Chipotle 2005 Annual Report Download - page 62

Chipotle Mexican Grill, Inc.
Notes to Financial Statements (Continued)
(in thousands, except per share data)
expense related to SARs was $384 and $193 ($231 and $193 net of tax) for the years ended
December 31, 2005 and 2004, respectively. As of December 31, 2005, there was $235 of unrecognized
compensation expense related to unvested SARs. Effective with the Company’s initial public offering,
all SARs outstanding as of January 25, 2006 were converted into options to purchase 148 shares of
Class A common stock. The options will have terms consistent with the original SARs, including the
same vesting schedule (vesting in full in July 2007) and an exercise price of $22.35 per share. Upon
conversion, the options will be accounted for as an equity award. The incremental compensation costs
arising from the difference in the SARs fair value just prior to conversion and the fair value of the new
award will be measured. The portion of the new award’s incremental compensation expense related to
service periods that have been completed as of the effective date will be recognized immediately.
Remaining unrecognized compensation expense will be recognized over the remaining 1.5 year vesting
period.
Nonvested Shares
In 2005, the Company granted 153 shares of common stock with a grant-date fair value of $19.50
per share (a related party contemporaneous valuation) which vest evenly over three years. No shares
vested or were forfeited during the year. Compensation expense is recognized over the vesting period
and is included in general and administrative expenses in the consolidated statement of operations.
Compensation expense was $1,369 ($1,104 net of tax) for the year ended December 31, 2005. As of
December 31, 2005, there was $1,619 of unrecognized compensation expense related to unvested shares
that is expected to be recognized over the remaining 2.3 year vesting period.
Fair Value of Equity Awards
The following table reflects the assumptions utilized to value the 2003 stock option awards granted
as well as the assumptions used to value the SARs as of December 31, 2005 under both SFAS 123(R)
and SFAS 123 using the Black-Scholes valuation model. The risk-free interest rate is based upon U.S.
Treasury Rates for instruments with similar terms. The expected life of the options is derived from
historic behavior of representative employee groups. The full term of the options and SARs (together
the ‘‘share units’’) was used for the expected life since the share units were granted to senior
management where turnover is expected to be low and since they are expected to hold the shares units
for the full term to obtain the maximum benefit. The Company has not paid dividends to date and
does not plan to pay dividends in the near future. The volatility assumptions were derived from the
Company’s annual independent stock valuation and historical volatilities of competitors whose shares
are traded in the public markets and are adjusted to reflect anticipated behavior specific to the
Company.
2005 2003
(SARs) (Options)
Risk-free interest rate ................................. 3.9% 2.9%
Expected life (years) .................................. 5.0 5.5
Expected dividend yield ............................... 0.0% 0.0%
Volatility .......................................... 37.0% 37.0%
In accordance with SFAS 123(R), the SARs were revalued as of December 31, 2005 using the
assumptions effective as of that date which are noted above.
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