<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 0-20574
------------------------
THE CHEESECAKE FACTORY INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 51-0340466
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26950 AGOURA ROAD 91301
CALABASAS HILLS, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(818) 871-3000
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of April 30, 1998, 20,075,574 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
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<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
---------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets--March 31, 1998 and December 30, 1997............ 1
Consolidated Statements of Operations-- 2
Thirteen weeks ended March 31, 1998 and March 30, 1997.....................
Consolidated Statements of Cash Flows-- 3
Thirteen weeks ended March 31, 1998 and March 30, 1997.....................
Notes to Consolidated Financial Statements--March 31, 1998................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 5-11
Operations.................................................................
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................. 12
Signatures................................................................................. 13
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 30,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 35,985 $ 43,543
Investments and marketable securities................................................. 16,648 8,508
Accounts receivable................................................................... 1,349 2,164
Other receivables..................................................................... 6,227 8,087
Inventories........................................................................... 5,055 5,069
Prepaid expenses...................................................................... 1,433 963
Preopening expenses................................................................... 8,781 9,690
----------- ------------
Total current assets................................................................ 75,478 78,024
----------- ------------
Property and equipment, net............................................................. 92,491 88,064
----------- ------------
Other assets:
Marketable securities................................................................. 2,970 1,500
Other receivables..................................................................... 6,615 6,875
Trademarks............................................................................ 1,523 1,256
Deferred income taxes................................................................. 2,333 2,329
Other................................................................................. 1,942 1,895
----------- ------------
Total other assets.................................................................. 15,383 13,855
----------- ------------
Total assets...................................................................... $ 183,352 $ 179,943
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 6,588 $ 12,071
Income taxes payable.................................................................. 2,101 667
Other accrued expenses................................................................ 11,333 8,251
Deferred income taxes................................................................. 6,409 6,409
----------- ------------
Total current liabilities........................................................... 26,431 27,398
----------- ------------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized; none issued and
outstanding......................................................................... -- --
Common Stock, $.01 par value, 30,000,000 shares authorized; 20,022,312 and 19,893,312
issued and outstanding for 1998 and 1997, respectively.............................. 200 199
Additional paid-in capital............................................................ 115,561 114,119
Retained earnings..................................................................... 41,203 38,262
Marketable securities valuation account............................................... (43) (35)
----------- ------------
Total stockholders' equity.......................................................... 156,921 152,545
----------- ------------
Total liabilities and stockholders' equity........................................ $ 183,352 $ 179,943
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
1
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED MARCH 31, ENDED MARCH 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues:
Restaurant sales............................................................. $ 54,967 $ 40,891
Bakery sales................................................................. 4,534 4,337
------- -------
Total revenues........................................................... 59,501 45,228
------- -------
Costs and expenses:
Cost of food, beverages and supplies......................................... 16,063 11,829
Bakery costs................................................................. 2,111 1,761
Operating expenses:
Labor...................................................................... 19,314 14,621
Occupancy and other........................................................ 9,267 7,473
General and administrative expenses.......................................... 4,777 4,291
Depreciation and amortization expenses....................................... 2,015 1,494
Preopening amortization expense.............................................. 2,204 1,271
------- -------
Total costs and expenses................................................. 55,751 42,740
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Income from operations......................................................... 3,750 2,488
Interest income, net........................................................... 734 88
Other income, net.............................................................. 96 56
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Income before income taxes..................................................... 4,580 2,632
Income tax provision........................................................... 1,572 908
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Net income..................................................................... $ 3,008 $ 1,724
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------- -------
Net income per share:
