EXCHANGE: McDonalds (MCD) and Chipotle (CMG)

Issue:

McDonald's made an exchange offer to their shareholders where a share of McDonald's could be exchanged for .8879 shares of Chipotle. The offer expired at midnight on 10/5/06.

Resolution:

This exchange offer is known as a "split-off" (not a "spin-off"), and, as such, requires some creative, work-around accounting in our Club Accounting software. It differs from a spin-off, in that shares of McDonald's [MCD] were actually exchanged for the Chipotle [CMG-B] shares. In a spin-off, shares of the originating company remain constant. We will account for the transaction first by effecting a spin-off to record the Chipotle shares received, then recording a reverse stock split to reduce the McDonald's shares to the actual number of shares retained after the exchange.

Let's assume a case where we owned 200 shares of MCD at a total cost of $6,314.98, and we elected to exchange 50 of those shares for stock in Chipotle [CMG]. Since the exchange ratio is .8879 shares of CMG for each share of MCD, we would receive 44.395 shares of CMG.

First, we will record a spin-off of 50 shares of CMG-B.

[Note - I will be using that symbol for the Class B shares of Chipotle, throughout. It may be that the data source for market quotes will use some other symbol, like CMG.B. Until you are able to obtain quotes for the Class B shares, you may use the symbol for the Class A shares [CMG], since the prices should be close.]

* Enter 10/12/06 as the date.

* Select McDonald's as the parent security.

* Click on the Remaining Basis Percentage button, and enter 75. Since we are exchanging 50 of our 200 shares of MCD, the Rem Basis percentage for the MCD "spin-off" will be 75% [150/200].

* If Chipotle does not appear as one of the Spinoff Securities, click on NEW SECURITY, and enter the data for Chipotle.

* When Chipotle appears in the Spinoff Securities window, enter 44.395 and 49.95375 for shares received and price per share.

* Enter any cash received in lieu of fractional shares in the Cash Received window. Note- if you have not yet received this information from the broker, you can leave this amount blank, and later sell your fractional shares when you know the amount.

* Click on OK to complete the "spin-off"

Now, we must reduce the number of our MCD shares to the amount retained after the exchange, 150 in this case. To do this:

* Go to NEW TRANSACTION > STOCK SPLIT.

* The date of the transaction should be one day after the date used for the "spin-off", or 10/13/06.

* On the next screen, select McDonald's for the security.

* In our example, you should enter 150 for 200 as the split ratio. The program should then show 150 as the number of shares remaining after the split.

* Do not enter anything for Cash Payment for Fractional Shares, and click OK.

Some very astute readers of this article might notice that the above method might not yield absolutely accurate results when more than one purchase was made for McDonald's. In that case, in our example, the correct basis to be transferred to the 44.395 shares of Chipotle would be the amount paid for the first 50 shares of MCD purchased. It can't be helped. No club accounting software on the market has the ability to allocate specific lot amounts in a spin-off where multiple lots are involved. In the opinion of this writer, the chances of this treatment ever being challenged are nil.