<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 SEPTEMBER 29, 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
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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 November 10, 1998, 19,870,867 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>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets--September 29, 1998 and December 30, 1997.................... 1
Consolidated Statements of Operations--Thirteen weeks and thirty-nine weeks ended
September 29, 1998 and September 28, 1997.............................................. 2
Consolidated Statements of Cash Flows--Thirty-nine weeks ended September 29, 1998 and
September 28, 1997..................................................................... 3
Notes to Consolidated Financial Statements--September 29, 1998........................... 4-5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 6-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................... 14
Signatures.......................................................................................... 15
</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>
SEPTEMBER 29, DECEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 26,342 $ 43,543
Investments and marketable securities................... 16,051 8,508
Accounts receivable..................................... 1,772 2,164
Other receivables....................................... 3,900 8,087
Inventories............................................. 6,453 5,069
Prepaid expenses........................................ 1,547 963
Preopening expenses..................................... 9,770 9,690
------------- -------------
Total current assets.................................. 65,835 78,024
------------- -------------
Property and equipment, net............................... 103,299 88,064
------------- -------------
Other assets:
Marketable securities................................... 10,745 1,500
Other receivables....................................... 7,692 6,875
Trademarks.............................................. 1,532 1,256
Deferred income taxes................................... 2,359 2,329
Other................................................... 2,460 1,895
------------- -------------
Total other assets.................................... 24,788 13,855
------------- -------------
Total assets........................................ $193,922 $179,943
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 13,019 $ 12,071
Income taxes payable.................................... 2,512 667
Other accrued expenses.................................. 9,124 8,251
Deferred income taxes................................... 6,409 6,409
------------- -------------
Total current liabilities............................. 31,064 27,398
------------- -------------
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding................. -- --
Junior Participating Cumulative Preferred Stock, $.01 par
value, 150,000 shares authorized; none issued and
outstanding............................................. -- --
Common Stock, $.01 par value, 30,000,000 shares
authorized; 20,081,867 issued and 19,893,312 issued and
outstanding for 1998 and 1997, respectively............. 201 199
Additional paid-in capital................................ 116,490 114,185
Retained earnings......................................... 49,263 38,196
Marketable securities valuation account................... (88) (35)
------------- -------------
165,866 152,545
Less: Treasury Stock, 181,000 shares of common stock at
cost for 1998........................................... (3,008) --
------------- -------------
Total stockholders' equity............................ 162,858 152,545
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Total liabilities and stockholders' equity.......... $193,922 $179,943
------------- -------------
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE)
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales........................................ $ 64,259 $ 49,558 $179,069 $136,744
Bakery sales............................................ 4,317 3,996 13,282 13,033
------------- ------------- ------------- -------------
Total revenues...................................... 68,576 53,554 192,351 149,777
------------- ------------- ------------- -------------
Costs and expenses:
Cost of food, beverages and supplies.................... 18,542 14,024 51,790 38,973
Bakery costs............................................ 2,046 1,625 6,247 5,213
Operating expenses:
Labor................................................. 21,899 17,282 61,768 48,475
Occupancy and other................................... 10,702 8,476 29,650 23,893
General and administrative expenses..................... 5,900 4,844 16,439 13,814
Depreciation and amortization expenses.................. 2,168 1,635 6,230 4,693
Preopening amortization expense......................... 2,094 1,456 6,238 4,374
------------- ------------- ------------- -------------
Total costs and expenses............................ 63,351 49,342 178,362 139,435
------------- ------------- ------------- -------------
Income from operations.................................... 5,225 4,212 13,989 10,342
Interest income, net...................................... 836 77 2,330 105
Other income, net......................................... 59 140 262 284
------------- ------------- ------------- -------------
Income before income taxes................................ 6,120 4,429 16,581 10,731
Income tax provision...................................... 1,911 1,528 5,512 3,702
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Net income................................................ $ 4,209 $ 2,901 $ 11,069 $ 7,029
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Net income per share:
Basic................................................... $ 0.21 $ 0.18 $ 0.55 $ 0.43
Diluted................................................. $ 0.21 $ 0.17 $ 0.54 $ 0.42
Weighted average shares outstanding:
Basic................................................... 20,059 16,434 20,018 16,442
Diluted................................................. 20,510 16,784 20,591 16,663
</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>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
SEPTEMBER 29, SEPTEMBER 28,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 11,069 $ 7,029
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization......................... 6,230 4,693
Preopening amortization............................... 6,238 4,374
Deferred income taxes................................. -- (5)
Loss on sale of assets................................ -- 122
Loss on available-for-sale securities................. -- 56
Changes in assets and liabilities:
Accounts receivable................................. 392 292