Basic........................................................................ $ 0.15 $ 0.10
Diluted...................................................................... $ 0.15 $ 0.10
Weighted average shares outstanding:
Basic........................................................................ 19,930 16,419
Diluted...................................................................... 20,501 16,612
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS
ENDED MARCH 31, ENDED MARCH 30,
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 3,008 $ 1,724
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.............................................. 2,015 1,494
Preopening amortization.................................................... 2,204 1,271
Deferred income taxes...................................................... -- (5)
Changes in assets and liabilities:
Accounts receivable...................................................... 815 314
Other receivables........................................................ 2,120 (1,646)
Inventories.............................................................. 14 362
Prepaid expenses......................................................... (470) (65)
Preopening expenses...................................................... (1,294) (1,418)
Trademarks............................................................... (279) --
Other.................................................................... (78) (461)
Accounts payable......................................................... (5,483) (574)
Income taxes payable..................................................... 1,434 933
Other accrued expenses................................................... 3,082 554
------- -------
Cash provided by operating activities.................................. 7,088 2,483
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Cash flows from investing activities:
Additions to property and equipment.......................................... (6,400) (1,959)
Investments in available-for-sale securities................................. (14,135) --
Sales of available-for-sale securities....................................... 4,512 --
------- -------
Cash used by investing activities...................................... (16,023) (1,959)
------- -------
Cash flows from financing activities:
Common stock issued.......................................................... 1 --
Proceeds from exercise of employee stock options............................. 1,376 299
------- -------
Cash provided by financing activities.................................. 1,377 299
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Net change in cash and cash equivalents........................................ (7,558) 823
Cash and cash equivalents at beginning of period............................... 43,543 8,536
------- -------
Cash and cash equivalents at end of period..................................... $ 35,985 $ 9,359
------- -------
------- -------
Supplemental disclosures:
Interest paid................................................................ $ 24 $ 91
------- -------
------- -------
Income taxes paid............................................................ $ 138 $ 7
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying consolidated financial statements of The Cheesecake Factory
Incorporated and Subsidiaries (the "Company") for the thirteen weeks ended March
31, 1998 have been prepared in accordance with generally accepted accounting
principles and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. The financial statements presented herein have not been audited by
independent public accountants, but include all material adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for such periods. However, these results are not
necessarily indicative of results for any other interim period or for the full
year. The consolidated balance sheet data presented herein for December 30, 1997
was derived from the Company's audited consolidated financial statements for the
fiscal year then ended. The preparation of financial statements in accordance
with generally accepted accounting principles requires the Company's management
to make certain estimates and assumptions for the reporting periods covered by
the financial statements. These estimates and assumptions affect the reported
amounts of assets, liabilities, revenues and expenses. Actual amounts could
differ from these estimates.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted pursuant to requirements of the Securities and Exchange Commission.
Management believes the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K for the fiscal
year ended December 30, 1997.
NOTE B--INVESTMENTS AND MARKETABLE SECURITIES
Investments and marketable securities, all classified as available for sale,
consisted of the following as of March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
UNREALIZED BALANCE
(LOSS) SHEET
CLASSIFICATION COST FAIR VALUE GAIN AMOUNT MATURITY
- --------------------------------- --------- ----------- ------------- --------- ---------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Corporate obligations............ $ 16,648 $ 16,648 $ -- $ 16,648 Various dates, all before
--------- ----------- --- --------- March 31, 1999
--------- ----------- --- ---------
OTHER ASSETS:
Corporate obligations............ $ 1,530 $ 1,525 $ (5) $ 1,525 Various dates, all before May 1,
1999
Preferred stocks................. 1,508 1,445 (63) 1,445 No maturity dates
--------- ----------- --- ---------
Total.......................... $ 3,038 $ 2,970 $ (68) $ 2,970
--------- ----------- --- ---------
--------- ----------- --- ---------
</TABLE>
4
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE C--NET INCOME PER SHARE
Effective December 15, 1997, the Company adopted the provisions of SFAS No.
128, "Accounting for Earnings Per Share." SFAS No. 128 requires companies to
present basic earnings per share (EPS) and diluted EPS, instead of the primary
and fully diluted EPS presentations that were formerly required by Accounting
Principles Board Opinion No. 15, "Earnings Per Share." Basic EPS is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. For the Company, diluted
EPS includes the dilutive effect of potential stock option exercises, calculated
using the treasury stock method. EPS amounts for all periods presented reflect
the provisions of SFAS No. 128, including amounts presented for prior periods
which have been restated to conform with SFAS No. 128.
