other 678.7 661.6 622.8
Corporate 378.9 517.7 272.3
- ------------------------------------------------------------------------------
Total assets $ 19,784.4 $18,241.5 $17,386.0
==============================================================================
U.S. $ 445.5 $ 584.0 $ 882.9
Europe 870.2 929.5 945.8
Asia/Pacific 224.0 277.3 283.1
Latin America 236.8 227.9 172.5
Other 102.8 92.5 91.0
- -------------------------------------------------------------------------------
Total capital expenditures $ 1,879.3 $ 2,111.2 $ 2,375.3
===============================================================================
(1) Includes $161.6 million of Made For You costs and $160.0 million
special charge related to the home office productivity initiative.
(2) Includes $72.0 million special charge related primarily to plans to
strengthen the U.S. business and reduce ongoing costs.
Total long-lived assets, primarily property and equipment and intangibles, were
(in millions): Consolidated 1998-$18,244.4; 1997-$16,706.1; 1996-$16,069.8. U.S.
1998-$7,533.2; 1997-$7,530.7; 1996-$7,234.3.
INCOME TAXES
- -------------------------------------------------------------------------------
Income before provision for income taxes, classified by source of income, was as
follows:
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------
U.S. and Corporate $ 804.3 $1,004.6 $ 933.9
Outside the U.S. 1,503.1 1,402.7 1,317.1
- ------------------------------------------------------------------------------
Income before provision for income taxes $2,307.4 $2,407.3 $2,251.0
==============================================================================
23
<PAGE>
The provision for income taxes, classified by the timing and location of
payment, was as follows:
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
U.S. federal $267.8 $336.3 $260.0
U.S. state 71.4 66.0 49.4
Outside the U.S. 382.7 363.6 336.1
- -------------------------------------------------------------------------------
Current tax provision 721.9 765.9 645.5
- -------------------------------------------------------------------------------
U.S. federal 32.8 2.5 (13.2)
U.S. state (6.9) 13.5 1.6
Outside the U.S. 9.5 (17.1) 44.5
- -------------------------------------------------------------------------------
Deferred tax provision (benefit) 35.4 (1.1) 32.9
- -------------------------------------------------------------------------------
Provision for income taxes $757.3 $764.8 $678.4
===============================================================================
Net deferred tax liabilities consisted of:
- -------------------------------------------------------------------------------
(In millions) December 31, 1998 1997
- -------------------------------------------------------------------------------
Property and equipment basis differences $1,121.5 $1,033.1
Other 355.2 426.0
- -------------------------------------------------------------------------------
Total deferred tax liabilities 1,476.7 1,459.1
- -------------------------------------------------------------------------------
Deferred tax assets before
valuation allowance/(1)/ (561.8) (493.1)
Valuation allowance 45.5 41.7
- -------------------------------------------------------------------------------
Net deferred tax liabilities/(2)/ $ 960.4 $1,007.7
===============================================================================
(1) Includes tax effects of loss carryforwards (in millions): 1998-$67.1; 1997-
$51.9 and foreign tax credit carryforwards: 1998-$38.5; 1997-$109.9.
(2) Net of current tax assets included in Prepaid expenses and other current
assets in the Consolidated Balance Sheet (in millions):1998-$121.5; 1997-
$55.8.
The statutory U.S. federal income tax rate reconciles to the effective
income tax rates as follows:
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of related federal
income tax benefit 1.8 2.1 1.5
Benefits and taxes related to foreign operations (3.3) (5.2) (6.8)
Other-net (.7) (.1) .4
- -------------------------------------------------------------------------------
Effective income tax rates 32.8% 31.8% 30.1%
===============================================================================
Deferred U.S. income taxes have not been provided on basis differences related
to investments in certain foreign subsidiaries and affiliates. These basis
differences were approximately $2.2 billion at December 31, 1998, 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 if and when remittance occurs.
DEBT FINANCING
- -------------------------------------------------------------------------------
LINE OF CREDIT AGREEMENTS
The Company has several line of credit agreements with various banks: a $975.0
million line expiring on February 27, 2003, 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 a $500.0 million short-term
line expiring in the first half of 1999 with fees of .04% per annum on the total
commitment. All agreements remained unused at December 31, 1998. 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 $452.4 million
at December 31, 1998; 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% at December 31, 1998 and 1997.
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 2008 and relate primarily to the exchange of
Deutsche Marks, French Francs, Japanese Yen and British Pounds Sterling. The
notional principal is equal to the amount of foreign currency or U.S. Dollar
principal exchanged at maturity and is used to calculate interest payments that
are exchanged over the life of the transaction. The Company has also entered
into interest-rate exchange agreements that expire through 2011 and relate
primarily to U.S. Dollars, British Pounds Sterling and Dutch Guilders. The net
value of each exchange agreement based on its current spot rate was classified
as an asset or liability. Net interest is accrued as either interest receivable
or payable, with the offset recorded in 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. The Company's
current policy regarding agreements with certain counterparties is to require
collateral in the event credit ratings fall below A- or in the event that
aggregate exposures exceed limits as defined by contract. At December 31, 1998,
no collateral was required of counterparties, nor was the Company required to
collateralize any of its obligations.
24
<PAGE>
At December 31, 1998, the Company had purchased foreign currency options
outstanding (primarily Deutsche Marks, British Pounds Sterling and French
Francs) with a notional amount equivalent to U.S. $115.8 million. The
unamortized premium related to these currency options was $2.0 million and there
were no related deferred gains recorded as of year end. Forward foreign exchange
contracts outstanding at December 31, 1998 (primarily British Pounds Sterling,
Hong Kong Dollars and Italian Lira) had a U.S. Dollar equivalent of $1,037.9
million.
GUARANTEES
The Company has guaranteed and included in total debt at December 31, 1998,
$102.9 million of 7.2% ESOP Notes Series A and $56.8 million of 7.1% ESOP Notes
Series B issued by the Leveraged Employee Stock Ownership Plan with payments
through 2004 and 2006, respectively. The Company has agreed to repurchase the
notes upon the occurrence of certain events. The Company also has guaranteed
certain affiliate loans totaling $285.3 million at December 31, 1998.
FAIR VALUES
- -------------------------------------------------------------------------------
December 31, 1998
(In millions) Carrying amount Fair value
- -------------------------------------------------------------------------------
Liabilities
Debt $6,249.7 $6,581.8
Notes payable 686.8 686.8
Foreign currency exchange agreements/(1)/ 106.9 120.1
Interest-rate exchange agreements/(2)/ 20.8
- -------------------------------------------------------------------------------
Total liabilities 7,043.4 7,409.5
- -------------------------------------------------------------------------------
Assets
Foreign currency exchange agreements/(1)/ 113.4 40.6
- --------------------------------------------------------------------------------
Net debt $6,930.0 $7,368.9
================================================================================
(1) Combined notional amount equivalent to U.S. $2.9 billion.
(2) Notional amount equivalent to U.S. $1.7 billion.
The carrying amounts for cash and equivalents, notes receivable, purchased
foreign currency options and 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, notes payable obligations (excluding capital
leases) and the currency and interest-rate exchange agreements were estimated
using various pricing models or discounted cash flow analyses that incorporated
quoted market prices. 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 substantially higher than their carrying value at
December 31, 1998.
DEBT OBLIGATIONS
The Company has incurred debt obligations 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.
25
<PAGE>
<TABLE>
<CAPTION>
DEBT OBLIGATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rates/(1)/ Amounts outstanding Aggregate maturities by
December 31 December 31 currency for 1998 balances
(In millions of U.S. Maturity ------------------- -------------------- -----------------------------------
Dollars) dates 1998 1997 1998 1997 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-original issue/(2)/ 6.9% 7.2% $3,452.6 $2,487.6
Fixed-converted via
exchange agreements/(3)/ 6.3 6.1 (2,072.7) (1,869.7)
Floating 5.3 5.6 357.2 646.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total U.S. Dollars 1999-2037 1,737.1 1,264.4 $ 235.5 $(210.5) $(302.5) $(61.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed 6.2 7.2 1,771.6 1,107.7
Floating 4.0 4.3 849.9 1,422.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total Euro-based
currencies 1999-2007 2,621.5 2,529.8 606.3 467.8 342.1 267.1
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed 7.7 9.2 529.4 541.2
Floating 5.6 6.5 212.3 255.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total British Pounds
Sterling 1999-2008 741.7 796.5 129.4 91.2 24.9
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed 7.9 7.8 157.4 120.3
Floating 2.1 6.0 137.9 107.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total other
European
currencies/(4)/ 1999-2003 295.3 227.4 165.2 76.0 15.6
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed 3.8 3.9 387.5 343.6
Floating 0.5 0.6 322.5 203.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Japanese Yen 1999-2023 710.0 546.6 53.0 88.4 159.0 79.5
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed 8.8 9.1 393.2 286.5
Floating 6.8 7.8 337.6 344.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total other
Asia/Pacific
currencies/(5)/ 1999-2008 730.8 631.0 582.1 20.1 23.9 25.9
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed 7.4 9.5 9.3 11.5
Floating 8.9 4.6 84.3 220.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total other currencies 1999-2021 93.6 231.8 19.5 65.8 0.5 0.4
- -----------------------------------------------------------------------------------------------------------------------------------
Debt obligations including the
net effects of currency and interest-rate
exchange agreements 6,930.0 6,227.5 1,791.0 598.8 238.6 336.0
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term obligations
supported by long-term
line of credit agreement (975.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset positions of currency exchange
agreements (included in miscellaneous
other assets) 113.4 236.0 38.8 11.0 22.1 10.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt obligations $ 7,043.4 $ 6,463.5 $ 854.8 $ 609.8 $260.7 $346.6
===================================================================================================================================
<CAPTION>
- -----------------------------------------------------------------------------
(In millions of U.S. Dollars) 2003 Thereafter
- -----------------------------------------------------------------------------
<S> <C> <C>
Fixed-original issue/(2)/
Fixed-converted via
exchange agreements/(3)/
Floating
- -----------------------------------------------------------------------------
Total U.S. Dollars $ (78.1) $2,154.5
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total Euro-based
currencies 311.0 627.2
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total British Pounds
Sterling 164.7 331.5
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total other
European 38.5
currencies/(4)/
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total Japanese Yen 84.8 245.3
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total other
Asia/Pacific
currencies/(5)/ 44.4 34.4
- -----------------------------------------------------------------------------
Fixed
Floating
- -----------------------------------------------------------------------------
Total other currencies 5.1 2.3
- -----------------------------------------------------------------------------
Debt obligations including the
net effects of currency and interest-rate
exchange agreements 570.4 3,395.2
- -----------------------------------------------------------------------------
Short-term obligations
supported by long-term
line of credit agreement 975.0
- -----------------------------------------------------------------------------
Net asset positions of currency exchange
agreements (included in miscellaneous
other assets) 9.7 21.2
- -----------------------------------------------------------------------------
Total debt obligations $1,555.1 $3,416.4
=============================================================================
</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) Primarily consists of Swiss Francs.
(5) Primarily consists of Australian Dollars and New Taiwan Dollars.
26
<PAGE>
LEASING ARRANGEMENTS
At December 31, 1998, the Company was lessee at 4,734 restaurant locations
through ground leases (the Company leases the land and the Company or franchisee
owns the building) and at 5,714 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 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>
- --------------------------------------------------------------------------------
(In millions) Restaurant Other Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 570.4 $ 54.8 $ 625.2
2000 553.6 44.4 598.0
2001 539.9 37.5 577.4
2002 519.1 30.6 549.7
2003 494.9 26.5 521.4
Thereafter 4,688.0 152.3 4,840.3
- --------------------------------------------------------------------------------
Total minimum payments $ 7,365.9 $346.1 $7,712.0
================================================================================
</TABLE>
Rent expense was (in millions): 1998-$723.0; 1997-$641.2; 1996-$581.6. These
amounts included percent rents in excess of minimum rents (in millions): 1998-
$116.7; 1997-$99.4; 1996-$91.4.
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,812.1 $ 3,592.2
Buildings and improvements on owned land 7,665.8 7,289.7
Buildings and improvements on leased land 6,910.4 6,168.3
Equipment, signs and seating 2,728.8 2,345.1
Other 640.9 692.9
- --------------------------------------------------------------------------------
21,758.0 20,088.2
- --------------------------------------------------------------------------------
Accumulated depreciation and amortization (5,716.4) (5,126.8)
- --------------------------------------------------------------------------------
Net property and equipment $ 16,041.6 $ 14,961.4
================================================================================
</TABLE>
Depreciation and amortization expense was (in millions): 1998-$808.0; 1997-
$726.4; 1996-$673.4.
EMPLOYEE BENEFIT PLANS
The Company's benefits program for U.S. employees includes profit sharing,
401(k) (McDESOP) and leveraged employee stock ownership (LESOP) features.
McDESOP allows participants to make contributions that 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, McDESOP 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): 1998-$63.3; 1997-$57.6; 1996-$59.9.
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): 1998-$37.5; 1997-$34.1; 1996-$30.6.
Other postretirement benefits and postemployment benefits, excluding severance
benefits related to the home office productivity initiative, were immaterial.
STOCK OPTIONS
At December 31, 1998, the Company had three stock option 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 the 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 expire 10 years
from the grant date. At December 31, 1998, the number of shares of common stock
reserved for issuance under the plans was 187.0 million, including 23.0 million
available for future grants.
A summary of the status of the Company's plans as of December 31, 1998, 1997
and 1996, and changes during the years then ended is presented in the following
table.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- ------------------------
Weighted- Weighted- Weighted-
average average average
Shares exercise Shares exercise Shares exercise
Options (in millions) price (in millions) price (in millions) price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 156.3 $16.79 145.5 $14.73 136.2 $11.93
Granted 33.7 25.90 30.2 23.53 30.0 24.57
Exercised (22.8) 12.00 (14.6) 9.63 (15.6) 8.88
Forfeited (3.2) 21.06 (4.8) 17.78 (5.1) 16.16
- -------------------------------------------------------------------------------------------------------
Outstanding at
end of year 164.0 $19.32 156.3 $16.79 145.5 $14.73
=======================================================================================================
Options exercisable
at end of year 64.4 60.5 53.3
- -------------------------------------------------------------------------------------------------------
</TABLE>
Options granted each year were about 2% of average common shares outstanding
for 1998, 1997 and 1996, representing grants to approximately 11,500, 11,000 and
10,300 employees in those three years. When stock options are exercised, shares
are issued from treasury stock.
27
<PAGE>
The average per share cost of treasury stock issued for option exercises was:
1998-$7.00; 1997-$6.47; 1996-$6.53. 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 resulted
in $319.6 million of tax benefits for the Company during the three years ended
December 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31, 1998
- --------------------------------------------------------------------------------------------------
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>
$ 7 to 9 14.3 2.2 $ 7.77 14.3 $ 7.77
10 to 15 44.6 4.6 13.38 26.5 13.14
16 to 23 45.9 7.4 20.45 16.0 19.38
24 to 34 59.2 8.5 25.69 7.6 24.75
- --------------------------------------------------------------------------------------------------
$ 7 to 34 164.0 6.6 $ 19.32 64.4 $ 14.87
==================================================================================================
</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 No. 123 and are presented in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income-pro forma (in millions) $ 1,474.0 $1,589.3 $ 1,538.3
Net income per common share-pro forma
Basic 1.08 1.13 1.08
Diluted 1.05 1.11 1.05
Weighted-average fair value per option granted 8.75 8.41 8.44
- --------------------------------------------------------------------------------
</TABLE>
For pro forma disclosures, the options' estimated fair value was amortized
over their expected seven-year life. SFAS No. 123 does not apply to grants
before 1995. Therefore, the pro forma disclosures in the table above do not
include a full seven years of grants and therefore, may not be indicative of
anticipated future disclosures. 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>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield .65% .65% .65%
Expected stock price volatility 18.0% 18.1% 18.2%
Risk-free interest rate 5.56% 6.61% 6.14%
Expected life of options (in years) 7 7 7
- --------------------------------------------------------------------------------
</TABLE>
CAPITAL STOCK
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
At December 31, 1997, 1.8 million common equity put options were outstanding,
all of which expired unexercised in 1998. In 1998, the Company sold 7.3 million
common equity put options, of which 1.0 million options were outstanding at
December 31, 1998. The options expire at various dates through February 1999. At
December 31, 1998, the $59.5 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 nonvoting Preferred
Share Purchase Right (Right) on each outstanding share of common stock. Under
certain conditions related to a potential change in control of the Company, each
Right entitled certain holders 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. All Rights expired on December 28, 1998.
28
<PAGE>
QUARTERLY RESULTS (unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Quarters ended December 31 September 30
(In millions, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SYSTEMWIDE SALES $ 9,316.0 $ 8,530.4 $ 9,246.2 $ 8,799.7
- -----------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $ 2,304.5 $ 2,110.7 $ 2,305.7 $ 2,158.5
Revenues from franchised and affiliated
restaurants 916.2 841.9 909.3 847.5
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,220.7 2,952.6 3,215.0 3,006.0
- -----------------------------------------------------------------------------------------------------------
COMPANY-OPERATED MARGIN 418.2 384.4 437.5 402.4
FRANCHISED MARGIN 734.8 681.3 737.3 693.6
OPERATING INCOME/(1)/ 637.2 695.2 835.2 755.4
NET INCOME/(1)/ $ 348.5 $ 410.9 $ 482.2 $ 448.9
===========================================================================================================
NET INCOME PER COMMON SHARE/(1)(3)/ $ .26 $ .30 $ .35 $ .32
NET INCOME PER COMMON
SHARE--DILUTED/(1)(3)/ .25 .29 .34 .31
- -----------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE/(3)/ $ .04500 $ .04125 $ .04500 $ .04125
- -----------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES/(3)/ 1,354.3 1,375.3 1,362.1 1,377.0
WEIGHTED-AVERAGE SHARES--DILUTED/(3)/ 1,399.1 1,403.6 1,404.7 1,408.9
- -----------------------------------------------------------------------------------------------------------
MARKET PRICE PER COMMON SHARE/(3)/
High $ 39 3/4 $ 24 13/16 $ 37 1/2 $ 27 3/8
Low 28 1/8 21 1/16 26 3/4 22 7/8
Close 38 7/16 23 7/8 29 7/8 23 13/16
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
June 30 March 31
(In millions, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SYSTEMWIDE SALES $ 9,247.6 $ 8,475.1 $ 8,169.7 $ 7,833.1
- -----------------------------------------------------------------------------------------------------------------
REVENUES
Sales by Company-operated restaurants $ 2,270.4 $ 2,014.1 $ 2,014.3 $ 1,853.2
Revenues from franchised and affiliated
restaurants 910.4 818.5 790.6 764.4
- -----------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,180.8 2,832.6 2,804.9 2,617.6
- -----------------------------------------------------------------------------------------------------------------
COMPANY-OPERATED MARGIN 426.7 374.0 350.9 326.1
FRANCHISED MARGIN 743.9 667.4 632.5 616.1
OPERATING INCOME/(1)/ 646.8/(2)/ 743.5 642.7 614.2
NET INCOME/(1)/ $ 357.2/(2)/ $ 438.2 $ 362.2 $ 344.5
=================================================================================================================
NET INCOME PER COMMON SHARE/(1)(3)/ $ .26/(2)/ $ .31 $ .26 $ .24
NET INCOME PER COMMON
SHARE--DILUTED/(1)(3)/ .25/(2)/ .30 .26 .24
- -----------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE/(3)/ $ .04500 $ .04125 $ .04125 $ .03750
- -----------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES/(3)/ 1,372.1 1,379.5 1,372.8 1,383.2
WEIGHTED-AVERAGE SHARES--DILUTED/(3)/ 1,415.1 1,414.6 1,403.9 1,415.0
- -----------------------------------------------------------------------------------------------------------------
MARKET PRICE PER COMMON SHARE/(3)/
High $ 35 $ 27 7/16 $ 30 1/8 $ 24 11/16
Low 28 9/16 23 3/8 22 5/16 21 1/4
Close 34 1/2 24 3/16 30 23 5/8
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes Made For You costs in 1998 of $5.0 million ($3.4 million after tax)
in second quarter; $10.6 million ($7.1 million after tax or $0.01 per share)
in third quarter; and $146.0 million ($98.6 million after tax or $0.07 per
share) in fourth quarter.
(2) Includes $160.0 million special charge related to the home office
productivity initiative ($110.0 million after tax or $0.08 per share).
(3) Restated for two-for-one stock split in March 1999.
29
<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 controls 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 that 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 it
maintains 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.
McDONALD'S CORPORATION
January 26, 1999
AUDIT COMMITTEE'S REPORT
The Audit Committee is responsible for overseeing the financial reporting
process, financial policies and internal controls on behalf of the Board of
Directors. In this regard, it helps to ensure the independence of the Company's
auditors, the integrity of management and the adequacy of disclosure to
shareholders. Representatives of the internal audit function, independent
auditors and financial management each have unrestricted access to the Committee
and each periodically meet privately with the Committee.
In conformity with its charter, in 1998, among other things, the Committee
recommended the selection of the Company's independent auditors to the Board of
Directors; reviewed the scope and fees for the annual audit and the internal
audit program; reviewed fees for non-audit services provided by the independent
auditors; reviewed the annual financial statements and the results of the annual
audit with financial management and the independent auditors; consulted with
financial management and the independent auditors regarding risk management;
reviewed the adequacy of certain financial policies and internal controls; and
reviewed significant legal developments.
The Audit Committee, which met five times during 1998, is comprised of three
independent Directors: Gordon C. Gray, Chairman, Walter E. Massey and B. Blair
Vedder, Jr. Donald G. Lubin serves as secretary in a non-voting capacity.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
OF McDONALD'S CORPORATION
January 26, 1999
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
McDonald's Corporation
We have audited the accompanying consolidated balance sheet of McDonald's
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 26, 1999
30
<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, 1998.
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, 1998.
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, 1998.
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, 1998.
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) 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, 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date of Item Financial statements
report number required to be filed
- --------------------------------------------------------------------------------
<S> <C> <C>
10/19/98 Item 7 No
1/26/99 Item 7 No
- --------------------------------------------------------------------------------
</TABLE>
(c) Exhibits:
The exhibits listed in the accompanying index are filed as part of this report.
31
<PAGE>
MCDONALD'S CORPORATION EXHIBIT INDEX (ITEM 14)
EXHIBIT NUMBER/DESCRIPTION
(3) Restated Certificate of Incorporation, effective as of March 24, 1998,
incorporated herein by reference from Form 8-K dated April 17, 1998. By-
Laws, effective as of July 8, 1998, incorporated herein by reference from
Form 10-Q for the quarter ended June 30, 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.
(ii) 5.90% REset Put Securities due 2011. Supplemental Indenture
No. 2 dated as of May 11, 1998, incorporated herein by
reference from Exhibit 4(a) of Form 8-K dated May 6, 1998.
(iii) 6% REset Put Securities due 2012. Supplemental Indenture No. 3
dated as of June 23, 1998, incorporated herein by reference
from Exhibit 4(a) of Form 8-K dated June 18, 1998.
(iv) Medium-Term Notes, Series F, due from 1 year to 60 years from
the Date of Issue. Supplemental Indenture No. 4 incorporated
herein by reference from Exhibit (4) (c) of Form S-3
Registration Statement (File No. 333-59145), dated July 15,
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 ref-erence 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. 3312364).
(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 refer-ence 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.
32
<PAGE>
EXHIBIT NUMBER/DESCRIPTION
(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) 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.
(10) Material Contracts
(a) Directors' Stock Plan, as amended and restated, incorporated herein 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, 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 Form 10-Q for the quarter ended
March 31, 1998.*
(e) 1992 Stock Ownership Incentive Plan, as amended and restated,
incorporated herein by reference from Form 10-Q for the quarter ended
March 31, 1998.*
(f) McDonald's Corporation Deferred Income Plan, as amended and restated,
filed herewith.*
(g) Non-Employee Director Stock Option Plan, incorporated herein 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) Executive Retention Plan, filed herewith.*
(12) Statement re: Computation of Ratios
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(27) Financial Data Schedule
* Denotes compensatory plan.
(A) 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.
33
<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)
/s/ Michael L. Conley
- --------------------------------------------------------
By Michael L. Conley
Executive Vice President and
Chief Financial Officer
March 30, 1999
- --------------------------------------------------------
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, 1999:
SIGNATURE, TITLE
/s/ Hall Adams, Jr.
- --------------------------------------------------------
Hall Adams, Jr.
Director
- --------------------------------------------------------
James R. Cantalupo
Vice Chairman; Chairman, and Chief Executive Officer--
McDonald's International and Director
/s/ Gordon C. Gray
- --------------------------------------------------------
Gordon C. Gray
Director
/s/ Jack M. Greenberg
- --------------------------------------------------------
Jack M. Greenberg
President and Chief Executive Officer and Director
- --------------------------------------------------------
Enrique Hernandez, Jr.
Director
/s/ Donald R. Keough
- --------------------------------------------------------
Donald R. Keough
Director
/s/ Donald G. Lubin
- --------------------------------------------------------
Donald G. Lubin
Director
/s/ Walter E. Massey
- --------------------------------------------------------
Walter E. Massey
Director
/s/ Andrew J. McKenna
- --------------------------------------------------------
Andrew J. McKenna
Director
- --------------------------------------------------------
Michael R. Quinlan
Chairman of the Board
/s/ Terry L. Savage
- --------------------------------------------------------
Terry L. Savage
Director
/s/ Roger W. Stone
- --------------------------------------------------------
Roger W. Stone
Director
/s/ Robert N. Thurston
- --------------------------------------------------------
Robert N. Thurston
Director
- --------------------------------------------------------
Fred L. Turner
Senior Chairman and Director
/s/ B. Blair Vedder, Jr.
