Chapter 10: Decision Case 10-2 Required Part A. The Ratio Analysis Model For each company, determine: The debt-to-equity ratio = Total Liabilities/Total Stockholders' Equity = X.XX% (relationship) Is the debt-to-equity ratio of either company too high? Have the companies effectively used leverage? Part B. The Business Decision Model If you were an investor, would you be willing to lend money to either or both companies based on their use of debt? 1. Formulate the Question 2. Gather Information from the Financial Statements and Other Sources 3. Analyze the Information Gathered 4. Make the Decision 5. Monitor Your Decision PANERA HREAD COMPANY CONSOLIDATED BALANCE SHEETS in the desert share and per share information) December 29, December 30, 2015 2014 5 241.865 38211 77,575 22.450 59457 34479 2.69 50279 776,248 196,493 36,584 70,060 22.811 51.58 23621 406.166 787294 121,791 120,778 63.877 70.940 10.613 5.SON 196,231 197225 1.415151,300.6.86 5 19,511 333,201 Assets Current Cash and cash oquivalent Trade accounts receivable net Other accounts receivable Inventories Prepaid expenses and other Deferred income taxes Assists held for sale. Total current asset Property and equipment, net Othernet Goodwill Other intangible assets, nel Deposits and other Total other assets Total assets.. Liabilities, Redeemable Noncontrolling Interest, and Stockholders' Equity Current liabilities Accounts payable Accrued expenses. Current portion of long-term debt Liabilities associated with assets held for sale Total current liabilities. Long-term debt Deferred rent Deferred income taxes Other long-term liabilities. Total liabilities Commitments and contingencies (Note 14) Redeemable noncontrolling interest, Stockholders' equity: Common stock, 5.0001 par value per share: Class A, 212,500,000 shares authorized: 30,836,669 shares issued and 23.346,188 shares outstanding at December 29, 2015 and 30,703,472 stures issued and 25,442,728 shares outstanding at December 30, 2014.. Class B, 10,000,000 shares authorised: 1.381,730 shares issued and outstanding at December 29, 2015 and 1.181.865 hures issued and outstanding at December 30, 2014 Treasury stock, carried at cost: 7,490,481 shares at December 29, 2015 and 5.260,744 shares at December 30, 2014. Preferred stock, 5.0001 par value per share; 2,000,000 shares authorized and no shares issued or outstanding at December 29, 2015 and December 30, 2014 Additional paid-in capital accumulated other comprehensive income (loss). etained camnings Total stockholders' equity. Total liabilities, redeemable noncontrolling interest, and stockholders' equity 19,8055 359,464 17.229 2.945 399.443 388971 62.610 70.447 52,566 974,037 352,712 99,784 67.390 76.589 58.027 654502 3.981 3 (1,111,586) (706,073) 235,393 (5.029) 1,378,519 497,300 1.475.3185 214.437 (1,360) 1.229.177 736,184 1.390,686 The accompanying notes are an integral part of the consolidated financial statements. 43 PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF INCOME in thousands, except per share information) For the fiscal year ended December 29, December 30, December 31. 2015 2014 2013 52,358,794 5 2.230,370 5 2,108,90 138.563 123.686 112,641 184,223 175,139 161.453 52,681,5805 2.529,1955 2385,002 5 Revenues Bakery-cale sales, net.. Franchise royalties and fees Fresh dough and other product sales to franchisees Total revenues Costs and expenses Bakery-cafe expenses Cost of food and paper products Labor Occupancy Other operating expenses Total bakery-cafe expenses Fresh dough and other product cost of sales to franchisees Depreciation and amortization General and administrative expenses Pre-opening expenses Refranchising loss. Total costs and expenses Operating profit. Interest expense Other (income) expense, net Income before income taxes Income taxes Net income Less: Net loss attributable to socontrolling interest Net income attributable to Panera Bread Company 669.8605 685,376 159,794 314,879 1,830,109 152.267 124.109 138,060 8,707 625622 625457 148 816 295 539 1.695,434 142.160 106.523 123.335 7.794 715,5025 754,646 169.998 334,635 1.974,781 160,706 135,398 142,904 9.059 17.108 2.439,986 241,594 3,830 1.192 236,572 87,247 149.32$ 5 (17) 149,3425 2.253.252 275.903 1.824 13.175) 277.294 98,001 179,2935 2,075,246 309.756 1.053 (4.017) 312,720 116 $$1 196,169 s 179.2935 195.169 Earnings per common share: Basic Diluted S $ 5.815 5.79 $ 667 5 6.64 $ 6.85 6.81 Weighted average shares of common and common equivalent shares outstanding Basic Diluted 25,685 26. 26,999 28.629 28,794 25,78 The accompanying notes are an integral part of the consolidated financial statements 44 PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Net income Less: Net loss attributable to moncontrolling interest Net income attributable to Panem Bread Company For the fiscal year ended December 29, December 30, December 31, 2015 2014 2013 149,3255 179.293 S 196,169 (17) 149,342 S 179,2935 196,169 Other comprehensive income (los), net of tax Unrealized gains (losses) on cash flow hedging instruments Tax (expense) benefit Foreign currency translation adjustment Other comprehensive income (los) attributable to Panera Bread Company. Comprehensive income attributable to Panera Bread Company (2.552) 1,009 (2,126) (1,027) (1.005) 0.649) 145,6735 (1.027) 178.2665 (1.005) 195,164 $ The accompanying notes are an integral part of the consolidated financial statement 45 PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND REDEEMABLE NONCONTROLLING INTEREST in thousands) Cart CA Share Ae 200 5 1 14 A 23 OSS Balne, Dreher 15, 2011 Net Other comprehen 30 1. www.dk Sach- bloween HI 2.0 2019 C. Rauchmeck Tax bf wako Other Halaar, terrahar 18 Nel talam 26.290 3 1 13 1994 S 154 1 0 W IR 11 II of cock Sandham 111 IT 1923 Till 13 - prawa Te benefit of wok op Oder Balan, Deeler 2014 Netcon herche ) 10 108 25.44 $ 3 US SI 5 SH SLUI ed 34 OM 150 Stocool.com 10 Real Tek bent met af kapi Rinalls are in from DO 1981 10 3 3 5 74 S SSUU Base, December 10, 2015 The accompanying notes are an integral part of the consolidated financial statements 47 PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (ed) As of December 29, 2015, the Company classified as held for sale the assets and certain its of 35 Compay-owned bakery cafes the Company expects to sell during the next 12 months. During fiscal 2015, the Company recorded losses on its held for sale of $11.0 million. The Company classifies assets as held for sale and coses depreciation of the mus when these meet the held for sale criteria, as defined in GAAP. The following sumarizes the financial statement carrying amounts of its and liabilities associated with the bakery-cafes classified as held for sale in thousands December 29, 2015 Inventories 73% Property and equipment, net 26,462 Goodwill 1,499 Assets held for sale $ 28,699 Deferred rent Asset retirement obligation $ 2,410 Liabilities associated with assets held for sale. 535 2.945 Assets held for sale were valued using Level 3 inputs, primarily representing information obtained from signed letters of intent. Costs to sell are considered in the estimates of fair value for those assets included in assets held for sale in the Company's Consolidated Balance Sheets. The