On February 26, 1998, the Company's Board of Directors declared a 50% stock
dividend, in the form of a three-for-two stock split, payable on April 1, 1998
to stockholders of record on March 12, 1998. All references herein to numbers of
shares and per share amounts for all periods presented have been adjusted to
reflect this stock split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS FORM 10-Q WHICH ARE NOT HISTORICAL FACTS
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE CHEESECAKE FACTORY
INCORPORATED AND ITS SUBSIDIARIES TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY FORWARD-LOOKING
STATEMENTS. SUCH RISKS, UNCERTAINTIES, AND OTHER FACTORS INCLUDE, BUT ARE NOT
LIMITED TO, THE FOLLOWING: CHANGES IN GENERAL ECONOMIC CONDITIONS WHICH AFFECT
CONSUMER SPENDING PATTERNS FOR RESTAURANT DINING OCCASIONS; INCREASING
COMPETITION IN THE UPSCALE CASUAL DINING SEGMENT OF THE RESTAURANT INDUSTRY;
ADVERSE WEATHER CONDITIONS WHICH IMPACT CUSTOMER TRAFFIC AT THE COMPANY'S
RESTAURANTS IN GENERAL AND WHICH CAUSE THE TEMPORARY UNDERUTILIZATION OF OUTDOOR
PATIO SEATING AVAILABLE AT SEVERAL OF THE COMPANY'S RESTAURANTS; EVENTS WHICH
INCREASE THE COST TO DEVELOP AND/OR DELAY THE DEVELOPMENT AND OPENING OF THE
COMPANY'S NEW, HIGHLY CUSTOMIZED RESTAURANTS; CHANGES IN THE AVAILABILITY AND/OR
COST OF RAW MATERIALS, MANAGEMENT AND HOURLY LABOR, AND OTHER RESOURCES
NECESSARY TO OPERATE THE COMPANY'S RESTAURANTS AND BAKERY PRODUCTION FACILITY;
THE SUCCESS OF OPERATING INITIATIVES, INCLUDING BRAND EXTENSIONS AND NEW
CONCEPTS; DEPTH OF MANAGEMENT; ADVERSE PUBLICITY; THE COMPANY'S DEPENDENCE ON A
SINGLE BAKERY PRODUCTION FACILITY; THE COMPANY'S ABILITY TO OBTAIN AND RETAIN
LARGE-ACCOUNT CUSTOMERS FOR ITS BAKERY OPERATIONS; CHANGES IN TIMING AND/OR
SCOPE OF THE PURCHASING PLANS OF LARGE-ACCOUNT BAKERY CUSTOMERS WHICH CAUSE
FLUCTUATIONS IN BAKERY SALES AND OPERATING RESULTS; THE RATE OF GROWTH OF
GENERAL AND ADMINISTRATIVE EXPENSES ASSOCIATED WITH BUILDING A STRENGTHENED
CORPORATE INFRASTRUCTURE TO SUPPORT THE COMPANY'S EXPANDED RESTAURANT AND BAKERY
OPERATIONS; THE AVAILABILITY, AMOUNT, TYPE, AND COST OF CAPITAL FOR THE COMPANY
AND THE DEPLOYMENT OF SUCH CAPITAL; CHANGES IN, OR ANY FAILURE TO COMPLY WITH,
GOVERNMENTAL REGULATIONS; THE REVALUATION OF ANY OF THE COMPANY'S ASSETS; THE
AMOUNT OF, AND ANY CHANGES TO, TAX RATES; AND OTHER FACTORS REFERENCED IN THIS
FORM 10-Q AND THE COMPANY'S FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION FOR THE FISCAL YEAR ENDED DECEMBER 30, 1997.
5
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE C--NET INCOME PER SHARE (CONTINUED)
GENERAL
As of March 31, 1998, the Company operated 23 upscale, high volume, casual
dining restaurants and a bakery production facility. The Company's revenues
consist of sales from its restaurant operations and sales from its bakery
operations to other foodservice operators and distributors. Certain costs and
expenses relate only to restaurant sales (cost of food, beverages and supplies)
or only to bakery sales (bakery costs, which include ingredient, packaging and
supply costs). All other operating costs and expenses relate to both restaurant
and bakery sales. Comparable restaurant sales include the sales of restaurants
open for the full period of each period being compared.
At the end of calendar 1992, the Company adopted a 52/53 week fiscal year
ending on the Sunday closest to December 31 for financial reporting purposes.
Commencing with the start of fiscal 1998, the Company changed its fiscal week
and year-end from Sunday to Tuesday to facilitate certain operational
efficiencies. In order to effect the transition, the fourth quarter of fiscal
1997 was extended by two additional days to Tuesday, December 30, 1997. Fiscal
1998 will consist of 52 weeks and will end on Tuesday, December 29, 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Consolidated
Statements of Operations of the Company expressed as percentages of total
revenues. The results of operations for the thirteen weeks ended March 31, 1998
are not necessarily indicative of the results to be expected for the full fiscal
year.
