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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
As filed with the Securities and Exchange Commission on January 10, 2006
Registration No. 333-129221
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHIPOTLE MEXICAN GRILL, INC.
(Exact name of registrant as specified in its charter)
5810
84-1219301
(Primary Standard Industrial
(IRS Employer
Classification Code Number)
Identification Number)
1543 Wazee Street, Suite 200
Denver, CO 80202
(303) 595-4000
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Delaware
(State or other jurisdiction of
incorporation or organization)
Montgomery F. Moran
Chipotle Mexican Grill, Inc.
1543 Wazee Street, Suite 200
Denver, CO 80202
(303) 595-4000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Janet L. Fisher, Esq.
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
(212) 225-2000
Copies to:
Bryant S. Messner, Esq.
Messner & Reeves, LLC
1430 Wynkoop Street, Suite 400
Denver, CO 80202
(303) 623-1800
Bruce K. Dallas, Esq.
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, CA 94025
(650) 752-2000
Approximate date of commencement of proposed sale of the securities to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box. 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering: 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering: 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering: 
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: 
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities To Be Registered
Class A common stock, par value $0.01 per share,
offered by the registrant
Amount To Be
Registered(1)
Proposed Maximum
Offering Price Per Unit(2)
Proposed Maximum
Aggregate
Offering Price
Amount of
Registration Fee(3)
6,060,606
$17.50
$106,060,605
$12,418.50
Class A common stock, par value $0.01 per share,
offered by the selling shareholder
3,000,000
$17.50
$52,500,000(4)
$5,617.50
(1)
Estimated pursuant to Rule 457(a).
(2)
Anticipated to be betweeen $15.50 and $17.50 per share.
(3)
Includes $11,770 previously paid on behalf of the registrant and $5,296.50 previously paid on behalf of the selling shareholder.
(4)
Including shares of class A common stock which may be purchased by the underwriters from the selling shareholder to cover over-allotments, if any.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting
pursuant to such Section 8(a), may determine.
EXPLANATORY NOTE
We will have two versions of our prospectus included in this registration statement. In addition to a paper version, we will maintain an electronic version at
www.chipotleipo.com. The electronic version will be identical to the paper version except that persons viewing the electronic version of our prospectus will be able to
access additional materials about us by following a link under the caption "Prospectus Summary." The script of those materials and a description of the graphics used in
them is provided in Annex A beginning on page A-1.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is not is an offer to sell these securities and we are not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued January 10, 2006
7,878,788 Shares
CLASS A COMMON STOCK
Chipotle Mexican Grill, Inc. is offering 6,060,606 shares of our class A common stock and McDonald's Ventures, LLC, the selling shareholder, is offering
1,818,182 shares. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between
$15.50 and $17.50 per share.
We've applied to list our class A common stock on the New York Stock Exchange under the symbol "CMG."
Investing in our class A common stock involves risks. See "Risk Factors" beginning on page 10.
PRICE$
A SHARE
Underwriting
Discounts and
Commissions
Price to
Public
Proceeds to
Selling
Shareholder
Proceeds to
Chipotle
Per share
$
$
$
$
Total
$
$
$
$
The selling shareholder has granted the underwriters the right to purchase an additional 1,181,818 shares of class A common stock to cover over-allotments. The
underwriters expect to deliver the shares of common stock to purchasers on
, 2006.
The U.S. Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
MORGAN STANLEY
SG COWEN & CO.
BANC OF AMERICA SECURITIES LLC
CITIGROUP
JPMORGAN
MERRILL LYNCH & CO.
A.G. EDWARDS
RBC CAPITAL MARKETS
SUNTRUST ROBINSON HUMPHREY
WACHOVIA SECURITIES
, 2006
TABLE OF CONTENTS
Prospectus Summary
Summary Consolidated Financial Data
Risk Factors
Special Note Regarding Forward-Looking Statements and Industry Data
1
7
10
26
Use of Proceeds
27
Dividend Policy
27
Capitalization
28
Dilution
30
Selected Consolidated Financial Data
32
Management's Discussion and Analysis of Financial Condition and Results of Operations
34
What We Do
56
Management
71
Principal and Selling Shareholders
83
Certain Relationships and Related Party Transactions
85
Description of Capital Stock
90
Shares Eligible for Future Sale
95
Certain U.S. Federal Tax Consequences to Non-U.S. Holders
98
Underwriters
99
Legal Matters
103
Experts
103
Where You Can Find More Information
103
Index to Consolidated Financial Statements
F-1
No one is authorized to provide you with information that conflicts with information in the registration statement we have filed with the Securities and Exchange
Commission. We and the selling shareholder are offering to sell, and seeking offers to buy, shares of our class A common stock only where those offers and sales are
permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of when this prospectus is delivered or any sale of our class A
common stock occurs.
Until
, 2006 (25 days after the date of this prospectus), all dealers that buy, sell or trade our class A common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
Neither we nor the selling shareholder has taken any action to permit a public offering of the shares of our class A common stock outside the United States or to
permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must
inform themselves about, and observe any restrictions relating to, the offering of the shares of our class A common stock and the distribution of this prospectus outside
of the United States.
We have a separate website, www.chipotleipo.com, where you can access additional materials about us.
Except as the context otherwise requires, "Chipotle," the "Company," "we," "our" or "us" refer to Chipotle Mexican Grill, Inc. and its consolidated subsidiaries.
"McDonald's" refers to McDonald's Corporation or, as the context requires, McDonald's Ventures, LLC.
"Chipotle," "Chipotle Mexican Grill," "Chipotle Mexican Grill (in stylized font)," "Unburritable," "Food With Integrity," "Fresh Is Not Enough Anymore," "The
Gourmet Restaurant Where You Eat With Your Hands," the Chili Pepper Logo design, the Foil Burrito design and the Chipotle Medallion design are U.S. registered
trademarks of Chipotle.
i
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you in making your
investment decision. You should read the entire prospectus carefully, including the section describing the risks of investing in our class A common stock entitled "Risk
Factors" and our financial statements and related notes included elsewhere in this prospectus, before deciding to buy our class A common stock.
CHIPOTLE MEXICAN GRILL, INC.
When a Chain Isn't a "Chain"
When Chipotle (pronounced chi-POAT-lay) opened its first store in 1993, the idea was simple: demonstrate that food served fast didn't have to be a "fast-food"
experience. We use high-quality raw ingredients, classic cooking methods and a distinctive interior design, and have friendly people to take care of each
customer—features that are more frequently found in the world of fine dining. When we opened, there wasn't an industry category to describe what we were doing.
Some 12 years and more than 480 stores later, we compete in a category of dining now called "fast-casual," the fastest growing segment of the restaurant industry,
where customers expect food quality that's more in line with full-service restaurants, coupled with the speed and convenience of fast food.
Our revenue was $470.7 million in 2004, a 130% increase from 2002 and a 49% increase from 2003, driven by new store openings and increased average store
sales. Average store sales grew from $1,056,000 for 2002 to $1,274,000 for 2003, $1,361,000 for 2004 and $1,406,000 for the trailing 12-month period ended
September 30, 2005, reflecting the growing consumer awareness of our brand. Strong growth in sales at stores open at least 13 full months, which we call comp store
sales, is due mainly to an increase in the number of transactions processed at our registers. Our net income (loss) improved from a loss of $(7.7) million in 2003 to
income of $6.1 million in 2004 and $33.4 million (inclusive of a non-recurring $20.3 million tax benefit) in the first nine months of 2005, and our earnings before
interest, taxes, depreciation and amortization, or EBITDA, was $7.2 million in 2003, $27.9 million in 2004 and $43.7 million in the first nine months of 2005.
McDonald's, our management and a small number of outside investors currently own Chipotle. McDonald's interest is about 91% and, after the offering, we expect
McDonald's will own about 88% of the combined voting power of our outstanding stock and 69% of the economic interest in our outstanding common stock.
What We Do Really Well
We try to do a few things really well, and we plan to keep this intentionally focused strategy as we grow. We elevate basic raw ingredients into food that's richer
and more sophisticated through our recipes and cooking techniques. Similarly, our store design transforms simple materials in distinctive ways, giving our stores a style
that's more architectural in nature and less dependent on standardized design elements. We respect our employees and invite them to share their ideas, which we think
inspires them to take pride in their work and increases their dedication to our customers and our company.
"Food With Integrity"
Our focus has always been on using the kinds of higher-quality ingredients and cooking techniques used in high-end restaurants to make great food accessible at
reasonable prices. But our vision has evolved. While using a variety of fresh ingredients remains the foundation of our menu, we believe that "fresh is not enough,
anymore." Now we want to know where all of our ingredients come from, so that we can be sure they are as flavorful as possible while understanding the environmental
and societal impact of our business. We call this idea "food with integrity," and it guides how we run our business.
•
Using higher-quality ingredients. We use a variety of ingredients that we purchase from carefully selected suppliers. We concentrate on where we obtain each
ingredient, and this has become a cornerstone of our continuous effort to improve our food. Some of the ingredients we use include naturally raised pork, beef and
chicken, as well as organically grown and sustainably grown produce, and we continue to investigate using even more naturally raised, organically grown and
sustainably grown ingredients, in light of pricing considerations.
•
A few things, thousands of ways. We only serve a few things: burritos, burrito bols (a burrito without the tortilla), tacos and salads. We plan to keep a simple menu, but
we'll always consider sensible additions. For example, we introduced the burrito bol in 2003—just when the popularity of low-carbohydrate diets exploded—and
estimate that we sold about seven million of them in that year. In 2005, we also rolled out a salad.
We believe that our focus on "food with integrity" will resonate with customers as the public becomes increasingly aware of, and concerned about, what they eat.
Our Employees Set Us Apart
We believe that our front-line crew differentiates the Chipotle experience. Virtually all of what our crew does is in view of customers, and because the person who
prepares the food is often the same person who serves it, our employees have a strong sense of pride in their work. We think this and our crew's commitment to our
vision contribute to better execution and service and are reflected in our crew turnover rate, which we believe is lower than the average in our industry.
No Two Stores Are The Same
The design of each Chipotle store reflects the same idea as our food: a limited number of basic materials used in creative ways. We design each store individually
to suit the space. Even the design of our chairs and artwork is unique to Chipotle. The design of our serving line and our open kitchens also exemplify our vision,
demonstrating our commitment to cooking fresh food.
Customers Who Sell For Us
We believe the best and most recognizable brands aren't built through advertising or promotional campaigns alone, but rather through deeply held beliefs evident in
how a company runs its business. By adhering to this principle, we believe that Chipotle is becoming a highly recognized brand. We believe the single greatest
contributor to our success has been word-of-mouth, with our customers learning about us and telling others. For example, some of our customers have gone so far as to
develop websites about Chipotle. Our advertising has a low-key and irreverent tone that has been popular with customers. Our approach has captured the attention of
some of the country's most renowned news media, including the Washington Post , Food and Wine magazine, the New York Times , and several well-regarded food
critics, which we think is unusual in our segment of the restaurant industry. If you are reading an electronic version of this prospectus, which is available at
www.chipotleipo.com, click <here> for some additional materials we've used to communicate with customers.
Rapidly Improving Financial Performance
Our simple but effective approach has helped us build a sizeable and loyal customer base and resulted in rapidly improving financial performance over the last five
years. Our revenue was $470.7 million in 2004, a 130% increase from 2002, driven by new store openings and increased average store sales. During 2002, 2003 and
2004, we opened 237 stores in total. Increases in average store sales have occurred partly because the time it takes for our new stores to achieve planned sales volumes,
or ramp up, has consistently shortened as we've grown and customers have learned about our brand, enabling new stores to open with higher average sales. Average
sales for new stores in the first 90 trading days increased 29.4% to $303,390
2
for stores opened in 2004 from $234,450 for stores opened in 2002. We've also had strong growth in comp store sales, due mainly to an increase in the number of
transactions. We anticipate that comp store sales growth for fiscal 2006 as a percentage will be in the low- to mid-single digits.
Management's Passion, Not Just Experience
Our senior management is comprised of people who bring a mix of restaurant and business experience to their work. But most importantly, the team is committed
to making Chipotle's vision a part of all facets of our business. Steve Ells, our founder and Chief Executive Officer, holds a degree from the Culinary Institute of
America. Monty Moran, our President and Chief Operating Officer, joined Chipotle in March 2005, previously serving as chief executive officer of a private law firm,
and as general counsel of Chipotle for much of our history. Jack Hartung, our Chief Finance and Development Officer, joined Chipotle in 2002, after spending 18 years
with McDonald's, where he held a variety of management positions, including vice president and chief financial officer for McDonald's Partner Brands group. Bob
Wilner, our Chief Administrative Officer, joined Chipotle in 2002, and previously served as vice president of human resources for McDonald's Partner Brands group.
Together, our senior management team will beneficially own about 5% of the combined voting power of our outstanding stock and 4% of the economic interest in our
outstanding common stock after this offering.
Where We Go From Here
We believe that our growth has been driven by the appeal of our food, the clarity of our vision, the increasing strength of our brand and our commitment to
constantly improving our customer experience. We anticipate that our growth plans for the foreseeable future will continue to be rooted in these fundamentals as we
bring the Chipotle experience to more people.
Focusing On Our Vision to Appeal to Customers
Our menu is intentionally simple. By focusing on just a few menu items, we can concentrate our effort on doing a few things very well. We believe that by
focusing on the details of quality, service and the Chipotle experience, we'll be able to bring great food and our vision to new customers and keep existing customers
coming back. We believe that consumers' increasing concern about the food they eat will foster demand for higher-quality foods. We believe this, in turn, will attract the
interest and capital investment of larger farms and suppliers, and help us make our food more accessible, although we'll continue to balance our interest in advancing
"food with integrity" with our desire to provide great food at reasonable prices.
Expanding Our Operations and Sales
We plan to increase both sales and profits by opening new stores and increasing comp store sales:
•
Building More Stores. We plan to grow in a measured and disciplined way by strategically adding stores in existing and new markets. We opened 80 stores in 2005,
and we plan to open between 80 and 90 stores in 2006. We believe most of our sales increases will come from opening new stores.
•
Selling More Food Every Day. We continue to focus on ways to improve the customer experience at our existing stores so we can increase comp store sales. We
believe that the best way to do this is to speed up our service to sell food to more customers. We're doing this by, for example, enhancing our staffing and training
models, expanding our use of fax service lines and implementing our new online ordering system. These changes allow us to accommodate more customers and larger
orders without disrupting store traffic. We'll also consider additions to our menu that could enable us to enhance sales. For example, in 2005 we rolled out a salad that
uses essentially the same ingredients as our burritos and tacos. We believe that another way we can grow sales is by getting more people to try our food. We hope to
keep expanding brand awareness.
3
Risks of Investing in Chipotle
Our business involves various risks, including the rapid increase in the number of our stores; various aspects of our relationship with McDonald's, including our
ability to manage relationships and obtain services McDonald's currently manages or obtains on our behalf; our lack of independent operating history as a large
company; our ability to continue to grow and to manage our growth effectively; our ability to maintain and grow comp store sales; our ability to open new stores as
planned; our expansion into new markets; continued competitive pressures; health and safety concerns about the ingredients we use; credit and debit card fraud;
sabotage of our information systems; and our ability to continue inspiring pride in our store managers and crews and to maintain our culture. In addition, McDonald's
will continue to be able to exert a controlling influence over all matters requiring shareholder approval after the offering, including the election of directors and
significant business transactions. You should carefully consider the risks discussed in "Risk Factors" before deciding to invest in our class A common stock.
Share Reclassification
Currently we have one class of common stock and three classes of preferred stock outstanding. Each share of our outstanding common stock and each share of our
outstanding preferred stock will be reclassified into one-third of one share of class B common stock in connection with this offering, which will result in a decrease in
the number of shares outstanding. We also plan to amend our certificate of incorporation and bylaws and increase our total authorized number of shares of capital stock.
After the offering, we will have no outstanding preferred stock and two classes of common stock. In this prospectus, we refer to all of these actions together as the
"Reclassification." The Reclassification will take place immediately prior to the closing of this offering. Except where otherwise noted, the description of the terms of
our charter documents in this prospectus reflects the terms of those documents as they will exist following the Reclassification. Throughout this prospectus, we have
revised the per share data for common stock to reflect the effect of the one for three reverse common stock split that is part of the Reclassification.
In this offering, both we and the selling shareholder are selling shares of class A common stock, which will have fewer votes per share than our class B common
stock. Under the terms of our amended certificate of incorporation, one of the features of the class B common stock is that any holder of shares of class B common
stock, including the selling shareholder, will have the right to convert those shares to shares of class A common stock at any time prior to a tax-free distribution of such
shares to McDonald's shareholders (including a distribution in exchange for McDonald's shares or securities). In addition, prior to any such distribution, under the
amended certificate of incorporation, shares of class B common stock can only be transferred to McDonald's or its subsidiaries, and any other transfer of such shares
will result in the automatic conversion of those shares to shares of class A common stock without action by the transferor or transferee. Thus, although all of the shares
that the selling shareholder will receive in connection with the Reclassification will be shares of class B common stock, any shares that investors will receive from the
selling shareholder in the offering will be shares of class A common stock.
Future Dispositions
After the completion of this offering, McDonald's will beneficially own common stock representing 88% of the combined voting power of our outstanding stock
and 69% of the economic interest in our outstanding common stock (or 87% and 65%, respectively, if the underwriters' over-allotment option is exercised in full).
McDonald's has informed us that, at some time in the future, but no earlier than the expiration of the lock-up period, it may sell all or a portion of its ownership interest
in us or may make a tax-free distribution to its shareholders of all or a portion of that interest, including a distribution in exchange for McDonald's shares or securities
(or another similar transaction). Any such sale, distribution or exchange (or other similar transaction) would be subject to various conditions, including receipt of any
necessary regulatory or other approvals, the existence of satisfactory market conditions, and, in the case of
4
a tax-free transaction, McDonald's receipt of a private letter ruling from the Internal Revenue Service and/or an opinion of counsel that such sale, distribution or
exchange (or other similar transaction) would be tax-free to McDonald's and its shareholders. The conditions to such a sale, distribution or exchange (or other similar
transaction) may not be satisfied, or McDonald's may decide not to consummate such a sale, distribution or exchange (or other similar transaction). McDonald's has no
obligation to pursue or consummate any further dispositions of its ownership interest in us by any specified date or at all, whether or not these conditions are satisfied. A
sale or other disposition of our common stock by McDonald's could depress the price of our class A common stock.
Incorporation and Principal Executive Offices
The first Chipotle restaurant opened in 1993. We have been a subsidiary of McDonald's since February 1998, and McDonald's beneficially owns about 91% of our
voting stock. McDonald's acquired a controlling stake in us at the same time that our predecessor, World Foods Inc., a Colorado corporation formed in 1996, merged
with Chipotle Mexican Grill, Inc., a Delaware corporation. Chipotle Mexican Grill, Inc., was the surviving entity in the merger. Our main office is located at 1543
Wazee Street, Suite 200, Denver, Colorado, and our telephone number is (303) 595-4000.
5
THE OFFERING
Class A common stock offered by us
6,060,606 shares
Class A common stock offered by the
selling shareholder
1,818,182 shares
Common stock to be outstanding
immediately after this offering:
Class A
Class B
Total
7,878,788 shares
24,615,831 shares
32,494,619 shares
Common stock voting rights:
Class A
Class B
One vote per share, representing in aggregate 3% of the combined voting power
of our outstanding stock.
Ten votes per share, representing in aggregate 97% of the combined voting
power of our outstanding stock.
Use of proceeds
We intend to use the net proceeds from this offering to repay the balance
outstanding under our $30 million revolving line of credit with McDonald's, to
provide additional long-term capital to support the growth of our business
(primarily through opening new stores), to continue to maintain our existing
stores and for general corporate purposes. We will not receive any proceeds from
the sale of shares by the selling shareholder. See "Use of Proceeds."
New York Stock Exchange trading symbol
CMG
The numbers of shares of common stock that will be outstanding after this offering is based on 26,434,013 shares outstanding at December 31, 2005, including
non-vested shares subject to forfeiture, after giving retroactive effect to the reclassification of each share of our outstanding common stock and each share of our
outstanding preferred stock into one-third of one share of our class B common stock in the Reclassification, which will result in a decrease in the number of shares
outstanding, and excludes:
•
228,666 shares of class A common stock issuable upon the exercise of options outstanding at September 30, 2005 at a weighted average exercise price of $16.25 per
share; and
•
2,200,000 shares of class A common stock reserved for future issuance under our Chipotle 2006 Stock Incentive Plan.
Except as otherwise indicated, all information in this prospectus gives effect to the Reclassification and assumes no exercise of the underwriters' option to purchase
up to an additional 1,181,818 shares of class A common stock from the selling shareholder to cover over-allotments.
6
SUMMARY CONSOLIDATED FINANCIAL DATA
Our summary consolidated financial data shown below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. The summary consolidated statements of operations data
for the years ended December 31, 2002, 2003 and 2004 have been derived from our audited consolidated financial statements included elsewhere in this prospectus, and
the summary consolidated statements of operations data for the nine months ended September 30, 2004 and 2005 and the balance sheet data at September 30, 2005 have
been derived from our unaudited consolidated financial statements and include all adjustments consisting only of normal recurring adjustments necessary for a fair
presentation of the results of the interim periods.
Year Ended December 31,
2002
Nine Months Ended September 30,
2003
2004
2004
2005
(in thousands, except share data, store data and percentages)
Statements of Operations Data:
Revenue
Restaurant sales
Franchise royalties and fees
$
Total revenue
203,892
753
$
314,027
1,493
$
468,579
2,142
$
341,750
1,503
$
452,593
1,789
204,645
315,520
470,721
343,253
454,382
67,681
66,515
18,716
29,791
25,803
11,260
1,022
1,489
104,921
94,023
25,570
43,527
34,189
15,090
1,631
4,504
154,148
139,494
36,190
64,274
44,837
21,802
2,192
1,678
111,414
101,756
26,192
46,108
29,190
15,807
1,561
1,364
146,863
129,678
34,517
59,408
37,212
20,392
1,247
1,806
Total costs and expenses
222,277
323,455
464,615
333,392
431,123
Income (loss) from operations
Interest income
Interest expense
(17,632)
444
(101)
(7,935)
249
(28)
6,106
211
(191)
9,861
172
(191)
23,259
23
(663)
Income (loss) before income taxes
Benefit for income taxes(1)
(17,289)
—
(7,714)
—
6,126
—
9,842
—
22,619
10,815
Food, beverage and packaging costs
Labor costs
Occupancy costs
Other operating costs
General and administrative expenses
Depreciation and amortization
Pre-opening costs
Loss on disposal of assets
Net income (loss)
$
(17,289)
$
(7,714)
$
6,126
$
9,842
$
33,434
Historical income (loss) available to common shareholders(2)
Historical earnings (loss) per common share(2)
Basic
Diluted
Shares used in computing historical earnings (loss) per common
share(2)
Basic
Diluted
$
(17,289)
$
(7,714)
$
4,484
$
7,174
$
24,754
$
$
(0.44)
(0.44)
$
$
(0.17)
(0.17)
$
$
0.08
0.08
$
$
0.13
0.13
$
$
0.42
0.42
Pro forma income (loss) available to common shareholders(3)
$
(17,289)
$
(7,714)
$
6,126
$
7,174
$
33,434
Pro forma earnings (loss) per common share(3):
Basic
Diluted
$
$
(1.32)
(1.32)
$
$
(0.50)
(0.50)
$
$
0.24
0.24
$
$
0.39
0.39
$
$
1.27
1.27
39,324,552
39,324,552
Shares used in computing pro forma earnings (loss) per common
share(3):
Basic
Diluted
Selected Operating Data:
Restaurant Data:
Number of stores in operation at end of period(4)
Average store sales(5)
Comp store sales growth(6)
Number of stores opened during period(7)
EBITDA(8)
EBITDA as a percentage of revenue
Net cash provided by operating activities
46,683,077
46,683,077
13,108,184
13,108,184
$
$
$
55,893,078
56,090,651
15,561,026
15,561,026
227
1,056
$
17.0%
57
(6,372) $
(3.1)%
5,971
$
298
1,274
$
24.4%
76
7,155
$
2.3%
22,069
$
7
55,060,651
55,258,224
25,454,284
25,520,142
401
1,361
$
13.3%
104
27,908
$
5.9%
39,672
$
58,372,266
58,517,125
18,353,550
18,419,408
373
1,365
$
14.4%
75
25,668
$
7.5%
31,073
$
26,280,680
26,328,966
453
1,406
8.7%
52
43,651
9.6%
52,569
At September 30, 2005
Actual
Pro Forma
As Adjusted(10)
Pro Forma(9)
(in thousands)
(unaudited)
Balance Sheet Data:
Total current assets
Total assets
Total current liabilities
Total liabilities
Total shareholders' equity
$
$
$
$
$
14,368
371,777
37,473
74,004
297,773
$
$
$
$
$
14,368
371,777
37,473
73,490
298,287
$
$
$
$
$
100,578
457,987
32,835
68,852
389,135
(1)
We are not a separate taxable entity for federal and most state income tax purposes and our results of operations are included in McDonald's consolidated federal and
state income tax returns; however, the provision for income taxes is calculated on a separate return basis. At December 31, 2004, we had incurred total net operating
losses, or NOLs, of $139.4 million since our inception as a "C" corporation on January 1, 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 separate return limitation year ("SRLY") losses before McDonald's acquired over 80%
of our equity and will begin to expire in 2012. Through December 31, 2004, we recorded a valuation allowance to offset our deferred tax assets, including those related
to the NOLs, net of deferred tax liabilities. 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, resulting in a net tax benefit of $10.8 million in our results of operations. During the nine months ended
September 30, 2005, we also realized $8.5 million of SRLY losses which reduced goodwill but did not impact our results of operations.
(2)
Historical earnings (loss) per common share and shares used in computing historical earnings (loss) per common share do not reflect the effect of the Reclassification.
(3)
The pro forma earnings (loss) per common share and shares used in computing pro forma earnings (loss) per common share presented for the years ended December 31,
2002 and 2003 and the nine months ended September 30, 2004 give retroactive effect to the one for three reverse common stock split to be executed as part of the
Reclassification. The pro forma earnings (loss) per common share and shares used in computing pro forma earnings (loss) per common share presented for the year
ended December 31, 2004 and the nine months ended September 30, 2005 give retroactive effect to the Reclassification.
(4)
Includes company-operated stores only. We also have three franchisees who operated five, seven and eight stores at the end of 2002, 2003 and 2004, respectively, and
eight stores at September 30, 2004 and 2005.
(5)
Includes company-operated stores only. We define "average store sales" as the average trailing 12-month sales for company-owned stores in operation for at least 12
full months. As average store sales are computed using the same periods for all of our stores, they do not include sales during the stub portion of the month in which a
store begins operating.
(6)
Includes company-operated stores only. Represents the change in period-over-period sales for the comparable store base. A store becomes comparable in its 13 th
month of operation. As comp store sales are computed using the same periods for all of our stores, they do not include sales during the stub portion of the month in
which a store begins operating.
(7)
Includes company-operated and franchised stores.
8
(8)
Represents net income (loss) before deductions for interest, income taxes, depreciation and amortization. We believe that EBITDA is useful to investors as a measure of
comparative operating performance, as it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and
more reflective of changes in pricing decisions, cost controls and other factors that affect operating performance. We also present EBITDA because we believe it is
useful to investors as a way to evaluate our ability to incur and service debt, make capital expenditures and meet working capital requirements. EBITDA is not intended
as a measure of our operating performance, as an alternative to net income or as an alternative to any other performance measure in conformity with U.S. generally
accepted accounting principles or as an alternative to cash flow provided by operating activities as a measure of liquidity. The following is a reconciliation of net
income (loss) to EBITDA:
Year Ended December 31,
2002
2003
Nine Months Ended September 30,
2004
2004
2005
(in thousands)
Net income (loss)
Interest income
Interest expense
Depreciation and amortization
Benefit for income taxes*
$
(17,289) $
(444)
101
11,260
—
EBITDA
$
(6,372) $
(7,714) $
(249)
28
15,090
—
7,155
$
6,126 $
(211)
191
21,802
—
9,842 $
(172)
191
15,807
—
27,908
25,668
$
$
33,434
(23)
663
20,392
(10,815)
43,651
*
See note (1) above.
(9)
The pro forma balance sheet data at September 30, 2005 give retroactive effect to the Reclassification and the conversion of stock appreciation rights into stock options.
(10)
The pro forma as adjusted balance sheet data at September 30, 2005 give retroactive effect to the Reclassification, the conversion of stock appreciation rights into stock
options and the application of the estimated net proceeds we will receive from this offering, based on an assumed initial public offering price of $16.50 per share (the
midpoint of the range shown on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering
expenses payable by us.
9
RISK FACTORS
An investment in our class A common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with
the other information contained in this prospectus, before deciding to buy our class A common stock. Any of the risks we describe below could adversely affect our
business, financial condition or operating results. The market price of our class A common stock could decline if one or more of these risks and uncertainties develop
into actual events. You could lose all or part of your investment.
Risks Related to Our Business and Industry
The planned rapid increase in the number of our stores may make our future results unpredictable.
There were 489 Chipotle stores at December 31, 2005, 184 of which have opened since January 1, 2004. We plan to increase the number of our stores significantly
in the next three years. This growth strategy and the substantial investment associated with the development of each new store may cause our operating results to
fluctuate and be unpredictable or adversely affect our profits. Our future results depend on various factors, including successful selection of new markets and store
locations, market acceptance of the Chipotle experience, consumer recognition of the quality of our food and willingness to pay our prices (which reflect our often
higher ingredient costs), the quality of our operations and general economic conditions. What's more, as has happened when other fast-casual restaurant concepts have
tried to expand nationally, we may find that the Chipotle concept has limited or no appeal to customers in new markets or we may experience a decline in the popularity
of the Chipotle experience. Newly opened stores may not succeed, future markets and stores may not be successful and, even if we're successful, our average store sales
may not increase at historical rates.
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.
We've benefited from our relationship as a consolidated or majority-owned subsidiary of McDonald's. For example, McDonald's has provided us, directly or
through its own vendor relationships, with accounting services, insurance policy coverage, banking services, health and other insurance benefits for our employees and
employee benefit plans, as well as with its expertise in certain areas of our operations, such as real estate. We also benefit from our relationship with McDonald's when
we buy supplies or distribution or other services. For example, McDonald's relationship with Coca-Cola has helped us contain our beverage costs, and we've relied on
the McDonald's distribution network. As long as we are a consolidated or majority-owned subsidiary of McDonald's, we expect to continue to have some of these
advantages, and in connection with this transaction we've entered into a services agreement with McDonald's to clarify our relationship.
Following this offering, we expect that McDonald's will own about 88% of the combined voting power of our common stock. If McDonald's ownership interest
declines significantly in the future, as we expect it will, we'll lose an increasing amount of these benefits, many of which will not be covered by the services agreement.
For example, we currently obtain beneficial pricing and/or service levels from certain suppliers and service providers, and pay McDonald's for the costs they incur in
administering our 401(k) plan and providing certain health benefits, including workers compensation, for our employees. If McDonald's ceases to own more than 80%
of the combined voting power of our outstanding stock, we'll need to administer our 401(k) plan and provide these health benefits on a stand-alone basis and could incur
increased costs as a result. If McDonald's ceases to own more than 50% of the combined voting power of our outstanding stock, we may have to pay more for
processing our credit and debit cards and our gift cards, our audit fees, our property insurance, our umbrella and excess liability premiums and our banking services. In
some cases, current benefits, such as the use of McDonald's distribution network, are not
10
contractually tied to the level of McDonald's ownership, and the relevant suppliers and service providers could decide to stop giving us beneficial pricing and/or service
levels even if McDonald's still owns a substantial equity stake in us.
As we begin to increase our independence from McDonald's, we may have to seek new suppliers and service providers or enter into new arrangements with our
existing ones, and we may encounter difficulties or be unable to negotiate pricing or other terms as favorable as those we currently enjoy, which could harm our
business and operating results. However, because we currently have not begun to negotiate new or amended contracts with suppliers and service providers, we cannot
now quantify with greater certainty potential increases in our expenses. Furthermore, as a public company, in each of 2006 and future years we expect to incur a few
million dollars of legal, accounting and other expenses that we did not previously incur as a subsidiary of McDonald's. See "Certain Relationships and Related Party
Transactions."
We have no independent operating history as a large company, which makes our future business prospects difficult to evaluate.
We have been a subsidiary of McDonald's since 1998, which has affected the way we operate and manage our business. Because we have no independent
operating history as a large company, our historical results may not be indicative of our future performance. Our future results depend on various factors, including
those identified in these risk factors. We may not remain profitable.
Our sales growth rate depends primarily on our ability to open new stores and is subject to many unpredictable factors.
We may not be able to open new stores as quickly as planned. We've experienced delays in opening some stores and that could happen again. Delays or failures in
opening new stores could materially and adversely affect our growth strategy and our expected results. As we operate more stores, our rate of expansion relative to the
size of our store base will decline. In addition, one of our biggest challenges is locating and securing an adequate supply of suitable new store sites. Competition for
those sites in our target markets is intense, and lease costs are increasing (particularly for urban locations). Our ability to open new stores also depends on other factors,
including:
•
obtaining financing and negotiating leases with acceptable terms;
•
hiring and training qualified operating personnel in the local market;
•
managing construction and development costs of new stores at affordable levels, particularly in competitive markets;
•
the availability of construction materials and labor;
•
the availability of, and our ability to obtain, adequate supplies of ingredients that meet our quality standards;
•
securing required governmental approvals (including construction, parking and other permits) in a timely manner; and
•
the impact of inclement weather, natural disasters and other calamities, such as hurricanes Katrina and Rita in 2005.
Although we plan to open between 80 and 90 stores in 2006, we may not be able to do so for the reasons described in this risk factor. In addition, our progress in
opening new stores from quarter to quarter may occur at an uneven rate.
11
Our sales and profit growth could be adversely affected if comp store sales are less than we expect.
While future sales growth will depend substantially on our plans for new store openings, the level of comp store sales will also affect our sales growth and will
continue to be a critical factor affecting profit growth. This is because the profit margin on comp store sales is generally higher than the profit margin on new store
sales, as comp store sales enable fixed costs to be spread over a higher sales base. While we don't expect comp store sales growth to continue at historical levels, our
plans do incorporate positive comp store sales. We anticipate that comp store sales growth for fiscal 2006 as a percentage will be in the low- to mid-single digits. It is
possible that we will not achieve our targeted comp store sales growth or that the change in comp store sales could be negative. If this were to happen, sales and profit
growth would be adversely affected.
Our failure to manage our growth effectively could harm our business and operating results.
Our plans call for a significant number of new stores. Our existing store management systems, financial and management controls and information systems may be
inadequate to support our expansion. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train
and retain store managers and crew. We may not respond quickly enough to the changing demands that our expansion will impose on our management, crew and
existing infrastructure. We also place a lot of importance on our culture, which we believe has been an important contributor to our success. As we grow, however, we
may have difficulty maintaining our culture or adapting it sufficiently to meet the needs of our operations. Our failure to manage our growth effectively could harm our
business and operating results.
New stores, once opened, may not be profitable, and the increases in average store sales and comp store sales that we've experienced in the past may not be
indicative of future results.
Historically, our new stores have opened with an initial ramp-up period typically lasting 24 months or more, during which they generated sales and income below
the levels at which we expect them to normalize. This is in part due to the time it takes to build a customer base in a new market, higher fixed costs relating to increased
construction and occupancy costs and other start-up inefficiencies that are typical of new stores. New stores may neither be profitable nor have results comparable to
our existing stores. In addition, our average store sales and comp store sales likely will not continue to increase at the rates achieved over the past several years. Our
ability to operate new stores profitably and increase average store sales and comp store sales will depend on many factors, some of which are beyond our control,
including:
•
executing our vision effectively;
•
initial sales performance of new stores;
•
competition, either from our competitors in the restaurant industry or our own stores;
•
changes in consumer preferences and discretionary spending;
•
consumer understanding and acceptance of the Chipotle experience;
•
road construction and other factors limiting access to new stores;
•
general economic conditions, which can affect store traffic, local labor costs and prices we pay for the ingredients and other supplies we use; and
•
changes in government regulation.
If we fail to open stores as quickly as planned, or if new stores don't perform as planned, our business and future prospects could be harmed. In addition, changes
in our average store sales or comp store sales
12
could cause our operating results to vary adversely from expectations, which could cause the price of our common stock to fluctuate substantially.
Our expansion into new markets may present increased risks due to our unfamiliarity with those areas.
Some of our new stores are planned for markets where we have little or no operating experience. Those markets may have different competitive conditions,
consumer tastes and discretionary spending patterns than our existing markets. As a result, those new stores may be less successful than stores in our existing markets.
Consumers in a new market may not be familiar with the Chipotle brand, and we may need to build brand awareness in that market through greater investments in
advertising and promotional activity than we originally planned. We may find it more difficult in new markets to hire, motivate and keep qualified employees who can
project our vision, passion and culture. Stores opened in new markets may also have lower average store sales than stores opened in existing markets, and may have
higher construction, occupancy or operating costs than stores in existing markets. What's more, we may have difficulty in finding reliable suppliers or distributors or
ones that can provide us, either initially or over time, with adequate supplies of ingredients meeting our quality standards. Sales at stores opened in new markets may
take longer to ramp up and reach expected sales and profit levels, and may never do so, thereby affecting our overall profitability.
We may not persuade customers of the benefits of paying our prices for higher-quality food.
Our success depends in large part on our ability to persuade customers that food made with higher-quality ingredients is worth the prices they will pay at our stores
relative to prices offered by some of our competitors, particularly those in the quick-service segment. We may not successfully educate customers about the quality of
our food, and they may not care even if they do understand our approach. That could require us to change our pricing, advertising or promotional strategies, which
could materially and adversely affect our results or the brand identity that we've tried to create.
Changes in customer tastes and preferences, spending patterns and demographic trends could cause sales to decline.
Changes in customer preferences, general economic conditions, discretionary spending priorities, demographic trends, traffic patterns and the type, number and
location of competing restaurants affect the restaurant industry. Our success depends to a significant extent on consumer confidence, which is influenced by general
economic conditions and discretionary income levels. Our sales may decline during economic downturns, which can be caused by various economic factors such as
high gasoline prices, or during periods of uncertainty, such as those that followed the terrorist attacks on the United States in 2001. Similarly, hurricanes Katrina and
Rita are affecting consumer confidence and are likely to affect our supply costs, near-term construction costs for our new stores and may affect our sales going forward.
Any material decline in consumer confidence or a decline in family "food away from home" spending could cause our sales, operating results, profits, business or
financial condition to decline. If we fail to adapt to changes in customer preferences and trends, we may lose customers and our sales may deteriorate.
Competition from other restaurant companies could adversely affect us.
We operate in the fast-casual segment of the restaurant industry. This segment is highly competitive with respect to, among other things, taste, price, food quality
and presentation, service, location and the ambiance and condition of each restaurant. We also compete with restaurants in the quick-service segment. Our competition
includes a variety of locally owned restaurants and national and regional chains. Our competitors offer dine-in, carry-out and delivery services. Many of our competitors
have existed longer and often have a more established market presence with substantially greater financial, marketing, personnel and other resources than Chipotle. Our
parent, McDonald's, operates in the quick-service segment of the restaurant industry. Among our main competitors are a number of multi-unit, multi-market
13
Mexican food or burrito restaurant concepts, some of which are expanding nationally. As we expand further in existing markets, our existing stores may face
competition from our new stores that begin operating in those markets.
Several of our competitors compete by offering menu items that are specifically identified as low in carbohydrates, better for customers or otherwise targeted at
particular consumer preferences. Many of our competitors in the fast-casual and quick-service segments of the restaurant industry also emphasize lower-cost, "value
meal" menu options, a strategy we don't pursue. Our sales may be adversely affected by these products and price competition.
Moreover, new companies may enter our markets and target our customers. For example, additional competitive pressures have come more recently from the deli
sections and in-store cafés of several major grocery store chains, including those targeted at customers who want higher-quality food, as well as from convenience
stores and casual dining outlets. These competitors may have, among other things, lower operating costs, better locations, better facilities, better management, more
effective marketing and more efficient operations.
All of these competitive factors may adversely affect us and reduce our sales and profits.
Additional instances of avian flu or of "mad cow" disease or other food-borne illnesses could adversely affect the price and availability of chicken, beef or other
meat, cause the temporary closure of some stores and result in negative publicity, thereby resulting in a decline in our sales.
In 2004 and 2005, Asian and European countries experienced outbreaks of avian flu. Incidents of "mad cow" disease have occurred in Canadian and U.S. cattle
herds. These problems, food-borne illnesses (such as e. coli, hepatitis A, trichinosis or salmonella) and injuries caused by food tampering have in the past, and could in
the future, adversely affect the price and availability of affected ingredients and cause customers to shift their preferences, particularly if we choose to pass any higher
ingredient costs along to consumers. As a result, our sales may decline.
Instances of food-borne illnesses, real or perceived, whether at our stores or those of our competitors, could also result in negative publicity about us or the
restaurant industry, which could adversely affect sales. If we react to negative publicity by changing our menu or other key aspects of the Chipotle experience, we may
lose customers who do not accept those changes, and may not be able to attract enough new customers to produce the revenue needed to make our stores profitable. In
addition, we may have different or additional competitors for our intended customers as a result of making these changes and may not be able to compete successfully
against those competitors. If our customers become ill from food-borne illnesses, we could be forced to temporarily close some stores. For example, in June 2004,
Texas health officials investigated reports that customers and employees had become ill with flu-like symptoms after spending time in one of our stores, and we closed
that store for less than a week. A decrease in customer traffic as a result of these health concerns or negative publicity, or as a result of a change in our menu or dining
experience or a temporary closure of any of our stores, could materially harm our business.
Changes in food and supply costs could adversely affect our results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. Any increase in the prices of the ingredients most critical
to our menu, such as beef, chicken, cheese, avocados, beans, tomatoes and pork, could adversely affect our operating results. Although we try to manage the impact that
these fluctuations have on our operating results, we remain susceptible to increases in food costs as a result of factors beyond our control, such as general economic
conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, generalized infectious diseases, product recalls and government regulations. For
example, higher diesel prices have in some cases resulted in the imposition of surcharges on the delivery of commodities to our distributors, which they have generally
passed on to us to the extent permitted under our arrangements with them. In 2004, hurricanes in
14
some parts of the United States damaged tomato crops and drove prices higher. Similarly, in 2005, hurricane Katrina destroyed a number of chickens raised by one of
our chicken suppliers and increased our short-term chicken prices. Both hurricanes Katrina and Rita have resulted in higher diesel and gasoline prices, are affecting
consumer confidence and are likely to affect our supply costs, near-term construction costs for our new stores and may affect our sales going forward. In addition, in
2004, prices for chicken rose significantly due to a ban by Asian countries on their chicken exports following outbreaks of avian flu. We do not have long-term supply
contracts or guaranteed purchase amounts. As a result, we may not be able to anticipate or react to changing food costs by adjusting our purchasing practices or menu
prices, which could cause our operating results to deteriorate. In addition, because we provide moderately priced food, we may choose not to, or be unable to, pass
along commodity price increases to our customers.
We may have experienced a security breach with respect to certain customer credit and debit card data, and we have incurred and may continue to incur substantial
costs as a result of this matter. We may also incur costs resulting from other security risks we may face in connection with our electronic processing and
transmission of confidential customer information.
In August 2004, the merchant bank that processes our credit and debit card transactions (the "acquiring bank") informed us that we may have been the victim of a
possible theft of credit and debit card data. Together with two forensic auditing firms, we investigated the alleged theft and reviewed our information systems and
information security procedures. We also reported the problem to federal law enforcement authorities and have been cooperating in their investigation. While to date we
have not discovered conclusive evidence that a theft occurred, we identified some store practices that may have made information systems at our stores vulnerable
during periods before August 2004. Notably, without our knowledge, the card processing software we used inadvertently retained credit and debit card "Track 2" data,
consisting of, among other items, the customer's name, card number, card expiration date and card verification number. In addition, the internet gateways on our
computers in some stores may not have been fully secure at all times. As a result, outside parties may have gained access to stored information. We began accepting
credit cards in 1999, and it is possible that all of the cards we processed since then may have been vulnerable. In the three months prior to being notified of the problem,
we processed between 1.3 million and 1.5 million credit and debit card charges each month.
To date, we have received claims through the acquiring bank with respect to fewer than 2,000 purportedly fraudulent credit and debit card charges allegedly arising
out of this matter in an aggregate amount of about $1.2 million. We've also incurred $1.3 million of expense in connection with fines imposed by the Visa and
MasterCard card associations on the acquiring bank. In 2004, we recorded charges of $4.0 million to establish a reserve for claims seeking reimbursement for
purportedly fraudulent credit and debit card charges, the cost of replacing cards, monitoring expenses and fees, and fines imposed by Visa and MasterCard. All of the
reimbursement claims are being disputed, although we've not formally protested all of the charges. At November 30, 2005, after charging these expenses against the
reserve, the remaining reserve was $1.9 million, which does not take into account a fine of $0.4 million assessed by MasterCard in December 2005 that we expect to
charge against that reserve. In addition to the reserve, we've also incurred about $1.5 million of additional expenses in this matter, including $1.3 million for legal fees,
bringing our total expense relating to this matter to $5.5 million. We have not reserved any additional amounts to date in 2005.
We may in the future become subject to additional claims for purportedly fraudulent transactions arising out of this matter. As long as a credit or debit card is
active, fraudulent charges may be made using that card until the card's expiration date. We may also be subject to lawsuits or other proceedings by various interested
parties, including banks and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit) and federal and state regulators. The
statutes of limitation for pursuing some of these potential claims may extend for six years or more in some cases, depending on the circumstances. Moreover, the
application of the law and the rules and procedures of the major card
15
associations in these circumstances is generally untested. Any lawsuit or other proceeding will likely be complex, costly and protracted, which could in turn divert
financial and management resources from execution of our business plan. We have no way to predict the level of claims or the number or nature of proceedings that
may be asserted against us, nor can we quantify the costs that we may incur in connection with investigating, responding to and defending any of them. If we litigate
these matters, we may not be able to defend against penalties successfully. The ultimate outcome of this matter could differ materially from the amounts we've recorded
in our reserve and could have a material adverse effect on our financial results and condition. Consumer perception of our brand could also be negatively affected by
these events, which could further adversely affect our results and prospects.
Despite the changes we've made to our information systems as a result of this matter, we still need to periodically upgrade our software. We rely on commercially
available software and other technologies to provide security for processing and transmission of customer credit card data. About 44% of our current sales are
attributable to credit card transactions, and we expect credit card usage to increase. Our systems could be compromised in the future, which could result in the
misappropriation of customer information or the disruption of our systems. Either of those consequences could have a material adverse effect on our reputation and
business or subject us to additional liabilities.
Failure to receive frequent deliveries of higher-quality food ingredients and other supplies could harm our operations.
Our ability to maintain our menu depends in part on our ability to acquire ingredients that meet our specifications from reliable suppliers. Shortages or
interruptions in the supply of ingredients caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather or other
conditions could adversely affect the availability, quality and cost of our ingredients, which could harm our operations. If any of our distributors or suppliers performs
inadequately, or our distribution or supply relationships are disrupted for any reason, our business, financial condition, results of operations or cash flows could be
adversely affected. We currently depend on three or four suppliers for our pork, chicken and beef supplies. It could be more difficult to replace our pork suppliers if we
were no longer able to rely on them. We do not have long-term contracts with any of our suppliers. In addition, we've relied on the McDonald's distribution network. As
we begin to increase our independence from McDonald's, we may have to seek new suppliers and service providers. If we cannot replace or engage distributors or
suppliers who meet our specifications in a short period of time, that could increase our expenses and cause shortages of food and other items at our stores, which could
cause a store to remove items from its menu. If that were to happen, affected stores could experience significant reductions in sales during the shortage or thereafter, if
our customers change their dining habits as a result. Our focus on a limited menu would make the consequences of a shortage of a key ingredient more severe.
In addition, our approach to competing in the restaurant industry depends in large part on our continued ability to adhere to the principle of "food with integrity."
We use a substantial amount of naturally raised and sustainably grown ingredients, and try to make our food as fresh as we can, in light of pricing considerations. As we
increase our use of these ingredients, the ability of our suppliers to expand output or otherwise increase their supplies to meet our needs may be constrained. Our
inability to obtain a sufficient and consistent supply of these ingredients on a cost-effective basis, or at all, could cause us difficulties in aligning our brand with the
principle of "food with integrity." That could make us less popular among our customers and cause sales to decline.
16
Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to various factors.
Our quarterly operating results may fluctuate significantly because of various factors, including:
•
the impact of inclement weather, natural disasters and other calamities, such as hurricanes Katrina and Rita in 2005;
•
the timing of new store openings and related revenues and expenses;
•
operating costs at our newly opened stores, which are often materially greater during the first several months of operation;
•
labor availability and wages of store management and crew;
•
profitability of our stores, especially in new markets;
•
changes in comp store sales and customer visits, including as a result of the introduction of new menu items;
•
variations in general economic conditions, including those relating to changes in gasoline prices;
•
negative publicity about the ingredients we use or the occurrence of food-borne illnesses or other problems at our stores;
•
changes in consumer preferences and discretionary spending;
•
increases in infrastructure costs; and
•
fluctuations in supply prices.
Seasonal factors also cause our revenue to fluctuate from quarter to quarter. Our revenue is typically lower during the winter months and the holiday season and
during periods of inclement weather (because fewer people are eating out) and higher during the spring, summer and fall months (for the opposite reason). Our revenue
will also vary as a result of the number of trading days, that is, the number of days in a quarter when a store is open.
As a result of these factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. Average store
sales or comp store sales in any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and
investors. In that event, the price of our common stock would likely decrease.
Our success depends substantially upon the continued retention of certain key personnel.
We believe that our success has depended and continues to depend to a significant extent on the efforts and abilities of our senior management team. The members
of our management team currently are employed by us on an "at-will" basis and may resign from our employment at any time, subject in certain cases to the forfeiture
of options or unvested shares they may hold. In connection with this offering, we will enter into a registration rights agreement with certain of our current shareholders
granting demand registration rights to McDonald's and piggyback registration rights to the other shareholders, including Steve Ells and Monty Moran. Those piggyback
registration rights generally will enable those shareholders, including Steve with respect to 1,005,050 shares and Monty with respect to 153,333 non-vested shares, to
have all or a portion of their shares registered with the SEC at any time that we file a registration statement on our own behalf or at a time when McDonald's exercises
its right to demand registration of the shares that it beneficially owns. McDonald's may exercise that right any time after the expiration of the lock-up period it agreed to
in connection with this offering. See "Certain Relationships and Related Party Transactions—Registration Rights" and "Underwriters." Our failure to retain members of
that team could adversely affect our ability to build on the efforts they've undertaken with respect to our business.
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Specifically, the loss of Steve Ells, our founder and Chief Executive Officer, Monty Moran, our President and Chief Operating Officer, Jack Hartung, our Chief Finance
and Development Officer, or Bob Wilner, our Chief Administrative Officer, could adversely affect us.
Our business could be adversely affected by increased labor costs or difficulties in finding the right teams for our stores.
Labor is a primary component of our operating costs, and we believe good managers and crew are a key part of our success. We devote significant resources to
recruiting and training our store managers and crew. Increased labor costs due to factors like competition, increased minimum wage requirements and employee
benefits would adversely impact our operating costs. Our success also depends in part on the energy and skills of our employees and our ability to hire, motivate and
keep qualified employees, including especially store managers and crew members. Our failure to find and keep enough employees who are a good fit with our culture
could delay planned store openings, result in higher employee turnover or require us to change our culture, any of which could have a material adverse effect on our
business and results of operations. Restaurant operators have traditionally experienced relatively high employee turnover rates. Any increase in our turnover rates for
managers or crew could be costly.
Our franchisees could take actions that harm our reputation and reduce our royalty revenues.
We do not exercise control over the day-to-day operations of our franchised stores. While we try to ensure that franchised stores meet the same operating standards
that we demand of company-operated stores, one or more franchised stores may not do so. Any operational shortcomings of our franchised stores are likely to be
attributed to our system-wide operations and could adversely affect our reputation and have a direct negative impact on the royalty revenues we receive from those
stores.
We expect to need capital in the future, and we may not be able to raise that capital on acceptable terms.
Developing our business will require significant capital in the future. We have funded our operations and growth primarily through capital investments by
McDonald's and, to a lesser degree, our minority shareholders, and in some cases short-term borrowings from McDonald's that we repaid through private placements of
our equity securities. However, McDonald's has no obligation to continue providing us with capital in the future. To meet our capital needs, we expect to rely on our
cash flow from operations, the proceeds from this offering and third-party financing, such as the revolving credit facility we're negotiating. Third-party financing may
not, however, be available on terms favorable to us, or at all. Our ability to obtain additional funding will be subject to various factors, including market conditions, our
operating performance, lender sentiment and our ability to incur additional debt in compliance with other contractual restrictions such as financial covenants under our
credit facility. These factors may make the timing, amount, terms and conditions of additional financings unattractive. Our inability to raise capital could impede our
growth.
We're subject to all of the risks associated with leasing space subject to long-term non-cancelable leases and, with respect to the real property that we own, owning
real estate.
Our leases generally have initial terms of between five and 20 years, and generally can be extended only in five-year increments (at increased rates) if at all. All of
our leases require a fixed annual rent, although some require the payment of additional rent if store sales exceed a negotiated amount. Generally, our leases are "net"
leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. Additional sites that we lease are
likely to be subject to similar long-term non-cancelable leases. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be
committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as
each of our leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which
18
could cause us to close stores in desirable locations. Also, because we purchase real property for various store locations from time to time, we're subject to all of the
risks generally associated with owning real estate, including changes in the investment climate for real estate, demographic trends and supply or demand for the use of
the stores, which may result from competition from similar restaurants in the area as well as strict, joint and several liability for environmental contamination at or from
the property, regardless of fault.
Governmental regulation may adversely affect our ability to open new stores or otherwise adversely affect our existing and future operations and results.
We are subject to various federal, state and local regulations. Each of our stores is subject to state and local licensing and regulation by health, alcoholic beverage,
sanitation, food and workplace safety and other agencies. We may experience material difficulties or failures in obtaining the necessary licenses or approvals for new
stores, which could delay planned store openings. In addition, stringent and varied requirements of local regulators with respect to zoning, land use and environmental
factors could delay or prevent development of new stores in particular locations.
We are subject to the U.S. Americans with Disabilities Act and similar state laws that give civil rights protections to individuals with disabilities in the context of
employment, public accommodations and other areas. We may in the future have to modify stores, for example by adding access ramps or redesigning certain
architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. The expenses associated with these modifications could be
material.
Our operations are also subject to the U.S. Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions,
along with the U.S. Americans with Disabilities Act, family leave mandates and a variety of similar laws enacted by the states that govern these and other employment
law matters. In addition, federal proposals to introduce a system of mandated health insurance and flexible work time and other similar initiatives could, if implemented,
adversely affect our operations.
In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry. Restaurants
operating in the quick-service and fast-casual segments have been a particular focus. As a result, we may in the future become subject to initiatives in the area of
nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of our food, that could increase our expenses.
We may not be able to adequately protect our intellectual property, which could harm the value of our brands and adversely affect our business.
Our intellectual property is material to the conduct of our business. Our ability to implement our business plan successfully depends in part on our ability to further
build brand recognition using our trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos and the unique
ambiance of our stores. If our efforts to protect our intellectual property are inadequate, or if any third party misappropriates or infringes on our intellectual property,
either in print or on the internet, the value of our brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from
achieving or maintaining market acceptance. We may also encounter claims from prior users of similar intellectual property in areas where we operate or intend to
conduct operations. This could harm our image, brand or competitive position and cause us to incur significant penalties and costs.
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We could be party to litigation that could adversely affect us by distracting management, increasing our expenses or subjecting us to material money
damages and other remedies.
Our customers occasionally file complaints or lawsuits against us alleging that we're responsible for some illness or injury they suffered at or after a visit to our
stores, or that we have problems with food quality or operations. We're also subject to a variety of other claims arising in the ordinary course of our business, including
personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar
matters, and we could become subject to class action or other lawsuits related to these or different matters in the future. For example, we're currently investigating
issues that may arise in connection with the possible theft of certain credit and debit card data. We're also subject to "dram shop" statutes, which generally allow persons
injured by intoxicated people to recover damages from the place that wrongfully served those people alcohol. Regardless of whether any claims against us are valid, or
whether we're ultimately held liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A
judgment significantly in excess of our insurance coverage for any claims could materially and adversely affect our financial condition or results of operations. Any
adverse publicity resulting from these allegations may also materially and adversely affect our reputation or prospects, which in turn could adversely affect our results.
In addition, the restaurant industry has been subject to a growing number of claims based on the nutritional content of food products they sell and disclosure and
advertising practices. We may also be subject to this type of proceeding in the future and, even if not, publicity about these matters (particularly directed at the
quick-service and fast-casual segments of the industry) may harm our reputation or prospects and adversely affect our results.
We will incur increased costs as a result of being a public company.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The U.S. Sarbanes-Oxley Act of
2002 and related rules of the U.S. Securities and Exchange Commission, or SEC, and the New York Stock Exchange regulate corporate governance practices of public
companies. We expect that compliance with these public company requirements will increase our costs and make some activities more time-consuming. For example,
we'll create new board committees and adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated
with our SEC reporting requirements. A number of those requirements will require us to carry out activities we have not done previously. For example, under
Section 404 of the Sarbanes-Oxley Act, for our annual report on Form 10-K for 2006 we'll need to document and test our internal control procedures, our management
will need to assess and report on our internal control over financial reporting and our independent accountants will need to issue an opinion on that assessment and the
effectiveness of those controls. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our accountants identified a material
weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those
issues could adversely affect us, our reputation or investor perceptions of us. We also expect that it will be difficult and expensive to obtain director and officer liability
insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it
may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by shareholders and third
parties may also prompt even more changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or
the timing of such costs.
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Risks Relating to Our Affiliation with McDonald's
We're controlled by McDonald's, whose interests may conflict with yours.
Upon completion of this offering, McDonald's will beneficially own no shares of our class A common stock, but will own about 90% of our outstanding class B
common stock, representing 88% of the combined voting power of our outstanding stock and 69% of the economic interest in our outstanding common stock (or 87%
and 65%, respectively, if the underwriters' over-allotment option is exercised in full). Accordingly, as it has since 1998 when we became its subsidiary, McDonald's will
continue to exercise significant influence over our business policies and affairs, including the composition of our board of directors and any action requiring the
approval of our shareholders, including the adoption of amendments to our certificate of incorporation, the issuance of additional shares of equity securities, the
payment of dividends and the approval of mergers or a sale of substantially all of our assets. The concentration of ownership may also make some transactions,
including mergers or other changes in control, more difficult or impossible without the support of McDonald's. McDonald's interests may conflict with your interests as
a shareholder. For additional information about our relationships with McDonald's, you should read the information under the headings "Principal Shareholders" and
"Certain Relationships and Related Party Transactions."
Conflicts of interest between McDonald's and us could be resolved in a manner unfavorable to us.
Various conflicts of interest between McDonald's and us could arise. Many of our officers own stock in McDonald's, in some cases more than the amount of
Chipotle common stock they own. In addition, one of our directors, Mats Lederhausen, is Managing Director of our controlling shareholder, McDonald's Ventures,
LLC. Ownership interests of directors or officers of McDonald's in the common stock of Chipotle, or a person's service as either a director or officer of both companies,
could create or appear to create potential conflicts of interest when those directors and officers are faced with decisions that could have different implications for
McDonald's and Chipotle. These decisions could, for example, relate to:
•
disagreement over corporate opportunities;
•
competition between us and McDonald's;
•
management stock ownership;
•
employee retention or recruiting;
•
our dividend policy; and
•
the services and arrangements from which Chipotle benefits as a result of its relationship with McDonald's.
Potential conflicts of interest could also arise if we enter into any new commercial arrangements with McDonald's in the future. Our directors and officers who
have interests in both McDonald's and us may also face conflicts of interest with regard to the allocation of their time between McDonald's and Chipotle.
In addition, under our tax allocation agreement with McDonald's, McDonald's (as our parent) has the sole authority to file federal income tax returns and most state
income tax returns on our behalf and is responsible for administering that agreement until the consummation of this offering. Assuming McDonald's economic interest
in our outstanding common stock falls to less than 80%, this arrangement is expected to terminate for federal and some state income tax purposes for taxable periods
following the offering. However, the tax allocation agreement will remain in effect for taxable years prior to this offering. Consequently, this may result in conflicts of
interest between McDonald's and us. For example, McDonald's (as our parent) may choose to contest, compromise or settle any adjustment or deficiency proposed by
the relevant taxing authority in a manner that may be beneficial to McDonald's and detrimental to us and for which we may be required to reimburse McDonald's under
the tax allocation
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agreement. The tax allocation agreement will continue to apply to, and govern, the sharing of tax liabilities between McDonald's and us for state tax purposes for those
states in which we and McDonald's will continue to file tax returns on a combined basis following the offering.
The corporate opportunity provisions in our amended certificate of incorporation could enable McDonald's to benefit from corporate opportunities that might
otherwise be available to Chipotle.
Our amended certificate of incorporation will contain provisions related to corporate opportunities that may be of interest to both McDonald's and us. It will
provide that if a corporate opportunity is offered to:
•
one of our officers or employees who is also a director (but not an officer or employee) of McDonald's, that opportunity will belong to us unless expressly offered to
that person primarily in his or her capacity as a director of McDonald's, in which case it will belong to McDonald's;
•
one of our directors who is also an officer or employee of McDonald's, that opportunity will belong to McDonald's unless expressly offered to that person primarily in
his or her capacity as our director, in which case it will belong to us; and
•
any person who is either (1) an officer or employee of both us and McDonald's or (2) a director of both us and McDonald's (but not an officer or employee of either
one), that opportunity will belong to McDonald's unless expressly offered to that person primarily in his or her capacity as our director, in which case such opportunity
shall belong to us.
In following these procedures, any person who is offered a corporate opportunity will have satisfied his or her fiduciary duties to our shareholders and us. In
addition, our amended certificate of incorporation will provide that any corporate opportunity that belongs to McDonald's or to us, as the case may be, may not be
pursued by the other, unless and until the party to whom the opportunity belongs determines not to pursue the opportunity and so informs the other party. Furthermore,
so long as the material facts of any transaction between us and McDonald's have been disclosed to or are known by our board of directors or relevant board committee,
and the board or such committee (which may, for quorum purposes, include directors who are directors or officers of McDonald's) authorizes the transaction by an
affirmative vote of a majority of the disinterested directors, then McDonald's will have satisfied its fiduciary duties and will not be liable to us or our shareholders for
any breach of fiduciary duty or duty of loyalty relating to that transaction. These provisions create the possibility that a corporate opportunity that may be pertinent to us
may be used for the benefit of McDonald's.
Future sales or distributions of our shares by McDonald's could depress our class A common stock price.
After this offering, and subject to the lock-up period described below, McDonald's may sell all or a portion of the shares of our class B common stock that it owns
(which shares would be converted automatically into class A shares in connection with any sale prior to a tax-free distribution) or distribute those shares to its
shareholders, including a distribution in exchange for McDonald's shares or securities (or another similar transaction). Sales by McDonald's in the public market or
distributions to its shareholders of substantial amounts of our common stock, or the filing by McDonald's of a registration statement relating to a substantial amount of
our common stock, could depress our class A common stock price. McDonald's has informed us that, at some time in the future, but no earlier than the expiration of the
lock-up period, it may sell all or a portion of its ownership interest in us or may make a tax-free distribution, including a distribution in exchange for McDonald's shares
or securities (or another similar transaction), to its shareholders of all or a portion of that interest. McDonald's is not, however, subject to any contractual obligation to
maintain its ownership position in our shares, except that it has agreed not to sell or otherwise dispose of any of our shares of common stock for a period ending
180 days (subject to extension) after the date of the final prospectus without the prior written consent of Morgan Stanley & Co.
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Incorporated and SG Cowen & Co., LLC, on behalf of the underwriters, subject to specified limited exceptions and extensions described in "Underwriters."
Consequently, McDonald's may decide not to maintain its ownership of our common stock once the lock-up period expires.
In addition, McDonald's will have the right, subject to some conditions, to require us to file registration statements covering its shares or to include its shares in
other registration statements that we may file. By exercising their registration rights and selling a large number of shares, McDonald's could cause the price of our
class A common stock to decline.
Risks Related to Ownership of Our Class A Common Stock
There is no existing market for our class A common stock and we do not know if one will develop. Even if a market does develop, the stock prices in the market may
not exceed the offering price.
Prior to this initial public offering, there has not been a public market for our class A common stock. Furthermore, because McDonald's will beneficially own most
of our common stock immediately following this offering as described above under "—Risks Relating to our Affiliation with McDonald's—We're controlled by
McDonald's whose interest may conflict with yours," only a limited number of our class A shares are likely to be actively traded and an active market in our class A
shares may not develop. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the New
York Stock Exchange or otherwise, or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any class A
shares that you buy.
The initial public offering price for the class A common stock will be determined by negotiations among us, McDonald's and the representatives of the
underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our
class A common stock at prices equal to or greater than the price you pay in this offering.
Our class A common stock price may be volatile and you may lose all or part of your investment.
The market price of our class A common stock could fluctuate significantly, and you may not be able to resell your shares at or above the offering price. Those
fluctuations could be based on various factors in addition to those otherwise described in this prospectus, including:
•
our operating performance and the performance of our competitors;
•
the public's reaction to our press releases, our other public announcements and our filings with the SEC;
•
changes in earnings estimates or recommendations by research analysts who follow Chipotle or other companies in our industry;
•
variations in general economic conditions;
•
the number of shares to be publicly traded after this offering;
•
actions of our current shareholders, including sales of common stock by McDonald's or our directors and executive officers;
•
the arrival or departure of key personnel;
•
matters affecting McDonald's, which will remain our principal shareholder following this offering; and
•
other developments affecting us, our industry or our competitors.
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In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations may be unrelated to the operating
performance of particular companies. These broad market fluctuations may cause declines in the market price of our class A common stock. The price of our class A
common stock could fluctuate based upon factors that have little or nothing to do with our company or its performance, and those fluctuations could materially reduce
our class A common stock price.
Because holders of the shares of class B common stock will control the majority of the voting power of our common stock, investors in this offering will not be able
to determine the outcome of shareholder votes with respect to most events.
Our class A common stock will have one vote per share, and our class B common stock will have ten votes per share, other than with respect to a limited number
of matters specified in our amended certificate of incorporation (such as approval of transactions by which a third party might acquire control of us). Following this
offering, holders of shares of class B common stock will collectively control 97% of the combined voting power of our outstanding common stock other than with
respect to those matters. For example, the holders of shares of class B common stock will be able to direct the election of all of the members of our board of directors,
who will determine our strategic plans, approve major financing decisions and appoint top management. In addition, the holders of the class B common stock may seek
to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to holders of our class A common stock
or adversely affect us or other investors, including investors in this offering. Although substantially all of the class B common stock will be beneficially owned by
McDonald's following the offering and such shares will only be transferable to McDonald's or one of its subsidiaries, McDonald's may in the future decide to distribute
all or a portion of its interest in the class B common stock to its shareholders through a tax-free distribution. Following any such distribution, none of the outstanding
shares of class B common stock will be subject to transfer restrictions.
Future sales of our common stock, or the perception that such sales may occur, could depress our class A common stock price.
Sales of a substantial number of shares of our common stock, or the perception that such sales may occur, following this offering could depress the market price of
our class A common stock. This would include sales by McDonald's, as detailed above under "—Future sales or distributions by McDonald's could depress our stock
price." We and all of our executive officers and directors and certain other equity holders, including McDonald's, have agreed with the underwriters not to offer, sell,
dispose of or hedge any shares of our class A common stock or securities convertible into or exchangeable for shares of our class A common stock (including shares of
our class B common stock), subject to specified limited exceptions and extensions described elsewhere in this prospectus, during the period ending 180 days (subject to
extension) after the date of the final prospectus, except with the prior written consent of Morgan Stanley & Co. Incorporated and SG Cowen & Co., LLC, on behalf of
the underwriters. Our certificate of incorporation will authorize us to issue up to 200,000,000 shares of class A common stock, of which 7,878,788 shares will be
outstanding and 228,666 shares will be issuable upon the exercise of outstanding stock options, and up to 30,000,000 shares of class B common stock, of which
24,615,831 shares will be outstanding, upon completion of this offering. Of the outstanding shares, 7,878,788 class A shares and 933,639 class B shares will be freely
tradable after the expiration date of the lock-up agreements, excluding any acquired by persons who may be deemed to be our affiliates. All of the outstanding class B
shares will be eligible for conversion and resale after the expiration of the lock-up period. Shares of our common stock held by our affiliates will continue to be subject
to the volume and other restrictions of Rule 144 under the U.S. Securities Act of 1933, or the Securities Act. Morgan
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Stanley & Co. Incorporated and SG Cowen & Co., LLC may, in their sole discretion and at any time without notice, release all or any portion of the class A shares or
the class B shares subject to the lock-up.
In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act the shares of common stock reserved
for issuance under our employee stock option plan. See the information under the heading "Shares Eligible for Future Sale" for a more detailed description of the shares
that will be available for future sales upon completion of this offering.
We do not intend to pay dividends for the foreseeable future.
We've never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and
expansion of our business, and we do not anticipate paying any cash dividends on our class A common stock. See "Dividend Policy."
Provisions in our charter documents and Delaware law may delay or prevent our acquisition by a third party.
