Chipotle 2006 Annual Report Download - page 54

Chipotle Mexican Grill, Inc.
Notes to Consolidated Financial Statements—(Continued)
(dollar and share amounts in thousands, unless otherwise specified)
consolidated federal tax group, the Company eliminated the deferred tax asset related to the post-acquisition net
operating loss carry-forwards (“NOLs”) of $32,859 and alternative minimum tax (“AMT”) credits of $918
through equity. As a result, the Company converted to a net long-term deferred tax liability position. There were
no other significant changes to the Company’s deferred tax balances as a result of the tax deconsolidation.
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 the Company 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 used $118,041 of the Company’s losses as a reduction of taxable income in its consolidated
federal return. McDonald’s use of the Company’s NOLs was recorded as a capital contribution. As of
December 31, 2006 the Company recorded the receivable from McDonald’s in other current assets in the
consolidated balance sheet of $8,783 for these unreimbursed tax attributes. The December 31, 2005 balance of
$28,195 was reflected in shareholders’ equity in the consolidated balance sheet.
7. Shareholders’ Equity
Common Stock
The consolidated financial statements and related notes reflect retroactive application of the Reclassification
(as discussed in Note 1) including the conversion of each of the outstanding shares of preferred stock and
common stock into one-third share of class B common stock. The restated certification of incorporation
authorizes the issuance of an aggregate 230,000 shares of common stock consisting of 30,000 shares of class B
common stock with a $0.01 par value and 200,000 shares of class A common stock with a $0.01 par value. Prior
to Disposition, each share of class B common stock was convertible at the option of the shareholder into one
share of class A common stock, and each share of class B common stock generally also converted into one share
of class A common stock if a transfer of ownership occurred. Shares of class B common stock are no longer
convertible beginning October 12, 2006. Shares of class B common stock participate equally in dividends with
shares of class A common stock. Shares of class B and class A common stock generally vote as a single class of
common stock. Class B common stock shares have ten votes per share whereas class A common stock shares
have one vote per share, except that for purposes of approving a merger or consolidation, a sale of substantially
all property or dissolution, each share of both class A and class B will have only one vote.
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