MCDONALDS CORP
10-K, 1999-03-31
EATING PLACES
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<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

<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>
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                                                                            ----
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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
</TABLE>

                                      -i-
<PAGE>


<TABLE>
<CAPTION>
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                                                                            ----
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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
</TABLE>

                                     -ii-
<PAGE>


<TABLE>
<CAPTION>
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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
</TABLE>

                                     -iii-
<PAGE>
 
<TABLE>
<CAPTION>
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                                                                ----
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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
</TABLE>

                                       iv
<PAGE>

 
<TABLE>
<CAPTION>
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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
</TABLE> 

                                      -v-
<PAGE>


<TABLE>
<CAPTION>
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                                                                            ----
<S>                                                                         <C>
  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
</TABLE>

                                     -vi-
<PAGE>
 
                 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
<PAGE>
 
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.

                                      -2-
<PAGE>
 
                                   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

                                      -3-
<PAGE>
 
     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.

                                      -4-
<PAGE>
 
          (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

                                      -5-
<PAGE>
 
          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

                                      -6-
<PAGE>
 
     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

                                      -7-
<PAGE>
 
               (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.

                                      -8-
<PAGE>
 
   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

                                      -9-
<PAGE>
 
     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

                                      -10-
<PAGE>
 
     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").

                                      -11-
<PAGE>
 
     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.

                                      -12-
<PAGE>
 
   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

                                      -13-
<PAGE>
 
          (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

                                      -14-
<PAGE>
 
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.

                                      -15-
<PAGE>
 
   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.

                                      -16-
<PAGE>
 
          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

                                      -17-
<PAGE>
 
          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

                                      -18-
<PAGE>
 
               (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

                                      -19-
<PAGE>
 
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

                                      -20-
<PAGE>
 
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

                                      -21-
<PAGE>
 
     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.

                                      -22-
<PAGE>
 
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.

                                      -23-
<PAGE>
 
   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.

                                      -24-
<PAGE>
 
                                   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

                                      -25-
<PAGE>
 
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.

                                      -26-
<PAGE>
 
                                  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.

                                      -27-
<PAGE>
 
   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.

                                      -28-
<PAGE>
 
                                   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

                                      -29-
<PAGE>
 
     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.

                                      -30-
<PAGE>
 
          (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

                                      -31-
<PAGE>
 
     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

                                      -32-
<PAGE>
 
     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.

                                      -33-
<PAGE>
 
     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

                                      -34-
<PAGE>
 
     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.

                                      -35-
<PAGE>
 
          (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.

                                      -36-
<PAGE>
 
   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

                                      -37-
<PAGE>
 
               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.

                                      -38-
<PAGE>
 
               (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.

                                      -39-
<PAGE>
 
                                   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

                                      -40-
<PAGE>
 
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

                                      -41-
<PAGE>
 
          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.

                                      -42-
<PAGE>
 
          (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"):

                                      -43-
<PAGE>
 
               (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

                                      -44-
<PAGE>
 
     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.

                                      -45-
<PAGE>
 
          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

                                      -46-
<PAGE>
 
     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

                                      -47-
<PAGE>
 
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").

                                      -48-
<PAGE>
 
          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).

                                      -49-
<PAGE>
 
   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.

                                      -50-
<PAGE>
 
          (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.

                                      -51-
<PAGE>
 
                                   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

                                      -52-
<PAGE>
 
          (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,

                                      -53-
<PAGE>
 
     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

                                      -54-
<PAGE>
 
     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

                                      -55-
<PAGE>
 
     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

                                      -56-
<PAGE>
 
     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.

                                      -57-
<PAGE>
 
   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.

                                      -58-
<PAGE>
 
                                  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

                                      -59-
<PAGE>
 
     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)

                                      -60-
<PAGE>
 
          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

                                      -61-
<PAGE>
 
          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

                                      -62-
<PAGE>
 
     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.

                                      -63-
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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

                                      -65-
<PAGE>
 
               (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

                                      -66-
<PAGE>
 
          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.

                                      -67-
<PAGE>
 
               (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

                                      -68-
<PAGE>
 
     "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.

                                      -69-
<PAGE>
 
                                   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

                                      -70-
<PAGE>
 
     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)

                                      -71-
<PAGE>
 
          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).

                                      -72-
<PAGE>
 
          (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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<PAGE>
 
   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.

                                      -74-
<PAGE>
 
     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.

                                      -75-
<PAGE>
 
   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.

                                      -76-
<PAGE>
 
                    (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

                                      -77-
<PAGE>
 
                    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

                                      -78-
<PAGE>
 
          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,

                                      -79-
<PAGE>
 
     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

                                      -80-
<PAGE>
 
     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

                                      -81-
<PAGE>
 
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

                                      -82-
<PAGE>
 
     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.

                                      -83-
<PAGE>
 
   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.

                                      -84-
<PAGE>
 
   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.

                                      -85-
<PAGE>
 
          (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

                                      -86-
<PAGE>
 
     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

                                      -87-
<PAGE>
 
     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.

                                      -88-
<PAGE>
 
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.

                                      -89-
<PAGE>
 
                                   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

                                      -90-
<PAGE>
 
          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.

                                     -91-

<PAGE>
 
                    (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

                                     -92-

<PAGE>
 
          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 (including an immediate or a
     delayed date) of commencement of benefits.  The actual date of distribution
     shall be determined in accordance with the administrative procedures
     established by the Plan Administrator but shall be no earlier than the day
     following the Valuation Date which next follows the date the completed
     election form is submitted to the Plan Administrator.  To the extent that
     such a Participant is receiving a portion of his benefit in a form other
     than an annuity purchased from an insurance company, he may from time to
     time make or change his benefit elections to accelerate or to delay the
     date and the rate of distribution on such a form as may be provided or
     approved by the Committee, subject to such rules as the Committee shall
     specify and to the limits stated in Sections 11.2(d) and 11.2(e), hereof.
     In the absence of any election, a Participant who has a Termination of
     Employment on or after his Vesting Retirement Date or on account of
     Disability shall be deemed to have elected to receive the vested portion of
     his Net Balance Account in a single non-periodic payment paid within a
     reasonable time after the end of the calendar year in which he attains age
     70-1/2, but not later than his Required Beginning Date.

          (c)  Types of Annuities.  If the Participant elects to receive his
     benefit in the form of an annuity contract as permitted under Section
     11.2(a)(1), each Participant, subject to Sections 11.2(d) and 11.2(e) shall
     have the right to direct the Trustee to purchase an available
     nontransferable annuity contract 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.  The benefit under such
     annuity contract shall be paid to the Participant prior to his death, and
     if a joint and survivor annuity is provided, unless such joint annuitant
     shall be the Participant's spouse, the periodic benefit payable to the
     Participant's Beneficiary shall not be greater than the Applicable
     Percentage of the benefit paid to the Participant as shown in Appendix A.

          (d)  Limitations on Participant Elections.  Notwithstanding the
     provisions of Section 11.9 or any elections made by the Participant,

               (1)  Period for Installment or Annuity Payments.  Except as
          provided in Section 11.14, installment payments and period certain
          payments under any annuity contract purchased from an insurance
          company shall be made or shall commence not later than the Required
          Beginning Date and shall

                                     -93-

<PAGE>
 
          be made over a period not in excess of (A) the lesser of the period
          determined under Section 11.2(d)(3) or (B) the Participant's life
          expectancy or the joint and last survivor life expectancy of the
          Participant and his Beneficiary (such life expectancies to be
          determined in accordance with Section 11.12(e)). In the case of
          payments made in the form of a life annuity, payments shall be made
          over a period not in excess of the life of the Participant or the
          lives of the Participant and his Beneficiary.

               (2)  Annuity Payments. If benefits are paid under an annuity
          contract, payments shall be non-increasing or shall increase only as
          follows:

                    (A)  with any percentage increase in a specified and
               generally recognized cost-of-living index;

                    (B)  to the extent of the reduction in the Participant's
               payments to provide for a survivor benefit upon death of the
               beneficiary whose life was being used to determine the period
               over which benefits are being paid; or

                    (C)  to provide cash refunds of Participant Contributions
               upon the Participant's death.

               (3)  Minimum Distribution Incidental Benefit Requirements. If
          benefits are paid in installments to the Participant and if the
          Participant's beneficiary is not his spouse or his former spouse
          receiving benefits pursuant to a Qualified Domestic Relations Order as
          defined in Section 16.5, payments for the calendar year in which the
          Participant attains the age of 70-1/2 and in each calendar year
          thereafter shall equal at least the dollar value of the Participant's
          vested Net Balance Account as of the last Valuation Date of the
          immediately preceding Plan Year divided by the following Applicable
          Divisor from Appendix B.

          If benefits are paid in the form of an annuity with a period certain
          feature, the number of years over which such period certain payments
          are made shall not exceed the lesser of (1) the Participant's or the
          Participant's and Beneficiary's joint and last survivor life
          expectancy as determined in Section 11.12(e) or (2) the number of
          years shown in the Applicable Divisor column in Exhibit B.

          (e)  Qualified Joint and Survivor Annuities.

               (1)  Notwithstanding the foregoing provisions of this Section
          11.2 to the contrary, in the case of a Participant who has elected
          pursuant to Section 11.2(a)(1) to receive one or more of his Accounts
          in a life annuity, such distribution shall be in the form of a
          Qualified Joint and Survivor Annuity purchased by the Trust from an
          insurance company designated by the Participant which is authorized to
          do business in any state and which has an A

                                     -94-

<PAGE>
 
          plus rating by A.M. Best Company or a comparable rating by a
          comparable service which rates insurance companies, unless the
          Participant with his spouse's consent as provided in Section 11.10
          elects to receive a different form of annuity or another form of
          benefit. The term "Qualified Joint and Survivor Annuity" means an
          immediate annuity payable, for a married Participant, to the
          Participant for life and, if the Participant's spouse survives the
          Participant, a survivor annuity payable to the spouse for life in an
          amount equal to 50 percent (50%) of the annuity payable to the
          Participant and, for an unmarried Participant, a single life annuity
          payable to the Participant for life. The amount of the benefits
          payable under a Qualified Joint and Survivor Annuity shall be the
          amount which can be purchased from an insurance company with the
          vested portion of the one or more of his Accounts which the
          Participant elects to receive in the form of a life annuity.

               (2)  If a Participant who has elected to receive all or a portion
          of his vested Net Balance Account in the form of a life annuity dies
          before the annuity starting date, such portion of his vested Net
          Balance Account shall be paid to his surviving spouse in the form of a
          Qualified Preretirement Survivor Annuity payable to the surviving
          spouse for life ("QPSA") unless either the Participant, with his
          spouse's consent in accordance with Section 11.10, has elected to
          waive the QPSA or the spouse elects pursuant to Section 11.3(a)(3) to
          waive the QPSA and to receive another form of benefit; provided that
          if the Trust has paid for an annuity to provide a life annuity benefit
          elected by the Participant and the Participant dies before his annuity
          starting date under the contract, the QPSA shall be provided by the
          annuity contract and the surviving spouse shall have no claim against
          the Trust with respect to the Accounts which he has elected to receive
          in the form of a life annuity. Any portion of a Participant's vested
          Net Balance Account in excess of the value of a QPSA, if paid directly
          by the Program, or remaining after the payment of annuity premiums to
          an insurance company, if paid by an insurance company, shall be
          distributed to the Participant's Beneficiary as provided in Section
          11.3.

               (3)  A Participant who elects to receive benefits in the form of
          a life annuity and to whom benefits would be payable in the form of a
          Qualified Joint and Survivor Annuity pursuant to this Section 11.2(e)
          shall have the right to waive a Qualified Joint and Survivor Annuity
          (such waiver shall be consented to by the Participant's spouse in
          writing in accordance with Section 11.10) and the QPSA by delivering
          written notice to the Committee, at any time within the 90 day period
          prior to the annuity starting date, to receive all or a portion of
          such benefits in a different form of annuity or another form of
          benefit. If a Participant elects to receive benefits in the form of a
          life annuity, the Committee shall within a reasonable period of time
          provide the Participant, by personal delivery or first class mail,
          with a written explanation of:

                    (A)  the terms and conditions of the Qualified Joint and
               Survivor Annuity and the QPSA;

                                     -95-

<PAGE>
 
                    (B)  the Participant's right to make, and the effect of, an
               election to waive the Qualified Joint and Survivor Annuity and
               the QPSA;

                    (C)  the rights of the Participant's spouse to consent to
               the Participant's election to waive the Qualified Joint and
               Survivor Annuity and the QPSA and the effect of consenting to
               such waiver; and

                    (D)  the Participant's right to make, and the effect of, a
               revocation of an election to waive the Qualified Joint and
               Survivor Annuity and the QPSA.

          Any election made by a Participant to receive a life annuity form of
     benefit pursuant to this Section 11.2(e) may be revoked by such Participant
     (with his spouse's consent) by delivering written notice to the Committee
     at any time prior to the Participant's annuity starting date and, once
     revoked, may be made again at any time by delivering written notice to the
     Committee prior to the Participant's annuity starting date. If a
     Participant, who has elected a life annuity form of benefit and who has not
     waived (with his spouse's consent) the QPSA, dies before his annuity
     starting date, his surviving spouse may elect pursuant to (A) through (D)
     and Section 11.10 to waive the QPSA.
 
          (f)  Form of Profit Sharing Distributions. If the method of
     distribution selected by a Participant includes either a nonperiodic
     payment or installment payments or a combination of nonperiodic payments
     and installments, the Participant may elect, on such form and in such
     manner as the Committee shall provide or permit, to receive the Profit
     Sharing Plan portion of his vested Net Balance Account distributed in cash
     or in shares of McDonald's common stock or in any combination of the two as
     elected by the Participant; provided however that, in the absence of an
     election to receive shares of McDonald's common stock, such distributions
     shall be made in cash and, further provided, that the portion of such
     distribution distributed in the form of shares of McDonald's common stock
     shall not, except as otherwise provided below, exceed the value (if any) of
     the Participant's interest in the Profit Sharing McDonald's Common Stock
     Fund.

          Until such time as a Participant's vested Net Balance Account has been
     distributed, transferred to a Holding Fund in accordance with Section 10.23
     or forfeited in accordance with Section 11.4, any portion of the
     Participant's Net Balance Account remaining in the Profit Sharing Plan
     portion of the Program shall continue to be invested in accordance with
     Section 10.7 and the Participant's (or his Beneficiary's) investment
     elections in accordance with Sections 10.8 and 10.9, as applicable.

          (g)  McDESOP Accounts. A Participant's vested balances in his
     Participant Elected Contribution Account, Employer Matching Contribution
     Account and McDESOP Diversification Account shall be distributed in cash
     unless the Participant

                                     -96-

<PAGE>
 
     (or his Beneficiary) elects, at such time and in accordance with such
     procedures as the Committee shall from time to time permit, with respect to
     the portions of such accounts invested in McDonald's common stock, whether
     held in the Profit Sharing McDonald's Common Stock Fund or the McDESOP
     McDonald's Common Stock Fund, to receive a distribution in shares of
     McDonald's common stock.

          (h)  LESOP Accounts.  A Participant's vested balances in his LESOP
     Accounts and his LESOP Diversification Account shall be distributed in cash
     unless the Participant (or his Beneficiary) elects, at such time and in
     accordance with such procedures as the Committee shall from time to time
     permit, with respect to the portions of such accounts invested in Company
     Stock, whether held in the Profit Sharing McDonald's Common Stock Fund or
     the LESOP portion of the Trust to receive a distribution in shares of
     McDonald's common stock.

          (i)  Stock Sharing Accounts.  A Participant's vested balances in his
     Stock Sharing Accounts shall be distributed in cash unless the Participant
     (or his Beneficiary) elects, at such time and in accordance with such
     procedures as the Committee shall from time to time permit, with respect to
     the portions of such accounts invested in McDonald's common stock to
     receive a distribution in shares of McDonald's common stock.

          (j)  If any distribution in shares of McDonald's common stock
     described in this Section 11.2 would not be in whole shares, the value of
     any fractional share shall be distributed in cash. A Participant or
     Beneficiary who is entitled to a distribution may elect to receive
     McDonald's common stock distribution in lieu of cash by filing a written
     election with the Committee on forms approved by the Committee and in a
     manner prescribed by the Committee on or before the Valuation Date
     coincident with or next preceding the date of distribution.

          Until such time as a Participant's vested Net Balance Account has been
     distributed, transferred to a Holding Fund in accordance with Section
     10.23, or forfeited in accordance with Section 11.4, (A) any portion of his
     Net Balance Account in his Diversification Account shall continue to be
     invested as provided in Section 10.10, and (B) any portion of his Net
     Balance Account remaining in the McDESOP, LESOP or Stock Sharing portions
     of the Program shall continue to be invested in Company Stock and held
     therein.

          (k)  Put Option. If any Company Stock distributed from a Participant's
     Participant Elected Contribution Account, Employer Matching Contribution
     Account, McDESOP Diversification Account, LESOP Diversification Account or
     Stock Sharing Account is not readily tradeable on an established market
     when distributed, the distributee shall have the put option rights with
     respect to such shares which are described in Section 6.5(b).

          (l)  Distributions After Rehire.  If a Participant who has had a
     Termination of Employment subsequently becomes an Employee, such
     Participant shall not be

                                     -97-

<PAGE>
 
     entitled to elect distributions until he again becomes eligible to receive
     distributions as provided in Section 11.2.

   11.3   Payment of Net Balance Account on Death of Participant.

          (a)  Form of Payment.  The Net Balance Account of a Participant who
     dies before having a Termination of Employment shall be fully vested. The
     Net Balance Account of a Participant who dies after having a Termination of
     Employment for reasons other than a Termination of Employment on or after
     his Vesting Retirement Date, death or Disability shall be vested as
     provided in Section 11.4(b). If a Participant dies before his entire vested
     Net Balance Account has been paid from the Program, except to the extent
     otherwise provided in Section 11.2(e)(2) in cases in which the Participant
     has elected an annuity form of distribution, distributions shall be made as
     follows:

               (1)  If the Participant has a surviving spouse, the Trustee shall
          distribute the vested portion of the Participant's Net Balance Account
          to the Participant's surviving spouse as the Participant's Beneficiary
          in accordance with Section 11.3(a)(3) unless the Participant (with his
          spouse's consent in accordance with Section 11.10) has named another
          Beneficiary.

               (2)  If the Participant does not have a surviving spouse or if
          the Participant (with his spouse's written consent in accordance with
          Section 11.10) has named another Beneficiary, the Trustee shall
          distribute the vested portion of the Participant's Net Balance Account
          in accordance with Section 11.3(a)(3) to the Beneficiary named by the
          Participant in accordance with Section 11.6.

               (3)  The Participant's vested Net Balance Account shall be
          distributed within a reasonable time after the Valuation Date
          following the Participant's death or at such later date as the
          Beneficiary may elect under Section 11.3(b). Distributions to the
          Participant's Beneficiary shall be in whichever of the following
          methods of payment the Beneficiary, by written notice to the
          Committee, shall elect unless the Participant has elected in a written
          notice delivered to the Committee not to permit such Beneficiary
          elections in which case the Participant shall elect the method of
          payment, from the following:

                    (A)  A single non-periodic payment;

                    (B)  Substantially equal installments, not less frequently
               than annually, over a period certain, directly from the Profit
               Sharing Plan portion of the Program; or

                    (C)  In the form of a nontransferable annuity contract
               purchased from an insurance company designated by the Beneficiary

                                     -98-

<PAGE>
 
               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 to the
               Beneficiary over his life.

          In the absence of any election by a Participant or a Beneficiary as to
     time and manner of payment, the Participant and the Beneficiary shall be
     deemed to have elected to receive the benefit in an immediate single sum
     payment. Distributions shall be made to a Participant's Beneficiary in cash
     or in Company Stock as provided under Sections 11.2(f) through 11.2(i).

          (b)  Beneficiary's Elections. With respect to a distribution on
     account of a Participant's death, his Beneficiary, as designated pursuant
     to Section 11.6, may elect the form of benefit and the date of commencement
     of benefits, unless the Participant has elected not to permit such
     Beneficiary elections. If the Participant has not elected otherwise, the
     Beneficiary may also elect, with respect to benefits not being received in
     the form of an annuity, to accelerate or to delay the receipt of benefits.
     Such elections shall be made in writing on a form provided or approved by
     the Committee and are subject to such rules as the Committee shall specify
     and to the limits stated in Sections 11.3(c) through 11.3(i), as
     applicable. Once a Beneficiary has made benefit elections, he may in the
     same manner and subject to the same conditions, with respect to benefits
     not being received in the form of an annuity contract purchased from an
     insurance company, change the election at any time, and with respect to any
     election delay or accelerate the receipt of benefits from time to time.

          (c)  Period of Distribution - Death After Distributions Commence.
     Notwithstanding any other provisions of this Program and any elections made
     by the Participant or his Beneficiary, except an election made in
     accordance with Section 11.13(a), if a Participant dies on or after his
     Required Beginning Date but before his entire vested Net Balance Account
     has been distributed, and on or after the date upon which distribution of
     his vested Net Balance Account has commenced in installments over a period
     certain:

               (1)  not in excess of the life expectancy of the Participant or
          the joint and last survivor life expectancy of the Participant and his
          Beneficiary and such life expectancy was not subject to
          redetermination under Section 11.12(b), the balance of the
          Participant's vested Net Balance Account shall be distributed to his
          Beneficiary at least as rapidly as under the method of distribution in
          effect on the date of the Participant's death; or

               (2)  not in excess of the life expectancy or life expectancies
          one or both of which are subject to periodic redetermination in
          accordance with Section 11.12(b), the balance of the Participant's
          vested Net Balance Account shall be distributed to his Beneficiary (A)
          by the last day of the Plan Year following the Plan Year in which the
          Participant died, if the period was based solely upon the
          Participant's life expectancy and (B) over a period not longer

                                     -99-

<PAGE>
 
          than the Beneficiary's remaining life expectancy as determined under
          the method of determining life expectancy used for the Beneficiary at
          the time benefit payments commenced to the Participant, if the period
          was based upon the joint and last survivor life expectancy of the
          Participant and the Beneficiary. The remaining life expectancy of a
          Beneficiary for purposes of the preceding sentence shall be (1) if
          such life expectancy is not subject to redetermination, the
          Beneficiary's life expectancy at the time installment payments
          commenced to be made to the Participant reduced by one year for each
          year over which such payments have been made or (2) if such life
          expectancy is subject to redetermination, the Beneficiary's life
          expectancy as redetermined at the applicable times following the
          Participant's death.

          (d)  Period of Distribution - Death Before Distributions Commence.
     Notwithstanding any elections made by a Participant or Beneficiary, if
     Section 11.3(c) is not applicable, and a Participant dies before his entire
     vested Net Balance Account has been distributed or commenced to be
     distributed, the Participant's vested Net Balance Account shall be
     distributed not later than December 31 of the calendar year which contains
     the fifth anniversary of the Participant's death; except that if his
     Beneficiary is an individual, the Participant's vested Net Balance Account
     may be distributed over a period not exceeding the Beneficiary's life
     expectancy (or, if there are multiple Beneficiaries, the Beneficiary with
     the shortest life expectancy) determined as of the date of the
     Participant's death, and if the Beneficiary is a trust, the Participant's
     vested Net Balance Account may be distributed over a period not exceeding
     the life expectancy, determined as of the Participant's death, of the
     beneficiary of the trust or estate who then has the shortest life
     expectancy, beginning, in either event, no later than December 31 of the
     calendar year after the calendar year of the Participant's death to the
     extent permitted under Section 11.3(h). Notwithstanding the foregoing, if
     the Beneficiary is the Participant's surviving spouse, distribution shall
     be made or shall commence not later than December 31 of the calendar year
     in which the Participant would have attained the age of 70-1/2 years.

          (e)  Death of Surviving Spouse Who Is Beneficiary Before Benefit
     Payments Commence. If the surviving spouse of a Participant is the
     Beneficiary, and the surviving spouse dies before distributions have begun
     to the surviving spouse in accordance with Section 11.3(c)(1) or (2), the
     rules of Sections 11.3(c) and 11.3(d) shall apply as though such surviving
     spouse were the Participant, substituting the date of death of such spouse
     for the date of the Participant's death to determine the dates therein.
     Distributions are considered to have begun to the surviving spouse on the
     later of the dates specified in Section 11.3(c)(1) or (2).

          (f)  Death of Beneficiary After Benefit Payments Commence. If a
     Beneficiary has commenced to receive distributions under Section 11.3(d),
     and such Beneficiary dies before the entire vested Net Balance Account has
     been distributed, any subsequent Beneficiary whose status as a Beneficiary
     was contingent on the death of the first Beneficiary shall receive
     distributions at least as rapidly as under the distribution method in
     effect upon the first Beneficiary's death.

                                     -100-

<PAGE>
 
     (g)  Amount Paid to a Child.  Any amount paid to a child, in accordance
with regulations prescribed by the Secretary of the Treasury, shall be treated
as if it had been paid to the Participant's surviving spouse if such amount will
become payable to the surviving spouse upon such child reaching majority (or
such other events as the Secretary of the Treasury may by regulations
prescribe).

