McDonalds 2007 Annual Report Download - page 56

OTHER OPERATING (INCOME) EXPENSE, NET
IN MILLIONS 2007 2006 2005
Gains on sales of restaurant
businesses $ (88.9) $ (38.3) $ (44.7)
Equity in earnings of
unconsolidated affi liates (115.6) (76.8) (52.8)
Asset dispositions and
other expense 193.4 184.2 200.8
Total $ (11.1) $ 69.1 $103.3
• Gains on sales of restaurant businesses
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 franchisees who
generally have options to purchase the businesses). The Com-
pany’s purchases and sales of businesses with its franchisees
and affi liates are aimed at achieving an optimal ownership
mix in each market. Resulting gains or losses are recorded in
operating income because the transactions are a recurring part
of our business.
• Equity in earnings of unconsolidated affi liates
Equity in earnings of unconsolidated affi liates–businesses in
which the Company actively participates, but does not control–
represents McDonald’s share of each affi liate’s results. These
results are reported after interest expense and income taxes,
except for partnerships in certain markets such as the U.S.,
which are reported before income taxes.
• Asset dispositions and other expense
Asset dispositions and other expense consists of gains or
losses on excess property and other asset dispositions,
provisions for contingencies and uncollectible receivables,
and other miscellaneous expenses.
CONTINGENCIES
From time to time, the Company is subject to proceedings,
lawsuits and other claims related to competitors, customers,
employees, franchisees, government agencies, intellectual
property, shareholders and suppliers. The Company is required
to assess the likelihood of any adverse judgments or outcomes
to these matters as well as potential ranges of probable losses.
A determination of the amount of accrual required, if any, for
these contingencies is made after careful analysis of each mat-
ter. The required accrual may change in the future due to new
developments in each matter or changes in approach such as
a change in settlement strategy in dealing with these matters.
The Company does not believe that any such matter currently
being reviewed will have a material adverse effect on its fi nancial
condition or results of operations.
In connection with the sale of the Company’s businesses in
Latam, the Company has agreed to indemnify the buyers for
certain tax and other claims, certain of which are refl ected as
liabilities in McDonald’s Consolidated balance sheet totaling
$179.2 million at year-end 2007.
FRANCHISE ARRANGEMENTS
Individual franchise arrangements generally include a lease
and a license and provide for payment of initial fees, as well
as continuing rent and royalties to the Company based upon a
percent of sales with minimum rent payments that parallel the
Company’s underlying leases and escalations (on properties
that are leased). McDonald’s franchisees are granted the right
to operate a restaurant using the McDonald’s System and, in
most cases, the use of a restaurant facility, generally for a period
of 20 years. Franchisees pay related occupancy costs
including property taxes, insurance and maintenance. In addi-
tion, in certain markets outside the U.S., franchisees pay a
refundable, noninterest-bearing security deposit. Foreign
affi liates and developmental licensees pay a royalty to the Com-
pany based upon a percent of sales, as well as initial fees.
The results of operations of restaurant businesses purchased
and sold in transactions with franchisees, affi liates and others
were not material to the consolidated fi nancial statements for
periods prior to purchase and sale.
Revenues from franchised and affi liated restaurants
consisted of:
IN MILLIONS 2007 2006 2005
Rents and royalties $6,118.3 $5,441.3 $5,061.4
Initial fees 57.3 51.5 38.0
Revenues from franchised
and affi liated restaurants $6,175.6 $5,492.8 $5,099.4
Future minimum rent payments due to the Company under
existing franchise arrangements are:
IN MILLIONS Owned Sites Leased Sites Total
2008 $ 1,120.1 $ 933.4 $ 2,053.5
2009 1,084.3 905.8 1,990.1
2010 1,045.2 874.5 1,919.7
2011 995.6 838.2 1,833.8
2012 959.3 809.0 1,768.3
Thereafter 7,117.7 5,414.8 12,532.5
Total minimum payments $12,322.2 $9,775.7 $22,097.9
At December 31, 2007, net property and equipment under
franchise arrangements totaled $10.9 billion (including land
of $3.3 billion) after deducting accumulated depreciation and
amortization of $5.8 billion.
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