following summarizes activity associated with the refranchising initiative recorded in the caption entitled refranchising loss in the Consolidated Statements of Income in thousands For the fiscal year ended December 29, 2015 Loss on assets held for sale. 10,999 Impairment of long-lived assets and lease termination costs, 5,461 Professional fees and severance 1,088 Gain on sale of bakery-cafes. (440) Refranchising loss (1). s 17.108 (1) The caption entitled refranchising loss in the Consolidated Statements of Cash Flows as a no-cash adjustment to reconcile net income to net cash provided by operating activities includes caly non-cash refranchising amounts Tante Acquisition On December 7, 2015, the Company acquired a 50.01% interest in Tatte Holdings, LLC (Tome) for a cash contribution of 10 million (the "Tatte Acquisition"). Tatte is a bakery-cafe concept with five locations in the Boston area. The Company has evaluated all of the applicable criteria for an entity subject to consolidation under the provisions of the variable interest model and has concluded that Tatte is a VIE requiring consolidation. The following summarizes the consolidated assets and liabilities of Tale as of December 7, 2015, including the Company's investment in Tatte, which is climinated in consolidation in thousands PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (contined) Current assets, including cash Property and equipment 4.136 Goodwill. 1,757 Intangible assets 2:512 Deposits and other 1.657 Total assets 87 10,149 Current liabilities Long-term debt 777 1.237 Other long-term liabilities, 132 Total liabilities 2.151 Redeemable noncontrolling interest 3.998 Panera Bread Company investment in Tatte. 4,000 Total liabilities, redeemable noncontrolling interest, and stockholders' equity. $ 10,149 Redeemable noncontrolling interest reflects that the noncontrolling interest holder holds a written put option, which will allow them to sell their noncontrolling interest to the Company at any time after the end of the third year after the Tante Acquisition. In addition to the written put option, the Company holds a call option to acquire the noncontrolling interest after 42 months after the Tatte Acquisition. Under each of these alternatives, the exercise price will be based on a contractually defined multiple of cash flows, subject to certain limitations (the redemption value"), which is not a fair value measurement and is payable in cash. As the written put option is redeemable at the option of the noncontrolling interest holder, and mot solely within the Company's control the noncontrolling interest in Talte is classified as temporary equity and reflected in redeemable no controlling interest between the Liabilities and Stockholders' Equity sections of the Company's Consolidated Balance Sheets. The initial carrying amount of the noncontrolling interest is the fair value of the moncontrolling interest as of the acquisition date The noncontrolling interest is adjusted each period for comprehensive income attributable to the noncontrolling interest and changes in the Company's ownership interest in Tatte, if any. An additional adjustment to the carrying value of the non controlling interes may be required if the redemption value exceeds the current carrying value. Changes in the carrying value of the non controlling interest related to a change in the redemption value will be recorded against permanent equity and will not affect net income While there is no impact on net income, the redeemable noncontrolling interest will impact the Company's calculation of eamings per share. Utilizing the two-class method, the Company will adjust the numerator of the earnings per share calculation to reflect the changes in the excess, if any, of the noncontrolling interest's redemption value over the noncontrolling interest carrying amount. The Company did not record any such adjustments as of December 29, 2015 The pro-forma impact of the Tatte Acquisition on prior periods is not presented as the impact is not material to reported results All of the recorded goodwill is included in the Company Bakery-Cafe Operations segment. Florida Bakery-cafe Acquisition On April 9, 2013, the Company acquired substantially all the assets of one bakery-cafe from its Hallandale, Florida franchisee for a purchase price of $2.7 million. The Company paid approximately $2.4 million of the purchase price on April 9, 2013 and paid the remaining 50.3 million with interest during fiscal 2014. The Consolidated Statements of Income include the results of operations for the bakery-cafe from the date of its acquisition. The pro-forma impact of the acquisition on prior periods is not presented as the impact is not material to reported results 4. Investments Held to Maturity During fiscal 2013, the Company purchased and sold seven zero-coupon discount notes that were classified as held-to-maturity The amortized cost of the investments sold was $97.9 million. The Company realized a lows on the sale of less than 50.1 million The Company sold the investments prior to maturity during fiscal 2013 as a result of higher than anticipated liquidity noods 57 PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cated) 5. Fair Value Measurements The following summarizes assets and liabilities measured at fii ale caring basis in thousands) Quoted Prices Significant Acthe Other Marlies for Observable Identical Arts Input Total (Led) (Level 2) December 29, 2015: Cash equivalents 25 25 Total assets 5 25 25 Significant Uobservable Inputs (Level 3) S $ Interest rate swap liability Total liabilities $ 2,5525 25525 - 5 2.5525 25525 December 30, 2014: Cash equivalents Total assets. $ 92.316 5 923165 923165 92.316 5 The fair value of the Company's cash equivalents is based on quoted market prices for identical securities. The fair value of the Company's interest rate swaps are determined based on a discounted cash flow analysis on the expected future cash flow of cach derivative. This analysis reflects the contractual terms of the derivatives and was observable market-based inputs, including interest rate curves and credit spreads 6. Inventories Inventories consisted of the following in thousands December 29, December 30, 2015 2014 Food Fresh dough facilities: Raw materials Finished goods Bakery-cafes: Raw materials Paper goods Total 3.561 5 446 3,413 460 14,819 3,656 2.425 15,152 3,786 22.811 PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cated) 5. Fair Value Measurements The following summarizes assets and liabilities measured at fii ale caring basis in thousands) Quoted Prices Significant Acthe Other Marlies for Observable Identical Arts Input Total (Led) (Level 2) December 29, 2015: Cash equivalents 25 25 Total assets 5 25 25 Significant Uobservable Inputs (Level 3) S $ Interest rate swap liability Total liabilities $ 2,5525 25525 - 5 2.5525 25525 December 30, 2014: Cash equivalents Total assets. $ 92.316 5 923165 923165 92.316 5 The fair value of the Company's cash equivalents is based on quoted market prices for identical securities. The fair value of the Company's interest rate swaps are determined based on a discounted cash flow analysis on the expected future cash flow of