     (h)  Trust as Beneficiary.  Notwithstanding the foregoing provisions of
Section 11.3, if a trust is designated the Beneficiary under the Program and

               (1)  if the following requirements are met, the Beneficiary or
          Beneficiaries of the trust shall be considered the Beneficiary in
          accordance with applicable regulations and rulings for the purpose of
          determining the period over which distributions in the form of
          installments or annuities may be distributed. The applicable trust
          requirements are:

                    (A)  the trust is a valid trust under state law, or would be
               but for the fact that there is no corpus;

                    (B)  the trust is irrevocable or will become so by its terms
               upon the Participant's death;

                    (C)  the beneficiaries of the trust with respect to the
               trust's interest in the Participant's vested Net Balance Account
               are identifiable from the trust instrument as provided in Section
               401(a)(9) of the Internal Revenue Code and the regulations
               adopted or proposed hereunder; and

                    (D)  a copy of the trust instrument has been provided to the
               Plan Administrator; and

               (2)  If the above listed requirements are not met and the
          Participant dies on or after the Participant's Required Beginning
          Date, the Participant shall be treated as not having designated a
          Beneficiary for purposes of determining the period over which
          distributions may be made and distributions shall be made to the trust
          at least as rapidly as over the longest period over which
          distributions could have been made under Section 11.3(c) if the
          Participant had no Beneficiary.

               (3)  If the above listed requirements are not met, and the
          Participant dies before his Required Beginning Date, the Participant
          shall be treated as not having designated a Beneficiary for purposes
          of the exception to the requirement in Section 11.3(d) that
          distributions be made within five years and distributions shall be
          made within the five year period designated in Section 11.3(d).

                                     -101-

<PAGE>
 

   11.4   Vesting and Forfeitures.

          (a)  A Participant who has a Termination of Employment on or after his
     Vesting Retirement Date or who has a Termination of Employment on account
     of Disability or death shall be fully vested in his Net Balance Account.

          (b)  If a Participant has a Break in Service or has a Termination of
     Employment with the Employer for reasons other than retirement on or after
     his Vesting Retirement Date, death, or Disability, such Participant shall
     be fully vested in his (1) Investment Savings Account; (2) his Rollover
     Account; (3) Rollover Holding Account; (4) Participant Elected Contribution
     Account; (5) Employer Matching Contribution Account; (6) McDESOP
     Diversification Account; and (7) Stock Sharing Account. Such Participant
     shall be vested in his Profit Sharing Account, LESOP Account and LESOP
     Diversification Account in accordance with the following table wherein the
     first column represents the Credited Service of the Participant, and the
     second column represents the Vested Percentage of the Participant's Profit
     Sharing Account, LESOP Account and LESOP Diversification Account:

<TABLE> 
<CAPTION> 
          Years of Credited Service      Vested Percentage
          -------------------------      -----------------
<S>                                      <C>
          less than 2 years                       0
          2 years but less than 3                 5
          3 years but less than 4                20
          4 years but less than 5                40
          5 years but less than 6                60
          6 years but less than 7                80
          7 years and over                      100
</TABLE>
          (c)  The portion of the Participant's Profit Sharing Account, LESOP
     Account and LESOP Diversification Account which is not vested as of his
     Termination of Employment or the occurrence of a Break in Service shall
     become a Forfeiture at the earlier of (1) the first day of the Plan Year
     immediately following the Plan Year in which the Participant has five
     consecutive Breaks in Service or (2) as of the Valuation Date immediately
     following the Valuation Date as of which the Vested Percentage of the
     Participant's Profit Sharing Account, LESOP Account and LESOP
     Diversification Account, respectively, are distributed. Subject to Section
     11.3(d) and 11.3(e), (A) Forfeitures occurring with respect to a
     Participant's Profit Sharing Account shall be credited to the McDESOP
     Holding Fund as of the Valuation Date following the date the amount of such
     Forfeiture is determined but not later than the sixth Valuation Date after
     the date as of which the amounts became a Forfeiture and (B) from
     Participants' LESOP Accounts and LESOP Diversification Account shall be
     allocated for the Plan Year among all Active Participants as provided in
     Section 7.3 for Forfeitures from Participants' LESOP Accounts. A
     Participant whose Vested Percentage is zero at the time of his Termination
     of Employment or Break in Service shall be deemed to have had a
     distribution of the Vested Percentage of his Profit Sharing Account, LESOP
     Account and LESOP Diversification Account as of the

                                     -102-
<PAGE>
 

     Valuation Date immediately following the date on which the Participant has
     a Termination of Employment or Break in Service.

          (d)  If a Participant, (1) who had a Termination of Employment, 
     resumes employment with an Employer before he has a Break in Service or,
     (2) who had a Termination of Employment or Break in Service occurring on or
     after January 1, 1985, earns one Year of Eligibility Service following the
     Break in Service (but before having five consecutive Breaks in Service),
     the amount of the Participant's Profit Sharing Account, LESOP Account and
     LESOP Diversification Account, if any, forfeited under Section 11.4(c)
     shall be reinstated to the respective Accounts out of Forfeitures from the
     Profit Sharing portion and the LESOP portion of the Program, respectively,
     for the Plan Year in which such resumption of employment occurs or such one
     Year of Eligibility Service is earned, whichever is applicable. To the
     extent that Forfeitures for such Plan Year are not sufficient, the amount
     to be reinstated shall be charged against income of the Profit Sharing
     Holding Fund and the McDESOP Holding Fund, respectively. Thereafter, in the
     case of a Participant who received a distribution and had his Forfeiture
     reinstated, the Participant's Vested Percentage in his Profit Sharing
     Account, LESOP Account or LESOP Diversification Account shall be equal to
     an amount determined by subtracting the amount distributed (the
     "Distributed Amount") on the Participant's Termination of Employment or
     Break in Service from the product of (1) the Participant's Vested
     Percentage determined pursuant to Section 11.4 multiplied by (2) the sum of
     (a) the Distributed Amount and (b) the value of the Participant's Profit
     Sharing Account, LESOP Account or LESOP Diversification Account,
     respectively.

          (e)  The amount, if any, forfeited under Section 11.4(c) shall not be
     reinstated if a Participant is rehired or again becomes a Participant and
     if the Participant (1) had a Break in Service before January 1, 1985 or (2)
     did not have a Break in Service before January 1, 1985 and had five
     consecutive Breaks in Service. If all or a portion of the Vested Percentage
     of a Participant's Profit Sharing Account, LESOP Account or LESOP
     Diversification Account prior to his Termination of Employment or Break in
     Service was not distributed prior to his resumption of service and he was
     not 100% vested in such accounts upon Termination of Employment or Break in
     Service, then: (1) the Vested Percentage of the Participant's Profit
     Sharing Account, LESOP Account or LESOP Diversification Account at the time
     of Forfeiture which was not distributed shall be held in a "Pre-Break
     Profit Sharing Account," "Pre-Break LESOP Account" or "Pre-Break LESOP
     Diversification Account," respectively, which shall be 100% vested; and (2)
     the Participant's Profit Sharing Contributions and the net earnings thereon
     and LESOP Contributions and the net earnings thereon attributable to
     service after the Break in Service or five (5) consecutive Breaks in
     Service, as applicable, shall be held in a "Post-Break Profit Sharing
     Account," and "Post-Break LESOP Account," respectively, which shall be
     vested in accordance with Section 11.4(b). Any amounts transferred to the
     Participant's LESOP Diversification Account from the Participant's Pre-
     Break LESOP Account shall be held in the Participant's Pre-Break LESOP
     Diversification Account

                                     -103-
<PAGE>
 

     and amounts transferred from the Participant's Post-Break LESOP Account
     shall be held in the Participant's Post-Break LESOP Diversification
     Account.

          (f)  Each Participant who is a certified swing manager, primary
     maintenance employee, crew member or other hourly restaurant employee who
     is an Employee on July 1, 1992, shall be fully vested in his LESOP Account
     as of July 1, 1992.

     11.5 Payment of Employer Profit Sharing Contribution for Year of
Termination of Employment. If a Participant (or the Beneficiary thereof) who is
an Active Participant for the Plan Year in which or immediately before which he
has a Termination of Employment receives an allocation of Employer Profit
Sharing Contributions pursuant to Section 7.1, an allocation of Company Stock
released from the LESOP Suspense Account pursuant to Section 7.3 or an
allocation of Employer Matching Contributions and Forfeitures pursuant to
Section 7.2 after he has received a single sum distribution of his Net Balance
Account, the vested portion of any such allocation shall be distributed to the
Participant or, in the event of his death, to his Beneficiary within a
reasonable time after the later of the close of the Plan Year or the Valuation
Date following the Participant's election to receive such distribution. If such
Participant or Beneficiary has not received a single sum distribution of his
vested Net Balance Account, any such allocations pursuant to Sections 7.1, 7.2
and 7.3 for the Plan Year shall be credited to the Participant's respective
Accounts and the vested portion of such contributions shall be distributed as a
part of such account in the manner provided in Section 11.2 or 11.3, whichever
shall apply.

   11.6 Designation of Beneficiary and Form of Beneficiary Benefit. Subject to
Sections 11.3 and 11.10, the Participant may (1) designate his Beneficiary, (2)
elect the form of his Beneficiary's benefit and (3) elect to prohibit
Beneficiary elections under Section 11.3(b) on forms provided by and filed with
the Committee; provided that a beneficiary designation completed and filed with
the Committee before January 1, 1989, under the McDonald's Corporation Savings
and Profit Sharing Plan shall be deemed to apply to the Profit Sharing Plan
portion of the Program and a beneficiary designation completed and filed with
the Committee before January 1, 1989, under the McDonald's Matching and Deferred
Stock Ownership Plan shall be deemed to apply to the McDESOP and LESOP portions
of the Program. A beneficiary designation form filed with the Committee on or
after January 1, 1989 and before January 1, 1996 shall be deemed to apply to the
Profit Sharing, McDESOP and LESOP portions of the Program and to replace all
prior Beneficiary designations unless the Beneficiary designation provides
otherwise. A Beneficiary designation filed by a Participant under the Stock
Sharing Plan before January 1, 1996 shall be deemed to apply to the Stock
Sharing portion of the Program. A Beneficiary designation filed with the
Committee on or after January 1, 1996, shall be deemed to apply to the entire
Program and to replace all prior Beneficiary designations except to the extent
such Beneficiary designation provides otherwise. The Participant may submit
separate Beneficiary designations for the Profit Sharing, McDESOP, LESOP and
Stock Sharing portions of the Program change his Beneficiary designation and his
elections concerning his Beneficiary's benefit from time to time by filing the
beneficiary designation form with the Committee. No designation of Beneficiary
or election concerning a Beneficiary's benefit or change of such designation or

                                     -104-
<PAGE>
 

election shall be effective until filed with the Committee. If a Participant
shall fail to file a valid Beneficiary designation, if all persons designated on
the Beneficiary designation form predecease the Participant (or, in the case of
a Beneficiary other than an individual, cease to exist prior to the
Participant's death) or to the extent that the Participant's Beneficiary
designation form fails to dispose of his entire interest, the Trustee shall
distribute the Participant's vested Net Balance Account to the following persons
in the following order of precedence:

          (a)  His surviving spouse;

          (b)  With respect to the Profit Sharing Plan portion of the Program,
     his Beneficiary designated under McDESOP portion of the Program; with
     respect to the McDESOP and LESOP portion of the Program, his Beneficiary
     designated under the McDonald's Corporation Savings and Profit Sharing Plan
     or the Profit Sharing Plan portion of the Program; and with respect to the
     Stock Sharing portion of the Program, those persons designated by the
     Participant to receive his death benefits under the Participant's
     McDonald's basic group term life insurance benefits or, in the absence of
     such designation, under the Profit Sharing Plan portion of the Program.

          (c)  The person or entity who receives the Participant's McDonald's
     basis group term life insurance benefits;

          (d)  His lawful descendants including adopted children per stirpes;

          (e)  His parents in equal shares, or (if only one parent survives him)
     his surviving parent;

          (f)  The lawful descendants of his parents, per stirpes;

          (g)  His estate.

In the absence of a Participant's election to prohibit the Beneficiary elections
allowed in Section 11.3(b), his Beneficiary shall be permitted to make such
elections.

     11.7 Incompetency, Distribution of Benefits.

          (a)  If a Participant or Beneficiary is declared an incompetent or is
     a minor, and a conservator, guardian or other person legally charged with
     his care is appointed or if such Participant is not a minor and has
     executed a so-called durable power of attorney and if the Committee is
     given written notice of such appointment or power of attorney, any benefits
     to which such Participant or Beneficiary is entitled shall be distributable
     to such conservator, guardian or other person legally charged with his care
     or to the attorney-in-fact under the power of attorney.

          (b)  If a Participant or Beneficiary is incompetent, a minor or, in
     the opinion of the Committee, would fail to derive benefit from
     distribution of his

                                     -105-
<PAGE>
 

     accounts and if a conservator, guardian or other person legally charged
     with his care has not been appointed or if the Committee has not been given
     written notice of such appointment, the Committee may (1) require the
     appointment of a conservator or guardian, (2) distribute the Participant's
     Accounts to relatives of the Participant or Beneficiary for the benefit of
     the Participant or Beneficiary, or (3) distribute such Accounts directly to
     or for the benefit of the Participant or Beneficiary.

          (c)  The decision of the Committee in such matters shall be final,
     binding and conclusive upon the Employer and the Trustee and upon each
     Employee, Participant, Beneficiary and every other person or party
     interested or concerned, and neither the Employer, the Committee nor the
     Trustee shall be under any duty to see to the proper application of such
     distribution made to or for a Participant or Beneficiary, or conservator,
     guardian or relative of a Participant or Beneficiary.

   11.8   Deduction of Taxes from Accounts Payable. The Trustee or the Committee
may deduct from the amount to be distributed such amount as the Trustee or the
Committee, in its sole discretion, deems proper to protect the Trustee, the
Committee and the Trust against liability for the payment of death, succession,
inheritance, income, or other taxes, and out of the money so deducted, the
Trustee may discharge any such liability and pay the amount remaining to the
Participant, the Beneficiary or the deceased Participant's estate, as the case
may be.

   11.9   Deadline for Payment of Benefits. Except to the extent that a
Participant in accordance with the Program otherwise elects and except to the
extent it is not administratively feasible, payment of benefits shall be made or
commence not later than sixty (60) days after the latest of (a) the close of the
Plan Year in which the Participant attains age fifty-five (55), (b) the close of
the Plan Year in which occurs the tenth (10th) anniversary of the Plan Year in
which the Participant commenced participation, and (c) the close of the Plan
Year in which the Participant has a Termination of Employment; provided that, a
Participant, who is entitled to receive a distribution pursuant to this Section
11.9, must submit a claim for benefits before any distributions will be made
hereunder.

   11.10  Spousal Consent to a Beneficiary or a Waiver.

          (a)  A valid spousal consent to the Participant's naming of a
     Beneficiary other than his spouse or to the Participant's Waiver of a
     Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor
     Annuity shall be:

               (1)  in a writing acknowledging the effect of the consent;

               (2)  witnessed by a notary public;

               (3)  effective only with respect to a specific Beneficiary and,
          in the case of a waiver of a Qualified Joint and Survivor Annuity or
          Qualified Preretirement Survivor Annuity, shall specify an optional
          form of benefit unless the spouse voluntarily in such consent
          expressly permits subsequent

                                     -106-
<PAGE>
 

          designations of beneficiaries or elections of optional forms of
          benefit without further spousal consent and acknowledges the spouse's
          right to limit the consent to a specific Beneficiary and optional form
          of benefit, where applicable; and

               (4)  effective only for the spouse who exercises the consent;

     provided that notwithstanding the provisions of this Article XI, the
     consent of a Participant's spouse shall not be required if it is
     established to the satisfaction of a Plan representative that such consent
     may not be obtained because there is no spouse, because the spouse cannot
     be located or because of such other circumstances as the Secretary of the
     Treasury may by regulations prescribe.

          (b)  To the extent provided in any Qualified Domestic Relations Order
     (as defined in Section 414(p) of the Internal Revenue Code), the former
     spouse of a Participant shall be treated as the surviving spouse of such
     Participant for purposes of Section 11.3 and for providing consent in
     accordance with Section 11.10(a).

   11.11  Single Sum Payment without Election. Notwithstanding any provisions of
this Article XI (except Section 11.14 to the extent therein provided) to the
contrary, if the Participant or Beneficiary is entitled to a distribution
because of the Participant's Break in Service (but not in the case of a Break in
Service without a Termination of Employment), retirement on or after his Vesting
Retirement Date, death, Disability, or other Termination of Employment, and if
the value of the vested portion of a Participant's Net Balance Account under the
Program does not exceed $3,500 ($5,000 on or after January 1, 1998), the
Committee shall direct the immediate distribution of such benefit prior to the
annuity starting date or other date of distribution or commencement of
distribution, regardless of any election or consent of the Participant, his
spouse, or other Beneficiary. If the Net Balance Account under the Program of an
alternate payee under a Qualified Domestic Relations Order, as provided under
Section 16.5, does not exceed $3,500 ($5,000 on or after January 1, 1998), the
Committee shall direct the immediate distribution of such benefit regardless of
any election of the alternate payee absent a contrary provision in the Qualified
Domestic Relations Order.

   11.12  Installment Payments. Notwithstanding anything in Sections 11.2 or
11.3 to the contrary and subject to Section 11.4:

          (a)  Elected Installments Paid to Participant. If a Participant elects
     installment payments, they shall be substantially equal installments, paid
     at least annually, over a period certain as elected by the Participant
     which period shall not be in excess of the life expectancy of the
     Participant or the joint and last survivor life expectancy of the
     Participant and his Beneficiary, if such Beneficiary is an individual
     ("Applicable Life Expectancy") determined as of the date such payments
     commence; provided that if elected by the Participant pursuant to Section
     11.12(e), life expectancy may be redetermined.

                                     -107-
<PAGE>
 

          (b)  Required Installments Paid to Participant. The Applicable Life
     Expectancy of a Participant, who according to the records of the Employer
     has attained the age of 70-1/2 and who elects to receive installments but
     who fails to make a permissible election with respect to the period over
     which installments shall be paid or fails to provide the Committee with any
     requested proof of his age or the age of his Beneficiary by such deadline
     as the Committee shall require, shall be deemed to be the life expectancy
     of the Participant as reasonably determined from the records of the
     Employer; provided that if a Participant subsequently provides the
     Committee with proof that his age is greater than the Employer's records
     indicated, the Committee shall redetermine the Participant's Applicable
     Life Expectancy based upon the corrected information and shall distribute
     to the Participant any amounts which would have been required to be
     distributed if the Participant's correct age had been used to determine his
     Applicable Life expectancy for the purpose of determining the Minimum
     Distribution Amount for any installment distributions which have already
     been made.

          (c)  Installments Commencing After Participant's Death. If
     installments commence to be paid after the Participant's death to the
     Participant's Beneficiary who is an individual, they shall be substantially
     equal installments, paid at least annually, over a period certain not in
     excess of the life expectancy of such individual ("Applicable Life
     Expectancy") determined as of the date such payments commence; provided
     that if the Participant's Beneficiary is his surviving spouse, such
     Beneficiary may elect to have his life expectancy redetermined as provided
     in Section 11.12(e).

          (d)  Minimum Distribution Amount. Installment payments are
     substantially equal if the amount of each installment distributed in a
     calendar year is not less than an amount ("Minimum Distribution Amount")
     equal to the balance of the person's Net Balance Account as of the last day
     of the preceding calendar year divided by the Applicable Life Expectancy.
     In calculating the Minimum Distribution Amount for each calendar year after
     the calendar year in which the Participant attained the age of 70-1/2 or
     for each calendar year after payments to the Beneficiary have commenced
     (either of which is called the "First Year"), the Applicable Life
     Expectancy shall be reduced by one for each calendar year which has elapsed
     commencing with the First Year.

          (e)  Determination of Life Expectancy. The life expectancy of a
     Participant and of his spouse and the joint and last survivor life
     expectancy of the Participant and his spouse may be redetermined for
     purposes of determining the amounts required to be distributed pursuant to
     Section 11.2(c), 11.2(d) or 11.12(a), if elected by the Participant (or his
     spouse, if the Participant is deceased and if his spouse is the
     Participant's Beneficiary) in accordance with such uniform and
     nondiscriminatory rules as the Committee shall establish, but may not be
     redetermined more frequently than annually. Life expectancies shall not be
     redetermined unless the Participant (or spouse) so elects by the date
     distributions are required to commence under the Program. Unless subject to
     redetermination, life expectancies are calculated using the Participant's
     or Beneficiary's birth date in the calendar year in which the Participant

                                     -108-
<PAGE>
 

     attains the age of 70-1/2, in the case of benefits commencing during the
     Participant's lifetime and in the case of payments to the Beneficiary, as
     of the date such payments commence. In the case of annuity payments,
     however, life expectancy is determined in the calendar year in which
     annuity payments commence. If a Participant's or his spouse's life
     expectancy is not being redetermined, it shall be reduced by one for each
     year after the calendar year in which it was determined for the purpose of
     determining the amount of installment payments hereunder. All life
     expectancies shall be determined using the expected return multiples in
     Tables V and VI of Treas. Reg. (S) 1.72-6 or any successor tables issued
     from time to time by the Internal Revenue Service.

   11.13  Required Minimum Distributions to Employed Participants.
     
          (a)  A Participant who has attained his Required Beginning Date but
     has not had a Termination of Employment shall commence receiving
     installment payments in the Minimum Distribution Amount for the calendar
     year in which he becomes 70-1/2 not later than April 1 of the following
     year and installment payments for each calendar year after the calendar
     year in which he became 70-1/2, not later than the last day of each such
     year.

          (b)  The amount distributed for the year in which such Participant
     becomes 70-1/2 and in each calendar year thereafter shall be not less than
     the Minimum Distribution Amount determined under Section 11.12(a).

          (c)  A Participant who has not had a Termination of Employment and who
     expects to attain his Required Beginning Date in the next calendar year,
     may elect at such time and on such form as the Committee shall permit to
     receive his first distribution required pursuant to Section 11.13(a) in the
     year in which he becomes 70-1/2 years of age.

          (d)  A Participant who attains the age of 70-1/2 may elect to receive
     his entire vested Net Balance Account on or after the Attainment of that
     age. A Participant, who elects to receive his entire vested Net Balance
     Account pursuant to the preceding sentence, may elect to have such election
     apply each subsequent Plan Year until he changes the election with respect
     to a future Plan Year.

          (e)  Elective Distributions. Notwithstanding the foregoing provisions
     of Section 11.13, a Participant, who is not a Five Percent Owner and has
     attained the age of 70 1/2 but has not had a Termination of Employment, may
     elect to receive or not to receive distributions as provided in Sections
     11.13(a) and 11.13(b). If the Participant fails to make such an election,
     the distributions provided in Sections 11.13(a) and 11.13(b) shall be made
     to such a Participant. If such distributions have commenced to such a
     Participant, he or she may make an election to discontinue such
     distributions. If such distributions are not being made to a Participant,
     he or she may make one election, which shall be irrevocable subject to the
     Participant's right under Section 11.16(c) to elect a distribution of his
     entire Net Balance Account, to

                                     -109-
<PAGE>
 

     commence receiving distributions as provided in Sections 11.13(a) and
     11.13(b). Elections made hereunder shall be made at such time and in
     accordance with such procedures as the Committee shall from time to time
     permit.

   11.14  Transitional Rules.

          (a)  TEFRA 242(b) Elections. Effective for all Participants and
     Beneficiaries whether or not the Participant was an Employee after the
     Effective Date of the Program, notwithstanding any other provision herein,
     distributions to Participants or Beneficiaries made from the Profit Sharing
     Plan portion of the Program, except for the Participant's Diversification
     Account, are subject to any valid election under TEFRA Section 242(b) made
     under the McDonald's Corporation Savings and Profit Sharing Plan by a
     Participant prior to January 1, 1984 to have the distribution of the
     Participant's benefits deferred or extended beyond the period otherwise
     permitted under the provisions of this Article XI which was then permitted
     under applicable law until the Participant (or his Beneficiary) revokes the
     election by an act recognized as a revocation under TEFRA 242(b); provided
     that if the Participant's spouse is not the Beneficiary of 100 percent of
     his vested Accrued Benefit under the Program, the Participant's spouse
     shall have consented to the naming of another Beneficiary in accordance
     with Section 11.10.

          (b)  Distributions to Certain Participants and Beneficiaries in Pay
     Status. Effective for all Participants and Beneficiaries whether or not the
     Participant was an Employee after January 1, 1984, for any distribution
     which would not have disqualified the Trust under Code Section 401(a)(9) as
     in effect prior to amendment by the Tax Reform Act of 1984, which was
     permitted under the Program as in effect on the date such distributions
     commenced, and which either

               (1)  commenced prior to and continued on or after January 1,
          1984, distributions may continue to the Participant or the Beneficiary
          to whom such distribution is being made under the method of
          distribution in effect; provided that the method of distribution was
          specified in a writing including the time at which the distribution
          was to commence, the period over which such distributions will be made
          and, in the case of any distribution upon the Participant's death, a
          list of the Beneficiaries of the Participant in order or priority; or

               (2)  commenced prior to the first Plan Year beginning in 1985,
          distributions may continue to the Participant or the Beneficiary to
          the extent permitted under applicable law, regulations and rulings.

   11.15  Sale of Restaurant - Special Vesting Rules. Notwithstanding any of the
provisions herein to the contrary, a Participant who is not 100% vested in his
Profit Sharing Account and his LESOP Account and who has a Termination of
Employment on account of a sale on or after December 1, 1986 but prior to
January 1, 1993 of a McDonald's restaurant to a joint venture partnership in
which the Company owns an interest ("Joint Venture") shall

                                     -110-
<PAGE>
 

have a single opportunity to elect, in accordance with such procedures as the
Committee shall establish, to receive a distribution of his benefits as provided
in Article XI (or to retain the ability to make an election to receive such a
distribution at any time) or (notwithstanding the provisions of Section 11.11 to
the contrary), solely for purposes of determining the Participant's Vested
Percentage in his Profit Sharing Account, his LESOP Account and LESOP
Diversification Account, if any, to continue to be credited with Credited
Service for employment with the Joint Venture. If the Participant elects to
continue to be credited with Credited Service for employment with the Joint
Venture, his Accounts will subsequently be distributed by applying Article XI as
if the Joint Venture were his sole Employer for the purpose of determining when
such Participant thereafter has a Termination of Employment. Service for periods
of employment with the Joint Venture shall be determined by crediting each such
electing Participant with one Year of Credited Service for each subsequent
consecutive October 31 that such Participant is employed by the Joint Venture;
provided that a Participant shall not receive more than one Year of Credited
Service for a single Plan Year.