- --------------------------------------------------------
B. Blair Vedder, Jr.
Director
/s/ Michael L. Conley
- --------------------------------------------------------
Michael L. Conley
Executive Vice President and Chief Financial Officer
/s/ Christopher Pieszko
- --------------------------------------------------------
Christopher Pieszko
Senior Vice President and Corporate Controller
34
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.B
<SEQUENCE>2
<DESCRIPTION>PROFIT SHARING PROGRAM
<TEXT>
<PAGE>
Exhibit 10(b)
McDONALD'S CORPORATION
PROFIT SHARING PROGRAM
As amended and restated
effective
January 1, 1997
<PAGE>
McDONALD'S CORPORATION PROFIT SHARING PROGRAM
---------------------------------------------
Summary of Contents
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - DEFINITIONS
1.1 "Account"........................................................... 3
1.2 "Active Participant"................................................ 6
1.3 "Affiliated Service Group".......................................... 7
1.4 "Authorized Leave of Absence"....................................... 8
1.5 "Auxiliary ESOP".................................................... 8
1.6 "Beneficiary"....................................................... 8
1.7 "Board of Directors"................................................ 9
1.8 "Break in Service".................................................. 9
1.9 "Committee"......................................................... 9
1.10 "Commonly Controlled Corporation"................................... 9
1.11 "Commonly Controlled Entity"........................................ 9
1.12 "Company"........................................................... 9
1.13 "Company Stock"..................................................... 9
1.14 "Considered Compensation"........................................... 9
1.15 "Credited Service".................................................. 12
1.16 "Disability"........................................................ 12
1.17 "Disqualified Person"............................................... 12
1.18 "Domestic Affiliate"................................................ 12
1.19 "Effective Date".................................................... 13
1.20 "Eligibility Computation Period".................................... 13
1.21 "Eligibility Service"............................................... 13
1.22 "Employee".......................................................... 13
1.23 "Employer".......................................................... 13
1.24 "Employer Contributions"............................................ 14
1.25 "Entry Date"........................................................ 14
1.26 "ERISA"............................................................. 14
1.27 "Five Percent Owner"................................................ 14
1.28 "Foreign Affiliate"................................................. 15
1.29 "Forfeiture"........................................................ 15
1.30 "Highly Compensated Employee"....................................... 15
1.31 "Hour of Service"................................................... 16
1.32 "Internal Revenue Code"............................................. 19
1.33 "Investment Fund"................................................... 19
1.34 "Leased Employee"................................................... 20
1.35 "LESOP"............................................................. 20
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1.36 "LESOP Suspense Account"............................................. 20
1.37 "Licensee"........................................................... 20
1.38 "McDESOP"............................................................ 20
1.39 "Non-highly Compensated Employee".................................... 20
1.40 "Parental Leave"..................................................... 20
1.41 "Participant"........................................................ 21
1.42 "Participant Contributions".......................................... 21
1.43 "Participant Elected Contributions".................................. 21
1.44 "Party in Interest".................................................. 21
1.45 "Program"............................................................ 22
1.46 "Plan Administrator"................................................. 22
1.47 "Plan Year".......................................................... 22
1.48 "Profit Sharing Plan"................................................ 22
1.49 "Qualified Preretirement Survivor Annuity"........................... 22
1.50 "Related Plan"....................................................... 22
1.51 "Required Beginning Date"............................................ 22
1.52 "Rollover"........................................................... 22
1.53 "STIF Fund".......................................................... 23
1.54 "Stock Sharing"...................................................... 23
1.55 "Subsidiary"......................................................... 23
1.56 "Termination of Employment".......................................... 23
1.57 [Reserved]........................................................... 23
1.58 "Trust".............................................................. 23
1.59 "Trust Agreement".................................................... 23
1.60 "Trustee"............................................................ 24
1.61 "Trust Fund"......................................................... 24
1.62 "Valuation Date"..................................................... 24
1.63 "Vesting Retirement Date"............................................ 24
1.64 "Year of Credited Service"........................................... 24
1.65 "Year of Eligibility Service"........................................ 24
ARTICLE II - PARTICIPATION
2.1 Participation........................................................ 25
2.2 Certification of Participation and Compensation to Committee......... 25
2.3 Termination of Employment, Break in Service, Reemployment and
Change in Employment Status.......................................... 25
2.4 Employees of Foreign or Domestic Affiliates.......................... 26
2.5 Leased Employee...................................................... 26
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ARTICLE III - PROFIT SHARING PLAN EMPLOYER CONTRIBUTIONS
3.1 Profit Sharing Contributions....................................... 27
3.2 Payment of Contributions Made Pursuant to Article III.............. 28
ARTICLE IV - McDESOP and LESOP EMPLOYER CONTRIBUTIONS
4.1 Amount of Employer Matching Contributions.......................... 29
4.2 LESOP Contributions................................................ 33
4.3 Annual Employer Contribution Elections............................. 35
4.4 Additional Employer Contributions.................................. 36
4.5 Payment of Contributions Made Pursuant to Article IV............... 36
4.6 Form of Contributions.............................................. 37
4.7 Reemployed Members of the Uniformed Services....................... 37
ARTICLE V - PARTICIPANT ELECTED CONTRIBUTIONS
5.1 Participant Elected Contributions.................................. 40
5.2 Restrictions on Participant Elected Contributions.................. 41
5.3 Allocation of Income to Certain Distributed Amounts................ 46
5.4 Multiple Use of Alternative Limitations............................ 47
5.5 Excess Compensation Reduction Elections............................ 50
5.6 Deadline for Participant Elected Contributions..................... 51
5.7 Application of the Limitations of Sections 5.2(c),
5.2(e), 5.4 and 9.1................................................ 51
ARTICLE VI - LESOP LOAN PROVISIONS
6.1 Power to Borrow.................................................... 52
6.2 Accounting for Loan Proceeds and LESOP Contributions............... 53
6.3 Release from LESOP Suspense Account................................ 53
6.4 Installment Payments on Exempt Loan................................ 55
6.5 Non-Terminable Rights and Protections.............................. 56
6.6 Independent Appraisals Required.................................... 58
ARTICLE VII - ALLOCATIONS OF CONTRIBUTIONS
7.1 Profit Sharing Contribution Allocation Formula..................... 59
7.2 Employer Matching Contributions, LESOP Employer
Matching Contributions Additional Employer
Contributions and Special Section 401(k) Employer
Contributions...................................................... 60
7.3 LESOP Contributions................................................ 61
7.4 Participant Elected Contributions.................................. 63
7.5 Timing of Allocations.............................................. 63
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ARTICLE VIII - ROLLOVERS AND TRUSTEE TRANSFERS
8.1 Participant Rollovers.............................. 64
8.2 Limited Participation.............................. 64
8.3 Withdrawal of Rollovers............................ 64
8.4 Rollover Not Forfeitable........................... 64
ARTICLE IX - LIMITATIONS ON CONTRIBUTIONS BECAUSE OF FEDERAL
LEGISLATION
9.1 Limitations on Contributions....................... 65
9.2 Employer Contribution Reductions................... 69
ARTICLE X - TRUSTEE AND TRUST FUNDS
10.1 Trust Agreements................................... 70
10.2 Trustee's Duties................................... 70
10.3 Trust Expenses..................................... 70
10.4 Trust Entity....................................... 70
10.5 Right of the Employers to Trust Assets............. 70
10.6 Trust Investment Funds............................. 71
10.7 Investment of Participant's Employer Profit
Sharing Contributions.............................. 74
10.8 Investment Election with Regard to a Participant's
Profit Sharing, Diversification, Investment Savings
and Rollover Accounts.............................. 74
10.9 Failure to Make an Investment Election............. 76
10.10 Diversification of McDESOP and LESOP Contributions. 76
10.11 Effective Date of Participant's Investment and
Diversification Elections.......................... 81
10.12 Trust Income....................................... 81
10.13 Adjustment of Participant's Account Balances and
the LESOP Suspense Accounts........................ 82
10.14 Allocation of Income to Holding Funds.............. 83
10.15 Separate Accounting in the Trust Fund.............. 83
10.16 Trust Investment................................... 83
10.17 Separate Accounting for LESOP Suspense Account..... 83
10.18 Correction of Error................................ 84
10.19 Statement of Accounts.............................. 85
10.20 Purchase or Sale of Company Stock.................. 85
10.21 Shareholder Rights in Company Stock................ 85
10.22 Cash Distributions with Respect to Company Stock... 87
10.23 Holding Funds...................................... 87
10.24 Restrictions Applicable to Participants Subject to
Section 16......................................... 88
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ARTICLE XI - DISTRIBUTION OF BENEFITS
11.1 Distributions, General.............................................. 90
11.2 Payment of Net Balance Account on Disability, or on Retirement or
Other Termination of Employment..................................... 90
11.3 Payment of Net Balance Account on Death of Participant.............. 98
11.4 Vesting and Forfeitures............................................. 102
11.5 Payment of Employer Profit Sharing Contribution for Year of
Termination of Employment........................................... 104
11.6 Designation of Beneficiary and Form of Beneficiary Benefit.......... 104
11.7 Incompetency, Distribution of Benefits.............................. 105
11.8 Deduction of Taxes from Accounts Payable............................ 106
11.9 Deadline for Payment of Benefits.................................... 106
11.10 Spousal Consent to a Beneficiary or a Waiver........................ 106
11.11 Single Sum Payment without Election................................. 107
11.12 Installment Payments................................................ 107
11.13 Required Minimum Distributions to Employed Participants............. 109
11.14 Transitional Rules.................................................. 110
11.15 Sale of Restaurant - Special Vesting Rules.......................... 110
11.16 In-Service Withdrawals.............................................. 111
11.17 Direct Rollovers.................................................... 112
ARTICLE XII - SUBSIDIARY PARTICIPATION
12.1 Adoption of Program and Trust....................................... 115
12.2 Withdrawal from Program by Participating Employer................... 115
ARTICLE XIII - ADMINISTRATION OF THE PROGRAM
13.1 Appointment and Removal of, and Resignation by, Trustee............. 117
13.2 Appointment of Committee; Tenure in Office.......................... 117
13.3 Named Fiduciaries................................................... 117
13.4 Delegation of Responsibilities...................................... 118
13.5 Committee Duties.................................................... 118
13.6 Committee Action by Majority -- Authorization of Members to Execute
Documents........................................................... 119
13.7 Secretary........................................................... 120
13.8 Member as Participant............................................... 120
13.9 Rules and Decisions................................................. 120
13.10 Electronic Elections................................................ 120
13.11 Agents and Counsel.................................................. 120
13.12 Authorization of Benefit Distribution............................... 120
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13.13 Claims Procedure.................................................. 121
13.14 Information to be Furnished to Committee.......................... 122
13.15 Plan Administrator................................................ 122
13.16 Fiduciary as Participant.......................................... 122
13.17 Fiduciary Responsibility.......................................... 122
ARTICLE XIV - AMENDMENT, TERMINATION, MERGER AND CONSOLIDATION OF PLAN
14.1 Amendment......................................................... 123
14.2 Termination of Program By the Company............................. 123
14.3 Merger, Consolidation, or Transfer of Assets...................... 124
14.4 Transfer of Assets from Plans of Subsidiaries..................... 124
ARTICLE XV - TOP HEAVY PROVISIONS
15.1 Application....................................................... 126
15.2 Special Top Heavy Definitions..................................... 126
15.3 Special Top Heavy Provisions...................................... 133
ARTICLE XVI - MISCELLANEOUS PROVISIONS
16.1 Headings.......................................................... 136
16.2 Indemnification................................................... 136
16.3 Employees' Trust.................................................. 136
16.4 Nonalienation of Benefits......................................... 136
16.5 Qualified Domestic Relations Order................................ 137
16.6 Unclaimed Amounts................................................. 138
16.7 Maximum Age Condition............................................. 140
16.8 Invalidity of Certain Provisions.................................. 140
16.9 Gender and Number................................................. 140
16.10 Law Governing..................................................... 141
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MCDONALD'S CORPORATION PROFIT SHARING PROGRAM
History. The McDonald's Corporation Savings and Profit Sharing Plan, as
amended and restated effective January 1, 1987 ("Profit Sharing Plan") and
subsequently amended from time to time and the McDonald's Matching and Deferred
Stock Ownership Plan, as amended and restated effective January 1, 1984
("McDESOP Plan") and subsequently amended from time to time, were merged,
effective December 31, 1988, amended and restated effective January 1, 1989, and
renamed the "McDonald's Corporation Profit Sharing Program" (the "Program").
The Program was subsequently amended from time to time and was amended and
restated effective July 1, 1992. The McDonald's Stock Sharing Plan ("Stock
Sharing Plan") was amended and restated effective January 1, 1989.
The Stock Sharing Plan was merged into the Program effective after the
close of business on December 28, 1995. After the merger, the Stock Sharing
portion of the Program continued to be controlled by the McDonald's Stock
Sharing Plan, as amended and restated effective January 1, 1989 and the Profit
Sharing portion of the Program continued to be controlled by the McDonald's
Corporation Profit Sharing Program, as amended and restated effective January 1,
1992 until January 1, 1996. The assets of the McDonald's Stock Sharing Trust
were transferred to the McDonald's Matching and Deferred Stock Ownership Trust
on or after December 29, 1995 until such time as there were no remaining assets
and the Trust ceased to exist.
The Program was amended and restated in one document effective January 1,
1996, except as otherwise specifically provided in the Program document as
amended and restated effective January 1, 1996 and subsequently amended from
time to time.
The Program is hereby amended and restated January 1, 1997, except as
otherwise specifically provided herein.
Structure and Purpose. The Program has four component portions, (1) the
Profit Sharing Plan portion which is intended to be a profit sharing plan and to
meet the requirements of Sections 401(a) of the Internal Revenue Code, (2) the
McDESOP portion which is intended to meet the requirements for a stock bonus
plan, a cash or deferred arrangement and a leveraged employee stock ownership
plan under Sections 401(a), 401(k), 401(m) and 4975(e)(7) of the Internal
Revenue Code, (3) the LESOP portion which is intended to meet the requirements
of a stock bonus plan and a leveraged employee stock ownership plan under
Sections 401(a), 4975(e)(7) and 401(m) of the Internal Revenue Code and which
provides LESOP Employer Matching Contributions effective November 1, 1998, and
(4) the Stock Sharing portion which is intended to meet the requirements of a
stock bonus plan and a tax credit employee stock ownership plan in accordance
with Sections 401(a) and 409 of the Internal Revenue Code and Section 41 of the
Internal Revenue Code before its repeal with respect to compensation paid or
accrued after December 31, 1986. Each portion of the Program shall be
interpreted in a manner consistent with it meeting the requirements of the
respective Internal Revenue Code Sections applicable thereto. The assets of the
McDESOP, LESOP and the Stock Sharing portions of the Program shall be invested
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primarily in qualifying employer securities as defined in Section 409(l) of the
Internal Revenue Code and Section 407(d)(6) of ERISA.
Application of Provisions. The purposes of the McDonald's Corporation
Profit Sharing Program are to permit Participants (1) to share in the success of
the Company by receiving a portion of its profits, (2) to provide employees a
convenient means to save for their own future retirement security through their
participation in this Program and (3) to provide Participants, individually and
as a group, with a substantial ownership interest in the Company.
Except as otherwise specifically provided herein, the Program as amended
and restated herein applies to persons who are Employees on and after January 1,
1997. Eligibility, benefits, payment of benefits and the amount of benefits, if
any, of a person whose employment with an Employer terminated before January 1,
1997, and who is not rehired by an Employer on or after January 1, 1997, shall,
except as otherwise specifically provided herein, be determined in accordance
with the provisions of the Program, the Stock Sharing Plan, the McDESOP Plan,
and the Profit Sharing Plan as in effect on the date the person ceased to be an
Employee of an Employer.
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ARTICLE I
DEFINITIONS
The following words and phrases, when used herein, unless their context
clearly indicates otherwise, shall have the following respective meanings:
1.1 "Account" means a Participant's share of contributions and Forfeitures
arising under the Program, and the income, profits and increments thereon less
all losses, expenses and distributions chargeable thereto.
(a) Each Participant may have one or more of the following Accounts in
the Profit Sharing portion of the Program ("Profit Sharing Accounts") which
shall be held in the Trust Fund:
(1) "Investment Savings Account," to which shall be credited the
Participant's after tax Participant Contributions to the Profit
Sharing Plan which were made before January 1, 1987.
(2) "Profit Sharing Account," to which shall be credited each
Participant's share of Employer Profit Sharing Contributions with
respect to the Profit Sharing Plan allocated in accordance with
Section 7.1. A Participant's Profit Sharing Account shall include his
"Pre-Break Profit Sharing Account" and his "Post-Break Profit Sharing
Account" pursuant to Section 11.4(e), if applicable.
(3) "Profit Sharing Holding Account," to which shall be credited
the Participant's share of Employer Profit Sharing Contributions until
such contributions shall be removed and invested in accordance with
Sections 10.7 and 10.8 as of each February 1.
(4) "Rollover Account," to which shall be credited the balance of
the Participant's Rollover Holding Account as of each Valuation Date.
(5) "Rollover Holding Account," to which shall be credited the
Participant's Rollover pursuant to Section 8.1 until such
contributions are removed and credited to the Participant's Rollover
Account at the next Valuation Date occurring at the end of a calendar
month in which such contributions were made.
(b) Each Participant may have one or more of the following Accounts in
the McDESOP portion of the Program ("McDESOP Accounts") which shall be held
in the McDESOP Trust except to the extent transferred to the Profit Sharing
Trust in
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accordance with Participant's diversification elections made in accordance
with Section 10.10:
(1) A "Participant Elected Contribution Account", to which shall
be credited Participant Elected Contributions made to the Program on
behalf of the Participant in accordance with Section 7.4;
(2) An "Employer Matching Contribution Account" to which shall
be credited Employer Matching Contributions (including any Employer
Per Capita Matching Contributions under the provisions of the Program
before January 1, 1996), LESOP Employer Matching Contributions,
Additional Employer Contributions, Special Section 401(k) Employer
Contributions and any Forfeitures allocated to the Participant in
accordance with Section 7.2.
(3) The "McDESOP Holding Account" to which shall be credited the
Participants' Participant Elected Contributions to the Program until
such contributions are credited to the Participants' Participant
Elected Contribution Account.
(4) The "Matching Contribution Holding Account" to which shall
be credited the Participants' Employer Matching Contributions to the
Program until such contributions are credited to the Participants'
Employer Matching Contribution Account.
(c) Each Participant may have one or more of the following accounts
in the LESOP portion of the Program ("LESOP Accounts") which shall be held
in the McDESOP Trust except to the extent transferred to the Profit Sharing
Trust in accordance with a Participant's diversification elections pursuant
to Section 10.10.
(1) A "Per Capita LESOP Account," to which were credited Company
Stock and associated dividends attributable to Employer Contributions
made on a Per Capita Basis under the terms of the Program before
January 1996.
(2) A "Compensation Based LESOP Account," to which shall be
credited Company Stock released from the LESOP Suspense Account in
accordance with Section 6.3(a), allocated in accordance with Section
7.3(b) and any Special Dividend Replacement Contributions credited to
such account in accordance with Section 7.3(d).
(3) An "Additional LESOP Account," to which shall be credited,
in accordance with Section 7.3(b) a Participant's Per Capita
Additional LESOP Contributions and Forfeitures therefrom and his
Compensation Based Additional LESOP Contributions and Forfeitures
therefrom, if any.
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(d) Each Participant who has an account in the Stock Sharing Plan may
have the following Accounts in the Stock Sharing portion of the Program
("Stock Sharing Accounts") which shall be held in the McDESOP Trust:
(1) A "Participant Contribution Stock Sharing Account," to which
shall be credited Participant Matched Contributions made under the
Stock Sharing Plan with respect to Plan Years ending on or before
December 31, 1982.
(2) An "Unmatched Employer Contribution Stock Sharing
Contribution Account," to which shall be credited Unmatched Employer
Contributions contributed to the Stock Sharing Plan with respect to
Plan Years ending on or before December 31, 1982.
(3) A "PAYSOP Stock Sharing Contribution Account," to which
shall be credited Employer Contributions contributed to the Stock
Sharing Plan with respect to Plan Years beginning on or after January
1, 1983 and before January 1, 1987.
(4) An "Employer Matching Stock Sharing Contribution Account,"
to which shall be credited Employer Matching Contributions made by an
Employer to the Stock Sharing Plan for Plan Years ending on or before
December 31, 1982.
(5) An "Additional Employer Stock Sharing Contribution Account,"
to which shall be credited (A) contributions which have been allocated
to a Participant's Additional Company Contribution Account with
respect to Plan Years ending on or before December 31, 1982, and (B)
with respect to contributions for Plan Years ending after December 31,
1982, contributions to the Stock Sharing Plan in excess of the amount
which qualified for tax credit under Section 41(a)(2) of the Internal
Revenue Code.
(e) Each Participant shall have the following accounts
("Diversification Accounts"), to which shall be credited the respective
portions of a Participant's LESOP Accounts, and McDESOP Accounts,
transferred to his Diversification Account pursuant to a Diversification
Election made in accordance with Section 10.10. A Participant's
Diversification Account shall be part of the McDESOP and LESOP portion of
the Program, but is held in the Profit Sharing Trust in order to implement
Participant's diversification elections made in accordance with Section
10.10. The Diversification Account shall consist of two sub-accounts as
follows:
(1) "LESOP Diversification Account," to which shall be credited
the portions of a Participant's LESOP Account transferred to his LESOP
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Diversification Account pursuant to a Diversification Election made in
accordance with Section 10.10(a); and
(2) "McDESOP Diversification Account," to which shall be
credited the portions of a Participant's Participant Elected
Contribution Account and Employer Matching Contribution Account,
transferred to his McDESOP Diversification Account pursuant to a
Diversification Election made in accordance with Sections 10.10(b) and
10.10(c).
(f) "Net Balance Account," means a Participant's interest in the
Trust composed of all of the Participant's Accounts. A Participant's
accrued benefit at any time during any Plan Year (except on a Valuation
Date) shall be the value of the number of full and fractional shares of
Company Stock and any other value held in such Participant's Accounts as
adjusted on the immediately preceding Valuation Date, and on a Valuation
Date it shall be the number of full and fractional shares of Company Stock
and other value held in such Participant's Accounts as adjusted to that
Valuation Date.
1.2 "Active Participant" means
(a) for purposes of receiving an allocation of the Profit Sharing
Contributions pursuant to Section 7.1 for a Plan Year, a Participant
(1) who (A) has accumulated one thousand (1,000) Hours of
Service during the Plan Year; (B) has Considered Compensation during
such Plan Year; and (C) is employed by an Employer on the last day of
the Plan Year; or
(2) who (A) is transferred during the Plan Year to a Domestic
Affiliate or Foreign Affiliate; (B) has accumulated one thousand
(1,000) Hours of Service during a Plan Year; (C) has Considered
Compensation during such Plan Year; and (D) is employed on the last
day of the Plan Year by an Employer, a Domestic Affiliate or a Foreign
Affiliate; or
(3) who (A) was a Participant on any day of a Plan Year; (B) has
Considered Compensation during such Plan Year; and (C) prior to the
last day of such Plan Year, died, retired on or after attaining age 55
or suffered a Disability, terminated his employment because of the
sale or lease of a McDonald's restaurant operation and became an
employee of the purchasing Licensee, or terminated his employment when
he had at least 10 years of Credited Service under the Program; and
(b) for the purpose of being eligible to share in allocations of
Company Stock released from a LESOP Suspense Account for a Plan Year, in
accordance with
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Section 6.3(a), and of Additional LESOP Contributions for a Plan Year, a
Participant who is a staff or an executive employee or a store manager; and
(1) who (A) has accumulated one thousand (1,000) Hours of
Service during the Plan Year; (B) has Considered Compensation during
such Plan Year; and (C) is employed by an Employer on the last day of
the Plan Year; or
(2) who (A) is transferred during the Plan Year to a Domestic
Affiliate or Foreign Affiliate; (B) has accumulated one thousand
(1,000) Hours of Service during a Plan Year; (C) has Considered
Compensation during such Plan Year; and (D) is employed on the last
day of the Plan Year by an Employer, a Domestic Affiliate or a Foreign
Affiliate; or
(3) who (A) was a Participant on any day of a Plan Year; (B) has
Considered Compensation during such Plan Year; and (C) prior to the
last day of such Plan Year, died, retired on or after attaining age 55
or suffering a Disability, terminated his employment because of the
sale or lease of a McDonald's restaurant operation and became an
employee of the purchasing Licensee, or terminated his employment when
he had at least 10 years of Credited Service under the Program; and
(c) for purposes of the McDESOP portion of the Program and, effective
with respect to periods on or after November 1, 1998, for the purpose of
being eligible to share in releases from the LESOP Suspense Accounts
pursuant to Section 6.3(c), a Participant who is an Employee on any day of
the Plan Year.
1.3 "Affiliated Service Group" means a group including an Employer which:
(a) consists of an organization the principal business of which is
the performance of services ("first service organization") and one or more
of the organizations described in (1) or (2):
(1) any service organization which
(A) is a shareholder or partner in the first service
organization (as determined in accordance with applicable
Treasury Regulations), and
(B) regularly performs services for the first service
organization or is regularly associated with the first service
organization in performing services for third persons, or
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(2) any other organization if
(A) a significant portion of the business of such
organization is the performance of services for the first service
organization or for one or more organizations identified in
Section 1.3(a)(1) or for both, and the services are of a type
historically performed in such service field by employees, and
(B) 10 percent or more of the interests in such
organization are held by persons who are highly compensated
employees (within the meaning of section 414(q) of the Internal
Revenue Code) of the first service organization or an
organization described in Section 1.3(a)(1); or
(b) consists of
(1) an organization the principal business of which is
performing on a regular and continuing basis management functions for
one organization identified in Section 1.3(b)(2); and
(2) the organization for which such management functions are
performed and organizations aggregated with such organization in
accordance with Code Sections 414(b), 414(c), 414(m) or 414(o) with
the organization identified in Section 1.3(b)(1); or
(c) is required to be aggregated pursuant to regulations issued under
Section 414(o) of the Internal Revenue Code.
1.4 "Authorized Leave of Absence" means any absence authorized by an
Employer under such Employer's standard personnel practices. An absence due to
service in the Armed Forces of the United States shall be considered an
Authorized Leave of Absence provided that the Employee returns to employment
with the Employer with reemployment rights provided by law.
1.5 "Auxiliary ESOP" means the LESOP portion of the Program and the
provisions applicable thereto.
1.6 "Beneficiary" means one or more persons or entities designated by a
Participant or the Program, as applicable, in accordance with the provisions of
Section 11.3 or 11.6 to receive any benefit which shall be distributable under
the Program on account of the Participant's death. Such a Beneficiary shall be
deemed to be the Participant's "designated beneficiary" for purposes of Section
401(a)(9) of the Internal Revenue Code to the extent permitted therein.
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1.7 "Board of Directors" means the board of directors of the Company and
any person or committee authorized to act on behalf of the Board of Directors.
1.8 "Break in Service" means, for purpose of determining Eligibility
Service and Participant status, an Eligibility Computation Period, and for all
other purposes, a Plan Year, within which an Employee has not completed more
than five hundred (500) Hours of Service.
1.9 "Committee" means the Administrative Committee appointed pursuant to
Section 13.2.
1.10 "Commonly Controlled Corporation" means the Company and any other
corporation if it and the Company are members of a controlled group of
corporations as defined in Section 409(l)(4) of the Internal Revenue Code.
1.11 "Commonly Controlled Entity" means a corporation, trade or business
if it and an Employer are members of a controlled group of corporations as
defined in Section 414(b) of the Internal Revenue Code, under common control as
defined in Section 414(c) of the Internal Revenue Code or required to be
aggregated with one or more Employers pursuant to Section 414(m); provided,
however, that solely for purposes of Article IX including the definition of
Related Plan when used in Article IX, the standard of control under Sections
414(b) and 414(c) of the Internal Revenue Code shall be deemed to be "more than
50%" rather than "at least 80%."
1.12 "Company" means McDonald's Corporation or any successor corporation
by merger, consolidation, purchase or otherwise which elects to adopt the
Program and the Trust.
1.13 "Company Stock" means common or preferred stock of the Company which
is a qualifying employer security as defined in (a) Section 4975(e)(8) of the
Internal Revenue Code (for purposes of McDESOP and LESOP), (b) Section 409(l) of
the Internal Revenue Code (for purposes of the Stock Sharing portion of the
Program) and (c) Section 407(d)(5) of ERISA (for the purpose of all portions of
the Program).
1.14 "Considered Compensation" of a Participant for a Plan Year means:
(a) except as otherwise specified below, the Participant's total
compensation paid during the Plan Year to such Participant by an Employer
while an Active Participant in the Program as reported in Box 1 of Form
W-2, for 1997, or the equivalent box on any comparable form for subsequent
Plan Years, increased by (i) any amounts by which the Participant's
compensation is reduced by Participant Elected Contributions under the
McDESOP portion of the Program or any other portion of the Program, and
under any portion of any Related Plan which meets the requirements of
Section 401(k) of the Internal Revenue Code; and (ii) compensation
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reduction contributions for medical, dental or dependent care or other
benefits under a cafeteria plan meeting the requirements of Section 125 of
the Internal Revenue Code; and excluding (I) provisions for life insurance;
(II) reimbursement for or other payment for expenses related to, moving
expenses (including the relocation bonuses); (III) any benefits under the
Program or any other qualified plan described in Section 401(a) of the
Internal Revenue Code; (IV) distributions under McDonald's Profit Sharing
Program Equalization Plan ("McEqual"), McDonald's 1989 Executive
Equalization Plan ("McCAP I"), the McDonald's Supplemental Employee Benefit
Equalization Plan ("McCAP II") or the McDonald's Corporation Deferred
Income Plan; (V) income earned from stock options granted under the
McDonald's 1975 Stock Ownership Option Plan; Stock Exchange Rights or
Performance Units granted under the McDonald's Corporation 1978 Incentive
Plan; options, restricted stock, stock appreciation rights, performance
units and stock bonuses awarded under the McDonald's 1992 Stock Ownership
Incentive Plan; (VI) payments to a Participant for foreign service in the
form of tax gross-up benefits; (VII) allowances for cost of living, housing
and education, and other similar payments; (VIII) any income attributable
to personal use of an employer-provided vehicle, an allowance paid for the
loss of an employer-provided vehicle, use of a company condo, participation
in group trips, gift stock, any payments for referrals of new employees,
spouse's travel and perquisites whether in cash or in kind and other
similar items; and (IX) any special termination bonus paid pursuant to a
termination agreement and any severance pay;
(b) for purposes of top heavy rules in Article XV (except for
determining whether a Participant is a Key Employee pursuant to Section
15.2(d)) and for determining the limitations under Section 415 of the
Internal Revenue Code in Article IX, Considered Compensation means total
compensation paid to the Participant by an Employer, a Commonly Controlled
Entity or a member of an Affiliated Service Group for the Plan Year,
including distributions from any nonqualified deferred compensation plans
maintained by an Employer, Commonly Controlled Entity or member of an
Affiliated Service Group and amounts paid or reimbursed by the employer for
moving expenses incurred by the Participant to the extent it is reasonable
to believe that such amounts are not deductible by the Participant under
Section 217 of the Internal Revenue Code and excluding (i) with respect to
Plan Years commencing before January 1, 1998, any salary reduction
contributions to a plan sponsored by an Employer meeting the requirements
of Section 125 or Section 401(k) of the Internal Revenue Code, (ii) any
salary reduction amounts credited to the Participant's accounts under the
McDonald's Supplemental Employee Benefit Equalization Plan ("McCAP II"),
the McDonald's Profit Sharing Program Equalization Plan ("McEqual"), the
McDonald's 1989 Executive Equalization Plan ("McCAP I"), the McDonald's
Corporation Deferred Income Plan, or any other non-qualified deferred
compensation plans from time to time maintained by an Employer, (iii)
income from stock options, and (iv) any other amounts which receive special
tax benefits and for Plan Years beginning on and after January 1, 1998,
Considered
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Compensation under this Section 1.14(b) shall not exclude salary reduction
contributions to a plan sponsored by an Employer which meets the
requirements of Section 125 or Section 401(k) of the Internal Revenue Code;
(c) effective before January 1, 1988, for the purpose of determining
whether a Participant is (1) a Highly Compensated Employee or (2) a Key
Employee pursuant to Section 15.2(d), Considered Compensation shall be the
Participant's Considered Compensation as defined in Section 1.14(b)
increased by the amount by which the Participant's compensation is reduced
pursuant to a compensation reduction election under Section 5.1 or any
other Related Plan which meets the requirements of Section 401(k) of the
Internal Revenue Code or pursuant to other compensation reduction
contributions for medical, dental or dependent care or other benefits under
a cafeteria plan meeting the requirements of Section 125 of the Internal
Revenue Code; and effective January 1, 1998 and thereafter, for the purpose
of determining whether a Participant is (1) a Highly Compensated Employee
or (2) a Key Employee pursuant to Section 15.2(d), Considered Compensation
shall be the Participant's Considered Compensation as defined in Section
1.14(b).