Our certificate of incorporation and bylaws contain several provisions that may make it more difficult for a third party to acquire control of us without the approval
of our board of directors. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock. These
provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our shareholders'
receiving a premium over the market price for their common stock. See "Description of Capital Stock."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus, including particularly the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," contains forward-looking statements. Such forward-looking statements include the discussions of our business
strategies and our expectations concerning future operations, margins, profitability, liquidity, and capital resources. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "thinks," "estimates," "seeks," "expects," "predicts,"
"potential" and similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those in the future that are implied by these
forward-looking statements. These risks and other factors include those listed under "Risk Factors" and elsewhere in this prospectus. Those factors, among others, could
cause our actual results and performance to differ materially from the results and performance projected in, or implied by, the forward-looking statements. As you read
and consider this prospectus, you should carefully understand that the forward-looking statements are not guarantees of performance or results.
All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may
affect us. We assume no obligation to update any forward-looking statements after the date of this prospectus as a result of new information, future events or
developments, except as required by the federal securities laws.
Industry data and other statistical information used in this prospectus are based on independent publications, government publications, reports by market research
firms or other published independent sources. Some data are also based on our good faith estimates, derived from our review of internal surveys and the independent
sources listed above. Although we believe these sources are reliable, we've not independently verified the information.
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USE OF PROCEEDS
We estimate that our net proceeds from our sale of 6,060,606 shares of class A common stock in this offering at an assumed initial public offering price of $16.50
per share (the midpoint of the range shown on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering
expenses payable by us, will be about $90.8 million. We will not receive any proceeds from the sale of shares by the selling shareholder, including with respect to any
sale of shares resulting from an exercise by the underwriters of their option to purchase additional shares from the selling shareholder.
We intend to use the net proceeds from the sale of the common stock to repay the balance outstanding under our $30 million revolving line of credit with
McDonald's, to provide additional long-term capital to support the growth of our business (primarily through opening new stores), to continue to maintain our existing
stores and for general corporate purposes. At September 30, 2005, the balance outstanding under our revolving line of credit was $4.6 million, and the annual interest
rate with respect to those borrowings on that date was 7.5% (representing the U.S. prime rate on that date plus 100 basis points). This revolving line of credit expires on
June 30, 2006. We expect that it will be terminated in connection with this offering. The amounts and timing of our actual expenditures will depend on numerous
factors, including the status of our expansion efforts, sales and marketing activities and competition. Accordingly, our management will have broad discretion in the
application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds from this offering.
A $1 change, up or down, in the midpoint of the range shown on the cover page of this prospectus would change our estimated net proceeds by $6.1 million.
Similarly, a change in the number of shares of class A common stock we sell would increase or decrease our net proceeds. We believe that our intended use of proceeds
would not be affected by changes in either our initial public offering price or the number of shares of class A common stock we sell. However, if our net proceeds were
significantly reduced and we were not able to find alternate sources of financing, our growth rate could be slowed. See "Risk Factors."
DIVIDEND POLICY
We did not declare or pay any cash dividends on our common stock in 2002, 2003 or 2004. We anticipate that we'll retain any future earnings for the operation and
expansion of our business. Accordingly, we do not anticipate declaring or paying any cash dividends on our common stock for the foreseeable future.
Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions,
including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may
deem relevant.
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CAPITALIZATION
As discussed under "Prospectus Summary—Share Reclassification," each share of our outstanding common stock and each share of our outstanding preferred
stock will be reclassified into one-third of one share of class B common stock in connection with this offering, which will result in a decrease in the number of shares
outstanding. We also plan to amend our certificate of incorporation and bylaws and increase our total authorized number of shares of capital stock. All of this, which we
refer to as the Reclassification, will take place immediately prior to the closing of this offering.
The following table sets forth our cash and cash equivalents and our consolidated capitalization at September 30, 2005:
•
on an actual basis to reflect the one for three reverse common stock split, which is part of the Reclassification; and
•
on a pro forma as adjusted basis to give retroactive effect to the Reclassification, the conversion of stock appreciation rights into stock options and the application of the
estimated net proceeds that we will receive from this offering, based on an assumed initial public offering price of $16.50 per share (the midpoint of the range shown on
the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
September 30, 2005
Pro Forma
As Adjusted
Actual
(in thousands, except share amounts)
(unaudited)
Cash and cash equivalents
$
1,958
$
88,168
Total debt(1)
$
7,034
$
2,396
Shareholders' equity
Common stock, $0.03 par value; 31,666,666 shares authorized, 19,457,422
shares issued and outstanding(2)
Class A common stock, $0.01 par value; 200,000,000 shares authorized,
7,878,788 shares issued and outstanding
Class B common stock, $0.01 par value; 30,000,000 shares authorized,
24,462,498 shares issued and outstanding
Preferred stock, $0.01 par value; 40,000,000 shares authorized, comprising:
Series B preferred stock, $0.01 par value; 8,034,009 shares issued
and outstanding
Series C preferred stock, $0.01 par value; 3,925,125 shares issued
and outstanding
Series D preferred stock, $0.01 par value; 8,510,639 shares issued
and outstanding
Paid-in capital
Tax receivable—McDonald's
Accumulated other comprehensive income
Accumulated deficit
Total shareholders' equity
Total capitalization
$
584
—
—
79
—
245
80
—
39
—
85
378,285
(38,596)
9
(42,713)
—
470,111
(38,596)
9
(42,713)
297,773
389,135
304,807
$
391,531
(1)
Total debt consists of $4.6 million outstanding under our line of credit with McDonald's and $2.4 million of deemed landlord financing. The pro forma as adjusted
amount gives effect to the repayment of our balance outstanding under the McDonald's line of credit.
(2)
Excludes 228,666 shares of common stock issuable on the exercise of outstanding stock options, 153,333 shares of outstanding non-vested common stock and 771,334
shares of common stock
28
reserved for future issuance under the Chipotle Executive Stock Option Plan. We do not intend to grant additional options under this plan following the
consummation of this offering.
The pro forma as adjusted number of shares of common stock to be outstanding is based on
retroactive effect to the Reclassification, and excludes:
shares outstanding at September 30, 2005, after giving
•
228,666 shares of class A common stock issuable upon the exercise of options outstanding at September 30, 2005 at a weighted average exercise price of $16.25 per
share;
•
153,333 shares of non-vested common stock outstanding at September 30, 2005;
•
2,200,000 shares of class A common stock reserved for future issuance under our Chipotle 2006 Stock Incentive Compensation Plan; and
•
153,466 shares of class A common stock issuable upon the exercise of options to be issued upon the conversion of stock appreciation rights outstanding at
September 30, 2005.
29
DILUTION
If you invest in our class A common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our class A
common stock (the midpoint of the range shown on the cover page of this prospectus) and the pro forma net tangible book value per share of our class A common stock
upon the completion of this offering.
Our net tangible book value at September 30, 2005 was about $280.0 million, or $10.65 per share of class B common stock (after giving retroactive effect to the
Reclassification). The net tangible book value per share represents the amount of our net worth, or total tangible assets less total liabilities, divided by 26,280,680 shares
of our class B common stock outstanding as of that date (after giving retroactive effect to the Reclassification).
After giving retroactive effect to the Reclassification, the conversion of stock appreciation rights into stock options and the issuance and sale of 6,060,606 shares of
our class A common stock in this offering and our receipt of about $90.8 million in net proceeds from such sale, based on an assumed public offering price of $16.50
per share (the midpoint of the range shown on the cover page of this prospectus), and after deducting the underwriting discounts and commissions payable by us and our
estimated expenses of the offering, our as adjusted net tangible book value per share at September 30, 2005 would have been about $371.4 million, or $11.48 per share.
This amount represents an immediate increase in net tangible book value of $0.83 to existing shareholders and an immediate dilution in net tangible book value of
$5.02 per share to purchasers of our common stock in this offering. Dilution per share is determined by subtracting the net tangible book value per share as adjusted for
this offering from the amount of cash paid by a new investor for a share of our common stock.
The following table illustrates the per share dilution:
Initial public offering price per share of class A common stock
Net tangible book value per share at September 30, 2005 (as adjusted for
the Reclassification, but excluding this offering)
$
16.50
10.65
Increase in net tangible book value per share attributable to new investors
0.83
As adjusted net tangible book value per share after the offering
11.48
Dilution per share to new investors
5.02
The following table summarizes, at September 30, 2005, after giving retroactive effect to the Reclassification and this offering as described above:
•
the number of shares of common stock purchased from us;
•
the total consideration paid to us before deducting underwriting discounts and commissions of $7.0 million and estimated offering expenses payable by us of about
$2.2 million; and
•
the average price per share paid by existing shareholders and to be paid by new investors purchasing shares of common stock in this offering, before deducting the
underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased
Number
Average Price
per Share
Total Consideration
Percent
Amount
Existing shareholders
New investors
26,748,844
6,060,606
82% $
18
311,827,000
100,000,000
Total
32,809,450
100% $
411,827,000
30
Percent
76% $
24
100%
11.66
16.50
The foregoing tables include options granted to our officers, directors and affiliates under our stock option plans to purchase an aggregate of 314,831 shares of
class A common stock, which are outstanding or are to be granted effective upon the consummation of this offering. and 153,333 outstanding shares of non-vested stock
that are subject to forfeiture, but do not include options granted to other employees under such plans to purchase an additional aggregate of 129,500 shares of class A
common stock under such plans. See "Management—Executive Compensation—Stock Option Plans."
31
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data shown below should be read together with our "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and respective notes included elsewhere in this prospectus. The selected consolidated statements of operations
data for the years ended December 31, 2002, 2003 and 2004 and the consolidated balance sheet data at December 31, 2003 and 2004 have been derived from our
audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data at December 31, 2002 have been derived
from audited consolidated financial statements not included in this prospectus. Our consolidated financial statements for the years ended December 31, 2002, 2003 and
2004 have been audited and reported upon by Ernst & Young LLP, an independent registered public accounting firm. The selected consolidated statements of
operations data for the years ended December 31, 2000 and 2001 and the consolidated balance sheet data at December 31, 2000 and 2001 have been derived from
unaudited financial statements not included in this prospectus. The selected consolidated statements of operations data for the nine months ended September 30, 2004
and 2005 and the balance sheet data at September 30, 2005 have been derived from our unaudited consolidated financial statements included elsewhere in this
prospectus and include all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of the results of the interim periods. The data
shown below are not necessarily indicative of results to be expected for any future period.
Year Ended December 31,
2000
2001
2002
Nine Months Ended September 30,
2003
2004
2004
2005
(in thousands, except share data)
Statements of Operations:
Revenue
Restaurant sales
Franchise royalties and fees
67,757 $
—
131,331 $
267
203,892 $
753
314,027 $
1,493
468,579 $
2,142
341,750
1,503
Total revenue
67,757
131,598
204,645
315,520
470,721
343,253
454,382
Food, beverage and packaging costs
Labor costs
Occupancy costs
Other operating costs
General and administrative expenses
Depreciation and amortization
Pre-opening costs
Loss on disposal of assets
23,920
24,370
5,825
10,612
15,746
4,985
2,811
49
45,236
46,048
11,742
21,553
20,687
8,730
2,245
79
67,681
66,515
18,716
29,791
25,803
11,260
1,022
1,489
104,921
94,023
25,570
43,527
34,189
15,090
1,631
4,504
154,148
139,494
36,190
64,274
44,837
21,802
2,192
1,678
111,414
101,756
26,192
46,108
29,190
15,807
1,561
1,364
146,863
129,678
34,517
59,408
37,212
20,392
1,247
1,806
Total costs and expenses
88,318
156,320
222,277
323,455
464,615
333,392
431,123
Income (loss) from operations
Interest income
Interest expense
(20,561)
1,460
(441)
(24,722)
735
(13)
(17,632)
444
(101)
(7,935)
249
(28)
6,106
211
(191)
9,861
172
(191)
23,259
23
(663)
Income (loss) before income taxes
Benefit for income taxes(1)
(19,542)
—
(24,000)
—
(17,289)
—
(7,714)
—
6,126
—
9,842
—
22,619
10,815
(19,542) $
(24,000) $
(17,289) $
(7,714) $
6,126 $
9,842
$
33,434
(19,542) $
(24,000) $
(17,289) $
(7,714) $
4,484 $
7,174
$
24,754
(1.32) $
(1.32) $
(0.87) $
(0.87) $
(0.44) $
(0.44) $
(0.17) $
(0.17) $
0.08 $
0.08 $
0.13
0.13
$
$
0.42
0.42
Net income (loss)
$
$
Historical income (loss) available to common
shareholders(2)
$
Historical earnings (loss) per common
share(2)
Basic
$
Diluted
$
Shares used in computing historical earnings
(loss) per common share(2)
Basic
Diluted
Pro forma income (loss) available to common
shareholders(3)
$
Pro forma earnings (loss) per common
share(3):
Basic
Diluted
Shares used in computing pro forma earnings
(loss) per common share(3):
Basic
Diluted
$
$
14,819,978
14,819,978
27,719,316
27,719,316
39,324,552
39,324,552
46,683,077
46,683,077
55,893,078
56,090,651
$
55,060,651
55,258,224
452,593
1,789
58,372,266
58,517,125
(19,542) $
(24,000) $
(17,289) $
(7,714) $
6,126 $
7,174
$
33,434
(3.96) $
(3.96) $
(2.60) $
(2.60) $
(1.32) $
(1.32) $
(0.50) $
(0.50) $
0.24 $
0.24 $
0.39
0.39
$
$
1.27
1.27
4,939,993
4,939,993
9,239,772
9,239,772
13,108,184
13,108,184
32
15,561,026
15,561,026
25,454,284
25,520,142
18,353,550
18,419,408
26,280,680
26,328,966
At September 30,
2005
At December 31,
2000
Balance Sheet Data:
Total current assets
Total assets
Total current liabilities
Total liabilities
Total shareholders' equity
$
$
$
$
$
25,546
107,117
10,306
13,863
93,254
2001
$
$
$
$
$
10,819
146,403
14,913
22,706
123,697
2002
$
$
$
$
$
20,221
194,172
20,806
32,918
161,254
2003
$
$
$
$
$
7,833
249,014
38,266
57,506
191,508
2004
$
$
$
$
$
10,332
329,653
38,663
67,087
262,566
$
$
$
$
$
14,368
371,777
37,473
74,004
297,773
(1)
We are not a separate taxable entity for federal and most state income tax purposes and our results of operations are included in McDonald's consolidated federal and state income tax returns; however, the
provision for income taxes is calculated on a separate return basis. At December 31, 2004, we had incurred total NOLs of $139.4 million since our inception as a "C" corporation on January 1, 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 losses before McDonald's acquired over 80% of
our equity and will begin to expire in 2012. Through December 31, 2004, we recorded a valuation allowance to offset our deferred tax assets, including those related to the NOLs, net of deferred tax
liabilities. 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, resulting
in a net tax benefit of $10.8 million in our results of operations. During the nine months ended September 30, 2005, we also realized $8.5 million of SRLY losses, which reduced goodwill but did not impact
our results of operations.
(2)
Historical earnings (loss) per common share and shares used in computing historical earnings (loss) per common share do not reflect the effect of the Reclassification.
(3)
The pro forma earnings (loss) per common share and shares used in computing pro forma earnings (loss) per common share presented for the years ended December 31, 2000, 2001, 2002 and 2003 and the
nine months ended September 30, 2004 give retroactive effect to the one for three reverse common stock split to be executed as part of the Reclassification. The pro forma earnings (loss) per common share
and shares used in computing pro forma earnings (loss) per common share presented for the year ended December 31, 2004 and the nine months ended September 30, 2005 give retroactive effect to the
Reclassification.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Consolidated Financial Data" and our consolidated financial statements and related notes
included elsewhere in this prospectus. The discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to
differ materially from expectations. Factors that might cause such differences include those described under "Risk Factors," "Special Note Regarding Forward-Looking
Statements" and elsewhere in this prospectus.
Overview
Our revenue was $470.7 million in 2004, a 130% increase from 2002 and a 49% increase from 2003, driven by new store openings and increased average store
sales. During that three-year period, we opened a total of 237 stores. Increases in average store sales have occurred partly because the time it takes for our new stores to
ramp up has consistently shortened as we've grown and customers have learned about our brand, enabling new stores to open with higher average store sales. We've
also historically had strong growth in comp store sales, due mainly to an increase in the number of transactions processed at our registers.
As our revenue has increased, our expenses have increased as well. The most important factor affecting our food, beverage and packaging costs and other
restaurant operating costs is the price of ingredients critical to our menu, especially beef, chicken, cheese, avocados and beans. These five ingredients have historically
accounted for a substantial portion of our food, beverage and packaging costs. Other important ingredients that we use include tomatoes and pork. The absolute increase
in our expenses mostly reflected our growth, but other factors also contributed, such as changes in commodity costs driven by export / import restrictions affecting meat
supplies and weather conditions that affected growing seasons and drove some prices higher.
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. After we become a public company, we expect that
McDonald's will stop financing us, and we'll fund our growth with cash flow from operations and other sources. We also currently benefit from our McDonald's
relationship in other ways, such as pricing benefits for some products and services. If McDonald's ownership interest declines significantly, we'll lose an increasing
amount of these benefits. That will further increase our costs significantly. See "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."
How We Make Money: Restaurant Sales
Restaurant sales represent sales of food and drinks in stores operated by Chipotle, and does not include revenue from stores operated by franchisees (which
represented less than 1% of our revenue in each of the last three years). Restaurant sales increased considerably in the last three years, from $203.9 million in 2002, to
$314.0 million in 2003 and $468.6 million in 2004. For the first nine months of 2005, they were $452.6 million, 32.4% higher than the same period in 2004. Several
factors affect our restaurant sales in any period, including mainly the number of stores in operation and average store sales. Various factors influence sales at a given
store or group of stores, including increased customer recognition of our brand, our operational effectiveness, pricing, marketing and promotional efforts, local
competition and trade area demographics.
34
Expanding Store Base
Opening additional stores in existing and new U.S. markets has contributed substantially to our restaurant sales growth. We opened 57 stores in 2002, 76 stores in
2003, 104 stores in 2004 and 80 stores in 2005. We opened more stores in 2004 in part because, in certain markets, we were able to use McDonald's real estate
personnel and other resources to locate and obtain additional store sites. We did not use those resources in connection with openings in 2005. We plan to open between
80 and 90 stores in 2006. We may, however, not be able to open new stores as quickly as planned. See "Risk Factors—Risks Related to Our Business and
Industry—Our sales growth rate depends primarily on our ability to open new stores and is subject to many unpredictable factors." We have closed only five stores
during the past three years—two in 2002 and three in 2003—and have closed only six stores in total since we began operating. As we operate more stores, our rate of
expansion relative to the size of our store base will decline.
Our operating plan calls for new store openings throughout the year and our capital needs vary based on the types of stores we build and local market conditions.
We have urban stores, free-standing stores and suburban stores. Our suburban stores are either in-line, that is, located in a line of stores, or end-cap, that is, located at
the end of a line of stores. In 2004, we spent on average about $906,000 ($880,000 excluding land purchases) in development and construction costs per store. On
average, our free-standing stores cost about $1.2 million each, while our end-cap and in-line stores cost about $700,000 each. While free-standing and suburban end-cap
stores generally cost more to build than suburban in-line stores, those stores are often located in better trade areas, are more visible and generally attract more customers
in the start-up period. Urban stores, such as those in New York City and other downtown urban areas, are generally our most expensive stores, with average
development and construction costs of $1.3 million in 2004. Meeting our plan in the coming years will depend on various factors, including whether a given market is
new for us, the availability of appropriate sites, competition for those sites, construction schedules and costs, as well as other matters that are often outside our control,
such as local zoning and licensing requirements. As we expand into central urban areas, we expect our average costs to open new stores may increase due to the more
significant reconstruction work that often needs to be done at those sites.
Historically, our new stores have opened with an initial ramp-up period typically lasting up to 24 months or more, during which they generated sales below the
levels at which we expect them to normalize. However, the period of time it takes for our stores in existing markets to ramp up has consistently shortened as we've
grown and customers have learned about our brand, enabling new stores in those markets to open with higher average store sales. For example, average sales for new
stores in the first 90 trading days increased 29.4% to $303,390 for stores opened in 2004 from $234,450 for stores opened in 2002. In new markets, however, our
ramp-up periods and average sales for new stores are less predictable as a result of our less extensive knowledge of those markets and lower brand awareness, among
other factors. Another important factor in declining ramp-up periods is the ongoing evolution of our real estate selection process. As we've gained experience, we've
been able to adopt more effective criteria in deciding where to build each store, and have adjusted our mix of store types to support our brand development. In addition,
our national brand awareness has increased and our store opening strategies have become more effective. For example, when we open a new store, we plan a range of
activities to introduce our food to the local community to help create interest in the store from the start.
Increased Average Store Sales
The other important driver of the growth in our restaurant sales has been increased average store sales, which we define as the average trailing 12-month sales for
stores in operation for at least 12 full
35
months. The following graphs show our average store sales in each of the last three years and for the trailing 12-month period ended September 30, 2004 and 2005.
Average store sales have increased partly because ramp-up periods have become consistently shorter as new stores have opened with higher average sales for the
reasons described under "—Expanding Store Base" above. Average store sales increases have also been driven by strong growth in comp store sales, due mainly to
increased numbers of transactions at our stores, as described below. While we believe most of our sales increases will come from opening new stores, we'll continue to
focus on ways to improve the customer experience at our existing stores so we can increase comp store sales. For additional information about how we intend to do that,
see "What We Do—Where We Go From Here—Expanding Our Operations and Sales—Selling More Food Every Day."
Comp Stores Sales Growth. Comp store sales refer to year-over-year sales comparisons for stores in operation for at least 12 full months and do not include sales
during the portion of the month in which a store begins operating. Historically, increases in comp store sales, which were 10.2% in 2005, 13.3% in 2004, 24.4% in 2003
and 17.0% in 2002, accounted for a substantial portion of our restaurant sales growth. In 2003, 45.5% of our restaurant sales growth resulted from comp store sales
increases, as compared to 27.0% in 2004 and 26.6% in the first nine months of 2005. We anticipate that comp store sales growth for fiscal 2006 as a percentage will be
in the low- to mid-single digits. We may, however, experience lower rates of growth or our comp store sales growth may decline. See "Risk Factors—Risks Related to
Our Business and Industry—Our sales and profit growth could be adversely affected if comp store sales are less than we expect."
We believe that our strong historical comp store sales growth was mainly due to the growing appeal of our core menu items, increasing consumer understanding
and appreciation of our passion for good, higher-quality food and our focus on building customer relationships "one burrito at a time." Comp store sales in 2004 and the
first nine months of 2005 grew at a slower rate than prior years and represented a smaller percentage of the growth in our total restaurant sales than in prior years. This
slower growth is due to new store average sales in the first 12 months increasing over time and baseline restaurant volumes increasing due to the cumulative impact of
positive comp store sales in each of the last three years and the first nine months of 2005. As a result of the effects of these trends, we believe that comp store sales
likely will not continue to increase at the rates achieved over the past several years. Comp store sales also increase when we introduce modest price increases to our
menu. In each of 2002, 2003 and 2004, we raised our prices both to adjust for inflation and to cover food, beverage and packaging cost increases and other operating
costs. For example, we raised prices in some markets where we began to use more expensive, naturally raised chicken in 2003 and 2004. Our focus on "food with
integrity" may cause us to charge higher prices in some cases because right now there are limited supplies of naturally raised and sustainably grown ingredients. See
"Risk Factors—Risks Related to Our Business and Industry—New stores, once opened,
36
may not be profitable, and the increases in average store sales and comp store sales that we've experienced in the past may not be indicative of future results."
Discounting. Unlike many of our competitors in the restaurant industry, we do not offer discounts or "value meal" options. Instead, we have promotions that
allow customers to sample our food for free. We believe that one of the most important ways for us to increase sales is getting people to try our food and learn about the
quality of our ingredients and preparation methods. We include the cost of the food we give away in our other operating costs.
Seasonality
Our revenue fluctuates as a result of seasonal and other factors. See "—Quarterly Financial Data" below.
Franchise Royalties and Fees
We have three franchisees that, in the aggregate, operate eight of our stores. Franchise royalties and fees represented less than 1% of our revenue in each of the last
three years and first nine months of 2005. Although franchising is currently not an important component of our strategy, we constantly try to improve our performance
and we may decide to license more stores to franchisees in the future. In the near term, however, we do not expect that we'll have significant increases in these revenues.
In addition, if McDonald's ceases to own a majority of our outstanding common voting stock or if we cease to be an affiliate of McDonald's, under the terms of our
franchise agreements, our franchisees (each of whom is also a McDonald's franchisee) must either sell either their Chipotle franchise to someone who agrees to perform
their obligations under the franchise agreements (at fair market value determined in the manner provided in the franchise agreements) or sell their McDonald's franchise
within 24 months after the relevant triggering event. If our franchisees don't sell either franchise within the 24-month period, their franchise agreements with
McDonald's will terminate automatically.
How We Spend Money: Food, Beverage and Packaging Costs, Labor, Other Restaurant Operating Costs and Other Expenses
We have four basic types of expense: food, beverage and packaging costs; labor; other restaurant operating costs (consisting of occupancy costs and other
operating costs); and other expenses (consisting of general and administrative expenses, depreciation and amortization, pre-opening costs and gains or losses on asset
disposals). As we do more business, open more stores and hire more people, our food, beverage and packaging costs, labor and other restaurant operating costs increase.
We've grown considerably over the last three years, and our combined food, beverage and packaging costs, labor and other restaurant operating costs have followed
pace, increasing from $182.7 million in 2002 to $268.0 million in 2003, and to $394.1 million in 2004. These expenses for the first nine months of 2005 were
$370.5 million, 29.8% higher than the same period in 2004. Our other expenses have also increased, from $39.6 million in 2002 to $55.4 million in 2003, and to
$70.5 million in 2004. Other expenses for the first nine months of 2005 were $60.7 million. As we continue to grow, we expect that other expenses will also increase,
but may decline as a percentage of revenue.
Food, Beverage and Packaging Costs
Food, beverage and packaging costs are the largest component of our expenses and represented about 33.1% of total revenue in 2002, 33.3% in 2003, 32.7% in
2004 and 32.3% in the first nine months of 2005. The most important factor affecting our food, beverage and packaging costs is the price volatility of our key
ingredients. Our food, beverage and packaging costs change as a result of fluctuations in commodity and material costs, but also depend in part on the success of our
cost management efforts. Since we use higher-quality ingredients that we purchase from carefully selected suppliers, and are increasing our use of
37
more expensive, naturally raised and sustainably grown ingredients, our expenses are often higher than those of other restaurants that use a higher proportion of
commodity-priced ingredients.
Like the rest of the restaurant industry, our expenses fluctuate from time to time due to external events. In 2003, our food expense was affected by higher avocado
prices reflecting a poor growing season due to inclement weather and pestilence. In 2004, prices for chicken (our most-used meat ingredient) rose significantly due to a
ban by Asian countries on their chicken exports following outbreaks of avian flu. The more limited worldwide chicken supply, combined with continued high demand,
drove prices upward. Beef prices have also been higher in the past year due to U.S. restrictions on Canadian imports in the wake of incidents of "mad cow" disease in
Canadian cattle herds. Weather is also a factor, especially when severe conditions limit the growing season or crop quality. This happened in 2004, when hurricanes in
some parts of the United States damaged tomato crops and drove prices higher. Unlike many other restaurants, we decided not to limit our use of tomatoes (and not to
pass the cost increase on to customers). These and other cost increases negatively affected our margins in 2004. Similarly, hurricanes Katrina and Rita in the fall of
2005 have resulted in higher short-term chicken prices and higher diesel prices, which may affect our suppliers, causing them to increase the price of other ingredients.
We try to minimize the volatility of our food expense by working closely with our suppliers and using a mix of forward, fixed and formula pricing protocols.
Under forward pricing protocols, our suppliers and we agree on prices for the ingredients or other raw materials that they sell to us at specified times in the future
(possibly weeks or months in advance). Whether the price goes up, down or remains stable over the period, we pay that agreed-upon price at the time we make our
purchase. Under fixed pricing protocols, we agree a fixed price with our supplier for the duration of that protocol. Under formula pricing protocols, the prices we pay
are based on a specified formula related to the prices for the goods; for example, prices may be tied to the spot price for the ingredient or raw materials in the
commodities market on the date of purchase. Though we do not have long-term supply contracts or guaranteed purchase amounts, our pricing protocols with suppliers
can remain in effect for periods ranging from one month to a year, depending on the outlook for prices of the particular ingredient. We also sometimes buy supplies at
current market or spot prices.
We've also tried to expand, where necessary, the number of suppliers for our ingredients and other raw materials to assure supply and freshness and mitigate
pricing volatility. Our focus on "food with integrity" has constrained our sourcing flexibility to some extent. We've been careful in expanding that initiative so that we
don't outpace available supply. Some of our ingredients come from small farms that have facilities that must comply with federal or industry standards for classification
as natural, and they may face economic or other limits on their growth. We believe that consumers' increasing concern about where and how food is raised,
environmental management and animal husbandry will foster demand for these foods, which will in turn attract the interest and capital investment of larger farms and
suppliers. That said, we understand that we'll continue to be at the forefront of this trend and must balance our interest in advancing "food with integrity" with our desire
to provide great food at reasonable prices. If our focus resonates with consumers, it should improve our sourcing flexibility, although we'd expect that these kinds of
ingredients and other raw materials will remain more expensive than commodity-priced equivalents for some time to come.
Beverage and packaging costs, while smaller than food costs, are also a significant portion of these costs. McDonald's relationship with Coca-Cola has helped us
contain our beverage costs and as long as we are a consolidated subsidiary of McDonald's, we expect to continue to have that pricing advantage. See "Risk
Factors—Risks Relating 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." Food, beverage and packaging costs also include
freight costs, which can be higher than those of some of our competitors in part because we rely primarily on perishable ingredients rather than on processed food
products. These costs have also been affected by higher diesel prices that have in some cases resulted in the imposition of surcharges on
38
the delivery of commodities to our distributors, which they have generally passed on to us to the extent permitted under our arrangements with them.
Labor Costs
Labor costs are the second-largest component of our expenses, and represented 32.5% of total revenue in 2002, 29.8% in 2003, 29.6% in 2004 and 28.5% in the
first nine months of 2005. Labor costs include wages for our store managers, assistant store managers and crew, bonuses (which we pay quarterly), taxes and benefits.
As we've added stores, our average number of hourly employees increased from about 3,000 in 2002 to 5,100 in 2003, 8,100 in 2004, and to about 9,900 in the first nine
months of 2005. We generally have two shifts at most of our stores, which helps us better predict our store payroll expenses and in return provides our employees with
more stable and predictable work hours. Some of the benefits we offer to our hourly employees are a bit unusual, such as English and Spanish lessons, free food and the
opportunity to participate in our 401(k) plan. Although these and other benefits may increase our labor costs, we believe they help us to attract and keep good store
managers and crew, which is important to our future success. We expect that some of these costs, such as workers compensation, will increase as McDonald's
ownership interest decreases. See "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."
Occupancy Costs
Occupancy costs represented 9.1% of total revenue in 2002, 8.1% in 2003, 7.7% in 2004 and 7.6% in the first nine months of 2005. These costs include rent, real
estate taxes, property taxes and common area maintenance charges. Occupancy costs generally increase as the number of stores increases, but have tended to decline as
a percentage of sales due to our increasing average store sales.
Other Operating Costs
Other operating costs represented 14.6% of total revenue in 2002, 13.8% in 2003, 13.7% in 2004 and 13.1% in the first nine months of 2005. These costs include
utilities, marketing and promotional costs (including free samples), bank fees, credit and debit card processing fees, store supplies, repair, maintenance and similar
costs. One of the unique employee benefits included in other operating costs is our company car program, which is available to store managers who have been with us
for more than four years. Although this and other similarly unusual benefits may increase our other operating costs, we believe it helps us to attract and keep good store
managers, which is important to our future success. Other operating costs generally increase as sales increase and as the number of stores increases, but have tended to
decline as a percentage of sales due to our increasing average store sales.
General and Administrative Expenses
General and administrative expenses include the corporate and administrative functions that support our stores, including employee wages and benefits, travel,
information systems, recruiting and training costs, corporate rent, the $4.0 million credit and debit card liability reserve, professional fees, supplies and insurance and
also include costs for store accounting services we received from McDonald's. General and administrative expenses represented about 12.6% of total revenue in 2002,
10.8% in 2003, 9.5% in 2004 and 8.2% in the first nine months of 2005.
As a public company, we'll incur legal, accounting and other expenses that we did not incur as a majority-owned subsidiary of McDonald's. We expect that these
additional expenses will be a few million dollars in each of 2006 and future years.
39
Depreciation and Amortization
Depreciation and amortization are periodic non-cash charges that represent the reduction in usefulness and value of a tangible or intangible asset. Depreciation and
amortization represented about 5.5% of total revenue in 2002, 4.8% in 2003, 4.6% in 2004 and 4.5% in the first nine months of 2005. Our principal depreciation and
amortization charge relates to capital expenditures for store construction.
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
40
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 of deconsolidation, we'll reduce the
receivable recorded in equity and not recognize any benefit in the consolidated statement of operations. See "Certain Relationships and Related Party
Transactions—Tax Allocation Agreement."
Other Factors Affecting Our Results
Equity Compensation Expenses
Effective January 1, 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based
Payment ("SFAS 123R"), before its required date of adoption, using the modified-prospective transition method. Under this transition method, our 2005 equity
compensation costs of $0.3 million related to our stock option plan includes the portion vesting in the period for (i) all share-based payments granted prior to, but not
vested as of January 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and (ii) all share-based payments
granted after January 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The following table illustrates the effect on
net income (loss) as if the fair-value-based method had been applied to all outstanding and unvested awards in each period.
Year Ended December 31,
2002
2003
2004
(in millions)
Net income (loss), as reported
Stock-based employee compensation expense
$
(17.3)
(0.2)
$
(7.7)
(0.4)
$
6.1
(0.5)
Pro forma net income (loss)
$
(17.5)
$
(8.1)
$
5.6
We also have other equity compensation expenses. During the first nine months of 2005, we granted 153,333 shares of our common stock, which vest in equal
annual installments over three years, and recognized $0.9 million of related compensation expense. In 2004, we adopted a stock appreciation rights plan and granted
stock appreciation rights (SARs) in respect of 167,100 shares of common stock, which vest three years from the date of grant and expire after five years and six months.
The common stock had a fair value of $22.35 per share on the date of grant. Our compensation expense related to these grants of SARs was $0.2 million for 2004 and
$0.3 million for the first nine months of 2005. In connection with this offering, we intend to convert these SARs, which we have accounted for as a liability, into options
to purchase our class A common stock. The options granted to purchase 167,100 shares will have terms consistent with the original grants of SARs, including the same
vesting schedule (vesting in full in July 2007) and an exercise price of $22.35 per share. We'll compare the fair value of the stock appreciation rights immediately before
that conversion to the fair value of the options, and recognize any incremental compensation cost. We do not expect that this will result in additional compensation cost
at the conversion date. Once converted, we'll account for the options as an equity award. In 2001, McDonald's issued options for its common stock to certain of our
employees under its stock ownership option plan, all of which were fully vested by the end of 2005, expire ten years from the date of grant and have an exercise price of
$29.43 per share of McDonald's common stock. The McDonald's options were granted with an exercise price equal to the fair market value of McDonald's common
stock on the date of grant and therefore had no intrinsic value on that date. Accordingly, we did not reflect the fair value of the expenses related to this grant in our
financial statements. We paid McDonald's $2.4 million for our cost of participating in its plan, which we expensed equally over the four-year vesting period.
41
The fair value of the non-vested common stock granted in March 2005 to Monty Moran, our President and Chief Operating Officer, was estimated by
management. We did not obtain contemporaneous valuations by an unrelated valuation specialist. Instead, management's valuation framework relied principally on data
compiled as part of its review of strategic options in early 2005, prior to our determination to proceed with this offering. Because that data reflected market conditions
contemporaneous with the grant of the non-vested common stock, as well as our then-current projections of our results and financial condition, management concluded
that retention of a separate valuation specialist for purposes of the grant was not necessary.
Determining the fair value of our common stock requires making complex and subjective judgments, particularly since there is no public trading market for our
common stock. We used the market approach to estimate the value of the enterprise when the 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.
Based on the above analysis, management determined that the per share fair value of the non-vested common stock was $6.50 ($19.50 after giving retroactive
effect to the Reclassification). The difference between the fair value estimated by management (after giving retroactive effect to the Reclassification) and the offering
price range shown on the cover page of this prospectus is primarily due to the negative impact on forecasted income resulting from our implementation in 2006 of
FASB Staff Position No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (FSP 13-1), which was issued in October 2005. FSP 13-1
requires lease rental costs incurred prior to a store opening to be recognized as rental expense, whereas we had previously capitalized these costs. The difference also
reflects to a lesser extent the dilutive effect of this offering, which management was not able to estimate at the time of the March grant.
Claims for Fraudulent Credit Card Transactions
In August 2004, the acquiring bank that processes our credit and debit card transactions informed us that we may have been the victim of a possible theft of credit
and debit card data. To date, we have received claims through the acquiring bank with respect to fewer than 2,000 purportedly fraudulent credit and debit card charges
allegedly arising out of this matter in an aggregate amount of about $1.2 million. We've also incurred $1.3 million of expense in connection with fines imposed by the
Visa and MasterCard card associations on the acquiring bank. In 2004, we recorded charges of $4.0 million to establish a reserve for claims seeking reimbursement for
purportedly fraudulent credit and debit card charges, the cost of replacing cards, monitoring expenses and fees, and fines imposed by Visa and MasterCard. All of the
reimbursement claims are being disputed, although we've not formally protested all of the charges. At November 30, 2005, after charging these expenses against the
reserve, the remaining reserve was $1.9 million, which does not take into account a fine of $0.4 million assessed by MasterCard in December 2005 that we expect to
charge against that reserve. In addition to the reserve, we've also incurred about $1.5 million of additional expenses in this matter, including $1.3 million for legal fees,
bringing our total expense relating to this matter to $5.5 million. We have not reserved any additional amounts to date in 2005.
We may in the future become subject to additional claims for purportedly fraudulent transactions arising out of this matter. We have no way to predict the level of
claims or the number or nature of proceedings that may be asserted against us, nor can we quantify the costs that we may incur in connection with investigating,
responding to and defending any of them. The ultimate outcome of this matter could differ materially from the amounts we've recorded in our reserve and could have a
material adverse effect
42
on our financial results and condition. See "Risk Factors—Risks Related to Our Business and Industry—We may have experienced a security breach with respect to
certain customer credit and debit card data, and we've incurred and may continue to incur substantial costs as a result of this matter. We may also incur costs resulting
from other security risks we may face in connection with our electronic processing and transmission of confidential customer information."
Critical Accounting Policies and Estimates
We describe our significant accounting policies, including our critical accounting policies, in note 1 of our consolidated financial statements. Critical accounting
policies are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the
effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under
the circumstances. Actual results may differ from these estimates, and we might obtain different estimates if we used different assumptions or conditions. We believe
the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
Leasehold Improvements, Property and Equipment
We state the value of our leasehold improvements, property and equipment, including primarily store equipment, furniture, fixtures and smallwares, and our
leasehold improvements at cost, minus accumulated depreciation and amortization. We calculate depreciation using the straight-line method of accounting over the
estimated useful lives of the related assets. We amortize our leasehold improvements using the straight-line method of accounting over the shorter of the lease term
(including reasonably assured renewal periods) or the estimated useful lives of the related assets. We generally use estimated useful lives of between three and seven
years for equipment; between three and ten years for furniture and fixtures; and between three and 20 years for leasehold improvements and buildings. We expense
repairs and maintenance as incurred, but capitalize major improvements and betterments. We make judgments and estimates related to the expected useful lives of these
assets that are affected by factors such as changes in economic conditions and changes in operating performance. If we change those assumptions in the future, we may
be required to record impairment charges for these assets.
Impairment of Long-Lived Assets
We review property and equipment, including leasehold improvements, for impairment when events or circumstances indicate these assets might be impaired. We
test impairment using historical cash flow and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. We perform this
analysis at the store level to determine whether there are any indicators of permanent impairment. In determining future cash flows, we make significant estimates with
respect to future operating results of each store over its remaining lease term. If we determine that assets are impaired, we then measure the impairment charge by
calculating the amount by which the asset-carrying amount exceeds its fair value, as determined by an estimate of discounted future cash flows. We use estimates and
assumptions that are subject to a high degree of judgment in determining asset fair values. If we change those assumptions in the future, we may be required to record
impairment charges for these assets.
Goodwill
Goodwill resulted primarily from McDonald's purchase of Chipotle. The most significant purchases generating goodwill were completed prior to 2001. Goodwill is
not subject to amortization. We do, however, test goodwill for impairment at least annually and whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. We completed our most recent impairment test in December 2004, and determined that there were no impairment losses related to
goodwill or other indefinite lived assets. In assessing the recoverability of goodwill, we use projections about estimated
43
future cash flows and other factors to determine the fair value of the respective assets. We project estimated future cash flows using significant assumptions, including
future revenue and expenses. If we change these estimates or related projections in the future, we may be required to record impairment charges for goodwill.
Leases
We lease most of our store locations. We account for our leases under FASB Statement No. 13,Accounting for Leases ("SFAS 13") and subsequent amendments,
which require that our leases be evaluated and classified as operating or capital leases for financial reporting purposes. We recognize rent expense for our operating
leases, which have escalating rentals over the term of the lease (which includes reasonably assured renewal options), on a straight-line basis over the initial term. In
addition, the lease term is deemed to commence when we take physical possession of the leased property. We currently capitalize the straight-line rent amounts during
the period prior to store opening. We will, however, begin expensing these amounts beginning January 1, 2006 as a result of the issuance of FSP 13-1. We use a
consistent lease term when calculating depreciation of leasehold improvements, when determining straight-line rent expense and when determining classification of our
leases as either operating or capital. Contingent rents are generally amounts we must pay to landlords when we have sales in excess of certain thresholds stipulated in
certain store leases and are included in rent expense as they accrue. Some of our leases contain tenant improvement allowances. For purposes of recognizing tenant
improvement allowances, we amortize the incentives over their estimated useful lives. For tenant improvement allowances, we also record a deferred rent liability or an
obligation on our consolidated balance sheet.
Insurance Liability
We maintain, or in some cases McDonald's maintains on our behalf, various insurance policies for workers' compensation, employee health, general liability and
property damage. Pursuant to those policies, we're responsible for losses up to certain limits for our general liability and property damage insurance and are required to
estimate a liability that represents our ultimate exposure for aggregate losses below those limits. This liability is based on our estimates of the ultimate costs to be
incurred to settle known claims and claims not reported as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions
and factors, including historical trends, actuarial assumptions and economic conditions. If actual trends differ from our estimates, our financial results could be affected.
Income Taxes
As a subsidiary of McDonald's, we are not a separate taxable entity for federal or most state income tax purposes. Consequently, McDonald's includes our results
of operations in its consolidated federal and state income tax returns. Our tax provision is computed based on a separate return basis. We've accounted for, and currently
account for, income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109") . SFAS 109
established financial accounting reporting standards for the effects of income taxes resulting from an enterprise's activities during the current and preceding years. It
requires an asset and liability approach for financial accounting and reporting of income taxes. We recognize deferred tax liabilities and assets for the future
consequences of events that have been recognized in our consolidated financial statements or McDonald's tax returns. If the future consequences of differences between
financial reporting basis and tax basis of our assets and liabilities result in a net deferred tax asset, we evaluate the probability of our ability to realize the future benefits
indicated by that asset. If it is more likely than not that some portion or all of the deferred tax asset will not be realized, we'll record a valuation allowance related to a
deferred tax asset. Our ability to realize that net deferred tax asset generally depends on whether we have enough taxable income of an appropriate character within the
carry-forward period permitted by the tax law. Unless we have enough taxable income to offset the deductible amounts and carry forwards, the related tax benefits will
expire
44
unused. We evaluate both positive and negative evidence in making a determination as to whether it is more likely than not that all or some portion of the deferred tax
asset will not be realized, and we measure deferred items based on enacted tax laws. This evaluation requires us to project our taxable income sufficiently to realize the
tax assets. The preparation of the projections requires considerable judgment and is subject to change to reflect future events and changes in tax laws.
Reserves / Contingencies for Litigation and Other Matters
We are involved in various claims and legal actions that arise in the ordinary course of business. These actions are subject to many uncertainties, and we cannot
predict the outcomes with any degree of certainty. Consequently, we were unable to ascertain the ultimate aggregate amount of monetary liability or financial impact
with respect to these matters at December 31, 2004 and at September 30, 2005. Once resolved, however, these actions may affect our operating results and cash flows.
In addition, we're involved in claims relating to the possible theft of our customers' credit and debit card data. In 2004, we recorded charges of $4.0 million to establish
a reserve for claims seeking reimbursement for purportedly fraudulent credit and debit card charges and the cost of replacing cards and monitoring expenses and fees.
At November 30, 2005, the remaining reserve was $1.9 million, which does not take into account a fine of $0.4 million assessed by MasterCard in December 2005 that
we expect to charge against that reserve. As the situation develops and more information becomes available, the amount of the reserve may increase or decrease
accordingly. See "Risk Factors—Risks Related to Our Business and Industry—We may have experienced a security breach with respect to certain customer credit and
debit card data, and we've incurred and may continue to incur substantial costs as a result of this matter. We may also incur costs resulting from other security risks we
may face in connection with our electronic processing and transmission of confidential customer information."
45
How We Did: Results of Operations
Our operating results for 2002, 2003 and 2004 and the nine months ended September 30, 2004 and 2005 are expressed as a percentage of total revenue below:
Nine Months Ended
September 30,
Year Ended December 31,
2002
Restaurant sales
Franchise royalties and fees
2003
99.6%
0.4
Total revenue
2004
99.5%
0.5
2004
99.5%
0.5
99.6%
0.4
2005
99.6%
0.4
100.0
100.0
100.0
100.0
100.0
Labor costs
Occupancy costs
Other operating costs
General and administrative expenses
Depreciation and amortization
Pre-opening costs
Loss on disposal of assets
33.1
32.5
9.1
14.6
12.6
5.5
0.5
0.7
33.3
29.8
8.1
13.8
10.8
4.8
0.5
1.4
32.7
29.6
7.7
13.7
9.5
4.6
0.5
0.4
32.5
29.6
7.6
13.4
8.5
4.6
0.5
0.4
32.3
28.5
7.6
13.1
8.2
4.5
0.3
0.4
Total costs and expenses
108.6
102.5
98.7
97.1
94.9
Food, beverage and packaging costs
Income (loss) from operations
Interest income
Interest expense
(8.6)
0.2
—
(2.5)
0.1
—
1.3
—
—
2.9
0.1
(0.1)
5.1
—
(0.1)
Income (loss) before income taxes
Benefit for income taxes
(8.4)
—
(2.4)
—
1.3
—
2.9
—
5.0
2.4
Net income (loss)
(8.4)%
(2.4)%
1.3%
2.9%
7.4%
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
The table below presents our operating results for the nine months ended September 30, 2004 and 2005 and the related period-to-period changes:
Nine Months Ended
September 30,
2004
Increase/
(Decrease)
2005
% Increase/
(Decrease)
(in millions, except percentages)
Restaurant sales
Food, beverage and packaging costs
Labor costs
Occupancy costs
Other operating costs
General and administrative expenses
Depreciation and amortization.
Pre-opening costs
Loss on disposal of assets
Net interest expense
Benefit for income taxes
$
341.8
111.4
101.8
26.2
46.1
29.2
15.8
1.6
1.4
—
—
*
Not meaningful.
46
$
452.6
146.9
129.7
34.5
59.4
37.2
20.4
1.2
1.8
0.6
10.8
$
110.8
35.5
27.9
8.3
13.3
8.0
4.6
(0.4)
0.4
0.6
10.8
32.4%
31.8
27.4
31.8
28.8
27.5
29.0
(20.1)
32.4
n/m*
n/m*
Restaurant Sales. Of the $110.8 million increase in restaurant sales, $29.4 million was due to an increase in comp store sales in the first nine months of 2005
compared to the 2004 period, $29.3 million related to the impact of non-comparable sales at stores opened in January through August 2004, $27.2 million was due to
stores opened in September through December 2004 and $25.0 million was due to stores opened in 2005. Average store sales for the trailing 12-month period ended
September 30, 2005 increased 3.0% to $1,406,000 from $1,365,000 for the trailing 12-month period ended September 30, 2004, driven primarily by comp store sales
growth of 8.7% that reflected increasing nationwide awareness of our brand, which also enabled new stores to open with higher average sales. A substantial majority of
the comp store sales growth was due to an increase in the number of transactions, and the remainder was driven primarily by menu price increases.
Food, Beverage and Packaging Costs. Food, beverage and packaging costs increased due to the increase in restaurant sales because we used more ingredients
and packaging as a result of the addition of new stores in the last three months of 2004 and the first nine months of 2005, comp store sales increases and increasing sales
at stores opened in the first nine months of 2004 that were not in operation for 12 full months in the first nine months of 2005. As a percentage of total revenue, food,
beverage and packaging costs decreased slightly to 32.3% in the first nine months of 2005 from 32.5% in the comparable 2004 period. This decrease was due primarily
to a decline in raw ingredient costs and menu price increases, partially offset by increased fuel costs.
Labor Costs. The period-to-period increase in labor costs was due to the growth in our store base, as our average number of hourly employees increased to about
9,900 in the first nine months of 2005 from about 7,900 in the comparable 2004 period. The effect was mainly due to the impact of staff hired for stores opened
throughout 2005 and the last quarter of 2004. As a percentage of total revenue, labor costs decreased to 28.5% in the nine first months of 2005 from 29.6% in the
comparable 2004 period, largely due to improved employee efficiency resulting from an increase in the number of transactions, which did not require a corresponding
increase in staff, and a gradual improvement over time in staffing our stores with the most appropriate number of crew members for each store.
Occupancy Costs. The $8.3 million period-to-period increase in occupancy costs was primarily due to an increase in rental costs relating to the opening of new
stores, inflationary pressures on rents and the opening of stores in more expensive locations such as New York City. As a percentage of total revenue, occupancy costs
remained flat at 7.6%.
Other Operating Costs. The $13.3 million period-to-period increase in other operating costs resulted primarily from the opening of new stores in the last three
months of 2004 and the first nine months of 2005. As a percentage of total revenue, other operating costs declined to 13.1% in the first nine months of 2005 from 13.4%
in the prior period, primarily due to the effect of higher average store sales on a partially fixed-cost base and improvements in store operations over time.
General and Administrative Expenses. The increase in general and administrative expenses primarily resulted from hiring more employees as we grew. As a
percentage of total revenue, these expenses decreased to 8.2% in the first nine months of 2005 from 8.5% in the comparable 2004 period, due primarily to the effect of
higher average store sales on a partially fixed-cost base.
Depreciation and Amortization. Depreciation and amortization increased primarily due to stores opened in the last three months of 2004 and the first nine months
of 2005. As a percentage of total revenue, depreciation and amortization decreased from 4.6% to 4.5%.
Pre-Opening Costs.
2004 period.
Pre-opening costs decreased principally because there were fewer store openings in the first nine months of 2005 than in the comparable
47
Loss on Disposal of Assets. The increase of $0.4 million in loss on disposal of assets was largely due to additional write-offs associated with investigating
potential store sites that we considered but subsequently rejected, as well as write-offs of obsolete equipment as a result of software upgrades.
Net Interest Expense. The increase in interest expense (net of interest income) was due to higher average borrowings from McDonald's in the first nine months of
2005 than in the comparable 2004 period, as McDonald's did not make any equity contributions in the first nine months of 2005.
Benefit for Income Taxes. During the first nine months of 2005, we determined that it was more likely than not that we would realize our deferred tax assets and
we reversed our valuation allowance. The benefit from the reduction of the valuation allowance, excluding the allowance on SRLY losses, was partially offset by our
current tax expense, which resulted in the realization of a net tax benefit of $10.8 million. The reduction of the valuation allowance for the SRLY losses during the first
nine months of 2005 reduced goodwill recorded in conjunction with McDonald's acquisition of us.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
The table below presents our operating results for the years ended December 31, 2003 and 2004 and the related year-to-year changes:
Year Ended December 31,
2003
2004
Increase/
(Decrease)
% Increase/
(Decrease)
(in millions, except percentages)
Restaurant sales
$
314.0
$
468.6 $
154.6
49.2%
Food, beverage and packaging costs
104.9
154.1
49.2
46.9
Labor costs
94.0
139.5
45.5
48.4
Occupancy costs
25.6
36.2
10.6
41.5
Other operating costs
43.5
64.3
20.8
47.7
General and administrative expenses
34.2
44.8
10.6
31.1
Depreciation and amortization.
15.1
21.8
6.7
44.5
Pre-opening costs
1.6
2.2
0.6
34.4
Loss on disposal of assets
4.5
1.7
(2.8)
(62.7)
Net interest income
0.2
—
(0.2)
n/a
Restaurant Sales. Of the $154.6 million year-to-year increase in restaurant sales, $62.8 million resulted from sales by 103 company-operated stores opened in
2004, $50.1 million resulted from additional sales in 2004 by 74 company-operated stores opened in 2003 and $41.7 million was due to comp store sales increases. A
substantial majority of the comp store sales growth was due to an increase in the number of transactions and the remainder was driven primarily by menu price
increases. Average store sales for 2004 increased 6.8% to $1,361,000 from $1,274,000 for 2003, driven primarily by comp store sales growth of 13.3% that reflected
increasing nationwide awareness of our brand, which also enabled new stores to open with higher average store sales.
Food, Beverage and Packaging Costs. Food, beverage and packaging costs increased because we used more ingredients and packaging as a result of comp store
sales increases, increasing sales at 74 stores opened in 2003 that were not in operation for 12 full months in the first six months of 2004 and sales at new stores opened
in 2004. As a percentage of total revenue, food, beverage and packaging costs decreased to 32.7% in 2004 from 33.3% in 2003. This decrease was largely driven by a
menu price increase that was partially offset by higher chicken, beef, cheese and tomato costs.
Labor Costs. The year-to-year increase in labor costs was due to the growth in our store base, as our average number of hourly employees increased to about
8,100 in 2004 from about 5,100 in 2003. The effect was particularly significant in 2004, when we opened a large number of stores and experienced the full-year
48
impact of staff hired for stores opened throughout 2003. As a percentage of total revenue, labor costs decreased slightly to 29.6% in 2004 from 29.8% in 2003, largely
due to improved employee efficiency resulting from an increase in the number of transactions, which did not require a corresponding increase in staff.
Occupancy Costs. The year-to-year increase in occupancy costs was primarily due to an increase in rental costs resulting from the large number of stores opened
in 2004 and the full-year impact in 2004 of such costs for stores opened throughout 2003. As a percentage of total revenue, occupancy costs decreased from 8.1% in
2003 to 7.7% in 2004, largely as a result of the effect of higher average store sales on a largely fixed-cost base.
Other Operating Costs. The year-to-year increase in operating costs was driven by the large number of stores opened in 2004 and the full-year impact in 2004 of
stores opened throughout 2003. As a percentage of restaurant sales, other operating costs declined slightly to 13.7% in 2004 from 13.8% in 2003, largely as a result of
the effect of higher average store sales on a partially fixed-cost base.
General and Administrative Expenses. The increase in general and administrative expenses primarily resulted from a $4.0 million charge to set up a reserve
related to potential credit card liabilities and hiring more employees as we grew. As a percentage of total revenue, these expenses decreased to 9.5% in 2004 from
10.8% in 2003 as a result of our ability to further leverage our existing corporate infrastructure over more stores.
Depreciation and Amortization. Depreciation and amortization increased primarily due to stores opened in 2004 and the full-year impact in 2004 of stores
opened throughout 2003. As a percentage of total revenue, depreciation and amortization decreased from 4.8% in 2003 to 4.6% in 2004, largely as a result of the effect
of higher average store sales on a largely fixed-cost base.
Pre-Opening Costs. The increase in pre-opening costs was principally due to the opening of 103 company-operated stores in 2004, an increase of 29
company-operated store openings from 2003.
Loss on Disposal of Assets.
2003.
Net Interest Income.
to 2003.
The decrease in loss on disposal of assets was largely due to a $2.0 million write-off associated with the closing of three stores in
The decrease in interest income (net of interest expense) was due to reduced earnings on average excess cash deposits in 2004 as compared
49
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
The table below presents our operating results for the years ended December 31, 2002 and 2003 and the related year-to-year changes:
Year Ended
December 31,
2002
Increase/
(Decrease)
2003
% Increase/
(Decrease)
(in millions, except percentages)
Restaurant sales
Food, beverage and packaging costs
Labor costs
Occupancy costs
Other operating costs
General and administrative expenses
Depreciation and amortization.
Pre-opening costs
Loss on disposal of assets
Net interest income
$
203.9
67.7
66.5
18.7
29.8
25.8
11.3
1.0
1.5
0.3
$
314.0
104.9
94.0
25.6
43.5
34.2
15.1
1.6
4.5
0.2
$
110.1
37.2
27.5
6.9
13.7
8.4
3.8
0.6
3.0
(0.1)
54.0%
55.0
41.4
36.6
46.1
32.5
34.0
59.6
n/m*
(35.6)
*
Not meaningful.
Restaurant Sales. Of the $110.1 million year-to-year increase in restaurant sales, $50.0 million was due to comp store sales increases, $32.5 million resulted from
additional sales in 2003 by 55 company-operated stores opened in 2002, and $27.5 million resulted from sales by 74 company-operated stores opened in 2003. Average
store sales for 2003 increased 20.6% to $1,274,000 from $1,056,000 for 2002, driven primarily by comp store sales growth of 24.4% that reflected increasing
nationwide awareness of our brand, which also enabled new stores to open with higher average store sales. A substantial majority of the comp store sales growth was
due to an increase in the number of transactions.
Food, Beverage and Packaging Costs. Food, beverage and packaging costs increased because we used more ingredients and packaging as a result of comp store
sales increases, increasing sales at 55 company-operated stores opened in 2002 that were not in operation for 12 full months in the first six months of 2003 and sales at
new stores opened in 2003. As a percentage of total revenue, food, beverage and packaging costs increased to 33.3% in 2003 from 33.1% in 2002. This increase was
largely due to cost increases for avocados and beef in 2003.
Labor Costs. The year-to-year increase in labor costs was due to the growth in our store base, as our average number of hourly employees increased to about
5,100 in 2003 from about 3,000 in 2002. The effect was significant in 2003, when we opened a large number of stores and experienced the full-year impact of staff
hired for stores opened throughout 2002. As a percentage of total revenue, labor costs decreased to 29.8% for 2003 from 32.5% for 2002 as a result of improved
employee efficiency resulting from an increase in the number of transactions, which did not require a corresponding increase in staff, and more effective scheduling of
employee shifts.
Occupancy Costs. The year-to-year increase in occupancy costs was primarily due to an increase in rental costs resulting from the opening of new stores in 2003
and the full-year impact in 2003 of such costs for stores opened throughout 2002. As a percentage of total revenue, occupancy costs decreased to 8.1% in 2003 from
9.1% in 2002, largely as a result of the effect of higher average store sales on a largely fixed-cost base.
Other Operating Costs. The year-to-year increase in other operating costs was primarily due to the opening of new stores in 2003 and the full-year impact in
2003 of stores opened throughout 2002. As a percentage of total revenue, these expenses decreased to 13.8% for 2003 from 14.6% for 2002, largely as a result of the
effect of higher average store sales on a partially fixed-cost base.
50
General and Administrative Expenses. The increase in general and administrative expenses was mainly the result of hiring more employees as we grew and
increased marketing expenses. As a percentage of total revenue, these expenses decreased to 10.8% in 2003 from 12.6% in 2002 as a result of our ability to further
leverage our existing corporate infrastructure over more stores and the impact of higher average store sales.
Depreciation and Amortization. Depreciation and amortization increased primarily due to stores opened in 2003 and the full-year impact in 2003 of stores
opened throughout 2002. As a percentage of total revenue, depreciation and amortization decreased to 4.8% in 2003 from 5.5% in 2002, largely as a result of the effect
of higher average store sales.
Pre-Opening Costs. The increase in pre-opening costs was primarily a result of an increased number of store openings in 2003 compared to 2002, as well as an
increase in average per-store opening costs in 2003 in order to promote brand awareness.
Loss on Disposal of Assets. A significant portion of the increase in loss on disposal of assets was attributable to having closed three stores in 2003 at a cost of
$2.0 million compared to two stores in 2002 at a cost of $0.9 million.
Net Interest Income.
to 2002.
The decrease in interest income (net of interest expense) was due to reduced earnings on average excess cash deposits in 2003 as compared
Quarterly Financial Data
The following table presents consolidated statements of operations data for each of the eleven quarters in the period ended September 30, 2005. The operating
results for any quarter are not necessarily indicative of the results for any subsequent quarter.
2003 Quarters Ended
Mar. 31
June 30
2004 Quarters Ended
Sept. 30
Dec. 31
Mar. 31
June 30
2005 Quarters Ended
Sept. 30
Dec. 31
Mar. 31
June 30
Sept. 30
(in millions)
Revenue
Operating income (loss)
Net income (loss)
Number of stores opened in quarter
Comp store sales growth
$
64.7 $
(4.0)
(3.9)
77.3 $
(0.6)
(0.5)
85.4
0.2
0.3
7
25.3%
10
24.6%
28
24.7%
$
88.1 $
(3.5)
(3.5)
101.4
0.7
0.5
31
23.4%
29
23.2%
$
117.2
4.9
5.0
26
13.2%
$
124.6
4.2
4.3
21
8.9%
$
127.5 $
(3.8)
(3.7)
28
10.4%
133.4
4.4
2.6
18
4.1%
$
156.3
9.3
25.7
17
9.6%
$
164.7
9.5
5.1
17
11.5%
Seasonal factors cause our revenue to fluctuate from quarter to quarter. Historically, our revenue is lower in the first and fourth quarters due, in part, to the holiday
season and because fewer people eat out during periods of inclement weather (the winter months) than during periods of mild or warm weather (the spring, summer and
fall months). Other factors also have a seasonal effect on our results. For example, stores located near colleges and universities generally do more business during the
academic year. The number of trading days can also affect our results. For example, 2004 was a leap year, which contributed about 3 percentage points of the increase
in our restaurant sales in February of that year. Overall, on a year-to-year basis, changes in trading days do not have a significant impact on our results.
Our quarterly results are also affected by other factors such as the number of new stores opened in a quarter and unanticipated events. New stores have lower
margins immediately following opening as a result of the expenses associated with opening new stores and their operating inefficiencies in the months immediately
following opening. Because we tend to open more new stores later in the fiscal year, our fourth quarter net income may be lower than in other quarters. In addition,
unanticipated events also impact our results. For example, in the second quarter of 2005, we determined that it was more likely than not that we would realize our
deferred tax assets and we reversed our valuation allowance, resulting in a net tax benefit of $16.7 million in that quarter. At December 31, 2004, we recorded charges
of $4.0 million
51
to establish a reserve for claims seeking reimbursement for purportedly fraudulent credit and debit card charges and for the cost of replacing cards and monitoring
expenses and fees, which reduced our operating income. Our loss on disposal of assets in the first quarter of 2004 decreased compared to the same period in 2003
largely due to a $2.0 million write-off associated with the closing of three stores in the first quarter of 2003. Accordingly, results for a particular quarter are not
necessarily indicative of results to be expected for any other quarter or for any year.
Liquidity and Capital Resources
Our primary liquidity and capital requirements are for new store construction, working capital and general corporate needs. We have financed these requirements
primarily through equity sales to McDonald's and others as well as through cash flows from operations. At September 30, 2005, we had $2.0 million in cash and cash
equivalents.
McDonald's and, to a lesser extent, some of our minority shareholders have historically provided us with significant financing. We have also historically obtained
short-term borrowings from McDonald's from time to time under documented lines of credit at an interest rate equal to the U.S. prime rate plus 100 basis points. We've
repaid these loans using a portion of the proceeds of private placements of our equity securities. In March 2004, April 2003 and April 2002, we issued shares of
common stock to McDonald's, certain directors, employees and other persons who were accredited investors (consisting of friends and family of our employees and
persons having business relationships with us), in each case as identified in our shareholders' agreement, for an aggregate purchase price of $65.0 million, $38.0 million
and $55.0 million, respectively.
We haven't required significant working capital because customers pay using cash or credit cards and because our operations do not require significant receivables,
nor do they require significant inventories due, in part, to our use of various fresh ingredients. In addition, we generally have the right to pay for the purchase of food,
beverage and supplies some time after the receipt of those items, generally within ten days, thereby reducing the need for incremental working capital to support
growth.
Operating Activities. Net cash provided by operating activities was $52.6 million for the nine months ended September 30, 2005 compared to $31.1 million for
the comparable period in 2004. The $22.2 million increase was primarily attributable to a $12.8 million improvement in income before income taxes driven by
increased average store sales and a $4.6 million increase in depreciation and amortization (a non-cash expense) due to significantly more stores in operation in the first
nine months of 2005 compared to the comparable 2004 period. Net cash provided by operating activities was $39.7 million for 2004 compared to $22.1 million for
2003. The $17.6 million increase in 2004 was primarily attributable to a $13.8 million improvement in net income (loss) driven primarily by increased average store
sales and a $6.7 million increase in depreciation and amortization (a non-cash expense) due to significantly more stores in operation in 2004 than in 2003. Net cash
provided by operating activities for 2002 was $6.0 million. The $16.1 million increase from 2002 to 2003 was primarily the result of an $9.6 million improvement in
our net loss driven by increased average store sales and a $6.4 million increase in accounts payable and cash overdraft due to the substantially greater number of store
openings in late 2003 than in late 2002.
Investing Activities. Net cash used in investing activities was $53.3 million for the nine months ended September 30, 2005 compared to net cash used in investing
activities of $72.2 million for the comparable period in 2004. The $18.9 million decrease related to lower capital expenditures in 2005 as we opened 52 stores in the
nine months ended September 30, 2005, compared with 75 stores in the nine months ended September 30, 2004. Net cash used in investing activities was $95.6 million
for 2004 compared to $86.1 million for 2003. The increase in cash used in investing activities was primarily as a result of higher capital expenditures as we opened 104
stores in 2004, compared to 76 in 2003. We used $48.6 million in cash for investing activities in 2002. The $37.5 million increase in cash used for investing activities
from
52
2002 to 2003 was due to higher capital expenditures as we opened 76 stores in 2003 compared to 57 in 2002.
Financing Activities. Net cash provided by financing activities was $2.7 million for the nine months ended September 30, 2005 compared to $41.2 million for the
nine months ended September 30, 2004. The decrease in cash provided by financing activities in the 2005 period was attributable to decreased financing requirements
as a result of improvements in our net cash provided by operating activities and fewer store openings in the nine months ended September 30, 2005 compared to the
comparable period in 2004. Net cash provided by financing activities was $55.9 million for 2004 compared to $64.0 million for 2003. The decrease in cash provided by
financing activities in 2004 was attributable to decreased financing requirements as a result of our strong improvement in net cash provided by operating activities,
which was partially offset by more store openings in 2004. Our net cash provided by financing activities in 2002 was $42.6 million. We used about $21.4 million more
cash for financing activities in 2003 compared to 2002 as a result of increased financing requirements resulting from more store openings in 2003.
Liquidity and Capital Expenditures. We will use the proceeds from this offering to repay the $4.6 million balance outstanding at September 30, 2005 under our
$30 million revolving line of credit with McDonald's, to provide additional long-term capital to support the growth of our business (primarily through opening new
stores), to continue to maintain our existing stores and for general corporate purposes. We do not expect McDonald's to continue to provide us with financing in the
future. Therefore, we expect to maintain our business, expand our store base and further implement our growth strategy primarily using cash flow from operations, the
proceeds from this offering and third-party financing. We currently expect that our total capital expenditures for 2005 will be about $75 million, and we expect to incur
capital expenditures of about $95 million in 2006, relating primarily to our construction of new stores in both periods. We believe that our cash flow from operations,
together with the net proceeds from this offering, will be enough to meet our ongoing capital expenditure, working capital and other cash needs over at least the next
24 months.
In connection with the repayment of our revolving line of credit from McDonald's, we're in the process of negotiating with several banks to establish a revolving
credit facility. We intend to use this facility for general corporate purposes including future capital expenditures and working capital needs.
Contractual Obligations
Our contractual obligations at December 31, 2004 were as follows:
Payments Due by Period
Less than
1 year
Total
2-3 years
4-5 years
After 5 years
(in millions)
Operating leases
$
724.1
$
39.6
$
79.6
$
78.9
$
526.0
Total contractual cash obligations
$
724.1 $
39.6 $
79.6 $
78.9 $
526.0
We're obligated under non-cancelable leases for our stores and our administrative offices. Our leases generally have initial terms of either five to ten years with two
or more five-year extensions, for end-cap and in-line stores, or 15 to 20 years with several five-year extensions, for free-standing stores. Our leases generally have
renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common charges and other operating costs. Some store leases
provide for contingent rental payments based on sales thresholds, although we generally do not expect to pay significant contingent rent on these properties based on the
thresholds in those leases. See "Risk Factors—Risks Related to Our Business and Industry—Substantially all of our stores are located in leased space that is subject to
long-term non-cancelable leases, and we're also subject to all of the risks associated with owning real estate with respect to the real property that we own." At
September 30, 2005, there were no material differences
53
in our outstanding contractual obligations, except that as of that date we had $4.6 million outstanding under our revolving line of credit with McDonald's and
$2.4 million of deemed landlord financing.
As discussed in "Certain Relationships and Related Party Transactions—Services Agreement," we expect to enter into an agreement with McDonald's pursuant to
which McDonald's will continue to provide us, for a mutually agreed-upon fee of about $10 million to $11 million for the first year of services, with certain services it
has historically provided, including, among others, accounting services, insurance policy coverage and certain welfare plans for our employees. The services agreement
will become operative on the closing date of this offering and will have terms ranging from approximately one or two years depending on the service. Services will
renew automatically unless we or McDonald's terminate the services agreement prior to renewal. In addition, we may in the future repurchase Chipotle franchises from
our franchisees in connection with their obligation to dispose of either that franchise or their McDonald's franchise within 24 months after relevant triggering events.