cach derivative. This analysis reflects the contractual terms of the derivatives and was observable market-based inputs, including interest rate curves and credit spreads 6. Inventories Inventories consisted of the following in thousands December 29, December 30, 2015 2014 Food Fresh dough facilities: Raw materials Finished goods Bakery-cafes: Raw materials Paper goods Total 3.561 5 446 3,413 460 14,819 3,656 2.425 15,152 3,786 22.811 PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued) 7. Property and Equipment, net Major classes of property and equipment consisted of the following in thousands Leasehold improvements Machinery and equipment Computer hardware and software, Furniture and fixtures Construction in progress Smallwares Land December 29, December 30, 2015 2014 5 683.2965 693,503 338,500 340,854 192,521 137.663 159,653 167,183 97.416 99,255 29,056 29,841 1.604 2,060 1.502.046 1,470,559 (725.798) (683,265) s 776,2485 787.294 Less: accumulated depreciation Property and equipment, net The Company recorded depreciation expense related to these sets of $1267 million, 51154 million, and 597.2 million during fiscal 2015, fiscal 2014, and fiscal 2013, respectively 8. Goodwill The following is a reconciliation of the beginning and ending balances of the Company's goodwill by reportable segment at December 29, 2015 and December 30, 2014 (in thousands Balance as of December 31, 2013 Impairment charge Currency translation Balance as of December 30, 2014 Acquisition of Tatto Goodwill classified as held for sale Balance as of December 29, 2015 Company Bakery Franchise Fresh Dough and Other Cafe Operations Operations Product Operations Total 1193845 1.934 S 1.695 5 123.013 (2057) (2,057) (178) (178) 117.149 5 1934 5 1,695 $ 120,778 2512 2,512 (1.499) (1.499) 115.1625 1.934 5 1.695 $ 121.791 The Company did not record a goodwill impairmu charge in either fiscal 2015 or fiscal 2013. The Company recorded a 521 million full impairment charge of goodwill for the Canadian bakery-cafe operations reporting unit during fiscal 2014 9. Other Intangible Assets Other intangible assets consisted of the following in thousands Valee Trademark Re-acquired territory rights Favorable leases Total other intangible assets December 29, 2015 December 30, 2014 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Value Amortizati Valor Amortization Value s 7,000 $ (220) S 4.1975 5.6105 (2.017) 5 3,593 97,865 (40.432) 57,433 97.865 (32.569) 65,496 5,012 0.365) 1.67 4825 2,974) 1,851 $ 109,957 5 (46,080 S 63.877 5108,300 (37.360) 5 70,940 Amortization expense on these intangible assets for fiscal 2015, focal 2014, and fiscal 2013, was approximately 58.7 million, $8.7 million, and 59.3 million, respectively. Future amortizatie expense on these intangible metsas of December 29, 2015 is 59 PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) estimated to be approximately: 58.8 million in fiscal 2016, 58.8 million in fiscal 2017, 58.7 million in fiscal 2018, 583 million in fiscal 2019.57.2 million in fiscal 2020 and 522.1 million thereafie 10. Accrued Expenses Accrued expenses consisted of the following in thousands): Unredeemed gift cards, nel Compensation and related employment taxes Capital expenditures Insurance. Taxes, other than income tax Fresh dough and other product operations Occupancy costs Deferred revenue Advertising Utilities Loyalty program Other Total December 29, December 30, 2015 2014 123.363 $ 105,576 64,882 59.442 53,914 56.DK 37.208 32,359 20,206 21.068 10,854 6,812 8,394 7.263 5,690 5,291 5.242 10,147 4,581 2.653 2,525 22.277 20,183 359.4645 333.201 5.527 11. Debt Long-term debt consisted of the following (in thousands) 2014 Term Loan 2015 Term Loan 2015 Note Payable Debt assumed in Tatte acquisition Aggregate umamortized lender fees and issuance costs Total carrying amount Current portion of long-term debt. Long-term debt December 29, December 30, 2015 2014 100,000 $ 100,000 296,250 10,144 1,147 (1,341) (216) 406,200 99,784 17.229 388 9715 99.764 Tim Loans On June 11, 2014, the Company entered into a term loan agreement (the 2014 Term Loan Agreement"), by and among the Company, as borrower Bank of America, NA, as administrative agent, and other lenders party thereto. The 2014 Term Loan Agreement provides for an unsecured term loan in the amount of 100 million (the 2014 Term Loan"). The 2014 Term Loan is scheduled to mature on July 11, 2019, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the 2014 Term Loan Agreement. The Company incurred lender fees and issuance costs totaling $0.2 million in connection with the issuance of the 2014 Term Loan. The lender foes and issuance costs are being amortized to expense over the term of the 2014 Term Loan. On July 16, 2015, the Company entered into a term loan agreement (the "2015 Term Loan Agreement"), with Bank of America N.A., as administrative agent, and other lenders party thereto. The 2015 Term Loan Agreement provides for an unsecured term loan in the amount of $300 million (the "2015 Term Loan"). The 2015 Term Loan is scheduled to mature on July 16, 2020, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the 2015 Term Loan Agreement, and is amortized in equal quarterly installments in an amount equal to 1.25 percent of the original principal amount of the 2015 Term Loan The Company incurred lender fees and issuance costs totaling $1.4 million in connection with the issuance of the 2015 Term Loan The lender fees and issuance costs are being amortized to expense over the term of the 2015 Term Loan. As of December 29, 60 PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (contined) The accounting policies applicable to each segment are consistent with these described in Note 2. Summary of Significant Accounting Policies." Segment information related to the Company's three business segments is as follows (in thousands For the fiscal year ended December 29, December 30, December 31, 2014 2013 2015 $ 2,358,794 5 138,563 382,110 (197,887) 2.681.580$ 2.230,370 5 2,108,908 123.686 112.641 370,004 347,922 (194.65) (184,469) 2.529,195 52.385,002 Revenues: Company bakery-cafe operations Franchise operations .... Fresh dough and other product operations Intercompany sales eliminations Total revenues. Segment profit: Company bakery-cafe operations (1) Franch operations Fresh dough and other product operations Total segment profit 366,9055 133.449 23,517 523.8715 400,2615 117.770 22.72 S0903 5 413,474 106,395 21.293 541.162 $ s 135,3985 137,790 9,089 3,830 1.192 236,5725 124.1095 132.144 707 1.804 B.175) 2772945 106,523 117089 7,794 1.053 (4,017) 312,720 $ $ Depreciation and amortization Unallocated general and administrative expenses. Pre-opening expenses. Interest expense.. Other (income) expense, nel Income before income taxes Depreciation and amortization: Company bakery-cafe operations Fresh dough and other product operations Corporate administration... Total depreciation and amortization Capital expenditures: Company bakery-cafe operations Fresh dough and other product operations Corporate administration Total capital expenditures. 