(d) for the purpose of calculating (1) the actual contribution
percentage in accordance with Section 4.1, (2) the actual deferral
percentage in accordance with Section 5.2 or (3) the multiple use test in
accordance with Section 5.4, Considered Compensation shall be the
Participant's compensation for the portion of the Plan Year during which he
or she was an Active Participant, as defined in Section 1.2(c), (i) as
reported in Box 1 of Form W-2, or the equivalent box on any comparable form
for subsequent years plus (ii) any amounts by which the Participant's
compensation is reduced by Participant Elected Contributions under the
McDESOP portion of the Program or any other portion of the Program or any
Related Defined Contribution Plan which meets the requirements of Section
401(k) of the Internal Revenue Code or compensation reduction contributions
for medical, dental or dependent care or other benefits under a cafeteria
plan meeting the requirements of Section 125 of the Internal Revenue Code.
(e) for the purposes of determining the amount of Participant Elected
Contributions pursuant to Section 5.1, Considered Compensation means a
Participant's Considered Compensation while an Active Participant as
defined in Section 1.14(a) increased by expatriate equalization
differentials and reduced by all compensation not paid in cash, by cash
perquisites, and officers discretionary bonuses to the extent included in
Considered Compensation as defined in Section 1.14(a).
For purposes of this Section 1.14 except for purposes of determining the
limitations under Section 415 of the Internal Revenue Code in Article IX,
Considered Compensation taken into account under the Program shall not exceed
$160,000 (for 1997) and as adjusted in subsequent years as provided by the
Secretary of the Treasury (the "dollar limit").
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Anything to the contrary herein notwithstanding, Considered Compensation
for a Plan Year shall not be reduced by the pay for a period of short term
disability which is repaid to an Employer in a subsequent Plan Year by a
Participant who fails to complete the requirements to be eligible to retain such
pay.
1.15 "Credited Service" shall mean an Employee's total Years of Credited
Service excluding the following:
(a) Years of Credited Service before January 1, 1964;
(b) Years of Credited Service before January 1, 1976, which would
have been disregarded under the McDonald's Corporation Savings and Profit
Sharing Plan before January 1, 1976, with regard to the then existing rules
on reemployment;
(c) Years of Credited Service prior to a Break in Service, if the
Participant had no vested interest in his Profit Sharing Account prior to
such Break in Service and (1) effective with respect to a Break in Service
which occurred before January 1, 1985, if the Participant had no more than
one year of Credited Service prior to such Break in Service and (2)
effective with respect to one or more consecutive Breaks in Service none of
which occurred before January 1, 1985, if the number of consecutive Breaks
in Service equals or exceeds five consecutive Breaks in Service;
(d) For purposes of determining a Participant's vested interest in
his Profit Sharing Account or his LESOP Account (called "Leveraged ESOP
Account" before January 1, 1997) accrued before (1) a Break in Service
which occurred before January 1, 1985 or (2) five consecutive Breaks in
Service if none of the Breaks in Service occurred before January 1, 1985,
Years of Credited Service after such Break in Service.
1.16 "Disability" means a mental or physical condition which renders a
Participant permanently unable or incompetent to carry out the job
responsibilities he held or tasks to which he was assigned at the time the
disability was incurred. Such determination shall be made by the Committee on
the basis of such medical and other competent evidence as the Committee shall
deem relevant.
1.17 "Disqualified Person" means a person defined in Section 4975(e)(2) of
the Internal Revenue Code.
1.18 "Domestic Affiliate" means any domestic corporation, partnership or
joint venture of which, in the case of a corporation, the Company owns, directly
or indirectly, either twenty-five percent or more of the voting power of all
classes of stock or twenty-five percent or more of the value of all stock, or of
which, in the case of a partnership or joint venture, the Company owns, directly
or indirectly, a twenty-five percent or more interest in both the capital and
profits.
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1.19 "Effective Date" means January 1, 1997.
1.20 "Eligibility Computation Period" means the twelve-month period
commencing with the first day of the pay period in which an Employee first
performs an Hour of Service following hire (or rehire after a Break in Service)
and each subsequent twelve-month period commencing on an anniversary of that
date. In addition, with respect to Hours of Service which are credited to an
Employee pursuant to Section 1.31(b)(2) for service with a Licensee whose
restaurant(s) are acquired by an Employer (the "Acquisition"), Eligibility
Computation Period means (a) each full calendar year such individual was
employed by the Licensee before the calendar year of such Acquisition commencing
with the calendar year in which such Employee first performed an hour of service
for the Licensee and continuing through the calendar year ending immediately
before the date of such Acquisition and (b) if such Employee was employed by the
Licensee on January 1 of the calendar year of the Acquisition, the calendar year
of such Acquisition; provided that for the calendar year in which the
Acquisition occurs both Hours of Service credited pursuant to Section 1.31(b)(2)
and those credited pursuant to the remainder of Section 1.31 for service after
the Acquisition shall both be counted in the Eligibility Computation Period in
which the Acquisition occurred.
1.21 "Eligibility Service" means the number of Eligibility Computation
Periods during which an Employee has completed not less than 1000 Hours of
Service excluding any Eligibility Service earned before a Break in Service until
the Employee has completed one Year of Eligibility Service following the Break
in Service.
1.22 "Employee" means any person who is employed by the Company or another
Employer (as that entity is defined for the Profit Sharing Plan portion, the
McDESOP portion or the LESOP portion of the Program, respectively, with respect
to contributions to such portions of the Program with respect to which the term
Employee is being used) including a person on an Authorized Leave of Absence.
Such term does not include a consultant, an independent contractor or a Leased
Employee. A consultant, an independent contractor or a Leased Employee shall
not become an Employee because of being reclassified as an employee of
McDonald's or another Employer by the Internal Revenue Service, except
prospectively from the date on which such reclassification occurs.
1.23 "Employer" means,
(a) for purposes of Article III, concerning contributions to the
Profit Sharing Plan portion of the Program and other provisions of the
Program as they relate to the Profit Sharing Plan portion of the Program
and for purposes of Section 4.1(a), 4.3 and Article V, concerning Employer
Matching Contributions and Forfeitures and Participant Elected
Contributions, the Company and any Subsidiary, Commonly Controlled Entity,
Domestic or Foreign Affiliate, or any other business in which the Company
owns an interest which, pursuant to Section 12.1, elects to adopt the
Profit Sharing Plan portion of the Program; and
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(b) for purposes of the LESOP portion of the Program and for LESOP
Employer Matching Contributions, the Company and any Commonly Controlled
Corporation which, pursuant to Section 12.1, elects to adopt the LESOP
portion of the Program on or after January 1, 1989; and
(c) for purposes of the Stock Sharing portions of the Program, the
Company and any Commonly Controlled Corporation which had adopted the
McDonald's Stock Sharing Plan before January 1, 1989.
1.24 "Employer Contributions" means the following payments made from time
to time by an Employer to the Trustee:
(a) "Employer Profit Sharing Contributions" made pursuant to Sections
3.1 or 15.3(a);
(b) "Employer Matching Contributions" made pursuant to Section
4.1(a);
(c) "Special Section 401(k) Employer Contributions" made pursuant to
Section 4.3(b);
(d) "LESOP Contributions" made pursuant to Section 4.2;
(e) "LESOP Employer Matching Contributions made pursuant to Section
4.1(b);
(f) "Additional Employer Contributions" made pursuant to Section 4.4;
(g) "Special Dividend Replacement Contributions" made pursuant to
Section 4.2(d);
(h) "Unmatched Employer Stock Sharing Contributions," "Employer
Contributions", "Employer Matching Stock Sharing Contributions,"
"Additional Employer Stock Sharing Contributions," and "PAYSOP Stock
Sharing Contributions" made to the Stock Sharing Plan at various dates with
respect to periods before January 1, 1987 as provided in Section 1.1(d).
1.25 "Entry Date" means January 1 and July 1 of each Plan Year.
1.26 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.27 "Five Percent Owner" means a Participant who owns (or is considered
as owning within the meaning of Section 318 of the Internal Revenue Code) more
than five
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percent of an Employer, Commonly Controlled Entity or member of an Affiliated
Service Group as provided in Section 416(i)(1)(B)(i) of the Internal Revenue
Code.
1.28 "Foreign Affiliate" means any foreign corporation, partnership or
joint venture of which, in the case of a corporation, the Company owns, directly
or indirectly, either twenty-five percent or more of the voting power of all
classes of stock or twenty-five percent or more of the value of all stock, or,
of which, in the case of a partnership or a joint venture, the Company owns,
directly or indirectly, a twenty-five or more percent interest in both the
capital and profits.
1.29 "Forfeiture" means the portion of a Participant's Profit Sharing
Account which is forfeited as provided in Section 11.4, his LESOP Account which
is forfeited as provided in Section 11.4 and unclaimed amounts which are
forfeited under Section 16.6.
1.30 "Highly Compensated Employee" means, for a Plan Year, any Participant
who performs services as an employee for an Employer, Commonly Controlled Entity
or member of an Affiliated Service Group during such Plan Year:
(a) and who
(1) at any time during the Plan Year or the preceding Plan
Year ("Preceding Plan Year"), was a Five Percent Owner; or
(2) received Considered Compensation in excess of $80,000
(for 1996, adjusted in subsequent years as provided by the
Secretary of the Treasury) during the Preceding Plan Year.
(b) For purposes of this Section 1.30, employees who are
nonresident aliens and who receive no earned income (within the
meaning of Section 911(d)(2) of the Internal Revenue Code) from an
Employer, a Commonly Controlled Entity or member of an Affiliated
Service Group which constitutes income from sources within the United
States (within the meaning of Section 861(a)(3) of the Internal
Revenue Code) shall not be treated as employees.
(c) A former employee shall also be treated as a Highly
Compensated Employee for a Plan Year if such former employee had a
Termination of Employment prior to such Plan Year and was a Highly
Compensated Employee (without regard to this Section 1.30(c)) for
either the Plan Year in which he had a Termination of Employment or
any Plan Year ending on or after his 55th birthday.
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1.31 "Hour of Service" means:
(a) Each hour for which an employee or a Leased Employee (determined
without regard to Section 1.34(b)) is paid directly or indirectly, or
entitled to payment, by an Employer, Commonly Controlled Entity or member
of an Affiliated Service Group,
(1) for performance of duties;
(2) on account of a period of time during which no duties were
performed, provided that, except as herein otherwise expressly
provided, no more than 501 Hours of Service shall be credited for any
single continuous period during which an Employee performs no duty,
and provided that no Hours of Service shall be credited for payments
made or due under a plan maintained solely for the purpose of
complying with applicable worker's compensation, unemployment
compensation or disability insurance laws, or for reimbursement of
medical expenses; and
(3) for which back pay, irrespective of mitigation of damages,
is awarded or agreed to by the Employer, provided that no more than
501 Hours of Service shall be credited for any single continuous
period of time during which the Employee did not or would not have
performed duties.
(b) (1) Credit for Hours of Service shall be given for the
following:
(A) For Plan Years beginning before January 1, 1994, an
Employee's prior or subsequent employment by a Foreign
Affiliate or Domestic Affiliate;
(B) For Plan years beginning after December 31, 1993, an
Employee's prior or subsequent employment by a Domestic or
Foreign Affiliate if the employee is transferred to or from
such Domestic or Foreign Affiliate from or to, respectively,
the employment of an Employer at the initiative of an
Employer (a "Company Initiated Transfer"). For the purposes
of this Section 1.31(b)(1)(B), a sale of assets or stock to
a Domestic or Foreign Affiliate that is not an Employer
under the Program shall not be considered a Company
Initiated Transfer with respect to employees employed solely
with respect to such assets or stock who become employees of
such purchasing Domestic or Foreign Affiliate immediately
after such sale, provided that the decisions concerning such
employment are made by an entity which is not more than 50
percent owned by an Employer.
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In determining the number of such Hours of Service to be credited, the
Plan Administrator shall make good faith estimates based upon the
available information and records including the use of reasonable
equivalencies similar to those permitted under DOL Reg. Section
2530.200b-3 or estimated average number of hours per week for
employees in a given job category.
(2) If a McDonald's Restaurant or a group of restaurants
operated by a Licensee is acquired by the Company or another Employer
in the first six months of a calendar year and if such restaurant or
group of restaurants is designated as a permanent acquisition by the
Company, the store managers who are employed by such Licensee either
in a restaurant or in connection with the operation of one or more
restaurants as of the date of such acquisition and who continue to be
employed by the Company or other Employer until June 30 of the Plan
Year in which the acquisition occurred shall be credited by the
Employer with his Hours of Service with such Licensee. If a McDonald's
Restaurant or group of restaurants operated by a Licensee is acquired
by the Company or another Employer, during the Plan Year, each store
manager who is employed by such Licensee either in a restaurant or in
connection with the operation of one or more restaurants as of the
date of acquisition and continues to be employed by the Company or
other Employer until the last day of the Plan Year in which such
acquisition occurred who has not already received credit for service
with the Licensee under the preceding sentence shall as of the last
day of such Plan Year be credited by the Company or other Employer
with his Hours of Service with such Licensee. In determining the
number of such Hours of Service to be credited, the Plan Administrator
shall make good faith estimates based upon the available information
and records including the estimated average number of hours per week
for employees in a given job category.
(3) To the extent an Employee is not otherwise credited with
Hours of Service for each payroll period while on an Authorized Leave
of Absence, an Employee shall be credited with the number of Hours of
Service equal to the average number of Hours of Service per payroll
period (not to exceed forty Hours of Service per week) of such
Employee for the six calendar week period, or pertinent payroll period
if such period is longer, ending immediately prior to the commencement
of the Authorized Leave of Absence notwithstanding the limitations of
Section 1.31(a)(2). If a Participant is on an Authorized Leave of
Absence on the last day of a Plan Year, the Hours of Service credited
pursuant to the preceding sentence shall be counted for the purpose of
determining whether he is an Active Participant under Sections 1.2(a)
and (b) for such Plan Year. Notwithstanding the foregoing, an
Employee who fails either (A) to return to his employment within
ninety (90) days after the expiration of an Authorized Leave of
Absence, or (B) to remain in the employ of an Employer after the
expiration of an Authorized Leave of
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Absence for the lesser of (i) a period equal to the period of his
Authorized Leave of Absence or (ii) one year following his return to
employment, unless such failure shall be due to death, Disability,
illness, retirement on or after age 55 or the sale by the Company, one
of its Subsidiaries or Affiliates of the McDonald's Restaurant in
which such Employee is employed, shall be considered to have
voluntarily terminated his employment as of the date the Leave of
Absence commenced for purposes of determining Hours of Service for
Eligibility Service and Credited Service.
(4) A person who became an Employee on September 16, 1994, as a
result of the acquisition of the Special Operations Division of
Corporate Systems, Inc. and who immediately prior to that date was an
employee of the Special Operations Division of Corporate Systems, Inc.
shall be credited with Hours of Service pursuant to the foregoing
provisions of this Section 1.31 as if service with Corporate Systems,
Inc. were service with the Company. Such Hours of Service shall be
credited using actual hours of service for hourly paid employees and
using the service equivalencies provided in Section 1.31(e) for
salaried employees.
(5) Each restaurant management and staff employee who became an
employee of Restaurant Acquisition Corp., McDonald's Corporation or
another Employer on or after February 14, 1997 as a result of an
acquisition of a Roy Rogers' or Hardee's restaurant ("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 Systems") 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 or, if later, the
next Entry Date following date he became an Employee of an Employer.
An Employee shall not receive Hours of Service credit for service with
Hardee's System's if such Employee did not become an Employee of an
Employer as a result of an acquisition of a Roy Rogers or Hardee's
restaurant on or after February 14, 1997.
(c) To the extent not otherwise credited in Section 1.31, solely for
purposes of avoiding a Break in Service, for periods of absence from work
on account of Parental Leave, an Employee shall be credited with Hours of
Service as defined below:
(1) the Hours of Service which normally would have been credited
to such individual but for the Parental Leave, or
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(2) eight (8) Hours of Service per day of such absence if the
Program is unable to determine the Hours of Service which would have
been credited to such individual but for the Parental Leave.
An Employee's Hours of Service for absence on account of Parental
Leave shall not exceed the lesser of 501 Hours of Service or the number of
Hours of Service needed to prevent a Break in Service and shall be credited
to the Eligibility Computation Period (for purposes of crediting
Eligibility Service) or the Plan Year (for purposes of crediting service
other than Eligibility Service) in which absence because of a Parental
Leave commenced; except that if such Hours of Service are not needed to
prevent a Break in Service in the Eligibility Computation Period or Plan
Year in which absence because of a Parental Leave commenced, and the
Parental Leave continues into the next following Eligibility Computation
Period or Plan Year then, if needed to prevent a Break in Service, such
Hours of Service shall be credited to the Eligibility Computation Period or
Plan Year following the year in which such absence commenced.
(d) Hours of Service for reasons other than the performance of duties
shall, except as provided in Section 1.31(b)(2), be determined in
accordance with the provisions of Department of Labor Regulations Section
2530.200b-2(b), and Hours of Service shall be credited to computation
periods in accordance with the provisions of Department of Labor
Regulations Section 2530.200b-2(c).
(e) Except as provided in Sections 1.31(b)(2) through 1.31(b)(5) and
1.31(c) each Employee who is paid on a salaried basis shall be credited
with (1) 95 Hours of Service if paid on a semimonthly payroll period or (2)
90 Hours of Service if paid on a bi-weekly payroll period during which such
Employee has any Hours of Service.
1.32 "Internal Revenue Code" means the Internal Revenue Code of 1986, as
from time to time amended and any subsequent Internal Revenue Code. References
to any section of the Internal Revenue Code shall be deemed to include similar
sections of the Internal Revenue Code as renumbered or amended.
1.33 "Investment Fund" As provided in Section 10.6 and excluding those
assets held in the Profit Sharing Holding Fund pursuant to Section 10.23, (a)
assets of the Profit Sharing Plan portion of the Trust Fund shall be held in the
following Investment Funds: (1) the Diversified Stock Fund, (2) the Profit
Sharing McDonald's Common Stock Fund, (3) the Money Market Fund, (4) the Stable
Value Fund, and (5) the Blended Stock Bond Fund, and (b) assets of the McDESOP
and Leveraged ESOP portions of the Trust Fund shall be held in the McDESOP
McDonald's Common Stock Fund provided, however, that separate subaccounts shall
be maintained of the amount of Company Stock held in the McDESOP McDonald's
Common Stock Fund and allocated to Participants' Stock Sharing Accounts,
Participant Elected Contribution Accounts, Employer Matching Contribution
Accounts and
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LESOP Accounts, in the latter case accounting separately for the Company Stock
purchased with each Loan (or Company Stock into which the Company Stock
purchased with the Loan has been converted).
1.34 "Leased Employee" means any person who is not an employee of a
Commonly Controlled Entity or a member of an Affiliated Service Group and who
provides services to a Commonly Controlled Entity or a member of an Affiliated
Service Group ("Recipient") if:
(a) such services are performed pursuant to an agreement between
the Recipient and any other person;
(b) such person has performed such services for the Employer (or
for the Employer, any Commonly Controlled Entity or member of an
Affiliated Service Group) on a substantially full time basis for a
period of at least 1 year; and
(c) such individual's services are performed under the primary
direction or control of the Recipient.
1.35 "LESOP" means the portion of the Program consisting of Participants'
LESOP Accounts.
1.36 "LESOP Suspense Account" means the separate accounts maintained by
the Committee pursuant to Section 6.2. All Employer Per Capita LESOP
Contributions, Compensation Based LESOP Contributions and LESOP Employer
Matching Contributions made with respect to a Loan and the dividends with
respect to Employer Stock purchased with such Loan (and the Employer Stock into
which such stock has been converted) including dividends which have been
replaced in Participant's LESOP Accounts by Dividend Replacement Contributions
shall be held and accounted for within the separate LESOP Suspense Account.
1.37 "Licensee" means any person, other than the Company or a Commonly
Controlled Entity which operates a McDonald's Restaurant pursuant to lease and
license agreements (or so-called "Business Facilities Lease") with the Company
or affiliated companies.
1.38 "McDESOP" means the portion of the Program consisting of Participants'
Participant Elected Contribution Accounts and Employer Matching Contribution
Accounts, McDESOP Holding Accounts, Matching Contribution Holding Account and
McDESOP Diversification Accounts.
1.39 "Non-highly Compensated Employee" means, for a Plan Year, any
Participant who performs services for an Employer, Commonly Controlled Entity or
Affiliated Service
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Group during such Plan Year and who was not a Highly Compensated Employee for
such Plan Year.
1.40 "Parental Leave" means a period during which an individual is absent
from work for any period:
(a) by reason of the pregnancy of the individual,
(b) by reason of the birth of a child of the individual,
(c) by reason of the placement of a child with the individual in
connection with the adoption of such child by such individual, or
(d) for purposes of caring for such child for a period beginning
immediately following such birth or placement.
An absence from work shall not be a Parental Leave unless the
individual furnishes the Committee such timely information as may reasonably be
required to establish that the absence from work was for one of the reasons
specified above and the number of days for which there was such an absence.
Nothing contained herein shall be construed to establish an Employer policy of
treating a Parental Leave as an Authorized Leave of Absence or to otherwise
establish a parental leave policy for any Employer, except for the purpose of
avoiding a Break in Service.
1.41 "Participant" means a person participating in the Program in
accordance with the provisions of Article II.
1.42 "Participant Contributions" means (a) the voluntary contributions
made by a Participant to the Trustee with respect to Plan Years commencing
before January 1, 1987, and credited to his Investment Savings Account and (b)
Participant Matched Contributions made under the Stock Sharing Plan with respect
to Plan Years ending on or before December 31, 1983 and credited to his
Participant Contribution Stock Sharing Account.
1.43 "Participant Elected Contributions" means the contributions made by
an Employer on behalf of an Active Participant attributable to reductions of the
Participant's Considered Compensation determined under Section 5.1, including:
(a) "Participant Elected Matched Contributions", which means the
portion of Participant Elected Contributions for a Plan Year with respect
to which the Company pursuant to Section 4.3(a) makes Employer Matching
Contributions or LESOP Employer Matching Contributions; and
(b) "Participant Elected Unmatched Contributions", which means the
portion of Participant Elected Contributions for a Plan Year with respect
to which the
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Company may not, in accordance with Section 7.2, make Employer Matching
Contributions or LESOP Employer Matching Contributions.
1.44 "Party in Interest" means a person defined in Section 3(14) of ERISA.
1.45 "Program" means the McDonald's Corporation Profit Sharing Program as
herein set forth, and as hereafter amended from time to time, including its four
components: (i) Profit Sharing, (ii) McDESOP, (iii) LESOP and (iv) Stock
Sharing.
1.46 "Plan Administrator" means the Plan Administrator appointed under or
by the provisions of Section 13.15.
1.47 "Plan Year" means the 12-month period commencing on January 1 and
ending on December 31.
1.48 "Profit Sharing Plan" means the portion of the Program consisting of
Participants' Profit Sharing Accounts, Rollover Accounts, Rollover Holding
Accounts, Investment Savings Accounts and the Profit Sharing Holding Fund.
1.49 "Qualified Preretirement Survivor Annuity" means an immediate monthly
pension payable in accordance with Section 11.2(e)(2) to the surviving spouse of
a Participant who has elected to receive benefits in the form of a life annuity
in an amount equal to an annuity for the life of the surviving spouse which can
be purchased with fifty percent of the portion of the Participant's vested Net
Balance Account which the Participant had elected to be paid in the form of a
life annuity pursuant to Section 11.2(a).
1.50 "Related Plan" means any other qualified defined contribution plan or
qualified defined benefit plan (as defined in Section 415(k) of the Internal
Revenue Code) maintained by an Employer, a Commonly Controlled Entity or member
of an Affiliated Service Group, respectively called a "Related Defined
Contribution Plan" and "Related Defined Benefit Plan."
1.51 "Required Beginning Date" means April 1 of the calendar year following
the later of:
(a) the calendar year in which a Participant attains age 70-1/2;
or
(b) if the Participant is not a Five Percent Owner of the
Employer or a Commonly Controlled Entity at any time during the Plan
Year ending with or within the calendar year in which he attains age
70-1/2, the calendar year in which he has a Termination of Employment.
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Notwithstanding the foregoing, the Required Beginning Date shall not be any date
earlier than any date to which the Required Beginning Date can be delayed in
accordance with Section 11.14 and any applicable law, regulations, or rulings.
1.52 "Rollover" means a Participant's rollover contribution as described
in Section 402(a)(5) (effective before January 1, 1993), Section 402(c)
(effective on or after January 1, 1993), Section 403(a)(4) or Section 408(d)(3)
of the Internal Revenue Code and credited to his Rollover Holding Fund Account,
in accordance with Section 8.1., Rollovers made in accordance with Section
402(c) or 403(a)(4) may be transfers of (a) distributions made to a Participant
in accordance with one of the above referenced sections of the Internal Revenue
Code or (b) direct Rollovers made in compliance with Section 401(a)(31) of the
Internal Revenue Code.
1.53 "STIF Fund" means the Northern Trust Company Collectively Trust Short
Term Investment Fund and such other common or collective trust funds or
investment companies registered under the Investment Company Act of 1940, which
have similar investment and administrative characteristics, as the Committee may
from time to time designate.
1.54 "Stock Sharing" means the portion of the Program consisting of
Participants' Stock Sharing Accounts as identified in Section 1.1(d).
1.55 "Subsidiary" shall mean any corporation affiliated with the Company
within the meaning of Section 1504 of the Internal Revenue Code.
1.56 "Termination of Employment" means (a) a resignation by an Employee
for any reason, (b) a dismissal of an Employee for any reason, or (c) any other
termination of the employee-employer relationship. Transfers of an Employee
from an Employer, Commonly Controlled Entity, member of an Affiliated Service
Group, Domestic Affiliate or Foreign Affiliate to another Employer, Commonly
Controlled Entity, member of an Affiliated Service Group, Domestic Affiliate or
Foreign Affiliate shall not be treated as a Termination of Employment.