Other receivables................................... 3,370 (1,387)
Inventories......................................... (1,384) (365)
Prepaid expenses.................................... (584) (66)
Preopening expenses................................. (6,318) (5,801)
Trademarks.......................................... (319) (1,900)
Other............................................... (654) (166)
Accounts payable.................................... 948 2,511
Income taxes payable................................ 1,845 2,095
Other accrued expenses.............................. 873 4,568
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Cash provided by operating activities............. 21,706 16,050
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Cash flows from investing activities:
Additions to property and equipment..................... (21,333) (18,079)
Sales of property and equipment......................... -- 47
Investments in available-for-sale securities............ (31,780) (1,548)
Sales of available-for-sale securities.................. 14,908 791
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Cash used by investing activities................. (38,205) (18,789)
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Cash flows from financing activities:
Proceeds from bank borrowings........................... -- 3,000
Common stock issued..................................... 1 1
Treasury stock purchased................................ (3,008) --
Proceeds from exercise of employee stock options........ 2,305 323
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Cash provided (used) by financing activities...... (702) 3,324
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Net change in cash and cash equivalents................... (17,201) 585
Cash and cash equivalents at beginning of period.......... 43,543 8,536
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Cash and cash equivalents at end of period................ $ 26,342 $ 9,121
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Supplemental disclosures:
Interest paid........................................... $ 24 $ 340
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Income taxes paid....................................... $ 3,675 $ 1,639
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</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
SEPTEMBER 29, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying consolidated financial statements of The Cheesecake Factory
Incorporated and Subsidiaries (the "Company") for the thirteen weeks and
thirty-nine weeks ended September 29, 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. When compared to the Company's press release dated
October 22, 1998, the amounts reported herein for the current and long-term
portions of investments and marketable securities differ as a result of final
classification adjustments, although the total amount of reported investments
and marketable securities is the same.
NOTE B--INVESTMENTS AND MARKETABLE SECURITIES
Investments and marketable securities, all classified as available for sale,
consisted of the following as of September 29, 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................. $ 16,132 $ 16,051 $ (81) $ 16,051 Various dates, all before
--------- ----------- --- --------- June 30, 1999
--------- ----------- --- ---------
OTHER ASSETS:
Corporate obligations................. $ 9,294 $ 9,298 $ 4 $ 9,298 Various dates, all before
May 25, 2002
Preferred stocks...................... 1,508 1,447 (61) 1,447 No maturity dates
--------- ----------- --- ---------
Total............................... $ 10,802 $ 10,745 $ (57) $ 10,745
--------- ----------- --- ---------
--------- ----------- --- ---------
</TABLE>
4
<PAGE>
THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 29, 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.
NOTE D--STOCK TRANSACTIONS
Earnings per share amounts for all periods presented reflect a three-for-two
stock split which was effective 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. As of November 10, 1998, the Company has
repurchased 211,000 shares at a total cost of approximately $3.5 million.
5
<PAGE>
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; IMPACT OF YEAR 2000 ISSUES; 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.
GENERAL
As of November 10, 1998, the Company operated 26 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 and thirty-nine weeks
ended September 29, 1998, if annualized, are not necessarily indicative of the
results to be expected for the full fiscal year.
6
<PAGE>
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
% % % %
Revenues:
Restaurant sales........................................ 93.7 92.5 93.1 91.3
Bakery sales............................................ 6.3 7.5 6.9 8.7
----- ------ ------ ------
Total revenues...................................... 100.0 100.0 100.0 100.0
----- ------ ------ ------
Costs and expenses:
Cost of food, beverages and supplies.................... 27.0 26.2 26.9 26.0
Bakery costs............................................ 3.0 3.0 3.3 3.5
Operating expenses:
Labor................................................. 31.9 32.3 32.1 32.4
Occupancy and other................................... 15.6 15.8 15.4 16.0
General and administrative expenses..................... 8.6 9.0 8.6 9.2
Depreciation and amortization expenses.................. 3.2 3.1 3.2 3.1
Preopening amortization expense......................... 3.1 2.7 3.2 2.9
----- ------ ------ ------
Total costs and expenses............................ 92.4 92.1 92.7 93.1
----- ------ ------ ------
Income from operations.................................... 7.6 7.9 7.3 6.9
Interest income, net...................................... 1.2 0.1 1.2 0.1
Other income, net......................................... 0.1 0.3 0.1 0.2
----- ------ ------ ------
Income before income taxes................................ 8.9 8.3 8.6 7.2
Income tax provision...................................... 2.8 2.9 2.9 2.5
----- ------ ------ ------
Net income................................................ 6.1 5.4 5.7 4.7
----- ------ ------ ------
----- ------ ------ ------
</TABLE>
THIRTEEN WEEKS ENDED SEPTEMBER 29, 1998 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 28, 1997
REVENUES
For the thirteen weeks ended September 29, 1998, the Company's total
revenues increased 28% to $68.6 million versus $53.6 million for the thirteen
weeks ended September 28, 1997. Restaurant sales increased $14.7 million or 30%
to $64.3 million versus $49.6 million for the same period of the prior year. The
$14.7 million increase in restaurant sales consisted of a $1.4 million (2.8%)
increase in comparable restaurant sales for the period and a $13.3 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 1998.