We are not obligated to repurchase any of these franchises. See "Certain Relationships and Related Party Transactions—Agreements With Franchisees."
Off-Balance Sheet Arrangements
At December 31, 2004 and September 30, 2005, we had no off-balance sheet arrangements or obligations.
Quantitative and Qualitative Disclosure about Market Risk
We're exposed to interest rate risk in two ways. First, we've invested our excess cash under an agreement with McDonald's. Under that agreement, McDonald's has
agreed to pay us interest on those cash investments at the 30-day commercial paper rate plus 50 basis points. Changes in interest rates affect the interest income we earn
and, therefore, impact our cash flows and results of operations. At December 31, 2004, we had deposited $0.7 million with McDonald's under this agreement, bearing
interest at 2.66% on that date. We're also exposed to interest rate risk as a result of our interest-bearing obligations. Such exposures currently are limited to borrowings
we've made under our $30 million line of credit with McDonald's, which bears interest at the U.S. prime rate plus 100 basis points. At September 30, 2005, we had
$4.6 million outstanding under this line of credit with McDonald's, bearing interest at 7.5% on that date. We expect that this line of credit will be terminated in
connection with this offering and that we will repay any outstanding amounts.
We're also exposed to commodity price risks. Many of the ingredients we use to prepare our food, as well as our packaging materials, are commodities that are
affected by weather, seasonality and other factors outside our control. We work closely with our suppliers and use a mix of forward, fixed and formula pricing
protocols. Though we do not have long-term supply contracts or guaranteed purchase amounts, our pricing protocols with suppliers can remain in effect for periods
ranging from one month to a year, depending on the outlook for prices of the particular ingredient. We've tried to increase, where necessary, the number of suppliers for
our ingredients, which we believe can help mitigate pricing volatility, and we follow industry news, trade issues, weather, crises and other world events that may affect
supply prices. Long-term increases in ingredient prices could adversely affect our future results if we could not increase menu prices at the same pace for competitive or
other reasons. Similarly, if we believe the ingredient price increase to be short in duration we may choose not to pass on the cost increases, which could adversely affect
our short-term financial results.
54
Inflation
Over the past five years, inflation has not significantly affected our operating results. The impact of inflation could, however, significantly affect our operations in
the following ways:
•
Food, beverage and packaging costs as a percentage of revenue has fluctuated in the past, generally in response to changes in availability of our main ingredients. Based
on current market conditions, we believe that the cost of our main ingredients should not experience significant volatility, except for short-term chicken prices, which
have increased as a result of the damage to chicken farms caused by hurricane Katrina. In addition, diesel prices could also experience further increases as a result of the
shut-down of several oil refineries by hurricanes Katrina and Rita, which could cause our other ingredient costs to increase.
•
We pay many of our crew members hourly rates related to the applicable federal or state minimum wage (although all of our crew members make more than the
minimum wage). Our workers' compensation and health insurance costs have been and are subject to continued inflationary pressures.
•
Costs for construction, taxes, repairs, maintenance and insurance are all subject to inflationary pressures and impact our occupancy costs.
In some markets, inflation rates may be higher than the national average.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R, which replaces the requirements under SFAS 123 and APB 25. The statement sets accounting requirements for
share-based compensation to employees, including employee stock option and purchase plans, and requires all share-based payments, including employee stock options,
to be recognized in the financial statements based on their fair value. It carried forward prior guidance on accounting for awards to non-employees. We adopted
SFAS 123R during the first quarter of 2005 using the modified-prospective transition method. Results for prior periods will not be restated. Had we adopted
SFAS 123R in prior periods, the impact would have approximated the impact of SFAS 123 as described in note 1 of our consolidated financial statements and above in
"—Other Factors Affecting Our Results."
In October 2005, the FASB issued FSP 13-1, which 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 costs 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 to incur higher pre-opening costs as a result of the
application of FSP 13-1 in future periods.
55
WHAT WE DO
When a Chain Isn't a "Chain"
When Chipotle opened its first store in 1993, the idea was simple: demonstrate that food served fast didn't have to be a "fast-food" experience. We tried to avoid
using a formulaic approach when creating our experience and looked to fine-dining restaurants for inspiration. We use high-quality raw ingredients, classic cooking
methods and a distinctive interior design, and have friendly people to take care of each customer—features that are more frequently found in the world of fine dining.
When we opened, there wasn't an industry category to describe what we were doing. Some 12 years and more than 480 stores later, we compete in a category of dining
now called "fast-casual," the fastest growing segment of the restaurant industry, where customers expect food quality that's more in line with full-service restaurants,
coupled with the speed and convenience of fast food.
A lot of what we do can be related to our namesake: the chipotle pepper. A chipotle pepper is a jalapeño pepper that's been dried, then smoked over mesquite,
transforming its simple taste into a richly nuanced, smoky flavor. We've used that characteristic of the chipotle as an inspiration in all of the elements that shape the
depth of flavor and nuance in what we do at Chipotle—great food accessible at reasonable prices, genuinely friendly people providing real service and a stylish
atmosphere.
What We Do Really Well
We try to do a few things really well, and we plan to keep this intentionally focused strategy as we grow. We transform our food in the same way the jalapeño is
transformed into a chipotle, elevating basic raw ingredients into food that's richer and more sophisticated through our recipes and cooking techniques. Our store design
also transforms simple materials in distinctive ways, giving our stores a style that's more architectural in nature and less dependent on standardized design elements to
influence the customer experience. We respect our employees and invite them to share their ideas on how to best serve our customers, which we think inspires them to
take pride in their work and increases their dedication to our customers and our company. From our focused menu to the uncomplicated flow of our stores, simple but
thorough management and operations practices and a comparatively small inventory (about 130 items on hand, including things like chicken, steak, napkins and forks,
compared to 500 or more in some other fast-food establishments), we think that keeping things simple helps us focus on serving great food.
"Food With Integrity"
Our focus has always been on using the kinds of higher-quality ingredients and cooking techniques used in high-end restaurants to make great food accessible at
reasonable prices. But as we've grown, our vision has evolved. While using a variety of fresh ingredients remains the foundation of our menu, we believe that "fresh is
not enough, anymore." "Fresh" is just a starting point. Now we want to know where all of our ingredients come from—how vegetables are grown and animals are
raised—so that we can be sure they are flavorful while understanding the environmental and societal impact of our business. We call this idea "food with integrity," and
it guides how we run our business.
•
Using higher-quality ingredients. We use a variety of ingredients that we purchase from carefully selected suppliers. We concentrate on where we obtain each
ingredient, and this has become a cornerstone of our continuous effort to improve our food. For example, we only use naturally raised pork, and other ingredients we
use include naturally raised beef and chicken, as well as organically grown and sustainably grown produce, as described below under "—"Hours to Prepare, Seconds to
Serve": Menu and Food Preparation." We continue to investigate using even more naturally raised, organically grown and sustainably grown ingredients, in light of
pricing considerations. In all of our stores, we make our guacamole, tomato and corn salsa daily, using what we believe are the best available ingredients. We hope to be
at the forefront in creating larger markets for these higher56
quality ingredients and making higher-quality food that's previously been available only in some grocery stores and high-end restaurants
accessible to just about everyone.•
A few things, thousands of ways. We only serve a few things: burritos, burrito bols (a burrito without the tortilla), tacos and salads. But because customers can choose
from many different ingredients, there's a lot of variety. Mathematically speaking, our menu can provide literally thousands of choices. We plan to keep a simple menu,
but we'll always consider sensible additions. For example, we introduced the burrito bol in 2003—just when the popularity of low-carbohydrate diets exploded—and
estimate that we sold about seven million of them in that year. While many of our competitors raced to create low-carbohydrate menus, we didn't change much. We just
developed a new way to deliver the food we already served. In 2005, we rolled out a salad that we think appeals to people who want lighter fare or more variety. We
think our customers like the simplicity of what we're doing and that the Chipotle experience has broad appeal.
We believe that our focus on "food with integrity" will resonate with customers as the public becomes increasingly aware of, and concerned about, what they eat.
Our Employees Set Us Apart
We believe that our front-line crew differentiates the Chipotle experience. We place a premium on finding employees who will thrive in an environment where
they're expected to do more than follow a detailed manual and who embrace our vision of good food, served quickly. This is important because our food ordering
process lets our customers select exactly what they want and how they want it by speaking directly to the employees preparing the food. Virtually all of what our crew
does is in view of customers, giving them a chance to display their culinary skills as well as their individuality. These and other aspects of our culture set us apart from
many of our competitors, as described below under "—Making and Selling "One Burrito At A Time": Store Management and Operations." Because the person who
prepares the food—grilling chicken and steak, chopping fresh vegetables, tossing freshly steamed rice with cilantro and citrus juice—is often the same person who
serves it, our employees have a strong sense of pride in their work. We think this and our crew's commitment to our vision contribute to better execution and service and
are reflected in our crew turnover rate, which we believe is lower than the average in our industry.
No Two Stores Are The Same
The design of each Chipotle store reflects the same idea as our food: a limited number of basic materials—concrete, corrugated barn metal, plywood, steel and
utilitarian light fixtures—used in creative ways. We design each store individually to suit the space. Our stores rely on a natural flow to make the food ordering process
intuitive. Our approach allows us to build stores that are unmistakably Chipotle, while respecting the character of the neighborhoods where we operate, as described
below under "—Looking for New Opportunities: Site Development and Expansion." The design of our serving line and our open kitchens also exemplify our vision,
demonstrating our commitment to cooking higher-quality food. Through this approach, we think we've made interesting and intelligent design available to the general
public.
Customers Who Sell For Us
We believe the best and most recognizable brands aren't built through advertising or promotional campaigns alone, but rather through deeply held beliefs evident in
how a company runs its business. All of the ways that we project ourselves—beginning with each customer's experience in our stores, the look and feel of our stores,
our advertising and promotional programs, and the design items that carry our name or logo—influence how people think about us. By adhering to this principle, we
believe that Chipotle is becoming a highly recognized brand. Although our marketing program has many components, we believe the single greatest contributor to our
success has been word-of-mouth, with our customers learning about
57
us and telling others. Our website generated about 290,000 visits in August 2005, and some of our customers have gone so far as to develop websites about Chipotle,
providing a way for Chipotle customers to share their stories. This kind of support helps us grow without requiring additional advertising expenditures. When we open a
new store, we plan a range of activities to introduce our food to the local community to help create interest in the store from the start. And our advertising, which
includes print, outdoor, transit and radio ads and most recently a sponsorship of a cooking show on the Public Broadcasting Service, has a low-key and irreverent tone
that has been popular with customers. In addition, a number of publications have written favorably about our food and store concept, and our food and stores have even
featured in television programs produced without our involvement. We describe all of this in more detail below under "—Communicating With Customers: Advertising
and Marketing."
Rapidly Improving Financial Performance
Our business model is simple. We start by giving our employees fun and meaningful work, and treating them with respect. We think this makes them happier, and
we believe happier employees help make customers happier. Happier customers come back more frequently and are more likely to tell their friends and families about
their experience at our stores. This simple but effective approach has helped us build a sizeable and loyal customer base and resulted in rapidly improving financial
performance over the last five years. Our revenue was $470.7 million in 2004, a 130% increase from 2002, driven by new store openings and increased average store
sales. During 2002, 2003 and 2004, we opened 237 stores in total. Increases in average store sales have occurred partly because the time it takes for our new stores to
ramp up has consistently shortened as we've grown and customers have learned about our brand, enabling new stores to open with higher average sales. Average sales
for new stores in the first 90 trading days increased 29.4% to $303,390 for stores opened in 2004 from $234,450 for stores opened in 2002. We've also had strong
growth in comp store sales, due mainly to an increase in the number of transactions. We anticipate that comp store sales growth for fiscal 2006 as a percentage will be
in the low- to mid-single digits. Our net income reached $6.1 million in 2004 and $33.4 million (inclusive of a non-recurring $20.3 million tax benefit) in the first nine
months of 2005, and our EBITDA was $27.9 million in 2004 and $43.7 million in the first nine months of 2005.
Management's Passion, Not Just Experience
Our senior management is comprised of people who bring a mix of restaurant and business experience to their work. But most importantly, the team is committed
to making Chipotle's vision a part of all facets of our business. Steve Ells, our founder and Chief Executive Officer, holds a degree from the Culinary Institute of
America. Before he opened our first store in 1993, Steve cooked at Stars restaurant in San Francisco under chef Jeremiah Tower. The Chipotle experience is infused
with Steve's understanding of, and passion for, fine dining. Monty Moran, our President and Chief Operating Officer, joined Chipotle in March 2005, previously serving
as chief executive officer of Messner & Reeves, LLC, a private law firm, and as general counsel of Chipotle for much of our history. Jack Hartung, our Chief Finance
and Development Officer, joined Chipotle in 2002, after spending 18 years with McDonald's, where he held a variety of management positions. Most recently, Jack was
vice president and chief financial officer for McDonald's Partner Brands group, where he oversaw Chipotle's financial operations from December 1999 to August 2002.
Bob Wilner, our Chief Administrative Officer, joined Chipotle in 2002, and previously served as vice president of human resources for McDonald's Partner Brands
group. Together, our senior management team will beneficially own about 5% of the combined voting power of our outstanding stock and 4% of the economic interest
in our outstanding common stock after this offering.
Where We Go From Here
We believe that our growth has been driven by the appeal of our food, the clarity of our vision, the increasing strength of our brand and our commitment to
constantly improving our customer experience.
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We anticipate that our growth plans for the foreseeable future will continue to be rooted in these fundamentals as we bring the Chipotle experience to more people.
Focusing On Our Vision to Appeal to Customers
Our menu is intentionally simple. By focusing on just a few menu items, we can concentrate our effort on doing a few things very well. We haven't really changed
our approach that much since 1993, but we've strived to make our food taste better. For example, we've tried to improve the quality of our ingredients, when we can do
so at a reasonable price. We believe that by focusing on the details of quality, service and the Chipotle experience, we'll be able to bring great food—and our vision—to
new customers and keep existing customers coming back. The more people understand and share our vision of "food with integrity," we think the more they'll want to
eat our food. We believe that consumers' increasing concern about the food they eat will foster demand for higher-quality foods. We believe this, in turn, will attract the
interest and capital investment of larger farms and suppliers, and help us make our food more accessible. That said, we understand that we'll continue to be at the
forefront of this trend and must balance our interest in advancing "food with integrity" with our desire to provide great food at reasonable prices.
Expanding Our Operations and Sales
We plan to increase both sales and profits by opening new stores and increasing comp store sales:
•
Building More Stores. We plan to grow in a measured and disciplined way by strategically adding stores in existing and new markets. We opened 80 stores in 2005,
and we plan to open between 80 and 90 stores in 2006. We believe most of our sales increases will come from opening new stores. As we've grown and become
increasingly well-known, we've developed specific criteria that we continuously review and adjust to evaluate each site, as store locations are critical to our long-term
success.
•
Selling More Food Every Day. We continue to focus on ways to improve the customer experience at our existing stores so we can increase comp store sales. We
believe that the best way to do this is to speed up our service to sell food to more customers. We're doing this by, for example, enhancing our staffing and training
models, expanding our use of fax service lines and implementing our new Chipotle DSL (Don't Stand in Line) online ordering system. These changes allow us to
accommodate more customers and larger orders without disrupting store traffic. We'll also consider additions to our menu that could enable us to enhance sales. For
example, in 2005 we rolled out our salad. Given the brand loyalty that our customers have shown, we believe that another way we can grow sales is by getting more
people to try our food. We hope to keep expanding brand awareness in various ways, including through free food giveaways, word-of-mouth marketing and innovative
ads and promotions.
Our Industry
Research shows that people need to eat. Where and what they choose to eat, however, has been gradually changing over time. Studies show that, over the past
50 years, people in the United States have relatively steadily shifted toward purchasing food away from home, instead of preparing and eating food at home. And the
restaurant industry has grown to accommodate that trend. The National Restaurant Association estimates that the U.S. industry's sales in 2005 will reach $476 billion
(about 4.0% of the U.S. gross domestic product) at 900,000 locations nationwide. The Association further predicts that, by 2010, food purchased away from home will
represent more than half of all consumer food purchases, and that the number of restaurants around the country will swell to more than a million locations.
We believe that there are many reasons that the industry is expanding and eating out is becoming increasingly popular. A growing population means more
customers for restaurants to draw from, higher income levels (particularly among dual-income families, "Gen-Xers" and "baby boomers") mean more
59
discretionary income to spend eating out, and busier lifestyles mean people have less time to prepare food at home. As a result, more people are willing to pay for the
convenience of quality food made by others. As the restaurant industry adapts to consumer trends, restaurants (including fast-casual restaurants in particular) have
increasingly made available the higher-quality food that people want, as illustrated by the proliferation of premium coffee shops, beers, specialty supermarkets and the
like.
Restaurants today come in many shapes and sizes, ranging from high-end full-service restaurants to fast-food establishments. But that hasn't always been the case.
When Steve Ells opened the first Chipotle in 1993, consumers had few dining options between traditional fast-food establishments and high-end full-service restaurants.
Steve was frustrated by this lack of options and thought he could fill the void. Relying on his view that "fast" didn't have to mean "fast food," Steve opened the first
Chipotle store and served food made from higher-quality ingredients, using many traditional cooking methods and prepared to order rather than in advance. Steve tried
to avoid formulaic approaches that were common in quick-service restaurants and looked to fine-dining restaurants for inspiration, using architectural and design
elements like those one would expect in a full-service restaurant. He also chose a simple menu that allowed him to price menu items closer to fast-food prices and
decided not to use waiters, so that food could be quickly served directly to the customer.
When we opened our first store in 1993, there wasn't even an industry category to describe what we were doing. Since then, others have moved to fill the gap
between fast-food establishments and full-service restaurants and a new industry segment, dubbed "fast-casual," has emerged. These restaurants combined
characteristics from both full-service restaurants (the more pleasant atmosphere, higher-quality ingredients and food that's made to order) and from quick-service
restaurants (chiefly accessibility, lower prices and faster service), and blended them to create something that sets fast-casual restaurants apart from both. Like many
fast-casual restaurants, our stores feature last-minute food preparation and assembly with menu items ordered directly from the employees preparing the food, and rely
on a variety of fresh ingredients used in creative ways, all served in stores that emphasize design. Customers of fast-casual restaurants often have to pay a bit more for
the experience—the fast-casual segment charges, on average, about $7 to $10 per person. The growing demand for fast-casual restaurants (particularly among
"Gen-Xers" and "baby boomers") and the increasing popularity and acceptance of various ethnic foods work to our advantage.
And customers have been gravitating to fast-casual restaurants. In 2004, the fast-casual segment generated about $7.2 billion in sales (representing 2.3% of the
industry), according to Technomic, Inc., a national consulting and research firm, and, based on the data prepared by Technomic, is the fastest growing segment of the
restaurant industry. Indeed, in 2004, sales in the fast-casual segment grew 12.8%, compared to 7.2% for the industry as a whole, and Technomic has forecast such sales
to grow at a compound annual growth rate of between 10.8% and 12.5% from 2004 to 2009, compared to 5.6% for the industry generally.
The Good, the Bad and the Ugly: Competition
The fast-casual segment of the restaurant industry is highly competitive and fragmented. In addition, fast-casual restaurants compete against other segments of the
restaurant industry, including in particular quick-service restaurants and casual dining restaurants. The number, size and strength of competitors vary by region. All of
these restaurants compete based on a number of factors, including taste, quickness of service, value, name recognition, restaurant location and customer service.
Competition within the fast-casual restaurant segment, however, focuses primarily on taste, quality and the freshness of the menu items and the ambiance and condition
of each restaurant. For further information about the restaurant industry, see "—Our Industry" above.
We compete with national and regional fast-casual and quick-service restaurants, including our parent McDonald's. Our competition also includes a variety of
locally owned restaurants and the deli sections and in-store cafés of several major grocery store chains. Many of our competitors have greater financial and
60
other resources, have been in business longer, have greater name recognition and are better established in the markets where our stores are located or are planned to be
located. See "Risk Factors—Risks Relating to Our Business and Industry—Competition from restaurant companies could adversely affect us." Our competitors include
a number of multi-unit, multi-market Mexican food or burrito restaurant concepts, some of which have plans for national expansion and some of which have raised
capital in the public or private financial markets.
We believe we're well-positioned to continue to grow our market position in existing and new markets given current favorable consumer trends, including the
increasing impact of Hispanic culture on food and flavors, the growth of the Mexican food segment and increasing public awareness and concern about what they eat.
Some of our competitors have formats similar to ours. We believe, however, that Chipotle is rapidly becoming one of the most recognized fast-casual restaurants and is
known for its focus on using a variety of fresh ingredients and commitment to "food with integrity," which we think represents a significant competitive advantage in
the segment in which we operate.
Making and Selling "One Burrito At A Time": Store Management And Operations
People With Passion. We value the individuality of our company, our employees and our customers, which we believe results in a management, operations and
training philosophy distinct from that of our competitors. We make an effort to hire employees who share a passion for food, and who will operate our stores in a way
that is consistent with our high standards but that allows each of their unique personalities and strengths to contribute to our success. We also produce training materials
that require thought on the part of our employees, rather than providing rote, step-by-step scripts or rigid policy manuals. Through our culture, diversity and language
programs that we provide in all of our markets, we teach English to Spanish-speaking workers and Spanish to English-speakers, which helps staff to better serve
customers and makes for tighter crews. This program helps people feel more comfortable to grow and develop skills that help them both at work and in their personal
lives.
Importance of Methods and Culture. Although we have many stores, we believe that our departure from the automated cooking techniques used by many of our
competitors sets our vision and our food apart. Our crews use classic professional cooking methods, including slicing, marinating and grilling our meat ingredients and
hand-chopping many of our vegetables, in kitchens resembling those of high-end restaurants. Everyone, including our store managers, spends his or her first three
weeks working solely with food and learning those techniques, and we spend a significant portion of time ensuring that each crew member learns how to prepare and
cook our food properly. Despite our more labor-intensive method of food preparation, we believe that we produce food with an efficiency that enables us to compete
effectively.
The Front Line is Key. Our store and kitchen designs intentionally place crew members "up front" with customers to reinforce our focus on service. Our
employees are encouraged to have genuine interactions with customers no matter what they are doing, whether preparing food or serving customers during our busiest
period. We focus on attracting and keeping people who can replicate that experience for each customer "one burrito at a time." We provide each customer with
individual attention and make every effort to respond to customer suggestions and concerns in a personal and hospitable way. We believe our focus on creating a
positive and interactive experience helps build loyalty and enthusiasm for our brand among store managers, crew members and customers alike.
The Basics. Each store typically has a store manager, an assistant manager and as many as 23 to 25 full and part-time crew members. We generally have two
shifts at most of our stores, which helps us better predict our store payroll expenses and in return provides our employees with more stable and predictable work hours.
We tend to have more employees in our busier stores. We cross-train our employees, with a view to creating depth of competency in our critical store functions.
Consistent with our emphasis on customer contact, we encourage our store managers and crew members to welcome and interact with
61
customers throughout the day. And although they may increase our labor costs or general and administrative expenses, we believe that the benefits we provide to our
employees, which include language training and our company car program for longer-term store managers, help us to attract and keep good store managers and crew
members.
In addition to the employees we have at each store, we also have area managers (who are responsible for between three and eight stores each) and operations
directors (each of whom is responsible for about 50 stores). Our four regional directors each supervise between one and three operations directors and report to our
President and Chief Operating Officer.
Looking for New Opportunities: Site Development and Expansion
Our store locations are critical to our long-term success, and we devote significant time and resources to assessing each prospective site. We've developed specific
criteria (described below) to evaluate each site. We continuously review these criteria and adjust them as warranted by changing circumstances in our business or local
operating conditions.
What We're Looking For. We primarily focus our search for sites on major metropolitan areas, particularly suburban and urban areas with strong residential and
daytime populations. Our demographic requirements include areas with at least 15,000 residents ranging in age from 18 to 49, a daytime population of at least 10,000
and a household median income above the national average. Preferred locations include shopping center end-caps and free-standing buildings near large intersections,
residential areas, offices, retail outlets, universities, recreational facilities and hospitals. We also consider various other factors, including traffic patterns, area restaurant
competition, the likely effect on sales of our nearby stores, parking, accessibility, potential store size and visibility. In larger metropolitan regions, we generally open
stores in urban storefronts. We use a combination of our own development staff and outside real estate consultants to locate, evaluate and negotiate new sites using
these criteria. We use in-house demographic software to assist in our evaluation, which we also use as our store lifecycle management system.
The cost to open a Chipotle store depends on several factors, including the type of real estate, the location of the site and the amount of construction required. See
"Management's Discussion and Analysis of Financial Condition and Results of Operations—How We Make Money—Expanding Store Base." We generally lease the
land where we build our stores. We sometimes receive landlord development and/or rent allowances for leasehold improvements, furniture, fixtures and equipment.
Design Matters. We design each store individually to suit the space, and no two stores look exactly the same. This approach, which is critical to our brand
identity, allows us to build stores that are unmistakably Chipotle, while respecting the character of the neighborhoods where we operate. Whether we're in a historic
district in an urban area, or a suburban community with more restrictive zoning and similar requirements, we try to design and build stores that complement their
surroundings, rather than overwhelm them. The overall layouts, together with the sights and sounds of our food preparation, work together to contribute to our
distinctive dining experience. We've even taken the fundamental and necessary elements of any store, such as chairs, tables and lighting, and included them in our
design aesthetic. Our stores don't use signs that say "Order Here" or "Pick-up Here," but instead rely on a natural flow, based on the floor plan and architectural
elements, to make the food ordering process intuitive. And our music is distinctive too—we select each song played in our stores to match our design and our overall
approach to the Chipotle dining experience. Even the design of our chairs and artwork, created by a Colorado artist, is unique to Chipotle. The design of our serving line
and our open kitchens also exemplify our vision, demonstrating our commitment to cooking fresh food. We strive to entertain our customers with our design and décor
and provide a distinct visual, auditory and olfactory experience.
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Where You Can Find Us: Store Locations
At December 31, 2005, we and our franchisees operated 489 stores. Starting from 177 stores on January 1, 2002, we've expanded our store base substantially since
that time. For additional information on past and planned store openings, see "Management's Discussion and Analysis of Financial Condition and Results of
Operations—How We Make Money: Restaurant Sales—Expanding Store Base." The table below sets forth the locations (by state) of Chipotle stores in operation and
under construction on December 31, 2005, including stores under construction that we expect to open in 2006:
Stores in
operation
Arizona
California
Colorado
District of Columbia
Florida
Georgia
Illinois
Indiana
Kansas
Kentucky
Maryland
Michigan
Minnesota
Missouri
Nebraska
Nevada
New York
Ohio
Oregon
Texas
Virginia
Washington
Wisconsin
Stores under
construction
21
67
55
6
14
10
47
6
12
5
21
0
36
8
6
5
13
60
5
60
20
4
8
Total
489(1)
2
2
—
—
1
—
—
—
—
—
—
3
1
1
1
—
1
2
—
—
1
2
—
17
(1)
Includes two franchised stores in Illinois, two in Missouri and four in Ohio.
Of our stores on that date, 118 were free-standing units, 276 were located at end-cap locations, 86 were located at in-line locations and nine were in malls. The
average free-standing store seats about 100 customers while the average in-line or end-cap store seats about 65 customers. Our stores typically range in size from 1,800
square feet to 2,800 square feet, depending on trade space characteristics, with the average store being about 2,500 square feet. Most of our stores also feature outdoor
patio space. See "—Making and Selling 'One Burrito At A Time': Store Management and Operations" for additional information about our stores, and "—Franchising"
for a discussion of our franchisees.
"Hours To Prepare, Seconds to Serve": Menu and Food Preparation
A Few Things, Thousands of Ways. We serve only a few things: burritos, burrito bols (a burrito without the tortilla), tacos and salads. But because customers can
choose from four different meats, two types of beans and a variety of extras such as salsas, guacamole, cheese and lettuce, there's enough variety to extend our menu to
provide more than 65,000 choices (mathematically speaking). We plan to keep a simple menu, but we'll always consider additions that we think make sense.
Furthermore, we've from time
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to time extended our core menu items to enhance sales. For example, we introduced the burrito bol in 2003 and, in 2005, we rolled out a salad that uses the same
ingredients as our burritos and tacos, with the addition of a chipotle-honey vinaigrette that we make in-store daily.
In preparing our food, we use gas stoves and grills, pots and pans, wire whisks and other kitchen utensils, walk-in refrigerators stocked with a variety of fresh
ingredients, and dry goods including rice, herbs and spices. Ingredients we use include marinated chicken, carnitas (seasoned free-range pork), barbacoa (spicy shredded
beef), marinated steak and pinto and vegetarian black beans. We add our rice, which is flavored with cilantro and lime, as well as freshly shredded cheese, sour cream,
lettuce, tomatoes, peppers and onions, depending on each customer's specifications. We use various herbs, spices and seasonings to prepare our meats and vegetables.
We also provide a variety of extras such as guacamole and salsas. To complement our main menu items, we also serve tortilla chips seasoned with lime and salt. In
addition to sodas and other soft drinks, most of our stores also offer a selection of beer and margaritas.
We prepare most items from scratch in our stores, and we've developed a start-to-finish process for food preparation that drives our food ordering process. In all of
our stores, we make our guacamole, tomato and corn salsa daily, using what we believe are the best available ingredients, including Hass avocados, herbs, spices and
real citrus juice.
Food Served Fast … So That Customers Can Enjoy It Slowly. Our employees spend hours preparing our food on-site, but each customer order can be ready in
seconds. Customers select exactly what they want and how they want it by speaking directly to the employees preparing the food. While we think that our customers
come because of the great-tasting food, we also think that they like getting food served fast without having a "fast-food" experience, even when they're not in a hurry.
And while our stores often have lines, we try to get food to people as quickly as possible; we've even been able to serve as many as 300 people an hour at some
locations. The natural flow of our overall layout, including the floor plan and the design of our serving line, are designed to make the food ordering process intuitive and
thus, we believe, more efficient. And we're focused on further improving the speed of service in all of our restaurants, so that we can accommodate more customers and
larger orders without disrupting store traffic, as discussed above under "—Where We Go From Here—Expanding Our Operations and Sales—Selling More Food Every
Day." By emphasizing speed of service without compromising the genuine interactions between our customers and our crews, and by continually making improvements
to our stores to keep pace at even our highest-volume stores, we believe that we can provide the Chipotle experience to more and more customers.
"Food with Integrity." We focus on quality, service and the Chipotle experience. At the same time, however, we're committed to emphasizing "food with
integrity," beginning with our suppliers and ending with the way we prepare food for customers. Because our menu is so focused, we can concentrate on where we
obtain each ingredient, and this has become a cornerstone of our continuous effort to improve our food. All of our pork, for example, comes from pigs that are naturally
raised without the use of antibiotics in open pastures or deeply bedded barns, without limited confinement. We also serve naturally raised chicken in about 43% of our
stores and naturally raised beef in about 32% of our stores. For us, "naturally raised" means that our suppliers' pigs, chickens and cattle are raised in humane
environments on vegetarian diets without the use of antibiotics. It also means that our suppliers don't use hormones, which are prohibited by federal regulations for pork
and chicken, and which we explicitly prohibit for our beef. We're enthusiastically investigating the use of more sustainably grown produce, meaning produce grown by
suppliers who we believe respect the environment, while still charging reasonable prices for our food. Today, about 20% of all of the beans we buy are organically
grown, that is, they meet U.S. Food and Drug Administration standards for "organic." At each store, we mix those organically grown beans with other ingredients that
don't meet those standards in the food we sell to customers. We even work with experts in the areas of animal ethics to create more humane farming environments, and
visit the farms and ranches from which we obtain our ingredients.
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We do, however, face challenges in pursuing this approach, including the length of time, costs and risks associated with purchasing naturally raised or sustainably
grown ingredients. Naturally raised meat and sustainably grown vegetables are more costly and the growth process is longer. Herd losses are also greater when animals
aren't treated with antibiotics and hormones. Given the costs associated with natural and sustainable farming practices, many large suppliers have not found it
economical to pursue business in this area. We believe that consumers' increasing concern about where and how food is raised, environmental management and animal
husbandry will foster demand for these foods, which will in turn attract the interest and capital investment of larger farms and suppliers. That said, we understand that
we'll continue to be at the forefront of this trend and must balance our interest in advancing "food with integrity" with our desire to provide great food at reasonable
prices. If our focus resonates with consumers, it should improve our sourcing flexibility, although we would expect that these ingredients and other raw materials will
remain more expensive than commodity-priced equivalents for some time to come.
Looking Out For Customers: Quality Control
We've designed our food safety and quality assurance programs to maintain high standards for our food and food preparation procedures. Our quality assurance
manager performs comprehensive store and supplier audits based upon the potential food safety risk of each food. We regularly inspect our suppliers to ensure that the
ingredients we buy conform to our quality standards and that the prices we pay are competitive. We also rely on recipes, specifications and protocols to ensure that our
food is the best quality possible when served, including a physical examination of ingredients when they arrive at our stores and "mystery shopper" visits to each store
at least once each month—sometimes twice, depending on the particular market. Area managers visit and evaluate each store for which they're responsible once every
three months and regional training consultants visit and evaluate each certified training store every six months. We also train our employees to pay detailed attention to
food quality at every stage of the food preparation cycle, and have developed a daily checklist that our employees use to assess the freshness and quality of food
supplies delivered to the stores where they work. Finally, we encourage our customers to communicate with us about our food quality so that we can identify and
resolve problems or concerns as quickly as possible.
Where We Get Our Ingredients: Provisions and Supplies
Close Relationships With Vendors. Maintaining high-quality levels in our stores depends in part on our ability to acquire fresh ingredients and other necessary
supplies that meet our specifications from reliable suppliers. We purchase from various suppliers, carefully selected based on quality and their understanding of our
brand, and we seek to develop mutually beneficial long-term relationships with them. We work closely with our suppliers and use a mix of forward, fixed and formula
pricing protocols, although we do not have long-term supply contracts or guaranteed purchase amounts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations—How We Spend Money" for additional information about our purchasing arrangements. We've tried to increase, where necessary,
the number of suppliers for our ingredients, which we believe can help mitigate pricing volatility, and we follow industry news, trade issues, weather, crises and other
world events that may affect supply prices.
We do not purchase raw materials directly from farmers or other suppliers. Instead, we train suppliers to purchase ingredients and other supplies for us based upon
our specifications and to negotiate the terms of purchase with raw materials suppliers on our behalf. We estimate that we have 50 key food suppliers for our meats,
beans, tortillas, seasonings, dairy products, salsas, produce, packaging and beverages. Purchases made from our ten largest suppliers in 2004 and the first nine months
of 2005 represented about 25% of our revenue, with purchases from our largest supplier representing 5% of revenue.
Distribution Arrangements. We deliver ingredients and other supplies to our stores from 16 regional distribution centers. As a subsidiary of McDonald's, we've
relied on its distribution network. Of our 16 distribution centers, 13 serve McDonald's, its subsidiaries and its franchisees exclusively, while the other
65
three have customers other than McDonald's. Although this network is comprised of independent distribution centers, we anticipate that we may need to replace some of
them as we become more independent from McDonald's.
Relationship With McDonald's. We also benefit from our relationship with McDonald's when we buy supplies or distribution or other services. Our relationship
gives us substantial credibility with our suppliers, and we can use McDonald's knowledge of purchasing and supply chain management to negotiate lower prices. For
example, McDonald's relationship with Coca-Cola has helped us contain our beverage costs, and we've historically had access to the McDonald's distribution network.
We also use many of the same suppliers for our paper and packaging products. See "Risk Factors—Risks Relating 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" and "Certain Relationships and Related Party Transactions."
Communicating With Customers: Advertising and Marketing
Advertising and Other Ways Customers Learn About Chipotle. We try to keep our customers coming back to our stores based on the experience we create. We
spent about $8.7 million on advertising in 2004, and we expect to spend about $9.8 million on advertising in 2005, of which we had spent $7.8 million by
September 30, 2005, representing in each case less than 2% of our total revenue in those periods. We believe that word-of-mouth is the best and most effective method
of building our brand, and that the Chipotle experience inspires our customers to continue frequenting our stores and to recommend our food to others.
We design our advertising to stir our customers' passion for great food without compromising convenience. And we do it using a low-key and irreverent voice
that's been popular with customers. We target all kinds of customers; based on our most recent marketing survey, however, most of our customers are adults between
the ages of 18 and 44, relatively evenly split by gender and marital status, with slightly more of our customers having no children. We spend our advertising budget
primarily on print, outdoor, transit and radio ads and direct mailings in markets where we have some existing market penetration. We used television advertising for the
first time in 2005, when we sponsored a program on the Public Broadcasting Service entitled "Bittman Takes on America's Chefs."
We want our customers to think our advertising is creative. We try to surprise them each time with our ad messages, which are simple and focused, as we seek both
to entertain and sell. Our print ads have been the core of our advertising efforts and focus on our iconic foil-wrapped burrito image (like the one on the cover page of
this prospectus), coupled with messages that emphasize our recipes, spicy flavors and the size of our portions, among other features. We've even included some
examples in the electronic version of this prospectus so that you can get an idea of our approach (and you can see some of our print ads on the inside front and back
cover pages of this prospectus). We use a number of individual free-lance artists and small advertising agencies to help to make each of our ads unique, and we have no
long-term relationships with large advertising agencies. We also use our packaging to educate our customers about our vision and to surprise them with humorous
messages similar in style to those used in our print ads. We also sell and give away t-shirts and other items bearing our messages and images.
We also believe that our website is an important marketing tool that creates a strong customer connection. Through it, we generated about 290,000 visits in
August 2005.
Our approach to food, service and atmosphere has captured the attention of some of the country's most renowned news media, including several well-regarded food
critics, which we think is unusual in our segment of the restaurant industry. The Washington Post , Food and Wine magazine, the New York Times , Fast Company
magazine, the Seattle Times , the Atlanta-Journal Constitution , the Denver Post , and many other newspapers, magazines and media outlets have praised Chipotle.
MTV's popular reality program,
66
"The Osbournes," even had an entire episode devoted to rocker Ozzy Osbourne's love of Chipotle burritos. Chipotle has also appeared in MTV's "The Real World:
Austin" series.
Getting More People to Try Our Food. We conduct targeted marketing and promotional campaigns to attract customers in a highly competitive marketplace. We
focus significant promotional activities on new store openings, as described in more detail below. We also use more general promotional strategies to get people to try
our food, such as "Free Burrito Day" and free giveaway promotions that require customer interaction and participation on holidays such as Halloween (we call it
"Boo-Rito Day"), when customers dress up as their favorite Chipotle food or ingredient to get a free burrito. Recently, we gave away free burritos at some of our stores
to people displaced by hurricane Katrina. We also offer a "Burrito Bank" card on which customers can deposit up to $250 and "Burrito Bucks" and coins that can be
redeemed for free burritos at any Chipotle store. We don't, however, offer discounts or "value meal" options similar to those offered by many of our competitors.
Building the Buzz, Not Just the Store. We've developed a marketing strategy that we use in connection with new store openings to help build local brand
recognition. We start off by establishing a visual presence through the use of banners and "coming soon" barricades during construction. During that time, we also try to
become active in the local community by, for example, joining the chamber of commerce, hosting local community or philanthropic events and giving away free
burritos to local businesses and residents before the store opens. We also generally have a big party on opening day. Then, during the first three months after opening a
new store, we engage in intense local marketing efforts. For example, we distribute print advertising and provide promotional free food to local radio stations, hospitals
and schools, all of which help us create interest in the store from the start.
Our Intellectual Property and Trademarks
"Chipotle," "Chipotle Mexican Grill," "Chipotle Mexican Grill (in stylized font)," "Unburritable," "Food With Integrity," "Fresh Is Not Enough Anymore," "The
Gourmet Restaurant Where You Eat With Your Hands," the Chili Pepper Logo design, the Foil Burrito design and the Chipotle Medallion design are U.S. registered
trademarks of Chipotle.
In addition to these U.S. registrations, we own the trademarks for "Chipotle Mexican Grill" in Brazil and Mexico and for "Chipotle" in Australia and the European
Union, among other countries. We have also filed trademark applications for "Chipotle" in a number of countries and for "Chipotle Mexican Grill" in two countries. We
plan to assign and transfer our interest in our non-domestic trademarks to Chipotle International, Ltd., our wholly-owned Irish subsidiary. Our policy is to protect and
defend vigorously our rights to this intellectual property. See "Risk Factors—Risks Related to Our Business and Industry—We may not be able to adequately protect
our intellectual property, which could harm the value of our brands and adversely affect our business."
Governmental Regulation and Environmental Matters
Government Regulation. We're subject to extensive and varied federal, state and local government regulation, including regulations relating to public health and
safety, zoning and fire codes. We operate each of our stores in accordance with standards and procedures designed to comply with applicable codes and regulations.
However, if we could not obtain or retain food or other licenses, it would adversely affect our operations. Although we have not experienced, and do not anticipate, any
significant difficulties, delays or failures in obtaining required licenses, permits or approvals, any such problem could delay or prevent the opening of, or adversely
impact the viability of, a particular store or group of stores.
In addition, in order to develop and construct more stores, we'll need to comply with applicable zoning, land use and environmental regulations. Federal and state
environmental regulations have not had a material effect on our operations to date, but more stringent and varied requirements of local governmental bodies with
respect to zoning, land use and environmental factors could delay or even
67
prevent construction and increase development costs for new stores. We're also required to comply with the accessibility standards mandated by the U.S. Americans
with Disabilities Act, which generally prohibits discrimination in accommodation or employment based on disability. We may in the future have to modify stores, for
example by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. While
these expenses could be material, our current expectation is that any such actions will not require us to expend substantial funds.
In 2004 and the first nine months of 2005, less than 1% of our restaurant sales were attributable to the sale of alcoholic beverages. Alcoholic beverage control
regulations require each of our stores to apply to a state authority and, in certain locations, county or municipal authorities for a license that must be renewed annually
and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations affect numerous aspects of our operations, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. We're also
subject in certain states to "dram shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment
that wrongfully served alcoholic beverages to the intoxicated person. We carry up to $1 million in liquor liability coverage as part of our existing $2 million
comprehensive general liability insurance, which has a $100,000 deductible, as well as excess umbrella coverage of up to $500 million, with no additional deductible.
In addition, we're subject to the U.S. Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of 1986 and various federal and state laws governing
various matters including minimum wages, overtime and other working conditions. We pay a significant number of our hourly staff at rates consistent with but higher
than the applicable federal or state minimum wage. Accordingly, increases in the minimum wage would increase our labor cost. We're also subject to various laws and
regulations relating to our current and any future franchise operations. See "Risk Factors—Risks Related to Our Business and Industry—Governmental regulation may
adversely affect our ability to open new stores or otherwise adversely affect our existing and future operations and results."
Environmental Matters. We are subject to federal, state and local environmental laws and regulations concerning the discharge, storage, handling, release and
disposal of hazardous or toxic substances ("environmental laws"). These environmental laws provide for significant fines, penalties and liabilities, sometimes without
regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may
also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such
substances. We cannot predict what environmental laws will be enacted in the future, how existing or future environmental laws will be administered or interpreted, or
the amount of future expenditures that we may need to make to comply with, or to satisfy claims relating to, environmental laws. While, during the period of our
ownership, lease or operation, our stores have not been the subject of any material environmental matters, we have not conducted a comprehensive environmental
review of our properties or operations. We have, however, conducted investigations of some of our properties and identified contamination caused by third-party
operations; in these instances, the contamination has or will be addressed by the third party. If the relevant third party does not or has not addressed the identified
contamination properly or completely, then under certain environmental laws, we could be held liable as an owner and operator to address any remaining
contamination. Any such liability could be material. Further, we may not have identified all of the potential environmental liabilities at our properties, and any such
liabilities could have a material adverse effect on our operations or results of operations.
Franchising
We have three franchisees that operate eight of our stores. Each of them is also a McDonald's franchisee. We granted our first franchise in April 2001 for a
two-year term (which expired and was not renewed) including leases for store property and equipment, and subsequently granted eight additional
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franchises with ten-year terms to qualified franchisees. These eight franchises are still within their initial ten-year terms. Each franchise includes the right to operate a
Chipotle store at a particular address only. At the end of a franchise term, the franchise expires, and the franchisee has no unilateral right to renew or extend the
franchise (although we may agree with the franchisee to extend the franchise for an additional term). Each franchisee is obligated to operate franchised stores in
accordance with our operating standards and is obligated to allocate and spend specific amounts, as specified by us, on marketing of the stores, subject to our approval
of all marketing materials.
Although franchising is currently not an important component of our strategy, we may decide to license more franchisees in the future. In the near term, however,
we do not expect to significantly increase the number of franchisees. In addition, if McDonald's ceases to own a majority of our outstanding common voting stock or if
we cease to be an affiliate of McDonald's, under the terms of our franchise agreements, our franchisees must either sell either their Chipotle franchise to someone who
agrees to perform their obligations under the franchise agreements (at fair market value determined in the manner provided in the franchise agreements) or sell their
McDonald's franchise within 24 months after the relevant triggering event. If our franchisees don't sell either franchise within the 24-month period, their franchise
agreements with McDonald's will terminate automatically.
Employees
At September 30, 2005, we had about 12,200 employees, including 1,200 salaried employees and 11,000 hourly employees. None of our employees are unionized
or covered by a collective bargaining agreement.
Properties
Our main office is located at 1543 Wazee Street, Suite 200, Denver, Colorado, and our telephone number is (303) 595-4000. As of December 31, 2005, there were
481 company-operated and eight franchised stores in locations across the United States. See "—Where You Can Find Us: Store Locations."
We lease our main office and substantially all of the properties on which we operate stores. For additional information regarding the lease terms and provisions,
see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations."
We own nine properties and operate stores on all of them.
Legal Proceedings
We're involved in various claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of these actions will
have a material adverse effect on our financial position, results of operations, liquidity or capital resources. However, a significant increase in the number of these
claims or an increase in amounts owing under successful claims could materially and adversely affect our business, financial condition, results of operation and cash
flows.
In addition, we're involved in claims relating to the possible theft of our customers' credit and debit card data. To date, we have received claims through the
acquiring bank with respect to fewer than 2,000 purportedly fraudulent credit and debit card charges allegedly arising out of this matter in an aggregate amount of about
$1.2 million. We've also incurred $1.3 million of expense in connection with fines imposed by the Visa and MasterCard card associations on the acquiring bank. In
2004, we recorded charges of $4.0 million to establish a reserve for claims seeking reimbursement for purportedly fraudulent credit and debit card charges, the cost of
replacing cards, monitoring expenses and fees, and fines imposed by Visa and MasterCard. All of the reimbursement claims are being disputed, although we've not
formally protested all of the charges. At November 30, 2005, after charging these expenses against the reserve, the remaining reserve was $1.9 million, which does not
take into account a fine of $0.4 million assessed by
69
MasterCard in December 2005 that we expect to charge against that reserve. In addition to the reserve, we've also incurred about $1.5 million of additional expenses in
this matter, including $1.3 million for legal fees, bringing our total expense relating to this matter to $5.5 million. We have not reserved any additional amounts to date
in 2005.
We may in the future become subject to additional claims for purportedly fraudulent transactions arising out of this matter. We have no way to predict the level of
claims or the number or nature of proceedings that may be asserted against us, nor can we quantify the costs that we may incur in connection with investigating,
responding to and defending any of them. If we litigate these matters, we may not be able to defend against penalties successfully. The ultimate outcome of this matter
could differ materially from the amounts we've recorded in our reserve and could have a material adverse effect on our financial results and condition. See "Risk
Factors—Risks Related to Our Business and Industry—We may have experienced a security breach with respect to certain customer credit and debit card data, and
we've incurred and may continue to incur substantial costs as a result of this matter. We may also incur costs resulting from other security risks we may face in
connection with our electronic processing and transmission of confidential customer information."
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information as to persons who currently serve as our directors and executive officers. We expect to appoint new board members in
connection with this offering.
Name
Age
Position
Steve Ells
40
Founder, Chairman and Chief Executive Officer
John R. (Jack) Hartung
48
Chief Finance and Development Officer
Montgomery F. (Monty) Moran
39
President and Chief Operating Officer
Robert D. (Bob) Wilner
51
Chief Administrative Officer
Albert S. Baldocchi
51
Director
John S. Charlesworth
59
Director
Patrick J. Flynn
63
Director
Darlene J. Friedman
62
Director
Mats Lederhausen
41
Director
Ages shown above are as of September 30, 2005. The following is a brief description of the business experience of the persons who currently serve as our directors
and executive officers.
Steve Ells founded Chipotle in 1993. He is Chief Executive Officer and was appointed chairman of the board of directors in 2005, and has served as a director
since 1996. Prior to launching Chipotle, Mr. Ells worked for two years at Stars restaurant in San Francisco. Mr. Ells is a 2003 recipient of a Silver Plate Award from the
International Foodservice Manufacturers' Association. Mr. Ells graduated from the University of Colorado with a Bachelor of Arts degree in art history. He is also a
1990 Culinary Institute of America graduate.
John R. (Jack) Hartung is Chief Finance and Development Officer. Mr. Hartung joined Chipotle in 2002 after spending 18 years at McDonald's where he held a
variety of management positions, most recently as Vice President and Chief Financial Officer of its Partner Brands Group. Mr. Hartung has a Bachelor of Science
degree in accounting and economics as well as an MBA from Illinois State University.
Montgomery F. (Monty) Moran is President and Chief Operating Officer. He was appointed to this position in March 2005. Mr. Moran previously served as chief
executive officer of the Denver law firm Messner & Reeves, LLC, where he was employed since 1996, and as general counsel of Chipotle. Mr. Moran holds a Bachelor
of Arts degree in communications from the University of Colorado and a law degree from Pepperdine University.
Robert D. (Bob) Wilner is Chief Administrative Officer responsible for Human Resources and Information Technology. Mr. Wilner joined Chipotle in 2002 after
spending 30 years at McDonald's where he held a variety of operations and human resources positions, most recently as Vice President of Human Resources of the
Partner Brands Group of McDonald's. He also served in a number of other capacities in Human Resources (domestic and international) and Operations at McDonald's.
Albert S. Baldocchi has served as a director of Chipotle since 1997. He has been self-employed for the past five years as a financial consultant and strategic advisor
for a variety of privately-held companies. Mr. Baldocchi holds a Bachelor of Science degree in chemical engineering from the University of California at Berkeley and
an MBA from Stanford University.
John S. Charlesworth has served as a director of Chipotle since 1999. He is currently the sole owner/member of Hunt Business Enterprises LLC and EZ Street
LLC. Before retiring in 2000, Mr. Charlesworth worked for McDonald's for 26 years, most recently as president of its midwestern division from July 1997 to
December 2000. He holds a Bachelor of Science degree in business, majoring in economics, from Virginia Polytechnic Institute.
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Patrick J. Flynn has served as a director of Chipotle since 1998. He has been retired since January 2, 2001. Prior to retiring in 2001, Mr. Flynn spent 39 years at
McDonald's where he held a variety of executive and management positions, most recently as Executive Vice President responsible for strategic planning and
acquisitions.
Darlene J. Friedman has served as a director of Chipotle since 1995. Prior to retiring in 1995, Ms. Friedman spent 19 years at Syntex Corporation where she held a
variety of management positions, most recently as Senior Vice President of Human Resources. While at Syntex Corporation, Ms. Friedman was a member of the
corporate executive committee and the management committee. Ms. Friedman holds a Bachelor of Arts in psychology from the University of California at Berkeley and
an MBA from the University of Colorado.
Mats Lederhausen has served as a director of Chipotle since 1999. He is currently Managing Director of McDonald's Ventures, LLC, a wholly-owned subsidiary of
McDonald's, and was recently President of McDonald's Business Development Group. Mr. Lederhausen previously was executive vice president of McDonald's
strategy and business development and has held a variety of executive and management positions with McDonald's since 1994. He worked for The Boston Consulting
Group in London from 1988 to 1990. Mr. Lederhausen is currently chairman of the governance committee of the board of directors of the not-for-profit Business for
Responsibility and serves on the board of trustees of Ronald McDonald House Charities. Mr. Lederhausen graduated from Bromma Gymnasium of Sweden with a
degree in business administration and holds a master's degree from the Stockholm School of Economics.
Board Structure
We currently have six directors. Each member of the board is elected annually and serves a one-year term. In connection with this offering, we will increase the
number of directors, change the structure of the board and the method of electing directors. The board will be divided into three classes, as nearly equal in number as
possible, serving staggered three-year terms. About one-third of the board will be elected annually, and each member will serve a three-year term. See "Description of
Capital Stock—Certain Certificate of Incorporation and Bylaw Provisions."
Board Committees
After the offering, our board of directors will establish standing committees in connection with the discharge of its responsibilities. These committees will include
an audit committee, a compensation committee and a nominating and governance committee. The board of directors will also establish such other committees as it
deems appropriate, in accordance with applicable law and regulations and our certificate of incorporation and bylaws.
Audit Committee. Prior to this offering, our board of directors will establish an audit committee to assist our board in overseeing the preparation of our financial
statements, the independent auditor's qualifications and independence, the performance of our internal audit function and independent auditors and our compliance with
legal and regulatory requirements. Within a year of this offering, all of the members of the audit committee will be independent, as determined in accordance with the
rules of the New York Stock Exchange and any relevant federal securities laws and regulations. Immediately following the offering, we expect that at least one member
of the committee will be independent, as permitted by the relevant transition rules. We anticipate that the members of this committee will initially be Albert Baldocchi,
John Charlesworth and Patrick Flynn.
Compensation Committee. We currently have a compensation committee but expect to revise the structure and charter of the committee and to appoint new
members to this committee following the completion of this offering. Within a year of this offering, all of the members of the compensation committee will be
independent, as determined in accordance with the terms of the New York Stock Exchange and any relevant federal securities laws and regulations. Immediately
following the offering, we
72
expect that at least one member of the committee will be independent, as permitted by the relevant transition rules. The compensation committee will have overall
responsibility for evaluating and approving our executive officer incentive compensation, benefit, severance, equity-based or other compensation plans, policies and
programs. The compensation committee will also produce an annual report on executive compensation for inclusion in our proxy statement. We anticipate that the
members of this committee initially will be Patrick Flynn and Darlene Friedman.
Nominating and Governance Committee. We expect that the members of the nominating and governance committee will be appointed following the completion
of this offering. Within a year of this offering, all of the members of the nominating and governance committee will be independent, as determined in accordance with
the rules of the New York Stock Exchange and any relevant federal securities laws and regulations. Immediately following the offering, we expect that at least one
member of the committee will be independent, as permitted by the relevant transition rules. The nominating and governance committee will assist our board of directors
in implementing sound corporate governance principles and practices. Our nominating and governance committee will identify individuals qualified to become board
members and recommend to our board of directors the director nominees for the next annual meeting of shareholders. It will also review the qualifications and
independence of the members of our board of directors and its various committees on a regular basis and make any recommendations the committee members may
deem appropriate from time to time concerning any recommended changes in the composition of our board. We anticipate that the members of this committee initially
will be Patrick Flynn and Darlene Friedman.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or
more executive officers who serve on our board of directors or compensation committee.
Limitation of Liability and Indemnification
Our certificate of incorporation and bylaws limit the liability of directors to the maximum extent permitted by Delaware law. Specifically, a director will not be
personally liable for monetary damages for breach of fiduciary duty as a director, except liability for:
•
any breach of the director's duty of loyalty to us or our shareholders;
•
acts of omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
•
unlawful payments of dividends or unlawful stock repurchases or redemptions; or
•
any transaction from which the director derived an improper personal benefit.
Our bylaws provide that we'll indemnify our directors and officers and may indemnify our employees and other agents to the fullest extent permitted by law. We
believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also provide that we'll
advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and we may advance expenses incurred by our
employees or other agents in advance of the final disposition of any action or proceeding. Our bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her actions in his or her capacity as an officer, director, employee or other agent. We may in the
future enter into agreements to indemnify our directors, executive officers and other employees as determined by the board of directors. These agreements provide for
the indemnification of directors and officers to the fullest extent permitted by Delaware law, whether or not expressly provided for in our bylaws, and govern the
process by which claims for indemnification are considered. We believe that these bylaw provisions and
73
indemnification agreements are necessary to attract and retain the services of highly qualified persons as directors and officers.
The limited liability and indemnification provisions in our certificate of incorporation, bylaws and indemnification agreements may discourage shareholders from
bringing a lawsuit against our directors for breach of their fiduciary duty and may reduce the likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our shareholders. A shareholder's investment in us may be adversely affected to the extent we
pay the costs of settlement or damage awards against our directors and officers under these indemnification provisions.
There is no pending litigation or proceeding involving any director, officer or employee where indemnification is sought, nor are we aware of any threatened
litigation that may result in indemnification claims.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers and controlling persons of us under the foregoing
provisions or otherwise, we've been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
Directors' Compensation
Each non-employee director will receive an annual cash retainer of $25,000 and an annual grant of $25,000 in shares of class A common stock. We'll pay
non-employee directors $1,500 for each meeting of the board of directors that they attend and $1,000 for each meeting of a committee of the board of directors that they
attend. Annual retainers will be paid to the chairperson of each committee of the board of directors as follows: $20,000 for the audit committee chairperson, $5,000 for
each of the compensation committee chairperson and the nominating/governance committee chairperson and $3,000 for the chairperson of any other committee
established by the board of directors. Directors will also be reimbursed for expenses incurred in connection with their service as directors, including travel expenses for
meeting attendance. Each of Messrs. Baldocchi, Charlesworth and Flynn and Ms. Friedman is entitled to payment of $12,000 in 2006 for service as a director during
2005.
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Executive Compensation
The following table sets forth certain information concerning the compensation of those persons who were, at December 31, 2005, the Chief Executive Officer and
our executive officers (the "named executive officers").
Summary Compensation Table
Annual Compensation
Name and Principal Position
Year
Salary ($)
Long-Term Compensation
Other Annual
Compensation
($)(1)
Bonus
($)
Restricted
Stock Awards
($)
Options /
SARS
(#)(2)
LTIP($)
All Other
Compensation
($)(3)
Steve Ells(4)
Chief Executive Officer
2005
2004
2003
384,369
367,115
314,990
*
297,101
411,938
—
—
—
—
—
—
—
25,000
24,833
—
—
90,636
28,295
31,871
23,905
John R. Hartung
Chief Finance and
Development Officer
2005
2004
2003
287,804
284,213
260,564
*
159,779
235,689
67,893
66,228
84,652
—
—
—
—
18,333
13,833
—
—
—
18,676
21,692
16,475
Robert D. Wilner
Chief Administrative
Officer
2005
2004
2003
235,008
234,784
219,061
*
123,024
180,417
38,118
326,298
67,258
—
—
—
—
13,333
13,833
—
—
—
14,951
17,704
13,812
Montgomery F. Moran(4)(5)
Chief Operating Officer
2005
250,039
*
—
—
—
879
2,990,000(6)
*
Bonus amounts for our employees and named executive officers in respect of 2005 have not yet been determined. Bonus amounts for our named executive officers for
2005 will be determined by our Compensation Committee no later than March 15, 2006, which is the scheduled payment date for bonuses. The bonuses for 2005 will be
based on a combination of Chipotle, team and individual performance factors that include operating income, new store average daily sales, comp store sales, new store
months of operation and Chipotle key initiatives.
(1)
Includes (i) for 2005, $49,511 and $24,743 in temporary housing and relocation expenses, and $18,382 and $13,375 for company car costs for Mr. Hartung and
Mr. Wilner, respectively; (ii) for 2004, $50,256 and $101,721 in temporary housing and relocation expenses for Mr. Hartung and Mr. Wilner, respectively, and a
$214,500 payment to Mr. Wilner to cover a loss on the sale of his home incurred in connection with his relocation; and (iii) for 2003, $56,558 and $54,535 in temporary
housing and relocation expenses for Mr. Hartung and Mr. Wilner, respectively.
(2)
In 2003, we granted stock options, and in 2004, we granted stock appreciation rights, or SARs. All share-related data have been adjusted to give retroactive effect to the
Reclassification.
(3)
All Other Compensation consists of the following (i) for 2005, for Messrs. Ells, Hartung, Wilner and Moran, respectively: $27,259, $17,904, $14,321 and $0 of
employer matching contributions to a 401(k) and a supplemental retirement plan maintained by McDonald's in which certain of our executives participate and $1,036,
$772, $630 and $879 for group term life insurance premiums; (ii) for 2004, for Messrs. Ells, Hartung and Wilner respectively: $31,162, $20,796 and $16,608 of
employer matching contributions to a 401(k) and a supplemental retirement plan maintained by McDonald's in which certain of our executives participate and $709,
$896 and $1096 for group term life insurance premiums; and (iii) for 2003, for Messrs. Ells, Hartung and Wilner, respectively: $23,344, $15,643 and $13,112 of
employer matching contributions to a 401(k) and a supplemental retirement plan maintained by McDonald's in which certain of our executives participate and $561,
$832 and $700 for group term life insurance premiums.
(4)
We have provided Mr. Ells and Mr. Moran piggyback registration rights with respect to shares they beneficially own. See "Risk Factors—Risks Relating to Our
Business and Industry—Our success depends substantially upon the continued retention of certain key personnel" and "Certain Relationships and Related Party
Transactions—Registration Rights."
(5)
Mr. Moran was hired as President and Chief Operating Officer on March 24, 2005. His annual salary is $330,000.
(6)
On May 27, 2005, Mr. Moran was granted 153,333 shares of non-vested common stock (after giving retroactive effect to the Reclassification), which are subject to
forfeiture, and vest in equal annual installments over three years from March 24, 2005, subject to his continued employment with us. The shares also vest on a
termination of
75
Mr. Moran's employment by us without cause, by Mr. Moran for good reason, or due to Mr. Moran's death or disability. Mr. Moran has the right to vote
these shares and to accrue dividends, subject to vesting restrictions, prior to the vesting date of the restricted shares. After giving retroactive effect to the
Reclassification, the fair market value of the non-vested shares at December 31, 2005 was estimated to be $2,529,945 based on a value of $16.50 per share,
which is the midpoint of the range shown on the cover page of this prospectus.
SAR Grants in Last Fiscal Year
We did not grant any stock options or stock appreciation rights in 2005.
Aggregated Company Option / SAR Exercises in Last Fiscal Year and Fiscal Year-End
The following table provides summary information about options and SARs held by the named executive officers in fiscal 2005. The value of unexercised,
in-the-money options and SARs at fiscal year-end is calculated using the difference between the applicable exercise price and the estimated fair market value at
December 31, 2005 (after giving retroactive effect to the Reclassification), which has been deemed to be $16.50 per share (the midpoint of the range shown on the cover
page of this prospectus), multiplied by the number of shares underlying the option or SAR. An option or SAR is in-the-money if the fair market value of the common
stock subject to the option is greater than the exercise price.
Number of Securities Underlying
Unexercised Options / SARs as of
December 31, 2005 (#)
Name and Principal Position
Shares Acquired
on Exercise (#)
Value
Realized ($)
Exercisable/Unexercisable
Value of Unexercised
In-the-Money Options /SARs
at December 31, 2005 ($)(1)
Exercisable/Unexercisable
Steve Ells(2)
Chief Executive Officer
John R. Hartung
Chief Finance and
Development Officer
—
—
20,000 / 49,833
30,600 / 0
—
—
13,333 / 32,166
20,399 / 0
Robert D. Wilner
Chief Administrative
Officer
—
—
13,333 / 27,166
20,399 / 0
Montgomery F. Moran
Chief Operating Officer
—
—
0/0
0/0
(1)
Calculated using the price of $16.50 less the applicable exercise price multiplied by the number of option shares or SARs, as applicable. All share-related data have
been adjusted to give retroactive effect to the Reclassification.
(2)
We have provided Mr. Ells piggyback registration rights with respect to shares he beneficially owns. See "Risk Factors—Risks Relating to Our Business and
Industry—Our success depends substantially upon the continued retention of certain key personnel" and "Certain Relationships and Related Party
Transactions—Registration Rights."
Aggregated McDonald's Option / SAR Exercises in Last Fiscal Year and Fiscal Year-End
Messrs. Hartung and Wilner were both employees of McDonald's prior to joining Chipotle. Due to McDonald's current economic interest in us, any options
granted to Messrs. Hartung and Wilner by McDonald's continue to vest while these individuals remain employed by Chipotle. In addition, we granted McDonald's
options to our employees prior to 2002 because we did not have our own employee stock option plan at that time.
Options granted under McDonald's plan have an exercise price equal to the fair market value of a share of McDonald's common stock on the grant date, generally
have a ten-year life, and vest in equal
76
annual installments over periods of four years. Generally, options expire 30 days after termination of employment; however, McDonald's equity compensation plans
provide for accelerated vesting and an extended exercise period upon death, change of control, disability, retirement and, under other limited circumstances, upon
termination of employment. McDonald's compensation committee has general authority to accelerate, extend or otherwise modify benefits under stock option grants.
Subject to the approval of the compensation committee, options may be transferred to certain permissible transferees, including immediate family members, for no
consideration.
The following table provides summary information about McDonald's options held by the named executive officers during fiscal 2005.
Number of McDonald's Securities
Underlying Unexercised Options /
SARs at December 31, 2005(2)
Name and Principal Position
McDonald's
Shares Acquired
on Exercise (#)
McDonald's
Value Realized
($)(1)
Value of Unexercised
In-the-Money Options / SARs
at December 31, 2005 ($)(3)
Exercisable/Unexercisable
Exercisable/Unexercisable
41,050 / 0
176,105 / 0
—
—
8,000
71,000
128,025 / 6,875
594,843 / 34,169
Robert D. Wilner
Chief Administrative
Officer
—
—
89,240 / 5,000
469,781 / 24,850
Montgomery F. Moran
Chief Operating Officer
—
—
—
—
Steve Ells
Chief Executive Officer
John R. Hartung
Chief Finance and
Development Officer
(1)
Calculated by subtracting the exercise price from the market value of McDonald's common stock on the exercise date, then multiplying by the number of shares
exercised. All values are on a pretax basis.
(2)
The option term was extended three years for those options granted between May 1, 1999 and December 31, 2000 that have an exercise price greater than $28.90.
(3)
Calculated using the closing price of McDonald's common stock at December 30, 2005 ($33.72 per share), less the option exercise price multiplied by the number of
exercisable and unexercisable option shares. All values are on a pretax basis.
Description of Equity Compensation Plans
Chipotle Executive Stock Option Plan
Under the Chipotle Executive Stock Option Plan (the "Option Plan"), our board of directors or a committee designated by our board of directors may grant to our
key employees who are employed in job classification A, B or C options to purchase our common stock. The Option Plan provides for the issuance of up to
1,000,000 shares of our common stock (after giving retroactive effect to the Reclassification), and further provides that for grants in any consecutive 12 month period,
(i) the aggregate exercise price of options granted under the Option Plan may not exceed the greater of (A) $1,000,000; and (B) 15% of our total assets measured as of
our most recent balance sheet date; and (ii) the number of shares subject to Options granted under the Option Plan may not exceed 15% of the number of shares
outstanding, measured at our most recent balance sheet date.
All options granted under the Option Plan have an exercise price at least equal to the fair market value of the underlying stock on the date of grant, and a term of
five years and six months, subject to earlier termination in the event of the termination of a participant's employment with us. Under the
77
Option Plan, we or McDonald's (so long as it continues to own at least 50% of the our then-outstanding shares) may elect to repurchase any or all of the outstanding
options for a cash payment equal to their value at the time of repurchase and/or to terminate the Option Plan.
We currently intend that options granted under the Option Plan prior to this offering will remain outstanding in accordance with their terms as adjusted to take into
account this offering. Following the offering, such options will be in respect of class A shares. We do not intend to grant additional options under the Option Plan
following the consummation of this offering.
Chipotle Stock Appreciation Rights Plan
Under the Chipotle Stock Appreciation Rights Plan (the "SAR Plan"), our compensation committee has granted stock appreciation rights ("SARs") relating to our
common stock to key employees who are employed in job classification A, B, C or D. Each outstanding SAR represents the right to receive a cash award equal to the
appreciation in value of a share of common stock over a base "exercise" price. The exercise price of each SAR granted under the SAR Plan is at least equal to the fair
market value of a share of common stock at the time of grant. Upon exercise of a SAR, a participant is entitled to receive a cash payment equal to the excess of the fair
market value of a share of common stock on the date of exercise over the exercise price of the SAR. The SAR Plan was adopted on July 14, 2004.
Under the terms of the SAR Plan, upon the occurrence of an initial public offering of our common stock, the compensation committee or our board of directors, as
the case may be, may elect to make adjustments to our outstanding SARs. In connection with this offering, we intend, subject to approval by the compensation
committee, to convert all of our outstanding cash-settled SARs into stock options to purchase class A shares. As a result, upon exercise of a SAR an employee will be
entitled to receive shares of our class A common stock instead of receiving a cash payment. We intend that the shares issued upon exercise of the converted SARs will
be issued under the new 2006 Incentive Plan (described below) that we intend to adopt. No changes will be made to the exercise prices or number of SARs currently
outstanding in connection with the conversion of the SARs from cash-settled rights to options, other than any changes needed to give retroactive effect to the
Reclassification.
We do not intend to issue additional awards under the SAR Plan following this offering.
Chipotle 2006 Stock Incentive Compensation Plan
General. Prior to this offering, we expect that McDonald's, as our majority shareholder, will approve, contingent on the offering occurring and on adoption by
our board of directors, the Chipotle Mexican Grill, Inc. 2006 Stock Incentive Compensation Plan (the "2006 Incentive Plan"). We anticipate that the 2006 Incentive
Plan will be administered by our compensation committee or such other committee as our board of directors will appoint from time to time to administer and to
otherwise exercise and perform the authority and functions assigned to such committee (the "Committee").