1.57 [Reserved]
1.58 "Trust" means the legal entity or entities resulting from the Trust
Agreement between the Company and the Trustee, and any amendments thereto, by
which Employer Contributions, Participant Contributions, Rollovers, Participant
Elected Contributions, the proceeds of any loan made pursuant to Article VI,
Employer LESOP Contributions the LESOP Suspense Account, any Company Stock
purchased therewith, amounts held in Participants' Stock Sharing Accounts and
any net income and profits thereon shall be received, held, invested and
distributed to or for the benefit of the Participants and Beneficiaries.
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1.59 "Trust Agreement" means any agreement between the Company and a
Trustee, establishing the McDonald's Corporation Savings and Profit Sharing
Master Trust (the "Profit Sharing Trust") and the McDonald's Matching and
Deferred Stock Ownership Trust ("the McDESOP Trust"), as amended from time to
time and such additional trust agreements as the Company and the Trustee shall
establish under the Program.
1.60 "Trustee" means any corporation, individual or individuals who shall
accept the appointment to execute the duties of Trustee as set forth in a Trust
Agreement.
1.61 "Trust Fund" means all property received and held by a Trustee
pursuant to a Trust Agreement for the Program.
1.62 "Valuation Date" means the last business day of each calendar month
and such additional dates as the Committee may from time to time specify except
that solely for the purpose of valuing Partipipant's Accounts to make
distributions pursuant to Article XI, "Valuation Date" means the fifteenth day
of each calendar month (or if the fifteenth day of the month is not a business
day, the next previous business day) and the last business day of each calendar
month and such additional dates as the Committee may from time to time specify.
The Committee may designate additional Valuation Dates prospectively or
retroactively.
1.63 "Vesting Retirement Date" means the date on which a Participant
attains age 55.
1.64 "Year of Credited Service" means a Plan Year during which an Employee
has not less than one thousand (1,000) Hours of Service, including, once the
individual has become an employee, Hours of Service credited while he was a
Leased Employee.
1.65 "Year of Eligibility Service" means an Eligibility Computation Period
during which an Employee has not less than one thousand (1,000) Hours of
Service, including, once the individual has become an employee, Hours of Service
credited while he was a Leased Employee.
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ARTICLE II
PARTICIPATION
2.1 Participation. Each person who was a Participant under the provisions
of the McDonald's Corporation Profit Sharing Program on the day before the
Effective Date, shall continue to be a Participant hereunder. Each other
Employee shall become a Participant in the Program on the first Entry Date
coinciding with or next following the date he completes one Year of Eligibility
Service and attains age 21; provided that each Participant who is a certified
swing manager, primary maintenance employee, crew member or other store hourly
employee shall become a Participant solely for purposes of the Profit Sharing
and the McDESOP portions of the Program and for the purpose of receiving
allocations with respect to LESOP Employer Matching Contributions and Employer
Matching Allocations under Section 7.2(a)(2) of the LESOP portion of the Plan.
Admission to participation in the Program shall only be made when an
Employee is not on an Authorized Leave of Absence or serving with the Armed
Forces of the United States.
Each Participant shall continue to be a Participant for purposes other than
being an Active Participant as provided in Sections 1.2(a) and 1.2(c) until the
later of (a) the date he incurs a Termination of Employment or has a Break in
Service and (b) the date his entire vested Net Balance Account has been paid
from the Trust.
Notwithstanding the foregoing, each Participant is a participant only with
respect to the portions of the Program which have been adopted by his Employer
and no additional Participants shall enter the Stock Sharing portion of the
Plan.
2.2 Certification of Participation and Compensation to Committee. Each
Employer shall certify to the Committee, within a reasonable time before each
Entry Date, the names of all new Participants. Each Employer, within a
reasonable time after the last day of each Plan Year, shall certify to the
Committee with respect to its Employees each Participant's number of Hours of
Service and Considered Compensation during such Plan Year and such other
information as the Committee may request.
2.3 Termination of Employment, Break in Service, Reemployment and Change
in Employment Status. Upon resuming employment following a Break in Service, an
Employee who is at least age 21, who had at least one Year of Eligibility
Service prior to such Break in Service ("Rehired Employee"), and who completes
one Year of Eligibility Service following such Break in Service shall become a
Participant retroactively to the day of such Rehired Employee's Retroactive
Participation Date (as defined in the following sentence) provided that such
Rehired Employee shall not be an Active Participant until the first day of the
calendar month in which occurs the date of his completion of one Year of
Eligibility Service following the Break in Service (the "Active Participation
Date") and his Considered
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Compensation shall be deemed to be first earned commencing with his Active
Participation Date; and further provided that Participant Elected Contributions
and Employer Matching Contributions or allocations with respect to LESOP
Employer Matching Contributions for periods on or after November 1, 1998, shall
commence on the first day of the pay period in which the Participant completes
One Year of Eligibility Service or as soon as administratively feasible
thereafter. An Employee's "Retroactive Participation Date" is the date such
Employee resumes employment.
Upon a change in his employment status or resuming employment following a
Termination of Employment which did not constitute a Break in Service, an
Employee who was a Participant prior to a Termination of Employment shall be
treated as an Active Participant from the day of his change in status or
resumption of employment.
Notwithstanding the foregoing provisions of this Section 2.3, a Rehired
Employee who has a Participant Elected Contribution Account shall have his
Participant Elected Contributions reinstated at the same level as was in effect
at the time of his Termination of Employment subject to any new election made by
such Participant pursuant to Section 5.1
2.4 Employees of Foreign or Domestic Affiliates. An employee of a Foreign
or Domestic Affiliate who becomes an Employee shall become a Participant on the
later of the day such individual becomes an Employee or the next Entry Date
following the date such Employee attains age 21 and completes one Year of
Eligibility Service.
2.5 Leased Employee. A person who has been a Leased Employee (determined
without regard to Section 1.34(b)) who becomes an Employee shall become a
Participant on the later of (a) the first day of the month following the month
in which such person becomes an Employee or (b) the next Entry Date following
the date such person attains age 21 and completes one Year of Eligibility
Service; provided that such Employee's entry into the Plan on account of service
as a Leased Employee shall not occur before the next Entry Date following the
date the Employee first reports his service as a Leased Employee to the Plan
Administrator.
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ARTICLE III
PROFIT SHARING PLAN EMPLOYER CONTRIBUTIONS
3.1 Profit Sharing Contributions. Profit Sharing Contributions shall be
made by Employers, as follows:
(a) Determination of Contribution. The Board of Directors shall
determine and certify to the Committee the amount, if any, of Employer
Profit Sharing Contributions to be made to the Program by all Employers
hereunder separately for (1) staff and executive employees or store
managers and (2) Certified Swing Managers, primary maintenance employees,
crew members and other hourly restaurant employees. In its discretion, the
Board of Directors may determine different amounts of contributions or
contributions of different percentages of Considered Compensation for the
groups identified in (1) and (2) of the preceding sentence. Such
determination shall be binding on all Participants, the Committee, the
Company and the Other Employers.
(b) Employer's Shares of Profit Sharing Contributions. Subject to
Section 12.2, each Employer including the Company shall contribute for each
Plan Year an amount equal to the sum of the Staff Contribution and the Crew
Contribution as determined for such Employer below:
(1) Staff Contribution. The amount of an Employer's Staff
Contribution shall equal the product of (A) the total Profit Sharing
Contributions for the Plan Year for the Participants identified in
Section 3.1(a)(1), as determined by the Board of Directors in
accordance with Section 3.1(a), multiplied by (B) a fraction the
numerator of which is the total Considered Compensation for such Plan
Year of such Participants who are (i) Active Participants and (ii)
Employees of such Employer and the denominator of which is the total
Considered Compensation for the Plan Year of all Active Participants
who are Employees, described in Section 3.1(a)(1), of all Employers;
and
(2) Crew Contribution. The amount of an Employer's Crew
Contribution shall equal the product of (A) the total Profit Sharing
Contributions for the Plan Year for the Participants identified in
Section 3.1(a)(2), as determined by the Board of Directors in
accordance with Section 3.1(a), multiplied by (B) a fraction the
numerator of which is the total Considered Compensation for such Plan
Year of such Participants who are (i) Active Participants and (ii)
Employees of such Employer and the denominator of which is the total
Considered Compensation for the Plan Year of all Active Participants
who are Employees, described in Section 3.1(a)(2), of all Employers.
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3.2 Payment of Contributions Made Pursuant to Article III. The Employer
Profit Sharing Contributions for each Plan Year shall be paid in cash or in
securities of McDonald's Corporation, which are qualifying employer securities
as defined in ERISA Section 407(d)(5) (which includes but is not limited to
Company Stock), in full not later than the due date for filing the federal
income tax return of the Employer for the tax year during which the last day of
such Plan Year falls.
Employer Profit Sharing Contributions, if any, for each Plan Year shall be
held in the Profit Sharing Holding Fund and, if contributed in cash, invested in
the STIF Fund or, if contributed as qualifying employer securities, remain
invested in qualifying employer securities until February 1 following the Plan
Year or, if not administratively feasible, as soon thereafter as administrative
requirements may warrant, at which time the Committee shall allocate such
amounts to Participants' Profit Sharing Accounts and invest them in accordance
with Section 10.7, 10.8 or 10.9(a), as applicable.
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ARTICLE IV
McDESOP and LESOP EMPLOYER CONTRIBUTIONS
4.1 Amount of Employer Matching Contributions and LESOP Employer Matching
Contributions. Employer Matching Contributions and LESOP Employer Matching
Contributions shall be made by Employers as specified in (a) or (b), subject to
the limitations specified in (c) below:
(a) Employer Matching Contributions. For periods before November 1,
1998, each Employer shall contribute to the McDESOP Trust as Employer
Matching Contributions for each Plan Year an amount as defined below:
(1) The amount of Employer Matching Contributions plus the
Forfeiture Amount shall equal fifty percent (or such greater
percentage as the Board of Directors from time to time determines) of
the sum of all Participant Elected Matched Contributions (excluding
Special Participant Elected Matched Contributions as described in
Section 5.1) for the Plan Year or portion of a Plan Year made for
Active Participants who are employed by that Employer.
(2) The Forfeiture Amount shall equal (A) the amount of
Forfeitures which occur during a Plan Year pursuant to Sections
11.4(c) and 16.6 after any charges to Forfeitures provided hereunder,
(B) multiplied by a fraction the numerator of which is the amount of
Participant Elected Matched Contributions (excluding Special
Participant Elected Matched Contributions) made for Active
Participants who are Employees of such Employer and the denominator of
which is the total amount of Participant Elected Matched Contributions
(excluding Special Participant Elected Matched Contributions) made for
Active Participants for the Plan Year.
(b) LESOP Employer Matching Contributions. For periods beginning on
or after November 1, 1998, each Employer shall make LESOP Employer Matching
Contributions and Forfeitures in an amount which when added to the value of
the shares released from a leveraged ESOP Suspense Account pursuant to
Section 6.3(c) with equal fifty percent (or such greater percentage as the
Board of Directors from time to time determines) of the Participant Elected
Matched Contributions made to the Plan for the Plan Year for Active
Participants who are Employees of such Employer.
(c) Average Actual Contribution Percentage. The average actual
contribution percentage ("Average ACP") for a specified group of
Participants for a Plan Year shall be the average of the actual
contribution percentages of the persons in such group. A Participant's
actual contribution percentage is equal to the product of (1) 100
multiplied by (2) the quotient of (A) the sum of Employer Matching
Contributions (including any Forfeitures allocated therewith), LESOP
Employer
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Matching Allocations, LESOP Employer Matching Contributions and such amount
of Special Section 401(k) Employer Contributions and Participant Elected
Contributions as the Committee determines to include in the calculation of
the Average ACP for each such Employee for such Plan Year divided by (B)
the Employee's Considered Compensation for the Plan Year ("Actual
Contribution Percentage"). As soon as practicable after the end of the
Plan Year, the Committee shall calculate the Average ACP for the Plan Year
for the group of Employees eligible to be Active Participants who are
Highly Compensated Employees and for the group of such Employees who are
Non-highly Compensated Employees.
Notwithstanding the foregoing provisions of Section 4.1, solely for
purposes of the Average ACP test the Committee shall have the discretion to
determine the portion of a Participant's (or selected group of
Participants') Employer Matching Contributions (and Forfeitures), LESOP
Employer Matching Contributions, Special Section 401(k) Employer
Contributions or Participant Elected Contributions to be counted in
calculating the Participant's average contribution percentage and in making
such determination shall be under no obligation to treat similarly situated
Participants in a like manner so long as the following requirements (to the
extent applicable) are satisfied:
(1) The amount of Special Section 401(k) Employer Contributions
is non-discriminatory under Code Section 401(a)(4);
(2) All contributions to the Program other than Participant
Elected Contributions, Employer Matching Contributions, LESOP Employer
Matching Contributions and Special Section 401(k) Employer
Contributions satisfy the requirements of Code Section 401(a)(4); and
(3) The Participant Elected Contributions, including those
treated as matching contributions for purposes of the Required ACP
Test satisfy the requirements of the ADP test.
(4) The Special Section 401(k) Contributions are allocated to
the Participant as of a date within the Plan Year and the Participant
Elective Contributions satisfy the requirements of Treas. Reg. Section
1.401(k)-1(b)(4)(i) for the Plan Year.
A Participant's Employer Matching Contributions, LESOP Employer
Matching Contributions, Special Section 401(k) Contributions or Participant
Elected Contributions which are counted for purposes of the Required ADP
Test pursuant to Section 5.2(e) shall not be counted for purposes of
calculating such Participant's Average Contribution Percentage.
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(d) Required Actual Contribution Percentage Test and Adjustment. The
Average ACP for the group of Highly Compensated Employees for a Plan Year
beginning on or after January 1, 1997 shall bear a relationship to the
Average ACP for all Non-highly Compensated Employees for the preceding Plan
Year which meets either of the following tests ("Required ACP Test"):
(1) The Average ACP for the preceding Plan Year 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 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 of all
Non-highly Compensated Employees who are Active Participants
multiplied by 2.
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) or the LESOP Employer Matching Contributions 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 or LESOP Employer Matching Contributions 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 or LESOP Employer
Matching Contributions 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 on account of any reductions made under Section
5.2, 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
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Step 1, no longer would exceed the amounts permitted in both Sections
4.1(c)(1) and (c)(2). Then, 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 or LESOP Employer Matching
Contributions 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 and
LESOP Employer Matching Contributions calculated under Step 1 ("Total
Excess Contributions").
Step 3. Finally, the Committee shall reduce the Employer Matching
Contributions and Forfeitures and LESOP Employer Matching Contributions of
the Highly Compensated Employees with the highest total dollar amount of
Employer Matching Contributions and Forfeitures and LESOP Employer Matching
Contributions by the lesser of the amount which either: (i) causes such
Highly Compensated Employees' Employer Matching Contributions and
Forfeitures and LESOP Employer Matching Contributions to equal the total
dollar amount of the Employer Matching Contributions and Forfeitures and
LESOP Employer Matching Contributions of the Highly Compensated Employees
with the next highest dollar amount of Employer Matching Contributions and
Forfeitures and LESOP Employer Matching Contributions or (ii) reduces the
total of the Highly Compensated Employee's Employer Matching Contributions
and Forfeitures and LESOP Employer Matching Contributions by the Total
Excess Contributions. Then, unless the total amount of reductions made to
Highly Compensated Employees' Employer Matching Contributions and
Forfeitures and LESOP Employer Matching Contributions 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 and LESOP Employer Matching Contributions of the group of
Highly Compensated Employees with the highest dollar amount of Employer
Matching Contributions and Forfeitures and LESOP Employer Matching
Contributions, 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
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and LESOP Employer Matching Contributions made in this Step 3 to equal the
dollar amount of the Employer Matching Contributions and Forfeitures and
LESOP Employer Matching Contributions of other Highly Compensated Employees
with the next highest dollar amount of Employer Matching Contributions and
Forfeitures and LESOP Employer Matching 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 Employer
Matching Contributions and Forfeitures and LESOP Employer Matching
Contributions 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 and LESOP Employer Matching Contributions
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 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 and LESOP Employer Matching
Contributions were made.
4.2 LESOP Contributions. LESOP Contributions shall be made by Employers,
as follows:
(a) Company LESOP Contributions. For each Plan Year that a loan
authorized under Section 6.1 remains unpaid, the Company shall contribute
in cash to the Trust, as LESOP Contributions, such amounts (if any) as
shall be determined by the Board of Directors, provided, however, the
Company's LESOP Contribution in cash for any Plan Year shall not be less
than the product of:
(1) the installments (if any) payable on such loan reduced by
the sum of the (A) dividends on unallocated shares of Company Stock
(including Company Stock into which such shares have been converted)
held in the suspense account associated with such loan (or any loan
refinanced with such loan) and on LESOP Contributions made to repay
such loan, (B) dividends on allocated shares of Company Stock
(including Company Stock into which such shares have been converted)
held in Participants' LESOP Accounts acquired with the proceeds of
such loan (or any Loan refinanced with such loan) and earnings
attributable to such dividends, and (C) LESOP Employer Matching
Contributions made for the Plan Year by the Company; multiplied by
(2) a fraction, the numerator of which is the Considered
Compensation paid by the Company to Employees for the Plan Year paid
while they were Active Participants and the denominator of which is
the Considered Compensation for the Plan Year paid to all Employees
while they were Active Participants.
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If no installment (as drawn or renegotiated) is payable on a loan for the
Plan Year, no LESOP Contribution shall be required with respect to such
loan for the Plan Year, except as otherwise determined by the Board of
Directors. The dividends on allocated shares of Company Stock held in
Participants' LESOP Accounts which were acquired with the proceeds of a
loan or any loan refinanced with such loan (or shares into which such
Company Stock has been converted) shall be included in Section 4.2(a)(1)(B)
for a Plan Year only to the extent that Employer Contributions and the
dividends and other income attributable to unallocated shares held in the
suspense account associated with such loan are less than the installments
payable or to be payable with respect to such loan.
LESOP Employer Matching Contributions shall be included in Section
4.2(a)(1)(C) for a Plan Year only to the extent of the value of Company
Stock allocated to Participants' LESOP Employer Matching Contribution
Account pursuant to Section 7.2(a)(2) as of the Valuation Date as of which
such allocation occurs.
(b) LESOP Contributions by Other Employers. Each Employer that has
adopted the LESOP portion of the Plan (other than the Company) shall
contribute to the Trust an amount equal to the product of:
(1) the total Considered Compensation for the Plan Year paid by
such Employer to Employees while they were Active Participants;
multiplied by
(2) a fraction the numerator of which is the LESOP Contribution
of the Company for the Plan Year and the denominator of which is the
Considered Compensation paid by the Company to Employees while they
were Active Participants.
(c) Additional LESOP Contributions. The Board of Directors may, in
its discretion, determine that Additional LESOP Contributions shall be made
for a Plan Year in Company Stock and designate such contributions as Per
Capita Additional LESOP Contributions or Compensation Based Additional
LESOP Contributions (collectively called "Additional LESOP Contributions").
The Company shall make such Additional LESOP Contributions in an amount
equal to the total Additional LESOP Contribution multiplied by a fraction
the numerator of which is the Considered Compensation paid by the Company
to Employees for the Plan Year paid while they were Active Participants and
the denominator of which is the Considered Compensation for the Plan Year
paid to all Employees while they were Active Participants.
Each Employer that has adopted the LESOP (other than the Company)
shall contribute to the Trust as Additional LESOP Contributions an amount
equal to the product of the total Considered Compensation for the Plan Year
paid by such
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Employer to Employees while they were Active Participants multiplied by a
fraction the numerator of which is the Company's Additional LESOP
Contribution and the denominator of which is the Compensation paid by the
Company to Employees while they were Active Participants.
(d) Special Dividend Replacement Contributions. The Employers shall
make Special Dividend Replacement Contributions as of any Valuation Date in
an amount not to exceed the dividends with respect to Company Stock which
has been allocated to Participant's LESOP Accounts and are placed in the
LESOP Suspense Account to be used pursuant to Section 6.3(b) to repay an
Exempt Loan (or other loan authorized under Section 6.1). Each Employer
shall make any such Special Dividend Replacement Contributions in an amount
equal to the total amount of such contributions to be made as of a
Valuation Date multiplied by a fraction the numerator of which is the
Considered Compensation paid to Active Participants who are Employees of
the Employer for the calendar quarter ending on the Valuation Date and the
denominator of which is the Considered Compensation paid to all Active
Participants during the calendar quarter ending on the Valuation Date.
4.3 Annual Employer Contribution Elections.
(a) Minimum and Maximum Amount of Participant Elected Matched
Contributions. If Participant Elected Matched Contributions are to be
permitted for all or any portion of a Plan Year, the Company by action of
its Board of Directors shall specify for the Plan Year or portion of the
Plan Year, the amount (either as a dollar amount or a percentage of each
Active Participant's Considered Compensation) of such Participant Elected
Matched Contributions ("Specified Participant Elected Matched
Contributions") which shall be made on behalf of an Active Participant in
the absence of a contrary election by the Participant and may also specify,
the minimum and maximum amounts of Participant Elected Matched
Contributions which a Participant may elect in lieu of Specified
Participant Elected Matched Contributions (either as a dollar amount or a
percentage of each Participant's Considered Compensation) for the Plan Year
or portion of the Plan Year as permitted by procedures established by the
Plan Administrator, provided that such minimum and maximum amounts shall be
not greater for any Plan Year than:
(1) six percent (6%) of the Participant's Considered
Compensation if the Participant is a staff or an executive employee or
a store manager,
(2) ten percent (10%) of the Participant's Considered
Compensation if the Participant is a Certified Swing Manager or
primary maintenance employee, and
(3) eight percent (8%) of the Participant's Considered
Compensation if the Participant is a crew member or other hourly
restaurant employee.
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(b) Special Section 401(k) Employer Contributions. For each Plan
Year, the Company may elect to have the Company and the other Employers
make a Special Section 401(k) Employer Contribution to the Program in such
amount (if any) as the Board of Directors may determine, which shall be
allocated pursuant to Section 7.2(b) to the Employer Matching Contribution
Accounts of those Active Participants who for the Plan Year are Non-highly
Compensated Employees who have Compensation reduction elections in effect.
In any Plan Year in which the Company elects to have such a Special Section
401(k) Employer Contribution made, each Employer, including the Company,
shall contribute a fractional portion of the Special Section 401(k)
Employer Contribution, in an amount equal to the Special Section 401(k)
Employer Contribution multiplied by a fraction, the numerator of which is
the amount of Participant Elected Contributions for such Plan Year of those
Active Participants who are employed by the Employer and who are Non-highly
Compensated Employees, and the denominator of which is the amount of
Participant Elected Contributions for the Plan Year of all Active
Participants who are Non-highly Compensated Employees.
4.4 Additional Employer Contributions. For such Plan Years, if any, as
the Board of Directors shall direct, the Employers shall make Additional
Employer Contributions in an amount to be determined by the Board of Directors.
Each such Employer shall contribute Additional Employer Contributions to the
Trust for a Plan Year in an amount equal to the total Additional Employer
Contributions for such Plan Year multiplied by a fraction the numerator of which
is the number of Active Participants eligible to receive Additional Employer
Contributions who are Employees of the Employer and the denominator of which is
the total number of Active Participants eligible to receive Additional Employer
Contributions.
4.5 Payment of Contributions Made Pursuant to Article IV. Employer
Contributions for each Plan Year made in accordance with Article IV, except for
Special Section 401(k) Employer Contributions as provided in Section 4.3(b),
shall be delivered to the Trustee on or before the due date for the filing of
the federal income tax return (including any extensions) of the Employer for the
tax year during which the last day of such Plan Year occurs. Special Section
401(k) Employer Contributions for a Plan Year may be made during the Plan Year
or at any time on or before the last day of the following Plan Year.
Employer Matching Contributions and any Forfeitures allocated therewith,
Special Section 401(k) Employer Contributions and Additional Employer
Contributions shall be invested in the McDESOP McDonald's Common Stock Fund and
held in the McDESOP and Holding Fund until allocated to Participant's Accounts
as provided in Sections 7.2(a), 7.2(b) and 7.2(c), respectively. Participant
Elected Contributions shall be invested in the McDESOP McDonald's Common Stock
Fund and held in the McDESOP and Holding Fund until credited to Participant's
Accounts as provided in Section 7.4.
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4.6 Form of Contributions. Except as otherwise provided, Employer
Contributions to the McDESOP Trust shall be either in cash or in Company Stock,
as each Employer shall determine in its discretion.
4.7 Reemployed Members of the Uniformed Services. The provisions of this
Section 4.7 shall apply to each person reemployed by an Employer after a period
of uniformed service with reemployment rights under Chapter 43 of Title 38,
United States Code ("Qualified Uniformed Service"); provided that any Employee
seeking benefits under this Section 4.7 shall notify the Benefits Accounting
Department of his eligibility and provide such information and proof, including
but not limited to his certificate of service, as shall reasonably be required
to confirm the Employee's eligibility.
(a) Contributions. The Accounts of each such reemployed veteran
("Reemployed Veteran") shall be credited with contributions (but not
earnings or Forfeitures except as he becomes entitled to them under
the Plan after the date of reemployment) as follows:
(i) Employer Profit Sharing Contributions. As of the
Valuation Date next following such reemployment, each Reemployed
Veteran's Employer Profit Sharing Account shall be credited with
the Employer Profit Sharing Contributions which he would have
been allocated under Section 7.1 if he had been an Employee of an
Employer during the period of Qualified Uniformed Service with
Considered Compensation determined as described in Section
4.7(d). Such amounts shall be credited from Forfeitures under
the Profit Sharing portion of the Program or, if the Employer so
elects, from special contributions made for the purpose by the
Employer.
(ii) LESOP Allocations. As of the Valuation Date next
following the date of such reemployment, each Reemployed
Veteran's LESOP Accounts shall be credited with the allocations
of Company Stock from the LESOP Suspense Account in the amount he
would have received under Section 7.3 if he had been an Employee
of an Employer with Considered Compensation determined as
described in Section 4.7(d) during the period of Qualified
Uniformed Service. Such allocations shall be made from amounts
released from the LESOP Suspense Account under Section 6.3 in the
Plan Year in which the allocation is made before the allocations
in Section 7.3(a) are made and if there are no such releases or
they are insufficient from Forfeitures under the LESOP or special
contributions made for the purpose by the Employer.
(iii) Participant Elected Contributions. At any time
during the period beginning on the date of reemployment and
ending on the earlier
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of the end of a period which is (A) three times the length of the
period of the person's Qualified Uniformed Service or (B) five
years, the Reemployed Veteran may make elective deferrals from
his Considered Compensation with respect to his period of
Qualified Uniformed Service provided that the amount of such
contributions shall not exceed the amount the person would have
been permitted to elect to contribute had the person remained
continuously employed and been an Employee throughout the period
of Qualified Uniformed Service ("Additional Elective Deferrals").
(iv) Employer Matching Contributions. Each Employer shall
make Employer Matching Contributions to the Program to be
credited to such Reemployed Veteran's Employer Matching
Contribution Account with respect to any Additional Elective
Deferrals in the amount which such Employer would have
contributed under the Program had the Additional Elective
Deferrals been make during the period of Qualified Uniformed
Service. Such amounts shall be credited from Forfeitures under
the Profit Sharing Portion of the Program unless the Employer
determines to make a special contribution for the purpose.
Notwithstanding the foregoing, effective for LESOP Employer
Matching Allocations made with respect to Participant Elected
Contributions for periods on or after November 1, 1998, LESOP
Employer Matching Contributions shall be made from the LESOP
Suspense Account under Section 6.3 in the Plan Year in which the
allocation is made and before allocations in Section 7.3(a) are
made and if there are no such releases or if they are
insufficient from Forfeitures under the LESOP or special
contributions made for the purpose by the Employer.
(b) Service and Position with the Employer. In determining the
contributions to which each such Reemployed Veteran is entitled under
Section 4.7(a), he shall be credited with Hours of Service hereunder
during his period of Qualified Uniformed Service both with respect to
Eligibility Service and Vesting Service. In determining the amount of
such Hours of Service to be credited, the Plan Administrator shall
make good faith estimates of the Hours of Service the person would
have received had he been continuously employed by the Employer during
the period of Qualified Uniformed Service.
In addition, each Reemployed Veteran shall be deemed to have been
employed in the same position he would have been in had he not had the
period of Qualified Uniformed Service.
