Chipotle 2006 Annual Report Download - page 46

Chipotle Mexican Grill, Inc.
Notes to Consolidated Financial Statements
(dollar and share amounts in thousands, unless otherwise specified)
1. Description of Business and Summary of Significant Accounting Policies
Chipotle Mexican Grill, Inc. (the “Company”), a Delaware corporation, develops and operates fast-casual,
fresh Mexican food restaurants in 26 states throughout the United States and in the District of Columbia. As of
December 31, 2006 and 2005, the Company operated 573 and 481 restaurants, respectively, and had eight
restaurants operated by franchisees as of the end of each year. The Company manages its operations based on
three regions and has aggregated its operations to one reportable segment and one reporting unit.
Initial Public Offering
In January 2006, the Company completed its offering of 6,061 shares of class A common stock, $0.01 par
value, in its initial public offering at a per share price of $22.00 receiving net proceeds of approximately
$120.9 million (the “initial public offering”). McDonald’s Corporation (“McDonald’s”) sold an additional 3,000
shares, including the underwriters’ over-allotment shares, in the initial public offering. In connection with the
initial public offering, the Company filed a restated certificate of incorporation effecting the reclassification of all
outstanding shares of Series B convertible preferred stock and Series C and Series D junior convertible preferred
stock and all outstanding shares of common stock into one-third share of class B common stock (the
“Reclassification”). The accompanying consolidated financial statements and related notes reflect the effect of
the Reclassification retroactively.
McDonald’s Disposition
Historically McDonald’s has been the majority shareholder of the Company’s voting and economic interest.
During 2006, through the initial public offering in January 2006, a secondary offering in May 2006 and a tax-free
exchange offer in October 2006 (the “Disposition”), McDonald’s disposed of it interest in the Company and no
longer holds any voting or economic interest in the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-
company balances and transactions have been eliminated.
Management Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates
under different assumptions or conditions.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage products are sold. A deferred liability
is recognized for gift cards that have been sold but not yet redeemed at their anticipated redemption value. The
Company recognizes revenue and reduces the related deferred liability when the gift cards are redeemed. Fees
from franchised restaurants include continuing rent and service fees, initial fees and royalties. Continuing fees
and royalties are recognized in the period earned. Initial fees are recognized upon opening a restaurant, which is
when the Company has performed substantially all initial services required by the franchise arrangement.
40