The purpose of the 2006 Incentive Plan is to promote our interests and the interests of our shareholders by providing our employees and our non-employee
directors, who collectively are responsible for the management, growth and protection of our business, with incentives and rewards to encourage them to continue in our
service. The 2006 Incentive Plan is designed to meet this purpose by providing these employees and eligible non-employee directors with a proprietary interest in
pursuing our long-term growth, profitability and financial success.
The material terms of the 2006 Incentive Plan are summarized below. The summary is not a complete description of the terms of the 2006 Incentive Plan.
Eligible Participants and Types of Awards. We anticipate that the 2006 Incentive Plan will provide for the grant of non-qualified and incentive stock options
("Options") and other stock-based awards (Options and other stock based awards are referred to herein as the "Incentive Awards") to our employees and
78
non-employee directors. Incentive Awards may be settled in cash or in shares or other property pursuant to the terms of the relevant Incentive Award.
Shares Available for Awards and Individual Award Limits. Following the one for three reverse common stock split that is part of the Reclassification, the number
of shares of our class A common stock ("Shares") authorized for issuance with respect to Incentive Awards granted under the 2006 Incentive Plan is estimated to be
2,200,000, of which 666,667 represent Shares that were authorized for issuance but not issued under our Option Plan. This 2,200,000 includes Shares issuable upon the
exercise of our converted SARs. Of those Shares, the maximum number of Shares that may be covered by "incentive stock options" within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), will not exceed 2,200,000. Shares issued under the 2006 Incentive Plan may be either newly issued
shares or treasury shares.
We anticipate that the maximum number of Shares that may be covered by Incentive Awards granted under the 2006 Incentive Plan to any single participant in the
2006 Incentive Plan (a "Participant") in any calendar year will not exceed 333,333 Shares.
We intend that Shares covered by Incentive Awards will only be counted as used to the extent they are actually issued and delivered to a Participant (or a
Participant's permitted transferees). Accordingly, if an Incentive Award is settled for cash or if Shares are withheld to pay the exercise price of an Option or to satisfy
any tax withholding requirement in connection with an Incentive Award, only the Shares issued (if any), net of the Shares withheld, will be deemed delivered for
purposes of determining the number of Shares that remain available for delivery under the 2006 Incentive Plan. We also intend that if Shares are issued subject to
conditions which may result in the forfeiture, cancellation or return of such Shares to our company, any portion of the Shares forfeited, cancelled or returned will be
treated as not issued pursuant to the 2006 Incentive Plan. We further intend that if Shares owned by a Participant (or a Participant's permitted transferees) are tendered
(either actually or through attestation) to us in payment of any obligation in connection with an Incentive Award, the number of Shares tendered will be added to the
number of Shares that are available for delivery under the 2006 Incentive Plan.
In addition, we expect that if we use cash we receive in payment of the exercise price or purchase price in connection with any Incentive Award to repurchase
Shares, the Shares so repurchased will be added to the aggregate number of Shares available under the 2006 Incentive Plan. We also expect that the Shares covered by
Incentive Awards granted pursuant to the 2006 Incentive Plan in connection with the assumption, replacement, conversion or adjustment of outstanding equity-based
awards in the context of a corporate acquisition or merger will not count as used under the 2006 Incentive Plan for these purposes.
Administration. We intend that the Committee will from time to time designate those persons who will be granted Incentive Awards and the amount, type and
other terms and conditions of such Incentive Awards. We expect that the Committee will have full authority to administer the 2006 Incentive Plan, including authority
to interpret and construe any provision of the 2006 Incentive Plan and the terms of any Incentive Award issued under it and to adopt such rules and regulations for
administering the 2006 Incentive Plan, as it may deem necessary. Pursuant to this authority, on or after the date of grant of an Incentive Award under the 2006 Incentive
Plan, the Committee may (i) accelerate the date on which any such Incentive Award becomes vested, exercisable or transferable, as the case may be; (ii) extend the term
of any such Incentive Award, including, without limitation, extending the period following a termination of a Participant's employment during which any such Incentive
Award may remain outstanding; (iii) waive any conditions to the vesting, exercisability or transferability, as the case may be, of any such Incentive Award; or
(iv) provide for the payment of dividends or dividend equivalents with respect to any such Incentive Award; provided that the Committee will not have any such
authority to the extent that the grant of such authority would cause any tax to become due under Section 409A of the Code.
In addition, we expect to pay any amount payable with respect to an Incentive Award in accordance with the terms of such Incentive Award, provided that the
Committee may, in its discretion, defer the
79
payment of amounts payable with respect to an Incentive Award subject to and in accordance with the terms of any deferred compensation plans we may adopt from
time to time.
Significant Features of Incentive Awards. The following is a description of the terms we expect to apply to each Option issued under the 2006 Incentive Plan.
Each Option will entitle the holder thereof to purchase a specified number of Shares. The exercise price of each Option will be at least equal to 100% of the fair market
value of a Share on the date on which the Option is granted. Options will have terms that do not exceed ten years and will have vesting periods as determined by the
Committee. Each Option may be exercised in whole or in part; provided, however, that no partial exercise of an Option will be for an aggregate exercise price of less
than an amount determined by the Committee from time to time. Each agreement evidencing the award of each Option will specify the consequences with respect to
such Option of the termination of the employment, service as a director or other relationship between Chipotle and the Participant.
The Committee may grant equity-based or equity-related Incentive Awards other than Options in such amounts and subject to such terms and conditions as the
Committee determines. Each such Incentive Award may, among other things, (i) involve the transfer of actual Shares, either at the time of grant or thereafter, or
payment in cash or otherwise of amounts based on the value of Shares; (ii) be subject to performance-based and/or service-based conditions; and (iii) be in the form of
stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units, share-denominated performance units or other
full value stock awards.
Performance-Based Compensation. The Committee may grant Incentive Awards that are intended to qualify under the requirements of Section 162(m) of the
Code as performance-based compensation. The performance goals upon which the payment or vesting of any Incentive Award (other than Options) that is intended to
so qualify depends may relate to one or more of the following performance measures: (i) revenue growth; (ii) operating income; (iii) operating cash flow; (iv) net
income; (v) earnings per share; (vi) return on sales; (vii) return on assets; (viii) return on equity; (ix) return on invested capital; (x) new store openings; and (xi) total
shareholder return.
Performance periods may be equal to or longer than, but not less than, one fiscal year of our company and its subsidiaries and may be overlapping. Within 90 days
after the beginning of a performance period, and in any case before 25% of the performance period has elapsed, we expect that the Committee will establish
(i) performance goals and objectives for such performance period; (ii) target awards for each Participant; and (iii) performance schedules or other objective methods for
determining the applicable performance percentage to be applied to each such target award.
The measurement of any performance measure(s) may exclude the impact of charges for restructurings, discontinued operations, extraordinary items, and other
unusual or non-recurring items, and the cumulative effects of accounting changes, each as defined by generally accepted accounting principles and as identified in our
company's audited financial statements, including the notes thereto. Any performance measure(s) may be used to measure our performance as a whole or the
performance of any of our business units or any combination thereof, as the Committee may deem appropriate, or any of the above performance measures as compared
to the performance of a group of competitor companies, or a published or special index that the Committee, in its sole discretion, deems appropriate.
General Plan Provisions. We expect that the 2006 Incentive Plan will provide for an adjustment in the number of Shares available to be issued under the 2006
Incentive Plan, the number of Shares subject to Incentive Awards and the exercise prices of certain Incentive Awards upon a change in our capitalization, a stock
dividend or split, a merger or combination of Shares and certain other similar events.
We expect that the 2006 Incentive Plan will provide that Participants may elect to satisfy certain federal income tax withholding requirements by remitting to us
cash or, subject to certain conditions, Shares or by instructing us to withhold Shares payable to the Participant.
80
We expect that under the 2006 Incentive Plan, Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution, except as permitted by the Committee on a general or specific basis.
Our board of directors may at any time suspend or discontinue the 2006 Incentive Plan or revise or amend it in any respect whatsoever, except that, to the extent
any applicable law, regulation or rule of a stock exchange requires shareholder approval for any revision or amendment to be effective, the revision or amendment will
not be effective without shareholder approval.
We will not make any grants of Incentive Awards under the 2006 Incentive Plan following the tenth anniversary of the date that the 2006 Incentive Plan becomes
effective.
We expect the 2006 Incentive Plan to provide for accelerated vesting of awards under certain circumstances in connection with a change in control of Chipotle.
Tax Consequences of the Plan. The tax consequences of participation in the Plan for Participants and us will generally depend on the type of award issued to a
Participant. In general, if a Participant recognizes ordinary income in connection with the grant, vesting or exercise of an award, we will be entitled to a corresponding
deduction equal to the amount recognized as income by the Participant.
In connection with this offering, and taking into consideration the fact that we did not grant any stock options or SARs to our named executive officers in 2005, we
expect to grant Options under our 2006 Incentive Plan to purchase 75,000, 40,000, 24,000 and 20,000 Shares (after giving retroactive effect to the Reclassification) to
Messrs. Ells, Moran, Hartung and Wilner, respectively. We expect that the Options will have a seven-year term, subject to earlier termination in the event of a
Participant's termination of employment with us, and will be granted with an exercise price equal to the offering price at which our Shares are made available to the
public for purchase by Morgan Stanley & Co. Incorporated and SG Cowen & Co., LLC, on behalf of the underwriters. We expect that these Options will vest in full on
the third anniversary of the grant date if the Participant remains continuously employed by us, and will be subject to accelerated vesting in connection with certain
qualifying terminations of employment such as a termination due to death, disability or retirement or in connection with a change in control of Chipotle.
Chipotle 2006 Cash Incentive Plan
Prior to this offering, we intend to adopt a cash bonus plan for our key employees. We expect that the cash bonus plan will be administered by a committee of our
board of directors, which will include at least two members who qualify as "outside directors" within the meaning of Section 162(m) of the Code.
Awards under the cash incentive plan may be designed to qualify under the requirements of Section 162(m) of the Code as performance-based compensation. The
performance goals upon which the payment or vesting of any cash award that is intended to so qualify depends may relate to one or more of the following performance
measures: (i) revenue growth; (ii) operating income; (iii) operating cash flow; (iv) net income; (v) earnings per share; (vi) return on sales; (vii) return on assets;
(viii) return on equity; (ix) return on invested capital; (x) new store openings; and (xi) total shareholder return.
We expect that performance periods under the cash bonus plan may be equal to or longer than, but not less than, one of our fiscal years and may be overlapping.
Within 90 days after the beginning of a performance period, and in any case before 25% of the performance period has elapsed, it is expected that the compensation
committee will establish (i) performance goals and objectives for such performance period; (ii) target awards for each participant; and (iii) performance schedules or
other objective methods for determining the applicable performance percentage to be applied to each such target award. The measurement of any performance
measure(s) may exclude the impact of charges for restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring items, and the
cumulative effects of accounting changes, each as defined by generally accepted accounting principles and as identified in our company's audited financial statements,
including the notes thereto. Any performance
81
measure(s) may be used to measure the performance of our company as a whole or any business unit of our company or any combination thereof, as the compensation
committee may deem appropriate, or any of the above performance measures as compared to the performance of a group of competitor companies, or a published or
special index that the compensation committee, in its sole discretion, deems appropriate.
The amount paid under the cash bonus plan to any participant with respect to any award for a performance period of one year will not exceed $3.0 million. The
amount paid under the cash bonus plan to any participant with respect to any award for a performance period of more than one year will not exceed $9.0 million. No
participant will be eligible to earn awards for more than three performance periods that end within any single fiscal year.
82
PRINCIPAL AND SELLING SHAREHOLDERS
Beneficial Ownership of Our Common Stock
The following table sets forth information as of December 31, 2005, as to the beneficial ownership of shares of common stock of Chipotle, after giving retroactive
effect to the Reclassification and this offering, in each case, by:
•
each person (or group of affiliated persons) known to us to beneficially own more than 5% of our common stock;
•
each named executive officer;
•
each of our directors; and
•
all of such executive officers and directors as a group.
As of December 31, 2005, there were no outstanding shares of class A common stock and 26,434,013 outstanding shares of class B common stock.
The number of shares beneficially owned by each stockholder is determined under rules promulgated by the SEC and generally includes voting or investment
power over the shares. The information does not necessarily indicate beneficial ownership for any other purpose. Under SEC rules, the number of shares of common
stock deemed outstanding includes shares issuable upon conversion of other securities, as well as the exercise of options held by the respective person or group that may
be exercised within 60 days after December 31, 2005. For purposes of calculating each person's or group's percentage ownership, shares of class A common stock
issuable pursuant to stock options exercisable within 60 days after December 31, 2005 are included as outstanding and beneficially owned for that person or group but
are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group. The table below assumes the underwriters do not
exercise their option to purchase additional shares.
Shares of Class A and Class B Common Stock
Beneficially Owned Before This Offering
Name and Address of Beneficial
Owner(1)
McDonald's Ventures, LLC(7)
Steve Ells(8)
John Hartung
Montgomery Moran(8)(9)
Robert Wilner
Albert Baldocchi(8)(10)
John Charlesworth
Patrick Flynn
Darlene Friedman(8)(11)
Mats Lederhausen
All current directors and executive
officers as a group (9 persons)
Shares of
Class A
Common
Stock Offered
in This
Offering(2)
Number of
Class A
Shares(4)
Number of
Class B Shares
Convertible Into
Class A
Shares(5)
Percentage of
Class A
Shares(6)
Shares of Class A and Class B Common Stock
Beneficially Owned After This Offering(3)
Percentage of
Class B Shares
Number of
Class A
Shares
Number of
Class B Shares
Convertible Into
Class A
Shares(5)
Percentage of
Class A
Shares(6)
Percentage of
Class B Shares
1,818,182
—
—
—
—
—
—
—
—
—
—
20,000
13,333
—
13,333
—
—
—
—
—
24,081,066
1,005,050
—
153,333
—
162,841
—
—
93,418
—
91.1
3.8
*
*
*
*
—
—
*
—
91.1
3.8
—
*
—
*
—
—
*
—
—
20,000
13,333
—
13,333
—
—
—
—
—
22,262,884
1,005,050
—
153,333
—
162,841
—
—
93,418
—
68.5
3.1
*
*
*
*
—
—
*
—
90.4
4.1
—
*
—
*
—
—
*
—
—
46,666
1,419,308
5.5
4.5
46,666
1,419,308
5.4
5.7
*
Less than one percent (1%)
(1)
The addresses for the listed beneficial owners are as follows: for McDonald's Ventures, LLC, Parkview Plaza, Suite 640, Oak Brook Terrace, IL, 60181; for each director or executive officer, c/o Chipotle
Mexican Grill, Inc., 1543 Wazee Street, Suite 200, Denver, CO, 80202.
(2)
In connection with the offering, shares of class B common stock held by McDonald's Ventures, LLC, the selling shareholder, will be converted into shares of class A common stock. Those shares of class A
common stock will be the shares offered to investors in the offering by the selling shareholder.
(3)
Assumes no exercise of the underwriters' over-allotment option. In the event the underwriters' over-allotment option is exercised, the underwriters have an option to purchase up to 1,181,818 additional shares
of our class A common stock. Any shares purchased pursuant to the underwriters' over-allotment option will be purchased from McDonald's Ventures, LLC. In the event that the over-allotment option is
exercised in full, McDonald's Ventures, LLC will beneficially own 21,081,066 shares of class B common stock, representing 90.0% of the class B stock outstanding. The number of shares of class B common
stock held by our directors and officers will not change as a result of the exercise of the over-allotment option. However, if the over-allotment
83
option were exercised in full, the percentage of the outstanding shares of class B common stock held by Mr. Ells would increase to 4.3%. Mr. Moran, Mr. Baldocchi and Ms. Friedman would
continue to hold less than 1% of the outstanding shares of class B stock.(4)
Reflects options that are exercisable within 60 days.
(5)
Following the Reclassification, our certificate of incorporation will provide that each share of class B common stock will be convertible into one share of class A common stock at any time at the option of
the holder thereof. As of December 31, 2005, there were 26,434,013 shares of class B common stock outstanding, and no shares of class A common stock outstanding.
(6)
For purposes of calculating the percentage of the class A common stock owned by the listed beneficial owners before and after this offering, as required under SEC rules, these columns assume that all
outstanding shares of class B common stock have been converted into shares of class A common stock.
(7)
McDonald's Ventures, LLC is a wholly-owned subsidiary of McDonald's Corporation.
(8)
Following this offering, all shares beneficially owned by Steve Ells, Montgomery F. Moran, Albert S. Baldocchi (including shares owned jointly by him and his wife) and Darlene J. Friedman (including
shares owned by the Friedman Family Follies Partnership) will be entitled to piggyback registration rights. See "Risk Factors—Risks Related To Our Business and Operations—Our success depends
substantially upon the continued retention of certain key personnel" and "Certain Relationships and Related Party Transactions—Registration Rights."
(9)
All of the shares beneficially owned by Mr. Moran are non-vested shares. Mr. Moran has the right to vote these shares and receive dividends in respect thereof, subject to his continued employment with us.
Those shares are, however, subject to forfeiture in certain circumstances.
(10)
Includes 140,623 shares owned jointly by Albert Baldocchi and Anne Baldocchi.
(11)
Includes 61,290 shares owned by the Friedman Family Follies Partnership.
For each of the persons listed below, the following is their beneficial ownership of shares of common stock of McDonald's as of December 31, 2005 (including
shares with respect to which each will acquire voting and/or investment power within 60 days):
Shares of McDonald's Common
Stock Beneficially Owned Before and After This
Offering
Name and Address of Beneficial Owner(1)
Number of Shares
Steve Ells
John Hartung
Montgomery Moran
Robert Wilner
Albert Baldocchi
John Charlesworth
Patrick Flynn
Darlene Friedman
Mats Lederhausen
Percentage of Class
41,675
152,247
—
89,240
—
—
8,469
—
233,935
*
*
—
*
—
—
*
—
*
525,566
*
All current directors and executive officers as a group (9 persons)
*
Less than one percent (1%).
(1)
The address for the listed beneficial owners is as follows: for each director or executive officer, c/o Chipotle Mexican Grill, Inc., 1543 Wazee Street, Suite 200, Denver, CO, 80202.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Relationship with McDonald's
Our equity is currently owned by McDonald's, our management and a small number of outside investors. McDonald's interest is about 91% and, after the offering,
we expect McDonald's will own about 88% of the combined voting power of our outstanding stock and 69% of the economic interest in our outstanding common stock
(or 87% and 65%, respectively, if the underwriters' over-allotment option is exercised in full).
In connection with this offering, we've entered into agreements with McDonald's to clarify our relationship with McDonald's while it is our controlling
shareholder. These agreements address services that McDonald's or its suppliers provide to us at preferred rates and for the allocation of employee benefit, tax and other
liabilities and obligations attributable to or related to periods or events prior to and in connection with this offering. The agreements summarized below have been
incorporated by reference as exhibits to the registration statement of which this prospectus is a part. As our controlling shareholder after this offering, McDonald's will
continue to exercise significant influence over our business policies and affairs, including the composition of our board of directors and any action requiring the
approval of our shareholders. Currently, one of the members of our board of directors, Mats Lederhausen, is also an employee of McDonald's. See "Risk Factors—Risks
Relating to Our Affiliation with McDonald's."
Historically, we've also entered into short-term agreements with McDonald's to provide us with temporary capital. In addition, we invest our excess cash under
short-term agreements with McDonald's. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources."
We currently reimburse McDonald's for payroll and related expenses relating to certain McDonald's employees that perform services for us, insurance coverage,
software maintenance agreements and non-income based taxes, and we lease office and restaurant space from McDonald's and its affiliates. In aggregate, we paid
McDonald's $3.6 million, $5.6 million and $8.8 million in 2002, 2003 and 2004, respectively, and $8.3 million in the first nine months of 2005 for those matters.
Services Agreement
As a majority-owned subsidiary of McDonald's, we've historically received various services from McDonald's. These services include, among others, accounting
services, insurance policy coverage (including primarily property and umbrella / excess liability) and certain welfare plans for our employees. Under the terms of a
services agreement we'll enter into with McDonald's when we complete this offering, McDonald's will continue to provide services to us.
The services agreement will become operative on the closing date of this offering and will have terms ranging from approximately one or two years depending on
the service. Services will renew automatically unless we or McDonald's terminate the services agreement prior to renewal. If McDonald's ceases to own more than 80%
of the combined voting power of our stock, we or McDonald's may terminate the services agreement or any of the services on providing advance notice, which ranges
from two to 15 months, depending on the service; however, we or McDonald's may terminate the accounting services that McDonald's provides to us at any time, upon
providing 15 months' notice, regardless of the level of McDonald's ownership.
We will pay McDonald's mutually agreed-upon fees for the services. We estimate that the aggregate fees we'll pay for the first year of services will be about
$10 million to $11 million. However, this amount may increase or decrease depending on a number of factors, including an increase or decrease over time in the
number of services provided by McDonald's, the number of our stores or the number of our employees, agreed-upon annual price negotiations between us and
McDonald's or an increase or decrease over time in the cost to McDonald's of procuring applicable insurance coverages and employee benefit
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arrangements. In addition, we and McDonald's have agreed that the fees for certain of the services will increase in the event that McDonald's ceases to hold more than
50% of the combined voting power of our outstanding stock and neither we nor McDonald's exercise our option to terminate the services agreement. We believe that the
payments we'll make to McDonald's are reasonable. However, these payments are not necessarily indicative of, and it is not practical for us to estimate, the level of
expenses we might incur in procuring these services from alternative sources. See "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."
Benefits of the McDonald's Relationship
As a majority-owned subsidiary of McDonald's, we also benefit from our relationship with McDonald's when we buy supplies or distribution or other services. If
McDonald's ownership interest declines significantly, as we expect it will, we'll lose an increasing amount of the benefits of our relationship with McDonald's, many of
which will not be covered by the services agreement. For example, we currently obtain beneficial pricing and/or service levels from certain suppliers and service
providers, and pay McDonald's for the costs they incur in administering our 401(k) plan and providing certain health benefits, including workers compensation, for our
employees. If McDonald's ceases to own more than 80% of the combined voting power of our outstanding stock, we'll need to administer our 401(k) plan and provide
these health benefits on a stand-alone basis and could incur increased costs as a result. If McDonald's ceases to own more than 50% of the combined voting power of
our outstanding stock, we may have to pay more for processing our credit and debit cards and our gift cards, our audit fees, our property insurance, our umbrella and
excess liability premiums and our banking services. In some cases, these benefits, such as the use of McDonald's distribution network, are not contractually tied to the
level of McDonald's ownership, and the relevant suppliers and service providers could decide to stop giving us beneficial pricing and/or service levels even if
McDonald's still owns a substantial equity stake in us. However, because we currently have not begun to negotiate new or amended contracts with suppliers and service
providers, we cannot now quantify with greater certainty potential increases in our expenses. Furthermore, as a public company, in each of 2006 and future years we
expect to incur a few million dollars of legal, accounting and other expenses that we did not previously incur as a subsidiary of McDonald's. See "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."
Tax Allocation Agreement
McDonald's has filed federal income tax returns and certain state income tax returns with us on a consolidated basis since June 2000. In connection with this
consolidation, the allocation of federal and state tax liabilities to us was based on the liability that would have been calculated had we operated on a stand-alone basis.
Prior to the consummation of this offering, we entered into a tax allocation agreement with McDonald's which provides that we'll make distributions to McDonald's, and
McDonald's will make contributions to us, such that we'll incur the expense for taxes generated by our business on the same basis as if we were not part of McDonald's
consolidated tax returns. Assuming McDonald's economic interest in our outstanding common stock falls to less than 80%, following this offering we expect that we
will become a separate taxable entity for federal and some state income tax purposes. McDonald's has agreed that any amounts owed to us by McDonalds' on account of
unreimbursed tax attributes will be paid to us following deconsolidation. The tax allocation agreement will continue to apply to, and govern, the sharing of tax liabilities
between McDonald's and us for state tax purposes for those states in which we and McDonald's will continue to file tax returns on a combined basis following the
offering.
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Relationship with Messner & Reeves, LLC
Monty Moran, our President and Chief Operating Officer, served as general counsel of Chipotle while he was the chief executive officer and member of the
Denver law firm Messner & Reeves, LLC ("M&R"). We paid M&R about $2.2 million for legal services in 2004 and about $2.4 million for the first nine months of
2005. Mr. Moran ceased to be a member of M&R in March 2005. During the period from January 1, 2005 to the date of Mr. Moran's departure from M&R, we paid
M&R about $0.8 million for legal services. We continue to employ M&R as legal counsel.
Relationships with Franchisees
Each of our three franchisees, who in aggregate operate eight of our stores, is also a McDonald's franchisee. We granted our first franchise in April 2001 for a
two-year term (which expired and was not renewed) including leases for store property and equipment, and subsequently granted eight additional franchises with
ten-year terms to qualified franchisees. These eight franchises are still within their initial ten-year terms. Each franchise includes the right to operate a Chipotle store at
a particular address only. At the end of a franchise term, the franchise expires, and the franchisee has no unilateral right to renew or extend the franchise (although we
may agree with the franchisee to extend the franchise for an additional term). Each franchisee is obligated to operate franchised stores in accordance with our operating
standards and is obligated to allocate and spend specific amounts, as specified by us, on marketing of the stores, subject to our approval of all marketing materials. In
addition, if McDonald's ceases to own a majority of our outstanding voting common stock or if we cease to be an affiliate of McDonald's, under the terms of our
franchise agreements, our franchisees must either sell their Chipotle franchise to someone who agrees to perform their obligations under the franchise agreements (at
fair market value determined in the manner provided in the franchise agreements) or sell their McDonald's franchise within 24 months after the relevant triggering
event. If our franchisees don't sell either franchise within the 24-month period, their franchise agreements with McDonald's will terminate automatically.
Registration Rights
Prior to the consummation of this offering, McDonald's and certain of our current shareholders, including Steve Ells, our Chairman and Chief Executive Officer,
Monty Moran, our President and Chief Operating Officer, and Albert S. Baldocchi and Darlene J. Friedman, members of our board of directors (the "Initial
Shareholders"), will enter into a registration rights agreement with us relating to the shares of common stock they hold (including shares issuable upon the exercise of
outstanding options). Subject to several exceptions, including our right to defer a demand registration under certain circumstances, McDonald's will have the right to
require us to register for public resale under the Securities Act all shares of common stock that they request be registered at any time after the expiration of the lock-up
period following this offering. McDonald's will have the right to demand several such registrations. The Initial Shareholders other than McDonald's are entitled to
piggyback registration rights with respect to any registration request made by McDonald's, subject to customary restrictions and pro rata reductions in the number of
shares to be sold in an offering. In addition, the Initial Shareholders have been granted piggyback rights on any registration for our account or the account of another
shareholder. We would be responsible for the expenses of any such registration.
Shareholders' Agreement
We are party to a shareholders' agreement with all of our shareholders. The shareholders' agreement, among other matters:
•
restricts the transfer by our management shareholders of our common shares, subject to certain exceptions, and provides that all transferees must become a party to the
shareholders' agreement;
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•
grants first to holders of our Series B Preferred Stock and then to us, certain rights of first refusal with respect to transfers of our common shares to third parties by our
management shareholders;
•
grants to holders of our Series B Preferred Stock and to our management shareholders, certain rights of first refusal with respect to any new shares that we may issue;
•
grants to each of our management shareholders, the right to require McDonald's to purchase a minimum amount of such management shareholder's shares on specific
dates provided for in the shareholder's agreement; and
•
restricts the transfer of common shares by our management shareholders for (i) the period beginning seven days prior to and ending 180 days after the effective date of
any public sale or distribution of our equity securities, or any securities convertible into or exchangeable or exercisable for such securities; and (ii) the period beginning
ten days prior to and ending 180 days after the effective date of any offering by us of our equity securities to the public pursuant to an effective registration statement
under the Securities Act or any comparable statement (subject to certain minimum price requirements for any such offering), any underwritten registration or any
underwritten piggyback registration, unless the underwriters managing such offering agree otherwise.
We expect that the shareholders' agreement will be terminated by our shareholders in connection with this offering.
Corporate Opportunity
Under the terms of our certificate of incorporation, for so long as McDonald's owns at least 5% of our outstanding common stock or at least one person who is a
director or officer of us is also a director or officer of McDonald's, McDonald's will not have a duty to refrain from engaging directly or indirectly in the same or similar
business activities or lines of business as us, and neither McDonald's nor any of its officers or directors will be liable to us or our shareholders for breach of any duty by
reason of any such activities. If McDonald's acquires knowledge of a potential transaction or matter that may be a corporate opportunity for McDonald's and us,
McDonald's will have no duty to communicate or offer such corporate opportunity to us and will not be liable to us or our shareholders for breach of any duty as our
shareholder if McDonald's pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person or entity, or does not
communicate information about, or offer, such corporate opportunity to us.
Our amended certificate of incorporation will contain provisions related to corporate opportunities that may be of interest to both McDonald's and us. It will
provide that if a corporate opportunity is offered to:
•
one of our officers or employees who is also a director (but not an officer or employee) of McDonald's, that opportunity will belong to us unless expressly offered to
that person primarily in his or her capacity as a director of McDonald's, in which case it will belong to McDonald's;
•
one of our directors who is also an officer or employee of McDonald's, that opportunity will belong to McDonald's unless expressly offered to that person primarily in
his or her capacity as our director, in which case it will belong to us; and
•
any person who is either (i) an officer or employee of both us and McDonald's or (ii) a director of both us and McDonald's (but not an officer or employee of either
one), that opportunity will belong to McDonald's unless expressly offered to that person primarily in his or her capacity as our director, in which case such opportunity
shall belong to us.
In addition, no such director, officer or employee will be liable to us or our shareholders for breach of any duty by reason of the fact that in compliance with those
guidelines, (i) the director, officer or employee
88
offered such corporate opportunity to McDonald's (rather than us) or did not communicate information about such corporate opportunity to us; or (ii) McDonald's
pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another person or does not communicate information about such
corporate opportunity to us. Neither McDonald's nor any officer or director of McDonald's will be liable to us or our shareholders for breach of any duty by reason of
the fact that McDonald's or an officer or director of McDonald's takes or fails to take any action or exercises or fails to exercise any rights or gives or withholds any
consent in connection with any agreement or contract between McDonald's and us.
In addition, no contract, agreement, arrangement or other transaction between us and McDonald's will be void or voidable solely because McDonald's is a party
thereto, and so long as the material facts as to such transaction are disclosed or known to the board of directors or the committee thereof that authorizes that transaction,
and the board or such committee (which may, for quorum purposes, include directors who are directors or officers of McDonald's) in good faith authorizes the
transaction by an affirmative vote of a majority of the disinterested directors, then McDonald's will have fulfilled its fiduciary duties to us and our shareholders, will not
be liable to us or our shareholders for any breach of fiduciary duty by entering into or executing such transaction, will be deemed to have acted in good faith and in a
manner it reasonably believes to be in and not opposed to our best interests and will be deemed not to have breached its duties of loyalty to us and our shareholders or to
have received an improper personal gain therefrom.
Equity Sales and Grants
In May 2005, we issued 153,333 shares of non-vested common stock to Mr. Montgomery Moran pursuant to a Restricted Stock Agreement dated March 24, 2005
executed in connection with Mr. Moran's offer of employment by us. The shares vest in equal annual installments over three years from his date of employment, subject
to his continued employment with us. This transaction was effected without registration under the Secutities Act in reliance on the exemption from registration provided
under Section 4(2) promulgated thereunder.
In April 2004, we issued 2,908,278 shares of common stock to McDonald's and certain other persons who were accredited investors (consisting of friends and
family of our employees and persons having business relationships with us), in each case as identified in our shareholders' agreement, at an aggregate offering price of
$65.0 million. These transactions were effected without registration under the Securities Act in reliance on the exemption from registration provided under Section 4(2)
promulgated thereunder.
In June 2003, we issued 2,172,670 shares of common stock to McDonald's and certain other persons who were accredited investors (consisting of friends and
family of our employees and persons having business relationships with us), in each case as identified in our shareholders' agreement, at an aggregate offering price of
$38.0 million. These transactions were effected without registration under the Securities Act in reliance on the exemption from registration provided under Section 4(2)
promulgated thereunder.
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DESCRIPTION OF CAPITAL STOCK
The following discussion is a summary of the terms of our capital stock, our certificate of incorporation and bylaws and certain applicable provisions of Delaware
law. Copies of our certificate of incorporation and bylaws as they will be in effect following this offering are filed as exhibits to the registration statement of which this
prospectus is a part.
Reclassification
Prior to this offering, we had one class of common stock and three classes of preferred stock outstanding, our Series B Preferred Stock, our Series C Preferred
Stock and our Series D Preferred Stock. In accordance with the terms of our amended certificate of incorporation, which will become effective immediately prior to the
consummation of this offering, each share of our outstanding preferred stock and each share of our outstanding common stock will be reclassified automatically and
without any action on the part of the holders of those shares into one-third of one share of our class B common stock, which will result in a decrease in the number of
shares outstanding. In addition, immediately prior to the consummation of this offering, we'll increase our total authorized number of shares of capital stock, and amend
our certificate of incorporation and bylaws such that they reflect the descriptions below. Except where otherwise noted, the description of the terms of our charter
documents below reflects the terms of those documents as they will be following the Reclassification. The historical data presented in the accompanying financial
statements have not been adjusted to give retroactive effect to the Reclassification. We have, however, reflected the Reclassification in the unaudited pro forma balance
sheet and pro forma earnings per common share included in the financial statements.
In this offering, both we and the selling shareholder are selling shares of class A common stock, which will have fewer votes per share than our class B common
stock. Under the terms of our amended certificate of incorporation, one of the features of the class B common stock is that shares of class B common stock can only be
transferred to McDonald's or its subsidiaries, and that any other transfer of such shares before a tax-free spin-off (as described below under "—Common
Stock—Conversion") will result in the automatic conversion of those shares to shares of class A common stock without action by the transferor or transferee. In
addition, under the amended certificate of incorporation, any holder of shares of class B common stock, including the selling shareholder, will have the right to convert
those shares at any time to shares of class A common stock. See "—Common Stock—Conversion" below. Accordingly, although all of the shares that the selling
shareholder will receive in connection with the Reclassification will be shares of class B common stock, any shares that investors will receive from the selling
shareholder in the offering will be shares of class A common stock.
Following the offering, our authorized capital stock will consist of 200,000,000 shares of class A common stock, 30,000,000 shares of class B common stock and
600,000,000 shares of preferred stock, of which 7,878,788 shares of class A common stock and 24,615,831 shares of class B common stock are expected to be
outstanding (excluding shares to be issued upon exercise of outstanding options and assuming that the underwriters do not exercise their option to purchase additional
shares), and no shares of preferred stock are expected to be outstanding. If the underwriters exercise their option in full, we expect 9,060,606 shares of class A common
stock and 23,434,013 shares of class B common stock to be outstanding.
Common Stock
The certificate of incorporation authorizes the issuance of an aggregate of 230,000,000 shares of common stock consisting of 200,000,000 shares of class A
common stock and 30,000,000 shares of class B common stock. Upon consummation of this offering, of those authorized shares of class A common stock and class B
common stock, 32,494,619 will be validly issued, fully paid and nonassessable. At December 31, 2005, without giving retroactive effect to the Reclassification, there
were 43 holders of record of common
90
stock and non-vested stock, who collectively held about 58,832,266 shares of common stock and non-vested stock. Each of these shares will be reclassified into
one-third of one share of class B common stock as described above under "—Reclassification."
Voting Rights
Except as provided by statute or the certificate of incorporation, holders of the common stock have the sole right and power to vote on all matters on which a vote
of Chipotle's shareholders is to be taken. The holders of class A common stock and class B common stock generally have identical rights, except that holders of class A
common stock are entitled to one vote per share while holders of class B common stock are entitled to ten votes per share on matters to be voted on by shareholders,
with certain exceptions as provided by the certificate of incorporation. For example, for purposes of approving a merger or consolidation, a sale of all or substantially all
of our property or a dissolution, each share of both class A common stock and class B common stock will have one vote only. The holders of common stock are
entitled, by a plurality of the votes cast by the holders of class A common stock and class B common stock present in person or represented by proxy, voting together as
a single voting group at a meeting at which a quorum is present, to nominate and thereafter elect directors to the board of directors. With certain exceptions, other
matters to be voted on by shareholders must be approved by a majority of the votes cast on the matter by the holders of class A common stock and class B common
stock present in person or represented by proxy, voting together as a single voting group at a meeting at which a quorum is present, subject to any voting rights granted
to holders of any outstanding shares of preferred stock. Approval of an amendment of our certificate of incorporation and removal of directors from the board of
directors must be approved by 66 2 / 3 % of all votes entitled to be cast by the holders of class A common stock and class B common stock, voting together as a single
group.
Dividends
Holders of class A common stock and class B common stock will share equally on a per share basis in any dividend declared by our board of directors, subject to
any preferential rights of holders of any outstanding shares of preferred stock. Dividends payable in shares of common stock may be paid only as follows: shares of
class A common stock may be paid only to holders of class A common stock, and shares of class B common stock may be paid only to holders of class B common
stock; and the number of shares so paid will be payable at the same rate per share so as to retain the relative proportion of outstanding shares of class A common stock
and class B common stock.
Conversion
Each share of class B common stock is convertible at the option of the holder into one share of class A common stock. Before a tax-free spin-off (as described
below), any shares of class B common stock transferred to a person other than McDonald's or a subsidiary of McDonald's will automatically be converted into shares of
class A common stock. In addition, upon the occurrence of certain specified events prior to a tax-free spin-off, all of the outstanding shares of class B stock will
automatically be converted into shares of class A common stock.
Following any distribution of class B common stock to shareholders of McDonald's in a transaction, including any distribution in exchange for McDonald's shares
or securities, intended to qualify as a tax-free distribution under Section 355 of the Code, or any corresponding provision of any successor statute (a "tax-free spin-off"),
shares of class B common stock will no longer be convertible into shares of class A common stock. Shares of class B common stock transferred to shareholders of
McDonald's in a tax-free spin-off will not be converted into shares of class A common stock and, following a tax-free spin-off, shares of class B common stock will be
transferable as class B common stock, subject to applicable laws.
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Other Rights
In the event of any reorganization of Chipotle with one or more corporations or a merger or share exchange of Chipotle with another corporation in which shares of
our common stock are converted into or exchangeable for shares of stock, other securities or property, including cash, all holders of our common stock, regardless of
class, will be entitled to receive with respect to each share held the same kind and amount of shares of stock and other securities and property, including cash.
On liquidation, dissolution or winding up of Chipotle, after payment in full of the amounts required to be paid to holders of any outstanding shares of preferred
stock, if any, all holders of common stock, regardless of class, are entitled to receive the same amount per share with respect to any distribution of assets to holders of
shares of common stock.
Preferred Stock
The certificate of incorporation authorizes the issuance of an aggregate of 600,000,000 shares of preferred stock. Upon consummation of this offering, there will be
no shares of preferred stock outstanding
Chipotle's board of directors may, from time to time, direct the issue of shares of preferred stock in series and may, at the time of issue, determine the designation,
powers, rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding preferred stock would reduce the amount of funds
available for the payment of dividends on shares of common stock. Holders of preferred stock may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of Chipotle before any payment is made to the holders of common stock. Under certain circumstances, the issuance of preferred
stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of Chipotle's
securities or the removal of incumbent management. Upon the affirmative vote of a majority of the total number of directors then in office, the board of directors may
issue shares of preferred stock with voting and conversion rights that could adversely affect the holders of shares of common stock.
At December 31, 2005, there were about 8,034,009 shares of Series B Preferred Stock outstanding, about 3,925,125 shares of Series C Preferred Stock outstanding
and about 8,510,639 shares of Series D Preferred Stock outstanding, without giving retroactive effect to the Reclassification. Each of these shares will be reclassified
into one-third of one share of class B common stock as described above under "—Reclassification."
Pre-emptive Rights
Under Delaware law, a shareholder is not entitled to pre-emptive rights to subscribe for additional issuances of common stock or any other class or series of
common stock or any security convertible into such stock in proportion to the shares that are owned unless there is a provision to the contrary in the certificate of
incorporation. Our certificate of incorporation does not provide that our shareholders are entitled to pre-emptive rights.
Certain Certificate of Incorporation and Bylaw Provisions
The certificate of incorporation provides for the board to be divided into three classes, as nearly equal in number as possible, serving staggered terms. About
one-third of the board will be elected annually, and each member will serve a three-year term. The provision for a classified board could prevent a party who acquires
control of a majority of the outstanding voting shares from obtaining control of the board until the second annual shareholders meeting following the date the acquirer
obtains the controlling share interest. The classified board provision is designed to have the effect of discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of Chipotle and to increase the
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likelihood that incumbent directors will retain their positions. Under Delaware law, directors of a corporation with a classified board may only be removed for cause
unless the certificate of incorporation provides otherwise. Our certificate of incorporation does not provide that our shareholders can remove the directors without cause.
See "Management."
After the completion of this offering, McDonald's will beneficially own no shares of our outstanding class A common stock, but will own about 22,262,884 shares
of our outstanding class B common stock, representing 88% of the combined voting power of all classes of our outstanding voting securities and 69% of the economic
interest in our outstanding common stock (or 87% and 65%, respectively, if the underwriters' over-allotment option is exercised in full). Therefore, McDonald's will
have the power to elect all of the members of our board of directors and will have the power to control all matters requiring shareholder approval or consent.
The certificate of incorporation provides that shareholder action can be taken only at an annual or special meeting of shareholders and cannot be taken by written
consent in lieu of a meeting. The bylaws provide that, except as otherwise required by law, annual or special meetings of the shareholders can only be called pursuant to
a resolution adopted by a majority of the total number of directors then in office or by the chairman of the board. Shareholders are not permitted to call a general
meeting or to require the board of directors to call a general meeting.
The bylaws establish an advance notice procedure for shareholder proposals to be brought before a general meeting of shareholders, including proposed
nominations of persons for election to the board of directors.
Shareholders at a general meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the
direction of the board of directors or by a shareholder who was a shareholder of record on the record date for the meeting, who is entitled to vote at the meeting and who
has given to Chipotle's Secretary timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. Although neither the
certificate of incorporation nor the bylaws gives the board of directors the power to approve or disapprove shareholder nominations of candidates or proposals about
other business to be conducted at a general meeting, the certificate of incorporation and the bylaws may have the effect of precluding the conduct of certain business at
a meeting if the proper procedures are not followed or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of Chipotle.
The certificate of incorporation provides that the provisions of Section 203 of the Delaware General Corporation Law, which relate to business combinations with
interested shareholders, apply to Chipotle. See "—Corporate Opportunity" above for a description of the corporate opportunity provisions of the certificate of
incorporation.
Certificate of Incorporation
Our certificate of incorporation will provide that the affirmative vote of the holders of at least 66 2/3% of the voting power of our issued and outstanding capital
stock entitled to vote in the election of directors, is required for the following:
•
adoption, amendment or repeal of any provision of our bylaws;
•
removal of individual directors or the entire board of directors; and
•
alteration, amendment, repeal, in a manner that is adverse to the interests of McDonald's, or adoption of any provision adverse to the interests of McDonald's and
inconsistent with, any provision in our certificate of incorporation relating to corporate opportunities of Chipotle.
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In addition, the board of directors will be permitted to alter certain provisions of our bylaws without obtaining shareholder approval.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, Inc.
Listing
We've applied to list our class A common stock on the New York Stock Exchange under the symbol "CMG."
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public market, or the perception that substantial sales may occur, could adversely affect the
prevailing market price of our class A common stock. Prior to this offering, there has been no public market for our class A common stock. After completion of the
offering, there will be 7,878,788 shares of class A common stock and 24,615,831 shares of class B common stock outstanding. Of these shares, 7,878,788 class A
shares and none of the class B shares, or up to 9,060,606 class A shares if the underwriters fully exercise their option to purchase additional shares, are freely
transferable without restriction under the Securities Act, except by persons who may be deemed to be our affiliates.
Sales of Restricted Shares
None of the shares of class A stock are expected to be "restricted securities" upon completion of this offering, other than any shares purchased in this offering by
persons who may be deemed our "affiliates." An aggregate of 23,691,997 shares of our class B common stock held by our existing shareholders upon completion of this
offering will be "restricted securities," as that phrase is defined in Rule 144, and may not be resold in the absence of registration under the Securities Act or pursuant to
an exemption from such registration, including, among others, the exemptions provided by Rules 144, 144A and 144(k) under the Securities Act, which are summarized
below. Taking into account the lock-up agreements described below and the provisions of Rules 144 and 144(k), additional shares of our class A and class B common
stock will be available for sale in the public market as follows:
•
no shares will be available for immediate sale on the date of this prospectus;
•
24,462,498 shares of our class B common stock, which are convertible into shares of our class A common stock in certain circumstances, will be available for sale after
the expiration date for the lock-up agreements (180 days after the date of the final prospectus unless earlier waived by the underwriters or unless later extended in the
circumstances described under
"Underwriters"), pursuant to Rules 144, 144A and 144(k). Of these shares, 22,262,884 will be held by the selling stockholder, which is our affiliate.
Rule 144
In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares for at least one year, including a person who may be
deemed to be our "affiliate," is entitled to sell within any three-month period a number of shares that does not exceed the greater of:
•
1.0% of the number of shares of class A common stock then outstanding, which will equal about 78,788 shares immediately after this offering; or
•
the average weekly trading volume of our class A common stock on the New York Stock Exchange during the four calendar weeks before a notice of the sale on
Form 144 is filed with the SEC.
Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of certain public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our "affiliates" at any time during the 90 days preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an "affiliate," is entitled to sell these shares
without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
95
Options / Rule 701
Following this offering, we intend to file a registration statement on Form S-8 to register
shares of our class A common stock reserved for issuance under
our option plans and arrangements. Pursuant to Rule 701 under the Securities Act, we've granted options to members of management to purchase 228,666 shares of our
class A common stock. Rule 701 permits resales of shares in reliance upon Rule 144 without compliance with some restrictions of Rule 144, including the holding
period requirement. However, holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. Subject to the
90-day restriction period provided for in Rule 701 and the lock-up agreements described below, all of the shares of our class A common stock issuable upon the
exercise of options under our stock option plans and arrangements will be freely tradable upon effectiveness of the registration statement on Form S-8 without
restrictions under the Securities Act, unless these shares are held by an "affiliate" of ours or subject to other contractual restrictions.
Rule 144A
Rule 144A would allow our existing shareholders to sell their current holdings of shares of common stock in the private market to qualified institutional buyers (as
defined in Rule 144A), and would permit resales among such institutions, without regard to any volume or other restrictions. There can be no assurance that sales
pursuant to Rule 144A will not have an adverse effect on the liquidity and trading price of the class A common stock in the public market.
Lock-up Agreements
We and all of our executive officers and directors and certain other equity holders, including McDonald's, have agreed with the underwriters not to offer, sell,
dispose of or hedge any shares of our class A common stock or securities convertible into or exchangeable for shares of our class A common stock (including shares of
class B common stock), subject to specified limited exceptions and extensions described elsewhere in this prospectus, during the period continuing through the date that
is 180 days (subject to extension) after the date of the final prospectus, except with the prior written consent of Morgan Stanley & Co. Incorporated and SG Cowen &
Co., LLC, on behalf of the underwriters. See "Underwriters." Morgan Stanley & Co. Incorporated and SG Cowen & Co., LLC, in their sole discretion on behalf of the
underwriters, may release any of the securities subject to these lock-up agreements at any time without notice.
Immediately following the consummation of this offering, we expect that shareholders subject to lock-up agreements will hold class A shares representing about
10% of our then-outstanding shares of class A common stock, or about 9% of our then-outstanding shares of class A common stock if the underwriters' over-allotment
option is exercised in full, and class B shares representing about 99% of our then-outstanding shares of class B common stock.
We've agreed not to issue, sell or otherwise dispose of any shares of our common stock during the lock-up period (subject to extension) following the date of this
prospectus, subject to certain specified exceptions. See "Underwriters." The lock-up period may be extended in the circumstances described under "Underwriters."
Registration Rights
Prior to the consummation of this offering, we will grant certain registration rights to persons who, following the consummation of this offering, will hold, in the
aggregate, about 23,201,188 shares of our class B common stock (including shares issuable upon the exercise of outstanding options). Subject to several exceptions,
McDonald's will have the right to require us to register for public resale under the Securities Act all shares of common stock that they request be registered at any time
after the expiration of the lock-up period following this offering. If McDonald's exercises its right to demand that we register its
96
shares, or if we file a registration statement on our own behalf, certain other current shareholders, including Steve Ells, our Chairman and Chief Executive Officer,
Monty Moran, our President and Chief Operating Officer, and Albert S. Baldocchi and Darlene J. Friedman, members of our board of directors, will have piggyback
registration rights to require that their shares be included in that registration. McDonald's will have the right to demand several such registrations. For more information,
see "Certain Relationships and Related Transactions—Registration Rights Agreements." Under the lock-up agreements described above, McDonald's and these other
shareholders have agreed not to exercise those rights during the lock-up period without the prior written consent of Morgan Stanley & Co. Incorporated and SG
Cowen & Co., LLC, on behalf of the underwriters.
97
CERTAIN U.S. FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS
The following discussion is a summary of certain U.S. federal income and estate tax considerations that may be relevant to you if you become a beneficial owner
of our class A common stock and you are not a citizen or resident of the United States, a U.S. domestic corporation, or a person that would otherwise be subject to U.S.
federal income tax on a net income basis in respect of such common stock. The summary deals only with shares of class A common stock that will be held as capital
assets and does not purport to deal with all possible tax consequences of purchasing, owning, and disposing of our class A common stock. In particular, the summary
does not address the tax consequences that may be applicable to persons in special tax situations, including persons that will hold shares of our common stock in
connection with a U.S. trade or business or a U.S. permanent establishment or persons who hold more than 5% of our common stock. You should consult your own tax
advisers about the tax consequences of the purchase, ownership, and disposition of our class A common stock in the light of your own particular circumstances,
including the tax consequences under state, local, foreign, and other tax laws and the possible effects of any changes in applicable tax laws.
Dividends
Any dividends that you receive with respect to our class A common stock will be subject to U.S. federal gross income and withholding tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. In order to claim the benefits of an income tax treaty, you will generally be required to provide a
certification of your entitlement to treaty benefits on IRS Form W-8BEN.
Sale, Exchange, or other Disposition
Any gain that you realize upon a sale, exchange, or other disposition of our class A common stock will generally not be subject to U.S. federal income tax unless
you are an individual who is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met.
Estate Tax
If you are an individual, shares of our class A common stock that you own or are treated as owning at the time of your death will be included in your gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax unless an applicable estate tax treaty otherwise provides.
Backup Withholding
In general, you will not be subject to any U.S. federal backup withholding tax on dividends that you receive with respect to our class A common stock if you
provide a certification of your status as a non-U.S. person on IRS Form W-8BEN or otherwise establish an exemption. In addition, no backup withholding will
generally be required with respect to the proceeds of a sale of our class A common stock that you make within the United States or through certain U.S. and U.S.-related
financial intermediaries if the payor receives such a certification or you otherwise establish an exemption. If you do not provide a certification of your status as a
non-U.S. person on IRS Form W-8BEN or otherwise establish an exemption, U.S. federal backup withholding tax will apply to such dividends and sales proceeds.
98
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom
Morgan Stanley & Co. Incorporated and SG Cowen & Co., LLC are acting as representatives, have severally agreed to purchase, and we and the selling shareholder
agreed to sell to them, severally, the number of shares indicated below:
Name
Number of
Shares
Morgan Stanley & Co. Incorporated
SG Cowen & Co., LLC
Banc of America Securities LLC
Citigroup Global Markets Inc.
J.P. Morgan Securities Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
A.G. Edwards & Sons, Inc.
RBC Capital Markets Corporation
SunTrust Capital Markets, Inc.
Wachovia Capital Markets, LLC
Total
7,878,788
The underwriters are offering the shares of class A common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of class A common stock offered by this prospectus are
subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of
class A common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the
underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of class A common stock directly to the public at the public offering price listed on the cover page of
this prospectus and part to certain dealers at a price that represents a concession not in excess of $
per share under the public offering price. After the initial
offering of the shares of class A common stock, the offering price and other selling terms may from time to time be varied by the representatives.
The selling shareholder has granted to the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of
1,181,818 additional shares of class A common stock at the public offering price shown on the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of
class A common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to
purchase about the same percentage of the additional shares of class A common stock as the number listed next to the underwriter's name in the preceding table bears to
the total number of shares of class A common stock listed next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the
total price to the public would be $
, the total underwriting discounts and commissions would be $
and the total proceeds to us would be $
and to
the selling shareholder would be $
.
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock
offered by them.
We and all of our executive officers and directors and certain other equity holders, including McDonald's, have agreed with the underwriters that, without the prior
written consent of Morgan
99
Stanley & Co. Incorporated and SG Cowen & Co., LLC, on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of the
final prospectus:
•
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of class A common stock or any securities convertible into or exercisable or exchangeable for
common stock; or
•
enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the class A common stock;
whether any such transaction described above is to be settled by delivery of class A common stock or such other securities, in cash or otherwise. The restrictions
described in this paragraph do not apply to:
•
the sale of shares by us or McDonald's to the underwriters;
•
the issuance by us of shares of class A common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this
prospectus of which the underwriters have been advised in writing;
•
the grant of options or the issuance of shares of common stock by us to employees, officers, directors, advisors or consultants under any employee benefit plan
described in this prospectus;
•
the filing by us of any registration statement on Form S-8 in respect of any employee benefit plan described in this prospectus;
•
transactions by any person other than us relating to shares of class A common stock or other securities acquired in open market transactions after the completion of the
offering of the shares;
•
the transfer by any person other than us of shares of common stock or securities convertible into or exchangeable or exercisable for common stock by gift, will or
intestacy to such person's immediate family, to a trust formed for the benefit of any such person or such person's immediate family, or to a partnership or a limited
liability company, the partners or members of which, as applicable, are exclusively that person and/or such person's immediate family;
•
the transfer by any person of shares of common stock or securities convertible into or exercisable or exchangeable for common stock to us;
•
the transfer by any person other than us of shares of common stock or securities convertible into common stock to limited partners or stockholders of that person; or
•
the transfer by any person other than us of shares of common stock to wholly-owned subsidiaries of that person or to the parent corporation of that person or to another
wholly-owned subsidiary of such parent corporation.
With respect to the last four bullets, it will be a condition to the transfer or distribution that the transferee execute a copy of the lock-up agreement, no filing by any
party (donor, donee, transferor or transferee) under Section 16(a) of the U.S. Securities Exchange Act of 1934, or the Exchange Act, will be required or will be made
voluntarily in connection with such transfer or distribution (other than a filing on Form 5 made after the expiration of the lock-up period), and that no such transfer or
distribution may include a disposition for value.
The lock-up period described in the preceding paragraph will be extended if:
•
during the last 17 days of the lock-up period we issue a release about earnings or material news or events relating to us occurs; or
•
prior to the expiration of the lock-up period, we announce that we'll release earnings results during the 16-day period beginning on the last day of the lock-up period,
100
in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the
release or the occurrence of the material news or material event.
The following table shows the per share and total underwriting discounts and commissions that we and the selling shareholder are to pay to the underwriters in
connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of our
class A common stock.
Paid by Us
No Exercise
Full Exercise
Paid by Selling Shareholder
No Exercise
Full Exercise
Per share
$
$
$
$
Total
$
$
$
$
In order to facilitate the offering of the class A common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of
the common stock. The underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale
is covered if the short position is no greater than the number of shares available for purchase by the underwriters under their over-allotment option. The underwriters
can close out a covered short sale by exercising their over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a
covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under their over-allotment
option. The underwriters may also sell shares in excess of their over-allotment option, creating a naked short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward
pressure on the price of the class A common stock in the open market after pricing that could adversely affect investors who purchase in the offering. In addition, to
stabilize the price of the class A common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the class A common stock in the offering, if the syndicate repurchases
previously distributed class A common stock to cover syndicate short positions or to stabilize the price of the class A common stock. These activities may raise or
maintain the market price of the class A common stock above independent market levels or prevent or retard a decline in the market price of the class A common stock.
The underwriters are not required to engage in these activities, and may end any of these activities at any time.
We've applied to list our class A common stock on the New York Stock Exchange under the symbol "CMG."
From time to time, each of Morgan Stanley & Co. Incorporated and SG Cowen & Co., LLC and their affiliates has provided and continues to provide investment
banking and other services to us and McDonald's, a selling shareholder and our controlling shareholder. A.G. Edwards & Sons, Inc. has provided us with certain
services primarily in connection with the offerings of our common stock to our existing shareholders.
A prospectus in electronic format may be made available on the websites maintained by one or more underwriters. The lead underwriters may agree to allocate a
number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the lead underwriters to underwriters that
may make internet distributions on the same basis as other allocations.
We, the selling shareholder and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The
underwriters have agreed to reimburse the selling shareholder and us for certain identifiable expenses associated with this offering.
101
Directed Share Program
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 787,878 shares of class A common stock offered in this prospectus
for our directors, officers, employees, business associates and other related persons. The number of shares of class A common stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered in this prospectus.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of our class A common stock. The initial public offering price will be determined by
negotiations among us, McDonald's and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price will
be our future prospects and those of our industry in general, our sales, earnings and other financial operating information in recent periods, and the price-earnings ratios,
price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. The estimated initial
public offering price range shown on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.
102
LEGAL MATTERS
Cleary Gottlieb Steen & Hamilton LLP, New York, New York, will pass upon the validity of the securities offered in this offering. Davis Polk & Wardwell, Menlo
Park, California, is acting as counsel to the underwriters.
EXPERTS
The consolidated financial statements of Chipotle Mexican Grill, Inc. at December 31, 2003 and 2004, and for each of the three years in the period ended
December 31, 2004, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm,
as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We filed with the SEC a registration statement on Form S-1 for the common stock being sold in this offering. This prospectus, which constitutes a part of that
registration statement, does not contain all the information shown in the registration statement and the exhibits and schedules to the registration statement. For further
information with respect to us and our common stock, you should refer to the registration statement and the exhibits and schedules filed as part of that document. You
may read and copy the registration statement and other documents and reports we file with the SEC without charge at the SEC's principal office in Washington, D.C.
Copies of all or any part of the registration statement may be obtained after payment of fees prescribed by the SEC from the SEC's Public Reference Room at the SEC's
principal office, 100 F Street, NE, Washington, DC 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website that contains registration statements, reports, proxy and information statements and other information about registrants, including us.
The SEC's web address is www.sec.gov.
Upon completion of this offering, we'll be subject to the information and periodic reporting requirements of the Exchange Act and will file periodic reports, proxy
statements and other information with the SEC. Those periodic reports, proxy statements and other information will be available for inspection and copying at the
public reference room and website of the SEC referred to above. We also intend to furnish our shareholders with annual reports containing our financial statements
audited by an independent registered public accounting firm and quarterly reports containing our unaudited financial information. We maintain a website at
www.chipotle.com. The information on or available through our website is not, and should not be considered, a part of this prospectus. You may access our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to,
the SEC.
103
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheet
F-3
Consolidated Statement of Operations
F-4
Consolidated Statement of Shareholders' Equity and Comprehensive Income
F-5
Consolidated Statement of Cash Flows
F-6
Notes to Financial Statements
F-7
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Chipotle Mexican Grill, Inc.
We have audited the accompanying consolidated balance sheets of Chipotle Mexican Grill, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chipotle Mexican Grill, Inc.
and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Denver, Colorado
October 5, 2005
F-2
Chipotle Mexican Grill, Inc.
Consolidated Balance Sheet
(in thousands, except share and per share data)
December 31
2003
Assets
Current assets:
Cash
$
Accounts receivable, net of allowance for doubtful accounts of $0, $804 and $525 at
December 31, 2003 and 2004 and September 30, 2005 (unaudited), respectively
Notes receivable—McDonald's Corp.
Inventory
Current deferred tax assets
Prepaid expenses
Total current assets
Leasehold improvements, property and equipment, net
Other assets
Restricted cash and cash equivalents
Long-term deferred tax assets
Goodwill
Total assets
Liabilities and shareholders' equity
Current liabilities:
Cash overdraft
Accounts payable
Accrued payroll and benefits
Accrued liabilities
Accrued loss contingency
Note payable—McDonald's Corp.
Current portion of deemed landlord financing
Due to McDonald's Corp.
2004
—
$
—
$
September 30
2005
Pro Forma
September 30
2005
(unaudited)
(unaudited)
1,958
2,605
—
1,466
—
3,762
2,490
732
2,256
—
4,854
1,927
—
2,684
2,591
5,208
7,833
10,332
14,368
211,877
2,564
497
—
26,243
289,873
2,825
380
—
26,243
319,529
2,812
—
17,330
17,738
$
249,014
$
329,653
$
371,777
$
2,550
10,021
8,053
5,968
—
10,138
—
1,536
$
4,431
11,803
7,308
9,430
4,000
—
—
1,691
$
—
10,912
10,890
7,580
1,991
4,638
50
1,412
Total current liabilities
38,266
38,663
37,473
Deferred rent
Deemed landlord financing
Other liabilities
19,240
—
—
28,231
—
193
33,671
2,346
514
—
Total liabilities
57,506
67,087
74,004
73,490
Series B convertible preferred stock, issued and outstanding
shares—8,034,009 (liquidation preference of $25,309, $27,334 and
$28,974 at December 31, 2003 and 2004 and September 30, 2005
(unaudited), respectively)
80
80
80
—
Series C junior convertible preferred stock, issued and outstanding
shares—3,925,125 (liquidation preference of $7,890)
39
39
39
—
85
85
85
—
496
584
584
—
Shareholders' equity:
Preferred stock, 40,000,000 authorized shares, $0.01 par value:
Series D junior convertible preferred stock, issued and outstanding
shares—8,510,639 (liquidation preference of $20,000)
Common stock, 95,000,000 authorized shares, $0.01 par value:
Issued and outstanding shares—49,647,433, 58,372,266 and 58,372,266
at December 31, 2003 and 2004 and September 30, 2005 (unaudited),
respectively
Common stock, class B, 30,000,000 authorized shares, $0.01 par value:
Issued and outstanding shares—26,280,680 at September 30, 2005
Additional paid-in capital
Tax receivable—McDonald's Corp.
Accumulated other comprehensive income
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
$
—
310,193
(37,112)
—
(82,273)
—
383,901
(45,985)
9
(76,147)
—
378,285
(38,596)
9
(42,713)
263
379,324
(38,596)
9
(42,713)
191,508
262,566
297,773
298,287
249,014
$
329,653
$
See accompanying notes to consolidated financial statements.
F-3
371,777
$
371,777
Chipotle Mexican Grill, Inc.
Consolidated Statement of Operations
(in thousands, except share and per share data)
Nine months ended
September 30
Years ended December 31
2002
2003
2004
2004
2005
(unaudited)
Revenue:
Restaurant sales
Franchise royalties and fees
$
Total revenue
Restaurant operating costs:
Food, beverage and packaging
Labor
Occupancy
Other operating costs
General and administrative expenses
Depreciation and amortization
Pre-opening costs
Loss on disposal of assets
Income (loss) from operations
Interest income
Interest expense
Income (loss) before income taxes
Benefit for income taxes
203,892 $
753
314,027 $
1,493
468,579 $
2,142
341,750
1,503
204,645
315,520
470,721
343,253
454,382
67,681
66,515
18,716
29,791
25,803
11,260
1,022
1,489
104,921
94,023
25,570
43,527
34,189
15,090
1,631
4,504
154,148
139,494
36,190
64,274
44,837
21,802
2,192
1,678
111,414
101,756
26,192
46,108
29,190
15,807
1,561
1,364
146,863
129,678
34,517
59,408
37,212
20,392
1,247
1,806
222,277
323,455
464,615
333,392
431,123
6,106
9,861
23,259
(17,632)
(7,935)
444
(101)
249
(28)
(17,289)
—
(7,714)
—
6,126
—
9,842
—
211
(191)
$
172
(191)
452,593
1,789
23
(663)
22,619
10,815
Net income (loss)
$
(17,289) $
(7,714) $
6,126 $
9,842
$
33,434
Historical income (loss) available to common
shareholders
$
(17,289) $
(7,714) $
4,484 $
7,174
$
24,754
Earnings (loss) per common share—basic
$
(0.44) $
(0.17) $
0.08 $
0.13
$
0.42
Earnings (loss) per common share—diluted
$
(0.44) $
(0.17) $
0.08 $
0.13
$
0.42
Weighted average common shares
outstanding—basic
39,324,552
46,683,077
55,893,078
55,060,651
58,372,266
Weighted average common shares
outstanding—diluted
39,324,552
46,683,077
56,090,651
55,258,224
58,517,125
Pro forma income (loss) available to common
shareholders
$
6,126
$
33,434
Pro forma earnings per common share—basic
$
0.24
$
1.27
Pro forma earnings per common share—diluted
$
0.24
$
1.27
Pro forma weighted average common shares
outstanding—basic
25,454,284
26,280,680
Pro forma weighted average common shares
outstanding—diluted
25,520,142
26,328,966
See accompanying notes to consolidated financial statements.
F-4
Chipotle Mexican Grill, Inc.
Consolidated Statement of Shareholders' Equity and Comprehensive Income
(in thousands, except share data)
Series B
Preferred Stock
Shares
Balance, December 31, 2001
8,034,009
Series C
Preferred Stock
Amount
$
Shares
80
3,925,125
Series D
Preferred Stock
Amount
$
Shares
39
8,510,639
Common
Stock
Amount
$
Shares
Additional
Paid-in
Capital
Amount
85
32,107,378
$
321 $
196,243 $
Issuance of common stock
—
—
—
—
—
—
11,022,044
110
54,736
Tax sharing benefit
—
—
—
—
—
—
—
—
10,401
Net loss
—
—
—
—
—
—
—
—
—
8,034,009
80
3,925,125
39
8,510,639
85
43,129,422
431
261,380
Issuance of common stock
—
—
—
—
—
—
6,518,011
65
37,903
Tax sharing benefit
—
—
—
—
—
—
—
—
10,910
Net loss
—
—
—
—
—
—
—
—
—
8,034,009
80
3,925,125
39
8,510,639
85
49,647,433
496
310,193
Issuance of common stock
—
—
—
—
—
—
8,724,833
88
64,835
Tax sharing benefit
—
—
—
—
—
—
—
—
8,873
—
—
—
—
—
—
—
—
—
Balance, December 31, 2002
Balance, December 31, 2003
Tax
Receivable
McDonald's
Corp
(15,801) $
—
(10,401)
—
(26,202)
—
(10,910)
—
(37,112)
—
(8,873)
Accumulated
Deficit
(57,270) $
Accumulated
Other
Comprehensive
Income
— $
Total
123,697
—
—
54,846
—
—
—
(17,289)
—
(17,289)
(74,559)
—
161,254
—
—
37,968
—
—
—
(7,714)
—
(82,273)
—
191,508
—
—
64,923
—
—
—
6,126
—
6,126
(7,714)
Comprehensive income:
Net income
—
Foreign currency
translation adjustment
—
—
—
—
—
—
—
—
—
—
—
9
Total
comprehensive
income
Balance, December 31, 2004
9
6,135
8,034,009
80
3,925,125
39
8,510,639
85
58,372,266
584
Tax sharing provision
(unaudited)
—
—
—
—
—
—
—
—
(6,788)
Stock-based compensation
(unaudited)
—
—
—
—
—
—
—
—
Net income (unaudited)
—
—
—
—
—
—
—
—
Balance, September 30, 2005
(unaudited)
8,034,009
80
3,925,125
39
8,510,639
85
58,372,266
$
$
$
$
584 $
383,901
(76,147)
9
262,566
7,389
—
—
601
1,172
—
—
—
1,172
—
—
33,434
—
33,434
378,285 $
See accompanying notes to consolidated financial statements.
F-5
(45,985)
(38,596) $
(42,713) $
9 $
297,773
Chipotle Mexican Grill, Inc.
Consolidated Statement of Cash Flows
(in thousands)
Nine months ended
September 30
Years ended December 31
2002
2003
2004
2004
2005
(unaudited)
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization
Current income tax (benefit) provision
Deferred income tax (benefit) provision
Change in valuation allowance
Loss on disposal of assets
Bad debt allowance
Stock based compensation
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses
Other assets
Accounts payable
Accrued liabilities
Due to McDonald's Corp.
Deferred rent
$
(17,289) $
(7,714) $
6,126
$
9,842
$
33,434
11,260
(10,401)
3,544
6,857
1,489
—
—
(294)
15,090
(10,910)
7,968
2,942
4,504
—
—
(301)
21,802
(8,873)
11,485
(2,612)
1,678
804
193
—
15,807
(4,417)
8,614
(4,197)
1,364
—
—
24
20,392
11,941
(2,413)
(20,343)
1,806
(12)
1,493
624
(6)
(194)
(363)
(680)
2,069
5,708
976
3,295
(1,929)
(433)
(1,072)
337
5,040
2,996
(69)
5,620
(689)
(790)
(1,092)
(145)
(2,345)
6,717
155
7,258
(372)
(779)
(754)
(263)
(386)
269
40
6,281
575
(428)
(354)
392
1,635
(277)
(279)
4,383
5,971
22,069
39,672
31,073
52,569
Purchases of leasehold improvements, property and equipment, net
(48,601)
(86,107)
(95,615)
(72,223)
(53,322)
Net cash used in investing activities
(48,601)
(86,107)
(95,615)
(72,223)
(53,322)
Financing activities
Net proceeds from sale of common stock
Proceeds from McDonald's—intercompany notes
Payments to McDonald's—intercompany notes
Changes in cash overdrafts
Proceeds from deemed landlord financing
Payments on deemed landlord financing
Payments on capital lease obligations
54,846
44,156
(52,700)
(3,621)
—
—
(51)
37,968
62,261
(36,000)
(191)
—
—
—
64,923
55,139
(66,000)
1,881
—
—
—
64,923
42,881
(66,000)
(654)
—
—
—
—
31,746
(27,000)
(4,431)
2,405
(9)
—
42,630
64,038
55,943
41,150
2,711
—
—
—
—
—
—
—
—
1,958
—
Net cash provided by operating activities
Investing activities
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
$
—
$
—
$
—
$
—
$
1,958
Non-cash preopening rent capitalized to leasehold improvments
$
1,361
$
Net purchases of leasehold improvements, property and equipment
accrued in accounts payable
$
811
$
1,965
$
2,317
$
(453) $
4,127
$
See accompanying notes to consolidated financial statements.