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MARCH 31, MARCH 30,
1998 1997
--------------- ---------------
% %
<S> <C> <C>
Revenues:
Restaurant sales................................................................... 92.4 90.4
Bakery sales....................................................................... 7.6 9.6
----- -----
Total revenues................................................................. 100.0 100.0
----- -----
Costs and expenses:
Cost of food, beverages, and supplies.............................................. 27.0 26.2
Bakery costs....................................................................... 3.5 3.9
Operating expenses:
Labor............................................................................ 32.5 32.3
Occupancy and other.............................................................. 15.6 16.5
General and administrative expenses................................................ 8.0 9.5
Depreciation and amortization expenses............................................. 3.4 3.3
Preopening amortization expense.................................................... 3.7 2.8
----- -----
Total costs and expenses....................................................... 93.7 94.5
----- -----
----- -----
Income from operations............................................................... 6.3 5.5
Interest income, net................................................................. 1.2 0.2
Other income, net.................................................................... 0.2 0.1
----- -----
Income before income taxes........................................................... 7.7 5.8
Income tax provision................................................................. 2.6 2.0
----- -----
Net income........................................................................... 5.1 3.8
----- -----
----- -----
</TABLE>
6
<PAGE>
THIRTEEN WEEKS ENDED MARCH 31, 1998 COMPARED TO THIRTEEN WEEKS ENDED MARCH 30,
1997
REVENUES
For the thirteen weeks ended March 31, 1998, the Company's total revenues
increased 32% to $59.5 million versus $45.2 million for the thirteen weeks ended
March 30, 1997. Restaurant sales increased $14.1 million or 34% to $55.0 million
versus $40.9 million for the same period of the prior year. The $14.1 million
increase in restaurant sales consisted of a $1.5 million (3.9%) increase in
comparable restaurant sales for the period and a $12.6 million increase from the
openings of new restaurants. Sales in comparable restaurants benefited, in part,
from the impact of an effective menu price increase of approximately 1.5% which
was taken during the months of June and July 1997. Excluding the rain-impacted
Southern California restaurants from the base of comparable restaurants, sales
for all other comparable restaurants increased 5.4% during the thirteen weeks
ended March 31, 1998.
Bakery sales increased 4.5% to $4.5 million for the thirteen weeks ended
March 31, 1998. The Company continues to make progress in developing, testing
and qualifying additional products for current and potential large-account
bakery customers.
The Company developed a limited menu, self-service bakery cafe concept
during the first half of 1997 principally to extend The Cheesecake
Factory-Registered Trademark- brand and to provide another source of sales and
operating leverage for its bakery production facility. The first bakery cafe
opened in July 1997 in the Ontario Mills shopping complex near Los Angeles and
is operated by Host Marriott Services Corporation ("Host") under a licensing
agreement with the Company. During August 1997, the Company opened three small
bakery cafe outlets in the new terminal of the Ronald Reagan Washington National
Airport. These bakery cafe outlets are operated by the Company under a
subcontract with Host. The Company also continues to evaluate sites in the Los
Angeles market for an additional bakery cafe outlet. If successful, the bakery
cafe concept could be more rapidly expanded than the Company's full-service
restaurants. Bakery sales include sales from Company-operated bakery cafe
outlets. Sales from bakery cafes are not expected to be material to total
revenues in the near future.
COST OF FOOD, BEVERAGES AND SUPPLIES
During the thirteen weeks ended March 31, 1998, cost of food, beverages and
supplies for the restaurants was $16.1 million versus $11.8 million for the
comparable period last year. The related increase of $4.3 million was primarily
attributable to new restaurant openings. As a percentage of restaurant sales,
these costs increased slightly to 29.2% versus 28.9% for the same period of the
prior year, principally as a result of higher produce and dairy-related
commodity costs due, in part, to heavier-than-normal rainfall in California and
Florida during the period. The menu at the Company's restaurants is one of the
most diversified in the industry and, accordingly, is not overly dependent on a
single commodity. With respect to newly opened restaurants, costs in this
category will typically be higher than normal during the first 90-120 days of
operations until the restaurant staffs become more accustomed to optimally
managing and servicing the high sales volumes typically experienced by the
Company's restaurants.