105,535 5 9,367 20,496 1353955 103.2395 8613 12.257 124.1095 90,872 8.239 7,412 106.523 $ 174,6335 12.175 37.124 227,9325 1678565 12.178 4418 2242175 153584 11.461 26,965 192,010 (1) Includes refranchising losses of $17.1 million for the fiscal year ended December 29, 2015 December 29, December 30, 2015 2014 Segment assets: Company bakery-cafe operations $ 953.717 5 953.896 Franchise operations 13.049 13.145 Fresh dough and other product operations 75.634 65.219 Total segment assets 102.400 5 1,032.260 Unallocated cash and cash equivalents Unallocated trade and other accounts receivable Unallocated property and equipment. Unallocated deposits and other Other unallocated assets Total assets 5 241.65 196,493 2.968 3,104 107 333 84.224 6660 3.575 74071 71,030 51,475.318 S 1,1904686 73 PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (antised) "Unallocated cash and cash equivalents relates primarily to corporale cash and cash equivalents, allocated trade and other accounts receivable" relates primarily to rebates and interest receivable, "unallocated property and equipment relates primarily to corporate fixed assets, unallocated deposits and other relates primarily to insurance deposits, and other unallocated relates primarily to current and deferred income taxes 20. Earnings Per Share The following table set forth the computation of basic and diluted caring pershare in hands, except for per share data For the fiscal year ended December 29, December 30, December 31. Amounts used for basic and diluted per share calculations 2015 2014 2013 Net income attributable to Pancra Bread Company 149.1425 179.1935 196,169 Weighted average number of shares outstanding - basic. Effect of dilutive stock-based employee compensation awards 25.625 26,881 28,629 Weighted average number of shares outstanding 103 118 165 diluted 25,783 26.999 28,794 Earnings per common share: Basic 5.81 $ 6.67 S Diluted 6.85 5.95 6,64 6531 For each of fiscal 2015, fiscal 2014, and fiscal 2013, weighted average outstanding stock options, restricted stock, and stock settled appreciation rights of less than 0.1 million shares were excluded in calculating diluted camins per share as the exercise price exceeded fair market value and the inclusion of such shares would have been antidilutive 21. Supplemental Cash Flow Information The following table set forth supplemental cash flow information for the periods indicated in thousands For the fiscal year ended December 29, December 30, December JI. 2015 2014 2013 Cash paid during the year for 5 3,073 $ 7735 253 Interest. 92.954 91.187 104.072 Income taxes. Non-cash investing and financing activities: $ 2.894) 5 15,479 $ 16,194 Change in accrued property and equipment purchases Financed property and equipment purchases 270 Accrued purchase price of Florida acquisition (186) (186) (186) Investment in municipal industrial revenue bonds 635 9341 664 Asset retirement obligations 74 PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (red) 22. Selected Quarterly Financial Data (unaudited) The following table presents selected audited quarterly financial data for the periode indicated in thousands, except per share data) Revenues Operating profit Net income attributable to Panera Bread Company Earnings per common share Basic Diluted Fhical 2015-quarters eaded (1) March 31 June 30 September 29 December 29 648, 5045 676,6575 664.6545 691,765 51,197 68.412 52.102 69.83 31.860 41.929 32.393 43.160 1.20 5 1205 1.285 1.605 1.605 1.75 $ Revenues Operating profil Net income attributable to Panera Broad Company Earnings per common share: Basic Diluted. Fiscal 2014 - quarters ended (1) April July 1 September 30 December 30 605,7535 631,0555 619,X905 672497 67,005 73.942 57959 77,037 42395 49.192 39,214 492 1835 1.52 1.55$ 1.SSS 1.475 1465 (1) Fiscal quarters may not sum to the fiscal year reported amounts due to tounding ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company's disclosure controls and procedures as of December 29, 2015. The term disclosure controls and procedures," as defined in Rules 130-15(e)and 158-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarived and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files en sits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures Based on the evaluation of the Company's disclosure controls and procedures as of December 29, 2015, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company's disclosure controls and procedures were effective at the reasonable assurance level. No change in the Company's internal control over financial reporting occurred during the fiscal quarter ended December 29, 2015 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting 75 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Incorporated by reference from the information in the Company's proxy statement for the 2016 Annual Meeting of Stockholders, which the Company intends to file with the SEC within 120 days of the end of the fiscal year to which this report relates. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Incorporated by reference from the information in the Company's proxy statement for the 2016 Annual Merting of Stockholders, which the Company intends to file with the SEC within 120 days of the end of the fiscal year to which this report relates PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (X1) All Financial Statement Consolidated financial statements filed as part of this report are listed under Item 8: "Financial Statements and Supplementary Data" (aX 2) Financial Statement Schedule: The following financial statement schedule for the Company is filed herewith: Schedule II -- Valuation and Qualifying Accounts PANERA BREAD COMPANY VALUATION AND QUALIFYING ACCOUNTS in thousands) Balance - Beginning of Period Additions Charged to Expense Deducties Other Additions Balance - End of Period Description Self-insurance reserves Fiscal year ended December 31, 2013. Fiscal year ended December 30, 2014 Fiscal year ended December 29, 2015 5 5 $ 28.903 $ 31.5455 32.559 $ 46,9305 50,7295 54,3415 (44.288) 5 (49.715) 5 (49.692) 5 31.545 32.559 37.208 Deferred tax assets, valuation allowance: Fiscal year ended December 31, 2013. Fiscal year ended December 30, 2014 Fiscal year ended December 29,2015. 