F-6
1,705
$
(287) $
1,507
(2,526)
Chipotle Mexican Grill, Inc.
Notes to Financial Statements
(in thousands, except share and per share data)
1.
Description of Business and Summary of Significant Accounting Policies
Chipotle Mexican Grill, Inc. (the Company), a Delaware corporation, develops and operates fast-casual, fresh Mexican food restaurants in 22 states throughout the
United States. At December 31, 2002, 2003 and 2004, the Company operated 227, 298, and 401 restaurants, respectively, and had five, seven, and eight restaurants,
respectively, operated by franchisees. McDonald's Corporation (McDonald's) is the majority owner of the Company (approximately 92%).
The Company manages its operations based on five regions and has aggregated its operations to one reportable segment.
Initial Public Offering and Unaudited Pro Forma Balance Sheet and Earnings Per Common Share
In connection with the proposed initial public offering, each share of Series B convertible preferred stock, Series C and Series D junior convertible preferred stock
and common stock issued and outstanding as of the date of this offering will be reclassified into one-third of one share of class B common stock (the Reclassification), a
new class of stock generally having ten votes per share. Class A common stock, also a new class of stock, will be issued and sold to investors in connection with the
initial public offering. The class A common stock will have one vote per share. All other provisions of the class A and class B common stock will be substantially the
same. At the completion of the proposed offering, McDonald's will own about 88% of the combined voting power of the Company's outstanding common stock and
69% of the economic interest of the Company. The accompanying consolidated financial statements and notes to the consolidated financial statements do not reflect the
effect of the one for three reverse common stock split that is part of the Reclassification.
The pro forma balance sheet as of September 30, 2005 and the pro forma earnings per share for the year ended December 31, 2004 and the nine months ended
September 30, 2005 give retroactive effect to the reclassification of all of the Company's outstanding common stock and all shares of its outstanding preferred stock into
26,280,680 shares of class B common stock in connection with this offering and the conversion of stock appreciation rights into common stock options. The effect of
the sale of class A common stock shares has been excluded.
Unaudited Interim Financial Statements
The interim financial statements of the Company for the nine months ended September 30, 2004 and 2005 included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules
and regulations relating to interim financial statements. In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments,
consisting of normal recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2005 and the results of its operations
and its cash flows for the nine months ended September 30, 2004 and 2005. The interim results of operations for the nine months ended September 30, 2005 are not
necessarily indicative of the results that may be achieved for the full year.
F-7
1.
Description of Business and Summary of Significant Accounting Policies (Continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage products are sold. A deferred liability is recognized for gift cards that have been sold but not
yet redeemed at their anticipated redemption value. The Company recognizes revenue and reduces the related deferred liability when the gift certificates are redeemed.
Fees from franchised restaurants include continuing rent and service fees, initial fees and royalties. Continuing fees and royalties are recognized in the period earned.
Initial fees are recognized upon opening a restaurant, which is when the Company has performed substantially all initial services required by the franchise arrangement.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable consists of tenant improvement receivables, credit card receivables, and miscellaneous receivables. The allowance for doubtful accounts is the
Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable based on a specific review of account balances. Account
balances are charged off against the allowance after all means of collection have been exhausted and the potential for recoverability is considered remote.
Inventory
Inventory, consisting principally of food, beverages, and supplies, is valued at the lower of first-in, first-out cost or market. The Company has no minimum
purchase commitments with its vendors. The Company purchases certain key ingredients (steak, chicken, pork and tortillas) from a small number of suppliers.
Leasehold Improvements, Property and Equipment
Leasehold improvements, property and equipment are stated at cost. Internal costs clearly associated with the acquisition, development and construction of a
restaurant are capitalized. Expenditures for major
F-8
1.
Description of Business and Summary of Significant Accounting Policies (Continued)
renewals and improvements are capitalized while expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term, which generally
includes reasonably assured option periods, or the estimated useful lives of the assets. Upon retirement or disposal of assets, the accounts are relieved of cost and
accumulated depreciation and the related gain or loss is reflected in earnings.
The estimated useful lives are:
Leasehold improvements and buildings
Furniture and fixtures
Equipment
Goodwill
3-20 years
3-10 years
3-7 years
Goodwill represents the excess of cost over fair value of net assets of the business acquired. Goodwill resulted from McDonald's purchases of the
Company. Goodwill determined to have an indefinite life is not subject to amortization, but instead is tested for impairment at least annually in accordance with the
provision of Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 142, the
Company is required to make any necessary impairment adjustments. Impairment is measured as the excess of the carrying value over the fair value of the goodwill.
Based on the Company's analysis, no impairment charges were recognized for the periods ended December 31, 2002, 2003 and 2004.
Other Assets
Other assets consist primarily of transferable liquor licenses which are carried at the lower of fair value or cost.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Based on the Company's analysis, no impairment charges were recognized for the periods ended December 31, 2002, 2003 and 2004.
Fair Value of Financial Instruments
The carrying value of the Company's financial assets and liabilities, because of their short-term nature, approximates fair value.
F-9
1.
Description of Business and Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company is not a separate taxable entity for federal and certain state income tax purposes and its results of operations are included in the consolidated federal
and state income tax returns of McDonald's. The provision for income taxes is calculated on a separate return basis. The Company recognizes deferred tax assets and
liabilities at enacted income tax rates for the temporary differences between the financial reporting basis and the tax basis of its assets and liabilities. Any effects of
changes in income tax rates or tax laws are included 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, the Company provides a corresponding valuation allowance against the deferred tax asset.
Equity-Based Compensation Plan
Prior to January 1, 2005, the Company accounted for its equity-based compensation plan using the intrinsic-value method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees , and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) . Prior to January 1, 2005, no compensation expense was recognized on stock option grants as the exercise price equaled the fair value at
the date of grant. Accordingly, share-based compensation was included as a pro forma disclosure in the financial statement footnotes.
Effective January 1, 2005, the Company early adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment (SFAS 123(R)), using the
modified-prospective transition method. Under this transition method, compensation cost in 2005 includes the portion vesting in the period for (1) all share-based
payments granted prior to, but not vested as of January 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and
(2) all share-based payments granted subsequent to January 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
Results for prior periods have not been restated.
The following table illustrates the effect on net income (loss) as if the fair-value-based method had been applied to all outstanding and unvested awards in each
period.
Years ended December 31
2002
2003
2004
Net income (loss), as reported
Stock-based employee compensation expense
$
(17,289) $
(166)
(7,714) $
(434)
6,126
(527)
Pro forma net income (loss)
$
(17,455) $
(8,148) $
5,599
Earnings (loss) per share:
Basic, as reported
$
(0.44) $
(0.17) $
0.08
Basic, pro forma
$
(0.44) $
(0.17) $
0.07
Diluted, as reported
$
(0.44) $
(0.17) $
0.08
Diluted, pro forma
$
(0.44) $
(0.17) $
0.07
F-10
1.
Description of Business and Summary of Significant Accounting Policies (Continued)
Total compensation recognized on stock options during the nine months ended September 30, 2005 was $260 ($157 after tax) (unaudited). Compensation expense
is recognized over the vesting period and is included in general and administrative expenses in the consolidated statement of operations. At September 30, 2005, there
was $114 (unaudited) of total unrecognized compensation cost related to non-vested stock options that is expected to be recognized over the remaining seven-month
vesting period.
The estimated fair value of stock options granted in 2002 and 2003 was $2.09 and $2.27 per share, respectively, using the Black Scholes option-pricing model with
the following assumptions:
2002
2003
Risk-free interest rate
4.5%
2.9%
Expected life (years)
5.5
5.5
Expected dividend yield
0.0%
0.0%
Volatility
37.0%
37.0%
The estimated fair value of stock appreciation rights (SARs) granted in 2004 at September 30, 2005 was $2.19 per share, using the Black Scholes option-pricing
model with the following assumptions:
2005
(unaudited)
Risk-free interest rate
3.9%
Expected remaining life (years)
5.0
Expected dividend yield
0.0%
Volatility
37.0%
The volatility factor was estimated based on competitor information and the Company's annual independent stock valuation. The full term of the options and SARs
(share units) was used for the expected life since the share units are granted to senior management where turnover was expected to be low and since it was expected
they would hold options for the full term to obtain the maximum benefit, including time value of money.
Restaurant Pre-Opening Costs
Pre-opening costs are expensed as incurred. These costs include wages, benefits and travel for the training and opening teams, and food, beverage and other
restaurant operating costs incurred prior to a restaurant opening for business.
Insurance Liability
The Company maintains various insurance policies for workers' compensation, employee health, general liability and property damage. Pursuant to these policies,
the Company is responsible for losses up to certain limits for general liability and property damage insurance and is required to estimate a liability that represents the
ultimate exposure for aggregate losses below those limits. This liability is based on management's estimates of the ultimate costs to be incurred to settle known claims
and claims not reported as of the balance sheet date. The estimated liability is not discounted and is based on a number of
F-11
1.
Description of Business and Summary of Significant Accounting Policies (Continued)
assumptions and factors, including historical trends, actuarial assumptions, and economic conditions. If actual trends differ from the estimates, the financial results
could be impacted.
Advertising Costs
Advertising is expensed as incurred and aggregated $5,135, $6,231 and $8,715 for the years ended December 31, 2002, 2003 and 2004, respectively.
Rent
Rent expense for the Company's leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term.
The lease term begins when the Company has the right to control the use of the property, which is typically before rent payments are due under the lease. The difference
between the rent expense and rent paid is recorded as deferred rent in the consolidated balance sheet. Rent expense for the period prior to store opening is capitalized
and included in leasehold improvements in the consolidated balance sheet. Rent expense capitalized during the pre-opening period was $1,814, $2,489 and $3,626 for
the years ended December 31, 2002, 2003, and 2004, respectively. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized
as reductions of lease expense over the term of the lease.
Additionally, certain of the Company's operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain
specified target amounts. The Company recognizes contingent rent expense prior to the achievement of the specified target that triggers contingent rent, provided the
achievement of that target is considered probable.
Foreign Currency Translation
Currently, the Company has no operations outside the United States, but has created an international subsidiary to hold international trademarks. The Company's
international entity uses its local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income
and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a separate component of
accumulated other comprehensive income in shareholders' equity.
2.
Recently Issued Accounting Standards
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 is effective
for reporting periods beginning after December 15, 2005. Retroactive application is permitted, but not required. Had FSP 13-1 been effective, the Company would have
recognized additional occupancy costs of $1,814, $2,489 and $3,626 for the years ended December 31, 2002, 2003, and 2004 respectively and $2,649 (unaudited) and
$2,655 (unaudited) for the nine months ended September 30, 2004 and 2005, respectively.
F-12
3.
Leasehold Improvements, Property and Equipment
Leasehold improvements, property and equipment were as follows:
December 31
2003
September 30
2005
2004
(unaudited)
Land
Leasehold improvements and buildings
Furniture and fixtures
Equipment
$
$
6,298
262,332
29,814
51,907
251,438
(39,561)
Accumulated depreciation
$
4.
5,827
185,103
21,124
39,384
$
6,298
299,838
34,009
59,170
350,351
(60,478)
211,877
$
289,873
399,315
(79,786)
$
319,529
Income Taxes
The Company is not a separate taxable entity for federal and certain state income tax purposes and its results of operations are included in the consolidated federal
and state income tax returns of McDonald's and its affiliates. The provision for income taxes is calculated on a separate return basis.
The components of the benefit for income taxes are as follows:
Nine months ended
September 30
Years ended December 31
2002
2003
2004
2005
(unaudited)
Current tax benefit (provision):
Federal
State
$
Deferred tax benefit (provision):
Federal
State
Valuation allowance
Total benefit for income taxes
$
8,776
1,625
$
9,205
1,705
$
7,487
1,386
$
(9,778)
(2,163)
10,401
10,910
8,873
(3,190)
(354)
(6,825)
(1,143)
(9,647)
(1,838)
2,574
(161)
(3,544)
(7,968)
(11,485)
2,413
(6,857)
(2,942)
2,612
20,343
0
$
0
$
0
(11,941)
$
10,815
During the nine months ended September 30, 2005, we utilized $11,941 of our net operating loss carry forwards. In addition, deferred taxes included an adjustment
to the provision based on the actual tax returns filed, which resulted in an additional expense of $389. This true-up process also resulted in the receivable from
McDonald's being reduced by $3,352 in the same period. Lastly, we recorded adjustments to deferred tax assets and liabilities for enacted changes in state tax laws,
which resulted in an additional $240 expense for the nine months ended September 30, 2005.
F-13
4.
Income Taxes (Continued)
The following table shows the principal reasons for the difference between the effective tax rate and the United States federal statutory income tax rate:
Years ended December 31
2002
2003
2004
Nine months ended
September 30, 2005
(unaudited)
Statutory U.S. federal income tax rate
State income tax, net of related federal income
tax benefit
Meals and entertainment
Other
Valuation allowance
Effective income tax rates
35.0%
4.8
(0.4)
0.3
(39.7)
0.0%
35.0%
4.7
(1.3)
(0.3)
(38.1)
0.0%
35.0%
4.8
2.1
0.7
(42.6)
0.0%
35.0%
4.8
0.6
1.7
(89.9)
(47.8)%
Deferred income tax liabilities are taxes the Company expects to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions
in taxes payable in future periods.
F-14
4.
Income Taxes (Continued)
Deferred income taxes arise because of the differences in the book and tax basis of certain assets and liabilities. Deferred income tax liabilities and assets consist of the
following:
December 31,
2003
September 30,
2004
2005
(unaudited)
Long-term deferred income tax liability:
Leasehold improvements, property and equipment
$
Total long-term deferred income tax liability
18,461
$
33,846
$
29,760
18,461
33,846
29,760
37,112
8,505
2,745
760
449
(31,110)
45,985
8,505
4,341
935
760
(26,680)
39,197
—
5,491
1,029
1,373
—
18,461
33,846
47,090
—
—
17,330
Prepaid assets and other
381
758
514
Total current deferred income tax liability
381
758
514
Long-term deferred income tax asset:
Post-acquisition net operating loss carryforwards
Preacquisition net operating loss carryforwards
Deferred rent
Separate state net operating loss carryforwards
Stock compensation and other employee benefits
Valuation allowance
Total long-term deferred income tax asset
Net long-term deferred income tax asset
Current deferred income tax liability:
Current deferred income tax asset:
Allowances, reserves and other
Stock compensation and other employee benefits
AMT tax credit
Valuation allowance
85
660
—
(364)
Total current deferred income tax asset
Net current deferred tax asset
Total deferred tax asset
$
2,060
866
—
(2,168)
1,273
1,231
601
—
381
758
3,105
—
—
2,591
—
$
—
$
19,921
As of December 31, 2004, the Company has incurred total net operating losses (NOLs) of approximately $139,434 since inception as a C Corporation on
January 1, 1996. Approximately $118,041 of these losses were incurred subsequent to the majority acquisition of the Company by McDonald's. The remaining $21,393
in losses relates to separate return limitation year (SRLY) losses prior to the majority acquisition by McDonald's, which will begin to expire in 2012. Through
December, 31, 2004, a valuation allowance had been recorded to offset the deferred tax assets, including those related to the NOLs, net of deferred tax liabilities.
During the nine months ended September 30, 2005, the Company determined that it was more likely than not that we would realize our deferred tax assets and a
valuation allowance was no longer required. When the SRLY losses are realized, the tax benefit for those items reduces goodwill. During the nine months ended
September 30, 2005, the Company realized $8,505 (unaudited) of SRLY losses which reduced goodwill.
F-15
4.
Income Taxes (Continued)
In accordance with the tax allocation agreement between McDonald's and the Company, the Company's tax liability is computed based on a separate return basis.
The Company shall pay McDonald's for its allocated tax liability or if it benefited from net losses or tax credits of other members of the consolidated tax return.
Likewise, McDonald's will compensate the Company if it has a net operating loss or tax credit during the tax year that is used by other members of McDonald's
consolidated return. To the extent the Company generates taxable income, it will first be allocated to the SRLY losses. Once the SRLY losses have either been fully
utilized or expire, the taxable income will be offset against the tax attributes/deferred tax assets previously used by McDonald's.
The losses incurred subsequent to the majority acquisition of $118,041 have been utilized by McDonalds, as a reduction of taxable income in its consolidated
return. No tax benefit was reflected in the consolidated statement of operations for McDonald's utilization of the Company's NOLs, but rather was treated as a capital
contribution. At December 31, 2003 and 2004 and September 30, 2005, the Company has recorded a receivable from McDonald's in shareholder's equity in the
consolidated balance sheet of $37,112, $45,985 and $38,596 (unaudited), respectively, for these unreimbursed tax attributes.
If the Company were to exit the consolidated group, it would be reimbursed for any remaining unreimbursed tax attributes. The tax effect of all changes in the tax
bases of assets and liabilities, such as the elimination of the deferred tax asset related to the post-acquisition net operating loss carryforwards, will be recorded in equity.
5.
Shareholders' Equity
The Company is authorized to issue 40,000,000 shares of preferred stock with a $0.01 par value. The preferred stock consists of 8,034,009 shares designated as
Series B convertible preferred stock issued on March 2, 1998 at a per share price of $2.01, 4,975,125 shares designated as Series C junior convertible preferred stock
issued on September 1, 1998 at a per share price of $2.01 and 8,510,639 shares designated as Series D junior convertible preferred stock issued on September 1, 1999 at
a per share price of $2.35. The remaining preferred shares authorized have not been designated.
The Series B convertible preferred stock is convertible into common stock based on the original purchase price of such series divided by the conversion price at the
option of the holder or upon an initial public offering of the Company meeting certain conditions. The initial conversion price equals the per share price purchase price
of $2.01. The conversion price is subject to adjustment under provisions designated to protect against dilution as set forth in the Company's Certificate of Incorporation
but does not include a beneficial conversion feature. As of December 31, 2004, the Series B convertible preferred shares could be converted into 8,034,009 shares of
common stock. The Series B convertible preferred stock has a liquidation preference of $2.01 per share plus 8% per annum from the closing date and any accrued,
unpaid dividends. The liquidation preference was $23,434, $25,309 and $27,334 at December 31, 2002, 2003 and 2004 respectively.
Holders of Series B convertible preferred stock are entitled to vote on matters submitted to a vote of the stockholders of the Company and would receive a vote
equal to the number of common shares the holder would be entitled to if the respective preferred share were converted to common stock. If at any time, the Company
pays dividends to the common shareholders, the Company shall pay the holders of Series B convertible preferred stock the dividends each holder would receive had
each holder converted its
F-16
5.
Shareholders' Equity (Continued)
preferred stock into common stock as of the date of the dividend. No dividends have been declared as of December 31, 2004.
The Series C and Series D junior convertible preferred stock have similar terms to those described above for the Series B convertible preferred stock, except for the
liquidation preferences which are subordinate to the Series B convertible preferred stock. The Series C junior convertible preferred stock has a liquidation preference
($7,890 at December 31, 2002, 2003 and 2004) of $2.01 per share plus any accrued, unpaid dividends and was convertible into 3,925,125 shares of common stock as of
December 31, 2004. The Series D junior convertible preferred stock has a liquidation preference ($20,000 at December 31, 2002, 2003 and 2004) of $2.35 per share and
any accrued, unpaid dividends and was convertible into 8,510,639 shares of common stock as of December 31, 2004. No dividends have been declared.
6.
Stock Based Compensation
In 2002, the Company adopted the Chipotle Executive Stock Option Plan (the Option Plan). Under the plan, 3,000,000 shares of common stock have been reserved
for issuance to eligible employees. The Option Plan is administered by the Board of Directors, which has the authority to select the individuals to whom awards will be
granted and to determine when the options 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 options granted under the Option Plan cannot be less than fair market value at the date of grant. The options granted vest three
years from the date of grant and expire after five years and six months.
In 2002, the Company granted options to purchase 356,000 shares of common stock with an exercise price of $4.99 per share which have a weighted-average
remaining contractual life of approximately 2.8 years. In 2003, the Company granted options to purchase 368,000 shares of common stock with an exercise price of
$5.83 per share which have a weighted-average remaining contractual life of approximately 3.8 years. In 2004, no options were granted to employees. At December 31,
2004, no options had expired, were forfeited or exercised. In addition, none of the options outstanding at December 31, 2004 are vested or exercisable. During the nine
months ended September 30, 2005, options to purchase 337,000 shares of common stock at $4.99 per share vested and became exercisable and options to purchase
38,000 shares of common stock were forfeited. Vested options had an intrinsic value of $509 (unaudited) with a remaining weighted-average contractual life of 2.1
years. Options expected to vest in 2006 had an intrinsic value of $234 (unaudited) with a remaining weighted average contractual life of 3.1 years.
In 2004, the Company adopted the Chipotle Stock Appreciation Rights Plan (the SAR Plan). The Company granted stock appreciation rights on 501,300 shares of
common stock which vest three years from the date of grant and expire after five years and six months. The fair value of the common stock on the date of grant was
$7.45 per share. Compensation expense is recognized over the vesting period and is included in general and administrative expenses in the consolidated statement of
operations. The liability is included in other liabilities in the consolidated balance sheet. Compensation expense related to grants under the SAR Plan was $193 for the
year ended December 31, 2004 and $321 ($193 after tax) (unaudited) for the nine months ended September 30, 2005. At December 31, 2004, no SARs granted had
expired, were forfeited or exercised. In addition, none of the SARs outstanding at December 31, 2004 are vested or exercisable. At September 30, 2005, there was $466
of total unrecognized compensation cost related to non-vested SARS that is expected to be recognized over the remaining 1.8 year vesting period.
F-17
6.
Stock Based Compensation (Continued)
In 2005, the Company granted 460,000 shares of common stock with a fair value of $6.50 per share (a related party contemporaneous valuation) which vest evenly
over three years. Compensation expense is recognized over the vesting period and is included in general and administrative expenses in the consolidated statement of
operations. The Company recognized $912 ($549 after tax) (unaudited) of related compensation expense for the nine months ended September 30, 2005. At
September 30, 2005, there was $2,078 (unaudited) of total unrecognized compensation cost related to the non-vested portion that is expected to be recognized over the
next 2.5 years.
McDonald's issues stock options to certain employees of McDonald's Corporation and its subsidiaries. On February 2, 2001, stock option grants were issued to
certain employees of the Company under the McDonald's Stock Ownership Incentive Plan (McDonald's Plan). The options became exercisable equally over four years,
expire 10 years from the date of grant and have an exercise price of $29.43 per share of McDonald's stock. The Company has agreed to pay McDonald's $2,356 for its
cost of participating in McDonald's Plan which was expensed equally over the four-year vesting period.
7.
Employee Benefit Plans
McDonald's sponsors a 401(k) plan which covers eligible employees of the Company. The Company matches 100% of the first 3% of pay contributed by each
employee and 50% on the next 2% of pay contributed. For the years ended December 31, 2002, 2003 and 2004, Company matching contributions totaled approximately
$470, $436 and $747, respectively.
8.
Related-Party Transactions
The Company enters into short-term agreements with McDonald's to provide the Company with temporary capital. The Company has a line of credit with
McDonald's, which was for $20,000 as of December 31, 2004 and for $30,000 as of September 30, 2005. The line of credit bears interest at the prime rate plus 100 basis
points (6.25% and 7.50% at December 31, 2004 and September 30, 2005, respectively). The weighted-average interest rate was 5.75%, 5.00% and 5.00% for the years
ended December 31, 2002, 2003 and 2004, respectively. Interest is added to the outstanding principal monthly. The line of credit is due on demand and expires June 30,
2006. For the years ended December 31, 2002, 2003 and 2004, interest expense was $98, $15 and $191, respectively. For the nine months ended September 30, 2005,
interest expense was $629 (unaudited). At December 31, 2003 and September 30, 2005, the Company had $10,138 and $4,638 (unaudited), respectively, outstanding
under the line of credit. No amount was outstanding at December 31, 2004.
The Company invests its excess cash under short-term agreements with McDonald's. The agreement in place at December 31, 2004 provided for interest at the
30-day Commercial Paper rate plus 50 basis points (2.66% at December 31, 2004), was due on demand and expired April 14, 2005. Interest was added to the principal
monthly. For the years ended December 31, 2002, 2003 and 2004, interest income was $440, $244, and $205, respectively. As of December 31, 2004 the Company had
$732 deposited under this arrangement.
The consolidated statement of operations reflects charges from McDonald's of $3,047, $4,917 and $7,711 for the years ended December 31, 2002, 2003 and 2004,
respectively, and $7,274 (unaudited) for the nine months ended September 30, 2005. These charges primarily related to reimbursements of payroll and
F-18
8.
Related-Party Transactions (Continued)
related expenses for certain McDonald's employees that perform services for the Company, insurance coverage, software maintenance agreements and non-income
based taxes. The charges are specifically identifiable to the Company. The Company cannot estimate with any reasonable certainty what these charges would have been
on a stand-alone basis. However, the Company feels that these charges are indicative of what it could have incurred on a stand-alone basis.
The Company leases office and restaurant space from McDonald's and its affiliates. Rent expense was $95, $243 and $306 for such leases for the years ended
December 31, 2002, 2003 and 2004, respectively, and $318 (unaudited) for the nine months ended September 30, 2005.
9.
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 30-50 years. Typically the lease includes 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 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 and vehicles.
Future minimum lease payments required under existing operating leases as of December 31, 2004 are as follows:
2005
2006
2007
2008
2009
Thereafter
Total minimum lease payments
$
39,604
40,312
39,354
38,984
39,888
525,996
$
724,138
Minimum lease payments have not been reduced by minimum sublease rentals of $16,497 due in the future under non-cancelable subleases.
Rental expense consists of the following:
For the years ended December 31,
2002
Minimum rentals
Contingent rentals
Sublease rental income
$
$
$
F-19
16,854
82
(534)
2003
$
$
$
23,688
196
(1,143)
2004
$
$
$
33,201
284
(1,632)
9.
Leases (Continued)
During the nine months ended September 30, 2005, the Company entered into four sales and leaseback transactions. These transactions do not qualify for sales
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 assets under
deemed landlord financing, net, totaled $2,077 (unaudited) and the deemed landlord financing liability was $2,396 (unaudited) at September 30, 2005.
10. Earnings Per Share
The Company uses the two-class method for computing basic and diluted earnings per share amounts. Basic earnings per common share is calculated by dividing
income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during each period. In periods in which there
is a net loss, losses are not allocated to preferred shares as the preferred shares are not obligated to share in the losses of the Company. Diluted earnings per common
share (Diluted EPS) is calculated using income (loss) available to common shareholders divided by diluted weighted-average shares of common stock outstanding
during each period. Potentially dilutive securities include potential common shares related to stock options and non-vested stock. Diluted EPS considers the impact of
potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Options
to purchase 356,000 and 724,000 shares of common stock in 2002 and 2003, respectively, at a weighted-average exercise price of $4.99 and $5.24, respectively, which
were outstanding during the period, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
F-20
10. Earnings Per Share (Continued)
The following table sets forth the computations of basic and dilutive earnings per common share:
Nine months ended
September 30,
Year ended December 31,
2002
2003
2004
2004
2005
Basic
Weighted average common shares outstanding
39,324,552
46,683,077
55,893,078
55,060,651
58,372,266
Divided by: Total weighted average shares
outstanding (Common stock in periods of a net loss or
common stock, Series B convertible preferred stock
and Series C and Series D junior convertible preferred
stock in periods of net income)
39,324,552
46,683,077
76,362,851
75,530,424
78,842,039
Multiplied by: undistributed earnings
$
(17,289) $
(7,714) $
6,126 $
9,842
$
33,434
Allocated undistributed earnings
$
(17,289) $
(7,714) $
4,484 $
7,174
$
24,754
Divided by: Weighted average common shares
outstanding
Earnings (loss) per common share
39,324,552
$
(0.44) $
46,683,077
(0.17) $
55,893,078
0.08 $
55,060,651
0.13
58,372,266
$
0.42
Diluted
Weighted average common shares outstanding
39,324,552
46,683,077
56,090,651
55,258,224
58,517,125
Divided by: Total weighted average shares
outstanding (Common stock in periods of a net loss or
common stock, Series B convertible preferred stock
and Series C and Series D junior convertible preferred
stock in periods of net income)
39,324,552
46,683,077
76,560,424
75,727,997
78,986,898
Multiplied by: undistributed earnings
$
(17,289) $
(7,714) $
6,126 $
9,842
$
33,434
Allocated undistributed earnings
$
(17,289) $
(7,714) $
4,488 $
7,182
$
24,769
Divided by: Weighted average common shares
outstanding
Earnings (loss) per common share
The calculation of weighted average common shares
outstanding is as follows:
Weighted average common shares outstanding:
39,324,552
$
(0.44) $
46,683,077
(0.17) $
56,090,651
0.08 $
55,258,224
0.13
58,517,125
$
0.42
Shares used in basic per-share calculation
39,324,552
46,683,077
55,893,078
55,060,651
58,372,266
—
—
—
—
197,573
—
197,573
—
96,436
48,423
39,324,552
46,683,077
56,090,651
55,258,224
58,517,125
Effect of dilutive securities:
Dilutive stock options
Dilutive non-vested stock
Shares used in diluted per-share calculation
F-21
10. Earnings Per Share (Continued)
The following table sets forth the computations of pro forma basic and diluted earnings per share to give retroactive effect to the Reclassification for the year ended
December 31, 2004 and the nine months ended September 30, 2005 as if the Reclassification occurred at the beginning of the period. The stock options to be granted in
connection with the conversion of SARs upon consummation of the proposed offering were excluded from the calculation of diluted earnings per share because they
were anti-dilutive. The pro forma calculation excludes the shares to be issued in connection with the proposed offering and as a result, there is only one class of stock.
For the nine months
ended
September 30, 2005
For the year ended
December 31, 2004
Income (loss) available to common shareholders
Shares:
$
6,126
Weighted average number of common shares outstanding
Dilutive stock options
Dilutive non-vested stock
Diluted weighted average number of common shares
outstanding
$
33,434
25,454,284
26,280,680
65,858
32,145
16,141
25,520,142
26,328,966
Basic earnings per common share
$
0.24
$
1.27
Diluted earnings per common share
$
0.24
$
1.27
11. Contingencies
In August 2004, the merchant bank that processes the Company's credit and debit card transactions, informed the Company it may have been the victim of a
possible theft of credit and debit card data. Together with two forensic auditing firms, the Company investigated the alleged theft and reviewed its information systems
and information security procedures. The Company also reported the problem to federal law enforcement authorities and has been cooperating in their investigation.
While to date the Company has not discovered conclusive evidence that a theft occurred, the Company has upgraded its information security systems, including
remediating the specific problems identified during the forensic audits. As of December 31, 2004, the Company recorded a reserve for the potential exposure for losses
and fines of $4,000. Through September 30, 2005 (unaudited), the Company utilized $2,009 (unaudited) of the reserve to cover fines and losses. As the situation
develops and more information becomes available, the amount of the reserve may increase or decrease accordingly.
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. Such matters are subject to many uncertainties, and outcomes
are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters at December 31, 2004. These matters could affect the operating results of any one quarter when resolved in future periods. However,
management believes after final disposition, any monetary liability or financial impact to the Company beyond that provided for at the end of the year would not be
material to the Company's annual consolidated financial statements.
F-22
11. Contingencies (Continued)
The Company is party to an irrevocable standby letter of credit that ensures the Company's performance/payment to Enterprise Fleet Services related to a leasing
arrangement for vehicles and $425 and $800 was outstanding at December 31, 2003 and 2004, respectively.
12. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data:
2003
March 31
Revenue
Operating income (loss)
Net income (loss)
$
$
$
June 30
64,712
(3,972)
(3,932)
September 30
December 31
$
$
$
77,281
(637)
(539)
$
$
$
85,391
165
256
$
$
$
88,136
(3,491)
(3,499)
$
$
(0.01)
(0.01)
$
$
0.00
0.00
$
$
(0.07)
(0.07)
Basic earnings (loss) per share
$
$
Diluted earnings (loss) per share
0.09
0.09
2004
March 31
Revenue
Operating income (loss)
Net income (loss)
June 30
September 30
December 31
$
$
$
101,442
702
515
$
$
$
117,248
4,944
5,034
$
$
$
124,563
4,215
4,293
$
$
$
127,468
(3,755)
(3,716)
$
$
0.01
0.01
$
$
0.06
0.06
$
$
0.05
0.05
$
$
(0.06)
(0.06)
Basic earnings (loss) per share
Diluted earnings (loss) per share
2005
March 31
Revenue
$
Operating income
$
Net income
$
Basic earnings per share
$
Diluted earnings per share
$
The quarterly results were impacted by the following unusual or infrequent events:
133,416
4,439
2,626
0.03
0.03
June 30
$
$
$
$
$
156,296
9,321
25,725
0.33
0.33
September 30
$
$
$
$
$
164,670
9,498
5,085
0.06
0.06
In the second quarter of 2005, the Company determined that it was more likely than not that it would realize its deferred tax assets and reversed its valuation
allowance, resulting in a net tax benefit of $16,739 in that quarter.
In the fourth quarter of 2004, the Company recorded charges of $4,000 to establish a reserve for claims seeking reimbursement for purportedly fraudulent credit
and debit card charges and for the cost of replacing cards and monitoring expenses and fees, which reduced the Company's operating income.
F-23
Annex A
We have an electronic version of this prospectus at www.chipotleipo.com. That electronic version is identical to the paper version except that persons viewing the
electronic version of our prospectus are able to access a selection of our print, radio and television advertisements by following a link under the caption "Prospectus
Summary." The script of these items and a description of the graphics used in them are provided below.
TV Ads
Each of the following is a 15-second television spot that originally ran on the Public Broadcasting Service. Each spot ends with a static screen showing the
Chipotle logo and the text "Gourmet Burritos & Tacos."
Sign Language
This spot opens on a distinguished gentleman sitting in a well-appointed den, closing a book. As he starts to speak, a woman doing sign language for the
hearing-impaired pops up in the bottom right hand corner of the screen.
Host: Good evening. Tonight's program is made possible by a grant from Chipotle Mexican Grill, purveyors of fine burritos and tacos. [While Host is speaking, the
interpreter is trying to sign and eat her burrito; she loses pace with the host and then decides to give up and just eat her burrito.]
Telethon
This spot opens on a distinguished gentleman standing in front of a charitable pledge drive sign. There is a sound of many phones ringing in the background.
Host: Welcome back. This program was made possible by a grant from Chipotle Mexican Grill. We look forward to bringing you more outstanding shows like this
one. [As Host is talking, he walks in front of the phone bank where phones are unanswered due to the operators eating burritos.] And, remember that you…" [Host is
drowned out by the sounds of unanswered phones.]
The News
This spot opens at the beginning of a news program.
Voiceover: The preceding program made possible by Chipotle Mexican Grill.
Anchorwoman: In world news tonight [camera angle goes askew], financial markets saw mixed results due to the continued fluctuation of the drachma. At the
same [cameraman eating a burrito becomes visible]…(whispers) William, William!
Radio Ads
Each of the following songs is a radio spot that we've used in the past.
"You Can Choose"
You can choose to be nasty
You can choose to be nice
You can choose to have a sex change
But you can't do it twice
A-1
You can choose to be faithful
You can choose to fool around
You can live out in the country
You could get a place in town
You could try out for the Olympics
Or just watch it on TV
You could hide that new tattoo
Or let everybody see
You can choose to eat the chicken
You can choose to eat no meat
At Chipotle you can choose
Exactly what you want to eat
It's up to you
It's up to you
"Moo"
Moo moo moo moo moo moo
Moo moo moo moo
Cow!
Moo moo moo moo moo moo
Moo moo moo moo
Cow!
Moo moo moo moo moo moo
Moo moo moo moo
Cow!
Moo moo moo moo moo moo
Moo moo moo moo
Cow!
Moo moo moo moo moo moo
Moo moo moo
Happy Cow!
(instrumental, moos in background)
How?
Naturale
Wow
Now
Cow
Happy Cow
"My Baby"
My baby likes to go out
Every night
She said she don't care where we go
Any place is all right
She said she just wants
Somethin real to eat
Other than that
Its really up to me
Yeah, my baby likes to go out
Every night
A-2
But when I pick her up
Its always the same
'cause that's when we got to play
our little game
I like Japanese, Chinese
Thai food OK?
She's like, nah,
Why don't you take me down to Chipotle?
Yeah my baby likes to go to
Every night
"Clean Livin"'
Clean livin', out on the ranch
Theres a bird singin on a cottonwood branch
Clean livin', cows walkin' by
They look so happy I was wonderin' why
So I asked the rancher, he said
Clean livin' son, shootin' up ain't cool
I don't fill 'em up with chemicals
I keep 'em natural
And then I only feed 'em
Good natural things to eat
You raise 'em up right
They make some mighty tasty meat
I said I gotta go get me some
He said well you better have a lot of dough
'cause I sell to fancy restaurants
And I said "Oh."
He said but I'll let you in on a little secret son
There is one other way
You can get my natural beef
Right down at Chipotle
Oh yeah, clean livin',
I said with a shout
I'm headin' to Chipotle
Gonna check it out
Print Ads
Our print ads generally focus on either an image of a large foil burrito like the one shown on the cover of the prospectus or an image of one of our ingredients. The
text below the image varies. We've included the following examples.
BURRITOS & TACOS & BOLS. OH MY!
TILT. BITE. REPEAT.
TACOS THAT ROCKOS.
GRAB LIFE BY THE TACOS.
A-3
BEEF, PORK AND CHICKEN FROM FARMS, NOT FACTORIES.
OUR SALAD CAN BEAT UP YOUR SALAD.
SERVED HOT, NOT HEATED.
EVER MET A BURRITO YOU DIDN'T LIKE? WE HAVE, SO WE MADE THESE.
TASTY FAST FOOD, BECAUSE IT'S MADE LIKE TASTY SLOW FOOD.
WE USE SALSA INSTEAD OF HEAT LAMPS.
SLOW COOKED, DELICATELY SPICED, GOURMET INGREDIENTS, WRAPPED IN FOIL FOR IRONY.
FRESH AS THE DAY IT WAS MADE, WHICH WOULD BE TODAY.
WHAT THE HECK IS PROCESSED CHEESE FOOD ANYWAY?
CONTAINS ONLY GENUINE PLANTS AND ANIMALS.
INGEST NO EVIL.
IT'S 11:45 AM. DO YOU KNOW WHERE YOUR BEEF COMES FROM?
A-4
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following sets forth the estimated expenses and costs (other than underwriting discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the common stock registered hereby:
SEC registration fee
$
18,037
NASD fee
16,356
New York Stock Exchange listing fees
150,000
Printing expenses
250,000
Accounting fees and expenses
550,000
Legal fees and expenses
1,550,000
Blue Sky fees and expenses
20,000
Transfer agent fees and expenses
10,000
Miscellaneous
100,000
Total
$
2,664,393
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a corporation to indemnify its directors, officers, employees and agents against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement reasonably incurred, provided they act in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, had no reasonable cause to believe their conduct was
unlawful, although in the case of proceedings brought by or on behalf of the corporation, such indemnification is limited to expenses and is not permitted if the
individual is adjudged liable to the corporation (unless the Delaware Court of Chancery or the court in which such proceeding was brought determines otherwise in
accordance with the Delaware General Corporation Law). Section 102 of the Delaware General Corporation Law authorizes a corporation to limit or eliminate its
directors' liability to the corporation or its stockholders for monetary damages for breaches of fiduciary duties, other than for (i) breaches of the duty of loyalty; (ii) acts
or omissions not in good faith or that involve intentional misconduct or knowing violations of law; (iii) unlawful payments of dividends, stock purchases or
redemptions; or (iv) transactions from which a director derives an improper personal benefit. Our certificate of incorporation contains such a provision.
Our bylaws incorporate Section 145 of the Delaware General Corporation Law, which provides that we will indemnify each director and officer against all claims
and expenses resulting from the fact that such person was an director, officer, agent or employee of the registrant. A claimant is eligible for indemnification if the
claimant (i) acted in good faith and in a manner that, in the claimant's reasonable belief, was in or not opposed to the best interests of the registrant; or (ii) in the case of
a criminal proceeding, had no reasonable cause to believe the claimant's conduct was unlawful. This determination will be made by our disinterested directors, our
shareholders or independent counsel in accordance with Section 145 of the Delaware General Corporation Law.
Section 145 of the Delaware General Corporation Law authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation against any liability asserted against and incurred by such person in any such capacity, or arising out of such
person's status as such. We have obtained liability insurance covering our directors and officers for claims asserted against them or incurred by them in such capacity.
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The underwriting agreement provides that the underwriters are obligated, under certain circumstances, to indemnify our directors, officers and controlling persons
against certain liabilities, including liabilities under the Securities Act. Reference is made to the form of underwriting agreement filed as Exhibit 1.1 hereto.
Reference is made to Item 17 for our undertakings with respect to indemnification for liabilities arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
The following relates to sales of securities that have occurred since October 1, 2002 that have not been registered under the Securities Act:
In May 2005, the registrant issued 153,333 shares of non-vested common stock (after giving retroactive effect to the Reclassification) to Mr. Montgomery Moran
pursuant to a Restricted Stock Agreement dated March 24, 2005 executed in connection with Mr. Moran's offer of employment by us. The shares vest in equal annual
installments over three years from his date of employment, subject to his continued employment with us. In connection with this issuance, the registrant recognized
$0.9 million of related compensation expense during the nine months ended September 30, 2005. This transaction was effected without registration under the Securities
Act in reliance on the exemption from registration provided under Section 4(2) promulgated thereunder.
In April 2004, the registrant issued 2,908,278 shares of common stock (after giving retroactive effect to the Reclassification) to McDonald's and certain other
persons who were accredited investors (consisting of friends and family of our employees and persons having business relationships with us), in each case as identified
in our shareholders' agreement, at an aggregate offering price of $65 million. These transactions were effected without registration under the Securities Act in reliance
on the exemption from registration provided under Section 4(2) promulgated thereunder.
In June 2003, the registrant issued 2,172,670 shares of common stock (after giving retroactive effect to the Reclassification) to McDonald's and certain other
persons who were accredited investors (consisting of friends and family of our employees and persons having business relationships with us), in each case as identified
in our shareholders' agreement, at an aggregate offering price of $38 million. These transactions were effected without registration under the Securities Act in reliance
on the exemption from registration provided under Section 4(2) promulgated thereunder.
Item 16. Exhibits
See the Exhibit Index, which follows the signature pages and is incorporated herein by reference.
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of such issue.
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(b) The undersigned registrant hereby undertakes that:
(1)
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared effective.
(2)
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(c)
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
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SIGNATURES
Pursuant to the requirements of the U.S. Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of Colorado, on January 10, 2006.
CHIPOTLE MEXICAN GRILL, INC.
By:
/s/ JOHN R. HARTUNG
Name:
Title:
John R. Hartung
Chief Finance and Development Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Steve Ells, Montgomery Moran and John Hartung, or any of them, as his true and lawful
attorney-in-fact with full power of substitution and resubstitution, in any and all capacities, to sign this registration statement or amendments (including, without
limitation, post-effective amendments and registration statements filed pursuant to Rule 462 under the U.S. Securities Act of 1933) thereto and to file the same, with all
exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto each of said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the U.S. Securities Act of 1933, the registration statement has been signed below on January 10, 2006 by the following persons in
the following capacities and on the date indicated.
Signature
Title
*
Chief Executive Officer (principal executive officer) and Chairman of the Board of Directors
Steve Ells
/s/ JOHN R. HARTUNG
John R. Hartung
Chief Finance and Development Officer (principal financial officer)
*
Robin S. Anderson
Executive Director and Controller (principal accounting officer)
*
Albert S. Baldocchi
Director
*
John S. Charlesworth
Director
*
Patrick J. Flynn
Director
*
Darlene J. Friedman
Director
*
Mats Lederhausen
Director
*By:
/s/ JOHN R. HARTUNG
Name:
Title:
John R. Hartung
Attorney-in-fact
II-4
EXHIBIT INDEX
Exhibit
Number
Description
1.1
Form of Underwriting Agreement.
3.1
Form of Restated Certificate of Incorporation of Chipotle Mexican Grill, Inc.
3.2
Form of Restated Bylaws of Chipotle Mexican Grill, Inc.
5.1
Opinion of Cleary Gottlieb Steen & Hamilton LLP.
10.1
Chipotle Executive Stock Option Plan.†
10.2
Chipotle Stock Appreciation Rights Plan.†
10.3
Chipotle 2006 Cash Incentive Plan.
10.4
Chipotle 2006 Stock Incentive Compensation Plan, including the form of Option Agreement and the form of Option Agreement for converted
SARs.
10.5
Form of Services Agreement between Chipotle Mexican Grill, Inc. and McDonald's Corporation.†
10.6
Form of Amended and Restated Registration Rights Agreement among Chipotle Mexican Grill, Inc., McDonald's Ventures, LLC and certain
shareholders.
10.7
Restricted Stock Award Agreement between Chipotle Mexican Grill, Inc. and Montgomery F. Moran.
21.1
Subsidiaries of Chipotle Mexican Grill, Inc.†
23.1
Consent of Ernst & Young LLP.
23.2
Consent of Cleary Gottlieb Steen & Hamilton LLP (included in Exhibit 5.1).
24.1
Power of Attorney (included on signature pages hereto).
†
Filed previously.
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Exhibit 1.1
7,878,788 Shares
CHIPOTLE MEXICAN GRILL, INC.
Class A Common Stock (Par Value $0.01 Per Share)
UNDERWRITING AGREEMENT
[
], 2006
[
], 2006
Morgan Stanley & Co. Incorporated
SG Cowen & Co., LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Chipotle Mexican Grill, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "
Underwriters "), and McDonald's Ventures, LLC, a Delaware limited liability company (the " Selling Shareholder "), proposes to sell to the several Underwriters, an
aggregate of 7,878,788 shares (the " Firm Shares ") of the Company's Class A Common Stock, par value $0.01 per share (the " Class A Common Stock "), of which
6,060,606 shares are to be issued and sold by the Company and 1,818,182 shares are to be sold by the Selling Shareholder.
The Selling Shareholder also proposes to issue and sell to the several Underwriters not more than an additional 1,181,818 shares of Class A Common Stock (the "
Additional Shares ") if and to the extent that you, as managers of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of Class A Common Stock granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred
to as the " Shares ." The shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to collectively as the " Common Stock ." The Company and the Selling Shareholder are hereinafter sometimes collectively
referred to as the " Sellers ."
The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, including a prospectus, relating to the Shares.
The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the " Securities Act "), is hereinafter referred to as the " Registration Statement ";
the prospectus in the form first used to confirm sales of Shares (or in the form first made available to the Underwriters by the Company to meet requests of purchasers
pursuant to Rule 173 under the Securities Act) is hereinafter referred to as the " Prospectus ." If the Company has filed an abbreviated registration statement to register
additional shares of Class A Common Stock pursuant to Rule 462(b) under the Securities Act (the " Rule 462 Registration Statement "), then any reference herein to
the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement.
For purposes of this Agreement, "free writing prospectus" has the meaning set forth in Rule 405 under the Securities Act, "Time of Sale Prospectus " means the
preliminary prospectus together with the free writing prospectuses, if any, each identified in Schedule II hereto, and " broadly available road show " means a "bona
fide electronic road show" as defined in Rule 433(h)(5) under the Securities Act that has been made available without restriction to any person.
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to reserve a portion of the Shares to be purchased by it under this Agreement for sale to
certain of the Company's directors, officers and employees and business associates and other parties related to the Company (collectively, " Participants "), as set forth
in the Prospectus under the heading "Underwriters" (the " Directed Share Program "). The Shares to be sold by Morgan Stanley and its affiliates pursuant to the
Directed Share Program (the " Directed Shares ") will be sold by Morgan Stanley pursuant to the terms of this Agreement at the public offering price set forth in the
Prospectus. Any Directed Shares not orally
confirmed for purchase by any Participant by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set
forth in the Prospectus.
1.
Representations and Warranties of the Company.
The Company represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for
such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration
Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder, (iii) the Time of Sale Prospectus does not, and at the time of each sale of the Shares in connection with the offering
when the Prospectus is not yet available to prospective purchasers and at the Closing Date (as defined in Section 4), the Time of Sale Prospectus, as then amended or
supplemented by the Company, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not misleading, (iv) the broadly available road show, if any, which is identified in Schedule II as
part of the Time of Sale Prospectus, when considered together with the other items identified in Schedule II as part of the Time of Sale Prospectus, does not contain any
untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were
made, not misleading and (v) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided, in each
case, that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement, the Time of Sale
Prospectus or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for
use therein.
(c) The Company is not an "ineligible issuer" in connection with the offering pursuant to Rules 164, 405 and 433 under the Securities Act. Any free writing
prospectus that the Company is required to file pursuant to Rule 433(d) under the Securities Act has been, or will be, filed with the Commission in accordance with the
requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Each free writing prospectus that the Company has filed, or is
required to file, pursuant to Rule 433(d) under the Securities Act or that was prepared by or on behalf of or used or referred to by the Company complies or will comply
in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Except for the free writing
prospectuses, if any, identified in Schedule II hereto, and electronic road shows, if any, furnished to you before first use, the Company has not prepared, used or referred
to, and will not, without your prior written consent, prepare, use or refer to, any free writing prospectus.
(d) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not reasonably be expected to have, individually or in the
2
aggregate, a material adverse effect on the condition, financial or otherwise, earnings or business or operations of the Company and its subsidiaries, taken as a whole (a
" Material Adverse Effect ").
(e) Each "significant subsidiary" of the Company, as defined in Rule 1-02(w) of Regulation S-X under the Securities Exchange Act of 1934, as amended (the "
Exchange Act "), has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not reasonably be expected to have a Material Adverse Effect; all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and, except as listed on Schedule III hereto, are wholly
owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims.
(f)
This Agreement has been duly authorized, executed and delivered by the Company.
(g) The authorized capital stock of the Company will, immediately prior to the Closing Date, conform as to legal matters to the description thereof contained in
each of the Time of Sale Prospectus and the Prospectus under the heading "Description of Capital Stock."
(h) The shares of Common Stock (including the Shares to be sold by the Selling Shareholder) outstanding prior to the issuance of the Shares to be sold by the
Company have been duly authorized and are validly issued, fully paid and non-assessable.
(i) The Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights.
(j) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any
(i) provision of applicable law, (ii) the certificate of incorporation or by-laws of the Company, (iii) any agreement or other instrument binding upon the Company or any
of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or (iv) any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary, except, in case of clauses (iii) and (iv) for such contraventions as would not reasonably be expected to
have a Material Adverse Effect, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such as have already been obtained or may be required by the securities or Blue Sky laws
of the various states in connection with the offer and sale of the Shares.
(k) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus.
(l) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries is a
party or to which any of the properties of the Company or any of its subsidiaries is subject (i) other than proceedings accurately described in all material respects in the
Time of Sale Prospectus and proceedings that would not have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole, or on the power or
ability of the Company to perform its obligations under this Agreement or to consummate the transactions contemplated by the Time of Sale Prospectus or (ii) that are
required to be described in the Registration Statement or the Time of Sale Prospectus and are not so described or that, if determined adversely to the Company or any of
its subsidiaries, could reasonably be expected to have,
3
singly or in the aggregate, a Material Adverse Effect; and there are no statutes, regulations, contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required.
(m) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424
under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder.
(n) The Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described under the heading
"Use of Proceeds" in the Prospectus will not be, required to register as an "investment company" as such term is defined in the Investment Company Act of 1940, as
amended.
(o) Except as described in the Time of Sale Prospectus, the Company and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state
and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or
contaminants (" Environmental Laws "), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or
approvals could not reasonably be expected to have, singly or in the aggregate, a Material Adverse Effect.
(p) Except as described in the Time of Sale Prospectus, there are no costs or liabilities associated with Environmental Laws (including, without limitation, any
capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third parties) which could reasonably be expected to have, singly or in the aggregate, a Material
Adverse Effect.
(q) Except as described in the Time of Sale Prospectus, there are (i) no contracts, agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or (ii) to require the
Company to include such securities with the Shares registered pursuant to the Registration Statement; all such rights have been validly waived in respect of the
Registration Statement.
(r) Subsequent to the respective dates as of which information is given in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus
(i) the Company and its subsidiaries on a consolidated basis have not incurred any material liability or obligation, direct or contingent, nor entered into any material
transaction; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its
capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries on a consolidated basis, except in each case as described in each of the Registration Statement, the Time of Sale Prospectus and the
Prospectus.
(s) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property
owned by them which is material to the business of the Company and its subsidiaries, taken as a whole, in each case free and clear of all liens, encumbrances and
defects except such as are described in the Time of Sale Prospectus or such as do not materially affect the value of such property and do not interfere with the use made
and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings
4
held under lease by the Company and its subsidiaries that are material to the Company and its subsidiaries, taken as a whole, are held by them under valid, subsisting
and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries, in each case except as described in the Time of Sale Prospectus.
(t) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks
and trade names currently employed by them in connection with the business now operated by them, except where the failure to own, possess or have the right to
acquire such intellectual property could not reasonably be expected to have a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received
any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could reasonably be expected to have a Material Adverse Effect.
(u) No material labor dispute with the employees of the Company or any of its subsidiaries exists, except as described in the Time of Sale Prospectus, or, to the
knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors that could reasonably be expected to have a Material Adverse Effect.
(v) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which they are engaged; and except as described in the Time of Sale Prospectus, neither the Company nor any of its
subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a cost that could not reasonably be expected to have a Material Adverse Effect.
(w) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses other than such certificates, authorizations and permits which the failure to so possess could not reasonably be expected
to have a Material Adverse Effect. Neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could reasonably be expected
to have a Material Adverse Effect, except as described in the Time of Sale Prospectus.
(x) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in
conformity with U.S. generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(y) Except as described in the Time of Sale Prospectus, the Company has not sold, issued or distributed any shares of any class of common stock during the
six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act, other than shares issued
pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants.
5
(z) The Registration Statement, the Prospectus, the Time of Sale Prospectus and any preliminary prospectus comply, and any amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus, the Time of Sale Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection with the Directed Share Program.
(aa) No consent, approval, authorization or order of, or qualification with, any governmental body or agency, other than those obtained, is required in connection
with the offering of the Directed Shares in any jurisdiction where the Directed Shares are being offered, except for such as have been obtained or may be required under
the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares.
(bb) The Company has not offered, or caused Morgan Stanley to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to
unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company, or (ii) a trade journalist
or publication to write or publish favorable information about the Company or its products.
2.
Representations and Warranties of Parent and the Selling Shareholder.
(a) The Selling Shareholder represents and warrants to and agrees with each of the Underwriters that:
(i) This Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Shareholder.
(ii) The Selling Shareholder has, and on the Closing Date will have, valid title to, or a valid "security entitlement" within the meaning of Section 8-501 of the
New York Uniform Commercial Code in respect of, the Shares to be sold by the Selling Shareholder free and clear of all security interests, claims, liens, equities or
other encumbrances and the legal right and power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the
Shares to be sold by the Selling Shareholder or a security entitlement in respect of such Shares.
(iii) Upon payment for the Shares to be sold by the Selling Shareholder pursuant to this Agreement, delivery of such Shares, as directed by the Underwriters, to
Cede & Co. (" Cede ") or such other nominee as may be designated by the Depository Trust Company (" DTC "), registration of such Shares in the name of Cede or
such other nominee and the crediting of such Shares on the books of DTC to securities accounts of the Underwriters (assuming that neither DTC nor any such
Underwriter has notice of any adverse claim (within the meaning of Section 8-105 of the New York Uniform Commercial Code (the " UCC ")) to such Shares),
(A) DTC shall be a "protected purchaser" of such Shares within the meaning of Section 8-303 of the UCC, (B) under Section 8-501 of the UCC, the Underwriters will
acquire a valid security entitlement in respect of such Shares and (C) no action based on any "adverse claim", within the meaning of Section 8-102 of the UCC, to such
Shares may be asserted against the Underwriters with respect to such security entitlement; for purposes of this representation, the Selling Shareholder may assume that
when such payment, delivery and crediting occur, (x) such Shares will have been registered in the name of Cede or another nominee designated by DTC, in each case
on the Company's share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a "clearing corporation"
within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the accounts of the several Underwriters on the records of DTC will have been made
pursuant to the UCC.
(iv) The Selling Shareholder has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its
incorporation.
6
(v) The execution and delivery by the Selling Shareholder of, and the performance by the Selling Shareholder of its obligations under, this Agreement will not
contravene any (i) provision of applicable law, (ii) the organizational documents of the Selling Shareholder, (iii) any agreement or other instrument binding upon the
Selling Shareholder or any of its subsidiaries that is material to the Selling Shareholder and its subsidiaries, taken as a whole, or (iv) any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the Selling Shareholder or any of its subsidiaries, except, in the case of clauses (iii) and (iv) for such
contraventions as would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the condition, financial or otherwise, earnings
or business or operations of the Selling Shareholder and its subsidiaries, taken as a whole, and no consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Selling Shareholder of its obligations under this Agreement, except such as have already been
obtained or may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares.
(vi) Except as described in the Time of Sale Prospectus, there are no contracts, agreements or understandings between the Selling Shareholder and any person
granting such person the right to require the Company to file or cause the Company to file a registration statement under the Securities Act with respect to any securities
of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement.
(vii) The Selling Shareholder has no reason to believe that the representations and warranties of the Company contained in Section 1(b) of this Agreement (other
than Section 1(b)(ii) as to which the Selling Shareholder is not called upon to express any belief) are not true and correct; and the sale of the Shares by the Selling
Shareholder pursuant to this Agreement is not prompted by any material information concerning the Company or any of its subsidiaries which is not set forth in the
Time of Sale Prospectus.
(b) McDonald's Corporation (the "Parent") represents and warrants to and agrees with each of the Underwriters that:
(i) This Agreement has been duly authorized, executed and delivered by or on behalf of Parent.
(ii) The Parent has no reason to believe that the representations and warranties of the Company contained in Section 1(b) of this Agreement (other than Section
1(b)(ii) as to which the Parent is not called upon to express any belief) are not true and correct; and the sale of the Shares by the Selling Shareholder pursuant to this
Agreement is not prompted by any material information concerning the Company or any of its subsidiaries which is not set forth in the Time of Sale Prospectus.
3. Agreements to Sell and Purchase. The Company (as to 6,060,606 shares) and the Selling Shareholder (as to 1,818,182 shares), severally and not jointly,
hereby agree to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees, severally and not jointly, to purchase from each Seller at $[
] per share (the " Purchase Price ") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by such Seller
as the number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Selling Shareholder agrees to sell to the
Underwriters the Additional Shares, and the Underwriters shall have the right to purchase, severally and not jointly, up to 1,181,818 Additional Shares at the Purchase
Price. Morgan Stanley and SG Cowen & Co., LLC (" SG Cowen ")
7
may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice not later than 30 days after the date of this
Agreement. Any exercise notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be
purchased. Each purchase date must be at least two business days after the written notice is given and may not be earlier than the closing date for the Firm Shares nor
later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. On each day, if any, that Additional Shares are to be purchased (an " Option Closing Date "),
each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Additional Shares to be purchased on such Option Closing Date as the number of Firm Shares set forth
in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan Stanley and SG Cowen on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise or (3) file any registration statement with the Commission relating to the offering of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock.
The restrictions contained in the preceding paragraph shall not apply to (a) the Shares to be sold hereunder, (b) the issuance by the Company of shares of Common
Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing or
that is described in the Time of Sale Prospectus, (c) the grant of options or the issuance of shares of Common Stock to employees, officers, directors, advisors or
consultants pursuant to any employee benefit plan described in the Prospectus or (d) the filing of any registration statement on Form S-8 in respect of any employee
benefit plan described in the Prospectus. Notwithstanding the foregoing, if (i) during the last 17 days of the 180-day restricted period the Company issues an earnings
release or material news or a material event relating to the Company occurs; or (ii) prior to the expiration of the 180-day restricted period, the Company announces that
it will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions imposed by this agreement shall continue to
apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. The Company
shall promptly notify Morgan Stanley and SG Cowen of any earnings release, news or event that may give rise to an extension of the initial 180-day restricted period.
4. Terms of Public Offering. Each of the Company and the Selling Shareholder are advised by you that the Underwriters propose to make a public offering of
their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. Each of the
Company and the Selling Shareholder are further advised by you that the Shares are to be offered to the public initially at $[ ] per share (the " Public Offering Price
") and to certain dealers selected by you at a price that represents a concession not in excess of $[ ] per share under the Public Offering Price, and that any Underwriter
may allow, and such dealers may reallow, a concession, not in excess of $[ ] per share, to any Underwriter or to certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be sold by each Seller shall be made to such Seller in Federal or other funds immediately available in
New York City against delivery of such
8
Firm Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on [T+3], 2005, or at such other time on the same or such other
date, not later than [T+3+5], 2005, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the " Closing Date ."
Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the corresponding notice described
in Section 3 or at such other time on the same or on such other date, in any event not later than [Expiration of greenshoe option +10], 2005, as shall be designated in
writing by you.
The Firm Shares and Additional Shares shall be registered in such names and in such denominations as you shall request in writing not later than one full business
day prior to the Closing Date or the applicable Option Closing Date, as the case may be. The Firm Shares and Additional Shares shall be delivered to you on the Closing
Date or an Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the
transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The obligations of the Sellers to sell the Shares to the Underwriters and the several obligations of the
Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later
than 5:00 p.m., New York City time, on the date hereof.
The several obligations of the Underwriters are subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible
change that does not indicate the direction of the possible change, in the rating accorded any of the securities of the Company or any of its subsidiaries by any
"nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus.
(b) The Underwriters shall have received on the Closing Date:
(i) a certificate, dated the Closing Date and signed by an executive officer of the Company to the effect set forth in Section 6(a)(i) above and to the effect that the
representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of
the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering
such certificate may rely upon the best of his or her knowledge as to proceedings threatened;
(ii) a certificate, dated the Closing Date and signed by an officer of the Selling Shareholder, who is authorized by corporate action to provide such certificate, to
the effect that the representations and warranties of the Selling Shareholder contained in this Agreement are true and correct as of the Closing Date and that the Selling
Shareholder has complied with all of the
9
agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date; and
(iii) a certificate, dated the Closing Date and signed by an officer of Parent, who is authorized by corporate action to provide such certificate, to the effect that the
representations and warranties of Parent contained in this Agreement are true and correct as of the Closing Date.
(c) The Underwriters shall have received on the Closing Date an opinion of Cleary Gottlieb Steen & Hamilton LLP, outside counsel for the Company, dated the
Closing Date, to the effect set forth in Exhibit B.
(d) The Underwriters shall have received on the Closing Date an opinion of Cleary Gottlieb Steen & Hamilton LLP, counsel for the Parent and the Selling
Shareholder, dated the Closing Date, to the effect set forth in Exhibit C.
(e) The Underwriters shall have received on the Closing Date an opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the Closing Date, to the
effect that:
(i) the Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive rights;
(ii) this Agreement has been duly authorized, executed and delivered by the Company, the Parent and the Selling Stockholder;
(iii) the statements relating to legal matters, documents or proceedings included in the Time of Sale Prospectus and the Prospectus under the captions "Description
of Capital Stock" (with respect to the Company's charter and by-laws) and "Underwriters" fairly summarize in all material respects such matters, documents or
proceedings; and
(iv) (A) in the opinion of such counsel, the Registration Statement, the Time of Sale Prospectus and the Prospectus (except for the broadly available road show,
the financial statements and financial schedules and other financial and statistical data included therein, as to which such counsel need not express any belief) appear on
their face to be appropriately responsive in all material respects to the requirements of the Securities Act and the applicable rules and regulations of the Commission
thereunder, and (B) nothing has come to the attention of such counsel that causes such counsel to believe that (i) the Registration Statement or the prospectus included
therein (except for the financial statements and financial schedules and other financial and statistical data included therein, as to which such counsel need not express
any belief) at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii) the Time of Sale Prospectus (except for the broadly available road show, the financial
statements and financial schedules and other financial and statistical data included therein, as to which such counsel need not express any belief) as of the date of this
Agreement or as amended or supplemented, if applicable, as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) the
Prospectus (except for the financial statements and financial schedules and other financial and statistical data included therein, as to which such counsel need not
express any belief) as of its date or as amended or supplemented, if applicable, as of the Closing Date contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
10
With respect to Section 6(e)(iv), counsel for the Underwriters may state that their opinion and belief is based upon their participation in the preparation of the
Registration Statement, the Time of Sale Prospectus and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but
are without independent check or verification, except as specified.
The opinions of Cleary Gottlieb Steen & Hamilton LLP provided pursuant to Sections 6(c) and 6(d) above shall be rendered to the Underwriters at the request of
the Company, the Parent or the Selling Shareholder, as the case may be, and shall so state therein.
(f) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be,
in form and substance satisfactory to the Underwriters, from Ernst & Young LLP, an independent registered public accounting firm, containing statements and
information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date
hereof.
(g) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and certain shareholders (including the Selling Shareholder),
officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or
before the date hereof, shall be in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of
such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares to be
sold on such Option Closing Date and other matters related to the issuance of such Additional Shares.
7. Covenants of the Company.
as follows:
In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter
(a) To furnish to you, without charge, three signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a
conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 a.m., New York City
time, on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(f) below, as many copies of the Time of Sale
Prospectus, the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement, the Time of Sale Prospectus or the Prospectus, to furnish to you a copy of each such proposed
amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.
(c) To furnish to you a copy of each proposed free writing prospectus to be prepared by or on behalf of, used by, or referred to by the Company and not to use or
refer to any proposed free writing prospectus to which you reasonably object.
(d) Not to take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) under the
Securities Act a free writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would not have been required to file thereunder.
(e) If the Time of Sale Prospectus is being used to solicit offers to buy the Shares at a time when the Prospectus is not yet available to prospective purchasers and
any event shall occur or condition
11
exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances,
not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the
Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply
with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either
amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of
the circumstances when delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict
with the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.
(f) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus (or in lieu thereof
the notice referred to in Rule 173(a) under the Securities Act) is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act) is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may
have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements
in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a)
under the Securities Act) is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law.
(g) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request; provided,
however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a consent to service of
process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction in which it is not already conducting its business.
12
(h) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering a period of at least twelve
months beginning with the first fiscal quarter of the Company occurring after the date of this Agreement which shall satisfy the provisions of Section 11(a) of the
Securities Act and the rules and regulations of the Commission thereunder.
(i) To comply with all applicable securities and other laws, rules and regulations in each jurisdiction in which the Directed Shares are offered in connection with
the Directed Share Program.
8. Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay or
cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel and the Company's accountants and counsel for the Selling Shareholder in connection with the registration and delivery of the Shares under the Securities Act
and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, the
Prospectus, any free writing prospectus prepared by or on behalf of, used by, or referred to by the Company and amendments and supplements to any of the foregoing,
including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the
cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all
expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(g) hereof, including filing fees and the
reasonable fees and disbursements of one firm of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal
Investment memorandum, (iv) all filing fees and the reasonable fees and disbursements of one firm of counsel to the Underwriters incurred in connection with the
review and qualification of the offering of the Shares by the National Association of Securities Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the NYSE,
(vi) the cost of printing global certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses
of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without
limitation, expenses associated with the preparation or dissemination of any electronic road show, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging
expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show, (ix) the
document production charges and expenses associated with printing this Agreement, (x) all fees and disbursements of counsel incurred by the Underwriters in
connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the
Directed Share Program, (xi) all expenses in connection with any offer and sale of the Shares outside of the United States, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with offers and sales outside of the United States and (xii) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided
in this Section, Section 10 entitled "Indemnity and Contribution," Section 11 entitled "Directed Share Program Indemnification" and the last paragraph of Section 13
below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the
Shares by them and any advertising expenses connected with any offers they may make.
14
The provisions of this Section shall not supersede or otherwise affect any agreement that the Sellers may otherwise have for the allocation of such expenses among
themselves.
9. Covenants of the Underwriters. Each Underwriter severally covenants with the Company not to take any action that would result in the Company being
required to file with the Commission under Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of or used by such Underwriter that
otherwise would not be required to be filed by the Company thereunder, but for the action of the Underwriter.
10. Indemnity and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405
under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus as defined in
Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) of the Securities Act, or the
Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through
you expressly for use therein.
(b) The Parent and the Selling Shareholder agree to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405 under the
Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus as defined in Rule 433(h)
under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) of the Securities Act, or the Prospectus or
any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue
statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use
therein, but only with reference to information relating to the Parent or the Selling Shareholder furnished by or on behalf of the Parent or the Selling Shareholder for use
in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus, the Prospectus or any amendments or
supplements thereto.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Shareholder, the directors of the Company, the
officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or the Selling Shareholder, within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Underwriter, but
only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any
15
preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus or the Prospectus or any amendment or supplement thereto.
(d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity or contribution may
be sought pursuant to Section 10(a), 10(b), 10(c) or 10(e) such person (the " indemnified party ") shall promptly notify the person against whom such indemnity or
contribution may be sought (the " indemnifying party ") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees
and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is
understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any,
who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act or who are affiliates of any Underwriter
within the meaning of Rule 405 under the Securities Act, and (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Selling
Shareholder and the Company, and each of its directors, officers who sign the Registration Statement and each person, if any, who controls the Company or the Selling
Shareholder within the meaning of either such Section. In the case of any such separate firm for the Underwriters and such control persons and affiliates of any
Underwriters, such firm shall be designated in writing by Morgan Stanley and SG Cowen. In the case of any such separate firm for the Selling Shareholder and the
Company, and such directors, officers and control persons of the Company or the Selling Shareholder, such firm shall be designated in writing by the Company. The
indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or
judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement.