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(c) Break in Service. After reemployment, such a person shall
not be treated as having incurred a Break in Service by reason of such
person's period(s) of Qualified Uniformed Service.
(d) Considered Compensation. For purposes of determining the
amount of a Reemployed Veteran's contributions under Section 4.7(a),
each person shall be treated as receiving Considered Compensation
during the period of Qualified Uniformed Service equal to (i) the
Considered Compensation he would have received during such period if
he were not in Qualified Uniformed Service, determined based on the
rate of pay the Reemployed Veteran would have received from the
Employer but for the absence during the period of Qualified Uniformed
Service, or (ii) if the Considered Compensation the Veteran would have
received during such period was not reasonably certain, the Reemployed
Veteran's average compensation from the Employer during the 12-month
period immediately preceding the Qualified Uniformed Service (or, if
shorter, the period of employment immediately preceding the Qualified
Uniformed Service).
(e) Limits. The contributions made pursuant to Section 4.7(a)
above shall be taken into account with respect to the limits contained
in Section 5.2(c)(1) or Article IX, as applicable in the Plan Year for
which such contributions are made but shall not be taken into account
in applying such limits with respect to the Plan Year in which the
contributions are made. Assuming that the Reemployed Veteran had
compensation as described in 4.7(d) during the period of Qualified
Uniformed Service. The ADP test and non-discrimination tests for a
prior Plan Year shall not be recalculated to take into account
contributions made under this Section 4.7.
(f) References. All references to Sections of the Program in
this Section 4.7 shall refer to the analogous sections of the Program
as in existence during the period of Qualified Uniform Service with
respect to which contributions are being made.
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ARTICLE V
PARTICIPANT ELECTED CONTRIBUTIONS
5.1 Participant Elected Contributions. Each Active Participant, who is
employed by an Employer, shall have his Considered Compensation reduced for each
Plan Year or designated portion of a Plan Year by an amount equal to the
Specified Participant Elected Matched Contribution for the Plan Year or
designated portion of a Plan Year, as provided in Section 4.3(a), which amount
his Employer shall contribute to the McDESOP Trust on the Participant's behalf
as a Participant Elected Matched Contribution, unless the Participant shall
elect, on such form, at such time and in such manner as the Committee shall
specify, not to have his Considered Compensation so reduced or (subject to the
minimum and maximum amounts of reduction specified for the Plan Year pursuant to
Section 4.3(a)) reduced by a lesser or greater amount. In addition, each Active
Participant may elect in writing on forms approved by the Committee to have his
Employer contribute to the McDESOP Trust on the Participant's behalf as
Participant Elected Unmatched Contributions an amount equal to any additional
amount by which the Participant elects to have his Considered Compensation
reduced (which election may be a larger percentage for certain Considered
Compensation during a Plan Year, e.g. bonus, and a smaller percentage for other
Considered Compensation, e.g. salary, as the Committee shall permit), provided
that such amount may not exceed seven percent (7%) of his Considered
Compensation for a Plan Year and further provided that an Active Participant may
elect Participant Elected Unmatched Contributions as provided above regardless
of whether the Participant is making Participant Elected Matched Contributions
for that period. The Committee may from time to time establish general policies
requiring Participants to elect Participant Elected Matched Contributions up to
a specified level before electing any Participant Elected Unmatched
Contributions.
At each quarterly Valuation Date, the amount of a Participant's Participant
Elected Matched Contributions shall be redetermined by recharacterizing any
Participant Elected Unmatched Contributions as Participant Elected Matched
Contributions to the extent that in the Plan Year to date, taking into account
all of the Participant's Participant Elected Matched Contributions and his
Considered Compensation in the Plan Year through the Valuation Date, the
Participant has not made the maximum permitted Participant Elected Matched
Contributions for Participants in the same category as the Participant.
Notwithstanding any provision herein to the contrary, the amount of a
Participant's Participant Elected Contributions for any calendar year shall not
exceed an amount or percentage which from time to time is established by the
Committee or the Board of Directors, nor a pro rata portion of said amount for
any partial calendar year of contributions.
Except as otherwise specifically provided herein, a Participant may make,
change or revoke a Compensation reduction election at such times and in such
manner as the Committee may permit, provided that any such election, change or
revocation shall apply solely to Considered Compensation, which is not currently
available to the Participant as of
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the date of such election, change or revocation. The Compensation reduction
election by the Active Participant which is in accordance with the Program shall
continue in effect, notwithstanding any change in Considered Compensation, until
he shall change such Compensation reduction election or until he shall cease to
be an Active Participant. If a Participant has an election pursuant to the
McDonald's 1989 Executive Equalization Plan ("McCap I") or the McDonald's
Supplemental Employee Benefit Equalization Plan ("McCap II") in effect for a
calendar year, the Participant's Compensation reduction election hereunder may
not be changed for such year but may only be changed before the beginning of the
following Plan Year for such Plan Year. Each Employer shall make Participant
Elected Contributions to the Trustee on behalf of each Active Participant
employed by the Employer in the amount by which the Participant's Considered
Compensation was reduced pursuant to this Section 5.1.
5.2 Restrictions on Participant Elected Contributions. Notwithstanding
the provisions of Section 5.1, the following restrictions shall apply to
Participant Elected Contributions:
(a) No Participant Compensation reduction election shall be solicited
or accepted from any Participant and no Participant Elected Contributions
shall be made on behalf of any Participant unless and until a registration
statement under the Securities Act of 1933 has become effective with
respect to securities offered in connection with the Program, unless in the
opinion of counsel for the Company such registration statement is not
required;
(b) No Compensation reduction election shall be solicited or accepted
from any Participant who resides or works in any state and no Participant
Elected Contributions shall be made on behalf of any Participant who
resides or works in any state unless and until the Program shall have
complied with applicable securities and blue sky laws of the state or in
the opinion of counsel of the Company is exempt from such law; and
(c) (1) The sum of Participant Elected Contributions and of elected
deferrals under any Related Defined Contribution Plan for any
Participant shall in no event exceed a maximum of $9,500 (in 1997 as
adjusted from time to time, in accordance with Section 402(g)(5) of
the Internal Revenue Code) for a calendar year ("Maximum Elective
Deferral Amount").
(2) If the Participant notifies the Committee in writing by
March 1 following the Plan Year or such later date not later than the
April 15 following the Plan Year as the Committee shall permit, that
the sum of his elective contributions to a simplified employer
pension, to a 403(b) plan (as defined in Section 402(g)(3) of the
Internal Revenue Code), or to any qualified cash or deferred
arrangement (as defined in Section 401(k) of the Internal Revenue
Code) exceeds the Maximum Elective Deferral Amount ("Excess Elected
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Deferrals"), such portion of the Participant's Participant Elected
Contributions as the Participant shall elect in such notice not to
exceed the amount of such Excess Elected Deferrals (including any
income allocated thereto as determined in accordance with Section 5.3)
shall be distributed to the Participant not later than the April 15
following the Plan Year. In determining whether a Participant has
made Excess Elected Deferrals under this Section 5.2(c)(2), if a
Participant is a participant in any plan described in Section 403(b)
of the Internal Revenue Code under which he makes elective deferrals,
the Maximum Elective Deferral Amount shall be increased in accordance
with the provisions of Sections 402(g)(4) and 402(g)(8) of the
Internal Revenue Code with respect to any Participant who participates
in a plan described in Section 403(b) of the Internal Revenue Code or
who is a qualified employee in a plan of a qualified organization (as
defined in Section 402(g)(8) of the Internal Revenue Code) for a
calendar year.
(3) Notwithstanding the foregoing, if the Participant has
elected to participate in McCAP I or McCAP II as provided therein his
Compensation reduction elections hereunder shall be irrevocable to the
extent provided in Section 5.1 and any amount of such deferrals which
shall be in excess of the Maximum Elective Deferral Amount and any
Employer Matching Contributions and any Forfeitures and LESOP Employer
Matching Contributions and Forfeitures allocated therewith shall not
be contributed or allocated hereunder but shall be credited to the
Participant's account under McCAP I or McCAP II, as applicable, to the
extent provided thereunder and further provided that no such amount
shall be credited to a Participant under more than one of the
McDonald's Profit Sharing Program Equalization Plan ("McEqual"), McCAP
I and McCAP II or any other non-qualified deferred compensation plan
from time to time maintained by the Company.
(4) If a Participant is not eligible to or has not elected to
participate in McCAP I or McCAP II as provided therein and has
Compensation reduction elections in excess of the Maximum Elective
Deferral Amount hereunder, such Participant Elected Contributions
shall not be contributed to the Program nor shall such Participant be
credited with any Participant Elected Contributions or Employer
Matching Contributions and any Forfeitures and LESOP Employer Matching
Contributions and Forfeitures allocated therewith under McCAP I or
McCAP II, as applicable, for the Plan Year.
(5) In determining whether the Maximum Elective Deferral Amount
has been exceeded, the Plan Administrator may count Participant
Elected Contributions toward the limit in the order contributed to the
Program, may apply the Maximum Elective Deferral Amount on a pro rata
basis to periods specified by the Plan Administrator or such other
approach as the Plan Administrator shall reasonably determine.
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(d) Average Actual Deferral Percentage. The average Actual Deferral
Percentage ("Average ADP") for a specified group of Participants for a Plan
Year shall be the average of the Actual Deferral Percentages of the members
of such group. The Actual Deferral Percentage of an individual is the
amount of his Participant Elected Contributions (excluding for each Non-
highly Compensated Employee any such contributions in excess of the Maximum
Elective Deferral Amount as defined in Section 5.2(c)(1)) and such amount
of Employer Matching Contributions, LESOP Employer Matching Contributions
and Special Section 401(k) Employer Contributions, as provided in Section
4.3(b), paid to the Trust for or allocated to each such Employee for such
Plan Year divided by the Employee's Considered Compensation for the Plan
Year ("Actual Deferral Percentage"). As soon as practicable after the end
of the Plan Year, the Committee shall calculate the Average ADP for the
Plan Year for the group of Participants who are Highly Compensated
Employees and for the group of Participants who are Non-highly Compensated
Employees.
Effective January 1, 1987, solely for purposes of calculating the
Average ADP the Committee shall have the discretion to determine the
portion of a Participant's (or selected group of Participant's) Participant
Elected Contributions, Employer Matching Contributions, LESOP Employer
Matching Contributions or Special Section 401(k) Employer Contributions to
be counted in calculating the Participant's Actual Deferral Percentage and
in making such determination shall be under no obligation to treat
similarly situated Participants in a like manner so long as the following
requirements (to the extent applicable) are satisfied:
(1) The amount of Special Section 401(k) Employer Contributions
to be counted for purposes of calculating Actual Deferral Percentage
shall satisfy the requirements of Section 401(a)(4);
(2) All contributions to the Program other than Participant
Elected Contributions, Employer Matching Contributions, LESOP Employer
Matching Contributions and Special Section 401(k) Employer
Contributions satisfy the requirements of Code Section 401(a)(4); and
(3) The Employer Matching Contributions, LESOP Employer Matching
Contributions and Special Section 401(k) Contributions are allocated
to Participant's Net Balance Account under the Program as of the last
day of the Plan Year for which the ADP test is being calculated.
(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"):
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(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
or LESOP 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 and LESOP Employer Matching
Contributions and Forfeitures counted in the Required ADP Test) and any
Employer Matching Contributions and Forfeitures or LESOP Employer Matching
Contributions and Forfeitures allocated with respect to reduced Participant
Elected Contributions 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 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
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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 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 Employees' 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 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.
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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 or LESOP
Employer Matching Contributions and 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 or LESOP
Employer Matching Contributions and 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 or LESOP Employer Matching
Contributions and 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 or LESOP Employer Matching
Contributions and Forfeitures Accounts in proportion to the Employer
Matching Contributions and any Forfeitures or LESOP Employer Matching
Contributions and Forfeitures, respectively, allocated therewith to such
accounts pursuant to Sections 7.2(a) and (b).
5.3 Allocation of Income to Certain Distributed Amounts. Income, gains
and losses equal to the sum of the amounts determined under (a) below shall be
allocated to and distributed with any amounts distributed to a Participant
pursuant to Sections 4.1(c), 5.2(e) or 5.4 as follows:
(a) Income for Plan Year. Income, gains and losses for a completed
Plan Year with respect to contributions distributed in accordance with
Section 4.1(c), 5.2(e) or 5.4 shall equal the income, gains and losses for
the Plan Year allocable to a Participant's Account for such contributions
(taking the contributions allocated to each different type of Account,
separately) multiplied by a fraction the numerator of which is the amount
of such contributions so distributed and the denominator of which is the
total of such Account balance as of the last day of the Plan Year reduced
by all earnings and gains and increased by all expenses and losses
allocable to such Account for the Plan Year.
(b) Allocation of Distributed Income to Accounts. Income, gains and
losses distributed with any amounts distributed to a Participant pursuant
to Sections 4.1(c), 5.2(e) or 5.4 shall reduce the income, gains and losses
allocated to a Participant's Participant Elected Contribution Account or
Employer Matching
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Contribution Account or LESOP Employer Matching Contribution Account, in
accordance with Section 10.13, in an amount equal to the total amount of
such income, gains and losses distributed.
5.4 Multiple Use of Alternative Limitations. If assuming that the
reductions in the amount and manner provided for in Section 5.2(b) and in Step 1
of Sections 4.1(c) and 5.2(e) were made the ACP of highly Compensated Employees
would exceed the amount in Section 4.1(c)(1) but would not exceed the lesser of
the amounts in Section 4.1(c)(2) and the Average ADP of Highly Compensated
Employees exceeds the amount in Section 5.2(e)(1) but does not exceed the lesser
of the amounts in Section 5.2(e)(2), the sum of the Average ADP and the Average
ACP for a Plan Year of the Highly Compensated Employees who are Active
Participants shall not exceed the greater of (a) or (b), where:
(a) equals the sum of (1) plus (2) where:
(1) is one hundred and twenty-five percent (125%) of the greater
of (A) the Average ADP for such Plan Year of the Non-Highly
Compensated Employees who are Active Participants, or (B) the Average
ACP for such Plan Year of such Non-Highly Compensated Employees; and
(2) is two percent plus the lesser of the amount determined
under Section 5.4(a)(1)(A) or the amount determined under Section
5.4(a)(1)(B), but in no event shall this amount exceed two hundred
percent (200%) of the lesser of the amounts determined under Section
5.4(a)(1(A) or 5.4(a)(1(B); and
(b) equals the sum of (1) plus (2) where
(1) is one hundred and twenty-five percent (125%) of the lesser
of (A) the Average ADP for such Plan Year of the Non-Highly
Compensated Employees who are Active Participants, or (B) the Average
ACP for such Plan Year of such Non-Highly Compensated Employees; and
(2) is two percent plus the greater of the amount determined
under Section 5.4(b)(1)(A) or 5.4(b)(1)(B). In no event, however,
shall this amount exceed 200 percent of the greater of the amounts
determined under Section 5.4(b)(1)(A) or 5.4(b)(1)(B).
If the sum of the Average ADP and the Average ACP of Highly Compensated
Employees for a Plan Year, after any reductions provided for in Section 5.2(b)
or in Step 1 of Sections 4.1(c) and 5.2(e) if applicable, exceeds the amounts
determined under both Sections 5.4(a) and 5.4(b) and if the Company does not
elect to make Special Section 401(k) Employer Contributions so that the sum of
such Average ADP and Average ACP does not exceed both Sections 5.4(a) and
5.4(b), the Committee shall determine, in accordance with Step 1, the smallest
aggregate dollar amount of reductions to Participant Elected Contributions and
any Employer Matching Contributions and Forfeitures and LESOP Employer Matching
Contributions and Forfeitures of Highly Compensated Employees
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allocated therewith which would make the sum of such Average ADP and Average ACP
not exceed both Sections 5.4(a) and 5.4(b). In determining whether any Employer
Matching Contributions and Forfeitures and LESOP Employer Matching Contributions
and Forfeitures are allocated with respect to Participant Elected Contributions,
reductions shall be made first to a Participant's Unmatched Participant Elected
Contributions and then to his Matched Participant Elected Contributions.
Step 1. The Committee shall determine the dollar amount of the
reductions which have to be made under this Section 5.4 so that the
Multiple Use Test is met. Such amount shall be calculated by first
determining the dollar amount by which the total of the Participant Elected
Contributions (and the Employer Matching Contributions and Forfeitures and
LESOP Employer Matching Contributions and Forfeitures allocated with
respect to such Participant Elected Contributions) after any reductions
made under Section 5.2(b) or Step 1 of Sections 4.2(c) or 5.2(e) of the
Highly Compensated Employees the sum of whose Actual Contribution
Percentage and Actual Deferral Percentage is the greatest of all Highly
Compensated Employees would have to be reduced until the total of his
Actual Contribution Percentage and Actual Deferral Percentage equals
either: (i) the sum of the Actual Contribution Percentage and Actual
Deferral Percentage of other Highly Compensated Employees or (ii) or the
sum of the Average ACP and the Average ADP of the Highly Compensated
Employees, as calculated after such reduction, no longer exceeds the
amounts determined under both Section 5.4(a) and (b). Then, unless the sum
of the Average ACP and Average ADP of the Highly Compensated Employees, as
recalculated after the reductions made under Section 5.2(b) and Step 1 of
Sections 4.2(c), 5.2(e) and 5.4, no longer exceeds the amounts determined
under both Sections 5.4(a) and (b), 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, whose
Actual Contribution Percentage and Actual Deferral Percentage after all
prior reductions under Step 1 would sum to the highest amount until the
first to occur of: (iii) the sum of the Actual Contribution Percentage and
the Actual Deferral Percentage, after the prior reductions, of each person
in such group becomes tied with that of one or more other Highly
Compensated Employees or (iv) that the sum of the Average ADP and the
Average ACP of all Highly Compensated Employees, after all prior reductions
made under Sections 5.2(b) and Step 1 of Sections 4.1(c), 5.2(e) and 5.4,
would no longer exceed the amounts determined under both Sections 5.4(a)
and (b). This process is repeated until the sum of the Average ACP and the
Average ADP of all of the Highly Compensated Employees, after all
reductions, would no longer exceed the amount permitted in both Sections
5.4(a) and (b).
Step 2. Next the Committee shall determine the total dollar amount
of reductions to the Participant Elected Contributions, Employer Matching
Contributions and Forfeitures and LESOP Employer Matching Contributions and
Forfeitures as calculated under Step 1 ("Total Reduction Amount").
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Step 3. Once the Total Reduction Amount has been determined, the
Participant Elected Contributions, Employer Matching Contributions and
Forfeitures and LESOP Employer Matching Contributions and Forfeitures of
the Highly Compensated Employee for whom the sum of his Participant Elected
Contributions, Employer Matching Contributions and Forfeitures and LESOP
Employer Matching Contributions and Forfeitures, after any reductions made
in Section 5.2(b) or in Step 3 of Sections 4.2(b) or 5.2(e), is the highest
dollar amount of all Highly Compensated Employees shall be reduced by the
lesser of the amount which either: (i) causes the sum of such Highly
Compensated Employee's Participant Elected Contributions, Employer Matching
Contributions and Forfeitures and LESOP Employer Matching Contributions and
Forfeitures to equal the sum of the Highly Compensated Employee with the
next highest sum of his Participant Elected Contributions, Employer
Matching Contributions and Forfeitures and LESOP Employer Matching
Contributions and Forfeitures or (ii) reduces the Highly Compensated
Employee's Sum of Participant Elected Contributions, Employer Matching
Contributions and Forfeitures and LESOP Employer Matching Contributions and
Forfeitures by the Total Reduction Amount. Then, unless the total amount
of reductions made equals the Total Reduction Amount, the reduction process
shall be repeated by reducing the Participant Elected Contributions,
Employer Matching Contributions and Forfeitures and LESOP Employer Matching
Contributions and Forfeitures allocated with respect thereto by the lesser
of such amount which either: (iii) causes the sum of such highly
Compensated Employees' Participant Elected Contributions, Employer Matching
Contributions and Forfeitures and LESOP Employer Matching Contributions and
Forfeitures allocated with respect to such Participant Elected
Contributions to equal the dollar amount of such contributions of other
Highly Compensated Employees or (iv) causes total reductions to equal the
Total Reduction Amount. This process is repeated with each successive
group of Highly Compensated Employees with the highest sum of Participant
Elected Contributions, Employer Matching Contributions and Forfeitures and
LESOP Employer Matching Contributions and Forfeitures allocated with
respect thereto, after the prior reductions, until the total reductions
made under this Step 3 is equal to the Total Reduction Amount.
The Committee may establish, from time to time, such rules, restrictions
and limitations as it may deem appropriate to insure that the above limitations
are met. If the Committee determines that the reduction or disallowance of
Employer Matching Contributions and Forfeitures and LESOP Employer Matching
Contributions and Forfeitures allocated therewith, Participant elections or
Participant Elected Contributions is necessary or desirable with respect to
Highly Compensated Employees, the Committee may reduce or disallow Employer
Matching Contributions and any Forfeitures and LESOP Employer Matching
Contributions and Forfeitures allocated therewith pursuant to Section 5.3 for
such Highly Compensated Employees, including elections for Participant Elected
Contributions or such contributions, Employer Matching Contributions and any
Forfeitures and LESOP Employer Matching Contributions and Forfeitures allocated
therewith for the Plan Year, as provided in Section 4.1(c) or 5.2(e).
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5.5 Excess Compensation Reduction Elections. Participant Elected
Contributions for any Participant or group of Participants shall not exceed the
maximum amounts permitted under Sections 4.1(c), 5.2(e) and 5.4, as determined
by the Committee in its sole discretion. If any amounts of Employer Matching
Contributions and any Forfeitures or LESOP Employer Matching Contributions and
Forfeitures allocated therewith of any Participant or group of Participants are
determined by the Committee to be in excess of the amounts permitted under
Section 4.1(c) or 5.4, or if any amounts of Participant Elected Contributions
for any Participant or group of Participants are determined by the Committee to
be in excess of the amounts permitted under Section 5.2(e) or 5.4 and if the
Company has not elected to make Special Section 401(k) Employer Contributions
with respect to the Plan Year sufficient to satisfy the requirements of Section
4.1(c), 5.2(e) or 5.4 or if the Committee reasonably expects that Employer
Matching Contributions and any Forfeitures or LESOP Employer Matching
Contributions and Forfeitures allocated therewith or Participant Elected
Contributions will be in excess of the amounts permitted under Section 4.1(c),
5.2(e) or 5.4, the Committee may apply one or both of (a) and (b) below to the
extent the Committee, in its discretion, reasonably estimates to be necessary to
satisfy Section 4.1(c), 5.2(e) or 5.4.
(a) Restrictions on Participant Elected Contributions. The Committee
may reduce prospectively the amount of the Participant Elected
Contributions which may be made by an Employer to the McDESOP Trust on
behalf of an Active Participant or any specified group of Active
Participants who are Highly Compensated Employees by reducing the future
contributions made with respect to such Participant's or Participants'
elections to the extent the Committee reasonably determines it is necessary
to satisfy Section 5.2(e) or 5.4. In making reductions to future
Participant Elected Contributions hereunder the Committee, generally, shall
have no obligation to treat similarly situated Participants who are Highly
Compensated Employees in the same manner and, particularly, shall not be
obligated to reduce Participant's future elections in any particular
systematic manner based upon the amount of Participant Elected
Contributions already made for the Plan Year, the percentage of a
Participant's Considered Compensation which Participant Elected
Contributions constitute, or the amount or percentage of Considered
Compensation which a Participant's effective Participant Elected
Contribution election constitutes.
(b) Staggered and Limited Elections for Highly Compensated Employees.
The Committee may, in accordance with uniform and non-discriminatory rules
it establishes from time to time, require that Active Participants who are
among the Highly Compensated Employees for the Plan Year make elections
with respect to Participant Elected Contributions following and/or
preceding the completion of such elections by Employees who are Non-highly
Compensated Employees and the Committee may (1) limit the amount by which
each Participant who is among the Highly Compensated Employees may elect to
reduce his Considered Compensation, and (2) permit each Employee who is a
Non-highly Compensated Employee to elect to reduce his Considered
Compensation within higher limits than those for Highly Compensated
Employees.
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(c) Estimated Compensation. For the purposes of Section 5.5(a) and
(b), Employers are permitted to determine that Participants are Highly
Compensated Employees or Non-highly Compensated Employees based on the
Participant's Considered Compensation for the immediately preceding Plan
Year or estimated Considered Compensation for the current Plan Year
applicable whenever information regarding actual Considered Compensation
for the Plan Year is not reasonably available at the time the amount of a
contribution hereunder is determined or limited; provided that subsequent
adjustments shall be made, as necessary, to the extent such estimates prove
to be incorrect.
5.6 Deadline for Participant Elected Contributions. Each Employer shall
contribute on behalf of each Active Participant the Participant Elected
Contributions for each Plan Year to the Trustee as soon as administratively
possible as of the earliest date on which such contributions can reasonably be
segregated from the Employer's general assets but not later than the earlier of
(1) 90 days from the date on which such amounts would otherwise have been
payable to the Active Participant in cash or (2) the end of the twelve-month
period immediately following the last day of such Plan Year or by such later
date as may be permitted under applicable law, Treasury Regulations and Rulings
of the Internal Revenue Service.
5.7 Application of the Limitations of Sections 5.2(c), 5.2(e), 5.4 and
9.1. Section 9.1 shall be first applied to contributions under the Program;
secondly, Section 5.2(c) shall be applied to contributions under the Program;
thirdly, Section 5.2(e) shall be applied to contributions under the Program; and
fourthly, Section 4.1(c) shall be applied to contributions under the Program;
and lastly, 5.4 shall be applied to contributions under the Program. Amounts
contributed to the Plan in excess of the amounts permitted under Section 9.1
which are reduced under Sections 5.2(c), 5.2(e), 4.1(c) or 5.4 shall be
disregarded for the calculation of the tests in Sections 5.2(e), 5.2(e), 4.1(c)
or 5.4. Other than with respect to the reductions required under Section 9.1,
amounts reduced in an earlier step in the above sequence shall reduce the
reductions of contributions of the same type required to be made in subsequent
steps.
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ARTICLE VI
LESOP LOAN PROVISIONS
6.1 Power to Borrow. The Board of Directors in its discretion may
authorize the Trustee of the Trust to borrow funds on behalf of the Program for
the purpose of purchasing Company Stock and for making repayment of outstanding
loans, the proceeds of which have been used to purchase Company Stock and for
which the Program is liable. In the event the Trustee's borrowing shall cause a
lending of money or other extension of credit to be made between the Program and
a Disqualified Person or a Party in Interest or, if in connection with such
borrowing, a Disqualified Person or Party in Interest shall guarantee a loan or
other extension of credit to the Program, such loan or other extension of credit
to the Program shall, as an "Exempt Loan," meet the requirements of Section
4975(d)(3) of the Internal Revenue Code and Section 408(b)(3) of ERISA and
regulations thereunder, which include the following:
(a) The loan shall be for a specific term and not payable upon demand
except in the event of default;
(b) The loan is primarily for the benefit of Participants and
Beneficiaries, at a reasonable rate of interest, and under terms at the
time the loan is made which are at least as favorable to the Program as the
terms of a comparable loan resulting from arms-length negotiations between
independent parties;
(c) The proceeds of the loan must be used within a reasonable time
after their receipt to acquire Company Stock or for making repayment of an
outstanding Exempt Loan;
(d) The loan shall be without recourse against the Program and
collateral for the loan shall be limited to the shares of Company Stock
acquired with the proceeds of the loan (or Company Stock into which such
shares have been converted) or used as collateral on an outstanding Exempt
Loan which is being repaid with the proceeds of the loan. No person
entitled to payment under the loan shall have any right to any assets of
the Program other than the collateral, LESOP Contributions (excluding
contributions of Company Stock), earnings on such collateral and
contributions (including but not limited to dividends paid on unallocated
Company Stock held in the LESOP Suspense Account) and dividends paid on
Company Stock (or Company Stock into which such shares have been converted)
acquired with the loan proceeds and held in Participants' LESOP Accounts;
(e) In the event of a default upon the loan, the value of the Program
assets transferred in satisfaction of the loan shall not exceed the amount
of the default and, if the lender is a Party in Interest or Disqualified
Person, shall not exceed an amount of Plan assets equal to the amount of
the payment schedule with respect to which there is a failure to pay; and
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(f) The loan may provide that there shall be no required payments of
principal and/or interest for one or more years and the Company may from
time to time request the Trustee to renegotiate any such loan to change the
payment terms with respect to payments not then due and payable, to extend
the period of payment, or to reduce or eliminate the amount of any payment
or payments of principal and/or interest not then due and payable.