BAKERY COSTS
Bakery costs, which include ingredient, packaging and production supply
costs, were $2.1 million for the thirteen weeks ended March 31, 1998 versus $1.8
million for the same period of the prior year. As a percentage of bakery sales,
bakery costs for the thirteen weeks ended March 31, 1998 increased to 46.6%
versus 40.6% for the comparable period last year. This percentage increase was
primarily due to higher costs for dairy-related commodities (principally cream
cheese, whipped cream and butter) and a shift in the mix of sales to products
with slightly higher bakery costs as a percentage of sales. The Company's costs
for dairy-related commodities increased as much as 25% during fiscal 1996 when
the overall level of such costs rose across the country. The Company's costs for
dairy-related commodities gradually decreased during fiscal 1997, but in some
cases, not to their pre-1997 levels. The Company currently expects its dairy
7
<PAGE>
commodity costs for the remainder of fiscal 1998 to be approximately the same or
slightly less than the cost levels experienced during the thirteen weeks ended
March 31, 1998. There can be no assurance that future costs for these
commodities, or any commodities used in the Company's bakery or restaurant
operations, will not begin to rise again due to market conditions beyond the
Company's control.
OPERATING EXPENSES--LABOR
Labor expenses, which include restaurant-level labor and bakery direct labor
costs (including associated fringe benefits), were $19.3 million for the
thirteen weeks ended March 31, 1998 versus $14.6 million for the same period of
the prior year. This increase was principally due to the impact of new
restaurant openings. As a percentage of total revenues, labor expenses increased
slightly to 32.5% versus 32.3% for the comparable period last year due, in part,
to higher hourly wages resulting from statutory minimum wage increases and
general labor market conditions.
OPERATING EXPENSES--OCCUPANCY AND OTHER
Occupancy and other expenses for both the restaurants and the bakery
increased 24% to $9.3 million for the thirteen weeks ended March 31, 1998 versus
$7.5 million for the same period of the prior year. This increase was
principally attributable to new restaurant openings. As a percentage of total
revenues, occupancy and other expenses decreased to 15.6% for the thirteen weeks
ended March 31, 1998 versus 16.5% for the same period of fiscal 1997. This
percentage decrease was primarily attributable to the leveraging of the fixed
component of such costs by the 32% increase in revenues for the thirteen weeks
ended March 31, 1998, coupled with lower costs for workers' compensation
insurance and other cost reductions.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of bakery selling and
administrative expenses (including product development and marketing expenses),
certain restaurant administrative expenses (principally credit card discounts
and certain insurance-related expenses), restaurant field supervision expenses
(salaries and expenses of regional vice presidents and area directors of
operations) and corporate support expenses (salaries and related fringe
benefits, travel, and other administrative expenses). General and administrative
expenses increased to $4.8 million for the thirteen weeks ended March 31, 1998
versus $4.3 million for the same period of fiscal 1997, an increase of $0.5
million or 11%. As a percentage of total revenues, general and administrative
expenses decreased to 8.0% for the thirteen weeks ended March 31, 1998 versus
9.5% for the same period of fiscal 1997. This percentage decrease was
principally attributable to the leveraging of the fixed component of such costs
by the 32% increase in revenues for the thirteen weeks ended March 31, 1998.
The Company plans to continue to strengthen its operational and corporate
support infrastructure during the remainder of fiscal 1998 and fiscal 1999 to
support its planned future growth. This strengthening will likely result in a
higher level of general and administrative expenses during those respective
periods. Additionally, the Company plans to aggressively pursue new
large-account customers for its bakery operations which will require continuing
investments in product development and marketing programs. One of the Company's
principal objectives for fiscal 1998 is to more effectively leverage its
operational and corporate support infrastructure with higher sales volumes.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses were $2.0 million for the thirteen
weeks ended March 31, 1998 versus $1.5 million for the thirteen weeks ended
March 30, 1997. As a percentage of total revenues, depreciation and amortization
expenses were 3.4% for the thirteen weeks ended March 31, 1998 versus 3.3% for
the same period of the prior year. The increase of $0.5 million for the thirteen
weeks ended
8
<PAGE>
March 31, 1998 primarily consisted of higher restaurant depreciation expense
which, in turn, was principally due to the openings of new restaurants.