No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of
which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in Section 10(a), 10(b)or 10(c) is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by
16
clause 10(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 10(e)(i) above
but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received
by each Seller on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by such Seller and the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares.
The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by the
Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters'
respective obligations to contribute pursuant to this Section 10 are several in proportion to the respective number of Shares they have purchased hereunder, and not
joint.
(f) Each of the Company, the Selling Shareholder and the Underwriters agrees that it would not be just or equitable if contribution pursuant to this Section 10
were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 10(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in Section 10(e) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 10, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 10 are not exclusive and shall not limit
any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this Section 10 and the representations, warranties and other statements of the Company, the Parent
and the Selling Shareholder contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter, any person controlling any Underwriter or any affiliate of any Underwriter, the Parent or any person controlling
the Parent, the Selling Shareholder or any person controlling the Selling Shareholder or the Company, its officers or directors or any person controlling the Company
and (iii) acceptance of and payment for any of the Shares.
11. Directed Share Program Indemnification. (a) The Company agrees to indemnify and hold harmless Morgan Stanley, each person, if any, who controls
Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each affiliate of Morgan Stanley within the
meaning of Rule 405 of the Securities Act (the " Morgan Stanley Entities ") from and against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in
17
connection with the Directed Share Program or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged
omission based upon information relating to the Morgan Stanley Entities furnished to the Company by the Morgan Stanley Entities; (ii) caused by the failure of any
Participant to pay for and accept delivery of Directed Shares that the Participant agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed
Share Program, other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or
gross negligence of the Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation) shall be instituted involving any Morgan Stanley Entity in respect of which indemnity may
be sought pursuant to Section 11(a), the Morgan Stanley Entity seeking indemnity shall promptly notify the Company in writing and the Company, upon request of the
Morgan Stanley Entity, shall retain counsel reasonably satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity and any others the Company
may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any Morgan Stanley
Entity shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Morgan Stanley Entity unless (i) the
Company shall have agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the
Company and the Morgan Stanley Entity and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests
between them. The Company shall not, in respect of the legal expenses of the Morgan Stanley Entities in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Morgan Stanley Entities. Any such
separate firm for the Morgan Stanley Entities shall be designated in writing by Morgan Stanley. The Company shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Company agrees to indemnify the Morgan
Stanley Entities from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time a Morgan
Stanley Entity shall have requested the Company to reimburse it for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph,
the Company agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than
45 days after receipt by the Company of the aforesaid request and (ii) the Company shall not have reimbursed the Morgan Stanley Entity in accordance with such
request prior to the date of such settlement. The Company shall not, without the prior written consent of Morgan Stanley, effect any settlement of any pending or
threatened proceeding in respect of which any Morgan Stanley Entity is or could have been a party and indemnity could have been sought hereunder by such Morgan
Stanley Entity, unless such settlement (i) includes an unconditional release of the Morgan Stanley Entities from all liability on claims that are the subject matter of such
proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.
(c) To the extent the indemnification provided for in Section 11(a) is unavailable to a Morgan Stanley Entity or insufficient in respect of any losses, claims,
damages or liabilities referred to therein, then the Company in lieu of indemnifying the Morgan Stanley Entity thereunder, shall contribute to the amount paid or
payable by the Morgan Stanley Entity as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Morgan Stanley Entities on the other hand from the offering of the Directed Shares or (ii) if the allocation provided
by clause 11(c)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in
clause 11(c)(i) above but also the relative fault of the Company on the one hand and of the Morgan Stanley Entities on the other hand in connection with any statements
or omissions that resulted in such
18
losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand in connection with the offering of the Directed Shares shall be deemed to be in the same respective proportions as the net
proceeds from the offering of the Directed Shares (before deducting expenses) and the total underwriting discounts and commissions received by the Morgan Stanley
Entities for the Directed Shares, bear to the aggregate Public Offering Price of the Directed Shares. If the loss, claim, damage or liability is caused by an untrue or
alleged untrue statement of a material fact or the omission or alleged omission to state a material fact, the relative fault of the Company on the one hand and the Morgan
Stanley Entities on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement or the omission or alleged
omission relates to information supplied by the Company or by the Morgan Stanley Entities and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would not be just or equitable if contribution pursuant to this Section 11 were determined by pro
rata allocation (even if the Morgan Stanley Entities were treated as one entity for such purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 11(c). The amount paid or payable by the Morgan Stanley Entities as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred
by the Morgan Stanley Entities in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 11, no Morgan
Stanley Entity shall be required to contribute any amount in excess of the amount by which the total price at which the Directed Shares distributed to the public were
offered to the public exceeds the amount of any damages that such Morgan Stanley Entity has otherwise been required to pay. The remedies provided for in this
Section 11 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
(e) The indemnity and contribution provisions contained in this Section 11 shall remain operative and in full force and effect regardless of (i) any termination of
this Agreement, (ii) any investigation made by or on behalf of any Morgan Stanley Entity or the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Directed Shares.
12. Termination. The Underwriters may terminate this Agreement by notice given by you to the Company, if after the execution and delivery of this Agreement
and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, any of the New York Stock Exchange,
the American Stock Exchange, the Nasdaq National Market, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade,
(ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a material disruption in securities
settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by
Federal or New York State authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets or any calamity or
crisis that, in your judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in your judgment,
impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus or the
Prospectus.
13. Effectiveness; Defaulting Underwriters. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they
have agreed to purchase
19
hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the
number of Firm Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 13 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If,
on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased on such date, and arrangements satisfactory to you, the Company and the
Selling Shareholder for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of
any non-defaulting Underwriter, the Company or the Selling Shareholder. In any such case either you or the Company shall have the right to postpone the Closing Date,
but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the Time of Sale Prospectus, in the Prospectus or
in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional
Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to
be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Additional
Shares to be sold on such Option Closing Date or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company, the Parent or the Selling
Shareholder to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company, the Parent or the Selling Shareholder shall
be unable to perform its obligations under this Agreement, or if the underwriters elect to terminate this Agreement pursuant to Section 11 hereof, the Company will
reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including
the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder.
14. Counterparts. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
15. Applicable Law.
This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York.
16. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this
Agreement.
17. Entire Agreement. (a) This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not
superseded by this Agreement) that relate to the offering of the Shares, represents the entire agreement between the Company and the Selling Shareholders, on the one
hand, and the Underwriters, on the other, with respect to the
20
preparation of any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, the conduct of the offering, and the purchase and sale of the Shares.
(b) The Company acknowledges that in connection with the offering of the Shares: (i) the Underwriters have acted at arms length, are not agents of, and owe no
fiduciary duties to, the Company or any other person, (ii) the Underwriters owe the Company only those duties and obligations set forth in this Agreement and prior
written agreements (to the extent not superseded by this Agreement), if any, and (iii) the Underwriters may have interests that differ from those of the Company. The
Company waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in
connection with the offering of the Shares.
18. Notices. All communications hereunder shall be in writing and effective only upon receipt and (a) if to the Underwriters, shall be delivered, mailed or sent
to you in care of Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, New York 10036, Attention: Legal Department, and SG Cowen & Co., LLC, 1221
Avenue of the Americas, New York, New York 10020, Attention: General Counsel, (b) if to the Company, shall be delivered, mailed or sent to
1543 Wazee Street, Denver, Colorado 80202, Attention: Montgomery Moran, or (c) if to Parent or the
21
Selling Shareholder, shall be delivered, mailed or sent to 2915 Jorie Blvd., Oak Brook, Illinois 60523, Attention: General Counsel.
Very truly yours,
CHIPOTLE MEXICAN GRILL, INC.
By:
Name: M. Steven Ells
Title: Chief Executive Officer
MCDONALD'S VENTURES, LLC
By:
Name:
Title:
MCDONALD'S CORPORATION
By:
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
SG Cowen & Co., LLC
Acting severally on behalf of themselves and the several Underwriters named in Schedule I
hereto
By:
Morgan Stanley & Co. Incorporated
By:
Name:
Title:
By:
SG Cowen & Co., LLC
By:
Name:
Title:
SCHEDULE I
Underwriter
Number of Firm
Shares To Be
Purchased
Morgan Stanley & Co. Incorporated
SG Cowen & Co., LLC
Banc of America Securities LLC
Citigroup Global Markets Inc.
J.P. Morgan Securities Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
A.G. Edwards & Sons, Inc.
RBC Capital Markets Corporation
SunTrust Capital Markets, Inc.
Wachovia Capital Markets, LLC
Total:
7,878,788
SCHEDULE II
Time of Sale Prospectus
SCHEDULE III
List of Subsidiaries Not Wholly Owned by the Company
Exhibit A
, 2005
Morgan Stanley & Co. Incorporated
SG Cowen & Co., LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan Stanley") and SG Cowen & Co., LLC ("SG Cowen") propose to enter into an
Underwriting Agreement (the " Underwriting Agreement ") with Chipotle Mexican Grill, Inc., a Delaware corporation (the " Company "), McDonald's Venture LLC,
a Delaware limited liability company, and McDonald's Corporation, a Delaware corporation, providing for the public offering (the " Public Offering ") by the several
Underwriters, including Morgan Stanley and SG Cowen (the " Underwriters "), of shares (the " Shares ") of the common Class A stock of the Company, par value
$0.01 per share (the " Common Stock ").
To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby
agrees that, without the prior written consent of Morgan Stanley and SG Cowen on behalf of the Underwriters, it will not, during the period commencing on the date
hereof and ending 180 days after the date of the Underwriting Agreement (the " Restricted Period "), (1) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or
(2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise.
The foregoing sentence shall not apply to (a) transactions relating to shares of Common Stock or other securities acquired in open market transactions after the
completion of the Public Offering, provided that no filing under Section 16(a) of the Securities Exchange Act of 1934, as amended (the " Exchange Act ") shall be
required or shall be voluntarily made in connection with subsequent sales of Common Stock or other securities acquired in such open market transactions, (b) transfers
of shares of Common Stock or any security convertible into Common Stock as a bona fide gift, (c) transfers of shares of Common Stock to any trust, partnership or
limited liability company for the direct or indirect benefit of the undersigned or the immediate family of the undersigned provided that any such transfer shall not
involve a disposition for value, (d) transfers of shares of Common Stock to any beneficiary of the undersigned pursuant to a will or other testamentary document or
applicable laws of descent, (e) transfers of shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock to the
Company, (f) distributions of shares of Common Stock or any security convertible into Common Stock to limited partners or stockholders of the undersigned provided
that any such transfer shall not involve a disposition for value, (g) transfers of shares of Common Stock to any wholly-owned subsidiary of the undersigned or to the
parent corporation of the undersigned or any wholly-owned subsidiary of such parent corporation provided that any such transfer shall not involve a disposition for
value, or (h) transfers of shares of Common Stock with the prior written consent of Morgan Stanley and SG Cowen, provided that in the case of any transfer or
distribution pursuant to clause (b), (c), (d), (e), (f) or (g) of this lock-up letter, (i) each donee, distributee or transferee shall sign and deliver a lock-up letter substantially
in the form of this letter and (ii) no filing under Section 16(a) of the Exchange Act, reporting a reduction in beneficial ownership of shares of Common Stock, shall be
required or shall be voluntarily made during the restricted period referred to in the
foregoing sentence. For purposes of this lock-up letter, "immediate family" shall mean any relationship by blood, marriage, domestic partnership or adoption, not more
remote than first cousin.
In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley and SG Cowen on behalf of the Underwriters, it will not, during the
Restricted Period, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent
and registrar against the transfer of the undersigned's shares of Common Stock except in compliance with the foregoing restrictions.
If:
(1) during the last 17 days of the Restricted Period the Company issues an earnings release or material news or a material event relating to the Company occurs;
or
(2) prior to the expiration of the Restricted Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day
of the Restricted Period;
the restrictions imposed by this agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
The undersigned shall not engage in any transaction that may be restricted by this agreement during the 34-day period beginning on the last day of the initial
Restricted Period unless the undersigned requests and receives prior written confirmation from the either Company or Morgan Stanley and SG Cowen on behalf of the
Underwriters that the restrictions imposed by this agreement have expired.
This lock-up letter shall be terminated (i) if for any reason the Underwriting Agreement is terminated prior to the closing of the Public Offering or (ii) if, prior to
the execution and delivery of the Underwriting Agreement, (a) June 30, 2006 occurs or (b) McDonald's Corporation publicly announces that the Company will not be
proceeding with the Public Offering.
The undersigned understands that the Company and the Underwriters are relying upon this agreement in proceeding toward consummation of the Public Offering.
The undersigned further understands that this agreement is irrevocable and shall be binding upon the undersigned's heirs, legal representatives, successors and assigns.
Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant
to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters.
Very truly yours,
Name:
Address:
Exhibit B
FORM OF COMPANY COUNSEL OPINION
Exhibit C
FORM OF PARENT AND SELLING STOCKHOLDER
COUNSEL OPINION
QuickLinks
SCHEDULE I
Time of Sale Prospectus
List of Subsidiaries Not Wholly Owned by the Company
FORM OF COMPANY COUNSEL OPINION
FORM OF PARENT AND SELLING STOCKHOLDER COUNSEL OPINION
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Exhibit 3.1
FORM OF RESTATED CERTIFICATE OF INCORPORATION OF CHIPOTLE MEXICAN GRILL, INC.
Chipotle Mexican Grill, Inc., a corporation originally organized in the State of Delaware on January 30, 1998, hereby certifies that this Restated Certificate of
Incorporation was duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. This Restated Certificate of
Incorporation amends and restates the Corporation's Certificate of Incorporation in its entirety as follows:
Article I—NAME
The name of the company is Chipotle Mexican Grill, Inc. (the "Corporation").
Article II—AGENT
The registered office of the Corporation is located at 1209 Orange Street, in the City of Wilmington, in the County of New Castle, in the State of Delaware. The
name of its registered agent at that address is The Corporation Trust Corporation.
Article III—PURPOSE
The purpose for which the Corporation is organized is to engage in any lawful act or activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware or any applicable successor act thereto, as the same may be amended from time to time (the " DGCL ").
Article IV—STOCK
Section 1. Authorized Stock. The Corporation shall have the authority to issue eight hundred thirty million (830,000,000) shares of capital stock, consisting of
two hundred million (200,000,000) shares of Class A common stock with a par value of $0.01 per share (the " Class A Common Stock "), thirty million (30,000,000)
shares of Class B common stock with a par value of $0.01 per share (the " Class B Common Stock " and, together with the Class A Common Stock, the " Common Stock
"), and six hundred million (600,000,000) shares of preferred stock with a par value of $0.01 per share (the " Preferred Stock "). The number of authorized shares of
Class A Common Stock or Class B Common Stock may be increased or decreased (but not below the number of shares of Class A Common Stock or Class B Common
Stock then outstanding) by such affirmative vote as may be required at that time by the DGCL.
Section 2. Common Stock.
(a) Ranking. The preferences, limitations and rights of the Class A Common Stock and Class B Common Stock, and the qualifications and restrictions thereof,
shall be in all respects identical, except as otherwise required by law or expressly provided in this Certificate of Incorporation.
(b) Voting—General. Except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of Preferred Stock, the
holders of outstanding shares of Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes. Except as otherwise
required by law or this Certificate of Incorporation:
(i) each share of Class A Common Stock outstanding on any record date shall be entitled to one vote and each share of Class B Common Stock outstanding on
such record date shall be entitled to 10 votes in respect of any actions of shareholders for which such record date was fixed; provided, however , that each share of
Common Stock shall have one vote only for purposes of approving any of the following matters:
(A) the consummation of any merger or consolidation of the Corporation, or the issuance, sale, transfer or assignment of securities of the Corporation that would,
following such issuance, sale, transfer or assignment, represent a majority of the voting power of the Corporation's then-outstanding Common Stock to any person, in a
single transaction or series of related transactions;
(B) the sale, lease, exchange or other disposition of all or substantially all of the assets of the Corporation or any of its
subsidiaries, directly or indirectly, in one or more transactions, to any person; or
(C) the voluntary liquidation, dissolution or winding up of the Corporation;
(ii) the Class A Common Stock and the Class B Common Stock shall vote together as a single class;
(iii) the vote required to constitute approval of any corporate action shall be a majority of all votes cast on the matter by the holders of outstanding shares of
Common Stock at a meeting at which a quorum exists; and
(iv) holders of Common Stock shall be entitled to cast votes in person or by proxy in the manner and to the extent permitted under the Bylaws of the Corporation
(the " Bylaws ").
(c) Amendments. So long as any shares of Class A Common Stock are outstanding, the Corporation shall not, without the affirmative vote of the holders of a
majority of the voting power of the outstanding shares of Class A Common Stock, (i) amend, alter or repeal any provision of this Section so as to affect adversely the
relative rights, preferences, qualifications, limitations or restrictions of the Class A Common Stock as compared to those of the Class B Common Stock; or (ii) take any
other action upon which class voting is required by law. So long as any shares of Class B Common Stock are outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the voting power of the outstanding shares of Class B Common Stock, (i) amend, alter or repeal any provision of this
Section so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the Class B Common Stock as compared to those of the
Class A Common Stock; or (ii) take any other action upon which class voting is required by law.
(d) Dividends; Changes in Common Stock. No dividend or distribution may be declared or paid on any share of Class A Common Stock unless a dividend or
distribution, payable in the same consideration and manner, is simultaneously declared or paid, as the case may be, on each share of Class B Common Stock, nor shall
any dividend or distribution declared or paid on any share of Class B Common Stock unless a dividend or distribution, payable in the same consideration and manner, is
simultaneously declared or paid, as the case may be, on each share of Class A Common Stock, in each case without preference or priority of any kind; provided ,
however , that if dividends are declared that are payable in shares of Class A Common Stock or in Class B Common Stock or in rights, options, warrants or other
securities convertible into or exchangeable for shares of Class A Common Stock or Class B Common Stock, dividends shall be declared that are payable at the same
rate on both classes of Common Stock and the dividends payable in shares of Class A Common Stock or in rights, options, warrants or other securities convertible into
or exchangeable for shares of Class A Common Stock shall be payable to holders of Class A Common Stock and the dividends payable in shares of Class B Common
Stock or in rights, options, warrants or other securities convertible into or exchangeable for shares of Class B Common Stock shall be payable to holders of Class B
Common Stock.
If the Corporation in any manner subdivides or combines the outstanding shares of Class B Common Stock, the outstanding shares of the Class A Common Stock
shall be proportionately subdivided or combined, as the case may be. Similarly, if the Corporation in any manner subdivides or combines the outstanding shares of
Class A Common Stock, the outstanding shares of Class B Common Stock shall be proportionately subdivided or combined, as the case may be.
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(e) Liquidation. Subject to the rights of the holders of Preferred Stock, shares of Class B Common Stock shall rankpari passu with shares of Class A
Common Stock as to distribution of assets in the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or
involuntary. A liquidation, dissolution or winding up of the Corporation, as such terms are used in this paragraph (e), shall not be deemed to be occasioned
by or to include any voluntary consolidation or merger of the Corporation with or into any other corporation or other entity or corporations or other entities
or a sale, lease or conveyance of all or a part of its assets.
(f) Reorganization or Merger. Subject to the rights of the holders of Preferred Stock, in case of any reorganization, share exchange or merger of the
Corporation with another corporation in which shares of Class A Common Stock or Class B Common Stock are converted into (or entitled to receive with respect
thereto) shares of stock and/or other securities or property (including cash), each holder of a share of Class A Common Stock and each holder of a share of Class B
Common Stock shall be entitled to receive with respect to each such share the same kind and amount of shares of stock and other securities and property (including
cash). In the event that the holders of shares of Class A Common Stock or of shares of Class B Common Stock are granted rights to elect to receive one of two or more
alternative forms of consideration, the foregoing provision shall be deemed satisfied if holders of shares of Class A Common Stock and holders of shares of Class B
Common Stock are granted substantially identical election rights, as the case may be.
(g) Conversion of Class B Common Stock.
(i) Prior to the date on which shares of Class B Common Stock are transferred to shareholders of McDonald's Corporation in a transaction, including any
distribution in exchange for McDonald's Corporation's share or securities, intended to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code,
or any corresponding provision of any successor statute (a " Tax-Free Spin-Off "), each record holder of shares of Class B Common Stock may convert any or all of
such shares into an equal number of shares of Class A Common Stock by surrendering the certificates, if any, for such shares, accompanied by any payment required for
documentary, stamp or similar issue or transfer taxes and by a written notice by such record holder to the Corporation stating that such record holder desires to convert
such shares of Class B Common Stock into the same number of shares of Class A Common Stock (including, but not limited to, for the purpose of the sale or other
disposition of such shares of Class A Common Stock), and requesting that the Corporation issue all of such shares of Class A Common Stock to persons named in such
notice. Such notice shall set forth the number of shares of Class A Common Stock to be issued to each such person and the denominations in which the certificates, if
any, therefor are to be issued. To the extent permitted by law, such voluntary conversion shall be deemed to have been effected at the close of business on the date of
such surrender. Following a Tax-Free Spin-Off, shares of Class B Common Stock shall no longer be convertible into shares of Class A Common Stock. For purposes of
this Section, a Tax-Free Spin-Off shall be deemed to have occurred at the time the shares are first transferred to shareholders of McDonald's following receipt of a
certificate described in Section 2(g)(vii)(B) below.
(ii) Prior to a Tax-Free Spin-Off, each share of Class B Common Stock shall automatically be converted into one share of Class A Common Stock upon the
transfer of such share if, after such transfer, such share is not beneficially owned by McDonald's or a subsidiary of McDonald's. Shares of Class B Common Stock shall
not convert automatically into shares of Class A Common Stock (A) as a result of a distribution of Class B Common Stock to shareholders of McDonald's in a Tax-Free
Spin-Off or (B) in any transfer after a Tax-Free Spin-Off.
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(iii) Prior to a Tax-Free Spin-Off, each outstanding share of Class B Common Stock shall automatically be converted into one share of
Class A Common Stock if such action is approved by the affirmative vote of the holders of not less than a majority of the voting power of the
then-outstanding shares of Class B Common Stock.
(iv) The Corporation shall provide notice of (A) any automatic conversion of outstanding shares of Class B Common Stock to holders of record of such shares of
Common Stock pursuant to Section 2(g)(ii) above as soon as practicable following such conversion; and (B) any automatic conversion of all outstanding shares of
Class B Common Stock pursuant to Section 2(g)(iii) above to all holders of record of Common Stock as soon as practicable following such conversion; provided,
however, that the Corporation may satisfy such notice requirements by providing such notice prior to such conversion. Such notice shall be provided by any means
then permitted by the DGCL; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the automatic conversion of any
shares of Class B Common Stock. Each such notice shall, as appropriate, (A) state the automatic conversion date; (B) identify the outstanding shares of Class B
Common Stock that are automatically converted; and (C) the place or places where certificates if any, for such shares may be surrendered in exchange for certificates, if
any, representing Class A Common Stock, or the method by which book-entry interest in the Class A Common Stock may be obtained in exchange for such certificates
in respect of shares of Class B Common Stock.
(v) Immediately upon conversion of any shares of Class B Common Stock into shares of Class A Common Stock pursuant to the provisions of this Article, the
rights of the holders of shares of Class B Common Stock as such shall cease and such holders shall be treated for all purposes as having become the record owners of
the shares of Class A Common Stock issuable upon such conversion; provided , that such persons shall be entitled to receive when paid any dividends declared on the
Class B Common Stock as of a record date preceding the time of such conversion and unpaid as of the time of such conversion subject to the following sentence. Upon
any conversion of shares of Class B Common Stock into shares of Class A Common Stock pursuant to the provisions of this Article, any dividend for which the record
date or payment date shall be subsequent to such conversion which may have been declared on the shares of Class B Common Stock so converted shall be deemed to
have been declared, and shall be payable, with respect to the shares of Class A Common Stock into or for which such shares of Class B Common Stock shall have been
so converted, and any such dividend that shall have been declared on such shares payable in shares of Class B Common Stock shall be deemed to have been declared,
and shall be payable, in shares of Class A Common Stock.
(vi) Prior to a Tax-Free Spin-Off, holders of shares of Class B Common Stock may (A) sell or otherwise dispose of or transfer any or all of such shares held by
them, respectively, only in connection with a transfer that meets the qualifications of Section 2(g)(vii) below, and under no other circumstances; or (B) convert any or
all of such shares into shares of Class A Common Stock (including, but not limited to, for the purpose of the sale or other disposition of such shares of Class A
Common Stock to any person as provided in Section 2(g)(i) above). Prior to a Tax-Free Spin-Off, no one other than persons in whose names shares of Class B Common
Stock become registered on the original stock ledger of the Corporation, or transferees or successive transferees who receive shares of Class B Common Stock in
connection with a transfer meeting the qualifications set forth in Section 2(g)(vii) below, shall have the status of an owner or holder of shares of Class B Common Stock
or be recognized as such by the Corporation or be otherwise entitled to enjoy for his or her own benefit the special rights and powers of a holder of shares of Class B
Common Stock. Holders of shares of Class B Common Stock may at any and all times transfer to any person the shares of Class A Common Stock issuable upon
conversion of such shares of Class B Common Stock (subject to any restrictions at such time on transfers of shares of Class A Common Stock).
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(vii) Prior to a Tax-Free Spin-Off, shares of Class B Common Stock shall be transferred on the books of the Corporation upon presentation
at the office of the Secretary of the Corporation (or at such additional place or places as may from time to time be designated by the Secretary or
any Assistant Secretary of the Corporation) of proper transfer documents, accompanied by a certificate stating either (A) that such transfer is to
McDonald's or a subsidiary of McDonald's; or (B) that such transfer is to the shareholders of McDonald's in connection with a Tax-Free Spin-Off.
(viii) Prior to the occurrence of a Tax-Free Spin-Off, every certificate of shares of Class B Common Stock, if any, shall bear a legend on its face reading as
follows:
"THE SHARES OF CLASS B COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED TO ANY PERSON IN
CONNECTION WITH A TRANSFER THAT DOES NOT MEET THE QUALIFICATIONS SET FORTH IN ARTICLE IV(2)(g)(vii) OF THE CERTIFICATE OF
INCORPORATION OF THIS CORPORATION AND NO PERSON WHO RECEIVES SUCH SHARES IN CONNECTION WITH A TRANSFER THAT DOES
NOT MEET THE QUALIFICATIONS PRESCRIBED IN SUCH ARTICLE IS ENTITLED TO OWN OR TO BE REGISTERED AS THE RECORD HOLDER OF
SUCH SHARES OF CLASS B COMMON STOCK, BUT THE RECORD HOLDER OF THIS CERTIFICATE MAY AT SUCH TIME AND IN THE MANNER SET
FORTH IN ARTICLE IV(2)(g) OF THE CERTIFICATE OF INCORPORATION OF THIS CORPORATION CONVERT SUCH SHARES OF CLASS B COMMON
STOCK IN TO THE SAME NUMBER OF SHARES OF CLASS A COMMON STOCK FOR PURPOSES OF EFFECTING THE SALE OR OTHER DISPOSITION
OF SUCH SHARES OF CLASS A COMMON STOCK TO ANY PERSON. EACH HOLDER OF THIS CERTIFICATE, BY ACCEPTING THE SAME, ACCEPTS
AND AGREES TO ALL OF THE FOREGOING."
Upon and after the transfer of shares of Class B Common Stock in a Tax-Free Spin-Off, certificates for shares of Class B Common Stock, if any, shall not longer
bear the legend set forth above.
(ix) The Corporation shall at all times reserve and keep available, out of its authorized but unissued Common Stock, such number of shares of Class A Common
Stock as would become issuable upon the conversion of all shares of Class B Common Stock then outstanding.
Section 3. Preferred Stock. The Preferred Stock may be issued from time to time in one or more classes or series. The Board of Directors of the Corporation
(the " Board of Directors ") is hereby authorized to provide for the issuance of shares of Preferred Stock in one or more classes or series and, by filing a certificate
pursuant to the applicable law of the State of Delaware (hereinafter referred to as " Preferred Stock Designation "), to establish from time to time the number of shares
to be included in each such class or series, and to fix the designation, powers, preferences and rights of the shares of each such class or series and the qualifications,
limitations and restrictions thereof prior to its issuance. Each such class or series of Preferred Stock shall have such voting powers, full or limited, or no voting powers,
as shall be authorized by the Board of Directors and stated in the applicable Preferred Stock Designation.
The Common Stock shall be subject to the express terms of any series of Preferred Stock. Except as required by a Preferred Stock Designation or applicable law,
holders of Preferred Stock shall not be entitled to vote at or receive notice of any meeting of shareholders.
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Section 4.
Reclassification and Stock Split.
(a) Reclassification. Immediately upon the filing of this Certificate of Incorporation with the Secretary of State of the State of Delaware (the " Effective Time "),
each of the shares of (i) common stock, par value $0.01 per share, (ii) the Series B Preferred Stock, par value $0.01 per share, (iii) the Series C Preferred Stock, par
value $0.01 per share, and (iv) the Series D Preferred Stock, par value $0.01 per share, of the Corporation (the common stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, collectively, the " Old Stock ") issued and outstanding as of the close of business on the day prior to the Effective Time
shall be reclassified into and shall become one-third of one share of Class B Common Stock (the " Reclassification ").
(b) Certificates. The reclassification of the Old Stock into Class B Common Stock shall be deemed to occur at the Effective Time, regardless of when any
certificate previously representing such shares of Old Stock (if such shares are held in certificated form) are physically surrendered to the Corporation in exchange for
certificates representing such new Class B Common Stock. Each certificate outstanding immediately prior to the Effective Time representing shares of Old Stock shall,
until surrendered to the Corporation in exchange for a certificate representing such new number of shares of Class B Common Stock as determined in paragraph (a),
automatically represent from and after the Effective Time the reclassified number of shares of Class B Common Stock.
(c) Status. The Corporation shall not close its books against the transfer of the Old Stock in any manner that interferes with the Reclassification. All shares of
Class A Common Stock and Class B Common Stock outstanding after the Reclassification shall be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges.
Section 5. No Fractional Shares. No fractional shares of the capital stock of the Corporation shall be issued, but in lieu thereof the Corporation may, at its
option, make a cash adjustment therefor.
Article V—BOARD OF DIRECTORS
Section 1. Number. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not fewer than
three nor more than 20 directors (exclusive of directors referred to in the last paragraph of this Section 1), the exact number of directors to be determined from time to
time by resolution adopted by the affirmative vote of a majority of the total number of directors then in office.
From and after the date of the first meeting of the Board of Directors following the Effective Time, the directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of
Directors. The initial division of the Board of Directors into classes shall be made by the decision of the affirmative vote of a majority of the total number of directors
then in office. Class I directors shall serve for an initial term ending at the annual meeting of shareholders held in 2006, Class II directors for an initial term ending at
the annual meeting of shareholders held in 2007 and Class III directors for an initial term ending at the annual meeting of shareholders held in 2008. At each annual
meeting of shareholders beginning in 2006, successors to the directors in the class whose term expires at that annual meeting shall be elected for a three-year term.
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If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for the remaining term
of that class, but in no case shall a decrease in the number of directors shorten the term of any incumbent director.
Each director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or removal from office. Directors shall be elected by the affirmative vote of a plurality of the
votes cast by shares entitled to vote in the election at a meeting at which a quorum is present.
Elections of directors at an annual or special meeting of shareholders shall be by written ballot.
Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting
separately by class or series, to elect directors at an annual or special meeting of shareholders, the number of such directors and the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the provisions of Article V of this Certificate of Incorporation and any resolution or resolutions
adopted by the Board of Directors pursuant thereto, and such directors shall not be divided into classes unless expressly so provided therein.
Section 2. Vacancies. Any vacancy in the Board of Directors that results from an increase in the number of directors, from the death, disability, resignation,
disqualification, removal of any director or from any other cause shall be filled by the affirmative vote of a majority of the total number of directors then in office, even
if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall hold office
for the remaining term of his or her predecessor.
Section 3. Removal. Any director or the entire Board may be removed from office at any time, but only for cause and only by the affirmative vote of the holders
of not less than 66 2 / 3 % of the voting power of the outstanding Common Stock.
Section 4. Committees. Pursuant to the Bylaws, the Board of Directors may establish one or more committees to which may be delegated any of or all of the
powers and duties of the Board of Directors to the full extent permitted by laws.
Article VI—LIABILITY OF DIRECTORS AND OFFICERS
Section 1. Elimination of Certain Liability of Directors. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders;
(ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for any
transaction from which the director derived an improper personal benefit. If the DGCL is hereafter amended to permit further elimination or limitation of the personal
liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL as so amended.
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Section 2.
Indemnification and Insurance.
(a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a " proceeding "), by reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, liens, amounts paid or to be paid in settlement and excise
taxes or penalties arising under the Employee Retirement Income Security Act of 1974) reasonably incurred or suffered by such person in connection therewith and
such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors
and administrators; provided, however, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to
indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses (including attorney's fees)
incurred in defending any such proceeding in advance of its final disposition provided, however, that, if the DGCL requires, the payment of such expenses incurred by
a director or officer in his or her capacity as such in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there
is no further right to appeal that such director or officer is not entitled to be indemnified under this Section or otherwise (an " undertaking "); and provided further that
such advancement of expenses incurred by any person other than a director or officer shall be made only upon the delivery of an undertaking to the foregoing effect and
may be subject to such other conditions as the Board may deem advisable.
(b) Non-Exclusivity of Rights; Accrued Rights. The right to indemnification and the advancement of expenses conferred in this Section shall not be exclusive of
any other right that any person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation, Bylaw, agreement, vote of shareholders or
disinterested directors or otherwise. Such rights shall be contract rights, shall continue as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of such person's heirs, executors and administrators. Any repeal or modification of this Article shall not adversely affect any right or protection
of a director of the Corporation in respect of any act or omission occurring prior to the time of such repeal or modification.
(c) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the DGCL.
(d) Other Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification
and to the advancement of expenses to any employee not within the provisions of paragraph (a) of this Section or to any agent of the Corporation, subject to such
conditions as the Board of Directors may deem advisable.
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(e) Savings Clause. If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each person entitled to indemnification hereunder as to all expense, liability, and loss (including attorney's fees,
judgments, fines, ERISA excise taxes, penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such person and for
which indemnification is available to such person pursuant to this Article VI to the fullest extent permitted by any applicable portion of this Article VI that
shall not have been invalidated and to the fullest extent permitted by applicable law.
Article VII—SECTION 203 OF THE DGCL
The Corporation expressly elects to be governed by Section 203 of the DGCL.
Article VIII—CERTAIN CONTRACTS; CORPORATE OPPORTUNITY
Section 1.
Regulation of Certain Affairs.
In anticipation that:
(a) the Corporation will cease to be a wholly owned subsidiary of McDonald's, but that McDonald's will remain, for some period of time, a shareholder of the
Corporation;
(b) the Corporation and McDonald's may engage in the same or similar activities or lines of business and have an interest in the same or similar areas of corporate
opportunities; and
(c) there will be benefits to be derived by the Corporation through its contractual, corporate and business relations with McDonald's (including possible service of
officers and directors of McDonald's as officers and directors of the Corporation) and there will be benefits in providing guidelines for directors and officers of
McDonald's and of the Corporation with respect to the allocation of corporate opportunities and other matters;
the provisions of this Article are set forth to regulate, define and guide the conduct of certain affairs of the Corporation as they may involve McDonald's and its officers
and directors, and the powers, rights, duties and liabilities of the Corporation and its officers, directors and shareholders in connection therewith; provided, however,
that nothing in this Article will impair the Corporation's ability to enter into contractual arrangements with a shareholder of the Corporation, which arrangements restrict
the shareholder from engaging in activities otherwise allowed by this Article, and the following provisions shall be subject to any such contractual obligation of the
Corporation.
Section 2. Certain Contracts. No contract, agreement, arrangement or transaction between the Corporation and McDonald's shall be void or voidable solely for
the reason that McDonald's is a party thereto, and McDonald's (a) shall have fully satisfied and fulfilled its fiduciary duties to the Corporation and its shareholders with
respect thereto; (b) shall not be liable to the Corporation or its shareholders for any breach of fiduciary duty by reason of the entering into, performance or
consummation of any such contract, agreement, arrangement or transaction; (c) shall be deemed to have acted in good faith and in a manner it reasonably believed to be
in and not opposed to the best interests of the Corporation; and (d) shall be deemed not to have breached its duties of loyalty to the Corporation and its shareholders and
not to have received an improper personal gain therefrom, if the material facts as to the contract, agreement, arrangement or transaction are disclosed or are known to
the Board of Directors or the committee thereof that authorizes the contract, agreement, arrangement or transaction, and the Board of Directors or such committee in
good faith authorizes the contract, agreement, arrangement or transaction by the affirmative vote of a majority of the disinterested directors, even though less than a
quorum. Directors of the Corporation who are also directors or officers of McDonald's may be counted in determining the presence of a quorum at a meeting of the
Board of Directors or of a committee that authorizes the contract, agreement, arrangement or transaction.
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Section 3. Competition and Corporate Opportunities.
Subject to any contractual provisions to the contrary, McDonald's shall have the right to, and shall have no duty hereunder to refrain from, (a) engaging in the same
or similar activities or lines of business as the Corporation; (b) doing business with any potential or actual customer or supplier of the Corporation; or (c) employing or
otherwise engaging any officer or employee of the Corporation. To the fullest extent permitted by law, neither McDonald's nor any officer or director thereof (except as
provided in this Article) shall be liable to the Corporation or its shareholders for breach of any fiduciary duty by reason of any such activities of McDonald's, or such
person's participation therein.
In the event that McDonald's acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both McDonald's and the
Corporation, McDonald's shall have no duty to communicate or present such corporate opportunity to the Corporation, and shall not be liable to the Corporation or its
shareholders for breach of any fiduciary duty as a shareholder of the Corporation by reason of the fact that McDonald's pursues or acquires such corporate opportunity
for itself, directs such corporate opportunity to another person, or does not communicate information regarding such corporate opportunity to the Corporation.
Section 4.
Allocation of Corporate Opportunities.
In the event that a director or officer of the Corporation who is also a director or officer of McDonald's acquires knowledge of a potential transaction or matter
which may be a corporate opportunity for both the Corporation and McDonald's, to the fullest extent permitted by law, such director or officer of the Corporation:
(a) shall be deemed to have fully satisfied and fulfilled such person's fiduciary duty to the Corporation and its shareholders with respect to such corporate
opportunity;
(b) shall not be liable to the Corporation or its shareholders for breach of any fiduciary duty by reason of the fact that McDonald's pursues or acquires such
corporate opportunity for itself or directs such corporate opportunity to another person (including, without limitation, McDonald's) or does not communicate
information regarding such corporate opportunity to the Corporation;
(c) shall be deemed to have acted in good faith and in a manner such person reasonably believes to be in or not opposed to the best interests of the Corporation;
and
(d) shall be deemed not to have breached such person's duty of loyalty to the Corporation or its shareholders and not to have derived an improper personal
economic gain or other benefit therefrom, if such director or officer acts in a manner consistent with the following policy:
(i) a corporate opportunity offered to any person who is an officer or employee (whether or not a director) of the Corporation, and who is also a director but not
an officer or employee of McDonald's, shall belong to the Corporation, unless such opportunity is expressly offered to such person primarily in his or her capacity as a
director of McDonald's, in which case such opportunity shall belong to McDonald's;
(ii) a corporate opportunity offered to any person who is a director but not an officer or employee of the Corporation, and who is also an officer or employee
(whether or not a director) of McDonald's shall belong to McDonald's unless such opportunity is expressly offered to such person primarily in his or her capacity as a
director of the Corporation, in which case such opportunity shall belong to the Corporation;
(iii) a corporate opportunity offered to any person who is either (1) an officer or employee of both the Corporation and McDonald's; or (2) a director of both the
Corporation and McDonald's (but not an officer or employee of the Corporation or McDonald's), shall belong to McDonald's unless such opportunity is expressly
offered to such person primarily in his or her capacity as a director of the Corporation, in which case such opportunity shall belong to the Corporation.
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Section 5. Non-Pursuit. Any corporate opportunity that belongs to McDonald's or to the Corporation pursuant to the foregoing policy shall not be pursued by
the other, unless and until the party to whom the opportunity belongs determines not to pursue the opportunity and so informs the other party.
Section 6. Deemed Notice. Any person or entity purchasing or otherwise acquiring any interest in any shares of the capital stock of the Corporation shall be
deemed to have notice of and to have consented to the provisions of this Article.
Section 7. Chairman or Chairman of a Committee. For purposes of this Article, a director who is chairman of the Board of Directors or chairman of a
committee of the Board of Directors is not deemed an officer of the Corporation by reason of holding that position unless that person is a full-time employee of the
Corporation.
Section 8. Expiration of Certain Provisions. Notwithstanding anything in this Certificate of Incorporation to the contrary, (a) this Article shall expire on the
date that McDonald's ceases to beneficially own shares representing at least 5% of the voting power of the outstanding Common Stock and no person who is a director
or officer of the Corporation is also a director or officer of McDonald's; and (b) in addition to any vote of the shareholders required by this Certificate of Incorporation,
until the time that McDonald's ceases to beneficially own shares representing at least 5% of the voting power of the outstanding Common Stock, the affirmative vote of
the holders of at least 66 2 / 3 % of the voting power of the outstanding Common Stock entitled to vote thereon shall be required to alter, amend, repeal (by merger or
otherwise, in a manner adverse to the interests of McDonald's) or adopt any provision adverse to the interests of McDonald's and inconsistent with any provision of this
Article.
Neither the alteration, amendment or repeal of this Article nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article shall
eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article, would accrue or arise, prior
to such alteration, amendment, repeal or adoption. Following the time that McDonald's ceases to beneficially own shares representing at least 5% of the voting power of
the outstanding Common Stock, any contract, agreement, arrangement or transaction involving a corporate opportunity shall not be reason thereof result in any breach
of any fiduciary duty or duty of loyalty or failure to act in good faith or in the best interests of the Corporation or derivation of any improper benefit or personal
economic gain, but shall be governed by the other provisions of this Certificate of Incorporation, the Bylaws, the DGCL and other applicable law.
Article IX—CONSIDERATION OF OTHER CONSTITUENCIES
In addition to any other considerations which they may lawfully take into account in determining whether to take or to refrain from taking action on any matter and
in discharging their duties under applicable law and this Certificate of Incorporation, the Board of Directors, its committees and each director may take into account the
interests of customers, distributors, suppliers, creditors, current and retired employees and other constituencies of the Corporation and its subsidiaries and the effect
upon the communities in which the Corporation and its subsidiaries do business; provided, however, that this Article shall be deemed solely to grant discretionary
authority only and shall not be deemed to provide to any constituency a right to be considered.
Article X—SHAREHOLDER ACTION
Subject to the rights of the holders of Preferred Stock, any action required or permitted to be taken at any annual or special meeting of shareholders of the
Corporation may be taken only upon the vote of the shareholders at an annual or special meeting duly called and may not be taken by written consent of the
shareholders.
The Bylaws may establish procedures regulating the submission by shareholders of nominations and proposals for consideration at meetings of shareholders of the
Corporation.
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Article XI—SPECIAL MEETINGS
Subject to the rights of the holders of Preferred Stock, special meetings of the shareholders may be called at any time only by the Board of Directors pursuant to a
resolution adopted by the affirmative vote of a majority of the total number of directors then in office or by the chairman of the Board of Directors.
Article XII—AMENDMENT OF CERTIFICATE OF INCORPORATION
Subject to any requirement of applicable law or any other provision of this Certificate of Incorporation and to any voting rights granted to or held by the holders of
any series of Preferred Stock, the Corporation reserves the right at any time from time to time to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and any other provisions authorized by the DGCL at the time in force may be added or inserted, in the manner now or hereafter prescribed
by law; and all rights, preferences and privileges of whatsoever nature conferred upon shareholders, directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article. In addition to any affirmative vote
required by applicable law or any other provision of this Certificate of Incorporation or specified in any agreement, and in addition to any voting rights granted to or
held by the holders of any series of Preferred Stock, the affirmative vote of the holders of a majority of the voting power of the outstanding Common Stock shall be
required to amend, add, alter, change, repeal or adopt any provisions inconsistent with this Certificate of Incorporation.
Article XIII—AMENDMENT OF BY-LAWS
The Board of Directors is expressly authorized and empowered to adopt, amend and repeal the Bylaws by the affirmative vote of a majority of the total number of
directors present at a regular or special meeting of the Board of Directors at which there is a quorum (as defined from time to time in the Certificate of Incorporation) or
by written consent. The shareholders of the Corporation may not adopt, amend or repeal any Bylaw, and no provision inconsistent therewith shall be adopted by the
shareholders, unless such action is approved by the affirmative vote of the holders of not less than 66 2 / 3 % of the voting power of the outstanding Common Stock.
Article XIV—DEFINITIONS
Except as otherwise defined in this Certificate of Incorporation, the following terms shall have the meanings ascribed to them below:
(a) "beneficial ownership" shall have the meaning given to such term in Rule 13d-3 promulgated under the Securities Exchange Act of 1934.
(b) "corporate opportunities" shall include, but not be limited to, business opportunities which (i) the Corporation is financially able to undertake; (ii) are, from
their nature, in the line or lines of the Corporation's business; (iii) are of practical advantage to the Corporation; (iv) are ones in which the Corporation has an interest or
reasonable expectancy; and (v) are ones in which, by embracing the opportunities, the self-interest of McDonald's or its officers or directors may be brought into
conflict with that of the Corporation.
(c) "McDonald's" shall mean McDonald's Corporation, an Delaware corporation, and any of its successors by way of merger, share exchange or sale of all or
substantially all of its assets, and all subsidiaries of McDonald's; provided, however , that for purposes of Article VIII, "McDonald's" shall not include the Corporation
or any of the Corporation's subsidiaries.
(d) "person" shall mean a natural person, corporation, partnership, joint venture, association, or legal entity of any kind; each reference to a "natural person (or to
a "record holder" of shares, if a natural person) shall be deemed to include in his or her representative capacity a guardian, committee, executor, administrator or other
legal representative of such natural person or record holder.
(e) "subsidiary" shall mean, as to any person, a corporation, partnership, joint venture, association or other entity in which such person beneficially owns (directly
or indirectly) 50% or more of the outstanding voting power or partnership interests or similar voting interests.
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QuickLinks
Exhibit 3.1
FORM OF RESTATED CERTIFICATE OF INCORPORATION OF CHIPOTLE MEXICAN GRILL, INC.
Article I—NAME
Article II—AGENT
Article III—PURPOSE
Article IV—STOCK
Article V—BOARD OF DIRECTORS
Article VI—LIABILITY OF DIRECTORS AND OFFICERS
Article VII—SECTION 203 OF THE DGCL
Article VIII—CERTAIN CONTRACTS; CORPORATE OPPORTUNITY
Article IX—CONSIDERATION OF OTHER CONSTITUENCIES
Article X—SHAREHOLDER ACTION
Article XI—SPECIAL MEETINGS
Article XII—AMENDMENT OF CERTIFICATE OF INCORPORATION
Article XIII—AMENDMENT OF BY-LAWS
Article XIV—DEFINITIONS
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Exhibit 3.2
CHIPOTLE MEXICAN GRILL, INC.
FORM OF RESTATED BYLAWS
(as of
, 2006)
ARTICLE I—OFFICES
Section 1. Registered Office. Chipotle Mexican Grill, Inc. (the "Corporation") shall have and maintain at all time (a) a registered office in the State of
Delaware, which office shall be located at 1209 Orange Street, in the City of Wilmington, in the County of New Castle, Delaware 19801; and (b) a registered agent
located at such address whose name is The Corporation Trust Corporation, until changed from time to time as provided by the General Corporation Law of the State of
Delaware (the " DGCL ").
Section 2. Other Offices. The principal office of the Corporation may be located within or without the State of Delaware, as designated by the Board of
Directors of the Corporation (the " Board of Directors "). The Corporation may have other offices and places of business at such places within or without the State of
Delaware as shall be determined by the directors or as may be required by the business of the Corporation.
ARTICLE II—SHAREHOLDERS
Section 1. Annual Meeting. Annual meetings of the shareholders, for the purpose of election of directors to succeed those whose terms expire and for such other
business as may properly come before it, shall be held at such place, either within or without the State of Delaware (including by remote communication as authorized
by Section 211(a)(2) of the DGCL), on such date and at such time as the Board of Directors shall designate from time to time, as set forth in the notice of the meeting
delivered or mailed to shareholders.
Section 2. Special Meetings. Subject to the rights of the holders of the preferred stock, par value $0.01 per share, of the Corporation (the " Preferred Stock "),
special meetings of the shareholders, for any purpose or purposes prescribed in the notice of the meeting, may be called only by the Board of Directors pursuant to a
resolution adopted by the affirmative vote of a majority of the total number of directors then in office or by the Chairman of the Board, and shall be held at such place,
either within or without the State of Delaware, on such date and at such time as they or he or she shall designate, as set forth in the notice of the meeting.
Section 3. Notice of Meetings. Except as otherwise provided by law or the Certificate of Incorporation of the Corporation (the "Certificate of Incorporation "),
written notice of the place, date, time and purpose of all meetings of the shareholders shall be given, not less than ten nor more than 60 days before the date on which
the meeting is to be held, to each shareholder entitled to vote at such meeting, except that where the matter to be acted on is one specified in Section 2(b)(i) of the
Certificate of Incorporation, such notice shall be given no less than 20 nor more than 60 days before the date on which the meeting is to be held.
If at any meeting action is proposed to be taken which, if taken, would entitle shareholders fulfilling the requirements of Section 262(d) of the DGCL to an
appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that purpose and to that effect and shall be accompanied by a copy of
that statutory Section.
When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are
announced at the meeting at which the adjournment is taken; provided , however , that if the date of any adjourned meeting is more than 30 days after the date of the
original meeting, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in
conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting.
Notice of the time, place and purpose of any meeting of shareholders may be waived in writing, either before or after such meeting, and to the extent permitted by
law, shall be waived by any shareholder by his or her attendance thereat, in person or by proxy. Any shareholder so waiving notice of such meeting shall be bound by
the proceedings of any such meeting in all respects as if due notice thereof had been given.
Section 4. Quorum. At any meeting of the shareholders, the holders of a majority in voting power of the outstanding shares of capital stock entitled to vote at
the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be
required by law, the Certificate of Incorporation or these Bylaws. Where a separate vote by a class or classes is required, a majority in voting power of the shares of
such class or classes present in person or by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority in voting power of the outstanding shares of capital stock
entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time, without notice other than as specified in Section 3 of
this Article.
Section 5. Organization. Such person as the Chairman of the Board may have designated or, in the absence of such a person, such person as the Board of
Directors may have designated or, in his or her absence, the Chief Executive Officer, or in his or her absence, such person as may be chosen by the holders of a majority
of the voting power of the outstanding shares of capital stock entitled to vote who are present, in person or by proxy, shall call to order any meeting of the shareholders
and act as chairman of the meeting. In the absence of the Secretary, the secretary of the meeting shall be such person as the chairman of the meeting appoints.
Section 6. Conduct of Business. The chairman of any meeting of shareholders shall determine the order of business and the procedure at the meeting, including
such regulation of the manner of voting and the conduct of discussion as seems to him or her in order. The date and time of the opening and closing of the polls for each
matter upon which the shareholders will vote at the meeting shall be announced at the meeting.
Section 7. Proxies and Voting. At any meeting of the shareholders, every shareholder entitled to vote in accordance with the terms of the Certificate of
Incorporation may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure
established for the meeting, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original
writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile, telecommunication or
other reproduction shall be a complete reproduction of the entire original writing or transmission.
All voting, except as provided in the Certificate of Incorporation or where otherwise required by law, may be by a voice vote;provided,however, that upon demand
therefor by a shareholder entitled to vote or by his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the
name of the shareholder or proxy voting and such other information as may be required under the procedure established for the meeting.
In advance of any meeting of shareholders, the Board of Directors shall appoint one or more inspectors to act at the meeting and make a written report thereof and
may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of
shareholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability and may perform such other
duties not inconsistent herewith as may be requested by the Corporation.
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Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, the affirmative vote of the holders of not less than a majority of the voting
power of the outstanding shares of capital stock cast at the meeting of the holders present in person or by proxy and entitled to vote on the subject matter shall be the act
of the shareholders.
Section 8. No Shareholder Action by Consent. No action required to be taken or which may be taken at any annual or special meeting of shareholders of the
Corporation may be taken without a meeting, and such actions may not be taken by written consent of the shareholders.
Section 9. Notice of Shareholder Business and Nominations.
(a)(i) To be properly brought before an annual meeting or special meeting, nominations of persons for election to the Board of Directors or other business must be
(A) specified in the notice of meeting given by or at the direction of the Board of Directors; (B) otherwise properly brought before the meeting by or at the direction of
the Board of Directors; or (C) otherwise properly brought before the meeting by a shareholder.
(ii) For business to be properly brought before an annual meeting by a shareholder (A) the shareholder must have given timely notice thereof in writing to the
Secretary; (B) the subject matter thereof must be a matter which is a proper subject matter for shareholder action at such meeting; and (C) the shareholder must be a
shareholder of record of the Corporation at the time the notice required by this Section is delivered to the Corporation and must be entitled to vote at the meeting.
(iii) Except as otherwise provided in the Certificate of Incorporation, to be considered timely notice, a shareholder's notice must be received by the Secretary at the
principal executive offices of the Corporation not less than 120 calendar days before the date of the Corporation's proxy statement released to shareholders in
connection with the previous year's annual meeting of shareholders. If no annual meeting was held in the previous year, or if the date of the applicable annual meeting
has been changed by more than 30 days from the date of the previous year's annual meeting, then a shareholder's notice, in order to be considered timely, must be
received by the Secretary not later than the later of the close of business on the 90th day prior to such annual meeting or the tenth day following the day on which notice
of the date of the annual meeting was mailed or public disclosure of such date was made.
Such shareholder's notice shall set forth:
(A) as to each person whom the shareholder proposes to nominate for election as a director, (1) all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case in accordance with Regulation 14A under the
Securities Exchange Act of 1934 (the " Exchange Act ") and such other information as may be required by the Corporation pursuant to any policy of the Corporation
governing the selection of directors; and (2) such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected;
(B) as to any business the shareholder proposes to bring before the meeting, (1) a brief description of such business; (2) the text of the proposal or business
(including the text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend the Bylaws, the language of the
proposed amendment); (3) the reasons for conducting such business at the meeting; and (4) any material interest in such business of such shareholder and the beneficial
owner, if any, on whose behalf the proposal or nomination is made; and
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(C) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal or nomination is made,
(1) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner; (2) the class
and number of shares of the Corporation that are owned beneficially and held of record by such shareholder and such beneficial
owner; (3) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to propose such business or nomination; and (4) a representation whether the
shareholder or the beneficial owner, if any, intends or is part of a group which intends (x) to deliver a proxy statement and/or form of
proxy to holders of at least the percentage of the Corporation's outstanding shares of capital stock required to approve or adopt the
proposal or elect the nominee; and/or (y) otherwise to solicit proxies from shareholders in support of such proposal or nomination.
The foregoing notice requirements shall be deemed satisfied by a shareholder if the shareholder has notified the Corporation of his or her intention to present a
proposal or nomination at an annual meeting in compliance with applicable rules and regulations promulgated under the Exchange Act and such shareholder's proposal
or nomination has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting. The Corporation may require
any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the
Corporation. In addition, a shareholder seeking to bring an item of business before the annual meeting shall promptly provide any other information reasonably
requested by the Corporation.
(iv) Notwithstanding anything in paragraph (a)(iii) to the contrary, in the event that the number of directors to be elected to the Board of Directors at an annual
meeting is increased and there is no public announcement by the Corporation naming the nominees for the additional directorships at least 100 days prior to the first
anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section shall also be considered timely, but only with respect to nominees for
the additional directorships, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth
day following the day on which such public announcement is first made by the Corporation.
(b) Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice
of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected pursuant
to the Corporation's notice of meeting (i) by or at the direction of the Board of Directors; or (ii) provided that the Board of Directors has determined that directors
shall be elected at such meeting, by any shareholder of the Corporation who is a shareholder of record at the time the notice provided for in this Section is delivered to
the Secretary, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section.
Notwithstanding the foregoing provisions of this Section, a shareholder who seeks to have any proposal included in the Corporation's proxy materials must provide
notice as required by and otherwise comply with the applicable requirements of the rules and regulations under the Exchange Act. Nothing in this Section shall be
deemed to affect any rights (a) of shareholders to request inclusion of proposals or nominations in the Corporation's proxy statement pursuant to applicable rules and
regulations promulgated under the Exchange Act; or (b) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the
Certificate of Incorporation.
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The chairman of an annual meeting shall determine all matters relating to the conduct of the meeting, including, but not limited to, determining whether any
nomination or item of business has been properly brought before the meeting in accordance with these Bylaws (including whether the shareholder or beneficial owner,
if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of
such shareholder's nominee or proposal in compliance with such shareholder's representation as required by clause (A)(iii)(C)(4) of this Section), and if the chairman
should so determine and declare that any nomination or item of business has not been properly brought before an annual or special meeting, then such business shall not
be transacted at such meeting and such nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Section, if the shareholder (or a qualified representative of the shareholder) does not appear at the annual or
special meeting of shareholders of the Corporation to present a nomination or item of business, such proposed business shall not be transacted and such nomination
shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the Corporation.
Section 10. Opening of Polls. The date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting
shall be announced at the meeting by the person presiding over the meeting. The Board of Directors may adopt by resolution such rules and regulations for the conduct
of the meeting of shareholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the
person presiding over any meeting of shareholders shall have the right and authority to convene and to adjourn the meeting, to prescribe such rules, regulations and
procedures and to do all such acts as, in the judgment of such presiding person, are appropriate for the proper conduct of the meeting.
Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the presiding person of the meeting, may include, without
limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the
safety of those present; (c) limitations on attendance at or participation in the meeting to shareholders of record of the Corporation, their duly authorized and constituted
proxies or such other persons as the presiding person of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement
thereof; and (e) limitations on the time allotted to questions or comments by participants.
The presiding person at any meeting of shareholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if
the facts warrant, determine and declare to the meeting that a matter or business was not properly brought before the meeting and if such presiding person should so
determine, such presiding person shall so declare to the meeting and any such matter or business not properly brought before the meeting shall not be transacted or
considered. Unless and to the extent determined by the Board of Directors or the person presiding over the meeting, meetings of shareholders shall not be required to be
held in accordance with the rules of parliamentary procedure.
ARTICLE III—BOARD OF DIRECTORS
Section 1. Powers. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors. The Board of Directors
may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by law or otherwise directed or required to be exercised
or done by the shareholders.
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Section 2. Number and Election. Subject to the rights of holders of Preferred Stock, the number of directors shall be such number as is from time to time
determined in the manner provided in the Certificate of Incorporation. The election of directors shall be conducted in the manner provided in the Certificate of
Incorporation and each director so elected shall hold office as provided in the Certificate of Incorporation.
Section 3. Resignation. Any director may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if
no time be specified, at the time of its receipt by the Chairman of the Board or the Chief Executive Officer. The acceptance of a resignation shall not be necessary to
make it effective.
Section 4. Vacancies. Any vacancy on the Board of Directors, howsoever resulting, may only be filled in the manner provided in and to the extent permitted
under the Certificate of Incorporation.
Section 5. Removals. Subject to the rights of the holders of Preferred Stock, any director, or the entire Board, may be removed from office in the manner
provided in and to the extent permitted under the Certificate of Incorporation.
Section 6. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as
soon as practicable after each annual meeting of shareholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting
need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such other time or place (within or
without the State of Delaware) as provided in Section 8 of this Article.
Section 7. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times
as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required.
Section 8. Special Meetings. Special meetings of the Board of Directors may be called by one-third of the directors then in office (rounded up to the nearest
whole number), by the Chairman of the Board or by the Chief Executive Officer and shall be held at such place, on such date, and at such time as they or he or she shall
fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not less than
24 hours before the meeting or such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Notice of any
such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting, except
when such director attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting.
Section 9. Quorum. At any meeting of the Board of Directors, a majority of the total number of directors then in office shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date or time, without further notice or
waiver thereof.
Section 10. Participation in Meetings By Conference Telephone. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of
the Board of Directors, or of any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in
person at such meeting.
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Section 11. Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time
to time determine, and all matters shall be determined by the vote of a majority of the total number of directors present at such meeting at which there is a quorum,
except as otherwise provided in the Certificate of Incorporation or these Bylaws or as required by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors.
Section 12. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for
their services as directors, including, without limitation, their services as members of committees of the Board of Directors.
ARTICLE IV—COMMITTEES
Section 1. Committees of the Board of Directors. The Board of Directors shall appoint from among its members an Audit Committee, a Compensation
Committee and a Nominating and Corporate Governance Committee, each composed of at least two directors or such higher number of directors as may be required by
law or the standards of any stock exchange on which shares of the Corporation are listed, with such lawfully delegable powers and duties as it thereby confers or that
are required by law or such standards of any stock exchange on which shares of the Corporation are listed.
The Board of Directors may from time to time designate other committees of the Board, each composed of one or more directors, with such lawfully delegable
powers and duties as it thereby confers, to serve at the pleasure of the Board.
In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present
at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum may by unanimous vote appoint another member of the Board of
Directors to act at the meeting in the place of the absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board of Directors or these Bylaws, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which
may require it; but (a) unless the resolution, the Certificate of Incorporation or these Bylaws expressly so provide, no such committee shall have the power or authority
to declare a dividend, authorize the issuance of stock, to adopt a certificate of ownership and merger pursuant to Section 253 of the DGCL or to recommend to the
shareholders either the sale, lease or exchange of all or substantially all of the Corporation's property and assets or a dissolution of the Corporation (or the revocation of
a dissolution); and (b) no such committee shall have the power or authority of the Board of Directors in reference to adopting, amending or repealing any provision of
the Certificate of Incorporation or these Bylaws or approving or adopting, or recommending to the shareholders, any action or matter expressly required by the DGCL
to be submitted to stockholders for approval other than those identified in (a) above.
Section 2. Term. The Board, subject to the requirements specifically set forth in this Section, may at any time change, increase or decrease the number of
members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or resignation, but
the Board may at any time for any reason remove any individual committee member and the Board may, subject to the requirements specifically set forth in this
Section, fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may, subject
to the requirements specifically set forth in this Section, designate one or more directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may, subject to the requirements specifically set forth in
this Section, unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.
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Section 3. Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance
therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; a majority of the members
shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be
determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and
the writing or writings are filed with the minutes of the proceedings of such committee.
ARTICLE V—OFFICERS
Section 1. Generally. The officers of the Corporation shall consist of a Chief Executive Officer, a President, a Chief Operating Officer, a Chief Financial
Officer, a Secretary, a Treasurer, one or more Vice Presidents and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be
elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of shareholders. In addition, the Board of Directors
may elect a Chairman of the Board and one or more Vice Chairmen from among its members. None of the officers of the Corporation need be directors. Each officer
shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same
person.
Section 2. Chairman of the Board. The Chairman of the Board, or in the absence of the Chairman of the Board, a Vice Chairman, if any, or the President, if
any, shall preside as chairman at meetings of the shareholders and the Board of Directors. The Chairman of the Board shall, in addition, have such other duties as the
Board may prescribe that he or she perform. At the request of the Chief Executive Officer (if other than the Chairman of the Board), the Chairman of the Board may, in
the case of the Chief Executive Officer's absence or inability to act, temporarily act in his place. In the case of death of the Chief Executive Officer or in the case of his
absence or inability to act without having designated the Chairman of the Board to act temporarily in his place, the Chairman of the Board shall perform the duties of
the Chief Executive Officer, unless the Board of Directors, by resolution, provides otherwise. If the Chairman of the Board shall be unable to act in place of the Chief
Executive Officer, the Chief Financial Officer or the Chief Operating Officer may exercise such powers and perform such duties as provided below.
Section 3. Chief Executive Officer. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, the Chief Executive Officer shall
perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He
or she shall have power to sign all contracts and other instruments of the Corporation that are authorized and shall have general supervision and direction of all of the
other officers, employees and agents of the Corporation.
Section 4. President. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, the President shall perform all duties and have all
powers that are commonly incident to the office of president, including the power to sign any stock certificates, or that are delegated to him or her by the Board of
Directors.
Section 5. Chief Operating Officer. The Chief Operating Officer shall be responsible for overseeing restaurant operations and for such other responsibilities as
the Board of Directors may from time to time prescribe.
8
Section 6. Chief Financial Officer. The Chief Financial Officer shall have the responsibility for maintaining the financial records of the Corporation. He or she
shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the
financial condition of the Corporation. The Chief Financial Officer shall also perform such other duties as the Board of Directors may from time to time prescribe.
Section 7. Treasurer. In addition to those responsibilities delegated to the Treasurer by the Board of Directors from time to time, the Treasurer may
authenticate and sign on behalf of the Corporation any certificate representing any debt or equity security issued by the Corporation.
Section 8. Secretary. The Secretary shall issue all authorized notices for, and shall keep minutes of, all meetings of the shareholders and the Board of Directors.
He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe.
Section 9. Vice Presidents.
may from time to time prescribe.
Vice Presidents, if any, shall be elected and shall have such powers and perform such duties, respectively, as the Board of Directors
Section 10. Assistant Treasurers and Assistant Secretaries. Assistant Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers
and perform such duties, respectively, as the Board of Directors may from time to time prescribe.
Section 11. Delegation Of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents,
notwithstanding any provision hereof.
Section 12. Resignation. Any officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if
no time be specified, at the time of its receipt by the Chairman of the Board or the Chief Executive Officer. The acceptance of a resignation shall not be necessary to
make it effective.
Section 13. Removal. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. Nothing herein shall limit
the power of any officer to discharge any subordinate.
Section 14. Delegation of Duties. Whenever an officer is absent, or whenever, for any reason, the Board of Directors may deem it desirable, the Board may
delegate the powers and duties of an officer or officers or to any director or directors.
Section 15. Officers' Bonds or Other Security. If required by the Board of Directors, any officer of the Corporation shall give a bond or other security for the
faithful performance of his duties, in such amount and with such surety as the Board of Directors may require.
Section 16. Compensation. The compensation of the officers of the Corporation for their services as such shall be fixed from time to time by the Board of
Directors. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that he is also a director of the Corporation.
ARTICLE VI—EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
Section 1. Execution of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided
by law, and such execution or signature shall be binding upon the Corporation.
9
Unless otherwise specifically determined by the Board of Directors or otherwise required by law, formal contracts of the Corporation, promissory notes, deeds of
trust, mortgages and other evidences of indebtedness of the Corporation, and other corporate instruments or documents requiring the corporate seal shall be executed,
signed or endorsed by the Chairman of the Board (if there be such an officer appointed) or by the Chief Executive Officer; in the alternative, such documents may be
executed by the Chief Financial Officer or the Chief Operating Officer and countersigned or attested by the Secretary or Treasurer or any Assistant Secretary or
Assistant Treasurer. Certificates of stock shall be signed as set forth in Section 1 of Article VII of these Bylaws. All other instruments and documents requiring the
corporate signature, but not requiring the corporate seal, may be executed as aforementioned or in such other manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to the credit of the Corporation, or in special accounts of the Corporation, shall be signed by
such person or persons as the Board of Directors shall authorize so to do.
Section 2. Voting of Securities Owned by Corporation. All stock and other securities of other corporations owned or held by the Corporation for itself, or for
other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of
Directors or, in the absence of such authorization, by the Chairman of the Board (if there be such an officer appointed), or by the Chief Executive Officer (if there be
such an officer), or by the Chief Financial Officer (if there be such an officer) or the Chief Operating Officer (if there be such an officer).
ARTICLE VII—STOCK
Section 1. Certificates of Stock. Each shareholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the Chairman or Vice
Chairman of the Board of Directors (if there be such officers appointed) or the President or Vice President, and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by
transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article VII of these
Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. A record shall be
made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer.
Section 3. Record Date. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or for the
purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record
date is adopted and which record date shall not be more than 60 nor less than ten days before the date of any meeting of shareholders, nor more than 60 days prior to the
time for such other action as hereinbefore described; provided , however , that if no record date is fixed by the Board of Directors, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for any other purpose, the record date shall be at the close
of business on the day on which the Board of Directors adopts a resolution relating thereto.
A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided ,
however , that the Board of Directors may fix a new record date for the adjourned meeting.
10
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place
pursuant to such regulations as the Board of Directors may in their discretion establish concerning proof of such loss, theft or destruction and concerning the giving of a
satisfactory bond or bonds of indemnity.
Section 5. Regulations.
Directors may establish.
The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of
Section 6. Registered Shareholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares
to receive dividends and to vote as such owner and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound
to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
Section 7. Dividends. Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor at any
regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Dividends may be paid in cash, in property, or
in shares of the capital stock of the Corporation; and in the case of a dividend paid in shares of theretofore unissued capital stock of the Corporation, the Board of
Directors shall, by resolution, direct that there be designated as capital in respect of such shares an amount not less than the aggregate par value of such shares and, in
the case of shares without par value, such amount as shall be fixed by the Board of Directors. Before declaring any dividend, there may be set apart out of any funds of
the Corporation available for dividends, such sum or sums as the Board of Directors from time to time in its discretion deems proper for working capital or as a reserve
fund to meet contingencies or for such other purposes as the Board of Directors shall deem conducive to the interests of the Corporation.
ARTICLE VIII—NOTICES
Section 1. Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any shareholder, director, officer,
employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram. Any such notice shall be addressed to such shareholder, director, officer, employee or agent at
his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered , or dispatched, if delivered
through the malls or by telegram or mailgram shall be the time of the giving of the notice.