5 $ s 1,761 5 3.173 5 4.6255 14125 1,4525 674 $ - 5 - 5 - 5 3.173 4.625 5,299 (a3) Exhibits: See Exhibit Index incorporated into this item by reference 77 PART II (continued) CHIPOTLE MEREAN GRILL CHIPOTLE MEXICAN GRILL, INC. CONSOLIDATED BALANCE SHEET (in thousands, except per share data) December 31 2015 2014 fas adjusted $ 248.005 5 419 465 38.283 34.839 15,043 15,332 39.965 34.795 Sa.152 16,488 46.199 338 592 814,647 859,5 1217220 106,984 622.939 496.106 48,321 42.777 21939 21939 52.725.066 52,527317 Assets Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $1,176 and $2,199 as of December 31, 2015 and December 31, 2014, respectively Inventory Prepaid expenses and other current assets Income tax receivable Investments Total current assets Leasehold improvements, property and equipment.net Long term investments Other assets Goodwill Total assets Llabilities and shareholders' equity Current liabilities: Accounts payable Accrued payroll and benefits Accrued liabilities Total current abilities Deferred rent Deferred income tax liability Other liabilities Total liabilities Shareholders' equity Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of December 31, 2015 and December 31, 2014, respectively Common stock $0.01 par value, 230,000 shares authorized and 35.790 and 35,394 shares issued as of December 31, 2015 and December 31, 2014, respectively Additional paid in capital Treasury stock, at cost.5.206 and 4,367 common shares at December 31, 2015 and December 31, 2014, respectively Accumulated other comprehensive income foss) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity $ 85,709 5 69,613 64958 73.894 129275 102 203 279,942 245,710 251962 219.414 32.305 21561 RU 28,263 997.092 514.9 358 172.628 354 LO38.932 01234,600 (748,759 8.2730 (429) 2.197873 1722.271 2.127.974 2012.369 $2,725.066 $2.527 317 See accompanying notes to consolidated financial statements 2015 Annual Report 41 PART II (continued) CHIPOTLE MEXICAN GRILL, INC. CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (in thousands, except per share data) Year ended December 21, Revenue 2015 2014 2013 Restaurant operating costs exclusive of depreciation and amortization shown $4501223 $4,108,269 53.214,591 separately below: Food, beverage and packaging Labor 1.503.835 1420.994 1,073,514 Occupancy 1045,726 904.407 739,800 262,412 230.868 Other operating costs 199307 General and administrative expenses 514.963 434244 347,401 250,214 Depreciation and amortization 273,897 203,733 130,368 10,474 96,054 Pre-opening costs 16.922 15,609 15,5 Loss on disposal of assets 13.194 6.976 6.751 Total operating expenses 2,737.634 397,469 2.681,871 Income from operations 763.589 710,800 532.720 Interest and other income expensel.net 6.278 3.503 1751 Income before income taxes 769,867 714,303 534,471 Provision for income taxes (294, 265) (268,929) (207,033) Net income $ 475.602 5 445.374 5327.438 Other comprehensive income (ossi, net of income taxes Foreign currency translation adjustments (6,3223 2,049) 596 Unrealized loss on investments, net of income taxes of $9.46. So, and 50 (1522) 6,844) 12.049) Other comprehensive income doss), net of income taxes 596 Comprehensive income $ 467,758 $ 443,325 $328,034 Earnings per share 5 15.30 $ 14.355 10.58 Basic $ 15.10 $ 14.10 $ 10.47 Diluted Weighted average common shares outstanding 631092 31038 30.957 Basic 31494 31512 31281 Diluted See accompanying notes to consolidated financial statements 42 2015 Annual Report PART II (continued) CICHIPOTLE HERICAN GRILL CHIPOTLE MEXICAN GRILL, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In thousands) Total $1245,926 64,781 100 38,350 (138,903) 327,438 596 $1538.288 97,618 149 (196) Common Stock Additional Accumulated Pad-in Treasury Stock Other Shares Amount Capital Retained Shares Amount Comprehensive Balance, December 31, 2012 Earnings income (Less) 34,912 5349 $ 816,612 3,819 $ (521518) $ 949.459 Stock-based compensation $ 1024 64.781 Stock plan transactions and other 333 3 97 Excess tax benefit on stock- based compensation, net of utilization of $29 38,350 Acquisition of treasury stock 393 (138,903) Net Income 327,438 Other comprehensive Income doss), net of income tax 596 Balance, December 31, 2013 35.245 $352 $ 919,840 4.212 $ (660,420 $1.276,897 $ 1620 Stock-based compensation 97,618 Stock plan transactions and other 2 (193) Excess tax benefit on stock- based compensation 21667 Acquisition of treasury stock 155 (88,338) Net Income 445,374 Other comprehensive income 12,049) Closs), net of income tax Balance, December 31, 2014 35,394 $ 354 $1,038,932 4,367 S (748,759) $ 1722,271 $ (429) 59,465 Stock-based compensation Stock plan transactions and 396 4 other (211) Excess tax benefit on stock 74,442 based compensation 839 (485,853) Acquisition of treasury stock 475,602 Net income Other comprehensive income 67,844) (loss), net of income tax $(8,273) Balance, December 31, 2015 35,790 $358 $ 172,628 5.206 SIL234,612) $2.197,873 21,667 188,338) 445,374 (2,049 $2.012.369 59,465 (207) 74,442 (485,853) 475,602 (7,844) $2,127,974 See accompanying notes to consolidated financial statements. 2015 Annual Report 43 PART II (continued) CHIPOTLE WERIAN GRILL 2. Supplemental Financial Information Leasehold improvements, property and equipment were as follows: December 31 2015 2014 13.052 $ TL062 $ Land Leasehold improvements and buildings Furniture and fixtures Equipment market value of those securities was determined to be SL038 138. resulting in an unrealized holding loss of $2.712 As a result, the Company recorded $2.468 (S1522. net of tax of unrealized holding losses in other comprehensive income Gossland another than temporary impairment charge of $244 in interest and other income (erpense), in the consolidated statement of income and comprehensive income. The Company determined its investments approximated fair value as of December 31, 2014, and no Impairment charges were recognized on the Company's investments for the years ended December 31, 2014 and 2013 1419,418 1267108 142,825 127.260 362.800 315.230 1938,095 1720,660 (720.875) (613.676) $ 1217.220 $1106,984 Accumulated depreciation Accrued liabilities were as follows: The Company has elected to fund certain deferred compensation obligations through arbitrust the assets of which are designated as trading securities, as described further in Note Employee Benefit Plans 4. Income Taxes The components of the provision for income taxes are as follows: Gift card liability Transaction tax payable Treasury stock liability Other accrued expenses December 31, 2015 2014 $ 51055 $ 48,105 15,634 22929 25,178 0 37,408 31.169 $129,275 $102.203 Year ended December 2015 2014 2013 Current tac U.S. Federal US State Foreign $244.470 $248.219 $ 165,731 37.957 41225 39,136 172 156 63 282,599 289,600 204.930 3. Investments As of December 31, 2015, the Company's investments, consisting of U.S. treasury notes with maturities up to approximately two years, were classified as available for sale. As of December 31, 2014, the Company's investments consisted of U.S. treasury notes and CDARS, certificates of deposit placed through an account registry service, with maturities up to approximately two years, and were classified as held-to-maturity. Fair market value of U.S. treasury notes is measured on a recurring basis based on Level 1 inputs and fair market value of CDARS is measured on a recurring basis based on Level 2 inputs (level inputs are described in Note 1 under "Fair Value Measurements Deferred tax US Federal US. State Foreign 11,000 699 2.288 9,471 2,255 (1890) (6,740) 3,075) 23.705 3,034 5.238 3.1051 11330) 803 1300 Valuation allowance Provision for income taxes $294,265 $268,929 $207,033 Actual taxes paid for each tax period were less than the current tax expense due to the excess tax benefit on stock- based compensation of $74,442. $21,667and $38.379 during the years ended December 31, 2015, 2014 and 2013, respectively The Company designates the appropriate classification of its investments at the time of purchase based upon the Intended holding period. During the year ended December 31, 2015, the Company transferred the classification of its investments from held-to-maturity to available-for-sale due to anticipated liquidity needs related to increased repurchases of shares