Bakery sales were $4.3 million for the thirteen weeks ended September 29,
1998, an increase of 8.1% versus the same period of the prior year. This
increase was principally attributable to higher product sales to warehouse club
customers. The Company continues its efforts to develop, test and qualify
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 currently operated by the Company under a
subcontract with Host. The Company has signed an agreement to open and operate a
bakery cafe outlet in the Venetian casino and resort in Las Vegas, Nevada which
is currently planned for a spring of 1999 opening. In addition, the Company has
7
<PAGE>
agreed to permit Host to open another licensed bakery cafe outlet in Norfolk,
Virginia during 1999. 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, which are not expected to be a material component of the Company's
total revenues in the near future.
COST OF FOOD, BEVERAGES AND SUPPLIES
During the thirteen weeks ended September 29, 1998, the cost of food,
beverages and supplies for the restaurants was $18.5 million versus $14.0
million for the same period last year. The related increase of $4.5 million was
primarily attributable to new restaurant openings. As a percentage of restaurant
sales, these costs increased slightly to 28.9% versus 28.3% for the same period
of the prior year, principally as a result of higher produce, chicken and
dairy-related commodity costs due, in part, to unfavorable weather conditions in
certain agricultural areas during the nine months ended September 29, 1998. 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's staff
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 September 29, 1998 versus
$1.6 million for the same period of the prior year. As a percentage of bakery
sales, bakery costs for the thirteen weeks ended September 29, 1998 increased to
47.4% versus 40.7% 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 general
level of dairy-related commodity costs across the country has increased
significantly during fiscal 1998 as a result of unfavorable market conditions
for these commodities. The Company's costs for dairy-related commodities have
slightly abated during the past 30 days. However, there can be no assurance that
future costs for these commodities, or any commodities used in the Company's
bakery or restaurant operations, will abate to their previous levels or not
begin to rise again due to unfavorable weather or other market conditions beyond
the Company's control.
OPERATING EXPENSES--LABOR
Labor expenses, which includes restaurant-level labor and bakery direct
labor costs (including associated fringe benefits), were $21.9 million for the
thirteen weeks ended September 29, 1998 versus $17.3 million for the same period
of the prior year. This 27% increase was principally due to the impact of new
restaurant openings. As a percentage of total revenues, labor expenses decreased
slightly to 31.9% versus 32.3% for the comparable period last year.
OPERATING EXPENSES--OCCUPANCY AND OTHER
Occupancy and other expenses for both the restaurants and the bakery
increased 26% to $10.7 million for the thirteen weeks ended September 29, 1998
versus $8.5 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 slightly to 15.6% for the
thirteen weeks ended September 29, 1998 versus 15.8% for the same period of
fiscal 1997.
8
<PAGE>
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 $5.9 million for the thirteen weeks ended September 29,
1998 versus $4.8 million for the same period of fiscal 1997, an increase of $1.1
million or 22%. As a percentage of total revenues, general and administrative
expenses decreased slightly to 8.6% for the thirteen weeks ended September 29,
1998 versus 9.0% for the same period of fiscal 1997.
The Company expects 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 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 is to more effectively leverage its operational and corporate support
infrastructure with higher sales volumes.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses were $2.1 million for the thirteen
weeks ended September 29, 1998 versus $1.6 million for the thirteen weeks ended
September 28, 1997. As a percentage of total revenues, depreciation and
amortization expenses were 3.2% for the thirteen weeks ended September 29, 1998
versus 3.1% for the same period of the prior year. The increase of $0.5 million
for the thirteen weeks ended September 29, 1998 was principally due to the
openings of new restaurants.