Section 2. Waivers. A written waiver of any notice, signed by a shareholder, director, officer, employee or agent, whether before or after the time of the event
for which notice is to be given, shall be deemed equivalent to the notice required to be given to such shareholder, director, officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE IX—MISCELLANEOUS
Section 1. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile
signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof.
11
Section 2. Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the
Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant
Secretary or Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of
the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation
and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so
designated, or by any other person as to matters that such director or committee member reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the Corporation.
Section 4.
Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of Directors.
Section 5. Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an
event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be
excluded, and the day of the event shall be included.
Section 6. Ratification by Stockholders. Any contract, transaction or act of the Corporation or of the Board of Directors or of any committee of the Board of
Directors which shall be ratified by the holders of a majority of the voting power of the outstanding shares of capital stock present in person or by proxy and voting at
any annual meeting or at any special meeting called for such purpose, shall, insofar as permitted by law or under the provisions of the Certificate of Incorporation of the
Corporation or these Bylaws, be as valid and binding as though ratified by every shareholder of the Corporation.
Section 7. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers or between the Corporation and
any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers or have a financial interest,
shall be void or voidable solely for this reason or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction or solely because his or her or their votes are counted for such purpose if:
(a) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the
committee and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even
though less than a quorum; or
(b) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or
(c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved, or ratified by the Board of Directors, a committee thereof, or
the shareholders.
Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee that authorizes
the contract or transaction.
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ARTICLE X—INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (hereinafter a " proceeding "), by reason of the fact that he or she, or a person of whom he or she is
the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, liens, amounts paid or to be paid in
settlement and excise taxes or penalties arising under the Employee Retirement Income Security Act of 1974) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that the Corporation shall indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors.
The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses (including
attorney's fees) incurred in defending any such proceeding in advance of its final disposition provided, however, that, if the DGCL requires, the payment of such
expenses incurred by a director or officer in his or her capacity as such in advance of the final disposition of a proceeding shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision
from which there is no further right to appeal that such director or officer is not entitled to be indemnified under this Section or otherwise (an " undertaking "); and
provided, further, that such advancement of expenses incurred by any person other than a director or officer shall be made only upon the delivery of an undertaking to
the foregoing effect and may be subject to such other conditions as the Board may deem advisable.
Section 2. Right of Claimant to Bring Suit. If a claim under Section 1 of this Article is not paid in full by the Corporation within 60 days after a written claim
has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such suit. It shall be a defense to any such suit (other than a suit brought to
enforce a right to advancement of expenses where the required undertaking has been tendered to the Corporation) that the claimant has not met the applicable standard
of conduct set forth in the DGCL, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation
(including its Board, independent legal counsel or its shareholders) that the claimant has not met such standard, shall be a defense to the suit or create a presumption that
the claimant has not met the applicable standard of conduct.
Section 3. Non-Exclusivity of Rights; Accrued Rights. The right to indemnification and advancement of expenses conferred in Section 1 of this Article shall not
be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote
of shareholders or disinterested directors or otherwise. Such rights shall be contract rights, shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of such person's heirs, executors and administrators. Any repeal or modification of this Article shall not adversely affect
any right hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.
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Section 4. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the DGCL.
Section 5. Other Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to
indemnification and to the advancement of expenses to any employee not within the provisions of Section 1 of this Article or to any agent of the Corporation, subject to
such conditions as the Board may deem advisable.
Section 6. Savings Clause. If this Article X or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each person entitled to indemnification under Section 1 of this Article as to all expense, liability, and loss (including attorney's
fees, judgments, fines, ERISA excise taxes, penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such person and for which
indemnification is available to such person pursuant to this Article X to the fullest extent permitted by any applicable portion of this Article X that shall not have been
invalidated and to the fullest extent permitted by applicable law.
ARTICLE XI—AMENDMENTS
The Board of Directors and Shareholders may adopt, amend and repeal the Bylaws in the manner provided in the Certificate of Incorporation.
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Exhibit 3.2
CHIPOTLE MEXICAN GRILL, INC. FORM OF RESTATED BYLAWS (as of , 2006)
ARTICLE I—OFFICES
ARTICLE II—SHAREHOLDERS
ARTICLE III—BOARD OF DIRECTORS
ARTICLE IV—COMMITTEES
ARTICLE V—OFFICERS
ARTICLE VI—EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF SECURITIES OWNED BY THE CORPORATION
ARTICLE VII—STOCK
ARTICLE VIII—NOTICES
ARTICLE IX—MISCELLANEOUS
ARTICLE X—INDEMNIFICATION OF DIRECTORS AND OFFICERS
ARTICLE XI—AMENDMENTS
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Exhibit 5.1
[CLEARY GOTTLIEB STEEN & HAMILTON LLP LETTERHEAD]
Writer's Direct Dial: (212) 225-2472
E-Mail: [email protected]
January 10, 2006
Chipotle Mexican Grill, Inc.
1543 Wazee Street, Suite 200
Denver, CO 80202
Re:
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Chipotle Mexican Grill, Inc., a Delaware corporation (the "Company"), in connection with the preparation of a registration statement
on Form S-1 (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended
(the "Act"), for the registration of (i) the sale by the Company of shares (the "Company Securities") of the Company's class A common stock, par value $.01 per share
("Common Stock"); and (ii) the sale by McDonald's Ventures, LLC, of shares of the Company's Common Stock (the "Secondary Securities").
In arriving at the opinion expressed below, we have reviewed the following documents:
(a)
the Registration Statement;
(b)
the form of restated certificate of incorporation (the "Restated Certificate of Incorporation") of the Company, included as Exhibit 3.1 to the Registration Statement; and
(c)
the form of underwriting agreement (the "Underwriting Agreement") by and among the Company, McDonald's Ventures, LLC, McDonald's Corporation and the
underwriters named therein, as represented by Morgan Stanley & Co. Incorporated and SG Cowen & Co., LLC, included as Exhibit 1.1 to the Registration Statement.
In addition, we have reviewed the originals or copies certified or otherwise identified to our satisfaction of all such corporate records of the Company and such
other instruments and other certificates of public officials, officers and representatives of the Company and such other persons, and we have made such investigations of
law, as we have deemed appropriate as a basis for the opinions expressed below.
In arriving at the opinions expressed below, we have assumed the authenticity of all documents submitted to us as originals and the conformity to the originals of
all documents submitted to us as copies.
Based on the foregoing and subject to the further assumptions and qualifications set forth below, it is our opinion that, upon the filing of the Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware:
1. The Company Securities have been duly authorized by all necessary corporate action of the Company and, upon (i) due action of the pricing committee of the
Board of Directors of the Company; and (ii) the issuance of the Company Securities against payment therefor in the manner described in the Underwriting Agreement,
will be validly issued by the Company and fully paid and nonassessable.
2. The Secondary Securities have been duly authorized by all necessary corporate action of the Company, have been validly issued by the Company and are
fully paid and nonassessable.
The foregoing opinions are limited to the General Corporation Law of the State of Delaware (including the applicable provisions of the Delaware Constitution and
reported judicial decision interpreting that Law).
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement and in the prospectus that forms a part of the Registration Statement. In giving such consent, we do not thereby admit that we are within the
category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
CLEARY GOTTLIEB STEEN & HAMILTON LLP
By
/s/ Janet L. Fisher
Janet L. Fisher, a Partner
2
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Exhibit 5.1
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Exhibit 10.3
CHIPOTLE MEXICAN GRILL, INC. 2006 CASH INCENTIVE PLAN
(EFFECTIVE
, 2006)
Section 1. Purpose.
The purpose of the 2006 Cash Incentive Plan (the "Plan") is to promote the interests of Chipotle Mexican Grill, Inc. ("Chipotle") and its subsidiaries (the "
Company ") by providing eligible key employees of the Company with incentive to assist the Company in meeting and exceeding its business goals.
Section 2. Administration.
(a) The Plan shall be administered by the Executive Compensation Committee (the "Committee") of the Board of Directors of Chipotle (the " Board ") from
among its members and shall be comprised of not fewer than two members who shall be "outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the " Code "), and the regulations thereunder.
(b) The Committee may, subject to the provisions of the Plan, establish, adopt or revise rules and regulations relating to the Plan or take such actions as it deems
necessary or advisable for the proper administration of the Plan. The Committee shall have the authority to interpret the Plan in its discretion. Each interpretation made
or action taken by the Committee pursuant to the Plan shall be final and conclusive for all purposes and binding upon all Participants (as defined in Section 3) or former
Participants and their successors in interest.
(c) Neither the Committee nor any member of the Committee shall be liable for any act, omission, interpretation, construction or determination made in good
faith in connection with the Plan, and the members of the Committee shall be entitled to indemnification and reimbursement by Chipotle in respect of any claim, loss,
damage or expense (including, without limitation, reasonable attorneys' fees) arising or resulting therefrom to the fullest extent permitted by law.
Section 3. Eligibility.
Awards may be granted to key employees of the Company who are selected for participation in the Plan by the Committee. A qualifying employee selected by the
Committee to participate in the Plan shall be a " Participant " in the Plan.
Section 4. Award Criteria.
The Committee may grant performance-based awards ("Awards") to Participants with respect to any performance period (each, a "Performance Period "), subject
to the terms and conditions of the Plan. All Awards shall be settled in cash. Performance Periods may be equal to or longer than, but not less than, one fiscal year of the
Company and may be overlapping. Within 90 days after the beginning of a Performance Period, and in any case before 25% of the Performance Period has elapsed, the
Committee shall establish (a) performance goals and objectives (" Performance Targets ") for the Company for such Performance Period, (b) target awards (" Target
Awards ") for each Participant which shall be a specified dollar amount, and (c) schedules or other objective methods for determining the applicable performance
percentage (" Performance Percentage ") to be applied to each Target Award to which a Performance Target relates in arriving at the actual Award payout amount ("
Performance Schedules ").
Section 5. Performance Targets.
The Committee shall establish Performance Targets for each Performance Period. Such Performance Targets shall be based on one or more of the following
business criteria: revenue growth, operating income, operating cash flow, net income, earnings per share, return on sales, return on assets, return on equity, return on
invested capital, new store openings and total shareholder return.
The measurement of any Performance Targets may exclude the impact of charges for extraordinary, unusual or non-recurring items (including without limitation
charges for restructurings and discontinued operations), and the cumulative effects of accounting changes, each as defined by generally accepted accounting principles
and as identified in the Company's audited financial statements, including the notes thereto. Any Performance Targets may be used to measure the performance of
Chipotle or a subsidiary of Chipotle as a whole or any business unit of Chipotle or any subsidiary or any combination thereof, as the Committee may deem appropriate,
or any of the above Performance Targets as compared to the performance of a group of comparator companies, or a published or special index that the Committee, in its
discretion, deems appropriate.
Section 6. Awards.
(a) Calculation. In the manner required by Section 162(m) of the Code, the Committee shall, promptly after the date on which the necessary financial and other
information for a particular Performance Period becomes available, certify the extent to which Performance Targets have been achieved. Using the Performance
Schedule, the Committee shall determine the Performance Percentage applicable to each Performance Target and multiply the portion of the Target Award to which the
Performance Target relates by such Performance Percentage in order to arrive at the actual Award payout for such portion.
(b) Discretionary Reduction. The Committee may, in its discretion, reduce or eliminate the amount of any Award payable to any Participant, based on such
factors as the Committee may deem relevant, but the Committee may not increase the amount of any Award payable to any Participant above the amount established in
accordance with the relevant Performance Targets. For purposes of clarity, the Committee may exercise the discretion provided for by the foregoing sentence in a
non-uniform manner among Participants.
(c) Limitation. The amount paid under the Plan to any Participant with respect to any Award for a Performance Period of one year shall not exceed $3,000,000.
The amount paid under the Plan to any Participant with respect to any Award for a Performance Period of more than one year shall not exceed $9,000,000. No
Participant shall be eligible to earn Awards for more than three Performance Periods that end within any single fiscal year of the Company.
(d) Payment. The Company shall pay Awards as soon as administratively practical following certification by the Committee of the extent to which the applicable
Performance Targets have been achieved and the determination of the actual Awards in accordance with Section 5 and this Section 6, and in no event more than two
and one half months following the end of the Performance Period to which such certification relates.
Section 7. General Provisions.
(a) No Rights to Awards or Continued Employment. No employee of the Company shall have any claim or right to receive Awards under the Plan. Neither the
Plan nor any action taken under the Plan shall be construed as giving any employee any right to be retained by the Company.
(b) No Limits on Other Awards and Plans. Nothing contained in this Plan shall prohibit the Company from establishing other special awards or incentive
compensation plans providing for the payment of incentive compensation to employees of the Company, including any Participants.
(c) Withholding Taxes. The Company shall deduct from all payments and distributions under the Plan any required federal, state or local governments tax
withholdings.
(d) Unfunded Status of Plan. The Company shall not have any obligation to establish any separate fund or trust or other segregation of assets to provide for
payments under the Plan. To
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the extent any person acquires any rights to receive payments hereunder from the Company, such rights shall be no greater than those of an unsecured creditor.
(e) Effective Date; Amendment. The Plan is effective as of
, 2006, subject to approval by the shareholders of Chipotle. The Committee may at any
time and from time to time alter, amend, suspend or terminate the Plan in whole or in part.
(f) Governing Law. The Plan and the rights of all persons under the Plan shall be construed and administered in accordance with the laws of the State of
Colorado without regard to its conflict of law principles.
(g) Interpretation. The Plan is designed and intended to comply with Section 162(m) of the Code and all provisions hereof shall be construed in a manner so to
comply.
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Exhibit 10.4
CHIPOTLE MEXICAN GRILL, INC.
2006 STOCK INCENTIVE PLAN
(As Adopted
Purpose of the Plan
, 2006)1.
This Chipotle Mexican Grill, Inc. 2006 Stock Incentive Plan is intended to promote the interests of the Company and its shareholders by providing the employees
of the Company and eligible non-employee directors of Chipotle, who are largely responsible for the management, growth and protection of the business of the
Company, with incentives and rewards to encourage them to continue in the service of the Company. The Plan is designed to meet this intent by providing such
employees and eligible non-employee directors with a proprietary interest in pursuing the long-term growth, profitability and financial success of the Company.2.
Definitions
As used in the Plan or in any instrument governing the terms of any Incentive Award, the following definitions apply to the terms indicated below:
(a) "Board of Directors" means the Board of Directors of Chipotle.
(b) "Cause" means, when used in connection with the termination of a Participant's employment with the Company, unless otherwise provided in the Participant's
award agreement with respect to an Incentive Award or effective employment agreement or other written agreement with respect to the termination of a Participant's
employment with the Company, the termination of the Participant's employment with the Company on account of: (i) a failure of the Participant to substantially perform
his or her duties (other than as a result of physical or mental illness or injury); (ii) the Participant's willful misconduct or gross negligence which is materially injurious
to the Company; (iii) a breach by a Participant of the Participant's fiduciary duty or duty of loyalty to the Company; (iv) the Participant's unauthorized removal from the
premises of the Company of any document (in any medium or form) relating to the Company or the customers of the Company; or (v) the commission by the
Participant of any felony or other serious crime involving moral turpitude. Any rights the Company may have hereunder in respect of the events giving rise to Cause
shall be in addition to the rights the Company may have under any other agreement with the Participant or at law or in equity. If, subsequent to a Participant's
termination of employment, it is discovered that such Participant's employment could have been terminated for Cause, the Participant's employment shall, at the election
of the Committee, in its sole discretion, be deemed to have been terminated for Cause retroactively to the date the events giving rise to Cause occurred.
(c) "Change in Control" means the occurrence of any of the following:
(i) Any Person (other than McDonald's Corporation or one of its Subsidiaries) becoming the beneficial owner (within the meaning of Rule 13d-3 promulgated
under the Exchange Act, a " Beneficial Owner ") of twenty-five percent or more of the combined voting power of Voting Securities; provided , however that a Change
in Control shall not be deemed to occur by reason of an acquisition of Voting Securities by the Company or by an employee benefit plan (or a trust forming a part
thereof) maintained by the Company; and provided , further that a Change in Control shall not be deemed to occur solely because any Person becomes the Beneficial
Owner of twenty-five percent or more of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the
number of Voting Securities deemed to be outstanding, increases the proportional number of shares Beneficially Owned by such Person, except that a Change in
Control shall occur if a Change in Control would have occurred (but for the operation of this proviso) as a result of the acquisition of Voting Securities by the Company,
and after such acquisition such Person becomes the Beneficial Owner of any additional Voting Securities following which such Person is the Beneficially Owner of
twenty-five percent or more of the outstanding Voting Securities;
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(ii) The individuals who, as of January , 2006, are members of the Board of Directors (the "Incumbent Board"), cease for any reason to constitute at
least a majority of the members of the Board of Directors; provided , however that if the election or appointment, or nomination for election by Chipotle's
common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of the
Plan, thereafter be considered as a member of the Incumbent Board; provided , further, however, that no individual shall be considered a member of the
Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board of Directors (a " Proxy Contest ") including by reason of any agreement intended to avoid or settle any Proxy Contest; or
(iii) The consummation of:
(A) A merger, consolidation, reorganization or similar transaction (any of the foregoing, a "Business Combination") with or into Chipotle or in which securities of
Chipotle are issued, unless such Business Combination is a Non-Control Transaction.
(B) A complete liquidation or dissolution of the Company; or
(C) The sale or other disposition of all or substantially all of the assets of the Company (on a consolidated basis) to any Person other than the Company or an
employee benefit plan (or a trust forming a part thereof) maintained by the Company or by a Person which, immediately thereafter, will have all its voting securities
owned by the holders of the Voting Securities immediately prior thereto, in substantially the same proportions.
For purposes of the Plan, a "Non-Control Transaction" is Business Combination involving Chipotle where:
(A) the holders of Voting Securities immediately before such Business Combination own, directly or indirectly immediately following such Business Combination
more than fifty percent of the combined voting power of the outstanding voting securities of the parent corporation resulting from, or issuing its voting securities as part
of, such Business Combination (the " Surviving Corporation ") in substantially the same proportion as their ownership of the Voting Securities immediately before such
Business Combination by reason of their prior ownership of Voting Securities,
(B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Business Combination
constitute a majority of the members of the board of directors of the Surviving Corporation, or a corporation beneficially owning a majority of the voting securities of
the Surviving Corporation, and
(C) no Person other than the Company or any employee benefit plan (or any trust forming a part thereof) maintained immediately prior to such Business
Combination by the Company or McDonald's Corporation or any of its Subsidiaries immediately following the time at which such transaction occurs, is a Beneficial
Owner of twenty-five percent or more of the combined voting power of the Surviving Corporation's voting securities outstanding immediately following such Business
Combination.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur as a result of any event or transaction to the extent that treating such event or
transaction as a Change in Control would cause any tax to become due under Section 409A of the Code.
(d) "Chipotle" means Chipotle Mexican Grill, Inc., a Delaware corporation, and any successor thereto.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and all regulations, interpretations and administrative guidance issued
thereunder.
2
(f) "Committee" means the Compensation Committee of the Board of Directors or such other committee as the Board of Directors shall appoint from time to time
to administer the Plan and to otherwise exercise and perform the authority and functions assigned to the Committee under the terms of the Plan.
(g) "Common Stock" means Chipotle's Class A Common Stock, $0.01 par value per share, or any other security into which the common stock shall be changed
pursuant to the adjustment provisions of Section 9 of the Plan.
(h) "Company" means Chipotle and all of its Subsidiaries, collectively.
(i) "Covered Employee" means a Participant who at the time of reference is a "covered employee" as defined in Section 162(m) of the Code and the regulations
promulgated thereunder.
(j) "Director" means a member of the Board of Directors who is not at the time of reference an employee of the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" or "FMV" means, with respect to a share of Common Stock, the value of a share as of a certain date or over a period of time as
determined by the Committee utilizing the following standards:
(i) If the determination of FMV is to be made with respect to a share of Common Stock as of the date on which the Company commences the sale of shares of its
Common Stock to the public in a public offering pursuant to a Registration Statement under the Securities Act (a "Public Offering"), and if the Incentive Award is
granted in connection with and made contingent upon such Public Offering and a declaration by the Securities and Exchange Commission that the Company's
Registration Statement relating to such Public Offering ("Registration Statement") has become effective, FMV shall be the price at which the shares are sold to the
public in the offering.
(ii) If FMV is determined with respect to shares actively traded on the New York Stock Exchange ("NYSE"), the determination shall be made utilizing actual
transactions as reported on the NYSE, consistently applied, or if the shares are not traded on the NYSE, utilizing actual transactions as reported on such other
established stock exchange (or exchanges) on which the shares are traded as the Committee may determine.
(iii) In the event that shares are not publicly traded at the time a determination of FMV is required to be made hereunder and if the shares are not being valued in
connection with an Incentive Award as described in sub-paragraph (i) above, the determination of FMV shall be made by the Committee in such manner, as it deems
appropriate.
(m) "Good Reason" means, unless otherwise provided in any award agreement entered between the Company and the Participant with respect to an Incentive
Award or effective employment agreement or other written agreement between the Participant and the Company with respect to the termination of a Participant's
employment with the Company, the Participant's termination of employment on account of: (i) a material diminution in a Participant's duties and responsibilities other
than a change in such Participant's duties and responsibilities that results from becoming part of a larger organization following a Change in Control, (ii) a decrease in a
Participant's base salary, bonus opportunity or benefits other than a decrease in bonus opportunity or benefits that applies to all employees of the Company otherwise
eligible to participate in the affected plan or (iii) a relocation of a Participant's primary work location more than 30 miles from the Participant's work location on the
date of grant of a Participant's Incentive Awards under the Plan, without the Participant's prior written consent; provided that, within thirty days following the
occurrence of any of the events set forth herein, the Participant shall have delivered written notice to the Company of his or her intention to terminate his or her
employment for Good Reason, which notice specifies in reasonable detail the circumstances claimed to give rise to the Participant's right to terminate employment for
Good Reason, and the Company shall not have cured such circumstances within thirty days following the Company's receipt of such notice.
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(n) "Incentive Award" means an Option or Other Stock-Based Award granted to a Participant pursuant to the terms of the Plan.
(o) "Option" means an option to purchase shares of Common Stock granted to a Participant pursuant to Section 6.
(p) "Other Stock-Based Award" means an equity or equity-related award granted to a Participant pursuant to Section 7.
(q) "Participant" means a Director or employee of the Company who is eligible to participate in the Plan and to whom one or more Incentive Awards have been
granted pursuant to the Plan and, following the death of any such Person, his successors, heirs, executors and administrators, as the case may be.
(r) "Performance-Based Compensation" means compensation that satisfies the requirements of Section 162(m) of the Code for deductibility of remuneration paid
to Covered Employees.
(s) "Performance Measures" means such measures as are described in Section 8 on which performance goals are based in order to qualify certain awards granted
hereunder as Performance-Based Compensation.
(t) "Performance Period" means the period of time during which the performance goals must be met in order to determine the degree of payout and/or vesting
with respect to an Incentive Award that is intended to qualify as Performance-Based Compensation.
(u) "Person" means a "person" as such term is used in Section 13(d) and 14(d) of the Exchange Act, including any "group" within the meaning of Section 13(d)(3)
under the Exchange Act.
(v) "Plan" means this Chipotle Mexican Grill, Inc. 2006 Stock Incentive Plan, as it may be amended from time to time.
(w) "Qualifying Termination" means a Participant's termination of employment by the Company Without Cause or for Good Reason, in either case during the
period commencing on a Change in Control and ending on the second anniversary of the Change in Control.
(x) "Securities Act" means the Securities Act of 1933, as amended.
(y) "Subsidiary" means any "subsidiary" within the meaning of Rule 405 under the Securities Act.
(z) "Voting Securities" means, at any time, Chipotle's then outstanding voting securities.
(aa) "Without Cause" means a termination of a Participant's employment with the Company other than: (i) a termination of employment by the Company for
Cause, (ii) a termination of employment as a result of the Participant's death or Disability or (iii) a termination of employment by the Participant for any reason.
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3.
Stock Subject to the Plan
(a) In General*
*
All numbers have been adjusted to reflect the Reclassification of the Company's Common Stock and the reverse 3 for 1 stock split.
Subject to adjustment as provided in Section 9 and the following provisions of this Section 3, the maximum number of shares of Common Stock that may be
covered by Incentive Awards granted under the Plan shall not exceed 2,200,000 shares of Common Stock in the aggregate, of which 666,666 shares of Common Stock
were available for issuance but were not issued under the Company's Executive Stock Option Plan. Out of such aggregate, the maximum number of shares of Common
Stock that may be covered by Options that are designated as "incentive stock options" within the meaning of Section 422 of the Code shall not exceed 2,200,000 shares
of Common Stock, subject to adjustment as provided in Section 9 and the following provisions of this Section 3. Shares of Common Stock issued under the Plan may be
either authorized and unissued shares or treasury shares, or both, at the discretion of the Committee.
For purposes of the preceding paragraph, shares of Common Stock covered by Incentive Awards shall only be counted as used to the extent they are actually
issued and delivered to a Participant (or such Participant's permitted transferees as described in the Plan) pursuant to the Plan. For purposes of clarification, in
accordance with the preceding sentence if an Incentive Award is settled for cash or if shares of Common Stock are withheld to pay the exercise price of an Option or to
satisfy any tax withholding requirement in connection with an Incentive Award only the shares issued (if any), net of the shares withheld, will be deemed delivered for
purposes of determining the number of shares of Common Stock that are available for delivery under the Plan. In addition, if shares of Common Stock are issued
subject to conditions which may result in the forfeiture, cancellation or return of such shares to the Company, any portion of the shares forfeited, cancelled or returned
shall be treated as not issued pursuant to the Plan. In addition, if shares of Common Stock owned by a Participant (or such Participant's permitted transferees as
described in the Plan) are tendered (either actually or through attestation) to the Company in payment of any obligation in connection with an Incentive Award, the
number of shares tendered shall be added to the number of shares of Common Stock that are available for delivery under the Plan. In addition, if the Company uses cash
received by the Company in payment of the exercise price or purchase price in connection with any Incentive Award granted pursuant to the Plan to repurchase shares
of Common Stock from any Person, the shares so repurchased will be added to the aggregate number of shares available for delivery under the Plan. For purposes of the
preceding sentence, shares of Common Stock repurchased by the Company shall be deemed to have been repurchased using such funds only to the extent that such
funds have actually been previously received by the Company and that the Company promptly designates in its books and records that such repurchase was paid for
with such funds. Shares of Common Stock covered by Incentive Awards granted pursuant to the Plan in connection with the assumption, replacement, conversion or
adjustment of outstanding equity-based awards in the context of a corporate acquisition or merger (within the meaning of Section 303A.08 of the New York Stock
Exchange Listed Company Manual or any successor provision) shall not count as used under the Plan for purposes of this Section 3.
Subject to adjustment as provided in Section 9, the maximum number of shares of Common Stock that may be covered by Incentive Awards granted under the
Plan to any single Participant in any fiscal year of the Company shall not exceed 333,333 shares, prorated on a daily basis for any fiscal year of the Company that is
shorter than 365 days.
5
(b) Prohibition on Substitutions and Repricings
In no event shall any new Incentive Awards be issued in substitution for outstanding Incentive Awards previously granted to Participants, nor shall any repricing
(within the meaning of US generally accepted accounting practices or any applicable stock exchange rule) of Incentive Awards issued under the Plan be permitted at
any time under any circumstances, in each case unless the shareholders of the Company expressly approve such substitution or repricing.4.
Administration of the Plan
The Plan shall be administered by a Committee of the Board of Directors designated by the Board of Directors consisting of two or more persons, at least two of
whom qualify as non-employee directors (within the meaning of Rule 16b-3 promulgated under Section 16 of the Exchange Act), and as "outside directors" within the
meaning of Treasury Regulation Section 1.162-27(e)(3) and as "independent" within the meaning of any applicable stock exchange or similar regulatory authority. The
Committee shall, consistent with the terms of the Plan, from time to time designate those employees and non-employee directors who shall be granted Incentive Awards
under the Plan and the amount, type and other terms and conditions of such Incentive Awards. All of the powers and responsibilities of the Committee under the Plan
may be delegated by the Committee, in writing, to any subcommittee thereof. In addition, the Committee may from time to time authorize a committee consisting of one
or more Directors to grant Incentive Awards to persons who are not "executive officers" of Chipotle (within the meaning of Rule 16a-1 under the Exchange Act),
subject to such restrictions and limitation as the Committee may specify. In addition, the Board of Directors may, consistent with the terms of the Plan, from time to
time grant Incentive Awards to Directors.
The Committee shall have full discretionary authority to administer the Plan, including discretionary authority to interpret and construe any and all provisions of
the Plan and the terms of any Incentive Award (and any agreement evidencing any Incentive Award) granted thereunder and to adopt and amend from time to time such
rules and regulations for the administration of the Plan as the Committee may deem necessary or appropriate (including without limitation the adoption or amendment
of rules or regulations applicable to the grant, vesting or exercise of Incentive Awards issued to employees located outside the United States). Without limiting the
generality of the foregoing, (i) the Committee shall determine whether an authorized leave of absence, or absence in military or government service, shall constitute
termination of employment and (ii) the employment of a Participant with the Company shall be deemed to have terminated for all purposes of the Plan if such person is
employed by or provides services to a Person that is a Subsidiary of the Company and such Person ceases to be a Subsidiary of the Company, unless the Committee
determines otherwise. Decisions of the Committee shall be final, binding and conclusive on all parties.
On or after the date of grant of an Incentive Award under the Plan, the Committee may (i) accelerate the date on which any such Incentive Award becomes vested,
exercisable or transferable, as the case may be, (ii) extend the term of any such Incentive Award, including, without limitation, extending the period following a
termination of a Participant's employment during which any such Incentive Award may remain outstanding, (iii) waive any conditions to the vesting, exercisability or
transferability, as the case may be, of any such Incentive Award (iv) provide for the payment of dividends or dividend equivalents with respect to any such Incentive
Award; or (v) otherwise amend an outstanding Incentive Award in whole or in part from time-to-time as the Committee determines, in its sole and absolute discretion,
to be necessary or appropriate to conform the Incentive Award to, or otherwise satisfy any legal requirement (including without limitation the provisions of
Section 409A of the Code), which amendments may be made retroactively or prospectively and without the approval or consent of the Participant to the extent
permitted by applicable law; provided, that the Committee shall not have any such authority to the extent that the grant or exercise of such authority would cause any
tax to become due under Section 409A of the Code.
6
No member of the Committee shall be liable for any action, omission, or determination relating to the Plan, and Chipotle shall indemnify and hold harmless each
member of the Committee and each other Director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan
has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee)
arising out of any action, omission or determination relating to the Plan, unless, in either case, such action, omission or determination was taken or made by such
member, director or employee in bad faith and without reasonable belief that it was in the best interests of the Company.5.
Eligibility
The Persons who shall be eligible to receive Incentive Awards pursuant to the Plan shall be those employees of the Company and Directors whom the Committee
shall select from time to time. All Incentive Awards granted under the Plan shall be evidenced by a separate written agreement entered into by the Company and the
recipient of such Incentive Award.6.
Options
The Committee may from time to time grant Options, subject to the following terms and conditions:
(a) Exercise Price
The exercise price per share of Common Stock covered by any Option shall be not less than 100% of the Fair Market Value of a share of Common Stock on the
date on which such Option is granted. The agreement evidencing the award of each Option shall clearly identify such Option as either an "incentive stock option" within
the meaning of Section 422 of the Code or as not an incentive stock option.
(b) Term and Exercise of Options
(1) Each Option shall become vested and exercisable on such date or dates, during such period and for such number of shares of Common Stock as shall be
determined by the Committee on or after the date such Option is granted (including without limitation in accordance with terms and conditions relating to the vesting or
exercisability of an Option set forth in any employment, severance, change in control or similar agreement entered into by the Company with a Participant on or after
the date of grant); provided , however that no Option shall be exercisable after the expiration of ten years from the date such Option is granted; and, provided , further ,
that each Option shall be subject to earlier termination, expiration or cancellation as provided in the Plan or in the agreement evidencing such Option. In addition,
except as otherwise determined by the Committee at or after the time of grant, unless an Option becomes vested or exercisable pursuant to Sections 6(c) or 6(d) hereof,
an Option may not become vested or exercisable in whole or in part during the twelve-month period commencing with the date on which the Option was granted.
(2) Each Option may be exercised in whole or in part;provided,however that no partial exercise of an Option shall be for an aggregate exercise price of less than
$1,000 or such other amount as the Committee may determine from time to time. The partial exercise of an Option shall not cause the expiration, termination or
cancellation of the remaining portion thereof.
(3) An Option shall be exercised by such methods and procedures as the Committee determines from time to time, including without limitation through net
physical settlement or other method of cashless exercise.
(4) Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised, during the lifetime of a Participant, only by the Participant; provided , however that the Committee may permit Options to be sold,
sold, pledged, assigned, hypothecated, transferred, or disposed of, on a general or specific basis, subject to such conditions and limitations as the Committee may
determine.
7
(c) Effect of Termination of Employment or other Relationship
The agreement evidencing the award of each Option shall specify the consequences with respect to such Option of the termination of the employment, service as a
director or other relationship between the Company and the Participant holding the Option.
(d) Effect of Qualifying Termination
If a Participant experiences a Qualifying Termination or a Director's service on the Board terminates in connection with or as a result of a Change in Control, each
Option outstanding immediately prior to such Qualifying Termination or termination of a Director's service shall become fully and immediately vested and exercisable
as of such Qualifying Termination or termination of a Director's service and shall remain exercisable until its expiration, termination or cancellation pursuant to the
terms of the Plan and the agreement evidencing such Option.
(e) Special Rules for Incentive Stock Options
(1) The aggregate Fair Market Value of shares of Common Stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code)
are exercisable for the first time by a Participant during any calendar year under the Plan and any other stock option plan of the Company (or any "subsidiary" as such
term is defined in Section 424 of the Code of Chipotle) shall not exceed $100,000. Such Fair Market Value shall be determined as of the date on which each such
incentive stock option is granted. In the event that the aggregate Fair Market Value of shares of Common Stock with respect to such incentive stock options exceeds
$100,000, then incentive stock options granted hereunder to such Participant shall, to the extent and in the order required by regulations promulgated under the Code (or
any other authority having the force of regulations), automatically be deemed to be non-qualified stock options, but all other terms and provisions of such incentive
stock options shall remain unchanged. In the absence of such Regulations (and authority), or in the event such Regulations (or authority) require or permit a designation
of the options which shall cease to constitute incentive stock options, incentive stock options granted hereunder shall, to the extent of such excess and in the order in
which they were granted, automatically be deemed to be non-qualified stock options, but all other terms and provisions of such incentive stock options shall remain
unchanged.
(2) No incentive stock option may be granted to an individual if, at the time of the proposed grant, such individual owns stock possessing more than ten percent of
the total combined voting power of all classes of stock of Chipotle or any of its "subsidiaries" (within the meaning of Section 424 of the Code), unless (i) the exercise
price of such incentive stock option is at least one hundred and ten percent of the Fair Market Value of a share of Common Stock at the time such incentive stock option
is granted and (ii) such incentive stock option is not exercisable after the expiration of five years from the date such incentive stock option is granted.7.
Other Stock-Based Awards
The Committee may grant equity-based or equity-related awards not otherwise described herein in such amounts and subject to such terms and conditions as the
Committee shall determine. Without limiting the generality of the preceding sentence, each such Other Stock-Based Award may (i) involve the transfer of actual shares
of Common Stock to Participants, either at the time of grant or thereafter, or payment in cash or otherwise of amounts based on the value of shares of Common Stock,
(ii) be subject to performance-based and/or service-based conditions, (iii) be in the form of cash-settled stock appreciation rights, stock-settled stock appreciation rights,
phantom stock, restricted stock, restricted stock units, performance shares, or share-denominated performance units (iv) be designed to comply with applicable laws of
jurisdictions other than the United States, and (v) be designed to qualify as Performance Based Compensation.
8
Except as may be expressly provided to the contrary by the Committee in an agreement evidencing the grant of an Other Stock-Based Award or any employment,
severance, change in control or similar agreement entered into with a Participant, if a Participant experiences a Qualifying Termination or a Director's service on the
Board terminates in connection with or as a result of a Change in Control, each Other Stock-Based Award outstanding immediately prior to such Qualifying
Termination or termination of Director's service shall become fully and immediately vested and, if applicable, exercisable as of such Qualifying Termination or
termination and shall remain exercisable until its expiration, termination or cancellation pursuant to the terms of the Plan and the agreement evidencing such Other
Stock-Based Award.8.
Performance Measures
(a) Performance Measures
The performance goals upon which the payment or vesting of any Incentive Award (other than Options and SARs) to a Covered Employee that is intended to
qualify as Performance-Based Compensation depends shall relate to one or more of the following Performance Measures: revenue growth, operating income, operating
cash flow, net income, earnings per share, return on sales, return on assets, return on equity, return on invested capital, new store openings and total shareholder return.
Performance Periods may be equal to or longer than, but not less than, one fiscal year of the Company and may be overlapping. Within 90 days after the beginning
of a Performance Period, and in any case before 25% of the Performance Period has elapsed, the Committee shall establish (a) performance goals and objectives for the
Company for such Performance Period, (b) target awards for each Participant, and (c) schedules or other objective methods for determining the applicable performance
percentage to be applied to each such target award.
The measurement of any Performance Measure(s) may exclude the impact of charges for restructurings, discontinued operations, extraordinary items, and other
unusual or non-recurring items, and the cumulative effects of accounting changes, each as defined by generally accepted accounting principles and as identified in the
Company's audited financial statements, including the notes thereto. Any Performance Measure(s) may be used to measure the performance of the Company or a
Subsidiary as a whole or any business unit of the Company or any Subsidiary or any combination thereof, as the Committee may deem appropriate, or any of the above
Performance Measures as compared to the performance of a group of comparator companies, or a published or special index that the Committee, in its discretion, deems
appropriate.
Nothing in this Section 8 is intended to limit the Committee's discretion to adopt conditions with respect to any Incentive Award that is not intended to qualify as
Performance-Based Compensation that relate to performance other than the Performance Measures. In addition, the Committee may, subject to the terms of the Plan,
amend previously granted Incentive Awards in a way that disqualifies them as Performance-Based Compensation.
(b) Committee Discretion
In the event that the requirements of Section 162(m) of the Code and the regulations thereunder change to permit Committee discretion to alter the Performance
Measures without obtaining shareholder approval of such changes, the Committee shall have discretion to make such changes without obtaining shareholder approval.
9
9.
Adjustment Upon Changes in Common Stock
(a) Shares Available for Grants
In the event of any change in the number of shares of Common Stock outstanding by reason of any stock dividend or split, recapitalization, merger, consolidation,
combination or exchange of shares or similar corporate change, the maximum aggregate number of shares of Common Stock with respect to which the Committee may
grant Incentive Awards and the maximum aggregate number of shares of Common Stock with respect to which the Committee may grant Incentive Awards to any
individual Participant in any year shall be appropriately adjusted by the Committee. In the event of any change in the number of shares of Common Stock outstanding
by reason of any other similar event or transaction, the Committee may, but need not, make such adjustments in the number and class of shares of Common Stock with
respect to which Incentive Awards may be granted as the Committee may deem appropriate.
(b) Increase or Decrease in Issued Shares Without Consideration
Subject to any required action by the shareholders of Chipotle, in the event of any increase or decrease in the number of issued shares of Common Stock resulting
from a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend (but only on the shares of Common Stock), or any other increase or
decrease in the number of such shares effected without receipt or payment of consideration by the Company, the Committee may, to the extent deemed appropriate by
the Committee, proportionally adjust the number of shares of Common Stock subject to each outstanding Incentive Award and the exercise price per share of Common
Stock of each such Incentive Award.
(c) Certain Mergers
Subject to any required action by the shareholders of Chipotle, in the event that Chipotle shall be the surviving corporation in any merger, consolidation or similar
transaction as a result of which the holders of shares of Common Stock receive consideration consisting exclusively of securities of such surviving corporation, the
Committee may, to the extent deemed appropriate by the Committee, adjust each Incentive Award outstanding on the date of such merger or consolidation so that it
pertains to and applies to the securities which a holder of the number of shares of Common Stock subject to such Incentive Award would have received in such merger
or consolidation.
(d) Certain Other Transactions
In the event of (i) a dissolution or liquidation of Chipotle, (ii) a sale of all or substantially all of the Company's assets (on a consolidated basis), (iii) a merger,
consolidation or similar transaction involving Chipotle in which Chipotle is not the surviving corporation or (iv) a merger, consolidation or similar transaction involving
Chipotle in which Chipotle is the surviving corporation but the holders of shares of Common Stock receive securities of another corporation and/or other property,
including cash, the Committee shall, in its discretion, have the power to:
(i) cancel, effective immediately prior to the occurrence of such event, each Incentive Award (whether or not then exercisable), and, in full consideration of such
cancellation, pay to the Participant to whom such Incentive Award was granted an amount in cash, for each share of Common Stock subject to such Incentive Award
equal to the value, as determined by the Committee in its discretion, of such Incentive Award, provided that with respect to any outstanding Option such value shall be
equal to the excess of (A) the value, as determined by the Committee in its discretion, of the property (including cash) received by the holder of a share of Common
Stock as a result of such event over (B) the exercise price of such Option; or
(ii) provide for the exchange of each Incentive Award (whether or not then exercisable or vested) for an incentive award with respect to, as appropriate, some or
all of the property which a holder of the number of shares of Common Stock subject to such Incentive Award would have received in such transaction and, incident
thereto, make an equitable adjustment as determined by the Committee in its discretion in the exercise price of the incentive award, or the number of shares or amount
of property subject to the incentive award or, if appropriate, provide for a cash payment to the Participant to whom such Incentive Award was granted in partial
consideration for the exchange of the Incentive Award.
10
(e) Other Changes
In the event of any change in the capitalization of Chipotle or corporate change other than those specifically referred to in paragraphs (b), (c) or (d), the Committee
may, in its discretion, make such adjustments in the number and class of shares subject to Incentive Awards outstanding on the date on which such change occurs and in
such other terms of such Incentive Awards as the Committee may consider appropriate.
(f) No Other Rights
Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the
payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger or consolidation of Chipotle or
any other corporation. Except as expressly provided in the Plan, no issuance by Chipotle of shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of shares or amount of other property subject to any Incentive
Award.
(g) Savings Clause
No provision of this Section 9 shall be given effect to the extent that such provision would cause any tax to become due under Section 409A of the Code.10.
Rights as a Stockholder
No person shall have any rights as a stockholder with respect to any shares of Common Stock covered by or relating to any Incentive Award granted pursuant to
the Plan until the date of the issuance of a stock certificate with respect to such shares. Except as otherwise expressly provided in Section 9 hereof, no adjustment of any
Incentive Award shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued.11.
No Special Employment Rights; No Right to Incentive Award
(a) Nothing contained in the Plan or any Incentive Award shall confer upon any Participant any right with respect to the continuation of his employment by or
service to the Company or interfere in any way with the right of the Company at any time to terminate such employment or to increase or decrease the compensation of
the Participant from the rate in existence at the time of the grant of an Incentive Award.
(b) No person shall have any claim or right to receive an Incentive Award hereunder. The Committee's granting of an Incentive Award to a Participant at any time
shall neither require the Committee to grant an Incentive Award to such Participant or any other Participant or other person at any time nor preclude the Committee
from making subsequent grants to such Participant or any other Participant or other person.12.
Securities Matters
(a) Chipotle shall be under no obligation to effect the registration pursuant to the Securities Act of any shares of Common Stock to be issued hereunder or to
effect similar compliance under any state laws. Notwithstanding anything herein to the contrary, Chipotle shall not be obligated to cause to be issued or delivered any
certificates evidencing shares of Common Stock pursuant to the Plan unless and until Chipotle is advised by its counsel that the issuance and delivery of such
certificates is in compliance with all applicable laws, regulations of governmental authority and the requirements of any securities exchange on which shares of
Common Stock are traded. The Committee may require, as a condition to the issuance and delivery of certificates evidencing shares of Common Stock pursuant to the
terms hereof, that the recipient of such shares make such covenants, agreements and representations, and that such certificates bear such legends, as the Committee
deems necessary or desirable.
11
(b) The exercise of any Option granted hereunder shall only be effective at such time as counsel to Chipotle shall have determined that the issuance and delivery
of shares of Common Stock pursuant to such exercise is in compliance with all applicable laws, regulations of governmental authority and the requirements of any
securities exchange on which shares of Common Stock are traded. Chipotle may, in its discretion, defer the effectiveness of an exercise of an Option hereunder or the
issuance or transfer of shares of Common Stock pursuant to any Incentive Award pending or to ensure compliance under federal or state securities laws or the rules or
regulations of any exchange on which the Shares are then listed for trading. Chipotle shall inform the Participant in writing of its decision to defer the effectiveness of
the exercise of an Option or the issuance or transfer of shares of Common Stock pursuant to any Incentive Award. During the period that the effectiveness of the
exercise of an Option has been deferred, the Participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid with respect
thereto.13.
Withholding Taxes
(a) Cash Remittance
Whenever shares of Common Stock are to be issued upon the exercise of an Option or the grant or vesting of an Incentive Award, Chipotle shall have the right to
require the Participant to remit to Chipotle in cash an amount sufficient to satisfy federal, state and local withholding tax requirements, if any, attributable to such
exercise, grant or vesting prior to the delivery of any certificate or certificates for such shares or the effectiveness of the lapse of such restrictions. In addition, upon the
exercise or settlement of any Incentive Award in cash, Chipotle shall have the right to withhold from any cash payment required to be made pursuant thereto an amount
sufficient to satisfy the federal, state and local withholding tax requirements, if any, attributable to such exercise or settlement.
(b) Stock Remittance
At the election of the Participant, subject to the approval of the Committee, when shares of Common Stock are to be issued upon the exercise, grant or vesting of
an Incentive Award, the Participant may tender to Chipotle a number of shares of Common Stock that have been owned by the Participant for at least six months (or
such other period as the Committee may determine) having a Fair Market Value at the tender date determined by the Committee to be sufficient to satisfy the minimum
federal, state and local withholding tax requirements, if any, attributable to such exercise, grant or vesting but not greater than such minimum withholding obligations.
Such election shall satisfy the Participant's obligations under Section 13(a) hereof, if any.
(c) Stock Withholding
At the election of the Participant, subject to the approval of the Committee, when shares of Common Stock are to be issued upon the exercise, grant or vesting of
an Incentive Award, Chipotle shall withhold a number of such shares having a Fair Market Value at the exercise date determined by the Committee to be sufficient to
satisfy the minimum federal, state and local withholding tax requirements, if any, attributable to such exercise, grant or vesting but not greater than such minimum
withholding obligations. Such election shall satisfy the Participant's obligations under Section 13(a) hereof, if any.
12
14.
Amendment or Termination of the Plan
The Board of Directors may at any time suspend or discontinue the Plan or revise or amend it in any respect whatsoever;provided,however, that to the extent any
applicable law, regulation or rule of a stock exchange requires shareholder approval in order for any such revision or amendment to be effective, such revision or
amendment shall not be effective without such approval. The preceding sentence shall not restrict the Committee's ability to exercise its discretionary authority
hereunder pursuant to Section 4 hereof, which discretion may be exercised without amendment to the Plan. No provision of this Section 14 shall be given effect to the
extent that such provision would cause any tax to become due under Section 409A of the Code. Except as expressly provided in the Plan, no action hereunder may,
without the consent of a Participant, reduce the Participant's rights under any previously granted and outstanding Incentive Award. Nothing in the Plan shall limit the
right of the Company to pay compensation of any kind outside the terms of the Plan.15.
No Obligation to Exercise
The grant to a Participant of an Incentive Award shall impose no obligation upon such Participant to exercise such Incentive Award.16.
Transfers Upon Death
Upon the death of a Participant, outstanding Incentive Awards granted to such Participant may be exercised only by the executors or administrators of the
Participant's estate or by any person or persons who shall have acquired such right to exercise by will or by the laws of descent and distribution. No transfer by will or
the laws of descent and distribution of any Incentive Award, or the right to exercise any Incentive Award, shall be effective to bind Chipotle unless the Committee shall
have been furnished with (a) written notice thereof and with a copy of the will and/or such evidence as the Committee may deem necessary to establish the validity of
the transfer and (b) an agreement by the transferee to comply with all the terms and conditions of the Incentive Award that are or would have been applicable to the
Participant and to be bound by the acknowledgements made by the Participant in connection with the grant of the Incentive Award.17.
Expenses and Receipts
The expenses of the Plan shall be paid by Chipotle. Any proceeds received by Chipotle in connection with any Incentive Award will be used for general corporate
purposes.18.
Governing Law
The Plan and the rights of all persons under the Plan shall be construed and administered in accordance with the laws of the State of Colorado without regard to its
conflict of law principles.19.
Effective Date and Term of Plan
The Plan was adopted by the Board of Directors on
the Plan after the tenth anniversary of adoption.
, and approved by the shareholders of Chipotle on
13
. No grants may be made under
Exhibit A
Form of Option Agreement
This option agreement ("Option Agreement") evidences the grant to [
] (the "Participant") by Chipotle Mexican Grill, Inc. (the "Company") of the
non-qualified option to purchase shares of Common Stock provided for below (the "Option") pursuant to the Chipotle Mexican Grill, Inc. 2006 Stock Incentive Plan
(the "Plan"). This Option Agreement and the Option granted hereunder is expressly subject to all of the terms, definitions and provisions of the Plan as it may be
amended and restated from time-to-time. Capitalized terms used in this Option Agreement and not defined herein shall have the meanings attributed to them in the Plan.
1. Grant Date and Term. The date on which the Option is granted is [Option [
Date until the seventh anniversary of the Grant Date, subject to earlier termination of employment.
[
] (the "Grant Date"). The term of the Option is from the Grant
2. Number of Shares Subject to Option; Type of Option. The number of shares of the Company's Class A Common Stock ("Shares") subject to the Option is
]. The Option is a "non-qualified stock option" which is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Code.
3.
Exercise Price.
The Exercise Price of the Option is $[
] per Share.
4. Vesting. Subject to the provisions of the Plan and the Participant's continued employment with the Company, the Option shall vest as to all Shares subject to
the Option on the third anniversary of the Grant Date. No accelerated vesting shall occur except as provided in the Plan, as determined by the Committee or as a result
of certain circumstances described in this Agreement, including: i) a reduction in force or downsizing, and/or closing of facilities (as described in Section 10); becoming
a Retiree (as described in Section 11); termination of employment arising from death or disability (as described in Section 12), or ii) an event or circumstance resulting
in accelerated vesting pursuant to the terms of any separate "Change in Control Employment Agreement" or similar agreement applicable in relation to or upon the
occurrence of a Change in Control as defined in the Plan.
5.
Exercise of Option.
a) Exercise. Except as provided in the Plan, the Participant may exercise a vested Option, in whole or in part, at any time during the term of the Option by
providing written notice to the Company stating the number of shares in respect of which the Option is being exercised accompanied by payment of the aggregate
Exercise Price. Such written notice may be delivered in person or by certified mail to the Corporate Secretary of the Company or in such other form or manner as the
Committee may approve or any administrative agent engaged by the Company may specify for such purpose. The Option may not be exercised with respect to a number
of Shares that is less than the lesser of (i) twenty-five or (ii) the total number of Shares remaining available for exercise pursuant to this Option Agreement.
b) Payment. In order for an exercise of the vested Option to be effective, the Participant must pay the aggregate Exercise Price and all required withholding
taxes with respect to the Shares being purchased. Such payment shall be made to the Company in cash or pursuant to such other payment terms and arrangements as the
Committee may accept.
1
6.
Transferability of Option.
The Options granted hereby shall not be transferable except in accordance with the following provisions:
a) Limit on Transfers.
Participant.
During the Participant's lifetime, all Options shall be exercisable only by the Participant or by the legal guardian of a disabled
b) Dispositions to Beneficiaries. A Participant shall have the right to designate a beneficiary who shall be entitled to exercise the Participant's Options (subject
to their terms and conditions) following the Participant's death, and to whom any amounts payable following the Participant's death shall be paid. Such designation shall
be made in such manner and in accordance with such procedures as may be established by the Committee from time to time. If no beneficiary designation has been
made to the Committee at the time of a Participant's death, then the Participant's beneficiary shall be deemed to be the Participant's estate or heirs pursuant to the laws of
descent and distribution. In order to exercise a Option after the Participant's death, the beneficiary, or if no beneficiary designation has been made the personal
representative of Participant's estate or Participant's lawful heirs, must agree to be bound by the provisions of the Plan and this Option Agreement and to be treated as
the "Participant" under the Plan and the Option Agreement. All references to a "Participant" under the Plan and this Option Agreement shall be deemed to refer to the
Participant's beneficiaries, the personal representative of Participant's estate or Participant's heirs, as applicable after his or her death; provided , however , that
references in the Plan or this Option Agreement to the employment of a Participant or to the termination of such Employment or to any competitive activity by a
Participant shall continue to refer to the employment or any competitive activity of the Participant.
c) Legal Restrictions on Transferability and Exercise. The Option covered hereby may not be exercised in any manner or at any time if the issuance of Shares
upon the exercise of the Option or the method of payment of consideration for such Shares would constitute a violation of any applicable federal or state securities or
other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve
Board. The Participant agrees that if any of the Shares acquired by exercise of the Option granted hereunder are registered under the Securities Act, no public offering
(otherwise than on a national securities exchange, as defined in the Exchange Act) of any Shares acquired by exercise of the Option will be made by the Participant or
by any successor under circumstances such that the Participant or such successor may be deemed an underwriter, as defined in the Securities Act.
7. Withholding Taxes. No later than the date as of which an amount first becomes includible in the gross income of the Participant for federal income tax
purposes with respect to the Option, the Participant shall pay to the Company or make arrangements satisfactory to the Committee regarding the payment of, any
federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. If approved by the Committee in its sole discretion, the
minimum required withholding obligations may be settled with Shares, including without limitation Shares otherwise delivered upon exercise of the Option. The
obligations of the Company under the Plan and this Option Agreement shall be conditional on such payment, and the Company shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment otherwise due to the Participant.
8. Applicability of the Plan. The Options and the Shares that may be purchased by exercise of the Options are subject to all provisions of the Plan and all
determinations of the Committee made in accordance with the terms of the Plan. By executing this Option Agreement, the Participant expressly acknowledges
(i) receipt of the Plan and any current Plan prospectus and (ii) the applicability of all provisions of the Plan to the Option. In the event of any inconsistency between this
Option Agreement and the Plan, the Plan shall control.
2
9. General Termination of Employment. This Section 9 sets forth the normal treatment of a Participant's Options following the date on which the employment
relationship between Participant and the Company (including any subsidiary or parent of the Company) ceases to exist (the "Date of Termination") where such
termination does not result from circumstances such as a reduction in force or downsizing, closing of facilities, termination arising from death or disability or
termination for Cause as described respectively in Sections 10, 11, 12 and 13 below. Notwithstanding any provision of this Section 9 or ensuing Sections 10, 11, 12 and
13 to the contrary, after a Participant's Date of Termination, no Option may be exercised after the end of its full term specified pursuant to Section 1, unless otherwise
determined by the Committee. In addition, the Participant's Options, and the rights and obligations set forth herein, are subject to amendment, adjustment or termination
pursuant to the Plan and/or Section 14:
a) Unvested Options Held on the Date of Termination.
Any unvested Options held by the Participant as of the Date of Termination shall immediately expire.
b) Post-Termination Exercise and Expiration. The deadline for Participant's exercise of any vested Options held by the Participant as of the Date of
Termination shall be 30 days after the Date of Termination (the "Exercise Deadline"). Any vested but unexercised Options not exercised on or before the Exercise
Deadline shall immediately expire.
10. Economic Termination. In the event that a Participant's Employment terminates as a result of a reduction in force or downsizing related to plant or facility
closings, technology changes, reorganizations within the Company or a subsidiary of the Company, as applicable, or adverse economic or business conditions then:
a) Unvested Options Held on the Date of Termination. Any unvested Options held by the Participant as of the Date of Termination that are scheduled to vest on
or before the first anniversary of the Date of Termination shall vest immediately. Any other unvested Options held by the Participant on the Date of Termination shall
immediately expire.
b) Post-Termination Exercise and Expiration. The Exercise Deadline for Participant's exercise of any vested Options held by the Participant as of the Date of
Termination shall be 30 days after the Date of Termination. Any vested but unexercised Options not exercised on or before the Exercise Deadline shall immediately
expire.
11. Participant's Retirement or Becoming a Franchisee. The Company has specified criteria for classification as a "Retiree" for purposes of certain
compensation plans which include a requirement that an employee shall have achieved the combined Age and Years of Service (as those terms are defined below) of at
least 70. In this Section 11, the term "Age" of a Participant means (as of a particular date of determination), the Participant's age on that date in whole years and any
fractions thereof, and the term "Years of Service" means the number of years and fractions thereof during the period beginning on a Participant's most recent
commencement of employment with the Company or a subsidiary or parent of the Company and ending on such Participant's Date of Termination. In the event that a
Participant meeting the Age and Years of Service criteria for classification as a Retiree retires or if a Participant becomes a franchisee of the Company (or of a
subsidiary of the Company whose financial results are consolidated with those of the Company), then provided such Participant gave the Chief Executive Officer of the
Company or his or her designee at least six months prior written notice of retirement and additionally agreed for a period of two years after such retirement or
acquisition of a franchise not to engage in any "competitive activity" with the Company (as determined from time to time by the Committee), the following special
provisions shall apply:
a) Unvested Options Held on the Date of Termination. Any unvested Options held by the Participant as of the Date of Termination that are scheduled to vest on
or before the third anniversary of the Date of Termination shall vest immediately. Any other unvested Options held by the Participant as of the Date of Termination
shall immediately expire.
3
b) Post-Termination Exercise and Expiration. The Exercise Deadline for the Participant's vested Options shall be the third anniversary of
the Date of Termination. Any unexercised Options held by the Participant shall expire immediately after the Exercise Deadline.
12. Death or Disability. In the event that a Participant's Employment is terminated by reason of death or disability (for purposes of this Agreement, "disability"
shall mean a Participant's medically diagnosed permanent physical or mental inability to perform his or her job duties), the following shall apply:
a) Unvested Options Held on the Date of Termination.
Any unvested Options held by the Participant as of the Date of Termination shall immediately vest.
b) Post-Termination Exercise and Expiration. The Exercise Deadline for any Options held by the Participant (or his or her beneficiaries or estate, in the case of
death) on the Date of Termination shall be the third anniversary of the Date of Termination. Any unexercised Options held by the Participant (or his or her beneficiaries
or estate, in the case of death) shall expire immediately after the Exercise Deadline.
13. Termination For Cause. In the event that a Participant's Employment is terminated for Cause (as defined in the Plan), any Options held by such Participant
on the Date of Termination, whether vested or unvested, shall immediately expire.
14. Modification; Waiver. Except as provided in the Plan or this Option Agreement, no provision of this Agreement may be amended, modified, or waived
unless such amendment or modification is agreed to in writing and signed by the Participant and by a duly authorized officer of the Company, and such waiver is set
forth in writing and signed by the party to be charged, provided that any change that is advantageous to Participant may be made by the Committee without Participant's
consent or written signature or acknowledgement. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent
time. Participant acknowledges and agrees that the Committee has the right to amend an outstanding Option in whole or in part from time-to-time if the Committee
believes, in its sole and absolute discretion, such amendment is required or appropriate in order to conform the Option to, or otherwise satisfy any legal requirement
(including without limitation the provisions of Section 409A of the Code). Such amendments may be made retroactively or prospectively and without the approval or
consent of the Participant to the extent permitted by applicable law, provided that the Committee shall not have any such authority to the extent that the grant or
exercise of such authority would cause any tax to become due under Section 409A of the Code.
15. Notices. Except as the Committee may otherwise prescribe or allow in connection with communications procedures developed in coordination with any
third party administrator engaged by the Company, all notices, including notices of exercise, requests, demands or other communications required or permitted with
respect to the Plan, shall be in writing addressed or delivered to the parties. Such communications shall be deemed to have been duly given to any party when delivered
by hand, by messenger, by a nationally recognized overnight delivery company, by facsimile, or by first-class mail, postage prepaid and return receipt requested, in each
case to the applicable addresses set forth below:
If to the Participant:
to the Participant's most recent address on the records of the Company
If to the Company:
Chipotle Mexican Grill, Inc.
1543 Wazee
Denver, CO 80202
Attn: Human Resources Executive Director
Facsimile: 303-222-2500
(or to such other address as the party in question shall from time to time designate by written notice to the other parties).
4
16. Governing Law. Except to the extent that provisions of the Plan are governed by applicable provisions of the Code or other substantive provisions of
federal law, the Plan and all Options made and actions taken thereunder shall be governed by and construed and enforced in accordance with the laws of the State of
Colorado without regard to the principles of conflicts of law thereof.
CHIPOTLE MEXICAN GRILL, INC.
By:
[NAME OF PARTICIPANT]
5
Exhibit B
Form of Option Agreement [Converted SARS]
This option agreement ("Option Agreement") evidences the conversion of
stock appreciation rights (the "SARs") issued under the Chipotle Stock
Appreciation Rights Plan and held by [
] (the "Participant") into a non-qualified option to purchase
shares of Common Stock as more fully
described below (the "Option") pursuant to the Chipotle Mexican Grill, Inc. 2006 Stock Incentive Plan (the "Plan") by Chipotle Mexican Grill, Inc. (the "Company").
This Option Agreement and the Stock Option issued hereunder is expressly subject to all of the terms, definitions and provisions of the Plan as it may be amended and
restated from time-to-time. Capitalized terms used in this Option Agreement and not defined herein shall have the meanings attributed to them in the Plan.
It is agreed as follows:
1. Effective Date of Conversion; Term of Option. Effective as of
, the SARs will be converted into an Option to purchase
shares of
Class A Common Stock (the "Shares"). The SARs will terminate effective as of such conversion, and the Participant acknowledges and agrees that he or she will have
no further rights with respect to the SARs, subject to earlier termination of employment.
2. Type of Option. The Option is a non-qualified stock option which is not intended to qualify as an "incentive stock option" within the meaning of Section 422
of the Code. For purposes of determining the vesting, exercisability and termination of the Option, the Option will be deemed to have been granted on July 14, 2004
(the "Grant Date"). Unless sooner terminated in accordance with the terms of the Plan or this Option Agreement, the Option shall terminate on July 14, 2010.
3.
Exercise Price.
The Exercise Price of the Option is $22.35 per Share.
4. Vesting. Subject to the provisions of the Plan, the Stock Option shall vest as to all Shares subject to the Stock Option on the third anniversary of the Grant
Date. No accelerated vesting shall occur except as provided in the Plan or as a result of certain circumstances described in this Agreement, including: i) a reduction in
force or downsizing, and/or closing of facilities (as described in Section 10); becoming a Retiree (as described in Section 11); termination of employment arising from
death or disability (as described in Section 12), or ii) an event or circumstance resulting in accelerated vesting pursuant to the terms of any separate "Change in Control
Employment Agreement" or similar agreement applicable in relation to or upon the occurrence of a Change in Control as defined in the Plan.
5.
Exercise of Option.
a) Exercise. Except as provided in the Plan, the Participant may exercise a vested Option, in whole or in part, at any time during the term of the Option by
providing written notice to the Company stating the number of shares in respect of which the Option is being exercised accompanied by payment of the aggregate
Exercise Price. Such written notice may be delivered in person or by certified mail to the Corporate Secretary of the Company or in such other form or manner as the
Committee may approve or any administrative agent engaged by the Company may specify for such purpose. The Option may not be exercised with respect to a number
of Shares that is less than the lesser of (i) twenty-five or (ii) the total number of Shares remaining available for exercise pursuant to this Option Agreement.
b) Payment. In order for an exercise of the vested Option to be effective, the Participant must pay the aggregate Exercise Price and all required withholding
taxes with respect to the Shares being purchased. Such payment shall be made to the Company in cash or pursuant to such other payment terms and arrangements as the
Committee may accept.
1
6.
Transferability of Option.
The Options granted hereby shall not be transferable except in accordance with the following provisions:
a) Limit on Transfers.
Participant.
During the Participant's lifetime, all Options shall be exercisable only by the Participant or by the legal guardian of a disabled
b) Dispositions to Beneficiaries. A Participant shall have the right to designate a beneficiary who shall be entitled to exercise the Participant's Options (subject
to their terms and conditions) following the Participant's death, and to whom any amounts payable following the Participant's death shall be paid. Such designation shall
be made in such manner and in accordance with such procedures as may be established by the Committee from time to time. If no beneficiary designation has been
made to the Committee at the time of a Participant's death, then the Participant's beneficiary shall be deemed to be the Participant's estate or heirs pursuant to the laws of
descent and distribution. In order to exercise a Option after the Participant's death, the beneficiary, or if no beneficiary designation has been made the personal
representative of Participant's estate or Participant's lawful heirs, must agree to be bound by the provisions of the Plan and this Option Agreement and to be treated as
the "Participant" under the Plan and the Option Agreement. All references to a "Participant" under the Plan and this Option Agreement shall be deemed to refer to the
Participant's beneficiaries, the personal representative of Participant's estate or Participant's heirs, as applicable after his or her death; provided , however , that
references in the Plan or this Option Agreement to the employment of a Participant or to the termination of such Employment or to any competitive activity by a
Participant shall continue to refer to the employment or any competitive activity of the Participant.
c) Legal Restrictions on Transferability and Exercise. The Option covered hereby may not be exercised in any manner or at any time if the issuance of Shares
upon the exercise of the Option or the method of payment of consideration for such Shares would constitute a violation of any applicable federal or state securities or
other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve
Board. The Participant agrees that if any of the Shares acquired by exercise of the Option granted hereunder are registered under the Securities Act, no public offering
(otherwise than on a national securities exchange, as defined in the Exchange Act) of any Shares acquired by exercise of the Option will be made by the Participant or
by any successor under circumstances such that the Participant or such successor may be deemed an underwriter, as defined in the Securities Act.
7. Withholding Taxes. No later than the date as of which an amount first becomes includible in the gross income of the Participant for federal income tax
purposes with respect to the Option, the Participant shall pay to the Company or make arrangements satisfactory to the Committee regarding the payment of, any
federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. If approved by the Committee in its sole discretion, the
minimum required withholding obligations may be settled with Shares, including without limitation Shares otherwise delivered upon exercise of the Option. The
obligations of the Company under the Plan and this Option Agreement shall be conditional on such payment, and the Company shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment otherwise due to the Participant.
8. Applicability of the Plan. The Options and the Shares that may be purchased by exercise of the Options are subject to all provisions of the Plan and all
determinations of the Committee made in accordance with the terms of the Plan. By executing this Option Agreement, the Participant expressly acknowledges
(i) receipt of the Plan and any current Plan prospectus and (ii) the applicability of all provisions of the Plan to the Option. In the event of any inconsistency between this
Option Agreement and the Plan, the Plan shall control.
2
9. General Termination of Employment. This Section 9 sets forth the normal treatment of a Participant's Options following the date on which the employment
relationship between Participant and the Company (including any subsidiary or parent of the Company) ceases to exist (the "Date of Termination") where such
termination does not result from circumstances such as a reduction in force or downsizing, closing of facilities, termination arising from death or disability or
termination for Cause as described respectively in Sections 10, 11, 12 and 13 below. Notwithstanding any provision of this Section 9 or ensuing Sections 10, 11, 12 and
13 to the contrary, after a Participant's Date of Termination, no Option may be exercised after the end of its full term specified pursuant to Section 1, unless otherwise
determined by the Committee. In addition, the Participant's Options, and the rights and obligations set forth herein, are subject to amendment, adjustment or termination
pursuant to the Plan and/or Section 14:
a) Unvested Options Held on the Date of Termination.
Any unvested Options held by the Participant as of the Date of Termination shall immediately expire.
b) Post-Termination Exercise and Expiration. The deadline for Participant's exercise of any vested Options held by the Participant as of the Date of
Termination shall be 30 days after the Date of Termination (the "Exercise Deadline"). Any vested but unexercised Options not exercised on or before the Exercise
Deadline shall immediately expire.
10. Economic Termination. In the event that a Participant's Employment terminates as a result of a reduction in force or downsizing related to plant or facility
closings, technology changes, reorganizations within the Company or a subsidiary of the Company, as applicable, or adverse economic or business conditions then:
a) Unvested Options Held on the Date of Termination. Any unvested Options held by the Participant as of the Date of Termination that are scheduled to vest on
or before the first anniversary of the Date of Termination shall vest immediately. Any other unvested Options held by the Participant on the Date of Termination shall
immediately expire.
b) Post-Termination Exercise and Expiration. The Exercise Deadline for Participant's exercise of any vested Options held by the Participant as of the Date of
Termination shall be 30 days after the Date of Termination. Any vested but unexercised Options not exercised on or before the Exercise Deadline shall immediately
expire.
11. Participant's Retirement or Becoming a Franchisee. The Company has specified criteria for classification as a "Retiree" for purposes of certain
compensation plans which include a requirement that an employee shall have achieved the combined Age and Years of Service (as those terms are defined below) of at
least 70. In this Section 11, the term "Age" of a Participant means (as of a particular date of determination), the Participant's age on that date in whole years and any
fractions thereof, and the term "Years of Service" means the number of years and fractions thereof during the period beginning on a Participant's most recent
commencement of employment with the Company or a subsidiary or parent of the Company and ending on such Participant's Date of Termination. In the event that a
Participant meeting the Age and Years of Service criteria for classification as a Retiree retires or if a Participant becomes a franchisee of the Company (or of a
subsidiary of the Company whose financial results are consolidated with those of the Company), then provided such Participant gave the Chief Executive Officer of the
Company or his or her designee at least six months prior written notice of retirement and additionally agreed for a period of two years after such retirement or
acquisition of a franchise not to engage in any "competitive activity" with the Company (as determined from time to time by the Committee), the following special
provisions shall apply:
a) Unvested Options Held on the Date of Termination. Any unvested Options held by the Participant as of the Date of Termination that are scheduled to vest on
or before the third anniversary of the Date of Termination shall vest immediately. Any other unvested Options held by the Participant as of the Date of Termination
shall immediately expire.
