| JACK IN THE BOX INC /NEW/ ITEM 1A RISK FACTORS Risks Related to the Food Service Industry |
| Food service businesses may be materially and adversely affected by changes in consumer tastes, national, regional and local economic and political conditions, demographic trends, and the impact on consumer eating habits of new information regarding diet, nutrition and health |
| The performance of individual restaurants may be adversely affected by factors such as traffic patterns, demographics and the type, number and location of competing restaurants |
| Multi-unit food service businesses such as ours can also be materially and adversely affected by widespread negative publicity of any type, but particularly regarding food quality, fat content, illness (such as epidemics or the prospect of a pandemic such as 10 _________________________________________________________________ [44]Table of Contents avian flu), obesity, injury or other health concerns with respect to certain foods |
| To minimize the risk of food-borne illness, we have implemented a HACCP system for managing food safety and quality |
| Nevertheless, the risk of food-borne illness cannot be completely eliminated |
| Any outbreak of such illness attributed to our restaurants or within the food service industry or any widespread negative publicity regarding our brands or the restaurant industry in general could have a material adverse effect on our financial condition and results of operations |
| Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses, such as ours, to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients |
| In addition, unfavorable trends or developments concerning factors such as inflation, increased cost of food, labor, fuel, utilities, technology, insurance and employee benefits (including increases in hourly wage, and workers’ compensation and other insurance premiums), increases in the number and locations of competing restaurants, regional weather conditions and the availability of experienced management and hourly employees, may also adversely affect the food service industry in general |
| Because our restaurants are predominantly company-operated, we may have greater exposure to operating cost issues than chains that are primarily franchised |
| Changes in economic conditions affecting our customers could reduce traffic in some or all of our restaurants or impose practical limits on pricing, either of which could have a material adverse effect on our financial condition and results of operations |
| Our continued success will depend in part on our ability to anticipate, identify and respond to changing conditions |
| Risks Associated with Our Development |
| We intend to grow primarily by developing additional company-owned restaurants and through new restaurants to be developed by franchisees |
| Development involves substantial risks, including the risk of (i) the availability of financing for the Company and to franchisees at acceptable rates and terms, (ii) development costs exceeding budgeted or contracted amounts, (iii) delays in completion of construction, (iv) the inability to identify, or the unavailability of suitable sites, both traditional and nontraditional, on acceptable leasing or purchase terms, (v) developed properties not achieving desired revenue or cash flow levels once opened, (vi) competition for suitable development sites; (vii) incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion, (viii) the inability to obtain all required governmental permits, including, in appropriate cases, liquor licenses; (ix) changes in governmental rules, regulations, and interpretations (including interpretations of the requirements of the American with Disabilities Act, (ADA) and (x) general economic and business conditions |
| Although we intend to manage our development to reduce such risks, we cannot assure you that present or future development will perform in accordance with our expectations |
| We cannot assure you that we will complete the development and construction of the facilities, or that any such development will be completed in a timely manner or within budget, or that any restaurants will generate our expected returns on investment |
| Our inability to expand in accordance with our plans or to manage our growth could have a material adverse effect on our results of operations and financial condition |
| Our plans to increase our franchising activities and to further develop Qdoba and our convenience store/gas station/restaurant co-brand will require the implementation of enhanced operational and financial systems and will require additional management, operational, and financial resources |
| For example, we will be required to recruit franchise sales and administrative personnel; and to recruit and train managers and other personnel for each new company-owned restaurant, as well as additional development and accounting personnel |
| We cannot assure you that we will be able to manage our expanding operations effectively to continue to recognize value from franchising and co-branding |
| The failure to implement such systems and add such resources on a cost-effective basis could have a material adverse effect on our results of operations and financial condition |
| Reliance on Certain Geographic Markets |
| Because our business is regional, with approximately 60prca of our restaurants located in the states of California and Texas, the economic conditions, state and local government regulations and weather conditions affecting those states may have a material impact upon our results |
| Risks Related to Entering New Markets |
| We cannot assure you that we will be able to successfully expand or acquire critical market presence for our brands in new geographical markets, as we may encounter well-established competitors with substantially greater financial resources |
| We may be unable to find attractive locations, acquire name recognition, successfully market our products and attract new customers |
| Competitive circumstances and consumer characteristics in new market segments and new geographical markets may differ substantially from those in the market segments and geographical markets in which we have substantial experience |
| We cannot assure you that we will be able to profitably operate new company-operated or franchised restaurants in new geographical markets |
| Management decisions to curtail or cease investment in certain locations or markets may result in impairment charges |
| The restaurant industry is highly competitive with respect to price, service, location, personnel and the type and quality of food, and there are many well-established competitors |
