Chipotle 2005 Annual Report Download - page 21

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. Prior to our initial public
offering, we 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 and the proceeds from our initial public offering.
Should we need additional funding, third party financing may not 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 debt in compliance
with then-existing contractual restrictions. 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 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
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