of the Company's common stock. The carrying value of held-to-maturity securities transferred to available-for-sale during the year ended December 31, 2015 was $1,040,850 and the fair 2015 Annual Report 49 PART II (continued) The effective tax rate differs from the statutory tax rates as follows: Year ended December 31 2015 2014 2013 Statutory U.S.federal income tax rate 35.0% 35.0% 35.0% State income tax, netol related federal income tax benefit 3.6 3.7 42 Other (0.4) (11) (0.5) Effective income tax rate 38.2% 37.6% 38.79 In 2015 and 2014, the effective tax rate was lower than 2013 because there was a decrease in the state tax rate. Additionally, 2014 included a benefit from filing the 2013 tax returns, which included a non-recurring change in the estimate of usable employer credits Deferred income tax abilities are takes the Company expects to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following December 31 2015 2014 25 adjusted Long-term deferred income tax liability Leasehold improvements property and equipment 5192.125 $175.808 Goodwill and other assets 1696 1519 Prepaid assets and other 8297 6,091 Total long-term deferred income tax liability 202.18 183.418 Long term deferred income tax asset: Deferred rent 57.716 52.147 Gift card liability 3.m 1451 Capitalized transaction costs 502 SO3 Stock-based compensation and other employee benefits 83,058 87,70 Foreign net operating loss carry-forwards 1407 State credits 4783 4281 Allowances, reserves and other 18:57 14,656 Valuation allowance 19,400 (7.5123 Total long-term deferred 169.80 161,857 Income tax asset Net long term deferred income $32.305 $ 21561 tax liability 8,618 As described in Note the Company elected to early adopt FASB Quidance ASU 2015-17 Income Taxes" as of December 31 2015 and to apply the guidance retrospectively to all periods presented related to the classification of current and noncurrent deferred tax assets and abilities. Accordingly, the Company reclassified the prior period amount of $18.968 related to its net deferred tax asset from current to noncurrent, resulting in an offset to the noncurrent deterred income tax liability for the same amount for that period 50 2015 Annual Report PART II (continued) CICHIPOTLE MERICAN GAS The unrecognized tax benefits are as follows: 2014 2015 1.342 2013 Beginning of year Increase resulting from prior year tax position Increase resulting from current year tax position End of year 402 2,032 $3,776 1,342 $1342 $- The Company is open to federal and state tax audits until the applicable statutes of limitations expire. Tax audits by their very nature are often complex and can require several years to complete. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2012. For the majority of states where the Company has a significant presence, it is no longer subject to tax examinations by tax authorities for tax years before 2012. Some of the Company's foreign net operating losses began expiring in 2015. applicable award agreements and plan are deemed repurchased by the Company but are not part of publicly announced share repurchase programs. For the years ended December 31, 2015, 2014 and 2013, the Company's repurchases in connection with such netting and surrender were less than 1 share, I share, and 57 shares for a total cost of $12. $342, and $28,916 respectively 6. Stock Based Compensation The Company issues shares pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the "20 Incentive Plan"), approved at the annual shareholders' meeting on May 13, 2015. Shares issued pursuant to awards granted prior to the 2017 Incentive Plan were issued subject to previous stock plans. For purposes of counting the shares remaining available under the 200 Incentive Plan, each share issuable pursuant to outstanding full value awards, such as restricted stock units and performance shares will count as two shares used, whereas each share underlying a stock appreciation right or stock option will count as one share used. Under the 2011 Incentive Plan, 5.560 shares of common stock have been authorized and reserved for issuance to eligible participants, of which 2,988 represent shares that were authorized for issuance but not issued or subject to outstanding awards at December 31, 2015. The 2011 Incentive Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to select the individuals to whom awards will be granted or to delegate its authority under the plan to the Company's executive officers to make grants to non- executive officer level employees, to determine the type of awards and when the awards are to be granted, the number of shares to be covered by each award, the vesting schedule and all other terms and conditions of the awards The exercise price for stock awards granted under the 201 Incentive Plan cannot be less than fair market value at the date of grant 5. Shareholders' Equity Through December 31, 2015, the Company announced authorizations by its Board of Directors of the expenditure of an aggregate of up to $1,300,000 to repurchase shares of the Company's common stock. The Company announced that its Board of Directors authorized the expenditure of up to an additional $300,000 on January 6, 2016 and $300,000 on February 2, 2016 to repurchase shares of its common stock. Under the remaining repurchase authorization, shares may be purchased from time to time in open market transactions, subject to market conditions. The shares of common stock repurchased under authorized programs were 839, 154 and 336 for a total cost of $485,841, $87,996 and $109.987 during 2015, 2014 and 2013, respectively. As of December 31, 2015, $116,394 was available to be repurchased under the authorized programs. The Company repurchased 609 shares of common stock for a total cost of $270,013 from January 1 2016 through February 3, 2016 under programs announced on December 4, 2015 and January 6, 2016. The shares repurchased are being held in treasury until such time as they are reissued or retired, at the discretion of the Board of Directors. Stock only stock appreciation rights ("SOSARs generally vest equally over two and three years and expire after seven years. Stock-based compensation expense is generally recognized on a straight-line basis for each separate vesting portion. Compensation expense related to employees eligible to retire and retain full rights to the awards is recognized over six months which coincides with the notice period. The Company has also granted SOSARS and stock awards with performance vesting conditions and or market vesting conditions. Compensation expense on SOSARS subject to performance conditions is recognized over the longer of the estimated performance goal attainment period of time vesting period. Compensation During 2015, 2014, and 2013, shares of common stock were netted and surrendered as payment for minimum statutory tax withholding obligations in connection with the exercise and vesting of outstanding stock awards. Shares surrendered by the participants in accordance with the 2015 Annual Report 51 PART II (continued) expense on stock awards subject to performance conditions, which is based on the quantity of awards the Company has determined are probable of vesting, is recognized