| Each of our restaurants competes directly and indirectly with a large number of national and regional restaurant chains, as well as with locally-owned quick-service restaurants, fast-casual restaurants, sandwich shops and similar types of businesses |
| The trend toward convergence in grocery, deli and restaurant services may increase the number of our competitors |
| Such increased competition could have a material adverse effect on our financial condition and results of operations |
| Some of our competitors have substantially greater financial, marketing, operating and other resources than we have, which may give them a competitive advantage |
| Certain of our competitors have introduced a variety of new products and engaged in substantial price discounting in recent years and may continue to do so in the future |
| We plan to take various steps in connection with our “brand re-invention” strategy, including introducing new, higher-quality products, discontinuing certain menu items, testing new service and training initiatives, and making improvements to facility image at our restaurants |
| However, there can be no assurance (i) that our facility improvements will foster increases in sales and yield the desired return on investment, (ii) of the success of our new products, initiatives or our overall strategies or (iii) 11 _________________________________________________________________ [45]Table of Contents that competitive product offerings, pricing and promotions will not have an adverse effect upon our results of operations and financial condition |
| Our promotional strategies or other actions during unfavorable competitive conditions may adversely affect our margins |
| Risks Related to Increased Labor Costs |
| We have a substantial number of employees who are paid wage rates at or slightly above the minimum wage |
| As federal and state minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to the employees at wage rates which are above minimum wage |
| If competitive pressures or other factors prevent us from offsetting the increased costs by increases in prices, our profitability may decline |
| In addition, various proposals that would require employers to provide health insurance for all of their employees are being considered from time-to-time in Congress and various states |
| We offer access to healthcare benefits to our restaurant crew members |
| If our crew members do not find the opportunity to obtain this insurance attractive, we may not see the reductions in turnover, training costs and workers’ compensation claims that we expect |
| The imposition of any requirement that we provide health insurance to all employees on terms materially different from our existing programs would have a material adverse impact on the results of operations and financial condition of the Company |
| Risks Related to Advertising |
| Some of our competitors have greater financial resources which enable them to purchase significantly more television and radio advertising than we are able to purchase |
| Should our competitors increase spending on advertising and promotion, should the cost of television or radio advertising increase, or our advertising funds decrease for any reason, including implementation of reduced spending strategies, or should our advertising and promotion be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition |
| The trend toward fragmentation in the media favored by our target consumers may dilute the effectiveness of our advertising dollars |
| Our income tax provision is sensitive to expected earnings and, as expectations change, our income tax provisions may vary from quarter-to-quarter and year-to-year |
| In addition, from time-to-time, we may take positions for filing our tax returns, which differ from the treatment for financial reporting purposes |
| The ultimate outcome of such positions could have an adverse impact on our effective tax rate |
| Risks Related to Achieving Increased Franchise Ownership and to Franchise Operations |
| At October 1, 2006, approximately 29prca of the Jack in the Box restaurants were franchised |
| Our plan to achieve 35prca franchise ownership by the end of 2008 and to further increase the percentage of franchised restaurants thereafter by approximately 5prca annually and to move towards a range of franchise ownership more closely aligned with that of the QSR, is subject to risks and uncertainties |
| We may not be able to identify franchisee candidates with appropriate experience and financial resources or to negotiate mutually acceptable agreements with them |
| The goal of 2008 may not provide sufficient time for us to achieve the ownership mix of franchise to company-operated restaurants that we desire and we cannot assure you that we will be able to continue to expand our franchising activities thereafter |
| Sales of our franchises and the realization of gains from franchising may vary from quarter to quarter and may not meet expectations |
| Our ability to sell franchises and to realize gains from such sales is uncertain |
| The opening and success of franchised restaurants depends on various factors, including the demand for our franchises, and the selection of appropriate franchisee candidates, the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the availability of financing, and the financial and other capabilities of our franchisees and developers |
| We cannot assure you that developers planning the opening of franchised restaurants will have the business abilities or sufficient access to financial resources necessary to open the restaurants required by their agreements |
| We cannot assure you that franchisees will successfully participate in our strategic initiatives or operate their restaurants in a manner consistent with our concept and standards |
| In addition, certain federal and state laws govern our relationships with our franchisees |
| See “Risks Related to Government Regulations” below |
| The restaurant industry is subject to extensive federal, state and local governmental regulations, including those relating to the preparation, labeling, advertising and sale of food and those relating to building and zoning requirements |
| We and our franchisees are also subject to licensing and regulation by state and local departments relating to health, sanitation and safety standards, and liquor licenses and to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements |
| The inability to obtain or maintain such licenses or publicity resulting from actual or alleged violations of such laws could have an adverse effect on our results of operations |