PREOPENING AMORTIZATION EXPENSE
Preopening amortization expense was $2.2 million for the thirteen weeks
ended March 31, 1998 versus $1.3 million for the thirteen weeks ended March 30,
1997. As a percentage of total revenues, preopening amortization expense was
3.7% versus 2.8% for the same period of the prior year. The increase in
preopening amortization expense was principally due to six restaurant openings
during fiscal 1997, all of which were still amortizing their preopening costs
during the quarter ended March 31, 1998, versus three restaurant openings during
fiscal 1996.
As a result of the highly customized and operationally complex nature of the
Company's restaurants, the restaurant preopening process is extensive and costly
relative to that of most chain restaurant operations. Preopening costs, which
often exceed $1 million per restaurant, include recruiting, training, relocation
and related costs for developing management and hourly staff for new
restaurants, as well as other costs directly related to the opening of new
restaurants. Preopening costs will vary from location to location depending on a
number of factors including, among others, the proximity of other established
Company restaurants, the size and layout of each location and the relative
difficulty of the restaurant staffing and training process.
As is currently the practice of many casual dining and upscale,
highly-customized restaurant entities, the Company defers its restaurant
preopening costs and amortizes them over the twelve-month period following the
opening of each respective restaurant. In April 1998, the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." SOP 98-5 requires entities to expense as
incurred all start-up and preopening costs that are not otherwise capitalizable
as long-lived assets. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, although earlier adoption is encouraged. Restatement of
previously issued financial statements is not permitted by SOP 98-5, and
entities are not required to report the pro forma effects of the retroactive
application of the new accounting standard. The Company's adoption of the
expense-as-incurred accounting principle required by SOP 98-5 will involve the
recognition of the cumulative effect of the change in accounting principle
required by SOP 98-5 as a one-time charge against earnings, net of any related
income tax effect, retroactive to the beginning of the fiscal year of adoption.
Total deferred preopening costs were $8.8 million at March 31, 1998.
As has been the case with the Company's current deferred method for
accounting for preopening costs, preopening expense comparisons under the new
expense-as-incurred standard will continue to vary from period to period,
depending on the number and timing of restaurant openings and the specific
preopening expenses incurred for each restaurant during each period being
compared. Based on the Company's current expansion plans, the Company believes
total preopening expenses for fiscal 1998 and 1999 under either accounting
principle (deferred or expense-as-incurred) will likely exceed the respective
amount for each immediate prior year. However, the new expense-as-incurred
accounting principle required by SOP 98-5 will, by definition, cause an
acceleration in the timing of recognition of preopening expenses. The impact of
this accelerated recognition on the Company's results of operations for any
given period could be significant, depending on the number of restaurants opened
during that period. During fiscal 1996 and 1997, the Company reevaluated its
restaurant preopening process with the objective of reducing its timeframe,
intensiveness and overall cost. The Company intends to pursue further
refinements to this process during fiscal 1998. However, there can be no
assurance that preopening costs will be reduced for future restaurants or that
preopening expenses will not continue to have a significant impact on the
Company's results of operations.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's key liquidity
measurements for the quarters ended March 31, 1998, December 30, 1997 and March
30, 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------
MARCH 31, DECEMBER 30, MARCH 30,
1998 1997 1997
----------- ------------- -----------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Cash and marketable securities on hand, end of quarter...................... $ 55.6 $ 53.6 $ 11.6
Net working capital, end of quarter......................................... $ 49.0 $ 50.6 $ 8.3
Current ratio, end of quarter............................................... 2.9:1 2.8:1 1.4:1
Long-term debt, end of quarter.............................................. -- -- $ 6.0
Cash provided (used) by operations.......................................... $ 7.1 $ (4.6) $ 2.5
Capital expenditures........................................................ $ 6.4 $ 3.6 $ 2.0
</TABLE>
During the thirteen weeks ended March 31, 1998, the Company's cash and
marketable securities on hand and net working capital position did not fluctuate
significantly versus the respective amounts as of December 30, 1997. Compared to
March 30, 1997, however, these two measurements increased by $44 million and
$40.7 million, respectively. These increases principally resulted from the
Company's completion of a follow-on public offering of 3.5 million shares of its
common stock in November 1997 at a price to the public of $18.00 per share. Of
the approximate $58.6 million of net proceeds to the Company from that offering,
$14 million was utilized in December 1997 to repay in full all funded debt
outstanding at that time under the Company's $25 million revolving credit and
term loan facility (the "Credit Facility").