PREOPENING AMORTIZATION EXPENSE
Preopening amortization expense was $2.1 million for the thirteen weeks
ended September 29, 1998 versus $1.5 million for the thirteen weeks ended
September 28, 1997. As a percentage of total revenues, preopening amortization
expense increased slightly to 3.1% versus 2.7% for the same period of the prior
year. The increase in the dollar amount of preopening amortization expense was
principally due to six new restaurants amortizing their preopening costs during
the thirteen weeks ended September 29, 1998 versus four restaurants amortizing
their preopening costs during the same period of the prior year.
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.
Consistent with 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
9
<PAGE>
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 $9.8 million at September 29,
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 mandated 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.
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 1998 COMPARED TO
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1997
REVENUES
For the thirty-nine weeks ended September 29, 1998, the Company's total
revenues increased 29% to $192.4 million versus $149.8 million for the
thirty-nine weeks ended September 28, 1997. Restaurant sales increased $42.3
million or 31% to $179.1 million versus $136.7 million for the same period of
the prior year. The $42.3 million increase in restaurant sales consisted of a
$3.9 million (3.1%) increase in comparable restaurant sales for the period and a
$38.4 million increase from the openings of new restaurants. Bakery sales
increased to $13.3 million for the thirty-nine weeks ended September 29, 1998
compared to $13.0 million for the same period of the prior year.
COST OF FOOD, BEVERAGES AND SUPPLIES
During the thirty-nine weeks ended September 29, 1998, the cost of food,
beverages and supplies for the restaurants was $51.8 million versus $39.0
million for the comparable period last year. The related increase of $12.8
million was primarily attributable to new restaurant openings. As a percentage
of restaurant sales, these costs increased slightly to 28.9% versus 28.5% for
the same period of the prior year, principally as a result of higher produce,
chicken and dairy commodity costs.
BAKERY COSTS
Bakery costs were $6.2 million for the thirty-nine weeks ended September 29,
1998 versus $5.2 million for the same period of the prior year. As a percentage
of bakery sales, bakery costs for the thirty-nine weeks ended September 29, 1998
increased to 47.1% versus 40.0% for the comparable period last year. This
percentage increase was primarily due to higher costs for dairy-related
commodities and a shift in the mix of sales to products with slightly higher
bakery costs as a percentage of sales.
10
<PAGE>
OPERATING EXPENSES--LABOR
Labor expenses were $61.8 million for the thirty-nine weeks ended September
29, 1998 versus $48.5 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 decreased slightly to 32.1% versus
32.4% for the comparable period last year.
OPERATING EXPENSES--OCCUPANCY AND OTHER
Occupancy and other expenses for both the restaurants and the bakery
increased 24% to $29.6 million for the thirty-nine weeks ended September 29,
1998 versus $23.9 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 15.4% for the
thirty-nine weeks ended September 29, 1998 versus 16.0% 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 29% increase in revenues
for the thirty-nine weeks ended September 29, 1998, coupled with lower costs for
workers' compensation insurance and certain other cost reductions.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $16.4 million for the
thirty-nine weeks ended September 29, 1998 versus $13.8 million for the same
period of fiscal 1997, an increase of $2.6 million or 19%. As a percentage of
total revenues, general and administrative expenses decreased to 8.5% for the
thirty-nine weeks ended September 29, 1998 versus 9.2% 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 29% increase in revenues
for the thirty-nine weeks ended September 29, 1998.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses were $6.2 million for the thirty-nine
weeks ended September 29, 1998 versus $4.7 million for the thirty-nine weeks
ended September 28, 1997. As a percentage of total revenues, depreciation and
amortization expenses were 3.2% for the thirty-nine weeks ended September 29,
1998 versus 3.1% for the same period of the prior year. The increase of $1.5
million for the thirty-nine weeks ended September 29, 1998 was principally due
to the openings of new restaurants.
PREOPENING AMORTIZATION EXPENSE
Preopening amortization expense was $6.2 million for the thirty-nine weeks
ended September 29, 1998 versus $4.4 million for the same period of the prior
year. As a percentage of total revenues, preopening amortization expense was
3.2% versus 2.9% for the thirty-nine weeks ended September 28, 1997. The
increase in preopening amortization expense during the thirty-nine weeks ended
September 29, 1998 was principally due to a greater number of new restaurants
amortizing their preopening costs versus the same period of the prior year.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's key liquidity
measurements for the thirty-nine weeks ended September 29, 1998 and September
28, 1997.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------
SEPTEMBER 29, SEPTEMBER 28,
1998 1997
--------------- ---------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C>
Cash and marketable securities on hand, end of period........... $ 53.1 $ 12.1
Net working capital, end of period.............................. $ 34.8 $ 3.2
Current ratio, end of period.................................... 2.1:1 1.1:1
Long-term debt, end of period................................... -- $ 9.0
Cash provided by operations..................................... $ 21.7 $ 16.1
Capital expenditures............................................ $ 21.3 $ 18.1
</TABLE>
The increases in cash and marketable securities on hand and net working
capital as noted in the preceding table 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"). The remaining $44.6 million of net
proceeds from that offering was invested in short-term, investment grade,
interest-bearing securities.