| We are also subject to federal regulation and certain state laws, which govern the offer and sale of franchises |
| Many state franchise laws impose substantive requirements on franchise agreements, including limitations on noncompetition provisions and on provisions concerning the termination or nonrenewal of a franchise |
| Some states require that certain materials be registered before franchises can be offered or sold in that state |
| The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and our franchisees |
| Changes in, and the cost of compliance with, government regulations could have a material adverse effect on our operations |
| Risks Related to Interest Rates |
| The Company has exposure to changes in interest rates based on its financing, investing and cash management activities |
| Changes in interest rates could materially impact the Company’s profitability |
| Risks Related to the Failure of Internal Controls |
| The Company maintains a documented system of internal controls which is reviewed and monitored by an Internal Controls Committee and tested by the Company’s full time Internal Audit Department |
| The Internal Audit Department reports to the Audit Committee of the Board of Directors |
| The Company believes it has a well-designed system to maintain adequate internal controls on the business |
| However, there can be no assurance that there won’t be any control deficiencies in the future |
| Should we become aware of any significant control deficiencies, the Internal Controls Committee would recommend prompt remediation and report them to the Audit Committee |
| We have devoted 12 _________________________________________________________________ [46]Table of Contents significant resources to document, test, monitor and improve our internal controls and will continue to do so; however, we cannot be certain that these measures will ensure that our controls are adequate in the future or that adequate controls will be effective in preventing errors or fraud |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud |
| Any failures in the effectiveness of our internal controls could have a material adverse effect on our operating results or cause us to fail to meet reporting obligations |
| Environmental Risks and Regulations |
| As is the case with any owner or operator of real property, we are subject to a variety of federal, state and local governmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials |
| Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law, which could adversely affect operations |
| We do not have environmental liability insurance; nor do we maintain a reserve to cover such events |
| We have engaged and may engage in real estate development projects and own or lease several parcels of real estate on which our restaurants are located |
| We are unaware of any significant hazards on properties we own or have owned, or operate or have operated, the remediation of which would result in material liability for the Company |
| In the event of the determination of contamination on such properties, the Company, as owner or operator, could be held liable for severe penalties and costs of remediation |
| We also operate motor vehicles and warehouses and handle various petroleum substances and hazardous substances, and are not aware of any current material liability related thereto |
| Risks Related to Leverage |
| The Company has received commitments for a new dlra625 million credit facility, which will be comprised of a dlra150 million revolving credit facility and a dlra475 million term loan |
| The Company expects to close the new credit facility no later than December 19, 2006 |
| Increased leverage could have certain material adverse effects on the Company, including, but not limited to the following: (i) our credit rating may be reduced; (ii) our ability to obtain additional financing in the future for acquisitions, working capital, capital expenditures, and general corporate or other purposes could be impaired, or any such financing may not be available on terms favorable to us; (iii) a substantial portion of our cash flow could be required for debt service and, as a result, might not be available for our operations or other purposes; (iv) any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations or sell assets; (v) our ability to withstand competitive pressures may be decreased; and (vi) our level of indebtedness may make us more vulnerable to economic downturns, and reduce our flexibility in responding to changing business, regulatory and economic conditions |
| Our ability to repay expected borrowings under the Credit Facilities, and to meet our other debt or contractual obligations (including compliance with applicable financial covenants) will depend upon our future performance and our cash flow from operations, both of which arc subject to prevailing economic conditions and financial, business and other known and unknown risks and uncertainties, certain of which are beyond our control |
| Other Risks include: • Weather conditions and related events such as floods or other natural disasters which may adversely affect the level of customer traffic, damage our restaurants, or otherwise disrupt operations |
| • Changes in accounting standards policies and practices or related interpretations by auditors or regulatory entities may negatively impact our results |
| • Changes in assumptions relating to pension costs may increase our pension expense and contributions |
| • The Company has an on-going “profit improvement program” under which it seeks to improve efficiencies and lower costs in all aspects of operations |
| Although the Company has been successful in improving efficiency and reducing costs in the past, there is no assurance that it will be able to continue to do so in the future |
| • The risks associated with information security and the use of cashless payments, such as increased investment in technology, the costs of compliance with privacy, consumer protection and other laws, and the expenses associated with cashless payment, may negatively impact our results |
| • The practical or psychological effects of terrorist acts or government responses, the on-going conflict in Iraq and war or the risk of war on consumer behavior may negatively impact our results |
| • Litigation trends and potential class actions by consumers and shareholders, and the costs and other effects of legal claims by employees, franchisees, customers, vendors, stockholders and others, including settlement of those claims may negatively impact our results |