Chipotle 2005 Annual Report Download - page 40

Liquidity and Capital Resources
Our primary liquidity and capital requirements are for new store construction, working capital and
general corporate needs. Until our initial public offering, we have financed these requirements
primarily through equity sales to McDonald’s and others as well as through cash flows from operations.
As of December 31, 2005, we had no cash and cash equivalents. On January 25, 2006, our initial public
offering became effective. We will use the net proceeds from the offering of approximately
$121.3 million to provide additional long-term capital support to the growth of our business (primarily
through opening stores), to continue to maintain our existing stores and for general corporate purposes.
McDonald’s and, to a lesser extent, some of our minority shareholders have historically provided
us with significant financing. We have also historically obtained short-term borrowings from
McDonald’s from time to time under documented lines of credit at an interest rate equal to the U.S.
prime rate plus 100 basis points. The existing line of credit with McDonald’s, (under which there were
no borrowings outstanding as of December 31, 2005) will expire in June 2006 and is not expected to be
renewed. Loans under these agreements were repaid with proceeds of private placements of our equity
securities. In April 2004 and June 2003, we issued shares of common stock to McDonald’s and to
certain other persons who were accredited investors (consisting of friends and family of our employees
and persons having business relationships with us), in each case as identified in our shareholders’
agreement, for an aggregate purchase price of $65.0 million and $38.0 million, respectively.
We haven’t required significant working capital because customers pay using cash or credit cards
and because our operations do not require significant receivables, nor do they require significant
inventories due, in part, to our use of various fresh ingredients. In addition, we generally have the right
to pay for the purchase of food, beverage and supplies some time after the receipt of those items,
generally within ten days, thereby reducing the need for incremental working capital to support growth.
Operating Activities. Net cash provided by operating activities was $77.4 million for 2005
compared to $39.7 million for 2004. The $37.8 million increase was primarily attributable to a
$31.6 million improvement in net income driven by higher average store sales and higher store margins
due to having significantly more stores in operation. Net cash provided by operating activities was
$39.7 million for 2004 compared to $22.1 million for 2003. The $17.6 million increase in 2004 was
primarily attributable to a $13.8 million improvement in net income (loss) driven primarily by higher
average store sales and higher store margins.
Investing Activities. Net cash used in investing activities was $83.0 million for 2005 compared to
$95.6 million in 2004. The $12.6 million decrease related to lower capital expenditures in 2005 as we
opened 80 stores in 2005, compared with 104 stores in 2004. Net cash used in investing activities was
$95.6 million for 2004 compared to $86.1 million for 2003. The increase was primarily as a result of
higher capital expenditures as we opened 104 stores in 2004 compared to 76 in 2003.
Financing Activities. Net cash provided by financing activities was $5.7 million in 2005 compared
to $55.9 million in 2004. The $50.3 million decrease was attributable to decreased financing
requirements as a result of improvements in net cash provided by operating activities and fewer store
openings in 2005 as compared to 2004. Net cash provided by financing activities was $55.9 million for
2004 compared to $64.0 million for 2003. The decrease in cash provided by financing activities in 2004
was attributable to decreased financing requirements as a result of our improvement in net cash
provided by operating activities, which was partially offset by more store openings in 2004.
Liquidity and Capital Expenditures. We will use the proceeds from the initial public offering to
provide additional long-term capital to support the growth of our business (primarily through opening
stores) and to continue to maintain our existing stores and for general corporate purposes. We do not
expect McDonald’s to provide us with financing in the future; However, in accordance with the tax
allocation agreement between McDonald’s and Chipotle, McDonald’s has agreed to compensate us for
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