Cash provided by operations was $21.7 million for the thirty-nine weeks
ended September 29, 1998 compared to $16.1 million for the same period of the
prior year. The related increase of $5.6 million was principally due to the
collection of construction contributions due from landlords.
As of November 10, 1998, there were no borrowings outstanding under the
Credit Facility. The terms of the Credit Facility were amended in March 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 31,
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 rate 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
should range between $25 - $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 six
new restaurants to be opened during fiscal 1998 and early 1999 (including
DisneyQuest--Orlando) and provides for an anticipated increase in
construction-in-progress disbursements for other 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. As of November 10, 1998, there were three restaurants
under construction or in the design and permitting process for potential late
1998 and early 1999 openings. These restaurants are located in Sunrise, Florida;
San Diego, California; and Thousand Oaks, California. Leases have also been
signed for potential 1999 openings in Las Vegas, Nevada (Grand Lux Cafe at the
Venetian casino and resort); DisneyQuest--Chicago; Columbus, Ohio;
12
<PAGE>
Providence, Rhode Island; and Boulder, Colorado. Letters of intent have been
signed for other potential locations, of which three are currently planned to
open during the latter half of 1999. A lease has been signed for a potential
year 2000 opening in West Palm Beach, Florida, along with several other letters
of intent for potential openings that year. In addition to growing its
full-service restaurant concept, the Company has entered into an agreement to
lease and operate foodservice facilities in the first two DisneyQuest-TM-
entertainment facilities. The first DisneyQuest-TM- facility opened on June 17,
1998 in Orlando, Florida, and the second opening is currently planned for summer
1999 in Chicago, Illinois
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 construction contributions 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 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 November 10, 1998,
the Company has repurchased 211,000 shares at a total cost of approximately $3.5
million.
The Year 2000 issue, which is common to many businesses, results from
certain computer systems and software applications that only use two digits
(rather than four) to define the applicable year. As a result, such systems and
applications may recognize a date of "00" as the year 1900 instead of the
intended year 2000, which could result in data miscalculations and software
failures. The Year 2000 issue is real and presents a number of risks and
uncertainties that could impact the Company and that are extremely difficult to
predict. The Company has conducted an initial assessment of its mission-critical
computer systems and software applications and believes they are Year 2000
compliant. The Company believes that the nature of its business is such that its
principal business risks associated with the Year 2000 issue can be addressed by
closely assessing the key suppliers of goods and services to its restaurant,
bakery and corporate operations to ensure they are aware of Year 2000 issues and
are taking appropriate steps to address them.
During fiscal 1998 and 1999, the Company plans to communicate with all of
its key suppliers and business partners, as well as its significant third-party
bakery customers, to identify and coordinate the resolution of any Year 2000
issues with those constituencies. To the extent that key suppliers and bakery
customers do not provide the Company with satisfactory evidence of their
abilities and intentions to timely address the Year 2000 issue, contingency
plans will be developed. However, all of these efforts will not necessarily
guarantee that events and circumstances involving Year 2000 issues beyond the
Company's control will not adversely affect its operations.
While the Company currently believes that the Year 2000 issues outlined
above should not have a material impact on its financial position or results of
operations, it remains uncertain as to what extent, if any, the Company may be
impacted.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K on August 19, 1998 reporting its
adoption of a shareholder rights plan on August 4, 1998.
14
<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
Date: November 13, 1998 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>
15
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> SEP-29-1998
<CASH> 26,342
<SECURITIES> 16,051
<RECEIVABLES> 1,772
<ALLOWANCES> 0
<INVENTORY> 6,453
<CURRENT-ASSETS> 65,835
<PP&E> 131,440
<DEPRECIATION> 28,141
<TOTAL-ASSETS> 193,922
<CURRENT-LIABILITIES> 31,064
<BONDS> 0
0
0
<COMMON> 201
<OTHER-SE> 165,665
<TOTAL-LIABILITY-AND-EQUITY> 193,922
<SALES> 192,351
<TOTAL-REVENUES> 192,351
<CGS> 58,037
<TOTAL-COSTS> 58,037
<OTHER-EXPENSES> 120,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
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<INCOME-TAX> 5,512
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<NET-INCOME> 11,069
<EPS-PRIMARY> .55
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</TABLE>