These rules shall be changed by amendment to the Program to the extent
changes in applicable law require or permit.
6.2 Accounting for Loan Proceeds and LESOP Contributions. The Committee
shall establish with respect to each loan a separate LESOP Suspense Account to
record and separately account for: (a) the proceeds of each loan or other
extension of credit authorized under Section 6.1 and any unallocated Company
Stock purchased with proceeds of such a loan or any loan refinanced with such
loan (and any Company Stock into which such purchased shares have been
converted), (b) LESOP Contributions with respect to such loan, (c) any income,
gains or losses allocated to the LESOP Suspense Account with respect to such
loan and (d) any dividends from shares of Company Stock purchased (and Company
Stock into which such purchased shares have been converted) with the proceeds of
the loan (or any loan refinanced with such loan) which have been allocated to
Participants' Accounts and transferred to the Suspense Account. Subject to the
discretion of the Trustee to reinvest proceeds from the sale of Company Stock
pursuant to Section 6.4(b), earnings of the LESOP Suspense Account with respect
to a loan shall be used to repay the loan, and to the extent not so used shall
be released and allocated under Section 6.3 hereof. Assets shall be released
from the LESOP Suspense Account only in accordance with the provisions of
Section 6.3 or to repay a loan or for reinvestment in Company Stock pursuant to
Section 6.4(b), provided, however, proceeds of an Exempt Loan may not be used to
repay any loan which is not an Exempt Loan.
6.3 Release from LESOP Suspense Account.
(a) Loan Repayment Release. Company Stock acquired with the proceeds
of an Exempt Loan, or other loan authorized under Section 6.1 or a loan
refinanced with such Exempt Loan or other loan (and Company Stock into
which such purchased shares have been converted) and held in the LESOP
Suspense Account under Section 6.2 shall be released as of the last
Valuation Date of a Plan Year immediately following the release under
Sections 6.3(b) and 6.3(c) for such Valuation Date for allocation to LESOP
Accounts, of each Active Participant in accordance with the provisions of
Section 6.3(a)(1) below, unless such loan provides for the annual payment
of principal and interest at a cumulative rate that is not less rapid at
any time than level annual payments of such amounts for ten (10) years, and
the interest paid on such loan is determined under standard loan
amortization tables, in which case such Company Stock shall be released in
accordance with Section 6.3(a)(1) or (2) below, as may be selected by the
Board of Directors in its discretion at the time such loan is made;
provided, however, if such loan is renewed, extended or refinanced, and if
the sum of the expired duration of the loan, any renewal period,
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extension period, and the duration of the refinancing exceeds ten (10)
years, determined as of the date of the renewal, extension or refinancing,
Section 6.3(a)(1) shall apply:
(1) Each Plan Year in which any amount remains outstanding under
an Exempt Loan (or other loan authorized under Section 6.1), the
number of shares of Company Stock released from the LESOP Suspense
Account shall equal the difference between (A) the product (rounded
upward to the nearest whole number of shares) of the number of shares
of Company Stock held and accounted for under the LESOP Suspense
Account immediately before the release increased by the number of
shares, if any, previously released from the LESOP Suspense Account in
accordance with Sections 6.3(b) and 6.3(c) for the Plan Year with
respect to such loan, multiplied by a fraction, the numerator of which
is the amount of principal and interest paid on the Exempt Loan (or
other loan authorized under Section 6.1) for the Plan Year and the
denominator of which is the sum of the numerator plus the principal
and interest to be paid for all future Plan Years (without
consideration of possible extensions or renewal periods) reduced by
(B) the number of shares, if any, previously released from the LESOP
Suspense Account in accordance with Sections 6.3(b) and 6.3(c) for the
Plan Year with respect to such loan. If the interest rate under the
Exempt Loan (or other loan authorized under Section 6.1) is variable,
the interest to be paid in future Plan Years shall be computed by
using the interest rate applicable as of the end of the Plan Year of
payment.
(2) For each Plan Year during the duration of an Exempt Loan (or
other loan authorized under Section 6.1), the number of shares of
Company Stock released from the LESOP Suspense Account shall equal the
difference between (A) the product of the number of shares of Company
Stock held and accounted for under the LESOP Suspense Account
immediately before the release increased by the number of shares, if
any, previously released from the LESOP Suspense Account in accordance
with Sections 6.3(b) and 6.3(c) for the Plan Year with respect to such
loan, multiplied by a fraction, the numerator of which is the amount
of principal paid on the Exempt Loan (or other loan authorized under
Section 6.1) for the Plan Year and the denominator of which is the sum
of the numerator plus the principal to be paid for all future years
reduced by (B) the number of shares, if any, previously released from
the LESOP Suspense Account in accordance with Sections 6.3(b) and
6.3(c) for the Plan Year with respect to such loan.
If subsection (1) is applicable and if no amount of principal and
interest is paid with respect to a loan for the Plan Year, or if subsection
(2) is applicable and no amount of principal is paid for the Plan Year,
there shall be no release of shares of Company Stock from the LESOP
Suspense Account maintained with respect to such loan for the Plan Year in
accordance with Section 6.3(a). If an Exempt Loan (or other loan
authorized under Section 6.1) is repaid as a result of a refinancing by
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another Exempt Loan (or other loan authorized under Section 6.1), such
repayment shall not be considered a repayment of principal under Sections
6.3(a)(1) and (2) and the release of shares shall be determined as provided
in Section 6.3(a)(1) and (2), by aggregating principal and interest on the
loan and any refinancings of the loan.
(b) As of each Valuation Date, there shall be released from the LESOP
Suspense Account maintained with respect to each Exempt Loan (or other loan
authorized under Section 6.1) Company Stock in an amount equal to (1) the
number of shares which have a fair market value as of the Valuation Date
equal to the amount of dividends paid to the Trust with respect to shares
of Company Stock which were purchased with the proceeds of such loan or any
loan refinanced with such loan (and Company Stock into which such purchased
shares have been converted) and which have been allocated to Participants'
Accounts, which dividends shall be received by the Trust since the
immediately preceding Valuation Date, credited to Participants' Accounts
and immediately placed in the LESOP Suspense Account to be used to repay
the loan, reduced by (2) the number of any shares contributed or the number
of shares purchased with any cash contributed to the Trust as Special
Dividend Replacement Contributions in accordance with Section 4.2(d) with
respect to the loan.
(c) As of each Valuation Date occurring on or after November 1, 1998,
there shall be released from the LESOP Suspense Account maintained with
respect to each Exempt Loan (or other loan authorized under Section 6.1)
the number of shares of Company Stock which have a fair market value equal
to fifty percent (or such higher percentage as the Board shall from time to
time determine) of the amount of Participant Elected Matched Contributions
contributed to the Plan since the immediately preceding Valuation Date and
which shall be allocated to Participant's Matching Contribution Account as
provided in Section 7.2(a)(2). For purposes of this Section 6.3(c), a
Participant's Participant Elected Matched Contributions to the Program
since the immediately preceding Valuation Date shall be the difference
between the amount of his Participant Elected Contributions as of the
Valuation Date and the amount of his Participant Elected Contributions as
of the immediately preceding Valuation Date up to an amount not to exceed
the maximum percentage of his Considered Compensation specified for such
Participant in Section 4.3(a).
(d) Any release from the LESOP Suspense Account provided for in
Sections 6.3(b) and 6.3(c) for each Valuation Date during a Plan Year
(including the last Valuation Date for a Plan Year) shall be made prior to
the release from the LESOP Suspense Account provided for in Section 6.3(a).
6.4 Installment Payments on Exempt Loan.
(a) Installment Payments. The Trustee shall make payments on an
Exempt Loan (or other loan authorized under Section 6.1) in the amounts and
at such times as such payments are due under the terms of such loan and
such additional payments on such loan as the Trustee determines in its
discretion, provided, however, such payments shall be made solely from the
LESOP Suspense Account, from amounts of
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LESOP Contributions made in cash, from dividends with respect to shares of
Company Stock purchased with a loan or a loan refinanced by such loan (or
Company Stock into which such shares have been converted) which shares have
been released from a LESOP Suspense Account and allocated to Participants'
Accounts and from dividends or other earnings with respect to the LESOP
Suspense Account maintained with respect to such loan.
(b) Sale of Company Stock Held in LESOP Suspense Account. In the
event that any shares of Company Stock acquired with the proceeds of a loan
or a loan refinanced with such loan (and Company Stock into which such
purchased shares have been converted) and held in a LESOP Suspense Account
are sold prior to release from such LESOP Suspense Account, the Trustee, in
its sole discretion, may either (1) apply the proceeds of such sale, or any
portion thereof, toward repayment of such loan or a loan refinanced with
such loan or (2) reinvest the proceeds of such sale, or any portion
thereof, in shares of Company Stock. In exercising its discretion pursuant
to Section 6.4(a), the Trustee shall consider the long-term interests of
both current and future Participants and Beneficiaries in providing
benefits under the Program and Trust.
6.5 Non-Terminable Rights and Protections. Any of the provisions herein
to the contrary notwithstanding, the following protections and rights are non-
terminable, except to the extent required or permitted under applicable law,
Treasury Regulations and Rulings of the Internal Revenue Service, with respect
to proceeds of an Exempt Loan regardless of whether the Program continues to be
maintained as a leveraged ESOP.
(a) Except as provided in this Section 6.5, or except as otherwise
required by applicable law, no security acquired with the proceeds of an
Exempt Loan may be subject to a put, call (other than a call with respect
to Company Stock which is convertible preferred stock which provides for a
reasonable opportunity for a conversion into common stock of the Company
which is Company Stock after such call is exercised), or other option, or
buy-sell or similar arrangement while held by and when distributed from the
Program, whether or not the Program is then an ESOP.
(b) If any Company Stock acquired with the proceeds of an Exempt Loan
(or other loan authorized under Section 6.1) or which is otherwise subject
to this provision pursuant to Section 11.2(k) is not readily tradeable on
an established market, or thereafter ceases to be publicly traded and if
and only if such Company Stock should ever be distributed from the Program,
the distributee shall be given an option exercisable only by the
distributee (or the distributee's donees or a person, including an estate
of a distributee, to whom the security passes by reason of the
Participant's death), to put the security to the Company for a 60 day
period beginning on the date of distribution ("First Put Period") and for
another 60 day period commencing on the first anniversary of the date of
distribution ("Second Put Period"). If such security ceases to be readily
tradeable on an established market (or becomes subject to a trading
limitation) before the end of the Second Put Period, the Company
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shall notify the Participant in writing on or before the 10th day after the
date the security ceases to be readily tradeable on an established market
(or becomes subject to a trading limitation) that the security is subject
to a put option to the Company for any portion of the First Put Period and
the Second Put Period remaining after the date the security ceases to be
readily tradeable on an established market, and such notice shall inform
the distributees of the terms of the put option. The Program shall have
the right, but not the obligation, to assume the rights and obligations of
the Company with respect to the put option at the time the put option is
exercised. A put option hereunder shall be exercised by the holder
notifying the Company in writing that the put option is being exercised.
If during the First Put Period or the Second Put Period, a distributee is
unable to exercise a put option because the Company is prohibited from
honoring it under applicable Federal or State law ("Non-Exercise Period"),
the put option shall be exercisable during an extended put period
("Extended Put Period"). The Extended Put Period shall commence on the
10th day after the Company can honor the put option and notice of this fact
is given to the distributees entitled to an Extended Put Period and shall
extend for a period equal to the number of days in the Non-Exercise Period
but not more than 60 days.
If the Non-Exercise Period was for more than 60 days, a second
Extended Put Period shall occur commencing on the first anniversary of the
first Extended Put Period and shall extend for the lesser of (1) 60 days or
(2) number of days in the Non-Exercise Period reduced by 60 days.
A put option shall be exercisable at a price equal to the value of the
security determined as of the most recent Valuation Date following the
Participant's exercise of the put option. Payment under a put option shall
not be restricted by the provisions of a loan or other arrangement,
including the Company's articles of incorporation, unless so required by
State law. If the distributee exercises a put option with respect to
Company Stock received by the Participant as part of an installment
distribution, the Company shall pay for such Company Stock not later than
thirty days after the exercise of such option. If the distributee
exercises a put option with respect to Company Stock received as part of a
distribution to the Participant within one taxable year of the balance to
the credit of the Participant's vested Net Balance Account, the Company may
pay for such Company Stock not later than the thirtieth day after the
exercise of such option or may elect to pay for such Company Stock with
deferred payments. Payments for shares of Company Stock put to the Company
may be deferred only if adequate security and a reasonable rate of interest
are provided and if periodic payments are made in substantially equal
installments (at least annually) beginning within 30 days after the date
the put option is exercised and extending for no more than 5 years after
the put option is exercised.
The provisions of this Section 6.5 shall not be terminated or amended
except to the extent required or permitted under applicable law, Treasury
Regulations and Rulings of the Internal Revenue Service.
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6.6 Independent Appraisals Required. All valuations of Company Stock
which is not readily tradeable on an established securities market shall be made
as of each Valuation Date by an independent appraiser meeting requirements
similar to the requirements of the regulations prescribed under Section
170(a)(1) of the Internal Revenue Code.
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ARTICLE VII
ALLOCATIONS OF CONTRIBUTIONS
7.1 Profit Sharing Contribution Allocation Formula.
(a) As of the last Valuation Date of each Plan Year, the Profit
Sharing Contributions made pursuant to Section 3.1(b)(1) and the net income
gains and losses of the Profit Sharing Holding Fund as provided in Sections
10.13 and 10.14 shall be allocated to the Profit Sharing Fund Account of
each Active Participant who is a staff or an executive employee or a store
manager, in an amount equal to the product of (1) multiplied by (2) where:
(1) is Profit Sharing Contributions made pursuant to Section
3.1(b)(1) for the Plan Year, and
(2) is a fraction the numerator of which is the Active
Participant's Considered Compensation for the Plan Year and the
denominator of which is the total Considered Compensation of all such
Active Participants for such Plan Year.
(b) As of the last Valuation Date of each Plan Year, the Profit
Sharing Contributions made pursuant to Section 3.1(b)(2) and the net income
gains and losses of the Profit Sharing Holding Fund as provided in Sections
10.13 and 10.14 shall be allocated to the Profit Sharing Account of each
Active Participant who is a certified swing manager, a primary maintenance
employee or crew or other store hourly employee in an amount equal to the
product of (1) multiplied by (2) where:
(1) is Profit Sharing Contributions made pursuant to Section
3.1(b)(2) for the Plan Year, and
(2) is a fraction, the numerator of which is the Active
Participant's Considered Compensation for the Plan Year and the
denominator of which is the total Considered Compensation of all such
Active Participants for such Plan Year.
(c) Allocations to the Profit Sharing Accounts of Active Participants
shall be made as soon as reasonably possible after the end of a Plan Year
after the Company has determined that its final contribution for the Plan
Year has been made to the Profit Sharing Trust. Employer Profit Sharing
Contributions shall be held in the Profit Sharing Holding Fund until
allocated to the Profit Sharing Account of each Active Participant. If
notwithstanding its earlier determination that the final contribution for a
Plan Year has been made, additional Employer Profit Sharing Contributions
are contributed for a Plan Year, such contributions shall be allocated no
later than the last day of the next following Plan Year. Effective the
first day of the calendar month next following the date amounts are
allocated pursuant to this
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Section 7.1, such amounts shall be invested in accordance with the
investment elections applicable to each respective Participant's Profit
Sharing Account as provided in Sections 10.7, 10.8 or 10.9.
7.2 Employer Matching Contributions, LESOP Employer Matching Contributions
Additional Employer Contributions and Special Section 401(k) Employer
Contributions.
(a) Allocation of Employer Matching Contributions and LESOP Employer
Matching Contributions.
(1) For periods before November 1, 1998, as of each Valuation
Date, the Employer Matching Contributions and Forfeitures held in the
McDESOP Holding Fund shall be allocated to the Employer Matching
Contribution Account of each Active Participant in an equal percentage
(not to exceed the Matching Percentage as defined in Section 4.1(a))
of each Participant's Participant Elected Matched Contributions
(excluding Special Participant Elected Matched Contributions) made for
the period since the immediately preceding Valuation Date. For
purposes of Section 7.2(a)(1), a Participant's Participant Elected
Matched Contributions made for the period since the immediately
preceding Valuation Date shall be the difference between the amount of
his Participant Elected Contributions for the Plan Year as of the
Valuation Date and the amount of his Participant Elected Contributions
for the Plan Year as of the immediately preceding Valuation Date up to
an amount not to exceed the percentage of his Considered Compensation
specified for such Participant in Section 4.3(a). Notwithstanding the
foregoing, any amount in the McDESOP Holding Fund as of the last
Valuation Date of the Plan Year (even if such contributions for the
Plan Year are made after such Valuation Date as provided in Section
10.15) after allocations are made pursuant to the preceding sentence,
shall be allocated to Employer Matching Contribution Account of each
Active Participant who is an Employee on such Valuation Date in an
amount equal to such remaining amount multiplied by a fraction the
numerator of which is the amount of Participant Elected Matched
Contributions (excluding Special Participant Elected Matched
Contributions) made on behalf of such Active Participant for the Plan
Year and the denominator of which is the total amount of Participant
Elected Matched Contributions (excluding Special Participant Elected
Matched Contributions) made on behalf of all such Active Participants
for the Plan Year.
(2) For periods beginning on or after November 1, 1998, any
shares of Company Stock released from the LESOP Suspense Account as of
a Valuation Date as LESOP Employer Matching Allocations and
Forfeitures pursuant to Section 6.3(c) shall be allocated to the
Employer Matching Contribution Account of each Active Participant in
an equal percentage (not to exceed fifty percent or such higher
percentage as the Board shall provide pursuant to Section 4.1(b)) of
each such Participant's Participant Elected Matched Contributions
(excluding Special Participant Elected Matched Contributions)
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made for the period since the immediately preceding Valuation Date.
For purposes of this Section 7.2(a)(2), a Participant's Participant
Elected Matched Contributions to the Program since the immediately
preceding Valuation Date shall be the difference between the amount of
his Participant Elected Contributions for the Plan Year as of the
Valuation Date and the amount of his Participant Elected Contributions
for the Plan Year as of the immediately preceding Valuation Date up to
an amount not to exceed the percentage of his Considered Compensation
specified for such Participant in Section 4.3(a).
(b) Allocation of Special Section 401(k) Employer Contributions.
Special Section 401(k) Employer Contributions to the Trust for a Plan Year,
if any, shall be allocated, as of the last Valuation Date of the Plan Year,
in an equal amount to the Employer Matching Contribution Account of each
designated Active Participant. The designated Active Participants shall be
the smallest group of Non-Highly Compensated Employees who made Participant
Elected Contributions for the Plan Year and to whom the dollar amount of
per individual Special Section 401(k) Employer Contributions could be
allocated which would cause the Program to pass whichever of the following
tests it would not otherwise pass: the ADP test in Section 5.2(e), the ACP
test in Section 4.1(c) or the multiple use test in Section 5.4.
(c) Allocation of Additional Employer Contributions. As of the last
Valuation Date of each Plan Year as the Board of Directors may direct,
Additional Employer Contributions shall be allocated to the Employer
Matching Contribution Account of each Active Participant in an amount equal
to the amount of the Additional Employer Contributions for the Plan Year
multiplied by a fraction, the numerator of which is the number of full
calendar months during which the Participant was an Active Participant, and
the denominator of which is the aggregate number of full calendar months
during which all Active Participants were Active Participants.
7.3 LESOP Contributions.
(a) LESOP Contributions. Any shares of Company Stock purchased with
the proceeds of a loan (or Company Stock into which such shares have been
converted) designated by the Board of Directors to be repaid by
Compensation Based LESOP Contributions (or a loan refinanced by such loan)
and released from the LESOP Suspense Accounts maintained with respect to
such loan, any income from such LESOP Suspense Accounts released pursuant
to Sections 6.2 and 6.3, and any Forfeitures from LESOP Accounts for the
Plan Year shall be allocated to each Active Participant's LESOP Account:
(1) as of each Valuation Date, in an amount, if any, with
respect to each loan equal to the amount of dividends paid with
respect to Company Stock (or Company Stock into which such shares have
been converted) which was purchased with the proceeds of such a loan
(or a loan refinanced by such loan) and which has been allocated to
the Participant's Account, which
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dividends, since the immediately preceding Valuation Date, were
credited to Participants' Accounts and immediately transferred to the
LESOP Suspense Account pursuant to Section 10.13(b) to be used to make
payments on the loan; and
(2) as of the last Valuation Date of each Plan Year, in an
amount equal to the number of shares of Company Stock released from
the LESOP Contribution Suspense Account in accordance with Section
6.3(a) multiplied by a fraction the numerator of which is the
Considered Compensation of the Active Participant and the denominator
of which is the total of all Considered Compensation of all Active
Participants.
(b) Additional LESOP Contributions. Additional LESOP Contributions
for a Plan Year which were designated in accordance with Section 4.2(c) as
Per Capita Additional LESOP Contributions (and any Forfeitures therefrom)
shall be allocated as of the last Valuation Date of the Plan Year to the
Additional LESOP Account of each Active Participant in an amount equal to
the total amount of Per Capita Additional LESOP Contributions (and any
Forfeitures therefrom) for the Plan Year divided by the number of Active
Participants. Additional LESOP Contributions for a Plan Year which were
designated in accordance with Section 4.2(c) as Compensation Based
Additional LESOP Contributions (and any Forfeitures therefrom) shall be
allocated as of the last Valuation Date of such Plan Year to the Additional
LESOP Account of each Active Participant in an amount equal to the total
amount of Additional LESOP Contributions (and any Forfeitures therefrom)
multiplied by a fraction the numerator of which is the Considered
Compensation of such Active Participant and the denominator of which is the
total Considered Compensation of all Active Participants for the Plan Year.
Per Capita Additional Employer LESOP Contributions and Compensation Based
Additional Employer LESOP Contributions shall be separately accounted for
in Participants' Additional LESOP Accounts.
(c) Special Dividend Replacement Contributions. Any Special Dividend
Replacement Contributions made to the Program pursuant to Section 4.2(d)
shall be credited to Participant's Accounts to replace dividends which
pursuant to Section 6.3(b) are credited to the LESOP Suspense Account to be
used to repay the Exempt Loan the proceeds of which purchased the shares of
Company Stock with respect to which such dividends were paid.
(d) LESOP Employer Matching Contributions. Any LESOP Employer
Matching Contributions and Forfeitures made to the Program, on or after
November 1, 1998, pursuant to Section 4.1(b) shall be credited to a LESOP
Suspense Account in an amount not to exceed the value of the Company Stock
expected to be released from the LESOP Suspense Account pursuant to Section
6.3(c). Any amount of LESOP Employer Matching Contributions and
Forfeitures for a Plan Year which exceeds the fair market value of the
Company Stock released from the LESOP Suspense Accounts pursuant to Section
6.3(c) shall be allocated to Participant's
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Employer Matching Contribution Accounts pursuant to Section 7.2(a)(2) with
amounts released from the LESOP Suspense Accounts pursuant to Section
6.3(c).
7.4 Participant Elected Contributions. As of each Valuation Date, the
Participant Elected Contributions in the McDESOP Holding Fund made since the
preceding Valuation Date shall be credited to the Participant Elected
Contribution Accounts of the Participants for whom such contributions were made.
7.5 Timing of Allocations. Amounts allocated to or transferred to
Participants' Accounts as of a Valuation Date shall be credited to the Accounts
as of such Valuation Date but after the adjustments are made for Trust income as
provided in Sections 10.12, 10.13 and 10.14. Amounts contributed to the Program
shall be credited as of the date of contribution to the following Accounts and
Funds: Profit Sharing Holding Fund, McDESOP Holding Fund, and Rollover Holding
Account as provided in Section 10.23 and the LESOP Suspense Account as provided
in Section 6.2.
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ARTICLE VIII
ROLLOVERS AND TRUSTEE TRANSFERS
8.1 Participant Rollovers. A Participant may elect through procedures
approved by the Committee to make Rollovers to the Program. If any Rollover
includes property other than money, the Trustee may in its sole discretion
refuse to accept such Rollover or may condition its acceptance of such Rollover
on such terms and conditions as it deems reasonable. Each Participant's
Rollover shall be held in his Rollover Holding Account until the next following
Valuation Date at which time his Rollover Holding Account is transferred to the
Participant's Rollover Account and invested in accordance with his investment
elections provided for in Section 10.8.
8.2 Limited Participation. An Employee who is not eligible to participate
in the Program solely by reason of failing to meet the eligibility requirements
of Section 2.1 and who reasonably expects to become a Participant when such
requirements are met, may be a Participant in the Program solely for the limited
purpose of making a Rollover subject to the same conditions on such Rollovers as
any other Participant.
8.3 Withdrawal of Rollovers. At the election of the Participant, amounts
in his Rollover Account and Rollover Holding Account may be withdrawn as
provided in Section 11.16.
8.4 Rollover Not Forfeitable. A Participant's Rollover Account and
Rollover Holding Account shall be fully vested and non-forfeitable.
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ARTICLE IX
LIMITATIONS ON CONTRIBUTIONS
BECAUSE OF FEDERAL LEGISLATION
9.1 Limitations on Contributions. Any of the provisions herein to the
contrary notwithstanding, a Participant's Annual Additions (as defined in
paragraph (a) below) for any Plan Year shall not exceed his Maximum Annual
Additions (as defined in paragraph (b) below) for the Plan Year. If a
Participant's Annual Additions would but for the provisions of this Section 9.1,
exceed his Maximum Annual Additions (the "Annual Excess"), the Participant's
Annual Additions for the Plan Year shall be reduced under Section 9.1(d) by the
amount necessary to eliminate such Annual Excess. Rollovers shall not be
included as part of a Participant's Annual Additions.
(a) "Annual Additions" of a Participant for a Plan Year means the sum
of the following:
(1) Employer Contributions allocated to his Profit Sharing
Account for the Plan Year;
(2) Participant Elected Contributions, Employer Matching
Contributions, Additional Employer Contributions, Special Section
401(k) Contributions and any Forfeitures and LESOP Employer Matching
Contributions and Forfeitures allocated therewith for the Plan Year
allocated to the Participant;
(3) any amount of LESOP Annual Additions, as determined under
Section 9.1(c), allocated to the Participant;
(4) all other employer contributions and forfeitures (excluding
Forfeitures allocated to the Participant's LESOP Account) for such
Plan Year allocated to the Participant's accounts for such Plan Year
under the Program or any other Related Defined Contribution Plan not
already included under Section 9.1(a)(1), 9.1(a)(2) or 9.1(a)(3);
(5) the amount of nondeductible participant contributions under
the Program or any Related Plan made by the Participant for the Plan
Year; and
(6) solely with respect to the limitation under Section
9.1(b)(2) contributions allocated to any individual medical account as
provided in Code Section 415(l)(1).
(b) "Maximum Annual Additions" of a Participant for a Plan Year means
the lesser of (1) or (2) below:
(1) 25% of the Participant's Considered Compensation, or
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(2) $30,000, adjusted in subsequent years for cost of living
adjustments determined in accordance with regulations prescribed by
the Secretary of Treasury or his delegate pursuant to the provisions
of Section 415(d) of the Internal Revenue Code.
(c) "LESOP Annual Additions" means:
(1) If the Participant is an Active Participant under the LESOP
portion of the Program, and if no more than one-third (1/3) of the
total amounts deductible under Section 404(a)(9) of the Internal
Revenue Code for the Plan Year is allocated to Highly Compensated
Employees, an amount for each Exempt Loan equal to the product of (A)
the total amount of Company and Other Employer LESOP Contributions for
a Plan Year as provided in Sections 4.2(a) and 4.2(b) used to repay
each loan for the Plan Year, reduced, for any Plan Year for which the
loan repaid is an Exempt Loan as defined in Section 6.1, by the amount
used to pay interest on the Exempt Loan, multiplied by (B) a fraction,
the numerator of which is the Participant's Considered Compensation
for the Plan Year, and the denominator of which is the Considered
Compensation of all Active Participants for the Plan Year; provided
that, if a Participant's allocations to his LESOP Account are reduced
in order to reduce the Annual Excess in accordance with the provisions
of this Article IX, the Participant's Considered Compensation for
purposes of both the numerator and the denominator of this fraction
shall be reduced to an amount equal to the Participant's Considered
Compensation, multiplied by a fraction, the numerator of which is the
Participant's allocation to his LESOP Account for the Plan Year after
applying the Annual Excess reduction provisions hereunder and the
denominator of which is such allocation to his LESOP Account for the
Plan Year before applying the Annual Excess reduction provisions
hereunder.