   11.16  In-Service Withdrawals.

          (a)  Investment Savings and Rollover Accounts. A Participant may, upon
     written notice to the Committee, given before the administrative cutoff
     date prior to the end of any calendar month, withdraw all or any portion of
     such Participant's Investment Savings Account, Rollover Account and
     Rollover Holding Account valued as of the Valuation Date of the calendar
     month in which such notice is given. Distribution of such withdrawals shall
     be made within the next calendar month. The Committee may, from time to
     time, establish such rules and procedures as it deems appropriate to
     administer or limit the withdrawal of Participant and Rollovers under this
     Section 11.16 provided, however, that in no event shall the Committee limit
     Participants' rights of withdrawal to less than one withdrawal per Plan
     Year. To the extent administratively feasible the period of notice required
     for withdrawal or distribution can be relaxed, reduced or eliminated upon
     appropriate request to the Committee.

          (b)  Stock Sharing Accounts. A Participant may, on a form at such time
     and in such manner as the Committee shall prescribe, elect to have
     distributed to him in cash or in shares of common stock of the Company, the
     shares which have been allocated to his Stock Sharing Account for eighty-
     four (84) months following the month in which such shares were allocated to
     his Stock Sharing Account, provided that such withdrawals shall consist of
     whole shares. As of the Effective Date all shares of common stock of the
     Company purchased with contributions to the Stock Sharing Plan have been
     held for more than 84 months and therefore may be distributed.

          (c)  Distributions after Age 70 1/2. A Participant who has attained
     the age of 70 1/2 but has not had a Termination of Employment may elect, at
     such time and on such form as the Committee shall permit, to begin
     receiving installment payments beginning after he becomes 70 1/2 or to
     receive a distribution of his entire Net Balance

                                     -111-
<PAGE>
 

     Account. An affirmative election to receive installment payments shall be
     irrevocable, provided that at any time a Participant who has attained the
     age of 70 1/2 may elect a distribution of his entire Net Balance Account.

   11.17  Direct Rollovers.

          (a)  Notwithstanding any provision of the Program to the contrary that
     would otherwise limit a Distributee's election under this Section 11.17, a
     Distributee whose benefit is distributable pursuant to another provision of
     the Program may elect, at the time and in the manner prescribed by the
     Committee, to have any portion of an Eligible Rollover Distribution paid
     directly to an Eligible Retirement Plan specified by the Distributee in a
     Direct Rollover; subject to such reasonable administrative requirements as
     the Committee may from time to time establish which may include, but shall
     not be limited to, requirements consistent with Treasury Regulations and
     other guidance issued by the Internal Revenue Service permitting de minimis
     standards for amounts eligible to be rolled over or paid partly to the
     Participant and partly rolled over. A Participant may make an election
     pursuant to this Section 11.17 only after the Distributee has met otherwise
     applicable requirements for receipt of a distribution under the Program,
     including but not limited to any applicable requirements that the
     Participant's spouse or (pursuant to a Qualified Domestic Relations Order
     as defined in Section 16.5) former spouse consent to the Participant's
     waiver of a Qualified Joint and Survivor Annuity or Qualified Preretirement
     Survivor Annuity.

          If a Participant or Beneficiary elects to receive a Direct Rollover or
     a distribution in a form other than an annuity as provided in Section
     11.2(a)(1)(C) or 11.3(a)(3)(C), such distribution may be made or commence
     to be made less than 30 days after the notice required under Section
     1.411(a)-11(c) of the Income Tax Regulations is given, provided that:

               (1)  the Committee shall inform the Participant or Beneficiary
          that he has a right to a period of at least 30 days after receiving
          the notice to consider the decision of whether or not to elect a
          distribution (and, if applicable, a particular distribution option or
          a direct rollover), and

               (2)  the Participant or Beneficiary after receiving the notice
          affirmatively waives his right to consider his decision for a 30 day
          period.

          (b)  In the absence of the adoption by the Committee of any
     requirements to the contrary, the following shall apply:

               (1)  A Distributee whose Eligible Rollover Distribution is less
          than $200 upon the Valuation Date immediately preceding the date of
          distribution shall not be permitted to elect to have all or any
          portion of the distribution made in the form of a Direct Rollover.

                                     -112-
<PAGE>
 

               (2)  A Distributee who elects a Direct Rollover in an amount
          equal to at least $500 may also elect to have the remaining portion of
          his distribution paid to the Distributee.

               (3)  A Distributee shall be permitted to divide an Eligible
          Rollover Distribution into separate distributions to be paid to two or
          more Eligible Retirement Plans in two or more Direct Rollovers.

               (4)  A Distributee's election to make or not to make a Direct
          Rollover with respect to a payment in a series of periodic payments
          shall apply to all subsequent payments in the series until the
          Distributee changes his election.

               (5)  If a Distributee, who has been notified as to the
          availability of the Direct Rollover option, fails to elect a Direct
          Rollover with respect to an Eligible Rollover Distribution, such
          Distributee shall be deemed to have elected not to make a Direct
          Rollover.

          (c)  As used in this Section 11.17, the following terms shall have the
     following meanings:

               (1)  "Eligible Rollover Distribution" means any distribution of
          all or any portion of the balance to the credit of the Distributee,
          except that an Eligible Rollover Distribution does not include: any
          distribution that is one of a series of substantially equal periodic
          payments (not less frequently than annually) made for the life (or
          life expectancy) of the Distributee or the joint lives (or joint life
          expectancies) of the Distributee and the Distributee's designated
          Beneficiary, or for a specified period of ten years or more; any
          distribution to the extent such distribution is required under Section
          11.13; and the portion of any distribution that is not includable in
          gross income (determined without regard to the exclusion for net
          unrealized appreciation with respect to employer securities).

               (2)  "Eligible Retirement Plan" means an individual retirement
          account described in Section 408(a) of the Internal Revenue Code, an
          individual retirement annuity described in Section 408(b) of the
          Internal Revenue Code, an annuity plan described in Section 403(a) of
          the Internal Revenue Code, or a qualified trust described in Section
          401(a) of the Internal Revenue Code, that accepts the Distributee's
          Eligible Rollover Distributions. However, in the case of an Eligible
          Rollover Distribution to a Participant's surviving spouse or surviving
          former spouse who is a Distributee pursuant to a Qualified Domestic
          Relations Order, an Eligible Retirement Plan is an individual
          retirement account or individual retirement annuity.

               (3)  "Distributee" means a Participant. In addition, a
          Participant's surviving spouse and a former spouse who is the
          alternate payee under a

                                     -113-
<PAGE>
 

          Qualified Domestic Relations Order are Distributees with regard to the
          interest of such spouse or former spouse.

               (4)  "Direct Rollover" means a payment by the Program to the
          Eligible Retirement Plan specified by the Distributee.

                                     -114-
<PAGE>
 

                                  ARTICLE XII

                           SUBSIDIARY PARTICIPATION

   12.1   Adoption of Program and Trust. Any Commonly Controlled Entity,
Subsidiary or Domestic or Foreign Affiliate of the Company (or other business
entity in which the Company owns an interest) may, with the approval of the
Board of Directors and under such terms and conditions as the Board of Directors
may prescribe, adopt the Program and Trust by resolution of its board of
directors (or approval of other appropriate persons in the case of a
noncorporate entity); provided that the LESOP portion of the Program can be
adopted only by a corporation which is a Commonly Controlled Entity or another
corporation included with the Company in a group defined in (a) or (b) below:

          (a) a corporation which is part of a group of corporations in which a
     common parent owns directly stock possessing at least 50 percent of the
     voting power of all classes of stock and at least 50 percent of each class
     of non-voting stock in a first tier subsidiary and such subsidiary (and all
     other corporations below it in the chain) which would meet the 80 percent
     test of Section 1563(a) of the Code if the first tier subsidiary were the
     common parent); and

          (b) a corporation which is part of a group of corporations in which a
     common parent owns directly stock possessing all of the voting power of all
     classes of stock and all of the non-voting stock in the first tier
     subsidiary and the first tier subsidiary owns directly stock possessing at
     least 50 percent of the voting power of all classes of stock, and at least
     50 percent of each class of non-voting stock, in a second tier subsidiary
     of the common parent and such second tier subsidiary (and all other
     corporations below it in the chain which would meet the 80 percent test of
     Section 1563(a) of the Code if the second tier subsidiary were a common
     parent).

   12.2   Withdrawal from Program by Participating Employer. While it is not the
present intention of any Employer to withdraw from the Program, any Employer
other than the Company shall have the right, at any time, upon the approval of
and under such conditions as may be provided by the Board of Directors, to
withdraw from the Program and Trust by delivering to the Committee and the
Trustee written notice of its election so to withdraw.

     Upon receipt of such notice by the Committee, the Accounts of Participants
employed by the withdrawing Employer as of the date of withdrawal shall be fully
vested and shall not thereafter be subject to Forfeiture unless such Participant
shall transfer to another Employer as of the date of the withdrawal. In the
event of the withdrawal of an Employer, such Employer shall elect and notify the
Committee of its election, whether the Net Balance Accounts of the Participants
employed by such Employer (a) shall be immediately distributable by the Trustee,
(b) shall be retained in the Program and become distributable when such
employees die, or otherwise terminate their employment with the Employer, or (c)
if the Employer establishes a plan which meets the requirements of Section
401(a) of the Code which plan permits a transfer from this Program to it by
transfer of the Net Balance

                                     -115-
<PAGE>
 

Accounts of Participants who are employees of such Employer to such Employer's
plan to be held in separate accounts under such plan for the benefit of the
respective Participants; provided that a distribution shall not be made to a
Participant who is not otherwise entitled to a distribution in accordance with
Article XI unless there has been a disposition of substantially all the assets
used by the Employer in a trade or business and the Employee continues
employment with the corporation acquiring such assets or the Company has
disposed of its interest in the Employer and the Employee continues employment
with the former Employer.

                                     -116-
<PAGE>
 

                                 ARTICLE XIII

                         ADMINISTRATION OF The Program

   13.1   Appointment and Removal of, and Resignation by, Trustee. The Board of
Directors shall have the power to appoint a successor to a Trustee (including
any one or more individuals acting as Trustee) which has resigned or been
removed, to direct the Trustee to enter into a custodial agreement providing for
deposit of all or any part of the Trust Fund with the custodian, and, with the
consent of the Trustee, to appoint a co-Trustee. The Trustee may resign at any
time upon thirty (30) days' written notice (or such shorter period of time as
the Board of Directors shall permit by written consent) to the Company and the
Committee. The Board of Directors shall have the power to remove the Trustee,
with or without cause, upon written notice to the Trustee.

     The appointment of a successor Trustee or co-Trustee shall become effective
upon acceptance in writing of such appointment by the successor Trustee or co-
Trustee and upon acceptance of such appointment by the successor Trustee, the
Trustee shall assign, transfer and pay over to the successor Trustee the Trust
Fund. The successor Trustee or co-Trustee may be either a corporate Trustee or
an individual, and, except as required by federal law, the successor Trustee or
co-Trustee shall not be personally liable for anything done or omitted to be
done by a predecessor Trustee or co-Trustee prior to the appointment of the
successor or co-Trustee or be required to examine the accounts, records or acts
of any predecessor Trustee or co-Trustee. Each successor Trustee appointed to
and accepting a Trusteeship hereunder shall have all the rights, title, powers,
duties, exemptions and limitations of the original Trustee.

   13.2   Appointment of Committee; Tenure in Office. The administrative
committee ("Committee") shall consist of not less than five (5) members who
shall be appointed by the Board of Directors. The Board of Directors shall have
power to determine the period during which any Committee member shall serve and,
in its discretion, may remove any member of the Committee at any time without
assigning any reason therefore. A Committee member may resign at any time by
written notice to the Chief Executive Officer or any Executive Vice President of
the Company. Upon a vacancy occurring, owing to the death, resignation or
removal by the Board of Directors of any member of the Committee, a successor
shall be appointed by the Board of Directors. Until a vacancy in the Committee
is filled by the Board of Directors, the remaining members of the Committee
shall continue to act as the Committee. The Board of Directors shall certify to
the Trustee and the Committee the names of the members of the Committee and,
thereafter, any change in its membership.

   13.3   Named Fiduciaries. The Company, the Board of Directors, the Committee
and every Participant, Beneficiary or Employee of the Company, its subsidiaries
or affiliates who becomes a fiduciary by virtue of the delegation of duties,
responsibilities and authority with respect to the administration and operation
of the Program in accordance with Article XIII shall be "named fiduciaries" as
provided in Section 402(a) of ERISA, and shall, accordingly, be afforded the
protection provided for in Section 405(c)(2) of ERISA with respect to named
fiduciaries.

                                     -117-
<PAGE>
 

   13.4   Delegation of Responsibilities. The Committee and the Board of
Directors shall have the authority, as it may deem advisable, to delegate, from
time to time, by instrument in writing all or any part of its responsibilities
under the Program (including the power to delegate) to such person or persons as
it may deem suitable, and in the same manner to revoke any such delegation of
responsibility. Periodically the delegate shall report to the Committee or Board
of Directors concerning the discharge of his delegated responsibilities. Any
action of the delegate in the exercise of such delegated responsibilities shall
have the same force and effect for all purposes hereunder as if such action had
been taken by the Committee or the Board of Directors. Neither the Committee,
the Board of Directors nor any of their members shall be liable for the acts or
omissions of such delegate except as otherwise required by Federal law.

     The Committee's authority to delegate in accordance with this Section 13.4
shall include, but not be limited to, authority to delegate all or any part of
the responsibilities set forth in Section 13.5 to any department or employee of
the Company or other Employer including but not limited to the Legal Department,
the Tax Department, the Accounting Department, the Human Resources Department,
the Information Services Department or the Payroll Department.

   13.5   Committee Duties. The Committee on behalf of the Participants and all
other Beneficiaries of the Program and the Trust shall administer and operate
the Program and the Trust Agreement in accordance with the terms of the Program
and the Trust Agreement and shall periodically report to the Board of Directors
on the administration and operation of the Program. The Committee shall have all
powers necessary to discharge its duties, including, but not by way of
limitation, the following:

          (a)  To periodically review and monitor the performance of the
     Investment Managers, as defined in Section 4.4 of the Trust Agreement, and
     provide recommendations to the Board of Directors for the appointment or
     removal of the Program's Investment Managers;

          (b)  To prepare and furnish to the Board of Directors its
     recommendations with respect to the establishment of and, from time to
     time, changes in the general investment objectives and guidelines for the
     management and investment of the assets of the Program;

          (c)  To prepare and furnish the Board of Directors with periodic
     reports on the performance of the Investment Funds and the general
     administration of the Program;

          (d)  To review and monitor the performance of the Trustee with respect
     to the responsibilities set forth in the Trust Agreements;

          (e)  To construe and interpret the Program, decide all questions
     concerning eligibility for participation and questions relating to the
     amount and manner of

                                     -118-
<PAGE>
 

     payment of benefits hereunder and all such determinations shall be
     conclusive and binding upon Participants, spouses and other Beneficiaries;

          (f)  To receive from the Company and Employer or have prepared by the
     Company and Employer such records and information as shall be necessary for
     the proper administration of the Program;

          (g)  To have prepared and furnished to Participants or Beneficiaries
     all information required under Federal law or provisions of this Program to
     be furnished to them;

          (h)  To have prepared and filed or published with the Department of
     Labor and the Department of Treasury or other governmental agency all
     reports or other information required under federal law;

          (i)  To have maintained records of the Trust Fund with respect to the
     Net Balance Accounts of Participants;

          (j)  To determine all questions arising in the administration of the
     Program, including those relating to the eligibility of persons to become
     Participants; the rights of Participants and their Beneficiaries; and
     Employer Contributions; and its decision thereon shall be final and binding
     upon all persons hereunder;

          (k)  To review the performance of any person to whom duties and
     responsibilities have been delegated under Section 13.4;

          (l)  To annually review and approve the proposed budget for the
     Program's administrative expenses and to approve and direct the Trustee as
     to the payment of such expenses including those which arise which were not
     anticipated in the budget; and

          (m)  To direct the Trustee as to the payment of distributions from the
     Trust or otherwise arrange for distributions to be made from the Trust Fund
     through a commercial banking account as provided in Section 3.2 of the
     Trust.

   13.6   Committee Action by Majority -- Authorization of Members to Execute
Documents. The Committee may act at a meeting (including a meeting at which some
or all of the members of the Committee are present by telephone) by the consent
of a majority of its members, or without a meeting by the unanimous written
consent of its members.

     No member of the Committee shall vote or decide upon any matter relating
specifically to himself or to his specific rights or benefits under the Program.

     The Committee may authorize any of its members to execute on its behalf any
document which reflects an action or decision of the Committee and the Committee
shall notify the Trustee in writing of the names of its members so authorized.
Until the

                                     -119-
<PAGE>
 

Committee revokes or alters such authorization by a written notice to the
Trustee, the Trustee may accept and rely upon any document executed by such
members as reflecting action by the Committee.

   13.7   Secretary. The Committee shall appoint a Secretary (who may, but need
not, be a member of the Committee) to keep records of the acts and resolutions
of the Committee. The Secretary may also perform such other duties which may,
from time to time, be delegated to him in writing by the Committee.

   13.8   Member as Participant. A member of the Committee who is also a
Participant or a Beneficiary shall receive any benefit to which he may be
entitled as a Participant or Beneficiary in the Program so long as such benefit
is computed and paid on a basis that is consistent with the terms of the Program
as applied to all other Participants and Beneficiaries.

   13.9   Rules and Decisions. The Committee may, from time to time, adopt or
amend such rules and regulations as it deems necessary or desirable which are
consistent with the provisions or the purposes of the Program. All rules and
decisions of the Committee shall be applied to all Participants in similar
circumstances in a uniform and non-discriminatory manner. In adopting, amending
or applying its rules and regulations, the Committee shall be entitled to, but
need not, rely upon information furnished by a Participant or Beneficiary, a
delegate, an Employer or Employee, the Trustee or the Company. All rules and
regulations of the Committee shall be conclusive and binding upon Participants,
spouses and Beneficiaries.

   13.10  Electronic Elections. Anything in the Plan to the contrary not
withstanding, the Committee may determine to permit Participants or their
Beneficiaries to make electronic elections (except for elections to receive
amounts from a Participant's accounts whether by distribution, in-service
withdrawal or otherwise) in lieu of written elections provided in the Plan. In
making such a determination, the Committee shall consider the availability of
electronic elections to Participants, the protection of the rights of
Participants and their Beneficiaries, the appropriateness of the standards for
authentication of identity and other security considerations involved in the
electronic election system and any guidance issued by the Internal Revenue
Service and the Department of Labor.

   13.11  Agents and Counsel. The Committee and its delegates shall have the
authority to appoint or employ individuals to assist or to advise in the
administration of the Program and any other agent deemed advisable, including
but not limited to, independent certified public accountants and legal and
actuarial counsel, who may but need not be the accountants or the legal or the
actuarial counsel of the Company.

   13.12  Authorization of Benefit Distribution. The Committee shall issue
directions to the Trustee concerning all distributions to be made from the Trust
Fund pursuant to the provisions of the Program. All such directions shall be in
accordance with the Program.

                                     -120-
<PAGE>
 

   13.13  Claims Procedure.

          (a)  Each Participant or Beneficiary (for purposes of this Section
     called a "Claimant") may submit his claim for benefits to the Plan
     Administrator in writing in such form as is permitted by the Committee. A
     Claimant shall have no right to seek review of a denial of benefits, or to
     bring any action in any court to enforce a claim for benefits, prior to his
     filing a claim for benefits and exhausting his rights to review in
     accordance with this Section.

          When a claim for benefits has been filed properly, such claim for
     benefits shall be evaluated and the Claimant shall be notified of the
     approval or the denial within ninety (90) days after the receipt of such
     claim unless special circumstances require an extension of time for
     processing the claim. If such an extension of time for processing is
     required, written notice of the extension shall be furnished to the
     Claimant prior to the termination of the initial ninety (90) day period,
     and such notice shall specify the special circumstances requiring an
     extension and the date by which a final decision will be reached (which
     date shall not be later than one hundred and eighty (180) days after the
     date on which the claim was filed). A Claimant shall be given a written
     notice in which he shall be advised as to whether the claim is granted or
     denied, in whole or in part. If a claim is denied, in whole or in part, the
     Claimant shall be given written notice which shall contain (1) the specific
     reasons for the denial, (2) references to pertinent Plan provisions on
     which the denial is based, (3) a description of any additional material or
     information necessary to perfect the claim and an explanation of why such
     material or information is necessary, and (4) the Claimant's rights to seek
     review of the denial.

          (b)  If a claim is denied, in whole or in part, the Claimant shall
     have the right to request that the Committee review the denial, provided
     that he files a written request for review with the Committee within sixty
     (60) days after the date on which he received written notification of the
     denial (or such longer period as the Committee for good cause may permit).
     A Claimant (or his duly authorized representative) may review pertinent
     documents and submit issues and comments in writing to the Committee.
     Within sixty (60) days after a request for review is received, the review
     shall be made and the Claimant shall be advised in writing of the decision
     on review, unless special circumstances require an extension of time for
     processing the review, in which case the Claimant shall, within such
     initial sixty (60) day period, be given a written notification specifying
     the reasons for the extension and when such review shall be completed
     (provided that such review shall be completed within one hundred and twenty
     (120) days after the date on which the request for review was filed). The
     decision on review shall be forwarded to the Claimant in writing and shall
     include specific reasons for the decision and references to Plan provisions
     upon which the decision is based. A decision on review shall be final and
     binding on all persons for all purposes. If a Claimant shall fail to file a
     request for review in accordance with the procedures herein outlined, such
     Claimant shall have no rights to review and shall have no right to bring
     action in any court, and the denial of the claim shall become final and
     binding on all persons for all purposes.

                                     -121-
<PAGE>
 

   13.14  Information to be Furnished to Committee. The Company and Employers
shall furnish the Committee or its delegate such evidence, data and information
as the Committee or its delegate may reasonably request. Participants and their
Beneficiaries shall also furnish to the Committee such evidence, data or
information as the Committee or its delegate shall request.

   13.15  Plan Administrator. The Committee may appoint a Plan Administrator who
may (but need not) be a member of the Committee; and in the absence of such
appointment, the Committee shall be the Plan Administrator.

   13.16  Fiduciary as Participant. A fiduciary who is also a Participant or a
Beneficiary shall receive any benefit to which he may be entitled as a
Participant or Beneficiary in the Program so long as such benefit is computed
and paid on a basis that is consistent with the terms of the Program as applied
to all other Participants and Beneficiaries.

   13.17  Fiduciary Responsibility. If a Plan fiduciary acts in accordance with
ERISA, Title I, Subtitle B, Part 4:

          (a) in determining that a Participant's spouse has consented to the
     naming of a Beneficiary other than the spouse, in relying on a
     Participant's election to waive a Qualified Joint and Survivor Annuity or a
     qualified survivor annuity or a revocation of such an election, or in
     determining that the consent of the Participant's spouse may not be
     obtained because there is no spouse, the spouse cannot be located or other
     circumstances prescribed by the Secretary of the Treasury by regulations,
     then to the extent of payments made pursuant to such consent, revocation or
     determination, the Program and its fiduciaries shall have no further
     liability;

          (b) in treating a domestic relations order as being (or not being) a
     Qualified Domestic Relations Order, or, during any period in which the
     issue of whether a domestic relations order is a Qualified Domestic
     Relations Order is being determined (by the Committee, by a court of
     competent jurisdiction, or otherwise), in segregating in a separate account
     in the Program or in an escrow account the amounts which would have been
     payable to the alternate payee during such period if the order had been
     determined to be a Qualified Domestic Relations Order, in paying the
     amounts segregated or held in escrow to the person entitled thereto if
     within 18 months the domestic relations order (or a modification thereof)
     is determined to be a Qualified Domestic Relations Order, in paying such
     amounts to the person entitled thereto if there had been no order, if
     within 18 months the domestic relations order is determined not to be
     qualified or if the issue is not resolved within 18 months and in
     prospectively applying a domestic relations order which is determined to be
     qualified after the close of the 18-month period, then the obligation of
     the Program and its fiduciaries to the Participant and each alternate payee
     shall be discharged to the extent of any payment made pursuant to such
     acts.

                                     -122-
<PAGE>
 

                                  ARTICLE XIV

           AMENDMENT, TERMINATION, MERGER AND CONSOLIDATION OF PLAN

   14.1   Amendment. The Board of Directors shall have the right, at any time
and from time to time, to amend, in whole or in part, any or all of the
provisions of the Program and the Trust Agreement, provided that no amendment
shall authorize or permit any part of the Trust Fund to be used for or diverted
to purposes other than for the exclusive benefit of the Participants or their
beneficiaries, or permit any portion of the Trust Fund to revert to or become
the property of any Employer, except as may be permitted under applicable law,
regulations and rulings. No amendment shall deprive any Participant or any
Beneficiary of a deceased Participant of any of the benefits or of an optional
form of benefit to which he is entitled under this Program with respect to
contributions previously made or, except to the extent permitted in regulations
and rulings issued by the Secretary of the Treasury, shall eliminate an optional
form of benefit with respect to contributions previously made, nor shall any
amendment decrease any Participant's Accounts provided that no amendment made in
conformance to provisions of the Internal Revenue Code or any other statute
relating to employee's trusts, or any official regulations or rulings issued
pursuant thereto, shall be considered prejudicial to the rights of any
Participant or Beneficiary. No amendment which affects the rights, duties or
responsibilities of the Trustee may be made without the Trustee's written
consent.

