Chipotle 2005 Annual Report Download - page 34

non-vested common stock was granted. The market approach uses direct comparisons to other
enterprises and their equity securities to estimate the fair value of privately issued securities. We relied
primarily on the price to earnings methodology and compared our historical and forecasted income
growth rate to determine our peer group within the high-growth restaurant industry and, subsequently,
the appropriate earnings multiple range to apply to our forecasted income in determining our value.
We then reduced this by a marketability discount due to the lack of liquidity for our common stock.
In connection with our initial public offering, we converted our outstanding stock appreciation
rights (‘‘SARs’’) granted in 2004 which were accounted for as a liability into stock options. The options
have terms consistent with the original SARs, including the same vesting schedule (vest in full in
July 2007) and an exercise price of $22.35 per share. In January 2006, we compared the fair value of
the SARs immediately before that conversion to the fair value of the options and recognized
compensation costs of approximately $0.2 million. Once converted, the options are accounted for as an
equity award.
In connection with our initial public offering, we completed a one-time, broad based grant of
774,150 options to purchase common stock. As a result, we expect total stock-based compensation
expense of approximately $3.5 million to $4.0 million in 2006.
Certain Trends and Uncertainties
Relationship with McDonald’s
Since we became a subsidiary of McDonald’s and began substantially expanding our operations in
1998, McDonald’s has provided a significant portion of the capital needed to operate our business and
open new stores. Generally, McDonald’s has done this through direct equity investments, although it
has also in some cases provided us with short-term borrowings that we repaid through private
placements of our equity securities. We expect that McDonald’s will no longer finance us after our
initial public offering, and we’ll fund our growth with cash flow from operations, proceeds from the
initial public offering and other sources.
We also currently benefit from our McDonald’s relationship in other ways, such as pricing benefits
for some products and services. We will incur increased costs as a result of our initial public offering
and the decrease in McDonald’s ownership interest in us, and if McDonald’s ownership interest
declines significantly from their current ownership position, we’ll lose an increasing amount of these
benefits. See Item 1A ‘‘Risk Factors—Risks Related to Our Business and Industry—As we increase our
independence from McDonald’s, we may face difficulties replacing services it currently provides to us
and entering into new or modified arrangements with existing or new suppliers or service providers.’’
For example:
• McDonald’s relationship with Coca-Cola has helped us contain our beverage costs and we may
lose some of that pricing advantage if we are no longer a consolidated subsidiary of McDonald’s
or we may have to negotiate with other beverage suppliers to remain competitive;
• As a separate public company we’ll incur legal, accounting and other expenses, which we expect
to be a few million dollars in each of 2006 and future years, that we did not incur as a majority-
owned private subsidiary of McDonald’s;
• we opened 104 stores in 2004, when we were able to use McDonald’s real estate personnel and
other resources to locate and obtain additional store sites in certain markets. We did not use
those resources in 2005 and do not anticipate using them in 2006 or in future years; and
• we expect that some of our labor costs, such as worker’s compensation, will increase as
McDonald’s ownership interest decreases.
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