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SEC Filings

CHIPOTLE MEXICAN GRILL INC filed this Form S-1/A on 12/05/2005
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    Other Expenses

        Other expenses include pre-opening costs and gains or losses on disposals of assets. Pre-opening expenses are expenses related to preparing to open a new store, and include the costs of hiring and training the initial work force, travel and the cost of food, beverage and packaging used in connection with those activities. Losses on disposal of assets include the costs related to store closures, store equipment retirements and costs to investigate potential store sites that we considered but subsequently rejected. In aggregate, these expenses represented about 1.2% of total revenue in 2002, 1.9% in 2003, 0.9% in 2004 and 0.7% in the first nine months of 2005.

        In October 2005, the FASB issued FASB Staff Position No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period ("FSP 13-1"). FSP 13-1 requires rental costs associated with ground or building operating leases incurred during a construction period to be recognized as rental expense. FSP 13-1 applies to reporting periods beginning after December 15, 2005. Retroactive application is permitted, but not required. Had FSP 13-1 been effective in prior periods, we would have recognized additional expenses of $1.8 million, $2.5 million and $3.6 million for the years ended December 31, 2002, 2003 and 2004, respectively, and $2.7 million for the nine months ended September 30, 2005. We expect this trend to continue as we recognize this expense beginning in 2006.

    Benefit for Income Taxes

        As a subsidiary of McDonald's, we are not a separate taxable entity for federal and most state income tax purposes. Consequently, McDonald's includes our results of operations in its consolidated federal and most state income tax returns. However, income taxes in our financial statements have been computed on a separate return basis. At December 31, 2004, we had incurred total federal NOLs (net operating losses) of $139.4 million since our inception as a "C" corporation in 1996. We incurred $118.0 million of these NOLs after McDonald's acquisition of over 80% of our equity. The remaining $21.4 million of these NOLs relates to SRLY (separate return limitation year) losses before McDonald's acquired over 80% of our equity. We recognize deferred tax assets and liabilities, at enacted income tax rates, based on the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We include any effects of changes in income tax rates or tax laws in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. Through December 31, 2004, we have had a partial valuation allowance against our deferred tax assets. During the nine months ended September 30, 2005, we determined that it was more likely than not that we would realize our deferred tax assets and we reversed our valuation allowance. Accordingly, in the first nine months of 2005, this resulted in a net tax benefit of $10.8 million being realized in the consolidated statement of operations. In the first nine months of 2005, we also reversed the valuation allowance of $8.5 million of SRLY losses, which reduced goodwill recorded in conjunction with McDonald's acquisition of Chipotle and is not recorded in our consolidated statement of operations. After the consummation of this offering, we expect that we will become a separate taxable entity for federal and some state income tax purposes. On the date of deconsolidation, the tax effect of all changes in the tax bases of assets and liabilities will be recorded in equity. We expect that after deconsolidation we will recognize tax expense as a stand alone entity without regard to the NOLs.

        In accordance with the tax allocation agreement between McDonald's and Chipotle, we've agreed to make payments to McDonald's to reflect any tax liability allocated to us or if we benefit from net losses or tax credits not attributable to our operations. Likewise, McDonald's has agreed to compensate us for any NOLs or tax credits it uses that are attributable to our operations. After McDonald's files its first consolidated federal tax return excluding us, we expect to receive payment for the federal and some state NOLs that we have not utilized on a stand alone basis as of the date of deconsolidation. We expect to receive final payment in the fourth quarter of 2007. At September 30, 2005, the amount owed by McDonald's totaled $38.6 million. Note that as we utilize the NOLs on a stand alone basis up until the date


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