     The Committee shall have the same authority with respect to the adoption of
amendments to the Program and the Trust Agreement as the Board of Directors in
the following circumstances:

          (a)  to adopt amendments to the Program or Trust which the Committee
     determines are necessary or desirable for the Program to comply with or to
     obtain benefits or advantages under the provisions of applicable law,
     regulations or rulings or requirements of the Internal Revenue Service or
     other government administrative agency or of changes in such law,
     regulations, rulings or requirements; and

          (b)  to adopt any other procedural or cosmetic amendment that the
     Committee determines to be necessary or desirable that does not materially
     change benefits to Participants or their Beneficiaries or materially
     increase the Employers' contributions to the Program.

     The Committee shall provide notice of amendments adopted by the Committee
to the Board of Directors on a timely basis.

   14.2   Termination of Program By the Company. Although it is the intention of
the Company that this Program be permanent, the Company reserves the right to
terminate the Program and the Trust at any time, by delivering to the Committee,
the Trustee and each Employer hereunder, written notice of termination.

                                     -123-
<PAGE>
 

     Upon termination of the Program or permanent discontinuance of Employer
Contributions to the Program, the interest in his Net Balance Account of each
Participant who is an Employee at the time of the termination, shall become
fully vested. Such vested Accounts, shall, however, be subject to readjustment
as provided in Sections 10.14, 10.15, 10.16, 10.17 and 10.19. In the event of
termination of this Program, the Board of Directors may direct that the Trustee
continue the Trust for a specified period of time, or for such period of time,
as the Trustee, in its sole discretion, may deem to be in the best interest of
the Participants or their Beneficiaries. In the absence of specific direction
from the Board of Directors, the Trust assets shall be distributed by the
Trustee to Participants under the options set forth in Section 11.2 hereof or to
Beneficiaries under the options set forth in Section 11.3: provided, however,
that Participant Elected Contributions, Employer Matching Contributions and
Special Section 401(k) Employer Contributions shall be distributed only if (a)
the Participant has a Termination of Employment, death or Disability, or has
attained the age of 59-1/2, (b) the Program is terminated without the Employer's
establishment or maintenance of another defined contribution plan (excluding a
leveraged ESOP as defined in Code Section 4975(e)(7)), (c) the Employer disposes
of substantially all of its assets used in a trade or business to an unrelated
corporation and the Employee continues employment with the acquiring corporation
or (d) the Employer disposes of its interest in a subsidiary to an unrelated
party and the Employee continues employment with the corporation acquiring the
assets or the subsidiary and if, in the case of a distribution made pursuant to
(b), (c) or (d), the distribution is made in the form of a single distribution
of the entire balance to the credit of the Participant in a single taxable year.
Upon the partial termination of the Program the interest of each Participant
whose employment is terminated on account of, or who is affected by, such
partial termination shall become fully vested and such Participant's benefits
shall be distributable to the extent permitted in the preceding sentence. Sales
of McDonald's Restaurants by the Company or another Employer will not constitute
a partial termination unless such sale under all other facts and circumstances
constitutes a partial termination.

   14.3   Merger, Consolidation, or Transfer of Assets. This Program shall not
be merged or consolidated with, nor shall any assets or liabilities be
transferred to, any other plan, unless the benefits payable to each Participant
if the Program were terminated immediately after such action would not be less
than the benefits which would have been payable to each such Participant if the
Program had been terminated immediately before such action.

   14.4   Transfer of Assets from Plans of Subsidiaries. The Board of Directors
may, in its sole and exclusive discretion, authorize and direct the transfer to
the Trust of all (or any designated portion) of the assets of any defined
contribution plan (the "Transferred Assets") which is a Related Plan. The
Transferred Assets, to the extent allocable to persons who are Participants in
the Program, shall be held, managed and distributed for the benefit of
participants of the Related Plan (the "Transferred Assets") subject to such
terms and conditions as the Board of Directors and the board of directors (or
persons having authority similar to the board of directors of a corporation) of
the Commonly Controlled Entity, if applicable, of the Company shall provide.

                                     -124-
<PAGE>
 

          (a) The Trustee shall accept, under such terms and conditions as the
     Board of Directors shall provide for, all Transferred Assets.

          (b) Except as otherwise expressly provided by the Board of Directors
     and the board of directors (or persons having authority similar to the
     board of directors of a corporation) of the Commonly Controlled Entity, if
     applicable, all Participants' interests in the Transferred Assets shall be
     100 percent (100%) vested and non-forfeitable.

          (c) The Committee shall keep separate records of account for each
     Participant's interests in the Transferred Assets.

          (d) Except as otherwise expressly provided herein, the Transferred
     Assets shall be held, managed, invested and distributed in the same manner
     (and subject to the same restrictions) as Rollovers as provided in Article
     VIII of the Program.

          (e) Each Participant's Transferred Assets shall be distributable in
     the same manner as a Participant's Rollover Account; provided that the
     Participant can also elect any benefit option which was available with
     respect to the Transferred Assets under the Related Plan.

                                     -125-
<PAGE>
 

                                  ARTICLE XV

                             TOP HEAVY PROVISIONS

   15.1   Application. The definitions in Section 15.2 shall apply under this
Article XV and the special rules in Section 15.3 shall apply, notwithstanding
any other provisions of the Program, for any Plan Year in which the Program is a
Top Heavy Plan and for such other Plan Years as may be specified herein.
Anything in this Article XV to the contrary notwithstanding, if the Program is a
multiple employer plan as described in Internal Revenue Code Section 413(c), the
provisions of this Article XV shall be applied separately to each Employer
(together with the businesses which with that Employer are Commonly Controlled
Entities or members of an Affiliated Service Group) taking account of benefits
under the plan provided to employees of the Employer, Commonly Controlled Entity
or members of an Affiliated Service Group because of service with that Employer
or Commonly Controlled Entity.

   15.2   Special Top Heavy Definitions. The following special definitions shall
apply under this Article XV.

          (a) "Aggregate Employer Contributions" means the sum of all Employer
     Contributions and Forfeitures under this Program allocated for a
     Participant to the Program and employer contributions and forfeitures
     allocated for the Participant to all Related Defined Contribution Plans in
     the Aggregation Group; provided, however, that Participant Elected
     Contributions, Employer Matching Contributions, LESOP Employer Matching
     Contributions and Special Section 401(k) Contributions shall not be
     included for Non-Key Employees.

          (b) "Aggregation Group" means the group of plans in a Mandatory
     Aggregation Group, if any, that includes the Program, unless inclusion of
     Related Plans in the Permissive Aggregation Group in the Aggregation Group
     would prevent the Program from being a Top Heavy Plan, in which case
     "Aggregation Group" means the group of plans consisting of the Program and
     each other Related Plan in a Permissive Aggregation Group with the Program.

               (1)  "Mandatory Aggregation Group" means each plan (considering
          the Program and Related Plans) that, during the Plan Year that
          contains the Determination Date or any of the four preceding Plan
          Years,

                    (A) had a participant who was a Key Employee, or

                    (B) was necessary to be considered with a plan in which a
               Key Employee participated in order to enable the plan in which
               the Key Employee participated to meet the requirements of Section
               401(a)(4) and Section 410 of the Internal Revenue Code.

                                     -126-
<PAGE>
 

          If the Program is not described in (A) or (B) above, it shall not be
          part of a Mandatory Aggregation Group.

               (2)  "Permissive Aggregation Group" means the group of plans
          consisting of (A) the plans, if any, in a Mandatory Aggregation Group
          with the Program, and (B) any other Related Plan, that, when
          considered as a part of the Aggregation Group, does not cause the
          Aggregation Group to fail to satisfy the requirements of Section
          401(a)(4) and Section 410 of the Internal Revenue Code. A Related Plan
          in (B) of the preceding sentence may include a simplified employee
          pension plan, as defined in Internal Revenue Code Section 408(k), and
          a collectively bargained plan, if when considered as a part of the
          Aggregation Group such plan does not cause the Aggregation Group to
          fail to satisfy the requirements of Section 401(a)(4) and Section 410
          of the Internal Revenue Code considering, if the plan is a multiple
          employer plan as described in Internal Revenue Code Section 413(c),
          benefits under the plan only to the extent provided to employees of
          the employer because of service with the employer and, if the plan is
          a simplified employee pension plan, only the employer's contribution
          to the plan.

          (c) "Determination Date" means, with respect to a Plan Year, the last
     day of the preceding Plan Year or, in the case of the first Plan Year, the
     last day of such Plan Year. If the Program is aggregated with other plans
     in the Aggregation Group, the Determination Date for each other plan shall
     be, with respect to any Plan Year, the Determination Date for each such
     other plan which falls in the same calendar year as the Determination Date
     for the Program.

          (d) "Key Employee" means, for the Plan Year containing the
     Determination Date, any person or the beneficiary of any person who is an
     employee or former employee of an Employer, a Commonly Controlled Entity or
     member of an Affiliated Service Group as determined under Internal Revenue
     Code Section 416(i) and who, at any time during the Plan Year containing
     the Determination Date or any of the four (4) preceding Plan Years (the
     "Measurement Period"), is a person described in paragraph (1), (2), (3) or
     (4), subject to paragraph (5).

               (1) An officer of the Employer, Commonly Controlled Entity or
          member of an Affiliated Service Group who:

                    (A) in any Measurement Period is an officer during the Plan
               Year and has annual Considered Compensation for the Plan Year in
               an amount greater than fifty percent (50%) of the amount in
               effect under Section 415(b)(1)(A) of Internal Revenue Code for
               the calendar year in which such Plan Year ends ($120,000 in 1996,
               adjusted in subsequent years as determined in accordance with
               regulations prescribed by the Secretary of the Treasury or his
               delegate pursuant to the provisions of Section 415(d) of the
               Internal Revenue Code); and

                                     -127-
<PAGE>
 

          No more than a total of fifty (50) persons (or, if lesser, the greater
          of three (3) persons or ten percent (10%) of all persons or
          beneficiaries of persons who are employees or former employees) shall
          be treated as Key Employees under this paragraph (1) for any
          Measurement Period. In the case of an Employer, Commonly Controlled
          Entity or member of an Affiliated Service Group which is not a
          corporation in any Measurement Period, the term "officer" as used in
          this subsection (d) shall include administrative executives as
          described in Section 1.416-1(T-13) of the Treasury Regulations.

               (2)  One (1) of the ten (10) persons who, during a Plan Year in
          the Measurement Period:

                    (A) have annual Considered Compensation from the Employer,
               Commonly Controlled Entity or member of an Affiliated Service
               Group for such Plan Year greater than the amount in effect under
               Section 415(c)(1)(A) of the Internal Revenue Code for the
               calendar year in which such Plan Year ends (the greater of
               $30,000 for 1996 or one-fourth of the dollar limitation in effect
               under Section 415(b)(1)(A) of the Internal Revenue Code, adjusted
               in subsequent years as determined in accordance with regulations
               prescribed by the Secretary of the Treasury or his delegate
               pursuant to the provisions of Section 415(d) of the Internal
               Revenue Code); and

                    (B) own (or are considered as owning within the meaning of
               Internal Revenue Code Section 318) in such Plan Year, the largest
               percentage interests in the Employer, Commonly Controlled Entity
               or member of an Affiliated Service Group, in such Plan Year,
               provided that no person shall be treated as a Key Employee under
               this paragraph unless he owns more than one-half percent (1/2%)
               interest in the Employer, Commonly Controlled Entity or member of
               an Affiliated Service Group.

          No more than a total of ten (10) persons or beneficiaries of persons
          who are employees or former employees shall be treated as Key
          Employees under this paragraph (2) for any Measurement Period.

               (3)  A person who, for a Plan Year in the Measurement Period, is
          a more than five percent (5%) owner (or is considered as owning more
          than five percent (5%) within the meaning of Internal Revenue Code
          Section 318) of the Employer, Commonly Controlled Entity or member of
          an Affiliated Service Group.

               (4)  A person who, for a Plan Year in the Measurement Period, is
          a more than one percent (1%) owner (or is considered as owning more
          than one percent (1%) within the meaning of Internal Revenue Code
          Section 318) of the Employer, a Commonly Controlled Entity or member
          of an Affiliated Service

                                     -128-
<PAGE>
 

          Group and has an annual Considered Compensation for such Plan Year
          from the Employer, Commonly Controlled Entity or member of an
          Affiliated Service Group of more than $150,000.

               (5)  If the number of persons who meet the requirements to be
          treated as Key Employees under paragraph (1) or (2) exceed the
          limitation on the number of Key Employees to be counted under
          paragraph (1) or (2), those persons with the highest annual Considered
          Compensation in a Plan Year in the Measurement Period for which the
          requirements are met and who are within the limitation on the number
          of Key Employees will be treated as Key Employees.

          If the requirements of paragraph (1) or (2) are met by a person in
          more than one (1) Plan Year in the Measurement Period, each person
          will be counted only once under paragraph (1) or (2):

                    (A) under paragraph (1), the Plan Year in the Measurement
               Period in which a person who was an officer and had the highest
               annual Considered Compensation shall be used to determine whether
               the person will be treated as a Key Employee under the preceding
               sentence;

                    (B) under paragraph (2), the Plan Year in the Measurement
               Period in which the ownership percentage interest is the greatest
               shall be used to determine whether the person will be treated as
               a Key Employee under the preceding sentence.

          Notwithstanding the above provisions of paragraph (5), a person may be
          counted in determining the limitation under both paragraphs (1) and
          (2). In determining the sum of the Present Value of Accrued Benefits
          for Key Employees under subsection (h) of this Section, the Present
          Value of Accrued Benefits for any person shall be counted only once.

          (e) "Non-Key Employee" means (1) a person or the beneficiary of a
     person with an account balance in the Program or an account balance or
     accrued benefit in any Related Plan in the Aggregation Group or (2) an
     employee, a former employee or the beneficiary of such person who has
     received a distribution during the Measurement Period and (3) who during
     the Measurement Period is not a Key Employee.

          (f) "Present Value of Accrued Benefits" means, for any Plan Year, an
     amount equal to the sum of (1), (2) and (3) for each person who, in the
     Plan Year containing the Determination Date, was a Key Employee or a Non-
     Key Employee.

               (1) Subject to (4) below, the value of a person's Net Balance
          Account under the Program and his accrued benefit under each Related

                                     -129-
<PAGE>
 

          Defined Contribution Plan in the Aggregation Group, determined as of
          the valuation date coincident with or immediately preceding the
          Determination Date, adjusted for contributions due as of the
          Determination Date, as follows:

                    (A)  in the case of a plan not subject to the minimum
               funding requirements of Section 412 of the Internal Revenue Code,
               by including the amount of any contributions actually made after
               the valuation date but on or before the Determination Date, and,
               in the first plan year of a plan, by including contributions made
               after the Determination Date that are allocated as of a date in
               that first plan year; and

                    (B)  in the case of a plan that is subject to the minimum
               funding requirements, by including the amount of any
               contributions that would be allocated as of a date not later than
               the Determination Date, plus adjustments to those amounts as
               required under applicable rulings, even though those amounts are
               not yet required to be contributed or allocated (e.g., because
               they have been waived) and by including the amount of any
               contributions actually made (or due to be made) after the
               valuation date but before the expiration of the extended payment
               period in Section 412(c)(10) of the Internal Revenue Code.

               (2) Subject to (4) below, the sum of the actuarial present values
          of a person's accrued benefits under each Related Defined Benefit Plan
          in the Aggregation Group, expressed as a benefit commencing at Vesting
          Retirement Date (or the person's attained age, if later) determined
          based on the following actuarial assumptions:

                    (A) Interest rate 5%; and

                    (B) Post Retirement Mortality: 1984 Unisex Pension Table;

          and determined in accordance with Internal Revenue Code Section
          416(g), provided, however, that if a defined benefit plan in the
          Aggregation Group provides for different or additional actuarial
          assumptions to be used in determining the present value of accrued
          benefits thereunder for the purpose of determining the top heavy
          status thereof, then such different or additional actuarial
          assumptions shall apply with respect to each defined benefit plan in
          the Aggregation Group, and further provided that the accrued benefit
          of any Non-Key Employee shall be determined under the method which is
          used for accrual purposes for all Related Defined Benefit Plans or, if
          no single accrual method is used in all such plans, such accrued
          benefit shall be determined as if such benefit accrued not more
          rapidly than the slowest accrual rate permitted under Section
          411(b)(1)(C) of the Internal Revenue Code.

          The present value of an accrued benefit for any person who is employed
          by an employer maintaining a plan on the Determination Date is
          determined as of the

                                     -130-
<PAGE>
 
          most recent valuation date which is within a 12-month period ending on
          the Determination Date, provided however that:

                    (C)  for the first plan year of the plan, the present value
               for an employee is determined as if the employee had a
               Termination of Employment (i) on the Determination Date or (ii)
               on such valuation date but taking into account the estimated
               accrued benefit as of the Determination Date; and

                    (D)  for the second and subsequent plan years of the plan,
               the accrued benefit taken into account for an employee is not
               less than the accrued benefit taken into account for the first
               plan year unless the difference is attributable to using an
               estimate of the accrued benefit as of the Determination Date for
               the first plan year and using the actual accrued benefit as of
               the Determination Date for the second plan year.

          For purposes of this paragraph (2), the valuation date is the
          valuation date used by the plan for computing plan costs for minimum
          funding, regardless of whether a valuation is performed that year.

               If the plan provides for a nonproportional subsidy as described
          in Treasury Regulations Section 1.416-1 (T-27), the present value of
          accrued benefits shall be determined taking into account the value of
          nonproportional subsidized early retirement benefits and
          nonproportional subsidized benefit options.

               (3)  Subject to (4) below, the aggregate value of amounts
          distributed during the plan year that includes the Determination Date
          or any of the four preceding plan years including amounts distributed
          under a terminated plan which, if it had not been terminated, would
          have been in the Aggregation Group.

               (4)  The following rules shall apply in determining the Present
          Value of Accrued Benefits:

                    (A)  Amounts attributable to qualified voluntary employee
               contributions, as defined in Section 219(e) of the Internal
               Revenue Code, shall be excluded.

                    (B)  In computing the Present Value of Accrued Benefits with
               respect to rollovers or plan-to-plan transfers, the following
               rules shall be applied to determine whether amounts which have
               been distributed during the five (5) year period ending on the
               Determination Date from or accepted into this Program or any plan
               in the Aggregation Group shall be included in determining the
               Present Value of Accrued Benefits:

                                     -131-

<PAGE>
 
                         (i)   Unrelated Transfers made from the Program or any
                    plan in the Aggregation Group shall be included.

                         (ii)  Related Transfers made from the Program or any
                    plan in the Aggregation Group shall not be included by the
                    transferor plan (but shall be counted by the accepting
                    plan).

          The accrued benefit of any individual who has not performed services
     for an Employer maintaining the Program at any time during the five (5)
     year period ending on the Determination Date shall be excluded in computing
     the Present Value of Accrued Benefits.

          (g)  "Related Transfer" means a rollover or a plan-to-plan transfer
     which is either not initiated by the Employee or is made between plans each
     of which is maintained by a Commonly Controlled Entity or member of an
     Affiliated Service Group.

          (h)  A "Top Heavy Aggregation Group" means an Aggregation Group in any
     Plan Year for which, as of the Determination Date, the sum of the Present
     Value of Accrued Benefits for Key Employees under all plans in the
     Aggregation Group exceeds sixty percent (60%) of the sum of the Present
     Value of Accrued Benefits for all employees under all plans in the
     Aggregation Group; provided that, for purposes of determining the sum of
     Present Value of Accrued Benefits for all employees, former Key Employees
     who have not performed any services for an Employer, a Commonly Controlled
     Entity or a member of an Affiliated Service Group in the Plan Year
     containing the Determination Date or the preceding four Plan Years shall be
     excluded entirely from the calculation of the Present Value of Accrued
     Benefits for the Plan Year that contains the Determination Date. For
     purposes of applying the special rules herein with respect to a Super Top
     Heavy Plan, a Top Heavy Aggregation Group will also constitute a "Super Top
     Heavy Aggregation Group" if in any Plan Year as of the Determination Date,
     the sum of the Present Value of Accrued Benefits for Key Employees under
     all plans in the Aggregation Group exceeds ninety percent (90%) of the sum
     of the Present Value of Accrued Benefits for all employees under all plans
     in the Aggregation Group.

          (i)  "Top Heavy Plan" means the Program in any Plan Year in which it
     is a member of a Top Heavy Aggregation Group, including a Top Heavy
     Aggregation Group consisting solely of the Program. For purposes of
     applying the rules herein with respect to a Super Top Heavy Plan, a Top
     Heavy Plan will also constitute a "Super Top Heavy Plan" if the Program in
     any Plan Year is a member of a Super Top Heavy Aggregation Group, including
     a Super Top Heavy Aggregation Group consisting solely of the Program.

          (j)  "Unrelated Transfer" means a rollover or a plan-to-plan transfer
     which is both initiated by the Employee and (1) made from a plan maintained
     by a Commonly Controlled Entity or member of an Affiliated Service Group to
     a plan

                                     -132-

<PAGE>
 
     maintained by an employer which is not a Commonly Controlled Entity or
     member of an Affiliated Service Group or (2) made to a plan maintained by a
     Commonly Controlled Entity or member of an Affiliated Service Group from a
     plan maintained by an employer which is not a Commonly Controlled Entity or
     member of an Affiliated Service Group.

   15.3   Special Top Heavy Provisions.  For each Plan Year in which the Program
is a Top Heavy Plan, the following rules shall apply, except that the special
provisions of this Section 15.3 shall not apply with respect to any employee
included in a unit of employees covered by an agreement which the Secretary of
Labor finds to be a collective-bargaining agreement between employee
representatives and one or more employers if there is evidence that retirement
benefits were the subject of good faith bargaining between such employee
representative and the Employer or Employers:

          (a)  Minimum Employer Contributions.  In any Plan Year in which the
     Program is a Top Heavy Plan, the Employers shall make additional Employer
     Contributions to the Program as necessary for each Participant who is
     employed on the last day of the Plan Year and who is a Non-Key Employee to
     bring the amount of his Aggregate Employer Contributions for the Plan Year
     up to at least three percent (3%) of his Considered Compensation, or such
     lesser amount as is equal to the largest percentage of a Key Employee's
     Considered Compensation allocated to the Key Employee as Aggregate Employer
     Contributions.

     For purposes of determining whether a Non-Key Employee is a Participant
     entitled to have minimum Employer Contributions made on his behalf, a Non-
     Key Employee will be treated as a Participant even if he is not otherwise a
     Participant (or accrues no benefit) under the Program because:

               (1)  he has failed to complete the requisite number of hours of
          service (if any) after becoming a Participant in the Program,

               (2)  he is excluded from participation in the Program (or accrues
          no benefit) merely because his compensation is less than a stated
          amount, or

               (3)  he is excluded from participation in the Program (or accrues
          no benefit) merely because of a failure to make mandatory employee
          contributions or because of a failure to make elective 401(k)
          contributions.

          (b)  Vesting.  For each Plan Year in which the Program is a Top Heavy
     Plan and for each Plan Year thereafter, the vested right of each
     Participant who has an Hour of Service after the Program becomes a Top
     Heavy Plan to a percentage of his Profit Sharing Account and Employer LESOP
     Account (to the extent such Accounts had not been forfeited prior to the
     Program's becoming a Top Heavy Plan) shall be determined under the
     following table:

                                     -133-

<PAGE>
 
<TABLE>
<CAPTION>
          Year of Credited Service    Vested Percentage
          ------------------------    -----------------

 
          <S>                         <C>
          Less than 2                          0%
          2 but less than 3                   20
          3 but less than 4                   40
          4 but less than 5                   60
          5 but less than 6                   80
          6 or more                          100
</TABLE>

          (c)  Limitations. In computing the limitations under Article IX hereof
     for years in which the Program is a Top Heavy Plan, the special rules of
     Section 416(h) of the Code shall be applied in accordance with applicable
     regulations and rulings so that, in determining the denominator of the
     defined contribution plan fraction, as defined in Section 415(e)(3) of the
     Internal Revenue Code ("Defined Contribution Plan Fraction") and the
     defined benefit plan fraction as defined in Section 415(e)(2) of the
     Internal Revenue Code ("Defined Benefit Plan Fraction") at each place at
     which "1.25" would have been used, "1.00" shall be substituted and by
     substituting $41,500 for $51,875 in the numerator of the transition
     fraction described in Section 415(e)(6)(B) of the Internal Revenue Code,
     unless the Program is not a Super Top Heavy Plan and the special
     requirements of Section 416(h)(2) of the Internal Revenue Code have been
     satisfied.