Cash provided by operations was $7.1 million for the thirteen weeks ended
March 31, 1998 compared to cash used by operations of $4.6 million for the
thirteen weeks ended December 30, 1997. The net fluctuation of $11.7 million on
this measurement was principally due to the recognition of tenant improvement
allowances due from landlords and the incurrence of preopening costs related to
three restaurant openings which occurred during the thirteen weeks ended
December 30, 1997 versus no restaurant openings during the thirteen weeks ended
March 31, 1998.
As of May 6, 1998, there were no borrowings outstanding under the Credit
Facility. The terms of the Credit Facility were amended in April 1998 to provide
for, among other things, borrowings under the Credit Facility to bear interest
at variable rates based, at the Company's option, on either the prime rate of
interest, the lending institution's cost of funds rate plus 0.75%, or the
applicable LIBOR rate plus 0.75%. The Credit Facility expires on May 30, 2000.
On that date, a maximum of $25 million of any borrowings outstanding under the
Credit Facility automatically convert into a four-year term loan, payable in
equal quarterly installments at interest rates of 0.5% higher than the
applicable revolving credit rates. The Credit Facility is not collateralized and
requires the Company to maintain certain financial ratios and to observe certain
restrictive covenants with respect to the conduct of its operations, with which
the Company is currently in compliance.
During fiscal 1997, the Company's total capital expenditures were $21.7
million, most of which were related to its restaurant operations. For fiscal
1998, the Company currently estimates its total capital expenditure requirement
to range between $28-$30 million, excluding approximately $7-$8 million of
expected noncapitalizable restaurant preopening costs and net of anticipated
landlord construction contributions. This estimate contemplates as many as seven
new restaurants to be opened during fiscal 1998 and provides for an anticipated
increase in construction-in-progress disbursements for anticipated fiscal 1999
openings. The Company has historically leased the land and building shells for
its restaurant locations and has expended cash for leasehold improvements and
furnishings, fixtures and equipment for the locations.
The Company's primary expansion objective is to increase its total
restaurant productive square footage and operating weeks by 25% to 30% during
fiscal 1998 and 1999. In addition to growing its full-
10
<PAGE>
service restaurant concept, the Company has entered into an agreement to lease
and operate foodservice facilities in the first two DisneyQuest-TM-
entertainment facilities (currently planned for spring 1998 and 1999 openings)
and has signed a lease to operate a 20,000 square foot restaurant in the new
Venetian casino and resort in Las Vegas (currently planned for a spring 1999
opening) to be called Grand Lux Cafe.
Based on its current expansion objectives and opportunities, the Company
believes its cash and short-term investments on hand, coupled with expected cash
provided by operations, available borrowings under its Credit Facility and
expected tenant improvement allowances from landlords should be sufficient to
finance its planned capital expenditures and other operating activities through
fiscal 1999. The Company anticipates that it may seek additional funds to
finance its future growth. However, there can be no assurance that such funds
will be available when needed or be available on terms acceptable to the
Company.
The Company effected a three-for-two stock split on April 1, 1998. The
Company is also authorized to repurchase up to 450,000 shares of its common
stock for reissuance upon the exercise of stock options under the Company's
current stock option plans. A source of funding for share repurchases will be
the proceeds to the Company from the exercise of employee stock options. Shares
may be repurchased in the open market or through privately negotiated
transactions at times and prices considered appropriate by the Company. As of
May 6, 1998, no shares had been repurchased by the Company.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
THE CHEESECAKE FACTORY
INCORPORATED
By: /s/ DAVID M. OVERTON
--------------------------------------
David M. Overton
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
By: /s/ GERALD W. DEITCHLE
--------------------------------------
Gerald W. Deitchle
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Date: May 13, 1998
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 35,985
<SECURITIES> 16,648
<RECEIVABLES> 1,349
<ALLOWANCES> 0
<INVENTORY> 5,055
<CURRENT-ASSETS> 75,478
<PP&E> 116,506
<DEPRECIATION> 24,015
<TOTAL-ASSETS> 183,352
<CURRENT-LIABILITIES> 26,431
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 156,721
<TOTAL-LIABILITY-AND-EQUITY> 183,352
<SALES> 59,501
<TOTAL-REVENUES> 59,501
<CGS> 18,174
<TOTAL-COSTS> 18,174
<OTHER-EXPENSES> 37,577
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 4,580
<INCOME-TAX> 1,572
<INCOME-CONTINUING> 3,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,008
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
