June 2, 2008 5:07 PM

Friday night filings - starring Chipotle

There's no better evidence of the fact I'm playing catch-up here at Material Disclosures than this Monday post about a Friday filing - Friday, May 23, to be exact.

To be fair, I read Chipotle's avalanche of Form 4s, the reporting of changes in stock holdings, when they were filed. They reported that Chipotle was cancelling existing restricted stock for new "performance-contingent" shares.

I let it slide, but fellow footnote reader Michelle Leder, founder of footnoted.org, didn't. In this post, she notes that "Normally, anything filed late on a Friday means that a company is trying to bury something pretty juicy. That's doubly true when that late Friday filing happens before a holiday weekend when the markets are closed."

Instead, she says the new stock awards mean "Chipotle's top executives have to do more than just take up space at company headquarters in order to receive the shares."

No doubt. I'm not one to criticize a company for replacing pay-for-pulse, time-vesting restricted stock with a performance plan.

I am one, however, to point out that it's not all shiny like a foil-wrapped burrito.

For one, this is not expense-neutral for the company. Chipotle explained the change in its proxy statement as it sought shareholder approval to change its incentive plans:

The shares of performance-contingent restricted stock will, if issued, qualify as performance-based compensation under Section 162(m), and therefore will allow us to take a deduction for federal income tax purposes of the full amount of the compensation expense associated with these awards. The outstanding shares of time-based restricted stock do not qualify as performance-based compensation, potentially subjecting us to significant additional tax expense in the years in which the awards are scheduled to vest (2009 and 2010).

The replacement awards, it concludes "would provide no additional benefit to the employees while potentially saving us a significant amount of tax expense."

In addition, Chipotle isn't giving us much carnitas as to what performance goals must be met for the execs to get these shares.

The proxy lists 40(!) different possible criteria (which I will reproduce below, but not here, to keep you from going mad).

I asked spokesman Chris Arnold via e-mail what, specifically, needs to happen.

"That information is not available<" he wrote back. "We moved to the performance based shares to better align executive compensation and shareholder interests, but are not disclosing the targets. We believe that disclosing those targets would reveal confidential information about our internal financial modeling and other business planning, and that making that information public would subject us to competitive harm in a number of ways."

(Milstead memo to the Securities and Exchange Commission: Is that enough disclosure for the spring 2009 proxy?)

Arnold did say the vesting is based on the achievement of a cumulative performance goal, beginning this quarter and ending with the first quarter of 2012. The awards will not vest prior to April 1, 2009, even if the performance goal was achieved, unless the executive is terminated or if there's a change in control.

Here's the full list of possible criteria:

The committee may grant awards that are intended to qualify under the requirements of Section 162(m) of the Internal Revenue Code as performance-based compensation. The performance goals upon which the payment or vesting of any award that is intended to so qualify depends (other than any option or stock appreciation right, which need not include performance goals to so qualify) 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 are proposing that the amended and restated plan to be voted upon in this Proposal C include the following potential performance measures: (i) revenue growth; (ii) cash flow; (iii) cash flow from operations; (iv) net income; (v) earnings per share, diluted or basic; (vi) earnings per share from continuing operations, diluted or basic; (vii) earnings before interest and taxes; (viii) earnings before interest, taxes, depreciation, and amortization; (ix) earnings from continuing operations; (x) net asset turnover; (xi) inventory turnover; (xii) capital expenditures; (xiii) net income; (xiv) income from operations; (xv) income before income taxes; (xvi) gross or operating margin; (xvii) restaurant-level operating margin; (xviii) profit margin; (xix) assets; (xx) debt; (xxi) working capital; (xxii) return on equity; (xxiii) return on net assets; (xxiv) return on total assets; (xxv) return on capital; (xxvi) return on investment; (xxvii) return on revenue; (xxviii) net or gross revenue; (xxix) comparable restaurant sales; (xxx) market share; (xxxi) new restaurant openings; (xxxii) economic value added; (xxxiii) cost of capital; (xxxiv) expense reduction levels; (xxxv) safety record; (xxxvi) stock price; (xxxvii) productivity; (xxxviii) customer satisfaction; (xxxix) employee satisfaction; and (xl) total shareholder return.

Posted by David Milstead at 5:07 PM | Comments (0)