          (d)  Transition Rule for a Top Heavy Plan.  Notwithstanding the
     provisions of Section 15.3(c), for each Plan Year in which the Program is a
     Top Heavy Plan and in which the Program does not meet the special
     requirements of Section 416(h)(2) of the Internal Revenue Code in order to
     use 1.25 in the denominator of the Defined Contribution Plan Fraction and
     the Defined Benefit Plan Fraction, if an Employee was a participant in one
     or more defined benefit plans and in one or more defined contribution plans
     maintained by the Employer before the plans became Top Heavy Plans and if
     such Participant's Combined Fraction exceeds 1.00 because of accruals and
     additions that were made before the plans became Top Heavy Plans, a factor
     equal to the lesser of 1.25 or such lesser amount (but not less than 1.00)
     as shall be needed to make the Employee's Combined Fraction equal to 1.00
     shall be used in the denominator of the Defined Benefit Plan Fraction and
     the Defined Contribution Plan Fraction if there are no further accruals or
     annual additions under any Top Heavy Plans until the Participant's Combined
     Fraction is not greater than 1.00 when a factor of 1.00 is used in the
     denominators of the Defined Benefit Plan Fraction and the Defined
     Contribution Plan Fraction. Any provisions herein to the contrary
     notwithstanding, if the Program is a Top Heavy Plan and the Program does
     not meet the special requirements of Section 416(h)(2) of the Internal
     Revenue Code in order to use 1.25 in the denominator of the Defined Benefit
     Plan Fraction and the Defined Contribution Plan Fraction, there shall be no
     further Annual Additions for a Participant whose Combined Fraction is
     greater than 1.00 when a factor of 1.00 is used in the denominator of the
     Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction,
     until such time as the Participant's Combined Fraction is

                                     -134-

<PAGE>
 
     not greater than 1.00. This Section 15.3(d) shall not apply in Plan Years
     beginning after December 31, 1999.

          (e)  Transition Rule for a Super Top Heavy Plan.  Notwithstanding the
     provisions of Sections 15.3(c) and 15.3(d), for each Plan Year in which the
     Program is a Super Top Heavy Plan, (1) if an Employee was a participant in
     one or more defined benefit plans and in one or more defined contribution
     plans maintained by the employer before the plans became Super Top Heavy
     Plans, and (2) if such Participant's Combined Fraction exceeds 1.00 because
     of accruals and additions that were made before the plans became Super Top
     Heavy Plans and if immediately before the plans became Super Top Heavy
     Plans the Combined Fraction as then computed did not exceed 1.00, then a
     factor equal to the lesser of 1.25 or such lesser amount (but not less than
     1.00) as shall be needed to make the Employee's Combined Fraction equal to
     1.00 shall be used in the denominator of the Defined Benefit Plan Fraction
     and the Defined Contribution Plan Fraction if there are no further accruals
     or annual additions under any Super Top Heavy Plans until the Participant's
     Combined Fraction is not greater than 1.00 when a factor of 1.00 is used in
     the denominators of the Defined Benefit Plan Fraction and the Defined
     Contribution Plan Fraction. Any provisions herein to the contrary
     notwithstanding, if the Program is a Super Top Heavy Plan, there shall be
     no further Annual Additions for a Participant whose Combined Fraction is
     greater than 1.00 when a factor of 1.00 is used in the denominator of the
     Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction
     until the Participant's Combined Fraction is not greater than 1.00.

          (f)  Terminated Plan.  If the Program becomes a Top Heavy Plan after
     it has formally been terminated, has ceased crediting for benefit accruals
     and vesting and has been or is distributing all plan assets to participants
     and their beneficiaries as soon as administratively feasible or if a
     terminated plan has distributed all benefits of participants and their
     beneficiaries, the provisions of Section 15.3 shall not apply to the
     Program.

          (g)  Frozen Plans.  If the Program becomes a Top Heavy Plan after
     contributions have ceased under the Program but all assets have not been
     distributed to participants or their beneficiaries, the provisions of
     Section 15.3 shall apply to the Program.

                                     -135-

<PAGE>
 
                                  ARTICLE XVI

                           MISCELLANEOUS PROVISIONS

   16.1   Headings.  Headings of sections and subsections of the Program are
inserted for convenience of reference and are neither part of the Program nor to
be considered in the construction thereof.

   16.2   Indemnification.  Each member of the Committee, each member of the
Board of Directors, each individual serving as Trustee without compensation, and
each and every Employee to whom are delegated duties, responsibilities and
authority with respect to the Program and the Trust shall be indemnified, held
harmless and promptly reimbursed by the Company against all claims, liabilities,
fines and penalties and all expenses (including, but not limited to, attorney
fees) reasonably incurred by or imposed upon such member, individual or Employee
which arise as a result of his actions or failure to act in connection with the
operation and administration of the Program and the Trust, to the extent
lawfully allowable; provided that to the extent that such claim, liability,
fine, penalty or expense is paid for by liability insurance purchased by or paid
for by the Company, reimbursement shall be limited to amounts which would not
cause the loss of coverage under such insurance and further provided that to the
extent that the Company has reimbursed the Employee, the Company shall be
subrogated to the Trustee's rights to reimbursement under such insurance.
Notwithstanding the foregoing, the Company shall not indemnify any person for
any such amount incurred through any settlement or compromise of any action
unless the Company consents in writing to such settlement or compromise.
Expenses incurred in defending a civil or criminal action, suit or proceeding
shall be paid by the Company in advance of the final disposition of such action,
suit or proceeding as authorized by the Company in the specific case upon
receipt of an undertaking by or on behalf of the member of the Committee, member
of the Board of Directors, individual Trustee or Employee to repay such amount
unless it shall ultimately be determined that he is entitled to be indemnified
by the Company as authorized in this Section 16.2.

   16.3   Employees' Trust.  This Program is created for the exclusive purpose
of providing benefits to the Participants in the Program and their
Beneficiaries, and shall be interpreted in a manner consistent with its being a
Plan described in Section 401(a) of the Internal Revenue Code and with the
Trust's being a Trust exempt under Section 501(a) of the Internal Revenue Code.

   16.4   Nonalienation of Benefits.  Benefits payable under this Program shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, prior to actually being received by the
person entitled to the benefit under the terms of the Program; and any attempt
to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge,
garnish, execute on, levy or otherwise dispose of any right to benefits payable
hereunder, shall be void. The Trust Fund shall not in any manner be liable for,
or subject to, the debts, contracts, liabilities, engagements or torts of any
person entitled to benefits hereunder. The foregoing provisions of this Section
16.4 shall not preclude the

                                     -136-

<PAGE>
 
(1) enforcement of a Federal tax levy made pursuant to Section 6331 of the
Internal Revenue Code or (2) collection by the United States on a judgment
resulting from an unpaid tax assessment.

   16.5   Qualified Domestic Relations Order.

          (a)  Qualified Domestic Relations Order means any judgment, decree, or
     order (including approval of a property settlement agreement):

               (1)  which is made pursuant to a state domestic relations law
          (including a community property law),

               (2)  which relates to the provision of child support, alimony
          payments, or marital property rights to a spouse, former spouse,
          child, or other dependent of a Participant,

               (3)  which creates or recognizes the existence of an alternate
          payee's right to receive all or a portion of the Participant's Net
          Balance Account under the Program, and

               (4)  with respect to which the requirements of paragraphs (b) and
          (c) are met.

          (b)  A domestic relations order can be a Qualified Domestic Relations
     Order only if such order clearly specifies:

               (1)  the name and the last known mailing address, if any, of the
          Participant and the name and mailing address of each alternate payee
          covered by the order,

               (2)  the amount or percentage of the Participant's Accrued
          Benefit to be paid by the Program to each such alternate payee, or the
          manner in which such amount or percentage is to be determined,

               (3)  the number of payments or period to which such order 
          applies, and

               (4)  each Plan to which such order applies.

          (c)  A domestic relations order can be a Qualified Domestic Relations
     Order only if such order does not:

               (1)  require the plan to provide any type or form of benefit, or
          any option not otherwise provided under the Program,

                                     -137-

<PAGE>
 
               (2)  require the Program to provide increased benefits
          (determined on the basis of actuarial value), or

               (3)  require the payment of benefits to an alternate payee which
          are required to be paid to another alternate payee under another order
          previously determined to be a Qualified Domestic Relations Order.

          (d)  In the case of any payment before a Participant has had a
     Termination of Employment, a domestic relations order shall not be treated
     as failing to meet the requirements of Section 16.5(c)(1) solely because
     such order requires that payment of benefits be made to an alternate payee:

               (1)  without regard to the Participant's attainment of any
          specified age;

               (2)  as if the Participant had retired on the date on which such
          payment is to begin under such order; and

               (3)  in any form in which such benefits may be paid under the
          Program to the Participant (other than in the form of a Qualified
          Joint and Survivor Annuity with respect to the alternate payee and his
          or her subsequent spouse).

          (e)  To the extent provided in any Qualified Domestic Relations Order
     the former spouse of a Participant if married to the Participant for at
     least one year, shall be treated as the surviving spouse of such
     Participant for purposes of consenting to the waiver of a Qualified Joint
     and Survivor Annuity as provided in Sections 11.2(f) and 11.10 and the
     naming of another Beneficiary to the extent provided in Sections 11.3 and
     11.10.

          (f)  Notwithstanding anything to the contrary in Article X, if,
     pursuant to a Qualified Domestic Relations Order, a segregated account is
     established containing the interest of an alternate payee, the alternate
     payee shall direct the manner in which such segregated account shall be
     invested in accordance with the procedures under Article X; provided that
     such segregated account shall remain invested in the same manner as the
     assets were invested before the account was segregated until the alternate
     payee's election in accordance with this Section 16.5(f) becomes effective.

   16.6   Unclaimed Amounts.  Unclaimed amounts shall consist of the amounts of
the Accounts of a retired, deceased or terminated Participant (including amounts
held in the Holding Fund with respect to checks which are distributed but which
are not cashed) which cannot be distributed because of the Committee's
inability, after a reasonable search, to locate a Participant or his Beneficiary
within a period of two (2) years after the payment of benefits becomes due.

                                     -138-

<PAGE>
 
          (a)  Unclaimed amounts with respect to Accounts held in the Profit
     Sharing Plan portion of the Program for a Plan Year shall become a
     Forfeiture and shall be allocated for such Plan Year as determined in
     accordance with Section 7.1 hereof, within a reasonable time after the
     close of the Plan Year in which such two-year period shall end.

          (b)  The Committee shall allocate Forfeitures with respect to Accounts
     held in the McDESOP portion of the Program to Participants' Participant
     Elected Contribution Accounts and Employer Matching Contribution Accounts
     by crediting such Forfeitures to the McDESOP Holding Fund as of the
     Valuation Date following the date the amount of such Forfeitures is
     determined for the immediately preceding Plan Year but not later than March
     31 of the year following the Plan Year with respect to which such
     Forfeitures occurred.

          (c)  Forfeitures arising in respect to a LESOP Account to
     Participants' LESOP Accounts shall be allocated in the same manner as
     Forfeitures under Section 7.3 are allocated to such Accounts.

          (d)  As of the last day of the Plan Year, Forfeitures arising in
     respect to the Stock Sharing Accounts of Participants shall be charged with
     the expenses of the Stock Sharing portion of the Program without regard to
     the limitations on reimbursement for expenses prescribed by Section 409(l)
     of the Internal Revenue Code. Any net Forfeitures after such charges and
     charges pursuant to Section 16.6(e) shall be allocated as income of the
     Stock Sharing portion of the Program as provided in Section 10.13(b).

          (e)  If an unclaimed amount is subsequently properly claimed by the
     Participant or the Participant's Beneficiary ("Reclaimed Amount") and
     unless an Employer in its discretion makes a contribution to the Program
     for such year in an amount sufficient to pay such Reclaimed Amount, it
     shall be charged as follows:

               (1)  To the extent such Reclaimed Amount originated as an
          unclaimed amount with respect to the Accounts held in the Profit
          Sharing Plan portion of the Program, it shall be charged against
          Forfeitures from the Profit Sharing portion of the Program and, if
          such Forfeitures are not sufficient, the remainder shall be treated as
          an expense of the Profit Sharing Plan portion of the Program during
          the Plan Year in which the Participant or Beneficiary makes such
          claim.

               (2)  To the extent that the Reclaimed Amount originated as an
          unclaimed amount with respect to the amounts held in the McDESOP
          portion of the Program it shall be charged against Forfeitures for the
          Plan Year with respect to Participants' Participant Elected
          Contribution Accounts and Employer Matching Contribution Accounts and,
          to the extent such Forfeitures are not sufficient, shall be treated as
          an expense of the McDESOP portion of the Program.

                                     -139-

<PAGE>
 
               (3)  To the extent that such Reclaimed Amount originated as an
          unclaimed amount in respect to a LESOP Account, it shall be treated as
          a charge against Forfeitures arising under Sections 11.4 and 16.6 for
          the Plan Year with respect to Participants' LESOP Accounts and, to the
          extent such Forfeitures are not sufficient, shall be treated as an
          expense of the LESOP portion of the Program.

               (4)  To the extent that such Reclaimed Amount originated as an
          unclaimed amount with respect to a Stock Sharing Account, it shall be
          treated as a charge against Forfeitures arising under Section 16.6 for
          the Plan Year with respect to Participants' Stock Sharing Accounts
          and, to the extent that such Forfeitures are not sufficient, shall be
          treated as an expense of the Stock Sharing portion of the Program.

   16.7   Maximum Age Condition.  Anything to the contrary herein
notwithstanding, eligibility to participate in the Program and to elect or
receive allocations of contributions to the Trust shall not be subject to any
restrictions on account of a maximum age condition.

   16.8   Invalidity of Certain Provisions.  If any provision of this Program
shall be held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provisions hereof, and this Program shall be
construed and enforced as if such provisions, to the extent invalid or
unenforceable, had not been included.

   16.9   Gender and Number.  Except when otherwise indicated by the context,
any masculine terminology herein shall also include the feminine and the
singular shall also include the plural.

                                     -140-

<PAGE>
 
   16.10  Law Governing.  This Program and Trust shall be construed and
enforced according to the laws of the State of Illinois other than its laws
respecting choice of law, to the extent not preempted by ERISA.

     Executed in multiple originals this _____ day of  ____________, 1998.

                              McDonald's Corporation

                              By:  /S/ STANLEY N. STEN
                                  --------------------------

                              Its: Executive Vice President
                                   -------------------------

                                     -141-

<PAGE>
 
                                   APPENDIX A


     Maximum Percentage of Annuity Benefit Paid to Participant Which Can Be Paid
to a Non-spouse Beneficiary.
<TABLE>
<CAPTION>

          Excess of age of employee     Applicable
           over age of beneficiary       percentage
          -------------------------      ----------
          <S>                            <C>
             10 years or less                100
             11                               96
             12                               93
             13                               90
             14                               87
             15                               84
             16                               82
             17                               79
             18                               77
             19                               75
             20                               73
             21                               72
             22                               70
             23                               68
             24                               67
             25                               66
             26                               64
             27                               63
             28                               62
             29                               61
             30                               60
             31                               59
             32                               59
             33                               58
             34                               57
             35                               56
             36                               56
             37                               55
             38                               55
             39                               54
             40                               54
             41                               53
             42                               53
             43                               53
             44 and greater                   52
</TABLE>
<PAGE>
 
                                   APPENDIX B

     The Applicable Divisor for purposes of Section 11.2(d)(3) shall be:

          Attained Age of Participant
          on Birthday in Calendar Year   Applicable Divisor
          ----------------------------   ------------------
<TABLE>
<CAPTION>
 
<S>                 <C>
             70     26.2
             71     25.3
             72     24.4
             73     23.5
             74     22.7
             75     21.8
             76     20.9
             77     20.1
             78     19.2
             79     18.4
             80     17.6
             81     16.8
             82     16.0
             83     15.3
             84     14.5
             85     13.8
             86     13.1
             87     12.4
             88     11.8
             89     11.1
             90     10.5
             91      9.9
             92      9.4
             93      8.8
             94      8.3
             95      7.8
             96      7.3
             97      6.9
             98      6.5
             99      6.1
             100     5.7
             101     5.3
             102     5.0
             103     4.7
             104     4.4
             105     4.1
             106     3.8
             107     3.6
             108     3.3
             109     3.1
             110     2.8
             111     2.6
             112     2.4
             113     2.2
             114     2.0
             115     1.8
</TABLE>

<PAGE>


                                                                   Exhibit 10(f)

                            McDONALD'S CORPORATION
                            ----------------------
                             DEFERRED INCOME PLAN
                             --------------------
          (As Amended and Restated Effective as of  December 1, 1998)


                                   Section 1
                                   ---------
                                 Introduction
                                 ------------

     1.1  The Plan and Effective Date. The McDonald's Corporation Deferred
Income Plan, formerly known as the McDonald's Corporation Deferred Incentive
Plan, ("Plan") was established November 1, 1993. The Plan was amended and
restated effective September 1, 1994 and was subsequently amended by the first
amendment thereof effective as of February 1, 1996 and the second amendment
thereof effective as of August 15, 1996 . The Plan was subsequently amended and
restated effective several times, including amendment and restatements effective
as of January 1, 1997, July 15, 1997 and August 1, 1998. The "effective date" of
the amendment and restatement of the Plan as set forth herein is December 1,
1998 (unless otherwise indicated herein).

     1.2  Purpose. McDonald's Corporation ("McDonald's" or the "Company") has
established the Plan for its officers, regional managers, department directors
and certain expatriate international country heads to retain and attract highly
qualified personnel by offering the benefits of a non-qualified, unfunded plan
of deferred compensation. The Company may also allow other subsidiaries or
affiliates to adopt the Plan in accordance with Section 7.

     1.3  Administration. The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company (the "Committee"). The
Committee shall have the powers set forth in the Plan and the power to interpret
its provisions. Any decisions of the Committee shall be final and binding on all
persons with regard to the Plan. The Committee may delegate its authority
hereunder to an officer or officers of the Company.

                                   Section 2
                                   ---------
                     Participation and Deferral Elections
                     ------------------------------------

     2.1  Eligibility and Participation. Subject to the conditions and
limitations of the Plan, all officers, regional managers and department
directors of the Company and international country heads who are on United
States payroll and who are identified as eligible by the Committee shall be
eligible to participate in the Plan ("Eligible Employees"). Notwithstanding the
foregoing, effective January 1, 1999, an individual who becomes employed in one
of the positions listed in the preceding sentence after the Due Date (as defined
in Section 2.3(b)) shall be eligible to participate in the Plan and become an
Eligible Employee on the first day of the month next following the date of such
employment. Any Eligible Employee who makes a Deferral Election as described in
Section 2.2 below shall become a participant in the Plan

                                       1
<PAGE>
 

("Participant") and shall remain a Participant until the entire balance of the
Participant's Deferral Accounts (defined in Section 4.1 below) is distributed.

     2.2  Deferral Elections. Any Eligible Employee may make an election to
defer receipt of all or any portion of his or her incentive under the McDonald's
Target Incentive Plan ("TIP") for a calendar year. Subject to Section 2.3(b)
below, any Eligible Employee may also make an election to defer a percentage of
his or her base salary for the following calendar year in accordance with the
following schedule:

<TABLE>
<CAPTION>
     Category of Eligible Employee
     -----------------------------                  Maximum Deferral
     (or Equivalent Compensation Band)                 Percentage
     ---------------------------------                 ----------
<S>                                                 <C>
     Highest paid five officers (ranked by the
     total of base pay and the target incentive
     under TIP for the current year)                      90%
     Executive Vice Presidents                            80%
     All other officers and regional managers             70%
     Department Directors                                 60%
</TABLE>

provided, however, that the committee of officers designated by the Committee to
administer the Plan (the "Officer Committee") may, in its discretion, grant
individual requests for higher deferral percentages of base salary and provided
further that the Officer Committee may, in its discretion, authorize Eligible
Employees to modify their deferral percentages of base salary as may be
necessary to reflect organizational, title or compensation band changes. Such
modification may be made only with respect to base salary earned and paid after
the effective date of the modification.

If applicable, any Eligible Employee may also make an election to defer all or a
portion of his or her Three-Year Incentive award ("Three-Year Incentive") under
the 1992 Stock Ownership Incentive Plan for a calendar year.

Elections to defer TIP, base salary or Three-Year Incentive awards are referred
to herein as "Deferral Elections". Exit bonuses, severance bonuses or bonuses
paid under the Executive Retention Plan during a transition or retention period
may not be deferred under this Plan.

     2.3  Rules for Deferral Elections. Deferral Elections shall be made in
accordance with the rules set forth below:

     (a)  All Deferral Elections must be in writing on such forms as the
          Committee may prescribe and must be returned to the Committee no later
          than the date specified by the Committee (the "Due Date"). In no event
          will the Due Date be later than the end of the year that precedes the
          year that the amount deferred would otherwise be made available to
          such Eligible Employee.

                                       2
<PAGE>
 

     (b)  An individual shall be eligible to make a Deferral Election only if he
          or she is an Eligible Employee on the Due Date. Notwithstanding the
          foregoing, effective January 1, 1999, an individual who becomes an
          Eligible Employee after the Due Date in accordance with Section 2.1
          will be eligible to make a base salary Deferral Election within 30
          days after the date he or she becomes an Eligible Employee. Such
          Deferral Elections shall become effective as soon as administratively
          feasible after the Deferral Election is made.

     (c)  If an Eligible Employee terminates employment in the same calendar
          year in which he or she makes a Deferral Election, that Deferral
          Election (and any Deferral Elections respecting future compensation in
          years following the year of employment termination) will be null and
          void and no deferral will be made.

     (d)  Amounts will be deferred to the "Payment Date" specified by the
          Eligible Employee in the Deferral Election and payments will commence
          within 30 days following the Payment Date in accordance with Section
          5.1(b). The Payment Date specified must be no earlier than the March
          31st of the calendar year following the year in which the deferred
          amounts would otherwise have been paid and must be either a "Specific
          Payment Date" or an "Employment Termination Payment Date" as follows:

          (i)  A "Specific Payment Date" is the 15th or last day of a specified
               month (but not December 31) of a specified year.

          (ii) An "Employment Termination Payment Date" is the March 31
               following the year in which the Eligible Employee terminates
               employment, unless the Eligible Employee elects a later
               Employment Termination Date in accordance with Section 5.1(a).

          If an Eligible Employee terminates employment and has one or more
          Specific Payment Dates that would occur after the Employment
          Termination Payment Date, all amounts deferred to those Specific
          Payment Date(s) shall automatically be accelerated and payment will
          commence in accordance with the Eligible Employee's Employment
          Termination Payment Date election under Section 5.1(a). Participant
          401(k) McDESOP Equalization Amounts and Company Profit Sharing
          Equalization Credits described in Section 3 shall be deferred to the
          Participant's Employment Termination Payment Date, even though a
          Participant has elected a Specific Payment Date for the remainder of
          his or her deferral.

     (e)  Effective December 1, 1998, an Eligible Employee may revoke a Specific
          Payment Date and elect an earlier or later Payment Date and may revoke
          an Employment Termination Payment Date and elect an earlier Payment
          Date, subject to the following rules:

                                       3
<PAGE>
 

          (i)  The election to revoke a Payment Date and elect a new Payment
               Date must be made no later than the end of the calendar year
               preceding the original designated Payment Date and must be made
               at least six months prior to the original designated Payment
               Date; and

          (ii) Any new designated Payment Date must be in a calendar year
               subsequent to the date of the election and must be at least six
               months after the date of the election.

                                   Section 3
                                   ---------
        Equalization for McDonald's Corporation Profit Sharing Program
        --------------------------------------------------------------
                                        
     3.1  Equalization to Adjust for Participant 401(k) McDESOP Contributions.
Amounts deferred under this Plan are not considered compensation for the
McDonald's Corporation Profit Sharing Program (the "Profit Sharing Program") or
for the related non-qualified plans: the McDonald's 1989 Executive Compensation
Plan, the McDonald's Supplemental Employee Benefit Equalization Plan and the
McDonald's Profit Sharing Program Equalization Plan (the "McCAP/McEqual Plans").
The McDESOP portion of the Profit Sharing Program allows participants to
contribute a percentage of their compensation as Section 401(k) contributions.
Therefore, Eligible Employees who are Profit Sharing Program participants and
make Deferral Elections for base salary and TIP awards under this Plan shall
automatically have a portion of these deferred amounts set aside until the
Participant's Employment Termination Payment Date to adjust for the fact that
McDESOP Section 401(k) contributions cannot be made to the Profit Sharing
Program or the related non-qualified plans for these deferred amounts (the
"Participant 401(k) McDESOP Equalization Amount"). The Participant 401(k)
McDESOP Equalization Amount shall be based on the amount that would have been
contributed by the Participant under the McDESOP portion of the Profit Sharing
Program and the related non-qualified plans if the deferral of base salary and
TIP had not occurred. No Participant 401(k) McDESOP Equalization credit will be
made for deferrals of Three-Year Incentive awards under this Plan.

     3.2  Company Profit Sharing Equalization Credits. Amounts deferred under
this Plan are not considered as compensation under the Profit Sharing Program or
the McCAP/McEqual Plans. Therefore, base salary and TIP awards deferred under
this Plan shall be credited with an amount equal to the Company contribution
that the Participant would have received under the Profit Sharing Program and/or
McCAP/McEqual Plans if such deferral had not occurred ("Company Profit Sharing
Equalization Credit"). If a Participant is not eligible to participate in the
Profit Sharing Program or McCAP/McEqual Plans, or is not eligible to receive a
Company contribution under such plans with respect to a deferred amount, no
Company Profit Sharing Equalization Credit will be made. No Company Profit
Sharing Equalization Credit shall be made for Three-Year Incentive awards
deferred under this Plan.

                                       4
<PAGE>
 

     3.3  Rules for Profit Sharing Equalization Amounts. Equalization amounts
under Sections 3.1 and 3.2 above (collectively referred to as "Equalization
Amounts") shall be deferred until the Participant's Employment Termination
Payment Date and cannot be withdrawn under Section 5.3. Equalization Amounts
will become part of the Participant's Deferral Account and will be credited with
earnings as part of that Deferral Account as described in Section 4.1.

                                   Section 4
                                   ---------
                               Deferral Accounts
                               -----------------
                                        
     4.1  Deferral Accounts. A bookkeeping account shall be established in the
Participant's name ("Deferral Account"). Each Participant's deferral account may
be further divided into:

     (a)  amounts deferred pursuant to that year's Deferral Election and
          earnings thereon,

     (b)  Company Profit Sharing Equalization Credits associated with that
          year's Deferral Election and earnings thereon; and

     (c)  Participant 401(k) McDESOP Equalization amounts associated with that
          year's Deferral Election and earnings thereon.

