Chipotle 2006 Annual Report Download - page 57

Chipotle Mexican Grill, Inc.
Notes to Consolidated Financial Statements—(Continued)
(dollar and share amounts in thousands, unless otherwise specified)
The following table reflects the assumptions utilized to value the 2006 stock option awards granted, option
modifications in 2006, the SARs conversion upon the initial public offering and to value the SARs as of
December 31, 2005 under FAS 123R using the Black-Scholes valuation model. In accordance with FAS 123(R),
upon conversion to options in conjunction with the initial public offering, the SARs were revalued using the
assumptions as of that date. In addition, the SARs were revalued as of December 31, 2005 using the assumptions
effective as of that date. The risk-free interest rate is based upon U.S. Treasury Rates for instruments with similar
terms. The full term of the SARs was used for the expected life because the SARs were granted to senior
management, where turnover is expected to be low, and because the Company expects the SARs to be held the
full term to obtain the maximum benefit. The expected life of the 2006 granted options was derived utilizing the
short-cut method allowed for a vanilla option grant under Staff Accounting Bulletin No. 107, in which the
expected life is assumed to be the average of the vesting period and the contractual life of the option. 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.
2006 2005
Risk-free interest rate ........................................... 4.4% to 5.3% 3.9%
Expected life (years) ............................................ 0.1to5.0 5.0
Expected dividend yield ......................................... 0.0% 0.0%
Volatility ..................................................... 40.0% 37.0%
On February 2, 2001, stock option grants were issued to certain employees of the Company under the
McDonald’s Stock Ownership Incentive Plan (the “McDonald’s Plan”). The options became exercisable equally
over four years and have an exercise price of $29.43 per share of McDonald’s stock. At the Disposition, the
expiration of the options was decreased from 10 years from the date of grant to between 30 days and three years,
based upon the option holder’s age and years of service with McDonald’s and the Company. The Company
agreed to pay McDonald’s $2,356, which was expensed equally over the four-year vesting period, for its cost of
participating in the McDonald’s Plan. As of December 31, 2006 and 2005, $589 and $1,178, respectively of the
amount was payable to McDonald’s. The final payment is due in 2008, and is included in the accrued liabilities
on the balance sheet.
9. Employee Benefit Plans
In October 2006, effective upon consummation of the Disposition, the Company adopted the Chipotle
Mexican Grill 401(k) plan (the “401(k) plan”). Prior to October 2006, eligible Chipotle employees were
participants of a 401(k) plan sponsored by McDonald’s. 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,
2006, 2005 and 2004, Company matching contributions totaled approximately $1,070, $828 and $747,
respectively.
As a result of the Disposition, the Company adopted 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, unfunded plan that allows participants to make tax-deferred contributions that cannot be
made under the 401(k) plan because of Internal Revenue Service limitations. Participant’s earnings on
contributions made to the Deferred Plan fluctuate with the actual earnings and losses of a variety of available
investment choices selected by the participant. Total liabilities under the Deferred Plan as of December 31, 2006
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