(2) If the Participant is an Active Participant with respect to
the ESOP for the Plan Year and if Section 9.1(c)(1) does not apply, an
amount for each loan equal to the sum of (A) Forfeitures (and earnings
thereon) allocated to the Participant's LESOP Account under the LESOP
portion of the Program, and (B) the total amount of Company and Other
Employer LESOP Contributions for a Plan Year as provided in Sections
4.2(a) and 4.2(b) used to repay each loan for the Plan Year (including
the amount used to repay interest on such loans), multiplied by (i) in
the case of LESOP Contributions, a fraction, the numerator of which is
the Participant's Considered Compensation for the Plan Year and the
denominator of which is the Considered Compensation of all Active
Participants for the Plan Year; provided that, if a Participant's
allocations to his LESOP Account are reduced in order to reduce the
Annual Excess in accordance with the provisions of this Article IX,
the Participant's Considered Compensation for purposes of both the
numerator and the denominator of this fraction shall be reduced to an
amount equal to the Participant's Considered Compensation, multiplied
by a fraction, the
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numerator of which is the Participant's allocation to his LESOP
Account for the Plan Year, after applying the Annual Excess reduction
provisions hereunder and the denominator of which is such allocation
to his LESOP Account for the Plan Year before applying the Annual
Excess reduction provisions hereunder.
(3) The amount of LESOP Contributions deemed to be used to pay
interest on a loan for a Plan Year for purposes of Section
9.1(c)(2)(A) and (B) shall be the amount of LESOP Contributions made
for the Plan Year multiplied by a fraction the numerator of which is
the amount of all interest payments made by the Trust for the Plan
Year with respect to such loan (including any refinancing of such
loan) from all sources and the denominator of which is the amount of
all payments of both principal and interest made by the Trust for the
Plan Year with respect to such loan (including any refinancing of such
loan) from all sources.
(d) Elimination of Annual Excess. If a Participant has an Annual
Excess for a Plan Year, such excess shall not be allocated to the
Participant's Accounts, but shall be eliminated as follows:
(1) If any Annual Excess exists, the Participant's Employer
Contributions allocable to such Participant's Profit Sharing Account
shall be reduced to the extent such reductions reduce the Annual
Excess.
(2) If any Annual Excess remains after application of the
preceding paragraph, the Participant's LESOP Annual Additions (other
than Dividend Replacement Contributions) shall be reduced by reducing
the allocations made as of a given Valuation Date reducing allocations
with respect to Forfeitures before allocations with respect to
Employer Contributions for each loan starting first with the most
recent loan and then with other loans in the reverse of the order in
which made to the extent which reductions reduce the amount of the
Annual Excess.
(3) If any Annual Excess remains after application of the
preceding paragraph, Participant Elected Contributions, and Employer
Matching Contributions and Forfeitures and LESOP Employer Matching
Contributions and Forfeitures shall be reduced by reducing those
contributions most recently credited to the Participant's Accounts
first (followed by the next most recent and so forth) and with respect
to contributions credited as of a Valuation Date reducing
contributions in the order listed, as follows: (A) Participant
Elected Unmatched Contributions and (B) Participant Elected Matched
Contributions and associated Employer Matching Contributions and
Forfeitures or LESOP Employee Matching and Forfeitures Contributions
to the extent such reductions reduce the amount of the Annual Excess.
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(4) If any Annual Excess remains after application of the
preceding paragraph, the Participant's allocations of Additional
Employer Contributions shall be reduced to the extent such reductions
reduce the amount of the Annual Excess.
(5) If any Annual Excess remains after application of the
preceding paragraph, the Participant's allocations of Special Section
401(k) Employer Contributions shall be reduced to the extent such
reductions reduce the amount of the remaining Annual Excess.
(6) If any Annual Excess remains after application of the
preceding paragraph, the Participant's allocations to his Additional
LESOP Account shall be reduced to the extent such reductions reduce
the amount of the Annual Excess.
(7) If any Annual Excess remains after application of the
preceding paragraph, any Special Dividend Replacement Contributions
credited to the Participant's LESOP Account shall be reduced to the
extent such reductions reduce the amount of the remaining Annual
Excess.
Any allocations of Employer Contributions and Forfeitures reduced or
eliminated under this Section 9.1(d), as above provided, shall, subject to
the limits of this Section 9.1, be reallocated to the Accounts of the other
Participants not having such reductions as of the last day of that Plan
Year in the same manner as such Employer Contributions and Forfeitures were
initially allocated under Article VII. The amount of any Participant
Elected Contributions reduced or eliminated under this Section 9.1 which
have been contributed to the Program shall be allocated as (and in lieu of)
Employer Matching Contributions, if before November 1, 1998, or LESOP
Employer Matching Contributions, if on or after November 1, 1998, in the
Plan Year for which or next following the Plan Year for which the reduction
is made. Any Employer Contributions and Forfeitures which, under the
limits of this Section 9.1, cannot be reallocated to the Accounts of other
Participants in the Plan Year shall, subject to the limits of this Section
9.1, be held in an unallocated suspense account and reallocated in a
subsequent Plan Year. If the Program shall be terminated, any amounts held
in a suspense account shall be reallocated to the accounts of all
Participants in accordance with Article VII subject to the limitations of
Section 9.1, and any such amounts which cannot be reallocated to
Participants in the Plan Year of the termination shall be returned to the
Employers in such proportions as shall be determined by the Committee.
(e) Limitation in Case of Employee Participation in Both Defined
Benefit and Defined Contribution Plans. If a Participant participates in
any defined benefit plan of the Employer (or any Related Defined Benefit
Plan), the sum of the Defined Benefit Plan Fraction (as defined in Section
415(e)(2) of the Internal Revenue Code) and the Defined Contribution Plan
Fraction (as defined in Section 415(e)(3) of the Internal Revenue Code) for
such Participant shall not exceed 1.0 (called the
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"Combined Fraction"). If the Combined Fraction of such Participant exceeds
1.0, the Participant's Defined Benefit Plan Fraction shall be reduced by
limiting the Participant's annual benefits payable from the Related Defined
Benefit Plan in which he participates to the extent necessary to reduce the
Combined Fraction of such Participant to 1.0, and to the extent the
Combined Fraction continues to exceed 1.0, by reducing the Participant's
Maximum Annual Additions to the extent necessary to reduce the Combined
Fraction to 1.0. In calculating the Participant's Defined Contribution
Fraction employee contributions as permitted under the Program or a Related
Plan before January 1, 1987, shall be counted as Annual Additions only to
the extent that they were counted under the Program as then in effect.
This Section 9.1(e) shall not apply in Plan Years beginning after December
31, 1999.
9.2 Employer Contribution Reductions. If a Participant's Participant
Elected Contributions or his allocations of Employer Contributions and
Forfeitures are reduced or eliminated under Section 9.1, the amount shall be
provided to the Participant under McEqual, McCAP I or McCAP II, or other non-
qualified plans maintained by the Company, to the extent therein provided.
Amounts of Participant Elected Contributions, Employer Matching Contributions
and LESOP Employer Matching Contributions expected to be within the limitations
under Section 9.1 shall be contributed to the Program and credited hereunder.
Amounts of such contributions expected to be in excess of the limitations under
Section 9.1 shall be tentatively credited to McEqual, McCAP I or McCAP II or
other non-qualified plans maintained by the Company. If it is subsequently
determined that additional amounts of Participant Elected Contributions,
Employer Matching Contributions or LESOP Employer Matching Contributions should
be contributed hereto to attain the limitations under Section 9.1, in order to
put the Participant in the same position he would have been in had such amounts
been contributed contemporaneously to the Program, contributions to the Program
will reflect, to the extent of the limits of Section 9.1, the income, gains and
losses which would have been credited to the Participant's Accounts hereunder
had such amounts been credited hereto instead of being tentatively credited to
McEqual, McCAP I, McCAP II or other non-qualified plans maintained by the
Company. The effect of adjustments to contributions for such income, gains and
losses may be that some Participants hereunder will be credited with Participant
Elected Contributions in excess of the limits stated in Sections 4.3(a) and 5.1
and in amounts which are more than or less than the amounts of such
contributions elected by the Participant, and may have rates of Employer
Matching Contributions or LESOP Employer Matching Contributions which are larger
or smaller than the rate established by the Company for the Plan Year in
accordance with Section 4.1. In determining the amounts to be credited to a
Participant's accounts during a Plan Year under McEqual, McCAP I, McCAP II and
other non-qualified plans maintained by the Company, the Committee may make
assumptions based upon reasonable estimates of the amount of the Participant's
Considered Compensation, his Participant Elected Contributions, levels of
Employer Contributions hereunder and other relevant factors and, as necessary,
make subsequent adjustments to the extent the estimates prove to be incorrect.
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ARTICLE X
TRUSTEE AND TRUST FUNDS
10.1 Trust Agreements. The Company and the Trustee have entered into one
or more Trust Agreements which provide for the investment of the assets of the
Program and administration of the Trust Funds. The Trust Agreements, as from
time to time amended, shall continue in force and shall be deemed to form a part
of the Program, and any and all rights or benefits which may accrue to any
person under the Program shall be subject to all the terms and provisions of the
Trust Agreement.
10.2 Trustee's Duties. The powers, duties and responsibilities of the
Trustee of the Trust shall be as stated in the respective Trust Agreements and
as may be delegated to, and accepted by, the Trustee from the Committee and
Board of Directors. Nothing contained in the Program either expressly or by
implication shall be deemed to impose any additional powers, duties or
responsibilities upon the Trustee. All Employer Contributions, Participant
Contributions, Rollovers and Participant Elected Contributions shall be paid
into a Trust and all withdrawals permitted and benefits payable under the
Program shall be paid from the Trust.
10.3 Trust Expenses. Except to the extent paid by an Employer, all
clerical, legal and other expenses of the Program and the Trust and the
Trustee's fees shall be paid by the Trust and shall be proportionately charged
to the Profit Sharing, McDESOP, Leveraged ESOP, Stock Sharing and other parts of
the Trust Fund except to the extent directly attributable to a specific portion
of a Trust Fund in which case it shall be directly charged to that portion of
the Trust Fund.
10.4 Trust Entity. The Trust under this Program from its inception shall
be a separate entity aside and apart from the Employers or their assets. The
Trusts and the corpus and income thereof, shall not be subject to the rights or
claims of any creditor of any Employer.
10.5 Right of the Employers to Trust Assets. Subject to the provisions of
Section 9.1, the Employers shall have no right or claims of any nature in or to
the Trust Fund except the right to require the Trustee to hold, use, apply, and
pay such assets in its possession in accordance with the Program for the
exclusive benefit of the Participants or their Beneficiaries and for defraying
the reasonable expenses of administering the Program and Trust, provided that:
(a) if, and to the extent that, a deduction for Employer
contributions under Section 404 of the Internal Revenue Code is disallowed,
employer contributions conditioned on deductibility shall be returned to
the appropriate Employer within one year after the disallowance of the
deduction; and
(b) if, and to the extent that, an Employer contribution is made
through mistake of fact, such employer contribution shall be returned to
the appropriate
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Employer within one year of the payment of the contribution and any
Participant Elected Contributions shall be distributed to the Participants
with respect to which such contributions were made.
Notwithstanding any other provision of this Section 10.5, if, upon
application of (a) or (b) above, Employer contributions would be returned to an
Employer, then the Employer shall distribute the value of any portion of such
contributions to the appropriate Participants.
All Employer Contributions are conditioned on their being deductible under
Section 404 of the Internal Revenue Code.
10.6 Trust Investment Funds. Excluding those assets held in the Holding
Funds, as provided in Section 10.23, assets of the Trust Fund shall be held as
follows:
(a) Profit Sharing Plan. The assets held in Participant's Profit
Sharing Accounts and any amounts held in Participant's Diversification
Accounts shall be held in the following Investment Funds:
(1) The Diversified Stock Fund invested in common stocks, and
securities convertible into common stocks, of corporations other than
McDonald's Corporation or its Domestic or Foreign Affiliates, and in
any other securities which represent an equity investment, provided,
however, that the Diversified Stock Fund may be invested in pooled or
common trust funds or open-end investment companies without regard to
whether assets of such funds or investment companies are invested in
securities of McDonald's Corporation or its Domestic or Foreign
Affiliates;
(2) The Profit Sharing McDonald's Common Stock Fund invested in
common stock of McDonald's Corporation;
(3) The Stable Value Fund or such other fund designated by the
Committee which shall be invested (i) in contracts issued by an
insurance or other company (or companies), (ii) directly in debt
securities that have fixed obligations to pay interest and principal
on specified dates or which have similar investment characteristics
(which may have equity features triggered by performance, the passage
of time, or similar characteristics or may be securities which are
derivatives of such securities) ("Fixed Income Obligations") or (iii)
in pooled or common trust funds, regulated investment companies, or
open-ended investment companies generally invested in Fixed Income
Obligations without regard to whether assets of such common trust
funds, regulated investment companies, or open-ended investment
companies are invested in securities of McDonald's Corporation or its
Domestic or Foreign Affiliates. The contracts issued by insurance or
other companies held by the Stable Value Fund (iv) may be investment
contracts or (v) may be investment management agreements which may
provide separate book value guarantees pursuant to which the insurance
or other company guarantees (A)
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the book value of a pool or segregated group of fixed income
obligations held in the Stable Value Fund and (B) specified amounts of
income under various conditions as provided in such agreement ((iv)
and (v) collectively shall be referred to as "Assets Subject to
Guarantee"). With respect to Assets Subject to Guarantee, the Program
shall use book value accounting and Participants' Accounts shall
contain and shall be entitled only to their pro rata share of book
value and guaranteed income which for all purposes hereunder will be
treated as fair market value unless the Committee determines that the
guarantees no longer apply, a market value distribution has occurred
under the contract, or there has been a default on the guarantee.
(4) The Blended Stock Bond Fund invested in domestic common
stocks, debt securities that have a fixed obligation to pay interest
and principal on specified dates or which have substantially similar
investment characteristics, international common stocks, and
securities convertible into domestic common stocks of corporations
other than McDonald's Corporation or its Domestic or Foreign
Affiliates, and in any other securities which represent an equity
investment, provided, however, that the Blended Stock Bond Fund may be
invested in pooled or common trust funds or open-end investment
companies without regard to whether assets of such funds or investment
companies are invested in securities of McDonald's Corporation or its
Domestic or Foreign Affiliates; and
(5) The Money Market Fund invested in United States Government
debt securities which mature or become payable within two years and
which are the direct obligation of or guaranteed by the United States
Government, including bonds, notes, certificates of indebtedness, and
treasury bills; in commercial paper rated according with such
guidelines as the Board of Directors may from time to time approve;
and in certificates of deposit in those banks designated in the
agreement with the Investment Manager or, if there is no such
agreement or if the agreement fails to designate such banks, in those
banks designated under the McDonald's Corporation Investment Policy.
In order to maintain appropriate or adequate liquidity and pending or
pursuant to investment directions from an Investment Manager, the Trustee
of the Trust is authorized to hold such portions as it deems necessary of
the Diversified Stock Fund, the Profit Sharing McDonald's Common Stock
Fund, the Stable Value Fund, the Money Market Fund, and the Blended Stock
Bond Fund in cash, a short-term investment fund (a "STIF Fund"), or liquid
short-term cash equivalent investments or securities (including, but not
limited to United States government treasury bills, commercial paper, and
savings accounts and certificates of deposit, including those of the
Trustee or custodian, if the Trustee or custodian is a bank, and common or
commingled trust funds invested in such securities, including those of the
Trustee or custodian).
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(b) LESOP. The assets of the LESOP portion of the Trust (other than
any amounts which have been transferred to a Participant's Diversification
Account pursuant to Section 10.10) shall be invested in Company Stock which
is common stock of McDonald's Corporation held in the McDESOP McDonald's
Common Stock Fund, provided that it shall at all times be possible to
determine the number of such shares of Company Stock which are allocated to
a Participant's LESOP Accounts.
In order to maintain adequate liquidity, pending the investment of
funds, or the use of funds to make payments on a loan, or for funds which
could not be appropriately invested either because of the small amount
involved or the short time duration for which the investment is to be made,
the Trustee is authorized to hold portions of the LESOP Accounts and LESOP
Suspense Accounts in cash, a STIF Fund or liquid short-term cash equivalent
investments or securities (including, but not limited to United States
government treasury bills, commercial paper, and savings accounts and
certificates of deposit, including those of the Trustee or custodian, if
the Trustee or custodian is a bank, and common or commingled trust funds
invested in such securities, including those of the Trustee or custodian).
(c) (1) McDESOP. The assets of the McDESOP portion of the McDESOP
Trust (other than any amounts which have been transferred to a
Participant's Diversification Account pursuant to Section 10.10) shall
be held in the McDESOP McDonald's Common Stock Fund invested in
Company Stock which is common stock of McDonald's Corporation.
(2) McDESOP Diversification. Participant Elected Contributions
which a Participant has elected to diversify pursuant to Section 10.10
shall be credited to the Participant's McDESOP Contribution
Diversification Account and invested in the Profit Sharing Trust
Investment Funds listed in Section 10.6(a) as provided in Section
10.11 as of the first business day of the calendar month following the
later of the month in which (1) the Diversification Election was made
for amounts diversified in accordance with Sections 10.10 and 10.11
and (2) the Considered Compensation (from which such Participant
Elected Contributions were taken) was paid or as of such earlier date
as the Committee shall provide. For periods before January 1, 1998,
Participant Elected Contributions and Employer Matching Contributions
which the Participant has elected to diversify pursuant to Section
10.10 shall be invested in the McDESOP McDonald's Common Stock Fund
until the Diversification Election is implemented pursuant to Section
10.11. In the case of contributions made on or after January 1, 1998
which are subject to a Diversification Election pursuant to Section
10.10, the Diversification Election shall be implemented as of the
next date on which Investment Elections are implemented in accordance
with Section 10.8 or 10.9(a), as applicable, after the date such
contributions are made to the Program.
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10.7 Investment of Participant's Employer Profit Sharing Contributions. The
provisions of Sections 10.7(a) and 10.7(b) shall apply to Employer Profit
Sharing Contributions as follows:
(a) Each Participant's share of Employer Profit Sharing Contributions
and the earnings thereon shall be invested in the Profit Sharing McDonald's
Common Stock Fund in an amount equal to the Participant's share of Employer
Profit Sharing Contributions multiplied by the Automatic McDonald's Stock
Proportion. The "Automatic McDonald's Stock Proportion" is a percentage, if
any, announced by the Board of Directors for the Plan Year. The remainder
of the Participant's Employer Profit Sharing Contributions and the earnings
thereon for the Plan Year shall be invested in accordance with Section 10.8
or 10.9, as applicable; provided that if in accordance with a Participant's
elections pursuant to Section 10.8, a percentage of his Employer Profit
Sharing Contributions and the earnings thereon for the Plan Year greater
than the Automatic McDonald's Stock Proportion would be invested in the
Profit Sharing McDonald's Common Stock Fund, the Participant's Employer
Profit Sharing Contributions and the earnings thereon with respect to the
Profit Sharing Plan for the Plan Year shall be invested in accordance with
the Participant's elections pursuant to Section 10.8.
(b) A Participant may elect, at such time and in such manner as the
Committee shall designate for each Plan Year not to have the Automatic
McDonald's Stock Proportion of his Employer Profit Sharing Contributions
and Forfeitures and the earnings thereon with respect to the Profit Sharing
Plan for the Plan Year invested in the Profit Sharing McDonald's Common
Stock Fund. If a Participant elects not to have the Automatic McDonald's
Stock Proportion of his Employer Profit Sharing Contributions and
Forfeitures with respect to the Profit Sharing Plan for the Plan Year
invested in the Profit Sharing McDonald's Common Stock Fund, his Employer
Profit Sharing Contributions, such Forfeitures and the earnings thereon
shall be invested in accordance with Sections 10.8 or 10.9, as applicable.
10.8 Investment Election with Regard to a Participant's Profit Sharing,
Diversification, Investment Savings and Rollover Accounts. The following two
paragraphs are effective before January 1, 1998. Four times each Plan Year (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 prescribe, 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 Stable
Value Fund, the Blended Stock Bond 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 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.
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If a Participant makes a LESOP Diversification Election, McDESOP Future
Contribution 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 from time to
time thereafter 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.
Effective January 1, 1998 the preceding two paragraphs shall be replaced
with the following:
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 Stable
Value Fund, the Blended Stock Bond 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 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 LESOP 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.
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10.9 Failure to Make an Investment Election.
(a) Profit Sharing Accounts. If a Participant fails to make an
investment election for his Profit Sharing Account and his Diversification
Account during any Plan Year, then such Accounts shall be invested in
accordance with such Participant's immediately preceding investment
election made with respect to such Accounts in accordance with Section
10.8; provided that any amounts invested in the 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 Section 10.8 is
effective. If a Participant has never made an investment election with
respect to such Accounts, then the amount, if any, invested in the 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 and the
remainder of the Participant's Profit Sharing Account, the Participant's
LESOP Diversification Account and the McDESOP Diversification Account shall
be invested one hundred percent (100%) in the Money Market Fund.
(b) Investment Savings Fund Account and Rollover Account. If a
Participant fails to make an investment election for his Investment Savings
Account and/or his Rollover Account during any Plan Year, then such
Account(s) shall be invested in accordance with such Participant's
immediately preceding investment election made with respect to such
Account(s). If a Participant has never made an investment election with
respect to such Account(s) then such Account(s) shall be invested 100
percent (100%) in the Money Market Fund.
10.10 Diversification of McDESOP and LESOP Contributions and Accounts.
(a) Age Diversification of LESOP Account Balances.
(1) Diversification Elections by Qualified Participant.
Commencing with the first day of the month after a Participant becomes
a Qualified Participant and during each Annual Election Period and, in
addition, at the same times and subject to the same administrative
requirements as apply to Investment Elections under Section 10.8, each
Qualified Participant shall be permitted to make a diversification
election with respect to his Qualified Account ("LESOP Diversification
Election").
(2) Definitions. As used in Section 10.10(a), the following
terms shall have the meanings indicated:
(A) "Qualified Participant" means a Participant (including
a Participant who has had a Termination of Employment) who has
attained age 55 or the Beneficiary of a deceased Participant who
would have attained the age of 55 if he were alive.
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(B) "Annual Election Period" means the 90 day period after
the last day of each Plan Year commencing with the Plan Year in
which the Participant first becomes a Qualified Participant.
(C) "Qualified Account" means a Qualified Participant's
LESOP Accounts.
(D) "Maximum Diversification Percentage" means:
(i) In the case of a Qualified Participant who has
not attained age 60 and who has not had a Termination of
Employment, 25%;
(ii) In the case of a Qualified Participant who has
attained age 60 and has not had a Termination of Employment,
50%; and
(iii) In the case of a Qualified Participant who has
had a Termination of Employment, 100%.
(E) "Leveraged Diversification Election" means an election
by a Qualified Participant to transfer to his LESOP
Diversification Account, an amount not exceeding the difference
between
(i) the Maximum Diversification Percentage (or
lesser percentages in five percent (5%) increments) of the
sum of (a) the value of Company Stock credited to the
Participant's Qualified Account plus (b) the amounts
previously transferred under this Section 10.10 from such
Qualified Account to the Participant's Diversification
Accounts ("Prior Diversification Transfers"), reduced by
(ii) the Participant's Prior Diversification
Transfers.
If a Participant has made a LESOP Diversification
Election and has not made a subsequent LESOP Diversification
Election with a lower percentage election than his prior
LESOP Diversification Election, a percentage of the value of
all future allocations to the Participant's Qualified
Account equal to the percentage of the Participant's LESOP
Diversification Election shall be transferred to the
Participant's LESOP Diversification Account. If a
Participant who has made a LESOP Diversification Election
makes a new LESOP Diversification Election at a percentage
(including to zero) lower than the percentage of the earlier
LESOP Diversification Election, no portion of allocations to
the Participant's Qualified Account shall
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be transferred to the Diversification Account until the
product of the new lower percentage elected multiplied by
the sum of the Qualified Account plus Prior Diversification
Transfers exceeds the Prior Diversification Transfers, at
which time such excess, and thereafter, a percentage of all
future allocations to the Participant's Qualified Account
equal to the percentage of the Participant's LESOP
Diversification Election shall be transferred to
Participant's Diversification Account. No amount transferred
to a Participant's Diversification Account may be
transferred back to the Participant's LESOP Account.
(3) Investment of Amounts Subject to LESOP Diversification
Election. The amount subject to a Participant's LESOP Diversification
Election shall be transferred to the Participant's LESOP
Diversification Account under the Program and thereafter shall be
invested in accordance with the Participant's elections pursuant to
Section 10.8 or 10.9(a) but determined without regard to Section 10.7
provided that such transfer shall occur no later than 90 days after
the date on which the Participant becomes a Qualified Participant,
attains age 60 or the end of each Annual Election Period during which
the Participant makes a LESOP Diversification Election or at such
earlier dates as the Committee, pursuant to Section 10.11 shall
permit.
(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 affect 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 Contribution 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
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Contributions and the earnings credited thereon in the Participant's
McDESOP 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 such Participant's 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.
(c) Age Diversification of McDESOP Accounts. Beginning with the first
day of the month following the month in which a Participant attains 50
years of age,
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the Participant (or the Beneficiary of a Participant who would have
attained age 50 if he had not died) may elect ("McDESOP Diversification
Election") to diversify by transferring to his McDESOP Diversification
Account up to 100 percent (100%) (in increments of five percent (5%)) of
his:
(1) Participant Elected Contribution Account; and
(2) Employer Matching Contribution Account.
The diversification amount to be transferred from a Participant's
Participant Elected Contribution Account shall be an amount equal to the
difference between (A) the diversification percentage elected by the
Participant multiplied by the sum of (i) the Participant's Participant
Elected Contribution Account, and (ii) the amounts previously transferred
from the Participant's Participant Elected Contribution Account to the
Participant's McDESOP Diversification Account ("Prior Elected Contribution
Transfers") reduced by (B) the amount of the Participant's Prior Elected
Contribution Transfers. The Diversification Amount to be transferred from
a Participant's Employer Matching Contribution Accounts shall be an amount
equal to the difference between (A) the diversification percentage elected
by the Participant multiplied by the sum of (i) the Participant's Employer
Matching Contribution Accounts and (ii) the amounts previously transferred
from the Participant's Employer Matching Contribution Accounts to the
Participant's McDESOP Diversification Account ("Prior Matching Contribution
Transfers") reduced by (B) the amount of the Participant's Prior Matching
Contribution Transfers. If a Participant has made a Diversification
Election and has not made a subsequent Diversification Election with a
lower percentage, a percentage of the value of all future allocations to
the Participant's Participant Elected Contribution Account and Employer
Matching Contribution Account respectively equal to the percentage of the
Participant's Diversification Election shall be transferred to the
Participant's McDESOP Diversification Account.
If a Participant who has made a McDESOP Diversification Election,
makes a new McDESOP Diversification Election at a percentage (including
zero) lower than the percentage of the earlier McDESOP Diversification
Election, no portion of the allocations to the Participant's Participant
Elected Contribution Account and Employer Matching Contribution Accounts,
respectively, shall be transferred to the McDESOP Diversification Account
until the respective products of the new lower percentage elected
multiplied by (A) the sum of the Participant Elected Contribution Account
plus Prior Elected Contribution Transfers and (B) the sum of the Employer
Matching Contribution Accounts plus Prior Matching Contribution Transfers
exceed (A) the Prior Elected Contribution Transfers and (B) Prior Matching
Contribution Transfers, at which time each such respective excess, and
thereafter, a percentage of all future allocations respectively to the
Participant's Participant Elected Contribution Account and Employer
Matching Contribution Accounts equal to the percentage of the Participant's
McDESOP Diversification Election shall be transferred to the Participant's
McDESOP Diversification Account. A McDESOP Diversification Election shall
be made at the same time and with the same effective dates and such
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other rules as investment elections under Section 10.11. Once a
Participant has made a McDESOP Diversification Election of a given
percentage it will continue in effect until he makes a new election. A
Participant can elect to reduce the percentage of his McDESOP
Diversification Election to a larger or a lesser percentage (including to
zero); however, amounts already credited to his McDESOP Diversification
Account shall not be transferred back to his Participant Elected
Contribution Account and his Employer Matching Contribution Accounts.