The Committee may also authorize other divisions or subaccounts of the deferral
accounts as may be necessary to reflect the terms of the Plan as amended from
time to time.

Amounts deferred pursuant to a Deferral Election shall be credited to the
Deferral Account as of the date the Participant would otherwise have received
the deferred amounts in the absence of a Deferral Election. Any Equalization
Amounts shall be credited to the Deferral Account as of the date the amount
would have been allocated under the Profit Sharing Program or the McCAP/McEqual
Plans if the deferral had not occurred.

     4.2  Investment Elections and Earnings Credits. Each Participant in the
Plan shall make an investment election, as described below, and such election
shall apply to the entire amount credited to the Participant's Deferral Accounts
under the Plan. However, Section 16 Insiders, as defined in Section 5.5 of the
Plan may not make investment elections involving McDonald's Common Stock. (For
further details concerning these restrictions, see Section 5.5 of the Plan.)

A Participant may change his investment election effective as of the first day
of any month. All investment elections shall be made by filing an investment
election form with the Committee at such time and in such manner as the
Committee may specify. If no new investment election is filed, the Participant's
Deferral Account will continue to be invested in accordance with his or her most
recent investment election.

                                       5
<PAGE>
 

Investment elections may be split between the following equivalent rates of
return in increments of 10%, provided that the percentages specified must total
100%.

     (a)  a rate of return based upon the McDonald's Common Stock Fund under the
          Profit Sharing Program, after adjustment for expenses ("McDonald's
          Common Stock" equivalent);

     (b)  a rate of return based upon the Stable Value Fund under the Profit
          Sharing Program, after adjustment for expenses ("Stable Value"
          equivalent);

     (c)  a rate of return based upon the Diversified Stock Fund under the
          Profit Sharing Program, after adjustment for expenses ("Diversified
          Stock" equivalent);

     (d)  a rate of return based upon the Blended Stock/Bond Fund under the
          Profit Sharing Program, after adjustment for expenses ("Blended
          Stock/Bond" equivalent); and

     (e)  a rate of return based upon the Money Market Fund under the Profit
          Sharing Program, after adjustment for expenses ("Money Market"
          equivalent).

If a Participant who is employed fails to make an investment election, amounts
shall be credited with the same rate of return as amounts for which no
investment election is received under the Profit Sharing component of the
McDonald's Corporation Profit Sharing Program. (Currently, this is the Money
Market equivalent rate of return.) All investment elections will continue in
effect for all Participants until the Participant files a new investment
election.

As of the 15th day (or if the 15th day of the month is not a business day, the
next previous business day) and the last business day of each calendar month, or
such additional dates as the Committee shall specify ("Valuation Date"), each
Deferral Account shall be credited with earnings, gains and losses equal to the
amount the Deferral Account would have earned, gained or lost, since the prior
Valuation Date if actually invested in the funds specified.

     4.3  Vesting. A Participant shall be fully vested at all times in the
balance of his or her Deferral Account.

                                   Section 5
                                   ---------
                              Payment of Benefits
                              -------------------

     5.1  Time and Method of Payment. Payments of a Participant's Deferral
Account shall be made to a Participant, or the Participant's beneficiary if the
Participant is deceased, in accordance with the rules set forth below:

     (a)  Time of Payment. Payment shall be made in accordance with the
          applicable Specific Payment Date or Employment Termination Payment
          Date. A Participant

                                       6
<PAGE>
 

          may elect an Employment Termination Payment Date that is later than
          the March 31 following the year in which the Participant terminates
          employment, which later date shall be either the 15th or last date of
          any month (but not December 31) specified by the Participant. Such
          election shall be made in writing in such form as the Committee shall
          require, no later than December 31 of the year in which the
          Participant terminates employment.

     (b)  Commencement of Payment. Payment to the Participant or the
          Participant's beneficiary shall commence within 30 days following the
          Payment Date.

     (c)  Method of Payment. Payments to a Participant or Participant's
          beneficiary shall automatically be paid in a lump sum, unless the
          Participant or the Participant's beneficiary elects one of the
          following installment payment methods:

          (i)  In monthly, quarterly or annual installments over a period of up
               to 25 years, as specified by the Participant or the Participant's
               beneficiary. Installment payments shall be made in substantially
               equal installments over the installment period specified. Each
               installment payment shall be computed by dividing the balance of
               the Deferral Account that is to be paid in installments by the
               number of payments remaining in the installment period.

         (ii)  In monthly, quarterly or annual installments of a dollar amount
               specified by the Participant or the Participant's beneficiary.

        (iii)  In an initial partial lump sum payment with subsequent
               installment payments. The lump sum payment and first installment
               payment shall be distributed in a year specified by the
               Participant or the Participant's beneficiary and subsequent
               monthly, quarterly or annual installment payments shall be made
               either over a period of years (as described in (i) above) or of a
               specified dollar amount (as described in (ii) above), as
               specified by the Participant or the Participant's beneficiary.

          An installment distribution election under this Section 5.1(c) shall
          be made in writing in such form as the Committee shall require on or
          before the December 31 of the calendar year preceding the Payment
          Date. Such installment distribution election shall apply to all
          payments that commence on the same Payment Date. Once an installment
          election is filed for a Payment Date, it cannot be revoked.
          Installment payments shall commence within 30 days after the Payment
          Date.

Notwithstanding the foregoing, Deferral Elections made in 1993 which specified a
five year installment payment shall be null and void, and shall be paid in a
lump sum, unless the Participant or the Participant's beneficiary files a
written installment election prior to December 31 of the calendar year preceding
the Payment Date.

                                       7
<PAGE>
 

     5.2  Form of Payment. All payments shall be made in cash. However, a
Participant who has elected a McDonald's Common Stock based return may elect to
receive payment in the form of shares of McDonald's Common Stock by filing a
written request with the Committee prior to December 31 of the calendar year
preceding the Payment Date.

     5.3  Early Withdrawals and Acceleration of Installment Payments. A
Participant shall have the right to withdraw in cash any portion of the balance
of his or her Deferral Accounts (except for the Equalization Amounts of the
Participant's Deferral Accounts under Sections 4.1(b) and (c) and amounts which
were not withdrawable under the terms of the Plan prior to September 1, 1994) at
any time prior to the applicable Payment Date, subject to the Committee's
consent and a 10% forfeiture penalty on the amount requested. A Participant who
is receiving installment payments may accelerate payment of any unpaid amount,
subject to the Committee's consent and 10% forfeiture penalty on the amount
accelerated. The withdrawal or accelerated installment (reduced by the 10%
forfeiture penalty) shall be paid within 30 days of the Valuation Date next
following the date the election to withdraw or accelerate payments is approved
by the Committee. Withdrawals and accelerated installments shall be made first
from the earliest maturing Deferral Account and shall be taken pro rata from the
investment rate equivalents elected by the Participant. Withdrawals shall be
subject to such procedures as the Committee shall establish from time to time.

     5.4  Withholding of Taxes. The Company shall withhold any applicable
Federal, state or local income tax from payments due under the Plan in
accordance with such procedures as the Company may establish. Generally, any
Social Security taxes, including the Medicare portion of such taxes, shall be
withheld and paid at the time base salary payments or incentive payments under
TIP or the Three Year Incentive would otherwise have been paid to the
Participant. The Company shall also withhold any other employment taxes as
necessary to comply with applicable laws.

     5.5  Limitations For Section 16 Insiders. A "Section 16 Insider" shall
include any Participant who has been deemed to be subject to Section 16 of the
Securities Exchange Act of 1934 (the "Exchange Act") by the Board of Directors
of the Company. Notwithstanding any provision of the Plan to the contrary, the
Deferral Account of each Section 16 Insider is subject to the following
limitations:

     (a)  An Eligible Employee who is a Section 16 Insider at the time he or she
          makes a Deferral Election may elect a McDonald's Common Stock based
          return and at the same time must also specify the Payment Date and
          whether the payment will be in a lump sum or the specific installment
          method that will apply. The election of a McDonald's Common Stock
          based return is irrevocable and cannot be changed by an investment
          election at a later date. A Participant who is a Section 16 Insider
          may not make a withdrawal or accelerate installments under Section 5.3
          of any Deferral Account(s) that are credited with a McDonald's Common
          Stock based return. Section 16 Insiders who elect a McDonald's Common
          Stock based return and a form of payment will not be able to change
          those elections, even if the Plan is amended at a later date to
          provide increased flexibility.

                                       8
<PAGE>
 

     (b)  A Section 16 Insider who elects to invest in McDonald's Common Stock
          based return shall also elect, at the time the deferral is made,
          whether the distribution will be paid in cash or in the form of
          McDonald's Common Stock. This provision applies only to deferral
          elections made on and after August 15, 1996. Amounts deferred under
          all deferral elections made prior to August 15, 1996 will be paid in
          cash. However, for these cash distributions only, to the extent that a
          Section 16 Insider uses the cash distribution to purchase shares of
          McDonald's Common Stock on the open market in one or more transactions
          within seven months after the date such amounts are distributed, the
          Company shall reimburse the Section 16 Insider for all reasonable
          brokerage fees and other transaction costs incurred in connection with
          such purchases upon presentation of satisfactory evidence thereof not
          later than 60 days after the date of each transaction.

     (c)  If any Participant becomes a Section 16 Insider after making a
          Deferral Election under the Plan, any Deferral Account that is being
          credited with a McDonald's Common Stock based return shall
          automatically be converted to any non-McDonald's Common Stock based
          investment return specified by the Participant on an investment
          election form as of the Valuation Date immediately preceding the date
          the Participant is designated a Section 16 Insider by the Board of
          Directors. This automatic change to non-McDonald's Common Stock based
          returns will be made to preserve the Participant's right to make
          investment choices for investment options that do not involve
          McDonald's Common Stock, make early withdrawals and elect accelerated
          installments under Section 5.3.

     (d)  Elections to invest in McDonald's Common Stock based returns can be
          made by Section 16 Insiders only at the time the Deferral Election is
          made. Investment elections which would result in a transfer into the
          McDonald's Common Stock based return at a later date are not permitted
          for Section 16 Insiders.

In addition, the Committee may take such other actions as are necessary so that
transactions by Section 16 Insiders do not result in liability under Section
16(b) of the Exchange Act.

     5.6  Beneficiary. A Participant shall have the right to name a beneficiary
or beneficiaries who shall receive the balance of a Participant's Deferral
Account in the event of the Participant's death prior to the payment of his or
her entire Deferral Account. A beneficiary may include any person or persons or
an entity (ies) which is tax exempt under Section 501(c)(3) of the Internal
Revenue Code. If no beneficiary is named by a Participant or if he or she
survives all of the named beneficiaries, the Deferral Account shall be paid to
the same beneficiary or beneficiaries to which the Deferral Account would have
been paid if it were in the Participant's Profit Sharing Fund Account under the
Profit Sharing Program as of the date of the Participant's death. To be
effective, any beneficiary designation shall be filed in writing with the
Committee. A Participant may revoke an existing beneficiary designation by
filing another written beneficiary designation with the Committee. The latest
beneficiary designation received by the Committee shall be controlling.

                                       9
<PAGE>
 

A beneficiary designated by the Participant who has not yet received payment of
the entire benefit payable to him or her under the Plan shall have the right to
name a beneficiary or beneficiaries to receive the balance of such benefit in
the event of the beneficiary's death prior to the payment of the entire amount
of such benefit. Any such beneficiary designation shall be made in accordance
with the provisions of this Section 5.6

                                   Section 6
                                   ---------
                                 Miscellaneous
                                 -------------

     6.1  Funding. Benefits payable under the Plan to any Participant shall be
paid directly by the Company. The Company shall not be required to fund, or
otherwise segregate assets to be used for payment of benefits under the Plan.
While the Company may, in the discretion of the Committee, make investments (a)
in shares of McDonald's Common Stock through open market purchases or (b) in
other investments in amounts equal or unequal to amounts payable hereunder, the
Company shall not be under any obligation to make such investments and any such
investment shall remain an asset of the Company subject to the claims of its
general creditors. Notwithstanding the foregoing, the Company may maintain one
or more trusts ("Trust") to hold assets to be used for payment of benefits under
the Plan. Any payments by a Trust of benefits provided to a Participant under
the Plan shall be considered payment by the Company and shall discharge the
Company of any further liability under the Plan for such payments.

     6.2  Account Statements. The Company shall provide Participants with
statements of the balance of their Deferral Accounts under the Plan at least
annually. The Committee may, in their discretion, also issue statements as of
the March 31, June 30, September 30 and December 31 Valuation Dates, or as of
any other Valuation Date that the Committee deems appropriate.

     6.3  Employment Rights. Establishment of the Plan shall not be construed to
give any Eligible Employee the right to be retained in the Company's service or
to any benefits not specifically provided by the Plan.

     6.4  Interests Not Transferable. Except as to withholding of any tax under
the laws of the United States or any state or locality and the provisions of
Section 5.6, no benefit payable at any time under the Plan shall be subject in
any manner to alienation, sale, transfer, assignment, pledge, attachment, or
other legal process, or encumbrance of any kind. Any attempt to alienate, sell,
transfer, assign, pledge or otherwise encumber any such benefits, whether
currently or thereafter payable, shall be void. No person shall, in any manner,
be liable for or subject to the debts or liabilities of any person entitled to
such benefits. If any person shall attempt to, or shall alienate, sell,
transfer, assign, pledge or otherwise encumber benefits under the Plan, or if by
any reason of the Participant's bankruptcy or other event happening at any time,
such benefits would devolve upon any other person or would not be enjoyed by the
person entitled thereto under the Plan, then the Company, in its discretion, may
terminate the interest in any such benefits of the person entitled thereto under
the Plan and hold or apply them to or for the benefit of such person

                                      10
<PAGE>
 

entitled thereto under the Plan or such individual's spouse, children or other
dependents, or any of them, in such manner as the Company may deem proper.

     6.5  Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of
the amounts of the Deferral Accounts of a Participant that cannot be distributed
because of the Committee's inability, after a reasonable search, to locate a
Participant or the Participant's beneficiary, as applicable, within a period of
two (2) years after the Payment Date upon which the payment of benefits become
due. Unclaimed amounts shall be forfeited at the end of such two-year period.
Penalties charged for withdrawals under Section 5.3 shall also be forfeited in
the year in which the penalty is charged. These forfeitures will reduce the
obligations of the Company under the Plan. After an unclaimed amount has been
forfeited, the Participant or beneficiary, as applicable, shall have no further
right to the Participant's Deferral Account.

     6.6  Controlling Law. The law of Illinois, except its law with respect to
choice of law, shall be controlling in all matters relating to the Plan to the
extent not preempted by ERISA.

     6.7  Action by the Company. Except as otherwise specifically provided
herein, any action required of or permitted by the Company under the Plan shall
be by resolution of the Board of Directors of the Company or by action of any
member of the Committee or person(s) authorized by resolution of the Board of
Directors of the Company.

                                   Section 7
                                   ---------
                            Employer Participation
                            ----------------------

     7.1  Adoption of Plan. Any subsidiary or affiliate of the Company
("Employer") may, with the approval of the Committee and under such terms and
conditions as the Committee may prescribe, adopt the corresponding portions of
the Plan by resolution of its board of directors. The Committee may amend the
Plan as necessary or desirable to reflect the adoption of the Plan by an
Employer, provided however, that an adopting Employer shall not have the
authority to amend or terminate the Plan under Section 8.

     7.2  Withdrawal from the Plan by Employer. Any such Employer shall have the
right, at any time, upon the approval of and under such conditions as may be
provided by the Committee, to withdraw from the Plan by delivering to the
Committee written notice of its election so to withdraw. Upon receipt of such
notice by the Committee, the portion of the Deferral Accounts of Participants
and beneficiaries attributable to credits made while the Participants were
employees of such withdrawing Employer, plus any net earnings, gains and losses
on such credits, shall be distributed from the Trust at the direction of the
Committee in cash at such time or times as the Committee, in its sole
discretion, may deem to be in the best interest of such employees and their
beneficiaries. To the extent the amounts held in the Trust for the benefit of
such Participants and beneficiaries are not sufficient to satisfy the Employer's
obligation to such Participants and their beneficiaries accrued on account of
their employment with the Employer, the remaining amount necessary to satisfy
such obligation shall be an

                                      11
<PAGE>

 
obligation of the Employer, and the Company shall have no further obligation to
such Participants and beneficiaries with respect to such amounts.

                                   Section 8
                                   ---------
                           Amendment and Termination
                           -------------------------

The Company intends the Plan to be permanent, but reserves the right at any time
by action of its Board of Directors or by the Committee (in accordance with the
restrictions in the following sentence) to modify, amend or terminate the Plan,
provided however, that any amendment or termination of the Plan shall not reduce
or eliminate any Deferral Account accrued through the date of such amendment or
termination.

The Committee shall have the same authority to adopt amendments to the Plan as
the Board of Directors of the Company in the following circumstances:

     (a)  to adopt amendments to the Plan which the Committee determines are
          necessary or desirable for the Plan to comply with or to obtain
          benefits or advantages under the provisions of applicable law,
          regulations or rulings or requirements of the Internal Revenue Service
          or other governmental or administrative agency or changes in such law,
          regulations, rulings or requirements; and

     (b)  to adopt any other procedural or cosmetic amendment that the Committee
          determines to be necessary or desirable that does not materially
          change benefits to Participants or their beneficiaries or materially
          increase the Company's or adopting Employers' credits to the Plan.

The Committee shall provide notice of amendments adopted by the Committee to the
Board of Directors of the Company on a timely basis.

                                      12
<PAGE>
 

     Executed in multiple originals this 3rd day of December, 1998.


                                                 McDONALD'S CORPORATION
                             
                             
                             
                                                 /s/ Stanley R. Stein
                                                 By:    Stanley R. Stein
                                                 Title: Executive Vice President





                                      13

<PAGE>

                                                                   Exhibit 10(h)
 
                           EXECUTIVE RETENTION PLAN
                           ------------------------

          McDonald's Corporation, a Delaware corporation (the "Company"), hereby
establishes the Executive Retention Plan (the "Plan") effective as of October 1,
1998 (the "Effective Date").

                                   Article I

                                    Purpose

          It is in the best interests of the Company and its shareholders to
assure that the Company has the continued dedication of its key executives in a
highly competitive global marketplace. This Plan is established to promote the
retention of these key executives and provide the Company with a smooth
succession process. This Plan is also intended to provide these key executives
with incentives that are designed to focus their energy on contributing to the
ultimate success of the Company.

                                   Article 2

                              Plan Administration

          2.01 The Committee. The Compensation Committee of the Board of
Directors of the Company, as constituted from time to time (the "Committee"),
shall have overall responsibility for the establishment, amendment,
administration and operation of the Plan. The Committee may elect to delegate
certain of such responsibilities to one or more of its members and, in such
case, all references in this Plan to the "Committee" shall include a reference
to one or more of the Committee members to whom any such responsibilities have
been delegated. This Plan shall be administered in a uniform and
nondiscriminatory manner by the Committee, which shall have the responsibilities
and duties and powers under this Plan which are not specifically delegated to
anyone else, including the following powers:

          (i)   subject to any limitations under this Plan or applicable law, to
          make and enforce such rules and regulations of this Plan and prescribe
          the use of such forms as it shall deem necessary for the efficient
          administration of this Plan;

          (ii)  to require any person to furnish such information as it may
          reasonably request as a condition to receiving any benefit under this
          Plan;

          (iii) to decide on questions concerning this Plan and the eligibility
          of the persons identified as "Tier I Executives" and "Tier II
          Executives" (collectively, the "Executives") on Appendix A to
          participate in this Plan, in accordance with the provisions of this
          Plan;

                                       1
<PAGE>
 
          (iv) to compute or cause to be computed the amount of benefits which
          shall be payable to any person in accordance with the provisions of
          this Plan; and

          (v) to appoint and remove, as it deems advisable, the Plan
          Administrator.

          2.02 The Plan Administrator. The Committee may appoint a Plan
Administrator who may (but need not) be a member of the Committee, and in the
absence of such appointment, the Committee shall be the Plan Administrator. The
Plan Administrator shall perform the administrative responsibilities delegated
to the Plan Administrator from time to time by the Committee.

          2.03 Discretionary Power of the Committee. The Committee from time to
time may establish rules for the administration of this Plan. The Committee
shall have the sole discretion to make decisions and take any action with
respect to questions arising in connection with this Plan, including the
construction and interpretation of this Plan and the determination of
eligibility for and the amount of benefits under this Plan. The decisions or
actions of the Committee as to any questions arising in connection with this
Plan, including the construction and interpretation of this Plan, shall be final
and binding upon all Executives and their respective beneficiaries.

          2.04 Action of the Committee. The Committee may act at a meeting,
including a telephonic meeting, by the consent of a majority of the members of
the Committee at the time in office, or without a meeting, by the unanimous
written consent of the individual members of the Committee. An executed document
signed by an individual member of the Committee and transmitted by facsimile
shall be valid as the original signed document for all purposes. Any person
dealing with the Committee shall be entitled to rely upon a certificate of any
member of the Committee, or the Secretary or any Assistant Secretary of the
Company, as to any act or determination of the Committee.

          2.05 Advisors and Agents of the Committee. The Committee may, subject
to periodic review, (a) authorize one or more of its members or an agent to
execute or deliver any instrument, and make any payment on its behalf and (b)
utilize the services of associates and engage accountants, agents, legal
counsel, record keepers, professional consultants (any of whom may also be
serving the Company) or authorized Company personnel to assist in the
administration of this Plan or to render advice with regard to any
responsibility or issue arising under this Plan.

          2.06 Records and Reports of the Committee. The Committee shall
maintain records and accounts relating to the administration of this Plan. An
Executive shall be entitled to review any records relating to his or her
individual participation in the Plan and to make copies of such records upon
written request to the Committee.

          2.07 Liability of the Committee; Indemnification. The members of the
Committee and the Plan Administrator shall have no liability with respect to any
action or

                                       2
<PAGE>
 
omission made by them in good faith nor from any action or omission made in
reliance upon (a) the advice or opinion of any accountant, legal counsel,
medical adviser or other professional consultant or (b) any resolutions of the
Board (or the Committee) certified by the Secretary or Assistant Secretary of
the Company. Each member of the Committee and the Plan Administrator shall be
indemnified, defended and held harmless by the Company and its respective
successors against all claims, liabilities, fines and penalties and all expenses
(including reasonable attorneys' fees and disbursements and other professional
costs incurred in enforcing this provision) reasonably incurred by or imposed
upon such individual which arise as a result of his or her actions or failure to
act in connection with the operation and administration of this Plan, to the
extent lawfully allowable and to the extent that such claim, liability, fine,
penalty or expense is not paid for by liability insurance purchased by or paid
for by the Company or an affiliate thereof. Notwithstanding the foregoing, the
Company shall not indemnify any person for any such amount incurred through any
settlement or compromise of any action unless the Company consents in writing to
such settlement or compromise, which consent shall not be unreasonably withheld.

          2.08 Plan Expenses. Expenses relating to this Plan prior to its
termination shall be paid from the general assets of the Company. To the extent
required by applicable law, the Company may require any member of the Committee
to furnish a fidelity bond satisfactory to the Company.

          2.09 Service in More than one Capacity. Any person or group of persons
may serve this Plan in more than one capacity.

          2.10 Named Fiduciary. The named fiduciary of this Plan shall be the
Committee.

          2.11 Delegation of Responsibility. The Committee shall have the
authority to delegate from time to time, in writing, all or any part of its
responsibilities under this Plan to a member of the Committee. The Committee may
also delegate administrative functions to the Plan Administrator pursuant to
Section 2.02. The Committee may in the same manner revise or revoke any such
delegation of responsibility. Any action of the delegate in the exercise of such
delegated responsibilities shall have the same force and effect for all purposes
hereunder as if such action had been taken by the Committee. The Committee shall
not be liable for any acts or omissions of any such delegate. The delegate shall
periodically report to the Committee concerning the discharge of the delegated
responsibilities.

          2.12 Allocations of Responsibility. The Committee shall have the
authority to allocate from time to time, in writing, all or any part of its
responsibilities under this Plan to one or more of its members as it may deem
advisable, and in the same manner to revoke such allocation of responsibilities.
Any action of the member to whom responsibilities are allocated in the exercise
of such allocated responsibilities shall have the same force and effect for all
purposes hereunder as if such action had been taken by the allocating authority.
The Committee shall not be liable for any acts or omissions of such member. The
member to whom responsibilities have been allocated shall periodically report to
the Committee concerning the discharge of the allocated responsibilities.

                                       3
<PAGE>
 
          2.13 Filing a Claim. Each individual eligible for benefits under this
Plan ("Claimant") may submit a claim for benefits ("Claim") to the Plan
Administrator in writing on a form provided or approved by the Plan
Administrator or, if no such form has been so provided or approved, on any form
that specifies, in reasonable detail, facts and circumstances and the applicable
Plan provisions which the Claimant believes entitle him or her to compensation
or benefits under this Plan. A Claimant shall have no right to seek review of a
denial of benefits, or to bring any action in any court to enforce a Claim,
prior to his filing a Claim and exhausting his or her rights to review under
this Article 2.