over the longer of the estimated performance goal attainment period of time vesting period. Compensation expense is recognized ratably for awards subject to market conditions regardless of whether the market condition is satisfied, provided that the requisite service has been provided. Stock-based compensation recognized as capitalized development is included in leasehold improvements, property and equipment in the consolidated balance sheet. The following table sets forth stock-based compensation expense, including SOSARs and stock awards: Year ended December 31 2015 2014 2013 Stoc! compensation expense $59.465 $ 97,618 $64,781 Stock-based compensation expense, net of tax 36,666 60.084 39.465 Stock-based compensation expense recognized as capitalized development UT 1124 1554 The tables below summarize the option and SOSAR activity under the stock incentive plans in thousands, except years and per share data: Outstanding, beginning of year Granted Exercised Forfeited Outstanding, end of year Shares 2,087 379 (716) (56) 1694 2015 Weighted Average Exercise Price Per Share $395.46 $ 659.12 $297.25 $554.73 $490.70 Shares 1690 764 (315) (52) 2087 2014 Weighted Average Exercise Price Per Share $ 312 44 $545.66 $ 310.32 $ 419.74 $395.46 Shares 1449 672 (369) 1623 1690 2013 Weighted Average Exercise Price Per Share $274.92 $320.21 $ 176.23 5329.76 $312.44 Weighted Average Reminine Years el Contractual Lite 49 Shares Weighted Average Exercise Price Per Share $490.70 $ 486 10 $ 339.72 1694 1640 321 Aggregate Intrinsic Value $92.773 $92,672 $ 45.12 Outstanding as of December 31, 2015 Vested and expected to vest as of December 31, 2015 Exercisable as of December 31 2015 35 During the years ended December 31, 2014, and 2013, the Company granted SOSARs that include performance conditions, in amounts totaling 220 and 191 shares, respectively. No SOSARs that include performance conditions were granted during 2015. As of December 31, 2015, 426 SOSARs that include performance conditions were outstanding of which 36 awards had met the performance conditions. In addition to time vesting described above the shares vest upon achieving a targeted cumulative cash flow from operations. The total intrinsic value of options and SOSARs exercised during the years ended December 31, 2015, 2014 and 2013 was $260,466, $88.245 and $91,178. Unearned compensation as of December 31, 2015 was $40.298 for SOSAR awards, and is expected to be recognized over a weighted average period of 15 years 52 2015 Annual Report PART II (continued) OCHIPOTLE MERICAN GRILL The following table reflects the average assumptions utilized in the Black-Scholes option pricing model to value SOSAR awards granted for each year. Risk-free interest rate 2015 2014 2013 0.89 0.5% Expected lite (years) 34 34 3.4 Expected dividend yield 0.0% 0.096 0.0% Volatility 30.8% 33.3% 35.4% Weighted average Black-Scholes fair value per share at Gate of grant $156.32 $136.18 $82.51 The Company has not paid dividends to date and does not plan to pay dividends in the near future. The risk-free interest rate is based upon U.S. Treasury rates for instruments with similar terms. The volatility assumption was based on the Company's historical data and implied volatility, and the expected life assumptions were based on the Company's historical data. Valve A summary of non-vested stock award activity under the stock incentive plans is as follows on thousands, except per share data: 2015 2014 2013 Grant Date Fair Grant Date Fair Grant Date Fair Value Value Shares Per Share Shares Per Share Shares Per Share Outstanding, beginning of year 70 $525.60 71 $520.27 120 $218.34 Granted 47 $785.32 2 $495.92 68 5527.45 Vested (1) $ 413.07 (2) $ 284.11 (117) $ 215.76 Forfeited $534.55 0 $ 410.55 $ Outstanding, end of year 116 $ 511.88 70 $525.60 71 5520.27 At December 31, 2015, 106 of the outstanding non-vested stock awards were subject to performance and/or market conditions, in addition to service vesting conditions. During the year ended December 31, 2013, the Company granted 66 stock awards that were subject to both service and performance vesting conditions ("the 2013 stock awards"). The quantity of shares that ultimately vest is determined based on the cumulative cash flow from operations reached during the three year period ending on September 30, 2016. The quantity of shares awarded ranges from 0% to 100% based on the level of achievement of the performance conditions. If the cumulative cash flow from operations during the three year period does not reach a specified level, no shares will vest. During the year ended December 31, 2015, the Company reduced its estimate of the number of the 2013 stock awards that it expects will vest, which resulted in a cumulative adjustment to expense of $10,851 ($6,691 net of tax as well as $.22 to basic and $.21 diluted earnings per share) During the year ended December 31, 2015, the Company awarded 40 performance shares that were subject to service, performance, and market vesting conditions the 2015 stock awards"). The quantity of shares that will ultimately vest is determined based on Chipotle's relative performance versus a restaurant industry peer group in the annual average of: revenue growth, net income growth and total shareholder return. The quantity of shares awarded ranges from 0% to 200% based on the level of achievement of the performance and market conditions. If minimum targets are not met, then no shares will vest. Each performance and market measure will be weighted equally, and performance is calculated over a three year period beginning January 1, 2015 through December 31 2017. During the year ended December 31, 2015, the Company reduced its estimate of the number of the 2015 stock awards that it expects will vest, which resulted in a cumulative adjustment to expense of $1344 (5829 net of tax and $.03 to basic and diluted earnings per sharel 2015 Annual Report 53 PART II (continued) The Company's measurement of the grant date fair value of the 2015 stock awards included using a Monte Carlo simulation model which incorporates into the fair value determination the possibility that the market condition may not be satisfied, using the following assumptions: 2015 made to the Deferred Plan fluctuate with the actual earnings and losses of a variety of available investment choices selected by the participant. Total abilities under the Deferred Plan as of December 31, 2015 and 2014 were $18,331 and 516,147, respectively, and are included in other long-term liabilities in the consolidated balance sheet. The Company matches 100% of the first 3% of pay contributed by each eligible employee and 50% on the next 2% of pay contributed once the 401) contribution limits are reached For the years ended December 31, 2015, 2014, and 2013, the Company made deferred compensation matches of $617. 5536 and 5201 respectively, to the Deferred Plan Risk-free interest rate Expected life (years) Expected dividend yield Volatility 10% 29 0.0% 33.7% Unearned compensation as of December 31, 2015 was $19,511 for non-vested stock awards the Company has determined are probable of vesting, and is expected to be recognized over a weighted average period of 16 years. The fair value of shares earned as of the vesting date during the year ended December 31, 2015, 2014 and 2013 was $634, 9783, and $58,941, respectively. 