3
b) Post-Termination Exercise and Expiration. The Exercise Deadline for the Participant's vested Options shall be the third anniversary of
the Date of Termination. Any unexercised Options held by the Participant shall expire immediately after the Exercise Deadline.
12. Death or Disability. In the event that a Participant's Employment is terminated by reason of death or disability (for purposes of this Agreement, "disability"
shall mean a Participant's medically diagnosed permanent physical or mental inability to perform his or her job duties), the following shall apply:
a) Unvested Options Held on the Date of Termination.
Any unvested Options held by the Participant as of the Date of Termination shall immediately vest.
b) Post-Termination Exercise and Expiration. The Exercise Deadline for any Options held by the Participant (or his or her beneficiaries or estate, in the case of
death) on the Date of Termination shall be the third anniversary of the Date of Termination. Any unexercised Options held by the Participant (or his or her beneficiaries
or estate, in the case of death) shall expire immediately after the Exercise Deadline.
13. Termination For Cause. In the event that a Participant's Employment is terminated for Cause (as defined in the Plan), any Options held by such Participant
on the Date of Termination, whether vested or unvested, shall immediately expire.
14. Modification; Waiver. Except as provided in the Plan or this Option Agreement, no provision of this Agreement may be amended, modified, or waived
unless such amendment or modification is agreed to in writing and signed by the Participant and by a duly authorized officer of the Company, and such waiver is set
forth in writing and signed by the party to be charged, provided that any change that is advantageous to Participant may be made by the Committee without Participant's
consent or written signature or acknowledgement. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent
time. Participant acknowledges and agrees that the Committee has the right to amend an outstanding Option in whole or in part from time-to-time if the Committee
believes, in its sole and absolute discretion, that such amendment is required or appropriate in order to conform the Option to, or otherwise satisfy any legal requirement
(including without limitation the provisions of Section 409A of the Code). Such amendments may be made retroactively or prospectively and without the approval or
consent of the Participant to the extent permitted by applicable law, provided that the Committee shall not have any such authority to the extent that the grant or
exercise of such authority would cause any tax to become due under Section 409A of the Code.
15. Notices. Except as the Committee may otherwise prescribe or allow in connection with communications procedures developed in coordination with any
third party administrator engaged by the Company, all notices, including notices of exercise, requests, demands or other communications required or permitted with
respect to the Plan, shall be in writing addressed or delivered to the parties. Such communications shall be deemed to have been duly given to any party when delivered
by hand, by messenger, by a nationally recognized overnight delivery company, by facsimile, or by first-class mail, postage prepaid and return receipt requested, in each
case to the applicable addresses set forth below:
If to the Participant:
to the Participant's most recent address on the records of the Company
If to the Company:
Chipotle Mexican Grill, Inc.
1543 Wazee
Denver, CO 80202
Attn: Human Resources Executive Director
Facsimile: 303-222-2500
(or to such other address as the party in question shall from time to time designate by written notice to the other parties).
4
16. Governing Law. Except to the extent that provisions of the Plan are governed by applicable provisions of the Code or other substantive provisions of
federal law, the Plan and all Options made and actions taken thereunder shall be governed by and construed and enforced in accordance with the laws of the State of
Colorado without regard to the principles of conflicts of law thereof.
CHIPOTLE MEXICAN GRILL, INC.
By:
[NAME OF PARTICIPANT]
5
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Exhibit 10.6
CHIPOTLE MEXICAN GRILL, INC.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
Dated as of
, 2006
TABLE OF CONTENTS
Page
1.
DEFINITIONS
1
DEMAND REGISTRATION
3
2.1
Requests for Registration
3
2.2
Continued Effectiveness
4
2.3
Preemption
4
2.4
Restrictions
5
2.5
Payment of Expenses for Demand Registration
5
2.6
Selection of Underwriters
5
2.
3.
PIGGYBACK REGISTRATION
6
3.1
Right to Piggyback
6
3.2
Priority on Primary Registrations
6
3.3
Priority on Secondary Registrations
6
3.4
Other Registrations
6
3.5
Selection of Underwriters
7
3.6
Limitations on Registrations
7
3.7
No Effect on Demand Registrations
7
4.
REGISTRATION PROCEDURES
7
5.
REGISTRATION EXPENSES
10
HOLDBACK AGREEMENTS
10
6.1
10
6.
Investors' Agreements
6.2
Company's Agreements
11
7.
OTHER AGREEMENTS
11
INDEMNIFICATION AND CONTRIBUTION
12
8.1
Indemnification
12
8.2
Contribution
13
8.3
Procedures
13
8.4
Survival
14
8.
9.
COMPLIANCE WITH RULE 144
14
MISCELLANEOUS
14
10.1
No Inconsistent Agreements
14
10.2
Authority; Enforceability
14
10.3
Adjustments Affecting Registrable Shares
15
10.
i
10.4
Other Registration Rights
15
10.5
Amendments and Waivers
15
10.6
Successors, Assigns and Transferees
15
10.7
Term
15
10.8
Severability
16
10.9
Remedies
16
10.10
Descriptive Headings
16
10.11
Notices
16
10.12
Governing Law
16
10.13
Final Agreement
16
Execution in Counterparts
16
10.14
SCHEDULE:
Schedule 1
Investors
ii
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Amended and Restated Registration Rights Agreement (this "Agreement"), dated as of
, 2006, by and among Chipotle Mexican Grill, Inc., a Delaware
corporation (together with its successors, the " Company "), McDonald's Ventures, LLC, a Delaware corporation (together with its successors, " McDonald's "), and the
parties set forth on Schedule 1 attached hereto (together with their respective successors, the " Individual Shareholders ," and, together with McDonald's, the " Investors
").
RECITALS
WHEREAS, the Company has filed a Registration Statement (as defined below) on Form S-1 under the Securities Act (as defined below) with respect to an initial
public offering of shares of the Company's class A common stock, $0.01 par value per share (the " Common Stock "), by the Company and McDonald's (the " Initial
Public Offering ");
WHEREAS, the Company entered into a Registration Rights Agreement, dated as of March 2, 1998 (the "Registration Rights Agreement"), to formalize certain
registration rights with respect to its Series B Convertible Preferred Stock, $0.01 par value per share (the " Series B Preferred Stock ");
WHEREAS, in connection with the Initial Public Offering, each share of the outstanding Series B Preferred Stock will be reclassified automatically into one-third
of one share of the Company's class B common stock, $0.01 par value per share (the " Class B Common Stock "); and
WHEREAS, the parties desire to amend and restate the Registration Rights Agreement to set forth certain registration rights applicable to the Registrable Shares
(as defined below) held from time to time by the Investors, and the Company desires to indemnify each of the Investors against certain liabilities to which they may
become subject as a result of their investment in the Company;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and upon the terms and subject to the conditions hereof, the parties hereto hereby agree as follows:
1.
Definitions.
The following terms shall have the following meanings when used in this Agreement.
"Adverse Disclosure" means public disclosure of material non-public information that, in the Board of Directors' good faith judgment, after consultation with
independent outside counsel to the Company, (i) would be required to be made in any Registration Statement the Company files with the Commission or otherwise
designates as a Registration Statement for the offer and sale of Registrable Shares by the Investors from time to time, so that such Registration Statement would not be
materially misleading; (ii) would not be required to be made at such time but for the filing or designation of such Registration Statement; and (iii) the Company has a
bona fide business purpose for not disclosing publicly.
"Affiliate" has the meaning specified in Rule 12b-2 under the Exchange Act. The term "Affiliated" has a correlative meaning.
"Agreement" has the meaning set forth in the Preamble.
"Board of Directors" means the board of directors of the Company.
"Claim" has the meaning set forth in Section 8.2(b).
"Class B Common Stock" has the meaning set forth in the Recitals.
"Commission" means the U.S. Securities and Exchange Commission, or any successor governmental agency or authority thereto.
"Common Stock" has the meaning set forth in the Recitals.
"Company" has the meaning set forth in the Preamble.
"Demand Registration" has the meaning set forth in Section 2.1(b).
"Demand Suspension" has the meaning set forth in Section 2.4.
"Effectiveness Date" means the date on which McDonald's is no longer subject to any underwriters' lock-up or other contractual restriction in connection with the
Initial Public Offering.
"Equity Securities" means the Common Stock and the Class B Common Stock and any other rights to subscribe for or to purchase, or any options for the purchase
of, Common Stock, any stock or security convertible into or exchangeable or exercisable for Common Stock or any stock, security or interest in the Company whether
or not convertible into or exchangeable or exercisable for Common Stock.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"Free Writing Prospectus" means a free writing prospectus, as defined in Rule 405 under the Securities Act.
"Group" has the meaning set forth in Rule 13d-5 under the Exchange Act.
"Indemnified Company Parties" has the meaning set forth in Section 8.1(b).
"Indemnified Parties" has the meaning set forth in Section 8.1(a).
"Individual Shareholders" has the meaning set forth in the Preamble.
"Initial Public Offering" has the meaning set forth in the Recitals.
"Investors" has the meaning set forth in the Preamble.
"Issuer Free Writing Prospectus" means an issuer free writing prospectus, as defined in Rule 433 under the Securities Act.
"Long-Form Registration" has the meaning set forth in Section 2.1(a).
"Losses" has the meaning set forth in Section 8.1(a).
"McDonald's" has the meaning set forth in the Preamble.
"Notice of Demand" has the meaning set forth in Section 2.1(b).
"Permitted Free Writing Prospectus" has the meaning set forth in Section 7(a).
"Person" means a natural person, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization or other entity, or a governmental entity or any department, agency or political subdivision thereof.
"Piggyback Registration" has the meaning set forth in Section 3.1.
"Preemption Notice" has the meaning set forth in Section 2.3(a).
"Prospectus" means the prospectus included in the Registration Statement at each such time as such Registration Statement is filed with the Commission and at the
time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereof, including
post-effective amendments, and all material incorporated by reference into such Prospectus.
"Registrable Shares" means (i) the shares of Common Stock beneficially owned by the Investors on the date hereof; (ii) shares of Common Stock issued or
issuable upon conversion of the Class B Common Stock; and (iii) any other shares of Common Stock issued or issuable as a distribution with respect to or in exchange
or replacement for or exercise of any shares referred to in clauses (i) and (ii).
2
Registrable Shares shall cease to be such when (i) a Registration Statement with respect to the sale thereof shall have become effective under the Securities Act and
such securities shall have been disposed of in accordance with such Registration Statement; (ii) they shall have been sold as permitted by Rule 144 (or any successor
provision) under the Securities Act; (iii) they shall have been otherwise transferred and subsequent public distribution of them shall not require registration of such
distribution under the Securities Act; or (iv) they shall have ceased to be outstanding. For purposes of this Agreement, a Person shall be deemed to be a holder of
Registrable Shares whenever such Person has the then-existing right to acquire such Registrable Shares (by conversion or otherwise), whether or not such acquisition
actually has been effected.
"Registration Expenses" has the meaning set forth in Section 5.
"Registration Period" has the meaning set forth in Section 2.2.
"Registration Rights Agreement" has the meaning set forth in the Recitals.
"Registration Statement" means a registration statement of the Company, concerning the sale of its securities to the public, on an appropriate form under the
Securities Act, including the Prospectus included therein, all amendments thereof and supplements thereto (including post-effective amendments) and all exhibits and
all material incorporated by reference therein.
"Securities Act" means the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
"Securities Laws" means the Securities Act and the Exchange Act, and the rules and regulations promulgated thereunder, and state and local "blue sky" securities
laws.
"Series B Preferred Stock" has the meaning set forth in the Recitals.
"Short-Form Registrations" has the meaning set forth in Section 2.1(a).
2.
Demand Registration.
2.1 Requests for Registration. (a) Subject to the terms of this Agreement, McDonald's may at any time after the Effectiveness Date and once in each nine-month
period after the Effectiveness Date, request registration by the Company under the Securities Act of all or part of its Registrable Shares on Form S-1 or any similar
long-form registration statement (" Long-Form Registration ") for a public offering, so long as McDonald's beneficially owns at least 5% of the vote represented by the
Equity Securities at the time of such request. In addition, McDonald's shall be entitled to request an unlimited number of registrations under the Securities Act of all or
part of its Registrable Shares on Form S-3 or any similar short-form registration statement (" Short-Form Registration ") as described below; provided , however , that
the aggregate offering price of the Registrable Shares requested to be registered in any Long-Form Registration or Short-Form Registration must reasonably be expected
to equal at least $2,000,000.
(b) Any Long-Form Registration and Short-Form Registration requested pursuant to subsection (a) above is referred to herein as a " Demand Registration ." Any
request for a Demand Registration (each, a " Notice of Demand ") shall specify (i) the amount of Registrable Shares proposed to be registered; and (ii) the intended
method or methods and plan of disposition thereof, including whether such requested registration is to involve an underwritten offering. Within 45 days of a Notice of
Demand, the Company shall file with the Commission, or otherwise designate an existing filing as, a Registration Statement relating to such Notice of Demand for the
offer and sale of the Registrable Shares by the Investors from time to time in accordance with the method or methods and plan of disposition elected by such Investors
and set forth or to be set forth in such Registration Statement and, thereafter, shall (i) use its reasonable best efforts to cause such Registration Statement promptly to be
declared effective under (A) the Securities Act; and (B) the "Blue Sky" laws of such jurisdictions as any seller of Registrable Shares being registered under such
Registration Statement or any underwriter, if any, reasonably requests; or (ii) otherwise make available for use by Investors a previously filed effective Registration
Statement for the offer and sale of the Registrable Shares.
3
(c) Subject to the terms and conditions hereof, each Demand Registration shall register the offer and sale of Registrable Shares for all cash consideration and shall
be Short-Form Registrations whenever the Company is eligible to use Form S-3, unless McDonald's specifically requests a Long-Form Registration. It is agreed that at
any time when the Company is eligible to file a Registration Statement on Form S-3 (or any successor form), McDonald's may request that the Company file a
Registration Statement pursuant to Rule 415 under the Securities Act to permit the offering of the Registrable Shares on a delayed or continuous basis. Once the
Company has become subject to the reporting requirements of the Exchange Act, the Company shall use its reasonable and best efforts to make Short-Form
Registrations available for the sale of Registrable Shares.
2.2 Continued Effectiveness. The Company shall use its reasonable best efforts to keep any Registration Statement filed or designated pursuant to
Section 2.1(b) continuously effective under the Securities Act in order to permit the Prospectus forming a part thereof to be usable by sellers of the Registrable Shares
covered thereby until the earlier of (i) the date as of which all Registrable Shares have been sold pursuant to the Registration Statement or another registration statement
filed under the Securities Act (but in no event prior to the applicable period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder); and (ii) the date
as of which each of such sellers is permitted to sell its Registrable Shares without registration pursuant to Rule 144 under the Securities Act without volume limitation
or other restrictions on transfer thereunder (such period of effectiveness, the " Registration Period "). Subject to Section 2.4, the Company shall not be deemed to have
used its reasonable best efforts to keep the Registration Statement effective during the Registration Period if the Company voluntarily takes any action or omits to take
any action that would result in sellers of the Registrable Shares covered thereby not being able to offer and sell any Registrable Shares pursuant to such Registration
Statement during the Registration Period, unless such action or omission is required by applicable law.
2.3 Preemption. (a) If, not more than 30 days prior to receipt of a Notice of Demand, the Company shall have (i) circulated to prospective underwriters and
their counsel a draft of a Registration Statement for a primary offering of Common Stock on behalf of the Company; (ii) solicited bids for a primary offering of shares
of Common Stock; or (iii) otherwise reached an understanding with an underwriter with respect to a primary offering of shares of Common Stock, the Company may
preempt such Demand Registration with such primary offering by delivering written notice of such intention to pursue a primary offering (the " Preemption Notice ") to
McDonald's within five days after the Company has received the Notice of Demand; provided , however , that the Company shall not be permitted to preempt a Demand
Registration (i) more than once during any 12-month period; or (ii) for a period exceeding 30 days following the date of the Preemption Notice on any one occasion,
unless a registration statement relating to a primary offering of securities shall have become effective during such 30-day period, in which event such period may be
extended for up to an additional 10 days.
(b) If the Company preempts a Demand Registration, in the ensuing registration of the primary offering of Common Stock, the Company shall (i) as soon as
practicable (but in no event less than 30 days prior to the proposed date of filing or designation of the related Registration Statement), give written notice to the
Investors of its intention to make such primary offering and of their right to register their Registrable Shares in connection therewith; and (ii) register under such
Registration Statement all Registrable Shares (in accordance with the provisions set forth in Section 3.2 below) with respect to which the Company shall have received
written requests therefor within 15 days after delivery of the Company's written notice. If, at any time after giving written notice of its intention to register a primary
offering of Common Stock and prior to the effective date of the related Registration Statement, the Company shall determine for any reason not to register or to delay
registration of such
4
primary offering, the Company shall give prompt written notice of such determination to each Investor; and (x) in the case of a determination not
to register, shall be relieved of its obligation to register any Registrable Shares in connection with such registration, but without prejudice to the
rights of McDonald's pursuant to Section 2.1; and (y) in the case of a determination to delay the registration, shall be permitted to delay
registering any Registrable Shares, for the same period as the delay in registering such primary offering.
(c) Upon the Company's preemption of a registration requested pursuant to Section 2.1, such requested registration shall not be considered a Demand
Registration.
2.4 Restrictions. The Company shall not be obligated to effect any Long-Form Registration within four months after the effective date of a previous
Long-Form Registration. If the filing, designation, initial effectiveness or continued use of a Registration Statement at any time would require the Company to make an
Adverse Disclosure, the Company may, upon giving at least 10 days' prior written notice of such action to McDonald's, delay the filing, designation or initial
effectiveness of, or suspend use of, the Registration Statement (a " Demand Suspension "); provided , however , that the Company shall not be permitted to exercise a
Demand Suspension (i) more than once during any 12-month period; or (ii) for a period exceeding 30 days on any one occasion. In the case of a Demand Suspension,
McDonald's agrees to suspend use of the applicable Prospectus and any Free Writing Prospectuses in connection with any sale or purchase, or offer to sell or purchase,
Registrable Shares, upon receipt of the notice referred to above. The Company shall immediately notify McDonald's upon the termination of any Demand Suspension,
amend or supplement the Prospectus (including by means of an Issuer Free Writing Prospectus), if necessary, so it does not contain any untrue statement or omission
and furnish to McDonald's such numbers of copies of the Prospectus and any applicable Issuer Free Writing Prospectus as so amended or supplemented as McDonald's
may reasonably request. The Company agrees, if necessary, to amend or supplement the Registration Statement, if required by the registration form used by the
Company, by the instructions applicable to such registration form, by the Securities Act or the rules or regulations promulgated thereunder, or as may reasonably be
requested by McDonald's.
2.5 Payment of Expenses for Demand Registration. The Company shall pay all Registration Expenses (as defined in Section 5 below) for the first two
Long-Form Registrations and unlimited Short-Form Registrations. A registration shall count as one of the Company-paid Long-Form Registrations if and only if a
Registration Statement with respect thereto has become effective under the Securities Act and remains effective during the Registration Period; provided , however ,
that in any event the Company shall pay all Registration Expenses in connection with any Long-Form Registration initiated prior to the completion of McDonald's
second Long-Form Registration that is withdrawn by the Company or otherwise fails to be declared effective. The Company and McDonald's shall share equally the
Registration Expenses of any Long-Form Registration other than the first two Long-Form Registrations.
2.6 Selection of Underwriters. In connection with any Demand Registration, McDonald's shall have the sole right to select the nationally recognized investment
banker(s) and manager(s) to administer the offering, subject to the Company's approval, which shall not be unreasonably withheld or delayed.
5
3.
Piggyback Registration.
3.1 Right to Piggyback. Whenever the Company proposes to register any of its Common Stock under the Securities Act (other than pursuant to a Demand
Registration), including any registration pursuant to Section 2.3, or McDonald's requests the Company to register any of its Common Stock under the Securities Act
pursuant to a Demand Registration, the Company shall (i) as soon as practicable (but in no event less than 25 days prior to the proposed date of filing or designation of
the related Registration Statement), give written notice to the Investors (other than McDonald's, if following a request by McDonald's), as applicable, of its intention to
effect such a registration; and (ii) shall register under such Registration Statement all Registrable Shares (in accordance with the priorities set forth in Sections 3.2 and
3.3 below) with respect to which the Company shall have received written requests therefor within 15 days after delivery of the Company's notice (each such
registration, a " Piggyback Registration ").
3.2 Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company and the managing
underwriters advise the Board of Directors in writing that in their opinion the total number of shares of Common Stock (including the Registrable Shares) requested to
be included in the registration is such as would create a substantial risk of adversely affecting the ability of the underwriters to effect the underwritten offering, then the
Company shall include in such registration only such number of shares of Common Stock, if any, which the Company is so advised can be sold in such offering without
materially and adversely affecting the ability of the underwriters to execute the offering. The Company shall include in such registration (i) first, 100% of the Equity
Securities that the Company proposes to sell; (ii) second, if McDonald's participates in such registration, 100% of the Registrable Shares that McDonald's proposes to
sell; (iii) third, only if all the Registrable Shares referred to in clause (ii) have been included, the number of Registrable Shares requested to be included therein pro rata
among the remaining Investors on the basis of the respective number of Registrable Shares as to which registration has been requested; and (iv) fourth, only if all of the
Registrable Shares referred to in clauses (ii) and (iii) have been included, any other securities requested to be included therein.
3.3 Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of McDonald's and the managing
underwriters advise the Board of Directors in writing that in their opinion the total number of shares of Common Stock (including the Registrable Shares) requested to
be included in the registration is such as would create a substantial risk of adversely affecting the ability of the underwriters to effect the underwritten offering, then the
Company shall include in such registration such number of shares of Common Stock which the Company is so advised can be sold in such offering. The Company shall
include in such registration (i) first, 100% of the Registrable Shares that McDonald's proposes to sell; (ii) second, only if all the Registrable Shares referred to in
clause (i) have been included, the number of Registrable Shares requested to be included therein pro rata among the remaining Investors on the basis of the respective
number of Registrable Shares as to which registration has been requested; and (iii) third, only if all of the Registrable Shares referred to in clauses (i) and (ii) have been
included, any other securities requested to be included therein.
3.4 Other Registrations. If the Company has previously filed or designated a registration statement with respect to Registrable Shares pursuant to
Section 2.1(b) or pursuant to this Section 3, and if such previous registration has not been withdrawn or abandoned, the Company shall not file, designate or cause to be
effected any other registration of any of its Equity Securities under the Securities Act (except on Form S-4 or S-8 or any successor form to such forms or part of any
registration of securities for offering and sale to employees or directors of the Company pursuant to any employee stock plan or other employee benefit plan
arrangement), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least 120 days has elapsed from the effective
date of such previous registration.
6
3.5 Selection of Underwriters. If a Piggyback Registration involves an underwritten primary registration on behalf of the Company, the managing
underwriter or underwriters thereof shall be selected by the Company, subject to the approval of the holders of at least 50% by number of the Registrable
Shares requested to be registered, which approval shall not be unreasonably withheld or delayed.
3.6 Limitations on Registrations. The Company shall not register any of its securities for sale for its own account (other than securities issued to employees of
the Company under an employee benefit plan or securities issued to effect a business combination pursuant to Rule 145 promulgated under the Securities Act and other
than a registration on Form S-3) except as a firm commitment underwriting.
3.7 No Effect on Demand Registrations. No registration or designation of Registrable Shares effected pursuant to a request under this Section 3 shall be deemed
to have been effected pursuant to Section 2 or shall relieve the Company of its obligations under Section 2.
4. Registration Procedures. Whenever McDonald's shall have made a Notice of Demand, the Company shall use all reasonable and diligent efforts to effect the
registration and sale of such Registrable Shares in accordance with the intended method or methods of disposition thereof and, pursuant thereto, the Company shall as
expeditiously as possible:
(a) within 30 days of receipt of such Notice of Demand, prepare and file with the Commission, or designate an existing filing as, a Registration Statement with
respect to such Registrable Shares and use its reasonable best efforts to cause such Registration Statement to become effective or otherwise make available for use by
the sellers of Registrable Shares a previously filed effective Registration Statement; provided that before filing or designating a Registration Statement or Prospectus,
or filing any amendment thereof or supplement thereto, the Company shall furnish copies of all such documents proposed to be filed or designated to counsel for the
sellers of Registrable Shares;
(b) prepare and file with the Commission such pre- and post-effective amendments of and supplements to such Registration Statement and the Prospectus(es)
used in connection therewith as may be (i) reasonably requested by McDonald's; (ii) reasonably requested by any seller of Registrable Shares (to the extent such request
relates to information relating to such seller); or (iii) necessary to keep such Registration Statement effective for the Registration Period, and comply with the provisions
of the applicable Securities Laws with respect to the sale or other disposition of all securities covered by such Registration Statement during such period in accordance
with the intended method or methods of disposition by the sellers thereof set forth in such Registration Statement;
(c) furnish to the sellers of Registrable Shares or counsel for the sellers such number of copies of such Registration Statement, the Prospectus(es) included in such
Registration Statement (including each preliminary Prospectus), any other prospectus filed under Rule 424 promulgated under the Securities Act relating to the sellers'
Registrable Shares, any Issuer Free Writing Prospectuses, and each amendment of and supplement to any of the foregoing, in conformity with the requirements of the
Securities Act, and such other documents as any seller may reasonably request in order to facilitate the disposition of its Registrable Shares under such Registration
Statement;
(d) use its reasonable and diligent efforts to register or qualify such Registrable Shares under the securities or blue sky laws of such jurisdictions as any seller of
Registrable Shares reasonably requests and keep such registration or qualification in effect for so long as any Registration Statement remains in effect, and do any and
all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable
Shares owned by it; provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required
to qualify but for this subparagraph; (ii) subject itself to taxation in any such jurisdiction; or (iii) consent to general service of process in any such jurisdiction;
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(e) notify each seller of Registrable Shares, at any time when a Prospectus relating thereto is required to be delivered under the applicable Securities
Laws (including in circumstances where such requirement may be satisfied pursuant to Rule 172 under the Securities Act) and when any Issuer Free Writing
Prospectus includes information that may conflict with the information contained in the Registration Statement (including any document incorporated by
reference therein that has not been superseded or modified), of the happening of any event as a result of which the Prospectus included in such Registration
Statement contains an untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, and, at the request of any such seller, the Company shall promptly prepare and
furnish to each such seller a reasonable number of copies of an amendment of or supplement to such Prospectus or an Issuer Free Writing Prospectus so that,
as thereafter delivered to the purchasers of such Registrable Shares, such Prospectus shall not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not
misleading; provided that upon receipt of any notice delivered in accordance with the provisions of this Section 4(e), each seller of Registrable Shares shall
be deemed to have agreed that such seller shall forthwith discontinue such disposition of Registrable Shares pursuant to such Registration Statement and
Prospectus until the receipt of the copies of the amended or supplemented Prospectus or Issuer Free Writing Prospectus contemplated by this Section 4(e)
and, if so directed by the Company, shall deliver to the Company all copies, other than permanent file copies, then in its possession of the Prospectus relating
to such Registrable Shares current at the time of receipt of such notice;
(f) cause all such Registrable Shares to be listed, on or prior to the effective date of such Registration Statement, on each securities exchange or national market
on which similar securities issued by the Company are then listed;
(g) provide a transfer agent and registrar for all such Registrable Shares not later than the effective date of such Registration Statement;
(h) enter into such customary agreements (including underwriting agreements) and take all such other customary actions as the underwriters, if any, and their
counsel reasonably request in order to expedite or facilitate the disposition of such Registrable Shares (including, but not limited to, effecting a stock split or a
combination of shares) and, to the extent reasonably requested by the managing underwriters of any underwritten offering, send appropriate officers of the Company to
attend "road shows" scheduled in connection with any such registration;
(i) make available for inspection by any seller of Registrable Shares, any underwriter participating in any sale or other disposition pursuant to such Registration
Statement, and any legal counsel, accountant or other agent retained by McDonald's or any underwriter, all financial and other records, pertinent corporate documents
and properties of the Company, and cause the Company's officers, directors, employees and independent registered public accountants (subject to any requesting party
executing any document reasonably requested by such accountants to furnish such information) to supply all information reasonably requested by any such seller,
underwriter, counsel, accountant or agent in connection with such Registration Statement (including the opportunity to discuss the business of the Company with its
officers and the independent registered public accountants who have certified its financial statements) as shall be necessary, in the opinion of their respective counsel, to
conduct a reasonable investigation within the meaning of the Securities Act; and give the sellers and their counsel, accountant or agent and each underwriter the
opportunity to participate in the preparation of such Registration Statement, each Prospectus included therein or each Prospectus filed with the Commission in
connection therewith;
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(j) promptly notify the sellers of Registrable Shares and each underwriter, if any:
(i) when such Registration Statement or any Prospectus or Issuer Free Writing Prospectus used in connection therewith has been filed and, with respect to such
Registration Statement or any post-effective amendment thereof, when the same has become effective;
(ii) of any written comments from the Commission with respect to any filing referred to in clause (i) and of any written request by the Commission for
amendments of or supplements to such Registration Statement, Prospectus or Issuer Free Writing Prospectus;
(iii) of the notification to the Company by the Commission or any other regulatory authority of its initiation of any proceeding with respect to, or of the issuance
by the Commission or any other regulatory authority of, any stop order or notice suspending the effectiveness of such Registration Statement; and
(iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Shares for sale under the applicable
securities or blue sky laws of any jurisdiction;
and, in the case of clauses (ii), (iii) and (iv), promptly use all reasonable and diligent efforts to, respectively, (A) respond satisfactorily to any such comments and to file
promptly any necessary amendments or supplements; (B) prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; and
(C) obtain the withdrawal of any such suspension of qualification;
(k) upon request, furnish to each seller of Registrable Shares a signed counterpart, addressed to such seller (and each underwriter, if any) of:
(i) an opinion of counsel to the Company, dated the effective date of such Registration Statement (and, if such registration includes an underwritten public
offering, dated the date of the closing under the underwriting agreement), reasonably satisfactory in form and substance to such seller (and such underwriter); and
(ii) a "comfort" letter, dated the effective date of such Registration Statement (and, if such registration includes an underwritten public offering, dated the date of
the closing under the underwriting agreement), signed by the independent registered public accountants who have certified the Company's financial statements included
in such Registration Statement, provided that such seller of Registrable Shares provides such accountants with such certificates as are reasonably and customarily
requested by such accountants;
in each case covering substantially the same matters with respect to such Registration Statement (and the Prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such financial statements and other financial matters, as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities;
(l) otherwise use all reasonable and diligent efforts to comply with all applicable Securities Laws and make available to its security holders, as soon as
reasonably practicable an earning statement satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder;
(m) cooperate with each seller, underwriter or agent participating in the disposition of such Registrable Shares and their respective counsel in connection with any
filings required to be made with the National Association of Securities Dealers, Inc.; and
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(n) at least 48 hours prior to the filing or designation of any Registration Statement, the filing of any Prospectus or Issuer Free Writing Prospectus or
the filing of any amendment of or supplement to such Registration Statement, Prospectus or Issuer Free Writing Prospectus, furnish a copy thereof to the
sellers of Registrable Shares or their legal counsel and refrain from filing or designating, as the case may be, any such Registration Statement, Prospectus,
Issuer Free Writing Prospectus or amendment thereof or supplement thereto to which such counsel shall have reasonably objected on the grounds that such
document does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, unless, in the case of
an amendment or supplement, in the opinion of counsel for the Company the filing or designation of such amendment or supplement is reasonably necessary
to protect the Company from any liabilities under any applicable federal or state law and such filing or designation will not violate applicable laws.
5. Registration Expenses. Except as provided in Section 2.5 hereof, all reasonable expenses incident to the Company's performance of or compliance with this
Agreement, including, but not limited to, (i) all registration, filing and listing fees and all fees of the National Association of Securities Dealers, Inc.; (ii) all registration,
filing, qualification and other fees and expenses of complying with securities or blue sky laws; (iii) all word processing, duplicating, printing, messenger and delivery
expenses; (iv) the reasonable fees and disbursements of counsel for the Company and of its independent registered public accountants, including, without limitation, the
expenses of any "comfort letters" required by or incident to such performance and compliance; (v) the reasonable fees and disbursements of one legal counsel selected
by McDonald's (there being no obligation of the Company to pay or reimburse any fees of any separate counsel for any other Investor); (vi) any reasonable fees and
disbursements of underwriters customarily paid by issuers or sellers of securities (but excluding underwriting discounts and commissions and transfer taxes, if any,
relating to securities being sold by any Investor or that are otherwise not being sold or disposed of by the Company), including, without limitation, reasonable fees and
disbursements of counsel for the underwriter(s) in connection with blue sky qualifications of the Registrable Shares and determination of their eligibility for investment
under the laws of such jurisdictions; and (vii) reasonable fees and expenses of other Persons retained or employed by the Company (all such expenses being herein
called " Registration Expenses "), shall be borne by the Company. In addition, the Company shall pay its internal expenses (including, but not limited to, all salaries and
expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any insurance
obtained by the Company against liabilities arising out of the public offering of the Registrable Shares being registered and the expenses and fees for listing the
securities to be registered on each securities exchange.
6.
Holdback Agreements.
6.1 Investors' Agreements. Each Investor agrees not to effect any public sale or distribution of Equity Securities during the period beginning seven days before
and ending 90 days (or such lesser period as may be permitted by the Company or the managing underwriter or underwriters) after the effective date of the Registration
Statement filed or designated in connection with any underwritten public offering, unless the managing underwriter or underwriters thereof shall otherwise agree.
Nothing herein shall prevent an Investor that is a partnership from making a distribution of Registrable Shares to its partners, an Investor that is a limited liability
company from making a distribution of Registrable Shares to its members, an Investor that is a trust from making a distribution of Registrable Shares to its beneficiaries
or an Investor that is a corporation from making a distribution of Registrable Shares to its stockholders, provided that the transferees of such Registrable Shares agree
to be bound by the provisions of this Agreement to the extent the transferor would be so bound.
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6.2 Company's Agreements. The Company agrees not to effect any public sale or distribution of Equity Securities during the period beginning seven
days before and ending 90 days (or such lesser period as may be permitted by the managing underwriter or underwriters) after the effective date of the
Registration Statement filed or designated in connection with any underwritten public offering (or, in the case of an offering on Form S-3, the date of the
closing under the underwriting agreement in connection therewith), unless the managing underwriter or underwriters thereof shall otherwise agree.
Notwithstanding the foregoing, the Company may effect a public sale or distribution of Equity Securities during the periods described above if such sale or
distribution is made pursuant to registrations on Form S-4 or S-8 or any successor form to such forms or as part of any registration of securities for offering
and sale to employees or directors of the Company pursuant to any employee stock plan or other employee benefit plan arrangement. The Company agrees
to use its reasonable best efforts to obtain from each holder of restricted securities of the Company which securities are the same as or similar to the
Registrable Shares being registered, or any restricted securities convertible into or exchangeable or exercisable for any such securities, an agreement not to
effect any public sale or distribution of such securities during any period referred to in this paragraph, except as part of any such underwritten public
offering, if permitted.
7. Other Agreements. (a) Each Investor represents that it has not prepared or had prepared on its behalf or used or referred to, and agrees that it will not prepare
or have prepared on it behalf or use or refer to, any Free Writing Prospectus, and has not distributed and will not distribute any written materials in connection with the
offer or sale of the Common Stock without the prior express written consent of the Company and, in connection with any underwritten offering, the underwriters. Any
such Free Writing Prospectus consented to by the Company and the underwriters, as the case may be, is hereinafter referred to as a " Permitted Free Writing Prospectus
." The Company represents and agrees that it has treated and will treat, as the case may be, each Permitted Free Writing Prospectus as an Issuer Free Writing
Prospectus, including in respect of timely filing with the Commission, legending and record keeping.
(b) If requested by the underwriter(s) for any underwritten offering pursuant to a Demand Registration, the Company shall enter into an underwriting agreement
with such underwriter(s) for such offering, such agreement to contain such representations and warranties by the Company and such other terms as are generally
prevailing in agreements of this type. In any such case, the Company shall allow McDonald's and its counsel to participate in the negotiation of such underwriting
agreement, and approve its terms, such approval not to be unreasonably withheld or delayed. Each of the Investors participating in such registration shall be a party to
such underwriting agreement and may, at its option, require that any or all of the representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriter(s) shall also be made to and for the benefit of such Investors and that any or all of the conditions precedent to the
obligations of such underwriters(s) under such underwriting agreement be conditions precedent to the obligations of such Investors thereunder. Any such Investor shall
not be required to make any representations or warranties to or agreements with the Company other than representations, warranties or agreements regarding such
Investor, such Investor's title to the Registrable Shares, such Investor's intended method or methods of distribution and any other representation required by law. No
Person may participate in any registration hereunder which is underwritten unless such Person (i) agrees to sell its securities on the basis provided in such underwriting
agreement; and (ii) completes and executes all questionnaires, powers of attorney (which may contain customary terms regarding the minimum price of the Registrable
Shares to be sold in the subject offering), custody agreements, indemnities and other documents reasonably required under the terms of such underwriting agreement.
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8.
Indemnification and Contribution.
8.1 Indemnification. (a) The Company agrees to indemnify and hold harmless, to the extent permitted by law, each Investor and, in the case of an underwritten
offering, each underwriter, their respective officers and directors and each Person who controls such Investor or underwriter, as applicable, (within the meaning of the
Securities Act) (collectively, the " Indemnified Parties ") from and against any and all losses, penalties, judgments, suits, costs, claims, damages, liabilities and expenses
(including, but not limited to, reasonable attorney's fees and disbursements but excluding taxes imposed as a result of being a direct or indirect owner of the Common
Stock or realizing income or gain with respect thereto) (collectively, " Losses "), incurred by, imposed upon or asserted against any of the Indemnified Parties as a result
of, relating to or arising out of any untrue or alleged untrue statement of material fact contained in any Registration Statement, Prospectus or preliminary Prospectus,
Issuer Free Writing Prospectus or any amendment thereof or supplement thereto, or any omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as the same are caused by,
contained in or omitted from any information furnished in writing to the Company by such Investor expressly for use therein or by such Investor's failure to deliver a
copy of the Prospectus, Issuer Free Writing Prospectus or any amendment thereof or supplement thereto after the Company has furnished such Investor with a sufficient
number of copies of the same. Unless and until a final and non-appealable judicial determination shall be made that an Indemnified Party is not entitled to
indemnification, the Company shall pay or reimburse each Indemnified Party for all indemnified Losses as they are incurred; provided that if a final and
non-appealable judicial determination shall be made that such Indemnified Party is not entitled to be indemnified for Losses, such Indemnified Party shall repay to the
Company the amount of such Losses for which the Company shall have paid or reimbursed such Indemnified Party.
(b) In connection with any Registration Statement in which an Investor is participating, each such Investor agrees, as a condition of the Company's obligation to
indemnify, to furnish to the Company in writing such information as the Company reasonably requests for use in connection with any such Registration Statement or
Prospectus and shall indemnify and hold harmless, to the extent permitted by law, the Company, its officers and directors and each Person who controls the Company
(within the meaning of the Securities Act) (collectively, the " Indemnified Company Parties ") from and against any and all Losses incurred by, imposed upon or
asserted against any of the Indemnified Company Parties as a result of, relating to or arising out of (i) any untrue or alleged untrue statement of material fact contained
in the Registration Statement, Prospectus or preliminary Prospectus, Issuer Free Writing Prospectus or any amendment thereof or supplement thereto, or any omission
or alleged omission of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were
made, not misleading, but only to the extent that the same are caused by, contained in or omitted from any information furnished in writing to the Company by such
Investor of, if not furnished in writing, which is acknowledged by such Investor in writing to have been contained in or omitted from the information so provided; and
(ii) any Free Writing Prospectus used by such Investor without the prior consent of the Issuer; provided that the obligation to indemnify shall be several, not joint and
several, among the Investors who furnished or failed to furnish the information that resulted in such Losses and the liability of each such Investor shall be in proportion
to and limited in all events to the net proceeds received by such Investor from the sale of Registrable Shares pursuant to such Registration Statement.
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8.2 Contribution.
(a) To the extent the indemnification provided for in Section 8.1 hereof is unavailable to an indemnified Person or insufficient in respect of any Losses referred to
therein, then an indemnifying Person, in lieu of indemnifying such indemnified Person thereunder, shall contribute to the amount paid or payable by such indemnified
Person as a result of such Losses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying Person on the one hand and the
indemnified Person on the other hand; or (ii) if the allocation provided by clause (i) of this Section 8.2(a) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i) in this Section 8.2(a) but also the relative fault of the indemnifying Person on the one hand
and of the indemnified Person on the other hand in connection with the acts, statements or omissions that resulted in such Losses, as well as any other relevant equitable
considerations. In connection with any Registration Statement filed with the Commission by the Company, (x) the relative benefits received by the Company on the one
hand and the Investors on the other hand shall be deemed to be in the same respective proportions as the net proceeds from the offering of securities registered
thereunder (before deducting expenses) received by the Company and the net proceeds from the offering of securities registered thereunder (before deducting expenses)
received by the Investors, bear to the aggregate public offering price of the securities registered thereunder; (y) the relative fault of the Company on the one hand and
the Investors on the other hand shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information supplied by the Company or by the Investors and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or omission; and (z) the Investors' respective obligations to contribute pursuant to this
Section 8.2 are several in proportion to the respective number of shares of securities they sell under any such Registration Statement, and not joint, and the contribution
of each Investor shall be in proportion to and limited in all events to the net proceeds received by such Investor from the sale of Registrable Shares pursuant to such
Registration Statement.
(b) The Company and the Investors agree that it would not be just or equitable if contribution pursuant to this Section 8.2 were determined by pro rata allocation
(even if the Investors were treated as one entity for such purposes) or by any other method of allocation that does not take account of the equitable considerations
referred to in Section 8.2(a) hereof. The amount paid or payable by an indemnified Person as a result of the Losses referred to in Section 8.2(a) shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified Person in connection with investigating or
defending any action or claim for Losses (a " Claim "). Notwithstanding the provisions of this Section 8.2, in connection with any Registration Statement filed by the
Company, none of the Investors shall be required to contribute any amount in excess of the net proceeds from the offering of the securities registered thereunder (before
deducting expenses) received by such Investor under such Registration Statement. No Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The remedies provided
for in this Section 8.2 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified Person at law or in equity.
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8.3 Procedures. Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying Person of any Claim with
respect to which it seeks indemnification; and (ii) unless in such indemnified Person's reasonable judgment a conflict of interest between such indemnified
and indemnifying Persons may exist with respect to such Claim, the indemnifying Person shall have the absolute right, in its sole discretion and expense, to
elect to defend, contest or otherwise protect against any such Claim with legal counsel of its own selection, reasonably satisfactory to the indemnified
Person. The indemnified Person shall have the right, but not the obligation, to participate, at its own expense, in the defense thereof through counsel of its
own choice and shall have the right, but not the obligation, to assert any and all cross-claims or counterclaims it may have. If the indemnifying Person elects
to assume the defense of such Claim, the indemnifying Person shall not be subject to any liability for any settlement made by the indemnified Person without
its consent (but such consent shall not be unreasonably withheld or delayed). An indemnifying Person who is not entitled to, or elects not to, assume the
defense of a Claim shall not be obligated to pay the fees and expenses of more than one counsel for all Persons indemnified by such indemnifying Person
with respect to such Claim, unless in the reasonable judgment of any indemnified Person a conflict of interest may exist between such indemnified Person
and any other of such indemnified Persons with respect to such Claim. The indemnified Persons shall, and shall cause their Affiliates to, at all times
cooperate in all reasonable ways with, make their relevant files and records available for inspection and copying by, and make their employees available or
otherwise render reasonable assistance to, the indemnifying Person (i) in its defense of any Claim; and (ii) its prosecution under the last sentence of this
Section 8.3 of any related claim, cross-complaint, counterclaim or right of subrogation. In the event the indemnifying Person fails timely to defend, contest
or otherwise protect against any such Claim, the indemnified Person shall have the right, but not the obligation, to defend, contest, assert cross-claims or
counterclaims or otherwise protect against the same. The indemnifying Person shall be subrogated to the claims or rights of the indemnified Person as
against any other Persons with respect to any Loss paid by the indemnifying Person under this Section.
8.4 Survival. The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf
of the indemnified Person or any officer, director or controlling Person of such indemnified Person and shall survive the transfer of securities.
9. Compliance With Rule 144. At the request of any Investor who proposes to sell securities in compliance with Rule 144 under the Securities Act, the
Company shall (i) forthwith furnish to such Investor a written statement of compliance with the filing requirements of the Commission as set forth in Rule 144, as such
rule may be amended from time to time; and (ii) make available to the public and such Investor such information as will enable such Investor to make sales pursuant to
Rule 144.
10. Miscellaneous.
10.1 No Inconsistent Agreements. The Company shall not hereafter enter into any agreement with respect to its securities that is inconsistent with the rights
granted to the Investors in this Agreement or otherwise conflicts with the provisions hereof.
10.2 Authority; Enforceability. Each entity and each natural person that is a party hereto has the corporate power and legal capacity, respectively, and each has
the authority to enter into this Agreement and to carry out its obligations hereunder. Each entity that is a party hereto is duly organized and validly existing under the
laws of its jurisdiction of organization, and the execution of this Agreement and the consummation of the transactions contemplated herein have been duly authorized
by all necessary action, and no other act or proceeding, corporate or otherwise, on its part is necessary to authorize the execution of this Agreement or the
consummation of any of the transactions contemplated hereby. This Agreement has been duly executed by each party and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with the terms of this Agreement, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other
laws affecting the rights of creditors generally and to the exercise of judicial discretion in accordance with general principles of equity (whether applied by a court of
law or of equity).
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10.3 Adjustments Affecting Registrable Shares. The Company shall not take any action, or permit any change to occur, with respect to its restated
certificate of incorporation or amended and restated bylaws which would reasonably be expected to adversely affect the ability of Investors to include such
Registrable Shares in a registration undertaken pursuant to this Agreement or which would reasonably be expected to adversely affect the marketability of
such Registrable Shares in any such registration.
10.4 Other Registration Rights. The Company shall not hereafter grant to any Person or Persons the right to request the Company to register any Equity
Securities without the prior express written consent of McDonald's.
10.5 Amendments and Waivers. This Agreement may be amended, supplemented or modified at any time, and any term or condition of the Agreement may be
waived at any time by the party hereto that is entitled to the benefit hereof, in each case by a written instrument duly executed by the Company and (i) in the case of any
such amendment, supplement or modification, McDonald's and the holders of at least 80% of the vote represented by the Registrable Shares held by the remaining
Investors; or (ii) in the case of any such waiver, by the party waiving such term or condition; provided , however , that the provisions of this Agreement may not be
amended, supplemented or modified without the consent of the holders of all the Registrable Shares adversely affected by such amendment, supplement or modification
if such amendment, supplement or modification adversely affects a portion of the Registrable Shares but does not so adversely affect all of the Registrable Shares. Any
amendment, supplement or modification of this Agreement or waiver of any term or condition of this Agreement effected in accordance with this Section 10.5 shall be
binding upon each holder of Registrable Shares. No waiver by any party of any term or condition of this Agreement, in one or more instances, shall be deemed to be or
construed as a waiver of the same term or condition of this Agreement on any future occasion.
10.6 Successors, Assigns and Transferees.
(a) Each party may assign all or a portion of its rights hereunder to any Person to which such party transfers its ownership of all or any of its Registrable Shares;
provided that no such assignment shall be binding upon or obligate the Company to any such assignee unless and until the Company shall have received notice of such
assignment as herein provided and a written agreement of the assignee to be bound by the provisions of this Agreement; and provided , further , that the rights described
under Section 2.1 shall not transfer to any Person unless such Person (i) is an Affiliate of the holder transferring such rights; or (ii) acquires at least 33 1 / 3 % of the
Registrable Shares initially held by McDonald's.
(b) The terms and provisions of this Agreement shall be binding on and inure to the benefit of each of the parties hereto and their respective successors and
permitted assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to confer upon any Person not a party hereto (other than each other
Person entitled to indemnity or contribution under Section 8 hereof) any right, remedy or claim under or by virtue of this Agreement.
10.7 Term. Section 8 hereof shall remain in effect with respect to an Investor so long as such Investor may, in the reasonable judgment of counsel for such
Investor as evidenced by a written opinion to such effect, constitute a "controlling person" with respect to the Company, or be part of a Group that may constitute such a
"controlling person," within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.
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10.8 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, (i) such provision shall
be fully severable; (ii) this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part
hereof; (iii) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance here from; and (iv) in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible.
10.9 Remedies. Any Person having rights under any provision of this Agreement shall be entitled to enforce such rights specifically, to recover damages caused
by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law.
10.10 Descriptive Headings. The headings contained in this Agreement are inserted for convenience of reference only and do not constitute a part of and shall
not affect in any way the meaning or interpretation of this Agreement.
10.11 Notices. Any notice, requests and other communications required or permitted to be sent hereunder must be in writing and shall be deemed to have been
duly given only if (i) delivered personally; (ii) given by facsimile transmission; (iii) delivered by FedEx or other nationally recognized overnight courier service; or
(iv) mailed (first class postage prepaid), certified mail, return receipt requested to the parties at the addresses or facsimile numbers set forth below, or such other address
or facsimile number as any Person designates by written notice to the Company, and shall be deemed to have been duly given upon delivery, if delivered personally,
upon receipt by the sender of a printed facsimile confirmation sheet, if given by facsimile transmission, one business day after delivery to the courier, if delivered by
overnight courier service, or three days after mailing, if mailed:
If to the Company, to:
Chipotle Mexican Grill, Inc.
2546 15th Street
Denver, CO 80211
Attention: Chief Executive Officer
If to the Investors, to the addresses set forth on Schedule 1 hereto.
If to holders of the Registrable Shares other than the Investors, to the addresses set forth on the stock record books of the Company.
10.12
Governing Law.
This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York.
10.13 Final Agreement. This Agreement supersedes and replaces the Registration Rights Agreement in its entirety, constitutes the complete and final
agreement of the parties concerning the matters referred to herein, and supersedes all other prior agreements and understandings among the parties with respect to the
subject matter.
10.14 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one instrument.
[Remainder of page intentionally left blank]
16
The parties hereto have executed this Agreement on the date first set forth above.
CHIPOTLE MEXICAN GRILL, INC.
Name:
Title:
MCDONALD'S VENTURES, LLC
Name:
Title:
Kurt Altman
Michael Baghramian
Albert S. Baldocchi,
as to shares owned jointly with Anne M. Baldocchi and individually
Anne M. Baldocchi,
as to shares owned jointly with Albert S. Baldocchi
Robert Bernstein
Michele Castle
Hardy W. Chan
17
The Marybeth Cohen Family Partnership
Name:
Title:
Marybeth Cohen
Robert P. Cook,
as to shares owned jointly with Eda S. Cook
Eda S. Cook,
as to shares owned jointly with Robert P. Cook
AnnMarie Don Vito
Michael Duffy
Barbara Ells,
as to shares owned jointly with Robert Ells
Steve Ells
Robert Ells,
as to shares owned jointly with Barbara Ells
Neil W. Flanzraich
The Neil W. Flanzraich Revocable Trust
Name:
Title:
Ken S. Fong,
as to shares owned jointly with Pamela P. Fong
Pamela P. Fong,
as to shares owned jointly with Ken S. Fong
18
Darlene J. Friedman
Friedman Family Follies Partnership
Name:
Title:
Tom Giordano
Melvyn Goodman
Brand Gould
Cecilia Gowins
Marlane Harrington
Laura Linkow Hill,
as to shares owned jointly with Robert F. Hill
Robert F. Hill,
as to shares owned jointly with Laura Linkow Hill
Robert and Laura Linkow Hill Revocable Trust
Name:
Title:
Roy Kuramoto
Alfred LaNasa
MDG Company
Name:
Title:
Montgomery F. Moran
19
Erich Overhardt
Victoriano Pena
Andrew Petriwsky
Gretchen Selfridge
Scott Shippey
Timothy Spong
Joseph Stupp
John M. Thompson,
as to shares owned jointly with Nancy R. Thompson
Nancy R. Thompson,
as to shares owned jointly with John M. Thompson
Jorge Velazquez
Kevin Wamego
Margaret Zgol
20
Schedule 1
Investors
McDonald's Ventures, LLC
1 Parkview Plaza, Suite 640
Oakbrook Terrace, IL 60181
w/ a copy to:
McDonald's Ventures, LLC
c/o McDonald's Corporation
Attn: General Counsel
2915 Jorie Blvd.
Oak Brook, IL 60523
Kurt Altman
4187 South Granby Circle
Aurora, CO 80014
Michael Baghramian
29 Sea Isle Drive
Long Beach, CA 90803
Robert Bernstein
Bernstein-Rein Advertising, Inc.
4600 Madison, Suite 1500
Kansas City, MO 64112
Michele Castle
2761 Kendrick Street
Golden, CO 80401
Hardy W. Chan
ScinoPharm Taiwan, LTD.
No. 1 Nan-Ke Eighth Road
Tainan Science Industrial Park
Shan-Hua, Tainan County 741
Taiwan, R.O.C.
The Marybeth Cohen Family Partnership
538 Huckleberry Lane
Franklin Lakes, NJ 07417
Marybeth Cohen
538 Huckleberry Lane
Franklin Lakes, NJ 07417
Robert P. and Eda S. Cook
171 Turnberry Road
Half Moon Bay, CA 94019
AnnMarie Don Vito
2007 West Evergreen Ave., Apt. #3
Chicago, IL 60622
21
Steve Ells
c/o Chipotle Mexican Grill, Inc.
1543 Wazee Street, Suite 200
Denver, CO 80202
Robert and Barbara Ells
17 Sandstone St.
Portola Valley, CA 94028
Neil W. Flanzraich
IVAX Corporation
4400 Biscayne Boulevard
Miami, FL 33137
The Neil W. Flanzraich Revocable Trust
Revocable Trust UAD 6/10/88
c/o Mr. Neil W. Flanzraich
IVAX Corporation
4400 Biscayne Boulevard
Miami, FL 33137
Ken S. and Pamela P. Fong
P.O. Box 969
Menlo Park, CA 94026
Darlene J. Friedman
429 Bear Creek Circle
Napa, CA 94558
Friedman Family Follies Partnership
c/o Darlene J. Friedman
429 Bear Creek Circle
Napa, CA 94558
Tom Giordano
12975 Kilger Court
Pickerington, OH 43147
Melvyn Goodman
c/o L.A. Sani-Felt Co.
830 E. 59th Street
Los Angeles, CA 90001
Brand Gould
5065 Lowell Boulevard
Denver, CO 80221
Cecilia Gowins
201 Jay Street
Lakewood, CO 80226
Marlane Harrington
4685 Honeymoon Bay Road
Freeland, WA 98249
22
Robert F. and Laura Linkow Hill
1441 18th Street, Suite 100
Denver, CO 80202
Robert and Laura Linkow Hill Revocable Trust
1441 18th Street, Suite 100
Denver, CO 80202
Roy Kuramoto
373 Pine Lane, #1112
Los Altos, CA 94022
Alfred LaNasa
4400 West University #1433
Dallas, TX 75209
MDG Company
c/o Mr. Melvyn Goodman
830 E. 59th Street
Los Angeles, CA 90001
Montgomery F. Moran
7705 Fairview Road
Boulder, CO 80303
Erich Overhardt
7603 Leatherfern Court
Pinellas Park, FL 33782
Victoriano Pena
624 Winona Court
Denver, CO 80204
Andrew Petriwsky
c/o Paul Durr, PC
1777 S. Harrison Street, Suite P309
Denver, CO 80210
Gretchen Selfridge
15 Timber Lane
Evergreen, CO 80439
Scott Shippey
6116 Ginita Lane
Austin, TX 78739
Timothy Spong
612 Fairfield Lane
Louisville, CO 80027
Joseph Stupp
225 Lincoln Street, #5
Denver, CO 80203
John M. and Nancy R. Thompson
20 Sandstone
Portola Valley, CA 94028
23
Jorge Velazquez
216 Quart Street
Binghamton, NY 13901
Kevin Wamego
2509 South Pittsburg Avenue
Tulsa, OK 74114
Margaret Zgol
3153 Renaissance Drive
Rio Rancho, NM 87124
24
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Exhibit 10.6
TABLE OF CONTENTS
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
RECITALS
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Exhibit 10.7
Chipotle Mexican Grill, Inc.
Restricted Stock Award Agreement
This document describes the terms of your Restricted Stock Award Agreement, entered into and effective as of March 24, 2005, by and between Montgomery F.
Moran (the "Executive") and Chipotle Mexican Grill, Inc., a Delaware corporation (the "Company").
May 27, 2005
Effective Date of Grant:
Number of Share of Restricted Stock Granted:
460,000
Lapse of Restriction Date:
Restrictions placed on the shares of Restricted Stock shall lapse on the date and in the amount listed below:
Date on Which
Restrictions Lapse
Number of Shares for Which
Restrictions Lapse
Cumulative Number of Shares
for Which Restrictions Lapse
March 24, 2006
153,333
153,333
March 24, 2007
153,333
306,666
March 24, 2008
153,334
460,000
1. Employment with the Company. Except as may otherwise be provided in Sections 5 or 6, the Restricted Stock granted hereunder is granted on the condition
that the Executive remains an employee of the Company from the Date of Grant through (and including) the Lapse of Restriction Date, as set forth above (referred to
herein as the "Period of Restriction"). Upon vesting, the shares of Restricted Stock will be referred to as "Vested Shares."
This grant of Restricted Stock shall not confer any right to the Executive to be granted Restricted Stock or other awards in the future.
2. Certificate Legend. Each certificate representing shares of Restricted Stock granted pursuant to the Plan shall bear the following legend:
"These shares of stock have not been registered under the Securities Act of 1933. The sale or other transfer of the shares of stock represented by this certificate, whether
voluntary, involuntary, or by the operation of law, is subject to certain restrictions or transfer as set forth in the Chipotle Mexican Grill, Inc. Restricted Stock Award
Agreement dated
."
3. Removal of Certificate Legend. The shares of Restricted Stock granted pursuant to this Agreement shall become vested on the dates and in the amounts set
forth under the Lapse of Restriction Dates above. Following the occurrence of an IPO (as defined below), the Executive shall be entitled to have the legend required by
Section 2 of this Agreement removed from the applicable stock certificates for Vested Shares; provided, however, that the first sentence of the certificate legend shall
not be removed unless the shares are in fact registered under the Securities Act or otherwise not subject to registration thereunder. Prior to the occurrence of an IPO, no
portion of the legend required by Section 2 of this Agreement will be removed.
4. Voting Rights and Dividends. During the Period of Restriction, the Executive may exercise full voting rights and shall accrue all dividends and other
distributions paid with respect to the shares of Restricted Stock, if any, while they are held. Any dividends or distributions, whether paid in shares or cash, will be
subject to the same vesting restrictions as the underlying shares of Restricted Stock to which the dividends or distributions relate and, if any such dividends or
distributions are paid in shares, such shares shall be subject to the same restrictions on transferability as are the shares of Restricted Stock with respect to which they
were paid.
1
5. Termination Due to Death or Disability. In the event the Executive's employment is terminated due to death or Disability, all shares of Restricted Stock
held by the Executive at the time of employment termination shall immediately become vested and released from restriction as of such date. Following the occurrence
of an IPO, the Vested Shares shall be freely Transferable by the Executive or the Executive's beneficiaries in the event of death, subject to applicable federal and state
securities laws. Prior to the occurrence of an IPO, the Vested Shares will be subject to the restrictions on Transfer set forth in Section 8.
6. Termination by the Company Without Cause or by the Executive for Good Reason. In the event the Company terminated the Executive's employment
without Cause, or the Executive voluntarily terminates employment for Good Reason, all shares of Restricted Stock held by the Executive at the time of employment
shall immediately become vested and released from restriction as of such date. Following the occurrence of an IPO, the Vested Shares shall be freely Transferable by
the Executive, subject to applicable federal and state securities law and any other applicable securities trading restrictions of the Company. Prior to the occurrence of an
IPO, the Vested Shares will be subject to the restrictions on Transfer set forth in Section 8.
7. Termination for Any Other Reason. In the event the Executive's employment is terminated for any reason other than those described in Sections 5 and 6
herein, all shares of Restricted Stock held by the Executive at the time of employment termination and still subject to the Period of Restriction shall be forfeited by the
Executive to the Company.
8.
Restrictions on Transfer of Restricted Stock and, Prior to an IPO, Vested Shares.
(a) During the Period of Restriction, shares of Restricted Stock granted pursuant to this Agreement may not be sold, transferred, assigned, or otherwise alienated
(a "Transfer"). If any Transfer of Shares of Restricted Stock is purported to be made, such shares of Restricted Stock shall be immediately forfeited to the Company,
and this Agreement shall lapse.
(b) Notwithstanding the foregoing, shares of Restricted Stock shall vest on death and may be Transferred by will or by the laws of descent and distribution to the
Executive's beneficiary or estate. Prior to the occurrence of an IPO, any such Transfer to the Executive's beneficiary or estate shall be subject to the agreement by the
beneficiary or estate, as the case may be, to be bound by the same terms and conditions and restrictions on Transfer (including the Put and Call Rights described below)
as applied to the Executive prior to his death with respect to Vested Shares. To effectuate the foregoing, the Executive's beneficiary or estate, as the case may be, shall
be required to execute such documents as the Company may provide.
(c) Put/Call Rights. Prior to the occurrence of an IPO, Vested Shares may not be Transferred by the Executive (or for his beneficiaries or estate, as the case may
be) except in accordance with the following Put Right or Call Right.
(i)
During any Sell Window during the five years following the Executive's termination of employment with the Company for any reason, (A) the Executive (or his
beneficiaries of the estate, as the case may be) shall have the right to sell any of his Vested Shares to the Company, McDonald's Corporation or their respective
designees (a "Put Right") and (B) the Company, McDonald's Corporation or their respective designees shall have the right to purchase any Vested Shares held by the
Executive (or his beneficiaries or estate, as the case may be).
(ii)
A Put Right shall be exercised by the Executive (or his beneficiaries or estate, as the case may be) by giving McDonald's Corporation and the Company a written notice
(a "Put Notice") indicating that the Executive (or his beneficiaries or estate, as the case may be) wishes to exercise such Put Right with respect to a number of Vested
Shares held by the Executive (or his beneficiaries or estate, as the case may be) and specified in such Put Notice. A Put Notice shall be effective on the first Sell
Window Day after such receipt by McDonald's Corporation and the Company.
2
(iii)
A Call Right shall be exercised by the Company, McDonald's Corporation or one of their designees giving the Executive (or his beneficiaries or estate, as the case may
be) written notice (a "Call Notice") indicating the McDonald's Corporation or such designee wishes to exercise such Call Right with respect to a number of vested
shares of Restricted Stock held by the Executive (or his beneficiaries or estate, a the case may be), and specified in such Call Notice. A Call Notice shall be effective on
the First Sell Window Day after such receipt by the Executive.
(iv)
As soon as practicable after a Put Notice or a Call Notice becomes effective, the Company, McDonald's Corporation or the applicable designee and the Executive (or
his beneficiaries or estate, as the case may be) shall make mutually agreeable arrangements to pay to the Executive (or his beneficiaries or estate, as the case may be) the
Purchase Price for the Vested Shares that it is purchasing pursuant to the Put Right or the Call Right, as applicable, and for the Executive (or his beneficiaries or estate,
as the case may be) to surrender to the Company, McDonald's Corporation or the applicable designee stock certificates with respect to such Vested Shares. If the Put
Right or Call Right is exercised with respect to less than all of the Vested Shares covered buy a stock certificate, such stock certificate (or a replacement stock
certificate) marked with any notations deemed appropriate by the Company, shall be returned to the Executive (or his beneficiaries or estate, as the case may be).
(d) The shares granted herein will generally be considered "restricted securities" under the Securities Act. As such, the Company may impose additional transfer
restrictions on such shares as it deems necessary to comply with any applicable securities laws, including not be limited to federal securities laws, or any applicable blue
sky or state securities law.
9. Stock Certificates Held by the Company. To the extent the Company deems it appropriate, the Company may retain the certificates representing shares of
Restricted Stock in the Company's possession until restrictions on the shares lapse.
10. Recapitalization. From and after the Date of Grant, shares of Restricted Stock, whether or not vested, will be subject to the same adjustment provisions as
are generally applicable to the Company's outstanding shares of common stock.
11. Beneficiary Designation. The Executive may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively)
to whom any benefit under this Agreement is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the Executive, shall be in a form prescribed by the Company, and will be effective only when filed by the Executive in writing with the
CAO of the Company during the Executive's lifetime. In the absence of any such designations, benefits remaining unpaid at the Executive's death shall be paid to the
Executive's estate, subject to the provisions of Section 8 of this Agreement.
12. Continuation of Employment. This Agreement shall not confer upon the Executive any right to continue employment with the Company, nor shall this
Agreement interfere in any way with the Company's right to terminate the Executive's employment at any time.
13. Piggyback Rights. The Executive will have such registration rights and obligations as are set forth in a Registration Rights Agreement mutually agreeable
to the Executive and the Company.
14. Section 83(b) Election. The Executive may elect to be immediately taxed on the Restricted Shares under internal Revenue Code Section 83(b). The
Executive shall notify the Company of his election within thirty (30) days of the Date of Grant.
3
15.
Miscellaneous.
(a) The Company shall have the power and the right to deduct or withhold, or require the Executive to remit to the Company, an amount sufficient to satisfy
federal, state, and local taxes (including the Executive's FICA obligation), domestic or foreign, required by law to be withheld with respect to any exercise of the
Executive's rights under this Agreement as well as upon the vesting of the Restricted Shares.
(b) The Board shall have the right to impose such restrictions on any shares acquired pursuant to this Agreement, as it may deem advisable, including restrictions
under applicable federal securities law, under the requirements of any stock exchange or market upon which such shares are then listed and/or traded, and under any
blue sky or state securities laws applicable to such shares.
(c) The Executive Agrees to take all steps necessary to comply with all applicable provisions of federal sand state securities laws in exercising his or her rights
under this Agreement and in transferring Vested Shares to the extent permitted by this Agreement.
(d) This Agreement shall be subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities
exchanges as may be required.
(e) All obligations of the Company under this Agreement, with respect to the Restricted Stock, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the
Company.
(f) To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of Colorado.16.
Definitions.
(a) "Cause" means:
(i)
The Executive's continued failure to substantially perform his duties with the Company, other than any such failure resulting from Disability or occurring after issuance
by the Executive of a notice of termination for Good Reason, after written demand for substantial performance is delivered to the Executive that specifically identifies
the manner in which the Board believes that the Executive has willfully failed to substantially perform his duties, and after the Executive has failed to resume
substantial performance of his duties, as determined in the sole discretion of the Board, on a continuous basis within thirty (30) calendar days of receiving such demand.
(ii)
The Executive's gross negligence or willful misconduct with respect to the Company, including but not limited to dishonesty in the performance of the Executive's
duties hereunder or conversion or misappropriation by the Executive of any monies or property of the Company.
(iii)
The Executive having been convicted of a felony, as evidenced by binding and final judgment, order, or decree of a court of competent jurisdiction, in effect after
exhaustion or termination of all rights of appeal which, in the Board's sole discretion, substantially impairs the Executive's ability to perform his duties or
responsibilities.
(b) "Disability" shall have the same meaning ascribed to such term in the Company's Long-Term Disability Plan, as maintained by the Company for employees,
or any successor plan thereto.
(c) "Exchange Act" shall mean the Securities Act of 1934, as amended from time to time, or any successor thereto.
4
(d) "Good Reason" means, without Executive's express written consent, the occurrence of any of the following circumstances unless such circumstances are fully
corrected within thirty (30) days after the Executive notifies the Company of the existence of such circumstances:
(i)
The assignment to the Executive of any duties, functions, or responsibilities that adversely alters the nature or status of the Executive's responsibilities or the condition
of the Executive's employment from those in effect immediately prior to the assignment;
(ii)
A reduction by the Company in the Executive's base salary;
(iii)
The relocation of the Company's headquarters to a location more than fifty (50) miles from its current location, or the Company requiring the Executive to be based
anywhere other than the Company's headquarters, except for required travel on Company business; or
(iv)
Any other material breach by the Company of any other material provision of this Agreement.
(e) "IPO" shall mean any offering by the Company of its equity securities to the public pursuant to an effective registration statement under the Securities Act
(other than a registration statement form on Form S-4 or S-8) to register the sale of shares to the public in the United States, or any comparable statement under any
successor federal statute then in force.
(f) "Purchase Price" for a Vested Share sold pursuant to a Put Notice or a Call Notice means the Fair Market Value of such Vested Share on the effective date if
the applicable Put Notice or Call Notice.
(g) "Securities Act" shall mean the Securities Act of 1933, as amended from time to time, or any successor thereto.
(h) "Sell Window" means a period established by the Board of Directors of the Company (the "Board") (or any Committee appointed by the Board to administer
the Chipotle Executive Stock Option Plan) in its discretion, pursuant to the Chipotle Executive Stock Option Plan. A Sell Window shall last for the period determined
pursuant to the Chipotle Executive Stock Plan.
(i) "Sell Window Day" means any business day during a Sell Window.
5
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective as of the Date of Grant.
ATTEST:
Chipotle Mexican Grill, Inc.:
By: M. Steven Ells
Its: Chief Executive Officer
Executive:
Montgomery F. Moran
6
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Exhibit 10.7
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Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated October 5, 2005, in the Amendment No. 3 to the Registration
Statement (Form S-1; File No. 333-129221) and related Prospectus of Chipotle Mexican Grill, Inc. to be filed January 10, 2006.
/s/ Ernst & Young LLP
Denver, Colorado
January 6, 2006
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Consent of Independent Registered Public Accounting Firm