          When a Claim has been filed properly, it shall be evaluated and the
Claimant shall be notified of the approval or the denial of the Claim within 45
days after the receipt of such Claim unless special circumstances require an
extension of time for processing the Claim. If such an extension is required,
written notice of the extension shall be furnished to the Claimant prior to the
end of the initial 45-day period, which notice shall specify the special
circumstances requiring an extension and the date by which a final decision will
be reached (which date shall not be later than 90 days after the date on which
the Claim was filed). A Claimant shall be given a written notice in which the
Claimant shall be advised as to whether the Claim is granted or denied, in whole
or in part. If a Claim is denied, in whole or in part, the notice shall contain
(a) the specific reasons for the denial, (b) references to pertinent Plan
provisions upon which the denial is based, (c) a description of any additional
material or information necessary to perfect the Claim and an explanation of why
such material or information is necessary, and (d) the Claimant's right to seek
review of the denial.

          2.14 Review of Claim Denial. If a Claim is denied, in whole or in
part, the Claimant shall have the right to (a) request a review of the denial by
the Committee or its delegate, (b) review pertinent documents (c) submit issues
and comments in writing to the Committee and (d) appear before the Committee in
person to present such issues and comments; provided that the Claimant files a
written request for review with the Committee within 60 days after the
Claimant's receipt of written notice of the denial. Within 60 days after the
Committee receives a request for review, the review shall be made and the
Claimant shall be advised in writing of the decision on review, unless special
circumstances require an extension of time for such review, in which case the
Claimant shall be given a written notice within such initial 60-day period
specifying the reasons for the extension and when such review shall be
completed; provided that such review shall be completed within 120 days after
the filing of the request for review. The Committee's decision on review shall
be sent to the Claimant in writing and shall include (a) specific reasons for
the decision and (b) references to Plan provisions upon which the decision is
based. A decision on review shall be binding on all persons for all purposes.

          If a Claimant shall fail to file a request for review in accordance
with the procedures herein outlined, such Claimant shall have no right to obtain
such a review or to bring an action in any court, and the denial of the Claim
shall become final and binding on all persons for all purposes except upon a
showing of good cause for such failure.

                                   Article 3

                                       4
<PAGE>
 
                               Retention Period

          As a condition of receiving the Transition Benefits (as defined in
Section 4.02) and the Continued Employment Benefits (as defined in Section
5.02), an Executive must provide services to the Company as an Executive Officer
(as defined below) throughout the Retention Period. During the Retention Period,
(i) an Executive's employment shall be on an at-will basis and (ii) the
Executive shall be entitled to participate in the Company's benefits and
compensation plans, practices, policies and programs as in effect from time to
time.

          For purposes of this Plan:

               (a) an Executive's "Retention Period" shall mean the period
               commencing on the Executive's Start Date (as specified on
               Appendix A) and ending five years thereafter (in the case of Jack
               Greenberg) or three years thereafter (in the case of all other
               Executives); and

               (b) "Executive officer" means an executive officer (as defined by
               Rule 3b-7 (or any successor rule) under the Securities Exchange
               Act of 1934 as in effect from time to time) of the Company.

                                   Article 4

                               Transition Period

          4.01 Election to Become a Transition Officer. Upon an Executive's
completion of his or her Retention Period, such Executive may elect by written
notice (accompanied by a fully executed Release (as described in Section
8.01(i)) and Noncompetition Agreement (as defined in Section 9.01) (such notice,
Release and Noncompetition Agreement collectively referred to herein as the
"Transition Documents") to the Committee to become an officer of the Company who
is not an Executive Officer (such non-Executive Officer, a "Transition
Officer"), provided that, in the case of a Tier II Executive (i) a successor has
been selected by the Company and has been approved by the Chief Executive
Officer of the Company (the "CEO") in such CEO's sole discretion, or (ii) such
Tier II Executive has attained age 62. Such election shall become effective upon
the Change-in-Status Date (as defined below) and the Executive shall thereafter
serve as a Transition Officer during a number of months (the "Transition
Period") equal to the lesser of (i) the number of the Executive's Years of
Service (as defined below), or (ii) 18 months. During the Transition Period, an
Executive's employment shall be on an at-will basis and subject to the
termination provisions set forth in Articles 6 and 7.

                                       5
<PAGE>
 
          For purposes of this Plan:

               (a) an Executive's "Change-in-Status Date" shall mean the date
               specified in the Executive's Transition Documents, provided that
               the Committee may accelerate such date in its sole discretion;
               and

               (b) an Executive's "Years of Service" shall equal the number of
               consecutive complete 12-month intervals during the period
               beginning on the earlier of the Executive's historical service
               date or company service date and ending on the Change-in-Status
               Date rounded down to the nearest complete 12-month interval
               (e.g., a period of 10 years, 8 months and 3 days shall equal 10
               "years of service").

          4.02 Transition Benefits. (a) Base Salary. During the Transition
Period, the Company shall pay an Executive a base salary at the annualized rate
in effect on the day immediately preceding the Change-in-Status Date but in no
event lower than the highest base salary in effect at any time between the
Effective Date and the Change-in-Status Date, provided that the base salary
payable under this Section shall be reduced to reflect any across-the-board
reductions implemented by the Committee prior to the Change-in-Status Date which
reductions affect Company officers generally (the "Annual Base Salary"). The
Annual Base Salary shall also be reduced to the extent that the Executive elects
to defer or reduce such salary under the terms of any deferred compensation plan
or other employee benefit plan or arrangement maintained or established by the
Company.

          (b) Annual Bonus. In respect of each calendar year which ends during
the Transition Period, the Company shall pay to the Executive an Annual Bonus
(as defined below), which bonus shall be payable in a lump sum on April 1st of
the year following the year in which it was earned (or such other date, as
determined by the Committee in accordance with the Company's Target Incentive
Program or any successor plan ("TIP")). In respect of any calendar year in which
the Transition Period ends, the Company shall pay to the Executive (in lieu of
an Annual Bonus) a Prorated Annual Bonus (as defined below), which Prorated
Bonus shall be payable in a lump sum within 60 days after the end of the
Transition Period.

          Notwithstanding the foregoing, the Annual Bonus shall be reduced to
the extent that the Executive previously elected to defer or reduce such bonus
under the terms of any deferred compensation plan or other employee benefit plan
or arrangement maintained or established by the Company. The Executive shall not
be entitled to defer any portion of the Prorated Bonus.

          For purposes of this Plan,

               (i) "Annual Bonus" shall mean an annual bonus pursuant to TIP
               which is equal to the product of the Annual Base Salary and the
               Full Target Percentage (as defined below);

                                       6
<PAGE>
 

               (ii) "Full Target Percentage" shall mean the target percentage
               which the Executive was eligible to receive under TIP on the day
               immediately preceding the Change-in-Status Date without any
               adjustment, but in no event lower than the Executive's highest
               target percentage in effect at any time between the Effective
               Date and the Change-in-Status Date, provided that the target
               percentage shall be reduced to reflect any across-the-board
               reductions implemented by the Committee prior to the Change-in-
               Status Date which reductions affect Company officers generally,
               and

               (iii) "Prorated Annual Bonus" shall mean a bonus in an amount
               equal to the Annual Bonus multiplied by a fraction, the numerator
               of which is the number of days which have elapsed during such
               calendar year through the last day of the Transition Period, and
               the denominator of which is 365.

               (c) Three-Year Incentive Plan Awards. During the Transition
Period, any outstanding awards under the Company's Three-Year Incentive Plan or
any successor plan ("LTIP") will continue to vest and become payable in
accordance with the Company's policies as in effect from time to time. Such LTIP
awards ("LTIP Awards") shall be computed by reference to 100% of the target
percentage the Executive would have received pursuant to the terms of the
original LTIP grant without any adjustment. During the Transition Period, the
Executive shall not be eligible to participate in any new cycles under LTIP or
other long-term incentive plan.

               (d) Continued Vesting and Exercisability of Stock Options. During
the Transition Period, stock options will continue to vest, expire and otherwise
be subject to the express terms of the related stock option plan and the
applicable Golden M Certificate (or other applicable award agreement). During
the Transition Period, an Executive shall retain the right to exercise any
unexercised stock option to the extent vested on the date of exercise, provided,
however, that an Executive shall not be entitled to receive any additional stock
option grants and in no event shall the term of any stock option extend beyond
its original term.

               (e) Benefit Programs and Policies. During the Transition Period,
all benefit plans, policies, fringe benefits and practices in effect from time
to time shall continue to apply to the Executive in accordance with the terms of
the benefit plans sponsored by the Company and the Company's policies and
procedures established for officers of the Company who are not Executive
Officers, except that: (i) the Executive will not be eligible for any pay
increase, (ii) the Executive will not be eligible to participate in TIP during
any year if the Transition Period ends prior to the end of a calendar year,
(iii) no new stock option grants will be given to the Executive, and (iv) no new
awards will be granted under LTIP. Amounts paid during the Transition Period
shall be treated as "compensation" for purposes of determining any benefits
provided under McDonald's Corporation Profit Sharing Program and the related 
non-qualified benefit plans known as McCAP I, McCAP II or McEQUAL, and
McDonald's Corporation Deferred Income Plan and life insurance benefit plans
sponsored by McDonald's Corporation (collectively, the "Benefit Plans") to the
extent permitted by the terms of such Benefit Plans as in effect from time to
time. Nothing in this Plan shall be construed to limit the

                                       7
<PAGE>
 

ability of the Company to amend or terminate any of the plans, programs or
arrangements under which benefits are provided to officers and employees of the
Company, and any such terminations or amendments shall be effective as to the
Executives.

          4.03 Time Devoted to Duties During Transition Period. During the
Transition Period, an Executive shall devote substantially all of his or her
normal business time and efforts to the business of the Company, its
subsidiaries and its affiliates, the amount of such time to be sufficient to
permit him or her to diligently and faithfully serve and endeavor to further its
interests to the best of his or her ability. Subject to the foregoing, an
Executive may participate in various civic and philanthropic activities, may
serve on boards of directors and committees of not-for-profit organizations of
the Executive's choice, and, consistent with the policies of the Company, may
serve as a non-employee director of one or more corporations (unless the
Committee concludes that such service would be inappropriate or not in the best
interests of the Company).

                                   Article 5

                          Continued Employment Period
                                        
          5.01 Employee Status. Following the Transition Period, the Executive
will become a staff employee of the Company for a five year "Continued
Employment Period", provided that the Executive complies with the Noncompetition
Agreement at all times during the term of the Continued Employment Period. As a
condition to receiving the Continued Employment Benefits (defined in Section
5.02), the Executive shall have executed and delivered to the Committee the
Release described in Section 8.01(ii). During the Continued Employment Period,
an Executive's employment shall be on an at-will basis and subject to the
termination provisions set forth in Articles 6 and 7.

          5.02 Continued Employment Benefits. (a) Base Salary. During the
Continued Employment Period, the Company shall pay the Executive a base salary
for each year equal to twenty-five percent (25%) of his or her Annual Base
Salary (the "Continued Employment Period Salary"), provided, however, that the
Continued Employment Period Salary shall be reduced to the extent that the
Executive elects to defer or reduce such salary under the terms of any employee
benefit plan or arrangement maintained or established by the Company.

               (b) Target Incentive Awards. During the Continued Employment
Period, an Executive shall not be eligible to participate in TIP or any other
annual incentive plan of the Company.

               (c) LTIP Awards. During the Continued Employment Period, any
outstanding awards under LTIP will continue to vest and become payable in
accordance with the Company's then current policies notwithstanding the
Executive's staff employee status during this period. Such LTIP Awards shall be
computed by reference to 100% of the target percentage the Executive would have
received pursuant to the terms of the original LTIP grant without any

                                       8
<PAGE>
 

adjustment. During the Continued Employment Period, the Executive shall not be
eligible to participate in any new cycles under LTIP or other long-term
incentive plan.

               (d) Continued Vesting and Exercisability of Stock Options. During
the Continued Employment Period, stock options will continue to vest, expire and
otherwise be governed by the express terms of the related stock option plan and
the applicable Golden M Certificate (or other applicable award agreement).
During the Continued Employment Period, an Executive shall retain the right to
exercise any unexercised stock option to the extent vested on the date of
exercise, provided, however, that an Executive shall not be entitled to receive
any additional stock option grants and, in no event, shall the term of any stock
option extend beyond its original term.

               (e) Benefit Programs and Policies. During the Continued
Employment Period, all benefit plans, policies, fringe benefits and practices in
effect from time to time shall continue to apply to the Executive in accordance
with the terms of the benefit plans sponsored by McDonald's and McDonald's
policies and procedures established for staff employees of the Company, except
that: (i) the Executive will not be eligible for any pay increase, (ii) the
Executive will not be eligible to participate in the TIP, (iii) no new stock
option grants will be given to the Executive, and (iv) no new awards will be
granted under LTIP. Amounts paid during the Continued Employment Period shall be
treated as "compensation" for purposes of determining any benefits provided
under the Benefit Plans to the extent permitted by the terms of such Benefit
Plans as in effect from time to time. Nothing in this Plan shall be construed to
limit the ability of the Company to amend or terminate any of the plans,
programs or arrangements under which benefits are provided to officers or
employees of the Company, and any such terminations or amendments shall be
effective as to the Executives.

          5.03 Time Devoted to Duties During Continued Employment Period. During
the Continued Employment Period, an Executive shall devote such time to the
business of the Company as may be reasonably requested by the Company from time
to time, which requests shall be commensurate with the compensation the
Executive is receiving hereunder. Notwithstanding the foregoing, an Executive
may participate in various civic and philanthropic activities, may serve on
boards of directors and committees of not-for-profit organizations of the
Executive's choice, may serve as a member of one or more corporate boards of
directors and may engage in a full-time employment arrangement with another
organization of the Executive's choice, provided that such activities do not
violate the Executive's obligations set forth in Article 9. The Company shall
have the right to request that the Executive provide services to the Company
during the Continued Employment Period in a manner that reasonably accommodates
such outside activities, services and arrangements.

          5.04 Mitigation. In the event that an Executive shall engage in any
employment arrangement permitted by Section 5.03 (including self-employment)
during the Continued Employment Period, no amount paid to or earned by such
Executive therefrom shall reduce any payments or other benefits due such
Executive pursuant to the Plan.

                                       9
<PAGE>
 
                                   Article 6

                           Termination of Employment

          6.01 Death or Disability. An Executive's employment shall terminate
automatically upon his or her death. In the event that (a) the Committee
determines in good faith that the Executive is suffering from a "Disability"
(together with its various cognates, as defined below) and (b) the appropriate
decisionmaker under any applicable Company plan or program providing disability
benefits to the Executive (a "Disability Plan") similarly determines that the
Executive is eligible for such benefits by virtue of the Executive's disability
(as defined for purposes of such plan or program), the Company may deliver to
the Executive written notice (a "Disability Termination Notice") in accordance
with Section 6.05 of this Plan of the Company's intention to terminate the
Executive's employment. In such event, the Executive's employment shall
terminate effective on the later of (y) the 30th day after receipt of such
Disability Termination Notice by the Executive and (z) the first date on which
the Executive becomes eligible for long-term disability benefits under the
principal Disability Plan applicable to the Executive (the "Disability Effective
Date"), provided, however, that (1) in the interim the Executive shall not have
returned to full-time performance of the Executive's duties and/or (2) the
Executive shall not have delivered to the Committee within 30 days of receipt of
a Disability Termination Notice a written objection thereto (an "Objection"). In
the event of a timely objection, any termination of the Executive shall be
suspended and the Executive shall be promptly examined by two physicians or
other professionals skilled in the relevant field, one selected by the Executive
and one by the Committee. Each of the two professionals shall issue a written
opinion within 15 days following the completion of his or her examination as to
whether the Executive is Disabled in accordance with the definition provided in
this Plan. If the two professionals agree, each of the Executive and the Company
shall be bound by their joint conclusion. If the two professionals disagree,
they shall jointly agree on a third professional to conduct a similar
examination. Each of the Executive and the Company shall be bound by the
conclusion of such third professional. The Executive agrees to each such
examination and to waive any confidentiality rights necessary to allow each of
the professionals conducting such examinations to do so. The Company shall pay
all fees and costs of all such examinations. In the event of a disagreement as
to the determination of the Executive's disability for purposes of a Disability
Plan, such disagreement shall be resolved as provided for in such Disability
Plan. For purposes of this Plan, the term "Disability" shall mean the material
inability of the Executive, due to injury, illness, disease or bodily, mental or
emotional infirmity, to carry out the job responsibilities which such Executive
held or the tasks to which such Executive was assigned at the time of the
incurrence of such Disability, which inability is reasonably expected to be
permanent or of indefinite duration exceeding one year.

          6.02 Cause. The Company may terminate an Executive's employment at any
time for Cause. For purposes of this Plan, "Cause" means: (i) the willful
failure of an Executive to perform substantially all of the Executive's duties
with the Company (other than any failure resulting from incapacity due to
physical or mental illness), after written demand for substantial


                                      10
<PAGE>
 
performance is delivered to the Executive by the Committee or the CEO; (ii) a
willful violation of McDonald's rules and policies as in effect from time to
time; or (iii) the commission of any act or acts involving dishonesty, fraud,
illegality or moral turpitude. For purposes of this provision, no act or failure
to act, on the part of the Executive, shall be considered "willful", unless it
is done, or omitted to be done, by the Executive in bad faith or without
reasonable belief that the Executive's action or omission was in the best
interests of the Company. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or upon the instructions of
the CEO or an officer of the Company senior in rank to the Executive to whom the
Executive reports or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. The cessation of employment
of the Executive shall not be deemed to be for Cause unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of a majority of the Board at a meeting of the Board
called and held upon appropriate notice (after reasonable notice is provided to
the Executive and the Executive is given an opportunity, together with counsel,
to be heard before the Board), finding that, in the good faith opinion of the
Board, the Executive is guilty of the conduct described in this paragraph, and
specifying the particulars thereof in detail.

          6.03  Good Reason. During the Retention Period and the Transition
Period, a Tier I Executive may terminate his employment at any time for Good
Reason. For purposes of this Plan, "Good Reason" shall mean:

                (i) the assignment to the Executive of any duties inconsistent
          in any respect with the Executive's position (including status,
          offices, titles and reporting requirements), authority, duties or
          responsibilities as of the Effective Date, or any other action by the
          Company which results in a diminution in such position, authority,
          duties or responsibilities, excluding for this purpose an isolated,
          insubstantial and inadvertent action, provided that any change in
          status, duties and responsibilities resulting from a change in status
          from Executive Officer to Transition Officer pursuant to the
          provisions of this Plan shall not constitute Good Reason; or

                (ii) the relocation of the Executive's principal place of
          employment to a location outside the greater Chicago metropolitan
          area.

Notwithstanding the foregoing, a Tier I Executive cannot terminate employment
for Good Reason (i) if the Executive consented in writing to the occurrence of
the event giving rise to the claim of Good Reason or (ii) unless the Executive
shall have delivered a written notice to the Committee within 30 days of his
having actual knowledge of the occurrence of such event stating that he intends
to terminate his employment for Good Reason and specifying the factual basis for
such termination, and such event is not cured within 30 days of the receipt of
such notice.

          6.04  Termination of Employment For Any Other Reason. The Company may
terminate an Executive's employment at any time by written notice to the
Executive in

                                      11
<PAGE>
 
accordance with Section 6.05 of this Agreement of its intention to terminate the
Executive's employment for any reason other than death, Disability or Cause.

          6.05  Notice of Termination. Any termination by the Company other than
for death, or by a Tier I Executive for Good Reason, shall be communicated by
Notice of Termination to the other party hereto given in accordance with this
Section 6.05. For purposes of this Plan, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Plan relied upon, (ii) to the extent applicable, sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated, and (iii) if the Date
of Termination (as defined in Section 6.06) is other than the date of receipt of
such notice, specifies the termination date (which date shall be not more than
30 days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.

          6.06  Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company other than for death or
Disability, or by the Tier I Executive for Good Reason, the date of receipt of
the Notice of Termination or any later date specified therein, as the case may
be, (ii) if the Executive's employment is terminated by death, the date of
death, and (iii) if the Executive's employment is terminated by reason of
Disability, the Disability Effective Date.

                                   Article 7

               Obligations of the Company upon Termination

          7.01  By an Executive for Good Reason; By the Company Other Than for
Cause, Death or Disability. If the Company terminates an Executive's employment
other than for Cause, death or Disability or if a Tier I Executive terminates
his employment for Good Reason,

                         (i)  the Company shall pay the following amounts
                (collectively, the "Termination Payment") to the Executive in a
                lump sum in cash within 60 days after the Date of Termination:


                              A. the Accrued Obligations (as defined below),
                         and

                              B. the Severance Benefit (as defined below), and

                              C. the Welfare Benefit (as defined below); and

                         (ii)  the Executive shall have the right to exercise
                the following categories of stock options as of his or her Date
                of Termination and for

                                      12
<PAGE>
 
          five years thereafter: (i) all options exercisable as of the
          Executive's Date of Termination, and (ii) all options that will become
          exercisable within five years following the Executive's Date of
          Termination (collectively, the "Exercisable Options"), provided that
          in no event shall any option be exercised more than ten years after
          the date of grant.

     For purposes of this Plan:

          (a)  "Accrued Obligations" shall mean the sum of (1) any unpaid base
          salary accrued through the Date of Termination unless previously
          deferred by the Executive pursuant to the terms of an employee benefit
          plan or arrangement maintained by the Company ("Accrued Salary"), (2)
          any unpaid annual bonus amounts in respect of any calendar year ended
          before the Date of Termination (computed by reference to the Target
          Percentage (as defined below)) ("Earned Bonus"), unless previously
          deferred by the Executive pursuant to the terms of an employee benefit
          plan or arrangement maintained by the Company, (3) the product of (x)
          any annual bonus in respect of any incomplete calendar year (computed
          by reference to the Target Percentage and (y) a fraction, the
          numerator of which is the number of days in the current fiscal year
          through the Date of Termination, and the denominator of which is 365
          ("Prorated Bonus"), and (4) any accrued vacation pay, in each case to
          the extent not previously paid;

          (b)  "Discount Rate" shall mean the interest rate equal to the Prime
          Rate as reported in The Wall Street Journal, Midwest Edition, as in
          effect on the Date of Termination;

          (c)  "Severance Benefit" means (x) in the case of a termination of
          employment which occurs during the Retention Period, a lump sum
          payment equal to the aggregate of the amounts of the Annual Base
          Salary, the Annual Bonus and Continued Employment Period Salary which
          would have been receivable by the Executive if his or her Transition
          Period commenced on the Date of Termination and he or she had remained
          employed during the Transition Period and the Continued Employment
          Period, and (y) in the case of a termination of employment which
          occurs during the Transition Period or the Continued Employment
          Period, a lump sum payment equal to the aggregate of the amounts of
          the Annual Base Salary, the Annual Bonus and Continued Employment
          Period Salary which otherwise would have been receivable by the
          Executive if he or she had remained employed during the Transition
          Period and the Continued Employment Period; with the applicable amount
          being discounted from its scheduled payment date to the Date of
          Termination by reference to the Discount Rate,

                                      13
<PAGE>
 
               (d)  "Target Percentage" shall mean the target percentage which
               the Executive was eligible to receive under TIP on the day
               immediately preceding the Change-in-Status Date (or in the
               absence of a Change-In-Status Date, the day immediately preceding
               the Date of Termination) without any adjustment, but in no event
               lower than the Executive's highest target percentage in effect at
               any time between the Effective Date and the Change-in-Status Date
               (or in the absence of a Change-In-Status Date, the Date of
               Termination), provided that the target percentage shall be
               reduced to reflect any across-the-board reductions implemented by
               the Committee prior to the Change-in-Status Date (or in the
               absence of a Change-In-Status Date, the Date of Termination)
               which reductions affect Company officers generally; and

               (e)  "Welfare Benefit" shall mean a lump sum payment (in lieu of
               continued participation in the Benefit Plans) equal to an amount
               equal to the Company's estimated cost of providing the Benefit
               Plans to the Executive throughout the Transition Period and the
               Continued Employment Period (as reasonably determinable by the
               Committee in its sole discretion on the Date of Termination).

          7.02 Death. If the Executive dies during the Retention Period, the
Transition Period or the Continued Employment Period (collectively, the
"Periods"), the Company shall have no further obligations to the Executive's
legal representatives under this Plan, other than for payment of Accrued Salary,
any Earned Bonus and any payment or provision of Other Benefits (as defined in
this Section 7.02). Such amounts shall be paid to the Executive's legal
representatives in a lump sum in cash within 60 days of death unless deferred in
accordance with the terms of an employee benefit plan or arrangement maintained
by the Company. Upon death, the Executive's unexercised stock options shall
remain subject to the applicable provisions of the related stock option plans
and applicable Golden M Certificates (or other applicable award agreements).

          The term "Other Benefits" as utilized in this Section shall mean
benefits equal to the benefits provided by the Company to the estates and
beneficiaries of:

          (i) other Executive officers of the Company if the Executive dies
          during the Retention Period,

          (ii) other officers of the Company who are non-Executive Officers if
          the Executive dies during the Transition Period, or

          (iii) other staff employees of the Company if the Executive dies
          during the Continued Employment Period,

under such plans, programs, practices and policies relating to death benefits,
if any, as in effect on the date of the Executive's death.

                                      14
<PAGE>
 
          7.03  Disability.  If the Executive's employment is terminated by
reason of Disability during any of the Periods, the Company shall not have any
further obligations to the Executive, other than for payment of Accrued Salary,
any Earned Bonus and payment or provision of other Benefits (as defined in this
Section 7.03). Such amounts shall be paid to the Executive in a lump sum in cash
within 60 days of the Disability Effective Date unless deferred in accordance
with the terms of an employee benefit plan or arrangement maintained by the
Company. In the event of Disability, the Executive's unexercised stock options
shall remain subject to the applicable provisions of the related stock option
plans and applicable Golden M Certificates (or other applicable award
agreements).