(d) Distributions from Diversification Accounts. The provisions of
the Program shall apply to amounts subject to a Diversification Election
under Section 10.10 in the same manner as to the Participant Elected
Contribution Accounts, Employer Matching Contribution Accounts or LESOP
Accounts, respectively, except that the balance in a Participant's McDESOP
Diversification Account and LESOP Diversification Account and LESOP
Diversification Account shall be invested in the Investment Funds in the
same manner as the Participant elects to invest his Profit Sharing Account
pursuant to Section 10.8 or as provided in Section 10.9(a), whichever is
applicable, but determined without regard to Section 10.7. A Participant
to whom a distribution is payable under Article X shall have the right to
elect to receive any distributions made from his McDESOP Diversification
Account and LESOP Diversification Account in McDonald's common stock.
10.11 Effective Date of Participant's Investment and Diversification
Elections. Participant's investment elections, pursuant to Section 10.8, or
Diversification Elections, pursuant to Section 10.10, submitted by the date
designated by the Committee shall be made effective as of the first day of the
next calendar month (or as soon thereafter as is administratively convenient) or
at such more frequent times as the Committee shall determine. Diversification
Elections with respect to future contributions made in accordance with Section
10.10 shall be implemented the first day of the calendar month after the month
in which such contributions are made to the Program (or as soon thereafter as is
administratively convenient) or at such more frequent times as the Committee
shall determine. This Section 10.11 is intended to give the Committee the
authority to implement Participants' Investment Elections and Diversification
Elections as soon as possible with due regard for requiring advance notice of
elections. The Committee may use such methods as making transfers between
Investment Funds based upon estimates followed by corrective adjustments made
when exact data becomes available and, in the event of inability to effectuate
elections because of data processing, communications or other systems
breakdowns, the Committee may effectuate such elections as soon as is reasonable
under the existing circumstances.
10.12 Trust Income. As of the close of business on each Valuation Date,
the Trustee shall determine the fair market value of the Trust Fund and of each
separate Investment Fund. The fair market value of Assets Subject to Guarantee,
as defined in Section 10.6(a)(3), shall be book value for all purposes hereunder
unless the Committee determines that the book value guarantees no longer apply,
a market value distribution has occurred under the contract or there has been a
default on the guarantee. The fair market value of the Trust Fund and the
Investment Funds shall be recorded and communicated in writing to the
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Committee by the Trustee. The Trustee's determination of fair market value
shall be final and conclusive on all persons.
10.13 Adjustment of Participant's Account Balances and the LESOP Suspense
Accounts. As of each Valuation Date, the Committee shall determine the
adjustment required to be made to the value of each Participant's Accounts and
the LESOP Suspense Accounts to make the total of the portion of all such Account
balances which are invested in an Investment Fund equal to the total value of
that Investment Fund.
(a) Valuation of the Portion of Profit Sharing Accounts, Investment
Savings Accounts, Rollover Accounts, Diversification Accounts, Participant
Elected Contribution Accounts and Employer Matching Contribution Accounts
invested in an Investment Fund. The value of the portion of each of a
Participant's Accounts invested in an Investment Fund as of a Valuation
Date shall be equal to the product for each Investment Fund of (1)
multiplied by (2) where:
(1) is the value of an Investment Fund as of the Valuation Date,
and
(2) is a fraction, the numerator of which is the value of the
portion of each of a Participant's Accounts invested in such
Investment Fund as of the immediately preceding Valuation Date reduced
by any distributions therefrom on or since such Valuation Date and the
denominator of which is the value of such Investment Fund as of the
immediately preceding Valuation Date reduced by any distributions
therefrom since such Valuation Date.
(b) Valuation of the Portion of the LESOP Suspense Account and of
Participants' LESOP Accounts and Stock Sharing Accounts invested in Company
Stock. Each Valuation Date, Participants' LESOP Accounts and Stock Sharing
Accounts and the LESOP Suspense Accounts shall be credited with the
dividends and other distributions and earnings of shares of Company Stock
credited thereto; provided that any dividends credited to Participants'
LESOP Accounts which are to be used to repay an Exempt Loan, pursuant to
Section 6.3(b), shall immediately after being so credited to Participants'
Accounts be transferred to the LESOP Suspense Account and held there in a
separate account until used to repay an Exempt Loan and further provided
that the amount of such dividends transferred to the LESOP Suspense Account
for a Plan Year shall not exceed the fair market value of the Company Stock
(determined on the Valuation Date allocated) allocated to Participants'
LESOP Accounts pursuant to Section 6.3(b) for the Plan Year. Earnings on
Forfeitures from the LESOP portion of the Program shall be allocated to
Participants' LESOP Accounts as of each Valuation Date in the proportion
that dividends and other distributions and earnings are allocated in
accordance with the preceding sentence. The income under Section 16.6 (d)
shall be allocated to Participant's Stock Sharing Accounts in the
proportion that each Participant's Stock Sharing Account balance is to the
total of all Participant's Stock Sharing Account balances. Notwithstanding
the foregoing, the records of such accounts may be maintained in cash
provided that it is at all times possible to determine the number and the
basis of the shares of Company
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Stock credited to a Participant's Accounts in the LESOP Accounts and the
Stock Sharing Plan and to the LESOP Suspense Account.
The Accounts of Participants as adjusted according to Section 10.13 shall
determine the value of the interest of each Participant in the Trust for all
purposes subject to the crediting of any contributions as provided in Article
VII until a subsequent determination is made by the Committee.
10.14 Allocation of Income to Holding Funds.
(a) Profit Sharing Holding Fund. Any net income and gains (after
reduction by losses and by expenses not paid by an Employer) of the Profit
Sharing Holding Fund for a Plan Year shall be allocated to each
Participant's Profit Sharing Accounts in the proportion that the amount of
Profit Sharing Contributions allocated to each Participant in accordance
with Section 7.1 bears to the total amount of Profit Sharing Contributions
allocated under Section 7.1 to all Participants.
(b) McDESOP Holding Fund. Any net income and gains (after reduction
by losses and by expenses not paid by an Employer) of the McDESOP Holding
Fund for a Plan Year shall be credited to Participants' Elected
Contribution Accounts as earnings pursuant to the fraction in Section
10.13(a)(2).
(c) Rollover Holding Fund. Any net income and gains (after reduction
by losses and by expenses not paid by an Employer) of the Rollover Holding
Fund for a Plan Year shall be allocated to Participant's Profit Sharing
Accounts pursuant to the fraction in Section 10.13(a)(2).
10.15 Separate Accounting in the Trust Fund. The Committee shall create
and maintain separate accounts for each Participant as described in Section 1.1.
Every adjustment to a Participant's Accounts shall be considered as having been
made on the relevant Valuation Date, regardless of the date of actual entry or
receipt by the Trustee of Employer Contributions and Participant Elected
Contributions for a Plan Year.
10.16 Trust Investment. The assets of a Trust Fund may at any one time be
invested up to 100% exclusively in Company Stock subject to the provisions of
the Trust.
10.17 Separate Accounting for LESOP Suspense Account. The Committee shall
create and maintain a separate account, called a LESOP Suspense Account, to
record and to separately account for (a) each loan or other extension of credit
made pursuant to Section 6.1, (b) all LESOP Contributions to the Program to
repay each such loan or extension of credit, (c) all dividends transferred to
the LESOP Suspense Account to repay an Exempt Loan pursuant to Section 6.3(b),
(d) net income, gains or losses charged to such LESOP Contributions and LESOP
Suspense Account under Sections 10.13 and 10.6(b), and (e) all payments made on
such loan or other extension of credit until such loan or other extension of
credit is repaid, in accordance with Sections 6.1, 6.2 and 6.3.
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10.18 Correction of Error. In the event of any error, including but not
limited to an error in the adjustment of a Participant's Accounts or an error in
including or excluding persons as Participants, the Committee, in its sole
discretion, may correct such error by either crediting or charging the
adjustment required, or such adjustment as the Committee in its sole discretion
shall determine to be equitable, to make such correction to or against
Forfeitures or to or against income and expenses of the Trust for the Plan Year
in which the correction is made, or if an Employer contributes an amount to
correct any such error, from such amount.
Corrections of Participant Elected Contributions and Employer Matching
Contributions which an individual should have been permitted to make, but
because of an error in Program administration was not permitted to make, shall
be made as provided in the preceding sentence by crediting the individual's
Participant Elected Contribution Account and Employer Matching Contribution
Account respectively with (a) Participant Elected Contributions equal to the
average percentage of compensation which was contributed for the preceding Plan
Year as such contributions by highly compensated employees or non-highly
compensated employees (whichever the individual is classified as) and (b) the
amount of Employer Matching Contributions and Forfeitures which would have been
credited to such individual's Employer Matching Contribution Account with
respect to such Employer Matching Contributions. After the preceding correction
is made, the Participant's Participant Elected Contribution Account and Employer
Matching Contribution Account shall be credited with a rate of return which is
equal to the rate of return the Participant's accounts would have received had
the accounts been invested in the manner in which such accounts were invested at
the time the Participant was first given the opportunity to make Participant
Elected Contributions.
Effective July 1, 1998, notwithstanding the foregoing, an Employee who
fails, upon request, to provide the Committee information, as requested by the
Committee, concerning his service as a Leased Employee and who, as a consequence
does not enter the Program as early as he could have if such service had been
taken into account shall not be deemed to have suffered an error in Program
administration and shall not receive corrected Participant Elected
Contributions, Employer Matching Contributions or LESOP Employer Matching
Contributions for periods before the earlier of such Employee's Entry Date
determined without regard to such Leased Employee service or such Employee's
Entry Date including such Leased Employee service from the date the Employee
provides the Committee with such information concerning such service as the
Committee requests. Profit Sharing Contributions and allocations from the
leveraged ESOP Suspense Account pursuant to Section 6.3(a) which such a
Participant would have received if his Leased Employee service had been
considered from his date of hire shall be credited to the former Leased
Employees' Accounts as of the first Valuation Date next following the Leased
Employee's actual Entry Date.
Except as provided in this Section, the Accounts of other Participants
shall not be readjusted on account of such error.
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10.19 Statement of Accounts. As soon as practicable after the last day of
each Plan Year, the Committee shall deliver to each Participant a statement of
his Net Balance Account.
10.20 Purchase or Sale of Company Stock. The Trustee, on behalf of the
Program, may (a) sell Company Stock to a Party in Interest or a Disqualified
Person if such sale is for at least the fair market value of the Company Stock
and (b) purchase Company Stock from a Party in Interest or a Disqualified
Person, if such purchase is for no more than the fair market value of the
Company Stock and (c) no commission is charged with respect to such sale or
acquisition; provided that such sale or acquisition is for the price of the
Company Stock prevailing on an established securities market, if the Company
Stock is readily tradeable on such market and determined by an independent
appraiser, if the Company Stock is not readily tradeable on an established
securities market.
10.21 Shareholder Rights in Company Stock. A fundamental purpose of the
Program and the Trust is to obtain for the Company, its shareholders,
Participants and future Participants the benefits resulting from Participants
having the right to vote shares of Company Stock and to determine whether shares
of Company Stock should be sold or retained in response to a public or private
tender offer. A key purpose of the Program is to encourage Participants to feel
and to act like owners of the Company by assuring them the opportunity to share
the economic benefit of ownership of Company Stock and the opportunity to direct
the manner in which shares held by the Program are voted at all shareholder
meetings and to determine whether shares of Company Stock should be sold or
retained in response to a public or private tender offer. The broad employee
participation in the Program at all levels of the Company and limitations on
maximum benefits to Participants who are officers, shareholders or highly
compensated employees assure that such voting and decisions by Participants
represent the overall knowledge and experience of a broad representative cross-
section of employees of the Company. It, therefore, is anticipated that the
votes and other decisions of Participants will be fairly representative of both
present and future Participants' interests. Accordingly it has been concluded
that Participants are best able to determine questions concerning voting and
whether to sell or retain shares of Company Stock in a public or private tender
offer with respect to shares allocated to their own accounts, as each person is
uniquely able to determine his best interests based upon both his unique
knowledge of his own situation and his unique knowledge of the Company.
Moreover, because the overall broad group of employees who are Participants is
fairly representative of both present and future Participants' interests it is
believed that such Participants as a group are uniquely able to determine the
best interests of future Participants who benefit from future allocations of
Company Stock under the Program. Further, such participation in fundamental
shareholder decisions by Participants is expected to result in increased
commitment to the success of the Company further enhancing financial rewards of
Program participation for such Participants, as well as enhancing shareholder
and Company values. In order to assure that each Participant will express his
or her unrestrained best judgment concerning how these rights should be
exercised independent of any considerations associated with such Participant's
employment status with the Company, Participants exercise such rights through a
method that assures the confidentiality of their votes and other decisions.
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(a) Allocated Shares. With respect to shares (and fractional shares)
of Company Stock which have been allocated to Participants' Accounts each
Participant or Beneficiary, as a named fiduciary, shall have the right to
direct the Trustee as to the manner of voting and the exercise of all other
rights which a shareholder of record has with respect to such shares
(including, but not limited to, the right to sell or retain such shares in
a public or private tender offer). In voting or exercising such other
rights with respect to such shares, the Participants and Beneficiaries
shall consider their own individual long-term best interests in providing
benefits under the Program and Trust rather than a short term gain. In the
event that a Participant shall fail to direct the Trustee as to the manner
of voting of such shares of Company Stock allocated to the Participant's
Accounts or as to the exercise of other rights in respect of such shares,
the Trustee shall vote such shares or exercise such rights with respect to
such shares in accordance with Section 10.21(b).
(b) Unallocated Shares and Allocated Shares Not Directed. With
respect to shares (and fractional shares) of Company Stock which are either
not allocated to Participants' Accounts or are allocated to the Accounts of
Participants who fail (or whose Beneficiaries fail) to provide any
direction pursuant to Section 10.21(a), each Participant who is an
Employee, as a named fiduciary, shall have the right to direct the Trustee
as to the manner of voting the number of such shares (and fractional
shares), and the exercise of all other rights which a shareholder of record
has with respect to such shares (including, but not limited to, the right
to sell or retain such shares in a public or private tender offer), as is
equal to the product of (i) the sum of the number of unallocated shares and
undirected shares multiplied by (ii) a fraction, the numerator of which is
the number of shares (and fractional shares) of Company Stock for which
directions are given pursuant to this Section 10.21(b) and which have been
allocated to the Accounts of such Participant and the denominator of which
is the total number of shares (and fractional shares) of Company Stock
which have been allocated to the Accounts of all Participants who give
directions to the Trustee pursuant to this Section 10.21(b). In voting or
exercising such other rights with respect to such shares, such Participants
shall consider the long term interests of both current and future
Participants and Beneficiaries in providing benefits under the Program and
Trust rather than short term gain.
(c) Named Fiduciaries. The Trustee shall notify each Participant and
Beneficiary who is authorized pursuant to Section 10.21(a) and (b) to
direct the Trustee as to the manner of voting and the exercise of other
shareholder rights with respect to shares (and fractional shares) of
Company Stock that such Participant or Beneficiary is a named fiduciary,
within the meaning of Section 402(a)(2) of ERISA, with respect to such
shares (and fractional shares), and shall instruct each such Participant
and Beneficiary that is exercising such authority to direct the Trustee,
with respect to shares of Company Stock allocated to his Accounts, he
should consider his own individual long-term best interests in providing
benefits under the Program and, with respect to shares of Company Stock
voted pursuant to Section 10.21(b), he should consider the long-term
interests of both current and future Participants and
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Beneficiaries in providing benefits under the Program and Trust rather than
a short term gain.
(d) Confidentiality. The Trustee shall solicit the directions of
Participants and Beneficiaries in accordance with Section 10.21(a) or (b)
and shall follow such directions by delivering aggregated votes to the
Company or otherwise implementing such directions in any convenient manner
which preserves the confidentiality of the votes or other directions of
individual Participants or Beneficiaries. Any designee of the Trustee who
assists in the solicitation or tabulation of the directions of Participants
or Beneficiaries shall certify that he will maintain the confidentiality of
all directions given.
10.22 Cash Distributions with Respect to Company Stock. If there is a
discrepancy between (1) the amount received by the Trust upon the sale of
Company Stock or credited to a portion of the Trust upon the transfer of Company
Stock from one portion of the Trust to another, for the purpose of making cash
distributions to Participants or Beneficiaries and (2) the value of such Company
Stock on the Valuation Date as of which such stock is valued for the purpose of
determining the amount of the Participant's cash distributions, such discrepancy
shall be credited to or charged against the Trust Income of the portion of the
Trust Fund (i.e., accounts in the Profit Sharing portion of the Program, the
LESOP Accounts, McDESOP Accounts and Stock Sharing Accounts) which held the
stock before sale or transfer as of the Valuation Date next following the sale
or transfer.
10.23 Holding Funds.
(a) Profit Sharing Holding Fund. Profit Sharing Contributions made
to the Program shall be held in the Profit Sharing Holding Fund until
allocated to Participant's accounts in accordance with Section 7.1. Such
contributions as provided in Section 3.1(a) and 3.1(b) shall be separately
accounted for. Amounts which in accordance with Article XI are currently
distributable in cash to Participants or Beneficiaries with respect to the
Profit Sharing portion of the Plan shall be transferred to the Profit
Sharing Holding Fund during the calendar month next following the calendar
month within which such amount became distributable. The Profit Sharing
Holding Fund shall be held (a) in a checking account of the Trustee in the
name of the Trust with, if the Trustee or custodian is a bank or a Trust
Company, the Trustee's or custodian's banking department, or (b) in a STIF
Fund or in such types of investments or pooled, common, commingled or
collective trust funds, including, if the Trustee or custodian is a bank,
those of the Trustee or custodian, as the Committee may from time to time
authorize the Trustee to invest in such respective amounts and proportions
and in such manner as the Committee shall from time to time determine.
(b) McDESOP Holding Fund. Participant Elected Contributions and
Matching Contributions made to the Program shall be held in the McDESOP
Holding Fund until credited to Participant's accounts in accordance with
Sections 7.4 and 7.2, respectively, and amounts which are distributable to
a Participant or Beneficiary in
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cash from the McDESOP and LESOP portions of the Program shall, at the
direction of the Committee, be transferred to the McDESOP Holding Fund
during the calendar month next following the calendar month within which
such amount became distributable. The McDESOP Holding Fund shall be held
(a) in a checking account of the Trustee in the name of the Trust with, if
the Trustee or custodian is a bank, the banking department of the Trustee
or custodian, or (b) in the STIF Fund or in such types of investments or
pooled, common, commingled or collective trust funds including, if the
Trustee or custodian is a bank, those of the Trustee or custodian, as the
Committee may from time to time authorize the Trustee to invest in such
respective amounts and proportions and in such manner as the Committee
shall from time to time determine.
(c) Rollover Holding Fund. Rollover Contributions to the Program
made in a calendar month shall be held in the Rollover Holding Fund until
the next Valuation Date when such contributions shall be invested in
accordance with the Participant's investment elections and amounts which
are distributable to a Participant or Beneficiary in cash from
Participants' Rollover Contribution Accounts or Investment Savings
Accounts.
(d) Committee Action. The Committee may authorize one or more of its
members, or their designees, to sign, manually, or by facsimile signature,
any and all checks, drafts, and orders, including orders or directions in
informal or letter form, against any funds in the Holding Funds and the
Trustee is authorized to honor any and all checks, drafts and orders so
signed. As of each Valuation Date, income, gains, losses and expenses (to
the extent not paid by an Employer) of the Holding Funds shall be
determined separately from the remainder of the Trust and the net income or
losses of the Holding Funds, for each Plan Year shall be added to the net
income of the Trust Fund for such Plan Year as provided in Section 10.14
and any net losses of the Holding Funds for the Plan Year shall be paid by
the Company.
10.24 Restrictions Applicable to Participants Subject to Section 16.
Effective November 1, 1996, anything herein to the contrary notwithstanding, a
Participant who is subject to Section 16 of the Securities Exchange Act of 1934
("1934 Act") may not engage in any one or more of the following transactions
involving Company Stock if he has engaged in an opposite way transaction, as
defined below, involving Company Stock within the preceding seven months:
(a) Investment elections into or out of Company Stock;
(b) Age diversification elections of amounts invested in Company
Stock under the McDESOP or LESOP portions of the Program; and
(c) Cash withdrawals during employment of amounts invested in Company
Stock under the Investment Savings, Rollover, Stock Sharing or any other
portions of the Program.
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For purposes of this Section 10.24, the transactions described in (i) are
opposite way transactions to the transactions described in (ii):
(i) a Participant's making an investment election which results in a
transfer of assets credited to his Account into a McDonald's Common Stock
Fund, on the one hand, and
(ii) his election (x) to take a cash withdrawal from one or more
Accounts invested in Company Stock, (y) to have assets in his Accounts
transferred from Company Stock to another investment option available under
the Program and (z) to make an age diversification election with respect to
his Accounts in the McDESOP or LESOP portions of the Program, on the other
hand.
In addition to the foregoing, the Committee may establish such rules and
procedures, applicable to Participants who are subject to Section 16 of the 1934
Act, as are necessary or desirable to prevent the occurrence of opposite way
transactions or of other circumstances which might create liabilities under
Section 16(b) of the 1934 Act, provided that such rules and procedures are not
inconsistent with the provisions of the Internal Revenue Code applicable to the
Program.
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ARTICLE XI
DISTRIBUTION OF BENEFITS
11.1 Distributions, General.
(a) Except as provided in Section 11.11 (for lump sum distributions
of amounts not more than $3,500) ($5,000 on or after January 1, 1998) and
subject to Section 11.8 (with respect to withholding of taxes), upon the
Participant's Termination of Employment on or after Vesting Retirement
Date, Disability or for any other reason other than death, distributions
shall be made in accordance with Section 11.2.
(b) Except as provided in Section 11.11 (for lump sum distributions
of amounts not more than $3,500) ($5,000 on or after January 1, 1998) and
subject to Section 11.8 (with respect to withholding of taxes), upon the
Participant's death, distributions shall be made in accordance with Section
11.3.
(c) If a Participant or Beneficiary is otherwise entitled to a
distribution because of retirement on or after Vesting Retirement Date,
Disability, death or other Termination of Employment, the Committee shall
require that immediate distribution of small vested Accrued Benefits shall
be made in accordance with and subject to the limitations of Section 11.11,
notwithstanding the provisions of Sections 11.2 and 11.3.
(d) A Participant or Beneficiary who has not had a Termination of
Employment shall receive a distribution not later than his Required
Beginning Date as provided in Section 11.13.
(e) A Participant shall be entitled to elect to receive in-service
withdrawals from Investment Savings Accounts, Rollover Accounts and Stock
Sharing Accounts as provided in Section 11.16.
11.2 Payment of Net Balance Account on Disability, or on Retirement or
Other Termination of Employment.
(a) Form of Payment of Accounts.
(1) Retirement or Disability. Subject to Sections 11.11 and
11.14, if a Participant retires on or after his Vesting Retirement
Date or has a Termination of Employment on account of a Disability and
if the Participant makes no election pursuant to Section 11.2(b), the
Trustee shall distribute to the Participant the vested portion of his
Net Balance Account credited to his Accounts held in the Program in a
single non-periodic distribution within a reasonable time after the
Valuation Date next following the later of (i) such event or (ii) the
last day of the Plan Year in which he attains the age of
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70-1/2. A Participant whose Net Balance Account is payable pursuant to
the preceding sentence may elect to receive payment in whichever of
the following methods the Participant shall elect in writing:
(A) A single non-periodic payment;
(B) Substantially equal installments, not less frequently
than annually, over a period certain determined in accordance
with Section 11.12, either directly from the Program, or by
purchase of a nontransferable period certain annuity contract
purchased from an insurance company which is authorized to do
business in any state and which has an A plus rating by A.M. Best
Company or a comparable rating by a comparable service which
rates insurance companies, payable for such period of time as the
Participant shall elect; or
(C) In the form of a nontransferable life annuity contract
in an amount which can be purchased from an insurance company
designated by the Participant which is authorized to do business
in any state and which has an A plus rating by A.M. Best Company
or a comparable rating by a comparable service which rates
insurance companies, with the Participant's vested Net Balance
Account credited to his Accounts or with the portion of the
Participant's vested Net Balance Account which the Participant
elects to receive in the form of a nontransferable life annuity
contract.
(2) Termination for Reasons Other than Retirement or Disability
or Death. If a Participant has a Termination of Employment for reasons
other than retirement on or after his Vesting Retirement Date,
Disability or death, the Trustee shall distribute the Participant's
vested Net Balance Account subject to the Participant's election to
receive nonperiodic or installment distributions, as follows:
(A) Profit Sharing Account. The vested portion of the
Participant's Profit Sharing Account shall be distributed to the
Participant in cash or in McDonald's common stock, in accordance
with Section 11.2(f), within a reasonable time after the
Participant elects to receive or to commence receiving a
distribution of such account.
(B) Investment Savings Account. The Participant's
Investment Savings Account shall be distributed to the
Participant in cash or in McDonald's common stock, in accordance
with Section 11.2(f) within a reasonable time after the
Participant elects to receive or to commence receiving a
distribution of such account.
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(C) Rollover Account and Rollover Holding Account. The
Participant's Rollover Account and Rollover Holding Account shall
be distributed to the Participant in cash or in McDonald's common
stock, in accordance with Section 11.2(f) within a reasonable
time after the Participant elects to receive or to commence
receiving a distribution of such account.
(D) McDESOP Accounts and LESOP Accounts. The Participant's
McDESOP Accounts and LESOP Accounts, including the vested portion
of all accounts identified in Sections 1.1(b) and in 1.1(c) shall
be distributed to the Participant in cash or in McDonald's common
stock as provided in Section 11.2(g) within a reasonable time
after the Participant elects to receive or to commence receiving
a distribution of such account.
(E) Stock Sharing Accounts. The Participant's Stock Sharing
Accounts, including the vested portion of all accounts identified
in Section 1.1(d) shall be distributed to the Participant in cash
or in McDonald's common stock as provided in Section 11.2(i)
within a reasonable time after the Participant elects to receive
or to commence receiving a distribution of such account.
(F) Distributions in Default of Election. In the absence of
an election by a Participant to receive a distribution of his
entire vested Net Balance Account or to commence to receive
installment distributions at least equal to the greater of the
Minimum Distribution Amount, as defined in Section 11.12(d), and
the amount determined under Section 11.2(d)(3), his entire vested
Net Balance Account shall be distributed within a reasonable time
after the end of the calendar year in which he attains the age of
70-1/2, but not later than his Required Beginning Date.
A Participant entitled to elect to receive a distribution or to
commence receiving distributions pursuant to this Section 11.2(a)(2)
is not entitled to elect an annuity form of distribution.
(3) Break in Service. If a Participant has a Break in Service
without having a Termination of Employment, the Trustee shall
distribute the portion of his vested Net Balance Account in the Profit
Sharing Plan in cash and in a single non-periodic payment within a
reasonable time after the earlier of the Valuation Date next following
the date the Participant elects to receive such distribution or after
the Participant attains the age of 70-1/2, but not later than his
Required Beginning Date; provided that if the Participant completes
one year of Eligibility Service following the Break in Service, he
shall not be permitted further elections to receive distributions made
pursuant to Article XI, except as he may otherwise be entitled to
receive in-service distributions
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pursuant to Section 11.16, until he again has a subsequent Break in
Service or Termination of Employment.
(b) Elections by Retired or Disabled Participants. As permitted in
Section 11.2(a)(1), with respect to a distribution on account of a
Participant's Termination of Employment on or after his Vesting Retirement
Date or on account of Disability, a Participant may elect separately with
respect to the portion of his Net Balance Account held in the Profit
Sharing, McDESOP, LESOP, Stock Sharing, Rollover and Investment Savings
portions of the Program, on such form as may be provided or approved by the
Committee, the form of benefit and the date (inclu