Chipotle 2005 Annual Report Download - page 59

Chipotle Mexican Grill, Inc.
Notes to Financial Statements (Continued)
(in thousands, except per share data)
As of December 31, 2005, the Company had total net operating losses (‘‘NOLs’’) of approximately
$95,143 (after utilizing $41,239 in 2005) which were utilized by McDonald’s under the Company’s tax
sharing agreement (see below). Through December 31, 2004, a valuation allowance had been recorded
to offset the deferred tax assets, including those related to the NOLs, net of deferred tax liabilities.
During the year ended December 31, 2005, the Company determined that it was more likely than not
that it would realize its deferred tax assets and a valuation allowance was no longer required. When a
valuation allowance related to net deferred tax assets resulting from an acquisition is reversed, the
related tax benefit reduces goodwill. During the year ended December 31, 2005, the Company released
$28,848 of valuation allowance of which $8,505 was attributable to the net deferred tax assets of
Chipotle at the date of McDonald’s majority acquisition of the Company. The related release of
valuation allowance has been recorded as a reduction of goodwill.
In accordance with the tax allocation agreement between McDonald’s and the Company, which is
effective any time the Company is included in a consolidated return with McDonald’s, the Company’s
tax liability is computed on a separate return basis. The Company would pay McDonald’s for its
allocated tax liability or if it benefited from net losses or tax credits of other members of the
consolidated tax return. Likewise, McDonald’s would compensate the Company if it had a net
operating loss or tax credit during the tax year that is used by other members of McDonald’s
consolidated return. To the extent the Company generated taxable income, it would first be allocated to
the separate return limitation year (‘‘SRLY’’) losses. Once the SRLY losses had either been fully
utilized or expired, the taxable income would be offset against the tax attributes/deferred tax assets
previously used by McDonald’s.
McDonald’s has utilized $118,041 of the Company’s losses, as a reduction of taxable income in its
consolidated return. No tax benefit was reflected in the consolidated statement of operations for
McDonald’s utilization of the Company’s NOLs, but rather was treated as a capital contribution. As of
December 31, 2005 and 2004, the Company has recorded a receivable from McDonald’s in
shareholder’s equity in the consolidated balance sheet of $28,195 and $45,985, respectively, for these
unreimbursed tax attributes.
At the consummation of the Company’s initial public offering, the Company exited the
consolidated group for federal and some state tax purposes and will be reimbursed for the remaining
tax attributes in accordance with the tax sharing agreement. The tax effect of all changes in the tax
bases of assets and liabilities, such as the elimination of the deferred tax asset related to the
post-acquisition net operating loss carryforwards, will be recorded in equity and the Company will
convert to a net long-term deferred tax liability position.
5. Shareholders’ Equity
Preferred Stock
Prior to the initial public offering, the Company was authorized to issue 40,000 shares of preferred
stock with a $0.01 par value. As mentioned in Note 1, as of the effective date of the Company’s initial
public offering, each of the 8,034 shares of Series B convertible preferred stock and 3,975 shares of
Series C and 8,511 shares of Series D junior convertible preferred stock outstanding were converted
into one-third share of Class B common stock. The remaining preferred shares authorized had not
been designated. In connection with the initial public offering, the Company authorized 600,000 shares
of preferred stock with par value of $0.01, which have not been designated.
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