          The term "Other Benefits" as utilized in this Section shall mean
disability and other benefits equal to those generally provided by the Company
to:

          (i) disabled Executive Officers and/or their families if the Executive
          becomes disabled during the Retention Period,

          (ii) disabled officers who are not Executive Officers and/or their
          families if the Executive becomes disabled during the Transition
          Period, or

          (iii) disabled staff employees and/or their families if the Executive
          becomes disabled during the Continued Employment Period,

in accordance with such plans, programs, practices and policies relating to
disability, if any, as in effect on the Disability Effective Date.

          7.04  By the Company for Cause.  If an Executive's employment is
terminated during any of the Periods by the Company for Cause, the Company shall
have no obligation to the Executive pursuant to this Plan other than to pay the
Executive his or her Accrued Salary through the Date of Termination and any
Earned Bonus. In any such case, all Accrued Salary and Earned Bonus shall be
paid to the Executive in a lump sum in cash within 60 days of the Date of
Termination unless otherwise deferred by the Executive pursuant to the terms of
an employee benefit plan or arrangement maintained by the Company. Upon such
termination, the Executive's stock options shall be governed by the express
provisions of the related stock option plans and applicable Golden M
Certificates (or other applicable award agreements).

          7.05  By a Tier I Executive Without Good Reason.  If a Tier I
Executive terminates his employment during the Retention Period or the
Transition Period without Good Reason, or during the Continued Employment Period
for any reason, the Company shall have no obligation to the Executive pursuant
to this Plan other than to pay the Executive his or her Accrued Salary through
the Date of Termination and any Earned Bonus. In any such case, all Accrued
Salary and Earned Bonus shall be paid to the Executive in a lump sum in cash
within 60 days of the Date of Termination unless otherwise deferred by the
Executive pursuant to the terms of an employee benefit plan or arrangement
maintained by the Company. Upon such termination, the Executive's stock options
shall be governed by the express provisions of the

                                      15

<PAGE>
 
related stock option plans and applicable Golden M Certificates (or other
applicable award agreements).

          7.06  By a Tier II Executive for any Reason.  If a Tier II Executive
terminates his employment during any of the Periods for any reason or no reason,
the Company shall have no obligation to the Executive pursuant to this Plan
other than to pay the Executive his or her Accrued Salary through the Date of
Termination and any Earned Bonus. In any such case, all Accrued Salary and
Earned Bonus shall be paid to the Executive in a lump sum in cash within 60 days
of the Date of Termination unless otherwise deferred by the Executive pursuant
to the terms of an employee benefit plan or arrangement maintained by the
Company. Upon such termination, the Executive's stock options shall be governed
by the express provisions of the related stock option plans and applicable
Golden M certificates (or other applicable award agreements).

                                   Article 8

                      Requirement of Effective Releases;
                  Integration with other Separation Benefits

          8.01  Releases as a Condition to Plan Benefits.  It shall be a
condition to an Executive's right to receive any benefits pursuant to this Plan
that the Executive shall execute and deliver to the Company the following
releases in the form provided by the Company (each, a "Release"):

               (i) in the case of Transition Benefits, a Release with respect to
          the period ended on the Change-in-Status Date,

               (ii) in the case of Continued Employment Benefits, a Release with
          respect to all periods ended on or before the last day of the
          Transition Period, and

               (iii) in the case of the Termination Payment, a Release with
          respect to all periods ended on the Date of Termination.

          8.02  Form of Release.  Each Release shall provide among other things
that the Executive understands, intends and agrees that the agreement he or she
is signing constitutes full, complete and final satisfaction of all claims,
demands, lawsuits or actions of any kind, whether known or unknown, against the
Company or its subsidiaries, divisions, affiliates and related companies
(collectively "McDonald's") or their respective directors, officers or employees
(with McDonald's collectively the "Released Persons') and that the Executive
forever releases each Released Person from all such matters. This includes, but
is not limited to, a release of claims, demands, lawsuits and actions of any
kind relating to any employment or application for employment or franchise,
claims relating to resignation and/or cessation of employment, claims alleging
breach of contract of any tort, claims for wrongful termination, defamation,
intentional infliction of emotional distress, personal injury, violation of
public policy and/or negligence related to employment or resignation, claims
under Title VII of the Civil Rights Act of 1964, as

                                      16
<PAGE>
 
amended, Section 1981 of the Civil Rights Act of 1866, as amended, the Age
Discrimination in Employment Act of 1967, as amended, the Rehabilitation Act of
1973, the Americans with Disabilities Act of 1990, the Employee Retirement
Income Security Act of 1974, as amended, the Worker Adjustment and Retraining
Notification Act, the Family and Medical Leave Act of 1993, the Illinois Human
Rights Act, or any other state, Federal or local law prohibiting discrimination,
and claims based on any other law, regulation, or common law, whether before any
Federal, state or local agency, in any court of law or before any other forum.

          8.03  Other Separation Benefits.  The Releases will also provide that
(i) the payments or benefits provided for hereunder shall be in lieu of any
payments, benefits or arrangements to which the Executive might otherwise be
entitled to under any plan or arrangement which provides for severance or
separation ("Other Separation Benefits") and, that (ii) the Executive waives any
and all rights and claims that he or she may then or thereafter have to (A) any
Other Separation Benefits and (B) retiree status under any of the Company's
stock option plans.

          8.04  Effect of Claim.  If an Executive (i) files a lawsuit, charge,
complaint or other claim asserting any claim or demand within the scope of his
or her Releases, (ii) fails to execute and deliver a Release required pursuant
to Section 8.01, or (iii) purports to revoke any of the Releases, the Company
shall retain all rights and benefits of the Releases, and in addition, shall be
entitled to cancel any and all future obligations under this Plan and recoup the
value of all payments and benefits under this Plan, together with the Company's
costs and reasonable attorney's fees. In addition, the Company shall be entitled
to pursue any other remedy available to enforce the terms of the Releases and
Noncompetition Agreement described in Article 9.

                                   Article 9

                    Requirement of Noncompetition Agreement

          9.01  Noncompetition Agreement as a Condition to Plan Benefits.  It
shall be a condition to receive Transition Benefits, Continued Employment
Benefits and the Severance Benefit under this Plan that the Executive shall have
signed a confidentiality and noncompetition agreement in the form provided by
the Company as substantially described in this Article 9 (the "Noncompetition
Agreement"). The failure or refusal of an Executive to sign such a
Noncompetition Agreement shall disqualify the Executive from receiving any
benefits under this Plan.

          9.02  Form of Noncompetition Agreement.

          (a)  Confidentiality.  Each Executive's Noncompetition Agreement shall
provide that:

               (i)  the Executive acknowledges that it is the policy of
               McDonald's to maintain as secret and confidential all valuable
               and unique tangible and intangible information and techniques
               acquired, developed or used by McDonald's relating to its
               business, operations, employees and customers,

                                      17
<PAGE>
 
               which gives McDonald's a competitive advantage in the businesses
               in which McDonald's is engaged ("Confidential Information").

               (ii) the Executive recognizes that all such Confidential
               information is the sole and exclusive property of McDonald's, and
               that disclosure of Confidential Information would cause
               significant damage to McDonald's; and

               (iii) the Executive shall not, without the prior written consent
               of the Company, use, disclose, furnish or make accessible to any
               person, firm, corporation, partnership or other entity of any
               kind (collectively, "Person") any Confidential Information
               obtained during the Executive's employment with McDonald's at any
               time (including, without limitation, during or after the
               Retention Period, the Transition Period or the Continued
               Employment Period) for so long as such information is valuable
               and unique except (A) with the prior written consent of
               McDonald's in respect of such disclosure, (B) as required by the
               duties of the Executive's employment with McDonald's, (C) in
               connection with the Executive's good-faith enforcement of his or
               her rights under this Plan, or (D) if the Executive reasonably
               and in good faith believes that he or she is compelled by law or
               by a court or governmental agency by a proper proceeding;
               provided that the Executive, to the extent not prohibited from
               doing so by applicable law or court order, shall give the Company
               written notice of the Confidential Information to be so disclosed
               pursuant to clause (C) or (D) of this sentence as far in advance
               of its disclosure as is lawful and practicable, shall cooperate
               (at the Company's sole expense) with the Company in its efforts
               to protect the information from disclosure, and shall limit his
               or her disclosure of such Confidential Information to the minimum
               disclosure required by law or court order unless the Company
               agrees in writing to a greater level of disclosure.

          (b)  Noncompetition. Each Executive's Noncompetition Agreement will
also provide that the Executive will not, at any time during the period
specified in Section 9.02(c), directly or indirectly:

               (i) in any capacity, engage or participate in, or become employed
               by or render advisory or consulting or other services in
               connection with any Prohibited Business (as defined in Section
               9.03), provided that nothing in this Section 9.02(b) shall
               preclude an Executive from performing services on behalf of an
               investment banking or commercial banking, auditing or consulting
               firm so long as he or she is not engaged in rendering services to
               or soliciting business of a Prohibited Business;

               (ii) make any financial investment, whether in the form of equity
               or debt, or own any interest, directly or indirectly, in any
               Prohibited Business,

                                   

                                       18
<PAGE>
 
               provided that nothing in this Section 9.02(b) shall restrict the
               Executive from owning, of record or beneficially, up to one
               percent of the outstanding voting securities of any publicly
               traded corporation; provided that such investment does not create
               a conflict of interest between the Executive's duties hereunder
               and the Executive's interest in such investment;

               (iii) employ any employee of McDonald's (with the exception of
               the Executive's administrative assistant) or any Person who was
               employed by the Company within 180 days of such hiring; or

               (iv) interfere with McDonald's relationship with, or endeavor to
               entice away from McDonald's any employees (other than the
               Executive's administrative assistant), customers, vendors or
               suppliers, franchisees or business partners of the Company.

          (c) Restrictive Period. The Noncompetition Agreement shall provide
that the covenants described in Section 9.02(b) shall remain in effect (i) at
all times during an Executive's Transition Period and Continued Employment
Period and (ii) if the Executive's employment is terminated by the Company or by
the Executive for any reason or for no reason during the Transition Period or
the Continued Employment Period, for two years after the Date of Termination
(but in no event after the end of the Continued Employment Period).

          9.03 Prohibited Business. For purposes of this Plan, "Prohibited
Business" means any Person (and any branches, offices or operations thereof)
that is a material and direct competitor of McDonald's in any country in the
world or in any state of the United States, but shall not include any Person
which is not one of the 15 or fewer Persons designated as a Prohibited Business
on Annex A attached to the Executive Noncompetition Agreement.

          9.04 Remedy. (a) Injunctive Relief. The Noncompetition Agreement shall
also provide that:

               (i) in recognition of the confidential nature of the Confidential
               Information, and in recognition of the necessity of the limited
               Restrictions imposed by the Noncompetition Agreement, it would be
               impossible to measure solely in money the damages which the
               Company would suffer if the Executive were to breach any of his
               obligations under such Agreement;

               (ii) any breach of any such provisions of the Noncompetition
               Agreement would irreparably injure the Company;

               (iii) if the Executive breaches any of the provisions of the
               Noncompetition Agreement, the Company shall be entitled, in
               addition to any other remedies to which the Company may be
               entitled under the Noncompetition Agreement or otherwise, to an
               injunction issued by a

                                       19

<PAGE>
 
               court of competent jurisdiction, to restrain any breach or
               threatened breach, of such provisions, and the Executive waives
               any right to assert any claim or defense that the Company has an
               adequate remedy at law for any such breach.

          (b) Effect on other Benefits. Each Executive's Noncompetition
Agreement shall also provide that, in the event of a breach by such Executive of
the provisions of his or her Noncompetition Agreement excluding for this purpose
an isolated, insubstantial and inadvertent action, the Company shall be entitled
to (i) discontinue any and all payments and other benefits to which the
Executive or his or her beneficiaries would otherwise be entitled pursuant to
this Plan, (ii) terminate any and all unexercised stock options then held by the
Executive or by any transferee of the Executive, (iii) require the Executive to
repay to the Company the aggregate amount of cash payments received by the
Executive from the Company pursuant to this Plan during the period commencing on
the Executive's Change-in-Status Date and ending on the date on which the
Company requests such repayment (the "Recovery Period") and (iv) require the
Executive to pay to the Company (A) with respect to stock options that were not
vested as of the Executive's Change-in-Status Date, the aggregate amount of gain
recognized by the Executive during the Recovery Period as the result of the
exercise by the Executive or by any transferee of the Executive of such stock
options, and (B) with respect to stock options that were vested as of the
Executive's Change-in-Status Date, an amount equal to the positive difference,
if any, of (I) the aggregate amount of gain recognized by the Executive during
the Recovery Period as the result of the exercise by the Executive or by any
transferee of the Executive of such stock options ("Exercised options"), minus
(II) the amount of gain that would have been recognized by the Executive had the
exercised options been exercised as of the Executive's Change-in-Status Date.

                                  Article 10

                         Legal Fees and Other Expenses

          If an Executive incurs legal and other fees or other expenses in a
good faith effort to obtain benefits under this Plan, regardless of whether the
Executive ultimately prevails, the Company shall reimburse the Executive on a
monthly basis upon the written request for such fees and expenses to the extent
not reimbursed under the Company's officers and directors liability insurance
policy, if any. The existence of any controlling case or regulatory law which is
directly inconsistent with the position taken by the Executive shall be evidence
that the Executive did not act in good faith.

          Reimbursement of legal fees and expenses shall be made monthly upon
the written submission of a request for reimbursement together with evidence
that such fees and expenses are due and payable or were paid by the Executive.
If the Company shall have reimbursed the Executive for legal fees and expenses
and it is later determined that the Executive was not acting in good faith, all
amounts paid on behalf of, or reimbursed to, the Executive shall be promptly
refunded to the Company.

                        
                                       20
<PAGE>
 
                                  Article 11

                    Amendment and Termination of this Plan

          This Plan shall be effective on the Effective Date and shall remain in
effect until the later of (i) October 1, 2004, or (ii) a date that is two years
after the date on which the Company gives written notice to all Executives of
its intention to terminate the Plan. The Company has the right to amend this
Plan in whole or in part at any time; provided that no amendment of this Plan
shall be effective as to any Executive who is or may reasonably be expected to
be materially adversely affected thereby (an "Affected Executive") until the
later of (i) October 1, 2004, or (ii) a date that is two years after the date on
which the Company gives written notice to all Affected Executives of its
intention to adopt such amendment. Notwithstanding the foregoing, no Plan
termination or amendment shall become effective during the Transition Period or
Continued Employment Period as to any Affected Executive. Any purported Plan
termination or amendment in violation of this Section 11 shall be void and of no
effect. Notwithstanding the foregoing, any Executive may consent in writing to
any amendment or termination of this Plan.

                                  Article 12

                           Miscellaneous Provisions

          12.01 Successors. This Plan shall be binding upon the Company and its
successors and assigns. Subject to satisfaction of the conditions set forth in
Sections 3, 4, 5 and 8, the Plan shall inure to the benefit of the Executives
and their respective successors, heirs and permitted assigns.

          12.02 Executive Information. Each Executive shall notify the committee
of his or her mailing address and each change of mailing address to the extent
that he or she has not previously informed the Company thereof. In addition,
each Executive shall furnish the Committee with any other information and data
that the Committee reasonably considers necessary for the proper administration
of this Plan. The information provided by the Executive under this section shall
be binding upon the Executive, his or her dependents and any beneficiaries for
all purposes of this Plan. The Committee shall be entitled to rely on any
representations regarding personal facts made by a Executive, his or her
dependents or beneficiaries, unless it has knowledge that such representations
are false.

          12.03 Payments to Beneficiary. If an Executive dies before receiving
amounts to which he is entitled under this Plan, such amounts shall be paid to
the Beneficiary (as defined below) or if none, to the Executive's estate. If a
Beneficiary dies before complete payment of any benefits attributable to a
deceased Executive, the remaining benefits shall be paid the Beneficiary's
estate. For purposes of this Plan, a Beneficiary shall mean any Person or
Persons, including any entity which is tax-exempt under Section 501(c)(3) of the
Internal Revenue Code, designated in writing by an Executive.

                                       21

                                       
<PAGE>
 
          12.04  Notices.  Any notice, request, election, or other official
communication under this Plan shall be in writing and shall be delivered
personally, by courier service, by registered or certified mail, return receipt
requested or by telecopy and shall be effective upon actual receipt by the party
to which such notice shall be directed, and shall be addressed as follows: (i)
if to the Company, McDonald's Corporation, One McDonald's Plaza, Oak Brook IL
60523, Attention: Corporate Secretary, and (ii) if to an Executive, the last
mailing address as specified by the Executive in accordance with Section 12.02.

          12.05  No Employment Contract.  The existence of this Plan shall not
confer any legal or other rights upon any Executive to a continuation of
employment. The Company and each successor thereof reserves the right to
terminate the employment of any Executive, with or without cause, at any time,
notwithstanding the existence of this Plan.

          12.06  Non-Alienation.  Except to the extent expressly permitted by
law, no Executive shall have the right to assign, transfer or anticipate an
interest in any benefit under this Plan.

          12.07  Severability.  If any one or more articles, sections or other
portions of this Plan are declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not serve to
invalidate any article, section or other portion not so declared to be unlawful
or invalid. Any article, section or other portion so declared to be unlawful or
invalid shall be construed so as to effectuate the terms of such article,
section or other portion to the fullest extent possible while remaining lawful
and valid.

          12.08  No Waiver.  An Executive's failure to insist upon strict
compliance with any provision of this Plan shall not be deemed a waiver of such
provision or any other provision of this Plan. An Executive may waive any or all
of the provisions of this Plan only by signing a document to that effect. A
waiver of any provision of this Plan shall not be deemed a waiver of any other
provision, and any waiver of any default in any such provision shall not be
deemed a waiver of any later default thereof or of any other provision.

          12.09  Governing Law.  To the extent not preempted by federal law,
this Plan shall be interpreted and construed in accordance with the laws of the
State of Illinois, without regard to any otherwise applicable conflicts of law
or choice of law principles.

          12.10  Construction.  Any masculine personal pronoun shall be
considered to mean also the corresponding feminine or neuter personal pronoun,
as the context requires. The singular and plural forms of any term used in this
Plan shall be interchangeable, as the context requires.

          12.11  Captions.  The captions of the Sections and Articles of this
Plan are not a part of the provisions hereof and shall have no force or effect.

          Executed in multiple originals this 27th day of March 1999.


                                    McDonald's Corporation
                
                                    /s/ Robert N. Thurston
                                    Chairman, Compensation Committee of the 
                                    Board of Directors of McDonald's Corporation

                                      22

<PAGE>

 
                                  Appendix A
Tier I Executives
- -----------------

Jack Greenberg
Jim Cantalupo

Tier II Executives
- ------------------

Claire Babrowski
Mike Conley
Alan Feldman
Jeff Kindler
Jim Skinner
Stan Stein

Start Dates
- -----------

Tier I Executives: April 29, 1998
Tier II Executives: October 1, 1998

                                 


                                       23

<PAGE>
 
EXHIBIT 12

MCDONALD'S CORPORATION

STATEMENT RE: COMPUTATION OF RATIOS

(Dollars in millions)

<TABLE> 
<CAPTION> 
- -----------------------------------------------------------------------------------------------------
                 Year ended December 31,      1998       1997        1996       1995     1994
- -----------------------------------------------------------------------------------------------------
<S>                                          <C>       <C>        <C>        <C>       <C>
EARNINGS AVAILABLE
FOR FIXED CHARGES

Income before provision
for income taxes                         (1) $2,307.4  $2,407.3   $2,251.0   $2,169.1  $1,886.6

Minority interest in operating
results of majority-owned
subsidiaries, including fixed
charges related to
redeemable preferred stock,
less equity in undistributed
operating results of less-than-
50% owned affiliates                             23.7      28.3       39.6       19.6       6.6

Provision for income taxes
of 50% owned affiliates
included in consolidated
income before provision for
income taxes                                     99.9      69.0       73.2       73.3      34.9

Portion of rent charges
(after reduction for rental
income from subleased
properties) considered to be
representative of interest
factors*                                        161.3     145.9      130.9      103.8      83.4

Interest expense,
amortization of debt discount
and issuance costs, and
depreciation of capitalized
interest*                                       461.9     424.8      392.2      388.8     346.0
- -----------------------------------------------------------------------------------------------------
                                             $3,054.2  $3,075.3   $2,886.9   $2,754.6  $2,357.5
=====================================================================================================

FIXED CHARGES

Portion of rent charges
(after reduction for rental
income from subleased
properties) considered to be
representative of interest
factors*                                     $  161.3  $  145.9   $  130.9   $  103.8  $   83.4

Interest expense,
amortization of debt discount
and issuance costs, and fixed
charges related to
redeemable preferred stock*                     453.4     426.1      410.4      403.4     343.9

Capitalized interest*                            18.3      23.7       23.5       22.8      21.0
- -----------------------------------------------------------------------------------------------------
                                             $  633.0  $  595.7   $  564.8   $  530.0  $  448.3
=====================================================================================================

RATIO OF EARNINGS
TO FIXED CHARGES                         (2)     4.82      5.16       5.11       5.20      5.26
=====================================================================================================
</TABLE> 

*    Includes amounts of the Registrant and its majority-owned subsidiaries, and
     one-half of the amounts of 50% owned affiliates.
     
(1)  Includes $161.6 million of Made For You costs and the $160.0 million pre-
     tax special charge related to the home office productivity initiative for a
     1998 pre-tax total of $321.6 million.

(2)  Excluding Made For You costs and the special charge, the ratio of earnings
     to fixed charges for the year ended December 31, 1998 would have been 5.33.

<PAGE>
 
EXHIBIT 21
MCDONALD'S CORPORATION
SUBSIDIARIES OF THE REGISTRANT

NAME OF SUBSIDIARY (STATE OR COUNTRY OF INCORPORATION)

- ------------------------------------------------------------------------------
Domestic Subsidiaries
- ------------------------------------------------------------------------------
McDonald's Australian Property Corporation (Delaware)
McDonald's Deutschland, Inc. (Delaware)
McDonald's Development Italy, Inc. (Delaware)
McDonald's Property Company Limited (Delaware)
McDonald's Restaurant Operations Inc. (Delaware)
McDonald's System of France, Inc. (Delaware)
McDonald's Sistemas de Espana, Inc. (Delaware)
Restaurant Realty of Mexico, Inc. (Delaware)

- --------------------------------------------------------------------------------
Foreign Subsidiaries
- --------------------------------------------------------------------------------
McDonald's Australia Limited (Australia)
McDonald's Properties (Australia) Pty. Ltd. (Australia)
McDonald's Central Europe GmbH (Austria)
McDonald's Restaurants of Canada Limited (Canada)
McDonald's Danmark A/S (Denmark)
McDonald's Restaurants Limited (United Kingdom)
McDonald's France, S.A. (France)
McDonald's GmbH (Germany)
McDonald's Immobilien GmbH (Germany)
McDonald's Restaurants Ltd. (Hong Kong)
Italian Restaurant Financing S.R.L. (Italy)
MDC Inmobiliaria de Mexico S.A. de C.V. (Mexico)
McDonald's Nederland B.V. (Netherlands)
McDonald's System de Puerto Rico, Inc. (Puerto Rico)
McDonald's LLC (Russia)
McDonald's Restaurants Pte., Ltd (Singapore)
McDonald's Restaurants (Suisse) S.A. (Switzerland)
McDonald's Restaurants (Taiwan) Co., Ltd. (Taiwan)
- --------------------------------------------------------------------------------

The names of certain subsidiaries have been omitted as follows:
(a) 48 wholly-owned subsidiaries of the Company, each of which operates one or
    more McDonald's restaurants within the United States.
(b) Additional subsidiaries, including some foreign, other than those
    mentioned in (a), because considered in the aggregate as a single
    subsidiary, they would not constitute a significant
    subsidiary.


     

<PAGE>
 
EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the following Registration
Statements of McDonald's Corporation and in the related prospectuses of our
report dated January 26, 1999 with respect to the consolidated financial
statements of McDonald's Corporation included in this Annual Report (Form 10-K)
for the year ended December 31, 1998.


Commission File No.

<TABLE>
<CAPTION>
- ---------------------------------------------- 
Form S-8                              Form S-3 
- ---------------------------------------------- 
<S>                                  <C>       
33-09267                              33-00001 
33-24958                              33-42642 
33-49817                              33-64873 
33-50701                              33-60939 
33-58840                             333-14141 
333-03409                            333-25899 
333-65033                            333-59145  
- ---------------------------------------------- 
</TABLE> 

ERNST & YOUNG LLP
Chicago, Illinois
March 30, 1999
- --------------------------------------------------------------------------------

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Company's Form
10-K for the year ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                             299
<SECURITIES>                                         0
<RECEIVABLES>                                      609
<ALLOWANCES>                                         0
<INVENTORY>                                         77
<CURRENT-ASSETS>                                 1,309
<PP&E>                                          21,758
<DEPRECIATION>                                   5,716
<TOTAL-ASSETS>                                  19,784
<CURRENT-LIABILITIES>                            2,497
<BONDS>                                          6,189
                                0
                                          0
<COMMON>                                            17
<OTHER-SE>                                      14,198
<TOTAL-LIABILITY-AND-EQUITY>                    19,784
<SALES>                                          8,895
<TOTAL-REVENUES>                                12,421
<CGS>                                            7,262
<TOTAL-COSTS>                                    7,940
<OTHER-EXPENSES>                                   261
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 414
<INCOME-PRETAX>                                  2,307
<INCOME-TAX>                                       757
<INCOME-CONTINUING>                              1,550
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     1,550
<EPS-PRIMARY>                                     1.14<F1>
<EPS-DILUTED>                                     1.10<F1>
<FN>
<F1>The EPS amounts above reflect a two-for-one stock split effected in March
1999 with respect to the Company's common stock. Financial data schedules for
prior years have not been restated.
</FN>
        

</TABLE>


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