7. Employee Benefit Plans The Company maintains the Chipotle Mexican Grill 406) Plan (the -401k) Plan"). The Company matches 100% of the first 3% of pay contributed by each eligible employee and 50% on the next 2% of pay contributed. Employees become eligible to receive matching contributions after one year of service with the Company. For the years ended December 31, 2015, 2014, and 2013, Company matching contributions totaled approximately $4.995, $3,881 and $2,644, respectively. The Company has elected to fund its deferred compensation obligations through a rabbitrust. The rabbi trust is subject to creditor claims in the event of insolvency. but the assets held in the rabbitrust are not available for general corporate purposes. Amounts in the rabbitrust are invested in mutual funds, as selected by participants, which are designated as trading securities and carried at lait value, and are included in other assets in the consolidated balance sheet. Fair value of mutual funds is measured using Level 1 inputs (quoted prices for identical assets in active markets), and the fair values of the investments in the rabbi trust were $18,331 and 516,147 as of December 31, 2015 and 2014, respectively. The Company records trading gains and losses in general and administrative expenses in the consolidated statement of income and comprehensive income, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect its exposure of the Deferred Plan liability. The following table sets forth unrealized gains and losses on investments held in the rabbitrust: Year ended December 31 2015 2014 2013 The Company also offers an employee stock purchase plan ("'ESPP"). Employees become eligible to contribute after one year of service with the Company and may contribute up to 15% of their base earnings, subject to an annual maximum dollar amount toward the monthly purchase of the Company's common stock. Under the ESPP, 250 shares of common stock have been authorized and reserved for issuances to eligible employees, of which 248 represent shares that were authorized for issuance but not issued at December 31, 2015. For each of the years ended December 31, 2015, 2014 and 2013, the number of shares Issued under the ESPP were less than 1 Unrealized gains Llosses) on investments held in rabbi trust $(570 5184 $722 The Company also maintains the Chipotle Mexican Grill, Inc. Supplemental Deferred Investment Plan (the "Deferred Plan") which covers eligible employees of the Company. The Deferred Plan is a non qualified plan that allows participants to make tax deferred contributions that cannot be made under the 401(k) Plan because of internal Revenue Service limitations. Participants' earnings on contributions 8. Leases The Company generally operates its restaurants in leased premises. Lease terms for traditional shopping center or building leases generally include combined initial and option terms of 20-25 years. Ground leases generally include combined initial and option terms of 30-40 years. The option terms in each of these leases are typically in five-year increments. Typically, the lease includes rent escalation terms every five years including fixed rent escalations, escalations based on inflation indexes, and fair market value adjustments. Certain leases contain contingent rental provisions based upon the sales of the 54 2015 Annual Report PART II (continued) CICHIPOTLE MERICAN SAILE underlying restaurants. The leases generally provide for the payment of common area maintenance, property taxes Insurance and various other use and occupancy costs by the Company. In addition, the Company is the lessee under non-cancelable leases covering certain offices Future minimum lease payments required under existing operating leases as of December 31, 2015 are as follows 2016 2017 2018 2019 2020 Thereafter Total minimum lease payments $ 239,683 24366 244,698 245.251 239.933 2.257,081 $2.468.02 calculated using income available to common shareholders divided by diluted weighted average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying SOSARs and non-vested stock awards (collectively "stock awards". Diluted EPS considers the impact of potentially dutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Stock awards are excluded from the calculation of diluted EPS in the event they are subject to performance conditions or antidilutive The following stock awards were excluded from the calculation of diluted EPS: Year ended December 31, 2015 2014 2013 Stock awards subject to performance conditions 266 385 381 Stock awards that were antidilutive 289 232 393 Total stock awards excluded from diluted earnings per share 555 617 Minimum lease payments have not been reduced by minimum sublease rentals of $6.217 due in the future under non-cancelable subleases. 774 Rental expense consists of the following The following table sets forth the computations of basic and diluted earnings per share Year ended December 31 2015 2014 2013 Minimum rentals $227,602 $200,575 $178.395 Contingent rentals $ 4,542 $ 4,616 $ 2,719 Sublease rental income $ (1879) $ (1838) $ (1726) Year ended December 31. 2015 2014 2013 $475,602 $445,374 $327.438 31,092 402 31.038 474 30,957 324 Net income Shares Weighted average number of common shares outstanding Dilutive stock awards Diluted weighted average number of common shares outstanding Basic earnings per share Diluted earnings per share 31,494 31.512 The Company has six sales and leaseback transactions These transactions do not qualify for sale leaseback accounting because of the Company's deemed continuing involvement with the buyer-lessor due to fixed price renewal options, which results in the transaction being recorded under the financing method. Under the financing method, the assets remain on the consolidated balance sheet and the proceeds from the transactions are recorded as a financing liability. A portion of lease payments are applied as payments of deemed principal and imputed interest. The deemed landlord financing liability was $3,060 and $3,233 as of December 31, 2015, and 2014. respectively. with the current portion of the liability included in accrued liabilities, and the remaining portion included in other liabilities in the consolidated balance sheet. 31281 $ 15.30 $ 14.35 $ 10.58 $ 15.10 $ 14,13 $ 10.47 9. Earnings Per Share Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share ("diluted EPS 10. Commitments and Contingencies Purchase Obligations The Company enters into various purchase obligations in the ordinary course of business, generally of short term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, 2015 Annual Report 55 PART 1 (continued) C CHIPOTLE MERICAN GRILL Miscellaneous The Company is involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company's financial position, results of operations, liquidity or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which the Company incurs greater abilities than the Company currently anticipates.could materially and adversely affect the Company's business, financial condition, results of oper